[ { "title": "Continental Construction Ltd vs Commissioner Of Income-Tax, Central-1 on 15 January, 1992", "url": "https://indiankanoon.org//doc/416340/", "text": "Continental Construction Ltd vs Commissioner Of Income-Tax, Central-1 on 15 January, 1992\nEquivalent citations: 1992 AIR 803, 1992 SCR (1) 57, AIR 1992 SUPREME COURT 803, 1992 AIR SCW 473, 1992 TAX. L. R. 424, (1992) 1 SCR 57 (SC), (1992) 60 TAXMAN 429, 1992 (2) UPTC 1177, (1992) 2 COMLJ 50, 1992 UPTC 2 1177, (1992) 1 JT 140 (SC), 1992 (2) SCC(SUPP) 567, 1992 SCC (SUPP) 2 567, 1992 (1) SCR 57, 1993 ALL TAXJ 1, (1992) 195 ITR 81, (1992) 107 TAXATION 133, (1992) 101 CURTAXREP 386\n PETITIONER:\nCONTINENTAL CONSTRUCTION LTD.\n\n\tVs.\n\nRESPONDENT:\nCOMMISSIONER OF INCOME-TAX, CENTRAL-1\n\nDATE OF JUDGMENT15/01/1992\n\nBENCH:\nRANGNATHAN, S.\nBENCH:\nRANGNATHAN, S.\nRAMASWAMI, V. (J) II\nOJHA, N.D. (J)\n\nCITATION:\n 1992 AIR 803\t\t 1992 SCR (1)\t 57\n 1992 SCC Supl. (2) 567 JT 1992 (1)\t140\n 1992 SCALE (1)65\n\n\nACT:\n Income-tax Act, 1961 : Ss. 9(1)(vi),(vii),119(1),80-0,80-HHB :\n Assessee-Engineering and Construction Company-\nUndertaking of foreign projects-Approval by Central Board of\nDirect Taxes-payments in respect of consideration for supply\nof technical information for use outside India and rendering\nTechnical Services to foreign Government Enterprise-Whether\n`similar' to\t`royalty', `Commission\t or `free' etc.-\nDeductions-Scope of Assessee-Whether\tentitled to relief\nunder S. 80-O for assessment years earlier to 1983-84 -\nWhether\t eligible for\t deductions under s.\t80-HHB\t for\nassessment years 1983-84 onwards.\n Assessee\tCompany-Foreign\t contracts-Execution\t of-\nConstruction of dam and irrigation project, water supply\nproject\t etc.-Services\t involving specialised\t knowledge,\nexperience and skill in constructional operations-Whether ar\ntechnical services.\n \"Technical\t Services\"-Whether can be rendered through\nmedium of employees, skilled and unskilled.\n Foreign projects of `composite' activities-Activities\nfalling partly under S. 80-HHB-Whether relief can be granted\nunder each sections separately.\n Activities of foreign contract falling under S. 80-0 as\nwell as Section 80-HHB-Deductions-Whether can\tbe computed\nunder s. 80-HHB only.\n Central Board of Direct Taxes-Circulars No. 187 dated\n23.12.1975 & 253 dated 30.4.1979. Letters dated 28.10.83 and\n31.7.1985-Board's power to grant approval\tto foreign\ncontracts-Purpose and\tscope of: Guidelines for approval\nnature\tof: Approval once granted-Whether to continue\t for\nsubsequent assessment years for the same agreement.\n\t\t\t\t\t\t 58\nWords and phrases :\n `business\tof execution of a foreign project', profits\nderived', `royalty', `similar', `technical services'-Meaning\nof.\n\n\n\nHEADNOTE:\n Section 80-O of the Income Tax Act, 1961 provides for a\ndeduction in computing the total income, in\t respect of\nroyalty, commission, fees, or any similar payment received\nby the assessee from the Government of a foreign State or a\nforeign\t enterprise in consideration for the\tuse outside\nIndia of any\tpatent,\t invention, model, design, secret\nformula or process, or similar property right or information\nconcerning industrial, commercial or scientific knowledge,\nexperience or skill made available or provided or agreed to\nbe made available or\t provided to such Government\t or\nenterprise by the assessee or in consideration of technical\nservices rendered or agreed to be rendered outside India to\nsuch government or enterprise by the\t assessee under an\nagreement approved by the Central Board of Direct Taxes in\nthis behalf.\n The appellant-assessee, a civil construction company,\ndescribing itself as Engineers, and contractors executed\nprojects overseas and\t in India. It undertook certain\ncontracts for\tconstruction, inter alia, of\t a dam\t and\nirrigation project, a fibre-board factory and a huge water\nsupply\tproject in foreign countries. One of its projects,\ncalled the Karkh Project, which constituted a major portion\nof its\t gross total income was with the Iraqi Government\nthrough the Baghdad Water Supply Administration (BWSA).\t The\ncontract was for the design, manufacture, delivery, supply,\nconstruction and installation for the first stage of Karkh\nWater Supply Scheme. Since tenders had been called for from\nconsortia the assessee associated with the State Contracting\nCompany\t for Water and Sewerage Projects, Baghdad (SCC)\t and\nformed a consortium and the said consortium entered into an\nagreement on 17.12.1980 with the Iraqi Government.\t The\nterms of the consortium between the assessee and SCC\twere\nset out in another agreement dated 18.12.1980 dividing\t the\nareas of responsibility (the packages) under the contract\nbetween the two.\n The assessee applied to the Central Board of Direct\nTaxes (CBDT) for latter's approval to the contracts \"for the\nsupply\tof Civil construction know-how to the Government of\nIraq\" under Section 80-O of the Income-Tax Act, 1961.\t In\npara 5(a)(ii) of the proforma of the application prescribed\nfor the purpose, the assessee indicated that\t\"information\nconcerning industrial, commercial, or scientific knowledge\nor skill\" was being made available outside India; and in\nColumn\t5(b) thereof it mentioned that\t technical services\nwould be rendered by the assessee to\n\t\t\t\t\t\t 59\nBWSA, Government of Iraq through its Indian Engineers,\nScientists, technicians and semi-skilled labours to\t be\ninducted for that purpose.\n Meanwhile, by the Finance Act, 1982, section 80-HHB was\ninserted to the Act with effect from 1.4.1983, providing for\n25% deduction from the profits and gains derived from\t the\nbusiness of execution of a foreign project undertaken by the\nassessee with the government of a foreign State-enterprise.\nSub-section (5) of section\t80-HHB\tprovided that\t not\nwithstanding any provision in Chapter VIA of the Act, no\npart of any consideration or of the income comprised in\t the\nconsideration payable\tto the assessee for execution of a\nforeign\t project shall qualify for\tdeduction for\t any\nassessment year under any such other provision.\n The CBDT accorded its approval on 28.10.1983. However,\nwith respect to Karkh and Diwaniyah projects, the approval\nwas granted for the assessment year 1982-83, stating\tthat\nfor the subsequent period section 80-HHB, which came\tinto\nforce w.e.f. 1.4.1983, would be operative.\n The assessee claimed and obtained deduction under\nsection\t 80-0 in respect of some of the contracts in\tsome\nassessment year between 1976-77 to 1980-81.\n For the year 1983-84, the assessee returned a gross\ntotal income of Rs. 72,67,45,938 but as against this it\nclaimed\t a deduction of Rs. 89,16,19,198 : of this,\t the\ndeduction claimed in respect of karkh and Diwaniyah projects\ncame to Rs. 77,84,29,446 and Rs. 6,36,85,436 respectively.\nAs Board's approval under section 80-0 in respect of these\ntwo contracts was limited to the assessment year 1982-83,\nthe Inspecting\t Assistant Commissioner\t (IAC)\tdeclined to\ngrant the assessee any deduction under section 80-0 not only\nin respect of these two projects but also for\tthe others,\nholding\t that section 80-HHB, and not section 80-0, applied\nto the\t agreements. However, relief was not granted\teven\nunder section\t80-HHB\ton the ground that conditions\t for\nexemption specified thereunder were not fulfilled. The\t IAC\ndetermined assessee's\ttotal income at Rs.\t89,41,35,103\nraising a tax demand of Rs. 66,07,72,982.\n On\t appeal, the Commissioner of Income Tax (Appeals)\nagreed\twith the IAC to the extent that the assesse was\t not\nentitled to relief under section 80-0 because\t : (1)\t the\napproval of the CBDT for three of the\t contracts did\t not\nextend\tto assessment year 1983-84; (2) all the contracts\nundertaken by the assessee were in the nature\tof `foreign\nprojects' within the meaning of section 80-HHB; and\t (3)\nnotwithstanding the\n\t\t\t\t\t\t 60\napproval of the CBDT section 80-HHB (5) ruled out the grant\nof relief under section 80-O for any of the projects.\t He\nhowever, set aside the assessment and directed the IAC to\nreappraise assessee's claim for exemption under section\t 80-\nHHB holding that the assessee, being\t under\ta bona-fide\nbelief\tall through that it was entitled to relief under\nsection\t 80-O, did not have a proper opportunity of putting\nforth its claim for relief under section 80-HHB.\n The assessee appealed to the Income Tax Appellate\nTribunal (ITAT). During the pendency of the appeal before\nITAT, the CBDT, by its letter dated 31.7.1985 modified\t the\noriginal letter of approval dated 28.10.1983 and made\t the\napproval operative even for years subsequent to assessment\nyear 1982-83.\n The ITAT affirmed the order of the C.I.T. but, at\t the\nrequest of the assessee, made a reference to the High Court.\nThe High Court answered the reference against the assessee\nholding that the execution of the work by the assessee\tfell\nunder section\t80-HHB\tand not under\t section 80-O;\t the\nreceipts of the assessee from the contracts did not\tfall\nwithin\tthe category of receipts for\twhich deduction is\nprovided in section 80-O; that the Board's approval was a\nqualified one\twhich fully authorised\t and empowered\t the\nofficer\t to determine\twhether all the\t conditions of\t the\nsection were fulfilled as well as the amount, if any, which\ncould be deducted under section 80-O,\n In\t the assessee's appeal to this Court, it\t was\ncontended by the Revenue that (1) the receipts of\t the\nassessee under the contract were profits and gains of\t its\nbusiness of execution of foreign projects under\t sub-clauses\n(i) and (ii) of clause (b) of s. 80-HHB and did not qualify\nfor deduction\tunder section 80-O as the receipts did\t not\nfall under any of the categories either of royalty,\ncommission, fees or `any similar payment', and the assessee\neither\tmade any information available nor rendered\t any\ntechnical service to its foreign clients; (2) the contract\nfor Karkh Water Supply Project was in the nature of a\nturnkey\t project as the client wanted the project to be\nexecuted by the consortium complete in all respects\t and\nhanded over to it, and the client was neither interested in\nthe details of the information possessed or the services\nrendered by the contractor nor was the assessee as\t per\nconsortium agreement,\tconcerned with\t any part of\t the\ncontract other\t than the \"civil works\"; (3) the assessee\nneither\t rendered any\ttechnical service nor\t made\tsuch\ninformation available\teither to the consortium or to\t the\nforeign government, but the information possessed by it\t and\nthe services rendered in these respects by its engineers and\nother employees were utilised by the\n\t\t\t\t\t\t 61\nassessee itself; (4)\t the contract\tbeing an integral\nindivisible one, it was not permissible to the assessee to\ndissect\t the consideration as attributable to\tits several\ningredients and apportion a part of it as being payment\t for\ninformation made available or technical services rendered to\nthe foreign government; (5) even assuming that the whole or\natleast a part of the consideration payable to the assessee\nfalls under section 80-O, still as per sub-section (5)of\nsection 80-HHB the assessee would be eligible for deduction\nunder section 80-HHB only; and (6) even if the assessee's\ncase falls under section 80-O to will be entitled to relief\nnot on\t the entire profits derived by it but only to\tthat\nportion\t of the receipts as can be described as\t having\t the\ncharacter enumerated in section 80-O\n On\t behalf of the assessee it was contended that since\nthe insertion\tof section 80-HHB has not resulted in\t the\ndeletion of section 80-O, the two sections should be\tread\nharmoniously and given effect to together restricting\t the\noperation of section 80-HHB to contracts entered into on or\nafter 1.4.1983\t so as not to effect the contracts entered\ninto before that date and approved by the Board; that\teven\nafter the insertion of section 80-HHB there is room\t for\napplicability of section 80-O in relation to a contract of\ncomposite activities and section 80-HHB applies only to\nconstruction-installation activity simpliciter; and\tthat\nonce an approval under section 80-O is granted (on whatever\ndate it be) the approval should ensure for the entire period\nof contract and connot be restricted\t to any particular\nassessment year or years.\n On\t the question whether the assessee is entitled to a\ndeduction under section 80-O or section 80-HHB or partly\nunder one or partly under the other or under neither of\t the\nprovisions.\n Dismissing the assessee's appeal, this Court,\n HELD : 1.1 The assessee was entitled to\t the relief\nunder section 80-O for assessment years earlier to 1983-84\nand the approval granted by the Board under that section was\nright and proper. However, for the assessment year 1983-84,\nthe assessee does not qualify for deduction on the terms of\nthat section as the contract receipts are fully covered by\nthe provisions\t of section 80-HHB and the deduction under\nthat section will prevail over the relief that\t might\thave\nbeen otherwise available in view of the terms of section 80-\nHHB(5). [p.116AB]\n 1.2 The assessee's claim for exemption under section\n80-HHB\tdeserves to be considered afresh after\t giving\t the\nassessee an opportunity of being heard, as directed by\t the\nCIT (Appeals) and confirmed by the ITAT and the High Court.\n[p. 86BC]\n\t\t\t\t\t\t 62\n Continental Construction Ltd. v. Commissioner of Income\nTax. (1990) 185 ITR 230, affirmed.\n 2.1 Eligibility of an item to tax or deduction\t can\nhardly\tbe made to depend on the label given to it by\t the\nparties. An assessee cannot claim deduction under section\n80-O in respect of certain receipts merely on the basis that\nthey are described as royalty, fee or\t commission in\t the\ncontract between the\tparties. By the same\t token,\t the\nabsence\t of a specific label cannot be destructive of\t the\nright of an assessee to claim a deduction, if in fact,\t the\nconsideration for the receipts can be\t attributed to\t the\nsources indicated in the section. [p. 100BC]\n 2.2 The receipts by way of royalty, fees,\t commissions\nand `similar payments' envisaged by section 80-O may be\nderived\t in the course of a business\t or profession\t and\nconstitute part of the profits and gains of such business or\nprofession. For instance, the fees received by a consulting\nscientist, an\tarchitect or an engineer for providing\ntechnical services to others will nevertheless be assessable\nas part of the profits and gains from such profession.\t [p.\n90DE]\n 2.3 The essence of the exemption under section\t80-O\nlies,\tnot in\t consigning the receipt to one of\t the\npigeonholes or\t `royalty', `commission' or `fees' but in\nexamining whether the receipt is a payment in consideration\nof one\t of the two situations envisaged in the section :\ne.g., where the assessee is the owner of a patent or\ninvention, he may generally permit another to make use of\npatent\tor invention,\tin consideration of a `royalty'\npayment; or, where the assessee is\t in possession\t or\ntechnical know-how, he may be prepared to allow another to\nmake use thereof in\tconsideration of a `fee' to\t the\nassessee; or he may stipulate a consideration in the form of\na commission based on the sales of the products the other\nparty is able to manufacture with the aid of such invention\nor know-how,\tor an\tassessee may have achieved\tsome\nspeciality and\t he may agree to lend his services to\tsome\nother person and stipulate a consideration therefor which\nmay be variously described. [p. 92E-G]\n Gestetner\tDuplicators Pvt. Ltd. v. C.I.T., (1979)\t 117\nI.T.R. 1 (S.C.); Cloth Traders P. Ltd. v. C.I.T., (1979) 118\nITR 243 & Distributors (Baroda) P. Ltd. v. Union, (1985) 155\nITR 120, referred to.\n 2.4 The word `similar'\toccurring in section\t80-O\nconnotes that the payment made to the assessee need not be\nin the nature of royalty, commission or fees only; it could\nbe any payment of like nature, made in\n\t\t\t\t\t\t 63\nconsideration of the\tuse or supply\tof such an asset,\nknowledge or services in the same manner as royalty, fees or\nconsideration could be. Therefore, any type\t of payment\nreceived by an assessee will qualify for deduction under the\nsection so long as it is a payment made in consideration of\none of\t the two types of transaction referred\t to in\t the\nsection. [p. 93AB]\n 2.5 In column 5 of the applications for approval under\nsection 80-O the assessee stated that the payments under the\ncontracts did not come under category (a) (i) but they\t did\nfall under categories a (ii) and (b)\tenumerated therein.\nThe finding of the Tribunal in this regard is not one of\nfact based on an admission; it proceeds on an incorrect\nappreciation of the contents of assessee's application\t for\napproval. [pp. 93G; 94AB]\n 3.1 The expression \"technical services\"\thas a\tvery\nbroad connotation and it has been used in section 9(1) (vii)\nof the\t Act also so widely as\tto comprehend\tprofessional\nservices. [p. 98CD]\n 3.2 Services involving specialised knowledge experience\nand skill in the field of constructional operations\t are\n\"technical services\".\tThe Board's guidelines\tspecifically\nsay so. [p.98DE]\n 3.3 Any\tengineering contract\tinvolves technical\nservices more\tso, a contract of the nature and magnitude\ninvolved in the instant case. The contract executed by\t the\nassessee was no ordinary contract; the activities thereunder\ninvolved technical and expertise. It was executed jointly\nwith an enterprise that was nothing but an instrumentally of\nthe foreign State. [p. 95B-F]\n 3.4 The\t assessee had\tmade available technical\ninformation to the foreign Government for use outside India\nand had also rendered technical services to\tthe foreign\nGovernment of the nature outlined in section 80-O. [pp.98F;\n100F]\n 4.1 The assessee\t is a\tcompany\t and any technical\nservices rendered by it can only be through the medium of\nits employees, skilled and unskilled. [p. 97E]\n 4.2 In order to\t say that a person is rendering\ntechnical services to another, it is not necessary that\t the\nservice should be rendered by the former personally and\t not\nthrough the medium of others. [p.98EF]\n 5.1 Section 80-HHB provides for an exemption in respect\nof profits from a \"foreign project\" undertaken outside India\nin the course of\n\t\t\t\t\t\t 64\nbusiness. The\t expressions \"business of execution of a\nforeign project\" or work forming part of it or the `profits\nderived' from\tthe business,\ttake in\t all aspects of a\nbusiness involving than activities referred to in subsection\n(2) (b) of section 80-HHB together with all\t activities,\ncommitments and obligation ancillary and incidental thereto\nand the profits flowing therefrom. The definition cannot be\nrestricted to the mere\tphysical activity or putting up\t the\nsuperstructure, machinery or plant but should be understood\nto take within its fold all utilisation of technical\nknowledge or rendering of technical services necessary to\nbring about the construction, assembly and installation. [p.\n102FG]\n 5.2 Section 80-HHB comes into force on 1.4.1983\t and\nshould be applicable for assessment year 1983-84 onwards in\nall cases. It does not contain even a reference to section\n80-O and so its applicability cannot depend on the formation\nof the contract subsequent to that date or to the date of\nits approval under the latter section being after that date.\n[p. 115A]\n 5.3 Section 80-HHB does\t not confer an additional\nbenefit; sub-section (5) in no uncertain terms states\tthat\nthe benefit thereunder will take away the benefit, if\tany,\nunder any other provision. This has to be given effect\t to.\n[p. 115F]\n 5.4 The assessee is entitled to deduction under section\n80-O on the terms of that section even for\t1983-84\t and\nsubsequent years. It becomes disentitled to the relief\t not\nbecause it does not fulfil the requirements of section\t80-O\nbut only because section 80-HHB(5) stands in the way\t and\nmandates that\tin cases to which both provisions apply,\nrelief\tunder section 80-HHB will alone be available.\t [p.\n114G]\n 5.5 The fact that the income in question\tmay qualify\nfor deduction\tunder section 80-HHB does not\t necessarily\nexclude the applicability of the provisions of section 80-O.\nThe language of sub-section (5) of section 80-HHB which\ngives precedence to a claim under section 80-HHB over\t one\nunder any other provision, itself necessarily postulates the\npossibility of\t the whole or\tpart of the consideration\npayable\t to an\t assessee for the execution of a foreign\nproject\t qualifying for deduction under any other provision\nas well. [pp.86G; 87A]\n 5.6 The statutory interdict cannot be frustrated by the\nterms of an approval of the Board under section 80-O.\tSuch\napproval, at its best, cannot\t overreach the\t limitations\nimposed\t on the relief available under that section as a\nconsequence of section 80-HHB(5). [p.107BC]\n\t\t\t\t\t\t 65\n 5.7 The\t legislature has clearly envisaged\t the\npossibility of the same receipts qualifying for deduction\nunder section 80-HHB as well as under any other provision of\nthe Act and has specifically provided that, in such a case,\nthe terms of Section 80-HHB will prevail over the provisions\nof such other provision. [p. 106FG]\n 5.8 One\tcannot\tdecline\t to give effect to\t the\napplicability of a statutory provision on the ground of\nhardship or on the ground that it restricts\t the relief\nwhich, but for the insertion of the section, would have been\navailable to the assessee, particularly when\tthe section\nitself envisages the possibility of the assessee being\talso\neligible for relief under another section and makes special\nprovision for that eventuality. [p. 115BC]\n 5.9 The assessee was able to get 100% relief in earlier\nyears only because the contract is of such nature that it\nconsists only of the rendering or technical services so that\nthe fields of the two exemptions completely overlap. On the\nother hand, it is possible to conceive of foreign projects\nwherein\t the construction and installation\taspect\t and\ninformation or technical services aspect are kept separate.\nEqually, there can be cases falling under section 80-O which\ndo not at all relate to a \"foreign project\" as defined under\nsection\t 80-HHB. In such cases the two provisions\twill\ncontinue to operate independently. [p.115F-H]\n 6.1 The Board was fully justified in considering\t the\nreceipts of the assessee as falling under section 80-O\t and\nin granting approval to the contract. [p. 105BC]\n 6.2 Board's approval for the purpose of section\t80-O\ncannot be tentative or provisional or qualified. The Board\ncan neither limit the relief to certain assessment years\nonly nor can it restrict or enlarge the scope of the relief\nthat can be granted under the section. [p. 106AB]\n 6.3 Once a contract stands approved under section\t80-O\nin relation to the first assessment\tyear, the approval\nenures for the entire duration of the contract.\t Section 80-\nO does\t not envisage an application for approval of\t the\ncontract every\t assessment year or the\t limitation of\t the\napproval granted by the Board to any particular assessment\nyear. [p. 105DE]\n C.I.T. v.\t Institute of Public Opinion,\t (1982)\t 134\nI.T.R. 23 (Del.), referred to.\n 6.4 The Board's approval in respect of assessment years\nearlier to\n\t\t\t\t\t\t 66\n1983-84 will enable the assessee to claim like relief under\nsection\t 80-O for all subsequent years too. But, after\t the\ninsertion of Section\t80-HHB, in the\tmatter\tof receipts\ngovernment both by Section 80-HHB and\t Section 80-O,\t the\nformer and not the latter will prevail. [p. 106BC]\n 6.5 The Board's decision of 31.7.1985 extending\t the\napproval beyond 1982-83 cannot be given effect to in\t the\nsame way as its earlier approval letter of 28.10.1983\t for\nthe reasons : (1) the jurisdiction of the Board is to grant\napproval to a\t contract cannot only for the\t purpose of\nsection\t 80-O,\tit has no jurisdiction to pronounce on\t the\navailability or otherwise of an exemption under section\t 80-\nHHB and the Board's opinion as to this, even if expressly\nstated,\t cannot\t bind the Officer, (2) the relief under\nsection 80-HHB is not dependent on the approval of the Board\nand is for a totally different type of transaction; (3)\t the\nletter of 31.7.1985 is also a decision in an individual case\nand cannot be treated as a general circular incorporating a\npolicy\tdecision by the Board that\tin all\t cases of a\nparticular type government by both sections relief may be\ngiven under section 80-O; (4) the Board in the 1985 letter\nonly stated, and rightly, that the approval under section\n80-O would enure for 1982-83 onwards, for the approval\t of\nthe Board is to the contract and so long as the contract\nsubsists the relief should be granted on the terms of\nsection 80-O; and (5) the approval which otherwise qualifies\nthe assessee for relief is no doubt still effective but\t its\npower to qualify for\t relief if taken away\tby the\t new\nstatutory provision. [pp.114DG; 115B]\n 6.6 The reasons to vest power of approval in the Board\nare that it\tis considered\tbetter\tequipped, both\t on\nconsiderations\tof times as well as the technical knowledge\nneeded\t to examine\tthe ramifications of technical\ninternational contracts and decide how far the relevant\ncontract and the receipts thereunder are of\t the nature\nintended to be covered by the exemption clause and that\t the\napplicant is sure to take steps to obtain necessary approval\nat a state earlier to the implementation of the contract and\nhe can know well before-hand where he stands in the matter\nof tax exemption. [p. 110C-F]\n 6.7 After\t the power of approval was vested in\t the\nBoard,\telaborate guidelines, as provided, inter alia, in\nBoard's\t Circular NO. 187 dated 23.12.1975 and Circular\t No.\n253 dated 30.4.79, were drawn up which clearly\t envisage a\ndetailed examination,\tby the Board, of the terms of\t the\ncontract submitted to\t it for\t scrutiny from\t all angles\nrelevant for a decision as to\t eligibility for exemption\nunder section\t80-O. These guidelines have\talso since\nattained statutory recognition as the proforma earlier\nprescribed by the Board has virtually been incorporated in\nRule\n\t\t\t\t\t\t 67\n11E and Form prescribed thereunder. The proforma calls\t for\ndetails of the analysis of the receipts under the contract.\n[pp. 111AB; 113BC]\n 6.8 The Board has chalked out\t for itself, quite\nlegitimately and properly, a very detailed and dominant rule\nas to\tthe availability of exemptions under section 80-O.\nThe guidelines are of general nature, fully sanctioned by the\nprovisions of\t section 119(1) of the Act\tand, being\ninstructions enuring to the benefit of the assessee, cannot\nbe gone back upon by the Department Officers subordinate to\nthe Board, particularly in a case where no steps have\tbeen\ntaken - or even suggested as necessary to be\ttaken - to\nrevoke the approval already accorded. [p.112 FG]\n Navnitlal\tJaveri's case\t(1965)\t56 I.T.R. 198(SC),\nrelied on.\n 6.9 While granting the approval under Section 80-O, the\nBoard\thas not only\t the jurisdiction but\t also\t the\nresponsibility\tof examining the agreement submitted\t for\napproval from all angles relevant to the deduction provided\nfor under section 80-O and it is not competent to\t the\nDepartment to question the maintainability of the claim\t for\ndeduction under section 80-O in respect of the aspects\tgone\ninto and decided upon by the Board. [p.113DE]\n 6.10 However, the assessing officer is not deprived of\nhis functions.\t He has to satisfy himself that (i)\t the\namounts\t in respect of which the relief is\tclaimed\t are\namounts arrived at in accordance with the formula, principle\nor basis explained in the assessee's application\t and\napproved by the Board; (ii) the deduction claimed in\t the\nrelevant assessment year relates to\t the items and is\nreferable to the basis on which application for exemption\nwas asked for and granted by the Board; (iii) the receipts\n(before\t the 1975 amendment) were duly certified by an\naccountant or\tthat, thereafter, the\t amounts have\tbeen\nreceived in or brought into India in\tconvertible foreign\nexchange within the specified period.\tThe second of these\nfunctions is particularly important as the approval\t for\nexemption granted in principle has to be translated\tinto\nconcrete figures for\tthe purposes of each\t assessment.\nNeither\t the introduction of the words \"in accordance\twith\nand subject to the provisions of this section\" nor\t the\nvarious \"conditions\" outlined in the letter of approval\t add\nanything to or detract anything from\t the scope of\t the\napproval. [p.113E-H]\n 7.1 For purposes\t of income tax, a principle\t of\napportionment has always been applied in different contexts.\nConsolidated receipts\t and expenses\thave always\tbeen\nconsidered apportionable in the contexts; (a) of the capital\nand revenue constituents comprised in them; (b) portions\n\t\t\t\t\t\t 68\nof expenditure\t attributable to business and\tnon-business\npurposes; (c)\tof places of accrual or arisal\tand (d) of\nagricultural and non-agricultural elements in such receipts\nor payments. [p.100DE]\n Kanga & Palkhivala on the Law and Practice of Income-\nTax (Vol. I Eighth Edition), referred to.\n 7.2 Contracts of the type envisaged by section 80-O are\nusually\t very\tcomplex\t ones and cover a multitude\t of\nobligations and responsibilities. It is not always possible\nor worthwhile for the parties to dissect the consideration\nand apportion\tit to the various ingredients\tor elements\ncomprised in the contract. [p. 100CD]\n 7.3 If, a contract obliges the assessee to\tmake\navailable information\tand render services to\tthe foreign\nGovernment of the nature outlined in section 80-O, it is the\nduty of the Revenue and the right of the assessee to\t see\nthat the consideration paid under the contract\tlegitimately\nattributable to such information and services is apportioned\nand the assessee given the\tbenefit\t of the deduction\navailable under the\tsection\t to the extent of\tsuch\nconsideration. [p.100FG]\n\n\n\nJUDGMENT:\n CIVIL APPELLATE JURISDICTION : Civil Appeal NO. 3458 of\n1990.\n Appeal by certificate from the Judgment and Order dated\n24.5.1990 of the Delhi High Court in I.T.R. No. 110 of 1987.\n F.S. Nariman, Srinivasan, Bishamber Lal Khanna, Harsh\nSalve,\tSubhash Sharma,\t D.N. Sawhney, Ms. Geetanjali Mohan\nand Vineet Kumar for the Appellant.\n S.C. Manchanda, Ms. A. Subhashini and B.B. Ahuja\t for\nthe Respondents.\n The Judgment of the Court was delivered by\n RANGANATHAN, J. This is an appeal preferred by\tM/S.\nContinental Construction Ltd.\t (hereinafter called\t`the\nassessee') from the judgment of the Delhi High Court in\nI.T.R.\t110 to 112 of 1987 (reported in 1990-185 I.T.R.178)\nanswering, against the assessee, the following questions of\nlaw referred to it under section 256 of the Income Tax\tAct,\n1961 (`the Act') :\n\t 1. \"Whether on the facts and in the circumstances\n\t of the case the Tribunal is right in holding\tthat\n\t the income arising from the\n\t\t\t\t\t\t\t69\n\t activities pursuant to the seven agreement\twith\n\t foreign governments\t /enterprises, etc.\t are\n\t governed by the provisions of section 80-HHB of the\n\t Income-Tax Act, 1961 and not of section 80-O of\n\t that Act?\n\t 2. \"Whether on the facts and in the circumstances\n\t of the case, the Tribunal was right in holding that\n\t notwithstanding the approvals granted by the Board\n\t to the seven agreements for the purpose of section\n\t 80-O, for the purpose of assessment for assessment\n\t year\t1983-84, the income arising\tfrom these\n\t contracts have to be brought under section 80-HHB\n\t of the Income-Tax Act, 1961?\"\n\t 3.\"Whether on the facts of the case, the Tribunal\n\t is right in holding that the income from the entire\n\t activities under the seven agreements cannot be\n\t bifurcated and is wholly covered under section\t 80-\n\t HHB of the Income Tax Act, 1961?\"\n\t 4.\"Whether on the facts and in the circumstances of\n\t the case, the Tribunal is right in holding that the\n\t assessee company is not an `industrial company' as\n\t defined in the Finance Act, 1982?\"\n The first two Income-Tax References were made to the\nHigh Court at\t the instance of the\tassessee which\t was\ndissatisfied with the decision of the Income Tax Appellate\nTribunal on these qestions : there were two references\nbecause\t the above qestions arouse out of two cross-appeals\nbefore\tthe Tribunal - one by the assessee and the other by\nthe Department. This appeal by the assessee, CA. 3458 of\n1990 is disposed by the present judgment.\n The third\t reference (I.T.R. 112/87) was made by\t the\nTribunal at the instance of the Department on a totally\ndifferent question which related to the interpretation of\nsections 40(c)\t and 40A(5) of the Act. The\t High Court\nanswered all the three references in favour of the assessee\nand the aggrieved Commissioner of Income Tax (C.I.T.)_\t has\npreferred an appeal to this Court from that part of\t the\njudgment being C.A. 3458-A of 1990. But that question\t has\nno connection with the other four question set out earlier.\nWe have, therefore, delinked the appeal by the\t C.I.T.\t for\nseparate hearing. Also, of the four questions posed above\nin the\t assessee's appeal, counsel for\t the appellant\t has\nstated that he is not pressing question No. 4 before us. We,\ntherefore, do\tnot express any opinion on it\t and merely\ndismiss the appeal in so far as this question is concerned.\nIn the result, we confine this judgemnt to the assessee's\nappeal and to the first three of the four questions set\t out\nabove.\n The questions arise out of the assessee's assessment to\nincome tax for\n\t\t\t\t\t\t 70\nthe assessment year 1983-84 (the calendar year\t 1982 being\nthe relevant previous year). Section 80-O of the Act, under\nwhich the assessee claimed deductions, provides for a\ndeduction, in\tcomputing the total income , in\t respect of\nroyalties etc. from certain foreign enterprises. This topic\nwas originally dealt with by section 85-C. Section 80-O\t was\nsubstituted in its place w.e.f. April 1, 1968.\tThe section\nhas since undergone amendments from time to time. As on\n1.4.83,\t the provision, in so far as is relevant for\t our\npurposes, was in the following terms :\n Section 80-O Deduction in respect of royalties etc.\n\t from certain foreign enterprises.\n\t \"Where the gross total income of an assessee, being\n\t an Indian company, includes any income by way of\n\t royalty, commission, fees or any similar payment\n\t received by the assessee from the Government of a\n\t foreign State or a foreign enterprise\t in\n\t consideration\tfor the use outside India of\t any\n\t patent, invention, model, design, secret formula or\n\t process or similar property right, or\t information\n\t concerning industrial, commercial or scientific\n\t knowledge, experience or skill made available or\n\t provided or agreed to be made available or provided\n\t to such Government or enterprise by the assessee,\n\t or in consideration of technical services rendered\n\t or agreed to be rendered outside India to\tsuch\n\t Government or enterprise by the assesse, under an\n\t agreement approved by the Board in this behalf\t and\n\t such income is received in\tconvertible foreign\n\t exchange in India, or having been\treceived in\n\t convertible foreign exchange\t outside India, or\n\t having\t been converted into\tconvertible foreign\n\t exchange outside India, is brought into India, by\n\t or on behalf of the assessee in accordance with any\n\t law for the time being in force for regulating\n\t payments and dealings in foreign exchange, there\n\t shall be allowed, in accordance with and subject to\n\t the provisions of this section, a deduction of\t the\n\t whole\tof such income so received in,\t or brought\n\t into India in computing the total income of\t the\n\t assessee.\n During the currency of this provision, the Finance Act,\n1982 introduced a new section 80-HHB w.e.f. 1.4.1983.\tThis\nprovision reads thus :\n Section 80-HHB Deduction in respect of profits\t and\n\t gains from projects outside India -\n\t (1) Where the gross total income of\tan assessee\n\t being\tan Indian company or a person (other than a\n\t company) who\tis resident in\tIndia includes\t any\n\t profits and gains derived from the business of\n\t\t\t\t\t\t 71\n\t (a) the execution of a foreign project undertaken\n\t by the assessee in pursuance of a contract entered\n\t into by him, or\n\t (b) the execution of any work undertaken by him an\n\t forming part of a foreign project undertaken by any\n\t other\tperson\tin pursuance of a contract entered\n\t into by such other person, with the Government of a\n\t foreign State\t or any statutory or other public\n\t authority or\tagency\tin a foreign State, or a\n\t foreign enterprise, there shall, in accordance with\n\t and subject to the provision of this\tsection, be\n\t allowed, in computing the total income of\t the\n\t assessee, a deduction from such profits and gains\n\t of an amount equal to twenty five per cent thereof\n\t :\n\t Provided that the consideration for the execution\n\t of such project or, as the case may be, of\tsuch\n\t work is payable in convertible foreign exchange.\n\t (2) For the purposes of this section -\n\t (a) \"convertible foreign exchange\" means foreign\n\t exchange which is for the time being treated by the\n\t reserve bank\tof India as convertible foreign\n\t exchange for the purposes of the Foreign Exchange\n\t Regulation Act, 1973 (46 of 1973), and any rules\n\t made thereunder :\n\t (b) \"foreign project\" means a project for -\n\t (i) the construction of any building,\t road,\tdam,\n\t bridge or other structure outside India;\n\t (ii) the assembly or installation of any machinery\n\t or plant outside India;\n\t (iii) the execution of such other work (of whatever\n\t nature) as may be prescribed.\n\t (3) The deduction under this section shall be\n\t allowed only\tif the\t following conditions\t are\n\t fulfilled, namely :-\n\t (i) the assessee maintains separate\taccounts in\n\t respect of the profits and gains derived from\t the\n\t business of the execution of the foreign project,\n\t or, as the case may be, of the work forming\tpart\n\t of the foreign project undertaken by him and,\n\t\t\t\t\t\t 72\n\t where the assessee is a person other than an Indian\n\t company or a co-operative society, such amounts\n\t have been audited by an accountant as\t defined in\n\t the Explanation below sub-section (2)\t of section\n\t 288 and the assessee furnishes, along with\t his\n\t return\t or income, the report of such audit in\t the\n\t prescribed form duly signed and verified by\tsuch\n\t accountant :\n\t (ii) an amount equal to twenty five per cent of the\n\t profits and gains referred to in sub-section (1) is\n\t debited to the profit and loss account of\t the\n\t previous year\t in respect of which the deduction\n\t under this section is to be allowed and credited to\n\t a reserve account (to be called the \"Foreign\n\t Project Reserve Account\") to be utilised by\t the\n\t assessee during a period of five\tyears\tnext\n\t following for the purposes of his business other\n\t than for distribution by way of dividends or\n\t profits;\n\t (iii)\tan amount equal to twenty five per cent of\n\t the profits and gains referred to in\t sub-section\n\t (1) is brought by the assessee in\t convertible\n\t foreign exchange into India, in accordance with the\n\t provisions of the Foreign Exchange Regulation\tAct,\n\t 1973 (46 of 1973), and any rules made\t thereunder,\n\t within\t a period of six months from the end of\t the\n\t previous year referred to in clause (ii) or, where\n\t the Chief Commissioner or Commissioner is satisfied\n\t (for reasons to be recorded in writing) that\t the\n\t assessee is, for reasons beyond his control, unable\n\t to do\t so within the said period of\tsix months,\n\t within\t such\t further period as\t the Chief\n\t Commissioner or Commissioner may allow in\tthis\n\t behalf :\n\t Provided that\t where the amount credited by\t the\n\t assessee to the Foreign Projects Reserve Account\n\t in pursuance of clause (ii) or the amount brought\n\t into India by the assessee in pursuance of clause\n\t (iii)\tor each of the said amounts is less\tthan\n\t twenty\t five per cent of the\t profits and gains\n\t referred to in sub-section (1), the deduction under\n\t that sub-section shall be limited to the amount so\n\t credited in pursuance of clause (ii) or the amount\n\t so brought into India in pursuance of clause (iii)\n\t whichever is less.\n\t (4) If at any time before the expiry of five years\n\t from the end of the previous year in which\t the\n\t deduction under sub-section (1) is allowed,\n\t\t\t\t\t\t 73\n\t the assessee utilises the amount credited to\t the\n\t Foreign Projects Reserve Account for\tdistribution\n\t by way of dividends or profits or for any other\n\t purpose which is not a purpose of the business of\n\t the assessee,\t the deduction\t originally allowed\n\t under sub-section (1) shall be deemed to have\tbeen\n\t wrongly allowed, and the Income-tax Officer\tmay,\n\t notwithstanding anything contained in this\tAct,\n\t recompute the total income of the assessee for\t the\n\t relevant previous year and\tmake the necessary\n\t amendment; and the provisions of section 154 shall,\n\t so far as may be, apply thereto, the period of four\n\t years specified in sub-section (7) of that section\n\t being reckoned from the end of the previous year in\n\t which the money was so utilised.\n\t (5) Notwithstanding anything contained in any other\n\t provision of\tthis Chapter under the\theading\t \"C-\n\t Deductions in respect of certain incomes\", no\tpart\n\t of the consideration or of the income comprised in\n\t the consideration payable to the assessee for\t the\n\t execution of\ta foreign project referred to in\n\t clause\t (a) of sub-section (1) or of any\twork\n\t referred to in clause (b) of that sub-section shall\n\t qualify for deduction for any assessment year under\n\t any such other provision.\"\n .lm\n The three\t questions which are now for consideration\nbefore\tus raise the issue whether the assessee is entitled\nto a deduction under section 80-O or\t section 80-HHB or\npartly\tunder one and partly under the\t other\tor, indeed,\nunder neither of the provisions. We shall now\t proceed to\nset out the factual background in which the issues arise.\n The assessee is a civil\tconstruction company which\ndescribes itself as Engineers and Contractors. It\t has\nexecuted a large number of projects overseas and in India,\nits projects include dams, irrigation and hydel projects,\nwater supply and sewerage plants, marine and harbour works,\nairports etc. The assessee entered into eight contracts for\nthe construction, inter alia, of a\tdam and irrigation\nproject\t in Libya, a fibre-board factory at Abu\t Sukhair in\nIraq and the huge Karkh Water Supply Project n Baghdad which\nwas of the total values of 534 million dollars. For these\ncontracts the assessee obtained the approval of the Central\nBoard of Direct Taxes (Board' or `C.B.D.T.') in terms of\nsection\t 80-O.\tA broad outline of these projects can be\ngathered from the following table :\n\t\t\t\t\t\t 74\n-------------------------------------------------------------------------\nS. Name of Date of Name of the\t Date of Period of\nNo. Project agreement Other contrac-\t approval approval as per\n\t\t ing party\t by Board Board's letter\n-------------------------------------------------------------------------\n1.Abu Sukhair 6.9.75 State Organisation 11.8.76 For assessment\n Project\t of Industrial Design\t years 1976-77\n\t\t & Construction, Mini-\t to 1978-79\n\t\t stry of Industry &\n\t\t Minerals, Baghdad\n\t\t (Iraq)\n2.Wadi Ghan 8.8.77 Socialist people's Lib 31.8.78 For the assess-\n Dam\t\t -yan Arab Jamahiriya,\t ment years 1978-\n\t\t Secretariat of Dams and\t 79 and onwards\n\t\t Water Resources, Tripoli,\n\t\t (Libya)\n3.Ammara 15.3.78 State Contracting Co. 22.2.79 \"Assessment years\n Project\t for Water and Sewerage\t 1979-80 to\n\t\t Projects, Ministry of\t 1982-83\"\n\t\t Municipalities, Republic\n\t\t of Iraq\n4.Nassir- 14.12.78 Ministry of Housing & 7.2.80 \"Assessment years\n iyah\t\t Construcion, Govt of\t\t1980-81 and onw-\n Project\t Iraq\t\t\t\t ards\"\n5.Sulaim- 10.10.79 Ministry of Housing & 31.5.80\t\"Assessment years\n aniyah\t Construction, Govt of\t\t 1980-81 and onw-\n Project\t Iraq\t\t\t\t ards\".\n6.West Bank 12.4.80 Baghadad Sewerage Board 23.7.80\t\"Assessment years\n Project\t Construction, Govt of\t\t 1980-81 and onw-\n\t\t Iraq\t\t\t\t ards\"\n7.Karkh\t 17.12.80 Amanat Al-Asima,\t 28.10.83\t\"For the assessem-\n Project\t Baghdad Water Supply\t\t ent year 1982-83.\n\t\t Administration, Govt.\t\t For the subseque-\n\t\t of Iraq, Baghdad\t\t\t nt period your\n\t\t\t\t\t\t\t attention is in-\n\t\t\t\t\t\t\t vited to the pro-\n\t\t\t\t\t\t\t ision of s. 80\n\t\t\t\t\t\t\t HHB which are\n\t\t\t\t\t\t\t operative w.e.f.\n\t\t\t\t\t\t\t 1.4.83\"\n8.Diwan- 10.1.81 Water & Sewerage\t 28.10.83\t -do-\n iyah\t\t Projects, Baghdad\n Project\n\t\t\t\t\t\t 75\n In\t the light of these approvals, the assessee claimed\nand obtained deduction under section 80-O in respect of the\nreceipts from the first six of the contracts in some of\t the\nassessment years between 1976-77 to 1980-81.\n For the assessment year 1983-84, the assessee returned\na gross total income or Rs. 72,67,45,938 but,\t as against\nthis, it claimed a deduction of Rs. 89,16,19,198 in respect\nof seven of the above contracts, the\t eight\thaving\tbeen\ncompleted much earlier. Of this, the deduction claimed in\nrespect\t of the Karkh and Diwaniyah projects came to\t Rs.\n77,84,29,446 and Rs. 6,36,85,436 respectively.\t As pointed\nout above, the letter of approval of the Board under section\n80-O in respect of these two contracts dated 28.10.83\t was\nlimited\t to the assessment year 1982-83. The Inspecting\nAssistant Commissioner\t (I.A.C.), Sri\t Hari Narain,\t who\ncompleted the assessment on 26.3.1984 declined to grant\t the\nassessee any deduction under section\t 80-O not only in\nrespect\t of these two contracts but also in respect of\t the\nother five. He was of opinion that it was section 80-HHB\nthat applied to these agreements and\t not section 80-O.\nHowever, he declined to grant any relief to the assessee\neven under section 80-HHB as the conditions for exemption\nspecified in that sub-section were not fulfilled. In\t the\nresult,\t he determined the assessee's total income at\t Rs.\n89,41,35,103 as against the NIL income returned by\t the\nassessee, thus raising a tax demand of Rs. 66,07,72,982.\n On\t appeal, the Commissioner of Income-tax (Appeals)\ngave the assessee partial relief. He agreed with the\t IAC\nthat the assessee was not entitled to relief under section\n80-O because : (1) the approval of the CBDT for three of\nthe contracts did not extend to assessment year 1983-84; (2)\nall the contracts undertaken by the assessee were in\t the\nnature\tof `foreign projects' within the maning of section\n80-HHB; and (3) even where the contracts had the approval of\nthe CBDT the non-obstante provisions of section 80-HHB\t (5)\nruled out the grant of relief under section 80-O for any of\nthe projects.\t He however, felt that as the assessee\t had\nbeen under a\tbonafide belief all through that it\t was\nentitled to relief under section 80-O, it had\t not had a\nproper\topportunity of putting forth its claim\t for relief\nunder section\t80 HHB. He,\ttherefore, set\t aside\t the\nassessment to enable both sides to marshall their evidence\nand to enable the IAC to reappraise the assessee's claim for\nexemption under that section.\t The order of the CIT\t was\ndated 26.3.85.\n The Income-tax Appellate Tribunal (ITAT)\tagreed\twith\nthe CIT. Its conclusion, set out succinctly in para 48\t of\nits order was thus :\n\t \"To conclude\tthis point, we would hold that\t the\n\t income\t and consideration received by the assessee\n\t in the execution of all the\tseven contracts in\n\t general and the Karkh work in particular fell\n\t\t\t\t\t\t 76\n\t under\tthe provisions\t of section 80-HHB as\t the\n\t contracts were for execution of foreign projects.\n\t We further hold that in view of the provision of\n\t section 80-HHB (5) the claim of the assessee under\n\t section 80-O cannot be considered inspite of\t the\n\t approval orders of the Board.\t This ground in\t the\n\t assessee's appeal has, therefore, to\tbe rejected\n\t and the conclusion arrived\tat by\tthe learned\n\t Commissioner of Income-Tax (Appeals) is upheld,\"\n It\t may be mentioned here that, before the\t appeal\t was\nheard by the ITAT, the CBDT on a representation made by\t the\nassessee and after some enquiry and correspondence, issued\non 31.7.85 a\tletter\tmodifying the\toriginal letter of\napproval of 28.10.83 in respect of the Karkh and Diwaniyah\ncontracts. By this\t letter, the CBDT directed\t the\nsubstitution of the following words in place of the\tword\nquoted in the last column of the table set out earlier:\n \"Assessment year 1982-83 and onwards\".\n In other words, the CBDT lifted its earlier limitation\nof approval only to assessment year 1982-83 and made it\noperative even for subsequent assessment years. There\t has\nbeen some criticism,\ton behalf of the assessee, of\t the\nmanner\tin which the Department has sought to get over\t the\neffect\tof modification letter attributing it to\tsome\nmisunderstanding or confusion. One\tof the\t assessee's\nprincipal grievances is that the ITAT has erred in accepting\nthis explanation, treating the approval of 28.10.1983 as a\nqualified one and ignoring the letter of 31.7.85. We shall\ndiscuss this aspect later.\n The ITAT, at the request of the assessee, referred\t the\nfour questions of law which we have set out earlier for\t the\ndecision of the High Court. The High Court came to\t the\nconclusion that the receipts of the\t assessee from\t the\ncontracts did not fall within the category of receipts\t for\nwhich deduction is provided in section 80-O. It was of\t the\nview that the Board's approval was a qualified one which\nfully\tauthorised and empowered the officer to determine\nwhether all the conditions of the section are fullfilled as\nwell as the amount, if any, which could be deducted under\nsection\t 80-O.\tThe Court also came to the conclusion\tthat\nthe execution of the work by the assessee, in\tthe present\ncase, fall under section 80 HHB and not section 80-O.\t In\nthe result, questions\t 1 to 3 were answered\tagainst\t the\nassessee and in favour of the Revenue.\t The assessee,\thas,\ntherefore, preferred these appeals.\n As\t pointed out earlier,\t the assessee's claim\t for\ndeduction relates to seven contracts and depends on\t the\nterms and conditions of each one of them. However,\t the\nKarkh Water Supply scheme contracts has been taken as the\n\t\t\t\t\t\t 77\nmodel or specimen for purposes of discussion both because\nthe terms and conditions of all the contracts are more or\nless similar and also because the deduction\t claimed in\nrespect of this contract constitutes an overwhelmingly\thigh\npercentage of the assessee's total claim. We\tshall also,\ntherefore, proceed to discuss the issues raised in the light\nof the\t terms\tand conditions of this contract and\t the\napproval given therefor. Before doing so, we would like to\npoint out that for the assessment year 1983-84 with which we\nare concerned,\t a discussion of the relative\t spheres of\nsection 80-HHB and section 80-O would be called for and\t the\nassessee may get full or partial relief under either or\nneither\t of the sections for the said assessment year;\t but\nif, in\t the process, we come to the conclusion that\t the\nprovisions of section 80-O can have no application to\t the\ncontracts in question, such conclusion is bound to\thave\nrepercussion also on the deductions claimed by, and allowed\nto, the assessee under that section in the earlier years in\nrespect of some of the contracts.\n The Baghdad Water Supply Administration (BWSA) invited\ntenders\t from 'experienced engineering consortia\" to submit\ntenders\t \"for the design, manufacture, delivery, supply,\nconstruction and installation, complete under a single\ncontract of the works required\" for the first stage of\t the\nKarkh Water Supply Scheme. The works comprised 'a River\nintake\tand pumping station on the west bank of the River\nTigris\tabout 30 kms. north of Baghdad; raw water pumping\nthrough\t twin 1800 mm diameter pumping mains to a nearby\ntreatment works; treatment comprising essentially\tpre-\nsettlement, clarification and chemical\t coagulation, rapid\ngravity\t sand filtration and disinfection with chlorine:\ntreated\t water storage; treated water pumping through\ttwin\n2200 mm diameter transmission pipelines to the\t city area,\nand distribution and storage within the west bank part of\nthe city area and within the municipalities of\t Abu Ghraib\nand Taji\".\tFive volumes\t of documents\t containing\ninstructions,\tconditions, general\tspecifications\t and\nrequirements, specifications for plant and civil works,\nschedules, and supplementary information and a sixth volume\ncontaining 99\tdrawings were issued along with\t the tender\ndocuments. Since tenders had been\t called\t for\tfrom\nConsortia, the assessee joined hands with\t the State\nContracting Company for Water and Sewerage Projects, Baghdad\n(SCC) to form a consortium and was able to bag the contract\nand an agreement was entered into on 17.12.80\tbetween\t the\nIraqi Government and\tthe Consortium.\t The terms of\t the\nconsortium between the assessee and SCC were set down in an\nagreement dated 18.12.80 which divided the areas\t of\nresponsibility (the packages) under the contract between the\ntwo. Broadly speaking, the SCC was made responsible for the\nReservoir works while the assessee was made responsible\t for\nthe civil works. The total value of the contract\t was\n325,750,000 Iraq Dinars (ID) of which 65% was\n\t\t\t\t\t\t 78\npayable\t in U.S. dollars, pound sterling or Swiss francs.\nThe value of the package of the assessee was ID\t 152,956,253\n(75% of which was payable in the said foreign exchange).\n On\t 3rd March, 1981, the assessee applied to the\tCBDT\nfor according approval to the contract \"for the supply of\ncivil construction know-how to the Government of Iraq\" under\nsection\t 80-O of the Act. A proforma\t prescribed by\t the\nRevenue was filled up and enclosed to the application.\tPara\n5 to 11 of this proforma run as follows :\n 5. Please state whether the income is\n\treceived in consideration for-\n (a) the use outside India of\n\t (i) any patent, invention model,\n\t design , secret, formula or\n\t process, or similar property\n\t right :\t\t\t No\n\t (ii) information concerning in-\n\t dustrial, commercial or sci-\n\t entific knowledge, experi-\n\t ence, or skill made available\t Yes\n (b) technical services rendered\t Techincal services will be\n or agreed to be rendered outside\t rendered by us to Baghadad\n India (Please also state the arr-\t Water Supply Administration,\n angements availabe with the appli-\t Government of Iraq in accord-\n cant for rendering such technical\t ance with the said agreement\n services and the mode of tendering\t dated 17.12.80. The technical\n such services).\t\t\t know-how and services will be\n\t\t\t\t\t rendered by us through our qu-\n\t\t\t\t\t alified experienced and skilled\n\t\t\t\t\t Engineers, Scientists and Tech-\n\t\t\t\t\t nicians, for that purpose, a\n\t\t\t\t\t strength or about 1,800 Indian\n\t\t\t\t\t Engineers, Tecnicians and semi-\n\t\t\t\t\t skilled labours will be inducted.\n 6.Does the Agreement provide for\t The agreement also provides for\n supply of technical know-how or\t the supply use of goods as per\n rendering of any services other\t details given below :\n than those covered by section\n 80-0(e.g. use of trade marks\n or supply of goods) if so\t\t Machinery, plant, Equipment, Ve-\n please specify them and also\t hicles cement, steel-bars, Sand\n the amount of consideration\t Aggregate, Bitumen, Fencing-fabri\nc,\n receivable/received in resp-\t Shuttering material, Steel pipes,\n ect of them.\t\t\t Patent items, projection cladding\n\t\t\t\t\t ceiling, Joining, Steel Pipes wit\nh\n\t\t\t\t\t joining and aductile iron pipes e\ntc.\n\t\t\t\t\t The cost of\n\t\t\t\t\t\t\t\t 79\n\t\t\t\t\t supply of these tiems will be det\ner-\n\t\t\t\t\t mined at the close of each year a\ns\n\t\t\t\t\t the work progresses. The total va\nlue\n\t\t\t\t\t of the contract is ID 152,956,253\n.\n\t\t\t\t\t After\ttaking\tout the net cos\nt of\n\t\t\t\t\t machinery & equipment and other e\nmbed-\n\t\t\t\t\t ded items, as mentioned above (in\n whi-\n\t\t\t\t\t ch no profit elements is involved\n),\n\t\t\t\t\t from the total value of the Contr\nact\n\t\t\t\t\t the remaining amount will be the\n\t\t\t\t\t value of technical know-how and s\nerv-\n\t\t\t\t\t ices to be rendered by us under t\nhis\n\t\t\t\t\t contract, It is this amount for w\nhich\n\t\t\t\t\t we are seeking exemption u/s 80-O\n.\n 7.If technical know-how falls\tNot applicable.\n under 5(a)(i) above, please\n indicate.\n (a) how the applicant acquired\tNot applicable.\n\t it or what arrangements he\n\t has made for acquiring it\n (b) What are the applicant's own\t Not applicable.\n\t rights in respect thereof\n (c) Whether its provision to the\n\t other party to the agreement\n\t involves :-\n (i) transfer of all or any rights\n\t of the applicant in respect of\t Not applicable.\n\t it, if so, please specify the\n\t nature and extent of the right\n\t transferred and the manner of\n\t its transfer :\n (ii)the imparting of any information\n\tconcerning its working or use; if\n\tso, please specify the information Not applicable.\n\timparted and the manner of its imp-\n\tarting;\n (iii)its use by the other person to the\n\t agreement if so, please specify the\n\t nature and manner of the use.\t\t Not applicable.\n 8.If the technical know-how falls under\n (a)(ii) above, please specify\n\t\t\t\t\t\t\t\t 80\n (a) the arrangements available with the\t we have on our rolls qual\nifed\n\t applicant for obtaining and impart-\t Engineers and Technicians\n who\n\t ing it\t\t\t\t\t have already acquired the\n re-\n\t\t\t\t\t\t quisite scientific knowle\ndge,\n\t\t\t\t\t\t experience and skill for\ngiv-\n\t\t\t\t\t\t ing such technical know-h\now\n\t\t\t\t\t\t and it is they, who will\nbe\n\t\t\t\t\t\t imparting the same to the\n\t\t\t\t\t\t client by executing the w\norks\n\t\t\t\t\t\t at the site in Iraq.\n (b) the manner of imparting it\t\tThe Engineers and Technici\nans\n\t\t\t\t\t\twill be working for about\n5\n\t\t\t\t\t\tyears at the site of const\nr-\n\t\t\t\t\t\tuction to impart the techn\nical\n\t\t\t\t\t\tknow-how and services on b\ne-\n\t\t\t\t\t\thalf of our Company.\n 9. Has the applicant made any agree-\n ment or arrangement with any other\n person in India or abroad for obta-\n ining the technical know-how etc.,\t\tNot applicable.\n to be provided under this agreement\n or for rendering technical services?\n If so please give the follwing infor-\n mation :\n\t(i) the name and address of such\tNot applicable.\n\t other person;\n\t(ii) details of the agreement or ar-\n\t rangement together with a cer-\tNot applicable.\n\t tified copy of the written\n\t agreement, if any.\n\t (iii)the nature, and extent of appli-\n\t cant's relationship association\t Not applicable.\n\t with such other person.\n 10. Please state the nature of the income\t Income out of imparting c\nivil\n in respect of which deducation is claimed,\t construction know-how and\n viz..,\t\t\t\t\t services for the connstru\nc-\n\t\t\t\t\t\t tion of work of Karkh Wat\ner\n\t\t\t\t\t\t Supply Scheme, Baghdad.\nRoyalty\nCommissin\nFees\n\t\t\t\t\t\t\t 81\nAny similar payment\n11. Please indicate the portion/amount\n(alongwith its computation) which is\t Please see our reply under\neligible for deduction under section\t S. No. 6 of this form.\n80-O of the Act.\n On\t 9.7.81, the C.B.D.T. called upon the\t assessee to\nclarify four aspects of its application : (i) the details or\nthe materials and equipment to be supplied by the assessee\nunder the contract and the quantum of profit thereon; (ii)\nwhether\t any engineers, scientists and technicians\twere\nrecruited in India and there was any fee attributable to\nsuch services\t; (iii) whether any tests on materials\t and\nworkmanship were carried out in India and there was any\t fee\nattributable to such tests; and (iv) the break-up of the fee\nrelating to the supply of information/know-how and rendering\nof the\t technical services. The assessee answered in\t the\nfollowing terms on 4.8.1981 :\n\t \"As desired,\tthe information/ clarification is\n\t furnished below :-\n\t (i) Our contract is for civil construction\t and\n\t know-how.\t The use of materials and equipment\n\t is part of\t these\tservices. There is\t no\n\t separate supply of\tmaterials and\t equipment.\n\t As such the question of any separate quantum of\n\t profit on the same does not arise. As\t the\n\t material\tis purchased locally in Iraq, there\n\t is no possibility or making any profit on its\n\t consumption in execution of the works.\n\t (ii) The qualified experienced skilled\t engineers,\n\t scientists and technicians are our employees\n\t and sent to Iraq for executing the work under\n\t contract.\t We do not avail of the\t service of\n\t any agency for the purpose. As such there are\n\t no recruitment expenses involved. Consequently\n\t no fee can be attributed on the\ttransfer of\n\t our workers to foreign country.\n\t (iii)No tests will ever be taken in India because\n\t all\t works will\tbe executed in\t Iraq.\t The\n\t question of attributing any fees to such\ttest\n\t in India,\ttherefore, does not arise. These\n\t tests\tare\tpart of the process undertaken to\n\t render\t technical know-how\n\t (Vi) The profits which will accrue to our Company\n\t will be\tthe gross contracts receipts\tless\n\t expenses incurred in supplying technical know-\n\t how and execution of the works, It is\n\t\t\t\t\t\t 82\n\t estimated that this will be about 25% of\t the\n\t contract value. The exact amount may vary\t and\n\t will be known only after the works have\tbeen\n\t completed.\"\n There was further correspondence, discussion\t and\nhearing\t including a detailed letter of the assessee dated\n24.12.1981 and clarificatory\t letters dated\t 15.2.1982,\n17.3.1982, 9.10.1982, some of the contents of which may have\nto be referred to later. Eventually, the C.B.D.T. accorded\nits approval to the agreements, as already maintained, on\n28.10.1983. The letter of approval has to be extracted\nhere. It runs :\n\t \"I am\tdirected to refer to\t your application\n\t 3.3.1981 received with your letter No.\t 601/IT/80-O\n\t dated\t3.3.1981 and to convey the approval of\t the\n\t Central Board\t of Direct Taxes to the agreement\n\t entered into between you and M/S. Amanat Al-Asima\n\t Baghdad Water Supply Administration, Government of\n\t Iraq,\tBaghdad, on 17.12.1980 for the\t purpose of\n\t section 80-O of the Income-Tax Act, 1961, for\t the\n\t assessment years 1982-83. For the\t subsequent\n\t period\t your attention is invited to the provision\n\t of Sec. 80-HHB which are operative w.e.f. 1.4.1983.\n\t 2. The income allowable as a\t deduction for\t the\n\t assessment year 1981-82 and onwards would be\t the\n\t income\t computed after accounting for expenses\n\t incurred in earning such income i.e. net income.\n\t 3. The actual deduction to\t be allowed will,\n\t however, be such portion of the income which\t has\n\t been received in convertible foreign\texchange in\n\t India,\t or having been received in\t convertible\n\t foreign exchange outside india or\thaving\tbeen\n\t converted into convertible foreign exchange outside\n\t India is brought into India in accordance with\t the\n\t law for the time being in force for regulating\n\t payment and dealings in foreign exchange.\n\t 4. The grant of deduction from the total Income\n\t will be subject to\tyour fulfilling the other\n\t conditions laid down in the Act in this behalf.\n\t The amount\teligible for deduction will\t be\n\t determined by\t Income-tax Officer at the time of\n\t assessment.\n\t 5. This approval is subject to any amendment in the\n\t provisions of the Income-tax Act, 1961, from\ttime\n\t to time.\n\t\t\t\t\t\t 83\n\t 6. I am further to add that the approval accorded\n\t by this letter is only for the purpose of section\n\t 80-O of the Income-tax Act, 1961, and should not be\n\t construed to\tconvey the approval of\tthe Central\n\t Government or Central Board of Direct Taxes or\t any\n\t other statutory authority under the Government\t for\n\t any other purposes.\"\n It\t may be mentioned that even while the assessee's\napplications for approval to the Kharkh & Diwaniya contracts\nwere pending, the Finance Act, 1982 had amended the Act to\ninsert section 80-HHB with effect from 1.4.1983.\n This amendment compelled the assessee to send a letter\nto the\t C.B.D.T. on 9.10.82\texplaining that this\t new\nprovision would not stand in the way\t of approval being\naccorded to its contracts under section 80-O.\tBut despite\nthe pleas in this letter the C.B.D.T., in para 1 of\t its\nletter of approval of 28.10.1983 restricted the approval to\nassessment year 1982-83. The assessee, therefore, wrote\nagain in detail on 2.12.1983, urging the Board that\t the\nreference to section 80-HHB in the letter of approval\t was\nuncalled for and that the approval granted should be\tmade\nvalid for the entire duration of the contract.\tThe material\non record shows that this letter was the subject of careful\nconsideration by the\tC.B.D.T. which\t finally issued a\nclarification in the following terms on 31.7.1985, more than\na year and a half later :\n\t \"With\t reference to\tyour representation dated\n\t 2.12.83 on the above subject, I am directed to\t say\n\t that for the words and figures \"assessment years\n\t 1982-83. For the subsequent period your attention\n\t is invited to the provision of section 80-HHB which\n\t are operative w.e.f. 1.4.83,\" appearing at the\t end\n\t of para 1 of the Board's letter F. NO. 473/46/81-\n\t FTD dated 28.10.83, the following words and figures\n\t may please be substituted :\n\t \"assessment years 1982-83 and onwards\"\n It\t appears that though the above\t intimation to\t the\nassessee was cryptic, the CBDT had decided to\t extend\t the\nperiod\tof operativeness of its approval under section\t80-O\nonly after consulting the Attorney General of India (A.G.).\nThe CBDT had circulated the opinion of the A.G. in this case\nalong with the statement of case put up to him for opinion\nto all the officers of the Departments. On 14.8.1985,\t the\nCIT Central-I), New Delhi wrote a letter to the concerned\nmember\tof the CBDT which makes interesting reading. We do\nnot wish to extract, or comment on, the contents of\tthis\nletter here. Suffice\n\t\t\t\t\t\t 84\nit to say that the writer of the letter was of opinion\tthat\nthe CBDT should not have reviewed the decision taken by it\non 28.10.83. He stated that, on the strength of the CBDT's\nletter\tdated 31.7.85,\t the assessee\twas claiming\t100%\nexemption and requested that \"clear instructions\" should be\nissued\tearly 'on the complications\" pointed\tout in\t the\nletter;\t Thereupon, a letter. dated 24.9.1985 was addressed\nby the Deputy Secretary (FTD), Government of India, (who, at\nthe time, happened to be Sri Hari Narain, the IAC who\t had\ncompleted the\t assessment on the\tassessee) to\t the\nC.I.T.(Central), New Delhi to the following effect :\n\t \"Please refer\t to your D.O. No. 77,\tdated\t14th\n\t August, 1985\taddressed to Member I.T.(J) on\t the\n\t above subject.\n\t 2. Letter F. No. 473/644/83-FTD dated 31 st July,\n\t 1985 was only in recognition of the position\tthat\n\t the approval u/s 80-O is for the agreement as\tsuch\n\t and the mention of any time limit\t therein is\n\t redundant, except for the starting year.\n\t 3. As\t would\tbe noticed from all the approval\n\t letters themselves,\tBoard's\t approval to\t the\n\t agreements is subject to the other conditions of\n\t the Act being satisfied. These have to be examined\n\t carefully by the assessing officers while making\n\t the assessments. If the income does\tnot satisfy\n\t the requirements of section 80-O, it cannot be said\n\t that the mere approval would automatically entitle\n\t the assessee to relief u/s 80-O. The quantum, if\n\t any, of the\tincome which would be\tentitled to\n\t relief\t under\tsection 80-O has necessarily to be\n\t determined by them on the facts of each case.\n\t 4. It would also be noticed from all the approval\n\t letters that they are subject to amendments enacted\n\t in the Income-tax Act, 1961, from time to time.\n\t Therefore, notwithstanding the approval under\n\t section 80-O or the words \"Assessment year 82-83 and\n\t onwards\", if the project or work falls within\t the\n\t definition given in section 80-HHB(1), the\tsame\n\t would be hit by the provision of section 80-HHB(5).\n\t 5. Your apprehension\t that the approval has been\n\t modified or that it ignores\t the provisions of\n\t Section 80-HHB is, therefore, without any basis.\n\t The position\t in respect of letter F.\t No.\n\t 473/643/83-FTD\t dated 31.7.1985 for the agreement\n\t dated\t10.1.81 in respect of the same\tassessee is\n\t also identical.\"\n\t\t\t\t\t\t 85\n Normally,\tcorrespondence of this type would be hardly\nrelevant for deciding question regarding the construction or\na section in the statute. But, apparently, the\t Department,\nbefore\tthe Tribunal, relief upon the letter of\t 14.9.85 as\nsuperseding the effect of the approval granted on 31.7.85.\nThe Tribunal,\tin its appellate order,\t referred to these\nletters. It observed :\n\t \"It is that\tin respect of Karkh and Diwaniyah\n\t Projects confusion which has arisen in this\tcase\n\t could\thave been avoided. In the first approval\n\t letter\t the Board confined the approval to\t the\n\t assessment year 1982-83 and referred to section 80-\n\t HHB for the subsequent years.\tOn representation by\n\t the assessee the matter was considered for almost\n\t two years and meanwhile the assessment was\talso\n\t made and the first appellate authority also decided\n\t the matter.\tIt was only in July, 1985 that\t the\n\t Board\trectified their earlier order removing\t the\n\t reference to\tsection 80-HHB\tfor the assessment\n\t years 1983-84 onwards.\t The second order was likely\n\t to give an impression that the rectification\t has\n\t been made in view of the representation made by the\n\t assessee about the scope and application of section\n\t 80-HHB. This impression was not only\t created in\n\t the minds of the assessee but also led to\tsome\n\t misunderstanding in the mind of the Commissioner.\n\t When he sought a clarification the Board stated\n\t that inspite of approval under section 80-O if\t the\n\t income\t does not satisfy the requirements of\tthat\n\t section, the assessee would not be entitled to such\n\t deduction. In this letter it was also stated\tthat\n\t the mention of the assessment years in the approval\n\t orders\t was redundant. We have referred to\tthis\n\t clarification\tgiven by the Board only because\t the\n\t the learned counsel for the revenue has adopted the\n\t arguments given in this letter as his own. There\n\t is no\t doubt\tthat the first\t qualifies approval\n\t followed by the modification of that approval\n\t coupled with this thinking on the part of the Board\n\t as given to the Commissioner does indicate that the\n\t position was\t not clear in\t the mind of\t the\n\t authorities who approved or modified the approval\n\t of the contracts. Be that as it may, we have to\n\t consider the\tmatter from the angle of law as it\n\t stands\t and we cannot decide on the basis of\tsome\n\t misunderstanding or confusions which\t might\thave\n\t been created at some stage.\"\n Learned counsel for the assessee vehemently criticised\nthe issue of the letter of 'clarification\" by\tthe officer\nwho had completed the assessment in the case. He urged that\nthe Tribunal should not have taken into account the contents\nof this letter at all and, in any event, could not\thave\ndrawn an\n\t\t\t\t\t\t 86\n inference,\t because of this letter, that the position\nwas not clear in the mind of the CBDT.\tHe also pointed\t out\nthat he had sought for a reference of a \"question of law\" Of\nthe High Court on this aspect which the Tribunal (in\t his\nsubmission, unjustifiably) declined on the ground that the\nletter had been considered only because it was adopted as an\nargument by counsel for the Revenue. One aspect which\t may\nneed consideration by us is the question how for the issue\nof the letter of 14.9.85 affects the assessee's claim\t for\nexemption under section 80-O in the present case.\n There does not seem to\t be much doubt that\t the\nprovisions of\tS. 80-HHB apply to the contracts in\t the\npresent\t case and that, at the worst, the assessee's claim\nfor exemption under section 80-HHB deserves to be considered\nafresh\tafter giving the assessee an opportunity of being\nhard, as directed by the CIT (Appeals) and confirmed by\nC.I.T.\tand the High Court (see 1990 : 185 ITR 230). It is\npossible that, with section 80-HHB and 80-O, as they stand\ntoday,\tit might not\tmake very much\t difference to\t the\nassessee whether the relief is granted under the one section\nor the other, as they both permit a deduction from the gross\ntotal income, of fifty per cent, of the profits in the\t one\ncase and of the qualifying receipts in the other. However,\ntill 1.4.1987, the relief under section 80-HHB was 25% of\nthe profits whereas the deduction under section 80-O\t was\n100% of the qualifying receipts upto assessment year 1984-\n85. Thereafter the latter was reduced to 50%\tonly w.e.f.\n1.6.1987. This has made it very material to decide whether\nthe assessee is entitled to the deduction under section 80-O\nand the question that really arises for our consideration is\nwhether\t the relief under that section is available to\t the\nassessee. We\tshall first discuss this question only\t the\nlanguage of section 80-O without taking into\taccount\t the\ninsertion of section 80-HHB or the complication introduced\nthe case by the approvals of the CBDT referred to earlier.\n The Department's case, urged with great emphasis\t and\nvehemence by Sri B.B. Ahuja, is that a careful\t reading of\nsection\t 80-O will show that the deduction provided by\tthat\nsection\t is very limited in nature and not available to\t the\nassessee. He submits, on the other hand, that this case is\nclearly one falling under the terms of section 80-HHB being\na case\t of execution of a \"foreign project\" as\t defined in\nthat section.\tWe shall, however, consider the two aspects\nof the argument separately for the fact that the income in\nquestion may qualify for deduction under section 80-HHB does\nnot necessarily exclude the applicability of the provisions\nof section 80-O. It is sufficient to point out that\t the\nlanguage of sub-section (5) of section 80-HHB\twhich gives\nprecedence to a claim under section 80-HHB over one under\nany other provision,\titself\tnecessarily postulates\t the\npossibility of the whole or part of\n\t\t\t\t\t\t 87\nthe consideration payable to an assessee for the execution\nof a foreign project qualifying for deduction under section\n80-HHB\tfalling\t for consideration also under any other\nprovision as well.\n Sri Ahuja points out that Part C of Ch. VI-A of the Act\nPermits\t deductions, from the gross total income of an\nassessee, of\tvarious\t \"species\" of\tincome,\t which\t are\ncarefully defined, in section 80H onwards. Sections 80H to\n80-JJA,\t 80QQ,80RR and 80S permit a deduction in respect of\nthe \"profits and gains\" or \"profits\" derived from various\ntypes of business, undertakings or professions, sections 80K\nto 80N and 80Q deal with income by way of \"dividends\"\t and\n\"interest\" falling under certain categories; section 80-P,\nwhich\tgrants\t a deduction to cooperative\t societies,\nclassifies the deductible income into \"profits\t and gains\"\nfrom activities in the nature of business on the one\thand\nand income falling under other heads\t such as interest,\ndividends, income from house property etc. on\t the other;\n80QQA refers to income derived from a profession but only in\nthe form of consideration for assignment or grant of\ncopyright interests or royalties or copyright fees; section\n80R and 80RRA allow a deduction in respect of \"remuneration\"\n:and section 80T relates to \"capital\t gains\". In other\nwords,\tthe scheme of this Part of Ch. VI-A is to correlate\nthe deductions to specific heads of income. Section 80-HHB\ntalks of the profits and gains derived from a\tbusiness-and\nthe assessee here is seeking such a deduction - but section\n80-O provides\tfor a\tdeduction only\t in respect of an\nassessee's receipts from a foreign Government or enterprise\nby way\t of \"royalty,\tcommission, fees or any similar\npayment.\" Not only this; the section also requires that the\nassessee must have derived the receipts falling under\t the\nabove categories in one of two ways -\n (i) in consideration for the use outside India of any\n\t patent, invention, model, design, secret formula\n\t or process\tor similar property,\t right\t or\n\t information concerning industrial commercial or\n\t scientific knowledge,\t experience or\t skill\tmade\n\t available or\t provided or agreed to be\tmade\n\t available or\t provided to such Government\t or\n\t enterprise by the assessee; or\n\t (ii) in consideration of technical services\n\t rendered or\t agreed to be rendered outside\n\t India to such\t\t Government or enterprise by\n\t the assessee.\n According\tto learned counsel, the receipts of\t the\npresent, assessee do not fulfill these requirements.\n In\t support of the contention that the claim for\t the\nassessee, on the facts,\n\t\t\t\t\t 88\nis only for a deduction from the profits and\tgains of a\nbusiness carried on by it and that such a claim is\t not\nreferable to section 80-O at all. Sri Ahuja first draws our\nattention to the treatment accorded to the receipts by\t the\nassessee in its books of account as well as the claim\tmade\nin the\t applications filed before the\tCBDT.\tThe balance\nsheet of the company for the calendar year 1982 accounts for\n\"contract receipts\" of Rs. 2,332,490,079 and \"other receipt\"\nof Rs.\t 47,000,122. Deducting a total expenditure of\t Rs.\n1,717,751,494\tclassified under three headings Direct\nContract Expenses,\tmanagement expenses\tand other\nexpenditure, a \"net profit\" of Rs.661,738,707 is arrived at.\nWhile the details of the \"direct contract expenses\" set\t out\nin Schedule I include an item of \"royalties\" paid and\t the\ndetails of \"other expenditure\" set out in Schedule K include\nan item of payment of \"technical consultation fees\", there\nis no\tsimilar\t item under contract\treceipts or other\nreceipts. The\t assessee's balance sheet is thus one of a\ncompany\t carrying on business as Engineers and\t Contractors\nand reflects only the profits derived from such business.\nIt is then pointed out that the assessee has not been\table\nto identify the basis of the deduction claimed by it in\t the\napplication made to the C.B.D.T. In para 6 read with\tpara\n11 of\tthe application, the assessee explains\tthat it is\nclaiming exemption under section 80-O of the contract on the\nthe total value of the contract less the net cost of\nmachinery, equipment and other items (on which no profit\nelement is involved (and, obviously, though not specifically\nmentioned, all other expenses incurred on the contract). In\nother words, the exemption claimed is on the contract\nreceipts less the contract expenses : that is to say, on the\nentire profits from the contract. Paras (i) and (iv) of the\nletter\tof the assessee to the CBDT dated 4.8.81 also leave\nno doubt regarding this. Para 10 of the proforma requires\nthe assessee to give details of the receipts under the\tfour\nheadings mentioned in section 80-O but the assessee side-\nsteps the query with a vague answer.\t It is, therefore,\nclear,\tsays Sri Ahuja, that this is a case in which\ndeduction is claimed\tof the \"profits and gains\" of a\n\"foreign project\", a claim surely falling under section\t 80-\nHHB and totally outside the terms of section 80-O.\n Sri Ahuja, in this context, relied on the\tobservations\nof this Court in Cloth Traders P. Ltd. v. C.I.T., (1979) 118\nITR 243. There the\tquestion which\tthis Court had to\nconsider was whether the deduction provided for in section\n80-M of the Act was of the gross amount of\t the inter-\ncorporate dividend received by an assessee or the net amount\nthereof arrived at after deducting the expenses incurred for\nthe earning of such\tincome.\t The Court held that\t the\ndeduction was\tavailable for\tthe gross amount of\t the\ndividend. This question does not concern us\tbut in\t the\ncourse\tof the\t discussion, the Court\tmade the following\nobservations on which Sri Ahuja seeks to rely :\n\t\t\t\t\t\t 89\n\t \"Section 80M, sub-section (1), opens with the words\n\t \"where\t the gross total income of\tan assessee\n\t ......includes any income by way of dividends\tfrom\n\t a domestic company\" and proceeds to say that in\n\t such a case there shall be allowed in computing the\n\t total income of the assessee a deduction \"from such\n\t income\t by way of dividends\" of an amount equal to\n\t the whole of such income or 60 per cent of\tsuch\n\t income, as the case may be, depending on the nature\n\t of the domestic company from which the income by\n\t way of dividends is received.\tNow, the words \"such\n\t income\t by way of dividends\" must be referable to\n\t the income by way of dividends from\t a domestic\n\t company which\t is included in the\tgross total\n\t income. The whole of such income, that is, income\n\t by way of dividends from a domestic company or 60\n\t per cent of such income, as the case may be, would\n\t be deductible\t from the gross total\t income\t for\n\t arriving at the total income of the assessee.\t The\n\t words\t \"where\t the gross total income of\t an\n\t assessee.....includes\t any income by way\t of\n\t dividends from a domestic company\" are intended\n\t only to provide that a particular\tcategory of\n\t income, namely, income by way of dividends from a\n\t domestic company, should form a component part of\n\t the gross total income. These words merely\n\t prescribe a condition for the applicability of\t the\n\t section, namely, that the gross total income\tmust\n\t include the category of income described by\t the\n\t words\t\"income by way of dividends from a domestic\n\t company\". If the gross total income includes\tthis\n\t particular category of income, whatever be\t the\n\t quantum of such income included, the condition\n\t would\tbe satisfied and the\t assessee would be\n\t eligible for deduction of the whole or 60 per\tcent\n\t of \"such income.\" Now, if the words\t \"where\t the\n\t gross total income of an assessee ....... includes\n\t any income by way of dividends from\t a domestic\n\t company\" in the opening part of the section refer\n\t only to the\tinclusion of the category of\t the\n\t income\t denoted by the words \"income\t by way of\n\t dividends from a domestic company\" and not to\t the\n\t quantum of the income so included, the words \"such\n\t income\" cannot have reference to the quantum of the\n\t income\t included, that is,\tincome\tby way\t of\n\t dividends from a domestic company. The words \"such\n\t income\" as a\t matter of plain grammar must be\n\t substituted by the\twords \"income\tby way\t of\n\t dividends from a domestic company\" in order to\n\t arrive at a proper construction of the section\t and\n\t if that is done, it would be obvious that\t the\n\t deduction is to be in respect of the whole or 60\n\t per\tcent\tof the \"income by\t way\t of\n\t 90\n\t dividends from a domestic company\" which can\tonly\n\t mean the full amount of dividends received from a\n\t domestic company.\"\n Sri Ahuja\t is, of course, fully\tconscious that\t the\ndecision in Cloth Traders (supra) has since been overruled\nby a larger bench of the Court in Distributors (Baroda) P.\nLtd. v. Union, (1985) 155 ITR 120 but he points out -\t and\nwe agree he is right in this - that the latter decision does\nnot affect the weight of the above observations.\t We\nentirely agree with Sri Ahuja is that the deduction under\nsection\t 80-O is in respect of the categories of income\nspecifically referred to therein and this is an aspect to\nwhich we shall advert later.\tBut we are unable to agree\nwith him that there is an antithesis between the categories\nof income so\tspecified and the expression 'profits\t and\ngains\".\t It is no doubt true that, wherever\tthe statute\nrefers\tto the \"profits and gains\" of a business, it has in\nmind the income chargeable under the Act under that head -\nhead \"D\" specified in section 14 of the Act - but the other\ncategories of income referred to in the various sections are\nnot correlated to the headwise classification of section 14.\nIt is well known that items of interest, dividends and other\nitems of remuneration\t are not always referable to\t any\nparticular head. They may be assessable as \"business\"\nincome\tor income from other sources.\tIn particular,\t the\nreceipts by way of royalty, fee, commissions\tand similar\npayments may be derived in the course of a\tbusiness or\nprofession and constitute part of the profits and gains of\nsuch business\tor profession.\tFor instance, a consulting\nscientist, architect or engineer might provide technical\nservices to others and receive what is styled as \"fees\"\nfrom them; the receipts will nevertheless be assessable as\npart of the profits and gains from his profession. The mere\nfact, therefore, that the assessee is carrying on business\nas engineers and contractors and the receipts\tin question\nflow to it in the course of its business as such will\t not\nnecessarily preclude relief under section 80-O if they\t can\nbe brought within the categories of receipts mentioned in\nthe section.\tThe material question,\t therefore, is\t not\nwhether\t the receipts form part of the business\t profits of\nthe assessee but whether the entire receipts, or any part of\nthem, can be brought within the qualifying words in section\n80-O. To this basic question we shall now turn.\n Sri Ahuja's point on this aspect is two fold. He first\npoints\tout that the contract does not\t stipulate for\t any\npayment\t labelled under one of these categories.\t The\nexpressions royalty, commission and fees have well-known\nconnotations and the word \"any similar payment\", he says,\nhas to be construed ejusdem generis and the receipts under\nthe contract answer none of these descriptions. We do\t not\nthink that the mere\tfact that the\t contract does\t not\nspecifically assign the nomenclature\t mentioned in\t the\nsection\t to the payments made to the assessee can be\nconclusive of the assessee's claim to\n\t\t\t\t\t\t 91\nexemption. That apart, of the four expressions referred to\nin the section there are referred to elsewhere in the\t Act.\nWhile `royalty' is generally a consideration paid to\t the\nowner of a right or asset - such as copyright patent right,\nmining right etc. - for the privilege of using it for one's\nown purposes, the other expressions are more comprehensive.\nThe expressions `royalty' and `technical fees' have\tbeen\ndefined\t in section 9.\tThough the definitions are only\t for\nthe purposes of clauses (vi) and (vii) of section\t9(1)\nrespectively, they may be set out here. The\t definitions\nread thus :\n\t \"S.9(1)(vi) - income by way of royalty payable by -\n\t Explanation 2 : For the purposes of this clause,\n\t \"royalty\" means consideration (including\t any\n\t lumpsum consideration but excluding\t any\n\t consideration\twhich would be the income of\t the\n\t recipient chargeable\t under\tthe head \"Capital\n\t gains\") for -\n\t (i) the transfer of all or any rights (including\n\t the granting of a licence) in respect of a\n\t patent,\tinvention, model, design, secret\n\t formula\tor process or trade mark or similar\n\t property;\n\t (ii) the imparting of any information concerning\n\t the working of, or the use of, a patent,\n\t invention, model, design, secret, formula or\n\t process or trade mark or similar property;\n\t (iii) the use\t of any patent, invention, model\n\t design,\tsecret formula or process or trade\n\t mark or similar property;\n\t (iv) the imparting of any information concerning\n\t technical, industrial, commercial\t or\n\t scientific knowledge, experience or skill;\n\t (v) the transfer of all or any rights (including\n\t the granting of a licence) in respect of\t any\n\t copyright, literary, artistic or scientific\n\t work including films or video tapes for\t use\n\t in connection with television or tapes\t for\n\t use in connection with\tradio broadcasting,\n\t but not including consideration for the sale,\n\t distribution\t or\t exhibition\t of\n\t cinematographic films; or\n\t\t\t\t\t\t 92\n\t (vi) the rendering of any services in\t connection\n\t with the activities referred\tto in\tsub-\n\t clauses (i) to (v).\n Section 9 (1) (vii) - income by way of fees\t for\n\t technical services payable by -\n\t xxx\t\t xxxx xxx\n\t Explanation (2) : For the purposes of\tthis clause,\n\t \"fees\t for\ttechnical services\"\tmeans\t any\n\t consideration\t (including\t any\tlump\t sum\n\t consideration) for the rendering of any managerial,\n\t technical or consultancy services (including\t the\n\t provision of\t services of technical or other\n\t personnel) but does not include consideration\t for\n\t any construction, assembly, mining or like project\n\t undertaken by the recipient or consideration which\n\t would\tbe income of the recipient chargeable under\n\t the head `Salaries'.\n The word\t `commission' has a\tsomewhat different\nconnotation and is used differently in different contexts.\nIt has been explained by this Court in Gestetner Duplicators\nPvt. Ltd. v.\tC.I.T., (1979) 117 I.T.R. 1 (S.C.) in\t the\ncontext\t of the definition of `salary'. Black's\t Law\ndictionary assigns very wide meaning to these expressions :\nSee, for example, p. 614, 1369 and 1463 of the Sixth Edition\n(1991).\t But we do not think that it is necessary to attempt\nany precise definition of each of these expressions or to\nattempt to discern any common thread running through them so\nas to\trestrict the meaning of the\twords `any similar\npayment'. In\t our opinion,\t the true clue to\t the\ninterpretation of this expression lies not in the preceding\nthree words but really in the second part of the section.\nThe essence of the exemption lies, not in consigning\t the\nreceipt to one of these pigeonholes but in examining whether\nthe receipt is a payment in consideration of one of the\t two\nsituations envisaged in the section. To illustrate : where\nthe assessee is the owner of a patent or invention, he\t may\ngenerally permit another to make use of the patent or\t the\ninvention in consideration of a `royalty' payment.\t Or,\nagain,\twhere the assessee is in possession of technical\nknow-how, he may be prepared to allow another to make\t use\nthereof\t in consideration of a `fee' to the assessee.\t He\nmay also stipulate a\t consideration\tin the\t form of a\ncommission based on the sales of the\tproducts the other\nparty is able to manufacture with the aid of such invention\nor know-how.\tAgain, an assessee may\thave achieved\tsome\nspeciality and\t he may agree to lend his services to\tsome\nother person and stipulate a consideration therefore which\nmay be variously described. The nature of the asset, right,\ninformation or\t services which can be\tbrought\t under\tthis\nprovision may be varied and the considera-\n\t\t\t\t\t 93\ntion stipulated for allowing\t another to avail of\t the\nassess's asset, knowledge or services can likewise assume\nmulti-farious forms. The word `similar' connotes that\t the\npayment\t made to the assessee need not be in the nature of\nroyalty, commission or fees only; it could be any payment of\nlike nature i.e. made in consideration of the use or supply\nof such an asset, knowledge or services in the same manner\nas royalty, fees or\tconsideration could be. We\tare,\ntherefore, of the view that any type of payment received by\nan assessee will qualify for deduction under the section so\nlong only as it is a payment made in consideration of one of\nthe two types of transactions referred to in the section.\n Sri Ahuja then draws attention to the finding of\t the\nTribunal in para 41 of its order :\n\t \"Admittedly in the present case, there is no claim\n\t under\tthe first part of the section and the claim\n\t was that the assessee company was receiving\n\t payments in consideration of\t technical services\n\t rendered outside India.\"\n He\t submits that this is a finding of fact based on an\nadmission which has not been specifically challenged by\t the\nassessee in its application for reference to the High Court\nand that it is not open to the assessee to go\tbehind\tthis\nposition at this stage.\t It seems to us that there has\tbeen\nsome misconception on the part of the Tribunal. There\t are\nactually two limbs to the first part of the relevant clause\nof the section which are clearly brought out in clolumn 5 of\nthe application for approval made to the Board. Col.\t5(a)\nrefers\tto consideration received for the use outside India\n(i) of any patent, invention, model, design, secret formula\nor process or similar property right and (ii) of information\nconcerning industrial, commercial or scientific knowledge,\nexperience or\tskill made available by the assessee.\t The\nsecond\tpart of the clause is dealt with in Col. 5(b) which\nrefers\tto consideration for technical services rendered\noutside India to the foreign Government or enterprise.\t If,\nin this context, we peruse the applications for approval\nmade by the assessee to the Board, it will be seen that\t the\nassessee had no doubt clearly stated\t that the payments\nreceived by it did not come under category (a) (i) above\nreferred to. It was, however, claimed that they did\tfall\nunder (a) (ii) as well as category (b).\t In the application,\nthis was further elaborated. The second limb of the first\nclause\tof the\t section (a) (ii) was, it was claimed,\nattracted in the manner set out in Col. 8 and\t the second\npart of the section was explained to be attracted set\t out\nagainst\t sub-para (v)\tof Col. 5. The Tribunal, in\t the\nparagraph referred to by Sri Ahuja refers only to the first\nlimb of the first part of the section - which we\thave\nreferred to as \"(a) (i)\" - and has\n\t\t\t\t\t 94\noverlooked the presence of the second limb referred to by us\nas \"(a) (ii)\". Sri Ahuja may not, therefore, be quite\ncorrect\t in asserting that the assessee had restricted\t its\nclaim before the Tribunal only to the ground of \"technical\nservices\" rendered by the assessee outside India to\t its\nclient.\t The assessee's claim rested both on the second limb\nof the\t first\tpart as well as on the second part of\t the\nrelevant clause. The finding of the Tribunal in this regard\nis not one of fact based on an admission as suggested by Sri\nAhuja.\tThe finding proceeds on an incorrect appreciation of\nthe contents of the assessee's application for approval.\nThere is no basis to put forward a contention that, though\nin the application to the Board, the assessee\thad claimed\nrelief\ton two grounds, it had given up a part of the claim\nbefore\tthe Tribunal.\tThe word \"Admittedly\" used by\t the\nTribunal in the passage relied on by Sri Ahuja does\t not\nappear\tto refer to any admission over and\t above\tthat\ncontained in regard to column 5 (a)(i) of the\t application\nfor approval.\tThe question is whether the claim has\tbeen\nsubstantiated under either of these headings.\n Sri Ahuja\t vehemently argues it\thas not been.\t He\nsubmits\t that the assessee has neither made any\t information\navailable to the foreign client nor has it rendered\t any\ntechnical services to the said client.\tHe contends that the\ncontract in favour of the two members of the consortium\t was\nin the\t nature of a turnkey project. This meant that\t the\nclient was not interested in the details of the\t information\npossessed or the services rendered by the contractor: all it\nwanted\twas that the\tWater Supply Project,\tas per\t the\ndetailed specifications, designs and drawings furnished by\nthe BWSA should be executed by the consortium, complete in\nall respects, and handed over to it. Sri Ahuja points\t out\nby analysing the provisions of the consortium agreement that\nthe assessee was not concerned with any part of the contract\nother than the \"civil works\". He\tsays that all\t the\n\"Reservoir works\" which involved the putting\t up of\t the\nreservoir structures,\t the\ttrunk pipelines and\t the\nmechanical and\t electrical plant for the project was\t the\nresponsibility of the SCC and that the assessee had nothing\nto do but put up a few buildings and ancillary pipelines.\nThe assessee was nothing more than an engineering contractor\nand, in constructing\t pump-houses or laying sanitary\nfittings, he imparted\t no information and rendered\t no\ntechnical services. Such information as it possessed in\nthese respects\t was utilised by itself and such technical\nservices, as were rendered by its engineers and other\nemployees were rendered to it and not to either its partner\nin the consortium or to the foreign Government.\n We\t do not desire to encumber this judgment with a\ndetailed discussion of the large number of clauses of\t the\ncontract (tender) document and the consortium agreement.\nBut it seems to us that while Sri Ahuja seems to be right in\nsaying\tthat the assessee was concerned only with the civil\nworks\n\t\t\t\t\t 95\nsection\t of the project, he has over simplified the\tpart\nplayed by the assessee in the execution of the contract. It\nis not necessary to quarrel with Sri Ahuja's description of\nthe contract as a \"turn-key project\" which, indeed, was\t the\ndescription given to it by the assessee itself - in para 19\nof the application to the Board and in para 2 of the letter\ndated 17.3.82\t- or his consequent suggestion that\t the\nforeign government was not interested in. the minute details\nor working of the contract but only in the final outcome.\nStill the fact is that the contract executed by the assessee\nis no ordinary contract. It may be that a good part of\t the\ncontract was executed by the SCC. But this cannot render\nthe assessee's part insignificant. If the State enterprise\nitself\twas a fully expert body capable of completing\t the\nentire project on its own, there would have been no need to\ncall for tenders from experienced consortia. The part of\nthe contract entrusted to the assessee was therefore no less\nsignificant. The value of the assessee's package in\t the\ncontract was about ID 153 million as against the total value\nof the contract estimated at ID 326 millions - more than 40\nper cent. The job of the assessee involved survey,\tsoil\ninvestigation design, detailed drawings and construction of\nall civil works and pipelines (other than trunk\t pipelines).\nEven these activities\t involve technical knowledge\t and\nexpertise. It\t cannot\t therefore, be\t doubted that\t the\nassessee, under the contract, had to\t make use, outside\nIndia,\t of its industrial, commercial and\t scientific\nknowledge, experience and skill. Sri Ahuja makes the point\nthat, even if this be so, the assessee made available no\ninformation regarding\t such expertise to the foreign\nGovernment. There is equally no doubt that, in executing\nthe contract the assessee has rendered technical services.\nAny engineering contract involves technical services;\tmore\nso, a contract of the nature and magnitude involved in\t the\npresent\t case.\t Here again, Sri Ahuja\tsays, no technical\nservices were\trendered by the assessee to\tthe foreign\nGovernment; the assessee only made use of the technical\nknowledge, experience\tand skill of its own employees to\nperform a task undertaken by it.\n We\t think\tthe approach of Sri Ahuja on this issue is\nnarrow\tand unrealistic. It would be far from\taccurate to\nsay that no information of a technical nature was imparted\nor made available to the foreign Government. It cannot be\nforgotten that\t the contract was executed jointly with an\nenterprise that was nothing but an instrumentality of\t the\nforeign\t state.\t The contract had to be executed in close\ncoordination with the\t SCC.\tEvery single step in\t the\ncontract was done under the supervision of a Consortium\nBoard and a Project Management Board on which both\t the\npartners of the consortium were represented. It would be\nunpragmatic to suggest that this close association was\t not\naimed at enabling the foreign state to collect and acquire\nsuch technical knowledge and know-how from the assessee as\ncould be reasonably acquired in the process of execution of\nthe project. In our view, there is force\n\t\t\t\t\t 96\nin the assessee's contention that it would not be possible\nto execute the contract without imparting to\tthe foreign\nstate and enterprise information of the category specified\nin the\t section. The findings of the Tribunal in\tthis\nregard,\t which have not been challenged by the\t Department,\nand are contained in para 42 of the order, are as follows :\n\t \"42. We have already extracted some parts of\t the\n\t contract and the terms of the agreement and\tfrom\n\t these extracts it appears that the contract was for\n\t execution of\tKarkh Water Supply Scheme contract\n\t Stage 1. As already stated above \"works\" has\tbeen\n\t given\ta defined meaning for interpreting\t the\n\t contract as it means all the works to be executed\n\t in accordance with the provision of the contract\n\t including the design, manufacture, delivery,\n\t supply, installation,\t construction,\tsetting\t to\n\t work, commissioning , site testing, operations\t and\n\t maintenance as the case may be. Form of agreement\n\t also makes it clear that the consideration of\t the\n\t payment to be made\t by the employer to\t the\n\t contractor was for\texecuting, completing\t and\n\t maintaining works in conformity in all respect with\n\t the provisions of the contract. The general\n\t specification\tof the work to be done gives\t the\n\t details about head-works,\t making of\t the\n\t transmission pipelines, reservoir works, trunk-\n\t pipelines etc. The tender document\t itself\t had\n\t given\t some geological hydrological\t and other\n\t information for assisting the contractor at\t the\n\t time of tendering but this information was\t not\n\t guaranteed by the employer and the contractor\t had\n\t to make use of and interprete the same on his\t own\n\t responsibilities. The contract comprised\t all\n\t surveys and site investigation and also detailed\n\t design, manufacture, supply etc. of all the works\n\t including mechanical plant and services, pipelines\n\t and civil and building works from the point of\n\t abstraction at the river Tigris intake to\t the\n\t connections of the proposed primary feeder systems\n\t to the existing distribution networks in\t the\n\t various supply areas. The\tsurveys, planning,\n\t designing and\t actual\t construction as well\t as\n\t installations\twere part of the whole contract\t and\n\t the assessee\tcompany\t had to\t perform all these\n\t functions and after completion of the work, had to\n\t commission it and had to operate the works for a\n\t period\t of three months after the\t issue\t of\n\t Certificate of completion. The various surveys and\n\t design\t reports are contemplated as a part of\t the\n\t contract. The contract also contemplated training\n\t the employers\t personnel for\t the operation\t and\n\t maintenance of the whole of the work and had\talso\n\t to conduct studies on water treatment\t process to\n\t optimise operations.\n\t\t\t\t\t\t 97\n Similar objective\t observations regarding technical\ncompetence, expertise and experience are also found in\tpara\n44 of the order which is extracted a little later. In\t the\ncontext\t of these factors and findings, it is difficult to\nsay that no information of the type contemplated in\tcol.\n5(a)(ii) of the application form had been made available by\nthe assessee to the foreign Government for\tuse outside\nIndia.\t What exactly would be the proportion of the total\nconsideration that could reasonably be attributed to\tsuch\nimparting of information would, however, be\t a separate\nquestion and may have to be reasonably estimate.\n But, even assuming that there could be some difference\nof opinion on the above issue, there can be no doubt at\t all\nthat, under the contract, technical services were rendered\nby the assessee to the foreign Government. In our opinion,\nthe attempt of Sri Ahuja to differentiate technical services\nrendered to the assessee by its employees and\t technicians\nfrom technical\t services rendered by\tthe assessee to a\nforeign\t constituent and urge that the latter alone\t can\nqualify\t for relief under section 80-O\ton the\tground\tthat\nthe project in question was a turnkey\t project which\t has\nsucceeded before the\tHigh Court, proceeds on an unduly\nnarrow\tinterpretation\tof the section.\t In our view,\t the\nassessee was undoubtedly rendering services to the foreign\nGovernment by\texecuting the water supply project. These\nservices were no doubt technical services, as they required\nspecialised knowledge experience and skill for their proper\nexecution. The argument seems to be that the\tservices in\nthe present case will not be covered by the section because\nthere was no privity of contract between the employees of\nthe assessee who contributed their technical skill and\t the\nforeign\t Government. We think this\targument cannot be\naccepted. The\t assessee is a company\t and any technical\nservices rendered by\tit can only be through the medium of\nits employees,\t skilled and unskilled, and even if\t the\ncontract had\tnot related to a turnkey project,\t the\nassessee's employees would have been answerable only to\t the\nassessee and none else though, perhaps, in such an event,\nthe other party to the contract may have retained a larger\ndegree\tof control and supervision in the execution of\t the\ncontract. Even where the contractor is an individual or\nfirm and not a company, a contract of this magnitude can be\nexecuted only\tthrough\t the medium of\temployees or other\npersonnel engaged by\t the assessee.\t The facts that,\nphysically speaking, it is only such employees that render\nservices and that, so far as they are concerned, they render\nservices only\tto their employer and\t not to the other\ncontracting party are\t in no\tway inconsistent with, or\nrepugnant to,\tthe notion that, so far as\tthe foreign\nGovernment is concerned, it looks only to the assessee\t for\nrendering of the technical services under the contract.\t The\nHigh Court has pointed out that a person who manufactures a\ntelevision set ordered by another cannot be said to render\ntechnical\t\t\t\t\t services\n98\nto the latter.\tIn our view, that analogy is not apposite in\nthe context of a contract of the nature, magnitude\t and\nspecialisation with which we are concerned. Where a person\nemploys an architect or an engineer to construct a house or\nsome other complicated type of structure such as a theatre,\nscientific laboratory or the like for him, it will not be\nincorrect to say that the engineer is, in putting up\t the\nstructure, rendering him technical services even though\t the\nactual construction and even the design thereof may be\tdone\nby staff and labour employed by the engineer or architect.\nWhere a person consults a lawyer and seeks an opinion\tfrom\nhim on some issue, the advice provided by the lawyer will be\na piece of technical service provided by him even though he\nmay have got\tthe opinion drafted by a junior\t of his or\nprocured from another expert in the particular branch of the\nlaw. Shri Ahuja tried to negative this line of thinking by\nurging that \"professional services\" have been brought within\nthe scope of\tsection 80-O only by an amendment by\t the\nFinance\t (No. 2) Act, 1991 and that, too, w.e.f. 1-4-1992\nwhich is proposing to substitute the\tword \"technical or\nprofessional services\"\t in place of the word \"technical\nservices\" now used in the section. It seems to us that this\namendment may\tbe only of a\tclarificatory nature.\t The\nexpression \"technical services\" has a very broad connotation\nand it has been elsewhere in the statute also so widely as\nto comprehend\t professional\tservices : vide section\n9(1)(vii), referred to earlier.\t But we need not digress on\nthis aspect for two reasons. Firstly, whatever may be\t the\nposition regarding other \"professional services\", there\t can\nhardly\t be any doubt that services involving\t specialised\nknowledge experience\t and skill in the\t field\t of\nconstructional\toperations are \"technical services\".\t The\nBoard's\t guidelines, to which\t reference is\tmade later,\nspecifically say so.\t Secondly, the question whether\n\"professional services\" would be \"technical services\" or not\nhas no impact on the point we are trying to make viz.\tthat\nin order to say that a person is rendering such services to\nanother, it is not necessary that the services should be\nrendered by the former personally and not through the medium\nof others. For the reasons discussed above, we have come to\nthe conclusion that, under the contracts in question,\t the\nassessee had made available technical information to\t the\nforeign\t Government for use outside India and had\talso\nrendered technical services to the\tforeign\t Government\noutside India.\n All the same, contends Sri Ahuja, the receipts of\t the\nassessee under\t the contract are just the profits of\t its\nbusiness and\t cannot\t be described\t as received\t in\nconsideration of such information or services as discussed\nabove.\t If what Sri Ahuja means is that no part of\t the\npayments made to the consortium is specially described by\nthe contract, or even the consortium agreement, as made in\nconsideration of such information or services he is no doubt\ncorrect and the consequence of such non-specification has to\nbe\n\t\t\t\t\t\t 99\nconsidered. But Sri Ahuja, like the Tribunal, seems to go\neven further.\tHe says that the contract has been found to\nbe an\tintegral, indivisible contract and that\t it is\t not\npermissible for the assessee to dissect the consideration as\nattributable to its several ingredients and apportion a part\nof the consideration as being payment for information\tmade\navailable to, or technical services rendered to, the foreign\nGovernment. The Tribunal observed :\n\t \"43. Schedule\t 11 to the contract refers to\t the\n\t consideration\tof the work.\tThough\tthe lumpsum\n\t price\tis indicated for different works but\t the\n\t overall consideration is for the work as a whole\n\t and it is made clear even before the tenders\twere\n\t given that the contract could not be bifurcated and\n\t it could not be given in parts. Separate payments\n\t are not contemplated for the surveys done, designs\n\t made and the other studies carried on they are made\n\t an integral part of the work.\tThe assessee company\n\t had to give proposals for execution of the works\n\t and had to submit a\tpreliminary work programme\n\t showing the starting and completion dates for\teach\n\t complex and\t major\t installation\t including\n\t construction of the preliminary works, submission\n\t of functional\t plants\t and general designs\t and\n\t periods for manufacture, delivery, erection etc.,\n\t of all works required including plant and civil\n\t works pipelines and services.\tThe price schedules\n\t were deemed to cover all expenses, costs risks\t and\n\t all material\tnecessary for\tthe contractor\t to\n\t execute, operate and maintain the works.\n\t 44. The perusal of the contract and\t its various\n\t parts\tvery clearly shows that is was contract\t for\n\t commissioning\tof a turn-key project for the Karkh\n\t Water Supply Scheme. It is true that for executing\n\t this work, it was absolutely\t essential for\t the\n\t contractor to have necessary technical competence\n\t and they had to use highly experience technical\n\t personnel for this purpose. From the very nature\n\t of the work, it is clear that the execution of\t the\n\t project involved a\thigh degree of technical\n\t competence as\t well as expertise and\t experience.\n\t However, reading the\t contract as a\t whole,\t the\n\t intention of the parties was only to get the whole\n\t project being made available on a turn-key basis\n\t according to the general specifications laid\tdown\n\t by the Baghdad authorities. It is not possible in\n\t this contract either to separate one part from\t the\n\t other\tor to bifurcate a part of consideration\t for\n\t any particular service. We have already considered\n\t the various case laws including certain decisions\n\t the Hon'ble Supreme Court in the case of Gannon\n\t Donkerley & Co. and Ram Singh Engineering\n\t\t\t\t\t\t 100\n\t Works\t(supra) which throw light on interpretation\n\t on such contracts. Various High Courts have\talso\n\t considered similar questions throwing light on\t the\n\t nature of contracts. Applying these principles, it\n\t appears that this is an indivisible and integrated\n\t contract for the whole work and has to be treated\n\t as such.\"\n In our view, neither of the propositions contended\t for\nby Sri\t Ahuja can be accepted as correct. So\tfar as\t the\nfirst proposition is concerned, it is sufficient for us to\npoint\tout that it is a well-settled principle\tthat\nexigibility of an item to tax or tax deduction can hardly be\nmade to depend on the label given to it by the parties.\t An\nassessee cannot claim\t deduction under section 80-O in\nrespect\t of certain receipts merely on the basis that\tthey\nare described as royalty, fee or commission in the contract\nbetween\t the parties. By the same token, the absence of a\nspecific label\t cannot be destructive of the right of an\nassessee to\tclaim a deduction, if, in\t fact,\t the\nconsideration for the receipts can be\t attributed to\t the\nsources indicated in the section. The second proposition is\nequally\t untenable. Contracts\t of the\t type envisaged by\nsection\t 80-O are usually very complex ones and cover a\nmultitude of obligations and responsibilities.\t It is\t not\nalways possible or worthwhile for the parties to dissect the\nconsideration and apportion it to the various ingredients or\nelements comprised in the contract. The cases referred to\nby the Tribunal and Sri Ahuja as to the indivisibility of a\ncontract arose\t in an\t entirely different context.\t For\npurposes of income-tax, a principle of apportionment\t has\nalways\tbeen applied in different contexts.\tConsolidated\nreceipts and\t expenses have\t always been\t considered\napportionable in the\tcontexts : (a) of the\tcapital\t and\nrevenue\t constituents comprised in them; (b)\tportions of\nexpenditure attributable to\tbusiness and\tnon-business\npurposes; (c)\tof places of accrual or arisal; and (d) of\nagricultural and non-agricultural elements in such receipts\nor payments.\tThis is a point that does not need\tmuch\nelaboration and it is sufficient to refer to decided cases\ncited under the passages on this topic at pp. 47, 137,\t264,\n621 and 677 of Kanga & Palkhivala on the Law and Practice of\nIncome-tax (Vol. I, Eigth Edition). We are, therefore, of\nopinion\t that if, as we have held, the contracts in\t the\npresent\t case\toblige\tthe assessee to make available\ninformation and render services to the foreign Government of\nthe nature outlined in section 80-O, it is the duty of\t the\nRevenue\t and the right of the assessee to see that\t the\nconsideration\tpaid under the contract\tlegitimately\nattributable to such information and services is apportioned\nand the assessee given the\tbenefit\t of the deduction\navailable under the\tsection\t to the extent of\tsuch\nconsideration.\n So far, we have looked at the language of section\t80-O\nin isolation. The question to be considered next is whether\nthe introduction of section 80-HHB\n 101\nhas made a difference. On behalf of the Revenue, it is\nurged that the facts of the present case squarely fall under\nthe scope of this new Section.\t The assessee, it is said,\nhas derived profits\tand gains from its business\t of\nexecution of a foreign project, as defined in clauses (b)(i)\nand (ii) of sub-section (2) of the section.\tWhether\t the\ncontract is viewed as one directly entered into by\t the\nassessee with\tthe foreign Government or as involving\t the\nexecution of work undertaken by it as part of a foreign\nproject\t undertaken in pursuance of a contract entered\tinto\nby the consortium with the foreign Government, the profits\nand gains qualify for deduction under section 80-HHB,\nsubject to the conditions and to the extent, outlined in the\nsection. Even assuming that the whole, or at least a part,\nof the\t consideration\tpayable\t to the assessee for\t the\nexecution of a foreign project or\twork in connection\ntherewith can\tbe said also to fall under the terms of\nsection 80-O, the terms of sub-section (5) of section 80-HHB\nmake it clear\t that the assessee would be eligible\t for\ndeduction under section 80-HHB only\t and cannot claim\ndeduction under section 80-O in respect of any part of\t the\nconsideration.\n Sri Nariman, on behalf of the assessee, seeks to repel\nthis contention in several ways. He\tsubmitted, firstly,\nthat since the insertion of section 80-HHB has not resulted\nin the deletion of section 80-O, the two sections should be\nread harmoniously and given effect to together. This, he\nsays, can be done by restricting the operation\t of section\n80-HHB\tto contracts entered into on or after\t1-4-1983 on\nwhich date that section came into force and so as not to\naffect contracts entered into before that date and approved\nby the\t Board.\t In this context, it is pointed out\tthat\nsection\t 80-O envisages grant of approval to a contract\t and\nonce such approval is granted (on whatever date it be)\t the\napproval should enure for the entire period of contract and\ncannot\tbe restricted to any particular assessment year or\nyears.\t In support of this contention, the\tdecision in\nC.I.T.\tv. Indian Institute of Public Opinion,\t (1982)\t 134\nI.T.R. 2 (Delhi) is relied upon. It is urged that, once the\napproval is granted to a contract, Section 80-O becomes\noperative in respect of all sums received under the contract\nof the nature specified therein. If the applicability of\nsection\t 80-HHB is thus restricted, it is submitted,\t the\nterms of that section, including sub-section (5) thereof;\ncannot\tstand in the way of the relief available to\t the\nassessee under section 80-O. Secondly, he contends that\t the\ndefinition of \"foreign project\" in section 80-HHB (2)(b) is\na restrictive one; it covers only the construction of\t the\nnature\tspecified in sub-clause (i) or the assembly\t and\ninstallation of the nature specified in sub-clause (ii),\nthere being no other prescribed work in terms of sub-clause\n(iii) and it is only the consideration received for\t the\ncarrying out of these two activities that is excluded\tfrom\nthe purview of relief under other sections under Heading `C'\nof Ch.\t VI-A.\tIn other words, it is said, section 80-HHB\napplies only to con-\n\t\t\t\t\t\t 102\nstruction/installation\t activity simpliciter\tand not a\n\"composite\" activity.\tIt is argued that where, as in\t the\npresent\t case,\tthe contract envisages, in addition\t to\nconstruction of buildings or other structures\t and\ninstallation of machinery or plant outside\tIndia,\tsome\nfurther\t acts to be done by the assessee-such as making\navailable information\ton rendering of services to\t the\nforeign\t Government or enterprise -\t the consideration\nattributable to such action will not forfeit the deduction\notherwise available under section 80-O. Some\tsignificance\nis sought to be attached to the use in sub-section (5) of\nthe words \"Notwithstanding anything contained in any other\nprovision under this\tChapter\" and not \"Notwithstanding\nanything done\tor any approval granted under any other\nprovision\" as also the use of the word \"shall not qualify\"\nat the\t end of the sub-section. It is argued that once\napproval is granted under section 80-O, the receipts\thave\nalready\t qualified for\t deduction under that\tsection\t and\nsection\t 80-HHB\t (5) does not operate after that stage. A\nreference is also made to the different language used in\nsection\t 80-HHA(6) which specifically excludes relief under\nsection 80 I and J and to the language used in section 80-MM\nwhich specifically excludes section 80-O. Thirdly, it is\nsubmitted that, if the Board, after considering\t the\narguments as to applicability of section 80-HHB put forward\nby the assessee, accepted this as a plausible view of\t the\nrelative area\tof operation of the two provisions,\t and\nextended the approval to assessment year 1983-84 onward as\nwell, it could not be said to have exceeded its jurisdiction\nand it\t is not open to the Revenue to ignore the order of\napproval merely for the reason that section 80-HHB has\tbeen\nintroduced into\t the statute book.\n The connection of Sri Nariman that, even after\t the\ninsertion of section 80-HHB, there is room for\tapplicabilty\nof section 80-O in relation to a contract of this type which\nis not\t a construction/installation contract\t simpliciter\nappears attractive but we do not think section 80-HHB should\nbe interpreted in such a narrow or pedantic fashion.\t The\nsection\t provides for an exemption in respect\t of profits\nfrom a\t \"foreign project\" undertaken outside India in\t the\ncourse of business. The expressions \"business of execution\nof a foreign\tproject\" or work forming part of it or the\n`profits derived' from the business, take in all aspects of\na business involving the activities referred\tto in\tsub-\nsection\t (2)(b) of section 80-HHB together\t with\t all\nactivities, commitments and\tobligations ancillary\t and\nincidental thereto and the profits flowing therefrom.\t The\ndefinition cannot be\trestricted to\tthe mere physical\nactivity or putting up the superstructure, machinery or\nplant but should be understood to take within its fold\t all\nutilisation of technical knowledge or rendering of technical\nservices necessary to bring about the construction, assembly\nand installation. However, we need\t not theoretically\neliminate all\t possibility of a\tcontract involving\nindependent elements calling for consideration both under\n\t\t\t\t\t\t 103\nsection\t 80-HHB and section 80-O. It is perhaps possible to\nenvisage cases where, While undertaking a foreign project,\nseparate contracts are entered into forming two different\nsets of activities involved viz. (i) construction of works\nand assembly or installation of plant and machinery and (ii)\nthe transfer\tof rights know-how, the impartation\t of\ntechnical knowledge or information and the rendering of\ntechnical services and providing separate consideration\nunder each heading. It is perhaps possible to say in\tsuch\ncases that there are two contracts in respect of a foreign\nproject, one of which will fall under section\t 80-HHB\t and\nanother\t under section 80-O. Or it may be that\teven though\nthere is a single contract, it separately identifies the two\nsets of activities and provides separate consideration\t for\neach. In such a case also, it is perhaps, possible to\t say\nthat the consideration for the foreign project does\t not\ncomprise in part or in whole of consideration\t that would\nfall under section 80-O. But where the contract is for a\nsingle\tindivisible consideration for the execution of a\nforeign\t project and does not spell out the imparting of\ninformation or the technical services and any consideration\ntherefor, it is difficult to segregate two parts of such a\ncontract, artifically apportion the consideration under\t two\nheadings referred to above and then apportion\t the relief\nunder section 80-HHB and section 80-O. This is\tparticularly\nso in the context of the fact that in the particular case,\nas has\t been pointed\tout earlier the impartation\t of\ninformation was only indirect consisting of what the foreign\nenterprise of\tGovernment could gather from the manner of\nexecution of the contract by the assessee and the technical\nservices rendered to the non-resident\tprincipal consisted\nonly of the execution of the project for it by the assessee.\nIn other words, this is a case where the execution of\t the\nforeign project, in itself, comprises the elements referred\nto in\t section 80-O.\t There\tis one\t single, integral,\nindivisible contract for executing a foreign\tproject\t and\nthe entire consideration is attributable to such execution.\n Sri Nariman drew our attention to columns 27 and 28 in\nFrom 10F which read thus :\n\t \"27. Whether\tany part of the payment\t is derived\n\t from, -\n\t (a) the execution of a foreign project\t undertaken\n\t by the applicant in pursuance of the agreement\n\t under consideration, or\n\t (b) the execution of any work undertaken by\t the\n\t applicant and\t forming part of a foreign project\n\t undertaken by any other person in pursuance of a\n\t contract entered into by such other person with a\n\t foreign Government or any statutory or other public\n\t authority or agency in a foreign State or a foreign\n\t enterprise.\n\t\t\t\t\t\t 104\n\t 28. With reference to 27(b) above, -\n\t (a) furnish the date of the contract entered into\n\t by the other person with the foreign Government or\n\t enterprise for the\texecution of the foreign\n\t project,\n\t (b) whether all the services were rendered by the\n\t applicant -\n\t (i) before the signing of such contract; or\n\t (ii) after signing of contract.\"\n He\t sought to contend on the strength of these columns\nthat a\t part only of the payment derived from\t a contract\nsubmitted for approval under section 80-O may be referable\nto section 80-HHB leaving a balance, at least, eligible for\nrelief\tunder section 80-O. This is not the purport of\tthis\npara. On the other hand it seems to be clearly intended to\nensure\twhile granting\t approval under section 80-O\t in\npursuance of the application that section 80-HHB(5) is given\neffect\tto and\t no part of the\t payment derived from\t the\nexecution of such a project is allowed to qualify under\nsection 80-O.\n Sri Ahuja sought to make a further point that even if\nthe assessee's case falls under section 80-O, assessee\twill\nbe entitled to relief not on the entire profits derived by\nthe assessee but only to that portion of the receipts as can\nbe ascribed the character in section 80-O. He suggested that\nit may actually be more beneficial to the assessee to claim\nrelief\tfor 25% of that whole under section 80-HHB rather\nthan claim 100% of say 10% attributable to section 80-O.\nThere is, of course, a fallacy in this argument. For\t the\nassessee's case is that the contract falls either wholly\nunder section 80-O or partly under section 80-HHB and partly\nsection\t 80-O.\tThus, if only\t 10% of the receipts\t are\nattributable to section 80-O, the assessee would be entitled\nto relief of 25% of the 90% under section 80-HHB and\t the\nwhole of the 10% under section 80-O in other words a relief\nof 323-1/2% (which is more than 25%) of the whole. But,\t for\nreasons, we have already set down this is a case in which\nthe impartation of information and provision of technical\nservices arise directly from the execution of\tthe project\nand nothing else. This being so there is a complete identity\nof the matters governed by section 80-HHB and section\t80-O\nand so the assessee will be entitled to only and not\tboth\nthe reliefs.\n The assessee has, naturally, placed\tconsiderable\nreliance on the approval granted by the Board under section\n80-O and, in particular, on the\n\t\t\t\t\t\t 105\nClarification issued by the Board on\t 31.7.85 after\t the\nassessee's representation, by deleting the reference to\nsection\t 80-HHB. The Department has sought to retaliate by\ntaking\tup the stand that the contracts in the present\tcase\ndo not\t at all fall under section 80-O and that the Board\nerred altogether in granting such approval. The Tribunal\naccepted a suggestion put forward\ton behalf of\t the\nDepartment that the clarification was the result of\tsome\nconfusion and purported to obtain a further clarification\nfrom the Board in a manner that has\t attracted vehement\ncomplaint and criticism from the assessee. We do not think\nit is necessary for us to enter into this realm of debate\nfor, apart from the doubtful sustainability of a collateral\nattack\tby the\t Department on an approval granted by\t the\nhighest\t administrative\t authority under the Act, we\thave\nendeavoured to point out that the Board was fully justified\nin considering the receipts of the assessee as falling under\nsection\t 80-O and in granting approval to the contract. We\nshall also proceed on the footing that the assessee is\talso\nright in saying that the Board had, after considering\t its\nrepresentations, accepted the position that the approval\nunder section 80-O would ensure also for the assessment year\n1983-84 onwards. In fact, we think that, irrespective of the\nBoard's clarification of 1985, the correct position is that,\nonce a\t contract stands approved under section 80-O in\nrelation to the first assessment year in relation to which\nthe approval is sought, the approval ensures for the entire\nduration of the contract. This is the principle enunciated\nin C.I.T. v. Institute of Public Opinion, (1982) 134 I.T.R.\n23 (Del.) the correctness of which cannot be doubted and is,\nindeed,\t accepted by both counsel before us. Section\t80-O\ndoes not envisage an\t application for approval of\t the\ncontract every\t assessment year or the\t limitation of\t the\napproval granted by the Board to any particular assessment\nyear. The Board is approving of a contract having regard to\nthe nature of the receipts flowing therefrom and once\tthis\napproval is granted, the assessee is entitled\t to seek a\ndeduction under section 80-O in respect of all the receipts\nunder the contract the consideration for which is traceable\nto the three ingredients discussed earlier irrespective of\nthe assessment year\tin which the\treceipts fall\t for\nassessment. The Board's approval of the contract - in\t1983\nas well as in 1985 - has no doubt this effect. But this is\nnot the same thing as saying that relief under section 80-O\nwould be available despite section 80-HHB. It seems to us\nthat the Board's clarification of 31.7.1985 (which merely\nwithdraws the reference to section 80-HHB and\textends\t the\napproval beyond 1982-83) cannot be read as\tinvolving a\nfurther decision that the assessee should be granted relief\nunder section 80-O contrary to the terms of section 80-HHB.\nSection\t 80-O only empowers the Board to approve of a\ncontract on being satisfied that it gives rise\tto receipts\nqualifying for\t deduction under section 80-O\tand nothing\nmore. In fact\t the various terms and\t conditions of\t the\nBoard's\t letter of approval (in relation to which arguments\nhave been ad-\n\t\t\t\t\t\t 106\ndressed\t before us) are totally redundant and\tunnecessary.\nAll that the Board has to do is to approve of an agreement\nfor the purposes of section 80-O. It has nothing more to do.\nIts approval\tcannot\tbe tentative or provisional\t or\nqualified. It\tcannot\tbe hedged in with conditions\t and\nrestrictions of the nature set out in the Board's letter. It\ncannot limit the relief to certain assessment years only; it\ncannot restrict or enlarge the scope of the relief that\t can\nbe granted under the section. The assessment years for which\nrelief is available, the extent of the receipts that qualify\nfor deduction and all other incidents flow from the language\nof the section. The position therefore is that the Board's\napproval of the agreements in the present case, originally\naccorded legitimately and properly, as pointed out by us, in\nrespect\t of assessment years earlier to 1983-84 will enable\nthe assessee to claim like relief under section 80-O for all\nsubsequent years too. But, after the insertion of S. 80-HHB,\nsection 80-O the matter of receipts governed both by section\n80-HHB,\t in the former and not the latter will\tprevail. We\nhave therefore\t come to the conclusion that\tthe 31.7.85\namendment of the Board's approval cannot help the assessee\nto overcome the mandate of section 80-HHB(5). The Board, by\nits 31.7.1985 letter, could not have intended to say\tthis\nand, if it did, it acted outside the jurisdiction conferred\non it\tby the statute. While the Board has every right to\ndeclare\t that section 80-applies in respect of the receipts\nunder a contract approved by it, it has no statutory or\nother right to supersede or limit the clear terms of section\n80-HHB.We find ourselves unable to accede to the proposition\nof Sri Nariman that the scope of S. 80-HHB should be\nexcluded from\tapplication to contracts approved prior to\n1.4.1983. Indeed, a difficulty of this type could arise even\nin respect of a contract entered into after 1.4.1983. Since\nsection 80-O, continues to be in the statute book even after\n1.4.1983, an application may be made and a contract approved\nunder that section. In doing this the Board may not have,\nand certainly need not have, considered the provisions of\nsection\t 80-HHB. But, despite such approval, the receipts\nunder the contract cannot qualify for relief under section\n80-O if the assessing officer comes to the conclusion\tthat\nthe case falls under section 80-HHB. The legislature\t has\nclearly\t envisaged the\t possibility of\t the same receipts\nqualifying for\t deduction under section 80-HHB as well as\nunder any other provision of the Act and has\tspecifically\nprovided that, in such a case, the terms of section 80-HHB\nwill prevail over the provisions of such other provision.\nSri Ahuja invited our attention to the fact that subsection\n(5) was not part of section 80-HHB at the stage of\t the\nFinance Bill but was inserted during the passage of the Bill\nin Parliament. The Finance Minister explained the purpose in\nhis budget speech. He said :\n\t \"Indian companies and resident non-corporate\t tax\n\t payers are entitled under the Bill to an exemption\n\t of 25 per cent of the\n\t\t\t\t\t\t 107\n\t profits desired by them from the execution of\n\t foreign contracts undertaken by them. Some doubts\n\t have been raised that income\t derived from\tsuch\n\t foreign projects may also be eligible for exemption\n\t under section 80-O of the Income-tax Act. I propose\n\t to make a provision to clarify that no part of\t the\n\t consideration\t received by a person for\t the\n\t execution of\tthe foreign project or\t the income\n\t comprised in such consideration shall qualify\t for\n\t deduction under any other provision in the Income-\n\t tax Act.\n The statutory interdict\t thus inserted\t cannot\t be\nfrustrated by the terms of an approval of the\tBoard under\nsection 80-O. Such approval, at its best, cannot overreach,\nthe limitations imposed on the relief available under\tthat\nsection as a consequence of section 80-HHB(5).\n There was a good deal of discussion before us as to the\nscope and effect of the approval granted by the Board to the\nterms of a contract under section 80-O. Sri\tAhuja would\nhave us hold that\tthe approval of the\t Board\t has\nsignificance only in\tthat, without\tsuch approval,\t the\nassessee's claim for relief under section 80-O could not all\nbe entertained. It only opens the gate to\t enable\t the\nassessee to enter and seek a deduction under the section. It\nis not\t conclusive on any other aspect of section 80-O,\ncertainly not on the merits of the assessee's claim. Despite\nthe approval, the Income-tax Officer cannot be absolved of\nhis functions and responsibility of deciding whether the any\npart of the assessee's receipts fulfills the characteristics\nprescribed for deduction under the section and, if so, to\nwhat extent the assessee is entitled to get the deduction\nin accordance\twith and subject to the\t provisions of\t the\nsection. According to counsel, the Board is not competent to\ndecide\tthese issues in the process of granting approval to\nthe agreement. He point out that, in the instant case,\tthe\nassessee has not identified the receipts or any parts\nthereof\t as having the characteristics\t enumerated in\t the\nsection. Nevertheless the assessee purported to claim\tthat\nthe entirety of such unidentified receipts would be\t the\nvalue of the\ttechnical information and services to be\nimparted or rendered under the contract (vide col. 6 of\t the\napplication), eligible\t for relief under section 80-O. In\norder, however, not to give an impression that exemption was\nsought\tfor the entire profits, the assessee purported to\nexclude from the claim of exemption the net cost of certain\nmachinery, equipment and other items allegedly supplied to\nthe foreign Government under the contract on\ta no-profit\nbasis. Sri Ahuja says, the calculations of the assessee\t are\nincorrect in several\trespects. These\t errors\t apart,\t the\nconsideration for services plus profits under\t the entire\ncontract was estimated at 69. 893 million ID at the time of\nfiling the application for approval as per a break-up chart\nplaced on record. Of this the figure of profits\n\t\t\t\t\t\t 108\nwas estimated at 25.49 million IDS or Rs. 68 crores only. As\nagainst\t this,\tthe assessment order shows that\t the relief\nclaimed\t under section 80-O for the assessment year 1983-84\nalone was to the tune of Rs. 77.84 crores in respect of\t the\nKirkh contract. He also points out that the aggregate\t net\nprofits\t shown\tby the assessee from this contract for\t the\nassessment years 1982-83 to 1989-90 were Rs.\t165 crores,\nalmost\t50% of the total receipts from\t the contract.\t Sri\nAhuja says, therefore, the application for approval\t was\nbased on wild estimates made before the contract began to be\nworked\tin right earnest and the Board could certainly\thave\nhad no possible material for accepting the basis of claim\nfor exemption\tset out in col. 6 as\tcorrect. It would,\ntherefore, Sri Ahuja\t urges,\t be totally untenable\t to\ninterpret the Board's approval as a decision on the merits\nof the assessee's claim putting the seal of finality as to\nthe basis or quantum of the relief to be granted to\t the\nassessee. That\t is the exclusive domain of the assessing\nofficer which the Board has no business to encroach upon.\n On the other hand, Sri Nariman contended that it would\nbe preposterous to attribute such an insignificant role to\nthe Board. The Board is the appex administrative authority\nunder the Act\t and the responsibility of approving\t the\ncontract was entrusted to such a high authority for weighty\nreasons with the clear intention that, once the contract is\napproved by the Board, the assessee should be\tentitled to\nexemption subject only to the arithmetical\tcomputations\nbeing left to be done by the assessing officer. He points\nout that the Board had prescribed an elaborate and detailed\nproforma on which the application for approval had to be\nmade, some portions of which have been extracted earlier in\nthis judgment. It requires the assessee to give full details\nof the\t contract (col. 2 to 4, 3 to 19) explain how\t the\nreceipts under contract fulfill each of the requirements of\nthe section (col. 5 to 9), specify the nature and quantum of\nthe exemption\tclaimed (col. 10 and 11) and indicate\t the\nterms and mode of payment (col. 12). Elaborate guidelines\nwere drawn up and publicised by Board's circular no.\t 187\ndated 23.12.75, (See\t(1976) 102 I.T.R. St.\t 83). These\nguidelines, read with the proforma, clearly envisage a vital\nrole to the Board to analyse the terms of the contract\t and\nnature of the assessee's receipts carefully and ensure\tthat\nthey qualify for relief under the section. No\t doubt,\t the\napproval is granted on the basis of the terms of the contact\nand the actual quantification of the relief available under\nthe contract for any particular assessment year has to be\nworked\tout by the assessing officer under the contract. It\nis also possible that the Board's approval is\tobtained by\nfraud or misrepresentation and the guidelines\tprovide\t for\nrevocation of the approval in case some such situation is\nfound to exist. But, so long as the approval\t lasts,\t the\nassessing officer is\t bound\tand cannot challenge\t the\ncorrectness of the approval or take up the position that the\n\t\t\t\t\t\t 109\ncontract itself falls outside the purview of the section.\nApart from this general position, Sri Nariman\t points\t out\nthat the approval of the Board had been accorded in\tthis\ncase after full and detailed discussions, correspondence and\nhearings stretching from 3.3.1981 - the date on which\t the\napplication was made\t to 28.10.1983\t when approval\t was\ngiven. These show that each and every aspect of the contract\nwas examined. The assessee was questioned as to how it\t was\nclaiming that\tno profit was involved in the sale of\nmaterials. Details regarding technical personnel engaged by\nthe assessee and the extent of fees attributable to their\nrecruitment in India were called for. A\t query was raised as\nto how the contract can be said to involve the rendering of\nservices to a\t foreign enterprise within the\t meaning of\nsection\t 80-O.\tThe objection that the\tservices under\t the\ncontract were rendered to self and not to a third party\t was\nalso raised. These objection were duly answered and it\t was\nonly after applying its mind and deliberating over\t the\nmatter\tthat Board approved the contract. If there had\tbeen\nany misrepresentation\tof facts on the basis of which\t the\napproval had been secured, it was open to the Board to\thave\nrevoked the approval but this had not been done till today.\nIn the circumstances, Sri Nariman\tcontends that\t the\nDepartment should not be allowed to take up the stand\tthat\nthe approval of the Board had no value at all and could be\ncompletely ignored by the assessing officer because, In\t his\nopinion, it did not fulfill the requirements of section\t 80-\nO.\n we\t have considered the contentions urged on behalf of\nboth parties. Since we have already expressed our conclusion\nthat the contract in the present case does come within\t the\nfold of section 80-O and that the Board acted\t rightly in\ngranting approval to\tthe contract, it may not be quite\nnecessary for\tus to express any opinion on\tthis issue.\nHowever, since the matter has been fully debated before\t us,\nand is of some general importance we may indicate our views\non this issue.\n At\t the outset, it may be pointed\t out that, earlier\nsection 80-O (and certain other sections in the statute) had\nprovided for the approval of the Central Government as a\ncondition precedent for the grant of relief or\t concessions\nthereunder, where the relief or concession was in relation\nto a contract with a foreign party. At that stage, it\t was\npossible to take a view that the provision was intended only\nas a safeguard to monitor contracts with foreigners as\tsuch\ncontracts may involve several aspects of policy, finance,\nforeign\t exchange and other elements vital to the country's\ninterests. But this power of approval has since been shifted\nto the Board which is the highest administrative authority\nunder the Act. This is a very significant change. No doubt,\neven after the change, the approval acts as a safety valve\nand enables the Government to decline its approval\t for\nvarious reasons the effect of\n\t\t\t\t\t\t 110\nwhich,\tinter alia, would be that no relief be\t sought\t for\nunder the relevant provisions. But there is a change in\t the\ncontent and purpose of the approval. The Board has to grant\nthe approval \"in this behalf\" that is for the\tpurposes of\nthis section. It is true that, even earlier, the approval of\nthe Central Government was to be granted \"in this behalf\"\nbut when the power is vested in the apex authority under the\nIncome-tax Act, it is clear that the scope of\tthe Board's\npowers\tis more extensive and should bear upon the terms of\nthe agreement\tvis-a-vis the claim for relief under\t the\nsection\t in relation to which relief is sought. It is\talso\ninteresting to\t see that this power of approval has since\nbeen de-centralised and vested in the Director-General\t and\nChief Commissioner which are authorities at a\t lower\trung\nthan the Board but at a higher rung\tthan the assessing\nofficer. While, at one time, the Income-tax\tOfficer\t was\ndescribed as the king-pin of the tax administration and\t was\nthe sole repository\tof all\t functions pertaining\t to\nassessment, the recent tendency has been to vest powers of\nassessment even in officers above the rank of the Income-\ntax officer either because of the amount involved or\t for\nother reason.\tHere again, there is good reason, over\t and\nabove the general need to have a surveillance over foreign\ncontracts, why the power to grant approval is vested in a\nhigher\tauthority in the Income-tax hierarchy\titself.\t The\nfirst is that the Board is considered better equipped,\tboth\non considerations of time as well as the technical knowledge\nneeded\t to examine\tthe ramifications of technical\ninternational contracts and decide how far the contract in\nquestion and the receipts thereunder are of\t the nature\nintended to be covered by the exemption clause; The second\nis that, with such a provision, the applicant is sure to\ntake steps to obtain necessary approval at a stage earlier\nto the\t implementation\t of the contract and\tit will be\npossible to require the party, if modification\t or changes\nare called for, to modify the contract even at the outset so\nas to\tbring it within the range of contracts for which\nrelief is intended. The third and perhaps and most important\nreason\tis that such contracts are generally likely to be\nlong-term contracts\tand it is of the essence for an\napplicant to know well beforehand where he stands in\t the\nmatter\tof tax\t exemption and whether\the can\t proceed to\nexecute the contract on the basis that he would be eligible\nfor the relief he feels he is eligible for. It would result\nin chaos if an assessee's contracts were\tleft to be\nscrutinised at the time of assessment several\tyears after\nthey have been implemented and the\tavailability of an\nexemption provision which the assessee was banking upon\t and\non the\t basis of which he had entered\tinto the contract,\ndenied\tto him\t for one reason\t or another whereas,\tduly\nforewarned by a disapproval, he could have backed out of the\ncontract, if necessary, and\tsaved his skin. In\tthis\nsituation, we find it difficult to accept the plea of\t Sri\nAhuja that the approval is nothing\tbut a\tmeasure\t for\nscreening the cases which an assessing officer may have to\nconsider.\n\t\t\t\t\t\t 111\n We are also reinforced in this conclusion by the manner\nin which the provision has been understood and\t implemented\nby the Board since its introduction. The Board\t had issued\ncirculars earlier when the relief had been introduced\noriginally by\tthe insertion of section 85-C\tand, again,\nlater in 1972. But, after the power of approval was vested\nin the Board, elaborate guidelines were drawn up as pointed\nout by\t Sri Nariman. These guidelines\tclearly\t envisage a\ndetailed examination,\tby the Board, of the terms of\t the\ncontract submitted to\t it for\t scrutiny from\t all angles\nrelevant for a decision as to\t eligibility for exemption\nunder section 80-O. The proforma calls for details of\t the\nanalysis of the receipts under the contract. An\t examination\nwhether\t the receipts can be said to be by way\tof royalty,\ncommission, fee or similar payment\tis undertaken.\t The\nreceipts are analysed under the three headings, as earlier\nreferred to us, set out in paras 5(a)(i), 5(a)(ii) and\t5(b)\nof the proforma. Even the situation where the contract is a\ncomposite one has been dealt with by the guidelines and this\nmay be referred to here in a little greater detail. In\t the\ncircular of 23.12.75 (supra), the Board decided that it\nwould decline\tapproval in cases where the\tconsolidated\nconsideration could not be legitimately attributed to know-\nhow, services\tetc. envisaged in the section but that in\ncases where such apportionment was considered\tpermissible,\nit would grant approval to the agreement and have\t the\nquantification\tof the\t exemption to\tbe decided by\t the\nassessing officer. It said :\n\t \"(ix)\t In the case\tof a composite agreement\n\t specifying a consolidated amount as consideration\n\t for purposes\twhich include matters\toutside\t the\n\t scope\tof section 80-O (e.g. use of trade marks,\n\t supply\t of equipment\tetc.) the amount of\t the\n\t consideration\t relating to\tthe provision\t of\n\t technical know-how or technical services,\tetc.\n\t qualifying for purposes of section 80-O will\thave\n\t to be determined by the\tIncome-tax Officer\n\t separately at\t the time of assessment after\t due\n\t appreciation of the relevant facts. Where, however,\n\t in the opinion of the Board, it will not be\n\t possible to properly ascertain and determine\t the\n\t amount\t of the consideration\t relatable to\t the\n\t provisions of the know-how\t or the technical\n\t services, etc., qualifying of section 80-O,\t the\n\t Board\tmay not approve such an agreement for\t the\n\t purposes of section 80-O of the Act.\"\n It had also taken the view that a consideration for the\nuse of\t the assessee's trade-mark would be\toutside\t the\npurview\t of section 80-O. Subsequently, however, the Board\nchanged\t its line of approach on these two issues . In\t its\ncircular No. 253 dated 30-4-1979, the Board clarified :\n\t \"Attention is invited to the Board's Circular\t No.\n\t 187 (F. No. 473/\n\t\t\t\t\t\t 112\n\t 15/73-FTD) dated 23rd December, 1975 on the above\n\t subject laying down the guidelines for the grant of\n\t approval under section 80-O. The Board has\t had\n\t occasion to re-examine the aforesaid guidelines and\n\t it has been decided to modify the guidelines to the\n\t extent indicated below :-\n XXX\t\t XXX\t\t XXX\n\t (ii)\tIn para (ix) of the said circular, it\t was\n\t mentioned that consideration for use of trade\tmark\n\t would be outside the scope of section 80-O. It\t has\n\t now been decided that payment made for the use of\n\t trade-marks are of the nature of royalty,\t and\n\t therefore, fall within the scope of section 80-O.\n\t (iii)\t It was also stated in para 3(ix) of\t the\n\t circular dated 23.12.1975 that in the case of a\n\t composite agreement which specified a\tconsolidated\n\t amount as consideration for purposes which included\n\t matters outside the scope of\t section 80-O,\t the\n\t Board\tmay not approve such an agreement for\t the\n\t purposes of section 80-O of the Act if it' was\t not\n\t possible to properly ascertain and determine\t the\n\t amount\t of the consideration\t relatable to\t the\n\t provision of\tthe know-how or\t technical services\n\t etc.,\t qualifying for section 80-O. Thus\t the\n\t benefits of section 80-O could be denied to\t the\n\t entire\t amount of royalty, commission,\t fees etc.,\n\t receivable under such an agreement. It has since\n\t been decided that in such cases approval would be\n\t granted by the Board subject to\ta suitable\n\t disallowance for the non-qualifying services after\n\t taking\t into consideration the totality of\t the\n\t agreement so that balance of the royalty'fees\tetc.\n\t which\tis for the services covered by section\t80-O\n\t can be exempted.\"\n It\t is thus clear that the Board has chalked out\t for\nitself,\t we think quite legitimately and properly, a\tvery\ndetailed and dominant\t rule as to the availability of\nexemptions under section 80-O. The guidelines are of general\nnature, fully sanctioned by the provisions of section 119(1)\nof the Act and, being instructions enuring to the benefit of\nthe assessee, cannot be gone back upon by the\tDepartmental\nOfficer\t subordinate to the Board, particularly in a\tcase\nwhere no steps have been taken - or\t even suggested as\nnecessary to be taken - to cancel or revoke the approval\nalready\t accorded. This is, indeed, a proposition well-\nsettled\t by the series of judicial decisions starting\tfrom\nNavnitlal Javeri's case (1955) 56 I.T.R. 198 S.C. In\tfact\nalso, the Board has\n\t\t\t\t\t\t 113\nfollowed only its own guidelines. Elaborate reference to the\ncorrespondence, discussions and hearing is unnecessary.\t The\nBoard had reached its decision to approve the contract\t and\nthe basis of claim for exemption after\t full consideration\nand analysis. We may, in this context, also point out\tthat\nwhile the Board, in the present case, simply\tapproved of\nsome of the contracts on the basis of the application filed,\nit has, in the case of some other contracts modified\tthat\nbasis also. For instance, in regard to the Wadi Khan and Abu\nSukhair\t projects, the\t letter\t of approval states\tthat\napproval is\tgranted\t subject to\tthe condition\t or\nclarification that only the profits relating to rendering of\ntechnical services will qualify for the benefit of section\n80-O of the I.T. Act and not the profits relating to\t the\nsupply\tof material/equipment. These guidelines have\talso\nsince attained statutory recognition as the proforma earlier\nprescribed by the Board has virtually been incorporated in\nRule 11E and Form prescribed thereunder.\n In fact Sri Nariman wants to utilise certain columns in\nthe statutory\tform to support his contentions that an\napproval under section 80-O is effective even after section\n80-HHB was introduced but to this argument, we shall advert\na little later. We have, in view of the above discussion, no\ndoubt at all that, while granting the approval under section\n80-O, the Board has not only the jurisdiction but also\t the\nresponsibility\tof examining the agreement submitted\t for\napproval from all angles relevant to the deduction provided\nfor under section 80-O and that it is not competent to\t the\nDepartment to question the maintainability of the claim\t for\ndeduction under section 80-O of the aspects gone into\t and\ndecided upon by the Board.\n We\t should, however, make it clear that our conclusion\ndoes not mean\t the deprivation of all functions of\t the\nassessing officer while making the\tassessment on\t the\napplicant. The Officer has to satisfy himself (i) that\t the\namounts\t in respect of which the relief is\tclaimed\t are\namounts arrived at in accordance with the formula, principle\nor basis explained in the assessee's application\t and\napproved by the Board; (ii) that the deduction\t claimed in\nthe relevant assessment year relates to the items and is\nreferable to the basis on which application for exemption\nwas asked for\t and granted by the Board; (iii) that\t the\nreceipts (before the 1975 amendment) were duly certified by\nan accountant\tor that, thereafter, the amounts have\tbeen\nreceived in or brought into India in\tconvertible foreign\nexchange within the specified period. The second of these\nfunctions is, particularly, important as the approval\t for\nexemption granted in principle has to be translated\tinto\nconcrete figures for\tthe purposes of each\t assessment.\nNeither\t the introduction of the words \"in accordance\twith\nand subject to the provisions of this\t sections\" nor\t the\nvarious \"conditions\" outlined in the letter of approval\t add\nanything to or detract anything from\t the scope of\t the\napproval\n\t\t\t\t\t\t 114\n As already mentioned, Sri Nariman also contended that,\neven after the insertion of S-HHB, the assessee would be\nentitled to claim the deduction under section 80-O in\tview\nof the Board's amendment to the letter of approval that\t the\napproval will\tbe operative for assessment year 1982-83\nonwards, rescinding the qualification in the earlier letter\nthat the provisions of S. 80-HHB will apply for assessment\nyear 1983-84\tonwards. It is true\tthat the earlier\nrestriction was lifted by the Board after considering\t the\ncontentions raised by the assessee in its letter of 2-12-\n1983 :\n\t (a)\tthat the two section operate in different\n\t fields for exemption;\n\t (b) that the approval once granted under section\n\t 80-O,\tthe exemption to which the assessee became\n\t eligible should ensure for the directions for\t the\n\t entire contract; and\n\t (c)\tthat s. 80-HHB should be restricted to\n\t agreements entered into before 1-4-1983.\n But we are unable to give effect to\tthe Board's\ndecision of 31-7-1985\t in the same way as we\t have given\neffect to the Board's earlier approval letter of 28-10-1983\nfor a number of reasons. The first is that the\tjurisdiction\nof a Board is to grant approval to a contract only for\t the\npurposes of section 80-O; it has no jurisdiction\t to\npronounce on the availability or otherwise of an exemption\nunder section\t80-HHB and the Board's opinion as to this,\neven if expressly stated by the Board, cannot bind\t the\nOfficer. The relief under section 80-HHB is not dependent on\nthe approval of the Board and is for a totally different\ntype of transaction.\tThe letter of\t31.7.85\t is also a\ndecision in an individual case and cannot be treated as a\ngeneral\t circular incorporating a policy decision by\t the\nBoard that in all cases of a particular type\tgoverned by\nboth section relief may be given under section 80-O in which\nevent perhaps it could have been implemented by applying the\nprinciple of the Jhavari case (supra). The second is\tthat\nthe Board, in the 1985 letter, has only stated that\t the\napproval under section 80-O will enure for 1982-83 onwards.\nThis is quite a correct statement of, as we have explained\nearlier, the approval by the Board is to the contract and so\nlong as the contract subsists the relief should be granted\non the term of section 80-O. Thus the assessee is entitled\nto deduction under section 80-O on the terms of that section\neven for 1983-84 and subsequent years.\tIt becomes\ndisentitled to the relief not because it does\tnot fulfill\nthe requirements of section 80-O but only because section\n80-HHB(5) stands in the way and mandates that in cases to\nwhich both provisions will apply relief under section 80-HHB\nwill alone be available. The argument that the applicability\nof section 80-HHB should be\n\t\t\t\t\t\t 115\nexcluded from contracts entered into, or those approved of\nunder section 80-O, before 1.4.1983, is patently untenable.\nSection\t 8 comes into force on 1.4.1983 and should be\napplicable for assessment year 1983-84 onwards in all cases.\nIt does not contain even a reference to section 80-O and so\nits applicability cannot depend on the formation of\t the\ncontract subsequent to that date or to the date of its\napproval under\t the latter section being after\t that date.\nThirdly, the approval which otherwise qualifies the assessee\nfor relief is no doubt still effective but its power to\n\"qualify\" for\trelief is taken away by the new statutory\nprovision. The\t argument that the assessee could not\thave\nanticipated the insertion of section 80-HHB and is put to a\nhardship if that section is applied is no doubt correct. But\none cannot decline to give effect to the applicability of\nthe statutory provision on the ground of hardship or on\t the\nground\tthat it restricts the relief which, but for\t the\ninsertion of the section, would have been available to\t the\nassessee, particularly when the section itself envisages the\npossibility of the assessee being also eligible for relief\nunder another section and makes special provision of\tthat\neventuality.\n Sri Nariman submitted that we should not\t favour\t the\nabove interpretation as it would lead to an anomalous\nresult. He says that the whole idea of section 80-HHB was to\nenlarge\t the benefits\tto contractors\tworking\t abroad\t and\nearning\t foreign exchange but\t that,\tby reason of\t our\ndecision, the\tassessee will now get relief only to\t the\nextent\tof 25% in respect of a contract for which it\t got\n100% benefit in earlier years. On the other hand,\t the\ndepartment would no doubt say that our conclusion that\t the\nassessee was entitled, in earlier assessment year, to 100 %\nrelief on this type of contract is anomalous in the light of\nthe fact that subsequently the legislature\tspecifically\nprovided that only 25 % of the earnings on foreign projects\nshould be exempted. In our view, there is no force in these\ncontentions. The anomaly, if it is one, arises because of\nthe specific language of the statute and the nature of\t the\ncontract we have to consider. S. 80-HHB does not confer an\nadditional benefit; sub-section (5) in no uncertain terms\nstates\tthat the benefit thereunder will take away\t the\nbenefit, if any, under any other provision. This has to be\ngiven effect to. Equally, the assessee was able to get 100 %\nrelief in earlier years only because the contract here is of\nsuch nature that it consists only of the rendering of\ntechnical services so that the fields of the two exemptions\ncompletely overlap. On the other hand, as discussed earlier,\nit is possible to conceive of foreign projects wherein\t the\nconstruction and installation aspect\tand information or\ntechnical services aspect are kept separate. Equally there\ncan be\t cases falling under section 80-O which do not\t all\nrelate to a \"foreign project\" as defined in section 80-HHB.\nIn such cases, the two provisions will continue to operate\nindependently. There is, therefore, no anomaly or absurdity\nin the conclusion we have reached.\n\t\t\t\t\t\t 116\n For the reasons\tdiscussed above, we hold that\t the\nassessee was entitled to the relief under section 80-O\t for\nassessment years earlier to 1983-84 and that the approval\ngranted\t by the Board under that section was right\t and\nproper.\t However, for\tthe assessment\t year 1983-84,\t the\nassessee does not qualify for deduction on the terms of that\nsection\t as the contract receipts are fully covered by\t the\nprovisions of s. 80-HHB and the deduction under that section\nwill prevail over the relief that might have been otherwise\navailable in view of the terms of section 80-HHB(5).\t We,\ntherefore, affirm the conclusion reached by the High Court\nand dismiss the appeal. We, however, make no order as to\ncosts.\nR.P.\t\t\t\t\t Appeal dismissed.\n\t\t\t\t\t\t 117" }, { "title": "Union Of India And Anr vs Azadi Bachao Andolan And Anr on 7 October, 2003", "url": "https://indiankanoon.org//doc/1960330/", "text": "Union Of India And Anr vs Azadi Bachao Andolan And Anr on 7 October, 2003\nEquivalent citations: AIR 2004 SUPREME COURT 1107, 2003 AIR SCW 5766, 2004 TAX. L. R. 1, 2004 (1) COM LJ 50 SC, 2004 (10) SCC 1, 2003 (6) SLT 373, 2003 (8) SCALE 287, 2003 (4) LRI 172, (2003) 132 TAXMAN 373, (2003) 263 ITR 706, (2003) 56 CORLA 344, (2003) 10 INDLD 645, (2003) 177 TAXATION 775, (2003) 7 SUPREME 406, (2003) 8 SCALE 287\nBench: Ruma Pal, B.N. Srikrishna\n CASE NO.:\nAppeal (civil) 8161-8162 of 2003\nAppeal (civil) 8163-8164 of 2003\n\nPETITIONER:\nUnion of India and Anr.\t\t\t\t\t\n\nRESPONDENT:\nAzadi Bachao Andolan and Anr.\t\t\t\n\nDATE OF JUDGMENT: 07/10/2003\n\nBENCH:\nRuma Pal & B.N. Srikrishna.\n\nJUDGMENT:\nJ U D G M E N T\n\n(Arising out of S.L.P.(C) Nos.20192-20193 of 2002)\n(@ S.L..P.(C) Nos. 22521-22522 of 2002)\n\nSRIKRISHNA,J.\n\n\tLeave granted.\n\nThese appeals by special leave arise out of the judgment of \nthe Division Bench of Delhi High Court allowing Civil Writ \nPetition (PIL)No.5646/2000 and Civil Writ Petition No.2802/2000. \nThe High Court by its judgment impugned in these appeals \nquashed and set aside the circular No.789 dated 13.4.2000 issued \nby the Central Board of Direct Taxes (hereinafter referred to as \n\"CBDT\") by which certain instructions were given to the Chief \nCommissioners/Directors General of Income-tax with regard to the \nassessment of cases in which the Indo - Mauritius Double \nTaxation Avoidance Convention, 1983 (hereinafter referred to as \n'DTAC') applied. The High Court accepted the contention before \nit that the said circular is ultra vires the provisions of Section 90 \nand Section 119 of the Income-tax Act, 1961(hereinafter referred \nto as 'the Act') and also otherwise bad and illegal.\n\nIt would be necessary to recount some salient facts in order \nto appreciate the plethora of legal contentions urged.\n\nFACTS\n\tA: The Agreement\n\t\nThe Government of India has entered into various \nAgreements (also called Conventions or Treaties) with \nGovernments of different countries for the avoidance of double \ntaxation and for prevention of fiscal evasion. One such Agreement \nbetween the Government of India and the Government of \nMauritius dated April 1, 1983, is the subject matter of the present \ncontroversy. The purpose of this Agreement, as specified in the \npreamble, is \"avoidance of double taxation and the prevention of \nfiscal evasion with respect to taxes on income and capital gains \nand for the encouragement of mutual trade and investment\". After \ncompleting the formalities prescribed in Article 28 this agreement \nwas brought into force by a Notification dated 6.12.1983 issued in \nexercise of the powers of the Government of India under Section \n90 of the Act read with Section 24A of the Companies (Profits) \nSurtax Act, 1964. As stated in the Agreement, its purpose is to \navoid double taxation and to encourage mutual trade and \ninvestment between the two countries, as also to bring an \nenvironment of certainty in the matters of tax affairs in both \ncountries.\n\n\tSome of the salient provisions of the Agreement need to be \nnoticed at this juncture. The Agreement defines a number of terms \nused therein and also contains a residuary clause. In the \napplication of the provisions of the Agreement by the contracting \nStates any term not defined therein shall, unless the context \notherwise requires, have the meaning which it has under the laws \nin force in that contracting State, relating to the words which are \nthe subject of the convention. Article 1(e) defines 'person' so as to \ninclude an individual, a company and any other entity, corporate or \nnon-corporate \"which is treated as a taxable unit under the \ntaxation laws in force in the respective contracting States\". The \nCentral Government in the Ministry of Finance (Department of \nRevenue), in the case of India, and the Commissioner of Income \nTax in the case of Mauritius, are defined as the \"competent \nauthority\". Article 4 provides the scope of application of the \nAgreement. The applicability of the Agreement is determined by \nArticle 4 which reads as under;\n\n\"Article 4 Residents\n\n1.\tFor the purposes of the Convention, the term \n\"resident of a Contracting State\" means any person \nwho under the laws of that State, is liable to \ntaxation therein by reason of his domicile, \nresidence, place or management or any other \ncriterion of similar nature. The terms \"resident of \nIndia\" and \"resident of Mauritius\" shall be \nconstrued accordingly.\n\n2.\tWhere by reason of the provisions of \nparagraph 1, an individual is a resident of both \nContracting States, then his residential status for \nthe purposes of this Convention shall be \ndetermined in accordance with the following rules:\n\n(a)\the shall be deemed to be a resident of \nthe Contracting State in which he has \na permanent home available to him; if \nhe has a permanent home available to \nhim in both Contracting States, he \nshall be deemed to be a resident of the \nContracting State with which his \npersonal and economic relations are \ncloser (hereinafter referred to as his \n\"centre of vital interests\");\n\n(b)\tif the Contracting State in which he \nhas his centre of vital interest cannot \nbe determined, or if he does not have \na permanent home available to him in \neither Contracting State he shall be \ndeemed to be a resident of the \nContracting State in which he has an \nhabitual abode;\n\n(c)\tif he has an habitual abode in both \nContracting States or in neither of \nthem, he shall be deemed to be a \nresident of the Contracting State of \nwhich he is a national;\n\n(d)\tif he is a national of both Contracting \nStates or of neither of them, the \ncompetent authorities of the \nContracting States shall settle the \nquestion by mutual agreement.\n\n3.\tWhere by reason of the provision of \nparagraph 1, a person other than an individual is a \nresident of both the Contracting States, then it shall \nbe deemed to be a resident of the Contracting State \nin which its place of effective management is \nsituated.\"\n\n\tThe Agreement provides for allocation of taxing jurisdiction \nto different contracting parties in respect of different heads of \nincome. Detailed rules are stipulated with regard to taxing of \nDividends under Article 10, interest under Article 11, Royalties \nunder Article 12, Capital Gains under Article 13, income derived \nfrom Independent Personal Services in Article 14, income from \nDependent Personal Services in Article 15, Directors' Fees in \nArticle 16, income of Artists and Athletes in Article 17, \nGovernmental Functions in Article 18, income of students and \nApprentices in Article 20, income of Professors, Teachers and \nResearch Scholars in Article 21, and other income in Article 22.\n\nArticle 13 deals with the manner of taxation of capital gains. \nIt provides that gains from the alienation of immovable \nproperty may be taxed in the Contracting State in which such \nproperty is situated. Gains derived by a resident of a Contracting \nState from the alienation of movable property, forming part of \nthe business property of a permanent establishment which an \nenterprise of a Contracting State has in the other Contracting \nState, or of movable property pertaining to a fixed base available \nto a resident of a Contracting State in the other Contracting State \nfor the purpose of performing independent personal services, \nincluding such gains from the alienation of such a permanent \nestablishment, may be taxed in that other State. Gains from the \nalienation of ships and aircraft operated in international traffic and \nmovable property pertaining to the operation of such ships and \naircraft, shall be taxable only in the Contracting State in which the \nplace of effective management is situated. With respect to capital \ngain derived by a resident in the Contracting State from the \nalienation of any property other than the aforesaid is concerned, it \nis taxable only in the State in which such a person is a 'resident'. \n\nArticle 25 lays down the Mutual Agreement Procedure. It \nprovides that where a resident of a Contracting State considers \nthat the actions of one or both of the Contracting State result or \nwill result for him in taxation not in accordance with this \nConvention, he may, notwithstanding the remedies provided by \nthe national laws of those States, present his case to the competent \nauthority of the Contracting State of which he is a resident. This \ncase must be presented within three years of the date of receipt of \nnotice of the action which gives rise to taxation not in accordance \nwith the Convention. Thereupon, if the objection appears to be \njustified, the competent authority shall attempt to resolve the case \nby mutual agreement with the competent authority of the other \nContracting State so as to avoid a situation of taxation not in \naccordance with the convention. This Article also provides for \nendeavour by the competent authorities of the Contracting States \nto resolve by mutual agreement any difficulties or doubts arising as \nthe interpretation or application of the convention. For this \npurpose, the convention contemplates continuous or periodical \ncommunication between the competent authorities of the \nContracting States and exchange of views and opinions.\n\nB : The Circulars\nBy a Circular No.682 dated 30.3.1994 issued by the CBDT \nin exercise of its powers under Section 90 of the Act, the \nGovernment of India clarified that capital gains of any resident of \nMauritius by alienation of shares of an Indian company shall be \ntaxable only in Mauritius according to Mauritius taxation laws and \nwill not be liable to tax in India. Relying on this, a large number \nof Foreign Institutional Investors s (hereinafter referred to as \"the \nFIIs\"), which were resident in Mauritius, invested large amounts of \ncapital in shares of Indian companies with expectations of making \nprofits by sale of such shares without being subjected to tax in \nIndia. Sometime in the year 2000, some of the income tax \nauthorities issued show cause notices to some FIIs functioning in \nIndia calling upon them to show cause as to why they should not \nbe taxed for profits and for dividends accrued to them in India. \nThe basis on which the show cause notice was issued was that the \nrecipients of the show cause notice were mostly 'shell companies' \nincorporated in Mauritius, operating through Mauritius, whose \nmain purpose was investment of funds in India. It was alleged that \nthese companies were controlled and managed from countries \nother than India or Mauritius and as such they were not \n\"residents\" of Mauritius so as to derive the benefits of the DTAC. \nThese show cause notices resulted in panic and consequent hasty \nwithdrawal of funds by the FIIs. The Indian Finance Minister \nissued a Press note dated April 4, 2000 clarifying that the views \ntaken by some of the income-tax officers pertained to specific \ncases of assessment and did not represent or reflect the policy of \nthe Government of India with regard to denial of tax benefits to \nsuch FIIs. \nThereafter, to further clarify the situation, the CBDT issued \na Circular No.789 dated 13.4.2000. Since this is the crucial \nCircular, it would be worthwhile reproducing its full text. The \nCircular reads as under:\n \"Circular No.789\n\nF.No.500/60/2000-FTD\nGOVERNMENT OF INDIA\nMINISTRY OF FINANCE\nDEPARTMENT OF REVENUE\nCENTRAL BOARD OF DIRECT TAXES\n\nNew Delhi, the 13th April, 2000\n\nTo\n\nAll the Chief Commissioners/ Directors\nGeneral of Income-tax\n\nSub:\tClarification regarding taxation of income \nfrom dividends and capital gains under the \nIndo-Mauritius Double Tax Avoidance \nConvention (DTAC) - Reg.\n\n\tThe provisions of the Indo-Mauritius DTAC \nof 1983 apply to 'residents' of both India and \nMauritius . Article 4 of the DTAC defines a \nresident of one State to mean any person who, \nunder the laws of that State is liable to taxation \ntherein by reason of his domicile, residence, \nplace of management or any other criterion of a \nsimilar nature. Foreign Institutional Investors and \nother investment funds etc. which are operating \nfrom Mauritius are invariably incorporated in \nthat country. These entities are 'liable to tax' \nunder the Mauritius Tax law and are therefore to \nbe considered as residents of Mauritius in \naccordance with the DTAC.\n\n\tPrior to 1st June, 1997, dividends distributed \nby domestic companies were taxable in the hands \nof the shareholder and tax was deductible at \nsource under the Income-tax Act, 1961. Under \nthe DTAC, tax was deductible at source on the \ngross dividend paid out at the rate of 5% or 15% \ndepending upon the extent of shareholding of the \nMauritius resident. Under the Income-tax Act, \n1961, tax was deductible at source at the rates \nspecified under section 115A etc. Doubts have \nbeen raised regarding the taxation of dividends \nin the hands of investors from Mauritius. It is \nhereby clarified that wherever a Certificate of \nResidence is issued by the Mauritian Authorities, \nsuch Certificate will constitute sufficient \nevidence for accepting the status of residence as \nwell as beneficial ownership for applying the \nDTAC accordingly.\n\n\tThe test of residence mentioned above \nwould also apply in respect of income from \ncapital gains on sale of shares. Accordingly, FIIs \netc., which are resident in Mauritius would not be \ntaxable in India on income from capital gains \narising in India on sale of shares as per paragraph \n4 of article 13.\n\n\tThe aforesaid clarification shall apply to all \nproceedings which are pending at various levels.\"\n\nC: The Writ Petitions\n\n\tCircular No. 789 was challenged before the High Court of \nDelhi by two writ petitions, both said to be by way of Public \nInterest Litigation. The petitioner in CWP 2802 of 2000 (Azadi \nBachao Andolan) prayed for quashing and declaring as illegal and \nvoid Circular No.789 dated 13.4.2000 issued by the CBDT. The \npetitioner in CWP 5646 of 2000 sought an appropriate \ndirection/order or writ to the Central Government and made the \nfollowing prayers:\n\n\"(a)\tissue such appropriate direction /order / writ \nas the Court deem proper, under the circumstances \nbrought to the knowledge of the Hon'ble Court, to the \nCentral Government to initiate a process whereby the \nterms of the Indo-Mauritius Double Taxation \nAvoidance Agreement are revised, modified, or \nterminated and /or effective steps taken by the High \nContracting Parties so that the NRIs and FIIs and such \nother interlopers do not maraud the resources of the \nState.\n\n(b)\t\tdeclare and delimit the powers of the \nCentral Government under section 90 of the Income \nTax Act, 1961 in the matter of entering into an \nagreement with the Government of any country \noutside India;\n\n(c)\t\tdeclare and delimit the powers of the \nCentral Board of Direct Taxes in the matter of the \nissuance of instructions through circulars to the \nstatutory authorities under the Income tax Act, \nspecially through such circulars which are beneficial \nto certain individual taxpayers but injurious to Public \nInterest.\n\n(d)\t\tdeclare the illegality of Circular No.789 of \nApril 13, 2000 issued by the Central Board of Direct \nTaxes and to quash it as a matter of consequence;\n\n(e)\t\tissue mandamus so that the respondents \ndischarge their statutory duties of conducting \ninvestigation and collection of tax as per law;\n\n(f)\t\tissue appropriate direction/ order or writ of \nthe nature of mandamus, as the Court deem fit, so that \nall remedial actions to undo the effects of the acts \ndone to the prejudice or Revenue in pursuance of \nCircular No.789 are taken by the authorities under the \nIncome tax Act, 1961\"\n\nD : High Court's findings\n\tThe High Court has quashed the circular on the following \nbroad grounds:\n(A)\tPrima facie, by reason of the impugned circular no direction \nhas been issued. The circular does not show that it has been issued \nunder section 119 of the Income-tax Act, 1961 and as such it \nwould not be legally binding on the Revenue;\n(B)\tThe Central Board of Direct Taxes cannot issue any \ninstruction, which would be ultra vires the provisions of the \nIncome-tax Act, 1961. Inasmuch as the impugned circular directs \nthe income-tax authorities to accept a certificate of residence \nissued by the authorities of Mauritius as sufficient evidence as \nregards status of resident and beneficial ownership, it is ultra vires \nthe powers of the CBDT;\n(C)\tThe Income-tax Officer is entitled to lift the corporate veil in \norder to see whether a company is actually a resident of Mauritius \nor not and whether the company is paying income-tax in Mauritius \nor not and this function of the Income-tax Officer is quasi-judicial. \nAny attempt by the CBDT to interfere with the exercise of this \nquasi-judicial power is contrary to intendment of the Income-tax \nAct.\n(D)\tConclusiveness of a certificate of residence issued by the \nMauritius Tax Authorities is neither contemplated under the \nDTAC, nor under the Income-tax Act; whether a statement is \nconclusive or not, must be provided under a legislative enactment \nsuch as the Indian Evidence Act and cannot be determined by a \nmere circular issued by the CBDT;\n(E)\t\"Treaty Shopping\", by which the resident of a third country \ntakes advantage of the provisions of the Agreement, is illegal and \nthus necessarily forbidden;\n(F)\tSection 119 of the Income-tax Act, 1961 enables the \nissuance of a circular for a strictly limited purpose. By a circular \nissued thereunder, neither can the essential legislative function be \ndelegated, nor arbitrary, uncanalized or naked power be conferred;\n(G)\tPolitical expediency cannot be a ground for not fulfilling the \nconstitutional obligations inherent in the Constitution of India and \nreflected in section 90 of the Act. The circular confers power to \nlay down a law which is not contemplated under the Act on the \nground of political expediency, which cannot but be ultra vires.\n(H)\tAny purpose other than the purpose contemplated by section \n90 of the Act, however bona fide it be, would be ultra vires the \nprovisions of section 90 of the Income tax Act.\n(I)\tWhile political expediency will have a role to play in terms \nof Article 73 of the Constitution, the same is not true when a \nTreaty is entered into under the statutory provision like section 90 \nof the Act. \n(J)\tAvoidance of double taxation is a term of art and means that \na person has to pay tax at least in one country; avoidance of double \ntaxation would not mean that a person does not have to pay tax in \nany country whatsoever.\n(K) Having regard to the law laid down by the Supreme Court in \nMcDowell & Company v C.T.O , it is open to the Income-tax \nOfficer in a given case to lift the corporate veil for finding out \nwhether the purpose of the corporate veil is avoidance of tax or \nnot. It is one of the functions of the assessing officer to ensure that \nthere is no conscious avoidance of tax by an assessee, and such \nfunction being quasi-judicial in nature, cannot be interfered with or \nprohibited. The impugned circular is ultra vires as it interferes with \nthis quasi judicial function of the assessing officer.\n\n(L)\tBy reason of the impugned circular the power of the \nassessing authority to pass appropriate orders in this connection to \nshow that the assessee is a resident of a third country having only \npaper existence in Mauritius, without any economic impact, only \nwith a view to take advantage of the double taxation avoidance \nagreement, has been taken away.\nTHE SUBMISSIONS\n\tThe learned Attorney General and Mr. Salve, for the \nappellants, have assailed the judgment of the Delhi High Court on \na number of grounds, while the respondents through Mr.Bhushan, \nand in person, reiterated their submissions made before the High \nCourt and prayed for dismissal of these appeals. \n\nPurpose and consequence of Double Taxation Avoidance \nConvention\n\n\tTo appreciate the contentions urged, it would be necessary \nto understand the purpose and necessity of a Double Taxation \nTreaty, Convention or Agreement, as diversely called. The \nIncome-tax Act, 1961, contains a special Chapter IX which is \ndevoted to the subject of 'Double Taxation Relief\". \nSection 90, with which we are primarily concerned, provides \nas under:\n\n\"90. Agreement with foreign countries.\n(1)\t\tThe Central Government may enter \ninto an agreement with the Government of any \ncountry outside India-\n\n(a)\t\tfor the granting of relief in respect of \nincome on which have been paid both income-\ntax under this Act and income-tax in that \ncountry, or \n\n(b)\t\tfor the avoidance of double taxation \nof income under this Act and under the \ncorresponding law in force in that country, or\n\n(c)\t\tfor exchange of information for the \nprevention of evasion or avoidance of income-\ntax chargeable under this Act or under the \ncorresponding law in force in that country, or \ninvestigation of cases of such evasion or \navoidance, or \n\n(d)\t\tfor recovery of income-tax under this \nAct and under the corresponding law in force in \nthat country, \n\nand may, by notification in the Official Gazette, \nmake provisions as may be necessary for \nimplementing the agreement.\n\n(2)\t\tWhere the Central Government has \nentered into an agreement with the Government \nof any country outside India under sub-section \n(1) for granting relief of tax, or as the case may \nbe, avoidance of double taxation, then, in \nrelation to the assessee to whom such \nagreement applies, the provisions of this Act \nshall apply to the extent they are more \nbeneficial to that assessee.\"\n\n(Explanation omitted as not relevant)\n\n\nSection 4 provides for Charge of Income-tax. Section 5 \nprovides that the total income of a resident includes all income \nwhich : (a) is received, deemed to be received in India or (b) \naccrues, arises or deemed to accrue or arise in India, or (c) accrues \nor arises outside India, during the previous year. In the case of a \nnon-resident, the total income includes \"all income from whatever \nsource derived\" which (a) is received or is deemed to be received \nor, (b) accrues or is deemed to accrue in India, during such year. A \nperson 'resident' in India would be liable to income-tax on the \nbasis of his global income unless he is a person who is 'not \nordinarily' resident within the meaning of section 6(b). The \nconcept of residence in India is indicated in section 6. Speaking \nbroadly, and with reference to a company, which is of concern \nhere, a company is said to be 'resident' in India in any previous \nyear, if it is an Indian company or if during that year the control \nand management of its affairs is situated wholly in India.\n\n\tEvery country seeks to tax the income generated within its \nterritory on the basis of one or more connecting factors such as \nlocation of the source, residence of the taxable entity, maintenance \nof a permanent establishment, and so on. A country might choose \nto emphasise one or the other of the aforesaid factors for exercising \nfiscal jurisdiction to tax the entity. Depending on which of the \nfactors is considered to be the connecting factor in different \ncountries, the same income of the same entity might become liable \nto taxation in different countries. This would give rise to harsh \nconsequences and impair economic development. In order to \navoid such an anomalous and incongruous situation, the \nGovernments of different countries enter into bilateral treaties, \nConventions or agreements for granting relief against double \ntaxation. Such treaties, conventions or agreements are called \ndouble taxation avoidance treaties, conventions or agreements.\n\nThe power of entering into a treaty is an inherent part of the \nsovereign power of the State. By article 73, subject to the \nprovisions of the Constitution, the executive power of the Union \nextends to the matters with respect to which the Parliament has \npower to make laws. Our Constitution makes no provision making \nlegislation a condition for the entry into an international treaty in \ntime either of war or peace. The executive power of the Union is \nvested in the President and is exercisable in accordance with the \nConstitution. The Executive is qua the State competent to represent \nthe State in all matters international and may by agreement, \nconvention or treaty incur obligations which in international law \nare binding upon the State. But the obligations arising under the \nagreement or treaties are not by their own force binding upon \nIndian nationals. The power to legislate in respect of treaties lies \nwith the Parliament under entries 10 and 14 of List I of the Seventh \nSchedule. But making of law under that authority is necessary \nwhen the treaty or agreement operates to restrict the rights of \ncitizens or others or modifies the law of the State. If the rights of \nthe citizens or others which are justiciable are not affected, no \nlegislative measure is needed to give effect to the agreement or \ntreaty. \nWhen it comes to fiscal treaties dealing with double \ntaxation avoidance, different countries have varying procedures. \nIn the United States such a treaty becomes a part of municipal law \nupon ratification by the Senate. In the United Kingdom such a \ntreaty would have to be endorsed by an order made by the Queen \nin Council. Since in India such a treaty would have to be \ntranslated into an Act of Parliament, a procedure which would be \ntime consuming and cumbersome, a special procedure was evolved \nby enacting section 90 of the Act. \nThe purpose of section 90 becomes clear by reference to its \nlegislative history. Section 49A of the Income-tax Act, 1922 \nenabled the Central Government to enter into an agreement with \nthe government of any country outside India for the granting of \nrelief in respect of income on which, both income-tax (including \nsuper-tax) under the Act and income-tax in that country, under the \nIncome-tax Act and the corresponding law in force in that country, \nhad been paid. The Central Government could make such \nprovisions as necessary for implementing the agreement by \nnotification in the Official Gazette. When the Income-tax Act, \n1961 was introduced, section 90 contained therein initially was a \nreproduction of section 49A of 1922 Act. The Finance Act, 1972 \n(Act 16 of 1972) modified section 90 and brought it into force with \neffect from 1.4.1972. The object and scope of the substitution was \nexplained by a circular of the Central Board of Taxes (No.108 \ndated 20.3.1973) as to empower the Central Government to enter \ninto agreements with foreign countries, not only for the purpose of \navoidance of double taxation of income, but also for enabling the \ntax authorities to exchange information for the prevention of \nevasion or avoidance of taxes on income or for investigation of \ncases involving tax evasion or avoidance or for recovery of taxes \nin foreign countries on a reciprocal basis. In 1991, the existing \nsection 90 was renumbered as sub-section(1) and sub-section(2) \nwas inserted by Finance Act, 1991 with retrospective effect from \nApril 1, 1972. CBDT Circular No. 621 dated 19.12.1991 explains \nits purpose as follows:\n\n\"Taxation of foreign companies and other non-\nresident taxpayers -\n\n43. Tax treaties generally contain a provision \nto the effect that the laws of the two contracting \nStates will govern the taxation of income in the \nrespective State except when express provision \nto the contrary is made in the treaty. It may so \nhappen that the tax treaty with a foreign country \nmay contain a provision giving concessional \ntreatment to any income as compared to the \nposition under the Indian law existing at that \npoint of time. However, the Indian law may \nsubsequently be amended, reducing the \nincidence of tax to a level lower than what has \nbeen provided in the tax treaty.\n\n43.1. Since the tax treaties are intended to \ngrant tax relief and not put residents of a \ncontracting country at a disadvantage vis-\u00e0-vis \nother taxpayers, section 90 of the Income-tax \nAct has been amended to clarify that any \nbeneficial provision in the law will not be \ndenied to a resident of a contracting country \nmerely because the corresponding provision in \nthe tax treaty is less beneficial.\"\n\tThe provisions of Sections 4 and 5 of the Act are expressly \nmade \"subject to the provisions of this Act\", which would include \nSection 90 of the Act. As to what would happen in the event of a \nconflict between the provision of the Income-tax Act and a \nNotification issued under Section 90, is no longer res-integra.\n\n The Andhra Pradesh High Court in Commissioner of \nIncome Tax v. Visakhapatnam Port Trust held that provisions of \nsection 4 and 5 of Income-tax Act are expressly made 'subject to \nthe provisions of the Act' which means that they are subject to \nprovisions of section 90. By necessary implication, they are \nsubject to the terms of the Double Taxation Avoidance Agreement, \nif any, entered into by the Government of India. Therefore, the \ntotal income specified in Sections 4 and 5 chargeable to income \ntax is also subject to the provisions of the agreement to the \ncontrary, if any.\n\n In Commissioner of Income Tax v. Davy Ashmore India \nLtd. , while dealing with the correctness of a circular no.333 dated \nApril 2, 1982, it was held that the conclusion is inescapable that in \ncase of inconsistency between the terms of the Agreement and the \ntaxation statute, the Agreement alone would prevail. The Calcutta \nHigh Court expressly approved the correctness of the CBDT \ncircular No.333 dated April 2, 1982 on the question as to what the \nassessing officers would have to do when they found that the \nprovision of the Double Taxation was not in conformity with the \nIncome-tax Act, 1961. The said circular provided as follows \n(quoted at p.632):\n\n\t\"The correct legal position is that where a \nspecific provision is made in the Double \nTaxation Avoidance Agreement, that provision \nwill prevail over the general provisions \ncontained in the Income-tax Act, 1961. In fact \nthe Double Taxation Avoidance Agreements \nwhich have been entered into by the Central \nGovernment under section 90 of the Income-tax \nAct, 1961, also provide that the laws in force in \neither country will continue to govern the \nassessment and taxation of income in the \nrespective country except where provisions to \nthe contrary have been made in the Agreement.\n\nThus, where a Double Taxation Avoidance \nAgreement provided for a particular mode of \ncomputation of income, the same should be \nfollowed, irrespective of the provisions in the \nIncome-tax Act. Where there is no specific \nprovision in the Agreement, it is the basic law, \ni.e, the Income-tax Act, that will govern the \ntaxation of income.\"\n\n\tThe Calcutta High Court held that the circular reflected the \ncorrect legal position inasmuch as the convention or agreement is \narrived at by the two Contracting States \"in deviation from the \ngeneral principles of taxation applicable to the Contracting States\". \nOtherwise, the double taxation avoidance agreement will have no \nmeaning at all. \n\n In Commissioner of Income Tax v. R.M. Muthaiah the \nKarnataka High Court was concerned with the DTAT between \nGovernment of India and Government of Malaysia. The High \nCourt held that under the terms of agreement, if there was a \nrecognition of the power of taxation with the Malaysian \nGovernment, by implication it takes away the corresponding \npower of the Indian Government. The Agreement was thus held to \noperate as a bar on the power of the Indian Government to tax and \nthat the bar would operate on Sections 4 and 5 of the Income Tax \nAct, 1961, and take away the power of the Indian Government to \nlevy tax on the income in respect of certain categories as referred \nto in certain Articles of the Agreement. The High Court summed \nup the situation by observing (at p.512-513):\n\n\"The effect of an \"agreement\" entered into by \nvirtue of section 90 of the Act would be : (1) If \nno tax liability is imposed under this Act, the \nquestion of resorting to the agreement would not \narise. No provision of the agreement can \npossibly fasten a tax liability where the liability \nis not imposed by this Act; (ii) if a tax liability is \nimposed by this Act, the agreement may be \nresorted to for negativing or reducing it; (iii) in \ncase of difference between the provisions of the \nAct and of the agreement, the provisions of the \nagreement prevail over the provisions of this \nAct and can be enforced by the appellate \nauthorities and the court.\"\n\n\tIt also approved of the correctness of the Circular No. 333 \ndated April 2, 1982 issued by the Central Board of Direct Taxes on \nthe subject.\n\n\tIn Arabian Express Line Ltd. of United Kingdom and Others \nv. Union of India the Gujarat High Court, interpreting section 90, \nin the light of circular No.333 dated April 2, 1982 issued by the \nCBDT, held that the procedure of assessing the income of a NRI \nbecause of his occasional activities in establishing business in \nIndia would not be applicable in a case where there is a convention \nbetween the Government of India and the foreign country as \nprovided under Section 90 of the Income-tax Act, 1961. In case of \nsuch an agreement, section 90 would have an overriding effect. \nInterestingly, in this case a certificate issued by the H.M. Inspector \nof Taxes certifying that the company was a resident of the United \nKingdom for purposes of tax and that it had paid advance \ncorporate tax in the office of the English Revenue Accounts \nOffice, was held to be sufficient to take away the jurisdiction of the \nIncome-tax Officer.\n\tA survey of the aforesaid cases makes it clear that the \njudicial consensus in India has been that section 90 is specifically \nintended to enable and empower the Central Government to issue a \nnotification for implementation of the terms of a double taxation \navoidance agreement. When that happens, the provisions of such \nan agreement, with respect to cases to which where they apply, \nwould operate even if inconsistent with the provisions of the \nIncome-tax Act. We approve of the reasoning in the decisions \nwhich we have noticed. If it was not the intention of the legislature \nto make a departure from the general principle of chargeability to \ntax under section 4 and the general principle of ascertainment of \ntotal income under section 5 of the Act, then there was no purpose \nin making those sections \"subject to the provisions\" of the Act\". \nThe very object of grafting the said two sections with the said \nclause is to enable the Central Government to issue a notification \nunder section 90 towards implementation of the terms of the DTAs \nwhich would automatically override the provisions of the Income-\ntax Act in the matter of ascertainment of chargeability to income \ntax and ascertainment of total income, to the extent of \ninconsistency with the terms of the DTAC.\n\n\tThe contention of the respondents, which weighed with the \nHigh Court viz. that the impugned circular No.789 is inconsistent \nwith the provisions of the Act, is a total non-sequitur. As we have \npointed out, Circular No.789 is a circular within the meaning of \nsection 90; therefore, it must have the legal consequences \ncontemplated by sub-section (2) of section 90. In other words, the \ncircular shall prevail even if inconsistent with the provisions of \nIncome-tax Act, 1961 insofar as assessees covered by the \nprovisions of the DTAC are concerned. \n\n\tThough a number of interconnected and diffused arguments \nwere addressed, broadly the argument of the respondents appears \nto be as follows: By reason of Article 265 of the Constitution, no \ntax can be levied or collected except by authority of law. The \nauthority to levy tax or grant exemption therefrom vests absolutely \nin the Parliament and no other body, howsoever high, can exercise \nsuch power. Once Parliament has enacted the Income-tax Act, \ntaxes must be levied and collected in accordance therewith and no \nperson has power to grant any exemption therefrom. The treaty \nmaking power under Article 73 is confined only to such matters as \nwould not fall within the province of Article 265. With respect to \nfiscal treaties, the contention is that they cannot be enforced in \ncontravention of the provisions of the Income-tax Act, unless \nParliament has made an enabling law in support. The respondents \nhighlighted the provisions of the OECD models with regard to tax \ntreaties and how tax treaties were enunciated, signed and \nimplemented in America, Britain and other countries. Placing \nreliance on the observations of Kier and Lawson , it was \ncontended that in England it has been recognised that \"there are, \nhowever, two limits to its capacity; it cannot legislate and it \ncannot tax without the concurrence of the Parliament\". It is urged \nthat the situation is the same in India; that unless there is a specific \nexemption granted by the Parliament, it is not open for the Central \nGovernment to grant any exemption from the tax payable under the \nIncome-tax Act. \n\nIn our view, the contention is wholly misconceived. \nSection 90, as we have already noticed (including its precursor \nunder the 1922 Act), was brought on the statute book precisely to \nenable the executive to negotiate a DTAC and quickly implement \nit. Even accepting the contention of the respondents that the \npowers exercised by the Central Government under section 90 are \ndelegated powers of legislation, we are unable to see as to why a \ndelegatee of legislative power in all cases has no power to grant \nexemption. There are provisions galore in statutes made by \nParliament and State legislatures wherein the power of conditional \nor unconditional exemption from the provisions of the statutes are \nexpressly delegated to the executive. For example, even in fiscal \nlegislation like the Central Excise Act and Sales Tax Act, there are \nprovisions for exemption from the levy of tax. Therefore we are \nunable to accept the contention that the delegate of a legislative \npower cannot exercise the power of exemption in a fiscal statute. \nThe niceties of the OECD model of tax treaties or the report \nof the Joint Parliamentary Committee on the State Market Scam \nand Matters Relating thereto, on which considerable time was \nspent by Mr. Jha, who appeared in person, need not detain us for \ntoo long, though we shall advert to them later. This Court is not \nconcerned with the manner in which tax treaties are negotiated or \nenunciated; nor is it concerned with the wisdom of any particular \ntreaty. Whether the Indo-Mauritius DTAC ought to have been \nenunciated in the present form, or in any other particular form, is \nnone of our concern. Whether section 90 ought to have been \nplaced on the statute book, is also not our concern. Section 90, \nwhich delegates powers to the Central Government, has not been \nchallenged before us, and, therefore, we must proceed on the \nfooting that the section is constitutionally valid. The challenge \nbeing only to the exercise of the power emanating from the section, \nwe are of the view that section 90 enables the Central Government \nto enter into a DTAC with the foreign Government. When the \nrequisite notification has been issued thereunder, the provisions of \nsub-section (2) of section 90 spring into operation and an assessee \nwho is covered by the provisions of the DTAC is entitled to seek \nbenefits thereunder, even if the provisions of the DTAC are \ninconsistent with the provisions of Income-tax Act, 1961.\n\nSTARE DECISIS\nThe learned Attorney General justifiably relied on the \nobservations of this Court in Mishri Lal v. Dhirendra Nath (Dead) \nby Lrs. and Others in which this Court referred to its earlier \ndecision in Muktul v. Manbhari on the scope of the doctrine of \nstare decisis with reference to Halsbury's Law of England and \nCorpus Juris Secundum, pointing out that a decision which has \nbeen followed for a long period of time, and has been acted upon \nby persons in the formation of contracts or in the disposition of \ntheir property, or in the general conduct of affairs, or in legal \nprocedure or in other ways, will generally be followed by courts of \nhigher authority other than the court establishing the rule, even \nthough the court before whom the matter arises afterwards might \nbe of a different view. The learned Attorney General contended \nthat the interpretation given to section 90 of the Income-tax Act, a \nCentral Act, by several High Courts without dissent has been \nuniformally followed; several transactions have been entered into \nbased upon the said exposition of the law; that several tax treaties \nhave been entered into with different foreign Governments based \nupon this law, hence, the doctrine of stare decisis should apply or \nelse it will result in chaos and open up a Pandora's box of \nuncertainty. \nWe think that this submission is sound and needs to be \naccepted. It is not possible for us to say that the judgments of the \ndifferent High Courts noticed have been wrongly decided by \nreason of the arguments presented by the respondents. As \nobserved in Mishrilal even if the High Courts have \nconsistently taken an erroneous view, (though we do not say that \nthe view is erroneous) it would be worthwhile to let the matter rest, \nsince large numbers of parties have modulated their legal \nrelationship based on this settled position of law.\n\nEffect of circular under Section 119 \n\nMuch of the argument centred around the effect of the \ncircular issued by the CBDT under Section 119 of the Act and its \nbinding nature. \nSection 119, strategically placed in Chapter XIII which deals \nwith 'Income-Tax Authorities' is an enabling power of the \nCBDT, which is recognised as an authority under the Income-tax \nAct under section 116(a). The CBDT under this section is \nempowered to issue such orders instructions and directions to \nother income-tax authorities \"as it may deem fit for proper \nadministration of this Act\". Such authorities and all other persons \nemployed in the execution of this Act are bound to observe and \nfollow such orders, instructions and directions of the CBDT. The \nproviso to sub-section (1) of section 119 recognises two \nexceptions to this power. First, that the CBDT cannot require any \nincome-tax authority to make a particular assessment or to dispose \nof a particular case in a particular manner. Second, is with regard \nto interference with the discretion of the Commissioner (Appeals) \nin exercise of his appellate functions. Sub-section(2) of Section \n119 provides for the exercise of power in certain special cases and \nenables the CBDT, if it considers it necessary or expedient so to \ndo for the purpose of proper and efficient management of the work \nof assessment and collection of revenue, to issue general or special \norders in respect of any class of incomes of class of cases , setting \nforth directions or instructions as to the guidelines, principles or \nprocedures to be followed by other income-tax authorities in the \ndischarge of their work relating to assessment or initiating \nproceedings for imposition of penalties. The powers of the CBDT \nare wide enough to enable it to grant relaxation from the provisions \nof several sections enumerated in clause (a). Such orders may be \npublished in the Official Gazette in the prescribed manner, if the \nCBDT is of the opinion that it is so necessary. The only bar on the \nexercise of power is that it is not prejudicial to the assessee. We \nare not concerned with the provisions in clauses (b) and (c) in the \npresent appeals.\nIn K.P. Varghese v. Income-Tax Officer, Ernakulam it was \npointed out by this Court that not only are the circulars and \ninstructions, issued by the CBDT in exercise of the power under \nsection 119, binding on the authorities administering the tax \ndepartment, but they are also clearly in the nature of \ncontemporanea expositio furnishing legitimate aid to the \nconstruction of the Act.\n\nThe Rule of contemporanea expositio is that \n\"administrative construction (i.e. contemporaneous construction \nplaced by administrative or executive officers) generally should be \nclearly wrong before it is overturned; such a construction \ncommonly referred to as practical construction, although non-\ncontrolling, is nevertheless entitled to considerable weight, it is \nhighly persuasive.\" \n\nThe validity of this principle was recognised in Baleshwar \nBagarti v. Bhagirathi Dass where the Calcutta High Court stated \nthe rule in the following words :\n\"It is a well-settled principle of \ninterpretation that courts in construing a statute \nwill give much weight to the interpretation put \nupon it, at the time of its enactment and since, \nby those whose duty it has been to construe, \nexecute and apply it.\"\n\n The statement of this rule has also been quoted with \napproval by this Court in Deshbandhu Gupta & Company v. Delhi \nStock Exchange Association Ltd .\n\nIn K.P. Varghese this Court held that the circulars of the \nCBDT issued in exercise of its power under section 119 are \nlegally binding on the revenue and that this binding character \nattaches to the circulars \"even if they be found not in accordance \nwith the correct interpretation of sub-section (2) and they depart \nor deviate from such construction.\"\t\n\nNavnit Lal C. Javeri v. K.K.Sen and Ellerman Lines Ltd. v. \nCIT clearly establish the principle that circulars issued by the \nCBDT under section 119 of the Act are binding on all officers and \nemployees employed in the execution of the Act, even if they \ndeviate from the provisions of the Act.\n\nIn UCO Bank v. Commissioner of Incom-Tax , dealing \nwith the legal status of such circulars, this Court observed:\n\"Such instructions may be by way of relaxation \nof any of the provisions of the sections \nspecified there or otherwise. The Board thus \nhas power, inter alia, to tone down the rigour of \nthe law and ensure a fair enforcement of its \nprovisions, by issuing circulars in exercise of \nits statutory powers under section 119 of the \nIncome-tax Act which are binding on the \nauthorities in the administration of the Act. \nUnder section 119(2) however, the circulars as \ncontemplated therein cannot be adverse to the \nassessee. Thus the authority which wields the \npower for its own advantage under the Act is \ngiven the right to forgo the advantage when \nrequired to wield it in a manner it considers just \nby relaxing the rigour of the law or in other \npermissible manners as laid down in section\n119. The power is given for the purpose of \njust, proper and efficient management of the \nwork of assessment and in public interest. It is a \nbeneficial power given to the Board for proper \nadministration of fiscal law so that undue \nhardship may not be caused to the assessee and \nthe fiscal laws may be correctly applied. Hard \ncases which can be properly categorised as \nbelonging to a class, can thus be given the \nbenefit of relaxation of law by issuing circulars \nbinding on the taxing authorities.\"\n\n In Commissioner of Income-Tax v. Anjum M.H.Ghaswala \nand Others it was pointed out that the circulars issued by CBDT \nunder Section 119 of the Act have statutory force and would be \nbinding on every income-tax authority although such may not be \nthe case with regard to press releases issue by the CBDT for \ninformation of the public.\n\n In Collector of Central Excise Vadodra v. Dhiren Chemical \nIndustries , this Court, interpreting the phrase 'appropriate', \nobserved :\n\"We need to make it clear that, regardless of \nthe interpretation that we have placed on the \nsaid phrase, if there are circulars which have \nbeen issued by the Central Board of Excise and \nCustoms which place a different interpretation \nupon the said phrase, that interpretation will be \nbinding upon the Revenue.\"\n\n\tWhile commenting adversely upon the validity of the \nimpugned circular, the High Court says \"that the circular itself \ndoes not show that the same has been issued under Section 119 of \nthe Income-tax Act. Only in a case where the circular is issued \nunder Section 119 of the Income-tax Act, the same would be \nlegally binding on the revenue. The circular does not deal with the \npower of the ITO to consider the question as to whether although \napparently a company is incorporated in Mauritius but whether the \ncompany is also a resident of India and/or not a resident of \nMauritius at all.\" It is trite law that as long as an authority has \npower, which is traceable to a source, the mere fact that source of \npower is not indicated in an instrument does not render the \ninstrument invalid. \n\nIs the impugned circular ultra-vires Section 119 ?\n\nIt was contended successfully before the High Court that the \ncircular is ultra vires the provisions of section 119. Sub-section(1) \nof section 119 is deliberately worded in general manner so that the \nCBDT is enabled to issue appropriate orders, instruction or \ndirection to the subordinate authorities \"as it may deem fit for the \nproper administration of the Act\". As long as the circular emanates \nfrom the CBDT and contains orders, instructions or directions \npertaining to proper administration of the Act, it is relatable to the \nsource of power under section 119 irrespective of its nomenclature. \nApart from sub-section(1), sub-section(2) of section 119 also \nenables the CBDT \"for the purpose of proper and efficient \nmanagement of the work of assessment and collection of revenue, \nto issue appropriate orders, general or special in respect of any \nclass of income or class of cases, setting forth directions or \ninstructions (not being prejudicial to assessees) as to the \nguidelines, principles or procedures to be followed by other \nincome tax authorities in the work relating to assessment or \ncollection of revenue or the initiation of proceedings for the \nimposition of penalties\". In our view, the High Court was not \njustified in reading the circular as not complying with the \nprovisions of section 119. The circular falls well within the \nparameters of the powers exercisable by the CBDT under Section \n119 of the Act. \n\nThe High Court persuaded itself to hold that the circular is \nultra vires the powers of the CBDT on completely erroneous \ngrounds. The impugned circular provides that whenever a \ncertificate of residence is issued by the Mauritius Authorities, such \ncertificate will constitute sufficient evidence for accepting the \nstatus of residence as well as beneficial ownership for applying the \nDTAC accordingly. It also provides that the test of residence \nmentioned above would also apply in respect of income from \ncapital gains on sale of shares. Accordingly, FIIs etc., which are \nresident in Mauritius would not be taxable in India on income \nfrom capital gains arising in India on sale of shares as per \nparagraph 4 of Article 13. This, the High Court thought amounts to \nissuing instructions \"de hors the provisions of the Act\".\n\n\tIn our view, this thinking of the High Court is erroneous. \nThe only restriction on the power of the CBDT is to prevent it \nfrom interfering with the course of assessment of any particular \nassessee or the discretion of the Commissioner of Income-Tax \n(Appeals). It would be useful to recall the background against \nwhich this circular was issued. \n\nThe Income-tax authorities were seeking to examine as to \nwhether the assessees were actually residents of a third country on \nthe basis of alleged control of management therefrom. \nWe have already extracted the relevant provisions of Article \n4 which provide that, for the purposes of the agreement, the term \n'resident of a contracting State' means any person who under the \nlaws of that State is liable to taxation therein by reason of his \ndomicile, residence, place of management or any other criterion of \nsimilar nature. The term 'resident of India' and 'the resident of \nMauritius' are to be construed accordingly. Article 13 of the \nDTAC lays down detailed rules with regard to taxation of capital \ngains. As far as capital gains resulting from alienation of shares are \nconcerned, Article 13(4) provides that the gains derived by a \n'resident' of a contracting State shall be taxable only in that State. \nIn the instant case, such capital gains derived by a resident of \nMauritius shall be taxable only in Mauritius. Article 4, which we \nhave already referred to, declares that the term resident of \nMauritius' means any person who under the laws of Mauritius is \n'liable to taxation' therein by reason, inter alia, of his residence. \nClause (2) of Article 4 enumerates detailed rules as to how the \nresidential status of an individual resident in both contracting \nStates has to be determined for the purposes of DTAC. Clause(3) \nof Article 4 provides that if, after application of the detailed rules \nprovided in Article 4, it is found that a person other than an \nindividual is a resident of both the contracting States, then it shall \nbe deemed to be a resident of the contracting State in which its \nplace of effective management is situated. The DTAC requires the \ntest of 'place of effective management' to be applied only for the \npurposes of the tie-breaker clause in Article 4(3) which could be \napplied only when it is found that a person other than an individual \nis a resident both of India and Mauritius. We see no purpose or \njustification in the DTAC for application of this test in any other \nsituation. \n\nThe High Court has held, and the respondents so contend, \nthat the assessing officer under the Income-tax Act is entitled to lift \nthe corporate veil, but the circular effectively bars the exercise of \nthis quasi-judicial function by reason of a presumption with regard \nto the certificate issued by the competent authority in Mauritius; \nconclusiveness of such a certificate of residence granted by the \nMauritius tax authorities is neither contemplated under the DTAC, \nnor under the Income-tax Act a provision as to conclusiveness of a \ncertificate is a matter of legislative action and cannot form the \nsubject matter of a circular issued by a delegate of legislative \npower.\n\nAs early as on March 30, 1994, the CBDT had issued \ncircular no.682 in which it had been emphasised that any resident \nof Mauritius deriving income from alienation of shares of an \nIndian company would be liable to capital gains tax only in \nMauritius as per Mauritius tax law and would not have any capital \ngains tax liability in India. This circular was a clear enunciation of \nthe provisions contained in the DTAC, which would have \noverriding effect over the provisions of sections 4 and 5 of the \nIncome-tax Act,1961 by virtue of section 90(1) of the Act. If, in \nthe teeth of this clarification, the assessing officers chose to ignore \nthe guidelines and spent their time, talent and energy on \ninconsequtial matters, we think that the CBDT was justified in \nissuing 'appropriate' directions vide circular no.789, under its \npowers under section 119, to set things on course by eliminating \navoidable wastage of time, talent and energy of the assessing \nofficers discharging the onerous public duty of collection of \nrevenue. The circular no.789 does not in any way crib, cabin or \nconfine the powers of the assessing officer with regard to any \nparticular assessment. It merely formulates broad guidelines to be \napplied in the matter of assessment of assessees covered by the \nprovisions of the DTAC.\n\nWe do not think the circular in any way takes away or \ncurtails the jurisdiction of the assessing officer to assess the \nincome of the assessee before him. In our view, therefore, it is \nerroneous to say that the impugned circular No.789 dated \n13.4.2000 is ultra vires the provisions of section 119 of the Act. \nIn our judgment, the powers conferred upon the CBDT by sub-\nsections (1) and (2) of Section 119 are wide enough to \naccommodate such a circular. \n\nIs the DTAC bad for excessive delegation ?\n\n\tThe respondents contend that a tax treaty entered into \nwithin the umbrella of section 90 of the Act is essentially delegated \nlegislation; if it involves granting of exemption from tax, it would \namount to delegation of legislative powers, which is bad. The \nlegislature must declare the policy of the law and the legal principles \nwhich are to control any given case and must provide a procedure to \nexecute the law. \n\nThe question whether a particular delegated legislation is in \nexcess of the power of the supporting legislation conferred on the \ndelegate, has to be determined with regard not only to specific \nprovisions contained in the relevant statute conferring the power to \nmake rule or regulation, but also the object and purpose of the Act as \ncan be gathered from the various provisions of the enactment. It \nwould be wholly wrong for the Court to substitute its own opinion as \nto what principle or policy would best serve the objects and purposes \nof the Act, nor is it open to the Court to sit in judgment of the \nwisdom, the effectiveness or otherwise of the policy, so as to declare \na regulation to be ultra vires merely on the ground that, in the view of \nthe Court, the impugned provision will not help to carry through the \nobject and purposes of the Act. This court reiterated the legal \nposition, well established by a long series of decisions, in \nMaharashtra State Board of Secondary and Higher Secondary \nEducation and another v. Paritosh Bhupeshkumar Sheth and Others :\n\"So long as the body entrusted with the task of \nframing the rules or regulations acts within the \nscope of the authority conferred on it, in the \nsense that the rules or regulations made by it \nhave a rational nexus with the object and \npurpose of the statute, the court should not \nconcern itself with the wisdom or \nefficaciousness of such rules or regulations. It \nis exclusively within the province of the \nlegislature and its delegate to determine, as a \nmatter of policy, how the provisions of the \nstatute can best be implemented and what \nmeasures, substantive as well as procedural \nwould have to be incorporated in the rules or \nregulations for the efficacious achievement of \nthe objects and purposes of the Act. It is not \nfor the Court to examine the merits or \ndemerits of such a policy because its scrutiny \nhas to be limited to the question as to whether \nthe impugned regulations fall within the \nscope of the regulation-making power \nconferred on the delegate by the statute.\"\n\n\tApplying this test, we are unable to hold that the impugned \ncircular amounts to impermissible delegation of legislative power. \nThat the amendment made in section 90 was intended to empower \nthe Government to enter into agreement with foreign Government, \nif necessary, for relief from or avoidance of double taxation, is also \nmade clear by the Finance Minister in his Budget Speech, 1953-54\n\nIs the Double Taxation Avoidance Convention 'DTAC') illegal \nand ultra vires the powers of the Central Government u/S 90\n\n\tAlthough the High court has not made any finding of this \nnature, the respondents have strenuously contended before us that \nthe Indo-Mauritius Double Taxation Avoidance Convention, \n1983 is itself ultra vires the powers of the Government under \nSection 90 of the Act. This argument deserves short shrift. \n\nSection 90 empowers the Central Government to enter into \nagreement with the Government of any other country outside India \nfor the purposes enumerated in clauses (a) to (d) of sub-section (1) \n. While clause (a) talks of granting relief in respect of income on \nwhich income-tax has been paid in India as well as in the foreign \ncountry, clause (b) is wider and deals with 'avoidance of double \ntaxation of income' under the Act and under the corresponding \nlaw in force in the foreign country. We are not concerned with \nclauses (c) and (d). \n\nThere are two hurdles against accepting the arguments \npresented on behalf of the respondents. Even if we accept the \nargument of the respondent that the DTAC is delegated legislation, \nthe test of its validity is to be determined, not by its efficacy, but \nby the fact that it is within the parameters of the legislative \nprovision delegating the power. That the purpose of the DTAC is \nto effectuate the objectives in clauses (a) and (b) of sub-section (1) \nof Section 90, is evident upon a reasonable construction of the \nterms of the DTAC. As long as these two objectives are sought to \nbe effectuated, it is not possible to say that the power vested in the \nCentral Government, under section 90, even if it is delegated \npower of legislation, has been used for a purpose ultra vires the \nintendment of the section. The respondents tried to highlight a \nnumber of unintended deleterious consequences which, according \nto them, have arisen as a result of implementation of the DTAC. \nEven if they be true, it would not enable this Court to strike down \nthe delegated legislation as ultra vires. The validity and the vires \nof the legislation, primary, or delegated, has to be tested on the \nanvil of the law making power. If an authority lacks the power, \nthen the legislation is bad. On the contrary, if the authority is \nclothed with the requisite power, then irrespective of whether the \nlegislation fails in its object or not, the vires of the legislation is not \nliable to be questioned. We are, therefore, unable to accept the \ncontention of the respondents that the DTAC is ultra vires the \npowers of the Central Government under Section 90 on account of \nits susceptibility to 'treaty shopping' on behalf of the residents of \nthird countries. \n\nThe High Court seems to have heavily relied on an \nassessment order made by the assessing officer in the case of Cox \nand Kings Ltd. drawing inspiration therefrom. We are afraid that it \nwas impermissible for the High Court to do so. An assessment \nmade in the case of a particular assessee is liable to be challenged \nby the Revenue or by the assessee by the procedure available under \nthe Act. In a Public Interest Litigation it would be most unfair to \ncomment on the correctness of the assessment order made in the \ncase of a particular assessee, especially when the assessee is not a \nparty before the High Court. Any observation made by the Court \nwould result in prejudice to one or the other party to the litigation. \nFor this reason, we refrain from making any observations about the \ncorrectness or otherwise of the assessment order made in Cox and \nKings Ltd. Needless to say, we decline to draw inspiration \ntherefrom, for our inspiration is drawn from principles of law as \ngathered from statutes and precedents.\n\nWhat is \"liable to taxation\"\nFiscal Residence\n\nThe concept of 'fiscal residence' of a company assumes \nimportance in the application and interpretation of double taxation \navoidance treaties. \nIn Cahiers De Droit Fiscal International it is said that \nunder the OECD and UNO Model Convention, 'fiscal residence' is \na place where a person amongst others a corporation is subjected to \nunlimited fiscal liability and subjected to taxation for the \nworldwide profit of the resident company. At para 2.2 it is \npointed out :\n\n\"The UNO Model Convention takes these two \ndifferent concepts into account. It has not \nembodied the second sentence of article 4, \nparagraph 1 of the OECD Model Convention, \nwhich provides that the term 'resident' does \nnot include any person who is liable to tax in \nthat State in respect only of income from \nsources in that State. In fact, if one adhered to \na strict interpretation of this text, there would \nbe no resident in the meaning of the \nconvention in those States that apply the \nprinciple of territoriality.\"\n\n\tAgain in paragraph 3.5 it is said :\n\n\"The existence of a company from a company \nlaw standpoint is usually determined under \nthe law of the State of incorporation or of the \ncountry where the real seat is located. On the \nother hand, the tax status of a corporation is \ndetermined under the law of each of the \ncountries where it carries on business, be it as \nresident or non-resident.\"\n\nIn paragraph 4.1 it is observed that the principle of \nuniversality of taxation i.e. the principle of worldwide taxation, \nhas been adopted by a majority of States. One has to consider the \nworldwide income of a company to determine its taxable profit. In \nthis system it is crucial to define the fiscal residence of a company \nvery accurately. The State of residence is the one entitled to levy \ntax on the corporation's worldwide profit. The company is subject \nto unlimited fiscal liability in that State. In the case of a company, \nhowever, several factors enter the picture and render the decision \ndifficult. First, the company is necessarily incorporated and \nusually registered under the tax law of a State that grants it \ncorporate status. A corporation has administrative activities, \ndirectors and managers who reside, meet and take decisions in \none or several places. It has activities and carries on business. \nFinally, it has shareholders who control it. Hence, it is opined :\n\"When all these elements coexist in the same \ncountry, no complications arise. As soon as \nthey are dissociated and \"scattered\" in \ndifferent States, each country may want to \nsubject the company to taxation on the basis \nof an element to which it gives preference; \nincorporation procedure, management \nfunctions, running of the business, \nshareholders' controlling power. Depending \non the criterion adopted, fiscal residence will \nabide in one or the other country.\n\nAll the European countries concerned, except \nFrance, levy tax on the worldwide profit at the \nplace of residence of the company \nconsidered.\n\nSouth Korea, India and Japan in Asia, \nAustralia and New Zealand in Oceania follow \nthis principle.\"\n\nIn paragraph 4.2.1 it is pointed out that the Anglo-Saxon \nconcept of a company's 'incorporation test', which is applied in \nthe United States, has not been adopted by other countries like \nAustralia, Canada, Denmark, New Zealand and India and instead \nthe criterion of incorporation amongst other tests has been adopted \nby them. \n\tThe judgment in Ingemar Johansson et al v. United State of \nAmerica , on which the respondent place reliance, is easily \ndistinguishable. In this case the appellant, Johansson, was a citizen \nof Switzerland and a heavyweight boxing champion by profession. \nHe had earned some money by boxing in the United States for \nwhich he was called upon to pay tax. Johansson floated a company \nin Switzerland of which he became an employee and contended \nthat all professional fee paid for his boxing bouts were received by \nhis employer company in Switzerland for which he was \nremunerated as an employee of the said company. He sought to \ntake advantage of the DTAT between USA and Switzerland which \nprovided \"an individual resident of Switzerland shall be exempt \nfrom United States Tax upon compensation for labour personal \nservices performed in the United States.... if he is temporarily \npresent in the United States for a period or periods not exceeding a \ntotal of 183 during the taxable year...\" There was no doubt that \nthe appellant was not present in the United States for more than \n183 days and that he had floated the Swiss company motivated \nwith the desire to minimise his tax burden. As conclusive proof of \nresidence he relied upon a determination by the Swiss Tax \nAuthority that he had become a resident of Switzerland on a \nparticular date. The United States Court of Appeal rejected the \nclaim of the appellant pointing out that the term \"resident\" had not \nbeen defined in the US-Swiss treaty, but under article II(2) each \ncountry was authorised to apply its own definition to terms not \nexpressly defined 'unless the context otherwise requires'. The \nCourt, therefore, held that the determination of the appellant's \nresidence statues by the Swiss tax authority, according to Swiss \nlaw, was not conclusive and that the U.S. tax authorities were \nentitled to decide it in accordance with the US laws under the \ntreaty. Hence, it was held that Johansson was not a resident of \nSwitzerland during the period in question and that the tax \nexemption in the treaty was not available to him. \nIn our view, this judgment, though relied upon very heavily \nby the respondents, is of no avail. The Indo-Mauritius DTAC, \nArticle 3, clearly defines the term 'residence' in a 'Contracting \nState'. Interestingly, even in this judgment, the Court observed : \n\"Of course, the fact that Johansson was motivated in his actions by \nthe desire to minimize his tax burden can in no way be taken to \ndeprive him of an exemption to which an applicable treaty entitles \nhim\", which will have some relevance to the contention of the \nrespondents with regard to the motivation to avoid tax.\n\nThe respondents contend that the FIIs incorporated and \nregistered under the provisions of the law in Mauritius are carrying \non no business there; they are, in fact, prevented from earning any \nincome there; they are not liable to income tax on capital gains \nunder the Mauritius Income-tax Act. They are liable to pay \nincome-tax under Indian Income-tax Act, 1961, since they do not \npay any income-tax on capital gains in Mauritius, hence, they are \nnot entitled to the benefit of avoidance of double taxation under the \nDTAC.\n\tSome of the assumptions underlying this contention, which \nprevailed with the High Court, need greater critical appraisal.\n\tArticle 13(4) of the DTAC provides that gains derived by a \nresident of a Contracting State from alienation of any property, \nother than those specified in the paragraphs 1, 2 and 3 of the \nArticle, shall be taxable only in that State. Since most of the \narguments centred around capital gains made on transactions in \nshares on the stock exchange in India, we may leave out of \nconsideration capital gains on the type of properties contemplated \nin paras 1, 2 and 3 of Article 13 of the DTAC. The residuary clause \nin para 4 of Article 13 is relevant. It provides that capital gains \nmade on sale of shares shall be taxable only in the State of which \nthe person is a 'resident' taking us back to the meaning of the term \n'resident' of a contracting State. According to Article 4, this \nexpression means any person who under the laws of that State is \n\"liable to taxation\" therein by reason of his domicile, residence, \nplace of management or any other criterion of a similar nature. \nThe terms 'resident of India' and 'resident of Mauritius' are \nrequired to be construed accordingly. This takes us to the test to \ndetermine when a company is 'liable to taxation' in Mauritius. \n\nMauritian Income Tax Act, 1995\n\nSection 4 of the Income Tax Act, 1995 (Mauritian Income-\ntax Act) provides that, subject to the provisions of the Act, income-\ntax shall be paid to the Commissioner of Income-tax by every \nperson on all income other than exempt income derived by him \nduring the preceding year and be calculated on the chargeable \nincome of the person at the appropriate rate specified in the First \nSchedule. \nSection 5 defines as to when income is deemed to be \nderived.\n\nSection 7 provides that the income specified in the Second \nSchedule shall be exempt from income-tax. \nPart IV of the Mauritian Income Tax Act deals with \nCorporate Taxation. \n\tSection 44 of the Act provides that every company shall be \nliable to income tax on its 'chargeable income' at the rate specified \nin Part II, Part III or Part IV of the First Schedule, as the case may \nbe.\n Section 51 defines the 'gross income' of a company as \ninclusive of income referred to in section 10(1)(b) (income derived \nfrom business), 10(1)(c) (any income from rent, premium or other \nincome derived from property), 10(1)(d) (any dividend, interest, \ncharges, annuity or pension other than a pension referred to in \nparagraph a(ii)) and 10(1)(e) (any other income derived from any \nother source).\n Section 73 (b) provides that for the purposes of the Act the \nexpression 'resident', when applied to a 'company', means a \ncompany which is incorporated in Mauritius or has its central \nmanagement and control in Mauritius.\n\tPart II of the First Schedule prescribes the rate of tax on \nchargeable income at 15% in the case of Tax Incentive companies \nand at other rates for other types of companies. Part V of the First \nschedule enumerates the list of tax incentive companies and item \n16 is : \"a corporation certified to be engaged in international \nbusiness activity by the Mauritius Offshore Business Activities \nAuthority established under the Mauritius Offshore Business \nActivities Act, 1992\". The second Schedule to the Mauritius \nIncome-tax Act in Part IV enumerates miscellaneous income \nexempt from income-tax. Item 1 reads \"gains or profits derived \nfrom the sale of units or of securities quoted on the Official List \nor on such Stock Exchanges or other exchanges and capital \nmarkets as may be approved by the Minister\".\n\tA perusal of the aforesaid provisions of the Income Tax Act \nin Mauritius does not lead to the result that tax incentive \ncompanies are not liable to taxation, although they have been \ngranted exemption from income-tax in respect of a specified head \nof income, namely, gains from transactions in shares and \nsecurities. The respondents contend that the FIIs are not \"liable to \ntaxation\" in Mauritius; hence they are not 'residents' of Mauritius \nwithin the meaning of Article 4 of the DTAC. Consequently, it is \nopen to the assessing officers under the Indian Income-tax Act, \n1961 to determine where the taxable entities are really resident by \ninvestigating the centre of their management and thereafter to \napply the provisions of Income-tax Act, 1961 to the global income \nearned by them by reason of sections 4 and 5 of the Income-tax \nAct, 1961.\n\tIt is urged by the learned Attorney General and Shri Salve \nfor the appellants that the phrase 'liable to taxation' is not the same \nas 'pays tax'. The test of liability for taxation is not to be \ndetermined on the basis of an exemption granted in respect of any \nparticular source of income, but by taking into consideration the \ntotality of the provisions of the income-tax law that prevails in \neither of the Contracting States. Merely because, at a given time, \nthere may be an exemption from income-tax in respect of any \nparticular head of income, it cannot be contended that the taxable \nentity is not liable to taxation. They urge that upon a proper \nconstruction of the provisions of Mauritian Income Tax Act it is \nclear that the FIIs incorporated under Mauritius laws are liable to \ntaxation; therefore, they are 'residents' in Mauritius within the \nmeaning of the DTAC.\n\n For the appellants reliance is placed on the judgment of this \nCourt in Wallace Flour Mills Contracting State. Ltd. v. Collector \nof Central Excise, Bombay Division II , a case under the Central \nExcise Act. This Court held that though the taxable event for levy \nof excise duty is the manufacture or production, the realisation of \nthe duty my be postponed for administrative convenience to the \ndate of removal of the goods from the factory. It was held that \nexcisable goods do not become non-excisable merely because of \nan exemption given under a notification. The exemption merely \nprevents the excise authorities from collecting tax when the \nexemption is in operation.\n In Kasinka Trading and Another v. Union of India and \nAnother this principle was reiterated in connection with an \nexemption under the Customs Act. This Court observed :\"The \nexemption notification issued under section 25 of the Act had the \neffect of suspending the collection of customs duty. It does not \nmake items which are subject to levy of customs duty etc. as items \nnot leviable to such duty. It only suspends the levy and collection \nof customs duty, wholly or partially, and subject to such \nconditions as may be laid down in the notification by the \nGovernment in 'public interest'. Such an exemption by its very \nnature is susceptible of being revoked or modified or subjected to \nother conditions.\"\n\nWe are inclined to agree with the submission of the \nappellants that, merely because exemption has been granted in \nrespect of taxability of a particular source of income, it cannot be \npostulated that the entity is not 'liable to tax' as contended by the \nrespondents.\n\nEffect of MOBA, 1992\nThe respondents, shifted ground to contend that the fact that \na company incorporated in Mauritius is liable to taxation under the \nIncome Tax Act there may be true only in respect of certain class \nof companies incorporated there. However, with respect to \ncompanies which are incorporated within the meaning of the \nMauritius Offshore Business Activities Act, 1992 (hereinafter \nreferred to as \"MOBA\"), this would be wholly incorrect. \n\nMOBA was enacted \"to provide for the establishment and \nmanagement of the MOBA Authority to regulate offshore business \nactivities from within Mauritius and for the issue of offshore \ncertificates, and to provide for other ancillary or incidental \nmatters\", as its preamble suggests. 'Offshore business activity' is \ndefined as the business or other activity referred to in section 33 \nand includes activity conducted by an international company. \n'Offshore company' is defined as a corporation in relation to which \nthere is a valid certificate and which carries on offshore business \nactivity. \nIn part II, MOBA establishes an Offshore Business Activity \nAuthority entrusted, inter alia, with the duty of overseeing offshore \nbusiness activities and also issuing permits, licences or any other \ncertificate as may be required, and other authorisation which may \nbe required by an offshore company through which they may \ncommunicate with any of the public sector companies.\n\n Section 16 of MOBA prescribes the procedure for issuing of \na certificate. Section 15 requires maintenance of confidentiality \nand non-disclosure of information contained in applications and \ndocuments filed with it except where such information is bona fide \nrequired for the purpose of any enquiry or trial into or relating to \nthe trafficking of narcotics and dangerous drugs, arms, trafficking \nor money laundering under the Economic Crime and Anti Money \nLaundering Act, 2000. \nPart II of MOBA contains the statutory provisions \napplicable to offshore companies. Section 26 provides that an \noffshore company shall not hold immovable property in Mauritius \nand shall not hold any share or any interest in any company \nincorporated under the Companies Act, 1984, other than in a \nforeign company or in another offshore company or in an offshore \ntrust or an international company. An offshore company shall not \nhold any account in a domestic bank in Mauritian Rupees, except \nfor the purpose of its day to day transactions arising from its \nordinary operations in Mauritius.\nSections 26 and 27 of MOBA are important and read as \nunder:\n\"26. Property of an offshore company\n\n(1)\tSubject to sub-section(2), an offshore \ncompany shall not hold -\n\n(a) immovable property in Mauritius ;\n\n(b)\tany share, or any interest in any \ncompany incorporated under the \nCompanies Act, 1984 other than in a \nforeign company or in another \noffshore company or in an offshore \ntrust or an international company ;\n\n(c) any account in a domestic bank in \nMauritian Rupee\n\n(2) An offshore company may -\n\n(a) open and maintain with a domestic \nbank an account in Mauritian rupees \nfor the purpose of its day to day \ntransactions arising from its ordinary \noperations in Mauritius ;\n\n(b) open and maintain with a domestic \nbank an account in foreign currencies \nwith the approval of the Bank of \nMauritius ;\n\n(c) where authorised by the terms of its \ncertificate, or where otherwise \npermitted under any other enactment, \nlease, hold, acquire or dispose of an \nimmovable property or any interest in \nimmovable property situated in \nMauritius ;\n\n(d) invest in any securities listed in the \nstock Exchange established under the \nStock Exchange Act 1988 and in other \ndebentures.\n\n27.\tDealings with residents\n\nNotwithstanding any other enactment, the \nMinister, on the recommendation of the \nAuthority may authorise any offshore \ncompany engaged in any offshore business \nactivities to deal or transact with residents on \nsuch terms and conditions as it thinks fit.\"\n\n\tOn the basis of these provisions, it is urged by the \nrespondents that any company which is registered as an offshore \ncompany under MOBA can hardly carry out any business activity \nin Mauritius, since it cannot hold any immovable property or any \nshares or interest in any company registered in Mauritius other \nthan a foreign company or another offshore company and cannot \nopen an account in a domestic bank in Mauritius. The respondents \nurge that such a company cannot transact any business whatsoever \nwithin Mauritius as the purpose of such a company would be to \ncarry out offshore business activities and nothing more. The \nrespondents contend that when the possibility of such a company \nearning income within Mauritius is almost nil, there is hardly any \npossibility of its paying tax in Mauritius, whatever be the \nprovisions of the Mauritian Income-Tax Act.\n\n\tIn our view, the contention of the respondents proceeds on \nthe fallacious premise that liability to taxation is the same as \npayment of tax. Liability to taxation is a legal situation; payment \nof tax is a fiscal fact. For the purpose of application of Article 4 of \nthe DTAC, what is relevant is the legal situation, namely, liability \nto taxation, and not the fiscal fact of actual payment of tax. If this \nwere not so, the DTAC would not have used the words 'liable to \ntaxation', but would have used some appropriate words like 'pays \ntax'. On the language of the DTAC, it is not possible to accept the \ncontention of the respondents that offshore companies incorporated \nand registered under MOBA are not 'liable to taxation' under the \nMauritius Income-tax Act; nor is it possible to accept the \ncontention that such companies would not be 'resident' in \nMauritius within the meaning of Article 3 read with Article 4 of \nthe DTAC.\n\n\tThere is a further reason in support of our view. The \nexpression 'liable to taxation' has been adopted from the \nOrganisation for Economic Co-operation and Development \nCouncil (OECD) Model Convention 1977. The OECD \ncommentary on article 4, defining 'resident', says: \"Conventions \nfor the avoidance of double taxation do not normally concern \nthemselves with the domestic laws of the Contracting States laying \ndown the conditions under which a person is to be treated fiscally \nas \"resident\" and, consequently, is fully liable to tax in that State\". \nThe expression used is 'liable to tax therein', by reasons of various \nfactors. This definition has been carried over even in Article 4 \ndealing with 'resident' in the OECD Model Convention 1992.\n\n\tIn A Manual on the OECD Model Tax Convention on \nIncome and On Capital, at paragraph 4B.05, while commenting \non Article 4 of the OECD Double Tax Convention, Philip Baker \npoints out that the phrase 'liable to tax' used in the first sentence of \nArticle 4.1 of the Model Convention has raised a number of issues, \nand observes:\n\"It seems clear that a person does not have \nto be actually paying tax to be \"liable to tax\" \n- otherwise a person who had deductible \nlosses or allowances, which reduced his tax \nbill to zero would find himself unable to \nenjoy the benefits of the convention. It also \nseems clear that a person who would \notherwise be subject to comprehensive \ntaxing but who enjoys a specific exemption \nfrom tax is nevertheless liable to tax, if the \nexemption were repealed, or the person no \nlonger qualified for the exemption, the \nperson would be liable to comprehensive \ntaxation.\"\n\n\tInterestingly, Baker refers to the decision of the Indian \nAuthority for Advance Ruling in Mohsinally Alimohammed \nRafik. An assessee, who resided in Dubai and claimed the \nbenefits of UAE-India Convention of April 29, 1992, even though \nthere was no personal income-tax in Dubai to which he might be \nliable. The Authority concluded that he was entitled to the \nbenefits of the convention. The Authority subsequently reversed \nthis position in the case of Cyril Eugene Pereira where a contrary \nview was taken.\n\tThe respondents placed great reliance on the decision by the \nAuthority for Advance Rulings constituted under section 245-O of \nthe Income-Tax Act, 1961 in Cyril Eugene Pereira's case . \nSection 245S of the Act provides that the Advance Ruling \npronounced by the Authority under section 245R shall be binding \nonly :\n\"(a) on the applicant who had sought it;\n(b) in respect of the transaction in relation to \nwhich the ruling had been sought; and\n\n(c) on the Commissioner, and the income-tax \nauthorities subordinate to him, in respect of \nthe applicant and the said transaction.\"\n\n\tIt is therefore obvious that, apart from whatever its \npersuasive value, it would be of no help to us. Having perused the \norder of the Advance Rulings Authority, we regret that we are not \npersuaded. \n\n\tThere is substance in the contention of Mr. Salve learned \ncounsel for one of the appellants, that the expression 'resident' is \nemployed in the DTAC as a term of limitation, for otherwise a \nperson who may not be 'liable to tax' in a Contracting State by \nreason of domicile, residence, place of management or any other \ncriterion of a similar nature may also claim the benefit of the \nDTAC. Since the purpose of the DTAC is to eliminate double \ntaxation, the treaty takes into account only persons who are 'liable \nto taxation' in the Contracting States. Consequently, the benefits \nthereunder are not available to persons who are not liable to \ntaxation and the words 'liable to taxation' are intended to act as \nwords of limitation.\n\nIn John N. Gladden v. Her Majesty the Queen the \nprinciple of liberal interpretation of tax treaties was reiterated by \nthe Federal Court, which observed :\n\n\"Contrary to an ordinary taxing statute a \ntax treaty or convention must be given a liberal \ninterpretation with a view to implementing the \ntrue intentions of the parties. A literal or \nlegalistic interpretation must be avoided when \nthe basic object of the treaty might be defeated \nor frustrated insofar as the particular item \nunder consideration is concerned.\"\n\n\tGladden was a case where an American citizen resident in \nU.S.A. owned shares in two privately controlled Canadian \ncompanies. Upon his death, the question arose as to the capital \ngains which would arise as a result of the deemed disposition of \nthe said shares. The Canadian Revenue took the position that there \nwas a deemed disposition of the shares on the death of the tax \npayer and capital gains tax was chargeable on account of the \ndeemed disposition. This view of the Revenue was upheld in \nappeal by the Tax Court of Canada. Upon further appeal to the \nFederal Court it was held that capital gains were exempt from tax \nunder the Canada-U.S.A. Tax Treaty as Canada had no capital \ngains tax when it entered the treaty and it could not unilaterally \namend its legislation. The argument which prevailed with the trial \ncourt in this case was similar to the one which prevailed with the \nHigh Court in the matter before us. Interpreting the relevant Article \nof the Double Taxation Avoidance Treaty the trial court held : \n\"The parties could not have negotiated to avoid double taxation on \na tax which did not exist in Canada\". The Federal Court \nemphasised that in interpreting and applying treaties the Courts \nshould be prepared to extend \"a liberal and extended construction\" \nto avoid an anomaly which a contrary construction would lead to. \nThe Court recognized that \"we cannot expect to find the same \nnicety or strict definition as in modern documents, such as deeds, \nor Acts of Parliament; it has never been the habit of those engaged \nin diplomacy to use legal accuracy but rather to adopt more liberal \nterms\".\n\tInterpreting the Article of the Treaty against avoidance of \ndouble taxation, the Federal Court said (at p.5):\n\"The non-resident can benefit from the \nexemption regardless of whether or not he is \ntaxable on that capital gain in his own country. \nIf Canada or the U.S. were to abolish capital \ngains completely, while the other country did \nnot, a resident of the country which had \nabolished capital gains would still be exempt \nfrom capital gains in the other country.\"\n\nThe appellants rely on this judgment to contend that, \nirrespective of the exemption from income-tax on capital gains \nupon alienation of shares under the Mauritius Income-tax Act, the \nbenefits of the DTAC would apply.\nThe appellants contend that, acceptance of the respondents' \nsubmission that double taxation avoidance is not permissible \nunless tax is paid in both countries is contrary to the intendment of \nsection 90. It is urged that clause (b) of sub-section(1) of Section \n90 applies to a situation to grant relief where income tax has been \npaid in both countries, but clause (b) deals with a situation of \navoidance of double taxation of income. Inasmuch as Parliament \nhas distinguished between the two situations, it is not open to a \nCourt of law to interpret clause (b) of section 90 sub-section(1) as \nif it were the same as the situation contemplated under clause (a).\n\nAccording to Klaus Vogel \"Double Taxation Convention \nestablishes an independent mechanism to avoid double taxation \nthrough restriction of tax claims in areas where overlapping tax-\nclaims are expected, or at least theoretically possible. In other \nwords, the Contracting States mutually bind themselves not to levy \ntaxes or to tax only to a limited extent in cases when the treaty \nreserves taxation for the other contracting States either entirely or \nin part. Contracting States are said to 'waive' tax claims or more \nillustratively to divide 'tax sources', the 'taxable objects', amongst \nthemselves.\" Double taxation avoidance treaties were in vogue \neven from the time of the League of Nations. The experts \nappointed in the early 1920s by the League of Nations describe this \nmethod of classification of items and their assignments to the \nContracting States. While the English lawyers called it \n'classification and assignment rules', the German jurists called it \n'the distributive rule' (Verteilungsnorm). To the extent that an \nexemption is agreed to, its effect is in principle independent of \nboth whether the other contracting State imposes a tax in the \nsituation to which the exemption applies, and of whether that State \nactually levies the tax. Commenting particularly on German \nDouble Taxation Convention with the United States, Vogel \ncomments: \"Thus, it is said that the treaty prevents not only \n'current', but also merely 'potential' double taxation\". Further, \naccording to Vogel, \"only in exceptional cases, and only when \nexpressly agreed to by the parties, is exemption in one contracting \nState dependent upon whether the income or capital is taxable in \nthe other contracting state, or upon whether it is actually taxed \nthere.\" \nIt is, therefore, not possible for us to accept the contentions \nso strenuously urged on behalf of the respondents that avoidance \nof double taxation can arise only when tax is actually paid in one \nof the Contracting States.\nThe decision of Federal Court of Australia in Commissioner \nof Taxation v. Lamesa Holdings is illuminating. The issue before \nthe Federal Court was whether a Netherlands company was liable \nto income-tax under the Australian Income Tax Act on profits from \nthe sale of shares in an Australian company and whether such \nprofits fell within Article 13 (alienation of property) of the \nNetherlands-Australia Double Taxation Agreement, so as to be \nexcluded from Article 7 (business profits) of that Agreement. One \nLeonard Green, a principal of Leonard Green and Associates a \nlimited partnership established in the United States, became aware \nof a potential investment opportunity in Australia. Arimco \nResources and Mining Company NL ('Armico'), a company listed \non the Australian Stock Exchange, which had a subsidiary called \nArmico Mining Pty. Limited engaged in gold mining activities, \nwas the subject of a hostile takeover bid, at a price which Green \nwas advised was less than the real value of the Armico. With this \nknowledge Green decided to mount a takeover offer for the \nsubsidiary company. Then followed a series of steps of formation \nof a number of companies with interlocking share holdings where \neach company owned 1005 shares of a different subsidiary \ncompany. Lamesa Holdings was one such intermediary company \nof which 100% shares were held by Green Equity Investments Ltd. \nThe share transactions brought about a profit to Lamesa Holdings \nwhich would be assessable to tax under the Australian Income Tax \nAct. Lamesa, however, relied on the provisions of the Article 13(2) \nof the Double Taxable Avoidance Convention ('DTAC') between \nNetherlands and Australia and claimed that the income was not \ntaxable in Australia by reason thereof. This income was wholly \nexempt from tax in Netherlands by reason of the Income Tax Law \napplicable therein. The Federal Court found that under Article \n13(2) (a) (ii) of the DTAC shares in a company were treated as \npersonalty, that since the place of incorporation of a company or \nthe place of situs of a share may be the subject of choice, the place \nof incorporation or the register upon which shares were registered \nwould not form a particularly close connection with shares to \nground the jurisdiction to tax share profits. It was held:\n\"It happens to be the case, because of \nunilateral relief granted by the law of the \nNetherlands, that no tax will be payable in the \nNetherlands. That of itself can not affect the \ninterpretation of the Agreement. If the relevant \nmining property had happened to be in the \nNetherlands so that the issue was between \ntaxation there on the one hand and taxation in \nAustralia on the other, the situation would have \nbeen one where tax would clearly have been \npayable on the alienation of the shares in \nAustralia without the benefit of any exemption. \nYet the Agreement must operate uniformly, \nwhether the realty is in the Netherlands or in \nAustralia.\"\n\n\tIn this view of the matter, it was held that there was no tax \npayable in Australia.\n\n\tChong v. Commissioner of Taxation holds similarly. \nAustralia and Malaysia have an agreement to avoid double \ntaxation. An Australian resident was paid pension by Malaysian \nGovernment for services rendered to Malaysian Government \nwhile he was in service there. This pension was taxed in Malaysia \nand the issue was whether the right to tax Government pensions \nunder the Agreement could be exercised by the Australian \nGovernment and the effect of the domestic law on the agreement. \nArticle 18 of the double taxation avoidance agreement provided \nthat pension paid to a resident of a contracting State shall be \ntaxable only in that State. Upon a proper construction of Article \n18(2) of the Treaty it was held that pension paid by Malaysia is \ntaxable in Australia inasmuch as the said Article did not provide \nthat Malaysia alone was to have the power to tax Government \npension, nor did it restrict Australia from doing so. Rather it \nprovided for the Contracting State paying the pension to have the \npower to tax the pension if it so desired and did not limit or restrict \nthe taxing power of the other Contracting State in that respect. \nThe Federal Court pointed out \"Whether one uses the language of \nallocation of power or the language of limitation of power, the \nresult is the same; there is designated or agreed who shall have the \nright under the agreement to impose taxation in the particular \narea\".\n\n\tThe Estate of Michel Hausmann v. Her Majesty The \nQueen is another Canadian judgment which throws light on the \nprinciple that the benefits of a double taxation agreement would be \navailable even if the other contracting State in which a particular \nhead of income is to be taxed, chooses not to impose tax on the \nsame. \n\tThe central question in this case was whether the pension \nreceived by Mr.Hausmann from the pension office of the Belgium \nGovernment was taxable in Canada. The facts indicated that there \nwas no tax withheld at source in Belgium. The argument of the \nCanadian Tax Authority was that if Belgium was not going to tax \nthe pension, Canada should. Otherwise, the unthinkable might \noccur and the amount might not be taxed by anyone. This would \nbe anathema. The facts indicated that the payment received by Mr. \nHausmann fell below the prescribed threshold and therefore was \nnot taxed in Belgium. The Canadian Court rejected the argument \nthat if Belgium did not tax the payment, it must be taxed by the \nCanada as plainly wrong by relying on the terms of the treaty. On \nthe basis of the material available, the Federal Court came to the \ninference that in negotiating the Belgium treaty both Canada and \nBelgium unquestionably regarded pensions paid under their social \nsecurity legislation, such as the CPP or the corresponding Belgian \nstatutory scheme, to be taxable only in the country from which \nthey emanated and not the country of residence of the recipient. \nHence, it was held that the pension payments received by Mr. \nHausmann from the office of Belgium were social security pension \nand such allowances could be taxable only in Belgium. The fact \nthat Belgium did not choose to tax them was held to be totally \nirrelevant. \n\n Mr. Salve contended that a profit made by sale of shares \nmay not invariably amount to capital gains, as for example if the \nshares were part of the trading assets of the company. If such be \nthe case, the gains may amount to trading income of such a \ncompany. He also relied on the observations of this Court in \nCommissioner of Income Tax Nagpur v. Sutlej Cotton Mills \nSupply Agency Limited . It is not necessary for us to go into this \nquestion as it would depend upon as to whether the shares are held \nby a company as an investment or as a trading asset. The \npossibility urged by the learned counsel certainly exists and cannot \nbe ruled out without examination of facts.\n\nTreaty Shopping - Is it illegal ?\n\tThe respondents vehemently urge that the offshore \ncompanies have been incorporated under the laws of Mauritius \nonly as shell companies, which carry on no business therein, and \nare incorporated only with the motive of taking undue advantage of \nthe DTAC between India and Mauritius. They also urged that \n'treaty shopping' is both unethical and illegal and amounts to a \nfraud on the treaty and that this Court must be astute to interdict all \nattempts at treaty shopping. \n\n'Treaty shopping' is a graphic expression used to describe \nthe act of a resident of a third country taking advantage of a fiscal \ntreaty between two Contracting States. According to Lord \nMcNair, \"provided that any necessary implementation by \nmunicipal law has been carried out, there is nothing to prevent the \nnationals of \"third States\", in the absence of any expressed or \nimplied provision to the contrary, from claiming the right or \nbecoming subject to the obligation created by a treaty\" . \nReliance is also placed on the following observations of \nLord McNair : \n\"that any necessary implementation by \nmunicipal law has been carried out, there is \nnothing to prevent the nationals of 'third \nStates', in the absence of any express or \nimplied provision to the contrary, from \nclaiming the rights, or becoming subject to the \nobligations, created by a treaty; for instance, if \nan Anglo-American Convention provided that \nprofessors on the staff of the universities of \neach country were exempt from taxation in \nrespect of fees earned for lecturing in the other \ncountry, and any necessary changes in the tax \nlaws were made, that privilege could be \nclaimed by, or on behalf of, professors of those \nuniversities who were the nationals of 'third \nStates'.\"\n\n\tIt is urged by the learned counsel for the appellants, and \nrightly in our view, that if it was intended that a national of a third \nState should be precluded from the benefits of the DTAC, then a \nsuitable term of limitation to that effect should have been \nincorporated therein. As a contrast, our attention was drawn to the \nArticle 24 of the Indo-US Treaty on Avoidance of Double \nTaxation which specifically provides the limitations subject to \nwhich the benefits under the Treaty can be availed of. One of the \nlimitations is that more than 50% of the beneficial interest, or in \nthe case of a company more than 50% of the number of shares of \neach class of the company, be owned directly or indirectly by one \nor more individual residents of one of the contracting States. \nArticle 24 of the Indo-U.S. DTAC is in marked contrast with the \nIndo-Mauritius DTAC. The appellants rightly contend that in the \nabsence of a limitation clause, such as the one contained in Article \n24 of the Indo-U.S. Treaty, there are no disabling or disentitling \nconditions under the Indo-Mauritius Treaty prohibiting the \nresident of a third nation from deriving benefits thereunder. They \nalso urge that motives with which the residents have been \nincorporated in Mauritius are wholly irrelevant and cannot in any \nway affect the legality of the transaction. They urge that there is \nnothing like equity in a fiscal statute. Either the statute applies \nproprio vigore or it does not. There is no question of applying a \nfiscal statute by intendment, if the expressed words do not apply. \nIn our view, this contention of the appellants has merit and \ndeserves acceptance. We shall have occasion to examine the \nargument based on motive a little later.\n\nThe decision of the Chancery Division in Re F.G. Films \nLtd. was pressed into service as an example of the mask of \ncorporate entity being lifted and account be taken of what lies \nbehind in order to prevent 'fraud'. This decision only emphasises \nthe doctrine of piercing the veil of incorporation. There is no doubt \nthat, where necessary, the Courts are empowered to lift the veil of \nincorporation while applying the domestic law. In the situation \nwhere the terms of the DTAC have been made applicable by \nreason of section 90 of the Income-Tax Act, 1961, even if they \nderogate from the provisions of the Income-tax Act, it is not \npossible to say that this principle of lifting the veil of incorporation \nshould be applied by the court. As we have already emphasised, \nthe whole purpose of the DTAC is to ensure that the benefits \nthereunder are available even if they are inconsistent with the \nprovisions of the Indian Income-tax Act. In our view, therefore, the \nprinciple of piercing the veil of incorporation can hardly apply to a \nsituation as the one before us.\n\n\tThe respondents banked on certain observations made in \nOppenheim's International Law . All that is stated therein is a \nreiteration of the general rule in municipal law that contractual \nobligations bind the parties to their contracts and not a third party \nto the contract. In international law also, it has been pointed out \nthat the Vienna Convention on the Laws of Treaties ,1969 \nreaffirms the general rule that a treaty does not create either \nobligations or rights for a third party state without its consent, \nbased on the general principle pacta tertiis nec nocent nec prosunt. \nIt is true that an international treaty between States A & B is \nneither intended to confer benefits nor impose obligations on the \nresidents of State C, but, here we are not concerned with this \nquestion at all. The question posed for our consideration is: If the \nresidents of State C qualify for a benefit under the treaty, can they \nbe denied the benefit on some theoretical ground that 'treaty \nshopping' is unethical and illegal ? We find no support for this \nproposition in the passage cited from Oppenheim. \n\n\tThe respondents then relied on observations of Philip \nBaker regarding a seminar at the IFI Barcelona in 1991, wherein \na paper was presented on \"Limitation of treaty benefits for \ncompanies\" (treaty shopping). He points out that the Committee \non Fiscal Affairs of the OECD in its report styled as \"Conduit \nCompanies Report 1987\" recognised that a conduit company \nwould generally be able to claim treaty benefits.\n\n\tThere is elaborate discussion in Baker's treatise on the anti \nabuse provisions in the OECD model and the approach of different \ncountries to the issue of 'treaty shopping'. True that several \ncountries like the USA, Germany, Netherlands, Switzerland and \nUnited Kingdom have taken suitable steps, either by way of \nincorporation of appropriate provisions in the international \nconventions as to double taxation avoidance, or by domestic \nlegislation, to ensure that the benefits of a treaty/convention are \nnot available to residents of a third State. Doubtless, the treatise by \nPhilip Baker is an excellent guide as to how a state should \nmodulate its laws or incorporate suitable terms in tax conventions \nto which it is party so that the possibility of a resident of a third \nState deriving benefits thereunder is totally eliminated. That may \nbe an academic approach to the problem to say how the law should \nbe. The maxim \"Judicis est jus dicere, non dare\" pithily \nexpounds the duty of the Court. It is to decide what the law is, and \napply it; not to make it.\n\nReport of the working group on non-resident taxation\n\n\tThe respondents contend that anti-abuse provisions need not \nbe incorporated in the treaty since it is assumed that the treaty \nwould only be used for the benefit of the parties. \nThey also strongly rely on the 'Report of the working group \non Non-Resident Taxation' dated 3rd January, 2003. In Chapter 3, \npara 3.2 of the report it is stated:\n\t\"3.2 Entitlement to avail DTAA benefit:\nPresently a person is entitled to claim \napplication of DTAA if he is 'liable to tax' in the \nother Contracting State. The scope of liability to tax \nis not defined. The term \"liable to tax\" should be \ndefined to say that there should be tax laws in force \nin the other State, which provides for taxation of \nsuch person, irrespective that such tax fully or \npartly exempts such persons from charge of tax on \nany income in any manner.\"\n\nIn para 3.3.1, after noticing the growing practice amongst \ncertain entities, who are not residents of either of the two \nContracting States, to try and avail of the beneficial provisions of \nthe DTAAs and indulge in what is popularly known as 'treaty \nshopping', the report says :\n\n\"3.3.1 ....there is a need to incorporate suitable \nprovisions in the chapter on interpretation of \nDTAAs, to deal with treaty shopping, conduit \ncompanies and thin capitalization. These may be \nbased on UN/OECD model or other best global \npractices.\"\n\nIn para 3.3.2, the working group recommended \nintroduction of anti-abuse provisions in the domestic law.\nFinally, in paragraph 3.3.3 it is stated \"The Working \nGroup recommends that in future negotiations, provisions \nrelating to anti-abuse/limitation of benefit may be incorporated in \nthe DTAAs also.\"\nWe are afraid that the weighty recommendations of the \nWorking Group on Non-Resident Taxation are again about what \nthe law ought to be, and a pointer to the Parliament and the \nExecutive for incorporating suitable limitation provisions in the \ntreaty itself or by domestic legislation. This per se does not \nrender an attempt by resident of a third party to take advantage of \nthe existing provisions of the DTAC illegal. \n\nJ.P.C. Report\n\t\nStrong reliance is placed by the respondents on the report of \nthe Joint Parliamentary Committee (hereinafter referred to as \n\"JPC\") on the Stock Market Scam and Matters Relating thereto \nwhich was presented in the Lok Sabha and Rajya Sabha on \nDecember 19, 2002. \nWhile considering the causes which led to the Stock Market \nscam, the JPC had occasion to consider the working of the Indo-\nMauritius DTAC. It noticed that area-wise foreign direct \ninvestment inflow from Mauritius increased from 37.5 million \nRupees in 1993 to 61672.8 million Rupees in the year 2001. The \nCBDT had approached the Indian High Commissioner at Mauritius \nto take up the matter with the Mauritian authorities to ensure that \nbenefit of the bilateral tax treaty were not allowed to be misused, \nby suitable amendment in Article 13 of the agreement. The \nMauritian authorities, however, were of the view that, though the \nbeneficiaries of such capital funds domiciled in Mauritius may be \nresiding in third countries, these funds had been invested in the \nIndian stock market in accordance with SEBI norms and \nregulations and that the Finance Minister of India had himself \nencouraged such FIIs as a channel for promoting capital flow to \nIndia in a meeting between himself and the Finance Minister of \nMauritius. The Ministry of finance was willing to have regular \njoint monitoring of the situation to avoid possible misuse of the tax \ntreaty by unscrupulous elements. It was pointed out by the \nMauritian authorities that DTAC between the two countries \"had \nplayed a positive role in covering the higher cost of investing in \nwhat was then assessed as 'high risk security' and being decisive \nin making possible public offerings in U.S.A. and Europe of \nfunds investing in India\". In the absence of such a facility, as \nafforded by the Indo-Mauritius DTAC, the cost of raising such \ninvestment would have been capital prohibitive. The JPC report \npoints out that the negotiations between the Government of India \nand Government of Mauritius resulted in a situation in which the \nMauritius Government felt that any change in the provisions of the \nDTAC would adversely affect the perception of potential investors \nand would prejudicially affect their financial interests.\nThe issue still appears to be the subject matter of \nnegotiations between the two Governments, though no final \ndecision has been taken thereupon. The JPC took notice of the \nfacts that MOBA has since been repealed by Mauritius and \nFinancial Services Development Act has been promulgated with \neffect from 1.12.2001, which has to some extent removed the \ndrawback of MOBA, and led to greater transparency and facility \nfor obtaining information under the DTAC, which was hitherto not \navailable. \n\n\tTaking notice of the facts, and the reluctance of the \nGovernment of Mauritius in the matter to renegotiate the terms of \ntreaty, the Committee recommended as under (vide para 12.205):\n\"The Committee find that though the exact \namount of revenue loss due to the 'residency \nclause' of the treaty cannot be quantified, but \ntaking into account the huge \ninflows/outflows, it could be assumed to be \nsubstantial. They therefore recommend that \nCompanies investing in Indian through \nMauritius, should be required to file details \nof ownership with RBI and declare that all \nthe Directors and effective management is in \nMauritius. The Committee suggest that all \nthe contentious issues should be resolved by \nthe Government with the Government of \nMauritius urgently through dialogue.\"\n\n\tIn our view, the recommendations of the Working Group of \nthe JPC are intended for Parliament to take appropriate action. The \nJPC might have noticed certain consequences, intended or \nunintended, flowing from the DTAC and has made appropriate \nrecommendations. Based on them, it is not possible for us to say \nthat the DTAC or the impugned circular are contrary to law, nor \nwould it be possible to interfere with either of them on the basis of \nthe report of the JPC.\n\nInterpretation of Treaties\nThe principles adopted in interpretation of treaties are not \nthe same as those in interpretation of statutory legislation. While \ncommenting on the interpretation of a treaty imported into a \nmunicipal law, Francis Bennion observes:\n\"With indirect enactment, instead of the \nsubstantive legislation taking the well-known \nform of an Act of Parliament, it has the form \nof a treaty. In other words the form and \nlanguage found suitable for embodying an \ninternational agreement become, at the stroke \nof a pen, also the form and language of a \nmunicipal legislative instrument. It is rather \nlike saying that, by Act of Parliament, a \nwoman shall be a man. Inconveniences may \nensue. One inconvenience is that the \ninterpreter is likely to be required to cope \nwith disorganised composition instead of \nprecision drafting. The drafting of treaties is \nnotoriously sloppy usually for very good \nreason. To get agreement, politic uncertainty \nis called for.\n\n.....The interpretation of a treaty imported \ninto municipal law by indirect enactment was \ndescribed by Lord Wilberforce as being \n'unconstrained by technical rules of English \nlaw, or by English legal precedent, but \nconducted on broad principles of general \nacceptation. This echoes the optimistic \ndictum of Lord Widgery CJ that the words \n'are to be given their general meaning, \ngeneral to lawyer and layman alike... the \nmeaning of the diplomat rather than the \nlawyer.\" \n\n\tAn important principle which needs to be kept in mind in the \ninterpretation of the provisions of an international treaty, including \none for double taxation relief, is that treaties are negotiated and \nentered into at a political level and have several considerations as \ntheir bases. Commenting on this aspect of the matter, David R. \nDavis in Principles of International Double Taxation Relief , \npoints out that the main function of a Double Taxation Avoidance \nTreaty should be seen in the context of aiding commercial relations \nbetween treaty partners and as being essentially a bargain between \ntwo treaty countries as to the division of tax revenues between \nthem in respect of income falling to be taxed in both jurisdictions. \nIt is observed (vide para 1.06):\n\n\"The benefits and detriments of a double tax \ntreaty will probably only be truly reciprocal \nwhere the flow of trade and investment \nbetween treaty partners is generally in \nbalance. Where this is not the case, the \nbenefits of the treaty may be weighted more \nin favour of one treaty partner than the other, \neven though the provisions of the treaty are \nexpressed in reciprocal terms. This has been \nidentified as occurring in relation to tax \ntreaties between developed and developing \ncountries, where the flow of trade and \ninvestment is largely one way.\n\n\t\tBecause treaty negotiations are largely \na bargaining process with each side seeking \nconcessions from the other, the final \nagreement will often represent a number of \ncompromises, and it may be uncertain as to \nwhether a full and sufficient quid pro quo is \nobtained by both sides.\"\n\nAnd, finally, in paragraph 1.08:\n\n\"Apart from the allocation of tax between the \ntreaty partners, tax treaties can also help to \nresolve problems and can obtain benefits \nwhich cannot be achieved unilaterally.\"\n\n\tBased on these observations, counsel for the appellants \ncontended that the preamble of the Indo-Mauritius DTAC recites \nthat it is for the \"encouragement of mutual trade and investment\" \nand this aspect of the matter cannot be lost sight of while \ninterpreting the treaty.\n\nMany developed countries tolerate or encourage treaty \nshopping, even if it is unintended, improper or unjustified, for \nother non-tax reasons, unless it leads to a significant loss of tax \nrevenues. Moreover, several of them allow the use of their treaty \nnetwork to attract foreign enterprises and offshore activities. Some \nof them favour treaty shopping for outbound investment to reduce \nthe foreign taxes of their tax residents but dislike their own loss of \ntax revenues on inbound investment or trade of non-residents. In \ndeveloping countries, treaty shopping is often regarded as a tax \nincentive to attract scarce foreign capital or technology. They are \nable to grant tax concessions exclusively to foreign investors over \nand above the domestic tax law provisions. In this respect, it does \nnot differ much from other similar tax incentives given by them, \nsuch as tax holidays, grants, etc. \n\tDeveloping countries need foreign investments, and the \ntreaty shopping opportunities can be an additional factor to attract \nthem. The use of Cyprus as a treaty haven has helped capital \ninflows into eastern Europe. Madeira (Portugal) is attractive for \ninvestments into the European Union. Singapore is developing \nitself as a base for investments in South East Asia and China. \nMauritius today provides a suitable treaty conduit for South Asia \nand South Africa. In recent years, India has been the beneficiary \nof significant foreign funds through the \"Mauritius conduit\". \nAlthough the Indian economic reforms since 1991 permitted such \ncapital transfers, the amount would have been much lower without \nthe India-Mauritius tax treaty. \n\nOverall, countries need to take, and do take, a holistic view. \nThe developing countries allow treaty shopping to encourage \ncapital and technology inflows, which developed countries are \nkeen to provide to them. The loss of tax revenues could be \ninsignificant compared to the other non-tax benefits to their \neconomy. Many of them do not appear to be too concerned unless \nthe revenue losses are significant compared to the other tax and \nnon-tax benefits from the treaty, or the treaty shopping leads to \nother tax abuses. \n\tThere are many principles in fiscal economy which, though \nat first blush might appear to be evil, are tolerated in a developing \neconomy, in the interest of long term development. Deficit \nfinancing, for example, is one; treaty shopping, in our view, is \nanother. Despite the sound and fury of the respondents over the so \ncalled 'abuse' of 'treaty shopping', perhaps, it may have been \nintended at the time when Indo-Mauritius DTAC was entered into. \nWhether it should continue, and, if so, for how long, is a matter \nwhich is best left to the discretion of the executive as it is \ndependent upon several economic and political considerations. \nThis Court cannot judge the legality of treaty shopping merely \nbecause one section of thought considers it improper. A holistic \nview has to be taken to adjudge what is perhaps regarded in \ncontemporary thinking as a necessary evil in a developing \neconomy.\n\nRule in McDowell\n\tThe respondents strenuously criticized the act of \nincorporation by FIIs under the Mauritian Act as a 'sham' and 'a \ndevice' actuated by improper motives. They contend that this \nCourt should interdict such arrangements and, as if by waving a \nmagic wand, bring about a situation where the incorporation \nbecomes non est. For this they heavily rely on the judgment of the \nConstitution Bench of this Court in McDowell and Company Ltd. \nv. Commercial Tax Officer . Placing strong reliance on \nMcDowell it is argued that McDowell has changed the \nconcept of fiscal jurisprudence in this country and any tax \nplanning which is intended to and results in avoidance of tax must \nbe struck down by the Court. Considering the seminal nature of \nthe contention, it is necessary to consider in some detail as to why \nMcDowell , what it says, and what it does not say.\n\n\tIn the classic words of Lord Sumner in IRC V. Fisher's \nExecutors , \n\"My Lords, the highest authorities have \nalways recognised that the subject is entitled \nso to arrange his affairs as not to attract taxes \nimposed by the Crown, so far as he can do so \nwithin the law, and that he may legitimately \nclaim the advantage of any expressed terms \nor any omissions that he can find in his \nfavour in taxing Acts. In so doing, he neither \ncomes under liability nor incurs blame.\"\n\n\tSimilar views were expressed by Lord Tomlin in IRC v. \nDuke of Westminster which reflected the prevalent attitude \ntowards tax avoidance:\n\"Every man is entitled if he can to order his \naffairs so that the tax attaching under the \nappropriate Acts is less than it otherwise \nwould be. If he succeeds in ordering them so \nas to secure this result, then, however, \nunappreciative the Commissioners of Inland \nRevenue or his fellow taxgatherers may be of \nhis ingenuity, he cannot be compelled to pay \nan increased tax.\"\n\n\tThese were the pre second world war sentiments expressed \nby the British Courts. It is urged that McDowell has taken a new \nlook at fiscal jurisprudence and \"the ghost of Fisher (supra) and \nWestminster have been exorcised in the country of its origin\". It \nis also urged that McDowell's radical departure was in tune with \nthe changed thinking on fiscal jurisprudence by the English Courts, \nas evidenced in W.T. Ramsay Ltd. v. IRC , Inland Revenue \nCommissioners v. Burman Oil Company Ltd and Furniss v. \nDawson .\n\tAs we shall show presently, far from being exorcised in its \ncountry of origin, Duke of Westminster continues to be alive and \nkicking in England. Interestingly, even in McDowell , though \nChinnappa Reddy,J., dismissed the observation of J.C. Shah,J. in \nCIT v. A. Raman and Company based on Westminster and \nFisher's Executors , by saying \"we think that the time has come \nfor us to depart from the Westminster principle as emphatically as \nthe British courts have done and to dissociate ourselves from the \nobservations of Shah J., and similar observations made elsewhere\", \nit does not appear that the rest of the learned Judges of the \nConstitutional Bench contributed to this radical thinking. Speaking \nfor the majority, Ranganath Mishra,J,(as he then was) says in \nMcDowell :\n\"Tax planning may be legitimate provided it \nis within the framework of law. Colourable \ndevices cannot be part of tax planning and it \nis wrong to encourage or entertain the belief \nthat it is honourable to avoid the payment of \ntax by resorting to dubious methods. It is the \nobligation of every citizen to pay the taxes\n\n honestly without resorting to subterfuges.\"\n\n\t\t\t\t(Emphasis supplied)\n\n\n\tThis opinion of the majority is a far cry from the view of \nChinnappa Reddy,J: \"In our view the proper way to construe a \ntaxing statute, while considering a device to avoid tax, is not to ask \nwhether a provision should be construed liberally or principally, \nnor whether the transaction is not unreal and not prohibited by the \nstatute, but whether the transaction is a device to avoid tax, and \nwhether the transaction is such that the judicial process may accord \nits approval to it.\" We are afraid that we are unable to read or \ncomprehend the majority judgment in McDowell as having \nendorsed this extreme view of Chinnappa Reddy,J, which, in our \nconsidered opinion, actually militates against the observations of \nthe majority of the Judges which we have just extracted from the \nleading judgment of Ranganath Mishra,J (as he then was).\n\n\tThe basic assumption made in the judgment of Chinnappa \nReddy,J. in McDowell that the principle in Duke of \nWestminster has been departed from subsequently by the House \nof Lords in England, with respect, is not correct. In Craven v. \nWhite the House of Lords pointedly considered the impact of \nFurniss , Burma Oil and Ramsay . The Law Lords were at \ngreat pains to explain away each of these judgments. Lord Keith \nof Kinkel says, with reference to the trilogy of these cases, (at \np.500):\n\" My Lords, in my opinion the nature of the \nprinciple to be derived from the three cases is \nthis : the court must first construe the relevant \nenactment in order to ascertain its meaning; it \nmust then analyse the series of transactions in \nquestion, regarded as a whole, so as to ascertain \nits true effect in law; and finally it must apply \nthe enactment as construed to the true effect of \nthe series of transactions and so decide whether \nor not the enactment was intended to cover it. \nThe most important feature of the principle is \nthat the series of transactions is to be regarded \nas a whole. In ascertaining the true legal effect \nof the series it is relevant to take into account, if \nit be the case, that all the steps in it were \ncontractually agreed in advance or had been \ndetermined on in advance by a guiding will \nwhich was in a position, for all practical \npurposes, to secure that all of them were carried \nthrough to completion. It is also relevant to \ntake into account, if it be the case, that one or \nmore of the steps was introduced into the series \nwith no business purpose other than the \navoidance of tax.\n\n\tThe principle does not involve, in my opinion, \nthat it is part of the judicial function to treat as \nnugatory any step whatever which a taxpayer \nmay take with a view to the avoidance or \nmitigation or tax. It remains true in general that \nthe taxpayer, where he is in a position to carry \nthrough a transaction in two alternative ways, \none of which will result in liability to tax and \nthe other of which will not, is at liberty to \nchoose the latter and to do so effectively in the \nabsence of any specific tax avoidance provision \nsuch as s.460 of the Income and Corporation \nTaxes Act, 1970.\n\n\tIn Ramsay and in Burmah the result of \napplication of the principle was to demonstrate \nthat the true legal effect of the series of \ntransactions entered into, regarded as a whole, \nwas precisely nil.\"\n\nLord Oliver (at p.518-19) says:\n\n\"It is equally important to bear in mind what \nthe case did not decide. It did not decide that a \ntransaction entered into with the motive of \nminimising the subject's burden of tax is, for \nthat reason, to be ignored or struck down. Lord \nWilberforce was at pains to stress that the fact \nthat the motive for a transaction may be to \navoid tax does not invalidate it unless a \nparticular enactment so provides (see (1981) 1 \nAll ER 865, (1982) AC 300 at 323). Nor did it \ndecide that the court is entitled, because of the \nsubject's motive in entering into a genuine \ntransaction, to attribute to it a legal effect which \nit did not have. Both Lord Wilberforce and \nLord Fraser emphasise the continued validity \nand application of the principle of IRC v. Duke \nof Westminster (1936) AC 1 (19350 All ER \nRep.259, a principle which Lord Wilberforce \ndescribed as a 'cardinal principle'. What it did \ndecide was that that cardinal principle does \nnot, where it is plain that a particular \ntransaction is but one step in a connected series \nof interdependent steps designed to produce a \nsingle composite overall result, compel the \ncourt to regard it as otherwise than what it is, \nthat is to say merely a part of the composite \nwhole.\"\n\nLord Oliver (at p.523 ) observes:\n\n\"My Lords, for my part I find myself unable to \naccept that Dawson either established or can \nproperly be used to support a general \nproposition that any transaction which is \neffected for the purpose of avoiding tax on a \ncontemplated subsequent transaction and is \ntherefore 'planned' is, for that reason, \nnecessarily to be treated as one with that \nsubsequent transaction and as having no \nindependent effect even where that is \nrealistically and logically impossible.\"\n\nContinuing, (at page 524) Lord Oliver \nobserves:\n\n\"Essentially, Dawson was concerned with a \nquestion which is common to all successive \ntransactions where an actual transfer of \nproperty has taken place to a corporate entity \nwhich subsequently carries out a further \ndisposition to an ultimate disponee. The \nquestion is : when is a disposal not a disposal \nwithin the terms of the statute ? To give to that \nquestion the answer 'when, on an analysis of \nthe facts, it is seen in reality to be a different \ntransaction altogether' is well within the \naccepted canons of construction. To answer it \n'when it is effected with a view to avoiding tax \non another contemplated transaction' is to do \nmore than simply to place a gloss on the words \nof the statute. It is to add a limitation or \nqualification which the legislature itself has not \nsought to express and for which there is no \ncontext in the statute. That, however, desirable \nit may seem, is to legislate, not to construe, and \nthat is something which is not within judicial \ncompetence. I can find nothing in Dawson or \nin the cases which preceded it which causes me \nto suppose that that was what this House, was \nseeking to do.\"\n\n\tThus we see that even in the year 1988 the House of Lords \nemphasised the continued validity and application of the principle \nin Duke of Westminster . \n\nWhile Chinnappa Reddy, J. took the view that Ramsay , \nwas an authoritative rejection of principle in the Duke of \nWestminster , the House of Lords, in the year 2001, does not \nseem to consider it to be so, as seen from MacNiven (Inspector of \nTaxes) v. Westmoreland Investments Ltd . Lord Hoffmann \nobserves:\n\"In the Ramsay case both Lord Wilberforce \nand Lord Fraser of Tullybelton, who gave the \nother principal speech, were careful to stress \nthat the House was not departing from the \nprinciple in IRC v. Duke of Westminster \n(1936) AC 1, (1935) All ER Rep.259. There \nhas nevertheless been a good deal of \ndiscussion about how the two cases are to be \nreconciled. How, if the various juristically \ndiscrete acquisitions and disposals which \nmade up the scheme were genuine, could the \nHouse collapse them into a composite self-\ncancelling transaction without being guilty of \nignoring the legal position and looking at the \nsubstance of the matter?\n\nMy Lords, I venture to suggest that some of \nthe difficulty which may have been felt in \nreconciling the Ramsay case with the Duke of \nWestminster's case arises out of an \nambiguity in Lord Tomlin's statement that \nthe courts cannot ignore 'the legal position' \nand have regard to 'the substance of the \nmatter'. If 'the legal position' is that the tax is \nimposed by reference to a legally defined \nconcept, such as stamp duty payable on a \ndocument which constitutes a conveyance on \nsale, the court cannot tax a transaction which \nuses no such document on the ground that it \nachieves the same economic effect. On the \nother hand, if the legal position is that tax is \nimposed by reference to a commercial \nconcept, then to have regard to the business \n'substance' of the matter is not to ignore the \nlegal position but to give effect to it.\n\nThe speeches in the Ramsay case and \nsubsequent cases contain numerous \nreferences to the 'real' nature of the \ntransaction and to what happens in 'the real \nworld'. These expressions are illuminating in \ntheir context, but you have to be careful about \nthe sense in which they are being used. \nOtherwise you land in all kinds of \nunnecessary philosophical difficulties about \nthe nature of reality and, in particular, about \nhow a transaction can be said not to be a \n'sham' and yet be 'disregarded' for the \npurpose of deciding what happened in 'the \nreal world'. The point to hold on to is that \nsomething may be real for one purpose but \nnot for another. When people speak of \nsomething being a 'real' something, they \nmean that it falls within some concept which \nthey have in mind, by contrast with \nsomething else which might have been \nthought to do so, but does not. When an \neconomist says that real incomes have fallen, \nhe is not intending to contrast real incomes \nwith imaginary incomes. The contrast is \nspecifically between incomes which have \nbeen adjusted for inflation and those which \nhave not. In order to know what he means by \n'real', one must first identify the concept \n(inflation adjustment) by reference to which \nhe is using the word.\n\nThus in saying that the transactions in the \nRamsay case were not sham transactions, one \nis accepting the juristic categorisation of the \ntransactions as individual and discrete and \nsaying that each of them involved no \npretence. They were intended to do precisely \nwhat they purported to do. They had a legal \nreality. But in saying that they did not \nconstitute a 'real' disposal giving rise to a \n'real' loss, one is rejecting the juristic \ncategorisation as not being necessarily \ndeterminative for the purposes of the statutory \nconcepts of 'disposal' and 'loss' as properly \ninterpreted. The contrast here is with a \ncommercial meaning of these concepts. And \nin saying that the income tax legislation was \nintended to operate 'in the real world', one is \nagain referring to the commercial context \nwhich should influence the construction of \nthe concepts used by Parliament.\"\n\n With respect, therefore, we are unable to agree with the \nview that Duke of Westminster is dead, or that its ghost has been \nexorcised in England. The House of Lords does not seem to think \nso, and we agree, with respect. In our view, the principle in Duke \nof Westminster is very much alive and kicking in the country of \nits birth. And as far as this country is concerned, the observations \nof Shah,J., in CIT v. Raman are very much relevant even today.\n\n We may in this connection usefully refer to the judgment of \nthe Madras High Court in M.V.Vallipappan and others v. ITO , \nwhich has rightly concluded that the decision in McDowell \ncannot be read as laying down that every attempt at tax planning \nis illegitimate and must be ignored, or that every transaction or \narrangement which is perfectly permissible under law, which has \nthe effect of reducing the tax burden of the assessee, must be \nlooked upon with disfavour. Though the Madras High Court had \noccasion to refer to the judgment of the Privy Council in IRC v. \nChallenge Corporation Ltd. , and did not have the benefit of the \nHouse of Lords's pronouncement in Craven , the view taken by \nthe Madras High Court appears to be correct and we are inclined to \nagree with it. \nWe may also refer to the judgment of Gujarat High Court in \nBanyan and Berry v. Commissioner of Income-Tax where \nreferring to McDowell , the Court observed:\n\"The court nowhere said that every action or \ninaction on the part of the taxpayer which \nresults in reduction of tax liability to which he \nmay be subjected in future, is to be viewed \nwith suspicion and be treated as a device for \navoidance of tax irrespective of legitimacy or \ngenuineness of the act; an inference which \nunfortunately, in our opinion, the Tribunal \napparently appears to have drawn from the \nenunciation made in McDowell case (1985) \n154 ITR 148 (SC). The ratio of any decision \nhas to be understood in the context it has been \nmade. The facts and circumstances which lead \nto McDowell's decision leave us in no doubt \nthat the principle enunciated in the above case \nhas not affected the freedom of the citizen to \nact in a manner according to his requirements, \nhis wishes in the manner of doing any trade, \nactivity or planning his affairs with \ncircumspection, within the framework of law, \nunless the same fall in the category of \ncolourable device which may properly be \ncalled a device or a dubious method or a \nsubterfuge clothed with apparent dignity.\" \n\n\tThis accords with our own view of the matter. \nIn CWT v. Arvind Narottam , a case under the Wealth \nTax Act, three trust deeds for the benefit of the assessee, his wife \nand children in identical terms were prepared under section 21(2) \nof the Wealth Tax Act. Revenue placed reliance on McDowell . \nBoth the learned Judges of the Bench of this Court gave separate \nopinions.\nChief Justice Pathak, in his opinion said (at p.486):\n\n\"Reliance was also placed by learned \ncounsel for the Revenue on McDowell and \nCompany Ltd. v. CTO (1985) 154 ITR \n148(SC). That decision cannot advance the \ncase of the Revenue because the language of \nthe deeds of settlement is plain and admits \nof no ambiguity.\"\n\nJustice S. Mukherjee said, after noticing \nMcDowell's case, (at page 487):\n\n\"Where the true effect on the construction of \nthe deeds is clear, as in this case, the appeal \nto discourage tax avoidance is not a relevant \nconsideration. But since it was made, it has \nto be noted and rejected.\"\n\n In Mathuram Agrawal v. State of Madhya Pradesh another \nConstitution Bench had occasion to consider the issue. The Bench \nobserved:\n\"The intention of the legislature in a taxation \nstatute is to be gathered from the language of \nthe provisions particularly where the language \nis plain and unambiguous. In a taxing Act it is \nnot possible to assume any intention or \ngoverning purpose of the statute more than \nwhat is stated in the plain language. It is not \nthe economic results sought to be obtained by \nmaking the provision which is relevant in \ninterpreting a fiscal statute. Equally \nimpermissible is an interpretation which does \nnot follow from the plain, unambiguous \nlanguage of the statute. Words cannot be \nadded to or substituted so as to give a meaning \nto the statute which will serve the spirit and \nintention of the legislature.\"\n\n The Constitution Bench reiterated the observations in Bank \nof Chettinad Ltd. v. CIT , quoting with approval the observations \nof Lord Russell of Killowen in IRC v. Duke of Westminster \nand the observations of Lord Simonds in Russell v. Scott \n\n\tIt thus appears to us that not only is the principle in Duke of \nWestminster alive and kicking in England, but it also seems to \nhave acquired judicial benediction of the Constitutional Bench in \nIndia, notwithstanding the temporary turbulence created in the \nwake of McDowell .\n\tHence, reliance on Furniss , Ramsay and Burmah Oil \nby the respondents in support of their submission is of no avail.\n\tThe situation is no different in United States and other \njurisdictions too. \n\tThe situation in the United State is reflected in the following \npassage from American Jurisprudence :\n\"The legal right of a taxpayer to decrease \nthe amount of what otherwise would be his \ntaxes, or altogether to avoid them, by \nmeans which the law permits, cannot be \ndoubted. A tax-saving motivation does not \njustify the taxing authorities or the courts in \nnullifying or disregarding a taxpayer's \notherwise proper and bona fide choice \namong courses of action, and the state \ncannot complain, when a taxpayer resorts to \na legal method available to him to compute \nhis tax liability, that the result is more \nbeneficial to the taxpayer than was intended. \nIt has even been said that it is common \nknowledge that not infrequently changes in \nthe basic facts affecting liability to taxation \nare made for the purpose of avoiding \ntaxation, but that where such changes are \nactual and not merely simulated, although \nmade for the purpose of avoiding taxation, \nthey do not constitute evasion of taxation. \nThus, a man may change his residence to \navoid taxation, or change the form of his \nproperty by putting his money into non-\ntaxable securities, or in the form of property \nwhich would be taxed less, and not be guilty \nof fraud. On the other hand, if a taxpayer at \nassessment time converts taxable property \ninto non-taxable property for the purpose of \navoiding taxation, without intending a \npermanent change, and shortly after the time \nfor assessment has passed, reconverts the \nproperty to its original form, it is a \ndiscreditable evasion of the taxing laws, a \nfraud, and will not be sustained.\"\n\nSeveral judgments of the US Courts were cited in respect of \nthe proposition that motive of tax avoidance is irrelevant in \nconsideration of the legal efficacy of a transactional situation. \n\nWe may recapitulate the observations of the Federal Court in \nJohansson as to the irrelevance of the motive for Johansson. To \nsimilar effect are the observations of the US Court in Perry R. Bas \nv. Commissioner of Internal Revenue :\n\n\"we infer that Stantus was created by \npetitioners with a view to reducing their \ntaxes through qualification of the \ncorporation under the convention. The test, \nhowever, is not the personal purpose of a \ntaxpayer in creating a corporation. Rather, it \nis whether that purpose is intended to be \naccomplished through a corporation carrying \nout substantive business functions. If the \npurpose of the corporation is to carry out \nsubstantive business functions, or if it in fact \nengages in substantive business activity, it \nwill not be disregarded for Federal tax \npurposes.\"\n\nIn Barber-Greene Americas, Inc. v. Commissioner of \nInternal Revenue it was observed that a corporation will not be \ndenied Western Hemisphere trade corporation tax benefits merely \nbecause it was purposely created and operated in such way as to \nobtain such benefits. Similarly, a corporation otherwise qualified \nshould not be disregarded merely because it was purposely created \nand operated to obtain the benefits of the United States-Swiss \nConfederation Income Tax Convention.\nThough the words 'sham', and 'device' were loosely used in \nconnection with the incorporation under the Mauritius law, we \ndeem it fit to enter a caveat here. These words are not intended to \nbe used as magic mantras or catchall phrases to defeat or nullify the \neffect of a legal situation. As Lord Atkin pointed out in Duke of \nWestminster :\n\"I do not use the word device in any sinister \nsense; for it has to be recognised that the \nsubject, whether poor and humble or wealthy \nand noble, has the legal right so to dispose of \nhis capital and income as to attract upon \nhimself the least amount of tax. The only \nfunction of a court of law is to determine the \nlegal result of his dispositions so far as they \naffect tax.\"\n\nLord Tomlin said :\n\n\"There may, of course, be cases where \ndocuments are not bona fide nor intended to \nbe acted upon, but are only used as a cloak to \nconceal a different transaction.\"\n\nIn Snook vs. London and West Riding Investments Ltd. \nLord Diplock L.J., explained the use of the word 'sham' as a legal \nconcept in the following words:\n\"it is, I think, necessary to consider \nwhat, if any, legal concept is involved in the \nuse of this popular and pejorative word. I \napprehend that, if it has any meaning in law, it \nmeans acts done or documents executed by the \nparties to the 'sham' which are intended by \nthem to give to third parties or to the court the \nappearance of creating between the parties legal \nrights and obligations different from the actual \nlegal rights and obligations (if any) which the \nparties intend to create. One thing I think, \nhowever, is clear in legal principle, morality \nand the authorities (see Yorkshire Railway \nWagon Contracting State. V. Maclure (1882) \n21 Ch.D.309 ; Stoneleigh Finance, Ltd. v. \nPhillips (1965) 1 All ER 513) that for acts or \ndocuments to be a \"sham\", with whatever legal \nconsequences follow from this, all the parties \nthereto must have a common intention that the \nacts or documents are not to create the legal \nrights and obligations which they give the \nappearance of creating. No unexpressed \nintentions of a \"shammer\" affect the rights of a \nparty whom he deceived.\"\n\n In Waman Rao and others v. Union of India & Ors. and \nMinerva Mills Ltd. and others v. Union of India and Ors. this \nCourt considered the import of the word \"device' with reference to \nArticle 31B which provided that the Acts and Regulations specified \nNinth Schedule shall not be deemed to be void or even to have \nbecome void on the ground that they are inconsistent with the \nFundamental Rights. The use of the word 'device' here was not \npejorative, but to describe a provision of law intended to produce a \ncertain legal result.\n\nIf the Court finds that notwithstanding a series of legal steps \ntaken by an assessee, the intended legal result has not been \nachieved, the Court might be justified in overlooking the \nintermediate steps, but it would not be permissible for the Court to \ntreat the intervening legal steps as non-est based upon some \nhypothetical assessment of the 'real motive' of the assessee. In our \nview, the court must deal with what is tangible in an objective \nmanner and cannot afford to chase a will-o'-the-wisp.\n\n\tThe judgment of the Privy Council in Bank of Chettinad , \nwholeheartedly approving the dicta in the passage from the opinion \nof Lord Russel in Westminster , was the law in this country \nwhen the Constitution came into force. This was the law in force \nthen, which continued by reason of Article 372. Unless abrogated \nby an Act of Parliament, or by a clear pronouncement of this Court, \nwe think that this legal principle would continue to hold good. \nHaving anxiously scanned McDowell , we find no reference \ntherein to having dissented from or overruled the decision of the \nPrivy Council in Bank of Chettinad. If any, the principle \nappears to have been reiterated with approval by the Constitutional \nBench of this Court in Mathuram . We are, therefore, unable to \naccept the contention of the respondents that there has been a very \ndrastic change in the fiscal jurisprudence, in India, as would \nentail a departure. In our judgment, from Westminster to Bank \nof Chettinad to Mathuram , despite the hiccups of \nMcDowell , the law has remained the same. \n\nWe are unable to agree with the submission that an act which \nis otherwise valid in law can be treated as non-est merely on the \nbasis of some underlying motive supposedly resulting in some \neconomic detriment or prejudice to the national interests, as \nperceived by the respondents. \n\nIn the result, we are of the view that Delhi High Court erred \non all counts in quashing the impugned circular. The judgment \nunder appeal is set aside and it is held and declared that the \ncircular No. 789 dated 13.4.2000 is valid and efficacious. \n\nWe cannot part with this judgment without expressing our \ngrateful appreciation to the Learned Attorney General, Mr. Harish \nSalve, Mr. Prashant Bhushan as also the party in person, Mr. S.K. \nJha, all of whom by their industrious research produced a wealth of \nmaterial and by their meticulous arguments rendered immense \nassistance.\n\n [1985] 154 ITR 148.\n See in this connection Maganbhai Ishwarbhai Patel & Others. v. Union of India & Another \n(1970) 3 SCC 400.\n [1988] 144 ITR 146.\n [1991] 190 ITR 626.\n See also in this connection Leonhardt Andra Und Partner, Gmbh v. Commissioner of Income Tax \n[2001] 249 ITR 418.\n [1993] 202 ITR 508.\n [1995] 212 ITR 31.\n Cases in Constitutional Law, D.L. Kier and F.H. Lawson, Pg.53-54, 159-163 (ELBS & \nOxford University Press 5th Ed.).\n See Section 5A of Central Excise Act, 1944 and Section 8(5) of the Central Sales Tax Act, 1956.\n (1999) 4 SCC 11, para 14 to 22.\n (1959) SCR 1099.\n Supra note 10.\n [1981] 131 ITR 597.\n Crawford on Statutory Construction, 1940 Ed, as in Supre note 13.\n [1908] ILR 35 Cal 701, 713.\n [1979] 4 SCC 565.\n Supra note 13.\n [1965] 56 ITR 198.\n [1971] 82 ITR 913.\n [1999] 237 ITR 889 at 896.\n [2001] 252 ITR 1.\n [2002] 2 SCC 127 at para 11.\n See in this connection State of Sikkim v. Dorjee Tshering Bhutia and Others (1991) 4 SCC 243 at para 16; N.B. \nSanjana, Assistant Collector of Central Excise, Bombay and Others v. Elphinshone Spinning and Weaving Mills Co. \nLtd.(1971) 1 SCC 337; B. Balakotaiah v. Union of India & Others (1968) SCR 1052 and Afzal Ullah v. State of U.P \n(1964) 4 SCR 991.\n See in this connection the observations of this Court in Harishankar Bagla and Another v. The \nState of Madhya Pradesh 1955 SCR 380 and Kishan Prakash Sharma v. Union of India and \nOthers (2001) 5 SCC 212.\n\n (1984) 4 SCC 27 at para 14.\n Jean-Maic Rivier, Cahiers de droit fiscal international, VolLXXIIa at pp.47-76.\n 336F.2d.809.\n See in this connection Ramanathan Chettiar v. Commissioner of Income Tax, Madras [1973] 88 ITR 169.\n (1989) 4 SCC 592.\n See also in this connection the judgment of Madras High Court in Tamil Nadu (Madras State) \nHandloom Weavers Contracting State-operative Society Ltd. v. Assistant Collector of Central Excise 1978 \nELT 57 (Mad HC).\n (1995) 1 SCC 274.\n [1994] 213 ITR 317.\n [1999] 239 ITR 650.\n Ibid\n 85 D.T.C.5188 at 5190.\n Ibid\n See in this connection Klaus Vogel, Double Taxation Convention, Pg.26-29 (3rd ed).\n (1997) 785 FCA.\n (2000) FCA 635.\n 1998 Can. Tax Ct.LEXIS 1140.\n [1975] 100 ITR 706.\n Lord McNair, The Law of Treaties, Pg.336 (Oxford, at the Clarendan Press, 1961).\n Ibid.\n 53 (1) WLR 483.\n L.Oppenheim, Oppenheim's International Law, Article 626 (9th Ed.).\n Philip Baker, Double Taxation Convention and International Law, Pg.91 ((1994) 2nd Ed.).\n Francis Bennion, Statutory Interpretation, Pg. 461 [Butterworths, 1992 (2nd Ed.)].\n David R. Davis, Principles of International Double Taxation Relief, Pg.4 (London Sweet & Maxwell, \n1985).\n Roy Rohtagi, Basic International Taxationt Pg.373-374 (Kluwer Law International).\n Ibid.\n Ibid. \n Supra note 1.\n Ibid. \n Ibid.\n Ibid .\n (1926) AC 395 at 412.\n (1936) AC 1; 19 TC 490.\n Supra note 1.\n Supra note 56.\n Supra note 57.\n Supra note 1.\n (1982) AC 300.\n (1982) STC 30.\n (1984) 1 All ER 530.\n Supra note 57.\n Supra note 1.\n [1968] 67 ITR 11. \n Supra note 57.\n Supra note 56.\n Supra note 1 at Pg. 171.\n Supra note 1.\n Ibid\n Supra note 57.\n (1988) 3 All ER 495. \n Supra note 64.\n Supra note 63.\n Supra note 62.\n Supra note 57.\n Supra note 62.\n Supra note 57.\n (2001) 1 All ER 865 at 877-878.\n Supra note 57.\n Ibid.\n Supra note 67.\n (1988) 170 ITR 238.\n Supra note 1.\n (1987) 2 WLR 24.\n Supra note 74.\n (1996) 222 ITR 831 at 850.\n Supra note 1.\n (1988) 173 ITR 479.\n Supra note 1.\n (1999) 8 SCC 667 at para 12.\n (1940) 8 ITR 522 (PC).\n Supra note 57.\n (1948) 2 All ER 15.\n Supra note 57.\n Supra note 1. \n Supra note 64.\n Supra note 62.\n Supra note 63.\n American Jurisprudence (1973 2nd Ed. Vol.71).\n See in this connection Gregory v. Helvering 293 US465, 469 55 S.Ct. 226, 267, 78 \nL.ed.566, 97 ALR 1335; Helvering v. St. Louis Trust Company 296 US 48, 56 S. Ct. 78, 80L; \nBecker v. St.Louis Union Trust Company 296 US 48, 56 S.Ct. 78, 80L. \n Supra note 27.\n (1968) US 50 TC 595.\n (1960) 35 T.C.365, 383,384.\n Supra note 57.\n (1967) All ER 518 at 528.\n (1981) 2 SCC 362 at para 45.\n (1980) 3 SCC 625 at para 91.\n Supra note 94.\n Supra note 57.\n Supra note 1.\n Supra note 94.\n Supra note 93.\n Supra note 57.\n Supra note 94.\n Supra note 93.\n Supra note 1.\n\n1" }, { "title": "R.K. Garg Etc. Etc vs Union Of India & Ors. Etc on 20 October, 1981", "url": "https://indiankanoon.org//doc/314044/", "text": "R.K. Garg Etc. Etc vs Union Of India & Ors. Etc on 20 October, 1981\nEquivalent citations: 1981 AIR 2138, 1982 SCR (1) 947\nAuthor: A.C. Gupta\nBench: A.C. Gupta, Y.V. Chandrachud, P.N. Bhagwati, Syed Murtaza Fazalali, Amarendra Nath Sen\n PETITIONER:\nR.K. GARG ETC. ETC.\n\n\tVs.\n\nRESPONDENT:\nUNION OF INDIA & ORS. ETC.\n\nDATE OF JUDGMENT20/10/1981\n\nBENCH:\nGUPTA, A.C.\nBENCH:\nGUPTA, A.C.\nCHANDRACHUD, Y.V. ((CJ)\nBHAGWATI, P.N.\nFAZALALI, SYED MURTAZA\nSEN, AMARENDRA NATH (J)\n\nCITATION:\n 1981 AIR 2138\t\t 1982 SCR (1) 947\n 1981 SCALE (3)1601\n CITATOR INFO :\n F\t 1982 SC 710\t (32)\n R\t 1983 SC 937\t (37)\n R\t 1984 SC1130\t (46)\n RF\t 1985 SC 551\t (32)\n RF\t 1985 SC 724\t (13)\n R\t 1987 SC 251\t (33)\n R\t 1990 SC 334\t (98)\n RF\t 1992 SC1033\t (39)\n\n\nACT:\n Special Rcarer Bonds (Immunities and\t Exemptions)\nordinance, 1981\t and Special Bearer Bonds (Immunities\t and\nExemptions) Act, 1981-Constitution validity\t of-Whether\ninfringes Art. 14-Act whether puts a premium on dishonesty.\n Constitution of India, 1950.\n Art. 14-Validity\t of\tclassification-How to\t be\ndetermined.\n Art. 32-Judicial review-Discharge of-Principles to be\nfollowed.\n Art. 123-ordinance\t making power of President-Whether\ncan extend to tax laws.\n Interpretation of\t statutes-Legislation\ton economic\nmatters-Effect of crudities, inequities and possibilities of\nabuse-Whether renders legislation invalid.\n\n\n\nHEADNOTE:\n The Special Bearer Bonds\t(Immunities and\t Exemptions)\nordinance, 1981\t was promulgated on January 12,1981. It was\nrepealed and\treplaced by the Special Bearer Bonds\n(Immunities and\t Exemptions) Act, 1981. The Act received the\nPresidential assent on March 27,1981. Section\t 1(3) of the\nAct stated that the Act was deemed to have come into force\non January 12, 1981. The provisions of the ordinance and the\nAct were similar except section 4(2)\tof the Act which was\nworded slightly differently from the corresponding provision\nof The ordinance. The Act provided for certain immunities to\nholders of Special Bearer Bonds, 1981, and\tfor certain\nexemptions from\t direct taxes in relation to such Bonds and\nfor matters connected therewith. The object and purpose for\nwhich the Act was passed was\tto canalise for productive\npurposes black\tmoney, which had become a serious threat to\nthe national economy and to provide for certain immunities\nand exemptions\t to render it possible for\t persons in\npossession of black money to invest the same\t in the said\nBonds.\n Section 3 of the Act provided for certain immunities to\na person who had subscribed to or otherwise acquired Special\nBearer Bonds. Clause (a) protected such a person from being\nrequired to disclose for any purpose whatsoever the I nature\nand source of acquisition of\tthe Special Bearer Bonds.\nClause (b) prohibited the commencement of any inquiry or\ninvestigate on against a person on the\n948\nground of his having subscribed to or otherwise acquired the\nSpecial Bearer\tBonds. Clause (c) provided that the fact of\nsubscription to or acquisition of Special Bearer Bonds shall\nnot be\ttaken into account and\t shall\tbe inadmissible in\nevidence in any proceedings relating to any offence or the\nimposition of any penalty. Sub-section (2) of section (3)\nprovided that the immunity granted under sub-section\t (1)\nshall not be available\t in relation to prosecution for any\noffence punishable under Chapter 9 or\t Chapter 17 of\t the\nIndian Penal Code or the Prevention of Corruption Act, 1957\nor other similar law.\n Section 4\t provided that\t without prejudice to\t the\nprovisions of section 3 subscription to, or acquisition of\nSpecial Bearer\tBonds by any person shall not be taken into\naccount for the purpose of any proceedings under the Income-\ntax Act, 1961, the Wealth-tax Act 1957 or the Gift-tax Act,\n1958 and that no person who\thas subscribed\t to or\t has\notherwise acquired the said Bonds shall be entitled to (a)\nclaim any set-off under the Income-tax Act or to reopen any\nassessment or reassessment made under that Act on the ground\nthat he has subscribed to or has otherwise acquired the said\nBonds; (b) that any asset which is includible in his net\nwealth for any assessment year under the Wealth-tax Act has\nbeen converted\tinto such bonds, and (c) that any asset held\nby him\t represents the consideration received for\t the\ntransfer of such Bonds.\n In their writ petitions to this\tCourt assailing\t the\nconstitutional validity\t of the ordinance and the Act it was\ncontended on behalf of\t the petitioners that: (I) since the\nordinance had the effect of amending\tthe tax\t laws it was\noutside the competence of the President under Article 123,\nthat the subject matter of the ordinance was in the nature\nof a Money Bill which could be introduced only in the House\nof the People and passed according to the procedure provided\nin Articles 109 and 110, the\tPresident had no power under\nArticle 123 to issue the ordinance by passing the special\nprocedure provided in Articles\t 109 and 110 for the passing\nof a Money Bill and (2) that the provisions of the Act were\nviolative of Article 14 of the Constitution.\n It was also contended: (a) that\tSpecial Bearer Bonds\nwould fetch a much higher value in the black market than\nthat originally\t subscribed and\t this would enable a larger\namount of black money\tto be legalised into white than what\nwas originally\tinvested in subscription to special bearer\nbonds, (b) an abuse which special bearer bonds might lend\nthemselves to was that if special bearer bonds are sold and\nthe sale proceeds are\tutilised in meeting expenditure, the\nassessee would not be precluded by section 4 clause (c) from\nexplaining the\tsource of the expenditure to be the\tsale\nconsideration of special bearer bonds and by resorting to\nthis strategy,\twhite money can be accumulated as capital\nwhile expenditure is met out of black money received by way\nof consideration for sale of\tspecial\t bearer\t bonds,\t (c)\nSection 4 clause (c) operates only in relation to a period\nbefore the date of maturity of special bearer bonds\t and\nafter the date of maturity the holder of special bearer\nbonds can sell such bonds, and, without running any risk\ndisclose the consideration received by him as his white\nmoney, because section 4 clause (c) being out of the way, he\ncan account for the possession of such money by showing that\nhe has\treceived it as consideration for sale\t of special\nbearer bonds and so far as the purchaser is concerned. if he\nhas Paid the consideration out of his black money, he can\nclaim\n949\nthe immunity granted under section 3 sub-section (1) and his\nblack money would be converted into white, (d) the Act is\nunconstitutional as it offends against morality by according\nto dishonest assessees who have evaded payment of\ttax.\nimmunities and\texemptions which are denied to honest tax-\npayers. Those who have broken the law and deprived the State\nof its\tlegitimate dues\t are given benefits and concessions\nplacing Them at an advantage over those who have observed\nthe law and paid the taxes due from them and this is clearly\nimmoral and unwarranted by the Constitution.\n Dismissing the petitions,\n^\n HELD :\n [Per majority Chandrachud, C. J., Bhagwati, Fazal Ali &\nAmarendra Nath Sen, J.J.]\n [Gupta, J, dissenting]\n None of the provisions of The Special Bearer Bonds\n(Immunities and Exemption) Act, 1981 is violative of Article\n14 and its constitutional validity must be upheld. [989 B]\n l(i). There is no substance in The contention that the\nPresident has no power under\t Article 123 to issue an\nordinance amending or altering\t the tax laws and that the\nordinance was outside the legislative power of the President\nunder that Article. [967 E]\n l(ii). Under Article 123 legislative power is conferred\non the\tPresident exercisable when both Houses of Parliament\nare not\t in session. It is possible that when neither House\nof Parliament is in session, a situation may\t arise which\nneeds to be dealt with immediately and for which there is no\nadequate provision in the\texisting law and emergent\nlegislation may be necessary to enable the executive to cope\nwith the situation. Article 123, therefore, confers powers\non the President to promulgate a law by issuing an ordinance\nto enable the executive to deal with the emergent situation\nwhich might well include a situation created by a law being\ndeclared void by a Court of law. The legislative power\nconferred on the President under the\t Article is not a\nparallel power\tof legislation.\t This power is the clearest\nindication that the\tPresident is\tinvested with\tthis\nlegislative power only in order to enable the executive to\ntide over an emergent\tsituation which may arise whilst The\nHouses of Parliament are not in session. The conferment of\nsuch power may appear\tto be undemocratic but it is not so,\nbecause\t The executive is clearly\tanswerable to\t the\nlegislature and\t if the\t President, on the aid and advice of\nthe executive,\tpromulgates an\tordinance in misuse or abuse\nof this power, the\tlegislature can not only pass a\nresolution disapproving\t the ordinance\tbut can\t also pass a\nvote of\t no confidence\tin the\texecutive There\t is in\t the\ntheory\tof Constitutional Law complete control of\t the\nlegislature over the executive, because if the executive\nmisbehaves or forfeits the confidence of the legislature, it\ncan be thrown out by the legislature. [954 E-G, 965 G-966 B]\n 1(iii). If parliament can by enacting legislation after\nor amend tax laws, equally can the President do so by\nissuing an ordinance under Article 123. There have\tbeen\nnumerous instances where the President has issued an\nordinance replacing with retrospective\t effect\t a tax\t law\ndeclared void by the High Court or\n950\nthis Court. Even offences have been created by ordinance\nissued by the President under Article 123 and such offences\ncommitted during the life of the ordinance have been held to\nbe punishable despite the expiry of the ordinance. [967 B-C]\n State of Punjab v. Mohar\t Singh\t[1955]\t1 SCR\t893,\nreferred to.\n 2(i). Certain well established principles have\tbeen\nevolved by Courts as rules of guidance in discharge of their\nconstitutional function\t of judicial review. The first rule\nis that\t there is always a presumption in favour of\t the\nconstitutionality of a statute\t and the burden is upon him\nwho attacks it to show that there\t has been a clear\ntransgression of the\t constitutional principles.\t The\npresumption of constitutionality is indeed so strong that in\norder to sustain it, the Court may take into consideration\nmatters of common knowledge, matters of common report, the\nhistory of the times and may\tassume every state of facts\nwhich can be conceived existing at the time of Legislation.\nAnother rule of equal\timportance is that laws relating to\neconomic activities should be\tviewed with greater latitude\nthan laws touching civil rights such as freedom of speech,\nreligion etc. The court should feel more inclined to give\njudicial deference to legislative judgment in the field of\neconomic regulation than in other areas where fundamental\nhuman rights are involved. [969 A-G]\n Morey v. Dond, 354 US 457, referred to.\n 2(ii). The court must always remember that \"legislation\nis directed to practical problems,\t that the economic\nmechanism is\thighly\tsensitive and\tcomplex, that\tmany\nproblems are singular and contingent, that laws are\t not\nabstract propositions and do not relate to abstract units\nand are\t not to be measured by abstract symmetry\" that exact\nwisdom and nice adoption of\tremedy\tare not f; always\npossible and that \"judgment is largely a prophecy based on\nmeagre\tand uninterpreted experience\". Every\t legislation\nparticularly in\t economic matters is essentially empiric and\nit is based on\t experimentation or what one may call trial\nand error method and therefore it cannot provide for all\npossible situations or anticipate all possible abuses. There\nmay be\tcrudities and inequities in complicated experimental\neconomic legislation but on that account alone it cannot be\nstruck down as invalid. [970 C.D]\n Secretary\tof Agriculture\t v. Central Reig Refining\nCompany, 94 Lawyers' Edition 381. referred to.\n 2(iii). The court must adjudge the constitutionality of\nlegislation by\tthe generality\tof its provisions and not by\nits crudities or inequities or by the possibilities of abuse\nof any\tof its\tprovision. If any crudities, inequities or\npossibilities of abuse come to light,\t the legislature can\nalways step in and enact suitable amendatory legislation.\nThat is\t the essence of pragmatic approach which must guide\nand inspire the legislature in dealing with complex economic\nissues. [970 G-H]\n 3(i). It is clear\t that Article 14 does\t not forbid\nreasonable classification of persons, objects\t and\ntransactions by the legislature for the purpose of attaining\nspecific ends.\tWhat is\t necessary in order to pass the test\nof permissible\tclassification under Article 14 is that the\nclassification must not be arbitrary, artificial or evasive\nbut must be based on some real and substantial distinction\nbearing\n951\na just\tand reasonable\trelation to the object sought to be\nachieved by the legislature.\n 3(ii). The\t validity of a\t classification\t has to be\njudged with reference to the object of the legislation and\nif that is done, there can be\tno doubt that\t the\nclassification made by the Act is rational and intelligible\nand the\t operation of the provisions of the Act is rightly\nconfined to persons in possession of black money.\n 4(i). The\tPreamble of the Act makes it clear that the\nAct is\tintended to canalise for productive purposes black\nmoney which has become\t a serious threat to the national\neconomy. It is an undisputed fact that there is considerable\namount of black money in circulation which is unaccounted or\nconcealed and\t therefore outside the disclosed trading\nchannels. It\tis largely the product of black market\ntransactions and evasion of tax. The\tabundance of black\nmoney has in fact given rise to a parallel economy operating\nsimultaneously and competing with the official economy. This\nparallel economy has over the\t years\tgrown in size\t and\ndimension and even on a conservative estimate, the amount of\nblack money in circulation runs into some thousand crores.\nThe menace of\tblack money has reached such staggering\nproportions that it is\t causing havoc to the economy of the\ncountry and poses a serious challenge to the fulfillment of\nobjectives of distributive justice and setting up of an\negalitarian society.\n 4(ii). The first casualty of the evil of black money is\nthe Revenue because it loses the tax which should otherwise\nhave come to the exchequer. The generation of black money\nthrough tax evasion throws a greater\tburden on the honest\ntax payer and leads to economic inequality and concentration\nof wealth in the hands of the unscrupulous\tfew in\t the\ncountry. It also leads\t to leakage of foreign exchange,\nmaking balance\tof payments rather distorted and unreal and\ntends to defeat the economic policies of the Government by\nmaking their implementation ineffective, particularly in the\nfield of credit and\t investment. Urgent measures\twere\nrequired to be adopted for preventing further generation of\nblack money as also for unearthing existing black money so\nthat it can be canalised for productive purposes with a view\nto effective economic and social planning.\n 4(iii). The Government introduced\t several changes in\nthe administrative set up of the tax department from time to\ntime with a\tview to strengthening\t the administrative\nmachinery for checking tax evasion. The Government\talso\namended section 37 of the Indian Income Tax Act, 1922 with a\nview to conferring power on the tax authorities to carry out\nsearches and seizures and this power was elaborated and made\nmore effectual under the Income Tax Act, 1961. The Voluntary\nDisclosure Scheme of\t1951 was made\t to facilitate\t the\ndisclosure of\t suppressed income by affording certain\nimmunities from penal provisions, Nearly a decade and a half\nlater a second scheme of voluntary disclosure was introduced\nby section 68 of the Finance Act, 1965, popularly known as\nthe sixty forty scheme\t which was a little more successful.\nClosely following on the heels of this scheme came another\nunder section 24 of the Finance (No. 2) Act\t 1965-'Block\nScheme'\t according to\t which\ttax was payable at rates\napplicable to the block of concealed\tincome disclosed and\nnot at\ta flat\trate as\t under the sixty-forty scheme. Then\ncame the Taxation Laws (Amendment\t and Miscellaneous\nProvisions) ordinance 1965 followed by an Act which provided\nfor exemption from\n952\ntax in\tcertain cases of undisclosed\tincome\tinvested in\nNational Defence Gold Bonds 1980. Later on, the Voluntary\nDisclosure of Income and Wealth ordinance 1975 which\t was\nfollowed by an Act\tintroduced a scheme of voluntary\ndisclosure of\t income\t and wealth and provided certain\nimmunities and exemptions.\t All\t these\t legal\t and\nadministrative measures\t were introduced by the Government\nand did\t not have any appreciable effect with regard to the\nproblem of black money which continued unabated\n 4 (iv). All efforts to detect black money and to\nuncover it having failed and the problem of\tblack money\nbeing an obstinate economic\t issue\t which\twas defying\nsolution, the impugned legislation providing for issue of\nSpecial Bearer\tBonds was enacted with a view to mopping up\nblack money and bringing it out in the open, so that,\ninstead\t of remaining\t concealed such money\t may become\navailable for augmenting the resources of the State\t and\nbeing utilised\tfor productive\tpurposes so as\t to promote\neffective social and economic planning. This was the object\nfor which the Act was enacted\t and it is with reference to\nthis object that it\tis to\tbe determined\twhether\t any\nimpermissible differentiation is made in the Act.\n 4 (v). The whole\tobject of the impugned\t Act is to\ninduce those having black money to convert it into white\nmoney by making it available to the State for productive\npurposes, without granting in return any immunity in respect\nof such\t black money if it could be detected through\t the\nordinary processes of taxation\t laws without\ttaking\tinto\naccount the fact of purchase of Special Bearer Bonds.\n 4 (vi). The acquisition or possession of Special Bearer\nBonds would not therefore afford any protection to a public\nservant against\t a charge of corruption or to a person\ncommitting any\t offence against property. Equally\tthis\nimmunity would\tnot be\tavailable where what is sought to be\nenforced is a civil liability other than liability by way of\ntax. The immunity granted in respect of subscription to or\nacquisition of Special Bearer Bonds is a severely restricted\nimmunity and this is the bare minimum immunity necessary in\norder to induce holders of black money to bring it out in\nthe open and invest it in Special Bearer Bonds\n 5. Section\t 4(c) is calculated to act as a strong\ndeterrent against negotiability of Special Bearer Bonds for\ndisclosed or 'white' money. The immunily granted under the\nprovisions of the Act, limited as it is, extends only to the\nperson who is for the time being the\t holder\t of Special\nBearer Bonds and the person who has transferred the Special\nBearer Bonds for black money has no immunity at all and all\nthe provisions\tof tax\tlaws are available against him for\ndetermining his\t true income or wealth and therefore no one\nwho has\t purchased Special Bearer Bonds with\t a view to\nearning security against discovery of unaccounted money in\nhis hands would ordinarily barter away that\tsecurity by\nagain receiving\t black money for the Special Bearer Bonds.\nEven if special bearer bonds are transferred against receipt\nof black money it will not have the\teffect of legalising\nmore black money into\twhite because the black money of the\nseller which had become white on his\t subscribing to or\nacquiring special bearer bonds would again be converted into\nblack money and the black money paid by the\n953\npurchaser by way of consideration would become white by\nreason of being converted into special bearer bonds.\n 6. No assessee would ever admit that\the incurred\nexpenditure out of black money received as consideration for\nsale of\t special bearer bonds because it would be impossible\nfor him\t to establish\treceipt\t of black money from\t the\npurchaser and if he is unable\t to do so, the amount of the\nexpenditure, would by reason of section 69C of the Income-\ntax Act, 1961 be deemed to be his concealed income liable to\ntax. Even if it is assumed that in some rare and exceptional\ncases the assessee may\t be able to establish\tthat he sold\nspecial bearer\tbonds against receipt of black money\t the\npurchaser would\t straight away run into difficulties because\nthe evidence furnished by the assessee would in such a case\nclearly establish that the purchaser had black money and he\npaid it to the assessee by way of consideration and he would\nin that\t event be rendered liable to tax and\t penalty in\nrespect of such black money. C\n 7. Howsoever special bearer bonds may be transferred\nand for\t whatever consideration\t only a\t limited amount of\nblack money namely The amount originally subscribed for the\nspecial bearer\tbonds or at the most the amount representing\nthe face value of the special bearer bonds would be\nlegalised into\t white\t money\t and the supposedly\tfree\nnegotiability of special bearer bonds would not have\t the\neffect\tof legalising\t more black money into while or\nencouraging further generation of black money.\n 8. When experience shows that the legislation as framed\nhas proved inadequate to achieve its purpose of mitigating\nan evil\t or there are cracks and loopholes in it which are\nbeing taken advantage of by the\tresourcefulness\t and\ningenuity of those minded to benefit themselves at the cost\nof the\tState or the others, the legislature\tcan and most\ncertainly would\t intervene and\tchange The law. But the law\ncannot be condemned as\t invalid on the ground That after a\nperiod of ten years it may lend itself to some possible\nabuse.\n 9. It is obvious\tthat the Act makes a classification\nbetween holders of black money and the rest and provides for\nissue of special bearer bonds\t with a view\tto inducing\npersons belonging to the former class to invest their\nunaccounted money in purchase\tof special bearer bonds, so\nthat such money which\tis today Lying idle\toutside\t the\nregular economy\t of the country is canalised into productive\npurposes. The object of the Act being to unearth black money\nfor being utilised for\t productive purposes with a view to\neffective social and\t economic planning,\t there\t has\nnecessarily to\t be a\t classification between persons\npossessing black money and others and\t such classification\ncannot be regarded as arbitrary or irrational.\n 10. The validity of a classification has to be judged\nwith reference\tto The object of the legislation and if that\nis done, there can be no doubt that the classification made\nby the Act is rational and intelligible and the operation of\nthe provisions\tof the Act is rightly confined to persons in\npossession of black money.\n 11. The\t legislature\thad obviously\t only\t two\nalternatives: either to allow the black money to remain idle\nand unproductive or to induce those in possession\n954\nof it to bring\t it out\t in the\t open for being utilised for\nproductive purposes. The first\t alternative would have left\nno choice to the government\tbut to\t resort\t to deficit\nfinancing or lo impose a heavy dose of taxation. The former\nwould have resulted in inflationary pressures affecting the\nvulnerable sections of the society while the latter would\nhave increased\tthe burden on\tthe honest tax payer\t and\nperhaps\t led to greater tax evasion. The\t legislature\ntherefore decided to adopt the second alternative of coaxing\npersons in possession of black money to disclose it and make\nit available to the government for augmenting its resources\nfor productive\tpurposes and with that\t end in view enacted\nthe Act providing for issue of special bearer bonds.\n 12. It would be outside the province of the court to\nconsider if any particular\t immunity or exemption is\nnecessary or not for the purpose of inducing disclosure of\nblack money. That would depend upon\tdiverse\t Fiscal\t and\neconomic considerations\t based on practical necessity\t and\nadministrative expediency and would also involve a certain\namount of experimentation on which the Court would be least\nfitted to pronounce. The Court would not have the necessary\ncompetence and expertise to adjudicate upon such an economic\nissue. The Court cannot possibly assess or evaluate\twhat\nwould be the impact of a particular immunity or exemption\nand whether it would serve the purpose in view or not. There\nare so\t many\timponderables that would enter into\t the\ndetermination that it would be wise for the\tcourt not to\nhazard an opinion where even economists may differ.\n 13. The court must while examining the constitutional\nvalidity of a legislation \"be resilient, not rigid, forward\nlooking, not static, liberal, not verbal\" and the court must\nalways bear in mind the constitutional proposition \"that\ncourts do not substitute their social and economic beliefs\nfor the judgment of legislative bodies\".\n 14. The court must defer to legislative judgment in\nmatters relating to social and economic policies and must\nnot interfere,\tunless the exercise of legislative judgment\nappears to be palpably arbitrary.\n[ Per A.C. Gupta, J. dissenting ]\n 1. The Special Bearer Bonds (Immunities and Exemptions)\nordinance, 1981 and the Special Bearer Bonds (Immunities and\nExemptions) Act, 1981 are invalid on\tthe ground that they\ninfringe Article 14 of the Constitution. [1002 A]\n 2 The Act puts a premium on dishonesty without even a\njustification of necessity-that the situation in the country\nleft no option. [1000 H-1001 A]\n 3. The basis on which the holders of Special Bearer\nBonds have been classified to give certain advantage to one\nclass and deny them to the other, has no rational nexus with\nthe object of the Act. [996 A]\n 4 (i). Article 14 forbids class legislation but permits\nclassification-Permissible classification, it is\twell\nestablished, must satisfy two\tconditions viz.\t (i) li that\nThe classification must be founded\ton an\tintelligible\ndifferential which distinguishes those that\tare grouped\ntogether from others and: (2) that the\n955\ndifferential must have a rational relation to the object\nsought to be achieved by A the Act. [993 G-994 A]\n 4\t(ii).\tThe differential that is the basis of\nclassification and the\t object\t of the Act are distinct\nthings, it is not enough that the differential should have a\nnexus with the object,\t but it should also be intelligible.\nThe presence of some characteristics in one class which are\nnot found in another is the difference between the\t two\nclasses, but a further requirement is that this differential\nmust be\t intelligible. If the basis of classification is on\nthe face of it\t arbitrary in the sense that it is palpably\nunreasonable it\t is not\t possible to call the\tdifferential\nintelligible. [997 B-C]\n The State\tof West\t Bengal v. Anwar Ali Sarkar, [1952]\nSCR 284; E. P.\t Royappa v. State of Tamil Nadu and another,\n[1974] 2 SCR 348 and Maneka Gandhi v. Union of India, [1978]\n2 SCR 621, referred to.\n 5. The preamble of the Act takes note of the fact that\nblack money has become a serious threat to national economy\nand says that to make economic and social planning effective\nit is necessary to canalise this black money for productive\npurposes. The Act however does not define black money. [990\nF]\n 6. The immunities provided by the impugned Act\t are\nclearly for the benefit of those who have acquired the Bonds\nwith black money. Clauses (a), (b) and (c) of section 3(1)\nprovide\t for these immunities \"notwithstanding anything\ncontained in any other\t law for the time being in force\".\nNone of\t These immunities is required\tby a person who has\npaid 'white' money, that is, money that has been accounted\nfor to\tacquire the Bonds. To a person who has disclosed the\nsource of acquisition of the Bonds, These immunities are of\nno use.\t Section 4 makes it\tclear that the immunities\nconferred by the Act are of use only\t to those who\thave\nacquired the Bonds with unaccounted money. [994 B-D]\n 7. The impugned Act denies to those who have acquired\nthe bonds not with black money any relief under the Income-\ntax Act\t or the\t Wealth-tax Act\t or any benefit in any other\nway claimed on the ground that they are holders of Special\nBearer Bonds, and the relief and the benefit denied to them\nhave been made available to those who have acquired\t the\nBonds with black money by ignoring the source of acquisition\nin their case. [995 C-D]\n 8. The Act distinguishes between two classes of holders\nof Special Bearer Bonds; tax evaders and honest tax-payers.\nThe object is\t to canalise black money for productive\npurposes to make economic and social planning effective. If\nthe exemptions\tand immunities\tconferred by the Act\t are\nsufficiently attractive\t to induce tax-evader\t to acquire\nSpecial Bearer Bonds, they will remain as attractive even if\nall these benefits were granted to those who will pay white\nmoney for the Bonds. Denial of these benefits to those who\nhave acquired the Bonds with money which has been accounted\nfor does not in any way further the object of canalisation\nof black money for productive purposes. The discrimination\nin favour of black money therefore seems to be obvious. [995\nE-F]\n 9. Terms like 'reasonable', 'just' or 'fair' derive\ntheir significance from the existing\t social\t conditions.\nExpressions like a 'reasonable and fair price' or 'fair\n956\nand equitable\t restitution' means nothing,\t except\t in\nconjunction with the social conditions of the time.\tThat\naction\t is called 'reasonable' which an informed,\nintelligent, just minded civilised Man could rationally\nfavour. [998 F-G]\n Quaker City Cab Co. v. Commonwealth of Pennsylvania 72\nLaw. Ed. 927, referred to.\n 10. What is arbitrary and offends Article 14 cannot be\ncalled intelligible. It is clear from the provisions of the\nAct that the advantage which the tax evaders derive from the\nimmunities provided by the Act are not available to those\nwho have acquired the\tBonds with 'white money' The\t Act\npromises anonymity and security for tax-evaders. No question\ncan be\tasked as to the nature and source of acquisition or\npossession of the Bonds. The Bonds can be transferred freely\nand passing of the Bonds from\t hand to hand is likely to\noperate as parallel currency and be used for\t any kind of\ntransaction. [999 F-G]\n 11. The Act discloses a\tscheme\twhich enables\ttax-\nevaders to convert black money into white after 10 years and\nin the\t meantime use\t the Bonds as parallel currency\ninitiating a chain of\tblack money investments. There is no\nprovision in the Act requiring that on maturity of the Bonds\ntheir holders would have to disclose their identity, which\nmeans that if after 10 years black money which had taken the\nshape of Special Bearer Bonds goes underground again\t and\nretain its colour, there is nothing to prevent it. There is\nnothing in the scheme\tto halt\t generation of\tblack money\nwhich threatens the\tnational economy. Some people by\nsuccessful evasion manoeuvres are able to throw the burden\nof taxation off their\town shoulders which means a greater\nburden on the honest tax payers and this leads to economic\nimbalance. [1000 B-D]\n 12. Any law that\trewards law breakers and tax dodgers\nis bound to invite criticism. No law can be struck down only\non the ground that it is unethical. However, there cannot be\nand there never has been a complete separation of law and\nmorality. Historical and ideological differences concern the\nextent to which the norms of the social order are absorbed\ninto the legal order. The principle of reasonableness is an\nessential element of equality. The concept of reasonableness\ndoes not exclude notions of morality and ethics. It cannot\nbe disputed that in the circumstances of a\t given\tcase\nconsiderations of morality and ethics may have a bearing on\nthe reasonableness of the law in question. [1001 B-D]\n\n\n\nJUDGMENT:\n ORlGlNAL JURISDICTION: Writ Petition Nos. 355,\t360,\n863, 994 & 3624 of 1981.\n (Under article 32 of the Constitution of India)\n Petitioner in person in WP. No. 350/81\n R.K Garg, A.R. Gupta, Brij Bhushan, Miss Renu Gupta and\nS.K Jain for the Petitioner in W.P. 360/81.\n957\n Soli J. Sorabjee, Harish\tSalve, S.K Dholakia &\tMrs.\nRanjana Anand for the Petitioners in W.P. 863/81.\n Soli J.\tSorabjee, Harish Salve, P.H.\t Parekh, R.\nKaranjawala. K.K. Lahiri & R. Swamy for the Petitioner in\nW.P. 994/81.\n R.S. Sodhi for the Petitioner in WP 3624/81.\n L.N. Sinha, Attorney General in WPs. 355 & 360/81.\n K Parasaran, Sol. General in WPs. 863 & 994/81.\n K.\t S. Gurumoorthi & Miss A.\tSubhashini for\t the\nRespondents.\n U.N. Banerjee for the intervener-Mr. K.B. Kastia\n V.J. Francis for\t the intervener-All India L.I.C.,\nEmployees Federation.\n The following Judgments were delivered\n BHAGWATI,\tJ. These writ\t petitions raise a common\nquestion of law relating to the constitutional validity of\nthe Special Bearer Bonds (Immunities and\t Exemptions)\nordinance, 1981\t (hereinafter referred\tto as the ordinance)\nand the Special Bearer Bonds (Immunities and Exemptions) Act\n1981 (hereinafter referred to\tas the\tAct). The principal\nground on which the constitutional validity of the ordinance\nand the\t Act is challenged is that they are violative of the\nequality clause contained in Article 14 of the Constitution.\nThere is also one other ground on which the ordinance is\nassailed as constitutionally invalid and it is that\t the\nPresident had no power under Article 123 of the Constitution\nto issue the ordinance and the ordinance is therefore ultra\nvires and void. We shall first deal with the latter ground\nsince it can be disposed of briefly, but before we do so, it\nwould be convenient to\t refer to the relevant provisions of\nthe Act. It is not necessary to make any specific reference\nto the\tprovisions of the ordinance since the provisions of\nthe Act\t are substantially a reproduction of the provisions\nof the ordinance.\n On 12th January 1981, both Houses of Parliament\t not\nbeing in session, the\tPresident issued the ordinance in\nexercise of the power\tconferred upon him under Article 123\nof the Constitution. The ordinance was later replaced by the\nAct which received the assent of the President on 27th March\n1981, but which was brought\n958\ninto force with retrospective effect from 12th January 1981\nbeing the date of promulgation of the ordinance. The Act is\na brief\t piece of legislation with only a few sections but\nthe ascertainment of their true meaning and legal effect has\ngiven rise to considerable controversy between the parties\nand hence it is necessary to examine the provisions of the\nAct in\tsome detail. The long title of the Act describes it\nas an Act \"to\tprovide for certain immunities to holders of\nSpecial Bearer\tBonds 1991 and for certain exemptions from\ndirect taxes in relation to such Bonds and\tfor matters\nconnected therewith\" and the provisions enacted in the Act\nare proceeded by a Preamble which indicates the object and\npurpose of the Act in the following words:\n\t Whereas for effective economic and social planning\n it is necessary to canalise for\tproductive purposes\n black money which has become a serious threat to the\n national economy;\n\t And whereas with a view to such canalisation the\n Central Government\t has decided to issue at par certain\n bearer bonds to be known as the Special Bearer Bonds,\n 1991, of the face\t value of ten thousand\t rupees\t and\n redemption value,\tafter ten years, of twelve thousand\n rupees;\n\t And whereas it is expedient to provide for certain\n immunities and exemptions to render it possible\t for\n persons in possession of black money to invest the same\n in the said Bonds;\nSections 3 and 4 are extremely material since on their true\ninterpretation depends\tto a large extent the determination\nof the\tquestion relating to the constitutional validity of\nthe Act and they may be reproduced as follows:\n 3. (1) Notwithstanding anything contained in any other\nlaw for the time being in force:-\n (a) no person who has subscribed to or has otherwise\n\t acquired Special Bearer Bonds shall be required to\n\t disclose, for\t any purpose whatsoever, the nature\n\t and source of acquisition of such Bonds;\n (b) no inquiry or investigation\tshall be commenced\n\t against any person under any such\tlaw on\t the\n\t ground that\n959\n such person has subscribed to or has otherwise acquired\n Special Bearer Bonds; and\n (c) the fact that a person has\tsubscribed to or has\n\t other wise acquired Special Bearer Bonds shall not\n\t be taken into account and shall be inadmissible as\n\t evidence in\t any proceedings relating to\t any\n\t offence or the imposition of any penalty under any\n\t such law.\n (2) Nothing in sub-section (1) shall apply in relation\nto prosecution\tfor any\t offence punishable under Chapter IX\nor Chapter XVII of the Indian Penal Code, the Prevention of\nCorruption Act,\t 1947 or any offence which is punishable\nunder any other law and which\t is similar to\t an offence\npunishable under either of those Chapters or under that Act\nor for the purpose of enforcement of any civil liability.\nExplanation : For the purposes of this sub-section \"civil\n\t liability\" does\tnot include liability by way\n\t of tax under any law for the time being in\n\t force.\n 4.\t Without prejudice to the\tgenerality of\t the\nprovisions of section 3, the subscription to, or acquisition\nof, Special Bearer Bonds by any person shall not be taken\ninto account for the purpose of any proceedings under the\nIncome-tax Act, 1961 (hereinafter referred to as the Income-\ntax Act), the Wealth-tax Act 1957 (hereinafter referred to\nas the\t Wealth-tax Act), or the\tGift-tax Act,\t1958\n(hereinafter referred to as the Gift-tax Act) and, in\nparticular, no\t person who has subscribed\tto, or\t has\notherwise acquired, the said Bonds shall be entitled-\n (a) to claim any set-off or relief in any assessment,\n\t reassessment appeal, reference or other proceeding\n\t under\t the Income-tax Act\t or t\treopen\tany\n\t assessment or\t reassessment made under that Act on\n\t the ground that he\thas subscribed\t to or\t has\n\t otherwise acquired the said Bonds;\n (b) to claim, in relation to any period before the\n\t date of maturity of the said Bonds, that any asset\n\t which is includible in his net wealth for\t any\n\t assessment year under the Wealth-tax Act has been\n\t converted into the said Bonds: or\n960\n (c) to claim, in relation to any period before\t the\n\t date of maturity of the said Bonds, that any asset\n\t held by him or any sum credited in his books of\n\t account or other wise held by him represents the\n\t consideration received by him for the transfer of\n\t the said Bonds.\nWe shall analyse the provisions of these two sections when\nwe deal with the arguments advanced on behalf of the parties\nand that will largely\tdecide the fate of the challenge\nagainst the constitutional validity of the Act, but in the\nmeanwhile we\tmay proceed to summarise the remaining\nprovisions of the Act.\t Section S amends the Income-tax Act\n1961 by\t providing that the definition of \"capital asset\" in\nsection 2 clause (14) shall not include that Special Bearer\nBonds issued under the\t Act so\t that any profit arising on\nsale of\t the Special Bearer Bonds would not be liable to\ncapital gains tax and it also excludes from the computation\nof the\ttotal income of the assessee, premium on redemption\nof the\tSpecial Bearer Bonds by introducing a new sub-clause\nin section 10 clause (15). Section 5 sub-section (I) of the\nWealth Tax Act 1957 is also amended by section 6 so as to\nexclude the Special Bearer Bonds from the net wealth of the\nassessee liable\t to wealth tax. Section 7,\tby amending\nsection S sub-section (I) of the Gift-tax Act 1958 exempts\ngifts of Special Bearer Bonds from the incidence of gift\ntax. Section 8 confers\t powers on the Central Government to\nmake order removing any difficulty which may arise in giving\neffect to the provisions of the Act and section 9\tsub-\nsection (1) repeals the ordinance, but since the Act is\nbrought into force with effect from the date of promulgation\nof the ordinance, sub-section (2) of section 9 provides that\nnotwithstanding the repeal of\tthe ordinance, anything done\nor any\taction taken under the ordinance shall be deemed to\nhave been done or taken under the corresponding provisions\nof the Act.\n Having set out the provision of the Act-and be it noted\nagain that the provisions\t of the ordinance\twere\nsubstantially in the same terms as the provisions of the\nAct-we may now proceed to consider the challenge against the\nconstitutional validity\t of the ordinance on the ground that\nthe President had no power to\t issue the ordinance under\nArticle 123 of the Constitution. There were two limbs of the\nargument under\tthis head of challenge; one was that since\nthe ordinance had the\teffect of amending the tax laws, it\nwas outside the competence of the President under Article\n123 and\t the other was\t that the subject matter of\t the\nordinance was in the nature\n961\nof a Money Bill which could be introduced only in the House\nof the\tA People and passed according to the procedure\nprovided in Articles 109 and 110 and\t the President\t had\ntherefore no power under Article 123 to issue the Ordinance\nby-passing the\tspecial procedure provided in Art. 109 and 1\n10 for\tthe passing of a Money Bill. There is, as we shall\npresently point\t out, no force in either of these\t two\ncontentions, but we may point out straightaway that\tboth\nthese contentions are 1 academic, since the Act has been\nbrought into force with effect from the date of promulgation\nof the\tOrdinance and sub-section (2) of section 9 provides\nthat anything done or\tany action taken under the Ordinance\nshall be deemed to have been\t done or taken under\t the\ncorresponding provisions of the Act and the\tvalidity of\nanything done or any action taken under the\tOrdinance is\ntherefore required to be judged not with reference to the\nOrdinance under\t which\tit was\t done or taken, but\twith\nreference to\tthe Act which was,\t by reason of\t its\nretrospective enactment, in force right from\tthe date of\npromulgation of\t the Ordinance\tand under which the thing or\naction was deemed to have been done or taken. It is in these\ncircumstances\twholly\t unnecessary\tto consider\t the\nconstitutional validity\t of the\t Ordinance, because even if\nthe Ordinance be unconstitutional, the validity of anything\ndone or any action taken under the Ordinance, could still be\njustified with\treference to the provisions of the Act. This\nwould seem to be clear on first principle as a matter of\npure construction and no authority is needed in support of\nit, but\t if any were needed, it may be found in the decision\nof this\t Court\tin Gujarat Pottery Works v.\t B.P. Sood,\nController of Mining Leases for India\t and Ors. There the\nquestion was whether the Mining Leases (Modification of\nTerms) Rules, 1956 (hereinafter referred to as the\t1956\nRules)\tmade under Mines and Minerals (Regulation\t and\nDevelopment) Act, 1948 (referred to shortly as 1948\tAct)\nwere void as being inconsistent with the provisions of the\n1948 Act and if they were void, they\t could be said to be\ncontinued by reason of section 29 of the Mines and Minerals\n(Regulation and\t Development) Act, 1957 (hereinafter called\nthe 1957 Act). This Court sitting in a Constitution Bench\nheld that the 1956 Rules were\t not inconsistent with\t the\nprovisions of the 1948\t Act and were therefore valid, but\nproceeded to observe that even if the 1956 rules were void\nas being inconsistent with the provisions of the 1949 Act,\nthey must by reason of section 29 of the 1957 Act be deemed\nto have been made under that Act and\n962\ntheir validity\tand continuity\tmust therefore be determined\nwith reference to the provisions of the 1957 Act and not the\nprovisions of\t the 1948 Act and since there was no\ninconsistency between the 1956\t Rules and the provisions of\nthe ]957 Act, the 1956 Rules could not be faulted as being\noutside the power of the Central Government. Raghubar Dayal,\nJ. speaking on behalf\tof the\tCourt articulated the reason\nfor taking this view in the following words:\n\t \"Even if the rules were not\t consistent with the\n provisions of the 1948 Act and were therefore void, we\n do not agree that\t they could not have continued after\n the enforcement of the 1957 Act. Section 29 reads:\n\t 'All rules made or purporting to have been\n\t made under the Mines and Minerals (Regulation and\n\t Development) Act, 1948, shall, in so far as they\n\t relate to matters for which provision is made in\n\t this Act and are not inconsistent therewith, be\n\t deemed to have been made under this Act as if this\n\t Act had been in force on the date on which such\n\t rules were made and shall continue in force unless\n\t and until they are superseded by any rules made\n\t under this Act.'\n The effect of this section is that the rules which were\nmade or\t purported to have been made under the 1948 Act in\nrespect of matters for\t which rules could be made under the\n1957 Act would be deemed to have been made under the 1957\nAct as\tif that\t Act had been in force on the date on which\nsuch rules were made and would continue in force. The Act of\n1957 in\t a way\tis deemed to have been in force when\t the\nmodification rules were framed in 1956. The 1956 rules would\nbe deemed to be framed under\tthe 1957 Act and therefore\ntheir validity\tand continuity\tdepends on the provisions of\nthe 1957 Act and not of the 1948 Act.\"\n In this connection we may refer to the case reported as\nAbdul Majid v. P.R. Nayak, A.I.R. 1951 Bom. 440. In\tthat\ncase section 58 of Act XXXI of 1950 repealed Ordinance No.\nXXVII of 1949 and provided as follows:\n\t 'The repeal by this\tAct by the Administration of\n Evacuee Property Ordinance 1949 (XXVII of 1949) shall\n not affect\t the previous operation thereof, and subject\n thereto, anything\tdone or\t any action taken in\t the\n exercise of any power conferred by or under that\n963\n Ordinance shall be deemed to have been done or taken in\n the exercise of the powers conferred by or under this\n Act, as if this Act were in force on the day on which\n such thing\t was done or action was taken.' Section 58\n was construed thus:\n\t 'The language\t used in s. 58 is both striking and\n significant. It does not merely provide that the orders\n passed under the Ordinance shall be deemed to be order\n passed under the Act, but it provides that the orders\n passed under the Ordinance shall be deemed to be orders\n under this\t Act as if this Act were in force on the day\n on which certain things were done or action taken.\n Therefore the object of this section is, as it were, to\n antedate this Act so as to bring it into force on the\n day on which a particular order\twas passed which is\n being challenged.\tIn other words, the validity of an\n order is to be judged not with reference to\t the\n Ordinance under which it was passed, but with reference\n to the Act subsequently passed by Parliament.'\n The rules\thave not been challenged to be ultra vires\nthe 1957 Act in the instant case.\"\nThe same process of reasoning which appealed to this Court\nin upholding the validity of the 1956 Rules\t must apply\nequally in the present\t case and the validity\t of anything\ndone or\t any action taken under the Ordinance must be judged\nwith reference\tto the\tprovisions of the Act and not of the\nOrdinance. It would therefore be academic for us to consider\nwhether the Ordinance was within the Ordinance-making power\nof the\tPresident under\t Article 123 and ordinarily we would\nhave resisted the temptation of pronouncing on this issue\nbecause it is a self-restraining rule of prudence adopted by\nthis Court that \"the court will not formulate a rule of\nconstitutional law broader than is required by the precise\nfacts to which it is to be applied.\" But since considerable\nargument was advanced before us in regard to this issue we\ndo not\tthink it would be right on our part\tto refuse to\nexpress our view upon it.\n The Ordinance was issued by the President under Article\n123 which is the solitary Article in chapter\t III headed\n\"Legislative Powers of the President.\" This Article provides\ninter-alia as follows:\n964\n123 (1)\t If at any time, except when both Houses of\n\t Parliament are in\tsession, the President is\n\t satisfied that circumstances exist which render it\n\t necessary for him to take immediate action, he may\n\t promulgate such Ordinances as the circumstances\n\t appear to him to require.\n (2)\t An Ordinance\tpromulgated under this article shall\n\t have the same force\tand effect as\t an Act of\n\t Parliament, but every such Ordinance:-\n\t (a) shall be laid\t before\t both\t Houses\t of\n\t Parliament and shall cease to operate at the\n\t expiration of six weeks\t from the reassembly\n\t of Parliament, or, if before the expiration\n\t of that\tperiod resolutions disapproving it\n\t are passed by both Houses, upon the passing\n\t of the second of those resolutions: and\n\t (b) may be\t withdrawn at\t any time by\t the\n\t President.\n (3)\t If and so far as an Ordinance under this article\n\t makes any provision which Parliament would\t not\n\t under this Constitution be competent to enact, it\n\t shall be void.\nIt will be noticed that under this Article legislature power\nis conferred on the President exercisable when both Houses\nof Parliament are not\tin session. It is possible that when\nneither House of Parliament is in session, a situation may\nbe arise which needs to be dealt with immediately and for\nwhich there is no adequate provision in the existing law and\nemergent legislation\tmay be\t necessary to\t enable\t the\nexecutive to cope with the situation. What is to be done and\nhow is the problem to be solved in such a case ? Both Houses\nof Parliament\tbeing in recess, no\tlegislation can be\nimmediately undertaken\tand if\tthe legislation is postponed\nuntil the House of Parliament meet damage may be caused to\npublic weal. Article 123 therefore confers powers on\t the\nPresident to promulgate a law by issuing an\tOrdinance to\nenable the executive to deal with the emergent situation\nwhich might well include a situation created by a law being\ndeclared void by a Court of law. \"Grave public inconvenience\nwould be caused\", points out Mr. Seervai in his famous book\non Constitutional Law, if on a statute like the Sales-tax\nAct being declared void, \"no machinery existed whereby a\nvalid law could\n965\nbe promulgated to take the place of the law declared void '.\nThe President is thus\tgiven legislative power to issue an\nOrdinance and since under our constitutional scheme as\nauthoritatively expounded by this Court in Shamsher and Anr.\nv. State of Punjab, the President cannot act except in\naccordance with\t the aid and\tadvice\tof his\t Council of\nMinisters, it is really the executive which is invested with\nthis legislative power. Now at first blush it might appear\nrather unusual and that was the main thrust of the criticism\nof Mr.\tR.K Garg on this point that the power to make laws\nshould have been entrusted by the founding fathers of the\nConstitution to\t the executive,\t because according to\t the\ntraditional outfit of a democratic political structure, the\nlegislative power must belong\texclusively to\tthe ejected\nrepresentatives\t of the people aud\tvesting\t it in\t the\nexecutive, though responsible to the legislature, would be\nundemocratic, as it might enable the executive to abuse this\npower by securing the\tpassage of an ordinary bill without\nrisking a debate in the legislature\tBut if\t we closely\nanalyse this provision and consider it in all its aspects,\nit does\t not appear to be so starting, though we may point\nout even if it\t were, the Court would have to accept it as\nthe expression\tof the\t collective will of the founding\nfathers. It may be noted, and this was pointed out forcibly\nby Dr.\tAmbedkar while replying to the criticism against the\nintroduction of Article 123 in the Constituent Assembly-that\nthe legislative\t power conferred on the President under this\nArticle is not a parallel power of legislation. It is a\npower exercisable only when both Houses of Parliament are\nnot in\tsession and it has been conferred ex-necessitate in\norder to enable the executive to meet an emergent situation.\nMoreover, the law made\t by the President by\t issuing an\nOrdinance is of strictly limited duration. It ceases to\noperate at the expiration of six weeks from the reassembly\nof Parliament or if before the expiration of this period,\nresolutions disapproving it are passed by both Houses, upon\nthe passing of the second of\tthose resolutions. This also\naffords\t the clearest\tindication that the President is\ninvested with this legislative power only in order to enable\nthe executive to tide\tover an emergent situation which may\narise whilst the Houses of Parliament\t are not in session.\nFurther\t more,\t this power to promulgate an Ordinance\nconferred on the President is co-extensive with the power of\nParliament to make laws and the President cannot issue an\nOrdinance which\t Parliament cannot enact into a law. It will\ntherefore be seen that legislative power has been conferred\non\n966\nthe executive by the constitution makers for a necessary\npurpose and it is hedged in by limitations and conditions.\nThe conferment\tof such\t power may appear to be undemocratic\nbut it\t is not so,\tbecause\t the executive\t is clearly\nanswerable to the legislature\tand if the President, on the\naid and advice of the executive, promulgates an Ordinance in\nmisuse or abuse of this power, the legislature cannot only\npass a\tresolution disapproving\t the Ordinance\tbut can also\npass a\tvote of\t no confidence in the executive. There is in\nthe theory of constitutional law complete control of\t the\nlegislature over the executive, because if the executive\nmisbehaves or forfeits the confidence of the legislature, it\ncan be\tthrown\tout by\t the legislature. Of\tcourse\tthis\nsafeguard against misuse or abuse of power by the executive\nwould dwindle in efficacy and value according as if\t the\nlegislative control over the executive diminishes and the\nexecutive begins to\t dominate the\t legislature.\t But\nnonetheless it\tis a safeguard which protects the vesting of\nthe legislative\t power in the President from the charge of\nbeing an undemocratic provision. We might profitably quote\nhere the words of one of us (Chandrachud, J, as he then was)\nin the State of Rajasthan v. Union of India where, repelling\nthe contention\tof the\tpetitioner that\t the interpretation\nwhich the Union of India was inviting the Court to place on\nArticle 356 would impair the future of democracy by enabling\nthe Central Government to supersede a\t duly elected State\nGovernment and\tto dissolve its legislature without prior\napproval of Parliament, the learned Judge said-\n\t \".... there may be situations in which it is\n imperative to act expeditiously and recourse to\t the\n parliamentary process may, by reason of the delay\n involved, impair rather than strengthen the functioning\n of democracy. The constitution has therefore provided\n safety-valves to meet extraordinary situations.\tThey\n have an imperious garb and a repressive content\t but\n they are designed to save, not destroy democracy. The\n fault, if\t any,\tis not in the meeting of\t the\n Constitution but in the working of it.\"\n These words provide a complete answer to the criticism\nof Mr. R.K. Garg.\n Now once\t it is\t accepted that\t the President\t has\nlegislative power under Article 123 to promulgate an\nOrdinance and this legis-\n967\nlative\tpower\tis co-extensive with\t the power of\t the\nParliament to make laws, it is difficult to\tsee how\t any\nlimitation can\tbe read\t into this legislative power of the\nPresident so as to make it ineffective to alter or amend tax\nlaws. If Parliament can by enacting legislation alter or\namend tax laws, equally can the President do so by issuing\nan Ordinance under Article 123. There\t have been, in fact,\nnumerous instances where the President has issued an\nOrdinance replacing with retrospective\t effect\t a tax\t law\ndeclared void by the High Court or this Court. Even offences\nhave been created by Ordinance issued by the President under\nArticle 123 and such offences committed during the life of\nthe Ordinance have been held to be punishable despite the\nexpiry of the Ordinance. Vide: State\tof Punjab v. Mohar\nSingh. lt may also be noted that Clause (2) of Article 123\nprovides in terms clear and explicit\t that an Ordinance\npromulgated under that Article shall have the same force and\neffect as an Act of Parliament. That there is no qualitative\ndifference between an Ordinance issued by the President and\nan Act passed by Parliament is also emphasized by clause (2)\nof Article 367 which provides that any reference in\t the\nConstitution to\t Acts or laws made by Parliament shall be\nconstrued as including a reference to an Ordinance made by\nthe President.\tWe do not therefore think there is\t any\nsubstance in the contention of the petitioner that\t the\nPresident has no power under\t Article 123 to issue an\nOrdinance amending or altering\t the tax laws and that the\nOrdinance was therefore outside the legislative power of the\nPresident under that Article.\n That takes\t us to the principal question arising in the\nwrit petitions namely, whether the provisions of the Act are\nviolative of Article 14 of the Constitution. The true scope\nand ambit of Article 14 has been the\t subject matter of\ndiscussion in numerous decisions of this Court and\t the\npropositions applicable\t to cases arising under that Article\nhave been repeated so\tmany times during the\tlast thirty\nyears that they now sound platitudinous. The latest and most\ncomplete exposition of the propositions relating to\t the\napplicability of Article 14 as emerging from \"the avalanche\nof cases which have\t flooded this\t Court\" since\t the\ncommencement of\t the Constitution is to be found in\t the\nJudgment of one of us (Chandrachud, J. as he then was) in\nRe: Special Courts Bill. It not only contains a lucid\nstatement of the propositions arising under Article 14, but\nbeing a decision given by a Bench of seven Judges of this\n968\nCourt, it is binding upon us. That decision sets out several\npropositions delineating the true scope and ambit of Article\n14 but\tnot all\t of them are relevant\tfor our\t purpose and\nhence we shall refer only to\tthose which have a direct\nbearing on the issue before us.\n They clearly recognise that classification can be made\nfor the purpose of legislation but lay down that:\n 1.\t The classification must not be arbitrary but must\n\t be rational,\tthat is\t to say, it must not only be\n\t based on some qualities or characteristics which\n\t are to be found in all the persons grouped\n\t together and\tnot in\tothers who are left out but\n\t those qualities or characteristics must have a\n\t reasonable relation\t to the object of\t the\n\t legislation.\tIn order to pass the test,\t two\n\t conditions must be fulfilled, namely, (1) that the\n\t classification must be founded on an intelligible\n\t differentia which distinguishes those that\t are\n\t grouped together from others and (2)\tthat\n\t differentia must have a rational relation to the\n\t object sought to be achieved by the Act.\n 2.\t The differentia which is\t the basis of\t the\n\t classification and the object of the Act\t are\n\t distinct things and what is\t necessary is\tthat\n\t there must be a nexus between them. In short,\n\t while Article\t 14 forbids class discrimination by\n\t conferring privileges or imposing liabilities upon\n\t persons arbitrarily selected out of a large number\n\t of other persons similarly situated in relation to\n\t the privileges sought to be conferred or\t the\n\t liabilities proposed\tto be imposed, it does not\n\t forbid classification for\t the\tpurpose\t of\n\t legislation, provided\t such classification is not\n\t arbitrary in the sense above mentioned.\nIt is clear that Article 14 does not forbid reasonable\nclassification of persons, objects and transactions by the\nlegislature for the purpose of attaining specific ends. What\nis necessary in order\tto pass the test of\t permissible\nclassification under Article 14 is that the classification\nmust not be \"arbitrary, artificial or evasive\" but must be\nbased on some real and substantial distinction bearing a\njust and reasonable relation to the object sought to be\nachieved by the legislature. The question to which we must\ntherefore address ourselves is\t whether the classification\nmade by the Act in the present case\n969\nsatisfies the\t aforesaid test or it is arbitrary\t and\nirrational and\thence A\t violative of the equal protection\nclause in Article 14.\n Now while\tconsidering the constitutional validity of a\nstatute said to be violative of Article 14, it is necessary\nto bear\t in mind certain well\testablished principles which\nhave been evolved by the courts as rules of guidance in\ndischarge of its constitutional function of judicial review.\nThe first rule is that there\tis always a presumption in\nfavour of the constitutionality of a statute and the burden\nis upon\t him who attacks it to show that there has been a\nclear transgression of the constitutional principles. This\nrule is\t based on the assumption, judicially recognised and\naccepted, that\tthe legislature\t understands and correctly\nappreciates the\t needs of its\town people, its laws\t are\ndirected to problems made manifest by\t experience and\t its\ndiscrimination\tare based on adequate grounds.\t The\npresumption of constitutionality is indeed so strong that in\norder to sustain it, the court may take into consideration\nmatters of common knowledge, matters of common report, the\nhistory of the times and may\tassume every state of facts\nwhich can be conceived existing at the time of legislation.\n Another rule of equal importance is that laws relating\nto economic activities should be viewed with greater\nlatitude than laws touching civil rights such as freedom of\nspeech, religion etc. It has been said by no less a person\nthan Holmes, J. that the legislature should be allowed some\nplay in\t the joints, because it has to deal with complex\nproblems which do not admit of solution through any doctrine\nor straight jacket formula and this is particularly true in\ncase of\t legislation dealing with economic matters, where,\nhaving regard to the nature of the problems required to be\ndealt with, greater play in the joints has to be allowed to\nthe legislature. The court should feel more inclined to give\njudicial deference to legislature judgement in the field of\neconomic regulation than in other areas where fundamental\nhuman rights are involved. Nowhere has this admonition been\nmore felicitously expressed than in Morey v.\t Dond where\nFrankfurter, J. said in his inimitable style:\n\t \"In the utilities, tax and\teconomic regulation\n cases, there are\t good reasons\tfor judicial self-\n restraint if not\tjudicial deference to\t legislative\n judgment. The legislature after all has the affirmative\n responsibility. The courts\n970\n have only\tthe power to destroy,\tnot to\treconstruct.\n When these\t are added to the complexity\tof economic\n regulation, the uncertainty, the\tliability to error,\n the bewildering conflict of the experts, and the number\n of times the judges have been overruled by events-self-\n limitation can be seen to be the path\tto judicial\n wisdom and institutional prestige and stability.\"\nThe court must always remember that \"legislation is directed\nto practical problems, that the economic mechanism is highly\nsensitive and complex, that many problems are singular and\ncontingent, that laws are not abstract propositions and do\nnot relate to abstract\t units and are not to be measured by\nabstract symmetry\" that exact\twisdom and nice adaption of\nremedy are not always possible and that \"judgment is largely\na prophecy based on meagre and uninterpreted experience\".\nEvery legislation particularly in economic\t matters is\nessentially empiric and it is based on experimentation or\nwhat one may call trial and error method and therefore it\ncannot provide for all possible situations or anticipate all\npossible abuses. There may be crudities and inequities in\ncomplicated experimental economic legislation\tbut on\tthat\naccount alone it cannot be struck down as invalid.\t The\ncourts cannot,\tas pointed out by the United States Supreme\nCourt in Secretary of\tAgriculture v. Central Reig Refining\nCompany, be converted into tribunals for relief from such\ncrudities and inequities. There may even be possibilities of\nabuse, but that too cannot of itself be a\t ground\t for\ninvalidating the legislation, because it is not possible for\nany legislature to anticipate as\tif by\tsome divine\nprescience, distortions\t and abuses of its legislation which\nmay be\tmade by\t those subject\tto its\t provisions and to\nprovide\t against such\t distortions and abuses. Indeed,\nhowsoever great\t may be the care bestowed on its framing, it\nis difficult to conceive of a\t legislation which is\t not\ncapable of being abused by perverted\thuman ingenuity. The\nCourt must therefore adjudge the constitutionality of such\nlegislation by\tthe generality\tof its provisions and not by\nits crudities or inequities or by the possibilities of abuse\nof any\tof its\tprovisions. If\tany crudities, inequities or\npossibilities of abuse come to light,\t the legislature can\nalways step in and enact suitable amendatory legislation.\nThat is\t the essence of pragmatic approach which must guide\nand inspire the legislature in dealing with complex economic\nissues.\n971\n With these\t prefatory observations, we may now proceed\nto examine the constitutional\tvalidity of the Act.\t The\nPreamble of the Act which \"affords useful light as to what\nthe statute intends to\t reach\" or in other words \"affords a\nclue the scope of the statute\" makes it clear that the Act\nis intended to canalise for productive purposes black money\nwhich has become a serious threat to the national economy.\nIt is an undisputed fact that there is considerable amount\nof black money\t in circulation which\t is unaccounted or\nconcealed and\t therefore outside the disclosed trading\nchannels. It\tis largely the product of black market\ntransactions and evasion of tax. Indeed, as pointed out by\nthe Direct Taxes Enquiry Committee headed by Mr. Wanchoo,\nretired Chief Justice of India \"tax evasion and black money\nare closely and inextricably interlinked.\" The abundance of\nblack money has in fact given\t rise to a parallel economy\noperating simultaneously and competing\t with the official\neconomy. This parallel economy\t has over the years grown in\nsize and dimension and even on a conservative estimate, the\namount of black money\tcirculation runs into some thousand\ncrores. The menace of\tblack money has now reached\tsuch\nstaggering proportions\tthat it\t is causing havoc to\t the\neconomy of the country and poses a serious challenge to the\nfulfilment of our objectives of distributive\tjustice\t and\nsetting up of an egalitarian society.\t There\tare several\ncauses responsible for the generation of black money\t and\nthey have been\t analysed in the Report of\tthe Wanchoo\nCommittee. Some of the principal causes may be summarised as\nfollows: (1) high rates of taxation under the direct tax\nlaws: they breed tax evasion and generate black money; (2)\neconomy of shortages and consequent controls\tand licences\nleading to corruption for issuing licences and permits and\nturning\t blind\t eye to the violation of controls;\t (3)\ndonations of black money encouraged by political parties to\nmeet election expenses and for augmenting party funds and\nalso for personal purposes; (4) Corrupt business practices\nsuch as payments of secret commission, bribes, money, pugree\netc. which need keeping on\thand money in\t black;\t (5)\nineffective administration and enforcement of tax laws by\nthe authorities\t and (6) deterioration in moral standards so\nthat tax evasion is no longer regarded as\timmoral\t and\nunethical and does not carry any social stigma. These causes\nneed to\t be eliminated\tif we want to eradicate the evil of\nblack money. But whether any steps are taken\t or not\t for\nremoving these\tcauses with a\tview to preventing future\ngeneration of black money, the fact remains that today there\nis considerable\t amount\t of black money, unaccounted\t and\nconcealed? in the hands of a few persons\n972\nand it\tis causing incalculable damage to the economy of the\ncountry.\n The first\tcasualty cf this evil of black money is the\nrevenue because it loses the tax which should otherwise have\ncome to the exchequer. The generation of black money through\ntax evasion throws a greater burden on the honest tax payer\nand leads to economic\tequality and concentration of wealth\nin the\thands of the unscrupulous few in the country. In\naddition, since\t black money is in a\t way 'cheap' money\nbecause it has not suffered reduction\t by way of taxation,\nthere is a natural tendency among those who possess it to\nuse it\tfor lavish expenditure and conspicuous consumption.\nThe existence\t of black money is\tto a large extent\nresponsible for\t inflationary pressures, shortages, rise in\nprices\t and\teconomically unhealthy speculation\t in\ncommodities. It\t also leads to leakage of foreign exchange,\nmaking our balance of\tpayments rather distorted and unreal\nand tends to defeat the economic policies of the Government\nby making their implementation ineffective, particularly in\nthe field of credit and investment. Moreover, since black\nmoney has necessarily to be suppressed in order to escape\ndetection, it results in immobilisation of investible funds\nwhich would otherwise be available to further the economic\ngrowth of the nation and in turn, foster the welfare of the\ncommon man. It is therefore no exaggeration to say\tthat\nblack money is a cancerous growth in the country's economy\nwhich if not checked in time is certain to lead to chaos and\nruination. There can be no doubt that urgent measures are\ntherefore required to be adopted for\t preventing further\ngeneration of black money as also for unearthing existing\nblack money so that it can be canalised for productive\npurposes with a view\tto effective economic\t and social\nplanning.\n Now this problem of black money corroding the economy\nof the\tcountry is not a new or recent problem. It has been\nthere almost since the\t Second World War and\tit has\tbeen\ncontinuously engaging the attention of the Government. The\nGovernment has\tadopted various\t measures in the past with a\nview to\t curbing the generation of black money and bringing\nit out\tin the\topen so\t that it may become available\t for\nstrengthening the economy. For instance, the Government\nintroduced several changes in\tthe administrative set up of\nthe tax\t department from time\t to time with\t a view to\nstrengthening the administrative machinery for checking tax\nevasion. The Government also amended\tsection\t 37 of\t the\nIndian Income Tax Act\t1922 with a view to conferring power\non the\ttax authorities\t to carry out searches and seizures\nand this power was elaborated and made more\n973\neffectual when\tthe Income Tax Act 1961 came to be enacted.\nQuite apart from these\t legal and administrative measures\ntaken for the purpose\tof curbing evasion of\ttax, certain\nsteps were also taken to tackle the black money built up out\nof past\t evasions. In 1946, just at the close of the Second\nWorld War, high denomination notes were demonetised so as to\nbring within the net of taxation black money earned during\nthe War. This was followed by the enactment of the Taxation\nof Income Investigation Commission Act 1947. Then came the\nVoluntary Disclosure Scheme of\t 1951,\tpopularly known as\nTyagi Scheme, to facilitate the disclosure of suppressed\nincome\tby affording certain\timmunities from the penal\nprovisions. This scheme was however not successful because\nit helped to unearth only Rs. 70.20 crores of black money.\nThereafter, nearly a decade and a half later, a second\nscheme of voluntary disclosure was introduced by section 68\nof the Finance Act 1965. This scheme, popularly known as the\nsixty-forty scheme, enabled the tax evaders\tto disclose\nsuppressed income by paying 60% of the concealed income as\ntax and\t bringing the balance of 40% into their books. This\nscheme was a little more successful than the earlier one,\nbut it\tcould help to net only about\tRs. 52.1 l crores of\nblack money. Closely following\t on the heels of this scheme\ncame another scheme under section 24 of the Finance (No. 2)\n.Act 1965 popularly known as the 'Block Scheme' according to\nwhich tax was payable\tat rates applicable to the block of\nconcealed income disclosed and\t not at a fiat rate as under\nthe sixty-forty\t scheme. This scheme received\t a slightly\nbetter response\t and the income disclosed under it amounted\nto about Rs. 145 crores. Then came\t the Taxation\tLaws\n(Amendment and\t Miscellaneous\tProvisions) Ordinance\t1965\nfollowed by an Act in identical terms, which provided for\nexemption from\ttax in\tcertain cases of undisclosed income\ninvested in National Defence Gold Bonds 1980. We shall have\noccasion to consider the broad scheme of this Act a little\nlater, but for the time being as we may point out that the\nscheme as envisaged in this Act was very closely similar to\nthe scheme under the impugned Act. Subsequent to this Act\nfollowed the Report of the Wanchoo Committee and as a result\nof the\trecommendations made in this Report certain penal\nprovisions contained in the Income Tax Act 1961 were made\nmore severe and rigorous. Then came the Voluntary Disclosure\nof Income and Wealth Ordinance 1975 which was followed by an\nAct in\tthe same terms. This legislation introduced a scheme\nof voluntary disclosure of income and\t wealth and provided\ncertain immunities and exemptions. The record before us does\nnot show as to\t what was the concealed income and wealth\ndisclosed pursuant to this scheme. But it is an indisputable\nfact\n974\nthat the adoption\tof these stringent\t legal\t and\nadministrative measures\t as also the introduction of these\ndifferent voluntary disclosure schemes\t did not have\t any\nappreciable effect and despite all these efforts made by the\nGovernment, the\t problem of black money continues unabated\nand has\t assumed serious dimensions. It may be possible to\nsay and\t that was the criticism of Mr. R.K. Garg-that the\nenforcement machinery of the\ttax department\t is not as\neffective as it should\t be and\t no serious effort has been\nmade to\t eliminate the\tother causes of generation of black\nmoney, but whatever may be the failures of the political and\nadministrative machinery and we are not here concerned to\ninquire into that question nor are we competent to express\nany opinion upon it-the fact remains that there is\nconsiderable amount of black money in the hands of persons\nwhich is causing havoc\t to the\t economy of the country and\nseriously prejudicing mobilisation of\tresources for social\nand economical reconstruction of the nation.\n It was to combat\tthis menacing problem of black money\nand to\tunearth black money lying secreted and outside the\nordinary trade\t channels that the Act was\t enacted by\nParliament. It was realised that all efforts to detect black\nmoney and to uncover it had failed and the problem of black\nmoney was an obstinate\t economic issue\t which\twas defying\nsolution and the impugned legislation providing for issue of\nSpecial Bearer\tBonds was therefore enacted with a view to\nmopping-up black money and bringing it out in the open, so\nthat, instead of remaining concealed and idle, such money\nmay become available for augmenting the resources of\t the\nstate and being utilised for productive purposes so as to\npromote effective social and economic planning. This was the\nobject for which the\tAct was enacted and\tit is\twith\nreference to this object that we have to determine whether\nany impermissible differentiation is made by the Act so as\nto involve violation of Article 14.\n We may now turn to examine the provisions of the act.\nSection 3 sub-section (1) provides certain immunities to a\nperson who subscribed\tto or\totherwise acquired Special\nBearer Bonds, Clause (a) protects such a person from being\nrequired to disclose, for any purpose whatsoever, the nature\nand source of acquisition of\tthe Special Bearer Bonds.\nClause (b) prohibits the commencement of any\t inquiry or\ninvestigation against a person\t on the ground of his having\nsubscribed to or otherwise acquired\tthe Special Bearer\nBonds. And clause (c) provides that the fact of subscription\nto or acquisition of Special Bearer Bonds shall not be taken\ninto account\n975\nand shall be inadmissible in evidence\t in any\t proceedings\nrelating to any offence or the imposition of any penalty. It\nwill be\t seen that the immunities granted under section 3,\nsub-section (1)\t are very limited in scope. They do\t not\nprotect the holder of Special Bearer Bonds from any inquiry\nor investigation into concealed income which could have been\nmade if\t he had not subscribed to or acquired Special Bearer\nBonds. There is no immunity from taxation given to the black\nmoney which may be invested in Special Bearer Bonds. That\nmoney remains\t subject to tax with all consequential\npenalties, if it can be discovered independently of the fact\nof subscription\t to or\tacquisition of Special Bearer Bonds.\nThe only protection given by section\t3, sub-section\t1 is\nthat the fact of subscription to or acquisition of Special\nBearer Bonds shall be\tignored altogether and shall not be\nrelied upon as evidence showing possession of undisclosed\nmoney. This provision relegates the Revenue to the position\nas if Special Bearer Bonds had not been purchased at all. If\nwithout taking\tinto account the fact of subscription to or\nacquisition of\tSpecial Bearer Bonds and totally ignoring it\nas if it were\tnon-existent, any inquiry or investigation\ninto concealed\tincome could be carried out and such income\ndetected and unearthed, it would be open to the Revenue to\ndo so and it would be no answer for the assessee to say that\nthis money has been invested by him in Special Bearer Bonds\nand it\tis therefore exempt from tax or that he is on that\naccount\t not liable to prosecution\t and penalty\t for\nconcealment of\tsuch income. This is the main difference\nbetween the impugned Act and the Taxation Laws (Amendment\nand Miscellaneous Provisions) Act, 1965. Under the latter\nAct, where gold is acquired\t by a\tperson\tout of\t his\nundisclosed income, which is the same thing as black money,\nand such gold is tendered by\thim as\tsubscription for the\nNational Defence Gold Bonds, 1980, the income invested in\nsuch gold is exempted\tfrom tax, but where Special Bearer\nBonds are purchased out of undisclosed income under\t the\nimpugned Act, the income invested in\tthe Special Bearer\nBonds is not exempt from tax\tand if\tindependently of the\nfact of\t purchase of the Special Bearer Bonds and ignoring\nthem altogether, such income can be detected, it would be\nsubject to tax. The entire machinery\tof the taxation Laws\nfor inquiry and investigation into concealed income is thus\nleft untouched\tand no\tprotection is granted to a person in\nrespect of his\t concealed income merely because he\t has\ninvested such\t income\t in Special Bearer Bonds. It is\ntherefore incorrect to say that as soon as\t any person\npurchases Special Bearer Bonds, he is immunised against the\nprocesses of taxation laws. Here there is no amnesty granted\nin respect of any\n976\npart of\t the concealed\tincome even though it be invested in\nSpecial Bearer\tBonds. The whole object of the impugned Act\nis to induce those having black money to convert it into\n'white money' by making it available\t to the State\t for\nproductive purposes, without granting in return any immunity\nin respect of such black money, if it could be detected\nthrough the ordinary processes\t of taxation laws without\ntaking into account the fact of purchase of Special Bearer\nBonds. Now it is true and this was one of the arguments\nadvanced on behalf of\tthe petitioner-that if black money\nwere not invested in Special Bearer Bonds but were Lying in\ncash, it could be seized by the tax authorities by carrying\nout search and seizure in accordance with the provisions of\nthe tax\t laws and this opportunity to detect\tand unearth\nblack money would be lost, if such black money were invested\nin Special Bearer Bonds, because even\t if Special Bearer\nBonds were seized, they cannot be relied upon as evidence of\npossession of\t black\tmoney.\tBut this argument of\t the\npetitioner that\t the detection\tand discovery of black money\nwould thus thwarted by\t the conversion\t of black money into\nSpecial Bearer Bonds is highly theoretical and does not take\ninto account the practical realities of the situation. If it\nhad been possible to detect and discover a substantial part\nof the\tblack money in circulation by carrying out searches\nand seizures, there would have been no need\tto enact the\nimpugned Act.\t It is\t precisely because,\tinspite\t of\nconsiderable efforts made by the tax authorities including\ncarrying out of searches and seizures, the bulk of black\nmoney remained secreted and could not be unearthed, that the\nimpugned Act had to be enacted. Moreover, actual seizure of\nblack money by carrying out searches is not the only method\navailable to\ttax administration for detecting\t and\ndiscovering black money. There\t are other methods also by\nwhich concealment of income can be detected and these are\ncommonly employed by\t the tax authorities\t in making\nassessment of income or wealth. Close and searching scrutiny\nof the\tbooks of account may reveal that accounts are not\nproperly maintained, unexplained cash\tcredits may provide\nevidence of concealment and\t so too unaccounted\t for\ninvestments or\tlavish expenditure; information derived from\nexternal sources may indicate that income has been concealed\nby resorting to stratagems like suppression of sales or\nunderstatement of consideration; and existence of assets in\nthe names of\tnear relatives\t may give a lead showing\ninvestment of undisclosed income. All these methods and many\nothers would still remain available to the tax authorities\nfor detecting undisclosed income and bringing\t it to\t tax\ndespite investment in Special\tBearer\tBonds.\tThe taxable\nincome of the holder of Special Bearer Bonds\n977\nwould not stand reduced by the amount invested in\t the\npurchase of Special Bearer Bonds and it would be open to the\nRevenue to assess such taxable income in the same manner in\nwhich it would do in any other case,\t employing the\tsame\nmethods and techniques of inquiry and investigation\t for\ndetermining the\t true taxable income. The only inhibition on\nthe Revenue would be that it would not be entitled to call\nupon the assessee to disclose for the purpose of assessment,\nthe nature and source\tof acquisition of the Special Bearer\nBonds and in making the assessment, the investment in the\nSpecial Bearer\tBonds would have to be left wholly out of\naccount and the Revenue would not be entitled to rely upon\nit as evidence of possession of undisclosed money. This is\nthe only limited immunity granted under section 3\tsub-\nsection (1) and even this limited immunity is cut down by\nthe provision enacted in subsection (2) of section 3. This\nsub-section says that the immunity granted under sub-section\n(1) shall not be available in\t relation to prosecution for\nany offence punishable under Chapter IX or Chapter XVII of\nthe Indian Penal Code\tor the\tPrevention of Corruption Act\n1947 or\t any other similar law. If therefore an inquiry or\ninvestigation is sought to be made against a public servant\nin respect of an offence under Chapter IX of the Indian\nPenal Code or the Prevention of Corruption Act 1947 alleged\nto have been committed by him, the acquisition or possession\nof Special Bearer Bonds could be a ground for instituting,\nsuch inquiry or investigation\tand it\t could\talso be an\nadmissible piece of evidence in a prosecution in respect of\nsuch offence. The same would be the position in relation to\nan inquiry, investigation or prosecution in respect of an\noffence under Chapter XVlI of the Indian Penal Code. The\nacquisition or\tpossession of Special Bearer Bonds would not\ntherefore afford any protection to a public servant against\na charge of corruption or to a person committing any offence\nagainst\t property. Equally this immunity would not be\navailable where\t what is sought to be enforced is a civil\nliability other\t than liability\t by way of tax. It will thus\nbe seen that the immunity granted in respect of subscription\nto or acquisition of Special Bearer Bonds is\t a severely\nrestricted immunity and this is the bare minimum immunity\nnecessary in order to induce holders of black money to bring\nit out in the open and invest it in Special Bearer Bonds.\n It is also necessary to note the further restrictions\nprovided in section 4\twhich are calculated to pre-empt any\npossible abuse\t of the immunity granted in\t respect of\nsubscription to or acquisition of Special Bearer Bonds, This\nsection in its opening part affirms in\n978\nunmistakable terms that subscription to or acquisition of\nSpecial Bearer\tBonds shall not be taken into account in any\nproceeding under the Income-tax Act 1961 or the Wealth-tax\nAct 1957 or the Gift-tax Act\t1958. If any investment in\nSpecial Bearer Bonds has been made by the assessee, it is to\nbe ignored in making assessment on him under\t any of\t the\nabove-mentioned three tax laws, the assessment is to be made\nas if no Special Bearer Bonds had been purchased at all The\nprocess of computation of taxable income and assessment of\ntax on it remains unaffected and is not in any way deflected\nor thwarted by the investment in Special Bearer Bonds. The\nposition remains the same as it would have been if there\nwere no\t investment in Special Bearer Bonds. We have already\ndiscussed the full implications of this proposition in the\npreceding paragraph while dealing with section 3 and it is\nnot necessary\t to say anything more about it. Then,\nproceeding further, after enacting this provision in\t the\nopening part, section 4 branches off\tinto three different\nclauses, Clause (a)\tprovides that\tno person who\t has\nsubscribed to or otherwise acquired Special Bearer Bonds\nshall be entitled to claim any set off or relief in any\nproceeding under the Income-tax Act 1961 or to reopen any\nassessment or reassessment made under that Act on the ground\nthat he\t has subscribed to or otherwise acquired such Bonds.\nThe holder of Special\tBearer Bonds is thus precluded from\nclaiming any advantage by way\t of set-off or relief or\nreopening of assessment on the ground\t of having invested\nundisclosed money in purchase\t of Special Bearer Bonds.\nClause\t(b) enacts another prohibition with\t a view to\npreventing abuse of the immunity granted in\t respect of\nSpecial Bearer\tBonds and says that\tno person who\t has\nsubscribed to or otherwise acquired Special Bearer Bonds\nshall be entitled to claim, in relation to any period before\nthe date of maturity of such Bonds, that any asset which is\nincludible in his net\twealth for any assessment year under\nthe Wealth-tax\tAct has\t been converted into such Bonds. The\nobject of this provision is to preclude an assessee who is\nsought to be taxed on his net wealth under the wealth-tax\nAct from escaping assessment to tax on any asset forming\npart of\t his net wealth by claiming that he has invested it\nin purchase of Special\t Bearer\t Bonds.\t The investment in\nSpecial\t Bearer\t Bonds\t would\t not grant immunity\tfrom\nassessment to wealth lax to any asset which is found by the\ntaxing authorities, otherwise than by relying on the fact of\nacquisition of\tSpecial\t Bearer\t Bonds,\t to belong to\t the\nassessee and hence forming part of his net wealth .\t The\nasset would be subjected to wealth tax\tdespite\t the\ninvestment in Special Bearer Bonds. Then follows clause (c)\n979\nwhich is extremely important and which effectively counters\nthe possibility\t of serious abuse to which the issue of\nSpecial Bearer\tBonds might otherwise have lent itself. It\nprovides that no person who has subscribed to or otherwise\nacquired Special Bearer Bonds shall be entitled to claim, in\nrelation to any period\t before the date of maturity of such\nBonds, that any asset held by him or any sum credited in his\nbooks of account or otherwise held by him represents the\nconsideration received\tby him\tfor the transfer of\tsuch\nBonds. This provision precludes a person from explaining\naway the existence of\tany asset held by him or any\t sum\ncredited in his books of account or otherwise held by him by\nclaiming that it represents the sale\tproceeds of Special\nBearer Bonds held by him. If at any time before the date of\nmaturity of the Special Bearer Bonds held by an assessee, it\nis found that any asset is held by him or\tany sum is\ncredited in his books\tof accounts or is otherwise held by\nhim and\t he is\trequired to explain the nature and source of\nacquisition of\tsuch asset or sums of money,\the cannot be\nheard to say by way of explanation that such asset or sum of\nmoney represents the consideration received\tby him\t for\ntransfer of the Special Bearer Bonds, even\tif that be\nfactually correct. This explanation,\t though\t true being\nstatutorily excluded,\t it would be\timpossible for\t the\nassessee to offer any other explanation for the acquisition\nof such\t asset or sum of money, because any such explanation\nwhich might be given by him would be\t untrue and in\t the\nabsence of any satisfactory explanation in regard to\t the\nnature and source of acquisition of such asset or sum of\nmoney, the Revenue would be entitled\tto infer that\tsuch\nasset has been acquired out of undisclosed income or that\nsuch sum of money represents concealed income and hence the\nvalue of such asset or such sum of money, as the case may\nbe, should be treated\tas undisclosed\tincome liable to be\nincluded in the taxable income of\tthe assessee.\tVide\nsections 69, 69A and 69B of the Income-tax Act, 1961. It is\nobvious that this provision is calculated to act as a strong\ndeterrent against negotiability of Special Bearer Bonds for\ndisclosed or 'white' money. No holder\t of Special Bearer\nBonds would dare to transfer his Bonds to another person\nagainst receipt\t of disclosed or 'white' money, because he\nwill not be able to account for the consideration received\nby him,\t the true explanation being statutorily unavailable\nto him, and such consideration would inevitably be liable to\nbe regarded as his concealed income and would be subjected\nto tax\tand penalties.\tMoreover, it is difficult to see why\nanyone should want to\tinvest disclosed or 'white' money in\nthe acquisition of Special Bearer Bonds. Ordinarily a person\nwould\n980\ngo in for Special Bearer Bonds only for the\t purpose of\nconverting his\tundisclosed money into 'white' money and it\nwould be quite unusual bordering almost on freakishness for\nanyone to acquire Special Bearer Bonds with disclosed or\n'white money' when he can get only 2% simple interest on the\ninvestment in Special Bearer Bonds, while outside he\t can\neasily get anything between 15% to 40% yield by openly\ndealing\t with\this disclosed\t or 'white'\tmoney.\t The\ntransferability of Special Bearer Bonds against disclosed or\n'white' money is thus,\t from a\t practical point of view,\ncompletely excluded. The question may still arise whether\nSpecial Bearer\tBonds would not pass\tfrom hand to\thand\nagainst undisclosed or black money. Would they not be freely\nnegotiable against payment of\tundisclosed or black money ?\nNow it\tmay be\tconceded that a purchaser of Special Bearer\nBonds would undoubtedly be interested\t in acquiring\tsuch\nBonds by making payment of 'black' money, because he would\nthereby\t convert his undisclosed or\t'black\tmoney'\tinto\n'white' money.\tBut it\tis difficult to understand why a\nholder of Special Bearer Bonds should ever be interested in\nselling\t such\tBonds against\treceipt\t of 'black money'.\nObviously he would have acquired such Bonds for the purpose\nof converting his 'black money' into\t'white' in order to\navoid the risk of being found in possession of 'black money'\nand if\tthat be\t so, it\t is inexplicable as to why he should\nagain want to convert\this 'white money' into\t 'black' by\nselling such Bonds against receipt of\t 'black money'.\t The\nimmunity granted under the provisions of the Act, limited as\nit is extends only to the person who is for the time being\nthe holder of Special\tBearer Bonds and the person who has\ntransferred the\t Special Bearer Bonds for black money has no\nimmunity at all and all the provisions of tax laws\t are\navailable against him for determining his true income or\nwealth and therefore no one who has purchased Special Bearer\nBonds with a view to earning security against discovery of\nunaccounted money in his hands would ordinarily barter away\nthat security by again receiving black money for the Special\nBearer Bonds. Furthermore, even if special bearer bonds are\ntransferred against receipt of black money, it will not have\nthe effect of\tlegalising more black\t money\tinto white,\nbecause the black money of the seller which had become white\non his\tsubscribing to\tor acquiring special bearer bonds\nwould again be converted into black money and the black\nmoney paid by the purchaser by way of consideration would\nbecome white by reason\t of being converted into Special\nBearer\tBonds.\t The petitioners however expressed\t an\napprehension that special bearer bonds would\tfetch a much\nhigher value in the black market than that originally\nsubscribed and this would\n981\nenable a larger amount\t of black money to be legalised into\nwhite than what was originally invested in subscription to\nspecial bearer\tbonds. We do not think this apprehension is\nwell founded. It is true that\t once the date for original\nsubscription to\t special bearer\t bonds has expired, the only\nway in\twhich special\tbearer\tbonds could thereafter be\nacquired would be by going in the open market and the number\nof special bearer bonds in the market being\t necessarily\nlimited, they may fetch a higher value in black money from a\nperson who is anxious to convert his black money into white.\nIf the\tdemand outreaches the limited\tsupply, the price of\nspecial bearer\tbonds in the black market may\t exceed\t the\namount originally invested in subscription to special bearer\nbonds. But even so, the black\t money paid by the purchaser\nfor acquisition\t of special bearer bonds would not in its\nentirety be converted into white, it would change its colour\nfrom black to white only to\tthe extent of\t the amount\noriginally subscribed for the special bearer bonds or at the\nmost, if we also take into account interest on such amount,\nto the extent of the face value of the special bearer bonds,\nbecause whatever be the amount he might have paid in black\nmoney for acquisition of the\tspecial\t bearer\t bonds,\t the\nholder of the special bearer bonds will get only the amount\nrepresenting the face value on maturity of\tthe special\nbearer bonds. It will\tthus be\t seen that howsoever special\nbearer\tbonds\tmay be\t transferred\tand for whatever\nconsideration, only a limited amount of black money, namely,\nthe amount originally subscribed for\tthe special bearer\nbonds or at the most the amount representing the face value\nof the\tspecial bearer\tbonds would be legalised into white\nmoney and the\tsupposedly free negotiability\t of special\nbearer bonds would not\t have the effect of legalising more\nblack money into white or encouraging further generation of\nblack money.\n There was\talso one other abuse, said the petitioners,\nto which special bearer bonds might lend themselves and it\nwas that if Special Bearer Bonds are sold and the\tsale\nproceeds are utilised in meeting expenditure, the assessee\nwould not be\tprecluded by section\t4 clause (c)\tfrom\nexplaining the\tsource of the expenditure to be the\tsale\nconsideration of the special bearer bonds and hence by\nresorting to this strategy, white money can be accumulated\nas capital while expenditure is met out of\tblack money\nreceived by way of consideration for sale of special bearer\nbonds. We do not think there\tis any scope for such abuse;\nthe apprehension expressed by the petitioners is\tmore\nimaginary than\treal. It may be noted\t that in order to\nsustain his explanation, the assessee would have to prove to\n982\nthe satisfaction of the tax department that he had special\nbearer bonds and that he sold them for a certain amount. Now\nif he has received black money by way of consideration, it\nis difficult to see how he would ever be able to establish\nthat he sold special bearer bonds for that particular amount\nof black money. Would\the be so fool-hardy as to admit that\nhe received the consideration in black money and even if he\ndoes, would he ever be able to prove it? Who would believe\nhim even if he\t makes such an admission ? And when he has\nbought special\tbearer bonds for the purpose of converting\nhis black money into white, why should he again reconvert it\ninto black by selling special bearer bonds for black money ?\nThe entire postulate of the argument of the petitioners is\ntheoretical and\t has no\t basis in reality. No assessee would\never admit that he incurred expenditure out of black money\nreceived as consideration for\tsale of special bearer bonds\nbecause it would be impossible for him to establish receipt\nof black money from the purchase and if he is unable to do\nso, the\t amount of the\t expenditure would, by reason of\nsection 69C of the Income-tax Act, 1961, be deemed to be his\nconcealed income liable to tax. Even\tif we assume that in\nsome rare and exceptional case the assessee may be able to\nestablish that\the sold special bearer bonds against receipt\nof black money, the purchaser would straightaway run into\ndifficulties because the evidence furnished by the assessee\nwould, in such a case, clearly establish that the purchaser\nhad black money and he paid it to the assessee by way of\nconsideration and he would in that event be rendered liable\nto tax\tand penalty in respect\t of such black money.\tThis\nwould show the\t utter\timprobability bordering almost on\nimpossibility, of special bearer bonds being\tsubjected to\nany such abuse as is apprehended by the petitioners.\n It was then urged\t on behalf of the petitioners that\nsection clause\t(c) operates only in relation to a period\nbefore the date of maturity of special bearer bonds\t and\nafter the date of maturity, the holder of special bearer\nbonds can sell such bonds, and, without running any risk,\ndisclose the consideration received by him as his white\nmoney, because section 4 clause (c) being out of the way, he\ncan account for the possession of such money by showing that\nhe has\treceived it as consideration for sale\t of special\nbearer bonds and so far as the purchaser is concerned, if he\nhas paid the consideration out of his black money, he can\nclaim the immunity granted under section 3 sub-section (1)\nand his\t black money would be converted into white. Thus the\nblack money Of the seller which had been converted\tinto\nwhite on his subscribing\n983\nto or otherwise acquiring special bearer bonds would remain\nwhite and in addition,\t the black money of the purchaser\nwould also be converted into white by reason of his purchase\nof special bearer bonds. This argument plausible though it\nmay seem. is in our opinion,\t fallacious and cannot be\nsustained. It is a highly debatable issue whether, under the\nprovisions of the Act,\t special bearer\t bonds\tare at\t all\nintended to be transferable after the date of maturity, for\nthe postulate of the legislation clearly seems to be that on\nthe date of maturity, special bearer bonds will be encashed.\nIt is indeed difficult to believe that anyone holding\nspecial\t bearer\t bonds\twould keep them uncashed without\nearning any interest from and after the date of maturity,\nwhen they can\t be immediately encashed and\t the amount\nreceived can be invested yielding interest ranging between\n18 per\tcent to\t 40 per cent. Moreover, special bearer bonds\nwould cease to be exempt from wealth tax from and after the\ndate of\t maturity and they would therefore be includible in\nthe net\t wealth of the holder for the purpose of wealth tax\nand if\tthat be\t so, how would it benefit the holder to keep\nthem as\t part of his net wealth and pay wealth tax upon it\nwithout earning\t any interest ? It is therefore extremely\nunlikely that Special Bearer Bonds would remain uncashed\nafter the date of maturity\t and it would\t be equally\nimprobable that\t anyone\t should\t want to purchase Special\nBearer Bonds after the\t date of maturity when\t they do not\nyield any interest but\t are still includible\tin the\t net\nwealth for the purpose\t of liability to wealth tax. But let\nus assume for the purpose of argument that in a given case\nspecial bearer\tbonds are not\t encashed on the date of\nmaturity and they are lawfully transferred after the date of\nmaturity for a consideration paid by\tthe purchaser. There\nare two\t alternatives: the consideration may be paid by the\npurchaser in white money or in black money. If the purchaser\npays the consideration\t in white money, no\tquestion of\nconversion of further black money into white\t arises. rt\nwould be a straight open transaction to which no exception\ncan be\ttaken. But let us consider what consequences would\nensue if he pays in black money. The seller would obviously\nbe interested in showing the consideration as his white\nmoney and there may be no difficulty\t so far as he ii\nconcerned, because he would\t be able to\texplain\t the\npossession of such money by claiming that he has received it\nby way\tof consideration for sale of special bearer bonds.\nSection 4 clause (c) will not\t stand in the\tway of\t his\noffering that explanation. But\t so far\t as the purchaser is\nconcerned, he will run\t into serious difficulties. Even if\nthe immunity under section 3 sub-section (l) were available\nto him\tafter the date of maturity, he will still be in\ntrouble, because the disclosure made by\n984\nthe seller would be the clearest evidence showing that the\npurchaser had\t black\tmoney\twhich he paid\t by way of\nconsideration to the\tseller,\t and this evidence, being\nindependent of\tthe fact of acquisition of special bearer\nbonds by the\t purchaser, would be\tadmissible and\t the\npurchaser would\t be liable to tax and penalty on the amount\nof black money paid by him as consideration. We fail to see\nhow transfer of special bearer bonds\tafter the date of\nmaturity, even\tif legally permissible, can be utilised for\nthe purpose of legalising black money into white. But we may\npoint out that if at any time after the date of maturity or\neven before, it is found that there is some loophole in the\nprovisions of the Act\tor that\t special bearer bonds\t are\nutilised for any dishonest or nefarious purpose or are being\nperverted to any improper use, the legislature can always\nstep in and amend the Act\tor pass other\t appropriate\nlegislation with a view to preventing such abuse. It must be\nremembered that every\t legislation is an experiment in\nachieving certain desired ends and trial and error method is\ninherent in every such experiment. Therefore,\twhen\nexperience shows that the legislation as framed has proved\ninadequate to achieve its purpose of mitigating an evil or\nthere are cracks and loopholes in it which are being taken\nadvantage of by the resourcefulness and ingenuity of those\nminded to benefit themselves at the cost of the State or the\nothers,\t the legislature can\t and most certainly would\nintervene and\tchange\tthe law. But\tthe law cannot be\ncondemned as invalid on the ground that after a period of\nten years it may lend itself to some possible abuse.\n We may now proceed to consider\t the constitutional\nvalidity of the Act in the light of the above discussion as\nregards the scope and\teffect of its various provisions. It\nis obvious that the Act makes a classification between\nholders of black money\t and the rest and provides for issue\nof special bearer bonds with a view to inducing persons\nbelonging to the former class to invest their unaccounted\nmoney in purchase of special bearer bonds, so that\tsuch\nmoney which is today Lying idle outside the regular economy\nof the\tcountry is canalised into productive purposes. The\nobject of the Act being to unearth black money for being\nutilised for productive purposes with a view to effective\nsocial and economic planning, there has necessarily to be a\nclassification between\tpersons possessing black money\t and\nothers\tand such classification cannot be\tregarded as\narbitrary or irrational. It is of course true-and this must\nbe pointed out here since it was faintly touched upon in the\ncourse of the arguments-that there is no legal bar enacted\nin the Act against\n985\ninvestment of white money in subscription to or acquisition\nof special bearer bonds. But the provisions\tof the\t Act\nproperly construed are such that no one would even think of\ninvesting white\t money in special bearer bonds and from a\npractical point\t of view, they do operate as a bar against\nacquisition, whether\tby original subscription or\t by\npurchase, of special bearer bonds with white money. We do\nnot see\t why anyone should want to invest his white money in\nsubscribing to or acquiring special bearer bonds which yield\nonly 2\tper cent simple interest per annum and which are not\nencashable for\ta period of not less than ten years. It is\ntrue that special bearer bonds can be sold before the date\nof maturity but who would pay white money for them and even\nif in some rare and exceptional case, a purchaser could be\nfound who would pay the consideration in white money, no one\nwill dare to sell special bearer bonds for white money,\nbecause of the disincentive provided in section 4 cl. (c).\nThe investment\tof white money in special bearer bonds is\naccordingly, as\t a practical measure, completely ruled out\nand the\t provisions of\tthe Act are intended to operate only\nqua persons in\t possession of\t black\tmoney.\tThere is a\npractical and\treal classification made between persons\nhaving black money and\t persons not having such money and\nthis de facto classification is\tclearly\t based\t on\nintelligible differentia having rational relation with the\nobject of the Act. The petitioners disputed the validity of\nthis proposition and contended that the classification made\nby the\tAct is\tdiscriminatory in that it excludes persons\nwith white money from taking advantage of the provisions of\nthe Act by subscribing to or acquiring special bearer bonds.\nBut this contention is\t totally unfounded and we cannot\naccept the same. The validity of a classification has to be\njudged with reference to the object of the legislation and\nif that is done, there can be\tno doubt that\t the\nclassification made by the Act is rational and intelligible\nand the\t operation of the provisions of the Act is rightly\nconfined to persons in possession of black money.\n It was then contended that the Act is unconstitutional\nas it offends against\tmorality by according to dishonest\nassesses who have evaded payment of tax, immunities\t and\nexemptions which are denied to honest tax payers. Those who\nhave broken the law and deprived the State of its legitimate\ndues are given benefits and concessions placing them at an\nadvantage over\tthose who have observed the law and paid the\ntaxes due from them and this, according to the petitioners\nis clearly immoral and\t unwarranted by the Constitution. We\ndo not\tthink this contention\t can be sustained. It is\nnecessary\n986\nto remember that we are concerned here only with\t the\nconstitutional\tvalidity of the Act\t and not with\t its\nmorality. Of course, when we say this we do not wish to\nsuggest that morality can in no case have relevance to the\nconstitutional validity of a legislation. There may be cases\nwhere the provisions of a statute may be so reeking with\nimmorality that\t the legislation can be readily condemned as\narbitrary or irrational and hence violative of Article 14.\nBut the\t test in every such case would be not whether the\nprovisions of\tthe statute offend against morality\t but\nwhether they are arbitrary and irrational having regard to\nall the\t facts and circumstances of the case. Immorality by\nitself is not a ground of constitutional challenge and it\nobviously cannot be, because\tmorality is essentially a\nsubjective value, except in so far as it may be reflected in\nany provision of the Constitution or\tmay have crystalised\ninto some well-accepted norm of special behaviour. Now there\ncan be no doubt that under the provisions of the Act certain\nimmunities and\t exemptions are granted with\t a view to\ninducing tax evaders to invest their\tundisclosed money in\nspecial bearer\tbonds and to that extent they are given\nbenefits and concessions which\t are denied to those\t who\nhonestly pay their taxes. Those who are honest and\t who\nobserve the law are mulcted in paying the taxes legitimately\ndue from them while those who have broken the law and evaded\npayment of taxes are allowed by the provisions of the Act to\nconvert their black money into 'white' without payment of\nany tax\t or penalty. The provisions of the Act may thus seem\nto be putting premium\ton dishonesty and they may,\tnot,\nwithout some justification, be accused of being tinged with\nsome immorality, but howsoever regrettable or unfortunate it\nmay be,\t they had to be enacted by the legislature in order\nto bring out black money in the open\t and canalise it for\nproductive purposes. Notwithstanding stringent laws imposing\nsevere\tpenalties and\tvigorous steps\t taken\tby the\t tax\nadministration to detect black\t money and despite various\nvoluntary disclosure schemes introduced by the government\nfrom time to time, it had not been possible to unearth black\nmoney and the menace of black\t money had over the years\nassumed alarming proportions causing havoc to the economy of\nthe country and the legislature was therefore constrained to\nenact the Act with a view to mopping up black money so that\ninstead of remaining idle, such money could be utilised for\nproductive purposes The problem of black money was an\nobstinate economic problem which had been\tdefying\t the\nGovernment for\tquite some time and it was in order to\nresolve this problem that, other efforts having failed. the\nlegislature decided to enact the Act, even though the\n987\neffect\tof its provisions might be\t to confer certain\nundeserved advantages on tax evaders in possession of black\nmoney. The legislature had obviously only two alternatives;\neither\tto allow the\t black\tmoney to remain idle\t and\nunproductive or to induce those in possession of it to bring\nit out\tin the\t open for being utilised for productive\npurposes. The first alternative would have left no choice to\nthe government\tbut to\tresort to deficit financing or to\nimpose a heavy dose of taxation. The\t former\t would\thave\nresulted in inflationary pressures affecting the vulnerable\nsections of the society while the\t latter\t would\thave\nincreased the burden on the honest tax payer and perhaps led\nto greater tax evasion. The legislature therefore decided to\nadopt the second alternative of coaxing\t persons in\npossession of black money to\t disclose it and make it\navailable to the government for augment in, its resources\nfor productive\tpurposes and with that end in view, enacted\nthe Act\t providing for issue of special bearer bonds. It may\nbe pointed out that the idea of issuing special bearer bonds\nfor the\t purpose of unearthing black money was not a brain\nwave which originated for the first time in the mind of the\nlegislature in\tthe year 1981. The suggestion for issue of\nspecial bearer bonds was made as far back as 1950 by some of\nthe members of the provisional Parliament, notably those\nbelonging to\tthe opposition\t and the government\t was\nrepeatedly asked why it was not issuing special bearer bonds\nin order to absorb the liquidity and thereby\t control the\ninflationary pressures\tin the\tcountry. Though the majority\nof the members of the Wanchoo Committee expressed themselves\nagainst the issue of special bearer bonds, Shri Chitale a\nmember of that Committee wrote a dissenting note in which he\nsuggested that special bearer bonds should be issued. We may\npoint out that the majority members of the Wanchoo Committee\nwere against issue of\tspecial bearer bonds for the purpose\nof mopping up black money, because they apprehended certain\nabuses to which special bearer bonds might be subjected, but\nas we have already pointed out while discussing the true\nmeaning and legal effect of the provisions of the Act, we do\nnot think that there is any scope for such abuses, for the\nlegislature has, while enacting the provisions of the Act,\ntaken care to see that such abuses are reduced to\t the\nminimum, if not eliminated altogether.\n It is true that certain immunities and exemptions are\ngranted to persons investing their unaccounted money in\npurchase of special bearer bonds but that is an inducement\nwhich has to be offered for unearthing black money. Those\nwho have successfully evaded taxation and concealed their\nincome or wealth despite the stringent tax\n988\nlaws and the efforts of the tax department are likely to\ndisclose their\tunaccounted money without some inducement by\nway of\timmunities and exceptions and it must necessarily be\nleft to\t the legislature to decide what immunities\t and\nexemptions would be sufficient for the purpose. It would be\noutside the province of the\tcourt to consider if\t any\nparticular immunity or exemption is necessary or not for the\npurpose of inducing disclosure\t of black money. That would\ndepend upon diverse fiscal and economic considerations based\non practical necessity and administrative expediency\t and\nwould also involve a certain amount of experimentation on\nwhich the Court would\tbe least fitted to pronounce.\t The\ncourt would not have the necessary competence and expertise\nto adjudicate upon such an economic issue. The court cannot\npossibly assess\t or evaluate what would be the impact of a\nparticular immunity or exemption and whether it would serve\nthe purpose in view or not. There are so many imponderables\nthat would enter into\tthe determination that it would be\nwise for the court not to hazard an\topinion\t where\teven\neconomists may\tdiffer. The court must\t while examining the\nconstitutional validity\t of a legislation of this kind, \"be\nresilient, not\trigid, forward looking, not static, liberal,\nnot verbal\" and the court must always bear in mind\t the\nconstitutional proposition enunciated by the Supreme Court\nof the\tUnited States in Munn\tv. Illinois(l) namely, \"that\ncourts do not substitute their social and economic beliefs\nfor the\t judgment of legislative bodies\". The\t court\tmust\ndefer to legislative judgment in matters relating to social\nand economic policies and must not interfere, unless\t the\nexercise of legislative judgment appears to\tbe palpably\narbitrary. The court should constantly remind itself of what\nthe Supreme Court of the United States said in Metropolis\nTheater\t Co. v. City\t of Chicago,(2)\"The\tproblems of\ngovernment are\tpractical ones\tand may\t justify, if they do\nnot require, rough accommodations, illogical it may be, and\nunscientific. But even such criticism should not be hastily\nexpressed. What\t is best is not always discernible,\t the\nwisdom of any choice may be disputed or condemned.\tMere\nerrors\tof government\tare not subject to our judicial\nreview.\" It is true that one or the other of the immunities\nor exemptions granted under the provisions of the Act may be\ntaken advantage of by resourceful persons\tby adopting\ningenious methods and devices\twith a\tview to\t avoiding or\nsaving tax. But that cannot be helped because\n989\nhuman ingenuity\t is so\tgreat when it comes to tax avoidance\nthat it\t would be almost impossible to frame tax legislation\nwhich cannot be abused. Moreover, as\talready pointed\t out\nabove, the trial and error method is\t inherent in every\nlegislative effort to deal with an obstinate social or\neconomic issue\tand if\tit is found that any\timmunity or\nexemption granted under the Act is being utilised for tax\nevasion or avoidance not intended by\tthe legislature, the\nAct can\t always be amended and the abuse terminated. We are\naccordingly of\tthe view that none of the provisions of the\nAct is\tviolative of Article\t14 and\t its constitutional\nvalidity must be upheld.\n These were\t the reasons for which\t we passed our order\ndated 2nd September, 1981 rejecting the challenge against\nthe constitutional validity of the ordinance and the Act and\ndismissing the\twrit petitions.\t Since these writ petitions\nare in the nature of public interest litigation, we directed\nthat there should be no order as to costs.\n GUPTA, J. I was unable to share the view taken by the\nmajority in disposing of these writ petitions on September\n2, 1981\t that \"neither\tthe Special Bearer Bonds (Immunities\nand Exemptions) ordinance, 1981 nor the Special Bearer Bonds\n(Immunities and\t Exemptions) Act, 1981 is violative of Art.\n14 of the Constitution\", and I made the following order on\nthe same day:-\n\t \"I have come to the conclusion that the Special\n Bearer Bonds (Immunities\tand Exemptions) ordinance,\n 1981 and the Special Bearer Bonds (Immunities\t and\n Exemptions) Act,\t 1981 violate\t Art. 14 of\t the\n Constitution and are there- fore invalid. I would allow\n the writ petitions with costs.\n\t I shall give my reasons later.\"\n Here briefly are my reasons.\n These five\t writ petitions\t question the constitutional\nvalidity of the Special Bearer Bonds (Immunities\t and\nExemptions) ordinance,\t 1981\tand Special Bearer Bonds\n(Immunities and\t Exemptions) Act, 1981. The ordinance which\nwas promulgated\t by the\t President on January 1 2, 1981 was\nrepealed and replaced by the Act. The Act received\t the\nPresident's assent on March 27. 1981. Section I\n990\n(3) of\tthe Act\t says that it shall be deemed to have come\ninto force on January\t12, 1981. The\t Provisions of\t the\nordinance and the Act are similar except that section 4 (c)\nof the\t Act is worded slightly differently from\t the\ncorresponding provision\t of the ordinance but the difference\nis not\tmaterial and I shall\t hereinafter refer to\t the\nprovisions of the Act only.\n As the long title\t of the\t Act shows, it is \"An Act to\nprovide for certain immunities to holders of Special Bearer\nBonds, 1991 and for certain exemptions from the direct taxes\nin relation to such\t Bonds\tand for matters connected\ntherewith.\" The\t purpose for which the\t Act was passed as\nappearing from the preamble is:-\n\t \"Whereas for\t effective economic\tand social\n planning it is necessary\tto canalise for productive\n purposes black money which has become a serious threat\n to the national economy:\n\t And whereas with a view to such canalisation the\n Central Government\t has decided to issue at par certain\n bearer bonds to be known as the Special Bearer Bonds,\n 1991 of the face\tvalue of ten thousand\t rupees\t and\n redemption value,\tafter ten years, of twelve thousand\n rupees;\n\t And whereas it is expedient to provide for certain\n immunities and exemptions to render it possible for per\n sons in possession of black money to invest the same in\n the said Bonds ;\"\n The preamble thus takes note of\tthe fact that black\nmoney has become a serious threat to national economy and\nsays that to make economic and social planning effective it\nis necessary to canalise this black money for productive\npurposes. The Act does\t not attempt to define black money.\nThe Direct Taxes Enquiry Committee set up by the Government\nof India in 1970 with Shri K.N. Wanchoo, retired Chief\nJustice of the Supreme Court of India, as Chairman explains\nwhat the term\t black\tmoney means in its final report\nsubmitted in December, 1971:\n\t \"It [black money] is, as\tits name suggests,\n 'tainted' money-money which is not clean or which has a\n stigma attached to it.. Black is\t a colour which is\n generally associated with evil. While it symbolises\n something which\n991\n violates moral, social or legal norms, it also suggests\n a veil of secrecy shrouding it. The term 'black money'\n consequently has both these implications. It not only\n stands for\t money earned by violating legal provisions-\n even social conscience-but also\tsuggests that\tsuch\n money is kept secret and not accounted for.\n\t Today the term 'black money' is generally used to\n denote unaccounted\t money or concealed income and/or\n undisclosed wealth, as well as\t money\tinvolved in\n transactions wholly or partly suppressed.\"\n The Act contains nine sections. The sections that are\nrelevant for the present purpose are set out below.\nImmuni-\t 3. (1)\t Notwithstanding anything contained\nties\t\t\t other law for the time being in\n\t\t\t force,-\n\t\t (a)\t no person who has subscribed to or\n\t\t\t has otherwise\t acquired special\n\t\t\t Bearer Bonds shall be\t required to\n\t\t\t disclose, for any purpose\n\t\t\t whatsoever, the nature and source\n\t\t\t of acquisition of such Bonds;\n\t\t (b)\t no inquiry or investigation shall\n\t\t\t be commenced\tagainst\t any person\n\t\t\t under any such law on the ground\n\t\t\t that such person has subscribed to\n\t\t\t or has\t other wise acquired Special\n\t\t\t Bearer Bonds; and\n\t\t (c)\t the\t fact\tthat a\t person\t has\n\t\t\t subscribed to\t or has otherwise\n\t\t\t acquired Special Bearer Bonds shall\n\t\t\t not be taken into account and shall\n\t\t\t be inadmissible as evidence in any\n\t\t\t proceedings relating to any offence\n\t\t\t or the\t imposition of\tany penalty\n\t\t\t under any such law.\n\t (2)\t x\t x\t x\t x\n992\nAcquisition.4.\t Without prejudice to the generality of\netc., of\t the\t provisions of section 3,\t the\nBonds not to\t subscription to,\tor acquisition\t of,\nbe taken into\t Special Bearer Bonds by\t any person\naccount for\t shall not be taken into account for the\ncertain proc-\t purpose of\t any proceeding under\t the\needings.\t Income-tax\t Act,\t 1961\t(hereinafter\n\t\t referred to\t as the Income-tax Act), the\n\t\t Wealth-tax\t Act,\t 1957\t(hereinafter\n\t\t referred to\t as the\t Wealth-tax Act) or\n\t\t the\t Gift tax Act, 1958\t(hereinafter\n\t\t referred to as the Gift-tax Act) and, in\n\t\t particular, no person who has subscribed\n\t\t to, or has otherwise acquired, the said\n\t\t Bonds shall be entitled-\n\t\t (a)\t to claim any set-off\tor relief in\n\t\t\t any assessment, re-assessment,\n\t\t\t appeal, reference\t or other\n\t\t\t proceeding under the Income-tax Act\n\t\t\t or to reopen any, assessment or re-\n\t\t\t assessment made under that Act on\n\t\t\t the ground that he has subscribed\n\t\t\t to or\thas otherwise acquired\t the\n\t\t\t said Bonds:\n\t\t (b)\t to claim, in relation to any period\n\t\t\t before the date of maturity of the\n\t\t\t said Bonds, that any asset which is\n\t\t\t includible in\this net\t wealth\t for\n\t\t\t any assessment year\t under\t the\n\t\t\t Wealth-tax Act\t has been converted\n\t\t\t into the said Bonds; or\n\t\t (c)\t to claim, in relation to any period\n\t\t\t before the date or maturity of the\n\t\t\t said Bonds, that any asset held by\n\t\t\t him or\t any sum credited in\t his\n\t\t\t books of account or otherwise held\n\t\t\t by him represents the consideration\n\t\t\t received by him for the transfer of\n\t\t\t the said Bonds.\nAmendment 5. In the Income-tax Act,- (a) in section\nof Act 43\t 2, in clause (14), after sub clause Act\nof 1961\t\t (iv), the following sub-clause shall be\n\t\t inserted, namely:-\t\"(v) Special Bearer\n\t\t Bonds, 1991 issued by\tthe Central\n\t\t Government,\"\n993\n\t (b) in section\t10, in\tclause\t(15), after\n\t\t sub-cluase\t (ia),\tthe following\tsub-\n\t\t clause shall be inserted, namely:-\n\t\t (ib) premium on\tthe redemption of\n\t\t\t Special Bearer Bonds, 1991 :\" .\nAmendment 6. In section\tof 5 of the Wealth-tax Act,\nof Act 27\t in sub-section (1), after clause (xvia),\nof 1957.\t the following clause shall be inserted,\n\t\t namely :-\n\t\t (xvib) Special Bearer Bonds, 1991 ;\" .\nAmendment 7. In section\t5 of the Gift-tax Act, in\nof Act 18\t sub-section\t (1), after clause (iiia),\nof 1958\t\t the following clause shall be inserted,\n\t\t namely:-\n\t\t (iiib) \"of property in the form of Special\n\t\t\t Bearer Bonds, 1991.\".\"\n The marginal notes against sections 5, 6, and 7\nindicate that these sections are amendments respectively of\nthe Income-tax Act of 1961, Wealth-tax Act of 1957 and Gift-\ntax Act\t of 1958. Section 5 excludes Special Bearer Bonds,\n1991 from the capital\tasset of an assessee and exempts the\npremium payable\t on the redemption of the Bonds from income-\ntax. Section 6 exempts the Bonds from wealth-tax. Section 7\nexempts from gift-tax property in the form of these Bonds.\n The Act has been\tchallenged mainly on the ground that\nit infringes Art. 14 of the Constitution. Art. 14 forbids\nclass legislation but permits\tclassification.\t Permissible\nclassification, it is well established, must\tsatisfy\t two\nconditions which Das J. enunciated in\t the State of\tWest\nBengal v. Anwar Ali Sarkar(l) as follows:-\n \"(1) that\tthe classification must be founded on an\n\t intelligible differentia which distinguishes those\n\t that are grouped together from others and,\n994\n (2) that the differentia must have rational relation.\n\t to the object sought to be achieved by the Act.\"\nThe immunities\tprovided by the impugned Act are clearly for\nthe benefit of those who have acquired the Bonds with black\nmoney. Clauses (a), (b) and (c) of Section 3 (1) provide for\nthese immunities \"notwithstanding anything contained in any\nother law for the time being\tin force.\" Clause (a) states\nthat no\t holder of Special Bearer Bonds shall be required to\ndisclose for\tany purpose the nature and source of\nacquisition of the Bonds. Clause (b) forbids commencement of\nany enquiry or investigation under any law against a person\non the\tground\tthat he has subscribed to or otherwise\nacquired the Bonds. Under clause (c) the fact that a person\nhas subscribed to or otherwise acquired Special Bearer Bonds\nshall be inadmissible in evidence and cannot be taken into\naccount in any proceeding relating to\t any offence or the\nimposition of any penalty under any law. None of these\nimmunities is required by a person who has paid 'white'\nmoney, that is, money\tthat has been\t accounted for, to\nacquire Bonds.\tTo a person who has disclosed the source of\nacquisition of\tthe Bonds, these immunities are of no use.\nSection 4 makes it clear that\t the immunities conferred by\nthe Act are of use only to those who have acquired the Bonds\nwith unaccounted money. Section 4 states that the fact that\none has\t subscribed to or otherwise acquired the Bonds shall\nnot be\ttaken into account in\t any proceeding under\t the\nIncome-tax Act, 1961, the Wealth-tax Act, 1957 and the Gift-\ntax Act, 1958 and goes on to provide specifically that no\none shall be entitled to:\n (a) any manner of relief\t under the Income-tax Act on\n\t the ground that he has acquired the Bonds; or\n (b) claim that any asset belonging to him which formed\n\t part of his net wealth in any period before the\n\t maturity of the Bonds, has been converted\tinto\n\t such Bonds; or\n (c) claim that any asset held by him or any sum of\n\t money\t credited in\this books of\t account or\n\t otherwise held by him in the aforesaid period is\n\t the consideration received by him for the transfer\n\t of the Bonds.\nMr. Salve appearing for the petitioners in writ petitions\nNos. 863 and 994 of 1981 contended that section 4(c) did not\nconstitute an\n995\nabsolute bar to the assessee seeking to prove that the said\nsum or\tasset represents the sale price of Special Bearer\nBonds; on behalf of the Union of India it was asserted that\nthis was an absolute bar. In view of the conclusion I have\nreached, I do not propose to\tdecide the point and I shall\nproceed on the basis that it\tis an absolute bar. It is\napparent from clauses (a) to (c) of section\t4 that\t the\nrights they deny affect only those who have disclosed their\nsource of acquisition of the Bonds. Those in whose case the\nsource of acquisition has not been detected are not affected\nby the\tprohibition contained in section 4. The impugned Act\ndenies to those who have acquired the Bonds not with black\nmoney any relief under the Income-tax Act or the Wealth-tax\nAct or any benefit in any other way claimed by on the ground\nthat they are holders\tof Special Bearer Bonds, and\t the\nrelief and the\t benefit denied to them have been\tmade\navailable to those who\t have acquired\tthe Bonds with black\nmoney by ignoring the source of acquisition in their case.\n The Act thus distinguishes between two\t classes of\nholders of Special Bearer Bonds: tax-evaders and honest tax-\npayers. Has this classification a rational relation to the\nobject of the Act ? The object, as already noticed, is to\ncanalise black\t money\t for productive purposes to\tmake\neconomic and social planning effective. If the exemptions\nand immunities\t conferred by\t the Act are\tsufficiently\nattractive to induce tax-evaders to acquire Special Bearer\nBonds, they will remain as attractive\t even if all these\nbenefits were granted to those who will pay 'white' money\nfor the\t Bonds. Denial\tof these benefits to those who have\nacquired the Bonds with money which has been accounted for\ndoes not in any way further the object of canalisation of\nblack money for productive purposes. The discrimination in\nfavour of black money therefore seems to be obvious. It was\nhowever argued\tthat no\t one would be\tinclined to invest\n'white' money for Special Bearer Bonds which carry only 2\nper cent annual interest. I\t do not think\t this is a\nconsideration which could justify the discrimination. Apart\nfrom that, a return of 2 per cent simple interest per annum\nis not\ta correct measure of the actual advantages conferred\nby the\tAct. Taking into account the\tincome-tax and\t the\nwealth-tax savings if one did not have to pay any tax on the\namount\twith which Special Bearer Bonds were acquired-\npurchasers of the Bonds with black money did not-and the tax\nfree premium on the Bonds, the actual return would be many\ntimes more than 2 per cent simple interest per annum. It\nmust therefore be held that\n996\nthe basis on which the holders of Special Bearer Bonds have\nbeen classified\t to give certain advantages to one class and\ndeny them to the other, has no rational nexus with\t the\nobject of the Act.\n The matter\t has another aspect. The classification of\nholders of Special Bearer Bonds into\ttax-payers and\ttax-\nevaders does disclose a basis. Would\tit be an acceptable\nargument to say that this basis has a relation to the object\nof the\tAct because the black\tmoney invested\t in Special\nBearer Bonds by tax-evaders could be utilised for productive\npurposes for ten years\t and that both the conditions of a\nvalid classification were thus satisfied ? I am afraid not.\nIn State of West Bengal v. Anwar Ali Sarkar, (supra) Das J.\npoints out:\n\t \"The\tdifferentia which is\t the basis of\t the\n classification and\t the object of the Act are distinct\n things and\t what is necessary is\tthat there must be a\n nexus between them. In short while the Article [Art.\n 14] forbids class legislation in sense of making\n improper discrimination by conferring privileges or\n imposing liabilities upon persons arbitrarily selected\n out of a\tlarge number of other persons similarly\n situated in relation to the privileges sought to be\n conferred or the liability proposed to be imposed, it\n does not forbid classification for the\t purpose of\n legislation.. \"\nIn Anwar Ali Sarkar's\tcase the constitutional validity of\nthe West Bengal Special Courts Act (X of 1950) constituting\nspecial courts\tand empowering the state government to refer\n'cases' 'offences' or 'classes\t of cases' or\t'classes of\noffences' to such courts was in question. The object of the\nWest Bengal Act was to provide for the speedier trial of\ncertain offences. Das J. Observes further:\n \"To achieve this object, offences or cases have to\n be classified upon the basis of some differentia which\n will distinguish those offences or cases\t from others\n and which\twill have a reasonable relation to\t the\n recited object of the Act. The differentia and\t the\n object being, as I have said, different elements, it\n follows that the object by itself cannot be the basis\n of the classification of offences or the cases, for in\n the absence of any special circumstances which\t may\n distinguish one offence or one class of offences or one\n class\n997\n of cases from another offence, or class of offences or\n class of cases,\tspeedier trial\tis desirable in the\n disposal of all offences\tor classes of\toffences or\n classes of cases.''\n If\t the\tdifferentia, that is, the\t basis\t of\nclassification, and the object\t of the Act are distinct\nthings,\t it follows that it is not enough that\t the\ndifferentia should have a nexus with\tthe object, but it\nshould\talso be intelligible. The\tpresence of\tsome\ncharacteristics in one class which are not found in another\nis the\tdifference between the two classes, but a further\nrequirement is\tthat this differentia must be intelligible.\nIf the\tbasis of classification is on the\tface of it\narbitrary in the sense\t that it is palpably unreasonable, I\ndo not\t think\tit is\tpossible to call the\t differentia\nintelligible. The following passage from the\tjudgment of\nBose J. in Anwar Ali Sarkar's case illustrates the point:\n\t \"I can conceive of cases where there is the utmost\n good faith/and where the\tclassification is scientific\n and rational and yet which would offend this law. Let\n us take an imaginary case in which a State legislature\n considers\tthat all accused persons whose skull\n measurements are below a\t certain standard, or\t who\n cannot pass a given series of intelligence tests, shall\n be tried summarily whatever the offence on the ground\n that the less complicated the trial the fairer it is to\n their sub-standard of\t intelligence.\t Here\t is\n classification. It\t is scientific\tand systematic.\t The\n intention and motive are good. There is no question of\n favouritism, and yet I can hardly believe that such a\n law would\tbe allowed to stand. But what would be the\n true basis\t of the\t decision ? Surely simply this that\n the Judges would not consider that fair and proper.\"\nThe scope of Art. 14 was further elaborated in some of the\nlater decisions\t of this Court. This is what\tBhagwati, J.\nspeaking for himself and Chandrachud and Krishna Iyer JJ, in\nE.P. Royappa v. State of Tamil Nadu and another(l) says:\n\t \"We cannot countenance any attempt to truncate its\n all-embracing scope and meaning, for to do so would be\n to\t violate its activist\t magnitude. Equality is a\n dynamic\n998\n concept with many aspects and dimensions and it cannot\n be \"cribed, cabbined and\tconfined\" within traditional\n and doctrinaire limits. From a positivistic points of\n view, equality is antithetic to arbitrariness. In fact\n equality and arbitrariness are\tsworn enemies;\t one\n belongs to\t the rule of law in a\t republic while\t the\n other, to\tthe whim and caprice of an absolute monarch.\n Where an act is arbitrary it is implicit in it that it\n is\t unequal both\taccording to political logic\t and\n constitutional law\t and is\t therefore violative of Art.\n 14.\"\nBhagwati J. reiterates in Maneka Gandhi v. Union of India(l)\nwhat he had said in Royappa's case and adds:\n\t \"The principle of reasonableness, which legally as\n well as philosophically, is an essential\t element of\n equality or non-arbitrariness pervades Article 14 like\n a brooding omnipresence . . . \"\n To pass the test\tof reasonableness if it was enough\nthat there should be a differentia which should have some\nconnection with the\tobject\t of the Act,\t then these\nobservations made in Maneka Gandhi and Royappa would be so\nmuch wasted eloquence. The decisions of this Court insist\nthat the differentia must be intelligible and the nexus\nrational, and the observations quoted above would seem to be\nappropriate only if we attach some significance to the words\n'intelligible' and 'rational'. The question however remains:\nwhen is\t one justified\tin describing something as arbitrary\nor unreasonable\t ? Terms like 'reasonable', 'just' or 'fair'\nderive\ttheir\tsignificance from the existing social\nconditions. W. Friedmann in his \"Legal Theory\" (5th Ed. page\n80) points out that expressions like \"a reasonable and fair\nprice\" or a \"fair and equitable\" restitution means nothing,\nexcept in conjunction with the social\t conditions of\t the\ntime\". Brandeis\t J. in his opinion in Quaker City Cab Co. v.\nCommonwealth of Pennsylvania(2) explains\t when\t a\nclassification shall be reasonable: 'We call\tthat action\nreasonable which an informed, intelligent,\tjust-minded,\ncivilized men could rationally favour.\" Bose J. in Anwar Ali\nSarkar's case says much the same\n999\nthing in holing that the West Bengal Special Courts Act of\n1950 offends Art. 14:\n\t \"We find men accused of heinous crimes called upon\n to answer\tfor their lives and liberties. We find them\n picked out from their fellows, and however much the new\n procedure may give them a few crumbs of advantage, in\n the bulk they are deprived of substantial and valuable\n privileges of defence which others, similarly charged,\n are able to claim. It matters not to me, nor indeed to\n them and their families and their friends, whether this\n be done in good faith, whether it be done for\t the\n convenience of government, whether the process can be\n scientifically classified\tand labelled, or whether it\n is an experiment in speedier trials made for the good\n of society\t at large. It matters\tnot how lofty\t and\n laudable the motives are.\t The question with which I\n charge myself is, can fair-minded, reasonable, unbiased\n and resolute men, who are not swayed by\t emotion or\n prejudice, regard\tthis with equanimity and call it\n reasonable, just and fair, regard it as\t that equal\n treatment and protection in the defence\tof liberties\n which is expected of a sovereign democratic republic in\n the conditions which obtain in India today ?\"\n Keeping in mind\t these\t observations on what is\nreasonable, is\tthe basis on which the holders of Special\nBearer Bonds have been\t classified into two groups, honest\ntax-payers and tax-evaders, intelligible ? What is arbitrary\nand offends Art. 14, cannot be called intelligible. It is\nclear from the provisions of the Act set out earlier that\nthe advantages\t which\t the tax-evaders derive from\t the\nimmunities provided by the Act are not available to those\nwho have acquired the\tBonds with 'white' money. The\t Act\npromises anonymity and security for tax-evaders. No question\ncan be\tasked as to the nature and source of acquisition or\npossession of the Bonds. The\t Bonds\tcan be\t transferred\nfreely, and the apprehension expressed by the petitioners\ncannot he said to be baseless that passing from hand to hand\nthe Bonds are likely to operate as parallel currency and be\nused for any kind of transaction. From a reading of\t the\npreamble of the Act it does not seem that the object of the\nAct was\t only to enable the Central Government to have some\nuse for\t 10 years of the black money which is said to have\n\"become a serious threat\n1000\nto the national economy\". As I read the preamble the purpose\nof the\tAct is\tto unearth black money and\tuse it\t for\nproductive purposes for effective economic\t and social\nplanning. If that be the object of the Act, it is difficult\nto see\thow its\t provisions help to achieve the intended\npurpose. The Act discloses a\t scheme\t which\tenables\t tax\nevaders to convert black money into white after 10 years and\nin the\t meantime use\t the Bonds as parallel currency\ninitiating a chain of\tblack money investments There is no\nprovision in the Act requiring that on maturity of the Bonds\ntheir holders would have to disclose their identity, which\nmeans that if after 10 years black money which had taken the\nshape of Special Bearer Bonds goes under-ground again and\nretain its colour, there is nothing to prevent it. There is\nnothing in the scheme\tto halt\t generation of\tblack money\nwhich threatens the\tnational economy. Some people by\nsuccessful evasion manoeuvres are able to throw the burden\nof taxation of their own shoulders which means a greater\nburden on the honest tax-payers and this leads to economic\nimbalance. On the effect of giving concessions to\tsuch\nunscrupulous tax-evaders in preference\t to the\t honest tax-\npayers, Mr. R.K. Garg appearing in person and Mr. Salve both\nrepeated what the Direct Taxes Enquiry Committee's final\nreport says: \"Resorting to such a measure would only shake\nthe confidence\tof the\thonest tax-payers in the capacity of\nthe Government\tto deal\t with the law\tbreakers and would\ninvite\tcontempt for\tits enforcement machinery.\"\t The\npetitioners submitted further that measures like the Special\nBearer Bonds scheme would tempt more people to evade taxes\nand instead of serving\t a legitimate public interest would\ngrievously damage it.\n It has been pointed out that there have been voluntary\ndisclosure schemes in the past. That is so, but none of them\nis quite like the scheme in question which not only exempts\nthe unaccounted\t money in the shape of Special Bearer Bonds\nfrom all taxes but provides also for a tax-free premium on\nit. According to the petitioners, if\tthe earlier schemes\nhave been conciliatory, the\tpresent\t scheme\t amounts to\ncapitulation to black money. I asked the Attorney General if\nit was his case that all attempts to unearth black money had\nfailed and the present scheme was the only course open. His\nanswer was that was not his case The\t affidavit filed on\nbehalf of the Union of India also does not make such a case.\nClearly, the impugned Act puts a premium on dishonesty\nwithout even a justi-\n1001\nfication of necessity-that the situation in the country left\nno option.\n The Act has been\tcriticised as immoral and unethical.\nAny law\t that rewards law breakers and tax dodgers is bound\nto invite such criticism. Should the\tcourt concern itself\nwith questions\tof morality and ethics\t in considering\t the\nconstitutional validity\t of an Act ? of course no law can be\nstruck down only on the ground that it is unethical. However\nas Friedmann in his \"Legal Theory\" (page 43) says: \"There\ncannot be-and there never has been-a complete separation of\nlaw and\t morality. Historical and ideological\t differences\nconcern the extent to\twhich the norlns of the social order\nare absorbed into the\tgeneral\t order.\" It has been held by\nthis Court in Royappa\tand Maneka Gandhi that the principle\nof reasonableness is an essential element of equality. The\nconcept\t of reasonableness does not\texclude\t notions of\nmorality and ethics. I\t do not\t see how it can be disputed\nthat in\t the circumstances of a given case considerations of\nmorality and ethics may have a bearing on the reasonableness\nof the law in question.\n Having regard to the provisions of the impugned\t Act\nwhich I\t have discussed\t above and the object of the Act to\nwhich I\t have referred,\t is it\tpossible to say that it is\nreasonable to classify the E holders of Special Bearer Bonds\ninto honest tax-payers and tax-evaders for the purpose of\nconferring benefits on the tax-evaders and denying them to\nthose who have honestly paid their taxes, especially when a\nmeasure appeasing the tax-evaders to the extent the scheme\nin question does is not claimed as\t unavoidable ?\t The\ninformed, fair-minded,\tcivilized man on whose judgment both\nBrandeis J. and Bose J. rely, would he have found the basis\nof the\tclassification intelligible ? The questions answer\nthemselves, the\t arbitrary character of the differentiation\nis so obvious. I do not think it is possible to take the\nrhetoric of Royappa and Maneka Gandhi\t seriously and\tfind\nthat the Act passes the test of reasonableness.\n What I have said\tabove on the Special Bearer Bonds\nscheme should not be read as an expression of opinion on the\nwisdom of the government policy-that the scheme is not the\nbest in\t circumstances. My conclusion is based not on what\nthe policy of the government is but on what the equality\nelause in Art. 14 requires.\n1002\n Having held that the Special Bearer Bonds (Immunities\nand Exemptions) ordinance, 1981 and the Special Bearer Bonds\n(Immunities and\t Exemptions) Act, 1981 are invalid on\t the\nground that they infringe Art. 14 of the Constitution, I do\nnot find it necessary\tto consider whether Special Bearer\nBonds (Immunities and Exemptions) ordinance, 1981 is outside\nthe ordinance making power of the President under Art. 123\nof the Constitution.\nN.V.K.\t\t\t\t Petitions dismissed.\n1003" }, { "title": "Indian And Eastern Newspaper Society ... vs Commissioner Of Income Tax, New Delhi on 31 August, 1979", "url": "https://indiankanoon.org//doc/615273/", "text": "Indian And Eastern Newspaper Society ... vs Commissioner Of Income Tax, New Delhi on 31 August, 1979\nEquivalent citations: 1979 AIR 1960, 1980 SCR (1) 442, AIR 1979 SUPREME COURT 1960, 1979 SCC 248, 1979 TAX. L. R. 1299, (1979) 119 ITR 996, (1979) 54 TAXATION 105, (1979) 2 TAXMAN 197, 1979 (4) SCC 357, 1979 SCC(TAX) 336, (1979) 2 SCJ 450, (1979) 12 CURTAXREP 190\nAuthor: R.S. Pathak\nBench: R.S. Pathak, P.N. Bhagwati, V.D. Tulzapurkar\n PETITIONER:\nINDIAN AND EASTERN NEWSPAPER SOCIETY NEW DELHI\n\n\tVs.\n\nRESPONDENT:\nCOMMISSIONER OF INCOME TAX, NEW DELHI\n\nDATE OF JUDGMENT31/08/1979\n\nBENCH:\nPATHAK, R.S.\nBENCH:\nPATHAK, R.S.\nBHAGWATI, P.N.\nTULZAPURKAR, V.D.\n\nCITATION:\n 1979 AIR 1960\t\t 1980 SCR (1) 442\n 1979 SCC (4) 248\n\n\nACT:\n Income Tax\t Act 1961-S. 147(b)-Scope of-\"Information\"\n\"Reason to believe\"-Meaning of-Opinion\t of audit party of\nIncome Tax Department-If would constitute \"information\".\n\n\n\nHEADNOTE:\n Section 147(b) of the Income Tax\t Act, 1961 provides\nthat if\t an Income Tax officer has,\t in consequence of\ninformation in his possession, reason to believe that income\nchargeable to tax has escaped assessment for any assessment\nyear, he may assess or reassess such income.\n The internal audit organisation\tof the\t income\t tax\ndepartment, in the course of auditing the income tax records\npertaining to the assessee for certain assessment years\nstated that the assessee's income on account of letting out\nof halls and rooms should not have been assessed as income\nfrom business but an assessment should have been made under\nthe head \"Income from\tproperty\". Treating the report as\ninformation in his possession under s. 147(b) the Income Tax\nofficer re-assessed the assessee's income The Appellate\nAssistant Commissioner\treversed the Income Tax officers\norder. On the other hand, the\t Appellate Tribunal took the\nview that the Income Tax officer had jurisdiction to proceed\nunder s.147(b). In a reference under s.257 of the Income Tax\nAct the\t question was whether the Income Tax\tofficer\t was\nlegally justified in reopening the assessment under s.\n147(b) on the basis of the view expressed by the Internal\nAudit party received by him subsequent to the original\nassessment.\n Allowing the appeal,\n^\n HELD: The opinion of the internal audit organization of\nthe Department\ton a point of\tlaw cannot be\tregarded as\ninformation within the meaning\t of s.\t147(b) of the\tAct.\n[455A].\n 1. (a) An assessment proceeding, which is a quasi-\njudicial proceeding, acquires finality\t on the assessment\norder being made. The\tfinality of such an order can be\ndisturbed only\tin proceedings,\t and within the confines,\nprovided by law. An appeal, revision and rectification are\nproceedings in\twhich the finality of the assessment may be\nquestioned. Section 147, under\t which an assessment may be\nreopened, is a proceeding for assessing income which\t has\nescaped assessment. [446F-G]\n 2. In cases falling under s. 147(b) \"information\" is an\nindispensable ingredient. The word ''information'' has been\ninterpreted by\tthis Court to mean not only facts or factual\nmaterial but include information as to the true and correct\nstate of the law and, therefore, information as to relevant\njudicial decisions. The term is\t also\tdefined\t as\n\"instruction\" or Knowledge derived from an external source\nconcerning facts or particular, or as to law, relating to n\nmatter bearing on the assessment. [447D-F]\n Mahaaraj Kamal Singh v. Commissioner of Income Tax 35\nI.T.R. 1 (S.C.)= [1959] Sup. I SCR 10, Commissioner of\nIncome Tax v. Raman & Company 67 I.T.R. Il(SC)=[1968] I SCR\n10, referred to.\n443\n 3.(a) By its inherent nature, a\t fact has concrete\nexistence. It influences the determination of\t an issue by\nthe mere circumstance of its\trelevance. It\trequires no\nfurther authority to make it significant. [447-H].\n (b) The term 'law' is used in the sense of norms or\nguiding\t principles having\tlegal\teffect\t and legal\nconsequences. To possess legal significance for\tthat\npurpose, law must be enacted or declared by\ta competent\nauthority. The legal sanction vivifying it imparts to it its\nforce and validity and binding nature. Law may be statutory\nlaw enacted by a competent legislative authority, or it may\nbe judge made law emanating from a declaration or exposition\nof the content of a legal principle or the interpretation of\na statue and may in particular cases extend to a definition\nof the\tstatus of a party or the legal relationship between\nthe parties, the declaration being rendered by a competent\njudicial or quasi-judicial authority empowered to decide\nquestions of law between contending parties. The declaration\nor exposition is ordinarily set forth in the judgment of a\ncourt or the order of\t a tribunal. Such declaration or\nexposition in itself bears the character of law. In every\ncase, therefore, to be law it must be a creation by a formal\nsource,\t either\t legislative or judicial authority. A\nstatement by a person\tor body\t not competent to create, or\ndefine the law cannot be regarded as law. [448A-D]\n (c) Where\t s. 147(b) is read\t as referring\t to\n'information' as to\tlaw, what is contemplated\t is\n'information' as to the law created by a formal source. It\nis law which, because it issues from a competent legislature\nor a\tcompetent judicial or quasi-judicial authority,\ninfluences the\tcourse of the assessment and decides any one\nor more\t of these matters which determine the assessee's tax\nliability [448G]\n 4. The Internal Audit organisation of the Income Tax\nDepartment was\tset up\tprimarily for imposing a check over\nthe arithmetical accuracy of the computation of income and\nthe determination of tax. The audit of income tax receipts\nhaving been entrusted to the Comptroller and Auditor-General\nof India, it is intended as an exercise in removing mistakes\nand errors in income tax records before they are submitted\nto the\tscrutiny of the Comptroller and Auditor General. The\naudit by the Comptroller and Auditor General is, by virtue\nof s. 16 of the Comptroller and Auditor General (Duties,\nPowers and Conditions of Service) Act, 1971\tintended to\nensure\tthe sufficiency or otherwise\t of the rules\t and\nprocedures prescribed\t for the purpose of\tsecuring an\neffective check\t on the\t assessment, collection\t and proper\nallocation of revenue and to ascertain whether the rules and\nprocedure are being fully observed and L nothing more.\nTherefore the contents of an internal audit report cannot be\nconstrued as enjoying the status of a declaration of law\nbinding on the Income\tTax Officer. Both the internal audit\nparty of the Income Tax Department and\t the Audit report of\nthe Comptroller\t and Auditor General\tperform\t essentially\nadministrative\tor executive\tfunctions and\t cannot\t be\nattributed the\tpower of judicial supervision over\t the\nquasi-judicial acts of income\ttax authorities. The statute\ndoes not contemplate such power The opinion of the audit\nparty in regard to the application of one section of the\nIncome Tax Act instead of another by the Income Tax officer\nis not\tlaw because it is rot\t a declaration\t by a\tbody\nauthorised to declare the law. [450B-F]\n444\n 5. While the law may be enacted or laid down only by a.\nbody or\t person with authority in that behalf, knowledge or\nawareness of the law may be communicated by\tany one. No\nauthority is required\tfor the purpose of communicating\nknowledge or awareness of the law. [450G]\n 6 (a) In\tevery case the Income Tax officer\tmust\ndetermine for himself what the effect and consequence of the\nlaw mentioned\t in the audit\t note are and\t whether in\nconsequence of\tthe law\t which has come to his notice he can\nreasonably believe that income\t had escaped assessment. The\nbasis of his belief must be the law\tof which he has now\nbecome aware. The true evaluation of the law in its bearing\non the\tassessment must\t be made directly and solely by the\nIncome Tax officer. [451C-D]\n Maharaj Kamal Singh v. Commissioner of Income Tax 35\nI.T.R. I (SC)= [1959] Sup. I SCR 10, Commissioner of Income\nTax v.\tRaman &\t Company 67 I.T.R. 11 (SC)=[1968] 1 SCR 10,\nBankipur Club Ltd. v.\tCommissioner of Income Tax [1971] 82\nI.T.R. 831 followed\n R. K. Malhotra, Income Tax officer, Croup Circle 11(1),\nAhmedabad v. Kasturbhai Lalbhai, 109 I.T.R. 537, Kalyanji\nMavji &\t Co. v.\t Commissioner of Income Tax, 102 I.T.R. 287,\nover-ruled.\n Assistant Controller of Estate Duty Y. Nawab Sir Mir\nOsman Ali Khan Bahadur, 72 I.T.R, 376 referred to.\n Commissioner of Income Tax v. H. H. Smt. Chand Kanwarji\nAlwar 84 I.T.R 584, Commissioner of Income Tax v. Kalukutty\n85 I.T.R 102, Vashist\tBharghava v. Income Tax officer, 99\nI.T.R. 148, Muthukrishna Reddier v Com missioner of Income\nTax, Kerala, 90 I.T.R\t503, Raj Kumar Shrawan Kumar v.\nCentral Board of Direct Taxes & Anr. 107 I.T.R. 570, Elgin\nMills Co. Ltd., v. Income Tax officer, Companies Circle, 'A'\nWard, Kanpur, 111 I.T.R. 287 not approved.\n (b) The error discovered\tby the Income Tax Officer on\na. reconsideration of the same material (and nothing more)\ndoes not give the Income Tax Officer the power to reopen the\nassessment. [451G]\n (c) The submission of the Revenue that upon receipt of\nthe audit note the Income Tax officer discovers or realises\nthat a mistake has been committed in the original assessment\nand therefore\t the discovery\t of the mistake would be\n\"information\" within\tthe meaning of s.\t 147(b)\t is\ninconsistent with the terms\tof the\t section. What\t the\nsection envisages is that the Income Tax officer must first\nhave information in his possession and then in consequence\nof such\t information he\t must have reason to believe\tthat\nincome has 'escaped assessment. The realisation that income\nhas escaped assessment is covered by\tthe words \"reason to\nbelieve\", and it follows from the \"information\" received by\nhim. The information is not the realisation; the information\ngives birth to the realisation. [452C-D]\n\n\n\nJUDGMENT:\n CIVIL APPELLATE JURISDICTION: Tax Reference Case Nos. 1\nto 4 of 1973.\n Income Tax\t Reference under section 257 of Income Tax\nAct 1961 made by T T. Appellate Tribunal Delhi Bench 'C' in\nR.A. Nos. 491 to 494 of 1971-72 (I.T.A. NOS. 6992,19629-\n19631 of 1967-68).\n445\n V. S. Desai, (Mrs.) A. M. Verma, A. N. Haskar an(3 J.\nB. Dadachanji for the appellant.\n T. A. Ramachandran and Miss A.\tSubhashini for\t the\nrespondent.\n (Dr.) Devi\t Pal, Ravinder\tNarain and J. B. Dadachanji\nfor the Intervener.\n The Judgement of the Court was delivered by\n PATHAK, J.-Can the view expressed by an internal audit\nparty of the Income Tax Department on a point of law be\nregarded as ''information' for\t the purpose of initiating\nproceedings under section 147(b) of the Income Tax Act, 1961\n? opinion on the question has\t been divided among the High\nCourts, and accordingly the present cases have been referred\nby the\tIncome-tax Appellate Tribunal under s. 257 of the\nAct.\n The assessee, Messrs. Indian and Eastern Newspaper\nSociety, is a society registered under the Indian Companies\nAct. It is a professional\t association of newspapers\nestablished with the principal object of promoting\t the\nwelfare and interest of all newspapers. The assessee owns a\nbuilding in which a conference hall and rooms are let out on\nrent lo\t its members as well as to outsiders. Certain other\nservices are also provided to the members. The income from\nthat source was assessed to tax all along as income from\nbusiness. It was so assessed for the years 1960-61, 1961-62,\n1962-63 and 1963-64 also.\n The Income\t Tax Department\t includes an internal audit\norganisation whose function it\t is to\t examine income-tax\nrecords\t and check mistakes\tmade therein with a\tview\nultimately to improve the quality of\tassessments. In\t the\ncourse of auditing the income-tax records pertaining to the\nassessee for the assessment years 1960-61 to 1963-64, the\ninternal audit\tparty expressed\t the view that the money\nrealised by the assessee on account of the occupation of its\nconference hall\t and rooms should not have been assessed as\nincome from business. It said that an assessment should have\nbeen made under the head \"Income from property\". The Income\nTax Officer treated\tthe contents\tof the report as\n\"information\" in his possession for the purpose of s. 147(b)\nof the\tIncome Tax Act. 1961,\tand reassessed the income on\nthat basis. The Appellate Assistant Commissioner allowed the\nappeals filed by the assessee holding, inter alia, that in\nlaw it could not be said that the Income Tax officer had any\n\"information\" in his possession enabling him to take action\nunder s. 147(b). On appeal by\t the Revenue, the Income Tax\nAppellate Tribunal, Delhi Bench noticed a\tconflict of\njudicial opinion on the question whether the internal audit\n446\nreport could be treated as \"information\" for the purpose of\ns. 147(b). The Gujarat\t High Court in Kasturbhai Lalbhai v.\nR. K. 'Malhotra, Income-tax Officer, Group Circle 11(1),\nAhmedabad had held that an internal audit report could not\nbe regarded as \"information\", while the Delhi High Court in\nCommissioner of\t Income-tax v.\tH. H. Smt. Chand Kanwarji\nAlwar has expressed a\tcontrary view.\tFollowing the\tview\nadopted by the Delhi High Court, the Tribunal held that the\nIncome Tax officer had\t jurisdiction to proceed under s.\n147(b). The assessee applied for a reference, and having\nregard to the difference between the\tHigh Courts on\t the\npoint, the Tribunal has considered it expedient to refer the\nfollowing question of law directly to this Court:-\n\t \"Whether, on the facts and in the circumstances of\n the case,\tthe Income-tax officer was legally justified\n in reopening the assessments under section 147 (b) for\n the years\t1960-61, 1961-62, 1962-63 and 1963-64 on the\n basis of the view expressed by the Internal Audit party\n and received by\t him subsequent to the original\n assessment ?\"\n Since then, the judgment\tof the Gujarat High Court in\nKasturbhai Lalbhai's case (supra) has, on appeal,\tbeen\nreversed by this Court in R. K. Malhotra,\t Income\t Tax\nOfficer, Group Circle 11(1) Ahmedabad v. Kasturbhai Lalbhai.\nIt has\tbeen strenuously contended that the view taken by\nthis Court calls for further consideration. Having regard to\nthe dimensions\tof the controversy and the importance of the\nquestion, we have been persuaded to take a fresh look at the\npoint.\n An\t assessment proceeding is\ta quasi judicial\nproceeding. It\tacquires finality on the assessment order\nbeing made. And the finality\tof such an order can be\ndisturbed only\t in proceeding, and within the confines\nprovided by law. An appeal, revision and rectification are\nproceedings in\twhich the finality may\t be questioned.\t The\nassessment may\talso be\t reopened under\t section 147 of the\nAct. It\t is a proceeding for assessing income which\t has\n\"escaped assessment\". Section 147 reads:-\n\t \"147. If-\n\t (a)\tthe Income Tax officer has reason to believe\n\t that, by reason of the omission or failure on\n\t the part\t of an\tassessee to make a return\n\t under section 139 for any\n447\n\t assessment year to the Income Tax officer or Lo\n\t disclose fully and\t truly\tall material facts\n\t necessary for his assessment for that year, income\n\t chargeable to\t tax has escaped assessment for that\n\t year, or\n (b) notwithstanding that there has been no omission or\n\t failure as mentioned in clause (a) on the part of\n\t the assessee, the\tIncome-tax officer has in\n\t consequence of information\t in his possession\n\t reason to believe that income chargeable to tax\n\t has escaped assessment for any assessment year,\n he may, subject to the provisions of sections 148 to\n 153, assess or reassess such income or recompute the\n loss or the depreciation allowance, as the case may be,\n for the assessment year concerned.\"\n In cases falling under section 147(b), the expression\n\"information\" prescribes one of the conditions upon which a\nconcluded assessment may be reopened under that provision.\nIt is an indispensable\t ingredient which must exist before\nthe section can be availed of. What does \"information\" in\nsection\t 147(b)\t connote ? In Maharaj Karnal Singh v.\nCommissioner of Income-tax this Court, construing\t the\ncorresponding section 34(1) (b) of the Indian Income\t Tax\nAct, 1922 held the word \"information\" to mean not only facts\nor factual material but to include also information as to\nthe true and correct state of the law and, therefore,\ninformation as\tto relevant judicial decisions. Thereafter,\nin Commissioner\t of Income-tax v. Raman & Company, the Court\ndefined the expression \"information\" in section 147(b) of\nthe Income-Tax Act 1961 as \"instruction or knowledge derived\nfrom an\t external source concerning facts or particulars, or\nas to law, relating to a matter bearing on the assessment.\"\nThat definition has been reaffirmed in subsequent cases, and\nwith it as the point of departure we shall now proceed.\n In so far as the word \"information\" means instruction\nor know- ledge concerning facts or particulars, there is\nlittle difficulty. By\tits inherent nature,\ta fact\t has\nconcrete existence. It influences the determination of an\nissue by the mere circumstance of its relevance. It requires\nno further authority to make\tit significant. Its quint\nessential value lies in its definitive vitality.\n448\n But when\t \"information\"\tis regarded\tas meaning\ninstruction or\tknowledge as to law the position is\tmore\ncomplex. When we speak\t of \"law\", we ordinarily speak of\nnorms or guiding principles having legal effect and legal\nconsequences. To possess legal significance for\tthat\npurpose, it must be\tenacted\t or declared by competent\nauthority. The legal sanction vivifying it imparts to it its\nforce and validity and binding nature. Law may be statutory\nlaw or,\t what is popularly described as, judge-made law. In\nthe former case, it proceeds\tfrom enactment\t having\t its\nsource in competent legislative authority. Judge made law\nemanates from a declaration or exposition of the content of\na legal\t principle or the interpretation of a statute, and\nmay in particular cases extend to a definition of the status\nof a party or\tthe legal relationship between parties, the\ndeclaration being rendered by a competent judicial or quasi-\njudicial authority empowered to decide questions of\t law\nbetween contending parties. The declaration or exposition is\nordinarily set forth in the judgment of a court or the order\nof a tribunal. Such declaration or exposition in itself\nbears the character of law. In every case, therefore, to be\nlaw it\tmust be\t a creation by a formal source, either\nlegislative or\tjudicial authority. A statement by a person\nor body\t not competent to create or define the law cannot be\nregarded as law. The suggested interpretation\t of enacted\nlegislation and\t the elaboration of legal principles in text\nbooks and journals do not enjoy the status of law. They are\nmerely opinions\t and, at best, evidence in regard to\t the\nstate of the law and in themselves possess no binding effect\nas law. The forensic submissions of professional lawyers and\nthe seminal activities of legal academics enjoy no higher\nstatus. Perhaps\t the only exception is provided by\t the\nwritings of publicists in international law, for in the law\nof nations the\t distinction between formal and material\nsources is difficult to maintain.\n In that view, therefore,\twhen section 147(b) of\t the\nIncome Tax Act is read as referring to \"information\" as to\nlaw, what is contemplated is information as\tto the\t law\ncreated by a formal source. It is law, we must remember,\nwhich because it issues from a competent legislature or a\ncompetent judicial or quasi-judicial authority, influence\nthe course of the assessment and decides any one or more of\nthose matters which determine the assessee's tax liability.\n In determining the status of an internal audit report,\nit is necessary to consider the nature and scope of\t the\nfunctions of an internal audit party.\t The internal audit\norganisation of the Income Tax Department\twas set up\nprimarily for\t imposing a check over the\tarithmetical\naccuracy of the computation of income and the determination\nof tax, and now,\n449\nbecause of the audit of income-tax receipts being entrusted\nto the A Comptroller and Auditor-General of India from 1960,\nit is intended as an exercise\t in removing mistakes\t and\nerrors in income tax records before they are submitted to\nthe scrutiny\tof the\t Comptroller and Auditor-General.\nConsequently, the nature of its work and the scope of audit\nhave assumed a dimension ca-extensive with that of Receipt\nAudit. The nature and scope of Receipt Audit are defined by\nsection 16 of the Comptroller and Auditor General's-(Duties,\nPowers and Conditions of Services) Act, 1971.\n Under that\t section, the audit by\t the Comptroller and\nAuditor General\t is principally intended for the purposes of\nsatisfying him\twith regard to the sufficiency of the rules\nand procedures\tprescribed for\tthe purpose of securing an\neffective check\t on the\t assessment, collection\t and proper\nallocation of\trevenue. He is entitled to\texamine\t the\naccounts in order to\t ascertain whether the rules\t and\nprocedures are being duly observed, and he is required, upon\nsuch examination, to submit a report. His powers in respect\nof the audit of income-tax receipts and refunds are outlined\nin the\tBoard's Circular No. 14/19/ 56-II dated July\t 28,\n1960. Paragraph\t 2 of the Circular repeats the provisions of\nsection 16 of the Comptroller and Auditor General's (Duties,\nPowers and Conditions of Service) Act, 1971. And paragraph 3\nwarns that \"the Audit\tDepartment should not\tin any\t way\nsubstitute itself for the revenue\tauthorities in\t the\nperformance of\t their\t statutory duties.\" Paragraph 4\ndeclares:\n\t \"4. Audit does not consider it any part of its\n duty to pass in review the judgment exercised or the\n decision taken in individual\tcases by officers\n entrusted with those duties, but it must be recognised\n that an examination of such cases may be an important\n factor in\t judging the effectiveness of assessment\n procedure .. It is however, to\t forming a general\n judgment rather than to the detection of individual\n errors of\tassessment, etc. that the audit enquiries\n should be\n450\n directed. The detection of individual errors is an\n incident rather than the object of audit.\"\nOther provisions stress that the primary function of audit\nin relation to assessments and refunds is the consideration\nwhether the internal procedures are adequate and sufficient.\nIt is not intended that the purpose of audit should go any\nfurther. Our\tattention has\t been invited\t to certain\nprovisions of the Internal Audit Manual more specifically\ndefining the functions of internal audit in the Income Tax\nDepartment. While they speak of the\tneed to check\t all\nassessments and\t refunds in the light\tof the\trelevant tax\nlaws, the orders of the Commissioners of Income Tax and the\ninstructions of\t the Central Board of Direct Taxes, nothing\ncontained therein can be construed as\t conferring on\t the\ncontents of an\t internal audit report the status of a\ndeclaration of\tlaw binding on the Income Tax Officer.\nWhether it is the internal audit party of the Income Tax\nDepartment or an audit party of the Comptroller and Auditor-\nGeneral, they\t perform essentially\t administrative\t or\nexecutive functions and cannot\t be attributed the powers of\njudicial supervision over the quasi-judicial acts of income\ntax authorities. The Income Tax Act does not\t contemplate\nsuch power in any internal audit organisation of the Income\nTax Department;\t it recognises\tit in those authorities only\nwhich are specifically authorised to exercise adjudicatory\nfunctions. Nor\tdoes section 16 of the Comptroller\t and\nAuditor-General's (Duties, Powers and Conditions of Service)\nAct, 1971 envisage such a power for the attainment of the\nobjectives incorporated\t therein. Neither statute supports\nthe conclusion that an audit party can pronounce on the law,\nand that such pronouncement amounts to \"information\" within\nthe meaning of section 147(b) of the Income Tax Act, 1961.\n But although an audit party does not possess the power\nto so pronounce on the law, it nevertheless\tmay draw the\nattention of the Income Tax officer to it. Law is one thing,\nand its\t communication another.\t If the\t distinction between\nthe source of the law and the communicator of the law is\ncarefully maintained, the confusion which often results in\napplying section 147(b) may be avoided. While the law may be\nenacted or laid down only by a person or body with authority\nin that behalf, the knowledge or awareness of the law may be\ncommunicated by\t anyone. No authority is required for\t the\npurpose.\n In the present case, an internal\t audit party of the\nIncome Tax Department expressed the view that the receipts\nfrom the occupation of the conference hall and rooms did not\nattract section 10 of the Act and that the assessment should\nhave been made under section 9. While\n451\nsections 9 and 10 can be described as law, the opinion of\nthe audit A party in regard to their application is not law.\nIt is not a declaration by a body authorised to declare the\nlaw. That part alone of the note of\tan audit party which\nmentions the law which escaped the notice of the Income Tax\nofficer constitutes \"information\" within the\t meaning of\nsection 147(b);\t the part which embodies the opinion of the\naudit parts in regard\tto the application or interpretation\nof the\tlaw cannot be taken into account by the Income Tax\nOfficer. In every case, the Income Tax officer\tmust\ndetermine for himself what is the effect and consequence of\nthe law mentioned in the audit note and\t whether in\nconsequence of\tthe law\t which has now come to his notice he\ncan reasonably\tbelieve that income has escaped assessment.\nThe basis of his belief must be the law of which he has now\nbecome aware. The opinion rendered by\t the audit party in\nregard to the law cannot for the purpose of such belief, add\nto or colour the significance of such law. In short, the\ntrue evaluation\t of the law in its bearing on the assessment\nmust be made directly and solely by the Income Tax officer.\n Now, in the case before us, the Income Tax officer had,\nwhen he made\t the original\tassessment, considered\t the\nprovisions of sections 9 and 10. Any different view taken by\nhim afterwards\ton the application of those provisions would\namount to a change of opinion of material already considered\nby him.\t The Revenue contends that it is open to him to do\nso, and on that basis to reopen the assessment under section\n147(b). Reliance is placed on\t Kalyanji Mavji & Co. v.\nCommissioner of\t Income Tax, where a Bench of\t two learned\nJudges of this Court observed that a case where income had\nescaped assessment due to the \"oversight, inadvertence or\nmistake\" of the Income Tax officer must fall within section\n34(1) (b) of the Indian Income Tax Act, 1922. It appears to\nus, with respect, that the proposition is stated too widely\nand travels farther than the statute warrants in so far as\nit can\tbe said\t to lay\t down that if, on reappraising the\nmaterial considered by him during the original assessment,\nthe Income Tax officer\t discovers that\t he has committed an\nerror in consequence of which income has escaped assessment\nit is open to him to reopen the assessment. In our opinion,\nan error discovered on a reconsideration of the\tsame\nmaterial (and not more) does not give him that power. That\nwas the\t view taken by this Court in Maharaj Kamal Singh v.\nCommissioner of\t Income Tax (supra), Commissioner of Income\nTax v.\tRaman and Company (supra) and Bankipur Club Ltd. v.\nCommissioner of Income Tax. and we do not believe that\n452\nthe law has since taken a different course. Any observations\nin Kalyanji Mavji & Co. v Commissioner of Income Tax (supra)\nsuggesting the\tcontrary do not, we say with\trespect, lay\ndown the correct law.\n A further\tsubmission raised by the Revenue on section\n147(b) of the Act may be considered at this stage. It is\nurged that the expression \"information\" in section 147(b)\nrefers to the realisation by the Income Tax officer that he\nhas committed an error when making the original assessment.\nIt is said that, when upon receipt of the audit note the\nIncome Tax officer discovers or realizes that a mistake has\nbeen committed\tin the original assessment, the discovery of\nthe mis\t take would be \"information\" within the meaning of\nsection 147(b).\t The submission\t appears to us inconsistent\nwith the terms of section 147(b). Plainly, the statutory\nprovision envisages that the Income Tax officer must first\nhave information in his possession, and then in consequence\nof such\t information he\t must have reason to believe\tthat\nincome has escaped assessment.\t The realisation that income\nhas escaped assessment is covered by\tthe words \"reason to\nbelieve'. and it follows from the \"information\" received by\nthe Income Tax officer. The information\tis not\t the\nrealisation, the information gives birth to the realisation.\n The recent\t decision of this Court in R. K. Malhotra v.\nKasturbhai Lalbhai (supra) may be examined now. While making\nan assessment on a Hindu undivided family, the Income Tax\nofficer\t allowed a deduction\t of municipal\t taxes\t in\ndetermining the annual value of two house properties\noccupied by the assessee. Subsequently, the\t Income\t Tax\nofficer re-opened the assessment on receipt of a report from\nthe office of the Comptroller and Auditor-General of India\nthat on\t a true interpretation of s. 23(2) of the Income Tax\nAct, 1961, the deduction of municipal taxes was\t not\nadmissible in the computation\tof the annual value of self-\noccupied house\tproperties. The\t assessee contended that the\nreport did not constitute \"information\" within the meaning\nof section 147(b) of the Act,\t and the Gujarat High Court\naccepted the plea in the view\t that information as to law\nwould consist of a statement by a person, body or authority\ncompetent and authorised to pronounce\t upon the law\t and\ninvested with the authority to do so, and that the Audit\nDepartment was\tnot such competent or authorised authority.\nOn appeal by the Revenue, a Bench of two learned Judges of\nthis Court, although endorsing\t the principle enunciated by\nthe High Court, said that the\t audit\tdepartment was\t the\nproper machinery to scrutinise assessments made by\t the\nIncome Tax officer and to point out errors of law contained\ntherein, and the High Court had\n453\nerred in taking the strict view which it did. The Court\nrested its decision on\t Assistant Controller of Estate Duty\nv. Nawab Sir Mir Osman Ali Khan Bahadur, Commissioner of\nIncome\tTax v. H. H. Smt.\t Chand\t Kanwarji (supra),\nCommissioner of Income Tax v. Kalukutty and Vashist Bhargava\nv. Income Tax officer.\n In Assistant Controller of Estate Duty v. Nawab Sir Mir\nosman Ali Khan Bahadur (supra), this Court held the opinion\nof the\tCentral Board of Revenue as regards\tthe correct\nvaluation of securities for the purpose of estate duty to be\n\"information\" within the meaning of section 59 of the Estate\nDuty Act, 1953 on the basis of which\t the Controller of\nEstate Duty was held entitled to entertain a reasonable\nbelief that property assessed to estate duty had been under-\nvalued. The circumstance that\tthe opinion of the Board was\nrendered in an appeal filed before it under the Estate Duty\nAct against the assessment made by the Assistant Controller\nof Estate Duty was apparently not brought to the notice of\nthis Court when it heard R.\tK. Malhotra v. Kasturbhai\nLalbhai (supra). The opinion of the Board represented its\nview as\t a quasi-judicial authority possessing jurisdiction\nto lay\tdown the law. Although the Board did not enhance the\nvaluation of the securities in the appellate proceeding\nbecause\t of the argument advanced\tby the appellant,\nnonetheless its\t observations amounted\tto information as to\nthe law. It was not a case where the Board was functioning\nas an extrajudicial authority, performing administrative or\nexecutive functions, and not competent or authorised to\npronounce upon the law. The Delhi High Court in Commissioner\nof Income Tax v. H. H. Smt. Chand Kanwarji (supra) held that\nthe scrutiny note of Revenue Audit constituted \"information\"\nwithin the meaning of\tsection 147(b) of the Income Tax Act\nbecause the Comptroller and Auditor-General of India\t was\nempowered by statute to scrutinise the proceedings of the\nIncome Tax Department and to point out defects and mistakes\nwhich adversely affected the Revenue. The\t High Court\nconsidered that the view that information as to law could be\ngathered only from the\t decisions of\tjudicial or quasi-\njudicial authorities was unduly restrictive. In Commissioner\nof Income-tax v. Kalukutty (supra), the Kerala High-Court\nalso regarded the note\t put up\t by Audit as \"information\"\nwithin the meaning of\tsection 147(b)\tof the\tAct, but it\nappears to have assumed, without anything more, that an\naudit note would fall\twithin that expression. As regards\nVashist\t Bhargava v.\tIncome\t Tax officer\t(supra)\t the\n\"information\" consisted in a note of the Revenue Audit\n454\nand the\t Ministry of Law that the payment of interest by the\nassessee was in fact\tmade to his own account in\t the\nProvident Fund and, therefore, in law the money paid did not\nvest in\t the Government and,\tconsequently, the original\nassessment was\terroneous in so far\tas it\tallowed\t the\ndeduction of the interest as expenditure made by\t the\nassessee. The Delhi High Court upheld\t the reassessment on\nthe finding that the note of\tthe Revenue Audit and\t the\nMinistry of Law had to be taken into account by the Income\nTax officer, because in his executive capacity he had to be\nguided by the advice rendered by the Ministry of Law and he\nhad to\tpay due\t regard to the note of the Revenue Audit\nbecause the officers of the Audit Department were experts\nempowered to examine and check upon the work of the Income\nTax officers. It seems\t to us\tthat the considerations on\nwhich the Delhi High Court rested its judgment are\t not\ncorrect. But the decision of the case can be supported on\nthe ground that the basic information\t warranting the\t re-\nopening of the assessment was the fact that the payment of\ninterest was made to the Provident Fund account of\t the\nassesses himself. That the money so paid did not vest in the\nGovernment was\ta conclusion which followed automatically\nupon that fact, and no controversy in law could possibly\narise on that point.\n On the considerations prevailing\twith us, we are of\nopinion that the view taken by the Delhi High Court and the\nKerala High Court in the aforementioned cases is wrong and\nwe must, with great respect, hold that this\tCourt was in\nerror in the conclusion reached by it is. R. K. Malhotra v.\nKasturbhai Lalbhai (supra).\n Our attention has been drawn to the further decision of\nthe Kerala High Court in\t Muthukrishna\tReddier\t v.\nCommissioner of\t Income Tax, Kerala and the decisions of the\nAllahabad High\tCourt in Raj Kumar Shrawan Kumar v. Central\nBoard of Direct Taxes\t& Anr and Elgin Mills Co. Ltd. v.\nIncome Tax officer, Companies Circle, \"A\" Ward, Kanpur. The\nKerala High Court merely followed its\t earlier judgment in\nCommissioner of\t Income Tax v. Kalukutty (supra) and\t the\nAllahabad High\tCourt was impressed by the same reasons\nsubstantially which persuaded the Delhi High Court and the\nKerala High Court in the cases referred to above.\n Therefore, whether\t considered on\tthe basis that the.\nnature and scope of the functions of the internal audit\norganisation of\t the Income Tax Department are co-extensive\nwith that of Receipt Audit or on the\n455\nbasis of the provisions specifically detailing its functions\nin the Internal Audit Manual, we hold that the opinion of an\ninternal audit party of the Income Tax Department on a point\nof law\tcannot\tbe regarded as \"information\"\t within\t the\nmeaning of section 147(b) of the Income Tax Act, 1961.\n The question referred by\t the Income Tax Appellate\nTribunal is answered in the negative,\t in favour of\t the\nassessee and against the Revenue The assessee is entitled to\none set of costs in these appeals.\nP.B.R.\t\t\t\t\t Appeals allowed .\n456" }, { "title": "T. S. Balaram, Income Tax ... vs M/S. Volkart Brothers, Bombay on 5 August, 1971", "url": "https://indiankanoon.org//doc/271192/", "text": "T. S. Balaram, Income Tax ... vs M/S. Volkart Brothers, Bombay on 5 August, 1971\nEquivalent citations: 1971 AIR 2204, 1972 SCR (1) 30, AIR 1971 SUPREME COURT 2204, 1971 TAX. L. R. 1508\nAuthor: K.S. Hegde\nBench: K.S. Hegde, A.N. Grover\n PETITIONER:\nT. S. BALARAM, INCOME TAX OFFICER,COMPANY CIRCLE IV, BOMBAY\n\n\tVs.\n\nRESPONDENT:\nM/S. VOLKART BROTHERS, BOMBAY\n\nDATE OF JUDGMENT05/08/1971\n\nBENCH:\nHEGDE, K.S.\nBENCH:\nHEGDE, K.S.\nGROVER, A.N.\n\nCITATION:\n 1971 AIR 2204\t\t 1972 SCR (1)\t 30\n\n\nACT:\nIncome\ttax Act, 1961, s. 154-Mistake\t apparent from\t the\nrecord must he a patent mistake on which there can be no two\nopinions-Whether s. 17(1) of Income-tax Act, 1922 applied to\nfirms is not\ta question on which there can\t be no\t two\nopinions.\n\n\n\nHEADNOTE:\nThe respondent firm was duly registered under the Income-tax\nAct, 1922 as\twell as the Income tax Act, 1961. In\t the\noriginal assessments of the firm for\tthe years 1958-59,\n1960-61, 1961-62 and 1962-63 assessments were made on\t the\nslab rates prescribed under the respective Finance\tActs\napplicable to registered firms. In the individual assess-\nments of the partners, their respective shares in the income\nof the firm were included and assessed at the maximum rates\nsince their assessment,,; were made\t in the status of\nnonresident. On February 1, 1965 the respondent firm\t was\nserved with notices dated January 29, 1965 by the Income-tax\nOfficer\t intimating to it that in its assessments for\t the\nfour years in question there were mistakes apparent from the\nrecord\tinasmuch as the firm had not been charged at\t the\nmaximum\t rates of tax under s. 17(1) of the Income tax\tAct,\n1922 and that\t therefore he\tproposed to rectify those\nassessments under s.\t154 of the Income tax\t Act, 1961.\nThereafter the Income-tax Officer assessed the respondent\nfirm by applying the provisions of s. 17(1) of the 1922 Act.\nThe respondent challenged the validity of She said orders in\na writ\t petition under Art. 226 of the\t Constitution.\t The\nHigh Court held that there was no obvious and patent mistake\nin the original assessment orders and therefore the Income\ntax Officer was not competent to pass the impugned orders\nunder s. 154. In appeal by certificate,\nHELD:A mistake apparent on the record must be an obvious and\npatent mistake and not something which can be established by\na long drawn process of reasoning on points on which there\nmay conceivably be two opinions. [34E]\nThe applicability of s. 17(1) to the respondent would depend\nan the\t decision of the question whether a firm can be\nconsidered as a 'person' within the meaning of that section.\nThe term 'person' was defined in the 1922 Act as including a\nHindu Undivided Family and a local authority.\tIn the\t1961\nAct the definition has been expanded and includes firm.\t It\nis a matter for consideration whether the new definition\ncontained in s.. 2(31) of the Income-tax Act, 1961 is an\namendment of the law or is merely declaratory of the\t law\nthat was in force earlier. To pronounce upon this question\nit may be necessary to examine various provisions in the Act\nas well as its scheme. The Income-tax Officer it)\t the\npresent case was not justified in thinking that there could\nbe no two\n31\nopinions about\t the applicability of s. 17(1) . He\t was\ntherefore wholly wrong in holding that there was a mistake\napparent from\t the record of the assessments of\t the\nrespondent. [33F-34D]\nSatyanarayan Laxminarayan Hegde & Ors. v. Milikarjiun Bhava-\nnappa Thirumale, [1960] 1 S.C.R. 890 and Sidhrainappa v.\nCommissioner of Income-tax, Bombay, 21 T.I.R. 333 referred\nto\n\n\n\nJUDGMENT:\nCIVIL APPELLATE JURISDICTION : Civil Appeal No. 1170 of\n1968.\nAppeal\tfrom the judgement and order dated February 3, 6,\n1967 of the Bombay High Court in Misc.\tPetition No. 104 of\n1965.\nS.Mitra\t J. Ramamurthi, R. N. Sachthey and B. D. Sharma\nfor the Appellant.\nM. C. Chagla, N.A. Palkhivala, Bhuvanesh Kumari, J. B.\nDadachanji and\t Ravinder Narain for the respondent.\t The\nJudgment of the Court was delivered by\nHegde,\tJ.-This\t appeal\t by certificate arises from\t the\ndecision of the High Court of Bombay in Misc. Petition\t No.\n104 of 1968 on its file. That was a petition under Art. 226\nof the Constitution. Therein the respondents challenged the\nvalidity of the orders of rectification made by the Income-\ntax Officer, Company Circle, Bombay in the assessments of\nthe respondents for the assessment years 1958-59, 1960-61,\n1961-62\t and 1962-63 under S. 154 of the Income-tax\tAct,\n1961.\tRespondents Nos. 2 and 3 are the partners in\t the\nfirst respondent-firm.\t The first respondent-firm was\tduly\nregistered under the Indian Income-tax Act 1922 as well as\nunder the Income-tax Act 1961. In the original\t assessments\nof the firm for the concerned assessment years\t assessments\nwere made on the salb rates prescribed under the respective\nFinance\t Acts applicable to registered Firms. In\t the\nindividual assessments of the partners for their respective\nshare in the income of the firm was included and assessed at\nthe maximum rates since their assessments were made in\t the\nstatus\tof non-resident. On February, 11, 1965, the first\nrespondent firm was served with notices dated\tJanuary\t 29,\n1965 by the Income-tax Officer intimating to it that in\t its\nassessments for the assessment years\t1958-59, 1960-61 ,\n1961-62\t and 1962-63, there are mistakes apparent from\t the\nrecord inasmuch as the firm\n32\nhad not been charged at the maximum rates of income-tax\nunder S. 17(1) of the Indian\t Income-tax Act, 1922\t and\ntherefore he proposes to rectify those assessments under S.\n154 of the Income-tax Act, 1961. The respondents in their\nreply to those notices denied that there was\tany mistake\napparent or otherwise in those orders of assessment.\tThey\ndisputed the Income-tax Officer's authority to make\t any\ncorrection. The Income-tax Officer did not\t accept\t the\ncontention of the respondents and assessed them by applying\nthe provisions of S. 17(i) of the 1922 Act. The respondents\nchallenged the\t validity of the orders rectifying\t the\nassessments, before the High Court of Bombay as mentioned\nearlier. The\tHigh Court took the view that the original\nassessments made on the respondents were prima facie in\naccordance with law and at any rate as there was no obvious\nor patent mistake in those orders of assessment, the Income-\ntax Officer was incompetent to pass the impugned orders.\nThe first question that we have to decide is whether oil the\nfacts and in the circumstances of the 'case. The Income-tax\nOfficer\t was within his 'powers in making the impugned\nrectifications.\t He purported to make those rectifications\nunder s. 154 of the Income-tax Act, 1961. That section to\nthe extent material for our present purpose reads:\n\t \"154 (1) With a view to rectifying any mistake\n\t apparent from the record\n\t (a) the\t Income-tax Officer may amend\t any\n\t order of assessment or of refund or any other\n\t order passed by him:\nThe corresponding section in the Indian Income-tax Act,\n1922 is S. 35.\nWe have now to see whether the Income-tax\tOfficer\t was\njustified in opining that in the original orders of\tass-\nessment, there was any apparent mistake. As seen earlier in\nthe original assessments of the firm for the relevant\nassessment years, the Income-tax Officer adopted the\tslab\nrates applicable to registered firms.\t The question\t for\ndecision is whether the first respondent's firm\n33\ncame within the mischief of S. 17(1) of the Indian Income--\ntax Act, 1922.\tSection 17(1) reads:\n\t \"Where a person is not resident in the taxable\n\t territories and\tis not a company, the\ttax,\n\t including super-tax, payable by him or on\t his\n\t behalf on his total in come shall be an amount\n\t equal to\n\t (a) the income-tax which would be payable on\n\t his total income at the maximum rate, plus\n\t (b) either. the super-tax which would be\n\t payable on his total income at the rate of\n\t nineteen\tper cent, or the super-tax which\n\t would be\t payable on his total income if it\n\t were the total income of a person resident in\n\t the taxable territories whichever\t is\n\t greater....\". (Provision to the section is not\n\t relevant for our present purpose).\nSection\t 17(1)\tcan apply to a\t \"person\". The expression\n\"Person\" is defined in s. 2(9) of the Indian Income-tax Act,\n1922 thus:\n\" \"Person\" includes a Hindu undivided family and a local\nauthority\".\nUnless\ta firm can be considered as a\t\"Person\", S. 17(1)\ncannot govern the assessment of the first respondent. In the\nIncome-tax Act, 1961 [S. 2(31)]., the expression person\nis defined differently.\t That definition reads:\n\t\t \"person\" includes-\n(i) an individual,\n(ii) a Hindu undivided family,\n(iii)\t a company,\n(iv) a firm,\n(v) an\t association of persons or a body of\tindividuals,\nwhether incorporated or not,\n (vi)\t a local authority and\n34\n(vii)\t every\t artificial juridicial person,\tnot falling\nwithin any of the preceding sub clauses.,\nIt is\ta matter for consideration whether the definition\ncontained in S. 2(31) of the Income-tax Act,\t1961 is an\n,amendment of the law or is merely declaratory of the\t law\nthat was in force, earlier.\t To pronounce\t upon\tthis\nquestion, it may be necessary to examine various provisions\nin the Act as well as its scheme.\nSection\t 113 of the Income-tax Act, 1961 corresponded to S.\n17(1) of the Indian Income-tax Act, 1922 but that section\nhas now been omitted with effect from April 1, 1965 as a\nresult of the Finance Act, 1965.\nFrom what has been said above, it is clear that the question\nwhether\t S. 17(1) of the Indian Income-tax Act, 1922\t was\napplicable to the case of the first respondent is not\tfree\nfrom doubt. Therefore the Income-tax Officer was\t not\njustified in thinking that on that question there can be no\ntwo opinions. It was not open to the Income-tax Officer to\ngo into the true scope of the relevant provisions of the Act\nin a proceeding under S. 154 of the Income-tax Act, 1961. A\nmistake apparent on the record must be an obvious and patent\nmistake\t and not ,something which can be established by a\nlong drawn process of reasoning on points on which there may\nconceivably be\t two opinions.\tAs seen\t earlier, the\tHigh\nCourt of Bombay opined that the original assessments were in\naccordance with law though in our opinion the High Court was\nnot justified in going into that question. In\tSatyanarayan\nLaxminarayan Hegde and ors.\tv. Millikarjun\t Bhavanappa\nTirumale(1) this Court while Spelling out the scope of\t the\npower of a High Court under Art. 226 of the\tConstitution\nruled that an error which has to be established by a\tlong\ndrawn process\tof reasoning on points where\tthere may\nconceivably be two opinions cannot be said to be an error\napparent on the face\t of the record.\t A decision on a\ndebatable point of law is not a mistake apparent from\t the\nrecord-see Sidhamappa\tv.. Commissioner- of\t Income-tax,\nBombay(2). The power of the officers mentioned in S. 154 of\nthe Income-tax Act, 1961 to correct \"any mistake apparent\nfrom the record\" is\n(1) [1960] 1 S.C.R. 890.\n(2) 21 I.T.R. 333.\n35\nundoubtedly not more\tthan that of\tthe High Court to\nentertain a writ petition on the basis of an \"error apparent\non the\t face of the record\".\t In this case\t it is\t not\nnecessary for us to spell out the distinction\tbetween\t the\nexpressions 66 error apparent on the face of the record\" and\n\"mistake apparent from the record\". But suffice it to\t say\nthat the Income tax Officer was wholly wrong\tin holding\nthat there was a mistake apparent from the record of\t the\nassessments of the first respondent.\nFor the reasons mentioned above we dismiss this appeal\twith\ncosts.\nG.C.\t\t\t\t Appeal dismissed.\n36" }, { "title": "Mon Mohan Kohli vs Assistant Commissioner Of Income Tax & ... on 15 December, 2021", "url": "https://indiankanoon.org//doc/106138032/", "text": "Mon Mohan Kohli vs Assistant Commissioner Of Income Tax & ... on 15 December, 2021\nAuthor: Manmohan\nBench: Manmohan, Navin Chawla\n $~\n * IN THE HIGH COURT OF DELHI AT NEW DELHI\n + W.P.(C) 6176/2021\n\n MON MOHAN KOHLI ..... Petitioner\n Versus\n\n ASSISTANT COMMISSIONER OF INCOME TAX & ANR..\n ..... Respondents\n\n WITH\n W.P.(C) Nos. 6442/2021, 6443/2021, 6451/2021, 6465/2021, 6563/2021,\n 6531/2021, 6596/2021, 6607/2021, 6645/2021, 6665/2021, 6667/2021,\n 6668/2021, 6705/2021, 6717/2021, 6718/2021, 6777/2021, 6799/2021,\n 6800/2021, 6801/2021, 6805/2021, 6822/2021, 6830/2021, 6832/2021,\n 6857/2021, 6877/2021, 6880/2021, 6888/2021, 6889/2021, 6890/2021,\n 6894/2021, 6896/2021, 6897/2021, 6898/2021, 6904/2021, 6905/2021,\n 6906/2021, 6910/2021, 6917/2021, 6918/2021, 6920/2021, 6922/2021,\n 6924/2021, 6931/2021, 6950/2021 6954/2021, 6955/2021, 6962/2021,\n 6963/2021, 6965/2021, 6966/2021, 6968/2021, 6972/2021, 6976/2021,\n 7015/2021, 7016/2021, 7018/2021, 7027/2021, 7028/2021, 7030/2021,\n 7031/2021, 7037/2021, 7038/2021, 7039/2021, 7041/2021, 7047/2021,\n 7049/2021, 7054/2021, 7055/2021, 7058/2021, 7062/2021, 7066/2021,\n 7071/2021, 7072/2021, 7075/2021, 7076/2021, 7078/2021, 7079/2021,\n 7080/2021, 7083/2021, 7097/2021, 7098/2021, 7102/2021, 7104/2021,\n 7107/2021, 7109/2021, 7111/2021, 7130/2021, 7131/2021, 7132/2021,\n 7134/2021, 7138/2021, 7139/2021, 7140/2021, 7141/2021, 7143/2021,\n 7144/2021, 7145/2021, 7147/2021, 7158/2021, 7163/2021, 7165/2021,\n 7168/2021, 7169/2021, 7170/2021, 7171/2021, 7172/2021, 7173/2021,\n 7174/2021, 7175/2021, 7177/2021, 7178/2021, 7180/2021, 7181/2021,\n 7190/2021, 7191/2021, 7193/2021, 7196/2021, 7200/2021, 7201/2021,\n 7203/2021, 7205/2021, 7206/2021, 7208/2021, 7210/2021, 7211/2021,\n 7212/2021, 7213/2021, 7215/2021, 7217/2021, 7219/2021, 7220/2021,\n 7225/2021, 7229/2021, 7231/2021, 7257/2021, 7259/2021, 7262/2021,\n 7263/2021, 7267/2021, 7269/2021, 7273/2021, 7274/2021, 7275/2021,\n 7277/2021, 7278/2021, 7287/2021, 7292/2021, 7300/2021, 7301/2021,\n 7302/2021, 7303/2021, 7304/2021, 7305/2021, 7306/2021, 7307/2021,\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 1 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n 7308/2021, 7309/2021, 7311/2021, 7312/2021, 7313/2021, 7317/2021,\n 7318/2021, 7319/2021, 7320/2021, 7321/2021, 7324/2021, 7327/2021,\n 7333/2021, 7337/2021, 7346/2021, 7348/2021, 7359/2021, 7361/2021,\n 7362/2021, 7363/2021, 7364/2021, 7366/2021, 7367/2021, 7368/2021,\n 7369/2021, 7370/2021, 7374/2021, 7378/2021, 7383/2021, 7385/2021,\n 7386/2021, 7387/2021, 7388/2021, 7389/2021, 7391/2021, 7392/2021,\n 7393/2021, 7394/2021, 7397/2021, 7398/2021, 7399/2021, 7400/2021,\n 7401/2021, 7402/2021, 7404/2021, 7405/2021, 7406/2021, 7408/2021,\n 7409/2021, 7410/2021, 7411/2021, 7412/2021, 7419/2021, 7420/2021,\n 7421/2021, 7423/2021, 7425/2021, 7428/2021, 7429/2021, 7430/2021,\n 7431/2021, 7433/2021, 7434/2021, 7435/2021, 7436/2021, 7438/2021,\n 7440/2021, 7442/2021, 7443/2021, 7447/2021, 7450/2021, 7451/2021,\n 7453/2021, 7455/2021, 7456/2021, 7457/2021, 7458/2021, 7460/2021,\n 7461/2021, 7462/2021, 7465/2021, 7466/2021, 7467/2021, 7471/2021,\n 7472/2021, 7473/2021, 7474/2021, 7476/2021, 7477/2021, 7479/2021,\n 7480/2021, 7481/2021, 7484/2021, 7485/2021, 7488/2021, 7492/2021,\n 7494/2021, 7495/2021, 7503/2021, 7509/2021, 7511/2021, 7516/2021,\n 7517/2021, 7520/2021, 7522/2021, 7524/2021, 7525/2021, 7526/2021,\n 7527/2021, 7530/2021, 7531/2021, 7533/2021, 7534/2021, 7535/2021,\n 7536/2021, 7537/2021, 7538/2021, 7539/2021, 7541/2021, 7543/2021,\n 7544/2021, 7545/2021, 7546/2021, 7549/2021, 7552/2021, 7554/2021,\n 7555/2021, 7556/2021, 7557/2021, 7561/2021, 7562/2021, 7563/2021,\n 7567/2021, 7568/2021, 7569/2021, 7570/2021, 7571/2021, 7573/2021,\n 7574/2021, 7576/2021, 7577/2021, 7582/2021, 7584/2021, 7585/2021,\n 7586/2021, 7588/2021, 7590/2021, 7591/2021, 7593/2021, 7594/2021,\n 7595/2021, 7596/2021, 7598/2021, 7599/2021, 7600/2021, 7603/2021,\n 7610/2021, 7622/2021, 7630/2021, 7631/2021, 7632/2021, 7636/2021,\n 7639/2021, 7643/2021, 7646/2021, 7647/2021, 7648/2021, 7650/2021,\n 7651/2021, 7654/2021, 7655/2021, 7656/2021, 7658/2021, 7659/2021,\n 7660/2021, 7661/2021, 7663/2021, 7664/2021, 7667/2021, 7668/2021,\n 7675/2021, 7677/2021, 7678/2021, 7679/2021, 7681/2021, 7682/2021,\n 7683/2021, 7684/2021, 7685/2021, 7686/2021, 7687/2021, 7688/2021,\n 7689/2021, 7690/2021, 7691/2021, 7692/2021, 7693/2021, 7694/2021,\n 7695/2021, 7696/2021, 7697/2021, 7698/2021, 7699/2021, 7730/2021,\n 7731/2021, 7732/2021, 7733/2021, 7734/2021, 7735/2021, 7736/2021,\n 7737/2021, 7738/2021, 7754/2021, 7763/2021, 7770/2021, 7771/2021,\n 7772/2021, 7773/2021, 7774/2021, 7775/2021, 7776/2021, 7777/2021,\n 7783/2021, 7786/2021, 7787/2021, 7789/2021, 7790/2021, 7791/2021,\n\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 2 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n 7792/2021, 7793/2021, 7796/2021, 7797/2021, 7798/2021, 7801/2021,\n 7804/2021, 7808/2021, 7816/2021, 7821/2021, 7822/2021, 7862/2021,\n 7863/2021, 7864/2021, 7865/2021, 7866/2021, 7867/2021, 7868/2021,\n 7870/2021, 7871/2021, 7872/2021, 7873/2021, 7875/2021, 7876/2021,\n 7878/2021, 7879/2021, 7880/2021, 7889/2021, 7893/2021, 7894/2021,\n 7897/2021, 7898/2021, 7899/2021, 7901/2021, 7902/2021, 7903/2021,\n 7904/2021, 7908/2021, 7911/2021, 7912/2021, 7913/2021, 7914/2021,\n 7918/2021, 7919/2021, 7920/2021, 7921/2021, 7924/2021, 7925/2021,\n 7927/2021, 7929/2021, 7935/2021, 7938/2021, 7945/2021, 7946/2021,\n 7949/2021, 7950/2021, 7952/2021, 7953/2021, 7968/2021, 7969/2021,\n 7979/2021, 7986/2021, 7994/2021, 7995/2021, 7996/2021, 7998/2021,\n 7999/2021, 8005/2021, 8007/2021, 8009/2021, 8011/2021, 8012/2021,\n 8013/2021, 8016/2021, 8017/2021, 8018/2021, 8019/2021, 8021/2021,\n 8028/2021, 8032/2021, 8042/2021, 8050/2021, 8053/2021, 8056/2021,\n 8057/2021, 8059/2021, 8064/2021, 8070/2021, 8071/2021, 8074/2021,\n 8078/2021, 8080/2021, 8081/2021, 8082/2021, 8083/2021, 8084/2021,\n 8087/2021, 8088/2021, 8091/2021, 8093/2021, 8094/2021, 8097/2021,\n 8105/2021, 8106/2021, 8108/2021, 8116/2021, 8117/2021, 8123/2021,\n 8124/2021, 8126/2021, 8128/2021, 8129/2021, 8130/2021, 8134/2021,\n 8141/2021, 8143/2021, 8144/2021, 8146/2021, 8154/2021, 8165/2021,\n 8167/2021, 8168/2021, 8169/2021, 8170/2021, 8172/2021, 8173/2021,\n 8174/2021, 8175/2021, 8176/2021, 8178/2021, 8180/2021, 8182/2021,\n 8184/2021, 8185/2021, 8188/2021, 8190/2021, 8191/2021, 8192/2021,\n 8193/2021, 8196/2021, 8197/2021, 8198/2021, 8200/2021, 8201/2021,\n 8212/2021, 8215/2021, 8216/2021, 8217/2021, 8218/2021, 8219/2021,\n 8220/2021, 8221/2021, 8222/2021, 8223/2021, 8224/2021, 8225/2021,\n 8227/2021, 8260/2021, 8261/2021, 8262/2021, 8263/2021, 8264/2021,\n 8265/2021, 8266/2021, 8268/2021, 8269/2021, 8270/2021, 8271/2021,\n 8272/2021, 8273/2021, 8275/2021, 8276/2021, 8277/2021, 8278/2021,\n 8279/2021, 8281/2021, 8283/2021, 8284/2021, 8285/2021, 8286/2021,\n 8287/2021, 8288/2021, 8298/2021, 8299/2021, 8300/2021, 8302/2021,\n 8303/2021, 8304/2021, 8305/2021, 8306/2021, 8307/2021, 8309/2021,\n 8310/2021, 8312/2021, 8313/2021, 8314/2021, 8315/2021, 8316/2021,\n 8317/2021, 8318/2021, 8319/2021, 8320/2021, 8321/2021, 8322/2021,\n 8323/2021, 8354/2021, 8355/2021, 8356/2021, 8357/2021, 8359/2021,\n 8361/2021, 8362/2021, 8363/2021, 8364/2021, 8365/2021, 8368/2021,\n 8369/2021, 8370/2021, 8372/2021, 8373/2021, 8374/2021, 8376/2021,\n 8378/2021, 8380/2021, 8383/2021, 8384/2021, 8386/2021, 8387/2021,\n\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 3 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n 8388/2021, 8389/2021, 8390/2021, 8416/2021, 8431/2021, 8436/2021,\n 8438/2021, 8441/2021, 8443/2021, 8444/2021, 8446/2021, 8448/2021,\n 8450/2021, 8462/2021, 8463/2021, 8464/2021, 8465/2021, 8466/2021,\n 8467/2021, 8468/2021, 8469/2021, 8475/2021, 8476/2021, 8478/2021,\n 8480/2021, 8492/2021, 8499/2021, 8501/2021, 8502/2021, 8503/2021,\n 8505/2021, 8506/2021, 8511/2021, 8512/2021, 8513/2021, 8514/2021,\n 8517/2021, 8518/2021, 8519/2021, 8523/2021, 8525/2021, 8526/2021,\n 8527/2021, 8530/2021, 8531/2021, 8533/2021, 8534/2021, 8535/2021,\n 8536/2021, 8537/2021, 8538/2021, 8539/2021, 8541/2021, 8542/2021,\n 8543/2021, 8544/2021, 8545/2021, 8546/2021, 8550/2021, 8574/2021,\n 8575/2021, 8583/2021, 8584/2021, 8585/2021, 8586/2021, 8589/2021,\n 8590/2021, 8591/2021, 8593/2021, 8594/2021, 8595/2021, 8596/2021,\n 8600/2021, 8604/2021, 8607/2021, 8608/2021, 8616/2021, 8619/2021,\n 8622/2021, 8627/2021, 8629/2021, 8631/2021, 8633/2021, 8634/2021,\n 8636/2021, 8637/2021, 8638/2021, 8639/2021, 8641/2021, 8642/2021,\n 8644/2021, 8646/2021, 8647/2021, 8648/2021, 8660/2021, 8661/2021,\n 8662/2021, 8667/2021, 8668/2021, 8671/2021, 8688/2021, 8690/2021,\n 8693/2021, 8694/2021, 8695/2021, 8698/2021, 8699/2021, 8700/2021,\n 8701/2021, 8702/2021, 8705/2021, 8706/2021, 8707/2021, 8717/2021,\n 8721/2021, 8722/2021, 8723/2021, 8725/2021, 8727/2021, 8728/2021,\n 8734/2021, 8739/2021, 8741/2021, 8747/2021, 8752/2021, 8754/2021,\n 8755/2021, 8756/2021, 8757/2021, 8758/2021, 8760/2021, 8761/2021,\n 8763/2021, 8764/2021, 8766/2021, 8774/2021, 8776/2021, 8786/2021,\n 8788/2021, 8789/2021, 8795/2021, 8806/2021, 8810/2021, 8811/2021,\n 8813/2021, 8816/2021, 8818/2021, 8819/2021, 8822/2021, 8823/2021,\n 8824/2021, 8825/2021, 8827/2021, 8828/2021, 8829/2021, 8831/2021,\n 8836/2021, 8838/2021, 8846/2021, 8847/2021, 8849/2021, 8850/2021,\n 8851/2021, 8852/2021, 8854/2021, 8855/2021, 8856/2021, 8857/2021,\n 8858/2021, 8859/2021, 8860/2021, 8863/2021, 8864/2021, 8872/2021,\n 8874/2021, 8877/2021, 8880/2021, 8881/2021, 8889/2021, 8890/2021,\n 8891/2021, 8899/2021, 8913/2021, 8920/2021, 8921/2021, 8925/2021,\n 8930/2021, 8936/2021, 8939/2021, 8943/2021, 8944/2021, 8945/2021,\n 8949/2021, 8956/2021, 8958/2021, 8961/2021, 8965/2021, 8970/2021,\n 8975/2021, 8980/2021, 8981/2021, 8985/2021, 8987/2021, 8988/2021,\n 8999/2021, 9001/2021, 9006/2021, 9016/2021, 9024/2021, 9025/2021,\n 9026/2021, 9028/2021, 9030/2021, 9032/2021, 9034/2021, 9035/2021,\n 9036/2021, 9037/2021, 9039/2021, 9040/2021, 9041/2021, 9045/2021,\n 9047/2021, 9050/2021, 9052/2021, 9059/2021, 9060/2021, 9061/2021,\n\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 4 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n 9064/2021, 9066/2021, 9067/2021, 9068/2021, 9069/2021, 9070/2021,\n 9071/2021, 9075/2021, 9097/2021, 9098/2021, 9099/2021, 9100/2021,\n 9103/2021, 9104/2021, 9106/2021, 9107/2021, 9108/2021, 9109/2021,\n 9111/2021, 9113/2021, 9114/2021, 9117/2021, 9119/2021, 9121/2021,\n 9122/2021, 9123/2021, 9125/2021, 9127/2021, 9130/2021, 9131/2021,\n 9133/2021, 9134/2021, 9136/2021, 9137/2021, 9138/2021, 9146/2021,\n 9147/2021, 9151/2021, 9152/2021, 9157/2021, 9160/2021, 9164/2021,\n 9165/2021, 9166/2021, 9167/2021, 9176/2021, 9196/2021, 9197/2021,\n 9198/2021, 9200/2021, 9204/2021, 9205/2021, 9207/2021, 9208/2021,\n 9213/2021, 9215/2021, 9216/2021, 9221/2021, 9222/2021, 9225/2021,\n 9228/2021, 9231/2021, 9232/2021, 9233/2021, 9234/2021, 9235/2021,\n 9238/2021, 9240/2021, 9241/2021, 9242/2021, 9243/2021, 9244/2021,\n 9245/2021, 9246/2021, 9247/2021, 9248/2021, 9251/2021, 9252/2021,\n 9253/2021, 9264/2021, 9265/2021, 9266/2021, 9268/2021, 9270/2021,\n 9295/2021, 9300/2021, 9301/2021, 9303/2021, 9306/2021, 9310/2021,\n 9311/2021, 9315/2021, 9316/2021, 9317/2021, 9319/2021, 9321/2021,\n 9322/2021, 9323/2021, 9325/2021, 9327/2021, 9329/2021, 9330/2021,\n 9331/2021, 9332/2021, 9333/2021, 9334/2021, 9335/2021, 9337/2021,\n 9339/2021, 9340/2021, 9341/2021, 9342/2021, 9348/2021, 9350/2021,\n 9351/2021, 9353/2021, 9355/2021, 9356/2021, 9379/2021, 9391/2021,\n 9396/2021, 9397/2021, 9398/2021, 9399/2021, 9402/2021, 9403/2021,\n 9404/2021, 9406/2021, 9408/2021, 9414/2021, 9416/2021, 9422/2021,\n 9424/2021, 9431/2021, 9433/2021, 9434/2021, 9437/2021, 9439/2021,\n 9441/2021, 9443/2021, 9445/2021, 9446/2021, 9447/2021, 9449/2021,\n 9451/2021, 9453/2021, 9456/2021, 9458/2021, 9459/2021, 9488/2021,\n 9489/2021, 9490/2021, 9491/2021, 9492/2021, 9493/2021, 9494/2021,\n 9495/2021, 9497/2021, 9500/2021, 9501/2021, 9503/2021, 9506/2021,\n 9510/2021, 9513/2021, 9516/2021, 9517/2021, 9519/2021, 9520/2021,\n 9521/2021, 9524/2021, 9526/2021, 9527/2021, 9528/2021, 9532/2021,\n 9533/2021, 9534/2021, 9535/2021, 9536/2021, 9538/2021, 9542/2021,\n 9543/2021, 9544/2021, 9545/2021, 9546/2021, 9547/2021, 9548/2021,\n 9549/2021, 9550/2021, 9551/2021, 9552/2021, 9553/2021, 9554/2021,\n 9555/2021, 9557/2021, 9567/2021, 9569/2021, 9571/2021, 9572/2021,\n 9573/2021, 9599/2021, 9600/2021, 9601/2021, 9602/2021, 9603/2021,\n 9604/2021, 9605/2021, 9606/2021, 9607/2021, 9609/2021, 9610/2021,\n 9612/2021, 9613/2021, 9615/2021, 9616/2021, 9617/2021, 9618/2021,\n 9619/2021, 9620/2021, 9621/2021, 9623/2021, 9624/2021, 9625/2021,\n 9629/2021, 9632/2021, 9634/2021, 9635/2021, 9636/2021, 9641/2021,\n\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 5 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n 9642/2021, 9647/2021, 9648/2021, 9649/2021, 9650/2021, 9652/2021,\n 9654/2021, 9655/2021, 9656/2021, 9658/2021, 9660/2021, 9663/2021,\n 9664/2021, 9665/2021, 9668/2021, 9669/2021, 9672/2021, 9673/2021,\n 9674/2021, 9675/2021, 9676/2021, 9677/2021, 9678/2021, 9679/2021,\n 9680/2021, 9682/2021, 9686/2021, 9689/2021, 9696/2021, 9720/2021,\n 9722/2021, 9726/2021, 9727/2021, 9728/2021, 9729/2021, 9731/2021,\n 9732/2021, 9733/2021, 9736/2021, 9737/2021, 9738/2021, 9739/2021,\n 9741/2021, 9742/2021, 9757/2021, 9758/2021, 9759/2021, 9760/2021,\n 9807/2021 9810/2021, 9819/2021, 9820/2021, 9821/2021, 9822/2021,\n 9823/2021, 9824/2021, 9825/2021, 9826/2021, 9827/2021, 9828/2021,\n 9830/2021, 9831/2021, 9832/2021, 9839/2021, 9842/2021, 9843/2021,\n 9850/2021, 9851/2021, 9862/2021, 9863/2021, 9865/2021, 9879/2021,\n 9884/2021, 9886/2021, 9910/2021, 9911/2021, 9913/2021, 9919/2021,\n 9924/2021, 9927/2021, 9944/2021, 9945/2021, 9949/2021, 9953/2021,\n 9954/2021, 9955/2021, 9978/2021, 9979/2021, 9981/2021, 9982/2021,\n 9984/2021, 10035/2021, 10036/2021, 10038/2021, 10039/2021, 10046/2021,\n 10055/2021, 10059/2021, 10062/2021, 10076/2021, 10099/2021, 10100/2021,\n 10101/2021, 10102/2021, 10108/2021, 10116/2021, 10117/2021, 10130/2021,\n 10131/2021, 10132/2021, 10134/2021, 10137/2021, 10138/2021, 10139/2021,\n 10140/2021, 10142/2021, 10143/2021, 10144/2021, 10147/2021, 10148/2021,\n 10150/2021, 10151/2021, 10192/2021, 10194/2021, 10195/2021, 10198/2021,\n 10199/2021, 10200/2021, 10201/2021, 10202/2021, 10203/2021, 10207/2021,\n 10208/2021, 10209/2021, 10210/2021, 10211/2021, 10212/2021, 10214/2021,\n 10217/2021, 10224/2021, 10226/2021, 10228/2021, 10234/2021, 10236/2021,\n 10269/2021, 10271/2021, 10300/2021, 10301/2021, 10313/2021, 10315/2021,\n 10316/2021, 10321/2021, 10323/2021, 10325/2021, 10337/2021, 10338/2021,\n 10340/2021, 10341/2021, 10342/2021, 10346/2021, 10382/2021, 10386/2021,\n 10388/2021, 10391/2021, 10404/2021, 10407/2021, 10408/2021, 10413/2021,\n 10419/2021, 10420/2021, 10437/2021, 10465/2021, 10468/2021, 10469/2021,\n 10470/2021, 10474/2021, 10475/2021, 10476/2021, 10477/2021, 10478/2021,\n 10479/2021, 10480/2021, 10481/2021, 10483/2021, 10484/2021, 10485/2021,\n 10487/2021, 10488/2021, 10491/2021, 10512/2021, 10515/2021, 10516/2021,\n 10521/2021, 10526/2021, 10527/2021, 10541/2021, 10542/2021, 10544/2021,\n 10547/2021, 10548/2021, 10549/2021, 10550/2021, 10551/2021, 10553/2021,\n 10555/2021, 10557/2021, 10564/2021, 10568/2021, 10570/2021, 10572/2021,\n 10580/2021, 10581/2021, 10588/2021, 10626/2021, 10627/2021, 10628/2021,\n 10640/2021, 10643/2021, 10650/2021, 10653/2021, 6152/2021, 10396/2021,\n 10414/2021, 10533/2021, 10565/2021, 10587/2021, 10608/2021, 10609/2021,\n 10612/2021, 10613/2021, 10615/2021, 10618/2021, 10619/2021, 10620/2021,\n 10621/2021, 10642/2021, 10661/2021, 10662/2021, 10663/2021, 10683/2021,\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 6 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n 10684/2021, 10685/2021, 10687/2021, 10688/2021, 10692/2021, 10693/2021,\n 10694/2021, 10695/2021, 10696/2021, 10697/2021, 10700/2021, 10702/2021,\n 10704/2021, 10706/2021, 10734/2021, 10735/2021, 10739/2021, 10741/2021,\n 10744/2021, 10748/2021, 10752/2021, 10756/2021, 10757/2021, 10761/2021,\n 10764/2021, 10766/2021, 10767/2021, 10783/2021, 10799/2021, 10802/2021,\n 10803/2021, 10811/2021, 10819/2021, 10820/2021, 10827/2021, 10829/2021,\n 10841/2021, 10843/2021\n\n PRESENT FOR THE PETITIONERS:\n\n Mr. S. Ganesh, Senior Advocate with Ms. Archana Sahadeva, Advocate.\n Mr. Percy Pardiwalla, Senior Advocate with Mr. Salil Kapoor, Ms. Ananya\n Kapoor, Mr. Sumit Lalchandani, Ms. Soumya Singh, Mr. Sanat Kapoor,\n Advocates.\n Ms. Kavita Jha, Mr. Vaibhav Kulkarni, Mr. Udit Naresh, Mr. Anant Mann,\n Mr. Aditeya Bali, Mr. Rahul Unnikrishnan, Mr. Himanshu Aggarwal and\n Ms. Shwetha Prabhakar, Advocates.\n Mr. Ved Jain, Ms. Richa Mishra, Advocates.\n Mr. Rohit Jain with Mr. Neeraj Jain, Mr. Aniket D. Agrawal, Ms. Manisha\n Sharma, Advocates.\n Mr. Aseem Chawla, Mr. Manu K. Giri, Mr. Ashish Dhunna & Ms. Soniya\n Dodeja, Advocates.\n Mr. Piyush Kaushik, Advocate.\n Mr. Sachit Jolly, Ms. Anuradha Dutt, Mr. Rohit Garg, Ms. Disha Jham,\n Ms. Mehak Sachdeva, Mr. Sohum Dua, Advocates .\n Mr. Kapil Gupta, Advocate.\n Mr. Puneet Agarwal, Mr. Yuvraj Singh, Mr. Prem Kandpal, Mr. Chetan\n Kumar Shukla, Ms. Hemlata Rawat, Advocates.\n Mr. Gaurav Gupta, Mr. Jaspal Singh Sethi, Mr. Gaurav Gupta & Ms. Sahiba\n Pantel, Advocates.\n Mr. T.M. Shivakumar, Advocate.\n Mr. Manibhadra Jain, Advocate.\n Dr. Rakesh Gupta, Mr. Somil Agarwal, Mr. Tani Malik, Mr. Anshul Mittal\n Advocates.\n Mr. Mayank Nagi, Advocate.\n Mr. Arvind Kumar & Ms. Devina Sharma, Advocates.\n Mr. Sunil K.Mukhi, Mr. Ishan Garg, Mr.T.S Nerwal, Advocates.\n Mr. P.C. Yadav, Advocate.\n Mr. Raghvendra Singh and Mr Satish kumar, Advocates.\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 7 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n Mr. Rahul Chaudhary, Mr. Avesh Chaudhary, Mr. Abhay Shankar Dubey,\n Advocates.\n Mr. Navin Kumar with Mr. Deepak and Mr. Rohit Pal, Advs.\n Mr. Kamal Sawhney with Mr. Prashant Meharchandani, Mr. Nikhil\n Agarwal, Mr. Arun Bhaduria, Mr. Divyansh Singh, Advocates .\n Mr. Inder Paul Bansal and Mr. Vivek Bansal. Adv.\n Mr. Suresh Chandra Sati, Advocate.\n Mr.Sushil Tekriwal & Dr. Mamta Tekriwal, Advs.\n Mr. Piyush Singhal, Mr. Risabh Sharma, Advs.\n Mr. Rajiv Kumar Virmani, Mr. Abhinav Agrawal, Mr. Rishi Vohar, Ms.\n Swati Bhardwaj, Advs.\n Mr.Rishabh Ostwal, Adv.\n Mr. Rano Jain with Mr. Venketesh Chaurasia, Advs.\n Mr.Sourav Vig and Mr.Tushar Gupta, Advs.\n Mr. Virender Mehta Adv.\n Mr. Manish Paliwal, Mr. Vikas Kumar, Mr. Vishal Aggarwal, Advs.\n Mr.Anish Sarna, Adv.\n Mr. Pankaj Gupta and Ms. Rimpy Gupta, Advs.\n Mr. Harshit Batra and Mr. Ritesh Bajaj, Advs.\n Mr. A.K. Babbar, Mr. V.K. Sabharwal, Mr. Surendra Kumar, Mr. B.K.\n Tripathi, Advs.\n Ms. Vanita Bhargava, Mr. Ajay Bhargava, Ms. Shweta Kabra, Ms. Prerna\n Singh, Advs.\n Ms. Rashmi Chopra, Advocate\n Mr. Kishore Kunal, Mr. Manish Rastogi, Mr. Parth and Mr. Sumit Khadaria,\n Advs.\n Mr. Amol Sinha, Mr. Anshum Jain, Mr. Ashvini Kumar, Advs.\n Mr. Ashvini Kumar, Mr. Rahul Kochar, Mr. Kshitiz Garg, Mr. Abhinav\n Arya, Advs.\n Ms. Shreya Jain & Mr. Gaurav Tanwar, Advs.\n Mr. Pulkit Deora with Mr. Arnav Vidyarthi, Advs.\n Sh. Pankaj Jain, Sr. Advocate with Mr. Gaurav Mittal, Ms. Divya Suri and\n Mr. Sachin Bhardwaj, Advs\n Mr. Bhupinder Jit Kumar, Adv.\n Ms. Jyoti Taneja, Mr. Vidur Kamra Advoacte Advs.\n Mr. Neeraj Jain, Mr. Aditya Vohra, Advs.\n Mr. Divyanshu Agrawal, Ms. Ritika Chawla and Mr. Vaibhav Niti, Advs.\n\n\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 8 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n Mr. Jitesh Talwani, Mr. Abhimanyu Goyal, Mr. Sahil Mahajan and\n Ms. Anjali, Advs.\n Mr Krishna kumar Agarwal, Mr. Sharad Agarwal, Ms. Monika Ghai, Advs.\n Ms. Poonam Ahuja, Adv.\n Mr. R. Madhav Bera, Mr. Divyansh Jain, Mr. Dennis T Panmei, Mr. Aakash\n Bhardwaj, Mr. Rishi Jaiswal, Mr. Keshav Maheshwari, Ms. Akansha Gupta\n and Ms. Tanya Minocha, Advs.\n Mr.Udai Khanna, Adv.\n Mr. Ritambhara Narang and Mr. Pranay Mohan Govil, Advs.\n Mr. Sagar Rohatgi, Adv.\n Mr. Manuj Sabharwal, Adv.\n Mr. Ankur Bansal alongwith Mr. Mukul Rawal and Mr. Devendra Dang,\n Advs.\n Mr. Mukesh Gupta and Mr. Shashi Gandhi, Advs.\n Mr. Prakash Kumar along with Mrs. Rashmi Singh, Advs.\n Mr. Ansh Singh Luthra, Mr. Harmanpreet Singh Kohli and Mr. Abhishek\n Samal, Advs.\n Mr. Nitin Gulati, Adv.\n Mr. Arnav Kumar, Mr. Rajat Mittal, Mr. Devrath Arora and Mr. Lakshay\n Virmani, Advs.\n Mr. Sagar Rohatgi, Mr. Anil Kumar Chunduru & Mr. Neeraj Kumar Jha,\n Advs.\n Mr. Kapil Hirani, & Mr. Shakul R. Ghatole, Mr. Sumit K Batra, Mr. Manish\n Khurana, Advocates.\n Mr. Bharat Beriwal, Ms. Priyadarshini Dewan, Mr. Shankari Mishra,\n Priyesh Srivastava, Advs.\n Ms. Jaya Goyal & Ms. Manpreet Kaur, Advs.\n Mr. Yogesh K. Jagia, Mr. Amit Sood, Mr. Rishabh Nangia, Advs.\n Mr. Gautam Jain and Mr. Piyush Kumar Kamal, Advs.\n Mr. Nagesh Kumar Behl, Mr.Mayank Pachauri & Mr. Vishal Gourav, Advs.\n Mr. Simran Mehta, Adv.\n Shri Tejasvi Goel, Adv.\n Mr. K. Sampath & Mr. S. Krishnan, Advs.\n Mr. S. Krishnan & Mr. Rakesh Kumar, Adv.\n Mr. Mayank Nagi, Mr.Tarun Singh & Mr.Pulkit Verma, Advs.\n Mr. Ruchesh Sinha, Mr. Gautam Khaitan, Mr. AT Patra, Mr. Aditya\n Ghadge, Mr. Ramaditya Tiwari & Ms.Divya, Advs.\n Ms.Priamvada Surolia, Ms.Lakshita Arora & Mr. Abhishek Parmar, Advs.\n\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 9 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n Mr. Shafiq Khan, Adv.\n Ms. Ranjana Roy Gawai, Mr. Ujjwal Jain & Mr. Shikher Upadhyay, Advs.\n Mr. P.R Rajhans, Mr. Ankur Vats & Mr. Vivek Singh, Advs.\n Mr. Sekhar Gupta & Mr. Mehendra Pratap, Advs.\n Mr. Deepanshu Jain & Mr. Shaantanu Jain, Advs.\n Mr. Gagan Kumar, Adv.\n Mr. Abhimanyu, Mr. Ankit Panwar, Mr. Parth Dixit & Mr. Abhishek Singh\n & Ms. Leena Kalra, AR of the Company.\n Mr. Hemant Shah and Saurabh Pal, Advs.\n Mr. R. K. Handoo, Mr.Yoginder Handoo, Mr.Ashwin Kataria, Mr.Aditya\n Chaudhary and Mr.Raghav Bhalla, Advs.\n Mr. Rahul Malhotra, Mr. Manas Tripathi and Ms. Diksha Singh Dhakre,\n Advocates.\n Mr. K.R. Manjani & Mr.Tarun Aswani, Advs.\n Mr. Vishal Kalra, Mr. S.S. Tomar and Mr. Ankit Sahni, Advs.\n Mr. Rajeev Sharma, Adv.\n Mr. Kapil Goel and Mr.Sandeep Goel, Advocates\n Mr. Rohit Bansal, Adv.\n Mr. Amit Kaushik, Adv.\n Mr. Vikas Arora, Ms. Radhika Arora and Mr. Mohit Dagar, Advocates\n Mr. Satyen Sethi & Mr. Arta Trana Panda, Advs.\n Mr. Rupesh Kumar with Ms. Neelam Sharma, Mr. Pankhuri Shrivastava,\n Mr. Pravesh Bahuguna, Mr. Alekshendra Sharma, Advs.\n Mr. Sougat Sinha & Mr. Manoj Kumar, Advs.\n Mr. Hemant Singh, Mridul Chakravarty, Mr. Tushar Srivastava, Ms. Shruti\n Gupta, Lavanya Panwar, Advs.\n Dr. Shashwat Bajpai with Mr Vishal Aggarwal, Advs.\n Mr. Rakesh Jain, Adv.\n Mr. Pragyan Pradip Sharma and Ms. Gurnoor Kaur, Advs.\n Ms. Surbhi Chandra, Adv.\n Mr. Kanishk Agarwal with Mr. Mayank Patni, Ms. Nidhi Bhuwania Advs.\n Mr. Rajiv K. Garg and Mr. Ashish Garg, Advs.\n Mr. R. K. Handoo, Mr. Garvit Solanki, Advs.\n Mr. Deepak Chopra with Mr. Harpreet Singh Ajmani, Mr. Rashi Khanna,\n Ms. Priya Tandon and Mr. Manasvine Bajpai, Advs.\n Mr. Shekhar Gupta, Adv.\n Mr. Mani Bhadra Jain, Adv.\n Mr. Vishnu Langwat with Ms. Nidhi Tomar & Mr. Vinay Pal, Advs.\n\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 10 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n Mr. Vaibhav Sharma, Adv.\n Ms. Bandana Grover, Adv.\n Mr. Sumit Singh, Adv.\n Mr. Debesh Panda & Ms. Anandita Sharma, Advs.\n Mrs. Harvinder Oberoi, Adv.\n Mr. Purav Middha, Adv.\n Mr. Akarsh Garg, Mr. Parth Davar, Mr. Sushant Singhal & Mr. Himanshu\n Aggarwal, Advs.\n Mr. Sabhay Choudhary, Adv.\n Mr. Harpreet Singh & Mr. Gagan Kumar Singhal, Advs.\n Mr. Gaurav Jain & Mr.Gautam Jain, Advs.\n Mr. Anirudh Bakhru, Mr. Ayush Puri, Mr. Umang Tyagi & Mr. Tejaswini\n Chandrasekhar, Adv.\n PRESENT FOR THE RESPONDENTS:\n Mr Zoheb Hossain, Sr. Standing Counsel with Mr. Vipul Agarwal,\n Jr. Standing Counsel, Mr. Parth Semwal, Jr. Standing Counsel for Revenue.\n Mr. Sunil Agarwal, Sr. Standing Counsel, Tushar Gupta, Jr. Standing\n Counsel and Mr. Samarth Chaudhari, Adv.\n Mr. Puneet Rai, Sr. Standing Counsel along with Adeeba Mujahid, Jr.\n Standing Counsel.\n Mr. Ruchir Bhatia, Sr Standing Counsel.\n Mr. Abhishek Maratha, Sr. Standing Counsel.\n Mr. Sanjay Kumar, Sr. Standing Counsel with Ms. Easha Kadiyan, Jr.\n Standing Counsel for Revenue.\n Ms. Vibhooti Malhotra, Sr. Standing counsel Mr Shailender Singh, Jr St\n counsel and Mr.Udit Sharma, Adv.\n Mr. Harpreet Singh, Sr SC with Mr. Arunesh Sharma & Ms.Suhani Mathur,\n Advs.\n Mr. Kunal Sharma, Sr. Standing Counsel with Ms. Zehra Khan, Jr. Standing\n Counsel and Mr. Shubhendu Bhattacharya, Adv.\n Mr. Ajit Sharma, Sr. Standing Counsel with Mr. Anant Ram Mishra, Adv.\n Mr. Sanjeev Sabharwal, Sr. panel counsel for UOI.\n Mr. Avnish Singh with Ms. Pushplata Singh, Advs. for UOI.\n Mr. P.C Yadav, Sr Panel Counsel, UOI.\n Mr. Vivek Goyal, CGSC for UOI.\n Mr. Nawal Kishore Jha, Adv. for Respondents/UOI.\n Mr. Dilbag Singh Sr. CGC for Respondents/UOI.\n Mr. Kamal Kant Jha, Senior Panel Counsel for UOI.\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 11 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n Mr. Ranvir Singh, (CGSC) for UOI.\n Mr. D.S.Mehandru, Sr. Panel Counsel for UOI.\n Mr. Anil Dabas, Adv. for UOI.\n Mr. Praveen Kumar Jain, Adv.\n Ms. Richa Dhawan, Senior Panel counsel for UOI.\n Ms. Aakanksha Kaul, Mr. Manek Singh, Mr. Aman Sahani, Advs.\n Mr. Nitin Khanna, Advocate for R-4/UOI.\n Ms. Arti Bansal for Respondent No.3/ UOI.\n Mr. Prakash Kumar, Sr. Central Govt. Counsel.\n Mr. Narendra Kumar Srivastava Senior Panel Counsel for the respondent\n No. 3.\n Mr. Praveen Kumar Jain, Adv.\n Ms. Talish Ray, Adv. for UOI.\n Ms. Sunieta Ojha, Adv. for UOI.\n Mr. Neeraj, Mr. Sahaj Garg , Mr. Vedansh Anand, Mr. Rudra Paliwal and\n Mr. Sanjay Pal, Advs.\n Mr.Ajay Digpaul CGSC with Kamal R. Digpaul Adv.\n Mr. Ravi Prakash CGSC with Mr. Gurtejpal Singh, Ms. Shruti Shivkumar,\n Advs.\n Mr. Ashwani Kumar Sharma, CGSC.\n Mr.Sushil Kumar Pandey, Adv. with Mr. Rahul Mourya, Ms. Sweety Singh\n Chauhan & Ms. Anjum Kaur, Advs.\n Mr. Jitesh Vikram Srivastava, Mr. Prajesh Vikram Srivastava, Adv.\n Ms. Aakanksha Kaul, Mr. Manek Singh, Mr. Aman Sahani, Advs.\n Mr. Ajay Digpaul, Adv.\n Mr. Vivekanand Mishra, Senior Panel Counsel UOI.\n Mr. Ruchir Mishra and Mr. Mukesh Kumar Tiwari, Advs.\n Mr. Shankar Kumar Jha, Adv.\n Mr. Manoj Kumar Tyagi, Adv.\n Mr. Chiranjiv Kumar, Adv.\n Mr. Tanveer Ahmed Ansari, Adv.\n Mr. Pradeep Kumar Sharma, Adv.\n Mr. Siddharth Khatana, Adv.\n Ms. Leena Tuteja, Adv.\n Mr. T. P.Singh, Adv.\n Mr. Bhagvan Swarup Shukla (CGSC) with Mr. Sarvan Kumar, Advs.\n Mr. Dev P Bhardwaj, CGSC with Ms. Anubha Bhardwaj, Adv.\n Mr. Satyendra Kumar, Adv.\n\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 12 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n Mr. Satya Ranjan Swain, Senior Panel Counsel, Mr. Kautilya Birat, Adv.\n Mr. Farman Ali, Senior Panel Counsel and Mr.Athar Raza Farooquei, Adv.\n Mr. Sushil Kumar Pandey, Senior Panel Counsel for respondent No.1/UOI.\n Mr. Aman Malik, Senior Panel Counsel.\n Mr. Jivesh Tiwari, Adv. for UOI.\n Mr. Manisha Agrawal Narain, Mr. Rakshita Goyal, Mr. Aditya Deshwal,\n Advs.\n Ms. Suman Chauhan, Adv.\n Mr. Rishabh Sahu, Adv.\n Mr. Gigi C George, Adv.\n Mr Ayush Agrawal, Senior Panel Counsel (UOI), Mr. Vikrant Singh Bloria,\n and Mr. Sushant Tomar, Advs.\n Mr. Naginder Benipal, SPC with Mr. Naveen Chawla and Mr. Harithi\n Kambiri, Advs.\n Mr. B.N.P. Pathak Sr. Central Govt. Counsel for UOI.\n Mr. Vikrant N Goyal, Adv.\n Mr. Jaswant Rai Aggarwal, Adv.\n Mr. Akshay Amritanshu, Adv.with Mr. Kartikey Singh, Adv.\n Mr. Ghanshyam Mishra & Ms. Vinita Sharma, Advs. for UOI/R-3.\n Mr. Satyanand, SPC for UOI.\n Mr. Rajesh Kumar, Adv. for UOI.\n Mr. Harish Kumar Garg, Adv.\n Mr. Rajesh Gogna, CGSC with Mr. Vaibhav Anand, Adv.\n Mr. Chiranjiv Kumar, Adv. for UOI.\n Mr. Sandeep Tyagi, SPC for UOI.\n Mr. Akhilesh Kumar, Adv.\n Ms. Nidhi Banga, Senior Panel Counsel for UOI with Ms. Kirti Arora, Adv.\n Ms. Anju Gupta, Adv. for UOI.\n Mr. Shashank Bajpai, SPC, Mrs. Shakun Sudha Shukla, Mr. Dhananjay\n Tiwari, Advs. for UOI.\n Mr. Niraj Kumar, Sr. Central Govt. Counsel for UOI/R-4.\n Mr. S.S. Rai, SPC for UOIfor R-3 & R-4 alongwith Mrs. Roopam Rai, Adv.\n Mr. Alok Singh, SPC for UOI along with Ms. Sonam Awasthi, Mr. Gaurav\n Bhardwaj, Advs.\n Mr. Prasanta Varma, Sr. PC, Government Counsel with Mrs. Prativa Varma,\n Mr. Amrit Singh Khalsa, Ms. Hiteshi Kakkar, Advocates.\n Mr. G. D. Sharma, Adv.\n Mr. Asheesh Jain, CGSC with Mr. Adarsh Kr. Gupta, Advocates.\n\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 13 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n Mr. Saroj Bidawat, Sr. Panel counsel\n Ms. Archana Gaur, Adv.\n Mr. Ayush Agrawal, Senior Panel Counsel (UOI), Vikrant Singh Bloria,\n Adv.\n Mr. P. S. Singh, Advocate\n Mr. Ashish Verma and Mr. Debopriyo Moulik, Advs.\n Ms. Sonu Bhatnagar, Sr. SC with Ms. Venus Mehrotra, Ms. Kanak Grover,\n Advs.\n Mr. Rajesh Gogna, CGSC with Mr. Arihant Jain, Adv.\n Mr. Kirtiman Singh CGSC with Mr. Taha Yasin, Adv.\n Ms. Sarika Singh, Adv.\n Mr. Rahul Sharma, Central Government Counsel Panel and Mr. C.K.Bhatt,\n Adv.\n Mr.Virender Pratap Singh Charak with Ms.Shubhra Parashar,\n Mr. Pushpender Singh Charak, Mr. Kapil Gaur, Mr. Vaishnav Kirti Singh,\n Mr. Shubham Ahuja, Mr. Sanjay Singh Chauhan, Mr. Ram Pal Singh\n Tomar, Mr. Gyanwardhan Singh & Mr. Vivek Nagar, Advs. for UOI.\n Mr.Nirvikar Verma, Adv. for UOI.\n Mr.Rajesh Kumar, Adv. for UOI.\n Mr. Manish Mohan, CGSC with Ms. Manisha Saroha, Adv.\n Mr. Shyam Sundar Rai, Adv.\n\n Reserved on:- 30th October, 2021\n % Date of decision:- 15th December, 2021\n CORAM:\n HON'BLE MR. JUSTICE MANMOHAN\n HON'BLE MR. JUSTICE NAVIN CHAWLA\n JUDGMENT\n MANMOHAN, J:\n 1. Various issues arise for consideration in the present batch of one\n thousand three hundred and forty six (1346) writ petitions, yet in essence,\n the questions of law that arise for consideration are whether the\n Government/Executive can make or change law of the land by way of\n Explanations to Notifications without specific Authority from the\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 14 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n Legislature to do so and whether the Government/Executive can impede the\n implementation of law made by the Legislature.\n 2. It is pertinent to mention that in the present batch of matters, the\n petitioners-assessees have sought quashing of the re-assessment Notices\n issued post 31st March, 2021 by the Respondents-Revenue under Section\n 148 of the Income Tax Act, 1961. The petitioners-assessees also seek a\n declaration declaring Explanations A(a)(ii)/A(b) to the Notification No.20\n [S.O.1432(E)] dated 31st March, 2021 and Notification No.38 [S.O.1703(E)]\n dated 27th April, 2021 to the extent that the same extend the applicability of\n the \"provisions of Section 148, Section 149 and Section 151 of the Act, as\n the case may be, as they stood as on the 31st day of March, 2021, before the\n commencement of the Finance Act, 2021\" to the period beyond 31st March,\n 2021 as ultra vires the parent legislation, viz., The Taxation and Other Laws\n (Relaxation and Amendment of Certain Provisions) Act, 2020 (hereinafter\n referred to as 'Relaxation Act, 2020').\n\n ADMITTED FACTS\n\n 3. The procedure governing initiation of reassessment proceedings prior\n to coming into force of the Finance Act, 2021 was governed by the\n following provisions:-\n \"Income escaping assessment.\n\n 147. If the Assessing Officer has reason to believe that\n any income chargeable to tax has escaped assessment for\n any assessment year, he may, subject to the provisions of\n sections 148 to 153, assess or reassess such income and\n also any other income chargeable to tax which has\n escaped assessment and which comes to his notice\n subsequently in the course of the proceedings under this\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 15 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n section, or recomputed the loss or the depreciation\n allowance or any other allowance, as the case may be,\n for the assessment year concerned (hereafter in this\n section and in sections 148 to 153 referred to as the\n relevant assessment year):\n\n Provided that where an assessment under sub-section (3)\n of section 143 or this section has been made for the\n relevant assessment year, no action shall be taken under\n this section after the expiry of four years from the end of\n the relevant assessment year, unless any income\n chargeable to tax has escaped assessment for such\n assessment year by reason of the failure on the part of the\n assessee to make a return under section 139 or in\n response to a notice issued under sub-section (1) of\n section 142 or section 148 or to disclose fully and truly\n all material facts necessary for his assessment, for that\n assessment year:\n Provided further that nothing contained in the first\n proviso shall apply in a case where any income in\n relation to any asset (including financial interest in any\n entity) located outside India, chargeable to tax, has\n escaped assessment for any assessment year:\n Provided also that the Assessing Officer may assess or\n reassess such income, other than the income involving\n matters which are the subject matters of any appeal,\n reference or revision, which is chargeable to tax and has\n escaped assessment.\n\n Explanation 1.--Production before the Assessing Officer\n of account books or other evidence from which material\n evidence could with due diligence have been discovered\n by the Assessing Officer will not necessarily amount to\n disclosure within the meaning of the foregoing proviso.\n Explanation 2.--For the purposes of this section, the\n following shall also be deemed to be cases where income\n chargeable to tax has escaped assessment, namely :--\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 16 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n (a) where no return of income has been furnished\n by the assessee although his total income or the\n total income of any other person in respect of\n which he is assessable under this Act during the\n previous year exceeded the maximum amount\n which is not chargeable to income-tax;\n (b) where a return of income has been furnished by\n the assessee but no assessment has been made and\n it is noticed by the Assessing Officer that the\n assessee has understated the income or has\n claimed excessive loss, deduction, allowance or\n relief in the return;\n (ba) where the assessee has failed to furnish a\n report in respect of any international transaction\n which he was so required under section 92E;\n (c) where an assessment has been made, but--\n (i) income chargeable to tax has been\n underassessed ; or\n (ii) such income has been assessed at too\n low a rate ; or\n (iii) such income has been made the\n subject of excessive relief under this Act;\n or\n (iv) excessive loss or depreciation\n allowance or any other allowance under\n this Act has been computed;\n (ca) where a return of income has not been\n furnished by the assessee or a return of income has\n been furnished by him and on the basis of\n information or document received from the\n prescribed income-tax authority, under sub-section\n (2) of section 133C, it is noticed by the Assessing\n Officer that the income of the assessee exceeds the\n maximum amount not chargeable to tax, or as the\n case may be, the assessee has understated the\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 17 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n income or has claimed excessive loss, deduction,\n allowance or relief in the return;\n (d) where a person is found to have any asset\n (including financial interest in any entity) located\n outside India.\n Explanation 3.--For the purpose of assessment or\n reassessment under this section, the Assessing Officer\n may assess or reassess the income in respect of any issue,\n which has escaped assessment, and such issue comes to\n his notice subsequently in the course of the proceedings\n under this section, notwithstanding that the reasons for\n such issue have not been included in the reasons\n recorded under sub-section (2) of section 148.\n Explanation 4.--For the removal of doubts, it is hereby\n clarified that the provisions of this section, as amended\n by the Finance Act, 2012, shall also be applicable for any\n assessment year beginning on or before the 1st day of\n April, 2012.\n Issue of notice where income has escaped assessment.\n\n 148.(1) Before making the assessment, reassessment or\n recomputation under section 147, the Assessing Officer\n shall serve on the assessee a notice requiring him to\n furnish within such period, as may be specified in the\n notice, a return of his income or the income of any other\n person in respect of which he is assessable under this Act\n during the previous year corresponding to the relevant\n assessment year, in the prescribed form and verified in\n the prescribed manner and setting forth such other\n particulars as may be prescribed; and the provisions of\n this Act shall, so far as may be, apply accordingly as if\n such return were a return required to be furnished under\n section 139:\n Provided that in a case--\n (a) where a return has been furnished during the\n period commencing on the 1st day of October,\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 18 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n 1991 and ending on the 30th day of September,\n 2005 in response to a notice served under this\n section, and\n (b) subsequently a notice has been served under\n sub-section (2) of section 143 after the expiry of\n twelve months specified in the proviso to sub-\n section (2) of section 143, as it stood immediately\n before the amendment of said sub-section by the\n Finance Act, 2002 (20 of 2002) but before the\n expiry of the time limit for making the assessment,\n re-assessment or recomputation as specified in\n sub-section (2) of section 153, every such notice\n referred to in this clause shall be deemed to be a\n valid notice:\n Provided further that in a case--\n (a) where a return has been furnished during the\n period commencing on the 1st day of October,\n 1991 and ending on the 30th day of September,\n 2005, in response to a notice served under this\n section, and\n (b) subsequently a notice has been served under\n clause (ii) of sub-section (2) of section 143 after the\n expiry of twelve months specified in the proviso to\n clause (ii) of sub-section (2) of section 143, but\n before the expiry of the time limit for making the\n assessment, reassessment or recomputation as\n specified in sub-section (2) of section 153, every\n such notice referred to in this clause shall be\n deemed to be a valid notice.\n Explanation.--For the removal of doubts, it is hereby\n declared that nothing contained in the first proviso or the\n second proviso shall apply to any return which has been\n furnished on or after the 1st day of October, 2005 in\n response to a notice served under this section.\n (2) The Assessing Officer shall, before issuing any notice\n under this section, record his reasons for doing so.\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 19 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n Time limit for notice.\n 149. (1) No notice under section 148 shall be issued for\n the relevant assessment year,--\n (a) if four years have elapsed from the end of the relevant\n assessment year, unless the case falls under clause (b) or\n clause (c);\n (b) if four years, but not more than six years, have elapsed from\n the end of the relevant assessment year unless the income\n chargeable to tax which has escaped assessment amounts to or\n is likely to amount to one lakh rupees or more for that year;\n (c) if four years, but not more than sixteen years, have elapsed\n from the end of the relevant assessment year unless the income\n in relation to any asset (including financial interest in any\n entity) located outside India, chargeable to tax, has escaped\n assessment.\n Explanation.--In determining income chargeable to tax\n which has escaped assessment for the purposes of this\n sub-section, the provisions of Explanation 2 of section\n 147 shall apply as they apply for the purposes of that\n section.\n (2) The provisions of sub-section (1) as to the issue of\n notice shall be subject to the provisions of section 151.\n (3) If the person on whom a notice under section 148 is to\n be served is a person treated as the agent of a non-\n resident under section 163 and the assessment,\n reassessment or recomputation to be made in pursuance\n of the notice is to be made on him as the agent of such\n non-resident, the notice shall not be issued after the\n expiry of a period of six years from the end of the relevant\n assessment year.\n Explanation.--For the removal of doubts, it is hereby\n clarified that the provisions of sub-sections (1) and (3), as\n amended by the Finance Act, 2012, shall also be\n applicable for any assessment year beginning on or\n before the 1st day of April, 2012.\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 20 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n Sanction for issue of notice.\n 151. (1) No notice shall be issued under section 148 by an\n Assessing Officer, after the expiry of a period of four\n years from the end of the relevant assessment year, unless\n the Principal Chief Commissioner or Chief Commissioner\n or Principal Commissioner or Commissioner is satisfied,\n on the reasons recorded by the Assessing Officer, that it\n is a fit case for the issue of such notice.\n (2) In a case other than a case falling under sub-section\n (1), no notice shall be issued under section 148 by an\n Assessing Officer, who is below the rank of Joint\n Commissioner, unless the Joint Commissioner is satisfied,\n on the reasons recorded by such Assessing Officer, that it\n is a fit case for the issue of such notice.\n (3) For the purposes of sub-section (1) and sub-section\n (2), the Principal Chief Commissioner or the Chief\n Commissioner or the Principal Commissioner or the\n Commissioner or the Joint Commissioner, as the case\n may be, being satisfied on the reasons recorded by the\n Assessing Officer about fitness of a case for the issue of\n notice under section 148, need not issue such notice\n himself.\"\n 4. Due to the onset of Covid-19 pandemic followed by nationwide\n lockdown in March, 2020, the citizens and authorities inter alia faced\n difficulties in complying with the statutory time limits. To provide\n relaxation as well as to avoid any adverse consequence to either party, the\n Government of India announced various relaxations by way of The Taxation\n and Other Laws (Relaxation of Certain Provisions) Ordinance, 2020\n (hereinafter referred to as the 'Relaxation Ordinance, 2020'). The objects\n and reasons as well as the relevant portion of the Relaxation Ordinance,\n 2020 are reproduced herein below:-\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 21 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n \"THE TAXATION AND OTHER LAWS (RELAXATION OF\n CERTAIN PROVISIONS) ORDINANCE, 2020\n NO. 2 of 2020, DATED 31-3-2020\n Promulgated by the President in the Seventy-first Year of the Republic\n of India.\n\n An Ordinance to provide relaxation in the provisions of certain Acts\n and for matters connected therewith or incidental thereto.\n\n WHEREAS, in view of the spread of pandemic COVID-19 across\n many countries of the world including India, causing immense loss to\n the lives of people, it has become imperative to relax certain\n provisions, including extension of time limit, in the taxation and other\n laws;\n\n AND WHEREAS, Parliament is not in session and the President is\n satisfied that circumstances exist which render it necessary for him to\n take immediate action;\n\n NOW, THEREFORE, in exercise of the powers conferred by clause\n (1) of article 123 of the Constitution, the President is pleased to\n promulgate the following Ordinance: --\n\n CHAPTER I\n PRELIMINARY\n Short title and commencement\n 1. (1) This Ordinance may be called the Taxation and Other Laws\n commencement. (Relaxation of Certain Provisions) Ordinance, 2020.\n (2) Save as otherwise provided, it shall come into force at once.\n\n Definitions\n 2. (1) In this Ordinance, unless the context otherwise requires,--\n (a) \"specified Act\" means--\n (i) the Wealth-tax Act, 1957 (27 of 1957);\n (ii) the Income-tax Act, 1961 (43 of 1961);\n (iii) the Prohibition of Benami Property Transactions Act, 1988\n (45 of 1988);\n (iv) Chapter VII of the Finance (No. 2) Act, 2004 (22 of 2004);\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 22 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n (v) Chapter VII of the Finance Act, 2013 (17 of 2013);\n (vi) the Black Money (Undisclosed Foreign Income and Assets)\n and Imposition of Tax Act, 2015 (22 of 2015);\n (vii) Chapter VIII of the Finance Act, 2016; (28 of 2016) or\n (viii) the Direct Tax Vivad se Vishwas Act, 2020 (3 of 2020);\n\n (b) \"notification\" means the notification published in the Official\n Gazette.\n (2) The words and expressions used herein and not defined, but\n defined in the specified Act, the Central Excise Act, 1944 (1 of 1944),\n the Customs Act, 1962 (52 of 1962), the Customs Tariff Act, 1975 (51\n of 1975) or the Finance Act, 1994 (32 of 1994), as the case may be,\n shall have the meaning respectively assigned to them in that Act.\n\n CHAPTER II\n RELAXATION OF CERTAIN PROVISIONS OF SPECIFIED ACT\n\n Relaxation of certain provision of specified Act\n 3. (1) Where, anytime limit has been specified in, or prescribed or\n notified under, the specified Act which falls during the period from the\n 20th day of March, 2020 to the 29th day of June, 2020 or such other\n date after the 29th day of June, 2020 as the Central Government may,\n by notification, specify in this behalf, for the completion or\n compliance of such action as--\n\n (a) completion of any proceeding or passing of any order or\n issuance of any notice, intimation, notification, sanction or\n approval or such other action, by whatever name called, by any\n authority, commission or tribunal, by whatever name called,\n under the provisions of the specified Act; or\n (b) filing of any appeal, reply or application or furnishing of\n any report, document, return, statement or such other record,\n by whatever name called, under the provisions of the specified\n Act; or\n (c) in case where the specified Act is the Income-tax Act, 1961\n (43 of 1961), --\n (i) making of investment, deposit, payment, acquisition,\n purchase, construction or such other action, by whatever\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 23 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n name called, for the purposes of claiming any deduction,\n exemption or allowance under the provisions contained\n in--\n (I) sections 54 to 54GB or under any provisions of\n Chapter VI-A under the heading \"B.--Deductions\n in respect of certain payments\" thereof; or\n (II) such other provisions of that Act, subject to\n fulfillment of such conditions, as the Central\n Government may, by notification, specify; or\n\n (ii) beginning of manufacture or production of articles or\n things or providing any services referred to in section\n 10AA of that Act, in a case where the letter of approval,\n required to be issued in accordance with the provisions\n of the Special Economic Zones Act, 2005 (28 of 2005),\n has been issued on or before the 31st day of March, 2020\n (28 of 2005),\n and where completion or compliance of such action has not been\n made within such time, then, the time limit for completion or\n compliance of such action shall, notwithstanding anything contained\n in the specified Act, stand extended to the 30th day of June, 2020, or\n such other date after the 30th day of June, 2020, as the Central\n Government may, by notification, specify in this behalf:\n\n Provided that the Central Government may specify different dates for\n completion or compliance of different actions.\n\n Provided further that such action shall not include payment of any\n amount as is referred to in sub-section (2).\"\n\n 5. As the pandemic and problems arising therefrom did not show any\n sign of abatement, the Legislature enacted Relaxation Act, 2020 in\n September, 2020. By way of Relaxation Act, 2020, various due dates/time\n limits/limitations prescribed in different Central Acts, including the Income\n Tax Act, 1961, were relaxed. Additionally, Section 3 of Relaxation Act,\n 2020 enabled the Central Government to issue Notifications for further\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 24 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n relaxing the time limits/limitations prescribed in the 'Specified Acts'. The\n Statement of Objects and Reasons as well as the relevant portion of the\n Relaxation Act, 2020 are reproduced herein below:-\n\n \"STATEMENT OF OBJECTS AND REASONS\n The outbreak of Novel Corona Virus (COVID-19) pandemic across\n many countries of the world, including India, has caused immense\n loss to lives of people and given rise to unprecedented humanitarian\n and economic crisis in the country. Due to vagaries of pandemic, a\n national lockdown was imposed which had to be further extended.\n Due to very rapid spread of pandemic, social distancing had to be\n ensured immediately to prevent society at large from its disastrous\n consequences. This necessitated ease of compliance under certain tax\n and other laws.\n\n 2. As Parliament was not in session and in view of the urgency, the\n Taxation and Other Laws (Relaxation of Certain Provisions)\n Ordinance, 2020 (Ord. 2 of 2020) was promulgated on the 31st day of\n March, 2020 which, inter alia, relaxed certain provisions of the\n specified Acts relating to direct taxes, indirect taxes and prohibition\n of Benami property transactions. Further, certain notifications were\n also issued under the said Ordinance.\n\n 3. In view of stakeholders' representations received after enactment of\n the Finance Act, 2020, and due to need for further rationalisation of\n some provisions of certain Acts, further amendments are considered\n necessary to be incorporated in the proposed Bill replacing the\n Ordinance.\n\n 4. The Taxation and Other Laws (Relaxation and Amendment of\n Certain Provisions) Bill, 2020 which seeks to replace the said\n Ordinance, inter alia, provides for extension of various time limits for\n completion or compliance of actions under the specified Acts and\n reduction in interest, waiver of penalty and prosecution for delay in\n payment of certain taxes or levies during the specified period.\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 25 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n 5. Further, the Bill proposes amendments to the Income-tax Act, 1961\n which, inter alia, include providing of tax incentive for Category-III\n Alternative Investment Funds located in the International Financial\n Services Centre (IFSC) to encourage relocation of foreign funds to\n the IFSC, deferment of new procedure of registration and approval of\n certain entities introduced through the Finance Act, 2020, providing\n for deduction for donation made to the Prime Minister's Citizen\n Assistance and Relief in Emergency Situations Fund (PM CARES\n FUND) and exemption to its income, incorporation of Faceless\n Assessment Scheme, 2019 therein, empowering the Central\n Government to notify schemes for faceless processes under certain\n provisions by eliminating physical interface to the extent\n technologically feasible and to provide deduction or collection at\n source in respect of certain transactions at threefourth's rate for the\n period from 14th May, 2020 to 31st March, 2021.\n\n 6. The Bill also proposes to amend the Direct Tax Vivad se Viswas\n Act, 2020 to extend the date for payment without additional amount to\n 31st December, 2020 and to empower the Central Government to\n notify certain dates relating to filing of declaration and making of\n payment.\n\n 7. The Finance Act, 2020 is also proposed to be amended to clarify\n regarding capping of surcharge at 15 per cent on dividend income of\n the Foreign Portfolio Investor.\n\n 8. The Bill also proposes to empower the Central Government to\n remove any difficulty up to a period of two years and provide for\n repeal and savings of the Taxation and Other Laws (Relaxation of\n Certain Provisions) Ordinance, 2020.\n\n 9. The Bill seeks to achieve the aforesaid objectives.\n\n NEW DELHI; NIRMALA SITHARAMAN\n The 11th September, 2020.\n\n\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 26 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n THE TAXATION AND OTHER LAWS (RELAXATION AND\n AMENDMENT OF CERTAIN PROVISIONS) ACT, 2020\n NO. 38 OF 2020\n [29th September, 2020.]\n\n AN ACT to provide for relaxation and amendment of provisions of\n certain Acts and for matters connected therewith or incidental\n thereto.\n\n BE it enacted by Parliament in the Seventy-first Year of the\n Republic of India as follows:--\n\n CHAPTER I\n PRELIMINARY\n\n 1. (1) This Act may be called the Taxation and Other Laws\n (Relaxation and Amendment of Certain Provisions) Act, 2020.\n\n (2) Save as otherwise provided, it shall be deemed to have come into\n force on the 31st day of March, 2020.\n\n 2. (1) In this Act, unless the context otherwise requires,--\n (a) \"notification\" means the notification published in the\n Official Gazette;\n (b) \"specified Act\" means--\n (i) the Wealth-tax Act, 1957;\n (ii) the Income-tax Act, 1961;\n (iii) the Prohibition of Benami Property Transactions\n Act, 1988;\n (iv) Chapter VII of the Finance (No. 2) Act, 2004;\n (v) Chapter VII of the Finance Act, 2013;\n (vi) the Black Money (Undisclosed Foreign Income and\n Assets) and Imposition of Tax Act, 2015;\n (vii) Chapter VIII of the Finance Act, 2016; or\n (viii) the Direct Tax Vivad se Vishwas Act, 2020.\n\n (2) The words and expressions used herein and not defined, but\n defined in the specified Act, the Central Excise Act,1944, the Customs\n\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 27 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n Act, 1962, the Customs Tariff Act,1975 or the Finance Act,1994, as\n the case may be, shall have the same meaning respectively assigned to\n them in that Act.\n\n CHAPTER II\n RELAXATION OF CERTAIN PROVISIONS OF SPECIFIED ACT\n 3. (1) Where, any time-limit has been specified in, or prescribed or\n notified under, the specified Act which falls during the period from the\n 20th day of March, 2020 to the 31st day of December, 2020, or such\n other date after the 31st day of December, 2020, as the Central\n Government may, by notification, specify in this behalf, for the\n completion or compliance of such action as--\n (a) completion of any proceeding or passing of any order or\n issuance of any notice, intimation, notification, sanction or\n approval, or such other action, by whatever name called, by\n any authority, commission or tribunal, by whatever name\n called, under the provisions of the specified Act; or\n (b) filing of any appeal, reply or application or furnishing of\n any report, document, return or statement or such other record,\n by whatever name called, under the provisions of the specified\n Act; or\n (c) in case where the specified Act is the Income-tax Act,\n 1961,--\n (i) making of investment, deposit, payment, acquisition,\n purchase, construction or such other action, by whatever\n name called, for the purposes of claiming any deduction,\n exemption or allowance under the provisions contained\n in--\n (I) sections 54 to 54GB, or under any provisions of\n Chapter VI-A under the heading \"B.--Deductions\n in respect of certain payments\" thereof; or\n (II) such other provisions of that Act, subject to\n fulfilment of such conditions, as the Central\n Government may, by notification, specify; or\n\n\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 28 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n (ii) beginning of manufacture or production of articles or\n things or providing any services referred to in section\n 10AA of that Act, in a case where the letter of approval,\n required to be issued in accordance with the provisions\n of the Special Economic Zones Act, 2005, has been\n issued on or before the 31st day of March, 2020,\n and where completion or compliance of such action has\n not been made within such time, then, the time-limit for\n completion or compliance of such action shall,\n notwithstanding anything contained in the specified Act,\n stand extended to the 31st day of March, 2021, or such\n other date after the 31st day of March, 2021, as the\n Central Government may, by notification, specify in this\n behalf:\n\n Provided that the Central Government may specify\n different dates for completion or compliance of different\n actions:\n xxxx xxxx xxxx xxxx\n 10. (1) If any difficulty arises in giving effect to the provisions of this\n Act, the Central Government may, by order, not inconsistent with the\n provisions of this Act, remove the difficulty:\n\n Provided that no such order shall be made after the expiry of a\n period of two years from the end of the month in which this Act has\n received the assent of the President.\n\n (2) Every order made under this section shall be laid before each\n House of Parliament.\n\n 11. (1) The Taxation and Other Laws (Relaxation of Certain\n Provisions) Ordinance, 2020 is hereby repealed.\n\n (2) Notwithstanding such repeal, anything done, any notification\n issued or any action taken under the said Ordinance, shall be deemed\n to have been done, issued or taken under the corresponding\n provisions of this Act.\"\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 29 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n 6. In pursuance to the power vested under Section 3 of Relaxation Act,\n 2020, the Central Government issued following Notifications inter-alia\n extending the time lines prescribed under Section 149 for issuance of\n reassessment notices under Section 148 of the Income Tax Act, 1961:\n\n Date of Original limitation for Extended\n Notification issuance of notice under Limitation\n Section 148 of the Act\n 31.03.2020 20.03.2020 to 29.06.2020 30.06.2020\n\n 24.06.2020 20.03.2020 to 31.12.2020 31.03.2021\n\n 31.03.2021 31.03.2021 30.04.2021\n 27.04.2021 30.04.2021 30.06.2021\n\n 7. The Explanations to the Notifications dated 31st March, 2021 and 27th\n April, 2021 issued under Section 3 of Relaxation Act, 2020 also stipulated\n that the provisions, as existed prior to amendment by Finance Act, 2021,\n shall apply to the reassessment proceedings initiated thereunder. The\n Explanations to the Notifications dated 31st March, 2021 and 27th April,\n 2021 are impugned in the present proceedings. The said Notifications are\n reproduced hereinbelow:-\n\n \"A. NOTIFICATION S.O.1432(E) [NO.20/2021/F.NO.370142/\n 35/2020-TPL]\n SECTION 3 OF THE TAXATION AND OTHER LAWS\n (RELAXATION AND AMENDMENT OF CERTAIN\n PROVISIONS) ACT, 2020, READ WITH SECTIONS 139AA,\n 144C, 148, 149 AND 151 OF THE INCOME-TAX ACT, 1961 AND\n SECTION 168 OF THE FINANCE ACT, 2016 - RELAXATION\n OF CERTAIN PROVISIONS OF SPECIFIED ACT -\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 30 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n EXTENSION OF DUE DATE FOR COMPLETION OF ACTION\n UNDER SPECIFIED ACTS\n NOTIFICATION S.O.1432(E) [NO.20/2021/F.NO.370142 /35/2020-\n TPL], DATED 31-3-2021\n In exercise of the powers conferred by sub-section (1) of section 3 of\n the Taxation and Other Laws (Relaxation and Amendment of Certain\n Provisions) Act, 2020 (38 of 2020) (hereinafter referred to as the said\n Act), and in partial modification of the notification of the Government\n of India in the Ministry of Finance, (Department of Revenue) No.\n 93/2020 dated the 31st December, 2020, published in the Gazette of\n India, Extraordinary, Part II, Section 3, Sub-section (ii), vide number\n S.O. 4805(E), dated the 31st December, 2020, the Central Government\n hereby specifies that,--\n\n (A) where the specified Act is the Income-tax Act, 1961 (43 of 1961)\n (hereinafter referred to as the Income-tax Act) and, --\n (a) the completion of any action referred to in clause (a) of sub-\n section (1) of section 3 of the Act relates to passing of an order\n under sub-section (13) of section 144C or issuance of notice\n under section 148 as per time-limit specified in section 149 or\n sanction under section 151 of the Income-tax Act, --\n (i) the 31st day of March, 2021 shall be the end date of\n the period during which the time-limit, specified in, or\n prescribed or notified under, the Income-tax Act falls for\n the completion of such action; and\n (ii) the 30th day of April, 2021 shall be the end date to\n which the time-limit for the completion of such action\n shall stand extended.\n\n Explanation.-- For the removal of doubts, it is hereby\n clarified that for the purposes of issuance of notice under\n section 148 as per time-limit specified in section 149 or\n sanction under section 151 of the Income-tax Act, under this\n sub-clause, the provisions of section 148, section 149 and\n section 151 of the Income-tax Act, as the case may be, as they\n stood as on the 31st day of March 2021, before the\n commencement of the Finance Act, 2021, shall apply.\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 31 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n (b) the compliance of any action referred to in clause (b) of\n sub-section (1) of section 3 of the said Act relates to intimation\n of Aadhaar number to the prescribed authority under sub-\n section (2) of section 139AA of the Income-tax Act, the time-\n limit for compliance of such action shall stand extended to the\n 30th day of June, 2021.\n (B) where the specified Act is the Chapter VIII of the Finance Act,\n 2016 (28 of 2016) (hereinafter referred to as the Finance Act) and the\n completion of any action referred to in clause (a) of sub-section (1) of\n section 3 of the said Act relates to sending an intimation under sub-\n section (1) of section 168 of the Finance Act, --\n\n (i) the 31st day of March, 2021 shall be the end date of the\n period during which the time-limit, specified in, or prescribed\n or notified under, the Finance Act falls for the completion of\n such action; and\n (ii) the 30th day of April, 2021 shall be the end date to which the\n time-limit for the completion of such action shall stand\n extended.\n\n B. NOTIFICATION S.O.1703(E)[NO.38/2021/F.NO. 370142/ 35\n /2020-TPL]\n\n SECTION 3 OF THE TAXATION AND OTHER LAWS\n (RELAXATION AND AMENDMENT OF CERTAIN\n PROVISIONS) ACT, 2020 - RELAXATION OF CERTAIN\n PROVISIONS OF SPECIFIED ACT - EXTENSION OF DUE\n DATE FOR COMPLETION OF ACTION UNDER SPECIFIED\n ACTS\n\n NOTIFICATION S.O. 1703 (E) [NO. 38 /2021/ F. NO. 370142/\n 35/2020-TPL], DATED 27-4-2021\n In exercise of the powers conferred by sub-section (1) of section 3 of\n the Taxation and Other Laws (Relaxation and Amendment of Certain\n Provisions) Act, 2020 (38 of 2020) (hereinafter referred to as the said\n Act), and in partial modification of the notifications of the\n Government of India in the Ministry of Finance, (Department of\n Revenue) No. 93/2020 dated the 31st December, 2020, No. 10/2021\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 32 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n dated the 27th February, 2021 and No. 20/2021 dated the 31st March,\n 2021, published in the Gazette of India, Extraordinary, Part-II,\n Section 3, Subsection (ii), vide number S.O. 4805(E), dated the 31st\n December, 2020, vide number S.O. 966(E) dated the 27th February,\n 2021 and vide number S.O. 1432(E) dated the 31st March, 2021,\n respectively (hereinafter referred to as the said notifications), the\n Central Government hereby specifies for the purpose of sub-section\n (1) of section 3 of the said Act that, --\n\n (A) where the specified Act is the Income-tax Act, 1961 (43 of 1961)\n (hereinafter referred to as the Income-tax Act) and, --\n\n (a) the completion of any action, referred to in clause (a) of\n sub-section (1) of section 3 of the said Act, relates to passing of\n any order for assessment or reassessment under the Income-tax\n Act, and the time limit for completion of such action under\n section 153 or section 153B thereof, expires on the 30th day of\n April, 2021 due to its extension by the said notifications, such\n time limit shall further stand extended to the 30th day of June,\n 2021;\n\n (b) the completion of any action, referred to in clause (a) of\n sub-section (1) of section 3 of the said Act, relates to passing of\n an order under sub-section (13) of section 144C of the Income-\n tax Act or issuance of notice under section 148 as per time-limit\n specified in section 149 or sanction under section 151 of the\n Income-tax Act, and the time limit for completion of such action\n expires on the 30th day of April, 2021 due to its extension by the\n said notifications, such time limit shall further stand extended\n to the 30th day of June, 2021.\n\n Explanation.-- For the removal of doubts, it is hereby clarified\n that for the purposes of issuance of notice under section 148 as\n per time-limit specified in section 149 or sanction under section\n 151 of the Income-tax Act, under this sub-clause, the provisions\n of section 148, section 149 and section 151 of the Income-tax\n Act, as the case may be, as they stood as on the 31st day of\n March 2021, before the commencement of the Finance Act,\n 2021, shall apply.\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 33 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n (B) where the specified Act is the Chapter VIII of the Finance Act,\n 2016 (28 of 2016) (hereinafter referred to as the Finance Act) and the\n completion of any action, referred to in clause (a) of sub-section (1) of\n section 3 of the said Act, relates to sending an intimation under sub-\n section (1) of section 168 of the Finance Act, and the time limit for\n completion of such action expires on the 30th day of April, 2021 due to\n its extension by the said notifications, such time limit shall further\n stand extended to the 30th day of June, 2021.\"\n (emphasis supplied)\n\n 8. Parliament introduced reformative changes to Sections 147 to 151 of\n the Income Tax Act, 1961 governing reassessment proceedings by way of\n the Finance Act, 2021, which was passed on 28th March, 2021. The relevant\n portions of the Budget Speech 2021-2022 of the Minister of Finance, Union\n of India as well as Memorandum explaining the provisions in the Finance\n Bill, 2021, the Notes on clauses to the Finance Bill, 2021 and the Finance\n Act, 2021 are reproduced hereinbelow:-\n\n \"A. BUDGET SPEECH 2021-2022 OF THE MINISTER OF\n FINANCE\n\n Direct Tax Proposals\n 149. Keeping this in mind, our Government introduced a series of\n reforms in the Direct tax system for the benefit of our taxpayers and\n economy. Few months prior to the pandemic, in order to attract\n investments we slashed our Corporate tax rate to make it among the\n lowest in the world. The Dividend Distribution Tax too was abolished.\n The burden of taxation on small taxpayers was eased by increasing\n rebates. In 2020, the return filers saw a dramatic increase to 6.48\n crore from 3.31 crore in 2014.\n\n 150. In the Direct Tax administration, we had recently introduced the\n Faceless Assessment and Faceless Appeal. I now seek to take further\n steps to simplify the tax administration, ease compliance, and reduce\n litigation.\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 34 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n \"Annex to Part B of Budget Speech\n\n Direct Tax Proposals\n\n Sl.No. Proposals Proposed Amendments in brief\n\n 1. xxx xxx\n 2. Reduction in Time In order to reduce compliance\n Limits burden, the time-limit for re-\n opening of assessment is being\n reduced to 3 years from the\n current 6 years from the end of\n the relevant assessment year. Re-\n opening up to 10 years is\n proposed to be allowed only if\n there is evidence of undisclosed\n income of \u20b950 lakh or more for a\n year. Further, it is proposed to\n completely remove discretion in\n re-opening and henceforth re-\n opening shall be made only in\n cases flagged by system on the\n basis of data analytics, objection\n of C&AG and in search/survey\n cases.\n Further, in order to bring\n certainty in income tax\n proceedings at the earliest, it is\n also proposed to reduce the time\n limits for general assessment or\n processing of income tax return\n by three months and also for\n filing of returns.\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 35 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n B. MEMORANDUM EXPLAINING THE PROVISIONS IN THE\n FINANCE BILL, 2021\n \\\n\n Income escaping assessment and search assessments\n Under the Act, the provisions related to income escaping assessment\n provide that if the Assessing Officer has reason to believe that any\n income chargeable to tax has escaped assessment for any assessment\n year, he may assess or reassess or recompute the total income for\n such year under section 147 of the Act by issuing a notice under\n section 148 of the Act. However, such reopening is subject to the time\n limits prescribed in section 149 of the Act.\n\n In cases where search is initiated u/s 132 of the Act or books of\n account, other documents or any assets are requisitioned under\n section 132A of the Act, assessment is made in the case of the\n assessee, or any other person, in accordance with the special\n provisions of sections 153A, 153B, 153C and 153D, of the Act that\n deal specifically with such cases. These provisions were introduced by\n the Finance Act, 2003 to replace the block assessment under Chapter\n XIV-B of the Act. This was done due to failure of block assessment in\n its objective of early resolution of search assessments. Also, the\n procedural issues related to block assessment were proving to be\n highly litigation-prone. However, the experience with this procedure\n has been no different. Like the provisions for block assessment, these\n provisions have also resulted in a number of litigations.\n\n Due to advancement of technology, the department is now collecting\n all relevant information related to transactions of taxpayers from\n third parties under section 285BA of the Act (statement of financial\n transaction or reportable account). Similarly, information is also\n received from other law enforcement agencies. This information is\n also shared with the taxpayer through Annual Information Statement\n under section 285BB of the Act. Department uses this information to\n verify the information declared by a taxpayer in the return and to\n detect non-filers or or those who have not disclosed the correct\n amount of total income. Therefore, assessment or reassessment or re-\n computation of income escaping assessment, to a large extent, is\n information-driven.\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 36 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n In view of above, there is a need to completely reform the system of\n assessment or reassessment or re-computation of income escaping\n assessment and the assessment of search related cases.\n\n The Bill proposes a completely new procedure of assessment of such\n cases. It is expected that the new system would result in less litigation\n and would provide ease of doing business to taxpayers as there is a\n reduction in time limit by which a notice for assessment or\n reassessment or re-computation can be issued. The salient features of\n new procedure are as under:-\n (i) The provisions of section 153A and section 153C, of the Act\n are proposed to be made applicable to only search initiated\n under section 132 of the Act or books of accounts, other\n documents or any assets requisitioned under section 132A of\n the Act, on or before 31st March 2021.\n (ii) Assessments or reassessments or in re-computation in cases\n where search is initiated under section 132 or requisition is\n made under 132A, after 31st March 2021, shall be under the\n new procedure.\n (iii) Section 147 proposes to allow the Assessing Officer to\n assess or reassess or re-compute any income escaping\n assessment for any assessment year (called relevant assessment\n year).\n (iii) Before such assessment or reassessment or re-\n computation, a notice is required to be issued under section\n 148 of the Act, which can be issued only when there is\n information with the Assessing officer which suggests that the\n income chargeable to tax has escaped assessment in the case of\n the assessee for the relevant assessment year. Prior approval of\n specified authority is also required to be obtained before\n issuance of such notice by the Assessing Officer.\n (iv) It is proposed to provide that any information which has\n been flagged in the case of the assessee for the relevant\n assessment year in accordance with the risk management\n strategy formulated by the Board shall be considered as\n information which suggests that the income chargeable to tax\n has escaped assessment. The flagging would largely be done by\n the computer based system.\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 37 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n (v) Further, a final objection raised by the Comptroller and\n Auditor General of India to the effect that the assessment in the\n case of the assessee for the relevant assessment year has not\n been in accordance with the provisions of the Act shall also be\n considered as information which suggests that the income\n chargeable to tax has escaped assessment.\n (vi) Further, in search, survey or requisition cases initiated or\n made or conducted, on or after 1st April, 2021, it shall be\n deemed that the Assessing officer has information which\n suggests that the income chargeable to tax has escaped\n assessment in the case of the assessee for the three assessment\n years immediately preceding the assessment year relevant to\n the previous year in which the search is initiated or requisition\n is made or any material is seized or requisitioned or survey is\n conducted.\n (vii) New Section 148A of the Act proposes that before issuance\n of notice the Assessing Officer shall conduct enquiries, if\n required, and provide an opportunity of being heard to the\n assessee. After considering his reply, the Assessing Office shall\n decide, by passing an order, whether it is a fit case for issue of\n notice under section 148 and serve a copy of such order along\n with such notice on the assessee. The Assessing Officer shall\n before conducting any such enquiries or providing opportunity\n to the assessee or passing such order obtain the approval of\n specified authority. However, this procedure of enquiry,\n providing opportunity and passing order, before issuing notice\n under section 148 of the Act, shall not be applicable in search\n or requisition cases.\n (viii) The time limitation for issuance of notice under section\n 148 of the Act is proposed to be provided in section 149 of the\n Act and is as below:\n \uf0b7 in normal cases, no notice shall be issued if three years\n have elapsed from the end of the relevant assessment\n year. Notice beyond the period of three years from the\n end of the relevant assessment year can be taken only in\n a few specific cases.\n \uf0b7 in specific cases where the Assessing Officer has in his\n possession evidence which reveal that the income\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 38 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n escaping assessment, represented in the form of asset,\n amounts to or is likely to amount to fifty lakh rupees or\n more, notice can be issued beyond the period of three\n year but not beyond the period of ten years from the end\n of the relevant assessment year;\n \uf0b7 Another restriction has been provided that the notice\n under section 148 of the Act cannot be issued at any time\n in a case for the relevant assessment year beginning on\n or before 1st day of April, 2021, if such notice could not\n have been issued at that time on account of being beyond\n the time limit prescribed under the provisions of clause\n (b), as they stood immediately before the proposed\n amendment.\n \uf0b7 Since the assessment or reassessment or re-computation\n in search or requisition cases (where such search or\n requisition is initiated or made on or before 31st March\n 2021) are to be carried out as per the provision of\n section 153A, 153B, 153C and 153D of the Act, the\n aforesaid time limitation shall not apply to such cases.\n \uf0b7 It is also proposed that for the purposes of computing the\n period of limitation for issue of section 148 notice, the\n time or extended time allowed to the assessee in\n providing opportunity of being heard or period during\n which such proceedings before issuance of notice under\n section 148 are stayed by an order or injunction of any\n court, shall be excluded. If after excluding such period,\n time available to the Assessing Officer for passing order,\n about fitness of a case for issue of 148 notice, is less than\n seven days, the remaining time shall be extended to seven\n days.\n\n (ix) The specified authority for approving enquiries, providing\n opportunity, passing order under section 148A of the Act and\n for issuance of notice under section 148 of the Act are proposed\n to be--\n (a) Principal Commissioner or Principal Director or\n Commissioner or Director, if three years or less than\n\n\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 39 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n three years have elapsed from the end of the relevant\n assessment year;\n (b) Principal Chief Commissioner or Principal Director\n General or where there is no Principal Chief\n Commissioner or Principal Director General, Chief\n Commissioner or Director General, if more than\n three years have elapsed from the end of the relevant\n assessment year.\n\n (x) Once assessment or reassessment or re-computation has\n started the Assessing officer is proposed to be empowered (as\n at present) to assess or reassess the income in respect of any\n issue which has escaped assessment and which comes to his\n notice subsequently in the course of the proceeding under this\n procedure notwithstanding that the procedure prescribed in\n section 148A was not followed before issuing such notice for\n such income.\n These amendments will take effect from 1st April, 2021.\n xxxx xxxx xxxx xxxx\n\n C. NOTES ON CLAUSES TO THE FINANCE BILL, 2021\n\n ......\n Clause 35 of the Bill seeks to amend section 147 of the Income-\n tax Act relating to income escaping assessment.\n It is proposed to substitute the said section so as to provide that\n if any income chargeable to tax, in the case of an assessee, has\n escaped assessment for any assessment year, the Assessing officer\n may, subject to the provisions of sections 148 to 153, assess or\n reassess such income and also any other income chargeable to tax\n which has escaped assessment and which comes to his notice\n subsequently in the course of the proceedings under this section, or\n recompute the loss or the depreciation allowance or any other\n allowance, as the case may be, for such assessment year.\n This amendment will take effect from 1st April, 2021.\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 40 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n Clause 36 of the Bill seeks to amend section 148 of the Income-\n tax Act relating to issue of notice where income has escaped\n assessment.\n It is proposed to substitute the said section so as to provide that\n before making the assessment, reassessment or recomputation under\n section 147, and subject to the provisions of section 148A, the\n Assessing Officer shall serve on the assessee a notice along with a\n copy of order passed under clause (d) of section 148A, requiring him\n to furnish within such period, as may be specified in such notice, a\n return of his income or the income of any other person in respect of\n which he is assessable under this Act during the previous year\n corresponding to the relevant assessment year, in the prescribed form\n and verified in the prescribed manner and setting forth such other\n particulars as may be prescribed; and the provisions of this Act shall,\n so far as may be, apply accordingly as if such return were a return\n required to be furnished under section 139, provided that no notice\n under the said section shall be issued unless there is information with\n the Assessing Officer which suggests that the income chargeable to\n tax has escaped assessment in the case of the assessee for the relevant\n assessment year and prior approval of the specified authority to issue\n such notice has been obtained by the Assessing Officer. The proposed\n Explanation 1 to the said section provides for the purposes of the said\n section and section 148A, that information which suggests that the\n income chargeable to tax has escaped assessment means any\n information flagged in the case of the assessee for the relevant\n assessment year in accordance with the risk management strategy\n formulated by the Board from time to time or any final objection\n raised by the Comptroller and Auditor General of India to the effect\n that the assessment in the case of the assessee for the relevant\n assessment year has not been made in accordance with the provisions\n of this Act. The proposed Explanation 2 provides that where (i) a\n search is initiated under section 132 or books of account, other\n documents or any assets are requisitioned under section 132A, on or\n after the 1st day of April, 2021, in the case of the assessee; or (ii)\n survey is conducted under section 133A in the case of the assessee; or\n (iii) the Assessing Officer is satisfied, with the prior approval of\n Principal Commissioner or Commissioner, that any money, bullion,\n jewellery or other valuable article or thing, seized or requisitioned in\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 41 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n case of any other person on or after the 1st day of April, 2021,\n belongs to the assessee; or (iv) the Assessing officer is satisfied, with\n the prior approval of Principal Commissioner or Commissioner, that\n any books of account or documents, seized or requisitioned in case of\n any other person on or after the 1st day of April, 2021, pertains or\n pertain to, or any information contained therein, relate to, the\n assessee, the Assessing officer shall be deemed to have information\n which suggests that the income chargeable to tax has escaped\n assessment in the case of the assessee for the three assessment years\n immediately preceding the assessment year relevant to the previous\n year in which the search is initiated or books of account, other\n documents or any assets are requisitioned or survey is conducted or\n money, bullion, jewellery or other valuable article or thing or books\n of account or documents are seized or requisitioned in case of any\n other person. The proposed Explanation 3 provides that the\n \"specified authority\" shall mean the specified authority referred to in\n section 151.\n This amendment will take effect from 1st April, 2021.\n Clause 37 of the Bill seeks to insert a new section 148A in the\n Income-tax Act relating to Conducting inquiry, providing opportunity\n before issue of notice under section 148.\n It is proposed to insert a new section 148A, which seeks to\n provide that the Assessing Officer shall, before issuing any notice\n under section 148, - (a) conduct any enquiry, if required, with the\n prior approval of specified authority, with respect to the information\n which suggests that income chargeable to tax has escaped\n assessment; (b) provide an opportunity of being heard to the assessee,\n with the prior approval of specified authority, by serving upon him a\n notice to show cause within such time, as may be specified in the\n notice, being not less than seven days but not exceeding thirty days\n from the date on which such notice is issued, or such time, as may be\n extended by him on the basis of an application in this behalf, as to\n why a notice under section 148 should not be issued on the basis of\n information which suggests that income chargeable to tax has\n escaped assessment in his case for the relevant assessment year and\n results of enquiry conducted, if any, as per clause (a); (c) consider the\n reply of assessee furnished, if any, in response to the show-cause\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 42 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n notice referred to in clause (b); and (d) decide, on the basis of\n material available on record including reply of the assessee, whether\n or not it is a fit case to issue a notice under section 148, by passing an\n order, with the prior approval of specified authority, within one\n month from the end of the month in which the reply referred to in\n clause (c) is received by him, or where no such reply is furnished,\n within one month from the end of the month in which time or extended\n time allowed to furnish a reply as per clause (b) expires, provided\n that the provisions of this sub-section shall not apply in a case, where\n a search is initiated under section 132 or books of account, other\n documents or any assets are requisitioned under section 132A in the\n case of the assessee on or after the 1st day of April, 2021 or the\n Assessing officer is satisfied, with the prior approval of the Principal\n Commissioner or Commissioner that any money, bullion, jewellery or\n other valuable article or thing, seized in a search under section 132\n or requisitioned under section 132A, in the case of any other person\n on or after the 1st day of April, 2021, belongs to the assessee; or the\n Assessing officer is satisfied, with the prior approval of the Principal\n Commissioner or Commissioner that any books of account or\n documents, seized in a search under section 132 or requisitioned\n under section 132A, in case of any other person on or after the 1st day\n of April, 2021, pertains or pertain to, or any information contained\n therein, relates to, the assessee. Explanation 3 to the said section\n provides that \"Specified authority\" shall mean specified authority\n referred to in section 151.\n\n This amendment will take effect from 1st April, 2021.\n Clause 38 of the Bill seeks to amend section 149 of the Income-\n tax Act relating to time limit for notice.\n It is proposed to substitute the said section so as to provide that\n no notice under section 148 shall be issued for the relevant\n assessment year - (a) if three years have elapsed from the end of the\n relevant assessment year, unless the case falls under clause (b); (b) if\n three years, but not more than ten years, have elapsed from the end of\n the relevant assessment year unless the Assessing Officer has in his\n possession books of accounts or other documents or evidence which\n reveal that the income chargeable to tax, represented in the form of\n asset, which has escaped assessment amounts to or is likely to amount\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 43 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n to fifty lakh rupees or more for that year. Provided that no notice\n under section 148 shall be issued at any time in a case for the relevant\n assessment year beginning on or before 1st day of April, 2021, if such\n notice could not have been issued at that time on account of being\n beyond the time limit prescribed under the provisions of clause (b), as\n they stood immediately before the commencement of the Finance Act,\n 2021. Further, the provisions of this section shall not apply to cases\n where a notice under section 153A or section 153C read with section\n 153A is required to be issued in relation to a search initiated under\n section 132 or books of account, other documents or any assets\n requisitioned under section 132A on or before the 31st day of March,\n 2021 and for the purposes of computing the period of limitation as per\n this section, the time or extended time allowed to the assessee, as per\n show-cause notice under clause (b) of section 148A; or the period\n during which the proceeding under section 148A is stayed by an order\n or injunction of any court shall be excluded and also where\n immediately after the exclusion of such period, the period of\n limitation available to the Assessing Officer for passing an order\n under clause (d) of section 148A is less than seven days, such\n remaining period shall be extended to seven days and the period of\n limitation in sub-section (1) shall be deemed to be extended\n accordingly.\n This amendment will take effect from 1st April, 2021.\n Clause 39 of the Bill seeks to substitute of a new section for\n section 151 relating to sanction for issue of notice.\n It is proposed to substitute the said section so as to provide that\n for the purpose of section 148, specified authority shall be (i)\n Principal Commissioner of Income-tax or Principal Director of\n Income-tax or Commissioner of Income-tax or Director of Income-\n tax, if three years or less than three years have elapsed from the end\n of the relevant assessment year; (ii) Principal Chief Commissioner of\n Income-tax or Principal Director General of Income-tax, or where\n there is no Principal Chief Commissioner of Income-tax or Principal\n Director General of Income-tax, Chief Commissioner of Income-tax\n or Director General of Income-tax, if more than three years have\n elapsed from the end of the relevant assessment year.\n This amendment will take effect from 1st April, 2021...\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 44 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n D. RELEVANT EXTRACT OF THE FINANCE ACT, 2021\n\n MINISTRY OF LAW AND JUSTICE\n (Legislative Department)\n New Delhi, the 28th March, 2021/Chaitra 7, 1943 (Saka)\n\n The following Act of Parliament received the assent of the\n President on the 28th March, 2021, and is hereby published for\n general information:--\n THE FINANCE ACT, 2021\n NO. 13 OF 2021\n An Act to give effect to the financial proposals of the Central\n Government for the financial year 2021-2022.\n BE it enacted by Parliament in the Seventy-second Year of the\n Republic of India as follows:--\n CHAPTER I\n PRELIMINARY\n 1. (1) This Act may be called the Finance Act, 2021.\n\n (2) Save as otherwise provided in this Act,--\n (a) sections 2 to 88 shall come into force on the 1st day of\n April, 2021;\n (b) sections 108 to 123 shall come into force on such date as\n the Central Government may, by notification in the Official\n Gazette, appoint.\n xxxx xxxx xxxx xxxx\n 40. For section 147 of the Income-tax Act, the following section shall\n be substituted, namely:--\n\n \"147. If any income chargeable to tax, in the case of an\n assessee, has escaped assessment for any assessment year, the\n Assessing Officer may, subject to the provisions of sections 148\n to 153, assess or reassess such income or recompute the loss or\n the depreciation allowance or any other allowance or\n deduction for such assessment year (hereafter in this section\n\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 45 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n and in sections 148 to 153 referred to as the relevant\n assessment year).\n\n Explanation.--For the purposes of assessment or reassessment\n or recomputation under this section, the Assessing Officer may\n assess or reassess the income in respect of any issue, which has\n escaped assessment, and such issue comes to his notice\n subsequently in the course of the proceedings under this\n section, irrespective of the fact that the provisions of section\n 148A have not been complied with.\".\n\n 41. For section 148 of the Income-tax Act, the following section shall\n be substituted, namely:--\n \"148. Before making the assessment, reassessment or\n recomputation under section 147, and subject to the provisions\n of section 148A, the Assessing Officer shall serve on the\n assessee a notice, along with a copy of the order passed, if\n required, under clause (d) of section 148A, requiring him to\n furnish within such period, as may be specified in such notice, a\n return of his income or the income of any other person in\n respect of which he is assessable under this Act during the\n previous year corresponding to the relevant assessment year, in\n the prescribed form and verified in the prescribed manner and\n setting forth such other particulars as may be prescribed; and\n the provisions of this Act shall, so far as may be, apply\n accordingly as if such return were a return required to be\n furnished under section 139:\n Provided that no notice under this section shall be issued\n unless there is information with the Assessing Officer which\n suggests that the income chargeable to tax has escaped\n assessment in the case of the assessee for the relevant\n assessment year and the Assessing Officer has obtained prior\n approval of the specified authority to issue such notice.\n Explanation 1.--For the purposes of this section and\n section 148A, the information with the Assessing Officer which\n suggests that the income chargeable to tax has escaped\n assessment means,--\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 46 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n (i) any information flagged in the case of the assessee for\n the relevant assessment year in accordance with the risk\n management strategy formulated by the Board from time to\n time;\n (ii) any final objection raised by the Comptroller and\n Auditor-General of India to the effect that the assessment in\n the case of the assessee for the relevant assessment year has\n not been made in accordance with the provisions of this Act.\n Explanation 2.--For the purposes of this section,\n where,--\n (i) a search is initiated under section 132 or books of\n account, other documents or any assets are requisitioned\n under section 132A, on or after the 1st day of April, 2021,\n in the case of the assessee; or\n (ii) a survey is conducted under section 133A, other than\n under sub-section (2A) or sub-section (5) of that section, on\n or after the 1st day of April, 2021, in the case of the\n assessee; or\n (iii) the Assessing Officer is satisfied, with the prior\n approval of the Principal Commissioner or Commissioner,\n that any money, bullion, jewellery or other valuable article\n or thing, seized or requisitioned under section 132 or under\n section 132A in case of any other person on or after the 1st\n day of April, 2021, belongs to the assessee; or\n (iv) the Assessing Officer is satisfied, with the prior\n approval of Principal Commissioner or Commissioner, that\n any books of account or documents, seized or requisitioned\n under section 132 or section 132A in case of any other\n person on or after the 1st day of April, 2021, pertains or\n pertain to, or any information contained therein, relate to,\n the assessee,\n the Assessing Officer shall be deemed to have information\n which suggests that the income chargeable to tax has escaped\n assessment in the case of the assessee for the three assessment\n years immediately preceding the assessment year relevant to\n the previous year in which the search is initiated or books of\n account, other documents or any assets are requisitioned or\n\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 47 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n survey is conducted in the case of the assessee or money,\n bullion, jewellery or other valuable article or thing or books of\n account or documents are seized or requisitioned in case of any\n other person.\n Explanation 3.--For the purposes of this section,\n specified authority means the specified authority referred to in\n section 151.\"\n 42. After section 148 of the Income-tax Act, the following section shall\n be inserted, namely:--\n\n \"148A. The Assessing Officer shall, before issuing any notice\n under section 148,--\n (a) conduct any enquiry, if required, with the prior\n approval of specified authority, with respect to the\n information which suggests that the income chargeable to\n tax has escaped assessment;\n (b) provide an opportunity of being heard to the assessee,\n with the prior approval of specified authority, by serving\n upon him a notice to show cause within such time, as may\n be specified in the notice, being not less than seven days\n and but not exceeding thirty days from the date on which\n such notice is issued, or such time, as may be extended by\n him on the basis of an application in this behalf, as to why a\n notice under section 148 should not be issued on the basis\n of information which suggests that income chargeable to tax\n has escaped assessment in his case for the relevant\n assessment year and results of enquiry conducted, if any, as\n per clause (a);\n (c) consider the reply of assessee furnished, if any, in\n response to the show-cause notice referred to in clause (b);\n (d) decide, on the basis of material available on record\n including reply of the assessee, whether or not it is a fit case\n to issue a notice under section 148, by passing an order,\n with the prior approval of specified authority, within one\n month from the end of the month in which the reply referred\n to in clause (c) is received by him, or where no such reply is\n furnished, within one month from the end of the month in\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 48 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n which time or extended time allowed to furnish a reply as\n per clause (b) expires:\n Provided that the provisions of this section shall not\n apply in a case where,--\n (a) a search is initiated under section 132 or books of\n account, other documents or any assets are requisitioned\n under section 132A in the case of the assessee on or after\n the 1st day of April, 2021; or\n (b) the Assessing Officer is satisfied, with the prior\n approval of the Principal Commissioner or Commissioner\n that any money, bullion, jewellery or other valuable article\n or thing, seized in a search under section 132 or\n requisitioned under section 132A, in the case of any other\n person on or after the 1st day of April, 2021, belongs to\n the assessee; or\n (c) the Assessing Officer is satisfied, with the prior\n approval of the Principal Commissioner or Commissioner\n that any books of account or documents, seized in a search\n under section 132 or requisitioned under section 132A, in\n case of any other person on or after the 1st day of April,\n 2021, pertains or pertain to, or any information contained\n therein, relate to, the assessee.\n\n Explanation.--For the purposes of this section, specified\n authority means the specified authority referred to in section\n 151.\"\n 43. For section 149 of the Income-tax Act, the following section shall\n be substituted, namely:--\n '149. (1) No notice under section 148 shall be issued for the\n relevant assessment year,--\n (a) if three years have elapsed from the end of the relevant\n assessment year, unless the case falls under clause (b);\n (b) if three years, but not more than ten years, have elapsed\n from the end of the relevant assessment year unless the\n Assessing Officer has in his possession books of account or\n other documents or evidence which reveal that the income\n chargeable to tax, represented in the form of asset, which\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 49 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n has escaped assessment amounts to or is likely to amount to\n fifty lakh rupees or more for that year:\n Provided that no notice under section 148 shall be issued\n at any time in a case for the relevant assessment year\n beginning on or before 1st day of April, 2021, if such notice\n could not have been issued at that time on account of being\n beyond the time limit specified under the provisions of\n clause (b) of sub-section (1) of this section, as they stood\n immediately before the commencement of the Finance Act,\n 2021:\n\n Provided further that the provisions of this sub-section\n shall not apply in a case, where a notice under section\n 153A, or section 153C read with section 153A, is required\n to be issued in relation to a search initiated under section\n 132 or books of account, other documents or any assets\n requisitioned under section 132A, on or before the 31st day\n of March, 2021:\n Provided also that for the purposes of computing the\n period of limitation as per this section, the time or extended\n time allowed to the assessee, as per show-cause notice\n issued under clause (b) of section 148A or the period during\n which the proceeding under section 148A is stayed by an\n order or injunction of any court, shall be excluded:\n Provided also that where immediately after the exclusion\n of the period referred to in the immediately preceding\n proviso, the period of limitation available to the Assessing\n Officer for passing an order under clause (d) of section\n 148A is less than seven days, such remaining period shall\n be extended to seven days and the period of limitation under\n this sub-section shall be deemed to be extended\n accordingly.\n Explanation.--For the purposes of clause (b) of this sub-\n section, \"asset\" shall include immovable property, being land\n or building or both, shares and securities, loans and advances,\n deposits in bank account.\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 50 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n (2) The provisions of sub-section (1) as to the issue of notice\n shall be subject to the provisions of section 151.'\n 44. For section 151 of the Income-tax Act, the following section shall\n be substituted, namely:--\n\n \"151. Specified authority for the purposes of section 148 and\n section 148A shall be,--\n (i) Principal Commissioner or Principal Director or\n Commissioner or Director, if three years or less than three\n years have elapsed from the end of the relevant assessment\n year;\n (ii) Principal Chief Commissioner or Principal Director\n General or where there is no Principal Chief Commissioner\n or Principal Director General, Chief Commissioner or\n Director General, if more than three years have elapsed\n from the end of the relevant assessment year.\"\n\n 45. In section 151A of the Income-tax Act, in sub-section (1), in the\n opening portion, after the words and figures \"issuance of notice\n under section 148\", the words, figures and letter \"or conducting of\n enquiries or issuance of show-cause notice or passing of order under\n section 148A\" shall be inserted.\"\n\n 9. As, despite the substituted Sections 147 to 151 of the Income Tax Act,\n 1961 coming into force on 1st April, 2021, the respondents issued\n reassessment notices to the petitioners-assessees under the erstwhile\n Sections 148 to 151 of the Income Tax Act, 1961 relying on Explanations in\n the Notifications dated 31st March, 2021 and 27th April, 2021, the petitioners\n filed the present writ petitions challenging the legality and validity of the\n said Explanations as well as the reassessment notices issued pursuant\n thereto.\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 51 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n 10. In the present batch of writ petitions, this Court passed interim stay\n orders. The relevant portion of one such interim order passed in W.P.(C)\n 6442/2021 is reproduced hereinbelow:-\n\n \".......Learned counsel for the petitioners states that the impugned\n notices are invalid in the eyes of law and void from inception as\n they were issued without following the process of issuance of\n prior notice under section 148A of the Act. He submits that the\n impugned notices are invalid as they have been issued under the\n pre-amended provisions of the Act, which were no longer in force\n on the date of the impugned notices. He emphasises that the\n amendments are applicable to all the notices issued under\n Section 148 of the Act post 01st April, 2021.\n Learned counsel for the petitioners states that the\n impugned notifications issued by the Respondent-2 are ultra\n vires the Act insofar as they contain the 'explanation' clarifying\n that the pre-amended Sections 148, 149 and 151 of the Act shall\n govern the issue of notice under Section 148 post 01st April,\n 2021. According to him, Section 3(1) of the Taxation and Other\n Laws (Relaxation and Amendment of Certain Provisions) Act,\n 2020 authorizes the Central Government to only extend the time\n limits and nothing more.\n He further states that the respondents cannot indirectly\n extend the operation of the old provisions of the Act beyond\n 31st March, 2021 in the guise of a clarification under delegated\n legislation.\n He also relies upon interim stay orders passed by the\n Bombay High Court as well as by the learned predecessor\n Division Bench of this Court in Mon Mohan Kohli vs. Assistant\n Commissioner of Income Tax & Anr., W.P. (C) 6176/2021 dated\n 07th July, 2021.\n Issue Notice. Mr. Sanjay Kumar, Advocate, Mr.Ajit\n Sharma, Advocate and Mr.Kunal Sharma, Advocate accept\n notice on behalf of the respondents in W.P.(C) Nos.6442/2021,\n 6443/2021 and 6451/2021 respectively.\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 52 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n Learned counsel for the respondents state that in the\n present cases, the time limit for issuing the notices under Section\n 148 of the Act stood expired and, therefore, any action under\n Section 148 would have been time barred by virtue of the proviso\n to Section 149(1) of the Act. They submit that by virtue of\n introduction of Section 3(1) of the Taxation and Other Laws\n (Relaxation and Amendment of Certain Provisions) Act, 2020,\n the time limit for taking action under Section 148 has been\n extended till 30th June, 2021. Consequently, according to them,\n the impugned notifications only provide that as the time limit for\n issuing notice under Section 148A of the Act has been extended\n by deemed fiction, the procedure to be followed till 30th June,\n 2021 would be the old procedure mentioned under the Act. In\n support of their submission, they also rely upon Section 6 of the\n General Clauses Act, 1897.\n Having heard learned counsel for the parties, this Court is\n of the prima facie view that the impugned notification is contrary\n to settled principle of statutory interpretation, namely, that any\n action taken post the amendment of a procedural section would\n have to abide by the new procedures stipulated in the amended\n Act.\n Further, this Court is of the prima facie view that by virtue\n of a notification, which is a delegated legislation, the date for\n implementation of statutory provision, as stipulated in the Act,\n cannot be varied or changed.\n This Court is also of the prima facie opinion that Section 6\n of the General Clauses Act, 1897 offers no assistance to the\n respondents as the new Section 148A demonstrates an intent 'to\n destroy' the old procedure.\n Consequently, following the interim orders passed by the\n learned predecessor Division Bench in Mon Mohan Kohli vs.\n Assistant Commissioner of Income Tax & Anr., W.P. (C)\n 6176/2021 dated 07th July, 2021 as well as similar interim order\n passed by the Bombay High Court, this Court directs that there\n shall be a stay of the operation of the impugned notices dated\n 09th June, 2021, 30th June, 2020 and 28th June, 2020 passed in\n W.P. (C) 6442/2021, 6443/2021 and 6451/2021 respectively...\"\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 53 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n ARGUMENTS ON BEHALF OF THE PETITIONERS\n\n 11. Mr. S. Ganesh and Mr. Percy Pardiwalla, learned Senior counsel as\n well as Ms. Kavita Jha, Mr. Ved Jain, Mr. Rohit Jain, Mr. Neeraj Jain, Mr.\n Aseem Chawla, Mr. Piyush Kaushik, Mr. Sachit Jolly, Mr. Salil Kapur, Mr.\n Kapil Gupta, Mr. Puneet Agrawal, Mr. Gaurav Gupta, Mr. T.M.\n Shivakumar, Mr. Manibhadra Jain, Dr. Rakesh Gupta, Mr. Mayank Nagi,\n Mr. Arvind Kumar, Mr. Mukhi, Mr. P.C. Yadav, Mr. Raghvendra Singh and\n Mr. Rahul Chaudhary, learned counsel addressed arguments on behalf of the\n petitioners.\n 12. Learned counsel for the petitioners submitted that as the Finance Act,\n 2021 had substituted / replaced the earlier provisions, being Sections 147,\n 148, 149 & 151 of the Income Tax Act, 1961, with the new provisions, the\n same would result in repeal of the earlier provisions and, therefore, the\n earlier provisions could not be relied upon or referred to. In support of their\n submission, they relied upon the judgment passed by the Supreme Court in\n PTC India Limited Vs. Central Electricity Regulatory Commission,\n Through Secretary, (2010) 4 SCC 603. The relevant portion of the said\n judgment is reproduced hereinbelow:-\n \"91. In this connection, it may be seen that Section 121 of the\n original Act stood substituted by Amendment Act 57 of 2003.\n Substitution of a provision results in repeal of the earlier\n provision and its replacement by the new provision. Substitution\n is a combination of repeal and fresh enactment. (See Principles\n of Statutory Interpretation by G.P. Singh, 11th Edn., p. 638.)\n Section 121 of the original Electricity Act, 2003 was never\n brought into force. It was substituted by new Section 121 by\n Amendment Act 57 of 2003 which was brought into force by a\n Notification dated 27-1-2004. Substitution, as stated above,\n results in repeal of the old provision and replacement by a new\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 54 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n provision. Applying these tests to the facts of the present case,\n we find that the Electricity (Amendment) Act, 2003 (57 of 2003)\n was brought into force by Notification dated 27-1-2004. That,\n notification was issued under Section 1(2) of the Electricity\n (Amendment) Act, 2003 (57 of 2003). If one reads Section 1(2)\n of the Electricity (Amendment) Act, 2003 (57 of 2003) with\n Notification dated 27-1-2004 issued under Section 1(2) of the\n amended Act, 2003, it becomes clear that on coming into force\n of the Electricity (Amendment) Act, 2003 (57 of 2003) all\n provisions amended by it also came into force. Hence, there\n was no requirement for a further notification under Section\n 1(3), consequently, Section 121 in its amended form came into\n force with effect from 27-1-2004.\"\n 13. Learned counsel for petitioners pointed out that as per clause (a) of\n the new Section 149, reassessment proceedings could be initiated within\n three years from the end of relevant Assessment Year and as per clause (b),\n the reassessment proceedings, in exceptional circumstances, could be\n initiated within ten years from the end of relevant year; however, the\n extended time limit of ten years was fettered with preconditions, as under:\n a. The Assessing Officer has in his possession books of accounts\n or other documents or evidence;\n b. Such documents/evidence in possession of the Assessing\n Officer reveal escapement of income chargeable to tax in the\n form of an 'asset';\n c. Such 'asset', as defined, amounts to Rs. 50 lakhs or more.\n\n 14. Learned counsel for petitioners pointed out that this Court in C.B.\n Richards Ellis Mauritius Ltd. vs. Assistant Director of Income-Tax: 208\n Taxman 322 (Delhi), while interpreting the applicability of an earlier\n amendment to Section 149 of the Income Tax Act, 1961 vide Finance Act,\n\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 55 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n 2001, (whereby the earlier existing time limit of ten years was reduced to six\n years), has held that the reduced time limit applied with effect from the\n Finance Act coming into force.\n 15. Thus, according to them, under Section 149 clause (a) prescribing\n three years' time limit, reassessment from Assessment Year 2018-19\n onwards could only be reopened on or after 1st April, 2021 and prior years\n were barred. Further, for initiation of reassessment proceedings for any\n Assessment Year prior to Assessment Year 2018-19, exceptional conditions\n of Section 149 clause (b) were required to be satisfied by the Revenue.\n Importantly, satisfaction of the aforesaid preconditions prescribed by clause\n (b) could be ascertained only when the procedure prescribed under Section\n 148A had been followed prior to issuance of notice under Section 148 of the\n Income Tax Act, 1961.\n 16. Learned counsel for petitioners submitted that once the Parliament\n had exercised its powers of legislation (enactment of Finance Act, 2021),\n then any action, such as issuance of Notifications dated 31st March, 2021\n and 27th April, 2021 contrary to said legislation, taken by any other\n agency/wing of the Government was bad in law as the same fell foul of the\n doctrine of 'Occupied Field'. They submitted that the entire law stood\n substituted and was specifically made applicable from a particular date.\n Accordingly pursuant to the Legislature occupying the field governing\n initiation of reassessment proceedings, no authority was vested in\n Government to issue the Notifications dated 31st March, 2021 and 27th April,\n 2021, so as to disturb/intrude into the field occupied by the Legislature.\n 17. Learned counsel for petitioners also submitted that the impugned\n Notifications were subservient to the substituted Sections 147 to 151 by the\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 56 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\nFinance Act, 2021 and the Notifications to the extent they contradicted\n Section 149 were deemed to have been impliedly repealed by operation of\n the Finance Act, 2021. In support of their submission, they relied upon the\n Judgment passed by this Court in Fibre Boards (P.) Ltd., Bangalore vs.\n Commissioner of Income-tax, Bangalore: (2015) 376 ITR 596 (SC),\n wherein it has been held as under:\n \"13. Repeal by implication has been dealt with by at least two\n judgments of this Court. In State of Orissa v. M.A. Tulloch &\n Co. [1964] 4 SCR 461, this Court considered the question as to\n whether the expression \"repeal\" in Section 6 of the General\n Clauses Act would be of sufficient amplitude to cover cases of\n implied repeal. This Court stated:\n\n \"The next question is whether the application of that principle\n could or ought to be limited to cases where a particular form of\n words is used to indicate that the earlier law has been\n repealed. The entire theory underlying implied repeals is that\n there is no need for the later enactment to state in express\n terms that an earlier enactment has been repealed by using any\n particular set of words or form of drafting but that if the\n legislative intent to supersede the earlier law is manifested by\n the enactment of provisions as to effect such supersession, then\n there is in law a repeal notwithstanding the absence of the\n word 'repeal' in the later statute.\" (at page 483)\n Similarly in Ratan Lal Adukia v. Union of India, [1989] 3 SCC\n 537, this Court held that the substituted Section 80 of the Code of\n Civil Procedure repealed by implication, insofar as the railways\n are concerned, Section 20 of the self-same code. In so holding,\n this Court stated:--\n \"The doctrine of implied repeal is based on the postulate that\n the legislature which is presumed to know the existing state of\n the law did not intend to create any confusion by retaining\n conflicting provisions. Courts, in applying this doctrine, are\n supposed merely to give effect to the legislative intent by\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 57 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n examining the object and scope of the two enactments. But in a\n conceivable case, the very existence of two provisions may by\n itself, and without more, lead to an inference of mutual\n irreconcilability if the later set of provisions is by itself a\n complete code with respect to the same matter. In such a case\n the actual detailed comparison of the two sets of provisions\n may not be necessary. It is a matter of legislative intent that the\n two sets of provisions were not expected to be applied\n simultaneously. Section 80 is a special provision. It deals with\n certain class of suits distinguishable on the basis of their\n particular subject matters.\" (at para 18)\"\n\n 18. Learned counsel for petitioners further submitted that Notifications\n dated 31st March, 2021 and 27th April, 2021 were ultra vires the Income Tax\n Act, 1961 as amended by Finance Act, 2021 and in excess of the enabling\n powers prescribed under Section 3 of Relaxation Act, 2020. They stated that\n Legislature by virtue of Section 3 of Relaxation Act, 2020 had bestowed\n upon the Central Government very specific and limited power to issue\n Notifications extending time limits which fell during the period specified\n therein. They further stated that Explanation (A)(a)(ii) of Notification dated\n 31st March, 2021 and Explanation to clause (A)(b) of Notification dated 27th\n April, 2021 had illegally prescribed that the repealed Sections 148, 149 &\n 151 of the Income Tax Act, 1961 would be applicable. According to them,\n the following points were apparent on face of the said Notifications:-\n a. The Notifications were in excess of the enabling powers\n prescribed under Section 3 of Relaxation Act 2020, as\n Relaxation Act 2020 did not delegate the power to legislate on\n provisions to be followed for initiation of reassessment\n proceedings; and\n\n\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 58 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n b. The Notifications were ultra vires the provisions of Sections\n 147, 148, 148A, 149 & 151 of the Income Tax Act, 1961, as\n amended by the Finance Act, 2021, as the said provisions had\n been substituted /inserted with effect from 1st April, 2021,\n effectively repealing old provisions that existed prior thereto.\n 19. Learned counsel for petitioners submitted that the impugned\n Explanations had attempted to revive and keep in existence two different\n schemes governing the initiation of reassessment proceedings, which were\n substantially different from each other and thus could not co-exist at the\n same time.\n 20. Learned counsel for the petitioners submitted that the impugned\n reassessment notices issued between 1st April, 2021 and 30th June, 2021 had\n been issued in violation of the mandatory procedure prescribed under\n Section 148A of the Income Tax Act, 1961, as substituted by the Finance\n Act, 2021. They submitted that though the new Section 148A gave a\n legislative recognition to the procedure laid down in various judicial\n precedents such as GKN Driveshafts (India) Ltd. v. Income Tax Officer &\n Ors., 259 ITR 19 (SC) and created a vested right in favour of the assessee of\n being heard prior to issuance of notice under Section 148 as well as receipt\n of formal order considering the objections with inbuilt check in the form of\n mandatory sanction by the prescribed authority under Section 151 of the\n Income Tax Act, 1961, yet the impugned notices had been issued in\n violation of the same.\n 21. They emphasised that in the present batch of cases, the Revenue had\n not followed the procedure prescribed under Section 148A and no books of\n accounts/ evidence/ documents had been revealed to be in possession of the\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 59 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n Assessing Officer. Additionally, the other preconditions prescribed for\n invoking clause (b) had not been stated to be satisfied and thus, it was clear\n that the Assessing Officer had no ground to invoke clause (b) of the newly\n incorporated Section 149 of the Income Tax Act, 1961.\n 22. In the alternative, learned counsel for the petitioners submitted that\n Sections 147 to 151 were procedural provisions, inasmuch as, they primarily\n amended limitation period and therefore applied retrospectively i.e. to\n reassessment notices deemed to have been issued within the limitation\n period.\n ARGUMENTS ON BEHALF OF THE RESPONDENTS\n 23. Per contra, Mr. Sunil Agarwal, Mr. Zoheb Hossain, Mr. Puneet Rai,\n Mr. Sanjay Kumar, Mr. Shailender Singh, Mr. Ruchir Bhatia, learned\n counsel for the respondents, contended that the present batch of writ\n petitions challenged the legality and validity of only the Explanations to the\n two Notifications, being Notification No.20/2021 dated 31st March, 2021\n and Notification No.38/2021 dated 27th April, 2021, issued by Central\n Government in exercise of powers vested under Section 3(1) of Relaxation\n Act, 2020. They emphasized that petitioners had not challenged either the\n main Clause of the said Notifications to which 'Explanations' were\n appended or the Relaxation Ordinance, 2020 or Relaxation Act, 2020, which\n enabled the Central Government to extend dates as a measure of relief\n contingent upon on-ground analysis of Covid-19 situation.\n 24. They stated that the arguments advanced by the petitioners were in\n complete ignorance of the background of once-in-hundred years emergency\n called Global Covid-19 pandemic and the fact that all the three organs of the\n State and also the world at large were unanimous in their perception of the\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 60 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n threat to human life which was continuing with severe intensity [second\n wave] at the time when the impugned Notifications were issued. They\n pointed out that the Supreme Court by way of a series of orders in\n 'Cognizance of Limitation' extended limitation and Legislature by\n promulgating Relaxation ordinance in March, 2020 and conversion of\n Relaxation Ordinance into Relaxation Act, 2020 had extended dates for\n compliance and issuance of notices. They submitted that management of\n Covid-19 was akin to a war-time emergency measure and therefore had to\n be construed more liberally in favour of the State than peace time\n legislations. They stated that in State of Bombay vs. Virkumar Gulabchand\n Shah, AIR 1952 SC 335, the Supreme Court had held as under:-\n \"16. It is also perhaps relevant to note that the term which was\n under consideration in those cases occurred in a war-time\n measure, namely, a Proclamation promulgated on the 4th of\n August, 1914, the day on which the first world war started. There\n is authority for the view that war-time measures, which often\n have to be enacted hastily to meet a grave pressing national\n emergency in which the very existence of the State is at stake,\n should be construed more liberally in favour of the Crown or the\n State than peace time legislation.....\"\n 25. Learned counsel for respondents submitted that Section 3(1) of\n Relaxation Act, 2020 was an example of conditional legislation and not\n delegated legislation. They emphasised that jurisprudentially, conditional\n legislation is treated at par with plenary legislation and therefore is immune\n from attack on grounds on which delegated legislation can be attacked.\n According to them, the petitioners had failed to keep the said distinction in\n mind in the instant petitions. In support of their submission, they relied\n upon the judgments passed by the Supreme Court in Re Delhi Laws Act,\n\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 61 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n 1912, Ajmer-Merwara (Extension of Laws) Act, 1947 Vs. The Part 'C'\n States (Laws) Act, 1950, 1951 SCR 747 and I.T.C. Bhadrachalam\n Paperboards & Anr. vs. Mandal Revenue Officer, Andhra Pradesh & Ors.,\n (1996) 6 SCC 634. The relevant portions of the said judgments are\n reproduced hereinbelow:-\n A. Re Delhi Laws Act, 1912, Ajmer-Merwara (Extension of Laws)\n Act, 1947 (supra)\n \"301. Broadly speaking, the question of delegated legislation\n has come up for consideration before courts of law in two\n distinct classes of cases. One of these classes comprises what\n is known as cases of \"conditional legislation\", where\n according to the generally accepted view, the element of\n delegation that is present relates not to any legislative\n function at all, but to the determination of a contingency or\n event, upon the happening of which the legislative provisions\n are made to operate. The other class comprises cases of\n delegation proper, where admittedly some portion of the\n legislative power has been conferred by the legislative body\n upon what is described as a subordinate agent or authority.\n xxx xxx xxx\n 306. Thus, conditional legislation has all along been treated\n in judicial pronouncements not to be a species of delegated\n legislation at all. It comes under a separate category, and, if\n in a particular case all the elements of a conditional\n legislation exist, the question does not arise as to whether in\n leaving the task of determining the condition to an outside\n authority, the legislature acted beyond the scope of its\n powers...\n\n B. I.T.C. Bhadrachalam Paperboards & Anr. (supra)\n \"24. We may in this connection refer to the decision of the\n Supreme Court of United States in Field v. Clark [143 US\n 649 : 36 L Ed 294 (1892)]. The Tariff Act of 1890 empowered\n the President to suspend the operation of the Act, permitting\n free import of certain products within United States, on being\n satisfied that the duties imposed upon such products were\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 62 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n reciprocally unequal and unreasonable. It was submitted that\n the said power transfers the legislative and treaty-making\n power to the President and, hence, unlawful. The attack was\n repelled holding that the President was a mere agent of the\n Congress to ascertain and declare the contingency upon\n which the will of the Congress was to take effect....\n 26. What is, however, relevant is that the power to bring an\n Act into force as well as the power to grant exemption are\n both treated, without a doubt, as belonging to the category of\n conditional legislation. Very often the legislature makes a\n law but leaves it to the executive to prescribe a date with\n effect from which date the Act shall come into force. As a\n matter of fact, such a course has been adopted even in the\n case of a constitutional amendment, to wit, the Constitution\n (Forty-fourth Amendment) Act, 1978, insofar as it pertains to\n amendment of Article 22 of the Constitution. The power given\n to the executive to bring an Act into force as also the power\n conferred upon the Government to exempt persons or\n properties from the operation of the enactment are both\n instances of conditional legislation and cannot be described\n as delegated legislation.\"\n\n 26. They further submitted that Section 3(1) of Relaxation Act, 2020\n creates a legal fiction by virtue of which the Revenue was entitled to invoke\n Section 148 of the Income Tax Act, 1961, as it existed prior to 31st March,\n 2021 during the extended period between 1st April, 2021 and 30th June,\n 2021. They submitted that the fiction under Section 3(1) of Relaxation Act,\n 2020 was evident from its object namely, 'In view of the spread of pandemic\n Covid-19 across many countries of the world including India, causing\n immense loss to the lives of people, it had become imperative to relax\n certain provisions, including extension of time-limit'. They submitted that\n the limited fiction which came into play by virtue of Section 3(1) of\n Relaxation Act, 2020 was that 'such action' which was due for completion\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 63 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n or compliance between 20th March, 2020 and 31st December, 2020 or such\n other date after 31st December, 2020 as the Central Government may by\n Notification specify, which in this case is 31st March, 2021 [later modified\n to 30th April, 2021] stood 'extended' for the purpose of compliance or\n completion of 'such action' [which could not be completed] to a date\n beyond 31st March, 2021, which was finally specified by the Central\n Government to be 30th June, 2021. They submitted that it was this liminal\n period of 1st April, 2021 till 30th June, 2021 that the fiction came into play.\n 27. According to them, the two expressions vital for the purpose of\n understanding the fiction at play were 'such action' and 'extended'. They\n submitted that one could not be read in isolation of the other without doing\n violence to the plain language of Section 3(1) of Relaxation Act, 2020. They\n pointed out that neither the vires of Section 3(1) of Relaxation Act, 2020 nor\n the power conferred by Section 3(1) of Relaxation Act, 2020 upon the\n Central Government to fix the terminal dates were under challenge. They\n emphasized that the Central Government was conferred with the power to\n fix two terminal dates or outer time limits under Section 3(1) - the expiry\n date by which compliance was required to be made under the specified Act\n but could not be made and the extended date by which such compliance\n could be made.\n 28. They submitted that a legal fiction must be taken to its logical\n conclusion with all its natural corollaries and consequences. Therefore,\n according to them, the expressions 'such action' under the specified Act and\n 'extension' used in Relaxation Act, 2020 meant that the power to issue\n notice under Section 148 [as it existed prior to the coming into force of the\n Finance Act, 2021] was available to the Revenue by way of the fiction in\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 64 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n Relaxation Act, 2020, which extended the time limit for completion or\n compliance of 'such action' which would have otherwise expired between\n 20th March, 2020 and 31st March, 2021. In support of their submission, they\n relied upon the judgment passed by the Supreme Court in M. Venugopal vs.\n Divisional Manager, Life Insurance Corporation of India,\n Machilipatnam, A.P. & Anr., (1994) 2 SCC 323, wherein it has been held\n as under:-\n \"11. The effect of a deeming clause is well-known. Legislature\n can introduce a statutory fiction and courts have to proceed on the\n assumption that such state of affairs exists on the relevant date. In\n this connection, one is often reminded of what was said by Lord\n Asquith in the case of East End Dwellings Co. Ltd. v. Finsbury\n Borough Council that when one is bidden to treat an imaginary\n state of affairs as real, he must surely, unless prohibited from\n doing so, also imagine as real the consequences and incidents\n which inevitably have flowed from it -- one must not permit his\n \"imagination to boggle\" when it comes to the inevitable\n corollaries of that state of affairs. In view of the amendments\n aforesaid introduced in Section 48 it has to be held that\n Regulation 14 referred to above in respect of termination of the\n service of an employee of the Corporation within the period of\n probation shall be deemed to be a rule framed under Section\n 48(2)(cc) having overriding effect over Section 2(oo) and Section\n 25-F of the Industrial Disputes Act.\"\n 29. They submitted that as a result of the fiction created by Section 3 of\n Relaxation Act, 2020, the Revenue had available to it the \"power\" in cases\n where the limitation for issuance of notice was expiring between 20th March,\n 2020 and 31st March, 2021 [later modified to 30th April, 2021], to take \"such\n action\" i.e. the issuance of Notice under Section 148, on or before 30th June,\n 2021. The jural co-relative of \"power\", as per Hohfeld's theory on Jural\n Relations, is \"liability\". Therefore, where there is a power, it follows that\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 65 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n there is a liability imposed on the person against whom the power exists. If\n the power under the erstwhile Section 148 existed, then consequently, the\n corresponding liability to be reopened under unamended Section 148\n continued.\n 30. They also submitted that there was no conflict between Relaxation\n Act, 2020 and Finance Act, 2021 due to their specific text, context, scheme\n and object. They submitted that the principles of harmonious construction\n and ut res magis valeat quam pereat lead to an inexorable conclusion that if\n there was some conflict, alleged or real, between two provisions of law, the\n Courts were enjoined to make all out efforts to save both the provisions,\n rather than declaring any of them as a useless lumber.\n 31. In the alternative, they further submitted that if there was a conflict\n between the two statutes, Relaxation Act, 2020 would override the Finance\n Act, 2021, not only on ground of being a special Act but also for the reason\n that Section 3(1) of Relaxation Act contains a non-obstante clause giving the\n enacting part of Section 3(1) an overriding effect over the Income Tax Act,\n 1961. In support of their submission, they relied upon the judgment passed\n by the Supreme Court in Union of India & Ors. vs. Exide Industries\n Limited & Anr., (2020) 5 SCC 274, wherein it has been held as under:-\n \"21. Section 43-B bears heading \"certain deductions to be\n only on actual payment\". It opens with a non obstante\n clause. As per settled principles of interpretation, a non\n obstante clause assumes an overriding character against any\n other provision of general application. It declares that within\n the sphere allotted to it by Parliament, it shall not be\n controlled or overridden by any other provision unless\n specifically provided for. Out of the allowable deductions,\n the legislature consciously earmarked certain deductions\n from time to time and included them in the ambit of Section\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 66 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n 43-B so as to subject such deductions to conditionality of\n actual payment. Such conditionality may have the inevitable\n effect of being different from the theme of mercantile system\n of accounting on accrual of liability basis qua the specific\n head of deduction covered therein and not to other heads.\n But that is a matter for the legislature and its wisdom in\n doing so.\"\n 32. Consequently, according to them, in case of conflict between the\n Relaxation Act, 2020 and the Income Tax Act, 1961, Relaxation Act, 2020\n would prevail.\n 33. They submitted that even the Finance Act, 2021 did not apply to the\n substituted Sections 147 to 151 of the Income Tax Act, 1961 retrospectively\n and was applicable only with effect from 1st April, 2021. They further\n submitted that Section 147, being a right to assess, is a substantive right,\n while Sections 148 to 151 are the machinery provisions. According to them,\n Finance Act, 2021 had amended the entire scheme of reassessment from\n Sections 147 to 151 making both substantive and procedural amendments\n and, therefore, could not apply retrospectively. They submitted that there is\n a vested right in favour of the Revenue under the old regime of Sections 147\n to 151, which could not be taken away by applying retrospectively a shorter\n period of limitation in a new provision i.e., the substituted Section 149. In\n support of their submissions, they relied upon the judgment passed by the\n Supreme Court in M.P Steel Corporation vs. Commissioner of Central\n Excise (2015) 7 SCC 58, wherein it has been held, \"....The new law of\n limitation providing a longer period cannot revive a dead remedy. Nor can\n it suddenly extinguish a vested right of action by providing for a shorter\n period of limitation...a new law of limitation providing for a shorter period\n cannot certainly extinguish a vested right of action.\"\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 67 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n 34. Learned counsel for the respondents contended that the Relaxation\n Act, 2020 maintains equality ensuring that notices under old Section 148\n were issued to all similarly placed assessees i.e. the assessees to whom\n notices were issued prior to March, 2020 and those to whom notices could\n not be issued due to the pandemic. According to them, if the assessees'\n arguments were accepted, it would lead to unreasonable classification\n between those assessees who could not be issued notices only due to\n pandemic, who would be treated more favourably and unequally than those\n set of assessees in whose favour notices stood issued prior to March, 2020,\n for escapement of income for the same set of assessment years.\n 35. In the alternative, they submitted that Section 3(1) of Relaxation Act,\n 2020 is a 'stop-the-clock' provision somewhat similar to the U.S. legal\n doctrine known as 'Tolling' which allows for the pausing or delaying of the\n running of the period of time set forth by a statute containing limitation. In\n support of their submission, they relied upon the judgment passed by the\n Supreme Court of United States in Carlos CHARDON etc. et al. vs. Juan\n Fumero SOTO, et al., 1983 SCC OnLine US Sc 135 : 462 US 650 (1983),\n wherein it has been held as under:-\n \"1. Petitioners, Puerto Rican educational officials, demoted\n respondents from nontenured supervisory positions to teaching or\n lower-level administrative posts in the public school system\n because of respondents' political affiliations. Shortly before\n Puerto Rico's one-year statute of limitations would have expired, a\n class action was filed against petitioners on respondents' behalf\n under 42 U.S.C. \u00a7 1983. Subsequently class certification was\n denied because the class was not sufficiently numerous. The\n parties agree that the statute of limitations was tolled during the\n pendency of the \u00a7 1983 class action, but they disagree as to the\n effect of the tolling. [This opinion uses the word \"tolling\" to mean\n\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 68 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n that, during the relevant period, the statute of limitations ceases to\n run. \"Tolling effect\" refers to the method of calculating the\n amount of time available to file suit after tolling has ended. The\n statute of limitations might merely be suspended; if so, the plaintiff\n must file within the amount of time left in the limitations period. If\n the limitations period is renewed, then the plaintiff has the benefit\n of a new period as long as the original. It is also possible to\n establish a fixed period such as six months or one year during\n which the plaintiff may file suit, without regard to the length of the\n original limitations period or the amount of time left when tolling\n began.] Did the one-year period begin to run anew when class\n certification was denied, or was it merely suspended during the\n pendency of the class action? We must decide whether the answer\n is provided by Puerto Rican law or by federal law.\n xxx xxx xxx\n 21. In American Pipe the Court rejected the claim that antitrust\n claims brought by various Utah public agencies and\n municipalities was barred by the four-year limitations period of \u00a7\n 4B of the Clayton Act, reasoning that the running of this period\n had been tolled on three occasions. As to two of these occasions,\n involving periods during which federal litigation was pending, the\n Court's reasoning simply applied \u00a7 5(b) of the Clayton Act.\n Section 5(b) explicitly addressed the effect of pending federal\n litigation, stating unambiguously that \"Whenever any civil or\n criminal proceeding is instituted by the United States to prevent,\n restrain, or punish violations of any of the antitrust laws, . . . the\n running of the statute of limitations in respect of every private\n right of action arising under said laws . . . shall be suspended\n during the pendency thereof and for one year thereafter.\" 15\n U.S.C. \u00a7 16(b). The first two periods in which American Pipe held\n that \u00a7 4B had been tolled followed simply from a straightforward\n application of \u00a7 5(b) .\n\n ....The more orthodox inquiry, however, would seem to be what\n the Court actually decided then, not what we now think it needed\n to decide. And, as the discussion above plainly\n demonstrates, American Pipe concluded that Rule 23 contains a\n tolling rule that suspends (but does nothing more) the running of\n\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 69 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n limitations periods during the pendency of class actions. [The\n Court correctly recognizes that Board of Regents v. Tomanio, 446\n U.S. 478, 100 S.Ct. 1790, 64 L.Ed.2d 440 (1980), is\n distinguishable. That case did not involve a class action, and, thus\n the Court had no occasion to consider whether Rule 23 creates a\n federal tolling rule, or the character of that rule. Thus, there was\n \"a void . . . in federal statutory law,\" id., at 483, 100 S.Ct., at\n 1794, and state aw was called upon to fill the void. Owing\n to American Pipe and its interpretation of Rule 23, there is no\n comparable void in this case, and federal law is therefore\n applicable.]\"\n\n 36. Without prejudice and in the alternative to all of the above, they\n submitted that even Section 6 of the General Clauses Act, 1897 would allow\n notices to be issued and proceedings to be instituted, since by operation of\n Section 3(1) of Relaxation Act, 2020, a right had accrued in favour of the\n Revenue to re-open the assessment within an extended time period in such\n cases where limitation to reopen under Section 148/149 expired on 31st\n March, 2021. They submitted that by virtue of Section 6(c) of the General\n Clauses Act, 1897, the mere substitution of the erstwhile Section 148 did not\n take away the aforesaid incurred right. According to them, by virtue of\n Section 6(c) of the General Clauses Act, 1897, in all such cases wherein the\n limitation for issuance of notice under Section 148 was expiring on 31st\n March, 2021, the Revenue could initiate proceedings for the re-opening of\n assessment under the erstwhile Section 148, as if the same had not been\n substituted. In support of their submission, learned counsel for the\n respondents relied upon the judgment passed by the Supreme Court in T.S.\n Baliah vs. T.S. Rangachari, Income Tax Officer, Central Circle VI,\n Madras, (1969) 3 SCR 65 wherein it has been held as under:-\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 70 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n \"....But when the repeal is followed by fresh legislation on the\n same subject the Court would undoubtedly have to look to the\n provisions of the new Act, but only for the purpose of determining\n whether they indicate a different intention. The question is not\n whether the new Act expressly keeps alive old rights and liabilities\n but whether it manifests an intention to destroy them. Section 6 of\n the General clauses Act therefore will be applicable unless the\n new legislation manifests an intention incompatible with or\n contrary to the provisions of the section. Such incompatibility\n would have to be ascertained from a consideration of all the\n relevant provisions of the new statute and the mere absence of a\n saving clause is by itself not material....\"\n\n 37. Learned counsel for respondents lastly relied upon the judgment\n passed by the High Court of Chhattisgarh in Palak Khatuja vs. Union of\n India and Ors., W.P.(T) No. 149 of 2021 upholding the legality and validity\n of similarly issued reassessment notices. In the said judgment, the\n Chhattisgarh High Court has held, \"....legislative delegation which is\n exercised by the Central Government by notification to uphold the\n mechanism as prevailed prior to March, 2021 is not in conflict with any Act\n and notification by executive i.e. Ministry of Finance would be the part of\n legislative function.\"\n\n REJOINDER\n\n 38. In rejoinder, learned counsel for the petitioners submitted that the\n reasoning given by the Chhattisgarh High Court in the case of Palak\n Khatuja (supra) that the impugned Notifications issued under Relaxation\n Act, 2020 deferred the operation of Section 148A of the Income Tax Act,\n 1961 was a startling conclusion, apart from repeated references in the said\n judgments to the Covid-19 pandemic.\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 71 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n 39. Learned counsel for the petitioners pointed out that the Division\n Bench of Allahabad High Court had taken a diametrically opposite view in\n its judgment dated 30th September, 2021 passed in Writ Tax No. 524/2021\n titled Ashok Kumar Agarwal Vs. Union of India through its Revenue\n Secretary North Block. In the said judgment, the Allahabad High Court has\n upheld the submission of the petitioner-assessee that Section 148 notices\n issued after 1st April, 2021, which did not comply with post 31st March,\n 2021 provisions of the Income Tax Act, 1961, were illegal, bad in law as\n well as null and void.\n 40. They re-emphasised that the Relaxation Act, 2020 and the\n Notifications issued thereunder only extended the time limits for initiating\n re-assessment, but did not otherwise touch or affect the applicable\n provisions which mandatorily had to be complied with in respect of such re-\n assessment.\n\n SUR-REJOINDER\n\n 41. In sur-rejoinder, learned counsel for the respondents submitted that\n Allahabad High Court in Ashok Kumar Agarwal Vs. Union of India\n through its Revenue Secretary North Block (supra) had erroneously held\n that Section 3(1) of Relaxation Act, 2020 was meant to protect proceedings\n already underway or that may have become time-barred between 20th March,\n 2021 and 30th June, 2021. They pointed out that it was not the impugned\n Notifications but Section 3(1) of Relaxation Act, 2020 which permitted\n extension of time for compliance or completion of action which expired\n between 20th March, 2020 and 31st March, 2021 to be extended to a date\n beyond 31st March, 2021. Therefore, according to them, fixation of a date\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 72 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n beyond 31st March, 2021 was, in fact, permitted by the principle legislation\n - the Relaxation Act, 2020 itself.\n\n COURT'S REASONING\n\n AS THE LEGISLATURE HAS PERMITTED RE-ASSESSMENT TO BE\n MADE ONLY IN ACCORDANCE WITH THE SUBSTITUTED\n PROVISIONS, IT CAN ONLY BE DONE IN THIS MANNER, OR NOT AT\n ALL.\n 42. Having heard learned counsel for the parties, this Court is of the view\n that by virtue of Section 1(2)(a) of the Finance Act, 2021, the substituted\n Sections 147, 148, 149 and 151 of the Income Tax Act, 1961 pertaining to\n reopening of assessments came into force on 1st April, 2021. The\n significance of the expression 'shall' in Section 1(2)(a) of the Finance Act,\n 2021 cannot be lost sight of. This is in contrast to the language under\n Section 1(2)(b) which states that Sections 108 to 123 of the Finance Act,\n 2021 shall come into force on such date, as the Central Government may, by\n Notification in the Official Gazette, appoint. The Memorandum to the\n Finance Bill, 2021, too, clarifies that its Sections 2 to 88 which included the\n substituted Sections 147 to 151 of the Income Tax Act, 1961 will take effect\n from 1st April, 2021. There is also no power with the\n Executive/Respondents/Revenue to defer/postpone the implementation of\n Sections 2 to 88 of the Finance Act, 2021 which includes the substituted\n Sections 147 to 151 of the Income Tax Act, 1961.\n 43. It is settled law that the law prevailing on the date of issuance of the\n notice under Section 148 has to be applied. [See: Foramer Vs. CIT (2001)\n 247 ITR 436 (All.), affirmed by the Supreme Court in (2003) 264 ITR 566\n (SC), Varkey Jacob Co. Vs. CIT and Anr. (2002) 257 ITR 231 (Ker), Smt.\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 73 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n N.Illamathy vs. ITO (2020) 275 taxman 25/195 CTR 543 (Mad)(HC), RK\n Upadhyay v Shanabhai, (1987) 166 ITR 163 (SC); CIT v Rameshwar\n Prasad, (1991) 188 ITR 291 (All HC); Dr. Onkar Dutt Sharma v CIT,\n (1967) 65 ITR 359 (All HC)].\n 44. This Court is of the view that had the intention of the Legislature been\n to keep the erstwhile provisions alive, it would have introduced the new\n provisions with effect from 1st July, 2021, which has not been done.\n Accordingly, the notices relating to any assessment year issued under\n Section 148 on or after 1st April, 2021 have to comply with the provisions of\n Sections 147, 148, 148A, 149 and 151 of the Income Tax Act, 1961 as\n specifically substituted by the Finance Act, 2021 with effect from 1st April,\n 2021.\n 45. Consequently, this Court is of the opinion that as the Legislature has\n permitted re-assessment to be made in this manner only, it can be done in\n this manner, or not at all1.\n\n SECTION 3(1) OF RELAXATION ACT EMPOWERS THE\n GOVERNMENT/EXECUTIVE TO EXTEND ONLY THE TIME LINES.\n CONSEQUENTLY, THE GOVERNMENT/EXECUTIVE CAN NEITHER\n MAKE OR CHANGE LAW OF THE LAND NOR CAN IT IMPEDE THE\n IMPLEMENTATION OF LAW MADE BY THE PARLIAMENT.\n\n 46. Upon perusal of Section 3(1) of Relaxation Act, 2020, this Court is of\n the view that it extends only the time lines. Section 3(1) of the Relaxation\n Act, 2020 stipulates that where, any time limit has been stipulated in a\n\n\n 1\n This Court in Principal Commissioner of Income Tax-4 Vs. Headstrong Services India (P.) Ltd.,\n [2021] 125 taxman.com 262 (Del), has held, \"It is further settled law that when a power is given to do\n certain thing in a certain way, the thing must be done in that way or not at all and other methods of\n performance are forbidden. [See: Taylor Vs. Taylor,1875) 1 Ch.D.426; Nazir Ahmad Vs. King Emperor,\n AIR 1936 PC 253, AIR 1975 SC 985; Babu Verghese Vs. Bar Council of Kerala, (1999) 3 SCC 422].\"\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 74 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n specified Act which falls between the period 20th day of March, 2020 and\n 31st day of December, 2020 for the completion or compliance of such action\n as issuance of any notice under the provisions of the specified Acts and\n where completion or compliance of such action has not been made within\n such time, then the time limit for completion or compliance of such action\n shall, notwithstanding anything contained in the specified Acts, stand\n extended. It is important to bear in mind that Section 3(1) of the Relaxation\n Act, 2020 does not empower the Central Government to postpone the\n applicability of any provision which has been enacted from a particular date.\n There is a difference between extension of time of an action which is getting\n time barred and applicability of a provision which has been enacted and\n notified by the Legislature. Relaxation Act, 2020 nowhere delegates power\n to the Central Government to postpone the date of applicability of a new law\n enacted by the Legislature. Relaxation Act, 2020 also does not put any\n embargo on the power of the Legislature to legislate.\n\n 47. Also, the impugned Explanations in the Notifications dated 31st\n March, 2021 and 27th April, 2021 are beyond the power delegated to the\n Government, as the Relaxation Act does not give power to Government to\n extend the erstwhile Sections 147 to 151 beyond 31st March, 2021 and/or\n defer the operation of substituted provisions enacted by the Finance Act,\n 2021. Accordingly, the provisions of Section 148A had to be complied with\n before issuing notices under Section 147 of the Income Tax Act, 1961 and\n the submission of the respondents-Revenue based on the judgment passed\n by Chhattisgarh High Court in Palak Khatuja Vs. UOI (supra) does not find\n favour with this Court. After all, it is settled law that Executive cannot make\n\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 75 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n or change law of the land without specific Authority from Parliament to do\n so.2\n 48. Consequently, the Relaxation Act, 2020 and Notifications issued\n thereunder can only change the time-lines applicable to the issuance of a\n Section 148 notice, but they cannot change the statutory provisions\n applicable thereto which are required to be strictly complied with. Further,\n just as the Executive cannot legislate, it cannot impede the implementation\n of law made by the Legislature.\n THE IMPUGNED EXPLANATIONS IN THE NOTIFICATIONS DATED\n 31ST MARCH, 2021 AND 27TH APRIL, 2021 ARE ULTRA VIRES THE\n PARENT STATUTE I.E. THE RELAXATION ACT. THIS COURT IS\n RESPECTFULLY NOT IN AGREEMENT WITH THE VIEW OF THE\n CHHATTISGARH HIGH COURT IN PALAK KHATUJA (SUPRA), BUT\n WITH THE VIEWS EXPRESSED BY THE ALLAHABAD HIGH COURT IN\n ASHOK KUMAR AGARWAL (SUPRA) AND RAJASTHAN HIGH COURT\n IN BPIP INFRA PRIVATE LIMITED VS. INCOME TAX OFFICER,\n WARD 4(1), S.B. CIVIL WRIT PETITION 13297/2021\n 49. Further, the impugned Explanation is not only beyond the power\n delegated to the Government, but also in conflict with the provisions of the\n Income Tax Act, 1961 which had specifically made the new reassessment\n scheme applicable from 1st April, 2021. It is settled law that the delegation\n of authority must be express. There is no scope for any implied delegation of\n authority. The delegated authority must act strictly within the parameters of\n the authority delegated to it. The delegated authority cannot override the Act\n either by exceeding the authority or by making provisions inconsistent with\n the Act. The distinction between conditional legislation or delegated\n legislation is irrelevant to the controversy at hand, as the person to whom the\n\n 2\n R (on the application of Miller and Another) V. Secretary of State for Exiting the European Union\n (2017) UKSC 5) popularly known as Miller No.1.\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 76 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n power is entrusted in either situation can do nothing beyond the limits which\n circumscribe the power.3 Subordinate legislation cannot be contrary to the\n parent statute4. Consequently, this Court is respectfully not in agreement\n with the finding of Chhattisgarh High Court in Palak Khatuja (supra) that\n the legislative delegation exercised by the Central Government by impugned\n Notifications to uphold the mechanism as prevailing prior to March, 2021 is\n not in conflict with any Act. To be fair to Chhattisgarh High Court, there\n was no challenge in the petitions filed before it to the legality and validity of\n the impugned Notifications dated 31st March, 2021 and 27th April, 2021. On\n the contrary, this Court is in agreement with the views of the Allahabad\n High Court and Rajasthan High Court (Bench at Jaipur) in Ashok Kumar\n Agarwal (supra) and Bpip Infra Private Limited vs. Income Tax Officer,\n Ward 4(1), S.B. Civil Writ Petition 13297/2021, respectively.\n 50. Consequently, Explanations A(a)(ii)/A(b) to the Notifications dated\n 31st March, 2021 and 27th April, 2021 are ultra vires the Relaxation Act,\n 2020 and are therefore, bad in law and null and void.\n\n FINANCE ACT, 2021 HAS MERELY CHANGED THE PROCEDURE OF\n ISSUING NOTICE. CONSEQUENTLY, THE \"POWER\" OF\n ST\n REASSESSMENT THAT EXISTED PRIOR TO 31 MARCH, 2021\n CONTINUES TO EXIST EVEN THEREAFTER.\n 51. Hohfeld's theory on Jural Relations does not come to the aid of the\n Revenue. It is not disputed that as per Hohfeld's theory, the jural correlative\n of \"power\" is \"liability\". Where there is power, there is corresponding\n liability imposed upon the person against whom such power exists.\n\n 3\n Lachmi Narain vs. UOI AIR 1976 SC 714, St. John's Teachers Training Institute vs. Regional\n Director (2003) 3 SCC 321.\n 4\n Indian Express Newspapers vs. UOI AIR 1986 SC 515, State of Tamil Nadu vs. P Krishnamurthy\n (2006) 4 SCC 517.\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 77 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n However, with the coming into force of the Finance Act, 2021 w.e.f. 1st\n April, 2021, there has been no curtailing or taking away the power of the\n Revenue. It has merely changed the procedure of issuing notice.\n Consequently, the \"power\" as per Hohfeld's theory that existed prior to 31st\n March, 2021 continues to exist even thereafter.\n TO IGNORE THE LEGISLATIVE INTENT OF FINANCE ACT, 2021\n WOULD NOT BE IN ACCORDANCE WITH PAST PRACTICE.\n 52. It is pertinent to mention that the Legislature had even prior to\n Finance Act, 2021 enhanced/reduced time limit specified in Section 149 of\n the Income Tax Act, 1961, by way of Finance Acts, 1961, 1989, 2001, 2012\n and pertinently such enhancement/reduction to the time limit was made\n effective from different dates of the relevant financial year. A tabular chart\n showing previous changes to time limits under Section 149 is reproduced\n hereinbelow:-\n Amendments to Section 149 of the Income Tax Act, 1961\n Amending Act Permissible Time limit (from Effective Date of\n the end of assessment year) for coming into force\n issuance of notice under\n Section 148\n Income Tax Act, -8 years 01.04.1962\n -16 years\n 1961\n -4 years\n Direct Tax -4 years 01.04.1989\n Amendment Act, -7years\n 1987 -10 years\n (All the provisions were\n substituted)\n Finance Act, 2001 -4 years 01.06.2001\n -6 years\n (All the provisions were\n substituted)\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 78 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\nFinance Act, 2012 -4 years 01.07.2012\n -6 years\n -16 years\n (16 years condition has been\n newly inserted, rest were\n undisturbed)\n Finance Act, 2021 -3 years 01.04.2021\n -10 years\n (All the provisions are\n substituted)\n\n 53. This Court in C.B. Richards Ellis Mauritius Ltd. (supra), while\n interpreting the applicability of an earlier amendment to Section 149 of the\n Income Tax Act, 1961 vide Finance Act, 2001, whereby the earlier existing\n time limit of ten years was reduced to six years, has held that the reduced\n time limit applied with effect from the Finance Act coming into force. The\n relevant portion of the said judgment is reproduced hereinbelow:-\n \"7. Having considered the contentions of the parties and the\n legal issues raised therein, we feel that the petitioner is\n entitled to succeed. Section 6 of General Clauses Act deals\n with effect of repeal of an enactment and stipulates that\n unless a different intention appears, the repeal will not\n affect the previous operation of any enactment so repealed\n or any right, privilege, obligation or liability acquired,\n accrued or affect any penalty, investigation, legal\n proceeding or remedy. The said Section deals with\n substantive rights and liabilities. It is also subject to\n intention to the contrary. Intention can be implied. The\n procedural law when it is repealed should be applied from\n the date the new provision or procedure comes into force.\n The reason is that no person has a vested right or an\n accrued right in the procedure. No obligation or liability is\n normally imposed by a procedure. Sometime distinction is\n drawn between the right acquired or accrued and legal\n proceedings to acquire a right. In the latter case, there is\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 79 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n only hope which is destroyed by the repeal. What is\n protected is the preserved right and privileges acquired and\n accrued and corresponding obligation and liability incurred\n on the other party. The legal process or the procedure for\n the enjoyment of the said right is not protected. Section 6,\n normally does not apply to procedural law. The procedural\n law when amended or substituted is generally retroactive\n and applies from the day of its enforcement and to this\n extent it can be retrospective. The question raised is\n whether the amendment/substitution of the period with\n effect from 1.6.2001 in Section 149 of the Act, is procedural\n or substantive....\n xxx xxx xxx xxx\n 11. Law of limitation, therefore, being procedural law has\n to be applied to the proceedings on the date of\n institution/filing. No person can have a vested right in the\n procedure. Therefore, the procedural law on the date when\n it was enforced is applied. Bennion Statutory interpretation\n (1st addition page 446 para 191) has elucidated:-\n \"Because a change made by the legislator in\n procedural provisions is expected to be for the\n general benefit of litigants and others, it is\n presumed that it applies to pending as well as\n future proceedings.\"\n 12. Law of limitation does not create any right in favour of\n a person or define or create any cause of action, but simply\n prescribes that the remedy can be exercised or availed of by\n or within the period stated and not thereafter. Subsequently,\n the right continues to exist but cannot be enforced. The\n liability to tax under the Act is created by the charging\n Section read with the computation provisions. The\n assessment proceedings crystallize the said liability so that\n it can be enforced and the tax if short paid or unpaid can be\n collected. If this difference between liability to tax and the\n procedure prescribed under the Act for computation of the\n liability (i.e. the procedure of assessment), is kept in mind,\n there would be no difficulty in understanding and\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 80 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n appreciating the fallacy and the error in the primary\n argument raised by the Revenue. It is a settled position that\n liability to tax as a levy is normally determined as per\n statute as it exists on the first day of the assessment year,\n but this is not the issue or question in the present case. The\n issue or question in the present case relates to assessment\n i.e. initiation of re-assessment proceedings and whether the\n time/limitation for initiation of the re-assessment\n proceedings specified by the Finance Act, 2001 is\n applicable. We are not determining/deciding the liability to\n tax but have to adjudicate and decide whether the re-\n assessment notice is beyond the time period stipulated. This\n is a matter/issue of procedure i.e. the time period in which\n the assessment or re-assessment proceedings can be\n initiated. Thus the time period/limitation period prescribed\n on the date of issue of notice will apply. In our opinion, the\n answer is clear and has to be in affirmative, i.e. in favour of\n the assessee.\n 13. This question is not debatable or res integra and was\n examined and answered with lucid and clear reasoning in\n the opinion expressed by Hidayatullah, J. on behalf of\n himself and Raghubar Dayal, J. in S.C.\n Prashar v.Vasantsen Dwarkadas Hunger for Investment\n Trust Ltd. [1963] 49 ITR 1 (SC). The relevant portion\n reads:-\n \"93. ....If the 1948 Amendment could be treated\n as enabling the Income Tax Officer to take\n action at any point of time in respect of back\n assessment years within eight years of March 30,\n 1948 then such cases were within his power to\n tax. We have such a case here in CA No. 509 of\n 1958 where the notice was issued in 1949 to the\n lady whose husband had remitted Rs 9180 to her\n from Bangkok in the year relative to Assessment\n Year 1942-43. That lady was assessable in\n respect of this sum under Section 4(2) of the\n Income Tax Act. She did not file a return. If the\n case stood governed by the 1939 Amendment the\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 81 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n period applicable would have been four years if\n she had not concealed the particulars of the\n income. She had of course not deliberately\n furnished inaccurate particulars thereof. If the\n case was governed by the 1948 Amendment she\n would come within the eight-year rule because\n she had failed to furnish a return. Now, we do\n not think that we can treat the different periods\n indicated under Section 34 as periods of\n limitation, the expiry of which grant prescriptive\n title to defaulting tax-payers It may be said that\n an assessment once made is final and conclusive\n except for the provisions of Sections 34 and 35\n but it is quite a different matter to say that a\n \"vested right\" arises in the assessee. On the\n expiry of the period the assessments, if any, may\n also become final and conclusive but only so\n long as the law is not altered retrospectively.\n Under the scheme of the Income Tax Act a\n liability to pay tax is incurred when according to\n the Finance Act in force the amount of income,\n profits or gains is above the exempted. That\n liability to the State is independent of any\n consideration of time and, in the absence of any\n provision restricting action by a time limit, it can\n be enforced at any time. What the law does is to\n prevent harassment of assessees to the end of\n time by prescribing a limit of time for its own\n officers to take action. This limit of time is\n binding upon the officers, but the liability under\n the charging section can only be said to be\n unenforceable after the expiry of the period\n under the law as it stands. In other words,\n though the liability to pay tax remains it cannot\n be enforced by the officers administering the tax\n laws. If the disability is removed or according to\n a new law a new time limit is created\n retrospectively, there is no reason why the\n\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 82 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n liability should not be treated as still\n enforceable. The law does not deal with\n concluded claims or their revival but with the\n enforcement of a liability to the State which\n though existing remained to be enforced.\"\n\n 54. Consequently, in the present cases to ignore the legislative intent of\n Finance Act, 2021 would neither be legal nor reasonable.\n IT IS A PRINCIPLE OF LEGAL POLICY THAT CHANGES IN THE\n SUBSTANTIVE LAW SHOULD NORMALLY NOT TAKE EFFECT\n RETROSPECTIVELY EXCEPT IN RELATION TO PROCEDURAL\n MATTERS.\n\n 55. It is a cardinal principle of construction that every statute is prima\n facie prospective, unless it is expressly or by necessary implication made to\n have retrospective operation.5 There is a presumption of prospectivity\n articulated in the legal maxim 'nova constitutio futuris formam imponere\n debet non praeteritis', i.e., 'a new law ought to regulate what is to follow,\n not the past', and this presumption operates unless shown to be contrary by\n express provision in the statute or is otherwise discernible by necessary\n implication6 .\n 56. In contrast to statutes dealing with substantive rights, statutes dealing\n with merely matters of procedure are presumed to be retrospective, unless\n\n\n 5\nKeshavan Madhava Menon v. State of Bombay, 1951 SCR 228; Janardan Reddy and Others v. State,\n 1950 SCR 940; Mahadeolal Kanodia v. Administrator General of W.B., (1960) 3 SCR 578; State of\n Bombay v. Vishnu Ramchandra, (1961) 2 SCR 924; Rafiquennessa (Mst.) v. Lal Bahadur Chetri, (1964)\n 6 SCR 876; Arjan Singh v. State of Punjab, (1969) 2 SCR 347; Ex,-Capt. K.C. Arora and Another v.\n State of Haryana and Others, (1984) 3 SCC 281; Mithilesh Kumari and Another v. Prem Bahadur\n Khare, (1989) 2 SCC 95; State of Madhya Pradesh and Others v. Rameshwar Rathod, (1990) 4 SCC 21;\n Shyam Sunder and Others v. Ram Kumar and Another, (2001) 8 SCC 24; Zile Singh v. State of Haryana\n and Others, (2004) 8 SCC 1; Gem Granites v. Commr. of Income Tax, (2005) 1 SCC 229; C. Gupta v.\n Glaxo-Smithkline Pharmaceuticals Ltd., (2007) 7 SCC 171; J.S. Yadav v. State of Uttar Pradesh and\n Another, (2011) 6 SCC 570\n 6\n Monnet Ispat & Energy Ltd. v. Union of India & Ors., (2012) 11 SCC 1\n\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 83 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n such a construction is textually inadmissible.7 As stated by Lord Denning:\n \"The rule that an Act of Parliament is not to be given retrospective effect\n applies only to statutes which affect vested rights. It does not apply to\n statutes which only alter the form of procedure or the admissibility of\n evidence, or the effect which the courts give to evidence\".8 If the new Act\n affects matters of procedure only, then, prima facie, \"it applies to all actions\n pending as well as future\".9 In fact, there is line of authority to the effect\n that, in the absence of contrary intention, procedural changes apply to\n pending as well as future proceedings10. The nature of the exception was\n also clearly encapsulated in R. v. Makanjuola, (1995) 2 Cr. App. R. 469 at\n 472A-B, where Lord Taylor of Gosforth CJ held, \"The general rule against\n the retrospective operation of statutes does not apply to procedural\n provisions...Indeed, a general presumption is that a statutory change in\n procedure applies to pending as well as future proceedings.\"11\n\n RATIONALE BEHIND THE PRINCIPLE THAT CHANGE IN\n PROCEDURAL LAW OPERATES RETROSPECTIVELY\n 57. In stating the principle that \"a change in the law of procedure\n operates retrospectively and unlike the law relating to vested right is not\n\n 7\n Gardner v. Lucas (1878) 3 AC 582 (HL); Delhi Cloth & General Mills Co. Ltd. v. CIT, Delhi, AIR 1927\n PC 242; Jose De Costa v. Bascora Sadashiva Sinai Narcornim, (1976) 2 SCC 917; Gurbachan Singh v.\n Satpal Singh, (1990) 1 SCC 445\n 8\n Blyth v. Blyth, (1966) 1 All ER 524\n 9\n A.G. v. Vernazza, (1960) 3 All ER 97; K. Eapin Chako v. Provident Fund Investment Company (P)\n Ltd., (1977) 1 SCC 583\n 10\n Athlumney, Re, ex p Wilson [1898] 2 QB 54 per R S Wright J at 551-552; Kensinghton International\n Ltd. v. Republic of the Congo [2007] EWHC, 1632 (Comm), [2007] All ER (D) 209 (Jul) at [74]\n 11\n See also: R. v. Bradley [2005] EWCA Crim. 20. Also Justice GP Singh in his treatise Principles of\n Statutory Interpretation states, \"Fiscal legislation imposing liability is generally governed by the normal\n presumption that it is not retrospective and it is a cardinal principle of the tax law that the law to be\n applied is that in force in the assessment year unless otherwise provided expressly or by necessary\n implication. The above rule applies to the charging section and other substantive provisions such as a\n provision imposing penalty and does not apply to machinery or procedural provisions of a taxing Act\n which are generally retrospective and apply even to pending proceedings.\"\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 84 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n only prospective\"12, the Supreme Court has quoted with approval the reason\n of the rule as expressed in MAXWELL.[MAXWELL: Interpretation of\n Statutes, 11th Edition, p. 216]. \"No person has a vested right in any course\n of procedure. He has only the right of prosecution or defence in the manner\n prescribed for the time being by or for the Court in which the case is\n pending, and if, by an Act of Parliament the mode of procedure is altered, he\n has no other right than to proceed according to the altered mode\". In the\n opinion of this Court, this is because a procedural change is expected to\n improve matters for everyone concerned (or at least to improve matters for\n some, without inflicting detriment on anyone else who uses ordinary care,\n vigilance and promptness).\n FOR DETERMINING WHETHER THE AMENDMENT IS A\n PROCEDURAL OR A SUBSTANTIVE LAW ONE WILL HAVE TO\n EXAMINE THE INTENT, PURPOSE AND SCOPE OF THE\n AMENDMENTS.\n 58. Though the Black's Law Dictionary defines a procedural law as \"that\n which prescribes method of enforcing rights or obtaining redress for their\n invasion\" and a substantive law is one that which \"fixes duties, establish\n rights and responsibilities among and for persons natural or otherwise\", yet\n the question whether legislation is procedural or substantive in the context of\n retrospectivity needs to be considered by the reference to the facts of each\n particular case.\n 59. The same provision may be procedural in one context and substantive\n in another. Lord Brightman said in Yew Bon Tew v. Kenderaan Bas Mara.\n\n 12\n Anant Gopal Sheorey v. State of Bombay, 1959 SCR 919; Union of India v. Sukumar Pyne, 1966 (2) SCR 34;\n Tikaram & Sons v. Commr. of Sales Tax, U.P., (1968) 3 SCR 512; State of Madras v. Lateef Hamid & Co. (1971) 3\n SCC 560; Balumal Jamnadas Batra v. State of Maharashtra, (1975) 4 SCC 645; Rai Bahadur Seth Sriram\n Durgaprasad v. Director of Enforcement, (1987) 3 SCC 27; Gurbachan Singh v. Satpal Singh, (1990) 1 SCC 445\n\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 85 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n [1983] 1 AC 553 at 558, '....these expressions \"retrospective\" and\n \"procedural,\" though useful in a particular context, are equivocal and\n therefore can be misleading ... and an Act which is procedural in one sense\n may in particular circumstances do far more than regulate the course of\n proceedings, because it may, on one interpretation, revive or destroy the\n cause of action itself....' Consequently, the Court will have to examine the\n intent, purpose and scope of the amendments.\n THE INTENT, PURPOSE AND SCOPE OF THE AMENDMENTS\n INTRODUCED BY THE FINANCE ACT, 2021 WAS TO PROTECT THE\n RIGHTS AND INTERESTS OF ASSESSEES AS WELL AS PROMOTE\n PUBLIC INTEREST. IT IS SETTLED LAW THAT IF LEGISLATION IS\n INTRODUCED TO REMEDY THE DEFECTIVE RULE AND NO ONE\n SUFFERS THEREBY, IT IS SENSIBLE TO APPLY IT TO PENDING\n PROCEEDINGS.\n\n 60. The Finance Minister in her Budget Speech clearly stated that the\n object behind the amendment to the Income Tax Act, 1961 was \"to simplify\n the tax administration, ease compliance, and reduce litigation.\"\n 61. In the memorandum explaining the provisions in the Finance Bill,\n 2021, it was categorically admitted that it \"proposes a completely new\n procedure of assessment of such cases. It is expected that the new system\n would result in less litigation and would provide ease of doing business to\n taxpayers as there is a reduction in time limit by which a notice for\n assessment or reassessment or re-computation can be issued...\"\n 62. In fact, the unamended Sections 147 to 149 and 151 of the Income\n Tax Act, 1961 prescribed the procedure governing initiation of reassessment\n proceedings. However, the same gave rise to numerous litigations,\n particularly on the issues that reassessment proceedings were often initiated:\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 86 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n (a) without recording any valid 'reason to believe', (b) in absence of any\n tangible/reliable material/information in possession the Assessing Officer\n leading to formation of belief that income has escaped assessment, (c)\n without any enquiry being conducted by the Assessing Officer prior to the\n issuance of notice, (d) without following the mandatory procedure laid down\n by the Supreme Court in the case of GKN Driversafts (India) Ltd. Vs. ITO\n (supra) etc. Further, since reopening was permissible maximum up to six\n years and in some cases up to sixteen years, there was continuing\n uncertainty for a considerable long time.\n 63. The Legislature, being conscious of the shortcomings in the\n unamended Sections 147 to 151 of the Income Tax Act, 1961, which were\n relaxed by the aforesaid provisions of the Relaxation Act and the\n Notifications issued thereunder, introduced reformative changes to the said\n Sections governing the procedure for reassessment proceedings by way of\n the Finance Act, 2021 passed on 28th March, 2021.\n 64. The reformative substitutions carried out by the Finance Act, 2021\n with effect from 1st April, 2021 can be summarized as under:-\n a. Section 147: The earlier existing concept of income escaping\n assessment was simplified by substituting a new provision;\n b. Section 148: The provision governing issuance of notice for\n initiation of reassessment proceedings was substituted with a\n new provision, inter alia, prohibiting issuance of such notice, (a)\n in absence of any 'information' [as explained in Explanation 1]\n with the Assessing Officer suggesting escapement of income;\n (b) in absence of approval from the specified authority & (c)\n without following the procedure prescribed under Section 148A\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 87 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n of the Income Tax Act, 1961. Moreover, the said notice issued\n under Section 148 was now required to be served along with\n order passed under Section 148A of the Income Tax Act, 1961;\n c. Section 148A: New provision was introduced in the Income Tax\n Act, 1961, inter alia prescribing, (a) Assessing Officer to\n conduct inquiry, if required, with prior approval; (b) opportunity\n of heard to be given to the assessee, with prior approval; (c)\n Assessing Officer to consider reply of assessee; and (d) order to\n be passed as to whether it was a fit case for issuance of notice\n under Section 148 of the Income Tax Act, 1961;\n d. Section 149: The provisions governing time limit for issuance of\n notice under Section 148 of the Income Tax Act, 1961 were\n replaced with new provisions, inter alia, reducing the\n permissible time limit for issuance of such notice to three years\n [and ten years only in exceptional cases] and further changing\n the earlier existing criteria governing such time limit;\n e. Section 151: The earlier existing provision prescribing the\n sanctioning authorities for issuance of notice under Section 148\n was replaced with new provisions prescribing the sanctioning\n authorities for the purposes of Sections 148 & 148A; pertinently\n for issuance of notice after three years from the end of relevant\n Assessment Year, wherein reopening is permitted in exceptional\n cases, sanction from the highest level of Income Tax\n Department is required to be obtained.\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 88 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n 65. Based on the aforesaid substituted provisions as well as the speech of\n Finance Minister and the Memorandum explaining the provisions in the\n Finance Bill, 2021, it is apparent that the legislative intent behind the\n aforesaid substitutions/amendments is to reduce the time limit in ordinary\n cases to three years and to increase the threshold amount of income having\n escaped assessment to Rs.50 lakhs for invoking extended time limit of ten\n years is to reduce litigation and compliance burden, remove discretion,\n impart certainty and promote ease of doing business.\n 66. This Court is of the opinion that the new provisions are remedial and\n benevolent provisions which are meant and intended to protect the rights and\n interests of assessees as well as promote public interest. In Imperial\n Tobacco Ltd v. Attorney General [1979] QB 555 at 581, Omrod LJ said,\n 'The object of all procedural rules is to enable justice to be done between\n the parties consistently with the public interest'. If the procedural rules are\n defective, the legal apparatus works less efficiently and the public interest\n suffers. If legislation is introduced to remedy the defective rule and no one\n suffers thereby, it is sensible to apply it to pending proceedings.\n 67. Consequently, this Court is of the view that the Finance Act, 2021\n introduces a new regime regarding the procedure to be complied with in\n respect of the re-opening of an Income-tax assessment and accordingly, the\n benefit of the new provisions must necessarily be made available even in\n respect of proceedings relating to past Assessment Years provided,\n of course, Section 148 notice has been issued on or after 1st April, 2021. 13\n\n\n\n 13\nM.D. Frozen Foods Exports Private Limited and Others Vs. Hero Fincorp Limited, (2017) 16 SCC\n 741.\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 89 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n NEITHER THE CONCEPT OF VESTED RIGHT IN FAVOUR OF THE\n REVENUE NOR THE JUDGMENT OF THE SUPREME COURT IN M.P.\n STEEL CORPORATION V. CCE (2015) 7 SCC 58 HAS ANY\n APPLICATION.\n 68. In the opinion of this Court, neither the concept of vested right in\n favour of the Revenue nor the judgment passed by the Supreme Court in\n M.P. Steel Corporation v. CCE (2015) 7 SCC 58 has any application to the\n present batch of matters.\n 69. Admittedly, time limit to issue notices for re-assessment under the\n Income Tax Act, 1961 stood expired long time ago. The Legislature by\n virtue of the Relaxation Act, 2020 had extended the time limit till 31st\n December, 2020 and had given discretion to the executive to issue\n Notification to extend the timeline alone. However, extending the time limit\n or giving power to issue Notification to extend the time cannot be taken to\n be a vested right of the respondents.\n 70. Consequently, this Court is of the view that vested right in favour of\n the Revenue stood exhausted/expired long ago and no vested right of the\n respondents has been infringed leave alone violated.\n THE ARGUMENT OF THE RESPONDENT THAT THE SUBSTITUTIONS\n MADE BY THE FINANCE ACT, 2021 IS NOT APPLICABLE TO PAST\n ASSESSMENT YEARS, AS IT IS SUBSTANTIAL IN NATURE IS\n CONTRADICTED BY ITS OWN CIRCULAR 549 OF 1989 AND ITS OWN\n SUBMISSION THAT FROM 1ST JULY, 2021, THE SUBSTITUTIONS\n MADE BY THE FINANCE ACT, 2021 WILL BE APPLICABLE.\n 71. Circular 549 of 1989 issued by the CBDT explaining the provisions of\n the Direct Tax Laws (Amendment Act), 1989 amending erstwhile Sections\n 147 to 152 clarified that the said provisions were procedural in nature and\n would have retrospective effect, unless the amending statute provides\n\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 90 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n otherwise. The relevant provisions of Circular 549 of 1989 issued by the\n CBDT is reproduced hereinbelow:-\n \"...7.13 Amendments to have retrospective effect. - These\n amendments come into force with effect from the 1st day of\n April, 1989. However, it may be clarified that since the\n provisions of sections 147 to 152 lay down procedural law,\n these have retrospective effect, unless the amending statute\n provides otherwise. Therefore, the amendments made to\n these sections by the Amending Acts, 1987 and 1989,\n discussed in the preceding paragraphs, which came into\n force with effect from 1st April, 1989, will be retrospective\n in the sense that these will apply to all matters which were\n pending on 1st April, 1989 and had not become closed or\n dead on this date.\n 7.14 Thus, from 1st April, 1989 onwards, any action for\n opening or re-opening an assessment for the assessment\n year 1988-89 and earlier assessment years will have to be\n taken in accordance with the amended provisions. The\n following examples will clarify the position:-\n (i) No notice under section 148 can now be issued for the\n assessment years 1973-74 to 1978-79 even if the escaped\n income is Rs. 50,000 or more in each year, although under\n the old provisions this could have been done with Board's\n approval.\n (ii) Notice under section 148 can now be issued for any of\n the assessment years 1979-80 to 1981-82 if the following\n conditions are ful-filled:-\n (#) In a scrutiny case [i.e., where an assessment\n order had been passed under section 143(3) or 147],\n if the escaped income is Rs. 1 lakh or more in each\n year and approval of the Chief Commissioner or\n Commissioner has been obtained.\n (c) In a non-scrutiny case, if the escaped income is\n Rs. 50,000 or more in each year, and approval of\n the Deputy Commissioner has been obtained.\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 91 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n (Under the old provisions, there was no distinction between\n a scrutiny and a non-scrutiny case. Action could have been\n taken in respect of both types of cases for the assessment\n year 1981-82, with the approval of the Chief Commissioner\n or Commissioner, whatever be the amount of escaped\n income, while for the assessment years 1979-80 and 1980-\n 81, action could have been taken with Board's approval if\n the escaped income was Rs. 50,000 or more in each year.\n These old provisions, however, have no application now\n from 1-4-1989 onwards).\"\n 72. On the one hand, the Respondents are contending that the amendment\n made by the Finance Act, 2021 shall not be applicable to past assessment\n years, while on the other hand, they are contending that from 1st July, 2021,\n the amendments made by the Finance Act, 2021 will be applicable. This is\n contradictory inasmuch as for three months starting on or after 1st April,\n 2021, the amendment made by the Finance Act, 2021 shall be considered as\n substantive in nature and hence applicable prospectively, while from 1st\n July, 2021, the amendment made by the Finance Act, 2021 will be\n considered as procedural and hence will be applicable retrospectively for\n any assessment year including earlier years.\n 73. Keeping in view its own submission and past precedent to treat\n Sections 147 to 152 of the Income Tax Act, 1961 as procedural, the\n respondents are estopped from contending to the contrary.\n IF THE ARGUMENT OF THE RESPONDENTS THAT THE\n EXPLANATION IN NOTIFICATION NO. 20 DATED 31ST MARCH, 2021\n EXTENDED THE APPLICABILITY OF OLD PROCEDURE OF\n REASSESSMENT BEYOND 31ST MARCH, 2021 IS ACCEPTED, THE\n SAME SHALL LEAD TO MANIFEST ARBITRARINESS AND CONFLICT.\n\n 74. Further, if the argument of learned counsel for the respondents that\n the Explanation in Notification No. 20 dated 31st March, 2021 extended the\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 92 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n applicability of old procedure of reassessment beyond 31st March, 2021 is\n accepted the same shall lead to patent arbitrariness since:\n\n a. during the period from 1st April, 2021 to 30th June, 2021, both\n old as well as new procedure as enacted by Finance Act, 2021\n shall simultaneously operate [more so, since there is no statutory\n provision deferring the implementation of the new/mandatory\n procedure];\n\n b. for example: For A.Y.'s 2015-16 to 2017-18 [with limitation\n upto March, 22 to 24], in case of two identically placed\n taxpayers (say A & B) with \"information\" of having asset above\n Rs.50 lakh, Assessing Officer shall have absolute discretion to\n choose either the old or the new mechanism;\n\n c. 'doctrine of election' normally confers two separate alternative\n statutory powers/remedies (like Sections 154, 147, 263) for\n same/similar cause, but same provision (Section 147) with two\n opposite procedure for same cause can never be envisaged and\n shall necessarily lead to manifest arbitrariness and conflict.\n 75. Also, the new scheme of reassessment provides for a uniform manner\n of reassessment of two categories of cases, namely, regular reassessments\n and search/survey cases. Insofar as search/survey cases are concerned, the\n provisions are clear that the new scheme is to apply where the proceedings\n are initiated after 1st April, 2021 as Explanation 2 to Section 148 states that\n the Assessing Officer will be deemed to have 'information' for the purposes\n of Section 148/148A when search/survey is initiated on or after 1st April,\n 2021 and the first proviso to Section 148A states that the procedure in\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 93 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\nSection 148A will not apply to cases where search/survey is initiated after\n 1st April, 2021. Also, the second proviso to Section 149 states that the new\n limitation will not apply where search/survey is initiated on or before 1st\n April, 2021. In fact, the department's interpretation would also make the\n provisions relating to search cases completely unworkable. As per Sections\n 153A and 153C, the provisions of these two sections will not apply where\n search/survey is done after 1st April, 2021. Department contends that the\n erstwhile law continues to apply from 1st April, 2021 to 30th June, 2021. The\n erstwhile law on reopening did not cover search/survey cases. Consequently,\n for the search/survey done from 1st April to 30th June, there can neither be an\n assessment under sections 153A/153C or under 147, which cannot be the\n case. Further, Sections 148, 148A and 149 specifically cover cases where\n search/survey is done after 1st April, 2021. If department's interpretation is\n accepted, this specific date in all three Sections will have to be changed and\n read as 1st July, 2021, which cannot be done. Moreover, as the new\n provisions seek to bring uniformity between regular reassessments and\n search/survey cases, it follows that the cut off date for initiation of\n reassessment proceedings even for regular reassessment is 1st April, 2021.\n REVENUE CANNOT RELY ON COVID-19 FOR CONTENDING THAT\n THE NEW PROVISIONS SHOULD NOT OPERATE DURING THE\n PERIOD 1st APRIL, 2021 TO 30th JUNE, 2021.\n 76. When Finance Minister moved the Finance Bill, 2021 in Parliament\n on 1st February, 2021 and the Finance Act, 2021 was enacted in March,\n 2021, COVID-19 was widely prevalent and Parliament was fully aware of\n the same. Nevertheless, with the objective of promoting ease of doing\n business and reducing litigation, Parliament specifically enacted that the\n\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 94 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n new reassessment provisions would come into operation on 1st April, 2021.\n The Revenue cannot, therefore, rely on COVID-19 for contending that the\n new provisions should not operate during the period 1st April, 2021 to 30th\n June, 2021 or that Relaxation Act, 2020 deals with the situation arising out\n of Covid-19 and the Finance Act, 2021 was passed being oblivious of the\n Covid-19 Pandemic.\n NON-OBSTANTE CLAUSE HAS TO BE CONSTRUED STRICTLY.\n SECTION 3(1) OF RELAXATION ACT IS EXPRESSLY CONFINED TO\n AND ONLY SUPERSEDES THE TIME LIMITS. IT DOES NOT EXCLUDE\n THE APPLICABILITY OF PROVISIONS SUBSTITUTED BY FINANCE\n ACT, 2021.\n\n 77. It is settled law that the non-obstante clause in a statute has to be\n given a contextual interpretation and cannot be interpreted in a way which\n defeats or extends the object and purpose of the enactment. In Nawal Singh\n vs. State of U.P. & Anr.14, the Supreme Court has held that the non-obstante\n clause has to be construed strictly and has an overriding effect over the other\n statutes only to the limited extent that it expressly so provides. In other\n\n 14\n 2003(8) SCC 117. In this case, the Supreme Court held, \"...However, we would refer to the decision\n in A.G. Varadarajulu v. State of T.N. [(1998) 4 SCC 231] which was relied upon by the learned Senior\n Counsel Mr Dwivedi, wherein (in para 16) this Court held as under: (SCC p. 236)\n \"16. It is well settled that while dealing with a non obstante clause under which the legislature\n wants to give overriding effect to a section, the court must try to find out the extent to which the\n legislature had intended to give one provision overriding effect over another provision. Such\n intention of the legislature in this behalf is to be gathered from the enacting part of the section.\nIn Aswini Kumar Ghose v. Arabinda Bose [AIR 1952 SC 369] Patanjali Sastri, J. observed:\n 'The enacting part of a statute must, where it is clear, be taken to control the non obstante\n clause where both cannot be read harmoniously.'\n In Madhav Rao Scindia v. Union of India [(1971) 1 SCC 85] (SCC at p. 139) Hidayatullah, C.J.\n observed that the non obstante clause is no doubt a very potent clause intended to exclude every\n consideration arising from other provisions of the same statute or other statute but 'for that reason alone\n we must determine the scope' of that provision strictly. When the section containing the said clause does\n not refer to any particular provisions which it intends to override but refers to the provisions of the\n statute generally, it is not permissible to hold that it excludes the whole Act and stands all alone by itself.\n 'A search has, therefore, to be made with a view to determining which provision answers the description\n and which does not.' \"\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 95 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n words, the remaining parts of the other statutes are left untouched by the\n non-obstante clause.\n 78. In the present case, the ambit of the non-obstante clause in Section\n 3(1) of Relaxation Act, 2020 is expressly confined to and supersedes the\n time limits only for the completion or compliance of actions which are laid\n down in the specified Acts and Relaxation Act, 2020 only provides that\n these time limits shall stand extended as provided. The intent and purpose\n behind enactment of Section 3 of Relaxation Act, 2020 is relaxation of\n statutory timelines in various provisions of the specified Acts and thus, as a\n natural corollary the relaxation provided in Section 3 of Relaxation Act,\n 2020 inherently conflicts with various timelines provided in the specified\n Acts. To get over this inherent conflict between Section 3 of Relaxation Act,\n 2020 and various timelines provided in provisions prescribed in the\n specified Acts, the legislature has carefully incorporated the non-obstante\n clause in the said Section. Consequently, this non-obstante provision only\n operates to prevail over the time lines laid down in the specified Act. Apart\n from these timelines, no other provision of any specified Act is suspended or\n overridden. This non-obstante clause cannot, therefore, possibly be relied\n upon by the Revenue to contend that a Notification issued under Section 3 of\n Relaxation Act, 2020 overrides any provision of the Income-tax Act, 1961\n other than the applicable time-lines. Any Notification issued under\n Relaxation Act, 2020 cannot possibly have a reach and ambit wider than the\n Relaxation Act, 2020 itself for that would be contrary to the settled canons\n of construction of statutes.\n 79. It is also necessary to appreciate that the Relaxation Act, 2020 was\n enacted long before the Finance Act, 2021. Consequently, it cannot possibly\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 96 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n be contended that any provision of Relaxation Act, much less of any\n Notification issued thereunder, can be so construed as amending or\n modifying or excluding the applicability of the yet to be enacted Finance\n Act, 2021. Further, as the Petitioners are not questioning any of the time\n extensions made by or under Relaxation Act, 2020, the said non-obstante\n clause is totally irrelevant to controversy at hand.\n\n THE REVENUE'S CHOOSING AND PICKING OF TWO TERMS VIZ.\n \"SUCH ACTION\" & \"EXTENSION/EXTENDED\" IS CONTRARY TO\n BASIC PRINCIPLES OF INTERPRETATIONS WHICH PROHIBITS\n SELECTIVELY CHOOSING/IGNORING WORDS FROM THE\n STATUTORY LANGUAGE AS WELL AS THE FACT THAT THE\n RELAXATION ACT, 2020 WAS ENACTED LONG BEFORE FINANCE\n ACT, 2021.\n\n 80. To substantiate its stand that the impugned notices are not barred by\n limitation, the Revenue without even considering the pre-condition\n prescribed by Section 3 of Relaxation Act, 2020 has selectively chosen and\n picked up two terms viz. \"such action\" & \"stand extended\" to put forward\n an interpretation which could not have been contemplated by the Legislature\n at the time of enactment of the said provision, namely, that notices under\n Section 148 will relate back and be governed by old law. In the opinion of\n this Court, the submission of the Revenue is completely flawed, as the same\n is contrary to basic principles of interpretations, which prohibits selectively\n choosing/ignoring words from the statutory language.\n 81. It is settled law that when the words of a statute are clear and\n unambiguous, it is not permissible for the Court to read words into the\n\n\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 97 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n statute15. In fact, the principle of interpretation of taxing statutes was best\n enunciated by Rowlatt J. in his classic statement in Cape Brandy Syndicate\n v I.R.C. (1 KB 64, 71), \"In a taxing statute one has to look merely at what is\n clearly said. There is no room for any intendment. There is no equity about\n a tax. There is no presumption as to a tax. Nothing is to be read in, nothing\n is to be implied. One can look fairly at the language used.\"\n 82. The Judiciary cannot transgress into the domain of policy making by\n re-writing a statute, however strong the temptations maybe16. The Supreme\n Court in A.V Fernandez vs. State of Kerala (AIR 1957 SC 657) has held,\n \"In construing fiscal statutes and in determining the liability of a subject to\n tax one must have regard to the strict letter of law. If the revenue satisfies\n the court that the case falls strictly within the provisions of the law, the\n subject can be taxed. If, on the other hand, the case is not covered within the\n four corners of the provisions of the taxing statute, no tax can be imposed by\n inference or by analogy or by trying to probe into the intentions of the\n legislature and by considering what was the substance of the matter\".\n 83. Further, the Relaxation Act, 2020 received the President's assent on\n 29th September, 2020, whereas the Finance Act, 2021 received the assent on\n 31st March, 2021. Consequently, it cannot be contended that any provision\n of the Relaxation Act, 2020, much less of any Notification issued\n\n\n 15\n A Constitution Bench of the Supreme Court in Padma Sundara Rao and Others v State of Tamil\n Nadu and Others (2002) 3 SCC 533 has observed: \"12.....the court cannot read anything into a statutory\n provision which is plain and unambiguous. A statute is an edict of the legislature. The language\n employed in the statute is determinative factor of legislative intent. The first and primary rule of\n construction is that the intention of the legislation must be found in the words used by the legislature\n itself. The question is not what may be supposed and has been intended but what has been\n said.......14.While interpreting a provision the court only interprets the law and cannot legislate it. If a\n provision of law is misused and subjected to the abuse of process of law, it is for the legislature to\n amend, modify or repeal it, if deemed necessary.....\"\n 16 Saregama India Ltd. vs. Next Radio Limited & Ors., 2021 SCC OnLine SC 817\n\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 98 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n thereunder, should be so construed as amending or modifying or excluding\n the applicability of the yet to be enacted Finance Act, 2021.\n THE CONSEQUENCE OF NOT MENTIONING SUBSTITUTED SECTION\n 147 OF THE INCOME TAX ACT, 1961 IN THE IMPUGNED\n EXPLANATIONS.\n 84. Even if it is assumed that the impugned Explanations in the two\n Notifications are valid, still the impugned notices are bad in law, as the\n impugned Explanations only seek to effectuate the erstwhile Sections 148,\n 149 and 151 and they do not cover Section 147. However, the conditions\n provided for in the substituted Section 147 were not considered while\n issuing notices by the Assessing Officer. In fact, the said Section 147 is\n itself subject to Sections 148 to 153, which would include Section 148A.\n\n THE \"LEGAL FICTION\" ARGUMENT IS WITHOUT ANY FOUNDATION.\n THERE IS NO PROVISION IN RELAXATION ACT STATING THAT IF\n THE \"ACTION\" IS TAKEN WITHIN THE EXTENDED TIME LIMIT, IT\n WOULD BE DEEMED TO HAVE BEEN TAKEN BEFORE THE EXPIRY\n OF THE ORIGINAL (UN-EXTENDED) TIME LIMIT.\n\n 85. The \"legal fiction\" argument is without any foundation. A statute can\n be said to enact a legal fiction when it assumes the existence of something\n which is known not to exist. The extension of time for completing an\n assessment or issuing a Section 148 notice has no element of legal fiction in\n it. The only effect and consequence of this extension of the time limit is that\n if the act in question is performed within the extended time limit, it will be\n considered to be legally compliant. However, there is no assumption that the\n act in question is deemed to have been performed within the original time\n limit, as wrongly contended by the learned counsel for the Respondents. For\n achieving that result, clear and unequivocal language was required in the\n\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 99 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n Relaxation Act, 2020 - which is missing. In fact, there is no provision in\n Relaxation Act, 2020 laying down that if the \"action\" is taken within the\n extended time limit, it would be deemed to have been taken before the\n expiry of the original (un-extended) time limit.\n\n THE ESSENTIAL CONDITION FOR A PROVISION TO BE TERMED AS\n STOP THE CLOCK PROVISION IS ABSENT INASMUCH AS THE TIME\n DURING WHICH SUCH CLOCK IS STOPPED HAS NOT BEEN\n STIPULATED TO BE EXCLUDED.\n 86. Section 3 of the Relaxation Act, 2020 is not a 'stop the clock'\n provision, as it only relaxes the time limit, so as to facilitate the cases in\n which the Revenue/assessee has not been able to take the specified action\n within the statutory timelines. The essential condition for a provision to be\n termed as stop the clock provision is that the time during which such clock\n is stopped, such period has to be excluded. In the present instance, time limit\n is extended, not excluded or stopped.\n\n IT CANNOT BE THAT A FICTION IS CREATED OR CLOCK STOPPED\n ONLY FOR REASSESSMENT AND NOT FOR ASSESSMENT AND/OR\n FACELESS PENALTY SCHEME.\n 87. Further, if the interpretation being placed by the Respondent that\n Section 3(1)(a) creates a fiction and the clock gets stopped because of\n Section 3(1) of Relaxation Act, 2020 is correct, then all the actions and\n procedures should have been under that law and procedure which were on\n the day when the fiction was created or the clock stopped.\n 88. It may be relevant to point out that Section 144B was inserted in the\n Income Tax Act, 1961 by Relaxation Act, 2020 w.e.f. 1st April, 2021 for\n making faceless assessment. By virtue of Section 144B, the entire procedure\n for assessment under Sections 143(3) and 144 has changed. The time period\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 100 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n for both assessment as well as reassessment was extended under\n Notifications issued under Relaxation Act, 2020 itself. If the Respondent's\n stand is to be accepted that all such assessments had to be made under the\n unamended law, then assessments orders should not have been passed under\n the amended Section 144B of the Act. However, all the assessments after\n 31st March, 2021 have been made following the new procedure prescribed\n for the assessment after the amendment. In fact, it is pertinent to mention\n that CBDT itself vide its order No. 187/3/2020-ITA-1 dated 31st March,\n 2021 has directed that all pending assessments as on 31st March, 2021 are to\n be completed under Section 144 B i.e. the new procedure applicable w.e.f.\n 01st April, 2021.\n 89. Similar to assessment and reassessment, the time limit for levying\n penalty was also extended under Relaxation Act itself even up to 31st March,\n 2022. If the clock has stopped or fiction has been created as is being\n contended by the Respondents, then all the penalty orders passed under\n Section 274(2A) - Faceless Penalty Scheme till 31st March, 2022, following\n the new procedure will be bad in law. Consequently, it cannot be said that a\n fiction is created or clock stopped only for reassessment and not for\n assessment and/or Faceless Penalty Scheme.\n 90. In fact, wherever the Legislature intended that the old procedure is to be\n followed in respect of any assessment year as against the new procedure post\n the amendment, then it has specifically provided so. For instance, the Direct\n Laws (Amendment) Act, 1987 had introduced a new scheme for best judgment\n assessment (ex parte) under Section 144 w.e.f. 1st April 1989. However, in\n order to ensure that the assessments for years before coming into force of the\n new law is done under the old law, a specific sub-Section (2) was inserted in\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 101 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\nSection 144 to provide that the provisions of this Section as they stood\n immediately before their amendment by the Direct Tax Laws (Amendment)\n Act, 1987, shall apply to and in relation to any assessment for the assessment\n year commencing on the 1st day of April, 1988, or any earlier assessment year.\n \\\n\n\n\n\n THE PRINCIPLE THAT A SPECIAL ACT OVERRIDES A GENERAL ACT\n HAS NO APPLICATION TO THE PRESENT CASE BECAUSE RELAXATION\n ACT AND THE FINANCE ACT OPERATE IN DISTINCT AND SEPARATE\n SPHERES.\n 91. It is equally well-settled law that a special Act overrides a general\n Act. But this principle has no application whatsoever in the present case\n because Relaxation Act, 2021 and the Finance Act, 2021 operate in their\n distinct and separate spheres. Consequently, the question whether one\n prevails over and supersedes the other does not arise at all.\n\n THE ARGUMENT OF THE RESPONDENTS THAT RELAXATION ACT\n PROMOTES THE EQUALITY PRINCIPLES UNDER ARTICLE 14 OF THE\n CONSTITUTION IS UNTENABLE IN LAW.\n\n 92. The argument of the Respondents that Relaxation Act, 2020,\n promotes the equality principles under Article 14 of the Constitution and\n that if Petitioner's arguments are accepted, it would lead to unreasonable\n classification with those assessees who could not be issued notices earlier is\n untenable in law. If this is taken to the logical end, then any amendment in\n the procedural law will create inequality since procedural law will be\n applicable for all pending assessments as on that date. In UOI vs. VKC\n Footsteps India Pvt. Ltd.: CA No.4810/2021, the Supreme Court has held,\n \"'Perfect uniformity and perfect equality of taxation' in all aspects in which\n \"the human mind can view it, is a baseless dream\".\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 102 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n THE SUBMISSION OF THE REVENUE THAT SECTION 6 OF THE\n GENERAL CLAUSES ACT SAVES NOTICES ISSUED UNDER SECTION\n 148 POST 1ST APRIL, 2021 IS UNTENABLE IN LAW, AS IN THE\n PRESENT CASE, THE REPEAL IS FOLLOWED BY A FRESH\n LEGISLATION ON THE SAME SUBJECT AND THE NEW ACT\n MANIFESTS AN INTENTION TO DESTROY THE OLD PROCEDURE.\n\n 93. The provisions of the Finance Act, 2021 have not only repealed the\n erstwhile provisions of Sections 147, 148, 149 and 151 of the Income Tax\n Act, 1961 but also \"substituted\" them by new provisions. The process of\n 'substitution' consists of two steps: first, the rule is made to cease and the\n next, the new rule is brought into existence in its place.\n 94. 'Substitution' has to be distinguished from 'suppression' or a mere\n repeal of an existing provision. Substitution of a provision results in repeal\n of the earlier provision and its replacement by the new provision.17\n 95. Consequently, the submission of the revenue that Section 6 of the\n General Clauses Act saves notices issued under Section 148 of the Income\n Tax Act, 1961 is untenable in law, as in the present case, the repeal is\n followed by a fresh legislation on the same subject and the new Act\n manifests an intention to destroy the old procedure.18\n\n APPRECIATION\n 96. Before parting with this case, this Court places on record its deep\n appreciation for the assistance rendered by all the learned counsel, who\n appeared in the present batch of matters, in particular, Ms.Kavita Jha,\n Mr.Ved Jain, Mr.Sunil Agarwal and Mr.Zoheb Hossain, as they filed not\n\n\n 17\nZile Singh vs. State of Haryana, (2004) 8 SCC 1.\n 18\n State of Punjab vs. Mohar Singh: AIR 1955 SC 84; Jayantilal Amrathlal vs UOI: (1972) 4 SCC 174;\n Brihan Maharashtra Sugar Syndicate Limited vs. Janardan Ramachandran Kulkarni: AIR 1960 SC\n 794.\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 103 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n only compilation of documents and judgments but they also ensured that the\n virtual hearing was conducted in an organized and proper manner.\n CONCLUSION\n 97. This Court is of the view that as the Legislature has introduced the\n new provisions, Sections 147 to 151 of the Income Tax Act, 1961 by way of\n the Finance Act, 2021 with effect from 1st April, 2021 and as the said\n Section 147 is not even mentioned in the impugned Explanations, the\n reassessment notices relating to any Assessment Year issued under Section\n 148 after 31st March, 2021 had to comply with the substituted Sections.\n 98. It is clarified that the power of reassessment that existed prior to 31st\n March, 2021 continued to exist till the extended period i.e. till 30th June,\n 2021; however, the Finance Act, 2021 has merely changed the procedure to\n be followed prior to issuance of notice with effect from 1st April, 2021.\n 99. This Court is of the opinion that Section 3(1) of Relaxation Act\n empowers the Government/Executive to extend only the time limits and it\n does not delegate the power to legislate on provisions to be followed for\n initiation of reassessment proceedings. In fact, the Relaxation Act does not\n give power to Government to extend the erstwhile Sections 147 to 151\n beyond 31st March, 2021 and/or defer the operation of substituted provisions\n enacted by the Finance Act, 2021. Consequently, the impugned\n Explanations in the Notifications dated 31st March, 2021 and 27th April,\n 2021 are not conditional legislation and are beyond the power delegated to\n the Government as well as ultra vires the parent statute i.e. the Relaxation\n Act. Accordingly, this Court is respectfully not in agreement with the view\n of the Chhattisgarh High Court in Palak Khatuja (supra), but with the views\n\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 104 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n of the Allahabad High Court and Rajasthan High Court in Ashok Kumar\n Agarwal (supra) and Bpip Infra Private Limited (supra) respectively.\n 100. The submission of the Revenue that Section 6 of the General Clauses\n Act saves notices issued under Section 148 post 31st March, 2021 is\n untenable in law, as in the present case, the repeal is followed by a fresh\n legislation on the same subject and the new Act manifests an intention to\n destroy the old procedure. Consequently, if the Legislature has permitted\n reassessment to be made in a particular manner, it can only be in this\n manner, or not at all.\n 101. The argument of the respondents that the substitution made by the\n Finance Act, 2021 is not applicable to past Assessment Years, as it is\n substantial in nature is contradicted by Respondents' own Circular 549 of\n 1989 and its own submission that from 1st July, 2021, the substitution made\n by the Finance Act, 2021 will be applicable.\n 102. Revenue cannot rely on Covid-19 for contending that the new\n provisions Sections 147 to 151 of the Income Tax Act, 1961 should not\n operate during the period 1st April, 2021 to 30th June, 2021 as Parliament\n was fully aware of Covid-19 Pandemic when it passed the Finance Act,\n 2021. Also, the arguments of the respondents qua non-obstante clause in\n Section 3(1) of the Relaxation Act, 'legal fiction' and 'stop the clock\n provision' are contrary to facts and untenable in law.\n 103. Consequently, this Court is of the view that the\n Executive/Respondents/Revenue cannot use the administrative power to\n issue Notifications under Section 3(1) of the Relaxation Act, 2020 to\n undermine the expression of Parliamentary supremacy in the form of an Act\n of Parliament, namely, the Finance Act, 2021. This Court is also\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 105 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36\n of the opinion that the Executive/Respondents/Revenue cannot frustrate the\n purpose of substituted statutory provisions, like Sections 147 to 151 of\n Income Tax Act, 1961 in the present instance, by emptying it of content or\n impeding or postponing their effectual operation.\n\n RELIEF:\n 104. Keeping in view the aforesaid conclusions, Explanations A(a)(ii)/A(b)\n to the Notifications dated 31st March, 2021 and 27th April, 2021 are declared\n to be ultra vires the Relaxation Act, 2020 and are therefore bad in law and\n null and void.\n 105. Consequently, the impugned reassessment notices issued under\n Section 148 of the Income Tax Act, 1961 are quashed and the present writ\n petitions are allowed. If the law permits the respondents/revenue to take\n further steps in the matter, they shall be at liberty to do so. Needless to state\n that if and when such steps are taken and if the petitioners have a grievance,\n they shall be at liberty to take their remedies in accordance with law.\n\n MANMOHAN, J\n\n\n\n NAVIN CHAWLA, J\n DECEMBER 15, 2021\n rn/KA/js/TS/AS\n\n\n\n\nSignature Not Verified W.P.(C) 6176/2021 & connected matters Page 106 of 106\nDigitally Signed By:JASWANT\nSINGH RAWAT\nSigning Date:15.12.2021\n14:05:36" }, { "title": "Naresh Trehan vs Rakesh Kumar Gupta on 24 November, 2014", "url": "https://indiankanoon.org//doc/69052901/", "text": "Naresh Trehan vs Rakesh Kumar Gupta on 24 November, 2014\nAuthor: Vibhu Bakhru\nBench: Vibhu Bakhru\n THE HIGH COURT OF DELHI AT NEW DELHI\n% Judgment delivered on: 24.11.2014\n+ W.P.(C) 85/2010 & CM Nos.156/2010 & 5560/2011\n NARESH TREHAN ..... Petitioner\n versus\n RAKESH KUMAR GUPTA ..... Respondent\n AND\n+ W.P.(C) 251/2010 & CM No.526/2010\n AAA PORTFOLIO PVT LTD AND ANR. ..... Petitioners\n versus\n RAKESH KUMAR GUPTA ..... Respondent\n AND\n+ W.P.(C) 206/2010 & CM No.392/2010\n ESCORTS LTD ..... Petitioner\n versus\n RAKESH KUMAR GUPTA ..... Respondent\n AND\n+ W.P.(C) 214/2010 & CM No.445/2010\n CPIO CUM ASSISTANT COMMISSIONER\n OF INCOME TAX ..... Petitioner\n versus\n RAKESH KUMAR GUPTA ..... Respondent\n AND\n+ W.P.(C) 202/2010 & 389/2010\n ESCORTS HEART INSTITUTE AND\n RESEARCH CENTRE ..... Petitioner\n\n\n\nW.P.(C) Nos. 85/2010 & other connected matters Page 1 of 29\n versus\n RAKESH KUMAR GUPTA ..... Respondent\n AND\n+ W.P.(C) 207/2010 & CM No.394/2010\n RAJAN NANDA ..... Petitioner\n versus\n RAKESH KUMAR GUPTA ..... Respondent\nAdvocates who appeared in this case:\nFor the Petitioners : Mr Rajiv Nayar, Sr. Advocate with Ms Shyel\n Trehan and Ms Manjira Dasgupta in W.P.(C)\n 85/2010.\n Mr Sandeep Sethi, Sr. Advocate with Mr Simran\n Mehta and Mr Prabhat Kalia in W.P.(C) Nos.\n 251/2010, 206/2010 & 207/2010.\n Mr Rohit Puri in W.P.(C) 202/2010.\nFor the Respondent : In person.\n\nCORAM:-\nHON'BLE MR JUSTICE VIBHU BAKHRU\n\n JUDGMENT\n\nVIBHU BAKHRU, J\n\n1. These petitions are filed inter alia impugning a common order dated\n14.12.2009 passed by the Central Information Commission (hereafter\n'CIC') directing the Public Information Officers, Commissioner of Income-\ntax (hereafter 'PIO') to provide inspection of the records and also other\ninformation sought for by the respondent relating to the income tax returns\nfiled by the petitioners (other than the petitioner in W.P.(C) No.214 of\n2010).\n\nW.P.(C) Nos. 85/2010 & other connected matters Page 2 of 29\n 2. Brief facts which are relevant for examining the controversy in the\npresent petitions are that on 13.01.2009, Rakesh Kumar Gupta -\nrespondent, who is stated to be an informer to the income tax department,\nfiled an application under the Right to Information Act, 2005 (hereafter the\n'Act') with the PIO inter alia seeking information and all the records\navailable with the Income tax department in respect of nine assessees (out\nof the said assesses one assessee was deleted due to repetition) for various\nassessment years. The respondent had also sought:-\n\n \"1. Inspection of all records in above respect.\n\n 2. Kindly provide the copies of the documents mentioned at\n the time of inspection.\n\n 3. Kindly provide the officers (from assessing officers to\n CCIT), who are the officers to take action on \"Tax Evasion\n Petition\" given by me from 1/8/2003 till date.\n\n Request\n 4 If you want to treat the above information as third\n party information and want to send the notice to so called\n third parties inviting their objection, then kindly send the\n complete request to them including all the annexure e.g.\n citing public interest by me due to which information should\n be given to me.\"\n\n3. The details sought by the respondent of the eight assessees\n(hereinafter collectively referred to as 'assessees') including the details of\nthe assessment years are as under:-\n\n i) Dr. Naresh Trehan - petitioner in W.P.(C) No.85/2010 pertaining to\n Assessment Year 1998-99 to 2005-06\n\n\n\n\nW.P.(C) Nos. 85/2010 & other connected matters Page 3 of 29\n ii) Mr. Rajan Nanda - petitioner in W.P.(C) No.207/2010 pertaining to\n Assessment Year 1998-99 to 2005-06\n\n iii) AAA Portfolio Pvt. Ltd. - petitioner in W.P.(C) No.251/2010\n pertaining to Assessment Year 1998-99 to 2005-2006\n\n iv) Big Apple Clothing Pvt. Ltd. - petitioner in W.P.(C) No.251/2010\n pertaining to Assessment Year 1998-99 to 2005-06\n\n v) Escorts Ltd. - petitioner in W.P.(C) No.206/2010 pertaining to\n Assessment Year 1998-99 to 2005-06.\n\n vi) Escorts Heart Institute & Research Centre Ltd. (Delhi) - petitioner in\n W.P.(C) No.202/2010 pertaining to Assessment Year 1998-99 to\n 2001-02.\n\n vii) Escorts Heart Institute & Research Centre Chandigarh (Society)\n pertaining to Assessment Year (2001-2002)\n\n viii) Escorts Heart Institute & Research Centre Limited, Chandigarh\n pertaining to Assessment Year 2000-01 to 2005-06.\n\n4. Since the information sought by the respondent is third party\ninformation, the Deputy Commissioner of Income-tax issued separate\nnotices dated 04.02.2009 under Section 11(2) of the Act to the assessees.\nThe assessees submitted their separate objections and objected to the\ninspection and furnishing of the information. PIO considered the objections\nof the assessees and rejected the RTI application of the respondent, by its\ncommon order dated 16.02.2009, on the ground that the respondent has\nfailed to substantiate the public interest involved in disclosing the\n\n\n\n\nW.P.(C) Nos. 85/2010 & other connected matters Page 4 of 29\n information relating to third parties. PIO, however, held that the Tax\nEvasion Petition is under compilation and would be provided in due course.\n\n5. The respondent preferred separate appeals before the First Appellate\nAuthority - Addl. Commissioner of Income-tax (hereafter the 'FAA')\nagainst the order of PIO. By a common order dated 08.05.2009, FAA\nrejected the appeal of the respondent. Aggrieved by the order dated\n08.05.2009 of FAA, the respondent preferred an appeal before the CIC. By\nthe impugned order dated 14.12.2009, the CIC allowed the appeal and\ndirected PIO to provide inspection of the records and also other information\nsought for by the respondent.\n\n6. The learned counsel for the petitioner contended:-\n\n6.1 that the information sought for by the respondent such as income tax\nreturns are personal information and are exempt from disclosure under\nSection 8(1)(j) of the Act. Reliance was placed on decision of Supreme\nCourt in Girish Ramchandra Deshpande v. Central Information Commr.:\n(2013) 1 SCC 212, decision of Full Bench of this Court in Secretary\nGeneral, Supreme Court of India v. Subhash Chandra Agarwal & Anr.:\n166 (2010) DLT 305 and decision of Full Bench of the CIC in G R Rawal\nv. Director General of Income Tax (Investigation): Appeal No.\nCIC/AT/A/2007/00490, decided on 05.03.2008.\n\n6.2 that the disclosure of the income tax returns is prohibited under\nSection 138 of the Income Tax Act, 1961 and can be made only if the\nCommissioner is satisfied that the disclosure is in public interest, which in\nthe present case was rejected by the Commissioner. Reference was made to\n\n\n\nW.P.(C) Nos. 85/2010 & other connected matters Page 5 of 29\nHanuman Pershadganeriwala v. The Director of Inspection, Income Tax,\nNew Delhi: (1974) 10 DLT 96.\n\n6.3 that the disclosure of information is also exempted under Section\n8(1)(e) of the Act as the income tax department is holding the information\nof the assessees in fiduciary capacity.\n\n6.4 that the respondent has failed to disclose the public interest which is\na mandatory requirement under Section 11 of the Act for disclosure of\nconfidential and personal third party information.\n\n6.5 that the disclosure of the information sought for would be violative\nof the right to privacy, which has been read into Article 21 of the\nConstitution of India. Reference was made to paragraph 110 to 112 of the\ndecision of this court in Secretary General, Supreme Court of India v.\nSubhash Chandra Agarwal & Anr.: 166 (2010) DLT 305.\n\n6.6 that the disclosure of income tax returns is expressly forbidden to be\npublished by a tribunal, in the present case and the CIC therefore,\nexempted under Section 8(1)(b) of the Act.\n\n7. The respondent contended:-\n\n7.1 that he is an informer with the income tax department and sought the\ninformation in public interest in order to recover the tax evaded by the\npetitioners, to recover the properties mis-appropriated by the petitioners and\nto curb corruption and therefore, the exemptions provided under Section\n8(1)(e) and (j) of the Act are not applicable.\n\nW.P.(C) Nos. 85/2010 & other connected matters Page 6 of 29\n 7.2 that the bank details and tax details should be given to public, where\nprima facie wrong doing is detected by the government. Reliance was\nplaced on Ram Jethmalani & Ors. v. Union of India: (2011) 8 SCC 1.\n\n7.3 that the activities performed by the income tax department are public\nin nature and the income tax records are public documents. Reliance was\nplaced on Bhagat Singh v. Chief Information Commissioner and Ors.:\n146 (2008) DLT 385.\n\n7.4 that the disclosure of information under Section 3 of the Act is the\nrule and exemption under Section 8 of the Act is the exception.\n\n8. The controversy that needs to be addressed is whether income tax\nreturns and the information provided to the income tax authorities during\nthe course of assessment and proceedings thereafter, are exempt under the\nprovision Section 8(1) of the Act and further whether in the given\ncircumstances of this case, the CIC was correct in holding that such\ninformation was required to be disclosed in public interest.\n\n9. By virtue of Section 3 of the Act all citizens have a right to\ninformation subject to provisions of the Act. The expression \"information\"\nis defined under Section 2(f) of the Act as under:-\n\n \"2(f) \"information\" means any material in any form, including\n records, documents, memos, e-mails, opinions, advices, press\n releases, circulars, orders, logbooks, contracts, reports, papers,\n samples, models, data material held in any electronic form and\n information relating to any private body which can be accessed\n by a public authority under any other law for the time being in\n force;\"\n\nW.P.(C) Nos. 85/2010 & other connected matters Page 7 of 29\n (emphasis provided)\n\n10. It is also relevant to note that by virtue of Section 22 of the Act, the\nprovisions of the Act have an overriding effect over any other inconsistent\nlaw or instrument.\n\n11. The petitioners have contended that the income tax returns and other\ninformation provided by the assessees during the course of assessment\nwould be exempt from disclosure by virtue of section 8(1)(d), Section\n8(1)(e) and 8(1)(j) of the Act. It is thus necessary to examine the\napplicability of each of the above provisions with respect to the information\nsought by the respondent.\n\n12. Section 8(1)(d) of the Act expressly provides an exemption in respect\nof such information. At this stage, it is necessary to refer to Section 8(1)(d)\nof the Act which reads as under:-\n\n \"8. Exemption from disclosure of information.-- (1)\n Notwithstanding anything contained in this Act, there shall be\n no obligation to give any citizen,--\n\n xxxx xxxx xxxx xxxx xxxx\n\n (d) information including commercial confidence, trade secrets\n or intellectual property, the disclosure of which would harm\n the competitive position of a third party, unless the\n competent authority is satisfied that larger public interest\n warrants the disclosure of such information;\n\n13. Certain petitioners had specifically pleaded that information provided\nin the income tax returns could not be disclosed as the information was\nprovided in confidence. The CIC rejected the same by holding that the\nparties had failed to explain as to how that ground could apply or how\n\n\nW.P.(C) Nos. 85/2010 & other connected matters Page 8 of 29\n disclosure of information relating to commercial confidence would harm\ntheir competitive interest.\n\n14. The income tax returns filed by an assessee and further information\nthat is provided during the assessment proceedings may also include\nconfidential information relating to the business or the affairs of an\nassessee. An assessee is expected to truly and fairly disclose particulars\nrelevant for the purposes of assessment of income tax. The nature of the\ndisclosure required is not limited only to information that has been placed\nby an assessee in public domain but would also include information which\nan assessee may consider confidential. As a matter of illustration, one may\nconsider a case of a manufacturer who manufactures and deals in multiple\nproducts for supplies to different agencies. In the normal course, an\nAssessing Officer would require an assessee to disclose profit margins on\nsales of such products. Such information would clearly disclose the pricing\npolicy of the assessee and public disclosure of this information may clearly\njeopardise the bargaining power available to the assessee since the data as\nto costs would be available to all agencies dealing with the assessee. It is,\nthus, essential that information relating to business affairs, which is\nconsidered to be confidential by an assessee must remain so, unless it is\nnecessary in larger public interest to disclose the same. If the nature of\ninformation is such that disclosure of which may have the propensity of\nharming one's competitive interests, it would not be necessary to\nspecifically show as to how disclosure of such information would, in fact,\nharm the competitive interest of a third party. In order to test the\napplicability of Section 8(1)(d) of the Act it is necessary to first and\n\n\n\n\nW.P.(C) Nos. 85/2010 & other connected matters Page 9 of 29\n foremost determine the nature of information and if the nature of\ninformation is confidential information relating to the affairs of a private\nentity that is not obliged to be placed in public domain, then it is necessary\nto consider whether its disclosure can possibly have an adverse effect on\nthird parties.\n\n15. Insofar as the applicability of Section 8(1)(e) of the Act is concerned,\nI am unable to accept the contention that a fiduciary relationship within the\nmeaning of Section 8(1)(e) of the Act can be attributed to a relationship\nbetween an assessee and the income tax authority. The Supreme Court in\nthe case of CBSE v. Aditya Bandopadhyay: (2011) 8 SCC 497 had\nexplained that the words \"information available to a person in its fiduciary\nrelationship\" could not be construed in a wide sense but has to be\nconsidered in the normal and recognized sense. The relevant extract of the\nsaid decision is quoted below:-\n\n \"41. In a philosophical and very wide sense, examining bodies\n can be said to act in a fiduciary capacity, with reference to the\n students who participate in an examination, as a Government\n does while governing its citizens or as the present generation\n does with reference to the future generation while preserving\n the environment. But the words \"information available to a\n person in his fiduciary relationship\" are used in Section 8(1)(e)\n of the RTI Act in its normal and well-recognised sense, that is,\n to refer to persons who act in a fiduciary capacity, with\n reference to a specific beneficiary or beneficiaries who are to be\n expected to be protected or benefited by the actions of the\n fiduciary--a trustee with reference to the beneficiary of the\n trust, a guardian with reference to a minor/physically\n infirm/mentally challenged, a parent with reference to a child, a\n lawyer or a chartered accountant with reference to a client, a\n doctor or nurse with reference to a patient, an agent with\n\n\n\nW.P.(C) Nos. 85/2010 & other connected matters Page 10 of 29\n reference to a principal, a partner with reference to another\n partner, a Director of a company with reference to a\n shareholder, an executor with reference to a legatee, a Receiver\n with reference to the parties to a lis, an employer with reference\n to the confidential information relating to the employee, and an\n employee with reference to business dealings/transaction of the\n employer. We do not find that kind of fiduciary relationship\n between the examining body and the examinee, with reference\n to the evaluated answer books, that come into the custody of the\n examining body.\"\n16. The information provided by an assessee in its income tax return is in\ncompliance of the provisions of the Income Tax Act, 1961 and thus, could\nnot be stated to be information provided in course of a fiduciary\nrelationship.\n\n17. Four of the petitioners (Dr Naresh Trehan, Escorts Heart Institute and\nResearch Center, Delhi, Escorts Heard Institute and Research Center,\nChandigarh and Escorts Heart Institute and Research Center Ltd.) had\nfurther contended that information sought by the respondent was exempt\nunder Section 8(1)(j) of the Act. Section 8(1)(j) of the Act exempts\ninformation which relates to personal information. The said clause is\nquoted below for ready reference:-\n\n \"8. Exemption from disclosure of information.-- (1)\n Notwithstanding anything contained in this Act, there shall be\n no obligation to give any citizen,--\n xxxx xxxx xxxx xxxx xxxx\n\n (j) information which relates to personal information the\n disclosure of which has not relationship to any public\n activity or interest, or which would cause unwarranted\n invasion of the privacy of the individual unless the Central\n\n\n\nW.P.(C) Nos. 85/2010 & other connected matters Page 11 of 29\n Public Information Officer or the State Public Information\n Officer or the appellate authority, as the case may be, is\n satisfied that the larger public interest justifies the\n disclosure of such information:\"\n\n18. The question whether the information provided by an individual in\nhis income tax returns is exempt from disclosure under Section 8(1)(j) of\nthe Act is no longer res integra in view of the decision of the Supreme\nCourt in Girish Ramchandra Deshpande v. Central Information Commr.:\n(2013) 1 SCC 212. The relevant extract of the said judgment is quoted\nbelow:\n\n \"11. The petitioner herein sought for copies of all memos,\n show-cause notices and censure/punishment awarded to the\n third respondent from his employer and also details viz.\n movable and immovable properties and also the details of his\n investments, lending and borrowing from banks and other\n financial institutions. Further, he has also sought for the details\n of gifts stated to have been accepted by the third respondent, his\n family members and friends and relatives at the marriage of his\n son. The information mostly sought for finds a place in the\n income tax returns of the third respondent. The question that\n has come up for consideration is: whether the abovementioned\n information sought for qualifies to be \"personal information\" as\n defined in clause (j) of Section 8(1) of the RTI Act.\n\n 12. We are in agreement with the CIC and the courts below that\n the details called for by the petitioner i.e. copies of all memos\n issued to the third respondent, show-cause notices and orders of\n censure/punishment, etc. are qualified to be personal\n information as defined in clause (j) of Section 8(1) of the RTI\n Act. The performance of an employee/officer in an organization\n is primarily a matter between the employee and the employer\n and normally those aspects are governed by the service rules\n which fall under the expression \"personal information\", the\n disclosure of which has no relationship to any public activity or\n\n\n\nW.P.(C) Nos. 85/2010 & other connected matters Page 12 of 29\n public interest. On the other hand, the disclosure of which\n would cause unwarranted invasion of privacy of that individual.\n Of course, in a given case, if the Central Public Information\n Officer or the State Public Information Officer or the appellate\n authority is satisfied that the larger public interest justifies the\n disclosure of such information, appropriate orders could be\n passed but the petitioner cannot claim those details as a matter\n of right.\n\n 13. The details disclosed by a person in his income tax returns\n are \"personal information\" which stand exempted from\n disclosure under clause (j) of Section 8(1) of the RTI Act,\n unless involves a larger public interest and the Central Public\n Information Officer or the State Public Information Officer or\n the appellate authority is satisfied that the larger public interest\n justifies the disclosure of such information.\n\n 14. The petitioner in the instant case has not made a bona fide\n public interest in seeking information, the disclosure of such\n information would cause unwarranted invasion of privacy of\n the individual under Section 8(1)(j) of the RTI Act.\"\n19. The CIC rejected the aforesaid contention by holding that the\nexpression \"personal information\" would necessarily only apply to an\nindividual and could not be applicable in case of corporate entities.\n\n20. It has been contended by the petitioners that the expression \"personal\ninformation\" must also extend to information relating to corporate entities.\nInasmuch as they may also fall within the definition of expression \"person\"\nunder the General Clauses Act, 1897 as well as under the Income Tax Act,\n1961. However, I am unable to accept this contention for the reason that the\nexpression \"personal information\" as used in clause (j) of Section 8(1) of\nthe Act has to be read in the context of information relating to an\nindividual. A plain reading of the aforesaid clause would indicate that the\n\n\n\nW.P.(C) Nos. 85/2010 & other connected matters Page 13 of 29\n expression \"personal information\" is linked with \"invasion of privacy of the\nindividual\". The use of the word \"the\" before the word \"individual\"\nimmediately links the same with the expression \"personal information\"\n\n21. Black's law dictionary, sixth edition, inter alia, defines the word\n\"personal\" as under:-\n\n \"The word \"personal\" means appertaining to the person;\n belonging to an individual; limited to the person; having the\n nature or partaking of the qualities of human beings, or of\n movable property.\"\n22. A perusal of the above definition also indicates that the ordinary\nusage of the word \"personal\" is in the context of an individual human being\nand not a corporate entity. The U.S. Supreme Court has also interpreted the\nexpression \"personal\" to be used in the context of an individual human\nbeing and not a corporate entity. In the case of Federal Communications\nCommission v. AT&T Inc: 2011 US LEXIS 1899 the US Supreme Court\nconsidered the meaning of the expression \"personal privacy\" in the context\nof the Freedom of Information Act, which required Federal Agencies to\nmake certain records and documents publically available on request. Such\ndisclosure was exempt if the records \"could reasonably be expected to\nconstitute an unwarranted invasion of personal privacy\". The U.S.\nSupreme Court held that the expression \"Personal\" used in the aforesaid\ncontext could not be extended to corporations because the word \"personal\"\nordinarily refers to individuals. The Court held that the expression\n\"personal\" must be given its ordinary meaning. The relevant extract of the\nsaid judgment is as under:\n\nW.P.(C) Nos. 85/2010 & other connected matters Page 14 of 29\n \"\"Person\" is a defined term in the statute; \"personal\" is\n not. When a statute does not define a term, we typically \"give\n the phrase its ordinary meaning.\" Johnson v. United States, 559\n U.S. ___, ___, 559 U.S. 133, 130 S. Ct. 1265, 176 L. Ed. 2d 1,\n 8 (2010). \"Personal\" ordinarily refers to individuals. We do not\n usually speak of personal characteristics, personal effects,\n personal correspondence, personal influence, or personal\n tragedy as referring to corporations or other artificial entities.\n This is not to say that corporations do not have correspondence,\n influence, or tragedies of their own, only that we do not use the\n word \"personal\" to describe them.\n Certainly, if the chief executive officer of a corporation\n approached the chief financial officer and said, \"I have\n something personal to tell you,\" we would not assume the CEO\n was about to discuss company business. Responding to a\n request for information, an individual might say, \"that's\n personal.\" A company spokesman, when asked for\n information about the company, would not. In fact, we often\n use the word \"personal\" to mean precisely the opposite of\n business-related: We speak of personal expenses and business\n expenses, personal life and work life, personal opinion and a\n company's view.\n\n Dictionaries also suggest that \"personal\" does not ordinarily\n relate to artificial \"persons\" such as corporations. See, e.g., 7\n OED 726 (1933) (\"[1] [o]f, pertaining to . . . the individual\n person or self,\" \"individual; private; one's own,\" \"[3] [o]f or\n pertaining to one's person, body, or figure,\" \"[5] [o]f, pertaining\n to, or characteristic of a person or self-conscious being, as\n opposed to a thing or abstraction\"); 11 OED at 599-600 (2d ed.\n 1989) (same); Webster's Third New International Dictionary\n 1686 (1976) (\"[3] relating to the person or body\"; \"[4] relating\n to an individual, his character, conduct, motives, or private\n affairs\"; \"[5] relating to or characteristic of human beings as\n distinct from things\"); ibid. (2002) (same).\"\n\nW.P.(C) Nos. 85/2010 & other connected matters Page 15 of 29\n 23. In my view, the aforesaid reasoning would also be applicable to the\nexpression \"personal\" used in Section 8(1)(j) of the Act. The expression\n'individual' must be construed in an expansive sense and would include a\nbody of individuals. The said exemption would be available even to\nunincorporated entities as also private, closely held undertaking which are\nin substance alter egos of their shareholders. However, the expression\nindividual cannot be used as a synonym for the expression 'person'. Under\nthe General Clauses Act, 1897 a person is defined to \"include any company\nor association or body of individuals, whether incorporated or not\". Thus,\nwhereas a person would include an individual as well as incorporated\nentities and artificial persons, the expression 'individual' cannot be\ninterpreted to include such entities. The context in which, the expression\n\"personal information\" is used would also exclude it application to large\nwidely held corporations. While, confidential information of a corporation\nis exempt from disclosure under Section 8(1)(d) of the Act, there is no\nscope to exclude other information relating to such corporations under\nSection 8(1)(j) of the Act as the concept of a personal information cannot in\nordinary language be understood to mean information pertaining to a public\ncorporation.\n\n24. It would also be relevant to refer to the decision of a Division Bench\nof this Court in the case of Ashok Kumar Goel v. Public Information\nOfficer Vat Ward No. 64 & Anr.: (2012) 188 DLT 597 whereby it was\nheld that information of the returns made to the Sales Tax Commissioner in\nrelation to a firm was exempt under Section 8(1) of the Act. The relevant\nportion of the said judgment is quoted as under:-\n\nW.P.(C) Nos. 85/2010 & other connected matters Page 16 of 29\n \"7. It is not in dispute that the information in the form of returns\n filed by the respondent No. 2's firm is in the nature of\n commercial confidence which is clearly inferable from Section\n 98 of the Act. Such information can be given only if larger\n public interest warrants the disclosure of this information. All\n the authorities below including the learned Single Judge has\n held and rightly so that no public interest is at all involved in\n seeking of this information by the appellant from the\n Sales Tax Commissioner. What to talk of public interest, the\n finding is that the information is sought with oblique motive to\n settle personal scores.\"\n25. Indisputably, Section 8(1)(j) of the Act would be applicable to the\ninformation pertaining to Dr Naresh Trehan (petitioner in W.P.(C) 88/2010)\nand the information contained in the income tax returns would be personal\ninformation under Section 8(1)(j) of the Act. However, the CIC directed\ndisclosure of information of Dr Trehan also by concluding that income tax\nreturns and information provided for assessment was in relation to a \"public\nactivity.\" In my view, this is wholly erroneous and unmerited. The act of\nfiling returns with the department cannot be construed as public activity.\nThe expression \"public activity\" would mean activities of a public nature\nand not necessarily act done in compliance of a statute. The expression\n\"public activity\" would denote activity done for the public and/or in some\nmanner available for participation by public or some section of public.\nThere is no public activity involved in filing a return or an individual\npursuing his assessment with the income tax authorities. In this view, the\ninformation relating to individual assesse could not be disclosed. Unless,\nthe CIC held that the same was justified \"in the larger public interest\"\n\nW.P.(C) Nos. 85/2010 & other connected matters Page 17 of 29\n 26. At this stage, it may be appropriate to consider the nature of\ninformation that is provided by an assesse to its Assessing Officer. In case\nof Income from business and profession, the income tax returns mainly\ndisclose the final accounts (i.e. profit and loss account and balance sheets)\nThis information is otherwise also liable to be disclosed by companies and\nis available in public domain since it is necessary for a company to file its\nannual accounts with the Registrar of Companies. Other incorporated\nentities are similarly required to also publically disclose their final\naccounts. However, an Assessing Officer may call for further information\nwhile determining the assessable income, which may include all books and\npapers maintained by an entity. Such information may also have\ninformation relating to other parties, the disclosure of which may be exempt\nunder Section 8(1) of the Act. As a matter of illustration, the books of\naccounts would record transactions of commercial nature which may enjoin\nthe parties to the transactions to keep the information confidential. Further,\nthe books of accounts would also record salaries and other payments to\nother individuals. Disclosure of such information would affect not just the\nassessee but also other parties. In the circumstances, it would be necessary\nto examine the details of information that are sought from the public\nauthority. In the present case, the respondent seems to have sought for an\nomnibus disclosure of all records and returns. In my view, the same could\nnot be allowed without examining the nature of information contained\ntherein.\n\n27. The Supreme Court in the case of Thalappalam Ser. Coop. Bank Ltd.\nand others v. State of Kerala and others: Civil Appeal No. 9017 of 2013,\n\n\n\nW.P.(C) Nos. 85/2010 & other connected matters Page 18 of 29\n decided on 07.10.2013. considered the question whether a society\nregistered would fall within the definition of a public authority under\nSection 2(h) of the Act. The Court also clearly stated that the information\nsupplied by a society to the Registrar of Societies could be disclosed except\nfor the information that was exempt under Section 8(1) of the Act and that\nincluded accounts maintained by members of society. The relevant passage\nfrom the said judgment is quoted below:-\n\n \"52. Registrar of Cooperative Societies functioning under the\n Cooperative Societies Act is a public authority within the\n meaning of Section 2(h) of the Act. As a public authority,\n Registrar of Co-operative Societies has been conferred with lot\n of statutory powers under the respective Act under which he is\n functioning. He is also duty bound to comply with the\n obligations under the RTI Act and furnish information to a\n citizen under the RTI Act. Information which he is expected to\n provide is the information enumerated in Section 2(f) of the\n RTI Act subject to the limitations provided under Section 8 of\n the Act. Registrar can also, to the extent law permits, gather\n information from a Society, on which he has supervisory or\n administrative control under the Cooperative Societies Act.\n Consequently, apart from the information as is available to him,\n under Section 2(f), he can also gather those information from\n the Society, to the extent permitted by law. Registrar is also not\n obliged to disclose those information if those information fall\n under Section 8(1)(j) of the Act. No provision has been brought\n to our knowledge indicating that, under the Cooperative\n Societies Act, a Registrar can call for the details of the bank\n accounts maintained by the citizens or members in a\n cooperative bank . Only those information which a Registrar of\n Cooperative Societies can have access under the Cooperative\n Societies Act from a Society could be said to be the information\n which is \"held\" or \"under the control of public authority\". Even\n those information, Registrar, as already indicated, is not legally\n obliged to provide if those information falls under the exempted\n\n\n\nW.P.(C) Nos. 85/2010 & other connected matters Page 19 of 29\n category mentioned in Section 8(j) of the Act. Apart from the\n Registrar of Co-operative Societies, there may be other public\n authorities who can access information from a Co-operative\n Bank of a private account maintained by a member of Society\n under law, in the event of which, in a given situation, the\n society will have to part with that information. But the demand\n should have statutory backing.\n\n 53. Consequently, an information which has been sought for\n relates to personal information, the disclosure of which has no\n relationship to any public activity or interest or which would\n cause unwarranted invasion of the privacy of the individual, the\n Registrar of Cooperative Societies, even if he has got that\n information, is not bound to furnish the same to an applicant,\n unless he is satisfied that the larger public interest justifies the\n disclosure of such information, that too, for reasons to be\n recorded in writing.\"\n\n28. It is apparent that information submitted by an assessee in the course\nof assessment, may also include information relating to other persons. The\nexclusions available under Section 8(1) of the Act, would also be available\nin respect of that information.\n\n29. Section 137 of the Income Tax Act, 1961 provided that the\ninformation furnished by an assessee was confidential and was not liable to\nbe disclosed. Section 137 of the Income Tax Act, 1961 was deleted by the\nFinance Act, 1964 and simultaneously, Section 138 the Income Tax Act,\n1961 was substituted. Section 138 of the Income Tax Act, 1961 is quoted\nbelow:-\n\n \"138. Disclosure of information respecting assessees.- (1)(a)\n The Board or any other income-tax authority specified by it by\n a general or special order in this behalf may furnish or cause to\n be furnished to-\n\nW.P.(C) Nos. 85/2010 & other connected matters Page 20 of 29\n (i) any officer, authority or body performing any functions\n under any law relating to the imposition of any tax, duty\n or cess, or to dealings in foreign exchange as defined in\n clause (n) of section 2 of the Foreign Exchange\n Management Act, 1999 (42 of 1999); or\n\n (ii) such officer, authority or body performing functions\n under any other law as the Central Government may, if in\n its opinion it is necessary so to do in the public interest,\n specify by notification in the Official Gazette in this\n behalf,\n\n any such information received or obtained by any income-\n tax authority in the performance of his functions under this\n Act, as may, in the opinion of the Board or other income-tax\n authority, be necessary for the purpose of enabling the\n officer, authority or body to perform his or its functions\n under that law.\n\n (b) Where a person makes an application to the Chief\n Commissioner or Commissioner in the prescribed form for any\n information relating to any assessee received or obtained by any\n income-tax authority in the performance of his functions under\n this Act, the Chief Commissioner or Commissioner may, if he\n is satisfied that it is in the public interest so to do, furnish or\n cause to be furnished the information asked for and his decision\n in this behalf shall be final and shall not be called in question in\n any court of law.\n\n (2) Notwithstanding anything contained in sub-section (1) or\n any other law for the time being in force, the Central\n Government may, having regard to the practices and usages\n customary or any other relevant factors, by order notified in\n the Official Gazette, direct that no information or document\n shall be furnished or produced by a public servant in respect of\n such matters relating to such class of assessees or except to\n such authorities as may be specified in the order.\"\n\nW.P.(C) Nos. 85/2010 & other connected matters Page 21 of 29\n 30. In the case of Hanuman Pershad (supra), this Court considered the\nquestion whether there was any bar on the Income Tax Department from\ndisclosing records produced during the assessment proceedings. The said\ncontroversy was answered by the following words:-\n\n \"It is undoubtedly open to the authorities to disclose\n information received by them from assessments or other\n proceedings under the Act. However, there are restrictions\n contained in Section 138 as now existing concerning the\n manner in which that information is to be disclosed. Leaving\n aside sub-clause (a) of sub-section (1) it seems that under sub-\n clause (b), the Commissioner can disclose information if he is\n satisfied that it is within the public interest to do so. Hence, if\n some other authority applies to the Commissioner to obtain\n information, the same may be disclosed in the discretion of the\n Commissioner. Under Sub-clause (a) there is also a power to\n furnish information to other authorities. As this matter has not\n been fully argued or discussed in the present case, it is\n sufficient to note that there is no power to disclose information\n to other authorities and officers outside the provisions of the\n Section. As far as the information already given is concerned,\n we have no power to give any direction concerning the same.\"\n\n31. Although by virtue of Section 22 of the Act, the provisions of the Act\nhave an overriding effect over any other inconsistent law, the said\nprovisions of the Act insofar as they are not inconsistent with other statutes\nmust be read harmoniously. Undoubtedly, the income tax returns and\ninformation provided to Income Tax Authorities by assessees is\nconfidential and not required to be placed in public domain. Given the\nnature of the income tax returns and the information necessary to support\nthe same, it would be exempt under Section 8(1)(j) of the Act in respect of\nindividual and unincorporated assessees. The information as disclosed in\n\n\n\n\nW.P.(C) Nos. 85/2010 & other connected matters Page 22 of 29\n the income tax returns would qualify as personal information with regard to\nseveral private companies which are, essentially, alter egos of their\npromoters. However, in cases of widely held companies most information\nrelating to their income and expenditure would be in public domain and the\nconfidential information would be exempt from disclosure under Section\n8(1)(d) of the Act. Further, even in cases of corporate entities, the income\ntax returns and other disclosure made to authorities would also include\ntransactions with other parties and those parties can also claim the\nexception under Section 8(1) of the Act. One has to also bear in mind that\nan authority may not have any obligation to provide any information other\nthan in the form in which it is available and the information provided by an\nassessee may not have been edited to remove references to other persons.\nKeeping all the aforesaid considerations in view, the parliament has enacted\nSection 138 of the Income Tax Act, 1961 to provide for disclosure only\nwhere it is necessary in public interest. Similar provisions are enacted\nunder the Act and clauses (d), (e) and (j) of Section 8(1) of the Act that\nspecify that information exempt from disclosure under those clauses, could\nbe disclosed in larger public interest. Section 8(2) of the Act also provides\nfor a non obstante clause which permits disclosure of information in larger\npublic interest.\n\n32. It would also be necessary to refer to Section 11 of the Act, which\nprovides for a notice to a third party before any third party information is\ndisclosed. The proviso to Section 11 of the Act also specifies that\ndisclosure of trade or commercial secrets, which are protected by law\n\n\n\n\nW.P.(C) Nos. 85/2010 & other connected matters Page 23 of 29\n would not be allowed unless their disclosure is necessary in public interest.\nSection 11(1) of the Act reads as under:-\n\n \"11. Third party information.--(1) Where a Central Public\n Information Officer or the State Public Information Officer, as\n the case may be, intends to disclose any information or record,\n or part thereof on a request made under this Act, which relates\n to or has been supplied by a third party and has been treated as\n confidential by that third party, the Central Public Information\n Officer or State Public Information Officer, as the case may be,\n shall, within five days from the receipt of the request, give a\n written notice to such third party of the request and of the fact\n that the Central Public Information Officer or State Public\n Information Officer, as the case may be, intends to disclose the\n information or record, or part thereof, and invite the third party\n to make a submission in writing or orally, regarding whether\n the information should be disclosed, and such submission of the\n third party shall be kept in view while taking a decision about\n disclosure of information:\n Provided that except in the case of trade or commercial secrets\n protected by law, disclosure may be allowed if the public\n interest in disclosure outweighs in importance any possible\n harm or injury to the interests of such third party.\"\n\n33. In the above context where the nature of income tax returns and other\ninformation provided for assessment of income is confidential and its\ndisclosure is protected under the Income Tax Act, 1961 it is not necessary\nto read any inconsistency between the Act and Income Tax Act, 1961. And,\ninformation furnished by an assesse can be disclosed only where it is\nnecessary to do in public interest and where such interest outweighs in\nimportance, any possible harm or injury to the assesse or any other third\nparty. However, information furnished by corporate assessees that neither\n\n\n\n\nW.P.(C) Nos. 85/2010 & other connected matters Page 24 of 29\n relates to another party nor is exempt under Section 8(1)(d) of the Act, can\nbe disclosed.\n\n34. In view of the aforesaid, the principal question that is to be addressed\nis whether the CIC has misdirected itself in concluding that disclosure of\nincome tax returns and other information relating to assessment of income\nof the petitioners was in public interest.\n\n35. In order to address this controversy, it is important to understand the\npurpose of the respondent in seeking such information. The proceedings\nunder the Income Tax Act, 1961 with respect to assessment of income are\nat different stages. It is stated that in some cases, assessment is complete\nand appeal proceedings are pending in other fora. In one case, it is\ncontended that the Appellate Authorities have remanded the matter of\nassessment to the Assessing Officer. It is apparent that the assessment\nproceedings have thrown up contentious issues which are being agitated\nbetween the income tax authorities and the assessees. The respondent,\nessentially, wants to intervene in those proceedings by adding and\nproviding his contentions or interpretation as to the information provided\nby the asseesees or otherwise available with the Income Tax Authorities.\n\n36. In my view, the CIC has misdirected itself in concluding that this\nwas in larger public interest. The CIC arrived at this conclusion by noting\nthat disclosure of information was in larger public interest in increasing\npublic revenue and reducing corruption. The assessment proceedings are\nnot public proceedings where all and sundry are allowed to participate and\nadd their opinion to the proceedings. Merely because a spirited citizen\n\n\n\n\nW.P.(C) Nos. 85/2010 & other connected matters Page 25 of 29\n wishes to assist in assessment proceedings, the same cannot be stated to be\nin larger public interest. On the contrary, larger public interest would\nrequire that assessment proceedings are completed expeditiously and by the\nauthorities who are statutorily empowered to do so.\n\n37. In the present case, there was no material to indicate that there was\nany corruption on the part of the income tax authorities which led to a\njustifiable apprehension that the said authorities were not performing their\nfunction diligently. In any event, the CIC has not found that the\nproceedings relating to assessment were not being conducted in accordance\nwith law and/or required the intervention of the respondent. Assessment\nproceedings are quasi-judicial proceedings where assessee has to produce\nmaterial to substantiate their return of income. Income tax has to be\nassessed by the income tax authorities strictly in accordance with the\nIncome Tax Act, 1961 and based on the information sought by them. In the\npresent case, the respondent wants to process the information to assist and\nsupport the role of an Assessing Officer. This has a propensity of\ninterfering in the assessment proceedings and thus, cannot be considered to\nbe in larger public interest. The CIC had proceeded on the basis that the\nincome tax authorities should disclose information to informers of income\ntax departments to enable them to bring instances of tax evasion to the\nnotice of income tax authorities. In my view, this reasoning is flawed as it\nwould tend to subvert the assessment process rather than aid it. If this idea\nis carried to its logical end, it would enable several busy bodies to interfere\nin assessment proceedings and throw up their interpretation of law and facts\nas to how an assessment ought to be carried out. The propensity of this to\n\n\n\n\nW.P.(C) Nos. 85/2010 & other connected matters Page 26 of 29\n multiply litigation cannot be underestimated. Further, the proposition that\nunrelated parties could intervene in assessment proceedings is wholly alien\nto the Income Tax Act, 1961. The income tax returns and information are\nprovided in aid of the proceedings that are conducted under that Act and\nthere is no scope for enhancing or providing for an additional dimension to\nthe assessment proceedings.\n\n38. The Supreme Court in Bihar Public Service Commission v. Saiyed\nHussain Abbas Rizwi: (2012) 13 SCC 61 held that the statutory exemption\nprovided under Section 8 of the Act is the rule and only in exceptional\ncircumstances of larger public interest the information would be disclosed.\nIt was also held that 'public purpose' needs to be interpreted in the strict\nsense and public interest has to be construed keeping in mind the balance\nbetween right to privacy and right to information. The relevant extract from\nthe said judgment is quoted below:\n\n \"21. ...... Another very significant provision of the Act is\n Section 8(1)(j). In terms of this provision, information which\n relates to personal information, the disclosure of which has no\n relationship to any public activity or interest or which would\n cause unwarranted invasion of the privacy of the individual\n would fall within the exempted category, unless the authority\n concerned is satisfied that larger public interest justifies the\n disclosure of such information. It is, therefore, to be understood\n clearly that it is a statutory exemption which must operate as a\n rule and only in exceptional cases would disclosure be\n permitted, that too, for reasons to be recorded demonstrating\n satisfaction to the test of larger public interest. It will not be in\n consonance with the spirit of these provisions, if in a\n mechanical manner, directions are passed by the appropriate\n authority to disclose information which may be protected in\n terms of the above provisions. All information which has come\n\n\n\nW.P.(C) Nos. 85/2010 & other connected matters Page 27 of 29\n to the notice of or on record of a person holding fiduciary\n relationship with another and but for such capacity, such\n information would not have been provided to that authority,\n would normally need to be protected and would not be open to\n disclosure keeping the higher standards of integrity and\n confidentiality of such relationship. Such exemption would be\n available to such authority or department.\n\n 22. The expression \"public interest\" has to be understood in its\n true connotation so as to give complete meaning to the relevant\n provisions of the Act. The expression \"public interest\" must be\n viewed in its strict sense with all its exceptions so as to justify\n denial of a statutory exemption in terms of the Act. In its\n common parlance, the expression \"public interest\", like \"public\n purpose\", is not capable of any precise definition. It does not\n have a rigid meaning, is elastic and takes its colour from the\n statute in which it occurs, the concept varying with time and\n state of society and its needs (State of Bihar v. Kameshwar\n Singh [AIR 1952 SC 252] ). It also means the general welfare\n of the public that warrants recognition and protection;\n something in which the public as a whole has a stake [Black's\n Law Dictionary (8th Edn.)].\n 23. The satisfaction has to be arrived at by the authorities\n objectively and the consequences of such disclosure have to be\n weighed with regard to the circumstances of a given case. The\n decision has to be based on objective satisfaction recorded for\n ensuring that larger public interest outweighs unwarranted\n invasion of privacy or other factors stated in the provision.\n Certain matters, particularly in relation to appointment, are\n required to be dealt with great confidentiality. The information\n may come to knowledge of the authority as a result of\n disclosure by others who give that information in confidence\n and with complete faith, integrity and fidelity. Secrecy of such\n information shall be maintained, thus, bringing it within the\n ambit of fiduciary capacity. Similarly, there may be cases\n where the disclosure has no relationship to any public activity\n or interest or it may even cause unwarranted invasion of privacy\n of the individual. All these protections have to be given their\n\n\n\nW.P.(C) Nos. 85/2010 & other connected matters Page 28 of 29\n due implementation as they spring from statutory exemptions. It\n is not a decision simpliciter between private interest and public\n interest. It is a matter where a constitutional protection is\n available to a person with regard to the right to privacy. Thus,\n the public interest has to be construed while keeping in mind\n the balance factor between right to privacy and right to\n information with the purpose sought to be achieved and the\n purpose that would be served in the larger public interest,\n particularly when both these rights emerge from the\n constitutional values under the Constitution of India.\"\n\n39. Applying the aforesaid judgment to the facts of this case, it is\napparent that disclosure of information as directed has no discernable\nelement of larger public interest.\n\n40. Accordingly, the petitions are allowed and the impugned order is set\naside. The parties are left to bear their own costs.\n\n VIBHU BAKHRU, J\nNOVEMBER 24, 2014\nRK\n\n\n\n\nW.P.(C) Nos. 85/2010 & other connected matters Page 29 of 29" }, { "title": "Shri Sunil Siddharthbhai Etc vs Commissioner Of Income Tax, Ahmedabad ... on 27 September, 1985", "url": "https://indiankanoon.org//doc/1041876/", "text": "Shri Sunil Siddharthbhai Etc vs Commissioner Of Income Tax, Ahmedabad ... on 27 September, 1985\nEquivalent citations: 1986 AIR 368, 1985 SCR SUPL. (3) 102, AIR 1986 SUPREME COURT 368, 1985 (4) SCC 519, 1985 TAX. L. R. 1393, (1985) 49 CURTAXREP 172, 1985 SCC(TAX) 50, (1985) 156 ITR 509, (1986) 1 SUPREME 414, 1986 UPTC 243, (1985) 79 TAXATION 187, (1985) 23 TAXMAN 14\nAuthor: R.S. Pathak\nBench: R.S. Pathak, P.N. Bhagwati, Amarendra Nath Sen\n PETITIONER:\nSHRI SUNIL SIDDHARTHBHAI ETC.\n\n\tVs.\n\nRESPONDENT:\nCOMMISSIONER OF INCOME TAX, AHMEDABAD ETC.\n\nDATE OF JUDGMENT27/09/1985\n\nBENCH:\nPATHAK, R.S.\nBENCH:\nPATHAK, R.S.\nBHAGWATI, P.N. (CJ)\nSEN, AMARENDRA NATH (J)\n\nCITATION:\n 1986 AIR 368\t\t 1985 SCR Supl. (3) 102\n 1985 SCC (4) 519\t 1985 SCALE (2)755\n\n\nACT:\n Transfer of a capital asset - When the assessee brings\nthe shares of the limited companies into the\t partnership\nfirm as his contribution to its capital, whether there was a\ntransfer within\t the definition of section 2 (47) of capital\nasset within the terms of section 45 of the Income Tax Act,\n1961.\n Capital gains, scheme of\t- Sections 45 and 48 of the\nIncome Tax, 1961, scope of - When the assessee transferred\nhis shares to the partnership firm, whether he can be said\nto have\t received a consideration within the\t meaning of\nsection 48 of the Income Tax Act, 1961 and that a profit of\ngain accrued to him for the purpose of section 45 ibid.\n\n\n\nHEADNOTE:\n In Civil Appeal\t No. 1841 of 1981, the appellant-\nassessee was a partner\t in Messrs Suvas Trading Company, a\npartnership firm constituted under a deed of\t partnership\ndated September 27, 1973. As his contribution to the capital\nof the\tpartnership firm, the assessee\t made over certain\nshares of limited companies which were held by him as his\ncapital assets.\t The book value of the said shares in his\naccount books was shown as Rs. 1,60,279 but on the date when\nhe contributed\tthose shares to the partnership firm he\nrevalued the shares at the market value of Rs. 1,49,819, and\ndebited the resulting\tdifference of\tRs. 10,460 to\t his\ncapital account. Since the Income Tax Officer, when drawing\nup the\tassessment order for the assessment year 1974-75 in\nrespect of the assessee did not include the difference in\nthe assessable income, the Commissioner of Income Tax, being\nof the\topinion that the difference between the market value\nof the\tshares and the cost of acquisition of the shares to\nthe assessee is liable to tax as capital gains under section\n45 of the Income Tax Act, 1961 exercised his revisional\njurisdiction and reopening the assessment, remanded the case\nto the\tIncome Tax Officer directing\thim to\t revise\t the\nassessment after computing the capital gains arising out of\nthe transfer. The assessee appealed\tto the\t Income\t Tax\nAppellate Tribunal, which held\t that while the transaction\ndid amount to a transfer within the meaning of sub-section\n(47) of\n103\nsection 2 of the Income Tax Act, 1961, it did not result in\ncapital gains liable to tax.\tSubsequently the Appellate\nTribunal referred the case to the High Court of Gujarat for\nits opinion on the said two issues.\n In Civil Appeal\t No. 1777/1981,\t the appellant was a\npartner\t in a\tregistered partnership\t firm,\tM/s. Rajka,\nconstituted under an agreement\t dated February\t 24, 1973 of\nwhich the other partner was his wife. The assessee had in\nhis possession\t 580 ordinary\t shares of the Ahmedabad\nManufacturing and Calico Printing Co. Ltd. and 82 ordinary\nshares of Karamchand Premchand Private Ltd., the total cost\nof purchase being Rs.\t1,81,106. On March 22, 1973,\t the\nassessee introduced the two\t share\t holdings in\t the\npartnership firm as his capital contribution\tant the firm\ncredited his account with the market\tvalue of the shares,\nnamely Rs. 475,136. In\t the assessment\t proceedings for the\nassessment year\t 1973-74, the Income Tax Officer took\t the\nview that the contribution by the assessee of the shares to\nthe assets of the partnership constituted a transfer within\nthe meaning of sub-section (47) of D section 2 of the Income\nTax Act, 1961 and that the assessee was liable to income tax\non a capital gain of Rs. 2,94,030, being the difference\nbetween the market price at which the shares were entered in\nthe books of the partnership firm and the cost of the shares\nto the\tassessee. The appeal before the Appellate Assistant\nCommissioner failed, but in second appeal, the Appellate\nTribunal took the view\t that there was no transfer of a\ncapital asset within the meaning of section 45 read with\nsub-section (47) of section 2 of the Income\tTax Act\t and\nconsequently deleted the item\tfrom the assessment. In the\ncircumstances the Tribunal did\t not go\t into the question\nwhether the transfer was without consideration. At\t the\ninstance of the Commissioner of Income Tax a reference was\nmade to\t the High Court on the correctness of the Tribunal's\nviews. By a common judgment dated April 30/May 1 and 4, 1981\nthe High Court answered the questions referred in favour of\nthe Revenue ant against the assessee. Hence the appeals by\nspecial leave of the Court,\n Allowing the appeals in part, the Court\n^\n HELD: 1.1 When the assessee brought the shares of the\nlimited\t companies into the\t partnership firm as\t his\ncontribution to its capital, there was a transfer within the\nmeaning of sub-section (47) of section 2 of the Income Tax\nAct, 1961, of a capital asset within the terms of section 45\nof the Act.\n104\n 1.2 It is well settled that a partnership firm is not a\nseparate legal\tentity ant that the assets owned by\t the\npartner ship are collectively owned by the partners and that\nwhen a\t partner hands over\t a business asset to\t the\npartnership firm as his contribution to its\tcapital, he\ncannot be said to have effected a sale. [113 A-B; G-H]\n Malabar\tFisheries Co. v. Commissioner of Income Tax,\nKerala, (1979)\t120 ITR 49; Commissioner of Income Tax, West\nBengal v. Hind Construction Ltd. (1972) 83 ITR 211\t(SC)\nreferred to.\n Commissioner of Income Tax, Madras v. Janab N. Hyath\nBatcha Sahiv, (1969) 72 ITR 528 (Madras); Commissioner of\nIncome Tax (Madras) -\tI v. Abdul Khader Motor and Lorry\nService (1978)\t112 ITR\t 360 (Madras);\tDr. M.C. Kackkar v.\nCommissioner of Income Tax, Kanpur and Ors. (1973) 92 ITR 87\n(Allahabad); Commissioner of Income Tax, Kerala v.\tC.M.\nKhunhameed (1974) 94 ITR 179 (Kerala) approved.\n 1.3 But while the transaction may not amount to a sale,\nit can\tbe described as a transfer of some other kind. m e\ndefinition of the expression transfer in sub-section (47) of\nsection 2 of the Income Tax Act, 1961 is inclusive merely\nand does not exhaust other kinds of transfer. [114 A-B]\n 1.4 In its general sense, the expression transfer of\nproperty\" connotes the passing\t of rights in the property\nfrom one person to another. In one case there may be a\npassing of the entire\tbundle of rights from the transferor\nto the transferee. In another case, the transfer may consist\nof one of the estates only out of all the estates comprising\nthe totality of rights\t in the\t property. In a third case,\nthere may be a\t reduction of the exclusive interest in the\ntotality of rights of\tthe original owner into a joint or\nshared interest with other persons. An exclusive interest in\nproperty is a larger interest than a share in that property.\nTo the\textent to which the exclusive interest is reduced to\na shared interest it would seem that there is a transfer of\ninterest. Therefore when a partner brings in his personal\nasset into the capital\t of the partnership firm as\t his\ncontribution to\t its capital he reduces his exclusive rights\nin the\tasset to shared rights in it with the other partners\nof the\tfirm. While he does not lose his rights in the asset\naltogether what\t he enjoys now is an abridged\t right which\ncannot be identified with the fulness of the right which he\nenjoyed in the asset\n105\nbefore it entered the\tpartnership capital. When a partner\nbrings\tin his personal asset into a partnership firm as his\ncontribution to\t its capital, an asset which originally was\nsubject to the entire\townership of the partner becomes w\nsubject to the rights of other partners in it. It is not an\ninterest which\tcan be\t evaluated immediately. It is an\ninterest which\t is subject to the operation of future\ntransactions of\t the partnership, and it may\tdiminish in\nvalue depending\t on accumulating liabilities and losses with\na fall\tin the\tprosperity of\tthe partnership firm.\t The\nevaluation of a partner's interest takes place only\twhen\nthere is a dissolution\t of the\t firm or upon his retirement\nfrom it. Upon the dissolution of the\t firm or upon\t the\npartner retiring from the firm, the\tpartner's right to\nrealise the interest and receive its value arises. What is\nrealized is the interest which the partner enjoys in the\nassets during the subsistence\tof the\tpartnership firm by\nvirtue of his status as a partner and in accordance with the\nterms of the partnership agreement. It is because\tthat\ninterest exists already before dissolution that\t the\ndistribution of the assets on dissolution does not amount to\na transfer to the erstwhile partners. What the partner gets\nupon dissolution or upon retirement is the realisation of a\npre-existing right or interest. It is nothing strange in the\nlaw that a right or interest should exist in praesenti but\nits realisation\t or exercise should be postponed. Therefore,\nwhat was the exclusive interest of a partner in his personal\nasset is, upon its introduction into the partnership firm as\nhis share in the partnership capital\ttransformed into a\nshared interest\t with the other partners in that asset. Qua\nthat asset, there is a shared interest.\t During\t the\nsubsistence of\tthe partnership the value of the interest of\neach partner qua that asset cannot be isolated or carved out\nfrom the value of the partner's interest in the totality of\nthe partnership\t assets. And in regard\t to the\t latter, the\nvalue will be represented by his share in the net assets on\nthe dissolution of the firm or\tupon the partner's\nretirement. But\t the position is different when a partner\nretires or the partnership is dissolved. What the partner\nreceives then is his share in\t the partnership. What is\ncontemplated here is a\t share of the partner\tqua the\t net\nassets of the partnership firm. On evaluation, that share in\na particular case may be realised by the receipt of only one\nof all\tthe assets. What happens here\t is that a shared\ninterest in all the assets of\t the firm is replaced by an\nexclusive interest in an asset of equal value. That is why\nit has\tbeen held that there is no transfer.\t It is\t the\nrealisation of\t a pre-existing right. The\tposition is\ndifferent, when a partner brings his personal asset into the\npartnership firm as\n106\nhis contribution to its capital. An individual asset is the\nsole subject of consideration.\t An exclusive interest in it\nbefore it enters the partnership is reduced on such entry\ninto a shared interest. [114 D-G; 116 A-F; 117 B-D]\n Addanki Narayanappa & Anr. v. Bhaskara Krishtappa and\n13 Ors. [1966] 3 SCR 400;\t Malabar Fisheries Co. v.\nCommissioner of\t Income Tax, Kerala (1979) 120 ITR 49 (SC)\nreferred to.\n Commissioner of Income-Tax, Madras-I v. Abdul Khader\nMotor and Lorry Service (1978) 112 ITR 360 (Madras); and\nCommissioner of\t Income Tax, Tamil Nadu IV, Madras v. H.\nKannan (1984) 149 ITR 545 (Madras) partly overruled.\n Commissioner of Income Tax, Madhya Pradesh, Nagpur and\nBhandara v. Dewas Cine\t Corporation (1968) 68 ITR 240 (SC);\nCommissioner of\t Income Tax, Kerala v. Nataraj Motor Service\n(1972) ITR 109 (Kerala) Commissioner of Income Tax, Gujarat\nv. Mohanbhai\tPamabhai (1973) 91 ITR 393 (Gujarat)\ndistinguished.\n A. Abdul Rahim,\t Travancore Confectionery Works v.\nCommissioner of\t Income\t Tax, Kerala (1977) 110 ITR\t 595\n(Kerala); Addl. Commissioner of Income Tax, Mysore v. M.A.J.\nVasanaik (1979) 116 ITR 110 (Kerala) approved.\n Firm Ram Sahay\t Mall Rameshwar Dayal\t & Ors. v.\nBishwanath Prasad, AIR 1963 Patna 221; Sudhansu Kanta v.\nManindra Nath, AIR 1965 Patna 144 explained.\n 2.1 When the Assessee transferred his shares to the\npartnership firm he received no consideration\t within\t the\nmeaning of section 48\tof the\tIncome Tax Act, 1961 nor did\nany profit or gain accrue to him for the purpose of section\n45 of the Income Tax Act, 1961- [118 A-B]\n 2.2 The consideration for the transfer of the personal\nassets is the right which arises or accrues to the partner\nduring the subsistence of the partnership to get his share\nof the\tprofits from time to time and, after the dissolution\nof the\t partnership or with his retirement from\t the\npartnership, to\t get the value of a\t share\tin the\t net\npartnership assets as on the date of the dissolution or\nretirement after a reduction\t of liabilities ant prior\ncharges. The credit entry mate in the partner's capital\naccount in the books of the\tpartnership firm does\t not\nrepresent the true value of the consideration. It is a\nnotional value only,\n107\nintended to be taken into account at the time of determining\nthe A value of\t the partner's\tshare in the net partnership\nassets on the date of dissolution or on his retirement, a\nshare which will depend upon a deduction of the liabilities\nand prior charges existing on the date of dissolution or\nretirement. It is not possible to predicate before hand what\nwill be\t the position in terms of monetary\tvalue of a\npartner's share\t on that date. At the time when the partner\ntransfers his personal asset to the partnership firm, there\ncan be\tno reckoning of the liabilities ant losses which the\nfirm may suffer in the years to come. All that lies within\nthe womb of the future. It is impossible to conceive of\nevaluating the consideration acquired by the partner when he\nbrings his personal asset into the partnership firm\twhen\nneither\t the date of\tdissolution or\t retirement can be\nenvisaged nor can there by any ascertainment of liabilities\nand prior charges which may not have even\tarisen\tyet.\nTherefore, the\tconsideration which a partner\tacquires on\nmaking over his personal asset to the partnership firm as\nhis contribution to its capital cannot fall within the terms\nof section 48. And as that provision is fundamental to the\ncomputation machinery incorporated in the scheme relating to\nthe determination of the charge provided in section 45, such\na case\tmust be\t regarded as falling outside the scope of\ncapital gains taxation altogether. [118 E-H; 119 A-C]\n Commissioner of Income Tax, Bangalore v. B.C. Srinivasa\nSetty (1981) 128 ITR 294 referred to.\n 2.3 Applying the principle that profits or gains under\nthe Income Tax Act must be understood in the sense of real\nprofits or gains, that\t is to say, on the basis of ordinary\ncommercial principles on which actual profits are computed,\na sense\t in which no commercial man would misunderstand, and\nhaving regard to the nature and quality of the consideration\nwhich the partner may be said to acquire on introducing his\npersonal asset into the partnership firm as his contribution\nto its\tcapital, it cannot be\tsaid that any income or gain\narises or accrues to the assessee in the true commercial\nsense which a businessman would understand as real income or\ngain. Of course, the partnership firm in question mu t be a\ngenuine firm and not\tthe result of\t a sham or unreal\ntransaction, and the transfer by the partner of his personal\nasset to tee partnership firm\t must represent a genuine\nintention to contribute to the share capital of the firm for\nthe purpose of carrying on the partnership business. [120 A-\nB; 119 C-D]\n Miss Dhun Dadabhoy Kapadia v. Commissioner of Income-\nTax, Bombay (1967) 63\tITR 651\t (SC); Calcutta\t Co. Ltd. v.\nCommissioner of Income-Tax, West Bengal, (1959) 37 ITR 1 SC;\nCommissioner of\n108\nIncome Tax v. Bai Shirinbai K. Kooka, (1962) 46 ITR 86 SC;\nPoona Electric\tSupply Co. Ltd. v. Commissioner of Income-\nTax, Bombay City I, (1965) 57\t ITR 521 SC; Commissioner of\nIncome-Tax, West Bengal II v. Birla Gwalior (P) Ltd. (1973)\n89 ITR\t266 SC; Bafna\t Textiles v. Income Tax Officer,\nAssessment-4, Circle II, Bangalore (1975) 98\tITR 209 SC\nreferred to.\n 2.4 If the transfer of a personal asset by the assessee\nto a partnership in which he\tis or becomes a partner is\nmerely a device or ruse for converting the asset into money\nwhich would substantially remain available for his benefit\nwithout liability to income tax on a capital gain, it will\nbe open\t to the\t income tax authorities to go\t behind\t the\ntransaction and\t examine whether the transaction of creating\nthe partnership is a genuine or a sham transaction and, even\nwhere the partnership is genuine,\tthe transaction of\ntransferring the personal asset to the partnership\tfirm\nrepresents a real attempt to contribute to the share capital\nof the\tpartnership firm for the purpose of carrying on the\npartnership business or is nothing but a device or ruse to\nconvert the personal asset into money substantially for the\nbenefit of the assessee while evading tax on a capital gain\n121 E-G]\n\n\n\nJUDGMENT:\n CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1841 of\n1981.\n From the Judgment and Order dated 30.4.1981, 1/4.5.1981\nof the Gujarat High Court in Income Tax Reference No. 235 of\n1980.\n\t\t\t AND\n\t Civil Appeal No. 1777 of 1981.\n From the Judgment and Order dated 30.4.1981, 4.5.1981\nof the\tGujarat High Court in Income Tax Reference No. 34 of\n1980.\n V.S. Desai, J.P. Shah, P.H. Parekh and Gautam Phliph\nfor the Appellant in C.A. No. 1841 of 1981.\n M.K. Vanerjee, Additional Solicitor General,\tS.T.\nDesai,\tP.A. Francis,\t and Miss A.\tSubhashini for\t the\nRespondent in C.A. No. 1841 of 1981.\n J.P. Shah and P.H. Parekh for the Intervener in C.A.\nNo. u 1841 of 1981.\n109\n V.S. Desai, S.P. Mehta and Mrs. A.K. Verma for the\nAppellant in C.A. No. 1777 of 1981.\n S.T. Desai, and Miss A. Subhashini for the Respondent\nin C.A. No. 1777 of 1981.\n T.A. Ramachandran, Mrs. J. Ramachandran, H.K. Kaji and\nS.C. Patel for the Intervener in C.A. No. 1777 of 1981.\n The Judgment of the Court was delivered by\n PATHAK,\tJ. This\t and the connected appeal, filed by\ncertificate granted by the High Court, raise the interesting\nquestion whether the capital contribution by\ta partner to\nthe assets of a partnership firm at an appreciated value can\nbe said\t to give rise to a capital gain in his hands liable\nto income-tax.\n In Civil Appeal\t No. 1841 of 1981, the facts are as\nfollows. The appellant, who is the assessee, was a partner\nin Messrs. Suvas Trading Company,\ta partnership\tfirm\nconstituted under a deed of partnership dated September 27,\n1973. As his contribution to the capital of the partnership\nfirm the assessee made over\tcertain\t shares\t of limited\ncompanies which\t were held by him as his capital assets. The\nbook value of those shares in his account books was shown as\nRs. 1,60,279, but on the date\t when he contributed those\nshares to the partnership firm he revalued the shares at the\nmarket value of Rs. 1,49,819\tand debited the resulting\ndifference of Rs. 10,460 to his capital account.\n The Income Tax Officer, when drawing up the assessment\norder for the assessment year 1974-75\t in respect of\t the\nassessee, did not include the difference in the assessable\nincome. The Commissioner of Income-Tax, however, being of\nopinion that the difference between the market value of the\nshares and the cost of acquisition of the shares to\t the\nassessee should have been brought to tax as capital gains in\nview of\t s. 45\tof the\tIncome Tax Act, 1961, exercised his\nrevisional jurisdiction, and reopening\t the assessment he\nremanded the case to the Income Tax Officer directing him to\nrevise the assessment after computing\t the capital gains\narising out of the transfer. The assessee appealed to the\nIncome Tax Appellate Tribunal,\t and the Appellate Tribunal\nheld that while the transaction did amount to a transfer\nwithin the meaning of\tsub-s.(47) of s.2 of the Income Tax\nAct it\tdid not\t result in capital gains liable to tax. The\nAppellate Tribunal allowed the\t appeal and set aside\t the\norder of the Income\n110\nTax Officer. Subsequently the\tAppellate Tribunal referred\nthe case to the High Court of Gujarat for its opinion on the\nfollowing questions of law:\n\t 1 Whether, on the facts and in the circumstances\n\t of the case, the Income Tax Appellate Tribunal was\n\t right in law in holding that no capital gains\n\t resulted from\t the transfer of the shares held by\n\t the assessee\t to the partnership firm as\t his\n\t capital contribution,\t the cost of acquisition of\n\t the shares to the assessee being Rs. 1,49,819 and\n\t the market value of the shares being Rs. 1,60,279?\n\t 2. Whether, on the facts and in the Circumstances\n\t of the case, the Tribunal was right in law in\n\t holding that\tthere was a transfer\t within\t the\n\t meaning of sub-s.(47) of s.2 of the Income\t Tax\n\t Act,\t1961 of the\tshares\tcontributed by\t the\n\t assessee as capital to the partnership firm in\n\t which he was a partner?\n In Civil Appeal No. 1777 of 1981, the appellant was a\npartner in a registered partnership firm, Messrs. Rajka, or\nwhich the other partner was his wife. m e partnership was\nconstituted under an agreement dated February 25, 1973. The\npartnership deed recited that\tthe partnership business had\ncommenced on January 1, 1973, that it was a partnership at\nwill and further provided that the assessee would initially\ncontribute Rs.\t9,000 in cash to the share capital of the\nfirm and his wife would contribute Rs. 1,000 in cash. It was\nprovided that when any addition to the capital was required\nfor the\t purposes of the partnership,\tthe partners would\ncontribute such additional capital from time to time. It was\nfurther provided that if any asset was brought in by a\npartner as capital contribution the account of such partner\nwould be credited with the fair market value on the date the\nasset was brought in. The assessee had in his possession 80\nordinary shares\t of the\t Ahmedabad Manufacturing and Calico\nPrinting Company Limited which\t had been purchased at\t Rs.\n1,55,440. He had-also\t82 ordinary shares of Karamchand\nPremchand Private Limited purchased at Rs. 25,666. The total\ncost was Rs. 1,81,106\n on March 22, 1973 the market value of a share of the\nAhmedabad Manufacturing\t and Calico Printing Company Limited\nwas Rs.\t 442 and that of a share of Karamchand Premchand\nPrivate Limited\t was Rs. 2,668. On that day,\tthe assessee\nintroduced the\n111\ntwo shareholdings in the partnership firm as his capital\ncontribution, and the firm credited his account with\t the\nmarket value of the shares, namely Rs. 4,75,136.\n In the assessment proceedings for the assessment year\n1973-74, the Income Tax Officer took\tthe view that\t the\ncontribution by\t the assessee of the shares to the asset of\nthe partnership\t firm constituted a transfer\t within\t the\nmeaning of sub-s.(47) of s. 2\t of the Income Tax Act, 1961\nand that the assessee was liable to income tax on a capital\ngain of Rs. 2,94,030 being the difference between the market\nprice at which the shares were entered in the books of the\npartnership firm and the cost of the shares to the assessee.\nThe assessee\t appealed to\t the Appellate Assistant\nCommissioner of Income Tax, but the appeal was dismissed. In\nsecond appeal,\thowever, the Income Tax Appellate Tribunal\ntook the view that there was no transfer of a capital asset\nwithin the meaning of\ts.45 read with sub-s.(47) of s.2 of\nthe Income Tax Act and consequently he deleted the item from\nthe assessment. In the circumstances, the Appellate Tribunal\ndid not\t go into the question\t whether the transfer\t was\nwithout\t consideration.\t The Commissioner of\t Income\t Tax\nobtained a reference to the High Court of Gujarat on the\nfollowing questions of law:\n\t 1. Whether, on the facts and in the circumstances\n\t of E the case, the Appellate Tribunal was right in\n\t law in holding that\tthe contribution in the form\n\t of shares of the value of Rs. 4,75,136 by\t the\n\t assessee in the partnership firm of Messrs. Rajka\n\t did not amount to a transfer within the meaning of\n\t sub-s.(47) of s. 2 of the Act resulting in capital\n\t gains chargeable to tax?\n\t 2. If\t the reply to question No. 1 is in favour of\n\t the Revenue,\twhether the Tribunal erred in\t not\n\t considering whether\t the transfer\tis with or\n\t without consideration?\nBy a common judgment dated April 30/May 1 and 4, 1981 the\nHigh Court answered the questions in favour of the Revenue\nand against the assessee.\n Section 45 of the Income Tax Act, 1961 provides:\n\t \"45. (1) Any profits\t or gains arising from\t the\n\t transfer of\ta capital asset effected in\t the\n\t previous year shall, save as otherwise provided in\n\t sections 53,\n112\n54 and 54B and 54D, be chargeable to income-tax\n\t under the head Capital gains , and shall be deemed\n\t to be the income of the previous year in which the\n\t transfer took place\".\n Section 48 of the Act provides:-\n\t \"48. The income chargeable under the head Capital\n\t gains shall be computed by deducting from the full\n\t value of the consideration received or accruing as\n\t a result of the transfer of the capital asset the\n\t following amounts, namely:-\n\t (i) expenditure incurred wholly and exclusively in\n\t connection with such transfer;\n\t (ii) the cost of the acquisition of the capital\n\t asset and the cost of any improvement thereto.\n Learned counsel for the assessee contends that in order\nto attract tax under the head Capital gains , s. 45 must be\nread with s.48 and therefore three cumulative conditions\nmust be fulfilled:-\n\t 1. There must be a transfer\t of a capital asset,\n\t either under\t the general\tlaw or\t within\t the\n\t definition in\t sub-s.(47) of s.2 of the Income Tax\n\t Act.\n\t 2. Consideration must be received or must accrue\n\t as a result of the transfer, and the consideration\n\t must be capable of being determined\t in monetary\n\t terms in order that\tthe computation\t of capital\n\t gains may be as required by s. 48.\n\t 3. Profits or gains\tmust arise from the transfer\n\t and must be embedded in the consideration.\n It is urged that if any of the three conditions remains\nunfulfilled no\tcharge can be levied under the head \"Capital\ngains .\n In support of\tthe submission\t that there is no\n\"transfer\" in the general sense of that term when a partner\nbrings his personal assets into-the firm as his contribution\ntowards its capital,\n113\nlearned counsel\t points out that a partnership firm is not a\nseparate legal\tentity and that the assets owned by\t the\npartnership are\t collectively owned by the partners. We have\nno hesitation in accepting that proposition for in Malabar\nFisheries Co. v. Commissioner\tof Income-Tax, Kerala (1979)\n120 I.T.R. 49 SC, this Court observed:-\n\t .......... It seems to us clear that a partnership\n\t firm under the Indian Partnership Act, 1932, is\n\t not a distinct legal entity apart from\t the\n\t partners constituting\t it and\t equally in law the\n\t firm as such has no separate right of its own in\n\t the partnership assets and when one talks of the\n\t firm's property or firm's assets all that is meant\n\t is property or assets in which all the partners\n\t have a Joint or common interest.\n Our attention has been invited\t to Commissioner of\nIncome Tax, West Bengal v. Hind Construction Ltd., (1972) 83\nI.T.R. 211. In\t that case the assessee entered into a\npartnership and\t as its\t share of the capital it transferred\nthe stock of machinery\t to the partnership firm. This Court\nheld that when the assessee made over its machinery to the\npartnership firm there was no sale and the assessee did not\nderive any income. In Commissioner of Income-Tax, Madras v.\nJanab N. Hyath Batcha\tSahib, (1969) I.T.R. 528, the Madras\nHigh Court held that when a partner introduces his property\ninto a\tpartnership firm as his contribution to its capital\nthe transaction does not involve a sale of the property. The\nHigh Court referred to\t B. 14 of the Indian Partnership act\nand observed:-\n\t When a partnership is formed for the first time\n\t and one of the members of the partnership brings\n\t into the firm assets, they become the property of\n\t the firm, not by any transfer, but by the very\n\t intention of\tthe parties evinced in the agreement\n\t between them\tto treat such property belonging to\n\t one or more of the members of the partnership as\n\t that of the firm-\nThe view that when a partner hands over a business asset to\nthe partnership\t firm as his contribution to its capital he\ncannot be said to have effected a sale was also taken by the\nAllahabad High\tCourt in Dr. M.C. Kackkar v. Commissioner of\nIncome-Tax, Kanpur and Others,\t (1973) 92 I.T.R. 87,\t the\nKerala High Court in Commissioner of Income-Tax, Kerala v.\nC.M. Kunhammed\t(1974) 94 I.T.R. 179 and by the Madras High\nCourt in Commissioner\tof Income-Tax,\t Madras-l v. Abdul\nKhader Motor ant Lorry Service,\n114\n(1978) 112 I.T.R. 360.\t We find no difficulty in accepting\nthat proposition. But while the transaction may not amount\nto a sale, can\t it be described as a transfer of some other\nkind? Illustrations of other kinds of transfer are provided\nby sub-s.(47) of s.2 of the Income Tax Act which defines the\nexpression transfer in\t relation to a capital asset as\nincluding the sale exchange or relinquishment of the asset\nor the\t extinguishment of any rights therein or\t the\ncompulsory acquisition thereof under any law. The definition\nis inclusive merely, and does not exhaust other kinds of\ntransfer. Its inclusive character was\t overlooked by\t the\nMadras High Court in Commissioner of\tIncome-Tax, Madras-I\n(supra) and in Commissioner of Income-Tax, Tamil Nadu-IV,\nMadras v. H. Rajan and H. Kannan, (1984) 149 I.T.R. 545. In\nboth cases the High Court confined itself to\t considering\nwhether the transaction before it was covered by any of the\nexpress terms used in the definition, that is to say, sale,\nexchange relinquishment\t or extinguishment, and taking\t the\nview that it did not fall under any\tof them it held that\nthere was no transfer.\n In its general\tsense, the expression\ttransfer of\nproperty connotes the passing of rights in the property from\none person to another. In one case there may be a passing of\nthe entire bundle of rights from the\t transferor to\t the\ntransferee. In another case, the transfer may consist of one\nof the\testates only out of all the estates comprising the\ntotality of rights in\tthe property. In a third case, there\nmay be a reduction of the exclusive interest in the totality\nof rights of the original owner into a joint or shared\ninterest with\tother persons.\t An exclusive\tinterest in\nproperty is a larger interest than a share in that property.\nTo the\textent to which the exclusive interest is reduced to\na shared interest it would seem that there is a transfer of\ninterest. Therefore when a partner brings in his personal\nasset into the capital\t of the partnership firm as\t his\ncontribution to\t its capital he reduces his exclusive rights\nin the\tasset to shared rights in it with the other partners\nof the\tfirm. While he does not lose his rights in the asset\naltogether what\t he enjoys now is an abridged\t right which\ncannot be identified with the fullness of the right which he\nenjoyed in the asset before it entered the\t partnership\ncapital. In Addanki\tNarayanappa &\t Anr.\tv. Bhaskara\nKrishtappa and\t13 Ors.\t [1966] 3 S.C.R. 400.,\t this Court\nexplained:-\n\t ........ whatever may be the character of\t the\n\t property which is brought in by the partners when\n\t the partnership is formed or which may be acquired\n\t in the\n115\n\t course of the business of\tthe partnership it\n\t becomes the property\t of the firm\tand what a\n\t partner is entitled to is his share of profits, if\n\t any,\taccruing, to\tthe partnership from\t the\n\t realisation of this property, and upon dissolution\n\t of the partnership\tto a share in the money\n\t representing the value of the property. No doubt,\n\t since\t a firm has\t no legal existence,\t the\n\t partnership property will vest in all the partners\n\t and in that sense every partner has an interest in\n\t the property\t of the partnership.\t during\t the\n\t subsistence of the\t partnership,\thowever, no\n\t partner can deal with any portion of the property\n\t as his own. Nor can he assign his interest in a\n\t specific item of the partnership\tproperty to\n\t anyone. His right is\t to obtain such profits, if\n\t any, as fall to his share from time to time and\n\t upon the dissolution of the firm to a share in the\n\t assets of the firm which remain after satisfying\n\t the liabilities set out in cl.(a) and\tsub-\n\t cls.(i),(ii) of cl.(b) of s. 48.\n The position was elaborated later in the same judgment\nas follows:\n\t The whole concept of partnership is to embark upon\n\t a joint venture and\tfor that purpose to bring in\n\t as capital\tmoney or even\t property including\n\t immovable property. Once that is done whatever is\n\t brought in\twould cease to be the exclusive\n\t property of the person who brought it in. It would\n\t be the trading asset\t of the partnership in which\n\t all the partners would have interest in proportion\n\t to their share in\tthe joint venture of\t the\n\t business of partnership. The person who brought it\n\t in would, therefore, not be\t able to claim or\n\t exercise any\texclusive right\t over any property\n\t which he has brought in, much less over any other\n\t partnership property.\t He would not\tbe able to\n\t exercise his right even to the extent of his share\n\t in the business of the partnership.\t As already\n\t stated, his right during the subsistence of the\n\t partnership is to get his share of profits from\n\t time to time as may be agreed upon among\t the\n\t partners and\t after\t the dissolution of\t the\n\t partnership\tor with his retirement\tfrom\n\t partnership of the value of his share in the net\n\t partnership assets as on the date of dissolution\n\t of retirement after a deduction of liabilities and\n\t prior charges.\n116\nIt is apparent, therefore, that when a partner brings in his\npersonal asset\tinto a\tpartnership firm as his contribution\nto its capital, an asset which originally was subject to the\nentire ownership of the partner becomes now subject to the\nrights of other partners in it. It is not an interest which\ncan be\tevaluated immediately,\tit is an interest which is\nsubject to the operation of future transactions of\t the\npartnership, and it may diminish in\tvalue depending on\naccumulating liabilities and losses with a fall in\t the\nprosperity of the partnership\tfirm. The evaluation of a\npartner's interest takes place only when\tthere is a\ndissolution of\tthe firm or upon his retirement from it. It\nhas some times been said, and we think erroneously, that the\nright of a partner to a share in\tthe assets of\t the\npartnership firm arises upon dissolution of the firm or upon\nthe partner retiring from the firm. We think it necessary to\nstate that what is envisaged here is merely\tthe right to\nrealise the interest and receive its value. What is realised\nis the\tinterest which\tthe partner enjoys in\t the assets\nduring the subsistence of the partnership firm by virtue of\nhis status as a partner and in accordance with the terms of\nthe partnership\t agreement. It\t is because that interest\nexists already before dissolution, as was held by this Court\nin Malabar Fisheries Co. (supra), that the distribution of\nthe assets on dissolution does not amount to a transfer to\nthe erstwhile\t partners. What the\tpartner\t gets\tupon\ndissolution or\tupon retirement is the realisation of a pre-\nexisting right or interest. It is nothing strange in the law\nthat a\tright or interest should exist in praesenti but its\nrealisation or exercise should be postponed. Therefore, what\nwas the\t exclusive interest of a partner in his personal\nasset is, upon its introduction into the partnership firm as\nhis share to the partnership capital,\t transformed into a\nshared interest\t with the other partners in that asset. Qua\nthat asset, there is a shared interest.\t During\t the\nsubsistence of\tthe partnership the value of the interest of\neach partner qua that asset cannot be isolated or carved out\nfrom the value of the partner's interest in the totality of\nthe partnership\t assets. And in regard\t to the\t latter, the\nvalue will be represented by his share in the net assets on\nthe dissolution of the firm or\tupon the partner's\nretirement.\n Learned counsel for the assessee has attempted to draw\nan analogy between the\t position arising when\t a personal\nasset is brought by a partner\t into a\t partnership as\t his\ncontribution to\t the partnership capital and\t that which\narises when on dissolution of the firm or on retirement a\nshare in the partnership assets\n117\npasses to the erstwhile partner. It has been held by this\nCourt in Commissioner of Income-Tax, Madhya Pradesh, Nagpur\nand Bhandra v. Dewas Cine Corporation, (1968) 68 I.T.R. 240,\nCommissioner of\t Income-Tax, U.P. v.\tBankey\tLal Vaidya,\n(1971) 79 I.T.R. 594 and recently in Malabar Fisheries Co.\n(supra) as well as by the Punjab and Haryana High Court in\nKay Engineering\t Co. v. Commissioner of Income-Tax, Patiala,\n(1971) 82 I.T.R. 950 the Kerala High Court in Commissioner\nof Income Tax, Kerala\tv. Nataraj Motor Service (1972) 86\nI.T.R. 109, and the Gujarat High Court in Commissioner of\nIncome-Tax Gujarat v. Mohanbhai Pamabhai (1973) 91 I.T.R.\n393 that when a partner retires or\tthe partnership is\ndissolved what\tthe partner receives is his share in\t the\npartnership. What is contemplated here is a share of the\npartner qua the net assets of\t the partnership firm. On\nevaluation, that share in a particular case may be realised\nby the\treceipt of only one of all the assets. What happens\nhere is that a shared interest in all the assets of the firm\nis replaced by an exclusive interest\tin an asset of equal\nvalue. That is why it has been held\t that there is no\ntransfer. It is the realisation of a pre-existing right. The\nposition is different, it seems to us, when a partner brings\nhis personal\tasset into the partnership firm as\t his\ncontribution to its capital. An individual asset is the sole\nsubject of consideration. An exclusive interest in it before\nit enters the partnership is reduced\ton such entry into a\nshared interest.\n Our attention has also been invited to clause (b) of\nsub-s.(l) of s. 17 of the Registration Act which requires\nthe registration of\tnon-testamentary instruments which\npurport\t or operate to create declare assign limit or\nextinguish whether in present or in future, any right, title\nor interest whether vested or contingent, of the value of\none hundred rupees and upwards, to or in immovable property,\nand to\tthe view taken by the courts\tin this country that\nwhen a\tperson brings in even his immovable property as his\ncontribution to\t the capital of the firm no written document\nor registration\t is required under that clause. That view,\nwas expressed in Firm\tRam Sahay Mall Rameshwar Dayal and\nOthers v. Bishwanath Prasad, A.I.R. 1963 Patna 221.\t The\nlearned Judges\trelied on the English law that the personal\nassets\tintroduced by\ta partner into the firm as\t his\ncontribution to its capital becomes the property of the firm\nby reason of the intention and agreement of the parties. The\nview does not spring from the consideration that there is no\ntransfer. The view is\tthat no document of\ttransfer is\nrequired and that, therefore,\tregistration is unnecessary.\nThe Patna High Court reiterated that view in Sudhansu Kanta\nv. Manindra Nath A.I.R. 1965 Patna 144.\n118\n Accordingly we hold that when the assessee brought the\nshares of the limited companies into the partnership firm as\nhis contribution to its capital there\t was a transfer of a\ncapital asset within the terms of s.45 of the Income Tax\nAct. In this view of the matter we agree with the conclusion\nreached\t by the Kerala High\tCourt in A. Abdul Rahim,\nTravancore Confectionery Works v. Commissioner of Income-\nTax, Kerala, (1977) 110 I.T.R. 595 the Karnataka High Court\nin Addl. Commissioner\t of Income-Tax, Mysore v. M.A.J.\nVasanaik, (1979) 116 I.T.R. 110 and by the Gujarat\tHigh\nCourt in the judgment under appeal.\n The second question is whether the assessee can be said\nto have\t received any consideration as\t that expression is\nunderstood in the scheme of capital gains under the Income-\nTax Act. In Commissioner of Income-Tax, Bangalore v. B.C.\nSrinivasa Setty, (1981) 128 I.T.R. 294, this Court observed\nthat the charging section and the computation provisions\nunder each head of income constitute an integrated code, and\nwhen there is a case to which the computation provisions\ncannot apply at all it is evident that such a case was not\nintended to fall within the charging section. On the basis\nof that\t proposition learned counsel for the assessee\t has\nurged that s.45 is not attracted in the present case because\nto compute the profits or gains under s.48 the value of the\nconsideration received by the assessee or accruing to him as\na result of the transfer of the capital asset must be\ncapable\t of\tascertainment\tin monetary\tterms.\t The\nconsideration for the transfer of the personal assets is the\nright which arises or\taccrues`to the\tpartner\t during\t the\nsubsistence of\tthe partnership\t to get\t his share of\t the\nprofits from time to time and, after the dissolution of the\npartnership or\twith his retirement from the partnership, to\nget the value of a share in the net partnership assets as on\nthe date of the dissolution or retirement after a deduction\nof liabilities\tand prior charges. The credit entry made in\nthe partner's\t capital account in\tthe books of\t the\npartnership firm does not represent the true value of the\nconsideration. It is notional\tvalue only, intended to be\ntaken into account at\tthe time of determining the value of\nthe partner's share in\t the net partnership assets on the\ndate of dissolution or on his retirement, a share which will\ndepend upon a deduction of the liabilities and prior charges\nexisting on the date of dissolution or retirement. It is not\npossible to predicate before hand what will be the position\nin terms of monetary value of\t a partner's share on\tthat\ndate. At the time when the partner transfers his personal\nasset to the partnership firm, there can be no reckoning of\nthe liabilities\t and losses which the firm may suffer in the\nyears to\n119\ncome. All that lies within the womb of the future. It is\nimpossible to\tconceive of evaluating the consideration\nacquired by the partner when he brings his personal asset\ninto the partnership\t firm\twhen neither the date of\ndissolution or\tretirement can be envisaged nor can there be\nany ascertainment of liabilities and prior charges which may\nnot have even arisen yet. In\tthe circumstances, we\t are\nunable to hold\t that the consideration which a partner\nacquires on making over his personal asset to\t the\npartnership firm as his contribution to its capital can fall\nwithin\tthe terms of\t s.48.\tAnd as\t that provision is\nfundamental to the computation machinery incorporated in the\nscheme relating\t to the determination of the charge provided\nin s.45, such a case must be regarded as falling outside the\nscope of capital gains taxation altogether.\n The third contention of learned counsel for\t the\nassessee is that no profit or gain car. be said to arise to\na partner when he brings his personal asset into a\npartnership firm as his contribution to its capital. It is\nurged that the capital gains chargeable under s.45 are real\ncapital\t gains\t computed on the ordinary principles of\ncommercial accounting and that\t the capital gains must be\nembedded in the capital asset. In Miss Dhun Dadabhoy Kapadia\nv. Commissioner\t of Income-Tax,\t Bombay, (1967)\t 63 I.T.R..\n651, the appellant held by way of investment some ordinary\nshares in a limited company. An offer was made by\t the\ncompany to her by which she was entitled to apply for an\nequal number of new ordinary shares at a premium with an\noption of either taking the shares or renouncing them in\nfavour of others. The appellant renounced her rights to all\nthe shares and realised Rs. 45,262.50. When this amount was\nsought to be wholly taxed as\ta capital gain the appellant\nclaimed that on the issue of the new shares the value of her\nold shares depreciated and\tthat as a result of\t the\ndepreciation she suffered a capital loss in the old shares\nwhich she was entitled\t to set off against the capital gain\nof Rs.\t45,262.50. In the alternative\tshe claimed that the\nright to receive the new shares was\ta right which\t was\nembedded in her old\tshares\tand consequently when\t she\nrealised the sum of Rs. 45,262.50 by selling her right, the\ncapital gain should be\t computed after\t deducting from that\namount\tthe value of\t the embedded\tright which became\nliquidated. This Court upheld\tthe claim of the appellant\nthat she was entitled\t to deduct from the\tsum of\t Rs.\n45,262.50 the loss suffered by way of depreciation in the\nold shares. The Court proceeded on the basis that in working\nout capital gain or loss, the\t principles which had to be\napplied are those which are a part of commercial practice or\nwhich an\n120\nordinary man of business would resort to\twhen making\ncomputation for\t his business purposes. It will be noticed\nthat this principle was applied by the Court in a case where\na capital gain was sought to be taxed under the Income Tax\nAct. That profits or gains under the Income Tax Act must be\nunderstood in the sense of real profits or gains, that is to\nsay, on the basis of ordinary commercial principles on which\nactual profits\tare computed, a sense in which no commercial\nman would misunderstand, has been regarded as a principle of\ngeneral application, and there is a catena of cases of this\nCourt which affirms that principle. Reference may be made to\nCalcutta Co. Ltd. v.\t Commissioner of Income-Tax,\tWest\nBengal, (1959) 37 I.T.R. 1, Commissioner of Income-Tax v.Bai\nShirinbai K. Kooka, (1962) 46 I.T.R.\t86, Poona Electric\nSupply Co. Ltd. v. Commissioner of Income-Tax, Bombay City\nI, (1965) 57 I.T.R. 521, Commissioner\t of Income-Tax, West\nBengal II v. Birla Gwalior (P) Ltd. (1973) 89 I.T.R. 266 and\nBafna Textiles\tv. Income-Tax officer, Assessment-4, Circle\nII, Bangalore, (1975) 98 I.T.R. 209.\n What is the profit or gain which can be said to accrue\nor arise to the assessee when\t he makes over his personal\nasset to the partnership firm as his contribution to its\ncapital? The consideration, as\t we have observed, is\t the\nright of a partner during the subsistence of the partnership\nto get\this share of profits from time to time and after the\ndissolution of\tthe partnership\t or with his retirement from\nthe partnership to receive the value of the share in the net\npartnership assets as on the date\t of dissolution or\nretirement after a deduction\t of liabilities and prior\ncharges. When his personal asset merges into the capital of\nthe partnership firm a corresponding credit entry is made in\nthe partner's\t capital account in\tthe books of\t the\npartnership firm, but that entry is made merely for\t the\npurpose of adjusting the rights of the partners inter-se\nwhen the partnership is dissolved or the partner retires. It\nevidences no debt due\tby the\tfirm to the partner. Indeed,\nthe capital represented by the notional entry to the credit\nof the\tpartner's account may be completely wiped out by\nlosses which may be subsequently incurred by the firm, even\nin the\tvery accounting year in which the capital account is\ncredited. Having regard to the nature\t and quality of the\nconsideration which the partner may be said to acquire on\nintroducing his\t personal asset into the partnership firm as\nhis contribution to its capital it cannot be said that any\nincome or gain arises or accrues to the assessee in the true\ncommercial sense which a business man\t would understand as\nreal income or gain.\n121\n An objection has been taken by learned counsel for the\nrespondent to\t this submission being raised before us\nbecause, it is said, the question has neither been referred\nto his Court nor was it ever argued at any earlier stage. We\nare not\t impressed by the objection because we think that it\nconstitutes one\t aspect of the questions which have\tbeen\nreferred in these cases. The point rests on considerations\npurely of law and is fundamental to the question whether\ncapital gain arises to an assessee upon the transfer of his\nshares to the partnership firm as his capital contribution.\nThe objection is, therefore, over-ruled.\n Inasmuch as we are of opinion that the consideration\nreceived by the assessee on the transfer of his shares to\nthe partnership\t firm dies not fall within the contemplation\nof s.48 of the Income-Tax Act, and further that no profit or\ngain can be said to arise for the purposes of the Income-Tax\nAct, we hold that these cases fall outside the scope of s.45\nof the Act altogether.\n We have decided these appeals on\t the assumption that\nthe partnership\t firm in question is a genuine firm and not\nthe result of a sham or unreal transaction,\tand that the\ntransfer by the partner of his personal asset to\t the\npartnership firm represents\ta genuine intention\t to\ncontribute to the share capital of the firm for the purpose\nof carrying on the partnership business. If the transfer of\nthe personal asset by the assessee to a partnership in which\nhe is or becomes a partner is merely a device or ruse for\nconverting the\tasset into money which\t would substantially\nremain available-for his benefit without liability to income\ntax on\ta capital gain, it will be open to the income tax\nauthorities to go behind the transaction and examine whether\nthe transaction\t of creating the partnership is a genuine or\na sham\ttransaction and, even\t where\tthe partnership is\ngenuine the transaction of transferring the personal asset\nto the\t partnership firm represents\ta real\t attempt to\ncontribute to the share capital of the partnership firm for\nthe purpose of carrying on the partnership business or is\nnothing but a device or ruse to convert the personal asset\ninto money substantially for the benefit of the assessee\nwhile evading tax on a capital gain. The income Tax Officer\nwill be\t entitled to consider all the relevant indicia in\nthis regard, whether the partnership is formed between the\nassessee and his wife and children or substantially limited\nto them, whether the personal asset is sold by\t the\npartnership firm soon\t after\tit is\ttransferred by\t the\nassessee to it, whether the partnership firm has no\nsubstantial or real business or the\n122\nrecord shows that there was no real need of the partnership\nfirm for such capital\tcontribution from the assessee. ALL\nthese and other pertinent considerations may be taken into\nregard when the Income Tax Officer enters upon a scrutiny of\nthe transaction, for in the task of determining whether a\ntransaction is a sham or illusory transaction or a device or\nruse he\t is entitled to penetrate the veil covering it and\nascertain the truth.\n In the result, the questions which arise in these\nappeals are answered as follows:-\n\t 1. There was a transfer of\tthe shares when the\n\t assessee made them over to the partnership firm as\n\t his capital contribution.\n\t 2. When the assessee transferred his shares to the\n\t partnership firm he\t received no consideration\n\t within the meaning of s.48 of the Income-Tax Act\n\t 1961 nor did any profit or gain accrue to him for\n\t the purpose of s.45 of the Income-Tax Act, 1961.\nThese answers are given by us\t subject to the reservations\nmade by us in the preceding paragraph.\n The appeals are partly allowed and there is no order as\nto costs.\nS.R.\t\t\t\t Appeals partly allowed.\n123" }, { "title": "Distributors (Baroda) Pvt. Ltd vs Union Of India And Two Ors on 1 July, 1985", "url": "https://indiankanoon.org//doc/795227/", "text": "Distributors (Baroda) Pvt. Ltd vs Union Of India And Two Ors on 1 July, 1985\nEquivalent citations: 1985 AIR 1585, 1985 SCR SUPL. (1) 778, AIR 1985 SUPREME COURT 1585, 1986 (1) SCC 43, 1985 TAX. L. R. 915, (1985) 22 TAXMAN 49, (1985) 155 ITR 120, (1985) 2 COMLJ 389, (1985) 47 CURTAXREP 349, (1985) 78 TAXATION 391\nAuthor: P.N. Bhagwati\nBench: P.N. Bhagwati, Y.V. Chandrachud, Amarendra Nath Sen, D.P. Madon, M.P. Thakkar\n PETITIONER:\nDISTRIBUTORS (BARODA) PVT. LTD.\n\n\tVs.\n\nRESPONDENT:\nUNION OF INDIA AND TWO ORS.\n\nDATE OF JUDGMENT01/07/1985\n\nBENCH:\nBHAGWATI, P.N.\nBENCH:\nBHAGWATI, P.N.\nCHANDRACHUD, Y.V. ((CJ)\nSEN, AMARENDRA NATH (J)\nMADON, D.P.\nTHAKKAR, M.P. (J)\n\nCITATION:\n 1985 AIR 1585\t\t 1985 SCR Supl. (1) 778\n 1986 SCC (1)\t43\t 1985 SCALE (1)1216\n CITATOR INFO :\n D\t 1986 SC1565\t (9)\n RF\t 1992 SC 803\t (21)\n\n\nACT:\n Income Tax Act 1961 Sections 80M(1) and 80AA:\n Income by\tway of\tinter-corporate dividends-Deduction-\nWhether to be made with reference to full amount of dividend\nreceived or dividend\t computed in accordance with\t the\nprovisions of the Act-Section 80AA-Whether retrospective in\noperation.\n Constitution of India 1950, Article 141:\n Supreme Court-Declaration\t of law-To be certain,\ndefinite and\tcorrect-Judicial decisions-Continuity\t and\nconsistency-Essentiality-Pointed out-Earlier\t ruling\t of\nCourt-Manifestly wrong,\t proceeds upon\tmistaken assumption\nwith regard to existence or continuance of statutory\nprovision, contrary to another decision of Court-Doctrine\nof stare decisis-No bar to\tover-ruling such decision-\nDecision of Court in fiscal matters-Interference\t in\nexceptional cases-Necessity of.\n Interpretation of Statutes:\n Statutory\t provision-Meaning of-Interpretation\t on\nearlier\t statutory provision\tin different language\t and\nstructurally different-Reference to and reliance on-Whether\npermissible.\n Words and Phrases-Meaning of:\n 'Such income by way of dividends'-Meaning of-Section\n80M Income Tax Act 1961.\n\n\n\nHEADNOTE:\n The earliest provision granting exemption from super\ntax in\trespect of inter-corporate dividend was made as far\nback as\t 9th December,\t1933 in a Notification issued by the\nGovernor General in Council and it provided as follows:-\n \"The Governor General in\tCouncil is pleased to exempt\nfrom super tax:\n779\n (i) So much of the income of any investment trust\ncompany as is derived\tfrom dividends\tpaid by any other\ncompany which has paid\t or will pay super-tax in respect of\nthe profits out of which such dividends are paid\".\n This provision came up for consideration before a\nDivision Bench\tof the\tHigh Court of\t Bombay\t in CIT v.\nIndustrial Investment Trust Co. Ltd. (1968) 67 I.T.R. 437.\nThe High Court guided by a decision of this Court in CIT v.\nSouth India Bank (1966) 59 ITR 763 held that the dividend\nincome which was exempted under the notification would be\nthe dividend income received by the assessee and not the\nsaid income less any further amounts\" because\t the\nnotification must be regarded\ta self-contained one and not\ncontrolled by any other provisions of the Act and there was\nno warrant to construe the word income' in the notification\nas total income nor to qualify the dividend computed under\nSection 12 of the Act.\n A provision of a\tsimilar kind granting exemption from\nsuper tax in respect of certain specified categories of\ninter-corporate dividend was introduced as Section 56A of\nthe Income Tax Act 1922 by the Finance Act, 1953.\n When the Indian Income Tax Act, 1922 was repealed and\nthe Income Tax Act, 1961 was\tenacted with effect from 1st\nApril, 1902, Section 99, subsection (i) was introduced in\nthe new\t Act exempting\tcertain categories of\tincome\tfrom\nsuper tax and one such category was that set out in clause\n(iv) of Section 99 sub-section (1) which read as follows:\n \"99. (1) Super-tax shall not be payable by an assessee\n in respect\t of the following amounts which are included\n in his total income- (iv) if the assessee is a company,\n any dividend received by\tit from\t an Indian company,\n subject to the provisions contained in the fifth\n Schedule.\"\n This provision continued in force upto Ist March, 1965\nsubject to a minor inconsequential amendment\tmade by\t the\nFinance Act, 1964.\n This provision did not come up\t for interpretation\nbefore this Court only in Cloth Traders Case, but it came to\nbe considered by some of the High Courts.\n The three\tHigh Courts of Bombay,\t Calcutta and Madras\nC.I.T v. New Great Insurance Company Ltd. (1963) 90 ITR 348,\nC.I.T v. Darbhangha Marketing\tCompany Ltd. 1971 80 ITR 72\nand Madras Auto Service v. I.T.O. (1975) 101 I.T.R. 589] on\na construction\tof clause (iv) of sub-section (1) of section\n99, took the view that the\tentire\tamount\tof dividend\nreceived by the assessee from an Indian Company was exempt\nfrom super tax and the exemption was not limited to dividend\nincome computed in accordance with the provisions of the Act\nand forming part of the total income.\n780\n Section 99\t sub-section (i) remained in force only upto\nthe close of the assessment year 1964-65 and by an amendment\nmade by\t the Finance Act, 1965, Section 99 sub-section (1)\nwas omitted and chapter IVA and section 85A were introduced\nin the present Act with effect from Ist April, 1965. Chapter\nIVA comprised section 80A to\t80D providing\tfor certain\nspecified deductions to be made in computing total income,\nwhile Section\t 85A provided\t for deduction\t of tax on\nincorporate dividends.\n This Section was also considered by the Bombay\tHigh\nCourt in New Great Insurance Company's Case. The High Court\nobserved that except for some minor verbal changes, section\n85A was\t almost in the same terms as section 99 sub-section\n(1) clause (iv), the only real difference being that the\nexemption granted under section 99 sub-section (i) clause\n(iv) was in regard to super-tax, while the deduction allowed\nunder section 85A was in regard to income tax, and held that\nunder section 85A also, the deduction\t admissible was in\nrespect of the entire dividend received by the assessee from\nan Indian Company and\tnot in\trespect of dividend income\nminus deductions allowable under the provisions of the Act\nin computing 'total income'\n The spate of legislative changes did not come to an end\nwith the enactment of section 85A. The Original Chapter VIA\nand certain other sections including section 85A\twere\ndeleted from the present Act by Finance (No\t2) Act, 1967\nwith effect from Ist April, 1968 and replaced by the new\nChapter VIA which contains a fasciculus of sections from s.\n80A to s. 80VV. Section 80A sub-section (1) provides that in\ncomputing the total income of an assessee there shall be\nallowed from his gross total income, in accordance with and\nsubject to the provisions of\tChapter\t VIA the deduction\nspecified in Section 80C to Section 80VV and sub-section (2)\nof that\t Section imposed a ceiling on such deductions by\nenacting that the aggregate amount of such deduction shall\nnot in\tany case, exceed the gross total income of\t the\nassessee. The expression \"gross total income\" is defined in\nclause (V) of Section 80B to mean the total income computed\nin accordance with the\t provisions of the Act before making\nany deduction under Chapter VIA or under Section 280D.\nSection 80M is the new section which corresponds to\t the\nrepealed Section 85A and it\tprovides for deduction in\nrespect of certain categories of inter-corporate dividends.\nSeveral amendments were made subsequently in\tthis section\nbut they relate primarily to the percentage of the income to\nbe allowed as a deduction.\n One amendment that was made by the Finance Act, 1968\nwas that the words \"received by it\" occurring in sub-section\n(1) of\tSection 80M were omitted with effect from Ist April,\n1968, so that right from the date of its enactment, section\n80M sub-section (1) was to be read as if the words \"received\nby it\" were not in the opening part of that provision.\n Petitioner No. 1 was incorporated as a Limited Company\nand Petitioner\tNo. 2 a Director and shareholder therein.\nPetitioner No 1 received dividends on shares held by it in\ndifferent domestic companies and paid interest on monies\nborrowed for the purpose of investment in such shares. In\nthe course of its assessment for the assessment years 1970-\n71 up to 1980-81,\n781\nPetitioner No.\t1 claimed that\t the deduction\t permissible\nunder Section 80M must\t be calculated with reference to the\nfull amount of dividends received by Petitioner No. 1 from\nthe domestic companies and not with reference to\t the\ndividends as computed in accordance with the provisions of\nthe Income Tax Act, 1961. The assessments of Petitioner No.\n1 were\tactually completed on the basis of his claim and the\nview taken by this Court in Cloth Traders Case in regard to\nthe construction of Section 80M. The Revenue preferred\nappeals against\t such assessments and\tthese appeals\twere\npending at different stages at the time of filing the Writ\nPetition.\n The Petitioner No. 1 was entitled to succeed in the\nappeals as well as in the original assessments which were\npending before\tthe different authorities, so\tlong as\t the\ndecision in Cloth Traders Case stood\t unaffected by\t any\nconstitutionally valid legislative amendment.\n However, with a view to overriding the decision in the\nCloth Traders case with retrospective\t effect, Parliament\nenacted Section\t 80AA and since this section was deemed to\nhave been introduced in the Income Tax Act, 1961 with effect\nfrom 1st April, 1968,\tand it\tprovided that the deduction\nrequired to be allowed\t under Section 80M shall be computed\nnot with reference to the gross amount of dividend received\nby the\tassessee from a domestic company but with reference\nto the\tdividend income\t as computed in accordance with the\nprovisions of the Act,\t the claim of petitioner No. 1 for\ndeduction on the basis\t of the full\tamount\tof dividend\nreceived by it from domestic companies was liable to be\nrejected and deduction could be allowed to Petitioner No. 1\nonly with reference to\t the dividend\tincome\tcomputed in\naccordance with the provision of the Act.\n The introduction of Section 80AA thus had the effect of\nenhancing the tax liability of Petitioner No. 1 and\t the\npetitioners filed a\t Writ\tPetition challenging\t the\nConstitutional validity\t of Section 80AA on the ground that\nit enhanced the tax burden with retrospective effect going\nback for a period of\talmost\t12 years and\tconsequently\nimposed\t an unreasonable restriction\t on the right of\npetitioner No.\t1 to carry on\tits business in breach of\nArticle 19 (1) (g) of the Constitution.\n Dismissing the writ petition,\n^\n HELD-(By the Court)\n 1.\t The deduction\t envisaged by\tsub-section (1) of\nSection 80 is required\t to be\tmade with reference to\t the\nincome by way of dividends computed in accordance with the\nprovisions of the Income Tax Act and not with reference to\nthe full amount of dividend received by the assessee. [802F,\n809A]\n 2. Section\t 80AA in its\tretrospective operation is\nmerely declaratory of the law as it always was since Ist\nApril, 1968 and no complaint can validly be made against it.\n[807E, 809D]\n782\n Cloth Traders Ltd. v. Additional Commissioner of Income\nTax, 118 ITR 243, over-ruled and Cambey Electrical Supply\nIndustrial Co.\tLtd. v.\t Commissioner of Income-Tax, (1970)\n113 84, approved.\n (Per Chandrachud C.J., P.N. Bhagwati, D.P. Madon and\nM.P. Thakkar, JJ).\n The Inquiry is not whether the view taken by the Bombay\nHigh Court in New Great Insurance Company's case is correct.\nIt must\t be conceded that it has been held to be correct in\nthe decision in Cloth Traders Case. However another view in\nregard to the interpretation of Section 85A is possible. It\nis not\tat all unreasonable to construe the words \"income so\nincluded\" as meaning the quantum of\t income\t by way of\ndividends included in the total income of the assessee.\nThese words in the context\tin which they\t occur\thave\nobviously reference to quantum\t of the\t income\t by way of\ndividends to which the\t average rate of income tax is to be\napplied. That quantum is defined by these words and in order\nto determine it, the question is what is the income by way\nof dividends included in the total income and the answer can\nonly be\t that is income computed in accordance with\t the\nprovisions of the Act.\t It is\tnot necessary\tto consider\nwhether the construction placed on Section 85A by the Bombay\nHigh Court in New Great Insurance Company Case is correct or\nnot, because interpretation of Section 85A is not concerned.\nIt is section 80M which has\tto be\tconstrued and\tthis\nsection, is materially different from Section 85A. Section\n80M cannot be construed in the light of the interpretation\nplaced on its predecessor section by the Bombay High Court\nparticularly when Section 80M is\t admittedly worded\ndifferently from its predecessor section. Section 80M must\nbe construed on its own language and its true interpretation\narrived at according to the plain natural meaning of the\nwords used by the Legislature. [795 D-H]\n 2. Section\t 80M is the new Section which corresponds to\nthe repealed Section 85A and it provides for deduction in\nrespect of certain categories of inter-corporate dividends.\nIt is the interpretation of this section which constitutes\nthe subject-matter of controversy between the parties. [796\nD]\n 3. What is the object behind grant of relief under\nSection 80M. The main object of the relief under Section 80M\nis to avoid taxation\tonce again in\t the hands of\t the\nreceiving company of the amount which has already borne full\ntax in\tthe hands of the paying company. Now when an amount\nby way\tof dividend is received by the assessee from\t the\npaying company\tthe full amount of such dividend would have\nsuffered tax, in the assessment of the paying company in\norder to encourage inter-company investments. In order to\nencourage investments the Legislature\tintended that\tthis\namount should not bear\t tax once again in the hands of the\nassessee either\t its entirety or to a specified extent. But\nthe amount by way of dividend which would otherwise suffer\ntax in\tthe hands of the assessee, would be\t the amount\ncomputed in accordance with the provisions of the Act and\nnot the\t full amount received\t from the paying company.\nTherefore, it is reasonable to assume that\tin enacting\nSection 80M the Legislature intended to grant relief with\nreference to the amount of dividend computed in accordance\nwith the provisions of the Act and not with reference to the\nfull amount of dividend received from the paying\n783\ncompany. The Legislature could\t certainly be attributed the\nintention to prevent double taxation but not to provide an\nadditional benefit which would\t go beyond what is required\nfor saving the amount\tof dividend from taxation once again\nthe hands of the assessee. [799 A-E]\n 4. Section\t 80M sub-section (1) opens with the words\n\"where\tthe gross total income of an assessee.........\nincludes any income by\t way of\t dividends from\t a domestic\ncompany\" and proceeds to say that in such a case, there\nshall be allowed in computing\t the total income of\t the\nassessee, a deduction \"from such income by way of dividends\"\nof an amount equal to the whole of such income or 60% of\nsuch income as the case may be, depending on the nature of\nthe domestic company from which the\t income\t by way of\ndividends is received. The opening\twords describe\t the\ncondition which\t must be fulfilled in\torder to attract the\napplicability of the provision contained in sub-section (1)\nof Section 80M. The condition is that the gross total income\nof the assessee must include income by way of dividends from\na domestic company \"Gross total income\" is\t defined in\nSection 80B clause (v)\t to mean \"total income\t computed in\naccordance with\t the provisions of the Act before making any\ndeduction under\t Chapter VIA or under Section 280D\". Income\nby way\tof dividends from a domestic company included in the\ngross total income would therefore obviously be income\ncomputed in accordance with the provisions of the Act, that\nis after deducting interest on monies borrowed for earning\nsuch income. If income\t by way of dividends from a domestic\ncompany computed in accordance\t with the provisions of the\nAct is\tincluded in the gross\ttotal income, or in other\nwords, form part of the gross total income, the conditions\nspecified in the opening part of sub-section (1) of Section\n80M would be fulfilled\t and the provision enacted in that\nsub-section would be attracted.\n\t\t\t [799G-800C]\n 5. The words \"such income by way of dividends\" must\nhave reference\tto the\tincome by way of dividends mentioned\nearlier and that would be income by way of dividends from a\ndomestic company which\t is included in the\tgross total\nincome. Consequently, in order\t to determine what is \"such\nincome by way of dividends\", the question to\t be asked is\nwhat is\t the income by way of dividends from\t a domestic\ncompany included in the gross total income and that would\nobviously be the income by way of dividends\tcomputed in\naccordance with\t the provisions\t of the Act. It is difficult\nto appreciate how, when interpreting the words \"such income\nby way\tof dividends\" a dichotomy can be made between the\ncategory of income and\t the quantum of the income by way of\ndividends so included. [800H-801C]\n 6. There is also\tanother\t strong\t indication in\t the\nlanguage of sub-section (1) of Section 80M which clearly\ncompels taking the view that the deduction envisaged by that\nprovision is required to be made with reference to\t the\nincome by way of dividends computed in accordance with the\nprovisions of the Act\tand not\t with reference\t to the full\namount of dividend received by the assessee. The indication\nwas also unfortunately lost sight of by the Court in Cloth\nTraders case presumably because it was not brought to the\nattention of the Court. The Court observed in Cloth Traders\ncase that the whole of the income by way of dividends from a\ndomestic company or 60% of such income as the same may be,\nwould be deductible from the gross total income for\n784\nstriving at the total income of\tthe assessee.\tThis\nobservation appears to have\t been\t made\tunder\tsome\nmisapprehension, because what sub-section (1) of Section 80M\nrequired is that the deduction of the whole or a specified\npercentage must be made from \"such\t income\t by way of\ndividends\" and\tnot from the gross total income. Now when in\ncomputing the total income of the assessee, a deduction has\nto be made from \"such income\tby way\tof dividends\" it is\nelementary that \"such income by way of dividends\" from which\ndeduction has to be made must be part of gross total income.\nIt is difficult to see how the language of this part of sub-\nsection (1) of Section\t 80M can possibly fit in it if \"such\nincome by way of dividends\" were interpreted to mean that\nfull amount of dividend received by the assessee. The full\namount of dividend received by the assessee would not be\nincluded in the gross\ttotal income, what would be included\nwould only be\t the amount of dividend as\tcomputed in\naccordance with\t the provisions of the Act. If that be so it\nis difficult to appreciate how for the purpose of computing\nthe total income from\tthe gross total income any deduction\nshould be required to\tbe made\t from the full amount of the\ndividend. The deduction required to be made for computing\nthe total income from\tthe gross total income\t can only be\nfrom the amount of dividend computed in accordance with the\nprovisions of the Act\twhich would be forming\t part of the\ngross total income.\tWhatever might have\t been\t the\ninterpretation placed on clause (iv) of sub-section (1) of\nSection 99 and Section\t 85A the correctness of which is not\nin issue, so far as sub-section ( )\tof Section 80M is\nconcerned, the\tdeduction required to be allowed under that\nprovision is liable to\t be calculated with reference to the\namount\tof dividend computed\t in accordance with\t the\nprovisions of the Act\tand forming part of the gross total\nincome and not with reference to the full amount of dividend\nreceived by the assessee. [801G-802F]\n 7. Structurally there is hardly any difference between\nSection 80E sub-section (1) and Section 80M sub-section (1)\nand the\t reasoning which appealed to\t the Court in\t the\ninterpretation of sub-section (1) of Section 80E in Cambay\nElectric Supply Industrial Company Ltd. v. C.I.T. must apply\nequally in the interpretation of sub-section (1) of Section\n80M. [803 B]\n 8. Ordinarily this Court would be reluctant to overturn\na decision given by a Bench of this\tCourt, because it is\nessential that there should be continuity and consistency in\njudicial decisions, and law should be certain and definite.\nIt is almost as important that the law should be settled\ncorrectly. But\tthere may be\tcircumstances where public\ninterest demands that the previous decision be reviewed and\nreconsidered. The doctrine of stare decisis should not deter\nthe Court from overruling an earlier\tdecision, if it is\nsatisfied that such decision is manifestly wrong or proceeds\nupon a\tmistaken assumption in regard\tto the\texistence or\ncontinuance of\ta statutory provision\tor is\tcontrary to\nanother decision of the Court. [805G-806A]\n 9. There are over-riding\tconsiderations which compel\nreconsideration and review of the decision in Cloth Traders\nCase. In the first place, the decision in Cloth Traders case\nwas rendered by this Court on 4th May, 1979 and immediately\nthereafter, with in a\tfew months, Parliament introduced\nSection 80AA with retrospective effect from Ist April, 1968\nwith a\tview to\t over-riding the interpretation placed on\nSection 80M in Cloth Traders case. The decision\n785\nin Cloth Traders case did not therefore hold the field for a\nperiod of more than a few months and it could not be said\nthat any assessee was misled into acting to its detriment on\nthe basis of that decision. There was no decision of this\nCourt in regard to the interpretation of sub-section (1) of\nSection 80M prior to the decision in Cloth Traders case and\nthere was therefore no\t authoritative pronouncement of this\nCourt on this\t question of interpretation on which an\nassessee could\t claim\t to rely for\t making\t its fiscal\narrangements. Another circumstance which makes is necessary\nto reconsider and review the decision in Cloth Traders Case,\nis the\tdecision in Cambay Electric Supply Company case. The\ndecision in Cloth Traders case is inconsistent with that in\nCambay Electric\t Supply Company's case\t Both cannot stand\ntogether. If one is correct, the other must\tlogically be\nwrong and vice-versa. It is therefore necessary to resolve\nthe conflict between these two decisions and harmonise the\nlaw and that necessitates an inquiry into the correctness of\nthe decision in Cloth\tTraders Case, and having considered\nand reviewed the decision in Cloth Traders case come to the\nconclusion that\t the decision\tin Cloth Traders Case is\nerroneous and must be over turned. [806C-807D]\n (Per A.N. Sen, J. concurring)\n The authority and jurisdiction of a larger Bench of\nthis Court to override\t and over-rule\tany decision of a\nsmaller Bench cannot be questioned. However, a decision of\nthis Court on any fiscal legislation involving the question\nof financial benefit and liability should not normally be\ninterfered with\t and should be interfered with only in very\nrare cases. On the basis of the decision of this Court on\nany fiscal legislation and any matter\t involving financial\narrangements and adjustments, parties are\tentitled to\narrange their financial affairs and in fact they so arrange\nand adjust the financial affairs on the basis of the law\nlaid down by this Court. Unsettling a position settled by\nthe decision of this Court may lead to the confusion and\nresult in financial instability, causing serious prejudice\nnot only to the parties concerned but also to the economic\ngrowth of the country as a whole. [808 C-E]\n 2. If on interpretation of any provision of any fiscal\nlegislation two\t views may be reasonably possible, a larger\nBench of this Court may not interfere with a view taken by a\nsmaller Bench by this\tCourt mainly on the ground that the\nother view appears to the larger Bench to be the better view\nand may\t commend itself\t to the larger Bench. If, however, a\ndecision of the smaller Bench has necessarily to interfere\nwith the decision, as\tthis Court will not permit a wrong\ndecision to operate as good law of the land. [808 F]\n\n\n\nJUDGMENT:\n ORIGINAL JURISDICTION: Writ Petition No. 2043 of 1981.\n Under Article 32 of the Constitution of India\n K.H. Kaji and M.N. Shroff for the Petitioners.\n K. Parasaran, Attorney General and K.S. Gurumoorthy for\nthe Respondents.\n786\n The following Judgments were delivered\n BHAGWATI, J. This writ petition raises an interesting\nquestion of construction of Section 80 M of the Income Tax\nAct, 1961. This question would appear\t to be\tconcluded in\nfavour of the assessee\t by the\t decision of this Court in\nCloth Traders Limited v. Additional Commissioner of Income\nTax, 118 ITR 243, but the correctness of the view taken in\nthat case has been challenged in the present writ petition.\nSince the decision in\tCloth Traders Case (supra) was given\nby a Bench of three Judges, it is obvious that its validity\ncan be\tcanvassed before this Bench which consists of five\nJudges. If this Bench\ttoo takes the same view in regard of\nthe construction of Section 80M as that taken in Cloth\nTraders case (supra), it would become necessary to consider\nthe question of constitutional\t validity of Section\t80AA\nwhich was introduced in the Income Tax Act, 1961 by Section\n12 of the Finance (No. 2) Act 1980 with a view to overriding\nwith retrospective effect the construction placed on Section\n80M by\tthis in\t Cloth Traders case (supra). If on the other\nhand, this Bench disagrees with the view taken in Cloth\nTraders\t case\t(supra)\t and hold that even\t before\t the\nintroduction of Section 80AA, Section 80M,\t on a\ttrue\ninterpretation of its language, meant exactly what Section\n80AA now retrospectively declares it to mean, no question of\nconstitutional validity\t of Section 80AA would\t arise since\nSection 80AA would then be merely declaratory of the law as\nit always was and would not be imposing any new tax burden\nwith retrospective effect. The\t first question that we must\ntherefore consider is as to what is the true construction of\nSection\t 80M unaided\t by the subsequent\t legislative\ninterpretation imposed\tupon it\t by the enactment of Section\n80AA: do we affirm the view taken in\t Cloth Traders\tcase\n(supra) or do we dissent from it.\n We have given our\t most anxious consideration to this\nquestion, particularly\t since\t one of us, namely,\tP.N.\nBhagwati, J. was a party to the decision in Cloth Traders\ncase (supra). But having regard to various considerations to\nwhich we shall advert in detail when we\texamine\t the\narguments advanced on behalf of the parties, we\t are\ncompelled to reach the\t conclusion that Cloth Traders case\nmust be\t regarded as wrongly decided. The view taken in that\ncase in\t regard to the construction of Section 80M must be\nheld to be erroneous and it must be corrected. To perpetuate\nan error is no\t heroism. To rectify it is the compulsion of\njudicial conscience. In this we derive comfort and strength\nfrom the wise and inspiring words of\n787\nJustice Bronson in Pierce v. Delameter A.M.Y. at page 18: \"a\nJudge ought to be wise enough\t to know that he is fallible\ntherefore everyday to learn: great and honest enough to\ndiscard all mere pride of opinion and follow truth wherever\nit may\tlead: and courageous\tenough\tto acknowledge\t his\nerrors\".\n We\t may begin our discussion by referring to\t the\nlegislative history of the provision enacted in Section 80M\nbut before we do so, a brief statement of facts may help to\nprovide\t the back-drop against which the\tquestion of\nconstruction of Section 80M\t arises\t for consideration.\nPetitioner No.\t1 was incorporated as\ta limited company on\n10th November 1941 under the Baroda Companies Act, 1918 and\nat all\t material times it carried\ton business of an\ninvestment company. Petitioner No. 2\tis a Director\t and\nshareholder of\tPetitioner No.\t1. Throughout the material\nperiod with which we are concerned in this writ petition,\nPetitioner No.\t1 received dividends on shares held by it in\ndifferent domestic companies and paid interest on monies\nborrowed for the purpose of investment in such shares. In\nthe course of its assessments for the assessment years 1970-\n71 upto 1980-81, Petitioner No. 1 claimed that the deduction\npermissible under Section 80M must\tbe calculated\twith\nreference to the full\t amount\t of dividends\treceived by\nPetitioner No.\t1 from\t domestic companies and not\twith\nreference to the dividend income as computed in accordance\nwith the provisions of the Income Tax Act, 1961. This claim\nwas liable to succeed\tif the\tview taken in Cloth Traders\ncase (supra) in regard\t to the\t construction of Section 80M\nwas correct and some of the assessments of Petitioner No. 1\nwere actually completed on the basis\tthat this claim was\njustified. The\t Revenue preferred appeals against\tsuch\nassessments and\t these appeals\twere pending at different\nstages at the time of filing of the present writ petition.\nThe assessments\t for some of the assessment years were also\npending before\tthe Income tax\t Officer. So long as\t the\ndecision in Cloth Traders case (supra) stood unaffected by\nany Constitutionally valid legislative amendment, Petitioner\nNo. 1 was entitled to succeed in the appeals as well as in\nthe original assessments which\t were pending consideration\nbefore different authorities. But with a view to overriding\nthe decision\tin Cloth Traders case (supra)\twith\nretrospective effect, Parliament enacted Section 80AA\t and\nsince this section was deemed to have been introduced in the\nIncome Tax Act, 1961 with effect from Ist April, 1968 and it\nprovided that the deduction required to be allowed under\nSection 80M shall be computed not with reference to\t the\ngross amount of dividend received by the assessee from a\n788\ndomestic Company but with reference to the dividend income\nas computed in accordance with the provisions of the Act,\nthe claim of petitioner No. 1 for deduction on the basis of\nthe full amount of dividend received\tby it from domestic\ncompanies was liable to be rejected and deduction could be\nallowed to petitioner no. 1 only with reference to\t the\ndividend income computed in accordance with the provision of\nthe Act. The introduction of Section\t80AA thus had\t the\neffect of enhancing the tax liability\t of petitioner No. 1\nand the\t petitioners accordingly filed the present\twrit\npetition challenging the constitutional validity of Section\n80AA on\t the ground that it enhanced\tthe tax burden of\npetition No. 1 with retrospective effect going back for a\nperiod of almost 12 years and\t thus imposed\tunreasonable\nrestriction on the right of petitioner No. 1 to carry on its\nbusiness in breach of Article 19(1)(g) of the Constitution.\n We may first set\tout the\t history of the legislation\npreceding the enactment of Section 80M, since considerable\nreliance was placed on this history both in the decision in\nCloth Traders case (supra) as also in the course of\t the\narguments in\tthe present writ petition. The earliest\nprovision granting exemption from super tax in respect of\ninter-corporate dividends was\tmade as far back as\t 9th\nDecember 1933 in a notification issued by the Governor\nGeneral in Council and it provided as follows:\n\t \"The Governor\t General in Council is\t pleased to\n exempt from super tax-(i) so much of the income of any\n investment trust company as is derived from dividends\n paid by any other\t company which\thas paid or will pay\n super-tax in respect of the profits out of which such\n dividends are paid.\"\n This provision came up for consideration before a\nDivision Bench\tof the\tHigh Court of Bombay in C.I.T. v.\nIndustrial Investment Trust Co. Ltd. (1968) 67 I.T.R. 437\nand the\t question was whether the dividend income exempted\nfrom super tax the entire income by way of dividend received\nby an investment trust\t company or the dividend income as\ncomputed in accordance with the provisions of the Act, i.e.\nafter deducting\t the expenses incurred in earning it.\t The\nHigh Court of Bombay held that the \"dividend income which\nwas exempted under the\t notification would be the dividend\nincome received by the assessee and not the said income less\nany further amounts\" because\t\"the notification must be\nregarded as a self-contained one\n789\nand not\t controlled by\tany other provisions of the Act\" and\nthere was \"no warrant\tto construe the word 'income' in the\nnotification as\t total income nor to qualify the dividend\nincome specified in the said notification as the dividend\nincome computed\t under Section\t12 of the Act.\" It was thus\nheld that the entire amount of dividend received by an\ninvestment trust company would be exempt from super tax and\nnot the\t amount of dividend minus the expenses incurred in\nearning\t it. It may\tbe noticed, and this\t aspect\t was\nemphasised by the Bombay High Court, that what was exempted\nfrom super tax under the notification\t was \"so much of the\nincome of any investment trust company as is derived from\ndividends paid\tby any\tother company\"\t and there was no\nreference to 'total income' in the notification nor was any\nindication given in the notification that the income derived\nfrom dividends\twhich was sought to be exempted from super\ntax was\t dividend income forming part of 'total income' and\nthat is\t why the Bombay High Court came to the conclusion\nthat the dividend income exempted under the notification was\nthe entire income by\tway of\t dividend received by\t the\nassessee and\tnot the dividend income as\tcomputed in\naccordance with the provisions of the Act.\n The High Court of Bombay in taking this view in\nIndustrial Investment Trust Company's case was guided by the\ndecision of this Court in C.I.T. v. South Indian Bank (1966)\n59 I.T.R. 763. Since the decision in South Indian Bank case\n(supra) is the only decision of this Court respecting an\nallied provision prior to the decision in Cloth Traders case\n(supra), it is necessary to refer to it in some detail in\norder to see whether it really supports the conclusion\nreached in Cloth Traders case (supra). The question which\narose in South Indian Bank case (supra) was in regard to the\ntrue interpretation of a notification issued by the Central\nGovernment under Section 60A of the Indian Income Tax Act,\n1922. This notification was subsequent in point of time to\nthe notification which came to be considered by the High\nCourt of Bombay in the Industrial Investment Trust Company's\ncase, but it came up for construction before\t this court\nearlier in South Indian Bank case (supra). This notification\nwas in the following terms:\n\t \"No income-tax shall be payable by an assessee on\n the interest received on the following income-tax free\n loans issued by the former Government of Tranvancore or\n by the former Government of Cochin, provided that such\n790\n interest is received within the\tterritories of\t the\n State of Travancore Cochin and is not brought into any\n other part of the taxable territories to which the said\n Act applies. Such interest shall, however, be included\n in the total income of the assessee for the purpose of\n section 16 of the Indian Income-tax Act, 1922.......\"\nThe argument of the Revenue was that the exemption\tfrom\nincome tax granted under this notification was in respect of\ninterest receivable on securities\tminus the expenses\nincurred in earning it\t and not in respect of the entire\namount of interest because it\t was only that amount of\ninterest arrived at after computation in accordance\twith\nSection 8 of the old Act which was includible in the total\nincome and liable to bear tax and the exemption from the tax\ncould, therefore only be in respect of such\tamount. This\nargument was negatived by the court and it was pointed out\nby Subba Rao, J. that (p. 766):\n\t \"....this notification does\t not refer to\t the\n provision of section 8 of the Income-tax Act at all. It\n gives a total exemption from income-tax to an assessee\n in respect\t of the\t interest receivable on income-tax\n free loans\t mentioned therein. It gives that exemption\n subject two conditions, namely (i) that the interest is\n received within\tthe territories of the State of\n Travancore-Cochin, and (ii) that\tit is not brought to\n any other\tpart of the taxable territories. It includes\n the said exempted interest in the total income of the\n assessee for the purpose\tof section 16 of the Income-\n tax Act. Shortly stated,\tthe notification is a self-\n contained one; it provides an exemption from income-tax\n payable by\t an assessee on a particular class of income\n subject to specified conditions. Therefore, there is no\n scope for controlling\t the provisions of\t the\n notification with\treference to section 8 of the Income\n tax Act. The expression 'interest receivable on income-\n tax free loans' is clear and unambiguous. Though the\n point of time from which the exemption works is when it\n is received within the territories of the State of\n Travancore-Cochin, what is exempted is the interest\n receivable. 'Interest receivable' can only mean\t the\n amount of\tinterest calculated as per the terms of the\n securities. It\tcannot\t obviously mean interest\n receivable minus the amount spent in receiving\t the\n same.\"\n791\nIt will\t be noticed that the entire basis of the judgment of\nthe Court was that the notification was a self-contained one\nand it gave exemption from income tax in respect of interest\nreceivable on certain categories of income tax free loans,\nwithout any reference to total income, or to \"the provisions\nof section 8 of the Income tax Act at all.\" That is why the\njudgment pointed out that there was no scope for controlling\nthe provisions of the notification with reference to section\n8 of the Income Tax Act and proceeded to hold that what was\nexempted from\t income\t tax under the notification\t was\n\"interest receivable\" that is, \"the\tamount\tof interest\ncalculated as per the\tterms of the\tsecurities\" without\ndeduction of the \"amount spent in receiving the same\". There\nwas nothing in the notification to indicate that what was\nsought to be exempted was the amount of interest included in\nthe total income'.\n Thereafter a provision of a similar kind granting\nexemption from\tsuper tax in respect of certain specified\ncategories of inter-corporate dividends was introduced as\nSection 56 in the Indian Income Tax 1922 by the Finance Act,\n1953. It is however not necessary to\t make any detailed\nreference to this provision since there is no decided case\nwhich has considered this provision or expressed any opinion\nupon it.\n When the Indian Income Tax Act 1922 was repealed and\nthe Income Tax Act 1961 was enacted with effect from Ist\nApril, 1962, section 99 sub-section (i) was introduced in\nthe new\t Act exempting\tcertain categories of\tincome\tfrom\nsuper tax and one such category was that set out in clause\n(iv). Section\t99 sub-section\t (1) clause (iv) read as\nfollows:\n\t \"99. (1) Super-tax shall not be payable by an\n assessee in respect of the following amounts which are\n included in his total income .... (iv) if the assessee\n is a company, any\t dividend received by\tit from an\n Indian company, subject to the provisions contained in\n the Fifth Schedule.\"\nThis provision\tcontinued in force upto Ist\tMarch,\t1965\nsubject to a minor inconsequential amendment\tmade by\t the\nFinance Act 1964. Now\tthis provision\tdid not\t at any time\ncome up\t for interpretation before this Court prior to the\ndecision in Cloth Traders case but it\n792\ndid came to be\t considered by\tsome of the High Courts. The\nquestion in regard to\tthe interpretation of this provision\nwhich arose before the High Court of Bombay in C.I.T. v. New\nGreat Insurance\t Company Ltd.\t(1963)\t90 I.T.R. 348\t was\nwhether the exemption granted\tunder this provision was in\nregard to the entire amount of dividend received by\t the\nassessee from an Indian Company or it was limited to the\ndividend income\t computed in accordance with the provisions\nof the\tAct and\t forming part of 'total income'. The\tHigh\nCourt of Bombay accepting the contention of the assessee\nheld that on a plain reading of clause (iv) sub-section (1)\nof Section 99, it was clear that the exemption from super\ntax was\t granted in respect of \"any dividend received by it\nfrom an\t Indian Company\" and these last words, according to\ntheir plain grammatical construction,\tcould mean only one\nthing, namely, the entire amount of dividend received by the\nassessee from an Indian Company and nothing less. The Bombay\nHigh Court emphasised the\tword 'received' following\nimmediately upon the word 'dividend' and observed that the\nuse of\tthis word also showed\tthat the exemption was in\nregard to the dividend\t received and not in regard to the\ndividend received minus the expenses. The High Court of\nBombay\tpointed\t out that the\t words\t\"amounts which\t are\nincluded in his total income\" in the opening part of section\n99 sub-section\t(1) did\t not have any limitative effect but\nthey were used merely as a convenient mode of describing the\ndifferent items\t of income set out in clauses (i) to (v) of\nthat sub-section. Clauses (i)\tto (v) referred to different\nitems of income which were sought to be exempted from super\ntax under sub-section (1) of Section 99 and it was only if\nthese items of income\twere included in the total income of\nthe assessee that the\tquestion of exemption from super-tax\nwould arise and hence the legislature used the general words\n\"amounts which\tare included in his total income\" in\t the\nopening part of sub-section (1) of section 99 as an omnibus\nformula\t to cover these different items. These words,\naccording to the Bombay High Court, were descriptive of the\nitems of income a included in the computation of the total\nincome and were not indicative of the quantum of the amounts\nof the different items included in such computation and they\ndid not, therefore, have the effect of cutting down\t the\nplain natural meaning of the words \"any dividend received by\nit from\t an Indian company\" which represented the quantum of\nincome in respect of which exemption\tfrom super-tax\t was\ngranted under the section. It may be pointed out that the\nsame view in regard to the construction of clause (iv) of\nsub-section (1) of Section 99 was taken by the Calcutta High\nCourt in C.I.T. v.\n793\nDarbhanga Marketing Company Limited and this decision of the\nCalcutta High Court was noted with approval by the\tHigh\nCourt of Bombay in New Great Insurance Company's\tcase\n(supra). The same view\t was also taken by the Madras High\nCourt in C.I.T. v. Madras Motor and General Insurance\nCompany and it was approved in a later decision of the same\nHigh Court in Madras Auto Service v. I.T.O. It would thus be\nseen that, on a construction of clause (iv) of sub-section\n(1) of\tSection\t 99, three High Courts, namely, Bombay,\nCalcutta and Madras took the view that the entire amount of\ndividend received by the assessee from an Indian company was\nexempt from super tax\tand the exemption was not limited to\ndividend income\t computed in accordance with the provisions\nof the Act and forming part of the 'total income'.\n This view\ttaken by the three High Courts was strongly\nrelied\tupon by the\t petitioners in support of\t the\nconstruction of Section 80M canvassed on their behalf and in\nfact the decision in Cloth Traders case (supra) sought to\nderive\tsome strength\t from this view. But\t on further\nreflection we do not see how\tthis view taken by the three\nHigh Courts in regard to the construction of clause (iv) of\nsub-section (1) of Section\t 99 can assist in\t the\ninterpretation of an entirely\tnew section, namely, Section\n80M which, as we shall presently point out, is different in\nits structure,\tlanguage and content from clause (iv) sub-\nsection (1) of Section 99. We may point out that some doubt\nwas raised on behalf of the\tRevenue\t in regard to\t the\ncorrectness of\tthis view taken by the three High Courts but\nwe do not think it necessary to consider whether this doubt\nis well\t founded or not because we are of the view that even\nif the construction placed on clause (iv) of sub-section (1)\nof Section 99 by the three High Courts were correct, it\ncannot necessarily lead to the conclusion that a similar\nconstruction must also be placed on Section 80M which is\ndifferent in material respects\t from clause (iv) of\tsub-\nsection (1) of Section\t 99. It\t is most unsafe to try to\narrive at the true meaning of\t a statutory provision by\nreference to an interpretation which. might have been placed\non an earlier statutory provision which is not only couched\nin different language but is also structurally different We\nmust therefore\tconstrue the language of Section 80M on its\nown terms uninhibited by any interpretation which may have\nbeen placed on clause (iv) of sub-section (1) of Section 99\nby any High Court.\n794\n We may, proceeding further with the narration of the\nhistory of the legislation, point out that Section 99 sub-\nsection (1) remained in force only upto the\tclose of the\nassessment year\t 1964-65 and by an amendment made by\t the\nFinance Act No. 10 of 1965 Section 99 sub-section (1) was\nomitted and Chapter VI A and Section 85A were introduced in\nthe present Act with effect from Ist April, 1965. Chapter VI\nA comprised Section 80A to\t80D providing\tfor certain\nspecified deductions to be made in computing total income,\nwhile Section 85 A in\t so far as material\tprovided as\nfollows:\n\t \"85A.\t Deduction of\t tax\ton inter-corporate\n dividends where the total\t income of an assessee being\n company includes\t any income by way of dividends\n received by it from an Indian company or a company\n which has\tmade the prescribed arrangements for\t the\n declaration and\tpayment\t of dividends\t (including\n dividends on preference shares )\t within\t India,\t the\n assessee shall be entitled to a\tdeduction from\t the\n income tax\t with which it is chargeable on its total\n income for any assessment year of so much of the amount\n of income\ttax calculated at the average rate of\n income-tax on the income\tso included (other than any\n such income on which no income-tax is payable under the\n provisions of this Act) as exceeds an amount of twenty\n five per cent thereof..\nThis section too came\tto be considered by the Bombay High\nCourt in New Great Insurance Company's case (supra) because\ntwo of the assessment years with which the Bombay High Court\nwas concerned in that case were assessment years 1965-66 and\n1966-67 when Section 85A was in force. The Bombay High Court\npointed out that except for some minor verbal changes,\nSection 85A was almost in the same terms as Section 99 sub-\nsection (1) clause (iv), the only real difference being that\nthe exemption granted\tunder Section\t99 sub-section\t (1)\nclause (iv) was in regard to super-tax, while the deduction\nallowed under Section 85A was in regard to income-tax. The\nsame interpretation was, therefore, placed on Section 85A as\nin the case of Section 99 sub-section (1) clause (iv) and it\nwas held that under Section 85A the\t assessee would be\nentitled to deduction of income-tax in respect of the whole\nof the\t dividend received from an Indian company.\t The\nexpression \"where the total income...... includes any income\nby way\tof dividends\" in the opening part of Section 85A was\nconstrued as referring to the\n795\ncategory of income by\tway of\tdividends received from an\nIndian company.\t so that if this particular\tcategory of\nincome is included in\tthe computation of total income, the\nassessee would\tbe entitled to a deduction of so much of the\namount of income-tax calculated at the average rate of\nincome-tax on the \"income so included\" as exceeds an amount\nof twenty-five per cent of such income. The words \"income so\nincluded\" were\tread to\t mean not the quantum of the \"income\nby way\tof dividends\" included in the total income but the\nincome falling\twithin the category of\t \"income by way of\ndividends from\tan Indian company\" included in the total\nincome. Thus, the view\t taken by the Bombay High Court was\nthat under Section 85A also, the deduction admissible was in\nrespect of the entire\tdividend 'received by the assessee\nfrom an Indian company and not in respect of dividend income\nminus deductions allowable under the provisions of the Act\nin computing 'total income'.\n But here again we are not concerned to inquire whether\nthe view taken by the\t Bombay\t High Court in New Great\nInsurance Company's case (Supra) is correct, though it must\nbe conceded that it has been\theld to\t be correct in\t the\ndecision in Cloth Traders Case (Supra). We do feel, however,\nthat another view in regard to the interpretation of Section\n85A is\tpossible. It is not at all unreasonable to construe\nthe words \"income so included\" as meaning the quantum of\nincome by way of dividends included in the total income of\nthe assessee. These words in the context in which they occur\nhave obviously\treference to quantum of the income by way of\ndividends to which the\t average rate of income tax is to be\napplied. That quantum is defined by these words and in order\nto determine it, we have to ask the question: what is the\nincome by way of dividends included in the total income and\nthe answer can only be that\tit is\tincome\tcomputed in\naccordance with\t the provisions\t of the Act. But, as we have\npointed out above, it\tis not necessary to consider whether\nthe construction placed on Section 85A by the Bombay High\nCourt in New Great Insurance\tCompany's case\t (supra) is\ncorrect or not, because we are not concerned here with the\ninterpretation of Section 85A.\t It is Section 80M which has\nto be construed and this Section as we shall presently show,\nis materially different from Section 85A. We cannot construe\nSection 80M in the light of the interpretation placed on its\npredecessor section by the Bombay High Court particularly\nwhen Section 80M is admittedly worded differently from its\npredecessor section. We must construe Section 80M on its own\nand arrive at its true interpretation according to the plain\nnatural\t language meaning of\t the words used by\t the\nlegislature.\n796\n It seems that the spate of changes in this legislative\nprovision did not come\t to an\tend with the enactment of\nSection 85A. The original Chapter VI\tA and certain other\nsection including Section 85 A were deleted from the present\nAct by\tthe Finance (No. 2) Act, 1967, with effect from Ist\nApril 1968, and replaced by a new Chapter\tVI A which\ncontains a fasciculus of sections from Section 80A to 80VV.\nSection 80A, sub-section (1) provides that in computing the\ntotal income of an assessee there shall be allowed from his\ngross total income, in\t accordance with and subject to the\nprovisions of Chapter VI A, the deductions specified in\nSection 80C to Section\t 80VV and sub-section (2) of\tthat\nSection imposes\t a ceiling on such deductions by enacting\nthat the aggregate amount of such deductions shall not, in\nany case, exceed the gross total income of the assessee. The\nexpression \"gross total income\" is defined in clause (v) of\nSection 80B to mean the total income computed in accordance\nwith the provisions of the Act before making any deductions\nunder Chapter VI A or under Section 280 D. Section 80M is\nthe new\t Section which\tcorresponds to\tthe repealed Section\n85A and\t it provides for deduction in respect\t of certain\ncategories of\t inter-corporate dividends. It is\t the\ninterpretation\tof this section which constitutes\t the\nsubject-matter of controversy between the parties and hence\nit would be desirable to set it out in extenso. This Section\nhas under-gone\tchanges from time to time since the date of\nits enactment and we will therefore reproduce it in the form\nin which it stood when originally enacted:\n\t \"80M.\t Deduction in\trespect\t of certain inter-\n corporate dividends- (1) Where the gross total income\n of an assessee being a company includes any income by\n way of dividends\t received by it from\t a domestic\n company, there shall in accordance with and subject to\n the provisions of this\t section, be\tallowed, in\n computing the total income of the assessee, a deduction\n from such income by way of dividends of an amount equal\n to-\n\t (a) Where the assessee is a foreign company-\n\t (i) in respect of such income by was of dividends\n\t received by it from an Indian company which\n\t is not such a company as is referred to in\n\t Section 108 and which is mainly engaged in a\n\t priority industry\n 80% of such income;\n797\n\t (ii) in respect of such income by way of dividends\n\t other than the dividends referred to in sub-\n\t clause (i)\n\t\t\t 65% of such income;\n\t (b) where the assessee is a domestic company-\n\t in respect of any such\t income\t by way of\n\t dividends\n\t 60% of such income\"\nThere were several amendments\tmade subsequently in\tthis\nSection but they relate primarily to the percentage of the\nincome to be allowed as a deduction and do not have any\nbearing on the question of interpretation posed before us.\nOne amendment is however material and that was made by the\nFinance Act 1968 by which the words \"received by\t it\"\noccurring in sub-section (1) of Section 80M were omitted\nwith effect from 1st April 1968 so that right from the date\nof its enactment, Section 80M sub-section (1) was to be read\nas if the words \"received by\tit\" were not in the opening\npart of that provision.\n Soon after\t the enactment\tof Section 80M\t a question\narose before the Gujarat High Court in Addl. C.I.T. v. Cloth\nTraders Private\t Limited whether on a\ttrue construction of\nthat Section, the permissible deduction is to be calculated\nwith reference\tto the\tfull amount of dividends received by\nthe assessee from a domestic company\tor with reference to\nthe dividend\tincome\tcomputed in accordance with\t the\nprovisions of the Act, that is, after deducting the interest\npaid on monies borrowed for earning such income. The Gujarat\nHigh Court in a Judgment delivered on 28th November 1973,\nheld that the deduction permissible under Section 80M is\nliable to be calculated with\treference to the dividend\nincome computed in accordance with the provisions of the Act\nand not\t with reference\t to the\t full amount of dividends\nreceived by the assessee. The assessee being aggrieved by\nthis judgment preferred an appeal to\tthis Court and this\nappeal was allowed by\t the judgment\tdelivered in Cloth\nTraders Case (supra). This Court over-ruled the view taken\nby the\tGujarat High Court and held\tthat the deduction\nrequired to be allowed under Section 80M must be calculated\n\"with reference\t to the\t full amount of dividends received\nfrom a domestic company and\n798\nnot with reference to\tthe dividend income as\t computed in\naccordance with\t the provisions\t of the\t Act, that is, after\nmaking deductions provided under the Act.\" This decision was\ngiven by the Court on 4th May 1979.\n Now, according to Parliament,\tthis interpretation\nplaced on Section 80M\tby the\t summit\t court\twas not in\nconformity with\t the legislative intent and it resulted in\nconsiderable unjustified loss of revenue.\t Parliament\ntherefore immediately proceeded to set right what, according\nto it was an interpretation contrary\tto the\t legislative\nintent\tand with a\tview to setting at\tnaught\tsuch\ninterpretation. Parliament, by Section 12 of Finance (No. 2)\nAct 1980, introduced in the Income Tax Act, 1961, Section\n80AA with retrospective effect from 1st April 1968, that is\nthe date when Section 80M was originally enacted, providing\nthat the deduction required to be allowed under Section 80M\nin respect of inter-corporate\tdividends \"shall be computed\nwith reference\tto the\tincome by way of such dividends as\ncomputed in accordance with the provisions of this\t Act\n(before making\tany deduction under this Chapter) and\t not\nwith reference to the gross amount of such dividends\". It is\nthe validity of this new Section 80AA which is challenged in\nthe present writ petition. But we may make it clear that\nwhat is\t challenged is\tnot the prospective operation of\nSection 80AA. That would clearly be unexceptionable because\nthe Legislature\t can always impose a\tnew tax burden or\nenhance an existing tax liability with prospective effect.\nBut the\t complaint of the assessee was against retrospective\neffect being given to Section 80AA, because that would have\nthe effect of enhancing the tax burden on the assessee by\nsetting at naught the\tinterpretation placed on Section 80M\nby the\tdecision in Cloth Traders case and reducing\t the\namount of deduction required to be allowed under Section\n80M. However, as pointed out at the commencement of this\njudgment, it\twould become\tnecessary to examine\tthis\ncomplaint against the constitutional validity\t of\nretrospective operation\t of Section 80AA only\tif we affirm\nthe interpretation placed on Section 80M by the decision of\nthis Court in Cloth Traders case. If we do not agree with\nthe decision of this Court in Cloth Traders case (supra) and\ntake the view that the Gujarat High Court was right in the\ninterpretation placed by it on Section 80M in Addl. C.I.T.\nv. Cloth Traders Private\tLimited\t no question\t of\nconstitutional validity\t of the\t retrospective operation of\nSection 80AA would remain to be considered, because in that\nevent Section 80AA in\tits retrospective operation would be\nmerely\tclarificatory\tin nature and\t would\tnot involve\nimposition of any new tax burden.\n799\n We may therefore first examine the language of Section\n80M for\t arriving at its true interpretation. But before we\ndo so,\tlet us\tconsider what is the object behind grant of\nrelief under Section 80M. It was common ground between the\nparties that the main object of the relief under Section 80M\nis to avoid taxation\tonce again in\t the hands of\t the\nreceiving company of the amount which has already borne full\ntax in\tthe hands of the paying company. Vide the written\nsubmission under the heading \"Object of relief on inter-\ncorporate dividends\" filed by the learned counsel on behalf\nof the\tassessee in the course of the arguments. Now when an\namount by way of dividend is received by the assessee from\nthe paying company, the full amount of such dividend would\nhave suffered tax in the assessment of the paying company\nand it is obvious, that, in order to encourage inter-company\ninvestments, the Legislature\tintended that\tthis amount\nshould not bear tax once again in the hands of the assessee\neither its entirety or to a specified extent. But the amount\nby way\tof dividend which would other-wise suffer tax in the\nhands of the asseesee,\t would be the\tamount\tcomputed in\naccordance with\t the provisions\t of the Act and not the full\namount received\t from the paying company. Therefore it is\nreasonable to assume that in\t enacting Section 80M\t the\nLegislature intended to grant\trelief with reference to the\namount\tof dividend computed\t in accordance with\t the\nprovisions of the Act\tand not\t with reference\t to the full\namount of dividend received from the paying company. It is\ndifficult to imagine any reason why the Legislature should\nhave intended to give\trelief with reference to the\tfull\namount of dividend received from the\tpaying company\twhen\nthat is\t not the amount with is liable to suffer tax once\nagain in the hands of the assessee. The Legislature could\ncertainly be attributed the intention\t to prevent double\ntaxation but not to provide an additional benefit which\nwould go beyond what is required for saving the amount of\ndividend from taxation once again in\t the hands of\t the\nassessee. Bearing in mind these prefatory observations in\nregard to the legislative object, we\tmay now\t proceed to\nconstrue the language of Section 80M.\n Section 80M sub-section (1) opens with the words \"where\nthe gross total income\t of an\tassessee........includes any\nincome by way of dividends from a domestic company\"\t and\nproceeds to say that in such a case, there shall be allowed\nin computing the total\t income of the assessee, a deduction\n\"from such income by way of dividends\" of an amount equal to\nthe whole of such income or 60% of such income, as the case\nmay be, depending on the nature of the domestic company from\nwhich the income by way of dividends is\n800\nreceived. The opening words describe the condition which\nmust be\t fulfilled in order to attract the applicability of\nthe provision contained in sub-section (1) of Section 80M.\nThe condition is that the gross total income of the assessee\nmust include income by\t way of\t dividends from\t a domestic\ncompany. \"Gross\t total income\"\tis defined in\tSection\t 80B\nclause (v) to mean \"total income computed in accordance with\nthe provisions\tof the Act before making any deduction under\nChapter VIA or\t under\tSection\t 280D.\"\t Income\t by way of\ndividends from\ta domestic company included in the gross\ntotal income would therefore obviously be income computed in\naccordance with\t the provisions\t of the\t Act, that is, after\ndeducting interest on\tmonies\tborrowed for earning\tsuch\nincome. If income by way of\tdividends from\t a domestic\ncompany computed in accordance\t with the provisions of the\nAct in\tincluded in the gross\ttotal income, or in other\nwords, forms part of the gross total income, the condition\nspecified in the opening part of sub-section (1) of section\n80M would be fulfilled\t and the provision enacted in that\nsub-section would be attracted.\n Now it was urged\ton behalf of the assessee that the\nwords \"Where the gross total income of an assessee..........\nincludes any income by\t way of\t dividends from\t a domestic\ncompany\" in the opening part of sub-section (1) of Section\n80M refer only to the inclusion of the category of income\nand not\t to the\t quantum of such income and therefore\t the\nwords \"such income by\tway of dividends\" following upon the\nspecification of this condition, cannot have\treference to\nthe quantum of the income included\t but must be\theld\nreferable only\tto category of the income included, that is,\nincome by way of dividends from a domestic company. This was\nthe same argument which found favour with the Court in Cloth\nTraders case (supra), but on fuller consideration, we do not\nthink it is well founded. We\tmay assume with the Court in\nCloth Traders case that the words \"where the\t gross total\nincome of an assessee............. includes any income by\nway of\tdividends from a domestic company\" are intended only\nto provide that a particular category\t of income, namely,\nincome by way of dividends from a domestic company should\nform a\tcomponent part\tof gross, total income, irrespective\nof what\t is the\t of quantum income so\tincluded but it is\ndifficult to see how the factor of quantum can altogether be\nexcluded when we talk of any category of income included in\nthe gross total income. What is included in the gross total\nincome in such a case is a particular quantum of income\nbelonging to the specified category. Therefore the words\n\"such income by way of dividends\" must be referable not only\nto the cate-\n801\ngory of\t income included in the gross total income but also\nto the\tquantum of the income so included. It is obvious, as\na matter of plain grammer that the words \"such income by way\nof dividends\" must have reference to\tthe income by way of\ndividends mentioned earlier and that would be income by way\nof dividends from a domestic company\twhich is included in\nthe gross total income. Consequently, in order to determine\nwhat is\t \"such income by way of dividends\", we have to ask\nthe question: what is the income by way of dividends from a\ndomestic company included in the gross total income and that\nwould obviously\t be the\t income by way of dividends computed\nin accordance\twith the provisions of the\tAct. It is\ndifficult to appreciate how, when we\tare interpreting the\nwords \"such income by\tway of\tdividends\", we\tcan make a\ndichotomy between the category of income by way of dividends\nincluded in the gross\ttotal income and the quantum of the\nincome by way of dividends so included. This Court observed\nin Cloth Traders case that the words \"such income by way of\ndividends\" as a matter of plain grammer must be substituted\nby the\twords \"income by way of dividends from a domestic\ncompany\" in order to arrive at a proper construction of the\nsection, but there is\ta clear fallacy in this observation,\nbecause in making the\tsubstitution it\t stop short with the\nwords \"income by way of dividends from a domestic company\"\nand does not go the full length to which plain grammer must\ndictate us to go, namely, 'income be way of dividends from a\ndomestic company included in the gross total income\"\n(emphasis supplied). Otherwise we would not be giving to the\nword 'such' its full meaning and effect. The word 'such' in\nthe context in which it occurs can only mean that income by\nway of\tdividends from\ta domestic company which is included\nin the\tgross total income and\t that must necessarily be\nincome by way of dividends computed in accordance with the\nprovisions of the Act.\n There is also one other\t strong\t indication in\t the\nlanguage of sub-section (1) of Section 80M which clearly\ncompels us to take the view that the deduction envisaged by\nthat provision\tis required to be made with reference to the\nincome by way of dividends computed in accordance with the\nprovisions of the Act\tand not\t with reference\t to the full\namount of dividend received by the assessee. This indication\nwas also unfortunately lost sight of by the Court in Cloth\nTraders case presumably because it was not brought to the\nattention of the Court. The Court observed in Cloth Traders\ncase that the whole of the income by way of dividends from a\ndomestic company or 60% of such income as the case may be?\nwould be deductible from the gross\n802\ntotal income for arriving at\t the total income of\t the\nassessee. We are afraid this observation appears to\thave\nbeen made under some misapprehension,\t because what\tsub-\nsection (1) of Section 80M requires is that the deduction of\nthe whole or a specified percentage must be made from \"such\nincome by way of dividends\" and not from the gross total\nincome. Sub-section (1) of Section 80M provides that in\ncomputing the total income of the assessee there shall be\nallowed a deduction from \"such income by way of dividends\"\nof an amount equal to the whole or a specified percentage of\nsuch income. Now when\tin computing the total income of the\nassessee, a deduction has to be made from \"such income by\nway of dividends\", it is elementary that \"such income by way\nof dividends\" from which deduction has to be made must be\npart of\t gross total income. It is difficult to see how the\nlanguage of this part of sub-section (1) of Section 80M can\npossibly fit in if \"such income by way of dividends\" were\ninterpreted to\tmean the full amount of dividend received by\nthe assessee. The full\t amount of dividend received by the\nassessee would\tnot be\tincluded in the gross total income:\nwhat would be included would only be the amount of dividend\nas computed in accordance with the provisions of the Act. If\nthat be 50 it is difficult to appreciate how for the purpose\nof computing the total\t income from the gross total income\nany deduction should be required to be made from the full\namount of the dividend. The deduction\t required to be made\nfor computing the total income from the gross total income\ncan only be from the amount of dividend\tcomputed in\naccordance with\t the provisions\t of the\t Act which would be\nforming part of the gross total income. It is therefore\nclear that whatever might have been\t the interpretation\nplaced on clause (iv)\tof sub-section (1) of Section 99 and\nSection 85A, the correctness of which is not in issue before\nus, so\tfar as\tsub-section (1) of Section 80M is concerned,\nthe deduction required to be allowed under that provision is\nliable to be calculated with reference to the amount of\ndividend computed in accordance with the provisions of the\nAct and\t forming part of the gross total income and not with\nreference to the full\tamount of dividend received by the\nassessee.\n This view\t which\twe are\t taking\t in regard to\t the\nconstruction of\t sub-section (1) of Section 80M is\talso\nsupported by\tthe decision of a Bench of\t this Court\nconsisting of one of us, Chandrachud, C.J. and Tulzapurkar,\nJ. in Cambay Electric\tSupply Industrial Company Limited v.\nC.I.T. This decision was rendered by the Court on\n803\n11th April 1978 at least a year before the decision in Cloth\nTraders case, but, unfortunately, it appears,\t it was\t not\nbrought to the attention of the Court when the Cloth Traders\ncase was argued, because we have no doubt that if it had\nbeen cited, the Court would have certainly made a reference\nto it in the judgment in Cloth Traders case. The Section\nwhich came up for consideration before the Court in Cambay\nElectric Supply\t Company's case\t was undoubtedly a different\none, namely, Section 80E, but the reasoning which prevailed\nwith the Court in placing a particular interpretation on\nsub-section (1)\t of Section 80E would equally to applicable\nin the\tinterpretation of sub-section (1) of Section\t80M.\nSection 80E as it stood at the material time provided inter\nalia as follows in subsection (1):\n\t \"80E(1). Deduction in respect of profits and gains\n from specified industries in the case\t of certain\n companies. -(1) In the case of a company to which this\n section applies, where the total income (as computed in\n accordance with the other provisions of this\tAct)\n includes any profits and\tgains attributable to\t the\n business of generation or\t distribution of electricity\n or\t any other form of\tpower or of construction,\n manufacture or production of any one or more of the\n articles or things specified in the list in the Fifth\n Schedule, there shall be allowed a deduction from such\n profits and gains of an amount equal to eight per cent\n thereof, in computing the total income of the Company.\"\nThe question which arose in Cambay Electric Supply Company's\ncase was whether unabsorbed depreciation and unabsorbed\ndevelopment rebate were liable to be deducted in arriving at\nthe figure of profits\tand gains exigible to deduction of 8\nper cent contemplated in sub-section (1) of Section 80E. The\nargument of the assessee was precisely the same as the one\nadvanced in the present case, namely, that the words \"such\nprofits and gains\" in\tthe later part of sub-section (1) of\nSection 80E were intended to refer only to the category of\nprofits and gains referred to in the earlier part of that\nprovision, namely, \"profits and gains attributable to the\nbusiness of generation or distribution of electricity or any\nother form of power or of construction, manufacture or\nproduction of any one\tor more\t of the\t articles or things\nspecified in the list in the Fifth Schedule\" and not to the\nquantum of the profits\t and gains included in the total\nincome, so\n804\nthat the profits and gains exigible to the deduction of 8\nper cent were\t the profits and gains\t attributable to the\nspecified business in their entirety and not the profits and\ngains as computed in accordance with the provisions of the\nAct. The assessee contended that, in\t the circumstances,\nunabsorbed depreciation\t and unabsorbed\t development rebate\nwere not liable to be deducted from the profits and gains\nattributable to\t the specified\tbusiness for arriving at the\nfigure exigible to the deduction of 8%. This argument of the\nassessee was rejected by the Court and the Court held that\nthe profits and gains\texigible to the deduction of 8 per\ncent were profits and gains computed in accordance with the\nprovisions of the Act\tand forming part of the total income\nand hence unabsorbed depreciation and unabsorbed development\nrebate were liable to be excluded from the profits and gains\nattributable to\t the specified\tbusiness in arriving at the\nfigure exigible\t to 8 per cent\t deduction. Tulzapurkar, J.\nspeaking on behalf of\tthe Court analysed the provisions of\nsub section (1) of Section 80E in the following words:\n\t \"On reading sub-section (1)\tit will become clear\n that three\t important steps are required\tto be taken\n before the\t special deduction permissible thereunder is\n allowed and the net total income\t exigible to tax is\n determined. First,\t compute the total income of\t the\n concerned\tassessse in accordance with the other\n provisions of the Act, i.e., in accordance with all the\n provisions except\tsection 80E; secondly, ascerta what\n Part of the total\t income so computed represses\t the\n profits and gains attributable to the business of the\n specified industry (here generation and distribution of\n electricity); and,\t thirdly, if there be\tprofits\t and\n gains so attributable, deduct 8 per cent thereof from\n such profits and gains and then arrive at the net total\n income exigible to tax.\"\nThe learned\tJudge\tthen proceeded to\tapply\tthis\ninterpretation of sub-section (1) of Section\t80E to\t the\nfacts of the case before him and observed:\n\t \"As\t indicated earlier,\t sub-section\t (1)\n contemplates three\t steps being taken for computing the\n special deduction\tpermissible thereunder\tand arriving\n at the net income\t exigible to tax find the first two\n steps read\t together contain the legislative mandate as\n to how the total income of which the profits and gains\n attributable to the busi-\n805\n ness of the specified industry forms a\tpart-of\t the\n concerned assessee\t is to\tbe computed and according to\n the parenthetical clause, which contains the key words,\n the same is to be computed in accordance with\t the\n provisions of the Act except section 80E and since in\n this case it is income from business the same will have\n to be computed in\t accordance with sections 30 to 43A\n which would include section 32(2) (which provides for\n carry forward of depreciation) and section 33(2) (which\n provides for carry forward of development rebate for\n eight years). In other words, in\t computing the total\n income of\tthe concerned assessee, items of unabsorbed\n depreciation and unabsorbed development\trebate\twill\n have to be deducted before arriving at the figure that\n will become exigible to the deduction of 8 per cent\n contemplated by Section 80E (1).\nIt will\t thus be seen that according to this decision, the\nwords \"such profits and gains\" in the later\tpart of sub-\nsection(1) of Section 80E were referable to the quantum of\nthe profits and gains attributable to the specified business\nincluded in the total\tincome as referred to in the earlier\npart of\t the provision.\t If this decision lays down\t the\ncorrect interpretation of sub-section (1) of Section 80E the\nsame interpretation must also\tgovern the language of sub-\nsection (1) of Section 80M. Structurally there is hardly any\ndifference between Section 80E\t sub-section (1) and Section\n80M sub-section\t (1) and the reasoning which appealed to the\nCourt in the interpretation of subsection (1) of Section 80E\nmust apply equally in the interpretation of sub-section (1)\nof Section 80M. We find ourselves wholly in agreement with\nthe view taken by the\t Court\tin Cambay Electric Supply\nCompany's case\tand we\t must therefore dissent from\t the\ninterpretation placed on sub-section (1) of Section 80M by\nthe decision in Cloth Traders case (supra).\n But, even\tif in our view the decision in Cloth Traders\ncase is\t erroneous, the\t question still\t remains whether we\nshould over-turn it. Ordinarily we would be reluctant to\nover-turn a decision given by a Bench of this Court, because\nit is\t essential that There\t should\t be continuity\t and\nconsistency in\tjudicial decisions and law should be certain\nand definite. It is almost as important that the law should\nbe settled permanently as that it\t should\t be settled\ncorrectly. But\tthere may be\tcircumstances where public\ninterest demands that the previous decision be reviewed and\nreconsidered. The doctrine of stare\n806\ndecisis should\tnot deter the\tCourt from over-ruling an\nearlier decision, if it is satisfied that such decision is\nmanifestly wrong or proceeds upon a mistaken assumption in\nregard to the\texistence or continuance of\ta statutory\nprovision or is contrary to another decision of the Court.\nIt was\tJackson, J. who said in his dissenting opinion in\nMassachusetts v. United States: \"I see no reason why I\nshould\tbe consciously wrong today because I\t was\nunconsciously wrong yesterday\". Lord Denning also said to\nthe same effect when he observed in Ostime v. Australian\nMutual Provident Society: \"The\t doctrine of precedent does\nnot compel Your Lordships to follow the wrong path until you\nfall over the edge of the cliff\". Here we find that there\nare over-riding considerations which compel us to reconsider\nand review the decision in Cloth Traders case. In the first\nplace, the decision in\t Cloth Traders\tcase was rendered by\nthis Court on 4th May\t 1979 and immediately\t thereafter,\nwithin a few months, Parliament introduced Section 80AA with\nretrospective effect from 1st\tApril 1968 with a view to\nover-riding the\t interpretation placed\ton Section 80M in\nCloth Traders case. The decision in Cloth Traders case did\nnot therefore hold the field for a period of more than a few\nmonths and it could not be said that any assessee was misled\ninto acting to its detriment on the basis of that decision.\nThere was no decision\tin regard to the interpretation of\nsub-section (1) of Section 80M given by any High Court prior\nto the\t decision in Cloth Traders case and there\t was\ntherefore no authoritative pronouncement of this Court on\nthis question of interpretation on which we assessee could\nclaim to rely for making its fiscal arrangements. The only\ndecision in regard to the interpretation of sub-section (1)\nof Section 80M given by any High Court prior to the decision\nin Cloth Traders case, was that of the Gujarat High Court in\nAddi. C.I.T. v. Cloth\tTraders\t Private Limited and\tthat\ndecision took precisely the same view which we are inclined\nto accept in the present case. It is therefore difficult to\nsee how\t any assessee can legitimately\t complain that\t any\nhardship or inconvenience would be caused to\t it if\t the\ndecision in Cloth Traders case was over-turned by us. If\ndespite the decision of the Gujarat High Court in Addl.\nC.I.T. v. Cloth Traders Private Limited (supra) the assessee\nproceeded on the assumption, now found to be erroneous, that\nthe Gujarat High Court decision was wrong and the deduction\npermissible under sub-section (1) of Section 80M was liable\nto be calculated with\treference to the full amount of\ndividend\n807\nreceived by the assessee, the assessee can have only itself\nto blame. Knowing fully well that the Gujarat High Court had\ndecided the question of interpretation of sub-section (1) of\nSection 80M in favour\tof the\tRevenue\t and there was no\ndecision of this Court\t taking a different view, no prudent\nassessee could\t have\tproceeded to\tmake its financial\narrangements on\t the basis that the decision of the Gujarat\nHigh Court was erroneous. Moreover, we find, for reason we\nhave already discussed that the decision in Cloth Traders\ncase is\t manifestly wrong because it has failed to take into\naccount a very vital factor, namely,\tthat the deduction\nrequired to be made under sub-section (1) of Section 80M is\nnot from the gross total income but from \"such income by way\nof dividends\". There is also\tanother\t circumstance which\nmakes it necessary for\t us to\treconsider and\t review\t the\ndecision in Cloth Traders case and that is the decision in\nCambay Electric SUPPLY Company's case. The decision in Cloth\nTraders case is inconsistent with that in Cambay Electric\nSupply Company's case. Both cannot stand together. If one is\ncorrect, the other must logically be wrong and vice versa.\nIt is therefore necessary to resolve\tthe conflict between\nthese two decisions\tand harmonise\t the law and\tthat\nnecessitates an inquiry into the correctness of the decision\nin Cloth Traders case. It is\tfor this reason that we have\nreconsidered and reviewed the decision in Cloth Traders case\nand on\tsuch reconsideration and review, we have come to the\nreconsideration that the decision in Cloth Traders case in\nerroneous and must be over-turned.\n It\t is obvious that, ON this\t view,\t it becomes\nunnecessary to\t consider the\tquestion of constitutional\nvalidity of the retrospective\toperation of Section 80AA.\nSection\t 80AA in its\tretrospective operation is merely\ndeclaratory of the law as it always was since 1st April 1968\nand no complaint can validly be made against it.\n We accordingly dismiss the writ petition\t but, in the\npeculiar circumstances\tof the\tcase, we direct that\teach\nparty shall bear and pay its own costs.\n AMARENDRA NATH SEN, J. I\t have had the\t benefit of\nreading the judgment of my learned brother Bhagwati, J. MY\nlearned brother in his judgment has set out all the material\nfacts and circumstances of the case. He has referred to the\nrelevant statutory provisions and to the legislative history\nof Section 80M of the Income-Tax Act. He has also considered\nthe earlier decisions of various Courts including\n808\nthe decisions of this\t Court\tin Cloth Traders Ltd. v.\nAdditional Commissioner of Income\ttax and in Cambay\nElectrical Supply Industrial Co. Ltd\tv. Commissioner of\nIncome-Tax. He\thas analysed the provisions of Section 80M\nand has\t proceeded to interpret the same. As I am in broad\nagreement with\twhat have been stated by my learned brother,\nI do not propose to reproduce the same. I, however, wish to\nmake some observations of my own.\n The authority and jurisdiction of a larger Bench of\nthis Court to over-ride and over-rule\t any decision of a\nsmaller Bench cannot be questioned. I\t am, however, of the\nopinion that the decision of\tthis Court on\t any fiscal\nlegislation involving the question of financial benefit and\nliability should not normally be interfered with and should\nbe interfered with only in very rare cases. On the basis of\nthe decision of this Court on any fiscal legislation and any\nmatter involving financial arrangements and\tadjustments,\nparties are entitled to arrange their financial affairs and\nin fact\t they so arrange and adjust their financial affairs\non the\tbasis of the law laid down by this Court. Unsettling\na position settled by the decision of this Court may lead to\nconfusion and\tresult\tin financial instability, causing\nserious prejudice not only to the parties concerned but also\nto the\teconomic growth\t of the\t country as a whole. If on\ninterpretation of any provision in any fiscal legislation\ntwo views may be reasonably possible, a larger Bench of this\nCourt may not interfere with the view taken\tby a smaller\nBench of this Court merely on the ground that the other view\nappears to the larger\tBench to be the better view and may\ncommend\t itself\t to the larger Bench. If, however,\t the\ndecision of the smaller Bench is erroneous, the larger Bench\nhas necessarily\t to interfere with the\t decision, as\tthis\nCourt will not permit\ta wrong\t decision to operate as good\nlaw of the land.\n On a careful consideration of all the relevant facts\nand circumstances of this case and the earlier decisions\nwhich have all been noted in\tthe judgment of my learned\nbrother, I have no hesitation in coming to the conclusion\nthat the decision arrived at by my learned brother for the\nreasons stated\tby him in his judgment is sound and correct.\nMy learned brother has\t properly analysed the provisions of\nSection 80M and has correctly construed the same, applying\nthe well settled principles of construction, I agree\n809\nwith my\t learned brother and the reasons given by him for\ncoming to the conclusion that the decision of this Court\nCloth Traders Ltd. v. Additional Commissioner of Income Tax\nis erroneous. In my opinion, it cannot be said that in\ndeciding the case of Cloth Traders Ltd. this Court had taken\none of\ttwo reasonably possible views. As my learned brother\nin his\t judgment has\t aptly\t pointed out on a proper\ninterpretation of Section 80M\tthat the view taken by this\nCourt in Cloth Traders case is fallacious and wrong. I am in\nentire agreement with the interpretation of Section 80M made\nby my learned brother for reasons stated in his judgment.\n It may be noted that as\tsoon as the decision of this\nCourt in Cloth Traders\t case was given, the Parliament to\nclearly manifest the legislative intent and to indicate that\nthe decision did not reflect the true intention of\t the\nLegislature introduced\t by amendment\t Section 80AA\twith\nretrospective effect. In view\tof the proper interpretation\nof Section 80M in the judgment of my learned brother with\nwhich I\t agree, it cannot be said that Section 80AA has the\neffect of imposing any fresh tax with retrospective effect.\nSection 80AA is clearly declaratory in nature and merely\ndeclares what the correct position has always been. No\nquestion of imposition of any fresh tax with retrospective\neffect falls for consideration in this case. It may also be\npointed out that the decision in Cloth Traders case cannot\nbe said\t to have held the field for any length of time to\ncause any serious prejudice to an assessee. The decision of\nthe Gujarat High Court in Cloth Traders case which was upset\nby this\t Court was against the\t assessee and the Parliament\nhad intervened\tas soon\t as this Court reversed the decision\nof the Gujarat High Court in Cloth Traders case. This aspect\nhas also been fully dealt with in the judgment of my learned\nbrother.\n With these\t observations I\t am in entire agreement with\nthe judgment of my learned brother and I agree with\t the\norder proposed by him.\nN.V.K.\t\t\t\t\tPetition dismissed.\n810" }, { "title": "Vazir Sultan Tobacco Co. Ltd. Etc. Etc vs Commlssioner Of Income-Tax Andhra ... on 25 September, 1981", "url": "https://indiankanoon.org//doc/76552/", "text": "Vazir Sultan Tobacco Co. Ltd. Etc. Etc vs Commlssioner Of Income-Tax Andhra ... on 25 September, 1981\nEquivalent citations: 1981 AIR 2105, 1982 SCR (1) 789, AIR 1981 SUPREME COURT 2105, 1981 (4) SCC 435, 1981 TAX. L. R. 1780, (1981) 132 ITR 559, (1981) 7 TAXMAN 28\nAuthor: V.D. Tulzapurkar\nBench: V.D. Tulzapurkar, E.S. Venkataramiah, Amarendra Nath Sen\n PETITIONER:\nVAZIR SULTAN TOBACCO CO. LTD. ETC. ETC.\n\n\tVs.\n\nRESPONDENT:\nCOMMlSSIONER OF INCOME-TAX ANDHRA PRADESH, HYDERABAD\n\nDATE OF JUDGMENT25/09/1981\n\nBENCH:\nTULZAPURKAR, V.D.\nBENCH:\nTULZAPURKAR, V.D.\nVENKATARAMIAH, E.S. (J)\nSEN, AMARENDRA NATH (J)\n\nCITATION:\n 1981 AIR 2105\t\t 1982 SCR (1) 789\n 1981 SCC (4) 435\t 1981 SCALE (3)1483\n CITATOR INFO :\n RF\t 1986 SC 484\t (13,17)\n F\t 1986 SC1746\t (6)\n R\t 1986 SC1938\t (5,13,14,16,17)\n\n\nACT:\n Super Profits Tax Act, 1963 and\tCompany's (Profits)\nSur-tax\t Act, 1964-Rule I of\t Second\t Schedule-Scope\t of-\n\"Provision\" and \"Reserve\"-Distinction- A sum of money\ntransferred from current profits to general reserves-\nDividend paid from that fund-General reserve how calculated.\n\n\n\nHEADNOTE:\n The Super\t(Profits Tax) Act, 1963 and the Company's\n(Profits) Sur-tax Act, 1964 (the scheme and main provisions\nof both\t of which are almost identical) impose a special tax\non excess profits earned by companies. The special tax is\nimposed in respect of\tso much\t of a company's \"chargeable\nprofits\" of the previous year as exceeded the \"standard\ndeduction\"- The\t term \"chargeable profit\" is defined to mean\nthe total income of an assessee computed under the Income\nTax Act, 1961\t for any previous year and\tadjusted in\naccordance with the provisions of that Act. \"Standard\ndeduction\" is determined by computing\t the capital of a\ncompany in accordance with the rules\t laid down in\t the\nschedule. The material part of rule I provides that before\nany amount or\t sum qualifies\t for inclusion\t in capital\ncomputation of\ta company two conditions are required to be\nfulfilled namely: (i) that the amount\t or sum\t must be a\n\"reserve\" and (b) that\t it must not have been allowed in\ncomputing the company's profit\t for the purposes of Income\nTax Acts, 1922 or 1961.\n ln their respective balance sheets, the assessees had\nshown under the heading \"current liabilities and provisions\"\nappropriations\tof large sums of money for taxation,\nretirement gratuity and dividends and claimed that for the\npurposes of super profits tax these sums should be regarded\nas \"other reserves\" within the meaning of Rule 1 of Second\nSchedule to the Act and that for the computation of capital\nthey should be taken into account.\n Treating these sums as\t \"provisions\"\tand not as\n\"reserves\", the\t Super Profits\tTax officer determined\t the\ncapital and the standard deduction by\t excluding them from\nthe computation of the capital. He then levied super profits\ntax on\tthat portion of the\tchargeable profits of\t the\nprevious year as exceeded the standard deduction.\n While the\tAppellate Assistant Commissioner upheld the\nassessee's contention that these sums were \"reserves\" which\nshould be taken into account for computing their capital,\nthe Appellate Tribunal held that these were not \"reserves\"\nwithin\n790\nthe meaning of Rule l of the Second Schedule to the Act and\nas such could not enter into capital computation.\n On reference the High Court held\t that the sums\t set\napart were not \"reserves and so should be excluded in the\ncomputation of\tthe capital for the purposes of levying the\nsuper profits tax.\n In Tax Reference no. 5 (a case under the Companies\n(Profits) Sur-tax Act, 1964) the assessee transferred from\nout of\tits current profits a\tlarge sum of money to\t the\ngeneral reserves and paid dividend to its shareholders from\nout of\tthe augmented general\treserves. On the question\nwhether for computing the capital for the purpose of sur-tax\nthe general reserves should or should not be reduced by the\nsum of\t dividend paid, the taxing authorities and\t the\nappellate tribunal ignored this amount holding that it was\nnot a \"reserve\".\n None of the items of appropriation either for taxation\nor for\tretirement gratuity or for proposed dividend in the\nassessees' cases had been allowed in computing their profits\nunder the Income Tax Act, 1961.\n^\n HELD: [per Tulzapurkar & Venkataramiah, JJ]\n The expressions \"reserve\" and \"provision\" have not been\ndefined in the Act. Standard dictionaries, without making\nany distinction\t between the two concepts, use them more or\nless synonymously connoting the same idea. But since in the\ncontext of the legislation a clear distinction between the\ntwo is implied it is essential to know the exact connotation\nof the\t two concepts\tand the distinction as known in\ncommercial accountancy. The rules for computation of capital\ncontained in the Second Schedule to the Act proceed on the\nbasis of the formula of capital plus reserve, a formula well\nknown in commercial accountancy. But since they occur in a\ntaxing\tstatute\t applicable to companies\tonly these\nexpressions will have to be understood in the sense or\nmeaning attributed to them by men of business, trade and\ncommerce and by persons interested in or dealing\twith\ncompanies. Therefore, the meaning attached to these words in\nthe Companies Act, 1956 would govern their construction for\nthe purpose of these two enactments [800 C-H]\n The broad\tdistinction between the two expressions as\njudicially evolved by this\t Court\tis that, while a\n\"provision\" is a charge against the profits to be taken into\naccount against\t gross\treceipts in the profit and\tloss\naccount, a \"reserve\" is an appropriation of profits,\t the\nasset or assets by which it is represented being retained to\nform part of the capital employed in the business. [801 F]\n C.l.T. v.\tCcntury Spinning & Manufacturiag Co., 24 ITR\n499 and Metal Box Company of India Ltd. v. Their Workmen, 73\nlTR 67 followed.\n The Companies Act, which\tenjoins upon the Board of\nDirectors of every company to lay before the annual general\nmeeting of its shareholders an annual\t balance sheet and a\nprofit and loss account, enumerates the separate heads that\nshould be shown in the balance sheet, two of these items\nbeing \"reserve'\t and \"provision\". The definitions of these\ntwo expressions given in the Act show\n791\nthat if any retention or appropriation of a sum falls within\nthe definition of A \"provision\" it can never be a \"reserve\".\nBut the converse is\t not true. If the retention or\nappropriation is not a\t \"provision\" that is, if it is not\ndesignated to meet depreciation, renewals or diminution in\nvalue of assets or\t any known liability\t it is\t not\nautomatically a\t \"reserve\" and\tthe question will have to be\ndecided having\tregard to the true nature and character of\nthe sum\t so retained or appropriated depending on several\nfactors, including the intention with which and the purposes\nfor which such retention or appropriation had been made.\n[803 E-Fl\n Having regard to the type of definitions of the two\nconcepts, if a particular retention or appropriation of a\nsum falls within the expression \"provision\" then that sum\nwill have to be excluded from the computation of capital. If\nthe sum\t is in\tfact a \"reserve\" then it would be taken into\naccount for the computation of capital. [804 B-C]\n Where the assessee had set apart a sum of money to meet\ntax liability\tin respect of\t profits earned during an\naccounting year, which liability was not quantified, such\nsetting apart for a known and existing liability, would be a\n\"provision\" and\t could not be regarded as a \"reserve\". [806\nA-C]\n Kesoram Industries and Cotton Mills Ltd.v. Commissioner\nof Wealth Tax (central) Calcutta, 59 ITR 767 followed.\n But if provision for a known or existing liability is\nmade in\t excess of the amount\treasonably necessary for the\npurpose, such excess should be treated as reserve\"\tand,\ntherefore, would be includible in capital computation. [806\nE]\n Since the assessee (in C.A. No. 860/73) had at no stage\nof the\t proceedings before\tthe Taxing Authorities or\nAppellate Tribunal or the High Court raised a plea that the\nprovision made\tby it for taxation was in excess of\t the\namount reasonably necesssary for the purpose and that such\nexcess should be treated as a\t \"reserve\", the\t plea which\nneeds investigation into facts, could not be allowed to be\nraised for the first time in appeal before this Court. [807\nF]\n Ordinarily an appropriation to gratuity reserve\twill\nhave to\t be regarded as a provision made for a contingent\nliability, for,\t under a scheme framed\t by a\tcompany\t the\nliability to pay gratuity to its employee on determination\nof employment\tarises\tonly when the\t employment of\t the\nemployee is determined by death, incapacity, retirement or\nresignation-an event (cessation of employment) certain to\nhappen in the service\tcareer of every employee. Moreover,\nthe amount of gratuity\t payable is usually dependent on the\nemployee's wages at the time of G, determination of\t his\nemployment and\tthe number of years of service put in by him\nand the\t liability accrues and enhances with completion of\nevery year of service;\t but the company can work out on an\nacturial valuation its estimated liability (i.e. discounted\npresent value of the\tliability under the scheme on a\nscientific basis) and make a provision for such liability\nnot all\t at once but spread over a number of years. If by\nadopting such scientific method any appropriation is made\nsuch appropriation will constitute a provision representing\nfairly accurately a known and existing liability for\t the\nyear in question; if however, an ad hoc sum\n792\nis appropriated\t without resorting to any scientific basis\nsuch appropriation would also\tbe a provision intended to\nmeet a\tknown liability, though a contingent one, for, the\nexpression 'liability'\toccurring in cl. (7)(1)(a) of Part\nIII of\tSixth Schedule\tto the\tCompanies Act includes\t any\nexpenditure contracted\tfor and\t arising under\ta contingent\nliability: but\tif the sum so appropriated is shown to be in\nexcess of the sum required to meet the estimated liability\n(discounted present value on a scientific basis) it is only\nthe excess that will have to be regarded as a reserve under\nclause (7) (2) of Part III to the Sixth Schedule. [807 G.H;\n808 A-D]\n In the instant case although the\t assessee had urged\nbefore the authorities below that different treatment for\nthe same item could not be given for purposes of income tax\nassessment and super profits tax assessment the assessee did\nnot clarify by placing\t material on record as\t to whether\nappropriation was based on any acturial valuation or whether\nit was\tan appropriation of an\t ad hoc amount a which has a\nvital bearing on the question, whether the appropriation\ncould be treated as a provision or reserve. In the absence\nof proper material the\t question should be decided by the\ntaxing\tauthorities whether the amount set apart\t and\ntransferred to\tgratuity reserve by the assessee company was\neither a provision or\ta reserve and if the latter to what\nextent. [812 C-E]\n Standard Mills Co. Ltd. v. Commissioner of Wealth-Tax,\nBombay, 63, I.T.R.470 & Workmen of William Jacks & Co. Ltd.\nv. Management of Jacks & Co.Ltd; Madras. [1971] Supp. S.C.R.\n450 followed.\n Southern Railway of Peru\tLtd. v. Owen [1957] A.C. 334\nreferred to.\n The appropriations of an amount by the Board of\nDirectors by way of providing for proposed dividend would\nnot constitute\t'provision', for, the appropriations cannot\nbe said\t to be by way of providing for any known or existing\nliability, none having arisen on the date when the Directors\nmade recommendation much less on the relevant date after the\nfirst day of the previous year relevant to the assessment\nyear in\t question. This\t by itself would not\tconvert\t the\nappropriations into \"reserves\". [813 E-F]\n The tests\tand guidelines\tlaid down by this Court in\nthis respect are: (1)\tthe true nature and character of the\nappropriation must be\tdetermined with reference to\t the\nsubstance in the matter, which means\tthat one must\thave\nregard to the intention with which and the purpose for which\nappropriation has been made such intention and purpose being\ngathered from the surrounding\t circumstances.\t A mass of\nundistributed profits cannot automatically become a reserve.\nSome body possessing the requisite authority\tmust clearly\nindicate that a portion thereof has\t been earmarked or\nseparated from\tthe general mass of profits with a view to\nconstituting it\t either a general reserve or\t a specific\nreserve; (2) the surrounding circumstances should make it\napparent that the amount so earmark ed or set apart is in\nfact a\treserve to be utilised\t in future for\t a specific\npurpose on a specific\toccasion; (3) a clear conduct on the\npart of the Directors in setting apart a sum from out of the\nmass of\t undistributed profits\tavowedly for the purpose of\ndistribution of\t dividend in the same year would run counter\nto any\tintention of making that amount a reserve, (4) the\nnomenclature accorded to any particular fund\twhich is set\napart from out of the profits would not be material\n793\nOr decisive of the matter; and (5) if any amount set apart\nfrom out of the profits A is going to make up capital fund\nof the\tassessee and would be available to the assessee for\nits business purposes it would become a reserve liable to be\nincluded in the capital computation of the assessee under\nthat Act. [815 F-H, 817 G]\n The relevant provisions of the Companies\t Act clearly\nshow that creating reserves out of the profits is a stage\ndistinct in point of fact and anterior in point of time to\nthe stage of making recommendation for payment of dividend\nand the scheme of the provisions suggests that appropriation\nmade by\t the Board of Directors by way of recommending a\npayment of dividend cannot in the nature of\tthings be a\nreserve. [818 F-G]\n Judged in\t the light of\t the above guidelines\t the\nappropriations made by the Directors for proposed dividend\nin the\tcase of\t the concerned\tassessee companies did\t not\nconstitute 'reserves' and the concerned amounts so set apart\nwould have to be ignored\tor excluded from capital\ncomputation. [818 H]\n Standard Mills Co. Ltd. v. Commissioner of Wealth-tax\nBombay, 63 I.T.R.470, Metal Box Co. Of India Ltd. v. Their\nWorkmen, 73 ITR 67, First National City Bank v. Commissioner\nof Income-Tax,\t42 ITR\t67 & Commissioner of\tIncome-\t tax\n(Central), Calcutta v. Standard Vacuum oil Co., 59 ITR 685\nfollowed.\n Although under the Companies Act it is open to\t the\nDirectors to recommend and the share-holders\t to approve\npayment of dividend from the current year's profits or from\nthe past year's profits and on transfer of a portion of the\ncurrent year's\tprofit to the general reserve the augmented\ngeneral reserve\t becomes a congolmerate fund, having regard\nto the\tnatural course\tof human conduct it is not difficult\nto predicate that dividends would ordinarily\tbe paid\t out\nfrom the current income rather than from the past savings,\nunless\tthe directors\t in their report expressly\t or\nspecifically state that payment of dividends would be made\nfrom the past savings. From the commercial point of view, if\nany amount is required\t for incurring\tany expenditure or\nmaking any disbursement like distribution of dividends in a\ncurrent year, ordinarily the same will come\tout of\t the\ncurrent income of the company if it is available and only if\nthe sum\t is insufficient then\tthe past savings will be\nresorted to for the purpose of incurring that expenditure or\nmaking that disbursement. Such\t a course would be in accord\nwith the common sense point of view. [822 C-F]\n In the absense of\t express indication to the contrary\nthe normal rule for a commercial concern would be to resort\nto current income rather than past savings while incurring\nany expenditure or making any disbursement. [822 H]\n Commissioner of Income-Tax, Bombay City-l v. Bharat\nBijlee Ltd. 107 ITR 30; & Commissioner of Income-Tax, Bombay\nCity-ll v. Marrior (India) Ltd. 120 ITR Sl 2 approved.\n[per A.N. Sen, J.]\n The amount\t set apart for payment of any dividend\nrecommended by\tthe Board of Directors is not an amount set\napart for meeting a known or existing\n794\nliability and cannot be considered to be a \"reserve\" within\nthe meaning of the Act for the purposes of computation of\nthe capital of the company. [832 F]\n The Companies Act, 1956 provides for the preparation of\nannual balance\tsheet in the prescribed form and laying it\nbefore the shareholders at the annual general meeting.\nRegulation 87,\tTable A\t in Schedule I contemplates that the\nBoard may set aside out of the profits of\tthe company\ncertain sum as \"reserve\" before dividend is recommended by\nit. The\t amount recommended by the Board for\t payment of\ndividend is shown in the balance sheet under the\thead\n\"provision\" and\t not under any head of \"reserve\". The true\nnature and character of the sum so\tset apart must be\ndetermined with\t regard to the substance of the matter which\nin this case is that the sum set apart was never intended to\nconstitute a \"reserve' of the company. [833 F, 834G]\n In law the liability for payment\t of dividend arises\nonly when the share-holders accept the recommendations made\nby the\tDirectors. Till\t then it is open to the Directors to\nmodify\tor withdraw their recommendation before it is\naccepted by the shareholders and it is equally open to the\nshare-holders not to\taccept\tthe recommendation in\t its\nentirety. Even\tso, for business purposes when the Directors\nmake any recommendation for payment of dividend and\t set\napart any amount for this purpose the Directors intend to\nmake a provision and do not create any reserve, as Directors\nknow that their recomendation\tis generally accepted by the\nshareholders as a matter of course. Therefore any amount set\napart for this purpose\t is understood by persons interested\nin company matters and\t in dealing with companies to mean a\nprovision for the payment of dividend\t to the shareholders\nand is not understood to constitute a \"reserve\". [832 C-F]\n Commissioner of lncome-tax Bombay City\t v. Century\nSpinning and Manufacturing Co.\t Ltd. [1953] 24 I.T.R. 499,\nCommissioner of\t Income Tax v.\t Standard Vaccum oil\tCo.,\n[1966] 59 I.T.R. 685,\tMetal Box Co.\t Of Ltd. v. Their\nWorkmen, [1963]\t 73 I.T.R, 53, Commissioner of Income-tax v.\nMysore Electrical Industries Ltd., [1971] 80 l.T.R. 567 and\nKesho Ram Industries and Cotton Mills Ltd v.Commissioner of\nWealth\tTax (Central), Calcutta, [1966] 59\t I.T.R.\t 767\nreferred to.\n\n\n\nJUDGMENT:\n CIVIL APPELLATE JURISDICTION: Civil Appeal No. 860 of\n1973.\n From the judgment and order dated the 1st September,\n1972 of\t the Andhra Pradesh High Court at Hyderabad in R.C.\nNo. 10 of 1971.\n\t\t\t AND\n\t Civil Appeal No. 1614 (NT) of 1978.\n Appeal by\tSpecial Leave from the\t judgment and order\ndated the 26th July, 1976 of the Calcutta High Court in l.T.\nReference No.454 of 1974.\n\t\t\t AND\n\t\t Review Petition No. 57 of 1980.\n795\n\t\t\t IN\n\t Special Leave Petition (Civil) No. 4602 of 1977\n From the judgment and order dated the 11th June, 1974\nof the\tCalcutta High Court in\t I.T. Reference\t No. 195 of\n1969.\n\t\t\t AND\n\t Tax Reference Case Nos. 2 and 3 of 1977.\n Income-tax Reference under section 257 of the Income-\ntax Act, 1961 drawn up by the Income-tax Appellate Tribunal,\nBombay Bench 'B' in R.A. Nos. 1223 and 1224 (Bom.) of 1972-\n73 (I.T. A. Nos. 24 and 25 (Bom.) of 1971-72.\n\t\t\t AND\n\t\t Tax Reference Case No. S of 1978.\n Income Tax\t Reference under section 257 of the Income\nTax Act, 1961 made by the Income Tax\t Appellate Tribunal,\nBombay Bench \"D\" in R.A. No. 225 (Bom.) of 1977-78 arising\nout of S.T.A.No. 36 (Bombay) 1 1976-77.\n A. Subbarao and Y.V. Anjaneyulu for the appellant in\nCivil Appeal No. 860/73. E\n V.S. Desai, Dr. Debi Pal, Praveen Kumar and Anil Kumar\nSharma for the Appellant in C.A. 1614 of 1978 and for the\nPetitioner in Review Petition No. 57/80.\n K.G. Haji\tand R.J. John\tfor the Appellant in\t Tax\nReference Case Nos. 2 and 3 of 1977.\n S.E. Dastur, S.N. Talwar and\tR.J. John for\t the\nAppellant in Tax Reference Case No. 5 of 1978.\n S.T. Desai, J. Ramamurthi\t and Miss A. Subhashini for\nthe Respondent in Civil Appeal No. 860/73.\n Miss A. Subhashini for the Respondent in Civil Appeal\nNo.1614 of 1978\n S.C. Manehanda and Miss A. Subhashini for\t the\nRespondent in Tax Reference Nos. 2 and 3 of 1977.\n796\n S.C. Manchanda, Anil Dev\tSingh and Miss A. Subhashini\nfor the Respondent in Tax Reference Case No. 5/1978.\n S P. Mehta and K.J. John for the Intervener.\n Dr. Debi Paul and\t K.J. John for the Intervener in Tax\nReference Case No. 5/1978.\n The following Judgments were delivered:\n TULZAPUKKAR, J.\tIn these Civil Appeals and\t Tax\nReference Cases\t certain common\t questions of law arise for\nour determination and hence all these\t are disposed of by\nthis common judgment.\t The common questions\t raised\t are\nwhether amounts retained or appropriated or set apart by the\nconcerned assessee company by\tway of\tmaking provision (a)\nfor taxation, (b) for\t retirement gratuity and (c)\t for\nproposed dividends from out of profits and other surpluses\ncould be considered as\t \"other reserves\" within the meaning\nof Rule\t I of the Second Schedule to the Super Profits Tax\nAct, 1963 (or Rule 1 of the Second Schedule to the Company's\n(Profits) Sur-tax Act, 1964)\t for inclusion\t in capital\ncomputation of\tthe Company for the purpose of levying super\nprofit tax ? The first three matters concerning Vazir Sultan\nTobacco Co. Ltd; Hyderabad, Ballarpur lndustries, Ltd; and\nM/s. Bengal Paper Mills Co. Ltd; Calcutta arise under the\nSuper Profits Tax Act,\t 1963 while the the Tax Reference\nCases concerning M/s. Echjay Industries Pvt. Ltd. and Hyco\nProducts Pvt.\t Ltd. Bombay\tarise under the Companies\n(Profits) Sur-tax Act.1 964.\n Since Civil Appeal No. 860 of\t1973 (Vazir Sultan\nTobacco Company's case) is comprehensive and comprises all\nthe three items of appropriation it will be sufficient if\nthe facts in this case are set out in detail so as to\nunderstand how\tthe questions for determination arise in\nthese matters. Vazir Sultan Tobacco Co. Ltd. was an assessee\nunder the Super (Profits) Tax Act, 1963. For\t the assess-\nment year 1963-64, for which the relevant accounting period\nwas the year which ended 30th September, 1962, for computing\nthe chargeable\tprofits of that year for the purpose of levy\nof super profits tax under the Act, the assessee company\nclaimed that the appropriations of a)\t Rs. 33,68,360\t for\ntaxation, (b) Rs. 9,08,106 for retirement gratuity and (c)\nRs. 18,41,820 for dividends (all of which items were shown\nunder the heading 'current liabilities and provisions' in\nthe concerned balance-sheet as at 30th Sept. 1962) should be\nregar-\n797\nded as\t\"other reserves\" within the meaning of Rule 1 of\nSecond\tA Schedule to the Act and\t be included while\ndetermining its\t capital. The\tSuper Profits\tTax officer\nrejected the assessee's contention as in his opinion\t all\nthese items were \"provisions ' and not \"reserves\" and as\nsuch these had to be ignored\tor excluded from the capital\ncomputation of\tthe assessee company and on that basis he\ndetermined the\tcapital, and the standard deduction\t and\nlevied super profits tax on that portion of the chargeable\nprofits of the previous year which exceeded the standard\ndeduction. In the appeal preferred by the assessee company\nagainst the assessment, the Appellate Commissioner upheld\nthe assessee's\tcontentions and\t held that those items were\n\"reserves\" and\ttook them into account\t while computing the\ncapital of the assessee company. In\tthe further appeal\nprefer- red by\t the Super Tax officer, the\t Income\t Tax\nAppellate Tribunal accepted the Department's contention and\nheld that these were not \"reserves\" within the meaning of\nRule I\tof the\tSecond Schedule to the Act and as such these\ncould not enter into capital computation of the assessee\ncompany. In the Reference that was made under section 256(1)\nof the\tIncome Tax Act, 1961 read with s. 10 of the Super\nProfits Tax Act at the instance of the assessee company the\nfollowing question of law was referred to the Andhra Pradesh\nHigh Court for its opinion:\n\t \"Whether on the facts and in the circumstances of\n the case the provisions (a) for taxation Rs. 33,68,360,\n (b) for retirement gratuity Rs. 9,08,106\t and (c) for\n dividends Rs. 18,41,820, could be treated as 'reserves'\n for computing the capital\t for the purpose of super\n profits tax under Second Schedule to the Super Profits\n Tax Act, 1963 for the assessment year 1963-64 ?\" F\n The High\t Court\ton a\tconsideration\tof several\nauthorities answered the question in respect\tof the three\nitems in favour of the Revenue and against the assessee\ncompany and held that\tthe three sums so set apart by the\nassessee company in its balance-sheet were not \"reserves\"\nand had to be excluded in the computation of its capital for\nthe purpose of levying\t super profits\ttax payable on\t the\nchargeable profits tor the relevant accounting year. It is\nthis view of the High Court that is being challenged by the\nassessee company in the Civil Appeal No. 86() of 1973 before\nus.\n In Civil Appeal No. 1614/1978 (Ballarpur Industries Ltd\n) and Review Petition\tNo. 57\tof 1980\t (M/s. Bengal Paper\nMills Co. Ltd.)\n798\nWe are\tconcerned with only two items of appropriation being\n(a) provision for taxation and (b) provision for proposed\ndividend and in each one of these cases the Calcutta High\nCourt had taken the view that these\t two items do\t not\nconstitute \"reserves\" and as such have to be ignored while\ncomputing the capital of the assessee company.\n In Tax Reference Case Nos. 2 and 3 of 1977 (M/s Echjay\nIndustries Pvt. Ltd.)-a case\t under\tCompanies (Profits)\nSurtax Act, 1964, we\tare concerned\twith two items of\nappropriation being (a) provision for taxation (b) provision\nfor proposed dividend for the two assessment years 1969-70\nand 1970-71 and in each of the years the Taxing Authorities\nas also\t the Income Tax Appellate Tribunal Bombay have taken\nthe view that these appropriations did not constitute \"other\nreserves\" within the meaning\tof Rule I of\t the Second\nSchedule to the Companies (Profit) Surtax Act, 1954 and as\nsuch were not includible in the capital computation of the\nassessee company but in view of a divergence\t of opinion\nbetween the different High Courts on the point, the Tribunal\nhas at\tthe instance of the assessee company made a direct\nReference to this Court under s. 257 of the Income Tax Act,\n1961 read with s. 18 of the Companies (Profits) Surtax Act,\n1964.\n In Tax Reference Case No. 5 of 1978 (Hyco Products\nPvt.Ltd.)-also a case under Companies (Profits) Surtax Act,\n1964 the same question pertaining to dividend alone but in a\ndifferent form\tarose for consideration before\t the Taxing\nAuthorities and\t the Income Tax Appellate Tribunal. It was\nnot a case of\t'proposed dividend' but the assessee company\nafter transferring Rs. 29,77,000 out of the current year's\nprofit amounting to Rs. 61,03,382 to General Reserves, paid\nout of\tRs. 3,10,450 as dividend to its share-holders from\nsuch augmented General Reserves and the question was whether\nwhile computing\t the capital of the assessee-company for the\npurpose of levy of surtax the\t General Reserves should or\nshould not be reduced by the aforesaid sum of Rs. 3,10,450 ?\nIn other words, the question was whether the amount of Rs.\n3,10,450 could\tnot form part of the General Reserves on the\nrelevant date (being 1.1. 1973) for the computation of the\ncapital ? The Taxing Authorities as well as the Appellate\nTribunal Bombay\t held that the said amount of Rs. 3,10,450\nhad to\tbe ignored for the purpose of computation of capital\nfor surtax purposes because it was not a reserve.\t The\nassessee company has challenged this view of the Tribunal\nbefore us in this direct Reference made to this Court under\ns. 257 of the\n799\nIncome Tax Act, 1961 read with s. 18\t of the Companies'\n(Profits) A Surtax Act, 1964.\n It\t may be stated that\t the scheme and the\tmain\nprovisions of\tthe two concerned enactments\t are almost\nidentical, the\tobject of both these enactments being\t the\nimposition of a special tax on excess profits earned by\ncompanies. Under Section 4 of the 1963 Act,\twhich is the\ncharging provision, there shall be charged on every company\nfor every assessment year commencing on and from 1st April,\n1963, a\t tax, called the super profits tax, in respect of so\nmuch of\t its \"chargeable profits\" of the previous year as\nexceed\tthe \"standard\tdeduction\" at\tthe rate or rates\nspecified in the Third\t Schedule. Section 2(5) defines the\nexpression \"chargeable\tprofits\" to mean the total income of\nan assessee computed under the Income Tax Act, 1961, for any\nprevious year and adjusted in accordance with the provisions\nof First Schedule, while Section 2(9) defines the expression\n\"standard deduction\" to mean an amount equal to six per cent\nof the capital of company as computed in accordance with the\nprovisions of the Second Schedule, or\t an amount of\t Rs.\n50,000\twhichever is greater.\t In order to\tD determine\n\"standard deduction\" it becomes necessary to compute capital\nof the company in accordance with the rules laid down in the\nSecond Schedule and rule 1 is relevant for our purposes, the\nmaterial portion whereof runs as follows:\n \"1. Subject to the other provisions contained in this\n\t Schedule, the\t capital of a company\tshall be the\n\t sum of the amounts,\tas on the first day of the\n\t previous year\t relevant to the assessment year, of\n\t its paid up share capital and of its reserve, if\n\t any, credited under the proviso (b) to Clause (vi-\n\t b) of\t sub-section (2! of sec. 10 of the Indian\n\t Income Tax Act, 1922\t or under sub section (3) of\n\t sec. 34 of the Income Tax Act, 1961, and of its\n\t other reserves in so\t far as the amounts credited\n\t to such other reserves have not been allowed in\n\t computing its\t profits for the purposes of\t the\n\t Indian Income Tax Act, 1922 or the Income Tax Act,\n\t 1961 .. \"\n It will be clear from the aforesaid provision of rule 1\nthat before any amount\t or sum\t qualifies for\tinclusion in\ncapital computation of a company two conditions are required\nto be fulfilled-(a) that the\tamount\tor sum\t must be a\n\"reserve\" and (b) the\tsame must not have been allowed in\ncomputing the company's profits for the purposes of the 1922\nAct or the 1961 Act. That none of the items\n800\nof appropriation either for taxation\t or for retirement\ngratuity, or\tfor proposed\tdividend in the concerned\nassessees' case had been allowed in computing the assessee's\nprofits under the 1961\t Act has not been disputed; in other\nwords the second condition\t indicated above has\tbeen\nsatisfied. The\tquestion is whether any of these items could\nbe treated as or falls within the expression \"other\nreserves\" occurring in the said rule.\n The expression 'reserve' has not been defined in the\nAct and\t therefore one\twould be inclined to resort to its\nordinary natural meaning as given in the dictionary but it\nseems to us that the dictionary meaning, though useful in\nitself, may not be sufficient, for, the dictionaries do not\nmake any distinction between the two concepts 'reserve' and\n'provision' while giving their\t primary meanings whereas in\nthe context of the legislation with which we are concerned\nin the\tcase a clear distinction between the two is implied.\nAccording to the dictionaries (both oxford and Webster) the\napplicable primary meaning of\tthe word 'reserve' is: \"tc,\nkeep for future use or enjoyment; to set apart for\tsome\npurpose or end in view; to keep in store for future or\nspecial\t use;\tto keep in reserve\", while\t 'provision'\naccording to Webster means: \"something provided for future.\"\nIn other words according to the dictionary meanings both the\nwords are more or less synonymous and connote the same idea.\nSince the rules for computation of capital contained in the\nSecond Schedule\t to the\t Act proceed on the basis of\t the\nformula of capital plus reserves-a formula well-known in\ncommercial accountancy,\t it becomes essential to know\t the\nexact connotation of\t the two concepts 'reserve'\t and\n'provision' and\t the distinction between the two as known in\ncommercial accountancy. Besides, though the expression\n'reserve' is not defined in the Act, it cannot be forgotten\nthat it\t occurs in a taxing statute which is applicable to\ncompanies only\tand to\tno other assessable entities and as\nsuch the expression will have\t to be\t understood in\t its\nordinary popular sense, that is to say, the sense or meaning\nthat is\t attributed to\tit by men of business, trade\t and\ncommerce and by persons interested in or dealing\twith\ncompanies. Therefore, the meanings attached to these\t two\nwords in the provisions of the Companies Act 1956 dealing\nwith preparation of balance-sheet and profit and\tloss\naccount would govern their construction for the purposes of\nthe two\t taxing enactments. We might mention here that in\nC.l.T. v. Century Spinning and Manufacturing\tCompany\t (1)\nthis Court after referring to the dictionary\n801\nmeaning of the expression 'reserve' observed: \"what is the\ntrue A\tnature\tand character\tof the\t disputed sum\t(sum\nallegedly set apart) must be determined with reference to\nthe substance of the matter\" and went on to determine the\ntrue nature and character of the disputed sum by relying\nupon the provisions of\t the Indian Companies Act 1913, the\nform and the contents\tof the balance-sheets required to be\ndrawn up and Regulation 99 in Table A of the 1st Schedule.\n The distinction between the two concepts of 'reserve'\nand 'provision' is fairly\twell-known in\t commercial\naccountancy and the same has been explained by this Court in\nMetal Box Company of India Ltd. v. Their Workmen (1) thus:\n\t \"The distinction between a provision and a reserve\n is in commercial accountancy fairly well known. Provi-\n sions made\t against anticipated losses and contingencies\n are charges against profits and therefore, to be taken\n into account against gross receipts in the P. and L.\n account and the balance-sheet. On the\tother hand,\n reserves are appropriations of profits, the assets by\n which they\t are represented being retained to form part\n of the capital employed in the business. Provisions are\n usually shown in the balance sheet by way of deductions\n from the assets in respect of which they are\tmade\n whereas general reserves and reserve funds are shown as\n part of the proprietor's\tinterest. (See\t Spicer\t and\n Pegler's Book-keeping and Accounts, 15th Edition, page\n 42)\".\nIn other words the broad distinction between the two is that\nwhereas a provision is\t a charge against the profits to be\ntaken into account against gross receipts in the P and L\naccount, a reserve is an appropriation of profits, the asset\nor assets by which it is represented being retained to form\npart of\t the capital employed in the business. Bearing in\nmind the aforesaid broad distinction we will briefly\nindicate how the two concepts are defined and dealt with by\nthe Companies Act, 1956.\n Under s. 210 of the Companies Act, 1956 it is incumbent\nupon the Board of Directors of every company to lay before\nthe annual general meeting of its share-holders (a)\t the\nannual balancesheet and (b) the profits and loss account\npertaining to the previous\n802\nfinancial year.\t Section 211(1) provides that every balance-\nsheet of a company shall give\t a true and fair view of the\nstate of affairs of the company as at the\tend of\t the\nfinancial year\tand shall, subject to the provisions of this\nsection, be in the form set out in Part I of Schedule VI, or\nnear thereto as circumstances admit or in such other from as\nmay be\tapproved by the Central Government either generally\nor in any particular case, while s. 211(2) provides that\nevery profit and loss account of a company shall give a true\nand fair view of the profit or loss of the company for the\nfinancial year\tand shall, subject as aforesaid, comply with\nthe requirements of Part Ir of r Schedule VI, so far as they\nare applicable\tthereto. In other words the preparation of\nbalance-sheet as well as profit and loss account in\t the\nprescribed forms and laying the same\t before\t the share-\nholders\t at the annual general meeting are statutory\nrequirements which the company\t has to observe. The Form of\nbalance-sheet as given in Part I of Schedule\t VI contains\nseparate heads\tof 'reserves and Surpluses' and 'current\nliabilities and provisions'\tand under the sub-head\n'reserves' different kinds of\treserves are indicated\t and\nunder sub-head\t'provisions' different\ttypes of provisions\nare indicated; Part III is the interpretation clause setting\nout the\t definitions of\t various expressions occurring in\nParts I\t and Il\t and the expressions 'reserve', 'provision'\nand 'liability' have been defined in cl. 7 thereof. Material\nportion of cl. (7) of Part III runs as under:\n \"(1) For the purposes of\tParts I and II of this Sche-\n dule, unless the context otherwise requires:\n (a) the expression \"provision\" shall, subject to sub.\n\t cl. (2) of this clause mean any amount written off\n\t or retained by way of providing for depreciation,\n\t renewals or diminution in value of\t assets, or\n\t retained by\t way of providing for any known\n\t liability of which the amount cannot be determined\n\t with substantial accuracy:\n (b) the expression \"reserve\" shall not,\t subject as\n\t aforesaid, include any amount written off or\n\t retained by way of providing for depreciation,\n\t renewals or diminution in value of assets or\n\t retained by\t way of providing for any known\n\t liability;\n (c) x\tx x\t x x\t x\tx x\t x\n803\n and in this sub-clause the expression \"liability\" shall\n include A\tall liabilities\t in respect of\t expenditure\n contracted\t for and all\t disputed or\t contingent\n liabilities.\n (2) Where-\n\t (a) any amount written off or retained by way of\n\t providing for\tdepreciation, renewals\t or\n\t diminution in value of\tassets, not being an\n\t amount written\toff in\t relation to fixed\n\t assets before the commencement\tof this Act;\n\t or\n\t (b) any amount retained by\tway of providing for\n\t any known liability,\n is in excess of the amount which, in the opinion of the\n directors, is reasonably necessary for the purpose, the\n excess shall be treated\tfor the purposes of\tthis\n Schedule as a 'reserve' and not a 'provision'.\"\n On a plain reading of cl. 7(1) (a) and (b) and cl. 7(2)\nabove it will appear clear that though the term 'provision'\nis defined positively\tby specifying\twhat it means\t the\ndefinition of\t 'reserve' is\tnegative in form and\t not\nexhaustive in the sense that\tit only specifies certain\namounts which are not to be included in the term 'reserve'.\nIn other words the effect of\treading the two definitions\ntogether is that if any retention or appropriation of a sum\nfalls within the definition of 'provision' it can never be a\nreserve but it does not follow that if the retention or\nappropriation is not a\t provision it\tis automatically a\nreserve and the question will have to be decided having\nregard to the true nature and\t character of\tthe sum so\nretained or appropriated depending\ton several factors\nincluding the intention with which and the purpose for which\nsuch retention\tor appropriation has been made because the\nsubstance of the matter is to\t be regarded and in\tthis\ncontext the primary dictionary meaning of the term 'reserve'\nmay have to be availed of. But it is clear beyond doubt that\nif any\t retention or\tappreciation of a sum is not a\nprovision, that\t is to\tsay, if it is not designated to meet\ndepreciation, renewals\tor diminution in value of assets or\nany known liability the same is not necessarily a reserve.\nWe are\temphasising this aspect of the matter because during\nthe hearing almost all counsel for the assessees strenuously\ncontended before us that once it was shown or became clear\nthat the retention or appreciation of a sum out of\n804\n profits and surpluses was\t for an unknown liability or\nfor a liability which did not exist on the relevant date it\nmust be\t regarded as a reserve. The fallacy underlying the\ncontention becomes apparent\tif the\t negative and\tnon-\nexhaustive aspects of the definition of reserve are borne in\nmind. Having regard to\t type of definitions\tof the\t two\nconcepts which\tare to\tbe found in cl. 7 of Part. III the\nproper approach\t in our\t view, would be first\tto ascertain\nwhether the particular retention or appropriation of a sum\nfalls within the expression 'provision' and if it does then\nclearly the concerned sum will have to be excluded from the\ncomputation of\ta capital, but in case the retention or\nappropriation of the sum is not a provision as defined the\nquestion will have to\tbe decided by reference to the true\nnature and character of the sum so retained or appropriated\nhaving regard to several factors as mentioned above and if\nthe concerned sum is in fact a reserve then it will be taken\ninto account for the computation of capital.\n Having thus indicated the proper approach to be\nadopted, we shall proceed to deal with the three items of\nappropriation being (a) provision\tfor taxation,\t (b)\nprovision for retirement gratuity and\t (c) provision\t for\nproposed dividends in the case of\t concerned assessee\ncompanies in these Appeals and Tax Reference Cases.\n Dealing first with the item of appropriation by way of\nprovision for taxation, which\tarises in Civil Appeal\t No.\n860/1973 (Vazir\t Sultan Tobacco\t Company), Civil Appeal No.\n1614 (NT)/ 1978 (Ballarpur Industries Ltd;) Review Petition\nNo. 50/1980 (M/s. Bengal Paper Mills\tCo. Ltd.) and\t Tax\nReference Cases\t Nos. 2 & 3/1977 (M/s Echjay Industries Pvt.\nLtd;)-the common question is whether the concerned amounts\nappropriated or\t set apart by these assessee-companies from\nout of\tthe profits and other\tsurpluses by way of making\nprovision for taxation constitute a provision or a reserve\non the\trelevant date,\tbeing the first day of the previous\nyear relevant to the assessment year\tin question ? Taking\nVazir Sultan Tobacco Company's case as an illustration, for\nthe assessment\tyear 1963-64 the relevant accounting period\nwas the year which ended on September 30, 1962; under Rule I\nof the\tSecond Schedule\t to the\t Super Profits\tTax Act, the\nfirst day of the previous year would be october 1, 1961 and.\ntherefore, the balance-sheet of that company as on September\n30, 1961 and the profits and\tloss account which ended on\nSeptember 30, 1961 would be relevant. It cannot be disputed\nthat on\t the expiry of September 30,\t1961, the assessee\ncompany incurred the taxation\tliability in respect of the\nprofits\n805\nwhich it had earned during that year, though the exact\namount of such\t liability could not\tbe determined\twith\nsubstantial accuracy at that time and the same would have to\nbe ascertained\tby reference to rate of taxes applicable to\nthat year. The liability for taxation having thus arisen on\nthe expiry of the last day of the year, the setting apart of\nthe sum of Rs. 33,68,360 by the Board of Directors will have\nto be regarded as a provision\t for a\tknown and existing\nliability, the\tquantification whereof bad to be done later.\nOn principle, therefore, it seems to us clear that the item\nof Rs.\t33,68,360 which\t had been set apart by the Board of\nDirectors for taxation must be regarded as a provision and\ncannot be regarded as\ta reserve. Similar would be\t the\nposition in regard to\tthe appropriations for taxation made\nby the other assessee-companies mentioned earlier.\n In this context a reference to this Court's decision in\nthe case of Kesoram Industries and Cotton Mills Ltd. v.\nCommissioner of\t Wealth Tax (Central) Calcutta(') would be\nuseful. In that case the question was whether a certain\namount which had been set apart as provision for payment of\nincome-tax and\tsuper tax was\ta \"debt owed\"\t within\t the\nmeaning of s. 2(m) of the Wealth-Tax Act, 1957, as on March\n31, 1957 which was the valuation date and as such\t was\ndeductible in computing the net wealth of the appellant\ncompany. In its balance-sheet for the year ending March 31,\n1957 the appellant company had shown\ta certain amount as\nprovision for payment of income-tax and super-tax in respect\nof that\t year of account and this Court took the view that\nthe expression\t\"debt owed\" within the meaning of s. 2(m) of\nthe Wealth-Tax\tAct, 1957 could be defined as the liability\nto pay\tin presenti or in futuro an ascertainable sum of\nmoney and that the liability to pay income-tax was a present\nliability though the\ttax became payable after it\t was\nquantified in accordance with ascertainable data; that there\nwas a perfected debt on the last date of the accounting year\nand not\t a contingent liability. The Court further observed\nthat the rate was always easily ascertainable; that if the\nFinance Act was passed, it was the rate fixed by that Act;\nif the\tFinance Act was not yet passed, it was the\trate\nproposed in the Finance Bill pending before the Parliament\nor the\trate in\t force in the preceding year whichever was\nmore favourable to the assessee and that all the ingredients\nof a \"debt\" were present and it was a present liability of\nan ascertainable amount and that, therefore, the amount of\nprovision for payment of income-tax and super-tax in respect\nof the year of account ending March 31, 1957 was a \"debt H\n806\nowed\" within the meaning of s. 2(m) on the valuation date,\nnamely\tMarch 31, 1957 and was as\tsuch deductible in\ncomputing the net wealth. The ratio of this decision clearly\nsuggests that the appropriation of the amounts set apart by\nthe assessee\tcompanies before us\tfor taxation would\nconstitute a provision made by them to meet\ta known\t and\nexisting liability and as such the concerned amounts would\nnot be includible i n capital computation.\n Counsel for the\tassessee company in Vazir Sultan\nTobacco\t Company's case, however, attempted\tto raise a\nfurther plea that the\tprovision for taxation in the sum of\nRs. 33,68,360 was an excess provision in the sense it was in\nexcess of the amount which was reasonably necessary for the\npurpose of taxation and, there ore, the excess should be\ntreated as a reserve and not a provision and in this behalf\nreliance was placed on\t cl. (7) (2) of Part III of Schedule\nVT and three decisions-of the Madras High Court Commissioner\nof Income-tax Madras v. Indian Steel Rolling Mills Ltd.(l)\nof the\tHimachal Pradesh High Court in Hotz Hotels Pvt. Ltd.\nv. Commissioner\t of Income Tax, Haryana, H.P. and Delhi(2)\nand of\tAllahabad High\tCourt in Commissioner of Income-Tax,\nDelhi v. Modi Spinning and Weaving Mills(3). There could be\nno dispute about the principle that if provision for a known\nor existing liability is made in excess of the amount that\nwould be reasonably necessary for the purpose 13: the excess\nshall have to be treated as a reserve and, therefore, would\nbe includible in the capital computation but no such case\nwas made out by the assessee\tcompany at any stage of the\nassessment proceedings\teither before the Taxing Authorities\nor even\t before the Tribunal or the High Court and in the\nabsence of any such plea having been raised at any stage of\nthe proceedings\t it will not be proper for this Court to\nallow the assessee company to raise such a plea, which will\nneed investigation into facts,\t for the first time in its\nappeal before this Court. The\t contention is, therefore,\nrejected. Dealing next with the item of appropriation made\nfor retirement\tgratuity, which\t arises only in Civil Appeal\nNo. 860/1973 (Vazir Sultan Tobacco Co.) the\tquestion is\nwhether the sum of Rs. 9,O8,106 appropriated or set apart by\nthe assessee company from out of its\t profits and other\nsurpluses by way of providing for retirement gratuity is a\nprovision or a reserve on the relevant date,\n807\nviz. 1.10.1961 ? Counsel for the assessee-compaoy vehemently\nurged before us that this appropriation had not been allowed\nas a deduction in the income-tax assessment proceedings of\nthe company for the relevant assessment year on the ground\nthat it\t was in\t the nature of a reserve and the entire sum,\nminus the actual payments, was added back to the income and\nprofits of the assessee-company and if that be so, in the\nsuper profit-tax assessment it cannot be treated as a\nprovision and excluded from capital computation. According\nto him\tthere could not be two different treatments for the\nsame item in income-tax assessment and super\t profit\t tax\nassessment. He\t pointed out\t that this contention\t was\nspecifically urged in\t the appeal before the Appellate\nAssistant Commissioner\tbut was wrongly rejected. He further\nsubmitted that\tno actuarial valuation had been undertaking\nbut ad hoc amount was appropriate or transferred to gratuity\nreserve and as such the same should have been treated as a\nreserve and included in capital computation.\tOn the other\nhand, counsel for the\tRevenue seriously disputed the last\nsubmission and\tcontended that\tit was never the case of the\nassessee-company either\t before the Taxing Authorities or\nbefore the Tribunal or\t before\t the High Court that\t the\nappropriation was or an ad hoc sum without undertaking any\nactuarial valuation. It must be observed that whereas the\nassessee-company did urge a contention before the lower\nauthorities that different treatments\tfor the same\titem\ncould not be given for purpose of income-tax assessment and\nsuper profit-tax assessment, the assessee company did not\nclarify by placing material on record\t as to\twhether\t the\nappropriation of the amount was based on any actuarial\nvaluation or whether it was an appropriation of an ad hoc\namount an aspect which, as we shall presently point out, has\na vital\t bearing on the question whether the appropriation\ncould be treated as a provision or a reserve. In the absence\nof proper material touching this vital aspect, we\t are\nafraid, the issue in question will have to be remanded to\nthe Taxing Authorities through the Tribunal for disposal in\nthe light of the well settled\t principles in\tthat behalf,\nwhich we shall presently indicate.\n Ordinarily an appropriation to gratuity reserve\twill\nhave to\t be regarded as a provision made for a contingent\nliability, for,\t under a scheme framed\t by a\tcompany\t the\nliability to pay gratuity to its employees on determination\nof employment arises only when the\temployment. Of\t the\nemployee is determined by death, incapacity, retirement or\nresignation-an event (cessation of employment) Certain to\nhappen in the service\tcareer of every employee; moreover,\nthe amount of gratuity\t payable is usually dependent on the\nemp-\n808\nloyee's wages at the time of determination of his employment\nand the\t number of years of service put in by him and the\nliability accrues and enhances with completion of every year\nof service; but the company can work out on an actuarial\nvaluation its estimated liability (i.e. discounted present\nvalue of the liability\t under the scheme on a scientific\nbasis) and make a provision for such liability not all at\nonce but spread over a number of years. It is clear that if\nby adopting such scientific method any appropriation is made\nsuch appropriation will constitute a provision representing\nfairly accurately a known and existing liability for\t the\nyear in question; if, however, an ad hoc sum is appropriated\nwithout resorting to any scientific basis such appropriation\nwould also be a provision\tintended to meet a known\nliability, though a contingent\t one, for, the expression\n'liability' occurring in cl. (7) (1) (a) of Part III of the\nSixth Schedule to the Companies Act includes any expenditure\ncontracted for and arising under a contingent liability; but\nif the\tsum so\tappropriated is shown to be in excess of the\nsum required to meet the estimated liability\t (discounted\npresent value on a scientific basis) it is only the excess\nthat will have to be regarded as a reserve under cl. (7) (2)\nof Part III to the Sixth Schedule.\n In the above context we might refer to one English case\ndecided by the House of Lords and two or three decisions of\nthis Court, which seem to lead to aforesaid propositions. In\nSouthern Railway of Peru Ltd. v. Owen(1) an English Company\noperating a railway in\t Peru was, under the laws of\tthat\ncountry, liable\t to pay\t its employees\tconpensation on\t the\ntermination of\ttheir services\teither by dismissal or by\nnotice\tor on\tsuch termination by death or efflux of\ncontractual time. The compensation so paid was an amount\nequivalent to one month's salary at the rate in force at the\ndate of\t determination for every year\tof service. In\t the\ncomputation of taxable income under the Income-tax Act 1918,\nthe company claimed to\t be entitled to charge against each\nyear's\treceipts the cost of\t making\t provision for\t the\nretirement payments which would ultimately be thrown on it,\ncalculating the\t sum required to be paid to each employee if\nhe retired without forfeiture\tat the close of the year and\n(; setting aside the aggregate of what was required in so\nfar as\tthe year had contributed to the aggregate. The House\nof Lords rejected the\tdeductions on the ground that in\ncalculating the\t deductions the company had\tignored\t the\nfactor of discount. But, their Lordships recognised\t the\nprinciple that\tthe company was entitled to charge, against\neach year's receipts, the cost of making the\n809\nprovision for the retirement\twhich would ultimately be\npayable as the company\t had the benefit of the employee's\nservices during\t that year provided the present value of the\nfuture payments\t could be fairly estimated. Lord MacDermott\nobserved at page 345 as follows:\n\t \".... as a general proposition it is, I think\n right to say that, in computing his taxable profits for\n a particular year, B a trader, who is under a definite\n obligation to pay his employees for their services in\n that year\tan immediate payment\tand also a future\n payment in\t some subsequent year, may properly deduct,\n not only the immediate payment but the present value of\n the future\t payment, provided such present value can be\n satisfactorily determined or fairly estimated.\"\n In Standard Mills Co. Ltd. v. Commissioner of Wealth-\nTax, Bombay (1) the question for decision was whether an\nestimated liability under gratuity schemes framed under\nindustrial awards amounted to 'debts' and could be deducted\nwhile computing the net wealth of the assessee-company under\nthe Wealth Tax Act. This Court held in view of the terms of\ns. 2 (m) of that Act, that as the liability lo pay gratuity\nwas not in praesenti but\twould arise in future on\ndetermination of the service, i. e. On the retirement, death\nor termination,\t the estimated\tliability under\t the schemes\nwould not be a 'debt' and, therefore, could not be deducted\nwhile computing\t the net wealth. The House of Lords decision\nin the\tcase of\t Southern Rly.\tOf Peru Ltd.\t(supra)\t was\ndistinguished by this Court as having\t no relevance to the\nquestion before\t it on the ground that the House of Lords in\nthat decision was concerned in determining the deductibility\nof the\tpresent value of a liability which may arise in\nfuture in the computation of taxable income for the relevant\nyear under the income-tax laws. It will thus\t appear that\nthis Court was of the view that though such a liability is a\ncontingent liability and, therefore, not a 'debt' under s.\n2(m) of\t the Wealth-Tax Act it would be deductible under the\nIncome Tax Act while computing the taxable profits; in other\nwords different\t considerations would apply to cases arising\nunder the Wealth-Tax Act and the Income-Tax Act.\n In Matal Box Co's case (supra) this Court was concerned\nwith the nature of liability under a scheme of gratuity in\nthe context of the Payment of\t Bonus\tAct, 1965 and\t the\nquestion related to a sum\n810\nof Rs.\t18.38 lakhs being the estimated liability under the\ntwo gratuity schemes framed by the\tcompany, which\t was\ndeducted from the gross receipts in the P & L Account, it\nbeing contended on behalf of the workmen that such deduction\nwas not\t justified while determining the 'available surplus'\nand the\t 'allocable surplus' for payment of bonus to them\nunder the Payment of Bonus Act, 1965. The Court rejected the\ncontention and\tadverting to the decision of House of Lords\nin the\tcase of Southern Rly. Of Peru Ltd. (supra) held that\nan estimated liability under gratuity schemes\t even if it\namounted to a contingent liability and was not a 'debt'\nunder the Wealth Tax Act, if properly ascertainable and its\npresent value was fairly discounted was deductible from the\ngross-receipts while preparing\t the P\t & L Account.\t The\nmaterial portion of the head-note appearing at page 54 of\nthe report runs thus:\n\t \"Contingent liabilities discounted and valued as\n necessary,\t can be taken into\taccount\t as trading\n expenses if they are sufficiently certain to be capable\n of\t valuation and if profits\tcannot\tbe properly\n estimated without\ttaking them into consideration. An\n estimated liability under\t a scheme of\tgratuity if\n properly ascertainable and its\t present value is\n discounted, is deductible from the gross receipts while\n pre paring\t the P\t& L account. This is recognised in\n trade circles and there is nothing in the Bonus Act\n which prohibits such a practice. Such\ta provision\n provides for a known liability of which the amount can\n be determined with substantial accuracy.\t It cannot,\n therefore,\t be termed a\t \"reserve\". Therefore,\t the\n estimated liability for the year on account of a scheme\n of gratuity should be allowed to be deducted from the\n gross profits. The allowance is not restricted to the\n actual payment of gratuity during the year.\"\nAt page 62 of the Report this Court observed thus:\n\t \"Two questions, therefore, arise: (I) whether it\n is legitimate in such a scheme of gratuity to estimate\n the liability on an actuarial valuation and deduct such\n estimated liability in the P & L Alc while working out\n its net\tprofits; (2) if it is, b whether\tsuch\n appropriation amounts to a reserve or a provision?.. In\n the case of an assessee maintaining his accounts on\n mercantile system,\t a liability already accrued, though\n to be discharged at a future date, would be a proper\n deduction while working out the profits\tand gains of\n his business, re-\n811\n gard being\t had to the accepted principle of commercial\n A practice\t and accountancy . It\tis not\tas if\tsuch\n deduction\tis permissible\t only in case\t of amounts\n actually expended or paid. Just as receipts, though not\n actual receipts but accrued due, are brought in\t for\n income-tax assessment, so also liabilities accrued due\n would be taken into account while working out\t the\n profits and gains of the business\".\nAgain at page 64 of the Report this Court observed thus:\n\t \"In the instant case\t the question is not whether\n such estimated liability arising\tunder the gratuity\n schemes amounts to a debt or not. The question that\n concerns us is whether while working out the\t net\n profits, a\t trader can pro vide from his gross receipts\n his liability to pay a certain sum for every additional\n year of service which he receives from his employees.\n This, in our view, he can do if\t such liability is\n properly ascertainable and it is possible to arrive at\n a proper discounted present value. Even if the n\n liability\tis a contingent liability, provided\t its\n discounted present\t value is ascertainable, it can be\n taken into\t account. Contingent liabilities discounted\n and valued\t as necessary can be taken into account as\n trading expenses if they are sufficiently certain to be\n capable of\t valuation and if profits cannot be properly\n estimated without taking them into account.\"\n In the case of Workmen of William Jacks . Co. Ltd. v.\nManagement of Jacks &\tCo. Ltd. Madras (1) another decision\nunder the Payments of\tBonus Act, 1965, this\tCourt, after\nreferring to the distinction pointed out in Metal Box Co's\ncase between the two concepts 'provision' and 'reserve' has\nobserved on page 547 as follows:\n\t \"The\tprovision for\tgratuity, furlough salary,\n passage, service and commission,\tin the\tpresent case\n was all\tmade in respect of\texisting and known\n liabilities though\t in some cases the amount could not\n be ascertained with accuracy. It was not a case where\n it was an anticipated loss or anticipated expenditure\n which would arise in\tfuture.\t Such provision is\n therefore not a reserve at all and cannot be added back\n under item 2 (c) of the Second Schedule.\"\n812\n In the above case also the Court was concerned with the\nquestion whether particular provision\tmade for gratuity,\nfurlough salary, passage, etc. was a reserve or a provision\nfor the\t purpose of Second Schedule to the Payment of Bonus\nAct, 1965. At\t page 546 of\tthe report the Court\t has\ncategorically observed\t that\tall these items, namely,\ngratuity furlough salary, passage, service, commission, etc.\nwere clearly in respect of liabilities which had already\naccrued in the years in which\t the provision\twas made and\nwere not in respect of anticipated liabilities which might\narise in future and, therefore, the Court held that the said\nprovision was not a reserve but a provision.\n From the aforesaid discussion of the case law it seems\nto us clear that the propositions indicated by us earlier\nclearly\t emerge. Since in the instant case sufficient\nmaterial throwing light on the above aspects of the question\nhas not\t been made available, we think, it will be in the\ninterest of justice to remand the case through the Tribunal\nto the taxing authority to decide the issue whether the con-\ncerned amount (Rs. 9,O8,1061-) set apart and transferred to\ngratuity reserve by the assessee company was either a\nprovision or a reserve and if the latter to what extent? The\ntaxing authority will decide the issue in light of the above\nprinciples after giving an opportunity to the assessee\ncompany to place additional relevant materials before\n Turning to\t the last item of appropriation by way of\nprovision for proposed dividends, which arises in all these\nmatters (except\t in Tax\t Reference Case\t No. 511978 of Hyco\nProducts Pvt. Ltd.) the common question is\twhether\t the\nconcerned amount appropriated or set apart by the assessee-\ncompanies from out of the profits and other surpluses by way\nof making provision for 'proposed dividends' constituted a\nprovision or a reserve on the relevant date ?\n It is true that under s. 27 of the Companies Act, 1956\nthe Directors can merely recommend that a certain sum be\npaid as\t dividend but such recommendation does not result in\nany obligation\tor liability; the obligation or liability to\npay the\t dividend arises only when the share-holders at the\nannual general\tmeeting of the company decide to accept the\nrecommendation and pass a resolution for declaration of the\ndividend. It is therefore open to the directors to withdraw\nor modify their recommendation at any time\t before\t the\nshareholders accept the same and it is equally open to the\nshareholders not to accept the recommendation at all or to\ndeclare a dividend of an amount lesser than that recommended\nby directors. In Kesoram\n813\nIndustries case (supra) this Court\t has clarified\t the\naforesaid legal\t A position by observing at page 772 of the\nreport, thus:\n\t \"The directors cannot distribute dividends\t but\n they can only recommend to the general body of\t the\n company the quantum of dividend\tto be\tdistributed.\n Under section 217 of the Indian\tCompanies Act, there\n shall be attached to every balance-sheet laid before a\n company in\t general meeting a report by its board of\n directors with respect to, interalia, the amount, if\n any, which it recommends to be paid by way of dividend.\n Till the company in its general\tbody meeting accepts\n the recommendation and declares\t the dividend,\t the\n report of\tthe directors in that\t regard\t is only a\n recommendation which may be withdrawn or\t modified as\n the case may be.\tAs on the valuation date (under the\n Wealth Tax\t Act) nothing further happened\t than a mere\n recommendation by\tthe directors as to the amount that\n might be distributed as dividend, it is not possible to\n hold that\tthere was any debt owed by the assessee to\n the share holders on the valuation date.\"\n All that follows from above is that in\tthe instant\ncases the appropriations of the concerned amounts by\t the\nBoard of Directors by way of providing for proposed dividend\nwould not constitute 'provisions' for, the appropriations\ncannot be said to be by way of providing for any known or\nexisting liability, none having arisen on the date when the\ndirectors made\tthe recommendation much less on the relevant\ndate being the first day of the previous year relevant to\nthe assessment\tyear in question. But as stated earlier this\nby itself would not automatically convert the appropriation\ninto 'reserves', regard being\thad to the negative and non-\nexhaustive character of the definition of 'reserve' given in\ncl. 7 (I)(b) of Part III of the Sixth Schedule to\t the\nCompanies A ct. The question whether the concerned amounts\nin fact\t constituted 'reserves'\t or not will\thave to be\ndecided by having regard to the true nature and character of\nthe sums so appropriated depending\ton the\t surrounding\ncircumstances particularly the intention with which and the\npurpose for which such appropriations had been made.\n We\t have\talready\t indicated that according to\t the\ndictionaries (both oxford and Webster) the applicable\nmeaning of the word 'reserve' is: \"to keep for future use or\nenjoyment; to set apart for some purpose or end in view; to\nkeep in store for future or special\n814\nuse; to keep in reserve.\" In other words, the word 'reserve'\nas a noun in ordinary parlance would mean \"something which\nis kept\t for future use or stored up\tfor something or set\napart for some purpose\". It cannot be disputed that a\nreserve may be a general reserve or specific reserve and all\nthat is\t required is that an amount should be kept apart for\nsome purpose, either general or specific. Eeven so\t the\nquestion is whether the earmarking of a portion of pro fits\nby the\tboard of directors of\ta company avowedly for\t the\npurpose of distributing dividend would fall\t within\t the\nexpression 'reserve' occurring in rule T of\t the Second\nSchedule to the Super\tProfits\t Tax Act, 1963? For\tthis\npurpose certain\t tests indicated in some decisions of this\nCourt will have to be considered: The first decision of this\nCourt in that behalf is the decision in Century Spinning and\nManufacturing Company's\t ease (supra).\t In that case\t the\nmaterial facts\t were\tthese:\tFor the year\tending\t31st\nDecember, 1946,\t the profit of the assessee-company, whose\naccounting year\t was the calendar year, was a\t certain sum\naccording to the profit and loss account. After making\nprovision for depreciation and taxation, the balance of Rs.\n5,08,637 was carried to the balance sheet. This sum was not\nallowed in computing the profits of the assessee for the\npurposes of income tax. On 28th February, 1946, the Board of\ndirectors recommended out of that amount the sum of\t Rs.\n4,92,426 should\t be distributed\t as dividend and the balance\nof Rs.\t16,211 was to be carried forward to the next year's\naccount. This recommendation was accepted by\t the share-\nholders in their meeting on 3rd April, 1946, and the amount\nwas shortly afterwards distributed as dividend. In computing\nthe capital of the assessee company on 1st April, 1946,\nunder the Business Profits Tax Act,\t1947, the assessee\nclaimed that the sum of Rs. 5,08,637 and the profit earned\nby it during the period 1st January, 1946 to 1st April,\n1946, should be treated as \"reserves\"\t for the purpose of\nrule 2(1) of Schedule\tIT. The High Court held that the sum\nof Rs. 5,08,637 must be treated as a reserve for the purpose\nof rule\t 2, but\t the profit made by the assessees during the\nperiod 1st January, 1946 to 1st April, 1946\tcould not be\nincluded in the reserves. On appeal to this Court, it was\nheld that the sum of Rs. 5,08,637 as\t well as the profits\nearned by the assessee\t during the period 1st January, 1946\nto 1st\tApril, 1946 did not constitute \"reserves\" within the\nmeaning of rule 2 (1) of Schedule II. After noting that the\nexpression 'reserve' had not been defined in the Business\nProfits Tax Act, 1947\tand after noting dictionary meanings\nof that expression the Court observed:\n815\n\t \" What is the true nature and character of the\n disputed A sum must be determined with reference to the\n substance of the matter and when this is borne in mind,\n it follows\t that the 1st of April, 1946\twhich is the\n crucial date, the sum of Rs. 5,08,637 could not be\n called a reserve for nobody possessed of the requisite\n authority had indicated on that date the manner of\n disposal or distination. On the other hand, B on the\n 28th February, 1946 the directors clearly earmarked it\n for distribution as dividend and did not make it a\n reserve. Nor did the company in\tits meeting of\t 3rd\n April, 1946 decide that it was a reserve. It remained\n on the 1st of April, as a mass of undistributed profits\n which were available for distribution and not earmarked\n as \"reserve\". On the 1st of January, 1946 the amount\n was simply\t brought from the profit and loss account to\n the next year and\t nobody with any authority on that\n date made\tor declared a reserve. The reserve may be a\n general reserve or a specific reserve, but there must\n be a clear indication to show whether it was a reserve\n either of\tthe one\t or the other kind. The fact that it\n constituted a mass of undistributed profits on the 1st\n Jan. 1946\tcannot automatically make it a reserve. On\n the 1st April, 1946 which is the commencement of the\n chargeable\t accounting year, there was merely a\n recommendation by\tthe directors that the amount in\n question should be distributed as dividend. Far from\n showing that the directors have made the amount in\n question a\t reserve it shows that\t they had decided to\n earmark it for distribution as dividend.\"\n The decision clearly lays down that the true nature and\ncharacter of the appropriation must\tbe determined\twith\nreference to the substance of the matter; obviously\tthis\nmeans that one must have regard to the intention with which\nand the\t purpose for which appropriation has been made, such\nintention and purpose being gathered from the surrounding\ncircumstances.\tIn that behalf the\t following aspects\nmentioned in the judgment provide some guidelines: (a) a\nmass of\t undistributed profits cannot automatically become a\nreserve and that somebody possessing the requisite authority\nmust clearly indicate\tthat a\t portion thereof has\tbeen\nearmarked or separated from the general mass of profits with\na view\tto constituting\t it either a general reserve or a\nspecific reserve, (b) the surrounding circumstances should\nmake it\t apparent that the amount so ear-marked or set apart\nis in fact a reserve to be utilised in future for a specific\npurpose and on a specific occasion, and (c) a clear conduct\non the\n816\npart of the directors in setting apart a sum from out of the\nmass of\t undistributed profits\tavowedly for the purpose of\ndistribution as\t dividend in the same year would run counter\nto any\tintention of making that amount a reserve. It was\nbecause these aspects obtained\t in the case that this Court\ntook the view that neither the sum of Rs. 5,08,637 nor the\nprofits\t earned\t by the assessee during the\t period\t 1st\nJanuary, 1946 to 1st April 1946 constituted \"reserve\" within\nthe meaning of Rule 2(1) of Second Schedule of the Business\nProfits Tax Act, 1947.\n Two more decisions of this Court one in First National\nCity Bank v. Commissioner of Income-Tax (1) and the other in\nCommissioner of\t Income-Tax (Central),\tCalcutta v. Standard\nVacuum oil Co.(2) which provide two more guidelines, may now\nbe considered.\tIn both\t these cases the Court was concerned\nwith the question whether the amount set apart as \"undivided\nprofit\" or set apart as \"earned surplus\" in accordance with\nthe system of accountancy which obtained in\t the United\nStates amounted\t to a reserve liable to be included in the\ncapital computation under rule\t 2 of Schedule\t II of\t the\nBusiness Profits Tax Act, 1947. In both the cases\t the\nassessees were\t non-resident companies and followed\t the\nsystem\tof accounting\t that\tobtained in the American\ncommercial world. In the first case Justice Kapur, speaking\nfor the\t court, pointed\t out the difference between the two\nsystem of accounting at Page 23 of the Report thus:\n \"In India at the end of an year of account the\n unallocated profit\t or loss is carried forward to the\n account of\t the next year, and such unallocated amount\n gets merged in the account of that year. In the system\n of accounting in the USA each year's account is self-\n contained and nothing is\tcarried forward. If afteral\n locating the profits to diverse heads mentioned above\n any balance remains, it is credited to the \"undivided\n profits\" which become part of the capital fund. If in\n any year as a result of\tthe allocation there is loss\n the accumulated undivided profits of the previous years\n are drawn\tupon and if that fund is exhausted\t the\n banking company draws upon the surplus.\tIn its\tvery\n nature the undivided profits are accumulation of\n amounts of\t residue on hand at the end of the year of\n successive periods\t of accounting and these amounts are\n by the prevailing accounting practice and the Treasury\n directions regarded as a\tpart of\t the capital fund of\n the banking company.'\n817\n After quoting with approval the above observations, Mr.\nA Justice Shah in Standard Vacuum Oil Co.'s case went on to\nobserve at page 695 of the report as follows:\n \"It is true that the court\t in that case\t was\n dealing with a case of a banking company but\t the\n characteristics noted are not peculiar to the accounts\n of\t a banking company;\t they are applicable\twith\n appropriate variations to the accounts of all companies\n in\t which\tdifferent nomenclatures are used in\t the\n accounts to designate the residue on hand as 'surplus',\n ' undivided profits' or 'earned surplus'.\n\t Where the balance of net profits after allocation\n to\t specific reserves and payment of dividend\t are\n entered in the account\tunder the caption 'earned\n surplus', it is intended thereby to designate the fund\n which is to be utilised for the purpose of the business\n of the assessee. Such a fund may be regarded according\n to the Indian practice as 'general reserve\")\nThis Court in the first case held that the amount designated\nas \"undivided profits\" which was available for continuous\nfuture use of the business for the bank was a part of the\nreserve and had to be taken into account while computing the\ncapital under rule 2(1) of Schedule II of the Business\nProfits Tax Act; similarly, in the second case the Court\nheld that the amount which had been allocated to \"earned\nsurplus\" which\twas intended for the purpose of the business\nof the\tassessee company and was used in subsequent years in\nbusiness, represented ''reserves\" within the meaning of rule\n2 of Schedule II of the Business Profits: Tax. From these\ntwo decisions two aspects emerge very clearly. In the first\nplace, the nomenclature accorded to any particular\tfund\nwhich is set apart from out of the profits would not be\nmaterial or decisive of the matter and secondly, having\nregard to the purpose\tof rule\t of 2 of Schedule II of the\nBusiness Profits Tax Act, 1947, if any amount set apart from\nout of\tthe profits is going to make up capital fund of the\nassessee and would be\tavailable to the assessee for\t its\nbusiness purposes, it would become a\treserve liable to be\nincluded in the capital computation of the assessee under\nthat Act.\n The provisions of the Companies Act 1956 also\tlend\nsupport\t to the proposition\tthat an appropriation\t for\nproposed dividend would not amount to\t a reserve. Section\n217(1) runs thus:\n818\n\t \"217(1) There\t shall be attached to every balance\n sheet laid\t before a company in\tgeneral\t meeting, a\n report by its Board of directors, with respect to-\n\t (a) the state of the company's affairs,\n\t (b) the amounts, if any which it\tproposes to\n\t carry to any reserves in such balance sheet,\n\t (c) the amounts, if\t any, which it recommends\n\t should be paid by way of dividend;\n\t (d) ................................. \"\nRegulation 87 of Table A in the First Schedule runs thus:\n\t \"87(1) The Board may, before recommending\t any\n dividend, set aside out of the profits of the company\n such sums\tas it thinks proper as a reserve or reserves\n which shall, at\tthe discretion\t of the Board, be\n applicable for any purpose to which the profits of the\n company may be properly applied, including provision\n for meeting contingencies or for equalising dividends;\n and pending such application\tmay at\t the\tlike\n discretion, either\t be employed in the business of the\n company or\t be invested in such investments (other than\n shares of\tthe company) as the Board may, from time to\n time, think fit.\n\t (2) The Board may also carry forward any profits\n\t which it may think prudent not to divide, without\n\t setting them aside as a reserve.\"\nThe aforesaid provisions read\ttogether clearly show\tthat\ncreating re serves out of the profits is a stage distinct in\npoint of fact and anterior in point of time to the stage of\nmaking recommendation for payment of dividend and the scheme\nof the\tprovisions suggests that appropriation\t made by the\nBoard of Directors by\tway of\trecommending a\t payment of\ndividend cannot in the nature of things be a reserve.\n If regard\tbe had to the guide-lines indicated above as\nwell as\t the provisions\t of the Companies Act 1956 specified\nabove we are clearly of the opinion that the appropiations\nmade by\t the directors\tfor proposed dividend in the case of\nthe concerned\t assessee-companies do not\t constitute\n'reserves' and the concerned amounts so set apart would have\nto be ignored or excluded from capital computation.\n819\n Since we have reached the aforesaid conclusion on first\nprinciples and\ton the\tbasis of the guidelines discussed\nabove it is unnecessary for us to go\t into or discuss the\nscope and effect of the Explanation to Rule\t1 in Second\nSchedule to The Companies (Profits) Sur-tax Act, 1964 though\nit seems to us\t prime facie that the\t Explanation, being\nclarifacatory in nature is declaratory of the existing legal\nposition.\n Dealing with the last case of Hyco Products Pvt. Ltd.\nBombay (Tax Reference\tCase No. 5 of 1978), where\t the\nquestion pertaining to dividend but in a different\tform\narises for consideration, the admitted facts may briefly be\nstated. The question relates to the Assessment Year 1974-75,\nthe relevant previous year being calendar year 1973 and the\nmaterial date being 1.1.1973.\tAfter the accounts of\t the\ncalendar year 1972 were finalised the directors transferred\nout of\tthe profits of Rs. 61,03,382 of that year a sum of\nRs. 29,77,000 to the General Reserve. With such tranfer the\nGeneral Reserve of the assessee company as on 1.1.1973 stood\nat Rs.\t86,07,712. At the end\tof the\tcalendar year,\t1973\nadmittedly the\tdirectors did not make\t any provision\t for\n'proposed dividend' in its accounts but there was note on\nthe Balance Sheets to the following effect:-\n\t \"The directors have recommended dividend for the\n year 1972\tat the\trate of\t Rs. 10/- per share free of\n tax. The dividend, if approved by the share-holders at\n the forth-\t coming Annual General Meeting, will be paid\n out of General Reserve and no separate provision has\n been made therefor in the accounts.\"\nAt the Annual General Meeting held on June 30, 1973 dividend\nof Rs.\t3,10,450 was declared by the share-holders and the\nsame was soon thereafter paid\t out of the said General\nReserve. In the surtax assessment proceedings under the 1964\nAct the\t assessee claimed that the entire general reserve\nwhich stood as Rs. 86,07,712 as on 1.1.1973 should be taken\ninto account while computing the capital of the assessee\ncompany. But the taxing officer reduced the general reserves\nby the aforesaid sum of Rs. 3,10,450 and only the balance of\nRs. 82,97,262 was added in computing the capital.\t The\nAppellate Assistant Commissioner as well as the Income-Tax\nAppellate Tribunal, Bombay confirmed the order of the Taxing\nofficer. The Tribunal took the view that though it was not a\ncase of 'pro- posed dividend' since the amount actually paid\nout as\t dividend was\t a smaller sum than\t the amount\ntransferred from out of profits to\n820\nthe General Reserve that amount could not form part of the\nreserve and therefore the General Reserve as reduced by Rs.\n3,10,450 was properly taken into account for the purpose of\ncomputation of\tthe capital as on the relevant date. At the\ninstance of the assessee the\tTribunal has referred\t the\nfollowing question of law directly to\t this Court for its\nopinion under s. 257 of the Income Tax Act 1961 read with s.\n18 of the Companies (Profits) Sur-tax Act, 1964:\n\t \"Whether on the facts and in the circumstances of\n the case the Tribunal was justified in excluding a sum\n of Rs. 3,10,450 representing the dividends declared for\n the calendar year 1972 from the General Reserves on the\n opening date of the previous year while computing the\n capital under the Second\tSchedule of the Companies\n (Profits) Sur-tax\tAct, 1964 for the assessment\tyear\n 1974-75?\"\n Counsel for the assessee-company\tcontended that after\ncon ceding that this was not a case of \"proposed dividend\"\nthe Tribunal erred in\tholding that the sum of Rs 3,10,450\nrepresenting the dividends paid out from the General Reserve\nwas liable to be excluded while computing the capital of the\ncompany as on 1.1.1973\t for purposes of sur-tax assessment\nunder the 1964 Act. According to him under s. 205(1) of the\nCompanies Act,\t1956 dividend can be paid from out of the\ncurrent year's\tprofits or profits of any previous financial\nyear or\t years and there is no presumption in law or in\ncommercial accounting that a dividend has to be paid either\nfrom the current year's profits or from the\tpast year' s\nprofits. He further urged that once from out of the current\nyear's profit\ta certain sum is transferred to the General\nReserve it merges into the latter and the General Reserve so\naugmented becomes a conglomerate fund and if out of such\nconglomerate fund any sum is recommended or paid out as\ndividend it will be difficult to say that such payment has\ncome out of the portion of current year's profits that has\nbeen transferred and merged and there is no reason why the\nprinciple 'Last-in, First-out' should be invoked for drawing\nthe inference that the\t payment has been made\t out of\t the\ncurrent year's profits. He pointed out that such a principle\nwas applied by the Bombay High Court\t in two decisions,\nnamely, Commissioner of Income-Tax, Bombay City-l v. Bharat\nBijlee Ltd.(1)\tand Commissioner of Income Tax, Bombay City-\nll v. Marrior (India) Ltd.(2) but urged that there\n821\nwas no warrant for it. In support of his contention that the\nentire A General Reserve of\tRs. 86,07,712\twithout\t any\ndeduction should have been\t taken\tinto account while\ncomputing the\tcapital\t of the assessee-company, counsel\nrelied upon a decision\t of the Andhra Pradesh High Court in\nSuper Spinning\tMills Ltd. v. Commissioner of Income\tTax,\nHyderabad(l).\n Alternatively counsel pointed out that as far as stock\nvaluation is concerned a question often arises whether the\nstock on hand at the end of the year is to be valued at the\nclosing price or at the initial purchase price and in\n'Advanced Accounting' by R. Keith Yorston and E. Bryan Smyth\n(a treatise on the principles and practice of accounting in\nAustralia) three methods of valuing the closing stock have\nbeen indicated at pages 441 and 442 of Vol. II (5th Edn.) of\nthe treatise, namely, (a) First-in First-out,\t (b) Last-in\nFirst-out and (c) Average Cost. In regard to\t these three\nmethods the authors have stated thus .\n (a) First-in First-out\n\t The assumption underlying this method is that the\n oldest stock is used or issued first or that sales are\n made in the order\t in which the goods are purchased or\n produced.\tIf there are\tseveral\t lots of goods at\n different prices,\tthey are regarded as being exhausted\n in the order of purchase. On a rising market this would\n write off the lower-priced lots first, and on a falling\n market the higher-priced lots would go first.\"\n (b) \"Last-in First-out.\n\t This\tmethod\tassumes\t that the items of stock\n purchased are the first to be issued or sold and thus\n the stock\tremaining is valued at the cost of\t the\n earlier purchase.\"\n (c) Average Cost.\n\t On this basis issues\t of stocks are valued at the\n weighted average cost of\tthe stock on hand at\t the\n beginning and of the purchases, less any issues already\n made.\"\n822\nCounsel for the assessee urged that for determining whether\nthe entire General Reserve of\t Rs. 86,07,712\t or reduced\nGeneral Reserve\t of Rs. 82,97,262 should be\t taken\tinto\naccount for capital computation either the 'First-in First-\nout' principle\t should be adopted;\t if not, only a\nproportionate deduction\t should\t be made and\tthe balance\nshould be held to be includible in capital\tcomputation,\nparticularly because the payment of dividend has been from a\nconglomerate fund.\n It\t is not possible to accept either of these\ncontentions urged by counsel for the assessee-company. It is\ntrue that under s. 205(1) a of the Companies Act, 1956 it is\nopen to\t the directors to recommend and the share-holders to\napprove payment\t of dividends either from the current year's\nprofits or from the past year's profits. It\tis also true\nthat on\t transfer of a portion of current year's profits to\nthe General Reserve the augmented General Reserve becomes a\nconglomerate fund but having regard to the natural course of\nhuman conduct of hard-headed men of business and commerce it\nis not\tdifficult to predicate\t that the dividends would\nordinarily be paid out\t from the current income rather than\nfrom the past savings\tunless the directors in their report\nexpressly or specifically state that payment\tof dividends\nwould be made from the past savings. From the commercial\npoint of view if any amount is required for incurring any\nexpenditure or\tmaking any disbursement like distribution of\ndividends in a current\t year, then ordinarily the same will\ncome out of the current income of the company if it is\navailable and only if the same is insufficient then the past\nsavings will be resorted to for the purpose\tof incurring\nthat expenditure or making that disbursement; such a course\nwould be in accord with the common sense point of view. We\nmay point out that this aspect of the matter was\t not\nconsidered by\tthe Andhra Pradesh High Court in Super\nSpinning Mills\tLtd. case (supra) and the view of the Bombay\nHigh Court in the case of Bharat Bijlee Ltd. (supra) and\nMarrior (India)\t Ltd. (supra) commends itself to us. Even in\nregard to the question\t of valuing the closing stock\t the\nlearned authors\t of the\t treatise referred to by the counsel\nfor the\t assessee-company merely indicate three methods for\nsuch valuation\tand it\twill be open to a commercial concern\nto avail of any one method. In our view in the context of\nthe question whether while incurring\tany expenditure or\nmaking any disbursement a commercial concern will resort to\ncurrent income\tor past\t savings, the normal rule, in\t the\nabsence of express indication\tto the contrary, would be to\nresort to the current income rather than past savings.\n823\n In our view, therefore, the Tribunal was right in\nexcluding the sum of Rs. 3,10,450 from the General Reserves\nwhile computing\t the capital of the assessee-company for the\nassessment year ]974-75, in\t the absence\t of express\nindication to the contrary.\n In the result Civil Appeal No. 1614(NT) of 1978 and\nReview Petition\t No. 57\t of 1980 are dismissed. Civil Appeal\nNo. 860\t of g 1973 is\tpartly allowed and the issue whether\nthe appropriation for retirement gratuity is\ta reserve or\nnot is\tremanded to the Taxing Authority and the rest of the\nappeal is dismissed. In Tax Reference Cases Nos. 2 and 3 of\n1977 and No. S\t of 1978 the questions\t referred to us are\nanswered in favour of the Department and\tagainst\t the\nassessee-companies. Each party will bear its\town costs in\nall the matters.\n AMARENDRA NATH SEN, J. At the outset I wish to observe\nthat I\t have been somewhat diffident in hearing these\nmatters. I felt a little embarrassed\tas I found that as a\nJudge of the High Court at Calcutta, I had an occasion to\nconsider some of the questions in the case of Braithwaite\nand Co.\t (India) Ltd. v. Commissioner of. Income- Tax, West\nBengal, (I) (Income Tax Reference No.\t 262 of\t 1969). As I\nhave already considered some of the\tquestions and\thave\nexpressed my views on the same in the judgment delivered by\nme in the said\t reference, I was wondering whether I should\nhear these appeals. The members of\t the Bar, however,\nrepresented to\tme that they had not only no objection to my\nhearing these appeals but they also wanted me to hear these\nappeals. They further represented that most of the Judges of\nthis Court had on some occasion or other considered these\nquestions. They\t further stated\t that if I would decline to\ntake up\t these matters\tnot only the members of the Bar who\nhad come from various parts of the country for these appeals\nwould be seriously inconvenienced; but also the litigant\npublic who had been waiting for years for the hearing of\nthese matters would be\t prejudiced. It\t was further pointed\nout to\tme that\t the judgment which was delivered by me was\nnot under appeal and further\tit would appear from\t the\njudgment which\t I had\t earlier delivered in\t Braithwaite\nmatter, there was in fact a concession made by the learned\ncounsel appearing on behalf of the assessee that the said\ncase was covered by the decision of the Supreme Court in the\ncase of\t Commissioner of Income-tax Bombay City v. Century\nSpinning and Manufacturing Co. Ltd. (') The learned counsel\nappearing on behalf\n824\nof the\tparties further\t represented to\t me that the earlier\njudgment was delivered by me as a Judge of the High Court\nand it\twas always open to me to reconsider\t' my view,\nparticularly as\t a Judge of this Court after\thearing\t the\nsubmissions to\tbe made\t by the learned counsel appearing on\nbehalf\tof the parties. In\t view\tof the aforesaid\nrepresentations and submissions made by the learned lawyers,\nI was persuaded to hear these appeals with\t my learned\nbrothers to avoid inconvenience not only to the lawyers but\nto the\tlitigant public. I have also had no doubt in my mind\nthat if\t I felt\t after hearing\tthe submissions\t made by the\nlearned counsel\t appearing on behalf of the parties in these\nappeals, that the earlier judgment delivered by me was wrong\nand incorrect,\tI would\t have no hesitation in reconsidering\nmy earlier decision.\n I do not propose\tto set out the facts of this case at\nany length in this judgment. The facts have been fully and\ncorrectly set out in the judgment of my learned brother\nTulzapurkar, J.\t My learned brother in his judgment has also\ndealt with the various\t arguments which were advanced from\nthe Bar\t and has also considered the decisions which were\ncited.\n I propose\tto notice only some of the decisions which,\nto my mind, are particularly important for decision of the\nquestion whether the provision made in the balance-sheet for\npayment of dividend to the share-holders recommended by the\nBoard of Directors constituted\t a 'reserve' and the amount,\nso set apart, should be taken into account, in computing the\ncapital of the company for the purpose of Super-Profits Tax\nAct, 1963. It may be noted that in the Act\t itself\t the\nexpression 'reserve' has not been defined.\n In the case of Commissioner of Income-tax, Bombay City\nv. Century Spinning and Manufacturing Co. Ltd. (supra), this\nCourt had the occasion\t to consider the meaning of the word\n'reserve' while\t dealing with a case under Business Profits\nTax Act\t (XXI of 1947). In this Act also, there were similar\nprovisions with\t regard to computation of the capital of the\nCompany\t and the assessee had claimed that\t the amount\nrecommended by\tthe Board of Directors\t and earmarked\t for\npayment of the dividend to the share-holders should be\ntreated as 'reserve' and should be taken into consideration\nin computing the capital of the assessee. The Supreme Court\nobserved at pp. 503-504 as follows :-\n\t \"The term 'reserve' is not defined in the Act and\n we must resort to\t the ordinary\tnatural\t meaning as\n understood\n825\n in common\tparlance. The dictionary meaning of the word\n 'reserve' is :-\n\t \"1 (a) To keep\tfor future use or enjoyment;\n\t to store up for some time or occasion; to refrain\n\t from using or for enjoying at once.\n\t (b) To keep back or hold over to a later time\n\t or place or for further treatment.\n\t 6. To set apart for some purpose or with some\n\t end in view; to keep for some use.\n\t II. To\t retain\t or preserve\tfor certain\n\t purposes (oxford Dictionary, Vol . VIII, P. 513.)\n\t In Webster's New International Dictionary\n\t Second Edition, page 2118 'reserve' is defined as\n\t follows:\n\t 1. To keep in store for future or special\n\t use; to keep in reserve; to\t retain, to keep, as\n\t for oneself.\n\t 2. To keep back; to retain or hold over to a\n\t future time or place.\n\t 3. To preserve.\"\n The Supreme Court further observed at p. 504: \"What is\nthe true nature and character of the disputed sum, must be\ndetermined, with reference to the substance of the matter?\"\nThe Supreme Court held at p. 504-505 as follows :-\n\t \"A reserve in the sense in\twhich it is used in\n rule 2 can only mean profit earned by a company and not\n distributed as dividend to the shareholders but kept\n back by the directors for any purpose to which it may\n be put in future.\t Therefore, giving to the 'reserve'\n its plain\tnatural meaning\t it is clear that the sum of\n Rs. 5,08,637 was\t kept in reserve by the company and\n not distributed as profits and subjected to taxation.\n Therefore, it satisfied all the requirements of rule 2.\n The Directors had no power to distribute the sum as\n dividend. They could only recommend as indeed they did,\n and it was upto the shareholders\t of the\t company to\n accept that recommendation in which case alone the\n826\n distribution could\t take place. The recommendation was\n accepted and the dividend was actually distributed. It\n is, therefore, not correct to say that the amount was\n kept back.\t The nature of the amount which was nothing\n more than\tthe undistributed profits of the Company,\n remained unaltered. Thus the profits Lying unutilised\n and not specially set apart for\tany purpose on\t the\n crucial date did not constitute reserves\t within\t the\n meaning of Schedule II, rule 2(1).\"\n The Supreme Court also referred to S.l31 (a) and 132 of\nthe Indian Companies Act. Referring to these sections the\nSupreme Court observed at p. 505 as follows:\n\t \"Section 131\t(a) enjoins upon the directors to\n attach to\tevery balance sheet a report with respect to\n the state\tof company's affairs and the amount if any\n which they\t recommend to be paid by way of dividend and\n the amount, if any, which they propose to carry to the\n reserve fund, general reserve or reserve account. The\n latter section refers to\tthe contents of the balance\n sheet which is to\t be drawn up in the Form marked in\n Schedule III. This Form contains a separate head of\n reserves. Regulation 99 of the Ist Schedule. Table A,\n lays down\t'that the directors may, before recommending\n any dividend set aside out of the profits of\t the\n company such sums as they think proper as a reserve or\n reserves which shall, at the\t discretion of\t the\n directors, be applicable for meeting contingencies, or\n for equalising dividends, or for any other purpose to\n which the\tprofits\t of the company may\tbe properly\n applied.. ' The Regulation suggests that any sum out of\n the profits of the company which\t is to\tbe made\t asa\n reserve or\t reserves must\t be set aside\t before\t the\n directors recommend any dividend.\t In this case\t the\n directors while recommending dividend took no action to\n set aside\tany portion of this sum as a\t reserve or\n reserves. Indeed, they never applied their mind to this\n aspect of the matter. The balance sheet drawn up by the\n assessee as showing the profits was\tprepared in\n accordance with the provisions of the Indian Companies\n Act. These provisions also support the conclusion as to\n what is the true nature of a reserve shown in a balance\n sheet.\"\n In the case of Commissioner of Income Tax v. Standard\nVacuum oil Co. (1) this Court had occasion to consider the\ndecision in\n827\nthe case of Commissioner of Income-tax v. Century Spinning\nand A Manufacturing Co. Ltd. (supra). Dealing with the said\ndecision of this Court held at p. 697-98 as follows :-\n\t \"The Court was dealing in this case with\t the\n accounts of an Indian Company, the balance-sheet of\n which was\tprepared according to the provisions of the\n Indian Companies Act, 1913. Regulation 99 of the First\n Schedule, Table A, required that reserves must be set\n apart before the directors recommended any dividend but\n out of the profits of the company no amount was set\n apart towards reserves before the directors recommended\n payment of\t dividend to the shareholders. The identity\n of the amount remaining on hand\tat the\tfoot of\t the\n profit and\t loss account was not\tpreserved. rt is on\n these facts that the court held\tthat there was no\n allocation of the amount\tto reserve and from the mere\n fact that\tit was carried forward in the account of the\n next year\t and ultimately applied in\t payment of\n dividend, it could not be said to be specifically set\n apart for\tany purpose at the relevant date, i. e. the\n end of the year of account.\"\n This Court\t then proceeded\t to hold at p. 697-98 as\nfollows :-\n\t \"We are in this case dealing with a foreign\n company and the system of accounting followed by the\n company is\t different in important respects from\t the\n system which obtains in\tIndia.\tCompanies in India\n maintain diverse types of\t reserves: such\t as capital\n reserve, reserve for redemption of debentures, reserve\n for replacement of plant\tand machinery,\treserve\t for\n buying new\t plant to be added to the existing ones,\n reserve for bad and doubtful debts? reserve for payment\n of dividend and general reserve. Depreciation reserves\n within the\t limit prescribed by the Income-tax Act or\n the Rules\tthereunder is the only\t reserve which\tis a\n permissible allowance in the computation\t of taxable\n profits. In its\t ordinary meaning the expression\n 'reserve' means something specifically kept apart for\n future use or for a specific occasion.\"\n In the case of Metal Box Company of India Ltd. v. Their\nWorkmen, (1) this Court while dealing with a case under the\npay-\n828\nment of\t Bonus\tAct, 1965 had\t occasion to consider\t the\nexpression 'reserve' and its meaning for the purpose of the\nsaid Act. This Court held at p. 67-68 as follows :-\n\t \" The\t next question\tis whether the amount so\n provided is a provision or a reserve. This distinction\n between a\tprovision and a reserve is in commercial\n accountancy fairly\t well known. Provisions made against\n anticipated losses and\tcontingencies\tare charges\n against profits and therefore, to be taken into account\n against gross receipts in\t the P\t& L account and the\n balance-sheet. On\t the other hand reserves\t are\n appropriations of\tprofits, the asset by which they are\n represented being\tretained in form part of the capital\n employed in the business. Provisions are usually shown\n in the balance-sheet by way of deductions from\t the\n assets in\trespect\t of which they are made whereas\n general reserves and reserve funds are shown as part of\n the proprietor's interest\t (see Spicer and Pegler's\n Book-keeping and Accounts, 15th\tEdn. page 42). An\n amount set\t aside out of profits\tand other surpluses,\n not designed to\t meet\ta liability,\tcontingency,\n commitment or diminution in value of assets known to\n exist at the date of the balance-sheet is a reserve but\n an amount\tset aside out of profits and other surpluses\n to provide\t for any known liability of which the amount\n cannot be\tdetermined with\t substantial accuracy is a\n provision; (see William Pickles\tAccountancy, Second\n Edn. p. 192; Part\t III, clause 7, Schedule VI to the\n Companies\tAct, 1958, which derives provision\t and\n reserve.\"\nIn the\t case\tof Commissioner of Income-tax v. Mysore\nElectrical Industries Ltd.(1) the facts were\t briefly as\nfollows:-\n Out of the profits of the company for the accounting\nperiod ending March 31, 1963. the Directors of the company\nappropriated the following amounts towards\treserves on\nAugust 8, 1963: (i) Rs. 2,56,000 as plant modernisation and\nrehabilitation\treserve: (ii)\tRs. 89,557 as\t development\nrebate reserve. The question was whether these amounts could\nbe included in computing the capital of the respondent as on\nApril 1, 1963 under rule 1 of Schedule II to the Companies\n(Profits) Sur-tax Act, 1964. for the purpose of\t the\nstatutory deduction for the assessment year 1961-65,\t The\ncontention of\t the department was\t that\t since\t the\nappropriations were made on 8th August, 1963 they could not\nbe treated as components of capital as on the first day of\nthe previous year i.e. 1st April, 1963. Negativ-\n829\ning the\t contention of\tthe department, this Court held that\nthe determination of\tthe Directors\tto appropriate\t the\namounts of the three items of\t reserve on 8th August, 1963\nhad to\tbe related to first April, 1963, viz., the beginning\nof the\taccounts for the new year, and had to be treated as\neffective from\tthat day and the said three items had to be\nadded to the other items for computation of the capital of\nthe company as on first April, 1963 under rule 1 of Schedule\nII to the Companies (Profits) Sur-tax Act, 1964. It may be\nnoted that in this case before the trial court a claim had\nbeen made by the company that a sum of Rs. 3,15,000\nrepresenting dividend\treserve\t was to be considered in\ncomputing the\t assessee's capital for the\t purpose of\nCompanies (Profits) Sur-tax Act, 1964 and the High Court had\nrejected this claim. As against the rejection of this claim\nby the\tHigh Court, no appeal\thad been preferred by\t the\nassessee to the Supreme Court. The Supreme\tCourt while\nconsidering the\t three items which came up for consideration\nbefore it held, as already noted, that the decision of the\ndirectors to appropriate the amounts to these three items of\nreserve on 8th August, 1963 had to be related to 1st April,\n1963 and this Court observed at pp. 560-570 as follows:-\n\t \"It is well known that the accounts of the company\n have to be made up for a year up to a particular day.\n In this case that\t day was the 31st March, 1963. If it\n was reasonably practicable to make up the accounts up\n to the 31st March, 1963, and present the same to the\n directors of the respondent on April 1,\t 1963,\tthey\n could have made up their minds on that day and declared\n their intention of appropriating\tthe said and other\n sums to reserves of different kinds. But the fact that\n they could\t not do\t so for\t the simple reason that the\n calculation and collection of figures of all the items\n of income\tand expenditure\t of the company for the year\n ending March 31, 1962, was bound\t to take some\ttime\n cannot make any difference to the nature or quality of\n the appropriation\t of the profits to\treserves as\n determined by the directors after the first of April,\n 1963. Their determination to appropriate the\tsums\n mentioned to the three separate classes of reserves on\n the 8th August, 1963, must be related to the 1st of\n April, 1963, i.e., the beginning of the accounts for\n the new year and must be treated as effective from that\n day\".\n830\n Relying on\t the aforesaid decisions and also many other\ndecisions of the various High Courts which have\tbeen\nconsidered by my learned brother Tulzapurkar,\t J. in\t his\njudgment, the learned counsel\tfor the\t assessee has argued\nthat the word 'reserve' which has not been defined in the\nAct, has to be\t understood in\tits ordinary meaning as laid\ndown by\t the Supreme Court in\tthe case of Century Spinning\nMills Ltd. The further\t argument is that the recommendation\nfor dividend by the directors of the Company does not create\nany kind of liability,\t immediate or future. It is argued\nthat the obligation to pay the dividend only arises when the\nshareholders at\t the Annual General Meeting of the Company\ndecided to accept the\trecommendation of the Directors and\npass a\t resolution for declaration of dividend. It is\nsubmitted that\tit is open to\tthe Directors to withdraw or\nmodify the recommendations made by them any time before the\nshareholders accept the recommendations and in support of\nthis contention\t reference is made to\tthe decision of this\nCourt in the case of Keshoram\t Industries and Cotton Mills\nLtd. v.\t Commissioner of Wealth Tax (Central), Calcutta (I)\nand n reliance is placed on the following observations at p.\n772 :-\n\t \"The directors cannot distribute dividends\t but\n they can only recommend to the general body of\t the\n company the quantum of dividend\tto be\tdistributed.\n Under section 217 of the Indian\tCompanies Act, there\n shall be attached to every balance-sheet laid before a\n company in\t general meeting a report by its board of\n directors with respect to, inter alia, the amount. if\n any, which it recommends to be paid by way of dividend.\n Till the company in its general\tbody meeting accepts\n the recommendations and declares\t the dividend,\t the\n report of\tthe directors in that\t regard\t is only a\n recommendation which may be withdrawn or\t modified as\n the case may be.\tAs on the valuation date nothing\n further happened than a mere recommendation by\t the\n directors as to the amount that might be distributed as\n dividend, it is not possible to hold that there was any\n debt owed\tby the\tassessee to the share holders on the\n valuation date.\"\nIt is further argued that it is open to the share-holders to\naccept the i recommendations in its entirety or to modify\nthe same by\n831\ndeciding to declare dividend at a rate lower than the one\nrecommended by\tthe directors.\tIt is,\ttherefore, contended\nthat the recommendation of the directors for\t payment of\ndividend does not have\t the effect of creating any kind of\nliability and there is no debt owed by the company by virtue\nof the\tsaid recommendations. It has been submitted that the\ndecision of this Court\t in the\t case of Mysore Electrical\nIndustries Ltd.\t (supra) is of no assistance and the said\ndecision does not lay\tdown that in the event of the share\nholders' acceptance of recommendation made by the directors\nfor the distribution of dividend to the share-holders of the\ncompany, the liability for payment of the dividend will also\nrelate back; and the doctrine of relation-back applies only\nin respect of items which the\t directors are\tcompetent to\ndecide for themselves, in view of the process involved in\nthe preparation of accounts of the company.\n The main argument advanced on behalf of the Revenue is\nthat any amount which\tmay be\tset apart for\t payment of\ndividend r recommended to be paid by the Directors cannot\nconstitute 'reserve' within the meaning of the Act.\n The argument advanced on behalf of the assessee appears\nto be sound; but to my mind the said arguments are\t not\nsufficiently convincing\t to lead the Court to the conclusion\nthat the amount set\t apart\t for payment\tof dividend\nrecommended by\t the Board of Directors can constitute\n'reserve' within the meaning of the Act for the purpose of\ncomputation of the capital of the Company.\n The word 'reserve' has not been defined in the ACT. In\nthe absence of any such definition the word\t has to be\nunderstood in its ordinary sense. It\tis, however, to be\nremembered that\t the word 'reserve' in the instant\tcase\noccurs in a taxing statute specially applicable to Companies\nonly. The word 'reserve' should be so construed as to give\nthe said word\t the meaning in which it is ordinarily\nunderstood by persons interested in Companies or in dealing\nwith Companies.\t In other words, the word 'reserve' for the\npurpose of this Act should be\t understood in\tthe sense in\nwhich it is understood\t in company circles and by persons\ninterested in Companies and in dealing with Companies. It\nmay be\tnoticed that while considering the true meaning and\ntrue nature of 'reserve', the Supreme Court in the case of\nCommissioner of Income Tax\t v. Century Spinning\t and\nManufacturing Co. Ltd. (supra) has referred\n832\nto S. 131 (a)\tand 132\t of the Indian Companies Act, to the\nForm marked in Schedule III in which balance sheet of the\nCompany has to be prepared and also to Regulation 99 of the\nFirst Schedule,\t Table A. I have earlier quoted the relevant\nobservations of the Supreme Court.\n It is, no doubt, true that the re commendations of the\nDirectors for payment of any dividend\t does not create any\nkind of\t liability for\tthe payment of the said amount. The\nliability for payment of any amount by way of dividend only\narises when the share-holders accept the recommendations and\na dividend is declared at the annual general meeting of the\nCompany. It is open to the Directors to modify or withdraw\nthe recommendation with regard\t to the\t payment of dividend\nbefore the said recommendation\t is accepted by the share-\nholders. It is also open to the share-holders not to accept\nthe recommendation of the Directors in its entirety and to\nmodify the same. The legal liability for the payment of any\ndividend only arises after the share-holders at the annual\ngeneral meeting\t have decided to declare a dividend on the\nbasis of the recommendations of the Directors or on\t the\nbasis of any modification thereof. The liability for\t the\npayment of dividend only arises after the dividend has been\ndeclared by the share-holders at the annual general meeting\nand this liability does not relate back to 3 any earlier\ndate on\t the basis of the recommendations of the directors.\nas the\tdirectors do not enjoy any power of declaring the b\ndividend. The amount that may be set apart for payment of\nany dividend on the basis of the recommendations made by the\nDirectors, cannot be considered to be\t an amount set apart\nfor meeting a known or existing liability.\n Though the amount which is set apart for payment of any\ndividend recommended by the Board of\tDirectors is not an\namount\tset apart for meeting any\t known\tor existing\nliability, yet\tthe said amount so set apart cannot be\nconsidered to be a 'reserve' within the meaning of the Act\nfor the\t purpose of computation of the capital of\t the\nCompany.\n S. 210 of the Companies Act, 1956 specifically provides\nthat at\t every annual general meeting of a Company the Board\nof Directors of a Company shall lay before the Company the\nbalance sheet of the Company and also the Profits and Loss\naccount. S. 211\n833\nfurther provides that every balance sheet of a Company shall\ngive a\tA true\tand fair view of the state of affairs of the\nCompany as at the end of the Financial Year\t and shall,\nsubject to the provisions of the section, be in the form set\nout in\tPart I\tof Schedule VI, or as near\t thereto as\ncircumstances admit or in such other form as may be approved\nby the\tCentral Government either generally or in a parti-\ncular case. The preparation of a balance sheet in\t the\nprescribed form and laying the same before the share-holders\nat the\tannual meeting\tare statutory requirements which the\nCompany has to observe.\n Regulation 87 of Table A in Schedule I provides:\n\t \"(1)\tThe Board may, before recommending\t any\n dividend, set aside out of the profits of the Company\n such sums\tas it thinks proper as a reserve or reserves\n which shall, at\tthe discretion\t of the Board, be\n applicable for any purpose to which the profits of the\n Company may be properly applied, including provisions\n for meeting contingencies or for equalising dividends;\n and pending such application,\t may at the\tlike\n discretion, either\t be employed in the business of the\n company or\t be invested in such investments (other than\n shares of\tthe Company) as the Board may from time to\n time, think fit.\n\t (2) The Board may also carry forward any profits\n which it may think prudent not\tto divide. without\n setting them aside as a reserve\".\nThis Regulation\t contemplates that the Board may set aside\nout of\tthe profits of the Company such sums, as it thinks\nproper, as a reserve\tor reserves which shall, at\t the\ndiscretion of the Board, be applicable for any purpose to\nwhich the profits of the Company may be properly applied\nincluding the provisions for meeting contingencies or for\nequalising the\tdividends, before recommending any dividend.\nIn other words, the sums out of the profits of the Company\nhave to\t be set\t apart as reserve before any\tdividend is\nrecommended by\tthe Board; and the recommendation of\t the\nBoard for payment of dividend comes only after the creation\nof reserve. The amount that may, therefore, be set apart for\npayment of dividend recommended by the Board is an amount\nwhich is set apart\n834\nafter the Board had created the reserve. The form of balance\nsheet referred\tto in S. 211 of the Companies Act, 1956 is\nappended in Part I of Schedule VI of\t the Statute. In the\nstatutory form\tthere are various heads including heads of\nvarious kinds of reserves and also of provisions. In the\nbalance sheet of the Company which has necessarily\tbeen\nprepared in accordance with the provisions of the statute\nand in\tthe form prescribed, the amount recommended by the\nBoard for payment of dividend has been shown under the head\nprovisions and\tnot under any head of reserves. It is, no\ndoubt, true that the true nature and character of the sum so\nset apart must be determined with regard lo the substance of\nthe matter. The substance of the matter clearly appears to\nbe that\t the amount is set apart for\tpayment of dividend\nrecommended by the Board to be paid to the share-holders and\nthe said amount is never intended to constitute a reserve of\nthe Company. Indeed a\tprovision is made for payment of the\nsaid amount to the share-holders by way of dividend on the\nbasis of the recommendation made by the Directors. Though in\nlaw the\t recommendation made by the Directors for payment of\ndividend to share-holders does not create any liability for\nthe payment of dividend and liability only arises when the\nshareholders accept the said recommendation, and though in\nlaw it\tmay be\topen to\t the Board to modify or withdraw the\nrecommendation with regard to the payment of dividend before\nthe acceptance\tby the share-holders and it may also be open\nto the\tshare-holders not to accept the said recommendation\nin its\tentirety and to modify\t the same, yet, for business\npurposes, when\tthe directors make any\t recommendation\t for\npayment of dividend and set apart any amount for the payment\nof dividend so recommended, the directors intended to make a\nprovision for the payment of dividend\t recommended by them\nand not\t to create any reserve, as the Directors very well\nknow that the recommendation made by them with regard to the\npayment of dividend is\t not normally up-set by the share-\nholders and it is generally accepted by the share-holders,\nas a matter of course. Any amount set apart by the Directors\nfor payment of dividend to the share-holders recommended by\nthem, is understood by persons interested in company and in\ndealing with companies to mean a provision for the payment\nof dividend to the share-holders and\tis not understood to\nconstitute a reserve. In my opinion,\tthis true nature and\ncharacter of the sum so set apart are reflected in\t the\nprovisions of the Companies Act and more particularly in the\nmanner of preparation of the balance-sheet of the Company. I\nam, therefore,\tof the opinion that the amount set apart for\nthe payment\n835\nof any\tproposed dividend on the basis of the recommendation\nof A the Directors cannot constitute reserve for the purpose\nof computation\tof the capital of the Company. The view that\nI have\ttaken, to my mind, appears to be in accord with the\nview earlier expressed by this Court\tin the\tdecisions to\nwhich I have already referred.\n On the other questions, I entirely agree with the view\nexpressed by my learned brother Tulzapurkar, J. and I agree\nwith the order proposed by him.\n\t C.A. No. 1614(NT)/78, Review Petition\nNo. 57180 and Tax Reference Cases\nNos 2&3/77 and 5/1978 dismissed.\nP.B.R.\t\t\t C.A. No. 860/73 partly allowed.\n836" }, { "title": "Allied Motors (P) Ltd vs Commissioner Of Income-Tax, Delhi on 10 March, 1997", "url": "https://indiankanoon.org//doc/648522/", "text": "Allied Motors (P) Ltd vs Commissioner Of Income-Tax, Delhi on 10 March, 1997\nEquivalent citations: AIR 1997 SUPREME COURT 1361, 1997 (3) SCC 472, 1997 AIR SCW 1473, 1997 TAX. L. R. 403, 1997 (2) SCALE 575, (1997) 3 JT 418 (SC), (1997) 91 TAXMAN 205, (1997) 2 SCR 780 (SC), (1997) 66 DLT 464, (1997) 3 SUPREME 255, (1997) 2 SCALE 575, (1997) 137 TAXATION 690, (1997) 139 CURTAXREP 364, (1997) 224 ITR 677\nAuthor: Sujata V. Manohar\nBench: A.M. Ahmadi, Sujata V. Manohar, K. Venkataswami\n PETITIONER:\nALLIED MOTORS (P) LTD.\n\n\tVs.\n\nRESPONDENT:\nCOMMISSIONER OF INCOME-TAX, DELHI.\n\nDATE OF JUDGMENT:\t10/03/1997\n\nBENCH:\nA.M. AHMADI, SUJATA V. MANOHAR, K. VENKATASWAMI\n\n\n\n\nACT:\n\n\n\nHEADNOTE:\n\n\n\nJUDGMENT:\n (With Tax Reference No.1/94, CA Nos. 3175/91 and 2380/91)\n\t\t J U D G M E N T\nMrs. Sujata V. Manohar, J.\n The two Income-tax References which are before us deal\nwith a\tcommon question\t relating to the interpretation of\nSection 43B of the Income-tax Act, 1961. The references have\nbeen made under Section 256(1) of the Income-tax Act, 1961.\nSince the same question arises in the two civil appeals also\nthese appeals have been heard along with these references.\nFor the\t sake of convenience, we are taking the statement of\nthe case in Income-tax Reference No.2 of 1993.\n The following question has been referred\t to us under\nSection 256(1):-\n \"Whether on the facts and in the\n circumstances of\t the case, the\n sales-tax collected by the assessee\n and paid\tafter the end\t of the\n relevant previous\tyear but within\n the time allowed under the relevant\n sales-tax law is to be Income-Tax\n Act, 1961\t while\t computing the\n business\tincome\t of the said\n previous year \"?\n The relevant assessment year is 1984-85, the relevant\naccounting period being the year ending on 30th of June,\n1983. The assessee filed the return declaring an income of\nRs. 1,91,940/-. The Income-Tax Officer, however, disallowed,\ninter alia, deduction claimed\tby the assessee of an amount\nof Rs.\t 5,78.240/- which was on account of sales-tax\ncollected by the assessee for\t the last quarter of\t the\nrelevant accounting year. This amount was payable within 30\ndays of\t the end of the quarter. The\tdeduction which\t was\nclaimed by the assessee was disallowed by the Income-tax\nOfficer under Section 43B of the Income-tax Act, 1961 which\nwas inserted in the statute with effect from 1.4.1984. The\nassessee filed\tan appeal before the Commissioner of Income-\nTax (Appeals), inter alia, in respect of this disallowance.\nHowever, the appeal was dismissed. The assessee filed an\nappeal\tbefore\t the Income-Tax Appellate Tribunal.\t The\ntribunal also dismissed the appeal on\t the basis of\t the\njudgments of the Delhi\t High Court in the case of Sanghi\nMotors v. Union of India (187 ITR 703) and Escorts Ltd. v.\nUnion\tof India & Ors. (189 ITR 81). Hence the present\nreference has come before us. One of the judgment relied\nupon by\t the tribunal was the\t judgment in the case of\nEscorts Ltd. v. Union\tof India (supra). Civil Appeal No.\n3175 (NT) of 1991 is an appeal from\tthe decision of the\nDelhi High Court in the above\t case which is being heard\nalong with the present tax-references.\n The relevant provisions of\t Section 43B for our purpose\nar as follows :-\n \"43B:- Certain deductions to be\n only on actual payment --\n\t Notwithstanding\tanything\n contained in any other provision of\n this Act,\t a deduction otherwise\n allowable under this Act in respect\n of --\n (a) any sum payable by the assessee\n by way of tax, duty, cess or fee,\n by whatever name called, under any\n law for the time being in force, or\n (b) ............................\n (c) ............................\n (d) ............................\n shall be allowed (irrespective of\n the previous year in which the\n liability\tto pay such\tsum was\n incurred by the assessee according\n to\t the\tmethod\t of accounting\n regularly employed\t by him) only in\n computing the income referred to in\n section 28\t of that previous year\n fin which such sum in actually paid\n by him :\n -\t Provided that\t nothing\n contained\tin this section shall\n apply in\t relation to\tany sum\n referred to in clause (a) or clause\n (c) or clause (d) which is actually\n paid by the assessee on or before\n the due date applicable in his case\n for furnishing the return of income\n under sub-section\t(1) of\t section\n 139 in respect of the previous year\n in which the liability to pay such\n sum was incurred as aforesaid and\n the evidence of such payment is\n furnished\tby the\t assessee along\n with such return :\n Provided further .........\n Explanation 1 - ..........\n - - Explanation 2 -- For the\n purposes of clause (a), as in force\n at all material times, 'any sum\n payable means a sum for which the\n assessee incurred\tliability in the\n previous year even though such sum\n might not\thave been payable within\n that year under the relevant law.\n Explanation 3 - .............\n Explanation 4 - .............\"\n Section 43B was inserted\tin the\tIncome-tax Act, 1961\nwith effect from 1.4.1984. The section, as it originally\nstood, did not contain\t the two provisos. The first proviso\nhas been set out above. The proviso was inserted by\t the\nFinance Act of 1987 which came into effect from 1.4.1988.\nExplanation 2 has been added subsequently by the Finance Act\nof 1989\t but with retrospective effect\t from 1.4.1984. In\nthese References and appeals we are\tconcerned with\t the\napplication of\tSection 43B as it stood before the provisos\nwere added.\n Prior to the insertion of Section 43B in the Income Tax\nAct, 1961, income chargeable under the head 'profits\t and\ngains'\tof business or profession\twas computable in\naccordance with\t the method of accounting regularly employed\nby the\tassessee as per Section 145 of the Income-tax Act,\n1961. An assessee who\thad adopted the mercantile system of\naccounting would be entitled to account for his income and\nexpenditure on\tthe basis of accrual and not on the basis of\nactual receipt\tor disbursement. After insertion of Section\n43B, however, even if\tthe assessee had regularly adopted\nmercantile system of accounting, the amount of tax payable\nby the\tassessee could be deducted only in the year in which\nthe assessee incurred the liability to pay that tax. Hence\nan assessee (as in the present case), who had collected\nsales-tax in the last\tquarter of the previous accounting\nyear and deposited it\tin the treasury within the statutory\nperiod falling\tin the\tnext accounting\t year, would not be\nentitled to claim any\tdeduction for it. The\tsales-tax so\ncollected will\tform a\tpart of\t the assessee's\t income. To\nobviate this kind of unexpected outcome of section 43B, the\nfirst proviso was added in Section 43B by the Finance Act of\n1987. The proviso makes it clear that the Section will not\napply in relation to any sum which is actually paid by the\nassessee in the next accounting year\tif it is paid on or\nbefore the due date for furnishing the return of income in\nrespect of the previous year in which the liability to pay\nsuch sum was incurred\tand the\t evidence of such payment is\nfurnished by the assessee along with the return.\n The proviso, however, was not on the statute book when\nthe assessments\t were made in respect\tof these assessees\nsince the assessments pertain\tto assessment year prior to\nthe insertion of the proviso in Section 43B. The assessees,\nhowever, contend that the proviso should be given effect to\nretrospectively from the date when section 43B became a part\nof the\tIncome-tax Act,\t 1961, as it is intended to obviate\nunexpected hardships in the application of Section 43B.\n To under stand the circumstances in which section 43B\ncame to\t be inserted in the Income-tax Act and the mischief\nwhich it sought to prevent, it is necessary to look at the\nmemorandum explaining the provisions in the Finance Bill of\n1983 [(1983) 140 ITR (St.) 160] :-\n \"59. Under the\tIncome-tax Act,\n profits and gains of business and\n profession\t are\t computed in\n accordance\t with\tthe method of\n accounting\t regularly employed by\n the assessee. Broadly stated, under\n the mercantile\t system of\n accounting, income\t and outgo are\n accounted\tfor on the basis of\n accrual and not on the basis of\n actual disbursements or receipts.\n for the purposes of computation of\n profits and gains of business and\n profession, the\tIncome-tax act\n defines the word\t'paid'\tto mean\n 'actually\t paid\t or incurred'\n according\t to the method of\n accounting on the basis of which\n the profits or gains are computed.\n 60. Several cases have\tcome to\n notice where tax\t payers\t do not\n discharge their statutory liability\n such as in respect of excise duty,\n employer's\t contribution to\n provident\tfund, Employees' State\n Insurance Scheme,\tetc.. for long\n period of time, extending sometimes\n to several\t years. For the purpose\n of\t their\tincome-tax assessments,\n they claim the\t liability as\n deduction on the ground that they\n maintain accounts\ton mercantile or\n accrual basis. On the other hand\n they dispute the liability and do\n not discharge the same. For some\n reason or\t the other undisputed\n liabilities also are not\tpaid. To\n curb this\tpractice, it is proposed\n to proved\tthat deduction\tfor any\n sum payable by the assessee by way\n of tax or duty under any\t law for\n the time being in\t force\n (irrespective of whether such tax\n or duty is disputed or not) or any\n sum payable by the assessee as an\n employer by way of contribution to\n any provident\t fund, or\n superannuation fund or\tgratuity\n fund or any other fund\tfor the\n welfare of\t computing the income of\n that previous year in which such\n sum is actually paid by him.\"\n The Budget\t Speech of the Finance Minister for the year\n1983-84, reproduced in (1983)\t140 ITR\t (St.) 31, is to the\nsame effect.\n Section 43B was, therefore, clearly aimed at curbing\nthe activities\tof those tax payers who did not discharge\ntheir statutory liability of payment of excise duty,\nemployer's contribution\t to provident fund etc. for\tlong\nperiods of time but claimed deductions in that regard from\ntheir income on the ground that the liability to pay these\namounts had been incurred by them in the relevant previous\nyear. It was to stop this mischief that Section 43B\t was\ninserted. It was clearly not realised that the language in\nwhich Section 43B was\tworded would cause hardship to those\ntax payers who had paid sales-tax within the statutory\nperiod prescribed for this payment, although the payment so\nmade by\t them did not fall in the relevant accounting year.\nIt could be paid only in the next quarter which fell in the\nnext accounting year. Therefore, even when the sales-tax had\nin fact\t been paid by the assessee within the statutory\nperiod prescribed for its payment and prior to the filing of\nthe income tax return,\t these\tassessees were\t unwittingly\nprevented from claiming a legitimate deduction in respect of\nthe tax\t paid by them. This was not intended by Section 43B.\nHence the first proviso was inserted\tin Section 43B. The\namendment which\t was made by the Finance Act\tof 1987 in\nSection 43B by inserting, inter alia, the first proviso, was\nremedial in nature,\tdesigned to eliminate unintended\nconsequences which may cause undue hardship to the assessee\nand which made the provision unworkable or unjust in a\nspecific situation.\n Looking to the curative nature of the amendment made by\nthe Finance Act of 1987 it has been submitted before us that\nthe proviso which is inserted by the amending Finance Act of\n1987 should be given retrospective effect and be read as\nforming a part of Section 43B\t from its inception.\tThis\nsubmission has\ttaken support from decisions of a number of\nHigh Courts before whom this question came up\t for\nconsideration.\tThe High Courts of\t Calcutta, Gujarat,\nKarnataka, Orissa, Gauhati, Rajasthan, Andhara Pradesh,\nPatna and Kerala appear to have taken the view that\t the\nproviso must be given\tretrospective effect. Some of these\nHigh courts have held\tthat \"sum payable\" under Section\n43B(a) refers only to the sum payable in the same accounting\nyear thus excluding sales tax payable in the next accounting\nyear from the ambit of Section 43B(a). The Delhi High Court\nhas taken a contrary view holding that the first proviso to\nSection 43B operates only prospectively. We will refer only\nto some of these judgments.\n Explanation 2 was added to Section 43B by the Finance\nAct of\t1989 with retrospective effect\t from 1.4.1984.\t The\nMemorandum explaining\t the\t reasons for\t introducing\nExplanation 2, states inter alia, as follows [(1989) 176 ITR\n(St.) 123] :-\n\t \"24.\t Under\t the\texisting\n provisions of section 43B\t of the\n Income-tax Act, a deduction for any\n sum payable by way of tax, duty\n cess or fee, etc., is allowed on\n actual payment basis only. The\n objective behind these provisions\n is\t to\tprovide\t for\t a tax\n disincentive by denying deduction\n in respect of a statutory liability\n which is not paid in time. The\n Finance Act, 1987, inserted a\n proviso to\t section 43B to provide\n that any sum payable by way of tax\n or duty, etc., liability for which\n was incurred in the previous year\n will he allowed as a deduction, if\n it is actually paid by the due date\n of\t furnishing the return under\n Section 139(1) of\t the Income-tax\n Act, in respect of the assessment\n year to\t which\t the aforesaid\n previous year relates. This proviso\n was introduced to remove the\n hardship\t caused\t to\t certain\n taxpayers who had represented that\n since the\tsales-tax for the last\n quarter cannot be paid within that\n previous of section 43B will\n unnecessarily involve disallowance\n of\t the payment\tfor the last\n quarter.\n\t Certain courts\t have\n interpreted the\t provisions of\n section 43B in a\tmanner which may\n negate the\t very operations of his\n section. The interpretation given\n by these courts revolves around the\n use of the words 'any sum payable'.\n The interpretation\t given to these\n words is that amount payable in a\n particular\t year\tshould\talso be\n statutorily payable under the\n relevant statute in the same year.\n This is against\tthe legislative\n intent and it\tis, therefore,\n proposed, by way of a clarificatory\n amendment\tand for removal of\n doubts, that the\twords 'any sum\n payable' be defined to mean any\n sum, liability for which\thas been\n incurred by the taxpayer during the\n previous year irrespective of the\n date by\t which\t such\tsum is\n statutorily payable.\n\t This\t amendment will take\n effect from April 1, 1984.\"\n While interpreting Section 43B\t without the first\nproviso some of the High Courts, in order to prevent undue\nhardship to the assessee, had taken the view that Section\n43B would not be attracted unless the sum payable by the\nassessee by way of tax, duty, cess or fee was payable in the\nsame accounting\t year. If the tax was payable\t in the next\naccounting year, Section 43B would not be attracted. This\nwas done in order to prevent any undue hardship to assessees\nsuch as\t the ones before us. The memorandum of reasons takes\nnote of\t the combined effect of Section 43B and the first\nproviso inserted by the Finance Act, 1987. After referring\nto the\tfact that the first proviso now removes the hardship\ncaused to such tax payers it\texplains the insertion of\nExplanation 2 as being\t for the purpose of removing\t any\nambiguity about\t the term 'any sum payable' under clause (a)\nof Section 43B. This Explanation is made retrospective. The\nMemorandum seems to proceed on the basis that Section 43B\nread with the proviso\ttakes care of the hardship situation\nand hence Explanation 2 can be inserted with retrospective\neffect to make clear the ambit of Section 43B(a). Therefore,\nSection\t 43B(a), the first proviso of Section 43B\t and\nExplanation 2 have to\tbe read together as giving effect to\nthe true intention of\tSection 43B. If Explanation 2 is\nretrospective,\tthe first proviso will have to be so\nconstrued. Read\t in this light also, the proviso has to be\nread into Section 43B from\t its inception\t along\twith\nExplanation 2.\nThis position is reinforced by a departmental Circular No.\n550 dated 1st of January 1990, [(1990) 182 ITR (St.) 114,\n123] :-\n\t \"AMENDMENT\tOF PROVISIONS\n RELATING OF CERTAIN DEDUCTION OT BE\n ALLOWED ONLY ON ACTUAL PAYMENT.\n\t 15.1\t Under\t the\texisting\n provisions of section 43B\t of the\n Income-Tax Act, 1961, a deduction\n for any sum payable by way of tax,\n duty, cess or fee, etc., is allowed\n on actual\tpayment basis only. The\n objective behind these provisions\n is\t to\tprovide\t for\t a tax\n disincentive by 'statutory\n liability' which is not\tpaid in\n time. The\t Finance Act, 1987,\n inserted a\t proviso to section 43B\n to provide\t that any sum\t payable\n liability for which was incurred in\n the previsous year will be allowed\n as a deduction, if it is actually\n paid by the due date of furnishing\n the return\t under Section 139(1) of\n the Income-tax Act, in respect of\n assessment\t year\tto which the\n aforesaid\tprevious year\trelates.\n This proviso was introduced to\n remove the hardship caused to\n certain\ttaxpayers who had\n represented that since the sales\n tax for the last quarter cannot be\n paid within the previous year, the\n original provisions of section 43B\n will unnecessarily\t involve\n disallowance of the payment for the\n last quarter.\n\t Certain courts\t have\n interpreted the\t provisions of\n section 43B in a\tmanner which may\n negate the\t very operation\t of this\n section. The interpretation given\n by these courts revolves around the\n use of the words ' any sum\n payable'. The interpretation given\n to these words is\t that the amount\n payable in a particular year should\n also be statutorily payable under\n the relevant statute in the same\n year. Thus, the\t sales\t tax in\n respect of\t sales made in the last\n quarter was held\t to be\t totally\n outside the purview of section 43B\n since the\tsame is\t not statutorily\n payable in\t the financial\tyear to\n which it relates. This is against\n the legislative\t intent and,\n therefore, by way of inserting an\n Explanation, it has been clarified\n that the words 'any sum payable'\n shall mean\t any sum, liability for\n which has\t been incurred\t by the\n taxpayer during the previous year\n irrespective of the date\tby which\n such sum\tis statutorily\t payable\n ........\"\n The departmental understanding also appears to be that\nSection 43B, the proviso and Explanation 2 have to be read\ntogether as expressing the true intention of Section 43B.\nExplanation 2 has been\t expressly made\t retrospective.\t The\nfirst proviso,\thowever, cannot be isolated from Explanation\n2 and the main\t body\tof Section 43B. without the first\nproviso, Explanation 2 would not obviate the hardship or the\nunintended consequences of Section 43B. The proviso supplies\nan obvious omission. But for this proviso the ambit of\nSection 43B becomes unduly wide bringing within the scope\nthose payments which were not intended to be prohibited from\nthe category of permissible deductions.\n In the case of Goodyear India Ltd. v. State of Haryana\nand Anr. (188 ITR 402) this court said that he rule of\nreasonable construction\t must be applied while construing a\nstatute. Literal construction\t should\t be avoided if it\ndefeats the manifest object and purpose of the Act.\n Therefore, in the well known words of Judge learned\nHand, one cannot make a fortress out of the dictionary; and\nshould remember\t that statutes\thave some purpose and object\nto accomplish whose sympathetic and imaginative discovery\nis the\tsurest guide to their\tmeaning. In the case of R.B.\nJodha Mal Kuthiala v.\tCommissioner of\t Income-tax, Punjab,\njammu &\t Kashmir and Himachal Pradesh\t(82 ITR\t 570),\tthis\nCourt said that one should apply the rule of reasonable\ninterpretation.\t A proviso which is\tinserted to remedy\nunintended consequences\t and to made the provision workable,\na proviso which supplies an obvious omission in the section\nand is\trequired to be read into the\tsection to give the\nsection a reasonable interpretation, requires to be treated\nas retrospective in\toperation so\tthat a reasonable\ninterpretation can be given to the section as a whole.\n This view\thas been accepted by a number of High Court.\nIn the\tcase of\t Commissioner of Income-Tax v. Chandulal\nVenichand ([1994] 209 ITR 7), the Gujarat High Court has\nheld that he first proviso to section 43B is retrospective\nand sales-tax for the last quarter paid before the filing of\nthe return for the assessment\t year is deductable.\tThis\ndecision deals\twith assessment\t year 1984-85. The Calcutta\nHigh Court in the case of Commissioner of Income-tax v. Sri\nJagannath Steel\t Corporation ([1991] 191 ITR 676), has taken\na similar view holding\t that the statutory liability\t for\nsales-tax actually discharge after the expiry of accounting\nyear in\t compliance with the relevant stature is entitled to\ndeduction under\t Section 43B. The High\t Court has held the\namendment to be clarificatory and, therefore, retrospective.\nThe Gujarat High Court in the above case held the amendment\nto be curative and explanatory and hence retrospective. The\nPatna High Court has also held the amendment inserting the\nfirst proviso to be explanatory in the case of Jamshedpur\nMotor Accessories Stores v. union of India and Ors. ([1991]\n189 ITR\t 70.), It was held that amendment inserting first\nproviso to be retrospective. The special leave petition from\nthis decision of the Patna High Court was dismissed. The\nview of\t the Delhi High Court,\t therefore, that the first\nproviso to section 43B will be available only prospectively\ndoes not appear to be correct. As observed by G.P. Singh in\nhis Principles\tof statutory Interpretation, 4th Edn. Page\n291, \"It is well settled that\t if a statute\tcurative or\nmerely\tdeclaratory of the\tprevious law retrospective\noperation is generally intended.\" In\tfact the amendment\nwould not serve its object in such a situation unless it is\nconstrued as retrospective. The view, therefore, taken by\nthe Delhi High Court cannot be sustained.\n In the premises the appeals are allowed and the Income-\ntax references\tare answered in favour of the assessees and\nagainst the revenue. In the circumstances, however, there\nwill be no order as to costs." }, { "title": "R.K. Garg And Ors. vs Union Of India (Uoi) And Ors. on 13 November, 1981", "url": "https://indiankanoon.org//doc/1033021/", "text": "R.K. Garg And Ors. vs Union Of India (Uoi) And Ors. on 13 November, 1981\nEquivalent citations: [1982]133ITR239(SC), (1981)4SCC675, [1981]1SCR947, 1982(14)UJ12(SC), AIR 1981 SUPREME COURT 2138, 1981 (4) SCC 675, (1982) 95 MAD LW 45, (1982) 133 ITR 239\nAuthor: P.N. Bhagwati\nBench: Y.V. Chandrachud, A.C. Gupta, A.N. Sen, P.N. Bhagwati, S. Murtaza Fazal Ali\nJUDGMENT\n \n\nP.N. Bhagwati, J.\n \n\n 1. These writ petitions raise a common question of law relating to the constitutional validity of the Special Bearer Bonds (Immunities and Exemptions) Ordinance, 1981 (hereinafter referred to as the Ordinance) and the Special Bearer Bonds (Immunities and Exemptions) Act 1981 (hereinafter referred to as the Act). The principal ground on which the constitutional validity of the Ordinance and the Act is challenged is that they are violative of the equality clause contained in Article 14 of the Constitution. There is also one other ground on which the Ordinance is assailed as constitutionally invalid and it is that the President had no power under Article 123 of the Constitution to issue the Ordinance and the Ordinance is therefore ultra vires and void. We shall first deal with the latter ground since it can be disposed of briefly, but before we do so, it would be convenient to refer to the relevant provisions of the Act. It is not necessary to make any specific reference to the provisions of the Ordinance since the provisions of the Act are substantially a reproduction of the provisions of the Ordinance. \n\n 2. On 12th January 1981, both Houses of Parliament not being in session, the President issued the Ordinance in exercise of the power conferred upon him under Article 123 of the Constitution. The Ordinance was later replaced by the Act which received the assent of the President on 27th March 1981, but which was brought into force with retrospective effect from 12th January 1981 being the date of promulgation of the Ordinance. The Act is a brief piece of legislation with only a few sections but the ascertainment of their true meaning and legal effect has given rise to considerable controversy between the parties and hence it is necessary to examine the provisions of the Act in some detail. The long title of the Act describes it as an Act \"to provide for certain immunities to holders of Special Bearer Bonds 1991 and for certain exemptions from direct taxes in relation to such Bonds and for matters connected therewith\" and the provisions enacted in the Act are preceeded by a Preamble which indicates the object and purpose of the Act in the following words: \n\nWhereas for effective economic and social planning it is necessary to canalise for productive purposes black money which has become a serious threat to the national economy; \n\n And whereas with a view to such canalisation the Central Government has decided to issue at par certain bearer bonds to be known as the Special Bearer Bonds, 1991, of the face value of ten thousand rupees and redemption value, after ten years, of twelve thousand rupees; \n\n And whereas it is expedient to provide for certain immunities and exemptions to render it possible for persons in possession of black money to invest the same in the said Bonds; \n\n Sections 3 and 4 are extremely material since on their true interpretation depends to a large extent the determination of the question relating to the constitutional validity of the Act and they may be reproduced as follows: \n\n 3. (1) Notwithstanding anything contained in any other law for the time being in force: \n\n (a) no person who has subscribed to or has otherwise acquired Special Bearer Bonds shall be required to disclose, for any purpose whatsoever, the nature and source of acquisition of such Bonds; \n\n (b) no inquiry or investigation shall be commenced against any person under any such law on the ground that such person has subscribed to or has otherwise acquired Special Bearer Bonds; and\n \n\n (c) the fact that a person has subscribed to or has otherwise acquired Special Bearer Bonds shall not be taken into account and shall be inadmissible as evidence in any proceedings relating to any offence or the imposition of any penalty under any such law. \n\n(2) Nothing in Sub-section (1) shall apply in relation to prosecution for any offence punishable under Chapter IX or Chapter XVII of the Indian Penal Code, the Prevention of Corruption Act, 1947 or any offence which is punishable under any other law and which is similar to an offence punishable under either of those Chapters or under that Act or for the purpose of enforcement of any civil liability. \n\nExplanation: For the purposes of this sub-section \"civil liability\" does not include liability by way of tax under any law for the time being in force. \n\n 4. Without prejudice to the generality of the provisions of Section 3, the subscription to, or acquisition of, Special Bearer Bonds by any person shall not be taken into account for the purpose of. any proceedings under the Income-tax Act, 1961 (hereinafter referred to as the Income-tax Act), the Wealth-tax Act 1957 (hereinafter referred to as the Wealth-tax Act), or the Gift-tax Act, 1958 (hereinafter referred to as the Gift-tax Act) and, in particular, no person who has subscribed to, or has otherwise acquired, the said Bonds shall be entitled-\n\n (a) to claim any set-off or relief in any assessment, reassessment appeal, reference or other proceeding under the Income-lax Act or to reopen any assessment or reassessment made under that Act on the ground that he has subscribed to or has otherwise acquired the said Bonds; \n\n (b) to claim, in relation to any period before the date of maturity of the said Bonds, that any asset which is includible in his net wealth for any assessment year under the Wealth-tax Act has been converted into the said Bonds; or \n \n\n (c) to claim, in relation to any period before the date of maturity of the said Bonds, that any asset held by him or any sum credited in his books of account or otherwise held by him represents the consideration received by him for the transfer of the said Bonds. \n\n We shall analyse the provisions of these two sections when we deal with the arguments advanced on behalf of the parties and that will largely decide the fate of the challenge against the constitutional validity of the Act, but in the meanwhile we may proceed to summarise the remaining provisions of the Act. Section 5 amends the Income-tax Act 1961 by providing that the definition of \"capital asset\" in Section 2 Clause (14) shall not include that Special Bearer Bonds issued under the Act so that any profit arising on sale of the Special Bearer Bonds would not be liable to capital gains tax and it also excludes from the computation of the total income of the assessee, premium on redemption of the Special Bearer Bonds by introducing a new sub-clause in Section 10 Clause (15). Section 5 Sub-section (1) of the Wealth Tax Act 1957 is also amended by Section 6 so as to exclude the Special Bearer Bonds from the net wealth of the assessee liable to wealth tax. Section 7, by amending Section 5 Sub-section (1) of the Gift-tax Act 1958 exempts gifts of Special Bearer Bonds from the incidence of gift tax. Section 8 confers powers on the Central Government to make order removing any difficulty which may arise in giving effect to the provisions of the Act and Section 9 Sub-section (1) repeals the Ordinance, but since the Act is brought into force with effect from the date of promulgation of the Ordinance, Sub-section (2) of Section 9 provides that notwithstanding the repeal of the Ordinance, anything done or any action taken under the Ordinance shall be deemed to have been done or taken under the corresponding provisions of the Act. \n\n 5. Having set out the provision of the Act-and be it noted again that the provisions of the Ordinance were substantially in the same terms as the provisions of the Act-we may now proceed to consider the challenge against the constitutional validity of the Ordinance on the ground that the President had no power to issue the Ordinance under Article 123 of the Constitution. There were two limbs of the argument under this head of challenge; one was that since the Ordinance had the effect of amending the tax laws, it was outside the competence of the President under Article 123 and the other was that the subject matter of the Ordinance was in the nature of a Money Bill which could be introduced only in the House of the People and passed according to the procedure provided in Articles 109 and 110 and the President had therefore no power under Article 123 to issue the Ordinance by-passing the special procedure provided in Articles 109 and 110 for the passing of a Money Bill. There is, as we shall presently point out, no force in either of these two contentions, but we may point out straightaway that both these contentions are academic, since the Act has been brought into force with effect from the date of promulgation of the Ordinance and Sub-section (2) of Section 9 provides that anything done or any action taken under the Ordinance shall be deemed to have been done or taken under the corresponding provisions of the Act and the validity of anything done or any action taken under the Ordinance is therefore required to be judged not with reference to the Ordinance under which it was done or taken, but with reference to the Act which was, by reason of its restrospective enactment, in force right from the date of promulgation of the Ordinance and under which the thing or action was deemed to have been done or taken. It is in these circumstances wholly unnecessary to consider the constitutional validity of the Ordinance, because even if the Ordinance be unconstitutional, the validity of anything done or any action taken under the Ordinance, could still be justified with reference to the provisions of the Act. This would seem to be clear on first principle as a matter of pure construction and no authority is needed in support of it, but if any were needed, it may be found in the decision of this Court in Gujarat Pottery Works v. B.P. Sood, Controller of Mining Leases for India and Ors. There the question was whether the Mining Leases (Modification of Terms) Rules, 1956 (hereinafter referred to as the 1956 Rules) made under Mines and Minerals (Regulation and Development) Act, 1948 (referred to shortly as 1948 Act) were void as being inconsistent with the provisions of the 1948 Act and if they were void, they could be said to be continued by reason of Section 29 of the Mines and Minerals (Regulation and Development) Act, 1957 (hereinafter called the 1957 Act). This Court sitting in a Constitution Bench held that the 1956 Rules were not inconsistent with the provisions of the 1948 Act and were therefore valid, but proceeded to observe that even if the 1956 rules were void as being inconsistent with the provisions of the 1949 Act, they must by reason of Section 29 of the 1957 Act be deemed to have been made under that Act and their validity and continuity must therefore be determined with reference to the provisions of the 1957 Act and not the provisions of the 1948 Act and since there was no inconsistency between the 1956 Rules and the provisions of the 1957 Act, the 1956 Rules could not be faulted as being outside the power of the Central Government. Raghubar Dayal, J. speaking on behalf of the Court articulated the reason for taking this view in the following words:\n\nEven if the rules were not consistent with the provisions of the 1948 Act and were therefore void, we do not agree that they could not have continued after the enforcement of the 1957 Act. Section 29 reads: \n\nAll rules made or purporting to have been made under the Mines and Minerals (Regulation and Development) Act, 1948, shall, in so far as they relate to matters for which provision is made in this Act and are not inconsistent therewith, be deemed to have been made under this Act as if this Act had been in force on the date on which such rules were made and shall continue in force unless and until they are superseded by any rules made under this Act.' \n \n\n The effect of this section is that the rules which were made or purported to have been made under the 1948 Act in respect of matters for which rules could be made under the 1957 Act would be deemed to have been made under the 1957 Act as if that Act had been in force on the date on which such rules were made and would continue in force. The Act of 1957 in a way is deemed to have been in force when the modification rules were framed in 1956. The 1956 rules would be deemed to be framed under the 1957 Act and therefore their validity and continuity depends on the provisions of the 1957 Act and not of the 1948 Act.\n\nIn this connection we may refer to the case reported as Abdul Majid v. P.R. Nayak In that case Section 58 of Act XXXI of 1950 repealed Ordinance No. XXVII of 1949 and provided as follows:\n\nThe repeal by this Act by the Administration of Evacuee Property Ordinance 1949 (XXVII of 1949) shall not affect the previous operation thereof, and subject thereto, anything done or any action taken in the exercise of any power conferred by or under that Ordinance shall be deemed to have been done or taken in the exercise of the powers conferred by or under this Act, as if this Act were in force on the day on which such thing was done or action was taken.' Section 58 was construed thus: \n\nThe language used in Section 58 is both striking and significant. It does not merely provide that the orders passed under the ordinance shall be deemed to be order passed under the Act, but it provides that the orders passed under the Ordinance shall be deemed to be orders under this Act as if this Act were in force on the day on which certain things were done or action taken. Therefore the object of this section is, as it were, to antedate this Act so as to bring it into force on the day on which a particular order was passed which is being challenged. In other words, the validity of an order is to be judged not with reference to the Ordinance under which it was passed, but with reference to the Act subsequently passed by Parliament. \n\n The rules have not been challenged to be ultra vires the 1957 Act in the instant case. \n\n The same process of reasoning which appealed to this Court in upholding the validity of the 1956 Rules must apply equally in the present case and the validity of anything done or any action taken under the Ordinance must be judged with reference to the provisions of the Act and not of the Ordinance. It would therefore be academic for us to consider whether the Ordinance was within the ordinance-making power of the President under Article 123 and ordinarily we would have resisted the temptation of pronouncing on this issue because it is a self-restraining rule of prudence adopted by this Court that \"the court will not formulate a rule of constitutional law broader than is required by the precise facts to which it is to be applied.\" But since considerable argument was advanced before us in regard to this issue we do not think it would be right on our part to refuse to express our view upon it. \n\n 6. The Ordinance was issued by the President under Article 123 which is the solitary Article in chapter III headed \"Legislative Powers of the President.\" This Article provides inter-alia as follows: \n\n123 (1) If at any time, except when both Houses of Parliament are in session, the President is satisfied that circumstances exist which render it necessary for him to take immediate action, he may promulgate such Ordinances as the circumstances appear to him to require. \n\n (2) An Ordinance promulgated under this article shall have the same force and effect as an Act of Parliament, but every such Ordinance: \n\n (a) shall be laid before both Houses of Parliament and shall cease to operate at the expiration of six weeks from the reassembly of Parliament, or, if before the expiration of that period resolutions disapproving it are passed by both Houses, upon the passing of the second of those resolutions: and\n \n\n (b) may be withdrawn at any time by the President. \n\n (3) If and so far as an Ordinance under this article makes any provision which Parliament would not under this Constitution be competent to enact, it shall be void. \n\n It will be noticed that under this Article legislature power is conferred on the President exerciseable when both Houses of Parliament are not in session. It is possible that when neither House of Parliament is in session, a situation may be arise which needs to be dealt with immediately and for which there is no adequate provision in the existing law and emergent legislation may be necessary to enable the executive to cope with the situation. What is to be done and how is the problem to be solved in such a case ? Both Houses of Parliament being in recess, no legislation can be immediately undertaken and if the legislation is postponed until the House of Parliament meet damage may be caused to public weal. Article 123 therefore confers powers on the President to promulgate a law by issuing an Ordinance to enable the executive to deal with the emergent situation which might well include a situation created by a law being declared void by a Court of law. \"Grave public inconvenience would be caused\", points out Mr. Seervai in his famous book on Constitutional Law, if on a statute like the Sales-tax Act being declared void, \"no machinery existed whereby a valid law could be promulgated to take the place of the law declared void\". The President is thus given legislative power to issue an Ordinance and since under our constitutional scheme as authoritatively expounded by this Court in Shamsher and Anr. v. State of Punjab the President cannot act except in accordance with the aid and advice of his Council of Ministers, it is really the executive which is invested with this legislative power. Now at first blush it might appear rather unusual and that was the main thrust of the criticism of Mr. R.K. Garg on this point-that the power to make laws should have been entrusted by the founding fathers of the Constitution to the executive, because according to the traditional outfit of a democratic political structure, the legislative power must belong exclusively to the elected representatives of the people and vesting it in the executive, though responsible to the legislature, would be undemocratic, as it might enable the executive to abuse this power by securing the passage of an ordinary bill without risking a debate in the legislature. But if we closely analyse this provision and consider it in all its aspects, it does not appear to be so startling, though we may point out even if it were, the Court would have to accept it as the expression of the collective will of the founding fathers. It may be noted, and this was pointed out forcibly by Dr. Ambedkar while replying to the criticism against the introduction of Article 123 in the Constituent Assembly-that the legislative power conferred on the President under this Article is not a parallel power of legislation. It is a power exercisable only when both Houses of Parliament are not in session and it has been conferred ex-necessitate in order to enable the executive to meet an emergent situation. Moreover, the law made by the President by issuing an Ordinance is of strictly limited duration. It ceases to operate at the expiration of six weeks from the reassembly of Parliament or if before the expiration of this period, resolutions disapproving it are passed by both Houses, upon the passing of the second of those resolutions. This also affords the clearest indication that the President is invested with this legislative power only in order to enable the executive to tide over an emergent situation which may arise whilst the Houses of Parliament are not in session. Further more, this power to promulgate an Ordinance conferred on the President is co-extensive with the power of Parliament to make laws and the President cannot issue an Ordinance which Parliament cannot enact into a law. It will therefore be seen that legislative power has been conferred on the executive by the Constitution makers for a necessary purpose and it is hedged in by limitations and conditions. The conferment of such power may appear to be undemocratic but it is not so, because the executive is clearly answerable to the legislature and if the President, on the aid and advice of the executive, promulgates an Ordinance in misuse or abuse of this power, the legislature cannot only pass a resolution disapproving the Ordinance but can also pass a vote of no confidence in the executive. There is in the theory of constitutional law complete control of the legislature over the executive, because if the executive misbehaves or forfeits the confidence of the legislature, it can be thrown out by the legislature. Of course this safeguard against misuse or abuse of power by the executive would dwindle in efficacy and value according as if the legislative control over the executive diminishes and the executive begins to dominate the legislature. But nonetheless it is a safeguard which protects the vesting of the legislative power in the President from the charge of being an undemocratic provision. We might profitably quote here the words of one of us (Chandrachud, J, as he then was) in the State of Rajasthan v. Union of India where, repelling the contention of the petitioner that the interpretation which the Union of India was inviting the Court to place on Article 356 would impair the future of democracy by enabling the Central Government to supersede a duly elected State Government and to dissolve its legislature without prior approval of Parliament, the learned Judge said-\n ...there may be situations in which it is imperative to act expeditiously and recourse to the parliamentary process may, by reason of the delay involved, impair rather than strengthen the functioning of democracy. The Constitution has therefore provided safety-valves to meet extraordinary situations. They have an imperious garb and a repressive content but they are designed to save, not destroy democracy. The fault, if any, is not in the meeting of the Constitution but in the working of it. \n\n These words provide a complete answer to the criticism of Mr. R.K. Garg. \n\n 7. Now once it is accepted that the President has legislative power under Article 123 to promulgate an ordinance and this legislative power is co-extensive with the power of the Parliament to make laws, it is difficult to see how any limitation can be read into this legislative power of the President so as to make it ineffective to alter or amend tax laws. If Parliament can by enacting legislation alter or amend tax laws, equally can the President do so by issuing an Ordinance under Article 123. There have been, in fact, numerous instances where the President has issued an Ordinance replacing with retrospective effect a tax law declared void by the High Court or this Court. Even offences have been created by Ordinance issued by the President under Article 123 and such offences committed during the life of the Ordinance have been held to be punishable despite the expiry of the Ordinance. Vide: State of Punjab v. Mohar Singh It may also be noted that Clause (2) of Article 123 provides in terms clear and explicit that an Ordinance promulgated under that Article shall have the same force and effect as an Act of Parliament. That there is no qualitative difference between an ordinance issued by the President and an Act passed by Parliament is also emphasized by Clause (2) of Article 367 which provides that any reference in the Constitution to Acts or laws made by Parliament shall be construed as including a reference to an Ordinance made by the President. We do not therefore think there is any substance in the contention of the petitioner that the President has no power under Article 123 to issue an Ordinance amending or altering the tax laws and that the Ordinance was therefore outside the legislative power of the President under that Article.\n\n 8. That takes us to the principal question arising in the writ petitions namely, whether the provisions of the Act are violative of Article 14 of the Constitution. The true scope and ambit of Article 14 has been the subject matter of discussion in numerous decisions of this Court and the propositions applicable to cases arising under that Article have been repeated so many times during the last thirty years that they now sound platitudenous. The latest and most complete exposition of the propositions relating to the applicability of Article 14 as emerging from \"the avalanche of cases which have flooded this Court\" since the commencement of the Constitution is to be found in the Judgment of one of us (Chandrachud, J. as he then was) in Re: Special Courts Bill It not only contains a lucid statement of the propositions arising under Article 14, but being a decision given by a Bench of seven Judges of this Court, it is binding upon us. That decision sets out several propositions delineating the true scope and ambit of Article 14 but not all of them are relevant for our purpose and hence we shall refer only to those which have a direct bearing on the issue before us. They clearly recognise that classification can be made for the purpose of legislation but lay down that: \n\n 1. The classification must not be arbitrary but must be rational, that is to say, it must not only be based on some qualities or characteristics which are to be found in all the persons grouped together and not in others who are left out but those qualities or characteristics must have a reasonable relation to the object of the legislation. In order to pass the test, two conditions must be fulfilled, namely,(l) that the classification must be founded on an intelligible differentia which distinguishes those that are grouped together from others and (2) that differentia must have a rational relation to the object sought to be achieved by the Act.\n\n 2. The differentia which is the basis of the classification and the object of the Act are distinct things and what is necessary is that there must be a nexus between them. In short, while Article 14 forbids class discrimination by conferring privileges or imposing liabilities upon persons arbitrarily selected out of a large number of other persons similarly situated in relation to the privileges sought to be conferred or the liabilities proposed to be imposed, it does not forbid classification for the purpose of legislation, provided such classification is not arbitrary in the sense above mentioned. \n\n It is clear that Article 14 does not forbid reasonable classification of persons, objects and transactions by the legislature for the purpose of attaining specific ends. What is necessary in order to pass the test of permissible classification under Article 14 is that the classification must not be \"arbitrary, artificial or evasive\" but must be based on some real and substantial distinction bearing a just and reasonable relation to the object sought to be achieved by the legislature. The question to which we must therefore address ourselves is whether the classification made by the Act in the present case satisfies the aforesaid test or it is arbitrary and irrational and hence violative of the equal protection clause in Article 14.\n\n 9. Now while considering the constitutional validity of a statute said to be violative of Article 14, it is necessary to bear in mind certain well established principles which have been evolved by the courts as rules of guidance in discharge of its constitutional function of judicial review. The first rule is that there is always a presumption in favour of the constitutionality of a statute and the burden is upon him who attacks it to show that there has been a clear transgression of the constitutional principles. This rule is based on the assumption, judicially recognised and accepted, that the legislature understands and correctly appreciates the needs of its own people, its laws are directed to problems made manifest by experience and its discrimination are based on adequate grounds. The presumption of constitutionality is indeed so strong that in order to sustain it, the court may take into consideration matters of common knowledge, matters of common report, the history of the times and may assume every state of facts which can be conceived existing at the time of legislation. \n\n 10. Another rule of equal importance is that laws relating to economic activies should be viewed with greater latitude than laws touching civil rights such as freedom of speech, religion etc. It has been said by no less a person than Holmes, J. that the legislature should be allowed some play in the joints, because it has to deal with complex problems which do not admit of solution through any doctrine or straight jacket formula and this is particularly true in case of legislation dealing with economic matters, where, having regard to the nature of the problems required to be dealt with, greater play in the joints has to be allowed to the legislature. The court should feel more inclined to give judicial deference to legislature judgment in the field of economic regulation than in other areas where fundamental human rights are involved. Nowhere has this admonition been more felicitously expressed than in Morey v. Dond 354 US 457 where Frankfurter, J. said in his inimitable style: \n In the utilities, tax and economic regulation cases, there are good reasons for judicial self-restraint if not judicial difference to legislative judgment. The legislature after all has the affirmative responsibility. The courts have only the power to destroy, not to reconstruct. When these are added to the complexity of economic regulation, the uncertainty, the liability to error, the bewildering conflict of the experts, and the number of times the judges have been overruled by events-self-limitation can be seen to be the path to judicial wisdom and institutional prestige and stability. \n\n The court must always remember that \"legislation is directed to practical problems, that the economic mechanism is highly sensitive and complex, that many problems are singular and contingent, that laws are not abstract propositions and do not relate to abstract units and are not to be measured by abstract symmetry\" that exact wisdom and nice adoption of remedy are not always possible and that \"judgment is largely a prophecy based on meagre and un-interpreted experience\". Every legislation particularly in economic matters is essentially empiric and it is based on experimentation or what one may call trial and error method and therefore it cannot provide for all possible situations or anticipate all possible abuses. There, may be crudities and inequities in complicated experimental economic legislation but on that account alone it cannot be struck down as invalid. The courts cannot, as pointed out by the United States Supreme Court in Secretary of Agriculture v. Central Reig Refining Company 94 Lawyers Edition 381 be converted into tribunals for relief from such crudities and inequities. There may even be possibilities of abuse, but that too cannot of itself be a ground for invalidating the legislation, because it is not possible for any legislature to anticipate as if by some divine prescience, distortions and abuses of its legislation which may be made by those subject to its provisions and to provide against such distortions and abuses. Indeed, howsoever great may be the care bestowed on its framing, it is difficult to conceive of a legislation which is not capable of being abused by perverted human ingenuity. The Court must therefore adjudge the constitutionality of such legislation by the generality of its provisions and not by its crudities or inequities or by the possibilities of abuse of any of its provisions. If any crudities, inequities or possibilities of abuse come to light, the legislature can always step in and enact suitable amendatory legislation. That is the essence of pragmatic approach which must guide and inspire the legislature in dealing with complex economic issues. \n\n 11. With these prefatory observations, we may now proceed to examine the constitutional validity of the Act. The Preamble of the Act which \"affords useful light as to what the statute intends to reach\" or in other words \"affords a clue the scope of the statute\" makes it clear that the Act is intended to canalise for productive purposes black money which has become a serious threat to the national economy. It is an undisputed fact that there is considerable amount of black money in circulation which is unaccounted or concealed and therefore outside the disclosed trading channels. It is largely the product of black market transactions and evasion of tax. Indeed, as pointed out by the Direct Taxes Enquiry Committee headed by Mr. Wanchoo, retired Chief Justice of India \"tax evasion and black money are closely and inextricably interlinked.\" The abundance of black money has in fact given rise to a parallel economy operating simultaneously and competing with the official economy. This parallel economy has over the years grown in size and dimension and even on a conservative estimate, the amount of black money in circulation runs into some thousand crores. The menace of black money has now reached such staggering proportions that it is causing havoc to the economy of the country and poses a serious challenge to the fulfilment of our objectives of distributive justice and setting up of an egalitarian society. There are several causes responsible for the generation of black money and they have been analysed in the Report of the Wanchoo Committee. Some of the principal causes may be summarised as follows: (1) high rates of taxation under the direct tax laws: they breed tax evasion and generate black money; (2) economy of shortages and consequent controls and licences leading to corruption for issuing licences and permits and turning blind eye to the violation of controls; (3) donations of black money encouraged by political parties to meet election expenses and for augmenting party funds and also for personal purposes; (4) Corrupt business practices such as payments of secret commission, bribes, money, pugree etc. which need keeping on hand money in black; (5) ineffective administration and enforcement of tax laws by the authorities and (6) deterioration in moral standards so that tax evasion is no longer regarded as immoral and unethical and does not carry any social stigma. These causes need to be eliminated if we want to eradicate the evil of black money. But whether any steps are taken or not for removing these causes with a view to preventing future generation of black money, the fact remains that today the re is considerable amount of black money, unaccounted and concealed, in the hands of a few persons and it is causing incalculable damage to the economy of the country. \n\n 12. The first casualty of this evil of black money is the revenue because it loses the tax which should otherwise have come to the exchequer. The generation of black money through tax evasion throws a greater burden on the honest tax payer and leads to economic inequality and concentration of wealth in the hands of the unscrupulous few in the country. In addition, since black money is in a way 'cheap' money because it has not suffered reduction by way of taxation, there is a natural tendency among those who possess it to use it for lavish expenditure and conspicuous consumption. The existence of black money is to a large extent responsible for inflationary pressures, shortages, rise in prices and economically unhealthy speculation in commodities. It also leads to leakage of foreign exchange, making our balance of payments rather distorted and unreal and tends to defeat the economic policies of the Government by making their implementation ineffective, particularly in the field of credit and investment. Moreover, since black money has necessarily to be suppressed in order to escape detection, it results in immobilisation of investible funds which would otherwise be available to further the economic growth of the nation and in turn, foster the welfare of the common man. It is therefore no exaggeration to say that black money is a cancerous growth in the country's economy which if not checked in time is certain to lead to chaos and ruination. There can be no doubt that urgent measures are therefore required to be adopted for preventing further generation of black money as also for unearthing existing black money so that it can be canalised for productive purposes with a view to effective economic and social planning. \n\n 13. Now this problem of black money corroding the economy of the country is not a new or recent problem. It has been there almost since the Second World War and it has been continuously engaging the attention of the Government. The Government has adopted various measures in the past with a view to curbing the generation of black money and bringing it out in the open so that it may become available for strengthening the economy. For instance, the Government introduced several changes in the administrative set up of the tax department from time to time with a view to strengthening the administrative machinery for checking tax evasion. The Government also amended Section 37 of the Indian Income Tax Act 1922 with a view to conferring power on the tax authorities to carry out searches and seizures and this power was elaborated and made more effectual when the Income Tax Act 1961 came to be enacted. Quite apart from these legal and administrative measures taken for the purpose of curbing evasion of tax, certain steps were also taken to tackle the black money built up out of past evasions. In 1946, just at the close of the Second World War, high denomination notes were demonetized so as to bring within the net of taxation black money earned during the War. This was followed by the enactment of the Taxation of Income Investigation Commission Act 1947. Then came the Voluntary Disclosure Scheme of 1951, popularly known as Tyagi Scheme, to facilitate the disclosure of suppressed income by affording certain immunities from the penal provisions. This scheme was however not successful because it helped to unearth only Rs. 70.20 crores of black money. Thereafter, nearly a decade and a half later, a second scheme of voluntary disclosure was introduced by Section 68 of the Finance Act 1965. This scheme, popularly known as the sixty-forty scheme, enabled the tax evaders to disclose suppressed income by paying 60% of the concealed income as tax and bringing the balance of 40% into their books. This scheme was a little more successful than the earlier one, but it could help to net only about Rs. 52.11 crores of black money. Closely following on the heels of this scheme came another scheme under Section 24 of the Finance (No. 2) Act 1965 popularly known as the 'Block Scheme' according to which tax was payable at rates applicable to the block of concealed income disclosed and not at a flat rate as under the sixty-forty scheme. This scheme received a slightly better response and the income disclosed under it amounted to about Rs. 145 crores. Then came the Taxation Laws (Amendment and Miscellaneous Provisions) Ordinance 1965 followed by an Act in identical terms, which provided for exemption from tax in certain cases of undisclosed income invested in National Defence Gold Bonds 1980. We shall have occasion to consider the broad scheme of this Act a little later, but for the time being as we may point out that the scheme as envisaged in this Act was very closely similar to the scheme under the impugned Act. Subsequent to this Act followed the Report of the Wan???oo Committee and as a result of the recommendations made in this Report certain penal provisions contained in the Income-tax Act 1961 were made more severe and rigorous. Then came the Voluntary Disclosure of Income and Wealth Ordinance 1975 which was followed by an Act in the same terms. This legislation introduced a scheme of voluntary disclosure of income and wealth and provided certain immunities and exemptions. The record before us does not show as to what was the concealed income and wealth disclosed pursuant to this scheme. But it is an indisputable fact that the adoption of these stringent legal and administrative measures as also the introduction of these different voluntary disclosure schemes did not have any appreciable effect and despite all these efforts made by the Government, the problem of black money continues unabated and has assumed serious dimemsions. It may be possible to say and that was the criticism of Mr. R.K. Garg that the enforcement machinery of the tax department is not as effective as it should be and no serious effort has been made to eliminate the other causes of generation of black money, but whatever may be the failures of the political and administrative machinery-and we are not here concerned to inquire into that question nor are we competent to express any opinion upon it-the fact remains that there is considerable amount of black money in the hands of persons which is causing havoc to the economy of the country and seriously prejudicing mobilisation of resources for social and economical reconstruction of the nation. \n\n 14. It was to combat this menacing problem of black money and to unearth black money lying secreted and outside the ordinary trade channels that the Act was enacted by Parliament. It was realised that all efforts to detect black money and to uncover it had failed and the problem of black money was an obstinate economic issue which was defying solution and the impugned legislation providing for issue of Special Bearer Bonds was therefore enacted with a view to mopping-up black money and bringing it out in the open, so that, instead of remaining concealed and idle, such money may become available for augmenting the resources of the state and being utilised for productive purposes so as to promote effective social and economic planning. This was the object for which the Act was enacted and it is with reference to this object that we have to determine whether any impermissible differentiation is made by the Act so as to involve violation of Article 14.\n\n15. We may now turn to examine the provisions of the act. Section 3 Sub-section (1) provides certain immunities to a person who subscribed to or otherwise acquired Special Bearer Bonds. Clause (a) protects such a person from being required to disclose, for any purpose whatsoever, the nature and source of acquisition of the Special Bearer Bonds. Clause (b) prohibits the commencement of any inquiry or investigation against a person on the ground of his having subscribed to or otherwise acquired the Special Bearer Bonds. And Clause (c) provides that the fact of subscription to or acquisition of Special Bearer Bonds shall not be taken into account and shall be inadmissible in evidence in any proceedings relating to any offence or the imposition of any penalty. It will be seen that the immunities granted under Section 3, Sub-section (1) are very limited in scope. They do not protect the holder of Special Bearer Bonds from any inquiry or investigation into concealed income which could have been made if he had not subscribed to or acquired Special Bearer Bonds. There is no immunity from taxation given to the black money which may be invested in Special Bearer Bonds. That money remains subject to tax with all consequential penalties, if it can be discovered independently of the fact of subscription to or acquisition of Special Bearer Bonds. The only protection given by Section 3, Sub-section 1 is that the fact of subscription to or acquisition of Special Bearer Bonds shall be ignored altogether and shall not be relied upon as evidence showing possession of undisclosed money. This provision relegates the Revenue to the position as if Special Bearer Bonds had not been purchased at all. If without taking into account the fact of subscription to or acquisition of Special Bearer Bonds and totally ignoring it as if it were non-existent, any inquiry or investigation into concealed income could be carried out and such income detected and unearthed, it would be open to the Revenue to do so and it would be no answer for the assessee to say that this money has been invested by him in Special Bearer Bonds and it is therefore exempt from tax or that he is on that account not liable to prosecution and penalty for concealment of such income. This is the main difference between the impugned Act and the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1965. Under the latter Act, where gold is acquired by a person out of his undisclosed income, which is the same thing as black money, and such gold is tendered by him as subscription for the National Defence Gold Bonds, 1980, the income invested in such gold is exempted from tax, but where Special Bearer Bonds are purchased out of undisclosed income under the impugned Act, the income invested in the Special Bearer Bonds is not exempt from tax and if independently of the fact of purchase of the Special Bearer Bonds and ignoring them altogether, such income can be detected, it would be subject to tax. The entire machinery of the taxation Laws for inquiry and investigation into concealed income is thus left untouched and no protection is granted to a person in respect of his concealed income merely because he has invested such income in Special Bearer Bonds. It is therefore incorrect to say that as soon as any person purchases Special Bearer Bonds, he is immunised against the processes of taxation laws. Here there is no amnesty granted in respect of any part of the concealed income even though it be invested in Special Bearer Bonds. The whole object of the impugned Act is to induce those having black money to convert it into 'white money' by making it available to the State for productive purposes, without granting in return any immunity in respect of such black money, if it could be detected through the ordinary processes of taxation laws without taking into account the fact of purchase of Special Bearer Bonds. Now it is true and this was one of the arguments advanced on behalf of the petitioner-that if black money were not invested in Special Bearer Bonds but were lying in cash, it could be seized by the tax authorities by carrying out search and seizure in accordance with the provisions of the tax laws and this opportunity to detect and unearth black money would be lost, if such black money were invested in Special Bearer Bonds, because even if Special Bearer Bonds were seized, they cannot be relied upon as evidence of possession of black money. But this argument of the petitioner that the detection and discovery of black money would thus thwarted by the conversion of black money into Special Bearer Bonds is highly theoretical and does not take into account the practical realities of the situation. If it had been possible to detect and discover a substantial part of the black money in circulation by carrying out searches and seizures, there would have been no need to enact the impugned Act. It is precisely because, inspite of considerable efforts made by the tax authorities including carrying out of searches and seizures, the bulk of black money remained secreted and could not be unearthed, that the impugned Act had to be enacted. Moreover, actual seizure of black money by carrying out searches is not the only method available to tax administration for detecting and discovering black money. There are other methods also by which concealment of income can be detected and these are commonly employed by the tax authorities in making assessment of income or wealth. Close and searching scrutiny of the books of account may reveal that accounts are not properly maintained, unexplained cash credits may provide evidence of concealment and so too unaccounted for investments or lavish expenditure; information derived from external sources may indicate that income has been concealed by resorting to strategems like suppression of sales or under-statement of consideration; and existence of assets in the names of near relatives may give a lead showing investment of undisclosed income. All these methods and many others would still remain available to the tax authorities for detecting undisclosed income and bringing it to tax despite investment in Special Bearer Bonds. The taxable income of the holder of Special Bearer Bonds would not stand reduced by the amount invested in the purchase of Special Bearer Bonds and it would be open to the Revenue to assess such taxable income in the same manner in which it would do in any other case, employing the same methods and techniques of inquiry and investigation for determining the true taxable income. The only inhibition on the Revenue would be that it would not be entitled to call upon the assessee to disclose for the purpose of assessment, the nature and source of acquisition of the Special Bearer Bonds and in making the assessment, the investment in the Special Bearer Bonds would have to be left wholly out of account and the Revenue would not be entitled to rely upon it as evidence of possession of un-disclosed money. This is the only limited immunity granted under Section 3 Sub-section (1) and even this limited immunity is cut down by the provision enacted in Sub-section (2) of S ection 3. This sub-section says that the immunity granted under Sub-section (1) shall not be available in relation to prosecution for any offence punishable under Chapter IX or Chapter XVII of the Indian Penal Code or the Prevention of Corruption Act 1947 or any other similar law. If therefore an inquiry or investigation is sought to be made against a public servant in respect of an offence under Chapter IX of the Indian Penal Code or the Prevention of Corruption Act 1947 alleged to have been committed by him, the acquisition or possession of Special Bearer Bonds could be a ground for instituting such inquiry or investigation and it could also be an admissible piece of evidence in a prosecution in respect of such offence. The same would be the position in relation to an inquiry, investigation or prosecution in respect of an offence under Chapter XVII of the Indian Penal Code. The acquisition or possession of Special Bearer Bonds would not therefore afford any protection to a public servant against a charge of corruption or to a person committing any offence against property. Equally this immunity would not be available where what is sought to be enforced is a civil liability other than liability by way of tax. It will thus be seen that the immunity granted in respect of subscription to or acquisition of Special Bearer Bonds is a severely restricted immunity and this is the bare minimum immunity necessary in order to induce holders of black money to bring it out in the open and invest it in Special Bearer Bonds. \n\n 16. It is also necessary to note the further restrictions provided in Section 4 which are calculated to pre-empt any possible abuse of the immunity granted in respect of subscription to or acquisition of Special Bearer Bonds, This section in its opening part affirms in unmistakable terms that subscription to or acquisition of Special Bearer Bonds shall not be taken into account in any proceeding under the Income-tax Act 1961 or the Wealth-tax Act 1957 or the Gift-tax Act 1958. If any investment in Special Bearer Bonds has been made by the assessee, it is to be ignored in making assessment on him under any of the above-mentioned three tax laws, the assessment is to be made as if no Special Bearer Bonds had been purchased at all The process of computation of taxable income and assessment of tax on it remains unaffected and is not in any way deflected or thwarted by the investment in Special Bearer Bonds. The position remains the same as it would have been if there were no investment in Special Bearer Bonds. We have already discussed the full implications of this proposition in the preceding paragraph while dealing with Section 3 and it is not necessary to say anything more about it. Then, proceeding further, after enacting this provision in the opening part, Section 4 branches off into three different clauses, Clause (a) provides that no person who has subscribed to or otherwise acquired Special Bearer Bonds shall be entitled to claim any set off or relief in any proceeding under the Income-tax Act 1961 or to reopen any assessment or reasssssment made under that Act on the ground that he has subscribed to or otherwise acquired such Bonds. The holder of Special Bearer Bonds is thus precluded from claiming any advantage by way of set-off or relief or reopening of assessment on the ground of having invested undisclosed money in purchase of Special Bearer Bonds. Clause (b) enacts another prohibition with a view to preventing abuse of the immunity granted in respect of Special Bearer Bonds and says that no person who has subscribed to or otherwise aquired Special Bearer Bonds shall be entitled to claim, in relation to any period before the date of maturity of such Bonds, that any asset which is includible in his net wealth for any assessment year under the Wealth-tax Act has been converted into such Bonds. The object of this provision is to preclude an assessee who is sought to be taxed on his net wealth under the wealth-tax Act from escaping assessment to tax on any asset forming part of his net wealth by claiming that he has invested it in purchase of Special Bearer Bonds. The investment in Special Bearer Bonds would not grant immunity from assessment to wealth tax to any asset which is found by the taxing authorities, otherwise than by relying on the fact of acquisition of Special Bearer Bonds, to belong to the assessee and hence forming part of his net wealth. The asset would be subjected to wealth tax despite the investment in Special Bearer Bonds Then follows Clause (c) which is extremely important and which effectively counters the possibility of serious abuse to which the issue of Special Bearer Bonds might otherwise have lent itself. It provides that no person who has subscribed to or otherwise acquired Special Bearer Bonds shall be entitled to claim, in relation to any period before the date of maturity of such Bonds, that any asset held by him or any sum credited in his books of account or otherwise held by him represents the consideration received by him for the transfer of such Bonds. This provision precludes a person from explaining away the existence of any asset held by him or any sum credited in his books of account or otherwise held by him by claiming that it represents the sale proceeds of Special Bearer Bonds held by him. If at any time before the date of maturity of the Special Bearer Bonds held by an assessee, it is found that any asset is held by him or any sum is credited in his books of accounts or is otherwise held by him and he is required to explain the nature and source of acquisition of such asset or sums of money, he cannot be heard to say by way of explanation that such asset or sum of money represents the consideration received by him for transfer of the Special Bearer Bonds, even if that be factually correct. This explanation, though true being statutorily excluded, it would be impossible for the assessee to offer any other explanation for the acquisition of such asset or sum of money, because any such explanation which might be given by him would be untrue and in the absence of any satisfactory explanation in regard to the nature and source of acquisition of such asset or sum of money, the Revenue would be entitled to infer that such asset has been acquired out of undisclosed income or that such sum of money represents concealed income and hence the value of such asset or such sum of money, as the case may be, should be treated as undisclosed income liable to be included in the taxable income of the assessee. Vide Sections 69, 69A and 69B of the Income-tax Act, 1961. It is obvious that this provision is calculated to act as a strong deterent against negotiability of Special Bearer Bonds for disclosed or 'white' money. No holder of Special Bearer Bonds would dare to transfer his Bonds to another person against receipt of disclosed or 'white' money, because he will not be able to account for the consideration received by him, the true explanation being statutorily unavailable to him, and such consideration would inevitably be liable to be regarded as his concealed income and would be subjected to tax and penalties. Moreover, it is difficult to see why anyone should want to invest disclosed or 'white' money in the acquisition of Special Bearer Bonds. Ordinarily a person would go in for Special Bearer Bonds only for the purpose of converting his undisclosed money into 'white' money and it would be quite unusual bordering almost on freakishness for anyone to acquire Special Bearer Bonds with disclosed or 'white money' when he can get only 2% simple interest on the investment in Special Bearer Bonds, while outside he can easily get anything between 15% to 40% yield by openly dealing with his disclosed or 'white' money. The transferability of Special Bearer Bonds against disclosed or 'white' money is thus, from a practical point of view, completely excluded. The question may still arise whether Special Bearer Bonds would not pass from hand to hand against undisclosed or black money. Would they not be freely negotiable against payment of undisclosed or black money ? Now it may be conceded that a purchaser of Special Bearer Bonds would undoubtedly be interested in acquiring such Bonds by making payment of 'black' money, because he would thereby convert his un-disclosed or 'black money' into 'white' money. But it is difficult to understand why a holder of Special Bearer Bonds should ever be interested in selling such Bonds against receipt of 'black money'. Obviously he would have acquired such Bonds for the purpose of converting his 'black money' into 'white' in order to avoid the risk of being found in possession of 'black money' and if that be so, it is inexplicable as to why he should again want to convert his 'white money' into 'black' by selling such Bonds against receipt of 'black money'. The immunity granted under the provisions of the Act, limited as it is extends only to the person who is for the time being the holder of Special Bearer Bonds and the person who has transferred the Special Bearer Bonds for black money has no immunity at all and all the provisions of tax laws are available against him for determining his true income or wealth and therefore no one who has purchased Special Bearer Bonds with a view to earning security against discovery of unaccounted money in his hands would ordinarily barter away that security by again receiving black money for the Special Bearer Bonds. Furthermore, even if special bearer bonds are transferred against receipt of black money, it will not have the effect of legalizing more black money into white, because the black money of the seller which had become white on his subscribing to or acquiring special bearer bonds would again be converted into black money and the black money paid by the purchaser by way of consideration would become white by reason of being converted into Special Bearer Bonds. The petitioners however expressed an apprehension that special bearer bonds would fetch a much higher value in the black market than that originally subscribed and this would enable a larger amount of black money to be legalised into white than what was originally invested in subscription to special bearer bonds. We do not think this apprehension is well founded. It is true that once the date for original subscription to special bearer bonds has expired, the only way in which special bearer bonds could thereafter be acquired would be by going in the open market and the number of special bearer bonds in the market being necessarily limited, they may fetch a higher value in black money from a person who is anxious to convert his black money into white. If the demand outreaches the limited supply, the price of special bearer bonds in the black market may exceed the amount originally invested in subscription to special bearer bonds. But even so, the black money paid by the purchaser for acquisition of special bearer bonds would not in its entirety be converted into white, it would change its colour from black to white only to the extent of the amount originally subscribed for the special bearer bonds or at the most, if we also take into account interest on such amount, to the extent of the face value of the special bearer bonds, because whatever be the amount he might have paid in black money for acquisition of the special bearer bonds, the holder of the special bearer bonds will get only the amount representing the face value on maturity of the special bearer bonds. It will thus be seen that howsoever special bearer bonds may be transferred and for whatever consideration, only a limited amount of black money, namely, the amount originally subscribed for the special bearer bonds or at the most the amount representing the face value of the special bearer bonds would be legalised into white money and the supposedly free negotiability of special bearer bonds would not have the effect of legalizing more black money into white or encouraging further generation of black money. \n\n 17. There was also one other abuse, said the petitioners, to which special bearer bonds might lend themselves and it was that if Special Bearer Bonds are sold and the sale proceeds are utilised in meeting expenditure, the assessee would not be precluded by Section 4 Clause (c) from explaining the source of the expenditure to be the sale consideration of the special bearer bonds and hence by resorting to this strategy, white money can be accumulated as capital while expenditure is met out of black money received by way of consideration for sale of special bearer bonds. We do not think there is any scope for such abuse; the apprehension expressed by the petitioners is more imaginary than real. It may be noted that in order to sustain his explanation, the assessee would have to prove to the satisfaction of the tax department that he had special bearer bonds and that he sold them for a certain amount. Now if he has received black money by way of consideration, it is difficult to see how he would ever be able to establish that he sold special bearer bonds for that particular amount of black money. Would he be so fool-hardy as to admit that he received the consideration in black money and even if he does, would he ever be able to prove it? Who would believe him even if he makes such an admission ? And when he has bought special bearer bonds for the purpose of converting his black money into white, why should he again reconvert it into black by selling special bearer bonds for black money ? The entire postulate of the argument of the petitioners is theoretical and has no basis in reality. No assessee would ever admit that he incurred expenditure out of black money received as consideration for sale of special bearer bonds because it would be impossible for him to establish receipt of black money from the purchase and if he is unable to do so, the amount of the expenditure would, by reason of Section 69C of the Income-tax Act, 1961, be deemed to be his concealed income liable to tax. Even if we assume that in some rare and exceptional case the assessee may be able to establish that he sold special bearer bonds against receipt of black money, the purchaser would straightaway run into difficulties because the evidence furnished by the assessee would, in such a case, clearly establish that the purchaser had black money and he paid it to the assessee by way of consideration and he would in that event be rendered liable to tax and penalty in respect of such black money. This would show the utter improbability bordering almost on impossibility, of special bearer bonds being subjected to any such abuse as is apprehended by the petitioners. \n\n 18. It was then urged on behalf of the petitioners that Section 4 Clause (c) operates only in relation to a period before the date of maturity of special bearer bonds and after the date of maturity, the holder of special bearer bonds can sell such bonds, and, without running any risk, disclose the consideration received by him as his white money, because Section 4 Clause (c) being out of the way, he can account for the possession of such money by showing that he has received it as consideration for sale of special bearer bonds and so far as the purchaser is concerned, if he has paid the consideration out of his black money, he can claim the immunity granted under Section 3 Sub-section (1) and his black money would be converted into white. Thus the black money of the seller which had been converted into white on his subscribing to or otherwise acquiring special bearer bonds would remain white and in addition, the black money of the purchaser would also be converted into white by reason of his purchase of special bearer bonds. This argument plausible though it may seem, is in our opinion, fallacious and cannot be sustained. It is a highly debatable issue whether, under the provisions of the Act, special bearer bonds are at all intended to be transferable after the date of maturity, for the postulate of the legislation clearly seems to be that on the date of maturity, special bearer bonds will be encashed. It is indeed difficult to believe that anyone holding special bearer bonds would keep them uncashed without earning any interest from and after the date of maturity, when they can be immediately encashed and the amount received can be invested yielding interest ranging between 18 per cent to 40 per cent. Moreover, special bearer bonds would cease to be exempt from wealth tax from and after the date of maturity and they would therefore be includible in the net wealth of the holder for the purpose of wealth tax and if that be so, how would it benefit the holder to keep them as part of his net wealth and pay wealth tax upon it without earning any interest ? It is therefore extremely unlikely that Special Bearer Bonds would remain uncashed after the date of maturity and it would be equally improbable that anyone should want to purchase Special Bearer Bonds after the date of maturity when they do not yield any interest but are still includible in the net wealth for the purpose of liability to wealth tax. But let us assume for the purpose of argument that in a given case special bearer bonds are not encashed on the date of maturity and they are lawfully transferred after the date of maturity for a consideration paid by the purchaser. There are two alternatives: the consideration may be paid by the purchaser in white money or in black money. If the purchaser pays the consideration in white money, no question of conversion of further black money into white arises. It would be a straight open transaction to which no exception can be taken. But let us consider what consequences would ensue if he pays in black money. The seller would obviously be interested in showing the consideration as his white money and there may be no difficulty so far as he is concerned, because he would be able to explain the possession of such money by claiming that he has received it by way of consideration for sale of special bearer bonds. Section 4 Clause (c) will not stand in the way of his offering that explanation. But so far as the purchaser is concerned, he will run into serious difficulties. Even if the immunity under Section 3 Sub-section (1) were available to him after the date of maturity, he will still be in trouble, because the disclosure made by the seller would be the clearest evidence showing that the purchaser had black money which he paid by way of consideration to the seller, and this evidence, being independent of the fact of acquisition of special bearer bonds by the purchaser, would be admissible and the purchaser would be liable to tax and penalty on the amount of black money paid by him as consideration. We fail to see how transfer of special bearer bonds after the date of maturity, even if legally permissible, can be utilised for the purpose of legalizing black money into white. But we may point out that if at any time after the date of maturity or even before, it is found that there is some loophole in the provisions of the Act or that special bearer bonds are utilised for any dishonest or nefarious purpose or are being perverted to any improper use, the legislature can always step in and amend the Act or pass other appropriate legislation with a view to preventing such abuse. It must be remembered that every legislation is an experiment in achieving certain desired ends and trial and error method is inherent in every such experiment. Therefore, when experience shows that the legislation as framed has proved inadequate to achieve its purpose of mitigating an evil or there are cracks and loopholes in it which are being taken advantage of by the resourcefulness and ingenuity ??? those minded to benefit themselves at the cost of the State or the others, the legislature can and most certainly would intervene and change the law. But the law cannot be condemned as invalid on the ground that after a period of ten years it may lend itself to some possible abuse. \n\n 19. We may now proceed to consider the constitutional validity of the Act in the light of the above discussion as regards the scope and effect of its various provisions. It is obvious that the Act makes a classification between holders of black money and the rest and provides for issue of special bearer bonds with a view to inducing persons belonging to the former class to invest their unaccounted money in purchase of special bearer bonds, so that such money which is today lying idle outside the regular economy of the country is canalised into productive purposes. The object of the Act being to unearth black money for being utilised for productive purposes with a view to effective social and economic planning, there has necessarily to be a classification between persons possessing black money and others and such classification cannot be regarded as arbitrary or irrational. It is of course true-and this must be pointed out here since it was faintly touched upon in the course of the arguments-that there is no legal bar enacted in the Act against investment of white money in subscription to or acquisition of special bearer bonds. But the provisions of the Act properly construed are such that no one would even think of investing white money in special bearer bonds and from a practical point of view, they do operate as a bar against acquisition, whether by original subscription or by purchase, of special bearer bonds with white money. We do not see why anyone should want to invest his white money in subscribing to or acquiring special bearer bonds which yield only 2 per cent simple interest per annum and which are not encashable for a period of not less than ten years. It is true that special bearer bonds can be sold before the date of maturity but who would pay white money for them and even if in some rare and exceptional case, a purchaser could be found who would pay the consideration in white money, no one will dare to sell special bearer bonds for white money, because of the disincentive provided in Section 4 Clause (c). The investment of white money in special bearer bonds is accordingly, as a practical measure, completely ruled out and the provisions of the Act are intended to operate only qua persons in possession of black money. There is a practical and real classification made between persons having black money and persons not having such money and this de facto classification is clearly based on intelligible differentia having rational relation with the object of the Act. The petitioners disputed the validity of this proposition and contended that the classification made by the Act is discriminatory in that it excludes persons with white money from taking advantage of the provisions of the Act by subscribing to or acquiring special bearer bonds. But this contention is totally unfounded and we cannot accept the same. The validity of a classification has to be judged with reference to the object of the legislation and if that is done, there can be no doubt that the classification made by the Act is rational and intelligible and the operation of the provisions of the Act is rightly confined to persons in possession of black money. \n\n 20. It was then contended that the Act is unconstitutional as it offends against morality by according to dishonest assessees who have evaded payment of tax, immunities and exemptions which are denied to honest tax payers. Those who have broken the law and deprived the State of its legitimate dues are given benefits and concessions placing them at an advantage over those who have observed the law and paid the taxes due from them and this, according to the petitioners, is clearly immoral and unwarranted by the Constitution. We do not think this contention can be sustained. It is necessary to remember that we are concerned here only with the constitutional validity of the Act and not with its morality. Of course, when we say this we do not wish to suggest that morality can in no case have relevance to the constitutional validity of a legislation. There may be cases where the provisions of a statute may be so reeking with immorality that the legislation can be readily condemned as arbitrary or irrational and hence violative of Article 14. But the test in every such case would be not whether the provisions of the statute offend against morality but whether they are arbitrary and irrational having regard to all the facts and circumstances of the case. Immorality by itself is not a ground of coustitutional challenge and it obviously cannot be, because morality is essentially a subjective value, except in so far as it may be reflected in any provision of the Constitution or may have crystalised into some well-accepted norm of special behaviour. Now there can be no doubt that under the provisions of the Act certain immunities and exemptions are granted with a view to inducing tax evaders to invest their undisclosed money in special bearer bonds and to that extent they are given benefits and concessions which are denied to those who honestly pay their taxes. Those who are honest and who observe the law are mulcted in paying the taxes legitimately due from them while those who have broken the law and evaded payment of taxes are allowed by the provisions of the Act to convert their black money into 'white' without payment of any tax or penalty. The provisions of the Act may thus seem to be putting premium on dishonesty and they may, not, without some justification, be accused of being tinged with some immorality, but howsoever regrettable or unfortunate it may be, they had to be enacted by the legislature in order to bring out black money in the open and canalise it for productive purposes. Notwithstanding stringent laws imposing severe penalties and vigorous steps taken by the tax administration to detect black money and despite various voluntary disclosure schemes introduced by the government from time to time, it had not been possible to unearth black money and the menace of black money had over the years assumed alarming proportions causing havoc to the economy of the country and the legislature was therefore constrained to enact the Act with a view to mopping up black money so that instead of remaining idle, such money could be utilised for productive purposes. The problem of black money was an obstinate economic problem which had been defying the Government for quite some time and it was in order to resolve this problem that, other efforts having failed, the legislature decided to enact the Act, even though the effect of its provisions might be to confer certain undeserved advantages on tax evaders in possession of black money. The legislature had obviously only two alternatives; either to allow the black money to remain idle and unproductive or to induce those in possession of it to bring it out in the open for being utilised for productive purposes. The first alternative would have left no choice to the government but to resort to deficit financing or to impose a heavy dose of taxation. The former would have resulted in inflationary pressures affecting the vulnerable sections of the society while the latter would have increased the burden on the honest tax payer and perhaps led to greater tax evasion. The legislature therefore decided to adopt the second alternative of coaxing persons in possession of black money to disclose it and make it available to the government for augmenting its resources for productive purposes and with that end in view, enacted the Act providing for issue of special bearer bonds. It may be pointed out that the idea of issuing special bearer bonds for the purpose of unearthing black money was not a brain wave which originated for the first time in the mind of the legislature in the year 1981. The suggestion for issue of special bearer bonds was made as far back as 1950 by some of the members of the provisional Parliament, notably those belonging to the opposition and the government was repeatedly asked why it was not issuing special bearer bonds in order to absorb the liquidity and thereby control the inflationary pressures in the country. Though the majority of the members of the Wanchoo Committee expressed themselves against the issue of special bearer bonds, Shri Chitale a member of that Committee wrote a dissenting note in which he suggested that special bearer bonds should be issued. We may point out that the majority members of the Wanchoo Committee were against issue of special bearer bonds for the purpose of mopping up black money, because they apprehended certain abuses to which special bearer bonds might be supjected, but as we have already pointed out while discussing the true meaning and legal effect of the provisions of the Act, we do not think that there is any scope for such abuses, for the legislature has, while enacting the provisions of the Act, taken care to see that such abuses are reduced to the minimum, if not eliminated altogether. \n\n 21. It is true that certain immunities and exemptions are granted to persons investing their unaccounted money in purchase of special bearer bonds but that is an inducement which has to be offered for unearthing black money. Those who have successfully evaded taxation and concealed their income or wealth despite the stringent tax laws and the efforts of the tax department are likely to disclose their unaccounted money without some inducement by way of immunities and exceptions and it must necessarily be left to the legislature to decide what immunities and exemptions would be sufficient for the purpose. It would be outside the province of the court to consider if any particular immunity or exemption is necessary or not for the purpose of inducing disclosure of black money. That would depend upon diverse fiscal and economic considerations based on practical necessity and administrative expediency and would also involve a certain amount of experimentation on which the Court would be least fitted to pronounce. The court would not have the necessary competence and expertise to adjudicate upon such an economic issue. The court cannot possibly assess or evaluate what would be the impact of a particular immunity or exemption and whether it would serve the purpose in view or not. There are so many imponderables that would enter into the determination that it would be wise for the court not to hazard an opinion where even economists may differ. The court must while examining the constitutional validity of a legislation of this kind, \"be resilient, not rigid, forward looking, not static, liberal, not verbal\" and the court must always bear in mind the constitutional proposition enunciated by the Supreme Court of the United States in Munn v. Illinois 94 U.S. 13 namely, \"that courts do not substitute their social and economic beliefs for the judgment of legislative bodies\". The court must defer to legislative judgment in matters relating to social and economic policies and must not interfere, unless the exercise of legislative judgment appears to be palpably arbitrary. The court should constantly remind itself of what the Supreme Court of the United States said in Metropolis Theater Co. v. City of Chicago 57 Lawyers' Edition 730 \"The problems of government are practical ones and may justify, if they do not require, rough accommodations, illogical it may be, and unscientific. But even such criticism should not be hastily expressed. What is best is not always discernible, the wisdom of any choice may be disputed or condemned. Mere errors of government are not subject to our judicial review.\" It is true that one or the other of the immunities or exemptions granted under the provisions of the Act may be taken advantage of by resourceful persons by adopting ingenious methods and devices with a view to avoiding or saving tax. But that cannot be helped because human ingenuity is so great when it comes to tax avoidance that it would be almost impossible to frame tax legislation which cannot be abused. Moreover, as already pointed out above, the trial and error method is inherent in every legislative effort to deal with an obstinate social or economic issue and if it is found that any immunity or exemption granted under the Act is being utilised for tax evasion or avoidance not intended by the legislature, the Act can always be amended and the abuse terminated. We are accordingly of of the view that none of the provisions of the Act is violative of Article 14 and its constitutional validity must be upheld. \n\n 22. These were the reasons for which we passed our Order dated 2nd September, 1981 rejecting the challenge against the constitutional validity of the Ordinance and the Act and dismissing the writ petitions. Since these writ petitions are in the nature of public interest litigation, we directed that there should be no order as to costs. \n\nGupta, J. \n\n 23. I was unable to share the view taken by the majority in disposing of these writ petitions on September 2, 1981 that \"neither the Special Bearer Bonds (Immunities and Exemptions) Ordinance, 1981 nor the Special Bearer Bonds (Immunities and Exemptions) Act, 1981 is violative of Article 14 of the Constitution\", and I made the following order on the same day: \n\n I have come to the conclusion that the Special Bearer Bonds (Immunities and Exemptions) Ordinance, 1981 and the Special Bearer Bonds (Immunities and Exemptions) Act, 1981 violate Article 14 of the Constitution and are therefore invalid. I would allow the writ petitions with costs. \n\n I shall give my reapreamble\nsons later. \n\n 24. Here briefly are my reasons.\n\n 25. These five writ petitions question the constitutional validity of the Special Bearer Bonds (Immunities and Exemptions) Ordinance, 1981 and Special Bearer Bonds (Immunities and Exemptions) Act, 1981. The Ordinance which was promulgated by the President on January 12, 1981 was repealed and replaced by the Act. The Act received the President's assent on March 27, 1981. Section 1(3) of the Act says that it shall be deemed to have come into force on January 12, 1981. The Provisions of the Ordinance and the Act are similar except that Section 4(c) of the Act is worded slightly differently from the corresponding provision of the Ordinance but the difference is not material and I shall hereinafter refer to the provisions of the Act only. \n\n 26. As the long title of the Act shows, it is \"An Act to provide for certain immunities to holders of Special Bearer Bonds, 1991 and for certain exemptions from the direct taxes in relation to such Bonds and for matters connected therewith.\" The purpose for which the Act was passed as appearing from the preamble is: \n\n Whereas for effective economic and social planning it is necessary to canalise for productive purposes black money which has become a serious threat to the national economy: \n\n And whereas with a view to such canalisation the Central Government has decided to issue at par certain bearer bonds to be known as the Special Bearer Bonds, 1991 of the face value of ten thousand rupees and redemption value, after ten years, of twelve thousand rupees; \n\n And whereas it is expedient to provide for certain immunities and exemptions to render it possible for persons in possession of black money to invest the same in the said Bonds; \n\n27. The preamble thus takes note of the fact that black money has become a serious threat to national economy and says that to make economic and social planning effective it is necessary to canalise this black money for productive purposes. The Act does not attempt to define black money. The Direct Taxes Enquiry Committee set up by the Government of India in 1970 with Shri K.N. Wanchoo, retired Chief Justice of the Supreme Court of India, as Chairman explains what the term black money means in its final report submitted in December, 1971: \n\nIt [black money] is, as its name suggests, 'tainted' money-money which is not clean or which has a stigma attached to it... Black is a colour which is generally associated with evil. While it symbolises something which violates moral, social or legal norms, it also suggests a veil of secrecy shrouding it. The term 'black money' consequently has both these implications. It not only stands for money earned by violating legal provisions-even social conscience-but also suggests that such money is kept secret and not accounted for. \n\n Today the term 'black money' is generally used to denote unaccounted money or concealed income and/or undisclosed wealth, as well as money involved in transactions wholly or partly suppressed. \n\n 28. The Act contains nine sections. The sections that are relevant for the present purpose are set out below. \n Immuni- 3. (1) Notwithstanding any thing contained in any ties. other law for the time being in force, (a) no person who has subscribed to or has otherwise acquired Special Bearer Bonds shall be required to disclose,for any purpose whatsoever, the nature and source of acquisition of such Bonds; (b) no inquiry or investigation shall be commenced against any person under any such law on the ground that such person has subscribed to or has otherwise acquired Special Bearer Bonds;and (c) the fact that a person has subscribed to or has otherwise acquired Special Bearer Bonds shall not be taken into account and shall be inadmissible as evidence in any proceedings relating to any offence or the imposition of any penalty under any such law. (2) x x x x Acquisition 4. Without prejudice to the generality of the pro- eta, of vions of Section 3, the subscription to, or acquisi- Bonds not tion of, Special Bearer Bonds by any person to be taken shall rot be taken into account for the purpose into account of any proseeding under the Income-tax Act, for certain 1961 (hereinafter referred to as the Income-tax proceedings. Act), the Wealth-tax Act, 1957 (hereinafter referred to as the Wealth-tax Act) or the Gift- tax Act, 1958 (hereinafter referred to as the Gift-tax Act) and, in particular, no person who has subscribed to, or has otherwise acquired, the said Bonds shall be entitled- (a) to claim any set-off or relief in any assessment, re-assessment, appeal,reference or other proceeding under the Income-tax Act or to reopen any, assessment orre-assessment made under that Act on the ground that he has subscribed to or has otherwise acquired the said Bonds: (b) to claim, in relation to any period before the date of maturity of the said Bonds, that any asset which is includible in his net wealth for any assessment year under the Wealth-tax Acthas been converted into the said Bonds; or (c) to claim, in relation to any period before the date or maturity of the said Bonds, that any asset held by him or any sum credited in his books of account or otherwise held by him represents the consideration received by him for the transfer of the said Bonds. Amend- 5. In the Income-tax Act,- ment of (a) in Section 2, in Clause (14), after Sub-clause(iv), act 43 the following sub-clause shall be inserted, namely: of 1961. (v) Special Bearer Bonds, 1991 issued by the Central Government, (b) in Section 10, in Clause (15), after Sub-clause (ia), the following sub-clause shall be inserted, namely: (ib) premium on the redemption of Speeial Bearer Bonds, 1991: Amend- 6. In Section of 5 of the Wealth-tax Act, in Sub-section (1), ment of after Clause (xvia), the following clause shall be Act 27 inserted, namely: of 1957. (xvib) Special Bearer Bonds, 1991; Amend- 7. In Section 5 of the Gift-tax Act, in Sub-section (1), ment of after Clause (iiia), the following clause shall be Act 18 inserted, namely: of 1958. (iiib) of property in the form of Special Bearer Bonds, 1991. \n\n 29. The mariginal notes against Sections 5, 6, and 7 indicate that these sections are amendments respectively of the Income-tax Act of 1961, Wealth-tax Act of 1957 and Gift-tax Act of 1958. Section 5 excludes Special Bearer Bonds, 1991 from the capital asset of an assessee and exempts the premium payable on the redemption of the Bonds from income-tax. Section 6 exempts the Bonds from wealth-tax. Section 7 exempts from gift-tax property in the form of these Bonds. \n\n 30. The Act has been challenged mainly on the ground that it infringes Article 14 of the Constitution. Article 14 forbids class legislation but permits classification. Permissible classification, it is well established, must satisfy two conditions which Das J. enunciated in The State of West Bengal v. Anwar AH Sarkari [1952] SCR 284 as follows:\n\n (1) that the classification must be founded on an intelligible differentia which distinguishes those that are grouped together from others and, \n \n\n (2) that the differentia must have rational relation to the object sought to be achieved by the Act. \n\n The immunities provided by the impugned Act are clearly for the benefit of those who have acquired the Bonds with black money. Clauses (a), (b) and (c) of Section 3(1) provide for these immunities \"notwithstanding anything contained in any other law for the time being in force.\" Clause (a) states that no holder of Special Bearer Bonds shall be required to disclose for any purpose the nature and source of acquisition of the Bonds. Clause (b) forbids commencement of any enquiry or investigation under any law against a person on the ground that he has subscribed to or otherwise acquired the Bonds. Under Clause (c) the fact that a person has subscribed to or otherwise acquired Special Bearer Bonds shall be inadmissible in evidence and cannot be taken into account in any proceeding relating to any offence or the imposition of any penalty under any law. None of these immunities is required by a person who has paid 'white' money, that is, money that has been accounted for, to acquire Bonds. To a person who has disclosed the source of acquisition of the Bonds, these immunities are of no use. Section 4 makes it clear that the immunities conferred by the Act are of use only to those who have acquired the Bonds with unaccounted money. Section 4 states that the fact that one has subscribed to or otherwise acquired the Bonds shall not be taken into account in any proceeding under the Income-tax Act, 1961, the Wealth-tax Act, 1957 and the Gift-tax Act, 1958 and goes on to provide specifically that no one shall be entitled to: \n\n (a) any manner of relief under the Income-tax Act on the ground that he has acquired the Bonds; or\n \n\n (b) claim that any asset belonging to him which formed part of his net wealth in any period before the maturity of the Bonds, has been converted into such Bonds; or \n \n\n (c) claim that any asset held by him or any sum of money credited in his books of account or otherwise held by him in the aforesaid period is the consideration received by him for the transfer of the Bonds. \n\n Mr. Salve appearing for the petitioners in writ petitions Nos. 863 and 994 of 1981 contended that Section 4(c) did not constitute an absolute bar to the assessee seeking to prove that the said sum or asset represents the sale price of Special Bearer Bonds; on behalf of the Union of India it was asserted that this was an absolute bar. In view of the conclusion I have reached, I do not propose to decide the point and I shall proceed on the basis that it is an absolute bar. It is apparent from Clauses (a) to (c) of Section 4 that the rights they deny affect only those who have disclosed their source of acquisition of the Bonds. Those in whose case the source of acquisition has not been detected are not affected by the prohibition contained in Section 4. The impugned Act denies to those who have acquired the Bonds not with black money any relief under the Income-tax Act or the Wealth-tax Act or any benefit in any other way claimed on the ground that they are holders of Special Bearer Bonds, and the relief and the benefit denied to them have been made available to those who have acquired the Bonds with black money by ignoring the source of acquisition in their case. \n\n 31. The Act thus distinguishes between two classes of holders of Special Bearer Bonds: tax-evaders and honest tax-payers. Has this classification a rational relation to the object of the Act ? The object, as already noticed, is to canalise black money for productive purposes to make economic and social planning effective. If the exemptions and immunities conferred by the Act are sufficiently attractive to induce tax-evaders to acquire Special Bearer Bonds, they will remain as attractive even if all these benefits were granted to those who will pay 'white' money for the Bonds. Denial of these benefits to those who have acquired the Bonds with money which has been accounted for does not in any way further the object of canalisation of black money for productive purposes. The discrimination in favour of black money therefore seems to be obvious. It was however argued that no one would be inclined to invest 'white' money for Special Bearer Bonds which carry only 2 per cent annual interest. I do not think this is a consideration which could justify the discrimination. Apart from that, a return of 2 per cent simple interest per annum is not a correct measure of the actual advantages conferred by the Act. Taking into account the income-tax and the wealth-tax savings if one did not have to pay any tax on the amount with which Special Bearer Bonds were acquired-purchasers of the Bonds with black money did not-and the tax free premium on the Bonds, the actual return would be many times more than 2 per cent simple interest per annum. It must therefore be held that the basis on which the holders of Special Bearer Bonds have been classified to give certain advantages to one class and deny them to the other, has no rational nexus with the object of the Act. \n\n 32. The matter has another aspect. The classification of holders of Special Bearer Bonds into tax-payers and tax-evaders does disclose a basis. Would it be an acceptable argument to say that this basis has a relation to the object of the Act because the black money invested in Special Bearer Bonds by tax-evaders could be utilised for productive purposes for ten years and that both the conditions of a valid classfication were thus satisfied ? I am afraid not. In State of West Bengal v. Anwar Ali Sarkar, (supra) Das J. points out:\n The differentia which is the basis of the classification and the object of the Act are distinct things and what is necessary is that there must be a nexus between them. In short while the Article [Article 14] forbids class legislation in sense of making improper discrimiation by conferring privileges or imposing liabilities upon persons arbitrarily selected out of a large number of other persons similarly situated in relation to the privileges sought to be conferred or the liability proposed to be imposed, it does not forbid classification for the purpose of legislation... \n\n In Anwar Ali Sarkar's case the constitutional validity of the West Bengal Special Courts Act (X of 1950) constituting special courts and empowering the state government to refer 'cases' 'offences' or 'classes of cases' or 'classes of offences' to such courts was in question. The object of the West Bengal Act was to provide for the speedier trial of certain offences. Das J. observes further:\n To achieve this object, offences or cases have to be classified upon the basis of some differentia which will distinguish those offences or cases from others and which will have a reasonable relation to the recited object of the Act. The differentia and the object being, as I have said, different elements, it follows that the object by itself cannot be the basis of the classification of offences or the cases, for in the absence of any special circumstances which may distinguish one offence or one class of offences or one class of cases from another offence, or class of offences or class of cases, speedier trial is desirable in the disposal of all offences or classes of offences or classess of cases.\n\n 33. If the differentia, that is, the basis of classification, and the object of the Act are distinct things, it follows that it is not enough that the differentia should have a nexus with the object, but it should also be intelligible. The presence of some characteristics in one class which are not found in another is the difference between the two classes, but a further requirement is that this differentia must be intelligible. If the basis of classification is on the face of it arbitrary in the sense that it is palpably unreasonable, I do not think it is possible to call the differentia intelligible. The following passage from the judgment of Bose J. in Anwar Ali Sarkar's case illustrates the point:\n I can conceive of cases where there is the utmost good faith/and where the classification is scientific and rational and yet which would offend this law. Let us take an imaginary case in which a State legislature considers that all accused persons whose skull measurements are below a certain standard, or who cannot pass a given series of intelligence tests, shall be tried summarily whatever the offence on the ground that the less complicated the trial the fairer it is to their sub-standard of intelligence. Here is classification. It is scientific and systematic. The intention and motive are good. There is no question of favouritism, and yet I can hardly believe that such a law would be allowed to stand. But what would be the true basis of the decision? Surely simply this that the Judges would not consider that fair and proper. \n\n The scope of Article 14 was further elaborated in some of the later decisions of this Court. This is what Bhagwati, J. speaking for himself and Chandrachud and Krishna Iyer JJ. in E.P. Royappa v. State of Tamil Nadu and Anr. says:\n We cannot countenance any attempt to truncate its all-embracing scope and meaning, for to do so would be to violate its activist magnitude. Equality is a dynamic concept with many aspects and dismensions and it cannot be \"cribed, cabbined and confined\" within traditional and doctrinaire limits. From a positivistic points of view, equality is antithetic to arbitrariness. In fact equality and arbitrariness are sworn enemies; one belongs to the rule of law in a republic while the other, to the whim and caprice of an absolute monarch. Where an act is arbitray it is implicit in it that it is unequal both according to political logic and constitutional law and is therefore violative of Article 14.\n\nBhagwati J.\n\n Reiterates in Maneka Gandhi v. Union of India what he had said in Royappa's case and adds:\n The principle of reasonableness, which legally as well as philosophically, is an essential element of equality or non-arbitrariness pervades Article 14 like a brooding omnipresence....\n\n 34. To pass the test of reasonableness if it was enough that there should be a differentia which should have some connection with the object of the Act, then these observations made in Maneka Gandhi and Royappa would be so much wasted eloquence. The decisions of this Court insist that the differentia must be intelligible and the nexus rational, and the observations quoted above would seem to be appropriate only if we attach some significance to the words 'intelligible' and 'rational'. The question however remains: when is one justified in describing something as arbitrary or unreasonable? Terms like 'reasonable', 'just' or 'fair' derive their significance from the existing social conditions. W. Friedmann in his \"Legal Theory\" (5th Ed. page 80) points out that expressions like \"a reasonable and fair price\" or a \"fair and equitable\" restitution means nothing, except in conjunction with the social conditions of the time\". Brandeis J. in his opinion in Quaker City Cab Co. v. Commonwealth of Pennsylvania 72 Law Ed. 1927 explains when a classification shall be reasonable: ''We call that action reasonable which an informed, intelligent, just-minded, civilized men could rationally favour.\" Bose J. in Anwar Ali Sarkar's case says much the same thing in holing that the West Bengal Special Courts Act of 1950 offends Article 14: We find men accused of heinous crimes called upon to answer for their lives and liberties. We find them picked out from their fellows, and however much the new procedure may give them a few crumbs of advantage, in the bulk they are deprived of substantial and valuable privileges of defence which others, similarly charged, are able to claim. It matters not to me, nor indeed to them and their families and their friends, whether this be done in good faith, whether it be done for the convenience of government, whether the process can be scientifically classified and labelled, or whether it is an experiment in speedier trials made for the good of society at large. It matters not how lofty and laudable the motives are. The question with which I charge myself is, can fair-minded, reasonable, unbiased and resolute men, who are not swayed by emotion or prejudice, regard this with equanimity and call it reasonable, just and fair, regard it as that equal treatment and protection in the defence of liberties which is expected of a sovereign democratic republic in the conditions which obtain in India today?\n\n 35. Keeping in mind these observations on what is reasonable, is the basis on which the holders of Special Bearer Bonds have been classified into two groups, honest tax-payers and tax-evaders, intelligible? What is arbitrary and offends Article 14, cannot be called intelligible. It is clear from the provisions of the Act set out earlier that the advantages which the tax-evaders derive from the immunities provided by the Act are not avilable to those who have acquired the Bonds with 'white' money. The Act promises anonymity and security for tax-evaders. No question can be asked as to the nature and source of acquisition or possession of the Bonds. The Bonds can be transferred freely, and the apprehension expressed by the petitioners cannot be said to be baseless that passing from hand to hand the Bonds are likely to operate as parallel currency and be used for any kind of transaction. From a reading of the preamble of the Act it does not seem that the object of the Act was only to enable the Central Government to have some use for 10 years of the black money which is said to have \"become a serious threat to the national economy\". As I read the preamble the purpose of the Act is to unearth black money and use it for productive purposes for effective economic and social planning. If that be the object of the Act, it is difficult to see how its provisions help to achieve the intended purpose. The Act discloses a scheme which enables tax-evaders to convert black money into white after 10 years and in the meantime use the Bonds as parallel currency intiating a chain of black money investments. There is no provision in the Act requiring that on maturity of the Bonds their holders would have to disclose their identity, which means that if after 10 years black money which had taken the shape of Special Bearer Bonds goes under-ground again and retain its colour, there is nothing to prevent it. There is nothing in the scheme to halt generation of black money which threatens the national economy. Some people by successful evasion manoeuvres are able to throw the burden of taxation off their own shoulders which means a greater burden on the honest tax-payers and this leads to economic imbalance. On the effect of giving concessions to such unscrupulous tax-evaders in preference to the honest tax-payers, Mr. R.K. Garg appearing in person and Mr. Salve both repeated what the Direct Taxes Enquiry Committee's final report says: \"Resorting to such a measure... would only shake the confidence of the honest tax-payers in the capacity of the Government to deal with the law breakers and would invite contempt for its enforcement machinery.\" The petitioners submitted further that measures like the Special Bearer Bonds scheme would tempt more people to evade taxes and instead of serving a legitimate public interest would grievously damage it. \n\n 36. It has been pointed out that there have been voluntary disclosure schemes in the past. That is so, but none of them is quite like the scheme in question which not only exempts the unaccounted money in the shape of Special Bearer Bonds from all taxes but provides also for a tax-free premium on it. According to the petitioners, if the earlier schemes have been conciliatory, the present scheme amounts to capitulation to black money. I asked the Attorney General if it was his case that all attempts to unearth black money had failed and the present scheme was the only course open. His answer was that that was not his case The affidavit filed on behalf of the Union of India also does not make such a case. Clearly, the impugned Act puts a premium on dishonesty without even a justification of necessity-that the situation in the country left no option. \n\n 37. The Act has been criticised as immoral and unnethical. Any law that rewards law breakers and tax dodgers is bound to invite such criticism. Should the court concern itself with questions of morality and ethics in considering the constitutional validity of an Act? Of course no law can be struck down only on the ground that it is unethical. However as Friedmann in his \"Legal Theory\" (page 43) says: \"There cannot be-and there never has been-a complete separation of law and morality. Historical and ideological differences concern the extent to which the norms of the social order are absorbed into the legal order.\" It has been held by this Court in Royappa and Maneka Gandhi that the principle of reasonableness is an essential element of equality. The concept of reasonableness does not exclude notions of morality and ethics. I do not see how it can be disputed that in the circumstances of a given case considerations of morality and ethics may have a bearing on the reasonableness of the law in question. \n\n 38. Having regard to the provisions of the impugned Act which I have discussed above and the object of the Act to which I have referred, is it possible to say that it is reasonable to classify the holders of Special Bearer Bonds into honest tax-payers and tax-evaders for the purpose of conferring benefits on the tax-evaders and denying them to those who have honestly paid their taxes, especially when a measure appeasing the tax-evaders to the extent the scheme in question does is not claimed as unavoidable? The informed, fair-minded, civilized man on whose judgment both Brandeis J. and Bose J. rely, would he have found the basis of the classification intelligible? The questions answer themselves, the arbitrary character of the differentiation is so obvious. I do not think it is possible to take the rhetoric of Royappa and Maneka Gandhi seriously and find that the Act passes the test of reasonableness. \n\n 39. What I have said above on the Special Bearer Bonds scheme should not be read as an expression of opinion on the wisdom of the government policy-that the scheme is not the best in circumstances. My conclusion is based not on what the policy of the government is but on what the equality clause in Article 14 requires. \n\n 40. Having held that the Special Bearer Bonds (Immunities and Exemptions) Ordinance, 1981 and the Special Bearer Bonds (Immunities and Exemptions) Act, 1981 are invalid on the ground that they infringe Article 14 of the Constitution, I do not find it necessary to consider whether Special Bearer Bonds (Immunities and Exemptions) Ordinance, 1981 is outside the ordinance making power of the President under Article 123 of the Constitution." }, { "title": "Shashikant Laxman Kale And Anr vs Union Of India And Anr on 20 July, 1990", "url": "https://indiankanoon.org//doc/1061804/", "text": "Shashikant Laxman Kale And Anr vs Union Of India And Anr on 20 July, 1990\nEquivalent citations: 1990 AIR 2114, 1990 SCR (3) 441, AIR 1990 SUPREME COURT 2114, 1990 (4) SCC 366, 1990 TAX. L. R. 877, (1990) 52 TAXMAN 352, (1990) 185 ITR 104, (1990) 86 CURTAXREP 201, 1990 SCC(TAX) 428, (1990) 3 JT 267 (SC), 1990 3 JT 267\nAuthor: Jagdish Saran Verma\nBench: Jagdish Saran Verma, N.D. Ojha\n PETITIONER:\nSHASHIKANT LAXMAN KALE AND ANR.\n\n\tVs.\n\nRESPONDENT:\nUNION OF INDIA AND ANR.\n\nDATE OF JUDGMENT20/07/1990\n\nBENCH:\nVERMA, JAGDISH SARAN (J)\nBENCH:\nVERMA, JAGDISH SARAN (J)\nVENKATACHALLIAH, M.N. (J)\nOJHA, N.D. (J)\n\nCITATION:\n 1990 AIR 2114\t\t 1990 SCR (3) 441\n 1990 SCC (4) 366\t JT 1990 (3)\t267\n 1990 SCALE (2)71\n\n\nACT:\n Income Tax Act, 1961: Chapter III--Section 10--Clause\n(10-C) --Scope and Constitutional validity of--Public Sector\nCompanies--Employees-Voluntary\t Retirement--\"Golden hand-\nshake\"to employees-Exemption from income-tax--Held clause\n(10-C) does not include employees of a private sector compa-\nny.\n Constitution of India, 1950: Article 14 Public Sector\nCompanies-Employees-Amount received at the time of voluntary\nretirement--Exemption from tax under clause (10-C) of\tSec-\ntion 10 of Income Tax Act, 1961--Exclusion of non-public\nsector employees from clause (10-C) and consequent denial of\nbenefit\t of tax exemption--Held public sector employees\nconstitute a distinct class--Clause (10-C) is neither arbi-\ntrary nor violative of Article 14 Object of cluase (10-C)\nexplained.\n Taxing Statute--Constitutional validity of--Reasonable-\nness of classification--Determination of--Scope for classi-\nfication in a taxing statute is greater--Court should\tlook\nbeyond\tobstensible classification into purpose of law\t and\napply the test of \"palpable arbitrariness\"\n Statutory\tinterpretation--Statute--Determination\t of\nobject\tand purpose--Permissible Aid--Statement\t of objects\nand reasons of the Bill--Whether can be looked into.\n Finance Bill--Explanatory\t Memorandum--Heading-Neither\ndeterminative of object nor can camouflage the object of the\nAct.\n\n\n\nHEADNOTE:\n By\tFinance\t Act, 1987, clause (10-C) was\tinserted in\nsection\t 10 of the Income-Tax Act, 1961. The effect of\tthis\nclause was to grant tax exemption to employees of the public\nsector in respect of the amount received under the voluntary\nretirement scheme approved by the Central Government.\n The petitioners-an employee of a private sector company\nand the trade-union of the said private company-flied a writ\npetition in this\n442\ncourt challenging the validity of clause (10-C)\t contending;\n(i) the denial of benefit of tax exemption to employees of\nprivate\t sector company being arbitrary and discriminatory,\nthe impugned clause was unconstitutional as violative of\nArticle\t 14: (ii) the heading\t 'Welfare-Measures' to\t the\nMemorandum explaining\tthe provisions in the Finance\tBill\n1987 proposing insertion of clause (10-C) in section 10 of\nthe Income-Tax Act, 1961 was decisive of the object of\t its\nenactment; the tax benefit being in the nature\t of welfare\nmeasure the impugned clause must be so construed as to apply\nto all employees equally, whether of the public sector or\nprivate sector in order to uphold its validity.\nDismissing the petition, this Court,\n HELD: There is a distinction between the\t public\t and\nprivate sectors. The Government or the public sector under-\ntakings\t are as a distinct class separate from those in\t the\nprivate\t sector and the fact that the profit earned in\t the\nformer\tis for public benefit instead of private benefit,\nprovides an intelligible differentia from the social point\nof view which is of prime importance for the national econo-\nmy. Thus, there exists an intelligible differentia between\nthe two categories which has a rational nexus with the\tmain\nobject\tof promoting the national economic policy or\t the\npublic\tpolicy.\t This element also appears in the impugned\nenactment itself wherein 'economic viability of such compa-\nny' is specified as the most relevant circumstance for grant\nof approval of the scheme by the Central Government.\tThis\nintrinsic element in the provision itself supports the\tview\nthat the main object thereof is to promote and improve\t the\nhealth of the public sector companies even though its effect\nis a benefit of its employees. The economic status of\t em-\nployees\t of a public sector company who get the\t benefit of\nthe provision is also lower as compared to their counterpart\nin the private sector. Viewed in this perspective, the\tvery\nfoundation of the challenge to the impugned provision on the\nbasis of economic equality of employees in both sectors is\nnon-existent. Once the stage is reached where the differen-\ntiation is rightly made between a public sector company\t and\na private sector company and that too essentially on\t the\nground\tof economic viability of the public sector company\nand other relevant circumstances, the\t argument based on\nequality does not survive. This is independent of the\tdis-\nparity\tin the\t compensation package of employees in\t the\nprivate\t sector and the public sector. The argument of\tdis-\ncrimination is\t based on initial equality between the\t two\nclasses\t alleging bifurcation thereafter between those\t who\nstood integrated earlier as one class. This basic assumption\nbeing fallacious, the question of any hostile discrimination\nby granting the benefit only to a few in the\t same class\ndenying the same to those left out does not arise. [465D-H;\n466A-B]\n443\n 2.\tThe purposes of the impugned\tlegislation include\nreduction in the existing gap between the lower compensation\npackage in public sector and the higher compensation package\nof the counterpart in private sector in addition to prevent-\ning misuse of the benefit in private sector which is\t not\nsubject to the control of administration by Government\tlike\nthat in the public sector. One of the purposes is streamlin-\ning the public sector to cure it of one of its ailments of\noverstaffing. The provision is an incentive to the unwanted\npersonnel to seek voluntary retirement thereby enabling\t the\npublic\tsector\tto achieve the true object indicated.\t The\npersonnel seeking voluntary retirement no doubt get a\t tax\nbenefit but then that is an incentive for seeking voluntary\nretirement and at any rate that is the effect of the provi-\nsion or its fallout and not its true object. The real\tdis-\ntinction between the true object of an enactment and\t the\neffect\tthereof, even\tthough appearing to be\t blurred at\ntimes, has to be borne in mind, particularly in a situation\nlike this. [466F-H; 467A-B]\n 2.1\t Keeping in view the true object of the impugned\nenactment, there is no doubt that employees of the private\nsector who are left out of the ambit of the impugned provi-\nsion do not fall in the same class as employees of\t the\npublic sector and the benefit of the fall-out of the provi-\nsion being available only to the public sector employees\ncannot\trender the classification invalid or arbitrary.\t The\nother clauses in section of the Act further show that\t the\nscheme\tof section 10 contemplates a\tdistinction between\nemployees based on the category of their employer.\tThis\nclassification cannot, therefore, be faulted. [67B-C]\n Hindustan Paper Corporation Ltd. v. Government of Kerala\nJUDGMENT:\nv. Union of India & Ors. etc. etc., Judgments Today 1982 (2)\nSC 465; L.K. Jha Memorial Lecture, delivered\ton the\t 6th\nDecember 1988, by Shri R.N. Malhotra, Governor, Reserve Bank\nof India, on \"Growth and Current Fiscal Challenges\",\t re-\nferred to.\n Hindustan Antibiotics v. Workmen, [1967] 1 SCR 652\t and\nS.K. Dutta, 1. T.O. v. Lawrence Singh Ingty, [1968] 68\nI.T.R. 272, distinguished and held inapplicable.\n R.D. Shetty v. International Airport Authority of India,\n[1979] 3 SCR 1014, cited.\n 2.2\t In view of the simultaneous definition\t of 'public\nsector\tcompany' in the Income-Tax Act, there\t can be no\noccasion to construe this\n444\nexpression differently without which a private sector compa-\nny cannot be included in it. It is, therefore, not possible\nto construe the impugned provision while upholding\t its\nvalidity in such a manner as to include a private sector\ncompany also within its ambit. [468C-D]\n 3. The principles of valid classification are that those\ngrouped together in one class must possess a common charac-\nteristic which distinguishes them from those excluded\tfrom\nthe group; and this characteristic or intelligible differen-\ntia must have a rational nexus with the object sought to be\nachieved by the enactment. [449D]\nRe The\t Special Courts Bill, 1978, [1979] 2\tS.C.R.\t476,\nreferred to.\n 4.\tThe latitude for classification in a taxing is\tmuch\ngreater; and in order to tax something it is not necessary\nto tax everything. These basic postulates have to be borne\nin mind while determining the constitutional validity of a\ntaxing provision challenged on the ground of discrimination.\n1451C]\n P.H. Ashwathanarayana v. State of Karnataka, [1989]\n(Supp.) 1 S.C.C. 696; Federation of Hotel and Restaurant\nAssociation of India v. Union of India, [1989]\t 178 I.T.R.\n97; Kerala Hotel and Restaurant Association & Ors. v. State\nof Kerala & Ors., A.I.R. 1990 SC 913 and 1. T.O. v. N. Takin\nRoy Rymbai, [1976] 103 I.T.R. 82 SC, referred to.\n East India Tobacco Co. v. Andhra Pradesh, A.I.R. 1962 SC\n1733; Vivian Joseph Ferriera v. Municipal Corporation of\nGreater\t Bombay, AIR 1972 S.C. 845 and Jaipur Hosiery Mills\nv. State of Rajasthan, A.I.R. 1971 SC 1330, cited.\n 5. The Court should, therefore, look beyond the obsten-\nsible classification and to the purpose of the law and apply\nthe test of 'palpable arbitrariness' in the context of\t the\nfelt needs of the times and societal exigencies informed by\nexperience to determine reasonableness of the\t classifica-\ntion. [453B]\n 5.1\t It is\t necessary to discern the true\t purpose or\nobject\tof the impugned enactment because it is only\twith\nreference to the true object of the\tenactment that\t the\nexistence of a rational nexus of the differentia on which\nthe classification is based, with the object sought to be\nachieved by the enactment, can be examined to test\t the\nvalidity of the classification. [453E-F]\n445\n 5.2 There is a clear distinction between the legislative\nintention and\tthe purpose or object of the\tlegislation.\nWhile the purpose or object of the legislation is to provide\na remedy for the malady, the legislative intention relates\nto the meaning or exposition of the remedy as enacted. While\ndealing with the validity of a classification, the rational\nnexus of the differentia on which the classification is\nbased has to exist with the purpose of object of the legis-\nlation, so determined. [453H; 454A]\n Francis Bennion's Statutory Interpretation, 1984\tedi-\ntion, page 237, referred to.\n 6. For determining the purpose or object of the legisla-\ntion, it is permissible to look into the circumstances which\nprevailed at the time when the law was passed and which\nnecessitated the passing of that law. For the limited\tpur-\npose of appreciating\tthe background\tand the antecedent\nfactual matrix leading to the legislation, it is permissible\nto look into the statement of Objects and Reasons of\t the\nBill which actuated the step to provide a remedy for\t the\nthen existing malady. [454B-C]\n A.\tThangal Kunju Musaliar v. M. Venkitachalam Potti &\nAnr., [1955] 2 S.C.R. 1196; State of West Bengal v. Union of\nIndia, [1964] 1 S.C.R. 371 and Pannalal Binjraj v. Union of\nIndia, [1957] S.C.R. 233, referred to.\n 6.1\t To sustain the presumption of constitutionality,\nconsideration may be had even to matters of common knowl-\nedge; the history of the times; and very conceivable state\nof facts existing at the time of legislation which can be\nassumed. Even\tthough\tfor the purpose\t of construing\t the\nmeaning\t of the enacted provision, it is not permissible to\nuse these aids, yet it is permissible to look into\t the\nhistorical facts and surrounding circumstances\t for ascer-\ntaining\t the evil sought to be\t remedied. The\t distinction\nbetween\t the purpose or object of the legislation and\t the\nlegislative intention\tis significant in this\texercise to\nemphasise the availability of larger material to the Court\nfor reliance when determining the purpose or object of\t the\nlegislation as distinguished from the meaning of the enacted\nprovision. [454F-H]\n 7. An explanatory memorandum is usually 'not an accurate\nguide of the final Act'. [455C]\nFrancis\t Bennion's Statutory Interpretation, 1984 Edn.\tpage\n529,referred to.\n446\n 7.1\t A catch-phrase possibly used as a populist measure\nto describe some provisions in the Finance Bill in\t the\nexplanatory memorandum\t while introducing the Bill in\t the\nParliament can\t neither be determinative of,\tnor can it\ncamouflage the\t true object of the legislation. It is\t not\nunlikely that\tthe phrase 'welfare measures' was used to\nemphasise more on the effect of the provisions thereunder on\nthe taxpayer for populism. [457G]\n\n\n\n&\nORIGINAL JURISDICTION: Writ Petition No. 136 of 1989.\n(Under Article 32 of the Constitution of India).\n Narayan B. Shatye, Mukul Mudgal, Venkatesh Rao, Sudhir\nGopi for the Petitioners.\n A.B. Divan, V. Gauri Shankar, S.C. Manchanda, Ashok\nSagar, Ms. Amrita Mitra, Ms. A. Subhashini, Ravinder Narain,\nS. Sukumaran, M.K. Shashidharan, S. Rajappa for the Respond-\nents.\nThe Judgment of the Court was delivered by\n VERMA, J. This petition under Article 32 of the Consti-\ntution\tchallenges the constitutional\tvalidity of clause\n(10-C) inserted in section 10 of the Indian Income-tax\tAct,\n1961 (hereinafter referred to as 'the Act') by the Finance\nAct, 1987 with effect from 1.4.1987. Section 10 deals\twith\nincomes\t not included in total income for the\t purpose of\ntaxation under\t the Act. The effect of clause (10-C) so\ninserted in section 10 of the Act is that any\tpayment\t re-\nceived by an employee of a public sector company at the time\nof his voluntary retirement in accordance with\t any scheme\nwhich the Central Government may, having regard to\t the\neconomic viability of such company and other relevant\tcir-\ncumstances, approve in this behalf, is not included in\t the\ntotal income of such employee resulting in grant of\t tax\nexemption to that extent to him. The\tpetitioners contend\nthat the denial of this benefit to an employee of a private\nsector\tcompany\t at the time of his voluntary retirement\namounts\t to an invidious distinction between public sector\nemployees and\tprivate sector employees in the matter of\ntaxation and is arbitrary and unintelligible amounting to\nhostile discrimination.\n The initial submission on behalf of the petitioners\t was\nthat the aforesaid clause (10-C) of section 10 of the Act is\nconstitutionally invalid for this reason. However, during\nthe course of arguments the\n447\nstand of the petitioners was modified to contend that\t the\nprovision must be so construed as to apply to all employees\nequally, whether of the public or private sector, in order\nto uphold its validity. The question, therefore, is whether\nthere is any such hostile discrimination as alleged by\t the\npetitioners and if so, is it possible to construe the provi-\nsion in the manner suggested on behalf of the petitioners to\napply it equally to all employees of the public as well as\nprivate sectors?\n The\t first petitioner is an employee of second respond-\nent--Peico Electronic\tand Electricals Limited, a private\nsector\tcompany--and the second petitioner is a registered\ntrade union representing the employees of the\t second\t re-\nspondent-company. Counsel for the second respondent-company\nsought\tto support the petitioners' case. Counsel for\t the\nfirst respondent supporting the validity of the provision\nindicated that employees of the public sector constituted a\ndistinct class for the purpose of taxation so that there was\nno discrimination between employees of the same class if the\nreal object of the provision is borne in mind. We shall\nrefer to the\targuments of the two sides in\tsome detail\nlater.\n Chapter III of the Indian Income Tax Act, 1961 relates\nto \"incomes which do not form part of the total income\".\nSection\t 10 in Chapter III deals with \"incomes not included\nin total income\". It provides that in computing the total\nincome of a previous year of any person, any income falling\nwithin any of the clauses therein shall not be included. The\nseveral\t clauses in section 10\t specify different incomes\nwhich would ordinarily be included in the total income of\nthe assessee for the purpose of taxation but\tfor such a\nprovision. Clause (10-C) of Section 10 is as under:\n\"(10-C):--any payment received by an employee' of a public\nsector\tcompany at the time of his voluntary retirement in\naccordance with any scheme which the Central Government may,\nhaving regard to the economic viability of such company\t and\nother relevant circumstances, approve in this behalf.\"\n We\tmay now summarise the arguments advanced before\t us.\nShri Shetye for the petitioners first contended that\t the\nreason given for enacting clause (10-C) as indicated in\t the\nmemorandum explaining provisions of the Finance Bill,\t1987\nis that the tax benefit is given as a welfare\tmeasure. He\nargued, if so, all employees whether of private or of public\nsector are in the same class and are entitled equally to the\n448\nbenefit of a welfare measure for employees. His next conten-\ntion is that, if that be the only stated basis of the clas-\nsification, it has no rational nexus with the object of\t the\nprovision and it violates Article 14 of the Constitution.\nLearned\t counsel for the petitioners referred\t to certain\nother clauses in section 10 of the Act which apply equally\nto all\t employees irrespective of the\t category of their\nemployer, to suggest that all such measures being for bene-\nfit of employees, no further classification of the employees\nis permissible\t with reference to the\t category of their\nemployer. It was further urged that consequently the exclu-\nsion of non-public sector employees is not only\t discrimina-\ntory but also arbitrary. On this basis it was contended that\ninstead\t of striking down the provision as invalid which\nwhile denying\tthe benefit to the public sector employees\nwould not also serve any useful purpose for\tthe private\nsector\temployees, the court should adopt a positive\t and\nconstructive approach and the provision so construed as to\nextend\tits benefit to all employees irrespective of\t the\ncategory of their employer to uphold its validity.\n Shri Dewan for the second respondent, a private sector\ncompany, supported learned counsel for the petitioners. He\ncontended that if there be any such discrimination then\t the\nquestion to ask is: whether the Parliament\tintended to\nconfine the benefit of this welfare measure only to employ-\nees of the public sector? He further contended that it is\npossible to read the provision in such a manner as to extend\nits benefit to all employees instead of confining it only to\nthe public sector employees.\n In\treply,\tDr. Gauri Shankar for the first respondent\ncontended that the employees of public sector constitute a\ndistinct class for this purpose in view of the fact that the\npublic\tsector\tundertakings have a distinct character\t and\nrole in the national economy. He argued that to make\t the\npublic\tsector\tundertakings economically more\t viable\t and\nthereby\t contribute more to the national economy, it\t has\nbecome necessary to streamline and trim the higher echelons\nby inducing the unwanted personnel to leave voluntarily with\na \"golden hand-shake\" instead of resorting to\tretrenchment\nwhich involves\t several complication including protracted\nlitigation which is not conducive to the wellbeing of\t the\npublic sector undertakings. He argued that this problem does\nnot exist in the private sector where the higher employees\ncan leave or be asked to leave, without corresponding diffi-\nculties, experienced in the public sector. This provision is\nmeant essentially for employees at the higher levels in\t the\npublic\tsector undertakings whose economic status cannot be\nequated with their counterpart in the\n449\nprivate\t sector. For this reason equating the two sets of\nemployees for the tax benefit was urged to be\tunjustified,\nthere being an intelligible differentia between them.\t Dr.\nGauri Shankar\talso contended that the real object of\t the\nenactment was to streamline the public sector\tby reducing\noverstaffing at the higher level and\tthe consequent\t tax\nexemption to the retiring employee was merely the effect or\nfall-out of the real object. The provision was meant to\ninduce\tthe unwanted personnel to seek voluntary retirement\nand thereby promote the real object of streamlining\t the\nailing\tpublic sector. To support his argument, he produced\nmaterial indicating the historical background\tand factual\nmatrix including material to show the great disparity in the\nemoluments and perquisites, i.e., compensation\t package of\nthe private sector and the public sector employees particu-\nlarly at the higher levels.\n The\t main question for decision is\t the discrimination\nalleged by the petitioners. The principles of valid classi-\nfication are long settled by a catena of decisions of\tthis\nCourt but their application to a given case is quite often a\nvexed question. The problem is more vexed in cases falling\nwithin the grey zone. The principles are that those grouped\ntogether in one class must possess a common characteristic\nwhich distinguishes them from those excluded from the group;\nand this characteristic or intelligible differentia\tmust\nhave a rational nexus with the object sought to be achieved\nby the enactment. It is sufficient to cite the decision in\n[1979]\t2 SCR 476--In Re The Special Courts Bill, 1978--and\nto refer to the propositions quoted at p. 534-537 therein.\nSome of the propositions are stated thus:\n\"2. The State, in the exercise of its\tgovernmental power,\nhas of\t necessity to make laws operating differently on\ndifferent groups or classes of persons within its territory\nto attain particular ends in giving effect to its policies,\nand it must possess for that purpose large powers of distin-\nguishing and classifying persons or things to be subjected\nto such laws.\n3. The Constitutional command to the State to afford equal\nprotection of\tits laws sets a goal not attainable by\t the\ninvention and application of a precise formula. Therefore,\nclassification need not be constituted by an exact or scien-\ntific exclusion or inclusion of persons or\tthings.\t The\nCourts\tshould\tnot insist on delusive\texactness or apply\ndoctrinaire tests for determining the validity of classifi-\ncation in any given case. Classification is justified if it\nis not palpably arbitrary.\n450\n4. The principle underlying the guarantee of Article 14 is\nnot that the same rules of law should be applicable to\t all\npersons\t within the Indian territory or that the same reme-\ndies should be made available to them irrespective of\tdif-\nferences of circumstances. It only means that\tall persons\nsimilarly circumstanced shall\t be treated alike both in\nprivileges conferred and liabilities imposed.\t Equal\tlaws\nwould have to be applied to all in the same situation,\t and\nthere should be no discrimination between one\t person\t and\nanother if as regards the subject-matter of the\t legislation\ntheir position is substantially the same.\n6. The law can make and set apart the classes according to\nthe needs and exigencies of the society and as suggested by\nexperience. It can recognise even degree of evil, but\t the\nclassification\tshould\tnever be arbitrary, artificial or\nevasive.\n7. The\t classification must not be arbitrary but must be\nrational, that is to say, it must not only be based on\tsome\nqualities or characteristics which are to be found in\t all\nthe persons grouped together and not in others who are\tleft\nout but those\t qualities or characteristics must have a\nreasonable relation to the object of the legislation. In\norder to pass the test, two conditions must be fulfilled,\nnamely,\t (1) that the classification must be rounded on' an\nintelligible differentia which distinguishes those that\t are\ngrouped\t together from others and (2) that differentia\tmust\nhave a rational relation to the object sought to be achieved\nby the Act.\n8. The differentia which is the basis of the classification\nand the object of the Act are distinct things and what is\nnecessary is that there must be a nexus between them. In\nshort,\twhile Article 14 forbids class discrimination by\nconferring privileges or imposing liabilities\tupon person\narbitrarily selected out of a large number of other persons\nsimilarly situated in relation to the privileges sought to\nbe conferred or the liabilities proposed to be imposed, it\ndoes not forbid classification for the purpose of legisla-\ntion, provided such classification is not arbitrary in\t the\nsense above mentioned.\n451\n11. Classification necessarily implied the making of a\ndistinction or discrimination between persons classified and\nthose who are not members of that class. It is the essence\nof a classification that upon the class are cast duties\t and\nburdens\t different from those resting upon the general\tpub-\nlic. Indeed, the very idea of classification\tis that of\ninequality, so\t that it goes without saying that the\tmere\nfact of inequality ,n no manner determines the matter of\nconstitutionality.\"\n(emphasis supplied)\n It is well-settled that the latitude for classification\nin a taxing statute is much greater; and in order to\t tax\nsomething it is not necessary to tax everything. These basic\npostulates have to be borne in mind while determining\t the\nconstitutional validity of a taxing provision challenged on\nthe ground of discrimination.\n The\t scope\tfor permissible classification in a taxing\nstatute\t was once again considered in a recent decision. of\nthis Court in P.H. Ashwathanarayana v. State of Karnataka,\n[1989]\tSuppl.\t1 SCC 696. After a review of earlier deci-\nsions, it was stated therein as under:\n\"It is for the State to decide what economic and socialpoli-\ncy it should pursue and what discriminations advance those\nsocial\tand economic policies. In view of the inherent\tcom-\nplexity\t of these fiscal adjustments, courts give a larger\ndiscretion to the legislature in the matter of its prefer-\nences of economic and social policies and effectuate\t the\nchosen system in all possible and reasonable ways .....\t \"\n(emphasis supplied)\n In\tFederation of Hotel and Restaurant Association of\nIndia v. Union of India, [1989] 178 ITR 97, it was said as\nunder:\n\"... The test could only be one of palpable arbitrariness\napplied\t in the context of the felt needs of the times\t and\nsocietal exigencies informed by experience.\"\n\"... A reasonable classification is. one which includes\t all\nwho are similarly situated and none who are not. In order to\nascertain whether persons are similarly placed, one\tmust\nlook beyond the classification and to the purposes of\t the\nlaw.\"\n(emphasis supplied)\n452\n This Court\t has held in Kerala Hotel and Restaurant\nAssociation & Ors. v. State of Kerala & Ors., A.I.R. 1990 SC\n913 as under:\n\"The scope for classification permitted in\ttaxation is\ngreater and unless the classification made can be termed to\nbe palpably arbitrary, it must be left to the\t legislative\nwisdom\tto choose the yardstick for classification, in\t the\nbackground of\tthe fiscal policy of the State\t to promote\neconomic equality as well ..... ' '\n\"Thus,\tit is clear that the test applicable for striking\ndown a taxing provision on this ground is one\tof palpable\narbitrariness applied in the context of the felt needs of\nthe times and societal exigencies informed by\t experience,\nand the courts should not interfere with the\t legislative\nwisdom\tof making the classification unless the\t classifica-\ntion is found to be invalid by this test.\"\n(emphasis supplied)\n It is useful to refer also to the decision of this Court\nin 1.\tT.O. v. N. Takin Roy Rymbai, [1976] 103 I.T.R. 82\n(S.C.)--wherein\t a similar question relating to validity of\nclassification\tin another clause of section 10 of the\t In-\ncome-Tax Act, 1961 arose for consideration. This Court while\nupholding the validity of the classification summarised\t the\nprinciples applied, as under:\n\".... it must be remembered that the State has, in view of\nthe intrinsic complexity of fiscal adjustments\t of diverse\nelements, a considerably wide discretion in the matter of\nclassification\tfor taxation purposes.\t Given\t legislative\ncompetence, the legislature has ample freedom to select\t and\nclassify persons, districts, goods, properties, incomes\t and\nobjects\t which it would tax, and which it would not tax. So\nlong as the classification made within this wide and flexi-\nble range by a taxing statute does not transgress the funda-\nmental principles underlying the doctrine of equality, it is\nnot vulnerable on the ground of discrimination\t merely\t be-\ncause it taxes or exempts from tax some incomes or objects\nand not others. Nor is the mere fact that a tax falls\tmore\nheavily on some in the same category, by itself a ground to\nrender the law invalid. It is only when within the range of\nits selection,\t the law operates unequally and cannot be\njustified on the basis of a valid classification, that there\n453\nwould be a violation of Article 14. (see East India Tobacco\nCo. v. Andhra Pradesh; Vivian Joseph Ferriera v. Municipal\nCorporation of Greater Bombay; Jaipur Hosiery Mills v. State\nof Rajasthan)\"\n(emphasis supplied)\n We must, therefore, look beyond the ostensible. classi-\nfication and to the purpose of the law and apply the test of\n'palpable arbitrariness' in the context of the felt needs of\nthe times and societal exigencies informed by experience to\ndetermine reasonableness of the classification. It is clear\nthat the role of public sector in the sphere of promoting\nthe national economy and the context of felt needs of\t the\ntimes and societal exigencies informed by experience gained\nfrom its functioning till the enactment are of significance.\nThere is no dispute that the impugned provision includes all\nemployees of the public sector and none not in\t the public\nsector. The question is whether those left out are similarly\nsituated for the purpose of the enactment to\t render\t the\nclassification\tpalpably arbitrary. It is only if this\ttest\nof palpable arbitrariness applied in this manner is satis-\nfied, that the provision can be faulted as discriminatory\nbut not otherwise. Unless such a defect can be\t found,\t the\nfurther\t question of construing the provision\t in such a\nmanner as to include all employees and not merely employees\nof public sector companies, does not arise.\n It\tis first necessary to discern the true\t purpose or\nobject\tof the impugned enactment because it is only\twith\nreference to the true object of the\tenactment that\t the\nexistence of a rational nexus of the differntia on which the\nclassification\tis based, with the object sought to be\nachieved by the enactment, can be examined to test\t the\nvalidity of the classification. In Francis Bennion's Statu-\ntory Interpretation, 1984 edition, the distinction between\nthe legislative intention and the purpose or object of\t the\nlegislation has been succinctly summarised at\t p. 237 as\nunder:\n\"The distinction between the purpose or object of an enact-\nment and the legislative intention governing it is that\t the\nformer\trelates\t to the mischief to which the enactment is\ndirected and its remedy, while the latter relates to\t the\nlegal meaning of the enactment.\"\n There is thus a clear distinction between the two. While\nthe purpose or object of the legislation is to provide a\nremedy for the malady, the legislative intention relates to\nthe meaning or exposition\n454\nof the remedy as enacted. While dealing with the validity of\na classification, the rational nexus of the differentia on\nwhich the classification is based has to exist with\t the\npurpose\t or object of the legislation, so determined.\t The\nquestion next\tis of the manner in which the\t purpose or\nobject of the enactment has to be determined and the materi-\nal which can be used for this exercise.\n For\t determining the purpose or object of the legisla-\ntion, it is permissible to look into the circumstances\nwhich.\tprevailed at the time when the law was\t passed\t and\nwhich necessitated the passing of that law. For the limited\npurpose\t of appreciating the background and the antecedent\nfactual matrix leading to the legislation, it is permissible\nto look into the Statement of Objects and Reasons of\t the\nBill which actuated the step to provide a remedy for\t the\nthen existing\tmalady. In A. Thangal Kunju Musaliar\tv.M.\nVenkitachalam Potti & Anr., [1955] 2 S.C.R. 1196, the State-\nment of Objects and Reasons was used for judging the reason-\nableness of a classification made in an enactment to see if\nit infringed or was contrary to the constitution. In\tthat\ndecision for determining the question, even affidavit on\nbehalf of the State of \"the circumstances which prevailed at\nthe time when the law there under consideration had\tbeen\npassed\tand which necessitated the passing of that law\"\t was\nrelied\ton. It was reiterated in State of West Bengal v.\nUnion of India, [1964] 1 S.C.R. 37 1- that the Statement of\nObjects and Reasons accompanying a Bill, when introduced in\nParliament, can be used for 'the limited purpose of under-\nstanding the background and the antecedent state of affairs\nleading\t up to\t the legislation.' Similarly,\tin Pannalal\nBinjraj\t v. Union of India, [1957] SCR 233--a challenge to\nthe validity of classification was repelled placing reliance\non an\taffidavit filed on behalf of the Central Board of\nRevenue disclosing the true object of enacting the impugned\nprovision in the Income-Tax Act.\n Not\t only this, to sustain the presumption of constitu-\ntionality, consideration may\tbe had even to\t matters of\ncommon\tknowledge; the history of the times; and every\tcon-\nceivable state of facts existing at the time of\t legislation\nwhich can be assumed. Even though for the purpose of\tcon-\nstruing\t the meaning of the enacted provision,\t it is\t not\npermissible to use these aids, yet it is permissible to look\ninto the historical facts and surrounding circumstances\t for\nascertaining the evil sought to be remedied. The distinction\nbetween\t the purpose or object of the legislation and\t the\nlegislative intention, indicated earlier, is significant in\nthis exercise to emphasise the availability of larger mate-\nrial to the Court for reliance when determining the purpose\nor object of\tthe legislation as distinguished from\t the\nmeaning of the enacted provision.\n455\n We\tpropose to utilise these permissible aids for\tdis-\ncerning\t the purpose or object of the legislative provision\nin order to examine the validity of the classification\tmade\ntherein.\n Strong reliance has been placed on behalf of the peti-\ntioners\t on the Memorandum explaining the provisions in\t the\nFinance Bill, 1987, wherein the explanatory note relating to\nclause 4(a) of the Bill proposing insertion of clause (10-C)\nin Section 10 of the Income-tax Act, 1961 appears under\t the\nheading\t 'Welfare Measures'. It may be mentioned that\tthis\nheading is only in the explanatory memorandum and not in the\n'Notes on Clauses' appended to the 'Statement of Objects and\nReasons' of the Bill. (See [1987] 165 ITR (Statutes) at\t pp.\n119, 122 & 155). We would presently show that the petition-\ners cannot draw support from this heading in the explanatory\nmemorandum. Moreover, an explanatory memorandum is usually\n'not an accurate guide of the final\tAct'. (See Francis\nBennion's Statutory Interpretation, 1984 Ed. at p. 529).\n It was urged that the impugned provision being described\nas a welfare measure in the explanatory memorandum,\t the\nobject\tof the enactment was the welfare of the employees\nand, therefore, no further classification of the employees\ncould be made. It was argued that the heading 'welfare\nmeasures' is,\ttherefore, decisive of the object of\t its\nenactment. In\tour opinion, this cannot be accepted.\t The\nStatement of Objects and Reasons (See (1987) 165 ITR (Stat-\nutes) at p. 119) is as under:\n\"The object of the Bill is to give effect to the financial\nproposals of the Central Government for the financial\tyear\n1987-88. The Notes on Clauses explain the various provisions\ncontained in the Bill.\"\nThereafter, the Notes on clauses in the Finance Bill,\t1987\nare from pp. 119-151. The Note relating to this clause at p.\n122 is as under:\n\"Clause 4 seeks to amend section 10 of the Income-Tax Act.\nSub-Clause (a)\t of this clause proposes to insert a\t new\nclause (10-C) in this section. Under the proposed amendment,\nany payment received\tby an employee of a public sector\ncompany\t at the time of his voluntary retirement in accord-\nance with any scheme which the Central Govern-\n456\nment may, having regard to. the economic viability of\t the\npublic\tsector\tcompany and other relevant circumstances,\napprove in this behalf, shall be exempt from tax.\nThis amendment will take effect from 1st April, 1987,\t and\nwill, accordingly apply in relation to the assessment\tyear\n1987-88 and subsequent years.\"\nNo where in the 'Notes on Clauses' the proposal in the\tBill\nis described as a welfare measure. It is then in the memo-\nrandum\texplaining the provisions in the Finance Bill,\t1987\nthat the provisions are divided under different heads,\t one\nof which is 'welfare measures'. The subheading relating to\nthis proposal\tis mentioned as 'Exemption of\tcompensation\nreceived by public sector employees on voluntary retire-\nment'.\tIt is mentioned in paragraph 13 of the\t explanatory\nmemorandum that a number of public sector undertakings\thave\nformulated voluntary retirement schemes for their employees;\nthat under section 10(10-B) of the Income-Tax Act any\tcom-\npensation received by a workman at the time of his retrench-\nment is exempt upto the specified limit; and that this limit\nof exemption under section 10 (10-B) is, however, not\t ap-\nplicable in respect of compensation received under certain\nschemes\t approved by the Central Government.\tBy enacting\nsection 10 (10-C), the proposal obviously was to extend\t the\nsame benefit to the payment\tmade under these approved\nschemes\t as was existing for compensation under approved\nscheme\tgiven by section 10 (lOB). The heading\tof 'welfare\nmeasures' applies also to paragraph 14 in the memorandum\nrelating to modification of provisions relating to deduction\nin respect of donations to certain funds etc. It is, there-\nfore, clear that in this explanatory memorandum the headings\nare fairly wide and matters collected under the same heading\nmay be diverse not giving a true indication of the object of\nthe provision.\n It\tis also significant that the proposal to amend\tsec-\ntion 10 by inserting a new clause (10-C) therein was\tcon-\ntained\tin sub-clause (a) of clause 4 of the Finance Bill,\nwhile sub-clause (b) of clause 4 of the Finance Bill\tpro-\nposed to insert a new item in sub-clause (iv) of clause (15)\nof section 10 to provide that interest payable by the public\nsector\tcompanies on certain specified bonds and debentures\nwill not form part of the tax-payer's total income subject\nto the\t specified conditions. This was in pursuance of a\nseries\tof public sector bonds being floated which are\t in-\ntended\tto yield tax-free return to the holders of\tsuch\nbonds. The effect of the amendment so made yielding tax-free\nreturn\tto the holders of public sector bonds is similar to\nthe amendment by\n457\ninsertion of a new clause (10-C), the effect of which is to\ngrant tax exemption to employees of the public sector in\nrespect\t of the amount received under the voluntary retire-\nment scheme approved by the Central Government. Both these\nproposals relating to the amendment of section 10 were in\nsub-clauses (a) and (b) of clause 4 of the Finance Bill.\nOrdinarily in the memorandum explaining the provisions in\nthe Finance Bill both the sub-clauses of clause 4 should\nhave been, therefore, mentioned under the same heading being\nof essentially the same nature. It is interesting to\tnote\nthat the proposal in clause 4(b) was mentioned in paragraph\n17 of the explanatory memorandum under the heading 'Incen-\ntives for growth and modernisation' with the\t sub-heading\n'Measures for\traising resources for the public sector'.\nAdmittedly, the effect of this provision was to grant a\t tax\nbenefit to the holders of the public sector bonds by amend-\ning section 10 in this manner but the real object for giving\nthat benefit to the tax-payer was to provide an incentive\nfor growth and modernisation by adopting a\tmeasure\t for\nraising the resources for the public sector. If the proposal\nin sub-clause of clause 4 of the Finance Bill fell in\tthis\ncategory, there is no reason why the proposal in sub-clause\n(a) of the same clause of the Bill, both sub-clauses relat-\ning to amendment of section 10, can be treated\t differently\nmerely\tbecause in the explanatory memorandum the two\tsub-\nclauses\t are under different headings. This distribution of\nthe sub-clauses of the same clause in the Finance Bill under\ndifferent heads in the explanatory memorandum is sufficient\nto show that no particular significance can be attached to\nthe heading 'welfare measures under which the\tproposal to\ninsert clause (10-C) in section 10 of the Act was placed in\nthat memorandum. We see no reason why insertion of clause\n(10-C)\tin section10 cannot also be described as incentive\nfor growth and modernisation being a measure for improvement\nof the public sector. Obviously the incentive given thereby\nis to the employees of the public sector companies to resort\nmore readily to the voluntary retirement scheme which would\nenable\timprovement of public sector by streamlining\t its\nstaff.\n A catch-phrase possibly used as a populist\t measure to\ndescribe some provisions in the Finance Bill in the explana-\ntory memorandum while introducing the Bill in the Parliament\ncan neither be determinative of, nor can it camouflage\t the\ntrue object of the legislation. It is not unlikely that\t the\nphrase 'welfare measures' was used to emphasise more on\t the\neffect\tof the provisions thereunder on the tax-payer\t for\npopulism.\nIn view of the fact that the challenge is based on\t the\ninitial\n458\nassumption of equality between all employees of the public\nsector and the private sector, it will be useful to refer to\nthe nature and role of the\tpublic\tsector\tundertakings\nvis-a-vis those of the private sector along with the histor-\nical background and surrounding circumstances\t leading to\nenactment of the impugned provision. For this\tpurpose, we\nwould first refer to the counter-affidavit of Shri\tS.K.\nAbrol,\tOfficer-onSpecial-Duty,\t Central Board\t of Direct\nTaxes,\tDepartment of\tRevenue, Ministry of Finance,\t New\nDelhi,\twhich states the reasons for insertion of clause\n(10-C) in section 10 of the Income-Tax Act, 1961. The coun-\nter-affidavit states with reference to some other clauses of\nsection\t 10 of the Act that the legislature for purposes of\nexemption from income-tax has always differentiated between\nprivate sector employees and those in the public sector\t and\nGovernment employment. It states further as follows:\n\"As submitted in the paragraph above, sectionl 10 (10-C) was\nintroduced by the Finance Act, 1987 w.e.f. 1.4.1987 and\t the\nlegislature in its wisdom sought to restrict these benefits\nto only the employees in the public sector. The reason\t for\nintroducing this provision is contained in the Circular of\nthe Central Board of Direct Taxes explaining\tthe Finance\nAct, 1987, relevant extract from which is reproduced hereun-\nder:\n\t 15.1.\t At present under section 10 (10B) any\tcom-\npensation received by a workmen at the time of his retire-\nment is exempted upto the amount calculated in accordance\nwith section\t25F of\t the Industrial Disputes Act\t or\nRs.50,000, whichever is less. The limit is, however,\t not\napplicable in respect of compensation received under certain\nschemes approved by the Central Government.\n\t 15.2\tA number of public sector undertakings.have\nformulated voluntary retirement schemes for their employees.\nWith a view to extend relief to such employees, the Finance\nAct, 1987, by introducing new clause (10C) in\tsection\t 10,\nprovides exemption in respect of any payment\treceived by\nthem at the time of their voluntary retirement in accordance\nwith any scheme which the Central Government may approve,\nhaving regard to the economic viability of the public sector\ncompany\t and other relevant circumstances. This exemption\nwill be available to any employee whether a workman or an\nexecutive.\n459\n 15.3. This\t amendment shall come\t into force w.e,f.\n1.4.1987 and will, accordingly, apply to assessment\tyear\n1987-88 and subsequent year.'\n\"It is submitted that for all purposes, the private sector\nand the public sector have been treated differently and\t are\nknown to be different classes. The Industrial Policy Resolu-\ntion, 1956, which reviewed the earlier\t Industrial Policy,\nclearly\t distinguished industries in the public\t sector\t and\nthose in the private sector. The Industrial Policy Resolu-\ntion mentioned\t that for adoption of socialist\t pattern of\nsociety as the national objective, the requirement was\tthat\nindustries of\tbasic and strategic importance,\t or in\t the\nnature\tof public utility service, should be in\t the public\nsector.\t The Industrial Policy Resolution placed the indus-\ntries in three different categories;\t .....\t Thus,\tthis\ncategorisation\tof industries into public sector, private\nsector was on the basis of Articles 38 and 39 of the Consti-\ntution\tof India, as has been mentioned in the Industrial\nPolicy Resolution, 1956.\"\n \"The respondent submits that there were certain basic\ndistinctions between the undertakings in the private sector\nand in the public sector as has been observed by this Hon'-\nble Court in the case of R.D. Shetry v. International\tAir-\nport Authority of India, [1979] 3 SCR 1014. A public sector\nundertaking is either established by a statute or incorpo-\nrated under law. Public Sector Undertakings\t are wholly\ncontrolled by Government not only in their policy making but\nalso in carrying out the functions entrusted to them by\t law\nestablishing it or by charter of their in corporation. As\nsuch public sector undertakings are bound by any directions\nthat may be issued by Government from time to time in\t re-\nspect of policy matters. The entire share capital of\t the\npublic sector undertakings is held by the Government and it\nis under the direct control and supervision of\t Government.\nThe pay scales of the employees in the public\t sector\t are\nfixed by the administrative Ministry inconsultation with the\nBureau of Public Enterprises, who exercise complete control\nover the actions of public sector undertakings. The public\nsector undertakings are answerable to the Parliament through\ntheir administrative Ministries. The entire budget of\t the\npublic sector undertakings is controlled by the\n460\nadministrative\tMinistries. The Comptroller and Auditor\nGeneral\t audits the accounts of the public sector undertak-\nings and any leakages etc. are brought to the notice of\nParliament. The recruitment and conduct rules of the public\nsector\temployees are subject to overall control of Govern-\nment through Bureau of Public Enterprises ..... \"\n\t \" ..... Section 10 (10C), while extending\t the\nbenefit\t to employees of public sector has, as\t its basis,\nexempted incomes received from Government through public\nsector undertakings. The distinction is based on intelligent\ndifferentiation and the object of this differentiation is to\npromote\t the interests of the employees of public sector\nundertakings so as to bring this at par with\tthe private\nsector\temployees whose emoluments and other conditions of\nservice are not governed by any statute or are not under any\ncontrol.\"\n\"The respondent submits that the legislature is aware of the\ndifferentiation\t between the public sector undertakings\t and\nprivate\t sector undertakings. and in its wisdom. has chosen\nto restrict the benefit only to the public sector\nemployees ..... \"\n\"The respondent submits that the extension of the benefit of\nsection\t 10 (10C) of the Income Tax Act to the employees of\nthe private sector is likely to be misused by way of\tfre-\nquent payment\tto the employees in the\t garb of voluntary\nretirement benefits and it will not be possible to provide\nnecessary safeguards in law to check such practices.\tThis\nwould defeat the very purpose of the Scheme of Voluntary\nRetirement, besides leading to large scale revenue loss.\"\n(emphasis supplied)\n The counter-affidavit filed on behalf of respondent\t No.\n1 disclosing the reasons which led to the insertion of\nclause (10C) in section 10 of the Act confining the benefit\ngranted\t thereby only\tto employees of\t the public sector\nindicates that\t the purposes of the\tlegislation include\nreduction in the existing gap between the lower compensation\npackage in public sector and the higher compensation package\nof the counterpart in private sector in addition to prevent-\ning misuse of the benefit in private sector which is\t not\nsubject to the control of administration by Government\tlike\nthat in the public sector. It is evident from the material\nproduced before us that the compensation package in\t the\npublic\n461\nsector,\t particularly at the higher levels, is\t much lower\nthan that in the private sector.\n Some insight into\t the existing state of\t the public\nsector undertakings and their viability with suggestions for\nimprovement are found in the First Dr. L.K. Jha Memorial\nLecture, delivered on the 6th December, 1988, by Shri\tR.N.\nMalhotra, Governor, Reserve Bank of India, on\t\"Growth\t and\nCurrent Fiscal Challenges\". While giving an overview of\t the\nprogress during the last four decades, the speaker referred\nto the 'performance of the public sector' as under:\n\"The public sector which now accounts for about half\t the\ntotal national investment has made crucial contributions to\nthe development of the economy by expanding the\t infrastruc-\nture, establishing basic industries and producing goods\t and\nservices of strategic importance. The public\tsector\thas,\nhowever, not been able to generate surpluses\tcommensurate\nwith its share in plan outlays.\"\n On\t\"planning and resources\" and \"financing of public\nsector\", he said:\n\"An analysis of the financing pattern of public sector\tplan\nexpenditures indicates that over time the shares of balance\nfrom current revenues and additional resource\tmobilisation\nhave been declining while reliance on borrowed funds\t has\nbeen rising ..... \"\n Therefore,\the referred to the deterioration in\t the\nfinances with\treference to the growing expenditure, as\nunder:\n\" ..... Interestingly, about two thirds of the savings of\nthese enterprises represent provisions for\tdepreciation\nwhich are supposed to cover replacement costs, Though sever-\nal of\tthese enterprises are\toperating efficiently,\t The\nsavings\t of public sector enterprises as a group are\t not\ncommensurate with the investment made in them. According to\nthe public enterprises survey, the capital employed in\t the\nCentral\t Public Sector Enterprises amounted\t to about\nRs.52,000 crores at the end of 1986-87. About 100 of these\nunits made losses amounting to Rs. 1,708 crores and\t 109\nunits were making after tax profit of Rs.3,478 crores of\nwhich Rs.2,142 crores came from the oil sector. The rate of\n462\nreturn\twas 6.0 per cent before tax and 3.4 per\t cent after\ntax. If the oil sector which benefits from the oil price\npolicy\t is excluded,\t the rate of\t return\t would\t be\nnegative ..... There is imperative need for\t substantial\nimprovement in\t the working and profitability of public\nsector undertakings.\"\nReferring to the existing state of \"public debt\", he said:\n\"The Long Term Fiscal Policy (LTFP) had raised concern about\nincreasing reliance on borrowings to finance the budgetary\noutlays and had suggested containment of domestic borrowings\nincluding those from the Reserve Bank ..... In the event,\nthe level of\tborrowings has been much higher than\tthat\nenvisaged in the Seventh Plan\t.....This has happened\t de-\nspite the fact that some public sector enterprises, previ-\nously dependent on the budget, were allowed to raise\t re-\nsources directly from the capital market through bond float-\nations of the order of Rs.2,000 crores each year from 1986-\n87 .....\n\t Growing levels of borrowing by the Government\t and\npublic sector undertakings raise two major concerns. First,\nwhether\t the present level of Government borrowing is\tsus-\ntainable? Unless there are adequate surpluses in the revenue\naccount which can be utilised for debt servicing, the budge-\ntary deficit would widen. The increased borrowings for\tdebt\nservicing would create the vicious circle of progressively\nhigher\tinterest burdens and still higher borrowing.\t The\nsecond\tissue is whether the increasing level of Government\nborrowing coupled with that of public\tsector\tundertakings\nwould result in crowding out of private sector\tinvestments.\nSince the total investment in the economy is shared about\nequally between the public and private sectors, it is impor-\ntant to ensure that the 'requirements of the private sector\nare also adequately met so that the overall growth targets\nof the national economy are achieved. ' '\nDealing with the efficiency issues, he said as under:\n\"I shall now refer briefly to the efficiency\tissues\twith\nspecial reference to the public sector\t..... The persist-\nence of a high ICOR would, however, indicate\tconsiderable\nscope of improvement in efficiency .....\n463\n\t Cost and time over-runs are major contributors to\nthe high ICOR\t.......... The public sector has rendered\ngreat service in providing infrastructure and\testablishing\nbasic and strategic industries. Managerial skills in\tthat\nsector are generally of a high order. The aim should there-\nfore be to promote productivity and profitability of\tthis\nsector\tby introducing\t the requisite\tpolicy\tchanges\t and\nimprovements. One of the important aims of this sector which\nneeds reiteration is its financial viability. Efficient\t use\nof manpower is imperative. This is difficulty to ensure if\novermanning persists along with restrictive practices which\nresist\ttechnological change and systems improvement .....\n\"\n(emphasis supplied)\n The\t factual matrix and historical background appearing\nfrom the above material prove that the public sector needs\ntoning\tup. One of its affliction is overmanning or surplus\nstaff,\tthe obvious remedy of which is streamlining, by\nremoving the non-productive and unwanted personnel, if\npossible, without any complication. Retrenchment is often an\nunsafe\tcourse\tto adopt.since it may\tlead to protracted\nlitigation and uncertain outcome. We cannot overlook\tthis\nwell known, though unfortunate fact.\n A safe mode to relieve the public sector of its unpro-\nductive\t and surplus manpower is to induce those persons to\nseek voluntary\t retirement under a scheme providing\tsome\nincentive or inducement for seeking voluntary\t retirement.\nClause\t(10-B)\tof section 10 of Incometax Act,\t 1961,\tdoes\ngrant tax exemption in respect of any compensation received\nat the time of retrenchment upto the prescribed limit.\tThat\nlimit,\thowever, does not apply to compensation received\nunder certain schemes approved by the Central Government. It\nis, therefore, reasonable that same benefit be also extended\nin respect of any payment received by an employee of\t the\npublic\tsector\ton his voluntary retirement under a scheme\nsimilarly approved by the Central Government.\n The public sector's role visualised on advent of freedom\nwas as an 'instrument of development and national strength',\na 'key to our self-reliance', 'catalyst of social change'\nand for attaining 'commanding heights of the\teconomy' in\nkeeping with our national aim of Welfare State and a social-\nist economy. Unfortunately, inspite of a\n464\nstrong rationale for setting up and promoting public sector\nin the national economy, it has not so far fully justified\nthe legitimate expectation and a large number of the public\nsector\tundertakings are losing concerns. A study into\t the\ncauses which all the public sector has shown that one of its\ndrawbacks is overstaffing. Streamlining the public sector to\nget rid of its unproductive and unwanted personnel\t is,\ntherefore, a felt need. A scheme whereby such unwanted\npersonnel can be induced to leave voluntarily granting\tsome\nincentive for doing so is, therefore, ultimately beneficial\nto the health and prosperity of the public sector and conse-\nquently\t to the national-economy. These factors alone\t are\nsufficient to provide an intelligible\tdifferentia between\npublic\tand private sectors and its rational nexus with\t the\nobject\tof improving the performance of public sector,\tpro-\nmoting national economy.\n It\tis useful to remember that the country having opted\nfor mixed economy, the healthy and vigorous functioning of\nthe public sector undertakings is conducive to the benefit\nof the private sector as well, in addition to promoting\t the\nwell-being of the national economy. A point of view emerging\ncurrently is that just as public sector undertakings\t are\noutside the purview of the Monopolies and Restrictive Trade\nPractices Act by virtue of the exemption conferred on them,\nthe Income-tax\t Act should confer similar exemption to it\nfrom tax liability by suitable amendment in section 10 of\nthe Act as is given to local authorities, housing boards,\netc. This view is supported on the ground that the exemption\nfrom tax liability or public\t sector\t undertakings would\nultimately benefit the consumers of the products of\t the\npublic\tsector undertakings. This is not an irrelevant\tcir-\ncumstances to indicate that according to the general percep-\ntion, there is a distinction between the public and private\nsectors. In some earlier decisions of this Court, the public\nsector has been treated as a distinct class for the purpose\nof exemption under Statutes.\n In\tHindustan Paper Corporation Ltd. v. Government of\nKerala & Ors., [1986] 3 SCC 398, a provision granting exemp-\ntion to Government companies and cooperative societies alone\nfor selling forest produce at less than selling price fixed\nunder the Kerala Forest Produce (Fixation of Selling Price)\nAct, 1978 was held to be constitutionally valid and\t not\nviolative of Articles 14 and 19(1)(g) of the Constitution of\nIndia.\tIt was held that the Government or public sector\nundertakings formed a distinct class. In this\tcontext, it\nwas held as under:\n\" ..... As far as Government undertakings and companies\nare concerned, it has to be held that they form a class by\n465\nthemselves since any profit that they may make would in\t the\nend result in the benefit to the members of the\t generalpub-\nlic. The profit, if any, enriches the public coffer and\t not\nthe private coffer. The role of industries in\t the public\nsector is very sensitive and critical from the point of view\nof national economy. Their survival very often depends\tupon\nthe budgetary.\t provision and not upon private resources\nwhich are available to the\tindustries in\tthe private\nsector\t..... \"\n(emphasis supplied)\nSimilarly, in\tM. Jhangir Bhatusha etc. etc. v. Union of\nIndia & Ors. etc. etc., 1982 Judgments Today 2 SC 465, a\nconcession in\timport\tduty granted to\t the State Trading\nCorporation was upheld on the ground that public policy\t can\nsupport the differentiation.\n It\tis clear that the Government or the public sector\nundertakings have been treated as a distinct class separate\nfrom those in\t the private sector and the fact that\t the\nprofit earned in the former is for public benefit instead of\nprivate\t benefit, provides an intelligible differentia\tfrom\nthe social point of view which is of prime importance\t for\nthe national economy. Thus, there exists an\tintelligible\ndifferentia between the two categories which has a rational\nnexus with the main object of promoting the national econom-\nic policy or the public policy. This element also appears in\nthe impugned enactment itself wherein 'economic viability of\nsuch company' is specified as the most relevant circumstance\nof grant of approval of the scheme by the Central Govern-\nment. This intrinsic element in the provision\titself\tsup-\nports the view that the main object thereof is\t to promote\nand improve the health of the public sector companies\teven\nthough its effect is a benefit to its employees.\n As already indicated, clause (10-C) of section 10 of the\nAct itself mentions economic viability of a public sector\ncompany\t as the most relevant circumstance to\tattract\t the\nprovision. The\t economic status of employees of a public\nsector company who get the benefit of the provision is\talso\nlower as compared to their counterpart in the private\tsec-\ntor. If this be the correct perspective as we think it is in\nthe present case, the very foundation of the challenge to\nthe impugned provision on the basis of economic equality of\nemployees in both sectors is non-existent. Once the stage is\nreached where the differentiation is rightly made between a\npublic sector company and a private sector company and\tthat\ntoo essentially on the ground of economic viability of\t the\npublic sector company and other relevant circumstances, the\n466\nargument based on equality does not survive. This is inde-\npendent\t of the disparity in the compensation\t package of\nemployees in the private sector and the public sector.\t The\nargument of discrimination is based on initial equality\nbetween\t the two classes alleging bifurcation thereafter\nbetween\t those\twho stood integrated earlier as\t one class.\nThis basic assumption being fallacious, the question of\t any\nhostile discrimination by granting the benefit only to a few\nin the same class denying the same to those left out\tdoes\nnot arise.\n We\tshall now refer to some other clauses of section 10\nof the\t Act to which reference was made at the\t hearing in\nsupport\t of the rival contentions. Sub-clause (i) of clause\n(10) of section 10 confines the benefit thereunder only to\nthe Government servants, defence personnel and employees of\na local authority. Sub-clause (i) of clause (10-A) similarly\nconfines the benefit to Government servants, defence person-\nnel and employees of a local authority or a\t corporation\nestablished by a statute. Clause (10-A) also makes a\tdis-\ntinction between the Government employees and other employ-\nees. Clause (10-B) also removes the limit in respect of\t any\npayment as retrenchment compensation under a scheme approved\nby the Central Government. Some other clauses in section 10\nof the Act further show that the scheme of section 10\tcon-\ntemplates a distinction between employees based on\t the\ncategory of their employer.\tAccordingly, clause (10-C)\ntherein\t is not a departure from the existing scheme but in\nconformity with some clauses earlier enacted therein.\n Once the impugned\t provision contained in the newly\ninserted clause (10-C) of section 10 of the Income-Tax\tAct,\n1961 is viewed in the above perspective keeping in mind\t the\ntrue object of the provision, there is no foundation for the\nargument that\tit is either discriminatory or arbitrary.\nThere is a definite purpose for its enactment. One of\t the\npurposes is streamlining the public sector to cure it of one\nof its\t ailments of overstaffing which is realised\tfrom\nexperience of\talmost four decades of its functioning. In\nview of the role attributed to the public sector in\t the\nsphere\tof national economy, improvement in the\t functioning\nthereof\t must be achieved in all possible ways. A measure\nadopted\t to cure it of one of its ailments is undoubtedly a\nforward\t step towards promoting the national economy.\t The\nprovision is an incentive to the unwanted personnel to\tseek\nvoluntary retirement thereby enabling the public sector to\nachieve\t the true object indicated. The personnel seeking\nvoluntary retirement no doubt get a tax benefit but\tthen\nthat is an incentive for seeking voluntary retirement and at\nany rate that is the effect of the provision or its fall-out\nand not its true\n467\nobject.\t It is similar to the incentive given to the\ttaX-\npayers to invest in the public sector bonds by non-inclusion\nof the\t interest earned thereon in the tax-payer's total\nincome\twhich promotes the true object of raising the\t re-\nsources\t of the public sector for its growth and modernisa-\ntion. The real distinction between the true object of an\nenactment and the effect thereof, even though appearing to\nbe blurred at times, has to be borne in mind,\tparticularly\nin a situation like this. With this perspective, keeping in\nview the true object of the impugned enactment, there is no\ndoubt that employees of the private sector who are left\t out\nof the ambit of the impugned provision do not fall in\t the\nsame class as employees of the public sector and the benefit\nor the fall-out of the provision being available only to the\npublic\tsector\temployees cannot render\t the classification\ninvalid or arbitrary. This classification cannot, therefore,\nbe faulted.\n Some of the cases cited by the petitioners in support of\nthe contention of equality of employees in the\t public\t and\nprivate\t sectors in the present context also are inapplica-\nble. The decision in Hindustan Antibiotics\tv. Workmen,\n[1967]\t1 SCR 652 related to wage fixation and\t is distin-\nguishable. S.K. Dutta, I.T.O. v. Lawrence Singh Ingty,\n[1968] 68 ITR 272--was distinguished and explained in [1976]\n103 ITR 82 relied on by us. Moreover, [1976]\t103 ITR 82\nwhich also related to a provision in Section 10 of Income-\ntax Act, 1961 itself says as under:\n\"Classification\t for purposes of taxation or for exempting\nfrom tax with\t reference to the source of the income is\nintegral to the fundamental scheme of the Income-tax\tAct.\nIndeed,\t the entire warp and woof of the 1961 Act has\tbeen\nwoven on this pattern.\"\n\" ..... Suffice it to say that classification of sources\nof income is integral to the basic scheme of the 1961\tAct.\nIt is\tnobody's case that the entire scheme of the Act is\nirrational and violative of article 14 of the Constitution.\nSuch an extravagent contention has not been canvassed before\nus. Thus, the classification made by\tthe aforesaid\tsub-\nclause\t(a) for purposes of exemption is not unreal or\t un-\nknown. It conforms to a well-recognised pattern. It is based\non intelligible differentia. The object of this differentia-\ntion between income accruing or received from a source in\nthe specified areas and the income accruing or received from\na source outside such areas, is to benefit not only\t the\nmembers of the Scheduled Tribes residing in the specified\n468\n areas but also to benefit economically such areas ..... \"\n The\t other submission of the petitioners is to read\t the\nprovision in a manner which would cover all employees\t in-\ncluding employees of the private sector within the ambit of\nthe impugned provision. This further question does not arise\nin view of our conclusion that there is no discrimination\nmade out. We may, however, mention that the Finance Bill,\n1987 while inserting a new clause (10-C) in section 10 of\nthe Income-tax\t Act simultaneously inserted a\t new clause\n(36-A)\tin section 2 of the Act with effect from 1.4.1987\ndefining 'public sector company', which expression has\tbeen\nused in the newly inserted clause (10-C) of section 10. In\nview of the simultaneous definition of 'public sector compa-\nny' in the Act, there can be no occasion to construe\tthis\nexpression differently without which a private sector compa-\nny cannot be included in it. It is, therefore, not possible\nto construe the impugned provision while upholding\t its\nvalidity in such a manner as to include a private sector\ncompany also within its ambit.\n Consequently, the writ petition is dismissed, but in the\nfacts and circumstances of the case, there shall be no order\nas to costs.\n All the interim orders shall stand vacated.\nT.N.A.\t\t\t\t\t\t Petition\ndismissed.\n469" }, { "title": "Jamnaprasad Kanhaiyalal vs Commissioner Of Income-Tax, M.P., ... on 8 May, 1981", "url": "https://indiankanoon.org//doc/1678889/", "text": "Jamnaprasad Kanhaiyalal vs Commissioner Of Income-Tax, M.P., ... on 8 May, 1981\nEquivalent citations: 1981 AIR 1759, 1981 SCR (3) 849, AIR 1981 SUPREME COURT 1759, 1981 TAX. L. R. 1357, (1981) 23 CURTAXREP 146, 1981 SCC (TAX) 236, 1981 UPTC 932, 1981 BBCJ 221, (1981) 6 TAXMAN 61, (1981) 130 ITR 244, 1981 (3) SCC 441\nAuthor: A.P. Sen\nBench: A.P. Sen, R.S. Pathak, E.S. Venkataramiah\n PETITIONER:\nJAMNAPRASAD KANHAIYALAL\n\n\tVs.\n\nRESPONDENT:\nCOMMISSIONER OF INCOME-TAX, M.P., BHOPAL\n\nDATE OF JUDGMENT08/05/1981\n\nBENCH:\nSEN, A.P. (J)\nBENCH:\nSEN, A.P. (J)\nPATHAK, R.S.\nVENKATARAMIAH, E.S. (J)\n\nCITATION:\n 1981 AIR 1759\t\t 1981 SCR (3) 849\n 1981 SCC (3) 441\n CITATOR INFO :\n R\t 1984 SC 989\t (1,2)\n F\t 1984 SC1990\t (2)\n\n\nACT:\n Voluntary Disclosure Scheme under\t section 24 of\t the\nFinance (No. 2) Act, 1965, Scope and effect of-Whether the\nacceptance of a disclosure statement made by a declarant\nunder section 24 of the Finance Act, 1965 confers immunity\non another person from tax liability in respect of the same\nsum of\tmoney-Whether section 24 has an overriding effect\nover section 68 of the Income\t Tax Act, 1961-Bar of double\ntaxation-Section 18 of the Voluntary Disclosures of Income\nand Wealth Act, 1976 (Act 8 of 1976).\n\n\n\nHEADNOTE:\n During the\t course of the assessment proceedings of the\nassessee-firm for the assessment year 1967-68, the Income\nTax officer noticed cash credits of Rs. 9,250 each in the\nnames of five sons of the Managing Partner, in the books of\nthe assessee. The Income Tax\t officer found\t that these\ncreditors, who\twere minors, had no independent source of\nincome. The assessee contended before the ITO that the five\ncreditors had\t voluntarily disclosed\t the credits under\nsection 24 of the Finance (No. 2) Act, 1965 and that the\ndisclosures were accepted by\tthe Commissioner. The\t ITO\nrejected the contention of the assessee and held that the\ncash credits in question were unexplained cash credits, that\nthey represented the income of the assessee from undisclosed\nsource, and accordingly made an addition of Rs. 46,250. The\nappellate Assistant Commissioner held that the acceptance of\nthe voluntary disclosures under section 24(3) of the Act and\nthe payment of tax thereon precluded\tthe Department\tfrom\ndisputing the\t fact that the income belonged to\t the\ncreditors, and,\t as the same income could not be taxed twice\nonce in the hands of the creditors and again in the hands of\nthe assessee, set aside the order of the ITO. The Tribunal\ndisagreed with\tthe Appellate\tAssistant Commissioner\t and\nupheld the order of the ITO.\tHence the reference at\t the\ninstance of the assessee under section 257 of the Income Tax\nAct, 1961 .\n Answering the reference against the assessee, the Court\n^\n HELD: Per Sen, J.\n 1. Section\t 24 of\tthe Finance (No. 2) Act, 1965 cannot\nbe construed as conferring any benefit, concession or\nimmunity on any person\t other than the person\t making\t the\ndeclaration under the provisions of the Act. The scheme of\nthe Act\t makes it abundantly clear that it was to protect\nonly those who preferred to\t disclose the\tincome\tthey\nthemselves had\tearned in The past and which they had failed\nto disclose at the proper time. The scheme only permitted\nthe bringing\n850\nforward of income to tax; it did not require investigation\nof the claim of the declarant. The Act granted immunity only\nto the declarant and not to other persons to whom the income\nreally belonged. [859 G-H, 860 A]\n 2. The legal fiction created by sub-s. (3) of s. 24 of\nthe Finance (No. 2) Act, 1965 by virtue of which the amount\ndeclared by the declarant had to be charged to income-tax\n\"as if\tsuch amount were the total income of the declarant\",\nwas limited in scope and it cannot be invoked in assessment\nproceedings relating to any person other than the person\nmaking the declaration, and did not take away the power\nvested in the ITO under section 68 of the Income Tax Act,\n1961 to\t reject the' explanation of an assessee for a cash\ncredit\ton the ground that\t the explanation was\t not\nsatisfactory in the case of such other person. [861 F-G]\n 3. The finality under sub-s. (8) of section 24 of the\nAct was\t to the\t order of the Central Board of Revenue under\nsub-s. (6) thereof and not to the assessment of tax made on\nthe basis of a\t declaration made by the creditors under the\nscheme.\t There\t was, therefore, nothing to\t prevent an\ninvestigation into the true nature and source of the cash\ncredits. [861 B, D]\n 4. The acceptance of voluntary disclosures under s 24\nof the\tAct and\t the payment of tax thereon by the creditors\ncould not, in law, justify the deletion of the amount of Rs.\n46,250\tas it\t represented the assessee's\tincome\tfrom\nundisclosed sources. In a case of this description, there\nwas no\tquestion of double taxation which was a situation of\nassessee's own\tmaking in getting false declarations made in\nthe names of the creditors with a view to avoid higher slab\nof taxation. once it was found that the income declared by\nthe creditors did not\tbelong to them, there was nothing to\nprevent the same being taxed in the hands of the assessee to\nwhich it actually belonged. [861 H, 862 A-B, 863 C]\n Manilal Gafoorbhai\t Shah v. Commissioner of Income Tax,\n(1974) 95 I.T.R. 624\tGujarat; Badri\t Prasad\t & Sons v.\nCommissioner of\t Income Tax, (1975) 98 I.T.R. 657 Allahabad;\nPioneer Trading\t Syndicate v. Commissioner of\tIncome\tTax,\nLucknow, (1979)\t 120 I.T.R. 5 (Full Bench Allahabad)\t and\nAdditional Commissioner of Income\tTax v.\t Samarathmal\nSantoshchand, (1980)\t124 I.T.R. 297 Madhya Pradesh,\napproved.\n Rattan Lal\t & Ors\tv. Income Tax officer, 98 I.T.R. 681\nDelhi; Shakuntala Devi & Ors v. C.I.T, (1980) 125 I.T.R. 18\nDelhi and Mohd. Ahsan\tWani v. C.I.T., (1977) 106 I.T.R. 84\nJammu & Kashmir, overruled.\n 5. The declaration made under sub-s. (2) of s.24 of the\nIncome Tax Act, 1961 had to relate to income actually earned\nby the\tassessee. It did not require any investigation into\nthe correctness\t of the declarations or any determination of\nthe amounts belonging to the declarant. The mere charge to\ntax on\tthe amounts under the\tVoluntary Disclosure Scheme\ncould not have the effect of converting the money from the\ndeductions from the books of the assessee into the income of\nThe declarants\t if it\t did not belong to it. It\twas,\ntherefore, open\t to the\t Income Tax officer to\t investigate\ninto the source of the cash credit amounting to Rs. 46,250\nstanding in the books\tof the\tassessee in the names of the\nsons of the Managing Partner. [859 C-D, 860 F-G]\n851\n 1. The making of\tan assessment against a declarant on\nhis disclosure\tof statement under section 24 of the Finance\n(No. 2)\t Act, 1965 cannot deprive Income Tax\t officer of\njurisdiction to\t assess the same receipt in the hands of\nanother person\tif, in\ta properly constituted assessment\nproceeding under the Income Tax Act,\tthe receipt can be\nregarded as the taxable income of such other person. [852 G-\nH, 853 A]\n 2. The liability\timposed\t under\tsection\t 24 of\t the\nFinance (No. 2) Act, 1965 is\tidentifiable with the income\ntax liability under the Income Tax Act. The\t scheme\t for\nvoluntary disclosure of income\t and its taxation is\tonly\nanother mode provided by law for imposing income tax and\nrecovering it.\tConsequently the general principles which\napply to assessments made under the Income Tax Act would,\nexcept for provision to the contrary, be applicable to\nassessments made under section\t 24 of\tthe Finance (No. 2)\nAct, 1965. Accordingly when the assessment to income tax is\nmade under the latter enactment, it will be governed by the\ngeneral principle that a finding recorded therein governs\nonly the particular person assessed. [852 B-D]\n 3. The finality enacted by sub.s. (8) of section 24 of\nthe Finance (No. 2) Act, 1965 attaches to the assessment of\nthe declarant only. It cannot in law operate in favour of or\nagainst any other person. [852 F]\n 3:1. The jurisdiction of\tan Income Tax officer\twhen\nmaking an assessment is concerned primarily with the issue\nwhether the receipt under consideration constitutes\t the\nincome of the assessee\t before him. Any finding reached by\nthe Income Tax officer touching a person not the assessee in\nthe process of determining that issue cannot be regarded as\nan operative finding in favour of or against such person.\nThe only exception of\tthis rule centers on\tthe limited\nclass, and for the limited purpose, defined by the Supreme\nCourt in Income Tax Officer, A-Ward,\tSitapur v. Murlidhar\nBhagwan Das, 52 I.T.R. 335 at 346. [852 D-F]\n Ahmed Ibrahim S. Dhoraji v. The Commissioner of Wealth\nTax Gujarat, [1981] 3 SCR p. 402 and Income Tax Officer, A-\nWard, Sitapur v. Murlidhar Bhagwan Das, 52 ITR 335 at 346,\napplied.\n\n\n\nJUDGMENT:\n CIVIL APPELLATE JURISDICTION: Tax Reference Case No. 19\nof 1975.\n Tax Reference u/s. 256 of the Income Tax Act, 1961 made\nby the\t Income\t Tax Appellate\t Tribunal, Jabalpur Bench,\nJabalpur in R.A. No. 221/Jab/73-74 arising out of I.T.A. No.\n1560 (Jab)/1972-73 decided on\t10-1-1974; Assessment\tYear\n1967-68.\n S. T. Desai, B.L. Noma and K.J. John for the Petitioner\n852\n V.s. Desai, Champat Rai and Miss A. Subhashini for the\nRespondent.\n The Judgment of A.P. Sen and E. S. Venkataramiah, JJ.\nwas delivered by Sen,\tJ. R.S.\t Pathak, J. gave a separate\nopinion.\n PATHAK, J:\t I agree. The acceptance of a disclosure\nstatement made by a declarant under s.24 of the Finance (No.\n2) Act,\t 1965 cannot confer immunity on another person from\ntax liability in respect of the same sum of money. As was\nheld by\t this Court in Ahmed Ibrahim\tS. Dhoraji v.\t The\nCommissioner (of Wealth Tax Gujarat the liability imposed\nunder s.24 of the Finance (No. 2) Act, 1965 is identifiable\nwith the income tax liability under the Income-tax Act. The\nscheme for voluntary disclosure of income and its taxation\nis only another mode provided by law for imposing income tax\nand recovering\tit. Consequently, the\t general principles\nwhich apply to assessments made under\t the Income-Tax\t Act\nwould except\tfor the provision to the contrary, be\napplicable to assessments made\t under s.24 of the Finance\n(No. 2)\t Act, 1965. Accordingly, when\t the assessment to\nincome tax is made under the\tlatter enactment, it will be\ngoverned by the general principle that a finding recorded\ntherein governs\t only the particular person assessed.\t The\njurisdiction of an Income Tax officer when making an\nassessment is concerned primarily with the issue whether the\nreceipt under consideration constitutes the income of the\nassessee before\t him. Any finding reached by the Income Tax\nofficer touching a person not the assessee in the process of\ndetermining that issue cannot\tbe regarded as an operative\nfinding in favour of or against such person. The\tonly\nexception to this rule centres on the limited class, and for\nthe limited purpose, defined by this\tCourt in Income-Tax\nOfficer, A-Ward\t Sitapur v. Murlidhar Bhagwan Das. Viewed in\nthe light of that principle it is apparent that the finality\nenacted by sub-section (8) of section 24 of the Finance (No.\n2) Act,\t 1965 attaches\tto the\tassessment of the declarant\nonly. It cannot in law operate in favour of or against any\nother person.\n I am of opinion that the making of an assessment\nagainst a declarant on\t his disclosure statement under s.24\nof the\tFinance (No. 2) Act, 1965 cannot deprive an Income\nTax officer of jurisdiction to assess\t the same receipt in\nthe hands of another person if, in\n853\na properly constituted assessment proceeding under\t the\nIncome Tax A Act, the receipt can be regarded as the taxable\nincome of such other person.\tI would answer the first\nquestion in the affirmative, in favour of the Revenue and\nagainst the assessee. That being so, no answer is necessary\nto the\tsecond question. The Commissioner of Income-Tax is\nentitled to his costs of the reference.\n SEN, J. This is a direct reference under s. 257 of the\nIncome Tax Act, 1961 made by\t the Income Tax Appellate\n(Tribunal, Jabalpur, for short, The Appellate Tribunal), at\nthe instance of the assessee. The reference is necessitated\ndue to\tdivergence of opinion, as reflected in the various\ndecisions of different High Courts, with respect to\t the\nscope and effect of the Voluntary Disclosure Scheme under s.\n24 of the Finance (No. 2) Act, 1965 (the 'Act', for short).\n The assessee, Messrs. Jamnaprasad\t Kanhaiyalal, is a\npartnership firm. The firm consists of 4 partners, namely,\nKanhaiyalal and\t his 3\tmajor sons, Rajkumar, Swatantrakumar\nand Santoshkumar with his minor son Satishkumar admitted to\nthe benefits of the partnership. In the course of assessment\nproceedings for\t the assessment\t year 1967-68,\tthe relevant\naccounting year\t of which was the year ending Diwali, 1966,\nthe Income Tax officer (ITO, for short) noticed in the books\nof account of the asssesee five Cash credits of Rs. 9,250\neach in\t the names of five sons of Kanhaiyalal, as detailed\nbelow:\n\t\t\t\t\t\t Rs.\n\t Sailendrakumar\t\t5 yrs.\t 9,250/-\n\t Satishkumar\t\t\t9 yrs.\t 9,250/-\n\t Sunilkumar\t\t\t7 yrs.\t 9,250/-\n\t Swatantrakumar\t\t16 yrs.\t 9,250/-\n\t Santoshkumar\t\t\t18 yrs.\t 9,250/-\n\t\t\t\t\t\t --------\n\t\t\t\t\t\t 46,250/-\n\t\t\t\t\t\t ---------\nThe ITo\t accordingly called upon the assessee to explain the\ngenuineness as\twell as\t the source of the cash credits. On\nbeing questioned, Kanhaiyalal the\t Managing Partner,\ndisavowed ail knowledge as to the capacity of the creditors\nto advance the amounts in question.\n854\nOn the\tcontrary, he admitted that the creditors had no\nindependent source of income of their\t own. In fact, he\nfurther stated\tthat he\t could not explain the source of the\ncash credits.\n It was contended before the ITo\tthat the creditors\nhaving\tmade voluntary disclosures under the Voluntary\nDisclosure Scheme and the disclosures made by them having\nbeen accepted by the Commissioner of Income Tax and tax paid\nthereon, the amount of\t Rs. 46,250 could not be treated as\nincome of the assessee\t from undisclosed sources. The ITo,\nhowever, held that the\t disclosures made under the scheme\ngranted\t immunity from further taxation only to\t the\ndeclarant, and\tnot to\tperson to whom the income actually\nbelonged. He further held that the assessee having failed to\nprove the genuineness and source of the cash credits, the\namount of Rs. 46,250 credited in the books of account of the\nassessee in the names of the creditors, who had no income of\ntheir own must be treated as\tthe assessee's\tincome\tfrom\nundisclosed sources. According to him, such cash credits\nwere treated in their names after making false declarations\nunder the Scheme, with\t a view\t to avoid a higher rate of\ntaxation. He accordingly made\tan addition of Rs. 46,250 as\nassessee's income from undisclosed sources.\n The Appellate Assistant Commissioner disagreed with the\nITO, holding that when\t an amount was disclosed by a person\nunder s. 24 of\t the Act, there was an immunity not only as\nregards the declarant, but there was also a finality as to\nthe assessment. In his view, the entire statement of\nKanhaiyalal had\t to be\tignored, as it was not clear in what\ncapacity the questions were put to him and\tthe answers\nelicited because any investigation into the source of the\ndeposits was prohibited and illegal\tunder the Act. He\naccordingly held that\t the acceptance of the voluntary\ndisclosures made by the creditors in question to\t the\nCommissioner and the payment of tax thereon precluded the\nDepartment from\t disputing that\t the income belonged to the\nsaid creditors-and as the same income cannot be taxed twice,\nonce in the hands of the creditors and again in the hands of\nthe assessee, the order passed by the ITO in that behalf was\nunsustainable.\t The Appellate Assistant Commissioner,\ntherefore, directed the deletion of Rs.\t46,250.\t The\nDepartment went up in appeal before the Appellate Tribunal.\n The Appellate Tribunal, however,\tdisagreed with\t the\nAppellate Assistant Commissioner and upheld the decision of\nthe ITo. It was of the opinion that the ITo was justified in\ntreating the cash credits appearing in the books of account\nof the assessee in the names of\n855\nthe creditors as unexplained cash credits, since it\t was\nfound that the A income declared by the creditors did not\nbelong to them, and there was\t nothing to prevent the same\nbeing taxed in the hands of\tthe assessee to which it\nactually belonged. According to the Tribunal\tthe immunity\nunder s. 24 of the Act was conferred on the declarant only,\nand there was nothing to preclude an investigation into the\ntrue nature and source of the credits. The Appellate\nTribunal, after\t taking into consideration the statement of\nKanhaiyalal, and having regard\t to the age of the creditors\nand the fact that none of them had any independent source of\nincome at any time, held that\t the ITo was justified in\nholding that the asssessee failed to discharge the burden of\nproof under s. 68 of the Income Tax Act, 1961 in regard to\nthe nature and source of the cash credits and, therefore, it\nhad to\tbe treated as the assessee's income from undisclosed\nsources. Thereupon, the assessee applied to the Appellate\nTribunal under\ts. 256\tof the Income Tax Act, 1961 to refer\nthe question of law arising out of its order, to the Madhya\nPradesh High Court for its opinion.\n There being a conflict of opinion between the different\nHigh Courts as to the true nature of the immunity granted\nunder s. 24 of\t the Act, the Appellate Tribunal has made a\nreference under\t s. 257\t of the Income Tax Act, 1961 to this\nCourt, of the following questions of law, for its opinion,\nnamely:\n 1.\t Whether on the facts\t and in the circumstances of\n\t the case, it was open to the Revenue authorities\n\t to investigate into the genuineness of the five\n\t credits aggregating to Rs. 46,250 and records a\n\t finding in regard thereto, when the Disclosure\n\t petitions made by the five creditors under Section\n\t 24 of\t the Finance (No. 2) Act, 1965, had\tbeen\n\t acted upon by the Revenue authorities ?\n 2.\t If the answer to the first\tquestion is in\t the\n\t negative and\tin favour of the assessee, whether\n\t the addition\tof Rs.\t46,250 to the income of the\n\t assessee as\t representing\t its income\tfrom\n\t undisclosed sources,\t for the assessment years\n\t 1967-68, is valid and justified in law ?\n The main question in controversy lies within a narrow\ncompass. The question, in fact, is whether the provisions of\ns. 24 of the Act can be construed as conferring any benefit,\nconcession or\n856\nimmunity on any person\t other than the person\t making\t the\ndeclaration under the provisions of the Act.\t It may be\nmentioned that\tto avoid any room for doubt, the legislature\nhas introduced\ts. 18 in the Voluntary Disclosures of Income\nand Wealth Act, 1976 (Act No. 8 of 1976) which specifically\nprovides that save as otherwise provided in the Act, nothing\ncontained in the Act shall be\t construed as conferring any\nbenefit, concession or immunity on any person other than the\nperson making the declaration\tunder the provisions of the\nAct. The question for\tconsideration is whether the absence\nof such\t a provision as is found in Act No. 8 of 1976 leads\nto the consequence that acceptance of a declaration under s.\n24 of the Act confers a benefit which is not provided by the\nAct on a person other than the declarants and takes away the\npower of the ITO under s. 68 of the Income Tax Act, 1961 to\nmake an\t investigation as to the nature and source of a cash\ncredit appearing in the books of the assesssee to reject the\nexplanation offered by the assessee as unsatisfactory and to\ntreat it as his income from undisclosed sources.\n Section 24\t of the\t Finance (No. 2) Act, 1965 provided\nfor the\t making\t of voluntary\tdisclosures in\t respect of\namounts representing income chargeable\t to tax under\t the\nIncome Tax Act 1922 or the Income tax Act, 1961, for any\nassessment year\t commencing on\tor before April 1, 1964. On\nsuch disclosure\t being made under sub-s. (I) thereof, in the\nmanner provided\t by sub-s. (2) the amount was to be charged\nto Income tax in accordance with sub-s. (3) which provided\nby a legal fiction that income tax shall be charged on the\namounts of voluntarily disclosed income at certain specified\nrates \"as if such amount were\t the total income of\t the\ndeclarant\". There was a safeguard provided in sub-s.\t (4)\nthat the benefit under the scheme would be available only in\nrespect of the voluntarily disclosed\tincome\tand not in\nrespect of the amount\tdetected or deemed to have\tbeen\ndetected by the ITO before the date of declaration. When the\nCommissioner of\t Income Tax passed an order under sub-s. (4)\nthere was an appeal provided to the Central Board of Revenue\nunder sub-s. (S) and the Board was empowered under sub-s.\n(6) to\tpass such orders thereon as it deemed fit. There was\na finality attached to\t the order of the Board under sub-s.\n(8)\n In support\t of the\t reference, learned counsel for the\nassessee has,\t in substance,\t put forth a three-fold\ncontention. It is submitted, firstly, that the ITO could not\nhave treated the cash credits standing\n857\nin the\tnames of the sons of\t Kanhaiyalal, the Managing\nPartner as . the assessee's income from undisclosed sources,\nhaving regard to the fact that each one of them had made a\ndeclaration under sub-s. (I) and paid tax thereon under sub-\ns. (3). The submission is that it is not permissible for the\nDepartment to go into the question of the nature and source\nof the\tamount so declared in\ta voluntary disclosure under\ns.24 of\t the Act, and to say that it does not represent the\nincome of the declarant. Secondly, it is urged that sub-s.\n(I) read with sub-s. (3) of s.24 of the Act has a overriding\neffect over s.68 of the Income Tax Act, 1961 and, therefore,\nthe ITO\t could not make any investigation as to the nature\nand source of the cash credits, and thirdly, it is submitted\nthat there cannot be double taxation\tof the\tsame income,\nonce in the hands of the creditors and again in the hands of\nthe assessee.\tThese submissions proceed on\t a wrongful\nassumption that\t there is a finality attached under sub-s.\n(8) to\tthe legal fiction created by sub-s. (3) for which\nthere is no basis whatever. The contentions cannot, in our\nopinion, prevail.\n For an appreciations of the contentions raised, it is\nnecessary to set out the relevant provisions of s.24 of the\nAct. Sub-s. (1), insofar as relevant reads .\n (1) Subject to the provisions of this section, where\n\t any person makes, on\t or after the 19th day of\n\t August, 1965,\t and before the 1st day of April,\n\t 1966, a declaration in accordance with sub-section\n\t (2) in respect of the amount representing income\n\t chargeable to tax under the Indian Income-tax Act,\n\t 1922 (11 of 1922), or the Income-tax Act, 1961 (43\n\t of 1961), for assessment year commencing on or\n\t before the 1st day of April, 1964-\n (a) for which he has failed to furnish a return within\n\t the time allowed under section 22 of the Indian\n\t Income-tax Act, 1922 (11 of 1922), or section 139\n\t of the Income-tax Act, 1961 (43 of 1961), or G\n (b) which he has failed to disclose in a return of in\n\t come filed by him on or before the\t 19th day of\n\t August, 1965,\t under the Indian Income Tax\tAct,\n\t 1922 (11 of 1922) or the Income Tax Act, 1961 (43\n\t of 1961), or\n858\n (c) which has escaped assessment\t by reason of\t the\n\t omission or failure on the part of such person to\n\t make a return under either of the said Acts to the\n\t Income-tax officer or to disclose fully and truly\n\t 11 material facts necessary for his assessment.\nhe shall, notwithstanding anything contained in the\tsaid\nActs, be charged income-tax in accordance with sub-section\n(3) in respect of the amount so declared or it more than one\ndeclaration has\t been made by a person the aggregate of the\namounts declared therein, as reduced by any amount specified\nin any\torder made under sub-section (4) or, if such amount\nis altered by an order of the Board under sub-section (6),\nthen such altered amount...............\n Sub-s. (3) containing the legal fiction reads as\nfollows:\n (3) Income-tax shall be charged\ton the amount of the\n\t voluntarily disclosed income-\n\t (a) where the declarant is a person other than a\n\t company, at the rates specified in paragraph\n\t A, and\n\t (b) where the declarant is\ta company, at\t the\n\t rates specified in Paragraph F,\nof Part\t I of First Schedule to the Finance Act (X of 1965)\nas if such amount were the total income of the declarant\n Sub-s. (8)\t on which strong reliance is placed,\truns\nthus:\n (8) An order under sub-section (6) shall be final and\n\t shall not be called\tin question before any Court\n\t of law or any other authority.\n The crux of the matter is whether the provisions of\ns.24 of\t the Act can be construed as conferring any benefit,\nconcession or immunity on any person other than the person\nmaking the declaration under the provisions of the Act. The\nquestion is whether the non-obstente clause contained in\nsub-s. (I) of s. 24 of the Act precludes the Department from\nproceeding against the person\tto whom\t the income actually\nbelonged. The contention that there was an immunity not only\nas regards the declarant, but there was also a finality as\nto the\tassessment under s.24\tof the\t Act stems from a\nmisconception of the nature and scope of the Voluntary\nDisclosure Scheme.\n859\n Under sub-s. (I) of s.24, a person was required to make\na voluntary disclosure in respect of the amount representing\nthe income chargeable to tax under the Indian Income Tax\nAct, 1922 or the Income Tax Act, 1961 for any assessment\nyear commencing on or before April 1, 1964. Sub s. (I) makes\nit clear that the declarations, which\t were expected to be\nmade in\t the manner provided by sub-s. (2), were with regard\nto the\tincome which was chargeable to tax under the Income\nTax Acts of 1922 or 1961, but which was not disclosed at the\nproper time. Neither under the Act of 1922 nor under the Act\nof 1961, was a\t person required to submit a\treturn\twith\nregard to the income which was either not earned or deemed\nto have\t been earned by him. It, therefore, follows that the\ndeclarations under sub-s. (2)\tof s.24\t had to relate to\nincome actually earned by him. The scheme only permitted the\nbringing forward of income to tax it did\tnot require\ninvestigation of the claim of the declarant. If a person\nmade a declaration, the Commissioner was under an obligation\nto assess him to tax.\n In\t respect of the voluntary disclosures made, a\ndeclarant acquired an immunity from further investigation as\nto the\tnature and source of the income. He also acquired\ncertain benefits. One of the distinctive features of\t the\nscheme was that tax was chargeable on the whole of\t the\ndisclosed income taken as a single block at rates prescribed\nfor personal income or\t for corporate income under the Act,\nand not\t at an ad hoc concessional rate. Further, facilities\nwere allowed to payment of tax in appropriate instalments\nextending over a period not exceeding four years, subject to\na down\tpayment of not less than 10%\tof the\ttax due\t and\nfurnishing a security in respect of the balance. Income\nwhich had already been\t detected on the material available\nprior to the date of\t disclosure, was, however, to be\nassessed under\tthe regular provisions of the Income Tax Act\nand not under the scheme. Any admissions made by a person in\nthe declarations filed by him under the scheme in respect of\nsuch income were not to be used in assessing that income\nunder the Income Tax Act. Under the scheme, the disclosed\nincome was not to be subject to any further proceedings of\nassessment. The\t identity of the declarant was not to be\nrevealed and he was also immune from penalty and prosecution\nfor the\t past concealment of the disclosed income. It is,\ntherefore, obvious that the Act granted immunity only to the\ndeclarant alone\t and not to other persons to whom the income\nreally belonged.\n The scheme of the Act makes it abundantly clear that it\nwas to\tprotect only those who\t preferred to disclose\t the\nincome they\n860\nthemselves had\tearned in the past and which they had failed\nto disclose at the appropriate time. It is undoubtedly true\nthat the Act was brought on the statute book to unearth the\nunaccounted money. But there is no warrant for\t the\nproposition that by enacting\tthe same, the\t legislature\nintended to permit, or\t connive at, any fraud sought to be\ncommitted by making benami declarations. If the contentions\nwere to be accepted, it would follow that an assessee in the\nhigher income group could, with immunity, find out a few\nnear relatives\twho would oblige him by filing returns under\ns.24 of the Act disclosing\tunaccounted income of\t the\nassessee as their own and claiming that the said income was\nkept by them in deposit with the assessee.\n That takes\t us to\tthe contention\tbased on the legal\nfiction contained in sub-s. (3) of s.24 of the Act and the\nfinality of the assessment, by virtue of sub-s. (8) thereof.\nThe legal fiction contained in sub-s.\t (3) of\t s.24 of the\nAct, construed\tin the\tlight of the other provisions; must\nmean that the income voluntarily disclosed shall be deemed\nto be the income of the declarant. The words \"as if such\nincome were the total income of the declarant\" can only mean\nthat even though the income did not actually belong to the\ndeclarant lt would be treated to be his income for purposes\nof payment of income tax under the scheme. If, therefore, a\nperson made a false declaration with\tregard to income not\nearned by him,\t it is\t difficult to\tcomprehend how\t the\nDepartment could be prevented\tfrom proceeding\t against the\nperson to whom the income actually belonged and during the\ncourse of whose assessment the concealed income is detected.\nIt, therefore,\tlogically follows that on a disclosure being\nmade, the amount was not to be charged to income tax in\naccordance with\t sub-s. (3) of s.24 of the Act, taking the\ndisclosed income as the taxable income of the declarant.\n The immunity under s. 24 of the Act was conferred on\nthe declarant only and\t there was nothing to\tpreclude an\ninvestigation into the true\tnature\tand source of\t the\ncredits. The ITO was,\ttherefore, justified in treating the\ncash credits in the books of account of the assessee in the\nnames of the creditors\t as unexplained\t cash credits.\t The\nfinality under\tsub-s. (8) is to the order of the Central\nBoard of Revenue under\t sub-s. (6). Under sub-s. (4)\t the\nCommissioner of Income Tax was required, within thirty days,\nif satisfied that the\twhole or any part of\t the income\ndeclared had been detected or deemed to have been detected\nby the ITO prior to the\n861\ndate of\t declaration, to make an order in writing to that\neffect and forward a copy thereof to the declarant.\t Any\nperson who objected to such an order could appeal under sub-\ns. (5)\tto the\tCentral Board of Revenue stating the grounds\nfor such an objection. The Board was empowered to pass such\norders as it thought fit under sub-s. (6). This order of the\nBoard under sub-s. (6) was final and conclusive by reason of\nsub-s. (8). Thus, the\tfinality under sub-s. (8) was to the\norder of the Board under sub-s. (6) of s. 24 and not to the\nassessment of tax made on the declarations furnished by the\ncreditors under\t the scheme, by virtue of the legal fiction\ncontained in sub-s. (3) of s. 24 of the Act.\n The next question\t that calls for determination is\nwhether the non-obstante clause contained in sub-s. (1) of\ns. 24 of the Act precludes the Department from proceeding\nagainst the person to\twhom the income actually belonged.\nUnder sub-s. (1) of s. 24 the declaration was required to be\nmade in\t respect of the amount which represented the income\nof the\tdeclarant. The\tdeclaration could not\tbe made in\nrespect of an amount which was not\tthe income of\t the\ndeclarant. If,\ttherefore, a person made a false declaration\nwith respect to an amount which was not his income, but was\nthe income of somebody\t else, then there was\t nothing to\nprevent an investigation into the true nature and sources of\nthe said amount. There was nothing in s. 24 of the Act which\nprevented the\tITO, if he was not\tsatisfied with\t the\nexplanation of\tan assessee about the genuineness or source\nof an amount found credited in his books, in spite of its\nhaving already been made the subject of a declaration by the\ncreditor and then taxed under the scheme. We find no warrant\nfor the\t submission that s. 24 had an overriding effect over\ns. 68 of the Income Tax Act, 1961, insofar as the persons\nother than the declarants were concerned.\n In our judgment, the legal fiction created by sub-s.\n(3) of\ts. 24 of the Act by virtue of which\t the amount\ndeclared by the declarant was to be charged to income tax\n\"as if\tsuch amount were the total income of the declarant\"\nwas limited in its scope, and\t it cannot be\t invoked in\nassessment proceedings relating to any person other than the\nperson making the declaration\tunder the Act so as to rule\nout the applicability of s. 68 of the Income Tax Act, 1961.\n The last question that remains is whether the\tsame\nincome cannot be taxed\t twice, once in the hands of\t the\ncreditors and again in the hands of the assessee. In a case\nof this description, there is\n862\nno question of double\ttaxation. The situation is of\t the\nassessee's own making in getting false declarations filed in\nthe names of the creditors with a view to avoid higher slab\nof taxation. Once it was found that the income declared by\nthe creditors did not\tbelong to them, there was nothing to\nprevent the same being taxed in the hands of the assessee to\nwhich it actually belonged.\n It follows that the decisions of the Gujarat High Court\nin Manilal Gafoorbhai Shah v. Commissioner of Income Tax, of\nthe Allahabad\t High Court in Badri\t Prasad\t & Sons v.\nCommissioner of Income Tax, and Pioneer Trading Syndicate v.\nCommissioner of\t Income\t Tax, Lucknow\tand of\t the Madhya\nPradesh High Court in\tAddl. Commissioner of Income Tax v.\nSamrathmal Santoshchand which lay down the true scope of the\nVoluntary Disclosure Scheme under s. 24 of the Act must be\nupheld. The decisions of the Delhi High Court in Rattan Lal\n& Ors v. Income Tax Officer and Shakuntala Devi & ors. v.\nC.I.T. and of the Jammu & Kashmir High Court in Mohd. Ahsan\nWani v. C.I.T., taking a view to\t the contrary,\t are\noverruled.\n The Income Tax officer\twas entitled to determine\nwhether the amount disclosed was or was not the income of\nthe declarant,\twhile dealing\twith the case\t of another\nassessee under\ts. 68 of the Income Tax Act, 1961. The legal\nfiction created by sub-s. (3) of s. 24 was restricted to the\nVoluntary Disclosure Scheme itself. The protection enjoyed\nby the\tdeclarant under\t that scheme extended only to\t the\namounts so declared being not liable\tto be added, in any\nassessment, of the declarant. There was no absolute finality\nattached to the declaration especially when the nature and\nsource of the sum declared was being determined for\t the\npurpose of its inclusion in the income of an assessee other\nthan the declarant. There was, therefore, nothing which\nprevented the Income Tax officer from investigating into the\nnature and source of the sums\t credited in the books of\naccount of an assessee\t and reject his explanation to the\neffect that\n863\nthe sums belonged to the persons who had made declarations\nabout them under s. 24 of the Act.\n Accordingly, the reference must be answered in favour\nof the\tRevenue and against the assessee. Our answer to the\nfirst question\tis that\t the legal fiction created by sub-s.\n(3) of\ts. 24 of the Finance (No.2) Act, 1965 by virtue of\nwhich the amounts disclosed by the declarants had to be\ncharged to income tax\t\"as if\tsuch amount were the total\nincome of the declarants\" was limited in its scope and could\nnot be invoked in the assessment proceedings relating to the\nassessee in whose books of account the cash credits appear.\nThe answer to the first question is sufficient to dispose of\nthe second. On the construction placed on sub-s. (3) of s.\n24 of the Act,\t it must also be held\t that the ITO\t was\njustified in treating the cash credits appearing in\t the\nbooks of account of the assessee, amounting to Rs. 46,250 as\nthe assessee's\tincome from undisclosed sources, since the\nassessee failed to discharge the burden of proof placed upon\nhim under s.\t 68 of the Income Tax Act, 1961.\t The\nCommissioner of Income Tax shall be entitled to his costs of\nthe reference.\nS.R.\n864" }, { "title": "The Commr Of Income Tax vs M/S Samsung Electronics Co Ltd on 24 September, 2009", "url": "https://indiankanoon.org//doc/486421/", "text": "The Commr Of Income Tax vs M/S Samsung Electronics Co Ltd on 24 September, 2009\nBench: D.V.Shylendra Kumar, Aravind Kumar\n \n\nIN THE HIGH COURT OF KARNATAKA\nAT BANGALORE\n\nDated this the 249 day of September, 2009 __ O' O V\n\nPRESENT\n\nAND\n\nTHE I-ION'BLE MR JUsT1CE.A3AVIN'D, \n\nITA Nos. 2808 of 2005, 2809._._0L_2GO5, 2810.,of,,7\n\n2005, 2911 of 2005, 29867-of ;,20015,O\"171*A .1V6,2989 of\n2005 C/w 2991 of 2005, -11'f1\"AO\"1\\}cs;' 12005\nC/w 3076 of 2005.,' 3077:61'~:;2005?--_3078;6f 2005,\n3079 of 2005,?' 3.15} 266 of 2006\nC/w 265 of 2006, 269 of\n2006, 270555192-006E1=1:606-of-2006;\"611\"0 of 2006, ITA\nNo. 611 of 2006\"1';;<;51 60961? 2006, ITA No. 612 of\n2006, 1TA._Nos.1055-l'ofV'290'6'\"& 585-594 of 2009\nC/w_lO56O01\" 2006--- &,'.5,5\"2}556 of 2009, 1066 of\n\n ,_ 2006-, 1067 of 2006.,_._6z.v557--575 of 2009, 1053 of\nV 2006 1.613 of 2009, 1061 of 2006 & 65 76682\n 672oo9,7811~,,s,,,11o,s. 1062 of 2006, 1258 of 2006,\n\n1.266' of 2006,1265 of 2006, rm No. 1268 of 2006\n0/151269 67 2006, ITA 515.1270 of 2006, ITA Nos.\n\n ' V'L\";.W0m60 of'2006 & 5951604 of2009, 737 of 200 7, 738\n_ 2007, 739 512007, 740 of 2007, 741 of 2007,\n 7215 of 2007, 746 of 2007, 747 of 2007, 777 of\n \"2007, 780 of 2007, 782 of 2007, 785 of 2007, 786\n\n12\nV,\n\nTHE HON'BLE MR JUSTICE D V X , 1,'\n\n\n\n[By Sri. M.V. Seshachala & Sri. K.V. Aravind, Advs.]\n\nAnd :\n\nM/ S. SAMSUNG ELECTRONICS CO. LTD.\nINDIA SOFTVVARE OPERATIONS\n\nLEVEL 61'\" AND 71\",\n\nPRESTIGE MERIDIANWII,\n\nNO.30, 1\\/LG. ROAD.\n\nBANGALORE -- 560 001. \" \n\n[By Sri. KP. Kumar, Sr. COun\u00e9$0::i\"fQ;* UnAive;rsa'1V \n\nTHIS APPEAL IS FILED UNDER__:SECTI_ON f260A_ OE'; THE\nINCOME TAX ACT, 1961, PRAY1?'\u00a7{} TQ'0SE\"T..ASI1':3E ORDER DATED\n18.02.2005 PASSED IN IT:3;._ fNO;._ FOR THE\nASSESSMENT YEAR 2001-2002 f A 2\nIn rm No. 2309 of 2(}G5_ \" A 0 0\n\nBetween:\n\n1 THE OOVMMISEIONERVOE.1N.cOME.JfAX,\nINTERD1A'I'IOIV7AiL TAX;A'nOr\u20ac., '\nRAsTROTHANA'Ei,IE,O'ING,_[ \nNRUPA'1'HUN_GA ROI \nBANGALORE. . ' '\n\n2 THE INCOME-'rAX'OFE1OER TDS~I,\n\n _ RASTROTHANA B'UILD__I__1\\IG,\n_ ..NRU--PAT5HIJN'GA ROAD,\n .B'ANGALOEE.j-~. APPELLANTS\n\n0 Seshachala, Adv.)\n\n\" \" M'/'s_. SAMSUNG. ELECTRONICS CO. LTD,\n.: LNIJIA OPERATIONS\n \"LEVEL .A6T\u00a5:i_AE'sID 7T1--J,\n\u00bb W..P}LF1S;'I'I'GE MERIDIAN-11.\n =NO..30,M.G.ROAD,\n\" , BANGALORE - 560 001. RESPONDENT\n\n \n\n\n\n[By Sri. K.P. Kumar, Sr. Counsel for Universal Legal]\n\nTHIS APPEAL IS FILED UNDER SECTION 260A OF TI\"IE\n\nINCOME TAX ACT, 1961, PRAYING TO SET ASIDE ORDER \n18.02.2005 PASSED IN ITA NO. 264/B/2002 FOR \n\nASSESSMENT YEAR 19992000 AND E'I'C., _\n\nIn ITA No. 2810 of 2005\n\nBetween:\n\nI THE COMMISSIONER OF INCOME-TAX,\u00bb \nINTERNATIONAL TAXATION, ' ' \nRASTROTHANA BUILDING.\n\nNRUPATHUNGA ROAD.\nBANGALORE.\n\n2 THE INCOMEWTAX OFFICER TDS \nRASTROTHANA BUILDING, \" '\nNRUPATHUNGAROAD. - *\nBANGALORE 2: \" ;AppELLANTS\n\n .. my sgsham Actv.1\nAnd: I I I 'D I\n\nM/S. SAMSUNG ELECTRONICS LTD,\n\nINDIA SOFTWARE OPERATIONS \"\n\nLEVEL em 1{'.ND_7TH, _ '\n\nP1?I\u00a3*STTGE\u00bb\u00bbN:ERIDLAN\u00bbII, _____ .. \u00ab\n\nN-O.3\"0, MQO. R0\"AD;\" \n\nBAI'=?_GALO--RE 58.0'OO'1.__ RESPONDENT\n\n[ByI'S:i\u00ab. Sr. Counsel for Universal Legal}\n\n IS FILED UNDER SECTION 260A OF THE\n\n_:CCe~I.?;\\ICOME TAX~.ACjT, 1961, PRAYING To SET ASIDE ORDER DATED\n_ \"*18,'02.'2005 PASSED IN ITA No. 265/BANG/2002 FOR THE\nIOASSESSMENT YEAR 2000-2001 AND ETC,\n\n\n\nIn ITA No. 2911 of 2005\nBetween:\n\n1 THE COMMISSIONER OF INCOIVIETAX,\nCR. BUELDING,\nQUEENS ROAD,\nBANGALORE.\n\n2 THE INCOME-TAX OFFICER {TDS]--I,\nC.R. BUILDING.\nQUEENS ROAD,\n\nBANGALORE. ,5 .. z$Ap1P'EI\u00a7LAN'IS' ' ~ \n\n[By Sri. IVLV. SeShaChB121_, AdIf.}__ ' . 1\n\nAnd :\n\nM/ S. RAFFLES SOFTWARE 2;' I O'\n7?\" FLOOR, No.12}, I\nDICKENSON ROAD, '\nBANGALORE ~ 560 04\"2,. \n\n[By Sri. }:'{j'\u00abI;LDII'\u00bbI(}'; A * *\nNRUPA'1'HUN-0A;:'RoA%J; \" \nBANGALORE. ' \n\n2 THE 1Nc0ME'TAXV.Q1r\u00a7fIcER.,_ \"\nINTERNATIONAL TAXA'1'E_Oi\\I :_ \nWARI).--19{1], \" r\n\n_ RAST\u00e9RO'FHANA BUILDING.\n' * _NRLI_PA'I';HUNGA R0A;u;\"\"\n'BANG.AL0\u00a3EI,.I;AI\\II*Sj-A ; A I\n\n{By Sri. M.V. Seshatihala, Aim\"\n\nAnd :\n\nM/S. EDS TECHNOLOGIES f _ V \nNO.153,2ND CROSS, I' ' - \"\nPROMENADE ROAD, - _ .\nFRAZER TOWN, V *\nBANGALORE -- 560 O(}5.W_ 1* \u00bb\n\n(::B\"y'iyI/is-.\" IIqII,?;;AcIvs.;\n\nTHIS APPfEAL\"j.IS FI3LED--_UNDER*\u00bbSECTION 260A OF THE\nINCOME TAX ACT, 105.1,' FRA1eINO TO SET ASIDE ORDER DATED\n30.09.2005 PASSED IIsT\"'-ETA, 14550/BANG/2004 FOR .. THE\nASSESSMENT YEAR 20002200 I AND \n\nIn ITA No, .610 \u00ab\u00a32005 \n\n , . . . . . . ..\n1 _ 'IZ'HE'CO'MM.IS\u00abS_IONER OF INCOME~TAX,\n\" IN'-FEIRNI'x'1'I.QI\\IAL TAXATION,\nRASTROTHANA' BUILDING,\nNRUPATHUNGA ROAD.\n1 BANC;ALOR3'\u00a3.\n\n.: f2' ., INCOMETAX OFFICER,\n\n\" _ INTERNATIONAL TAXATION.\nI VVARI} 1 9{1},\nRASTROTHANA BUILDING,\n\n '' ~~NRORATHUNGA ROAD,\n\nBANGALORE. APPELLANTS\n\n\n\n18\n\n{By Sri. M.V. Seshachala 8: Sn'. K.V. Arvind, Advs.}\n\nAnd:\n\nM/S. HEWLET PACKARD INDIA PVT. LTD.,\nNO. 24, SALARPURIA ARENA,\n\nHOSUR MAIN ROAD.\n\nADUGODI.\n\nBANGALORE ~ 560 030. ' fRF,S?ONjDEb-Iff\" 'V: \n\n[By Sri. G. Sarangan, Sr. Counsel. for Smt. Vani. Advi}\nTHIS APPEAL IS FILED UNDER\"-.SECT\u00a7A0N 260.3 \nINCOME TAX ACT, 1961, PRAYTNG TO '3ET,ASIDE'- DATED\n23.09.2005 PASSED IN ITA NO. 3708xI3ANG/20040 FOR} THE\nASSESSMENT YEAR 2001~2002:--AND \n\nin ITA No. 611 of 2006\n\nBetween:\n\n1 THE cOMMIs'SIQNRR'.01~':I:\\IC'QMI:.rI5A}<, . \nINTERNATIONA_:L\"'IfA}(ATIQN,.':-. \n\nRASIRVOTRANAI ';RUI_LDIN ' - ___\nNRUPATHUNCEA ROAD, *\nBANOAL'oRE._ ' ' \n\n2 THE INVCOMEVCAX OFFICER.\n INTE%RNAiHONAL'-TAXA'I'ION,\n' ..... \n' RAs*rRO17I=LANA BUILDING.\n NRUPATHUNGA ROAD.\n BANGALORE. APPELLAN'I'S\n\n Sktshachaia <32: Sri. K.V. Arvinci, Advs.}\n\n v._M/s~.. }~IEWI;ET PACKARD INDIA PVT. LTD..\n NO.-_2'4.._ SALARRURIA ARENA,\n--i=H_OsUR;MAIN ROAD.\nV AD{JG.ODI,\n BANGALORE A 560 030. RESPONDENT\n\n \n\n\n\n19\n\n[By Sri. G. Sarangan, Sr. Counsel for Smt. Vani. PL, Adv.};'\"--.\u00bb\n\nTHIS APPEAL IS FILED UNDER SECTION 260A \nINCOME TAX ACT, 1961, PRAYINO TO SET ASIDE ORDER\"DAI'ED\" ;_. \n23.09.2005 PASSED IN ITA NO. 3709/BANG/2004 .EORV..T'R.E'*I '\n\nASSESSMENT YEAR 2002-2003 AND E)'I'C.,\n\nIn ITA No. 609 of 2006\n\nBetween:\n\n1 THE COMMISSIONER OF' INCQME:'I1~\\.X.\nINTERNATIONAL TAXATION, --\nRASTROTHANA BUILDING,'\nNRUPATHUNGA ROAD, ' \nBANGALORE. ' '\n\n2 THE INCOME~TAX'Q_FFIC'ER{ ' - \nINTERNATIONAL 'I\u00a7A}\u00ab:ATION,g ~ \nWARD--19(1)_.,. __ ~ _ \nRASTROTHANA..EI}ILDING;~.D'j*--.0 I E.\nNRUPATHUNGA'---R{)AD, \n APPELLANTS\n\n[By Sri';._M'.V. K.V. Arvind, Advs.]\nAnd: 0' \n\nM/S. HEWLET PACKARD INDIA PVT. LTD,\n\nNO; 24, SAEARRURIA \"\n\nHQSUR MAIN 'ROAD\u00ab,.__\n\nADUGOD1,\u00bb_ ' \n\nBANG-ANQRE 500 0:30: RESPONDENT\n\n [\ufb02y Sri,__ O.V'Sar\u00e9';ngan, Sr. Counsel for Smt. Vani. H., Adm}\n\n THIS APPEAL IS FILED UNDER SECTION 260A OF THE\n_ ._INCOM'BTAX ACT, 1961, RRAYING TO SET ASIDE ORDER DATED\n\n '~._f23.0SI2V005\"_\u00abPASSED IN ITA NO. 3707/BANG/2004 FOR THE\n ASSESSMENT YEAR 20002001 AND ETC,\n\n\n\nIn ITA No. 612 of 2006\nBetween:\n\n1 THE COMMISSIONER OF INCOME--TAX.\nINTIERNATTONAL TAXATION.\nRASTROTI-{ANA BUILDING.\nNRUPATHUNGA ROAD.\n\nBANGALORE.\n\n2 THE INCOME--TAX OFFICER, *-\n\nIN\u00b0'I'ERNATIONAL TAXATION. I\n\nWARD~19(1},\n\nRASTROTHANA BUILDING.\n\nNRUPATHUNGAROAD, . \nBANGALORE. *._APPE=LLAN'1'S\n\n{By Sri. M.V. Seshachai'a_& A[r\"%ri_nd, \nAnd: _.. .\n\nM /S. HEWLET PACKARD' I.I_\\ID1A'--_ \nNO. 24, SALARPURIA'ARE.?1NA. =: _ \n\nI-IOSUR '1;\nADUGODL 3 _*g._~D\u00abA-,__;\nBANGALORE 560 030.' . RESPONDENT\n\n{By Sri. G. S\u00e9irahgafi', .S'I\"..'.CG;D}:1seI for Smt. Vani. H., Adv.]\n\n THIS APPEAL 1B...VEILEI:\u00bb UNDER SECTION 260A OF THE\n11\\ICOME;AC'E\"\u00bb, I96I,'PRAYING TO SET ASIDE ORDER DATED\n23.09.2005 p'AssED._ IN ITA NO. 3710/BANG/2004 FOR THE\nASSESSB/1EAN'1'v.YI:1Af~l2003-20041 AND E3'I'C..\n\n ITANOS. 10.455 552005 & 535-594 of 2009\n\n_ _Be1:ween: N' .. \n\n4: ~-:1' .. *I*Hi=;.cOi\\rIIx/IISSIONER OF INcOME--TAx.\n\n* 1NT1_'ERNA'i'1ONAL TAXATION.\nRASTROTHANA BUILDING,\n NRUPATHUNGA ROAD.\n\" 'BANGALORE.\n\n\n\n21\n\n2 THE INCOMEMTAX OFFICER,\nINTERNATIONAL TAXATION.\nVVARD~ 19(2),\nRASTROTHANA BUILDING.\nNRUPATHUNGA ROAD,\n\nBANGALORE. \n\n{By Sri. M.V. Seshachaia & Sri. K.V. Amnd, AciyE..}\" if 5?.' \"' \n\n!_L1\u00a3_= \n\nM/S. SONATA INFORMATION\n\nTECHNOLOGY LIMITED.\n\nNOJ93, 18'1\" FLOOR.\n\nRV. ROAD, BASAVANGUDI, \" . u \"\nBANGALORE A 560 004. \" ~R_E's:>ONDENT\n\n[By Sri. G. Sarangan, Sr. Ci0L1\ufb01nse_i'OfOfASfr;t:\"\"Jani. \n\nTHESE APPEALS ARE FILE0.C.UNI)ER\"sEC*1*\u00a7OAi' 260A OF THE\nINCOME TAX ACT, 1961.. PRAY]-NG. To SET ASI'DE'\u20ac_)'I{DER DATED\n31.01.2006 PASSED _ ma I-TA NO, 159341603/\"B2'.i1'\\\u00a7G/2004, AND\n\nIn rm Nos. 11056 0%.\" 20(\u00a70'&. '$5\u00e9A5_5$}$f 2009\nBetween: O A O 2\n\n1 THE VCQMMESSIONER OF INCOME/FAX,\n_ INTE}_RNATIONA'L--TAXA'I'ION.\n' * __ RAS'\ufb012QT{'PLlkNA BUI':L;D}NG,\n NRUPAT1--.ILIN'G_A ROAD.\n ' BAi\\EGALOREi'..A ' --.\n\n 2 \":H.E--.AINCO'\u00a7k1E#1?AX OFFICER,\n\nIN'PERNA'FIQNAL TAXA'1'iON,\n\u00ab WA.RD~I'9(2}.\n. ' RASTROTHANA BUILDING,\nA ' I'-JRUPATHUNGA ROAD.\n BA\u00a7\\IGALORE. APPELLAIVFES\n\n [By Sri. M.V. Seshachala 81 Sri. K.V. Anrind, A<:1vs.]\n\n\n\n22\nAnd :\n\nM/S. SONATA INFORMATION\nTECHNOLOGY LIMITED.\nNQ193, 1ST FLOOR.\n\nRV. ROAD, BASAVANGUDI, T = I .\"j ~ I\nBANGALORE -- 560 004. RESPONOEE. u _,_ \n\n[By Sri. G. Sarangan, Sr. Counsel for Smt. VaI1i,.,I:1b;' \n\nTHESE APPEALS ARE FILED UNDERfSEOT1ON'*\u00ab2S0A\u00ab \nINCOME TAX ACT, 1961, PRAYING TO SETzASII3E.. ORDER DATE :3\n31.01.2000 PASSED IN ITA NO. 3495-3500/BANG/2QgQ4,'v AND \n\nIn ITA No. 1066 of 2006\nBetween:\n\n1 THE COMMISSIONER OF' INCOME-TAX,--\"'~~. _ \nINTERNA1IONALfmxAIIO'I\\I;\"*..'A ' 1 .. \"\nRASTROTHAN\u00a3;B?;?11'.DINi'}, :: \u00bb\nNRUPATHUNGA ROAD, ~. 3 \nBANGALORE. \n\n2 THE INCOME--TAX OF}P'ICVEI?~?.,_ \n\nINTERNATIONAL TAX.ATIO'N_, \" v I\"\nWARDwI9{2}._ \" _ j I \nRAS'\u00a7fRO*II-IANA EU.I.1;I:>II\\IG, \n\n_ NRU}???A'IHUNGA\" ROAD.\n\n' _____ APPELLANTS\n\n L'[I3%yf:yI;I.i;oI1t.ended\n.1 in' !..Ij;..\u00abr>.\u00a7s\u00e9*..ay1p1:>e'als 1.1m: thxa rzamlre of }\")E1yIT1(\".']'\"l1 is not\n\nV\" $u:;>y--\u00ab-;x1:-;y*: ex.-'e1'1 witiain H16 H1e2u'1i1'1g zmd scope of secti01'1\n\n4'2\n\nA\\='oic.i:;.1.11C<:\u00e9 A_.\u00a7_{:'(*c:11t'1'1\u00a3.s [for short\" 'I)'.I'AA'E (=?111.er<>c1 irzto with\nsc=\\='cra1 C(.>11m.ri('rs alui :'c:l<:v21.11t\" for 1.119 purpose of ('EEC'}\"J,\n\n;)z:1yme1\"11' .\n\n6. While' U16', nat:1.:1'e of }')E.1yI1}C1'1i t:e*sI:\u00e9(i\"' ~--d1_1 t:h(~:_\n\nto11cl'1st.01.1e of 21 royalty paynmm. as (:i'<%:f]'.11_.'<.-'*;\u00abTj..~y'1'1'1 \n\nDTAA and the prese11t p21yme1'1t '<'::l_' tljxe zissc-jSsee}1_aot\nqu21li.1'yir1g for dE'.&5C'.1'i[JEZi(')l\"1 'rc)y:i:l_t.y'?_ 21nd. u1';}'1C.y:f\u00e9'f?_)1'e g()es out\n\nof the purview of 'r0y211i:y' ass\"d.e\u00a7i7i11cd}jr1 .t;r:1jf'11s'\u00a7 of S\u20acCT,i.OI}\n\n \n\n9[1}[\\/1] of the AQtj_.L;.1} there 3111\nin {x()y1.'-Sit-f.5'{:C? n cy_ ::':l:7}l\\'/\\\\ V f' 2111 En t.ernation 211\nAg1'eet1\"r1e1'11 :'e;_md ' 'of the Act, it is the\npr0vi.s1'0ns oi ut'E'1_'_\u00a7' has to pmvail and\n\n1;}1f:1fc2f()re..tf_he tonclL1s\u00a7io1.f3____Qf.the original authority and the\n\n1'i1_i.s\".:_V z3;pj3--e11a!.:\u00a7:\"~2m1:I'1vQ1-ity that it royalty ancl 1.he1'c.=f01fe\n\n\u00a7/\n\n\n\n51\n8. Whether the Tribunal was correct in\nholding that since the assessee had\npurchased only a right to use the\ncopyright i.e. the software and not the\nentire copyright itself, the payment .\ncannot be treated as Royalty as per the l \nDouble Taxation Avoidance Agreement\"-._V L\"\nand Treaties which is beneficial to --the'*- .\nassessee and consequently sect\u00a3on._9<.of' i\nthe Act should not 'take\"rt.'i'iniio \nconsideration. . l\n\n9. Whether the Tribunal .=toa;s'r..'jco'rrect in\" \nholding that the payr_ne=nt ._the\ncharacter of purchase anfd\"sale..Ofgoods\nand therefore carirzotf b'e._\"\u00bb,trea;texd_ 615\nroyalty liable-to Inco\ufb01L8.T\u00a2'x- \"\n\n13. It is in the b.a(\u00e9kgrour1d.. of developments and\n\nthe questions haVing.V.arisei1_l\"for examination in these\n\nappeals, argurnlents are ad\\ran.c'ed'.l\n\n .,i_Seshaehala. learned senior standing\n\n appellant M revenue along with\n\n K V 'Aravir;d;e:'I}_earned junior standing counsel, in all\n\n--4the\u00abse'.cases,\"rnany learned senior counsel instructed by\n\n thleirl\"--ll(A:o1_1rit-3el on record have appeared and made\n\n$/\n\n\n\n .AAI3V.'.-'i'.ji'i\"I1(',',I'1i'Il -is t.0- ~h.\u00e9}t21xed at 10% as givirig the niaxinium\n\" -\u00abbiE;i\u00ab1\u00a21'i~f. to t'i1C. is just and proper.\n7'4]. '}?q\u00e9i*\u00bb.c:E)1ii:.1'a Sri.K.P.Kuma1', 1\u20ac'c1I\"1'1(\"d senior (touiisel\n\n - \u00e91.i}3(i\u00b0;l\u00bbri--I'1g for the respo1'1c:i<;\".*.i'\"1\u00a3' would pose the foliowing\n\n54\n\nI'C\"'fC:?1'l't'd if.1}(:T1\"\u20ac?i1\"l dc-rc=-r1'1'ic(i to \u00a3}.('('l'E,.1(' or arise in india\nsquzxmly applies to 1,hc:~ fa(:1.s of the pm-:scm: Case.\nA(7c(>1'c1iiig;1y, SI'i.S(?Si'1E:1('h\u00a311E1. brings to our iioiiioe t,1_1r;-22\nEISSCSSIDETII1 o1'der w1'.1c-;r1'eir1 the Ass(3ss.ing Offic<~::t \nexami.i'1ed 'Lh\u20acS(;'. issues which is at AI1I'1\u20acX1.1f\u20ac--ij(::' \nsuppcirts the \\/i\u20acVV of the Assessing \neffect that the ti'ar1sact.ion wlieii li\ufb01ad \"\n\n21g:reeme1ii_ i'ei'ic3ct,s that it is a 1ic(;\ufb01::c and th.::\"v_arhoiif1t.\n\npaid thereu1'1dei' \\v_ou'lgVi\"_-be 1ic7eii(f\u00a3=. i'e\u00e97;-ind. i:ifiL1s _is royalty\nwithin the C1E'.fi1'1i3'[\"iC)i_f.\".\"'v(\ufb01\"V.$E3C\ufb01i5:1'3s'!Vg[..i':},--{\\*;i?,, 01': the i.'I\".Ac1' anti\n\nhence Sc:('7l.ivi)ii\"Vi'\u00a395; \"7'};iiii',r'\u00e9;i{::i'\"<*cw_19i i'(s)ya1i\"y \u00e9ifs per Section 1 15A is per\n\nD7I'AA., and\" LC3{f.fftE'}f\u20acl'11 pk{\u00e9i.*E:\u00abe1'1is21get fixed for dif'f(-:i\"erit\n\n(ie1.tQ.<;;'Q1'i<:fs. 'h\u00e9isu (1-(51n&_i.. to t\"hc'=r ('.()i\"EC1L1Si()I] that the eiitire\n\n5/\n\n\n\n c:omp21Iay'i--ss' i1i\"i'.he f2;=eit.:1re of royalty and not out right \n\n'7yo_s;.i11ce sofE;.\\i\u00bb2;'1*\u00e9A. rom21i11s with the trarlsferor.\n\n_A'Sfi;S\u00e9slmohala would fiirtiher come1'1c1 that the\n\n mling rcp<_)rE.ec.i in 238 ITR 296 which has been\n\n5\n\n'J1\n\n(;_uesI'io:1 for }3e;.*.ia\"1;-4' a1'1$\\4-\\-'e:'C('l 1'1am1c?iy w'}'1et.1'1c1\" H19 NR1 \nc11e1rge21b1e to tax in Erldia and a1'te1*npI:s to amswer the\nque.si,\u00a3c)1'1 by c()11i.m'1cliI'1_g E:11e1t_ the '\u00a7\"1\"ibuna1 in pa1'agra;\u00a7n_\n5.1 at page 35 has held t:}1aI: the was not \nin law in crc)nte:nding that this case is not \n\nSection 9{I}[vi) of the Act.\n\n18. Sri. Seshachala would co1}t.ehci\"._ihe1t. ,V4L'1\"v'1'L?'\n\nAppeliate Authority 21%, page,93,. _ha-S*-r3x2,11i1i'1j1<;Ei-,the effect of\n\n \n\nD'I'AA, the c1e1\"in1'1.i--:)I1 f V. 1'gi'1\u00abe('i:. _Vt1'1L:'\u00a7.1':%jz,t__oC1\u00e9'i*\" and also the\n\n \n\nmeau'1ing to be etsgigziggi to 'i1}1_}\u00e9;:11...___vHc}' cro_z'1i:ends that the\n1*oy;-my as ci\u00e9:j_fi1'u_:,d ;.aV1\"id'\u00e9:\u00e9g\"V's;\u00ab:;t%'i;vion._&}[ 1)[vi) of't:l1e Act' and the\nsame defilied 'uhd\u00a7:1'V\".Afi.iC\u00a7s{\"'_.\u00bb~12 emci '13 of the DTAA\n\n21grcc:111e13t_\u00a7.\ufb01()i\"USA \u00e91'n-.d_Sw(:(ich xscrspectively are one and\n\ni.}'1C_sa11:1'e. fggtnd i1e';'1%ti'c: _t:.hc-2 payment. made by the .respo.ndem.\n\n@/\n\n\n\n720;. Sesliachaia. lc:e1rnc'-mi senior standing coimsei\n\n 'zip'}J.\u00a7r25i.1'iiig for the 1'\u20ac\"'.\\\u00bb't':',l'1{1(,' f1i1'1'.hc1' (.'.(.)I\"1i(:'11dS tl'12.1t' in \n\n56\n\n(.1<_)1isidei'C(i by Hit\" Appclle-11.9 Al11'.}'1(')l\"iE'.y at gasige 94 of the\npapei' book \\V}'1t'l'\u20acil'1 it ('.()l'}-SiCi(\"'I'\u20acTCi by thli', AdV21I}:Cf--:T>7\nR1.iIi1'1\u00a7_.?\u00a7 At,1t,l1<>i'ii.y \\Vitl'} |'6t'f91'cr11(*L? 10 I;l'1(;' fL1m't1i()niI\"1\u00a7.3; ~\netc and C(_)11cEu(ieci t.he1i: such payment \n(vide page 99 and 100}. It (T(_)I1tI(?f:i(>{(;,(i:\"ih\u00e9ii. 1'-its \ndeeinccl income uricier SC()1.i0_11 9 iii\" \nthe 1'.'a(?i*. whether it is 'shrin}{\u00a5\"v\u00a7ifei;3psd*\" ~.9(>:'i~' \nshelf/brzinded software' ur\ufb01iL:\u00bb}1 \nand gone into. Si\"i.SV(1s1121c%lri,;1_1\u00a7i. 12 and\n13 of DTAA zmci points\n01.11: tliat thq in this regard is\noftwo fold: 9 V H\n\n(i) AVs\u00a7)fi,\\ir\u00e9i1*eV_:isw 7go.:'1 ('.\u20ac1.SC it does not :\"\nI'I'gl1('. of the I'(:'.Sp()i'1Cl\u20ac111' to cliallenge \nbased on c11argee1bi1ity. Sri KL1iTi'ai* \n(t11ai*geab1ii.y {to pay advance. \n\n4(2) read with Secriiicms 190.5196 gpi'----\u20ac'uh'c.Aci'. a11\u00e91\"(?v0n1;t;r1ds\n\nihai: adniiilieclly in _i.l\u00ab3'e_V i'_ii1si,\u00e9i1'1i_.cgise\u00ab,}52iy'm\u00a7;\u00a711:ii is not madc\nin India and it Op_\u20acI7)vfb\"'th\u00e9\"'f\u00a73Sj3GV. d\u00e9f1'{.Es to urge iihai. the\nE'(,'(f.'i_]')i(?i'11. )\"ir\"itm\"<_:'}1aiifg\u00e9zzaii\ufb01itr Iii\"i.1'1is 1*eg_gai'd Sr3ci..i0n.s\n\n4, 5[2b], g(ij'('\\7i}vE11}(.'1VI95.':2.Ii3Q\u00a7x\"jD'17\u20ac\u00a5SS\u20acd into $\u20ac;ri'vi('.c. 'I\"h<..*\n\ndecision in _t1\"1e E215? oft.'-CAI*\u00a7\" I31} Lilly (2009) 312 PPR\n\n2a2 5[SC} p'a,r21~g;'a.]')l'1\u00ab\"29 ;:)a.g<:* 247 is relied upon 1.0\n\n(rc)i11.\u20ac-izijiii_i.}'i&f._ provision uncic-tr S6-rciion 4 will have\n\n33/\n\n\n\n62\n\nSecti(:)1'1 200 e111(:l Elms the 1'c*:_s1)(')1'1(lc1'1t\" cicms not c0r1'1c\n\nwithin trlle ambit of cle_{ite11'c.led 111211'. o1'1ce they are\nouliside the p1tr.'v_iew of _cl'1'l211*'gg\u00e9;;bilitiy t.he1'e is abssolmiely no\nliability dt-YCl1l(\".l t\"e1'3--i. '&\u00bbiI1d .l'1C'.1'l(',C 1110 (I(')I'1.S\u20acC_]L1@1\"Il.lE;1l order\n\npzmsetl'\u00ab1--.1miCr'\u00abtbegii:-i.Q11 20'} bad in law. [11 ctmtended\n\n t.l'1et1!\". tile.CONS\u00e9tqV1j1\u00ab.ci:\u00a7=tfc?s:; of 1\"1()n--payme1'1l' not 21lt'.r2\u00bb1ciCc1, if\n\n7._l}1(:'Vpe1's(i)h 1710 duty 1:0 d\u20acdLl(\".lI. as Llrgeci.\n\n Se'=11'211'1\u00a7,_;\"e[11'1, Scniol' (::()ur1s<:1 by 1'elyi1'1g upon to\n\n F399) {TR 587 and with 1*efe1~c-zmre tic) Pezrzigrapll 8 of\n\n\n\n \n\n63\n\nthe Jucigenieiu of the '1\"1'ibu.;1'1al Whi('.h refe.1's to Section\n\n195(l.){2){3) of \u00a31119 Inconio Tax Act, submits that \n\nmiher sum (',h'di\"g\u20ac:'.Elb1\u20ac under the provisions of m;\u00a7'A:5;.~%-.__jg ;.\n\nwould meal} that 'sum' is ehargeablt-=. to tax. w}'1i'c?vii:co\u00a3;1d=A\n\nbe assessed to tax under the Act: 1111211,: 1116O(?ji\">r1'sidAe:f21tioif1s..__ \n\nwould be whether the payment. to I?:.QV1j1g..3\n\nresident is Cha1'gCdb1\u20ac to tax u11de_r___i\"i1:;~ 'provisions ofitiihe\n\nAct or not, subrnits that if ifhis tE1'i+',\u20acIf|:Vi.h\u00a7\u00a31';\"iIh(%--.,SL111} is not\n\n._.are'.i,l1<_3 (:Qn.:scC11i\u00e9i'\u00a3ces is not a\n\n \n\nat all (:l1argea1bI\u00a2,_V \nquestion 2111s'\\'7v__\u00a7fI:'e{j.V*:.ii1;_:O CORPORATION\nvase. 1T)(\",(.'.'r'.11,E.':,\u00a7;'-V\ufb01i\ufb02.' qr-_ie.stiion that arose for\nconsideration 'A1)'ei_'oro Sri Sarsingan subriiiiled\nt1'1:a1. Sec\u00e9ti,,c1\u00a7ii'V195 to pure income receipts like\".\n\niI11'.VC*\"['(',\\',-31:,\"~.1fCl11}V'\u20ac\ufb01[I(7,';\"\".E1]}d not to something in which the\n\n7'\u00bb__i11<:omes=is'--sa>11ibed'd.ed=imd 'mat' the Supreme Court: was not\n\nV:slj('.(1UVi1't?(ff to \u00e9o1'1sic1er a. Case of the p1'es\u20acn1: nat:ur<~.*. in\n\n\u00ab:\"i7z'a1'1sniissi.oz1 C()rporat:ion and th\u20acI'\u20acfOl'C the\n\n'_d(=:_(%'i's'i('Ji'.g is not: an aL1iiI*iori.t':y for the present. case. sL1bmit:s\n\nlj1a\"1'.\u00bb(':()1'1sidc?ra1ion in UIQSE' a1ppL'*.als is as to whetilier the\n\n$/\n\n \n\n\n\n \n\n64\n\npayrneiii of 21 's1,.1:m' to the r1on--1'eside1'1t. chargeable ,:.\"o,\n\ntax under the Act or i'1o1':? that. sum rnay be i1i1eor11e\u00ab...p_or_e-f \n\nincome or income hidden or embedded I:herein,\"'~--._If-:iSo,\n\nthen tax required to be imposed;o1i_the\n\nElab<)1\"ai1;i1ig; Sri SaraI1ga1'1 s1.:b111ii:s' ljhaii wh_.a'ii \\VO1}.1'd the';\n\nincome is to be computed on \nprovisions of the Act': iI1(3iL\u00a3dii1:g'- \nof the business inconie. if receipt.\nTrade receipt: proceeds of\nsome properiiy or in the course oi'\nf1,.irther to be deducteci is\nincome tax o\u00e9iyeble rate under the Act\n\nUnder the of previous year is\n Se('ii.'ioI1___.4={2]. Section 4 provides that in\n\nrespeci,:*oi;' i.nc.o11.1_eL'*--.chargeable under sub--section (1),\n\n ir1(to1ii'\u00e9.._i:'\u00e9icx. s}1.t3i_lJ__be'\"dec1L1(:ied at source where it is so\n\n .Videduci.ib}e__L1rider provision of the Act. If the sum that\n\nbcxpaicl to the non-residem, is (?hE1Fg(?2ib]\u20ac to tax, tax is\n\n5re%q_Liir_er.i L')-,be (ied'1,ic:t,ed. Emphasises the word ''if': that\n\n/\u00a7//\n\n \n\n\n\n \n\n65\n\nIf 3\": 5000 is carried from this C()'{1I1I,I'_V then obviously it is\n\nnot iiicome. there is no question of deductiilg the moixieyt\n\nat S()L11'(,'.\u20ac; that if a gift made tI:ie:re is no eler1\u00a7imeiii..'_'of ;_.\n\nincome iii the payment and draws attent.ior1_--to~-\n\nCircuiar which says that if a con1i11issio.r_1~is paicl-. to \n\nperson who carries on a c0miI1issio'r*:._Vbusi'nessVabtoaidvaodi\nservices are renciered in the oth1er__eo11_r1tify tha--t;_is not to\n\nbe subject. to tax; that if the foreign\n\n \n\ncountry and there is no\nliability of tag; iii 1 \n\n26. StlbI11i'\u00a3jSi()i}0\ufb01bjIV}\u00abP_eii'I'}(?%iTE':~v!i)_Li*1]i\u20ac-561 for the assessees is\nas under, iimy be income out\n\nof _c1iffere1j17_'\u00a7 i'ieads of izricome provided under Section 1.4 of\n\nt.I'1e._Ar7t.xtI1'c:T, L-.o.'s,ay income from salaries, income from\n\n house~.propei*ty:--._ \"pi\"ofit:s aiici gains of business or\n\n:t{professiori\"; c\u00e9ipitaxl gains and income from other sources.\n\n.127'. ,fTi'he\u00a7i-scheme of tax cieductzioii at source applies not\n\n\"_'c.,1niy9--'t:(5\u00a7 the amoi.mt. paid which wholly bears \"ir1come\"\n\n66\nctliaraeier siieii as saiaries. diviciends. ir1te1'esi'\n\nsecurities. ete.._ but also to g_gi'oss suins, the w1iioIefV.o_f\n\nwhich may not be iricome or p1'ofit:s of the re(>ipie'ii1i_s':it:h\n\nas paymei'1i.s to eo11ii1'a(:t.o1's and sL1b4eoi1i._1jgio3:oi7s\" e1'Iid7{.I1e f\n\npayment of iI'1SL11'a1\"l('.\u20ac (:()n1mi:+ssti'.()i'1. \ncontended that the sum which ma3i\"r3~ei1'equifed'.F[oV.:beivpaid\nto the no1i--1*esicIent. may and.\nmay co1:1tai1'} .21 fraction of the. :\u00a2i1':1'.C0}\"T1Ef. It\nis true that in eoritain a\nfraction of the in other cases\nsuch 21 ii'ite1'e,_s1' of 1'ig__\u00a7htos of patents,\ngoodwill or niaehinery and such\nother f4l\"c1I]S\u00a7~:':'.c:,1'CI'.'i~\u20ac)I1S. it: a large part as taxable\n\nir1e'o_1'ii.-e\"L1r1_cic-?i' 'iihe4piiov'isions of the Act. Whatever may be\n\n Z'i\ufb01Ai':h(\u00a7A'.::.ii!iCOET1(3 is from profits and gains of\n\n .\\i?o;.11.Ci\".V'be computed wider the Act as provided\n.1 .:i;i'i*rie,._.'(');fgular assessm en 1;.\n\nihirpose oi\" s1.ib--see'i.ion (I) of section 195 is to\n\n\"t:hai:' the sum which is ehaigeabie 1.II'id\u20acI' Seeiiion 4 of\n\n$/\n\n1) i'\u00b01',\n\n \n\n\u00a2\n\n\n\n \n\n67\n\n{.110 ACE. 1'c)r levy and colleciion of i1h1c()111.e--t,ax. the \n\nshould dedum il1('(\ufb01)I1']tFI.E1X tE'1e1'e()1'1 at 1'1'1e rates in t'<:\u00bb1\"h(;%V,~..i'1;' , A'\n\nthe amoum. is to be paid to a r1. ' inade to 21 ncm-reside1'\"at\nwq.s to tax and therefore no\n\n0bii'gVa*tiVQ11_Vo13.V_V V1iI'1'C'\u00ab._I\"\"t'.'T>'_iC1E)l'1f payer to deduct on payment.\n\n Vt H21t, 'Tr2m_sm1'ssi0n Co1'p01'ati0r; \n an'4\"e11.1\ufb01ts:_()fi'ty to hold that even wher1 there is 3-10\nC H't.he.re is an (_>b1igg21t:i01'1 to deduct. under\n of the Act', Lmless one has ,g\"c)ne through\n\n\u00a7/%\n\n'i;1.1,\u00a7 }\u00e9\u00bb1-()c:\u00a3\u00e9ss of Sec. 195(2) of'1ih\u00a3-: Act.\n\nas 69\n\n \n\n31. Sri Gamesh Sl,.lbI1')i.tS that the 'j1,1dggm.ent of tjsiis\nSLl])I'(.'.lTl.\u20ac Court fully siipporiis the case of the \ntiiaii; the e1'11.ire payment is 1101 (:!1e11'g_;'ea1b1e to i\nof the (rharge iinder Sec:i:i()1\"1 4 ofv' fIV\"1'(>j'\u00ab_\u00bb\u00e9\u00a7t':\u00ab1\"_. 2\n\nobligation to C1\u20acfd1.1C'[. at ail urider Se(rtiovi'1._ 1195 0ft1'].EjAx\":X(i'1L:.\n\n32. Leanied C()U.I1S\u20acl for F116? \nseveral conteiitions b21svt:&i--zT o.11'&*. =n_um.ber of\nauthorities. both of 't11<\u00e9_.SL1;3\"1'\u00e9r1*1V\u00a7%:: iseiverai High\nCourts, to drive { :if::_i1'a1_t:\"tHiVie payment is\nnot a payineiii.__i11 'i.l1:s ifciyzaiiiir paymt-:nt; {2} that\n\nit\" is more a \"of 21 payment made to\nacquire a Copysi'iiag{i1'LZ\u20acCir&Li;i.iijl\u00e9':i:}E11'1.e1ki1'1g the characizz-3r of a\np2i:,.r1}ien1'. or some .n1erChandize: {3}\nt1'1cr'3V..1I..:\u20ac'\\'/'f\",':VIA1\"' argu1nem.\"s sake. the payment is\n payment\" imcier the hicome\n 'Auct. \\7iiii,.hi);_11{Vxconcediiig. even then, in terms of the\n i:1V0idE111C\u20ac \u00a3~}.\u00a7.:{I'\u20ac?(-3I31\u20acI1tS, it does not retain\nA'.4'i?fiC.'_\"V'E}1J;iJ\u00a7'\u00a31(If.\u20ac1' of a royalty paynleiii; and it is an\n\n propositioii of law that the provisions of double\n\n$/is\n\n\n\n 'bt1sir1es\u00abs I'\ufb01E'?V';--'4\"E:/iii;-\u00a7\"i'-. and Consequently the income receipt\n\"i'11:.'I:t'h(;\"' !.12iI1ds*af the n0n\u00abresident recipient. then also, it\n47.1\"\u00ab_(f21I1't1011Kb\u20ac' taxed under the Act, but C2111 be subjected to\n\n * . 1'.&'V1){...\"()'1'1'}:g/'Zi.I1 the country of the n(m~resident recipient and\n\n70\n\ntaxation an-'c)idam\".e ag,.\u00a7ree1ne,i'1t.s prevail over the provision..s\n\nof the Imral IE1\\\u00bbVS \\\u00bb-'1':2:.. the income Tax Act and a \ndefiniti<)]-1 of 1'c3y.g11t.y in terms of the p1'o\\risioI1\"s_f::\nIncome Tzvt Act, part,ict,alarIy as in S:.\u00a7et:it)'1'1A \nIncome Tax Act, are of no c:()11seqVL1c:>11ezVe'gindt. \nnot at all an income receipt liainds \nresident; recipient: (4) if aceltiife the\ncrharacter of a payment t'c)if:_ or a\nproduct, in the se1:vs'e:;i. is copy-righted\narticle, which \u00e9tpackaged form,\naveiilable <)1;viV\" then, even\nassuming nattire of business\nreceipt m \u00a7\u00abh.x3(:'t'.7'g1 An0ni1'esider1t,. the non--resident\n a\u00abv}Se'1t1v1121nent. estabiishmerit or not\n\ncarxjying regtti..>jii* >..A1te.t~i\"\\/it.y in India, the payment: even if it\n\n5%// \n\n\n\n \n\n \n\n73\n\nCCE U. H P INDL/-1 SALES (P) LTD.\n[(2007) 8 SCC 404)]\n\nSPRINT R P G INDIA LTD. v. COMMR;..\"\")\"'\u00ab'[_\":\nOF CUSTOMS [2000 (1 16) ELT 6 SC)'-._ I\n\nPUNJAB NATIONAL BANK \"R L'.-I_/Alla!) _ \" \n\n[2004 (1 '72) ELT 24 SC]\n\nSTATE OF KARNATAKA_u. \n\n[(2006) 2 SCC 747]\n\nRAJENDRA SINGH v;\"0S1:'piT2.?0'-OF UI5 \n\n[(2007) 7 SCC 378jT_A _ 1, _\n\nCCE v. S.F-.!IKUMAR-- TAGEII:VC!1'ES\u00abV:.0)'[2008\n(232) SC]::\n\nSAMSUNG 'ELECT'ROIvICS\"; CO. LTD.\nINOIA 'OPERATIONS v.\nITO (TDS)gI, BANGALOI'\u20acE\nTATA~ CONSIILTANCY SERVICE v.\nSTATE)IQF\"AP..[{2.(?04) 271 ITR 404\n(SC)! '\n\n _ '0TR:ANSMISSION0' CORPORATION OF\n' _VINDLAvO;i'1'__AP LTD. v. CIT [(1999) 239\n IT'? *I55'7f(3*571\n\n2' ._tINION INDIA 1). AJADI BACI-mo\n\nANDOLAN & ANOTHER [(2003) 263\n\nITR 706 (SC)]\n\n v. VIJAY SHIP BREAKING\nCORPORATION {(2003} 261 ITR 1 1 3]\n\n \n\n\n\n \n\n74\n\nr CIT v. INTERNATIONAL DATA \nMANAGEMENT LTD. [(2003) 314 ITR W \n1 771 ~ \"\n\nr CIT v. ENGINEERING ANALYSIS *- \"\nCENTRE OF EXCELLENCE PVT. _L-'1'D:;~., \n[ITA 2158 AND 1270 014* $5006}. \n\nr CIT v. ELI LILLY AND . \u00ab. \"\nLTD. [(2009) 312 ITR225 SC] I * \n\n, DIRECTOR OF INCOM1?i4T\u00a7{1X._Vv. PAEER \nPRODUCTS LT1).~..[[200'2]'2.57'I.'1fR 11 \n\n2 CIT, PANJAB v. R \n[(1965)56.ITR 20;\u00bb. R. \n\n, CIT 'ENCEINEER.\nAP[(i!9$-5).152.IT.R.7'53] \n\n34. These W.-{Ii'.v;1;\u00a7\u00a7\u00a7;:I\u00a7:v'\u00bb;\u00a7'pd\u00a2\u00a7:_'h\u00e9\u00e9emn 260--A of the\nAct. The EI1C'CsniIe-- of iegislation enacted\nby the P2,r3,i_2In1euf1t._:valzkaiillhk the purpose of raising\n (:e'm:.;~aI\"gC\u00a5\u00a7}eTr1mer11. and the aim and object:\n\nis tci~..Ie\"-.\u00abf_y a11:\"C1._{:D1ie;\u00a7~t' tax on an incomes which come\n\n'v..__AAWi'iLhiH t.h'e__n1\u00a7>va;1.i D;g and scope of the pr0v1's1'_or1s of the Act\n\n' \" 'a5;'1i(l..<.\";\"uaI1t:ify11r1g the Eiabiiity (e:1'ez1t;ed on such income.\n\nQ/\n\n\n\n \n\nii 76\n\nwhich is not For the niziin purpose of levying tax c)r1.y'iCi*i,e\nincome of the resident. Oi' I'1OI'1-I'(-'Sidt?I1t..' i.e_, whe1je._.ii;nc'ie:tT \n\ncertaiii eire1,1msi:e:u'1ees eert,ai1'1 types of ii1(:O'1I1esifcire,3\n\n \n\nexempted from the net of iiaxaiiiori, u\n though has i'eeeive_d_ \notherwise definitely could have \nwill not become income for of\n\nthe Iiability to tax under the Ae't._iri:i__/Vieur -'ijfitiiievv-eixemption.\n\n37. it is t:herei?:a:'eyy_c:iea'i' ;.ii3_()'f.1'~41' i:i_ieV_-::hai'ging section\nand the CX\u20acITI.pfyi(_)i\"i..\u00a75i'O:if\u00a7_Si()i1_$'Si1(){.1\"Id~3i\\Af\u00a31yS be coristrued\nstrictly a1'1d\"'\u00a3::A1ie:--.re. ftzi' unduly expanding the\n\nscope of ievy, :\u00bb.1_ procte-ssioi\"ii:iiei'pi\"et.aiioii1.\n\n35??' to of the Income Tax Act,\nnanieiyl the previous year is brought, to tax\n i'()il'(>.x2iri.iiig'ye\u00e9ir, kiiown assessment: year and for\n to finalize the assessment and to\n specific tax iiabiiity of the assessee, ii\n\n * . riei:.es's\u00a3x;i*\u00a3iy involves an exercise o_i'g21i,hering iiiforiilatioii,\n\n\u00a7/\n\n\n\n\u00a7Oine par't...0l'V__*the liability is recovered in advance at\nW a1;1d rerriit.t.ed to the income Tax Departmerit which\n\"\u00ab_e'a1'i i.e1'-2Vst1--re avoidance of the later lamenteltiori by the\n\n l\"V('3'\\f'..\u00a7VI\"1U(\"i'V, due to the Ilorieavatilability of the assessee or\n\n77\n\nseeking for further explanation arlci tl'1ei1 passixig orders\netc.. there is bound to be a time gap between the actugil\nearning of the irieome and the date of dete1'r11ine1tir>jr'1~V..bf_V\"=V\nthe tax liability and as it was the is\nrevenue that realization of tax becomes' \ndifficult when once the income \nthe assessee. even before theifiii'a11izatio1j1.'0f\n\nliability for the assessment year\" a\n\ndemand notice is svewefl fo;},_l0win'g \"the--:.asseV\u00e9sment order.\nthe assessee eit.i\"iei'_:-4'rri\u00bb.'ciy'\"not,'*~be 'left W;\u00a7th much funds 01\"\n\nmay not eveh\ufb02 {i'1'\"i\u00ab..:'l11die3_) for enforcing the tax\n\nliability and to ()xreyr\":;@1V<:_l1'~si'tt2ati0I1s framers of the Act\n\nhave erivisaged the of advance payment. of tax as\nirrdieatedV\"i'iri Eihaiuters -~ and XVI of the Act providing\n\nfor arliat:_tre1t~:aa_\u00a2d fn.et,h0d of collecting tax. Where under.\n\n aiso coming within the scope of\noft1'1e total income of the n01'1~res1'dent\n4._';:r1\"i\u00a7i2~~tj}1e?fefQ1'cso far as non\u00bb\u00bbresident is concerned, there is\niV.t:o_1j'iVs\"id'e1\"\u00a311:ile significance to whcthei' any income had\n\n\"aris.er1 or accrued to the nonwresident. in India or has even\n\n78\n\neven due to the nonwavai1291bi1it.y of the assets of the\nassessee agz1i1'1st_ which the I'G\\\u00bb-'\u20acI'11.l\u20ac' could have pro<.:eecie\"CL_dv\n\nfor recovery of the aniount.\n\n39. Under the scheme ()ft}f1e Act ' 'A\nmain charging section, i.e. section -$01' thc-:\"A::t. \nthe resident is co11cerned,'ai1 global\nincome is taxable in India 'cir:idc1'&iV_Line:iAt:.i,\ufb01fV.':'S0,, far as non\nresident is co1ice1'nec_i;. linked\nto the total such income\n\nwhich is e\u00e9it.1i_er_1'e'ce'Ned or ._d'ceVI;i\ufb02ed..,1j_Q.have been received\n\nin India ()1*'.,_a(rc:r1*u.r:s'vrjitA_'a1ji'ses'\"'--or \"deemed to have been\n\naccrued or aris\"'e.n\"to er_1'1o11\"\u00bb1fe:<;ide11t. in India in the year\n\ndy1.ri1'1g w.h.iphii't11e S{1bj'S(vY_t'I\ufb01&1ttE\u00a51' arises and even here the\n\ni1'1conie_\"wliieh'isdeemed to accrue or arise in India in\n\n3/\n\n\n\n \n\ne 79\n\nbeen deemed to have a(.t(:rued or arisen in India. T his i{\u00a7;'.'t,o\n\nbe found in see1'1'on 5 of the Act providing for the se(ipe'_'ef \n\n \n\nt()i',a.l_ income, while section 6 of the Act. prox-fl' K\nconcept. of residence; se(tt,ion 9 of \nfiction, an arti1\"ieia1 way of tixideirstieiiidliiigl'wiiether \nhas accrued or arisen in India i;H3fiOI1\nand the significance being \nassessee, even by the empioiyrnien section\n\n9 of the Act, if accrued or\ndeemed 1:0 have in India, such\n\nincome, is ineoniei'wfhi(:h'Alis iizixeible in India.\n\n40. In all the \u00e9;b.ove discussion proceeds on\n tine\"'ps.yn'iei1ts have all been made to\nforeign are all non\u00bbres1'dents within the\n\n 5, 6 and 9 of the Act and by the\nteoi\"1ji'i.r1.p(:ti\"i.fe\" of these provisions if it is to be held\n i;i:'<1ni_' 'i'}i':l\"G\ufb02VpEi}>f.ID(?l11 in the hands of ricimresideiit is in the\n payment, which can be otherwise be called as\n\nfiiicorrae, the significance for present purpose is that the\n\nV\n\n\n\ne 80\n\nresident: payers such as the appellants are definiteiy\nunder an ob1ige1i.io1'1 to make deductions in terms of\nsection 195 of the Act and to remit. the same wit.hi11:\"th_eL'~\u00bb.v\nstipulated period 1.0 the aecr01.1nt of the revenue. is\nmay result: in the defaulting \nbeing iireaiied as a defaulter or \nagainst. for recovery of the a11noL1:rit.V_whi.eh__ \n\npayer shouicl have cIedue.ted.ar1d ren1.i:1_}te'Ci-\u00bbi,'.r.o i.he\"e-reaiit of\n\nthe Income Tax \n41. E1 is in effort has\nbeen put appearing for\nthe eissessees. us thai: in the first\n\niiistagnce the rec.#e'ip_i:.s=ii'1 t..11evhands of the nonvresident\n\nstippEier/ reL:i':pie1i'f,..yis nc)t:mat. all in the nature of income in\nthe h--;--1hC_3-S fei.1_o~i'i~r<;\u00e9sider]t Suppliers and therefore\n\n }'SAI'1.() lax .}ViAi.afA;i)iIit'y and that the Vi\u20acW taken by the\n\nH 'i:'i5i14f5:1r'i':;2.i is the.- proper View and no need for i1'it;e:rferenee.\n\n . T[i9991 239 1;*R 587[sc1.\n\n V~.L_\"\u20ac':~e(V:t\"i'oI1 195 of the Act. for n(J1'_1--ct()mpIianc:e, with\n' :whit':''h obligations as provided in this section. the I'\u20acV&?I\"1L1\u20ac\n\n'*}1;7;ci:fpr0ceec.ied e1gaa.i1'1st: tile 1'es1:)011dem's - assessees for\n\n84\n\nresort,<'-2d to the above noticreci argL11m-ants and .21 googi\nnumber of .2u1t,h0rit'.ies .2111\" Cited in support\" \n(:()nteI1t.io1'1s. A h\n47. Hcwvever. on the part. of thg V'\nSri. Seshachaia, learned \nstraight and simple and of\nthe obligatioxl on the part' and\nconsequence of nQr1;\ufb01g.c,j-: (1uct:'=Ai0I*, :\u00a7\u00bb\u00a7~ percentage\nof the payrnelli; \"Adhering to the\nreqL1i1'en1e11\u00a7jV\u00e9' is not a matter\nwhich is is fufiy and squarely\ncovered by ..1:he Supreme Court in the\n of '\u00bb;1'.'}2z:3z'J\u00a7.'Sjl'$ilT1f\ufb01SSI\u00e9OvJ?'\u00a7f\"\u00e9b0RPORATION OF A.P. LT1).,\n\nvs. OF INCOME TAX' reported in\n\n35/%\n\n\n\n \n\n85\n\nrecovery in terms of section 201 of the Act. Section 1950-ff\nthe Act reads as under:\n\n195. Other sums. -~ (1) Any person _ .\nresponsible for paying to a non-resi;;ie'nt,:'_iv, \nnot being a company, orfto \"a\u00abfo-yreign_'*\ncompany, any interest or any other sum \"\nchargeable under the provisions of th.is\" \"\nAct [not being income'lc'h._argeable und,er\u00a3j\u00ab~v... ~\nthe head \"Salaries\" shallfat the'i1'_rr1'e.of \ncredit of such income to__uthVe'Vaccount.iof \nthe payee or at~..the Cfuvpaymennt in\nthereof in cash by the \"issue of a\ncheque or draft or by any other.fV_'mode,\nwhicheveris earlie\"r,- .deciuc.t_ income tax\nthereon at' raises ginforce.' V. \n\nProviiiied-\"\"tha't\"-- in\"'-tithe' of interest\npay_able.tby*1:the G_ooei'nrn.ent' or a public\nsector\"ba5n_lc u7iitliin\"the meaning of clause\n[23~Dj'of Sec-t:i4or:ty1iOgyor a\" public financial\ninstitution' .u)ithin\"'-the \"meaning of that\nclaus'e,_4 deduction of tax shall be made\nonly at the~time* of payment thereof in\n.. \u00abcash or by\" 'the_'_issue of a cheque or draft\n\" oriby any other mode:\n\nin 'VP:\"oTvideti\".fi.irther that no such deduction\nA \"-shall---\"tjbe1' made in respect of any\n'--.._div__iti'ends referred to in Section 1 15-0.\n\nof T Explanation. --- For the purposes of this\nV 'section, where any interest or other sum\n aforesaid is credited to any account,\nwhether called \"interest payable\naccount\" or \"Suspense account\" or by\nany other name, in the books of account\n\nr/\n\n\n\n \n\n86\n\nof the person liable to pay such income,\n\nsuch crediting shall be deemed to be _ ._ .V\ncredit of such inco_me to the account of\" _.__\nthe payee and the provisions of this \nsection shall apply accordingly. V\n\n[2] Where the person responsible for paying ' '\n\nany such sum chargeable under. this Act, = , .\n{other than salary} to a non%resi'den't*VV. \nconsiders that the wh.o_le.. or of such' .su\"m ''\nwould not be income chargeable in \n\ncase of the recipient, an \napplication to the\"Assessing, 'Qfficer to\ndetermine, by general 'or'\u00a5\"special...order,\n\nthe appropriate pr0_i90rti0_n .,of 's.uc'h[j'sum\n\nso chargjeableg rand such\ndeterminati';;ri,V [shall be deducted\n\nunder, s'u.b\u00a5--sectio\u00abn----..__ ('\u00a31 _on_ly_. ' on that\nproportion._ {of the which is so\n\nch.a.*g\u20ac\u00a7lb,le: \"1 if; \"\n\n{3} Subject to rules made\" under sub-section\n{5),\"anyr person entitied to receive any\ninterest or othe1.'_si.:m on which income\n.tax has to bededucted under subsection\n\nJV may rnake__..an application in the\n\nA \"prescribed form to the Assessing Officer\n for._the'~gra.nt of a certificate authorising\n himffto 'receive such interest or other sum\n \"'witho'ut_ deduction of tax under that sub-\n\"'\u00ab\u00abseC.tion.\u00ab-\"'and where any such certificate\nis. granted, every person responsible for\n\n_ _ paying such interest or other sum to the\nV V \"person to whom such certificate is\n' granted shall, so long as the certificate is\nin force, make payment of such interest\n\nor other sum without deducting tax\n\nthereon under subsection (1).\n\n;:.,,vobligatory\".on the payer if the entire payment\n become income and that the present\n \"appeals are not appeals involving such\n only appeals involving the question as to\n\n yggjwhetli\u00e9fl the payment or any part of the payment has a\n\n89\n50. In so far as the Judgment of the Supreme Court \nTRANSMISSION CORPORATION OF A.P. ~\n{supra} is concerned, though Valiant attempts l\nmade on the part of the learned :\nassessee, particularly, Mr. K P Kurnar, \nSarangan, Mr. R B Krishna, \n\nto either distinguish this z-1:uthorjity--:_ to contend\nthat the Judgment can ivonly to the\nlimited extent of Where a\ndispute may arise of section\n195 of the entire payment\n\nto a foreign nonjresident\"\"d'oels'*----not partake the character\n\nof income_bi1tg.only part of that payment partakes\n\n income and even then the deduction is\n\nK\n\n\n\n \n\n gr the in TRANSMISSION CORPORATION\n Dpjstcase [supra] cannot in any way be diluted\n was the Supreme Court being directly\n exercise of interpreting the provisions of\n\n ggctioni 95 of the Act in that case and having interpreted\n\n90\n\ncharacter of income within the meaning of section 9 of the.,_\nAct read with charging section and that the \nbeing that no part of the payment made to \nresident can become income either under Athe\ufb02v \nAct or enjoys an exemption under 'if A\nthen no part of such payment \ntherefore in the absence of of\nsection 195[1] of the Act, the with\n\nthe requirements '{V\u00e9/\u00bbie}*,\"':[t5] of section\n195 of the Act examination, such\nargument the simple reason that\nin the first for determination\n\nof the taxggjliabiiity \"(;f;_Vthe nonmresident recipient of the\n\n binding nature of the Judgment\n\nV\n\n\n\n \n\n93\n\nAct\" would mean 'sum' on which\nincome~tax is leuiable. In other words,\nthe said sum is chargeable to tax and\ncould be assessed to tax under the Act.\n\nConsideration would be ---- whether A '\npayment of sum to non\u00abresident _\nchargeable to tax under the provisions\"-, \n\nof the Act or not? That sum .may' be\" \nincome or income hidden or otherwise_\"--._ A' '\nembedded therein. if so, r_equired_V' -. _ _\n\nto be deducted on thesaid sum 4\u00bb what _\n\nwould be the income is_.to:be \u00b0c--ornput'e--d.,. \n\non the basis of provisionsuof the\nAct including provisions'fo-'rgicomputation\nof the business income, if tl1e\"pag1nent\nis trade receipt Howeuer, 'whai'is. to be\ndeducted is:;1j.inconfae-tail: payable'-ti'1ereon\nat the rates' \"inj_\"orcef.--\u00ab.__ Und'e_r\"the__Act, total\nincon'ie_ j'or;j_ the previous year would\nbecome:\"chargeable\"--to under s. 4.\nSub--_s.. {2)'7Of.s;*.4 i\u00abnt\u20ac-K alias. provides that\nin' respect of '=inco_me ' chargeable under\nsub--s. (1), incom~a--ta2c'shall be deducted\nat source _u:he.-e \"it is so deductible\n\n_{under ang,vi__Vproui:3ion of the Act. {f the\n 'sum that be paid to the non-\n\nresir,ierit\u00ab--._is chargeable to tax, tax is\n\n__ \" 'reVq\u00abuirie\"d...to'..be deducted. The sum which\n~. A' may be income out of\n different heads of income provided\n un\"der'\"s. 14 of the Act, that is to say,\n\nincoirrie from salaries, income from\n\n \" property, profits and gains of\n business or profession, capital gains\n\nand income from other sources. The\nscheme of tax deduction at source\napplies not only to the amount paid\nwhich wholly bears \"income\" character\n\n\n\n \n\n94\n\nsuch as salaries, dividends, interest on\nsecurities, etc., but also to gross sums,\n\nthe whole of which may not be income l' l '\nor pro\ufb01t of the recipient, such as? _\npayments to contractors and ' \ncontractors and the payrnent.' of \ninsurance commission. It} has been \" '\ncontended that the sum whichgrriay be\" _\nrequired to be paid to, r the no'n_--reside_ntA A . f\n\nmay only be a trading r'ecei_pt, arid, \n\ncontain a fraction of sum' as taxablie\n\nincome. It is true,\u00bb that in\"so_me\"'cases,' \n\ntrading receipt may-cor-itain., afraciion of\nsum as taxable in_r,_-om..:2,f\" })ut\"in\u00bb...other\ncases such as 'interest, ..,ycom.misi.sion,\ntransfer _Q,i', yrights\ufb01z of 'goodwill or\ndrawings plant and _rnachinery and\nsuch gotrier. trarisasction-s, \" contain\nlarge sum tcpcabie under the\npi'ov'isioVn:s offiriilie\ufb02\u00e9ct. Whatever may be\nthe ,__I3'OSiiiQT'ES;\", if~._the_ -income is from\npro._fits_ and gVains\u00ab..olf. business, it would\nbe computed the Act as provided\nat the' Q!\" reguiar assessment. The\n\n_},purpose of.._sub--s. (1) of s. 195 is to see\n\n - 'that the sumlivhich is chargeable under\n s._ 4.,ofVthe Act for levy and collection of\n\nV' V , it the payee should deduct\n\n. Q\" -.,income_--tajc thereon at the rates in force,\n\n ij' thetifriount is to be paid to a non-\n\n\" resident. The said provision is for\n\nten_tative deduction of incomewtax\n\n.. A' 'lgthereon subject to regular assessment\n and by the deduction of incorne-tax,\n\nrights of the parties are not, in any\nmanner, adversely ajfected. Further, the\nrights of payee or recipient are fully\nsafeguarded under ss. 195(2), 195(3)\n\n\n\n95\n\nand 197. Only thing which is required to\nbe done by them is to file an appltbaiion\nfor determination by the AO that such\nsum would not be chargeable to tax in\nthe case of recipient, or\n\n \n\nfor \n\ndetermination of appropriate proportion' \nof such so chargeable, or for grant. V\n\ncerti\ufb01cate authorising recripient \n\nto i\n\nreceive the amount without:ded1,iciion.of.' 4' '\ntax, or deduction of incomeitaxjat any \u00bb _ ,\nlower rates or no deduction.\".On such\"\n\ndetermination, tax at appropriate 'rate\nwould be deducted at theusource. '4'f._ no\n\nsuch application.:*'is file'necessar:ily,' the cases on hand and the\nVVgiudgmentu\"rendered in each case, on such application of\n.1 the lixawxcie-clared by the Supreme Court, to the facts of the\n\n \"particular case.\n\n98\non appiying the tests as are relevant for determining the\nquestion as to whether a Judgment is an authority \nbinding precedent for a particular proposition \nratio if any has not even been appiied to the \ncase and decision of the case is not \nall such tests are irrelevant and 'd2oesd'n_ot in \ndetract from the constitutional of\nwherein it is emphatically\"iinade the law\ndeclared by the suprerne on all\ncourts within the interpretation\n\nof the supreine the legal position of\nsection 195 is the law\n\ndeclared bindingoon all courts in this country and\n\n assessees likes it or not it has to be\n\n\u00e9/i\n\n\n\n fact situation prevail in the present appeals.\n~ 'There \" .___3'e certain appeals wherein the very\n\n g \"argurnent raised by the respondents -- assessees before\n\n \n\n100\n\nthe payment to the resident recipient pri1na--facie bears\nthe character of an income recipient and therefore;the_.'_t'~e._\nobligation under sub--section {1} of section \n\n54. The Judgment of they \nTRANSMISSION CORPORATION \n[supra] is a binding and\nthere is absolutely no._scope,...fdI? even to\nexamine an A the premise\nthat the TRANSMISSION\nCORPORATlO_i\\T' case [supra] is not a\nbinding precedent premise that the said\nJudgmernifis distinguishable for any other reason for the\n\npurposely' \"the ruling in that Judgment to the\n\n appellate authority in their appeals filed under section\n\n%\n\n\n\n101\n\n246 of the Act as against an order passed under section\n\n201 of the Act which is a provision providing for the\n\nconsequential action that can be taken by the assessi.ng._\n\nauthority against an assessee who has failed to \n\nwith the requirement of deduction of tax at source'.__i.eg,'-at'ad\n\nthe time of payment and not remittingthe'arnount.Ato\u00abthVe\":\"\n\nrevenue after such deduction etc.,,\n\n56. As we have already of the\nnature involving\u20acexercisi3\\;'\u00a7;f of the\nnon--resident, 'or payment received\nby the nonqresildglentTtirjiri assessee cannot be\nan exercise that to even for the purpose of\n\n .,p_eXteritvv-sf'obligation on the part of the\n\nresilde-n~t payer .to=ascertain as to whether there is any\n\niinscope for_ll\"re1ievingAi:; the resident payer totally from the\n\n-. _l.oh1igation of deduction or even partially, as an answer for\n\n 'that obtained only by going through the procedure\n\n. under section 195[2] of the Act and on making\n\napplication in this regard and for the said purpose to\n\n\n\n \n\nM2\n\nthe assessing officer and in the absence of such \napplication by the resident payer, assuming \nappeal is filed by the resident payer '\nconsequential order passed by the assessing \nsection 201 of the Act, for the \nindicated earlier that question be\" in:\n\nthe appeal \ufb01led under section 246\"'oi against; the\norder under section 201 of the we have\n\nindicated earlier in_the_V\\a_vake of the reqiiirernent of section\n\n195[2] of the the wake of the\nbinding . supreme court. in\nTRANSMTSSIGN 4' J OF A.P. LTD.,'s case\n[supra] ey\u00a7n\"the ;ppe_llate authority in the appeal of the\n\nsection 246 of the Act as against the order\n\n of the\" asseyssVi1igvV._offi'cer passed under section 201 of the\n\n is precluded from going into such question and if so it\n'not:open eyen to the appellate Tribunal to Venture on\n'answer to the very question in the assessee's\n\nLE\"jgfurtherllappeal to the Tribunal and opinion rendered by\n\n\n\nlvrequirernents of 195 of the Act and the provision\n. being' to section 200 of the Act and section\n providing for consequential action only in a\n where any person who has actually deducted\n\namount in accordance with the preceding statutory\n\n \n\n103\n\nthe Tribunal on the question answering it in favour of tics\nassessee is of no consequence in law, is not a \nexercise of its appellate powers; an answer of \nis not binding in law and is necessai'iljfiiah1'e_ \n\naside and the question answered in favoiirlof the A\n57. In this context, an incidentaljvl\u00e9arguinient.'\\ai\u00a7\u00a7pf\u00e9fised\nthough feebiy, to the effect the nature\nas attempted by the to be for\nthe reason of of to comply\nwith the i'95{'l] of the Act and\ntherefore under section 201 of the\nAct cannot the the reason that section\n of consequential action on the\n\nfailure assessee on non--compliance of the\n\n$/'/\n\n\n\n= A. deductible to the date on which such tax\n\" _ \"is actually paid.\n\n Where the tax has not been paid as\n\n \n\n106\n201. Consequences of failure to deduct or\n\npay. ---- {1} If' any such person referred to \nin Section 200 and I the cases referred to___ ' . \" * '\nin Section 194, the principal officer --\nthe company of which he is the principal S\"\nofficer does not deduct the whole or'any--.'_~. S' V .\npart of the tax or after deductingfaiis cto < . \" V\npay the tax as required by 'or under \n\nAct, he or it shall, without prejudice _to_ \" b'\n\nany other consequenc;e_s'---._which- he or,\nmay incur, be deemed tc>~.be.an as-sessee \"\n\nin default in respect of the\"ta_x:'w. S\n\nProvided that penllliy be\ncharged under Section V221 ~fro'm,fV such\nperson, principal' cornpany\nunless the A Asseslsirtg \" Officer is -- satisfied\nthat such per:_=on4.:_or' ~pri'nc:;r_9'al_ officer or\ncornpar1y~;\ufb01__ be, has\nwithout'~Vi_gobt7i.V_ suj}'ic--ient reasons\nfailed to 'deduct and pay _the tax.\n\n(1 --A} With__prejudice.'A'io\u00bb_ \"the'provisions of sub-\nsection _V( .3}, if__ar.t_y 'such person, principal\ngojficer or\u00bb company as is referred to in\n\n ,s_ub~section' does not deduct the\n_ wh.:)ie_ or any part of the 'tax or after\n \" ~ deductingfails to pay the tax as required\n by'vo::,,_und\u00e9r this Act, he or it shall be\n\"ltable'to_ pay simple interest at twelve per\nV\"-.cen't'per annum on the amount of such\ntaxffrom the date on which such tax was\n\naforesaid after it is deducted, the\namount of the tax together with the\n\n\n\n of o.n the part of the assessee for not\n.:\"dn\u00a2d4u'c.ting th'e:_amount at source at the time of remittance\n to a non--resident and consequential non-\n. however bona fide the assessee might have\n\n'j\u00e9lfirterltained the thought and the belief that in fact no part\n\n \n\n107\n\namount of simple interest thereon r _\nreferred to in subsection, (1 -A} shall be a ._ V\ncharge upon all the assets of the person_,.... V \" '\nor the company, as the case may baa.\n\nreferred to in subsection (1). \" \n\nand a sequential reading of section \nis a Provision obviousiy Precedin\u00a7l,.5.,:V:S\u20ac:ction' Act';\nbecause of which it does get intov-se;c'ti.oi1..gA.20tiloft-the Act\nand at the relevant time . ucovering the\ncase of the total faiiu.re H ivnot only a\nsituation of dedu.ctlt._n av\ufb01fajlure to remit the\namount andginl 201 clearly\nindicating it springs into action\nas a consequential nieasure-S inilsituations of the assessee\nfailiiagieither deduct 'orto pay, the order passed under\n\nsection _of. _t}is4=,\"A_.c't.. is bad and is a relevant order even\n\n\n\n \n\n108\n\nof the payment to the non~resiclent was not chargeableitc-.g\n\ntax under the Income Tax Act, 1961, either for the \" \nthat it was income at all within the 3\nexpression and does not get into \nthe reason that even when ineonie it\nprovisions of the Act, it becomes \nview of the provisions of that such\nincome of the r1on--resident_ are all *~\nvirtually exercises the time of\ndetermination oi' liabililty of the non-\nresident asselssevei of a return being\n\ufb01eld by the examination of such\nquestions ggioesgnot arifsexwhilel the assessing o\ufb01icer is in\n\nthe.eXe1'cise of'takin.g consequential action on an assessee\n\n;_._vwho his obligation under section i95[1]\n\n the Act:\"'*ancl:.ti1erefore goes against the assessees and\n\n iansvvered accordingly.\n\n examining the scope and the extent of\n\n 'reivgipplicabiiity of the provisions of section 195 of the Act, We\n\n\n\n' lVl\"=li3.bi1it3.I'A it-.non~resident assessee. The amount\n-4h.l.l'_dvcducted uiid\u00e9r section 195 of the Act is not the same as\n the liability of the nomresident assessee for\n\n of tax ll\ufb02del' the Income Tax Act, 1961. A non~\u00ab\n\n \n\n109\n\ncannot lose sight of the fact that this section in the first\ninstance is not a charging section nor a section providiigig-.p'\nfor determination of the tax liability of the \nwho is in receipt of payments from a resident. '_ it it\n\n59. The section itself occurs in chapter' \nproviding for collection and recovery._:'by A it\ndeduction effected at source the\ndeduction is in advan;o_e:'-- __beforelV the\n\ndetermination of the aCt1,1_EJ~.'_'C:E].XVV--.1plaitbllilyi\".C)f the non\u00bb\n\nresident foreigin \n\n60. The the resident who is\nresponsible \u00a3015 to the non--resident is\nonlysiva or tentative amount which is kept as a\n\nbutter this amount against the possible tax\n\n\u00a9/\n\n\n\n authottity-'___Q.f by the supreme court in\nVV'i*~?i'i2z3ii\\TS1|\u00a2!'fS$I{)i!VvA'EORPORATION or A.P. LTD.,'s case\n scope and the manner of reducing the\n for deduction imposed on a resident payer in\n\n section 19511] of the Act is by the method of\n\n \n\n112\n62. Even here, one should bear in mind that it is\nactuaily either an exercise for the assessrnent_.iof \nincome of the non-resident nor _the _ it \n\ndetermination of the non-resident.\n\n63. As we are of the opinion that-section_\"'}95 of it\nis not at all a provision wherein is\nrequired to indulge in an effPfpdveterrrrintation of the\nincome of a non\u00bbre'sid;e.tn't orgy on\nthe basis of a the non\u00ab~resident\nwho can contentions as\nhave been in appeal by the learned\n\nsenior cotynsel appearing on 'behalf of the respondents,\n\n12;, thc.e_resident\"\u00abpayers and even much more on the\n\n3//,\n\n\n\n1.lvl'\"proportionate so deductible in terms of the\n--.ldeterminatioi1_lby the assessing officer i.e., the resident\n\njlias not filed an application under subsection\n\n to deduct and remit the amount turn around and\n\n \n\n113\n\ninvoking the procedure contemplated under sub\u00ab~sectio.n__>\n{2} of section 195 of the Act i.e., only when the \nresponsible for paying any such sum \nthis Act on a non~resident, considerS'ltha\"tethl-e \nsuch sum would not be income chargeable.in it\nthe recipient, by making an to \nofficer to determine by orderlllthe\nappropriate proportion of and\nupon such the liberty\n\nof deducting the to tax\n\nto ful\ufb01l the\"lobligat.ion_.l_l'\u00abcastiiinderllllsub--section [1] of\n\nsection 195 of t1'\u00ab1.p\u20acl\\Act.'~._lV it\n\n64;\" '~ ._In SQ .a resid \"'nt'payer who has not admittedly\n\ntaken \" had made any efforts to have the\n\nsection 195 of the Act cannot, later, after having\n\nV.\n\n\n\n'contendingllthat ltlijeiioayment did not result in any taxable\n in thevwhands of the non-resident and this can be\n\n 'e>iexfcis_e:\".:undertaken by the assessing officer only in an\n\n1 14\ncontend that no part of the payment had resulted in any\n\ntaxable income in the hands of the non--resident recipients\nand therefore it cannot be said that there was any ~\non the part of the resident payer in ful\ufb01lling its h\nunder section 19511] of the Act and'; J \ndemand raised in terms of section 20 the it\u00b0:vl'riot'3'; \nsustainable as the demand proceedsion \n\nthere was a failure on the part\"'~of \n\n65. We further if it is to be\nput in other iVhile' is not open to a\nresident payer' officer to embark\nupon the exercise ..of the tax liability of the\n\nncvn4'residv\u00e9_nt recipient\"on--~a'rnere \ufb01ling of objections to a\n\ndeInVa=n_.d'' : 201 of the Act by merely\n\nact'ua1yV_return of income \ufb01led by the non--resident recipient\n\n\n\n \n\n paymei1tV\"i)_\u00a2.Q:i's:\"t1j1\u00a2 ij1i'aracter of a semblance of an income\nVivireceipt of the non--resident recipient, then\n.1 on the part of the resident payer who\n\n a payment to the non--resident recipient is\n\n116\n\nand means of recovering the tax in advance even before\n\nthe actual crystaliization of the tax liability of an assessee'-.y.\n\nin terms of the provisions contained in chapter--XVIi.~c-i \" \nAct and section 195 of the Act being one such. it\nand an exercise of this nature and \ndetermination of the actual tax \" it\nassessee at the time of the piizlreiivfgthe\nrespondents in the presen't:._._a'p_pe:alsgit prernature\n\none for the ipactgzupai of the tax\nliability of the i\n\n66. If one oinigiving a rough and\n\ncrude comparison to in which the provisions\n\nof section' 9'5.of the Acitvioperates on a resident payer who\n\nrnakes non--resident recipient and if the\n\n\u00e9\ufb02z.\n\n The\"\"--oniy'iiniited way of either avoiding or warding\nngnidedsmissiie is by the resident payer invoking\n\n of section 195[2] of the Act and even here\n\n \n\n117\nlike a guided missile which gets itseif attached to the\n\ntarget, the moment the resident assessee makes paymenTt'~.g\nto the non~resident recipient and there is no way \nresident payer avoiding the guided missile zeroing: it\nresident payer Whether by way of \namount does not necessarily resuit it\namount taxable as income in \nresident recipient under contending\nthat the non--resident reci.pi.ent possibly\navoided any nnder the Act by\nthe over all of the Act or\neven by the Acorpnbinedtt of the provisions of a\n\ndouble tazggation avoidancedagreement and the Act as is\n\nsought'tovtttbe\ufb01coiltended by the respondents in the present\n\n l\n\n\n\n \n\n on of the provisions of section 195\nit Act\"~in the of the law declared by the supreme\nM in _ TRANSMSSION CORPORATION or A.P.\n\n ' ' \u00ab _ {supra}.\n\n118\nto the very limited extent of correcting an incorrect\nidentification, an incorrect computation or to call in \nthe actual determination of the tax liability of \nresident which in fact had been determined as'_pa\u00a7t':::of 3\nprocess of assessing the income of the \nby using that as the basis for \nreduction in the rate at which the to\n\nbe made on the payment to Except for\n\nthis method, therellthe-l-resident payer\navoiding the the provisions of\nsection 195[:.;1V]ll .a_' consequence of such\n\ndefault when isslerved. notice in terms of\n\nsection 20}; of the V\"\n\n583 \"'This.c..I\u00a7ositioi1iis the clear legal position that emerges\n\nW\n\n\n\n119\n69. The assessing authority and the first appellate\n\nauthority while are correct to the extent of holding that\nthere was an obligation on the part of the resident \"\n\nin effecting a deduction from out of the h\n\nby them in favour of the non--resident;recipi-Bnts g_ \n\nconsideration for acquiring what i'su\"imown'* ._as-_'.='shrinVk\n\nwrapped software' or what sou'ghV_t': as\n'ready to sell, off the shelf and\neven assuming it of goods for\nthe purpose of under the\nprovisions Sales Tax Act,\n1957 as held hy court in 'TATA\nCONSUL'1)f1NCY \"case [supra], all such\n\nto the background While examining the\n\n question'-Tof.3the\"'_o_h}igation of a resident payer in terms of\n\nVvigsseciion 1'95[1=]: of \"the Act and as arguments not relevant\n\n pur_pos'e of answering this question.\n\n Tribunai has clearly committed an error in law\n\n ' ~.__in upon to answer the question of the actual\n\n\u00abP\n\n\n\n122\n\ncharacter of a royalty paynient and therefore applying the\n\nrelevant provisions of the DTAA and even the exercisevyof\n\nholding that the actual percentage of deduction at \n\nwas at 10% or 12% or 15% as the case rnay be \n\nupon the country in which the non--re'side'r1et.recipient \n\nassessed and having regard to the of\" \nthat country and even such be\ndeclared to be incorrect, V law and\ntherefore illegal, wepvhfavgg by\nthe assessing appeliate\nauthority tfiere\ufb01ason that on this\naspect of not joined issue at\nall and while the\u00bb the very beginning had\nta:_1\u00a7;ei1,_thisp_j of payrnent in the hands of the non-\n\nresident' .:::being in the nature of a royalty\n\n'payment affirmed by the appeliate authority,\n\n~ .tIIi.at was not rriade an issue or question for determination\n\n'Vi4lbeforelithelftribunal by the revenue and therefore we do\n\nnlo't.lp_rQpose to disturb this factual emergence of facts.\n\nV\n\n\n\n \n\nV7_d\"o\ufb01\u00bbicer cannotv. enibark on an exercise as though it is\n to de\"'te__rinine the actual tax liability of the non--\n\n'~..yres'ident'~assessee is that if such a situation is permitted\n\nin to be assessed in advance, even in the hands of a\n\n123\n\nparticularly, in ascertaining the extent of deduction that\n\nwas required to be made by the resident payer \ntherefore we are not disturbing the orders of the \" \nauthority as affirmed by the first appellate \n\nsecond appellate authority on this aspect ofthje A \n\n72. One another reason for \"that_d\u00a7the\nassessing officer, even in a application\nis made by the resident p_ayer,' of the\nAct, for the the actual\namount being' t'he'--:vnon4res'ident recipient so\nthat the resident only the reduced\n\namount rernithit tocredit of the account of the\n\nre\u00a7Jen--ne while doiI'ig*\"so i.e., While examining an\n\napplieationuridpeir\u00e9 195[2] of the Act, the assessing\n\nto':\"taKe..Ep1ace and if the income of the non--resident is\n\n\n\nbayerl' Version of the liability when the\n pp of the' non-resident recipient of a\n this country is actually determined\n a different determination of the tax liability of\n\n V - ..the\" inonwresident recipient.\n\n124\nresident payer, there can arise conflicting decisions \nversions, in so far as the tax liability of the non--residvent.:l_:l_*-..\n\nis concerned as even after a determination 'V' \ni95[2] of the Act, where under the tax liabjilpity of it \nresident is determined in the hands oi\"l=the'_'_'re:siden'tl \nand that too prematurely, then \n\nproductive as it will be always open--to\"t-he--~.nona1'esi.de.rlt to\n\ncontend that no partpof in India\nand is able to rnalie basis of a\nreturn of income. nonlifresident assessee.\nit will resultiin of the actual tax\nliability of the of a payment from\n\nthis country; one i/ersion when the liability is determined\n\nex\"/en an-4:1 that too in the hands of the resident\n\nQ/,r\n\n\n\n \n\n125\n73. A situation of this nature should necessarily be\n\navoided and it can be avoided if we should bear in \n\nthat the exercise under section l95[2] of the Act \n\nfor extending a limited concession in favour...\n\nresident payer when things are veryiiclearrz A'\n\ninvolve any doubt or ainbiguityssuch as in a situation_V\u00a7\n\nwhere the non--resident recipient of the arnountgflas filed\n\na return of his income as. i7one--_ a.j_risi'ng\u00ab such a\n\ntransaction with assessing\nofficer has payment and\nhas indicatef\ufb01 1 .order passed on the\nreturn of incorneglfilevd liriionilresident that no part of\nthe Vreceiptgis taxable the provisions of the Act [for\n\nwhatever_, reasonip and if so based on this\n\nitppsettled'/undiispdied'iffactual/legal position, the resident\n\nTtggayer by the assessment order passed by the\n\n.1 on the return of income \ufb01led by the non-\n\n.A\"-dfresidentg for any earlier year seek for granting the\n\n VVcfp'-cornrnensurate relief from the obligation for deduction of\n\n,9/.\n\n :reCipient,...:the imposed on the resident payers in\n sec'tion 195[1] of the Act springs into action, the\n\n is to be a payment to the non-resident and\n\n . in all these appeals, the payers who are the\n\n,.,,,..,,t4ll\"\"t7t:5Spondents in all these appeals, having not taken any\n\n \n\n127\n\nrecipient was getting out of the net of taxation under\n\nIncome Tax Act, 1961 due to one or the other reason.\n\n75. in all these appeals, there being no dispute nor. \"\n\nthere be any dispute regarding the payments m_ade'-by the it \" it\n\nresident payers, bearing the \nreceipt in the hands of the the payments\nwhether are in respect of payment\nfor buying/purchasing\ufb01 software\nproduct and is or even be in the\nnature of opined by the\n\nassessing officers fin appeals by the first\n\nappellate at1thorit'i,es', nearerthefess, the payment de\ufb01nitely\nbeing,inv-\":,_tt1e,.\\---,.:naturex\ufb02ofwav payment resulting in some\n\npossibie the hands of the non--resident\n\n\ufb01g/.\n\n130\n78. For the reasons stated above, while we refrain from\nanswering the questions raised in these appeals \nto the actual determination of the tax liability of \nresident assessees in respect of the \nhad received from the resident \nrespondents in all these appeals',-~:,t:l:We \n\nquestions relating to the correctn.eSs=.orlo'ther\\vise'*of'lthe\n\norders passed by the tribunal favour of\nthe revenue and pas-slesslee;vlallowjlthe appeals,\nset aside the and restore\nthe orders authorities and\n\naffirming orders,' appellate authorities,\n\nso far as relates to confirming the demand raised on all\n\nthese re-sponclentsl\ufb01assessees in terms of the provisions\n\n of for the failure of the respondents\n\n assessees 'comply with the requirement of section\n\nirgagigpomle Act.\n\n . llnccordingly, these appeals are allowed.\n\nV\n\n\n\n131\n\nIN ITA Nos. 919/2007 & 921/2007:\n\n80. Whiie these two batches of appeals had \nheard along with the above appeals, it is noticed that \nstrike a slightly different note, in the \nultimately the question may be one of \n\nmanner of obligation of a residen't.e,.lpayer topdeducltp an\n\namount at a percentage of the made tollla 'non-\nresident recipient, these '-this court\nunder section 260f1#t stage had\nreached wherein or the\nsecond appeilate had...__opi.:1ed on merits about\nthe correctness order passed by the\noriginal/assessinglauthorityl:in: respect of 11 remittances\n\n[can-pespo3~ldin;gtll:oul:an:A Nos.931 to 941/Bang/2006] and\n\ngyvanothei'. [corresponding to ITA Nos.672 to\n\nVV7tl)2v/'.Bangl/'2OO':7a] \"made during the accounting period\n\nfor the assessment year 2006-07 and wherein\n\n\" \ufb01i--'st*appellate authority had declined to examine the\n\n the orders passed by the assessing authority\n\n99/\n\n \n\n\n\n132\n\nrelating to these 42 remittances where under the origin~a3\"*.y\nauthority had concluded that the remittances \" \n\nnature of a royalty payment, the amount to it\n\nWhile making the remittance is at such \n\namount as had been indicated inpthe A}D_ot:ble it\n\nAvoidance Agreement between \n\nStates of America, particu1a'riy;;as [2] of the\n\nagreement. V '\n\n81. The first dismissed the\nappeal Which=\"\"\"ti1e\u00a7 assessee under\nsection 248 the only for the\nreason that 'V ..assesseeftiriesident rernitter had not\navailed the}*~p;f.ocedure\"'Vofwnaking an application under\n\nsection: seeking for determination of the\n\n:?:pr.oportionate in the payment to the non--resident\n~ --cofnstituting the? taxable part of the payment or to put in\n\nit otheriVaordsj'A\"income part of the payment.\n\n43/\n\n \n\n\n\n \n\n \u00bb.l_8.07.20(:)7' the Income Tax Appellate Tribunal\npllinp_4pth\u00a2se appeals, i.e., ITA No.931-941/Bang/2006 and\n\n P\u00a7los,t$7~2--702/Bang/2007, the revenue has come up\n\n133\n82. The first appellate authority having dismissed such\nappeals filed under section 248/249 of the Act \ntenable, the assessee had preferred further appeals\u00a7V_:to \nIncome Tax Appellate Tribunal in appeals _a.-3\" \n\nabove .\n\n83. The Income Tax Appellate\"Tribunal;._ :Ba'ng.a\u00a71ore\nBench 'A' passed the comrnen 18.(V)l7.VfVl),OO7\nallowing all the appeals 'matter to the\n\nCommissioner of; for fresh disposal\nof the appea;ls.*;:.Eits that the\nCommissioner' jig\ufb01lppeals] was wrong in\ndismissingpthe p_appealAs_l'at~*l\"':the threshold as being not\n\n \n\n common remand order dated\n\nV\n\n\n\n134\n\n \n\nwith an appeal each i.e., ITA Nos.919 of 2007 & 921 \n\n2007 respectively.\n\n85. We notice that though the registryhas assi'gr1e'_cioi'1e'_' \n\nappeal number before this court and-v.pth'._'_'ei \n\nrevenue has only paid one set ofeoyurt fee both i\"i1_\"iTA'\u00b0\n\nNos.919 of 2007 and 92.1 of.2OO7y.i.;eA}\",v-.a\"--~su1no'i7Rs.,l\u00a72/~\n\non the memorandum of these two\nappeals are batch of apvpeals; order of\nthe Tribunal of all the 43\nappeals before\"it--.apr-,Vd should have\nnecessarily assigned of appeals instead of\none appe\u00e9ilciun and 31 numbers of\nappeals N'o'.\"9'21 of 2007 and should have\n\nalso c_re'coVer:ed.a.l ~ commensurate court fee from the\n\nlappellants; is also hereby directed to take such\n\n\"'co;'rective m'easures in all other appeals, wherein also\n\n \u00e9 's--uch.situ.ati.ons arise and act for correcting the number of\n\n apiplealsfand also for recovering the de\ufb01cit court fees,\n\n0, was payable by the appellants.\n\n35/\n\n\n\n \n\nde\ufb01niteljg' .erititl.e.di:Inaintain an appeal before the First\n\n -iiX};p.eliate Authority.\n\n -..l.'TI'hel>statutory provisions in the Section is very clear\n\n on thisaspect and the Tribunal is correct in holding that\n\n135\n86. Insofar the question of law raised in these appeals\n\nare concerned it is one of maintainability of an \nunder Section 248 of the Act, by a f \npayer/assessee who had in fact deductedthe: \nterms of sub--section (1) of Section 19:54Aa1_jidl..\namount to the account of 1\u00a7evelnue',p \n\nnevertheless disputing such p_iiability,_\ufb02' \n87. This question has to in the\n\n'af\ufb01rrnative' was correct in\nreversing the\" lth'e\"lCommissioner of\nIncome Tax rejected the appeal under\n\nSection 248_/24SS\"\"at\"th\u00a2v._ threshold as not maintainable.\n\nThve\"a.ssess_ee gyatho phasHi'r1\"fa'ct deducted and remitted the\n\n\"_:.sub~section (1) of Section 195 is\n\nV\n\n\n\n:\ufb02'\u20acommissi_oner. Income Tax (Appeals), takes up the\n for \"disposal on the merits of the matter. For\n\n 'statistical purposes, these appeals are dismissed.\n\n136\nthe appeals were maintainable and could not have been\ndisposed of at the threshoid and the Colnlnissioneifu \nIncome Tax (Appeals) could not have disposed;0f-'4\u00ab'thei4y\u00a5 \nappeals at the threshold, as not rnaintainabie. _. .. V in\n\n89. However, insofar as the scope it \n\nappeal under Section 248 is concerned \"in of:\n\nthe view, that we have appeals,\nthat View equally apppliies also and\nwhile the remand Tltibunal is left\nundisturbedpi, it Revenue are\n\ndismissed, the' the interpretation of law\n\nthat we have p1aced'\\on;,t_he\u00bb Vpfovisions of Section 195 of\nt1?_.e'Act, Apnecessaiailygoverns the examination of\n\n,. ,::S_ection 248 of the Act, when the\n\nwho\n\n\n\n \n\n137\n90. To sum up, the substantial questions raised in all\n\nthese appeals are answered as under:\n\nS1.No.\n\nSubstantial questions raised\n\n\"Whether the Tribunal was correct _\n\nin holding that an appeal was\nmaintainable u/5.248 of the Aet,\neven though there was no\n\nadjudication by the Authorities\"\n\nunder the Act in accordance .._with\n\nSection 195(3), (4) &. {5} read \n\nSection 200 of the Act?\n\n1[t2o07',' \u00bb 92 11 of zooff p\n\nA1:sw'eI''w. ' S' \u00abi _ \nAs ar1'sw'ere'd_' A. in _ V'\n1'i'A 919 {of |\u00ab\n\n. 'c0FyP'Tln\u20acd\"'*-~--, by\n \"C.o1m_'rt:'_.ss\u00bbioner.. needs to have been\n.g7\u00a7\u00a7duCf\u00e9d--? \"\n\nWhether the Tribunal' scorrectev.l_ ,\nS Not--e'orrect,\n\n'In ' the negative,\n\"against\n\nin holding that payments'\nmade by thejlssessee Companly\nfor purchase jiof software 4_'_fro'rn\"\nAayn1eb\"b6A's.ta'~Pa_,cy\"zI::,-\u00ab-._S'i::1gapOre;_\nPeritus SoftI;;~.a:fe S'erv.ice_'Inc'.\",t USA\nand ~AtSt\".'--'al'Y;COn?2p11terS*- PL'tl\"';l;l'd.,\nSingapore the'\u00ab..a\"mo;Lnts of\nRs.3,\"4_3,'O_95/~\u00ab, Rs_,'4-7_,89,419/--\nand Rs.=8,89,6'\"1 1'/.-' was not liable\nto tncorne in Vlndta and\nconseq.uently. no TDS as held by\nti-\"i._e'~ 2/'r.cA.-;sAessing\" '''' \"Q[f'Lcer and\nthe Appellate\n\nthe\nin\nthe\n\nassessee and\nfavour of\nrevenue\n\n lsamsung Electronics Co.\n' has not been accepted by\n'the\n\nAV\u00a3.r_'hether_S'the Tribunal was correct\nin \"merely following the judgment\npassed' by its in the case of\nLtd.\nand\n\nRevenue appealed\n\n V. \ufb01against before this Hon'ble Court\n\nwhere the facts were not entirely\n\nDe\ufb01nitely wrong,\nanswered in\n\nthe negative,\nagainst the\nassessee and in\nfavour of the\nrevenue\n\nV.\n\n\n\n138\n\n \n\nIdentical to one subsisting in the\npresent case and therefore the\nTlribunai was bound to have\nrecorded an independent funding\nand therefore the impugned order\n\nis perverse? s\n\nWhether the Tribunal based onthe\n\nfact that the Assessee has irrzpor;t.ed*\n\nsoftware from Aaymetrix Asia\n\nPacific, Singapore; Peritus 'S'-- \nconsideration the Ruling'r. of gthe\ufb01 '\nAdvance Ruling 'Authority_f_{238\"~l1'1R ' i'\n\n296}; the Dolublei'Taxaiion,Agreement \"\nbetween ;'fndi_o.V and USA and 'India'\n\n_'_'In'V t11\u00a7. \n\nagainst. . ' ' fthe\n\n\" :-1vssVessvee\"'.__\"an~d\"' in \" V\n\nfav-oi11\" the\n\nWhether the Tribunal should have\n.'*e.(_:Orded a finding that it is under\n\n 'vsection 195(2) and {3} and (4) of\n[the Act, the chargeability to tax or\n\n?not of the recipient is decided and\n\nIn the af\ufb01rmative,\nin favour of the\nrevenue and\nagainst the\n\n having failed to obtain such a assessee\n\n@/" }, { "title": "Joint Commissioner Of Income-Tax ... vs George Williamson (Assam) Ltd. And ... on 13 August, 2002", "url": "https://indiankanoon.org//doc/1838059/", "text": "Joint Commissioner Of Income-Tax ... vs George Williamson (Assam) Ltd. And ... on 13 August, 2002\nEquivalent citations: (2003)181CTR(GAU)69, [2002]258ITR126(GAUHATI)\nAuthor: P.P. Naolekar\nBench: Prakash Prabhakar Naolekar, Amitava Roy\nJUDGMENT\n \n\n P.P. Naolekar, C.J. \n \n\n 1. The basic fundamental facts, relevant for the purposes of adjudication of the questions involved in all these twelve appeals are similar and, therefore, all the matters are decided by a common order. \n\n 2. To better understand the questions involved and for convenience, we shall refer to the facts in Civil Rule No. 6491 of 1998 (Eveready Industries India Ltd. v. Joint CIT (Assessment) [2000] 243 ITR 540 (Gauhati)), which are, as stated by the petitioner, that Namdang Tea Company (India) Limited was incorporated under the Companies Act, 1956, having its registered office at Guwahati. The said company owned two tea estates, namely, Namdang Tea Estate and Boga-pani Tea Estate, both situated in the State of Assam. The said company was carrying on the business of growing green tea leaves in its own tea gardens and manufacturing black tea out of the said green tea leaves grown by it as well as others and further selling it in India and abroad. Under the scheme of arrangement, the tea business of the said company was transferred to Mcleod Russel (India) Limited. Subsequently, under a scheme of arrangement, the said Mcleod Russel (India) Limited merged with Eveready Industries India Limited with effect from April 1, 1996, and that is how the writ petition is filed by the petitioner company.\n\n 3. For the assessment year 1991-92, Namdang Tea Company (India) Limited, filed its return showing an income of Rs. 41,82,030. Along with the said return, the company filed the profit and loss account and the audited balance-sheet, as provided under the Companies Act, 1956, and the audit report and other relevant documents and papers. The company then received a notice under Section 142(1) and another notice under Section 143(2) of the Income-tax Act, 1961 (hereinafter for convenience shall be called as \"the Act of 1961\"), both dated January 24, 1992. Then the company received a letter dated July 28, 1993, requiring the company to furnish substantial details/documents/information, covering a list of 30 matters. The company in compliance therewith furnished the information asked for. Thereafter, the Assessing Officer required the company to furnish certain further information and documents. The same were also supplied by the company in the course of hearing. The Assessing Officer thereafter made the assessment under Section 143(3) of the Act of 1961, computing the total income of the company at Rs. 1,16,55,470. \n\n 4. Aggrieved by the assessment order, the company preferred an appeal before the Commissioner of Income-tax (Appeals), Guwahati. The appeal was partially allowed. Aggrieved by the appellate order of the Commissioner of Income-tax (Appeals), the Department filed an appeal before the Income-tax Appellate Tribunal, Guwahati Bench. A cross-objection was also filed by the company. \n\n 5. The company received a notice dated October 30/November 2, 1998, from the Assessing Officer under Section 148 of the Income-tax Act, 1961, alleging that the income of the company for the assessment year 1991-92 had escaped assessment within the meaning of Section 147 of the Act and that he proposes to assess/reassess the income of the said company. The company addressed a letter to the assessing authority contending, inter alia, that no income of the company for the assessment year in question had escaped assessment and such escapement of assessment, if any, was not by reason of any omission and/or failure on the part of the company either to file any return or to disclose fully and/or truly all primary and/or material facts necessary for the assessment of the said company and, therefore, the condition precedent for invoking the power under Section 147 read with Section 148 of the Act of 1961 was not fulfilled. The sine qua non for exercising the power under Section 147/148 of the Act having not been present, the Assessing Officer had no jurisdiction to issue the notices. The company had also filed the return under protest. \n\n 6. Thereafter, the petitioner received a notice dated December 3/4, 1998, from the Assessing Officer under Section 142 of the Act requiring the petitioner to furnish a return under Section 142(1) of the Act of 1961 and also to produce or cause to be produced before him the books of account, etc., relevant to the assessment year. The petitioner at this stage has moved a petition before the High Court under Article 226 of the Constitution of India challenging the notices issued by the Assessing Officer under Section 147 read with Section 148 of the Act of 1961. The High Court admitted the petition and issued notices to the respondent Department. \n\n 7. The respondents to the petition, namely, (1) Joint Commissioner of Income-tax (Assessment), Special Range-II, Guwahati, (2) Commissioner of Income-tax, Guwahati, and (3) Union of India, through the Secretary, Government of India, Finance Department, Ministry of Finance, New Delhi, filed counter by way of an affidavit, dated October 8, 1999. The affidavit has been sworn by Shri J.C. Pegu, Joint Commissioner of Income-tax, Special Range-II, Guwahati, who was the Assessing Officer. The details of the affidavit filed shall be referred to subsequently. In a nutshell, the contention of the Department was that the proceedings have been initiated on the basis of an enquiry conducted by an outside authority and relying on that enquiry, the present notices have been issued. The Assessing Officer has reason to believe that income has escaped assessment due to failure and/or omission on the part of the assessee to disclose the materials necessary for the purpose of assessment. In the order sheets, the Assessing Officer has recorded the reasons which led to his belief that income chargeable to tax to the tune of Rs. 27,25,600 had escaped assessment within the meaning of Section 147 of the Act during the assessment year on account of failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment of his income in the assessment proceedings under Section 143(3) of the Act. An additional affidavit has been filed by Shri J. C. Pegu, the Assessing Officer, on November 29, 1999, disclosing the reasons for initiating action under Section 147 read with Section 148 of the Act and for the impugned notices. The details of the reasons shall be referred to subsequently. \n\n 8. Thus, it is the stand of the Department that there was reason to believe by the Assessing Officer that income chargeable to tax has escaped assessment for the assessment year and further, that income chargeable to tax has escaped assessment for the assessment year in question by reason of the failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment for the assessment year, and, therefore, the exercise of the powers under Section 147, and consequent issuance of notice under Section 148 of the Income-tax Act, 1961, is in accordance with law. \n\n 9. The learned single judge, on appreciation of the relevant case law and the facts of the case, allowed the writ petitions by holding that, in his opinion, in\n\nthe facts and circumstances of the case, the Assessing Officer in fact had no reason to believe that any income of the assessee chargeable to tax has escaped assessment and the initiation of the proceedings under Section 147 read with Section 148 of the Income-tax Act, 1961, was without jurisdiction. Aggrieved by the said orders, the Revenue filed the present writ appeals. \n\n 10. It is submitted by learned counsel for the appellants that the impugned notices have been issued on the basis of the information sent with the letter dated June 30, 1998, to the Commissioner of Income-tax, Guwahati, and that the reasons recorded by the Assessing Officer clearly indicate that there was material on record on the basis of which he arrived at the conclusion that there was reason to believe that income of the assessee for the relevant assessment year has escaped assessment. On the other hand, it is urged by counsel for the respondents that the assessing authority's jurisdiction to issue the notices exercising powers under Section 147/148 of the Income-tax Act, 1961, depends on the fact, whether in the facts and circumstances of the case the Assessing Officer can be said to have a reason to believe that any income of the assessee chargeable to tax had escaped assessment for the relevant assessment year ; and on the facts found, there is no material evidence on record on the basis of which the Assessing Officer could have arrived at such conclusion, and, further, the reason to believe does not mean a purely subjective satisfaction on the part of the Assessing Officer, the reason must be held in good faith and cannot be merely a pretence. It is further contended that the escaped assessment, if any, should be on account of the fact that the assessee has not produced before the assessing authority at the relevant time true and correct statement of facts necessary for the assessment of his income. On this basis, it is urged that the case is not made out by the Department for issuance of notice under Section 148 of the Act. \n\n 11. It may be stated at the outset that for the assessment years 1991-92, 1992-93 and 1993-94, i.e., in nine writ petitions, the notices under Section 148 of the Income-tax Act, 1961, have been issued after the expiry of four years from the end of the relevant assessment year and, therefore, those nine cases shall be governed by the proviso, read with Explanations 1 and 2 to Section 147 of the Income-tax Act, 1961. The relevant provisions are reproduced hereinafter : \n\n \"147. Income escaping assessment, --If the Assessing Officer, has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year) :\n\n Provided that where an assessment under Sub-section (3) of Section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under Section 139 or in response to a notice issued under Sub-section (1) of Section 142 or Section 148 or to disclose fully and truly all material facts necessary for his assessment for that assessment year. \n\n Explanation 1.-- Production before the Assessing Officer of account books or other evidence from which material evidence could, with due diligence, have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of the foregoing proviso. \n\n Explanation 2.--For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely : -- \n\n (a) where no return of income has been furnished by the assessee although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax ; \n\n (b) where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return ; \n\n (c) where an assessment has been made, but--(i) income chargeable to tax has been underassessed ; or (ii) such income has been assessed at too low a rate ; or (iii) such income has been made the subject of excessive relief under this Act; or \n \n\n (iv) excessive loss or depreciation allowance or any other allowance under this Act has been computed. \n\n 148. Issue of notice where income has escaped assessment.--(1) Before making the assessment, reassessment or recomputation under Section 147, the Assessing Officer shall serve on the assessee a notice requiring him to furnish within such period, not being less than thirty days, as may be specified in the notice, a return of his income or the income of any other person in respect of which he is assessable under this Act during the previous year corresponding to the relevant assessment year, in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed ; and the provisions of this Act shall, so far as may be, apply accordingly as if such return were a return required to be furnished under Section 139. \n\n (2) The Assessing Officer shall, before issuing any notice under this section, record his reasons for doing so.\"\n\n 12. From a bare reading of the provisions of Section 147 of the Income-tax Act, 1961, it is seen that the Assessing Officer can exercise the powers under Section 147 read with Section 148 of the Income-tax Act, 1961, if he has reason to believe that any income chargeable to tax has escaped assessment for any assessment year. The proviso to Section 147 gives authority to the Assessing Officer to assess or reassess the assessee for the escaped income after the expiry of four years from the end of the relevant assessment year if he has reason to believe that the assessee has not disclosed fully and truly all material facts necessary for his assessment for the assessment year. For all the assessments or reassessments undertaken by the assessing authority exercising the powers under Section 147 of the Act of 1961, it is necessary that the assessing authority has reason to believe that any income chargeable to tax has escaped assessment and for the assessment/reassessment in respect of the assessment years after the expiry of four years from the end of the relevant assessment year, the assessing authority must be further satisfied that it is on account of the fact that the assessee has not disclosed fully and truly all material facts necessary for the assessment of the relevant assessment year. Section 148 of the Act requires issuance and service of notice on the assessee in the prescribed form, verified in the prescribed manner setting forth such other particulars as may be prescribed, by the assessing authority before making the assessment/reassessment or recomputation. Section 148(2) lays down the precondition for issuance of the notice under the section, which is, recording of the reason by the Assessing Officer for doing so. The service of the notice prescribed by Section 148 of the Act for the purpose of commencing proceedings for reassessment is not a mere procedural formality, it is a precondition of the initiation of the proceedings for assessment under Section 147 of the Income-tax Act, 1961. \n\n 13. While construing Section 34 of the Indian Income-tax Act, 1922, which is analogous to the present section, in the matter of Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191, the Supreme Court has held that to confer jurisdiction under Section 34 of the Indian Income-tax Act, 1922, to issue notice in respect of assessment beyond the period of four years but within the period of eight years from the end of the relevant assessment year, two conditions are to be satisfied. First, the Income-tax Officer must have reason to believe that income chargeable to tax had been underassessed and the second condition is that he must have reason to believe that the underassessment has occurred by reason of either (1) omission or failure on the part of the assessee to make a return of his income, or (2) omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the assessment year.\n\n 14. In S. Narayanappa v. CIT [1967] 63 ITR 219, the apex court held that if there is a reasonable ground for the Income-tax Officer to believe that there has been any non-disclosure as regards any fact, which could have a material bearing on the question of underassessment, that would be sufficient to give jurisdiction to the Income-tax Officer to issue notice under Section 34 of the Indian Income-tax Act, 1922 ; and the sufficiency or adequacy of the ground so found are not matters for the court to investigate.\n\n 15. In ITO v. Lakhmani Mewal Das [1976] 103 ITR 437, the apex court has held that the reason for the formation of the belief contemplated by Section 147(a) of the Income-tax Act, 1961, for the reopening of an assessment must have a rational connection or relevant bearing on the formation of the opinion. Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the Income-tax Officer and the formation of his belief that there has been escapement of the income of the assessee from assessment in the particular year because of his failure to disclose fully and truly all material facts. The court further held that it is no doubt true that the court cannot go into the sufficiency or adequacy of the material and substitute its own opinion for that of the Income-tax Officer on the point as to whether action should be initiated for reopening the assessment. At the same time, it is to be borne in mind that it is not any and every material, howsoever vague and indefinite or distant, remote or far-fetched, which would warrant the formation of the belief relating to escapement of the income from the assessment.\n\n 16. In ITO v. Madnani Engineering Works Ltd. [1979] 118 ITR 1, the Supreme Court has held that whether there is existence of reason to believe on the part of the assessing authority is a justiciable issue and it is for the court to be satisfied whether in fact the Income-tax Officer had reason to believe that income chargeable to tax had escaped assessment by reason of failure of the assessee to make a full and true disclosure.\n\n 17. In Ganga Saran and Sons P. Ltd. v. ITO [1981] 130 ITR 1, the apex court has stated that the words and the phrase used, \"has reason to believe\", in the first part of Section 147 of the Act were stronger than the word \"satisfied\". The belief entertained by the assessing authority must not be arbitrary or irrational. It must be reasonable, or, in other words, it must be based on reasons which are relevant and material. It is again reiterated by the court that of course the courts are not called upon to investigate into the adequacy or sufficiency of the reasons which have weighed with the assessing authority in coming to the belief, but, at the same time, the court can certainly examine whether the reasons are relevant and have a bearing on the matters in regard to which he is required to entertain the belief before he can issue notice under Section 147 of the Act. If there is no rational and intelligible nexus between the reasons and the belief, so that, on such reasons, no one properly instructed in fact and law could reasonably entertain the belief, the conclusion would be inescapable that the assessing authority had no reason to believe that any part\n\nof the income of the assessee had escaped assessment and such escapement was by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts.\n\n 18. In Coca-Cola Export Corporation v. ITO [1998] 231 ITR 200, the Supreme Court while interpreting Section 147 of the Act held that there was no ground for the Income-tax Officer to assume jurisdiction under Section 147 of the Act on the basis of some letters which were wholly irrelevant and could not be treated as information to the Income-tax Officer to initiate reassessment proceedings.\n\n 19. From the aforesaid decisions of the highest court of the land, the propositions of law under Section 147 and Section 148 of the Income-tax Act, 1961, are settled, which are, that, to proceed under Section 147 of the Act, the Income-tax Officer must have reason to believe that income chargeable to tax has been underassessed and that in cases of assessment proceedings initiated after four years from the end of the relevant assessment year, he has reason to believe that such underassessment had occurred by reason of either (i) omission or failure on the part of the assessee to make a return of his income, or (ii) omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the relevant assessment year and these conditions are the sine qua non for exercise of jurisdiction by the authority for issue of notice of reassessment. The reason so given by the assessing authority for initiating proceedings for reassessment, exercising powers under Section 147 and Section 148 of the Income-tax Act, 1961, are justiciable. The court has jurisdiction and authority to satisfy itself whether, in fact, the assessing authority had reason to believe, taking into consideration whether the reason so given has a rational connection or relevance for formation of that belief. The rational connection postulated in these sections must have a direct nexus or live link with the material coming to the notice of the assessing authority and formation of his belief regarding escaped income. The adequacy and/or sufficiency of the reason given is not within the scrutiny of the court--once the court finds that there is nexus between the reason and the belief arrived at by the assessing authority. \n\n 20. In the backdrop of the above mentioned statement of law, we propose to examine the factual matrix of the case. In the writ petitions, the respondents herein have challenged the notices under Section 147 read with Section 148 of the Act, alleging therein that the assessing authority had no reason to believe that any income chargeable to tax has escaped assessment and that the assessee disclosed fully and truly all material facts necessary for his assessment for that assessment year. The Revenue filed two affidavits, as hereinabove mentioned, containing the reasons recorded by the Assessing Officer for taking the steps of issuing notice and reassessment under Section 147/148 of the Act. In the additional affidavit filed on behalf of the respondents on November 29,\n\n1999, Shri J.C. Pegu, the Assessing Officer, has alleged in paragraphs 4 and 5, as under (see page 545 of [2000] 243 ITR) : \n\n \"4. That your deponent most respectfully begs to state that the enquiry officer on perusal of the D. O. letter dated June 11, 1998, of the Commissioner of Income-tax (CIT), West Bengal-II, Calcutta, communicated to the Commissioner of Income-tax, Guwahati, vide his letter F. No. Con/CIT-97-98/134, dated June 30, 1998, found that a survey was conducted by the Investigation Wing, Calcutta, at the instance of D. C., Range-7, towards the end of March, 1997, at the business premises of following companies : \n\n (i) Gladiolai Estate (P.) Ltd. ; \n\n (ii) Rohini Estate (P.) Ltd. ; \n\n (iii) Gagan Properties (P.) Ltd. ; and \n \n\n (iv) Smriti Properties (P.) Ltd. \n\n 21. It was found that huge payments were made to above parties by Williamson Magor group of companies for rendering services like cow dung supply, labour quarters repairing, fencing, etc. It was also found that these four above stated companies did not render the kind of service for which it was receiving payment. They claimed that they were getting the services rendered through other parties. A simultaneous survey was also carried out at the premises of following three parties who were supposed to have rendered services on behalf of the above mentioned four parties. \n\n (i) B. S. Consultants (P.) Ltd. ; \n\n (ii) Manoj Commercial Services (P.) Ltd. ; \n\n (iii) Ajanta Commercial and Mercantile (P.) Ltd. During the survey a common director of the above mentioned three companies, namely, Shri B. S. Kathria admitted on oath that no service was rendered by the aforesaid three companies in the nature of supply of cow dung, repairing of labour quarters, fencing, etc., as claimed by the companies, namely, (i) Gladiolai Estate (P.) Ltd., (ii) Rohini Estate (P.) Ltd., (iii) Gagan Properties (P.) Ltd., (iv) Smriti Properties (P.) Ltd. Actually these transactions were merely accommodation entries and the amount paid through cheques were ultimately returned in cash after routing it through four or five bank accounts. \n\n 22. Out of the above transactions the assessee, Namdung Tea Company (India) Ltd., made the following payments to the undermentioned parties during the financial year 1990-91, relevant to the assessment year 1991-92. \n\n Rs.\n\n (i)\n Rohini Properties (P.) Ltd.\n 13,96,000\n\n \n (ii)\n Gladiolai Estate (P.) Ltd.\n 13,29,600\n\n \n \n Total\n 27,25,600 \n\n\n\n \n\n 5. That the deponent most respectfully begs to state that in view of the above transactions and on scrutiny of the reasons the Assessing Officer had\n\nreason to believe that income chargeable to tax to the tune of Rs. 27,25,600 has escaped assessment within the meaning of Section 147 of the Income-tax Act, 1961, during the assessment year 1991-92 for the failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment at the time of assessment proceedings under Section 143(3).\" \n\n 23. From the aforesaid affidavit it is clear that the Revenue relies for its reason to believe on the fact that the Assessing Officer has perused the D. O. letter dated June 11, 1998, of the Commissioner of Income-tax, West Bengal-II, Calcutta, which was communicated to the Commissioner of Income-tax, Guwa-hati, by letter dated June 30, 1998, and found that a survey was conducted by the Investigating Wing, Calcutta, at the instance of D. C, Range-7, in March 1997, at the business premises of (1) Gladiolai Estate (P.) Ltd. ; (2) Rohini Estate (P.) Ltd.; (3) Gagan Properties (P.) Ltd.; and (4) Smriti Properties (P.) Ltd., and found that huge payments were made to these parties by the Wil-liamson Magor group of companies for rendering services like cow dung supply, labour quarters repairing, fencing, etc. These companies did not carry out the business of rendering the kind of services for which they had received payments. These companies claimed that the services were rendered through other parties. A simultaneous survey was carried out at the premises of three other parties, namely, (1) B. S. Consultants (P.) Ltd. ; (2) Manoj Commercial Services (P.) Ltd. ; and (3) Ajanta Commercial and Mercantile (P.) Ltd., who are alleged to have rendered the services on behalf of the abovementioned four parties and during the survey, the common director of these three companies, namely, Shri B. S. Kathria admitted on oath that no service was rendered by the aforesaid three companies in the nature of supply of cow dung, repairing of labour quarters, fencing, etc., as claimed by the four parties. Actually these transactions were merely accommodation entries and the amount paid through cheques were ultimately returned in cash after routing it through four or five bank accounts and, therefore, the assessing authority has reason to believe that income chargeable to tax has escaped assessment within the meaning of Section 147 of the Income-tax Act, 1961. \n\n 24. In Chhugamal Rajpal v. S. P. Chaliha [1971] 79 ITR 603 (SC), the assessee submitted his books of account and also the statement giving full facts and particulars of the various creditors from whom it had borrowed on hundis during the accounting year in question. The assessment was completed after enquiry. Thereafter, the assessing authority issued a notice under Section 148 of the Income-tax Act, 1961, initiating reassessment proceedings for that year. In the notice, the Income-tax Officer alleged that it appears that the persons from whom the loans were taken are name lenders and that no loan in fact had been advanced to the assessee. The transactions are bogus. The assessee challenged the notice in the High Court, The High Court dismissed the writ petition. Allowing the appeal, the Supreme Court has found that in the report\n\nof the assessing authority he referred to certain communications received by him from the Commissioner, from which it appeared that the creditors were name-lenders and the loan transactions were bogus and that, therefore, proper investigation regarding the loan taken by the assessee was necessary. He did not mention in the report the material which was before him and his reason for coming to the conclusion that this was a fit case for issuing notice under Section 148 of the Act. The Income-tax Officer had not even come to a prima facie conclusion that the loan transactions to which he referred were not genuine transactions. He has only a vague feeling that they might be bogus transactions. The officer should have some prima facie grounds before him for taking action under Section 148.\n\n 25. In the present case, the assessing authority has not mentioned as to whether except the letter written by the Commissioner of Income-tax, West Bengal, dated June 11, 1998, which was communicated to the Commissioner of Income-tax, Guwahati, he had any other material before him that the alleged payments were not in fact made and the amount paid in cheques was returned back in cash after routing it through four or five bank accounts. He has not mentioned as to when and by what transactions specific amounts which have been paid by cheques have been returned back in cash. There is no mention of any dates on which bank transactions between the four parties named in the affidavit and the assessee took place, not even the names of the banks allegedly involved. We also fail to understand when the said B.S. Kathria has no business transactions either with the assessee or the four parties named above, how can he say that the entries in the books of account about the transactions were made and the amount was paid in cheques merely to accommodate the assessee and that the amounts paid in cheques were ultimately returned in cash after routing it through four or five bank accounts. When the said Shri B.S. Kathria has no business transactions with the four parties named or the assessee, it is difficult to comprehend how he could know about the transactions which took place between those parties. In the absence of any material before the assessing authority that the amounts which have been paid through cheques to the four parties have been returned back in cash, we find it difficult to understand as to how the assessing authority could reach the conclusion that the transactions were bogus and the amount paid in cheques was returned back through cash transactions. In the absence of specific material before the assessing authority as to the transactions which had taken place between the assessee and the four parties named above and any material or record to prima facie satisfy the assessing authority that the amount paid by cheques were ultimately returned in cash after routing it through four or five bank accounts, there does not appear to be a link between facts found and the satisfaction arrived at by the assessing authority. The absence of mentioning relevant facts necessary for formation of opinion by the assessing authority in his order before issuing notice is explained when he has admitted in the additional affidavit that he had not made any independent enquiry for arriving at the prima facie conclusion that income of the assessee had escaped assessment. In the absence of application of mind to the facts alleged to have been found, the decision arrived at that income escaped assessment is not maintainable in law. We do not find that the assessing authority had any reason to believe that the income of the assessee escaped assessment, in the assessment proceedings for the relevant assessment year. \n\n 26. In most of the cases, the notices have been issued by the assessing authority exercising the powers under the proviso to Section 147 of the Act, whereunder reassessment can only be made if any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under Section 139 or in response to a notice issued under Sub-section (1) of Section 139 or Section 148, or to disclose fully and truly all material facts necessary for his assessment for that assessment year. The case of the Department/appellants is based on the allegation that the assessee has failed to disclose fully and truly all material facts necessary for his assessment for that assessment year. In paragraph 2A of the affidavit dated October 8, 1999, filed by J. C. Pegu, Joint Commissioner of Income-tax, Special Range-II, Guwahati, for the Department, it is stated as under : \n \". . . the deponent states that it is a fact that detailed enquiries were made at the time of assessment in the entire matter including the present issues involved were examined in details and after being satisfied the assessment was made. The materials on the basis of which the present impugned notice under Section 148 of the Income-tax Act has been issued was also examined at the time of assessment in details. However, the present reassessment proceedings have been initiated on the basis of that enquiry conducted by an outside authority and on the basis of that enquiry the present notice has been issued. The Assessing Officer had not made any independent enquiry and on the basis of the subsequent information received the assessing authority has reason to believe that income has escaped assessment due to failure and/or omission on the part of the assessee to disclose material facts necessary for the purpose of assessment.\" \n\n 27. The aforesaid affidavit filed on behalf of the Department clearly disclosed that in the assessment proceedings the issue involved for taking action under Section 147/148 of the Income-tax Act, 1961, has been minutely scrutinised and the assessment order was issued only after examination of the entire controversy. In fact the materials on the basis of which the present notice under Section 148 of the Income-tax Act has been issued, was also the subject-matter of scrutiny before the assessing authority at the time of the assessment. There is no claim that the assessee has not produced all the relevant material, information before the assessing authority at the time of the assessment. The duty\n\nof the assessee does not extend beyond making a full and true disclosure of primary facts. Once he has done so, his duty ends. It is for the assessing authority to draw the correct inference from the primary facts. It is not the responsibility of the assessee to advise the assessing authority with regard to the inferences which he should draw from the primary facts. If the assessing authority draws an inference which appears to him, subsequently, to be erroneous, mere change of opinion with regard to that inference would not justify initiation of action for reopening the assessment. The power to reopen the assessment proceedings would only be available if the assessing authority has reason to believe that any income chargeable to tax had been underassessed and also that he has reason to believe that such underassessment had occurred by reason of either omission or failure on the part of the assessee to make a return of his income or omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for that assessment year. The affidavit filed on record clearly indicates that the assessee at the time of his assessment has presented before the assessing authority all the material and relevant facts. The assessing authority while assessing the income of the assessee has scrutinised those facts and made the order of assessment. On the face of these facts, we cannot reach the conclusion that the foundation is laid by the Department for exercising the powers under Section 147/148 of the Income-tax Act, 1961. The notice issued to the assessee by the Department and the further proceedings initiated exercising the powers under Section 147/148 of the Act, are quashed. \n\n 28. The appeals are dismissed. However, in the circumstances of the case, we do not impose any costs and the costs shall be borne by the respective parties." }, { "title": "Commissioner Of Income-Tax vs Rajesh Kumar Jalan on 9 August, 2006", "url": "https://indiankanoon.org//doc/1843172/", "text": "Commissioner Of Income-Tax vs Rajesh Kumar Jalan on 9 August, 2006\nEquivalent citations: (2006)206CTR(GAU)361, [2006]286ITR274(GAUHATI)\nAuthor: T. Nandakumar Singh\nBench: D. Biswas, T. Nandakumar Singh\nJUDGMENT\nT. Nandakumar Singh J.\n\n1. The appellant/Commissioner of Income-tax, Gauhati-I, preferred this appeal under Section 260A of the Income-tax Act, 1961 against the common order dated April 18, 2001, passed by the Income-tax Appellate Tribunal, Gauhati Bench, Gauhati, in I. T. A. No. 328(Gau) of 1999 and I. T. A. No. 49(Gau) of 2000 for the assessment year of the assessee 1996-97. By an order of this Court dated February 28, 2003, the appeal is admitted on the question : \"Whether, in the facts and circumstances of the case, the assessee was entitled to claim benefit under Section 54 of the Income-tax Act, 1961, on the entire amount received by him on account of sale of his house property ?\" The respondent/assessee is an income-tax assessee and the status of the assessee is that of an individual trading in the business of truck plying. The assessment year under consideration is 1996-97.\n\n2. The issue involved in the present appeal is the claim for benefit of exemption from being charged to income-tax on the sale of properties used for residence under Section 54 of the Income-tax Act, 1961. Section 54 of the Income-tax Act, 1961, is a beneficial provision of the Income-tax Act, 1961 for the assessee in the matter relating with the sale of properties used for residence, it appears, for the constitutional goal of providing residence to the citizen of India. It is fairly well-settled that in construing a beneficial enactment, the view that advances the object of the beneficial enactment and serves its purpose must be preferred to the one which obstructs the objects and paralyses the purpose of the beneficial enactment. In this regard, we may refer to the decision of the apex court in Kunal Singh v. Union of India . Since Section 54 of the Income-tax Act, 1961, is required to be read and discussed in the present appeal it would be more convenient to quote Section 54 of the Income-tax Act, 1961, in entirety.\n\n54. Profits on sale of property used for residence.--(1) Subject to the provisions of Sub-section (2), where, in the case of an assessee being an individual or a Hindu undivided family, the capital gain arises from the transfer of a long-term capital asset ['to which the provisions of Section 53 are not applicable, omitted by the Finance Act, 1985 with effect from 1-4-1985] being buildings or lands appurtenant thereto, and being a residential house, the income of which is chargeable under the head 'Income from house property (hereafter in this Section referred to as the original asset), and the assessee has within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, a residential house, then, instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this Section, that is to say,--\n\n(i) if the amount of the capital gain is greater than the cost of the residential house so purchased or constructed (hereafter in this Section referred to as the new asset, the difference between the amount of the capital gain and the cost of the new asset shall be charged under Section 45 as the income of the previous year; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be nil; or\n \n\n(ii) if the amount of the capital gain is equal to or less than the cost of the new asset, the capital gains shall not be charged under Section 45 ; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be reduced by the amount of the capital gain.\n\n(2) The amount of the capital gain which is not appropriated by the assessee towards the purchase of the new asset made within one year before the date on which the transfer of the original asset took place, or which is not utilized by him for the purchase or construction of the new asset before the date of furnishing the return of income under Section 139, shall be deposited by him before furnishing such return [such deposit being made in any case not later than the due date applicable in the case of the assessee for furnishing the return of income under Sub-section (1) of Section 139] in an account in any such bank or institution as may be specified in, and utilized in accordance with, any scheme which the Central Government may, by notification in the Official Gazette, frame in this behalf and such return shall be accompanied by proof of such deposit; and, for the purposes of Sub-section (1), the amount, if any, already utilized by the assessee for the purchase or construction of the new asset together with the amount so deposited shall be deemed to be the cost of the new asset:\n\nProvided that if the amount deposited under this sub-section is not utilized wholly or partly for the purchase or construction of the new asset within the period specified in Sub-section (1), then,--\n\n(i) the amount not so utilized shall be charged under Section 45 as the income of the previous year in which the period of three years from the date of the transfer of the original asset expires ; and\n \n\n(ii) the assessee shall be entitled to withdraw such amount in accordance with the scheme aforesaid.\n\n3. The facts which would suffice for deciding the present appeal are that the respondent/assessee sold his 1/4th share in a residential property known as \"Jalal House\" at Rehabari, Guwahati, for a consideration of Rs. 40,00,000 (rupees forty lakhs) only to the Government of Meghalaya for the sale deed No. 348 dated December 21, 1995. Admittedly, the indexed cost of the property was worked out at Rs. 10,26,925 (rupees ten lakhs twenty-six thousand nine hundred and twenty-five) and thus, there was a capital gain of Rs. 29,73,048 (rupees twenty-nine lakhs seventy-three thousand and forty eight) earned by the respondent/assessee and it was also not disputed. The respondent/assessee with the money for the sale of his residential property known as \"Jalal House\" decided to purchase a residential Flat No. 4B on the fourth floor of a multistoried building situated at Bally High,l, Ballygunge Park Road, Calcutta-19, from Shri Radha Krishna Jalan and Smt. Anguri Devi Jalan on February 8, 1996, each having one half share of ownership of the residential flat. The respondent/ assessee negotiated with the above two owners to purchase their residential flat for a consideration of Rs. 30,00,000 (rupees thirty lakhs) and accordingly entered into two agreements dated May 9, 1996, and May 17, 1996, and under the said two agreements, the respondent/assessee had taken physical possession of the said residential flat. From the two agreements of purchase, it is clear that each of the co-owners agreed to transfer and assign their respective shares or interest in the said flat together with a car park space for a consideration of Rs. 30,00,000 (rupees thirty lakhs) in total.\n\n4. The Assessing Officer (for short the \"AO\") under his assessment order rejected the respondent/assessee's claim for exemption under Section 54 of the Income-tax Act, 1961, for the reason that (a) the appellant/assessee has taken only a sub-lease of the property vide indenture of sub-lease dated January 17, 1998, in between him and M/s. Agarwal Company Ltd, and the said indenture has been executed in pursuance of the letter dated August 28, 1961, written by Shri R.K. Jalan and Smt. Anguri Devi Jalan to the said lessee ; (b) the sub-lease cannot be taken as a clear purchase as per the meaning of the provisions of Section 54(1) of the Income-tax Act and also that there was no transfer of property as claimed and the same was merely a sub-lease ; (c) the appellant/assessee had not complied with the provisions of Section 54(2) of the Income-tax Act by not depositing the unappropriated amount of capital gain in the Capital Gains Deposit Scheme, 1988, within the stipulated time of furnishing the return of income-tax under Section 139(1) of the Income-tax Act. The respondent/ assessee preferred the first appeal being Appeal No. GUWA-75/99/2000 against the assessment order of the Assessing Officer to the Commissioner of Income-tax (Appeals), Guwahati. The first appellate authority had partly allowed the appeal by passing the final order dated September 24, 1999, wherein the first appellate authority held that even a lease also amounts to a transfer within the meaning of the Transfer of Property Act, 1882, by referring to two decisions of the Supreme Court in R.K. Palshikar (HUF) v. CIT and A.R. Krishnamurthy v. CIT , and as such the transfer in question between the respondent/ assessee on the one side and Shri Radha Krishna Jalan and Smt. Anguri Devi Jalan on the other side is the transfer of capital asset within the provisions of Section 2(47)(v) of the Income-tax Act but the first appellate authority held that the respondent/assessee could utilise only Rs. 14,43,254 (rupees fourteen lakhs forty-three thousand two hundred and fifty-four) up to August 31, 1996, towards the purchase of the property and balance amount of capital gain of Rs. 15,29,794 (rupees fifteen lakhs twenty nine thousand seven hundred and ninety-four) was not deposited in a separate capital gain account with the bank by construing Sub-section (2) of Section 54 of the Income-tax Act, 1961, in such a manner that the appellant/assessee did not deposit the unutilized portion of the capital gain before the date of furnishing the return of income-tax under Section 139(1) of the Income-tax Act, 1961.\n\n5. The respondent being aggrieved by the findings of the first appellate authority, i.e., the Commissioner of Income-tax (Appeals), that the respondent/assessee was eligible for exemption under Section 54 of the Income-tax Act, 1961, to the extent of only Rs. 14,43,254 (rupees fourteen lakhs forty-three thousand two hundred and fifty-four) and direction to the Assessing Officer to levy the capital gains tax on the amount of Rs. 15,29,794 (rupees fifteen lakhs twenty nine thousand seven hundred and ninety-four) only in place of Rs. 29,73,048 (rupees twenty-nine lakhs seventy-three thousand and forty eight) under Section 54 of the Income-tax Act also preferred an appeal against the order of the first appellate authority dated September 24, 1999, before the Income-tax Appellate Tribunal, Gauhati Bench, Gauhati. The Department also preferred an appeal against the order of the learned first appellate authority, i.e., the learned Commissioner of Income-tax dated September 24, 1999, before the learned Income-tax Appellate Tribunal, Gauhati Bench, Gauhati. By a common order dated April 18, 2001, the Income-tax Appellate Tribunal had allowed the appeal preferred by the respondent/assessee and rejected the appeal preferred by the appellant/Commissioner of Income-tax, Gauhati Bench. The basis on which the Income-tax Appellate Tribunal, Gauhati Bench, allowed the appeal preferred by the respondent/assessee is that Section 54 of the Income-tax Act being the beneficial provision, it should be construed liberally to advance the object of giving benefit to the assessee by exempting the capital gain on the sale of property used for residence from being charged to income-tax and also that Sub-section (2) of Section 54 of the Income-tax Act, 1961, simply mentions that the unutilized portion of the capital gain on the sale of the property used for residence could be deposited by the assessee before the date of furnishing return of income-tax under Section 139 of the Income-tax Act and also that the Sub-section (2) of Section 54 of the Income-tax Act does not mention that the date of furnishing of return of income-tax should be construed within the meaning of Section 139(1) of the Income-tax Act, 1961. The learned Income-tax Appellate Tribunal, Gauhati Bench was of the view that the date of furnishing of return of income-tax contemplated in Sub-section (2) of Section 54 should also include Sub-section (4) of Section 139 of the Income-tax Act inasmuch as Sub-section (2) of Section 54 of the Income-tax Act mentions only Section 139 of the Income-tax Act without any further restriction or without confining to Sub-section (1) of Section 139 of the Income-tax Act, 1961. The operative portion of the order of the learned Income-tax Appellate Tribunal Gauhati Bench, Gauhati, dated April 18, 2001, reads as follows :\n\n9. We have carefully considered the submissions of the learned representatives of the parties. We have also gone through the orders of the authorities below and the copies of the documents to which our attention was drawn by the learned representatives of the parties at the time of hearing of the appeals.\n\n10. There is no dispute that the assessee entered into two separate agreements with Shri Radha Krishna Jalan dated May 9, 1996 ; and Smt. Anguri Devi Jalan dated May 17, 1996, for purchase of undivided 1/2 share of each in the said flat together with the said undivided share in the land for a consideration of Rs. 15 lakhs to each aggregating to Rs. 30 lakhs. We also observe from the said agreement that the said vendors agreed to transfer and assign in favour of the assessee all their rights and interest in the said flat with the absolute ownership without any objection, obstruction and/or hindrance whatsoever on their part or any person claiming through under or on their behalf. We also observe that the assessee was liable to pay all future maintenance charges, municipal rates and taxes and other outgoings in respect of the said flat. Not only this, there is no dispute that the assessee got the possession of the said flat in May, 1996. We further observe that in the balance-sheet, a copy of which is placed at pages B-l to B-6 of the paper book the assessee had shown in the list of investments in Schedule E the total investment in the properties in respect of the said flat at Rs. 30 lakhs and the balance amount payable to Sri Radha Krishan Jalan and Smt. Anguri Devi Jalan was shown as unsecured loans. Clause 5 of Section 2(47) of the Act reads as under :\n\nany transaction involving the allowing of possession of any immovable property to be taken or retain in part performance of a contract of the nature referred to in Section 53A of the Transfer of Property Act, 1882 (4 of 1882), or, . . .\n\n11. Therefore, for the purpose of transfer the possession of the flat in part performance of the contract under Section 53A of the Transfer of Property Act is essential. Further, under the provision of Section 54(1) of the Act, it is stipulated that a person is entitled to take the benefit if the purchase has been made within the stipulated period of one year before or two years after the date on which the transfer took place. In the case before us, the assessee has undisputedly entered into agreement for purchase of the flat and taken possession within one year from the date of sale of the old residential house. Therefore, we agree with the learned authorised representative of the assessee that the assessee has complied with the requirements as laid down in Section 54(1) of the Act by purchasing the flat at a cost of Rs. 30 lakhs as against the capital gain of Rs. 29,73,048. Therefore, we agree with the learned authorised representative of the assessee that there has been no necessity to comply with the conditions for availing of the benefit from tax of the capital gain, as laid down under Section 54(2) of the Act, i.e., to deposit the unpaid amount in a separate bank account under the capital gain account scheme. We are of the view that the assessee had already appropriated the entire capital gain for purchase of the new asset within the stipulated time. In this regard, we find support from the decision of the Kerala High Court in the case of K.C. Gopalan wherein it was held that the assessee is entitled to exemption under Section 54 even though for the construction of the new house, the amount that was received by way of sale of his old property as such was not utilised. It was held by the Kerala High Court that no provision is made by the statute that the assessee should utilise the amount which he obtained by way of sale consideration for the purpose of meeting the cost of the new asset. It was held that Section 54 only provides that the assessee has to purchase a house property for the purpose of his own residence within a period of one year before or after the date on which the transfer of his property took place or he should have constructed a house property within a period of two years after the date of transfer. It was further held that entitlement of exemption under Section 54 relates to the cost of acquisition of a new estate in the nature of a house property for the purpose of his own residence within the specified period.\n\n12. In the case before us, the ratio laid down by the hon'ble Kerala High Court squarely applies to the case before us as the assessee had acquired the house at a cost more than the capital gains within the specified period.\n\n13. Therefore, we hold that the assessee is entitled to for the exemption under Section 54 of the Act for the entire long-term capital gain of Rs. 29,73,048. Accordingly, we allow the ground of appeal of the assessee and reject the ground of appeal of the Department.\n\n6. From a plain reading of Sub-section (2) of Section 54 of the Income-tax Act, 1961, it is clear that only Section 139 of the Income-tax Act, 1961, is mentioned in Section 54(2) in the context that the unutilised portion of the capital gain on the sale of property used for residence should be deposited before the date of furnishing the return of the Income-tax under Section 139 of the Income-tax Act. Section 139 of the Income-tax Act, 1961, cannot be meant only Section 139(1) but it means all sub-sections of Section 139 of the Income-tax Act, 1961. Under Sub-section (4) of Section 139 of the Income-tax Act any person who has not furnished a return within the time allowed to him under Sub-section (1) of Section 142 may furnish the return for any previous year at any time before the expiry of one year from the end of the relevant assessment year or before the completion of the assessment year whichever is earlier. Such being the situation, it is the case of the respondent/assessee that the respondent/assessee could fulfil the requirement under Section 54 of the Income-tax Act for exemption of the capital gain from being charged to income-tax on the sale of property used for residence up to March 30, 1998, inasmuch as the return of income-tax for the assessment year 1997-98 could be furnished before the expiry of one year from the end of the relevant assessment year or before the completion of the assessment whichever is earlier under Sub-section (4) of Section 139 of the Income-tax Act, 1961.\n\n7. The apex court in State of Maharashtra v. Santosh Shankar Acharya held that it is too well known a principle of construction of statutes that the Legislature engrafted every part of the statute for a purpose. The legislative intention is that every part of the statute should be given effect. The Legislature is deemed not to waste its words or to say anything in vain and a construction which attributes redundancy to the Legislature will not be accepted except for compelling reasons.\n\n8. The apex court in Bhavnagar University v. Palitana Sugar Mill P. Ltd. , held that it is the basic principle of construction of statute that statutory enactment must ordinarily be construed according to their plain meaning and no words should be added, altered or modified unless it is plainly necessary to do so to prevent a provision from being unintelligible, absurd, unreasonable, unworkable or totally irreconcilable with the rest of the statute. Paras. 24 and 25 of the Bhavnagar University v. Palitana Sugar Mill P. Ltd. as follows:\n\n24. True meaning of a provision of law has to be determined on the basis of what it provides by its clear language, with due regard to the scheme of law.\n\n25. Scope of the legislation on the intention of the Legislature cannot be enlarged when the language of the provision is plain and unambiguous. In other words statutory enactments must ordinarily be construed according to its plain meaning and no words shall be added, altered or modified unless it is plainly necessary to do so to prevent a provision from being unintelligible, absurd, unreasonable, unworkable or totally irreconcilable with the rest of the statute.\n\n9. For the reasons discussed above, we answer the question formulated in the present case in positive. Accordingly the order of the learned Income-tax Appellate Tribunal, Gauhati Bench, Gauhati, dated April 18, 2001, passed in I. T. A. No. 328/Gau/1999 and I. T. A. No. 49/Gau/2000 is not interfered with and the appeal is dismissed.\n\n Parties are to bear their own costs." }, { "title": "Commissioner Of Income-Tax vs Davy Ashmore India Ltd. on 13 December, 1990", "url": "https://indiankanoon.org//doc/1980426/", "text": "Commissioner Of Income-Tax vs Davy Ashmore India Ltd. on 13 December, 1990\nEquivalent citations: [1991]190ITR626(CAL)\nJUDGMENT\n \n\nAjit K. Sengupta, J. \n \n\n1. In this reference under Section 256(1) of the Income-tax Act, 1961, the following question of law has been referred to this court: \n \"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in law in holding that the payment of 36,470 made by the assessee-company to the foreign party as consideration for outright sale of drawings and design was not 'royalty' exigible to tax under the Income-tax Act, 1961 ?\" \n\n2. Shortly stated, the facts are as follows : \n The assessee received a letter of intent from Light Metal Industries Limited (hereinafter referred to as \"the LMI\") for maintenance and supply of terminal equipment for a secondhand aluminium cold-rolling mill being imported by them for their aluminium-rolled products project at Village Hoera in the District of Hooghly, West Bengal. LMI also issued a purchase order dated March 30, 1984, in terms of which the assessee was to arrange for the import of concept designs and drawings enabling it to prepare the detailed manufacturing drawings for purposes of manufacture of the terminal equipments which were required to be supplied by the assessee as per the letter of intent of LMI. \n\n3. The secondhand rolling mill was to be imported by LMI from Davy Makes (Pools) Ltd., U. K. On receipt of the purchase order and the letter of intent from LMI, the assessee placed an order with Davy Makes (Pools) Limited, U. K., for the supply of one print each of concept designs and drawings for the terminal equipment. In paragraph 2 of the letter of intent, it specifically mentions that the remittance of the purchase consideration as aforesaid was to be made by telegraphic transfer/demand draft in favour of Davy Makes (Pools) Limited, U. K. (hereinafter referred to as \"DMPL\") subject to the approval of the Reserve Bank of India. Paragraph 6 of the letter mentions that \"the concept designs and drawings shall be imported by us in terms of the approval letter dated April 10, 1984, issued by the Secretariat for Industrial Approval, FCI, Department of Industrial Development, Ministry of Industries, and the delivery of the concept designs and drawings for the items mentioned in paragraph 1 of the letter as extracted above were to be made within four weeks from the date of the remittance of the agreed sum of 36,470 in U. K, In the application made to the Secretariat for Industrial Approval, FCI, Department of Industrial Development, Ministry of Industries, the assessee stated that the purpose for which the application was made was that the concept designs and drawings upon import from DMPL would be used by the company for the preparation of detailed manufacturing drawings. The Ministry of Industries, by letter dated April 10, 1981, granted approval to the import of the designs and drawings from DMPL, U. K., for the manufacture of terminal equipments for a lump sum payment of 36,470 net of taxes. \n\n4. On these facts, the Income-tax Officer took the view that the payments made to the non-resident company were in the nature of royalty within the meaning of Explanation 2 to Section 9(1)(vi) of the Income-tax Act, 1961, and accordingly, he applied the rate of tax at 20% on the said sum of 36,470. On appeal, the Commissioner of Income-tax (Appeals) took the view that the transaction as approved by the Government of India was merely for the import of designs and drawings from the non-resident against a lump sum payment of 36,470. An import licence was also obtained for the purposes as above under the import policy for the year. According to the Commissioner of Income-tax (Appeals), therefore, the payment to a non-resident company would not be a payment in the nature of royalty. \n\n5 The Tribunal, on these facts, confirmed the order of the Commissioner of Income-tax (Appeals) and found that there was a transfer of drawings and designs to the assessee against the lump sum payment of 36,470. In terms of Clause 2 of Article XIII of the Avoidance of Double Taxation Agreement between India and the U. K., such transfer by way of an outright sale by a non-resident party to the assessee cannot be termed as royalty and only the rentals received as consideration for the use and/or the right to use of any patent, trademark, designs or models, plan, secret formula, etc., would be termed as royalty under the said clause. The Tribunal held further that, under Clause 3 of Article XIII of the Avoidance of Double Taxation Agreement between India and the U. K., a different meaning to the term \"royalty\" has been provided and it is different from the meaning given to the term \"royalty\" in Explanation 2 to Section 9(1)(vi) of the Income-tax Act, 1961. Therefore, in terms of the Circular No. 333 of the Central Board of Direct Taxes dated April 2, 1982 ([1982] 137 ITR (St.) 1) the provisions contained in Clause 3 of Article XIII of the Avoidance of Double Taxation Agreement between India and the U.K. would prevail. Since there was an outright sale of designs by the foreign company to the assessee-company, the payment of 36,470 cannot be taxed by reference to Explanation 2 to Section 9(1)(vi) of the Income-tax Act, 1961.\n\n6. The short question which falls for determination is whether, on a construction of the collaboration agreement by and between the assessee-company and the non-resident company, i.e., Davy Makes (Pools) Limited, U. K., in the light of the Avoidance of Double Taxation Agreement between India and the U. K., there was an outright transfer of the drawings and designs by the non-resident company to the assessee-company. \n\n7. It has been contended on behalf of the Revenue that the Income-tax Officer was justified in holding that sale of designs and drawings by the foreign company was transfer of all or any of the rights concerning such technical know-how, that is, designs and drawings as covered by the definition of \"royalty\" in Section 9(1)(vi) of the Income-tax Act, 1961. According to him, the payment made to the non-resident company was in the nature of royalty within the meaning of Explanation 2 to Section 9(1)(vi) of the Act and, accordingly, the tax was properly levied. It is also the contention of the Revenue that if there be any inconsistency between the agreement for avoidance of double taxation and Explanation 2 to Section 9(1)(vi) of the Act, in that event the Act will prevail over the agreement and the Board's Circular laying down to the contrary cannot be and is not binding on the court. \n\n8. We would like to dispose of the second contention first. The definition of \"royalty\" appearing in Article XIII of the Agreement for Avoidance of Double Taxation made between India and the U. K. is no doubt different from the definition appearing in Explanation 2 to Section 9(1)(vi) of the Act. In determining the liability of a non-resident company, if there is any Agreement for Avoidance of Double Taxation entered into under Section 90 of the Income-tax Act, 1961, the said agreement must prevail over the provisions of the Income-tax Act ; otherwise, there was no point in entering into any agreement for avoidance of double taxation. Whenever any specific arrangement or agreement has been made regarding the taxability of any income under the Agreement for Avoidance of Double Taxation, such arrangement or agreement will necessarily prevail over the provisions of the statute. \n\n9. In this connection, we may usefully refer to the notification enforcing the convention between the Government of India and the Government of the United Kingdom of Great Britain and Northern Ireland for the avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income and capital gains. This notification is dated November 23, 1981 (see [1982] 133 ITR (St.) 34), which reads as follows : \n\n\"Whereas the annexed convention between the Government of India and the Government of the United Kingdom of Great Britain and Northern Ireland for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains has come into force on the notification by both the Contracting States to each other of the completion of the procedures required by their respective laws, as required by Article 27 of the said Convention. \n\nNow, therefore, in exercise of the powers conferred by Section 90 of the Income-tax Act, 1961 (43 of 1961), and Section 24A of the Companies (Profits) Surtax Act, 1964 (7 of 1964), the Central Government hereby directs that all the provisions of the said Convention shall be given effect to in the Union of India. \n\nThe Government of India and the Government of the United Kingdom of Great Britain and Northern Ireland ; \n\nDesiring to conclude a Convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains : \n\nHave agreed as follows.\" \n\n\n10. The intention is clear. All provisions of the said Convention shall be given effect to notwithstanding the provisions contained in relevant Act or\nActs. \n\n11. Our attention has been drawn to a decision of the Andhra Pradesh High Court in the case of CIT v. Visakhapatnam Port Trust [1983] 144 ITR 146. There, the Andhra Pradesh High Court, while considering the Indo-German Double Taxation Avoidance Agreement, held that in cases of inconsistency between the Agreement and the Act, the Agreement will prevail. In our view, where an express provision to the contrary is made in this Agreement, the transaction will be governed by such Agreement, Explanation 2 to Section 9(1)(vi) cannot have any application inasmuch as the definition of royalty has been specifically provided in the Agreement. Thus an express provision to the contrary has been made in the Agreement. There is also another aspect of the matter. The charging provisions in Sections 4 and 5 of the Act defining \"total income\" of either residents or nonresidents are expressly made \"subject to the provisions of the Act\" which will include the Agreement made under Section 90 of the Act. That apart Explanation 2 to Section 9(1)(vi) makes it quite clear that \"royalty\" as defined in Explanation 2 is only for the purpose of Clause (vi). The said meaning assigned to royalty cannot be made applicable in an Agreement which is made under Section 90 of the Act.\n\n12. The conclusion is inescapable that, in case of inconsistency between the terms of the Agreement and the taxation statute, the Agreement alone would prevail. \n\n13. The Central Board of Direct Taxes has issued a Circular No. 333 on April 2, 1982 (see [1982] 137 ITR (St.) 1), on the question as to what the Assessing Officers will do when they find that the provisions of the\n\nDouble Taxation Avoidance Agreement are not in conformity with the provisions of the Income-tax Act, 1961. Then it was laid down by the Board in the said Circular as follows : \n\n\"The correct legal position is that where a specific provision is made in the Double Taxation Avoidance Agreement, that provision will prevail over the general provisions contained in the Income-tax Act, 1961. In fact the Double Taxation Avoidance Agreements which have been entered into by the Central Government under Section 90 of the Income-tax Act, 1961, also provide that the laws in force in either country will continue to govern the assessment and taxation of income in the respective country except where provisions to the contrary have been made in the Agreement. \n\nThus, where a Double Taxation Avoidance Agreement provided for a particular mode of computation of income, the same should be followed, irrespective of the provisions in the Income-tax Act. Where there is no specific provision in the Agreement, it is the basic law, i.e., the Income-tax Act, that will govern the taxation of income.'' \n \n\n14. In our view, the Circular reflected the correct legal position inasmuch as the Convention or Agreement is arrived at by the two contracting Governments in deviation from the general principles of taxation applicable to the Contracting States ; otherwise, the double taxation avoidance agreement will have no meaning at all. \n\n15. \"Royalty\" has been defined in the Agreement for Avoidance of Double Taxation between India and the U. K., as follows (sec [1982] 133 ITR (St.) 34, 44) : \n\n\"XIII(3) The term 'royalties' as used in this article means payments of any kind including rentals received as consideration for the use of, or the right to use : \n\n(a) any patent, trademark, design or model, plan, secret formula or process \n \n\n(b) industrial, commercial or scientific equipment, or information concerning industrial, commercial or scientific experience ; \n \n\n(c) any copyright of literary, artistic or scientific work, cinematographic films, and films or tapes for radio or television broadcasting ; \n \n\nbut does not include royalties or other amounts paid in respect of the operation of mines or quarries or of the extraction or removal of natural resources.\" \n\n16. It appears, therefore, that the term \"royalty\" has been defined in the agreement to mean, inter alia, the payment of any kind including rentals received as consideration for the use of or the right to use any patent, trademark, design or model, plan, secret formula or process. Therefore, what is important to consider is that, in order that a payment may be\n\ntreated as royalty for the purposes of Article XIII of the Agreement for Avoidance of Double Taxation between India and the U. K., the person who is the owner of such patents, designs or models, plans, secret formula or process, etc., retains the property in them and permits the use or allows the right to use such patents, designs or models, plans, secret formula, etc. In other words, where the transferor retains the property right in the designs, secret formula, etc., and allows the use of such right, the consideration received for such user is in the nature of royalty. Where, however, there is an outright sale or purchase, as in the present case, the consideration is for the transfer of such designs, secret formula, etc., and cannot be treated as royalty. \n\n17. In the case of secret processes, patents, special inventions, etc., where the right of exploitation is given by an owner to a third party instead of an outright sale, then for the right to exploit them, the secret processes, designs, etc., and the amount paid which may be either in lump or a periodic one partakes of the character of royalty. \n\n18. Our attention has been drawn to a decision of the Gujarat High Court in the case of CIT v. Ahmedabad Manufacturing and Calico Printing Co. [1983] 139 ITR 806. There, the Gujarat High Court observed as follows (p. 819) :\n\n\"A royalty may be a single payment covering the whole use of the patent for the whole term, but the more usual practice is to make periodic payments and to relate the amounts of those payments to the actual use of the patent by the licensee. It is common to charge royalties on the basis of a percentage of the price for which the licensee sells the articles or on the basis of the number of articles made under the patent. Although the amount of royalties is generally a matter of free bargaining between licensor and licensee, in some countries Governments preclude their nationals from paying royalties to foreign patent owners in excess of a certain maximum fixed by the Government. Some Governments also reserve the right to approve the entire licence contract concluded between their nationals and aliens. \n\nRoyalty payments may be in exchange for something in addition to the mere use of the invention. The most common example is that wherein the licensor not only grants the right to use the invention but also undertakes to supply the licensee with technical \"know-how\", that is to say, information from his own experience on the most efficient and economical way of working the patent. It is estimated that more than 50% of licence contracts include \"know-how\" provisions. \n\nWhen applied to industrial designs, the meaning of the word \"royalty\" is roughly the same as in the case of patented inventions. Designs, depending on their nature or the various national laws, may be protected by patents, copyright or registration. The form of legal protection, however, does little to change the system of royalty payment as described in regard to patents. \n\nIt is thus clear that in the case of secret processes, patents, special inventions, when right of exploitation is given by the owner of the inventions, patents, etc., to a third party, instead of outright sale, then for the right to exploit these inventions, secret processes, some amount may be paid and the amount paid may be co-related to the extent of exploitation. It is in this sense, -as pointed out by the Encyclopaedia Britannica, that licence agreements for the exploitation of patents, inventions, etc., are being entered into in the modern commercial world and as\" part of such agreements, even knowledge derived from his own experience and technical know-how for the most economical and efficient user of the patents, inventions, etc., are parted with by the licensor to the licensee.\" \n\n19. The Karnataka High Court, in the case of Citizen Watch Co. Ltd. v. IAC of I. T. [1984] 148 ITR 774, observed that the term \"royalty\" is referable to payments to be made for the use of patents by the Government or H. M. T. and it does not include the fee payable for supply of documents and information.\n\n20. This court, in the case of CIT v. Hindusthan General Electrical Corporation Ltd. [1971] 81 ITR 243, held that royalties usually are periodical payments for continuous enjoyment of certain benefits under a contract.\n\n21. Our attention has also been drawn to the decision of this court in the case of N.V. Philips v. CIT (No. 1) [1988] 172 ITR 521, where this court observed as follows (p. 538) :\n\n \"From the dictionary meaning of the term 'royalty', it appears that the said term connotes payments periodic or at a time for user by one person of certain exclusive rights belonging to another person. Examples of such exclusive rights are rights in the nature of a patent, mineral rights or rights in respect of publications. It appears to us that the person who grants the user of the exclusive right might have the sanction of law which guarantees such exclusiveness. Such sanction may be obtained by taking out a patent in respect of an invention. In other cases, such exclusive right would arise from the ownership of mineral rights and is protected by the laws relating to property. In respect of books and publications, the exclusive right of the author is protected and sanctioned by the laws of copyright. \n\n It is possible that a person who invents may not take out a patent for his invention but unless some other inventor independently and by his own efforts comes to duplicate the invention, the original invention remains exclusive to the inventor and it is conceivable that such an inventor might\n\nexploit his invention permitting some other person to have the user thereof against payment. Similarly, it is possible for a person carrying out operations of manufacture and production of a particular produce to acquire specialised knowledge in respect of such manufacture and production which is not generally available. A person having such specialised knowledge can claim exclusive right to the same as long as he chooses not to make such specialised knowledge public. It is also conceivable that such a person can exploit and utilise such specialised knowledge in the same way as a person holding a patent or owning a mineral right or having the copyright of a publication to allow a limited user of such specialised knowledge to others in confidence against payment. \n\nThere is no reason why payment for the user of such specialised knowledge, though not protected by a patent, should not be treated as\nroyalty or in the nature of royalty.\" \n\n22. Having regard to the facts and circumstances of this case, it must be held that the present case is not a case where the non-resident is retaining the property in the designs and drawings. Such designs and drawings are imported under the import policy and with the approval of the Reserve Bank of India on the basis of the letter of intent. The importation of the designs and drawings postulates an out and out transfer or sale of such designs and drawings and the non-resident company does not retain any property in them leaving the grantee to use or exploit them. The consideration paid for transfer, therefore, cannot be treated as royalty falling under Article XIII of the Agreement for Avoidance of Double Taxation between India and the U. K. The consideration paid is for an outright transfer of the drawings and designs by the non-resident company and such consideration cannot be termed as royalty. We, therefore, answer the question in this reference in the affirmative and in favour of the assessee. \n\n23. There will be no order as to costs. \n\n Bhagabati Prasad Banerjee J. \n\n24. I agree." }, { "title": "Mahadeva Upendra Sinai Etc. Etc vs Union Of India & Ors on 7 November, 1974", "url": "https://indiankanoon.org//doc/755547/", "text": "Mahadeva Upendra Sinai Etc. Etc vs Union Of India & Ors on 7 November, 1974\nEquivalent citations: 1975 AIR 797, 1975 SCR (2) 640, 1975 3 SCC 765, AIR 1975 SUPREME COURT 797, 1975 TAX. L. R. 293, 1975 SCC (TAX) 105, 1975 2 SCR 640, 98 ITR 209\nAuthor: A. Alagiriswami\nBench: A. Alagiriswami, A.N. Ray, Kuttyil Kurien Mathew, P.K. Goswami, Ranjit Singh Sarkaria\n PETITIONER:\nMAHADEVA UPENDRA SINAI ETC. ETC.\n\n\tVs.\n\nRESPONDENT:\nUNION OF INDIA & ORS.\n\nDATE OF JUDGMENT07/11/1974\n\nBENCH:\nALAGIRISWAMI, A.\nBENCH:\nALAGIRISWAMI, A.\nRAY, A.N. (CJ)\nMATHEW, KUTTYIL KURIEN\nGOSWAMI, P.K.\nSARKARIA, RANJIT SINGH\n\nCITATION:\n 1975 AIR 797\t\t 1975 SCR (2) 640\n 1975 SCC (3) 765\n CITATOR INFO :\n RF\t 1986 SC 368\t (16)\n R\t 1989 SC1719\t (16,18)\n\n\nACT:\nTaxation Laws (Extension to Union Territories) (Removal of\nDifficulties) Order 1970 Cl. (3), proviso (2)-If ultra vires\nTaxation laws (Extension to Union Territories) Regulation\nIII of 1963.\n\n\n\nHEADNOTE:\nGoa, Daman and Diu, erstwhile Portuguese territories became\na Union Territory of the Indian Union on December 19, 1961.\nThe President of India, in exercise of the powers under Art.\n240 promulgated the Taxation\t Laws (Extension to Union\nTerritories) Regulation II of 1963.\t By cl. 3 of\t the\nRegulation, the Indian Income Tax Act, 1961, was extended to\nthe Union Territory. By cl. (4) the corresponding law in\nthe Union Territory was repealed from April 1, 1963. Clause\n(7) provided that if any difficulty arose in giving effect\nin the Union Territory, to the provisions of any Act etc.,\nthe Central Government may, by general or special order give\nnecessary directions for the removal of the difficulty..\nThe petitioners were\tcarrying on business in the Union\nTerritory, where there was a Portuguese law relating to levy\nof tax, the scheme of which was entirely different from\t the\nIndian Act. Under that law, the net profits and gains\twere\nnot calculated but a tax was levied at a certain percentage\non the gross income or turnover of the business irrespective\nof whether the assessee made any profits or suffered losses.\nAfter the extension of the Indian Act. the petitioners\twere\nassessed under it from the assessment year 1964-65 onwards.\nThe assessee was allowed depreciation of the assets used by\nhim for his business. on the basis of\t the 'written\tdown\nvalue'\tunder s. 43(6)(b) read with s. 32 of the Income\t Tax\nAct.\nSection 32 adopts two methods in allowing depreciation.\t In\nthe case of non-ocean going ships and buildings, machinery,\nplant\tor furniture,\t the\tprescribed percentage\t of\ndepreciation is to be computed on the basis of the written\ndown value of the asset. Section 43 (6) defines 'written\ndown value' to mean (a) in the case of assets\tacquired in\nthe previous year, the actual cost and (b) in the case of\nassets\tbefore the previous year, the actual cost less\t all\ndepreciation actually allowed under the 1961-Act or under\nthe 1922-Act or any Act repealed by that Act or under\t any\nexecutive orders. Where the asset was acquired in\t the\nprevious year\t depreciation would be allowed at\t the\nprescribed rate on such cost, and in subsequent years,\t the\ndepreciation would be calculated on the basis of actual cost\nless depreciation actually allowed.\nFor the assessment\tyear 1964-65,\tin assessing\t the\npetitioner, the written down value was taken as the actual\ncost of the assessee's assets since no depreciation\t was\nactually allowed to him earlier and the written down value\nwas progressively reduced in\t the succeeding years\t by\ndeducting the depreciation actually allowed in\nOn Nov. 8, 1970, the\t Central Government, in purported\nexercise of its powers under cl. (7)\tof the\t Regulation,\npromulgated the Taxation Laws (Extension\t to Union\nTerritories) (Removal of Difficulties) Order.\tIt provided\nin cl. (3) that in making any assessment under\t the Income\nTax Act, 1961, all depreciation actually allowed tinder\t the\nlocal laws shall be taken into account in computing\t the\ndeductions, and in the proviso 2 to cl. (3), that, where in\nrespect\t of any period no depreciation was actually allowed\nunder the local law, depreciation for that period shall be\ncalculated at the rate under the Indian Income Tax, 1961, or\nthe 1922 Act or any Act repealed by that Act or under\t any\nexecutive orders issued when the Indian Income Tax\tAct,\n1886, was in force, and the depreciation shall be deemed to\nbe the depreciation actually allowed under the\t local\tlaw.\nIn the light of proviso 2 to cl. (3) of the 1970 order,\t the\nassessment already made of the petitioner were sought to be\nrevised, so that, the written down value of the\n641\nassets\tfor calculating the depreciation allowance-even\t for\nthe first time when the petitioners were assessed under\t the\n1961-Act-would\tnot be the actual cost of the assets, but a\nfar lower sum with\t proportionate\t increase in\t the\npetitioner's liability\t to tax since the assessment\tyear\n1964-65.\nThe petitioner therefore challenged the validity of Proviso\n2 to Cl. (3) of the Taxation\t laws (Extension to Union\nTerritories) (Removal of Difficulties) Order 1970.\n(Per A. N. Ray, C.J., K. K. Mathew, P. K. (Goswami and R. S.\nSarkaria, JJ.).\nHELD : Allowing the Petitions,\nThe 2nd Proviso to cl. (3) of the 1970-Order is ultra vires\nthe Central Government when exercising its powers under\t cl.\n(7) of\t Regulation III of 1963, and the Revenue is\t not\nentitled to levy tax on the basis of the depreciation allow-\nance computed in accordance with the said Proviso. [659E-F]\n(1) To keep pace\t with\t the rapidly\t increasing\nresponsibilities of a welfare democratic\tstate,\t the\nlegislature has to turn out a plethora\tof hurried\nlegislation. It is well nigh impossible, especially\twhen\nthe legislature deals with socioeconomic activities of\t the\nState or extends existing Indian laws to territories freshly\nmerged in the Indian Union, to foresee all the circumstances\nto deal with which a statute is enacted or to anticipate all\nthe difficulties that might arise in its working due to\npeculiar local conditions.\tIn order to obviate\t the\nnecessity of approaching the legislature for\t removal of\nevery difficulty however trivial, encountered in the\t en-\nforcement of the statute, the legislature\tinvests\t the\nExecutive with power to remove difficulties' for making\t the\nimplementation\tof the statute effective by making minor\nadaptations and peripheral adjustments in the statute\nwithout touching its substance. [653D-H]\n(2) The existence or arising of a 'difficulty' is the\tsine\nqua non for the exercise of the power under cl. 7 of\t the\n1963-Regulation. The\t'difficulty' contemplated by\t the\nclause must be a difficulty arising in giving effect to\t the\nprovisions of the Act and not a difficulty arising aliunde.\nFurther, the Central Government can exercise the power under\nthe clause only to the extent it is necessary for applying\nor giving effect to the Act and no further. It may slightly\ntinker\twith the Act to round off angularities and smoothen\nthe joints or remove minor obscurities to make it workable,\nbut it cannot change, disfigure or do violence to the basic\nstructure and primary features of the Act. Under the guise\nof removing a difficulty, it cannot change the\t scheme\t and\nessential provisions of the Act. [653H654B]\n(3) The contention that but for the impugned proviso,\t the\nprovisions of ss. 32 and 43 (6) (b) of 'the 1961-Act, on its\nextension to the Union Territory, could not be given effect\nto and applied to the petitioner must be rejected. There\ncould be no difficulty in computing the 'written down value'\nunder S. 43 (6) (b) of the assets that had been acquired by\nthe petitioner before the previous\t year.\t Since\t no\ndepreciation was, in fact, allowed to the petitioner in\t the\npast under the Portuguese law, in the first assessment under\nthe Indian Act, the written down value would be the actual\ncost of the assets less nil. Thereafter, in each succeeding\nyear, the depreciation actually allowed in the preceding\nyear would be deducted causing yearly\t diminution of\t the\nwritten\t down value with consequent decrease\t in the de\npreciation allowed on that basis. This was\texactly\t the\nmanner\tin which the 'written down value' of the assets of\nthe petitioner had been computed and depreciation allowed\nfor the several assessment years from 1964-65 onwards,\nshowing\t that there was no difficulty in applying\t the\nprovisions. [655H-656D]\n(4) There is no basis for the argument that the impugned\nproviso\t brings\t about\tequality of treatment\t among\t the\ndifferent assessees in India.\tFar from ensuring parity of\ntreatment it puts the assessee in the Union territories in a\nworse position than the assessees in the rest of India. [656\nD-F]\nStraw,\tProducts Ltd. v. Income-tax Officer, Bhopal, [1968]\n2, S.C.R. 1 followed.\nCommissioner of Income-tax, Hyderabad v. Dewan Bahadur\t Ram\nGopal Mills Ltd. [1961] 2 S.C.R. 318 at\t325 &\t 326\ndistinguished.\n642\nThe phrase 'actually allowed' is limited to the depreciation\nactually taken into account or granted or given effect to\nand cannot be stretched to mean 'nationally allowed'.\t In\nthis Union Territory, under the Portuguese law\t no\ndepreciation was ever computed or actually allowed to\t the\nassessees. The impugned proviso. by replacing\tdepreciation\n'actually allowed' with depreciation 'deemed to have\tbeen\nallowed, by a fiction of law, even where no depreciation was\nat all allowed, in\teffect,\t attempts to\tchange\t the\nfundamental scheme of the Indian Act in its application to\nthe assessees in the Union Territory of Goa, Diu and Daman.\n[658B-E]\n(6) Under s. 32(2) of the Indian Income Tax Act an assessee\nis entitled to ,carry forward' unabsorbed depreciation in\ncase of loss or inadequate profits, without any time limit.\nFor ensuring this right to an\t assessee, assessments\t for\nascertaining losses or insufficiency of profits of\t his\nbusiness, since the acquisition and use of the assets by\nhim, will have to be made. In the Union Territory of\t Goa\netc., during the interregnums between Dec. 19, 1961,\t and\nApril 1, 1963, there was no law authorising the levy of\nincome\ttax. Even under the Portuguese law, the tax was in\nreality\t a 'turn over' tax irrespective of the assessee\nmaking\tprofit or loss.\t Retrospective assessments for\t the\npurpose, going back to a period prior to 1963,\t could\thave\nbeen made under a law of Parliament but not under an execu-\ntive fiat. But, in the Indian Income Tax Act as extended to\nthese\tterritories, there is\t no provision\tfor making\nassessment in respect of those past years. In the absence\nof such law, it is impossible to work the Proviso without\nriding\trough shod over the rights of the assessees to\thave\ntheir unabsorbed depreciation\t relating to the pre-1963\nperiod,\t carried forward. Therefore, a Goan assessee,\t who\nsuffered losses and depreciation of his assets\t will never\nget the benefit of such carry forward, as no machinery\nexists\tfor determining the inadequacy of profits or\t the\nfactual\t of losses in those years. Viewed from this angle,\nthe impugned proviso would, in the implementation of\t the\nAct, create difficulties rather than remove them. [659A-E]\n(Per Alagiriswami. J., dissenting).\nHELD : Dismissing the petition,\n(1) The provision regarding\t written down\t value\t and\nallowance of depreciation under the Indian Income Tax\t law\nproceeds on the basis of depreciation allowed year by\tyear\nwith the result that the written down value goes down\tyear\nafter year aid similarly the depreciation. If, therefore,\nbecause\t there\twas no provision under the Income Tax\t law\napplying to the former Portuguese territories providing\t for\ndepreciation the written down value of an asset is taken as\nthe actual cost even after many years of its acquisition it\nwould mean putting the assessees in those 'territories at an\nadvantage compared to the assessees in the rest of India.\nMore important, it would not accord with realities and would\nnot be in accordance with the scheme of depreciation under\nthe Indian Income-tax Act. A certain plant and machinery\npurchased 10 years earlier and now worth half its original\nvalue would be taken to be worth its\t original cost\t and\ndepreciation allowed on that basis.\t It is, therefore,\nnecessary to devise some method by which both the assessees\nin the\t Indian\t Territory and\t the erstwhile\t Portuguese\nterritory could be put on the same footing and\t the normal\nscheme of depreciation under the Indian Income-tax Act\tmade\napplicable to\tall. A similar problem arose in the\tcase\ndealt with in Commissioner of Income Tax, Hyderabad v. Dewan\nBahadur Ramgopal Mills Ltd. [1961] 2 S.C.R. 318 dealing with\nassessees in Hyderabad governed by the Hyderabad Income\t Tax\nAct before the Indian Income tax Act was extended to\t the\nHyderabad area and the decision given therein is exactly to\nthe point. [661D-H; 663H]\n(2) In\t that case, this Court held that if\tdepreciation\nactually allowed under the. Hyderabad Income-tax Act alone\nwas taken into account in\t computing the aggregate\ndepreciation allowance\t and the written down value\t an\nanomalous result would follow, namely,\tdepreciation\nallowance to be allowed to the assessee in the accounting\nyear under the Indian Income Tax Act would be more than what\nwas allowed in previous years under the Hyderabad Income-tax\nAct, that this would create a disparity and be against\t the\nscheme\tof the Indian Income tax Act, that it was therefore\nnecessary to explain paragraph 2 of the Removal of\tDif-\nficulties Order, 1950, (considered\tto that case)\t to\nassimilate or harmonise the position regarding\tdepreciation\nallowance. This is exactly what was proposed to be dead in\nthe case of the former Portuguese\tterritories by\t the\nimpugned Order. [663B-H]\n643\n(3) The decision in Rajngopal Mills was considered in Straw\nProducts Ltd. v. I.T.O. [1968] 2 SCR 1.\tIt was\t not\ndissented from and by implication the decision in Ramgopal\nMills is still good law. In the Straw Products case\t the\ncourt held that the order impugned in that case sought, in\npurported exercise of the removal of difficulties power, to\nremove a difficulty which had not arisen and that therefore\nit was unauthorised. The Court specifically did not think\nit necessary to determine to what extent, if any, it would\nbe open to the Central Government by an Order issued in\nexercise of the power to remove difficulties to make\tpro-\nvision\twhich is inconsistent with the\t provisions of\t the\nIndian\tIncome\ttax Act, nor did it hold that the Order\nimpugned in that case was inconsistent with the provision of\nthe Indian Income-tax Act. It was therefore open to\t the\nCentral\t Government, in exercise of its powers under cl. 7,\nto issue the, impugned order.\t [665B-G]\n(4) Under the scheme of the Indian Income tax Act, it\t was\nopen to the assessee to carry forward the depreciation\t for\nany length of time if he had sustained any loss. It could\nnot however, be contended by the assessee in\tthe present\ncase that it will now be very difficult, if not\t impossible,\nfor the assessee to produce all the accounts\t of earlier\nyears to show\t the losses which he\t had incurred,\t the\ndepreciation he was entitled to and which he can carry\nforward. Assessees are expected to and\twould\thave\nmaintained accounts at least for the purpose of the Income-\ntax Act, which was in force\t in the former Portuguese\nterritories, though that Act was a simple one. What is\nnecessary for\tworking out the impugned order\tis to\tknow\nwhether\t there\twas a profit or a loss and as the cost of\nacquisition of the assets, in respect of which\tdepreciation\nallowance is claimed, should also be available it should not\nbe very difficult to calculate the depreciation and arrive\nat the\t written down value as on the date when\t the Indian\nIncome-tax Act\t was extended\tto the\t former\t Portuguese\nterritories. To accede to the claim of the assessee\tthat\nthe original value of the assets should be taken to be\t the\nwritten\t down value however long they might have been\tused\nmeans that they get an advantage not merely in the first\nyear in which the Indian Income-tax Act was applied to those\nterritories but to enjoy a continued advantage\t which\twill\nlast is long as their assets last. [665G-666C]\n(5) The Order\t is given retrospective effect, but\t the\nCentral Government has the power to make an order or give a\ndirection so as to remove, the difficulty from the\tvery\nbeginning, and that is what the Order does. [666F-G]\nRamgopal Mills Case, followed.\n\n\n\nJUDGMENT:\nORIGINAL JURISDICTION : Writ Petitions Nos. 112, 391-394 of\n1971 and 330-31 & 382-387 of 1974.\nPetitions under Article 32 of the Constitution of India.\nA. K. Sen (In W.P. No. 112/71), N. A. Palkhiwala (In\tW.P.\n330331\tand 382-387/74), S. P. Mehta, P. C. Bhartari, J. B.\nDadachanji, G. C. Mathur, Arati Mehta and Ravinder Narain,\nfor the petitioners.\nF. S. Nariman, Additional Solicitor General, P. P. Rao and\nS. P. Nayar, for the respondents.\nThe Judgment of the Court was delivered by R. S. Sarkaria,\nJ. A. Alagiriswami, J. gave a dissenting Opinion.\nSARKARIA, J. These writ petitions under Article 32 of\t the\nConstitution raise a question with regard to the validity of\nthe 2nd Proviso to Clause (3) of\tthe Taxation\tLaws\n(Extension to Union Territories) (Removal of Difficulties)\nOrder 2 of 1970. The first five petitions of 1971\twere\nurged earlier\tby Shri Ashok Sen and the rest have\tbeen\nargued\tnow by\t Shri N. A. Palkhiwala. They are being\ndisposed of by a common judgment.\nThe petitioners are carrying on business in the Union\nTerritories of Goa, Daman and Diu. Respondents 1 and 2\t are\nthe Union of India and the Income-tax Officer, respectively.\n644\nGoa, Daman and Diu are erstwhile Portuguese\t territories\nwhich became a part of the Union of\tIndia on and\tfrom\nDecember 19, 1961. Thereupon, the President of India in\nexercise of powers under Article 240 of the\tConstitution\npromulgated the Taxation Laws (Extension\t to Union\nTerritories) Regulation III\tof 1963 (for\tshort,\t the\nRegulation). By Clause (3) of this\tRegulation, amongst\nother laws, the Indian Income-tax Act, 1961 (for short,\t the\nAct) was extended to the Union Territory of Goa, Daman\t and\nDiu with effect from April 1, 1963\tsubject\t to certain\nmodifications, one of which was the insertion of s. 294-A in\nthe Act. Section 294-A gave power to the Central Government\nto make exemption, reduction or modification in, respect of\nincome-tax to\tavoid hardship\t or anomaly or to remove\ndifficulty in the application of the Act to any assessee in\nthe Union Territories of Dadra Nagar Haveli, Goa, Daman\t and\nDiu etc. The\t power\tgranting the exemption etc.\t was\nexercisable before March 31, 1967. We are not concerned\nwith the Section because the impugned order was not\tmade\nunder it..\nBy Clause (4) of the Regulation, t~e laws in force in\t the\nUnion Territory corresponding to the Acts specified in\t the\nSchedule, stand repealed from April 1, 1963.\nClause (7) provides\n\t \"If any difficulty arises in giving effect in\n\t any Union Territory to the provisions of\t any\n\t Act, or\tof any rule, notification or order\n\t made or\t issued\t thereunder, the Central\n\t Government may, by general or special order\n\t published\t in the Official Gazette, make\tsuch\n\t provisions or give such directions us appear\n\t to it to be expedient or-necessary for the re-\n\t moval of the difficulty.\nOn November 8, 1970, the Central Government in purported\nexercise of its powers under Clause (7) of the Regulation\npromulgated the Taxation Laws (Extension\t to Union\nTerritories) (Removal of Difficulties) Order No. 2 of\t1970\n(hereinafter called the 1970 Order). the material part of\nwhich runs thus\n\t \"Whereas\tcertain difficulties have arisen in\n\t giving effect to the provisions of the Income-\n\t tax Act,\t 1961. in the Union Territories of\n\t Goa, Daman, Diu .... Now therefore....\t the\n\t Central Government hereby makes the following\n\t order...\n\t (1)\n\t (2) It\tshall be deemed to have come\tinto\n\t force on the 1st day of April 1963.\n\t (3) Computation\t of aggregate\tdepreciation\n\t allowable and written down value-In making any\n\t assessment under the Income-tax Act, 1961\t (43\n\t of 1961)\t all depreciation actually allowed\n\t under the local\t laws shall be\t taken\tinto\n\t account in computing the aggregate of\t all\n\t deductions in respect of depreciation referred\n\t to in Clause (1) of subsection (2) of Section\n\t 34, and\tthe written down value under\t sub\n\t clause (2) of clause (6) of Section 43 of\t the\n\t said Act.\n\t 64 5\n\t Provided\tthat where in respect of any asset,\n\t depreciation has\t been allowed for any\tyear\n\t both in the assessment made under the local\n\t law and\tin the assessment made under\t the\n\t Income-tax Act, 1885, the greater of the\t two\n\t sums allowed shall only be taken into account,\n\t Provided further that where in respect of\t any\n\t period no depreciation was actually allowed\n\t under the local\t law or the\tdepreciation\n\t actually allowed cannot be ascertained, depre-\n\t ciation in respect of that period shall be\n\t calculated at the rate for the time being in\n\t force under the Income-tax Act, 1961 or under\n\t the Indian Income-tax Act, 1922, or any\t Act\n\t repealed\tby that Act or under any executive\n\t orders, issued when the Indian Income-tax Act,\n\t 1886 was in force, as the case may be, and the\n\t depreciation so calculated shall be deemed to\n\t be the depreciation actually allowed under the\n\t local law.\"\nAs clarified by the Explanation, \"local law\" in relation to\nthe, Union Territory\tof Goa, Daman\tand Diu means\t the\nPortuguese law\t relating to tax on income as in force\nimmediately before April 1, 1963. In\t these\tterritories,\nthere was in force a Portuguese law relating to levy of tax,\nthe scheme of which was entirely different from that of\t the\nIndian\tIncome-tax Act. Under that\tlaw there was\t no\nprovision for\tgranting depreciation\tallowance; the\t net\nprofits\t and gains of the business were not calculated\t and\nthe tax was levied at a certain percentage on the gross\nincome or turnover of the business, irrespective of whether\nthe assessee had made profits or suffered losses.,\nAfter the extension of the Act to Goa, Daman and Diu,\t the\npetitioners were assessed under the Act for several\nassessment years from\t 1964-65 onwards. In each of\t the\ncompleted assessments, the assessee was allowed depreciation\nof the assets used by him for his business, on the basis of\n'written-down value' under cl. (b) of S. 43(6) road with s.\n32. For the assessment year 1964-65 the \"written-down value\"\nwas taken as the actual cost of the assets to the assessee\nsince no depreciation was actually allowed to him earlier.\nIn each of the succeeding annual assessments the 'written-\ndown value' was progressively reduced by deducting\t the\ndepreciation actually allowed in the preceding year from the\nactual cost of the assets.\nIn the light of the 2nd Proviso to Clause (3) of the\t1970\nOrder,\tthe past completed assessments in the case of these\npetitioners are being revised.\tIn consequence, the written-\ndown value of the assets for calculating the,\tdepreciation\nallowance even for the first time when the petitioners\twere\nassessed under the Act, would not be the actual cost of\t the\nassets\tto the assessee, but a far lower sum with propor-\ntionate increase in the petitioners' liability to tax since\nthe assessment year 1964-65.\nIn the\t case of petitioners in Writ Petitions\t330-331- of\n1971, the Respondent\t(Income-tax Officer) has already\n\"revised\" the assessment for the year 1965-66, and reduced\nthe depreciation allowed in view of the 1970 Order and in\nthe result raised a higher demand. He has, However,\tkept\nthat demand in abeyance till the decision of these peti-\n646\ntions, wherein the validity of the 2nd Proviso\t(hereinafter\ncalled the impugned Proviso) to Clause (3) of the 1970 Order\nis in question.\nSection\t 2(24)\t(i) of the Act defines \"income\"\t to include\n\"profits and gains\". Section 28(i) makes the \"profits\t and\ngains of any business or profession which was carried on by\nthe assessee\tat any\t time during the previous year\"\nchargeable to\tincome-tax. Section 29\t requires that\t the\nincome referred to in S. 28 shall be computed in accordance\nwith the provisions including those for deductions contained\nin ss. 30 to 43-A. Since the tax is chargeable on \"profits\nand gains\" and not on gross receipts, the profits to be\nassessed must be the real profits computed, subject to\t the\nspecial\t requirements of the Act in accordance with\t the\nordinary principles of commercial accounting.\t It follows\nthat it the deduction of a particular item from the incoming\nof the business, or profession is neither expressly covered\nby the aforesaid sections, nor prohibited expressly or by\nnecessary implication by those provisions, it can be allowed\nunder S. 28(1) provided on ordinary commercial\t principles,\nit is a proper item to be debited against the\tincoming in\nascertaining the \"profits and gains\" property so-called-see\nBadridas Degu\t v. Commissioner of\t Income-tax(1)\t and\nCommissioner of Income-tax v. Plymaun.(2)\nWe have alluded to these general principles for a proper\nperspective. Dedications by way of depreciation allowance,\nwith which we are directly concerned, have been specifically\nrecognised and dealt with in ss. 3 2, 34 and 43 (6) of\t the\nAct.\nSection 32 adopts two methods in allowing depreciation.\t In\nthe case of ocean-going ships depreciation is allowed,\tyear\nafter year, at the fixed prescribed\t percentage on\t the\noriginal cost\tof the asset to the assessee s. 32(1)(8).\nThis has been called the straight-line method.\tIn the\tcase\nof non-ocean going ships and buildings, machinery, plant or\nfurniture, the prescribed percentage, of depreciation is to\nbe computed on the basis of written-down value of the asset\ns, 32(1)(ii).\t This is known as the \"written-down value'\nmethod.\t Both\tthese methods\tseek to ensure that\t the\naggregate of the depreciation allowances granted, year after\nyear, does not exceed hundred per cent of the original\tcost\nof the\t asset.\t In the straight-line method, however,\t the\nentire\tdepreciation is written off sooner than in\t the\n'written-down value' method, if the figures of actual\tcost\nof the asset and the prescribed percentage are the same in\neither case.\nSub-section (2) of s. 32 allows the carry-forward of\nunabsorbed depreciation allowance to any subsequent year,\nwithout any time-limit, where such non-absorption is \"owing\nto there being no profits or\t gains\tchargeable for\t the\nprevious year or owing to the profits or gains\t being\tless\nthan the allowance\". Depreciation loss under s. 32(2)\t (2)\nthus, to a large extent, stands on the same footing as other\nbusiness losses.\nAn assessee claiming depreciation of assets has to show that\nsuch assets are owned by him and were used by him in\t the\naccount year for the purpose of his business, the profits of\nwhich are being charged s.\n(1) 34 I.T.R. 10 (S. C.).\n(2) 46 I.T.R. 649 (S.C.).\n647\n32 (i) ]. Further, the total of all deductions in respect of\ndepreciation under s. 32(i) of the Act or under the Indian\nIncome-tax Act, 1922 (for short, the 1922 Act) or under\t any\nAct repealed by that Act, made year after year, should\tnot,\nin any event, exceed the actual cost of the assets to\t the\nassessee s. 34(2)(i).\nThe definition of \"actual cost\" is to be found in s. 43(1)\nand that of \"written-down value\" in s. 43 (6).\t The later\ndefines it to mean-\n\t (a) in\tthe case of assets acquired in\t the\n\t previous\t year,\tthe ,actual cost to\t the\n\t assessee;\n\t (b) in\tthe case of assets acquired before\n\t the previous year, the actual cost to\t the\n\t assessee\t less all depreciation actually\n\t allowed to him under this Act or under\t the\n\t 1922 Act or any Act repealed by that Act, or\n\t under any executive Orders issued when\t the\n\t Indian Income-tax Act, 1886 was in force.\n(emphasis supplied)\nThe pivot of the definition of \"written-down value\" is\t the\n\"actual\t cost\" of the assets. Where the asset was acquired\nand also used for the business in the previous\t year,\tsuch\nvalue would be its full actual cost and depreciation\t for\nthat year would be allowed at the prescribed rate oh\tsuch\ncost. In subsequent year, depreciation would be calculated\non the\t basis\tof actual cost\tless depreciation actually\nallowed. The key word in clause (b) is \"actually\". It is\nthe anti-thesis of that which is merely\tspeculative,\ntheoretical or\t imaginary. \"Actually\" contraindicates a\ndeeming\t construction of the word \"allowed\" which it quali-\nfies. The connotation of. the phrase \"actually allowed\" is\nthus limited to depreciation actually taken into account or\ngranted and given effect to, i.e. debited by the Income-tax\nOfficer\t against the incoming of the business in computing\nthe taxable income of the assessee; it cannot be stretched\nto mean \"nationally allowed\" or merely allowable, on a\nnotional basis.\nOf course, any depreciation carried forward under s. 32(2)\nis, in\t view of Explanation 3 to S. 43(6) considered as\ndepreciation \"actually allowed. But such is not the\tcase\nhere.\nFrom the above conspectus, it is clear that the essence of\nthe scheme of the\tIndian\tIncome-tax Act\t is,\tthat\ndepreciation is allowed, year after year, on the actual cost\nof the assets as reduced by depreciation actually allowed in\nearlier years. it follows, therefore, that even in the\tcase\nof assets acquired before the previous year, where in\t the\npast no depreciation\twas computed, actually\t allowed or\ncarried forward, for no fault of the assessee, the \"written-\ndown value\" may, under Clause (b) of s. 43 (6), also, be the\nactual cost of the assets to the assessee.\n648\nRelying\t on the ratio of this Court's\t decision in Straw\nProducts Ltd v. Income-tax Officer,\t Bhopal(1), learned\nCounsel\t for the petitioners have pressed these points\tinto\nargument\n\t (1) The 'arising of a difficulty' in giving\n\t effect to the Indian Income-tax Act or rules\n\t etc., made thereunder is a condition precedent\n\t to the invocation of the power under Clause\n\t (7) of the Regulation, and since the existence\n\t of that condition had not been established as\n\t an objective fact, the Central Government\t had\n\t no power to promulgate the impugned Proviso.\n\t It is stressed that the Act has been applied\n\t all these years since its extension in April,\n\t 1963 to\t these\t Territories without\t any\n\t difficulty.\n\t (2) The\t power\tunder Clause (7) of\t the\n\t Regulation can be exercised only in a manner\n\t consistent with\tthe scheme and essential\n\t provisions of the Act. The impugned proviso\n\t seeks to amend and change the scheme and basic\n\t provisions of the Act inasmuch as it provides,\n\t inconsistently with ss.43(6) and 32 of\t the\n\t Act, for determining the written-down value on\n\t the basis of a notional depreciation in cases\n\t in which no depreciation was actually allowed.\n\t (3) In\tany case, it would be impossible to\n\t work the impugned Proviso.\nMr. Nariman, learned Additional Solicitor-General, submits,\nin reply, that difficulties had arisen in the application of\nthe provisions\t of the Act in the\tmatter\tof allowing\ndepreciation to assessees in these Union Territories.\t But\nfor the impugned provisions, it is contended, such assessees\nwould not have been entitled to claim depreciation allowance\neither under clause (a) or under clause (b) of s.43(6)\tread\nwith s.32 of the Act.\tClause (a) could not apply to these\ncases because\tthe assets were acquired before the\tyear\nimmediately preceding April 1,1963. Clause (b) would\t not\ncover their case because, firstly, under the scheme of\t the\nAct, the written-down value of assets acquired several years\nearlier\t cannot\t be ,taken as their full actual\t cost,\tand,\nsecondly, the Portuguese law, under which they were formerly\nassessed, was not repealed by the Indian Income-tax Act, but\nby the Regulation. It is argued that in s.43(6) read\twith\ns.32, there is an implied prohibition against allowing\ndepreciation on the actual cost of the assets which were not\nacquired in the previous year.\t This difficulty, says\t the\nCounsel, had to be removed to enable\tthe petitioners to\nclaim just depreciation allowance.\tIf it\tis assumed-\nproceeds the argument that s. 43 (6) is applicable to\t the\n'case of these assessees and the depreciation\t has to be\ncalculated on the original full cost of the assets despite\ntheir being old and worn out by use over the years, such a\ncourse\twould. be wholly divorced from realities, and\tgive\nthe assessees in Goa, Daman and Diu an undue advantage\tover\nthe assessees\tin India. This resultant disparity, it is\nurged, was a difficulty and the\n(1)[1968] 2 S.C.R. 1.\n649\nimpugned Proviso removes it by bringing the assessees in the\nformer Portuguese Territories at par with the assessees\t who\nhad suffered taxation under the Act.\nLearned Counsel further maintains that the decision in Straw\nProducts' case does not advance the case of the petitioners,\nrather it supports the Revenue. In this connection, Counsel\nhas invited our attention to the observations of this Court\nat pp.\t 8 and 13 of the Report in Straw Products'\tcase\n(supra) to the effect that by the application,of the Indian\nIncome-tax Act, 1922, to the merged States \"a difficulty did\narise in the matter of determining the\t depreciation allo-\nwance under s. 10(2)(vi)\" which corresponds to\t s.32(1)(ii)\nof the 1961 Act, and that this \"difficulty\" was removed by\nthe Taxation Laws Merged States Removal of\tDifficulties\nOrder 1949.\nIt is further contended that once it was found that such a\ndifficulty had arisen, the Central Government could, in\t the\nlegitimate exercise of its powers under Clause (7) of\t the\nRegulation, exercise\tof the\t same by providing\tthat\nallowances, where they were, not actually allowed, should be\ndeemed to have been allowed for the purpose of\tdepreciation\nin prior years. On this point reliance has been placed on\nCommissioner of Income-tax,\tMadhya\tPradesh\t v. Straw\nProducts(1) and Commissioner of Income-tax Hyderabad v.\nDewan Bahadur RamGopal Mills Ltd.(2).\nSince both sides rely, more or less, on the decision of this\nCourt in Straw Products Ltd. v. Income-tax Officer, Bhopal\n(supra)\t and the other two authorities cited have also\tbeen\nnoticed therein, it will be appropriate to examine the\tsame\nin detail.\nThe assessee therein was a Company formed in 1937 in Bhopal'\nState and was\t exempted by the Ruler of that\t State\tfrom\npayment of' all taxes for a period of ten years expiring on\nOctober 31, 1948. The State of Bhopal merged with India on\nAugust 1, 1949.\t The Taxation Laws (Extension\tto Merged\nStates and Amendments) Act 67 of 1949,\twhich replaced\t the\nearlier\t Ordinance 21 of 1949, extended with\teffect\tfrom\nApril 1, 1949, to the merged States, amongst other Acts. the\nIndian Income-tax Act, 1922 and by s. 7 the laws in force in\nthe merged States corresponding to the extended Act stood\nrepealed Section 6 contained\t a \"removal of difficulty\nclause\" which was substantially the same as Clause 7 of\t the\nRegulation in the present case.\t Section 6 provided\n\t \"If any difficulty arises in giving effect to\n\t the provisions of any Act, rule or order\n\t extended\tby Section 3 to the merged States,\n\t the Central Government may, by\torder,\tmake\n\t such provisions\tor give such directions as\n\t appear to it to be necessary for\t removal of\n\t the difficulty.\"\nThe Central Government in exercise of its power under Clause\n(8) of\t Ordinance 21 of 1949\t (which corresponds to\nSection 6 of Act\n(1) [1964] 2 S.C.R. 881, 887. (2) [1961] 2 S.C.R. 318, 325.\n650\n 67 of 1949) issued the Taxation Laws (Merged States)\n(Removal ,of Difficulties) Order, 1949, clause(2) of which\nprovided :\n\t \"In making any, assessment under\t the Indian\n\t Income-tax Act,\t 1922,\t all\tdepreciation\n\t actually allowed under any laws or rules of a\n\t merged State relating to income-tax and super-\n\t tax, shall be taken into account in computing\n\t the aggregate depreciation allowance referred\n\t to in sub-clause (c) of the Proviso to clause\n\t (vi) of sub-section (2) and the written\tdown\n\t value under clause (b)\t of sub-s. (5) of\n\t section IO of the said Act.\n\t Provided\tthat where in respect of any asset,\n\t depreciation has\t been allowed for any\tyear\n\t both in\tthe assessment made in\t the merged\n\t State and in British India, the greater of the\n\t two sums\t allowed shall only be\t taken\tinto\n\t account.\"\nAccording to clause (2) of the above Order, in computing the\nprofits and gains of the business carried on by the assessee\nfor determining the tax payable by it for the assessment\nyear 1949-50, depreciation allowed under Section 10(2)\t(vi)\nof the 1922 Act was taken as a percentage of the original\ncost to the assessee of the assets used by\tit for\t its\nbusiness, and in the four subsequent years the written\tdown\nvalue\tof the\t assets\t admissible for depreciation\t was\ndetermined on\tthat basis. The Income-tax Officer\tthen\nrevised\t the assessments in respect of the assessment years\n1952-53 and 1953-54 and recomputed its taxable income on the\nfooting\t that since the commencement of the business\t the\nassessee must\tbe deemed nationally to\t have been allowed\ndepreciation under the Bhopal Income-tax Act. The Appellate\nAssistant Commissioner and the Income-tax Appellate Tribunal\ndisagreed with\t the Income-tax Officer and restored\t the\noriginal assessment. On a reference made by the Appellate\nTribunal, the\tHigh Court held in favour of the assessee.\nThe Income-tax Commissioner appealed to this Court. During\nthe pendency of that appeal, the Central Government in\nexercise of its power under s.6 of the Act 67 of 1949 issued\nan Order called the Taxation Laws (Merged States) (Removal\nof Difficulties) Amendment Order, 1962, adding\tthis\nExplanation to the order of 1949\n\t \"Explanation-For\t the\tpurpose\t of\tthis\n\t paragraph, the ,expression all\tdepreciation\n\t actually allowed under any laws ,or rules of a\n\t Merged State means and shall be deemed always\n\t to have meant\n\t (a) the aggregate allowance for depreciation\n\t taken into account in computing\tthe written\n\t down value under any laws or rules in force in\n\t a\t merged State or carried forward under\t the\n\t said laws or rules, and\n\t (b) in cases where income had been exempted\n\t from tax under any laws or rules in force in a\n\t merged State or under any assessment with a\n\t Ruler the depreciation that would have\tbeen\n\t allowed had the income not been so exempted.\n651\nThis Court held in Commissioner of\t Income-tax, Madhya\nPradesh\t v. Straw Products Ltd. (supra) that the expression\nactually allowed\" in the Removal of Difficulties Order 1949,\nmeant allowance actually given effect to, but by virtue of\nthe Explanation, added by the aforesaid Order of 1962,\t the\ncorrect\t basis for computing the written down value of\t the\ndepreciable assets for the relevant period was the\t one\nadopted by the Income-tax officer. This Court then declined\nto examine the challenge to the validity of the (Removal of\nDifficulties) Amendment Order, 1962, for the reason that an\nauthority or court administering the Act cannot permit a\nchallenge to be raised against the vires of the Act.\nThe assessee thereafter challenged the vires of the\t1962\nOrder by a writ petition filed under Article\t226 of\t the\nConstitution.\tThe Petition was dismissed and the assessee\nappealed to this Court on a certificate granted by the\tHigh\nCourt.\t The Court first examined clause (2) of the Removal\nof Difficulties Order of 1949, which\tcorresponds to\t the\nunchallenged part of paragraph (3) of the 1970\t Order,\t and\nheld it to be, valid on the ground that since the Income-tax\nActs of the merged States had not been repealed by the\t1922\nAct, a\t difficulty had arisen in taking into\taccount\t all\ndepreciation actually allowed under any laws or rules of a\nmerged\tState relating\t to income-tax for the\t purpose of\ncomputing the aggregate depreciation allowance referred to\nin sub-clause (c) of the Proviso to S. 10(2)(vi) of the 1922\nAct, and that the 1949 Order did no more than removing\tthis\ndifficulty.\nThe Court then proceeded to examine the challenge to\t the\nvalidity of sub-clause (g) of the Explanation added by\t the\n1962 Order. In this connection, contentions (1) and\t (2)\ncanvassed in that case were precisely the same\t which\thave\nnow been raised before us on behalf of the\tpetitioners.\nBoth these contentions were accepted by the Court and, as a\nresult, the aforesaid sub-clause (b) of the Explanation\t was\nstruck\tdown.\tIn that context, Shah J. (as he then\twas)\nspeaking for the Beach constituted by seven learned Judges,\nobserved\n\t \"Exercise\t of the power to make provisions or\n\t to issue directions as may appear necessary to\n\t the Central Government is conditioned by\t the\n\t existence\t of a difficulty arising in giving\n\t effect to the provisions of any Act, rule or\n\t order. The section does not make the arising\n\t of the.\tdifficulty a matter of subjective\n\t satisfaction. of\t the Government; it is a\n\t condition\t precedent to the exercise of power\n\t and existence of the condition, if challenged,\n\t must be established as an objective fact.\"\nThe Court held that after the promulgation of the 1949 Order\nno difficulty\tsurvived or arose in giving effect to\t the\nprovisions of s.10 of the 1922 Act. In that connection, it\nwas observed :\n\t \"It is impossible, on\tthe words used in\n\t s.10(5) clause (b) read with the 1949 Order,\n\t to hold\tthat-the written down value of\t the\n\t assessee in a merged State could not be deter-\n\t mined and with\t a view to remove that\n\t difficulty the impugned\n\t 652\n\t Order was promulgated.\tThe fact that\t the\n\t assets were acquired by a person at a\ttime\n\t when he was not an assessee under the Indian\n\t Income-tax Act or under the State Act\t not\n\t disable him, when he is assessed to tax on the\n\t profits will the business, from claiming\t the\n\t benefit of the depreciation allowance on those\n\t assets if used\t for the purpose of\t the\n\t business.\"\n\t (emphasis added)\nThe Court noted that the impugned provision of the\t1962\nOrder seeks to alter the connotation\t of the expression\n\"depreciation actually\t allowed.\" It then towards the\t end\nconcluded\n\t \"To sum up : the power conferred by s. 6 of\n\t\t\t Act\t 67 of\t 1949 is a power to\t r\nemove\ta\n\t difficulty which arose in the application of\n\t the Indian Income-tax Act to the merged States\n\t : it can be exercised in the manner consistent\n\t with the scheme and essential provisions of\n\t the Act and for the purpose for which it is\n\t conferred. The impugned Order which seeks in\n\t purported\t exercise of the power, to remove a\n\t difficulty which had\t not arisen\twas,\n\t therefore, unauthorised.\"\nA comparative study of Explanation (b) in the\t1962 Order,\nwhich was being challenged in Straw Products' case, and\t the\nsecond\tProviso to Clause (3) of Order 2 of 1970, which is\nthe target of\t attack from the petitioners' side in\t the\ninstant case, reveals a striking similarity between the\t two\nimpugned provisions. There, the 1962 Order envisaged cases\nof assessees from a merged State who had not been actually\nallowed\t depreciation of the assets because of\ttheir being\nexempted by the Ruler of that State from payment of income-\ntax. In the case in hand, also, the impugned proviso seeks\nto cover the case of an assessee, who before the merger of\nthese\tTerritories in\t the Union of India, had not\tbeen\nallowed\t depreciation because\tthe law by which he\t was\ngovernment was not a law imposing tax on the gross turnover\nof the\tbusiness, irrespective of profits or losses, and, as\nsuch, did not recognise any claim to depreciation. Further,\nin both the cases, the impugned provisions seek to change\nthe essence of the definition of \"written-down\t value\"\t and\nscheme of the Indian Income-tax Act relating to depreciation\nallowance, by\t substituting\t \"depreciation\t fictionally\nallowed\" for \"depreciation actually allowed.\" This,\t the\nCourt held, the Central Government was not competent to do\nunder the garb of removing a \"difficulty\" which was\t not\nproved to have arisen.\nIn Straw Products' case it was averred in the writ petition\nby the\t assessee that 'no difficulty had arisen in giving\neffect to the provisions of the Indian Income-tax Act 1922,\"\nand as such, there was no question of the exercise of\t any\npower under Section 6 of the Merged States Act \"for\t the\npurpose\t of passing the impugned Order of\t1962.\tThis\nallegation was\t denied\t by the Respondents,\tand it\t was\ncontended on their behalf that the \"arising of a difficulty\"\nin the enforcement of the Income-tax Act was a\t matter\t for\nsubjective satisfaction of the Government.\n653\nPrecisely similar pleas have been taken in the affidavits of\nthe parties in the present case (vide\tW.Ps.112,391-394 of\n1971).\t The position here is very much the same as was in\nStraw Products' case (supra) Here also, the\tRespondents'\nplea, in substance, is that there is a deficiency or\nomission in the provisions of ss.32 and 43(6) of the (1961\nAct and unless the deficiency or omission was supplied, it\nwould be difficult for the Central Government to collect tax\nand allow depreciation to assessees like the petitioners to\nthe same extent or at the same rate at which it has\tbeen\ncollected from or allowed to assessees who have throughout\nbeen assessed under the Indian Income-tax Act.\nThis raises two questions : (1) Is this a\t'difficulty'\nwithin\tthe contemplation of Clause (7) of the Regulation ?\n(2) Is the Central Government in the exercise of its power\nunder that Clause competent to supply a deficiency or cases\nomission of this nature ?\nFor reasons that follow( the answers to both these questions\nmust be in the negative.\nFor a\tproper appreciation of the points involved, it is\nnecessary to have a general idea of the nature and purpose\nof a \"removal of difficulty clause\" and the power conferred\nby it on the Government.\nTo keep pace with the rapidly increasing responsibilities of\na Welfare democratic, State, the legislature has to turn out\na plethora of hurried legislation, the volume of which is\noften matched\twith its complexity. Under conditions of\nextreme\t pressure, with heavy demands on the time of\t the\nlegislature and the endurance and skill of the draftsman, it\nis well nigh impossible to foresee all the circumstances to\ndeal with which a statute is enacted or to anticipate\t all\nthe difficulties that might arise in its working due to\npeculiar local\t conditions or even a local law. This is\nparticularly true when Parliament undertakes\t legislation\nwhich gives a new dimension to socioeconomic activities of\nthe State or\textends\t the existing Indian laws to\t new\nterritories or areas freshly merged in the Union of India.\nIn order to obviate\tthe necessity\tof approaching\t the\nlegislature for removal of every difficulty, howsoever\ntrivial, encountered in the enforcement of a\tstatute, by\ngoing through\tthe time-consuming amendatory process,\t the\nlegislature sometimes\tthinks it expedient to\t invest\t the\nExecutive with a very limited power to\tmake minor\nadaptations and peripheral adjustments in the statute,\t for\nmaking\tits implementation effective, without touching\t its\nsubstance. That is why the \"removal, of difficulty clause\",\nonce frowned upon and nick-named us \"Henry VIII Clause\" in\nscornful commemoration of the absolutist ways in which\tthat\nEnglish\t King got the\t \"difficulties\"\t in enforcing\t his\nautocratic will removed through the instrumentality of a\nservile\t Parliament, now finds acceptance as\ta practical\nnecessity, in several Indian statutes of post\tindependence\nera.\nNow let us turn to Clause (7) of the Regulation. It will be\nseen that the\t power given by it is not uncontrolled or\nunfettered. It is strictly circumscribed, and its use is\nconditioned and restricted. The existence or arising of a\n\"difficulty\" is the sine qua non for the exercise\n654\nof the power. If this condition precedent is not satisfied\nas an objective fact, the power under this Clause cannot, be\ninvoked at au.\tAgain, the \"difficulty\" contemplated by\t the\nClause must be a difficulty arising in giving effect to\t the\nprovisions of the Act and not a difficulty arising aliunde,\nor an extraneous difficulty. Further, the Central Govern-\nment can exercise the power under the Clause only to\t the\nextent it is necessary for applying or giving effect to\t the\nAct etc., and no further. It may slightly tinker with\t the\nAct to round off angularities, and smoothen the joints or\nremove minor obscurities to make it workable, but it cannot\nchange, disfigure or do violence to the basic structure\t and\nprimary features of the Act. In no case, can it, under\t the\nguise of removing a difficulty, change the\t scheme\t and\nessential provisions of the Act.\nThe above principles, particularly the distinction between a\n'difficulty' which falls within the purview of the Removal\nof Difficulty Clause and one which falls outside it, finds\nample illustration in\t the 1949 Order and the impugned\nprovision of the 1962 Order which came up for consideration\nin Straw Products' case (supra). Excepting the reference to\nthe corresponding provision of the 1922 Act, the language of\nthe 1949 Order was the same as that of the unimpugned\tpart\nof clause (3) of Order 2 of 1970 in the present case.\t The\n1949 Order related to the removal of a difficulty which\t bad\narisen\tin giving effect to the provisions of s.10(2)\t(vi)\nProviso\t (c) and s.10(5) (b) of the 1922 Act, corresponding\nto s.34 (2) (i) and s.43 (6) (b) of the Act of 1961.\tThis\ndifficulty had\t arisen because the income-tax laws of\t the\nmerged States were not repealed by the Indian Income-tax Act\nbut by\t the Taxation Laws (Extension to Merged\t States\t and\nAmendment) Act 67 of 1949. Owing to this, the\tdepreciation\nactually allowed under the laws of the merged States could\nnot be\t taken\tinto account in computing the aggregate\ndepreciation allowance\t referred to in sub-s.(2) (vi).\nProviso\t (c) or the written down value under clause (b) of\nsub-s.(5) of s.10 of the 1922 Act. If this difficulty\t had\nnot been removed, anomalous results would have followed.\nThe written down value of the assets acquired\t before\t the\nprevious year would have been taken as the original cost of\nthe assets without deduction of the depreciation actually\nallowed\t in the past under the State laws. This would\thave\ngiven to the assessees in the merged\tStates,\t a benefit,\ninconsistently\twith the scheme of s.10 of the 1922\tAct,\nexceeding in the aggregate even the original cost of\t the\nassets.\nThe 1949 order removed this difficulty.\t In terms, it did no\nmore than directing that if under the income-tax laws of a\nmerged\tState any depreciation was actually allowed, it\t was\nto be taken into account in ascertaining the\twritten-down\nvalue of the assets. Far from supplanting or changing\t the\nessence\t of the essential provisions of the Act relating to\ndepreciation and written down value, it gave effect,\tlife\nand meaning to them.\nThe, observations in Straw Products Ltd's case\t (supra) to\nthe effect, that \"by the extension of the Income-tax\tAct,\n1922, the rules and the orders made thereunder to the areas\nof the merged States,\n655\nundoubtedly numerous\tdifficulties arose\" and it\twas,\ntherefore, necessary to devise machinery for removing those,\ndifficulties\"-On which Shri Nariman relies-were made by this\nCourt in the context of the 1949 Order.\t They did not relate\nto the then impugned provision of the 1962 Order.\nThe 1962 Order, Explanation (b), is an instance of an Order\nforeign to the Removal of Difficulty Clause. The so-called\n\"difficulty\" which was sought to be 'removed' by that Order\nwas not a 'difficulty' of the kind contemplated by\tthat\nClause,\t because it did not, in fact, arise in\t the\napplication or enforcement of the Income-tax Act, but\t de-\nhors it. No difficulty in implementing the scheme of\t the\n1922 Act read with the 1949 Order existed as an objective\nfact.\nThe 1962 Order, Explanation (b), purported to substitute in\ns.10(5)\t (b) of the 1922 Act\t (as adopted by the\t1949\nOrder)'depreciation notionally allowed' for \"depreciation\nactually allowed\". This the Central\tGovernment was\t not\ncompetent to do under that Clause because \"depreciation\nactually allowed\" was the linchpin\t of the statutory\ndefinition of \"written-down value\". Indeed, the 1962 Order\nsought\tto amend the essential provisions of the Income-tax\nAct in an attempt to collect tax which in the opinion of the\nCentral\t Government, the tax-payer could and should pay\t but\nto recall the\t words of this Court--\"which has not\tbeen\nimposed\t by adequate legislation\". In the present cases,\nalso, the impugned Proviso of the 1970 Order seeks to do the\nsame thing by raising the taxable income of the assessee, in\nconsistently with the scheme of the Act of 1961.\nAlthough the language\t of the\t impugned Proviso, in\t the\npresent case, is not identical with that of Explanation\t (b)\nof the 1962 Order in the Straw Products Ltd. v. Commissioner\nof Income-tax (supra) yet the sum, substance and the device\nfor replacing depreciation\t \"actually allowed\"\t by\ndepreciation \"fictionally allowed\" are the same.\nTrue, that under the income-tax law of the merged State,\ndepreciation was allowable, and 1962 Order, Explanation\t (b)\nwas intended to cover cases\twhere no depreciation\t was\nactually allowed on account\tof the\t exemption of\t the\nassessee, from tax under a State law or a rule or under an\nagreement with the Ruler of a merged State (whose word\t was\nlaw); whereas\tin the instant case depreciation was\t not\nallowed\t because it was not computed under the Portuguese\nLaw. But this is a distinction without a difference.\t As\nnoticed\t already, the Portuguese law was not a law imposing\ntax on net income. That law levied tax on gross-receipts\nand not on the profits and gains of a business. It would\nnot be, wrong\t to say that before the merger, in these\nterritories, there was no income-tax in the sense the tax is\nunder stood under the Indian Income-tax Act. In principle,\ntherefore, there would be no difference between a case where\none person is exempted from income tax under the law, and a\ncase where all are exempted, there being no income-tax law.\nWe are\t unable to accept the contention that but for\t the\nimpugned Proviso, the provisions of s. 32 and s. 43 (6)\t (b)\nof the 1961 Act on\n656\nits extension\tto Goa, Daman and Diu could not be given\neffect to and applied to the assessees in those territories.\nThere could be no difficulty in computing the 'written\tdown\nvalue.\tof the\t assets\t that had been acquired by\t teh\npetitioners before the previous year, under clause (b) of s.\n43(6).\tSince no depreciation was, in fact, allowed to\t the\npetitioners in the past\t\t under the Portuguese law\nin the first assessment under the Indian Income-tax Act, the\nwritten down value would, under \" clause (b) work out to be\nthe actual cost of the assets less nil.\t Thereafter, in each\nsucceeding year the depreciation actually allowed in\t the\npreceding year would be deducted causing yearly diminution\nof the written down value with consequent decrease in\t the\ndepreciation allowed on that basis. Exactly, this was\t the\nmanner in which the written down value of the assets of\t the\npetitioners has been computed and depreciation allowed\t for\nseveral assessment years from 1964-65 ,onwards.\t This itself\ndemonstrates that there was no difficulty in applying\t the\naforesaid provisions to the cases of these assessees.\nWe find no merit in the argument that the impugned Proviso\nbrings about equality of treatment among different assessees\nin India. The law on the point was declared by this Court\nin Straw Products Ltd.'s case about seven years back.\t If\nthat decision did not correctly interpret the intendment of\nthe Legislature, the Parliament would have nullified\t its\neffect\tby legislation. As a result, no assessee, in\t the\nTerritories of the erstwhile Part B States and Merged States\nhas suffered the disadvantage of depreciation being deducted\non notional basis in determining the written\tdown value,\nwhen in fact, no depreciation had been actually allowed\nunder the former local laws.\tSimilarly, no\tassessee in\nBritish\t India\t suffered such fictional deduction\t of\ndepreciation when it had not been actually allowed earlier.\nThe impugned Proviso, therefore, far from ensuring parity of\ntreatment puts the assessee in Union Territories in a worse\nposition than the assessees in the rest of India.\nWe may now notice this Court's decision in Commissioner of\nIncome-tax, Hyderabad v. Dewan Bahadur Ramgopal Mills\tLtd.\n(supra), relied upon by Shri Nariman.\t The facts of\tthat\ncase were that prior to January 29, 1950, when the erstwhile\nState of Hyderabad was merged in the Union of\t India,\t the\nrespondent company therein was assessed to income-tax under\nthe Hyderabad\t Income-tax Act, by\twhich\tdepreciation\nallowance was granted to it on the basis of the written down\nvalue of its assets in accordance with cl.(c) of s.12 of\nthat Act. After the merger, the Hyderabad Income-tax\t Act\nwas repealed, and by ss.3 and 12 of the Finance Act 1950,\nthe Indian In come-tax Act, 1922, was extended to that area.\nUnder the Removal of Difficulty Clause ie. s.\t 12 of\t the\nFinance\t Act, the Central Government on December 2, 1950,\nissued the Removal of Difficulties.Order, 1950.\t Paragraph 2\nof the Order provided that \"in making any assessment under\nthe Indian Income-tax Act, 1922, all depreciation actually\nallowed\t under any laws or rules of Part B State .... shall\nbe taken into account in\t computing the aggregate\ndepreciation allowance referred to in Proviso (c) to s. 10\n(2) (vi) and the written down value under s.10(5) (b) of the\nsaid Act\". For the assessment year 1951-52\n\t\t\t 657\nthe, respondent company was assessed for the\t first\ttime\nunder the 1922 Act, aid on the basis of para 2 of the\t1950\nOrder, it claimed depreciation allowance by working out the,\nvalue of the\tassets\tat their inception and deducting\ntherefrom such\t depreciation as was allowed for the three\nassessment years in which it was assessed\t under\t the\nHyderabad income-tax Act. The matter was brought to\tthis\nCourt and while, it was pending here, on May 8, 1956,\t the\nCentral\t Government issued another order under s.12 of\nFinance Act, 1950, reenacting and adding this Explanation to\nthe, aforesaid para 2 :\n\t \"For the purpose, of paragraph 2, expression\n\t 'depreciation actually allowed' under any laws\n\t or rules of a Part B State means and shall be\n\t deemed to have always meant the aggregate\n\t allowance for depreciation taken into account\n\t in computing the written down value under\t any\n\t laws or\trules of a Part B State\t or carried\n\t forward under the said laws or rules.\"\nThe Company challenged the validity of Para 2 of the Order,\nparticularly the Explanation inter alia on the ground\tthat\nit was ultra\t vires\tthe powers conferred\ton Central\nGovernment by Section 12 of the Finance Act, 1950. 'Ibis\nCourt upheld the, validity of the\timpugned provision.\nTherein, it was manifest that in applying the provisions of\ns.10(5) (b) of the 1922 Act to the assessees from Hyderabad\n(a Part B State), there was an initial\t difficulty because\nthe Hyderabad income-tax Act had been repealed not by\t the\n1922 Act but by the Finance Act, 1950. This difficulty\ncould be validly removed by making an Order under s.12 of\nthe Finance Act, 1950.\tAttempt to remove it by issuing\t the\n1950 Order did not completely achieve its object. In\t its\napplication that Order led to an anomalous result, namely,\nthe written down value of the assets and the allowance to be\nallowed on its basis to the assessee in the accounting\tyear\non first assessment under the Indian Income-tax Act, would\nbe more than what it was allowed in previous years under the\nHyderabad Income-tax Act. It was to remove this difficulty\nand to harmonise the position as to depreciation with\t the\nscheme\tof the\t Indian Income-tax Act\t that the impugned\nExplanation was added by the 1956 Order.\nIt will be seen that under the Hyderabad Income-tax\tAct,\ndepreciation allowance\t had actually been allowed to\t the\nassessees on the basis of written down value calculated\naccording to the mechanism provided in that Act. After\t the\npromulgation of the 1950 Order, the only difficulty\tthat\nremained was caused by the different rates at which depre-\nciation\t had actually been taken into account\tand allowed\nunder the Hyderabad Income-tax Act. The Explanation added\nby the 1956 Order, in effect, did no more than explaining\nthat in paragraph 2\tof 1950 Order, \"all\tdepreciation\nactually taken\t into account by the Income-tax\t Officer in\ncomputing the written down value under the Hyderabad Income-\ntax Act means \"all depreciation actually allowed.\"\nAs has been said already and it needs to be said again,\t the\nwords \"depreciation actually\tallowed\" in s.\t43 (6)\t (b)\nconnote\t depreciation that has actually been\t taken\tinto\naccount and given effect to by the\n658\nIncome-tax authorities in the computation of the, profits\nand gains of\tthe, business in assessing income-tax\t for\nearlier\t years\tThe, said Explanation did not,\tchange\tthat\nbasic connotation, it only clarified it. Thus\t in issuing\nthe 1950 Order and the 1956 Order, adding the\t Explanation\nthe Central Government in that case, did not over-step\t the\nlimits\tof the\t power delegated to it\tunder s.12 of\t the\nFinance Act, 1950. The impugned provision in the D. B.\t Ram\nGopal Mills case (supra) corresponds to clause (2)\t and\nExplanation (a) thereto of\tthe 1949 Order and\t the\nsubstantive part of clause (3) of the 1970 Order, it is\t not\nanalogous to the impugned Proviso in the instant case.\nThe situation before us is materially different. Here, no\ndepreciation was ever computed or actually allowed to\t the\nassessees under the Portuguese Law. Indeed, under, that-\nlaw the. tax\twas levied not on net income but on gross\nturnover of the business. There wag, strictly speaking,, no\nassessment of\ttax on, real\t\"profits and gains\" of a\nbusiness, the tax being levied on gross receipts on ad\t hoc\nbasis'.\t Allowing or taking into account depreciation of\nassets\twas out of question in that process of\t assessment.\nIn the case in hand, the imputed Proviso seeks to introduce\na new\tconcept of calculating depreciation. By replacing\n\"depreciation actually allowed\" with \"depreciation deemed to\nhave been allowed\" by a fiction of law, even where no\ndepreciation was at all- allowed under any law outside\t the\ntaxation territories, it, in- effect, attempts to change the\nfundamental scheme of the Act.\nD. B.\t Ram Gopal Mills's, case (supra) was noticed,\nexplained and distinguished in, Straw Products\t Ltd's\tcase\n(supra). It was observed that the former \"did not support\nthe view that the arising of a difficulty is a\t matter\t for\nthe subjective satisfaction of the Central Government\"\t The\nprecedent case is not in pari materia with D. B. Ram Gopal\nMills'\tcase. It is in line with Straw Products Ltd. v.\nIncome-tax Commissioner, and. the, ratio of\tthe latter\ndecision and the observations made- therein with regard, to\nthe then impugned Order of 1962 apply with full force to the\nimpugned Proviso in the instant case.\nIn the\t light\tof what has been said above, we accept\ncontentions (1)\t and\t (2) advanced\ton behalf of\t the\npetitioners.\nBe that as it may, the last contention canvassed by\t Mr.\nPalkhiwala is a clincher. The argument is that the impugned\nProviso\t is not workable, because, under the Portuguese\t law\nthere was no tax on income at all. These Territories\twere\nmerged\twith India on December 19, 1961, and\t the Indian\nIncome-tax Act was extended to these Territories from April\n1, 1963. During this interregnums, it is contended, the was\nno law either Portuguese or Indian, under which the income\n659\nif those prior years could be computed.\t If there is a loss,\nor profit is inadequate to absorb the depreciation, latter\ncan be carried- for- Yard without limit of time. Owing to\nthe absence of any tax law during the aforesaid interregnum,\nproceeds the argument, the petitioners would not have\t the\nbenefit\t of carry-forward' of depreciation form any\tyear\nprior to 1963, and, thus, the impugned Proviso instead. of\nremoving any difficulty, would create serious\tdifficulties\nand legal complications.\nThere is a good deal of force in this contention.\nIt has been noticed earlier that the tax imposed under\t the\nPortuguese law was, in reality, a 'turn-over' tax and not a\ntax on the income of a business. The levy was\t exacted on\ngross receipts, irrespective of loss or profit.\t Thereafter,\nduring\tthe interregnum between December 19, 1661 and April\n1, 1963, there .was in force no law authorising the, levy of\nincome-tax in\tthese Territories. We have also seen\tthat\nunder the Act an assessee is entitled\t to 'carry-forward'\nunabsorbed depreciation in case of\tloss or inadequate\nprofits without any time limit Is. 32(2). For ensuring this\nright to an assessee, assessments for ascertaining losses or\ninsufficiency\tof profits of\t his business,\t since\t the\nacquisition and use of the assets by him will have to be\nmade.\tIn the Indian Income-tax Act as extended to these\nUnion\tTerritories, there is\t no provision\tfor making\nassessment in respect of those past years. Therefore a Goan\nassessee who made losses and suffered depreciation of\t his\nassets will never get the benefit of such carry-forward, as\nno machinery exists for determining inadequacy of profits or\nthe factum of losses in, those years which is. a condition\nprecedent to carry forward of. depreciation. Retrospective\nassessments for this purpose, going back to a period, prior\nto 1963 could have been made, if at all, under a law made by\nParliament and not under an executive fiat. In the absence\nof such law it is impossible to work the Proviso without\nriding\trough-shod over the rights of the assessees to\thave\ntheir unabsorbed depreciation relating to pre-1 963 period,\ncarried\t forward. Viewed from this #angle, the impugned\nProviso\t would,\t in the implementation of the\tAct, create\ndifficulties rather than removing them.\nFor the foregoing reasons, we allow these petitions\t and\ndeclare\t that the 2nd Proviso to Clause (3) of the Taxation\nLaws (Extension to\tUnion\tTerritories) (Removal\t of\nDifficulties) Order 2 of 1970, is ultra vires\tthe Central\nGovernment when exercising the powers under Clause (7)\t ,of\nRegulation IIII of 1963 and the Revenue authorities are\t not\nentitled to levy tax on the\tbasis of the\tdepreciation\nallowance computed in. accordance with the said\t Proviso in\nthe , Order. The respondents, shall pay, the costs of\t the\npetitioners.\n660\nALAGIRISAMI, J.These matters have been argued twice once by\nMr. A. K. Sen on behalf of the petitioners in W.P. Nos. 112,\n391-394 of 1971, and again by Mr. N. A. Palkhivala on behalf\nof the petitioner,, in W.P. Nos. 330-331 & 382-387 of 1974.\nThe question that arises in. all these petitions is\t the\nconstitutional validity of the Taxation Law,, (Extension to\nUnion Territories) (Removed of Difficulties) Order 2 of 1970\nissued\tunder clause 7 of the Taxation Laws (Extension\t to,\nUnion Territories) Regulation, 1963 by which\t the Indian\nIncome-tax Act was extended, with certain amendments, to the\nUnion Territories of Goa, Daman and Diu with\teffect\tfrom\nApril 1, 1963. Clause 7 of\tthat Regulation, which is\nrelevant for our purposes, reads as follows\n\t \"7. If any difficulty arises in giving effect\n\t in any Union Territory to the provisions of\n\t any Act, or of any rule, notification or order\n\t made or\t issued\t thereunder, the Central\n\t Government may, by general or special order\n\t published\t in the Official Gazette, make\tsuch\n\t provisions or give such directions as appear\n\t to it to be expedient or necessary for\t the\n\t removal of the difficulty.\"\nUnder the law in force in the former Portuguese\t territories\nof Goa, Daman and Diu income-tax was levied at a certain\npercentage of\tthe gross receipts of an assessee.\t No\nallowance in the nature of depreciation was permitted in\ncomputing the gross income. Under clause (ii)\t of section\n32(1) of the Indian Income-tax Act, 1961 depreciation is\nallowed\t in the case of buildings, machinery, plant or\nfurniture at such percentage on the\twritten\t down value\nthereof as may be prescribed. Written down value is defined\nin section 43 (6) as follows:\n\t \"(6) \"Written down value\" means-\n\t (a) in\tthe case of assets acquired in\t the\n\t previous\t year,\tthe actual cost to\t the\n\t assessee;\n\t (b) in\tthe case of assets acquired before\n\t the previous year,. the actual cost to\t the\n\t assessee\t less all depreciation actually\n\t allowed to him under this Act, or under\t the\n\t Indian Income-tax Act, 1922 (XI of 1922), or\n\t any Act\trepealed by that Act, or under\t any\n\t executive\t orders issued when\tthe Indian\n\t Income-tax Act,\t1886 (II of 1886), was in\n\t force:\n (Proviso omitted)\nIt would be noticed at once that even if depreciation\t was\nallowable under the Portuguese Income-tax Law, when it\t was\nin force in the former Portuguese territories,\t clause\t (b)\nabove will not apply as that law was not repealed by\t the\nIndian\tIncome-tax Act, 1961 or the Indian Income-tax\tAct,\n1922 or any Act repealed by that Act or under any executive\norders\tissued\twhen the Indian Income-tax Act 1886 was in\nforce.\tAs was pointed out by this Court in its decisions in\nThe Commissioner of Income-tax, Hyderabad v. Dewan Bahadur\nRamgopal Mills\t Ltd. [1961]. (2) SCR 318] and the Straw\nProducts Ltd.\tv. I.T.O. [1968 (2) SCR 1], this is\t one\ndifficulty to\tremove which a\tDifficulties Removal Order\nwould have had to be issued. When we put the\tquestion to\nMr. Palkhivala as to what would happen if such an order to\nremove difficulties was not issued, he maintained that\teven\nso the assessees in\n661\nthese cases would have been entitled to the\t benefit of\nclause\t(b). I am not sure that he is right\t but it is\nunnecessary to decide that question.\nBe that as it may, I shall now discuss the question based on\nthe relevant provisions of law. Clause (a) deals with a\ncase of the acquisition of the assets in the previous year,\nin which case the actual cost is itself taken as the written\ndown value. In the case of the assets acquired before\t the\nprevious year the actual cost less all depreciation actually\nallowed\t is the written down value. Now what\t happens if\nunder the law applicable to the territory in\tquestion no\ndepreciation was allowable at all?' It stands to reason\t and\ncommon\tsense that in such a case the written down value of\nthe asset in question on the date the Indian Income,-tax Act\n1961 becomes applicable to that territory should be related\nto realities and not\t be wholly unrelated\tto them or\nnotional. The provision regarding written down value\t and\nallowance of depreciation under the Indian Income-tax\t Law\nproceeds on the basis of depreciation allowed year by\tyear\nwith the result that the written down value goes down\tyear\nafter year and similarly the depreciation, as\twas pointed\nout by\t this Court in Ramgopal Mills case (supra) in\t the\nfollowing words :\n\t \" The basic and normal scheme of\tdepreciation\n\t under the Indian Income,-tax Act is that it\n\t decreases\t every year, being a percentage of\n\t the written down value which in the first year\n\t is the actual cost and in succeeding years\n\t actual cost less all depreciation actually\n\t allowed under the Income-tax Act or any\t Act\n\t repealed thereby etc.\"\nIf, therefore,\t because there was no provision under\t the\nIncome-tax law applying to the former Portuguese territories\nproviding for\tdepreciation the written down value of an\nasset is taken as the actual cost even after many years of\nis acquisition it would mean putting the assessees in those\nterritories at an advantage compared to the assesses in\t the\nrest of India. More important, it would not\taccord\twith\nrealities and would not be in accordance with the scheme of\ndepreciation under the Indian Income-tax Act. It\t is,\ntherefore, necessary to devise some method by which both can\nbe put\t on the same footing\tand the normal scheme of\ndepreciation under the Indian Income-tax Act made applicable\nto them. It cannot be argued that a certain plant machinery\npurchased 10 years earlier and now worth half its original\nvalue should still be taken to be worth its original\tcost\nand depreciation allowed on that basis.\t It is not as though\nsuch a problem arises for the first time. In the case dealt\nwith in the Ramgopal Mills case the Hyderabad Income-tax\nAct, which was applicable to the case\t before\t the Indian\nIncome-Tax Act was extended to the Hyderabad area, had\tcome\ninto force in 1357-F and had been in force for three years.\nIn the\t assessment for those\t three\tyears\tdepreciation\nallowance was given to it on the basis of the written\tdown\nvalue of its assets in accordance with the provisions of\nclause (c) of s.12(5) of the Hyderabad Income-tax Act.\tThat\nclause\tprovided that in the case of assets acquired before\nthe previous year and before the commencement of the\tAct,\nthe written down value would be the actual cost to\t the\nassessee less (i) depreciation at the rates applicable to\nthe assets calculated on the actual cost for the first\tyear\nsince acquisition and for the next year\n662\nOn the actual cost diminished by the depreciation allowance\nfor one year and so\t on, for each year upto,the-\ncommencement of the Act and (ii) depreciation\t actually\nallowed to the assessee on such assets for each\t financial\nyear after the commencement\tof the Act. Now this\t is-\nexactly-what is proposed-to be done;\tin-the-case of\t the\nformer Portuguese territories by the impugned order.\nFor an appreciation of the actual situation that arises\t let\nus take some concrete figures. Suppose in the Hyderabad\ncase the asset concerned had been purchased for Rs. 100.00\nthree years before, the Hyderabad Income-tax Act came\tinto\nforce and depreciation was ten per cent. At the end of\t the\nfirst year the written-down value would be Rs. 90.00, at the\nend of\t the second year Rs. 8 1.00 and at the\tend of\t the\nthird year Rs. 72.90. It was this Rs. 72.90 that was taken\ninto account for the purpose of working out the depreciation\nallowable under the Hyderabad Income-tax Act in the first\nyear when that Act came into force.\tOn this basis\t the\nwritten down value of the asset at the end of the first year\nafter the Hyderabad Income-tax Act came into force would be\nRs. 65.61, at the end of the second year Rs. 59 (more or\nless), at the end of the third year Rs. 53.10, that is, when\nthe Indian Income-tax Act was extended to the Hyderabad\narea.\tWhen the Indian Income-tax Act was\textended to\nHyderabad area a Difficulties Removal Order was first issued\nin there terms in 1950.\n\"Computation of aggregate depreciation allowance and written\ndown value\n\t In making any assessment under\t the Indian\n\t Income-tax Act,\t 1922,\t all\tdepreciation\n\t actually allowed under any laws ,or rules of a\n\t Part B State relating to Income-tax on profits\n\t of business, shall be taken into\t account in\n\t computing the aggregate depreciation allowance\n\t referred\tto in sub-clause (c) of the proviso\n\t to, clause (vi) of sub-section (2) and\t the\n\t written\tdown value under clause (b)\t of\n\t subsection (5) of sec. 10 of the said Act.\"\nTaking\t advantage of\tthe presence of the\twords\t\"all\ndepreciation actually allowed\" in this order the assessee\nargued\tthat only the\t depreciation ;allowed\t after\t the\n'Hyderabad Income-tax Act came into force should be taken\ninto account for the, purpose of arriving at\tthe written\ndown value for the purpose of the Indian Income tax\tAct.\nThat was on the basis that\tthe depreciation allowance\ncalculated for the three years before the Hyderabad Income-\ntax Act came\tinto- force was\t not depreciation actually\nallowed\t because in those years there\t was no income-tax\nassessment and\t there was no question of any\tdepreciation\nbeing allowed.\tIn other words, what. the assessee said\t was\nthat taking the original cost at Rs. 100.00 the depreciation\nactually allowed during the three years during which\t the\nHyderabad Income-tax Act was in, force, that is, Rs. 72.90\nminus,\tRs. 65.61 (,Rs. 7.29), Rs. 65.61 minus\t Rs. 59.00;\n(Rs. 6.61) and Rs. 59.00 minus Rs. 53. 10 (Rs. 5.90) that is\nRs. 19.80, should be deducted from the actual cost\t for\narriving at the written down value for the\tpurposes of\nIndian Income-tax Act and that Rs. 90.20(Rs lOO.00 minus Rs.\n19.80) should be taken to be the written down value instead\nof the figure of Rs.\n\t\t\t 663\n53.10.In order to get over this difficulty an\t explanation\nwas added total the Removal of Difficulties Order in 1953 in\nthe following words\n\t \"Explanation : For the\t purpose of this,\n\t paragraph, the expression \"all\tdepreciation\n\t actually\tallowed under any law or rules of a\n\t Part B State\" means and shall be deemed to\n\t have always meant the aggregate allowance\t for\n\t depreciation taken into account in computing\n\t the written down value under any laws or rules\n\t of a Part B State or carried forward under the\n\t said laws or rules.\"\n(There was another similar explanation added in 1956 but for\nthe purposes of the argument in this case that is not\tvery\nrelevant). It was the validity of this second order adding\nthe explanation that was questioned. In dealing with\t the\nargument that no difficulty arose in giving effect to\t the\nprovisions of the Act so as to justify the issuance of\t the\nDifficulties Removal Order and the Explanation thereto\tthis\nCourt first dealt with the difficulty caused by the fact of\nthe earlier Income-tax law not having been repealed by\t the\nIndian\tIncome-tax Act 1922 etc. and that difficulty having\nto be\tremoved by the issuance of a Difficulties Removal\nOrder and then made the observation which we have extracted\nearlier\t about the basic and normal scheme of\tdepreciation\nunder the Indian Income-tax Act and then went on to point\nout :\n\t \"If, however, depreciation actually allowed\n\t under the Hyderabad Income-tax Act was taken\n\t into. account in computing the aggregate\n\t depreciation allowance and the written\tdown\n\t value, an. anomalous result would. follow as\n\t in the present\tcase, namely\tdepreciation\n\t allowance to be allowed to the assessee in the\n\t accounting year under the Indian Income-tax\n\t Act would be more than what was\t allowed in\n\t previous years under the Hyderabad Income-tax\n\t Act. This would create a disparity and be\n\t against the scheme of the Indian, Income-tax\n\t Act. It\t was, therefore, necessary :\t to\n\t explain\tparagraph 2 of the,\tRemoval\t of\n\t Difficulties Order, 1950, to assimilate or\n\t harmonise the: position regarding depreciation\n\t allowance, and the explanation added in\t1953\n\t or 1956. was obviously intended.\t to, remove\n\t the difficulty arising out of that disparity\n\t or disharmony.\"\nIn, effect it means, in terms of the example which we\thave\ngiven earlier that instead of the written down value being\ntaken to be Rs. 53.10 when, the Indian Income-tax Act\t was\nextended to Hyderabad the assessee. wanted Rs. 80.20 to be\ntaken as the, written down- value and that was\t why- this,\nCourt pointed\tout that the depreciation allowed to\tthe,\nassessee. in, the accounting year, under the Indian Income-\ntax Act would, he more than what was\t allowed under\t the\nHYderabad Income-,tax Act, and that. this, would create a\ndisparity and be against the scheme of the) Indian Income-\ntax Act. This decision is exactly to the\tpoint.\t The\neffect. of, the argument on, behalf of the petitioners would\nbe, taking it, that in Goa, also. the asset had,\tbeen\nacquired for Rs. 100.00 six years,,\tbefore,\t the Indian\nIncome-,tax Act 1961 was extended to that area and the\trate\nof depreciation was also ten per\n664\ncent, that instead of the written down value being Rs. 53.10\nit Will be Rs. 100.00, exactly the price at which the asset\nwas acquired six years earlier, even though its value\t now\nmight be much less.\nMr. Palkhilvala relied completely on the decision in Straw\nProducts' case in support of his argument that in exercise\nof the powers under clause 7 the impugned order could\t not\nbe made. In that case when the Indian Income-tax Act\t was\nextended to the State of Bhopal a Removal of\tDifficulties\nOrder was issued in 1949 similar to the one introduced in\nHyderabad in the first instance in 1950. When it was argued\nthen on the basis of the use of the words \"depreciation-\nactually allowed\" that only such depreciation could be taken\ninto account a second Removal of Difficulties Order\t was\nissued\tin 1962 which added an explanation in the following\nterms :\n\t \"Explanation.-For the\t purpose of\tthis\n\t paragraph, the expression \"all\tdepreciation\n\t actually allowed under any laws or rules of a\n\t Merged State\" means and shall\t be deemed,\n\t always to have meant :\n\t a) the aggregate allowance for depreciation\n\t taken into account in computing\tthe written\n\t down value under any laws or rules in force in\n\t a\t marged State or carried forward under\t the\n\t said laws or rules, and\n\t (b) in cases where income had been exempted\n\t from tax under any laws or rules in force in a\n\t merged State or under any agreement with a\n\t Ruler, the depreciation that would have\tbeen\n\t allowed had the income not been so exempted.\"\nThat was because the Ruler of Bhopal had earlier exempted\nthe income of the assessee from income-tax and there\t was\ntherefore no question of any depreciation allowance having\nbeen made or any written down value having to be calculated.\nWhen the matter came up before this Court, this Court\theld\nthat whatever difficulty there was removed by the 1949 order\nand thereafter\t there\twas no\t further difficulty to be\nremoved. We shall quote the exact words\n\t \"Section\t6 of Act 67 of 1949 authorises\t the\n\t Central Government to make provisions or to\n\t give directions as may appear to be necessary\n\t for removal of difficulties which had arisen\n\t in giving effect to the provisions of any Act,\n\t rule or order extended by S. 3 to the merged\n\t States.\tBy the application of\t the Indian\n\t Income-tax Act\tto the\t merged\t States a\n\t difficulty did arise in the matter of deter-\n\t mining the depreciation allowance under S.\n\t 10(2) (vi). That difficulty was\t removed by\n\t the enactment of the Taxation Laws (Merged\n\t States) (Removal of Difficulties) Order, 1949.\n\t Even by that order all depreciation actually\n\t allowed under any laws or rules of a merged\n\t State relating to income-tax was to be taken\n\t into account in computing the aggregate\n\t depreciation allowance. Thereafter there\n\t 665\n\t survived no difficulty in giving effect to the\n\t provisions of the Indian income-tax Act or the\n\t rules or orders extended by s. 3 to the merged\n\t States.\n\t To sum up: the power conferred by s. 6 of\t Act\n\t 67 of 1949 is a power to remove a difficulty\n\t which arises in\t the application of\t the\n\t Income-tax Act to the merged States, it can be\n\t exercised\t in the manner consistent with\t the\n\t scheme and essential provisions of the Act and\n\t for the\tpurpose for which it is conferred.\n\t The impugned Order which seeks, in purported\n\t exercise of the power, to remove a difficulty\n\t which had not arisen was, therefore, unautho-\n\t rised.\"\nThat was the ratio\t of that decision.\tThis Court\nspecifically did not think it necessary to determine to what\nextent,\t if any, it would be open to the Central Government\nby an order issued in exercise of the power conferred by s.\n6 of Act 67 of 1949 to make provision which is\tinconsistent\nwith the provisions of the Indian Income-tax, Act. It\t did\nnot hold that\t the 1962 Order was inconsistent with\t the\nprovisions of the Indian Income-tax Act. It did consider\nthe decision in Ramgopal Mills case. After referring to the\nExplanation. added to the Removal of Difficulties Order this\nCourt pointed out\n\t \"This Court held that\tby the\t Removal of\n\t Difficulties Order, 1950 an anomalous result\n\t followed,\t and the depreciation allowance\n\t allowed to the\tassessee under\t the Indian\n\t Income-tax Act was more than the\tdepreciation\n\t allowance, under the Hyderabad Income-tax Act,\n\t and it was necessary to issue the Removal of\n\t Difficulties Order, 1956.\t In the view of\t the\n\t Court, in that case the\tcondition precedent\n\t to, the exercise of the power did exist.\"\nThus, it 'did not dissent from the decision\tin Ramgopal\nMills case,. By implication it hold that decision as a good\none. That is exactly the position here. It was, therefore,\nopen to the Central Government in exercise of\t its powers\nunder clause 7 to issue the impugned order. It only brings\nit into line with the scheme of the Indian Income-tax\tAct,\notherwise as I mentioned earlier, the\t assessees in\tGoa,\nDaman and Diu\t would be at an advantage compared to\t the\nassessees in the rest of India.\nThe only contention of any substance which was urged against\nThis was that under the scheme of the Indian Income-tax\t Act\nit was open\tto the\t assessee to carry forward\t the\ndepreciation for any length of time if he had sustained\t any\nloss and it would now be very difficult, if not impossible,-\nfor the assessee to produce all the accounts\t of earlier\nyears to show\t the losses which he\t had incurred,\t the\ndepreciation he was entitled to and which he can carry\nforward. I do not consider that it is an impossibility. If\nit is\tdifficult it is not a difficulty which cannot be\nsolved as the Hyderabad example shows.\n666\nAssessees are expected to and would have maintained accounts\nat least for the purpose of the Income-tax Act which was in\nforce in the former Portuguese territories, though that, Act\nwas a simple one and not as complex as the Indian Income-tax\nAct. What is necessary for working out the impugned order\nis to know whether there was a Profit or a loss and as\tthe,\ncost of acquisition of the assets, in respect of which\ndepreciation allowance is claimed, should also be available\nit should not be very difficult\tto calculate\t the\ndepreciation and arrive at the written down value as on\t the\ndate when the Indian Income-tax Art was extended to former\nPortuguese territories. To accede to the claim of\t the\nassessees that the original value of the assets should be\ntaken down to be the written down value, however long\tthey\nmight have been used, means that they get an advantage\t not\nmerely in the first year in which the Indian Income-tax\t Act\napplied\t to those territories- It is a\tcontinued advantage\nwhich will last as long as these assets last.\tIn terms of\nthe example I have given earlier in the first year instead\nof the\t 10 per cent out of the written down value of\t Rs.\n53.10,\tthat is Rs. 5.30, being allowed as the\tdepreciation\nit will be Rs. 10 In the second year it will be Rs.\t9.00\ninstead\t of Rs. 4.77. In the third year it will be Rs.\t8.10\nas against Rs- 4-30 and so on.\t I can see no justification\neither\ton principle or on the wording of the\t statute to\nallow the assessees any such concession. Whatever I\thave\nstated earlier would be sufficient to show that the impugned\norder is not in excess of the delegated powers but.merely\ncarries out the purpose of the delegation.\nIt only remains to deal with the, further contention raised\nthat the order is given retrospective effect and that is not\nvalid.\t This contention is best answered in the words of\nthis Court in Ramgopal Mills case thus :\n Section 12 (in this case cl. 7) by the\tvery\n\t nature of its intent and purpose\t confers on\n\t the Central Government power to make an order\n\t to remove a difficulty.which has already\n\t arisen, and the power to remove the difficulty\n\t must necessarily include the power to remove\n\t the difficulty from time to time it arose.\n\t The-Central Government has, therefore.\t the\n\t Power-to make an order or give a direction so\n\t as to remove-the difficulty from the\tvery\n\t beginning, and that is what the\tnotification\n\t of 1.956\t (in this case the notification of\n\t 1970) does.\"\n\t I\t would, therefore, dismiss\tthese\twrit\n\t petitions.\nV.P.S.\t\t\t\t Petitions allowed.\n667" }, { "title": "The Commissioner Of Income Tax, Delhi vs Bansi Dhar & Sons on 19 December, 1985", "url": "https://indiankanoon.org//doc/593132/", "text": "The Commissioner Of Income Tax, Delhi vs Bansi Dhar & Sons on 19 December, 1985\nEquivalent citations: 1985 SCALE (2)1416, AIR 1986 SUPREME COURT 421, 1986 (1) SCC 523, 1986 TAX. L. R. 317, (1986) 24 ELT 193, (1986) 1 SCJ 21, 1986 SCC(TAX) 233, (1986) 1 SUPREME 659, (1986) 1 CURCC 915, (1986) 157 ITR 665, (1986) 24 TAXMAN 11, 1986 UJ(SC) 179, 1986 UPTC 448, (1986) 50 CURTAXREP 250\nAuthor: Sabyasachi Mukharji\nBench: Sabyasachi Mukharji, V.D. Tulzapurkar\n PETITIONER:\nTHE COMMISSIONER OF INCOME TAX, DELHI\n\n\tVs.\n\nRESPONDENT:\nBANSI DHAR & SONS\n\nDATE OF JUDGMENT19/12/1985\n\nBENCH:\nMUKHARJI, SABYASACHI (J)\nBENCH:\nMUKHARJI, SABYASACHI (J)\nTULZAPURKAR, V.D.\n\nCITATION:\n 1985 SCALE (2)1416\n\n\nACT:\n Indian Income Tax Act 1922: Section 66 and Income Tax\nAct 1961: Section 256\t- High\tCourt - Jurisdiction of - To\ngrant stay or pass interim orders in pending references.\n Interpretation of\t statutes : Words of statute -\nJudicial construction of words\t by superior court - How far\nuseful in construing identical words in another enactment.\n\n\n\nHEADNOTE:\n The Assessee was a Hindu Undivided Family. The father\nof the Karta of the HUF died in an air crash. On his death a\nsum of\tover Rs. 2 lakhs was received by the Karta from the\nInsurance Company on\t account of the insurance policy\ncovering the life of his father. The income derived from the\nsaid amount was treated as his personal income and assessed\nin his\tpersonal assessment, and it continued to be assessed\nin the personal assessment of the Karta even after formation\nof the\tHUF on\this marriage and the birth of\t a son. This\nposition continued till the assessment year 1959-60.\n For the first time in the assessment year 1960-61 the\nIncome Tax Officer treated the income\t from the insurance\namount as that of the HUF and assessed the income in the\nhands of the HUF. Being aggrieved the assessee appealed and\nthe Appellate\t Assistant Commissioner set\t aside\t the\nassessment holding that the income was the personal income\nof the Karta and not of the HUF.\n The Revenue preferred an\tappeal\tto the\t Income\t Tax\nAppellate Tribunal. A similar\tappeal was also preferred to\nthe Tribunal by the Revenue for assessment year 1962-63.\nBoth the appeals were disposed of by a common order, whereby\nit was\theld that the income in question was that of the HUF\nand was liable to be assessed as such.\n The Tribunal referred to the High Court at the instance\nof the\t assessee-HUF the question, \"whether\t the amount\nreceived from\n851\nthe Insurance Company on account of the accident Insurance\nPolicy covering the risk of his father was correctly treated\nas ancestral property.\" The assessee also filed applications\nfor injunction\tand stay under section\t 151 of\t the Code of\nCivil Procedure\t invoking the inherent jurisdiction of the\nHigh Court.\n In the applications for stay it was contended that for\nthe subsequent\tyears 1963-64 & 1964-65 similar appeals had\nbeen filed by the Revenue, before the Tribunal and\twere\npending, that for the\tassessment years 1965-66 to 1969-70\nthe orders of the Appellate Assistant Commissioner\twere\nagainst the assessee and the\tassessee-HUF had preferred\nappeals to the Tribunal which were also pending, that in the\nsaid appeals preferred by the assessee HUF, on application\nby the assessee the Tribunal had granted stay of recovery of\nthe tax\t demanded, on the condition that the assessee should\nfurnish adequate security, that since the matter relating to\nthe two\t assessment years (1960-61 and 1962-63) were before\nthe High Court under section 66(1) of the Indian Income Tax\nAct, 1922/section 256(1) of the Income Tax Act, 1961 similar\norder of stay should be granted by the High Court because\nprejudice would\t be caused to the assessee if\t in spite of\nfull tax being paid by the karta in his personal assessment,\nthe HUF\t is asked to pay tax over again in respect of the\nsame income.\n The Revenue opposed the\taforesaid applications\t for\nstay, contending in its counter-affidavit that under\t the\nprovisions of the Income Tax Acts of 1922 and 1961 the High\nCourt\texercised only an\tadvisory or\tconsultative\njurisdiction, and consequently had no jurisdiction or power\nto grant stay of the recovery\t of tax as prayed for in the\napplication, and that grant of stay by the High Court and\nthis court had in fact been prohibited by the two Acts of\n1922 and 1961.\n The High Court rejected\tthe preliminary objections\nraised by the Revenue\tand granted stay of realisation of\ntaxes. It found that there should be stay on terms\t and\ngranted stay on condition that the assessee should furnish\nadequate security for the said amount to the satisfaction of\nthe concerned Income Tax Officer.\n In the appeals to\t this Court: on the\tquestion of\njurisdiction of\t the High Court and Supreme Court to grant\nstay or\t pass interim orders in pending references under\nsection 66 of the Indian Income Tax Act, 1922 and section\n256 of the Income Tax Act, 1961.\n Allowing the Appeals to this Court,\n852\n^\n HELD : 1. The High Court in answering a question under\nsection 66 of 1922 Act or section 256 of 1961 Act does not\nexercise original, appellate or revisional jurisdiction but\nonly advisory jurisdiction. [866 C; 870 C]\n 2. Rendering advice on the question of law referred to\nthe courts has nothing\t to do\twith the recovery of tax or\ngranting stay in respect of the same. [870 G]\n 3. It cannot be said that the High Court has inherent\npower or incidental power in the matter of\ta reference\npending before\tit to grant stay of realisation or to grant\nan injunction.\tThat must remain within the jurisdiction of\nthe appellate authority and pendency of a reference does not\ndetract from that jurisdiction\t of the Appellate Authority.\nThe High Court was, therefore in error in the instant case\nin exercising its jurisdiction by passing an order for stay\nof realisation\tunder section 151 of\tthe Code of Civil\nProcedure, 1908 in a pending reference. The High Court could\nhave exercised\tits power if the Appellate Authority had not\nproperly exercised its jurisdiction, not in reference\njurisdiction but by virtue of its jurisdiction under Art.\n226 or\t Article 227\tof the\t Constitution of India in\nappropriate cases. But that was not\tso in\tthe instant\ncase.[870 H - 871 B]\n Sridhar v.\t Commissioner of Wealth Tax, 153 at 543, at\n547; Dwarka Prasad Baja v. Commissioner of Income Tax, West\nBengal-I, 126 I.T.R. 219. approved.\n Polisetti Narayana\t Rao v.\t Commissioner of Income Tax,\nHyderabad, 29 I.T.R. 222, over-ruled.\n 4. In answering questions\t or disposing of references\neither under section 66 of 1922 Act or section 256 of 1961\nAct, the High\tCourts\tdo not\t exercise any\tjurisdiction\nconferred upon\tthem by\t the Code of Civil Procedure or the\nCharacters or by the Acts establishing the respective High\nCourts.\t In respect of certain matters jurisdictions\nexercised by the High\tCourt must be kept separate from the\nconcept\t of inherent\tpowers\t or incidental\t powers in\nexercising jurisdiction\t under section\t66 of 1922 Act or\nsection 256 of 1961 Act. Section 66 of Income-tax Act of\n1961 is a special jurisdiction of a limited nature conferred\nnot by\tthe Code of Civil Procedure or by the Charters or by\nthe special Acts constituting\tsuch High Courts but by the\nspecial provisions of Income-Tax Act 1922 or 1961 for the\nlimited\t purpose of obtaining High\tCourt's\t opinion on\nquestions of law. In giving\n853\nthat opinion properly if any\tquestion of incidental or\nancillary power\t arises such as giving\t an opportunity or\nrestoring a reference dismissed without hearing or giving\nsome additional time to file paper book, such powers inhered\nto the\tjurisdiction conferred\tupon it. But such incidental\npowers can not be so construed as to\t confer the power of\nstay of\t recovery of taxes pending a reference which lie in\nthe domain of\t an appellate\tauthority. The\t concept of\ngranting stay in a reference ex debito justitiae therefore,\ndoes not arise. That concept might arise in\tcase of\t the\nAppellate Authority exercising its power to grant stay where\nthere is no express provision. Ex debito justitiae is to do\njustice between the parties. [870 C-F]\n Tata Iron\t& Steel\t Co. Ltd. v. Chief Revenue Authority\nof Bombay, 1923 Privy\tCouncil - 50 Indian Appeals\t212;\nCommissioner v.\t Bombay Trust Corporation, 1936 A.I.R. Privy\nCouncil - 63 Indian Appeals\t408; Hukum Chand Boid v.\nKamalanand Singh, [1906] I.L.R> 33, Cal. 927; Commissioner\nof Income Tax Bombay v. Scindia Steam Navigation Co. Ltd.,\n42 I.T.R. 589; C.P. Sarathy Mudaliar\tv. Commissioner of\nIncome Tax, Andhra Pradesh, 62 I.T.R. 576;\t Jatashankar\nDayram v. Commissioner\t of Income Tax, 101\tI.T.R.\t343,\nreferred.\n Income Tax Officer, Cannaore v. M.K. Mohammed Kumhi, 71\nI.T.R. 815, explained.\n 5. In an appropriate case, if the assessee feels that a\nstay of\t recovery pending disposal of the reference is\nnecessary or is in the interest of\t justice, then\t the\nassessee is entitled to apply before the Appellate Authority\nto grant a stay until disposal of reference\tby the\tHigh\nCourt or until such time as the Appellate Authority thought\nfit. But in case the\tAppellate Authority acted without\njurisdiction or in excess jurisdiction or\tin improper\nexercise of the jurisdiction,\tthen the decision of\tsuch\nAppellate Authority can be corrected by the High Court by\nissuing appropriate writs under Articles 226 and 227 of the\nConstitution. [869 H - 870 B]\n 6. Prior to 1918, there was no provision for reference\nto the\tHigh Court at all in respect of any decision by the\nrevenue\t authorities.\tIn Act\t VII of 1918,\t section 51\ncontained this\tprovision under which\t the Chief Revenue\nAuthority was empowered to refer a case to the High Court\nwhen any questions arose regarding the interpretation of any\nof the provisions of the Act or of any rule made thereunder.\nThe said authority could do so\n854\n(i) either suo motu (ii) on reference from a subordinate\nauthority or (iii) on the application of the assessee. This\nis no\t part of the\tCivil or appellate or revisional\njurisdiction of the High Court. [858 G-H]\n 7. Section\t 66 of\tthe Act of 1922 provides that within\ncertain time either at\t the instance of the assessee or at\nthe instance of the Revenue, the Tribunal might refer a\nquestion of law for the opinion of the High Court. It also\nempowered the assessee to make an application to the High\nCourt in case the Tribunal refused to refer\tthe question\nafter drawing up a statement of case. Section 66A provides\nfor reference to be heard by\tBenches of High Courts\t and\nappeals in certain cases to this Court. Under Section 256 of\n1961 Act, the provision of reference\tto the High Court is\nthe same as under section 66 of 1922 Act. [859 B, F, 860 C]\n 8. Once certain words in an Act\t of Parliament\t had\nreceived a judicial construction in one of the superior\ncourts, and the legislature repeated\t these\twithout\t any\nalteration in a subsequent statute, the legislature must be\ntaken to have used them according to the meaning which a\ncourt of competent jurisdiction had given to them. This rule\nof interpretation affords only a valuable presumption as to\nthe meaning of the language employed in a statute. Where a\njudicial interpretation\t is well settled and well recognised\nthe rule ought doubtless, to receive effect, but must be a\nquestion of circumstances whether Parliament\t was to be\npresumed to have tacitly given statutory authority to a\nsingle judgment\t of a competent court\tso as to render that\njudgment, however, obviously\twrong unexaminable by\t the\nHighest Court. [868 E-G]\n Barras v. Aberdeen Steam Trawling and Fishing Co. Ltd.,\n1933 A.E.R. - 1933 A.C. 402, referred to.\n\n\n\nJUDGMENT:\n CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1668\n(NT) of 1978.\n From the Judgment and Order dated 15.7.1977 of\t the\nDelhi High Court in I.T.R. Nos. 82 & 83 of 1973.\n\t\t\t WITH\n Civil Appeal Nos. 77 & 78 (NT) of 1974\n From the judgment and Order dated 30.7.1973 of\t the\nPatna High Court in Tax Appeals Cases Nos. 16 & 17 of 1972.\n855\nS.C. Manchanda,\t and Miss A. Subhashini for the Appellant in\nC.A. No. 1668 of 1978.\n S.T. Desai, Harish Salve,\t Mrs. A.K. Verma, Miss Lira\nGoswami and J.B. Dadachandji for the Respondent in C.A. No.\n1668 of 1978.\n B.B. Ahuja\t and Miss A. Subhashini for the Appellant in\nC.A. No. 77 & 78 of 1974.\n Nemo for the Respondents in C.A. No. 77 & 78 of 1974.\n The Judgment of the Court was delivered by\n SABYASACHI MUKHARJI, J. The main question involved in\nthese appeals,\tis the\tquestion of jurisdiction of the High\nCourt, to grant stay or pass\tinterim\t orders\t in pending\nreferences under section 66 of the Indian Income-Tax Act,\n1922 (hereinafter called the Act of 1922) and section 256 of\nthe Income Tax Act, 1961 (hereinafter\t called the 'Act of\n1961').\t These\t appeals are by special leave from\t the\njudgments of the High\tCourts. The main judgment is\t the\njudgment of the Delhi\tHigh Court in the case of L. Bansi\nDhar and Sons v. Commissioner of Income-Tax, New Delhi (C.A.\nNo. 1668/78). The question arose in applications filed by\nthe assessee under section 151 of CPC in two Income-tax\nReferences Nos. 82 and 83 of 1973 relating to the assessment\nyears 1960-61 and 1962-63 respectively praying that the High\nCourt might be pleased\t to grant an order of injuction for\nrestraining the\t Commissioner of Income-tax (I), Central\nRevenue Building, and/or his subordinate officers including\nthe Income-tax Officer, Company Circle (III), from enforcing\nand/or\trealising the\t demand\t raised in the aforesaid\nassessment years 1960-61 and 1962-63, and from taking any\nsteps for the recovery\t thereof till the disposal of\t the\nreferences pending in the High Court.\n The assessee is a Hindu undivided family. The Karta of\nthe HUF is Lala Bansi Dhar. His father, Lala Murlidhar, died\nin the\tyear 1949 in an air crash. On the death of\t the\nfather, a sum of Rs.2,49,874 was received by Lala Bansi Dhar\nfrom the insurance company on account of\tan accident\ninsurance policy covering the\trisk of the life of\t the\ndeceased. The income derived\tfrom the said\t amount\t was\ntreated as the income of Lala Bansi Dhar and was assessed in\nhis personal assessment. Lala Bansi Dhar was married on 3rd\nFebruary, 1953, and a son, Tilak Kumar, was born on 3rd\n856\nFebruary, 1956. The\tincome\tfrom the insurance amount\ncontinued to be assessed in the personal assessment of Lala\nBansi Dhar even after\tformation of the HUF on his marriage\nand the birth of a son, and continued to be so assessed till\nthe assessment year 1959-60.\n In the assessment year 1960-61 for the first time, the\nIncome-tax Officer treated the\t income from the insurance\namount as that on the HUF and assessed the income in the\nhands of the HUF. On appeal by the\tassessee, HUF,\t the\nAppellate Assistant Commissioner set aside the assessment\nholding that the income was the personal income of\tLala\nBansi Dhar and not of the HUF. Against that\t order,\t the\nrevenue preferred an appeal to the Income-tax Appellate\nTribunal. A similar appeal was also preferred to\t the\nTribunal by the revenue for the assessment year 1962-63.\nBoth the appeals were\tdisposed of by the Tribunal by a\ncommon order on 23rd November, 1970 whereby it was held that\nthe income in question was that of the HUF and the liable to\nbe assessed as such. Then at the instance of asseasee-HUF,\nthe Tribunal referred\tto the\t High Court the following\nquestion under\tsection 256(1)\tof the Income-tax Act, 1961,\nas arising out of the said common order namely :\n \"Whether, on the facts and in the circumstances of the\ncase, the amount of Rs.2,49,874 received by L. Bansi Dhar\nfrom the insurance company on account of the accident\ninsurance policy covering the\trisk to the life of\t his\nfather, L. Murlidhar, is correctly treated as ancestral\nproperty of the H.U.F. of which L. Bansi Dhar is the karta?\"\n Two references were registered as Income-tax References\nNos. 82\t and 83\t of 1973, and it was in the said references,\nthat the applications for injunction and stay had been filed\nby the\tassesee-HUF under section 151\tof the Code of Civil\nProcedure invoking the inherent jurisdiction of the\tHigh\nCourt.\n It was stated in the application for stay that for the\nsubsequent assessment years 1963-64 and 1964-65, similar\nappeals had been filed\t by the\t revenue before the Tribunal\nand the\t same were pending, that for the assessment years\n1965-66 to 1969-70, however the orders of the Appellate\nAssistant Commissioner\twere against the assessee, and the\nassessee-HUF had preferred appeals to the Tribunal which\nwere also pending, that in the said appeals preferred by the\nassessee-HUF on\t application by\t the assessee,\tthe Tribunal\nhad granted stay of the recovery of the tax demanded on\n857\nthe condition that the\t assessee should furnish adequate\nsecurity to the satisfaction of the Income-tax Officer, that\nsince the matter relating to the two assessment years (1960-\n61 and\t1962-63) was before the High Court in references\nunder section\t 66(1)\tof the Indian Income-tax\tAct,\n1922/section 256(1) of the Income-tax Act, 1961, similar\norder of stay should be granted by the High Court\t and\nprejudice would\t be caused to the assessee if\t in spite of\nfull tax being paid by its karta in his personal assessment,\nthe HUF\t is asked to pay tax over again in respect of the\nsame income. A\t counter-affidavit was\t filed\tin which a\npreliminary objection was raised that under the provisions\nof the\tIncome-tax Act,\t the High Court exercised only an\nadvisory or consultative jurisdiction\tand consequently had\nno jurisdiction\t or power to grant stay of the recovery of\ntax as prayed for in the application, and that, in fact, the\ngrant of stay by the High Court and\tthis Court had been\nprohibited by the two\tActs of\t 1922 and 1961. On merits,\nhowever, it was admitted that tax had been paid by\tLala\nBansi Dhar in his personal capacity on the basis of the same\nincome which had been\treturned by him in his individual\nincome-tax return, yet, it was admitted that as a result of\nthe impugned order of\tthe Appellate Tribunal, the income\nfrom the insurance amount was assessable in the hands of the\nHUF and\t the HUF was obliged to pay the tax unless and until\nthe question of law referred to the High Court was answered\nin favour of the assesee and that the assessee would not be\nprejudiced if no stay was granted and the tax was realised,\nas it would get a refund of the tax\t paid in case\t the\nreferences were answered in its favour.\n The question for determination\t which\t fell\t for\nconsideration before the High Court and which requires to be\nconsidered in these appeals by this Court, is, whether the\ncourt, in a reference\tto it either under section 66(1) of\nthe Act of 1922, or under section 256(1) of the Act of 1961,\nhas jurisdiction or power to pass any order granting stay of\nrecovery of the taxes pending the disposal of\t the\nreferences.\n The High Court on\t consideration of certain matters,\nrejected the preliminary objection and granted stay of the\nrealisation of\ttaxes. The High Court\tfound that, in\t the\nfacts and circumstances of the case, there should be stay on\nterms and the High Court granted that stay on condition that\nthe assessee should furnish adequate security for the said\namount to the\tsatisfaction of the concerned Income-tax\nOfficer within\tsix weeks from the date of the order of the\nHigh Court. The other\ttwo matters being Civil Appeals Nos.\n77 and 78 of 1974 arise out of\n858\nthe decision of the Patna High Court where stay was granted\nby the\tPatna High Court in respect of realisation of tax\npending disposal of the income-tax references.\n The revenue has come up to this Court challenging the\nvalidity of the decision of the High Courts\tthat pending\nreferences in income-tax matters to the Courts either under\nsection 66 of the Act of the 1922 or under section 256 of\nthe Act\t of 1961, the High Courts or the Supreme Court, as\nthe case may be, have inherent powers or jurisdiction to\npass any order granting stay or granting injunction staying\nthe realisation\t of the amount pending disposal of\t the\nreferences. Incidentally, it may be pointed out that at the\nbar at\tthe time of hearing of the appeals, it was stated by\ncounsel on behalf of the assessee that in the decision of\nthe Delhi High Court,\tultimately the\treference has\tbeen\nanswered in favour of\tthe assessee. So far as the assessee\nin that matter is concerned the question\t has become\nacademic.\n The High Court of\t Delhi in its judgment had discussed\nall the\t relevant authorities.\tThe references\twere pending\nunder section 66(1) of\t the Act of 1922 for the first two\nyears, in respect of similar appeals\tfor the assessment\nyears 1965-66 and 1969-70 the references were pending under\nsection 256(1)\tof the\tAct of\t1961. The scheme of section\n66(1) of the Act of 1922 as well as section 256(1) of the\nAct of 1961 are well-known.\n The High Court noted and as is the case that the Act of\n1922 did not and the Act of 1961 does not\tcontain\t any\nexpress provision empowering the High Court or the Supreme\nCourt to grant stay of recovery of tax including pending\ndisposal of the reference before it or pass\tany order in\nthat respect of the same. Therefore, the assessee sought to\ninvoke the inherent jurisdiction or the ancillary powers of\nthe courts.\n Prior to 1918, there was no provision for reference to\nthe High Court at all in respect of\tany decision by the\nrevenue\t authorities.\tIn Act\t VII of 1918,\t section 51\ncontained this\tprovision under which\t the Chief revenue\nauthority was empowered to refer a case to the High Court\nwhen any question arose regarding the interpretation of any\nof the provisions of the Act or of any rule made thereunder.\nThe said authority could do so (i) either suo motu or (ii)\non reference from a subordinate authority or (iii) on the\napplication of the assessee. This is no part of the civil or\nappellate authority or revisional jurisdiction of the High\nCourt.\n859\n Section 66 of the Act\t of 1922 contains similar\nprovisions like\t section 149 of the English Income-Tax Act,\n1918. Section 66 of the Act of 1922\tprovides that within\ncertain time either at\t the instance of the assessee or at\nthe instance of the revenue, the Tribunal might refer a\nquestion of law for the opinion of the High Court. It also\nempowered the assessee to make an application to the High\nCourt in case the Tribunal refused to refer\tthe question\nafter drawing up a statement of case. It is well-settled\nthat the fact found by the Tribunal were to be accepted by\nthe High Court and in case the High\tCourt found that the\nfacts found by the Tribunal were not sufficient, the High\nCourt might under sub-section (4) of section 66 require the\nTribunal to make such additions thereto or alteration\ntherein as the High Court might direct in that behalf. The\nHigh Court upon hearing of any such case should decide the\nquestion of law raised\t thereby and deliver its judgment\nthereon containing the grounds\t on which such decision is\nfounded and shall send\t a copy\t of such judgment under the\nseal of\t the Court and the signature of the Registrar to the\nAppellate Tribunal. Sub-section (7) of section 66 provides\nthat notwithstanding that a reference is made under\t the\nsection to the High Court, \"income tax shall be payable in\naccordance with\t the assessment\t made in the case\". It is\nprovided that if the amount of an assessment is reduced as a\nresult of such reference, the amount\tover-paid shall be\nrefunded with such interest as the Commissioner may allow\nunless\tthe High Court, on\t intimation given by\t the\nCommissioner within thirty days of the receipt of the result\nof such reference that he intends to ask for leave to appeal\nto the\tSupreme Court,\tor to an authority authorising the\nCommissioner to\t postpone payment of such refund until the\ndisposal of the appeal to the Supreme Court.\n Section 66A provides for\treference to be heard by\nBenches of High Courts and appeals in certain cases to this\nCourt.\n The provisions of Code of Civil Procedure relating to\nappeals to the Supreme\t Court as far as might apply in case\nof appeals under the section in the like manner as in the\ncase of\t appeals by the High Court provided that nothing in\nsub-section (3)\t shall be deemed to have effect on\tsub-\nsection (5) or sub-section (7) of section 66. Sub-section\n(4) of\tsection 66A provides that where the judgment of the\nHigh Court is\tvaried\tor reversed in appeal under\t the\nsection, effect\t shall be given to the order of the Supreme\nCourt in the manner provided in sub-section (5) and (7) of\nsection 66 in the case of a judgment of the High Court.\n860\n After the\tHigh Court and in cases of appeals to the\nSupreme Court,\tthe courts answer the question in any manner\nor give\t certain opinion. The\t appellate tribunals would\ndispose of the appeals\t in accordance\t with the opinions\nexpressed or answers given by the High Courts or the Supreme\nCourt. Therefore under\t the scheme, the appeal is\tkept\npending before\tthe Tribunal and the appellate jurisdiction\nis retained by the Tribunal, but the High Court exercises an\nadvisory or consultative jurisdiction.\n Under section 256 of 1961 Act, the provision of\nreference to the High Court is the same as under section 66\nof 1922\t Act. The slight differences between section 256 of\n1961 Act and section 66(1) and (2) of 1922 Act have been\nnoted in Kanga & Palkivala's Income Tax - 7th Edn. - Vol I,\np.1146. For the present purpose it is not necessary to set\nthese out in detail. There is provision for reference to the\nSupreme Court under section 257 of 1961 Act. By sections 261\nand 262, there are provisions for appeal to Supreme Court\nand hearing before Supreme Court from\t the decision of the\nreferences in the High\t Courts. Section 265 enjoins\tthat\nnotwithstanding that a reference has been made to the High\nCourt or the Supreme Court or an appeal has been preferred\nto the\tSupreme Court,\ttax shall be payable in accordance\nwith the assessment made in the case. The scheme of 1961 Act\nso far\tas the\tscheme of reference to\t the High Court on a\nquestion of law is concerned is the same as that of 1922\nAct. When a question of law arises, the Tribunal can and in\ncertain circumstances must seek at the instance of\t the\nassessee or in its own motion\t or at\tthe instance of the\nrevenue the opinion of\t the High Court on such a questions.\nThe jurisdiction exercised by\tthe High Courts is purely\nadvisory, it\tis neither of\t a Civil Court exercising\noriginal, nor of any appellate or revisional jurisdiction.\nTherefore, the\tpowers and jurisdiction of the High Courts\nand in\tcertain cases of the Supreme Court, are those which\nare expressed and conferred upon them and also those which\ninher in the exercise of that jurisdiction or are ancillary\nor those which sub-serve the exercise of that function and\njurisdiction of\t giving advice.\t The appeal is kept pending\nbefore the Appellate Tribunal.\n In\t Tata Iron &\tSteel Co. Ltd. v. Chief Revenue\nAuthority of Bombay, 1923 Privy Council = 50 Indian Appeals\n212, the Judicial Committee had to consider the question\nwhether\t the function\t of the High\t Court\tunder these\nprovisions was\tadvisory or not. The\t Judicial Committee\ndecided that such advice was not judgment within the meaning\nof clause 39 of the Letter Patent of the High\n861\nCourt of Bombay. The use of the expression 'determination'\nwas not\t decisive as to whether the decision\t was merely\nadvisory or not. The decision or order made\tby the court\nunder section 51 was merely advisory. This view was\t re-\naffirmed in Commissioner v. Bombay Trust Corporation, 1936\nA.I.R. Privy council 269 = 63 Indian Appeals 408. It is for\nthis reason that section 66A of the\t1922 Act expressly\nprovided for an appeal\t from a\t decision of the High Court\nunder section 66 of the said Act. The High Court noted that\nneither 1922 Act nor 1961 Act did contain\tany express\nprovision empowering the High Court or the Supreme Court to\ngrant stay or recovery\t of tax pending disposal of\t the\nreference before it. The High Court in the decision under\nappeal held that it had inherent jurisdiction under section\n66 of 1922 Act\t or under section 256\tof 1961 Act to grant\nstay pending disposal of the\treference. The\t High Court\nreferred to the several decisions some of which will have to\nbe noticed here. Thereafter on consideration of the relevant\nfacts, the High Court\tgranted the stay in the instant case\nas noted before.\n Reliance was placed by the High Court on the decision\nof the\tAndhra Pradesh\tHigh Court in Polisetti Narayana Rao\nv. Commissioner of Income-tax, Hyderebad, 29 I.T.R. 222. The\nAndhra Pradesh\tHigh Court referred to\t the decision in the\ncase of\t Hukum Chand Boid v. Kamalanand Singh, (1906) I.L.R.\n33, Cal. 927, and referred to the observations of Woodroffe,\nJ., where he posed the question as to whether the power\nvested in the High Court under section 151 of the Code of\nCivil Procedure\t was wide enough to apply to a case like the\npresent. It was noted\tthat the decision was\tapproved and\nfollowed by the Madras\t High Court in several cases as was\nnoted at page 226 of 29 I.T.R. It was further pointed out\nthat article 227 was wide enough to include such power. The\njudgment of that Court\t was delivered\tby Bhimasankaram J.\nSubba Rao, C.J. of the Andhra Pradesh High Court was a party\nto that\t decision. It may, however, be pointed out that in\nthe facts and\t circumstances\tthe Court found that\t the\nassessee was not entitled to any relief pending the disposal\nof the\treference. As pointed out before that reliance had\nbeen placed by the Andhra Pradesh High Court on the decision\nin Hukum Chand Boid's case\t(supra). It is necessary,\ntherefore, to discuss that decision.\tThe said case\t was\nconcerned with\tthe nature of the jurisdiction and the ambit\nof powers under section 583 and 546 of the Code of Civil\nProcedure 1882\tas it\tstood at the\trelevant time.\t The\ndivision bench\tof the\tCalcutta High Court consisting of\nWoodroffe and Mookherjee JJ. held that under the principle\nindicated by section 583 of the Code of Civil Procedure a\ndecree for reversal\n862\nnecessarily carried with it the right to restitution of all\nthat had taken under the erroneous decree and the Appellate\nCourt having seisin of\t the appeal, had as ancillary to its\nduty to grant restitution, an inherent power in the exercise\nof which it could, notwithstanding that the decree appealed\nagainst had been executed, call upon\t the respondent to\nfurnish security for the due performance of any decree which\nmight be made on the appeal. After discussing the facts the\ncourt held that the Code of Civil Procedure bound the courts\nso far\tas it went. The Code, was not exhaustive and did not\naffect the previously existing\t powers unless it took these\naway; in matters with which it did not deal, the court could\nexercise an inherent jurisdiction to do that justice between\nthe parties which was warranted under the circumstances and\nwhich the necessities\tof the\t case required. There\t was\ndifference of opinion between Woodroffe J. and Mookerjee J.\non the\tscope of applicability of section 546 of the Code of\nCivil Procedure. Justice Woodroffe at page 931 of the report\nobserved:-\n\t \"The Court has, therefore, in many\tcases, where\n\t the circumstances require it, acted upon\t the\n\t assumption of\t the possession of an inherent power\n\t to act ex debito justitiae and to do that real and\n\t substantial justice for the\tadministration,\t for\n\t which it alone exists.\"\n Similarly Justice Mookerjee observed at page 941 of the\nreport as follows:-\n\t \"It may be added that the exercise by Courts, of\n\t what\tare called their \"inherent\t powers\" or\n\t \"incidental powers\" is familiar in other systems\n\t of law, and such exercise is justified on\t the\n\t ground that it is necessary to make its ordinary\n\t exercise of jurisdiction effectual, because, \"when\n\t jurisdiction\thas once attached, it continues\n\t necessarily and all the powers requisite to give\n\t it full and complete\t effect\t can be exercised,\n\t until the end of law shall be attained\" (See Works\n\t on Courts and their\tJurisdiction section 27 and\n\t Wells on Jurisdiction of Courts, Chapter XVII)\".\n These observations, however, will have to be understood\nin the\tcontext in which the same were made. If there was\njurisdiction to\t do certain matter then all powers to make\nthat jurisdiction effective must be implied to the authority\nunless expressly prohibited. But in references under 1922\nAct as well as\n863\n1961 Act the\t courts\t merely exercise an\tadvisory or\nconsultative jurisdiction while the appeals are kept pending\nbefore the tribunal, therefore, nothing should be implied as\ndistracting from the jurisdiction of the tribunals. Power to\ngrant stay is incidental and ancillary to the appellate\njurisdiction. What was true of the appellate jurisdiction\ncould not be predicated of the referential jurisdiction. -\nSee the\t observations of the majority judgment of the Delhi\nHigh Court in Narula Trading Agency v. Commissioner of Sales\nTax [1981] 47 S.T.C. p.45, though made in the context of\ndifferent statutory provisions.\n This decision of Andhra Pradesh High Court was noticed\nby this\t Court in Income-tax Officer,\t Cannanore v.\tM.K.\nMohammed Kunhi\t71 I.T.R. 815.\t That decision\t requires a\nlittle closer examination. This Court in that decision was\ndealing with section 254 of the Act of 1961 which conferred\non the\tAppellate Tribunal powers of the widest amplitude in\ndealing with appeals before it. This Court held that power\ngranted by implication the power of doing all such acts, or\nemploying such\tmeans, as were essentially necessary to its\nexecution. The\tstatutory power\t under section\t254 carried\nwith it\t the duty in proper cases to\tmake such orders for\nstaying recovery proceedings pending an appeal before the\nTribunal, as would prevent the appeal, if successful, from\nbeing rendered\tnugatory. Section 254 carried\twith it\t the\nappellate powers of the Appellate Tribunal. This Court while\ninterpreting that power referred to the\tSutherland's\nStatutory Construction\tof third edition, articles 5401 and\n5402., in Domat's Civil Law (Cushing's edition), Volume 1,\nat page\t 88, Maxwell on Interpretation of Statutes, eleventh\nedition, and case to the conclusion that where the power was\ngiven to an authority,\t incidental powers to discharge that\nauthority were\timplied in the grant of that\tpower.\tThis\nCourt noted that the Income-tax Appellate Tribunal was not a\ncourt but exercised judicial powers. The Court noted that\nthere were certain decisions in which difficulties were felt\nthat the Appellate Tribunal did not possess the power to\nstay recovery during the pendency of\tan appeal. Reference\nwas made to a\tdecision of the Andhra Pradesh High Court in\nthe case of Vetcha Sreeramamurthy v. The Income-tax Officer,\nVizianagaram and Another 30 I.T.R. 252, where Viswanatha\nSastri, J. observed that there was no confinement of an\nexpress power of granting a stay of realisation of the tax,\nnor was\t there any power allowing the tax to be paid in\ninstalments. The learned judge\t observed that\tneither\t the\nAppellate Assistant Commissioner nor the Appellate Tribunal\nwas given the power\t to stay the\tcollection of\ttax.\nTherefore, according to the learned judge,\n864\nwhether the law should\t not be\t made more liberal so as to\nenable an assessee who\t has preferred\tan appeal, to obtain\nfrom the appellate forum, a stay of\tcollection of\ttax,\neither in whole or in part, on furnishing suitable security,\nwas a matter for the legislature to consider. Referring to\nthe decision in Pollisetti Narayana Rao v. Commissioner of\nIncome-tax (supra), this Court\t made an observation to the\neffect that \"the same\tHigh Court held that stay could be\ngranted by it pending\treference of a case by the Appellate\nTribunal to the High Court. This power the High Court had\nunder section 151 of the Civil Procedure Code and under\narticle 227 of\t the Constitution\". This passage in\t our\nopinion cannot be taken as approving the observations of the\nAndhra Pradesh\tHigh Court in Pollisetti Narayana Rao's case\n(supra). This Court was dealing with\t the power of\t the\nappellate authority i.e. the Appellate Tribunal. Therefore,\nthat would be an entirely different question. The appellate\nauthority must\thave the incidental power or inherent power-\ninherent for the disposal of an appeal to grant a stay or\nnot to grant a stay.\n The High Court, in our opinion, as was contended by the\nrevenue in answering a question under section 66 of 1922 Act\nor section 256 of 1961 Act does not\t exercise original,\nappellate or revisional jurisdiction\t but only advisory\nJurisdiction. See the observations of the judicial committee\nin Tata\t Iron &\t Steel Co. Ltd. v. Chief Revenue Authority,\nBombay, (supra). It is\t only consultative, neither original\nnor appellate.\n In New Jehangir Vakil Mills Ltd.\t v. Commissioner of\nIncome-tax, Bombay North Kutch and Saurashtra 37 I.T.R. 11,\nthis Court held that the High Court\t cannot\t direct\t the\nTribunal to find new facts or raise a new question of law or\nembark a new line of enquiry.\n In Commissioner of Income-tax, Bombay v. Scindia Steam\nNavigation Co. Ltd. 42 I.T.R. 589, a bench of five judges of\nthis Court was of the view that reference jurisdiction or\nspecial\t jurisdiction\tis different\tfrom appellate\t or\nsupervisory jurisdiction. The jurisdiction of the High Court\nin a reference under section 66 of 1922 Act was special one,\ndifferent from\tits ordinary jurisdiction as a civil court.\nThe High Court hearing\t a reference under that section did\nnot exercise any appellate or\t revisional or\t supervisory\njurisdiction over the\tTribunal. It acted purely in an\nadvisory capacity on a reference which properly came before\nit under section 66(1) and (2) of 1922 Act. This Court noted\nthat the High Court gives the Tribunal advice,\n865\nbut ultimately it is for the Tribunal to give effect to that\nadvice. This Court further observed that it\twas of\t the\nessence of such a Jurisdiction that the court shall decide\nonly questions\twhich were referred to it and not any other\nquestions. This\t Court was, however of\t the view that\t the\npower of the court to issue a direction to the Tribunal\nunder section 66(2) of the Act of 1922 was in the nature of\na mandamus and it was well settled that no mandamus would be\nissued unless the applicant had made\ta distinct demand on\nthe appropriate\t authorities for the very reliefs which he\nsought to enforce by mandamus and that had been refused.\n This question was again considered by this Court in\nPetlad Turkey Red Dye Works Co. Ltd. Commissioner of Income-\nTax Bombay North 48 I.T.R. 92. This Court observed at page\n98 of the report that the jurisdiction of the High Court was\nconfined to giving an\topinion. It was purely advisory and\nthe High Court had no jurisdiction to direct the Tribunal to\ntake fresh evidence.\n In C.P. Sarathy Mudaliar v. Commissioner of Income-Tax,\nAndhra Pradesh 62 I.T.R. 576, this Court noted that the High\nCourt cannot set aside\t the order of the Tribunal and the\nHigh Court does not sit in appeal over the judgement of the\nTribunal. If the High\tCourt found that the material facts\nwere not stated in the statement of case, or the Tribunal\nhad not\t stated its conclusion on material facts, the High\nCourt might call upon the Tribunal to submit a supplementary\nstatement of case under section 66(4) of 1922 Act. It may be\nmentioned that\tit would be incidental to answering\t the\nquestion.\n In the case of Commissioner of Income-tax, Bombay City\nI v. Greaves Cotton and Co. Ltd. 68 I.T.R. 200, this Court\nnoted that it was well settled that the High Court was not a\ncourt of appeal under reference under section 66 of 1922 Act\nor under section 256 of 1961 Act and it was not open to the\nHigh Court in such a reference to embark upon a re-appraisal\nof the\tevidence and the facts found by the Tribunal must be\naccepted by the High Court.\nA full\tbench of the Kerala High Court in the case of K.\nAhamad v. Commissioner of Income-tax, Kerala 96 I.T.R. 29,\nheld that the High Court had power to delete under section\n256 of\t1961 Act an erroneous sentence in the judgment. The\nfull bench held that the courts were constituted for the\npurpose of doing justice and should have power that is\ninherent to the discharge of the function and that these\nmust have power akin to correct accidental slips. The full\nbench therein acted on\t the principle\tthat no\t act of\t the\ncourt should ever injure a party.\n866\n A learned\tsingle judge of the Bombay High Court in the\ncase of\t Jatashankar Dayaram v. Commissioner of Income-Tax\n101 I.T.R. 343, held that application for a reference under\nsection\t 256(2)\t of 1961 Act\tin forma pauperis can be\npermitted. This\t would be incidental or ancillary to\t the\ndischarge of the function of giving advice conferred under\nsection 66 of 1922 Act.\n This Court\t in the\t case of Jaipur Mineral Development\nSyndicate v. Commissioner of\tIncome-Tax, New Delhi\t 106\nI.T.R. 653 at 656, held that reference which was dismissed\nfor paper books not being filed in time could be restored.\n It is common ground that jurisdiction conferred upon\nthe High Court under the Income-Tax Act is neither original\nnor appellate.\t The jurisdiction which it exercised in\ndealing with the income-tax reference was advisory and is a\nspecial jurisdiction.\n It was contended on behalf of the assessee that the\nHigh Court was\t a court when\t it exercised\tits special\njurisdiction and it was well settled\tthat the High Court\nwhile hearing\ta reference under a\ttaxing\tstatute\t had\ninherent power\tto make\t all such orders as it would be\nnecessary to do justice where the circumstances of the case\nso required and for\tthis reliance\twas placed on\t the\nobservations of\t this Court in the case of Jaipur Mineral\nDevelopment Syndicate v. Commissioner\tof Income-Tax,\t New\nDelhi (supra). But as has been noticed before the power that\nwas exercised was for properly giving advice.\n The Allahabad High Court in Sridhar v. Commissioner of\nWealth-Tax, 153\t I.T.R. 543 at 547, observed that only power\nthat High Court could\texercise under\tsection\t 27 of\t the\nWealth-Tax Act,\t 1957 was similar to section 66 of 1922 Act\ni.e. to\t give opinion about the questions referred to it in\nan advisory capacity by answering the questions in favour of\nthe assessee or the revenue, as the case might be.\tEven\nwhile hearing a reference under a taxing statute, the High\nCourt has certain inherent powers. But the extent and scope\nof the inherent power which can be exercised by an appellate\nor revisional court cannot be the extent and scope of the\ninherent power\t of the High\tCourt while exercising an\nadvisory jurisdiction such as is conferred by section 27 of\nthe Act. The inherent\t power\twhich the High Court\t can\nexercise while\thearing a reference under section 27 must be\nconfined to the procedure about the hearing of a reference\nand to passing such orders as are ancillary or incidental to\nthe advice which the\n867\nHigh Court proposes to\t give while answering the questions.\nWhile hearing a reference under section 27, the Allahabad\nHigh Court further held that the High Court did not have the\nfurther inherent power to pass interim orders restraining\nthe orders of AAC or by the Tribunal being given effect to.\nIt was further held that what the High Court could not do at\nthe time of passing the final order, it could certainly not\ndo as an interim measure in the purported exercise of its\ninherent power.\n It is true that the High\t Courts sometimes act on the\nassumption that it possessed inherent power to act ex debito\njustitiae and to do real and substantial justice for which\nalone these existed where the circumstances of the case so\nrequired, the power related to matters of procedure and not\nsubstantive rights of the parties. See in this connection\nManohar Lal Chopra v.\tRai Bahadur Rao Raja Seth Hiralal,\n[1962] 1 Supp. S.C.R.\t450, where this Court a page 463 of\nthe report referred to\t section 151 of the Code of Civil\nProcedure and observed that the section itself said\tthat\nnothing in the Code should be deemed to limit or otherwise\naffect the inherent power of\tthe court to\tmake orders\nnecessary for the ends of justice. This 'inherent power' as\nwas observed by this Court \"had not been conferred on the\ncourt. It was a power inherent in the Court by virtue of its\nduty to do justice between the parties before it\".\n Further the Code itself recognised the existence of the\ninherent power\tof the\t Code,\tthere was no\tquestion of\nimplying any powers outside the limits of the Code. See also\nPadam sen and Anr. v. The State of Uttar Pradesh, [1961] 1\nS.C.R. 884 at 887.\n The special jurisdiction\t of the High\tCourt under\nsection 256 does not deprive it of judicial character or its\ninherent power,\t it was\t submitted. This in our opinion does\nnot solve the question\t because the High Court in answering\nreference indubitably acts in judicial capacity and must be\nimplied to have powers which are necessary to discharge the\nobligations in\texercising its jurisdiction of giving advice\nconferred by the special provisions of the statute. It was\nfurther submitted that the extent and scope of that inherent\npower could not be confined to a straight jacket. It took\nwithin its ambit the power to\t grant stay of\t proceedings\nbefore the court as it deemed necessary to do for the ends\nof justice. The High Court could exercise such power to\ngrant stay, it was submitted where the legislature had not\ndenied or excluded the same in unmistakable terms. But this\nwas not\t clear because\tof the\tlanguage. It was stated that\npendency of a\n868\nreference would\t not stay the realisation, indicates\tthat\nreference has nothing to do with the stay of realisation.\nThe realisation\t of non-realisation of tax is part of the\nappellate jurisdiction\tof the\tTribunal. It was, however,\nsubmitted that the inherent power of the High Court and also\nof the\tSupreme Court had not\tbeen excluded by the general\nprovision in section 265 of 1961 Act\t which\tstated\tthat\nnotwithstanding that a reference has been made to the High\nCourt or the Supreme Court or an appeal has been preferred\nto the\tSupreme Court,\ttax shall be payable in accordance\nwith the assessment made. This section, it was submitted,\ndid not\t impose any embargo on\t the inherent power. It was\nsubmitted that section 265 of 1961 Act, as regards reference\nmade to\t the High Court, is in pari materia with section\n66(7) which also related to reference\t to the\t High Court.\nSection 66(7) was interpreted\tby the\tAndhra Pradesh\tHigh\nCourt in Pollisetti Narayana Rao v. Commissioner of Income-\ntax (supra). It was submitted that legislature by adopting\nthe identical language in 1961 Act must be\tregarded as\nhaving accepted\t it in\tsection 265 of\t 1961 Act. It\t was\nsubmitted that\twhile in re-enacting similar provisions of\nsection 66(7),\tin section 265 the legislature must be\nregarded as intending the same meaning to the pari material\nexpression in the 1961 Act. For this reliance was placed on\nthe observations of House of Lords in the Case of Barras v.\nAberdeen Steam\tTrawling and Fishing Co., Ltd. 1933 A.E.R. =\n1933 A.C. 402, where it was held that once certain words in\nan Act of Parliament had received a judicial construction in\none of\tthe superior courts, and the legislature repeated\nthese without any alteration in a subsequent statute, the\nlegislature must be taken to have used them according to the\nmeaning which a court of competent jurisdiction had given to\nthem. Lord Macmillan however observed that this rule of\ninterpretation afforded\t only a\t valuable presumption as to\nthe meaning of the language employed in a statute. Where a\njudicial interpretation\t is well settled and well recognised\nthe rule ought, doubtless, to receive effect, but must be a\nquestion of circumstances whether Parliament\t was to be\npresumed to have tacitly given statutory authority to a\nsingle judgment\t of a competent court\tso as to render that\njudgment, however, obviously wrong, unexaminable by\t the\nhighest court.\n Therefore, in this case only solitary decision of the\nAndhra Pradesh\tHigh Court which was not in all subsequent\ncases followed\tand which in a\t way was contrary to several\ndecisions of the other\t High Courts as well as this Court\ncannot be said to have received parliamentary acceptance.\nThe attention of the Andhra Pradesh High Court was not drawn\nto the decision of this Court in Seth\n869\nPremchand Satramdas v. State of Bihar 19 I.T.R. 108, where\ndealing with the nature of the Jurisdiction of the Courts in\nreference matters under Sales\tTax Act\t this Court observed\nthat the High Court acquired Jurisdiction to deal with the\ncase by\t virtue of an express\tprovision of the Bihar Sales\nTax Act. Jurisdiction was only consultative neither original\nnor appellate.\n The Calcutta High Court in the case of Dwarka Prasad\nBaja v. Commissioner of Income-tax, West Bengal-I 126 I.T.R.\n219, observed that in\texercising its\t Jurisdiction under\nsection 256 of the Income-Tax Act, 1961, the High Court did\nnot act\t as a court of\t appeal, as the Income-tax Appellate\nTribunal does under section 254 of the Act. The High Court,\nin disposing of the\treference, could only\t answer\t the\nquestions actually referred and could not raise any question\nby itself. The findings of fact by the Tribunal were final\nso far\tas the\tHigh Court was concerned and only on limited\ngrounds such findings of fact could be challenged. After the\njudgment of the High Court is delivered, the Tribunal has to\npass necessary\torders to dispose of the case in conformity\nwith the judgment under section 260 of the Act. The High\nCourt exercised\t a very\t limited jurisdiction.\tIt did\t not\ndispose of the entire\tmatter but its decision was confined\nonly to\t the questions of law as arise from the order of the\nTribunal. Therefore, it could\tnot be\tsaid that the\tHigh\nCourt exercised\t its general jurisdiction under article 227\nof the Constitution in dealing with a reference. If the High\nCourt could in such case exercise its powers under equity\njurisdiction and grant a temporary injunction or a stay it\nwould have to ascertain and to go into facts for which the\nIncome-Tax Act,\t 1961 did not make any provision. Moreover,\nissuance of orders permitting collection or recovery of tax\nor staying such collection or recovery if\t made under\nexercise of inherent power would result in extension of the\njurisdiction of\t the High Court under section 256 of the Act\nof 1961. The Calcutta\tHigh Court, further, was of the view\nthat a\tcourt could not vest itself with such additional\njurisdiction by\t invoking its inherent powers.\t Hence,\t the\nCourt, in seisin of a reference under the I.T. Act could not\nissue an order of temporary injunction, according to\t the\nCalcutta High Court, or stay of proceedings which was an\ninjunction in an indirect manner in respect of recovery of\ntaxes.\n In an appropriate case, if the assessee feels that a\nstay of\t recovery pending disposal of the reference is\nnecessary or is in the interest of\t justice, then\t the\nassessee is entitled to apply before the appellate authority\nto grant a stay until disposal\n870\nof reference by the High Court or until such time as the\nappellate authority thought fit. But in case the appellate\nauthority acted without jurisdiction or\t in excess\njurisdiction or\t in improper exercise of the jurisdiction,\nthen decision of such\tappellate authority can be corrected\nby the\tHigh Courts by issuing appropriate\twrits under\narticle 226 and 227 of the Constitution.\n It has to be borne in mind that in answering questions\nor disposing of references either under section 66 of 1922\nAct or\tsection 256 of 1961 Act, the\tHigh Courts do\t not\nexercise any jurisdiction conferred upon them by the Code of\nCivil Procedure\t or the Charters or by the Acts establishing\nrespective High Courts. In respect\tof certain matters\njurisdictions exercised\t by the\t High Court, must be\tkept\nseparate from the concept of inherent powers or incidental\npowers in exercising jurisdiction under section 66 of 1922\nAct or 256 of 1961 Act. Section 66 of Income-Tax Act of 1922\nor section 256 of Income-Tax Act of\t1961 is a special\njurisdiction of\t a limited nature conferred not by the Code\nof Civil Procedure or by the Charters or by the special Acts\nconstituting such High Courts but by the special provisions\nof Income-Tax Act 1922\t or 1961 for\tlimited\t purpose of\nobtaining High\tCourt's opinion\t on questions\tof law. In\ngiving that opinion properly if any question of incidental\nor ancillary power arises such as giving an opportunity or\nrestoring a reference dismissed without hearing or giving\nsome additional time to file paper book, such powers inhered\nto the\tJurisdiction conferred\tupon it. But such incidental\npowers can not be so construed as to\t confer the power of\nstay of\t recovery of taxes pending a reference which lie in\nthe domain of an appellate authority. Therefore, the concept\nof granting stay in a reference ex debito justitiae does not\narise. That concept might arise in case of the appellate\nauthority exercising its power to grant stay where there is\nnot express provision. Ex debito justitiae is to do justice\nbetween the parties.\n Rendering advice on the question of law referred to the\ncourts has nothing to\tdo with the recovery\t of tax or\ngranting stay in respect of the same.\n Therefore, in our opinion\t it cannot be said that the\nHigh Court had inherent power or incidental power in the\nmatter of a reference\tpending before\tit to grant stay of\nrealisation or\tto grant injunction. That must remain within\nthe jurisdiction of the appellate authority and pendency of\na reference does not detract\n871\nfrom that jurisdiction of the appellate authority. In our\nopinion, therefore, the High Court was in error in\nexercising its\tjurisdiction by passing an order for stay of\nrealisation under section 151 of the Code of Civil Procedure\nin a pending reference. The High Court could have exercised\nits power if the appellate authority had not properly\nexercised its jurisdiction, not in reference\tjurisdiction\nbut by\tvirtue of its jurisdiction under article 226 or\narticle 227 in appropriate cases. But that was not the case\nhere.\n In that view of the matter, we\t are in respectful\nagreement with\tthe views expressed by\t the Allahabad\tHigh\nCourt in Sridhar v. Commissioner of Wealth-tax (supra) and\nthe views of the Calcutta High Court in Dwarka Prasad Baja\nv. Commissioner\t of Income-tax, West Bengal-I (supra) and we\nare unable to sustain the views expressed by Andhra Pradesh\nHigh Court in Polisetti Narayana Rao\tv. Commissioner of\nIncome-tax, Hyderabad (supra). The appeals are accordingly\nallowed. The judgment and order of the High Court are set\naside. But in the facts and circumstances of the case,\nparties are directed to pay and bear their own costs.\nN.V.K.\t\t\t\t\t Appeals allowed.\n872" }, { "title": "Madurai Distt. Central Cooperative ... vs The Third Income-Tax Officer, Madurai on 28 July, 1975", "url": "https://indiankanoon.org//doc/971033/", "text": "Madurai Distt. Central Cooperative ... vs The Third Income-Tax Officer, Madurai on 28 July, 1975\nEquivalent citations: 1975 AIR 2016, 1976 SCR (1) 136, AIR 1975 SUPREME COURT 2016, 1975 2 SCC 454, 1975 TAX. L. R. 913, 1976 (1) ITJ 89, 1976 (1) SCR 135, 1975 (11) CO-OP LJ 226, 1975 SCC (TAX) 374, 1976 (1) SCJ 127, 101 ITR 24, (1998) 2 SCC 454\nAuthor: Y.V. Chandrachud\nBench: Y.V. Chandrachud, Ranjit Singh Sarkaria, A.C. Gupta\n PETITIONER:\nMADURAI DISTT. CENTRAL COOPERATIVE BANK LTD.\n\n\tVs.\n\nRESPONDENT:\nTHE THIRD INCOME-TAX OFFICER, MADURAI\n\nDATE OF JUDGMENT28/07/1975\n\nBENCH:\nCHANDRACHUD, Y.V.\nBENCH:\nCHANDRACHUD, Y.V.\nSARKARIA, RANJIT SINGH\nGUPTA, A.C.\n\nCITATION:\n 1975 AIR 2016\t\t 1976 SCR (1) 136\n 1975 SCC (2) 454\n CITATOR INFO :\n D\t 1981 SC1562\t (17)\n\n\nACT:\n Constitution of India-Article 246(1)-7th Schedule List\n1 Entry\t 82- Income-Tax\t ,Act 1961-Sec.\t 2(8), 4 & 81(i)(a)-\nFinance Act 1963-Sec. 2(1) (a). 2(8),\t 3, Part 1, First\nSchedule-Whether tax can exceed taxable income- Finance Act-\nNature\tand scope of-Whether\t can impose fresh charge-\nHarshness of a taxing\tstatute if a ground for challenge-\nBusiness income\t of a cooperative society doing banking-\nWhether\t additional surcharge\t a tax-Whether additional\nsurcharge Can be levied on income exempted from payment of\ntax.\n\n\n\nHEADNOTE:\n The appellant is a Cooperative Society engaged in the\nbusiness of banking According\tto section 8] (i) (a) of the\nIncome 'Tax Act, 1961, a Cooperative Society engaged in the\nbusiness of banking is\t not liable to pay income tax on its\nbusiness income. The Finance Act, 1963, however, by section\n2(i) (a), 2(8), 3, paragraph A(ii) of Part I of the First\nSchedule and clause of that\tportion\t of Part I called\nsurcharge on Income Tax provides for\tlevy of additional\nsurcharge for the purposes of the Union calculated on the\namount\tof the\t residual income at the rates mentioned\ntherein. The\ttotal income\tof the\t appellant for\t the\nassessment year\t 1963-64 was Rs. 10,00,098. Out of this Rs.\n9,48,335 was its business income. 'The tax amounting to Rs.\n23,845 was charged on Rs. 51,763 Applying the Finance Act of\n1963, the residual income of the appellant was computed at\nRs. 5.39,386 and a surcharge thereon\twas levied of\t Rs.\n52,828 Thus, the total tax imposed on the appellant came to\nRs. 76,674.\n The assessment order passed by the Income Tax officer\nlevying the tax as aforesaid was challenged by the appellant\nin the\tHigh Court by a Writ Petition. The main grievance of\nthe appellant before the High Court was that\t whereas its\ntaxable income\twas only Rs. 51,763, a tax of Rs. 76,674 was\nimposed on it. The relevant provisions of the Finance Act\nwere challenged\t as invalid on the ground that(i)\tthey\nimposed additional surcharge on income which was exempt from\ntax under the provisions of the Income Tax Act and that (ii)\nthe additional\tsurcharge was intended as additional levy on\nthe income tax and had no independent existence apart from\nit The High Court rejected these contentions.\n On an appeal by certificate, dismissing the appeal,\n^\nHELD :\n 1.\t It is\t indisputable that the appellant is\t not\nrequired to pay income tax on the banking income. In view of\nsection 81. It is also not liable to pay surcharge on its\nbusiness income in view of section 99(1)(v). [139C]\n 2. The, grievance of the appellant that the tax levied\nupon it\t exceeds its taxable income can afford no true guide\nto the construction of the relevant provisions of the Income\nTax Act\t or the\t Finance Act. Harshness of a taxing statute,\napart from a possible\tchallenge to it under Art. 13 of the\nConstitution cannot be an invalidating circumstance.\tBut,\nthe grievance-on this score is misconceived. It assumes what\nhas to\tbe examined that no part of the income exempted from\nIncome Tax and Super Tax under the Income Tax Act can be\nbrought to tax by a Finance Act, [140G-H]\n 3. The concession of the counsel\t for the appellant\ngiving up challenge to\t the power. of\t the Parliament to\nimpose a new charge by Finance Act was Properly made. Under\nArt. 246(11)\tof the\t Constitution,\tParliament has\t the\nexclusive power\t to make laws with respect ''o any of the\nmatters in List\t of the Seventh Schedule. Entry 82 in List I\nrelates to tax on income other than agricultural income. The\nIncome Tax Act, 1961 and the annual Finance Acts are enacted\nby the Parliament in exercise of the powers conferred by Art\n246(1) read with entry 82 of List I. Once the Parliament has\nthe legislative\t competence to\tenact a\t law with respect to\ncertain subject matter, the limits of\n136\nthat competence\t cannot be judged further by the form or\nmanner in which that power is exercised. Exigencies of the\nFinancial year\t determine the\t scope\tand nature of\t the\nprovisions of the Finance Act. The primary purpose of the\nFinance Act is to describe the rates at with the Income Tax\nwill be\t charged under\tthe Income Tax Act but that does not\nmean that new and distinct tax cannot be charged under\nFinance Act. Therefore, what is not income under the Income\nTax Act\t can be made income by the Finance Act. An exemption\ngranted by the Income\tTax A,\tt can be withdrawn by\t the\nFinance Act or the efficacy of that exemption may be reduced\nby the imposition of a new charge. [141D-E; G-H]\n 4. The contention of the appellant that surcharges are\nnothing but income tax and, therefore, expression income tax\noccurring in Sec. 4 and 81 of the Act includes surcharges\nand AS\tsuch exempted cannot be accepted. The\t case of the\nC.I.T. Kerala vs. K. Srinivasan distinguished. There\t the\nessential point\t for determination was whether surcharge is\nadditional mode\t or rate for charging income tax. The Court\nheld there that it was so. The question before us is whether\neven if\t the surcharge\tis an additional mode\tor rate\t for\ncharging income to the Finance Act of 1963 authorises by its\nterms the levy of additional surcharge on income which is\nexempt from income tax under the Income Tax, Act, 1961. The\nresidual income\t as defined by the 1963 Finance Act is not\nthe same as the business income of a Cooperative Bank which\nis exempted under see.\t 81. The additional surcharge\tis a\ndistinct charge\t not dependent\tfor its\t leviability on\t the\nassessee's liability to pay income tax or Super Tax. The\ndecision of Allahabad High Court in Allahabad District Co-\noperative Bank Ltd vs. Union of India over-ruled. [143D-E]\n 5.\t The additional surcharge though levied by\t the\nFinance Act 1963 independently of the Income Tax Act is but\na mode\tof levying tax on a portion of the assessee's income\ncomputed in accordance with the definition in section 2(8)\nof the Finance Act 1963. [147F]\n\t\t\t ARGUMENTS\nFor The Appellant\n 1. Under section 81 read with section 4 of the Income-\ntax Act, 1961, income tax is not payable by the appellant. a\nCo-operative Society, in respect of its income from banking\nbusiness. Similarly super-tax is not payable under section\n99(i)(v) read with section 4.\n 2. The primary purpose of the annual Finance Acts as\nenvisaged by section 4 of the Income-tax Act is to prescribe\nthe rates of income-tax on the total income of an assessee,\nand this function as contemplated by\tsection 4 is to be\n\"subject to the other\tprovisions of this Act\", namely, the\nIncome-tax Act,\t 1961,\twhich would include,\tinter alia,\nsection 81.\n 3.\t The history\tof Indian income-tax\t shows\tthat\nsurcharges by way of increase to the amount of income-tax,\nwhich are added to the basic amount, in view of article 271\nof the Constitution of India, are nothing other than income-\ntax and a part of income-tax alone. Therefore the expression\n'income-tax' in\t section 4 and 81 of the Income-tax\tAct,\n1961, and section and Schedule I, Part 1 of the Finance Act,\n1953, includes surcharges.\n 4. Section\t 2 of the Finance Act, 1963, and Schedule I,\nPart I, Paragraph A\tall clearly contemplate that\t the\nsurcharge. special surcharge and additional surcharge\t are\nall only by way of increase of the amount of income-tax and\nnot only partake of the character of income-tax but\t are\nactually a part of income tax. They are merely rates of\nincome-tax. The\t main part of section\t2(1) (a) says\tthat\n\"Income-tax shall be charged at the rates specified in Part\nI of the First\t Schedule\" and\tclause (ii) of that section\nprovides in the ease referred to therein that income-tax\n\"shall further\tbe increased by an additional surcharge for\nthe purpose of the Union calculated in the manner provided\nin the First Schedule. Similarly in Paragraph A of Part I of\nthe First Schedule the heading to the provisions prescribing\nrates of surcharge is\t\"surcharges on\tincome-tax\" in\t the\nplural. The main part in the heading also provides that \"the\namount of\n137\nincome-tax... shall be increased by the aggregate of\t the\nsurcharges calculated as under \" Clause (c) thereafter\nprovides for the additional surcharge for the purpose of the\nUnion. Paragraph A also therefore clearly indicates that the\nthree surcharges are only of the same nature and that all\nthe three surcharges are only by way of increase of\t the\namount of income-tax; in other words part of the income-tax.\nIs either section 2 nor paragraph A of Part I of the First\nSchedule can even remotely be said\tto contemplate\t any\nseparate levy of additional surcharge other than income-tax.\n 5. From the assessment order it\t is seen that\t the\nfollowing have\tbeen charged only on the real taxable income\nof the\tappellant namely Rs. 51,763: (i) income tax\t(ii)\nsurcharge on income tax (iii) special surcharge on income-\ntax (iv) super-tax and\t (v) surcharge\ton super-tax. These\nitems have not been charged on the total income of\t Rs.\n10,00,098, because income-tax is not payable on the balance\nof the total income under section 81. The Income-tax officer\nhas sought to impose only additional surcharge under clause\n(c) in respect to the total income of Rs. 10,00,098. In view\nof section 81 no additional surcharge\t is payable on\t the\ntotal income of Rs. 10,00,098. It is payable\t only on the\ntaxable income of Rs. 51,763.\n 6. Section 2 read with Paragraph A Part I of Schedule I\nto the Finance Act merely purports to lay down the method of\ncomputation where income-tax is payable. It does not either\ndire thy or\tby implication make\t any amendment\t or\nmodification in section 81.\n 7. Section\t 3 of the Finance Act ]963 also applies to a\nstage of computation only and in regard to relief, rebate\netc. It\t does not impose any\tliability or any tax. It\noperates only where additional surcharge is payable and not\nother wise, and where\trelief, rebate\tetc. is\t to be given\nfrom the tax payable by the assessee, e.g. deduction of tax\nbased on life insurance premia provident fund contribution.\ndonations to charitable institution etc. Section 81 does not\nprovide for any such relief or rebate.\n 8. Section\t 2(8) of the Finance Act, 1963, defining\n\"residual income\" which requires deduction from the total\nincome of income-tax, surcharge and special surcharge to\nascertain residual income also\t does not have the effect of\nimposing any liability or any tax but merely provides for\ncomputation. In\t a taxing Act one has to look merely at what\nis clearly said. There is no room for any intendment. There\nis no equity about a tax. There is no presumption as to tax.\nNothing is to be read in, nothing is to be implied.\" \"In a\ncase of\t reasonable doubt. the construction most beneficial\nto the\tsubject is to be adopted.\" The court will be very\nslow in\t reading an implied amendment\tin a tax law because\nthere is no intendment.\n 9. Income-tax is one tax, not several taxes on several\nheads or several items of income:\nFor the Respondent\n 1. It is open to the Parliament to pass an Act relating\nto more than one topic or field of operation, covered by the\nEntries in List 1. It is not as if there must be as many\nEnactments as the topics which the enactment covers.\n 2. The legislature has a wide range of selection and\nfreedom in appraisal not only in the subjects of taxation\nand the\t manner of taxation but also in the determination of\nthe rate or rates applicable. If production were always to\nbe taken into account there will have to be a settlement for\nevery year and the tax will become a kind of income-tax.\n The burden\t of proving discrimination is\talways heavy\nand heavier still when a taxing statute is under attack. The\nburden is on the person complaining of discrimination. The\nburden is proving not\tpossible 'inequality'\tbut hostile\n'unequal' treatment. This is more so when uniform taxes are\nlevied. The State cannot be asked to demonstrate equality.\n 3. Income which is exempt from taxation is income which\nis assessable to tax and therefore liable to tax but tax is\nnot imposed on account of the exemp-\n138\ntion. This exemption can by subsequent legislation be wholly\nor partially withdrawn both as regards items of income and\nlevies imposed\tfor the\t purpose of taxation. Thus where the\nIncome-tax Act\t1961 says that business income of a\t co-\noperative society will be exempt from income-tax it would be\nopen to\t the Parliament\t by enactment of the Finance Act of\n1963 to say that this exemption shall be partially withdrawn\nas regards residual income and this partial exemption will\noperate only for the purpose of income-tax but not surcharge\non residual income. The net result of the partial withdrawn\nof the\texemption would mean that though the business income\nof a co-operative society will be exempt from tax\t the\nresidual income\t which\tis only a part of the exempted\nbusiness income\t could be subjected to surcharge on income-\ntax only.\n 4. Income-tax and\t surcharge on\tincome-tax are\t two\ndifferent levies though the computation of the latter is\nbased upon a percentage of the former. The to are inclusive\nfor the\t purpose of imposing tax but they are not one levy\nonly.\n\n\n\nJUDGMENT:\n CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1795 of\n1970.\n From the Judgment and order dated the 15th October,\n1968 of\t the Madras High Court in Writ Petition No. 2252 of\n1965.\n S. T. Desai and T. A. Ramachandran, for the appellant.\n N. D. Karkhanis and S. P. Nayar, for the respondent.\n The Judgment of the Court was delivered by\n CHANDRACHUD,J.-The appellant filed a writ petition in\nthe High Court of\tMadras\tunder Article\t226 of\t the\nConstitution to\t challenge an assessment order dated August\n22, 1963 made by the respondent,\t levying additional\nsurcharge on its residual income. The High Court dismissed\nthe writ petition by its judgment dated October IS, 1968 but\nit has\tgranted to the appellant a certificate to file an\nappeal to this Court under Articles 133(a) and (c) of the\nConstitution.\n The appellant is a co-operative society engaged in the\nbusiness of banking. Its total income\t for the assessment\nyear 1963-64\twas computed\tby the\t respondent at\t Rs.\n10,00,098. Out of this, Rs. 9,48,335 was its business income\nwhile Rs. 51,763 was its income from other sources. Since,\nunder section 81(i)(a) of the Income-tax Act, 1961 a co-\noperative society engaged in the business of banking is not\nliable to pay income-tax on its business income the\t tax\namounting to Rs. 23,845.47 was charged on Rs. 51,763 only\nthough for the purposes of rate the income was taken at Rs.\n9,48,335 in view of section 110 of the Act. Applying the\nFinance Act, XIII of 1963, the respondent computed\t the\nresidual income\t of the appellant at Rs. 5,39,386 and levied\non it an additional surcharge of Rs. 52,828.60. Thus the\ntotal tax levied on the appellant came to Rs. 23,845.47 plus\nRs. 52,828.60 i.e., Rs. 76,674.07.\n The main grievance of the appellant before the\tHigh\nCourt was that whereas\t its taxable income was only\t Rs.\n51,763, a tax of Rs. 76,674.07 was imposed\ton it.\t The\nrelevant provisions of the Finance Act were accordingly said\nto be invalid as they\t could\tnot subject to additional\nsurcharge an income which was exempt\tfrom tax under\t the\nprovisions of the Income-tax Act. The additional surcharge,\nit was\tcontended, was intended as an additional levy on the\nincome\n139\ntax and\t had no\t independent existence\tapart from it. These\ncontentions were rejected by the High Court and hence this\nappeal.\n Section 81\t of the\t Income-tax Act, 1961 was deleted by\nthe Finance Act, XX of 1967, with effect from April 1, 1968\nbut its provisions were incorporated by the same Finance Act\nin section 80P.\t Section 81 (i)(a) read thus:\n\t \"81. Income of co-operative societies.-Income-tax\n shall not be payable by a co-operative society-\n (i) in respect of\t the profits and gains\t of business\n carried on by it, if it is-\n\t (a) a society engaged in carrying on the business\n\t of banking or providing credit facilities to\n\t its members;\"\nIt is indisputable that by reason of this provision, the\ntanking income\t of the appellant amounting to Rs. 9,48,335\nis exempt from income\ttax. It\t is equally clear that by\nreason of section 99(1)(v) of the Act of 1961, the appellant\nis not\tliable to pay supertax on its business income. That\nsection provides that where the assessee is a co-operative\nsociety, super-tax shall not be payable by it on any income\nin respect whereof no income-tax is payable by it by virtue\nof the provisions of section 81.\n The dispute really centers round\t the provisions of\nFinance Act, VIII of 1963. The provisions of that Act which\nare relevant for our purpose are sections 2(1)(a), 2(8), 3,\nParagraph A(ii)\t of Part I of the First Schedule, and clause\n(c) of\tthat` portion of Part\t1, called `'Surcharges on\nIncome Tax.\"\n Section 2(1)(a) of the Finance Act, 1963 provides that:\n\t 2. Income-tax\t and super-tax-(1) Subject to\t the\n provisions of sub-section (2), (3), (4)\tand (5), for\n the assessment year commencing on the 1st day of April,\n 1963,-\n\t (a) income-tax shall\t be charged at the rates\n\t specified in Part I of the First Schedule\n\t and,-\n\t (i) in the cases to which paragraphs A,C,C\n\t\t and E of that Part apply, shall be\n\t\t increased by a surcharge for purposes of\n\t\t the Union and, except in\tthe cases to\n\t\t which the said paragraph\tapplies\t a\n\t\t special surcharge,\tcalculated in either\n\t\t case in the manner provided therein; and\n\t (ii) in\tthe cases to which paragraphs A and\n\t\t of\tthe aforesaid\t Part apply, shall\n\t\t further be\tincreased by an additional\n\t\t surcharge for purposes of the Union\n\t\t (hereinafter referred to as additional\n\t\t surcharge)\tcalculated in\t the manner\n\t\t provided in the said Schedule;\"\n Section 2 (8) provides that:\n\t For the purposes of paragraphs A and of Part I of\n the First\tSchedule, the expression \"residual income\"\n means the amount of the total income as reduced by-\n140\n (a) the amount of the capital gains, if any, included\n\t therein; and\n (b) the\tamount\tof tax (exclusive of additional\n\t surcharge) which would have\tbeen chargeable on\n\t such reduced total income if it had been the total\n\t income no part of which had been exempt from tax\n\t and on no portion of which\tdeduction of tax had\n\t been\tadmissible under any\t provisions of\t the\n\t Income-tax Act or this Act.\"\n Section 3 provides that:\n\t \"Notwithstanding anything\tcontained in\t the\n provisions of Chapter VII or Chapter VIII-A or section\n 110 of the Income tax Act or sub-section (5) of section\n 2 of this Act, in calculating any relief rebate or\n deduction in respect of income-tax payable on the total\n income of\tan assessee which includes any income on\n which no income-tax is payable or in respect of which a\n deduction of income-tax is admissible under any of the\n aforesaid provisions, no account shall be taken of the\n additional surcharge.\"\n The First Schedule of the Finance Act, 1963 consists of\nthree parts out of which we are only concerned with Part I.\nPart I which is called \"Income-tax and surcharges on income-\ntax\" consists of Paragraphs A, B, C, and out of which we are\nconcerned with\tParagraph A only. Clause (ii) of Paragraph A\nprescribes rate\t of income-tax\tfor incomes accruing, inter\nalia, to \"association of persons\". Since a\tco-operative\nsociety is an association of persons, Paragraph A of Part I\nwould apply to the case of the appellant for`the purposes of\nsection 2(1)(a)(ii) of the Finance Act oil 1963, though not\nfor the\t purpose of bringing its exempted business income to\nincome-tax.\n That portion of Part I, Paragraph A, called \"Surcharges\non Income Tax\" provides: \"The amount of income-tax computed\nat the\trates hereinbefore specified shall be increased by\nthe aggregate of the surcharges calculated as under\". Clause\n(a) provides for a surcharge for the purposes of the Union\nat the\trates mentioned\t in sub-clauses (i), (ii) and (iii).\nClause (b) provides for the levy of a special surcharge.\nClause (c) with which we are concerned provides for the levy\nof \"an\tadditional surcharge for the purposes of the Union\ncalculated on the amount of the residual income\" at\t the\nrates mentioned therein.\n The grievance of the appellant, which appears to have\nbeen pressed before the High Court with some earnestness,\nthat the tax levied upon it exceeds its taxable income can\nafford no true guide to the construction of\tthe relevant\nprovisions of the Income tax\t Act or the Finance\tAct.\nHarshness of a taxing statute, apart from\t a possible\nchallenge to it under Article 13 of the Constitution, cannot\nbe an invalidating circumstance. But the grievance on this\nscore is basically misconceived. It assumes, what has to be\nexamined, that\tno part\t of the income exempted from income-\ntax and super-tax under the Income-tax Act can be brought to\ntax by\ta Finance Act. The total income of the appellant was\ncomputed\n141\nat Rs.\t10,00,098. By reason of sections 81 (i) (a) and 99\n(1) (v)\t of the Income-tax Act, 1961 the appellant enjoys an\nexemption from\tincome tax and super-tax in respect of its\nbusiness income which amounts to Rs. 9,48,335. The balance,\nviz. Rs. 51,763 which was the appellant's income from other\nsources was alone taxable under the Act of 1961 and a tax of\nRs. 23,845.47 was imposed on that income; The Finance\t Act\nof 1963\t subjects 'residual income' to\t certain charges and\nsuch in\t come was computed, admittedly\t correctly, at\t Rs.\n5,39,386. An additional surcharge of\t Rs. 52,828.60\t was\nlevied on the residual\t income. Thus on the assumption that\nthe Finance Act, validly-and\ton a true interpretation,\nimposes the additional surcharge on residual income, the tax\nimposed\t on the appellant is Rs.\t23,845.47 plus\t Rs.\n52,828.60. The\ttotal tax of Rs. 76,674.07 thus imposed is\nfar less than the. appellant's total taxable income arrived\nat by the addition of\t its non-business income and\t the\nresidual income. That leads to the inquiry first as regards\nthe scope of\ta Finance Act\t and then as\tregards\t the\ninterpretation of the Finance Act of 1963.\n Learned counsel for the appellant, during the course of\nhis arguments,\tgave up\t the challenge\tto the\tpower of the\nParliament to impose a\t new charge by a Finance Act. This\nconcession was\tproperly made.\tBy Article 246(1) of\t the\nConstitution, Parliament has the exclusive power to\tmake\nlaws with respect to any of the matters in List I of the\nSeventh Schedule. Entry 82 in List I relates to \"taxes on\nincome other than agricultural income\". The Income-tax Act,\n1961 and the\tannual\tFinance\t Acts are enacted by\t the\nParliament in exercise of the power conferred by Article\n246(1) read with Entry 82 of List I. Once the Parliament has\nthe legislative\t competence to enact a law with respect to a\ncertain subject-matter, the limits of that competence cannot\nbe judged further by the form or manner in which that power\nis exercised. Accordingly, though it would be unconventional\nfor the Parliament to amend a taxing\tstatute\t by\nincorporating the amending provision in an Act of a\ndifferent pith and substance, such a course would not be un-\nconstitutional.\n Much more\tso can\tthe Parliament\tintroduce a charging\nprovision in a\t Finance Act.\tTrue, as said\t in Kesoram\nIndustries and\tCotton Mills Ltd v. Commissioner of Wealth\nTax, (Central)\tCalcutta(1), that the Income-tax Act is a\npermanent Act v. while\t the Finance Acts are\tpassed every\nyear and their primary purpose is to prescribe the rates at\nwhich the income-tax will be charged\tunder the Income tax\nact. But that does not mean that a new and distinct charge\ncannot be introduced under the Finance Act. Exigencies of\nthe Financial year determine the scope and nature of its\nprovisions. If the Parliament has the legislative competence\nto introduce a new charge of tax, it may exercise that power\neither by incorporating that charge in the Income-tax Act or\nby introducing\tit in the Finance Act or for the matter of\nthat in any other Statute. The alternative in this regard is\ngenerally determined by the consideration whether the new\ncharge is intended to be more or less of a permanent nature\nor whether its introduction is dictated by the financial\nexigencies of the particular year. Therefore,\t what is not\n'income' under\n142\nthe Income-tax Act can be made 'income' by a Finance Act, an\nexemption granted by the Income-tax Act can be withdrawn by\nthe Finance Act or the efficacy of that exemption may be\nreduced by the imposition of\ta new\tcharge.\t Subject to\nconstitutional limitations, additional tax revenue may be\ncollected either by enhance the rate\tor by the levy of a\nfresh charge. The Parliament,\t through the medium of a\nFinance Act, may as much do the one\t as the other. In\nMcGregor and\tBalfour\t Ltd.,\t Calcutta v. C.I.T.,\tWest\nBengal(1), which was affirmed by this Court in 36 I.T.R. 65.\nChakravartti C.J. delivering the judgment of\t a Division\nBench observed\tthat the Finance Acts though annual Acts are\nnot necessarily\t temporary Act\t for they may\tand often do\ncontain provisions of a general character which are\tof a\npermanent operation.\n In Hari Krishna Bhargav v. Union of India and Anr.(2)\nan assessee challenged the scheme of Annuity Deposits of the\nground that the Parliament has no competence to incorporate\nill the\t Income tax Act a provision which was substantially\none relating to borrowings by the Central Government from a\nclass of tax-payers. That scheme was introduced by Finance\nAct 5 of 1964\twhich incorporated Chapter XXII-A containing\nsection 28-A to section 28-X in the Income tax Act, 1961.\nThe challenge was repelled by this Court on the ground that\nif the\tparliament had the legislative competence to pass an\nAct for collecting Annuity Deposits from tax-payers, nothing\ncontained in the Constitution disentitled it \"as a matter of\nlegislative arrangement to incorporate the provisions\nrelating to borrowing from tax-payers in the Income-tax Act\nor any other statute\".\n This discussion became necessary in spite of\t the\nappellant's concession\t on the Parliament's\t legislative\ncompetence because for a proper understanding of\t the\nprovisions of the Finance Act 1963, it is essential to\nappreciate that\t a Finance Act may not only prescribe rates\nbut also introduce a new charge.\n We will now proceed to consider the provisions of the\nFinance Act, 1963 under which the respondent\t has levied\nadditional surcharge on the appellant's residual income. The\nquestion for consideration is\twhether clause\t(c) of\t the\nportion \"Surcharges on Income Tax\" occurring in Paragraph A\nof Part I introduces a new charge in the shape of additional\nsurcharge so that the\tsaid charge, can be levied even on a\npart of\t the appellant's income which is exempt from income-\ntax and\t super-tax under sections 81(i)(a) and 99(1)(v) of\nthe Act of 1961.\n The history of\tIndian\t income-tax, according\t to\nappellant's counsel,\tshows that surcharges\t by way of\nincrease in the amount of income-tax are nothing but income-\ntax and\t therefore the\texpression \"income-tax\" occurring in\nsections 4 and 81 of the Act of 1961 and in section 2 and\nthe First Schedule of the Finance\tAct, 1963 includes\nsurcharges. To\tput it differently, the argument is that the\nexemption granted by section 81(i)(a) extends to surcharges\nalso as\t a result whereof a co-operative society engaged in\nthe business of banking is neither liable to pay income-tax\nnor any of the surcharges on its business income.\n143\n In C.I.T.,\t Kerala v. K. Srinivasan(1) on which\t the\nappellant relies, this Court has traced the history of the\nconcept of 'surcharge' in tax laws of our country. After\nconsidering the report of\tthe Committee\t on Indian\nConstitutional Reforms,\t the provisions of the Government of\nIndia Act, 1935, the provisions of Articles 269, 270 and 271\nof the Constitution and the various Finance Acts, this Court\nheld, differing\t from the High Court, that the word \"income-\ntax\" in\t section 2(2) of the Finance\tAct, 1964 includes\nsurcharges and the additional surcharge.\n This case\tdoes not touch the point before us. In that\ncase, the assessee's income for the accounting year ending\nMarch 30, 1964 consisted mainly of his salary. Section\n2(2)(a) of the Finance Act, 1964 did not by itself refer to\nany surcharge but it provided that in making the assessment\nfor the\t assessment year commencing on\t April 1, 1964\t the\n\"income-tax\" payable by the assessee on his salary-income\nshall be an amount bearing to the total amount of \"income-\ntax\" payable according to the rates applicable under\t the\noperation of the Finance Act, 1963 on his total income, the\nsame proportion\t as the\t salary income\tbears t the total\nincome. The question which arose for consideration was under\nthe total income. The question which arose for consideration\nwas whether the words\t\"income-tax payable according to the\nrates applicable under the operation of the Finance\tAct,\n1963\" included\tsurcharges which were leviable under the Act\nof 1963. The question\twas answered by this Court in\t the\naffirmative. As the judgment shows, \"the essential point for\ndetermination\" was whether surcharge is an additional mode\nor rate\t for charging income tax\" (p. 351). The Court held\nthat it\t was. The question before us is whether, even if the\nsurcharger is but an additional mode\tor rate for charging\nincome-tax, the\t Finance Act of 1963 authorises by its terms\nthe levy of additional\t surcharge on income which is exempt\nfrom income-tax under\t the Income-tax Act,\t1961 In K.\nSrinivasans case the Court declined to express any opinion\non the\tdistinction made by the High Court that surcharges\nare levied under the Finance Act while income tax was levied\nunder the Income-tax Act (p. 351). In the instant case it is\nnot disputed by the-revenue that a surcharge partakes of the\nessential characteristics of income-tax and is an increase\nin income-tax.\tWhat we have to determine is whether the Act\nof 1963 provides for the levy of additional surcharge.\n Granting\tthat\tthe word \"income-tax\" includes\nsurcharges, it\tmay be\targuable that the exemption from the\npayment of income-tax under section 81 (i) (a) of the 1961\nAct would extend to surcharges. But the matter does not rest\nwith what section 81 (i)(a) says. Even if that section were\nto grant an express exemption from surcharges on business\nincome the Parliament could take away\t that exemption or\ncurtail\t the benefit\tavailable under it by making an\nappropriate provision\t in the Finance Act. If while\nlegislating on a matter within its competence the Parliament\ncan grant an exemption, it is\t surely competent to it to\nwithdraw that exemption in exercise of the self-same power.\n The Finance Act, 1963, like its\tannual counterparts,\ncontains provisions not only prescribing rates of taxation\nbut making extensive and important modifications in\t the\nIncome-tax Act itself. By sections 4 to\n144\n20 of the Act of 1963, various provisions of the income-tax\nAct have been amended.\t By these amendments, some of which\nare given retrospective effect, old provisions are deleted,\nnew ones are added and indeed\t new concepts\tof taxation\naltogether are\tintroduced. Such innovations fall within the\nlegitimate scope of Finance Acts. Section 11 (14) of the\nIndian Finance\tAct, 1946 made\t in the amount of excess\nprofits tax repaid under section 28 of the U.K. Finance Act,\n1941, \"income\"\tfor the purpose of the Indian Income tax Act\nand further provided that \"income shall be\ttreated\t for\npurposes of assessment to income tax\tand super-tax as the\nincome of the previous\t year. It was held by this Court in\nMcGregor and Balfour Ltd. v. C.I.T. West Bengal(1)\tthat\nsection 11(14) charged the amount with a liability to tax by\nits own\t force. It was further\t held that the particular\nprovision, framed as\t it was, applied to subsequent\nassessment years just as it applied to the assessment year\n1946-47.\n Having seen the nature and scope of Finance Acts, the\nspecific question which we have to consider is whether, as\ncontended by the appellant, section 2 read with Paragraph A,\nPart I of the First schedule of the Finance Act, 1963 merely\nlays down a method of computation in cases where income-tax\nis in fact payable or whether, as contended by the revenue,\nthe Finance Act provides for the levy of\t a new\t and\nindependent charge. According to the appellant, these\nprovisions of\t the Finance\tAct do\t not,\tdirectly or\nindirectly, bring about any amendment to section 81(i)(a) of\nthe Income-tax\tAct but merely prescribe that in cases where\nthe income-tax\tis payable, \"The amount of income tax....\nshall be increased by the aggregate of the surcharges\". The\nheading \"Surcharges on income tax\" under which provision is\nmade in\t the Finance Act for the calculation of a surcharge,\na special surcharge and an additional surcharge is also said\nto bear\t out the contention that the\tlevy of additional\nsurcharge on the residual income cannot be disassociated\nfrom the main charge of income-tax.\n We are unable to accept this contention Article 269(1)\nof the\tConstitution provides that the duties and taxes\nmentioned therein shall be levied and collected by\t the\nGovernment of India but shall be assigned to the States in\nthe manner provided in\t clause (2). Article 270(1) provides\nthat Taxes on income other than agricultural income shall be\nlevied\tand collected\t by the Government of India\t and\ndistributed between the Union\tand the States in the manner\nprovided in clause (2). By Article 271, notwithstanding\nanything in Articles 269 and 270, Parliament may increase\nany of\tthe duties or taxes referred to in those Articles by\na surcharge for purposes of the Union. Surcharges leviable\nunder section 2(1) of the Finance Act. 1963 are relatable to\nArticle 271 of the Constitution.\n Section 2(1)(a)(ii) of that Act provides, in so far as\nrelevant, that\tfor the\t assessment year commencing on April\n1, 1963\t income-tax shall be charged at the rates specified\nin Part I of First Schedule and in cases to which Paragraph\nA of Part I applies, the income-tax shall further\n145\nbe increased by an additional surcharge for purposes of the\nUnion calculated in the manner provided in the First\nSchedule. `Clause (c) of Paragraph prescribes the manner in\nwhich the additional surcharge\t is to\t be calculated. It\nprovides that additional surcharge for purposes of the Union\nshall be calculated \"on the amount of the residual income'.\nat the rates mentioned in that clause. Thus both the purpose\nand concept of the additional surcharge are different from\nthose of income-tax. The additional surcharge\t is leviable\nexclusively for\t purposes of the Union\t so that the entire\nproceeds of such surcharge may under\tArticle 271 of\t the\nConstitution, from part of the Consolidated Fund of India.\ntaxes and duties mentioned in Article 269(1), though levied\nand collected by the Government, have to be assigned to the\nStates in the manner provided in clause (2) of that Article.\nThen again, the additional surcharge levied for purposes of\nthe Union is to be calculated not on total income like the\nincome-tax but\tit is to be calculated on the residual\nincome. Section\t 2(8) of the Act of 1963 defines residual\nincome as total income reduced by (a) capital gains, if any,\nincluded in that total\t income and (b) the amount of\t tax\n(exclusive of additional surcharge) which would have been\nchargeable on such reduced total income if it had been the\ntotal income no part of which had been exempt from tax and\non no portion of which deduction of tax had been admissible.\nIn order that the exemption granted to co-operative banks by\nsection 81 (i) (a) may not lose its\tmeaning and content,\nsection 2(8) of the Finance Act introduces the concept of\nresidual income\t on which alone the additional surcharge is\npayable. The residual income is not the same as the business\nincome of a co-operative bank, which is exempt under section\n81(i)(a) from income tax. For\t ascertaining the residual\nincome\tthe total income is reduced by the amount of capital\ngains and further by the amount of tax\t(other\tthan\nadditional surcharge) which would have been charged on such\nreduced total income on the assumption that the whole of it\nwas liable to be brought to tax.\n Thus in the instant case the additional surcharge is\nnot levied on\t the appellant's business income of\t Rs.\n9,48,335 which\tis exempt from income-tax and super-tax. It\nis levied on the residual] income of Rs. 5,39,386 which is\narrived\t at after deducting\tGross taxes (exclusive of\nadditional surcharge) amounting to Rs. 4,60,712 from\t the\nassessee's gross income of Rs. 10,00,098. By section 3 of\nthe Finance Act of 1963 no account can be taken of\t the\nadditional surcharge in calculating any relief, rebate or\ndeduction in respect of income-tax payable on the total\nincome of an assessee which includes any income on which no\nincome-tax is payable or in respect of which a deduction of\nincome-tax is admissible. Section 3,\tby its\t terms,\t has\nprecedence over anything contained in Chapter VII or Chapter\nVIII A\tor in section 110 of the Income-tax Act or section\n2(5) of\t the Finance Act itself. Additional surcharge is\ntreated in this way as falling in a separate category.\n Thus, additional surcharge is a district\t charge. not\ndependent for its leviability on the assessee's liability to\npay income-tax\tor super-tax. Such a qualification cannot be\nread into section 2(1)(a)(ii)\tof the Act of 1963 as argued\nby the\tappellant. That section uses\t the language\tthat\n\"income-tax....shall further be increased by an additional\nsur-\n146\ncharge\", not for making the\tassessability to surcharge\ndependent upon\tAssessability to income tax but for\t the\nsimple reason that if\tan assessee`s total income includes\nincome on which no tax is payable, tax has all the same to\nbe computed for purposes of rate Section 110 of the Income-\ntax Act, 1961 provides\t that where there is included in the\ntotal income of an assessee any income on which no income-\ntax is payable, the assessee shall be entitled to deduction,\nfrom the amount of income tax with which he is chargeable on\nhis total income, of an amount equal\t to the income-tax\ncalculated at the average rate of income tax on the amount\non which no income-tax\t is payable. The income-tax computed\nat a certain rate is by section 2(1)(a)(ii) to be further\nincreased by an additional surcharge for purposes of\t the\nUnion. This becomes clearer still from the\tlanguage of\nParagraph A, under the heading ..Surcharges on Income Tax\".\nIt says: \"The amount of income-tax computed at the\trate\nhereinbefore specified\tshall be increased by the aggregate\nof the\tsurcharges,\". If the intention\t was to limit\t the\nliability to pay additional surcharge to income which can be\nbrought to income tax, appropriate language could have been\nused to convey that simple sense.\n The weakness of the appellant's\t contention becomes\nmanifest when it is realised that were the contention right,\nthe appellant\t would\tnot be\t liable\t to pay additional\nsurcharge even\ton that\t portion of its non-business income\nwhich is contained in the residual income. By the definition\nin section 2(8) of the Act of 1963, residual income means\nthe total income as reduced and therefore, the non business\nincome\twhich is chargeable to income-tax must form a\ncomponent of the residual income. Concededly, the appellant\nis liable to pay additional surcharge\t on its non-business\nincome. This is so not because additional surcharge is\npayable by law on non-business income\t but because it is\npayable\t on residual\tincome\t and residual\t income, by\ndefinition, includes non business income as\treduced. In\nfact, it consists of the amount of total income as reduced\nby the\tamounts mentioned in clauses (a) and (b) of section\n2(8).\n Relying on\t United Commercial Bank Ltd. v. Commissioner\nof Income-tax,\tWest Bengal(1),\t East India Housing and Land\nDevelopment Trust Ltd. v. Commissioner of Income-tax West\nBengal(2), and\t K. V. Al.\tM. Ramanathan\tChettiar v.\nCommissioner of Income-tax,\tMadras(3), the\t appellant's\ncounsel urged that income-tax\tis a single levy, that it is\none tax\t and not so many taxes separately levied on several\nheads of income. This\tpartly is the same argument in a\ndifferent disguise that an assessee who is not liable to pay\nincome-tax cannot be made liable to pay additional surcharge\nunder the Finance Act, 1963. We\thave rejected\tthat\ncontention. Partly, the argument is designed\tto establish\ncorrelation with section 146 of the income tax Act, 1961 by\nwhich, when any tax, interest, penalty, fine or any other\nsum is\tpayable in consequence of any order passed under the\nAct, the Income-tax office has to serve upon the assessee a\nnotice of demand in the prescribed form specifying the sum\nso payable. This provision presents no\n147\ndifficulty for,\t if an\tassessee is liable to pay additional\nsurcharge but no income-tax or super\ttax, the notice of\ndemand will mention the particular amount payable as\t tax\ndue. The appellant being liable to pay tax on its\tnon-\nbusiness income\t and additional\t surcharge on its residual\nincome, the demand notice will call for payment of the total\namount due from the appellant by way of tax.\n The interpretation\t put by\t us on the Finance Act, 1963\ndoes no\t violence to section 4\t of the Income-tax Act, 1961\nunder which income-tax\t at the rates\t prescribed by\t the\nFinance Act is to be\tcharged\t \"in accordance with,\t and\nsubject to the provisions of.\" the Income-tax Act.\t The\nIncome-tax Act\texempts the assessee's business income from\nincome tax and super-tax. The Finance Act brings to tax its\nresidual income.\n The decision of the Allahabad High Court in Allahabad\nDistrict Co-operative Bank Ltd. v. Union of India\t and\nOrs.(1)\t is directly\tin favour of\t the appellant\t and\nnaturally, learned counsel for\t the appellant\trelies on it\nvery strongly. But that case, in our opinion, is incorrectly\ndecided. The learned Judges were in error in holding that\nsection 2 of the Finance Act,\t 1963\tdoes not provide for\nthe levy of a tax other than income-tax\" and that therefore\nadditional surcharge is not payable to the extent of the\nincome which is exempt\t under section\t81 of the Income-tax\nAct. One of the difficulties which the learned Judges felt\nin accepting the revenue's contention\t was that if\t\"the\nadditional surcharge mentioned in the Finance\t Act of 1963\nwas not\t partake of the nature of income-tax it will not be\npossible to demand and\t realise it under the provisions of\nthe income-tax\tAct, and the notice of demand and recovery\nproceedings would be vitiated\ton that\t account\". The\tvery\nassumption of\t this observation is\t falacious because\nadditional surcharge indubitably partakes of the nature and\nessential characteristics of income-tax. It is a tax on\nresidual income and by reason of the definition contained in\nsection 2(8) of the Act of 1963, \"residual income\" would\ninclude non-business income which under the Income-tax Act\nis charge able to\tincome-tax. Thus, the additional\nsurcharge, though levied by\t the Finance\t Act,\t1963\nindependently of the Income-tax Act,\tis but\t a mode of\nlevying tax on a portion of the assessee's income computed\nin accordance with the definition in section 2(8) of the Act\nof 1963. Therefore, the notice of demand under section 156\nof the\tIncome-tax Act\tcan lawfully call for the payment of\namount due from an assessee by way of additional surcharge.\n For these\treasons, we confirm the judgment of the High\nCourt but in the circumstances there will be no order as to\ncosts.\nP.H.P.\t\t\t\t\t Appeal dismissed.\n148" }, { "title": "Income Tax Officer,Udaipur vs M/S Arihant Tiles & Marbles(P)Ltd on 2 December, 2009", "url": "https://indiankanoon.org//doc/148455/", "text": "Income Tax Officer,Udaipur vs M/S Arihant Tiles & Marbles(P)Ltd on 2 December, 2009\nEquivalent citations: 2010 AIR SCW 91, 2010 (2) SCC 699, AIR 2010 SC (SUPP) 149, 2010 TAX. L. R. 165, (2009) 14 SCALE 440, (2010) 78 ALL LR 22, (2010) 85 ALLINDCAS 59 (SC)\nAuthor: S.H. Kapadia\nBench: H.L. Dattu, J.M. Panchal, S.H. Kapadia\n REPORTABLE\n\n IN THE SUPREME COURT OF INDIA\n\n CIVIL APPELLATE JURISDICTION\n\n CIVIL APPEAL NO.8036 OF 2009\n (Arising out of S.L.P.(C) No.9812/2008)\n\nIncome Tax Officer, Udaipur ...Appellant(s)\n\n Versus\n\nM/s Arihant Tiles & Marbles (P) Ltd. ...Respondent(s)\n\n W I T H\n\n CIVIL APPEAL NOS.8037 TO 8044 OF 2009\n(Arising out of S.L.P.(C) Nos.1685, 1691, 2577, 3711, 5283,\n 16674, 20789 & 20619 of 2009)\n\n\n J U D G M E N T\n\nS.H. KAPADIA, J.\n\n\n Leave granted.\n\n In this batch of Civil Appeals, a common question\n\nof law which arises for determination is: whether\n\nconversion of marble blocks by sawing into slabs and\n\ntiles and polishing amounts to \"manufacture or\n\nproduction of article or thing\" so as to make the\n\nrespondent(s)-assessee(s) entitled to the benefit of\n\nSection 80IA of the Income Tax Act, 1961, as it stood at\n\nthe material time.\n\n The lead matter is Civil Appeal arising out of\n\nS.L.P.(C) No.9812/2008 in the case of Income Tax\n\nOfficer, Udaipur Vs. M/s. Arihant Tiles & Marbles (P)\n\fLtd.\n\n The assessee, during the relevant Assessment Year\n\n2001-2002, was engaged in the business of\n\nmanufacture/production of polished slabs and tiles which\n\nthe assessee exported (partly). The prime condition for\n\nallowing deduction under Section 80IA, as it stood at\n\nthe material time, was that industrial undertakings\n\nshould manufacture or produce any article or thing, not\n\nbeing any article or thing specified in the list in\n\nEleventh Schedule of the Income Tax Act, 1961.\n\n The question before us is: whether on facts and\n\ncircumstances of the case(s) the activities undertaken\n\nby the respondent(s) herein would fall within the\n\nmeaning of the words \"manufacture or production\" in\n\nSection 80IA of the 1961 Act?\n\n To answer the above issue, it is necessary to\n\nreproduce the details of stepwise activities undertaken\n\nby the assessee(s) which read as follows:-\n\n \"i) Marble blocks excavated/extracted\n by the mine owners being in raw\n uneven shapes have to be properly\n sorted out and marked;\n\n ii) Such blocks are then processed on\n single blade/wire saw machines\n using advanced technology to square\n them by separating waster material;\n\n iii) Squared up blocks are sawed for\n making slabs by using the gang saw\n machine or single/multi block\n cutter machine;\n\n iv) The sawn slabs are further\n\f reinforced by way of filling cracks\n by epoxy resins and fibre netting;\n\n v) The slabs are polished on polishing\n machine; the slabs are further edge\n cut into required dimensions/tiles\n as per market requirement in\n prefect angles by edge cutting\n machine and multi disc cutter\n machines;\n\n vi) Polished slabs and tiles are buffed\n by shiner.\"\n\nIn addition to the above activities, it may also be\n\nnoted that the assessee(s) has been consistently\n\nregarded as a manufacturer/producer by various\n\nGovernment Departments and Agencies. The above\n\nprocesses undertaken by the respondent(s) have been\n\ntreated as manufacture under the Excise Act and allied\n\ntax laws.\n\n At the outset, we may point out that in numerous\n\njudgments of this Court, it has been consistently held\n\nthat the word \"production\" is wider in its scope as\n\ncompared to the word \"manufacture\". Further, Parliament\n\nitself has taken note of the ground reality and has\n\namended the provisions of the Income Tax Act, 1961 by\n\ninserting Section 2(29BA) vide Finance Act, 2009, with\n\neffect from 1st April, 2009.\n\n We quote herein-below the relevant provisions of\n\nSection 2(29BA) as also the relevant provisions of\n\nSection 80IA(2)(iii) of the Income Tax Act, 1961.\n\n \"2(29BA) \"manufacture\" with its\n grammatical variations, means a\n\f change in a non-living physical\n object or article or thing,-\n\n (a) resulting in transformation of\n the object or article or thing\n into a new and distinct object\n or article or thing having a\n different name, character and\n use; or\n\n (b) bringing into existence of a\n new and distinct object or\n article or thing with a\n different chemical composition\n or integral structure;\"\n\n\n \"80IA(2) (iii) it manufactures or produces\n any article or thing, not being any article\n or thing specified in the list in the\n Eleventh Schedule, or operates one or more\n cold storage plant or plants, in any part\n of India.\"\n\n\n The Authorities below rejected the contention of\n\nthe assessee(s) that its activities of polishing slabs\n\nand making of tiles from marble blocks constituted\n\n\"manufacture\" or \"production\" under Section 80IA of the\n\nIncome Tax Act. There was difference of opinion in this\n\nconnection between the Members of the ITAT. However, by\n\nthe impugned judgment, the High Court has accepted the\n\ncontention of the assessee(s) holding that in the\n\npresent case, polished slabs and tiles stood\n\nmanufactured/produced from the marble blocks and,\n\nconsequently, each of the assessee was entitled to the\n\nbenefit of deduction under Section 80IA. Hence, these\n\nCivil Appeals have been filed by the Department.\n\n Incidentally, it may be noted that some of the\n\fassessees before us are also job workers duly registered\n\nunder the provisions of the Excise Act/Rules framed\n\nthereunder. It may also be clarified that in these\n\ncases, we are concerned with assessees who are basically\n\nfactory owners and not mine owners. This distinction is\n\nof some relevance when we analyse the various judgments\n\ncited before us fairly by the learned counsel on behalf\n\nof the Department.\n\n The main judgment on which the Department has\n\nplaced reliance is the judgment of this Court in Lucky\n\nMinmat Pvt. Ltd. Vs. Commissioner of Income Tax, Jaipur,\n\nreported in (2001) 9 SCC 669. In that case, the\n\nfollowing question came up for consideration before the\n\nTribunal:\n\n \"Whether on the facts and in the\n circumstances of the case, the Tribunal was\n justified in holding that business activity of\n the assessee was in the nature of manufacturing\n or production so as to be entitled for relief\n under Section 80HH of the Income Tax Act,\n 1961.\"\n\nThe assessee in that case had the business of mining of\n\nlimestones and marble blocks which thereafter were cut\n\nand sized before being sold in the market. It was held\n\nby this Court that the assessee was essentially in the\n\nbusiness of mining of limestone. It was held that the\n\nactivity of excavation will not constitute manufacture\n\nor production. It was further held that even the\n\nactivity of cutting and sizing of marble blocks after\n\fexcavation would not come within the ambit of expression\n\n'manufacture' or 'production'. In the circumstances,\n\nthis Court held that the assessee was not entitled to\n\nthe benefit of Section 80HH of the Income Tax Act.\n\nHowever, this Court distinguished the judgment of the\n\nRajasthan High Court in the case of CIT vs. Best\n\nChemical and Lime Stone Industries Pvt. Ltd., reported\n\nin 210 ITR 883 (Raj.). In that case, M/s Best Chemical\n\nwas engaged in the business of extracting limestone and\n\nits sale thereafter after converting it into lime and\n\nlimedust or concrete which was held to be an activity of\n\nmanufacture or production. The activity of conversion\n\ninto lime and limedust, according to this Court, in the\n\ncase of Lucky Minmat Pvt. Ltd. (supra) certainly\n\nconstituted a manufacturing process. It was clarified\n\nin the said case that mere mining of limestone and\n\nmarble and cutting the same before it was sold will not\n\nconstitute \"manufacture\" or \"production\" but conversion\n\ninto lime and limedust could constitute the activity of\n\nmanufacturing or production. This distinction has not\n\nbeen taken into account by the Department while\n\nrejecting the claim of the assessee(s) for deduction\n\nunder Section 80IA of the Income Tax Act, 1961.\n\n There is one more judgment of which Shri\n\nBhattacharya, learned Additional Solicitor General,\n\nappearing on behalf of the Department, has placed\n\nreliance. That is the judgment of this Court in\n\fRajasthan State Electricity Board Vs. Associated\n\nIndustries & Anr., reported in AIR 2000 SC 2382. In\n\nthat case, the only question that arose for\n\nconsideration was whether pumping out water from the\n\nmines came within the meaning of the word manufacture,\n\nproduction, processing or repair of goods so as to claim\n\nexemption from duty under Notifications issued under\n\nSection 3(3) of the Rajasthan Electricity Duty Act,\n\n1962. In that case, the first respondent was a\n\nregistered public limited company, engaged in\n\nexcavating stones from collieries and thereafter cutting\n\nand polishing them into slabs. The Rajasthan State\n\nGovernment levied excise duty under the provisions of\n\nthe Act. A Notification dated 23rd March, 1962 was\n\nissued by the State under Section 3(3) of the Act\n\ngranting exemption from tax on the energy consumed by a\n\nconsumer in any industry in the manufacture, production,\n\nprocessing or repair of goods and by or in respect of\n\nany mine as defined in the Indian Mines Act, 1923. This\n\nnotification was later on superseded on 2nd March, 1963\n\nby which electricity duty came to be remitted in certain\n\ncases. One more notification was issued on 1st November,\n\n1965 once again superseding earlier notifications. By\n\nclause (c) of the said notification, the State of\n\nRajasthan reduced the duty on the energy consumed in\n\nindustries, other than those mentioned in clause (a) of\n\nthe notification which are in the manufacture,\n\fproduction, processing or repair of goods.\n The basic controversy which arose for\n\ndetermination in the said case was whether the activity\n\nof pumping out water from the mines came within the\n\nmeaning of the words \"manufacture\", \"production\",\n\n\"processing or repair of goods\". While disposing of\n\nthe matter, this Court, vide paragraphs 1 and 10, stated\n\nthat the specific case of the company was that the\n\nelectrical energy was consumed for pumping out water\n\nfrom mines to make mines ready for mining activity.\n\nThis aspect is very important. It needs to be\n\nhighlighted that the case of the company was that\n\npumping out water from mines to make the mines ready\n\nfor mining activity came within the ambit of the term\n\n\"manufacture\". This argument was rejected by this\n\nCourt, after examining various judgments of this Court\n\non the connotation of the word \"manufacture\". In our\n\nview, the judgment of this Court in Rajasthan State\n\nElectricity Board has no application to the facts of the\n\npresent case. Even if one reads paragraph 17 of the\n\nsaid judgment in the light of paragraphs 1 and 10, it is\n\nvery clear that the only activity which came up for\n\nconsideration before this Court in the case of Rajasthan\n\nElectricity Board (supra) was the activity of pumping\n\nout water from a mine in order to make the mine\n\nfunctional. In the present case, we are not considered\n\nwith such activity. Therefore, in our view the judgment\n\fof this Court in Rajasthan Electricity Board (supra) has\n\nno application to the facts of the present case.\n In the case of Aman Marble Industries Pvt. Ltd.\n\nvs. Collector of Central Excise, reported in 157 ELT 393\n\n(SC), the question that arose for consideration was\n\nwhether cutting of marble blocks into marble slabs\n\namounted to manufacture for the purposes of Central\n\nExcise Act. At the outset, we may point out that in the\n\npresent case, we are not only concerned with the word\n\n\"manufacture\", but we are also concerned with the\n\nconnotation of the word \"production\" in Section 80IA of\n\nthe Income Tax Act, 1961, which, as stated herein-above,\n\nhas a wider meaning as compared to the word\n\n\"manufacture\". Further, when one refers to the word\n\n\"production\", it means manufacture plus something in\n\naddition thereto. The word \"production\" was not under\n\nconsideration before this Court in the case of Aman\n\nMarble Industries Pvt. Ltd. (supra). Be that as it may,\n\nin that case, it was held that \"cutting\" of marble\n\nblocks into slabs per se did not amount to\n\n\"manufacture\". This conclusion was based on the\n\nobservations made by this court in the case of Rajasthan\n\nState Electricity Board (supra). In our view, the\n\njudgment of this Court in Aman Marble Industries Pvt.\n\nLtd.(supra) also has no application to the facts of the\n\npresent case. One of the most important reasons for\n\nsaying so is that in all such cases, particularly under\n\fthe Excise law, the Court has to go by the facts of each\n\ncase. In each case one has to examine the nature of the\n\nactivity undertaken by an assessee. Mere extraction of\n\nstones may not constitute manufacture. Similarly, after\n\nextraction, if marble blocks are cut into slabs per se\n\nwill not amount to the activity of manufacture.\n In the present case, we have extracted in detail\n\nthe process undertaken by each of the respondents before\n\nus. In the present case, we are not concerned only with\n\ncutting of marble blocks into slabs. In the present\n\ncase we are also concerned with the activity of\n\npolishing and ultimate conversion of blocks into\n\npolished slabs and tiles. What we find from the process\n\nindicated herein-above is that there are various stages\n\nthrough which the blocks have to go through before they\n\nbecome polished slabs and tiles. In the circumstances,\n\nwe are of the view that on the facts of the cases in\n\nhand, there is certainly an activity which will come in\n\nthe category of \"manufacture\" or \"production\" under\n\nSection 80IA of the Income Tax Act. As stated herein-\n\nabove, the judgment of this Court in Aman Marble\n\nIndustries Pvt. Ltd. was not required to construe the\n\nword \"production\" in addition to the word \"manufacture\".\n\nOne has to examine the scheme of the Act also while\n\ndeciding the question as to whether the activity\n\nconstitutes manufacture or production. Therefore,\n\nlooking to the nature of the activity stepwise, we are\n\fof the view that the subject activity certainly\n\nconstitutes \"manufacture or production\" in terms of\n\nSection 80IA. In this connection, our view is also\n\nfortified by the following judgments of this Court which\n\nhave been fairly pointed out to us by learned counsel\n\nappearing for the Department.\n\n In the case of Commissioner of Income Tax vs.\n\nSesa Goa Ltd., reported in 271 ITR 331 (SC), the meaning\n\nof the word \"production\" came up for consideration. The\n\nquestion which came before this Court was whether the\n\nITAT was justified in holding that the assessee was\n\nentitled to deduction under Section 32A of the Income\n\nTax Act, 1961, in respect of machinery used in mining\n\nactivity ignoring the fact that the assessee was engaged\n\nin extraction and processing of iron ore, not amounting\n\nto manufacture or production of any article or thing.\n\nThe High Court in that case, while dismissing the appeal\n\npreferred by the Revenue, held that extraction and\n\nprocessing of iron ore did not amount to \"manufacture\".\n\nHowever, it came to the conclusion that extraction of\n\niron ore and the various processes would involve\n\n\"production\" within the meaning of Section\n\n32A(2)(b)(iii) of the Income Tax Act, 1961 and\n\nconsequently, the assessee was entitled to the benefit\n\nof investment allowance under Section 32A of the Income\n\nTax Act. In that matter, it was argued on behalf of the\n\nRevenue that extraction and processing of iron ore did\n\fnot produce any new product whereas it was argued on\n\nbehalf of the assessee that it did produce a distinct\n\nnew product. The view expressed by the High Court that\n\nthe activity in question constituted \"production\" has\n\nbeen affirmed by this Court in Sesa Goa's case saying\n\nthat the High Court's opinion was unimpeachable. It was\n\nheld by this Court that the word \"production\" is wider\n\nin ambit and it has a wider connotation than the word\n\n\"manufacture\". It was held that while every manufacture\n\ncan constitute production, every production did not\n\namount to manufacture.\n\n In our view, applying the tests laid down by this\n\nCourt in Sesa Goa's case (supra) and applying it to the\n\nactivities undertaken by the respondents herein,\n\nreproduced herein-above), it is clear that the said\n\nactivities would come within the meaning of the word\n\n\"production\".\n\n One more aspect needs to be highlighted. By the\n\nsaid judgment, this Court affirmed the decision of the\n\nKarnataka High Court in the case of Commissioner of\n\nIncome Tax vs. Mysore Minerals Ltd, (2001) 250 ITR 725\n\n(Kar).\n\n In the case of Commissioner of Income Tax Vs.\n\nN.C. Budharaja & Co., reported in 204 ITR 412 (SC), the\n\nquestion which arose for determination before this Court\n\nwas whether construction of a dam to store water\n\n(reservoir) can be characterised as amounting to\n\fmanufacturing or producing an article. It was held that\n\nthe word \"manufacture\" and the word \"production\" have\n\nreceived extensive judicial attention both under the\n\nIncome Tax as well as under the Central Excise and the\n\nSales Tax laws. The test for determining whether\n\n\"manufacture\" can be said to have taken place is whether\n\nthe commodity, which is subjected to a process can no\n\nlonger be regarded as the original commodity but is\n\nrecognised in trade as a new and distinct commodity.\n\nThe word \"production\", when used in juxtaposition with\n\nthe word \"manufacture\", takes in bringing into existence\n\nnew goods by a process which may or may not amount to\n\nmanufacture. The word \"production\" takes in all the\n\nbyproducts, intermediate products and residual products\n\nwhich emerge in the course of manufacture of goods.\n Applying the above tests laid down by this Court\n\nin Budharaja's case (supra) to the facts of the present\n\ncases, we are of the view that blocks converted into\n\npolished slabs and tiles after undergoing the process\n\nindicated above certainly results in emergence of a new\n\nand distinct commodity. The original block does not\n\nremain the marble block, it becomes a slab or tile. In\n\nthe circumstances, not only there is manufacture but\n\nalso an activity which is something beyond manufacture\n\nand which brings a new product into existence and,\n\ntherefore, on the facts of these cases, we are of the\n\nview that the High Court was right in coming to the\n\fconclusion that the activity undertaken by the\n\nrespondents-assessees did constitute manufacture or\n\nproduction in terms of Section 80IA of the Income Tax\n\nAct, 1961.\n\n Before concluding, we would like to make one\n\nobservation. If the contention of the Department is to\n\nbe accepted, namely that the activity undertaken by the\n\nrespondents herein is not a manufacture, then, it would\n\nhave serious revenue consequences. As stated above,\n\neach of the respondents is paying excise duty, some of\n\nthe respondents are job workers and the activity\n\nundertaken by them has been recognised by various\n\nGovernment Authorities as manufacture. To say that the\n\nactivity will not amount to manufacture or production\n\nunder Section 80IA will have disastrous consequences,\n\nparticularly in view of the fact that the assessees in\n\nall the cases would plead that they were not liable to\n\npay excise duty, sales tax etc. because the activity did\n\nnot constitute manufacture. Keeping in mind the above\n\nfactors, we are of the view that in the present cases,\n\nthe activity undertaken by each of the respondents\n\nconstitutes manufacture or production and, therefore,\n\nthey would be entitled to the benefit of Section 80IA of\n\nthe Income Tax Act, 1961.\n\n For the afore-stated reasons, Civil Appeals\n\nfiled by the Department stand dismissed with no order as\n\nto costs.\n\f ..................J.\n (S.H. KAPADIA)\n\n\n\n ..................J.\n (J.M. PANCHAL)\n\n\n\n ..................J.\n (H.L. DATTU)\nNew Delhi,\nDecember 02, 2009." }, { "title": "Bharat Commerce 7 Industries Ltd vs The Commissioner Of Income Tax, Central ... on 5 March, 1998", "url": "https://indiankanoon.org//doc/1812426/", "text": "Bharat Commerce 7 Industries Ltd vs The Commissioner Of Income Tax, Central ... on 5 March, 1998\nEquivalent citations: AIR 1998 SUPREME COURT 1795, 1998 (3) SCC 510, 1998 AIR SCW 1584, 1998 TAX. L. R. 645, (1998) 2 SCR 150 (SC), 1998 (2) SCALE 240, 1998 (2) ADSC 429, 1998 ADSC 2 429, (1998) 98 TAXMAN 151, (1998) 2 JT 283 (SC), (1998) 144 TAXATION 496, (1998) 230 ITR 733, (1998) 3 SUPREME 67, (1998) 2 SCALE 240, (1998) 145 CURTAXREP 340\nAuthor: Sujata V. Manohar\nBench: Sujata V.Manohar, D.P. Wadhwa\n PETITIONER:\nBHARAT COMMERCE 7 INDUSTRIES LTD.\n\n\tVs.\n\nRESPONDENT:\nTHE COMMISSIONER OF INCOME TAX, CENTRAL II\n\nDATE OF JUDGMENT:\t05/03/1998\n\nBENCH:\nSUJATA V.MANOHAR, D.P. WADHWA\n\n\n\n\nACT:\n\n\n\nHEADNOTE:\n\n\n\nJUDGMENT:\n\t [With C.A. Nos. 3355-56/1993]\n\t\t J U D G M E N T\nMrs. Sujata v. Manohar, J.\nC.A. No. 5509 of 1985\n The following question was referred to the High Court\nof Delhi under Section 256(1) of the Income tax Act, 1961 at\nthe instance of the assessee :-\n \"Whether on the facts and in the\n circumstances of the case the claim\n for deduction of\tinterest levied\n under Section 139 to the extent of\n Rs. 11,470/- and\t interest levied\n under Section 215 to the extent of\n Rs. 1,04,339/- was rightly rejected\n as not allowable under Section 37\n of the Income-Tax Act, 1961 for the\n assessment year 1972-73?\"\nThe High Court has answered the question in the affirmative\nand in\tfavour of the revenue.\t The question\tpertains to\nassessment year\t 1972-73. The assessee is a limited company\nmanufacturing yarn. It also\t does some other business\nactivities. The Income Tax Officer at the time of completing\nthe assessment\tfor assessment year 1972-73 levied interest\nunder Section 139 to the extent of Rs. 11,470/- and interest\nunder Section 215 of the Income Tax Act, 1961 to the extent\nof Rs.\t1,04, 399/-. The assessee claimed deduction of these\namounts of interest under Section 37 of the Income Tax Act,\n1961 in\t computing its\tbusiness income. This claim has been\nrejected.\n The assessee contends that the taxes which were payable\nwere delayed and to that extent the assessee's financial\nresources increased.\tthese increased resources became\navailable for business purposes. Hence the interest which is\npaid to\t the Government under Section 139 and 215 represent,\nin effect, interest on capital that would have been borrowed\nby the\tassessee otherwise. Hence these amount should be\nallowed as deduction under Section 37 as expenses incurred\nwholly and exclusively for the purpose of its business.\n The assessee was required\t to pay\t advance tax under\nSection 212 on the basis of his own estimate. Under Section\n215, it\t the tax so paid is less then 75% of the assessed\ntax, interest as prescribed therein, is payable . it is\ndifficult to see how the interest so paid for not paying the\nrequisite amount of advance tax as prescribed can be\nconsidered as expenditure laid\t out wholly and exclusively\nfor the\t purpose of business. In the case of Smt. Padmavati\nJaikrishna V. Additional Commissioner of Income-Tax, Gujarat\n([1987] 166 ITR 176) the assessee borrowed money for the\npurpose of discharge of her liabilities for the payment of\nincome-tax, wealth-tax\t and annuity\t deposit. She\tpaid\ninterest on this borrowed amount. The income earned by the\nassessee was income from other sources. hence the allowable\ndeduction would have been under Section 57(3). In respect of\nthe payment of annuity\t deposit this Court said that\t the\ndominant purpose of making the annuity deposit was not to\nearn income but to meet the statutory liability of making\nthe deposit. The liability for payment of income-tax\t and\nwealth-tax was\t a statutory\t liability. Therefore,\t the\nexpenditure in\tthe form of interest which was paid was not\nexpenditure wholly or exclusively for the purpose of earning\nincome. Hence it could\t not allowed as a deduction under\nSection 57(3) of the Income Tax Act, 1961. In the case of\nEast India Pharmaceutical Works Ltd.\tV. Commissioner of\nIncome-Tax ([1997] 224 ITR 627) this court held\tthat\ninterest on an overdraft for payment of income-tax was not\nexpenditure wholly and exclusively incurred for the purpose\nof business and was not deductible under Section 37 of the\nIncome Tax Act. This Court affirmed the decision in the case\nof Smt. Padmavati Jaikrishna (supra).\n A similar\tview has been taken by a number of\tHigh\nCourts in earlier decision. In the case of\tAruna Mills\nLimited v. Commissioner of Income-Tax Ahmedabad ([1957] 31\nITR 153) the Bombay High Court was concerned with a similar\nquestion. It held that the interest which an assessee had to\npay under sub-section 7 of Section 18A of the India Income-\nTax Act, 1922 for having under-estimated the tax payable by\nhim by\tway of\tadvance tax, cannot be\t claimed as business\nexpenditure under Section 10(2) (xv) of the said Act. The\nCourt observed that it was difficult to understand how, when\na business man commits default in discharging his statutory\nobligation, the consequences\t of that default could\nconstitute an\texpenditure exclusively incurred for\t the\npurpose of his business. The same view was taken in the case\nof orient General Industries Limited\tv. Commissioner of\nIncome-Tax ([1994] 209 ITR 490), where the Calcutta High has\nheld that interest paid for delay in filing the income-tax\nreturn has no connection with the business of the assessee.\nThe assessee does not\tpay the\t interest for the purpose of\nbusiness or for carrying on of business activity. Hence it\nis not\tdeductible in computing the income of the assessee.\nThe Calcutta High Court reaffirmed in this case its earlier\njudgment in Balmer Lawrie and Co. Ltd. v. Commissioner of\nIncome-Tax, Calcutta ([1960] 39 ITR 751). The Punjab\t and\nHaryana High Court has\t also taken the same view in\t the\nCommissioner of Income-Tax v. Oriental Carpet Manufacturers\n(India) P. Ltd. ([1973] 90 ITR 373) by holding that interest\non payment of delayed\ttax takes colour from the principle\namount payable\tand hence is not deductible. The madras High\nCourt has also held in Commissioner of Income-Tax, Madras V.\nSundaram & Company Private Ltd. ([1964] 52 ITR 763) that\ninterest money borrowed to pay advance tax is not deductible\nas business expenditure. This view has been affirmed by this\nCourt in Smt. Padmavati Jaikrishna's case (supra) as well as\nin East India Pharmacutical's case (supra).\n The assessee, however, has placed reliance upon a\ndecision of this court\t in commissioner of Income-Tax, West\nBengal I V. Birla Cotton Spinning and Weaving Mills Ltd.\n([1971] 82 ITR 166). The assessee in that case had spent\nmoney towards expenses in engaging lawyers and conducting\nproceedings before the Investigation Commission for its case\nrelating to certain assessment\t years and had also incurred\nsuch expenses in courts where the vires of the statute under\nwhich the Commission was constituted were challenged. The\nCourt allowed the expenses so incurred in connection with\nthe proceedings before the Investigation commission as\ndeductible expenses while computing the profits of\t the\nassessee's business. On the facts of\tthat case the Court\ncame to\t the conclusion\t that the expenses so incurred were\nfor protection\tof the\tassessee's business from any process\nor proceedings\twhich would have affected its\t income\t and\nprofits. Even otherwise the expenditure was incidental to\nthe business and was necessitated or justified by commercial\nexpediency.\n The expenses in that case were incurred for a\tvery\ndifferent purpose from the purpose for which the assessee\nhas paid interest in the present case. When interest is paid\nfor committing a default in respect of a statutory liability\nto pay\tadvance tax, the amount paid and the\t expenditure\nincurred in that connection is in no way connected\twith\npreserving or promoting the business of the assessee. this\nis not\texpenditure which is\tincurred and which has to be\ntaken into account before the profits\t of the business are\ncalculated. The\t liability in the case of payment of income-\ntax and\t interest for\tdelayed\t payment of income-tax of\nadvance tax arises on\tthe computation\t of the\t profits and\ngains of business. The\t tax which is\tpayable\t is on\t the\nassessee's income after the income is determined.\tThis\ncannot, therefore, be considered as an expenditure for the\npurpose of earning any income or profits. The ratio or Biral\nCotton Mills case (supra) is not applicable in the present\ncase.\n Learned Counsel for the assessee also relied upon a\ndecision of this Court\t in Mahalakshmi\t Sugar Mill Co. V.\nCommissioner of\t Income-TAx, Delhi ([1980] 123 ITR 429). The\nassessee in that case had claimed deduction of interest paid\non arrears of sugarcane cess. this was held by this Court as\na part\tof the assessee's liability to pay cess and was held\nto be deductible. The\tratio of this judgment also can have\nno application\there. The payment of sugarcane cess is very\nmuch a part of the assessee's business expense. Any interest\non arrears of cess would, therefore, take colour from cess\nwhich is payable. it is an indirect tax which has to be paid\nin the\tcourse of carrying on business. It is required to be\ndeducted in order to arrive at the net profits of\t the\nassessee for the relevant assessment year. We are here not\nconcerned with\tthe payment of any indirect tax which the\nassessee may have to pay in the course of his business. We\nare concerned with the\t tax with was required\t to be\tpaid\nafter the ascertainment of the net income of the assessee\nfor the relevant assessment year. Interest which is paid for\ndelayed payment\t of advance tax on such income cannot be\nconsidered as expenditure wholly and exclusively for\t the\npurpose of business. Under the Income Tax act the payment of\nsuch interest is inextricably connected with the assessee's\ntax liability.\tIf income-tax itself is not a\t permissible\ndeduction under Section 37, any interest payable for default\ncommitted by the assessee in\t discharging his statutory\nobligation under the Income Tax Act,\twhich is calculated\nwith reference\tto the\ttax on income cannot be allowed as a\ndeduction.\n In the present case section 80V of the income Tax Act\nis not\tattracted because Section 80V\twas inserted in the\nIncome Tax Act only with effect from 1st of April, 1976.\n In the premises the High Court has rightly answered the\nquestion in favour of the revenue and against the assessee.\nThe appeal is, therefore, dismissed with costs.\nC.A. Nos. 3355-56/1993\n These appeals relate to assessment years\t 1977-78 and\n1978-79. The following question was referred\tto the\tHigh\nCourt under Section 256(1) of the Income Tax Act, 1961 at\nthe instance of the revenue:-\n \"Whether on facts and circumstances\n of the case and in law the Tribunal\n was right\t in holding that the\n assessee was not entitled\t to the\n deduction\tof Rs. 2,94,082 in\n assessment\t year 1977-78\tand Rs.\n 43,142/- assessment year\t 1978-79\n being the\t interest payable on\n account of additional liability for\n income-tax and sur-tax on\t account\n of the disclosure of income made\n under the\tVoluntary Disclosure of\n Income and\t Wealth Act, 1976 u/s 37\n or 36(1) (iii) of\t the Income-tax\n Act, 1961?.\"\nThe assessee disclosed certain\t income under the voluntary\nDisclosure of Income and Wealth Act, 1976. As a result the\nassessee became\t liable to pay income-tax and sur-tax. The\nassessee applied for payment of income-tax and sur-tax by\ninstalments under the provisions of the Voluntary Disclosure\nof Income and Wealth Act, 1976. The assessee\t was granted\nthese instalments. The assessee was also required to\t pay\ninterest under Section 6 of the said Act for delayed payment\nof income-tax and sur-tax. The assessee paid by way of such\ninterest, a sum of Rs. 2,82,106/- in assessment year 1977-78\nand a sum of Rs. 36,370/- in assessment year 1978-79. The\nclaim of the assessee\tfor deduction of these\t amounts was\nrejected by the revenue authorities.\n At the instance of the assessee the above question has\nbeen raised, The High\tCourt has also answered the question\nagainst the assessee. It is the contention of the assessee\nthat instead of taking\t a loan\t or withdrawing capital from\nhis business for payment of tax, the assessee obtained\ninstalments for\t payment of tax and was, therefore, required\nto pay\tinterest. The payment of interest is, therefore, for\nthe purposes of assessee's business and hence should be\nallowed as a deduction. The argument\tis similar to\t the\nargument advanced in C.A. No. 5509 of 1985\trelating to\nBharat\tCommerce & Industries Ltd.\tThe main point of\ndistinction which the\t assessee has\tdrawn is that\t the\ninterest in his case is under\t the Voluntary Disclosure of\nIncome and Wealth Act,\t 1976 and hence it should be treated\nas expenditure\tincurred for the purposes of the assessee's\nbusiness.\n Voluntary Disclosure of Income and Wealth Act,\t1976\n[102 ITR page 49 (statutes)] is an Act to\tprovide\t for\nVoluntary Disclosure of Income and Wealth. Section 3 of the\nAct provides that where any person makes, on or before the\nprescribed date, as set out in the Section, a declaration in\nrespect of any income\tchargeable to tax under the Indian\nIncome Tax Act for any assessment year for which he\t has\nfailed to furnish a return under Section 139 of the Income\nTax; or\t has failed to disclose in a return of income, the\nincome so disclosed; or the assessee makes a declaration of\nincome\twhich has escaped assessment\t by reason of\t the\nomission or failure on\t the part of such person to make a\nreturn or to disclose\tfully and truly all material facts\nnecessary for his assessment or otherwise; then on\t the\nincome so disclosed and declared, income tax shall be\ncharged at the rates specified in the schedule to the said\nAct.\n Section 4\t provides for\t the manner in which\t the\ndeclaration is\tto be made and\t particulars which are to be\nfurnished. Under Section 5 income-tax payable under the Act\nin respect of the Voluntarily disclosed income is required\nto be paid by\tthe declarant before making the declaration\nand the\t declaration is\t required to be accompanied by proof\nof payment of such tax. Sub-section (2), however, provides\nthat if\t the Commissioner is satisfied\t on an application\nmade in\t this behalf by the declarant, that the declarant is\nunable, for good and sufficient reasons, to pay the full\namount of income-tax in respect of the voluntarily disclosed\nincome in accordance with sub-section (1), he may extend the\ntime for payment of the amount which remains unpaid or allow\npayment of the amount which remains unpaid of allow payment\nby instalments\tif the declarant furnishes adequate security\nfor the\t payment thereof. However, an\tamount which is not\nless than one-half of\tthe amount of income-tax payable in\nrespect of the Voluntarily disclosed income has to be paid\non or before 31st of day of march. 1976, and the remainder,\non or before the 31st day of March, 1977.\n Under Section 6, if the amount of income-tax is not\npaid on\t or before 31st of March, 1976 the declarant is\nliable to pay simple interest at 12 per cent per annum on\nthe amount remaining unpaid from 1st of April, 1976 to the\ndate of payment and \"the rules made thereunder shall, so far\nas may\tbe, apply as if the interest\tpayable\t under\tthis\nsection were interest\tpayable\t under\tsub-section (2) of\nSection 220 of that Act (i.e.\t Income Tax Act, 1961)\". The\ninterest, therefore, which is payable for delayed payment of\nincome-tax on the voluntarily\tdisclosed income is of\t the\nsame nature as interest on income-tax under the Income Tax\nAct. Payment of such\tinterest cannot be considered as\nexpenditure incurred wholly or exclusively for the purposes\nof business of the assessee. For the reasons which we have\nset out\t above in C.A. No. 5509 of 1985, in the present case\nalso the tax which is required to paid under the Voluntary\nDisclosure of Income and Wealth Act,\t1976 is a tax on the\ndeclared income\t of the\t assessee which\t was not disclosed\nearlier and is disclosed under the said Act. Income-tax is\npayable by virtue of the said Act. It is nevertheless a tax\non income and shares all characteristics of such tax. When\nthe assessee is liable to pay interest on delayed payment of\nsuch tax, it is on account of his not paying income-tax\nwithin the prescribed period.\tWe do not see any reason why\nany distinction\t can be made\tbetween\t such interest\t and\ninterest paid under the Income Tax Act, 1961. Both payments\ndo not\thave any nexus with the business of the assessee.\nThey are statutory liabilities in respect of the obligations\nof the assessee which arise under the Income Tax Act and the\nVoluntary Disclosure of Income\t and Wealth Act, 1976 after\nthe income of the assessee is\t determined and/or declared\nunder the said Acts. They cannot be deducted\t before\t the\ndetermination of such income.\n The assessee, however, has drawn our attention to\nSection 80V of the Income Tax Act, 1961 which was in force\nduring the assessment years with which we are concerned.\nUnder\tSection 80V, \"In computing the total\tincome of an\nassessee there\tshall be allowed by way of deduction\t any\ninterest paid by him in the previous year on any money\nborrowed for the payment of any tax due from him under this\nAct\". Learned counsel for the\t respondent submitted\tthat\nSection 80V will apply only to the payment of any tax under\nthe Income Tax Act of 1961. It will not apply to payment of\nincome-tax under the Voluntary\t Disclosure of\t Income\t and\nWealth Act, 1976. We need not\t dwell\ton this submission\nbecause, even it we assume that Section 80V does apply it\ncan apply only if the assessee has borrowed any money for\npayment of any tax and has paid interest in the relevant\nprevious year on such\tborrowed money. In the present case,\nthe assessee has not borrowed any money for the purpose of\npaying tax; nor has he paid any interest to any third party\nfor such borrowing. The contention of the assessee seems to\nbe, that he had avoided borrowing money for payment of tax\nby obtaining instalments from\tthe department\t and paying\ninterest. Therefore, the payment of\tinterest should be\nconsidered as equivalent to his paying interest on borrowed\nmoney for payment of tax. The submission has to be stated to\nbe rejected. Obtaining instalments from the department and\npaying\tinterest cannot be considered as equivalent to\nborrowing money\t from a\t third party for payment of tax and\npaying interest\t on such borrowed money. The assessee's\nargument, if taken to\tits logical conclusion, would amount\nto saying that the assessee had, in effect, borrowed money\nfrom the income tax department to pay tax for which he was\npaying interest\t to the income tax department. Such is\nclearly not the case, as it cannot be.\n The assessee has placed reliance on a decision of the\nAndhra Pradesh\tHigh Court in the case of Commissioner of\nIncome-Tax V. Bakelite Hylam Ltd. ([1988] 171 ITR 583). In\nthe case before the Andhra Pradesh High Court the assessee\nhad taken certain amount from his overdraft account to pay\nincome tax. The interest payable on the amount so withdrawn\nwas held deductible under section 80V. This decision has no\napplication to\tthe facts of the present case where\t the\nassessee has not borrowed any moneys for payment of income\ntax. Section 80V is not attracted in the present case.\n The assessee has strongly relied upon a decision of the\nGujarat High Court in\tthe case of c.J. Patel & co. v.\nCommissioner of\t Income-Tax ([1986] 179 ITR 486). The case\nbefore the Gujarat High Court was a case where the assessee\nhad made a disclosure under the Voluntary Disclosure scheme.\nInstead of making payment of\ttax a\tbank guarantee\t was\nfurnished to the department and commission was paid to the\nbank for obtaining the\t bank guarantee. A question arose\nwhether this commission which\twas paid to the bank by the\nassessee was allowable as a deduction. The Gujarat\tHigh\nCourt purported\t to distinguish\t the earlier judgments where\ninterest paid on delayed payment of tax was\theld as\t not\ndeductible. The\t Gujarat High Court said that\t payment of\ninterest for delayed payment of tax or payment of interest\non moneys borrowed from third parties fro payment of tax may\nbe inadmissible. But such payments are not similar to the\npayment which an assessee makes to the bank as commission\nfor obtaining a bank guarantee for securing the payment of\ntax. The Gujarat High has not held that payment of interest\non delayed payment of\ttax is n expense incurred wholly for\nthe purposes of the assessee's business. It has, however,\ndistinguished commission on bank guarantee from interest on\nmoney borrowed\tfor payment of tax. The above case does not,\ntherefore, help\t the assessee in the present case. We need\nnot, therefore,\t help the assessee in\tthe present case. We\nneed not, therefore, examine the correctness or otherwise of\nthe judgment of the Gujarat High Court.\n It cannot\tbe said, in the present case, that\t the\npayment of interest is in any way an expense incurred wholly\nor exclusively for the purpose of assessee's business. Nor s\nit a payment\tmade for the\tpurpose\t of preserving\t and\nprotecting the\tassessee's business as in the case of Birla\nCotton Mills (supra).\n Apart from\t section 37, the assessee has also present\ninto service Section 36(1) (iii) which permits deduction in\nrespect of the amount of interest paid in respect of capital\nborrowed for the purposes of the assessee's\tbusiness or\nprofession. For\t the reasons set out earlier, the claim for\ndeduction under section 36(1)(iii) is also misconceived just\nas the assessee's claim under section 37 is misconceived.\n In the premises, the question raised has to be answered\nin favour of the revenue and\tagainst\t the assessee.\t The\nappeals are, therefore, dismissed with costs." }, { "title": "Income Tax Officer, Income ... vs Nawab Mir Barkat Ali Khan Bahadur on 16 October, 1974", "url": "https://indiankanoon.org//doc/283959/", "text": "Income Tax Officer, Income ... vs Nawab Mir Barkat Ali Khan Bahadur on 16 October, 1974\nEquivalent citations: 1975 AIR 703, 1975 SCR (2) 464, AIR 1975 SUPREME COURT 703, 1975 4 SCC 370, 1975 TAX. L. R. 290, 1975 SCC (TAX) 326, 1975 2 SCR 464, 97 ITR 239\nAuthor: A.C. Gupta\nBench: A.C. Gupta, Hans Raj Khanna\n PETITIONER:\nINCOME\tTAX OFFICER, INCOME TAX-CUM-WEALTH TAX\t CIRCLE\t II,\n\n\tVs.\n\nRESPONDENT:\nNAWAB MIR BARKAT ALI KHAN BAHADUR\n\nDATE OF JUDGMENT16/10/1974\n\nBENCH:\nGUPTA, A.C.\nBENCH:\nGUPTA, A.C.\nKHANNA, HANS RAJ\n\nCITATION:\n 1975 AIR 703\t\t 1975 SCR (2) 464\n 1975 SCC (4) 370\n CITATOR INFO :\n F\t 1991 SC 331\t (6,13)\n\n\nACT:\nIncome\ttax Act, 1961, s. 147--Scope of High Court's power\ninterference under Art. 226.\n\n\n\nHEADNOTE:\nIn 1950, the respondent had executed three trust deeds\t for\nthe benefit of three ladies who were described as his wives,\nand himself, as the father of their minor children. After\nthe returns in respect of the assessment year 1955-56, 1956-\n57, 1957-58 and 1958-59 were filed by the respondent,\t the\nIncome-tax Officer, who had the three trust deeds before him\ncalled\tupon the respondent for information regarding\t his\nrelationship to those three\t ladies\t as well as\t his\nrelationship to a fourth lady.\t A statement was filed, on\nbehalf\tof the respondent, before the\tIncome-tax Officer,\nwherein\t it was stated that only the fourth lady was\t his\nlegally\t wedded\t wife,\tthat the other\t three\twere merely\nreferred to as the wives, and that their children were\t not\nthe legitimate children of the respondent. The Income-tax\nOfficer, in assessing the total income of the respondent did\nnot include, under s. 16(3) of the 1922-Act, the income of\nthose three ladies and their minor children arising out of\nthe trust properties. In fact, he assessed them separately\nwith respect to their income from the trust properties.\t In\n1964 the Income-tax Officer issued notices under s. 148 of\nthe 1961-Act seeking to reopen the assessments under s.\t 147\non the ground that there were two other trust deeds of 1957,\nwhich were not produced before the I. T. 0. in\t which\talso\ntwo of\t the ladies were acknowledged as the wives of\t the\nrespondent and their children as his children and that their\nmarriage should be presumed because of the acknowledgement.\nThe respondent\t there-upon challenged the validity of\t the\nproceedings and the High Court allowed his petition.\nDismissing the appeal to this Court,\nHELD : (1) Section 147(a) provides that if the Income-tax\nOfficer has reason to believe that by reason of the omission\nor failure on the part of the assessee to disclose fully and\ntruly all material facts necessary for his assessment\t for\nany year, income chargeable to tax has\t escaped assessment\nfor that year, he may assess or reassess such income for the\nassessment year concerned. The fact that the\t ladies\t and\ntheir children had been described in the 1957-documents as\nwives and children of the respondent would have\tbeen\nmaterial if the description were any thing new that\t the\nIncome-tax Officer happened to discover for the first time.\nBut the 1950,deeds also contained the same description.\t The\nnon-production\tof the 1957-documents at the time of\t the\noriginal assessment cannot therefore be regarded as\tnon-\ndisclosure of any material fact necessary for the assessment\nof the respondent for the relevant assessment years. Having\nsecond\tthoughts on the same material does not\twarrant\t the\ninitiation of a proceeding under s. 147. [467G-H; 468B; D-E]\n(2) The law\thas not changed or since the original\nassessments were made and it was open\t to the Income-tax\nOfficer\t to have made the presumption that the\tladies\twere\nthe wives at\tthe time when he made the assessment.\t He\ncannot avail of s. 147 to correct his mistake. [468F-G]\n(3) The expression 'reason to believe' occurring in s.\t 147\nof the 1961-Act or the corresponding s. 34 of the 1922-Act,\ndoes not mean a purely subjective satisfaction on the\tpart\nof the Income-tax Officer. The reasons for the belief\tmust\nhave a\t rational connection or relevant bearing to\t the\nformation of the belief. Therefore, the High Court, under\nArt. 226, has power to set aside a notice under s. 147 of\nthe 1961 Act or s. 34 of the 1922-Act, if the condition\nprecedent to the exercise of the .jurisdiction under those\nsections did not exist. [469C-D]\n465\n\n\n\nJUDGMENT:\nCIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 1179-1782\nof 1970.\nFrom the Judgment & Order dated the 7th March, 1969 of\t the\nAndhra Pradesh High Court in Writ Petition Nos. 1042-1045 of\n1964.\nS. C.\t Manchanda, B. B. Ahuja and R. N. Sachthey, for\t the\nAppellant (In all the Appeals).\nS. V.\t Gupte, Anwarulla Pasha, J. B. Dadachanji, A. Subba\nRao and Anjali K. Varma, for the Respondents (In all\t the\nAppeals).\nM. N. Phadke, A. V. Rangam, Gopal Nair and A.\t Subhashini,\nfor the Interveners (In all the Appeals).\nThe Judgment of the Court was delivered by\nGUPTA,\tJ. These are four appeals by\tcertificate from a\ncommon\tJudgment of the High Court of\t Andhra\t Pradesh at\nHyderabad by which the High Court directed the appellant,\nIncome\tTax Officer, Income Tax-cum-Wealth Tax\t Circle\t 11,\nHyderabad to refrain from proceeding against the respondent\nunder sec. 147 (a) of the Income Tax Act,\t 1961.\t The\nappellant had\tserved on the respondent, Nawab Sahib\t Mir\nOsman Alikhan\tBahadur, H. E. H., the Nizam of Hyderabad,\nnotices\t under sec. 148 of the income Tax Act, 1961 stating\nthat he had reasons to believe that income of the respondent\nchargeable to tax for the assessment years 1955-56, 1956-57,\n1957-58\t and 1958-59 had escaped assessment\t within\t the\nmeaning of sec. 147 of the Act and proposing to reassess the\nincome\tfor the said\tassessment years. The respondent\nchallenged the validity of the proceedings under sec.\t 147\nsought to be initiated by filing four writ petitions in\t the\nHigh Court of Andhra Pradesh at Hyderabad. The High Court\nby the impugned Judgment allowed all the four petitions\t and\nprevented the\tIncome Tax Officer from\t proceeding further\nunder sec. 147 of the Income Tax Act, 1961. In these\nappeals the appellant questions the correctness of the\tHigh\nCourt's decision.\nThe material facts are briefly these.\tAssessments for\t the\naforesaid four years were completed respectively on March\n18, 1958, March 19, 1958, July 20, 1958 and March 28,\t1961\nunder the income Tax Act of 1922. After the\t returns in\nrespect of the said years were filed, the Income Tax Officer\ncalled\tupon the respondent to state his relationship\twith\nfour ladies by putting three queries to him.\tThe queries\nwere as follows:\n\t \"(a) The\t rites and ceremonies attendant on\n\t legal marriages, according to Muslim law\t and\n\t how they were observed in the case of each of\n\t the four\t ladies\t viz.,\tDulhan\tPasha Begum\n\t Saheba, Mazharunnisa Begumsaheba, Laila Begum\n\t Saheba and jani Begum Saheba.\n\t (b) What legal\t status is accorded to\t the\n\t children\tof Mazharunnisa Begum Saheb, Laila\n\t Begum Saheba and Jani Begum Saheba, vis-a-vis,\n\t the children of the late Dulhan Pasha Be-gum\n\t Saheba?\n\t 466\n\t (c) Any other factors from the point of view\n\t of the religion which distinguished the status\n\t of late\tDulhan Pasha Begum Saheba from\t the\n\t other three ladies.\"\nIt appears that on May 1, 1950, August 6, 1950 and December\n29, 1950 the respondent had executed\tthree trust deeds,\ndescribed respectively as Family Trust, Miscellaneous Trust\nand Family Pocket Money Trust, for the\tbenefit\t of\nMazharunnissa Begum, Laila Begum, Jani Begum and the minor\nchildren of the last two. in the aforesaid trust deeds\t the\nthree ladies were described as wives of the respondent\t who\nwas also referred to as the father of their minor children.\nIn one\t of these documents, viz., the family Pocket Money\nTrust Deed, the description of Laila Begum and Jani Begum as\nwives was preceded by the expression \"ladies of position\".\nUnder sec. 16\t (3) of the income Tax Act of 1922, in\ncomputing the\ttotal income of any\tindividual for\t the\npurposes of assessment, the income of the wife or minor\nchild of the assessee arising from assets transferred by the\nhusband\t to the wife or the minor child otherwise than\t for\nadequate consideration\t was to be included. There is no\ndispute\t that these trust deeds were before the\t Income\t Tax\nOfficer\t before\t he completed the assessments for the\tsaid\nfour years.\nOn September 9, 1957 Shri C.\tB. Taraporewala, Financial\nAdviser\t and General\tPower of Attorney Agent of\t the\nrespondent, filed a statement before the Income Tax Officer\nin reply to these queries. In this reply it was stated that\nthe late Dulhan Pasha Begum Saheba was the only legally\nwedded\twife of the respondent, that with the\tother three\nladies\tthe respondent had not gone through the essential\nformalities of a valid marriage under Mohanunedan Law,\tthat\nthese three ladies who occupied high social position and who\nwere received in his palace were \"ladies of position\" and in\nview of the special favours bestowed upon them they\twere\nreferred to as wives in the said three trust deeds though in\nthe strict legal sense the description was incorrect and the\nchildren of these ladies were not tile legitimate children\nof the\t respondent and had no legal status as\tsuch.\tThis\nexplanation apparently\t satisfied the\tincome\tTax officer\nbecause in assessing the total income of the respondent\t for\nthe said four years he did not include the income of these\nthree ladies and their minor children arising out of\t the\ntrust\tproperties. It is\talso admitted\t that\t the\nbeneficiaries of the trusts were separately assessed on\t the\nincome\tderived from the trusts along with their individual\nincome.\nOn March 13, 1964 the notices under sec. 148 of the Income\nTax Act, 1961 were issued seeking to reopen the\t assessments\nunder sec. 147 of the Act. After some correspondence\twith\nthe income Tax Officer, the authorized\t representatives of\nthe respondent, M/s. S. G. Dastgir and Company, Chartered\nAccountants, filed supplemental returns for the aforesaid\nfour years \"without prejudice\" to the respondent's right to\nquestion the valid it of the\tnotices. The\tsupplemental\nreturns\t merely affirmed the original returns filed by\t the\nrespondent.\nBy his\t letter\t dated\tApril 15, 1964\t addressed to\tM/s.\nDastgir\t and Company,\tthe Income Tax\tofficer\t stated\t the\nreasons for reopening the\n467\nassessments under sec. 147(a).\tReferring to two subsequent\ntrusts\tnamed Fern Hill and\tRace View created by\t the\nrespondent on\t March\t 21,1957 and\tDecember 5,\t1957\nrespectively, it was stated that the material facts relating\nto these two documents were not brought to the notice of the\nDepartment in\tthe course of the original assessment\tpro-\nceedings. Fern Hill Trust was created for the benfit of the\nchildren of Laila Begum and Race View Trust for the benefit\nof Jani Begum and her son Imdad Jah Bahadur. 'in the\tFern\nHill Trust Deed Laila Begum was described as wife of\t the\nrespondent and her children\t as the children of\t the\nrespondent by her. Similarly in the Race View\t Trust\tDeed\nJani Begum was described as wife of the respondent and lmdad\nJah Bahadur as his son by her.\tAccording to the Income\t Tax\nOfficer\t the facts that Laila Begum and Jani\t Begum\twere\ndescribed as wives and their children as the children of the\nrespondent in\tthe Trust Deeds executed in 1957 indicated\nthat \"certain\tmaterial facts relevant for the assessment\nyears were not disclosed to\t the Department, that\t the\nstatement given by the Financial Adviser is. untrue and that\nthereby\t income chargeable to tax has been under assessed\".\nIn his letter the Income Tax Officer also referred to\tsec.\n268 of Mulla's Principles of Mohammedan Law which enumerates\nthe circumstances from which marriage will be\tpresumed in\nthe absence of direct proof and stated that the respondent\nhaving acknowledged the three ladies as his wives and their\nchildren as his children in the Trust Deeds executed in 1950\nand 1957 all the circumstances mentioned in see. 268\twere\npresent. The\tletter\tconcluded by saying that it\t was\nestablished that the ladies and their\t children were\t the\nlegal wives and legitimate children of the respondent.\nThe common counter-affidavit affirmed by the\t Income\t Tax\nofficer in answer to the writ petitions was on similar lines\nto the aforesaid latter. Admittedly Fern Hill and Race View\nTrust Deeds executed in 1957 were not produced\t before\t the\nIncome Tax officer when he made the original assessments for\nthe four years in question. in the counter affidavit it\t was\nalleged\t that these two Trust\t Deeds\twere \"material\t and\nprimary\t facts necessary for completing the assessments of\nthe petitioner-assessee for the relevant assessment years\"\nand it was submitted that if the said two documents had been\ndisclosed at the time of the\t original assessments,\t the\nincome\tTax Officer \"would have certainly arrived. at\t the\nconclusion\" that he came to in his letter dated April\t 15,\n1964.\nClause\t(a) of Sec. 147 of the Income Tax Act,\t 1961 under\nwhich the assessments were sought to be reopened, so far as\nit is relevant for the present purpose, provides that if the\nIncome Tax Officer has reason to believe that, by reason of\nthe omission or failure on the part\tof an\tassessee to\ndisclose fully and truly all material facts necessary\t for\nhis; assessment for any year, income chargeable to tax\t has\nescaped assessment for that year, he may assess or reassess\nsuch income for the assessment year concerned. The\tHigh\ncourt held. that the reasons assigned\t for reopening\t the\nassessments did not fall within the scope of\tomission or\nfailure\t on the part of the assessee to disclose fully\t and\ntruly all material facts, that all the material facts\twere\nbefore the Department\n15-255 Sup.Cl/75\n468\nwhen it made the assessments in question and\t the trusts\ncreated\t in 1957 did not \"throw a different light on\t the\nmatters already disclosed\".\nThe question is whether the existence of the two trust deeds\nexecuted by the respondent in 1957 was a material\tfact\nnecessary for\this assessment for the\trelevant assessment\nyears.\t The fact that the three ladies and their children\nhave been described in these two documents as wives\t and\nchildren of the respondent would have been material if\t the\ndescription were anything new that the Income\tTax Officer\nhappened to discover for the first time. The\tthree trust\ndeeds of 1950 also contained the same description of these\nladies\tand their children and the\tIncome\tTax Officer\naccepted the statement made\tby respondent's Financial\nAdviser\t Shri G. B. Taraporewala seeking to explain why\t the\nladies had been described as wives therein. It is true that\nthe trust deeds of 1957 were not produced at the time of the\noriginal assessment but we do not see what difference\nproduction of these two additional documents could have made\nwhich contain the same description of the ladies. Neither\nthe letter addressed\t to the respondent's\t authorised\nrepresentatives, M/s.\t S. G. Dastgir and Company, by\t the\nIncome\tTax Officer on April 15, 1964 nor the counter-\naffidavit filed in the High Court explains this point.\t The\ndocuments of 1957 conform to those of 1950\tin material\nparticulars; the trust deeds of 1957 only repeat what\t the\ndeeds\tof 1950 had disclosed. Non-production of\t the\ndocuments executed in\t 1957 at the time of the original\nassessments cannot therefore be regarded as non-disclosure\nof any\t material fact necessary for the assessment of\t the\nrespondent for\t the relevant assessment years. The\tHigh\nCourt was right in holding that the Income Tax officer\t had\nno valid reasons to believe that the respondent had omitted\nor failed to disclose fully and truly all material facts and\nconsequently had no jurisdiction to reopen the\t assessments\nfor the four years in question. Having second thoughts on\nthe same material does not warrant the initiation of a\nproceeding under sec. 147 of the Income Tax Act, 1961.\n Mr. Manchanda, learned counsel for the appellant, took us\nthrough several sections of Mulla's Principles of Mohammedan\nLaw including\t sec.\t268 and submitted that in\t the\ncircumstances of the case it must be presumed that the three\nladies were the legally wedded wives of the respondent.\t The\nlaw has not changed since the original assessments were made\nand it\t was open to the Income Tax Officer to make\tthat\npresumption at the time. If he should have but did not do\nso then, he cannot avail of sec. 147 to correct\tthat\nmistake. In any event, we are not called upon in\tthis\nproceeding to record a finding on the question\t whether in\nfact the ladies were respondent's legally wedded wives.\t We\nare concerned only with the question whether the condition\nprecedent to the exercise of jurisdiction under sec.\t 147\nexists in this case; we have found that it does not.\nMr. Manchanda also contended that the High Court exercising\njurisdiction under Art. 226 of the Constitution had no power\nto investigate\t whether on the material before him\t the\nIncome-Tax Officer was justified in proceeding\t under\tsec.\n147 of the Income Tax Act, 1961. He relied, among others,\non the following decisions in support\n469\nof his contention:\tS. Narayanappa\t and\tothers\t vs.\nCommissioner of Income Tax, Bangalore, (1) Kantamani Venkata\nNarayana and Sons vs. First Additional Income Tax Officer,\nRajahmundry, (2) Commissioner of Income Tax, Gujarat vs. A.\nRaman & Co. (3) and of course, Calcutta Discount Co.\tLtd.\nvs. Income tax Officer, Companies District I Calcutta, (4)\n We do not think that these decisions help him. In\tthis\ncase, the decision of the High Court is not that\t the\nmaterial before the Income Tax Officer was insufficient or\nthat he had failed to draw the correct conclusion from\t the\nmaterial before him but that no fresh material had come to\nlight\tjustifying reopening of the\t assessments.\t The\nauthorities to which Mr. Manchanda referred point out\tthat\nthe expression \"reason to believe\" occurring in sec. 147 of\nthe Income Tax Act, 1961 or the corresponding sec. 34 of the\nAct of 1922 does not mean a purely subjective\tsatisfaction\non the part of the Income Tax Officer, the reasons for\t the\nbelief must have a rational connection or a relevant bearing\nto the\t formation of the belief, and that the\t High Court\nunder Art. 226 of the Constitution has power to set aside a\nnotice\tunder sec. 147 of the Act of 1961 or sec. 34 of\t the\nAct of 1922 if the condition precedent to the\texercise of\njurisdiction under these sections does not exist.\nIn the\t result, these appeals fail and are dismissed\twith\ncosts.\tOne hearing fee.\nAn application\t for intervention in these appeals made by\nthree persons claiming to be sons of the respondent was\t not\nultimately pressed; no order is therefore called for on this\napplication.\nAppeals dismissed.\n(1) 63 I.T.R. 219.\n(2) 63 I.T.R. 638.\n(3) 67 I.T.R. 11.\n(4) 41 I.T.R. 191.\n470" }, { "title": "Commissioner Of Income Tax-12 vs Tip Top Typography on 8 August, 2014", "url": "https://indiankanoon.org//doc/11673789/", "text": "Commissioner Of Income Tax-12 vs Tip Top Typography on 8 August, 2014\nAuthor: S. C. Dharmadhikari\nBench: S.C. Dharmadhikari\n *1* itxa2447.11\n\n\nsbw\n IN THE HIGH COURT OF JUDICATURE AT BOMBAY\n\n\n\n\n \n ORDINARY ORIGINAL CIVIL JURISDICTION\n\n INCOME TAX APPEAL NO.1213 OF 2011\n\n\n\n\n \n Commissioner of Income Tax-12 ]\n R. No.265, 2nd Floor ]\n Ayakar Bhavan, Mumbai-400 020. ] ..Appellant\n\n\n\n\n \n -Versus-\n\n Tip Top Typography ]\n 58, Sheth Chambers ]\n\n\n\n\n \n Dr. V. B. Gandhi Marg, Fort ]\n Mumbai-400 023. ig ] ..Respondent\n\n\n ALONG WITH\n \n INCOME TAX APPEAL NOS.2447/2011, 5363/2010, 5489/2010, \n 673/2011, 732/2011, 1316/2011, 1468/2011, 2108/011, 2115/2011, \n 2116/2011, 2161/2011, 411/2012, 753/2012, 754/2012, 974/2012, \n 819/2012, 820/2012, 821/2012, 827/2012, 1182/2012, 1472/2012, \n 106/2014, 195/2014, 342/2014, 343/2014, 657/2014, 676/2014 and \n \n\n\n 944/2014. \n \n\n\n\n ...........\n\n Mr. P. C. Chhotaray for the Revenue in ITXA Nos.1213/2011, 1316/2011, \n 106/2014, 195/2014, 342/2014, 343/2014, 657/2014, 676/2014 and \n\n\n\n\n\n 944/2014.\n Mr. Tejveer Singh for the Revenue in ITXA Nos. 2447/2011, 753/2012, \n 754/2012, 974/2012, 819/2012, 820/2012, 821/2012, 827/2012 and \n 1182/2012.\n Mr. Vimal Gupta, Senior Advocate, with Ms. Padma Divakar for the \n Revenue in ITXA Nos.2108/2011 and 1472/2012.\n\n\n\n\n\n Mr. Abhay Ahuja for Revenue in ITXA Nos.5363/2010, 5489/2010, \n 673/2011, 732/2011 and 411/2012.\n Mr. Suresh Kumar for the Revenue in ITXA Nos.1468 of 2011 and \n 2161/2011.\n Ms. A. Vissanjee with Mr. S. J. Mehta for the Assesssee in ITXA \n Nos.2447/2011, 2116/2011, 2115/2011, 2161/2011, 753/2012, \n 754/2012, 794/2012, 819/2012, 820/2012, 821/2012, 827/2012 and \n\n 1/64\n\n\n\n\n ::: Downloaded on - 08/08/2014 23:49:46 :::\n *2* itxa2447.11\n\n\n 1182/2012.\n Mr. R. Murlidharan i/b. M/s. Rajesh Shah & Co. for the Assessee in ITXA \n\n\n\n\n \n Nos.1213/2011.\n Mr. Subhash Shetty for Assessee in ITXA Nos.5363/2010, 5489/2010, \n 673/2011, 737/2011 and 411/2012.\n\n\n\n\n \n Ms. Vasanti B. Patel for the Assessee in ITXA Nos.106/2014, 195/2014, \n 342/2014, 343/2014, 657/2014, 676/2014 and 944/2014.\n Mr. Prakash Shah with Mr. Jas Sanghavi i/b. PDS Legal for the Respondent \n in ITXA No.1468/2011.\n\n\n\n\n \n ...........\n\n CORAM: S.C. DHARMADHIKARI\n AND\n\n\n\n\n \n B.P. COLABAWALLA, JJ.\n ig RESERVED ON : 2nd JULY, 2014\n\n PRONOUNCED ON: 8th AUGUST, 2014.\n \n J U D G M E N T (PER S. C. DHARMADHIKARI, J.)\n\n 1] In all these appeals, we are concerned with the following \n \n\n\n substantial question of law:-\n\n \"(i) Whether on the facts and circumstances of the case and \n\n in law, Tribunal was right in holding that the fair rental \n\n\n\n\n\n value specified in section 23(1)(a) is the municipal value or \n\n actual rent received whichever is higher and not the annual \n\n\n\n\n\n letting value on the basis of comparable instances as \n\n adopted by the Assessing Officer, though the property under \n\n consideration was not covered by the Rent Control Act?\n\n (ii) Whether on the facts and circumstances of the case and \n\n\n 2/64\n ::: Downloaded on - 08/08/2014 23:49:46 :::\n *3* itxa2447.11\n\n\n in law, Tribunal was right in remitting the matter back to \n\n\n\n\n \n the file of the Assessing Officer with direction to verify the \n\n rateable value fixed by the Municipal Authorities and if the \n\n\n\n\n \n same is less than the actual rent received, then the actual \n\n rent received should be taxed?\"\n\n Some of the appeals have been admitted but we shall proceed to Admit \n\n the rest of them on the above mentioned substantial questions of law. The \n\n\n\n\n \n Respondents therein waive service. By consent heard forthwith.\n\n 2] Similarly, there are appeals in which arguments were canvassed on \n \n the basis that the rent control legislation operating in the State is \n\n applicable but the parties are not at idem on the quantum of rent. \n\n Therefore, the proceedings in that behalf and particularly for fixation of \n \n\n\n\n standard rent were not initiated under the rent control legislation. \n\n Therefore, the Assessing Officer took upon himself the responsibility of \n\n\n\n\n\n fixing the fair/standard rent. Whether this step taken by the Assessing \n\n Officer is permissible in law or otherwise is the further question. \n\n Similarly, in some of the appeals, there is not an agreement of tenancy but \n\n\n\n\n\n of leave and license. Thereunder, license fee has been agreed between \n\n the parties. Further, the quantum of security deposit has also been \n\n stipulated in the agreement. Therefore, the question arises as to whether \n\n\n 3/64\n ::: Downloaded on - 08/08/2014 23:49:46 :::\n *4* itxa2447.11\n\n\n the security deposit which though refundable but without interest can be \n\n\n\n\n \n taken into consideration for holding that the agreed license fees does not \n\n reflect the market trend or market rate prevailing in the area.\n\n 3] For the purposes of answering these questions we would refer to the \n\n\n\n\n \n facts in Income Tax Appeal No.1213 of 2011. The assessment year in \n\n question therein is 2005-06. The brief facts are that the return of income \n\n\n\n\n \n for assessment year in question was filed on 31 st August, 2005 declaring \n \n total income at Rs.3,12,520/-. The same was processed under section \n\n 143(1) of the Income Tax Act, 1961 (for short the 'I.T. Act'). The case was \n \n selected for scrutiny. The Assessing Officer noticed that the respondent-\n\n assessee had let out commercial premises admeasuring about 8118 sq.ft. \n\n built up area consisting of office premises along with Car parking open \n \n\n\n\n space in the building \"Seth House\" in a prime locality at Dr. V. B. Gandhi \n\n Road, Mumbai-23. The premises were given to a related concern namely \n\n\n\n\n\n M/s. Reliance Industries Ltd. for Rs.3,60,000/- and a sum of \n\n Rs.5,25,00,000/- was received as interest free security deposit. The \n\n Assessing Officer noticed that the rent received by the assessee was \n\n\n\n\n\n nominal and the circumstantial evidence indicated that the fair market \n\n value was higher. Therefore, he obtained instances of the rental amount \n\n prevailing in the market and particularly in the area and confirmed that \n\n\n 4/64\n ::: Downloaded on - 08/08/2014 23:49:46 :::\n *5* itxa2447.11\n\n\n the property was not covered by the Rent Control Act. On the basis of \n\n\n\n\n \n such comparable instance, the annual letting value as provided under \n\n section 23(1)(a) was determined at Rs.85,72,608/- as against \n\n\n\n\n \n Rs.3,60,000/- shown by the assessee. The assessment order dated 24 th \n\n December, 2007 copy of which is at Annexure-A was passed and being \n\n\n\n\n \n aggrieved thereby the assessee preferred an appeal before the \n\n Commissioner of Income Tax (Appeals). The Commissioner of Income Tax \n\n\n\n\n \n (Appeals) by his order dated 11 th December, 2008 confirmed the action of \n \n the Assessing Officer. A copy of the Commissioner's order is at \n \n Annexure-C.\n\n\n 4] The assessee, thereafter, carried the matter in appeal to the Income \n \n\n\n Tax Appellate Tribunal and by an order dated 31 st March, 2010 the matter \n \n\n\n\n was remitted back to the Assessing Officer. The Tribunal directed him to \n\n verify the rateable value fixed by the Municipal authorities and if the \n\n\n\n\n\n same is less than Rs.3,60,000/-, then, the actual rent received should be \n\n taxed. Copy of this order of the Tribunal is annexed as Annexure-E to this \n\n memo of appeal.\n\n 5] It is aggrieved by this order of the Tribunal that the revenue has \n\n approached this Court in appeal under section 260A of the Income Tax Act \n\n raising the above substantial questions of law.\n\n 5/64\n ::: Downloaded on - 08/08/2014 23:49:46 :::\n *6* itxa2447.11\n\n\n 6] Mr. Chhotaray, learned counsel, appearing for the revenue in these \n\n\n\n\n \n appeals submitted that the language of section 23(1)(a) of the Income \n\n Tax Act, 1961, for short the I.T. Act is clear. That has no relation to the \n\n\n\n\n \n rateable value determined by the municipal corporation. It has also no \n\n relation to any deposits or security amount obtained by the assessee like \n\n\n\n\n \n the respondents. Therefore, the attempt is to depress the rent. When such \n\n attempts are noticed, then, it can never be intended by the law that the \n\n\n\n\n \n Assessing Officer is obliged to adopt the municipal value. In the present \n \n case the matter has been completely distorted by the assessee. The \n \n reference to section 23(1)(b) is misplaced. The element of municipal \n\n property tax rate has, therefore, no relevance. On facts also, the \n\n relationship is admitted. The Assessing Officer has made a comparative \n \n \n\n\n\n study and analysed the prevailing rate. Mr. Chhotaray, therefore, submits \n\n that the findings at page 16 and 18 of the paper book would reflect that \n\n\n\n\n\n there was nothing erroneous or illegal in the manner in which the \n\n Assessing Officer proceeded to determine the rent. Mr. Chhotaray submits \n\n that section 23(1)(a) refers to a reasonable expectation with regard to the \n\n\n\n\n\n rent that can be obtained if the premises are let. The Assessing Officer has \n\n clearly gone by this requirement of the section. Mr. Chhotaray submits \n\n that the Assessing Officer had correctly determined the rent and his \n\n finding has been upheld by the Commissioner. The Assessee did not \n\n 6/64\n ::: Downloaded on - 08/08/2014 23:49:46 :::\n *7* itxa2447.11\n\n\n appear before the Commissioner but his absence cannot be said to be fatal \n\n\n\n\n \n more so, when the assessee had complete opportunity to argue its case \n\n before the Tribunal.\n\n 7] Criticizing the Tribunal's order, Mr. Chhotaray submits that the \n\n\n\n\n \n Tribunal has observed nothing with regard to the approach of the \n\n Assessing Officer. The Tribunal does not hold that the course adopted by \n\n\n\n\n \n the Assessing Officer is imperssible in law. In para-14 of the order, \n \n Tribunal has agreed with the Assessing Officer that there is a possibility of \n\n the rent or compensation being shown at lower rate and it can be \n \n determined by taking recourse to section 23(1)(a), then, there was no \n\n need to freeze the rent or the quantum thereof with the figure of the \n \n\n\n annual letting value as determined by the Mumbai Municipal Corporation. \n\n Thus, there is a patent error of law committed by the Tribunal. Merely, \n\n because the words \"might be reasonably expected to be let\" are inserted \n\n\n\n\n\n by the legislature in section 23(1)(a) that does not mean that the \n\n Assessing Officer is bound by the valuation made by the Municipal \n\n Corporation. That is a complete misreading of the section. Mr. Chhotaray \n\n\n\n\n\n submits that the municipal valuation cannot be the sole and only criterion. \n\n The municipal valuation is not binding on the Assessing Officer. He can \n\n independently determine the rent which can be fetched by the assessees. \n\n 7/64\n ::: Downloaded on - 08/08/2014 23:49:46 :::\n *8* itxa2447.11\n\n\n In doing so he can make local enquiry including from brokers and refer to \n\n\n\n\n \n the agreements between parties. He can also refer to the valuation by the \n\n State Government and for the purposes of recovery of State taxes. Mr. \n\n\n\n\n \n Chhotaray submits that there is a tendency to accept deposit of a hefty \n\n sum. Even a nominal rent which is higher than the municipal \n\n\n\n\n \n determination is taken as the basis for such security deposit. Mr. \n\n Chhotaray submits that if the intent of the legislature was to make an \n\n\n\n\n \n assessment by municipal valuation alone, then, that would have been \n \n clearly spelled out in law. Mr. Chhotaray, therefore, referred to Rule 4, 5, \n \n 6 and 7 of the Wealth Tax Rules in this behalf.\n\n 8] Mr. Chhotaray also submitted that the Tribunal has solely relied \n \n\n\n upon its own order in the case of Park Paper Industries Ltd. which is \n \n\n\n\n delivered in the case of a self-occupied property. At the same time, the \n\n Tribunal failed to note that there is a contrary view taken in the case of \n\n\n\n\n\n the Income Tax Officer V/s. M/s. Baker Technical Services Private Ltd. \n\n Income Tax Appeal No.5262, 5264/Mum/2006. In such circumstances, Mr. \n\n Chhotaray submits that the impugned order be set aside and the appeal be \n\n\n\n\n\n allowed.\n\n 9] Mr. Chhotaray also submits that the Assessing Officer was of the \n\n view that the monthly rent shown was very low and did not represent the \n\n 8/64\n ::: Downloaded on - 08/08/2014 23:49:46 :::\n *9* itxa2447.11\n\n\n correct fair rental value of the property under section 23(1)(a) of the Act. \n\n Under section 23(1)(a), the annual value of the property shall be deemed \n\n to be the sum for which the property might reasonably be expected to let \n\n\n\n\n \n from year to year (henceforth referred to as fair rental value of the \n\n property). The section mandates the Assessing Officer to determine the \n\n\n\n\n \n fair rental value of the property under section 23(1)(a). The Assessing \n\n Officer made enquiries to find out the comparable rent prevailing in the \n\n\n\n\n \n vicinity. He has prepared a chart of the comparable cases showing that the \n \n monthly rent per sq. ft. in the vicinity ranged between Rs.79 to Rs.110 per \n \n sq. ft. instead of Rs.3.70 per sq. ft. shown by the assessee. The \n\n information collected by the Assessing Officer was confronted to the \n\n assessee.\n\n 10] The assessee contended that the gross municipal rateable value of \n\n the property was Rs.39,572/- per annum which came to Rs.3298/- per \n\n\n\n\n\n month. As per the assessee the municipal rateable value represented the \n\n fair rental value of the property in the market under section 23(1)(a) and \n\n since the rent received was much more than the municipal rateable value, \n\n\n\n\n\n the annual value shown by the assessee should be accepted in view of \n\n section 23(1)(b) of the Act. Section 23(1)(b) provides that if the actual \n\n rent received is more than the fair rental value under section 23(1)(a), \n\n\n 9/64\n ::: Downloaded on - 08/08/2014 23:49:46 :::\n *10* itxa2447.11\n\n\n then the actual rent received should be adopted as the annual value.\n\n 11] At the time of the hearing it was pointed out by the revenue that , \n\n\n\n\n \n according to the theory behind the provision relating to the income from \n\n house property, annual value of the property is a hypothetical income from \n\n\n\n\n \n the property representing the sum for which the property might \n\n reasonably be expected to let from year to year. It is an artificial or \n\n\n\n\n \n assumed income. The actual rent received is not material in \n \n determination of the annual value. Annual value is the inherent attribute \n\n of the property to be determined by adopting various methods.\n\n 12] It was pointed out that reading both the provisions 23(1)(a) and \n\n 23(1)(b) together would show that determination of annual value is a \n \n\n\n two-step process. The first step is to determine the fair rental value in the \n \n\n\n\n market under section 23(1)(a). This is the most important part. \n\n Thereafter, the second step is to refer to section 23(1)(b) which provides \n\n\n\n\n\n that if the actual rent received is more than the fair rental value \n\n determined under section 23(1)(a), then the actual rent received would \n\n\n\n\n\n be deemed to be the annual value. It was pointed out that in the \n\n captioned case, there is no applicability of section 23(1)(b) since the \n\n annual value, as determined by the Assessing Officer, is much more than \n\n the actual rent received.\n\n 10/64\n ::: Downloaded on - 08/08/2014 23:49:46 :::\n *11* itxa2447.11\n\n\n 13] Mr. Chhotaray further submits that annual value is a statutory \n\n\n\n\n \n hypothetical figure. The provisions of section 23(1)(a) mandates the \n\n Assessing Officer to determine this value. It simply states that the annual \n\n\n\n\n \n value is the sum for which the property might reasonably be expected to \n\n let from year to year. It does not speak anything else. The Assessing \n\n\n\n\n \n Officer determines the annual value by taking various factors into account. \n\n He may take recourse to different recognized methods. One important \n\n\n\n\n \n method is to find the prevailing market rate of rent in the area. In order \n \n to find it out, he may make inquiry with let out properties in the locality, \n \n make enquiry with the brokers, use internet for knowing the prevailing \n\n rate in the area, take the help of a valuer, adopt any other method. After \n\n collecting the information, the assessee is confronted with the data \n \n \n\n\n\n gathered and after considering his objections suitable adjustments are \n\n made to determine the correct annual value. It is submitted that valuation \n\n\n\n\n\n is an art and there are recognized methods. The Assessing Officer is \n\n capable of making the valuation on his own by adopting the appropriate \n\n method. Each property is unique so far its annual value is concerned. It is \n\n\n\n\n\n not correct to impose a standard annual value for all properties in a \n\n locality. Valuation of a property is distorted because of relation between \n\n parties, collusion, heavy security deposit. Therefore, each case needs to \n\n be addressed on its own facts and Assessing Officer is competent to handle \n\n 11/64\n ::: Downloaded on - 08/08/2014 23:49:46 :::\n *12* itxa2447.11\n\n\n this issue. It is respectfully submitted that this is the correct approach to \n\n\n\n\n \n determine the annual value. It is important to note that the order of the \n\n Assessing Officer is subject to judicial scrutiny. The Assessing Officer \n\n\n\n\n \n should be left alone to perform this function as required by law.\n\n 14] Mr. Chhotaray submits that municipal rateable value is not a reliable \n\n data for determining the annual value under the Income Tax Act. It is \n\n\n\n\n \n invariably seen that the municipal value is much below the fair rental \n \n value of the property. The valuation is outdated. In such a situation, the \n\n municipal value is not a reliable data for determining the annual value for \n \n section 23(1)(a) of the Income Tax Act. Hence, adopting the municipal \n\n value for determining the annual value under the Income Tax Act would \n \n\n\n lead to substantial loss of revenue. The objectives of the local authorities \n \n\n\n\n and the Income Tax Departments are entirely different. Municipal \n\n Authorities are concerned with the collection of property tax in order to \n\n\n\n\n\n provide the civic amenities. They would rest content in prescribing the \n\n rate for a particular area and would not be bothered about accurately \n\n determining the income from a particular property which is the objective \n\n\n\n\n\n of the Income Tax Department. The municipal rateable value is also \n\n subject to litigation. It is impossible to develop any mechanism by which \n\n the Income Tax Department would keep track of the appeal proceedings in \n\n\n 12/64\n ::: Downloaded on - 08/08/2014 23:49:46 :::\n *13* itxa2447.11\n\n\n municipal cases and adopt the modifications. The Income Tax Department \n\n\n\n\n \n is not equipped to liaise regularly with municipal authorities in order to \n\n perform its own function of making an assessment. Also most of the \n\n\n\n\n \n returns are accepted without scrutiny and unless there is clear exposition \n\n of law, the assessee would show low income from house property which \n\n\n\n\n \n will lead to loss of revenue. It would be unfair to require the Income Tax \n\n Department to adopt the municipal valuation even if it notices gross and \n\n\n\n\n \n glaring undervaluation in municipal valuation. The Income Tax \n \n Department has no control over the municipal valuation. Under the law, \n \n there is no reference to the municipal valuation. There is no case for \n\n introducing the element of municipal valuation in the income tax law. \n\n The process of municipal valuation of different states is different. The \n \n \n\n\n\n local authorities have their own priorities. For example, Mumbai has now \n\n switched over to the capital value system where the municipal value is at a \n\n\n\n\n\n certain percentage of the capital value of the property. Properties with \n\n area up to 500 sq. ft. would not pay the higher rate. The concept of \n\n determining the fair rent of the property is no longer there. Therefore, \n\n\n\n\n\n there would no longer be any commonality in the wordings of the \n\n provisions of the section 23(1)(a) of the Income Tax Act and the \n\n provisions of the Municipal Act which is the main plank of the argument \n\n for adopting the municipal value for income tax. Income Tax Department \n\n 13/64\n ::: Downloaded on - 08/08/2014 23:49:47 :::\n *14* itxa2447.11\n\n\n is accountable for collection under the Income Tax law and should not be \n\n\n\n\n \n dependent on municipal system which is not accountable to it. Therefore, \n\n the annual value of the property under the income tax law should be \n\n\n\n\n \n delinked from the municipal valuation. Municipal valuation can at best be \n\n a factor to be considered by the Assessing Officer and nothing more than \n\n\n\n\n \n that. The Assessing Officer can reject the municipal valuation for valid \n\n reasons.\n\n 15]\n \n Mr. Chhotaray then submits that heavy security deposit is a factor to \n\n be taken judicial notice of. In many cases heavy security deposits running \n \n into crores of rupees are taken by the landlord as a consequence of which \n\n the amount of rent is reduced. It is accepted by the assessees that there is \n \n\n\n an inverse correlation between the amount of security deposit and the \n \n\n\n\n amount of rent. If the security deposit is more, the amount of rent is less \n\n and vice versa. Thus the rent fluctuates according to the amount of \n\n\n\n\n\n security deposit. Annual value is an artificial statutory figure which is \n\n germane to the property. It should be, by and large, same for a particular \n\n property and should not vary according to the quantum of security \n\n\n\n\n\n deposit. This goes against the very theory of annual value unanimously \n\n propounded by all the judgments. It needs to be judicially recognized that \n\n security deposit is a factor to be taken into account in determining the \n\n\n 14/64\n ::: Downloaded on - 08/08/2014 23:49:47 :::\n *15* itxa2447.11\n\n\n annual value. The Courts have not found favour with the idea of \n\n\n\n\n \n calculating the notional value of interest on the security deposit and \n\n increase the rent to that extent. But to completely ignore the effect of \n\n\n\n\n \n security deposit on the amount of rent fixed between the parties would \n\n lead to ignoring the ground reality of the transactions when it is openly \n\n\n\n\n \n admitted that one of the main objectives behind heavy security deposit is \n\n to reduce rent and this would result in eventually determining a wrong \n\n\n\n\n \n annual value. It is submitted that a rebuttable presumption may be raised \n \n against assessees accepting security deposit beyond a certain normal \n \n amount that, they have benefited to the extent of the notional interest on \n\n the security deposit and the annual value should be increased by this \n\n notional interest. The assessee would be free to rebut this presumption \n \n \n\n\n\n with valid reasons.\n\n 16] Mr. Chhotaray has relied upon the following decisions in support of \n\n\n\n\n\n his above contentions.\n\n 1) (1981) 128 ITR 315 - Bhagawan Dass Jain V/s. Union of India and \n\n Others;\n\n 2) (1975) 100 ITR 97 - Sakarlal Balabhai V/s. Income Tax Officer, \n\n Special Investigation Circle IV, Ahmedabad and Another;\n\n 3) AIR 1968 Supreme Court 441 (V 55 C 97) - Motichand Hirachand \n\n\n 15/64\n\n\n\n\n ::: Downloaded on - 08/08/2014 23:49:47 :::\n *16* itxa2447.11\n\n\n and others V/s. Bombay Municipal Corporation;\n\n\n\n\n \n 4) AIR 1962 Supreme Court 151 (V 49 C 28) - The Corporation of \n\n Calcutta V/s. Sm. Padma Debi and others;\n\n\n\n\n \n 5) AIR 2011 Supreme Court 1940 - Mohammad Ahmad & Anr. V/s. \n\n Atma Ram Chauhan & Ors.;\n\n\n\n\n \n 6) (1975) 101 ITR 810 - Kashi Prasad Kataruka V/s. Commissioner of \n\n Income Tax, Bihar;\n\n\n\n\n \n 7) (2001) 248 ITR 723 - Commissioner of Income Tax V/s. J. K. \n \n Investors (Bombay)Ltd.;\n \n 8) Order of Allahabad High Court in case of Sewa Ram Oil Mills V/s. \n\n Commissioner of Income Tax;\n\n 9) Order of Madras High Court dated 4 th April, 2003 in case of N. \n \n \n\n\n\n Nataraj V/s. Deputy Commissioner of Income Tax and\n\n 10) (2011) 333 ITR 38 - Commissioner of Income Tax V/s. Moni Kumar \n\n\n\n\n\n Subba. \n\n 17] Mr. Chhotaray's submissions were adopted by Mr. Tejveer Singh \n\n\n\n\n\n appearing for the revenue in Income Tax Appeal Nos. 2447/2011, \n\n 819/2012, 820/2012, 821/2012, 827/2012, 1182/2012, 753/2012, \n\n 754/2012 and 794/2012 and Mr. Suresh Kumar.\n\n 16/64\n ::: Downloaded on - 08/08/2014 23:49:47 :::\n *17* itxa2447.11\n\n\n 18] Mr. Abhay Ahuja appearing for the revenue in some of the appeals \n\n\n\n\n \n submitted that in Income Tax Appeal No.5489 of 2010, the questions of \n\n law arise out of the letting of two flats by the private limited companies to \n\n\n\n\n \n its Directors. The flats are in a building known as Samudra Gaurav \n\n Apartments, Worli, Mumbai. The facts of the case in the first matter viz. \n\n Income Tax Appeal No. 5489 of 2010 for assessment year 2005-06 are that \n\n the assessee by reason of its holding two class 'A' shares of M/s. Samudra \n\n\n\n\n \n Gaurav Apartment Pvt. Ltd. from the year 1980 was entitled to use and \n \n occupy two flats admeasuring 5142 sq. ft. each with four covered garages \n \n bearing No.E-1, E-2, E-6 and E-13 of which the assessee has been given \n\n possession. The assessee derives income from house property. The \n\n aforesaid property has not been included in the block of assets against \n \n \n\n\n\n which the aggregate rental income for each of the years is shown as \n\n Rs.60,000/- consisting of Rs.30,000/- from each of the directors. The \n\n\n\n\n\n Assessing Officer found that the property in question is Worli sea facing, \n\n and looking to the size of the flats, location of the property, car parking \n\n facility and use of the garden, the rent of Rs.2500/- per month for each \n\n\n\n\n\n flat to each of the directors is very low and he therefore called upon the \n\n assessee to explain why the ALV of the above flats should not be \n\n determined within the meaning of section 23(1) of the Income Tax Act, \n\n 1961. The Assessing Officer relying upon the records of the Sub-Registrar \n\n 17/64\n ::: Downloaded on - 08/08/2014 23:49:47 :::\n *18* itxa2447.11\n\n\n of Properties, circle Worli during the previous year under consideration \n\n\n\n\n \n showed the prevailing rate of Rs.8919/- per sq. ft. whereas the assessee \n\n recorded return from the property at the rate of 12% p.a. That would be \n\n\n\n\n \n about Rs.90/- per sq. ft. per month and upon further confirmation of the \n\n same on the basis of spot enquiry made by the inspector of the fair rental \n\n\n\n\n \n value of the area during the subject period which was ranging between \n\n Rs.80/- to Rs.100/- per sq. ft. per month, the Assessing Officer held that \n\n\n\n\n \n the assessee company has been charging only Re.1/- per sq. ft. per month \n \n from its Directors. He, therefore, adopted the lowest rent of Rs.80/- per \n \n sq. ft. for the relevant assessment year and calculated the rental value of \n\n two flats (5142 sq.ft.) at Rs.4,11,360/- p.m. and the annual rental at \n\n Rs.49,36,320/-.\n\n 19] Mr. Ahuja further submits that with respect to the assessee's claim \n\n that it could not charge rent higher than the deemed standard rent i.e. \n\n\n\n\n\n rent on 01.10.1987, the Assessing Officer held that the claim was not \n\n tenable as the standard rent had not been fixed by a Court under section \n\n 8(1)(c) of the Maharashtra Rent Control Act, 1999 upon an application for \n\n\n\n\n\n the same as could have been done by the assessee. Thus the assessee had \n\n deliberately foregone its right to fix standard rent higher than the \n\n artificially low rent being charged on 01.10.1987 and had not even \n\n\n 18/64\n ::: Downloaded on - 08/08/2014 23:49:47 :::\n *19* itxa2447.11\n\n\n availed off the benefit of annual 5% permissible increase under the \n\n\n\n\n \n Maharashtra Rent Control act, 1999 obviously because the Director being \n\n the tenant of the assessee company. The Assessing Officer held that the \n\n\n\n\n \n rent at which the property can be reasonably let out is definitely much \n\n more than the rent being charged from the director tenants. The \n\n\n\n\n \n Assessing Officer relied on the two judgments of Dewan Daulat Rai \n\n Kapoor V/s. New Delhi Municipal Committee and Anr. ]122 ITR 700 (SC)] \n\n\n\n\n \n and T. V. Sundaram Iyengar and Sons Ltd. V/s. CIT [241 ITR 420 (Mad)]. \n\n The assessee filed appeal against the order of the Assessing Officer mainly \n \n on the ground that the Assessing Officer erred in not considering the \n\n provisions that the Annual Value of the property situated in a area where \n\n Rent Control Law applies cannot exceed the standard rent as per \n \n \n\n\n\n Maharashtra Rent Control Act, 1999. The assessee submitted that as per \n\n Municipal Records the fair market value of the said property was \n\n\n\n\n\n Rs.24,288/- per year and the rent of Rs.30,000/- for each of the properties \n\n being higher should be taxed as rental income. The Commissioner of \n\n Income Tax (Appeals) upheld the Assessing Officer's order including the \n\n\n\n\n\n finding that the assessee had not taken any recourse to section 8(1) of the \n\n Maharashtra Rent Control Act, 1999 for fixation of standard rent. The \n\n Commissioner of Income Tax (Appeals) also gave a finding that the \n\n assessee's attempt to take protection of the Maharashtra Rent Control act, \n\n 19/64\n ::: Downloaded on - 08/08/2014 23:49:47 :::\n *20* itxa2447.11\n\n\n 1999 was inconsistent and highly contradictory. He found that on the \n\n\n\n\n \n assessee's own showing the rate by the Municipal Corporation of Greater \n\n Bombay was Rs.24,288/- and the rent received by the assessee was \n\n\n\n\n \n Rs.60,000/-. Accordingly he gave a finding that the assessee itself had \n\n given a go-by to the provisions of section 10 of the Maharashtra Rent \n\n\n\n\n \n Control Act, 1999 and concluded that the assessee had taken the property \n\n outside the purview of the Maharashtra Rent Control Act, 1999 and the \n\n\n\n\n \n assessee could not take cover under it for income tax purposes. The \n \n Commissioner of Income Tax (Appeals) also relied upon the cases of \n \n Dewan Daulat Rai Kapoor V/s. New Delhi Municipal Committee and Anr. \n\n (supra) and T. V. Sundaram Iyengar & Sons (supra), and held that the \n\n Assessing Officer was right in fixing the rent of property at Rs.4,11,360/- \n\n per month. In appeal before the Tribunal, on the finding of the lower \n\n authority that the Maharashtra Rent Control Act, 1999 was violated on the \n\n\n\n\n\n basis that the assessee received rent over and above the standard rent, the \n\n assessee submitted that the property was tenanted for a long time and the \n\n provisions of the Maharashtra Rent Control Act, 1999 protect the tenant \n\n\n\n\n\n and also postulates that if rent was fixed prior to the implementation of \n\n the Maharashtra Rent Control Act, 1999, the rent fixed will become \n\n standard rent under the Act and accordingly the assessee is covered under \n\n the provisions of the Maharashtra Rent Control Act, 1999. The Income \n\n 20/64\n ::: Downloaded on - 08/08/2014 23:49:47 :::\n *21* itxa2447.11\n\n\n Tax Appellate Tribunal held that (i) the assessee has given property on \n\n\n\n\n \n rent to Mr. T. B. Ruia long back and on his death Mrs. Asha Ruia became \n\n the tenant and there was a revised agreement dated 14.08.2008. In all \n\n\n\n\n \n the years the Assessing Officer has been accepting rent received by the \n\n assessee company and the assessment order for one of the years viz. \n\n Assessment year 2004-05 is under section 143(3) of the Income Tax Act, \n\n 1961 (ii) it was already established that while invoking provisions of \n\n\n\n\n \n section 23 of the Income Tax Act, 1961, the Assessing Officer has to \n \n consider municipal rateable value, or standard rent or actual rent \n \n received, whichever is higher and set out the various paragraphs of the \n\n decision of the Tribunal in the case of ITO v/s. Makrupa Chemicals (P)Ltd. \n\n [108 ITD 95 (Bom)] stating that the methodology for arriving at the \n \n \n\n\n\n annual value of property under the provisions of section 23(1) of the \n\n Income Tax Act, 1961 was given therein; (iii) that the property is a \n\n\n\n\n\n tenanted property and the tenant is a protected tenant as per the orders of \n\n the Court and since the rent received by the assessee is more than the \n\n standard rent/municipal rateable value, the Assessing Officer has no \n\n\n\n\n\n option than to accept the rent received by the assessee. He accordingly \n\n directed the Assessing Officer to accept the rent offered by the assessee \n\n and determine the income from the house property accordingly. Similar \n\n facts exist for assessment year 2005-06 in the case of Commissioner of \n\n 21/64\n ::: Downloaded on - 08/08/2014 23:49:47 :::\n *22* itxa2447.11\n\n\n Income Tax-Central III V/s. Ramrikhdas Balkison & Sons Pvt. Ltd. (ITXA \n\n\n\n\n \n 5356 of 2010) as well as for assessment year 2006-07 in the case of \n\n Commissioner of Income Tax-Central-III V/s. Ramgopal Ganpatrai & Sons \n\n\n\n\n \n Pvt. Ltd. (ITXA 732ofo 2011) and Commissioner of Income Tax-Central-III \n\n V/s. Ramrikhdas Balkison & Sons Pvt. Ltd. (ITXA 673 of 2011).\n\n 20] Mr. Ahuja, therefore, submits that findings by the Tribunal that the \n\n\n\n\n \n revised agreement is dated 14.08.2000 and after the enactment of the \n \n Maharashtra Rent Control Act, 1999 are vitiated in law. No finding was \n\n rendered by the Tribunal on the submission of the assessee that if rent was \n \n fixed prior to the implementation of the Maharashtra Rent Control act, \n\n 1999, the rent fixed will become standard rent under the Act. Even \n \n\n\n otherwise there is neither any evidence nor finding that the standard rent \n \n\n\n\n was fixed under section 7(14)(a) or section 8(1) nor the case falls under \n\n section 6 of the Maharashtra Rent Control Act, 1999. There is no finding \n\n\n\n\n\n by the Tribunal that standard rent was fixed in accordance with section \n\n 8(1) of the Maharashtra Rent Control Act, 1999. In fact, there is a clear \n\n statement by the assessee in the statement of facts in the appeal before \n\n\n\n\n\n Commissioner of Income Tax (Appeals) that as per Municipal Records the \n\n fair market value (and not standard rent) of the said property was \n\n Rs.24,288/- per year. The Tribunal appears to have erroneously \n\n\n 22/64\n ::: Downloaded on - 08/08/2014 23:49:47 :::\n *23* itxa2447.11\n\n\n considered this figure as the standard rent. Therefore, finding by the \n\n\n\n\n \n Tribunal that rent received is more than the standard rent and the \n\n Assessing Officer has no option but to accept the rent received as the \n\n\n\n\n \n basis, is also erroneous. Even assuming without admitting that the said \n\n rent received from each director per year is Rs.30,000/- that would be in \n\n\n\n\n \n violation of section 10 of the Maharashtra Rent Control Act, 1999 and \n\n take the assessee's case outside the ambit of the Rent Control legislation, \n\n\n\n\n \n which has been the case of the revenue. Also finding by the Tribunal that \n \n since rent received by the assessee is more than the municipal rateable \n \n value, the Assessing Officer has no option than to accept the rent received \n\n as per the decision in ITO V/s. Makrupa Chemicals (P)Ltd. (supra) is \n\n erroneous as it presupposes that the assessee is outside the purview of the \n \n \n\n\n\n Rent Control Act whereas the Tribunal itself has given a finding that the \n\n property is a tenanted property and the tenant is a protected tenant as per \n\n\n\n\n\n the orders of the Court. On the issue of earlier years, it is submitted that \n\n only for assessment year 2004-05 the assessee's stand appears to have \n\n been accepted under section 143(3) but for no other year. Every year is a \n\n\n\n\n\n separate unit of assessment. In any event the Tribunal has decided the \n\n matter on merits and not on the basis of earlier years. It is submitted that \n\n if this Court holds that the property is outside the purview/ambit of the \n\n Maharashtra Rent Control Act, 1999, the appellant revenue craves leave of \n\n 23/64\n ::: Downloaded on - 08/08/2014 23:49:47 :::\n *24* itxa2447.11\n\n\n this Court to adopt the arguments and submissions made by Shri P.C. \n\n\n\n\n \n Chhotaray in the case of Commissioner of Income Tax-12 V/s. Tip Top \n\n Typography (ITXA 1213 of 2011), and submit that Court be pleased to \n\n\n\n\n \n allow the appeals upholding the orders passed by the Assessing Officer \n\n and Commissioner of Income Tax (Appeals) determining ALV of the \n\n\n\n\n \n property. Alternatively, if this Court holds that the case of the assessees \n\n herein falls within the purview of the Maharashtra Rent Control Act, 1999, \n\n\n\n\n \n then, it is submitted on behalf of the appellant revenue that as no \n \n standard rent has been fixed by a Rent Controller or a Court either as per \n \n section 7(14)(a) or in accordance with section 8(1) of the Maharashtra \n\n Rent Control Act, 1999, nor is there any finding by the Tribunal that any \n\n standard rent was fixed prior to the Maharashtra Rent Control Act, 1999, \n \n \n\n\n\n this Court be pleased to apply the principles laid down by the Hon'ble \n\n Supreme Court in the case of Dewan Daulat Rai Kapoor v/s. New Delhi \n\n\n\n\n\n Municipal Committee and Anr. (supra). In the event, this Court finds that \n\n the assessee's case/property falls within the ambit of the Maharashtra Rent \n\n Control Act, 1999 it is submitted that this Court be pleased to consider \n\n\n\n\n\n remanding the matters back to the Assessing Officer to arrive at the figure \n\n of standard rent by applying the principles laid down in Maharashtra Rent \n\n Control Act, 1999 for determination of standard rent and determine the \n\n annual value of the property on the basis of such figure of standard rent. \n\n 24/64\n ::: Downloaded on - 08/08/2014 23:49:47 :::\n *25* itxa2447.11\n\n\n 21] Mr. Ahuja has relied upon the following judgments in support of the \n\n\n\n\n \n above contentions:-\n\n 1) (1980) 122 ITR 700 - Dewan Daulat Rai Kapoor V/s. New Delhi \n\n\n\n\n \n Municipal Committee and Another;\n\n 2) (2000) 241 ITR 420 - T. V. Sundaram Iyengar and Sons Ltd. V/s. \n\n\n\n\n \n Commissioner of Income Tax;\n\n 3) (2008) 298 ITR 413 (Jharkhand) - Commissioner of Income Tax \n\n\n\n\n \n V/s. Shrimati Bhagwani Devi.\n \n 22] On the other hand, Mr. Murlidhar and Mr. Jasani appearing for the \n \n assessee in some of the appeals so also Mr. Prakash Shah would submit \n\n that the expression \"sum for which the property might reasonably be \n \n\n\n expected to let from year to year\" is considered and explained in Circular \n \n\n\n\n No.204 dated 24th July, 1976. That Circular explains the provisions of the \n\n Taxation Laws (Amendment) Act, 1975. Prior to the insertion of section \n\n\n\n\n\n 23(1)(b) by this Amendment Act, 1975 the annual value of house \n\n property could only be determined on the basis of section 23(1)(a) and \n\n not on the basis of actual rent received for the property. The Central \n\n\n\n\n\n Board of Direct Taxes has explained the rationale for the amendment and \n\n hence reliance is placed by Shri Murlidhar on the wording of the Circular \n\n 204 dated 24th July, 1976. Mr. Murlidhar submits that the Central Board \n\n\n 25/64\n ::: Downloaded on - 08/08/2014 23:49:47 :::\n *26* itxa2447.11\n\n\n of Direct Taxes recorded the annual value under section 23(1)(a) as being \n\n\n\n\n \n equal to the municipal valuation of the property. He submits that this \n\n Circular holds the field and has not been withdrawn. It will bind the \n\n\n\n\n \n revenue under section 119 of Income Tax Act. Then, Mr. Murlidhar has \n\n placed reliance upon a judgment of the Calcutta High Court in the case of \n\n\n\n\n \n Commissioner of Income Tax V/s. Smt. Prabhavati reported in (1983) 141 \n\n ITR 149. Mr. Murlidhar relied upon the observations at page 424 of the \n\n\n\n\n \n report and urged that the wording of section 143 of the Bombay \n \n Municipal Corporation Act, 1888 contains identical expression/words \n \n namely that the rateable value has to be determined on the basis of the \n\n rent which such rent or building might reasonably be expected to be let \n\n from year to year. Similar principle is laid down in the case of Motichand \n \n \n\n\n\n Hirachand reported in AIR 1968 Supreme Court 441.\n\n 23] Mr. Murlidhar, then, relied upon the decision of this Court in the \n\n\n\n\n\n case of M.V. Sonavala V/s. Commissioner of Income Tax reported in \n\n (1989) 177 ITR 246. Mr. Murlidhar also relied upon the decision of this \n\n Court in the case of Smt. Smitaben N. Ambani V/s. Commissioner of \n\n\n\n\n\n Wealth Tax reported in (2010) 323 ITR 104. He has also relied upon the \n\n decision of the Calcutta High Court in the case of Commissioner of Income \n\n Tax V/s. Satya Co. Ltd. and the decision of the Full Bench of Delhi High \n\n\n 26/64\n ::: Downloaded on - 08/08/2014 23:49:47 :::\n *27* itxa2447.11\n\n\n Court in the case of Commissioner of Income Tax V/s. Mani Kumar Subba \n\n\n\n\n \n (2011) Vol.333 ITR 838. Mr. Murlidhar, therefore, submits that in all \n\n these decisions it has held that the rateable value fixed by the Municipal \n\n\n\n\n \n Corporation cannot be ignored or brushed aside. If the correctness of the \n\n municipal valuation was never disputed by the department, then, the \n\n\n\n\n \n same should be adopted as the annual value of the premises. In all these \n\n decisions, therefore, the principle laid down is that the department will \n\n\n\n\n \n have to bring in material to show as to how the municipal rateable value \n \n does not represent the correct rent. \n\n 24] In the facts of the case namely Tip Top Typography, Mr. Murlidhar \n\n submits that the respondent-assessee had received a refundable security \n \n\n\n deposit of Rs.5.25 crores and had spent a sum of Rs.65 lakhs on \n \n\n\n\n renovation of the premises. If the municipal rateable value of the \n\n premises is to be taken into consideration, then, the Tribunal's order \n\n\n\n\n\n cannot be said to be perverse or vitiated by an error of law apparent on \n\n the face of the record. Mr. Murlidhar submits that Municipal Corporation \n\n is a responsible body entrusted in imposing as much legitimate tax as \n\n\n\n\n\n possible, and therefore, its valuation constitutes a safe guide for \n\n determining the annual value of the property. He, therefore, submits that \n\n the appeal of the revenue be dismissed.\n\n 27/64\n ::: Downloaded on - 08/08/2014 23:49:47 :::\n *28* itxa2447.11\n\n\n 25] Ms.Vissanjee, learned counsel, appearing in the other appeals \n\n\n\n\n \n submits that the language of section 154 of the Mumbai Municipal \n\n Corporation Act, 1888 is in pari materia with section 23(1)(a). The test \n\n\n\n\n \n for determining the rateable value under the Mumbai Municipal \n\n Corporation Act and the annual letting value under section 23(1)(a) of the \n\n\n\n\n \n Income Tax Act is identical. Both statutes contemplate fixation of \n\n rateable/annual value at the reasonable amount of rent which can be \n\n\n\n\n \n expected by the owner from a hypothetical tenant. The basis of charge of \n \n income from house property is its 'annual value'. The annual value is a \n \n deemed or notional figure based on which the owner is subjected to tax \n\n irrespective of whether or not the property has been let. The only \n\n exceptions are (i) a property which is occupied by the owner for the \n \n \n\n\n\n purpose of his business (ii) a property occupied by the owner for the \n\n purpose of his own residence or cannot actually be occupied by the owner \n\n\n\n\n\n by reason of the fact that owing to his employment, business or \n\n profession carried on at any other place, he has to reside at that place in a \n\n building not belonging to him [section 23(2)(a) and (b)]. The exception \n\n\n\n\n\n in (ii) above is not available if the house or any part is actually let during \n\n the whole or part of the previous year or any other benefit is derived by \n\n the owner. [section 23(3)]. And further exception in (ii) above is limited \n\n to one house which the assessee at his option may specify [section 23(4)]. \n\n 28/64\n ::: Downloaded on - 08/08/2014 23:49:47 :::\n *29* itxa2447.11\n\n\n It is because an assessee is assessable to income from house property on a \n\n\n\n\n \n notional figure even if the property is not let out that section 23(1)(a) \n\n uses the expression 'reasonably be expected to let'. It is for this reason \n\n\n\n\n \n that the municipal rateable value has been correctly adopted for the \n\n purpose of determining the annual value under section 23(1)(a). The \n\n\n\n\n \n proposition by the Revenue that the Assessing Officer can adopt the 'fair \n\n rent' based on information obtained from local enquiries, brokers and the \n\n\n\n\n \n internet is totally unwarranted. In cases where the property is let out, \n \n ordinarily the license fee agreed between a willing licensor and a willing \n \n licensee uninfluenced by any extraneous circumstances would afford \n\n reliable evidence of what the landlord might reasonably expect to get from \n\n a hypothetical tenant. If such rent is higher than the municipal rateable \n \n \n\n\n\n value, the provisions of sub-clause (b) of section 23(1) would apply. The \n\n action of the Assessing Officer in determining the annual value by (i) \n\n\n\n\n\n imputing notional interest on the security deposit to the actual rent \n\n received while separately assessing the income earned on the security \n\n deposit (equivalent to 12 months advance license fee) offered to tax under \n\n\n\n\n\n the head 'other sources' [Reclamation Real Estate Co. India Pvt. Ltd.] (ii) \n\n adopting the rent fetched by another premises in the same building as the \n\n annual letting value in the case of the assessee [Reclamation Properties \n\n India Pvt. Ltd. & Reclamation Realty India Pvt. Ltd.] in place of the rent \n\n 29/64\n ::: Downloaded on - 08/08/2014 23:49:47 :::\n *30* itxa2447.11\n\n\n receivable has been rightly reversed by the Tribunal. So also the action of \n\n\n\n\n \n the Assessing Officer in reopening past assessments to reassess the annual \n\n letting value based on the rent fetched by some other premises has been \n\n\n\n\n \n rightly rejected by the Tribunal. Ms. Vissanjee, therefore, submits that the \n\n appeal be dismissed.\n\n 26] Mr. Prakash Shah appearing in Income Tax Appeal No.1468 of 2011 \n\n\n\n\n \n submits that this appeal challenges the order passed by the Income Tax \n \n Appellate Tribunal in Income Tax Appeal No.2587/MUM/2009 dated 16 th \n\n July, 2010 in respect of the assessment year 2005-06. The respondent is \n \n the owner of a commercial property at Kandivali(W), Mumbai. The \n\n respondent has let out the first floor admeasuring 4625 sq.ft to 9 entities, \n \n\n\n which are group entities in 1992. These entities have in turn sub-let the \n \n\n\n\n premises to Saraswat Co-operative Bank Ltd. The Assessing Officer \n\n accepted the transaction between the tenants and Saraswat Co-operative \n\n\n\n\n\n Bank Ltd. as genuine and the rent payable by the tenants to the \n\n respondents as Annual Letting Value within the meaning of section 23 of \n\n the Income Tax Act, 1961. It is urged by Shri Shah that though the \n\n\n\n\n\n tenants filed their respective returns of income and offered the rent \n\n received by them from Saraswat Bank for taxation what transpired \n\n thereafter is that the annual rateable value determined by the \n\n\n 30/64\n ::: Downloaded on - 08/08/2014 23:49:47 :::\n *31* itxa2447.11\n\n\n Brihanmumbai Mahanagarpalika was set aside by the Small Causes Court \n\n\n\n\n \n at Mumbai. The Small Causes Court, Mumbai had held that the municipal \n\n valuation cannot be based on the amount received by the tenants (group \n\n\n\n\n \n entities) from sub-tenant (M/s. Saraswat Bank). The rateable value has to \n\n be determined on the rent paid by the group entities (tenants) to the \n\n\n\n\n \n owner namely the respondent-assessee. It is in these circumstances that in \n\n the return of income, the respondent-assessee stated accordingly. \n\n However, the Assessing Officer determined the Annual Letting Value on \n \n the amount or quantum which was received by the tenant from the sub-\n\n tenant. The Assessing Officer added the difference between the rent \n\n received by the respondent-assessee from the tenants and the amount \n\n received by the tenants from the sub-tenant. For the first time in the \n \n \n\n\n\n assessment year 2005-06, the Assessing Officer held that the transaction \n\n between the respondents and the tenants is camouflage and colourable \n\n\n\n\n\n device to evade the tax. \n\n 27] An appeal was preferred before the Commissioner of Income Tax \n\n (Appeals) against the addition made by the Assessing Officer and the said \n\n\n\n\n\n appeal was partly allowed on 4 th February, 2009. By the impugned order, \n\n the Tribunal set aside the Annual Letting Value determined by the \n\n Assessing Officer and sustained by the Commissioner of Income Tax \n\n\n 31/64\n ::: Downloaded on - 08/08/2014 23:49:47 :::\n *32* itxa2447.11\n\n\n (Appeals). The Tribunal held that the transaction between the \n\n\n\n\n \n respondents and the tenants is not a colourable device. It is submitted, \n\n therefore, the tax effect, as stated by the revenue in the memo of appeal is \n\n\n\n\n \n Rs.6.84 lakhs which is much below Rs.10 lakhs. Therefore, no appeal can \n\n be filed to the Tribunal. Further and without prejudice, there is a pure \n\n\n\n\n \n finding of fact and which cannot be said to be perverse. All the tenants \n\n except one have offered the amount received from the sub-tenant to tax. \n\n The transaction between the respondent-assessee and the group entities is \n \n held to be genuine. It is purely a commercial transaction and cannot be \n \n said to be entered into for avoiding taxes. It may be that, there is an \n\n interest free deposit which has been made by the tenants with the \n\n respondents. However, no interest free security deposit was received by \n \n \n\n\n\n the Saraswat Bank from the respondent-assessee. Hence the transactions \n\n entered between the respondent and the tenants were at arm's length and \n\n\n\n\n\n the Annual Letting Value cannot be the rent received by the tenants from \n\n the sub-tenant. Further, it is submitted that where a property is let out \n\n and subsequently tenant's sub-let the same property for higher rental \n\n\n\n\n\n income, the higher rental income earned by the tenant from the same \n\n property cannot be taken as Annual Letting Value in the hands of owner \n\n for computing the income from house property. It is submitted that the \n\n Annual Letting Value in the present case is the actual rent received from \n\n 32/64\n ::: Downloaded on - 08/08/2014 23:49:47 :::\n *33* itxa2447.11\n\n\n the tenants. It is submitted that this Court in case of Akshay Textiles \n\n\n\n\n \n Trading and Agencies Pvt. Ltd. (supra) has held that Annual Letting Value \n\n is the rent received or receivable by the assessee-owner from the tenants \n\n\n\n\n \n irrespective whether the tenants have received higher rent by subletting. \n\n The premises are within Greater Mumbai and are covered by the rent \n\n\n\n\n \n control legislation. The Annual Letting Value for the purpose of municipal \n\n tax is held to be the rent paid by the tenants to the respondent determined \n\n\n\n\n \n by the competent court. The Assessing Officer was bound to take the \n \n rateable value fixed by the competent Court for the purpose of municipal \n \n tax as the Annual Letting Value. It is submitted that it is a well settled \n\n position that the rent received by the respondent or standard rent of \n\n property whichever is higher is the Annual Letting Value for the purpose of \n \n \n\n\n\n section 23(1) of the Act. It is also submitted that this issue had come up \n\n in earlier assessments of the respondent and the rent received by the \n\n\n\n\n\n respondent was accepted as Annual Letting Value by the department since \n\n assessment years 1993-94 (first year), 1994-95 and 1996-97. All these \n\n assessments were completed under section 143(3) and after elaborate \n\n\n\n\n\n discussion the rent received by the respondent was accepted as Annual \n\n Letting Value. There are no changes in the facts and circumstance of the \n\n case to deviate from the Annual Letting Value determined by the Assessing \n\n Officer in the previous assessment years. In general, doctrine of 'Res \n\n 33/64\n ::: Downloaded on - 08/08/2014 23:49:47 :::\n *34* itxa2447.11\n\n\n Judicata' does not apply to Income Tax Proceedings. However, it appears \n\n\n\n\n \n that conclusion reached based on identical facts in the previous years need \n\n not be given a go by in the absence of any compelling circumstance. In \n\n\n\n\n \n this respect, reliance is placed on following decisions:\n\n 1) Radhasoami Satsang 193 ITR 321 (SC);\n\n\n\n\n \n 2) Berger Paints India Ltd. V/s. CIT 266 ITR 99 (SC);\n\n 3) Baijnath Brijmohan & Sons Ltd. 161 ITR 234 (Bom);\n\n\n\n\n \n 4) H A Shah 30 ITR 618 (Bom); and\n \n 5) CIT V/s. Paul Brothers 216 ITR 548 (Bom).\n \n 28] Mr. Shah submits that in view of the above submissions, the \n\n impugned order passed by the Tribunal needs to be upheld and appeal \n \n \n\n\n\n filed by the revenue is liable to be dismissed.\n\n 29] For properly appreciating the rival contentions it would be \n\n\n\n\n\n necessary to make a reference to section 22 and 23 of the Income Tax Act, \n\n 1961. Section 22 falls in Chapter IV of the Income Tax Act which is \n\n entitled as computation of total income. Section 14 is the first section \n\n\n\n\n\n appearing in this Chapter and it sets out the heads of income. By section \n\n 14(A) the expenditure incurred in relation to the income which has to be \n\n excluded from the total income is set out. Then, there is a sub-\n\n 34/64\n ::: Downloaded on - 08/08/2014 23:49:47 :::\n *35* itxa2447.11\n\n\n title/heading \"A. Salaries\". Section 15 to 17 deal with salaries, deductions \n\n\n\n\n \n from salaries and salary, perquisites in lieu of salary. \n\n 30] Then, comes the heading \"C. Income from house property\". Section \n\n 22 falling thereunder states that the annual value of property consisting \n\n\n\n\n \n of any building or lands appurtenant thereto, of which the assessee is the \n\n owner, excluding such portions of such property as he may occupy for the \n\n\n\n\n \n purpose of any business or profession carried on by him and profits shall \n \n be chargeable to income tax under the head income from house property.\n\n 31] Section 23 states that for the purpose of section 22, the annual \n\n value of property shall be deemed to be under clause (a), the sum for \n\n which the property might reasonably be expected to be let from year to \n \n\n\n year or under clause (b) when the property or any part of the properties \n \n\n\n\n are let and the actual rent received or receivable by the owner in respect \n\n thereof, is in excess of the sum which is referred to in clause (a). Then, \n\n\n\n\n\n the amount so received or receivable would be deemed to be the annual \n\n value for the purposes of section 22. There is a third category where the \n\n\n\n\n\n property or any part of it has been let but was vacant during the whole or \n\n any part of the previous year and because of such vacancy the actual rent \n\n received or receivable by the owner in respect thereof, is less than the sum \n\n referred to in clause (a) the amount so received or receivable will be the \n\n 35/64\n ::: Downloaded on - 08/08/2014 23:49:47 :::\n *36* itxa2447.11\n\n\n annual value. Thereafter there is a proviso and which refers to the \n\n\n\n\n \n deduction towards tax levied by any local authority in respect of the \n\n property and these have to be deducted in determining the annual value \n\n\n\n\n \n of the property of that previous year in which such taxes are actually paid \n\n by the assessees. Then, there is an explanation and which states that for \n\n\n\n\n \n the purpose of clause (b) or (c) of sub-section (1) the amount of actual \n\n rent received or receivable by the owner shall not include, subject to the \n\n\n\n\n \n rules, the amount of rent which the owner cannot realize. By sub-sections \n \n (2) and (3) it has been clarified that the annual value in view of the \n \n circumstances set out in this sub-section will be taken to be nil but sub-\n\n section (2) of section 23 if will not apply in the circumstances set out by \n\n sub-section(3). If the owner has more than one house then, how the \n \n \n\n\n\n annual value has to be determined, is set out in sub-section (4) of section \n\n 23.\n\n\n\n\n\n 32] Thus, the scheme is that income from house property shall be taken \n\n as a component of the income chargeable to tax. How that income from \n\n house property has to be 'computed' is then provided by the legislature. \n\n That is the annual value of the property. Thus, the legislature deems the \n\n annual value firstly to be the sum for which the property might reasonably \n\n be expected to be let from year to year. In the event, the property which \n\n\n 36/64\n ::: Downloaded on - 08/08/2014 23:49:47 :::\n *37* itxa2447.11\n\n\n consists of any buildings or lands appurtenant thereto, the actual rent \n\n\n\n\n \n received or receivable by the owner in respect thereof if in excess of the \n\n sum referred to in clause (a), it is that amount so received or receivable \n\n\n\n\n \n which shall be deemed to be the annual value for the purposes of \n\n computing the tax under the head income from house property. \n\n 33] In the present appeals, the arguments proceed on the footing that in \n\n\n\n\n \n computing the annual value of house property under section 23 (1)(a) is \n \n the Assessing Officer required to adopt the municipal rateable value of the \n\n property. However, in all the appeals before us, the factual position is that \n \n the property or part thereof is let or given on leave and license basis. The \n\n Assessing Officer has disbelieved the assessees in computation or \n \n\n\n calculation of income from house property. In the opinion of the Assessing \n \n\n\n\n Officer and the revenue, the amount received towards rent or \n\n compensation either coupled with an interest free security deposit or \n\n\n\n\n\n otherwise as reflected and shown in the accounts of the assessees is not \n\n the market rent or market value. Therefore, it would be open for the \n\n Assessing Officer to doubt or question the same. Thereafter, the Assessing \n\n\n\n\n\n Officer is free to determine the amount which the property may fetch. In \n\n other words, the sum for which the property might reasonably be expected \n\n to be let from year to year can be determined by him.\n\n 37/64\n ::: Downloaded on - 08/08/2014 23:49:47 :::\n *38* itxa2447.11\n\n\n 34] The Assessing Officer, therefore, in the Appeal No.1213 of 2011 \n\n\n\n\n \n referred to the rental income shown under the head \"income from house \n\n property\". The assessee disclosed that after claiming deduction from \n\n\n\n\n \n municipal taxes, repairs, the net income from house property is \n\n Rs.2,49,882/- in the Profit and Loss Account for the year consideration \n\n\n\n\n \n though the assessee credited rental income of Rs.3,60,000/-.\n\n 35] The Assessing Officer called upon the assessee to furnish the details \n \n of the property let out. Although the Assessing Officer refers to the \n\n transaction as letting what the assessee produced was a copy of the leave \n \n and license agreement. The leave and license agreement is dated 1 st April, \n\n 2004. On perusal of the above, Assessing Officer noted the facts which we \n \n\n\n have referred in some details in the opening paragraphs of this judgment. \n\n We may proceed on the premise that the Assessing Officer was empowered \n\n and equally justified in calling upon the assessee to substantiate the \n\n\n\n\n\n quantum received but what we find is that the assessee furnished certain \n\n details. Those details are referred to in para-3 of the assessment order. \n\n Thereafter, the Assessing Officer issued a notice under section 142(1) of \n\n\n\n\n\n the Income Tax Act and the assessee was called upon to furnish an \n\n explanation as to why the income from house property should not be \n\n computed by estimating the annual value as per provisions of section \n\n\n 38/64\n ::: Downloaded on - 08/08/2014 23:49:47 :::\n *39* itxa2447.11\n\n\n 23(1)(a) of the Income Tax Act. The assessees representative addressed \n\n\n\n\n \n letters and urged that no estimation is required to be made as the \n\n quantum reflects the prevailing rate or value in the market. From the \n\n\n\n\n \n record it appears that the Assessing Officer in the letter dated 12 th \n\n December, 2007 set out certain instances and which he termed as \n\n\n\n\n \n comparable. He submits that these instances are of leave and license \n\n agreement. Therefore, the rate per sq.ft. and based on which the license \n\n\n\n\n \n fees are determined would demonstrate as to how the amount decided or \n \n determined as license fees by the assessee with the related party M/s. \n\n Reliance is lesser than the prevailing rate.\n\n 36] Thereafter, the Assessing Officer dealt with the stand of the assessee \n \n\n\n and which was supported by the assessee by some decisions of Courts of \n \n\n\n\n law. This is evident from paras-3.8 onwards. The Assessing Officer held \n\n that the assessee has let out the premises to M/s. Reliance Industries Ltd. \n\n for a period of 33 months as per the leave and license agreement entered \n\n into between the assessee and M/s. Reliance Industries Ltd. dated 1 st April, \n\n 2004. The Assessing Officer held that the relationship between the \n\n\n\n\n\n assessee firm and the tenants is established as both belong to the Reliance \n\n Group. Then, he held that the annual value of the premises let out by the \n\n assessee can be estimated as per the provisions of section 23(1)(a) and \n\n\n 39/64\n ::: Downloaded on - 08/08/2014 23:49:47 :::\n *40* itxa2447.11\n\n\n the estimate can be of an amount higher than the standard or 'fair rent' \n\n\n\n\n \n determined as per the Rent Control Act/municipal rateable value. \n\n 37] At the same time, the Assessing Officer refers to certain instances, in \n\n para 3.11.1 of his order, of properties in respect of which annual value had \n\n\n\n\n \n been estimated by the Assessing Officer under section 23(1)(a) of the \n\n Income Tax Act, 1961 on these properties which had not been let out. \n\n Therefore, only notional rent was estimated. \n\n 38]\n \n In the case before us what the Assessing Officer and the other \n \n authorities so also the revenue feels that despite the assessees producing \n\n before them the relevant documents evidencing the letting out of \n\n properties, the income derived therefrom is not in tune or par with the \n \n\n\n prevailing market rate. Therefore, an estimation can be done in terms of \n \n\n\n\n section 23(1)(a) of the Income Tax Act. During such estimation the \n\n Assessing Officer is not bound by either standard rent or the ratable value \n\n\n\n\n\n for the purposes of municipal taxation determined by the municipal \n\n authorities.\n\n 39] It is this controversy which is being dealt with by us. In the case of \n\n Commissioner of Income Tax V/s. J. K. Investors (Bombay) Ltd. (2001) \n\n 248 ITR 723 a Division Bench of this Court was considering a question of \n\n\n 40/64\n ::: Downloaded on - 08/08/2014 23:49:47 :::\n *41* itxa2447.11\n\n\n law, whether notional interest on interest free deposit received by the \n\n\n\n\n \n assessee against letting of property could be taken into account in the \n\n cases falling under section 23(1)(b) of Income Tax Act, 1961. In other \n\n\n\n\n \n words, whether such interest would form part of annual rent received or \n\n receivable under this provision.\n\n 40] The facts that are noted by the Division Bench are that the assessee \n\n\n\n\n \n purchased premises in a building and which premises were let out to M/s. \n\n Raymond Woollen Mills Ltd. from 1 st October, 1991. The assessee \n\n purchased the premises in the previous year relevant to the assessment \n \n year 1992-93. The Lessee agreed to deposit the amount as a security \n\n deposit for the due performance of the lease. The assessee was not to pay \n \n\n\n any interest on the security deposit to the lessee. The premises were \n \n\n\n\n covered by the provisions of the Bombay Rent Act, 1947. The Assessing \n\n Officer held that for the purposes of section 23(1)(b) and though the \n\n\n\n\n\n annual rent received or receivable was higher than the expected rent, still \n\n the notional interest for the interest free deposit would be the sum total of \n\n the rent actually received plus this notional interest. That notional \n\n\n\n\n\n interest was calculated by the Assessing Officer at a rate at which the \n\n assessee borrowed funds. This order of the Assessing Officer was \n\n confirmed in appeal by the Commissioner of Income Tax (Appeals). Being \n\n\n 41/64\n ::: Downloaded on - 08/08/2014 23:49:47 :::\n *42* itxa2447.11\n\n\n aggrieved by this order, the assessee carried the matter in the Tribunal. \n\n The Tribunal on facts found that the actual rent received by the assessee, \n\n even without taking into account the notional interest, was more than the \n\n\n\n\n \n annual value determinable under section 23(1)(a) of the Act and it is for \n\n this reason that the Department invoked only section 23(1)(b) of the Act. \n\n The Tribunal concluded that section 23(1)(b) only applied to cases of \n\n actual rent being received by the assessee and that the said section does \n\n\n\n\n \n not apply to cases falling under section 23(1)(a) which permits adoption \n \n of notional value as annual letting value of the property. Hence, the \n \n Tribunal allowed the appeal. \n\n 41] This Court, on facts further noted that the department has invoked \n \n\n\n section 23(1)(b) of the Act and not section 23(1)(a). Further the Tribunal \n \n\n\n\n held that an annual rent received by the assessee even without taking \n\n account the notional interest was more than Annual Letting Value of the \n\n\n\n\n\n property determinable under section 23(1)(a) of the Income Tax Act. The \n\n Division Bench of this Court referred to the judgment of the Calcutta High \n\n Court in the case of Commissioner of Income Tax V/s. Satya Co.Ltd. \n\n (1994) 75 Taxman 193 and a judgment of the Madras High Court in \n\n the case of Commissioner of Income Tax V/s. Ratanchand Chordia \n\n (1997) 228 ITR 626. The Division Bench further held as under:-\n\n 42/64\n ::: Downloaded on - 08/08/2014 23:49:47 :::\n *43* itxa2447.11\n\n\n \"In this matter, we are required to consider the scheme of taxation \n of income from house property. Section 22 says that the measure \n\n\n\n\n \n of income from house property is its annual value. The annual \n\n\n\n\n \n value is to be decided in accordance with section 23. In this \n matter, we are required to consider the scheme of taxation of \n income from house property. Section 22 says that the measure of \n\n\n\n\n \n income from house property is its annual value. The annual value \n is to be decided in accordance with section 23. Sub-section (1) of \n section 23, by virtue of the amendment with effect from the \n\n\n\n\n \n assessment year 1976-77, has two limbs, namely, clauses (a) and \n \n (b). Clause (a) states that the annual value is the sum for which \n the property might reasonably be expected to be let from year to \n \n year. Clause (b) covers a case where the property is let and the \n actual rent is in excess of the sum for which the property might \n reasonably be expected to be let from year to year. In other words, \n \n\n\n insertion of clause (b) by the Taxation Laws (Amendment) Act, \n \n\n\n\n 1975 covers a case where the rent for a year actually received by \n the owner is in excess of the lawful rent which is known as the fair \n rent or standard rent under the rent control legislation. The \n\n\n\n\n\n provision of section 23(1)(a) apply both to owner occupied \n property as also to property which is let out and the measure of \n valuation to decide the annual value is the standard rent or the \n\n\n\n\n\n fair rent. Section 23(1 )(b) only applies to cases where the actual \n rent received is more than the reasonable rent under section 23(1)\n (a) and it is for this reason that section 23(1)(b) contemplates \n that in such cases the annual value should be decided on the basis \n of the actual rent received. As stated hereinabove, in this case, the \n\n\n 43/64\n ::: Downloaded on - 08/08/2014 23:49:47 :::\n *44* itxa2447.11\n\n\n department has invoked section 23(1)(b) which, as stated \n hereinabove, proceeds on the basis that the actual rent received by \n\n\n\n\n \n the assessee is more than the reasonable rent under section 23(1)\n (a). The Tribunal has also found that the actual rent received by \n the assessee, even without taking into account the notional \n interest,was more than the annual value determinable under \n\n\n\n\n \n section 23(1)(a). This finding of fact has not been challenged by \n the department in this appeal. On the contrary, the department \n has contended that in this case section 23(1)(b) was applicable. \n\n They have not relied on the provisions of section 23(1)(a). The \n \n question as to whether notional interest could have been taken \n into account under section 23(1)(a) does not arise in this appeal \n \n and we do not wish to go into that question in this appeal. \n However, the moot point which needs to be considered in this case \n is whether notional interest could form part of the actual rent \n \n\n\n received by the assessee under section 23(1)(b). It is important to \n \n\n\n\n note that the property is covered by the provisions of the Bombay \n Rent Act. The scheme of section 23(1)(b), in contradistinction to \n section 23(1)(a), shows that fair rent is the basis to determine the \n\n\n\n\n\n annual value of a property. This was the sole basis prior to the \n assessment year 1975-76. However, after the amendment of \n section 23(1) by the Taxation Laves (Amendment) Act, 1975, the \n\n\n\n\n\n legislature has clearly laid down under section 23(1)(b) that when \n the actual annual rent received or receivable is in excess of the fair \n rent determinable under section 23(1)(a), then such higher actual \n annual rent would constitute the annual value of the property. It is \n important to bear in mind that under section 22, the measure of \n\n\n 44/64\n ::: Downloaded on - 08/08/2014 23:49:47 :::\n *45* itxa2447.11\n\n\n income from house property is its annual value. The annual value \n is to be decided in accordance with section 23(1). By, virtue of the \n\n\n\n\n \n amendment, clause (a) states that annual value is the sum for \n\n\n\n\n \n which the property might reasonably be expected to be let from \n year to year whereas clause (b) covers a case where the property is \n let and the actual rent is in excess of the sum for which the \n\n\n\n\n \n property might reasonable be expected to be let from year to year. \n In our view, this later insertion of clause (b) by the Taxation Laws \n (Amendment) Act. 1975 is meant to cover a case where the rent \n\n\n\n\n \n per annum actually received by the owner is in excess of the fair \n \n rent or the standard rent under the rent control legislation. Now, \n in this case, the department has invoked section 23(1)(b). Now, in \n \n this case, it has been found that the actual rent received by the \n assessee is more than the fair rent even without taking into \n account notional interest. Generally, the fair rent is fixed even \n \n\n\n under the B.M.C. Act and the Rent Act by taking into account \n \n\n\n\n various principles of valuation, viz., contractor's method, the rent \n method etc. However, that exercise is undertaken to decide the fair \n rent of the property. In that connection, the actual rent received by \n\n\n\n\n\n the lessor also provides a piece of evidence to decide the fair rent of \n the property. However, under the Income Tax Act, the scheme is \n slightly different. Section 23(1)(b) provides that where the actual \n\n\n\n\n\n rent is more than the fair rent, the actual rent would be the \n annual value of the property. In the circumstances, the value of the \n notional advantage, like notional interest in this case, will not \n form part of actual rent received as contemplated by section 23(1)\n (b). At the cost of repetition it may be mentioned that under \n\n\n 45/64\n ::: Downloaded on - 08/08/2014 23:49:47 :::\n *46* itxa2447.11\n\n\n section 23(1)(a), the assessing officer has to decide the fair rent of \n the property. While deciding the fair rent, various factors could be \n\n\n\n\n \n taken into account. In such cases various methods like contractors \n\n\n\n\n \n method could be taken into account. If on comparison of the fair \n rent with the actual rent received, the assessing officer finds that \n the actual rent received is more than the fair rent determinable as \n\n\n\n\n \n above, then actual rent shall constitute the annual value under \n section 23(1)(b). Now, applying the above test to the facts of this \n case, we find a categorical finding of fact recorded by the Tribunal \n\n\n\n\n \n that the actual rent received by the assessee was more than the fair \n \n rent. Under the above circumstances, in view of the said finding of \n fact, we do not see any reason to interfere.\"\n\n 42] The Division Bench expressly kept open the question as to whether \n \n\n notional interest can form part of the \"fair rent\" under section 23(1)(a) of \n \n\n\n\n the Income Tax Act, 1961.\n\n 43] It also appears that both, the judgment in the case of Satya & Co. \n\n (supra) rendered by a Division Bench of the Calcutta High Court and the \n\n judgment of this Court in the case of J.K. Investors (Bombay) (supra) were \n\n\n\n\n\n considered by the Full Bench of the Delhi High Court on which decision \n\n heavy reliance is placed by the counsel for the assessee. The Full Bench \n\n was called upon to decide as to how to determine \"fair rent\" of the \n\n property and, then, to find out as to whether the actual rent received is \n\n\n 46/64\n ::: Downloaded on - 08/08/2014 23:49:47 :::\n *47* itxa2447.11\n\n\n less or more than the \"fair rent\" so that higher of the two is taken as \n\n\n\n\n \n Annual Letting Value under section 23(1)(b) of the Income Tax Act.\n\n 44] The factual and admitted position before the Delhi Full Bench was \n\n in addition to the contractual rent, substantial amount by way of interest \n\n\n\n\n \n free deposit is given, the security deposit is many time more than the \n\n annual rent received by the assessee. Nonetheless, the Annual Letting \n\n\n\n\n \n Value arrived at by the Municipal Corporation was less than the \n \n contractual rent received by the assessees. The Assessing Officer while \n\n arriving at the \"fair rent\" had added notional interest on the security \n \n deposit to the actual rent received to arrive at the Annual Letting Value. \n\n None of the cases before the Full Bench involved applicability of the Delhi \n \n\n\n Rent Control Act. Therefore, question of fixing standard rent in terms of \n \n\n\n\n this Act did not arise. However, it was admitted that if the property is \n\n covered by Delhi Rent Control Act then the standard rent under the said \n\n\n\n\n\n Act can be treated as \"fair rent\" in view of various judgments.\n\n 45] In the above backdrop, the Full Bench held as under:-\n\n With this, we revert back to the moot question, viz., how to \n determine the \"fair rent\" of the property and then to find out as \n to whether actual rent received is less or more than the \"fair rent\" \n so that higher of two is taken as annual letting value under \n Section 23 (1) (b) of the Act. For this purpose, we first discuss the \n\n 47/64\n ::: Downloaded on - 08/08/2014 23:49:47 :::\n *48* itxa2447.11\n\n\n validity of approach taken by the AO, viz., whether it is \n permissible to add notional interest of interest free security \n\n\n\n\n \n deposit and add the same to the actual rent received for arriving \n\n\n\n\n \n at annual letting value. Even the Division Bench while making \n reference did not countenance the aforesaid formula adopted by \n the AO as is clear from Para 12 of the reference order wherein it \n\n\n\n\n \n is observed as under:\n\n \"12. In this backdrop, the important question which arises for \n determination is: what is the fair rent of the properties, which \n\n\n\n\n \n were let out in the instant case? The mistake committed by the \n \n AO was that he did not address this issue and straightway \n proceeded to add notional interest on the interest free security \n \n deposit. \n The aforesaid conclusion is correct. We may record that \n permissibility of adding notional interest into actual market rent \n \n\n\n received was not approved by the Calcutta High Court in the case \n \n\n\n\n of Commissioner of Income Tax Vs. Satya Co. Ltd.[(1997) 140 \n CTR (Cal) 569] and categorically rejected in the following words:\n\n \"There is no mandate of law whereby the AO could convert \n the depression in the rate of rent into money value by assuming \n the market rate of interest on the deposit as the further rent \n received by way of benefit of interest-free deposit. But s. 23, as \n\n\n\n\n\n already noted, does not permit such calculation of the value of the \n benefit of interest-free deposit as part of the rent. This situation is, \n however, foreseen by Schedule III to the WT Act and it authorises \n computation of presumptive interest at the rate of 15 per cent. as \n an integral part of rent to be added to the ostensible rent. No such \n\n 48/64\n ::: Downloaded on - 08/08/2014 23:49:47 :::\n *49* itxa2447.11\n\n\n provision, however, exists in the Act. That being so, the act of the \n AO in presuming such notional interest as integral part of the \n\n\n\n\n \n rent is ultra vires the provision of s. 23(1) and is, therefore, \n\n\n\n\n \n unauthorised. Though what has been urged on behalf of the \n Revenue is not to be brushed aside as irrational, yet the \n contention is not acceptable as the law itself comes short of \n\n\n\n\n \n tackling such fact-situation.\"\n This view of the Calcutta High Court has been accepted by \n a Division Bench of this Court as well in the case of Commissioner \n\n\n\n\n \n of Income Tax Vs. Asian Hotels Limited [(2008) 215 CTR (Del.) \n \n 84] holding that the notional interest on refundable security, if \n deposited, was neither taxable as profit or gain from business or \n \n profession under Section 28(iv) of the Act or income from house \n property under Section 23(1)(a) of the Act. Rationale given in \n this behalf was as under (page 493):\n\n \"A plain reading of the provisions indicates that the \n \n\n\n\n question of any notional interest on an interest free deposit \n being added to the income of an assessed on the basis that it \n may have been earned by the Assessee if placed as a fixed deposit, \n\n\n\n\n\n does not arise. Section 28 (iv) is concerned with business income \n and is distinct and different from income from house property. It \n talks of the value of any benefit on perquisite, \"whether \n\n\n\n\n\n convertible into money or not\" arising from \"the business or the \n exercise of a profession.\" It has been explained by this Court in \n Ravinder Singh that Section 28 (iv) can be invoked only where \n the benefit or perquisite is other than cash and that the term \n \"benefit or amenity or perquisite\" cannot relate to cash payments. \n\n 49/64\n ::: Downloaded on - 08/08/2014 23:49:47 :::\n *50* itxa2447.11\n\n\n In the instant case, the AO has determined the monetary value of \n the benefit stated to have accrued to the assessed by adding a sum \n\n\n\n\n \n that constituted 18% simple interest on the deposit. On the \n\n\n\n\n \n strength of Ravinder Singh, it must be held that this rules out the \n application of Section 28 (iv) of the Act.\n\n Section 23(1)(a) is relevant for determining the income \n\n\n\n\n \n from house property and concerns determination of the annual \n letting value of such property. That provision talks of \"the sum for \n which the property might reasonably be expected to let from year \n\n\n\n\n \n to year.\" This contemplates the possible rent that the property \n \n might fetch and not certainly the interest in fixed deposit that \n may be placed by the tenant with the landlord in connection with \n \n the letting out of such property. It must be remembered that in a \n taxing statute it would be unsafe for the Court to go beyond the \n letter of the law and try to read into the provision more than \n \n\n\n what is already provided for. The attempt by learned counsel for \n \n\n\n\n the Revenue to draw an analogy from the Wealth Tax Act, 1957 is \n also to no avail. It is an admitted position that there is a specific \n provision in the Wealth Tax Act which provides for considering of \n\n\n\n\n\n a notional interest whereas Section 23(1)(a) contains no such \n specific provision.\"\n\n We approve the aforesaid view of the Division Bench of this \n\n\n\n\n\n Court and Operative words in Section 23 (1)(a) of the Act are \n \"the sum for which the property might reasonably be expected to \n let from year to year\". These words provide a specific direction to \n the Revenue for determining the \"fair rent\". The Assessing Officer, \n having regard to the aforesaid provision is expected to make an \n\n 50/64\n ::: Downloaded on - 08/08/2014 23:49:47 :::\n *51* itxa2447.11\n\n\n inquiry as to what would be the possible rent that the property \n might fetch. Thus, if he finds that the actual rent received is less \n\n\n\n\n \n than the \"fair/market rent\" because of the reason that the assessee \n\n\n\n\n \n has received abnormally high interest free security deposit and \n because of that reason, the actual rent received is less than the \n rent which the property might fetch, he can undertake necessary \n\n\n\n\n \n exercise in that behalf. However, by no stretch of imagination, the \n notional interest on the interest free security can be taken as \n determinative factor to arrive at a \"fair rent\". The Provisions of \n\n\n\n\n \n Section 23(1)(a) do not mandate this. The Division Bench in \n \n Asian Hotels Limited [2010] 323 ITR 490 (Delhi), thus, rightly \n observed that in a taxing statute it would be unsafe for the Court \n \n to go beyond the letter of the law and try to read into the \n provision more than what is already provided for. We may also \n record that even the Bombay High Court in the case of \n \n\n\n Commissioner of Income Tax Vs. J. K. Investors (Bombay) Ltd., \n \n\n\n\n [(2001) 248 ITR 723 (Bom.)] categorically rejected the formula \n of addition of notional interest while determining the \"fair rent\".\n\n It is, thus, manifest that various Courts have held a \n\n\n\n\n\n consistent view that notional interest cannot form part of actual \n rent. Hence, there is no justification to take a different view that \n what has been stated in Asian Hotels Limited [2010] 323 ITR 490 \n\n\n\n\n\n (Delhi).\n\n The next question would be as to whether the annual letting \n value fixed by the Municipal Authorities under the Delhi Municipal \n Corporation Act can be the basis of adopting annual letting value \n for the purposes of Section 23 of the Act. This question was \n\n 51/64\n ::: Downloaded on - 08/08/2014 23:49:47 :::\n *52* itxa2447.11\n\n\n answered in affirmative by the Calcutta High Court in Satya Co. \n Ltd. [1997] 140 CTR (Cal) 569 on the ground that the provisions \n\n\n\n\n \n contained in the Delhi Municipal Corporation Act for fixing \n\n\n\n\n \n annual letting value is in pari materia with Section 23 of the Act. \n The Court opined that the fair rent fixed under the Municipal \n laws, which takes into consideration everything, would form the \n\n\n\n\n \n basis of arriving at annual value to be determined under Section \n 23(1)(a) and to be compared with actual rent and notional \n advantage in the form of notional interest on interest free security \n\n\n\n\n \n deposit could not be taken into consideration. It is clear from the \n \n following discussion therein:\n\n \"6. With regard to question Nos. (5) and (6) which are only \n \n for the assessment years 1984-85 and 1985-86 the further issue \n involved is whether any addition to the annual rental value can be \n made with reference to any notional interest on the deposit made \n \n\n\n by the tenant. When the annual value is determined under sub-\n\n clause (a) of sub-section (1) of section 23 with reference to the \n fair rent then to such value no further addition can be made. The \n fair rent, takes into consideration everything. The notional interest \n\n\n\n\n\n on the deposit is not any actual rent received or receivable. Under \n sub-clause (b) of section 23(1) only the actual rent received or \n receivable can be taken into consideration and not any notional \n\n\n\n\n\n advantage. The rent is an actual sum of money which is payable \n by the tenant for use of the premises to the landlord. Any \n advantage and/or perquisite cannot be treated as rent. Wherever \n any such perquisite or benefit is sought to be treated as income, \n specific provisions in that behalf have been made in the Act by \n\n 52/64\n ::: Downloaded on - 08/08/2014 23:49:47 :::\n *53* itxa2447.11\n\n\n including such benefit, etc., in the definition of the income under \n section 2(24) of the Act. Specific provisions have also been made \n\n\n\n\n \n under different heads for adding such benefits or perquisites as \n\n\n\n\n \n income while computing income under those heads, e.g., salary, \n business. The computation of the income under the head 'House \n property' is on a deemed basis. The tax has to be paid by reason of \n\n\n\n\n \n the ownership of the property. Even if one does not incur any sum \n on account of repairs, a statutory deduction therefore is allowed \n and where on repairs expenses are incurred in excess of such \n\n\n\n\n \n statutory limit, no deduction for such excess is allowed. The \n \n deductions for municipal taxes and repairs are not allowed to the \n extent they are borne by the tenant. However, even such actual \n \n reimbursements for municipal taxes, insurance, repairs or \n maintenance of common facilities are not considered as part of the \n rent and added to the annual value. Accordingly, there can be no \n \n\n\n scope or justification whatsoever for making any addition for any \n \n\n\n\n notional interest for determining the annual value.\n\n Whatever benefit or advantage which is derived from the \n deposits - whether by way of saving of interest or of earning \n\n\n\n\n\n interest or making profits by investing such deposit - the same \n would be reflected in computing the income of the assessee under \n other heads.\n\n In our view there is no scope for making any addition on \n account of so-called notional interest on the deposit made by the \n tenant, since there is no provision to this effect in s. 22 or 23 of \n the IT Act, 1961.\"\n\n 53/64\n ::: Downloaded on - 08/08/2014 23:49:47 :::\n *54* itxa2447.11\n\n\n In fact, this is the view taken even by the Supreme Court in \n the case of Mrs. Shiela Kaushish Vs. CIT [1981] 131 ITR 435 on \n\n\n\n\n \n account of similarity of the provisions under the municipal \n\n\n\n\n \n enactments and Section 23 of the Act.\n\n It is on this basis that in the present case, the Commissioner \n of Income Tax (Appeals) gave primacy to the rateable value of the \n\n\n\n\n \n property fixed by the Municipal Corporation of Delhi vide its \n assessment order dated December 31, 1996 and on this basis, \n opined that the actual rent was more than the said rateable value \n\n\n\n\n \n and therefore, as per Section 23 (1)(b), the actual rent would be \n \n the income from house property and there could not have been \n any further additions.\n\n Since the provisions of fixation of annual rent under the \n Delhi Municipal Corporation Act are in pari materia of Section 23 \n of the Act, we are inclined to accept the aforesaid view of the \n \n\n\n Calcutta High Court in Satya Co. Ltd. [1997] 140 CTR (Cal) 569 \n \n\n\n\n that in such circumstances, the annual value fixed by the \n Municipal Authorities can be a rational yardstick. However, it \n\n\n\n\n\n would be subject to the condition that the annual value fixed bears \n a close proximity with the assessment year in question in respect \n of which the assessment is to be made under the Income Tax laws. \n If there is a change in circumstances because of passage of time, \n\n\n\n\n\n viz., the annual value was fixed by the Municipal Authorities \n much earlier in point of time on the basis of rent than received, \n this may not provide a safe yardstick if in the Assessment Year in \n question when assessment is to be made under Income Tax Act. \n The property is let-out at a much higher rent. Thus, the Assessing \n\n 54/64\n ::: Downloaded on - 08/08/2014 23:49:47 :::\n *55* itxa2447.11\n\n\n Officer in a given case can ignore the municipal valuation for \n determining annual letting value if he finds that the same is not \n\n\n\n\n \n based on relevant material for determining the \"fair rent\" in the \n\n\n\n\n \n market and there is sufficient material on record for taking a \n different valuation. We may profitably reproduce the following \n observations of the Supreme Court in the case of Corporation of \n\n\n\n\n \n Calcutta Vs. Smt. Padma Debi, AIR 1962 SC 151, 153.\n\n \"A bargain between a willing lessor and a willing lessee \n uninfluenced by any extraneous circumstances may afford a \n\n\n\n\n \n guiding test of reasonableness. An inflated or deflated rate \n of rent based upon fraud, emergency, relationship and such \n \n other considerations may take it out of the bounds of \n reasonableness.\"\n\n Thus the rateable value, if correctly determined, under the \n municipal laws can be taken as ALV under Section 23(1)(a) of the \n \n\n Act. To that extent we agree with the contention of the learned \n Counsel of the assessee. However, we make it clear that rateable \n \n\n\n\n value is not binding on the assessing officer. If the assessing officer \n can show that rateable value under municipal laws does not \n\n\n\n\n\n represent the correct fair rent, then he may determine the same on \n the basis of material/ evidence placed on record. This view is \n fortified by the decision of Patna High Court in the case of Kashi \n\n\n\n\n\n Prasad Kataruka v. CIT [1975] 101 ITR 810.\n\n The above discussion leads to the following conclusions:\n\n (i) ALV would be the sum at which the property may be \n reasonably let out by a willing lessor to a willing lessee \n\n\n 55/64\n ::: Downloaded on - 08/08/2014 23:49:47 :::\n *56* itxa2447.11\n\n\n uninfluenced by any extraneous circumstances.\n\n (ii) An inflated or deflated rent based on extraneous \n consideration may take it out of the bounds of reasonableness.\n\n (iii) Actual rent received, in normal circumstances, would \n be a reliable evidence unless the rent is inflated/deflated by\n\n\n\n\n \n reason of extraneous consideration.\n\n (iv) Such ALV, however, cannot exceed the standard rent as \n per the Rent Control Legislation applicable to the property.\n\n (v) if standard rent has not been fixed by the Rent \n \n Controller, then it is the duty of the assessing officer to determine \n the standard rent as per the provisions of rent control enactment.\n\n (vi) The standard rent is the upper limit, if the fair rent is \n less than the standard rent, then it is the fair rent which shall be \n \n\n taken as ALV and not the standard rent.\n\n We would like to remark that still the question remains as \n to how to determine the reasonable/fair rent. It has been \n indicated by the Supreme Court that extraneous circumstances \n\n\n\n\n\n may inflate/deflate the \"fair rent\". The question would, therefore, \n be as to what would be circumstances which can be taken into \n consideration by the Assessing Officer while determining the fair \n\n\n\n\n\n rent. It is not necessary for us to give any opinion in this behalf, as \n we are not called upon to do so in these appeals. However, we may \n observe that no particular test can be laid down and it would \n depend on facts of each case. We would do nothing more than to \n extract the following passage from the Supreme Court judgment in \n\n\n 56/64\n ::: Downloaded on - 08/08/2014 23:49:47 :::\n *57* itxa2447.11\n\n\n the case of Motichand Hirachand Vs. Bombay Municipal \n Corporation, AIR 1968 SC 441, 442 :\n\n \"It is well-recognized principle in rating that both gross \n\n\n\n\n \n value and net annual value are estimated by reference to the rent \n at which the property might reasonably be expected to let from \n year to year. Various methods of valuation are applied in order to \n\n\n\n\n \n arrive at such hypothetical rent, for instance, by reference to the \n actual rent paid for the property or for others comparable to it or \n where there are no rents by reference to the assessments of \n\n\n\n\n \n comparable properties or to the profits carried from the property \n \n or to the cost of construction.\"\n\n 46] We have and after careful reading of the provision in question and \n\n the conclusion of the Full Bench of the Delhi High Court councluded that a \n \n\n\n different view cannot be taken. We respectfully concur with the view \n \n\n\n\n taken in this Full Bench decision of the Delhi High Court.\n\n 47] We are of the view that where Rent Control Legislation is applicable \n\n and as is now urged the trend in the real estate market so also in the \n\n commercial field is that considering the difficulties faced in either \n\n\n\n\n\n retrieving back immovable properties in metro cities and towns, so also \n\n the time spent in litigation, it is expedient to execute a leave and license \n\n agreements. These are usually for fixed periods and renewable. In such \n\n\n\n 57/64\n ::: Downloaded on - 08/08/2014 23:49:47 :::\n *58* itxa2447.11\n\n\n cases as well, the conceded position is that the Annual Letting Value will \n\n\n\n\n \n have to be determined on the same basis as noted above. In the event and \n\n as urged before us, the security deposit collected and refundable interest \n\n\n\n\n \n free and the monthly compensation shows a total mismatch or does not \n\n reflect the prevailing rate or the attempt is to deflate or inflate the rent by \n\n\n\n\n \n such methods, then, as held by the Delhi High Court, the Assessing Officer \n\n is not prevented from carrying out the necessary investigation and \n\n\n\n\n \n enquiry. He must have cogent and satisfactory material in his possession \n \n and which will indicate that the parties have concealed the real position. \n\n He must not make a guess work or act on conjectures and surmises. There \n\n must be definite and positive material to indicate that the parties have \n\n suppressed the prevailing rate. Then, the enquiries that the Assessing \n \n \n\n\n\n Officer can make, would be for ascertaining the going rate. He can make \n\n a comparative study and make a analysis. In that regard, transactions of \n\n\n\n\n\n identical or similar nature can be ascertained by obtaining the requisite \n\n details. However, there also the Assessing Officer must safeguard against \n\n adopting the rate stated therein straightway. He must find out as to \n\n\n\n\n\n whether the property which has been let out or given on leave and license \n\n basis is of a similar nature, namely, commercial or residential. He should \n\n also satisfy himself as to whether the rate obtained by him from the deals \n\n and transactions and documents in relation thereto can be applied or \n\n 58/64\n ::: Downloaded on - 08/08/2014 23:49:47 :::\n *59* itxa2447.11\n\n\n whether a departure therefrom can be made, for example, because of the \n\n\n\n\n \n area, the measurement, the location, the use to which the property has \n\n been put, the access thereto and the special advantages or benefits. It is \n\n\n\n\n \n possible that in a high rise building because of special advantages and \n\n benefits an office or a block on the upper floor may fetch higher returns or \n\n\n\n\n \n vice versa. Therefore, there is no magic formula and everything depends \n\n upon the facts and circumstances in each case. However, we emphasize \n\n\n\n\n \n that before the Assessing Officer determines the rate by the above exercise \n \n or similar permissible process he is bound to disclose the material in his \n \n possession to the parties. He must not proceed to rely upon the material \n\n in his possession and disbelieve the parties. The satisfaction of the \n\n Assessing Officer that the bargain reveals an inflated or deflated rate \n \n \n\n\n\n based on fraud, emergency, relationship and other considerations makes it \n\n unreasonable must precede the undertaking of the above exercise. After \n\n\n\n\n\n the above ascertainment is done by the Officer he must, then, comply with \n\n the principles of fairness and justice and make the disclosure to the \n\n Assessee so as to obtain his view.\n\n 48] We are not in agreement with Shri Chhotaray that the municipal \n\n rateable value cannot be accepted as a bonafide rental value of the \n\n property and it must be discarded straightway in all cases. There cannot \n\n\n 59/64\n ::: Downloaded on - 08/08/2014 23:49:47 :::\n *60* itxa2447.11\n\n\n be a blanket rejection of the same. If that is taken to be a safe guide, then, \n\n\n\n\n \n to discard it there must be cogent and reliable material.\n\n 49] We are of the opinion that market rate in the locality is an approved \n\n method for determining the fair rental value but it is only when the \n\n\n\n\n \n Assessing Officer is convinced that the case before him is suspicious, \n\n determination by the parties is doubtful that he can resort to enquire \n\n\n\n\n \n about the prevailing rate in the locality. We are of the view that \n \n municipal rateable value may not be binding on the Assessing Officer but \n\n that is only in cases of afore-referred nature. It is definitely a safe guide.\n\n 50] We have broadly agreed with the view taken by the Full Bench of \n\n the Delhi High Court. Hence, the issue of determination of the \"fair rental \n \n\n\n value\" in respect of properties not covered by or covered by the Rent \n \n\n\n\n Control Act is to be undertaken in terms of the law laid down in the Full \n\n Bench decision of the Delhi High Court. \n\n 51] We quite see the force in the arguments of Ms. Vissanjee that \n\n ordinarily the license fee agreed between the willing licensor or a willing \n\n\n\n\n\n licensee uninfluenced by any extraneous circumstances would afford \n\n reliable evidence of what the landlord might reasonably be expect to get \n\n from a hypothetical tenant. She has in making this submission, answered \n\n\n\n 60/64\n ::: Downloaded on - 08/08/2014 23:49:47 :::\n *61* itxa2447.11\n\n\n the issue and summed up the conclusion as well. Then, it is but natural \n\n\n\n\n \n and logical that in the event, the transaction is influenced by any \n\n extraneous circumstances or vitiated by fraud, or the like that the \n\n\n\n\n \n Assessing Officer can adopt a \"fair rent\" based on the opinion obtained \n\n from reliable sources. There as well, we do not see as to how we can \n\n\n\n\n \n uphold the submissions of Mr. Chhotaray that the notional rent on the \n\n security deposit can be taken into account and consideration for the \n\n\n\n\n \n determination. If the transaction itself does not reflect any of the afore-\n\n stated aspects, then, merely because a security deposit which is \n \n refundable and interest free has been obtained, the Assessing Officer \n\n should not presume that this sum or the interest derived therefrom at \n\n Bank rate is the income of the assessee till the determination or conclusion \n \n \n\n\n\n of the transaction. The Assessing Officer ought to be aware of several \n\n aspects and matters involved in such transactions. It is not necessary that \n\n\n\n\n\n if the license is for three years that it will operative and continuing till the \n\n end. There are terms and conditions on which the leave and license \n\n agreement is executed by parties. These terms and conditions are \n\n\n\n\n\n willingly accepted. They enable the license to be determined even before \n\n the stated period expires. Equally, the licensee can opt out of the deal. A \n\n leave and license does not create any interest in the property. Therefore, \n\n it is not as if the security deposit being made, it will be necessarily \n\n 61/64\n ::: Downloaded on - 08/08/2014 23:49:47 :::\n *62* itxa2447.11\n\n\n refundable after the third year and not otherwise. Everything depends \n\n\n\n\n \n upon the facts and circumstances in each case and the nature of the deal \n\n or transaction. These are not matters which abide by any fixed formula \n\n\n\n\n \n and which can be universally applied. Today, it may be commercially \n\n unviable to enter into a lease and, therefore, this mode of inducting a \n\n\n\n\n \n 'third party' in the premises is adopted. This may not be the trend \n\n tomorrow, therefore, we do not wish to conclude the matter by evolving \n\n\n\n\n \n any rigid test. \n 52] We have also noted the submissions of Shri Ahuja. We are of the \n \n opinion that even in the cases and matters brought by him to our notice, it \n\n is evident that the Assessing Officer cannot brush aside the rent control \n \n\n\n legislation, in the event, it is applicable to the premises in question. Then, \n \n\n\n\n the Assessing Officer has to undertake the exercise contemplated by the \n\n rent control legislation for fixation of standard rent. The attempt by the \n\n\n\n\n\n Assessing Officer to override the rent control legislation and when it \n\n balances the rights between the parties has rightly been interfered with in \n\n the given case by the Appellate authority. The Assessing Officer either \n\n\n\n\n\n must undertake the exercise to fix the standard rent himself and in terms \n\n of the Maharashtra Rent Control Act, 1999 if the same is applicable or \n\n leave the parties to have it determined by the Court or Tribunal under that \n\n\n 62/64\n ::: Downloaded on - 08/08/2014 23:49:47 :::\n *63* itxa2447.11\n\n\n Act. Until, then, he may not be justified in applying any other formula or \n\n\n\n\n \n method and determine the \"fair rent\" by abiding with the same. If he \n\n desires to undertake the determination himself, he will have to go by the \n\n\n\n\n \n Maharashtra Rent Control Act, 1999. Merely because the rent has not \n\n been fixed under that Act does not mean that any other determination and \n\n\n\n\n \n contrary thereto can be made by the Assessing Officer. Once again having \n\n respectfully concurred with the judgment of the Full Bench of the Delhi \n\n\n\n\n \n High Court, we need not say anything more on this issue.\n\n 53] Thus, apart from the three aspects namely of a municipal valuation, \n \n of obtaining interest free security deposit and the properties being covered \n\n by the Maharashtra Rent Control Act but no standard rent thereunder is \n \n\n\n fixed, our attention has not been invited to any other case. Suffice it to \n \n\n\n\n hold that in those cases and to which our attention is not invited the \n\n principles laid down in the decisions of the Hon'ble Supreme Court and \n\n\n\n\n\n referred to by the Full Bench of the Delhi High Court would govern the \n\n enquiry.\n\n 54] As a result of the above discussion, we are of the opinion that \n\n wherever the Assessing Officer has not adhered to the above principles, \n\n and his finding and conclusion has been interfered with, by the higher \n\n Appellate Authorities, the revenue cannot bring the matter to this Court as \n\n 63/64\n ::: Downloaded on - 08/08/2014 23:49:47 :::\n *64* itxa2447.11\n\n\n no substantial question of law can be arising for determination and \n\n\n\n\n \n consideration of this Court. Then, the findings by the last fact finding \n\n Authority, namely the Tribunal and against the revenue shall have to be \n\n\n\n\n \n upheld as they are consistent with the facts and circumstances brought \n\n before it. If they are not vitiated by any perversity or error of law \n\n\n\n\n \n apparent on the face of the record, the appeals of the revenue cannot be \n\n entertained. They would have to be accordingly dismissed.\n\n (B.P.COLABAWALLA, J.) (S.C. DHARMADHIKARI, J.)\n \n \n \n\n\n\n wadhwa\n\n\n\n\n\n\n 64/64\n\n\n\n\n ::: Downloaded on - 08/08/2014 23:49:47 :::" }, { "title": "Tata Iron & Steel Co. Ltd. vs D.V. Bapat, Income-Tax Officer, ... on 26 February, 1975", "url": "https://indiankanoon.org//doc/784482/", "text": "Tata Iron & Steel Co. Ltd. vs D.V. Bapat, Income-Tax Officer, ... on 26 February, 1975\nEquivalent citations: [1975]101ITR292(BOM)\nJUDGMENT\n\n\n\n\n \n\n S.K. Desai, J. \n \n\n 1. The petitioner before us is the Tata Iron & Steel Co. Ltd. and the petitioner will hereinafter be referred to as \"the company\" for the sake of brevity. The 1st respondent is the Income-tax Officer, Companies Circle I(2), Bombay, concerned with the 'assessment of the company and will hereinafter be referred to as \"the Income-tax Officer\" for the sake of brevity. The 2nd respondent is the Union of India. \n\n 2. Before adverting to the respective contentions it will be necessary to set out briefly the facts which are not in dispute. The company has its registered office in Bombay and has in its employment about 56,000 employees. It is the agreed position that the company keeps its accounts on the mercantile system of accounting. The accounting year of the company is the financial year. Up to and including the assessment year 1971-72, the company had claimed and was granted deduction in respect of its liability for gratuity to its employees on the basis of actual payments made during each relevant accounting year. For the next assessment year, however, the company claimed a deduction of a sum of Rs. 1,28,09,135 on the footing that the said amount represented its gratuity liability on an actuarial valuation, and the contention of the company was accepted by the Income-tax Officer. It may be mentioned that this allowance was in accordance with a circular dated September 21, 1970, issued by the Central Board of Direct Taxes, Government of India, New Delhi; this circular will hereinafter be referred be referred to as the \"first circular\". We shall refer in detail to this first circular subsequently. We are concerned with the assessment year 1973-74. The company obtained an actuarial valuation of its gratuity liability for the accounting year ending March 31, 1973. According to the company, an amount of Rs. 2,77,52,991 was the amount ascertained as a result of the said actuarial valuation. We are really not concerned with the reason why the provision of the actuarial calculation increased from slightly over one core to this large amount of over Rs. 2,70,00,000 within the short span. The company, however, claims that this was on account of the increased liability imposed by the Payment of Gratuity Act, 1972, which Act came into force on September 16, 1972. \n\n 3. In the course of the assessment proceedings the Income-tax Officer made certain inquiries regarding the claim of the company for deduction of the said amount. Before, however, the assessment could be completed, it appears, another circular dated September 26, 1974, was issued by the Central Board of Direct Taxes; this circular will hereinafter be referred to as the \"second circular\". By this second circular the first circular was withdrawn and directions were given to complete all pending all pending assessments in the light of the instructions given by the Board in the second circular. According to the company, after the second circular the Income-tax Officer addressed a latter dated December 6, 1974, to the company indicating that the company's claim for gratuity based on actuarial calculation was proposed to be disallowed. According to the company, in the course of discussions which took placed thereafter, the Income-tax Officer made it clear that the company's claim for the aforesaid gratuity liability would be disallowed in view of the Board's second circular. \n\n 4. The said two circulars may now be fully set out : \n\n \"First Circular No. 47 (F.No. 9/100/69-IT(A-II), dated September 21, 1970. See \n \n\n A question has arisen whether the provision made by an assessee in its accounts on account of the estimated service gratuity payable to the employees can be allowed as a deduction, when no gratuity fund has been set up under Part C of the Fourth Schedule of the Income-tax Act, 1961. \n\n The Board have decided that following the decision of the Supreme Court in the case of Metal Box Co. of India Ltd the provision of gratuity on a scientific basis (in the form of an actuarial valuation carried out every year) can be considered to represent a real liability of the employer to the employees. The Supreme Court in the case of Garment Cleaning Works (Civil Appeal No. 621 of 1960, dated 3-4-1961), decided that the employer would be required to pay gratuity even to an employee who has dismissed on account of misconduct. The Board have, therefore, come to the conclusion that the liability so ascertained cannot be considered as a contingent liability. Such provision of gratuity may be treated as an admissible deduction under section 37(1) of the Income-tax Act, 1961.\" \n\n \"Second Circular No. 146 (F.No. 228/2-73-IT(A-II), dated September 26, 1974. See [1975] 101 ITR (St). 46. \n\n Attention is invited to Board's Circular No. 47 (F. No. 9/100/69-IT (A-II), dated September 21, 1970, on the above subject. In this circular the Board has considered the question as to whether provision made by an assessee in its accounts for estimated service gratuity payable to its employees could be allowed as a deduction even though no approved gratuity fund under the provisions of the Income-tax Act had been set up. At the relevant time when this circular was issued, the Supreme Court's decision in the case of Metal Box Company of India Ltd. v. Their Workmen was available and taking note of certain observations in this particular decision of the Supreme Court, it was felt that provision of gratuity on a scientific basis (in the form of actuarial valuation carried out every year) could be considered to represent a real liability of the employer to the employees. Accordingly, the Board decided that such provision would not be a contingent liability and may be treated as admissible deduction under section 37(1) of the Income-tax Act, 1961.\n\n 2. The decision of the Board has been re-examined in the light of the unreported judgment of the Supreme Court in the cases of Bombay Dyeing and Manufacturing Co. Ltd. v. Commissioner of Wealth-tax Since reported in In this judgment, their Lordships have confirmed their own views in Commissioner of Wealth-tax v. Standard Mills and have observed that the decision in Metal Box Company's case was rendered under a different Act and in a different context.\n\n 3. In view of the later pronouncement of the Supreme Court in the case of Bombay Dyeing and Manufacturing Co. Ltd and on the clear provisions of law contained in section 36(1)(v) under which any sum paid by an employer by way of contribution to wards an approved gratuity fund created by him for the exclusive benefit of its employees under an irrevocable trust alone was admissible. Any allowance of such liability towards an unapproved gratuity fund under section 37(1) of the Income-tax Act does not arises. In view of this, the earlier instructions of the board referred to above stand withdrawn with immediately effect.\n\n 4. All pending assessments may be completed in the light of the present instructions.\" \n\n 5. The principal contention of the company in the petition is that the proposed action of the Income-tax Officer in disallowing the company's claim for deduction of the actuarially evaluated gratuity liability is without jurisdiction, patently illegal and contrary to the clear provisions of the Income-tax Act, 1961, and also contrary to the law laid down by the Supreme Court and the High Courts. Accordingly, it is submitted that there is an error apparent on the face of the record which is required to be judicial corrected. The company has further submitted in paragraph 4 of the petition what the consequences of such disallowance would be to the petition what the consequences of such disallowance would be to the petitioner and thereafter urged in paragraph 5 of the petition that although an appeal against such erroneous disallowance to the Appellate Assistant Commissioner is provided under the Income-tax Act, 1961, such provision would not be term. Apart from the individual case of the company it is urged that the question affects innumerable assesses all over India and is a question of utmost public importance. It is submitted that in view of the directions given in the second circular, which directions would be binding on or likely to be followed by the Income-tax Officers dealing with several assesses, the companies concerned would be required to prefer separate appeals in several separate assessments which will ultimately result in further second appeals to the Income-tax Appellate Tribunal and thereafter in references to the High Court. The company has also annexed to the petition a resolution passed by the Bombay Chamber of Commerce and Industry, which would seem to suggest that the question of law raised and agitated in the petition is not one concerning the individual case of the company only but is raised in a sort of representative action for and on behalf of all companies similarly situated all over India. Accordingly, the company has sought a writ or order in the nature of mandamus or other appropriate writ, direction or order under article 226 of the Constitution of India, directing the Income-tax Officer to allow the aforesaid gratuity liability as a deduction in computing the assessable income of the company.\n\n 6. A return has been filed by the Income-tax Officer in which the company's claim for deduction of an actuarially evaluated gratuity liability has been rebutted and the proposed action of disallowance is defended, it being urged that the same would not be without jurisdiction or illegal or contrary to the provisions of the Income-tax Act, 1961, or contrary to the law laid down by the Supreme Court or other High Courts. The Income-tax Officer has in the later part of the return dealt with several judgments of the Supreme Court and of the High Courts referred to by the company in its petition. But, in our opinion, it is unnecessary to set out at this stage the contentions either of the company or of the Income-tax Officer concerning these decisions as we will have occasion to refer to these several decisions in the course of our judgment. In paragraph 8 of the return the Income-tax Officer has denied that the disallowance of gratuity liability would be erroneous or that the appeal against such disallowance would not constitute an adequate remedy in any sense of the term. It has been further denied that the second circular is contrary to the law laid down by the Supreme Court of India. It has been submitted that this was not a fit case for issue of a high prerogative writ.\n\n 7. It is, however, important to note that in paragraph 5 of the petition the company has categorically stated at more than one place that the Income-tax Officer had made it clear that the would follow the second circular issued by the Central Board of Direct Taxes, and this specific allegation is n to clearly traversed by the Income-tax Officer. It has, therefore, become necessary to refer to this aspect of the matter in view of the contention of the learned counsel for the revenue which, was based on the nature of the reliefs sought by the company, which according to the learned counsel, should not be granted by the court in the form in which it was sought. \n\n 8. This contention as to the nature of relief may be briefly indicated though we propose to deal with it, if necessary, when the question of granting any relief would arise. It was submitted by Mr. Joshi that unless the court were clearly of the opinion that the law regarding such allowance has been clearly laid down by the Supreme Court of India and that the provisions of the Income-tax Act, 1961, in this connection are clear and would admit no discussion or argument, the court should not grant a writ of mandamus in the form sought for by the company but merely quash the direction contained in the second circular to complete the pending assessments in the light of instructions given by the Central Board of Direct Taxes in that circular and leave it to the Income-tax Officer to finalise the assessments according to the provisions of the Income-tax Act and uninfluenced by any instructions or directions given by the Central Board of Direct Taxes. Mr. Joshi referred us in this connection to Sirpur Paper Mills Ltd. v. Commissioner of Wealth-tax. That was a case under the Wealth-tax Act. He also referred us to Orient Paper Mills Ltd. v. Union of India. Which was a case under the Central Excises and Salt Act, 1944. As indicated earlier, it is our view that it would be appropriate to consider this question after discussing the various decisions which were discussed at the Bar and the respective contentions based on such decisions.\n\n 9. As stated earlier, it is the admitted position that the accounts of the company are kept on the mercantile system of accounting. The nature of this system has been adverted to in several judgments including those of the Supreme Court. Briefly stated, it is a system which \"brings into credit what is due, immediately it becomes legally due and before it is actually received, and it brings into debit expenditure, the amount for which a legal liability has been incurred before it is actually disbursed\"; the quotation is from the decision of the Supreme Court in Keshav Mills Ltd. v. Commissioner of Income-tax the actual passage being subsequently cited in a number of Supreme Court decisions. Thus, the clear position as far as the company is concerned is that the claim for such allowance is not based on any amount actually disbursed but on the basis of incurring a legal liability as indicated in the passage from Keshav Mill's case above cited.\n\n 10. The profits and gains of a business are made chargeable under section 28 of the Income-tax Act, 1961, and section 29 thereof provides that the income referred to in section 28 should be computed in accordance with the privations contained in sections 30 to 43A of the said Act. Section 30 to 37 would seem to consist of a list of permissible allowances and deductions as enumerated therein. Section 40 (we are not concerned with sections 38 and 39) contains provisions for certain amounts which are expressly declared as ones not to be deducted in computing income chargeable under the head \"profits and gains of business or profession\". Section 40A refers to certain expenses or payments which are declared to be not deductible in certain circumstances. Now, the question which would seem to arise on a consideration of the scheme of the Act pertaining to these sections would be whether the list of allowances and deductions enumerated is exhaustive. It seems to be now well settled by several decisions of the Supreme Court that this list is not exhaustive in the sense that an item of loss or expenditure incidental to business may be deducted in computing profits and gains even if it does not specifically find a place within any of these sections, provided it is an item which is allowable as a deduction on ordinary commercial principles. \n\n 11. Reference may be briefly made to some Supreme Court judgments in this connection. The first of these judgments is Badridas Daga v. Commissioner of Income-tax. In that decision the Supreme Court was considering section 10(1) of the Indian Income-tax Act, 1922, and one does not find any material difference (so far as we are concerned) in the phraseology employed in that provision and that of section 28(1) of the Income-tax Act, 1961. The deductions and the allowances which are now contained in sections 30 to 37 of the Act of 1961, were, it may be stated, to be found in section 10(2) of the Act of 1922. With this background the observations in Badridas Daga's case may now be noted.\n\n 12. According to Venkatarama Aiyar J., who spoke for the Supreme Court, it was well-settled that : \n \"Profits and gains which are liable to be taxed under section 10(1) are what are understood to be such according to ordinary commercial principles.'The word \"profits\"........ is to be understood, observed Lord Halsbury in Gresham Life Assurance Society v. Styles in its natural and proper sense-in a sense which no commercial man would misunderstand'.\" \n\n 13. It was further observed : \n \"The result is that when a claim is made for a deduction for which there is no specific provision in section 10(2), whether it is admissible or not will depend on whether, having regard to accepted commercial practice and trading principles, it can be said to arise out of the carrying on of the business and to be incidental to it. If that is established, then the deduction must be allowed, provided of course there is no prohibition against it, express or implied, in the Act.\" (page 15 of the report).\n\n 14. It will be observed that we are not really concerned with the nature of the allowance that was claimed in Badridas Daga's case but only with the principle affirmed by the Supreme Court, which principle has been set out above in the court's own words. There are, however, a number of other judgments which seek to apply that principle to the type of claim which is to be considered by us, viz, the claim made by the company for being allowed the deduction of an amount determined on an actuarial valuation of its gratuity liability for the employees.\n\n 15. It may be clarified at this juncture that the claim of the company pertains to what may be indicated as the incremental increase in its liability towards the accrued gratuity liability which arose in the year ended March 31, 1973. This would be indicated by a perusal of the actuarial valuation report, exhibit B to the petition. According to this report, the total accrued gratuity liability for the company as on Match 31, 1972, was in the amount of Rs. 11,37,80,345. Similarly, according to the actuary's report, the total accrued gratuity liability of the company as at March 31, 1973, was Rs. 14,15,33,336. Thus, by a simple process of subtraction the total accrual of gratuity liability for the year 1972-73 would be put at Rs. 2,77,52,991, which is the amount claimed by the company as a deduction. \n\n 16. Now, before discussing the cases which deal with such a claim, a brief reference may be made to the provisions of the Payment of Gratuity Act, 1972, since some of its provisions may have a bearing on our decision. Under section 4 of the said Act, gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous service for not less than five years, on his superannuation, or on his retirement or resignation, or on his death or disablement due to accident or disease. Sub-clauses (a) and (b) of the said sub-section. If the services of an employee have been terminated for any act, willful omission or negligence, causing any damage or loss to, or destruction of, property belonging to the employer, the gratuity can be forfeited to the extent of the damage or loss so caused. Similarly, gratuity payable to an employee shall be wholly forfeited if the services of the employee have been terminated for riotous or disorderly conduct or any other act of violence on his part. Similarly, the gratuity amount payable to the employee may be totally forfeited if the employee's service have been terminated for any act which constitutes an offence involving moral turpitude, provided that such offence is committed by the employee in the course of his employment. Thus, it is to be seen that although under sub-section (1) gratuity is payable to all employees after they have rendered continuous service for not less than five years in the sense that death, retirement, resignation or superannuation constitute what may be called cumulatively a certainty in the sense that one of these has to happen, sub-section (6) provides for two or three contingencies in which such payment is liable to be wholly or partially forfeited. It is in the light of these provisions that the judgments pertaining to gratuity may now be considered and understood. \n\n 17. The first of the cases which deal with the question of a claim made by an assessee for provision for retirement benefits of gratuity is Southern Railway of Peru Ltd. v. Owen (Inspector of Taxes). Under the legislation of Peru, an English company operating a railway there was bound to pay its employees compensation on the termination of their services, the legislative provisions being deemed to be incorporated into all contracts of service. The right arose on dismissal or on termination of the employment by the employee by proper notice, or on such termination by the death of the employee or on the expire of the term of employment. There were, however, certain exceptions when such benefits were not payable. The company claimed to be entitled to charge against each year's receipts the cost of making provision for the retirement payments which would ultimately be thrown on it, calculating what sum would be required to be paid to each employee if he retired without forfeiture at the close of the year and setting aside the aggregate of what was required in so far as the year had contributed to the aggregate. In the judgment it was held that the company was not entitled to make the deductions sought to be made. But this was on the footing that in calculating the amount which it claimed to deduct in each year the company had ignored the factor of discount. On the other hand, in principle it was accepted that the company was entitled retirement payments which would ultimately be payable as it had had benefit of the employee's services during that year, provided the present value of the future payments could be daily estimated. During the course of that judgment Lord McDermott (at page 747 of the report) observed as follows : \n \"My Lords, as a general proposition it is, I think, right to say that in computing his taxable profits for a particular year, a trader, who is under a definite obligation to pay his employees for their services in that year in immediate payment and also a future payment in some subsequent year, may properly deduct, not only the immediate payment, but the present value of the future payment, provided such present value can be satisfactorily determined or fairly estimated. Apart from special circumstances, such a procedure, if practicable, is justified because it bring the true costs trading in the particular year into account for that year and thus promotes the ascertainment of the 'annual profits or gains arising or accruing from' the trade.\" \n\n 18. The learned Law Lord went on to observe (at page 748 of the report) : \n \"The position, therefore, was that the appellant's liability to pay a lump sum could only be avoided by some breach of contract or grave misconduct on the part of the employee concerned. It may be correct to call such a liability contingent, but I must say the contingency seems to me too remote to justify a prudent trader or, for that matter, a competent accountant, in ignoring the liability until the day for payment has arrived. Whether, if this appeal related to but one employee and one lump sum, the degree of the contingency would, nevertheless, be such as to preclude a present allowance in respect of the future liability is a question which in my opinion, does not call for decision on the facts of this case.\" \n\n 19. Before the House of Lords it had been contended on behalf of the Crown, which contention appears to have found favour with the Court of Appeal, that this was a contingent liability and, therefore, the claim of the assessee was liable to be rejected. It was observed that the Court of Appeal had looked at this contingency argument from the point of view of an individual employee, and it was pointed out that such an approach was erroneous. It was observed again, by Lord McDermott (at page 748 of the report) : \n \"The question, as I see it, on this branch of the case, was not whether, in a given year, the appellant's liability to pay this employee or that was contingent; it was whether the appellant's liability to make some payment in respect of the lump sums accruing for the benefit of all its employees in that year was in any relevant sense contingent. If that is the right view, I think the Crown's contention on this point must fail. It is clear from the accounts that the appellant's employees during the material years were numerous and the chances of all, or even a substantial proportion or them, acting so as to forfeit their lump sum rights seems to me to be much too distant and improbable to merit significance.\" \n\n 20. Similar observations are to be found in the judgment of Lord Radcliffe; these are at page 754 of the report and occur in the following words : \n \"What the appellant claims the right to do is to charge against each year's receipts the cost of making provision for the retirement payments that will ultimately be thrown upon it by virtue of the fact that it has had the benefit of its employees' services during that year, As a corollary it will not make any charge to cover the actual payments made in the year in respect of retirement benefits. Only by such a method, it is said, can it bring against the receipts of the year the true cost of the services that it has used to earn those receipts. Generally speaking, this must, I think, be true. For, whereas it is possible that any one of its many employees may forfeit his benefit and so never require a payment, the substantial facts of the situation are that when the company has paid every salary and wage that is due for current remuneration of the year it has not by any means wholly discharged itself of the pecuniary burden which falls upon it in respect of the year's employment.\" \n\n 21. Again, as regards the Crown's contention that such liability was contingent, the same was rejected by Lord Radcliffe also, the learned Law Lord observing : \n \"........ where you are dealing with a number of similar obligations that arise from trading, although it may be true to say each separate one that it may never mature, it is the sum of the obligations that matter to the trader, and experience may show that, while each remains uncertain, the aggregate can be fixed with some precision. \"(at page 758). \n\n 22. Lord Radcliffe then went on to observe : \n \"But, whatever the legal analysis, I think that for liabilities as for debts their proper treatment in annual statements of profit depends not upon the legal form but upon the trader's answers to two separate questions. The first is : Have I adequately stated my profits for the year if I do not include some figure in respect of these obligations ? The second is : Do the circumstances of the case, which include the techniques of established accounting practice make it possible to supply a figure reliable established accounting practice make it possible to supply a figure reliable enough for the purpose ?\" (at page 758 of the report). \n\n 23. Theses observations have been set out in extenso because it is this case which has been subsequently referred to in Indian decisions and we were assured by the learned counsel for the company that the case still remains a leading case on the law in England. The decision in Southern Railway of Peru Ltd came to be referred to by the Supreme Court in Indian Molasses Co. (Private) Ltd. v. Commissioner of Income-tax. In that case the assessee-company had paid in 1948 a sum of pound 8,208 to certain trustees in implementation of an agreement to provide a pension for its managing director after his retirement. The provisions of the trust deed which are fully set out in the head-note of the report appear to be some-what complicated. It appears that by reason of these provisions the trustees took out a policy providing for an annuity of pound 563 if both H-the managing director- and Mrs. H. should die before that date and also an annuity of pound 645 if H should die before that date leaving Mrs. H surviving him. There was a special provision in the policy which entitled the trustees to surrender that annuity for the capital sum of pound 10,169 after giving notice, Clause III of the second schedule to the policy provided for the return of all premia paid to the insurance society should both H and Mrs. H die before September 20, 1955. The assessee-company claimed deduction of the initial sum and the yearly premia paid for the assessment years 1949-50, 1950-51, 1951-52 and 1952-1953, It was held that until September 20, 1955, the assessee-company had dominion through the trustees over the sums paid in two circumstances, viz, under the special provision (for surrender) and under clause III which provided for return of the premia paid in the event of the death of both Mr. and Mrs. H before September 20, 1955. Accordingly, there was a possibility of a resulting trust in favour of the assessee-company and the sums paid ought, therefore, to be treated as set apart to meet a contingency. The payment could not be regarded as a paying out or away of the sums irretrievably and could not amount to expenditure. Accordingly, the payments were held not to be allowable deductions under section 10(2)(xv) of the Indian Income-tax Act, 1922. It has to be borne in mind whilst considering this case that what was being claimed as a deduction under section 10(2)(xv) was on the footing of actual payment or expenditure of the same and not on the basis of a provision has been contended, and with considerable justification, by the learned counsel for the company that the observations made in the Indian Molasses Company's case in fact lend support to the submissions which he has been canvassing before us for our acceptance and that these observations are fully consistent with later decisions of the Supreme Court, particularly in the case of Metal Box Company of India Ltd. v. Workmen to which reference will be made later on. \n\n 24. In Indian Molasses Company's case Hidayatullah J. (as he then was), speaking for the Supreme Court, observed as follows :\n \"Side by side with these principles, there are others which are also fundamental. The income-tax law does not allow as expenses all the deductions a prudent trader would make in computing his profits. The money may be expended on grounds of commercial expediency but not if necessity. The test of necessity is whether the intention was to earn trading receipts or to avoid future recurring payments of a revenue character. Expenditure in this sense is equal to disbursement which, to use a homely phrase, means something which comes out of the trader's pocket. Thus, in finding out what profits there be, the normal accountancy practice may be to allow as expense any sum in respect of liabilities which have accrued over the accounting period and to deduct such sums from profits. But the income-tax laws do not take every such allowance as legitimate for purposes of tax. A distinction is made between an actual liability in present and a liability de futuro which, for the time being, is only contingent. The former is deductible but not the latter.\" (pages 75-76 of the report). \n\n 25. Thereafter, he referred to the case of Alexander Howard & Co. Ltd. v. Bentley and of Southern Railway of Peru Ltd. v. Owen and observed (at page 77) as under : \n \"These two cases illustrate the propositions that the recurring liability of a pension which is compressed into a lump payment should itself be a legal obligation, and that, if contingent, the present value of the future payments should be fairly estimable. If the pension itself be not payable as an obligation, and if there be a possibility that no such payment may be necessary in the future, the whole of the amount cannot be deducted but only the present value of the future liability, if it can be estimated.\" \n\n 26. The basis or the footing on which the claim of the Indian Molasses Company was disallowed is to be found in the penultimate paragraph of the above judgment and was that, on the facts of the case, before the Supreme Court the payment was not merely contingent but the liability itself was also contingent. According to the Supreme Court, the expenditure which is deductible for income-tax purposes is one which is towards a liability actually existing at the time, but the putting aside of money which may become expenditure on the happening of an event is not expenditure. These observations bear out what we have earlier maintained and which would be a distinguishing feature, viz., that the retirement benefits undertaken to be provided by the Indian Molasses Co. were for one employee as contradistinguished from over deduction was on the footing of moneys already paid to the trustees and not on the basis of a provision made on the basis of an actuarial calculation as is proposed to be made by the company before us. \n\n 27. In the very same volume of Income Tax Reports, viz, 37 ITR, one finds a case which will afford us some assistance although it is not specifically concerned or connected with a provision for gratuity or retirement benefit. The said case is Calcutta Co. Ltd. v. Commissioner of Income-tax. It is somewhat interesting to note that, although reported earlier in the very same volume, as a matter of fact it had been decided seven days after the Indian Molasses Company's case Hidayatullah J. (as he then was), who delivered the judgment in the latter case, was a party to the judgment in the Calcutta Company's case although the actual Judgment delivered by Bhagwati J., speaking for the Supreme Court.\n\n 28. Now, in Calcutta Company's case the assessee-company bought lands and sold them in plots for building purposes undertaking to develop the plots by laying out roads, providing a drainage system and installing lights, etc. When the plots were sold the purchaser paid only a portion of the purchase price and undertook to carry out the developments within six months; but, according to the Supreme Court, the period was not of the essence of the contract. In the relevant accounting year the assessee-company actually received in cash only a sum of Rs. 29,392 towards the sale price of the lands, but in accordance with the mercantile system of accounting adopted by it, it credit in its accounts a total sum of Rs. 43,692 representing the full sale price of the lands. At the same time it debited an estimated sum of Rs. 24,809 as expenditure for the developments it had undertaken to carry out, even thought no part of that amount was actually spent. The claim of the assessee-company to be allowed the entire sum was disallowed by the Income-tax Officer, the disallowance upheld by the Appellate Assistant Commissioner and the view of the Appellate Assistant Commissioner confirmed by the Income-tax Appellate Tribunal. The High Court, upon a reference made to it by the Appellate Tribunal answered the question again the assessee-company and in favour of the revenue. Being aggrieved by the decision of the High Court the assessee-company of being allowed the deduction claimed. It was observed by Bhagwati J. (at pages 6 and 7 of the report) as under :\n\n \"Inasmuch as the liability which had thus accrued during the accounting year was to be discharged at a future date the amount to be expended in the discharge of that liability would have to be estimated in order that under the mercantile system of accounting the amount could be debited before it was actually disbursed. \n\n The difficulty in the estimation thereof again would not convert an accrued liability into a conditional one, because it is always open to the income-tax authorities concerned to arrive at a proper estimate thereof having regard to all the circumstances of the case.\" \n\n 29. In Calcutta Company's case the views earlier expressed by the Supreme Court in Badridas Daga's case were reiterated and the passage from the said case which we have set out earlier quoted with approval.\n\n 30. Southern Railway of Peru's case came up for consideration of the Supreme Court once again in Standard Mills Co. Ltd. v. Commissioner of Wealth-tax the assessee-company appearing before the court claimed in the proceedings for assessment of wealth-tax that it was entitled to deduction, inter alia, of the amount of Rs. 25,02,675 on account of accrued liability for gratuity to workmen and staff as per the award of the industrial court and the Labour Appellate Tribunal. It is important ton note that in Standard Mills' case the Supreme Court was considering the application of the definition of \"net wealth\" in section 2(m) of the Wealth-tax Act, 1957, which requires that there should be debt owed by the assessee on the relevant valuation date. It was observed by the court that if there is no debt owed on the valuation date, it could obviously not be deducted in determining the net wealth which is liable to tax under Wealth-tax Act. The Supreme Court observed that the right to obtain gratuity under the awards arises only when there is determination of employment and not before and the liability did not exist in present but was contingent upon the determination of the employment (page 474 of the report). The case of Southern Railway of Peru and the observations there from were brought to the attention of the court. But, according to the Supreme Court, the house of Lords in that case was concerned with determining the deductibility of the present value of a liability which may arise in future in the computation of taxable profits for the relevant year under the Income-tax Act, and that the same considerations could not apply to a case under the Wealth-tax Act where the liability to pay wealth-tax is charged upon the net wealth of an assessee. It is pertinent to note that no fault was found with the reasoning of the House of Lords or with the view that before profits of a business could be fairly assessed in the sense of computed or calculated) such a deduction has to be made.\n\n 31. Southern Railway of Peru's case came to be considered by the Supreme Court once again in Commissioner of Income-tax v. Gemini Cashew Sales Corporation where the principle set out in extenso earlier in this judgment was approved by the Supreme Court, but the claim of the assessee in the appeal before it was rejected on a totally different footing as set out in the judgment of the court which was delivered by J. C. Shah J. (as he then was), speaking for the court. In the said case a firm consisting of two partners came to be dissolved by reason of the death of one of them on August 4, 1957. Thereafter, its business was taken over and continued by the surviving partner on his own account without any interruption in the services of the employees or alteration in the terms of their employment. In settling the accounts of the firm as on the date of death, i.e., August 4, 1957, a sum of Rs. 1,41,506 was taken into account as retrenchment compensation payable to the employees under section 25FF of the Industrial Disputes Act, 1947. The question was whether this sum constituted an allowable expenditure in computing the income of the firm for the assessment year 1958-59. The Supreme Court considered the liability to pay retrenchment compensation arising under section 25FF of the Industrial Disputes Act, 1947, and concluded that it would arise for the first time after the closure of the business and not before and that such liability arose not in the carrying on of the business but on account of the transfer of the business. According to the Supreme Court, during the entire period that the business was continued there was no liability to pay retrenchment compensation. Further, according to the Supreme Court, the liability which arose on transfer of the business was not of a revenue nature and, therefore, it could not be deducted under section 10(1) and 10(2)(xv) was disallowed. The Supreme Court, however, had occasion to consider the Southern Railway of Peru's case and Appeal from the Judgment and Order dated on discussing the same and the observations from the judgments of Lord McDermott and Lord Radcliffe, to which we have adverted earlier, observed as under. \n \"The question which arises in the present case is not about the miscibility of a provision made by a trader by the adoption of a reasonably satisfactory method estimating the present value of an obligation which may arise in future to pay a sum of money to his employees. The question that falls to be determined is whether the liability which arises on transfer of the business is to be regarded as a permissible our going in the account of the business which is transferred. Broadly stated, the present value on commercial valuation of money to become due in future, under a definite obligation, will be a permissible outgoing or deduction in computing the taxable profits of a trader, even if in certain condition s the obligation may cease to exist because of forfeiture of the right. Where, estimating its present value may arise, for to be a permissible outgoing or allowance, there must in the year of account be a present obligation capable of commercial valuation.\" (page 649 of the report). \n\n 32. It is clear, therefore, that even in this case the Supreme Court appears to have confirmed the principle enunciated by the House of Lords. \n\n 33. We now turn to Metal Box Company of India Ltd. v. Their Workmen which decision is expressly mentioned by the Central Board of Direct Taxes in the first circular and which decision, therefore, merits close scrutiny and attention. In that case the Supreme Court was primarily concerned with the calculation of bonus payable to the workmen of Metal Box Company under the Payment of Bonus Act, 1965; and, broadly speaking, under the provisions of the said Act the available surplus for any employer in respect of any accounting year has to be the gross profits for that year after deducting therefrom the sums referred to in section 6 of the said Act. Section 4 indicates the manner in which gross profits derived by an employer from an establishment are to be calculated. In the case of a banking company the gross profits are to be calculated in the manner specified in the First Schedule to the said Act, and in all other cases they are to be calculated in the manner specified in the Second Schedule to that Act. We are really not concerned with the detailed provisions in the Act or in the Schedules, and what has been mentioned above is only as a background for appreciating the rival contentions which came up for decision before the Supreme Court in Metal Box Company's case. In the profit and loss account of the said company a sum of Rs. 18.38 lakhs, being the estimated liability under two gratuity schemes framed by the company, was deducted from the gross receipts. Under one of the schemes, which was first introduced in 1960, gratuity was payable on the termination of an employee's service either due to retirement, death or termination of service, the amount of gratuity payable being dependent on his wages at that time and the number of years of service put in by him. The company had worked out on an actuarial valuation its estimated liability and made provision for such liability not all at once but spread over a number of years. In 1964-65, the second gratuity scheme was introduced by the company which was available to its officers. In this case also the estimated liability under the scheme was worked out. But, instead of providing the whole of it during the year, the provision was spread over a number of years. In the year under consideration, i.e., 1964-65, the company had made provision against its liability under the two schemes for Rs. 18.38 lakhs, whereas the actual payment as gratuity to the workmen and officers who retired was Rs. 1,31,585 and Rs. 87,295, respectively. The Union contended that the company could deduct from the gross receipts only the sums actually paid during the year. The company, on the other hand, maintained that what it had done was legitimate and was warranted by the principles of accountancy and, therefore, the hole amount of Rs. 18.38 lakhs was deductible in arriving at its net profits. The question which the Supreme Court was called upon to consider was whether it was legitimate in such a scheme of gratuity to estimate the liability on an actuarial valuation and deduct such estimated liability in the profit and loss account while working out the net profits of the company. It was observed by Shelat J., speaking for the Supreme Court (at pages 62-63 of the report), as under :\n \"In the case of an assessee maintaining his accounts on the mercantile system, a liability already accrued, though to be discharged at a future date, would be a proper deduction while working out the profits and gains of his business, regard being had to the accepted principles of commercial practice and accountancy. It is not as if such deduction is permissible only in case of amounts actually expended or paid. Just as receipts, though not actual receipts but accrued due are brought in for income-tax assessment, so also liabilities accrued due would be taken into account while working out the profits and gains of the business.\" \n\n 34. Reference was then made to Calcutta Company's case and Standard Mill's case, to which we have adverted earlier. It was observed that in Standard Mill's case the Supreme Court was concerned with the terms of section 2(m) of the Wealth-tax Act and that in view of the express phraseology employed, its liability to pay gratuity which did not exist in present would not constitute a debt and, therefore, could not be deducted while computing the net wealth. In connection with this aspect of the matter it was observed (at pages 64-65 of the report) as under\n \"These observation show that the court was of the view that though such a liability is a contingent liability and, therefore, not a 'debt' under section 2(m) of the Wealth-tax Act, it would be deductible under the Income-tax Act while computing the taxable profits. In the instant case, the question is not whether such estimated liability arising under the gratuity schemes amounts to a debt or not. The question that concerns us is whether, while working out the net profits, a trader can provide farmhouse gross receipts his liability to pay a certain sum for every additional year of service which he receives from his employees. This, in our view, he can do, if such liability is properly ascertainable and it is possible to arrive at a proper discounted present value. Even if the liability is a contingent liability, provided its discounted present value is ascertainable, it can be taken into account. Contingent liabilities decanted and valued as necessary can be taken into account as trading expenses if they are sufficiently certain to be capable of valuation and if profits cannot be properly estimated without taking them into account. Contingent rights, if capable of valuation, can similarly be taken into account as trading receipts where it is necessary to do so in order to do so order to ascertain the true profits : (see C. N. Beatti's Elements of the Law of Income and Capital Gains Taxation, 8th edition page 54).\" \n\n 35. In Metal Box Company's case Shelat J. cited Southern Railway of Peru's case and noted with approval the principle enunciated by the House of Lords that the company was entitled to charge against each year's receipts the cost of making provision for the retirement payments which would ultimately be payable as the company had had the benefit of the employee's service during that year, provided the present value of the future payments could be fairly estimated. It may be mentioned that the passage from Southern Railway of Peru's case which we have quoted earlier, has been quoted in extenso in the judgment of Metal Box Company's case repelling the contention that such provision was merely for a contingent liability which may or may not come about; and this argument advanced on behalf of the workmen appears to be repelled as was the argument of the Crown by the House of Lords. It appears thereafter from the report (at page 67) that it was contended before the Supreme Court that such a claim on behalf of the Metal Box Company ought not be countenanced inasmuch as it was not in accordance with the companies Act, and further that such a provision was not permissible under the Income-tax Act, 1961. Both these aspects were considered by the Supreme Court and the contentions based on the provisions of the two enactments negatived. As far as the Income-tax Act, 1961, is concerned, it was observed (at page 67 of the report) :\n \"But the contention was that though Schedule VI to the companies Act may permit a provision for contingent liabilities, the Income-tax Act, 1961 does not, for under section 36(v), the only deduction from profits and gains permissible is of a sum paid by an assessee as an employer by way of his contribution towards an approved gratuity fund created by him for the exclusive benefit of his employees under an irrevocable trust. This argument is plainly incorrect because section 36 deals with expenditure deductible from out of the taxable income already assessed and not with deductions which are to be made while making the profit and loss account.\" \n\n 36. After this discussion the Supreme Court held that an estimated liability under gratuity schemes such as the ones being considered by the Supreme Court, even if it amounted to a contingent liability and not a debt under the Wealth-tax Act, if properly ascertainable and its present value fairly discounted, was deductible from the gross receipts while preparing the profit and loss account. It found no rule or direction in the Companies Act which prohibited such a practice. This branch of the argument advanced before the Supreme Court then was clearly negatived. \n\n 37. It was on the basis of the judgment in Metal Box Company's case that the Central Board of Direct Taxes came to issue its first circular, dated September 21, 1970. According to the Board, the provision of gratuity on a scientific basis (in the form of an actuarial valuation carried out every year) could be considered to represent a real liability of the employer to the employees. In this view of the matter the Board came to the conclusion that the liability so ascertained could not be properly regarded as a contingent liability, and that such provision of gratuity, therefore, may be treated as an admissible deduction under section 37(1) of the Income-tax Act, 1961.\n\n 38. The learned counsel for the respondents has submitted that the observation in Metal Box Company's case pertaining to the allow ability of such provision under the Income-tax Act can in no sense of the term be regarded as the ratio dicidendi and were no more than mere casual observations which were not binding on the High Courts or subordinate courts and would not constitute the law of the land within the meaning of article 141 of the Constitution of Indian the other hand, it was submitted by Mr. Palkhivala on behalf of the company that these were not casual observations and not even obiter dicta but part of the ratio of the case, fully consistent with the previous decisions of the court, and, accordingly, the law of the land, binding upon the courts and all officers including Income-tax Officers. Alternatively, it was submitted by Mr. Joshi on behalf of the revenue that in his view the observations of the Supreme Court were per income and, therefore, ought not to be followed by the High Courts and that, in any event, no writ of mandamus should issue on the basis of these observations if the court was satisfied that the same were per income. In connection with these two heads of argument it would become necessary to refer briefly to some authorities of our High Court and the other High Courts cited at the Bar. But before doing so, we think it would be proper to complete the recital of the Supreme Court cases by referring to Bombay Dyeing and Manufacturing Co. Ltd. v. Commissioner of Wealth-tax which has been mentioned in the fore front in the second circular of the Central Board of Direct Taxes, which circular has been impugned in this petition.\n\n 39. In the above-cited case the Supreme Court was concerned with computing the net wealth of the assessee-company which was the appellant before it. It appears that the assessee-company wanted the Supreme Court to reconsider the decision it had given in Standard Mill's case to which reference has been made earlier. According to the assessee-company, the decision in Standard Mill's case was required to be reconsidered by a larger Bench of the Supreme Court in view of the Supreme Court's decision in Metal Box Company's case. According to Hegde J., there was no conflict between the two decisions and there was no justification for referring the Bombay Dyeing case to a larger Bench for reconsideration of the decision in Standard Mill's case. Accordingly, the latter decision was applied and the appeal to the Supreme Court dismissed. There is only one line in the judgment of the Supreme Court (if that decision can be elevated to the status of a judgment) pertaining to Metal Box Company's case and that line reads : \"Metal Box Company's case was rendered under the Bonus Act.\" That this is so is plain and obvious. But, in our opinion, it would be improper and impermissible to read anything more in this line than what it says. The Metal Box Company's case was obviously one where the Supreme Court was considering the claims and contentions of the respective parties before it arising under the Bonus Act. For that purpose, however, the court thought it necessary to refer to the provisions of and decisions under the Wealth-tax and the Income-tax Acts and the provisions of the Companies Act. In the Bombay Dyeing case it has not been stated that this discussion is obiter directly and it appears to us that merely by reason of this passage in the Bombay Dyeing case it would not be proper to consider that the Supreme Court has in any way regarded the observations in Metal Box Company's case pertaining to income-tax as obiter or casual and not binding.\n\n 40. The distinction between obiter dictum and \"casual observations\" of the Supreme Court is well illustrated by a decision of a Division Bench of this court in Mohandas Issardas v. A. N. Sattanathan. According to the Division Bench, it was as much necessary in the interests of judicial uniformity and judicial discipline that all the High Courts must accept as binding the obiter dicta of the Supreme Court in the same spirit as the High Courts accepted the obiter dicta of the privy Council. Am obiter dictum was defined as an expression of opinion on a point which is not necessary for the decision of a case. This definition draws a clear distinction between a point which is necessary for the determination of a case and a point which is not necessary for the determination of a case. It was, however, observed that in both cases the point must arise for the determination of the Tribunal. The question which was necessary for the determination of the case would be the ratio decidendi. The opinion of the Tribunal on the question which was not necessary to decide the case would be only an obiter dictum. However, according to the Division Bench, it would be incorrect to say that every opinion of the Supreme Court would be binding upon the High Court in India; the only opinion which would be binding would be an opinion expressed on a question that arose for the determination of the Supreme Court and even though ultimately it might be found that the particular question was not necessary for the decision of the case, even so if an opinion was expressed by the Supreme Court on that question the opinion must be regarded as binding upon the High Courts. The relevant observations from the judgment of Chagla C.J. are to be found at pages 1160, 1161 and 1163 of the report.\n\n 41. It was similarly pointed out by Mr. Joshi that in Zoolfiqar Ali Currimbhoy Ebrahim v. Official Trustee of Maharashtra counsel for one of the parties had referred to certain observations made in. judgment of the Supreme Court and attempted to utilise those observations in support of his argument advanced before the Bombay High Court. It was conceded that the observations of the Supreme Court did lend support to the argument of counsel but the observations were regarded as not amounting to either ratio decidendi or obiter dicta of the Supreme Court and in the nature of mere casual observations, which were not binding (see observations made by Tarkunde J. at pages 333.334 of the report and at pages 369.370 by Kotval C.J.).\n\n 42. On the other hand, according to the learned counsel for the company, the observations in Metal Box Company's case above quoted regarding deductibility of gratuity liability on an actuarial valuation basis for the purposes of computing income-tax payable by the assessee-company were part of the ratio of the case. According to his submission, for the purposes of computation of bonus under the Payment of Bonus Act, the starting point was the computation of commercial profits. There was no definition of such concept to be found in the payment of Bonus Act and, therefore, the Supreme Court took recourse and it had to take recourse to the corresponding provisions under the Companies Act and under the Income-tax Act. The learned counsel for the company proceeded to analyst the judgment in Metal Box Company's case in the light of this approach and submitted that, in the view of the Supreme Court as expressed in the said The Judgment commercial profits, which concept was not defined in either the Payment of Bonus Act or in the Income-tax Act, had to be computed on ordinary principles of commercial accounting. The Supreme Court had before it for consideration a new enactment of Parliament for which there was no judicial authority and, therefore, the question of computing or calculating commercial profits and the deductibility of gratuity liability which was payable in future but on the present scientific estimation had to be decided on the basis of decision given in respect similar enactments (the similarity being restricted to the provisions under consideration, viz., the Income-tax Act, 1961). It is in the light of this approach that the Supreme Court referred to cases under the income-tax law to elucidate the concept of commercial profits and the proper approach to the claim of the company to make the deduction for the provision under contemplation. Again, according to the contention of the learned sensual for the company, it was open to the learned judges of the Supreme Court to decide this question on first principles, being guided by the express statutory provisions under the Payment of Bonus Act, or it was open to them to decide this question with the help of analogous provisions and principles underlying the decisions in what they regarded as comparable enactment, viz., the Income-tax Act. It was submitted that in case the second approach was resorted to by the Supreme Court, it would not be proper for the High Court to hold that the observations made concerning the provisions in the Income-tax Act and the judicial decisions under that Act are casual observations or obiter. As far as this contention is concerned, it was submitted that where the Supreme Court has adopted an approach and after adopting that approach had indicated its views on an enactment which it expressly or by implication regards as comparable to the enactment under consideration, the views expressed by the Supreme Court on the latter enactment must be regarded as part of the ratio and cannot be regarded by the courts bound by Supreme Court decisions as obiter or casual observations which in the opinion of the subordinate courts were not necessary to be made which came up for consideration. According to this submission, the decision of the Supreme Court in Metal Box Company's case rested on the footing : (a) that the payment of Bonus Act and the Income-tax Act were in pari material as far as these two allied questions were concerned, and (b) that the legal position regarding such deduction under the Income-tax Act had to be determined in order to come to a conclusion as to the true position under the Payment of Bonus Act. If this is accepted-and in Mr. Palkhivala's submission, it was not open to us to question the approach of the Supreme Court or to say that some other approach was the proper or better one-it was impossible to argue that determination of the position under the Income-tax would amount to laying down obiter dicta, much less making a casual observation. According to the Supreme Court, the decision under the Income-tax was a necessary and essential step in coming to the conclusion regarding the question of deductibility of similar provision under the Payment of Bonus Act and that it would not be open for the High Court to say that any of the observations in such decision are obiter or casual because in the opinion of the High Court it would have adopted a different approach or would not have considered it necessary to decide some of the points in fact decided by the Supreme Court.\n\n 43. During the course of arguments it had appeared to us at one stage that perhaps it was unnecessary for the Supreme Court to have considered whether such a provision had been or could be deducted from the computation of gross profits of the business by reason of the provisions of section 36(1)(v) of the Income-tax Act, 1961. According to the Supreme Court, the argument advanced on behalf of the workmen that such a provision was not permitted by reason of section 36(1)(v) was not tenable inasmuch as section 36 deals with expenditure deducted from out of taxable income already computed and not with deductions which are to be made while making the profit and loss account. It was pointed out by Mr. Palkhivala whilst dealing with this aspect of the matter that one of the sums deductible from the gross profits of the employer under the provisions to be found in section 6 of the Payment of Bonus Act would be direct taxes which the employer is liable to pay for the accounting year in respect of his income, profits and gains during that year, and that it would be open to a court having regard to the statutory provision to seek to reconcile its decision under the Payment of Bonus Act with the position as, according to it, would exist under the Income-tax Act so that the estimation or computation of gross profits would be the same for both purposes and would not be lower for the Payment of Bonus Act and higher for the Income-tax Act, inasmuch as this might result in hardship to the workmen concerned. \n\n 44. The question before us is not what we would have done had we been faced with the task of deciding the question which came up for decision before the Supreme Court in Metal Box Company's case. We might have decided the case on first principles, restricting our decision to the provisions of the Payment of Bonus Act, 1965. That, however, the Supreme Court does not seem to have done. On the other hand, the Supreme Court does seem to us to have followed the approach indicated by Mr. Palkhivala during the course of arguments, and having followed that approach it would not be open to us now to question that approach or to say that any observations made by that court whilst following that approach would be obiter or casual observations. Indeed, it appears to us that the Central Board of Direct Taxes itself did not consider this observations to be casual observations, and this view is fortified by the language of the first circular which has been fully set of at the beginning of this judgment.\n\n 45. In dealing with this aspect of the matter it also becomes necessary, in our opinion, to refer to three judgments of the High Courts, including that of the Bombay High Court, which have considered and sought to apply the observations of the Supreme Court in Metal Box Company's case. These decisions of the High Courts would also go a long way to reveal the unstable foundations underlying Mr. Joshi's theory that those observations were casual observations. These three cases, to which brief reference may now be made are : Madho Mahesh Sugar Mill (P) Ltd. v. Commissioner of Income-tax. Delhi Flour Mills Co. Ltd. v. Commissioner of Income-tax and India United Mills Ltd. v. Commissioner of Income-tax \n \n\n 46. In Madho Mahesh Sugar Mill's case the assessee-company was maintaining its accounts on the mercantile system. In 1961 the U.P. Government issued a notification with regard to the sugar industry imposing a liability on persons running sugar mills to provide gratuity to their workmen in accordance with the scale provided in the said notification. In pursuance of this notification the assessee-company set apart the sum of Rs. 1,37,811, representing the sum that the assessee-company would be required to pay to its workmen as gratuity and made an appropriate entry in its book of accounts, crediting the gratuity account and debiting the profit and loss account for the assessment year 1962-63. This sum was claimed by the assessee-company as business expenditure, but the claim was disallowed by the Income-tax Officer, the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal. On a reference to the Allahabad High Court it was contended for the revenue that at best the assessee-company could claim only such gratuity relevant to the previous year. The discounted value of the assessee-company's liability to pay gratuity based on an actuarial valuation was determined at the instance of the High Court at Rs. 1,05,200. Before the High Court the Calcutta Company's case. Indian Molasses Company's case. Standard Mills' case were referred to, and finally the Metal Box Company's case according to Mr. Joshi, makes only casual observations regarding the position under the Income-tax Act, was considered and applied. It was held that the Government order provided that the gratuity would be payable to an employee not only in respect of his future services but also for his past services. Thus, on order to ascertain the quantum of liability as on the date the order came into effect, the past services of the employees had also to be taken into account. In the circumstances every businessman would make provision every year for his liability under the notification. According to the Allahabad High Court, the liability for payment of gratuity ascertained on actuarial calculations, in which all contingencies are taken into consideration, is a liability in present and is capable of ascertainment, and, therefore, the sum of Rs. 1,05,200 was a permissible business expenditure in the assessment year concerned. According to the High Court, prior to the decision of the Supreme Court in Metal Box Company's case there appeared to be some doubt as to whether such a liability was capable of ascertainment and whether it could be called a liability in present.\n\n 47. After considering the observations of the Supreme Court, the Allahabad High Court opined that the doubt had been set at rest by the decision of the Supreme Court. This would be found at page 509 of the report. A passage from the Indian Molasses Company's case was brought to the attention of the Allahabad High Court and these observations were made by the High Court after considering the said case as well as subsequent observations of the Supreme Court in Metal Box Company's case. It may be pointed out that before the Allahabad High Court, counsel for the department had contended that payment of gratuity was provided for in clause (v) of sub-section (1) of section 36 of the Income-tax Act and that deduction for gratuity could be allowed only in accordance with that provision. The Allahabad High Court answered that contention in the followed words (at page 509 of the report) \n \"In any case, the answer to that question is plain. The present case is not governed by section 36(1)(v), which permits deduction out of the gross profits of any contribution made by an employer towards gratuity fund created under a trust. In the present case the amount is deductible in the computation of the gross profit itself.\"\n\n 48. After making these observations the Allahabad High Court referred to the observations made to the same effect by the Supreme Court in Metal Box Company's case.\n\n 49. A similar question came up for consideration before the Delhi High Court in Delhi Flour Mill's case. Before the said High Court the Indian Molasses Company's case Southern Railway of Peru's case Metal Box Company's case and Madho Mahesh Sugar Mill's case were cited. Indian Molasses Company's case was distinguished and the other three cases followed and the question was answered in favour of the assessee-company. In the case before the Delhi High Court gratuity was payable to the employees of the assess-company under a settlement of disputes between the employer and the employees. Pursuant to such agreement the assessee-company, which maintained its accounts on the mercantile system, transferred the sums of Rs. 55,712 and Rs. 12,001 to the Employees' Gratuity Fund for the accounting periods ending on 31st October, 1956, and October 31, 1957, and in its balance-sheets the assessee-company showed these amounts under the head \"Current Liabilities and Provisions\". The assessee-company also gave credit of the amount of gratuity payable under the agreement to the employees in the account of each of the employees. The Income-tax Officer had allowed deduction only of the actual amounts disbursed during those years and disallowed the balance. According to the Delhi High Court, the provision made by the assessee-company for payment of gratuity under its agreement with the employees dated February 14, 1956, was in the nature of revenue expenditure and the amounts were allowable as business expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922, for the two assessment year respectively. The gratuity payable to an employee represented a part of the emoluments payable to him for rendering service during each year. The right to receive gratuity accrued to the employee as soon as he completed a year of service, and, as a corollary, the liability to pay the gratuity to the employee arose to the assessee-company at the end of each year. The amount of liability was also ascertainable and there was no question in that case of the discounted present value of the liability not being ascertainable. No doubt the actual payment of the gratuity was deferred to a later date on the happening of a certain event, viz., death or voluntary retirement of the employee. But, according to the Delhi High Court, these were not uncertain events. Further, according to the Delhi High Court, even though the gratuity might not be payable to an employee in the event of his dismissal or retrenchment from service, it could not be said that the liability of the assessee-company for the payment of gratuity to its employees under the agreement did not accrue during the relevant years. As the Delhi High Court observes, distinguishing the Indian Molasses Company's case (which pertained to the provision for retirement benefits of a single employee) :\n \"Under the agreement, every employee was entitled to receive gratuity for every year of service rendered by him to the assessee and this gratuity was payable to the employees on the happening of events which were certain. The possibility of the gratuity not being paid at all to the employees in the event of dismissal or retrenchment of the employees is certainly too remote to be taken into account.\" \n\n 50. It is interesting to not that as far as Metal Box Company's case was concerned, the Delhi High Court observed that the several observations made by the Supreme Court in that Case, though made in the context of the bonus payable by a company under the payment of Bonus Act which required computation of profits earned by the company in a particular year, were is its view equally applicable to the question for consideration before the High Court, viz., whether the provision made by the assessee-company for the payment of gratuity under its agreement with the employees was in the nature of an accrued liability of the assessee, which liability was liable to be taken into account for computing the income of the assessee-company for the years under reference.\n\n 51. Even if the position had rested with the judgment of the Allahabad and Delhi High Courts, it is our opinion that this court would have, on the application of the principle of uniformity of construction, followed the law laid down in the above-quoted two decisions. As has been observed in a number of decision of this court, the latest of which is Commissioner of Income-tax v. Tata Sons Private Ltd. the established practice and policy is that one High Court must accept the view taken by another High Court in the interpretation of the section of a statute which is an all-India statute. It is, however, unnecessary to base our view of the position under the Indian Income-tax Act, 1922, merely on the view taken by the Allahabad and Delhi High Courts inasmuch as in India United Mills Ltd. v. Commissioner of Income-tax a similar view appears to have been taken by a Division Bench of this court also. In that case the facts were as follows : By an award given under the Bombay Industrial Relations Act, 1946, the Industrial Court had directed payment of gratuity to workmen of the assessee-company in accordance with the scale provided therein, the amount of gratuity being dependent on the wages at that time and the number of years of service put in by the workmen. In order to implement this award the assessee-company provided or set apart during the year 1951, an amount of Rs. 21,77,359 for a gratuity fund made up of Rs. 19,11,658 on account of initial contribution and Rs. 2,65,701 on account of annual contributions for the year 1951. It may be noted, however, that the assessee-company subsequently created a trust by executing a deed on February 20, 1952, to hold the funds contributed to the gratuity fund and made payments to the trustees of the fund of Rs. 20,00,000 on February 28, 1952, and Rs. 1,50,466 on March 4, 1952. Gratuity rules had been framed and in these rules there was a specific provision that certain categories of employees who has been dismissed for dishonesty or misconduct were not to be entitled to claim gratuity and any amounts contributed by the company on their account were to stand transferred to \"Lapse and Forfeiture Suspense Account\". The assessee-company claimed deduction of the amounts contributed to the gratuity fund while determining its profits for the assessment years 1952-53 and 1953-54. The Income-tax Officer allowed as a deduction only the amount that had been actually paid to the persons who had retired in that year. On second appeal, the Appellate Tribunal rejected the assessee-company's claim on the ground that the said expenditure was of a capital nature. The Tribunal further held that though the assessee-company was following the mercantile system of accounting, that method only permitted a deduction on account of liabilities which were actual and present during the current year and which could be ascertained with a fair degree of precision and in the instant case the liability was not present and actual and that it was not possible to ascertain it with a fair degree of precision. According to the Tribunal, it was in the nature of a contingent liability and, therefore, the deduction claimed could not be allowed. On a reference to the High Court, after citing Madho Mahesh Sugar Mill's case and referring to the decision of the Supreme Court in Metal Box Company's case it was held the the liability for payment of such gratuity ascertained by actuarial calculations, in which all contingencies are taken into consideration, is a liability in present and capable of ascertainment and, therefore, the amount set apart was a permissible business expenditure in the assessment year concerned. Applying what was laid down in the above two decisions the High Court answered the question in favour of the assessee-company, observing that the setting apart of the two sums would have to be allowed as business expenditure provided it could be said that the amount claimed as a deduction had been arrived at by adopting a scientific method of determining the present value of the said Liability had been contended by the revenue before the High Court in India United Mill's case that in the case which was before the High Court for consideration the estimate of the liability had not been properly arrived at. According to the High Court, it was unnecessary to decide this particular issue in view of the creation of the trust inasmuch as the amount had been actually paid over by the assessee-company to the trustees and, therefore, this was a case of actual expenditure and not merely a provision on account of the liability. Mr. Joshi had urged before us that in India United Mill's case the facts disclosed an actual irretrievable parting of the amounts by the assessee-company, and he submitted that this was the basis why the question were answered in favour of the assessee-company. With respect to his sub-mission, it proceeds upon an erroneous appreciation of what that judgment discloses. This aspect of the matter assumed importance before the High Court only because of the limited contention raised by the revenue that the provision was not scientifically estimated. The High Court applied the observations of the Supreme Court in Metal Box Company's case and of the Allahabad High Court in Madho Mahesh Sugar Mill's case on the earlier aspect of the question viz., whether such liability was contingent or could be said to exist in present, and on this aspect of the question the fact that it had irretrievably parted with the amount was not of any relevance.\n\n 52. This decision (in India United Mill's case, in our opinion clearly establishes that the observations in Metal Box Company's case were not at all casual observations. Those observations have been held as ones which could be usefully referred to by our High Court and in fact have been followed and applied by the High Courts of Allahabad and Delhi. It is not necessary in our opinion, to consider whether the observations as to the position under the Income-tax Act made in Metal Box company' case would be the ratio or obiter dicta as in either case the observations are binding on the High Courts. These observations are according to us in line with the previous decisions of the Supreme Court under the Income-tax Act and merely elucidate the position which has been arrived at by the Supreme Court step by step from its decisions in the various cases to which we have referred earlier. To that extent, perhaps, Mr. Palkhivala is right in his submission that these observations cannot be characterised as obiter dicta but must be properly regarded as the ratio of the case inasmuch as the Supreme Court seems to have followed the approach of considering the position under the Income-tax Act and applying the same position to the position under the Payment of Bonus Act. It is true that some other court may decide not to follow that approach and ascertain the position under the Bonus Act on first principles; but merely because that is a possible approach, it would not be proper to regard these observations of the Supreme Court as being in the nature of obiter.\n\n 53. There remains the alternative argument of Mr. Joshi that these observations are and must be properly regarded as being made as per income. This submission proceeded upon the following footing : According to Mr. Joshi, section 36(1)(v) of the Income-tax Act, 1961, read with section 40(a) thereof and the Rules framed under the Income-tax Act provide a complete code for such allowance and provision made for gratuity liability. He conceded that there was no express bar to such provision as was intended to be made by the company before us. But, according to his submission, there was an implied bar by reason of these provisions read together with the Rules, which bar had not been properly considered by the Supreme Court in Metal Box Company's case and that to that extent the decision was per income and not binding on the High Courts.\n\n 54. The provisions of section 36(1)(v) and section 40(a)(iv), on which reliance was placed, may be set out : \n\n \"36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28 -..... \n\n (v) any sum paid by the assessee as an employer by way of contribution towards an approved gratuity fund created by him for the exclusive benefit of his employees under an irrevocable trust.\" \n\n \"40. Notwithstanding anything to the contrary in sections 30 to 39, the following amounts shall not be deducted in computing the income chargeable under the head 'Profits and gains of business or profession', - \n\n (a) in the case of any assessee -....... \n\n (iv) any payment to a provident or other fund established for the benefit of the employees of the assessee, unless the assessee had made effective arrangements to secure that tax shall be deducted at source from any payments made from the fund which are chargeable to tax under the head 'Salaries'.........\" \n\n 55. The approved gratuity rules are to be found in Part XIV of the Income-tax Rules, 1962, and provides as to how a trust is to created, in what its moneys are to be invested, who may be its directors; the rules also fix the limit for the annual and initial contributions. Mr. Joshi placed great reliance on rule 106 under which the employer is not to keep to have any interest in the fund moneys. Now, the argument of Mr. Joshi that the decision in Metal Box Company's case was per income inasmuch as it did not properly consider and apply this implied bar of the allowance of such provision, was met by Mr. Palkhivala on a number of alternative footings. In the first place, it was submitted that it was not open to the High Courts to take up a position that the decision of the Supreme Court or the observations made therein were per income and not to follow the decision and the observation. In this connection we were referred to Ballabhdas Mathuradas Lakhani v. Municipal Committee, Malkapur where it was observed that a decision of the Supreme Court was binding on the High Court and the High Court could not ignore it because they thought that \"relevant provisions were not brought to the notice of the court\". Similar views are to be found in Chhotala Vaghjibhai v. Vivekanand Mills Co. Ltd. where it is observed that it is only in case of the decision of the concurrent court that the doctrine of obiter per income, or distinguished on facts, could be applied; and that the same position would not extend to a decision of the superior court (viz., the Supreme Court) which was completely binding on the High Court. Mr. Palkhivala also referred us to similar observations in Sailendra Nath Neogy v. Purnendu Sen and Commissioner of Income-tax v. Roshanlal Kuthiala.\n\n 56. Alternatively, it was submitted that the doctrine of a decision being distinguished and not followed on the footing that it is per income has to be invoked in the rarest of cased and only when it is clear to the court that there is a manifest slip or an erroneous observation which is inconsistent with a specific statutory provision or a binding authority. In connection with this aspect of the matter we were referred to a discussion in Morelle Ltd. v. Wakeling The Court of Appeal was called upon to hold that its earlier decision in Morelle Ltd. v. Waterworth was per incuriam. This submission was not acceptable and it was observed that a decision should be held to have been given per income only where it was given in ignorance or forgetfulness of some inconsistent statutory provision or of some authority binding on the court, so that in such cases some part of the decision or some step in the reasoning on which it was based was on that account demonstrably wrong. The Court of Appeal went on to observe that a decision was not to be treated as having been given per incuriam simply because of a deficiency of parties, or because it might be made to appear that on an earlier occasion the court had not had the benefit of the best argument. \n\n 57. It was finally urged that the decision of the Supreme Court could not be said to be per incuriam inasmuch as the provisions contained in section 36(1)(v) of the Income-tax Act, 1961, had been brought to the attention of that court when it delivered its judgment in Metal Box Company's case that, further, the view that it took of the applicable provisions under the Income-tax Act was fully consistent with and in consonance with its earlier observations in the four cases, to which we have adverted earlier in the course of our judgment, and that, in any event, there was no basis in Mr. Joshi's contention that there was any bar by necessary implication by reason of the provisions contained in sections 36(1)(v) and 40(a)(iv) read together with the Rules contained in Part XIV of the Income-tax Rules, 1962.\n\n 58. In connection with the last mentioned argument Mr. Palkhivala took us through the various permissible deductions provided for under sub-section (1) of section 36 and demonstrated how it was not possible to argue that those only were the permissible deductions in respect of the heads thereunder mentioned and that the other deductions or allowances under those heads were barred by necessary implication. According to his submission, these were provisions for allowing certain provision made or expenses incurred irrespective of whether they would otherwise be properly regarded as expenses incurred by the assessee in the course of its business or amounts which had to be deducted before arriving at or estimating the income or profits of the assessee. For instance, there was a special provision made in respect of any special reserve created by a finance corporation indicated for providing long-term finances for industrial or agricultural development under section 36(1)(viii). This could not be deemed to be a complete self-contained code for such reserves or even as far as reserves of financial corporations were concerned, but a specific and a special provision for such deductions. The same may be said about the special provisions to be found in section 36(1)(vi), which permits of certain deductions in respect of animals used for the purpose of business or profession otherwise than as stock-in-trade, which deduction would otherwise not be regarded, perhaps, as a permissible deduction. But the argument may be best illustrated by referring to section 36(1)(i) which permits deduction of the amount of any premium paid in respect of insurance against risk of damage or destruction of stock or stores used for the purposes of the business or profession. Apart from such insurance, insurance against loss of profit and standing charter is a common type of insurance taken by various assesses. Can it possibly be contended that the only deduction permissible in respect of insurance premia is that contemplated by section 36(1)(i) and no other insurance premium is allowable as a deduction although it might be properly regarded as pertaining to the business activity of the assessee ? It is important in this connection to appreciate that under sections 40 and 40A of the Income-tax Act, 1961, are to be found specific express prohibitions against allowing certain types of deductions. Bearing in mind that where the legislature wanted to prohibit certain claims it did so expressly under these sections, it appears to us that the contention that such bar should be necessarily implied is not one that deserves to be easily accepted. Bearing all these considerations in mind the contention of Mr. Joshi that there is a bar by necessary implication by the provisions of section 36 is one which does not deserve to be accepted. As the Supreme Court has observed in Metal Box Company's case there appear to be two steps in the process of considering the tax liability for assesses similar to the company, the first step being to estimate the income which will permit deduction being made of the nature claimed by the company, and, thereafter, to consider whether any further deductions are available under section 36(1) and similar provisions. Accordingly, as the Supreme Court tersely put it, \"section 36 deals with expenditure deductible from out of the taxable income already assessed\" (i.e., calculated or arrived at) \"and not with deductions which are to be made while making the profit and loss account\", i.e., after the income is assessed but before considering the tax payable on such income. These observations, though tersely made and even assuming, as was contended, that the Supreme Court in that case might not have had the benefit of an elaborate argument such as the one which was made before us, appear to us to represent the true legal position under the Income-tax Act, 1961. This is also in accordance with the view taken by the Allahabad and Delhi High Courts in their decisions referred to above. If that be so, then on neither of the three alternative footings the argument of Mr. Joshi that the decision was per incuriam can be accepted. It does not appear to be per incuriam in the sense of the decision of the Court of Appeal in Morelle's case It is extremely debatable whether a decision of the Supreme Court or the observations made in such a decision can be disregarded by a High Court on this footing. And finally, as has been shown, the decision and the view taken by the Supreme Court on the provisions contained in section 36(1)(v) appears to us to be the correct view, and Mr. Joshi's contentions based on the provisions of section 36(1) read with section 40(a) together with the rules in Part XIV of the Income-tax Rules, 1962, cannot be accepted. There appears to us to be no implied prohibition contained in the Income-tax Act against allowing such provision as a deduction before the figure of profits is calculated or arrived at. \n\n 59. Before considering the argument advanced on behalf of the revenue as to the relief which ought to be granted, if any was liable to be granted, it now becomes necessary to make a few observations concerning the second circular of the Central Board of Direct Taxes which is impugned in this petition. We have already indicated that the view taken by the Board as to what the Supreme Court had observed in the Bombay Dyeing's case is not borne out by a careful perusal of the observations made by that court in its judgment. These observations did not warrant the conclusion that the Supreme Court had in any way doubted or limited or restricted its observations in Metal Box Company's case Bearing in mind the discussion which is to be found in the earlier part of this judgment, dealing with the somewhat terse observations in Metal Box Company's case as far as section 36(1) is concerned, the observations made in paragraph 3 of the said circular also appear to be unwarranted and untenable. A proper review of the Supreme Court decisions to which we have adverted during the course of this judgment would seem to indicate that permissible deductions are not restricted to those indicated in section 30 to 37, that such a provision is not for a contingent liability in the sense of the liability similar to that of the assessee-company in Indian Molasses Company's case but must be properly regarded as, if scientifically estimated, a provision for a present liability which is allowable in the case of an assessee which keeps its accounts on the mercantile system : it must be further held that there is no bar against such provision being allowable as a deduction by reason of section 36 or 37 which are mentioned in paragraph 3 of the second circular. It appears to us that the first circular issued by the Board had been issued on a proper consideration of the law laid down by the Supreme Court of India in Metal Box Company's case which law was in accord with its earlier decisions, and that the second circular which withdrew the first circular was clearly based on erroneous and untenable footings as we have indicated above. In this connection, it would be open to the Board to issue circulars granting relief and withdraw such circulars subsequently; but the difficulty in the instant case appears to be caused by the fact that the withdrawal of the first circular which is mentioned in the second circular is on a certain footing, which appears to us to be untenable and based on an incorrect view of the provisions of the Income-tax Act and the Supreme Court decisions.\n\n 60. It is in the light of these considerations that we have now to consider what relief is to be granted to the company, i.e., the petitioner, and what writ should issue. Before, however, dealing with the two authorities which were cited by Mr. Joshi in this connection and which we have mentioned earlier in this judgment, we may make it clear that we are not expressing any opinion as to the correctness of the calculations made by the actuary in his report dated June 15, 1974, a copy whereof is annexed as exhibit B to the petition. We have only considered a principle of the provision and no part of our judgment should be taken as certifying the correctness of the calculation of the amount of Rs. 2,77,52,991 which is to be found as determined by the said actuary. We have only considered whether if the present value of such liability can be scientific and properly ascertained and if the company makes a provision for such amount, it would be entitled to claim deduction in respect of this amount at the stage of ascertainment or estimating or computing its taxable profits. \n\n 61. In Sirpur Paper Mill's case the Supreme Court was considering the orders, instructions and directions which should be given by the Central Board of Direct Taxes under section 13 of the Wealth-tax Act, 1957, and observed that the Board cannot give directions or instructions to judicial functions. The provisions contained in section 13 of the Wealth-tax Act then under consideration by the Supreme Court were similar to the provisions contained in section 119 of the Income-tax Act, 1961. Mr. Joshi referred us to the relief granted by the Supreme Court in the said case and pointed out that inasmuch as the Commissioner had merely followed the impermissible directives given by the Central Board of Direct Taxes, the order of the Commissioner was quashed and the matter was remanded back to the Commissioner with a direction that he had to dispose of the revision application according to law and uninfluenced by any instructions or directions by the Central Board of Revenue (as it was then called). It was submitted by Mr. Joshi that in the instant case also the Income-tax Officer may be directed to dispose of the contention raised by the company in the matter of its claim for the deduction being allowed uninfluenced by the second circular which expressly directs the Income-tax Officer to complete the pending assessments in the light of the instructions contained in the said circular. We were also referred in this connection to the final order passed by the Supreme Court in Orient Paper Mills Ltd. v. Union of India where the Collector had been called upon to determine whether \"M.G. Poster Paper\" was packing and wrapping paper, and instead of determining the question for himself proceeded to answer the same in accordance with the directions issued by the Central Board of Revenue. It was observed that the power to be exercised by the Collector was a quasi-judicial power and that power could not be controlled by the directions issued by the Central Board of Revenue. By the final order the Supreme Court allowed the appeal and set aside the orders of the Collector as well as of the Central Government and remitted the proceedings back to the Collector for deciding the question whether the M.G. Poster paper should be assessed as printing and writing paper or wrapping and packing paper. It was submitted that this was the paper course and this could be the only writ to be issued by this court and not the writ as sought for by the company.\n\n 62. Now, it is important to note that in Orient Paper Mill's case the Supreme Court had been invited to decide the case and answer the question on the basis of the material on record. But the court observed that, ordinarily, it would not do so, since questions of fact were involved. It further observed that there was no exceptional circumstance in the case requiring the Supreme Court to deviate from the ordinary rule. As far as we are concerned, firstly, we are not called upon to determine any question of fact but only a matter of principle and to give a writ in accordance with the proper view of the provisions contained i the Income-tax Act, 1961, and the law laid down by the Supreme Court of India and the High Courts. In the second place, would it not be proper to regard this as an unusual if not an exceptional case and somewhat in the nature of a representative or a test case in the light of what is stated in paragraph 5 of the petition ? Further, there would be considerable justification in the company's apprehensions that in view of the express directions given in the second circular, the Income-tax Officer might not be able to discharge his quasi-judicial functions impartial despite the views expressed by this court; and that in such a contingency which could not be regarded a too remote or beyond the limit of possibility, the company and similar assesses would be constrained to avail of their remedies under the Income-tax Act of going in appeal to the Appellate Assistant Commissioner, in the first place, and, thereafter, in second appeals to the Income-tax Appellate Tribunal, with further reference to the High Court which would result in multiplicity of judicial proceedings which are both time-consuming and expensive, which is a result necessary to be avoided, and which could be avoided only if a clear writ as sought for by the petitioner is granted and not merely by following the course which was followed by the Supreme Court in Sirpur Paper and Orient Paper Mill's case attention was also drawn in this connection to the reply given by the Income-tax Officer to the specific allegations made in paragraph 5 of the petition. It appears to us that in this case there are exceptional circumstances which did not exist in either the Sirpur Paper Mill's case or in Orient Paper Mill's case and that it would not be proper, therefore, merely to quash the second circular issued by the Central Board of Direct Taxes, leaving it to the Income-tax Officer to complete the income-tax assessment of the company ignoring such circular. In the view that we have taken of the provisions of the Income-tax Act, 1961, and of the view of the Supreme Court and High Courts' judgments also, it appears to us that the writ as substantially sought for may issue.\n\n 63. In the view that we have taken, there will accordingly be a writ in terms of prayer (a) of the petition but omitting the word \"aforesaid\". We make it clear that in considering the claim of the company for the deduction being allowed, it will have to be seen whether the computation has been made on a scientific basis after providing for the discounting of all possible contingencies. \n\n 64. This has been a test case and, in our opinion, the parties should bear their own costs of the proceedings. Order accordingly. \n\n 65. Mr. Joshi applied for a certificate under article 133 of the Constitution of India. \n\n 66. Mr. Palkhivala opposes the application. \n\n 67. Under article 133(1) as amended, it is now provided that an appeal shall lie to the Supreme Court from any judgment, decree or final order in civil proceedings of a High Court if the High Court certifies : (A) that the case involves a substantial question of law of general importance, and (b) that in the opinion of the High Court the said question has to be decided by the Supreme Court. \n\n 68. We have already indicated how we were inclined to regard the question posed for our consideration in this petition, which was for an issue of a writ against the Income-tax Officer, as an exceptional case in the nature of a test case involving not merely the petitioner-company but a number of similar assesses, and we have decided in the view that we have taken to issue the writ sought for (substantially) by reason of these considerations. Now, the questions posed for our determination and dour decision have far-reaching importance at least in the sense of effect. These questions are important for limited companies from the point of view of the companies themselves, from the point of view of their shareholders and from the point of view of the revenue. These questions may have a bearing also on the rights of workers and other employees also. \n\n 69. It is true that as far as such question of provision for gratuity which may be payable in future is concerned, we have found the judgments of the Supreme Court all consistent in the sense that such liability may be regarded as a certain liability existing in present, thought payable in future. But on the other question posed by Mr. Joshi before us, viz., that such provision could not be allowed as a deduction by reason of the express provisions of section 36(1)(v) and section 40 read together with the Rules, which, according to him, constituted a bar on such amount being allowed as a deduction, we did not find an equally clear decision of the Supreme Court; and as far as this aspect of the matter is concerned, it would seem to be a substantial question of law of general importance which is required to be decided by the Supreme Court. \n\n 70. Accordingly, we certify that this case involves a substantial question of law of general importance which is required to be decided by the Supreme Court as indicated above." }, { "title": "Commissioner Of Income-Tax vs Dunlop Rubber Co. (I) Ltd. on 3 October, 1975", "url": "https://indiankanoon.org//doc/1094/", "text": "Commissioner Of Income-Tax vs Dunlop Rubber Co. (I) Ltd. on 3 October, 1975\nEquivalent citations: [1977]107ITR182(CAL)\nJUDGMENT\n \n\n Hazra, J. \n \n\n1. This is a reference by the Income-tax Appellate Tribunal under Section 256(1) of the Income-tax Act, 1961, to this court on the application of the Commissioner of Income-tax, West Bengal-I, Calcutta, made on June 13, 1969. \n\n2. The assessee, Dunlop Rubber Co. (India) Ltd., is a well-known manufacturer of rubber tyres, tubes, etc., in this country with its factory at Shahganj in West Bengal. It set up another factory, a completely new unit at Ambattur, near Madras, during the accounting years 1957 and 1958. \n\n3. For the assessment year 1963-64, the calendar year 1962 being the previous year, the assessee for the first time claimed exemption or relief under Sections 84 and 101 of the Income-tax Act, 1961, hereinafter called the Act. The assessee wrote to the Income-tax Officer on May 24, 1966, as follows: \n\n \"We file herewith our revised returns for the assessment year 1963-64, in terms of the provisions of Sub-section (5) of Section 139 of the Income-tax Act, 1961. This is as a result of discovering our omission to include claim for relief under Sections 84 and 101 of the Income-tax Act, 1961, in respect of our industrial undertaking at Ambattur, Madras. Our industrial undertaking at Ambattur, Madras, began to manufacture or produce articles in the previous year relevant to the assessment year 1960-61. \n\n We hereby declare that this undertaking was not formed by splitting up or reconstruction of a business already in existence. The buildings, machinery, plant, etc., of the new undertaking were not used for any\npurpose before. The new industrial undertaking has begun manufacture of articles in India within the prescribed number of years with reference to 1st April, 1948. It employs more than ten workers in a manufacturing process carried on with the aid of power. Computation of profits of the new industrial undertaking has been made in accordance with the provisions of Chapter IV-D of the Income-tax Act, 1961. \n\n Due to oversight the claim for relief under Sections 84 and 101 of the Act was not made for the assessment years 1960-61, 1961-62 and 1962-63 at the time of the assessment. However, we lodge herewith our claim for 1963-64, for which assessment is pending, and will be grateful if you will please admit our claim for this year.\" \n\n4. The assessee did not maintain any separate account for the new unit but only a record of fixed assets employed therein. In respect of the current assets and liabilities, a common and consolidated account for both the new unit and the old unit at Shahganj was maintained. In order to claim relief under Sections 84 and 101, the capital employed in the new unit had to be ascertained so that to the extent of 6% of the capital employed the assessee would get the relief or exemption under those provisions. Since the company did not maintain any separate account for the new unit, it computed the capital employed in the new unit by taking the fixed assets as per the separate accounts and current assets and current liabilities apportioned on the basis of the turnover of the new unit and the old unit. The fixed assets in Ambattur were taken at their written down value of Rs. 1,38,687. The other current assets and liabilities were taken at 17.15% of their totals in the common and consolidated account. On this basis the capital employed was arrived at Rs. 2,11,66,885 and 6% thereon worked out to Rs. 12,70,013 on which tax exemption was claimed. \n\n5. In the correspondence between the Income-tax Officer and the assessee, it was explained by the assessee that since both the factories at Shahganj and at Ambattur were run under the same company, the current assets and current liabilities were merged in the balance-sheet. As the items manufactured in Ambattur were similar to the ones manufactured at Shahganj and the products were sold uniformly throughout the country, it was explained by the assessee that the adoption of the ratio of sales between the two units was the proper basis for arriving at the profits relatable to Ambattur. \n\n6. The Income-tax Officer considered that the relevant claim on this basis by taking the capital and profits of the new industrial undertaking as a proportion of the total sales was not admissible. He took the view that the assessee should have maintained separate accounts for this purpose. \n\n7. The assessee appealed to the Appellate Assistant Commissioner and contended that there was no requirement to maintain separate account for\n\nany new unit for claiming exemption under Section 84 and Section 101; that the failure to claim exemption of the earlier years was due to inadvertence arid that the assets and liabilities were so inextricably mixed up that it was not possible to furnish the information which the Income-tax Officer required and about which he has mentioned in the assessment order. It was also submitted that the gestation period was over and that there was no development rebate or unabsorbed depreciation to be carried forward (which would affect the profits of the year under reference from the new unit). \n\n8. The Appellate Assistant Commissioner held, agreeing with the contentions put forward by the assessee, that it was entitled to the relief claimed. He also held that the failure of the assessee to claim in this year (sic) that there was no necessity to maintain separate account books, and that this being the fourth year of production the period of gestation was already over, so that the new unit went into full production. According, to him, profits were available to justify the claim of the exemption. He directed the Income-tax Officer to examine the arithmetical accuracy of the computation furnished by the assessee and then allow the appropriate relief. \n\n9. The department filed an appeal against that order. It was contended for the department that the Appellate Assistant Commissioner was wrong in granting relief; that the mistake of not claiming the relief due in the earlier years must be regarded as disentitling the assessee to claim the relief; that the assets employed must be distinct and separate and the cost thereof identifiable, and that the proportionate basis adopted by the assessee for the purpose of arriving at its current assets and liabilities was wholly inapplicable. According to the departmental representative, the onus of showing that the new unit had sufficient profits and was entitled to the claim was on the assessee which it had failed to discharge. He finally submitted that if the development rebate and unabsorbed depreciation were carried forward and set off against the profits this year, there were no profits and the relief granted by the Appellate Assistant Commissioner should be withdrawn. \n\n10. It was contended for the assessee that all the conditions laid down by the statute in this regard had been satisfied and the relief granted by the Appellate Assistant Commissioner should not be withdrawn. It was urged that the apportionment of current assets and current liabilities on turnover basis was a correct one as it indicated the rotation of the current assets and current liabilities vis-a-vis the end product. It was submitted that the section placed only a ceiling on the exemption to be granted and within the ceiling the exemption had got to be given if other conditions were satisfied. \n\n11. The Tribunal held as follows : \n\n \"(1) it is for the assessee to claim the benefit of the exemption (in any year) and the principle of res judicata had no application in these matters; \n\n (2) the current assets and liabilities have a direct relation to the turnover and since the items produced are the same and are sold at the same price, apportioning them on turnover basis is correct ; \n\n (3) the assessee has discharged the onus by submitting before the Income-tax Officer the computation of capital and profits ; and \n \n\n (4) on a consideration of all the facts, the assessee is entitled to the relief claimed.\" On the above facts, the following question of law has been referred : \n \"Whether, on the facts and in the circumstances of the case, the assessee was entitled to the relief claimed under Sections 84 and 101 of the Income-tax Act, 1961, in respect of the profits of its Ambattur unit ?\" \n\n12. On behalf of the revenue, Mr. Suhas Sen submitted before us that the meaning of the question is whether relief can be given to the assessee under Sections 84 and 101 on estimated figure. He developed his point thus : \n The onus of proving facts entitling the assessee to claim exemption under Sections 84 and 101 lies on the assessee. In order to get relief under Section 84 capital will have to be computed in the manner laid down in Rule 19 of the Income-tax Rules, 1962, and profits and gains must be computed in the manner laid down in Sub-section (5) of Section 84. If the profit so computed exceeds 6% of the capital in the prescribed manner, then the assessee becomes entitled to exemption up to 6%. Mr. Sen contended that relief cannot be given on an estimated figure, but the assessee must prove that there are profits and gains derived from the new industrial undertaking in the relevant assessment year. He submitted that the profits and gains as do not exceed 6% of the capital employed in the new undertaking is entitled to exemption and for this purpose computation must be done in the manner prescribed under Section 84. The particulars necessary for such computation of capital and profit must be furnished by the assessee. If this is not done then the assessee cannot avail of the benefit of Section 84. According to Mr. Sen, the assessee cannot make different basis of computation than what is provided under Rule 19. \n\n13. On behalf of the assessee, Mr. K. Ray appearing with Mr. A.S. Chari submitted that the meaning of the question is not what Mr. Sen contended. According to Mr. Ray in this reference the question is whether the assessee was entitled to the relief claimed under Sections 84 and 101 of the Act in respect of the profits of its Ambattur unit. Profits made by the assessee in its Ambattur unit is admitted. It is also admitted that Section 84, Sub-section (2), applies and the Ambattur unit of the assessee is a newly\n\nestablished undertaking and conditions laid down under Sub-section (2) have been fulfilled. \n\n14. According to Mr. Ray the question referred to this court is in a very limited form. It appears from the question that the assessee made profits in its Ambattur unit. So the question raised is whether, under the facts and circumstances of the case, the assessee is entitled to avail of the relief provided under Sections 84 and 101. \n\n15. Mr. Ray submitted that under Section 84, income-tax shall not be payable by the assessee on the profits and gains of a newly established industrial undertaking to which this section applies to the extent allowable under the section; and, therefore, if it can be shown that this section applies to a particular industrial undertaking it follows as a corollary that income-tax should not be payable by the assessee on its profits to the extent as provided under Section 84. Mr. Ray then contended that the first question is whether the assessee has a right to get the relief. If the assessee has a right to get the relief then the question of how much and to what extent relief could be granted would arise, or, in other words, the question of computation of relief would arise. To what extent the assessee will get relief is not a question which has been referred to this court as once the assessee has established its right to get relief, the question of extent of such relief would arise. \n\n16. In view of the arguments of the learned counsel for the respective parties I will consider the scope and effect of Section 84 of the Act and the meaning of the question referred to this court. I will first read the relevant portion of Section 84. \n\n\" CHAPTER VII INCOMES FORMING PART OF TOTAL INCOME ON WHICH \n\nNO INCOME-TAX IS PAYABLE.\n * * * *\n \n\n 84. Income of newly established industrial undertakings or hotels.- \n\n (1) Save as otherwise hereinafter provided, income-tax shall not be payable by an assessee on so much of the profits or gains derived from any industrial undertaking or hotel to which this section applies as do not exceed six per cent. per annum on the capital employed in the undertaking or hotel, computed in the prescribed manner. \n\n (2) This section applies to any industrial Undertaking which fulfils all the following conditions, namely :...... \n\n (5) The profits or gains of an industrial undertaking or hotel to which this section applies shall be computed in accordance with the provisions contained in Chapter IV-D......\" \n\n17. It is not necessary to read Section 101 of the Income-tax Act, 1961. Under that section the assessee shall be entitled to deduction of the amount\n\nof super-tax to which he is chargeable on his total income on profits and gains derived from industrial undertaking to the extent to which income-tax is not payable on such profits and gains under Section 84. \n\n18. Section 84 of the Income-tax Act, 1961, corresponds to Section 15C of the Indian Income-tax Act, 1922. The Madras High Court considered the scope of Section 15C in Ashok Motors Ltd. v. Commissioner of Income-tax [1961] 41 ITR 397 (Mad). Delivering the judgment of the court, Srinivasan J. said at page 402 :\n \"It would be desirable at the outset to determine exactly the scope of the exemption section provided under Section 15C before dealing with the contentions of the asscssee. Under Section 15C of the Act, which is headed \"Exemption from tax of newly established industrial undertakings\", the tax shall not be payable by an assessee on so much of the profits or gains derived from any industrial undertaking to which this section applies as do not exceed six per cent. per annum on the capital employed in the undertaking. Sub-section (2) defines the nature of the industrial undertaking to which the section will apply.\" \n\n19. Then the learned judge further observed: \n \"The scope of the exemption appears to be perfectly clear ; the section states that where any profits or gains are derived from any industrial undertaking, that portion of it to the extent of six per cent. on the capital employed in the undertaking shall be exempt from tax. Firstly, the profit in question must be derived from the industrial undertaking, and, secondly, the maximum limit of the exemption is also provided. It is clear that before an assessee can be eligible for any exemption, there should be profits. If there are no profits, no question of granting the exemption arises. It is equally clear that the profit in respect of which any exemption is available should be derived from the undertaking. The exemption cannot operate in respect of any profit derived by the assessee from any trade or business other than the industrial undertaking,\" \n\n20. The scope of exemption under Section 84 of the 1961 Act is similar to that of Section 15C of the 1922 Act and similar construction should be put as in Ashok Motor's case [1961] 41 ITR 397 (Mad) regarding Section 15C.\n\n21. Under Section 84, the legislature intends to put an incentive for expansion of industrial progress and setting up of new industry by allowing tax relief to a certain extent. Sub-section (1) of Section 84 provides that income-tax shall not be payable on profits and gains from any industrial undertaking as do not exceed six per cent. per annum on the capital employed in the undertaking or hotel to which this section applies. In order to attract Section 84, the industrial undertaking must fulfil the conditions laid down in Sub-section (2) and must make profit. As to the extent of six per cent. per annum up to which the assessee will get exemption, Sub-section (1) of Section 84 says that computation of capital should be made in the prescribed manner. Rule 19 of the Income-tax Rules relates to the manner of computation of capital employed in the industrial undertaking. Rule 19 has nothing to do with the profits or gains derived from any industrial undertaking. The profits or gains of the industrial undertaking should be computed in accordance with the provisions of Chapter IV-D of the Act as provided in Sub-section (5) of Section 84. The words \"as do not exceed six per cent. per annum on the capital employed\" in Section 84, Sub-section (1), refer to the quantification of the relief.\n\n22. Now, what is the meaning of the question ? As I read the question it seems to me that it means whether the assessee is entitled to the relief under Sections 84 and 101 in respect of the profits of its Ambattur unit. In this respect I accept the contention made by Mr. Ray as to the meaning of the question. In this view of the matter the answer to the question must be in favour of the assessee, because there is no doubt or dispute that conditions in Section 84(2) are fully satisfied under the facts of the instant case. Further, it is clear from the question that the new industrial undertaking of the assessee has made profits. The assessee has also made assessable profits. Therefore, the assessee must get relief under Section 84. The words in the section are that \"no income-tax shall be payable\". The extent to which the income-tax shall not be payable is a question of computation. \n\n23. In the instant case, computation of profits of the new industrial undertaking has been made by the assessee in accordance with Chapter IV-D of the Income-tax Act, 1961, and the assessee claimed relief up to 6% on computation of capital of the new undertaking on certain basis of apportionment. The Income-tax Officer took the view that the relief claimed by the assessee on the basis by taking capital and profits of the new industrial undertaking at the proportion of the total profits and capital employed in the whole business on the basis of sales of the Ambattur unit and the total sales is not admissible. On this view of the matter, the Income-tax Officer rejected the claim of the assessee. \n\n24. Here, the question is whether the Income-tax Officer could reject the claim for relief under Section 84 when the right to get such relief is established by the assessee? In my view, he cannot. \n\n25. Section 143 of the Income-tax Act says that the Income-tax Officer shall assess the total income of the assessee and shall determine the sum payable by him. Therefore, what sum is payable by the assessee shall be determined by the Income-tax Officer. In a case where Section 84, Sub-section (2), applies and the new industrial undertaking has made profits, the assessee must get relief. To what extent the assessee will get relief is a question of determination or computation of the amount of such relief. \n\n26. It is clear from Section 144 of the Act that the Income-tax Officer is not absolved from his duty to make computation. Again, in Section 145 of the Act with regard to method of accounting the Income-tax Officer \"shall compute in accordance with the method of accounting regularly employed by the assessee\". But the proviso to this section says that where the method employed is such that in the opinion of the Income-tax Officer, the income cannot be properly deduced therefrom then the computation shall be made on such basis and in such manner as the Income-tax Officer may determine. Therefore, denial of the relief to the assessee by the Income-tax Officer was clearly wrong. \n\n27. With regard to this aspect of the matter, the Appellate Tribunal said: \n \"If the method adopted by the assessee is found to be wrong or did not commend itself to the Income-tax Officer, the Income-tax Officer should have suggested a more rational and more appropriate method. But he cannot deny the exemption altogether on that account.\" \n\n28. I agree with the view of the Appellate Tribunal in this respect. \n\n29. I look back to the question again. I have to. In view of the further submission of the counsel for the assessee that the question may be read : \"Whether the assessee was entitled to the relief claimed under Sections 84 and 101 of the Income-tax Act, 1961, in respect of the profits of its Ambattur unit ?\", meaning thereby whether the assessee was entitled to the particular relief claimed by it, I will consider what should be the answer, \n \n\n30. It appears that the assessee arrived at Rs. 2,11,66,885 as capital employed in the new undertaking on the, basis of apportionment of turnover of the new and old unit and claimed relief of Rs. 12,70,013 being 6% of the capital employed. With regard to the method adopted by the assessee, the Tribunal said : \"The method adopted by the assessee cannot be said to be wrong.\" The Tribunal also held : \n \"The assessee has discharged the onus by submitting before the Income-tax Officer the computation of capital and profits. The Income-tax Officer ought to have examined it. If he found it to be wrong, he could have corrected it. Instead, he chose to reject the method wholesale. He had not suggested any other method. In these circumstances we accept the assessee's statement of the profits of the new undertaking.\" \n\n31. On the above findings of the Appellate Tribunal and in view of the meaning of the question referred to this court as I have understood them, it seems to me that the points urged by the learned counsel for the revenue do not arise in this reference. \n\n32. With regard to the principle of apportionment, the Supreme Court observed in Commissioner of Income-tax v. Best and Co. (Private) Ltd. :\n\n \"The difficulty in apportionment cannot be a ground for rejecting the claim either of the revenue or of the assessee.\" \n\n33. Again, in Madras Co-operative Central Land Mortgage Bank Ltd. v. Commissioner of Income-tax the Supreme Court said :\n \"A rule of apportionment consistent with commercial accounting must be evolved for determining the income from Government securities attributable to business activity of the society.\" \n\n34. The assessee in the instant case has kept a composite account and has made apportionment on certain basis on the principle of commercial accounting. Under Section 84 tax shall not be payable by the assessee on 6 per cent. per annum on the capital employed in the undertaking. So the Income-tax Officer cannot refuse the claim for exemption. \n\n35. On this view of the matter also the assessee is entitled to the relief under Section 84. The answer to the question must, therefore, be in favour of the assessee. \n\n36. I will now refer to some of the cases cited before us. The learned counsel for the parties admitted that there is no case exactly on the point. I shall mention some of the cases relied on by the learned counsel. \n\n37. Mr. Sen relied on Pr. Al. M. Muthuhamppan Chettiar v. Commissioner of Income-tax [1939] 7 ITR 76 (Mad) [FB]. In that case one of the questions referred to the Madras High Court was whether the assessee was entitled in law to a deduction of Rs. 1,875 in respect of depreciation of machinery in a particular mill, he having leased the mill. It was held by Leach C.J, at pages 89-90 of the report :\n \"When claiming a deduction an assessee must give the particulars required by proviso (a) of Section 10(2). This he admittedly failed to do and, therefore, he was not in a position to claim the deduction. The answer to the second question is that in the circumstances the assessee is not entitled in law to the deduction.\" \n\n38. The decision of the court was made on construction of proviso (a) to Section 10(2) of the Indian Income-tax Act, 1922, which reads as follows: \n\n Section 10(2)(vi): \n\n \"Such profits or gains shall be computed after making the following allowances, namely :--......... \n\n Provided that- \n (a) the prescribed particulars have been duly furnished ;.........\" \n\n39. The section clearly provides that unless the particulars are duly furnished the assessee will not get the exemption. But Section 84 of the Act which we are considering is entirely different. In my view the principles laid down in that case cannot apply under the facts and in the circumstances of the instant case. \n\n40. Mr. Son referred to Dharampur Leather Cloth Co. Ltd. v. Commissioner of Income-tax [1965] 55 ITR 329, 336 (Bom), where the learned judges held :\n\n \" It is further clear that if the assessee desired to claim depreciation, he must supply the required particulars. In the event the particulars arc not supplied by the assessee then depreciation is not allowed to him.\" \n\n41. The Bombay High Court in that case was considering Section 10(2)(vi) of the Indian Income-tax Act, 1922, which is differently worded.\n\n42. Mr. Sen then cited the decision of the Madras High Court in the case of Rajapalayam Mills Ltd. v. Commissioner of Income-tax and a decision of the Calcutta High Court in the case of Industrial Gases Ltd. v. Commissioner of Income-tax [1965] 58 ITR 317 (Cal) and submitted that the exemption under Section 15C should be strictly construedaa\n43. Mr. Ray in this connection cited the decision of the Punjab High Court, (Delhi Bench) in the case of Webbing and Belting Factory Private Ltd. v. Commissioner of Income-tax [1961] 43 ITR 234, 238 (Punj) and submitted that a provision of this kind which is intended to encourage the setting up of new industrial enterprises must be construed liberally.\n\n44. In my view, the general observations made by the learned judges in the above mentioned cases as to whether Section 84 should be construed liberally or strictly have no bearing in answering the question which arises for consideration in the facts and under the circumstances of this case. The assessee in the instant case has established its entitlement for the relief under Section 84 and discharged the onus to prove all the essential ingredients of the section for getting the benefit of exemption under it. So the section should be construed in order to give benefit to the assessee to the extent the Section intended to give. In Commissioner of Income-tax v. Mahaliram Ramjidas [1940] 8 ITR 442 (PC) the Privy Council laid down that in interpreting a section of a taxing Act which deals merely with the machinery of assessment and does not impose a charge on the subject that construction should be preferred which makes the machinery workable, ut res magis valeat potius quam pereat.\n\n45. Section 84 is an exemption) section. The section says that an assessee will get benefit under this section and to what extent the benefit will be given. The right to get benefit is distinguished from the amount or quantum of the benefit that the assessee will get under the section. In order to get benefit of exemption under this section the assessee must establish its right to get the benefit or its entitlement of the benefit. The law is well-settled that an assessee who claims exemption has to establish it. \n\n46. In Commissioner of Income-tax v. Ramakrishna Deo the Supreme Court, while considering certain observations of Lord Somervell L.J. in Australian Mutual Provident Society v. Inland Revenue\n\nCommissioners [1946] 1 All ER 528 (CA) quoted by the Supreme Court in that judgment laid down at page 316 of the report:\n \"These observations have, in our opinion, no bearing on the question of burden of proof. They merely lay down a rule of construction that in determining the scope of a rule, regard must be had to the exemptions engrafted thereon, and that the rule must be so construed as not to nullify those exemptions.\" \n\n47. Mr. Sen relied on Commissioner of Income-tax v. National Electrical Industries Ltd. [1959] 37 ITR 131 (Bom). In that case the assessee was a newly established industrial undertaking and was entitled to exemption from payment of tax to the extent prescribed by Section 15C of the Indian Income-tax Act, 1922. In the year of account (1951-52) the assessee made a profit of Rs. 8,65,000 but after making allowance of unabsorbed depreciation of previous years and also the losses carried forward from the previous years there remained no taxable income and accordingly no demand for tax was made for the assessment year 1952-53. In assessing the total income the Income-tax Officer did not give benefit of exemption from payment of tax under Section 15C of the Income-tax Act to the assessee. The question referred to the Bombay High Court was : \"Whether, on the facts and circumstances of the case, the loss brought forward from the preceding year amounting to Rs. 1,15,220 should be set off against the profits of the year of account without allowing the assessee the benefit of Section 15C of the Income-tax Act ?\" Shah J., delivering the judgment of the Bombay High Court, said : (page 134) \n \"It is true that in order to give a fillip to new industrial undertakings and to secure speedy industrialization the legislature has provided for exemption from payment of tax on a percentage of capital employed in the undertaking, but thereby the true nature of the exemption is not altered. The exemption is in terms from payment of tax and it is not exclusion of income in the computation of the total income.\"\n\n48. The Bombay High Court answered the question in the affirmative after substituting the word \"before\" for the word \"without\" in the question. \n\n49. 'The Bombay case has no application under the facts and in the circumstances of this, case as the assessee has made assessable profits for the accounting year and the claim for relief is fully covered by the profit available. \n\n50. Mr. Sen cited the case of Commissioner of Income-tax v. S. S. Sivan Pillai ., It appears from this report (page 357) :\n \"Exemption under Section 15C(1) of the Indian Income-tax Act, 1922, from payment of income-tax on part of the profits of a new industrial undertaking is not related to the business profits ; ......the profits or gains\n\nof an industrial undertaking have to be determined under Section 10 of\nthe Act.\" \n\n51. This case does not help the contentions made by Mr. Sen. In any event, I\nwill quote here the observation at page 358 of the report which is as\nfollows--See : \n \"Where the company has 'nil' profits under its final assessment, the non-application of Section 15C is not due to the fact that it made no profits and it was not entitled to the benefit of Section 15C(1). But in view of the overall result of the assessment there is no need for the company to claim exemption under that provision, as there is no tax liability at all. \" \n\n52. It is obvious that if there is no assessable profit there cannot be any claim for deduction under Section 84, but the facts and the circumstances of the case are otherwise here as the assessee has made assessable profits. \n\n53. Mr. Sen then cited the case of Kedarnath Jute Manufacturing Co. Ltd. v. Commercial Tax Officer . This is a sales tax matter and the Supreme Court considered Section 5(2)(a)(ii) of the Bengal Finance (Sales Tax) Act (6 of 1941) and Bengal Sales Tax Rules, 1941, Rule 27A. The question before the Supreme Court was when a dealer is entitled to claim exemption from sales tax ? I do not think that the decision of the Supreme Court is applicable on the question referred to us as an entirely different section of a different Act has to be construed by us. \n\n54. In that view of the matter which I have expressed, the question\nreferred to this court must be answered in the affirmative and against the\nrevenue. We return our answer accordingly. \n\n55. Parties will bear their own costs of the reference. \n\n Deb, J. \n\n56. I agree." }, { "title": "Russell Properties Pvt. Ltd. vs A. Chowdhury, Addl. Commissioner Of ... on 6 May, 1976", "url": "https://indiankanoon.org//doc/1449211/", "text": "Russell Properties Pvt. Ltd. vs A. Chowdhury, Addl. Commissioner Of ... on 6 May, 1976\nEquivalent citations: [1977]109ITR229(CAL)\nAuthor: Sabyasachi Mukharji\nBench: Sabyasachi Mukharji\nJUDGMENT\n \n\n Sabyasachi Mukharji, J. \n \n\n1. The petitioner, Russell Properties Pvt. Ltd. acquired premises No. 6, Little Russell Street, Calcutta, comprising an\n\narea of about 17 cottahs, together with an incomplete building for commercial purpose as well as for the purpose of having its registered office. The petitioner-company, thereafter, completed the construction of the said building and let it out to various tenants. In or about June, 1964, there was an indenture of lease entered into by and between the petitioner-company and the first tenant of the building, M/s. Siemens Engineering and Manufacturing Co. of India Ltd. Assessments for the assessment years 1965-66 and 1966-67 were completed by the Income-tax Officer on the 29th of March, 1971, and 26th of April, 1971, respectively. The question involved in the said assessments was about the true nature and character of the service and maintenance charges received by the assessee-company from its tenants in the multi-storeyed building at No. 6, Little Russell Street, Calcutta. In the said assessments, the Income-tax Officer included the amounts received on account of service and maintenance charges in the rental income and computed the total income of the assessee on the aforesaid basis. Appeals were preferred against the said orders of the Income-tax Officer for the assessment years 1965-66 and 1966-67. The Appellate Assistant Commissioner in his order for the assessment year 1965-66 dated 25th February, 1972, observed, inter alia, as follows : \n \"At the time of the appeal hearing the appellant took up the plea that income from service charges were taxable under the head 'business'. In this connection the appellant placed reliance on the decision of the Supreme Court in Karnani Properties Ltd. v. Commissioner of Income-tax . In that case their Lordships of the Supreme Court held that if the services rendered by an assessee to its tenants were the result of its activities carried on continuously in an organised manner for a set purpose and with a view to earning profits, those activities were business activities and the income arising therefrom was assessable to tax under the head 'business'. It was argued before me that the services rendered by the appellant were analogous to the service rendered by M/s. Karnani Properties Ltd. to its tenants. It was submitted that the appellant had installed an electric transformer for the regulation of supply of electricity to its tenants. It had also erected lift and employed liftman and it was also supervising, scavenging and other works which was very necessary to keep that premises healthy and clean. In the circumstances, the appellant's income from service charges was liable to be assessed under the head 'income from business.' \"\n\n2. I have considered the submission of the appellant and in my opinion they carry sufficient force. I find that provision of services in this case is one continuous and organised process and this was done with a view to earning profits. The facts of this case are on all fours similar with the facts in the case of M/s. Karnani Properties Ltd. and,\n\ntherefore, the ratio of the decision in that case is equally applicable in the case of the appellant. The income under the head \"services and maintenance charges\" is, therefore, liable to be assessed under the head \"income from business\". The property income has to be computed as under:\n \n \n \n \n \u00a0\n Rs.\n\n Rent received\n 2,28,625\n \n \n Less : 50% of the collection charges\n 25,000 \n \n \n \u00a0\n 2,03,625\n \n \n Less : 1/6th for repairs\n 33,971\n \n \n 6% collection charges\n 12,230 \n \n \n Property income\n 1,57,424\n \n \n\n\n \n\n3. There were similar observations in the order dated 2nd March, 1972, passed by the Appellate Assistant Commissioner for the assessment year 1966-67. Appeals against both the said orders were preferred by the revenue to the Income-tax Appellate Tribunal. Both these appeals came up for hearing before the Income-tax Appellate Tribunal and by an order dated 15th September, 1973, were disposed of by the Tribunal, The Tribunal observed, inter alia, as follows : \n\n\"(a) We have already given the factual background of the issues involved in this case and have described the various services rendered by the assessee to the tenants. They are practically the same as rendered by M/s. Karnam Properties Ltd., with one minor difference. \n\n (b) Considering the elaborate services undertaken by the assessee in the form of watch and ward and scavenging facilities, maintenance of underground drainage for the benefit of the tenants, maintenance of electric installations and electric pumps, constant supply of filtered and unfiltered water, conversion of electricity from high voltage to low voltage and to supply to the tenants, etc., we have no doubt in mind that the Appellate Assistant Commissioner of Income-tax was right in his decision that he took. \n\n (c) The services rendered by the assessee had to be viewed against time and expense and energy involved expended in these services. They really partake of the nature of an organised business activity conducted in a systematic manner. \n\n (d) In the words of the Bombay High Court decision in the case of National Storage Pvt. Ltd. [1963] 48 ITR 577 (Bom) as approved by the Hon'ble Supreme Court (See the services rendered by the assessee are complex and not merely incidental to the ownership of the property.\" \n\n4. In the meantime, between 11th February, 1972, and 21st February, 1972, orders of assessment were passed by the Income-tax Officer for the\n\nassessment years 1967-68, 1968-69 and 1969-70. The assessee being aggrieved on certain points by the said orders of assessment preferred appeals before the Appellate Assistant Commissioner on or about the 29th March,\n1972. In July, 1972, the, petitioner-assessee made an application for expeditious hearing of the appeals before the Appellate Assistant Commissioner. Thereafter, it is stated that diverse dates were fixed for disposal of the appeal in 1972 and 1973, but the appeal was adjourned though the petitioner-company was ready to proceed with the hearing. On March 5,\n1973, the petitioner-company made an application before the Commissioner of Income-tax, West Bengal-II, under Section 264 of the Income-tax Act for reduction of interest charged for the assessment years 1967-68, 1968-69 and 1969-70 as the petitioner contended that the petitioner-company was prevented by sufficient cause from filing the returns within the time. On 15th September, 1973, as mentioned hereinbefore, an order was passed by the Income-tax Appellate Tribunal affirming the order of the Income-tax Appellate Assistant Commissioner for the assessment years 1965-66 and 1966-67. Thereafter, on 8th January, 1974, a notice was given of the application under Section 256(1) of the Income-tax Act for referring certain questions of law to the High Court. \n\n5. On 11th January, 1974, the petitioner received the impugned notice under Section 263 of the Income-tax Act proposing to rectify the assessment orders for the assessment years 1967-68, 1968-69 and 1969-70. It would be relevant to set out the material portion of the said impugned notice: \n\n\"It appears from the assessment records of M/s. Russell Properties Private Ltd. that the receipts from tenants in respect of Russell Street property in its entirety was subjected to tax under the head 'property' up to the assessment year 1964-65. For the assessment years 1965-66 and 1966-67 you pleaded before the Appellate Assistant Commissioner that a part of such receipts from tenants relating to maintenance and service charges are assessable under the head 'business'. The Appellate Assistant Commissioner allowed your plea following the decision of the Supreme Court in the case of Karnani Properties Ltd. v. Commissioner of Income-tax . But, as the facts of your case appeared to be distinguishable from the facts of the aforesaid case relied on by the Appellate Assistant Commissioner, second appeals were filed before the Appellate Tribunal. The Tribunal, however, has upheld the Appellate Assistant Commissioner's orders for the said two years and the department has filed reference applications under Section 256(1) of the Income-tax Act, 1961, which are still pending. Notwithstanding the fact that the department had not accepted the orders of the Appellate Assistant Commissioner for the earlier assessment years 1965-66 and 1966-67 and the matter is now the subject of reference application under Section 256(1) of the Income-tax\n\nAct, 1961, the Income-tax Officer, D-Ward, Comp. Dist. III, who made the assessments in your case on February 11, 1972, February 21, 1972, and February 21, 1972, respectively, for the assessment years 1967-68, 1968-69 and 1969-70 has accepted your plea in this regard and assessed a portion of such receipts from tenants in respect of Russell Street property under the head 'business' with the consequential loss to revenue. On the facts, as stated above, the orders of assessment as framed by the Income-tax Officer for the aforesaid three assessment years are considered erroneous and prejudicial to the interests of the revenue.\n\n2. I, therefore, propose to pass such orders thereon under Section 263 as the circumstances of the case may justify including an order cancelling the assessment under section...for the assessment years 1967-68 and 1968-69 as rectified under Section 154 subsequently and also the order under Section 143(3) for the assessment year 1969-70 and directing the Income-tax Officer to make fresh assessments according to law and facts of the case.\" \n\n6. The petitioner, thereupon, represented to the Commissioner asking the Commissioner for certain clarifications of the alleged grounds for rectification. On the 15th January, 1974, the Appellate Assistant Commissioner passed an order for the assessment year 1964-65 holding that service charges were liable to be assessed under the head \"business\" following the decision of the Tribunal in other years. On 24th January, 1974, the petitioner moved this application under Article 226 of the Constitution and obtained a rule nisi. An ad interim order of injunction was granted pending the hearing of the application and the respondents were restrained from passing any final order. Thereafter, on 30th January, 1974, this court varied the interim order to the extent that the respondent, Commissioner of Income-tax, was given liberty to proceed with the matter and to make such order as he considered fit and proper but it was directed that the said order should not be communicated to the petitioner or given effect to until the disposal of the present writ application. On the 20th March, 1975, an order was passed by the Commissioner of Income-tax rejecting the petitioner's application under Section 264 of the Income-tax Act for reduction of interest charged for the assessment years 1967-68, 1968-69 and 1969-70, on the ground that the orders of assessment in question have already been set aside by an order under Section 263 of the Income-tax Act on the 7th February, 1974, by the Additional Commissioner of Income-tax, West Bengal-II. On the 4th April, 1974, the Tribunal under Section 256 of the Act framed a question of law as to whether the Tribunal was correct in holding that the service and maintenance charges were for the maintenance of lifts alone or for other services rendered by the assessee. The\nCommissioner of Income-tax thereafter made an application under Section 256(2) of the Act, but the High Court has dismissed the said application.\n\nOn the 31st January, 1975, the Tribunal passed the order in respect of the assessment year 1964-65, holding that the service charges were income from business. \n\n7. In this application, as mentioned hereinbefore, the challenge is to the notice issued under Section 263 of the Income-tax Act, 1961, for the assessment years 1967-68, 1968-69 and 1969-70. For the aforesaid assessment years the main question involved was whether the income received by the assessee from maintenance and service charges should be treated as income from business or as income of rent from house property. It has to be further noted that for all these years the assessee has preferred appeals to the Income-tax Appellate Assistant Commissioner and at the time when the impugned notice was issued, the said appeals were pending. It may, however, be mentioned that the appeals were not preferred on this ground as to whether the amount received on account of maintenance and service charges should be treated as income from house property or not but the appeals were directed on other disallowances made by the Income-tax Officer not relevant for the present purpose. In support of this application the first contention that was urged was that during the pendency of an appeal before the Appellate Assistant Commissioner the Commissioner of Income-tax was not competent to issue any notice under Section 263 of the Income-tax Act, 1961. It was contended that in an appeal before the Appellate Assistant Commissioner though at the instance of the assessee, the Appellate Assistant Commissioner had jurisdiction and competency to enhance the assessment and to rectify any error committed by the Income-tax Officer which might have caused prejudice to the revenue. In those circumstances it was contended that the Commissioner did not have jurisdiction to invoke his powers under Section 263 of the Act. It was urged that Section 263 of the Act had its inception in Section 33B of the Act of 1922, Which was introduced to give the Commissioner power to meet a particular situation, namely, to correct an erroneous order which could not be appealed from because the department was not competent to appeal from the order of the Income-tax Officer which has caused prejudice to the revenue. It was, therefore, submitted that in a situation where the department had the remedy of rectifying the alleged prejudice in the appellate order of the Appellate Assistant Commissioner, there was no occasion and purpose for resorting to the revisional power of the Commissioner. It was submitted that Section 33B of the Indian Income-tax Act, 1922, as well as Section 263 of the Income-tax Act, 1961, were revisional powers, and therefore, on the principle that the revisional powers should not be available where there was an appellate jurisdiction, the Commissioner was incompetent in the facts and circumstances of the case to invoke revisional powers under Section 263 of the Act. In aid of this submission reliance was placed\n\non the observations of the Bombay High Court in the case of Commissioner of Income-tax v. Amritlal Bhogilal and Co. [1953] 23 ITR 420 (Bom). There Chief Justice Chagla, speaking for the court held that an order of the Commissioner under Section 33B(1) of the Indian Income-tax Act, 1922, setting aside the order of the Income-tax Officer while an appeal from the said order was pending before the Appellate Assistant Commissioner was invalid. In that case for three assessment years the Income-tax Officer had made assessment on the assessee which was a registered firm under Section 26A of the Indian Incoine-tax^Act, 1922. The assessee appealed and the Appellate Assistant Commissioner reduced the assessments for the two years and kept the appeal for the third year pending before him. The Commissioner subsequently passed an order under Section 33B directing the Income-tax Officer to cancel the registration of the firm under Section 26A of the Indian Income-tax Act, 1922, and to assess the assessee as an unregistered firm for all these three years. On a reference, the High Court held that the order of the Commissioner under Section 33B was invalid. Chief Justice Chagla at page 425 of the report observed that if one analysed Section 33B a little more closely, it was apparent that the legislature never intended to give the power to the Commissioner to revise an order of the Income-tax Officer when the assessee had appealed from that order. The object of enacting Section 33B according to the learned Chief Justice was to confer a power upon the Commissioner in the interest of the revenue to revise the orders of the Income-tax Officer which could not be revised under any circumstances if the assessee did not appeal from those orders. However erroneous the order of the Income-tax Officer might be, however prejudicial to the revenue, the assessee by refusing to exercise his right of appeal could make that order conclusive. In order to fill up this obvious lacuna the legislature had enacted Section 33B. But, once the assessee had appealed, according to the learned Chief Justice, there was no difficulty whatsoever in the way of the department in agitating the question before the Appellate Assistant Commissioner which in its opinion should be agitated and decided in the interest of the public revenue. When an appeal was pending before the Appellate Assistant Commissioner, the Income-tax Officer had the right to be heard either in person or by a representative and the point which the Commissioner had taken and on which the Commissioner had given his decision under Section 33B could be urged upon the direction of the Commissioner before the Appellate Assistant Commissioner. According to the learned Chief Justice when no remedy was open to the Commissioner to revise the order of the Income-tax Officer, this jurisdiction under Section 33B arose. But when a legal remedy was given to him to get the order of the Income-tax Officer revised, he could not requisition to his aid the power conferred upon him under Section 33B. Once\n\nthe appeal with regard to the year, in that case 1949-50, was pending before the Appellate Assistant Commissioner, he had the full right to get the order of the Income-tax Officer revised in any manner he thought necessary in the interest of the public revenue. The learned Chief Justice observed that revisional powers were exceptional powers to be exercised at exceptional times for exceptional reasons and the exceptional reason for which the powers could be and should be exercised was when the Commissioner felt that the public revenue was likely to be suffered and that no remedy was open to him to get the order of the Income-tax Officer revised. The learned Chief Justice in the aforesaid decision was proceeding on the well-known principle as to how revisional powers are to be exercised and construed. But, in a fiscal statute the ambit and the content of the power must be determined by the language used in the enacting provision, though it is necessary that such expression used in the enacting provision must be construed in the light of the context in which the expression is used and in the context of the entire Act. The occasion for grant of a power does not and need not necessarily limit the amplitude of the grant. In the Indian Income-tax Act, 1922, Section 33Bhad to be introduced by amendment to meet perhaps an exceptional situation, namely, where an erroneous order, was passed by the Income-tax Officer but where the assessee had not preferred an appeal, in such a case to give to the Commissioner a remedy to rectify the error, Section 33B was introduced in the Indian Income-tax Act, 1922. But the question for determination in this case is whether the enacting provision of Section 33B of the Indian Income-tax Act, 1922, or the provision of Section 263 of the 1961 Act limits the power to such exceptional situation only. In my opinion it does not. In this connection reference may be made to the decision of the Supreme Court in the appeal from the judgment of the Bombay High Court in the case of Commissioner of Income-tax v. Amritlal Bhogilal & Co. . There, of course, the Supreme Court found as a fact that under Section 31 of the 1922 Act there was no appeal from an order granting registration to a firm under Section 26A of that Act. The Supreme Court held that an order granting registration to a firm under Section 26A of the Indian Income-tax Act, 1922, merely affected or governed the procedure of collecting or recovering the tax found due from a firm and was separate from and independent of the order of assessment. Therefore, as there was no appeal from an order granting registration to a firm, the Appellate Assistant Commissioner could not cancel, in exercise of his appellate jurisdiction under Section 31, an order granting registration to a firm. In that context the Supreme Court observed that an order of the Income-tax Officer registering a firm could be revised by the Commissioner under Section 33B whenever he considered that it was erroneously passed and was prejudicial to\n\nthe interests of the revenue even while an appeal was pending from the order of the assessment and even after the appeal was disposed of by the Appellate Assistant Commissioner. Counsel for the petitioner in the instant case before me sought to argue that the Supreme Court did not differ from the views of Chief Justice Chagla referred to hereinbefore that the revi-sional power under Section 33B of the Act was only available where there was no appeal. The Supreme Court found in that case that the order granting registration was not appealable and, as such, such an order was revisable by the Commissioner at any time even if an appeal was pending. It is true, as learned counsel rightly contended, that the point at issue in the aforesaid decision of the Supreme Court was whether the order of registration was independent from the order of assessment and whether an appeal could be preferred from the order of registration and in that context the Supreme Court was concerned with the question whether the order for registration passed by the Income-tax Officer could be revised by the Commissioner. Counsel is right that the Supreme Court was not concerned with the orders which were appealable and which had been appealed from; in such cases whether the revisional powers could be exercised by the Commissioner, the Supreme Court was not actually concerned. But the Supreme Court made some significant observations about the scope and effect of Section 33B of the Indian Income-tax Act, 1922. The Supreme Court observed as follows :--See .\n \"The case in regard to the subsequent year 1949-50 presents no difficulty. The appeal preferred by the respondent against the Income-tax Officer's assessment order in respect of this year was pending at the material time before the Appellate Assistant Commissioner; and so no question of merger arose in respect of the order granting renewal of registration for this period. There can be no doubt that even on the theory of merger the pendency of an appeal may put the order under appeal in jeopardy but until the appeal is finally disposed of the said order subsists and is effective in law. It cannot be urged that the mere pendency of an appeal has the effect of suspending the operation of the order under appeal. The High Court, however, appears to have taken the view that the revisional power is an extraordinary power and can be exercised only for unusual and extraordinary reasons. It was also assumed by the High Court that, in the pending appeal, the department would have an alternative remedy because, according to the High Court, the department could have challenged the validity or the propriety of the respondent's registration and could have asked the Appellate Assistant Commissioner to cancel it. As we have already pointed out, the department could not challenge the validity of the registration order in the assessee's appeal before the appellate authority and so the argument that the department had an alternative remedy is not correct.\n\nIt is clear from the judgment of the High Court that it is the assumption that the department had an alternative remedy which weighed with the learned judges in reaching their final conclusion. Then the argument that the extraordinary revisional power must be exercised only for extraordinary reasons is really not very material. Whether or not the revisional power can be exercised in a given case must be determined solely by reference to the terms of Section 33B itself. Courts would not be justified in imposing additional limitations on the exercise of the said power on hypothetical considerations of policy or the extraordinary nature of the power. We must, therefore, hold that the High Court was also in error in holding that the Commissioner was not authorised in cancelling the order of the respondent's registration for the year 1949-50. The result is that the view taken by the High Court must be reversed and the first question framed by the Tribunal as well as the additional question framed by the High Court must be answered in favour of the appellant.\" \n\n8. Therefore, the principle, in my opinion, that the Supreme Court laid down to find out whether the revisional powers can be exercised in particular situations must be determined solely by reference to the terms of the Section granting such revisional powers. Section 263 of the 1961 Act prescribes the circumstances and conditions upon which such power can be exercised. The section authorises the Commissioner to call for and examine the record of any proceeding under this Act and, if, thereupon, he considers that any order passed by the Income-tax Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such enquiry as he deems necessary, pass such order thereon as the circumstances of the case justify subject to the limitations mentioned in Sub-sections (2) and (3) of the Act with which I am not concerned in the instant case. In this connection Section 264 may also be referred to. Section 264 also deals with the power of revision of certain other orders. In this context, in any opinion, it would not be appropriate to impose further limits on the powers under Section 263 that the orders appealed from or appealable would be immune from the scope of operation of Section 263 of the Act. \n\n9. Counsel for the petitioner referred to certain other decisions as to how the Supreme Court judgment referred to hereinbefore has been construed. He referred to the decision in the case of Commissioner of Income-tax v. Smt. Durgabati . He also drew my attention to certain observations of the Division Bench of the Andhra Pradesh High Court in the case of Merla Sitarama Prasad v. Assistant Controller of Estate Duty . He referred me to the observations of the Master of the Rolls, Evershed, in the case of Wright v. Walford [1955] 1\n\nQB 363 (CA) that after a matter had come before the courts on the meaning of a phrase in an Act of Parliament there was a danger that the courts would thereafter construe not the Act and the words in it but expositions of the Act expressed in judgments of the courts, which expositions were in a sense necessarily limited to the particular facts of the particular case. But having regard to the well-known principle of construction of fiscal statutes and the language used in Section 263 of the Act, in my opinion, quite apart from the observations of the Supreme Court, it would not be proper to exclude the jurisdiction of the Commissioner in cases where appeals have been preferred from the order of the Income-tax Officer. Section 33B was enacted and thereafter it was re-enacted as Section 263 of the 1961 Act to arm the Commissioner with the power of revising any order which is erroneous and is prejudicial to the interest of the revenue inasmuch as the department has no right of appeal to the Appellate Assistant Commissioner against any order passed by the Income-tax Officer. But the enacting provisions of the section are not restricted to any order which is not the subject-matter of appeal. Therefore, it would be inappropriate to read any limitation to that extent in the section. In this connection, it is material to contrast the provisions of Sub-section (4) of Section 264 of the Act which deals with the revision of orders other than those mentioned in Section 263 of the Act. In the aforesaid view of the matter I am unable to accept the contention that in a matter where an appeal lies and an appeal was pending the Commissioner was not incompetent to exercise powers under the provisions of Section 263 of the Act. The first ground of challenge, therefore, fails. \n\n10. The next contention urged on behalf of the petitioner was that in this case the Commissioner had no material to proceed on the basis that the order in question was erroneous or prejudicial to the interest of the revenue and the conditions precedent for the issuance of the notice in this case were not fulfilled. Notice under Section 263 of the Act is not, unlike Section 148 of the Act, a mandatory requirement for the exercise of the power. The section requires only such reasonable opportunity be given as is consistent with the principle of natural justice. But the power under Section 263 is not unchartered and can be exercised only on fulfilment of certain conditions. The conditions are, first, the Commissioner must call for and examine the records of the proceedings under the Act. It is not in dispute in the instant case that the said condition was fulfilled. Second condition required to be fulfilled is that the Commissioner must consider the order passed therein by the Income-tax Officer to be erreneous in so far as it is prejudicial to the interest of the revenue. \n\n11. If these conditions are fulfilled, he may, after giving the assessee reasonable opportunity, pass such orders as he deems fit and proper. The\n\nsection as mentioned hereinbefore does not require service of any notice as condition precedent for initiation of the proceeding. Unlike section 34 of the Indian Income-tax Act, 1922 or Section 148 of the Income-tax Act, 1961, Section 33B of the 1922 Act or Section 263 of the 1961 Act does not require that any notice should be issued by the Commissioner before he assumes jurisdiction to proceed to revise the order passed by the Income-tax Officer. He is not required to give any notice before commencing the enquiry. What he is required to do before passing his order and not before commencement of the enquiry is to give the assessea an opportunity of being heard and to make such enquiry as he deems necessary. These requirements have nothing to do with the jurisdiction of the Commissioner but these requirements appertain to the region of natural justice. See the observations of the Supreme Court in the case of Commissioner of Income-tax v. Electro House . But, in my opinion, exercise of power given under Section 263 of the Act is dependent upon certain conditions as mentioned in the section. It is true that exercise of power is dependent upon the consideration by the Commissioner but consideration by the Commissioner mu&t be based on objective conditions laid down in Section 263 of the Act. Where powers are conferred on statutory authorities to exercise the same when \"they are satisfied\" or when \"it appears to them\" or when \"in their opinion\" or if they consider that \"certain state of affairs exists\" or when powers enable the statutory authorities to take such action as they think fit in relation to a subject-matter, the court would not readily defer to the con elusive ness of an executive authority's opinion as to the existence of a matter of law or fact upon which the validity of the exercise of the power is predicated. Where reasonable conduct is required, the criterion of reasonableness is not subjective but objective. The onus of establishing unreasonableness, however, rests upon the person challenging the validity of the action. Administrative decisions in exercise of powers even if conferred in subjective terms are to be made in good faith on relevant consideration. The courts can enquire whether a reasonable man would have come to the decision in question. The standard of reasonableness to which an administrative body is required to conform may range from the court's own opinion of what is reasonable to the criterion to what a reasonable body might have decided. Courts can find out whether conditions precedent to the formation of the opinion have a factual basis. See the observations of the Supreme Court in the case of M. A. Rasheed v. State of Kerala of the report, as well as the observations of Lord Atkin in the case of Liversidge v. Andersen [1942] AC 206 at pages 228 to 229 of the report. In the instant case exercise of the power is dependent upon the Commissioner consideiing-the order of the Income-tax Officer to be erroneous in so far as it is prejudicial\n\nto the interest of the revenue. Therefore, there must be material before the Commissioner before he passes the order to come to the conclusion that the order sought to be rectified was erroneous in so far as it was prejudicial to the interest of the revenue. To such a conclusion the Commissioner can come on relevant material facts in respect of which reasonable opportunity must be given to the person sought to be affected and such reasonable opportunity again, on the principles of natural justice, requires that the person to be affected should be given intimation of the materials. It is true that if the basic materials upon which the Commissioner proposes to act are intimated or communicated to the assessee, the Commissioner may in his order rely on other supporting materials. It is fundamental that such basic materials upon which the Commissioner proposes to act in an action under Section 263 must be intimated to the assessee concerned. In the instant case, such basic materials upon which the Commissioner proposed to act have been communicated to the petitioner. Furthermore, in the instant case there is a challenge thrown by the assessee that there were no materials on the facts and circumstances of the case for the Commissioner to come to the conclusion that the order in question was erroneous in so far as it was prejudicial to the interest of the revenue. The said challenge has been met by the answer to this rule nisi. It is, therefore, relevant and necessary to consider whether the ground communicated to the assessee or the statements contained in the affidavit-in-opposition are sufficient materials upon which the Commissioner can come to the conclusion that the order in question was erroneous in so far as it was prejudicial to the interests of the revenue. I have set out the grounds mentioned in the notice. It is clear that in respect of the previous years the Tribunal has come to the conclusion, following the decision of the Supreme Court in the case of Karnani Properties Ltd. v. Commissioner of Income-tax , that receipts from the tenants for the maintenance of service charges were assessable under the head \"business\" and not assessable under the head \"property\". The Supreme Court observed that the said decision in the aforesaid case was given on the facts and on the circumstances of that case. The Tribunal, on examination of the facts in the instant case, found that facts were identical upon which the ratio of the Supreme Court decision was dependent. In the aforesaid view of the matter, the Tribunal in the previous years' assessments had followed the Supreme Court decision and had come to the conclusion that income in this case was chargeable under the head \"business\". Following the decision of the Tribunal, the Income-tax Officer has proceeded to assess such income under the head \"business\".\n\n12. The Commissioner of Income-tax feels that such income should have been assessed to tax under the head \"property\" as in respect of the prior years'\n\nfindings reference application was pending before the High Court. In those circumstances, can it be said that the Income-tax Officer who had accepted the Tribunal's decision as correct and applied that decision to the facts of this case acted erroneously and his such action caused prejudice to the interests of the revenue. Counsel for the revenue contended that inasmuch as a reference was pending for the previous year, there was no question of res judicata on this issue. He relied on the observations of a Division Bench of this court in the case of Satyanarayan Prosad v. Diana Engineering Co. . Counsel for the revenue is right that there is no question of finality, but, though as a general Rule the principle of res judicata was not applicable to the decisions of the income-tax authority and an assessment for a particular year was final and conclusive between the parties only in relation to the assessment for that year and the decision given in an assessment for an earlier year were not binding either on the assessee or the department in the subsequent year, this rule was subject to limitation that there should be finality and certainty in all litigations including litigations arising out of the Income-tax Act and an earlier decision on the same question should not be reopened if that decision was not arbitrary or perverse and if it had been arrived at after due enquiry and if no fresh facts were placed before the authority giving the later decision and if the earlier decisions were based on all materials and relevant consideration. Furthermore, a revising decision for the subsequent year should not lead to injustice and the court must avoid injustice to all concerned. Reliance in this connection may be placed on the observations of the Division Bench of the Bombay High Court in the case of H. A. Shah & Co. v. Commissioner of Income-tax and Excess Profits Tax [1956] 30 ITR 618 (Bom). The section requires the Commissioner to come to the conclusion that the Older of the Income-tax Officer was erroneous and prejudicial to the interests of the revenue. It is not sufficient that the order was merely erroneous. It must be erroneous in so far as it is prejudicial to the interests of the revenue. Again, it is not sufficient for the order in question to be prejudicial. An order must be erroneous so as to be prejudicial to the interests of the revenue. It may, however, be stated that anything which is prejudicial to the interests of the revenue would be erroneous and that anything which is not lawful would be prejudicial to the interests of the revenue. For the ingredients or the requirements of the section reliance may be placed on the observations of the Supreme Court in the case of Smt. Tara Devi Aggarwal v. Commissioner of Income-tax and also on the observations of the Karnataka High Court in the case of Commissioner of Income-tax v, T. Narayana Pai [1975] 98 ITR 422 (Kar), I have set out before that the basis of the Commissioner's notice to the assessee is that the Commissioner feels that the decision of the Tribunal based upon the decision of the\n\nSupreme Court requires reconsideration in the facts of this case. In answer to the rule nisi Shri Ahindra Chaudhuri, Commissioner of Income-tax, West Bengal, in his affidavit in paragraphs 3 and 4 has stated as follows:\n\n\"3. With regard to the allegations contained in paragraphs 3, 4, 5, 6 and 7 of the petition, I say that I crave leave to refer to the assessment orders, the orders of the Appellate Assistant Commissioner as well as of the Income-tax Appellate Tribunal to ascertain the correct facts and the true scope, purport and intent of the aforesaid orders. Save as would appear therefrom the allegations contained therein are denied each and all. I say that the revenue has not accepted the orders of the Tribunal confirming the decision of the Appellate Assistant Commissioner treating the income in question under the head 'service and maintenance charges' as 'income from business'. The case of the revenue at all material times was and still is that the income from service and maintenance charges should be assessed as income from house property. Reference applications under Section 256 of the Income-tax Act, 1961, have been filed against the aforesaid Tribunal's orders and the said cases are still pending before this hon'ble court. In this connection it should be noted that up to the assessment year 1964-65 the income from service and maintenance charges was assessed under the head 'income from house property' and the said position was accepted by the assessee, \n \n\n4. With regard to the allegations contained in paragraphs 8, 9 and 10, I say that I crave leave to refer to the assessment orders for the assessment years 1967-68, 1968-69 and 1969-70 to ascertain the true scope, purport and intent thereof. Save as would appear therefrom the allegations contained in paragraphs 8 to 10 are denied. I say that on an examination of the records of the assessment proceedings for the assessment years 1967-68, 1968-69 and 1969-70, it appeared that the said orders were erroneous and prejudicial to the interests of the revenue. A notice, therefore, was issued to the assessee in order to enable the assessee to make out its case before any final decision was taken in this matter. Save as aforesaid and save as will appear from the records the allegations contained in paragraphs 8 to 10 are denied.\" \n\n13. It is, therefore, clear that the Commissioner is proceeding on the basis that the revenue has not accepted the order of the Tribunal and the revenue's case is that the income from service and maintenance charges should be assessed as income from house property. The Commissioner has not indicated either in the notice or in the affidavit-in-answer to rule nisi that there were any factual materials for holding that the ratio of the decision of the Supreme Court would not be applicable to the facts of the instant case for those years or that the Tribunal committed any error in following the decision of the Supreme Court on the facts of this case. The Commissioner\n\nseems to be proceeding only on the basis that the contention of the revenue to agitate for a review of the Supreme Court's decision has not been kept open by the Income-tax Officer by his impugned order. It may be, however, stated that the position is not factually correct in view of the fact that the appeal is pending before the Appellate Assistant Commissioner and the revenue would have an opportunity to induce the Appellate Assistant Commissioner to accept the revenue's point of view and if the Appellate Assistant Commissioner does not accept the revenue's contention and enhance the assessment on the basis that the receipts from service and lift charges are income from house property the revenue will have another opportunity of preferring an appeal before the Tribunal and thereafter come up before the High Court on an application under Section 256 of the Income-tax Act, 1961. The Income-tax Officer has merely followed the decision of the Tribunal. No error has been pointed out in the said decision of the Income-tax Officer. It has not been pointed out that there were materials for the Income-tax Officer not to follow the decision of the Tribunal. As a matter of fact whenever there is a decision of the higher appellate authority, the subordinate authorities are bound to follow the said decision if judicial discipline is to be maintained. Reliance may be placed in this connection on the observations of the Supreme Court in the case of East India Commercial Co. Ltd. v. Collector of Customs of the report. In the aforesaid view of the matter I must hold that the conditions for exercise of the power under Section 263 of the Act, namely, that there must be material for the Commissioner to consider that the order passed by the Income-tax Officer was erroneous in so far as it is prejudicial to the interests of the revenue were not fulfilled in the instant case. If that is the position, then the notice must be held to be without authority. It is true, unlike Section 148 of the Income-tax Act, 1961, for the initiation of the proceeding under Section 263 no conditions precedent are required to be fulfilled but when a statutory authority proceeds to act by virtue of the power given under a statutory enactment, exercise of which is dependent upon the existence of certain objective factors and when a challenge is thrown that such objective factors are not present and such challenge is met by placing before the court factors which the statutory authority considers to be factors relevant for the exercise of the power, it is open for the courts to examine whether such factors are relevant for the exercise of the power. It is in this light thit I have proceeded to examine the factors upon which it is proposed by the Commissioner to consider that the order passed by the Income-tax Officer was erroneous in so far as it is prejudicial to the interests of the revenue. Whether in cases where the revenue wants to keep alive a contention even though that contention has been concluded by the decision of the higher\n\nauthorities the Commissioner should have power to revise or set aside or not to give effect to the order of the Income-tax Officer by adding another provision in the Income-tax Act or whether the Income-tax Act, 1961, as it is by virtue of the provision of Section 147 or Sub-section (3) of Section 263 of the Act is sufficient to arm the Commissioner with the power to deal with such situation is another question with which I am not concerned in this application.\n\n14. In the aforesaid view of the matter I must hold that the proposed exercise of the power under Section 263 of the Income-tax Act is illegal and without jurisdiction. There is another aspect of the matter. I have mentioned before that the interim order as varied by the order dated the 30th January, 1974, directed that the Commissioner might pass the order but he should not communicate the order to the petitioner or give effect to the same. In the instant case the order has been passed by the Commissioner pursuant to that leave but the Commissioner has not gone further as mentioned hereinbefore. I have indicated that there was an application under Section 264 of the Act for the assessment years 1967-68, 1968-69 and 1969-70. The Commissioner by the order dated the 20th March, 1975, which is annexure \"B\" to the affidavit-in-reply of Harak Chand Kankaria, affirmed on the 5th of September, 1975, has dismissed the application on the ground that the assessment order has been set aside by the order passed pursuant to the notice under Section 263 of the Act. Therefore, the Commissioner by the order dated the 20th March, 1975, has given effect to the order passed under Section 263 of the Act which he was restrained to do so. In any event this is not permissible. I, therefore, set aside the order dated the 20th March, 1975, and direct the Commissioner to consider the application under Section 264 for the said assessment years. In the view I have taken the Commissioner must be restrained from giving effect to the notice under Section 263 of the Act which is under challenge in this writ application for the reasons mentioned hereinbefore. In the aforesaid view of the matter if any order has been passed pursuant to the notice as it has been passed in the instant case, the same is also quashed and set aside. The respondents are restrained from giving effect to the same. The rule is made absolute to the extent indicated above. There will be no order as to costs. Operation of this order is stayed for eight weeks." }, { "title": "Gopal C. Sharma vs Commissioner Of Income-Tax on 11 October, 1993", "url": "https://indiankanoon.org//doc/23531/", "text": "Gopal C. Sharma vs Commissioner Of Income-Tax on 11 October, 1993\nEquivalent citations: [1994]209ITR946(BOM)\nORDER \n\nFacts : \n Appeal, touching issue in question, filed by \nassessee dismissed as time barred. Same issues dealt with by \nTribunal while deciding revenue's appeal and finding recorded. \nFurther question touching the issues referred by Tribunal under \ns. 256(1). \n \n\nConclusion : \n Merely because assessee's appeal on the \nissues dismissed as time barred, it cannot be said the question \ndid not arise out of Tribunal's order. \n \n\nApplication : \n Also to current assessment years.\n \n\nCitation : \n \n\nIncome Tax Act 1961 s.256(1) \n\n \n\n \n \n\nHead of income--BUSINESS INCOME OR CAPITAL GAINS--Purchase of lands part of which subject to acquisition proceedings and the already subject to sale agreement with third party. \n\nHeld : \n The transaction of compulsory acquisition if land \nis respect of a capital asset could never be viewed as an \nadventure in the nature of trade. The assessee had no choice but to claim compensation \nfor acquisition of the said land. Even as far as the sale of land \nto V is concerned, the said lands were already subject-matter of \nprior agreement of sub-lease and prior agreement of sale entered \ninto by the predecessor-in-title of the assessee in favour of the \nsaid purchaser was binding on the assessee. The lands did not \nconstitute stock-in-trade of the assessee. As far as these lands \nare concerned, the assessee had no choice but to complete the \nsale of lands in favour of V and file a claim for compensation \nwith the Special Land Acquisition Officer in respect of lands \nunder acquisition. These transactions did not constitute, \ntherefore, adventure in the nature of trade and were liable to be \ntaxed to capital gain tax and not on the footing of `business \nincome'.\n \n\nConclusion : \n The transaction of compulsory acquisition of land in respect of a capital asset could never be viewed as an adventure in the nature of trade, but the transaction resulted in capital gains and not business income.\n \n\nApplication : \n Also to current assesment years.\n \n\nCitation : \n \n\nIncome Tax Act 1961 s.14 \n\n \n\n \n \n\nCapital gains--AGRICULTURAL LAND--User test. \n\nHeld : \n (i) The underlying object of the Act to exempt \n`agricultural income' from income-tax is to encourage actual \ncultivation or de facto agricultural operations. Actual user of \nthe land for agricultural purpose or absence thereof at the \nrelevant time is undoubtedly one of the crucial tests for \ndetermination of the issue. It is well settled that the nature \nand character of land may undergo a change depending upon its \nsituation, growth of locality, zone in which it is situate and \nits potentiality. The fact that the land is sold or transferred \nto a non-agriculturist for a non-agriculture purpose or that it \nis likely to be used for non-agricultural purpose soon after its \ntransfer is also considered as a relevant factor germane to the \ndetermination of the issue. Merely because the land was used for \nagricultural purpose in remote past or it continues to be \nassessed to land revenue on the footing of agricultural land is \nnot decisive.--Smt. Sarifabibi Mohamed Ibrahim v. CIT (1993) \n204 ITR 631 (SC) and CIT v. V. A. Trivedi (1988) 172 ITR \n95 (Bom) followed. (ii) The lands were situate in heavy \nindustrial zone and that the said lands were not in fact used or \nintended to be used for agricultural purpose at the relevant time \nsince several years. At least 10 acres of the land out of 25 \nacres was in fact used for non-agricultural purpose by L & T Ltd. \nsince the year 1960, i.e., for 7 years prior to the date of \ntransfer of the land. The reference lands were not, therefore, \nagricultural lands.\n \n\nConclusion : \n Non-user of land for cultivation for \nreasonable span of time and at the material time is crucial test \nand the mere user of land for agricultural purpose in the past and \nthe fact that land was continued to be assessed to land revenue \nare not material. \n \n\nApplication : \n Also to current assessment years.\n \n\nCitation : \n \n\nIncome Tax Act 1961 s.45 \n\n \n\n \n \n\nJUDGMENT\n \n\n D.R. Dhanuka, J. \n \n\n 1. By this reference made at the instance of the assessee under section 256(1) of the Income-tax Act, 1961, the Income-tax Appellate Tribunal had referred the following questions to this court for its opinion : \n\n \"1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding the intention of the assessee at the time of the purchase of the land was to trade in the same and not to hold it as an investment ? \n\n 2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the said land was not agricultural land ? \n\n 3. Whether there was any evidence before the Tribunal to hold that the said land was not agricultural land ? \n\n 4. Whether, on the facts and in the circumstances of the case, the lease rent was assessable under the head 'Business' and not under the head 'Other sources' ? \n\n 5. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the profit received by the assessee from the sale of the assessee's land was on revenue account and not on capital account, namely : \n\n (i) for 1965-66, Rs. 1,00,486 on sales of land to the Voras, \n \n\n (ii) for 1968-69, Rs. 5,59,821 out of compensation received from Larsen and Toubro, \n \n\n (iii) for 1972-73, Rs. 1,03,896 out of additional compensation from Larsen and Toubro ?\" \n\n 2. The \"reference lands\" consist of the following : \n\n (A) Land bearing survey No. 8 (part) situate at village Paspoli admeasuring about 25 acres, leased by the trustees for Sir Mohammed Yusuf Trust in favour of the assessee's father, Shri Chandrabhan B. Sharma, sub-leased by Chandrabhan B. Sharma in favour of Larsen and Toubro Ltd., purchased by the assessee from his father during pendency of acquisition proceedings in respect thereof for the said company and transferred to Larsen and Toubro Ltd. as a result of compulsory acquisition thereof on payment of \"compensation\" to the assessee as contemplated under the Land Acquisition Act, 1894. \n\n (b) Land admeasuring about 15,000 sq. yards situate at village \"Saki\" forming part of survey Nos. 64, 65, 66 (part) - New Survey No. 11 leased by the trustees of Sir Mohammed Yusuf Trust in favour of Chandrabhan B. Sharma, sub-leased by Chandrabhan B. Sharma in favour of Narottamdas Vora and Girdharlal Vora, purchased by the assessee from his father, sold and transferred by the assessee to the \"Voras\" in pursuance of the agreement of sale entered into by Chandrabhan Sharma in favour of \"Voras\" resulting in profit and gain to the assessee. \n\n3. The basic controversy arising in this reference centres around the question as to whether the profits and gains made by the assessee as a result of the transfer of reference lands was liable to be considered as \"agricultural income\" and exempt from tax or whether the same was liable to be taxed as business income or to capital gains tax. \n\n 4 . The Income-tax Officer, the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal held that the \"reference lands\" could not be considered as \"agricultural lands\" on the date of transfer and the income of the assessee resulting from the transfer thereof could not be classified as \"agricultural income\". The Appellate Assistant Commissioner held that the reference lands were not agricultural lands on the date of transfer and the profits and gains made as a result of the transfer thereof were liable to be taxed to capital gains tax. The Appellate Assistant Commissioner held that the transfers in question did not constitute adventure in the nature of trade. The Appellate Assistant Commissioner held that the assessee had no choice in the matter of completion of the pending land acquisition proceedings or completion of the sale in favour of the \"Voras\" in pursuance of the commitment already made by the predecessor-in-title of the assessee before he became the purchase thereof. The Appellate Assistant Commissioner held that the transactions in question amounted to transfer of a capital asset and were liable to be taxed to capital gains tax. The Income-tax Appellate Tribunal held that the transactions concerning the transfer of reference lands constituted adventure in the nature of trade and the profits and gains thereof were liable to be taxed as business income. For the reasons discussed in detail hereinafter, we are in agreement with the conclusions arrived at by the Appellate Assistant Commissioner summarised above. \n\n 5. Having regard to the ratio of the latest judgment of the Supreme Court in the case of Smt. Sarifabibi Mohmed Ibrahim v. CIT , dated September 14, 1993, and the applicability thereof to the facts of this case, we have no hesitation in holding that the reference lands were not \"agricultural lands\" on the date of transfer whatever might have been the character of the land in the past.\n\n 6. We shall now proceed to summarised the facts. \n\n 7. Sir Mohammed Yusuf Trust owned extensive plots of land in Powai Estate situate at villages Paspoli, Saki, Kapri, etc. The said plots of land were assessed to agricultural land revenue. The said trust owned at least about 1,500 acres of land as particularised in para 5 of the order of the Income-tax Tribunal dated January 25, 1977. On October 21, 1948, the trustees of the said trust granted a lease in respect of certain plots of land forming part of \"Powai estate\" in favour of a firm known as Gopal Housing and Plantation Society. The said lease was for a period of 99 years. By this indenture of lease, the lessor granted a lease in respect of 376 acres 20 1/2 gunthas of land in favour of the said firm. At the time when the said lease was granted, the firm of Gopal Housing and Plantation Society consisted of the following three partners : \n\n 1. Shri Chandrabhan B. Sharma (father of the assessee). \n\n 2. Shri Cheddilal B. Gupta; and \n \n\n 3. Shri Shrilal M. Bhatt. \n\n 8. By another indenture of lease, the owners granted lease of several other plots of land in favour of Shri Chandrabhan Sharma individually. \n\n (b) The abovereferred partnership firm of Gopal Housing and Plantation Society was dissolved on August 15, 1951. Shri Chandrabhan B. Sharma, the assessee's father, took over the assets and liabilities of the dissolved firm including the leasehold rights in respect of lands leased to the dissolved firm, i.e., lands admeasuring about 376 acres. On October 21, 1948, the said trust granted lease in respect of various other plots of land admeasuring about 945 acres in favour of the assessee's father, Shri Chandrabhan B. Sharma, for a period of 20 years. Each of the said indentures of lease stipulated that the leased lands shall be used by the lessee for agricultural purposes only. \n\n (c) On or about November 1, 1948, Shri Chandrabhan B. Sharma, the assessee's father, sub-leased land bearing Survey No. 8 (Part) situate at village Paspoli admeasuring about 25 acres in favour of a company known as Larsen and Toubro Limited. Larsen and Toubro Ltd. is an industrial company. The said sub-lease was for a period of 19 years. Larsen and Toubro acquired possession of several plots of land including the reference lands. Land bearing Survey No. 8 (part) is one of the reference lands and was situated at the material time behind the factory premises of the said company. The said land was situate in the heavy industrial zone in the development plan of the Bombay Municipal Corporation. Some time in the year 1959, Larsen and Toubro Ltd. applied to the Revenue authorities for their sanction to use the abovereferred land for non-agricultural purposes. Such sanction was received by the company much later. About 10 acres of the sub-leased land was in fact used by Larsen and Toubro Ltd. for non-agricultural purposes from the year 1960. Larsen and Toubro Ltd. was interested in using the said land for the purpose of its business and expansion of factories and not for agricultural purposes. The Appellate Assistant Commissioner has recorded a finding of fact to this effect in his order dated September 29, 1975. \n\n (d) On or about September 13, 1963, Shri Chandrabhan B. Sharma, granted sub-lease in respect of plots of land bearing Survey Nos. 64, 65 and 66 (part) - new Survey No. 11 situate at village Saki admeasuring about 15,000 sq. yds., in favour of Narottamdas Vora and Girdharlal J. Vora carrying on business in the name and style of Forage and Co. The said sub-lessees are hereinafter referred to as the \"Voras\". Soon thereafter, the said sub-lessee acquired possession of the abovereferred lands from the lessor, Shri Chandrabhan B. Sharma. The \"Voras\" were never interested in cultivation of the said lands or use thereof for agricultural purposes. \n\n (e) On or about July 20 1961, Shri Chandrabhan B. Sharma, the assessee's father, agreed to purchase reversionary rights in respect of all these plots and land from the trustees of Sir Mohammed Yusuf Trust for an aggregate sum of Rs. 30 lakhs. Shri Chandrabhan B. Sharma, in his turn, sold some of the plots of land to various third parties and some others to members of his family including the assessee. On March 30, 1964, the assessee, Shri Gopal C. Sharma purchased plots of land admeasuring 53.33 acres situate at village Paspoli and Kopri and 49.12 acres of land situate at village Paspoli and Saki from his father for the aggregate sum of Rs. 1,20,000 on the footing that the price of the said lands agreed to be purchased by the assessee could be paid by him to his father in due course. The assessee purchased the reference lands from his father. The reference lands formed part of the abovereferred plots of land admeasuring about 102 acres purchased by the assessee from his father. Part of the lands purchased by the assessee from his father was already the subject-matter of compulsory acquisition proceedings under Part VII of the Land Acquisition Act, 1894, and the subject-matter of the prior agreement of sale already executed by the predecessor-in-title of the assessee in favour of the \"Voras\". By this time, the situation in respect of these lands had completely changed. As a matter of fact the reference lands were not being used for agriculture or cultivation since long. There was no evidence worth its name on record to prove that the reference lands were factually and actually used for agriculture at or about the time of transfer or within a reasonable span of time prior to the date of transfer. \n\n (f) Some time in the year 1962, a notification under section 4 of the Land Acquisition Act, 1894, was issued in connection with intended acquisition proceedings pertaining the land bearing Survey No. 8 (part) situate at village Paspoli already in the possession of Larsen and Toubro Ltd. The said acquisition proceedings were initiated at the instance of the company under Part VII of the Land Acquisition Act, 1894, as the said company wanted to purchase the said land for expansion of this factories and its negotiations for purchase of land with the owners had failed. Some time in the year 1966, declaration and notification was issued for acquisition of the said land for Larsen and Toubro Ltd. The assessee filed his claim for compensation before the Special Land Acquisition Officer. An award was made. The requisite amount of compensation was paid by the Special Land Acquisition Officer to the assessee. The assessee received an additional amount of compensation as a result of the consent order in the land acquisition reference made at the instance of the assessee to this court. \n\n (g) On September 23, 1966, Chandrabhan B. Sharma, the assessee's father, agreed to sell the land situate at village Saki admeasuring about 15,000 sq. yds. in favour of the \"Voras\". On or about August 14, 1964, the assessee conveyed the said lands admeasuring about 15,000 sq. yds. forming part of Survey Nos. 64, 65, 66 (part) situate at village Saki in favour of the \"Voras\" for the stipulated sale price. \n\n (h) Under the award of the Special Land Acquisition Officer dated March 21, 1967 (which became fully operative on April 3, 1967), the assessee received a sum of Rs. 5,59,821 as compensation from the Special Land Acquisition Officer (II), Bombay, and the Bombay Suburban District. Being aggrieved by the quantum of compensation awarded to the assessee, the assessee sought a reference to this court as contemplated under section 18 of the Land Acquisition Act (1 of 1894). Some time in or about the year 1972, the assessee received a further sum of Rs. 1,03,896 as and by way of additional compensation for acquisition of the said land as a result of the orders passed by the court in Land Acquisition Reference No. 162 of 1969. \n\n(i) During some of the relevant assessment years, the assessee had also sold three \"Saki plots\" to Acme Tiles (2 acres, 10 gunthas), Hindustan Sheet Metal (3,445 + 3,654 sq. yds.) and Chawla Bros. (17,998 sq. yds.). The said lands are not the reference lands in this reference. \n\n (j) During the course of the relevant assessment proceedings, the assessee contended that the reference lands were \"agricultural lands\" on the date of transfer thereof and the profits and gains made by the assessee as a result thereof constitute \"agricultural income\" and were thus exempt from income-tax. The assessee relied upon the description of the said land as agricultural land in the indentures of lease and agreements of sub-lease, the mamlatdar's certificate and extracts from the land revenue records issued by the revenue authorities showing that the reference lands were assessed to land revenue on the footing of the said lands being agricultural lands. The Income-tax Officer reached the conclusion the effect that the said lands were not agricultural lands within the meaning of section 2(14) of the Income-tax Act, 1961, at the material time and the profits and gains made by the assessee from the transfer of these lands were liable to be assessed to income-tax as business income of the assessee. Several appeals were filed before the Appellate Assistant Commissioner for and on behalf of the assessee. All these appeals were consolidated. The Appellate Assistant Commissioner examined the question as to whether the reference lands were agricultural lands in depth and at considerable length. The Appellate Assistant Commissioner recorded his finding to the effect that the reference lands were not agricultural lands on the date of transfer. The Appellate Assistant Commissioner did not agree with the conclusion of the Income-tax Officer on the issue as to whether the profits and gains made were liable to be assessed as business income of the assessee. The Appellate Assistant Commissioner held that the transactions concerning the transfer of reference lands could not be treated as an adventure in the nature of trade. The Appellate Assistant Commissioner reached the conclusion that the profits and gains made by the assessee in respect of the transactions concerning the transfer of reference lands were liable to be assessed to capital gains tax. The Appellate Assistant Commissioner contrasted the transactions pertaining to sale of the lands by the assessee to Acme Tiles Manufacturing Company, Hindustan Sheet Metal and Chawla Brothers with the transactions of the transfer concerning the reference lands and held that the transactions concerning the transfer of lands to Acme Tiles and others constituted an adventure in the nature of trade whereas the transaction pertaining to transfer of reference lands could not be so treated. \n\n 9. Being aggrieved by the order of the Appellate Assistant Commissioner, the assessee as well as the Revenue filed several appeals before the Income-tax Appellate Tribunal. The appeals filed by the assessee were time-barred. Delay in filing of the said appeal was not condoned by the Tribunal. However, in the Department's appeals, it became necessary for the Income-tax Appellate Tribunal to decide the question as to whether the profits and gains arising from the transfer of reference lands sold to Voras as well as from compulsory acquisition of land acquired for Larsen and Toubro Ltd. were liable to be classified as business income or as agricultural income or capital gains. In the Department's appeals, the assessee contended that the profits and gains made by the assessee from the transfer of reference lands were neither liable to be classified as business income nor as capital gains but were liable to be treated as \"agricultural income\". At the hearing of the said appeals, the assessee contended that the reference lands were agricultural lands and the profits and gains made by the assessee from the transfer of the reference lands were exempted from levy of income-tax invoking section 10(1) of the Income-tax Act, 1961. The Income-tax Appellate Tribunal held that the reference lands were not \"agricultural lands\" on the date of transfer. The Income-tax Appellate Tribunal confirmed the conclusions arrived at by the Income-tax Officer and the Appellate Assistant Commissioner on this issue. The Income-tax Appellate Tribunal highlighted some of the relevant factors having a bearing on this issue and reached the conclusion that the reference lands could not be considered as \"agricultural lands\" on the date of transfer. The Income-tax Appellate Tribunal reversed the findings of the Appellate Assistant Commissioner on the issue concerning classification of income. The Tribunal reached the conclusion that the transaction in respect of transfer reference lands constituted an adventure in the nature of trade and the profits and gains made therefrom were liable to be classified as business income. \n\n 10. The first question which arises for the consideration of this court is as to whether the Tribunal was justified in law holding that the reference lands were not agricultural lands and as to whether there was any evidence before the Tribunal on the basis of which it could be held that the said lands were not agricultural lands on the date of transfer. \n\n 11. Shri Jetley, learned counsel for the Revenue, raised a preliminary objection to the effect that questions Nos. 2 and 3 ought not to have been referred by the Tribunal to this court under section 256(1) of the Income-tax Act, 1961, in view of the rejection of the assessee's appeals as time-barred and, as according to him, the said question did not really arise out of the Tribunal's order. We have carefully considered this submission. In our opinion, there is no merit in the preliminary objection. It was necessary for the Tribunal to decide the question as to whether the reference lands were agricultural lands or not even for the purpose of deciding the appeals filed by the Revenue before the Tribunal. The Income-tax Appellate Tribunal did decide the issue in the Revenue's appeals on the merits. Learned counsel for the assessee has pointed out several passages from the judgment of the Income-tax Appellate Tribunal dealing with the controversy. The Income-tax Tribunal has itself referred to questions Nos. 2 and 3 to this court for its opinion under section 256(1) of the Income-tax Act, 1961, on the footing that the said questions arose out of the Tribunal's order. The Income-tax Appellate Tribunal has recorded its findings on the issue under consideration in the appeals filed by the Revenue even though the assessee's appeals were held to be time-barred. We are satisfied that the question do arise out of Tribunal's order and the same are rightly referred by the Tribunal to this court. \n\n 12. Section 10(1) of the Income-tax Act, 1961, exempts \"agricultural income\" from levy of income-tax. The said section provides that \"agricultural income\" of a person shall not be included in the total income of the assessee. Section 2(1) of the Act defined the expression \"agricultural income\" prior to its being renumbered as section 2(1A) as a result of the amendment thereof. Section 2(14) of the Act defines the expression \"capital asset\". The expression \"transfer\" is defined by section 2(47) of the Act. Section 2(14) of the Act and other connected provisions were amended by the Finance Act, 1970. \n\n 13. Section 47(viii) of the Act as amended provides that nothing contained in section 45 of the Act shall apply to any transfer of agricultural land in India effected before March 1, 1970. In the instance case, the transfer of reference lands took place prior to March 1, 1970. There is a serious controversy between the parties in respect of the issued as to whether the reference lands were agricultural lands at the relevant time. \n\n 14. The expression \"agricultural land\" is not defined under the Income-tax Act, 1961. The question as to whether the land in question was liable to be considered as agricultural land for purposes of income-tax is liable to be decided with reference to the criteria laid down by judicial decisions of the Supreme court and High Courts. The underlying object of the Act to exempt \"agricultural income\" from income-tax is to encourage actual cultivation or de facto agricultural operations. Actual user of the land for agricultural purposes or absence thereof at the relevant time is undoubtedly one of the crucial tests for the determination of the issue. It is well-settled that the nature and character of the land may undergo a change depending upon its situation, growth of the locality of zone in which it is situate and its potentiality. According to recent decisions of the Supreme Court, the fact that the land is sold or transferred to a non-agriculturist for a non-agricultural purposes or that it is likely to be used for non-agricultural purposes soon after its transfer is also a relevant factor germane to the determination of the issue. Merely because the land was used for agricultural purposes in the remote past or it continues to be assessed to land revenue to the footing of agricultural land is not decisive. \n\n 15. At one stage, the High Court of Madras Sarojini Devi v. Sri Krishna, AIR 1994 Mad 401, had taken a view that any land which was capable of being used for agriculture was liable to be considered as agricultural land. This view was in terms overruled by the Supreme Court in its judgment in CWT v. Officer-in-charge (Court of Wards), Paigah . The latest judgment of the Supreme Court in the case of Smt. Sarifabibi Mohammed Ibrahim v. CIT clinches the issue.\n\n 16. Learned counsel for the Revenue submitted that the question as to whether the reference lands were agricultural lands or not was basically a question of fact and it could not be said in this case that the finding of fact arrived at by the Tribunal or other authorities was perverse or was arrived at as a result of misapplication of relevant tests or the principles applicable for the determination of the issue. Learned counsel for the Revenue appeals to be right on both these facets concerning issues Nos. 2 and 3. \n\n 17. Both learned counsel for the assessee as well as learned counsel for the Revenue cited a large number of authorities in support of their respective contentions, pertaining to questions Nos. 2 and 3 referred to us by the Tribunal. We have heard learned counsel on both sides at some length. We have gone through the relevant authorities cited by either side in detail. We however, do not think it necessary to refer to all the authorities cited at the Bar. \n\n 18. Learned counsel for the assessee relied, inter alia, on the following factors in support of her contention that \"the reference lands\" were liable to be treated as \"agricultural lands\" on the date of transfer for purposes of the Income-tax Act, 1961. \n\n (a) The documents of lease and sub-lease described the \"reference lands\" as agricultural lands and stipulated that the said lands shall be used by the lessee or sub-lessee for agricultural purposes only. \n\n (b) That the reference lands were assessed to land revenue on the footing that the said land continued to be agricultural lands. \n\n (c) That the assessee had at no stage applied to the Revenue authorities for permission to convert the said lands to non-agricultural use. \n\n 19. Learned counsel for the assessee further submitted as under : \n\n The factum of non-user of the said reference lands for several years prior to the date of transfer was of non consequence in law as it must be presumed that the reference land continued to be agricultural lands until non-agricultural user thereof was sanctioned by the Revenue authorities on the application of the assessee made prior to the transfer of the said lands. No such application was made in this case. The initial presumption arising from the assessment of the reference lands to land revenue on the footing of their being agricultural lands was not rebutted by the Revenue in this case. \n\n Learned counsel for the Revenue emphasised the following factors in support of his submission that the reference lands could not be treated as \"agricultural lands\" on the relevant date. Learned counsel submitted that even if the reference lands were agricultural lands in the past, the nature and character of said lands had undergone a change prior to the date of transfer in view of several relevant factors broadly listed hereinafter. \n\n (i) There reference lands were situate in a heavy industrial zone and were surrounded by factories and industries in the locality. Thus the situation of the reference lands at the material time proved that the nature and character, of the reference lands and its potentiality for non-agricultural user had undergone a complete change. \n\n (ii) The reference lands were not being cultivated by the assessee or by the sub-lessee in possession or any third party for several long years prior to the date of transfer. IT was settled law that if the lands in question were not factually and actually used for agricultural purposes for a reasonable span of time prior to the date of transfer, the fact of such non-user was germane to the issue under consideration. The reference lands were transferred to business companies and were not likely to be used for agricultural operations. Learned counsel submitted that this factor was also a crucial factor for the determination of the issue. \n\n (iii) On March 30, 1964, the assessee has purchased the reference lands from his father. The assessee did not intend to use the reference lands for agricultural purposes. The assessee could not do so as the assessee was not in possession of these lands on the date of transfer thereof firm his father. The concerned sub-lesses (who were in possession of reference lands) never cultivated these lands for agricultural operations or otherwise. Some time in the years 1959, Larsen and Toubro Ltd. had made in application to the Revenue authorities for their permission to use the land for non-agricultural purposes. Compulsory land acquisition proceedings were initiated by the Govt. of Maharashtra for acquisition of the said land (land bearing Survey No. F (part) not for purpose of enabling Larsen and Toubro Ltd. to use the reference land for purpose of agriculture but for purpose of business user thereof, i.e., expansion of their factories. \n\n (iv) It was obvious from the order passed by the District Deputy Collector B. S. D., Andheri, on March 21, 1968, relied on by the Appellate Assistant Commissioner that 40 per cent. of the land under acquisition, i.e., 10 acres out of 25 acres was in fact used by Larsen and Toubro Ltd. for non-agricultural purposes from the year 1960 onwards, i.e., since about seven years prior to the date of transfer. \n\n (v) Actual user of part of the reference lands for non-agricultural purposes coupled with non-user of the remaining land for agricultural purpose was an extremely relevant factor for the determination of the issue. \n\n20. Learned counsel for the Revenue submitted that it was not of any consequence that the assessee did not make any application to the Revenue authorities for sanction of conversion of the reference lands to non-agricultural user till the date of transfer thereof. The initial presumption of the reference lands being agricultural lands arising from their assessment to land revenue was outweighed and rebutted by other crucial factors as indicated below. Learned counsel for the Revenue submitted that the ratio of the judgment of the Supreme Court in Sarifabibi's case , was clearly applicable to this case. Learned counsel submitted that in any event the finding of fact arrived at by the three authorities below was based on evidence and the same could not be treated as perverse or erroneous in law. Learned counsel submitted that no case was made out for interference with the conclusion of the Tribunal on this issue.\n\n 21. At the outset, we would like to refer to the latest judgment of the Supreme Court in the case of Smt. Sarifabibi Mohmed Ibrahim v. CIT , being a judgment delivered by the apex court on September 14, 1993. In our opinion, this judgment is a complete answer to the controversy raised by the assessee concerning questions Nos. 2 and 3 referred to us. It is necessary to analyse the ratio of judgment of this case and apply the same to the reference under consideration. In the case before the Supreme Court, the land in question was assessed to land revenue on the footing of the same being agricultural land throughout and right up to the date of the transfer thereof. In this case also, no permission was obtained by the assessee for conversion of the land for non-agricultural user as contemplated under section 65 of the Bombay Land Revenue Code. In the case before the apex court, the assessee had obtained permission from the Revenue authorities to sell the land in question to a non-agriculturist co-operative housing society for non-agricultural purposes, i.e, building purposes. In this case, the Income-tax Appellate Tribunal had held that the land in question was agricultural land within the meaning of section 2(14) of the Income-tax Act, 1961. The High Court of Gujarat had, however, taken the view that the said land was not agricultural land at the time of its sale and that the income arising from its sale was thus not exempt from capital gains tax. In the case before the Supreme Court the following factors were noticed and high-lighted by the court :\n The land was assessed to land revenue on the footing of the same being \"agricultural lands\". The land was lying unused for at least four years prior to the date of its transfer and no agricultural operations were carried thereon for four years prior to the date of its transfer except for a few months immediately prior to the transfer thereof just with a view to create evidence of user of the land for agricultural purposes. The land was situate at a distance of one kilo metre from Surat Railway Station and was the subject-matter of transaction of sale in favour of a co-operative housing society for building of houses thereon immediately after the completion of sale. \n\n 22. In paragraph 9 of its judgment in Sarifabibi's case (SC), B. P. Jeevan Reddy J., speaking for the Bench, observed (at page 637) :\n\"Whether a land is an agricultural land or not is essentially a question of fact.\" \n\n 23. In paragraph 10 of the judgment, the Supreme Court referred to the judgment of the constitutional Bench in the case CWT v. Officer-in-Charge (Court of Wards), Paigah . In this case, the constitutional Bench of the Supreme Court had in terms observed that the expression \"agricultural land\" could not be given the wide meaning as desired by the assessee in view of the underlying object of the Act providing for exemption of land being to encourage cultivation of the land. In the above-referred case , the Supreme Court reversed the decision of the High Court of Madras in T. Sarojini Devi v. Sri Kristna , and also the Full Bench judgment of the High Court of Andhra Pradesh which was the subject-matter of the appeal before the Supreme Court in the case . The apex court emphasised that the object of the Legislature in exempting agricultural land from tax was to encourage the cultivation of agricultural land and agricultural operations. In the above-referred case , the Supreme Court considered the object of the Legislature in exempting agricultural land for taxation for purposes of the Wealth-tax Act, 1957. It is obvious to us that the same is the object of exemption for granting exemption in respect of \"agricultural income\" for purposes of the Income-tax Act, 1961. After laying down the narrower test for the purpose of determining the nature and character of land at the time of transfer for the purpose of the Income-tax Act, 1961, and the Wealth-tax Act, 1957, the apex court remanded the matter to the Tribunal for fresh determination of the issue in the light of the principles laid down. In paragraph 13 of its judgment, the Supreme Court referred to the judgment of this court in CIT v. V. A. Trivedi and approved the ratio of the said judgment. In paragraph 14 of the judgment, the Supreme Court referred with approval to the observations made by the Division Bench of this court in CIT v. V. A. Trivedi , to the effect that to ascertain the true character and the nature of the land, it must be seen whether the land had been put to use for agricultural purposes for a reasonable span of time prior to the relevant date and further as to whether on the date of the transfer the land in question was intended to be put to use by the purchaser for agricultural purposes for a reasonable span of time in the future. The relevancy of the test of \"factual user\" of the land for agricultural purposes was emphasised by the Division Bench of this court, consisting of Bharucha and Mohta JJ. in Trivedi's case , after interpreting and applying the ratio of the judgment of the Supreme Court in the case of CWT v. Officer-in-charge (Court of Wards), Paigah . The said test was duly approved by the Supreme Court in its latest judgment in Sarifabibi's case .\n\n 24. In paragraph 14 of its judgment in Sarifabibi's case , the Supreme Court summarised the Bombay view as expressed in Trivedi's case decided by S. P. Bharucha J., as his Lordship then was, in the following words (at page 641) :\n \"The Bench (meaning thereby the Division Bench of the High Court of Bombay deciding Trivedi's case) observed that : to ascertain the true character and the nature of the land, it must be seen whether it has been put to use for agricultural purposes for a reasonable span of time prior to the relevant date and further whether on the relevant date the land was intended to be put to use for agricultural purposes for a reasonable span of time in the future. : .\n\n 25. While dealing with the factor of the land in question being assessed to agricultural land revenue, the apex court held in the abovereferred case that several other relevant factors relied on on behalf of the Revenue outweighed the circumstances relied on by the assessee. It was argued on behalf of the assessee that no permission had been obtained on behalf of the assessee for conversion thereof for non-agricultural user and this factor clinched the issue in favour of the assessee. Dealing with this aspect of the matter, the Supreme Court held that though a formal permission as contemplated under section 65 of the Bombay Land Revenue Code was not obtained by the assessee right up to the date of transfer, the land in question was liable to be considered as non-agricultural land on the date of transfer. The Supreme Court emphasised the following factors in support of its conclusion that the land in question was not agricultural land on the relevant date : \n\n (a) That the said land was situated within the municipal limits and at a distance of 1 k.m. for the railway station; \n\n (Note : In this case, the reference lands were situate in a heavy industrial zone and were located in the midst of factories, etc.) \n \n\n (b) That the said land was not cultivated for a period of four years prior to the date of sale; \n\n (c) That the land was sold to a housing society for construction of residential buildings, i.e., for non-agricultural user; \n\n (d) That the purchaser had in fact started user of the said land for non-agricultural purposes soon after the completion of transaction of transfer as expected. \n\n 26. In the above-referred case, the Supreme Court interpreted and applied the ratio of the judgment of the constitutional Bench of the Supreme Court in the case of CWT v. Officer-in-charge (Court of Wards), Paigah and approved the criteria laid down by the Division Bench of this court in CIT v. V. A. Trivedi . On the application of the ratio of the above-referred three judgments to this case, we find no justification whatsoever for the grievance made by the assessee in respect of the controversy concerning questions Nos. 2 and 3.\n\n 27. Learned counsel for the assessee mainly relied upon the Division Bench judgment of this court in the case of CWT v. H. V. Mungale , the ratio of the judgment of the Division Bench of this court in the case of Wealth-tax Reference No. 5 of 1964 decided on Tuesday, December 4, 1973 CWT v. Podar Mills Ltd. and the judgment of this court in CIT v. P. C. Joshi and B. C. Joshi . The thrust of the argument of learned counsel for the assessee is that the fact that the land was lying vacant and was not used for cultivation for several years was not of any legal consequence. Learned counsel for the assessee submitted that the court must presume that the vacant land continued to be \"agricultural land\" in nature and character once it was shown that the land was assessed to land revenue as agricultural land. Learned counsel for the assessee relied upon the last two paragraphs from the judgment of Chandurkar J., as his Lordship then was, from Mungale's case (Bom) where in it was observed that unless the land was allowed to be converted for non-agricultural purposes by the order of the Collector under the provisions of the Land Revenue Act, the initial presumption to the effect that the land was agricultural in nature would continue to operate. To some extend, some of the observations appear to be in conflict with the view not waken by the Supreme Court in Sarifabibi's case . It is far too obvious to us that the view taken by the Supreme Court in Sarifabibi's case would prevail. In our opinion, the principles laid down by the Supreme Court in the case of Smt. Sarifabibi Mohmed Ibrahim v. CIT and by this court in Trivedi's case do emphasise the factor of non-user of the land for cultivation for a reasonable span of time prior to the date of transfer as a crucial factor for determination of the issue. Applying the ratio of the Supreme Court judgment in Sarifabibi's case to the facts of the case, we hold that the reference lands could not be considered as \"agricultural lands\" on the date of transfer.\n\n 28. The Appellate Assistant Commissioner and the Tribunal were more than justified in highlighting the fact that the reference land were situate in a heavy industrial zone and that the said lands were not in fact used or intended to be used for agricultural purposes at the relevant time since several years. The Appellate Assistant Commissioner also recorded a finding of fact based on relevant evidence that at least 10 acres of the land out of 25 acres was in fact used for non-agricultural purposes by Larsen and Toubro Limited since the year 1960, i.e., for seven years prior to the date of transfer of the land. If the relevant tests laid down by the Supreme Court Sarifabibi's case and the test laid down by this court in CIT v. V. A. Trivedi are to be applied to this case as they ought to be, it would become obvious that the finding of fact arrived at by the Income-tax Officer, the Appellate Assistant Commissioner and the Tribunal cannot be characterised as perverse or unsupported by evidence or erroneous in law. It is not possible to accept the submission made by learned counsel for the assessee that the authorities below did not apply the correct test or misdirected themselves in law or that the finding of cat arrived by the Tribunal was not supported be evidence.\n\n 29. In view of the above discussion we do not think it necessary to refer to the other authorities cited at the Bar. We uphold the finding of the Income-tax Appellate Tribunal to the effect that the reference lands were not agricultural lands. \n\n 30. The next question which arises for the consideration of the court is as to whether the transactions pertaining to transfer of reference lands constitute an adventure in the nature of trade and whether the profits and gains made by the assessee from transfer of these lands are liable to be taxed as business income or as income in the nature of capital gains. \n\n 31. We have heard learned counsel on both sides at length. We have gone through the large number of authorities cited at the Bar. Learned counsel for the assessee relied on the Division Bench judgment of this court in CIT v. Principal Officer, Laxmi Surgical Pvt. Ltd. . Learned counsel for the Revenue relied mainly on the ratio of the judgment of the Supreme Court in the case of G. Venkataswami Naidu and Co. v. CIT . Both learned counsel relied on various other authorities also. We do not think it necessary to refer to all the authorities cited at the Bar.\n\n 32. The Income-tax Appellate Tribunal reached the conclusion that the transactions in question constituted an adventure in the nature of trade as the assessee had purchased the reference lands form his father on March 30, 1964, with an intention to make profit. The lands sold to the Voras was already the subject-matter of the prior agreement of sub-lease dated September 13, 1963, and the prior agreement of sale dated October 29, 1963. The lands compulsorily acquired for Larsen and Toubro Limited under the acquisition made by the Special Land Acquisition Officer was already the subject-matter of compulsory acquisition proceedings initiated by issue of notification under section 4 of the Land Acquisition Act on August 21, 1962. The transaction of compulsory acquisition of land in respect of a capital asset could never be viewed as an adventure in the nature of trade. The assessee had acquired a capital asset from his father. The said capital asset was already the subject-matter of pending acquisition proceedings. The assessee had no choice but to claim compensation for acquisition of the said land. Even as far as the sale land to the Voras is concerned, the said lands were already the subject-matter of the prior agreement of sub-lease and prior agreement of sale entered into by the predecessor-in-title of the assessee in favour of the said purchaser was binding on the assessee. The reference lands did not constitute stock-in-trade of the assessee. As far as the reference lands are concerned, the assessee had no choice but to complete the sale of the lands in favour of the Voras and file a claim for compensation with the Special Land Acquisition Officer in respect of the lands under acquisition. After careful consideration of the facts and circumstances of the case and after applying the applicable principles laid down by the Supreme Court and this court, we have reached the conclusion that the Appellate Assistant Commissioner was more than justified in coming to the conclusion that these transactions did not constitute an adventure in the nature of trade and were liable to be taxed to capital gains tax and not on the footing of \"business income\". We shall now refer to the principles laid down by the Division Bench of our High Court in the above-referred case in CIT v. Principal Officer, Laxmi Surgical Pvt. Ltd. to which one of us (Justice Dr. B. P. Saraf) was a party. The said case was decided after interpreting and applying the ratio of various judgments of the Supreme Court. The profit motive of the assessee in selling the land without anything more by itself can never be decisive for determination of the issue as to whether the transaction amounted to an adventure in the nature of trade. The assessee may acquire a capital asset in the expectation that it may be sold at a profit. On this aspect, the observations made by the Supreme Court in the case of Janki Ram Bahadur Ram v. CIT are of considerable significance. In this case, J. C. Shah J., speaking for the apex court, in terms, observed that the profit motive in entering into a transaction was to decisive for determination of the issue and an accretion to capital could not be taxed as \"business income\" merely because the capital asset was acquired by the assessee in the expectation that it may be sold at a profit. If the relevant test laid down by the Supreme Court is to be applied to this case, it would follow that the Tribunal was in error while holding that the said transactions constitute an adventure in the nature of trade and were liable to be taxed as business income. We are in agreement with the conclusion of the Appellate Assistant Commissioner to the effect that the transactions of transfer in respect of the reference lands were liable to be taxed to capital gains tax. Question No. 4 is merely consequently to other questions. The said question need not be dealt with separately.\n\n 33. In the light of the above discussion, we answer the questions referred to us as under : \n\n (i) We answer question No. 2 in the affirmative and in favour of the Revenue \n \n\n (ii) We answer question No. 3 in the affirmative and in favour of the Revenue. \n\n (iii) We answer question No. 4 as under : \n \"the lease rent was assessable under the head \"Other sources.\" \n\n (iv) We answer question No. 5 in the negative and in favour of the assessee. We hold that the profit received by the assessee from the sale of the land as well as compulsory acquisition was liable to capital gains tax. \n\n 34. As regards the answer to question No. 1, we decline to answer the said question as unnecessary. The answer to question No. 1 is covered by our answer to question No. 5 and the said question need not be separately dealt with. \n\n 35. Heaving regard to the facts and circumstances of the case, there shall be no order as to costs." }, { "title": "Nirmala L. Mehta vs A. Balasubramaniam, Commissioner Of ... on 29 April, 2004", "url": "https://indiankanoon.org//doc/1886231/", "text": "Nirmala L. Mehta vs A. Balasubramaniam, Commissioner Of ... on 29 April, 2004\nEquivalent citations: (2004)191CTR(BOM)8, [2004]269ITR1(BOM)\nAuthor: R.M. Lodha\nBench: R.M. Lodha, J.P. Devadhar\nJUDGMENT\nR.M. Lodha J.\n\n1. The petitioner is a citizen of India and is a resident of Mumbai. In the month of August, 1987, she won a lottery of the Government of Sikkim having a prize money of Rs. 6,30,000. The Government of Sikkim deducted income-tax in the sum of Rs. 62,088 as per Sikkim tax laws from the prize money of Rs. 6,30,000 and the balance amount of Rs. 5,67,912 was paid. The petitioner filed a return of income on June 30, 1988, declaring total income of Rs. 55,630. She declared the prize money of the lottery received from the office of the Director of State Lotteries, Sikkim. After deducting a sum of Rs. 5,000 therefrom under Section 10(3) of the Income-tax Act, 1961, she showed the prize money of Rs. 6,25,000 from the lottery. The petitioner in her return claimed deduction of Rs. 62,088 on the ground that the said sum was deducted as income-tax at source while making the payment of Rs. 5,67,912. The Assessing Officer, however, did not give credit for the said sum of Rs. 62,088 as the tax deducted from the prize money of the lottery by the Sikkim State Government was not paid to the Indian treasury and tax was not deducted as per Section 199 of the Income-tax Act, 1961. The petitioner approached the Commissioner of Income-tax, Bombay City IV, in his revisional jurisdiction under Section 264. When the revision petition was filed by the petitioner before the Commissioner of Income-tax, her thrust in challenging the assessment order was that she should have been given credit for TDS certificate of Rs. 62,088. At the time of hearing, the petitioner raised additional grounds, inter alia, that no tax was payable by the petitioner on the prize money of the Sikkim lottery under the Income-tax Act, 1961.\n\n2. The Commissioner of Income-tax, Bombay City IV, by his order dated June 25, 1991, modified the order of the Assessing Officer only to the extent holding that the prize money of the lottery needed to be reduced by Rs. 62,088 as the assessee did not receive the said amount. The Commissioner of Income-tax held that the additional ground regarding taxability under the Indian Income-tax Act cannot be permitted to be raised at the stage of hearing of the revision. It is this order of the Commissioner of Income-tax, Bombay City IV, passed on June 25, 1991, that is under challenge before us in the writ petition.\n\n3. At this stage itself it may be noticed that Sikkim became the 22nd State of the Indian Union by and under the Constitution (36th Amendment) Act, 1975, with effect from April 26, 1975. The short history behind Article 371F (special provision with respect to the State of Sikkim) is succinctly summarised by the learned author Shri Durga Das Basu in his book entitled Shorter Constitution of India (Thirteenth edition, 2001) thus :\n\n\"During British days, Sikkim was an Indian State, under a hereditary monarch called Chogyal, subject to British paramountcy.\n\nWhen India became independent, there was a section of public opinion in Sikkim for merger with India. But the Princely Rule of that State and its strategic position stood in the way. Hence, after the lapse of paramountcy, a treaty was entered into between Sikkim and the Government of India, by which the latter undertook the responsibility with regard to the defence, external affairs and communications of Sikkim. Sikkim thus became a Protectorate of the Union of India.\n\nIn May, 1974, the Sikkimese Congress decided to put an end to monarchical rule, and the Sikkim Assembly passed the Government of Sikkim Act, 1974, for the progressive realisation of a fully responsible Government in Sikkim and for furthering its relationship with India. The Sikkim Assembly next, by virtue of its powers under the Government of Sikkim Act, passed a resolution--expressing its desire to be associated with the political and economic institutions of India and for seeking representation for the people of Sikkim in India's Parliamentary system. The Constitution (35th Amendment) Act, 1974, was promptly passed to give effect to this resolution. The main provisions of this Amendment Act included--\n\n(i) Sikkim would not be a part of the territory of India, but an 'associate State', which, was brought within the framework of the Indian Constitution by inserting Article 2A and the 10th Schedule in the Constitution.\n\n(ii) Sikkim would be entitled to send two representatives to the two Houses, whose rights and privileges would be the same as those of other members of Parliament, except that the representatives of Sikkim would not be entitled to vote at the election of the President or Vice-President of India. \n\nThere is little doubt that the 35th Amendment Act, 1974, introduced innovations into the original scheme of the Constitution of India. There was no room for any 'associate State' under the Constitution of 1949.\n\nThe criticism of the introduction of the status of an 'associated State' into the Indian federal system has, however, lost all practical significance, because Sikkim has shortly thereafter been admitted into the Indian Union as the 22nd State in the First Schedule of the Constitution of India, and both Article 2A and the 10th Schedule, which were added by the Constitution (35th Amendment) Act, 1974, were omitted by the Constitution (36th Amendment) Act, 1975, which followed in quick succession, and was given retrospective effect from April 26, 1975.\n\nWe shall now advert to this later development. While the Indian Parliament was enacting the Constitution (35th Amendment) Act, the Chogyal resented and sought to invoke international intervention. This provoked the progressive sections of the people of Sikkim and led to a resolution being passed by the Sikkim Assembly on April 10, 1975, declaring that the activities of the Chogyal were prejudicial to the democratic aspirations of the people of Sikkim and ran counter to the Agreement of May, 1974, executed by the Chogyal. The Assembly further declared and resolved that :\n\n'The institution of the Chogyal is hereby abolished and Sikkim shall henceforth be a constituent unit of India, enjoying a democratic and fully responsible Government.' \n \n\nThis resolution of the Assembly was submitted to the people of Sikkim for their approval. At the referendum so held, there was an overwhelming majority, and the Chief Minister of Sikkim, on behalf of his Council of Ministers, urged the Government of India to implement the result of the referendum. This led to the passing by the Indian Parliament of the Constitution (36th Amendment) Act, 1975, which was later ratified by the requisite number of States under Article 368(2), proviso.\n\nBy the 36th Amendment Act, Sikkim was admitted into the Union of India as a State, by amending the First and the Fourth Schedules, Articles 80-81, and omitting Article 2A and the 10th Schedule, as stated earlier. Article 371F has, thereafter, been inserted to make some special provisions relating to the administration of Sikkim to meet the special needs and circumstances of that State.\" \n\n4. In the backdrop of the brief history that led to the insertion of Article 371F in the Constitution of India with effect from April 26, 1975, we may now refer to Article 371F to the extent it is relevant.\n\n\"371F. Notwithstanding anything in this Constitution.-- . . . .\n\n(k) all laws in force immediately before the appointed day in the territories comprised in the State of Sikkim or any part thereof shall continue to be in force therein until amended or repealed by a competent Legislature or other competent authority ;\n\n(l) for the purpose of facilitating the application of any such law as is referred to in Clause (k) in relation to the administration of the State of Sikkim and for the purpose of bringing the provisions of any such law into accord with the provisions of this Constitution, the President may, within two years from the appointed day, by order, make such adaptations and modifications of the law, whether by way of repeal or amendment, as may be necessary or expedient, and thereupon, every such law shall have effect subject to the adaptations and modifications so made, and any such adaptation or modification shall not be questioned in any court of law . . .\" \n\n5. In State of Sikkim v. Surendera Prasad Sharma, , the special provisions relating to the State of Sikkim as provided in Article 371F came up for consideration before the Supreme Court. The Supreme Court in paragraphs 15, 20 and 21 held thus (pages 2352 and 2356) :\n\n\"15. Now we have already noticed that the Establishment Rules of 1974 were promulgated by the Chogyal of Sikkim as its absolute monarch for regulating the appointments to the Civil Services of the State and they were undoubtedly in existence before Sikkim acquired the status of an associate State by the 35th Amendment and a full-fledged State of the Indian Union by the 36th Amendment In view of the developments and political activity that had preceded these constitutional changes to bring the people of Sikkim within the mainstream of a democratic polity, certain provisions in the nature of transitory provisions had to be made. They are to be found in Article 371F. This article begins with a non obstante clause which, to the extent relevant and contextually permissible, applies to all the clauses of that article and cannot be read as limited in its application only to those clauses which run contrary to the provisions of the Constitution. The article is a special provision relating to the State of Sikkim. The article begins with a non obstante clause and goes on to add in Clause (f) that Parliament may, with a view to protecting the rights and interests of different sections of the population of Sikkim make provision for the number of seats in the legislative Assembly of the State of Sikkim which may be filled by candidates belonging to such sections, etc. This provision was scrutinised by this court in Poudyal's case, to which we have referred earlier. By majority the constitutional validity of this provision was upheld by this court in that case. For our purpose, however, Clause (k) of Article 371F is relevant which we have extracted earlier. That clause provides that notwithstanding anything in the Constitution, all laws in force immediately before the appointed day in the territories comprised in the State of Sikkim or any part thereof shall continue in force therein until amended or repealed by a competent Legislature or other competent authority, On a plain reading of this provision it becomes clear that all laws which were in force prior to April 26, 1975, in the territories now falling within the State of Sikkim or any part thereof were intended to continue to be in force until altered or repealed. Although the expression 'all laws in force' has not been defined the said expression must receive its ordinary, natural and grammatical meaning. The latter part of the clause--'until amended or repealed by a competent Legislature or other competent authority'--is indicative of the fact that the said expression was not intended to be confined to only legislative enactments but also laws which could be altered or amended or repealed by 'other competent authority', i.e., other than the Legislature itself. This supplies a clear indication that the said expression is wide enough to include subordinate legislations, e.g., rules, regulations, orders, etc. The expression 'existing law' is defined by Article 366(10) to include any rule, regulation, bye-law, etc., and we think the expression 'all laws in force' means all existing laws. But quite apart from the definition in Article 366(10), on a plain reading of Clause (k) in which this expression occurs, it seems clear to us that the said expression is wide enough to include the Establishment Rules of 1974, If any authority is needed reference could be made to the decision of this court in Edward Mills Co. Ltd., Beawar v. State of Ajmer, ; wherein a similar expression used in Article 372 was construed. There can, therefore, be no doubt that the Establishment Rules of 1974 which were in force in the territories comprised in the State of Sikkim prior to April 26, 1975, would stand covered by the expression 'all laws in force' used in Clause (k) of Article 371-F and would continue in force even after the appointed date as existing law until amended or repealed. This meaning given to the said expression is consistent with the definitions of 'existing law' and 'law', employed in the Adaptation of Sikkim Laws (No. 1) Order, 1975.\n\nIn the proviso to Rule 4(4) extracted earlier there is reference to Sikkimese nationals and non-Sikkimese nationals. The said proviso posits that non-Sikkimese nationals may be appointed only when suitably qualified and experienced Sikkimese nationals are not available and further provides for replacement of such non-Sikkimese nationals by Sikkimese candidates as and when the latter become available. The High Court has refused to construe the said proviso to mean local residents of Sikkim were to be preferred to non-residents of Sikkim. The High Court answers the contentions thus :\n\n'But even with the aid of these provisions, it is not possible to construe the expression \"Sikkimese-nationals\" as \"locals\" or permanent residents of Sikkim, as one can be a national of one country without being a resident in that country and may in fact be a permanent resident of another country with his domicile, whether of origin or of choice, in that country.' \n \n\nAnd caps the same as under :\n\n'I have already noted that the provisions of Rule 4(4) of the Sikkim Government Establishment Rules, quoted hereinbefore, provided for preferential treatment to Sikkimese nationals in matters relating to employments or appointments under the then Government of Sikkim and that with the incorporation of Sikkim as a component State in the Union of India with effect from April 26, 1975, Sikkimese nationality having ceased to exist as a politico-legal concept, the preference sought to be given by Rule 4(4) has become ineffective and unworkable.' \n \n\nWith respect we find it difficult to accept this highly technical approach. In the first place since this was an existing law which was continued in force, it would naturally contain expressions which were in vogue before the appointed day. These expressions had to be understood in the sense in which they were defined in the Sikkim Subjects Regulations, 1961. Regulation 3 defines Sikkim subjects and regulation 7 explains who shall not be Sikkim subject. Therefore, if the expressions 'Sikkimese nationals' and 'non-Sikkimese nationals' used in the proviso to Rule 4(4) are read and understood in the context of the provisions of the aforesaid regulations, the difficulty expressed by the learned judge in the High Court would appear to be imaginary.\n\n20. From what we have said earlier it is crystal clear that certain political developments of considerable significance to the people of Sikkim had preceded its merger into the Union of India. This merger was based on certain solemn assurances given to the people of India. The constitutional provisions cannot be read as torn from the historical developments which preceded the merger. The laws which were in force immediately before merger were enacted at a time when Sikkim was under the Chogyal's rule and could not, therefore, be in accord with the constitutional mandates of the free democratic republic. Therefore, to give effect to the political commitments and assurances given to the people of Sikkim, special provisions had to be made in respect of the new State of Sikkim by the insertion of Article 371F in the Constitution. Just as in the case of Article 35(b), this provision also had to begin with a non obstante clause to grant temporary immunity from the other provisions of the Constitution. If it were not to be so, the laws in force in the erstwhile territory of Sikkim would conflict with the provisions of the Constitution and would be hit by Article 13. But at the same time it must be realised that the said article does not use the phraseology of making the same subject to the provisions of the Constitution. It must also be borne in mind that Article 2 does not make use of a non obstante clause and, therefore, the terms and conditions prescribed thereunder must accord with the other constitutional requirements. Thus Article 371F occupies a special position to cope up with a special situation with a special historical backdrop.\n\n21. Article 371F, is as stated earlier, a special constitutional provision with respect to the State of Sikkim. The reason why it begins with a non obstante clause obviously is that the matters referred to in the various clauses immediately following required a protective cover so that such matters are not struck down as unconstitutional because they do not satisfy the constitutional requirement. Unless such immunity was granted 'the laws in force' would have had to meet the test of Article 13 of the Constitution. This being the objective, existing laws or laws in force came to be protected by Clause (k) added to Article 371-F. The said laws in force in the State of Sikkim were, therefore, protected, until amended or repealed, to ensure smooth transition from the Chogyal's rule to the democratic rule under the Constitution. Inherent in Clause (1) is the assumption that many of such existing laws may be inconsistent with the Constitution and, therefore, the President came to be conferred with a special power to make adaptations and modifications with a view to making the said rule consistent with the Constitution. Of course this power had to be exercised within two years from the appointed day. If any adaptation or modification is made in the law in force prevailing prior to the appointed day, the law would apply subject to such adaptation and modification. It is thus obvious that the adaptation and modification made by the President in exercise of this special power does not have the effect of the law ceasing to be a law in force within the meaning of Clause (k) of Article 371F. Therefore, on the plain language of the said provision it is difficult to hold that the effect of adaptation or modification is to take the law out of the purview of Taws in force'.\" \n\n6. It would be, thus, seen that existing laws or laws in force in the State of Sikkim came to be protected by Clause (k) added to Article 371F until amended or repealed to ensuresmooth transition from the Chogyal's rule to the democratic rule under the Constitution. In so far as Clause (1) is concerned, the inherent underlying idea behind the said provision is the assumption that many of such existing laws may be inconsistent with the Constitution and, therefore, the President of India came to be conferred with the power to make adaptation and modification with a view to making such law consistent with the Constitution of India. The adaptation or modification made by the President in exercise of the special power as provided in Clause (1) does not have the effect that the existing laws cease to be the law in force within the meaning of Clause (k) of Article 371F. By virtue of Clause (n), an Indian Act or enactment specified in the President's notification extends to Sikkim, superseding the constitutional law even without any repeal of that Sikkim law.\n\n7. The President of India in exercise of his powers conferred by Clause (n) of Article 371F of the Constitution, extended to the State of Sikkim, the Income-tax Act, 1961, vide Notification No. S. O. 1028(E), dated November 7, 1988 (see [1989] 176 ITR (St.) 222), with effect from April 1, 1989. However, the commencement of the Income-tax Act, 1961, was deferred (See Section 26 of the Finance Act, 1989 : [1989] 177 ITR (St.) 182.--Ed.) for one year making it effective from April 1, 1990, applicable from the assessment year 1990-91 and onwards.\n\n8. The legal position that emerges, thus, is that the Income-tax Act, 1961, was made applicable and came into force in the State of Sikkim from the assessment year 1990-91 (previous year 1989-90) and on the coming into force of the Income-tax Act, 1961, the Sikkim Income-tax Manual, 1948, stood repealed.\n\n9. The short question before us is : whether the prize money of Rs. 6,30,000 from the lottery of the Government of Sikkim won by the petitioner in the month of August, 1987, is chargeable to tax under the Income-tax Act, 1961.\n\n10. At the time the petitioner won the lottery of the Government of Sikkim, Sikkim was a component State of the Union and the prize money was won by the petitioner within the territory of India. As the prize money was won in the month of August, 1987, the relevant assessment year was 1988-89. The President of India in exercise of his powers conferred under Clause (n) of Article 371F extended the Income-tax Act, 1961, for the first time for the assessment year 1990-91 as the Income-tax Act, 1961, came into force in the State of Sikkim with effect from first April, 1990. Until then, all laws including the income-tax law in force immediately before the State of Sikkim became a component State of the Indian Union were in operation. Immediately before the State of Sikkim became component State of the Indian Union, income-tax in Sikkim was governed by the Sikkim Income-tax Manual, 1948. Thus, for the assessment year 1988-89 (the previous year during which the petitioner won the lottery of the Sikkim Government) the said income was chargeable to tax under the Sikkim Income-tax Manual. It was for this reason that the Office of the Director of State Lotteries, Government of Sikkim, Gangtok, deducted a sum of Rs. 62,088 towards Sikkim income-tax from the prize money of Rs. 6,30,000 and paid the remaining amount of prize money to the petitioner.\n\n11. It is advantageous to refer to the income-tax deduction certificate dated August 31, 1987, issued by the Director of State Lotteries, Government of Sikkim, to the petitioner. The copy of the said certificate (marked x for identification purpose) was handed in by learned counsel for the petitioner during the course of arguments. The said certificate reads thus :\n\n\"Office of the Director of State Lotteries, \nGovernment of Sikkim, \nGangtok (Sikkim).\n\nIncome-tax Deduction Certificate No. 52/FIN/LOT.\n\nCertificated that a sum of Rs. 62,088 (rupees sixty two hundred eighty eight) has been deducted towards Sikkim income-tax from the prize money of Rs. 6,30,000 (rupees six lakhs thirty thousand) payable to Smt. Nirmala Labh Shanker Mehta, Bombay-26, as first prize in ticket No. N-503303 in seventh draw of Snow Lion Weekly Lotteries.\n\nThe prize money less income-tax has been remitted to the said Smt. Nirmala Labh Shanker Mehta by demand draft No. 035569 dated August 28, 1987.\n\n (Sd.) .......................\n\nDirector of Lotteries, \nGovernment of Sikkim\". \n\n12. It would be, thus, seen that the income-tax from the prize money of Rs. 6,30,000 was deducted as per the Sikkim Income-tax Manual, 1948, and the remaining amount of the prize money was paid to the petitioner. The prize money was won by the petitioner from the lottery floated by one of the States of the Indian Union. The petitioner won the prize money within the territory of India, though in the said territory a special income-tax law, viz., Sikkim Tax Manual, 1948, was applicable. The said prize money won by the petitioner has been charged to tax as per the law applicable in the Sikkim State where the prize money was won. The Income-tax Act, 1961, was not applicable at the relevant time in Sikkim. So long as the Income-tax Act, 1961, did not become applicable to the State of Sikkim, Income-tax Act, 1961, could not be applied to the income earned in Sikkim. In the circumstances, we have no hesitation in holding that the prize money won by the petitioner from the lottery of the Government of Sikkim could have been charged to tax only in accordance with then existing income-tax laws in the State of Sikkim and could not be charged to tax under the Income-tax Act, 1961.\n\n13. The problem arose because the petitioner in her return for the assessment year 1988-89 filed on June 30, 1988, offered the prize money of the lottery to tax rather a fundamental error of law on the part of the assessee, but that error of law once detected by the petitioner, it was urged before the Commissioner of Income-tax that the prize money earned by the petitioner could not be taxed under the Income-tax Act, 1961. It is true that it v/as at a later stage that such contention was raised by the petitioner, but the said contention was a pure question of law and the Commissioner of Income-tax ought to have considered the said contention on its merits and ought not to have declined to entertain it on the ground of delay. There cannot be any estoppel against the statute, Article 265 of the Constitution of India in unmistakable terms provides that no tax shall be levied or collected except by authority of law. Acquiescence cannot take away from a party the relief that he is entitled to where the tax is levied or collected without authority of law.\n\n14. The Constitution Bench of the Supreme Court in Amalgamated Coalfields Ltd. v. Janapada Sabha, , held thus (page 965) :\n \"It may be stated at the outset that the tax now impugned has been imposed by the local authority from March 12, 1935, and that the first occasion when its validity was attacked was in only 1957, though if the petitioners are right in their submissions their acquiescence might not itself be a ground for denying them relief. Before however we set out the points urged by the learned Attorney-General in support of the petition, it would be convenient if we narrate briefly the history of the levy of this tax.\" \n\n15. The Supreme Court, thus, held that acquiescence to an illegal tax for a long time is not a ground for denying the party the relief that he is entitled to. In the instant case, therefore, it may be held that merely because the petitioner offered the prize money won in the lottery of the Sikkim Government, to tax under the Income-tax Act, 1961, that shall not take away her right in contending that the said prize money was not chargeable and assessable to tax under the Income-tax Act in the revisional jurisdiction. The said prize money was chargeable to income-tax under the Sikkim Tax Manual that held the field at the relevant time and the income-tax from the prize money as per the then existing Sikkim Income-tax Manual was deducted.\n\n16. The order dated June 25, 1991, passed by the Commissioner of Income-tax, Bombay City IV, Bombay, therefore, cannot be sustained and in the light of what we have observed above, the assessment order dated November 29, 1989, for the assessment year 1988-89 shall have to be reworked out as per this order.\n\n17. Consequently, the writ petition is allowed. The assessment order dated November 29, 1989, (exhibit B) and revisional order dated June 25, 1991, (exhibit F) are quashed and set aside. Respondent No. 2 or the successor-Assessing Officer having jurisdiction in the matter is directed to work out the petitioner's assessment for the assessment year 1988-89 afresh as per this order.\n\n18. Since the respondents have not chosen to appear, no order as to costs." }, { "title": "Jalgaon District Central Co-Operative ... vs Union Of India (Uoi) And Ors. on 5 September, 2003", "url": "https://indiankanoon.org//doc/1555502/", "text": "Jalgaon District Central Co-Operative ... vs Union Of India (Uoi) And Ors. on 5 September, 2003\nEquivalent citations: 2004(2)BOMCR88, [2004]265ITR423(BOM), 2003(4)MHLJ353\nAuthor: B. B. Vagyani\nBench: B.B. Vagyani, A.S. Bagga\nJUDGMENT\n \n\n B. B. Vagyani, J. \n \n\n 1. Rule. Rule made returnable forthwith. With consent of parties, taken up for final hearing forthwith. \n\n 2. The Maharashtra Co-operative Societies Act was enacted with a view to provide for orderly development of the co-operative movement in the State of Maharashtra in accordance with the relevant directive principles of State policy enunciated in the Constitution of India. The application of the principles of cooperation has made it possible for a society composed of comparatively poor and weak men to give its members some of the advantages ordinarily obtainable only to the rich and strong. The co-operation is not a merely business but a combination of business and a spirit of service. \n\n 3. The petitioner No. 1 is a Central Bank within the meaning of Section 2(6) of the Maharashtra Co-operative Societies Act, the object of which includes creation of funds to be advanced in the form of loans to other societies such as agricultural, co-operative and multipurpose co-operative societies. \n\n 4. Section 194A of the Income Tax Act, 1961 deals with interest other than interest on securities. Sub-section (1) of Section 194A mandates deduction of income tax at source in respect of the income by way of interest whereas Sub-section (3) of Section 194A engrafts an exception to the applicability of the provisions of Sub-section (1). Section 194A(3)(v) grants an exemption from T.D.S. to such income credited or paid by the co-operative society to a member thereof or to any other co-operative society. Clause (v) of Sub-section (3) of Section 194-A is very lucid and clear in its terms which suggests that the provisions relating to T.D.S. are inapplicable to the income credited or paid by the co-operative society to the member thereof. The word \"Member\" used in this provision is without any words of limitation. \n\n 5. The expression \"Member\" is defined in Section 2(19) of the Maharashtra Co-operative Societies Act, 1960. The said definition of Member includes nominal, associate, or sympathizer member also. \n\n 6. Under Circular No. 9 of 2002 issued by the CBDT, it is an accepted fact that the provisions of T.D.S. are not enforceable in respect of interest paid by the co-operative society/bank to its members or co-operative societies. But T.D.S. is to be deducted from the interest paid to the non-members. The CBDT in its Circular No. 9 of 2002 dated 11th September 2002, has made it clear that the exemption is available only to such members who have joined in application for the registration of co-operative society and those who are admitted to the membership after registration in accordance with the bye-laws and rules. The members eligible for exemption under Section 194-A(3)(v) must have subscribed to and fully paid for at least one share of the co-operative bank, must be entitled to participate and vote in general body meeting or special general body meeting of the co-operative bank and must be entitled to receive share from the profits of the co-operative bank. Acting upon the aforesaid circular, the consequential orders are issued by the Income Tax authorities. \n\n 7. According to the petitioner, the CBDT cannot issue a Circular which is contrary to the provisions of Section 194-A (3)(v) of the Income Tax Act, 1961. The circular issued by the CBDT deprives the exemption granted by the central enactment and, therefore, the said circular is bad in law and liable to be quashed and set aside. The petitioner has challenged the circular issued by CBDT. The CBDT has issued the circular by virtue of Section 119 of the Income Tax Act, 1961. The petitioner has found fault with the authority of CBDT. The power which has been assumed by CBDT, does not in fact springs from Section 119 of the Income Tax Act, 1961. No doubt, Section 119 of the Act empowers the CBDT to issue instructions to the subordinate authorities for proper administration of the Act. Having aggrieved by the impugned circular, the petitioner has filed this writ petition under Article 226 read with 227 of the Constitution of India and thereby challenged the validity of the impugned circular (Exh.A) and the competency of CBDT. \n\n 8. Similar challenge to the said circular is also given by the petitioner in Writ Petition No. 2261 of 2003. The petitioner therein is an Income Tax Consultant of Jalgaon. \n\n 9. In response to the notice, one S. Y. Jawale, Income Tax Officer, Ward 2(3), Jalgaon has filed affidavit in reply on behalf of the respondents. It is stated in the affidavit that the definition of \"Member\" does not include nominal member. It is denied that the CBDT has no authority to issue circular under challenge. It is further stated in the affidavit in reply that the CBDT, while issuing the impugned circular, has acted within its ambit by virtue of Section 119 of the Income Tax Act, 1961. It is stated in the affidavit in reply that the interim stay granted by the Gujarat High Court to the impugned Circular has been subsequently vacated on 13-1-2003 and, therefore, the petition filed by the petitioner is liable to be dismissed with costs. \n\n 10. We heard Shri P. M. Shah, learned Senior Counsel for the petitioner in Writ Petition No. 563 of 2003, Shri A. G. Talhar, learned counsel for the petitioner in Writ Petition No. 2261 of 2003, Shri Patil, learned AGP for the State of Maharashtra and Shri V. D. Sonwane, learned Additional Standing Counsel for the Union of India, at length. \n\n 11. The circular No. 9 of 2002 dated 11-9-2002 issued by the CBDT is challenged in both the writ petitions. Identical question is raised in both the writ petitions and, therefore, by common judgment, both the writ petitions are disposed of. \n\n 12. Shri Shah, learned Senior Counsel, during the course of submissions, highlighted following points : \n\n (1) The definition of \"Member\" as envisaged in Section 2(19) of the Maharashtra Co-operative Societies Act, 1960 also includes nominal member, associate member and sympathizer member. \n\n (2) Section 119 of the Income Tax Act, 1961 empowers CBDT to issue only administrative instructions to subordinate Income Tax authorities for proper administration of the provisions of the Income Tax Act, 1961. \n\n (3) The CBDT does not have any authority in law to withdraw the exemption granted by the Parliamentary legislation, as contemplated under Section 194-A(3)(v) of the Act to the Cooperative society. \n\n 13. Shri Shah, learned Senior Counsel submitted that Parliamentary legislation in the form of Section 194-A(3)(v) of the Income Tax Act, 1961 cannot be allowed to be defeated or frustrated by administrative instructions. The circular under challenge, according to Shri Shah, learned Senior Counsel, is directly in conflict with Section 194-A(3)(v) of the Income Tax Act, 1961. According to him, the CBDT is not empowered in law to withdraw the exemption granted under the law without there being any authority of law. He further submitted that the power of CBDT under the provisions of Section 119 of the Income Tax Act, 1961 only allows to issue such orders, instructions and directions to subordinate Income Tax authorities for proper administration of the provisions of Income Tax Act and such authorities are expected to observe and follow such orders, instructions and directions of CBDT. Therefore, the impugned circular is liable to be quashed and set aside. \n\n 14. In order to buttress his submissions, learned Senior Counsel Shri Shah has relied upon following cases : \n (1) Banque Nationale De Paris v. Commissioner of Income Tax, 1999 Income Tax. Reporter Vol. 237 page 518. (2) K. K. Adhikari v. T. G. Kulkarni, 1980 CTJ 241 (3) The Commissioner of Income Tax, Nasik v. Varangaon Co-operative Fruit and Agricultural Produce Sale Society Ltd. Varangaon, Income Tax Application No. 20 of 1987 decided on 26th July, 1990 and (4) U. P. Co-op. Cane Union Federation Ltd. Lucknow v. Commissioner of Income Tax, Lucknow, . \n\n 15. The learned Additional Standing Counsel Shri Sonwane for Union of India has argued that the CBDT, by virtue of Section 119 of the Income Tax Act, 1961, can certainly clarify by circular who are the beneficiaries under Section 194-A(3)(v) of the Income Tax Act, 1961. He submitted that the nominal member of a co-operative society has no right to vote and he cannot even participate in a general body meeting. According to him, the nominal member does not get rights and privileges of a duly qualified member. For this purpose, he mainly relied upon Sub-section (2) of Section 24 of the Maharashtra Cooperative Societies Act, 1960. He finally submits that the challenge to the impugned circular issued by the CBDT is devoid of any force and, therefore, both the writ petitions are liable to be rejected. \n\n 16. We gave anxious consideration to the rival submissions made at the Bar. The expression \"Member\" is not defined in the Income Tax Act, 1961. A co-operative society has to be established under the provisions of law made by the State Legislature. The definition of expression \"Member\" is given under Section 2(19) of the Maharashtra Co-operative Societies Act, 1960. As per the definition, \"Member\" means a person joining an application for registration of a co-operative society, which is subsequently registered or a person duly admitted to membership of a society after registration and includes a nominal, associate or sympathizer member. \n\n 17. In case of M/s U. P. Co-op. Cane Union Federation Ltd., Lucknow (cited supra), the Supreme Court has held that the expression \"Member\" is not defined in the Income Tax Act. Since the Co-operative society has to be established under the provisions of law made by the State Legislature in that regard, the expression \"Member\" in Section 80-P(2)(a)(i) must, therefore, be construed in the context of the provisions of law enacted by the State Legislature under which the co-operative society claiming exemption has been formed. The Supreme Court has further observed that it is necessary to construe the expression \"Member\" in Section 80-P(2)(a)(i) of the Act in the light of the definition of \"Member\" given under Section 2(n) of the U. P. Co-operative Societies Act, 1965. \n\n 18. The definition of \"Member\" given in Section 2(19) of the Maharashtra\nCo-operative Societies Act, 1960 takes within its sweep even a nominal member,\nassociate member and sympathizer member. There is no distinction made\nbetween duly registered member and nominal, associate and sympathizer\nmember. \n\n 19. In the case of K. K. Adhikari (cited supra), Division Bench of this Court has held that the definition of a Member under Section 2(19) of the Maharashtra Co-operative Societies Act, 1960 includes a nominal member or a sympathiser member. It is further held that notwithstanding the fact that a nominal member does not enjoy all the rights and privileges which are available to an ordinary member, his status is that of a member as defined in Section 2(19) of the Act. \n\n 20. Division Bench of this Court in the case of The Commissioner of Income Tax, Nasik (cited supra) has also taken similar view that the definition of \"Member\" under Section 2(19) (a) of the Maharashtra Co-operative Societies Act, 1960 includes a nominal member. It is further held by the Division Bench that there is nothing in Section 80-P(2)(iii) of the Income Tax Act to the contrary. \n\n 21. The reliance on Sub-section (2) of Section 24 of the Maharashtra Cooperative Societies Act, 1960 by Shri Sonwane, learned Additional Standing Counsel for Union of India is misconceived. The question for consideration is not with regard to what are the rights and privileges of duly registered member and a nominal, associate or sympathizer member. The question that falls for consideration is as to whether the exemption granted to the co-operative societies in the matter of T.D.S. can be taken away by making distinction between duly registered member and a nominal member. Section 194-A(3)(v) of the Income Tax Act, 1961 does not contemplate such a distinction. \n\n 22. The rights and privileges of a duly registered member under the Maharashtra Co-operative Societies Act, 1960 and the rights and privileges of a co-operative society under Section 194-A(3)(v) of the Income Tax Act, 1961 are two distinct things. We are not called upon to decide what are the rights and privileges of a nominal member, in the light of the provisions contained in Section 24(2) of the Maharashtra Co-operative Societies Act, 1960. We are concerned with as to whether the exemption granted to the co-operative society under Section 194-A(3)(v) can be taken away by creating a distinction between duly registered member and a nominal member, which is unknown to the exemption clause contained in Section 194-A(3)(v) of the Income Tax Act, 1961. \n\n 23. The impugned Notification issued by CBDT, which is in the form of clarification with regard to rights and privileges of a duly registered member and nominal member is outside the scope of Section 119 of the Income Tax Act, 1961. No doubt, Section 119 of the Income Tax Act, 1961 generates some power in CBDT. But the power so generated by virtue of Section 119 is required to be utilized in a prescribed manner. CBDT is empowered to issue only administrative instructions to the subordinate authorities for the purpose of proper administration and enforcement of the provisions of the Income Tax Act, 1961. Under the garb of Section 119 of the Income Tax Act, 1961, CBDT has crossed its authority. What is not contemplated in exemption clause under Section 194-A(3)(v) of the Income Tax Act, 1961 cannot be imported to deprive the exemption granted to co-operative society by issuing the impugned circular. By impugned circular, the co-operative society cannot be deprived of its right of exemption given under Incpme Tax Act, 1961. The CBDT has over-stepped its authority and has issued the impugned circular directly in conflict with the provisions contained in Section 194-A(3)(v) of the Income Tax Act, 1961. Section 119 of the Income Tax Act, 1961 does not at all support the action of CBDT. \n\n 24. The Division Bench of this Court, in the case of Banque Nationale De\nParis (cited supra), has ruled out that CBDT cannot issue a circular under Section\n119 of the Act, which would override or detract from the provisions of the\nIncome Tax Act, 1961. CBDT can legitimately issue administrative instructions\nor orders by exercising powers under Section 119 of the Income Tax Act, 1961.\nHowever, by virtue of Section 119 of the Act, the CBDT is not at all permitted to\noverride or withdraw the exemption clause under Section 194-A(3)(v) of the\nIncome Tax Act, 1961. Assumption of such powers in CBDT by virtue of Section 119 of the Income Tax Act, 1961 would really amount to bestowing powers on\ndelegated authority even to amend the provisions of the Income Tax Act, 1961\nenacted by the Parliament. \n\n 25. Having examined the validity of the impugned circular from all angles, we are of the clear opinion that CBDT has no authority to make a crack in the exemption clause contained in Section 194-A(3)(v) of the Income Tax Act, 1961 by issuing the impugned circular. The CBDT cannot usurp the powers of Parliament by virtue of Section 119 of the Income Tax Act, 1961. The CBDT, under the garb of Section 119 of the Income Tax Act, 1961, cannot exercise wider powers than the powers bestowed on it. The CBDT has no power to introduce a substantial change or alteration in the provisions of the Income Tax Act, 1961 by importing the ideas unknown to the Income Tax Act, 1961. The impugned circular, therefore, does not stand to the legal test. \n\n 26. In the result, both the writ petitions are allowed. The impugned circular No. 9 of 2002 dated 11-9-2002 (F. No. 275/106/2000/IT (B) Annexure-A) is quashed and set aside. Similarly, the letter issued by the Income Tax Officer, Jalgaon, Ward No. 2(3) (No. JAL/ITO/2(3)/TDS/194/2000-03 dated 9-10-2002 Annexure B) is also quashed and set aside. Rule made absolute in the above terms." }, { "title": "Petron Engineering Construction (P.) ... vs Central Board Of Direct Taxes And Others on 11 August, 1987", "url": "https://indiankanoon.org//doc/879244/", "text": "Petron Engineering Construction (P.) ... vs Central Board Of Direct Taxes And Others on 11 August, 1987\nEquivalent citations: (1987)89BOMLR383, [1988]171ITR80(BOM)\nJUDGMENT\n \n\n Bharucha, J. \n \n\n 1. The Judgment and the order of Jahagirdar J. (See [1987] 165 ITR 668) dismissing the appellant's writ petition is the subject matter of this appeal. \n\n 2. The appellants applied to the Central Board of Direct Taxes for approval under section 80-O of the Income-tax Act, 1961, of the agreements dated April 5, 1980, and August 14, 1980, entered into between them and Toyo Engineering India Ltd. (now called \"Toyo India\"). After giving the appellants a hearing, the Board rejected the appellants application by its letter dated March 27, 1981. The Board held that the agreements could not be approved under section 80-O because they were not made with the Government of a foreign state or a foreign enterprise and because the payments thereunder were payments from the Government of a foreign state or a foreign enterprise. \n\n 3. The order of the Board was impugned in the writ petition filed by the appellants. The learned single judge upheld the contention of the appellants that, under the terms of section 80-O of the Income-tax Act 1961, it was not necessary that the agreement should be with the Government of a foreign state or a foreign Enterprise. He however, rejected the writ petition on the ground that the payments under the agreements were not made to the appellants by the Government of a foreign State or a foreign enterprise. They clearly showed that the payments were made, though in foreign country and in foreign currency by Toyo India which was, beyond dispute, an Indian Company. \n\n 4. It is necessary to set out briefly the terms of what are, in any case brief agreements. They are stated to be between \"TOYO ENGINEERING INDIA LIMITED\" a company organised and existing under the laws of \"INDIA and having its registered office at... New Delhi\", and the appellants. The agreement recite that Toyo India \"has been engaged by Toyo Engineering Corporation, a company organised and existing under the laws of Japan and having its registered office at ... Japan... for the Project of Storage Terminal of State Organisation for Oil Project, a public organisation organised and existing under the laws of Iraq.\" Article 3 of the agreement deal with the contract price and states that the contract price to be paid by Toyo India to the appellants thereunder was attached therewith. \n\n 5. Section 80-O of the Income-tax Act, 1961, so far as it is material reads thus : \n \"80-O Where the gross total income of an assessee, being an Indian company, includes any income by way of royalty, commission, fees or any similar payment received by the assessee from the Government of a foreign State or a foreign Enterprise in consideration for use outside India of any patent, invention, model, design, secret formula or process, or similar property right, or information concerning industrial, commercial or scientific knowledge, appearance or skill made available or provided to such Government or enterprise by the assessee, or in consideration of the technical services rendered or agreed to be rendered outside India to such Government or Enterprise by the assessee, under an agreement approved by the Board in this behalf, and such income is received in convertible foreign exchange in India, or having been received in convertible foreign exchange outside India, or having been converted into convertible foreign exchange outside India, is brought into India, by or behalf of the assessee in accordance with the law for the time being in force for regulating payments and dealings in foreign exchange, there shall be allowed, in accordance with and the subject to the provisions of this section a deduction to an amount equal to fifty per cent of the income so received in, or brought into, India in computing the total income of the assessee.\" \n\n 6. Mr. Dwarakadas, learned counsel for the appellants, pointed out that Toyo India had an establishment or undertaking or branch or unit in Iraq. This is not in dispute. \n\n 7. Mr. Dwarakadas submitted that, therefore, this establishment or undertaking or branch or unit had to be regarded as a foreign enterprise for the purpose of section 80-O of the Income-tax Act, 1961. Mr. Dwarkadas drew our attention to the judgment of Gannon Dunkerley & Co. Ltd. v. CBDT [1986] 159 ITR 162 (Bom), wherein, in substantially similar circumstances, it was held that the agreement ought to be approved under section 80-O. In regard to \"foreign enterprise\", this is what the learned judge said (p. 164) : \"still further, EPI, a Government company registered in India, also had its branch office in Kuwait. One cannot ignore the fact that the enterprise also was in a foreign country, namely, at Kuwait, and that it was in all materials respects a foreign enterprise.\"\n\n 8. Mr. Dwarkadas also relied upon the judgment of another learned single Judge of this court delivered in Writ petition No. 1764 of 1981, Indian Hume Pipe Co. Ltd. v. CBDT [1987] 165 ITR 537 (Bom), decided on October 14, 1985. The learned judge held that under section 80-O of the Income-tax Act, 1961, it was necessary that the agreement should be between the assessee and the foreign part. All that was required was that the assessee should have rendered technical services under the agreement and this agreement should be approved by the Board. It was contended before the learned judge that the payment had been made by an organisation established by the Government of India, pursuant to an agreement between the assessee and the organisation The learned Judge found out that the payment had been received in foreign exchange on behalf of the assessee. It was, therefore, held that the agreement ought to have been approved under section 80-O. \n \n\n 9. Upon the plain words of the section 80-O of the Income-tax Act, 1961, we find it difficult to accept the interpretation of the words \"foreign enterprise\" canvassed by Mr. Dwarakadas. \n\n 10. Analysing section 80-O of the Income-tax Act, 1961, we find that it requires that the assessee should be an Indian company. It should receive income by the way of royalty, commission, fee or similar payments. The payments must be received \"from the Government of the foreign State or a foreign Enterprise\". It must be received in consideration of the use outside India of any patent, invention, model, design, and the like concerning industrial, commercial or scientific knowledge or in consideration of technical services rendered or agreed to be rendered outside India. Such use or service must also be by or to \"such Government or enterprise\". Such use or service must also be \"under an agreement approved by the Board in this behalf\". The income must be received in foreign exchange in India or, being received in convertible foreign exchange outside India, must be brought into India, by or behalf of the assessee. \n\n 11. In the context of the contention with which we are presently dealing, the words \"the Government of a foreign state or foreign enterprise\" must be read together. The words \"foreign enterprise\" must take colour from the words \"the Government of a foreign State\". The words \"foreign enterprise\" must, therefore be read to mean an enterprise of a foreign national or of foreign ownership. They cannot be read to mean an enterprise in a foreign land, regardless of its ownership. The words \"foreign enterprise\" cannot, upon an interpretation of section 80-O of the Income-tax Act, 1961, be held to apply to an establishment or undertaking or branch or unit of an Indian company in a foreign country. Such establishment, branch, undertaking, or unit may well be an \"enterprise\", but it is not a \"foreign enterprise\" within the meaning of theses words used in section 80-O. \n \n\n 12. In the judgment in the Indian Hume Pipe's case [1987] 165 ITR 537 (Bom), the learned judge held, on the facts that the payments had been received in foreign exchange on behalf of the assessee by the organisation established by the Government of India and, therefore, the agreement was one that ought to have been registered under section 80-O of the Income-tax Act, 1961. In the case of Gannon Dunkerley & Co. Ltd. [1986] 159 ITR 162 (Bom), there was, apparently no argument about the import of the words \"foreign enterprise\".\n\n 13. Our attention was drawn by Mr. Dwarkadas to Circular No. 187 of the Board dated December 23, 1975 (See [1976] 102 ITR (St) 83) which says that the section 80-O of the Income-tax Act, 1961, has been enacted with the twin object of encouraging the export of Indian Technical Know-how and augmentation of foreign exchange resources of the country. The construction that we have placed upon the section 80-O does not militate against these objects. The foreign exchange resources of a country are augmented when the foreign exchange comes to the country. Foreign exchange already in the hands of an Indian Enterprise in a foreign country will not necessarily augment the foreign exchange resources of the country when paid over to another Indian. \n\n 14. In our view, therefore, the learned single judge was right in the view that he took upon this aspect. \n\n 15. The other aspect, which was canvassed by the respondent before the learned single judge was that the agreement referred to in section 80-O of the Income-tax Act, 1961, had necessarily to be the Government of a foreign State or a foreign enterprise. The learned Judge disagreed. Mr. Dhanuka, learned counsel for the respondent, sought to support the learned judge's order by submitting that it was a necessary implication of the language employed in section 80-O that the agreement should be with the Government of a foreign State or foreign enterprise, which the present agreements were not. \n\n 16. We are unable to accede to this submission because the section does not specify who the part of the other part of the agreement should be, It is, therefore, difficult to imply that the party of the other part must be the Government of a foreign State or a foreign enterprise. This is all the more so when one sees that in relation to the use of patents, inventions, etc., and the utilization of technical services, the section makes it explicit that such use utilisation must be by \"such Government or enterprise\". \n\n 17. Even in the terms of the objects o the sections, there is no reason why the agreement should be restricted to one entered into with the Government of a foreign State or a foreign enterprise. Regardless of the party of the other part is, if the conditions of the section have been complied with, there will be an augmentation of foreign exchange resources of the country. \n\n 18. The appeal was dismissed. \n\n 19. No order as to costs." }, { "title": "Commissioner Of Income-Tax vs Mico Products Pvt. Ltd. on 4 October, 1990", "url": "https://indiankanoon.org//doc/934411/", "text": "Commissioner Of Income-Tax vs Mico Products Pvt. Ltd. on 4 October, 1990\nEquivalent citations: (1990)92BOMLR659, [1991]187ITR517(BOM)\nAuthor: Sujata V. Manohar\nBench: Sujata V. Manohar\nJUDGMENT\n \n\n Mrs. Sujata V. Manohar, J. \n \n\n 1. The assessee is a private limited company manufacturing and selling textile auxiliaries and other allied chemicals, Paints, etc. For the assessment year 1971-72, along with other claim, the assessee claimed depreciation on its laboratory building worth Rs. 71,024 and depreciation with triple shift allowance on laboratory machinery worth Rs. 2,16,206, these being in the nature of capital items used for scientific research relating to the business of the assessee. Before the Income-tax Officer, it was contended that the assessee is entitled to depreciation on these items under section 32(1) of the Income-tax Act, 1961, even though deduction under section 35(1)(iv) and section 32(2)(ia) of the Income-tax Act, 1961, had already been allowed in the previous years in respect of these items. \n\n2. The Income-tax Officer rejected the claim of the assessee for depreciation on the ground that as deduction had already been allowed in the previous years under section 35 in respect of these items, the assessee was not entitled to claim any depreciation. \n\n3. In appeal, the Appellate Assistant Commissioner set aside the order of the Income-tax Officer and held that deduction allowable under section 35 of the Income-tax Act and depreciation claimed under section 32 of the Income-tax Act are disjunctive and cumulative. Both can be allowed, though not in the same year. \n\n4. The Tribunal has also held that although a deduction has been allowed under section 35 in respect of these items in a previous year, the assessee is entitled to depreciation under section 32. From this finding of the Tribunal, the following question has been referred to us by the Tribunal under section 256(1) of the Income-tax Act, 1961 : \n \"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that depreciation allowance given under section 32(1) and deduction given under section 35(1)(iv)/35(2)(ia) of the Act. Are disjunctive, cumulative and not alternative and, accordingly, directing the Income-tax Officer to allow to allow depreciation on the cost of the laboratory building or Rs. 71,024 and depreciation including triple shift allowance on the laboratory machinery of Rs. 2,16,206 even though full deduction under section 35(1)(iv)/35(2)(ia) was given to the said capital expenditure in earlier years and the assets under reference were being used for scientific research only ?\" \n\n5. During the pendency of this reference, by the Finance (No. 2) Act of 1980, section 35(2)(iv) of the Income-tax Act, 1961, has been amended with retrospective effect from April 1, 1962. As a result, where deduction is allowed for any previous year under section 35, no depreciation shall be allowed under section 32 in respect of the same asset for any previous year. \n\n6. Writ Petition No. 1236 of 1980 challenges the constitutional validity of this retrospective amendment to section 35(2)(iv). The assessee has pointed out that it has its units at Khopoli, Belapur and Mahim. Between 1961 and 1969, the assessee incurred an aggregate expenditure of Rs. 2,46,16,726 in acquiring assets of a capital nature used for scientific research relating to the business of the assessee. The above assets were used by the assessee for the first time during the calendar year 1970, being the previous year relevant to the assessment year 1971-72. Since these capital assets for scientific research relating to the business of the assessee were assets covered by section 32, the assessee claimed depreciation in respect of these assets for the assessment years 1971-72 to 1980-81, before the Income-tax authorities. The claims for depreciation in respect of these assets are as follows : \n\nAssessment year Claim for depreciation\n (in Rs.)\n1971-72 70,111\n1972-73 85,154\n1973-74 2,41,858\n1974-75 3,91,373\n1975-76 4,87,175\n1976-77 13,36,622\n1977-78 11,61,914\n1978-79 12,93,069\n1979-80 10,69,898\n1980-81 11,75,187 \n \n\n By reason of the retrospective amendment of section 35, the assessee is denied these claims for depreciation. Hence, the present writ petition in which the assessee has challenged the retrospective operation of this amendment. \n\n7. Mr. S. E. Dastur, learned counsel for the assessee, contends that taking away a benefit granted to the assessee under section 35 retrospectively with effect from April 1, 1962, violates article 19(1)(G) and article 14 of the Constitution, while it is the contention of Mr. Jetley, learned counsel for the Department, that the amendment is merely clarificatory and made in order to carry out the original legislative intent. Hence, retrospective effect given to the amendment is justified and ought not to be considered as violating any fundamental rights under article 19(1)(G) of the Constitution. \n\n8. Legislative history : In order to examine these contentions, it is necessary to look at the legislative history of the benefit given under the Income-tax Act in respect of capital assets used for scientific research related to the business of the assessee. The necessity to give an incentive regarding expenditure on scientific research was first felt in the U.K. after the Second World War. The U.K. Finance Act, 1944, gave for the first time a tax benefit in respect of expenditure on scientific research. The statement of Sir John Anderson, Chancellor of the Exchequer, in moving the U.K. Finance Act, 1944, suggests that the Chancellor perhaps thought that, but for the provisions he was introducing, such an expenditure was not allowable as a deduction at all. It is significant that Sub-section (4) of section 20 of the U.K. Finance Act. 1944, read as under : \n \"(4) Where a deduction is allowed for any year under this or the last preceding section in respect of expenditure represented wholly or partly by any assets, no deduction shall be allowed under any provisions of the Income-tax Act other than this part of this Act in respect of wear and tear, obsolescence, depreciation or exceptional depreciation of these assets for any year of assessment during any part of which they are used by the person carrying on the trade for scientific research related to the trade.\" \n\n9. A somewhat similar provision was introduced for the first time in the Income-tax Act, 1946. This is what was stated in the Indian Legislature while moving the Bill. \n \"The proposals follow generally the provisions in the United Kingdom Finance Act, 1944; it has been described by the Chancellor of the Exchequer as a comprehensive attempt to relieve from taxation altogether funds devoted by the industries to the support of fundamental research, the translation of laboratory research to production and to the full scale development of the product.\" \n\n10. In the Statement of Objects and Reasons for inserting the provisions of section 10(2)(xiv) in the Indian Income-tax Act, it was stated (see [1946] 14 ITR(st.) 15) : \n \"This clause proposes to allow expenditure on scientific research related to a business or to the class of business carried on. The first two items, viz., revenue expenditure by the assessee on such scientific research and sums paid to research associations or institutions will be allowed in the assessments of the profits of the year in which the expenses were incurred. The other item, viz., capital expenditure, will be allowed in five consecutive equal installments and will be given also in respect of such expenditure incurred not more than three years before the commencement of the business. Other provisions, in connection with the allowance safeguard the revenue position, e.g., prevent double allowance or excessive allowance. A provision in the Finance Bill is designed to give retrospective effect for one year to the grant of this allowance.\" \n\n11. It is thus clear that when similar provisions were introduced in the Indian Income-tax Act, 1922, in the year 1946, the draftsman had before him the U.K. Finance Act on the basis of which the provision was introduced. Section 10(2)(xiv)(d) of the Indian Income-tax Act, 1922, provided that, in respect of any expenditure of a capital nature on scientific research related to the business of the assess, where a deduction was allowed for any previous year under this clause in respect of expenditure represented wholly or partly by any such asset, no deduction shall be allowed under clause (vi) or clause (vii) for the same previous year in respect of that asset. Clauses (vi) and (vii) deal with depreciation. Under section 10(2)(xiv) of the Indian Income-tax Act, 1922, deduction was to be allowed in respect of such capital assets over a period of five years in five equal installments. Now, on a comparison of the provisions in the U.K. Act with those introduced in the Indian Income-tax Act, 1922, it becomes very clear that the Legislature, in clause (d) of section 10(2)(xiv), provided that no depreciation was allowable in the year in which deduction was allowed under that clause as against the provision in the U.K. Act where deduction on account of depreciation was not to be allowed in the same year or for any subsequent year. There are only two ways of looking at it. One view could be that the difference between the two statutes is accidental or is by mistake. The other is that the difference is deliberate. There is no material to support the view that the difference is accidental or on account of any mistake. After all, the new provision was by way of an incentive to induce persons to spend more money on scientific research. If allowance of the expenditure in five years was an incentive, it cannot be disputed that allowing the expenditure in five years in addition to the depreciation normally allowable to an assessee in years subsequent to the years in which the special deduction was allowed, will be a much better incentive. There was, therefore, no legislative intent to exclude depreciation for all years. \n\n12. Except for a change of phraseology, similar provisions were introduced in the Income-tax Act, 1961, in the form of section 35. The original section 35 was substantially similar to the previous section 10(2)(xiv). Had there been a legislative intent to exclude the right to claim depreciation for all subsequent years, a suitable change could have been made while enacting section 35. But this was not done. \n\n13. By the Finance (No. 2) Act, 1967, with effect from April 1, 1968, section 35 was amended so that instead of one-fifth of the capital expenditure being allowed the whole of such capital expenditure can be deducted for that previous year. Section 35(2)(i), (ia) and (iv), after this amendment, was as follows : \n\n \"35. (2) For the purposes of clause (iv) of Sub-section (1), - \n\n (i) in a case where such capital expenditure is incurred before the first day of April, 1967, one-fifth of the capital expenditure incurred in any previous year shall be deducted for the previous year; and the balance of the expenditure shall be deducted in equal installments for each of the four immediately succeeding previous years; \n\n (ia) in a case where such capital expenditure is incurred after the March 31, 1967, the whole of such capital expenditure incurred in any previous year shall be deducted for that previous year.... \n\n (iv) where a deduction is allowed for any previous year under this section in respect of expenditure represented wholly or partly by an asset, no deduction shall be allowed under clause (i), (ii), (iii) and (vi) of subsection (1) or under Sub-section (1A) of section 32 for the same previous year in respect of that asset.\" \n\n14. Once again section 35(2)(iv) was retained in its original form. \n\n15. As a result of Finance (No. 2) Act. 1980, section 35(2)(iv) now stands amended as from April 1, 1962, to read as follows : \n\n \"35. (2) For the purposes of clause (iv) of Sub-section (1), - ... \n\n (iv) where a deduction is allowed for any previous year under this section in respect of expenditure represented wholly or partly by an asset, no deduction shall be allowed under clauses (i), (ii), (iia), (iii) and (vi) of Sub-section (1) or under Sub-section (1A) of section 32 for the same or any other previous year in respect of that asset :\" \n\n16. The amendment, therefore, makes a material change in the law. Instead of disallowing depreciation in the same year in which a deduction under section 35 is claimed, it now disallows depreciation for all time in a case where deduction has been claimed under section 35. Looking to this change in the law which is brought about retrospectively as from April 1. 1962, we have to consider whether the rights of the assessee under articles 19(1)(G) and 14 are violated. \n\n17. Retrospective legislation : There is no doubt that the Legislature has the power to make a law retrospective. This includes a power to give retrospective effect to a taxing statute. The only question that we have to consider is whether, in the circumstances of the present case, the retrospective amendment of section 35(2)(iv) is reasonable or not, now, there are a number of circumstances in which retrospective amendment of a law may be necessary. For example, a law may be ambiguous. It may be amended retrospectively to remove any doubts as to its interpretation. Such retrospective amendment is clarificatory in nature. It declares the legal position when there was some ambiguity about it in the existing law, such retrospective amendments have been upheld as reasonable, because in effect either on account of judicial interpretation or for any other reason, it is discovered that the law as enacted has some lacuna which requires to be intent. In such a case, any curative amendment to remove such lacunae and to bring out the legislative intent, even if it is enacted retrospectively can be considered as justified. These types of amendments have been often referred to as \"small repairs.\" Then, there may be cases where, under any the taxing statute is held unconstitutional by judicial decisions. This may be on the ground of lack of legislative competence, or lack of jurisdiction regarding subordinate legislation, or as violative of fundamental rights, if any retrospective amendment is enacted in order to validate such a taxing statute after complying with constitutional requirements, such a retrospective amendment has also been held to be valid - particularly in cases where the tax has already been collected and the assessees are claiming refund of tax on the ground that the Act under which the tax was collected the fiscal policy of the Government. The taxes already collected may have been spent on various requirements of the State. Retrospective validation of a taxing statute in such circumstances has been upheld. Therefore, normally, unless there are compelling reasons for making a retrospective amendment in public interest, such a retrospective amendment is not enacted, and when a retrospective amendment is enacted without any compelling reasons of public interest, it runs the risk of being declared unreasonable or arbitrary and violative of articles 14 and 19(1)(G) of the Constitution. \n\n18. In the case of Lohia Machines Ltd. v. Union of India , the Supreme Court was required to consider the constitutional validity of the Finance (No. 2) Act 1980, in so far as it amended section 80J by incorporating the provisions of rule 19A, as Sub-section (1A) in section 80J, with retrospective effect from April 1, 1972. The majority judgment of the Supreme Court held that the amendment was merely clarificatory in nature and was, therefore, valid even though it operated retrospectively. The majority held that the original rule 19A was a valid exercise of power to enact subordinate legislation. Incorporating the provisions of the rule in section 80J itself, therefore, did not change the law. Sen J., however, differed from the majority view and held that rule 19A, as it originally stood, was invalid. On a proper interpretation of section 80J, the provisions of rule 19A could not be read into it prior to the amendment. He held that, in these was none. He held that, as a result of the amendment, relief which had been granted by parliament was being withdrawn with retrospective effect to be unreasonable and arbitrary. It was, therefore, invalid.\n\n19. Although the judgment of Sen J., in so far as it strikes down the retrospective operation of the amendment is a minority judgment, the observations of Sen J., on the nature of a retrospective amendment and the circumstances in which it may or may not be upheld, cannot be considered as only a minority view, because the majority, having held that the amendment was only clarificatory, was not required to decide in what circumstances a retrospective amendment may be struck down. Hence, the majority did not consider this aspect. Moreover, Sen J., has reconfirmed in this case, the legal position regarding a retrospective amendment of a taxing statute as laid down by him in an earlier decision of the Supreme Court in the case of D. Cawasji and Co. v. State of Mysore , where he held that it may be open to the Legislature to impose tax at a higher rate with prospective operation. But levy of taxation at a higher rate which really amounts to imposition of tax, with retrospective operation, has to be justified on proper and cogent grounds. We cannot do better than reiterate his well considered observations on the constitutional validity of a taxing statute which imposes tax retrospectively as propounded in the case of Lohia Machines Ltd. . A. N. Sen J., has said that Parliament necessarily enjoys a very wide discretion in the matter of fiscal legislation. Validating Acts have necessarily to be passed with retrospective operation so that the fiscal arrangement of the State and its financial commitments may not in any way be in jeopardy and the State may be relieved of the liability of refunding any tax already collected. But he said (at p. 383) :\n \"The withdrawal with retrospective effect of any relief granted by a valid statutory provision to an assessee, depriving the assessee of the benefit of the relief vested in the assessee, stands on a footing entirely different from the footing which may necessitate the passing of a Validating Act seeking to validate any statutory provision declared unconstitutional. When Parliament passes an amendment validating any provision which might have been declared invalid for some defect or lacun, Parliament seeks to enforce its intention which was already there by removing the defect or lacuna... However, the withdrawal or modification with retrospective effect of the relief properly granted by the statute to an assessee which the assessee has lawfully enjoyed or is entitled to enjoy as his vested statutory right, depriving the assessee of the vested statutory right has the effect of imposing a levy with retrospective effect for the years for which there was no such levy and cannot, unless there be strong and exceptional circumstances justifying such withdrawal or modification. Be held to be reasonable or in public interest.\" \n\n20. Validating Act : There are a number of decisions of the Supreme Court as well as of other High Courts where a Validating Act which retrospectively validates the imposition of a tax has been upheld as valid. Thus, in the case of Asst. Commissioner of Urban Land Tax v. Buckingham and Caranatic Co. Ltd. , the Supreme Court observed that it is not right to say as a general proposition that the imposition of tax with retrospective effect per se renders the law unconstitutional. In applying the test of reasonableness to a taxing statute, it is, of course, a relevant consideration that the tax is being enforced with retrospective effect but that is not conclusive in itself. The Supreme Court, after taking into account the legislative history of the Act in question, held that the Madras Urban Land Tax Act of 1966 did not amount to a unreasonable restriction on the right to acquire, hold an dispose of property and was not violative of article 19(1)(f) of the Constitution. It said that, as a general rule, so long as the tax retains its character as a tax and is not confiscatory or extortionate, the reasonableness of the tax cannot be questioned.\n\n21. As far back as 1963, in the case of Rai Ramkrishna v. State of Bihar , retrospective validation of a law which was struck down as invalid for lack of Presidential sanction held to be valid. The court took into consideration the fact that tax had already been paid under the old Act by most persons, as a reason for not considering the retrospective operation of the validating law as unconstitutional. See also in this connection Epari Chinna Krishna Moorthy v. State of Orissa, , New Shakti Dye Works Pvt. Ltd. v. Union of India [1983] 14 ELT 1936 (Bom), Empire Industries Ltd. v. Union of India and Government of Andhra Pradesh v. Hindustan Machine Tools Ltd., .\n\n22. In the case of Ujagar Prints v. Union of India , the Supreme Court considered retrospective operation of amendment to the definition of \"manufacture\" in the Central Excises and salt Act, 1944, so as to include \"processing\" the definition of manufacture. The Supreme Court upheld the retrospective operation of the Amending Act stating that it is necessary that the Legislature should be able to cure defects in statutes. No individual can acquire a vested right from a defect in a statute and seek a windfall from the Legislature's mistakes. It said. \"in testing whether a retrospective imposition of a tax operates so harshly as to violate the fundamental right under article 19(1)(G), the factors considered relevant include the context in which retroactivity was contemplated such as whether the law is one of validation of taxing statute struck down by courts for certain defects, the period of such retroactivity and the defects and extent of any unforeseen or unforeseeable financial burden imposed for the past period, etc.\" (p. 348). The Supreme Court reaffirmed its decision on this point in Empire Industries Ltd.'s case , upholding the validity of retrospective amendment.\n\n23. There can, therefore, be no doubt that a taxing statute which validates imposition of a tax earlier held invalid by a court of law can be retrospective in operation and be not, on that account, considered unreasonable or violating article 19(1)(G), especially when the tax has already been collected. \n\n24. Curative Acts : Similarly, in a number of cases where the retrospective legislation seeks to cure a defect in the existing legislation and to bring out the original legislative intent. The legislation has been upheld. \n\n25. In the case of Krishnamurthi and Co. v. State of Madras, , the Madras General Sales Tax Act was amended in 1964 as a result of which entry 47 in the First Schedule to the principal Act was amended to levy sales tax on all kinds of mineral oils including non-lubricant oils. The Madras High Court, however, held that furnace oil which was a non-lubricant mineral oil was not covered by the entry. In view of this decision, an Amending Act of 1967 was passed to rectify the defect in the language of entry 47 and to validate the past levy and collection of tax in respect of all kinds of non-lubricating mineral oils including furnace oil. This was done with retrospective effect. The retrospective operation of the Amending Act of 1967 was challenged before the Madras High Court and, ultimately, before the Supreme Court. The Supreme Court held that such an amendment and validating Act was for the purpose of making small repairs. It was a permissible mode of legislation and retrospective operation of such an amending Act could not be considered as unreasonable or invalid.\n\n26. In the case of Hira Lal Rattan Lal v.STO [1973] 31 STC 178, the Supreme Court considered the relevant provisions of U.P. Sales Tax Act, 1948. Under section 3D of the U.P. Sales Tax Act, sales tax was levied at the stage of first purchase made by a dealer in respect. Inter alia, of foodgrain, the sales tax authorities sought to bring to tax the first purchases of processed or split dal on the ground that it constituted a separate item of foodgrain distinct from the unprocessed or unsplit dal. This was negatived by the High Court. To get over this decision, an Amending Act was brought in providing that split or processed dal shall be deemed to be a commodity different from unsplit or unprocessed dal and, accordingly, it was legitimate to impose, levy or collect tax in respect of the first purchases of split or processed dal, even though tax may have been imposed, levied or collected earlier in respect of the first purchases of unprocessed or unsplit dal. \n\n27. The Supreme Court said that although the amendment levied retrospectively sales tax on split or processed dal, this was merely a legislation to remove a lacuna in the existing legislation. The amendment was necessitated because of the Legislature's failure to bring out clearly in the principal Act, its intention to separate processed or split foodgrains, and the retrospective amendment became necessary as otherwise the State would have had to refund large sums of money. It, therefore, held that the retrospective levy was not violative of article 19(1) (f) or (g.) \n \n\n28. We need not consider in details all such cases where retrospective amendments to remove lacunae in existing legislation have been upheld. (See in this connection Pioneer Match Works v. Deputy CTO and Shiv Dutt Rai Fateh Chand v. Union of India . Shiv Dutt Rai's case dealt with a penalty under the Central Sales Tax Act. In the case of Khemka and Co. (Agencies) P. Ltd. v. state of Maharashtra, , the Supreme Court held that a penalty not being merely an adjunct to or consequential to an assessment, could not be levied in the absence of an express provision under section 9 of the Central Sales Tax Act. Section 9 was retrospectively amended. This was challenged in Shiv Dutt Rai's case . The Supreme Court upheld the retrospective operation of the newly added Sub-section (2A) of section 9 and held that it did not contravene the provisions of article 19(1)(f) and (g) of the Constitution. The Supreme Court said that it has to be presumed that all the tax had been collected by the dealers from their customers. There was also no dispute that the law requires the dealer to pay the tax within a specified time, the dealers had also knowledge of the provisions relating to penalty in the General Sales Tax law of the respective States. It was only owing to the defect in the Act pointed out by the Supreme Court in Khemka's case. , that penalties became not payable. In the Situation, if Parliament calls upon the dealers to pay the penalties in accordance with law as amended with retrospective effect. It cannot be said that there has been any unreasonable restriction imposed on the rights guaranteed under article 19(1)(f) and (g) of the Constitution even though the period of retrospectivity is nearly 19 years. It also pointed out that the Amending Act provided for exclusion of the period between the date on which the judgment in Khemka's case , was delivered up to the date of the commencement of the Amending Act in computing the period of limitation for questioning any order levying penalty. Looking to all the circumstances. It said that section 9(2A) cannot be said to be violative of article 19(1)(f) and (g) of the Constitution. \n\n29. Fresh levy : In contrast, when a fresh levy is imposed retrospectively by any legislation. The courts have tended to strike down such levy as being an unreasonable restriction on the fundamental rights guaranteed under article 19(1)(f) and (g) for the Constitution. Thus, in the case of Shew Bhagwan Goenka v. CTO [1973] 32 STC 368, the Calcutta High Court considered the West Bengal Taxation Laws (Amendment) Act of 1969, in so far as it gave retrospective operation to a new definition of \"business\" incorporated retrospectively by virtue of the amendment. The court observed that the object of the amendment was not to remove or rectify any defect in phraseology or lacuna or to validate proceedings which had taken place on the basis of the earlier enactment, the object was to enlarge the scope and ambit of the expression \"business\" by including within it transactions which without the amendment could not be brought within the meaning of the word \"business\" as understood in the commercial world and as interpreted by courts of law. The effect of such retrospective operation of the amendment would be to impose an unexpected liability in respect of transactions which, when they took place, were not subject to any charge or liability under the Act. The retrospective amendment, the court said, imposed an unreasonable restriction upon a person's fundamental right guaranteed under article 19(1)(f) and (g) of the Constitution and was, therefore, invalid. \n\n30. A similar view was taken by the Division Bench of the Calcutta High Court in the case of Bengal Paper Mill Co. Ltd. v.CTO [1976] 38 STC 163. \n\n31. Similarly, a retrospective amendment which does not remove the lacuna which it intended to remove, but merely legislates to impose a new burden has also been held to be unconstitutional. In the case of D. Cawasji and Co. v. State of Mysore , the Mysore State Government, with effect from April 1, 1966, had started collecting sales tax on the sale price of arrack as well as on the excise duty and cesses payable on it. So computed. The sales tax came to 24 paise per litre. The validity of the levy of sales tax on the price of arrack inclusive of excise duty and cess was challenged before the High Court, the High Court held that the State Government was not entitled to levy sales tax on excise duty and cess. In order to get over the High Court decision and to retain the tax already recovered, the State Government retrospectively levied sales tax at the increased rate of 45 per cent. instead of 61/2 per cent. with effect from April 1, 1966, and validated, inter alia, all collections already made. The Supreme Court said that the Amending Act did not proceed to cure the defect or lacuna by bringing in an amendment providing for exigibility of excise duty, health cess and education cess to sales tax. Instead of removing the defect, the Amending Act had merely sought to raise the rate of tax with retrospective effect to avoid the liability of refunding the excess amounts collected. Thus, the only object of the amendment was to enable the State Government to nullify the effect of the judgment and retain the amount wrongfully and illegally connected. The enhancement of the rate of tax was, therefore, clearly arbitrary and unreasonable. It could not be considered as rectifying any defect. The Supreme Court, therefore, set aside the Amending Act to the extent that it imposed a higher levy with retrospective effect and considered it as invalid and unconstitutional.\n\n32. Mr. Jetley, learned counsel for the Department, strongly relied upon two decisions of the Punjab and Haryana High Court in the case of Birla Cotton Spinning and Weaving Mills Ltd. v. State of Haryana [1979] 43 STC 158 and in the case of Bharat Engineering Co. v. Assessing Authority [1980] 45 STC 363. In both these cases, the Punjab and Haryana High Court held that a Legislature has the power to enact retrospective legislation. Hence, such retrospective legislation is valid and it cannot be challenged.\n\n33. The Punjab and Haryana High Court purported to rely upon a decision of the Supreme Court in the case of District Controller of Stores, Northern Railway v. Asst. CTO [1976] 37 STC 423. But, in the above case, the Supreme Court has not considered the question of constitutional validity of the law at all as the same was not challenged before the Supreme Court. The above two authorities of the Punjab and Haryana High Court have clearly ignored a large number of authorities of the Supreme Court as well as of the other High Courts where the courts have expressly examined the question of constitutional validity of retrospective legislation. Inter alia, on the ground of such retrospective legislation violating articles 19(1)(f) and (g) of the Constitution. We, therefore, respectfully differ from the view taken by the Punjab and Haryana High Court that retrospective legislation cannot be examined in the light of articles 19(1)(f) and (g) in order to determine whether it is a reasonable restriction on the fundamental rights guaranteed under article 19(1)(f) and (g) of the Constitution (now only article 19(1)(g)). \n\n34. It is submitted by Mr. Jetley, learned counsel for the Department that, in the present case, the amendment should not be considered as taking away retrospectively the benefit which was originally granted. The amendment should be considered as validating in nature or as removing a lacuna in the existing law to bring out the true legislative intent. This contention cannot be accepted looking to the legislative history of the provisions incorporated in sections 35 and 32 of the Income-tax Act, 1961. In order that the amendment may be considered as removing a lacuna and bringing out the true legislative intent, there must be something in the legislative history pertaining to the provision in question which would indicate the original legislative intent which is sought to be brought out by the retrospective amendment. The legislative intent has to be basically ascertained from the language used in the section itself when the language is clear. If one looks at the language of the original section 10(2)(xiv) of the Indian Income-tax Act, 1922, as well as section 35(\"2) (ia) and (iv) of the Income-tax Act, 1961, before the 1980 amendment, the legislative intent is clearly not to give depreciation under section 32 in the same year in which a deduction is granted under section 35. The intention is not to bar depreciation for all time. \n\n35. Even when the original provision was inserted in 1946 in the Indian Income-tax Act, 1922, the Statement of Objects and Reasons merely stated that other provisions in connection with the allowance safeguard the revenue position, for example, prevent double allowance or excessive allowance. This has a clear reference to depreciation not being allowed in the same previous year in which a deduction is allowed under section 10(2)(iv). So even the initial Statement of Objects and Reasons does not bring out anything which would suggest that this allowance was given on condition that no depreciation would be allowed in respect of the same capital asset for any year (see in this connection [1946] 14 ITR (St. 15). \n\n36. The same provision was carried forward to section 35 of the Income-tax Act, 1961. When the Finance (No. 2) Act, 1967, amended section 35 of the Income-tax Act 1961, as a result of which, after March 31, 1967, the whole of the capital expenditure incurred in any previous year was allowed to be deducted in that previous year, section 35(2)(iv) was not amended. The Notes on Clauses. Naturally, made no comment on section 35(2)(iv). (See in this connection . \n\n37. Even in the Notes on Clauses on the Finance (No. 2) Bill of 1980 under which section 35(2)(iv) was sought to be amended retrospectively, the amendment is merely explained as disallowing depreciation on capital assets on which a deduction has been granted under section 35 for the same or any other previous year. However, the Memorandum explaining the provision in the Finance (No. 2) Bill 1980, note 115, after explaining the amendments, state \"it is, accordingly, proposed to make an amendment of a clarificatory nature in the aforesaid section so as to bring out the intention clearly.\" (See [1980] 123 ITR (St.) pages 37, 121 and 174). \n\n38. It is not at all clear how it can be said that the original legislative intent was not to grant depreciation for any previous year in respect of such assets, nor is it clear how such an amendment can only be considered as clarificatory. A bare reading of section 35(2)(iv), as it stood prior to the amendment, clearly shows that where a deduction is allowed under section 35 for any previous year, no depreciation in respect of the same asset can be granted under section 32 for the same previous year. The phrase \"the same previous year\" clearly indicates that there is a prohibition against granting of depreciation only in that previous year in which deduction is allowed under section 35. By necessary implication, the claim for depreciation under section 32 can be granted if it is for any previous year other than the previous year in which deduction is allowed under section 35. \n\n39. It was contended by Mr. Jetley that section 35 and 32 are mutually exclusive. But there is nothing in the language of section 32 or section 35 which would indicate that the two sections are mutually exclusive or that, if any deduction is granted under section 35 depreciation cannot be granted under section 32. Sections 32 and 35 form part of a group of sections which deal with various deductions and allowances granted while computing profits and gains of business or profession. Each of these sections is independent. Wherever the Legislature has intended that a deduction under one section will deprive the assessee of a right to claim a deduction under another section, it has expressly so provided. For example, section 35B provides for export markets developments allowance. Section 35B(2) which was introduced from April 1, 1968, by the Finance Act, 1968 (since deleted), states \"where a deduction under this section is claimed and allowed for any assessment year.... deduction shall not be allowed in respect of such expenditure under any other provision of this Act for the same or and other assessment year\" Section 35C(2)(agricultural development allowance) also contained an identical provision. Section 35(2B)(b) inserted by the Finance (No. 2) Act of 1980, that is to say the same Finance Act which brought in the amendment to section 35(2)(iv). Also contains a similar provision. From 1968 to 1980 and thereafter, there have been a number of amendments to a number of section whereby the Legislature has expressly barred a double deduction for the same or any other previous year. Yet, section 35(2)(iv) which barred a double deduction only in the same previous year was not altered till 1980. Section 35, right from its inception, merely said that when a deduction was allowed under section 35, depreciation under section 32, inter alia, shall not be allowed only for the same previous year. There was clearly no prohibition against claiming depreciation in any other year. The amendment, therefore, clearly brings about a substantial change in the law with retrospective effect from April 1, 1862, as a result of which the assessee is retrospectively denied the benefit of depreciation which the assessee would have otherwise got under the unamended provision. \n\n40. In this connection, it is also necessary to note that, in respect of section 35 as it stood prior to its amendment in 1980, the Department's contention that the assessee was not eligible for any depreciation for any year in respect of assets used for scientific research related to the business of the assessee, when a deduction had been allowed under section 35, had been consistently negatived by the Income-tax Appellate Tribunal in a number of decisions. Only in 1978, for the first time, a Bench of the Tribunal, constituted for this purpose at Bombay, negatived the view taken by the Tribunal at Madras and upheld the earlier view taken by the Tribunal. The Karnataka High Court, in the case of CIT v. Indian Telephone Industries Ltd. , interpreted section 35(2)(iv) as it stood prior to the 1980 amendment and held that section 32 which provides for allowance of depreciation is not subject to any other allowance provided in the Act. And, in particular, not subject to the allowance to be made under section 35(2)(ia). Neither does the latter provision restrict the grant of depreciation allowance on the ground that relief is granted under the section. It said (at p. 549) : \"The prohibition is only in regard to grant of depreciation allowance in the same previous year in which an allowance under section 35 is given.\" It also referred to clause (v) of section 35(2) which provides that \"where the asset mentioned in clause (ii) is used in the business after it ceases to be used for scientific research (ii) and (iii) of Sub-section (1) of section 32.\" It said that clause (v) was framed in order to enable the assessee to have the benefit of depreciation allowance for subsequent years. This indicates that the Legislature was keen on providing for depreciation allowance whenever a special allowance over a period was to be discontinued.\n\n41. Thus, it is clear that the purpose of allowing a deduction under section 35 has been, throughout, to encourage scientific research related to the business of an assessee. We do not see any previous legislative intent in such circumstances to debar an assessee from claiming depreciation on his assets used for scientific research related to the business of the assessee, the only prohibition was against his claiming depreciation in the same year in which deduction was also allowed under section 35. The legislative history earlier set out and even the Statements of Objects and Reasons accompanying the relevant Amending Acts as earlier set out do not disclose any existing legislative intent to deny the benefit of depreciation to assets covered by section 35 in the years in which deduction under section 35 is not taken. Moreover, when the language of the section is clear-as CID in this case, the legislative intent must be gathered from the language used in the section. Looking to all these factors, in our view, prior to the amendment of 1980, section 35(2)(iv) denied to the assessee depreciation on the assets covered by it only in the year in which deduction was claimed under that section. The amendment now made in section 35 clearly brings about a change in the law by denying retrospectively to the assessee, this right to claim depreciation, and that too for the past 18 years. \n\n42. Mr. Jetley has contended that the length of retrospectivity is not relevant for the purpose of considering whether the amendment is reasonable or not. He has pointed out that even where the validating law was made retrospective for a considerable number of years, the validating law has been upheld as reasonable and not violative of article 19(1)(f) or (g) of the Constitution. But, when a retrospective amendment does not validate a defective law or fill up any lacuna in the existing law, the length of the retrospective operation of a fresh levy does become relevant while considering the extent of hardship which the assessed would suffer if long retrospectivity is given to such a new levy. For example, in the instant case, the assessee has set out in the petition the effect of the retrospective operation of the present amendment on the assessee. \n\n43. Over the last about 14 years, the assess points out, it has spent over Rs. 2.46 crores on research and development activity related to its business. The assessee has pointed out that it has undertaken scientific research and development programmes on such a large scale on the basis of the tax benefits available under sections 32 and 35. \n\n44. In respect of its Income-tax liability, the assessee has proceeded on the basis that it is entitled to depreciation on scientific research assets for the previous years in which a deduction was not claimed in respect of these assets. The annual report of the directors to the shareholders takes into account the tax liability calculated on the basis that the assessee is entitled to depreciation in respect of scientific research assets. Based on such provision for tax, the assessee has been augmenting its reserves from time to time. On this basis, on September 20, 1978, the assessee made an application to the Controller of Capital Issues for the consent of the Central Government to a proposed issue of bonus shares. This application proceeded on the financial calculations and tax liability computed after taking into account depreciation on scientific research assets. On account of the higher reserves in its books, the assessee was able to maintain its reserve above the minimum requirement of 33 1/3 per cent. \n\n45. The assessee has also pointed out that, from time to time, it required additional finances. For this purpose, the assessee had made an application to the Industrial Credit and Investment Corporation of India Limited on February 9, 1977. The financial summary and working results contained in this application proceeded on the basis that the assessee was entitled to depreciation on its scientific research assets. In the middle of 1979, the assessee required further working capital. For this purpose, it made an application dated June 1, 1979, to the Union Bank of India. This application was also based on financial calculations where the tax liability was computed after taking into account depreciation on scientific research assets. \n\n46. In order to increase its finance, the assessee had approached the public for getting fixed deposits. The advertisement in newspapers inviting fixed deposits contained, inter alia, a summarised financial position of the assessee-company which was prepared on the basis that the assessee was entitled to depreciation on scientific research assets. On November 12, 1979, the assessee issued a prospectus for the public issue of five lakhs equity shares of Rs. 10 each and offered for sale 3.3 lakhs fully paid equity share of Rs. 10 each. The prospectus issued by the assessee containing the financial position of the assessee as well as the auditor's report both proceeded on the basis of the tax liability computed after taking into account depreciation on scientific research assets. \n\n47. All the above decisions were taken by the assessee on the basis that it was entitled to depreciation on scientific research asset. Although the Department had contested this position, the assessee was justified in so proceeding, looking to the clear provisions of sections 32 and 35 and the consistent view of the Tribunal. As a result of the retrospective amendment in section 35(2)(iv), the assessee is suddenly faced with a liability for additional tax which would exceed Rs. 47 lakhs. As a result, the debt equity ratio of the assessee will be affected. It would result in paucity of funds and reduction of credit facilities adversely affecting the projects already under way. The assessee contends that, on the basis of internal accruals calcutated on the above basisi, the assessee has decided to put up a Methyl Chloride Chlorophilanez Project with an expected investment of Rs. 8 crores and an Antioxidants project with an expected investment of Rs. 2 crores. The retrospective amendment of section 35(2)(iv) would adversely affect the petitioners' right to carry on business. \n\n48. The assessee has also submitted that, in the light of the law as it stood, it has made representations to the public and to financial institutions and other authorities, which representations would be rendered incorrect by the retrospective amendment of section 35(2)(iv). It may result in the assess violating various provisions of law. The assessee also contends that it may be liable to penalty in respect of its tax liability of over Rs. 47 lakhs which arises on account of the retrospective amendent of section 35(2)(iv). \n\n49. Looking to the impact of the retrospective amendment as spelt out, in our view, the restrospective amendment of section 35(2)(iv) would seriously affect the assessee's right to carry on business under article 19(1)(g) of the Constitution. We do not see any basis for considering this amendment as an amendment to fill in any lacuna in section 35(2)(iv) or to bring out any legislative intent as contended by Mr. Jetley. We have not been shown any public purpose which is sought to be served by such retrospective removal of a benefit which was available to the assessee right from the year 1946. As explained by Sen. J., in the case of Lohia Machines Ltd. : \n \"On the other hand, it is quite clear that if the relief granted is to be withdrawn with retrospective operation from 1972, the assessees who have enjoyed the relief for all those years will have to face a very grave situation... Apart from the heavy financial burden which is likely to upset the economy of the undertaking, the assessee will have to face other serious problems. On the basis that the relief was legitimately and legally available problems. On the basis that the relief was legitimately and legally available to the assessee, the assessee had proceeded to act and to arrange its affairs... The assessee has. In any event, to run the risk and for no fault on his part has to place itself at the mercy of the authorities for facing consequences of violation of the statutory provisions, which but for the introduction of retrospective amendment, would not have been violated by the assessee. To establish arbitrariness or unreasonableness, it does not become necessary to prove that the undertaking of the assessee will be completely crippled and will have to be closed down in consequence of the withdrawal of the relief with retrospective effect... In my opinion, the possibility of very grave prejudice to the assessee by the withdrawal of the relief with retrospective effect, in the absence of any justifiable ground and any serious prejudice to the interests of the Revenue, establishes unreasonableness and arbitrariness of the retrospective amendment.\" \n\n50. These observations of Sen J., directly apply to the present case. The retrospective amendment, therefore, is clearly unreasonable and violates articles 19(1)(g) of the Constitution. The assessee whose assessments have been completed prior to the amendment are not affected by such an amendment while only those assessees whose assessments are pending or can be reopened, would be deprived of the benefits which were earlier available. The amendment, therefore, also violates article 14 of the Constitution. \n\n51. Mr. Jetley, learned counsel for the Department, relied upon a decision of this High Court in the case of T. Khemchand Tejoomal v. CIT as also the decision in the case of Union Carbide India Ltd. v. CIT ITR , Mysore Kirloskar Ltd. v. CIT [1986] 166 ITR 836 (Kar) and the case of Warner Hindustan Ltd. v. CIT . All these decisions deal with section 35(2)(iv), as amended in 1980. These decisions are to the effect that, in view of the amendment of section 35(2)(iv), an assessee cannot now claim depreciation in respect of capital assets used for scientific research relating to the business of the assessee in respect of which a deduction has been allowed under section 35. These cases merely interpret the law as amended. They do not deal with the question at issue before us and, therefore, we fail to see how they further the case of the Department in any way.\n\n52. In the premises, the amendment to section 35(2)(iv) of the Income-tax Act, 1961, brought about by the Finance (No. 2) Act of 1980, in so far as it is made retrospective in operation. The rule is made absolute in terms of prayers (a), (b) and (c). In view of the above, the question in Income-tax Reference No. 343 of 1975 is answered in the affirmative and in favour of the assessee. In the circumstances, there will be no order as to costs." }, { "title": "The Additional Commissioner Of ... vs Vinayaka Cinema, Nellore on 10 August, 1977", "url": "https://indiankanoon.org//doc/609142/", "text": "The Additional Commissioner Of ... vs Vinayaka Cinema, Nellore on 10 August, 1977\nEquivalent citations: [1977]110ITR468(AP), AIR 1978 ANDHRA PRADESH 51, 1978 TAX. L. R. 133\nJUDGMENT\n \n\nDivan, C.J.\n\n \n\n 1. These two matters have been placed before a Full Bench of five Judges in \nview of the order of reference made by a Division Bench of which one of us \n(Divan C. J.) was a member on December 1, 1976. Those two matters were \nreferred to a larger Bench in view of the conflicting decisions of the different High \nCourts on the point which is involved in both these matters. \n\n 2. The question that has to be decided is whether the provisions of S. 187 \nof the Income-tax Act , 1961 (hereinafter referred to as 'the Act') can be invoked \nby the Income-tax authorities, when a partnership firm is dissolved; and after the \ndissolution of the partnership firm, the business of the firm is continued by \nanother partnership firm in which one or more of the partners of the dissolved \nfirm have also joined and there are thus common partners between the dissolved \nfirm and the new firm which continues the business of the old firm. \n\n 3. In order to appreciate the controversies arising in both these matters, \nwe will first refer to the facts in R. C. No. 22 of 1975. We are concerned in this \ncase with assessment year 1969-70. The relevant accounting year is financial \nyear 1968-69. The assessee is a registered firm carrying on business of running \na cinema theatre under the name and style of \"Sri Vinayaka Cinema\" at Nellore. \nThe partnership was constituted by a partnership deed dated April 29, 1967. This \npartnership was duly registered under the provisions of the Income-tax Act. \nAmongst 9 partners of the firm, Srinivasulu and his son, Kamalakara Rao were \nalso partners. Kamalakara Rao was a major at the relevant time and was the \nmanaging partner of the firm. Srinivasulu had gifted away four out of the twelve \nshares that he held in the firm to his daughter Smt. Y.V. Ramani and had formed \na sub-partnership with her in the firm. The sub-partnership was recognised by the \nIncome-tax Department and assessments were made separately on the father \nand daughter in respect of their respective share incomes. Srinivasulu, died on \nAugust 17, 1968 and on that very day another partner, Subbarama Reddy, \nretired from the firm after gifting away his interest in the firm's business to one K. \nPenchala Lakshmamma. There was no clause in the partnership deed dated \nApril 29, 1967 providing that, in the event of the death of one of the partners, the \nfirm was not to be dissolved. Hence, as a result of the death of Srinivasulu, the \nold partnership firm stood dissolved under the provisions of the Partnership Act. \nBy a deed dated August 19, 1968, a new partnership firm was constituted and \nunder the new partnership deed, seven of the partners of the old firm together \nwith two new partners, viz., Y. V. Ramani and k. Penchala Lakshmamma, started \na new partnership firm. This new firm was also registered under the Income-tax \nAct. For the assessment year 1969-70, two separate returns were filed, one for \nthe period 1-4-1968 to 17-8-1968 and the other for the period 18-8-1968 to 31-3-\n1969. It may be mentioned that the business of the old firm was taken over and \ncontinued by the new firm that came into existence under the partnership deed \ndated August 19, 1968. An application for renewal of registration was sent along \nwith the return for the first period while for the second period, a fresh application \nin form 11 was filed. \n\n 4. On those facts, the Income-tax Officer held that there was only a \nchange in the constitution of the firm as contemplated by S. 187 (2) of the Act \nand he accordingly clubbed the incomes of the two periods and made a single \nassessment. He however granted registration to the firm that came into existence \nunder the partnership deed of August 19, 1968 and allocated the profits among \nthe respective partners who constituted the firm in the two different periods. \nAgainst this decision of the Income Tax officer, the matter was taken in appeal to \nthe Appellate Assistant Commissioner. The contention of the assessee was \naccepted by the Assistant Commissioner observing that, in the absence of any \nprovision in the partnership deed to continue the firm even after the death of a \npartner, the firm stood dissolved on August 17, 1968 when Srinivasalu died and \nthe firm, which came into existence on August 18, 1968 was a new firm. The \nmatter was taken in appeal to the Tribunal by the Revenue. The Tribunal held \nthat the Appellate Assistant Commissioner was right in directing that there should \nbe two separate assessments, one for the period 1-4-1968 to 17-8-1968 and the \nother 18-8-1968 to 31-3-1969. On these facts ultimately, at the instance of the \nRevenue, the following questions came to be referred to this Court for its opinion \n: \n\n \"Whether , on the facts and in the circumstances of the case \nand in view of S. 187 (2) (e) of the Income tax Act, 1961, a single assessment \ncould not be made on the aggregate of the incomes for the two periods and the \ntax charged on such aggregate income?\" \n\n 5. In R. C. No. 67 of 1975, the facts are as follows : The assessment year \nunder consideration is 1971-72. The accounting year is the financial year from \nApril 1, 1970 to March 31, 1971. There were originally two partners in the firm, \nM/s Prasad Motors and Electricals. They were Ch. Suryanarayana and K. \nSanyasiraju. Each of these two partners represented his Hindu undivided family \nin the business of the partnership firm. During the course of the financial year \n1970-71 which is the accounting year for this firm, a partition took lace in the \nfamily of Ch. Suryanarayana and after the partition, he retired from the \npartnership with effect from October 1, 1970. As a result of the retirement of \nSuryanarayana, it is obvious that the firm stood dissolved because the only \npartner left thereafter was K. Sanyasi Raju. A new partnership deed was \nexecuted on October 26, 1970, and under this deed, a new partnership firm was \nbrought into existence with effect from October 1, 1970. Under this new \npartnership deed, five minors some of whom belonged to the family of \nSuryanarayana, were admitted to the benefits of the partnership and two \nstrangers were taken as partners. On these facts, two returns were filed, one for \nthe period 1-4-1970 to 30-9-1970 and the other for the period 1-10-1970 to 31-3-\n1971. The Income-tax Officer held that there was only a change in the \nconstitution of the firm with effect from October 1, 1970 and he accordingly \nclubbed the incomes of the two periods and made a single assessment on the \nincome of the entire period from April 1, 1970 to March 31, 1971 under S. 187 (2) \nof the Act. The assessee took the matter in appeal and the Appellate Assistant \nCommissioner confirmed the order of the Income-tax Officer. The assessee \ncarried the matter in further appeal to the Tribunal and the Tribunal held that, on \nthe retirement of Suryanarayana, the firm which existed till then between \nSuryanarayana and Sanyasi Raju was dissolved and what was brought into \nexistence on October 1, 1970 was entirely a new firm and hence the provisions \nof S. 187 (2) were not applicable. The Tribunal directed that there should be two \nseparate assessments on the two firms, one on the old firm from April 1, 1970 to \nSeptember 30, 1970 and the other on the new firm, which came into existence \nunder the partnership deed of October 26, 1970, for the period October 1, 1970 \nto March 31, 1971. Thereafter, at the instance of the Revenue, the following \nquestion has been referred to this Court for its opinion: \n\n \"Whether, on the facts and in the circumstances of the case, \nthere was a change in the constitution of the earlier firm on 1-10-1970 in terms of \nS. 187 (2) of the Income-tax Act, 1961, or whether the firm that came into \nexistence on that date under the deed dated 26-10-1970 was a new firm which \nsucceeded the earlier firm in terms of S. 188 of the Act.\" It is obvious from the \nnarration of facts set out hereinabove that the main question that we have to \nconsider is the effect of the provisions of S. 187 (2) of the Income-tax Act when, \nunder the provisions of the Partnership Act, a firm is dissolved. \n\n 6. In order to appreciate the controversy that has arisen, it will be \nnecessary to refer to some of the provisions of the Income-tax Act. Sub-sec. (23) \nof S. 2 says that the words 'firm,' 'partner' and 'partnership' have the meanings \nrespectively assigned to them in the Indian Partnership Act, 1932 (9 of 1932); but \nthe expression 'partner' shall also include any person who, being a minor has \nbeen admitted to the benefits of partnership. It is thus clear that a departure to \nthis limited extent from the provisions of the Partnership Act has been made by \nthe Income-tax Act, because under the provisions of the Partnership Act, a minor \ncan only be admitted to the benefits of the partnership, but cannot be a partner \nbecause partnership requires an agreement between the partners and the minor \ncannot enter into a contract because of the provisions of S. 11 of the Contract \nAct. Under that section of the Contract Act, a contract by the minor would be void \nand hence the Partnership Act provides that a minor can only be admitted to the \nbenefits of the partnership; but he cannot become a partner. For the purpose of \nthe Income-tax Act, however a minor admitted to the benefits of the partnership \nis also a partner. \n\n 7. Under S. 2 (31), 'person' includes by cl. (Iv) a firm and S. 4 of the Act, \nwhich is the charging section, provides that, where any Central Act enacts that \nincome-tax shall be charged for any assessment year at any rate or rates, \nincome-tax at that rate or those rates shall be charged for that year in \naccordance with and subject to the provisions of the Act in respect of the total \nincome of the previous year or previous years as the case may be, of every \nperson. By virtue of the definition of the word 'person' it is obvious that a firm, as \ndistinguished from the partners constituting the firm is an assessable entity and \ncan be assessed as such. Chapter XVI of the Act contains special provisions \napplicable to firms. This chapter consists of Ss. 182 to 189 (both inclusive). \nSection 182 provides for assessment of registered firms and Section 183 \nprovides for assessment of unregistered firms. Section 184 provides for \napplication for registration of firms. Section 185 deals with the procedure on \nreceipt of application for registration or renewal of registration and S. 186 deals \nwith cancellation of registration. Sections 187, 188 and 189 are in the part of \nChap. XVI, which is designated as Part-C with the heading \"Changes in \nconstitution, succession and dissolution.\" Section 187 (1) is in these terms: \n\n \"187 (1) Where at the time of making an assessment under \nS. 143 or S. 144 it is found that a change has occurred in the constitution of a \nfirm, the assessment shall be made on the firm as constituted at the time of \nmaking the assessment: \n\n Provided that \n\n \n\n (i) the income of the previous year shall, for the purposes of \ninclusion in the total incomes of the partners, be apportioned between the \npartners who, in such previous year, were entitled to receive the same; and \n\n \n\n (ii) when the tax assessed upon a partner cannot be recovered from him, \nit shall be recovered from the firm as constituted at the time of making the \nassessment.\" \n\n Section 188 provides for succession of one firm by another firm. It may be \npointed out that S. 170 of the Act provides for succession to business otherwise \nthan on death and it deals with all persons and not merely with succession of one \nfirm by another. Under S. 188, where a firm carrying on a business or profession \nis succeeded by another firm, and the case is not one covered by S. 187, \nseparate assessments shall be made on the predecessor firm and the successor \nfirm in accordance with the provisions of S. 170. Therefore, it is obvious that S. \n188 is a specific provision which has to be applied when there is a succession of \none firm by another as distinguished from a change in the constitution of the firm \nand the case is not one covered by S. 187. Section 189 deals with a situation \nwhen the firm is dissolved or the business of a firm has been discontinued and \nunder sub-s. (1), where any business or profession carried on by a firm has been \ndiscontinued or where a firm is dissolved, the Income-tax Officer shall make an \nassessment of the total income of the firm as if no such discontinuance or \ndissolution had taken place, and all the provisions of the Act including the \nprovisions relating to the levy of a penalty or any other sum chargeable under \nany provisions of the Act shall apply, so far as may be, to such assessment. \n\n 8. At this stage, it will be relevant to refer to some of the provisions of the \nIndian Partnership Act, 1932. Section 4 provides that \"partnership\" is the relation \nbetween persons who have agreed to share the profits of a business carried on \nby all or any or them acting for all Persons who have agreed to share the profits \nof a business carried on by all or any or them acting for all Persons who have \nentered into partnership with one another are called 'individually 'partners' and \ncollectively 'a firm' and the name under which their business is carried on is \ncalled the 'firm name'. Chapter V of the Partnership Act deals with incoming and \noutgoing partners. Section 31 deals with introduction of a partner and it says that, \nsubject to contract between the partners and to the provisions of S. 30, no \nperson shall be introduced as a partner into a firm without the consent of all the \nexisting partners. Under S. 32 (1), a partner may retire with the consent of all the \nother partners, in accordance with an express agreement by the partners or \nwhere the partnership is at will, by giving notice in writing to all the other partners \nof his intention to retire. Section 33 provides for expulsion of a partner. Section \n34 (1) provides that, where under a contract between the partners the firm is not \ndissolved by the adjudication of a partner as an insolvent, the estate of a partner \nso adjudicated is not liable for any act of the firm and the firm is not liable for any \nact of the insolvent, done after the date on which the order of adjudication is \nmade. Section 35 provides that, where under a contract between the partners the \nfirm is not dissolved by the death of a partner, the estate of a deceased partner is \nnot liable for any act of the firm done after his death. Chapter VI of the \nPartnership Act provides for dissolution of a firm and under S. 39, the dissolution \nof partnership between all the partners of a firm is called the 'dissolution of the \nfirm'. Section 42 provides: \n\n \"Subject to contract between the partners a firm is dissolved-\n\n (a) if constituted for a fixed term, by the expiry of that \nterm; \n\n (b) if constituted to carry out one or more adventures or undertakings, by \nthe completion thereof; \n\n (c) by the death of a partner; and \n\n \n\n (d) by the adjudication of a partner as an insolvent.\" \n\n It is therefore clear that, subject to contract between the partners, a firm is \ndissolved by the death of a partner or by the adjudication of a partner as an \ninsolvent. If, under the partnership deed or any other agreement entered into \nbetween the partners before the date of the death of one of the partners or \nbefore the date of the adjudication of one of the partners as an insolvent, it is \nagreed between the partners inter se that the firm shall not be dissolved on the \ndeath or on the adjudication of one of the partners as an insolvent, the firm would \ncontinue. \n\n 9. Mr. Rama Rao, the learned counsel for the Revenue has emphasised \nbefore us that the words \"cease to be partners\" which occur in S. 187 (2) (a) of \nthe Income-tax Act, are also to be found in the Partnership Act, because it is \nobvious that, if one or more of the partners cease to be partners or one or more \nnew partners are admitted in a firm which exists and continues both under the \nPartnership Act as well as under the Income-tax Act, there is a mere change in \nthe constitution of the firm and there is no new firm which comes into existence. \nIn this case, we cannot do better than refer to the observations of Sir John \nBeaumont delivering the opinion of their Lordships of the Privy Council in \nBhagavanji v. Alembic Works, AIR P. C. 100. In para 10 at P. 101 of the report, it \nwas observed: \n\n \"Before the Board it was argued that under the Indian \nPartnership Act, 1932, a firm is recognised as an entity apart from the persons \nconstituting it, and that the entity continues so long as the firm exists and \ncontinues to carry on its business. It is true that the Indian Partnership Act goes \nfurther than the English Partnership Act, 1890 in recognising that a firm may \npossess a personality distinct from the persons constituting it, the law in India in \nthat respect being more in accordance with the law of Scotland, than with that of \nEngland. But the fact that a firm possesses a distinct personality does not involve \nthat the personality continues unchanged so long as the business of the firm \ncontinues. The Indian Act, like the English Act, avoids making a firm a corporate \nbody enjoying the right of perpetual succession.\" \n\n To the same effect are the observations of the Supreme Court in Commr. \nof Income-tax v. A. W. Figgies and Co. Mahajan J. (As he then was) speaking for the Supreme Court, \nobserved:\n\n \"It is true that under the law of partnership a firm has no legal \nexistence apart from its partners and it is merely a compendious name to \ndescribe its partners but it is also equally true that under that law there is no \ndissolution of the firm by the mere incoming or outgoing of partners. A partner \ncan retire with the consent of the other partners and a person can be introduced \nin the partnership by the consent of the other partners. The reconstituted firm can \ncarry on its business in the same firm's name till dissolution. The law with respect \nto retiring partners as enacted in the Partnership Act is to a certain extent a \ncompromise between the strict doctrine of English Common Law which refuses \nto see anything in the firm but a collective name for individuals carrying on \nbusiness in partnership and the mercantile usage which recognises the firm as a \ndistinct person or quasi Corporation.\" \n\n Mr. Rama Rao drew our attention to Black's Law Dictionary, Fourth \nEdition, page 282 where the word \"cease\" has been defined to mean to stop, to \nbecome extinct, to pass away, to come to an end. Similarly in Webster's \nInternational Dictionary the word 'cease' had been defined to mean a \ndiscontinuance or a temporary or final ceasing. In Corpus Juris Secundum, \nvolume 14, at page 58, the word 'cease' has been defined to mean to become \nextinct or pass away, to come to an end, or stop. Mr. Rama Rao also drew our \nattention to the fact that S. 37 of the Partnership Act mentions the words 'ceased \nto be a partner.' Section 45 (1) of the Partnership Act provides for liability for acts \nof partners done after dissolution, and it says: \n\n \"45. (1) Notwithstanding the dissolution of a firm, the \npartners continue to be liable as such to third parties for any act done by any of \nthem which would have been an act of the firm if one before the dissolution, until \npublic notice is given of the dissolution. \n\n Provided that the estate of a partner who dies, or who is adjudicated an \ninsolvent or of a partner who, not having been known to the person dealing with \nthe firm to be a partner, retires from the firm, is not liable under this section for \nacts done after the date on which he ceases to be a partner.\" \n\n It is true that, in the limited context of S. 45 (1) of the Partnership Act, even \non dissolution of Partnership because of the other provisions of the Partnership \nAct, the partner, who died, can be said to have ceased to be a partner. Such \ncessasion may either be because of the death of a partner or because of \nadjudication of a partner as an insolvent or because of retirement of a partner. In \nthe context of S. 45 (1) the words \"ceased to be a partner\" are undoubtedly used \nto cover all these three contingencies. \n\n 10. At this stage, before starting discussion on the different authorities to \nwhich our attention has been drawn, it is necessary to refer to the analogous \nprovisions of the Income-tax Act, 1922 (hereinafter referred to as '1922 Act'). \n\n Under S. 26 (1). \n\n \"Where, at the time of making an assessment under S. 23, it \nis found that a change has occurred in the constitution of a firm or that a firm has \nbeen newly constituted, the assessment shall be made on the firm as constituted \nat the time of making the assessment.\" \n\n The two provisos to sub-sec. (2) of S. 26 provided for succession of a \nbusiness and it says that, where a person carrying on any business, profession \nor vocation has been succeeded in such capacity by another person, such \nperson and such other person shall, subject to the provisions of sub-sec. (4) of S. \n25, each be assessed in respect of his actual share, if any, of the income, profits \nand gains of the previous year. It is obvious from what we have stated above that \nthe provisions of S. 26 (1) of 1922 Act had been re-enacted as S. 187 (1) of 1961 \nAct and an important change is that, whereas Section 26 (1) spoke of a change \nin the constitution of the firm and also of the firm being newly constituted under \n1961 Act, provision is made only for a change in the constitution of the firm and it \ndoes not deal with the eventuality of a firm being newly constituted. This change \nas between the provisions of 1922 Act and 1961 Act is very material, because if \nthe provisions of S. 26 (1) of 1922 Act are borne in mind, the distinction between \nS. 26 (1) of the 1922 Act and S. 187 (1) of 1961 Act will clearly remain in the \nforefront. \n\n 11. To deal in a chronological order with the authorities under the Income-\ntax Act, we will refer to the decision of the Supreme Court in Commr. of Income-\ntax v. A. W. Figgies and Co. (supra). The Court there was \nconcerned with succession under S. 26 (1) and the question was one of the \napplicability of S. 25 (4) and S. 26 (1) of the 1922 Act, Mahajan, J., (as he then \nwas) speaking for the Supreme Court, observed at page 409 of the report; AIR 1953 SC 456:\n\n \"But under the Income-tax Act, the position is somewhat \ndifferent. A firm can be charged as a distinct assessable entity as distinct from its \npartners who can also be assessed individually.\" \n\n After referring to the charging S. 3 of 1922 Act analogous to the charging S. \n4 of 1961 Act, Mahajan J. Observed (at p.456 of AIR): \n\n \"The partners of the firm are distinct assessable entities, \nwhile the firm as such is a separate and distinct unit for purposes of assessment. \nSections 26, 48 and 55 of the Act fully bear out this position. These provisions of \nthe Act go to show that the technical view of the nature of a partnership under \nEnglish law or Indian law, cannot be taken in applying the law of income tax. The \ntrue question to decide is one of identity of the unit assessed under the Income-\ntax Act. 1918 which paid double tax in the year 1939, with the unit to whose \nbusiness the private limited company succeeded in the year 1947.\" \n\n 12. In Shivram Poddar v. Income-tax Officer, the Supreme Court was concerned with the discontinuance of business of a \nfirm and the provisions of S. 26 (1) and other connected provisions of 1922 Act. \nShah, J. (As he then was ) speaking for the Supreme Court, observed at p. 827 \nof the report (51 ITR): (at p. 1098 of AIR):\n\n \"Discontinuance of business has the same connotation in S. \n44 as it has in S. 25 of the Act; it does not cover mere change in ownership or in \nthe constitution of the unit of assessment. Section 44 is, therefore, attracted only \nwhen the business of a firm is discontinued. i.e. when there is complete \ncessation of the business and not when there is a change in the ownership of the \nfirm, or in its constitution, because by reconstitution of the firm no change is \nbrought in the personality of the firm, and succession to the business and not \ndiscontinuance of the business results. Under the ordinary law governing \npartnerships, modification in the constitution of the firm in the absence of a \nspecial agreement to the contrary amounts to dissolution of the firm and \nreconstitution thereof, a firm at common law being a group of individuals who \nhave agreed to share the profits of a business carried on by all or any of them \nacting for all , and supersession of the agreement brings about an end of the \nrelation. But the Income-tax Act recognises a firm for purposes of assessment as \na unit independent of the partners constituting it; it invests the firm with a \npersonality which survives reconstitution. A firm discontinuing its business may \nbe assessed in the manner provided by Section 25 (1) in the year of account in \nwhich it discontinues its business; it may also be assessed in the year of \nassessment. In either case, it is the assessment of the income of the firm. Where \nthe firm is dissolved, but the business is not discontinued, there being change in \nthe constitution of the firm, assessment has to be made under S. 26 (1), and if \nthere be succession to the business, assessment has to be made under S. 26\n92). The provisions relating to assessment on reconstituted or newly constituted \nfirms,and on succession to the business are obligatory. Therefore, even when \nthere is change in the ownership of the business carried on by a firm on \nreconstitution or because of a new constitution, assessment must still be made \nupon the firm.\" \n\n 13. Mr. Rama Rao for the Revenue has very strongly relied upon the \nparticular words in the above passage,which we have underlined; but it must not \nbe forgotten that it was while dealing with the provisions of S. 26 (1) which dealt \nwith both changes occurring in the constitution of the firm and a newly-\nconstituted firm that those observations were made. Assessment undoubtedly \nhad to be made under S. 26 (1) when there was a change in the constitution of \nthe firm and when a firm was newly constituted. If a partnership firm was \ndissolved and the business of the firm was continued by another firm under the \nprovisions of 1922 Act, since there would be a newly constituted firm as \ndistinguished from a change of the constitution of the firm, the provisions of S. 26 \n(1) of 1922 Act had to be invoked. But the question is whether, with the change in \nthe provisions of S. 26 (1) by the dropping of the reference \"a newly-constituted \nfirm\" occurring in S. 26 (1), the above observations of the Supreme Court have \nany force to the provisions of S. 187 (1) of 1961 Act. We are unable to accept the \ncontention of Mr. Rama Rao that S. 187 (1) would cover the case of a firm which \nis dissolved, but its business has been continued by a new firm, though some of \nthe partners of the new firm may be common to the old firm as well. We see no \nreason to apply the above observations of the Supreme Court, particularly the \nunderlined words to the language of S. 187 (1) of 1961 Act. Those observations \nwere made in the context of the language of S. 26 (1) of 1922 Act where the \nlanguage and scheme of the section were entirely different. \n\n 14. The decision in Shivram Poddar's case was \nfollowed by the Supreme Court in Commr. of Income-tax v. Kirkend Coal Co., Shah, J., (as he then was) speaking for the Supreme Court quoted \nextensively from the decision in Shivram Poddar's case supra and the passages \nwhich we have extracted from that decision were also extracted by Shah, J., in \nCommr. of Income-tax v. Kirkend Coal Co. . For \nthe reasons which we have set out hereinabove, the decision in Commr. of \nIncome-tax v. Kirkend Coal Co. which was \ndelivered in the context of the provisions of Section 26 (1) and Section 44 of the \n1922 Act., cannot entirely help us in interpreting the provisions of S. 187 (1) \nwhich depart from the provisions of S. 26 (1) of 1922 Act in very material \nparticulars, as we have pointed out above.\n\n 15. We may however refer to another decision of the Supreme Court in \nCommr. of Income-tax v. K. H. Chambers . The \nquestion was what was meant by succession in the context of the Income-tax \nAct. Subba Rao, J. (As he then was) quoted with approval, at page 680 of the \nreport, (of 55 ITR); (at pp. 973, 974 of AIR 1965 SC) from the decision of Finlay \nJ. in Malayalam Plantations Ltd. v. Clark (1935) 19 Tax Cas 314. The passage \nfrom the decision of Finlay, J., is in these terms: \n\n \"The substance of what was done, I think clearly was this. \nThe thing was taken over as a going concern, taken over with the things growing \non it, and with the coolies employed to work the estate. I am not going into it any \nfurther because it is essentially a question of fact, but I cannot avoid the view that \nthere was material upon which commissioners might arrive at the conclusion that \nthere was a succession.\" \n\n 16. Commenting upon this observation of Finlay, J., Subba Rao, J. (As he \nthen was ) observed:- \n\n \"This is an authority for the position that if a business was \ntaken over as a going concern the mere fact that some assets, which were not \nrequired by the successor for the carrying on of the business, were not \ntransferred to him would not make it any the less a succession in law. It is not \nnecessary to multiply decisions. Succession involves change of ownership; that \nis, the transferor goes out and the transferee comes in; it connotes that the whole \nbusiness is transferred; it also implies that substantially the identity and the \ncontinuity of the business are preserved. If there is a transfer of a business, any \narrangement between the transferor and the transferee in respect of some of the \nassets and liabilities not with a view to enable the transferor to run a part of the \nbusiness transferred out to enable the transferee to run the business \nunhampered by the load of debts or for any other appropriate collateral purpose \ncannot detract from the totality of succession.\" \n\n This decision of the Supreme Court points out that, if there is any change \nof ownership in the sense of the transferor going out and the transferee coming \nin and at the same time substantially the identity and the continuity of the \nbusiness have been preserved, there would be a succession as distinguished \nfrom mere continuance of the firm if the transferor and the transferee are \npartnership firms. \n\n 17. We may point out that, apart from these decisions of the Supreme \nCourt which we have just now noted, under S. 26 (1) of the 1922 Act, there has \nbeen no decision of the Supreme Court regarding the provisions of S. 187 (1) of \nthe 1961 Act and hence we will first notice the provisions of Ss. 187, 188 and 189 \nin the context in which they occur in 1961 Act and then consider how the High \nCourts including this Court have dealt with this aspect of the law. \n\n 18. Section 187 which we have set out hereinabove deals with change in \nconstitution of a firm. The very concept of change in the constitution of a firm \nenvisages that the same identical firm continues as before, but there is a change \nin the composition of the firm or as Section 184 (7) and S. 187 (2) (b) point out, \nthere may be an alteration in the shares inter se of the partners of the firm. The \nchange in the constitution of the firm in the sense of continuity being maintained \nand the identity of the firm being maintained is contemplated by the provisions of \nSs. 31 to 35 of the partnership Act. The firm does not get dissolved as a result of \nthe change in the constitution of the firm. There may be the introduction of a new \npartner or there may be the retirement of a partner or there may be expulsion of \na partner or where there is a contract to the contrary, the partnership does not \nget dissolved even on the death of a partner. Similarly, if a partner is adjudicated \nan insolvent, and there is a provision to the contrary between the partners that \nthe insolvency of one of the partners is not to bring about a dissolution of the \nfirm, such adjudication of one of the partners as an insolvent may also bring \nabout a change in the constitution of the firm because the insolvent ceases to be \na partner of the firm; but the firm will not be dissolved. The very basic concept \nunderlying S. 187 (i) is that one and the same firm must be continuing throughout \nthe assessment year under consideration. But there is a change in the \nconstitution of the firm, though the firm, as an entity, continues as one and single \nentity throughout the period. If the firm ceases to exist, the relationship of \npartners inter se comes to an end and therefore the firm can no longer be said to \ncontinue as before. Since the continuance or the existence of the firm is the basic \nconcept underlying S. 187 (10 which speaks of a change in the constitution of the \nfirm, it is obvious that the provisions of S. 187 (2), which defines \"for the \npurposes of this section\" what is meant by change in the constitution of the firm, \ncannot go contrary to the basic concept underlying S. 187 (1). Clause (a) of \nSection 187 (2) provides that, for the purposes of this section, there is a change \nin the constitution of the firm if one or more of the partners cease to be partners \nor one or more new partners are admitted. In such circumstances, one or more of \nthe persons who were partners of the firm before the change continue as partner \nor partners after the change. Similarly, where all the partners continued with a \nchange in their respective shares or in the shares of some of them, there is a \nmere change in the constitution of the firm. It is obvious that, if the words \"if one \nor more of the partners cease to be partners\" are understood in the sense of the \nprovisions of the Sections in Chapter V of the Partnership Act without doing \nviolence to the underlying concept of S. 187 (1) the notions of the Partnership Act \nand the Income-tax Act can be reconciled. There is nothing in the Income-tax Act \nwhich compels us to take a different view and which compels us to hold that the \nscheme of these sections and the basic concept under the Partnership Act are \ndeparted from when the legislature enacted S. 187 (1). The words \"for the \npurposes of this Section\" occurring at the commencement of S. 187 (2) cannot \nserve the purpose of a non obstante clause, as has been contended by Mr. \nRama Rao. There is no provision in the Partnership Act which contemplates that, \nby a mere change in the constitution of the firm by virtue of the provisions of the \nPartnership Act, a firm can be said to be continued, as the two concepts are \ndiametrically opposed to each other. If there is a dissolution, the firm comes to an \nend and if a firm comes to an end, there cannot be a continuity of the firm as it \nstood prior to its dissolution and therefore, after the dissolution, there cannot be \nsaid to be a mere change in the constitution of a firm. \n\n 19. It may be pointed out that S. 189 (1) deals with a situation where any \nbusiness or profession carried on by a firm has been discontinued or where a \nfirm is dissolved and the liabilities of the firm which has been dissolved or the \nliabilities of the firm which has discontinued its business or the income of the firm \nwhich has been dissolved or the income of the firm which has been dissolved or \nthe income of the firm which has discontinued its business are to be adjusted in \nthe light of S. 189 (1). It is, therefore, difficult to accept the contention urged on \nbehalf of the Revenue that S. 187 also contemplates a situation where a firm has \nbeen dissolved because of the provisions of the Partnership Act. It may be \npointed out that, once a firm is dissolved under sub-sec. (8) of S. 184, a fresh \nregistration will have to be applied for. Even if there is a change in the \nconstitution of the firm, the firm has to apply for fresh registration. We are merely \nreferring to the provisions of S. 184 with a view to point out that the notions and \nconcepts in the Partnership Act are not totally to be overlooked when considering \nthe provisions of the 1961 Act. Moreover, S. 2 (23) requires the words 'firm,' \n'partner' and 'partnership to be interpreted in the same manner as has been done \nin the Partnership Act. Once a firm is dissolved in view of the provisions of the \nPartnership Act, it is obvious that that firm comes to an end and there cannot be \nsaid to be a change in the constitution of such a firm just because after the \ndissolution of the firm, by virtue of a new agreement between some of the \npartners of the dissolved firm, the business of the firm is continued and the new \nfirm takes over the business of the old firm. It is possible to urge that, in the event \nof a firm being dissolved under the provisions of the Partnership Act, if some o \nthe partners of the dissolved firm agree to restart the business by virtue of a new \nagreement, there is a newly-constituted firm but the words 'a newly-constituted \nfirm\" which were present in S. 26 (1) of the 1922 Act are absent from S. 187 (1) \nof the 1961 Act. Under these circumstances, by a mere process of interpretation, \nit obviously follows that the basic concept underlying S. 187 is a continuity of a \nfirm as an entity. Once dissolution comes about, the provisions of S. 187 can \nnever apply. Therefore, the decision in Shivram Poddar v. Income-tax Officer \n supra and Commr. of Income-tax v. Kirkend Coal Co. supra both decided by the Supreme Court, cannot help the \nIncome-tax authorities in such an eventuality.\n\n 20. We may point out that the Madras High Court in Kaithari Lungi Stores \nv. Cjommr. of Income-tax 104 ITR 160: (1977 Tax LR 354 (Mad)) dealt with the \nprovisions of S. 187 and Ramaswami J. speaking for the Division Bench of the \nMadras High Court, observed at page 164 of the report (104 ITR) : (at p. 356 of \n1977 Tax LR) : \n\n \"A change in the constitution of a firm must be distinguished \nfrom the dissolution of the firm. The distinction was clearly brought out by this \nCourt in Tyresoles (India) Calcutta v. Commr. of Income-tax, (1963) 49 ITR 515 \n(Mad) and the following passage in that Judgement is worth quoting:\n\n \"The dissolution and reconstitution of a partnership are two \ndifferent legal concepts. The dissolution puts an end to the partnership, but \nreconstitution keeps it subsisting, though in another form. A dissolution followed \nby some of the erstwhile partners taking over the assets and liabilities of the \ndissolved Partnership and forming themselves into a Partnership is not \nreconstitution of the original Partnership. The Partnership formed after the \ndissolution is a new Partnership and not a continuation of the old Partnership for \nit would be contradiction in terms to say that what ceased to exist was continued \nA reconstitution of a firm or Partnership necessarily implies that the firm never \nbecame extinct. What it denotes is a structural alteration of the membership of \nthe firm, by addition or reduction of members, and an incidental redistribution of \nthe shares of the partners.\" \n\n 21. Ramaswami, J. Further observed: \n\n \"In our opinion, the words \"ceasing to be partners\" in S. 187 \n(2) would also include a case of death of a partner when such death, by reason \nof a contract to the contrary or by reason of any law, did not bring about the \ndissolution of the Partnership.\" \n\n The learned Judges of the Madras High Court declined to accept the view \npropounded by Seth, J. in Dahi Laxmi Dal Factory v. Income-tax Officer 103 ITR \n517: (1975 Tax LR 132) (All) (FB). We respectfully agree with the conclusions of \nthe learned Judges of the madras High Court because, on our own analysis of \nthe wording of the Sections, we have come to the same conclusions.\n\n 22. We will now examine in chronological order the decisions of the \ndifferent High Courts delivered in the context of S. 187. In Dharam Pal Sat Dev v. \nCommr. of Income-tax a Division Bench of the Punjab \nand Haryana High Court dealt with a situation where three partners were carrying \non the Partnership business and one of the partners died. The remaining two \npartners and the son of the deceased entered into Partnership after the death of \nthe deceased partner and they carried on the same business as previous \nPartnership. There was no clause in the Partnership deed before the death of the \npartner providing for non-dissolution of the firm in the event of the death of one of \nthe partners. On these facts, the Division Bench held that the provisions of the \nPartnership Act can be referred to only if it is found that a particular situation is \nnot covered by the provisions of the Income-tax Act. A particular case can be \ncovered by S. 188 of the Act only when it is a succession of one firm by another, \nmeaning thereby that there is a complete change and no one of the partners in \nthe previous firm continued to be a partner in the latter firm, which was not the \ncase before the Division Bench. Bhopinder Singh Dhillon, J. delivering the \njudgement of the Division Bench, referred to the decisions of the Supreme Court \nin Commr. of Income-tax v. Kirkend Coal Co. supra and \nShivram Poddar v. Income-tax Officer (AIR 1954 SC 1075) supra and it appears \nfrom the decision of the Division Bench of the Punjab and Haryana High Court, \nthat the learned Judges did not distinguish between S. 26 (1) of the 1922 Act and \nS. 187 (1) of the 1961 Act and reproduced the observations of the Supreme \nCourt in Shivaram Poddar's case (at p. 1098 of Air) supra :\n\n \"Where the firm is dissolved, but the business is not \ndiscontinued, there being a change in the constitution of the firm, assessment \nhas to be made under S. 26 (1), and if there be succession to the business, \nassessment has to be made under S. 26 (2).\" \n\n We have already pointed out that those observations in Shivram Poddar's \ncase supra cannot apply to cases arising under S. 187 (1) of the 1961 Act. With \ngreat respect to the learned Judge of the Punjab and Haryana High Court, we \nare unable to accept their reasoning regarding S. 187 (1).\n\n 23. The next decision in point of time is the majority decision of the Full \nBench of the Allahabad High Court in Dahi Laxmi Dal Factory v. Income-tax \nOfficer 1975 Tax LR 132 (All) (FB) supra. The majority of the learned Judges \nthere held that S. 187 of the Income-tax Act 1961 applies only where a firm is \nreconstituted in accordance with Ss. 31 and 32 of the Indian Partnership Act, \nnamely, when a new partner if taken in or an existing partner retires with the \nconsent of all the partners or without their consent if the contract of Partnership \nso provides. But where a firm is dissolved either by agreement of the partners or \nby operation of law and another firm takes over the business, that will be a case \nof succession governed by Section 188 of the Act, even though some of the \npartners of the two firms are common. In the case before the Full Bench of the \nAllahabad High Court, the old firm was constituted by two partners. One of them \ndied and there was no stipulation in the partnership deed that the firm shall not \nstand dissolved on the death of a partner. Even if there had been such a \nstipulation, the firm could not have been saved from dissolution, because after \nthe death of one of the partners, only one partner was left and one man cannot \nconstitute a firm. The firm automatically came to an end. Since the erstwhile firm \nstood dissolved on the death of one of the partners, the new firm which took over \nthe same business could be assessed only in accordance with S. 188 and a \nsingle assessment for the whole year was not valid. With respect, we agree with \nthe learned Judges who delivered the majority decision of the Full Bench of the \nAllahabad High Court, but we differ from them only to the limited extent that the \nreconstitution of the firm is covered not only by Ss. 31 and 32 of the Partnership \nAct but also by the other provisions of Chapter V of the Partnership Act under \nwhich because of a contract to the contrary a firm is not dissolved even on the \ndeath of one of the partners of the firm or on the adjudication of a partner as an \ninsolvent. We agree with the comment of the learned Judges of the madras High \nCourt in Kaithari Lungi Stores v. Commr. of Income-tax (1977 Tax 354 (mad)) \n(supra) about this majority decision of the Full Bench of the Allahabad High \nCourt; but barring this divergence of views between ourselves and the majority of \nthe learned Judges of the Allahabad High Court as to when there can be said to \nbe a change in the constitution of a firm viz., whether only under the provisions of \nSs. 31 and 32 of the Partnership Act or whether under the other provisions of \nChapter V of the Partnership Act as well, we agree with the conclusions of the \nlearned Judges of the Full Bench of the Allahabad High Court.\n\n 24. In Addl. Commr. of Income-tax Gujarat v. Harjivandas Hathibhai, 1976 \nTax LR 1107 (Guj) a Division Bench of the Gujarat High Court to which one of us \n(Divan C. J. ) was a party, the provisions of S. 187 were considered, and it was \nheld (at p. 1112 Para 7) :\n\n \"Even though a partner retires, the firm continues as before. \nWhat is meant by a change in the constitution of the firm is coming in of a new \npartner with the consent of all the existing partners or by the retirement of a \npartner with the consent of all the partners. In such cases there is a mere change \nin the constitution of the firm and nothing more. The same firm continues as \nbefore. The question of dissolution of the firm either by operation of law or by act \nof parties is a different thing altogether. When a firm is dissolved, the old \nrelationship comes to and end and a new relationship comes into existence and if \nthe succeeding Partnership firm continues the old business, then there is \nsuccession of one firm by another as contemplated by Section 188. Sub-sec. (2) \nof S. 187 merely specifies two kinds of changes in the constitution of the firm. \nClause (a) of sub-sec. (2) of S. 187 refers to the continuance of the firm on one \nor more of the partners ceasing to be partners or one or more new partners being \nadmitted. It deals with cases of retirement of partners and introduction of new \npartners but the firm would continue in such a case. Therefore, all that sub-sec \n(2) of S. 187 points out is that with the retirement of one or more of the partners \nso long as one of the old partners continues and with the introduction of new \npartners there is a mere change in the constitution of the firm.\" \n\n 25. At page 1112 of the report, the Division Bench of the Gujarat High \nCourt pointed out: \n\n \"Even apart from the decision of the learned Judges of the \nAllahabad High Court in the Full Bench decision referred to above (Dahi Laxmi \nDal Factory's case (1975 Tax LR 132 (All)) (FB) it is obvious on general \nprinciples that unless the words of the Income-tax Act compel us to do so, it \nwould not be correct to depart from the well-known principles of Partnership law. \nThe Partnership law contemplates retirement of a partner and even though a \npartner retires the firm continues as before. What is meant by a change in the \nconstitution of the firm is coming in of a new partner with the consent of all the \nexisting partners or by the retirement of a partner with the consent of all the \npartners; in such cases there is a mere change in the constitution of the firm and \nnothing more. The same firm continues as before.\"\n\n 26. We are in agreement with this conclusion of the learned Judges of the \nDivision Bench of the Gujarat High Court. \n\n 27. In Addl. Commr. of Income-tax v. Visakha Flour Mills (ii) 1977 Tax LR \n41 (Andh Pra) a Full Bench of this Court consisting of one of us (Raghuvir J.) \nKondaiah and Gangadhara Rao, JJ. held (at p. 47):\n\n \"A change in the constitution of a firm within the meaning of \nS. 187 would occur where (i) one of the partners voluntarily retires or is expelled \nleaving the remaining partners to continue the business, or (ii) a new partner is \nintroduced with the consent of the existing partners or (iii) all the partners \ncontinue as before but with re-adjustment or reallocation of shares of one or \nmore or all of them, or (iv) one of the partners dies. Under S. 42 (6) of the \nPartnership Act, the firm gets dissolved if any one of the partners dies when \nthere is no specific agreement in the deed of partnership to the effect that \nnotwithstanding the death of any one of the partners, the firm continues to do its \nbusiness with the remaining partners.\" \n\n It was further held by the Full Bench: \n\n \"If there is conflict between the provisions of the Income-tax \nAct and those under the Partnership Act, the provisions of the Income-tax Act \nwould prevail over those of the Partnership Act.\" \n\n Pausing here we are in agreement with this proposition of law; but as \npointed out earlier, in fact, there is no conflict between the provisions of S. 187 \n(1) of the Income-tax Act and the provisions of the Partnership Act, when one \nbears in mind the basic concept underlying the provisions of S. 187, viz. the \ncontinuity of the firm as an entity in the eye of law. The Full Bench further \nobserved: \n\n \"A close and combined reading of Ss. 187 and 188 does not \nwarrant or justify the assumption that S. 187 is not applicable to a case of \ndissolution of a firm. Where therefore, a firm is dissolved on account of the death \nof a partner by virtue of the provisions of S. 42 (c) of the Partnership Act and the \nbusiness is continued by the remaining partners of by the remaining partners and \nanother in the place of the deceased partner, there being only a change in the \nconstitution of the firm within the meaning of S. 187 (2) (a) the assessment of the \nfirm for the previous year or years must invariably be made under S. 187 and if \nthere be succession to the business by another separate entity owned by \naltogether different partners, assessment has to be made under S. 188 as it \nwould squarely fall under S. 188 as it would squarely fall under \nS.188.\" \n\n The Full Bench further held: \n\n \"However, if there are one or more of the partners continuing \nas partners in the second firm, it must be construed to be only a change in the \nconstitution of the firm within the meaning of S. 187 but not a case of succession \nas contemplated by S. 188.\" \n\n With great respect to the learned Judges of the Full Bench of this Court, we \nare unable to agree with their interpretation of Ss. 187 and 188 of the Income-tax \nAct, 1961. \n\n 28. Sections 187, 188 and 189 deal with three different situations. Section \n187 deals with a case where the firm continues to be the same as before in the \neye of law, but there is a change in the constitution either because of a partner \ncoming into or another partner going out and so long as one partner is common \nthere is said to be a mere change in the constitution of the firm. Section 188 \ndeals with situation where there is a succession of one firm by another firm and \nin such a situation, the assessment has to be made in the light of S. 170. Section \n189 deals with a situation where a partnership firm is dissolved or its business \ndiscontinued. Just because some of the partners of the dissolved firm constitute \na new partnership firm by a new agreement arrived at among themselves it \ncannot be said that the old firm continues with a mere change in the constitution. \nIt is altogether a new firm and the learned Judges of the Madras High Court have \nrightly pointed out in Katthari Lungi Stores v. Commr. of Income-tax (1977 Tax \nLR 354 (Mad)) (supra) that a change in the constitution of the firm must be \ndistinguished from the dissolution of the firm. Under these circumstances, we are \nunable to accept the reasoning or conclusions of the learned Judges of the Full \nBench of this Court in Addl. Commr. of Income-tax v. Visakha Flour Mills. 1977 \nTax LR 41 (Andh Para) (FB) (supra), as regards the interpretation of S. 187 in \nthe context of dissolution of a firm by virtue of the provisions of the Partnership \nAct.\n\n 29. Mr. Rama Rao for the Revenue drew our attention to a decision of a \nDivision Bench of the Allahabad High Court in R. B. Jessa Ram Fateh Chand v. \nCommr. of Income-tax, . But this decision was overruled \nby the majority of the learned Judges of the Full Bench of the Allahabad High \nCourt in Dahi Laxmi Dal Factory v. Income-tax Officer, (1975 Tax LR 132 (All) \n(FB)) (supra), and since we substantially agree with the conclusions of the \nmajority of the learned Judges of the Full Bench in Dahi Laxmi Dal Factory v. \nIncome-tax Officer (supra), it is not necessary for us to deal with this \ndecision.\n\n 30. In Commr. of Income-tax v. Kelukutty, 85 ITR 102: (1972 Tax LR 72 \n(Ker)), a Division Bench of the Kerala High Court dealt with a situation where, \nbecause of cl. 7 of the partnership deed, the firm was not to be dissolved in the \nevent of the death of one of the partners and since the firm was not dissolved, \nthe case would squarely fall under the provisions of S. 187 (1) of the Income-tax \nAct.\n\n 31. In Hoshiarpur Electric Supply Co. v. Commr. of Income-tax, , after setting out the passage from the decision of the Supreme \nCourt in Commr. of I.-T. v. A. W. Figgies & Co., (supra), the \nlearned Judges of the Punjab and Haryana High Court Observed:\n\n These observations quite precisely apply to the present \ncase, because their Lordships definitely decided that technically the law of \npartnership does not apply to a case like the present which is to be considered \nby applying the law of income-tax. In the present case also the business of the \nfirm originally constituted continued as the electrical undertaking at Hoshiarpur \nfrom the very beginning right down to its purchase by the Punjab Government, \nand it continued to be the same unit throughout, carrying on the same business \nof supply of electricity, the same place and there was no cesser of that business \nor any change in the unit\" \n\n 32. The question which we have to consider in the present case did not \narise strictly for the decision in that particular case and it is not necessary for us \nto deal with that particular case in greater detail. \n\n 33. In Sandersons & Morgans v. Income-tax Officer, 87 ITR 270 : (1973 \nTax LR 614 (Cal) ), Sabyasachi Mukharji, J. of the Calcutta High Court, sitting \nsingle, dealt with a situation where there was a contract to the contrary providing \nthat, in the event of death of one of the partners, the partnership firm was not to \nbe dissolved. Thus it is obvious that the case would clearly fall under the \nprovisions of S. 187 of the Income-tax Act, 1961. At page 281 of the report (87 \nITR) : (at p. 620 of Tax LR), Sabyasachi Mukharji, J. Observed:\n\n \"Therefore, the expression \"change in the constitution of the \nfirm\" must be construed in the light of the ordinary meaning unless the language \nof the section or the purpose of the Act compels one to hold otherwise. \"Change \nin the constitution of the firm\" normally and ordinarily would mean every alteration \nin the set-up of the firm viz. death, retirement, incapacity of partners, alteration of \nthe shares of the partners in the firm etc. Whether any particular alteration would \namount to a change in the constitution of the firm would depend upon the context \nof the use of that expression. Partnership is the relationship between persons \nwho have agreed to share the profits of a business carried on by all or any of \nthem acting for all, according to the definition of the Partnership Act. Therefore, \nconstitution of the firm is a matter of agreement between the parties, subject, \nhowever, to the fact that the parties cannot contract out of the legal \nobligations.\" \n\n 34. Sabyasachi Mukharji, J. further observed: \n\n \"...................I must construe the expression \"Constitution of \nthe firm\" by its ordinary connotation and construe by that connotation that death \nwould certainly indicate a 'change in the constitution of the firm'.\" \n\n With respect, we are unable to agree with the later part of the reasoning of \nthe learned single Judge of the Calcutta High Court. \n\n 35. In Commr. of Income-tax v. T. Veera Raghavulu Chetty & Sons, 100 \nITR 723 : (1976 Tax LR 460 (Andh Pra) ), a Division Bench of this Court \nconsisting of Obul Reddi, C. J. and Sriramulu, J., dealt with a situation where \nthere was introduction of new partners in the midst of the accounting year. They \nwere not dealing with a situation where a firm was dissolved because of the \nprovisions of the Partnership Act, and it was held that the entire income of the \nfirm for the whole year was to be assessed instead of two separate assessments \nand the conclusion of the learned Judges of the Division Bench is correct in the \nlight of the fact that the case was clearly governed by the provisions of S. 187 (10 \nas interpreted by us. These are all the different decisions which have a bearing \non this case.\n\n 36. It is true, as pointed out by the Gujarat High Court in Addl. Commr. of \nIncome-tax, Gujarat v. Harjivandas hathibhai, (1976 Tax LR 1107 (Guj) ) (supra), \nin para 10 of its judgement that contract to the contrary can be spelled out from \nthe conduct of the parties: but such conduct must be of the partners who \nconstituted the firm before the dissolution took place under the provisions of the \nPartnership Act. It cannot be said that the conduct of the surviving partners, after \nthe dissolution of the firm, is any indication regarding the existence of the \ncontract to the contrary before the death of the deceased person, which brings \nabout the dissolution of the firm. Even the subsequent conduct of the surviving \npartners may indicate under certain circumstances that there must have been a \ncontract to the contrary between the surviving partners and the deceased partner \nduring the lifetime of the deceased partner. But as we have stated above, it is a \nmere question of inference from the facts. The decision of the Gujarat High Curt \nin Ramprasad Firm v. Bai Reva, which was relied upon by Mr. \nRama Rao in support of his argument, merely lays down the same proposition \nand it does not advance the case of the Revenue any further. These are all the \ndecisions which have been cited before us at the Bar and on a perusal and \nconsideration of these different decisions and in the light of the provisions of S. \n187 as interpreted by us, it must be held that S. 187 does not apply to a situation \nwhere a firm is dissolved by the operation of one or the other provisions of the \nPartnership Act and after dissolution, one or more of the partners of the dissolved \nfirm continue the same business as before by a fresh agreement with one or \nmore new partners.\n\n 37. In the light of the above conclusion, it is not strictly necessary for us to \ndeal with the contention urged by Mr. Swamy who appears for the assessee in R. \nC. No. 67 of 1975 that, even if the case falls under S. 187, there should be two \nassessments. It is not possible for us to accept that contention because under \nthe scheme of the Act, once the case falls under S. 187, there must be a single \nassessment because there is only one assessee viz. the firm as it stood \nconstituted at the end of the assessment year and there can be only one \nassessment in respect of a single assessee. This argument which appealed to \nthe dissenting Judge. H. N. Seth J. of the Allahabad High Court in Dahi Laxmi \nDal Factory v. Income-tax Officer, (1975 Tax LR 132 (All) ) (FB) (supra), \ntherefore, cannot be sustained.\n\n 38. In view of our conclusion as above, it necessarily follows that, in R. C. \nNo. 22/75, because of the death of Srinivasulu on August, 17, 1968, the old firm \nwas dissolved and there was succession to that firm by another firm within the \nmeaning of S. 188 when under a new agreement seven of the old partners \ntogether with two new partners continued the old business as before. Therefore, \nthe case was not covered by S. 187 and hence it is obligatory on the part of the \nIncome-tax Officer to make two separate assessments, one on the dissolved firm \nand the other on the new partnership firm. We therefore answer the question in \nR. C. No. 22 of 1975 in the affirmation i.e. in favour of the assessee and against \nthe Revenue. In R. C. No. 67/75 on the retirement of Ch. Suryanarayana with \neffect from September 30, 1970, the old firm, which was in existence till then, \ncame to an end because there were only two partners and one partner, Ch. \nSuryanarayana retired and the other partner, K. Sanyasiraju could not continue \nthe business of the firm. Because of hat dissolution, though the business of the \npartnership was carried on by another firm and was continued, there was a mere \nsuccession within the meaning of S. 188 and the case was not covered by the \nprovisions of S. 187. Under these circumstances, we answer the question \nreferred to us in r. C. No. 67/75 in the negative as to the first part and in the \naffirmative as to the second part i.e. in favour of the assessee as to both parts of \nthe question. The Commissioner will pay the costs of the reference to the \nassessees in each of these two matters. Advocate's fee Rs. 250/- in each. \n\nLakshmaiah, J. \n\n 39. The point that arises for determination in this reference pertains to the \ninterpretation of S. 187 of the Income-tax Act, 1961. \n\n 39-A. \"The main question\" that we have to consider on the facts of the two \ncases referred, as formulated by My Lord Chief Justice, is \"the effect of the \nprovisions of s. 187 (2) of the Income-tax Act, when under the provisions of the \nPartnership Act, a firm is dissolved.\" \n\n 40. But the crucial problem that requires solution into this reference is \nwhether it can be said that \"a change had occurred in the constitution of a firm\", \nwithin the meaning of that expression as occurring in S. 187 of the Income-tax \nAct, 1961 when a partner dies, \"in such circumstances that one or more of the \npersons who were partners of the firm before the change continue as partner or \npartners after the change.\" \n\n 41. In other words, to put it differently the question is whether, if a partner \ndies, he does not cease to be a partner under S. 187 (2) of the Income-tax \nAct. \n\n 42. The problem of interpretation can be approached both textually as well \nas contextually. \n\n 1. TEXTUAL APPROACH: \n\n \"A Statute is the will of the legislature, and the fundamental \nrule of interpretation to which all others are subordinate, is that a statute is to be \nexpounded 'according to the intent of them that made it.' If the words of the \nstatute are in themselves precise and unambiguous no more is necessary than to \nexpound those words themselves in such case best declaring the intention of the \nlegislature. The object of all interpretation of a statute is to determine what \nintention is conveyed, either expressly or impliedly, by the language used, so far \nas is necessary for determining whether the particular case or state of facts \npresented to the interpreter falls within it.............................The safer and more \ncorrect course of dealing with a question of construction is to take the words \nthemselves and arrive, if possible, at their meaning without, in the first place, \nreference to cases.......................... \n\n When the language is not only plain but admits of but one meaning, the \ntask of interpretation can hardly be said to arise. It is not allowable, says Vattel, \nto interpret what has no need of interpretation. Absoluta Sententia Expositore \nnon Indiget. Such language best declares, without more, the intention of the law \ngiver, and is decisive of it. The rule of construction is 'to intend the legislature to \nhave meant what they have actually expressed.\" (Maxwell on The Interpretation \nof Statutes - Eleventh Edition, pages 1 to 4). \n\n 43. Section 187 of the Income-tax Act, 1961 (referred to hereinafter as the \nAct) reads: \n\n \"187. Change in constitution of a Firm.- \n\n (1) Where at the time of making an assessment under S. \n143 or S. 144 it is found that a change has occurred in the constitution of a firm, \nthe assessment shall be made on the firm as constituted at the time of making \nthe assessment : \n\n Provided that \n\n \n\n (i) the income of the previous year shall, for the purposes of \ninclusion in the total incomes of the partners, be apportioned between the \npartners, who, in such previous year, were entitled to receive the same; and \n\n \n\n (ii) when the tax assessed upon a partner cannot be recovered from him, it \nshall be recovered from the firm as constituted at the time of making the \nassessment. \n\n 2. For the purposes of this section, there is a change in the constitution of \nthe firm.................... \n\n (a) if one or more of the partners cease to be partners or one \nor more new partners are admitted, in such circumstances that one or more of \nthe parsons who were partners of the firm before the change continue as partner \nor partners after the change; or \n\n \n\n (b) where all the partners continue with a change in their respective \nshares or in the shares of some of them.\" \n\n 44. Chapter XVI of the Act wherein the above section occurs deals with \n\"special provision applicable to firms\" with regard to assessment. Section 182 \nprovides for assessment of registered firms and S. 183, for assessment of \nunregistered firms. Sections 184 to 186 deal with \"registration of firms.\" \n\n 45. Of the remaining other three sections in that Chapter, S. 187 deals \nwith \"Change in constitution of a firm,\" S. 188, with \"succession of one firm by \nanother firm\", and S. 189, with \"firm dissolved or business discontinued.\" \n\n 46. Chapter IV deals with the general 'procedure for assessment.' Section \n139, the first section under that Chapter provides for the return of total income by \nan assessee. \n\n 47. Where a return has been made under S. 139, S. 143 provides for the \nmaking of an assessment of the assessee by the Income-tax Officer. \n\n 48. Where there is failure on the part of the assessee to make the return \nunder s. 139, or to comply with some or all of the requirements of Ss. 142 & 143, \ns. 144 provides for the making of a best judgement assessment by the Income-\ntax Officer. \n\n 49. Where at the time of making an assessment under S. 143 or S. 144, it \nis found that a change has occurred in the constitution of a firm the assessment \nshall have to be made under S. 187 on the firm as constituted at the time of \nmaking the assessment. \n\n 50. As to when such a change in the constitution of the firm takes place, \nsub- sec. (2) of S. 187 provides by saying, leaving the immaterial portion, \n\n \"For the purposes of this section, there is a change in the \nconstitution of the firm - if one......of the partners cease to be partners................in \nsuch circumstances that one or more of the persons who were partners of the \nfirm before the change continue as partner or partners after the \nchange.\" \n\n 51. Assuming that \"such circumstances\" as mentioned in sub-s. (2) exist, \nthe question is whether there can be a change in the constitution of the firm, if \none of the partners dies and whether on account of the death of such a partner, \nhe does not cease to be a partner. \n\n 52. The statutory expression needing explanation is 'if one...........of the \npartners cease to be partners'. When does a partner cease to be a partner ? \nWhether a partner does not cease to be a partner on account of his death, are \nthe questions to be answered. Put that way, not much dialectical dexterity, nor \nany interpretative ingenuity is needed to reach the conclusion that a partner \nceases to be a partner on account of his death as a partner cannot be said to \ncontinue as a partner after his death excepting it be when the legislature so \nprovides by any fiction, and it is nobody's case that the legislature so \nprovided. \n\n 53. The aforesaid statutory expression as to when \"a partner ceases to be \na partner\" and whether a partner does not cease to be a partner after his death, \ndo not admit any dubity or ambiguity as to justify a need to have resort to any \nextrinsic material such as what is contained in the Partnership Act. \n\n 54. The words of the statute are in themselves precise and unambiguous. \nNo more is necessary than to expound those words in their natural and original \nsense, as the words themselves best declare the intention of the legislature. The \nsafer and correct course of dealing with a question of construction is to take the \nwords themselves and arrive at their meaning, without in the first place, reference \nto cases and other extrinsic material. When the language is not only plain but \nadmits of one meaning, the task of interpretation can hardly be said to arise. It is \nnot allowable to interpret what has no need of interpretation. \n\n 55. I am therefore of the opinion that when a partner of a firm dies, such a \npartner ceases to be a partner and as such there will be \"a change in the \nconstitution of the firm\" under sub-sec. (2) of s. 187 of the Act provided that one \nor more of the persons who were partners of the firm before the change continue \nas partner or partners after the change. \n\n 56. The contextual theory of interpretation of the S. 187 of the Act to which \nwe now propose to advert does not in any way militate against the aforesaid \nview. \n\n 57. How far reference to and reliance upon the concepts of Partnership \nAct militate against the aforesaid interpretation of S. 187 of the Act is a question \nproposed to be answered under the contextual theory of interpretation. \n\n CONTEXTUAL APPROACH: \n\n 58. Consolidating Act - Principles and Presumptions of Interpretation: \n\n The Income-tax Act, 1961 as its preamble discloses, is an \nAct to consolidate and amend the law relating to income-tax and super-tax. This \nAct by S. 297 repealed the Indian Income-tax Act, 1922 which also contained the \nsame preamble. \n\n 59. In Ravulu Subba Rao v. Commr. of Income-tax, \n Justice Venkatarama Ayyar speaking for the Supreme Court \nobserved, referring to the Indian Income-tax Act, 1922: \n\n \"The Act is, as stated in the preamble, one to consolidate \nand amend the law relating to income-tax.\" \n\n After referring to the rule of construction to be applied to such a statute as \nstated by Lord Herschell in Bank of England v. Vagliano Bros., (1891 AC 107) \nthe learned Judge stated at page 170 of the report thus:- \n\n \"We must therefore construe the provisions of the Indian \nIncome-tax Act as forming a Code complete in itself and exhaustive of the \nmatters dealt with therein, and ascertain what their true scope is.\" (Emphasis \nsupplied). \n\n 60. The House of Lords decision in Bank of England v. Vagliano Bros., \n(1891) A C P 107 at pp. 144 and 145 concerned with the interpretation of the \nBills of Exchange Act, 1882 which codified the law relating to Negotiable \nInstruments. Lord Herschell laid down the proper rule of construction thus: \n\n \"I cannot bring myself to think that this is the proper way to \ndeal with such a statute as the Bills of Exchange Act, which was intended to be a \ncode of the law relating to negotiable instruments. I think the proper course is in \nthe first instance to examine the language of the statute and to ask what is its \nnatural meaning, uninfluenced by any considerations derived from the previous \nstate of the law, and not to start with inquiring how the law previously stood, and \nthen, assuming that it was probably intended to leave it unaltered, to see if the \nwords of the enactment will bear an interpretation in conformity with this \nview. \n\n If a statute, intended to embody in a code a particular branch of the law, is \nto be treated in this fashion, it appears to me that its utility will be almost entirely \ndestroyed, and the very object with which it was enacted will be frustrated. The \npurpose of such a statute surely was that on any point specifically dealt with by it \nthe law should be ascertained by interpreting the language used instead of as \nbefore, by roaming over a vast number of authorities in order to discover what \nthe law was, extracting it by a minute critical examination of the prior \ndecisions.\" \n\n 61. In Rogers Pratt Co. v. Secretary of State (AIR 1925 Cal 34 at p. \n41 (FB) ). A full Bench of the Calcutta High Court considered the principles of \ninterpretation applicable to the interpretation of Income-tax Act, 1918, Mukerji, J. \nobserved at page 41 of the report:\n\n \"A perusal of the several enactments makes it clear that the \nIncome-tax Act of 1918 (Act VII of 1918) effected a radical change in the scheme \nand scope of operation of this branch of law. The Act of 1918 professes to be a \nconsolidating and amending statute; on any point specifically dealt with in the Act \nthe law is to be ascertained by interpreting the language used in the statute in its \nnatural meaning, uninfluenced by considerations derived from the previous state \nof the law; Administrator General v. Premlal ( (1895) ILR 22 Cal 788 (PC) ). \nNorendra v. Kamalbasini ( (1896) ILR 23 Cal 563 (PC) ) and Ramdas v. \nAmarchand & Co. (1916) ILR 40 Bom 630 : (AIR 1916 PC 7). Reference to the \nprevious state of the law would be permissible for the purpose of aiding in the \nconstruction of a new statute if any provision therein is of doubtful import: Bank of \nEngland v. Vagliano bros (1891 AC 107) Robinson v. Canadian Pacific Rly. Co. \n(1892 AC 481) and Morsey Docks v. Cameron (1864) 11 HLC 443.\" \n\n \"The purpose of a consolidating statute is to present the whole body of the \nstatutory law on a subject in complete form, repealing the former statutes.\" \n\n (Halsbury's Laws of England, Third Edition Vol. 36 Para 538 at Page \n366). \n\n 62. The following passages on consolidating statute and their \ninterpretation from Maxwell on The Interpretation of Statutes, Twelfth Edition are \nvery instructive. \n\n \"Consolidating Statutes. \n\n A consolidating statute is one which collects the statutory provisions \nrelating to a particular topic, and embodies them in a single Act of Parliament, \nmaking only minor amendments and improvements. \n\n In the construction of a consolidation Act, the presumption that Parliament \ndoes not intend to alter the existing law applies with particular force. For the \nobject of the Act was merely to 'reproduce the law as it stood before,\" (at pp. 20, \n21) \n\n xx xx xx xx xx xx \n \n\n \n\n In interpreting a consolidating Act, account is taken of judicial decisions on \nprovisions contained in the statutes now codified. 'One has to remember', said \nLord Evershed M. R., that Parliament must be taken to have been aware of the \ndecisions of their courts in the meantime.\" (at. Page 24) \n\n xx xx xx xx xx xx \n \n\n \n\n In the case of a consolidating Act there is a particularly strong \npresumption that it does not alter the law contained in the statutes which it \nreplaces. The reason is that it is the invariable practice of Parliament to require \nfrom those who have preferred a consolidation Bill an assurance that it will make \nno substantial change in the law and to have that checked by a committee.\" (at \npp. 116, 117). \n\n \"The statutes dealing with a particular subject may constitute \na special code in regard thereto. Among the objects intended to be attained by \nthe codification of laws are the collection and embodiment in one statute of all the \nlaws and parts of laws on the same subject, which had previously been enacted \nand which it is intended to continue in force.\" (page 59). \n\n Xx xx xx xx xx xx \n \n\n \n\n \"Codes, Compilations, and Revisions.- It has generally been held that \ncodes and compiled or revised statutes intended to express either the whole of \nthe general laws of a state, or of some great sub-division of such laws, may be \nadopted by one act under a general title without violating a constitutional \nprovision prohibiting the enactment of any bill containing more than one subject \nand requiring that subject to be expressed in the title. In this respect, it has been \ndeclared that any construction of these with the very commendable policy of \nincorporating the entire body of statutory law on one general subject in a single \nact, instead of dividing it into a number of separate acts, would not only be \ncontrary to its spirit but also seriously embarrassing to honest legislation\" (p. \n184). \n\n (From 'American Jurisprudence' Vol 50) \"Consolidation is the reduction \ninto a systematic form of the whole of the statute law relating to a given subject, \nas illustrated or explained by judicial decisions. 'The very object of consolidation \nis to collect the statutory law bearing upon a particular subject, and to bring it \ndown to date, in order that it may form a useful code applicable to the \ncircumstances existing when the consolidating Act was passed. 'Referring to S. \n192 of the Supreme Court of Judicature (Consolidation ) Act, 1925, Lord \nHanworth M. R. Said: 'the object therefore of the Act was to consolidate and \nreproduce the law as it stood before the passing of that Act., \" (at pp. 361., \n362). \n\n Xx xx xx xx xx xx \n \n\n \n\n \"One has to begin\" (said Evershed M. R. In 1958) \"by the consideration \nthat the Judicature Act is a consolidating Ac t and one does not look for \nsubstantial changes in the law..................in a consolidating Act.\" \n\n And of the Trustee Act 1925 Romer L. J. Said: \"It is a consolidation Act......It \nis therefore, extremely unlikely, to say the least of it, that it effected any \nsubstantial change in the pre-existing law.\" In Galloway v. Galloway Lord \nRadcliffe said: \"This is a consolidation Act, the function of which is to repeat but \nnot to amend the existing statute law.\" (Pp. 363 & 364) (Craies on Statute-law \nSeventh Edition). Law Commission of India-Twelfth Report on Income-tax Act, \n1922. \n\n 63. The Income-tax Act, 1961 came into force on April, 1 1962,. It is based \non the recommendations contained in the law Commission's 12th Report, \n1958. \n\n 64. In this connection, it is very interesting and instructive to notice what \nthe Law Commission has said in their report about Chapter XVI of the Act which \ndeals with the special provisions applicable to Firms (wherein Ss. 187 to 189 \noccur) in para 65 at page 22 of their report: \n\n \"65. Chapter XVI Special Provisions of the Act applicable to \nfirms have been gathered together in this chapter. This will enable the partners \nand others to ascertain the law from one Chapter instead of searching for \nprovisions, dispersed all over the Act. \n\n The principal changes made in this Chapter are given below: \n\n (1) The provisions contained at present in the Rules \nregarding the registration and cancellation of registration of firms, have been \nincorporated in the Act. \n\n (2) The provision for fresh application for registration every year has been \ndeleted, as it entails hardship. A declaration that there has been no change in the \nconstitution of the firm will suffice. \n\n (3) There was some difficulty in the determining when there is a change in \nthe constitution of a firm and when there is a succession. The specific \ncircumstances which result in a change in the constitution of a firm have now \nbeen defined\". \n\n MACHINERY PROVISIONS- PRESUMPTIONS:- \n\n 65. Sections 187 to 189 in chapter XVI of the Act relate to assessment of \nfirms. They are not changing sections. They are only machinery provisions. \n\n 66. Lord Normand speaking for the Judicial Committee of the Privy \nCouncil, while interpreting S. 34 of the Indian Income -Tax Act, 1922 in Commr. \nOf Income-tax Bengal v. Mahalingam Ramjidas (1940) 8 ITR 442 at p. 448 : (AIR \n1940 PC 124 at pp. 126, 127 ) observed:\n\n \"The section, although it is part of the taxing Act, imposes no \nchanges on the subject and deals merely with the machinery of assessment . In \ninterpreting provisions of this kind the rule is that that construction should be \npreferred which makes the machinery workable, Ut Res Valeat Potius Quam \nPereat.\" (At p. 448) \n\n \n\n 67. Justice Sarkar (as he then was) laid down the following rule of \nconstruction for machinery provisions in a taxing statute in Gusahai Saigal v. \nCommr. of Income -tax, Punjab .\n\n \" Now it is well recognised that the rule of construction on \nwhich the assessee relies applies only to a taxing provision and has no \napplication to all provisions in a taxing statute. It does not, for example, apply to a \nprovision not, for example, apply to a provision not creating a charge for the tax \nbut laying down the machinery for its calculation or procedure for its collection. \nThe provisions in a taxing statute dealing with machinery for assessment have to \nbe construed by the ordinary rules of construction, that is to say, in accordance \nwith the clear intentions of the legislature which is to make a charge levied \neffective. Reference may be made to a few cases laying down this distinction. In \nCommr. of Income -tax v. Mahalingam Ramjidas, (AIR 1940 PC 124) it was said \n:- \n\n \" The section , although it is part of a taxing Act, impose no \ncharge on the subject, and deals merely with the machinery of assessment. In \ninterpreting provisions of this kind the rule is that that construction should be \npreferred which makes the machinery workable. Ut Res Vleat Quam Pereat. \n\n In India United Mills Ltd. v. Commr. of Excess Profits Tax This court observed :-\n\n \" That section is, it should be emphasised, not a changing \nsection, but a machinery section and a machinery section should be so \nconstrued as to effectuate the changing sections\". \n\n 68-69. The aforesaid rule of construction laid down by Sarkar, J. (As he \nthen was ) was referred to with approval by Justice Subbarao (as he then was ) \nin a latter case Banarasi Devi v. Income-tax Officer .\n\n CONTEXTUAL THEORY OF CONSTRUCTION: \n\n 70. The Judicial Committee of the Privy Council in Canada Sugar \nRefining Co. V. Reg. (1898) AC 735 speaking through Lord Davey Observed at \np. 741 of the report:- \n\n \" Every clause of a statute should be construed with \nreference to the context and the other clauses of the Act, so as, so far as \npossible, to make a consistent enactment of the whole statute or series of \nstatutes relating to the subject-matter\". \n\n 71. The following passages on principles of interpretation from Halsbury's \nLaws of England Third Edition Volume 36 may be usefully referred:- \n\n \" The dominant purpose in construing a statute is to \nascertain the intention of the legislature as so expressed. This intention, and \ntherefore the meaning of the statute, is primarily to be sought in the words used \nin the statue itself , which must, if they are plain and unambiguous, be applied as \nthey stand, ............... \n\n If the words of a statute are clear and unambiguous, they themselves \nindicate what must be taken to have been the intention of Parliament and there is \nno need to look elsewhere to discover their intention or their meaning. (pp. 337, \n338) \n\n xx xx xx xx xx xx \n \n\n \n\n Although the words of a statute are normally to be construed in their \nordinary meaning, due regard must be had to their subject matter and object, and \nto the occasion on which and the circumstances with reference to which they are \nused, and they should be construed in the light of their context rather than in \nwhat may be either their strict etymological sense or their popular meaning apart \nfrom that context.\" (At p. 394). \n\n REFERENTIAL LEGISLATION INCORPORATING THE PROVISIONS OF \nPARTNERSHIP ACT INTO INCOME-TAX ACT - LIMITS AND EXTENT: \n\n 72. Unless the context otherwise requires, the Income-tax Act, 1961 \nprovides in the definition clause by S. 2 (230 that \"firm\", \"partner\" and \n\"partnership\" have the meaning respectively assigned to them in the Indian \npartnership Act, 1932; but the expression 'partner' shall also include 'any person \nwho, being a minor, has been admitted to the benefits of partnership\" \n\n 73. The clue to the proper appreciation of the impact of Partnership Act on \nthe Income-tax Act, particularly on Section 187 thereof, is to be found only in a \ncorrect appraisal of what is called the theory of \"Referential Legislation.\" \n\n 74. The earliest case recognising this principle was R. v. Merionethshire \nInhabitants (1844) 6 QB 343. There, statute 43 G 3 E. 59 applied statute 13 G. C. \n78 \"as fully and effectually as if the same and every part thereof were hereinafter \nrepealed and re-enacted.\" \n\n 75. The classic exposition of the subject by Lord Esher, Master of Rolls in \nthe year 1866 in Re Wood's Estate; Exparte Her Majesty's Commrs. of Works & \nBuildings (1886) 31 Ch. D 607 was followed in subsequent decisions, here, \nthere, everywhere, set the trend in this branch of law. \n\n 76. In that case, Act 18 and 19 Victoria Ch. 95 was passed in 1855, after \nthe passing of the 'lands Clauses Act.' The material Sections of the Act of 1855 \nare 9th and 11th. By the 9th section, certain Sections of the Act of 1840 are \nincorporated into the Act of 1855. The Act of 1840 was passed before the Lands \nClauses Act. Considering the legal effect of the 9th Section of the Act of 1855 \nwhich brings into that Act those sections of the former Act. Lord Esher, M. R. \nSaid: \n\n \"..................It is to put them into the Act of 1855 just as if \nthey had been written into it for the first time. If a subsequent Act brings into itself \nby reference some of the clauses of a former Act, the legal effect of that, as has \noften been held, is to write those sections into the new Act just as if they had \nbeen actually written in it with the pen, or printed in it, and, the moment you have \nthose clauses in the later Act, you have no occasion to refer to the former Act at \nall. For all practical purposes, therefore, those sections of the Act of 1840 are to \nbe dealt with as if they were actually in the Act of 1855.\" (Pp. 615, \n616). \n\n 77. Speaking about the Legislative practice to incorporate by reference, \nthe Supreme Court of India said in A. T. Corporation v. Asstt. Collector, Customs \n: \n\n \"It is a well accepted Legislative practice to incorporate by \nreference, if the Legislature so chooses, the provisions of some other Act in so \nfar as they are relevant for the purposes of and in furtherance of the scheme and \nobject of that Act .....................\" \n\n 78. The same practice has been obtaining in the United States of America, \nMr. Justice Sanford delivering the opinion of the Supreme Court of America said \nin Engel v. Devenport (1925) 70 Law Ed. 813 at p. 817 : \n\n \"The adoption of an earlier statute by reference makes it as \nmuch as part of the later act as though it had been incorporated at full length. \nKendall v. United States, (1838) 12 Pet. 524 at p. 625: 9 Law ed. 1181, 1221; re \nHeath, 144 U.S. at pp. 92, 94 : 36 Law ed. 358 at p. 359: 12 Sup Ct. Rep. 615; \nInterstate Concol. Street R. Co. v. Massachusetts, (1907) 207 U. S. 79, 85: 52 \nLaw ed. 111, 114 : 28 Sup Ct. Rep. 26 : 12 Ann. Cas. 555: It brings into the later \nact \"all that is fairly covered by the reference\" (Panama R. Co. Case, (1923) 264 \nU. S. 375 (392) : 68 Law ed. 748 (755) : 44 Sup. Ct. Rep. 391); that is to say all \nthe provisions of the former act which, from the nature of the subject matter, are \napplicable to the later act.\" \n\n \"The adoption of an earlier statute by reference makes it as much part of \nthe later Act as though it has been incorporated at Full length.\" (American \nJurisprudence Vol. 50 at p. 58). \n\n \"Where a statute incorporates by reference the whole or any part of an \nearlier statute, the provisions so incorporated are in general to be construed as \nthey would be if set out in full in the later statute.\" (Halsbury's Laws of England-\nThird Edition Volume 36 at p. 404). \n\n \"The effect of incorporating one Act with another is presumably to make \nthem parts of the same Code.\" (Craies on Statute Law-Seventh Edition at p. \n360). \n\n LEGAL PERSONALITY OF A FIRM: \n\n Text Books: \n\n 79. Speaking about the legal conception of personality Sir John Salmond \nsaid in his 'Jurisprudence' Twelfth Edition in paragraph 61 at page 299: \n\n \"So far as legal theory is concerned, a person is any being \nwhom the law regards as capable of rights or duties. Any being that is so capable \nis a person, even though he be a man. Persons are the substances of which \nrights and duties are the attributes. It is only in this respect that persons possess \njudicial significance, and this is the exclusive point of view from which personality \nreceives legal recognition. \n\n Persons as so defined are of two kinds, distinguishable as natural and \nlegal. A natural person is a human being. Legal persons are beings, real or \nimaginary, who for the purpose of legal reasoning are treated in greater or less \ndegree in the same way as human beings.\" \n\n 80. G. W. Paton in his Text Book of 'Jurisprudence' Third Edition at page \n247 said : \n\n \"................Most of the matters ............... involve not tangible \nthings which exist in the world around us independently of man, but intangible \nthings created in one way or another by man for his purposes as a social animal. \nNotions and concepts like rights and duties, juristic acts, remedial rights, \nproperty, or possession, although they may be concerned with tangible things in \none way or another, are not themselves tangible things but represent or stand for \nor serve or describe certain relationships.\" \n\n Xx xx xx xx xx xx \n \n\n \n\n \"It is difficult to conceive of rights or duties except as going to the \nrelationships between persons.\" \n\n \"If by persons we meant always human beings that perhaps there would \nnot need to be much discussion about legal personality. It is clear, however, that \nthe law creates not only its own rules for determining the relationships between \npersons but its own rules for determining what entitles shall be recognised as \npersons for the purposes of the law. For the purposes of the law an idol, a trade \nunion, or a 'one man' commercial company may be recognised as persons for \nthe purposes of legal relationships, distinct from any human beings connected \nwith them.\" \n\n 81. Hans Kolson in his \"General Theory of Law & State\" under the heading \n\"The Legal Person\" said at page 93 : \n\n \"The concept of a legal person is another general concept \nused in the presentation of positive law and closely related to the concepts of \nlegal duty and legal right. The concept of the legal person - who, by definition, is \nthe subject of legal duties and legal rights-answers the need of imagining a \nbearer of the rights and duties. Juristic thinking is not satisfied with the insight \nthat a certain human action or omission forms the contents of a duty or a right. \nThere must exist something, that 'has' the duty or the right. In this idea, a general \ntrend of human thought is manifested. Empirically observable qualities, too, are \ninterpreted as qualities of an object or a substance, and grammatically they are \nrepresented as predicates of a subject. This substance is not an additional entity. \nThe grammatical subject denoting it is only a symbol of the fact that the qualities \nform a unity.\" \n\n Xx xx xx xx xx xx \n \n\n \n\n \"This duplication of the object of knowledge is characteristic of the \nprimitive mythological thinking which is called animism. According to the animistic \ninterpretation of nature, every object of the perceptual world is believed to be the \nabode of an invisible spirit who is the master of the object, who \"has\" the object in \nthe same way as the substance has its qualities, the grammatical subject its \npredicates. This the legal person, as ordinarily understood, also \"has\" its legal \nduties and rights in this same sense. The legal person is the legal substance to \nwhich duties and rights belong as legal qualities. The idea that \"the person has\" \nduties and rights involves the relation of substance and quality. \n\n In reality, however, the legal person is not a separate entity besides 'its' \nduties and rights, but only their personified unity or - since duties and rights are \nlegal norms - the personified unity of a set of legal norms.\" \n\n 82. Ernest Barker in his introduction to 'Natural Law and the Theory of \nSociety\" by Otto Gireke said at page IXIII. \n\n \"Legal personality, as distinct from Psychological and ethical \npersonality, is a power or capacity for legal action - a capacity recognised by law \n(and only existing when recognised by law) for originating such action as belongs \nto the scheme of law. From this point of view the existence of legal personality \nnot only presupposes, as that of moral personality does the presence of human \nsociety; it also presupposes the presence of an organised legal association. It is \na thing bound up with rights; in fact it is a capacity for rights; and rights, in the full \nsense of the word, are only possible in such an association. Now rights may \nbelong, and obviously do belong, to groups as well as to individuals. In the field \nof the organised legal association we must therefore assign legal personality to \ngroups as well as to individuals, and here we have to admit that there are Group-\npersons as well as individual persons. \n\n Xx xx xx xx xx xx \n \n\n \n\n \"Similarly many of the groups contained in the State are legal persons. \nThey have a capacity for rights; and a capacity for rights means a legal \npersonality.\" \n\n 83. L. C. B. Gower in his book \"The Principles of Modern company Law\" \nThird Edition said at page 67 :- \n\n \"...................Statutes of the early nineteenth century enabled \nthe Crown by letters patent to confer all or any of the advantages of incorporation \nwithout actually granting corporate personality, and similarly as statute may \nconfer many of these privileges without actual incorporation. In fact, this has \nbeen done in several cases, with the result that between the two extremes of an \nunincorporated club or society and the corporation there are many hybrids, which \nthough formally unincorporated, possess a greater or lesser number of the \nattributes of a corporation. Among these hybrids even partnership ought perhaps \nto be included for the partners can now sue or be sued in the firm's \nname.\" \n\n Case Law : \n\n 84. Bonsor v. Musicians' Union, (1956 AC 104) is a case decided by \nHouse of Lords where Lord Keith of Avanthilam referring with approval the \ndecision of Farwell, J. in Taff Vale Rly. case, (1901 AC 426) observed at page \n150 about the conception of legal entity thus: \n\n \"The view which I have endeavoured to formulate is, I think, \nentirely consistent with the decisions and dicta in earlier trade union cases which \nhave come before this House. In the Taff Vale Rly, case Farwell J. whose \njudgment was upheld by this House, does not describe a registered trade union \nas a legal entity, though he does so in another case to which I refer later. He \nuses language, however, from which I think the conception of such a union as a \nlegal entity arose. For instance, he says : Now although a corporation and an \nindividual or individuals may be the only entity known to the common law who \ncan sue or be sued, it is competent to the legislature to give to an association of \nindividual which is neither a corporation nor a partnership nor an individual a \ncapacity for owning property and acting by agents, and such capacity in the \nabsence of express enactment to the contrary involves the necessary correlative \nof liability to the extent of such property for the acts and defaults of such agents. \nIt is beside the mark to say of such an association that is unknown to the \ncommon law. The legislature has legalised it, and it must be dealt with by the \ncourts according to the intention of the legislature.\" In other places he refers to it \nas a creature of statute. In this House Lord Halsbury L. C. Expressly adopted the \njudgment of Farwell J. and in a short sentence referred to such a trade union as \na thing created by the legislature, Lord MacNaghten, Lord Shand and Lord \nBrampton also accepted the judgment of Farwell, J.\" \n\n 85. The Judicial Committee of the Privy Council observed about the 'legal \npersonality' thus in Bhagwanji v. Alembic Chemical works, (AIR 1948 PC 100) at \npage 101. Sir John Beaumont observed :\n\n \"It is true that the Indian Partnership Act goes further than \nthe English Partnership Act, 1890, in recognising that a firm may possess a \npersonality distinct from the persons constituting it; the law in India in that respect \nbeing more in accordance with the law of Scotland, than with that of England. But \nthe fact that a firm possesses a distinct personality does not involve that the \npersonality continues unchanged so long as the business of the firm continues. \nThe Indian Act, like the English Act, avoids making a firm a corporate body \nenjoying the right of perpetual succession.\" \n\n 86. Chief Justice Subba Rao of Andhra Pradesh High Court (as he then \nwas) observed in T. Jalayya v. N. Venkateswara Rao. (AIR 1957 Andh Pra 658) \nat pages 660 and 661 thus :-\n\n \"At the outset it is necessary to ascertain the legal \ncharacteristics of a firm. It is settled law that a firm is not legal entity but only \nconsists of the individual partners for the time being. The essential characteristic \nof a firm is that each partner is a representative of the other partners. Each of the \npartners is an agent and a principal. He is an agent in so far as he can bind the \nother partners by his acts within the scope of the partnership business and he is \na principal to the extent that he is bound by the acts of the other partners. The \nliabilities of the firm can be enforced against each of the partners personally. The \naforesaid legal concept is the foundation of the decision of the Judicial \nCommittee in the matter of Stuart Samual, (1913) AC 514.\" \n\n 87. Our Supreme Court speaking through Justice Mahajan (as he then \nwas) in Commr. of Income-tax v. A. W Giggies & Co., thus :\n\n \"It is true that under the law of partnership a firm has no legal \nexistence apart from its partners and it is merely a compendious name to \ndescribe its partners but it is also equally true that under that law there is no \ndissolution of the firm by the mere incoming or outgoing of partners. A partner \ncan retire with the consent of the other partners and a person can be introduced \nin the partnership by the consent of the other partners. The reconstituted firm can \ncarry on its business in the same firm's name till dissolution. The law with respect \nto retiring partners as enacted in the Partnership Act is to a certain extent a \ncompromise between the strict doctrine of English Common Law which refuses \nto see anything in the firm but a collective name for individuals carrying on \nbusiness in partnership and the mercantile usage which recognises the firm as a \ndistinct person or quasi-corporation. But under the Income-tax Act the position is \nsomewhat different. A firm can be charged as a distinct assessable entity as \ndistinct from its partners who can also be assessed individually.\" \n\n 88. After quoting S. 3 of the Income-tax Act, 1922 the learned Judge \nproceeded to state thus: \n\n \"The partners of the firm are distinct assessable entities, \nwhile the firm as such is a separate and distinct unit for purposes of assessment. \nSections 26, 48 and 55 of the Act fully bear out this position. These provisions of \nthe Act go to show that the technical view of the nature of a partnership, under \nEnglish law or Indian Law, cannot be taken in applying the law of Income-\ntax.\" \n\n 89. Yet on another occasion the Supreme Court of India in Shivram \nPoddar v. Income-tax Officer, \nspeaking through Shah, J. (As he then was) observed (at p. 1097 of AIR) :\n\n \"A firm whether registered or unregistered is recognised \nunder the Act as a unit of assessment (Ss. 3 and 2 (2) and its income computed \nunder cls. (3) and (4) of S. 23 as the income of any other unit.\" \n\n X x x x x x \n \n\n \n\n \"Under the ordinary law governing partnership modification in the \nconstitution of the firm in the absence of a special agreement to the contrary \namounts to dissolution of the firm and reconstitution thereof, a firm at common \nlaw being a group of individuals who have agreed to share the profits of a \nbusiness carried on by all or any of them acting for all, and suppression of the \nagreement brings about an end of the relation. But the Income-tax Act \nrecognises a firm for purposes of assessment as a unit independent of the \npartners constituting it; it invests the firm with a personality which survives \nreconstitution.\" \n\n 90. Dias in his 'Jurisprudence' Fourth Edition at page 340 said : \n\n \"A human being ceases to be a person, in law as in fact, at \ndeath\". \".........A statute can always abrogate the effect of a judicial decision, and \nthe courts regard themselves as bound to give effect to legislation.............\" (at p. \n164). \n\n (Rupert Cross in his 'Precedent in English Law'). \n\n \"A statute is abrogative and can sweep away inconvenient \nrules.\" (At p. 211) (Paton on 'Jurisprudence' third Edition). \n\n 91. We shall now proceed to discuss the problem raised in the aforesaid \nbackground. \n\n 92. The Income-tax Act, 1961 as its preamble discloses, is an Act to \nconsolidate and amend the law relating to income-tax and super-tax. That Act by \nS. 297 repealed the Indian Income-tax Act, 1922. The purpose of consolidating a \nstatute is to present the whole body of the statutory law on a subject in a \ncomplete form repealing the former statutes. There is a strong presumption that \nthe consolidating Act does not alter the law contained in the statutes it replaces. \nWe must construe the provisions of a consolidating Act as forming a code \ncomplete in itself and exhaustive of the matters dealt with therein and ascertain \nwhat their true scope is, as otherwise its utility as a consolidating Act will be \nalmost entirely destroyed and the very object with which it was enacted will be \nfrustrated. \n\n 93. Unless the context otherwise requires, the Act provides in the \ndefinition clause by S. 2 (230 that 'firm', 'partner' and 'partnership' have the \nmeanings respectively assigned to them in the Indian Partnership Act, 1932, but \nthe expression 'Partner' shall also include 'any person who being a minor, has \nbeen admitted to the benefits of partnership.\" \n\n 94. The Partnership Act defines by S. 4 the aforesaid expressions. \n\"Partnership\" is the relation between persons who have agreed to share the \nprofits of a business carried on by all or any of them acting for all.\" Persons who \nhave entered into partnership with one another are called individually 'Partners' \nand collectively 'a firm' and the name under which their business is carried on is \ncalled the 'Firm name'. The expression 'Partnership' does not occur in S. 187 \nand the expression 'Partner' was assigned in the Act an extended meaning. We \nare not now concerned with these two expressions for construing S. 187. The \nexpression 'Firm' contained therein needs explanation and interpretation. \n\n 95. When the Income-tax Act defines 'Firm' to have the same meaning \nassigned to it by the Partnership Act, the legal effect of that is to write \nPartnership Act definition of firm into the Income-tax Act just as if it has been \nactually written in it with the pen or printed in it and the moment you have that in \nthe Income-tax Act, you have no occasion to refer to the Partnership Act at \nall. \n\n 96. Such of those provisions of Partnership Act which were adopted by or \nincorporated into the Income-tax Act through the well-recognised and established \ndevice or referential legislation, must be dealt with as if they were actually in the \nIncome-tax Act, with the judicial Interpretation placed upon those adopted or \nincorporated concepts. There is thus no occasion to spell out any conflict, \napparent or real, between the two Acts as the one was integrated into or \ninterwoven into the warp and woof of the other later Act. For all practical \npurposes, it is the later Income-tax Act alone that has got to be looked into. \n\n 97. Under the law of Partnership, a firm has no legal existence apart from \nits partners and it is merely compendious name to describe its partners. But \nunder the Income-tax Act, the position is somewhat different. A firm can be \ncharged as a distinct assessable entity as distinct from its partners who can also \nbe assessed individually. Provisions contained in S. 26 of Act of 1922 \ncorresponding to S. 187 of the Act go to show that the technical view of the \nnature of a partnership cannot be taken in applying the law of Income-tax. A firm, \nwhether registered or unregistered, is recognised under the Income-tax Act as a \nunit of assessment and its income computed as the income of any other unit. \nLegal personality is the gift of law, be it common law or statutory law. With its \nabrogative force, the legislature can confer legal personality on any entity \nabsolutely or qualifiedly. The Income-tax Act invests a firm with a personality \nwhich survives its reconstitution. \n\n 98. Section 187 occurs in Chap. XVI of the Act which deals with special \nprovisions applicable to firms. The Income-tax Act, 1961 is based on the \nrecommendations contained in the law Commission's Twelfth Report, 1958. As \nper that report, the provisions pertaining to firms, whereever they are contained \nin the Act or the Rules made thereunder, were all collected together in that \nchapter. As there was some difficulty in determining when there is a change in \nthe constitution of a firm and where there is suggestion, specific circumstances \nwhich result in a change in the constitution, of a firm have been defined in S. 187 \n(2) of the Act. This repealing Act does not thus purport to alter the effect of the \nprovisions of the repealed Act. It is, as it should be, having regard to the \nconsolidating and amendatory nature of the Act. \n\n 99. Chapter XVI of the Act containing Ss. 187 to 189 relate to assessment \nof firms. They are not charging sections. They are only machinery provisions. \nThe principles and presumptions of interpretation of charging provisions are not \napplicable to machinery provisions though contained in the taxing statute. They \nare to be interpreted just like any other provision of law. \n\n 100. With the aforesaid background, we shall now interpret S. 187 of the \nAct. \n\n 101. Where at the time of making an assessment under s. 143 or S. 144, it \nis found that a change has occurred in the constitution of a firm, the assessment \nshall have to be made under S. 187 on the firm as constituted at the time of \nmaking the assessment. As to when such a change takes place, s. 187 (2) \nprovides by saying that, \"for the purpose of this section, there is a change in the \nconstitution of the firm, if one of the partners ceases to be partners, in such \ncircumstances that one or more of the persons who were partners of the firm \nbefore the change continue as partner or partners after the change.\" \n\n 102. \"A human being ceases to be a person in law, as in fact, at death\". A \npartner of a firm ceases to be a partner on his death. Therefore, whenever a \npartner of a firm dies, such a partner ceases to be a partner and as such there \nwill be \"change in the constitution of the firm\" under sub-s (2) of S. 187 of the Act, \nprovided that one or more of the persons who were partners of the firm before \nthe change continue as partner or partners after the change. \n\n 103. I am fortified in this view of mine by the decisions of the Supreme \nCourt rendered while interpreting S. 26 of Act of 1922 also which corresponds to \nS. 187 of the Act excepting it be in some particular matter to which we shall \nadvert to during the course of this judgment. The facts of these cases are given \nin the judgment of My Lord the Chief Justice. \n\n 104. In commr. of Income-tax v. A. W. Figgies & Co. \n(supra) the following observations of Mahajan, J. (As he then was) while \ninterpreting S. 25 (4) of 1922 Act are relevant (at page 456) : \n\n \"The Section does not regard a mere change in the \npersonnel of the partners as amounting to succession and disregards such a \nchange. It follows from the provisions of the section that a mere change in the \nconstitution of the partnership does not necessarily bring into existence a new \nassessable unit or a distinct assessable entity and in such a case there is no \ndevolution of the business as a whole.\" \n\n 105. Adverting to the substratum of the business the firm was carrying on, \nthe learned Judge proceeded to observe (at p. 456 of AIR) : \n\n \"The true question to decide is one of identity of the unit \nassessed under the Income-tax Act, 1918, which paid double tax in the year \n1939, with the unit to whose business the private limited company succeeded in \nthe year 1947. We have no doubt that the Tribunal and the High Court were right \nin holding that in spite of the mere changes in the constitution of the firm the \nbusiness of the firm as originally constituted continued as tea brokers right from \nits inception till the time it was succeeded by the limited company and that it was \nthe same unit all through, carrying on the same business, at the same place and \nthere was no cesser of that business or any change in the unit.\" \n\n X x x x x x \n \n\n \n\n \"To all intents and purposes the firm as reconstituted was not a different \nunit but it remained the same unit in spite of the change in its constitution.\" \n\n 106. It is pertinent to note that the definition of 'partnership' in S. 4 of the \nPartnership Act lays particular stress upon the 'business being carried on by all \nthe partners or any of them acting or all' with which aspect alone the Income-tax \nAct is primarily concerned and that aspect of the definition was not allowed to \nundergo any transformation in the Act though such transformation took place in \nthe definition of 'partner' and 'firm' either statutorily or judicially. \n\n 107. In Shivram Poddar v. Income-tax Officer, \n(supra) the Supreme Court was considering S. 26 (1) and (2) of Income-tax Act, \n1922. Justice Shah (as he then was) observed at page 827 of the report (51 ITR) \n: (At page 1098 of AIR SC) :\n\n \"Section 44 is, therefore, attracted only when the business of a \nfirm is discontinued i.e. when there is complete cessation of the business and not \nwhen there is a change in the ownership of the firm, or in its constitution, \nbecause by reconstitution of the firm, no change is brought in the personality of \nthe firm, and succession to the business and not discontinuance of the business \nresults.\" \n\n The learned Judge proceeded further to observe at p. 828 (of ITR) : (at page \n1098 of AIR SC) : \n\n \"Where the firm is dissolved, but the business is not \ndiscontinued, there being change in the constitution of the firm, assessment has \nto be made under S. 26 (1) and if there be succession to the business, \nassessment has to be made under S. 26 (2). The provisions relating to \nassessment on reconstituted or newly constituted firms, and on succession to the \nbusiness are obligatory.\" \n\n 108. In Commr. of Income-tax v. Kirkend Coal Co., . Justice Shah ( as he then was ) referred to his own judgement in \nShivram Poddar case, after referring to the same in \nextenso.\n\n 109. But it is submitted that these decisions were rendered in the context \nof S. 26 (1) of the Income-tax Act, 1922, the language in which differs in a \nmaterial particular from the language employed in S. 187. We have already \nextracted S. 187. We shall read S. 26 (1) of 1922 Act : \n\n \"26. Change in constitution of a firm : 91) Where at the time \nof making an assessment under S. 23, it is found that a change has occurred in \nthe constitution of a firm or that a firm has been newly constituted, the \nassessment shall be made on the firm as constituted at the time of making the \nassessment: \n\n Provided that the income, profits and gains of the previous \nyear shall, for the purpose of inclusion in the total incomes of the partners, be \napportioned between the partners who in such previous year were entitled to \nreceive the same : \n\n Provided further that when the tax assessed upon a partner \ncannot be recovered from him it shall be recovered from the firm as constituted at \nthe time of making the assessment.\" \n\n 110. \"Change in constitution of a firm\" is the marginal heading, same in \nboth the sections. The assessment shall have to be made in both the sections \n\"on the firm as constituted at the time of making the assessment.\" Whereas the \nexpression \"as constituted\" under S. 187 refers to a case where \"a change has \noccurred in the constitution of the firm\", that expression in S. 26 (1) refers to that \nand another case also where \"a firm has been newly constituted.\" \n\n 111. The expressions \"a change in the constitution of a firm\" as well as \"a \nfirm has been newly constituted\" under S. 26 (10 exhaust between themselves all \nthe cases provided for under the rubric of \"a change in the constitution of a firm\" \nas defined for the purpose of S.187 under cls. (A) and (b) of sub-s. (2) thereof as \nnot to suggest any materiality of change between the old and the corresponding \nnew section. \n\n 112. The consolidating Act, 1961 does not purport to bring any material \nchange in the law relating to the assessment of firms. The only change sought to \nbe brought about in 1961 Act as per the Law Commission's Report is to collect all \nprovisions of law contained in the Act and the Rules made thereunder pertaining \nto the firms at one place in Chap. XVI and to define the conception of \"change in \nthe constitution of the firm\" as was done under sub-s. (2) of S. 187. \n\n 113. There is no case brought to our notice to show that having regard to \nthe subject-matter to which the concept of \"a firm has been newly constituted\" \nrefers to, it falls under the category of \"succession of one firm by another firm\" \nunder S. 188 of 1961 Act or under Section 26 (2) of 1922 Act. Besides that, what \nfalls within S. 187 falls outside S. 188. There is that declaration of statutory \nexclusion of cases falling under S. 187 from out of the purview of S. 188. \n\n 114. Firms whether reconstituted or newly constituted or dissolved with \ntheir business not being discontinued, fall under s. 26 (1) of the repealed act of \n1922. We may remind ourselves once again of the observations of Justice Shah \n(as he then was) in Shivram Poddar's case that \"where the \nfirm is dissolved but the business is not discontinued, there being change in the \nconstitution of the firm, assessment has to be made under S. 26 (1).\"\n\n 115. Therefore, the Supreme Court decisions are applicable to the \ninterpretation of S. 187 and govern the cases arising thereunder. \n\n 116. The framers of the consolidating Act, 1961 grouped together under \nsub-heading (c0 in Chap. XVI, S. 187 dealing with \"change in the constitution of a \nfirm\", S. 188 with \"succession of one firm by another firm\" and S. 189 which deals \nwith \"firms dissolved or business discontinued\" together. Therefore, cases where \nfirm is dissolved and business discontinued fall under S. 189. But cases where \nthere is a dissolution but the business was not discontinued, fall under S. 187 \nprovided the other conditions mentioned therein are fulfilled. \n\n 117. For one thing, the expression \"dissolution\" does not appear in S. 187. \nThere is no justification grammatically, linguistically or otherwise to read into it by \nimplication conceptions pertaining to dissolution, as the latter cases are already \nprovided for under s. 189 as not to have any need to have recourse to s. 187. \nThe nature of the Act consolidating and amending and the presumptions of \ninterpretation negative such an interpretation. \n\n 118. The consequences that may flow or follow from out of dissolution \nunder Partnership Act such as winding up of the affairs of the firm after \ndissolution are not envisaged in a case of dissolution followed by reconstitution \nunder S. 187 though such a case may fall under S. 189. \n\n 119. Nor the tests of succession as laid down by Justice Suba Rao (as he \nthen was) in Commr. of Income-tax v. K. H. Chambers, as referred to by My Lord the Chief Justice are satisfied in \nthe cases under reference.\n\n 120. For the reasons given above, I agree with the conclusion reached by \nKondaiah, J. speaking for the Full Bench in Addl. Income-tax Commr., A. P. v. \nVisakha Flour Mills, (1977 Tax LR 41 (Andh Pra) (FB) that where a firm is \ndissolved on account of the death of a partner and the business is continued by \nthe remaining partners and another in the place of the deceased partner, there is \nonly a change in the constitution of the firm within the meaning of S. 187 (2) of \nthe Act. I agree with the conclusion of My Lord the Chief Justice and Kondaiah, J. \nin the above case that when a case falls under S. 187, there must be a single \nassessment. I agree with the conclusion of my learned brother, Raghuvir, J. \n\nRaghuvir, J.\n\n 121. In the Full bench judgment of Visakha Flour Mills case (1977 Tax LR \n41) (Andh Pra) (FB) this court considering an identical reference reviewed all the \ncases which have been cited now before us. Kondaiah, J. speaking for the Full \nCourt dealt with all aspects of the question and the divergent views expressed in \nthis regard by other High Courts in the country. The fact that two of us for the \nsecond time affirm and reiterate the views expressed earlier shows the \"question \nis open\" (Chunilal V. Mehta & Sons, Ltd v. Century Spg. & Mfg. Co Ltd., and the subject is capable of discussion as \npossible \"alternative views\". There is no case in this court in which the view taken \nin Visakha Flour Mills case 1977 Tax LR 41 (Andh Pra) (FB) is doubted.\n\n 122. The facts necessitating the references in R. C. No. 22 of 1975 and in \nR. C. No. 67 of 1975 have been fully stated in the opinion of the Chief \nJustice. \n\n 123. Following the reasoning stated in the Visakha Flour Mills case (1977 \nTax LR 41 (Andh Pra) (FB) (supra) in R. C. No. 22 of 1975 I answer the question \nthat single assessment could be made. The answer is against the assessee and \nin favour of the Revenue. In R. C. No. 67 of 1975 the firm constituted in the deed \non 26-10-1970 has not \"succeeded\" the earlier firm constituted by the deed on 1-\n10-1970 with in the meaning of S. 188 of the Act but was a \"change\" under S. \n187 (2) of the Act. The answer is in favour of the Revenue and against the \nassessee.\n\n124. \nAnswered against the Revenue." }, { "title": "Sadanand S. Varde And Ors. vs State Of Maharashtra And Ors. on 14 June, 2000", "url": "https://indiankanoon.org//doc/1026046/", "text": "Sadanand S. Varde And Ors. vs State Of Maharashtra And Ors. on 14 June, 2000\nEquivalent citations: 2001(1)BOMCR261, [2001]247ITR609(BOM)\nAuthor: B.N. Srikrishna\nBench: B.N. Srikrishna, Pratibha Upasani\nJUDGMENT\n \n\n B.N. Srikrishna, J. \n \n\n 1. This writ petition under article 226 read with articles 14 and 48A of the Constitution of India is a public interest litigation by the petitioners who are taxpayers and rate payers residing in Bandra area and claim to be deeply interested in environmental protection and planned and orderly development of the city of Mumbai. The first petitioner is the president of the Bombay Civic Trust and the second petitioner is the president of the Save Bombay Committee. The first petitioner was for a number of years municipal councillor and a member of the Maharashtra Legislative Assembly and later of the Council. He is also an ex-Minister of the Government of Maharashtra. The second petitioner was an active member of the Municipal Corporation of Greater Bombay for a number of years and is active in the field of environment protection. The third petitioner was a professor of the Bombay University who takes keen interest in environment protection. The fourth petitioner was director and labour advisor in Siemens. The fifth petitioner is a businessman and a founder member of the Mumbai Grahak Panchayat. The sixth petitioner is an executive in an international bank in Bombay and the seventh petitioner was a senior manager of the State Bank of India and later consultant to the World Bank. The first respondent is the State of Maharashtra ; the second respondent is the Municipal Corporation of Greater Bombay and the third respondent is the Commissioner thereof. The fourth respondent is the Union of India. The fifth respondent is the appropriate authority under Section 269UA of the Income-tax Act, 1961. The sixth respondent is the original owner of plot bearing R. S. Nos. 416 and 417 (part) situated\n\nat Byramji Jijeebhoy Road, Bandra (West), which land is the subject-matter of this writ petition. The seventh respondent is a builder and the transferee of the land described hereinabove. The eighth respondent was the Minister of Revenue in the Government of Maharashtra at the relevant time. The ninth respondent is Enjay Hotels Private Limited and the tenth respondent is Devdut Co-operative Housing Society Limited, both being subsequently added as party respondents in the writ petition. \n\n2. The petitioners claim to be deeply interested in environmental issues and have jointly moved this writ petition to invoke the constitutional powers of this court to obtain directions against the respondents for what the petitioners feel is unconstitutional, illegal and unjustified depredation of environmental resources in the Bandra Lands End area. \n\n3. The petition had an extremely chequered history and it is necessary to recount the facts leading to the writ petition in some detail so as to appreciate the plethora of complicated legal issues thrown up for consideration of this court. \n\n Facts : \n\n4. Land's End Bandra is a peninsular piece of land which juts into the sea, being covered on the East, North and West by the sea. It comprises a hill known as Mount Mary hill which houses the well known Mount Mary Church. The hill slopes towards the Mahim Bay on the eastern side and the Arabian sea on the western side. The area around the slopes has developed into a posh residential locality which is used to house spacious bungalows owned by the elite of Bombay. in the course of time, the bungalows have given way to multi-storeyed buildings. At the tip of this peninsular piece of land are situated the ruins of an ancient Portuguese fort known as the Bandra Fort, which fort has been declared a protected monument under Section 4(3) of the Maharashtra Ancient Monuments and Archaeological Act, 1960 (Mah. XII of 1961). There has been considerable development on this peninsular piece of land and a developed road runs north-south almost to the tip of the peninsular area. Towards the west seaward of this road, there exists a five star hotel, \"Sea Rock\", whose construction had been permitted much before the Coastal Regulation Zone Notification under the Environment (Protection) Act, 1986, was brought into force. Hotel Sea Rock is situated towards the north of the Bandra fort within about 100 meters therefrom. A plot of land, measuring 45,000 square yards bearing C. T. S. Nos. 416 and 417 (part) situated opposite the Hotel Sea Rock, i.e., towards the eastern side of the developed road is the subject-matter of this writ petition. Towards the east of this plot, the hill slopes down to the Mahim Bay and there is a large tract of open land which now has been encroached upon and dotted by numerous unauthorised structures, though continued to be shown as green area in the sanctioned and revised development plan for H-West ward of Mumbai.\n\n5. The first sanctioned Development Plan of Greater Bombay (H-West ward) was sanctioned on September 14, 1964. in this development plan, about 53,000 square yards from R. S. No. 6 and about 18,000 square yards from C. S. Nos. 416 and 417, representing the eastern slope, were reserved for garden. The remaining land, including the plot which is the subject-matter of the writ petition, was to be in the residential zone. The development plan also incorporated a loop comprising a 120 feet wide development plan road skirting the edge of the peninsula. This loop was conceived as a part of the larger arterial road under the plan. The southeastern portion of this loop was to join the Western Express Highway at the corner of AH Yavar jung bridge. The northern portion of this 120 feet road was aligned along with the existing road known as Carter Road and was to lead right up to Bortvali running parallel to Swami Vivekanand Road and Link Road which are existing roads. For smooth implementation and proper alignment of the eastern portion of this development plan road, it was necessary to make some marginal reclamation of land as envisaged. \n\n6. Some time in the year 1972, the State Government received representations urging it to extend the reservation for garden in the development plan to cover the plot which is the subject-matter of this writ petition (hereinafter referred to as the \"concerned plot\"). The concerned plot, which was situated in the residential zone, had in the meanwhile been purchased by the sixth respondent. Since alteration of the sanctioned development plan is the subject-matter falling within the jurisdiction of the planning authority under the Maharashtra Regional Town Planning Act, 1971, the first respondent instructed the second respondent to take suitable action under Section 37 of the Maharashtra Regional Town Planning Act, 1966 (hereinafter referred to as the \"MRTP Act\"), by the letter dated January 25, 1973. By this letter, the Government was responding to the representations made to it and was of the opinion that, in the larger public interest of the people of Bandra, there was need for providing adequate space for recreation and it would be desirable if the Bombay Municipal Corporation took suitable action under Section 37 of the Maharashtra Regional Town Planning Act by making a minor modification in the development plan of H-Ward to extend the reservation of the park by including in the reservation R. S. Nos. 416 and 417 (part) which was currently available for residential development. The Government was also of the opinion that, while making a modification of the H-Ward development plan, it would be desirable to shift the alignment of the 120 feet D. P. road so that it would divide the park at two places. The Government, therefore, requested the Bombay Municipal Corporation to consider the proposal and take suitable action under Ssection 37 of the Maharashtra Regional Town Planning Act. Under Section 37 of the Maharashtra Regional Town\n\nPlanning Act, the Bombay Municipal Corporation as the planning authority had to pass a general body resolution, give an opportunity for objectors to be heard and thereafter submit the proposal as deemed fit for the consideration of the State Government. Hence, the second respondent passed a resolution on December 3, 1973, suggesting full extension of the garden reservation to cover the concerned plot. This was done despite the objection of the owner, the sixth respondent. By another general body resolution passed on March 14, 1974, the garden and in return the sixth respondent was left free to develop the remaining plot without any claim on floor space index of the surrendered 7,000 square yards portion of the concerned plot. \n\n7. The modification made in the proposal was challenged by the present petitioners vide Misc. Petition No. 463 of 1974, before this court. This miscellaneous petition came to be dismissed by this court. Appeal No. 82 of 1979 carried thereagainst was dismissed by this court. Review Petition No. 8 of 1985 moved to review the decision of this court was also dismissed by this court. Thereafter, the petitioners filed a Special Leave Petition No. 17376 of 1985 in the Supreme Court contending, inter alia, that : (a) the mandatory directions under Section 37(1) of the Maharashtra Regional Town Planning Act were not followed, and (b) that the second general body resolution passed by the Bombay Municipal Corporation was bad in law and void. \n\n8. On July 26, 1978, the sixth respondent obtained from the State Government an exemption under Section 30 of the Urban Land (Ceiling and Regulation) Act, 1976 (the \"ULCA\"), in respect of the concerned plot. This order granted the exemption subject to the conditions that : (a) 18,683.15 square metres would be used for construction of a hotel and for no other purpose ; (b) 5,852.07 square metres would be transferred to the Bombay Municipal Corporation as gift for development of a garden without asking for any floor space index in respect thereof, the area to be identified and demarcated by the Bombay Municipal Corporation out of the total area of 24,535.22 square metres exempted under the order. if the Bombay Municipal Corporation did not require the land, the land holder had to utilise it for the purpose of developing a garden on it and for no other purpose ; (c) an area of 13,079.95 square metres was to be utilised for development plan road as per reservation and was excluded from the purview of the exemption order, and (d) the user of the land was subject to several restrictions and conditions which were indicated in the order. \n\n9. The order of exemption under the Urban Land (Ceiling and Regulation) Act was challenged by the petitioners by Misc. Petition No. 1406 of 1978, inter alia, on the ground that it was contrary to the State Government's directives to fully reserve the suit plot for garden. The said petition was dismissed on January 10, 1979, by the judgment and order of Bharucha J.\n\n(as his Lordship then was) holding that the exemption order did not violate the Government guidelines or the guidelines issued on December 20, 1977, by the Government of India recommending liberal exemption of lands under the Urban Land (Ceiling and Regulation) Act for certain purposes including construction of a hotel. The learned judge took the view that, considering the urgent necessity to increase the foreign exchange of the country, construction of a multi-star hotel which was likely to attract foreign visitors was in the public interest. The petitioners carried Appeal No. 81 of 1979, against the order of Bharucha J. This appeal was dismissed by the Division Bench on Augus.t 1, 1984. The petitioners filed Review Petition No. 8 of 1985, which was also rejected on October 10, 1985. The petitioners thereafter preferred Special Leave Petitions Nos. 17376 and 17377 of 1985 to the Supreme Court. By a common judgment, dated February 9, 1988, the Supreme Court of India dismissed Special Leave Petitions Nos. 17376 and 17377 of 1985, and Civil Appeal No. 2537 of 1985, and categorically rejected all the contentions urged before it. The Supreme Court observed : \n \"19. The above grounds of challenge to the order of exemption granted to respondent No. 5 have all been considered by the High Court in its judgment disposing of the review applications. The petitioners have not challenged the judgment on review applications. The petitioners are only interested in seeking that sufficient area is kept reserved for a park or recreation ground for the benefit of the members of the public. They are not, in our opinion, concerned with the question as to the legality or otherwise of the exemption granted by the Government to respondent No. 5 under the Urban Land Ceiling Act. A copy of the draft revised development plan has been produced before us by Mr. Desai, learned counsel appearing on behalf of respondent No. 5. We are satisfied that the question whether or not sufficient quantity of land has been kept reserved for park and recreation ground has been adequately considered and taken into account by the High Court. in the circumstances, we do not think that we are called upon to decide the legality or otherwise of the order granting exemption to respondent No. 5 under the Urban Land Ceiling Act. There is, therefore, no substance also in Special Leave Petition (Civil) No. 17377 of 1985.\" \n\n10. Thus, the challenge to the modified resolution of the general body of the Bombay Municipal Corporation and the challenge to the exemption granted under the Urban Land Ceiling Act attained finality by the said judgment and order of the Supreme Court. \n\n11. Then started another fresh round of litigation, all in \"public interest\". The sixth respondent, after obtaining the Urban Land Ceiling Act exemption order sought permission to construct a hotel on the concerned plot. Four municipal councillors of H-ward had written to the Municipal Com-\n\nmissioner (third respondent) on February 19, 1982 (exhibit \"G\" to the writ petition), requesting the Commissioner of the Bombay Municipal Corporation to reserve about 45,000 square yards of land in Land's End, Bandra, for a public park in the revised development plan for Greater Bombay. They had requested him to prepare a tentative proposal on the above lines and not to sanction any plan for residential development and/or construction of the hotel on the said land. \n\n12. On August 6, 1982, the Municipal Commissioner refused the development permission sought by the sixth respondent for construction of a hotel on the concerned plot. On August 7, 1982, the sixth respondent filed an appeal under Section 47 of the Maharashtra Regional Town Planning Act against refusal of the development permission. On October 8, 1982, the Municipal Commissioner addressed his report (exhibit \"G-3\") stating the circumstances under which he was of the opinion that a hotel should not be permitted to be constructed on the said piot. The main reason given by the Municipal Commissioner was paucity of open spaces in Bandra West area of H-vvard. He also pointed out the ratio of lung\" space to population density as a reason for refusing the permission. The appeal under Section 47 of the Maharashtra Regional Town Planning Act was heard by the eighth respondent, the then Minister of State for Urban Development, Shri Chandrakant Tripathi. By an order dated April 26, 1983, he set aside the order of the Municipal Commissioner refusing to grant development permission for construction of a hotel on the concerned plot. This order of the Minister of State was challenged in this court by Writ Petition No. 1432 of 1983 which was permitted to be replaced by Writ Petition No. 1822 of 1983. This order was set aside by this court on the ground that bias had been alleged against the said Shri Chandrakant Tripathi and that proper - hearing had not been given to the petitioners, who were objectors to the development permission. \n\n13. By an order made on December 8, 1983, by Smt. Sujata Manohar J. (as her Lordship then was), the appeal was revived before the Minister of State for a fresh hearing. At this stage, the eighth respondent heard the appeal. During the hearing of the appeal, the second petitioner in the present writ petition and his advocate were heard in support of the objections. The eighth respondent made an order on February 4, 1984, partially allowing the appeal of the sixth respondent under Section 47 of the Maharashtra Regional Town Planning Act. The eighth respondent made the following order : \n\n \"Appeal partly allowed. Due to north-south and east-west proposed 120 ft. wide development plan roads land is divided in three parts, viz.. Block A, Block B on south towards west of north-south D. P. Road. \n\n As decided earlier, 7,000 sq. yards of land which is the subject-matter of the urban land ceiling exemption, should be kept on Block B at the\n\nextreme end on the southern side abutting the sea. This area shall be kept as green space along with the Block C of Old Fort area. \n\n The Municipal Commissioner, Municipal Corporation of Greater Bombay, has informed that the Municipal Corporation of Greater Bombay proposes to shift the alignment of 120 feet east-west development plan road in the proposed revision of development plan of H ward of Greater Bombay. As such the Municipal Commissioner shall exercise the powers under the Development Control Rule 39(viii) and shift the alignment of the 120 feet east-west development plan road of the sanctioned development plan towards south, touching the green space kept in Block B as shown on the enclosed plan, and include this area in the green space so as to form the compact block for the purpose of park and green space. This would leave a compact block of enlarged plot A on the northern side as shown on the plan. \n\n The development permission to this plot A shall be allowed for the purpose of hotel which is permissible as per the sanctioned Development Control Rules subject to following conditions : \n\n (i) 15 per cent, recreation space to be left in Block A shall be kept on the southern side of the plot abutting the green space left from Block B after merging the road area in the green space. \n\n (ii) the development shall be allowed, 10D and CC shall be issued as per the Development Control Rules. \n\n (iii) The FSI of the road area would be admissible on plot A as per the Development Control Rules 10(2). \n\n (iv) The Municipal Commissioner, Municipal Corporation of Greater Bombay, Bombay, shall take over the possession of the land proposed to be kept as green on the southern side, abutting the sea after getting the plots properly demarcated. \n\n As regards directive of the Prime Minister for keeping 500 metres distance from the sea, this directive cannot be made applicable in this case, as this would stand applicable only for the beaches. \n\n The Municipal Commissioner, M. C., G. B., Bombay, may consider the proposal of allowing the development and maintenance of the park and garden space by the applicant party at their own cost after obtaining the possession of the lands now proposed to be kept green. \n\n The permission for development of plots as per plans submitted by the appellants be granted by the M. C., B. M. C., subject to the conditions mentioned above. \n\n No orders as to costs each party to bear its own costs.\" \n\n14. This order was consonant with the exemption order under Section 20 of\nthe Urban Land Ceiling Act and also made some realignment of the 120\nfeet development plan road as a result of which three distinct plots : (a)\none comprising the Fort ; (b) one comprising the garden measuring about\n\n7,000 square yards to be made available to the Municipal Corporation of Greater Bombay, and (c) one comprising a plot where the hotel could be constructed, were constituted. \n\n15. The order of the Minister of Slate for Urban Development made on February 4, 1984, under Section 47 of the Maharashtra Regional Town Planning Act was again challenged in Writ Petition No. 704 of 1984, before this court. A Division Bench of this court found no merit in the writ petition and dismissed the writ petition by its judgment and order dated April 27, 1984. Thin decision of the Division Bench of this court was challenged before the Supreme Court of India by Civil Appeal No. 2537 of 1985. The Supreme Court by its common judgment and order dated February 9, 1988, made in Civil Appeal No. 2537 of 1985, and Special Leave Petition (Civil) Nos. 17376 of 1985, and 17377 of 1985, dismissed all the three. We have already extracted the observations of the Supreme Court in the said judgment. \n\n16. In the meanwhile, the draft revised development plan for H-West ward was published by the second respondent with some further changes in the alignment of the 120 feet development plan road and increased area of garden beyond 7,000 square yards stipulated in the exemption order under the Urban Land Ceiling Act and the appeal order under Section 47 of the Maharashtra Regional Town Planning Act. The fact of the draft development plan having been published has been noticed in the judgment of the Supreme Court dated February 9, 1988, in Civil Appeal No. 2537 of 1985, and Special Leave Petitions Nos. 17376 of 1985 and 17377 of 1985. The Municipal Corporation granted development permission sought by issuing IOD under Section 346 of the Bombay Municipal Corporation Act, 1888, and issued commencement certificate for construction of the hotel on the concerned plot. \n\n17. On July 5, 1974, the then Prime Minister of India, Smt. Indira Gandhi, had addressed a letter to Shri V. P. Naik, the then Chief Minister of Maharashtra, stating, inter alia, therein that she was distressed to hear that Bandra Land's End area was to be developed for yet another housing project. She suggested that it was a kind of area that should be kept entirely unspoilt for recreational and leisure activities. There were also representations received by the Ministry of Environment, Union of India (fourth respondent), which resulted in voluminous correspondence between the first and the fourth respondents. After a full report was received by the Prime Minister's office from the Ministry of Environment and Forest, the matter appeared to have come to a close as indicated in the letter dated February 23, 1982, from the Joint Secretary, Ministry of Environment, who advised the Secretary, Urban Development and Public Health Department, Government of Maharashtra. \"The proposal of Enjay Estates to construct residential and other facilities in the land in their possession in Bandra's\n\nLand's End, has been reviewed by the Government of India and that the Prime Minister has been apprised of the issues and has directed us to inform the Maharashtra Government that the Government of India have no comments to offer in the matter\". He also requested that the final decision in the matter may kindly be intimated to his Department for record. \n\n18. By another letter dated November 30, 1981, the Government of India had stated that the Department of Environment, Government of India, had sought for detailed information of the present status of the Bandra Land's End's developmental activity and that there was no implied directive to hold up any action proposed by the State Government on any pending* issue, that it has been brought to the Government's notice by Enjay Estate Private Limited that construction on plots of land owned by them was being held up on account of the Government's enquiry. The letter advised that the State Government should settle the question expedi-liously and send a report to the Department at an early date. \n\n19. When Smt. Maneka Gandhi was in-charge of the Ministry of Environment, she had an occasion to visit Bandra Land's End. This gave rise to another round of objections before the fourth respondent. This also resulted in a meeting being held with the Chief Minister of the Government of Maharashtra on May 3, 1990, wherein several issues were discussed between the Chief Minister of Maharashtra and the Union Minister of State for Environment and Forest. The said meeting appears to have been held without prior notice to the Ministry of Urban Land Development and without any prior briefing of the Chief Minister on the status of the development activity at Land's End. Consequently, the minutes of the meeting read as under : \n \"2. Development of Land's End, Bandra, as a nature area : The Government of India desired that the Land's End area at Bandra should be a part of green belt to be developed as a nature area. The State Government were requested not to give permission for multi-storeyed buildings in this area. The Union Minister of State further observed that no construction work should be permitted within a distance of 500 meters from coast line in violation of the guidelines of the Government of India.\" \n\n20. By a letter dated February 19, 1991, the Ministry of Environment and Forest, Government of India, was informed by the Secretary, Urban Land Development, Government of Maharashtra, that the issue of reserving the concerned plot for a garden for recreation in the revised development plan for Greater Bombay was still under consideration of the State Government and would be taken up at the time of finalisation of tbe draft revised plan of Greater Bombay which was being sanctioned wardwise. On account of an interim order made by the Division Bench of the Bombay High Court, the State Government had been restrained from taking a decision in isolation in respect of individual development of draft deve-\n\nlopment plan. Hence, a final decision in the case would be taken only at the time of sanctioning of the revised draft development plan for the relevant part of Greater Bombay and that the final decision regarding the plot would be conveyed to the Ministry of Environment and Forest, Government of India. Thereafter, a committee specially appointed by the State Government considered the proposal for changes to be made in the draft revised development plan for H-West ward showing the concerned plot in the residential zone. Taking stock of all developments up-to-date, the committee of secretaries felt that the third respondent having already granted development permission, no change need be made in the proposals of the draft revised development plan published by the first respondent. The committee's recommendation in the matter about the status of the con-. cerned plot was accepted by the first respondent, Government of Maha-rashtra. The committee of secretaries, however, recommended deletion from the adjoining garden reservation C. T. S. No. 922 which was already covered by a slum. The committee's recommendation was also based on the suggestions from the third respondent who had suggested some changes in the network of 120 feet wide development plan roads. These changes were accepted and incorporated in the final sanctioned development plan on May 7, 1992. \n\n21. By an application dated February 17, 1979, the sixth respondent (Enjay Estates Private Limited) applied to the State Government for a no objection to the transfer of the concerned plot, which was exempted land under the Urban Land Ceiling Act exemption order dated July 25, 1978, to the ninth respondent (Enjay Hotels Private Limited) on the ground that the sixth respondent was proposed to be amalgamated into the ninth respon-. dent. By an order dated February 7, 1980, the State Government conveyed its no objection to the transfer of the exempted taken land to Enjay Hotels Private Limited with which Enjay Estates Private Limited was proposed to be amalgamated \"provided that the shareholders of Enjay Estates Private Limited will hold shares in the same proportion in Enjay Hotels Private Limited (after amalgamation) as they hold at present in Enjay Estates Private Limited\". It was further stipulated that under no circumstances the shareholding of the shareholders of Enjay Estates Private Limited shall fall below 26 per cent, of the total subscribed or paid-up equity capital in Enjay Hotels Private Limited, failing which the exemption order was liable to be revoked. A scheme of amalgamation of Enjay Estates Private Limited (sixth respondent) with Enjay Hotels Private Limited (ninth respondent) was prepared and, after taking necessary steps under the Companies Act, the sixth respondent and the ninth respondent filed in this court petitions for sanctioning the scheme of amalgamation vide Company Petition No. 442 of 1992, and Company Petition No. 443 of 1992. By an order made on February 3, 1993, the learned company judge sanctioned the scheme of\n\namalgamation in the said petitions. Certified true copies of the orders made in Company Petition No. 442 of 1992, and Company Petition No. 443 of 1992, were lodged with the Registrar of Companies as required under the Companies Act, 1956, and the Rules framed thereunder. Consequent to this amalgamation order, the ninth respondent became the owner of the concerned plot and started constructing' a multi-starred hotel thereupon. \n\n22. This writ petition was filed on October 21, 1992, but despite applications made on behalf of the petitioners, neither any ad interim relief nor interim relief was granted. However, by an order made on February 5, 1993, by the Bench of Mohta and Jhunjhunwala JJ., while admitting the writ petition, it was directed that the sixth respondent and/or the ninth respondent may proceed with the construction, if they so desire, provided they give an undertaking to the effect that the construction shall be carried out at their own risk and without claiming any equity in the event of the petition succeeding. Such undertakings have been given by the sixth and the ninth respondents and accepted by the court. Though the record of this writ petition is replete with a number of chamber summonses and notices of motion taken out from time to time by the petitioners and the interlocutory orders made therein by this court, we do not think it necessary to burden this judgment with the history of all the interlocutory proceedings. in our view, the facts recited hereinabove, would be broadly sufficient to deal with the contentions urged before us in support of the writ petition. \n\n23. The petition raises a number of contentions some of them quite diffusely, and alleges contravention of different provisions of various statutes on the part of the sixth and the ninth respondents in the construction of the hotel. We may mention here in passing that this long drawn out litigation in \"public interest\", which has spanned about two decades, has seen a multi-starred hotel being constructed on the concerned plot, which has been completed, become operational and is functioning in full swing. The petitioners have, however, continued with the spate of their litigations with unmitigated zeal. \n\n Bona /ides of the litigation : \n\n24. At the outset, it is contended by Mr. Tulzapurkar, learned counsel for the sixth and ninth respondents, that this is not a bona fide public interest litigation at all. It is urged that it is nothing but harassment and vindictive action on the part of the petitioners under the garb of public interest litigation. Learned counsel pointed out that the petitioners had filed several writ petitions and appeals in this court which were all dismissed. Finally, the litigation landed up in the Supreme Court and was the subject-matter of Civil Appeal No. 2537 of 1985, and Special Leave Petitions (Civil) Nos. 17376 of 1985 and 17377 of 1985. By its judgment delivered on February 9, 1988 (which is now reported in S. N. Rao v. Slate of Maharashtra, ), the Supreme Court rejected all the contentions urged by the peti-\n\ntioners before the courts. Mr. Tulzapurkar urges that the petition is barred by res judicata since most of the issues urged in the petition have already been settled by the Supreme Court in its judgment in S. N. Rao's case, . As to some of the contentions which were not the subject-matters of the litigation before this court and the Supreme Court, it is urged by Mr. Tulzapurkar that they must be deemed to be barred by the principle of constructive res judicata inasmuch as such contentions ought to have been urged before this court at the time when the earlier writ petitions were filed. Hence, learned counsel submits that the attempt to raise the contentions piecemeal involving multiplicity of litigation is indicative of gross mala fides on the part of the petitioners. It is urged that, though the petitioners claim to be environmentalists who are espousing issues affecting environmental protection, the fact that the present writ petition urges the question as to the applicability of Chapter XX-C of the Income-tax Act, 1961, in a so-called public interest litigation by environmentalists, is indicative of the fact that the petitioners have other objectives than mere environmenta! protection. That the petitioners are challenging the amalgamation of the two companies, namely, Enjay Estates Private Limited and Enjay Hotels Private Limited, and urging contravention of the order made under Section 20 of the Urban Land Ceiling Act which has nothing to do with environmental protection, shows their lack of bona fides according to counsel. Hence, for all these reasons, relying on the judgment in Sachidanand Pandey v. State of West Bengal, , Mr. Tulzapurkar urges that this court should hold that the petition is not bona fide, and not really for advancing public interest, but appears to be the result of something else. Learned counsel echoed the lurking doubt expressed by 'Khalid J. in Sacludanand Pandey's case, : \"Is there something more than what meets the eye in this case?\" \n\n25. On the material presented to us, we are unable to say that the litigation before us is not bona fide, though it does appear to us that the petitioners have been unduly persistent to the point of being odious in the pursuit of this case. As to the arguments based on res judicata and constructive res judicata, we shall deal with them when we take up for consideration the specific contentions. We shall, for the nonce, give the petitioners the benefit of doubt and assume that the petition is intended to be a bona fide public interest litigation, albeit pursued with misguided zeal. We would, however, like to add for the record that public interest litigation, even if pro bono publico initially, if it persists beyond the limits of tolerance, loses its halo and becomes oppressive and turns into persecution interest litigation. Such appears to be the present case. \n\n Legal contentions : \n\n26. The petitioners urged a number of contentions which were diffused and unstructured. We have gathered them as best as we can and the\n\ncontentions of the petitioners can be broadly summarized under the following heads' : \n\n (a) Violation of Coastal Regulation Zone (CRZ) Rules. \n\n (b) Contravention of the Urban Land Ceiling Act and the exemption order made thereunder. \n\n (c) Contravention of the provisions of the Maharashtra Regional and Town Planning Act, 1966. \n\n (d) Violation of the sanctioned development plan. \n\n (e) Challenge to the decision of the Ministry of Environment and Forests, Government of India. \n\n (f) Challenge to the corrigendum notification dated November 22, 1996. \n\n (g) Challenge to sanctioned development plan. \n\n (h) Challenge to permission granted by the State Pollution Control Board. \n\n (i) Contravention of the provisions of the Maharashtra Regional and Town Planning Act, 1966, and the Development Control Regulations for Greater Bombay, 1991. \n\n (j) Contravention of the Development Control Regulation No. 59. \n\n (k) Amalgamation of sixth and ninth respondents fraudulent, illegal and intended to circumvent law. \n\n (l) Application of Chapter XX-C of the Income-tax Act, 1961. \n\n Scope of judicial review : \n\n27. Before we take up the specific contentions urged by the petitioners, it is necessary to chalk out the compass within which this court exercises jurisdiction under article 226 in such matters. Doubtless, judicial review has been held to be a basic feature of the Indian Constitution and the power of the constitutional courts, whether they be High Courts exercising jurisdiction under article 226, or the Supreme Court under article 32, is virtually limitless except for self-imposed limitations in the interest of administration of justice and the dictates of prudence. A public interest litigation is not adversary in nature, but is intended to focus the public interest aspect before the court. if the court is apprised of substantial injury to public interest, the court is empowered and duty bound to interfere to do justice to the inarticulate public whose interest is projected as affected. Despite the awesome powers available in writ jurisdiction, the courts have constructively bridled this power and deferred to experts in matters of public interest where, in view of the amplitude of complexity and technical nature involved, judicial proceedings in the nature of a writ petition would be wholly inappropriate for determination of the issues thrown up. Policy matters have also been rightly left for the public autho-\n\nrities to decide and the final say in such matters should normally not come within the purview of judicial review. \n\n28. In Dahanu Taluha Environment Protection Group v. Bombay Suburban Electricity Supply Co. Ltd. , the Supreme Court observed with respect to judicial review as under (page 541) :\n \"The limitations, or more appropriately, the self-imposed restrictions of a court in considering such an issue as this have been set out by the court in Rural Litigation and Entitlement Kendra v. State of U. P. [1986] Supp. SCC 517 and Sachidanand Pandey v. State of West Bengal . The observations in those decisions need not be reiterated here. It is sufficient to observe that it is primarily for the governments concerned to consider the importance of public projects for the betterment of the conditions of living of the people on the one hand and the necessity for preservation of social and ecological balances, avoidance of deforestation and maintenance of purity of the atmosphere and water free from pollution on the other in the light of various factual, technical and other aspects that may be brought to its notice by various bodies of laymen, experts and public workers and strike a just balance between these two conflicting objectives. The court's role is restricted to examine whether the government has taken into account all relevant aspects and has neither ignored nor overlooked any material considerations nor been influenced by extraneous or immaterial considerations in arriving at its final decision.\" \n\n29. In a recent judgment in Tata Iron and Steel Co. Ltd. v. Union of India, , these principles were reiterated by the Supreme Court in the following words (page 727 and page 2473 of AIR 1996 SC) :\n \"At this juncture, we think it fit to make a few observations about our general approach to the entire case. This is a case of the type where legal issues are intertwined with those involving determination of policy and a plethora of technical issues. in such a situation, courts of law have to be very wary and must exercise their jurisdiction with circumspection for they must not transgress into the realm of policy-making, unless the policy is inconsistent with the Constitution and the law. . .\" \n\n30. Keeping this overall approach in view, we shall now examine the legal disputes posed for our resolution. \n\n (a) Violation of Coastal Regulation Zone (CRZ) Rules : \n\n***** \n \n\n The restrictions against construction in CRZ-I would apply only to a stretch of 500 metres from the High Tide Line as long as that area falls within the area declared as heritage monument under the MAMA Act. Looking at the revised dimensions in the notification of July 31, 1998, it is not possible to accept the contention that the concerned plot would fall within CRZ-I area so as to completely prohibit constructional activity on it.\n\n In fact, construction of hotels is permitted in CRZ-Ii and CRZ-III as evidenced from paragraph 7 of the said notification. Hence, the contention that the hotel is an \"industry\" and as such construction of the hotel on the concerned plot is prohibited under paragraph 2 of the CRZ notification\ndated February 19, 1991, must fail. \n\n***** \n \n\n If there was any doubt as to the manner in which the construction had to be carried out, even on the landward side, this is clarified by a subsequent notification which provides that construction shall be permitted on the landward side of an imaginary line between the two authorised constructions drawn parallel to the High Tide Line. Looked at this way also,\nwe find that the construction does not contravene the CRZ-II Regulations. \n\n***** \n \n\n Hence, we see no violation of sub-clause (v) of Clause 2 of 1991 CRZ notification. \n\n***** \n \n\n In fact, by the notification dated July 9, 1997, Sub-clause (viii) has been completely substituted and the activity of construction of the Bombay Municipal Corporation Sewerage Purification Plant is wholly permitted thereunder. \n\n In our view, Sub-clause (ix) of Clause 2 of the CRZ notification has no\napplication at all. \n\n***** \n \n\n Sub-clause (xiii) of Clause 2 of the notification uses the expression \"except as permissible under the notification\". in our view, if the construction activity is permitted under any other part of the notification, then the prohibition contemplated by Clause 2, Sub-clause (xiii) is not\nattracted. \n\n***** \n \n\n (b) Contravention of the Urban Land (Ceiling and Regulation) Act,\n1976, and the exemption thereunder : \n\n***** \n \n\n We are, therefore, not inclined to accept the contention that there is any violation of the exemption order under the Urban Land (Ceiling and Regulation) Act or the conditions stipulated therein. \n\n* * * * * * * * \n \n\n (c) Contravention oj the provisions of the Maharashtra Regional and\nTown Planning Act, 1966. \n \n\n***** \n \n\n We agree with the contention of the respondents that, because the Bombay Municipal Corporation failed to take over the land, the validity of the sanction for the building plans of the sixth and the ninth respon-\n\ndents would not be affected. The contention that the sanctioned building plans could never have been extended is, therefore, of no substance and\nfails. \n\n***** \n \n\n (d) Violation of the sanctioned development plan : \n\n***** \n In other words, the State Government maintained the reservation for garden in respect of all other areas even after due consideration of the fact that there were hutments on the said plot of land. We are, therefore, satisfied that the sanction gTanted by the State Government to the development plan was not vitiated on account of non-application of mind as contended. The contention must, therefore, fail for that reason also. \n\n (e) Challenge to decision of (he Ministry of Environment and Forests,\nGovernment of India : \n\n***** \n It appears to us that, after considering the matter in detail, in the light of the clarifications given by the State Government, the Ministry of Environment and Forests reconsidered its stand and granted the sanction. We see nothing wrong in that. At any rate, it is not for us to sit in appeal over the decision of the Ministry of Environment and Forest while exercising writ jurisdiction. The contention, therefore, fails. \n\n (f) Challenge to the corrigendum notification, dated November 22, 1996 : \n\n***** \n Development Control Regulation 11(4), in terms, empowers the Commissioner to shift/interchange the designation/reservation provided the actual area on which the designation or reservation is made is not altered. This exercise of power by the Commissioner or by the State Government does not amount to a modification of the sanctioned Development Plan requiring the following of the prescribed procedure of inviting objections, considering them and sanctioning the plan. We are, therefore, not impressed by this contention and reject it. \n\n (g) Challenge to sanctioned Development Plan : \n\n***** \n We are of the view that the contention is not required to be decided, as it is not material at this stage. \n\n (h) Challenge to permission granted by the State Pollution Control\nBoard : \n\n***** \n The ninth respondent applied to the State Pollution Control Board and obtained its permission subject to certain restrictions which it is bound to comply with. in these circumstances, we feel there is no substance in the challenge to the permission granted to the sixth and the ninth respondents by the State Pollution Control Board.\n\n (i) Contravention of the provisions of the Maharashtra Regional and Town Planning Act, 1966, and the Development Control Regulations for\nGreater Bombay, 1991 : \n\n***** \n The Bombay Municipal Corporation having followed consistently the practice of extending the development permission from time to time if the initial construction commenced within a period of one year of the first grant of development permission, the development permission extended from time to time in the case of the sixth and the ninth respondents cannot be said to be illegal on that count. \n\n (j) Contravention of the Development Control Regulation No. 59 : \n\n***** \n Thus, looked at from West or East, it cannot be held that the height restriction in the Development Control Regulation No. 59 would apply or that the planning authority erred in not making the height restriction applicable. The planning authority was justified in looking at the development pian while considering the application for development permission made by the sixth and the ninth respondents. Looked at from this point of view also, there was no error in granting development permission to the sixth and the ninth respondents. \n\n (k) Amalgamation of sixth and ninth respondents fraudulent, illegat and intended to circumvent law : \n\n We have already noticed that, by the order of the company court dated February 3, 1993, made in Company Petition No. 442 of 1992. and Company Petition No. 443 of 1992, the sixth respondent was amalgamated with the ninth respondent with effect from August 1. 1992, and the undertaking of the sixth respondent including all assets and liabilities stood vested in the ninth respondent, and that the Government of Maharashtra had, by an order dated February 7, 1990, issued no objection for transferring the exempted vacant land to the ninth respondent on amalgamation of the sixth respondent with the ninth respondent subject to certain stipulations as to the continuation of the shareholding ratio. It is contended by the petitioners that the amalgamation of the sixth respondent with the ninth respondent was intended to circumvent the provisions of Chapter XX-C of the Income-tax Act, 1961, and must be treated as invalid. Itis also urged that the amalgamation order was obtained by false representations to and by playing a fraud upon the company court. Consequently, it is contended that the amalgamation order obtained by fraud must be held ab initio bad and no legal consequence could arise therefrom. in view of the seriousness of the allegations, we have examined them meticulously by summoning the record of the company court in Company Petition No. 442 of 1992 and Company Petition No. 443 of 1992 and scrutinising them in the light of the legal submissions made. \n\n31. The fifth respondent (appropriate authority under Chapter XX-C of the Income-tax Act, 1961) has filed an affidavit dated October 17, 1994, of one Prayag Jha, Deputy Commissioner of Income-tax, and supported the contention of the petitioners that the order sanctioning\" the amalgamation scheme has been obtained by playing a fraud on the company court. The contention of the petitioners, and the fifth respondent, in support of the allegation of fraud is : \n\n (a) the sixth and ninth respondents deliberately misrepresented to the company court that only 7,227 shares of Rs. 100 each (valued at Rs. 7,22,700) would be issued on amalgamation, and \n \n\n (b) the sixth and ninth respondents deliberately suppressed from the company court that the value of shares to be issued on amalgamation would exceed Rs. 10 lakhs. \n\n32. Hence, the company court was deliberately misled into sanctioning a fraudulent scheme of amalgamation. \n\n33. In view of the seriousness of the allegation, we have extensively heard Mr. Sethna, learned counsel who appeared for the fifth respondent-appropriate authority, on the issue, apart from counsel for the petitioners and the sixth and the ninth respondents. \n\n34. We may straightaway dispose of the contention that the amalgamation was intended to circumvent the provisions of Chapter XX-C of the Income-tax Act. Amalgamation of the sixth respondent with the ninth respondent was mooted for the first time in the year 1979 in the tetter dated September 17, 1979, by which the sixth respondent applied for permission of the Government of Maharashtra to amalgamate with the ninth respondent. The Government of Maharashtra made an order on February 7, 1980, indi-eating its no objection to the transfer of the land, which was exempted by the Government's order dated July 26, 1970, to the ninth respondent consequent upon the amalgamation provided that the shareholders of the sixth respondent continued to hold shares in the same proportion in the ninth respondent company as they held prior to the amalgamation. A further stipulation was made that, under no circumstances should the shareholding of the shareholders of the sixth respondent fall below 26 per cent, of the total subscribed or paid-up equity capital in the ninth respondent, failing which the exemption order was liable to be revoked. Chapter XX-C of the Income-tax Act, was enacted and brought into force for the first time in the year 1986. Thus, the contention that the amalgamation was intended to circumvent the provisions of Chapter XX-C must obviously fail since the intention to amalgamate was mooted way back in the year 1979. \n\n35. We had directed the ninth respondent to file a detailed affidavit of one of its officers to explain specifically the issue of fraud alleged against it. One Pesi D. Colabawalla, director of the ninth respondent, has filed an affidavit dated July 28, 1998, in which this issue has been specifically dealt\n\nwith. in paragraph 7 of the said affidavit, the chronology of the events leading to the amalgamation have been set out. Itis pointed out that, prior to the amalgamation scheme being formulated, Gautam Joshi and Associates, chartered accountants, were requested to value the shares of the sixth and the ninth respondents and make a report on the fair share exchange ratio. The chartered accountants made a report dated July 10, 1992, recommending the exchange ratio of 7,227 shares of the transferee-company (i.e., the ninth respondent) for every one share of the transferor-company (i.e. the sixth respondent) and noting the need to increase the authorised share capital of the ninth respondent as proposed. This report of Gautam Joshi and Associates was placed before the board of directors of both the companies who accepted the said report including the suggested share exchange ratio as set out therein. The shareholders of both the sixth and ninth respondents acted on the basis that the scheme for amalgamation would provide for a share exchange ratio of 7,227 shares of the ninth respondent for every one share of the sixth respondent of Rs. 100 each. Itis on this basis that the shareholders of both the companies approved the proposed scheme of amalgamation and empowered the two companies to take steps in law for implementing the proposed scheme of amalgamation on the aforesaid basis. Clause (11) of the scheme reads as under : \n \"(11) in consideration of the transfer of assets and liabilities of the transferor-company in favour of the transferee-company in terms of this scheme, the transferee-company will issue and allot 7,227 (seven thousand two hundred twenty-seven only) equity shares of Rs. 100 (rupees one hundred only) each at par and credited as fully paid up to the members of the transferor-company whose names are recorded in the register of members, or their respective heirs, executors, administrators, legal representatives or successors as may be recognised by the board of directors of the transferee-company on a date, to be fixed by the directors of the transferee-company.\" \n\n36. While printing Clause (11) of the scheme of amalgamation, the share exchange ratio was not mentioned therein. Itis explained in the affidavit of Colabawalla that the words \"for every one share of the transferor-company\" were accidentally omitted by the typist operating the computer who followed the method of cut and paste and, since the same computer file was used, wherever the Clause 11 of the scheme was retyped and printed out, the same error continued and was not noticed by any one. The amalgamation petitions, i.e., Company Petition No. 442 of 1992 and Company Petition No. 443 of 1992, however, contained prayer (f) which was in the following terms : \n \"(f) that the amalgamation of the petitioner-company with the transferee-company be made on the basis that holders of 1,000 existing issued, subscribed and paid up equity shares of Rs. 100 each of the petitioner-com-\n\npany be entitled to equity shares of Rs. 100 each of the transferee-company in the proportion of 7,227 equity shares in the transferee-company of the face value of Rs. 100 each for every one equity share of Rs. 100 each of the petitioner-company as provided in Clause (11) of the scheme of amalgamation exhibit 'E' hereto.\" \n\n37. It is explained by the said Colabawalla that the reference to Clause (11) in the prayer clause of both the company petitions was made in the bona fide belief that Clause (11) of the scheme reflected the share exchange ratio as clearly brought out in the prayer clauses in the two company petitions. As required by Section 394A of the Companies Act, 1956, the Government of India in the Ministry of Law, Justice and Company Affairs, was served with copies of the two company petitions with the prayers as set out hereinabove and the schemes also containing the omission. The Department of Company Affairs addressed a letter dated September 25, 1992, to the advocates of the two companies seeking particulars in connection with the said proposed scheme of amalgamation. Paragraph (viii) of the said letter is significant and specifically raised the query, \"Exchange ratio postulated in the scheme should be clarified. Whether the transferee-company will issue 7,227 shares only against all of the 1,000 shares held in the transferee-company or the number of shares to be issued will be 72,27,000. in case the number will be 72,27,000, please intimate whether the transferee-company has increased its authorised share capital.\" A copy of this letter dated September 25, 1992, is annexed as exhibit \"1\" to the said affidavit of Colabawalla. This query raised by the Department of Company Affairs was answered by Wadia Ghandy and Co., advocates of the sixth and the ninth respondents. Wadia Ghandy and Co., forwarded three copies of the valuation reports of the shares of both the companies as also the share, exchange ratio. Further, in paragraph (viii) of their letter, Wadia Ghandy and Co., specifically stated \"The exchange ratio is 7,227 equity shares of Rs. 100 each to be issued as fully paid-up by the transferee-company (i.e., Enjay Hotels Private Limited) for one equity share of Rs. 100 each fully paid of the transferor-company (i.e., Enjay Estates Private Limited). Also, the transferee-company has not increased its authorised share capital. The existing authorised share capital of the transferee-company is Rs. 5,00,00,000 divided into 5,00,000 equity shares of Rs. 100 each and upon the scheme of amalgamation being approved by the Bombay High Court necessary increase in authorised share capital shall be made.\" This letter is annexed at exhibit \"2\" to the said affidavit of Colabawalla. Thus, even before the company petitions came up for consideration before the court, the position regarding the share exchange ratio was clearly placed on record and intimated to the Department of Company Affairs by the sixth and the ninth respondents. It is, therefore, contended by the said respondents that there were no mala fides or intention to misrepresent facts or play a fraud\n\nupon the company court as contended, since the share exchange ratio was clearly spelt out in the communication addressed to the Regional Director of Company Affairs much before the company petitions were taken up for consideration by the company court. \n\n38. When the two company petitions came up for consideration before the company court, both counsel for the Regional Director of Company Affairs and official liquidator had appeared before the court. Neither of them raised any objection on (he lines as contended by the petitioners, nor were any allegations of fraud or misrepresentations made by either of them. The company judge heard and disposed of the two company petitions by an order dated February 3, 1993, by which he sanctioned the scheme of amalgamation. The order made by the company judge is in the following terms : \n \"This court doth further order that the amalgamation of the transferor-company with the transferee-company be made on the basis that holders of 1,000 existing issued, subscribed and paid up equity shares of Rs. 100 each of the transferor-company be entitled to equity shares of Rs. 100 each of the transferee-company in the proportion of 7,227 equity shares in the transferee-company of the face value of Rs. 100 each for every one equity share held of Rs. 100 each of the transferor-company as provided in Clause (11) of the scheme of amalgamation.\" \n\n39. Pursuant to the order of amalgamation made on February 3, 1993, in the two company petitions, the advocates for the sixth and the ninth respondents prepared draft of the drawn up order and submitted it to the office of the Company Registrar-of this court for approval. Due notices thereof along with a copy of the drawn up order were served on the official liquidator and the Regional Director of Company Affairs calling upon them to attend the meeting for settlement of the draft drawn up order, approval and sealing by the office of this court. Pursuant to such meeting being held, the drawn up order was prepared in accordance with the draft drawn up order, approved and sealed. in terms of the sanctioned scheme, the ninth respondent was required to issue 7,227 shares of Rs. 100 each for every one equity share of the sixth respondent. At the relevant time, the authorised capital of the ninth respondent was only Rs. 5,00,00,000 (rupees five crores only). Hence, it was necessary to increase the authorised capital of the ninth respondent beyond the sum of Rs. 72,27,00,000. This was specifically suggested by the chartered accountants in their report dated July 10, 1992, as well as by the Regional Director for Company Affairs in his letter dated September 25, 1992. The board of directors of the ninth respondent, by the resolution dated May 31, 1994, increased its authorised capital from Rs. 5,00,00,000 to Rs. 75,00,00,000 divided into 7,50,00,000 shares of Rs. 10 each by splitting its shares of Rs. 100 into 10 shares of the face value of Rs. 10 each. The ninth respondent thereafter submitted to the Registrar of Companies Form No. 5 and Form No. 23 on May 31, 1994, and paid the filing fees of Rs. 21,00,000 (rupees twenty one lakhs only) for registration of the said forms. Copies of the said forms are placed on record at exhibits \"3\" and \"4\" to the said affidavit of Colaba-walla. The ninth respondent then issued 7,22,70,000 equity shares of Rs. 10 each aggregating to Rs. 72,27,00,000 to the shareholders of the sixth respondent in accordance with the exchange ratio of 7,227 equity shares against one equity share of the sixth respondent held on the record date. A copy of the return of allotment under Section 75(1) of the Companies Act, 1956, dated July 18, 1994, in Form No. 2 filed with the Registrar of Companies evidencing the aforesaid fact is also placed on record at exhibit \"5\" to the said affidavit of Colabawalla. The contemporaneous documents all indicate that all steps have been taken by the two companies (i.e., sixth and ninth respondents) acting under the belief that the share exchange ratio would be 7,227 shares of the ninth respondent for every one share of the sixth respondent. In these circumstances, we are of the view that the omission in Clause (11) of the scheme for amalgamation is merely a matter of inadvertence and not intentional misrepresentation or misleading of the company court. We are also of the view that there was no fraud as alleged and the mistake was purely inadvertent. Even assuming that Clause (11) of the scheme contained a material omission, the company court always had power to sanction the scheme after modifying it in such manner as it deems fit. The amalgamation order made by the company court in any event clarifies that the ninth respondent would issue 7,227 shares for each share of the sixth respondent. The said order has become final and binding and has in fact been acted upon. The only persons who could have raised objections, namely, the shareholders of both the companies, the Central Government, the official liquidator and the two companies, are all bound by the said order. The petitioners, by a side wind in the name of public interest litigation, cannot challenge the amalgamation scheme which has been sanctioned and validly carried out in accordance with the provisions of the Companies Act. \n\n We are of the view that the amalgamation, which has become final and binding, cannot be permitted to be challenged by the petitioners, without locus standi, in a collateral proceeding in the present writ petition. An amalgamation order can only be challenged under the Companies Act by an appeal under Section 391(7) by any one of the parties, but no such appeal was ever filed. From 1993 onwards, no one (except the writ petitioners by the present writ petition) has complained that the amalgamation order was vitiated for any reason whatsoever. It is also of interest to note that the appropriate authority under Chapter XX-C of the Income-tax Act (i.e., the fifth respondent) had also sought clarifications from the ninth respondent which were forwarded by the letters dated June 2, 1994, June\n\n9, 1994 and June 14, 1994, written by K. K. Ramani and Co., chartered accountants, on behalf of the ninth respondent. The appropriate authority had also called the ninth respondent for a hearing which was held some time in June, 1994. Even in the affidavit of Prayag Jha dated October 17, 1994, in which the omission in Clause (11) of the amalgamation scheme has been highlighted and detailed reference has been made to the order of the company court, issuance of shares by the ninth respondent and so on, there is no prayer made that the order of amalgamation be set aside or reviewed or recalled, nor were any steps taken by the fifth respondent to set aside the amalgamation order on the ground of misrepresentation, suppression of facts or fraud, as contended before this court. \n\n It is contended by learned counsel for the sixth and the ninth respondents that neither the appropriate authority (fifth respondent) nor any one else could challenge the order dated February 3, 1993, at this point of time. In the alternative, it is contended that the appropriate authority is estopped from doing so since it had taken no step at any point earlier and allowed the shareholders to alter their position to their detriment. The reliance placed on the judgment of this court in J. K. (Bombay) Pvt. Ltd. v. New Kaiser-J-Hind Spinning and Weaving Co. Ltd. [1967] 2 Comp LJ 272 appears justified.\n\n The contention of Mr. Tulzapurkar, learned counsel for the sixth and the ninth respondents, that the amalgamation order cannot he challenged in collateral proceedings--appears to be well founded. The fasciculus of Sections 391 to 394 of the Companies Act constitutes a complete code on the subject of amalgamation, (see in this connection, PMP Auto Industries Ltd., In re [1994] 80 Comp Cas 289 ; (1995) 5 Comp LJ 598 (Bom) and Vasant Investment Corporation Ltd. v. Official Liquidator [1981] 51 Comp Cas 20 (Bom)). Section 391(7) of the Companies Act, 1956, specifically gives a right of appeal from any order passed under the said section. The Central Government or the appropriate authority or any one interested could have filed an appeal under Sub-section (7) of section 391 of the Companies Act. But, as a matter of fact, no one filed such an appeal. Thus, the order has become final and binding under section 391 of the Companies Act. In the hierarchy of courts, this court has no special jurisdiction under Article 226 to sit in appeal over an order made under Section 391 of the Companies Act, 1956, which has become final, binding and conclusive. The sixth and the ninth respondents placed reliance on the judgment of the Calcutta High Court in Krishna Nath v. DinajpurLoan Office [1938] 8 Comp Cas 152, and the judgment of the Supreme Court in S. V. Kondashar v. V. M. Desh-pande and Aast. CITv. A. K. Menon . In our view, these judgments do support the contention canvassed by Mr. Tulzapurkar that it is not open to this court while exercising writ jurisdiction in a public interest litigation to sit in judgment over the correct-\n\nness of an order made under Section 391 by the company court which has become final, conclusive and binding\". \n\n Finally, Mr. Tulzapurkar contended that even assuming this court were to hold that the amalgamation order was bad, it would make no difference to the construction already put up on the concerned plot for several reasons. First, if the amalgamation were to be set aside by this court, then the sixth respondent-company would be deemed to be in existence with all its assets and liabilities and rights and obligations and the status quo ante as existing immediately prior to the amalgamation order would stand restored. This would mean that the sixth respondent would continue to be the owner of the property and entitled to exercise the benefits on all terms already granted to it. There would be no question of considering the impact of Chapter XX-C of the Income-tax Act, 1961, since there would be no amalgamation and no transfer. Thus, the end result would continue to be the same, namely, that the construction on the concerned plot would be valid if it was not otherwise invalid. Looked at from any point of view, the validity of the amalgamation order is, therefore, wholly immaterial and irrelevant in the submission of learned counsel. We are inclined to agree. Though we have examined the issue at length, from the material on record, it is not possible to hold that the amalgamation order dated February 3, 1993, was in any way vitiated. Much less are we in a position to say that the construction put upon the concerned plot by the sixth and the ninth respondents is illegal for the said reason. \n\n (1) Application of Chapter XX-C of the Income-tax Act, 1961 : \n\n The petitioners have by an amendment to the writ petition made on November 16, 1992, prayed that the fifth respondent (appropriate authority under Chapter XX-C of the Income-tax Act, 1961) be directed to take appropriate measures against the sixth and the ninth respondents for violation of the provisions of Chapter XX-C of the Income-tax Act, 1961. Though the plea is somewhat vaguely taken in the writ petition, it was supported and amplified by the fifth respondent in the affidavit of Prayag Jha, Deputy Commissioner of Incorne-tax, dated October 17, 1994, and the further affidavit of A. Kumar, Assistant Commissioner in the appropriate authority in the Income-tax Department dated July 24, 1998. \n\n It is contended in the affidavit of Prayag Jha that the authority under Chapter XX-C had no role to play at the stage of admission of the writ petition and, therefore, the fifth respondent did not file any affidavit in reply to oppose the admission. It is also accepted that the fifth respondent adopted a policy of wait and watch with regard to the filing of declaration in Form No. 37-I. The stand of the fifth respondent is that, unless a declaration in Form No. 37-I is filed by the intending transferee/transferor in any transaction of immovable property in excess of rupees ten lakhs (at the relevant time), the fifth respondent had no jurisdiction. It is contended\n\nthat the appropriate authority could not take further action suo motu since it had no jurisdiction for want of filing of a declaration in Form No. 37-I. The court having made no specific directions against it during the pendency of the writ petition, the appropriate authority could not have taken action under Section 276AB of Chapter XXII of the Income-tax Act. It is pointed out by the fifth respondent that, even while this writ petition was pending before this court, the petitioners had moved the Finance Minister, Government of India, requesting him to look into the matter of transfer of the concerned plot at Bandra Land's End, making serious allegations of fraud and contravention of law including the provisions of Chapter XX-C of the Income-tax Act. The Deputy Commissioner of Income-tax of the fifth respondent by his letter dated June 7, 1994, informed the petitioners that they may discuss the matter with the members of the appropriate authority. Pursuant to the discussions, the appropriate authority issued a letter dated May 23, 1994, and called upon the concerned parties, namely, Enjay Estates Private Limited, transferee (the sixth respondent) and Enjay Hotels Private Limited, transferor (the ninth respondent) for discussions. Written submissions were filed by the sixth and the ninth respondents through their auditors, K. K. Ramani and Co., on June 2, 1994, and June 17, 1994. Ramani and Co. also filed certain documents along with their submissions and by a letter dated June 17, 1994, Ramani and Co., had admitted that as on that date they were not in a position to submit the audited statements of accounts of the ninth respondent as the same had not been finalised. The fifth respondent urges that even a situation of amalgamation of one company with the other would result in transfer of immovable property within the meaning of Chapter XX-C and, therefore, such a transfer would require a no objection certificate from the appropriate authority under the provisions of Chapter XX-C since the value of the land in question exceeded rupees ten lakhs which stood transferred from the sixth respondent to the ninth respondent as a consequence of the amalgamation order. Though it is the contention of the fifth respondent that such a transfer would be covered by the provisions of Chapter XX-C, and that there was an obligation to file a declaration in Form No. 37-I as required thereunder, since no such declaration in Form No. 37-I had been filed, the fifth respondent felt that it had no jurisdiction to investigate the case and, therefore, was helpless in the matter, though the fifth respondent was satisfied that the amalgamation was a device for transfer of land from one owner to another and also that the situation was one of the transfer of shares in the company falling within the scope of Chapter XX-C of the Income-tax Act. Peculiarly, the fifth respondent contends in the affidavit that this was only a prima facie view and that a final view can be taken only after the procedure prescribed under Chapter XX-C was fulfilled (meaning thereby a declaration in Form No. 37-I was filed)\n\nand after hearing the interested parties. Thus, it appears that, despite the prima facie view that the transfer of the land in question from the sixth respondent to the ninth respondent pursuant to the amalgamation of the two companies attracted the provisions of Chapter XX-C of the Income-tax Act, 1961, the fifth respondent was unwilling or unable to take any action under Chapter XX-C of the Income-tax Act for want of a declaration filed in Form No. 37-I. \n \n\n On July 24, 1998, while the writ petition was being argued, an affidavit as directed by this court was filed by A. Kumar, Assistant Commissioner, in the office of the fifth respondent. After referring to the facts which were already pleaded in the earlier affidavit of Prayag Jha, the said A. Kumar pointed out that during the relevant period, i.e., 1992-93, the jurisdiction of the appropriate authority under Chapter XX-C would be attracted if the transferred property was of the value of rupees ten lakhs or above. It was contended that Clause (11) of the scheme of amalgamation presented to this court had, inter alia, recited that the transferee-company would issue and allot 7,227 equity shares of Rs. 100 each at par and credited as fully paid to the members of the transferror-company and a reading of the above clause induced him to believe that the transferee-company would issue and allot 7,227 equity shares of Rs. 100 each to the members of the transferor-company. Thus, in consideration of the transfer of assets and liabilities of the transferor-company, the transferee-company would issue 7,227 shares of Rs. 100 each against the total shareholding of 1,000 shares of different members of the transferor-company, meaning thereby that the entire asset's of the transferor-company would stand transferred to the transferee-company at the cost of Rs. 7,22,700. Since the substratum of the transferor-company was only one asset, which was its land holding, and since it was not carrying out any other substantive business, it would mean that the assets of the transferor-company stood transferred for a consideration of Rs. 7,22,700 to the transferee-company. Since the \"apparent consideration\" indicated in the amalgamation order was much below rupees ten lakhs, the authority thought that it had no jurisdiction to entertain the case. Consequently, there was no occasion for the sixth and the ninth respondents to point out to the company court while sanctioning the scheme of amalgamation under Section 394 of the Companies Act as to whether a no objection certificate had been obtained from the competent authority. The said A. Kumar also pointed out that, despite the misrepresentation in Clause (11) of the scheme, the sanctioning order of the company court dated February 3, 1993, makes it clear that the consideration amount for the transfer of land would work out to Rs. 72,27,00,000. He, therefore, contends that if this figure of Rs. 72 crores consideration was present to the mind of the company court, perhaps the company court itself would have sought a clarification from the sixth and the ninth\n\nrespondents as to whether they had obtained a no objection from the appropriate authority. In other words, the appropriate authority pleads helplessness for want of filing\" of the declaration in Form No. 37-I and on account of the amalgamation order already made by the company court. \n\n In view of the serious allegations made that there was a deliberate attempt to circumvent the provisions of Chapter XX-C of the Income-tax Act, 1961, we directed the appropriate authority to make submissions through counsel and we have heard Mr. Sethna, learned senior counsel for the fifth respondent at great length on the legal issues, even though Mr. Tulzapurkar, learned counsel for the sixth and the ninth respondents, vehemently opposed this contention being permitted to be urged in this writ petition initiated as public interest litigation. Apart from dealing with the legal contentions revolving around the provisions of Chapter XX-C, learned counsel for the sixth and the ninth respondents strongly urged that this public interest litigation, which was initiated ostensibly to prevent building activity on land falling within CRZ area, contrary to the permissible development control regulations and other building laws, was now being used as an instrument of harassment of the sixth and the ninth respondents by raising the issue of applicability of Chapter XX-C. Without prejudice to the said general submission, Mr. Tulzapurkar also addressed us on the merits of the contention, which we shall consider. \n\n The first contention urged on behalf of the sixth and the ninth respondents is that the petitioners are not entitled to raise this contention and no question of public interest arises, since this issue is alien to this public interest litigation which is primarily concerned with the implementation of the Environment (Protection) Act, the CRZ regulations and the development control regulations. We are, however, not inclined to shut out the arguments on the issue, despite the contentions of learned counsel for the sixth and the ninth respondents. We are aware that giving of overwide leeway in a public interest litigation might open up a Pandora's box, but, having regard to the chequered history and the meandering course of this litigation, we would prefer to exorcise this spectre once and for all instead of allowing it to haunt different courts from time to time. Hence, the extra effort on our part, overruling the preliminary contention of Mr. Tulzapurkar. \n\n At the outset, we notice that there was no impediment in the way of the fifth respondent-appropriate authority from taking action under Chapter XX-C of the Income-tax Act, for no court had restrained it from acting. It is the firm belief of the fifth respondent that it gets no jurisdiction to act under Section 276AB, unless a declaration under Form No. 37-I was filed. Thus, the inhibition, if any, arose from the view of the statute taken by the appropriate authority and nol on account of any external circumstances. \n\n It is urged for the sixth and ninth respondents that before a petition is entertained under Section 394 of the Companies Act for sanctioning the\n\namalgamation of a scheme, the court under Section 394A of the Act is required to give notice of such application to the Central Government and take into consideration the representations, if any, made to it by the Government before passing any order. That such a notice under Section 394A had been issued to the Central Government before the petitions for amalgamation were entertained by the company court. Upon such notice being received, if at all any department of the Central Government had any objection to the scheme of amalgamation being sanctioned, on any ground whatsoever, it was the responsibility of such department to put forth its views before the company court. No such attempt was made by the appropriate authority under Chapter XX-C or by any one on behalf of the Central Government. Consequently, the order made sanctioning\" the amalgamation would operate as res judicata and cannot now be reopened on the contention urged by the petitioners. It is contended that the principle of res judicata is applicable to public interest litigation also. The judgment of the Supreme Court in Forward Construction Co. v. Prabhat Man-dal (Regd.), , is cited in support.\n\n It is next contended that the question as to the applicability of Chapter XX-C should and ought to have been raised by the Central Government/ appropriate authority at the time of consideration of the amalgamation scheme, before the order sanctioning the scheme was made on February 3, 1993. Such a contention not having made at the appropriate time, should not now be permitted to be raised as otherwise it would reduce the notice required to be given under Section 394A to an empty ritualistic formality and rob the said section of its true purpose. \n\n In order to appreciate the rival contentions, it is necessary to understand the scheme of Chapter XX-C. Section 269UC provides that, notwithstanding anything contained in the Transfer of Property Act, 1882, or any other law for the time being in force, no transfer of any immovable property in an area where the Chapter applies shall be effected if its value exceeds rupees ten lakhs, unless a written agreement for transfer is entered into between the transferor and transferee, in accordance with Sub-section (2), at least four months in advance of the intended date of transfer. The section also requires the agreement between the parties to be reduced to writing in the prescribed form, giving the particulars and verified in a prescribed manner and furnished to the appropriate authority within the prescribed time. The prescribed form of declaration is Form No. 37-I. \n \n\n Section 269UD of the Income-tax Act empowers the appropriate authority to make an order for the purchase by the Central Government of the immovable property involved. Upon such an order being passed, the property vests in the Central Government by virtue of Section 269UE. Failure to file a declaration in Form No. 37-I is declared to be an offence under\n\nSection 276AB. The efforts of the fifth respondent were concentrated on emphasising the term \"apparent consideration\" defined in Section 269UA. This expression, in relation to immovable property, is separately defined with respect to incidents of sale, exchange, lease, rent. The term \"transfer\" is also defined in Clause (f) of Section 269UA in wide and general terms. Put in a nutshell, the argument of the appropriate authority is that the transaction by which the two companies, namely, the sixth and the ninth respondents were amalgamated, amounted to a \"transfer\" within the meaning of Clause (f) of Section 269UA and that the \"apparent consideration\" for the transfer was the consideration indicated in Clause (11) of the scheme itself and it being far in excess of rupees ten lakhs, there was an obligation to file a declaration in Form No. 37-I, and by reason of failure to do so, the consequences of application of Chapter XX-C could not be avoided. \n\n Mr. Tulzapurkar, learned counsel for the sixth and the ninth respondents, strongly urged that Chapter XX-C of the Income-tax Act, 1961, is not intended to apply to transfers effected under orders of a court pursuant to Sections 391 to 394 of the Companies Act, since the object of Chapter XX-C is to prevent evasion of tax or undervaluation of immovable property when it is transferred by act of parties. He cited the judgment of the Supreme Court in C. B. Gautam v. Union of India , wherein the Supreme Court has traced out the legislative history of Chapter XX-C. Though the Supreme Court was primarily concerned with the challenge to the constitutional validity of the provisions contained in Chapter XX-C, while upholding the constitutional validity, the Supreme Court pointed out that :\n\n (a) the provisions of this Chapter are attracted only when there is a significant undervaluation of the property to be sold with the intention of evading tax ; \n\n (b) the provision made for compulsory purchase can be effected only for reasons which are germane to the object of Chapter XX-C, namely, to overcome attempts at evasion of tax ; and \n \n\n (c) the provisions of Chapter XX-C are not intended to affect parties unconnected with tax evasion. \n\n It is contended that a situation of amalgamation takes place under the direct supervision of the company court, after notice to the Central Government, and, therefore, it is not a situation in which there could be any tax evasion. Consequently, it is urged that the provisions of Chapter XX-C would not be attracted. \n\n It is next contended that the provisions of Chapter XX-C would apply only to cases of \"tranfer\" as defined by Clause (f) of Section 269UA. A scrutiny of the definitions of \"apparent consideration\" given in Clause (b) and \"transfer\" given in Clause (f) would unmistakably indicate that the trans-\n\nfers to which the provisions of Chapter XX-C are intended to apply, are only transfers under agreements or contractual transfers and not statutory transfers or transfers effected by orders of the court or by operation of law. In a situation of amalgamation, the transfer is not by way of sale, exchange, lease or rent so as to fall within Section 269UA. Further, the process by which the land in question stood vested in the transferee-company by virtue of the amalgamation order, would not answer the description of \"immovable property\" within the meaning of Clause (d)(ii), nor does it answer the description of \"transfer\" as defined in Clause (f)(ii) of Section 269UA of the Income-tax Act. (See in this connection Sailendra Kumar Ray v. Bank of Calcutta Ltd. [1948] 18 Comp Cas 1 (Cal) and Suhti-yanidhi (Virudhunagar) Ltd. v. A.R.S. Subrahmanya Nadar [1951] 20 Comp Cas 214 (Mad) [FB] and Telesound India Ltd., In re [1983] 53 Comp Cas 926 (Delhi)). In Sailendra Kumar Ray's case [1948] 18 Comp Cas 1, the Calcutta High Court held that in a situation of amalgamation even if it can be said that there was a transfer of asset, the transfer was not by way of an assignment but by the order of the court backed up by the force of a statutory provision and by operation of law. In Sahayanidhi's case [1951] 20 Comp Cas 214 (Mad) [FB], the Madras High Court reiterated this proposition. In Telesound's case [1983] 53 Comp Cas 926 (Delhi), it is held that as amalgamation has its origin in a statute and is statutory in character, the transfer and vesting is by operation of law.and not an act of the transferor-company, nor an assignment by it, but is the result of a statutory instrument. In J. K. (Bombay) Pvt. Ltd. v. New Kaiser-I-Hind Spinning and Weaving Co. Ltd. [19671 2 Comp LJ 272, this court cited with approval the decision of the English Court in Re Garner Motors Ltd. [1937] 1 All ER 671 (Ch D) and held that a scheme of amalgamation has statutory operation when sanctioned by the company court under the relevant provisions of the Companies Act and is distinct and different from a mere agreement signed by the necessary parties. Even if the scheme is approved by all concerned parties by consensus, merely because it is so agreed upon, the court is not obliged to put its imprimatur on it. The court has the discretion and power to reject a scheme even if all the shareholders and creditors have agreed to it. But, once the scheme is scrutinised by the company court and sanctioned by an order made by it under Section 391 of the Companies Act, it ceases to retain the character of contract and operates by force of the statute. This judgment was considered by the Supreme Court in appeal in J. K. (Bombay) Pvt. Ltd. v. New Kaiser-I-Hind Spinning and Weaving Co. Ltd. [1970] 40 Comp Cas 689, and the Supreme Court reiterated that once a scheme becomes sanctioned by the court, it ceases to operate as a mere agreement between the parties and becomes binding on the company, the creditors and the shareholders and has statutory operation by virtue of the provisions of Section 391 of the Companies Act. Such a scheme sanctioned by\n\nthe company court is statutorily binding even on the creditors and shareholders who might have dissented from it or who might have opposed its being sanctioned. It, therefore, has the statutory sanction in that sense. The Supreme Court also approved the observations in Re Garner Motors Ltd. 11937] 1 All ER 671 (Ch D), while coming to this conclusion. The observations of the Calcutta High Court in House of Labourers Ltd. v. Comilia Banking Corporation Ltd., AIR 1937 Cal 381, are to similar effect.\n\n There is overwhelming authority of precedents suggesting that when an amalgamation takes place, the transfer of assets takes place by the force of the company court's order and/or by operation of law ; it ceases to be a contractual or a consensual transfer. The contention, therefore, is that Chapter XX-C is not attracted to such a transfer by operation of law. This contention has substance and needs to be upheld. \n\n It is alternatively contended by counsel for the sixth and the ninth respondents that Section 269UA is not intended to apply to all types of transfers, but only to some particular types of transfers as there is no reference therein to a transfer consequent upon an amalgamation scheme. Hence, it is contended that a transfer consequent upon amalgamation falls outside the sweep of Section 269UA. In order to drive home this point, learned counsel drew our attention to Section 2(1B) of the Income-tax Act, 1961, which defines the expression \"amalgamation\". Sections 45 and 47 of the Income-tax Act which deal with capital gains arising upon a transfer of a capital asset, expressly exclude a situation of amalgamation for the purposes of capital gains. Similarly, Section 45 of the Gift-tax Act, 1958, provides that no gift-tax will be leviable in a situation of amalgamation. The term \"amalgamation\" under the provisions of the Gift-tax Act has the same meaning as in Section 2(1B) of the Income-tax Act. It is, therefore, contended that, in an amalgamation, there is neither any sale, nor any exchange of any immovable property, nor any lease thereof. (See in this connection CIT v. Rasiklal Maneklal (HUF) .\n\n It is true that in a case of amalgamation there is a share exchange ratio prescribed according to which the shareholders of the transferor-company would be entitled to the shares of the transferee-company. This, however, does not make it a situation of exchange of immovable property, or relin-quishment of any right to immovable properly so as to make the transaction amenable to Section 269UA of the Income-tax Act. There is neither sale nor purchase in a case of amalgamation. Section 54 of the Transfer of Property Act defines \"sale\" as a transfer of ownership in exchange for a price, the \"price\" being defined in Section 2(10) of the Sale of Goods Act as any consideration paid for sale of the goods. In CIT v. Motors and General Stores (P.) Ltd. , it was pointed out by the Supreme Court that the presence of money consideration is an essential element in a transaction of sale. Tested by this yardstick, it would appear that in an\n\namalgamation no consideration in any form-much less in the form of money--flows from the transferee-company to the transferor-company, which was the erstwhile owner of the assets. The shares are issued by the transferee-company, not to the transferor-company, but to the shareholders of the transferee-company, who must necessarily be treated as distinct from the transferor-company itself. The shareholders of the transferor-company could not be deemed in law to be the owners of the assets of the transferee-company, nor can they be said to have held any interest in the assets of the transferee-company. (See in this connection Bacha F. Guzdar v. CIT ). Right from the time of Salomon's case [1897] AC 22 (HL) a company has always been treated as a separate and distinct juristic person with a personality of its own different from that of its shareholders. No shareholder can legitimately claim to have an interest in any of the properties or assets held by the company. The judgment of the Supreme Court in Accountant and Secretarial Services Pvt. Ltd. v. Union of India, , was pressed into service to contend that a bank constituted under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, though materially controlled by the Central Government, has a distinct personality of its own and its property cannot be said to be the property of the Union of India. Hence, it is contended that by the act of amalgamation, there was no sale of any assets by the transferor-company (the sixth respondent) to the transferee-company (the ninth respondent) in the amalgamation. Thus, it is urged that there being no sale or exchange or lease of immovable property in the case of amalgamation, the transfer of the assets of the sixth respondent to the ninth respondent does not fall within the ambit of Chapter XX-C of the Income-tax Act, 1961.\n\n Mr. Tulzapurkar referred extensively to the provisions of Chapter XX-C of the Income-tax Act and pointed out that the transfer on an amalgamation cannot fall within the sweep of Section 269UA of the Income-tax Act even if we were to consider the extended definitions of \"immovable property\" within the meaning of Clause (d)(ii) and \"transfer\" as defined in Clause (f)(ii) of Section 269UA for the following reasons : \n\n (a) there is no acquisition of shares by the transferee-company in the case of amalgamation and, therefore, neither is the case one of \"immovable property\" as defined in Clause (d)(ii) nor is it a situation of \"transfer\" as defined in Clause (f)(ii) ; \n\n (b) in a situation of amalgamation, the transferee-company does not acquire any shares giving to it the right of enjoyment of any property. The shares, on the other hand, are issued by the transferee-company to the shareholders of the transferor-company ; \n\n (c) acquisition of shares by the shareholders of the transferor-company does not enable them to acquire the assets of the amalgamated com-\n\npany, nor can they be said to enjoy any property or asset of the amalgamated company. \n\n Hence, it is contended that a transfer of assets pursuant to a scheme of amalgamation sanctioned by the court, neither falls within the ambit of \"immovable property\" as defined in Clause (d)(ii) of Section 269UA, nor amounts to a \"transfer\" within the meaning of Clause (f)(ii) of Section 269UA of the Income-tax Act. \n\n \"Apparent consideration\", as defined in Clause (b) of Section 269UA of the Income-tax Act, is an inalienable factor which must be reckoned within the application of Chapter XX-C for if the appropriate authority is satisfied that there is undervaluation, then it is empowered to purchase the property at the apparent consideration. In a situation of amalgamation, there is no consideration--apparent or otherwise--nor is it payable in respect of any specific immovable property. In Li Taka Pharmaceuticals Ltd. v. State of Maharashtra [1998] 91 Comp Cas 871, this court pointed out that when an amalgamation takes place what is transferred is a going concern and not the assets and liabilities separately. Consequently, while assessing stamp duty this court was of the view that the concerned authority has to levy duty only on the basis of the price of the shares allotted to the shareholders of the transferor-company, or other consideration if paid, and not by separately valuing the assets and the liabilities. Thus, when an amalgamation takes place, there is no sale or exchange of individual assets of one company for another. Consequently, it cannot be said that there is consideration paid for transfer of any particular asset of the transferor-company. Even if the assets of the transferor-company include items of immovable property, for the purposes of valuation and amalgamation, they must be treated as movable properties. In Malabar Fisheries Co. v. CIT , in a situation of dissolution of assets of the partnership firm, the Supreme Court held that there is no transfer of assets involved upon dissolution of the partnership and distribution of its assets. To similar effect is the view of the Supreme Court in CIT v. Dewas Cine Corporation and CIT v. Juggilal Kamalapat . In both the judgments, the Supreme Court has taken the view that the allotment of property of the firm upon its dissolution does not amount to sale. In Addanki Narayanappa v. Bhaskara Krishnappa, , the Supreme Court has specifically observed that even if the assets of the dissolved firm include immovable properties, for the purposes of their allotment amongst partners they must be treated as movable property. Thus, it is contended that an amalgamation falls outside the purview of Section 269UA of the Income-tax Act, 1961.\n\n It is then urged that, in order to attract the provisions of Chapter XX-C of the Income-tax Act, there must exist an \"agreement\" within the meaning of Section 269UC of the Income-tax Act. Section 269UC speaks of an\n\n\"agreement\" as a final, concluded and binding agreement between the parties. The submission is that a scheme of amalgamation, even if agreed to unanimously by the shareholders and creditors, does not attain the character of a final, binding and concluded agreement as provided under Section 269UC of the Income-tax Act. The reason for this is simple for until sanctioned by the court, a scheme for amalgamation is inchoate and without effect. It becomes effective only upon sanction by the court and that too to the extent sanctioned by it. Thus, whatever might have been in the contemplation of the shareholders and creditors agreeing upon a scheme of amalgamation, what is enforceable in law is only that portion of the scheme which is sanctioned by the court. But for the sanction of the court, the scheme would remain wholly unenforceable, consequently, it does not answer the description of the expression \"agreement\" contemplated under Section 269UC of the Income-tax Act. \n\n It is contended that a scheme of amalgamation could not amount to an \"agreement\" within the meaning of Section 269UC of the Income-tax Act for another reason also. Under Section 269UC, once an agreement has been entered into in the prescribed form, i.e., Form No. 37-I, and is filed with the appropriate authority, no modification or alteration in any of its terms is permissible. Again, the agreement itself has to be filed within the period stipulated in Sub-section (1) of Section 269UC. In the case of an amalgamation scheme, it is not possible to postulate the date on which the transfer would become effective since the parties have no control on the date on which the sanctioning order would be made by the court. Thus, there is no way of complying with the period within which such a document is to be filed. Secondly, the scheme of amalgamation, though unanimously agreed to by the shareholders and creditors, may be rejected by the court or approved only in part while making the sanction order. If such a scheme of amalgamation were to be considered as an \"agreement\" within the meaning of Section 269UC, it would mean that, after the declaration has been filed in Form No. 37-I, it may cease to exist or may be varied in material particulars as a result of the sanction order. This situation strongly militates against a scheme being considered as an \"agreement\" within the meaning of Section 269UC in the submissions of learned counsel. It is urged that if at all the Legislature intended that Chapter XX-C of the Income-tax Act, 1961, should apply to an amalgamation scheme, then it would have made an express provision for such a situation. The absence of reference to an amalgamation scheme is not accidental, but intentional, since the Legislature did not intend an amalgamation scheme to be covered by the provisions of Chapter XX-C, even if there is consequential transfer of immovable property. \n\n The valuation put on the shares cannot be treated as \"apparent consideration\" for the purposes of transfer. If the valuation of the shares pro-\n\nposed to be issued upon amalgamation is below the stipulated limit, then obviously the provisions of Chapter XX-C would not apply. However, while sanctioning the scheme, the company court may modify the scheme and provide for issuance of a larger number of shares upon amalgamation. When this happens, then, for the first time, it would be the stage when the actual valuation or the consideration becomes known. Thus, the consideration would be known at the stage of sanctioning of the amalgamation scheme and it would be practically impossible for anyone to comply with the provisions of Section 269UC of filing the declaration in Form No. 37-I in advance, or for seeking\" the no objection certificate from the appropriate authority. \n\n Chapter XX-C contemplates payment of consideration by the transferee to the transferor. In a scheme of amalgamation, no consideration is paid by the transferee-company to the transferor-company, but shares are issued to the shareholders of the transferor-company who were not the legal or beneficial owners of the assets transferred to the transferee-company upon amalgamation. (See in this connection Bacha F. Guzdar v. CIT . This also militates against the contention advanced by the fifth respondent.\n\n Chapter XX-C provides for compulsory purchase of immovable property sought to be transferred, in the event of undervaluation, at the price indicated as \"apparent consideration\". This also cannot be fulfilled in a case of amalgamation, since there being no transfer of individual assets for agreed consideration, it is not possible to stipulate as to what consideration, apparent or actual, was for transfer of any individual asset of the transferor-company. Thus, there is no way of knowing whether there is undervaluation, as contemplated by Chapter XX-C, in respect of a particular property. \n\n Under the scheme of Chapter XX-C, payment at the rate of apparent consideration is to be paid in the event of compulsory purchase to the owner, i.e., the transferor. Once an amalgamation scheme is sanctioned by the court, the transferor-company ceases to exist from the date on which the scheme comes into force and loses its identity. (See in this connection Saraswati Industrial Syndicate Ltd. v. CIT ). Consequently, a situation of identifying the transferor and paying it the purchase price equivalent to the apparent consideration by the Government, can never arise.\n\n There is no provision in Section 269UE(1) and (6) of the Income-tax Act for vesting of the property in the Central Government free from all liabilities and obligations. An elementary facet of the amalgamation scheme is that, along with the transfer of assets, all liabilities are also transferred to the amalgamated company or the transferor-company. It is difficult to take the view that the Central Government, in the event of its becoming a\n\npurchaser under Chapter XX-C, would have to meet and discharge all the obligations and liabilities of the transferor-company. That would be a situation which could arise if we accept the contention of the appropriate authority that an amalgamation is amenable to the provisions of Chapter XX-C of the Income-tax Act. \n\n Section 269UE(6) of the Income-tax Act provides that when the Central Government makes an order for compulsory purchase of the rights referred to in Sub-clause (ii) of Clause (d) of Section 269UA, the immovable property shall vest in the Central Government and place the Central Government in the same position in relation to such rights as the person in whom such right would continue if such an order had not been made. The consequences in the case of an amalgamation are somewhat startling. This would mean that in respect of an immovable property as defined in Sub-Clause (ii) of Clause (d) of Section 269UA, the Central Government would step into the shoes of the transferee-company. This in turn means that the Central Government is required to discharge all obligations which the transferee-company would have to do. These may include obligations like issuing of shares to the shareholders of the transferor-company or taking over the transferor-company as a going concern including workers, their liabilities, contracts, obligations, movables and so on. For this reason also, a situation of amalgamation does not appear to be intended to be covered by Chapter XX-C of the Income-tax Act. \n\n Thus, a conspectus of the provisions contained in Chapter XX-C of the Income-tax Act, 1961, and the probable consequences which might result if it were to be held that the Chapter applies to amalgamation schemes, are dissuasive enough not to accept the contention of the appropriate authority in this regard. \n\n The contention urged by the petitioners as well as the fifth respondent, appropriate authority, that a no objection certificate under Chapter XX-C is a condition precedent to the company court considering the scheme for amalgamation also does not appear to be tenable for several reasons. First, whenever the Legislature wanted a sanction order to be subject to some condition precedent, the Legislature has so provided expressly. (See in this connection provisions of Sections 23 and 24 of the Monopolies and Restrictive Trade Practices Act prior to the deletion of these Sections from the Act by amendment of 1991). While interpreting a statute, the court has to consider the legislative habit. The legislative habit indicates that where the Legislature intended a sanction to an amalgamation scheme was subject to consent by another authority, it expressly provided so. There is no such provision either in Chapter XX-C or in any other provision of the Income-tax Act, 1961. This is a clear indicator of the negative intention. The sixth respondent has cited an unreported judgment of this court (per Tipnis J.) dated November 10, 1994, in Judges Summons No. 346 of 1994 in Com-\n\npany Application No. 118 of 1994, connected with Company Petition No. 370 of 1994, where the contention urged in opposition to an amalgamation scheme was that the court should not consider an amalgamation scheme which was likely to result in an unlawful assignment of tenanted premises of the transferor-company to the transferee-company. This court rejected the contention on the ground that whether the scheme of amalgamation in fact and in law results in an unlawful assignment, is a question which can only be determined after amalgamation before the appropriate forum in proper proceedings and does not arise for consideration by the company court at the stage of giving sanction to the scheme for amalgamation. (This order of the learned single judge was virtually affirmed since an appeal thereagainst was summarily dismissed on November 24, 1994, by the Division Bench of this court). To similar effect are the observations of the Supreme Court in General Radio and Appliances Co. Ltd. v. M. A. Khn-der [1986] 60 Comp Cas 1013. It is, therefore, contended that, by conjuring up consequences that may arise after amalgamation, it is not open to the company court, which is the forum constituted under a special Act, namely, the Companies Act, to reject or refuse to sanction a scheme of amalgamation by reckoning factors which are non-germane and irrelevant for consideration under the provisions of Sections 391 to 394 of the Companies Act. Hence, it is contended that a no objection certificate by the appropriate authority under Chapter XX-C is not a prescribed condition precedent under Section 391 of the Companies Act and, therefore, is a factor wholly irrelevant, immaterial and non-germane for consideration at the time of sanctioning of the amalgamation scheme. In these circumstances, we are of the view that the contention of the petitioner, that the company court was obliged to suo motu issue a notice to the appropriate authority and seek its no objection certificate under Chapter XX-C as a condition precedent to sanctioning the amalgamation scheme, has no statutory basis and cannot be accepted. \n\n Finally, it is urged on behalf of the sixth and the ninth respondents, that even assuming Chapter XX-C is held to apply to a transfer upon amalgamation, the transfer effected does not become void or non est merely for non-compliance with the provisions of Chapter XX-C, or Section 269UC in particular. There is no provision in the entire Chapter XX-C providing that a transfer becomes void or non-est for non-compliance with any of the provisions contained therein. If at all the Legislature had so intended, there would have been a specific provision as contained in Section 281 of the Income-tax Act. Thus, the only consequence of failure to file a declaration in Form No. 37-I would be a prosecution under Section 276AB and non-registration of a document by virtue of Section 269UL, of the Income-tax Act. \n\n Even assuming that the petitioners are entitled to urge the contention that Chapter XX-C applies to the transfer of the concerned land as a consequence of the amalgamation scheme being sanctioned by the company court, upon careful consideration of the detailed provisions of Chapter XX-C of the Income-tax Act, we are inclined to take the view that Chapfer XX-C is not intended to apply to situations of transfer of immovable property consequent upon an amalgamation scheme being sanctioned by an order of the court. Once the scheme is sanctioned, it has the imprimatur of the court and operates by the combined force of the statute and the court's authority. The scheme as such ceases to be in the realm of an \"agreement\" as contemplated under Chapter XX-C of the Income-tax Act. We are, therefore, of the considered view that Chapter XX-C could not have applied to the transfer of the concerned plot at Bandra from the sixth respondent to the ninth respondent as a consequence of the scheme of amalgamation sanctioned by the company court by its order dated February 3, 1993. \n\n The conclusions which we have arrived at on statutory interpretation also appear backed by the following practical considerations : \n\n (a) It is significant that the appropriate authority has not bothered to take action under Section 276AB of the Income-tax Act, 1961. Nor has it initiated any other action in connection with the aforesaid transfer for over such a long period of time. \n\n (b) We can take judicial notice that several schemes of transfer are sanctioned every day by the company judge and no one seems to have seriously suggested, argued or held that Chapter XX-C of the Income-tax Act, 1961, would apply to a situation of sanction of an amalgamation scheme. The authorities entrusted with the administration of the statute (i. e., the Income-tax Act) also do not appear to have interpreted the provisions of Chapter XX-C to mean what is being contended now before us. By the principle of contemporanea expositio, the practical manner in which the provisions of Chapter XX-C have been interpreted over a considerably long period need not be upset by this court, in our judgment (see in this connection Raymond Synthetics Ltd. v. Union of India [1992J 73 Comp Cas 762 (SC) and Suresh Nathan (N.) v. Union of India, . \n\n (c) If this court were to accept the contention of the petitioners and interpret the provisions of Chapter XX-C in the manner suggested by the petitioners, a large number of innocent persons who have been parties to amalgamation schemes would stand exposed to criminal prosecutions under Section 276AB of the Income-tax Act. The appropriate authority has not placed any material before us that in any past case of sanction of an amalgamation scheme, they had insisted upon filing of a declaration in Form No. 37-I as required by the provisions of Section 269UC, nor have they placed any material to show that any such parties have been subjected to criminal prosecutions under Section 276AB for failure to do so. \n\n Thus, we are of the considered view that the contention of the petitioners, which was enthusiastically echoed by the fifth respondent, appro-\n\npriate authority, that the transfer of the concerned land from the sixth to the ninth respondent under the scheme of amalgamation would be covered by the provisions of Chapter XX-C, though novel and ingenious, must be rejected. \n\n History of litigation : \n\n Mr. Tulzapurkar, learned counsel for the sixth and the ninth respondents, urged that the history of the litigation spanning about twenty long years covering several writ petitions and appeals from this court to the Supreme Court, back and forth, the final decision of the Supreme Court in S. N. Rao's case, and the sword of Damocles hanging over this writ petition in which the petitioners have urged contention after contention, taken up by amendment after amendment, even though all contentions of the petitioners were rejected at all stages by all courts, indicates that there is utter lack of bona fides on the part of the petitioners who claim to be pursuing this litigation in public interest. He also urged that, pursuant to the sanctioned plans, whose validity was upheld by the Supreme Court in S. N. Rao's case, , the sixth and the ninth respondents have acted lawfully and in full compliance with all legal requirements and the applicable buildings rules and regulations. Obviously, this court did not injunct the said respondents from continuing with the construction which started in 1984, despite repeated clamour for injunction orders by the petitioners. Perhaps being possessed with the premonition that this writ petition has no substance, this court merely made an order that the sixth and the ninth respondents may continue the construction at their risk upon filing an undertaking that they would claim no equities in the matter if the construction was allowed to continue. Mr. Tulzapurkar urges that the construction is complete and has resulted in a multistoreyed seven star hotel, which was conceived way back when the plans were submitted for sanction and there is no reason whatsoever to interfere with its functioning. On the other hand, he urges that the history of litigation from 1974 onwards, the repeated contentions and challenges in all available fora by the petitioners, contentions urged as to the applicability of Chapter XX-C of the Income-tax Act, 1961, taken together, suggest that there may be \"something more than what meets the eye\" as observed by the Supreme Court in Sachindanan Pandey's case, . \n\n There appears to be quite some legitimacy to the grievance made by learned counsel for the sixth and the ninth respondents. It appears to us that, what may have started as a bona fide public interest litigation, soon degenerated into a case of private witch-hunting. If at all the petitioners were interested in pursuing the litigation as a public interest litigation, after the observations of the Supreme Court in S'. N. Rao's case, which we have reproduced above, the matter should have been put\n\nto rest. The annoying persistence with which the petitioners have pursued this writ petition certainly gives credence to the contention of learned counsel for the sixth and the ninth respondents that this writ petition was intended only as a PIL meaning \"persecution interest litigation\" and not PIL meaning public interest litigation. \n\n Though, this writ petition was seriously taken up for final hearing on June 30, 1998, and the hearing continued from July 1, 1998, to August 5, 1998, and the petition was finally reserved for judgment on August 6, 1998, the judgment could not be delivered earlier on account of several overriding reasons beyond our control. At one stage, following the dicta of the Supreme Court in Bhagwandas Fatechand Daswani v. H. P. A. International, , we even suggested to the parties and counsel that we may treat this matter as not part-heard and set it down for re-hearing. However, we are glad to note that the parties and their counsel reposed full faith in our ability to remember and decide the facts and the legal issues on the basis of our detailed notes supplemented by the efficient written submissions filed by the parties. At their request, we have decided the matter ourselves, though after a span of twenty-two months. While regretting the unavoidable delay in delivering our judgment, we express our gratitude to learned counsel on both sides who have with consummate skill rendered invaluable help in unravelling several knotty and complicated legal issues. At the end of the day, in our considered judgment, the writ petition has no merit and must fail.\n\n In the result, the writ petition fails and is hereby dismissed. The petitioners shall pay a sum of Rs. 20,000 (rupees twenty thousands only) each to the first, second, fourth, sixth and ninth respondents as costs. \n\n In view of the dismissal of the writ petition, all interim orders are vacated. \n\n Issuance of certified copy expedited." }, { "title": "Commissioner Of Income-Tax vs Vr. S.R.M. Firm And Others on 15 March, 1994", "url": "https://indiankanoon.org//doc/596546/", "text": "Commissioner Of Income-Tax vs Vr. S.R.M. Firm And Others on 15 March, 1994\nEquivalent citations: [1994]208ITR400(MAD)\nAuthor: A.R. Lakshmanan\nBench: A.R. Lakshmanan\nJUDGMENT \n \n\n Raju, J. \n \n\n 1. The taxability and computation of income of a resident of India in respect of the income derived from a foreign source is the subject-matter of a batch of tax reference cases pending on the file of this court. An adjudication of the issues raised depends upon the agreement entered into between the Government of India and the Government of Malaysia for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes of income published in Notification No. 1705/F. No. 11(43)/46-FTD dated July 1, 1977. Learned counsel appearing in some of the cases have selected a few of the representative cases which could be decided initially so that the other cases could be ultimately decided applying the ratio of these cases. Though the terms of reference in different cases vary, the core of the problem and the basic issues involved for adjudication are similar and identical and, consequently, these cases are taken up for consideration together. \n\n 2. Tax Case No. 264 of 1983 : The assessee in this case is a firm owning certain rubber estates in Malaysia. During the assessment year 1977-78, the assessee earned an income of Rs. 88,424. The assessee also sold an item of property, the short-term capital gains of which resulted in a sum of Rs. 18.113. On the ground that both the items of income are assessable in India, the Income-tax Officer assessed the assessee on an income of Rs. 1,06,540 to tax of Rs. 12,727 and adding interest under section 139(8) in a sum of Rs. 10,775, a total demand of Rs. 23,502 was raised against the assessee. Aggrieved, the assessee filed an appeal before the Commissioner of Income-tax (Appeals), Madurai. The appellate authority allowed the appeal applying article 1 read with articles 7 and 6, respectively, of the agreement for avoidance of double taxation. The matter was pursued on appeal before the Appellate Tribunal by the Department and the Tribunal also rejected the appeal. Thereupon, the Department moved the Tribunal for a reference and the Tribunal by its order dated June 7, 1982, referred the following two questions for the adjudication of this court : \n\n \"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the income from the rubber estates in Malaysia cannot be included in the total income of the assessee and assessed to tax in India under the Income-tax Act, 1961 ? \n\n (2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal's finding that the assessee does not maintain a separate establishment in India in respect of the rubber estates in Malaysia is at all relevant and if so whether it is based on materials and facts relevant thereto, regard being had to the provisions contained in the agreement for avoidance of double taxation between Malaysia and India ?\" \n\n 3. Tax Case No. 789 of 1984 : The assessee in this tax case is a Hindu undivided family and a resident in India. It earned business profits (share income) and property income from Malaysia. The assessee claimed before the Income-tax Officer that the Malaysian income is not includible in the total income in India in view of the agreement of avoidance of double taxation. The Income-tax Officer assessed the assessee on an income of Rs. 1,31,320 to a tax of Rs. 63,653. The Claim of the assessee that the Malaysian income should not be assessed to tax, was rejected on the ground that articles 6 and 7 of the agreement use the word \"may\" and, therefore, the country of residence has got every right to tax such income. The assessee filed an appeal before the first appellate authority in respect of the business income and the first appellate authority held that the Malaysian income is includible only for rate purposes, though it was held to be otherwise not taxable. The Department pursued the matter on appeal before the Tribunal but the same was rejected. The assessee also filed an appeal objecting to the inclusion of the income even for rate purposes. In view of certain conflicting views prevailing among different Benches, the matter was heard by a Special Bench of three Members and it was held by the Special Bench that the direction of the first appellate authority to include the foreign income for rate purposes shall stand cancelled. Thereupon, at the instance of the Department, by an order of reference dated September 28, 1983, the following question of law has been referred for the adjudication of this court : \n \"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal's decision that the Malaysian income cannot be subjected to tax in India is in accordance with the Agreement for Avoidance of Double Taxation entered into between the Government of India and Malaysia (Notification No. G. S. R. 167(E), dated April 1, 1977 (see [1977] 107 ITR (St.) 36)) ?\" \n\n 4. Tax Case No. 790 of 1984 : The assessee in this case is a Hindu undivided family and a resident in India. It earned income from the rubber estates owned in Malaysia. The Assessing Officer was of the view that, since the assessee is a resident and has been exercising control over the foreign business from within India having regard to article 6(2)(a) of the agreement, the profit attributable to such control in India can be taxed in India and double taxation relief will be available only in terms of article 22(1)(c) of the agreement. On appeal, the first appellate authority ordered the deletion of the entire income of Rs. 1,68,330 from Malaysia on the view that unless the Malaysian enterprise carries on business in India, its profits in Malaysia cannot be taxed. The Department pursued the matter in appeal before the Tribunal. In view of the conflict of views prevailing in the Tribunal as to whether the Malaysian income is includible for rate purposes or not, the matter was placed before a Special Bench. The Tribunal, on an elaborate consideration of the matter with particular reference to the provisions of the Income-tax Act and also the terms of the avoidance of double taxation agreement, held that article 6 of the agreement was a provision \"to the contrary\" so far as the Income-tax Act, 1961, is concerned in relation to the income from immovable property in Malaysia. So far as the business profits earned from Malaysia are concerned, the Tribunal held, applying article 7 of the agreement, that no portion of the business is attributable to establishments other than permanent establishments in Malaysia and consequently article 7 of the agreement also must be considered to be a provision \"to the contrary\" so far as Income-tax is concerned. As regards interest income, it was held that the reasons relating to the property income would equally apply and consequently such income would also be taxable only in Malaysia and to that extent article 12 of the agreement also must be considered to be a provision \"to the contrary\" for the purpose of the Income-tax Act. The Tribunal also considered the scope of article 22 of the agreement. The Tribunal repelled the stand of the Department that the income from Malaysia is first includible in the total income for rate purposes and held that having regard to the provisions \"to the contrary\", no part of the income accrued in Malaysia could be included in the assessment even for rate purposes. Thereupon, at the instance of the Department, the following question of law has been referred for the adjudication of this court : \n \"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal's decision that the Malaysian income cannot be subjected to tax in India is in accordance with the agreement for avoidance of double taxation entered into between the Government of India and Malaysia (Notification No. G. S. R. 167(E), dated April 1, 1977 (see [1977] 107 ITR (St.) 36) ?\" \n\n 5. Tax Cases Nos. 840 and 841 of 1984 : The assessee in these tax cases is a Hindu undivided family and a resident in India. It has earned income from house property and business in India and also interest on deposits, dividends and income from lands in Malaysia. The Income-tax Officer computed the assessee's income inclusive of the foreign income in a sum of Rs. 41,608 and inclusive of capital gains and assessed the assessee to tax, holding at the same time that the assessment will be subject to levy under avoidance of double taxation agreement on production of necessary tax receipts for having paid the tax in Malaysia. The assessee filed in appeal before the first appellate authority contending that the assessee did not exercise any control over the Malaysian affairs and that the entire income from Malaysia ought to have been excluded from its taxable income. Though the said appellate authority partly allowed the appeal holding that the income derived from dividends and interest are not taxable in India in view of article 8 of the agreement, he also held that they are includible for rate purposes and subject to the production of certificates that the incomes referred to in the order have been taxed in Malaysia, the orders of the Assessing Officer may be revised. Not satisfied with the nature of relief accorded, the assessee pursued the matter further before the Tribunal on appeal. The Department also filed an appeal. The plea of the assessee was that it is not necessary for the assessee to produce any certificate of assessment from the authorities in Malaysia. The Department contended that the relief ought not to be allowed on mere production of the certificate of assessment. The Tribunal, by a common order, disposed of both the appeals and held that the relief claimed and allowed by the first appellate authority will not be subject to the production of the certificate and allowed the appeal of the assessee while dismissing the appeal filed by the Department. Thereupon, at the instance of the Department, the following question of law was referred for the adjudication of this court : \n \"Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in directing the Income-tax Officer to allow double Income-tax relief without a certificate from the Malaysian Revenue authorities to show that the Malaysian income of the assessee has already suffered tax ?\" \n\n 6. Tax Case No. 135 of 1985 : The assessee in this case is a company and a resident in India. It earned income from Malaysia from house property, business and also capital gains from Malaysia. The claim of the assessee for exclusion of the income from Malaysia to the tune of Rs. 11,05,230 from immovable properties, profits and gains of business and capital gains, was rejected by the Income-tax Officer, but, on appeal by the assessee, it was upheld in so far as it related to rental income from property and business income. The claim relating to the capital gains was disallowed on the ground that there is no specific provision in the agreement for avoidance of double taxation for exclusion. Aggrieved against that portion of the order, the assessee pursued the matter further in appeal before the Tribunal. The Tribunal upheld the plea of the assessee that capital gains arise from sale of immovable property and, consequently, it springs out of the property income and is governed by article 6 of the agreement and, therefore, such income is not taxable in India. Thereupon, at the instance of the Department, the following question of law was referred to the adjudication of this court : \n \"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal's decision that capital gains arising in Malaysia cannot be subjected to tax in India is in accordance with the agreement for avoidance of double taxation between India and Malaysia (Notification No. G. S. R. 167(E), dated April 1, 1977 (see [1977] 107 ITR (St.) 36)) ?\" \n\n 7. Tax Case No. 72 of 1987 : The assessee in this case is a firm and a resident in India. The assessee owns certain rubber estates in Malaysia and during the assessment year 1977-78 it earned an income of Rs. 88,424 and from the sale of an item of property a short-term capital gain of a sum of Rs. 18,113 also accrued. The Income-tax Officer assessed both the incomes as assessable in India. When the assessee pursued the matter on appeal before the first appellate authority, the said authority applied article 7(1) of the avoidance of double taxation agreement and ordered the exclusion of the business income from Malaysia. Likewise, it was held that no capital gains in respect of a property situated in Malaysia can be taxed in India. The Department pursued the matter on appeal before the Tribunal. The Tribunal rejected the appeal of the Department and concurred with the order of the first appellate authority. Thereupon, at the instance of the Department, the following question of law was referred to this court for adjudication : \n \"Whether, on the facts and circumstances of the case, the Tribunal is justified in directing the exclusion of the income from capital gains arising on the sale of the property in Malaysia on the basis of article 6 of the agreement for avoidance of double taxation between India and Malaysia (Notification No. G. S. R. 167(E), dated April 1, 1977 (see [1977] 107 ITR (St.) 36)) ?\" \n\n 8. Mr. J. Jayaraman, learned senior counsel appearing for the Revenue contended that the avoidance of double taxation agreement does not have the effect of depriving the Department of assessing the income derived from Malaysia in all these cases, that the right under section 5(1)(c) of the Act to tax a resident on his global income cannot be denied to the State, that the provisions contained in article XXII demonstrate that the object of the agreement is only to eliminate double taxation and that it is only in cases where it is shown that the same income has been subjected to tax both in India and Malaysia that the tax payable in Malaysia shall be allowed as a credit against the Indian tax payable in respect of such income. It is also submitted that the fact that the agreement in question was also meant to prevent fiscal evasion with respect to taxes on income cannot be ignored in construing the scope and purport of the various provisions relating to different categories of income. Learned senior counsel also contended that the tax avoidance contemplated under the agreement in question may be effectively given effect to by adopting the tax credit system and not by total exclusion or exemption method. Our attention has been invited to the various articles in the agreement to highlight the position and justify the stand of the Revenue that wherever there was no prohibition against this country from assessing the income to tax, the language employed has been \"may be taxed\" in an enabling form and where there is a total prohibition, it is specifically stipulated and the pattern adopted is to indicate in which of the contracting States, the income concerned \"shall be taxable\", or \"shall not be taxed in the other contracting State\". While contending that the tax credit system is also a provision with reference to tax avoidance since it can also be treated as expenditure and claimed with even right to carry forward, it is also submitted that by allowing exemption of an income once and for all the same goes out of the net of taxation, even for rate purposes. While reliance was placed upon the decisions in CIT v. Carew and Co. Ltd. and A. C. Paul v. CIT [1974] 97 ITR 652 (Mad), it was contended that the decision of the Division Bench of the Karnataka High Court in CIT v. R. M. Muthaiah [1993] 202 ITR 508 does not consider the issue from all relevant angles and, therefore, the same does not merit the acceptance of this court.\n\n 9. Mr. K. R. Ramamani, learned senior counsel appearing on behalf of the assessees, contended that the use of mandatory or enabling language in some of the article of the agreement is neither relevant nor indicative of the absence of a prohibition as claimed for the Revenue, that there is clear cut difference concept wise between avoidance and relief, that the agreement entered into with Malaysia in substance belongs to an avoidance category though in respect of some special cases tax relief clauses have been employed, that wherever what is obvious is to be dealt with for exclusion, the enabling language has been liberally adopted and in respect of area of doubtful understanding, the mandatory language has been used to place matters beyond doubt or controversy and the overall intention and emphasis is on the situs of the source of income so as to exclude the same from the reach of the other contracting State. While contending that wherever express provision is made in an article of the agreement, with reference to a particular category of income, it excludes by necessary implication the other contracting State (non-source country) from taxing the same and the decision of the Karnataka High Court is based on sound reason and deserves acceptance and application to these cases also. To controvert the claim on behalf of learned senior counsel for the Revenue, that the report or the commentaries on the articles of the Economic Co-operation and Development (OECD) Model convention provide a guide for interpretation of the articles of the agreement it is contended that the same was made known and published subsequent to the agreement in question and, therefore, cannot be the basis for interpreting the words in the agreement in question. That apart, it is also stated that they cannot provide a safe guide or basis of interpretation of the articles of the agreement. As for the stand of the Revenue on article XXII, it is contended for the assessee that where double taxation results on account of non-fulfilment of the conditions stipulated for complete exemption or exclusion alone the said article would get attracted and construed thus, there would be complete reconciliation of the said provision with the other provisions and object and aim of the agreement and that any other interpretation is likely to defeat the very object of the agreement itself. Consequently, on behalf of the assessees, it is contended that income derived from immovable property including capital gains derived in respect thereof, whether forming part of an Indian enterprise or not, business income of a company, individual or Hindu undivided family, firm including a share of partnership attributable to business are all taxable only in Malaysia where the permanent establishment is situated and that the entire profits are attributable to Malaysian source only. As for dividend, interest, royalty and salary earned also, it is contended that they are taxable in Malaysia which is the country of the source. So far as capital gains are concerned, it is also contended that disposal of immovable property is as much a method or form of use so as to treat the same as income from such immovable property. In controverting the stand of the Revenue that the income from Malaysia is liable to the taken into account for arriving at the total income of the resident for rate purposes, it is contended that when the provisions of section 5 itself stood excluded on account of a provision to the contrary made in the agreement which is as much a law by itself, there is no scope whatsoever to take into account the income from Malaysian sources even for rate purposes. Mr. Balasubramaniam, one of learned counsel appearing for the assessees, while adopting the submissions of learned senior counsel for the assessees, contended that if the interpretation sought to be placed upon the articles of the agreement by the Revenue is accepted, it would lead to all sorts of anomalies and practical difficulties resulting in total negation of the purpose of the agreement itself. The other learned counsel appearing for the assessees adopted the above submissions on behalf of the assessees. \n\n 10. The charge of Income-tax is in respect of the total income of the previous year and the total income of any previous year of a person who is a resident includes all income from whatever source derived which accrues or arises or is received in India or which accrues or arises to him outside India during the previous year (section 5 of the Act). Section 6 defines what constitutes residence for the purpose of the Act. Section 90 enables the Central Government to enter into an agreement with the Government of any country outside India for : (a) the granting of relief in respect of income on which have been paid both Income-tax under the Act and Income-tax in the country outside India; (b) for the avoidance of double taxation of income under the Act and the corresponding law in force in the other country; (c) for the exchange of information for the prevention of evasion or avoidance of Income-tax chargeable under the Act or under the corresponding law in force in that country, or investigation of cases of such evasion or avoidance; and (d) recovery of Income-tax under the Act and under the corresponding law in force in that other country and to make such notification as may be necessary for implementing the agreement. The avoidance method absolves the assessee concerned from undergoing the ordeal of assessment at both places and seeking a refund of any excess tax he might have paid after the completion of the assessment as envisaged in the tax credit system. Section 91 which provides for unilateral relief stipulates that a resident in India who suffers tax on the same income in India and in any other country with which India did not have a tax treaty during the relevant period is extended, the unilateral relief shall be granted if the assessee is able to establish that he was resident in India during the year in question in which income was liable to tax, that the income in question accrued or arose in the country outside India and could not also be deemed to have accrued or arisen in that country and for that matter could not be deemed to have accrued or arisen in India and the tax on such income was actually paid in the foreign country either by way of deduction at source or otherwise. If the deduction is found to be equivalent to a sum calculated on the doubly taxed income to tax, at the Indian rate of tax or at the rate of tax of that country, whichever is lower or at the Indian rate if both rates are equal. In computing the total income of an assessee all income on which no Income-tax is payable under Chapter VI shall also be included and where any income on which no tax is payable under the provisions of the Act is included in the total income of an assessee, he shall be entitled to a deduction from the amount of Income-tax with which he is chargeable on his total income of an amount equal to the Income-tax calculated at the average rate of Income-tax on the amount on which no Income-tax is payable. \n\n 11. So far as the batch of cases now for consideration before us is concerned, there is no dispute that they all pertain to the taxability of the various categories of income derived from Malaysia and there exists an agreement between the Government of India and the Government of Malaysia for the avoidance of double taxation. Equally there is no dispute over the fact that all the assessee under consideration are residents in India and the issue relates to one or the other or more than one of the categories of income derived such as income from immovable property, capital gains arising out of sale of an item of immovable property, business income, dividend income, interest on deposits, etc., from sources situated in Malaysia. Equally, there is no dispute about the accounting of the income or the quantification and the determination of such income or the existence or otherwise of the source only in Malaysia from which the income has been earned or derived. \n\n 12. Article VI(1) provides that the income immovable property may be taxed in the contracting State in which such property is situated and such income must have been derived from the direct use, letting or use in any other form of immovable property. Income from immovable property of an enterprise also was subjected to the provisions of this article. Article VII provides that the income or profits of an enterprise of one of the contracting States shall be taxable only in that contracting State unless the enterprise carries on business in the other contracting State through a permanent establishment situated therein and if the enterprise carries on business as aforesaid tax may be imposed in that other contracting State on the income or profit of the enterprise but only on so much of that income or profits as is attributable to that permanent establishment. Article XI provides that dividends paid by a company which is a resident of a contracting State to a resident of the other contracting State may be taxed in the first mentioned contracting State. Where a company which is a resident on one of the contracting States derives income or profits from sources within the other contracting State there shall not be imposed in that other contracting State any form of taxation on dividends paid by the company to persons not resident in that other contracting State or any tax in the nature of an undistributed profits tax on the undistributed profits of the company whether or not those dividends represent, in whole or in part, income or profits so derived. Article XII provides that interest derived by a resident of one of the contracting States from the other contracting State may be taxed in that other contracting State. The term \"interest\" was to mean income from Government securities, bonds or debentures whether or not secured by mortgage and whether or not carrying a right to participate in profits and debt claims of every kind as well as all other income assimilated to income from money lent by the taxation law of the State in which the income arises. It may be noticed that unlike some of the agreements entered into by the Government of India with some other foreign countries, so far as the agreement entered into with the Government of Malaysia is concerned there is no specific stipulation or provisions with reference to the treatment of capital gains and this has led to keen debate among counsel appearing on either side at the time of hearing. \n\n 13. Article XXII deals with the elimination of double taxation and it provides that the laws in force in either of the contracting States will continue to govern the taxation of income in the respective contracting States \"except where provisions to the contrary are made in this agreement\". Paragraph 2(a) of this article also provides that the amount of Malaysian tax payable under the laws of Malaysia and in accordance with the provisions of the agreement whether directly or by deduction by a resident of India in respect of income from sources within Malaysia which has been subjected to tax both in India and Malaysia shall be allowed as a credit against the Indian tax payable in respect of such income but in an amount not exceeding that proportion of Indian tax which such income bears to the entire income chargeable to Indian tax. It is the language of this sub-article which is mainly availed of by the Revenue to justify its claim and stand in this batch of cases. \n\n 14. Learned counsel appearing on either side placed reliance on some of judicial pronouncements to substantiate their respective claims and it would be useful to refer to them before undertaking for consideration the various issues raised. The decision of the House of Lords in Assam Railways and Trading Co. v. IRC [1934] 2 ITR 467 was relied upon to support the claim on behalf of the assessees that the intention of the Legislature must be ascertained from the words of the statute, with such extraneous assistance as is legitimate, and that the language of a Minister of the Crown, in proposing in Parliament a measure which eventually becomes law is inadmissible and the report of the Commissioners is even more removed from value as evidence of intention. \n\n 15. The decision in Navinchandra Mafatlal v. CIT is of the Supreme Court wherein in construing the word \"income\" in entry 54 in List I of the Seventh Schedule to the Government of India Act, 1935, a Constitution Bench of the apex court held the word occurring in a legislative head conferring legislative power to be of the widest connotation inclusive of a capital gain. The decision in State of U. P. v. Ramagya Sharma Vaidya, , is that of the Supreme Court construing clause 7 of the Iron and Steel (Control) Order, 1956, and particularly the word \"use\". The apex court held that the word \"use\" must take its colour from the context in which it is used and in the context of the clause under their consideration, it was suggestive of something done positively, namely, utilisation or disposal. It was also observed that mere \"non-use\" could not be construed as inclusive of the word \"use\". The decision in Sevantilal Maneklal Sheth v. CIT is that of the Supreme Court wherein the scope of section 16(3)(a)(iii) of the Indian Income-tax Act, 1922, came up for consideration, and the court was obliged to consider the scope of the word \"income\" in section 2(6C) which expression has been used in section 16(3)(a)(iii) of the Act. The problem arose in the context of the question raised therein as to whether the sale of assets transferred to a wife by her husband could be included in the total income of the assessee under section 16(3)(a)(iii). Their Lordship of the Supreme Court held as hereunder (at page 507) :\n \"It was argued, in the first place, that what comes within the ambit of section 16(3)(a)(iii) was 'the income from the assets', i.e., the income which the asset produces while it continues to remain in the hands of the assessee and does not include the gain which the assessee makes by selling the asset and parting with possession of it. We see no justification for this argument. In our opinion, there is no logical distinction between income arising from the asset transferred to the wife and arising from the sale of the assets so transferred. The profits or gains which arise from the sale of the asset would arise or spring from the asset, although the operation by which the profits or gains is made to arise out of the asset is the operation of the sale. If the asset is employed, say by way of investment and produces income, the income arises or springs from the asset; the operation, which causes the income to spring from the asset, is the operation of the investment. In the operation of the investment, income is produced while the asset continues to belong to the assessee, while in the operation of a sale, gain is produced, which is still income, but in the process the title to the asset is parted with. Although the processes involved in the two cases are different, the gain which has resulted to the owner of the asset, in each case, is the gain, which has sprung up or arisen from the asset. There is hence no warrant for the argument that the capital gain is not income arising from the assets, but it is income, which arises from a source which is different from the asset itself. It was argued, in the second place, that section 16(3)(a) (iii) was enacted in 1937 when the word 'income' did not include 'capital gains' and income from property was understood to be income falling under that head in section 6 of the Act.\" \n\n 16. The decision in L.Hirday Narain v. ITO is one wherein the Supreme Court expressed the view that if a statute invests a public officer with authority to do an act in a specified set of circumstances, it is imperative upon him to exercise his authority in a manner appropriate to a case and even if the words used in the statute are prima facie enabling, the courts will readily infer a duty to exercise power which is invested in aid of enforcement of the right, public or private, of a citizen.\n\n 17. Learned counsel for the Revenue relied upon a decision in Paul (A. C.) v. CIT [1974] 97 ITR 652 which is the decision of a Division Bench of the court whereunder the Agreement for Avoidance of Double Taxation between India and Ceylon came up for consideration. Applying the ratio of the decision of the Supreme Court in O. A. P. Andiappan v. CIT [1971] 82 ITR 876, it was held by the learned judges of the Division Bench that each country is entitled to make an assessment in the ordinary way, under its own laws and if the tax payable on the income arising or accruing in Ceylon under the Indian Income-tax Act is in excess of the tax payable in Ceylon, an abatement or refund equal to the amount of tax payable under the Ceylon Act is to be given to the assessee and, consequently, it cannot be claimed that the entire income accruing in Ceylon is not liable to be taxed in India. It may be noticed even at this stage that this decision may not be of much assistance to the cases under consideration before us for the simple reason that the pattern of agreement as well as the language of the clauses incorporated therein are totally different from the one in the agreement entered into between the Government of India and Government of Malaysia. The decision of the Division Bench turned mainly on the construction of article III of the agreement between the Government of India and Government of Ceylon wherein it is postulated specifically that each country shall make assessment in the ordinary way under its own laws and where either country under the operation of its laws charges tax on any income from the sources or categories of transactions specified in column I of the Schedule to the agreement in excess of the amount calculated according to the percentages specified in the other part of the Schedule, that country shall allow an abatement equal to the lower of the amounts of tax attributable to such excess in either country. The decision in CIT v. Carew and Co. Ltd. is one involving consideration by the Supreme Court of an agreement entered not for avoidance of double taxation entered into between India and Pakistan and particularly article 4 of the said agreement. In deciding the issue raised therein, the learned judges of the apex court noticed the distinction between the avoidance of double taxation and relief from double taxation in the following terms (at page 548) :\n \"Before parting with this case, it is appropriate to point out that a distinction exists between the avoidance of double taxation and relief against double taxation. That distinction is evidenced by the two clauses of section 49A of the Indian Income-tax Act. One important feature distinguishing the two concepts lies in this that in the case of avoidance of double taxation the assessee does not have to pay the tax first and then apply for relief in the form of refund, as he would be obliged to do under a provision for relief against double taxation. The respective schemes embodying the two concepts differ in some degree from each other, and that needs to be borne in mind when statutory provisions are referred to and cases are cited before the court on a point involving double taxation.\" \n\n 18. The decision in CIT v. R. M. Muthaiah [1993] 202 ITR 508 is that of a Division Bench of the Karnataka High Court wherein the Division Bench construing the very agreement between India and Malaysia has expressed the same view as the one expressed by the Tribunal against the Revenue in these cases.\n\n 19. We have carefully considered the submissions of learned counsel appearing on either side. Section 90 of the Act enables among other things the Government of India to enter into an agreement with the Government of any country outside India for the granting of relief in respect of income on which have been paid both Income-tax under the Indian Act and in the other country outside India and or the avoidance of double taxation of income under the Act and under the corresponding law in force in the other country. Conceptually though there exists two different methods of elimination of double taxation, viz., the exemption method or the tax credit method, the provisions of the particular agreement for avoidance of double taxation entered into by the Government of India with the Government outside the country only could indicate the particular method adopted with a particular country and this would go a long way in understanding and answering the questions raised for our decision in these cases. A perusal of some of the agreements to which our attention has been invited by learned counsel only go to show that no one method or strait-jacket formula has been adopted uniformly in all cases or for that matter even in entering into an agreement with one country. For example, a reference to the agreement entered into with the Government of Ceylon and the Government of Malaysia itself would demonstrate the distinguishing disparity in the pattern of agreements adopted. The agreement with Ceylon which fell for the consideration of this court and the apex court provides that each country shall make assessment in the ordinary way under its own laws and then only provides for abatement of a portion of the tax liability in the manner and to the extent stipulated (vide articles III and IV). Per contra, article XXIII(1) of the agreement with Malaysia under the caption of elimination of double taxation, would declare that the laws in force in either of the contracting States will continue to govern the taxation of income in the respective States except where provisions to the contrary are made in the agreement. Therefore, it is obvious and inevitable that where there exists a provision to the contrary in the agreement, there is no scope for applying the law of any one of the respective contracting States to tax the income and the liability to tax has to be worked out in the manner and to the extent permitted or allowed under the terms of the agreement. In cases where perhaps there is no specific provision to the contra, the local tax law governing the levy of Income-tax in the respective States shall be applicable and if in the course of such application, assessment and determination of the tax liability, double taxation results or has been brought about of the entirety of the particular category of income in both countries, then the tax credit or relief contemplated in the other provisions of article XXII would get attracted and have got to be applied. That apart, in respect of some categories of income, total exemption or elimination is not contemplated and in certain other cases, the exemption depends upon the fulfilment of certain conditions and in all such cases only tax credit or relief can be accorded to the extent permissible under the various provisions of the agreement to avoid double taxation. \n\n 20. The stand taken for the Revenue that for rate purpose and the determination of the total income, all such income derived from a source in Malaysia shall first be taken into consideration in computation, in our view, does not merit acceptance and allowing the Department to do so would amount to permitting flagrant violation of law as also the agreement entered into, in these cases, with the Government of Malaysia. It is a well-accepted principle of construction of statues and rule of interpretation that whenever a particular act or thing is ordained to be performed or done in a particular manner and subject to certain conditions and by some one specified in this regard, it shall be taken to mean and considered inevitably that the same shall be done only in that manner and in no other manner and consequently an implied prohibition of doing it in any other manner comes to stay. As noticed supra, if in any of the provisions of the agreement entered into with Malaysia, it is stipulated that a particular income has to be available for assessment by any one of the contracting States as specified or identified therein, either in its entirety or a portion or there is any prohibition that one of the contracting States alone and the other shall not assess the said category of income or a portion thereof, the same would constitute in both of such cases, a provision to the contrary and consequently there is no further scope for allowing the laws in force in either of the States, per se being allowed to govern the taxation of the income in the respective States other than in a manner contemplated or ordained in the agreement. That this should be the indisputable position envisaged by the Governments of the contracting States has been made amply clear by the legislative will also be disclosed by Parliament enacting sub-section (2) of section 90 of the Act, though in 1991, but with effect from April 1, 1972, that in cases where the Central Government has entered into an agreement with the Government of any country outside India, then, in relation to the assessee to whom such agreement applies, the provisions of the Income-tax Act, 1961, shall apply only to the extent they are more beneficial to that assessee, and obviously, therefore, are not attracted in other cases or circumstances. \n\n 21. Tax treaties are for that matter considered to be mini legislations containing themselves all the relevant aspects or features which are at variance with the general taxation laws of the respective countries. Such variations are in some cases in addition to the existing local tax laws and in other cases in lieu thereof. That being the legal position, the exposition of the said position also by the Central Board of Direct Taxes in their Circular No. 333 dated April 2, 1982 (vide [1982] 137 ITR (St.) 1), assumes significance and importance inasmuch as they can also be traceable to the powers of the Board under section 119 of the Act. Consequently, wherever the double taxation avoidance agreement provides for a particular mode of computation of income, the said method alone is required to be followed, irrespective of the provisions of the Income-tax Act, and it is only where there is no specific provisions in the agreement to the contrary the basic tax law in force in the country will get attracted and govern the taxation of such income. If the income in any particular case in respect of sources within Malaysia has to be subjected to tax both in India and Malaysia, then alone the provisions of paragraph (2) of article 22 would be attracted and not otherwise. \n\n 22. The contention on behalf of the Revenue that wherever the enabling words such as \"may be taxed\" are used there is no prohibition or embargo upon the authorities exercising powers under the Income-tax Act, 1961, from assessing the category or class of income concerned cannot be countenanced as of substance or merit. As rightly pointed out on behalf of the assessees, when referring to an obvious position such enabling form of language has been liberally used and the same cannot be taken advantage of by the Revenue to claim for it a right to bring to assessment the income covered by such clauses in the agreement, and that the mandatory form of language has been used only where there is room or scope for doubts or more than one view possible, by identifying and fixing the position and placing it beyond doubt. The reliance sought to be placed on behalf of the Revenue on the commentaries on the articles of the model convention of 1977 presented by the Organisation for Economic Co-operation and Development (OECD) is inappropriate and unjustified. Further, it is not really the format adopted that really matters when basically they differ in their content and approach. A perusal and comparison of the content and purport of the articles in the model convention and those actually found in the agreement with Malaysia under consideration would go to show the wide range of difference which would per se render the commentaries on the model convention wholly inapplicable and expose the unreasonableness and futility in seeking to apply the same as a guide for interpretation and construction of the articles in the agreement under consideration. We are of the view that the commentaries relied upon can be of no use and utility and cannot also afford a safe or reliable guide or aid for such construction. \n\n 23. Coming to the categories or classes of income to be dealt with in these cases and the relevant clauses of articles in the agreement under consideration the first item for consideration is the income from immovable property. Section 22 to 27 of the Income-tax Act, 1961, broadly deals with the taxability in this regard under the Act. But, in view of paragraph 1 of article VI, income from immovable property can be taxed only in and by the contracting State in which such property is situated. There is no scope for the other contracting State dealing with such income. As to what constitutes immovable property for the purposes of the article has also been stated in detail. The article further stipulates that the provisions of paragraph (1) shall apply to income derived from the direct use, letting or use in any other form of immovable property. Controversies and conflicting claims have been made by the parties before us regarding the capital gains which is derived on account of the sale, exchange or transfer of the capital asset itself. Sections 45 to 55A of the Income-tax Act, 1961, deals with this aspect. Normally, the situs of the capital asset alone should provide the safe guide to decide as to which of the contracting States should have the power to tax such income. The ratio underlying paragraph 1 of article VI would also lead only to this inevitable course. But, the plea on behalf of the Revenue is that the sale or exchange or transfer of the capital asset itself cannot be claimed to be an instance of \"use\" of the property itself so as to contend that it is an income from immovable property. Disposal of the property or the capital asset itself is in our view as much a form or method of use of the immovable property as such, and the words \"direct use........ or use in any other form\" are sufficiently wide enough to include within its scope the transfer, sale or exchange of the property. As held by the apex court in the decision in Sevantilal Maneklal Sheth v. CIT [1968] 68 ITR 503, the profits and gains which arise from the sale of the asset would arise or spring from the asset, although the operation by which the profits or gains is made to arise out of the asset is the operation of the sale and consequently, there is no warrant for the submission that the capital gain is not income arising from the use of the assets. The provisions of article VI alone would apply and govern the assessment of capital gains also derived from the immovable property situated at Malaysia.\n\n 24. So far as business profits are concerned which are generally dealt with under sections 25 to 44D of the Income-tax Act, 1961, the clauses in article VII alone would apply to income derived from sources in Malaysia. Paragraph 1 stipulates that the income or profits of an enterprise of one of the contracting States shall be taxable only in that contracting State unless the enterprise carries on business in the other contracting State through a permanent establishment, as defined in article V, situated therein and if the enterprise carries on business as aforesaid, tax may be imposed in that other contracting State on the income or profit of the enterprise but only on so much of that income or profits as is attributable to that permanent establishment. In all these cases, there is no serious factual dispute over the position that the entire business profits are attributable only to the Malaysian source and, consequently, the business income, be it that of the company, individual or Hindu undivided family, firm including the share of partnership attributable to business is taxable only in Malaysia where the permanent establishment is situated and the authorities under the Act in this country cannot also assess the same in this country. \n\n 25. As far as the taxability of dividend income is concerned, the provisions of sections 8 and 9 of the Income-tax Act, 1961, deal with the same. But at the same time, article XI of the agreement provides for the same stating that dividends pad by a company which is a resident of a contracting State to a resident of the other contracting State may be taxed in the first mentioned contracting State. This article also provides for various contingencies and the formula to be adopted in enforcing the same. But, suffice it to notice that the basic tenet or principle underlying the same is the situs of the company which pays or declares the dividend. Likewise, article XII of the agreement provides that interest derived by a resident of one of the contracting States from the other contracting State may be taxed in the other contracting State and the term \"interest\" has been given meaning so as to take within it income from Government securities, bonds or debentures whether or not secured by mortgage and whether or not carrying a right to participate in profits and debt claims of every kind as well as all other income assimilated to income from money lent by the taxation law of the State in which the income arises. Thus, it could be seen that the principle underlying article XII is also to ensure the taxation of income in the country of its source and the place where the income arises. \n\n 26. Having regard to the above and in the light of the conclusions arrived at, we answer the question of law referred to for our consideration in each of the tax cases as hereinafter : \n\n Tax Case No. 264 of 1983 :\n\n (1) As for the first question of law, we answer the same in the affirmative and hold that the income derived from the rubber estates in Malaysia cannot be included in the total income of the assessee and assessed to tax in India under the Income-tax Act, 1961. \n\n (2) As for the second question of law, we answer the same in the affirmative holding that the finding of the Tribunal that the assessee does not maintain a separate establishment in India in respect of the rubber estates in Malaysia is based upon relevant materials and facts having regard to the provisions contained in the Agreement for Avoidance of Double Taxation between Malaysia and India and that the said finding is necessary and relevant for the adjudication of the claim that the income derived from the rubber estates in Malaysia is taxable only in Malaysia and not in this country under the provisions of the Income-tax Act, 1961. \n\n Tax Case No. 789 of 1984 and Tax Case No. 790 of 1984 :\n The question of law referred for our consideration in the above cases are answered in the affirmative holding that on the facts and circumstances of the case the decision of the Appellate Tribunal that the Malaysian income cannot be subjected to tax in India is quite in conformity and in accordance with the provisions of the agreement for avoidance of double taxation entered into between the Government of India and Malaysia and notified under Notification No. G. S. R. 167(E), dated April 1, 1977 (see [1977] 107 ITR (St.) 36). \n\n Tax Cases Nos. 840 and 841 of 1984 : \n The question of law referred in the above cases are answered in the affirmative holding that the Appellate Tribunal was correct in holding and also directing the Income-tax Officer to allow the benefit of double Income-tax relief without insisting upon the production of a certificate from the Malaysian Revenue authorities to show that the Malaysian income of the assessee has already actually suffered tax. \n\n Tax Case No. 135 of 1985 :\n The question of law referred for our consideration is answered in the affirmative holding that the decision of the Appellate Tribunal that the capital gains arising in Malaysia cannot be subjected to tax in India is in accordance with the terms of the agreement for avoidance of double taxation entered into between the Government of India and Malaysia notified in the Notification No. G. S. R. 167(E), dated April 1, 1977 (see [1977] 107 ITR (St.) 36). \n\n Tax Case No. 72 of 1987 :\n The question of law referred for our consideration is answered in the affirmative holding that the direction of the Appellate Tribunal ordering the exclusion of the income from capital gains arising on the sale of a property in Malaysia is quite in accordance with law and well justified in view of the provisions contained in article VI of the agreement for avoidance of double taxation entered into between the Governments of India and Malaysia, notified in Notification No. G. S. R. 167(E), dated April 1, 1977 (see [1977] 107 ITR (St.) 36). \n\n 27. Having regard to the facts and circumstances of these cases, there shall be no order as to costs." }, { "title": "T.M. Kanniyan vs Income-Tax Officer, Pondicherry And ... on 30 October, 1967", "url": "https://indiankanoon.org//doc/731827/", "text": "T.M. Kanniyan vs Income-Tax Officer, Pondicherry And ... on 30 October, 1967\nEquivalent citations: 1968 AIR 637, 1968 SCR (2) 103, AIR 1968 SUPREME COURT 637\nAuthor: R.S. Bachawat\nBench: R.S. Bachawat, K.N. Wanchoo, V. Ramaswami, G.K. Mitter, K.S. Hegde\n PETITIONER:\nT.M. KANNIYAN\n\n\tVs.\n\nRESPONDENT:\nINCOME-TAX OFFICER, PONDICHERRY AND ANR.(With Connected Peti\n\nDATE OF JUDGMENT:\n30/10/1967\n\nBENCH:\nBACHAWAT, R.S.\nBENCH:\nBACHAWAT, R.S.\nWANCHOO, K.N. (CJ)\nRAMASWAMI, V.\nMITTER, G.K.\nHEGDE, K.S.\n\nCITATION:\n 1968 AIR 637\t\t 1968 SCR (2) 103\n CITATOR INFO :\n RF\t 1970 SC1126\t (16)\n\n\nACT:\nConstitution of India, Articles 240(1) and Proviso,,\n246--Power of\tPresident to make Regulation\t for Union\nterritories,\tscope\tof--\"Peace, progress\t and\tgood\ngovernment\", meaning of--Taxation Laws (Extension,to Union\nTerritories) Regulation (3 of 1963)--General Clauses\tAct,\n1897, s. 3(58)--Definition of \"State\" including Union\nterritories if repugnant to the subject and context of\tArt.\n246.\n\n\n\nHEADNOTE:\nParliament enacted the Pondicherry Administration Act. 1962.\nwhich\t provided that all laws in force immediately before\nAugust 19. 1962, when Pondicherry became a Union territory,\nwere to continue to be in force until amended or repealed by\na competent legislature or other competent authority.\t The\nPresident, in\texercise of the powers conferred on him by\nArt. 240 of the Constitution to make regulations of \"peace,\nprogress and good government\" of the Union\t territories\npromulgated the Tax Laws (Extension to\t Union\tTerritories)\nRegulation. 1963. By this Regulation the laws in force in\nrelation to income tax in Union territory of\t Pond:cherry\nwere repeated and the Indian Income-tax Act, 1961 was made\napplicable.\t The petitioners challenged\tthe rites of\nthe Regulation.\nHELD: The Regulation is valid.\n The\t power\tof the President to make regulations under\nArt. 240 is not limited to the subject of law\t and order.\nAuthority to make regulations for \"peace. progress and\tgood\ngovernment\" is a common\t form of grant of legislative power\nand the expression \"peace, progress and good government\" is\nof very wide import giving wide discretion to the authority\nempowered to pass laws for such purposes. The President can\nmake regulations with respect to a Union territory occupying\nthe same field on which Parliament can also make laws.\tSuch\na regulation may repeal or amend any Act made by Parliament\nor any existing law which is for the time being applicable\nto the\t Union territory and when promulgated has the\tsame\nforce and effect as an Act of Parliament which\t applies to\nthat territory. [107E-108D]\n Riel v. queen. [1865] 10 A.C. 675. Chenard and Co. v.\nJoachim\t Arissol, [1949] A.C.\t 127, Attorney-General\t for\nSaskatchewan v. Canadian Pacific Ry. Co., [1953] A.C. 59'4,\nKing Emperor v. Benoari Lal Sarma, [1914] L.R. 72 I.A.\t 57.\nJogendra Narayan Deb v. Debendra Narayan Roy, [1942]\tL.R.\n69 I.A. 76 and Girindra Nath Banerjee v. Birendra Nath Pal.\n[1927] I.L.R. 54 Cal. 727, referred to.\n Parliament has, by virtue of Art. 246(4), power to\tmake\nlaws with respect to any matter including matters enumerated\nin the State List, for any part of the territory of India\nnot included in a State. With regard to Union\t territories\nthere is no distribution of legislative power\n104\nand Parliament\t has plenary power to make laws for those\nterritories on\t any subject.\t Though\t the definition of\n\"State\"\t in s.\t 3(58) of the General\tClauses\t Act, 1897,\ntaking\t within\t it Union territories, applies to\t the\ninterpretation\t of the Constitution, this inclusive\ndefinition is repugnant to the subject and context of\tArt.\n246. There,\tthe expression \"State\" means the State\nspecified in the FirSt Schedule. Parliament\tcan by\t law\nextend\tthe Income-tax Act, 1961, to a Union territory\twith\nsuch modifications as it thinks fit.\tThe President\tcan,\ntherefore, by regulation do the same. [108E; 109A-D]\nR.K. Sen v. Union, [1966] 1 S.C.R. 430, referred to.\n The\t power of the President to make regulations for\t any\nof the Union territories specified in Art. 240(1) so long as\nno legislature is created for the territory is not fettered\nby the. proviso to Art. 24-0(2 ) or\tlimited\t to matters\nenumerated in\tthe State List and the. Concurrent list.\n[110G]\n It is not necessary to make any distribution of income-\ntax with respect to Union territories, as those territories\nare centrally administered through the President. [111A-B]\n\n\n\nJUDGMENT:\nORIGINAL JURISDICTION: Writ Petitions Nos. 49, 60, 61 and 80\nof 1967.\n Writ Petitions under Art. 32 of the Constitution of\nIndia for the enforcement of fundamental rights.\n K. Narayanaswamy and Lily Thomas, for the petitioner (in\nW.P. No. 49 of 1967).\nSadhu Singh, for the petitioner (in W.P. No. 60 of 1967).\n S.K. Dholakia and Sadhu Singh, for the petitioner\t (in\nW.P. No. 61 of 1967).\n S.T. Desai and Sadhu Singh, for the petitioner (in\tW.P.\nNo. 80 of 1967).\n C.K. Daphtary, Attorney-General,\tB.L. lyengar,\tR.H.\nDhebar for R.N. Sachthey, for the respondents (in W.P. No 49\nof 1967).\n R.H. Dhebar for R.N. Sachthey, for the respondents\t (in\nW.Ps. Nos. 60, 61 and 80 of 1967).\nThe Judgment of the Court was delivered by\nBachawat, J. In all these writ petitions, the\t petitioners\nchallenge the vires of the Taxation Laws (Extension to Union\nTerritories) Regulation No. 3 of 1963.\t The contention is\nthat the President had no power to promulgate the Regulation\nunder Art. 240 of the Constitution. On August 16, 1962,\nPondicherry became a Union Territory. On December 5, 1962,\nParliament enacted the Pondicherry Administration Act,\t1962\n(Act No. 49 of 1962). Section 4 (1 ) of this Act provided\nthat all laws in force immediately before August 19,\t1962\nwould continue to be in force in\n105\nPondicherry until amended or\t repealed by a competent\nlegislature or\t other competent authority. Section\t4(2)\nempowered the\t Central Government to make necessary\nadaptations and modifications for\t the\tpurpose\t of\nfacilitating the application of any such law in relation to\nthe administration of Pondicherry\tand bringing\t the\nprovisions of any such law into accord with the provisions\nof the\t Constitution.\tSection 7 provided that\t all taxes,\nduties, cesses and fees which immediately before August\t 19,\n1962 were being lawfully levied would continue to be levied\nin Pondicherry\t and to be applied for\tthe same purposes,\nuntil other provision\twas made by a competent\t legislature\nor other competent authority. After the passing of\tthis\nAct, the petitioners\tcontinued to be sub.jeer to\t the\nexisting French laws relating to income-tax.On March\t 30,\n1963, the President in the exercise of the powers conferred\non him\t by Art. 240 of the Constitution promulgated\t the\nimpugned Regulation No. 3 of 1963. The Regulation extended\ncertain\t Indian\t Acts relating to taxation to\t the Union\nterritories mentioned\ttherein. Section 3 (2) of\t the\nRegulation extended the Income-tax Act, 1961, subject to the\nmodifications mentioned in Part II of the Schedule, to\nPondicherry as\t from April 1, 1963. Section 4(1) provided\nthat any law in force in Pondicherry corresponding to\t the\nIncome-tax Act, 1961 would stand repealed on April 1, 1963.\nThe petitioners carry on business at Pondicherry and\t are\nbeing assessed to income-tax under the Income-tax Act. 1961.\nThey have filed the present writ petitions asking for a\ndeclaration that the Income-tax Act, 1961 was\tnot legally\nextended to Pondicherry and a direction prohibiting\t the\nrespondents from implementing that Act in\trelation to\nPondicherry.\n In\tthe Constitution of India as\toriginally enacted,\nIndia was declared to be a Union of States, [Art. 1 (1)].\nThe States and their territories were specified in Parts A,\nB and C of the First schedule [Art. 1(2)]. The territory of\nIndia consisted of the territories of the\tStates,\t the\nterritories specified\tin Part D of\tthe First Schedule\n(Andaman and Nicobar Islands) and such other territories as\nmay be acquired, [Art. 1 (3)].\tAs original enacted. part VI\nof the Constitution dealt with Part A States, Part VII dealt\nwith Part B States, Part VIII dealt with Part C States\t and\nPart IX dealt with the territories specified in Part D of\nthe First Schedule. The Constitution\t(Seventh Amendment)\nAct passed on\t October 19, 1956 altered the scheme of\ndivision of India in\t to A\t B and\t C States and\t the\nterritories mentioned\tin Part D of the first Schedule.\nArticle\t 1 and the First Schedule were amended so that\t the\nterritory of India would comprise the territories of\t the\nstates,\t the Union territories specified in\t the First\nSchedule and such other territories as may be acquired.\t By\ncl. 30 added to Art. 66. \"Union territory\" was\t defined to\nmean any Union territory specified in the First Schedule and\nto include any other territory\nsupp. C.I./68-8\n106\ncomprised within 'the territory of India but not specified\nin that Schedule. Consequential amendments were made in Part\nVI and other Parts of the Constitution. Parts VII and IX\nwere repealed. Part VIII was drastically amended. The title\nof Part VIII was altered to that of \"Union Territories\". The\namended\t Art. 239 provided for the administration of Union\nterritories by the President acting through an administrator\nto be appointed by him. The amended Art. 240 was in these\nterms:\n\t\t \"240. Power of President to\tmake\n\t regulations for certain Union territories.--(\n\t 1 ) The President may make regulations for the\n\t peace, progress\tand good government of\t the\n\t Union territory of--\n\t (a) the Andaman and Nicobar Islands;\n\t (b) the\t Laccadive, Minicoy and Amindivi\n\t\t\t Islands.\n\t\t (2) Any regulation so made may repeal or\n\t amend any Act made by\t Parliament or\t any\n\t existing\tlaw which is for the\t time being\n\t applicable to the Union territory and,\twhen\n\t promulgated by the President, shall have\t the\n\t same force and effect as an Act of Parliament\n\t which applies to that territory.\"\nThe amended Art. 241 dealt with High Courts for Union\nterritories. Article 242 relating to Coorg was repealed.\nArticle\t 240 (1) and the First Schedule were amended\tfrom\ntime to time.\tThe Constitution (Fourteenth Amendment)\t Act\npassed\ton December 28, 1962 amended the First Schedule\t and\nArt. 240 and added Art. 239A. Article 239A and the amended\nArt. 240 are in these terms:\n\t\t \"239A. (1 ) Parliament may by law create\n\t for any of the Union territories of Himachal\n\t Pradesh, Manipur, Tripura, Goa, Daman and Diu,\n\t and Pondicherry--\n\t\t (a) a\t body,\twhether\t elected or partly\n\t nominated and partly elected, to function as a\n\t Legislature for the Union territory, or\n\t (b) a Council of Ministers,or both with\tsuch\n\t constitution, powers and functions, in\teach\n\t case, as may be specified in the law.\n\t\t (2)\t Any such law as is referred to in\n\t clause (1) shall not be deemed to be an\n\t amendment\t of this Constitution for\t the\n\t purposes\tof article 368 notwithstanding\tthat\n\t it contains any provision which amends or\t has\n\t the effect of amending this Constitution.\n\t 107\n\t\t 240. (1) The President may\tmake\n\t regulations for the peace, progress and\tgood\n\t government of the Union territory of-\n\t (a) the Andaman and Nicobar Islands;\n\t (b) the\t Laccudive, Minicoy and Amindivi\n\t Islands;\n\t\t (c)\tDadra and Nagar Haveli;\n\t\t (d)\tGao, Daman and Diu;\n\t\t (e)\tPondicherry:\n\t\t Provided that when any body is created\n\t under article\t239A to function as a\n\t Legislature for\tthe Union teriyaki of\tGoa,\n\t Daman and Diu or\t Pondicherry,\t the\n\t President\t shall not make any regulation\t for\n\t the peace, progress and good government of\n\t that Union territory with effect from the date\n\t appointed\t for the first meeting of\t the\n\t Legislature.\n\t\t (2) Any regulation so made may repeal\n\t or amend\t any Act made by Parliament or\t any\n\t existing\tlaw which is for the\t time being\n\t applicable to the Union territory and,\twhen\n\t promulgated by the President, shall have\t the\n\t same force and effect as an Act of Parliament\n\t which applies to that territory.\"\n Regulation\tNo. 3 of 1963 was made by the President in\nthe exercise of the\tpower conferred on him to\tmake\nregulations for the peace, progress and good government of\nthe Union territories. The contention that under Art.\t 240\nthe President can make regulations limited to the subject of\nlaw and order\t only cannot be accepted. The grant of\nlegislative power to make laws, regulations or ordinances\nfor British dependencies has long been expressed in\t the\ncommon\t form of that\t of making laws, regulations\t or\nordinances for \"peace and good government\" of the territory\nor similar objects such as\t\"peace,\t order\t and\tgood\ngovernment\", \"peace, welfare\tand good government\"\t and\n\"peace,\t progress and good government\" of the\t territory..\nInstances of\tthis common form of grant of\t legislative\npower to legislatures and authorities in India are s. 42 of\nthe Indian Councils Act, 1861, ss. 71, 72,\t80A of\t the\nGovernment of India Act, 1915, s. 72 of the ninth Schedule\nand s. 92(2) of the Government of India Act,1935. Such a\npower was held to authorise\t the utmost discretion of\nenactment for\tthe attainment of peace, order and\tgood\ngovernment of\tthe territory and a Court will\tnot enquire\nwhether\t any particular enactment made in the\texercise of\nthis power, in fact, promotes those objects, Riel v.\nQueen), Chenard and Co.\t v. Joachim Arissol(2). The words\n\"peace, order and good government\" and\n(1) [1885] 10 A.C. 675, 678-679.\n(2) [1949] A.C. 127, 132.\n108\nsimilar\t expressions are words of very wide import giving\nwide discretion to the authority empowered to pass laws\t for\nsuch purposes, Attorney-General for\t Saskatchewan\t v.\nCanadian Pacific Ry.\t CO.(1) King Emperor v. Benoari\t Lal\nSarma(2). In\tJogendra Narayan Deb v. Debendra Narayan\nRoy(3) Sir George Rankin said that the words have reference\nto the\t scope and not\tto the merits of the\tlegislation.\nGirindra Nath Banerjee v. Birendra Nath Pal(4), he said that\n\"these\twords are used because they are words of the widest\nsignificance and it is not open to a Court\t of law to\nconsider with regard to any particular piece of\t legislation\nwhether in fact it is meritorious in the sense that it\twill\nconduce\t to peace or to good government. It is sufficient\nthat they are words which are intended to give, subject to\nthe restrictions of the Act, a legislating power to the body\nwhich it invests with that authority.\" Article 240 of\t the\nConstitution confers on the President a general power of\nmaking\t regulations for the\tpeace,\tprogress and\tgood\ngovernment of the specified Union territories.\tIn exercise\nof this power, the President may make a regulation repealing\nor amending any Act made by Parliament or any existing\t law\nwhich is for\tthe time being applicable to the Union\nterritory. The regulation when promulgated by the President\nhas the stone force and effect as an Act of Parliament which\napplies\t to that territory. The President can thus\tmake\nregulations on\t all subjects on which Parliament can\tmake\nlaws for the territory.\n Parliament has plenary power to legislate for the Union\nterritories with regard to any subject. With regard to\nUnion territories there is no distribution of\t legislative\npower.\tArticle 246(4) enacts that \"Parliament has power to\nmake laws with respect to any matter for any part of\t the\nterritory of India not included in a State notwithstanding\nthat such matter is a matter enumerated in the State List.\"\nIn R.K. Sen v. Union(3) it was pointed out\tthat having\nregard to Art. 367, the definition of \"State\" in s. 3(58) of\nthe General Clauses Act, 1897 applies for the interpretation\nof the Constitution unless there is anything repugnant\t in.\nthe subject or context. Under that definition,\t the\nexpression \"State\" as respects any\t period\t after\t the\ncommencement of the Constitution (Seventh Amendment)\tAct,\n1956 \"shall mean a State specified in the First Schedule to\nthe Constitution and shall include a Union territory.'\t But\nthis inclusive definition is repugnant to the\tsubject\t and\ncon text of Art. 246.\tThere, the expression \"State\" means\nthe State specified in the First Schedule.\tThere is a\ndistribution of legislative power between Parliament and the\nlegislatures of the States Exclusive power to legislate with\nrespect\t to the matters enumerated in the State List is\nassigned to the legislatures of the States esta\n (1) [1953] A.C. 594, 613-614.'\n (2) [1914] L.R. 72 I.A. 57, 72.\n (3) [1942] L.R. 69 I.A. 76, 90.\n (4) [1927] I.L.R. 54 Cal. 727, 738,\n (5) [1966] 1 S.C.R. 430, 433.\n109\nblished by Part V1. There is no distribution of legislative\npower with respect to Union\tterritories. That is\t why\nParliament is given power by Art. 246(4) to legislate\teven\nwith respect to matters enumerated in the State List.\t If\nthe inclusive\tdefinition of \"State\" in s. 3(58) of\t the\nGeneral\t Clauses Act were to. apply\t to Art. 246(4),\nParliament would have no power to legislate for the Union\nterritories with respect to matters enumerated in the State\nList and until a legislature empowered to legislate on those\nmatters\t is created\tunder Art. 239A for\t the Union\nterritories, there would be no legislature competent to\nlegislate on\t those\tmatterS; moreover, for certain\nterritories such as the Andaman and\tNicobar\t Islands no\nlegislature can be created under Art. 239A, and for\tsuch\nterritories there can be no authority competent to legislate\nwith respect to matters,enumerated in the State List.\tSuch\na construction is repugnant to the subject and\t context of\nArt. 246. It follows that m view of Art. 246(4), Parliament\nhas plenary powers to make laws for Union territories on all\nmatters. Parliament can by law extend the Income-tax\tAct,\n1961 to a Union territory with such modifications as it\nthinks\tfit. The President in the exercise of\t his powers\nunder Art. 240 can make regulations which have the\tsame\nforce and effect as an Act of Parliament which\t applies to\nthat territory. The President can therefore by regulation\nmade under Art. 240 extend the Income-tax Act, 1961 to\tthat\nterritory with such modifications as he thinks lit.\n The\t President can thus make regulations under Art.\t 240\nwith respect to a Union territory occupying the same field\non which Parliament can also make\tlaws.\tWe are\t not\nimpressed by the argument that such overlapping of powers\nwould lead to. a clash between the President and Parliament.\nThe Union. territories. are centrally administered through\nthe President\tacting\tthrough an administrator. In\t the\ncabinet\t system\t of Government the President acts on\t the\nadvice of the Ministers who are\t responsible Parliament.\nThe proviso to Art. 240(1) lays down the condition for\t the\ncesser\tof power of the President to make regulations under\nArt. 240(1). The power of the President to make regulations\nfor the Union territory of Goa, Daman and Diu or Pondicherry\nceases when a legislature for the territory is created\twith\neffect from the date appointed for the first meeting of\t the\nlegislature. But until such a legislature is created,\t the\nPresident retains his full power to make regulations\t for\nthose territories. The proviso does not act as a fetter on\nthe general power of the President to make regulations\t for\nthe Union territory while no legislature for that territory\nis brought into. existence. The proviso does not enact, as\nis suggested by the petitioners, that the power of\t the\nPresident is confined\n110\nto making laws with respect to the matters enumerated\t in\nthe State List and the Concurrent List. The\targument is\nthat a legislature created under Art. 239A can be authorised\nto pass laws with respect to those matters only and having\nregard to. the proviso to Art. 240(1) the President's power\nto make regulations\t under\t Art.\t240 is similarly\ncircumscribed.\tAs a matter of fact, the Government of Union\nTerritories Act, 1963 created local legislatures for\t the\nUnion territories of Himachal Pradesh, Manipur. Tripura,\nGoa, Daman and Diu and Pondicherry and s. 18\tof the\t Act\nconferred on those legislatures power to make laws for those\nterritories with respect to the matters enumerated in\t the\nState List or\t the Concurrent List.\tAssuming that\t the\nlocal legislature created under Art. 239A can be authorised\nto make laws with respect only to the matters enumerated in\nthe State List or the Concurrent List, it does\t not follow\nthat the power of the President to make regulations under\nArt. 240 is so limited. By the express words of Art.\t240,\nthe President can make regulations for the peace, progress\nand good government of the specified Union territories.\t Any\nregulation so\tmade may repeal or amend any Act made by\nParliament and applicable to that\t territory.\tWhen\npromulgated by\t the President the regulation has the\tsame\nforce and effect as an Act of Parliament applicable to\tthat\nterritory. This general power of the\t President to\tmake\nregulations extends. to all matters on which Parliament\t can\nlegislate. It\t may be recalled that\tArt. 239A and\t the\nproviso\t to Art. 240(1) were inserted by the\tConstitution\n(Fourteenth Amendment) Act. Under Art. 240 as it stood after\nthe Constitution (Seventh Amendment) Act and\t before\t the\nenactment of the Constitution (Fourteenth Amendment) Act, it\ncould not be\tcontended that the general power of\t the\nPresident to make regulations under Art. 240(1) was limited\nto matters enumerated in the State List and the Concurrent\nList. The position was not changed by the insertion of\tArt.\n239A and the proviso to Art. 240(1) by the\tConstitution\n(Fourteenth Amendment) Act. Moreover, Art. 239A does\t not\nauthorise Parliament to create legislatures for the Union\nterritories of the Andaman and Nicobar Islands, Laccadive,\nMinicoy and Amindivi Islands and Dadra and Nagar Haveli. It\nis clear, therefore, that the power of the President to make\nregulations with respect to those territories is not limited\nby the proviso to Art. 240( 1 ). We are satisfied. -that\nthe proviso to Art. 240(1) on its true construction does not\nfetter\tthe power of the President to make regulations\t for\nany of\t the Union territories\t specified in\tArt. 240(1)\nincluding Pondicherry as long as no Legislature is created\nfor the territory.\n It\twas suggested that there is no\t provision for\t the\ndistribution of the\tincome-tax attributable to Union\nterritories and therefore the President could not extend the\nIncome-tax Act, 1961\tto the Union territories. If\tthis\nargument were sound, even Parliament\n111\ncould\tnot extend the Income-tax Act to\t the Union\nterritories. Moreover, the argument overlooks Art. 270 which\nshows that the income-tax attributable to Union\t territories\nforms part of the Consolidated Fund of India.\t It is\t not\nnecessary to make any distribution\tof income-tax\twith\nrespect\t to Union territories\t as those territories\t are\ncentrally administered through the President.\n There is no force in the contention that the President\ncannot make a law with respect to income-tax in the absence\nof an express grant of such a power. There is\tdistribution\nof legislative power between the Centre and the States\t and\nconsequently distinct grants of taxing power are made in the\nlegislative lists. With respect to Union territories, there\nis no\tdistribution of legislative power. For the Union\nterritories, Parliament has plenary powers to make laws\t and\nthe President has general powers to make regulations.\t In\nthe exercise of his powers under Art. 240, the President\ncould make Regulation No. 3 of 1963 extending the Income-tax\nAct, 1961 and other laws to the Union territories.\nThe petitions are dismissed with costs, one hearing fee.\nY.p.\t\t\t\t Petitions dismissed.\n112" }, { "title": "Dagi Ram Pindi Lal And Anr vs Trilok Chand Jain And Ors on 4 February, 1992", "url": "https://indiankanoon.org//doc/812533/", "text": "Dagi Ram Pindi Lal And Anr vs Trilok Chand Jain And Ors on 4 February, 1992\nEquivalent citations: 1992 AIR 990, 1992 SCR (1) 545, AIR 1992 SUPREME COURT 990, 1992 (2) SCC 13, 1992 AIR SCW 913, 1992 TAX. L. R. 856, (1992) 1 JT 526 (SC), 1992 (1) UPTC 502, 1992 UPTC 1 502, (1992) 1 SCR 545 (SC), (1992) 60 TAXMAN 551, 1992 (1) JT 526, (1992) 1 HINDULR 283, (1992) 194 ITR 228, (1993) 1 MAD LW 46, (1992) 1 RENTLR 129, (1992) 1 SERVLR 701, (1992) 107 TAXATION 447, (1992) 102 CURTAXREP 170\nAuthor: Kuldip Singh\nBench: Kuldip Singh\n PETITIONER:\nDAGI RAM PINDI LAL AND ANR\n\n\tVs.\n\nRESPONDENT:\nTRILOK CHAND JAIN AND ORS.\n\nDATE OF JUDGMENT04/02/1992\n\nBENCH:\nANAND, A.S. (J)\nBENCH:\nANAND, A.S. (J)\nKULDIP SINGH (J)\n\nCITATION:\n 1992 AIR 990\t\t 1992 SCR (1) 545\n 1992 SCC (2)\t13\t JT 1992 (1)\t526\n 1992 SCALE (1)249\n\n\nACT:\n Income Tax Act, 1922-Section 54 and Section 137 of\t the\nIncome\tTax Act, 1961-Repeal of 1922 Act and\tomission of\nSection\t 137-Jurisdiction of Courts to call for the record-\nScope of.\n Income Tax Act,\t1961-Section 138(1)(b)-Scope\t and\napplication of-Jurisdiction and powers of Commissioner of\nIncome\tTax under-Scope of-Court's order for Production of\nRecord-Commissioner cannot refuse-Omission of Section\t137-\nLegislative intention.\n Income Tax Act, 1961-Sections 138(1)(b), 137 read\twith\nsection\t 6, General Clauses Act-Repeal\t of any Enactment-\nEffect-Omission of Section 137-Court's order for production\nof record-Ban on Court's jurisdiction whether continues.\n Income Tax Act, 1961-Sections 137, 138(1)(b)-Repeal of\nSection 137-Documents relating to assessment proceedings for\n1964-65 onwards-Filed before the authority after 1.4.1964 by\nassessee-Whether Court can summon.\n\n\n\nHEADNOTE:\n The Plaintiff-respondent instituted a suit for recovery\nof Rs.1,39,722.86 against the defendants-appellants.\n When evidence was being recorded in\t the\tsuit\nproceedings, the plaintiff obtained summons from the court\nrequiring the Income Tax Department to produce in the court\nrecords\t relating to the income tax\t assessment of\t the\ndefendants for the assessment years 1964-65 to 1971-72.\n The\t Income Tax Officer produced the record in a sealed\ncover.\n The plaintiff also obtained summons requiring the Income\nTax Officer to produce the income tax record relating to two\nother assessees, which was produced in the Court by\t the\nDepartment in\ta sealed cover with a\tsubmission that no\ndisclosure of information regarding income tax\n\t\t\t\t\t\t 546\npertaining to\tan income tax assessee could be made.\t The\nplaintiffs in the meanwhile filed in the court\ta number of\ncertified copies of the accounts of the defendants, which\nhe had obtained from the Income-Tax authorities and sought\npermission of the Court to tender the certified copies in\nevidence.\n Before a Single Judge of the High Court on the question\nof privilege as claimed by the Income Tax\t Department,\narguments were addressed by the parties.\n The\t following three questions were referred to the Full\nBench\n (i)\t What is the position of law relating to privilege\nprior to 1964?\n (ii) What is the position of law relating to privilege\nafter 1964? and\n (iii) What is the effect of the production of certified\ncopies\trelating to income-tax assessment records, and\t how\nfar certified copies can be admitted in evidence?\n The\t Full Bench answered the first and second questions\nsustaining the\t claim of the privilege by the\t Income\t Tax\nDepartment and the Full Bench did not express any opinion on\nthe third question.\n Against the judgment of the Full Bench of the\tHigh\nCourt,\tappeal was filed by special leave. The\t controversy\nbefore\tthis Court was confined to the finding of the\tHigh\nCourt relating to the claim of privilege for the production\nof documents which were filed after the repeal\t of Section\n137, with effect from 1.4.1964 in respect of assessment\nyears 1964-65 onwards.\n The\t appellants (defendants) contended that after\t the\nrepeal\tof Section 137 of the Income-Tax Act, 1961 by\t the\nFinance Act, 1964 there was no longer any impediment left in\nthe way of a\t civil court to\t summon\t the production of\ndocuments filed by an assessee during the\t assessment\nproceedings before an Income-Tax Officer after 1.4.1964 in\nrespect\t of assessment years 1964-65 onwards, and that\t the\nfinality attached to\tan order of the Commissioner\twith\nregard to claim of privilege under Section 138(1)(b) had no\nrelationship to the power of the court to\tsummon\tthat\nrecord.\n Allowing the appeal of the defendants-appellants,\tthis\nCourt,\n\t\t\t\t\t\t 547\n HELD:1.01.\tSection 54 of the Income Tax Act, 1922\t and\nafter its repeal, Section 137 of the Income Tax Act,\t1961\nhad only placed fetters on the exercise of the jurisdiction,\nin respect of\t the specified\tdocuments, by\tthe courts,\nnotwithstanding anything contained in any other law for\t the\ntime being in force. The exercise of the jurisdiction to\nseek production of documents had, only been put under a\ncloud in so far as the record of assessment is concerned.\n[560E]\n 1.02. With the repeal of the 1922 Act and\tomission of\nSection 137 of the 1961 Act, the fetters on the exercise of\nthe jurisdiction were\t removed with the result that\t the\nexercise of jurisdiction to call for\t the production of\ndocuments relevant to the case pending before\t the court,\neven from the income-tax authorities, revived. [560E-F]\n 1.03. Neither Section 54 of the 1922 Act nor Section 137\nof the 1961\tAct had taken\t away for all\t times\t the\njurisdiction of the courts to call for the record from\t the\nIncome-Tax authorities. Those provisions had only put\t the\nexercise of that jurisdiction under\ta cloud and those\nfetters\t were coterminous with the life of Section 54 of\nthe 1922 Act or Section 137 of the 1961 Act. [560F-G]\n 2.01. Clause (b) of Sub-Section (1) of Section 138 is\nlimited\t in its scope and application. Under it, any person\ncan make an application to\tthe Commissioner for\t any\ninformation relating to an assessee\tin respect of\t any\nassessment made either under the 1922 Act or under the\t1961\nAct on or after the 1st April 1960 and the Commissioner of\nIncome\tTax has the authority to furnish or cause to be\nfurnished the\tinformation asked for\ton being satisfied\nthat it is in the public interest so to do and such an order\nof the\t Commissioner is final and cannot be called in\nquestion in any court of law. The Commissioner of Income Tax\nunder this clause performs only an administrative function,\non his\tsubjective satisfaction as to whether it is in\t the\npublic\tinterest to furnish the information or not to\t any\nperson\tseeking\t such information and his decision in\tthat\nbehalf is final and the aggrieved person cannot question it\nin a court of law.\tBy enacting this provision,\t the\nlegislature could not be said to have\t intended that\t the\nCommissioner of Income Tax would have the authority to\t sit\nin judgment over the requisition (Judicial order) made by\na court of law requiring the production of record of\nassessment relating to an assessee\tin a case pending\nbefore the court. [562H-563D]\n\t\t\t\t\t\t 548\n 2.02. When a court of law, in any matter pending before\nit, desires the production of record relating to\t any\nassessment after applying its judicial mind and hearing\t the\nparties\t and on being prima facie satisfied that the record\nrequired to be\tsummoned is relevant for the decision of the\ncontroversy before it - it passes a judicial order summoning\nthe production\t of that record from\t the Party having\npossession of\tthe record. The Commissioner of\t Income\t Tax\ncannot,\t therefore, refuse to\t send the record, as\t he\ncertainly is not authorised to set at\t naught\t a judicial\norder of a court law. He must obey the order of the court by\nsending the record to the court concerned. [563D-F]\n 2.03. It is open to the Commissioner of Income Tax to\nclaim privilege, in respect of any document or record so\nsummoned by a court of law, under Sections 123 and 124 of\nthe Indian Evidence Act, 1872 and even then it is for\t the\ncourt to decide whether or not to grant that privilege.\t Had\nthe legislature intended that no document\t from\t the\nassessment record of an assessee should be produced in a\ncourt on being summoned by it, without the approval of\t the\nCommissioner of Income Tax, it would have said so in Section\n138 of the Act itself. [563F-G]\n 2.04. The repeal of Section 137 of the\tAct clearly\ndiscloses the\tlegislative intent that it was felt by\t the\nlegislature that it was no more necessary to keep\t the\nrecords of assessment by the Income Tax Department relating\nto an assessee as confidential from the courts and the bar\nwith regard to the production of any part of the record\t was\nremoved in so far as the courts are concerned.\tThe finality\nwhich has been attached to the order of the\tCommissioner\nunder Section\t138(1)(b) of the Act is\t restricted to\t the\ncases where the information etc. as contemplated by\t the\nsection\t is called for by any person, other than a court of\nlaw by\ta judicial order. [563G-564A]\n 2.05 The finality which has been attached to the order\nof the Commissioner under Section 138(1)(b) of the Act is\napplicable only in cases where application is made to\t the\nCommissioner by a party or any other person for receiving\ndocuments or information. It has nothing to do with\t the\npowers of the courts to summon the production of assessment\nrecord of an assessee, filed after 1.4.1964. The privilege\nas to secrecy, which the assessee had acquired under Section\n54 of the 1922 Act remained unimpaired by the repeal of that\nAct or even by the omission of Section\n\t\t\t\t\t\t 549\n137 of\t the 1961 Act in respect of record filed prior to\n1.4.1964 and relating to the assessments prior to that date.\nThat privilege did not extend, after April 1,1964. to record\nfiled before the income-tax authorities, for the assessment\nyears 1964-65 onwards.\t[560H-561B]\n 2.06. Section 138(1)(b) does not effect the powers of\nthe courts to require the production of assessment records\nor the disclosure of any information therefrom to it, in a\ncase pending before the court when the court, by a judicial\norder,\trequires the production of the\t record, considered\nrelevant by it for decision of a case pending\t before\t it.\n[564B-C]\n 2.07. The High\tCourt,\ttherefore, fell in error\nin holding that the assessment records of an assessee filed\nbefore the income-tax authorities, even after April 1,1964,\nare immune from production in a court of law on summons\t for\ntheir production being issued by the court and that\t the\ndisclosure of any information from the record even to\t the\ncourts is subject to the veto powers of the Commissioner of\nIncome Tax. [564B]\n 3.01. Section 6 of the General Clauses Act as well as\nSection 138 (1)(b) of the 1961 Act cannot extend the ban on\nthe exercise of the jurisdiction by the courts to summon the\nproduction of\tdocuments from\tthe income-tax\t authorities\nafter April 1,1964 relating to assessment year\t 1964-65 in\nrespect of the record filed after April 1,1964. [561B-C]\n 3.02. Section 6 of the General Clauses Act provides\nthat the repeal of any enactment,\tunless\ta different\nintention appears, shall not affect any right, privilege,\nobligation or liability acquired, accrued or incurred under\nthe repealed enactment. [561F]\n 3.03 The general principle is that an enactment which\nis repealed, is to be treated, except as to\ttransactions\npast and closed, as if it had never existed. The assessee\nhad acquired no right or privilege under the repealed\tAct,\nsince the provision is only a procedural restriction and did\nnot create any substantive right in the assessee, in respect\nof assessments for the period after the omission of Section\n137 of\t the 1961 Act. Thus, reliance placed on\t the\nprovisions of Section 6 of the General Clauses Act to\thold\nthe continuation of the ban on the exercise of\tjurisdiction\nby the courts was misplaced. [561H-562B]\n 3.04. In\trespect\t of the documents filed after\t the\nomission of Section\n\t\t\t\t\t\t 550\n137 of\t the 1961 Act , with\teffect\tfrom April 1,1964,\nrelating to assessments for the period 1964-65 onwards, no\nright,\tprivilege, obligation or liability can be said to\nhave been acquired accrued or incurred prior to the omission\nof Section 137 of the Act. [561F-G]\n 3.05 The ban contained in Section 137 of the 1961\t Act\non the exercise of the powers of a civil court to call\t for\nproduction of\tdocuments etc. could not be said to\thave\ncontinued to exist, in matters arising subsequent to\t the\nomission of that Section with effect from April 1, 1964\t and\nthat ban came to an end in respect of the period after April\n1, 1964. [561G]\n 4. After the repeal of Section 137 of the act, there is\nno longer any\t impediment left in the way of\ta court to\nsummon\tthe production of documents filed by\tan assessee\nbefore\t the income-tax authorities after April 1,1964\nrelating to assessment proceedings for 1964-65 onwards\t and\nthat the finality attached to an order of the\t Commissioner\nunder Section 138 (1)(b) has no relevance to the exercise of\npowers by a court to summon the production of documents in a\ncase pending before the Court. [564D-E]\n\n\n\nJUDGMENT:\n CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1360 of\n1974.\n From the\tjudgment and Order dated 14.12.1973 of\t the\nDelhi High Court in suit No. 64 of 1969.\n Ms. Suruchi Agarwal and T.V.S.N. Chari for\t the\nAppellants.\n H.K. Puri and Mrs. Urmila Sirur for the Respondents.\n The Judgment of the Court was delivered by\n DR. A.S.ANAND,J.\t This appeal, by special leave, is\ndirected against the judgment of the Full Bench of the Delhi\nHigh Court, dated 14.12.1973 in Suit No. 64/69, delivered\nin a reference made by\t a learned Single Judge for opinion\nof the Full Bench. The questions referred by\tthe learned\nSingle Judge to the Full Bench revolved around the scope and\neffect\tof the\t provisions of Sections 54 and\t59B of\t the\nIndian\tIncome Tax Act 1922 (hereinafter referred to as\t the\n'1922 Act') and Sections 137 and 138 of the Income Tax\t Act\n1961 (hereinafter referred to as the '1961 Act') as amended\nfrom time to time in 1964 and 1967 in the context of\t the\nclaim of privilege by the Income Tax\tDepartment for\t the\nproduction of the\n\t\t\t\t\t\t 551\ndocuments relating to assessment of an assessee summoned by\nthe Civil Court. The following three questions\twere\nreferred to and considered by the Full Bench:\n\t \"1. What is\t the position of law\trelating to\n\t privilege prior to 1964?\n\t 2. What is\t the position of law\trelating to\n\t privilege after 1964 ?; and\n\t 3. What is\t the effect of\t the production of\n\t certified copies relating to income-tax assessment\n\t records, and\t how far certified copies can be\n\t admitted in evidence ?\"\n The circumstances under which these questions arose,\nbriefly put, are as follows:\n 2. The plaintiff, Trilok Chand Jain, instituted a\tsuit\nfor recovery of Rs. 1,39,722.86 against the defendants, M/s.\nDagi Ram Pindi Lal and Smt. Budh Wanti Gulati, w/o\tShri\nPindi Lal Gulati, the appellants herein. During the course\nof proceedings\t in the suit,\t when evidence\t was being\nrecorded, the\tplaintiff obtained summons from the court\nrequiring the Income Tax Department to produce in the court\nrecords\t relating to the Income Tax\t Assessment of\t the\ndefendants, M/s. Dagi Ram Pindi Lal,\tfor the assessment\nyears 1964-65 to 1971-72. The Income tax officer to\twhom\nthe summons were issued, sent the record in a sealed cover\nthrough\t an Inspector along with a letter, dated November\n1,1972,\t claiming that the said record was privileged under\nSection 137 of the 1961 Act. The plaintiff also applied for\nand obtained summons requiring the Income tax\t Officer to\nproduce\t the Income tax record relating to M/s Borizeon\nIndustrial Products (P) Ltd. and Bishamber Nath Kaul.\tThat\nrecord\twas also sent by the Income Tax Officer in a sealed\ncover alongwith a letter in which it was submitted that no\ndisclosure of information regarding income tax pertaining to\nan income tax assessee could be made.\tThe plaintiffs, it\nappears, in the meanwhile filed in the court a number of\ncertified copies of the accounts of the defendants, which he\nhad been able to obtain from the income-tax authorities\t and\nsought\tpermission of\tthe Court to tender the certified\ncopies in evidence. Arguments were addressed by the parties\nbefore the learned Single Judge on the question of privilege\nas claimed by the Income Tax officer. Being of the opinion\nthat the question of privilege, as claimed by the Income Tax\nofficer, was important and likely to arise in\n\t\t\t\t\t\t 552\nthe course of trial of suits in future also, a reference was\nmade by the learned Single Judge to the Full\t Bench.\t In\ndealing with the three questions (supra) referred to it, the\nFull Bench considered different situations. It considered\nthe first question in the following four situations:\n\t \"(a) Where the documents, records, etc. in respect\n\t of which privilege is claimed were filed by an\n\t assessee or a third party before April 1,1962, with\n\t effect\t from which date the Indian Income Tax\tAct,\n\t 1922 was repealed, in respect of assessment years\n\t up to\t and including assessment year\t 1961-62 in\n\t proceedings for the said assessment years taking\n\t place under the Indian Income-tax Act,1922;\n\t (b) Where the documents, records, etc. were filed\n\t by an assessee or a third party after April 1,1962,\n\t but before April 1,1964 in respect of assessment\n\t years\tup to and including assessment year 1961-62\n\t in proceedings for the said assessment years taking\n\t place under the Indian Income_tax Act,1922;\n\t (c) Where the document, records, etc. were filed\n\t by an assessee or a third party after April 1,1962,\n\t but before April 1,1964, in respect of assessment\n\t years\tup to and including assessment year 1961-62\n\t in proceedings for the said assessment years taking\n\t place under the Income-tax Act, 1961;and\n\t (d) Where the documents, records, etc. were filed\n\t by an assessee or a third party after April 1,1962,\n\t but before April 1,1964, in respect of\t assessment\n\t years\t1962-63 and 1963-64 in proceedings for\t the\n\t said assessment years taking place\t under\t the\n\t Income-tax Act, 1961.\"\n and sustained the claim of privilege by the Income Tax\nDepartment in each one of the situations.\n The Full Bench while considering\tthe second\nquestion, dealt with the following situations:\n\t (a) Where the documents, records, etc. in respect\n\t of which privilege is claimed were filed by an\n\t assessee or a third party after April 1, 1964, in\n\t respect of assessment years up to and including\n\t assessment year 1961-62 in proceedings for the said\n\t\t\t\t\t\t 553\n\t assessment years taking place under\t the Indian\n\t Income-tax Act, 1922;\n\t (b) Where the documents, records etc. were filed\n\t by an\t assessee or a third party after April 1,\n\t 1964,\tin respect of assessment years\t up to\t and\n\t including year 1961-62 in proceedings for the\tsaid\n\t assessment years taking place under\t the Indian\n\t Income-tax Act, 1961;\n\t (c) Where the documents, records, etc. were filed\n\t by an\t assessee or a third party after April 1,\n\t 1964,\tin respect of assessment years\t1962-63\t and\n\t 1963-64 in proceedings for the said\t assessments\n\t years taking place under the Income-tax Act, 1961;\n\t and\n\t (d) Where the documents, records, etc. were filed\n\t by an\t assessee or a third party after April 1,\n\t 1964,\tin respect of\t assessment years 1964-65\n\t onwards.\"\n The claim\t of privilege was sustained in all above\nsituations also.\n3. Dealing with the effect of omission of Section 137\t and\nsubstitution of section 138 (1) (a) and (b), the High Court\nopined;\n\t \".....that when a party to a proceeding in a Court\n\t applies for summoning any documents, records\tetc.\n\t from the income-tax authorities, the Court\t may\n\t summon\t the said documents, records, etc. But on\n\t receipt of summons, it is open\t to the Commissioner\n\t of Income-tax to consider the matter\tas provided\n\t under\tsection 138 (1) (b), and decide\t whether it\n\t would be (sic) in the public interest to produce or\n\t furnish the documents, records, etc. summoned\tfor,\n\t and submit his view to the Court in answer to\t the\n\t summons. In\tcase, he is satisfied that\t the\n\t production etc. would not\tbe in\tthe public\n\t interest, his decision is final and the Court to\n\t which\tthe said decision is\tcommunicated cannot\n\t question the same.\"\n\t\t\t\t\t[EMPHASIS SUPPLIED]\n The\tFull Bench, however, did not express any opinion on\nthe third question.\n 4. Learned counsel for the appellant has not questioned\nthe findings of the Full Bench in so far as they relate to\nthe claim of privilege in respect\n\t\t\t\t\t\t 554\nof documents filed prior to the repeal of the 1922 Act\t or\nbefore\tthe omission of Section 137 from the 1961 Act.\t She\nhas questioned\t the findings of the Full Bench only as\nregards\t the power and jurisdiction of the Court to summon\nthe documents,\t after the repeal of the 1922 Act and after\nthe deletion of Section 137 from the 1961 Act by the Finance\nAct, 1964 as also the interpretation placed by the Bench on\nSection\t 138 (1) (b) of the Act. The controversy before us\nhas been confined to the finding of the High Court relating\nto the claim of privilege for the production of documents\nwhich were filed after the repeal of\t Section 137,\twith\neffect from 1.4.1964 in respect of assessment years 1964-65\nonwards. Thus, it is the finding on situation (d) of\t the\nsecond\tquestion as rendered by the Full Bench\tWhich alone\nhas been questioned and debated before us.\n The precise argument of the learned counsel for\t the\nappellant is that after the repeal of Section 137 of\t the\n1961 Act by Act V of 1964, there is no longer any impediment\nleft in the way of a civil court to summon the production of\ndocuments filed by an assessee during the\t assessment\nproceedings before an Income-tax Officer after\t1.4.1964 in\nrespect\t of assessment years 1964-65 onwards, and that\t the\nfinality attached to\tan order of the Commissioner\twith\nregard\tto claim of privilege under Section 138 (1) (b)\t has\nno relationship to the power of the court to\tsummon\tthat\nrecord.\n 5.\t For a\tproper appreciation of the question debated\nbefore\tus, it would be desirable to refer to the relevant\nprovisions of\tthe 1922 Act and 1961 Act, as amended\tfrom\ntime to time, and notice the changes brought about in\t the\nmatter of claim of privilege by the Income Tax Department.\n\t Section 54 (1) and (2) of the 1922 Act provided as\n\t follows:\n\t \"54. Disclosure of information by a public\n\t servant\n\t (1) All particulars contained in any statement\n\t made,\treturn\tfurnished or accounts or documents\n\t produced under the provisions of this Act or in any\n\t evidence given, or affidavit or deposition made, in\n\t the course of any proceedings under this Act other\n\t than proceedings under this Chapter,\t or in\t any\n\t record\t of any assessment proceeding, or\t any\n\t proceeding relating to the recovery of a demand,\n\t prepared for\tthe purpose of this Act, shall be\n\t treated as confidential, and notwithstanding\n\t\t\t\t\t\t 555\n\t anything contained in the Indian Evidence\tAct,\n\t 1872(1 of 1872) no Court shall save as provided in\n\t this Act, be entitled to require any public servant\n\t to produce before it any such return, accounts,\n\t documents or\trecord\tor any\tpart of any\tsuch\n\t record, or to give evidence before it\t in respect\n\t thereof.\n\t (2) If a public servant discloses any\t particulars\n\t contained in\t any\tsuch statement, return,\n\t accounts,documents, evidence, affidavit deposition\n\t or record, he shall be punishable with imprisonment\n\t which\tmay extend to six months, and shall also be\n\t liable to fine.\"\n 6.\t By Section 9 of the Taxation Laws (Amendment)\t Act\nof 1960, Section 59-B was inserted in the 1922 Act\twith\neffect from April 1, 1960. It provided as under:-\n\t \"59-B\t Disclosure of\t information regarding\t tax\n\t payable-\n\t Where\t a person makes an application to\t the\n\t Commissioner in the prescribed form and after\n\t payment of the prescribed fee for information as to\n\t the amount of tax determined as payable by\t any\n\t assessee in respect of any assessment made on or\n\t after the 1st day of April, 1960, the\tCommissioner\n\t may, notwithstanding anything contained in section\n\t 54, if he is satisfied that there are\t no\n\t circumstances\tjustifying its refusal,\t furnish or\n\t cause to be furnished the information asked for.\"\n Both the\t aforesaid provisions\t dealt\t with\t the\nconfidential nature of the documents\t filed,\t before\t the\nIncome\tTax authorities and the claim of privilege to\ndisclose the same to anyone, including a court of\tlaw.\nSection 54 (1) declared that the various documents referred\nto therein shall be treated as confidential and prohibited a\ncourt from requiring any public servant to produce before it\nany such document or to give evidence before it in respect\nthereof, notwithstanding anything contained in\t the Indian\nEvidence Act,\t1872. Sub-Section (2) of Section 54\tmade\npunishable, the disclosure by a public servant, of\t any\ninformation contained\tin those documents. the effect of\nintroduction of Section 59-B by Taxation Laws\t (Amendment)\nAct 1960 was\tthat it entitled a person to make\t an\napplication to\t the Commissioner to\tobtain\t information\nthereafter as to the amount of tax determined, as payable by\nan assessee in respect of any assessment made\n\t\t\t\t\t\t 556\non or before April 1, 1960, and authorised the\tCommissioner\nto furnish or cause\t to be\t furnished the\t sought\t for\ninformation, if he was satisfied that there were\t no\ncircumstances justifying its refusal.\tThis legal position\ncontinued to prevail till April 1, 1960, when the 1922\t Act\nwas repealed by the 1961 Act. In the 1961 Act , provisions\nwere made corresponding to sections 54 and 59-B of the\t1922\nAct in\t Sections 137 and 138.\t The relevant\tportions of\nSections 137 and 138 of the Act provided as follows:\n\t \"137. Disclosure of information prohibited-\n\t (1) All particulars contained in any statement\n\t made,\treturn\tfurnished or accounts or documents\n\t produced under the provisions of this Act, or in\n\t any evidence given or affidavit or deposition\tmade\n\t in the course of any proceedings under this\tAct,\n\t other\tthan proceedings under Chapter XXII, or in\n\t any record of any assessment proceedings, or\t any\n\t proceedings relating\tto recovery of a demand,\n\t prepared for\tthe purposes of this Act, shall be\n\t treated as confidential, and notwithstanding\n\t anything contained in the Indian Evidence\tAct,\n\t 1872, no Court shall, save as provided in this Act,\n\t be entitled to require any\t public\t servant to\n\t produce before it any such\t return, accounts,\n\t documents or record or any part of any such record,\n\t or to give evidence before it in respect thereof.\n\t (2)\tNo public servant shall disclose\t any\n\t particulars contained in any such\t statement,\n\t return, accounts, documents, evidence, affidavit,\n\t deposition or record.\n\t (3) .......\n\t (4) .......\n\t (5) .......\n\t \"138.\t Disclosure of information respecting\t tax\n\t payable-\n\t WHERE\t A person makes an application to\t the\n\t Commissioner in the prescribed form and pays\t the\n\t prescribed fee for information as to the amount of\n\t tax determined as payable by an assessee in respect\n\t of any assessment made either under this Act or the\n\t Indian-income\ttax Act, 1922.\tOn or after the\t 1st\n\t day\n\t\t\t\t\t\t 557\n\t of\tApril,\t 1960,\t the\tCommissioner\tmay,\n\t notwithstanding anything contained in Section\t137,\n\t if he is satisfied that there are no circumstances\n\t justifying its refusal, furnish or cause to be\n\t furnished the information asked for.\"\n 7.\t The provisions of Section 137(1) of the 1961\t Act\nwere, as is seen, almost identical to the provisions of sub-\nsection\t (1) of Section 54 of the 1922 Act and\tSection\t 137\n(2) prohibited a public servant from disclosing\t the\nparticulars contained in any of the documents mentioned in\nSection 137 (1). The provisions of Section 138 of the\t1961\nAct were almost identical to the provisions of Section\t59-B\nof the 1922 Act.\n 8.\t With effect from April 1, 1964, Section 137 of\t the\n1961 Act was omitted from the Statute vide Section 32 of the\nFinance\t Act No. V of 1964, and Section 138 was\t substituted\nby a new Section vide Section 33 of the Finance Act No. V of\n1964. The substituted Section 138 reads as under:-\n\t \"138.\t Disclosure of information\t respecting\n\t assessees:-\n\t (1) Where a person makes an application to\t the\n\t Commissioner\tin the\t prescribed form for\t any\n\t information relating to any assessee in respect of\n\t any assessment made either under this Act or\t the\n\t Indian\t Income-tax Act, 1922, on or after the\t 1st\n\t day of April, 1960, the Commissioner may, if he is\n\t satisfied that it is in the public interest so to\n\t do, furnish\t or cause to\tbe furnished\t the\n\t information asked for in respect of that assessment\n\t only and his decision in this behalf shall be final\n\t and shall not be called in question in any Court of\n\t law.\n\t (2) Notwithstanding\tanything contained in\tsub-\n\t section (1) or\t any other law for the time being in\n\t force, the Central Government may, having regard to\n\t the practices\t and usages customary or any other\n\t relevant factors, by order notified in the Official\n\t Gazette, direct that no information\tor document\n\t shall be furnished or produced by a public servant\n\t in respect of such matters relating to such class\n\t of assessees or except to such authorities as\t may\n\t be specified in the order.\"\n 9.\t The scope of Section 138, of the 1961 Act was, as\ncan be\t seen,\tenlarged by the\t substituted provisions of\nSection 138. Under the original\n\t\t\t\t\t\t 558\nSection\t 138 a person could\t make an application\t for\ninformation only as to the amount of\ttax determined, as\npayable\t by an\t assessee, under sub-section\t(1) of\t the\nsubstituted Section 138, a person could make an\t application\nfor any information relating to an assessment.\tAgain, under\nthe original Section 138, before the necessary\t information\ncould be furnished or cause to be furnished to an applicant,\nthe Commissioner was to be satisfied that there were no\ncircumstances justifying refusal to furnish the\t information\nasked for; under sub-Section (1) of the substituted Section\n138, the Commissioner was required to be satisfied that it\nwas in the public interest to furnish the information asked\nfor and \"his decision in this behalf shall be final\t and\nshall not be called in question in any court of law.\"\tVide\nsub-Section (2) of the substituted Section 138, the Central\nGovernment was\t also empowered to direct, by an order\nnotified in the Official Gazette, that no information or\ndocument shall be furnished or produced by a public servant\nin respect of\t such matters relating\t to such class of\nassessees or except to such authorities as may be specified\nin the order.\n 10, The substituted Section 138 was once again amended\nand substituted vide Section 28 of the Finance Act,\t1967\nwith effect from April 1, 1967.\t The new sub-section (1) of\nsection 138 reads as follows:\n\t \"(1)(a) The\t Board\tor any\t other\t income-tax\n\t authority specified by it by a general or special\n\t order\tin this behalf may furnish or cause to be\n\t furnished to-\n\t (i) any officer, authority or body performing\t any\n\t functions under any law relating to the imposition\n\t of any tax, duty of cess, or to dealings in foreign\n\t exchange as defined in section 2(d) of the Foreign\n\t Exchange Regulation Act, 1947; or\n\t (ii)such officer, authority or body performing\n\t functions under any\tother law as\tthe Central\n\t Government may, if in its opinion it is necessary\n\t so to\t do in\t the public interest,\t specify by\n\t notification in the\tOfficial Gazette in\tthis\n\t behalf, any such information relating to\t any\n\t assessee in respect of any assessment\t made under\n\t this Act or the Indian income-tax Act, 1922 as may,\n\t in the opinion of the Board or other Income-tax\n\t authority, be necessary for the purpose of enabling\n\t the officer, authority or body to perform his or\n\t its functions under that law.\n\t\t\t\t\t\t 559\n\t (b) Where a person makes an application to\t the\n\t Commissioner\tin the\t prescribed form for\t any\n\t information relating to any assessee in respect of\n\t any assessment made under this Act or\t the Indian\n\t Income-tax Act 1922, on or after the 1st day of\n\t April,\t 1960\tthe Commissioner may,\t if he\t is\n\t satisfied that it is in the public interest so to\n\t do, furnish\t or cause to\tbe furnished\t the\n\t information asked for in respect of that assessment\n\t only and his decision in this behalf shall be final\n\t and shall not be called in question in any court of\n\t law.\"\n The provisions of sub-Section (1) of Section 138 as\nthey originally stood were incorporated in clause (b) of the\nsubstituted sub -Section (1)\t and a\t new provision\t was\nincorporated in clause (a)\tof sub-Section\t (1) which\nempowered the\tBoard or any\tother income-tax authority\nspecified by it by a general or special order in that behalf\nto furnish or cause to be furnished, information relating to\nany assessee\tto such officer, authority or\tbody as is\nmentioned in the provision to enable him or it\t to perform\nits functions\tunder the Act. Vide\t clause\t (b)of\t the\nsubstituted sub-Section (1) of Section 138, finality\t has\nalso been attached to an order of the Commissioner, made on\nan application\t filed by any\tperson\tseeking\t information\nrelating to an assessee in respect of any assessment.\t The\nCommissioner, has to make an order, after being satisfied\nthat it is in the public interest so to do, to\t furnish or\ncause to be furnished such information and that decision of\nthe Commissioner is immune from challenge in any court of\nlaw.\n 11. The controversy as already noticed, before us is\nlimited\t to the jurisdiction or lack of it of a civil court\nto seek production of documents relating to\t assessments\nfiled after April 1, 1964 in assessment proceedings 1964-65\nonwards, after the omission of Section 137 of the Act.\n 12. The Full Bench, in the impugned judgment, came to\nthe conclusion\t that the omission of Section 137 did\t not\nmake any difference and that the ban\t on the courts as\ncontained in the repealed Section 137 continued to remain in\nforce by virtue of the provisions of Section 138 (1)\t and\nafter 1967 by Section 138 (1)(b) of the Act even in respect\nof the documents filed in the assessment proceeding after\nApril 1, 1964 for assessments relating to the period 1964-65\nonwards. The\t Full Bench also pressed into aid\t the\nprovisions of Section 6 of the General Clauses Act to\n\t\t\t\t\t\t 560\nhold that the repeal of Section 137 did not remove the\t ban\non the courts to summon any documents from the income-tax\nauthorities, even in respect of documents which had\tbeen\nfiled before the Income-tax authorities after the repeal of\nSection 137 after April 1, 1964.\n 13. In our opinion the High Court fell in error in\ncoming\tto that conclusion.\tIt not\t only ignored\t the\nlegislative intent manifest in the omission of Section\t 137\nof the 1961 Act, after the repeal of the 1922 Act, but\talso\nignored\t the powers of a court under the general law, to\nsummon such documents, record etc. as is found relevant to a\ncase pending before the court, in the absence of\t any\nspecific prohibition, under any law for the time being in\nforce.\t The High Court assumed that by Section 54 of\t the\n1922 ACt and Section 137 of the 1961 Act, the jurisdiction\nof the\t courts to call for documents from the income-tax\nauthorities had been\ttaken away for all times to come,\nnotwithstanding\t the repeal of the 1922 Act or the omission\nof Section 137 specifically from the 1961 Act. The\tHigh\nCourt appears to have lost sight of the position that under\nthe Code of Civil Procedure, the courts of law have always\npossessed the\tjurisdiction to call for the production of\ndocuments relevant to the case before the court from anybody\nhaving\tcustody of those documents. Section 54 of the\t1922\nAct and after its repeal Section 137 of the 1961 Act\t had\nonly placed fetters on the exercise of that jurisdiction,\nin respect of\t the specified\tdocuments, by\tthe courts,\nnotwithstanding anything contained in any other law for\t the\ntime being in force. The exercise of the jurisdiction to\nseek production of documents had, thus only been put under a\ncloud in so far as the record of assessment is concerned.\nWith the repeal of the 1922 Act and omission of Section\t 137\nof the\t 1961 Act, the fetters on the exercise of\tthat\njurisdiction were removed with the result that the exercise\nof the jurisdiction to call for the production of documents\nrelevant to the case pending before the court, even from the\nincome-tax authorities, revived. Neither Section 54 of\t the\n1922 Act nor Section 137 of the 1961 Act had taken away\t for\nall times the jurisdiction of the courts to call for\t the\nrecord\tfrom the income-tax authorities. Those\t provisions,\nas already noticed had, only put the exercise of\tthat\njurisdiction under a cloud\t and those fetters\twere\ncoterminous with the life of Section 54 of the 1922 Act or\nSection 137 of the 1961 Act.\n 14. The finality which has been attached to the order\nif the Commissioner under Section 138 (1) (b) of the Act is\napplicable only in cases where application is made to\t the\nCommissioner by a party or any other person\n\t\t\t\t\t\t 561\nfor receiving documents or information. It has nothing to\ndo with the powers of the courts to summon the production of\nassessment record of an assessee, filed after 1.4.1964.\t The\nPrivilege as to secrecy, which the assessee had acquired\nunder Section 54 of the 1922 Act remained unimpaired by\t the\nrepeal\tof that Act or even by\tthe omission of Section\t 137\nof the 1951 Act in respect of record filed prior to 1.4.1964\nand relating to the assessments prior to that\tdate.\tThat\nprivilege did\tnot extend, after April 1, 1964, to record\nfiled before the income-tax authorities, for the assessment\nyears 1964-65 onwards.\tSection 6 of the General Clauses Act\nas well as Section 138 (1) (b) of the 1961 Act cannot extend\nthe ban on the exercise of the jurisdiction by the courts to\nsummon\tthe production\t of documents from the income-tax\nauthorities after April 1, 1964 relating to assessment\tyear\n1964-65 in respect of the record filed after April 1, 1964.\n 15. Section 6 (C) of the General Clauses Act, 1897 on\nwhich reliance was placed by the HIgh Court reads as under:-\n\t \"6. Where this ACt, or any Central Act\t or\n\t regulation made after the commencement of this Act,\n\t repeals any enactment hitherto made or hereafter to\n\t be made, then, unless a different intention\n\t appears, the repeal shall not ..................\n\t (c) affect any right, privilege, obligation or\n\t liability acquired or incurred under any enactment\n\t so repealed.\"\n A plain reading of the Section shows that the repeal of\nany enactment unless a different intention appears, shall\nnot affect any right, privilege, obligation or liability\nacquired, accrued or incurred under the repealed enactment.\nIn respect of\t the documents filed after the repeal of\nSection 137 of the 1961 Act, with effect from April 1, 1964,\nrelating to assessments for the period 1964-65 onwards, no\nright,\tprivilege, obligation or liability can be said to\nhave been acquired, accrued\tor incurred prior to\t the\nomission of section 137 of the Act.\tTherefore, the\t ban\ncontained in Section 137 of the 1961 Act on the exercise of\nthe powers of\t a civil court to call\t for production of\ndocuments etc.\t could\tnot be said to\thave continued to\nexist, in matters arising subsequent to the omission of that\nSection with effect from April 1, 1964 and that ban came to\nan end in respect of the period after April 1,\t 1964.\t The\ngeneral principle is that an enactment which is repealed, is\nto be\ttreated, except as to transactions past and closed,\nas if it had never existed. The assessee had\tacquired no\nright or\n\t\t\t\t\t\t 562\nprivilege under the repealed Act, since the provision is\nonly a\t procedural restriction and did not\t create\t any\nsubstantive right on the assessee, in respect of assessments\nfor the period after the omission of Section 137 of the 1961\nAct. Thus, reliance placed on the provisions of Section 6\nof the General Clauses Act to hold the continuation of\t the\nban on\t the exercise of jurisdiction\tby the\t courts\t was\nmisplaced.\n 16. Dealing with the scope of Section 138 (1) (b) of\nthe Act, the\tHigh Court held\t that the said provisions\nattached a finality\tto an\torder of the\tIncome\t Tax\nCommissioner and applied to the cases where the record\t was\nsummoned even by a court of law. The High Court opined:\n\t \"The\tcomplete omission of the declaration of\t the\n\t confidential nature of the documents, records, etc.\n\t and the removal of the ban on courts\t and public\n\t servants no doubt, suggests that the power of a\n\t court\t under\tthe general law to summon\tsuch\n\t documents, records,etc. relevant to the case before\n\t it has been restored.\t But at the same time,\t the\n\t legislature which empowered the Commissioner of\n\t Income-tax to\t furnish the information if he is\n\t satisfied that it is in the public interest so to\n\t do made the decision of the Commissioner final and\n\t un-questionable in a Court of law. When two powers\n\t are thus vested in two legal authorities, neither\n\t of them can be ignored, and both of them have to be\n\t reconciled and given effect to . In the case of\n\t the two powers under consideration, it has to be\n\t noted\tthat the power to summon which vests in a\n\t court is under the general law, while the power of\n\t the Commissioner has been conferred upon him by a\n\t special law and has, therefore, to prevail over the\n\t former. In view of the same, it has to be\theld\n\t that while it is open to a court to\t summon\t the\n\t documents, records etc. from the\t Income-tax\n\t Commissioner,\t it is equally open to\t the\n\t Commissioner on receiving the summons to consider\n\t whether the production/furnishing of the documents,\n\t records etc. would be in the public interest,\t and\n\t submit\t the same to the court in answer to\t the\n\t summons.\"\n\t We are unable to subscribe to the above view.\n 17. Clause (b) of sub-Section (1) of Section 138 is\nlimited in its scope and application. Under it, any person\ncan make an application to the\n\t\t\t\t\t\t 563\nCommissioner for any information relating to an assessee in\nrespect of any assessment made either under the 1922 Act or\nunder the 1961 Act on or after the 1st April 1960 and\t the\nCommissioner of Income Tax has the authority to furnish or\ncause to be furnished the information asked for on being\nsatisfied that\t it is in the public interest so to do\t and\nsuch an order of the Commissioner is final and cannot be\ncalled in question in any court of law.\t The Commissioner of\nIncome Tax under this clause performs only an administrative\nfunction, on his subjective satisfaction as to whether it is\nin the public interest to furnish the information or not to\nany person seeking such information and his decision in that\nbehalf is final and the aggrieved person cannot question it\nin a court of law.\t By enacting this provision,\t the\nlegislature could not be said to have\t intended that\t the\nCommissioner of Income Tax would have the authority to\t sit\nin judgment over the requisition made by a court of\t law\nrequiring the production of record of assessment relating to\nan assessee in a case pending before the court. When a\ncourt of law, in any matter pending before it\tdesires\t the\nproduction of\trecord\trelating to any assessment after\napplying its judicial mind and hearing the parties and on\nbeing prima facie satisfied that the record required to be\nsummoned is relevant for the decision of the\t controversy\nbefore\tit - it passes a judicial order summoning\t the\nproduction of that record from the party having possession of\nthe record.\tThe Commissioner of Income Tax cannot,\ntherefore, refuse to send the record, as he certainly is not\nauthorised to set at naught a judicial order of a court of\nlaw. He must obey the order of the court by\tsending\t the\nrecord\tto the\t court concerned indeed it is open to\t the\nCommissioner of Income Tax to claim privilege, in respect of\nany document or record so summoned by a court of law, under\nSections 123 and 124 of the Indian Evidence Act 1872\t and\neven then it is for the court to decide whether or not to\ngrant that privilege. Had the legislature intended that no\ndocument from the assessment record of an assessee should be\nproduced in a court on being summoned by it,\twithout\t the\napproval of the Commissioner of Income Tax, it\t would\thave\nsaid so in Section 138 of the Act itself. The repeal of\nSection\t 137 of the Act clearly discloses the\t legislative\nintent\tthat it was felt by the legislature that it was no\nmore necessary\t to keep the records of\t assessment by\t the\nIncome\t Tax Department relating to\t an assessee\t as\nconfidential from the courts and the bar with regard to\t the\nproduction of any part of the record was removed in so\t far\nas the courts are concerned. The finality which has\n\t\t\t\t\t\t 564\nbeen attached to the order of the Commissioner under Section\n138(1)(b) of the Act is, thus, restricted to the cases where\nthe information etc.\tas contemplated by the\t Section is\ncalled\tfor by any person, other than a court of law by a\njudicial order.\t The High Court, therefore, fell in error in\nholding\t that the assessment records of an assessee filed\nbefore the income-tax authorities, even after April 1, 1964,\nare immune from production in a court of law on summons\t for\ntheir production being issued by the court and that\t the\ndisclosure of any information from the record even to\t the\ncourts is subject to the veto powers of the Commissioner of\nIncome Tax. Section 138(1)(b) does not affect the powers of\nthe courts to require the production of assessment records\nor the disclosure of any information therefrom to it, in a\ncase pending before the court when the court, by a judicial\norder,\trequires the production of the\t record, considered\nrelevant by it for decision of a case pending before it.\n 18. As a result of the above discussion, we, therefore,\nfind that the answer given by the Full Bench of the\tHigh\nCourt in the impugned judgment, to situation\t(d) of\t the\nsecond\tquestion (supra) as formulated by it, is erroneous\nand we set it aside. Consequently, we hold that after\t the\nrepeal\tof Section 137 of the Act, there is no\t longer\t any\nimpediment left in the way of a court to\t summon\t the\nproduction of\tdocuments filed by an assessee\t before\t the\nincome-tax authorities\t after\tApril 1, 1964\trelating to\nassessment proceedings\t for 1964-65 onwards and that\t the\nfinality attached to an order of the\t Commissioner under\nSection 138(1)(b) has no relevance to the exercise of powers\nby a court to summon the production of documents in a\tcase\npending\t before the Court. Since, the challenge before us\nhad been confined to the answer given by the High Court to\nsituation (d) of the second question as formulated by it and\nno other finding of the High Court was called in question,\nwe have refrained from expressing any opinion on the other\nfindings recorded by the Full Bench of the High Court.\t The\nappeal\tconsequently succeeds to the extent indicated above\nand is allowed.\t We, however, make no order as to costs.\nV.P.R.\t\t\t\t\t Appeal allowed.\n\t\t\t\t\t\t 565" }, { "title": "Commissioner Of Income Tax, Calcutfa vs T.I. & M. Sales Ltd on 10 April, 1987", "url": "https://indiankanoon.org//doc/1968617/", "text": "Commissioner Of Income Tax, Calcutfa vs T.I. & M. Sales Ltd on 10 April, 1987\nEquivalent citations: 1987 AIR 1234, 1987 SCR (2) 883, AIR 1987 SUPREME COURT 1234, 1987 (3) SCC 132, 1987 TAX. L. R. 674, (1987) 31 TAXMAN 505, (1987) 2 JT 272 (SC), 1987 22 TAX LAW REV 466, 1987 2 ACC 132, 1987 SCC (TAX) 240, 1987 UPTC 855, 1987 UJ(SC) 2 31, 1987 3 JT 272, 1987 TAXATION 85 (2) 25, (1987) 166 ITR 93, (1987) 2 COMLJ 108, (1987) 2 SCJ 409, (1987) 61 CURTAXREP 273\nAuthor: Misra Rangnath\nBench: Misra Rangnath, R.S. Pathak\n PETITIONER:\nCOMMISSIONER OF INCOME TAX, CALCUTFA\n\n\tVs.\n\nRESPONDENT:\nT.I. & M. SALES LTD.\n\nDATE OF JUDGMENT10/04/1987\n\nBENCH:\nMISRA RANGNATH\nBENCH:\nMISRA RANGNATH\nPATHAK, R.S. (CJ)\n\nCITATION:\n 1987 AIR 1234\t\t 1987 SCR (2) 883\n 1987 SCC (3) 132\t JT 1987 (2)\t272\n 1987 SCALE (1)771\n\n\nACT:\n Income Tax\t Act, 1961/Income Tax\t Act, 1922--Section\n163(1)(b)/ Section 43--'Business Connection'--What amounts\nto-Dependent upon a set of facts in a particular case.\n\n\n\nHEADNOTE:\n The assessee-respondent was assessed to income tax as a\nrepresentative\tassessee of ten non-resident companies.\t The\ncompanies were grouped under three heads--six in Group---A,\nthree in Group--B and one in Group C. In regard to\t the\ncompanies under Group--A, the assessee had no direct agree-\nment but had dealings by virtue of its agreement with\t the\nexporting company; as regards the three companies under\nGroup--B, the assessee had no business connection with them;\nand so far as the only company under Group--C was concerned,\nthe assessee's\t stand was that it had\tan agreement dated\nDecember 16, 1948 with the export company, but no liability\naccrued under the law in respect of the transactions.\n The\t Income-tax Officer referred specifically to\t the\nagreement of 1948 and refuted the stand of the company. He\nheld that the agreement was a clear authority that the\tnon-\nresident had employed the Indian Company for\tselling\t its\ngoods in India on commission and that it brings into exist-\nence a\t business connection between the two companies. He\nalso held that the Group-A companies were connected with the\nIndian Company through the export company.\n Appeals were filed by the assessee challenging\t the\nassessments before the Appellate Assistant Commissioner. The\nassessee tried\t to establish the actual course\t of dealing\nbetween\t the Indian Company and the ten non-residents\t and\ncontended that\t no liability under the Act accrued.\t The\nAppellate Authority dismissed the contentions of the asses-\nsee by holding that the assessee had produced no proof of\nits assertions and on the contrary had blocked the inquiry.\n Before the Tribunal, an appeal was filed by the asses-\nsee. Along with the grounds, an affidavit dated December 27,\n1965 of the Secretary of the assessee was also filed and it\nwas stated therein that there was no\n884\nobstruction to the proceedings before the Appellate Assist-\nant Commissioner with regard to the attempted probe by\t the\nAppellate Authority and that several documents were\tmade\navailable before the Appellate Authority and were actually\nplaced\tbefore\thim, and in case the\tAppellate Authority\nwanted any information or further documents to be produced,\nthe Secretary was prepared to do so.\n The\t Tribunal did not deal with the aforesaid affidavit\non the ground that it was not necessary for the purpose of\ndetermining whether the Indian Company could be appointed\nagent under Section 163 of the Act. It upheld\tthe assess-\nments and referred to the High Court the questions whether\nthe non-resident companies had business connection with\t the\nIndian Company and whether the Indian Company was correctly\ntreated as an agent of the said non-resident companies under\nSection 163 of Income-tax Act, 1961.\n The\t High ,Court held that the Indian assessee had no\nbusiness connections with the non-resident companies within\nthe meaning of Section 9 of the Act.\nDismissing the appeals of the Revenue, this Court,\n HELD: 1. The High Court was right in holding that\t the\nIndian\tassessee had no business connections with the\tnon-\nresident companies within the meaning of Section 9 of\t the\n1961 Act. Unless the matter comes under Section 163(1)(a) of\nthe Act, there will be no liability for assessment. [893F]\n 2.\tWhether\t a relationship would amount to \"business\nconnection\" as provided in Section 163(1)(b) of the Income-\ntax Act of 1961 for the purpose of giving rise to the\t li-\nability\t under Section 9(1) of the Act would depend upon a\nset of facts arising in a particular case. [889F-G]\n 3.\tThe, order of the Appellate Assistant\tCommissioner\nshows that the Secretary appeared before him at the hearing\non September 3 and 4, 1965 and the appeals were dismissed by\norder dated September 17, 1965. [890F]\n 4.\tOrdinarily, the High Court should have\tdeclined to\nuse the assertions in the affidavit for the\t purpose of\nrecording findings of fact and if, at all, in\tits opinion\nthe affidavit\twas to be utilised, the matter\tshould\thave\ngone before the Tribunal for a fresh disposal of the\t ap-\npeals. [892H]\n885\n 5. In the instant case, the High Court relying upon\t the\naffidavit of the Secretary of the assessee had\t found\tthat\nduring\tthe hearing of the appeals before the Appellate\nAssistant Commissioner, the Secretary had produced certain\nrecords\t to show the manner in which the business had\tbeen\ncarried on and the nature of the transactions. The Tribunal\nobviously fell into an error in brushing aside the affida-\nvit. The facts stated therein had a direct bearing on\t the\npoint in issue, namely, whether there was any business\nconnection between the assessee and the non-resident compa-\nnies. [889G-H; 891C-D]\n 6. The assessments relate to a period about a quarter of\na century back and by its conduct, the Revenue\t appears to\nhave waived its right to dispute the facts asserted in\t the\naffidavit on one hand by not challenging its admissibility\nand on the other by not disputing the contents thereof. It\nwould not be\tappropriate at this stage to put back\t the\nmatter\tto the stage of the second appeal before the Tribu-\nnal. [893D-El\n Commissioner of Income Tax, Punjab v.R.D. Aggarwal\t and\nCompany and another, [1965] 56 ITR 20, referred to.\n\n\n\nJUDGMENT:\n CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 1449-\n1456 of 1974.\n From the Judgment and Order dated 15/21.9.1972 of\t the\nCalcutta High Court in I.T.R Nos. 128 and 160 of 1967.\n S.C. Manchanda, V.Gauri Shankar, M.B. Rao and Ms. A.\nSubhashini for the Appellants.\n Dr. Devi Pal, H.K. Dutt, Ms. S. Seal and D.N. Gupta\t for\nthe Respondent.\nThe Judgment of the Court was delivered by\n RANGANATH MISRA, J. These are appeals by the Revenue by\nspecial\t leave and are directed against the decision of\t the\nCalcutta High Court dated 15.9.1972 rendered upon references\nmade under section 256(1) of the Income-tax Act of 1961. The\nTribunal referred the following six questions for opinion of\nthe Court:-\n 1. Whether on the facts and in the circumstances of\nthe case and\ton a proper construction of the agreement\nbetween\t the Indian Company and the Export Company,\t the\nTribunal was\n886\nright in holding that the six\t non-resident companies in\nGroup A had a business connection with the Indian Company\nand therefore that the Indian Company was correctly treated\nas an agent of the said non-resident companies under section\n163 of the Income-tax Act, 1961?\n 2. If the answer to question No. 1 is in the affirma-\ntive, then, whether on the facts and in the circumstances of\nthe case, the Tribunal was justified in holding that\t any\nprofit\tcould be deemed to accrue or arise in India to\t the\nsix non-residents in the United Kingdom in respect of\t the\ngoods sold by them to customers in India?\n 3. Whether, on the facts and in the circumstances of\nthe case and on a proper construction of the agreement dated\n22.3. 1955 between the Indian Company and Crane Packing Ltd.\n(company in Group-B), the Tribunal was right in holding that\nthe non-resident company had business connection with\t the\nIndian\tCompany and, therefore, the Indian Company was\tcor-\nrectly treated as an agent of the said non-resident company\nunder section 163 of the Income-tax Act, 1961?\n 4. If the answer to question No. 3 is in the affirma-\ntive then, whether on the facts and in the circumstances of\nthe case, the Tribunal was justified in holding that\t any\nprofit\tcould be deemed to accrue or arise in India to\t the\naforesaid non-resident company in respect of the goods\tsold\nby it to customers in India?\n 5. Whether, on the facts and in the circumstances of\nthe case and on proper construction of the agreement dated\n1.6.1954 between the Indian Company and Budy\t Tubing\t Co.\n(Australia) Pvt. Ltd. (non-resident company in Group-B), the\nTribunal was right in holding that the non-resident company\nhad business connection with the Indian Company and, there-\nfore, the Indian Company was correctly treated as an agent\nof the\t said nonresident company under section 163 of\t the\nIncome-tax Act, 1961?\n 6. If the answer to question No. 5 is in the affirma-\ntive, then, whether on the facts and in the circumstances of\nthe case, the Tribunal was justified in holding that\t any\nprofits\t could be deemed to accrue or arise in India to\t the\naforesaid non-resident company in respect of the goods\tsold\nto the customers in India?\n887\n The short facts relevant for appreciating the background\nin which these questions arose are these--T.I.& M. Sales\nLtd., assesseerespondent, was assessed to income tax as a\nrepresentative\tassessee of ten non-resident companies.\t The\nTribunal grouped the ten nonresident companies under three\nheads--six in Group-A, three in Group-B and one in Group-C.\nIn regard to the companies under Group-A, the assesee had no\ndirect agreement but had dealings by virtue of its agreement\nwith the exporting company. So far as the three companies\nunder Group-B are concerned, the assessee had\tno business\nconnection with them and so far as the only company under\nGroup-C\t is concerned, the assessee's stand was that it\t had\nan agreement dated 16.12.1948 with the export company,\t but\nno liability accrued under the law in respect of the trans-\nactions. The Income-tax Officer referred specifically to the\nagreement of 1948 and refuted the stand of the assessee by\nsaying:-\n\t \"The agreement of 6.12.1948 referred to above\n\t which continued during the relevant years is\n\t clear authority\tthat the non-resident\t had\n\t employed\tthe Indian Company for\tselling\t its\n\t goods in India on commission. The agreement\n\t certainly\t brings\t into existence\t a business\n\t connection between the two. The Indian Company\n\t is in receipt of commission calculated\twith\n\t reference\t to the aforesaid values of goods\n\t sent not only by the non-residents, but\talso\n\t by some manufacturers of the T.I. Group in the\n\t United Kingdom with which the Indian Company\n\t had no direct contract, but which supply goods\n\t to India as per orders placed by\t the Indian\n\t Company\t through\t the\t\tnon-\n\t residents\t ............ \".\nThe Income-tax Officer also found that the Group-A companies\nbelonging to the T.I. Group were connected with the Indian\nCompany through the export company.\n Appeals challenging the assessment were taken to\t the\nAppellate Assistant Commissioner. Before him, the assessee\ntried to establish the actual course of dealing between\t the\nIndian Company and the ten non-residents and contended\tthat\nno liability under the Act accrued. The Appellate Authority\ndismissed the contentions of the assessee by holding\tthat\n\"the assessee has produced no proof of its assertions and on\nthe contrary, has blocked the enquiry by me thereon\". Along\nwith the grounds of the appeal filed before the Tribunal, an\naffidavit dated 27.12.1965 of Carol Sturart\tCameron\t was\nfiled.\tCameron\t stated in that affidavit that\the was\t the\nSecretary of the assessee and was in superin-\n888\ntendence of the proceedings relating to the assessments of\nthe assessee as representative-assessee of the ten\tnon-\nresidents. In that affidavit, he denied the fact that before\nthe Appellate\tAssistant Commissioner any obstruction\t was\noffered to an attempted probe by the said Appellate Authori-\nty. On\t the other hand, the affidavit stated that several\ndocuments were made available before the Appellate Authority\nand were available and actually placed before him and in\ncase the Appellate Authority wanted\tany information or\nfurther documents to be produced, Cameron was prepared to do\nso. We shall again refer to the affidavit in its appropriate\nplace later. Before the Tribunal, some argument was raised\nwith reference to the affidavit but ultimately the Tribunal\nupheld the assessments but referred the questions indicated\nabove for the opinion of the High Court. The High Court by\nthe impugned judgment reported in 151 ITR 286\treferred to\nthe provisions of sections, 4, 42 and 43 of the Income-tax\nAct of 1922 corresponding to sections 5, 9 and 163 respec-\ntively\tof the Income-tax Act of 1961. In the light of\t the\naffidavit of Cameron,\t it took note of the fact that no\nattempt\t had been made by the Revenue to traverse the facts\nstated therein, referred to and relied upon the decision of\nthis Court in the case of Commissioner of Income-tax, Punjab\nv. R.D. Aggarwal & Co., 56 ITR 20 and came to hold\tthat\nthere was no element of business connection and, therefore,\nthe assessee was not liable. Questions 1, 3 and 5 were\tthus\nanswered in the negative and against the Revenue and, there-\nfore, Questions 2, 4 and 6 which were required to be\t an-\nswered\tonly if the answer to the other three questions\t was\nin the affirmative did not arise.\n\t In 56 ITR 20, this Court held:-\n\t\t\t\"A relation to be a business connec-\n\t tion must be real and intimate, and through or\n\t from which income must accrue or arise whether\n\t directly or indirectly to the nonresident. The\n\t expression business connection\t undoubtedly\n\t means something more than business. A business\n\t connection in section 42 involves a relation\n\t between a business carried on by a non-resi-\n\t dent which yields profits or gains and\tsome\n\t activity\tin the\t taxable territories which\n\t contributes directly or\t indirectly to\t the\n\t earning of those profits or gains. It predi-\n\t cates an\t element of continuity\tbetween\t the\n\t business of the non-resident and the activity\n\t in the taxable territories, a stray or isolat-\n\t ed transaction is normally not to be regarded\n\t as a business connection. Business connection\n\t may take several forms it may include carrying\n\t on a part of\n\t 889\n\t the main business or activity incidental to\n\t the main business of the non-resident through\n\t an agent.or it may merely be a relation\t be-\n\t tween the business of the non-resident and the\n\t activity\tin the taxable\t territories, which\n\t facilitates or assists the carrying on of that\n\t business.\t In each case the question whether\n\t there is a business connection from or through\n\t which income, profits or gains arise or accrue\n\t to a nonresident must be determined upon\t the\n\t facts and circumstances of the case.\"\n\t\t \"A relation to be a business connec-\n\t tion must be real and intimate, and through or\n\t from which income must accrue or arise whether\n\t directly or indirectly to the nonresident. But\n\t it must\tin all cases be remembered that by\n\t section 42, income, profit or\t gain which\n\t accrues or arises to a non-resident outside\n\t the taxable territories\t is sought to\t be\n\t brought within the net of the Income-tax\tlaw,\n\t and not income, profit or gain which accrues\n\t or arises or is deemed to accrue or arise\n\t within the taxable territories.\t Income\t re-\n\t ceived or deemed to be received, or accruing\n\t or arising or deemed to be accruing or arising\n\t within the taxable teritories in the previous\n\t year is taxable by section 4(1)(a) & (c) of\n\t the Act,\t whether the person earning is a\n\t resident\tor non-resident. If the agent of a\n\t non-resident receives that income or is enti-\n\t tled to receive that income, it may be taxed\n\t in the hands of the agent by the machinery\n\t provision enacted in section 40(2). Income not\n\t taxable under section 4 of the Act of a\tnon-\n\t resident\tbecomes taxable under section 42(1)\n\t if there\t subsists a connection\tbetween\t the\n\t activity\tin the taxable territories and\t the\n\t business\tof the non-resident, and if through\n\t or from\tthat connection income\tdirectly or\n\t indirectly arises.\"\n Whether a relationship would amount to \"business connec-\ntion\" as provided in section 163(1)(b) of the Income-tax Act\nof 1961 for the purpose of giving rise to liability under\nsection\t 9(1) of the Act would depend upon a set of facts\narising\t in a particular case. The High Court, relying\tupon\nthe facts stated in the affidavit of Cameron, has found that\nduring\tthe hearing or the appeals before the Appellate\nAssistant Commissioner, Court had produced certain records\nto show the manner in which the business had been carried on\nand the nature of the transactions. The Appellate Assistant\nCommissioner in his order indicated:-\n890\n\t \"The assessee submits that the contracts\t for\n\t the supply of goods ordered by\t the Indian\n\t buyers are accepted in the foreign country,\n\t that the property in the goods shipped passes\n\t to the Indian buyers at the port of shipment\n\t in the foreign country, that the payment\t for\n\t the goods is received by the non-residents in\n\t the foreign country that the sale and\tpur-\n\t chases are as between principal and principal\n\t and, therefore, cannot be said that the\tnon-\n\t residents have either a business connection in\n\t India or have any income which could be deemed\n\t to accrue or arise in India as attributable to\n\t any operation carried out in India. I may here\n\t touch briefly on that the assessee has\tpro-\n\t duced no proof of these assertions and, on the\n\t contrary, has blocked enquiry by me therein.\"\n\t\t \"The assessee is aggrieved that in\n\t the orders under section 143, the Income-tax\n\t Officer assumed ipsi dixit that the sales were\n\t made in\tIndia. It submits that while it is\n\t true that the non-residents' products\twere\n\t sold to persons in India, that does not\tcon-\n\t clude the question and, on the facts of\tthis\n\t case, the property in the goods sold passed to\n\t the Indian buyers outside India\tand, there-\n\t fore, the Income-tax Officer's axiomatic\n\t assumption that there were any sales in India\n\t is incorrect and if there were no sales in\n\t India, there is\t no income which could be\n\t deemed to accrue or arise in India by invoking\n\t the provisions of section 9 as no operation is\n\t carried out in India.\"\nThe order of the Appellate Assistant Commissioner shows that\nCameron\t appeared before him at the hearing on 3.9.1965\t and\n4.9.1965 and the appeals were dismissed by\torder dated\n17.9.1965.\n This Court's judgment in C.I.T.v.R.D. Aggarwal &\t Co.\n(supra) was pronounced on 6th of October, 1964. The order of\nthe Appellate Assistant Commissioner makes casual reference\nto this judgment but the ratio thereof had not been put to\nuse in any manner and the same does not appear to have\t had\nany perceptible effect on the decision of the Appellate\nAssistant Commissioner.\n Along with\t the memoranda of appeal filed\t before\t the\nTribunal, the assessee filed the affidavit of Cameron.\tThat\naffidavit is dated 27.12.1965. The Revenue had notice of it\nand the Tribunal in its decision has stated \"along with\t the\ngrounds of appeal before us, there is an\n891\naffidavit by Shri Cameron setting out the course of dealing\nand alleging that several of these representatives files\nwere inspected by the Appellate Assistant Commissioner at\nthe time of hearing of the appeals.\" The Tribunal however\ndid not dealt with the affidavit by saying:-\n\t \"For the purpose of a decision as to whether\n\t the Indian company could be appointed agent\n\t under section 163 by virtue of business\tcon-\n\t nection with the non-resident companies, it is\n\t not necessary to go into the terms of\t the\n\t affidavit. These facts might have a bearing on\n\t the quantum of the income deemed to arise to\n\t the non-resident companies from the business\n\t connection.\"\nThe Tribunal obviously fell into an error in brushing aside\nthe affidavit for the reason it indicated. The facts stated\nin the affidavit had a direct bearing on the point in issue,\nnamely,\t whether there was any business\t connection between\nthe assessee and the non-resident companies.\n In course of the argument of the matter before the\tHigh\nCourt,\tsumptuous reference was made by the counsel for\t the\nRevenue\t to the affidavit of Cameron. The judgment of\t the\nHigh Court says:-\n\t \"Mr Pal (for the department) submits that\t the\n\t affidavit of Mr. Carol Stuart Cameron, Secre-\n\t tary of\t the Indian Company affirmed\t on\n\t 27.12.1965 which was filed before the Appel-\n\t late Tribunal contains facts which must be\n\t read in the light of the agreement between the\n\t parties. ?\".\n This would indicate that there was no objection to\t the\nacceptance of\tthe affidavit and use of its content while\ndealing\t with the matter and the High Court relied upon\t the\naffidavit and stated:-\n\t \"In our case, the facts as they\tappear\tfrom\n\t the documents on record and the affidavit of\n\t Mr. Cameron referred to above, which inciden-\n\t tally has not been traversed by the department\n\t are (a) procuring of raw materials and manu-\n\t facture of finished goods took place outside\n\t the taxable territories, (b) contracts\t for\n\t sale of goods were entered into\toutside\t the\n\t taxable territories, (c) price was received by\n\t the non-residents outside the taxable territo-\n\t ries and (d) delivery was also made outside\n\t the taxable territories. Moreover, Cameron in\n\t his affidavit categorically states that\t the\n\t orders which were sent from India were accept-\n\t ed by the\n\t 892\n\t non residents in London and intimation of such\n\t acceptance was communicated either to\t the\n\t Indian company or to the Indian customers\t and\n\t the orders became binding contracts only after\n\t being accepted in this manner. In other words,\n\t the Indian company had no authority to accept\n\t any offers on behalf of any of\t these\tnon-\n\t residents whether they belonged to Group-A or\n\t Group-B.\tThe department, as we have stated,\n\t has not adduced any evidence to contradict the\n\t facts stated by Cameron either from the course\n\t of dealings between the parties or otherwise.\"\n\t\t\t\"The position, therefore, is that in\n\t a\t case like this there can be\tno business\n\t connection unless the Indian assessee has\t the\n\t authority\t to accept offers or to\t enter\tinto\n\t contracts on behalf of the non-residents.\t The\n\t Tribunal\thas found that in the case of\t one\n\t company only there was an express\t prohibition\n\t against acceptance of offers. But in the other\n\t contracts\t there was no such express prohibi-\n\t tion. The Tribunal has granted relief in\t the\n\t case of express prohibition but has taken a\n\t different view with regard to those contracts\n\t in which there was no such prohibition. In our\n\t opinion, having regard to the facts stated by\n\t Cameron and the course of dealings between the\n\t parties,\tabsence of express prohibition, in\n\t the instant case, is immaterial. It is\ttrue\n\t that the Indian company was the sole agent of\n\t the Group-B companies. But it appears,\tfrom\n\t the evidence on record that in spite of being\n\t the sole\t agent, the Indian company had no\n\t authority given to it by the Group-B companies\n\t to accept offers on their behalf. So far as\n\t Group-A companies are concerned, there was no\n\t privity of contract at all either of agency or\n\t of any other variety. In these\tpremises we\n\t cannot but hold that the Indian assessee\t had\n\t no business connections with the\tnon-resident\n\t companies\t belonging either to\tGroup-A\t or\n\t Group-B within the meaning of section 42 of\n\t the 1922 Act corresponding to section 9 of the\n\t 1961 Act.\"\nLearned\t counsel for the appellant was very critical about\nthe manner in which the High Court utilised the affidavit\nand came to its conclusions regarding the facts in dispute.\nThe criticism\tis not without force. Ordinarily, the\tHigh\nCourt should have declined to use the\t assertions in\t the\naffidavit for the purpose of recording findings of fact\t and\nif, at all, in its opinion the affidavit was to be utilised,\nthe matter should\n893\nhave gone before the Tribunal for a fresh disposal of\t the\nappeals. The facts of this case are, however, somewhat\npeculiar. Rule\t 10 of the Income-Tax (Appellate Tribunal)\nRules, 1963 provides:-\n\t \"Where a fact which cannot be borne out by or\n\t is contrary to the record is alleged, it shall\n\t be stated clearly and concisely and supported\n\t by a duly sworn affidavit.\"\n It is the stand of the respondent that Cameron's affida-\nvit came within the ambit of Rule 10 and had, therefore,\nbeen filed along with the memoranda of appeals\t before\t the\nTribunal. We are satisfied that the Revenue had full notice\nof the affidavit and as pointed out by the High Court, it\ndid not dispute the facts stated in the affidavit by filing\nobjection or counter thereto. The affidavit had not\tbeen\nrejected by the Tribunal but had only been brushed aside by\nsaying\tthat it was not relevant. Before the\tHigh Court,\ncounsel\t for the Revenue also used the affidavit. We do\t not\nthink it would be appropriate at this stage to\t accept\t the\nsubmission made at the Bar on behalf of the appellant\t and\nput back the matter to the stage of the second appeal before\nthe Tribunal.\tThe assessments relate to a period about a\nquarter\t of a century back and by its conduct,\tthe Revenue\nappears\t to have waived its fight to dispute the facts\t as-\nserted\tin the affidavit on one hand by not challenging\t its\nadmissibility and on the other, by not disputing the\tcon-\ntents thereof. We have been told during the hearing of\t the\nappeals\t that Cameron is now dead. Once the facts stated in\nthe affidavit\tare accepted, the ratio of the\tdecision of\nthis Court in C. LT. v.R.D. Aggarwal & Co. (supra) would be\nfully applicable and the High Court has utilised the ratio\nin that decision to find out whether any business connection\nbetween the assessee and the non-resident companies had been\nestablished. There is no dispute that\t unless\t the matter\ncomes under section 163(1)(a) of the Act, there will be no\nliability for assessment. In that view of the matter, these\nappeals have to fail.\nThe appeals are therefore dismissed but without any order\nfor\ncosts.\nN.P.V.\t\t\t\t\t Appeals\tdis-\nmissed.\n894" }, { "title": "Shiela Kaushish vs Commissioner Of Income-Tax, Delhi on 18 August, 1981", "url": "https://indiankanoon.org//doc/380265/", "text": "Shiela Kaushish vs Commissioner Of Income-Tax, Delhi on 18 August, 1981\nEquivalent citations: 1981 AIR 1729, 1982 SCR (1) 309, AIR 1981 SUPREME COURT 1729, 1981 TAX. L. R. 146, 1981 TAX. L. R. 1463, 1981 RAJLR 608, 1981 SCC (TAX) 288, 1981 TAXATION 62 (3) - 59 (SC), 1981 SCC(TAX) 286, (1981) 24 CURTAXREP 351, (1981) 62 TAXATION 59, 1981 UJ (SC) 708, (1981) 131 ITR 435, 1981 (4) SCC 121\nAuthor: P.N. Bhagwati\nBench: P.N. Bhagwati, Baharul Islam\n PETITIONER:\nSHIELA KAUSHISH\n\n\tVs.\n\nRESPONDENT:\nCOMMISSIONER OF INCOME-TAX, DELHI\n\nDATE OF JUDGMENT18/08/1981\n\nBENCH:\nBHAGWATI, P.N.\nBENCH:\nBHAGWATI, P.N.\nISLAM, BAHARUL (J)\n\nCITATION:\n 1981 AIR 1729\t\t 1982 SCR (1) 309\n 1981 SCC (4) 121\t 1981 SCALE (3)1225\n CITATOR INFO :\n R\t 1982 SC 16\t (2)\n\n\nACT:\n Income Tax Act,\t1961, 5. 23(1)-Income\t from house\nproperty-Chargeability\tto income tax-\"Annual value\" of\nbuilding-Determination of-Whether standard rent determinable\nunder provisions of Rent Act or actual rent\treceived by\nlandlord from tenant.\n Words and\tPhrases-\"Annual Value\"-Meaning of-Income Tax\nAct, 1961, S. 23(1).\n\n\n\nHEADNOTE:\n The appellant-assessee constructed a warehouse and let\nout different portions under different tenancies commencing\non different dates. Later on a new lease was entered into\nbetween the assessee and her tenant for letting out of the\nentire warehouse and the assessee started receiving rent at\nthe rate of Rs. 34,797/- per month in respect of the entire\nwarehouse from 1st April, 1968.\n In the course of\tassessment of the assessee for the\nassessment years 1969-70 and 1970-71 the question arose as\nto how\tthe \"annual value\" of the warehouse should be\ndetermined for\tthe purpose of chargeability to income tax\nunder the head \"income\t from house property\". The assessee\nclaimed before\tthe Income. Tax officer that on a proper\nconstruction of\t sub-section (I) of section 23, it was not\nthe actual rent received by her from the warehouse that was\nmaterial for determining the annual value of the warehouse\nbut the\t hypothetical amount for which\t the warehouse might\nreasonably be expected to be let from year to year,\t and\nsince the Delhi Rent Control Act 1958 was applicable in the\narea in which the warehouse was situate, the warehouse could\nnot reasonably\tbe expected to be let from year to year at a\nrent exceeding\tthe standard rent determinable under\t the\nprovisions of that Act. The Income Tax officer rejected this\nclaim and took the view that the actual rent received by the\nassessee provided the most accurate and satisfactory measure\nof the\tamount for which the warehouse might reasonably be\nexpected to let from year to\tyear and the annual value of\nthe warehouse must therefore be taken to be the actual rent\nreceived by the assessee and he accordingly assessed\t the\nassessee to tax on the basis of the actual rent.\n The assessee's appeals for each of the two assessment\nyears to the\t Appellate Assistant\t Commissioner\twere\nunsuccessful. The Income-Tax Tribunal took the same view on\nfurther appeals\t by the\t assessee and held relying on\t the\ndecision of this Court in M. M. Chawla v. J. S. Sethi [1970]\n2 SCR, 390 that in the absence of fixation of standard rent,\nthe agreed rent which is legally recoverable and not tainted\nby fraud, relationship or any other consideration must be\ntaken to be the standard rent\t and hence the actual\trent\nreceived by the assessee was rightly\ttaken as the annual\nvalue of the warehouse.\n310\n The assessee's applications to the Tribunal as well as\nto the\tHigh Court for the making of\t a reference under\nsection 256 of the Income-Tax Act, 1961 were also dismissed.\n Allowing the appeals to this Court,\n^\n HELD: 1. The annual value of the building according to\nthe definition given in sub-section (l) of section 23 of the\nIncome-Tax Act, 1961 is the standard rent determinable under\nthe provisions\tof the\tRent Act and not the\tactual\trent\nreceived by the landlord from the tenant. [316 H-317 A]\n 2. In Dewan Daulat Rai\tKapoor\tetc. v. New Delhi\nMunicipal Committee [1980] 2 S.C.R. 607 a decision of this\nCourt given on the interpretation of\tthe , definition of\n'annual value'\tin the\tDelhi Municipal Corporation Act 1957\nand the Punjab Municipal Act 1911 for the purpose of levy of\nhouse tax, it was held that even if the standard rent of a\nbuilding has not been fixed by the Controller under section\n9 of the Rent Act, the landlord cannot reasonably expect to\nreceive from a hypothetical tenant anything more than the\nstandard rent determinable under the provisions of the Rent\nAct and\t this would be equally\t so whether the building has\nbeen let out to a tenant who has lost his right to apply for\nfixation of standard rent by reason of expiration of the\nperiod of limitation prescribed by section 12 of the Rent\nAct or\tthe building is self-occupied by the owner, and that\nthe standard rent determinable\t under the provisions of the\nRent Act and not the actual rent received by the landlord\nwould constitute the correct measure of the annual value of\nthe building. [314 H, 316 A-C]\n 3. This decision though given on the interpretation of\nthe definition\tof 'annual value' in the Delhi Municipal\nCorporation Act\t 1957 and the Punjab Municipal Act 1911 for\nthe purpose of levy\t of house tax, would\t be equally\napplicable in interpreting the definition of 'annual value'\nin sub-section (I) of section 23 of the Income-Tax Act, 1961\nbecause these definitions are\tin identical terms and it is\nimpossible to distinguish the\tdefinition of 'annual value'\nin sub section (1) of section 23 of the Income Tax Act, 1961\nfrom the definition\tof that term\t in the Municipal\nCorporation Act 1957, and the Punjab Municipal Act, 1911.\n In the instant case the annual value of the warehouse\nfor the\t purpose of chargeability to\tincome-tax for\t the\nassessment years 1969-70 and\t1970-71\t would\thave to be\ndetermined on the basis of the standard rents of different\nportions of the warehouse determinable under clause (b) of\nsub-section (2)\t and paragraph\t(b) of\t sub-clause (2) of\nclause (B) of sub-section (I) of section 6 of the Rent Act.\n[319 C]\n\n\n\nJUDGMENT:\n CIVIL APPELLATE JURISDICTION: Civil Appeal Nos.\t2110\nand 21 1 1 of 1978.\n Appeals by\t special leave\tfrom the judgment and order\ndated the 1st February, 1978 of the Delhi High Court in\nI.T.C. Nos. 14 and 15 of 1974.\n311\n\t\t\t WITH\n Civil Appeal Nos. 1184-85 of 1981.\n Appeals by\t special leave from the order dated the 28th\nSeptember, 1973\t of the\t Income Tax Appellate Tribunal Delhi\nBench in I.T.A. No 386 and 387 of 1972-73.\n Soli J. Sorabjee, T.A. Ramachandran, Parkash Sarup,\nRavinder Narain\t and Talat Ansari for\tthe Appellant in all\nthe Appeals.\n P.A. Francis, S.P. Nayar and Miss A. Subhashini for the\nRespondent in all the Appeals.\n The Judgment of the Court was delivered by C\n BHAGWATI, J. These appeals by special leave raise a\ncommon question\t of law\t relating to the determination of\nannual value of a building for the purpose of chargeability\nto tax\tunder the Income tax Act, 1961 where the building is\ngoverned by the provisions of the Rent Control legislation\nbut the\t standard rent\thas not yet been ID fixed. The facts\ngiving rise to these appeals are few and may be briefly\nstated as follows:\n The assessee constructed a warehouse in Delhi some time\nin 1961\t at a total cost of Rs. 4,13,000/-. The warehouse\nconsisted of two portions on the ground floor, one on the\nnorth and the other on the south and also a mezzanine floor\nand a first floor. On 19th March, 1962, the assessee let out\nthe whole of the first floor to the American Embassy at the\nrent of\t Rs. 5810/- per month and subsequently on 1st April,\n1964 she let out the northern\t portion of the ground floor\ntogether with the mezzanine floor to the same tenant at the\nrent of\t Rs. 6907/- per month and on 7th December, 1964 the\nnorthern portion of the ground floor was let out to the same\ntenant at the rent of Rs. 6640/- per month. Thus the entire\nwarehouse was let out\tby the\t assessee to the American\nEmbassy with different portions let out under different\ntenancies commencing on different dates. On 17th July, 1967,\nhowever, a new lease was entered into between the assessee\nand the\t American Embassy for letting\tout of\t the entire\nwarehouse at the rent\tof Rs.\t34,797/- per month and this\nlease came into effect\t from 1st April, 1968. The assessee\nthus started receiving rent at the rate of Rs. 34,797/- per\nmonth in respect of the entire warehouse from 1st April,\n1968.\n The question arose in the course of assessment of the\nassessee to income tax for the assessment years 1969-70 and\n1970-71 as to how the annual value of the warehouse should\nbe determined for the\n312\npurpose of chargeability to income tax under the\thead\n\"Income from house property\". Now income from house property\nchargeable to tax is computable under section 22 which\nprovides that the annual value of property consisting of any\nbuildings or\tlands appurtenant thereto, of which\t the\nassessee is the owner,\t shall be chargeable to income tax\nunder the head \"Income from house property\". Where,\ntherefore, the assessee owns a building, the annual value of\nsuch building is chargeable to income\t tax under the head\n\"income from house property\" under section 22. But\t the\nquestion immediately arises: how is the annual value to be\ndetermined ? The answer is provided by section 23 which lays\ndown the mode of determination of annual value. Sub-section\n(l) of\tthat section as it stood at\t the material\ttime\nprovided that \"for the\t purposes of section 22, the annual\nvalue of any property\tshall be deemed to be the sum for\nwhich the property might reasonably be expected to let from\nyear to\t year. The assessee therefore\tclaimed\t that on a\nproper construction of sub-section (I) of section 23, it was\nnot the\t actual\t rent received\t by the assessee for\t the\nwarehouse that was material for determining the annual value\nof the\twarehouse but the hypothetical amount for which the\nwarehouse might\t reasonably be\texpected to let from year to\nyear and since the Delhi Rent Control Act 1958 (hereinafter\nreferred to as the Rent Act) was applicable in the area in\nwhich the warehouse was situate, the\twarehouse could\t not\nreasonably be expected to let from year to year at a rent\nexceeding the\t standard rent\t determinable\t under\t the\nprovisions of that Act. The Income Tax officer however, took\nthe view that the actual rent\t received by the assessee\nprovided the most accurate and satisfactory measure of the\namount for which the warehouse might reasonably be expected\nto let\tfrom year to year and\t the annual value of\t the\nwarehouse must\ttherefore be taken to\tbe the\tactual\trent\nreceived by the assessee and he accordingly assessed\t the\nassessee to tax on the basis of the actual rent received by\nher. The assessee preferred an appeal to the Appellate\nAssistant Commissioner\tfor each of the two assessment years\nchallenging the correctness of the view taken by the Income-\ntax officer and contending that the annual value of\t the\nwarehouse must be taken to be the standard rent determinable\nunder the provisions of the Rent Act, but the appeals were\nunsuccessful and the determination of the annual value made\nby the\tIncome-tax officer was affirmed. The Tribunal also\ntook the same view on further appeals by the assessee and by\na consolidated\torder dated 28th September, 1973, confirmed\nthe assessments\t made on the assessee\ton the\tbasis of the\nactual rent received by her. The Tribunal held relying on\nthe decision of this Court in\t M.M. Chawala v. J S. Sethi,\n[1970] 2 SCR 390 that, in the\n313\nabsence of fixation of standard rent, the agreed rent which\nis legally A\t recoverable and not\t tainted by fraud,\nrelationship or\t any other consideration must be taken to be\nthe standard rent and hence the actual rent received by the\nassessee was rightly taken as\t the annual value of\t the\nwarehouse. In the mean\t time, an application was made for\nfixation of the standard rent of the warehouse by the new\ntenant who came to occupy the warehouse after the American\nEmbassy\t vacated it and on this application, the\tRent\nController by an order\t dated 13th March, 1973 fixed\t the\nstandard rent\t at Rs. 34,848.00 per annum under\t the\nprovisions of the Rent\t Act. The assessee aggrieved by the\norder dated 28th September 1973 made by the Tribunal,\npreferred two applications one in respect of each assessment\nyear, seeking reference of five questions which, according\nto the assessee, arose out of the order of the Tribunal, but\nthe Tribunal by a common order dated 26th February, 1974,\nrejected the applications on the ground that there was only\none question of law which arose out of the order of the\nTribunal but that was\tconcluded by the decision of\tthis\nCourt in M.M. Chawla's case (supra) and so far as the other\nquestions were\tconcerned, they\t were all questions of fact\nand hence not referable under section 256 (1) of the Income-\ntax Act, 1961. The\t assessee thereupon preferred\t two\napplications before the High Court of\t Delhi under section\n256 (2)\t of the\t Income-tax Act, 1961\t for directing\t the\nTribunal to make a reference, but these applications also\nmet with the same fate and on the same grounds which found\nfavour with the Tribunal, they were rejected by the High\nCourt by judgment dated 1st February, 1978. This led to the\nfiling of two petitions for special leave to appeal, one in\nrespect of each assessment year, and\tthese petitions were\nallowed and special leave granted by this Court, giving rise\nto civil appeals Nos. 2110 and 2111 of 1978. Since these two\nappeals were directed against the judgment of the High Court\nrefusing two call for\ta reference from the Tribunal, the\nonly question which could have been considered by the Court\nin these appeals was as to whether any questions of\t law\narose out of the order of the Tribunal requiring to be\nreferred to the High\tCourt and therefore even if\t the\nassessee succeeded in the appeals there would not be an end\nto the\tlitigation but\tthe questions of law formulated by\nthis Court would have to be referred by the Tribunal to the\nHigh Court and then the High\tCourt would have to hear the\nreference and answer the questions referred to it.\tThis\nwould have delayed considerably the final determination of\nthe questions of law arising\tout of\t the order of\t the\nTribunal and it was, therefore. agreed between the Parties\nthat the following two ques-\n314\ntions of law should be decided by the Court in these\nappeals, since they admittedly arose out of the order of the\nTribunal:\n (1) \"Whether, on the facts and in the circumstances of\n\t the case, the actual rent received by the assessee\n\t or the standard rent under the Delhi Rent Control\n\t Act, should be taken\t to be the \"annual value\" of\n\t the property\twithin the meaning of section 23 of\n\t the Income Tax Act, 1961,\n (2) Whether, there was any material on record on which\n\t the Tribunal\tcould hold that the receipt of Rs.\n\t 4,17,674/- from the\tAmerican Embassy would he\n\t reasonable rent for which the property might be\n\t let in spite of the fact that properties in the\n\t immediate neighbourhood let out to the Bank of\n\t Baroda and Indian Oxygen Company Ltd. were let at\n\t rents considerably lower.\nThis Court accordingly made an order\tdirecting that these\ntwo questions of law should be disposed of by the Court\ndirectly, without calling for a reference from the Tribunal.\nHowever, since\tsome doubt was felt whether this Court could\ndirectly dispose of the two questions of law arising out of\nthe order-of the Tribunal without calling for a reference,\nthe assessee by way of abundant caution preferred\t two\npetitions for special leave to appeal directed against the\norder of the Tribunal\tdated 28th September, 1973 and on\nthese petitions, special leave was granted by this-Court and\nthat is how Civil Appeal Nos. 1184-1185 of 1981 have come up\nfor hearing before us along with C.A. Nos. 2110 and 2111 of\n1978.\n Though two questions have been formulated by this Court\nas arising out of the order of the Tribunal\t dated\t28th\nSeptember, 1973, it is\t the first which really formed the\nsubject matter of controversy between the parties and since,\nin our\tview, that question has to be answered in favour of\nthe assessee,\t it is\t not necessary\t to embark upon a\nconsideration of the second question. So far as the first\nquestion is concerned, it stands concluded by the recent\ndecision of this Court in Dewan Daulat Rai Kapoor etc. etc.\nv. New\t Delhi\tMunicipal Committee.(1) There\t were three\nappeals decided\t by a common judgment\tin that case and the\nquestion which\tarose for determination in these appeals was\nas to how the annual value of a\n315\nbuilding should\t be determined\tfor levy of house tax where\nthe building is governed by the provisions of the Rent Act,\nbut the\t standard rent\thas not yet been fixed. One of these\nappeals related\t to a case where the building\t was situate\nwithin the jurisdiction of the New Delhi Municipal Committee\nand was\t liable to be assessed to house tax under the Punjab\nMunicipal Act,\t1911 while the other two related to cases\nwhere the building was\t situate within\t the limit of\t the\nCorporation of\tDelhi and was assessable to house tax under\nthe Delhi Municipal Corporation Act, 1957. The house\t tax\nunder both statutes was levied with reference to the 'annual\nvalue' of the building. The 'annual value' was defined in\nboth statutes in the same terms, barring a second proviso\nwhich occurred\t in section 116 of the Delhi Municipal\nCorporation Act, 1957, but was absent in section 3 (1) (b)\nof the\tPunjab Municipal Act, 1911. This proviso was however\nnot material as it dealt with a case where the standard rent\nwas fixed under the provisions of the Rent Act, while in\nnone of\t the cases before the\tCourt was the standard rent\nfixed in respect of the building involved in such case. L.\nAccording to the definition given in\tboth statutes,\t the\n'annual value'\tof a building meant the gross annual rent at\nwhich the building might reasonably be expected to let from\nyear to\t year. The controversy between the parties centered\nround the question as to what is the true meaning and effect\nof the expression \"the gross annual rent at which such house\nor building.. may reasonably be expected to let from year to\nyear\" occurring\t in the\t definition in\tboth statutes.\t The\nargument of the Municipal Authorities was that since\t the\nstandard rent\t of the building was\t not fixed by\t the\nController under section 9 of the Rent Act in any of the\ncases before the Court\t and in each of the cases the period\nof limitation prescribed by section 12 of the Rent Act for\nmaking an application for fixation of the standard rent had\nexpired, the landlord in each case was entitled to continue\nto receive the contractual rent from the tenant without any\nlegal impediment and hence the annual value of the building\nwas not limited to the standard rent determinable in\naccordance with\t the principles\t laid down in the Rent Act,\nbut was liable to\tbe assessed by reference to\t the\ncontractual rent recoverable\tby the\t landlord from\t the\ntenant. The Municipal Authorities urged that if it was not\npenal for the landlord to receive the contractual rent from\nthe tenant, even if it be higher than the standard\trent\ndeterminable under the provisions of the Rent Act, it would\nnot be\tincorrect to say that the landlord could reasonably\nexpect to let the building at the contractual rent and the\ncontractual rent therefore provided a correct\t measure for\ndetermination of the annual value of\tthe building.\tThis\nargument\n316\nwas hower rejected by the court and it was held that even if\nthe standard rent of a building has not been fixed by the\nController under section 9 of the Rent Act,\tthe landlord\ncannot reasonably expect to receive from a\thypothetical\ntenant anything\t more than the standard rent\tdeterminable\nunder the provisions of the Rent Act and this would be so\nequally whether\t the building has been\t let out to a tenant\nwho has lost his right to apply for fixation of the standard\nrent by\t reason of expiration of the period of limitation\nprescribed by section 12 of the Rent Act or the building is\nself-occupied by the owner. Therefore, in either case,\naccording to the definition of 'annual value' given in both\nstatutes, the\t standard rent\t determinable\t under\t the\nprovisions of the Rent Act and not the actual rent received\nby the landlord from the tenant would constitute the correct\nmeasure of the annual\tvalue of the building. The court\npointed out that in each case the assessing authority would\nhave to\t arrive at its own figure of\tthe standard rent by\napplying the principles laid down in\t the Rent Act\t for\ndetermination of the standard rent and determine the annual\nvalue of the building\ton the\tbasis of such figure of the\nstandard rent.\tThe court, on\t this view, negatived\t the\nattempt of the Municipal Authorities in each of the cases to\ndetermine the annual value of the the building on the basis\nof the\tactual rent received by the landlord\tand observed\nthat the annual value\tof the\tbuilding must be held to be\nlimited by the measure of the standard rent determinable on\nthe principles\tlaid down in the Rent Act and it could not\nexceed such measure of\t the standard rent. Now this was a\ndecision given\ton the\tinterpretation of the definition of\n'annual value'\tin the Delhi Municipal Corporation Act, 1957\nand the\t Punjab Municipal Act, .911 for the purpose of levy\nof house tax,\t but it would\t be equally applicable in\ninterpreting, the definition of 'annual value' in sub-sec.\n(1) of section 23 of the Income-tax Act, 1961, because these\ndefinitions are\t in identical terms and it is impossible to\ndistinguish the definition of 'annual value' in sub-sec. (I)\nof section 23 of the Income-tax Act, 1961 from\t the\ndefinition of that term in the Municipal Corporation Act,\n1957. and the Punjab Municipal Act, 1911. We must therefore\nhold, on an indentical\t line of reasoning, that even if the\nstandard rent of a building has not\tbeen fixed by\t the\nController under section 9 of the Rent Act and the period of\nlimitation prescribed by section 12 of the Rent Act\t for\nmaking an application for fixation of\t the standard\trent\nhaving expired,\t it is\tno longer competent to the tenant to\nhave the standard rent\t of the\t building fixed, the annual\nvalue of the building\taccording to the definition given in\nsub-section (l)\t of section 23 of the Income-tax Act, 1961\nmust be held to be the standard rent determinable under\n317\nthe provisions\tof the\tRent Act and not the\tactual\trent\nreceived by\tthe landlord\t from\tthe tenant.\tThis\ninterpretation which we are placing on the language of sub-\nsection (1) of sec. 23 of the Income-tax Act, 1961, may be\nregarded as having received legislative approval, for we\nfind that by section 6 of the Taxation Laws (Amendment) Act,\n1975, sub-section (I) of section 23 has been amended and it\nhas now been made clear by the introduction of clause (b) in\nthat sub-section that where the property is let and\t the\nannual rent received or receivable by the owner in respect\nthereof is in excess of the sum for which the property might\nreasonably be expected to let from year to year, the amount\nso received or receivable shall be deemed to\t the annual\nvalue of the property.\t The newly added clause (b) clearly\npostulates that the\tsum for which a building might\nreasonably be expected to let from year to year may be less\nthan the actual amount received of\t receivable by\t the\nlandlord from the tenant. We are therefore of the view that\nin the\tpresent case the standard rent of the warehouse\ndeterminable under the provisions of the Rent Act must be\ntaken to be the annual value\twithin the meaning of\tsub-\nsection (1) of section 23 of the Income-tax Act, 1961 D and\nthe actual rent received by the assessee from the American\nEmbassy cannot\tof itself be\ttaken as representing\t the\ncorrect measure of the annual value.\n We must therefore address ourselves to the question as\nto what would\t be the standard rent of the warehouse\ndeterminable under the provisions of the Rent Act for the\nassessment year\t 1969-70 and 1970-71 the relevant accounting\nyears being 1st April 1968 to 31st March 1969 and I st April\n1969 to\t 31 st March 1970. Now 'standard rent' is defined in\nsection 2 (k) to mean the standard rent referred to in\nsection 6 or where the standard rent has been increased\nunder section 7, such\tincreased rent.\t Section 6 lays down\ndifferent formulae for determination of standard\trent\naccording to different situations. Clause (A) of sub-section\n(1) enacts provisions for determination of standard rent in\ncase of residential premises. but we need not refer to those\nprovisions, since we are concerned in the present case not\nwith residential premises but with\t a warehouse which\nconstitutes non- residential\t premises. The provisions\napplicable for determination of standard rent in the case of\nnon-residential premises are set out in clause (B) of sub-\nsection (I) and there also, we are concerned only with sub-\nclause (2) because the warehouse was admittedly let out for\nthe first time after 2nd June, 1944. Since the standard rent\nof the\twarehouse was not at any time fixed under the Delhi\nand Ajmer Merwara Rent\t Control Act, 1947, or the Delhi and\nAjmer Rent\n318\nControl Act, 1952, the\t standard rent\t was liable to be\ndetermined under paragraph (b) of sub-clause (2) which\nprovides that \"the rent calculated on the basis of seven and\none-half per cent per\tannum of the aggregate amount of the\nreasonable cost\t of construction and the market price of the\nland comprised\t in the premises on the date of\t the\ncommencement of\t the construction\" shall be taken to be the\nstandard rent of the premises. There\tis a proviso to this\nparagraph which\t says that\" where the\trent so calculated\nexceeds twelve\thundred rupees\tper annum, this clause shall\nhave effect as if for the words \"seven and one-half\t per\ncent\" the words \"eight\t and five-eighth per cent\" had been\nsubstituted.\" But all these provisions for determination of\nstandard rent\tare subject to the overriding provision\nenacted in sub-section (2) which provides in clause\t(b),\nwhich is the clause applicable in the present case since the\nwarehouse was constructed on or after 19th June, 1955, that\nin case\t of such premises.... \"the annual rent calculated\nwith reference\tto the rent agreed upon between the landlord\nand the\t tenant when such premises were first let out shall\nbe deemed to be the standard rent for a period of five years\nfrom the date of such letting out..\" Now the first floor of\nthe warehouse was first let out at the rent of Rs. 5810/-\nper month from 19th March 1962 and therefore under clause\n(b) of\tsub-section (2)\t the rent of Rs. 5810/- per month\nwould be the standard\trent of the first floor of\t the\nwarehouse for the period of five years from 19th March 1962\nup to 18th March 1967 and thereafter the standard rent would\nhave to\t be determined under paragraph (b) sub-clause (2) of\nclause (B) of sub-section (I) and this latter figure would\nrepresent the standard rent of the warehouse determinable\nunder the provisions of the Rent Act for the accounting\nyears 1st April 1968 to 31st March 1969 and 1st April 1969\nto 31st\t March 1970. The next\tportion of the warehouse let\nout to\tthe American Embassy was the northern portion of the\nground floor together with the mezzanine floor for\t the\nperiod of five years from 1st\t April 1964 up to 31st March\n1969 under clause (b)\tof sub section (2) and thereafter it\nwould have to be deter mined\tunder paragraph\t (b) of sub-\nclause (2) of clause (B) of sub section (1). Thus for the\naccounting year\t 1st April 1968 to 31st March 1969\t the\nstandard rent of the northern portion\t of the ground floor\nand the mezzanine floor determinable under the provisions of\nthe Rent Act would be Rs. 6907/- per\t month while for the\naccounting year\t 1st April 1969 to 31st March 1970,\t the\nstandard rent would be that determinable under paragraph (b)\nof sub-clause (2) of clause (B) of sub-section (1). That\nleaves the southern portion of the ground floor which was\nfirst let out to the American\t Embassy at the rent of Rs.\n6640/- per\n319\nmonth from 7th December 1964, and according to clause (b) of\nsub- A\tsection (2), the standard rent of this portion would\nbe Rs.\t66401- per month for the period of five years from\n7th December, 1964 up\tto 6th December, 1969 and thereafter\nit would be determinable under paragraph (b) of sub-clause 2\nof clause (B) of sub-section (1). Thus for the accounting\nyear 1 st April 1968 to 31 st March 1969 and I st April 1969\nto 6th\tDecember 1969 the standard rent of the southern\nportion\t of the ground floor determinable\t under\t the\nprovisions of the Rent\t Act would be Rs. 66401- per month,\nwhile for the remaining portion of the accounting year from\n7th December 1969 to 31st March 1970, the standard\trent\nwould be determinable under paragraph (b) of sub-clause (2)\nof clause (B) of sub-section (1). The annual value of the\nwarehouse for the purpose of chargeability to income tax for\nthe assessment\tyears 1969-70 and 1970-71 would have to be\ndetermined on the basis of the standard rent of different\nportions of the warehouse determinable under clause (b) of\nsub-section (2)\t and paragraph\t(b) of\t sub-clause (2) of\nclause (B) of sub-section (1) of section 6 of the Rent Act\nas discussed above. D\n We accordingly answer question No. 1 in favour of the\nassessee by holding that the standard\t rent of different\nportions of the warehouse determinable under the provisions\nof the\tRent Act as indicated above and not the actual rent\nreceived by the assessee from the American Embassy should be\ntaken be the annual value of\t the warehouse\t within\t the\nmeaning of sub-section (I) of section 23 of the Income-tax\nAct, 1961. On this view taken\t by us, the the assessee did\nnot press question No.\t 2 and\thence it is not necessary to\nanswer it. We allow the appeals of the assessee to\tthis\nlimited extent\tand direct that the Revenue will pay\t the\ncosts of the appeals to the assessee.\nN. V. K.\t\t\t\t Appeals allowed\n320" }, { "title": "Thanthi Trust vs Income-Tax Officer on 22 November, 1988", "url": "https://indiankanoon.org//doc/295821/", "text": "Thanthi Trust vs Income-Tax Officer on 22 November, 1988\nEquivalent citations: [1989]177ITR307(MAD)\nAuthor: S. Mohan\nBench: S. Mohan\nJUDGMENT\n \n\n Mohan, J. \n \n\n 1. All these matters raise one and the same question of law. Therefore, we propose to deal with them under a common judgment. \n\n 2. The facts leading to the writ appeals are as follows: The appellant is a trust know as Thanthi Trust. This was created under an instrument of declaration of trust dated March 1, 1954. The purpose of the trust was to found Daily Thanthi Newspaper as an organ of educated public opinion for the Tamil reading public to disseminate news and ventilate opinions on all matters of public interest through the said newspaper. The appellant trust is an assessee on the file of the respondent. Its permanent account number is P.A. No. 47,005-AZ-5117. The trust had been claiming exemption under section 4(3)(i) of the Indian Income-tax Act, 1922, from the assessment year 1955-56 onwards in respect of its income. Though there were several proceedings in relation to the claim for exemption, ultimately, the Income-tax Officer upheld the appellant's claim for exemption for the assessment years 1955-56 to 1961-62. After the coming into force of the Income-tax Act, 1961, exemption was gain claimed by the appellant under section 11 of this Act on the basis of the original trust deed. The claim for exemption was upheld by the concerned Income-tax Officer for the year 1962-63 to 1967-68. For the assessment year 1968-69, the Income-tax Officer issued a notice under section 143(2) of the Act calling upon the appellant to produce its books of account relevant to the assessment year and also for the earlier years. This necessitated the appellant to file Writ Petition No.611 of 1969 contending that the said notice was without jurisdiction. During the pendency of this writ petition, the Income-tax Officer issued notices dated May 23, 1969, to the petitioner under section 148 of the Income-tax Act, 1961 (for short \"the Act\"). It was proposed to reopen the assessment for the earlier assessment years 1965-66 to 1967-68. It was stated that the officer has reason to believe that there has been escarpment of income chargeable to tax for the relevant assessment years. The appellant filed Writ Petitions Nos. 1557 to 1559 of 1969 questioning the validity of the said no ices issued under section 148 of the Act. Later, the Income-tax Officer, Special Investigation Circle issued similar notices to the appellant under section 148 of the Act proposing to reassess the income for the assessment years 1956-57 to 1961-62. Thereupon, the appellant filed Writ Petitions Nos. 3352 to 3357 of 1969 raising the same grounds as were urged in Writ Petitions Nos, 1557 to 1559 of 1969. This court by order dated December 21, 1972, disposed of the writ petition holding that the reopening of the assessments for the assessment years 1956-57. 1958-59, 1960-61 and 1962-62 was not valid. However, the reopening of the assessments for the assessment years 1957-58, 1959-60, 1965-66, 1966-67 and 1967-68 was valid. The assessments in respect of the other years are pending at various stages. \n\n 3. It is at this stage that the Income-tax Officer issued two notices dated November 17, 1978, under section 148 of the Act proposing to reopen the assessment for the assessment years 1969-70 and 1973-74. The appellant was called upon to file a return and produce all the documents and the necessary accounts. The validity of these notices was challenged in the writ petitions. \n\n 4. Before the learned single judge (Ramanujam J), it was argued that because there was no efficacious remedy under the Act, resort had to be had under article 226 of the Constitution of India. It was further urged that the mere change of opinion will not enable the issue of notices under section 148(2) of the Act. The statutory provisions have not been properly complied with. The assessments for the years 1969-70 and 1973-74 are still pending in appeal before the Tribunal. Therefore, the question of reopening the assessment does not arise. The object of issue of notices was to have a roving enquiry which is not permissible in law. \n\n 5. The learned judge, on going through the notices, held that it was purported to be under section 143(2) of the Act. It merely called upon the appellant-petitioner before him to produce certain account books in connection with the assessment year 1969-70. Actually, the notice under section 148 of the Act was issued on March 4, 1978. The petitioner before him had kept quiet on all these days. Therefore, he cannot challenge the consequential notice. In this view, the notice issued for the assessment year 1969-70. Which was impugned in Writ Petition No. 10840 of 1981, could not be challenged. The pendency of the appeal would be a bar to the reopening of the assessment. In this view, the learned single judge dismissed both the writ petitions (Writ Petitions Nos. 10480 of 1981). \n\n 6. Writ Appeal No. 539 of 1981 is directed against Writ Petition No. 10480 of 1981, while Writ Appeal No. 540 of 1981 is directed against Writ Petition No. 10841 of 1981. \n\n 7. To continue the narration of facts, it has already been continued that the deed of declaration of trust was made on March 1, 1954. A supplementary deed was executed by the donor on June 28, 1961, directing that the surplus income of the trust should be utilised only for educational purposes. The appellant filed C.S. No. 90 of 1961 by way of originating summons in the High Court. The High Court held that the trustees were bound by the supplementary deed and, therefore, the entire income had to be spent for the purposes mentioned in the supplementary deed. On March 17, 1969, after the transfer of file from the Third Income-tax Officer, City Circle-II, to the Income-tax Officer, Special Investigation Circle, notices were issued under section 143(2) of the Act to produce the books of account. Accordingly, the account books were produced for the assessment years 1965-66 to 1967-68. As noticed above, writ petitions have been filed for the years 1956-57 and 1961-62 as well as for the years 1965-66 to 1967-68. As seen above, the reopening of assessments for the assessment years 1956-57, 1958-59, 1960-61 and 1961-62 came to be quashed. However, the proposal to reassess was upheld in respect of the years 1957-58, 1959-60, 1965-66, 1966-67 and 1967-68. This was by order dated December 21, 1972, to which we had made reference earlier. In the said order. It was noticed that in respect of the assessment year 1957-58, one of the main reasons given is the suppression of sales of newspaper to the extent of Rs. 4,00,000 which is stated to have been discovered from the figures given by the Audit Bureau of Circulation. Therefore, the notice under section 147(a) of the Act for the said assessment year was upheld. Likewise for 1958-60. The said judgment is reported in Thanthi Trust v. ITO .\n\n 8. From September 3, 1976, to September 13, 1976, there was a search of the appellant's business premises and the officers seized the books of account. On November 4, 1976, action under section 132(5) was dropped though there was no specific order to that effect. Notices dated March 5, 1979, and March 15, 1980, came to be issued under section 148 of the Act for reopening the assessment for the years 1970-71 and 1971-72. Concerning these two years, the appeals are stated to be pending. The appellant filed a writ petition in the Delhi High Court. By judgment dated March 23, 1987, the High Court directed the income-tax authorities to return the seized books of account and documents within a week from the date of receipt of the said judgment. It was further directed that since the books of account and the documents have been seized by the income-tax authorities, the appellant-petitioner before that court was unable to file the requisite return as required under section 12A read with section 139 of the Act. Hence, one year's, time was granted to file the return, the one year period reckoned from the date the books of account and the documents seized were returned. This judgment is reported in Jameson and Magrudar Co. Pvt. Ltd. v. ITO .\n\n 9. We will now set out the tabular statement as to the subject-matter of the writ petitions: \n\n___________________________________________________________________\nAssessment Completion of Reopening Proceedings\nyear original notice No.\nassessment\n___________________________________________________________________\n1969-70 19-4-1972 4-3-1978 W.A. 539 of 1981\nagainst\nW.P. 10840 of 1981\n1970-71 28-3-1973 5-3-1979 W.P. 1222 of 1979\n1971-72 26-2-1975 13-3-1980 W.P. 1742 of 1980\n1972-73 27-3-1975 24-3-1981 W.A. 1828 of 1987\nagainst\nW.P. 2297 of 1982\n1973-74 31-12-1975 4-3-1978 W.A. 540 of 1981\nagainst\nW.P. 10841 of 1981\n___________________________________________________________________ \n \n\n10. It is under these circumstances that the writ petitions have been filed. The prayers in Writ Petitions No. 1222 of 1979, 1742 of 1980 and 2297 of 1981 are identical, viz., for the issue of a writ of prohibition. As for as Writ Appeals Nos. 539 and 540 of 1981 are concerned, the prayer in the Writ Petitions Nos. 10840 and 10841 of 1981 is for the issue of a mandamus restraining the respondent from proceeding with the notices dated November 17, 1981, calling upon the petitioner earlier to file returns of income for the assessment years 1969-70 and 1973-74, respectively, and from making any reassessment. \n\n11. In all these writ petitions, the stand taken is that is not a case in which section 147(a) could be invoked because there was no fault on the part of the assessee to file a true and full return. By reason of subsequent information, if something comes to the knowledge of the authority, the proper section will be section 147(b). These safeguards are vital in character and they cannot be lightly default with. The issue of notice a colourable exercise of power. The object of the notice is nothing but to have a roving enquiry. \n\n12. In the counter-affidavits, the stand taken is uniform, in that, by reason of the search conducted in the business premises of the appellant certain incrementing materials were found on the basis of which it came to light that the return filed was not true and full. Therefore, where there is an escapement and the failure to return the income came to be established on the persual of the ABC newsprint stock register, certainly, the authority is well within its jurisdiction to invoke section 147(a) of the Act. It is incorrect to contend that there is any colourable exercise of power. Nor again could it be urged that the object is to conduct a roving enquiry. In any event, when there are adequate remedies available under the Act, there is no justification for the petitioner to resort to the writ jurisdiction of this court under article 226 of the Constitution of India. \n\n13. Dr. Debi Pal, after taking us through the chronology of events, draws our attention to section 147 of the Act. It is his submission that the power under the said section could be exercised subject to section 148(2). Section 148(2) requires recording of reasons. Where the proposed notice is beyond four years, the Commissioner must satisfied, and that satisfaction must be recorded for reaching his conclusion. For 1969-70, the argument, of learned counsel runs as follows: If at the time of the original assessment, the assessing authority had knowledge of the stock register, this reason cannot be held to be valid. It is clear in this case, the reconciliation statement was filed. In fact, ABC newsprint stock register was in the full knowledge of the assessing authority. The assessing authority did not require the appellant to produce the register. If, subsequently the Department by reason of the alleged information gathered during the search, formed any belief that any income is stated to have escaped, such escapement of the income, even if there be any such escapement, is in consequence of the information which information was acquired subsequent to the completion of the assessment. Therefore, section 147(a) cannot be invoked. In support of this submission, he cites the decision in ITO v. Madnani Engineering Works Ltd. . That was a case where the loans were held to be fictitious and not genuine. It was held that the assessee had produced all the relevant accounts and documents. Therefore, the escapement is not due to the omission on the part of the assessee to file a return truly and fully. The ratio of that judgment will squarely apply to this case. To similar effect is the decision in CIT v. Burlap Dealers Ltd. . In CIT v. M. P. R.Peria Karuppan Chettiar [1969] 71 ITR 601 (Mad), it was held that where the loans had been taken under hundies in the bogus names, the assessee is not bound to oblige the Income-tax Department by informing that they are bogus. There is enough compliance with law if they have been shown in the return.\n\n14. In the case on hand, the counter-affidavit definitely takes the stand that it has become necessary to investigate the case in depth in order to bring to tax the income secreted from the books. Certainly this is not the purpose for which section 147 is intended because the grounds for issue of notice under section 147(a) must have a live link or close nexus. It has been so laid down in ITO v. Lakhmani Mewal Das , again in Indian Oil Corporation v. ITO [1986] 159 ITR 956 (SC), where excess administrative expenses were claimed at 40% and later it turned out to be bogus, namely, 10%, the Income-tax Officer having allowed the excess claim at 40% cannot, on the basis of the subsequent information, hold that the earlier assessment was wrong. This is because the expenses relating to administrative changes, though claimed at a higher figure, was all the while within the knowledge of the assessing authority.\n\n15. In the same way, in Ganga Saran and Sons P. Ltd., v. ITO [1982] 130 ITR 1 (SC), where remuneration was paid to the manger and a sizable portion towards remuneration was siphoned off as gift and it was held to be a subterfuge, nevertheless section 147(a) would not apply since that came to the knowledge of the assessing authority by means of subsequent information. In the light of the case law, if the notices are analysed, it will be clear that the very basis of reopening was the subsequent information. If. Under law, the assessee cannot delve into the mind of the income-tax authorities and so long as the return filed is true and full, merely because there is is escapement, section 147(a) cannot be invoked.\n\n16. As a matter of fact, after the return came to be filed, if any further information was required, the assessee could have been called upon either under section 143(2) or even thereafter to give particulars under section 142. That is the scheme underlying these provisions. This has been succinctly pointed out in Modi Spg. and Wvg. Mills v. ITO . The same ratio has been adopted by the Madhya Pradesh High Court also as seen from Smt. Kanchanbai v. CIT [1979] 117 ITR 367. Therefore, the submission is that there was no obligation on the part of the appellant to produce the stock register as the figures of the Audit Bureau of Circulation were known to the assessing authority at the time of the original assessment. The decision in Thanthi Trust v. ITO makes it very clear, yet another case that was cited in this behalf was Gemini Leather Stores v. ITO , where the amounts received by drafts were not disclosed. From this, it will be clear that it is not in every case if there is an escapement, straightway section 147 could be invoked. What is important to be noted is, whether it is on account of the failure to disclose or on account of subsequent information. If it is the latter, certainly, it is not open to the authority in invoke section 147(a). If, in the light of the case law, the notices are analysed, they do not answer the test and the omission cannot, by any stretch of imagination, be held to be attributable to the appellant.\n\n17. For the assessment year 1970-71, the reasoning in relation to discovery of promissory notes cannot be used for invoking section 147 because they are time-barred promissory notes. Looked at from this point of view there is no rational nexus. \n\n18. The suspense registers were produced for 1971-72. Even if excessive commission was paid to relations, it would not matter unless it had been siphoned off by the trust. That is not the case of the Department. For the assessment year 1972-73 and 1973-74, the same grounds are urged. It is not the concern of the appellant as to what inference of facts or law the authority has to make, any subsequent information will fall under section 147(b) and not under section 147(a). Therefore, this is a clear case in which the notices which do not spell out the grounds which have a live link or rational nexus for reopening under section 147 of the Act are sought to be used against the appellant-the writ petitioner in the other cases. If such notices are without jurisdiction, prohibition should issue. \n\n19. Mrs. Nalini Chidambaram, learned standing counsel for the Department, refers to the judgment of Ramanujam J., rendered in Writ Petition No. 10840 of 1981 and submits that in so far as what came to be challenged were notices under section 142 and not under section 147(a), that reasoning will hold good. \n\n20. In cannot be claimed as of right that in every case where notices under section 147 are challenged. The appellant would be entitled to know the reasoning. Law does not cast an obligation on the Department to provide the appellant with the reasoning. The Department is obliged to produce the concerned file before the court so that the court can satisfy itself whether the reasons recorded are germane. As a matter of fact, in case of this kind, all that the court is required to see is (1) whether there is a prima facie case for reopening the assessment; (2) whether there are materials. But that does not mean that the adequacy of the materials can be gone into; and (3) whether there had been any arbitrary exercise of power or whether there any extraneous matters taken into consideration. \n\n21. Then again, it is settled law that even if one of the reasons is good out of the several reasons stated for reopening, the notice has to be upheld. Therefore, it is submitted that it is not open to the appellant's counsel to comment upon the reasons which the court alone can scrutinize. In other words, article 226 cannot be utilised to find out the correctness of the reasoning. There are adequate remedies available. Hence, the remedy of the writ petitioner is misconceived. In support of this argument, learned counsel cites K. Mohammed Hussain v. CIT , VXL India Ltd. v. ITO , CIT v. A. Raman and Co. . Kantamani Venkata Narayana and Sons v. First Addl. ITO and CIT v. Mahalakshmi Textiles Mills Ltd. .\n\n22. Merely because there was subsequent information, it does not mean that section 147(a) ceases to apply. It has been so held in CIT v. Mahalakshmi Textiles Mills Ltd. . Again, in Jameson and Magrudar Co. Pvt. Ltd. v. ITO , it has been ruled that if our of the several grounds seeking to reopen an assessment, one ground is good, the notice has to be upheld. In Kantamani Venkata Narayana and Sons v. First Addl. ITO , it has been held that in view of the subsequent disclosure when it came to light that large accretions had not been disclosed when it came to light that large accretions had not been disclosed in the original return, that was enough to reopen the assessment. The decision in D.L.F. Housing and Construction P. Ltd., v. Union of India [1983] 142 ITR 347 (Delhi, is an authority for the proposition that if there has not been full disclosure, section 147(a) of the Act could be invoked. In any even, the notice in relation to the assessment year 1973-74 is well within four years. There is no ground at all for the appellant to approach this court. In a case even where there is no prima facie ground, the appellant was relegated to the assessing authority, as seen from the decision in R.L. Traders v. Union of India [1986] 158 ITR 824 (Delhi). In fine, therefore, it is submitted that there is no lack of jurisdiction; that there has been escapement of assessment is clear; that such an escapement is due to the non-disclosure and that at this stage of mere proposal to reassess, there is no justification for interference.\n\n23. Dr. Debi Pal in his reply would submit that the decision CIT v. A. Raman and Co. , can have no application to the facts of the present case, because that was a case under section 147(b). In that case, the reason that it was a substitute was not accepted by the Supreme Court. In all the rulings of the Supreme Court which had been cited by learned counsel for the appellant, the court had examined the reason whether there was a live or a close nexus. Therefore, the reason can be examined only for the purpose of finding this out. The same principle was adopted in Kantamani Venkata Narayana and Sons v. First Addla. ITO . In Thanthi Trust v. ITO , for four years, notices were issued. If the jurisdiction of the authority to invoke section 147 is challenged, the reasons will have to be disclosed as laid down in Gemini Leather Stores v. ITO , Madhya Pradesh Industries Ltd., v. ITO and ITO v. Madnani Engineering Works Ltd. . The reason why the appellant did not choose to cite various High Court decisions is that the law has been clearly laid down by the Supreme Court. In CIT v. Standard Motor Products of India Ltd. [1983] 142 ITR 877 (Mad), it is categorically laid down that if there is a Supreme Court decision on a point, there is no necessity to follow the High Court.\n\n24. Citing Madhya Pradesh Industries Ltd. v. ITO , it is urged that the notices for the assessment years 1969-70 and 1973-74 have not been challenged as wrong. The prayer itself is one for prohibition. Therefore, there cannot be any delay. Even if there were any delay, that cannot be against the appellant. The authorities in this regard are P. C. Doshi v. Seventh ITO [1967] 65 ITR 187 (Bom) and Smt. Suniti Devi Jaipuria v. ITO . Further, if there is lack of jurisdiction, no question of delay would arise as laid down in Calcutta Discount Co. Ltd., v. ITO . In P. C. Doshi v. Seventh ITO [1967] 65 ITR 187 (Bom), the delay of four years was held not to matter. Lastly, it is submitted that materials were available to the assessing authority at the time of assessment and hence section 147(a) could not be invoked.\n\n25. Having regard to the above submissions, the following questions emerge for our consideration: \n\n (1) What is the law in relation to invocation of power. Under section 147(a) of the Act ? \n\n(2) Whether the reason given in the notices could be held to be tenable ? \n\n(3) Whether the writ petitions are maintainable ? \n\n(4) Whether there is delay ? \n\nSection 147 of the Income-tax Act, 1961, confers jurisdiction to reopen the escaped assessment under two contingencies. The provision with regard to issue of notice is contained in section 148. But before the issue of notice, reasons will have to be recorded. The time-limit for the issue of such a notice is provided under section 149 of the Act. In cases falling under clause (a) of section 147, eight years should not have elapsed from the end of the relevant assessment year. However, if it is more than Rs. 50,000 then sixteen years. In cases falling under clause (b), four years is the limitation reckoned from the end of the relevant assessment year. \n\n26. It requires to be carefully noted that this section is subject to section 151 of the Act. In cases after the expiry of eight years, the satisfaction must be that of the Board. Where it is after the expiry of four years, it is the satisfaction of the commissioner. Here again, it has to be on reasons recorded. It is in this background that the relevant case law will have to be seen to ascertain when exactly the assessee failed within the meaning of section 147(a) of the Act. This becomes material because there is a vital difference between cases falling under section 147(a) and section 147(b). Under section 147(a), the jurisdiction is conferred when the assessee commits default. But section 147(b) relates to a case where notwithstanding there being no default, if some subsequent information comes to the knowledge of the authorities, the escapement of assessment can be brought to book. The case law is uniform in that the statutory safeguards are not to be viewed lightly. \n\n27. It has been held in ITO v. Madnani Engineering Works Ltd. [1978] 118 ITR 1 (SC) (headnote) thus:\n\n \"In the original assessment of the respondent for the assessment year 1959-60 completed on August 23, 1960, certain interest paid by it to creditors from which it claimed to have borrowed monies on hundis was allowed as deductible expenditure. Subsequently on January 25, 1968, i.e., after a lapse of four years from the end of the assessment year, a notice was issued by the Income-tax Officer to reopen the assessment of the respondent on the ground that the transactions of loan represented by the hundis were bogus and no interest was paid by the respondent to any of the creditors and interest was wrongly allowed. The respondent challenged the validity of the notice by filing a writ petition in the High Court. On December 5, 1968, the Income-tax Officer in his counter-affidavit declined to disclose the facts on the ground that if such facts were disclosed, it would cause great prejudice to the interests of the Revenue and would frustrate the object of reopening the assessment. Thereafter, he filed a further affidavit on January 27, 1970, stating that in the course of the assessment of the respondent for the assessment year 1963-64 it was discovered that various items shown as loans against the security of hundis in the respondent's books of account for the assessment year 1959-60 were in fact fictitious and credits against the names of certain persons, viz., A.G. R, M and D, were found not to be genuine, and that in that premise it appeared to the Income-tax Officer that the respondent had failed to disclose fully and truly all material facts necessary for its assessment and by reason of such failure a portion of its income had escaped assessment. A single judge of the High Court dismissed the writ petition, but on appeal a Division bench of the High Court allowed the petition and quashed the notice. On appeal to the Supreme Court: \n\n Held, affirming the Division Bench of the High Court, (i) the stand taken by the Income-tax Officer in his first affidavit dated December 5, 1968, was obviously untenable because the existence of reason to believe on the part of the Income-tax Officer was a justiciable issued and it was for the court to be satisfied whether in fact the Income-tax Officer had reason to believe that income had escaped assessment by reason of failure of the respondent to make a full and true disclosure. \n\n(ii) That the respondent had produced in the original assessment proceedings all hundis on the strength of which it had obtained loans from creditors as also entries in the books of account showing payment of interest and it was for the Income-tax Officer to investigate and determine whether these documents were genuine or not; the respondent could not be said to have failed to awake a true and full disclosure of the material facts by not confessing before the Income-tax Officer that the hundis and the entries in the books of account produced by it were bogus. \n\nCIT v. Burlop Dealers Ltd. , applied.\n\n(iii) That, as the Income-tax Officer had in the second affidavit merely stated his belief but not set out any material on the basis of which he had arrived at such belief, there was nothing on the basis of which court could be satisfied on the affidavit that he had reason to believe that a part of the income of the respondent had escaped assessment by reason of its failure to make a true and full disclosure of the material facts. \n\n(iv) That, therefore, the notice of reassessment was void.\" \n\n28. The point to be noted as far as this decision is concerned is that the respondent-assessee has produced the relevant materials because it was stated at page 5 thus: \n \"It will thus be seen that according to this judgment, there was no obligation on the assessee to disclose that the partnership agreement produced by it was bogus and that the entries made by it in its books of account were false. The assessee discharged the obligation which lay upon it by disclosing its books of account and evidence from which material facts could be discovered and it was for the Income-tax Officer to decide whether the documents produced by the assessee were genuine or false. Here also the respondent produced all the hundis on the strength of which it had obtained loans from creditors as also entries in the books of account showing payment of interest and it was for the Income-tax Officer to investigate and determine whether these documents were genuine or not. The respondent could not be said to have failed to make a true and full disclosure of the material facts by not confessing before the Income-tax Officer that the hundis and the entries in the books of account produced by it were bogus, we do not see any distinction at all between Burlop Dealers' case and the present one and the language of section 147(a) being identical with that of section 34(1)(a), the ratio of the decision in Burlop Dealers, case must govern the decision of the present case. We must, therefore, hold that there was no failure on the part of the respondent to disclose fully and truly all material facts necessary for it assessment and the conditions for the applicability of section 147(a) was not satisfied.\"\n\n29. CIT v. Burlop Dealers Ltd. , which was relied on, is a case wherein it was held that where a wrong inference was made at the original assessment, the assessee was not obliged to inform the officer of probable inference that may be raised on facts disclosed. It was further held (headnote):\n \"The respondent had disclosed its books of account and evidence from which material facts could be discovered: it was under no obligation to inform the Income-tax Officer about the possible inference that might be raised against it. It was for the officer to raise such an inference and if he had not done so in the original assessment, the income that escaped assessment could not be brought to tax under section 34(1)(a).\" \n\n30. This case dealt with the corresponding provision under the old Act. At page 612 of the above decision, it was held:\n \"We are of the view that under section 34(1)(a) if the assessee has disclosed primary facts relevant to the assessment, he is under no obligation to instruct the Income-tax Officer about the inference which the Income-tax Officer may raise from those facts. The terms of the Explanation to section 34(1) also do not impose a more onerous obligation. Mere production of the books of account or other evidence from which material facts could with due diligence have been discovered does not necessarily amount to disclosure within the meaning of section 34(1), but where, on the evidence and the materials produced, the Income-tax Officer could have reached a conclusion other than the one which he has reached, a proceeding under section 34(1)(a) will not lie merely on the ground that the Income-tax Officer has raised an inference which he may later regard as erroneous.\" \n\n31. In ITO v. Lakhmani Mewal Das , it was held at page 448 thus:\n\n \"As stated earlier, the reasons for the formation of the belief must have a rational connection with or relevant bearing on the formation of the belief. Rational connection postulates that there must be a direct nexus or live-link between the material coming to the notice of the Income-tax Officer and the formation of has belief that there has been escapement of the income of the assessee from assessment in the particular year because of his failure to disclose fully and truly all material facts. It is no doubt true that the court cannot go into the sufficiency or adequacy of the material and substitute its own opinion for that of the Income-tax Officer on the point as to whether action should be initiated for reopening the assessment. At the same time as have to bear in mind that it is not any and every material, howsoever vague and indefinite or distant, remote and far-fetched, which would warrant the formation of the belief relating to escapement of the income of the assessee from assessment. The fact that the words 'definite information' which were there in section 34 of the Act of 1922, at one time before its amendment in 1948, are not there in section 147 of the Act of 1961, would not lead to the conclusion that action can now be taken for reopening an assessment even if the information ins wholly vague, indefinite, far-fetched and remote. The reason for the formation of the belief must be held in good faith and should not be a mere pretense. \n\nThe powers of the Income-tax Officer to reopen an assessment, though wide, are not plenary. The words of the statute are 'reason to believe' and not 'reason to suspect'. The reopening of the assessment after the lapse of many years is a serious matter. The Act, no doubt contemplates the reopening of the assessment if grounds exist for believing that income of the assessee has escaped assessment. The underlying reason for that is that instance of concealed income or other income escaping assessment in a large number of cases come to the notice of the income-tax authorities after the assessment has been completed. The provisions of the Act in this respect depart from the normal rule that there should be, subject to right of appeal and revision, finally about orders made in judicial and quasi-judicial proceedings. It is, therefore, essential that before such action it taken. The requirements of the law should be satisfied. The live link or close nexus which should be there between the material before the Income-tax Officer in the present case and the belief which he was to form regarding the escapement of the income of the assessee from assessment because of the latter's failure or omission to disclose fully and truly all material facts was missing in the case.\" \n\n32. The headnote in Indian Oil Corporation v. ITO [1986] 159 ITR 956 (SC) is sufficient for our purpose:\n \"There must be materials to come to the conclusion that there was 'omission or failure to disclose fully and truly all material facts necessary for the assessment of the year'. This postulates a duty on every assessee to disclose fully and truly all material facts necessary for the assessment. Therefore, the obligation is to disclose facts; secondly. Those facts should be material; thirdly, the disclosure must be full and, fourthly, true. What facts are material and necessary for assessment will differ from case to case. In every assessment proceedings, for computing or determining the proper tax due from the assessee, it is necessary to know all the facts which held the assessing authority in coming to the correct conclusion. From the primary facts in his possession whether on disclosure by the assessee, or discovered by him on the basis of the facts disclosed, or otherwise, the assessing authority has to draw inference as to certain other facts. But, on the primary facts, it is for the taxing authority to draw inferences; it is not necessary for the assessee to draw inferences for him.\" \n\n33. In Ganga Saran and Sons (P.) Ltd., v. ITO [1981] 130 ITR 1 (SC), it requires to be noted that the original business was carried on at Delhi by one Deo Dutt Sharma. The same was taken over by the assessee-company. The said Deo Dutt Sharma was appointed as director to manage the Delhi business. In the original assessment, the salary, commission and bonus paid to Deo Dutt Sharma were allowed to be deducted. When it was proposed to reassess the same as escaped turnover under section 147(a) because Deo Dutta Sharma had given substantial amounts as loans to the managing director and gifts to his near relatives and drew only smaller amounts to himself, it was held at page 11 as follows:\n \"It is well-settled as a result of several decision of this court that two distinct conditions must be satisfied before the Income-tax Officer can assume jurisdiction to issue notice under section 147(a). First, he must have reason to believe that the income of the assessee has escaped assessment and, secondly, he must have reason to believe that such escapement is by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment. If either of these conditions is not fulfilled, the notice issued by the Income-tax Officer would be without jurisdiction. The important words under section 147(a) are 'has reason to believe' and these words are stronger than the words 'is satisfied', the belief entertained by the Income-tax Officer must not be arbitrary or irrational. It must be reasonable or in other words it must be based on reasons which are relevant and material. The court, of course, cannot investigate into the adequacy or sufficiency of the reasons which have weighed with the Income-tax Officer in coming to the belief, but the court can certainly examine whether the reasons are relevant and have a bearing on the matters in regard to which he is required to entertain the belief before he can issue notice under section 147(a). If there is no rational and intelligible nexus between the reasons and the belief, so that, on such reasons no one properly instructed on facts and law could reasonably entertain the belief, the conclusion would be inescapable that the Income-tax Officer could not have reason to believe that any part of the income of the assessee had escaped assessment and such escapement was by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts. And the notice issued by him would be liable to be struck down as valid\". \n\n34. On this reasoning it was further held at page 13 thus: \n \"We may point out that, in fact, the statements of account of Deo Dutt Sharma with the assessee for the relevant accounting year as also the previous years were with the Income-tax Officer at the time of the original assessment and these statements of accounts clearly showed that out of the amount of remuneration credited to his account, he had made a gift of Rs. 12,550 to the son of Ganga Saran Sharma on July 31, 1957, and given a loan of Rs. 2,25,000 to Ganga Saran Sharma on August 25, 1958, and the Income-tax Officer was fully aware that Ganga Saran Sharma was the managing director of the assessee. It is possible, and we may assume it in favour of the Revenue, that the subsequent gifts made by Deo Dutt Sharma to the wife and daughters-in-law of Ganga Saran Sharma were not disclosed to the Income-tax Officer at the time of the original assessment, but these gifts being subsequent to the relevant accounting year, the assessee was not bound to disclose the same to the Income-tax Officer. Moreover, it is difficult to appreciate how the assessee could be said to be under an obligation to disclose to the Income-tax Officer in the course of its assessment as to how a director who was in sole charge of the management of the business of the assessee and who was being paid remuneration for the services rendered by him to the assessee, had utilised the amount of remuneration received by him. We do not think it possible to sustain the conclusion that the assessee omitted or failed to disclose fully and truly and material facts relating to its assessment.\" \n\n35. In the decision in Gemini Leather Stores v. ITO , it is held (headnote):\n\n \"In proceedings for the original assessment of the appellant firm though the appellant did not disclose certain transactions evidenced by certain drafts, the officer himself discovered the facts relating thereto but by oversight did not bring the amounts represented by the drafts to tax as the income of the appellant. Subsequently, the Income-tax Officer issued a notice under section 147(a) of the Income-tax Act, 1961, with a view to assessee the amounts as the appellant's the High Court held that the Income-tax Officer did not apply his mind to the question whether the amounts could be treated as part of the total income of the appellant and as the appellant did not disclose the source of those amounts which were not recorded in the account books, all the conditions for invoking the jurisdiction under section 147(a) were present. On appeal to the Supreme Court: \n Held, reversing the decision of the High Court, that after discovery of the primary facts relating to the transactions evidenced by the drafts, it was for the officer to make the necessary enquiries and draw proper inference as to whether the amounts represented by the drafts could be treated as part of the total income of the appellant. This the officer did not do. It was plainly a case of oversight and it could not be said that income chargeable to tax had escaped assessment by reason of the omission or failure on the part of the appellant to disclose fully and truly all material facts. He could not, thereafter, taken recourse to section 147(a) to remedy the error resulting from his own oversight.\" \n\n36. These cases cited on behalf of the appellant made two thing clear. (1) For invocation of jurisdiction under section 147(a) of the Act, the escapement must be because of the omission on the part of the appellant. (2) The reasons to be recorded must have a live link or a close nexus. \n\n37. As against this, the Revenue cited before us the following cases to contend that under writ jurisdiction, it is neither feasible nor desirable to go into the correctness of the reasoning or the sufficiency thereof so long as there is a prima facie case to reopen. In K. Mohammed Hussain v. CIT , where one of us, sitting in the Bench with Ramanujam J., held at page 867 as follows:\n\n \"The petitioner's contention that Kumaraswami Mudaliar before his death and later the receiver had disclosed all necessary and material particulars for deciding the question of status and that the assessing authority had no power to go back on his earlier assessment on the question of status, involves investigation of facts as to what were the materials that were produced before the Income-tax Officer at the first instance when the assessment was first made in the status of an individual. Further, the petitioner has come to this court even at the stage of issue of a notice and before the actual proceedings are taken, it is always open to the petitioner to put forward his objections and convince the second respondent who issued the notice under section 147 of the Income-tax Act that there is no room for making a revised assessment as proposed by him and that he, having decided earlier the status, cannot change his opinion and make a revised assessment on the estate of Kumaraswami Mudaliar in the status of a Hindu divided family. \n\nWe have to, therefore, hold that this writ petition is premature. Further, the matter involves investigation of facts. The proper thing for the petitioner is to go before the second respondent and put forward his objections and if ultimately and adverse orders are passed against him by the second respondent, he can challenge that order in appropriate proceedings.\" \n\n38. In the decision in VXL India Ltd., v. ITO it is held (headnote):\n\n \"Whether there is any material or information in the possession of the Income-tax Officer which is sufficient to invoke the provisions of section 147 of the Income-tax Act, 1961, viz., whether income chargeable to tax has escaped assessment, has to be decided under the provisions of the Act itself and not by way of a writ petition under article 226 of the Constitution, it has to be decide dint the assessment proceedings after considering the objections raised by the assessee before the Income-tax Officer, the appellate or other authorities. \n\nIn the instant case, the writ petition was dismissed with liberty to the appellant to raise all questions that were open to it under law before the assessing authorities, including the question of jurisdiction or of the condition precedent for invoking the provisions of section 147.\" \n\n39. In CIT v. A. Raman and Co. , in dealing with the meaning of the expression information under section 147(b) of the Act, it was held that the High Court in exercise of its jurisdiction under article 226, has power to set aside a notice under section 147(b) if the condition precedent to the exercise of the jurisdiction does not exist. The court may, in exercise of its powers, ascertain whether the Income-tax Officer had in his possession any information; the court may also determine whether from the information the Income-tax Officer may have reason to believe that income chargeable to tax has escaped assessment. But the jurisdiction of the court extends no further. Whether on the information in his possession he should commence proceedings for assessment or reassessment, must be decided by the Income-tax Officer and not by the High Court. The Income-tax Officer alone is entrusted with the power to administer the Act; if he has information from which it may be said, prima facie, that he had reason to believe that income chargeable to tax had escaped assessment, it is not open to the High Court exercising powers under article 226 of the Constitution to set aside or vacate the notice for reassessment on a reappraisal of the evidence.\n\n40. In this case, it requires to be carefully noted by us that the jurisdiction of the High Court had not been completely excluded. In Kantamani Venkata Narayana and Sons v. First Addl. ITO , it was held by the Supreme Court thus (headnote):\n \"In proceedings under article 226 of the Constitution of India challenging the jurisdiction of the Income-tax Officer to issue a notice under section 34(1)(a), the High Court is only concerned to decide whether the conditions which invested the Income-tax Officer with power to reopen the assessment did exist: it is not within the province of the High Court to record a final decision about the failure to disclose fully and truly all material facts bearing on the assessment and consequent escapement of income from assessment and tax.\" \n\n41. In CIT v. Mahalakshmi Textiles Mills Ltd. , it has been held:\n \"These decisions indicate that if the materials coming to the knowledge of the Income-tax Officer or gathered by him subsequent to the original assessment showed that the statement made by the assessee at the stage of the original assessment proceedings cannot be true or full, then he is entitled to initiate proceedings under section 34(1)(a) notwithstanding the fact that he has accepted the statements of the assessee made at the stage of the original assessment without further scrutiny, we are not inclined to agree with the Tribunal that in this case the Income-tax Officer has tried to make good his deficiency in the original assessment. Admittedly, the materials gathered by the Income-tax Officer which formed the basis of the reassessment were not there at the stage of the original assessment. He had no opportunity to consider these materials at that stage. There is, therefore, no question of any deficiency in his original assessment. It is in view of the materials gathered subsequently after the original assessment, the reassessment had been initiated on the ground that from those materials it is reasonable to infer that the statement made by the assessee regarding the credit in the name of Thenappa Chettiar cannot be true. We are of the view that, on the materials, the initiation of proceedings under section 34(1)(a) was justified.\" \n\n42. This case related to the discovery of subsequent information. \n\n43. In D.L.F. Housing and Construction P. Ltd., v. Union of India [1983] 142 ITR 347 (Delhi), it has been held (headnote):\n\n \"For the assessment year 1960-61, the assessment of the assessee was completed by the Income-tax Officer on a total income of Rs. 5,04,449. Before the completion of the statement, the Income-tax Officer sought certain clarifications in regard to the purchase of some land by the assessee. The assessee explained that it had originally, jointly with the firm, entered into an agreement to purchase land from the vendor at the rate of Rs. 1,025 per bigha, but eventually had entered into an agreement with the vendor for purchasing the same land at Rs. 1,350 per bigha, that the total purchase price was Rs. 21,93,058, that a sum of Rs. 5,50,000 was paid by way of earnest money to the vendor, a sum of Rs. 6,10,958 was paid in cash and for the balance sum of Rs. 10,30,000 negotiable hundis were given, which were duly dischanged. However, a doubt arose in the mind of the Income-tax Officer as to why the assessee should purchase the land at a higher price, but the Income-tax Officer accepted the explanation of the assessee and made no additions to the income. The Income-tax Officer called upon the assessee to produce its account books and cash vouchers in discharge of the liability of Rs. 10,30,000, which, according to the assessee, was furnished to the Income-tax Officer. Thereafter, the Income-tax Officer issued notice under section 147(a) read with section 148 of the Income-tax Act, 1961, for reopening the assessment of the assessee by relying on the affidavit of the vendor in which he had stated he had received only a sum of Rs. 19,00,654 towards the purchase price of the land and not the entire sale price of Rs. 21,93,058 and also on the grounds that independent inquiries revealed that the market rates were much below the alleged purchase price of Rs. 1,350 per bigha, that the purchase price had been inflated to the extent of Rs. 2,92,404 and income to that extent had been concealed by the assessee and that a cash loan of Rs. 10,30,000 from the vendor was found in the books of the assessee, but the same did not appear in the books of the vendor, which led to the conclusion that the amount represented income of the assessee from undisclosed sources. On a writ petition filed by the assessee challenging the notice of reassessment issued by the Income-tax Officer, the assessee contended that at the time of the original assessment he had disclosed fully and truly all necessary facts and had produced all vouchers, receipts and payments, that the Income-tax Officer was fully aware that the vendor was also an assessee and could have verified the transaction by reference to the vendor's books, and that the mere fact that the vendor went back upon the transaction and alleged that he had received only a sum of Rs. 19,00,654 could not constitute material on the basis of which the assessment could be reopened. \n\nHeld, that the Income-tax Officer had, at the time of the original assessment, no reason to doubt the purchase price as stated by the assessee, but when he came across the statements and accounts of the vendor, he had reason to believe that the assessee's income had escaped assessment by reason of his wrongly stating the material facts as to the purchase price. The only method by which the Income-tax Officer could satisfy himself, as to the correctness or otherwise of the statement of the vendor. Was by initiating reassessment proceedings and examining and cross-examining the assessee and the vendor in the course of the reassessment proceedings. The reassessments could not become invalid merely because even at the time of the original assessment, the Income-tax Officer did not compare the account of the assessee with that of the vendor. The Income-tax Officer had material on the basis of which he could have entertained a reasonable belief that income had escaped assessment by reason of the omission of failure on the part of the assessee to disclose fully and truly all material facts at the time of the original assessment, and the notice issued for reassessment was valid.\" \n\n44. On facts it was found therein that there was no true and full disclosure. \n\n45. In R. L. Traders v. Union of India [1986] 158 ITR 824 (Delhi), it has been held (headnote):\n\n \"The jurisdiction to reopen an assessment is circumscribed by the conditions laid down in section 147(a) of the Income-tax Act, 1961. Certain facts have to exist to show that the assessment can be reopened. The existence of such reasons and a direct nexus between those reasons and the alleged evasion is a condition precedent for reopening the assessment.\n\nThe Income-tax Officer issued notices reopening the assessment of the petitioner under section 147(a) read with section 148 on the ground that during the course of some other proceedings, it was discovered that being was being sold through commission agents to havala agents at an under invoiced rate and that the petitioner had also been selling to these commission agents at an underinvoiced rate. The petitioner filed a writ petition challenging the reassessment notice on the ground that the material which the Income-tax Officer had was too vague and uncertain to connect the petitioner with any under invoicing or alleged concealment of income and, therefore, there was insufficient material for the Income-tax Officer to have 'reason to believe' that income had escaped assessment: \n Held, that where there were disputed facts, it was not easy to ascertain what was the material and what was the nexus. Unless the material appearing against the assessee was examined by the court n detail, it would not be easy to ascertain whether the reasons actually existed for reopening the assessment. It was difficult to decide what was relevant in a writ petition and that the Income-tax Officer could decide the question as a preliminary issue during the proceedings for reopening the assessment and then the assessee could appeal if he was aggrieved.\" \n\n46. In this case, Because there were disputed facts which were not easy to ascertain and what was the material and what was the nexus, it was directed to be decided as a preliminary issue. \n\n47. No doubt, in some of the cases cited by the Revenue, the matter was relegated to the Revenue. But we do not think that that could be the universal rule in all cases. As rightly urged by Dr. Debi Pal, the jurisdiction of this court is limited to find whether there is a live link or a reasonable nexus. For that limited finding at least. The reasons could be examined. No doubt, the income-tax authorities are not bound to furnish the assessee with the file containing the reasons. But in this case, the reasons have been furnished and copy therefore has also been given to the appellant. All that he wanted at our hands is to examine whether the reasons contained in the notices, which are more or less identical in language, have a live link or a close nexus. According to him, as to what is the scheme of the Act with regard to the obligation on the part of the assessee to furnish the return with true and full particulars and also such other information can be gathered from Modi Spg. and Wvg. Mills v. ITO , it has been held:\n \"The scheme underlying these sections seems to indicate that to begin with, at the time of filing of return, an assessee was merely required to furnish the particulars of his income in the prescribed form. In other words, he was to truly and fully supply the information sought for in various columns of the prescribed form of return. If the Income-tax Officer felt that the information conveyed, as per the prescribed form, was correct and was sufficient for making an assessment order, he could proceed to assess the persons filling the return on its basis. At that stage, no question of the assessee furnishing any information other than that required to be furnished in the prescribed form of return could arise. Accordingly, if the assessee truly and fully disclosed all information required to be supplied in the prescribed form of return, no question of his failure to disclose any other particulars of his income at that stage could arise, the next stage in the process of making an assessment was where a return in the prescribed form had been filed but the Income-tax tax Officer felt that although the information conveyed by the return was sufficient for making an assessment order, but before that information could be acted upon, the assessee should be required to verify the same by producing evidence. In such circumstances, he could require the assessee to produce evidence in support of his return. Here again, the assessee was required to produce evidence only in support of the statements made by him in the prescribed form of return and there was no obligation upon him to convey any other or further information or to produce evidence in support of any other matter which may ultimately be found to be relevant for the purpose of making an assessment in his case. There could yet be a third stage where the Income-tax Officer felt that not only the information conveyed in the return required verification but also a that it was not sufficient for making an assessment order. In such a case, he was required to specify the points and to ask the assessee to produce evidence on those points. He could also require the assessee to produce some particular evidence having a bearing on that point. It is at the stage when the assessee was required by the Income-tax Officer to elucidate some particular point that the assessee had again been obliged to disclosed all primary facts truly and fully in respect of that point. Till this stage was reached, there was no obligation on the assessee to disclose or produce evidence in respect of the points other than those in respect of which the assessee was, as provided in the prescribed form of return, obliged to furnish full and true information. In our opinion, so long as in the assessment proceedings the third stage was not reached, the assessee could not be blamed or held liable for not disclosing some information which till then he was not required to furnish in the prescribed form but which ultimately was found to be relevant in connection with his assessment.\" \n\n48. From the above, it is clear that there are three stages: (1) To file the return as required under the Act and supply all the information sought for in the various columns in the prescribed form of return. (2) Should the income-tax authorities feel that the information was not sufficient, they could require the assessee to produce evidence in support of his return. This is under section 143(2) of the Act. (3) Then again, at the third stage, the Income-tax Officer could require the assessee to produce some particular evidence which has a bearing on that particular point, this is under section 142 of the Act. This ruling has been followed by the Madhya Pradesh High Court as seen from Smt. Kanchanbai v. CIT [1979] 117 ITR 367, wherein it was held (headnote):\n\n \"It is well-settled that to confer jurisdiction on the Income-tax Officer under section 147(a) of the Income-tax Act, 1961, two conditions are to be satisfied: (i) the Income-tax Officer must have reason to believe that income, profits or gains chargeable to income-tax have escaped assessment, and (ii) he must also have reason to believe that such escapement has occurred by reason of either (a) omission or failure on the part of the assessee to make a return of his income under section 139 of the Act, or (b) omission of failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for that year. Both these conditions are conditions precedent to be satisfied before the Income-tax Officer could have jurisdiction to issue a notice under section 148 read with section 147(a) of the Act. What facts are material and necessary for assessment will differ from case to case. \n\nFor the assessment years 1956-57, 1957-58 and 1958-59, the assessee who derived income from money-lending business, was originally assessed as an individual on May 30, 1960, at the time of original assessments, the assessee had submitted a list of the parties from whom interest was received by the assessee. The assessee did not maintain any books of account and no inquiry was made at the time of the original assessments regarding the source of investments made by the assessee. Subsequently. The Income-tax Officer got information that the assessee had been in possession of substantial quantity of gold which was sold by the assessee, that the amount of sale proceeds was invested in money-lending business and as the Income-tax Officer had reasonable grounds to believe that income liable to tax had escaped assessment, he initiated reassessment proceedings under section 147(a) of the Act, after obtaining the sanction of the Commissioner of Income-tax for each of the three assessment years. The assessee filed returns under protest challenging the legality of the reassessment proceedings and contended that she had received ornaments from her father and father-in-law. The Income-tax Officer did not accept the version of the assessee and the amount obtained by the assess but sale or ornaments was added to the assessee's income from undisclosed sources. On appeals, both the Appellate Assistant Commissioner and the Tribunal affirmed the order of the Income-tax Officer. On a reference. \n\nHeld, that the assessee had produced before the Income-tax Officer at the time of original assessments a list of persons to whom moneys had been advanced by the assessee and the amounts of interest received from them. At the time of filing of her returns for the relevant assessment years, the assessee was not required to furnish information regarding the source of the capital invested in money-lending business and the Income-tax Officer had, at no stage, required the assessee to furnish the information. Therefore, there was no omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for her assessment for the relevant assessment years and the condition precedent for the exercise of powers under section 147(a) of the Act was not fulfilled. The Income-tax Officer was, therefore. Not justified in reopening the assessments under section 147(a) of the Act for any of the years\". \n\n49. Thus, on point No. 1 we conclude that the jurisdiction of this court is not completely shut out, but is still available to determine the limited questions, namely, whether there is a live link or a close nexus to the notices. With this, we go on to examine the notices issued for the various assessment years. \n\n50. In the case of the assessee which came up before this court earlier and reported in Thanthi Trust v. ITO , it was held at page 286 thus:\n \"It prima facie appears to us that some of the reasons set out above almost amount to a change of opinion in respect of certain items and there can be no question of the non-disclosure by the assessee leading to the escapement of income in relation to those items. However, it is not necessary for us to see whether all the reasons set out for each year by the Income-tax Officer in his reports are tenable. If at least one of the grounds in respect of each of the years in such as to lead to a prima facie and reasonable belief that income has escaped assessment in that year by reason of the non-disclosure of the primary facts by the assessee, the jurisdiction of the Income-tax Officer t initiate reassessment proceedings under section 147(a) cannot be successfully questioned. Therefore. We have to consider whether there exists at least one reason which would form the basis for the belief entertained by the Income-tax Officer with reference to each of the years.\" \n\n51. It is true as rightly contended by Mrs. Nalini Chidambaram appearing for the Revenue, that even if one of the reasons is sufficient, that will be enough to uphold the validity of the notice, she is fortified in relying on the decision in Jameson and Magrudar Co. P. Ltd., v. ITO , in which it has been held thus (headnote):\n\n \"If a notice is issued on more than one ground, and one of the grounds is sufficient to uphold the validity of the notice, then even if the other grounds are not sustainable, it will not make the notice bad. \n\nThe Income-tax Officer issued notice to the assessee under section 148 of the Income-tax Act, 1961, for the assessment year 1971-72 on the grounds, (i) that in consequence of information received from the Revenue audit, it was found that deductions under section 80K, 80L and 80M had been wrongly allowed and no deductions could be allowed in view of the provisions of section 80A(2) since there was no gross total income within the meaning of section 80B(5), the net result being a minus figure and loss had been carried forward due to incorrect dedications; (ii) that excess relief under section 80J had been allowed due to incorrect computation of capital employed; (iii) that travelling allowance disallowable under section 37(3) read with rule 6D of the Income-tax Rules, 1962, had not been disclosed in the return; (iv) that the assessee paid compensation on account of short production of controlled cloth which was in the nature of penalty and should have been disallowed; and, hence, the Income-tax Officer had reasons to believe that on account of the failure of the assessee to disclose fully and truly all material facts necessary for its assessment and also in consequence of information in the possession of the Income-tax Officer, the assessee's income had escaped assessment. The question arose whether the condition precedent for assumption of jurisdiction for initiation of proceedings in respect of income escaping assessment had been fulfilled or not; \n\nHeld, that the information that the Income-tax Officer had allowed the deductions under section 80K, 80L and 80M before considering the depreciation, would clothe the Income-tax Officer with jurisdiction to issue the notice. Therefore, the reopening of the assessments was valid.\" \n\n52. It is in the light of this, we will examine the notices. \n\n53. For the assessment year 1969-70, ABC newsprint stock register which contains account from July 1, 1967, to June 30, 1971, on a comparison with the financial statements filed for the purpose of income-tax, shows huge difference between closing stock and the purchase. Therefore, the difference in stock, in the absence of explanation, must have been purchased with undisclose income, the advertisement deposit account contained receipt of lump sums in the assessment year also. This position is at variance with the explanation offered by the appellant. In the assessment year 1970-71, the amounts representing the income of the appellant have not been properly accounted for. The plea of the appellant is that at the time of original assessment, the assessing authority had full knowledge about the existence of the ABC newsprint stock register. The accounts for the year ended June 30, 1969 (Sales Demand Statement), state as follows: \n\n \"Add: \n\nRs.\nTotal demand as per accounts 95,28,197\nTotal demand as per ABC reconciliation 95,23,780\n4,417\" \n \n\n 54. Further, it is seen from Thanthi Trust v. ITO itself, that the authority was aware of the figures furnished by the Audit Bureau of Circulation. It is stated at page 287 thus:\n\n \"For the year 1959-60, out of the many reasons given, one relates to the suppression of sales of newspaper to an extent of Rs. 53,552 as per the figures furnished by the Audit Bureau of Circulation and another relates to the lending of a sum of Rs. 10,000 to one Sankaralinga Iyer, outside the books of the accounts the trust. These grounds, if established, would came within the purview of section 147(a). \n\n For the year 1960-61 the tree grounds set out are: (1) investment in allied concerns of the founder; (2) deduction of interest of Rs. 51,931 on overdrafts wrongly allowed; and (3) suppression of sales of newspaper to an extent of Rs. 11,479 said to have been found out on information furnished by the Audit Bureau of Circulation.\" \n\n 55. Therefore, where the reconciliation statement relating to the sales which shows the total demand as per ABC reconciliation. The assessing authority could have called upon the appellant to furnish that particulars. We do not think this contention is well-founded. Therefore, applying the ruling of the Allahabad High Court in Modi Spg. and Wvg. Mills v. ITO [1975] 101 ITR 637 and Smt. Kanchanbai v. CIT , which succinctly set out the scheme of the Act, which extracts we have extracted above, this is not case of an assessee failing to furnish true and full return. Unless the assessee was called upon, there was no obligation on the part of the assessee to produce any further material, nor can the assessee delve in the mind of the authority to find out what inference could be drawn either on facts or on law.\n\n 56. As regards the advertisement charges, the finding of the appellate authority for the year 1970-71 may now be extracted: \n\n \"As pointed out by the Commissioner of Income-tax (Appeals) in respect of the same addition, the additions rest on surmises and suspicions. The explanation which was originally given was subsequently changed but the fact remains that the balances have been adjusted to revenue account in 1972-73 and offered as income. This has been accepted by the Department, in the face of this development, the variation in the explanation loses its significance. Having assessed the same in a subsequent year. The Income-tax Officer cannot subject it to assessment in the current year when it retained the character of deposit and when there is no positive material with the Income-tax Officer to show that the canvassers only settled the bills, but not made deposits or advances. In addition, the appellant has furnished the following details in respect of the advertisement income and advertisement deposit balance. \n\n Particulars: \n\nAcct. Year 1966-67 1967-68 1968-69 1969-70 1970-71 1971-72\n-------------------------------------------------------------------\nAsst. Year 1968-69 1969-70 1970-71 1971-72 1972-73 1973-74\n-------------------------------------------------------------------\nAdv. Income 2965304 3576001 42330134 5631567 7047772 7768658\nAdv. Dep.\nbalance 151230 363456 788002 789222 90872 90447 \n \n\n The appellant points out that advertisement income offered for assessment has been on the increase and the balances in the advertisement account were not added for the assessment years 1968-69 and 1969-70. The appellant's contention is correct. There is nothing to suggest that the trust has resorted to the practice of suppression of income by treating the advertisement receipts as advertisement deposits. In fact, no serious omission of irregularity in respect of advertisement receipts has been pointed out by the Income-tax Officer. On the whole, the addition is no warranted and accordingly the Income-tax Officer is directed to delete the same after due verification of the facts that Rs. 7,00,350 has been adjusted to the revenue account in the assessment year 1972-73 and included in the income and the assessment accepting the above potion has been made. Subject to verification on the above point, the appeal is allowed.\" \n\n 57. This affords a complete answer with regard to the omission or failure on the part of the appellant. \n\n 58. For the assessment year 1970-71, the first reasoning is in relation to ABC newsprint stock register about which we had already made a reference. The second reasoning is in relation to the two promissory notes, one dated April 21, 1969, for Rs. 1,30,000 executed by Pachaiyear Sugar Mills (P.) Ltd., and another dated January 1, 1970, executed by D. R Adityan for a sum of Rs. 69,200. According to Dr. Debi Pal these promissory notes are beyond three years and, therefore, the recovery of these promissory note amounts is not possible. Hence, there is no rational nexus or live link, He also relies in this regard on Sheo Nath Singh v. AAC , wherein it was held at page 153 as follows: \n \"In our judgment, the law laid down by this court in the above case a fully applicable to the facts of the present case. There can be no manner of doubt that the words 'reason to believe' suggest that the belief must be that of an honest and reasonable person based upon reasonable grounds and that the Income-tax Officer may act on direct or circumstances evidence but not on mere suspicions, gossip or rumour. The Income-tax Officer would be acting without jurisdiction if the reason for his belief that the conditions are satisfied down not exist or is not material or relevant to aspect though the declaration or sufficiency of the reasons for the belief that the conditions are satisfied does not exist or is not material or relevant to the belief required by the section. The court can always examine this aspect though the declaration of sufficiency of the reasons for the belief cannot be investigation by the court.\" \n\n 59. We consider that this is not the correct way of approach. What is a pointed out is that. These loans have not been accounted for in the books of the assessee. The question of recovery does not come in. Therefore, this reason appears to be valid. \n\n 60. The next is the suspense register. Tha stand of the appellant is that the suspense register maintained by the appellant does not show any discrepancy in view of the following statements: \n\n \"SUSPENSE-CASH BALANCE \n \n\n Madras Office \n \n___________________________________________________________________\nDate Balance as per suspense register Balance as per book\n___________________________________________________________________\n Rs. Rs.\n30-6-1968 65,445.79 65,445.79\n30-6-1969 1,49,131.80 1,49,131.80\n30-6-1970 1,48,471.82 1,48,741.82\n30-6-1971 1,66,107.05 1,66,107.05\n30-6-1972 2,27,367.62 2,27,367.62\"\n__________________________________________________________________ \n \n\n 61. Here again, the suspense register is for the assessment year 1970-71 which shows huge discrepancy which came to light in the course of the assessment for the year 1974-75. Therefore, this is not a case of omission by the appellant. But a subsequent discovery which could have been discovered with due diligence or by calling upon the appellant to produce the relevant account books. Hence, for the assessment year 1974-75, that cannot projected as a reason. For the assessment year 1971-72, in addition to these two reasons, on other reasons that is given is sale of excessive wastage. The sale of wastage at 8.89% accounted for that year had year fully accepted by the income-tax authorities. The fact that in the subsequent year 1974-75, 5% came to be arrived at cannot constitute a ground for reopening. This squarely falls with the ratio of the Supreme Court decision laid down in India Oil Corporation v. ITO [1986] 159 ITR 956.\n\n 62. The ground is with regard to excessive commission, it is stated by the authorities that the sales were obviously to agents who are none other than the employees of the appellant and such excessive commission payments to these persons were not genuine. We find some difficulty in accepting this line of reasoning because unless it is clear that the payments to the employees of the appellant have been safeness off to the trust, there is no question of failure to render a true and full account. We think the ruling in Ganga Saran and Sons (P.) Ltd., v. ITO [1981] 130 ITR 1 (SC) supports the appellant. For the assessment years 1972-73 and 1973-74, the same grounds have been urged. But as regards 1973-74, the notice issued is under section 147 of the Act which is well within four years. With regard to the other year, the law clearly lays down, that it must be within four years, if it is under section 147(a). In our view, on a very careful consideration, the notices for the assessment years 1969-70, 1971-72 and 1972-73 have to be held to be invalid because the reasons do not have a live-link or a close nexus. However, for 1970-71, we have to uphold the notice since in paragraph 3 of that notice reference is made to the two promissory notes which have not been brought into account. That will show that the appellant had not submitted a true and full return and this omission of the appellant had not submitted a true and full return and this omission of the appellant will confer jurisdiction on the officer. For the assessment year 1973-74, the notice, being well within time, will have to be upheld.\n\n 63. In view of the foregoing discussion. We hold that the writ petitions are maintainable for the limited purpose of deciding the jurisdictional issue. \n\n 64. We do not think the appellant could be denied the relief on the ground of delay. As matter of fact, we have already set out, the prayer in the Writ petitions leading to the writ appeals. In P. C. Doshi v. 7th ITO [1967] 65 ITR 187 (Bom) at P. 192, it has been held: \n \"Now, so far as the writ of prohibition is concerned, it cannot be said that the notices of demand suffer from a patent lack of jurisdiction. If the orders, in pursuance of which they have been issued, stand, no objection can be taken with regard to the consequential notices of demand. We may, however, agree with him that, in so far as the relief by way of writs of certiorari seeking to quash the orders made under sections 35(7) and 35(8) are concerned, he may be entitled to rely on the said decision provided he may be entitled to rely on the said decision provided he can satisfy us that there is a patent lack of jurisdiction on the part of the respondent in making the said orders. In the Privy Council case, Estate and Trust Agencies Ltd. v. Singapore Improvement Trust, AIR 1937 PC 265, relied on by him, it has been observed that an application for prohibition or certiorari is never too late as long as there is something left for it to operate upon. This observation was made in the context of a prayer for a writ of prohibition seeking to prevent the action of pulling down a building which was being done in consequence of an order, which was ultra vires the authority making it. The said decision, in our opinion, is consistent with the view which Mr. Justice S. T. Desai has taken in Madhavlal Sindhoo v. C. R. Idurkar [1956] 30 ITR 332 (Bom) that, if there is a patent lack of jurisdiction, normally, the court will interfere and will not stay its hands merely on the ground of delay on the apart of the petitioner to come to the court.\"\n\n 65. The decision in Smt. Suniti Devi Jaipuria v. ITO , is also to the same effect. In Calcutta Discount Co. Ltd., v. ITO , it has been held \n \"Mr.Sastri next pointed out that at the stage when the Income-tax Officer issued the notices he was not acting judicially or quasi-judicially and so a writ of certiorari or prohibition cannot issue. It is well settled however that though the writ of prohibition or certiorari will not issue against an executive authority, the High Courts have power to issue in a fit case an order prohibiting an executive authority from acting without jurisdiction. Where such action of an executive authority acting without jurisdiction subjects or is likely to subject a person to lengthy proceedings and unnecessary harassment, the High Courts, it is well-settled, will issue appropriate orders of directions to prevent such consequences.\"\n\n 66. Therefore, for a writ of prohibition, we do not propose to deny the relief on the ground of delay. Accordingly, W.A. Nos. 539 and 540 of 1981 will stand allowed. W.P. Nos. 1742 of 1980 and 2297 of 1981 will stand allowed. W.P. No. 1222 of 1979 will stand dismissed. Since W.A. No. 1828 of 1987 is against an interlocutory order and the writ petition itself has been allowed. no further orders are necessary. There will be no order as to costs." }, { "title": "H.L. Sibal vs Commissioner Of Income-Tax And Ors. on 15 July, 1975", "url": "https://indiankanoon.org//doc/1597467/", "text": "H.L. Sibal vs Commissioner Of Income-Tax And Ors. on 15 July, 1975\nEquivalent citations: [1975]101ITR112(P&H)\nJUDGMENT\n\n \n\nM.R. Sharma, J.\n\n \n\n1. The petitioner, Shri H. L. Sibal, is an advocate of this court. On October 17, 1974, while he was, working in his office at about 7-30 a.m., respondent No. 3 entered his office and showed him a warrant under Section 132 of the Income-tax Act, 1961 (hereinafter called \"the Act\"), authorising him to search the premises of the petitioner. Respondent No. 3 was at that time accompanied by respondent No. 4 and some other officials of the income-tax department. He also brought Major D. S. Brar and Shri P. L. Verma, retired Chief Engineer--Panch witnesses--to witness the search.\n\n2. The case of the petitioner is that he informed respondent No. 3 that he had to appear in some cases before this court including a part-heard case in which he was to represent the Punjab State and the Punjab State Electricity Board, but he was ordered by respondent No. 3 not to leave his premises. The reason given was that the latter had been ordered by his superior officers in that behalf.\n\n3. The son of the petitioner, Shri Kapil Sibal, advocate, was coming by air from Delhi and the wife of the petitioner was preparing to leave by car to receive him but she was also not allowed to leave the house.\n\n4. Shri Gurdial Singh Mann, a retired P. C. S. officer, and his wife had been staying with the petitioner for the last 4/5 days, because the father of the former was lying ill in the Post Graduate Institute of Medical Education and Research (P.G.I.). Chandigarh. They had been lodged in the guest room of the house in which their luggage was also kept. Shri Mann wanted to leave the premises for some work but the raiding party did not allow him to do so.\n\n5. The search of the premises was commenced at about 8-30 a.m. and it concluded at about 5-30 p.m. The raiding party also wanted to make a search of the luggage of Shri Mann and his wife to which Shri Mann objected. The petitioner also requested respondent No. 3 that it was unfair to conduct a search of the luggage of a guest because this action tantamounted to insulting the guest as well as the host. Upon this, respondent No. 3 is stated to have told them that he would like to take instructions from his superior officers in the matter. Consequently, he rang up respondent No. 2, who in turn asked him the name and address of the guest. These particulars having been supplied on telephone the warrant authorising the search of the luggage of Shri Mann was also received within about half an hour. The petitioner alleges that blank warrants of search signed by the Commissioner were available at Chandigarh, which were filled in at this place and were issued against Shri Mann. . From this, he infers that there could possibly be no information with the Commissioner against Shri Mann and that the former had not applied his mind before issuing the search warrants. The result of the search also revealed that Shri Mann had no such connection with the petitioner which could be taken notice of by the income-tax authorities.\n\n6. During the course of the search, the raiding party took into possession a cash amount of Rs. 10,000 and some documents. Panchnama exhibit P-1, in respect of this search, was prepared by respondent No. 3 and signed by the two Panch witnesses and the petitioner. The list of the documents seized by respondent No. 3 is contained in exhibits P-2 and P-3. The list of cash and jewellery found from the premises is given in exhibit P-4.\n\n7. At about 5 p.m. on the same day, respondent No. 2 came to the premises when the money, gold ornaments and silver utensils had all been placed in the bed room. The raiding party asked him whether they should seize any money or not. He ordered that a sum of Rs. 10,000 out of Rs. 14,070 belonging to the. petitioner be seized. When the petitioner objected that the sum of Rs. 14,070 was a small amount and did not\n\n\nrepresent any undisclosed income, respondent No. 2 remarked that Rs 10,000 had to be seized as per instructions.\n\n8. On October 24, 1974, a notice was served on the petitioner calling upon him to appear before the Income-tax Officer on November 18, 1974, to explain and to produce the evidence on which he might rely for explaining the nature of the possession and the sources of acquisition of the assets\n--both seized and unseized mentioned in the notice.\n\n9. On November 6, 1974, the petitioner submitted a reply to this notice stating therein that a search warrant could be issued only if the Commissioner or the Director of Inspection had information or reasons to believe that any person had in his possession money, bullion, jewellery or other valuable articles, which represented wholly or partly income or property which had not been disclosed for the purposes of the Act. He also requested that he should be furnished information in the possession of the authorities as to how any of the articles represented undisclosed income of a particular year. Further, he contested the value put on these articles by the department. The other plea raised was that the notice was issued with a view to conducting a fishing enquiry by placing burden on the asses-see to prove everything, which was not the intention of the legislature as manifested in Section 132 of the Act, Towards the end, it was submitted :\n \"In order to enable me to give a satisfactory reply to this notice, it is requested that the information asked for may kindly be supplied to me within a week.\"\n\n10. On November 12, 1974, respondent No. 4 informed the petitioner, vide annexure \"P-8\", that the value of the jewellery and the luxury articles had been taken on the basis of the market value, that the two cars which the petitioner possessed had also been taken into consideration and that if the petitioner disputed the value adopted by her, he was at liberty to adduce evidence in that behalf. She further informed him that under Section 132 of the Act, it was for him to explain the sources as well as the year of acquisition of the cash, the jewellery and other valuable articles found in his possession. The relevant information was ordered to be supplied on or before November 18, 1974, because an order under Sub-section (5) of that section had to be passed within 90 days of the search.\n\n11. On November 18, 1974, the petitioner made a detailed reply to the\nabove letter of respondent No. 4 through Shri Brij Mohan Khanna, advocate. It was pointed out that the petitioner was an eminent advocate of Northern India having twice held the office of Advocate General, Punjab. He had also been elected the President of the High Court Bar Association, Punjab and Haryana. From the assessment year 1965-66 onwards, his net taxable income amounted to Rs. 45,000 to Rs. 1,25,000 per year. He\n\n\nwas also a wealth-tax assessee for about a decade and the tax paid by him on his individual professional income during the last assessment year amounted to nearly Rs. 90,000. The manner in which the search of his premises and the luggage of his guests was conducted was also objected to. It was asserted that no house-holder was expected to keep vouchers or to maintain exact record of the purchase of various household effects, which were not liable to wealth-tax. Out of the total cash amount of Rs, 40,070 found in his possession, Rs. 26,000 had been entrusted to him by a client for effecting a compromise in a civil case. The balance of Rs. 14,070 consisted of his savings out of the current year's income till October 16, 1974, including the cash in hand of Rs. 8,268 at the end of the earlier assessment year. It was also pointed out that up to the date of the search, the petitioner had received over a lakh of rupees as his fees but the exact figure could not be indicated because the relevant registers had been taken into possession by respondent No. 3 at the time of the search. About the jewellery and the silver utensils, it was submitted that these items constituted stridhan of Mrs. Sibal and had been given to her at the time of her marriage by her parents and parents-in-law. Some explanation about the timber and electric fittings and other articles was also given. Towards the end, it was stated that since the acquisition of all the assets had been duly explained, the sum of Rs. 10,000 seized from his possession might be refunded or adjusted against the next instalment of advance tax payable by his client.\n\n12. On January 6, 1975, Shri Brij Mohan Khanna, advocate of the petitioner, addressed another letter (annexure \"P-10\") to the Income-tax Officer, in which it was stated that since the department had not asked for further clarifications, it was presumed that they were satisfied with the reply. It was further averred that if any inference adverse to the interests of the petitioner was to be drawn on the basis of the information supplied by him and the statement made by him, the same may be brought to his notice so that he may be able to satisfy the authorities by adducing evidence, if necessary. The learned counsel also demanded a reasonable opportunity of being heard and reserved his right to challenge the legality of the search and seizure in question.\n\n13. On the following day, the learned counsel addressed another letter (annexure \"P-11\") to respondent No. 1 drawing his attention to the fact that an order under Section 132(5) of the Act had to be passed with his approval. It was prayed that before according approval to such an order, the petitioner should be afforded an opportunity to rebut the evidence on the basis of which the approval, if any, was to be given.\n\n14. On January 9, 1975, the petitioner's counsel wrote still another letter (annexure \"P-12\") to the Income-tax Officer regretting the non-supply of\n\n\nthe material on the basis of which action was going to be taken against the petitioner. The request for the supply of this material was reiterated and it was mentioned that \"if it is not supplied immediately and a reasonable opportunity is not given to the petitioner to defend himself, he will presume that the department has no material and any order sought to be passed in the circumstances would be arbitrary.\"\n\n15. On January 9, 1975, the petitioner filed affidavits of Shri Kapil Sibal and Shri Baikunth Lal explaining some points.\n\n16. On January 13, 1975, the petitioner filed the instant petition questioning the legality of the impugned search and seizure with an interim prayer that the respondents be restrained from taking further proceedings in the matter. The petition came up before my Lord the Chief Justice and M. L. Verma J. on the same day when notice of motion was issued for January 20, 1975, at about 2 p.m. It was also ordered that no order be passed under Section 132(5) of the Act and the operation of any order already passed but not by then communicated to the petitioner be also stayed.\n\n17. Civil Miscellaneous Petition No. 157 of 1975 filed by the petitioner shows that Shri S. C. Sibal, advocate, noted down the order passed by the Motion Bench and showed this order and the copy of the petition to respondents Nos. 2 and 4 some time thereafter. After Shri S. C. Sibal had returned to the High Court, a peon of the office of the Income-tax Officer approached the petitioner with a duplicate notice issued by the said officer asking him to produce his witnesses on January 14, 1975, at 10 a.m. in her office. The petitioner kept one copy of the notice and made an endorsement on the other copy that this court had stayed further proceedings in the matter. On the following day, a news item appeared in the Daily Tribune to the effect that this court had stayed further proceedings in the matter. On January 17, 1975, the petitioner received a registered envelope from the office of respondent No. 4, which appeared to have been despatched from Patiala. The envelope contained an order passed by respondent No. 4 on January 14, 1975, at Camp Patiala with the approval of respondent No. 1. It was prayed that since this order had been passed in disregard of the injunction issued by this court, the same should be quashed. In support of the allegations made in this civil miscellaneous petition, the petitioner filed his own affidavit and an affidavit sworn by Shri S. C, Sibal, advocate.\n\n18. This petition and the main case came up for hearing before my Lord the Chief Justice and Verma J. on January 20, 1975. On that day, the learned counsel for the respondents fairly and frankly conceded that in view of the facts disclosed in the affidavits of the petitioner and Shri\nS. C. Sibal, advocate, the order might be annulled. The Bench ordered \n\n\naccordingly. The Bench also made some observations about the departmental files and allowed the learned counsel for the petitioner to inspect the record. At the instance of Mr. Awasthy, the learned counsel for the respondents, it was clarified that the stay order issued by the Motion Bench would continue to operate till the final disposal of the petition. The main case was admitted to a regular hearing.\n\n19. An affidavit sworn by Shri Gurdial Singh Mann has also been filed in support of the petition. In this affidavit, it has been mentioned that he was posted as an Additional District Magistrate in 1952 at Simla when he came to know the petitioner. He and his wife had social relations with the petitioner and his family. Before this occasion, he never stayed with the petitioner. On October 14, 1974, he and his wife called on Mr. Sibal who insisted that they should stay with him. Since his father was lying seriously ill in the P. G. I., Chandigarh, he and his wife had been staying in. the M.L.A. Hostel, Haryana, Chandigarh, from 2/3 October, 1974, up to October 11, 1974. He denied to have ever had any financial dealings with the petitioner in his whole life. According to him, his luggage and the luggage of his wife had been searched because they happened to be staying at the petitioner's residence. Further, the search party did not allow the petitioner to attend to his work in the High Court nor did it allow the petitioner's wife to go to the airport. With great reluctance, the search party allowed the car belonging to the petitioner to leave the premises along with the driver for the airport. He himself wanted to see Shri R. S. Talwar, Chief Secretary to the Government of Punjab, but he was not allowed to leave the premises by the Income-tax Officer. When respondent No. 3 wanted to search his luggage, he told him that the same could not be searched without a proper warrant. He pressed into service his own experience as a judicial officer and objected to the search being made of his luggage. According to him, the petitioner also submitted that it was highly improper to search the luggage of his guests. Upon this, respondent No, 3 rang up his superior officer and told him that the guests of the petitioner objected to their luggage being searched. Upon this, the superior officer asked respondent No, 3 to tell him the name of the guest so that the warrant authorising the search of his luggage might be issued. Respondent No, 3 then asked his full name and conveyed it on telephone to the superior officer. Within about half an hour, a warrant of search against him was also received but the actual search was started after lunch. He has also asserted that there could possibly be no information against him with respondent No. 1 justifying the issuance of the search warrant.\n\n20. Respondent No. 4 filed the main return to the petition on February 11, 1975. It was denied that the petitioner was disallowed to leave the premises. He was only requested to be present at the time of the search\n\n\nand he agreed to the request. It was also denied that the wife of the petitioner was disallowed to receive her son at the airport. It is further submitted that the car of the petitioner was allowed to go to the airport to bring his son. The placing of unnecessary restrictions on the movements of Shri Mann were also denied. It was further averred that since the room occupied by Mrs. and Mr. Mann was a part of the house of the petitioner, the luggage placed in that room had also to be checked up. In spite of the aggressive attitude of Mr. Mann, no insult was meted out to him or to his wife. Regarding the search warrant issued against Shri Mann, it is submitted that respondent No. 1 did have information that Shri Mann was staying with the petitioner. The, information was further to the effect \"that there was a close inter-connection between the petitioner and Shri Mann\". The remaining pleas on this point may be reproduced as under:\n\n\"The Commissioner was, therefore, satisfied that in case Shri Mann was still there with the petitioner he would have to be included in the search operations. But a warrant of authorisation against him could not be given to the authorised officer inasmach as had Shri Mann left the premises before the date of the search, there would have been an unnecessary and premature disclosure of the fact that his search was also contemplated. However, to meet the eventuality, a signed warrant of authorisation was placed with respondent No. 2 who was in overall charge of the search operations in Chandigarh with authority from respondent No. 1 to use against Shri Mann, if necessity arose.\n\nIt so happened that when the authorised officer started searching the room occupied by Shri Mann and his wife they objected to the search. Since Mann was behaving in a very aggressive manner, the authorised officer rang up respondent No. 2 and acquainted him with the situation. Respondent No. 2 thereupon advised the authorised officer to wait for the warrant of authorisation before proceeding with the search of the luggage of Mr. and Mrs. Gurdial Singh Mann. The warrant of authorisation was then sent to the authorised officer who completed the search accordingly.\n\nSince the warrant of authorisation was. filled in under the clear authority of respondent No. 1 and prior to giving this authority, respondent No. 1 had duly recorded his reasons about Shri Gurdial Singh Mann as well, there could be no objection in blank warrant of authorisation duly signed by respondent No. 1 being placed at the disposal of respondent No. 2 to be utilized under certain contingency. As submitted above, the name of Shri Mann was not filled up originally for reasons of secrecy. The allegations in the paragraph under reply that respondent No. 1 could have nothing against Shri Gurdial Singh Mann \"is denied as incorrect. In any case since no action has been taken against Shri Gurdial Singh Mann and he has\n\n\nnothing to do with this writ petition, the contents of the paragraph under reply are wholly irrelevant so far as the disposal of this writ petition is concerned.\"\n\n21. In paragraph 26 of the written statement it has been specifically stated that proceedings under Section 132 were initiated by Shri M. K. Dhar.\n\n22. The plea of the petitioner in paragraph 13 that respondent No. 1 had issued the impugned warrant without any basis has been controverted in the following terms:\n\n\"It is incorrect to say that the issuing of the warrant of authorisation against the petitioner was in furtherance of what is mentioned as ' a matter of policy'. In fact, information was received by respondent No. 1 that the petitioner had not been disclosing his correct income for the purposes of the Income-tax Act. It was further reported that the petitioner possessed undisclosed assets and thus was systematically evading payment of tax. He was following a systematic course whereby his wealth was considerably understated. It was also reported that the petitioner had in his possession money, bullion, jewellery and other valuable articles and things which represented income or property which were not disclosed for the purposes of the Income-tax Act.\n\nFor some time past tax evasion by business-community and professionals like doctors, advocates, etc., has been engaging the attention of the department. A close watch was being kept regarding the business activities and professional income and the returns made and assessments finalised in the past. A careful analysis of this information was duly processed in the intelligence wing in the office of respondent No. 1. Material was collected and facts were sifted. Thereafter, the matter was discussed with the various high functionaries working at various places in the charge of respondent No. 1. After carefully going into the matter, respondent No. 1 was satisfied that immediate action was necessary in the case of some of the members of the business community and the various professionals including the petitioner. Respondent No. 1 was satisfied that considering the business affairs of the petitioner he was in possession of accounts and papers which he would not produce before the income-tax authorities, if called upon to do so in the normal way. That is how the warrant of authorisation came to be issued by respondent No. 1 after duly recording his reasons therefor,\"\n\n23. Paragraph No. 12 of the petition in which it is asserted that the sum of Rs. 10,000 was seized under orders of respondent No. 2 has been replied to in the following terms ;\n \"That paragraph 12 of the petition is admitted. As already submitted above, respondent No. 2 was in overall charge of the search operations at Chandigarh. In this connection he went round the various premises\n\n\nwhere these searches were going on to resolve any difficulty which might be faced by the authorised officers at different places. It is, however, not correct that any item was seized at his instance or under his instructions. Throughout the search and while deciding what to seize and what not to seize, the authorised officer exercised his own judgment in the light of the departmental instructions on the point. These instructions were nothing but what is embodied in the Act and the Rules made thereunder.\"\n\n24. It was also asserted that the action of the Commissioner under Section 132 of the Act was an administrative action which was not open to detailed judicial scrutiny or review. In paragraph No. 19 of the return, it has been stated that the proceedings were started against the petitioner by the predecessor of respondent No. 1. It has also been asserted that the petitioner was afforded full opportunity to prove his case but he failed to adduce any satisfactory evidence explaining the nature of his possession and the sources of his acquisition of the various goods found in his residential house. Furthermore, the proceedings under Section 132(5) of the Act being time-bound proceedings, the petitioner was himself trying to prolong them so as to make it impossible for respondent No. 1 to finish them in time.\n\n25. It was admitted that the premises of the lawyers were searched at various places on the same day but it was also asserted that on this ground alone the searches could not be held to be indiscriminate.\n\n26. The affidavit sworn by respondent No. 1 gives the following account of the circumstances under which the luggage of Shri Gurdial Singh Mann was searched :\n\n\"However, at the time of recording his reasons for the search of the premises of the petitioner, the deponent had information that Shri Gurdial Singh Mann was staying with the petitioner. The information was further to the effect that there was a close inter-connection between the petitioner and Shri Mann. The Commissioner was, therefore, satisfied that in case Shri Mann was still there with the petitioner he would have to be included in the search operations. But a warrant of authorisation against him could not be given to the authorised officer inasmuch as had Shri Mann left the premises before the date of the search, there would have been an unnecessary and premature disclosure of the fact that his search was also contemplated. However, to meet the eventuality a signed warrant of authorisation was placed with respondent No. 2 who was in overall charge of the search operations in Chandigarh with authority from respondent No. 1 (deponent) to use against Shri Mann, if necessity arose.\n\nIt so happened that when the authorised officer started searching the room occupied by Shri Mann and his wife they objected to the search. Since, as already submitted in the written statement in para. 6, Shri\n\n\nMann was behaving in a very aggressive manner, the authorised officer rang up respondent No. 2 and acquainted him with the situation. Respondent No. 2 thereupon advised the authorised officer to wait for the warrant of authorisation before proceeding with the search of the luggage of Mr. and Mrs. Gurdial Singh Mann. The warrant of authorisation was then sent to the authorised officer who completed the search accordingly.\n\nSince the warrant of authorisation was filled in under the clear authority of the deponent and prior to giving this authority, the deponent had duly recorded his reasons about Shri Gurdial Singh Mann as well, there could be no objection in blank warrant of authorisation duly signed by the deponent being placed at the disposal of respondent No. 2 to be utilized under certain contingency. As submitted above, the name of Shri Mann was not filled up originally for reasons of secrecy. The allegation in the para, under reply that the deponent could have nothing against Shri Gurdial Singh Mann is denied as incorrect. In any case since no action has been taken against Shri Gurdial Singh Mann and he has nothing to do with this writ petition the contents of the para, under reply are wholly irrelevant so far as the disposal of this writ petition is concerned.\"\n\n27. The issuance of the search warrants against the petitioner pursuant to some matter of policy was denied and it was stated :\n\n\"In fact, information was received by the deponent that the petitioner had not been disclosing his correct income for the purpose of the Income-tax Act. It was further reported that the petitioner possessed undisclosed assets and thus was .systematically evading payment of tax. He was following a systematic course whereby his wealth was considerably understated. It was also reported that the petitioner had in his possession money, bullion, jewellery and other valuable articles and things which represented income or property which were not disclosed for the purpose of the Income-tax Act.\n\nFor some time past tax evasion by business community and professionals like doctors, advocates, etc., has been engaging the attention of the department. A close watch was being kept regarding the business activities and professional income and the returns made and assessments finalised in the past. A careful analysis of this information was duly processed in the intelligence wing in the office of the deponent. Material was collected and facts were sifted. Thereafter, the matter was discussed with the various high functionaries working at various places in the charge of the deponent. After carefully going into the matter, the deponent was satisfied that immediate action was necessary in the case of some of the members of the business community and the various professionals including the petitioner. The deponent was satisfied that considering the business affairs of the petitioner he was in possession of accounts and\n\n\npapers which he would not produce before the income-tax authorities, if called upon to do so in the normal way. That is how the warrant of authorisation came to be issued by the deponent after duly recording his reasons therefor.\"\n\n28. It was further asserted that no assessee was entitled to the disclosure of information or the sources of information on the basis of which action under Section 132 of the Act is taken.\n\n29. The petitioner filed replication to the reply-affidavits filed on behalf of respondents Nos. I and 4 and reiterated with some clarifications the stand taken in the writ petition.\n\n30. Immediately before the commencement of the hearing of the case, an affidavit sworn by respondent No. 3, Shri R. K. Bali, was filed in court. In this affidavit, it was stated that, respondent No. 4 visited the house-cum-office of the petitioner on October 17, 1974, under a warrant of authorisation signed by respondent No. 1 sanctioning the search of the premises of the petitioner. When he intended to make a search of the room occupied by Shri Gurdial Singh Mann and his wife, Shri Mann took a great deal of offence. The petitioner also expressed his strong feelings on the subject and wanted him to leave out Shri Mann and his belongings from the search, Considering the strong objections raised by the petitioner and Shri Mann, he thought it better to get instructions from respondent No. 2 ; when contacted on telephone respondent No. 2 enquired from him as to who the guest was. On his reply that it was Shri Gurdial Singh Mann, respondent No, 2, so far as he recollected, said, \"Oh, is it him. Now wait. I have got a warrant of authorisation against him which I am sending straightaway\". Further proceedings regarding search were held up by him till the messenger sent by respondent No. 2 brought the warrant, after the receipt of which the luggage of Shri Mann was searched and some documentary evidence of some information regarding the financial transactions made by Shri Mann and his wife regarding movable and immovable properties at various places, including their investments in fiats at the Nehru Place at New Delhi was recovered and seized under a separate panchnama.\n\n31. In the course of arguments, one question of fact cropped up whether Shri Gurdial Singh Mann was actually residing in the house of the petitioner on October 7 and 8, 1974. The record of the Commissioner of Income-tax reveals that information was conveyed to him on October 7, 1974, that Shri Gurdial Singh Mann was living as a guest with the petitioner. A reference has already been made to the affidavit of Shri Mann in which he had affirmed that he never lived in the house of the petitioner prior to October 14, 1974, and as a matter of fact he had been living in the M.L.As.' Hostel (Haryana) with effect from October 2 to October 11, 1974. Shri G.S. Mann is stated to have some links and connections with\n\n\nthe petitioner. We were of the view that if Shri Mann had not been living with the petitioner on October 7 and 8, 1974, the relevant entries in the file of the Commissioner of Income-tax about this point would have to be looked upon with a certain amount of suspicion. The learned counsel for the petitioner also brought to our notice a photostat copy of the relevant entry in the register, exhibit CW-I, maintained at the M.L.As.' Hostel (Haryana). In view of the importance of the question involved, we summoned Shri H.R. Minhas, guide-cum-clerk, Haryana Tourist Department, with the relevant register and recorded his statement. At the request of the learned counsel for the petitioner, we also examined Shri Mahant Ram, Watchman of the Hostel, and Shri Hardwari Lal, M.L.A., with whose good offices Shri Mann was permitted to occupy a room in the said hostel. A reference to this evidence will be made at the appropriate stage.\n\n32. On behalf of the respondents, a claim for privilege in respect of two files marked by us as I and II was made, which was turned down by us by means of a separate order. Mr. Awasthy was pointedly asked by us to address additional arguments, if any, on the assumption that the claim for privilege had been disallowed, but he had nothing to add.\n\n33. To sum up, the case of the petitioner is that as a successful advocate, he had been paying a large amount as income-tax every year. His returns were never doubted by the income-tax department nor did he ever decline to produce any document when called upon to do so. Neither there was nor there could possibly be any information with the Commissioner for initiating proceedings under Section 132 of the Act. The Commissioner did not apply his mind to the facts of the case and issued the search warrant as a matter of policy. The authorised officer was in fact satisfied that he had no concealed income, but he seized Rs. 10,000 at the behest of respondent No. 2. This is obvious from the fact that no question about this matter was put to him by the authorised officer. The enquiry under Section 132(5) of the Act was also vitiated because-\n\n(i) the same was conducted with regard to seized and unseized assets;\n\n(ii) no proper opportunity was granted to him by the Income-tax Officer, which was his due, and\n \n\n(ii) he was pre-determined to pass the order in violation of the stay order granted by this court by going to the extent of changing the official record.\n\n34. The case of the respondents is that the Commissioner acted on proper information and it was open to him to take into consideration the old income-tax returns filed by the petitioner. It is not open to this court to go into the question whether the Commissioner could or could not form the\n\n\nrequisite opinion so long as there was some information before him for ordering action under Section 132 of the Act. It is also asserted that the record depicted the correct picture and no part of it was altered or forged.\n\n35. In order to appreciate the points of law involved, it becomes necessary to notice the following portions of Section 132 of the Act :\n\n\"132. (1) Where the Director of Inspection or the Commissioner, in consequence of information in his possession, has reason to belive that-\n\n(a) any person to whom a summons under Sub-section (1) of Section 37 of the Indian Income-tax Act, 1922, or under Sub-section (1) of Section 132 of this Act, or a notice under Sub-section (4) of Section 22 of the Indian Income-tax Act, 1922, or under Sub-section (1) of Section 132 of this Act was issued to produce, or cause to be produced, any books of account or other documents has omitted or failed to produce, or cause to be produced, such books of account or other documents as required by such summons or notice, or\n \n\n(b) any person to whom a summons or notice as aforesaid has been or might be issued will not, or would not, produce or cause to be produced, any books of account or other documents which will be useful for, or relevant to, any proceeding under the Indian Income-tax Act, 1922, or under this Act, or\n \n\n(c) any person is in possession of any money, bullion, jewellery or\nother valuable article or thing and such money, bullion, jewellery or other\nvaluable article or thing represents either wholly or partly income or property which has not been disclosed for the purposes of the Indian Income-\ntax Act, 1922, or this Act (hereinafter in this section referred to as the\nundisclosed income or property), \n \n\nhe may authorise any Deputy Director of Inspection, Inspecting Assistant Commissioner, Assistant Director of Inspection or Income-tax Officer (hereinafter referred to as the authorised officer) to-\n\n(i) enter and search any building or place where he has reason to suspect that such books of account, other documents, money, bullion, jewellery or other valuable article or thing are kept;\n\n(ii) break open the lock of any door, box, locker, safe, almirah or other receptacle for exercising the powers conferred by Clause (i) where the keys thereof are not available;\n\n(iii) seize any such books of account, other documents, money, bullion, jewellery or other valuable article or thing found as a result of such search;\n\n(iv) place marks of identification on any books of account or other documents or make or cause to be made extracts or copies therefrom; \n\n(v) make a note or an inventory of any such money, bullion, jewellery or other valuable article or thing. ......\n\n(4) The authorised officer may, during the course of the search or seizure, examine on oath any person who is found to be in possession or control of any books of account, documents, money, bullion, jewellery or other valuable article or thing and any statement made by such person during such examination may thereafter be used in evidence in any proceeding under the Indian Income-tax Act, 1922, or under this Act.\n\n(5) Where any money, bullion, jewellery or other valuable article or thing (hereinafter in this section and Section 132A referred to as the assets) is seized under Sub-section (1), the Income-tax Officer, after affording a reasonable opportunity to the person concerned for being heard and making such enquiry as may be prescribed, shall, within ninety days of the seizure, make an order, with the previous approval of the Commissioner,--\n\n(i) estimating the undisclosed income (including the income from the undisclosed property) in a summary manner to the best of his judgment on the basis of such materials as are available with him ;\n\n(ii) calculating the amount of tax on the income so estimated in accordance with the provisions of the Indian Income-tax Act, 1922, or this Act;\n\n(iii) specifying the amount that will be required to satisfy any existing liability under this Act and any one or more of the Acts specified in Clause (a) of Sub-section (1) of Section 230A in respect of which such person is in default or is deemed to be in default,\n \n\nand retain in his custody such assets or part thereof as are in his opinion sufficient to satisfy the aggregate of the amounts referred to in Clauses (ii) and (iii) and forthwith release the remaining portion, if any, of the assets to the person from whose custody they were seized :\n\nProvided that if, after taking into account the materials available with him, the Income-tax Officer is of the view that it is not possible to ascertain to which particular previous year or years such income or any part thereof relates, he may calculate the tax on such income or part, as the case may be, as if such income or part were the total income chargeable to tax at the rates in force in the financial year in which the assets were seized \nProvided further that where a person has paid or made satisfactory arrangements for payment of all the amounts referred in Clauses (ii) and (iii) or any part thereof, the Income-tax Officer may, with the previous approval of the Commissioner, release the assets or such part thereof as he may deem fit in the circumstances of the case. ......\n\n(13) The provisions of the Code of Criminal Procedure, 1898 (5 of 1898), relating to searches and seizure shall apply, so far as may be, to searches and seizure under sub-section (1)\"\n\n36. The Scheme of Section 132(1) shows that--\n\n(1) the Commissioner of Income-tax must have some information;\n\n(2) the information should be relevant to the requisite belief of the Income-tax Commissioner; and\n \n\n(3) this belief should be entertained for a statutory purpose mentioned in Sub-section (1), Clause (a), (b) or (c) of Section 132.\n\n37. The word \"information\" has been denned in the Shorter Oxford Dictionary as \"that of which one is apprised or told\". The word \"reason\" has been denned as \"a statement of fact employed as an argument to justify or condemn some act\". On the other hand, the word \"conclusion\" is denned as \"a judgment arrived at by reasoning; an inference ; deduction, etc.\". In other words, when the information received or the basic facts are harnessed in support of an argument, the resultant effect assumes the shape of a reason and when a number of reasons are considered in relation to each other, the final result of this consideration assumes the shape of a conclusion. A necessary concomitant of this approach is that the facts constituting the information must be relevant to the enquiry. They must be such from which a reasonable and prudent man can come to the requisite belief or conclusion. If either of the afore-mentioned elements is missing, the action of the authority shall be regarded as lying outside the ambit and scope of the Act. Such an action would be liable to be struck down on the basis of what is commonly known as \"legal malice\".\n\n38. Because of the applicability of Section 165, Criminal Procedure Code, to the searches and seizures by virtue of Sub-section (13) of Section 132 of the Act, the taxpayer has been provided with important safeguards against arbitrary action. These safeguards, according to the observations made by their Lordships of the Supreme Court in Commissioner of Commercial Taxes v. Ramkishan Shrikishan Jhaver [1967] 66 ITR 664, 678 (SC), are :\n\n\"(i) The empowered officer must have reasonable grounds for believing that anything necessary for the purpose of recovery of tax may be found in any place within his jurisdiction,\n \n\n(ii) He must be of the opinion that such thing cannot be otherwise got without undue delay,\n \n\n(iii) He must record in writing the grounds of his belief, and\n \n\n(iv) He must specify in such writing so far as possible the thing for which search is to be made. After he has done these things, he can make the search. These safeguards, which in our opinion apply to searches under Sub-section (2), also clearly show that the power to search under Sub-section (2) is not arbitrary.\"\n\n39. Even if the above matters are not expressly mentioned in Section 132(1) of the Act, they have assumed statutory character by the force of Sub-section (13) of the same section. The important words of Section 165, Code of Criminal Procedure, are \"such officer may after recording in writing the grounds of his belief and specifying in such writing so far as possible the thing for which search is to be made\". Consequently, it cannot be argued with any justification that the statute does not require the Commissioner of Income-tax to record his grounds of the requisite belief. It is needless to point out that Section 165, Code of Criminal Procedure, does not authorise a general search on the off chance that something might be found. See in this connection Divakar Singh v. A. Ramamurthi Naidu AIR 1919 Mad 751 and Paresh Chandra Sen Gupta v. Jogendra Nath Roy Chowdhury AIR 1927 Cal 93.\n\n40. In Pooran Mal v. Director of Inspection (Investigation) Income-tax, New Delhi [1974] 93 ITR 505, 518 (SC), while repelling the attack against the constitutional validity of Section 132 of the Act, the court observed as under :\n \"We are, therefore, to see what are the inbuilt safeguards in Section 132 of the Income-tax Act. In the first place, it must be noted that the power to order search and seizure is vested in the highest officers of the department. Secondly, the exercise of this power can only follow a reasonable belief entertained by such officer that any of the three conditions mentioned in Section 132(1) (a), (b) and (c) exists. In this connection it may be further pointed out that under Sub-rule (2) of Rule 112, the Director of Inspection or the Commissioner, as the case may be, has to record his reasons before the authorisation is issued to the officers mentioned in Sub-section (1), Thirdly, the authorisation for the search cannot be in favour of any officer below the rank of an Income-tax Officer. Fourthly, the authorisation is for specific purposes enumerated in (i) to (v) in Sub-section (1), all of which are strictly limited to the object of the search. Fifthly, when money, bullion, etc., is seized the Income-tax Officer is to make a summary enquiry with a view to determine how much of what is seized will be retained by him to cover the estimated tax liability and how much will have to be returned forthwith. The object of the enquiry under Sub-section (5) is to reduce the inconvenience to the assessee as much as possible so that within a reasonable time what is estimated due to the Government may be retained and what should be returned to the assessee may be immediately returned to him. Even with regard to the books of account and documents seized, their return is guaranteed after a reasonable time. In the meantime the person from whose custody they are seized is permitted to make copies and take extracts. Sixthly, where money, bullion, etc., is seized, it can also be immediately returned to the person concerned after he makes appropriate provision for the payment of the estimated tax dues under Sub-section (5), and, lastly, and this is most important, the provisions of the Criminal Procedure Code relating to search and seizure apply, as far as they may be, to all searches and seizures under Section 132. Rule 112 provides for the actual search and seizure being made after observing normal decencies of behaviour. The person in charge of the premises searched is immediately given a copy of the list of articles seized. One copy is forwarded to the authorising officer. Provision for the safe custody of the articles after seizure is also made in Rule 112. In our opinion, the safeguards are adequate to render the provisions of search and seizure as less onerous and restrictive as is possible under the circumstances. The provisions, therefore, relating to search and seizure in Section 132 and Rule 112 cannot be regarded as violative of Article 19(1) (f) and (g).\"\n\n41. It was further observed that the measure would be objectionable if its implementation is not accompanied by safeguards against its undue and improper exercise. In case the safeguards were on the lines adopted by the Criminal Procedure Code, they were to be regarded as adequate.\n\n42. When the revenue defends the validity of a taxing statute on the basis of the safeguards accepted as adequate by the highest court of the land, then it is bound to provide all these safeguards in their letter and spirit to those against whom action is taken under that statute. Any departure from this principle would be regarded as fraudulent exercise of power by the revenue for, nobody, including the revenue, can be allowed to approbate and reprobate or to take different stands about the interpretation of a statute according to the exigencies of the occasion.\n\n43. In Income-tax Officer, Special Investigation Circle B, Meerut v. Seth Brothers, [1969] 74 ITR 836, 843 (SC) while interpreting Section 132 of the Act, the court observed as under :\n \"The section does not confer any arbitrary authority upon the revenue officers. The Commissioner or the Director of Inspection must have, in consequence of information, reason to believe that the statutory conditions for the exercise of the power to order search exist. He must record reasons for the belief and he must issue an authorisation in favour of a designated officer to search the premises and exercise the powers set out therein. The condition for entry into and making search of any building or place is the reason to believe that any books of account or other documents which will be useful for, or relevant to, any proceeding under the Act may be found. If the officer has reason to believe that any books of account or other documents would be useful for, or relevant to, any proceedings under the Act, he is authorised by law to seize those books of account or other documents, and to place marks of identification therein, to make extracts or copies therefrom and also to make a note or an inventory of any articles or other things found in the course of the search. Since by the\n\nexercise of the power a serious invasion is made upon the rights, privacy and freedom of the taxpayer, the power must be exercised strictly in accordance with the law and only for the purposes for which the law authorises it to be exercised. If the action of the officer issuing the authorisation or of the designated officer is challenged, the officer concerned must satisfy the court about the regularity of his action. If the action is maliciously taken or power under the section is exercised for a collateral purpose, it is liable to be struck down by the court. If the conditions for exercise of the power are not satisfied the proceeding is liable to be quashed. But where power is exercised bona fide, and in furtherance of the statutory duties of the tax officers any error of judgment on the part of the officers will not vitiate the exercise of the power. Whether the Commissioner entertains the requisite belief and for reasons recorded by him authorises a designated officer to enter and search premises for books of account and documents relevant to or useful for any proceeding under the Act, the court in a petition by an aggrieved person cannot be asked to substitute its own opinion whether an order authorising search should have been issued. Again, any irregularity in the course of entry, search and seizure committed by the officer acting in pursuance of the authorisation will not be sufficient to vitiate the action taken, provided the officer has in executing the authorisation acted bona fide.\"\n\n44. In N. K. Textile Mills v. Commissioner of Income-tax [1966] 62 ITR 58 (Punj), a Division Bench of this court while interpreting the words \"reason to believe\" occurring in Section 132(1) of the Act observed that the belief must be held in good faith. The existence of the belief and the reasons for the belief will be justiciable. Further, such belief should not be based on some suspicion. It must be based on information.\n\n45. In Balwant Singh v. R. D. Shah, Director of Inspection, Income-tax. New Delhi [1969] 71 ITR 550 (Delhi), a Division Bench of the Delhi High Court held that before the Commissioner acts under Section 132(1) of the Act, he must be reasonably satisfied that it is necessary to take the action contemplated by that section. If the grounds on which the belief is founded are non-existent or are irrelevant, or are such on which no reasonable man can come to that belief, the exercise of the power would be bad. It was further held that two officers at two different stages had to apply their minds. Firstly, the Commissioner of Income-tax when authorising an officer to search, his application of mind extends to two matters-\n\n(a) that the person concerned will not produce the books of account, and\n \n\n(b) that such books would be useful for, or relevant to, any proceeding under the Act.\n\n46. Secondly, the authorised officer would apply his mind at the time of the seizure of the books about the relevance and usefulness of these books in any proceedings. He cannot grab at the articles which would not be relevant or useful to any proceeding. The same cosiderations would apply in respect of undisclosed wealth.\n\n47. In Commissioner of Income-tax v. Ramesh Chander [1974] 93 ITR 450, 464 (Punj), another Division Bench of this court followed with approval the following passage appearing in a Division Bench judgment of the Gujarat High Court in Ramjibhai Kalidas v. I. G. Desai, Income-tax Officer [1971] 80 ITR 721, 728 (Guj):\n \"'It is apparent that search and seizure can be effected by an officer under Sub-section (1)(c)(iii) only if he is authorised to do so by the Director of Inspection or the Commissioner, and the Director of Inspection or the Commissioner can authorise search and seizre only if he has in consequence of information in his possession reason to believe that any person is in possession of money, bullion, jewellery or other valuable article or thing which represents undisclosed income or property. The condition precedent to the exercise of the power to issue authorisation for search and seizure is that the Director of Inspection or the Commissioner must have the requisite reason to believe in consequence of information in his possession. The power to authorise search and seizure is hedged in by the requirement of this condition precedent and it is only if this condition is fulfilled that the power can be exercised. Of course, it is for the Director of Inspection or the Commissioner to be satisfied that there is reason to believe and the court cannot sit in appeal over the decision of the Director of Inspection or the Commissioner regarding the existence of the reason to believe nor can the court examine the adequacy of the grounds on which the reason to believe entertained by such officer is based. But there is a limited area within which the reason to believe entertained by the Director of Inspection or the Commissioner can be scrutinised by the court. This area now stands clearly demarcated by several decisions of the Supreme Court and its extent and limit are no longer open to doubt or controversy.'\"\n\n48. This matter is now firmly established that the condition precedent to the exercise of power of issue of authorisation is that the Commissioner of Income-tax must have the requisite reasons to believe in consequence of some information in his possession. He must arrive at this decision in an honest manner. If the conclusions are arrived at on the basis of no evidence or irrelevant evidence, the action taken would be struck down by the court.\n\n49. Section 34 of the Indian Income-tax Act, 1922, and Section 147 of the\nAct lay down that if an Income-tax Officer has in consequence of the information in his possession reason to believe that income chargeable to tax has escaped assessment, he may, subject to the provisions of sections 148 to 153 of the Act, assess or reassess such escaped income.\n\n50. In Sheo Nath Singh v. Appellate Assistant Commissioner of Income-tax, [1971] 82 ITR 147, 153 (SC) the court, while discussing the scope of Section 34 of the Indian Income-tax Act, 1922, observed:\n \"In our judgment, the law laid down by this court in the above case is fully applicable to the facts of the present case. There can be no manner of doubt that the words 'reason to believe' suggest that the belief must be that of an honest and reasonable person based upon reasonable grounds and that the Income-tax Officer may act on direct or circumstantial evidence but not on mere suspicion, gossip or rumor. The Income-tax Officer would be acting without jurisdiction if the reason for his belief that the conditions are satisfied does not exist or is not material or relevant to the belief required by the section. The court can always examine this aspect though the declaration or sufficiency of the reasons for the belief cannot be investigated by the court.\"\n\n51. In Chhugamal Rajpal v. 5. P. Chaliha [1971] 79 ITR 603, 607, 608 (SC), a notice issued to an assessee under Section 148 read with Section 151(2) of the Act was quashed with these observations :\n \"In his report the Income-tax Officer does not set out any reason for coming to the conclusion that this is a fit case to issue notice under Section 148. The material that he had before him for issuing notice under Section 148 is not mentioned in the report. In his report he vaguely refers to certain communications received by him from the Commissioner of Income-tax, Bihar and Orissa. He does not mention the facts contained in those communications. All that he says is that from those communications 'it appears that these persons (alleged creditors) are name-lenders and the transactions are bogus'. He has not even come to a prima facie conclusion that the transactions to which he referred are not genuine transactions. He appears to have had only a vague feeling that they may be bogus transactions. Such a conclusion does not fulfil the requirements of section 151(2). What that provision requires is that he must give reasons for issuing a notice under Section 148. In other words he must have some prima facie grounds before him for taking action under Section 148.......We are not satisfied that the Income-tax Officer had any\nmaterial before him which could satisfy the requirements of either Clause (a)\nor Clause (b) of Section 147. Therefore, he could not have issued a notice\nunder Section 148. Further, the report submitted by him under Section 151(2)\ndoes not mention any reason for coming to the conclusion that it is a fit\ncase for the issue of a notice under Section 148. We are also of the opinion\nthat the Commissioner has mechanically accorded permission. He did not\n \nhimself record that he was satisfied that this was a fit case for the issue of a notice under Section 148. To question No. 8 in the report which reads 'Whether the Commissioner is satisfied that it is a fit case for the issue of notice under Section 148', he just noted the word 'yes' and affixed his signature thereunder. We are of the opinion that if only he had read the report carefully, he could never have come to the conclusion on the material before him that this is a fit case to issue notice under Section 148. The important safeguards provided in sections 147 and 151 were lightly treated by the Income-tax Officer as well as by the Commissioner. Both of them appear to have taken the duty imposed on them under these provisions as of little importance, They have substituted the form for the substance.\"\n\n52. In S. Narayanappa v. Commissioner of Income-tax, [1967] 63 ITR 219, 221 (SC). it was held:\n \"In our opinion, there is no substance in any one of these arguments. It is true that two conditions must be satisfied in order to confer jurisdiction on the Income-tax Officer to issue the notice under Section 34 in respect of assessments beyond the period of four years, but within a period of eight years, from the end of the relevant year. The first condition is that the Income-tax Officer must have reason to believe that the income, profits or gains chargeable to income-tax had been under-assessed. The second condition is that he must have reason to believe that such 'underassessment' had occurred by reason of either, (i) omission or failure on the part of an assessee to make a return of his income under Section 22, or (ii) omission or failure on the part of the assessee to disclose fully and truly all the material facts necessary for his assessment for that year. Both these conditions are conditions precedent to be satisfied before the Income-tax Officer acquires jurisdiction to issue a notice under the section. But the legal position is that if there are in fact some reasonable grounds for the Income-tax Officer to believe that there had been any non-disclosure as regards any fact, which could have a material bearing on the question of under-assessment, that would be sufficient to give jurisdiction to the Income-tax Officer to issue the notice under Section 34. Whether these grounds are adequate or not is not a matter for the court to investigate. In other words, the sufficiency of the grounds which induced the Income-tax Officer to act is not a justiciable issue. It is of course open for the assessee to contend that the Income-tax Officer did not hold the belief that there had been such non-disclosure. In other words, the existence of the belief can be challenged by the assessee but not the sufficiency of the reasons for the belief. Again the expression 'reason to believe' in Section 34 of the Income-tax Act does not mean a purely subjective satisfaction on the part of the Income-tax Officer. The belief must be held in good faith : it cannot be merely a pretence. To put it differently, it is open to the court to examine the question whether the reasons for the belief have a rational connection or a relevant bearing to the formation of the belief and are not extraneous or irrelevant to the purpose of the section. To this limited extent, the action of the Income-tax Officer in starting proceedings under Section 34 of the Act is open to challenge in a court of law.\"\n\n53. From the cases decided under Section 34 of the Indian Income-tax Act, 1922, and Section 147 of the Act, additional support can be obtained for the conclusion that before the Commissioner can exercise jurisdiction under Section 132(1) of the Act, he must have information on the basis of which he should come to a reasonable belief for any of the requisite purposes mentioned in Clause (a), (b) or (c) of that Sub-section.\n\n54. So far as Section 34 of the Indian Income-tax Act, 1922, and Section 147 of the Act are concerned, it has been repeatedly held that power to act on information is not to be confused with the power to revise the earlier conclusion. The Income-tax Officer is not permitted to apply his mind afresh to the same issue or to correct his or his predecessor's errors of judgment, In Income-tax Officer v. Nawab Mir Barkat Ali Khan Bahadur [1974] 97 ITR 239, 244, 245 (SC), it was observed as under :\n \"The High Court was right in holding that the Income-tax Officer had no valid reason to believe that the respondent had omitted or failed to disclose fully and truly all material facts and consequently had no jurisdiction to reopen the assessments for the four years in question. Having second thoughts on the same material does not warrant the initiation (c)f a proceeding under Section 147 of the Income-tax Act, 1961.\"\n\n55. On a parity of reasoning, it must be held that the Commissioner of Income-tax while acting under Section 132(1) of the Act must come into possession of some new material before he can take resort to the drastic measure of issuing a search warrant. When he receives some relevant new information, it would perhaps be permissible for him to look into the old record for his satisfaction but it is extremely doubtful if he can give his own interpretation to the circumstances on the basis of which assessments have been framed against an assessee for the previous years for the purpose of issuing a search warrant. It is in public interest that judgments and orders finally passed by the judicial and quasi-judicial tribunals should be regarded as sacrosanct unless there is a positive mandate of the legislature to the contrary. In the very nature of things, the provisions for revision or for reassessing a finally settled assessment have to be strictly construed. The matters which have been determined finally cannot be allowed to be tinkered with on lighter grounds.\n\n56. The applicability of Section 165, Criminal Procedure Code, to the searches made under Section 132(1) gives an indication that this section is intended\n\n\nto apply in limited circumstances to persons of a particular bent of mind, who are either not expected to co-operate with the authorities for the production of the relevant books or who are in possession of undisclosed money, bullion and jewellery, etc. Take for instance, a particular assessee who has utilised his undisclosed income in constructing a spacious building. His premises cannot be subjected t6 a search under this section on this score alone. A search would be authorised only if information is given to the Commissioner of Income-tax that such a person is keeping money, bullion, jewellery, etc., in this building or elsewhere. Further, if an assessee has been regularly producing his books of account before the assessing authorities who have been accepting these books as having been maintained in proper course of business, it would be somewhat unjustified use of power on the part of the Commissioner of Income-tax to issue a search warrant for the production of these books of account unless of course there is information to the effect that he has been keeping some secret account books also. He has to arrive at a decision in the background of the mental make up of an individual or individuals jointly interested in a transaction or a venture. A blanket condemnation of persons of diverse activities unconnected with each other on the odd chance that if their premises are searched some incriminating material might be found is wholly outside the scope of Section 165, Criminal Procedure Code. This power has to be exercised in an honest manner and search warrants cannot be indiscriminately issued purely as a matter of policy. The case of the petitioner will have to be examined in the light of these principles.\n\n57. It has been held in Seth Brothers' case that if the action of the Commissioner in issuing a search warrant under Section 132(1) of the Act is challenged, the burden lies on him to satisfy the court that he had taken action on proper and relevant material. The reasons which impel the Commissioner to take this action may not necessarily be mentioned in the search warrant itself but when the matter comes before the Board under Section 132(12) or before this court in proceedings under Article 226 of the Constitution, he has to produce the record to show that he formed the requisite belief on the basis of relevant information. There is a presumption of correctness in favour of the acts done and the record prepared contemporaneously by a public servant, in normal course of business, but this is not an irrebuttable presumption. Those who challenge the correctness of the official record have to prove this fact by bringing before the court the necessary material on the basis of which a finding in their favour can be given. It has been held that by virtue of the application of Section 165, Criminal Procedure Code, the Commissioner of Income-tax has to record his reasons before issuing a search warrant. These reasons are given in the official 61es and, naturally enough, the first thing to be determined is whether these files can be implicitly relied upon or not. In this context, the search of the luggage belonging to Shri Gurdial Singh Mann, who was alleged to be staying as a guest in the house of the petitioner, assumes considerable importance. The plea raised by the petitioner is that Shri Mann never stayed in his house prior to October 14, 1974. On the other hand, the respondents have urged that there was information with the Commissioner of Income-tax that Shri Mann was staying with the petitioner, on October 7, 1974. A reference has already been made to the affidavits sworn by Shri Mann, the petitioner and the respondents on this point. The evidence led on the point may now be examined.\n\n58. Shri M. R. Minhas, C.W. 1, is working as a clerk in the office of the Haryana Tourism Department, Chandigarh, since 1967. He brought the visitor's register in court and stated on oath that Shri Gurdial Singh Mann occupied room No. 7 with effect from October 2 to October 11, 1974. He paid Rs. 63 as rental charges for the occupation of this room for 9 days. Entry No. 1736 made in the register was signed by Mr. Mann in his presence. He gave a receipt for the sum of Rs. 63 paid by Shri Mann, a photostat copy of which is exhibit C. W. 1/2. He was allowed to be cross-examined by Mr. Awasthy, the learned counsel for the respondents. In cross-examination, this witness has stated that Mahant Ram, watchman of the hostel, stated before him that he knew that Shri Gurdial Singh Mann was Shri Hardwari Lal's man and on this account the room was allowed to be occupied by him. When questioned whether he could tell the time when Shri Mann arrived at the hostel, the witness replied, that the time was mentioned in the register and he could not orally remember the time of his coming in and leaving the hostel. By and large, the testimony of this witness remained unshattered.\n\n59. Shri Mahant Ram, P. W. 1, has stated that he was employed as a chowkidar in the Haryana M.L.A.s' Hostel at Chandigarh and his duty was to give keys of the rooms to the members of the Haryana Legislature and to collect back the same from them at the time of their departure. A register had been maintained showing the period containing the entries relating to the arrival and departure of M. L. As. from the hostel. The work inspector sends copies of the statement made out from this register to various offices including the office of the Haryana Vidhan Sabha for realising the charges due from the M. L.As. in respect of their stay in the hostel. The register brought by him showed that Shri Hardwari Lal stayed in room No. 8 of the hostel with effect from 3.30 p.m. on August 25, 1974, to 3.00 p.m. on October 24; 1974. According to this witness, for about 5 to 7 days during the period when Shri Hardwari Lal stayed in room No. 8, one Maun Sahib or Mann Singh and his family stayed in room No. 7, as\n\n\nguests of Shri Hardwari Lal. Room No. 7 was given to him as the guest of Shri Hardwari Lal. In cross-examination, he stated that he had no particular concern with Mr. Mann apart from asking the sweeper to clean his room.\n\n60. Sri Hardwari Lal, M.L.A., appeared as P.W. 2. He has also stated on oath that from August 25, 1974, to October 24, 1974, he stayed in room No. 8 of the Haryana M.L.As.' Hostel and the relevant entry bore his signatures. At his instance room No. 7 was allotted to Shri Gurdial Singh Mann who occupied it along with his family. This witness also stated that he spent most of his time with Mr. Mann because of the latter's father's illness. He also used to accompany him from the M.L.As.' Hostel daily to the Post Graduate Institute of Medical Sciences, which was under the charge of Dr. Chuttani. Shri Mann used to wake him up early in the morning and they used to go out for a walk. According to him, it was impossible that Shri Mann slept outside on any of the nights during his stay in room No. 7 during the period in question. This witness further stated that he used to sit with him till late in the night. In cross-examination, he was particularly asked whether he could exclude the possibility of Mr. Mann having visited his friends in Chandigarh outside the hostel daring those days. The witness answered that Mr. Mann was in fact so much worried in those days that he did not feel like going anywhere except being in the hostel or in the hospital. Since the witness tried to ensure that he could be of maximum help to him, he remained with him during most of the days.\n\n61. A perusal of this evidence shows that Shri Hardwari Lal, M.L.A. stayed in the M.L.As.' Hostel from August 25, 1974, to October 24, 1974. Through his good offices, Shri Mann was allowed to occupy room No. 7 with effect from October 2 to October 11, 1974. The statement made by Shri Hardwari Lal, P.W. 2, leaves no doubt in our mind that during this period Shri Mann remained with him for most of the period either in the M.L.As/ Hostel or in the hospital. He is duly corroborated on all material particulars by Shri M.R. Minhas, C.W. 1, and Shri Mahant Ram, P.W. 1, apart from the authentic documentary evidence referred to above. On May 5, 1975, we had particularly asked Mr. Awasthy, the learned counsel for the respondents, whether he would like to call any of the persons whose affidavits had been filed by the petitioner for cross-examination touching this point. On that date he informed us that he would make a statement on this point on the next date of hearing. On May 7, 1975, we particularly questioned Mr. Awasthy whether he wanted to cross-examine Mr. Hira Lal Sibal or Shri Gurdial Singh Mann on this point or not. Mr. Awasthy indicated that he had no such intention at that time. He also stated that he had no instructions to lead any evidence in rebuttal. The result is that\n\n\nthough the respondents were given an opportunity to rebut the evidence about the stay of Shri Mann and his family in room No. 7 of the Haryana M.L.As.' Hostel with effect from October 2 to October 11, 1974, yet they declined to avail of the same. In the circumstances it stands established beyond any shadow of doubt that Shri Mann did not stay at the house of the petitioner on October 7/8, 1974, as indicated by the respondents. Nor is there any rebuttal to the assertion made by Shri Mann and the petitioner in their respective affidavit that prior to October 14, 1974, Shri Mann never stayed at the house of the petitioner. We feel no hesitation in believing the petitioner and Shri Mann on this point.\n\n62. The circumstances in which the search warrant of Sri Mann's luggage was issued reveal quite interesting story. The case of the petitioner is that when Shri Mann indicated on the basis of his own experience as a judicial officer that his luggage could not be searched without a proper warrant, Shri R. K, Ball, the authorised officer, sought instructions from Shri J. S. Dulat, respondent No. 2, who in turn enquired the name of Mr. Mann on telephone and said that the warrant would follow. This warrant was received within about half an hour even though the Commissioner of Income-tax was at Patiala at a distance of 35 miles. The relevant portions of the warrant read as under :\n\n\"Shri R. K. Bali,\n \n\nI.T.O., Chandigarh.\n\nWhereas information has been laid, before me and on the consideration thereof I have reason to believe that-\n\na summons under Sub-section (1) of Section 37 of the Indian Income-tax Act, 1922, or under Sub-section (1) of Section 131 of the Income-tax Act, 1961, or a notice under Sub-section (4) of Section 22 of the Indian Income-lax Act, 1922, or under Sub-section (1) of Section 142 of the Income-tax Act, 1961, was issued by the Deputy Director of Inspection/Inspecting Assistant Commissioner of Income-tax/Assistant Director of Inspection/ Income-tax Officer to Shri Gurdial Singh Mann on 17-10-1974 to produce, or cause to be produced, books of account or other documents specified in the relevant summons or notice and he has omitted or failed to produce, or cause to be produced, such books of account or other documents as required by such summons or notice ;......\n\nSarvshri/Shri/Shrimati Gurdial Singh Mann are in possession of any money, bullion, jewellery, or other valuable article or thing and such money, bullion, jewellery, or other valuable article or thing represents either wholly or partly income or property which has not been disclosed for the purposes of the Indian Income-tax Act, 1922, or the Income-tax Act, 1961;\n\nAnd whereas I have reason to suspect that such books of account, other documents, money, bullion, jewellery or other valuable article or thing have been kept and are to be found at House No. 29, Sector 5, Chandigarh. This is to authorise and require you, Shri R. K. Bali, I.T.O......\"\n\n(Sd.)\u00a0 \u00a0 \u00a0 \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 \n\nS. N. Mathur,\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \n\n Commissioner of Income-tax, \n\n Patiala-1. \u00a0\u00a0 \u00a0 \u00a0 \u00a0\u00a0 \u00a0 \u00a0 \n\n8-10-74 \n\nPatiala. \n\n63. The record shows that no summons under Sub-section (1) of Section 37 of the Indian Income-tax Act, 1922, or under Sub-section (1) of Section 131 of Income-tax Act, 1961, or any notice had been issued to Shri Mann for producing books of account, etc., on October 17, 1974. Furthermore, the warrant purports to have been issued by the Commissioner of Income-tax on October 8, 1974, because Shri Mann failed to comply with some notice issued to him on October 17, 1974, and yet responsible officers of the income-tax department have chosen to justify this action. According to respondent No. 1, warrant of authorisation against Shri Mann could not be given to the authorised officer inasmuch as \"had Shri Mann left the premises before the date of search, there would have been unnecessary and premature disclosure of the fact that a search was also contemplated\". According to him, there was nothing improper in entrusting a blank signed warrant to respondent No. 2 with authority to fill the name of Shri Mann therein for utilising it for searching his luggage if an eventuality arose. Now it is the case of the respondents that all the warrants had been entrusted to respondent No. 2 who holds the rank of Inspecting Assistant Commissioner of Income-tax, Chandigarh. If this officer had been entrusted with the warrants regarding some other persons, it looks absurd that he was not being entrusted with the same type of warrant against Shri Gurdial Singh Mann. Furthermore, a perusal of the record shows that respondent No. 2 alone reported that Shri Mann was residing at the premises occupied by the petitioner and he had been indulging in tax evasion. Respondent No. 1 consciously handed him over a signed blank warrant with an oral authority to fill in the name of Shri Mann before using the same. This warrant was not handed over by respondent No. 2 to the authorised officer in the very beginning and was sent to him when the latter sought instructions on telephone. In this situation, it cannot be imagined how respondent No. 1 entertained the fear that if he gave a complete warrant to respondent No. 2, there would have been an unnecessery and premature disclosure of the fact that the search of the luggage of Shri Mann was also contemplated. This explanation is wholly unnatural and false. Had there been any information in ; possession of respondent No. 1 about the fact that Shri Mann had been residing at the premises of the petitioner prior to\n\n\nOctober 7/8, and had there been any doubt about the activities of Shri Mann, respondent No. 1 would have certainly handed over to respondent No. 2 a warrant complete in all respects for conducting the search of the luggage belonging to. Shri Mann. The only legitimate inference which can he drawn from these circumstances is that the record has been falsely prepared to justify the action taken against Shri Mann.\n\n64. The plea that respondent No. 1 did not act improperly by entrusting a blank signed warrant to respondent No. 2 with authority to him to insert the name of Shri Gurdial Singh Mann therein for pressing it into service for searching the luggage of Shri Mann, if an eventuality arose, is also devoid of any force. Rule 112 of the Rules framed under the Act expressly provides that the authorisation to make a search and seizure issued by the Commissioner shall be in writing under his signatures and bearing his seal. This rule implies that the authorisation should be [complete in all respects before the Commissioner appends his signatures and puts his seal to it. One cannot imagine that, the Commissioner was unaware of the true meaning and import of this important statutory provision. This plea also appears to have been raised to cover up the wrong action taken by respondent No. 2 in the situation resulting from his unexpected .presence at the premises of the petitioner on the date of the search.\n\n65. On page 2 of the file No. II marked by us, a list of 32 persons appears which purports to have been prepared pursuant to a note recorded by respondent No. 1 on October 1, 1974. A detailed reference to these documents will be made in the later part of the judgment. In this list, the name of the petitioner appears at No. 7, of his brother, Shri S. C. Sibal, appears at No. 8 and that of Shri G. S. Mann appears at No. 32 at the end of the list written in a different ink. It is the case of the respondents that the activities of the petitioner and those of Shri Mann were inter-connected. Had it been so, the name of Shri Mann would have appeared at S. No. 9 immediately after the name of the brother of the petitioner.\n\n66. When the three circumstances mentioned above are cumulatively taken into consideration, it becomes obvious that the record relating to the authorisation for the search of the premises of the petitioner was prepared after the search conducted on October 17, 1974, when for the first time the respondents came to know that Shri Mann happened to be residing with the petitioner. This record does not represent the contemporaneous thinking and the activities of the respondents. It has already been noticed that the Commissioner of Income-tax has to record in writing the reasons of his belief for any statutory purposes mentioned in Clause (a), (b) or (c) of Sub-section (1) of Section 132 of the Act before authorising the search of the premises of an assessee. Since respondent No. 1 failed to do so, his action cannot be justisfied in the eyes of law.\n\n67. The result would be the same if some part of the record was made earlier and additions were made to it after conducting the search, for, in such a situation the condition precedent of recording reasons based on information before issuing an authorisation for search would be violated.\n\n68. We may now come to the questions whether the Commissioner authorised the search of the premises of the petitioner on the basis of some tangible information or pursuant to a policy decision.\n\n69. File No. II, marked by us, relating to searches and seizures--doctors and advocates--starts with the following note :\n\n\"The matter of action against Patiala lawyers was discussed with S/Shri Kulkarni and Sharda, I.A.Cs. when the A.D.I, was present. It was learnt that large-scale tax evasion was being practised by them as most of them were submitting estimated incomes and no accounts or fee-books or briefs to support the gross receipts were maintained. They were also living in a good style and had assets which were not disclosed to the department and which according to both the I.T.O./I.A.Cs. were not to be disclosed by them unless action under Section 132 was taken against them. A.D.I, has been asked to process these cases with others at Chandigarh/Ludhiana/Ambala/Rohtak ranges where this matter has already been discussed with the I.A.Cs. and they are submitting proposals (except I.A.C., Rohtak, who handed it over to me on 28-9-1974, and the proposal of I.A.Cs. at Patiala). A.D.I, should also prepare separate folders for the professional persons for different ranges, where authorisations, etc., may be kept along with my directions.\n\nSd. \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \nS. N. Mathur, \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \n\n1-10-74.\"\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0\u00a0 \u00a0\n\n70. To begin with, some action was contemplated against the Patiala lawyers, because the Commissioner learnt that large-scale tax evasion was being practised by them. This conclusion was not derived from any external spurce and was inferred from the fact that most of them were submitting estimated incomes and no accounts or fee-books, or briefs to support the gross receipts were maintained. The fact that they were submitting estimated incomes was already known to the department because the concerned Income-tax Officers had framed assessments on that basis. If respondent No. 1 was not satisfied with this state of affairs he could have directed his Income-tax Officers to deal with such cases more carefully or he could have got these assessments reviewed by filing appeals, if the law permitted this course; but he could not apply his mind afresh to the same set of facts for initiating action under Section 132 of the Act, If he had realised that those who were living at Patiala, including the advocates, had inherited the princely traditions of pomp and show, and if he had applied his mind to the language of Section 132 of the Act he would perhaps have taken a more charitable view. The Income-tax Officer and Inspecting\n\n\nAssistant Commissioner would always state before an over-zealous Commissioner of Income-tax that the assessees were not likely to disclose their assets unless action under Section 132 of the Act was taken against them. On such complaints alone, the Commissioner of Income-tax cannot authorise searches of the premises of the assessees. In such a situation, the proper course for him is to ask his subordinate officers to bring forth concrete information against every individual assessee on the basis of which a reasonable man could come to the conclusion that the assessee concerned was not disclosing his income for purposes of income-tax. A conglomerate of two or more irrelevant surmises cannot take the place of relevant information on the basis of which statutory action can be initiated.\n\n71. The note recorded by the Commissioner of Income-tax is in the nature of a declaration of a policy intended to rope in people residing in Chandigarh, Ludhiana, Ambala and Rohtak ranges because the lawyers at Patiala were submitting estimated incomes and were living in high style. In Other words, a firm decision to initiate action was taken before there was any evidence on the point and the Assistant Director of Intelligence was asked to hunt out evidence for this purpose. A complete go-by was given to the safeguards formulated by their Lordships of the Supreme Court in Commissioner of Commercial Taxes v. Ramkishan Srikishan Jhaver.\n\n72. The next development relevant to this case is the proposal dated October 7, 1974, made by respondent No. 2. It is a part of file No. 1 marked by us and appears to have been placed in that file pursuant to the directions of respondent No. 1 to the Assistant Director of Intelligence asking him to prepare separate folders for professional persons for different ranges. It reads as under:\n\n\"Proposal for action under Section 132 of the Income-tax Act, 1961,\nWhereas I have reason to believe that the undermentioned persons, all Punjab leading advocates of Chandigarh, practising in the High Court of Punjab and Haryana at Chandigarh, and the Supreme Court of India at New Delhi, are not showing their total income correctly from year to year, but are understating the same and whereas they also have in their possession money, bullion, jewellery and other valuable articles and things which represent either wholly or partly income or property not disclosed for purposes of the Indian Income-tax Act, 1922, or 1961, I, therefore, request the Commissioner of Income-tax, Patiala-1, Patiala, to authorise action u/s 132 of the Income-tax Act, 1961, in respect of the said persons :\n\n1. Shri H. L. Sibab\n \n\n2. Shri Bhagirath Dass,\n \n\n3. Shri Anand Swarup.\n\n4. Shri Mulkh Raj Mahajan and his sons, S/Shri M. K. Mahajan, B. K. Mahajan and J. K. Mahajan.\n\n5. Shri S. C. Sibal.\n\nI also understand that one Shri Gurdial Singh Mann, at present residing within the premises occupied by Shri H. L. Sibal, at Chandigarh, is also in possession of unaccounted valuables and certain documents tending to prove the concealment of taxable income. I, therefore, request the Commissioner of Income-tax, Patiala, to authorise action under Section 132 of the Income-tax Act, 1961, in respect of that person also.\n\nSd.\u00a0\u00a0 \u00a0\u00a0 \u00a0 \n\nJ. S. Dulat,\u00a0 \n\nI.A.C. of I.T., \n\nChandigarh,\u00a0 \n\n7-10-74.\"\u00a0 \n\n73. It has been held that the respondents came to know about Shri Gurdial Singh Mann only on October 14, 1974, at the time of the search of the petitioner's premises. This note was obviously recorded after that date with a view to justify the action taken against Shri Mann. Assuming while not admitting that this note was written on the date when it purports to have been recorded, it does not carry the case of the respondents any further. It indicates that respondent No. 2 had reasons to, believe that the leading advocates of Punjab mentioned therein were not showing their total income correctly from year to year, etc., etc. There is no indication whatsoever of the information on the basis of which this officer had formed the aforementioned belief. At best, he was a reporting officer to convey the relevant information on the basis of which respondent No. 1 might have taken the action. There is no indication in the note that the persons mentioned therein had any inter-connection. Even regarding Shri Gurdial Singh Mann, it was mentioned that he himself was in possession of unaccounted valuable and documents tending to prove concealment of taxable income. It was quite natural for respondent No. 2 to come to such sweeping conclusions because respondent No. 1 had already decided that the houses of some of the assessees had to be searched come what may.\n\n74. On page No. 5 of file No. 1 marked by us, the names of the petitioner and his four sons are mentioned. One of them is said to be a Deputy Secretary in the Cabinet Secretariat, the second is working as Joint Textile Commissioner, Bombay, the third is a Deputy Secretary, Foreign Affairs, and the 4th is working as an advocate in the Supreme Court of India and the Delhi High Court. His wife is stated to be in I.F.S. Respondent No. 1 had noted in the margin that as regards the sons he would like to consider the matter further only when further information is available. Down below there is another note which reads as under :\n\n \" Discussed with I.A.C. who is Gurdial Singh Mann to Shri H. L. Sibal ? Is he one of the\n name-lenders or a person who is helping Shri- Sibal in divesting of his income surreptitiously and thus evading\n I.T./W.T., etc.\n \n \n \u00a0\n \n \n What about this person's own position ? His services could be utilised in shifting valuables of all types from Shri Sibal's place. His place would also need coverage.\n\n A.O. to please\n verify this at the time of search.\n\n Sd. S. N. Mathur,\n \n \n Sd. S. N. Mathur,\n \n \n \n \n 7-10-74\n \n \n 7/10/74\n \n \n \n \n see remarks of I.A.C. re. this matter\n in this note.\n \n \n \u00a0\n \n \n \n \n Sd. S. N. Mathur,\n \n \n \n \n\n 7-10-74. \"\n\n75. The original record of file No. 1 shows that respondent No. 2 had given the date as October 8, 1974, and had later on changed it to October 7, 1974. The important thing, however, is that at that time respondent No. 1 himself was not certain about the activities of Shri Mann. The authorised officer was being directed to verify the facts at the time of the search but the warrant had been issued in advance. This shows the type of mind which respondent No. 1 did apply to the case. The action taken by respondent No. 1 is clearly hit by the observations made by their Lordships of the Supreme Court in Chhugamal Rajpal's case.\n\n76. The marginal note quoted above and purported to have been recorded by respondent No. 1 directed the authorised officer to make an on the-spot enquiry about the manner in which the petitioner utilised the services of Shri Mann. The authorised officer did not put any question on this point either to Shri Sibal or to Shri Mann when they were examined by him. He could not have disregarded such an important direction issued by the Commissioner. This fact also conclusively established that the so-called inter-connection between the petitioner and Shri Mann was created by the respondents and this note was recorded by respondent No. 1 after the search.\n\n77. The note dated October 1, 1974, reproduced above was seen by respondent No. 1 on the same day. Strangely enough, he also construed it as containing the necessary information on the basis of which he could form the statutory belief and passed the following order :\n\n\"The case of the lawyers at Chandigarh and Simla were discussed earlier with the I.A.C., Chandigarh, in September, 1974, when he had brought to my notice data as to why action under Section 132(1) be taken in these cases. But before passing an order, I had asked him to put up proposals for consideration and my satisfaction.\nSince then the I.A.C. has also discussed the matter on 1-10-74, with A.D.I, and had suggested the names of the following parties at Chandigarh :--\n\n1. Shri H.L. Sibal, Advocate.\n\n2. Shri Satish Sibal, Advocate.\n\n3. Shri Bhagirath Dass, Advocate.\n\n4. Shri Anand Sarup, Advocate.\n\n5. Shri Mulkh Raj Mahajan, Advocate, \n\n(and also his sons).\n\nThe proposal now sent shows that there is large-scale tax evasion and abetment by lawyers. Looking to all factors, I am satisfied that action under Section 132(1) may be taken in these and other similar cases as and when this is mooted. We may then cover the sons of Shri M. R. Mahajan, named Sarvshri M. M. Mahajan, B. M. Mahajan and J. M. Mahajan, Chandigarh, as well as Shri Gurdial Singh Mann who is residing in the premises of Shri H. L. Sibal to guard against removal of valuables (including documents) from Shri Sibal to his portion of the house as well as his own material of unaccounted valuables and documents.\n\nSd.\u00a0\u00a0 \u00a0\u00a0 \n\nS. N. Mathur, \n\n 7-10-74.\"\n\n78. Respondent No. 1 has nowhere mentioned in the above order with regard to any specific matter mentioned in Section 132(1) (a), (b) or (c) that he was satisfied on the basis of any information received by him. Did he want the authorised officer to recover books of account or bullion and money, etc., or both, and which thing from which of the persons mentioned ? The whole thing is as vague as can be. He merely acted on the proposal which in turn contains the mere conclusions of his subordinates instead of the necessary facts constituting information. By acting upon the conclusions arrived at by his subordinates instead, of coming to his own conclusions, he has practically abdicated his statutory functions in their favour. This course is wholly unknown to law.\n\n79. At page No. 6 of file No. 1 some figures showing the returns submitted by the petitioner during the last five years and wealth-tax returns for two years have been scribed with the following note appearing on the right margin :\n\n\"Return on estimate basis. List of briefs and co-relation of the same with fees not submitted. Top lawyers--fees vary between Rs. 1,000 to Rs. 3,000. Normal fee is Rs. 1,650 per hearing. If he works even for 200 days, gross receipts should be more than Rs, 3 lakhs per year.\n\n Gross shown\n \n \n \n \n\nNet shown \n \n \n \n \n \n\n1970-71 \n \n \n \n\n1,09,548 \n \n \n \n\n75.601 \n \n \n \n \n \n\n1971-72 \n \n \n \n\n1,29,594 \n \n \n \n\n1,02,952 \n \n \n \n \n \n\n1972-73 \n \n \n \n\n1,48,669 \n \n \n \n\n1,03,810 \n \n \n \n \n \n\n1973-74 \n \n \n \n\n1,70,500 \n \n \n \n\n1,20,300 \n \n \n\n\n \n\nGross receipts shown low. Needs investigation by getting records or briefs.\n\nWealth showing a downward trend.\n\n1969-70\n \n \n \n\n3,30,622\n \n \n \n\nReason for this fall.\n\n1973-74\n \n \n \n\n91,267\n \n \n \n \n \n \n \n \n \n\n(Sd.) S. N. Mathur.\n \"\n\n80. The total information relied upon has been derived from the record which was already in the possession of the respondents. This could not have formed the basis for the impugned action on the analogy of the principle laid down by their Lordships of the Supreme Court in Nawab Mir Barkat Ali Khan Bahadur's case.\n\n81. Whether the premises of the petitioner were searched on the basis of valid reasons or the action was taken against him on the basis of some policy decision can be determined by considering the totality of the attendant circumstances. The direction in which the minds of the respondents had been working has to be judged on the basis of their conduct prior to and after the search. From the very beginning the case of the petitioner was clubbed with many other advocates and professional men. The allegation against the advocates was that most of them were submitting estimated income. The petitioner has alleged (in his replication dated 24th March, 1975), that he had been regularly submitting returns which had invariably been accepted. This allegation has not been denied. In other words, he was tagged on to a category of persons to which he could not have necessarily belonged. When Shri Gurdial Singh Mann, who happened to be present at his premises, objected to his luggage being searched, an illegal warrant was produced within about half an hour for conducting the search of his luggage. Though there is no indication on the record that Shri Gurdial Singh Mann had any objectionable dealings with the petitioner, a case has now been set up that he had some inter-links and interconnections with the petitioner's activities relating to evasion of tax. The name of Shri Gurdial Singh Mann was falsely introduced in the official record to give the semblance of truth to the action taken against him and the petitioner. There was no relevant information against the petitioner within the meaning of Section 132(1) of the Act and respondent No, 1 acted on the conclusions arrived at by his subordinates instead of himself deciding the question on information. At best, the information was derived\n\nfrom the returns submitted by the petitioner and even then returns were not properly scrutinised for judging the validity and reasonability of the conclusions drawn. As a consequence of the search, the petitioner was found to be in possession of cash which was quite commensurate with his position and status as a leading advocate. Even though the authorised officer was satisfied that money was to be seized, yet Rs. 10,000 were retained at the instance of respondent No. 2 on the basis of some instructions issued by the superior officers. On this point, we may observe that the petitioner's allegation that: Rs. 10,000 had been seized on the orders issued by respondent No. 2 has not been denied either by Shri R. K. Bali, the authorised officer, or respondent No. 2, even though they did file affidavits in court on some other points. The sum of Rs. 10,000 had been seized because in the absence of any seizure no order under Section 132(5) of the Act could be passed. The petitioner had been making repeated requests for being supplied the information on the basis of which action under Section 132(5) of the Act was contemplated and yet in spite of the clear provisions of Rule 112A(4) of the Rules, he was not supplied this material. In spite of the fact that the Motion Bench had issued an injunction against the respondents restraining them to finalise the proceedings under Section 132(5) of the Act, such an order was passed after the respondents had the knowledge of this fact. This matter has been dealt with separately in our judgment in Criminal Original No. 16 of 1975 The High Court v. S.N. Mathur, Commissioner of Income-tax -Reported infra. decided today. Suffice it to mention that when Shri Satish Sibal approached respondent No. 1 with a copy of the ad interim stay order passed by this court, she remarked that had this order been passed earlier she would have been saved from the trouble of processing the case. When she made this remark, she was obviously satisfied that this court had stayed further proceedings. On the following day, she proceeded to Patiala, passed an order under Section 132(5) of the Act, and obtained the approval of the Commissioner. In order to conceal the fact that she had information about the injunction, issued by this court she tore off the original order sheet of the file of proceedings under Section 132(5) of the Act and wrote down another order sheet in its place. These proceedings were initiated against the petitioner by her predecessor-in-office on October 24,1974. On the order sheet, the zimni order of that date is in the handwriting of respondent No. 4. When all these circumstances are taken together, it becomes obvious that the premises of the petitioner have been searched pursuant to a policy decision and the dominant object of the respondents was to pass an order under Section 132(5) of the Act regardless of the fact whether such an order could or could not have been passed in the eyes of law.\n\n82. For the reasons mentioned above, we hold-\n\n(i) that there was no information with the Commissioner of Income-tax on the basis of which he could form the requisite belief under Section 132(1) (a), (b) or (c) of the Act, on the basis of which he issued the search warrant of the premises of the petitioner to be conducted by the authorised officer. The power under Section 132(1) of the Act had been exercised for a collateral purpose ;\n\n(ii) that the authorised officer did not apply his mind before seizing the sum of Rs. 10,000 and did so under the extraneous orders of respondent No. 2; and\n \n\n(iii) since the seizure of Rs. 10,000 is not legal, no enquiry could be held against the petitioner under Section 132(5) of the Act.\n\n83. Towards the fag end of the arguments, Mr. Awasthy prayed that even if we allow the petition we should allow the respondents to keep the record for a reasonable period for allowing them to inspect the same. This record remained with the respondents till at least the date when the present petition was filed. Failure on the part of respondents to inspect the same shows the scant respect they had for the merits of the case.\n\n84. In any event ho provision of law has been brought to our notice authorising the retention of seized documents by the respondents after action taken against an assessee under Section 132 of the Act is quashed. On the other hand, Rule 112B of the Rules lays down that if proceedings under Section 132(5) of the Act culminate in favour of an assessee the articles seized have to be returned to the person from whose custody they were seized.\n\n85. For the reasons mentioned above, we quash the warrant dated October 8, 1974, issued by respondent No. 1 for conducting search of the premises of the petitioner, and the proceedings pending against him under Section 132(5) of the Act. We also order that the documents seized from the petitioner be returned to him forthwith. The sum of Rs. 10,000 seized from his possession shall also be returned to him unless this amount stands adjusted with his consent against any lawful demand of the revenue. The petitioner will also be entitled to costs.\n\n86. This is not all. The learned counsel for the petitioner has submitted that a complaint under Section 193, Indian Penal Code, should be filed against the respondents on the basis of the findings arrived at by this court. In brief, it is submitted that the filing of a complaint against the respondents and the Assistant Director of Intelligence is called for on account of the following salient facts:\n\n(1) The proposal under Section 132 of the Act purported to have been recorded by respondent No. 2 on October 7, 1974, was in fact recorded by him after the premises of the petitioner had been searched on\n\n\nOctober 14, 1974, when for the first time the respondents came to know that Shri Gurdial Singh Mann happened to be residing at the premises of the petitioner. Respondent No. 1 fabricated false evidence by recording a note on the same date authorising action under Section 132 of the Act against the petitioner. An offence under Section 193, Indian Penal Code, was prima facie proved against them.\n\n(2) Respondent No. 3 by changing the order sheet of the file in proceedings under Section 132(5) of the Act had also committed the same offence.\n\n(3) The Assistant Director of Intelligence attached to the office of respondent No. 1 by recording a note that the proposal of respondent No. 2 mentioned at (1) above had been received on October 7, 1974, had also fabricated false evidence.\n\n87. After hearing the learned counsel for the petitioner and Mr. Awasthy, we are tentatively of the view that it is expedient in the interest of justice that an enquiry be held into this matter. Let notices be issued to respondents Nos. 1, 2 and 3 and the Assistant Director of Intelligence working in the office of respondent No. 1 to show cause why a complaint under Section 193, Indian Penal Code, be not filed against them.\n\nR.S. Narula, C.J.\n\n88. I agree." }, { "title": "Commissioner Of Income Tax vs M/S.Ideal Garden Complex P.Ltd on 20 September, 2011", "url": "https://indiankanoon.org//doc/173486186/", "text": "Commissioner Of Income Tax vs M/S.Ideal Garden Complex P.Ltd on 20 September, 2011\nAuthor: Chitra Venkataraman\nBench: Chitra Venkataraman, M.Jaichandren\n \n\n \n\n \n\n \n \n IN THE HIGH COURT OF JUDICATURE AT MADRAS\n\nDated : 20.09.2011\n\nCoram\n\nThe Honourable Mrs.Justice CHITRA VENKATARAMAN\nand\nThe Honourable Mr.Justice M.JAICHANDREN\n\nTax Case (Appeal) Nos.443 to 448 of 2005\n---\n\nCommissioner of Income Tax\nSalem\t\t\t\t\t \t\t\t...Appellant \n\n-vs-\n\nM/s.Ideal Garden Complex P.Ltd\n7/54, Junction Yercaud Road, Salem\t\t ...Respondent \n\n\tTax Case (Appeals) filed under Section 260 A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal, Chennai 'D' Bench dated 03.08.2004 in ITA.No.1236 to 1241/(Mds)/2003.\n\n\t\tFor Appellant :\tMr.K.Subramaniam\t\t\t\t\t\t Standing Counsel for Income Tax\n\n\t\tFor respondent : Mr.P.J.Rishikesh\n\nJ U D G M E N T\n\n(The Judgment of the Court was made by\nCHITRA VENKATARAMAN, J. )\n\tThe Tax Case Appeal is filed by the Revenue against the common order of the Income Tax Appellate Tribunal, Chennai 'D' Bench dated 03.08.2004 in ITA.No.1236 to 1241/(Mds)/2003 relating to the assessment years 1992-93 to 1997-98 raising the following substantial questions of law:-\n\t\"1. Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in holding that the CIT (Appeals) was correct in cancelling the reopening of the assessment for the assessment years in question on the ground that there was no fresh information and there was failure on the part of the assessee to disclose material facts without considering the fact that the returns had only been processed under Section 143(1)(a) and the restrictions of reopening of assessments applicable to assessments u/s.143(3) were not applicable to intimations u/s.143(1)(a) ?\n\t2. Without prejudice to the first question, whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in cancelling the reopening of the assessment for the assessment year under consideration on the ground that it was based on audit objection, without following the decision of the Supreme Court 237 ITR 13 relied on by the Revenue ?\n\t3. Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in holding that the income was not assessable under the head 'income from property' but was assessable under the head 'business' merely on the ground that the land on which the super-structure was built had been taken on lease overlooking the fact that the provisions for computation of in come under the head 'income from property' envisaged such a situation and provided for allowing the rent paid for the grounds as a deduction while computing income from house property owned by the assessee ?\"\n\n 2. By a common order, the Income Tax Appellate Tribunal held that the income from letting out of the property was to be assessed as \"business income\". In so holding, the Tribunal considered the assessee's claim on the Officer's jurisdiction to deal with the assessment under Section 147 of the Income Tax Act, 1961, since there was no new information in possession of the Assessing Officer to reopen the assessment. Following the decisions in the case of CIT Vs. Sanmar Holdings Ltd reported in (2003) 129 Taxman 25 (Mad), in the case of ACIT Vs. Saptarshi Services Ltd reported in (265 ITR 379 (Guj)), the Tribunal held that the proceedings taken under Section 147 of the Income Tax Act, 1961 was bad in law. Thus, the Tribunal allowed the assessee's claim both on the aspect of jurisdiction to deal with the assessment under Section 147 of the Income Tax Act, 1961 as well as on the character of the receipt. Aggrieved by the same, the Revenue is on appeal before this Court.\n\n 3. The assessee herein is a company stated to have been incorporated with the object of carrying on business in real estate developing landed properties, promoting and setting up of a market thereon. The assessee claimed that the income derived from letting out of the properties was \"business income\" and was not to be taxed as \"income from house property\". While passing the assessment order under Section 143(1)(a) of the Income Tax Act, 1961, originally, the Assessing Officer accepted the claim of the assessee that the income thereon from letting out the property was \"business income\". However, proceedings under Section 147 of the Income Tax Act, 1961 was invoked on the basis of the decision of this Court in the case of Commissioner of Income Tax Vs. Indian Metal and Metallurgical Corporation reported in 215 ITR 424, wherein, this Court held that income received from letting out of property is to be assessed only as \"income from house property\".\n\n 4. The assessee filed its objection stating that the interpretation of law based on the decision of this Court reported in 215 ITR 424 ( Commissioner of Income Tax Vs. Indian Metal and Metallurgical Corporation) had no relevance to the facts of the case. Placing reliance on the decision of the Hon'ble Supreme Court in Indian and Eastern Newspaper Society Vs. Commissioner of Income Tax reported in 119 ITR 996 as well as on the decision in the case of Commissioner of Income Tax Vs. LKS Jewellers reported in 109 Taxman 114, the assessee contended that the opinion of the audit party as regards the application or interpretation of law could not be the basis for reopening the assessment. The assessee further contended that having regard to the business of the assessee to develop properties, the commercial complex constructed over the leasehold land was a commercial asset utilised for the purpose of the business, consequently, the income derived therefrom on letting out of the property had to be assessed only as \"business income\".\n\n 5. A reading of the order of assessment shows that the Assessing Officer rejected the assessee's contention and held that the decision of this Court reported in 215 ITR 424 (Commissioner of Income Tax Vs. Indian Metal and Metallurgical Corporation), which was rendered under similar circumstances would apply to the facts herein. The Assessing Authority held that the transaction being one of exploitation of the property as an owner and not by way of exploitation of business assets, the assessment of the rental receipts as \"business income\" would not arise but to be assessed under the head \"income from house property\" under Section 22 to 24 of the Income Tax Act. Aggrieved by the same, the assessee went on appeal before the Commissioner of Income Tax (Appeals).\n\n 6. In respect of the above said assessments, the assessee reiterated its contentions as taken before the Assessing Officer. By a common order, the Commissioner of Income Tax (Appeals) considered the question as to whether there was mere change of opinion by the Officer for reopening the assessment and ultimately the Commissioner of Income Tax (Appeals) came to the conclusion that the reopening of the assessment was the result of the Audit Objection. Thus accepting the contention of the assessee, based on the decision of this Court reported in 215 ITR 424 ( Commissioner of Income Tax Vs. Indian Metal and Metallurgical Corporation) and the decision of the Supreme Court, the Commissioner of Income Tax (Appeals) held that the Assessing authority wrongly applied the law to the facts herein. In the circumstances, following the decision of the Gujarat High Court in the case of Gujarat Ginning Factory Ltd reported in (94) 205 ITR 40 (Guj), in the case of Balaji Enterprises reported in (97) 225 ITR 471 (Kar), in the case of Shah Brothers reported in (99) 110 Taxmann 40 (Karnataka), the Commissioner of Income Tax (Appeals) agreed with the view of the assessee that the income was to be assessed under the head \"business income\" and not under \"income from house property\". Aggrieved by the same, the Revenue went on appeal before the Income Tax Appellate Tribunal, wherein, the Department placed reliance on the decision of the Apex Court in the case of the CIT Vs. P.V.S.Beedies Pvt Ltd., reported in 237 ITR 13 on the aspect of the reopening of the assessment.\n\n\t7. The Tribunal accepted the contention of the assessee that the reopening of the assessment was made based on the change of opinion and there were no fresh information available. Thus holding , it rejected the Revenue's appeal. \n\n 8. Learned Standing counsel appearing for the Revenue brought before us the decision of the Apex Court in the case of A.C.I.T Vs. Rajesh Jhaveri Stock Brokers P.Ltd reported in 291 ITR 500 (SC), wherein, the Apex Court pointed out to the scope of Section 143(1) as well as Sections 147 and 148 of the Income Tax Act, 1961, only to hold that Section 147 as substituted with effect from April 1, 1989, enabled the Officer to reopen the assessment. So long as the ingredients of Section 147 of the Income Tax Act, 1961 are fulfilled, the Assessing Officer is free to initiate proceeding under Section 147 of the Income Tax Act, 1961 to reopen the assessment. Considering the provisions of Section 143(1)(a) of the Act, as it stood during the relevant assessment years under consideration, the moment the Officer found that the assessment had been wrongly made and that the facts were not under any controversy, rightly, the Officer concerned applied the law of this Court following the Apex Court decision under similar circumstances to the case of the assessee to assess the rental receipts as \"income from house property\".\n\n 9. Learned Standing counsel for the Revenue further placed reliance on the decision of the Apex Court in the case of East India Housing and Land Development Trust Ltd Vs. CIT reported in 42 ITR 49 (SC), in the case of CIT Vs. Indian Metal and Metallurgical Corporation reported in 215 ITR 424 (Mad), in the case of (1)Universal Plast Ltd (2) Guntur Merchants Cottpn Press Co. Ltd. , Vs. CIT reported in 237 ITR 454 (SC), which were all considered in the case of CIT Vs. Chennai Properties and Investments Ltd., reported in 266 ITR 685 (Mad), that income from letting out of the property in case of company carrying on business in real estate, in construction and letting out of properties has to be assessed as \"income from house property\" and not as \"business income\". In the light of the above said decisions, the Tribunal committed serious error in allowing the claim of the assessee. He placed reliance on the decision of this Court in the case of Keyaram Hotels (P) Ltd Vs. Assistant Commissioner of Income Tax reported in (2008) 300 ITR 118 (Mad), which, once again reiterated the law declared by this Court by following the Supreme Court decision. Learned Standing Counsel for Revenue thus prays for setting aside the order of the Tribunal.\n\n 10. Per contra, learned counsel for the assessee relied on decision of the Supreme Court in the case of Indian & Eastern Newspaper Society, New Delhi Vs. Commissioner of Income Tax, New Delhi reported in (1979) 119 ITR 996, in the case of Vishwanath Vs. Asst. Controller of Estate Duty reported in (1983) 139 ITR 610 (Indore), in the case of Commissioner of Income Tax Vs. Lucas T.V.S.Ltd., reported in (1998) 234 ITR 296 (Mad), the decision of the Bombay High Court in the case of Sesa Goa Ltd., Vs. Joint Commissioner of Income Tax and Others reported in (2007) 294 ITR 101 (Bom) as well as in the case of Transworld International Inc. Vs. Jt. Commissioner of Income Tax reported in (2005) 273 ITR 242 (Delhi) on the question as to whether Audit Objection could be the basis for reopening the assessment and submitted that the assessment could not be reopened based on subsequent decision, To do so in the absence of any fresh material would amount to change of opinion. Placing reliance on the decision in the case of Commissioner of Income Tax, Spl.Range II Vs. Sanmar Holding Ltd., reported in (2005) 272 ITR 345(Mad) as well as order passed in T.C.A.707 to 709 of 2005 (Commissioner of Income Tax, Spl.Range II Vs. Sanmar Holdings Ltd) , in the case of Commissioner of Income Tax Vs. D.S.Promoters and Developers Pvt Ltd., reported in (2009) 183 TAXMAN 153 (Delhi), he pointed out to the memorandum of the Company that when the business of the Company is essentially one of construction and letting out properties, income from letting out of the property has to be assessed only as \"business income\". Even in the case of CIT Vs. Chennai Properties and Investments Ltd reported in 266 ITR 685 (Mad), this Court had pointed out to various decisions and laid down propositions, which have to be satisfied before assessing the income as \"business income\" or \"income from house property\". In the light of the above said facts and the decisions relied on, rightly, the Tribunal came to the conclusion that there was only change of opinion and that cannot be the basis for initiating proceedings under Section 147 of the Income Tax Act, 1961. Having regard to the nature of business carried on by the assessee, as a fact finding authority, the Tribunal held that business is assessable only as \"business income\".\n\n\t11. Referring to the contention of learned Standing counsel, placing reliance on the decision of the Supreme Court in the case of ACIT Vs. Rajesh Jhaveri Stock Brokers P.Ltd., reported in 291 ITR 500 (SC), learned counsel for the assessee pointed out that the Tribunal had not considered this aspect on the jurisdiction issue but held that the Audit Party Objection was the only reason on which the Assessing Officer resorted to reopen the assessment. Neither the Tribunal nor the Appellate Authority considered the jurisdiction issue. In fitness of things, the matter may have to be remanded to the Assessing Officer for de novo consideration. \n\n\t12. Heard learned Standing counsel for the Revenue as well as learned counsel for the assessee and perused the materials available on record. \n\n\t13. At the outset, we would state that in the light of the Apex Court decision in the case of ACIT Vs. Rajesh Jhaveri Stock Brokers P.Ltd reported in 291 ITR 500 (SC), we do not think that it is a fit case for remand to the Assessing Officer to consider the issue on reopening under Section 147. \n\n\t14. A reading of the decision of the Apex Court reported in 291 ITR 500 (SC)( ACIT Vs. Rajesh Jhaveri Stock Brokers P.Ltd-), particularly, in the context of provisions of Sections 147 and 148 of the Income Tax Act, 1961 (hereinafter called as the \"Act\"), after amendment, as well as Section 143(1)(a) of the Act as it stood at the relevant point of time shows that with the substitution of Section 147 of the Act, as well as amendment to Section 148 of the Act with effect from 01.04.1989, the Officer is endowed with the jurisdiction to initiate proceedings under Section 147 of the Act, in cases, where he has reason to believe that income has escaped assessment. The Apex Court pointed out to the provisions as it stood prior to the amendment in 1989 that under the original provision, two conditions were required to be satisfied viz., the Officer must have reason to believe that income, profits or gains chargeable to income tax have escaped assessment and secondly, he must also have reason to believe that such escapement is either on account of omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for his assessment of that year. \n\n\t15. Noting the substantial change made to Section 143 of the Act with effect from 01.06.1999, the Supreme Court pointed out that up to March 31st, 1989, after a return was filed, the Officer could make an assessment under Section 143(1) of the Act, without requiring the presence of the assessee or the production by him of any evidence in support of the return. Where the assessee objected to such an assessment or where the officer was of the opinion that the assessment was incorrect or incomplete or the officer did not complete the assessment under Section 143(1), but wanted to make an inquiry, a notice under Section 143(2) was required to be issued to the assessee requiring him to produce evidence in support of his return. After considering the material and evidence produced and after making necessary inquiries, the officer had power to make assessment under Section 143(3). With effect from April 1, 1989, the provisions underwent substantial and material changes. A new scheme was introduced and in the new substituted section 143(1) prior to the subsequent substitution with effect from June 1, 1999, in clause (a), a provision was made that where a return was filed under Section 139 or in response to a notice under Section 142(1), and any tax or refund was found due on the basis of such return after adjustment of tax deducted at source, without prejudice to the provisions of section 143(2) an intimation was to be sent to the assessee specifying the sum so payable and such intimation was deemed to be a notice of demand issued under Section 156 for the apparent purpose of making machinery provisions relating to recovery of tax applicable. The first proviso to section 143(1)(a) allowed the Department to make certain adjustments in the income or loss declared in the return. The Supreme Court held that there being no assessment under Section 143(1)(a) of the Act, the question of change of opinion, did not arise. The Supreme Court also held that with Section 147 permitting the Officer to assess or reassess the income chargeable to tax when he has reason to believe income escaping assessment, the mere failure to take steps under Section 143(3) would not render the Assessing Officer powerless to initiate reassessment proceedings under Section 147 of the Act even when intimation under Section 143(1) had been issued. In the light of the above said decision of the Apex Court, which was rendered on 23.05.2007, we do not think that the reliance on the decision of the Bombay High Court in the case of Sesa Goa Ltd., Vs. Joint Commissioner of Income Tax and Others reported in (2007) 294 ITR 101 (Bom) could be of any assistance to the assessee. So too, the reliance on the decision in the case of Indian & Eastern Newspaper Society, New Delhi Vs. Commissioner of Income Tax, New Delhi reported in (1979) 119 ITR 996.\n\n\t16. The decisions therein have to be seen in the context of the provisions as they stood therein. Thus, with the amendment brought to Section 147 of the Act, on and from 01.04.1989 and the elucidation on the scope of the authority and jurisdiction of the Officer under Section 147 of the Act as given in the above referred decision of the Apex Court, we have no hesitation in holding that the Tribunal committed serious error in holding that there was no material to justify the resort to Section 147 proceedings. Consequently, substantial question No.1 is answered in favour of the Revenue. In so holding, we have no hesitation in rejecting the assessee's prayer to remit the matter to the Assessing Officer. We do not think that any worthwhile exercise could be carried on by the Assessing Officer to consider the question as to whether assessment could be reopened, on the basis of the objection of the Audit party, which contention has no relevance for the purpose of considering the assessment under Section 147 of the Act, having regard to the order under Section 143(1)(a) of the Act. \n\n\t17. In the light of the above, we reject the prayer of the assessee for remand. Consequently, we also hold that substantial question No.2 merits to be answered in favour of the Revenue. \n\n\t18. In view of the above findings, the only question that is left behind is whether income from letting out of the property is to be assessable as \"business income\" or \"income from house property\".\n\n 19. Learned Standing Counsel appearing for the Revenue in this regard placed heavy reliance on the decision of the Supreme Court in the case of East India Housing and Land Development Trust Ltd Vs. CIT reported in 42 ITR 49 (SC), in the case of CIT Vs. Indian Metal and Metallurgical Corporation reported in 215 ITR 424 (Mad) as well as in the case of CIT Vs. Chennai Properties and Investment Ltd, reported in 266 ITR 345 (Mad).\n\n 20. As far as the first cited decision reported in 42 ITR 49(SC) (East India Housing and Land Development Trust Ltd Vs. CIT) is concerned, the assessee therein is a company formed with the object of promoting real estate business and developing markets. It claimed that the income derived from shops let out was to be assessed under Section 10 of the 1922 Act as \"profits or gains\" of business. In considering the question, the Supreme Court pointed out that the mere fact that the assessee had to obtain licence from the Corporation of Calcutta and to maintain sanitary and other services in conformity with the provisions of the Act, by itself, would not enable the assess to claim that income from letting out of the property was to be treated as \"business income\". Referring to different heads of income under Section 6 of the 1922 Act, the Apex Court pointed out as under:-\n\t\" If the income from a source falls within a specific head set out in S.6 the fact that it may indirectly be covered by another head will not make the income taxable under the latter head. The income derived by the company from shops and stalls is income received from property and falls under the specific head described in S.9. The character of that income is not altered because it is received by a company formed within object of developing and setting up markets. In United Commercial Bank Ltd Vs. CIT (1957) 32 ITR 688 (SC) this Court explained after an exhaustive review of the authorities that under the scheme of the IT Act, 1922, the heads of income, profits and gains enumerated in the different clauses of S.6 are mutually exclusive, each specific head covering items of income arising from a particular source.\"\nIn so holding, the Apex Court ultimately held as follows:-\n\t\" The income received by the appellant from shops is indisputable income from property ; so is the income from stall from occupants. The character of the income is not altered merely because some stalls remain occupied by the same occupants and the remaining source of income from the stalls is occupation of the stalls, and it is a matter of little moment that the occupation which is the source of the income is temporary. The IT authorities were, in our judgment, right in holding that the income received by the appellant was assessable under S.9 of the IT Act.\"\n\n\t21. In the decision reported in 215 ITR 424 (Mad) (CIT Vs. Indian Metal and Metallurgical Corporation), which was referred to by the Assessing Officer, this Court considered the case of the assessee, who was the owner of multi-storeyed building, in which, a part of the building in the first, second and fourth floors were let out with amenities. The Tribunal held that the income derived by the assessee should be treated as \"income from other sources\". On a reference before this Court, reversing the order of the Tribunal, this Court held that the income derived by the assessee could not be assessed as \"income from other sources\". In so holding, this Court pointed out to the decision of the Apex Court in Sultan Brothers' case reported in (1964) 51 ITR 353 and distinguished the same and held that when the assessee had let out the building along with amenities, the assessee derived income from letting out of the property owned by it, in the circumstances, the question of the income derived by the assessee from letting out of the property viz., first, second and fourth floors could not be assessed as income from \"other sources\", but to be assessed as \"income from house property\". \n\n\t22. In the decision reported in 266 ITR 685 (Mad) (Commissioner of Income Tax Vs. Chennai Properties and Investments Ltd), this Court elaborately considered the decisions of the Apex Court as well as this Court and pointed out that the question as to whether letting out of the property results in \"business income\" or \"income from property\" is to be decided based on the facts of each case. Pointing out to the decision in the case of East India Housing (1961) 42 ITR 49 (SC) as well as in the case of Karanpura Development Co.Ltd Vs. CIT reported in (1962) 44 ITR 362(SC), in the case of Sultan Brothers (1964) 51 ITR 353 (SC), approving the reasoning in the decision reported in 42 ITR 49 (East India Housing and Land Development Trust Ltd., Vs. CIT), this Court further pointed out to the decision reported in (1964) 51 ITR 353 (SC)(Sultan Brothers case), holding that income from letting out of the property, even in case of company carrying on business in real estate as well as having rental income from the property owned by the assessee has to be assessed as \"income from house property\". This Court in Chennai Properties case, further pointed out as follows:-\n\t\" Though it is not clear from the context as to why the Act describes income from property as income from house property, the substantive provision of law which creates the charge and obligates the person who receives such income to have it assessed under the head does not confine its application only to house property, but extends to all buildings whether such building is used as dwelling house or for other purposes.\"\n\n 23. It further pointed out therein that there had been a consistent view by the Apex Court in all these cases that even if the assessee's business was in real estate, the income on letting out of the property was to be assessed as \"income from house property\". The only exception are cases, where the letting of the building was inseparable from the letting of the machinery, plant and furniture. In such cases, it was held that the rental income would not have been realised, but for the letting out of the machinery, plant or furniture along with such building and therefore, the rental received for the building had to be assessed under the head \"Income from other sources\". It was reiterated that where the owner of the property exploited the property by leasing out the same and realised income by way of rent, the same was to be assessed under the head \"Income from house property\" and not as \"business income\". The said decision was applied in the decision of this Court in the case of Keyaram Hotels (P) Ltd Vs. Assistant Commissioner of Income Tax reported in (2008) 300 ITR 118 (Mad).\n\n 24. The Supreme Court in the decision of (1) Universal Plast Ltd., (2) Guntur Merchants Cotton Press Co. Ltd Vs. Commissioner of Income Tax laid down the following ratio :-\n\t\"(1) no precise test can be laid down to ascertain whether income (referred to by whatever nomenclature, lease, amount, rents, licence fee) received by an assessee from leasing or letting out of assets would fall under the head \"Profits and gains of business or profession\";\n\t(2) it is a mixed question of law and fact and has to be determined from the point of view of a businessman in that business on the facts and in the circumstances of each case, including true interpretation of the agreement under which the assets are let out ;\n\t(3) where all the assets of the business are let out, the period for which the assets are let out is a relevant factor to find out whether the intention of the assessee is to go out of business altogether or to come back and restart the same ;\n\t(4) if only a few of the business assets are let out temporarily, while the assessee is carrying out his other business activities, then it is a case of exploiting the business assets otherwise than employing them for his own use for making profit for that business ; but if the business never started or has started but ceased with no intention to be resumed, the assets also will cease to be business assets and the transaction will only be exploitation of property by an owner thereof, but not exploitation of business assets.\"\n\n\t25. In the background of the above said decisions, we reject the reliance placed on by the learned counsel for the assessee in the decision reported in the case of Commissioner of Income Tax, Spl.Range II Vs. Sanmar Holdings Ltd., reported in (2005) 272 ITR 345 (Mad). The said decision related to a case, where one of the objects of the Company was to deal in shares, stocks, debentures, bonds, obligations, chits, securities and to purchase, take on lease or in exchange, hire or otherwise acquire and deal in any movable or immovable property. In respect of rental income, the question arose as to whether the income was to be assessed as a \"business income\" ; this Court referred to the decision of the Apex Court in Sultan Brother P.Ltd Vs. CIT (1964) (51 ITR 353) and pointed out whether a particular letting was \"business\" had to be decided in the circumstances of each case and each case had to be looked at from a businessman's point of view to find out whether the letting was the doing of a business or the exploitation of the property as an owner. This Court referred to the decision in Sultan Brother P.Ltd., Vs. CIT (1964) 51 ITR 353 and held that before invoking Section 22 of the Act, for the purpose of assessing the rental income as an \"income from the house property\", the revenue authorities must go into the question whether there was any exploitation of the property by their owner by giving it away for rent, before assessing such rental income as an income from house property. Going through the records, this Court held that in the absence of any finding on this aspect, the proper course would be to remand the matter back to the Assessing Officer for de novo consideration. In the light of the above said decision, this Court remitted the matter to the Assessing Officer.\n\n\t26. It is seen from the order of assessment that the assessee took on lease the land and building owned by Mr.Sethu-Director of the Company. The assessee constructed the commercial complex and received rental income therefrom. The Assessing Officer pointed out that it was the only activity carried out during the year 1991-92 ; there were no other activity thereafter carried on ever since 1991-92. Under such circumstances, the Assessing Officer concluded that there was no such thing as exploitation of business assets. There are no materials placed before us by the assessee to contradict the above said facts. \n\n\t27. It was highlighted by learned counsel for the assessee that the assessee herein is not the owner of the land but only owner of the superstructure and submitted for application of the above said decision to the cases on hand for a remand. We do not think the facts of the present cases warrant such remand.\n\n 28. We have already referred to the decision of the Apex Court in East India Housing and Land Development Trust Ltd Vs. Commissioner of Income Tax reported in (1961) 42 ITR 49 (SC), which was also considered in the case of (1)Universal Plast Ltd., (2) Guntur Merchants Cottpn Press Co.Ltd Vs. CIT reported in 237 ITR 454. The question involved therein was as to whether income from letting of the property was to be treated as \"business income\" or not. As has been pointed out in the decision in the case of (1)Universal Plast Ltd., (2) Guntur Merchants Cottpn Press Co.Ltd Vs. CIT reported in 237 ITR 454, when the facts noted in the case before us clearly point out that the transaction was only by way of exploitation of the property by the assessee and not by way of exploitation of business assets, we do not find any ground to accept the contention of the assessee that the nature of business carried on by the assessee would be conclusive of the nature of receipts on the letting of the property. Going by the decision in East India Housing and Land Development Trust Ltd., Vs. Commissioner of Income Tax reported in (1961) 42 ITR 49 (SC), when the rental income falls within the specific head of income from house property, the mere fact of the assessee having business in letting out the property as stated in its memorandum, by itself, will not conclusively point out that the income is nothing but business income. Even in the case of Commercial Properties Ltd., Vs. CIT reported in (1928) 1 LR 55 Calcutta, a decision which was confirmed by the Apex Court, it was held that rental income derived by a company, whose sole object was to acquire lands, build houses and let them to tenants and whose sole business was management and collection of rents from the said properties, was held assessable under Section 9 and not under Section 10 of the Income Tax Act.\n\n 29. Thus, applying the decision in the case of East India Housing and Land Development Trust Ltd Vs CIT reported in 42 ITR 49 (SC) to the facts as found by the Assessing Officer that the assessee had no other activity during 1991-92 too, this Court accepts the case of the Revenue that income received from letting out of the property was rightly assessed by the Officer as \"income from property\". In the circumstances, we set aside the order of the Tribunal.\n\n\t30. In the result, we allow the Tax Case Appeals and the substantial questions of law are answered in favour of the Revenue.\n\nnvsri\n\nTo\n\n1.Commissioner of Income Tax, Salem\n\n2.The Commissioner of Income-Tax(Appeals) Salem\n\n3.The Income Tax Appellate Tribunal\n Bench 'D', \n Chennai" }, { "title": "Ahmedabad Electricity Co. Ltd. And ... vs Commissioner Of Income-Tax on 30 April, 1992", "url": "https://indiankanoon.org//doc/1841881/", "text": "Ahmedabad Electricity Co. Ltd. And ... vs Commissioner Of Income-Tax on 30 April, 1992\nEquivalent citations: 1992(3)BOMCR678, [1993]199ITR351(BOM)\nAuthor: Sujata Manohar\nBench: B.N. Srikrishna, Sujata V. Manohar\nORDER THEREON'--In s. 254(1)--Not merely refers to the appeal but the entire tax proceedings. \n\nHELD : \n Sec. 254 states that the Tribunal, \nwhile deciding the appeal, may pass such order on the appeal as \nit thinks fit. To read the word `thereon'as restricting the \njurisdiction of the Tribunal is, not warranted. It \ndoes not refer to the scope of jurisdiction at all. The words \nwhich prescribe the extent of jurisdiction of the Tribunal under \ns. 254 are the words \"may pass such orders...as it thinks fit\". \nThese are the words which describe the jurisdiction of the \nTribunal. The word `thereon' merely refers to the fact that the \nTribunal while deciding the appeal has to exercise this \njurisdiction. The phrase \"pass such order thereon\" does not in \nany way restrict the jurisdiction of the Tribunal but, on the \ncontrary, confers the widest possible jurisdiction on the \nTribunal including jurisdiction to permit any additional ground \nof appeal if, in its discretion, and for good reason, it thinks \nit necessary or permissible to do so. \n\nIncome Tax Act 1961 s.254 \n\n \n\n \n \n\nAppeal (Tribunal)--ADDITIONAL GROUND--Ground not arising from order of AAC--Tribunal competent to entertain same if it is in respect of subject-matter of the entire proceedings.\n\nHELD : \n Under s. 254(1) the Tribunal may, after giving \nboth the parties to the appeal an opportunity of being heard, \n\"pass such orders thereon as it thinks fit\". The word `thereon' \nmerely refers to the appeal. Sec. 254 states that the Tribunal, \nwhile deciding the appeal, may pass such order on the appeal as \nit thinks fit. To read the word `thereon' as restricting the \njurisdiction of the Tribunal is not warranted. It \ndoes not refer to the scope of jurisdiction at all. The words \nwhich prescribe the extent of jurisdiction of the Tribunal under \ns. 254 are the words \"may pass such orders... as it thinks fit\". \nThese are the words which describe the jurisdiction of the \nTribunal. The word `thereon' merely refers to the fact that the \nTribunal while deciding the appeal has to exercise its \njurisdiction. The phrase \"pass such order thereon\" does not in \nany way restrict the jurisdiction of the Tribunal but, on the \ncontrary, confers the widest possible jurisdiction on the \nTribunal including jurisdiction to permit any additional ground \nof appeal if, in its discretion, and for good reason, it thinks \nit necessary or permissible to do so. The Tribunal has \njurisdiction to permit additional grounds to be raised before it \neven though these may not arise from the order of the AAC, so \nlong as these grounds are in respect of the subject-matter of the \nentire tax proceedings. \n\nIncome Tax Act 1961 s.254 \n\n \n\n \n \n\nORDER\n \n\nMrs. Sujata Manohar J. \n\n 1. Income-tax Reference No. 481 of 1976 is in respect of two questions of law which have been referred by the Income-tax Appellate Tribunal to the High Court under section 256(1) of the Income-tax Act, 1961. This income-tax reference came up for hearing before a Division Bench of this High Court (see [1991] 190 ITR 413). As far as the first question was concerned, the Division Bench answered the question in the affirmative and in favour of the Revenue. The second question which was before the Division Bench was as follows (see [1991] 190 ITR 413, 414) : \n\n\"(2) Whether, on the facts and in the circumstances of the case, the Tribunal erred in not allowing the assessee leave to raise in its own appeals additional grounds and in the departmental appeals cross-objections regarding the deductibility of the sums transferred to contingency reserve and tariff and dividend control reserve ?\" \n\n 2. In respect of the second question, the pertinent facts are as follows : \n\n 3. This question refers to the assessment years 1962-63 to 1971-72. The assessee-company which is governed by the Electric Supply Act of 1948 was required to transfer certain amounts to contingency reserve and amounts as deductions either before the Income-tax Officer or before the Appellate Assistant Commissioner in appeal in respect of these assessment years. Subsequently, our High Court held in the case of Amalgamated Electricity Co. Ltd. v. CIT [1974] 97 ITR 334, that such amounts represented allowable deductions on revenue account.\n\n 4. At the time when this decision came, the assessee had already filed appeals before the Tribunal against the orders of the Appellate Assistant Commissioner for the assessment years 1962-63, 1963-64, 1966-67, 1967-68, 1968-69 and 1969-70. The Department had filed appeals before the Tribunal for the assessment years 1964-65, 1965-66, 1970-71 and 1971-72. For these assessment years, the assessee had filed cross-objections. In view of the decision of our High Court in Amalgamated Electricity's case [1974] 97 ITR 334, the assessee sought to raise additional grounds in that connections. It also sought to raise an additional grounds in its cross-objections in connection with this deduction. The Tribunal, however, refused to grant leave to the assessee to raise such an additional ground.\n\n 5. Question No. (2) is with reference to the refusal of this leave by the Tribunal to raise additional grounds. The Division Bench which heard the reference, while dealing with question No. (2), came to the conclusion that there was a conflict of views taken by our High Court in the cases of Ugar Sugar Works Ltd. v. CIT [1983] 141 ITR 326 and in the case of CED v. Bipinchandra N. Patel [1990] 186 ITR 29. The Division Bench, therefore, by its order dated February 19, 1991 (see [1991] 190 ITR 413), has directed that question No. (2) should be placed before the Honourable Chief Justice for constituting a larger Bench to resolve the controversy. Accordingly, this question has been referred to us for decision.\n\n 6. Income-tax Reference No. 45 of 1977 (see [1991] 191 ITR 311, 313) relates to a number of questions which were referred to the High Court by the Tribunal under section 256(1) of the Income-tax Act, 1961. One of the questions so referred was follows : \n \"3. Whether, on the facts and circumstances of the case, the Tribunal erred in law in not allowing the additional ground raised for allowing the applicants Rs. 42,443 as revenue loss under section 32(1)(iii) of the Income-tax Act, 1961, incurred due to destruction of the sugar godown because of cyclone during the relevant assessment year ?\" \n\n 7. The facts relating to this question are as follows : \n\n 8. The assessee had constructed a sugar godown during the previous year relevant to the assessment year 1962-63. On the ground that it was a shed and a temporary structure, the assessee claimed the expenditure incurred thereon as revenue expenditure. The shed was destroyed in the next assessment year by a cyclone. In view, however, of the stand was revenue expenditure, the assessee could not claim any deduction when the shed was destroyed in the following year under section 32(1)(iii) of the Income-tax Act as then in force. In the assessment proceedings, however, the assessee's stand for the earlier year was not accepted. The Tribunal decided the assessee's appeal for the assessment year 1962-63 some time in 1972 holding that the shed which was constructed was not a temporary shed and that it constituted a capital asset on which depreciation was to be allowed. For the next assessment year 1963-64, depreciation could not be allowed in view of section 34(2)(iii) as then in force, as the shed was destroyed by cyclone during the year. Thus, the question of claiming a deduction under section 32(1)(iii), admittedly, arose as a result of the Tribunal's order in the assessee's case for the assessment year 1962-63. The assessee sought to raise an additional ground of appeal to the effect that Rs. 42,443 be allowed as revenue loss under section 32(1)(iii) of the Income-tax Act, 1961, incurred due to the destruction of the sugar godown because of a cyclone on June 10, 1961. The Tribunal did not permit the assessee to raise this additional ground as the same was not raised and did not arise out of the order of the Appellate Assistant Commissioner from which the appeal had been preferred to the Tribunal. The above question, therefore, was, inter alia, referred to the High Court for determination by the Tribunal under section 256(1) of the Income-tax Act. \n\n 9. The Division Bench of the High Court which heard the reference, by its judgment and order dated February 28, 1991, (see [1991] 191 ITR 311), decided the other questions which were before it. But, in respect of the above question, it came to the conclusion that there was a conflict between two authorities of this High Court. They had, therefore, already referred this question to a larger Bench in the case of Ahmedabad Electricity Co. Ltd. v. CIT [1991] 190 ITR 413 (Bom) in Income-tax Reference No. 481 of 1976. They, therefore, directed the above question to be placed before a larger Bench for consideration. This question also, therefore, is referred to us. Both these questions relate to the jurisdiction of the Income-tax Appellate Tribunal to permit additional grounds to be raised before it which were not raised before the Appellate Assistant Commissioner or the Income-tax Officer.\n\n 10. Chapter XX of the Income-tax Act, 1961, deals with appeals and revision. An assessee, aggrieved by an order of assessment or any order enumerated in section 246, can (at the relevant time) file an appeal before the Appellate Assistant Commissioner. The Department does not have a right of appeal before the Appellate Assistant Commissioner. Under section 251 of the Income-tax Act, 1961 (as it stood at the relevant time), in disposing of an appeal, the Appellate Assistant Commissioner has the following powers : \n\n (a) in an appeal against an order of assessment, he may confirm, reduce, enhance or annul the assessment; or he may set aside the assessment and refer the case back to the Assessing Officer for making a fresh assessment in accordance with the directions given by the Appellate Assistant Commissioner and after making such further inquiry as may be necessary, and the Assessing Officer shall thereupon proceed to make such fresh assessment and determine, where necessary, the amount of tax payable on the basis of such fresh assessment; \n\n (b) in an appeal against an order imposing a penally, he may confirm or cancel such order or vary it so as either to enhance or to reduce the penalty; \n\n (c) in any other case, he may pass such orders in the appeal as he thinks fit. \n\n 11. Under section 251, sub-section (2), an Appellate Assistant Commissioner shall not enhance an assessment or a penalty or reduce the amount of refund unless the appellant has had a reasonable opportunity of showing cause against such enhancement or reduction. An Explanation to sub-section (2) states, \"In disposing of an appeal, the Appellate Assistant Commissioner may consider and decide any matter arising out of the proceedings in which the order appealed against was passed, notwithstanding that such matter was not raised before the Appellate Assistant Commissioner by the appellant.\" Thus, the Appellate Assistant Commissioner has very wide powers while considering an appeal which may be filed by the assessee. He may confirm, reduce, enhance or annul the assessment or remand the case to the Assessing Officer. This is because, unlike an ordinary appeal, the basic purpose of a tax appeal is to ascertain the correct tax liability of an assessee in accordance with law. Hence an Appellate Assistant Commissioner also has the power to enhance the tax liability of the assessee although the Department does not have a right of appeal before the Appellate Assistant Commissioner. The Explanation to sub-section (2), however, makes it clear that for the purpose of enhancement, the appellate Assistant Commissioner cannot travel beyond the proceedings which were originally before the Income-tax Officer or refer to new sources of income which were not before the Income-tax Officer at all. For this purpose, there are other separate remedies provided under the Income-tax Act. \n\n 12. From the order of the Appellate Assistant Commissioner an appeal is provided to the Income-tax Appellate Tribunal. Section 253 of the Income-tax act provides for such an appeal by an assessee who is aggrieved by any of the orders which are numerated in that section. Under sub-section (2) of section 253, the Department also has a right of appeal against the order of the Appellate Assistant Commissioner has been preferred, either under sub-section (1) or sub-section (2) by the other party may, notwithstanding that he may not have appealed against such order or any part of it, file a memorandum of cross-objections; and such memorandum shall be disposed of by the Appellate Tribunal as if it were an appeal. \n\n 13. Under section 254(1), the Appellate Tribunal may, after giving both the parties to the appeal an opportunity of being heard, \"pass such orders thereon as it thinks fit\". This gives a very wide power to the Appellate Tribunal to pass, on the appeal such orders as it may think fit. \n\n 14. In the case of the Appellate Assistant Commissioner there is an express power granted to him to enhance the tax liability. This is because the Department does not have a right of appeal before the Appellate Assistant Commissioner. As far as the Appellate Tribunal is concerned, the case may be, if it is aggrieved by any part of the order of the Appellate Assistant Commissioner. Therefore, any express power of enhancement has not been conferred on the Appellate Tribunal. The Tribunal can, in a given case, in dealing with an appeal filed by the Department or considering its cross-objections, enhance the tax liability of the assessee if the Tribunal accepts the contention of the Department. \n\n 15. Dr. Balasubramanian, learned advocate for the Department contends that, under section 254, the Tribunal can decide only points raised or allowed to be raised before it; and further that the Tribunal cannot permit raising of points not arising from the order of the Appellate Assistant Commissioner. We do not find anything in section 254 which would thus restrict the powers of the Appellate Tribunal while considering an appeal before it. As we have said earlier, the basic purpose of an appeal procedure in an income-tax matter is to ascertain the correct tax liability of the assessee in accordance with law. Therefore, at both the stages, either before the Appellate Assistant Commissioner or before the Appellate Tribunal, the appellate authority can consider the proceedings before it and the material on record before it for the purpose of determining the correct tax liability of the assessee. The appellate authorities of course, cannot travel beyond the proceedings and examine new sources of income. For this purpose, other separate remedies are provided to the Department under the income-tax Act. But, apart from this, there is nothing in section 254 or section 251 which would indicate that the appellate authorities are confined to considering only the objections raised before them or allowed to be raised before them either by the assessee or by the Department, as the case may be. They can consider the entire proceeding to determine the tax liability of the assessee. But they cannot travel beyond the proceedings to bring in new sources of income. The Explanation to section 251(2) clearly brings out this aspect. The Explanation clarifies the extent of the powers of an Appellate Assistant Commissioner. But, even before the Explanation was added to section 251, that section and the corresponding previous section had been interpreted by our High Court and other High Courts in the same manner. \n\n 16. As far back as in 1957, in the case of Narrondas Manordass v. CIT [1957] 31 ITR 909, the Bombay High Court had considered the scop of section 31(3) of the Indian Income-tax Act, 1922. This section is equivalent to section 251 of the present Income-tax Act, expect that, under section 31(3), there was no Explanation of the kind which is present in section 251. Nevertheless, the court had to say this about the interpretation of section 31(3) : The court said that section 31(3) relating to appeal is enacted for the purpose of ascertaining the tax liability of the assessee. The statute provides that once an assessment comes before the Appellate Assistant Commissioner, his competence is not restricted to examining those aspects of the assessment which are complained of by the assessee. His competence ranges over the whole assessment and it is open to him to correct the Income-tax Officer's order not only with regard to a matter which has been considered by the Income-tax Officer and determined in the course of the assessment. The court said (at page 921). \"The principle which clearly emerges from these observations is that the Appellate Assistant Commissioner cannot travel beyond the subject-matter of the assessment. Note that it is not the subject-matter of the appeal but the subject-matter of the assessment and when the learned judges of the Patna High Court in Jagarnath Therani v. CIT [1925] 2 ITC 4, say that the Appellate Assistant Commissioner is not entitled to assess new source of income, this expression is . . . in this sense that a source from which income may spring may not have been considered by the Income-tax Officer at all, and if that the position then it would not be open to the Appellate Assistant Commissioner to assess the assessee with regard to that source. It is in this sense that the source is looked upon by the Patna High Court as new source . . . Therefore, if an income is the subject-matter of the consideration by the Income-tax Officer may come to the conclusion that that income is not subject to tax, it would be open to the Appellate Assistant Commissioner to take a different view and to bring that income to tax\". Therefore, even without the Explanation, the court had interpreted the provisions of section 31(3) as conferring on the Appellate Assistant Commissioner powers much wider than those of an ordinary court of appeal. Once an assessment comes before an Appellate Assistant Commissioner, his competence is not restricted to examining those aspects of the assessment which are complained of by the assessee but ranges over the whole assessment and it is open to him correct the Income-tax Officer's order not only with regard to a matter raised by the assessee in the appeal but also with regard to a matter which has been considered by the Income-tax Officer and determined in the course of the assessment. The Explanation to section 251, therefore, neither confers any additional powers on the Appellate Assistant Commissioner nor does it take away any powers on the Appellate Assistant Commissioner.\n\n 17. Similarly, the absence of such an Explanation in section 254 which deals with the powers of the Tribunal also makes no different to the scope of powers of the Tribunal. Looking to the wide language in which this power is granted to the Tribunal, we do not find any reason for restricting this power only to the points at issue arising from the order of the Appellate Assistant Commissioner and raised by the assessee or by the Department before the Tribunal. \n\n 18. In this connection, a reference may also be made to the Income-tax (Appellate Tribunal) Rules, 1963, which have been framed under section 255(5) of the Income-tax Act, 1961. Under rule 11 of the Appellate Tribunal Rules, the appellant shall not, expect by leave of the Tribunal, urge or be heard in support of any ground not set forth in the memorandum of appeal but the Tribunal, in deciding the appeal, shall not be confined to the Tribunal under this rule; provided that the Tribunal shall not rest its decision on any other ground unless the party heard on that ground. So that, in deciding the appeal, the Tribunal is not restricted to the grounds which are taken or which have been allowed to be taken in the memorandum of appeal. \n\n 19. Similarly, under rule 29, the parties to the appeal shall not be entitled to produce additional evidence, either oral or documentary before the Tribunal, but if the Tribunal requires any documents to be produced or any witness to be examined or any affidavit to be filed to enable it to pass orders or for any other substantial cause, or if the income-tax authorities have decided the case without giving sufficient opportunity to the assessee to adduce evidence either on points specified by them or not specified by them, the Tribunal, for reasons to be recorded, may allow such document to be produced or witness to be examined or affidavit to be filed or may allow such evidence to be adduced. These rules, therefore, indicate that the scope of enquiry before the Tribunal can be wider than the points which are raised before the Tribunal. The Tribunal, therefore, would ordinarily have the power to allow additional points to be raised before it so long as they arise from the subject-matter of the proceedings and not necessarily only from the subject-matter raised in the memorandum of appeal. This point, however, is not res integra. There are a large number of authorities on this question. \n\n 20. In the case of Hukumchand Mills Ltd. v. CIT [1967] 63 ITR 232, the Supreme Court was required to consider the powers of the Appellate Tribunal under section 33(4) of the Indian Income-tax Act, 1922, which is equivalent to the present section 254 of the Income-tax Act, 1961. In the case before the Supreme Court, the assessee-company was incorporated in the then native State of Indore. It was assessed in British India, except for the assessment year 1948-49, as a non-resident on such income as fell within section 4(1)(a) or (c) read with section 42 of the Indian Income-tax Act, 1922. After the Constitution of India came into force, Indore became a Part B State and the Indian Income-tax Act, 1922, was brought into force in Part B State with effect from April 1, 1950. For the assessment year 1950-51, the assessee became assessable as a resident. The Tribunal, in that case, had permitted the Department to raise for the first time the contention that the Income-tax Officer had not considered the provisions of paragraph 2 of the Taxation Laws (Part B State) (Removal of Difficulties) Order, 1950, and remanded the matter to the Income-tax Officer to ascertain whether any depreciation was allowed under the Indore Industrial Tax Rules and, if he was of the opinion that there rules related to income-tax or super tax or any law relating to tax on profits of business, to take into consideration such depreciation actually allowed under these Rules also for the purpose of computing the written down value. The assessee contended that the Tribunal should not have allowed the Department to raise the contention for the first time before it and remanded the case. The Supreme Court held that the Appellate Tribunal had sufficient power under section 33(4) of the old Income-tax Act to entertain the contention of the Department and to remand the case to the Income-tax Officer.\n\n 21. After referring to section 33(4) which gave to the Appellate Tribunal power to pass \"such orders thereon as it thinks fit\", the Supreme Court said (at page 237) : \"The world 'thereon', of course, restricts the jurisdiction of the Tribunal to the subject-matter of the appeal. The words pass such orders as the Tribunal thinks fit' include all the powers (except possibly the power of enhancement) which are conferred upon the Appellate Assistant Commissioner by section 31 of the Act\". And a little later, the court explained, (at page 237) : \"In the present case, the subject of the appeal before the Tribunal was the question as to what should be the proper written down value of the buildings, machinery, etc., of the assessee for calculating the depreciation allowance under section 10(2)(vi) of the Act.\" Therefore, the Supreme Court clearly said that the Tribunal could permit additional grounds to be raised for the first time before it so long as these additional grounds were the subject-matter of the proceedings; because, quite clearly, the court has interpreted the subject-matter of the appeal widely as covering the various issues arising in the proceedings whether raised earlier or not. \n\n 22. The position was further clarified by the Supreme Court in the case of CIT v. Mahalakshmi Textile Mills Ltd. [1967] 66 ITR 710. The Supreme Court has held (headnote) : \"Under section 33(4), the Appellate Tribunal is competent to pass such order on appeal 'as it thinks fit'. There is nothing in the Income-tax Act which restricts the Tribunal to the determination of question raised before the Department authorities. All questions, whether of law or of facts, which relate to the assessment of the assessee may be raised before the Tribunal.\"\n\n 23. In the case of CIT v. S. Nelliappan [1967] 66 ITR 722, the Supreme Court once again considered the scope of section 33(4) of the Indian Income-tax Act, 1922. The court reiterated that in hearing an appeal the Tribunal may give leave to the assessee to urge grounds not set forth in the memorandum of appeal and in deciding the appeal the Tribunal is not restricted to the grounds set forth in the memorandum of appeal or taken by leave of Tribunal. The Tribunal was, therefore, competent to allow the assessee to raise the contention relating to the cash credits which was not made the subject-matter of a ground in the memorandum of appeal. The court said that the Tribunal is not precluded from adjusting the tax liabilities of the assessee in the light of its findings merely because the findings were inconsistent with the pleaded by the assessee.\n\n 24. Coming to our High Court in the case of Ramgopal Ganpatrai and Sons Ltd. v. CEPT [1953] 24 ITR 362, the court considered the provisions relating to appeals in respect of the Excess Profit Tax. The court observed that an Appellate Tribunal has jurisdiction to deal with an order which is in appeal before it on any ground even though such a ground was not taken earlier. It said, inter alia, that the appellate court may even reverse or modify the order on a point of law taken by itself suo motu, without being asked to do so by the appellant. When a statute confers a right of appeal and permits an order of the trial court to be challenged, the appellate court has full jurisdiction to reverse or modify that order on any ground which is open to it in law. The court further said that it was not suggesting that the appellate court had no discretion to refuse the appellant to urge a ground not taken in the court below, but the appellate court did have competence and jurisdiction to allow a point of law to be taken before it which was not taken in the court below. \n\n 25. In the case of CIT v. Breach Candy Swimming Bath Trust [1955] 27 ITR 279 (Bom), the High Court was required to consider the powers of the Income-tax Appellate Tribunal. In that case, the assessee for the first time raised a new contention before the Tribunal to the effect that it was a charitable trust and hence the income derived by the charitable trust was exempt from taxation. The Tribunal permitted the assessee to raise this point and answered it in its favour. The question which was referred to the High Court was whether the Tribunal was competent in law in permitting an assessee to raise a ground at the time of the hearing of the appeal - a ground which was not raised either before the Income-tax Officer or before the Appellate Assistant Commissioner, or in the grounds of appeal before the Appellate Tribunal. The court said that the Tribunal has the authority to permit a new point to be raised, provided that the party who is affected by the raising of this point. (vide rule 12 of the Appellate Tribunal Rules, 1946). (See also in this connection B. R. Bamasi v. CIT [1972] 83 ITR 223 (Bom)).\n\n 26. In the case of J. S. Parkar v. V. B. Palekar [1974] 94 ITR 616 (Bom), the court said that new contention could be raised before the Tribunal in an appeal which had not been taken either before the Appellate Assistant Commissioner or before the Income-tax Officer. In the case of CED v. Bipinchandra N. Patel [1990] 186 ITR 29 (Bom), our court was required to consider whether, in an appeal to the Appellate Tribunal under the Estate Duty Act, 1953, the Tribunal had the power to admit an additional ground which was not raised either before the Assistant Controller or before the Appellate Controller. The court (to which one of us was a party) held that it was permissible for the Tribunal to allow such an additional ground, especially as the ground pertained to a legal question. The court in that case considered various authorities of our High Court which have been referred to earlier and also referred to the decision of the Andhra Pradesh High Court in the case of CIT v. Gangappa Cables Ltd. as also Addl. CIT v. Gurjargravures P. Ltd. while arriving at this conclusion.\n\n 27. In the case of Addl. CIT v. Gurjargravures [1978] 111 ITR 1, the Supreme Court was concerned with a case where the Tribunal had allowed a point to be raised which had not been taken before the Income-tax Officer or before the Appellate Assistant Commissioner. The Supreme Court held that such a point should not have been allowed to be raised. It said, however, that it was not called upon to consider a case where the assessee had failed to make a claim although there was evidence on record to support it; nor was it called upon to consider a case where a claim was made but there was no evidence or insufficient evidence adduced in support of the claim. In the case before the Supreme Court, neigher any claim had been made before the Income-tax Officer, nor was there any material on record supporting such a claim and, therefore, such a claim ought not to have been allowed to be raised by the Tribunal before it for first time.\n\n 28. This decision has now been explained by the Supreme Court in the case of Jute Corporation of India Ltd. v. CIT [1991] 187 ITR 688, as turning upon its own special facts. We will revert to it a little later. This decision of the Supreme Court in the case of Addl. CIT v. Gurjargravures P. Ltd. [1978] 111 ITR 1, was also distinguished by the Andhra Pradesh High Court in the case of CIT v. Gangappa Cables Ltd. [1979] 116 ITR 778. The Andhra Pradesh High Court also said that the Appellate Tribunal disposing of an appeal under the Income-tax Act has got the power to allow the assessee to put forward a new claim, notwithstanding the fact that such a claim was not raised by him before the Income-tax Officer or the Appellate Assistant Commissioner provided that there is sufficient material on record to allow such a claim.\n\n 29. The Andhra Pradesh High Court relied upon the decisions of the Supreme Court in CIT v. Mahalakshmi Textile Mills Ltd. [1967] 66 ITR 710 and Hukumchand Mills Ltd. v. CIT [1967] 63 ITR 232 in support of its finding that the words \"pass such orders as the Tribunal thinks fit\" are wide enough to empower a Tribunal to consider a claim which was not made earlier, provided there was sufficient evidence on record to support such a claim.\n\n 30. The Punjab and Haryana High Court has also taken a similar view in the case of Atlas Cycle Industries Ltd. v. CIT [1982] 133 ITR 231. The Punjab and Haryana High Court relied upon the Supreme Court decision in the case of CIT v. Mahalakshmi Textile Mills Ltd. [1967] 66 ITR 710 in support of its finding that all question, whether of law or of fact, which relate to the assessment of the assessee, can be raised before the Tribunal. There is nothing in the Income-tax Act which restricts the Tribunal to the determination only of questions raised before the Department authorities. The Punjab and Haryana High Court also distinguished the Supreme Court decision in the case of Addl. CIT v. Gurjargravures P. Ltd. [1978] 111 ITR 1 on the ground that that decision turned upon the peculiar facts and circumstances of that case, since that was a case where material was not available in support of the plea which was raised before the Tribunal for the first time. (See also in this connection two other decisions of the Punjab and Haryana High Court to similar effect in the case of Oswal Cotton Spinning and Weaving Mills v. CIT [1981] 129 ITR 761 and in the case of Vijay Kumar Jain v. CIT [1975] 99 ITR 349).\n\n 31. The Kerala High Court has taken a similar view in the case of CIT v. Kerala State Co-operative Marketing Federation Ltd. [1992] 193 ITR 624. The Kerala High Court has observed that the appeal provisions under the Income-tax Act are for the purpose of assessing the correct tax liability of the assessee and, for that purpose, the Tribunal can permit additional grounds to be raised before it which had not been raised either before the Income-tax Officer or before the Appellate Assistant Commissioner.\n\n 32. A similar view has been taken by the Madras High Court in the case of CIT v. Indian Express (Madurai) Pvt. Ltd. [1983] 140 ITR 705. The Madras High Court has also said that the primary purpose of the Income-tax Act is to levy and collect income-tax and the purpose of the statutory provisions, especially those relating to the administration and management of income-tax, is to ascertain the tax liability correctly. The various provision relating to appeal, reference, etc., cannot be equated to a lis or dispute arising between two parties as in a civil litigation. The very object of the appeal is not to decide a point raised as a dispute but any point which goes into the adjustment of the taxpayer's liability. Therefore, the proceeding before such authorities lack the basic elements of adversary proceedings. Under section 33(4) of the Indian Income-tax Act, 1922, the Appellate Tribunal is competent to pass such orders on the appeal as it thinks fit and there is nothing in the Act which restricts the Tribunal to a determination of the question raised before the Department. All questions whether of law or of fact which relate to the assessment of the assessee may be raised before the Tribunal. The Madras High Court also relied upon the Supreme Court decisions in the cases of CIT v. Mahalakshmi Textile Mills Ltd. [1967] 66 ITR 710 and CIT v. Nelliappan [1967] 66 ITR 722, as also Hukumchand Mills Ltd. v. CIT [1967] 63 ITR 232. It did not follow a contrary decision of the Gujarat High Court in the case of CIT v. Karamchand Premchand Private Ltd. [1969] 74 ITR 254, in view of the above Supreme Court decisions. (See also in this connection CED v. R. Brahadeeswaran [1987] 163 ITR 680, 682 (Mad)). These decisions of the Madras High Court have taken a view which is different from the view earlier taken by the Madras High Court in the case of Panchura Estate Ltd. v. Government of Madras [1973] 87 ITR 698.\n\n 33. There are, however, some judgments of High Courts which have taken a somewhat different view. The case of Addl. CIT v. Gurjargravures P. Ltd. , we have already referred to earlier The decision of the Supreme Court in that case turned upon the special facts of that case, especially because there was absolutely no material on the basis of which the plea could have been raised before the Tribunal. The Gujarat High Court has also taken a different view. In the case of CIT v. Karamchand Premchand Private Ltd. [1969] 74 ITR 254, the Gujarat High Court has taken the view that the Tribunal can consider only the points which have been dealt with by the Appellate Assistant Commissioner. In that case, the Gujarat High Court held that where, in an appeal to the Appellate Assistant Commissioner by the assessee against an order of assessment, the assessee had not questioned the decision of the officer on a point decided and the Appellate Assistant Commissioner The High Court said that the Tribunal was not entitled to allow the assessee to agitate the question under the guise of granting leave under rule 11 of the Income-tax (Appellate Tribunal) Rules, 1963. The Gujarat High Court held that, while the powers of the Appellate Assistant Commissioner were very wide, under section 253 which dealt with an appeal to the Tribunal, the jurisdiction of the Tribunal was confined only to points raised before the Appellate Assistant Commissioner which were the subject-matter of the appeal before the Tribunal. It said that, if a particular matter is not considered and decided by the Appellate Assistant Commissioner and the decision on it does not form part of the order of the Appellate Assistant Commissioner, there can be no appeal against it. Apparently, there was no dispute before the court on this proposition (see page 262) : and hence the court said that the jurisdiction of the Tribunal in appeal was limited.\n\n 34. The Gujarat High Court did not consider the nature of the appeal or the nature of appellate proceedings in an income-tax appeal where the analogy of adversary proceedings does not strictly apply. If the purpose of the income-tax appeal, whether it is before the Appellate Assistant Commissioner or before the Tribunal, is to ascertain the correct tax liability of the assessee, we do not see any reason why the jurisdiction of the Tribunal should be restricted in the manner set out by the Gujarat High Court in the case of CIT v. Karamchand Premchand Private Ltd. [1969] 74 ITR 254.\n\n 35. The Gujarat High Court had emphasised the word \"thereon\" in section 254 of the Income-tax Act. In out view, this word does not in any manner restrict the jurisdiction of the Appellate Tribunal. The word \"thereon\" merely refers to the appeal. Section 254 states that the Appellate Tribunal, while deciding the appeal, may pass such order on the appeal as it thinks fit. To read the word \"thereon\" as restricting the jurisdiction of the Appellate Tribunal is, in our view, not warranted. It does not refer to the scope of jurisdiction at all. The words which prescribe the extent of jurisdiction of the Tribunal under section 254 are the words \"may pass such orders .... as it thinks fit\". These are words which prescribe the jurisdiction of Appellate Tribunal. The word \"thereon\" merely refers to the fact that the Tribunal, while deciding the appeal, has to exercise this jurisdiction. \n\n 36. Looked at from a slightly different point of view, if the word \"thereon\" can be said to refer to the subject-matter of the appeal, then, as stated by the Supreme Court in the case of Hukumchand Mills [1967] 63 ITR 232, the subject-matter of the appeal is the entire tax proceeding of the assessee which is before the Tribunal for consideration; and this will cover the proceedings before the Income-tax Officer, before the Appellate Assistant Commissioner as well as before the Tribunal - including the grounds raised before the Tribunal, any additional grounds which may be allowed to be raised before the Tribunal, as also cross-objections, if any, before the Tribunal. Undoubtedly, the Tribunal has discretion to decide whether any additional points can be allowed to be raised before it at the stage of appeal before it. And it may not permit such a new point to be raised for good reasons. But the extent of jurisdiction of the Tribunal is not confined only to points which were considered by the Appellate Assistant Commissioner and which may be challenged in appeal before the Tribunal. The Tribunal can permit other grounds also to be raised before it, provided, of course, that they arise out of the proceedings. \n\n 37. We do not, therefore, agree with the view taken by the Gujarat High Court in the case of CIT v. Karamchand Premchand Private Ltd. [1969] 74 ITR 254. The view taken by the Gujarat High Court in the case of CIT v. Karamchand Premchand Private Ltd. [1969] 74 ITR 254, was reiterated by a Full Bench of the Gujarat High Court in the case of CIT v. Cellulose Product of India Ltd. [1985] 151 ITR 499. This view has also been followed by the Madhya Pradesh High Court in the case of Hukumchand and Mannalal Co. v. CIT [1980] 126 ITR 251 and the Delhi High Court in the case of CIT v. Anand Prasad [1981] 128 ITR 388. For reasons set out above, we differ from the view taken in these cases.\n\n 38. Our High Court in the case of Ugar Sugar Works Ltd. v. CIT [1983] 141 ITR 326 also followed the judgment of the Gujarat High Court in the case of CIT v. Karamchand Premchand Private Ltd. [1969] 74 ITR 254 and held that there was a distinction between the jurisdiction of the Appellate Assistant Commissioner and that of the Tribunal. It said that, while the Appellate Assistant Commissioner's jurisdiction ranges over the whole assessment and is not confined to matters raised by the assessee, the Tribunal's Jurisdiction is restricted to the points which were decided by the Appellate Assistant Commissioner and which may be challenged in the memorandum of appeal before the Tribunal. For reasons set out earlier, in our view, the view expressed in this judgment cannot be accepted. It is contrary to the decisions of the Supreme Court referred to earlier as well as the decisions of our High Court which have also been set out earlier.\n\n 39. The powers of an appellate authority under the Income-tax Act have been recently considered once again by the Supreme Court in the case of Jute Corporation of India Ltd. v. CIT [1991] 187 ITR 688. In that case, the Appellate Assistant Commissioner permitted the appellate to raise an additional ground for the first time claiming deduction of purchase tax liability in its return because the assessee had been held liable to pay purchase tax Officer, the Appellate Assistant Commissioner allowed the deduction. On appeal, the Appellate Tribunal placed reliance on the decision of the Supreme Court in the case of Gurjargravures Pvt. Ltd. [1978] 111 ITR 1 and held that the Appellate Assistant Commissioner had no jurisdiction to entertain the additional claim. The Tribunal and the High Court rejected the applications of the application for a reference. On appeal, the Supreme Court said (headnote) : \"An appellate authority has all the powers which the original authority may have in deciding the question before it subject to the restrictions or limitations, if any, prescribed by the statutory provisions. In the absence of any statutory provision, the appellate authority is vested with all the plenary powers which the subordinate authority may have in the matter. There is no good reason to justify curtailment of the power of the Appellate Assistant Commissioner in entertaining an additional ground raised by the assessee in seeking modification of the order of assessment passed by the Income-tax Officer.\" The Supreme Court considered the observations in the case of Gurjargravures P. Ltd. , and said that these do not rule out the case for raising an additional ground before the Appellate Assistant Commissioner if the ground so raised could not have been raised at the stage when the return was filed or when the assessment order was made or if the ground became available on account of change of circumstances or law. There may be several factors justifying the raising of such a new plea in an appeal. Each case has to be considered on its own facts. If the Appellate Assistant Commissioner is satisfied, he would be action within his jurisdiction in considering the question so raised in all its aspects. He must be satisfied that the ground raised was bona fide and that the same could not have been raised earlier for good reasons. The Supreme Court said that it was not overruling the decision in Gurjargravures P. Ltd. [1978] 111 ITR 1, since it could be distinguished on facts.\n\n 40. The ratio of this judgment would apply to the jurisdiction of the Appellate Tribunal also. The observations of the Supreme Court, in fact, cover all appellate authorities under the Income-tax Act. We do not find anything in section 254(1) of the Income-tax Act which limits the jurisdiction of the Appellate Tribunal in any manner. For reasons which we have set out earlier, the phrase \"pass such order thereon\" does not in any way restrict the jurisdiction of the Tribunal but, on the contrary, confers the wides possible jurisdiction of the Appellate Tribunal including jurisdiction to permit any additional ground of appeal if, in its discretion, and for good reason, it thinks it necessary or permissible to do so. (See also in this connection a decision of the Bombay High Court in the case of CIT v. Western Rolling Mills (Pvt.) Ltd. [1985] 156 ITR 54).\n\n 41. In view of the above decisions, it is quite clear that the Appellate Tribunal has jurisdiction to permit additional grounds to be raised before it even though these may not arise from the order of the Appellate Assistant Commissioner, so long as these grounds are in respect of the subject-matter of the entire tax proceedings. \n\n 42. In the premises, the question before us in Inome-tax Reference No. 481 of 1976 is answered in the affirmative and in favour of the assessee. Similarly, in Income-tax Reference No. 45 of 1977, the question which is before us is answered in the affirmative and in favour of the assessee. In the circumstances, there will be no order as to costs. \n\n 43. The proceedings may, accordingly, be plated before the Tribunal for its decision in the light of the above." }, { "title": "Taylor Instrument Co. (India) Ltd. vs Commissioner Of Income-Tax on 22 April, 1992", "url": "https://indiankanoon.org//doc/703418/", "text": "Taylor Instrument Co. (India) Ltd. vs Commissioner Of Income-Tax on 22 April, 1992\nEquivalent citations: ILR1992DELHI1037\nAuthor: B.N. Kirpal\nBench: B.N. Kirpal\nJUDGMENT\n \n\n B.N. Kirpal, J.\n \n\n 1. In respect of the assessment years 1968-69 and 1969-70, the Income-tax Appellate Tribunal, under section 256(1) of the Income-tax Act, 1961, has referred a few questions of law to this court. Though most of the questions are overlapping, we shall, however, deal with the questions separately. \n\n For the assessment year 1968-69 : \n\n In respect of the assessment year 1968-69, the Tribunal has referred six questions of law to this court. These are as follows : \n\n \"1. Whether, on the facts and in the circumstances of the case, the assessed is entitled to depreciation under section 32(1)(ii) of the Income-tax Act, 1961, in respect of blocks and toolings of Rs. 22,750 acquired and used in the previous year 1967-68 relevant to the assessment year 1968-69 ? \n\n 2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the grounds regarding the computation of capital employed in the industrial undertaking and the quantum of deduction under section 80J could not be agitated before it under sections 253 and 254 of the Income-tax Act, 1961 ? \n\n 3. Whether, on the facts and in the circumstances of the case, the depreciation of the current year is deductible in computing the profits and gains for granting relief under section 80-I of the Income-tax Act ? \n\n 4. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that no appeal lay to the Appellate Assistant Commissioner against charge of interest under section 217 of the Income-tax Act, 1961 ? \n\n 5. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessment made by the Income-tax Officer on January 29, 1973, under section 143(3) of the Income-tax Act, 1961, for the assessment year 1968-69 was valid in law ? \n\n 6. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the assessed was not entitled to take the additional ground claiming surtax levied for 1968-69 as a deduction for computation of income from business before it for the first time ?\" \n\n The first question refers to the interpretation of section 32(1)(ii) and of the proviso thereto in particular. At the relevant time, the said provision read as under : \n\n \"32. (1) In respect of depreciation of buildings, machinery, plant or furniture owned by the assessed and used for the purposes of the business or profession, the following deductions shall, subject to the provisions of section 34, be allowed - ... \n\n (ii) in the case of any block of assets, such percentage on the written down value thereof as may be prescribed : \n\n Provided that where the actual cost of any machinery or plant does not exceed five thousand rupees, the actual cost thereof shall be allowed as a deduction in respect of the previous year in which such machinery or plant is first put to use by the assessed for the purposes of his business or profession : \n\n Provided further that no deduction shall be allowed under this clause in respect of any motor car manufactured outside India, where such motor car is acquired by the assessed after February 28, 1975 and is used otherwise than in a business of running it on hire for tourists.\" \n\n According to the statement of the case, the assessed had claimed depreciation on plaint and machinery. The total claim was for a sum of Rs. 2,89,690. Out of this, tools of the value of Rs. 22,750 were such that each of them was of a value of less than Rs. 750. The said tools, of the value of Rs. 22,750, with which we are concerned in question No. 1, had been purchased and put to use in the previous year relevant to the assessment year 1967-68. In the other words, the said tools had been purchased and utilised, for the first time, in the assessment year prior to the assessment year with which we are concerned in this reference. \n\n The Income-tax Officer construed the said proviso to section 32(1)(ii) to mean that depreciation at the rate of 100 per cent. was allowable only in the assessment year 1967-68, but as it was not claimed in that year the assessed was not entitled to claim, in subsequent years, depreciation under section 32(1)(ii) of the Income-tax Act, 1961. This conclusion of the Income-tax Officer was upheld by the Appellate Assistant Commissioner and also the Income-tax Appellate Tribunal. \n\n It has been contended before us by Mr. Bishamber Lal, advocate, that the right of the assessed to claim depreciation under the substantive provision, namely, section 32(1)(ii) is not taken away by virtue of the enactment of the proviso. On the other hand, the reasoning of the Revenue authorities has been supported by Mr. Rajendra who has submitted that the assessed can claim depreciation on these tools, each of which has a cost of less than Rs. 750, only in the year in which they are first used. \n\n Before examining the rival contentions, it is pertinent to note that the aforesaid proviso was inserted by the Finance Act, 1966, with effect from April 1, 1966. Prior to its insertion, plant, machinery and other items including tools were entitled to depreciation under the provisions of section 32(1)(ii). Depreciation is to be claimed at the rates which are prescribed from time to time. We are informed that in the year in question, the rate of depreciation, for the first years, was 30 per cent. It is after deducting the depreciation allowed that the written down value is calculated. The intention of inserting the proviso apparently seems to be that if the value of the item on which depreciation is allowable is only Rs. 750 then instead of spreading the allowance over a number of year it may be better to allow the deduction in one year. In other words, if the proviso applies then the depreciation which is allowed is 100 per cent. in the year in which it is first purchased and used. \n\n As we read section 32 it is clear that depreciations is allowed according to the rates prescribed. The depreciation is for the benefit of the assessed. The proviso gives an added benefit to the assessed, viz., that if it claims depreciation and fulfillls the conditions provided by this proviso, then instead of getting a depreciation of only 30 per cent. and the balance on the written down value in the future years, it will be entitled to claim 100 percent. depreciation in one year itself. We cannot read the proviso to mean that it excludes the right of the assessed to claim depreciation under section 32(1)(ii) if for any reason it has omitted to claim depreciation under the proviso. \n\n The matter may be looked at from another angle. The proviso has to be construed in accordance with its terms, especially when a benefit in the form of deduction is being allowed. It is only if the assessed fulfillls all the requirements of the proviso that depreciation of 100 per cent. is allowable. The proviso requires two conditions to be fulfillled. Firstly, the item on which the depreciation is to be allowed should not cost more than Rs. 750, and secondly the item must be used for the first time in the year in which the depreciation is being claimed. If either of the two conditions is not fulfillled, the proviso will not apply. In the year 1968-69, the second condition was not fulfillled because the items were not put to use in that year for the first time. No depreciation was, therefore, allowable under the proviso in the year 1968-69. The proviso does not, in any way, take away the right of an assessed to claim depreciation under section 32(1)(ii). \n\n Section 32 uses the expression \"shall\" both in sub-section (1) as also in the proviso. The use of the word \"shall\" is a direction to the Assessing Officer to allow the deduction if the conditions contained in the section are fulfillled. It is obvious that a deduction will be allowed only if a claim is made by an assessed. Where a claim under the proviso is not made, the question of the Assessing Officer allowing deduction under the proviso does not arise. For the year 1967-68, which was the immediately preceding assessment year in which the tools were used for the first time, no benefit has been accorded to the assessed for the simple reason that the assessed did not seek the benefit. This benefit which was available to the assessed was lost. Therefore, in the subsequent year it could not invoke the provisions of the proviso to section 32(1)(ii), but the substantive right under section 32(1)(ii) was not lost. In the terms in which it is framed the proviso cannot be so construed as to oust the applicability of section 32(1)(ii) to a case like the present one. In the year 1967-68, because the proviso applied, it would have been incumbent upon the Assessing Officer to give a deduction of 100 per cent. if a claim had been made. As no claim was made in the year 1967-68 and the claim has been made in the year in question, namely, 1968-69, then because the proviso is not applicable in this year, the assessed is entitled to claim and obtain deduction under section 32(1)(ii). The intentions of the Legislature in inserting the proviso was clearly to give an added benefit to the assessed. It was not meant to deprive the assessed of the benefit which was due under section 32(1)(ii). This added benefit could be availed of only in the year in which the machinery or the plant was purchased and used, but not in the subsequent year. It is not possible for us to construe this proviso in such a way as to take away a vested right of the assessed which is enshrined in section 32(1)(ii). In our opinion, therefore, the Tribunal was in error in holding that the assessed had, so to say, missed the bus, and was not entitled to any depreciation on the plant and machinery, in the instant case, of the value of Rs. 22,750. \n\n As far as question No. 2 is concerned, the same has become academic. The assessed, before the Tribunal, had filed an application under sections 253 and 254 of the Income-tax Act seeking to contend that for the purposes of computing the capital employed in an industrial undertaking for the purposes of benefit under section 80J, the money which was borrowed should be included. The Income-tax Appellate Tribunal came to the conclusion that such a question could not be agitated by an application under section 253 or 254 as it was not a mistake apparent on the face of the record. The Matter has become academic for the reason that the Supreme Court in Lohia Machines Ltd. v. Union of India [1985] 152 ITR 308 has already held that moneys which are borrowed do not form part of the expression \"capital employed\". Therefore, irrespective of the answer to question No. 2, ultimately, the assessed cannot get any benefit. This being so, it is not necessary for us to answer the said question.\n\n As far as question No. 3 is concerned, the claim of the assessed was that in computing profits and gains for getting relief under section 80-I of the Act depreciation of the current year should not be deducted. It is not necessary for us to consider this in any great detail because the Supreme Court in Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84, has already held that in determining the profits for the purpose of exemption under section 80-I of the Income-tax Act, depreciation has to be deducted. The conclusion of the Tribunal, therefore, was correct.\n\n The fourth question relates to the maintainability of an appeal by an assessed regarding the charge of interest under section 217 of the Act. The Income-tax Officer had sought to impose interest under section 217 for the reason that the assessed had not deposited advance tax for the year in question. In the appeal filed by the assessed, the levy of interest was sought to be challenged. The Appellate Assistant Commissioner came to the conclusion that the appeal on this ground was not maintainable. The Tribunal, purporting to follow the decisions of the Gujarat High Court and the Allahabad High Court in CIT v. Sharma Construction Co. [1975] 100 ITR 603 and Vidyapat Singhania v. CIT [1977] 107 ITR 533, came to the conclusion that the appeal was not maintainable. It also referred to another decision of the Allahabad High Court in Swadeshi Cotton Mills Co. Ltd. v. CIT [1975] 101 ITR 621. Two (sic) other decisions referred to by the Tribunal were that of the Madras High Court in the case of A.S.S.S.S. Chandrasekaran and Bros. v. CIT [1974] 96 ITR 711. Following the said decisions, the Tribunal held that the assessed was not entitled to agitate the charging of interest under section 217 of the Income-tax Act in an appeal.\n\n Neither the order of the Appellate Assistant Commissioner nor the order of the Tribunal indicates as to what was the nature of the challenge of the assessed to the levy of interest. It has been contended by learned counsel for the assessed before us that the assessed was entitled to challenge the liability to be subjected to interest. \n\n Strong reliance has been placed by learned counsel on a decision of a Division Bench by this court in the case of CIT v. Mahabir Parshad and Sons [1980] 125 ITR 165. It was held in that case that the second part of section 246(c) of the Income-tax Act, 1961, was wide enough to permit the agitation on the issue of charging of interest under section 139 in regard to both its liability and quantum, in a valid and competent appeal against the order of assessment, though an appeal may not lie against a separate order levying interest and nothing more. It has been submitted by learned counsel for the respondent that the observations of this court in CIT v. Mahabir Parshad and Sons [1980] 125 ITR 165, regarding the maintainability of the appeal, questioning the quantum of interest which is levied, is no longer good in view of a later decision of the Supreme Court. We need not go into this controversy because, in our opinion, what has now to be applied is the decision of the Supreme Court in the case of Central Provinces Manganese Ore Co. Ltd. v. CIT [1986] 160 ITR 961. The question which arose in that case was with regard to the liability to pay interest because of delay in filling the return. Interest was levied under section 215 of the Act and it was held by the Supreme Court that the levy of interest was a part of the process of assessment. It was further observed that, as the levy of interest is a part of the process of assessment, it is open to an assessed to dispute the levy in appeal provided he limits himself to the ground that he is not liable to the levy at all. The Supreme Court approved the observations of the Karnataka High Court in the case of National Products v. CIT [1977] 108 ITR 935, wherein it was held that (at page 946) : \"where penal interest is levied under section 215 by the order of assessment, the assessed may altogether deny his liability to pay such interest on the ground that he was not liable to pay advance tax at all or that the amount of advance tax determined by the Income-tax Officer as payable ought to be reduced. In either case, he denies his liability, wholly or partially, to be assessed. Similarly, where interest is levied under section 139 of the Act, the assessed may deny his liability to pay such interest on the ground that the return was not belated or that the penal provision was not attracted at all to his case. In such a case also, he denies his liability to be assessed to interest.\"\n\n The Supreme Court observed that (at page 968 of 160 ITB), \"in cases where the jurisdictional fact attracting the levy cannot be disputed, for example, that the return had been furnished under section 139 with delay, it will be a question merely of satisfying the relevant authority that there are circumstances calling for a reduction or waiver of the interest.\" \n\n From the aforesaid observations, it is clear that what can be challenged in an appeal, in relation to the levy of interest under section 217, is not the quantum of interest which is charged, but the fact that the interest itself was not leviable. The real attack has to be with regard to the payment of advance tax. If it is contended that advance tax was paid in time or a lesser amount of advance tax was payable, then on that basis challenge to the levy of interest can be raised in an appeal. If there is no dispute with regard to the non-payment of advance tax within the stipulated time then it is not possible for the assessed to raise a contention that the interest should not be levied or that a lesser amount of interest should be levied. \n\n In the present case, unfortunately, it is not borne out from the record as to what was the precise challenge of the assessed with regard to the imposition of interest under section 217 of the Act. Mr. Bishamber Lal contends that what was sought to be contended before the Appellate Assistant Commissioner and thereafter before the Tribunal was that there had been no default in the payment of advance tax and, therefore, interest was not liable to be imposed. In our opinion, such a contention could be raised by the assessed as it is squarely covered by the judgment of the Supreme Court in the case of Central Provinces Manganese Ore Co. Ltd. [1986] 160 ITR 961. The challenge, in such an event, would be not to the quantum of interest per se, but the challenge will be to the liability of the assessed to pay interest. To this limited extent, the imposition of interest under section 217 of the Act can be challenged. \n\n On the facts as set out by the Tribunal in the statement of the case, we do not find any reason for disagreeing with the Tribunal as far as question No. 5 is concerned. The contention of the assessed before the Tribunal was that the assessment was time-barred. It was pleaded that originally notice under section 143(2) had been issued and assessment was completed. No adequate opportunity of hearing was granted to the assessed. The Income-tax Officer had made assessment under section 144 of the Act giving reasons as to why the ex parte assessment framed under section 144 of the Act should be set aside. This application was accepted and the assessment framed under section 144 of the Act was cancelled. Thereafter, the Income-tax Officer made a fresh assessment and passed an order under section 143(3) on January 29, 1973. It had been contended before the Tribunal that as no opportunity of hearing had been granted, the original assessment which had been framed under section 144 was null and void and a fresh assessment could not be made. There is obviously no merit in this contention. It is no doubt true that the assessment which had been framed under section 144 may have suffered from an infirmity and that gave a ground to the assessed to have the said assessment set aside on its filling an application under section 146 of the Act. Thereafter, a valid assessment had been made and there is no grievance on the part of the assessed that full opportunity to represent itself was not granted. Once an order under section 146 is passed and the assessment under section 144 is set aside, then the question of the fresh assessment made on January 29, 1973, under section 143(3) being invalid, cannot arise. This question is, therefore, answered in favor of the Revenue. \n\n The relevant facts with regard to question No. 6 are that before the Income-tax Appellate Tribunal the assessed sought to raise an additional ground to the effect that surtax which was levied on the assessed for the assessment year 1968-69 was allowable as a deduction for computation of its total income. The Tribunal came to the conclusion that this was an altogether new point and it could not be agitated by the assessed for the first time before it. The short question which, therefore, arises for our consideration is whether it was open to the assessed, on the facts of the present case, to raise this additional ground before the Income-tax Appellate Tribunal for the first time. Before dealing with the two decisions of the Supreme Court, which are important and relevant, it is necessary to refer to rule 11 of the Income-tax (Appellate Tribunal) Rules, 1963. The said rule reads as under (see [1963] 49 ITR (St.) 66) : \n\n \"11. Grounds which may be taken in appeal. - The appellant shall not, except by leave of the Tribunal, urged or be heard in support of any ground not set for the in the memorandum of appeal, but the Tribunal in deciding the appeal, shall not be confined to the grounds set forth in the memorandum of appeal or taken by leave of the Tribunal under this rule : \n\n Provided that the Tribunal shall not rest its decision on any other ground unless the party who may be affected thereby has had a sufficient opportunity of being heard on that ground.\" \n\n The Income-tax Appellate Tribunal, in the present case, did not refer to the aforesaid fuel. It appears to us that the said rule gives statutory recognition to the inherent power of any appellate authority or the quasi-judicial Tribunal, namely, the power to admit new grounds. The said rule 11 specifically entitled the Tribunal to allow the appellant to urge any new ground even though it is not set forth in the memorandum of appeal. In the case of Addl. CIT v. Gurjargravures P. Ltd. [1978] 111 ITR 1(SC), there are some observations of the Supreme Court which seem to support the Revenue. In this case one of the grounds in appeal raised by the assessed before the Appellate Assistant Commissioner was that the Income-tax Officer had not given the benefit of section 84 of the Act to it. Such a claim had not been made before the Income-tax Officer nor had any material on record been placed in support of the claim. The Appellate Assistant Commissioner dismissed the appeal on the ground that this claim had not been made before the Income-tax Officer. The Tribunal, however, came to the conclusion that since the entire assessment was open before the Appellate Assistant Commissioner, there was no reason for it not to entertain this claim. The High Court, on a reference, upheld the decision of the Tribunal. The Division Bench of the Supreme Court, consisting of two Hon'ble judges, however, came to the conclusion (headnote of 111 ITR 1), \"that, as neither was any claim made before the Income-tax Officer regarding the relief under section 84 nor was there any material on record in support thereof, therefore, the Tribunal was not competent to hold that the Appellate Assistant Commissioner should have entertain the question of relief under section 84 or to direct the Income-tax Officer to allow the relief.\" Strong reliance has been placed on this decision by Mr. Rajendra, and it has been contended by him that as far as the Income-tax Appellate Tribunal is concerned, its jurisdiction is not coterminous with that of the Income-tax Officer. Learned counsel submits while relying upon Gurjargravures' case [1978] 111 ITR 1 (SC), that if the Appellate Assistant Commissioner could not permit the raising of a new ground, there was less reason or justification for the Tribunal to permit the urging of an additional or a new ground.\n\n Apart from the fact that the Supreme Court in Gurjargravures' case [1978] 111 ITR 1 was not concerned with the power of the Tribunal in allowing the assessed to urge an additional ground and, consequently, did not have an occasion to consider the full scope and effect of the aforesaid rule 11 of the Income-tax (Appellate Tribunal) Rules, 1963, the Supreme Court, in a later decision of a larger Bench, has struck a different note. In Jute Corporation of India Ltd. v. CIT [1991] 187 ITR 688, the question arose whether the Appellate Assistant Commissioner had the discretion to allow a ground to be urged which has not been raised at an earlier stage before the Income-tax Officer. In that case the facts were that the assessed was engaged in jute industry, but had not claimed any deduction of purchase tax liability in its return for the assessment year 1974-75 in the belief that it was not liable to purchase tax. Later on, the assessed was assessed to purchase tax, but had disputed its liability and preferred an appeal and obtained a stay order. In an appeal filed against the assessment order the assessed sought to raise an additional ground, claiming deduction of purchase tax on the ground that the tax liability should be deducted in computing its profits in view of the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363. While the Appellate Assistant Commissioner permitted the assessed to raise this additional ground, which was subsequently allowed, the Appellate Tribunal placed reliance upon the aforesaid decision of the Supreme Court in Gurjargravures' case [1978] 111 ITR 1, and held that the Appellate Assistant Commissioner had no jurisdiction to entertain the additional claim. The High Court, on a reference, upheld the decision of the Tribunal. The Supreme Court referred to its earlier decisions by larger Benches in CIT v. Kanpur Coal Syndicate [1964] 53 ITR 225 and also CIT v. McMillan and Co. [1958] 33 ITR 182 and CIT v. Shapoorji Pallonji Mistry [1962] 44 ITR 891, and came to the conclusion (at page 693 of 187 ITR) : \"that the power of the Appellate Commissioner was coterminous with that of the Income-tax Officer, and if that is so, there appears to be no reason as to why the appellate authority cannot modify the assessment order on an additional ground even if not raised before the Income-tax Officer. No exception could be taken to this view as the Act does not place any restriction or limitation on the exercise of appellate power. Even otherwise, an appellate authority while hearing the appeal against the order of a subordinate authority, has all the powers which the original authority may have in deciding the question before it subject to the restrictions or limitations, if any, prescribed by the statutory provisions. In the absence of any statutory provision, the appellate authority is vested with all the plenary powers which the subordinate authority may have in the matter.\"\n\n The Supreme Court noticed the decision in Gurjargravures' case [1978] 111 ITR 1 (SC), and observed that the court had taken a different view in that case, and further observed that the view taken by the two judge Bench appeared to be in conflict with the view taken by the three judge Bench of that court in Kanpur Coal Syndicate's case [1964] 53 ITR 225 which held the field. The Supreme Court did state that it did not consider it necessary to overrule the view taken in Gurjargravures' case [1978] 111 ITR 1, \"as, in our opinion, that decision is founded on the special facts of that case....\"\n\n The Supreme Court in Jute Corporation's case [1991] 187 ITR 688, specifically approved the decision of the Calcutta High Court in Rai Kumar Srimal v. CIT [1976] 102 ITR 525, wherein it had been held that the Appellate Assistant Commissioner was entitled to admit new grounds or evidence either suo motu or at the invitation of the parties.\n\n In our opinion, the observations of the Supreme Court in Jute Corporation's case [1991] 187 ITR 688 are clearly applicable here. There is no dispute with regard to the fact that surtax was levied in respect of the assessment year 1968-69. The only question which was sought to be urged was a pure question of law, namely, as to whether the surtax was entitled to be deducted or not. As the appellate authority, and specifically in view of the provisions of rule 11 of the Income-tax (Appellate Tribunal) Rules, 1963, the Tribunal had the jurisdiction to allow such a contention to be raised. Normally, whenever no fresh evidence is required to be taken, we see no reason as to why an additional ground should not be entertained by the Income-tax Appellate Tribunal. This is for the reason that under article 265 of the Constitution, the State is entitled to recover or realise only that tax which is imposed in accordance with law. It is the duty of the State to see that justice is done to its citizens. Therefore, shelter should not ordinarily be taken behind procedural technicalities with a view to defeat a just claim of an assessed. We are not here observing that the claim of the assessed in the present case is justified, but all that we are trying to impress is that the contention of the assessed ought to have been allowed to be raised, especially when it was a pure question of law which was sought to be agitated and it involved no investigation into facts. We may here observe that under rule 29 of the Income-tax (Appellate Tribunal) Rules, 1963, the Tribunal has been given the power to entertain and accept additional evidence, either oral or documentary, subject to the assessed fulfillling the conditions specified in the said rule. Therefore, when additional evidence can be raised before the Tribunal under rule 29 of the said Rules, we see no reason as to why an appellant cannot, with leave of the Tribunal, urge any additional ground. We are aware of the fact that the powers of the Tribunal may not be coterminous with those of the Income-tax Officer, but it is precisely for this reason that rule 11 has been specifically inserted in the Income-tax (Appellate Tribunal) Rules, 1963, which gives power to the Appellate Tribunal to entertain additional grounds. Furthermore, as observed by the Supreme Court in Jute Corporation's case [1991] 187 ITR 688, the appellate authority while hearing an appeal against the order of a subordinate authority, has all the power which the original authority may have in deciding the question before it. \n\n Mr. Rajendra also drew our attention to the case Manji Dana v. CIT . In that case, the Tribunal did not grant leave to the assessed to raise an additional ground. The question which was for consideration before the Supreme Court was whether the Tribunal erred in not allowing the assessed to raise and argue that additional contention. The Supreme Court observed that the Tribunal was justified in refusing to allow the question to be raised, which had not been set forth in the memorandum of appeal, for the reason that the necessary evidence was not on record. In the absence of relevant evidence, the Tribunal may be justified in refusing to allow an additional ground to be urged, but such a situation is not present in this case. As already observed there is no dispute with regard to the fact that surtax in respect of the assessment year 1968-69 was levied, and the only question which arose for consideration was whether this was entitled to be deducted or not. In our opinion, this question ought to have been allowed to be agitated by the Tribunal.\n\n From the aforesaid discussion, it will follow that question No. 1 is answered in favor of the assessed, question No. 2 has become academic while question No. 3 is answered in favor of the Revenue. Our answer to question No. 4 is that it is open to the assessed to challenge the liability to the charge of interest under section 217 of the Income-tax according to the principles laid down by the Supreme Court in Central Provinces Manganese Ore's case [1986] 160 ITR 961. Question No. 5 is answered in favor of the Revenue, while question No. 6 in answered in favor of the assessed.\n\n For the assessment your 1969-70 : \n\n Five questions of law are sought to be raised in this year. They are as follows : \n\n \"1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the grounds regarding the computation of capital employed in the industrial undertaking and the quantum of deduction under section 80J could not be agitated before it under sections 253 and 254 of the Income-tax Act, 1961 ? \n\n 2. Whether, on the facts and in the circumstances of the case, the assessed is entitled to deduction under section 80-I of the Income-tax Act, 1961, in respect of Rs. 1,25,602 ? \n\n 3. Whether, on the facts and in the circumstances of the case, the depreciation of the current year is deductible in computing the profits and gains for granting relief under section 80-I of the Income-tax Act, 1961 ? \n\n 4. Whether, on the facts and in the circumstances of the case, the assessed is entitled to depreciation under section 32(1)(ii) of the Income-tax Act, 1961, in respect of blocks and toolings of Rs. 22,750 used in the previous year relevant to the assessment year 1968-69 relevant to the assessment year 1969-70 ? \n\n 5. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the assessed was not entitled to take the additional ground claiming surtax levied for 1969-70 as a deduction for computation of income from business before it for the first time ?\" \n\n Questions Nos. 1, 3, 4 and 5 are identical to the questions which were raised in respect of the assessment year 1968-69 and which have been dealt with by us here in above. Arguments have been addressed only with regard to question No. 2. \n\n The assessed had entered into an agreement with an American company called Taylor Instrument Company. One agreement was called the technical collaboration agreement, and the other was manufacturer's representative agreement. Under the first agreement, an industry was set up for the manufacture of some items. This industry was a priority industry. The Income-tax Officer computed profits and gains attributable to this industry at Rs. 31,50,735. Certain amounts aggregating to Rs. 3,81,150 had been excluded by the Income-tax Officer while computing the assessed's profits and gains, attributable to the assessed's priority industry, and relief on the said amount had not been granted. The Appellate Assistant Commissioner, however, in appeal, came to the conclusion that the assessed was entitled to the relief claimed by it. This decision was upheld by the Tribunal. In the present reference, we are not concerned with this amount. The point in issue here is that under the second agreement whereby the assessed was made the representative of the foreign company, it had received commission in respect of the stock supplied by the collaborators to the parties in India. The total sum so received was Rs. 1,25,602. Under this agreement, the assessed was the exclusive sales representative and was entitled to receive commission in respect of the sales effected by the American company in the territory of India. The Appellate Assistant Commissioner upheld the decision of the Income-tax Officer and came to the conclusion that this amount of Rs. 1,25,602 was not earned as a direct result of the business of manufacture and sale of equipment. It was also noticed that in the books of account of the assessed, the commission was not recorded as of sale, but was termed as commission on import sale. This finding was also upheld by the Tribunal. The assessed, therefore, did not get relief under section 80-I of the Act on the said amount of Rs. 1,25,602. \n\n It is contended by learned counsel for the assessed that it was carrying on the business if manufacture of items which fall under the category of \"priority industry\". While admitting that the amount in question related to the commission received by it on sales made by the American company to the Indian constituents, it was, however, submitted that as the said items which were sold pertained to a priority industry and after sales service was being effected by the assessed, the provisions of section 80-I became applicable. Section 80-I along with the definition of the word \"priority industry\" contained in section 80B(7) shows that, on the facts of the present case, the assessed is not entitled to the relief claimed. Section 80-I is as follows : \n\n \"80-I. Deduction in respect of profits and gains from priority industries in the case of certain companies. - (1) In the case of a company to which this section applies, where the gross total income includes any profits and gains attributable to any priority industry, there shall be allowed, in accordance with and subject to the provisions of this section, a deduction from such profits and gains of an amount equal to eight per cent. thereof, in computing the total income of the company. \n\n (2) This section applies to a domestic company, save in a case where such company is a company which is referred to in section 108 and has a gross total income of fifty thousand rupees or less. \n\n (3) Where a company to which this section applies is entitled also to the deduction under section 80H, the deduction under sub-section (1) of this section shall be allowed with reference to the amount of the profits and gains attributable to the priority industry or industries as reduced by the deduction under section 80H in relation to such profits and gains.\" \n\n Section 80B(7) is as follows : \n \"'priority industry' means the business of generation or distribution of electricity or any other form of power or of construction, manufacture or production of any one or more of the articles or things specified in the list in the Sixth Schedule or the business of any hotel where such business is carried on by an Indian company and the hotel is for the time being approved in this behalf by the Central Government.\" \n\n According to section 80-I, deduction in respect of profits and gains is available to those industries to which the said section applies. The section applies to priority industries as defined in section 80B(7). This sub-section, inter alia, provides that a priority industry would mean the business of construction, manufacture or production of any one or more of the articles or things specified in the list in the Sixth Schedule to the Act. Therefore, the income must be generated in order to qualify for the benefit under section 80-I from the construction, manufacture or production of any one of the said items. There must be a direct nexus in the generation of income with the construction, manufacture or production by the assessed of any of the items falling in the Sixth Schedule. In the present case, in so far as items which are manufactured by the assessed, pursuant to its having entered into a collaboration agreement, the income derived there from has got the benefit under section 80-I. The present sum of Rs. 1,25,602, however, is in no way related to the activity of the assessed in the carrying out of the construction or manufacture or production of any one of the priority industry items. This sum relates to the commission received by it in respect of items manufactured or produced by the American company outside India. The intention and object of section 80-I is to give incentive and impetus to priority industries in India. If the contention of Mr. Bishamber Lal is to be accepted then it would follow that even if the assessed was not carrying on any manufacturing activity in India and even if there was no collaboration agreement like the present one, the assessed would still be entitled to claim benefit under section 80-I in respect of the commission received by it as a selling agent of a foreign seller. This was certainly not the intent of the Legislature and neither section 80-I nor section 80B can support such a contention on the part of the assessed. In our opinion, the Revenue authorities were right in holding that the income so received was not entitled to the deduction under section 80-I. \n \n\n Before concluding we may note that a similar view has been expressed in Ashok Motor Ltd. v. CIT [1961] 41 ITR 397 and CIT v. Standard Motor Products of India Ltd. [1962] 46 ITR 814 by the Madras High Court and we are in respectful agreement with the same.\n\n Question No. 2 is, therefore, answered in favor of the Revenue. Question No. 1 for the year 1969-70 is similar to question No. 2 for the earlier year, questions Nos. 3, 4 and 5 for the year 1969-70 are similar to questions Nos. 3, 1 and 6 respectively, for the year 1968-69. For the reasons contained in our judgment for the assessment years 1968-69, questions Nos. 1 and 3, in addition to question No. 2, are answered in favor of the Revenue, while question Nos. 4 and 5 are answered in favor of the assessed. \n\n There will be no order as to costs." }, { "title": "Orissa Cement Ltd. vs Commissioner Of Income-Tax, Delhi on 5 November, 1992", "url": "https://indiankanoon.org//doc/398334/", "text": "Orissa Cement Ltd. vs Commissioner Of Income-Tax, Delhi on 5 November, 1992\nEquivalent citations: 50(1993)DLT109, [1993]200ITR636(DELHI)\nAuthor: B.N. Kirpal\nBench: B.N. Kirpal\nJUDGMENT \n\n B.N. Kirpal, J. \n\n (1) In respect of the Assessment Year 1972-73 two questions of law have been referred at the instance of the assessed and three questions at the instance of the Revenue. The questions of law referred at the Instance of the assessed are as follows:- \n\n \"1. Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that interest paid under Section 220(2) of the Income-tax Act, 1961 is not allowable expenditure under Sections 28 and 37 of the Income-tax Act, 1961 ? \n\n 2.Whether the Tribunal is right in law in holding sur-tax levied under the Companies (Profits) Sur Tax Act, 1964 for the assessment year 1972-73 is not deductible in computing the total income of the assessed ? \" \n\nThe questions of law referred at the instance of the Department are as follows:- \n\n1. Whether on the facts and in the circumstances of the case, the tribunal was justified in law in directing the Income-tax Officer to work out and allow the assessed relief under Section 80J of the Income-tax Act, 1961 in respect of Mahuda Unit of the assessed ? \n\n 2.Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in directing the Income-tax Officer to compute the capital employed under Rule 1'9A of the Income- tax Rules, 1962 read with Section 80J of the Income-tax Act, 1961 in the manner laid down in the case of Century Enka Ltd. v. Income-tax Officer (107 Itr 909) and thereby permitting the inclusion of the borrowed money for the purpose of capital employed in the. industrial undertaking of Mahuda Unit ?\n\n 3.Whether on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in directing the Appellate Assistant Commissioner to decide on merit the assessed's objections against the computing of interest under Section 21.4? \" \n\n(2) We will firstly deal with the reference which has been made at the instance of assessed. \n\n(3) During the year in question the assessed has paid interest of Rs. 91,477 under Section 220(2) of the Income-tax Act, 1961. The Income-tax Officer disallowed the assessed's claim for deduction of this amount on the ground that the payment of interest for delayed payment of tax did not represent any business expenditure. This disallowance was confirmed, in appeal, by the Appellate Assistant Commissioner and, on a second appeal, by the Income tax Tribunal. Question No. \" which has been referred at the instance of the assessed relates to this claim. In the case of Commissioner of Income Tax . v. Modi Spinning and Weaving Mills Ltd. [ITR 161/81 (1) decided on 23rd October, 1992]; this Court has had an occasion to consider such a question. It came to the conclusion that payment of interest on account of delayed payment of tax partakes the character of the tax itself and is not allowable as deduction by virtue of the provisions of Section 40(a)(ii) of the Act. Two earlier decisions of this Court taking the same view are Commissioner of Income- tax v. Dalma Dadri Cement Ltd.) 125 Itr 510 and Bharat Commerce Industries Ltd. v. Commissioner of Income Tax ., 153 Itr 275. \n\n(4) In view of the aforesaid decisions the first question is answered in the affirmative and in favor of the Department. \n\n(5) The second question relates to the payment made by the assessed of sur-tax which was levied under the Companies (Profits) Sur-tax Act, 1964 in respect of the Assessment Year 1972-73. The claim of the assessed was that this was allowable as a deduction under Section 37 of the Income-tax Act. The Income-tax Officer did not accept this contention and his view was upheld by the Appellate Assistant Commissioner as well as the Income-tax Tribunal. \n\n(6) It has been contended before us by Shri Bishamber Lal that the expenditure was incurred for the benefit of the business of the assessed. The contention was that if the Sur-tax had not been paid the assessed would have been subjected to penalties etc. and it had no option but to make the said payment. The payment which was made had to be regarded as being incidental to the carrying on of the assessed's business. He further submitted that the provisions of Section 40(a)(ii) of the said Act are not applicable because Sur-tax is not a tax on the profits and gains as computed under the Income-tax Act. \n\n(7) The aforesaid question has come up for consideration before different High Courts in a number of cases. Except for the two decisions of the Gauhati High Court, every other High Court has come to the conclusion that the Sur-tax computed is not an allowable deduction under Section 37 of the Act and. some of the other High Courts have held that the tax so paid also comes within the ambit of Section 40(a)(ii). \n\n(8) The contention of Shri Bishamber Lal, learned counsel for the assessed is that except for the Gauhati High Court, the A either decisions do north lay down the correct law. Strong reliance is placed by him on a decision of the Supreme Court in the case of Jaipuria Samla Amalgamated Collieries Ltd. v. Commissioner of Income-tax, 82 Itr 580(4). In that case Casks were helved on owners of mines on the average of annual net profits of last three years. A question arose whether the amounts so paid were allowable as a deduction. The Supreme Court, in that case, had an occasion to construe the provisions of Section 10(4) of the Income-tax Act, 1h922, which was in pan malaria to Section 49(a)(ii) of the 1961 Acthaiu' it came to the conclusion that the words \"profits and gains of any business, profession or vocation\" of concurring in Section 10(4) can have reference only to profits afghan gains as determine-I under Section 10 of the 1922 Act. The Cess was leviable under the Respective statutes on the annual net profit and not on the profits and gains as computed under the Income-tax Act and, therefore, the provisions of Section 10(4) were held to be not \n\n(9) The decision in Jaipuria Samla's case (supra) can Oc to little assistance to the learned counsel for the .issesse's, and is clearly distinguishable. Firstly what the assessed ww required to pay turn carrying on the business of raising coal from coal Mews and selling it, was road and public works cess as well as education cess. The payment of these cesses was compulsory but the calculation thereof was relatable to the annual net profit of the assessed. The Supreme Court did not have occasion to consider the question as to whether the said amount was allowable as a deduction under Section 10(2)(xv) as it was assumed that the same would be regarded as a business expenditure, because this question was not raised, in the pre- sent case, as we shall see, (he expenditure in question, ^s not allowable as a deduction under Section 37. Secondly, whereas the Cesses in Jaipuria Samla's case were not relatable to Act. Income-tax the under computed as prophets to relatable clearly is 1964 Act, Sur-tax (Profits) Companies of provisions payable which 1922, prov.?sions profit \n\n(10) Section 4 of the 1964 Act is a charging section which provides that in respect of every assessment year commencing from 1st April, 1964 Sur-tax will be levied on Chargeable profits of the previous year as exceed the statutory deductio'i which was specified. Chargeable profit? are defined in Section 2(5) of the 1964 Act to mean the total income of an assessed computed under the Income-tax Act, 1961 for any previous year or years, as the case may be and adjusted in accordance with the pretensions of the First Schedule. The First Schedule, inter alia, profited for adjustment to be made to the total income computed in the year under the Income-tax Act while computing the chargeable profirts. The adjustment which is provided is for the exclusion of certain types of incomes, profits and gains and other sums from the total income which is computed under the said Act. Some odf the items which are to be excluded are capital gains, compensation or payment referred to in Section 28(ii) of the Income-tax Act, profits and gains of any business aof life insurance, income referred to in Section 41(2) of the Income-tax Act, income chargeable under the head \"interest on securities\" of certain kinds, 50 per cent of she deduction allowable under Section 80G cf the Act, income from dividends, income of royalties received from Government or local authorities or any other Indian concern, certain types of income of assdas banking company and amount of any deduction from income-tax chargeable on the total income in connection with the export sof any goods etc. \n\n(11) It is clear from the reading of Section 4 along with Section 2(5) and the First Schedule of the 1964 Act that the Sur-tax is sought to be computed primarily on the profits and gains from business of an assessed. The tax is in respect of the assessment year and the chargeable profits ars the total income computed under the Income-tax Act, 1961 bur. adjusted in accordance with the provisions of the First sehedule. There can be a number of cases where the types of incomes and gains referred to in the First Schedule to the said Act may not have accrued or arisen to an assessed and it may still be liable to pay Sur-tax because of its total income computed under the Income-tax Act, 1961 which is regarded as chargeable profits. We have no manner of doubt that the tax which is imposed by the charging Section under the 1964 Act is on the total income computed under the Income-tax Act, 1961, subject to such adjustments as may be necessary under the First Schedule to the Act. This was not the position in Jaipuria Samla's case (supra). There the annual net profits were not to be computed under the provisions of the Income-tax Act but the computation was to take place under the respective Cess Ac's. \n\n(12) Except for the two decisions of the Gauhati High Court, the opinion of all the other High Courts in India has been that Sur-tax so payable is not allowable as a deduction either because it is not a business expenditure and /or because it is a tax on profits and, therefore, is not allowable as a deduction by virtue of the provisions of Section 40(a)(ii). The decisions of the various High Courts taking this view are Molins of India Ltd v. Commissioner of Income Tax ., 144 Itr 317 (Calcutta) ; C.I.T. v. International Instruments (P) Ltd., 144 Itr 936 (Kar)(6) ; A. V. Thomas & Co. Ltd. v. Commissioner of Income Tax . 159 Itr 431 (F. B. Ker) (7); Sundaram Industries Ltd. v. Commissioner of Income Tax ., 159 Itr 646 (Madras) (8) ; Vazir Sultan Tobacco Co. v. Commissioner of Income Tax . 169 Itr 35 (A.P.)(9) ; Associated Stone Industries v. Commissioner of Income Tax ., 170 Itr 65? (Raj.) (10) ; S. L. M. Maneklal Industries Ltd. v. Commissioner of Income Tax ., 1.72 Itr 176 (Gu).)(ll) ; Simon Carves India Ltd. v. Commissioner of Income Tax ., 173 Itr 660 (Cal)(12) ; T. T. Pvt. Ltd. v. Commissioner of Income Tax ., 177 Itr 536 (Kar.)(13) ; Highway Cycle Industries v. Commissioner of Income Tax ., 178 Itr 601 (PAH) (14) ; Commissioner of Income Tax . v. Maltex Malsters Ltd., 179 Itr 41 (PAH) (15) ; H. M. M. Ltd. v. Commissioner of Income Tax ., 181 Itr 473 (PAH) (18) and Mysore Lamp Works Ltd. v. Commissioner of Income Tax ., 185 Itr 96 (Kar) (16).\n\n(13) The ratio of the decisions in the aforesaid cases is that Sur-tax is not paid for the conduct of the business and it is not incidental to the carrying on of the business, the Sur-tax is paid if the assessed has earned income. The payment of Sur-tax is nothing more than an apportionment of the profits after they have arisen. This payment is not a charge on the profits of the company but is an allocation or an apportionment which is made thereafter. The fact that this payment is not relatable to the carrying on of the business of the assessed is evident from the fact that if the assessed suffers a loss or does not have any chargeable profits then no Sur-tax is payable but the assessed can carry on its business activity. The payment is to be made only in the event of chargeable profits being there and not otherwise. It is clear, therefore, that \"The provisions of Section 37 of the Income-tax Act cannot be invoked by the assessed while claiming a deduction.\" \n\n(14) A different view. from all the other High Courts has. however, been expressed by the Gauhati High Court in the case of Makum Tea Co. (India) Ltd. v. Commissioner of Income Tax .. 178 Itr 453(17). In that case the question arose was whether the payment of Sur-tax could be disallowed under Section 40(a)(ii) of the Act. The Court was not, in that case, called upon to examine the Question whether Sur-tax was an allowable deduction under Section 37 of the Act. The Gauhati High Court referred to the decision of the Supreme Court in Jaipuria Samla.s case (supra) and observed as follows:- \"The ratio of Jaipuria's case is squarely applicable to the facts of the present case inasmuch as the amount of tax whose deduction is barred by Section 40(a)(ii) \"if the Act is the one levied on profits and gains of any business or profession, whereas the sur-tax under the Sur-tax Act is leviable on the total income of the assessed as that income is taken to be \"chargeable profits\". It may be pointed out that Section 4 of the Sur-tax Act which is the charging section has made it clear that sur-tax shall be charged in respect of the chargeable profits of the previous year or previous years\".\n\n(15) With respect we are unable to agree with the aforesaid observations of the Gauhati High Court. The Judges have not analysed the provisions of the Companies (Profits) Sur-tax Act, 1964 in any detail and have apparently overlooked the definition of the expression \"chargeable profits\" occurring in Section 2(5) of Sur-tax Act, 1964 which clearly stales that the chargeable profits mean the total income computed under the provisions of the Income-tax Act, 1961 subject to adjustments being made under the First Schedule. No doubt the charging section states that tax is to be levied on chargeable profits but then chargeable profits are no different than the total income computed under the provisions of Section 28 and 37 of the Income-tax Act but subject to adjustments under the First Schedule. The question as to whether the payment could be claimed as a deduction under Section 37 came up for consideration before the Gauhati High Court in the case of Doom Dooma Tea Co. Ltd. v. Commissioner of Income Tax ., 180 lTR 126(19). After \"referring to various cases it was observed that Sur-tax was different from Income-tax in all attributes and perspectives and \"Sur-tax was paid by the assessed in the install case under the compulsion of the statute for running: the business of tea, and. therefore, ban to be allowed to be deducted under Section 37 of the Income-tax Act.\"\n\n(16) We do not find either in the Income-tax Act or in the Sur-tax Act any provision which can persuade us to come to the conclusion that the payment of Sur-tax was an compulsion for running the business. It is not as if without payment of Sur-tax the business could not be conducted. As we have already indicated hereinabove if the business runs at a loss or its total income does not exceed the statutory deduction referred to in Section 4 the assessed can still continue to carry on its business. In ether words the carrying on of the business by the assessed is not dependent upon or subject to the condition of payment of Sur-tax under the said Act. \n\n(17) For the aforesaid reasons it must be held that the payment of Sur-tax is not allowable as a deduction under Section 37 of the Act. \n\n(18) Mr. Bishamber Lal, however, contended that the Supreme Court has observed in the case of Commissioner of Income Tax . v. Delhi Safe Deposit Company Ltd., 133 Itr 756 that the true test of an expenditure laid out wholly and exclusively for the purposes of trade or business is that it is incurred by the assessed as incidental to his trade for the purpose of keeping the trade going and of making it pay and not in any other capacity than that of a trader. The expenditure incurred on the preservation of a profit-earning asset o^ a business is always a deductible expenditure. The said test, as laid down by the Supreme \" Court, has no applicability in the present case. As we have already observed the money spent by the assessed in paying sur-tax was not for the purpose of carrying on any trade or business. The assessed was obliged to part with money by way of tax which was imposed on the profits which it had earned as a result of the carrying on of the business. The payment was not made for the preservation of any asset. It was. in fact, application of a part of its income towards payment of Sur-tax. \n\n(19) For the aforesaid reasons question No. 2 referred at the instance of the assessed is answered in the affirmative and in favor of the Department. \n\n(20) Now coming to the reference made at the instance of the Department, as far as question No. I is concerned the facts as found by the Tribunal are that the assessed had established a cement plant at Mahuda (Bihar). It claimed deduction under Section 80J in respect of the profits and gains of the aforesaid newly established industrial undertaking. Relying upon an earlier order the Income-tax Officer did not allow the claim. This was upheld by the Appellate Assistant Commissioner. The Tribunal, however, reversed the finding and allowed the claim of the assessed. The deduction under Section Soj was not allowed on the ground that the assessed had purchased some second hand machinery from Heavy Engineering Corporation, Ranchi for setting up a new unit and the condition laid down under Section 5oj(4)(ii) was not satisfied. The Tribunal found as a fact that in the year in question new assets worth Rs. 4,65,160.00 had been purchased by the assessed as against old assets worth Rs. 74,580. \"The percentage of new and old assets was 86 per cent : 14 per cent. .Following the decision of the Gujarat High Court in the case of Commissioner of Income-tax v. Satellite Engineering Ltd., 113 Itr 208 (21) the Tribunal came to the conclusion that the assessed was entitled to deduction.\n\n(21) This Court had also ?n occasion to consider the meaning of the expression \"reconstruction of business\", occurring in the analogous provisions under the Income-tax Act, 1922 namely Section 15(0(2) (i) in the case of Commissioner of Income-tax v. Ganga Sugar Corporation, 92 Itr 173(22). In that case the assessed company had set up a new plant for manufacturing sugar after it had scrapped the old plant. Nevertheless some of the old material was used in the erection of the new plant but the said percentage was only I per cent. It was observed by this Court that the use of scrap and material of the old plant of the value of a small fraction of the expenditure involved in the setting up of a new unit did not attract the concluding words of clause (i) of Section 15(C)(2). It also held that in order to hold that an industrial undertaking had been formed by the transfer to a new business of building, machinery or plant previously used in any other business the Court should take into account the value of the transferred building, machinery or plant vis-a-vis the total cost involved in the setting up of the new industrial undertaking. If in the context of the total cost involved in the setting up of the new industrial undertaking the value of transferred building, machinery or plant constitutes only a small fraction, the new industrial undertaking would not be held to have been formed by the transfer to a new business of building, machinery of plant previously used in any business. It is only if the value of the transferred building, machinery or plant is substantial, when compared to the total cost involved in the setting up of the new industrial undertaking could the said undertaking be regarded as being hit by the concluding words of clause (i) of Sub-Section (2) of Section 15C. The said reasoning of this Court in Ganga Sugar Corporation's case is clearly applicable in the instant case.\n\n(22) It has been contended by Shri Gupta that the value of the old machinery which was used in the instant case was not a small traction. He further submits that explanation (ii) lo Section 80J(4) was inserted w.e.f. 1st April, 1976 and it no doubt provided the use in the new industrial undertaking of old plant and machinery to the extent of 20 per cent of the total value of the machinery. The learned counsel contends that this explanation was not applicable to the assessment year in question viz., 1972-73. \n\n(23) In our opinion even without the help of this explanation but by virtue of. the ratio of the decision of this Court in Ganga Sugar Corporation's case (supra) the assessed is entitled to succeed. Out of a total expense which was incurred during the year, old assets of only Rs. 74,580 were used and these assets also were not those which belonged to the assessed. This was second hand machinery which was purchased from outside and as far as the assessed is concerned It was going to use the said machinery for the first time; in a sense the said machinery was new to the assessed. The Tribunal was, therefore, right in concluding that the assessed was entitled to the relief as prayed.\n\n(24) The said question is, therefore, answered inthe affirmative and in favor of the asssessee. \n\n(25) Question No. 2 referred at the instance of the Department has to be decided in its favor in view of the decision of the Supreme Court in the case of Lohia Machine Tools, 152 Itr 308. The said question is, therefore, answered in the negative and in favor of the. Department. \n\n(26) As regards question No. 3, the same is concluded against the Department by virtue of the Judgment of this Court in Commissioner of Income Tax . v. Mahabir parshad & Sons, 125 Itr 165. The assessed had not been allowed the correct amount of interest under Section 214 of lae Act. The Appellate Assistant Commissioner did not entertain the assessors appeal on this point, as, according to him, no appeal was provided. The Income- tax Tribunal, however, followed the aforesaid judgment of this Court in Mahabir Parshad's case and held that the question of interest under Section 214 could be challenged in an appeal filed against the assessed. Since the Appellate Assistant Commissioner had not dealt with this matter on merits, the point was referred back to him with a direction to decide it on merits and according to law. We find that the direction given by the Tribunal, in the instant case, is in confirmity with the observations of this Court in Mahabir Parshad's case (supra) and, therefore, the question of law is answered in the affirmative and in favor of the assessed. \n\n(27) The net result is that both the questions referred at the instance of the assessed are decided in favor of the Department. As regards the three questions referred at the instance of the Department, question Nos. 1 and 3 are decided in favor of the assessed and Question No. Tis decided in favor of the Department. There will be no order as to costs." }, { "title": "Commissioner Of Income Tax vs First Leasing Co. Of India Ltd. (Cit V. ... on 12 September, 1996", "url": "https://indiankanoon.org//doc/1034276/", "text": "Commissioner Of Income Tax vs First Leasing Co. Of India Ltd. (Cit V. ... on 12 September, 1996\nEquivalent citations: (1997)140CTR(MAD)218\nORDER. \n\nRatio: \n When a question of law was squarely before the \nTribunal, who failed to deal with it, the same question therefore, one \narising out of its order.\n\nHeld: \n When a question of law is raised before the \nTribunal, but the Tribunal fails to deal with it, it must be \ndeemed to have been dealt with by it and is, therefore, one \narising out of its order. In this case the question of law \nwhether the allowance under section 32A could be granted to the \nassessee was squarely before the Tribunal but, the Tribunal did \nnot actually consider one aspect of it in the light of one of the \nstatutory conditions prescribed in section 32A(2)(b)(iii) of the \nAct, in relation to the buldozer hired out by the assessee. So as \nper the above said decision of the Supreme Court that aspect \nmust deemed to have been dealt with by the Tribunal and, \ntherefore, it is one arising out of its order.\n\nCase Law Analysis: \n VR. C. RM. \nAdaikkappa Chettiar v. CIT (1970) 78 ITR 285 (Mad) and CIT \nv. Scindia Steam Navigation Co. Ltd. (1961) 42 ITR 589 (SC) \nfollowed.\n\nApplication: \n Also to current assessment years.\n\nA. Y.: \n 1977-78\n \n\nDt. Ord.: \n 12-9-1996\n \n\nIncome Tax Act 1961 s.32(1)(vi) \n\nIncome Tax Act 1961 s.32A \n\n \n \n\nInvestment allowance--ALLOWABILITY--In respect of a bulldozer. \n\nRatio: \n Assessee could not claim investment allowance in \nrespect of a buldozer under section 32A(2)(b)(iii).\n\nHeld: \nRelying on the terminology used in section \n32A(2)(b)(iii) buldozer cannot be considered as a \"machinery or \nplant installed......in any other industrial undertaking for the \npurpose of business of construction, manufacture or production of \nany article or thing......\". The Supreme Court so held that the \nassessee in that case was not entitled to the allowance under \nsection 32A. The assessee in this Tax Case No. 1651 of 1986, is \nnot entitled to the abovesaid investment allowance under section \n32A in relation to its hiring of buldozer.\n\nCase Law Analysis: \nCIT v. N. C. Budharaja & Co. etc., \n(1993) 204 ITR 412 (SC) and Builders Associations of India \nv. Union of India & Ors. (1994) 209 ITR 877 (SC) followed.\n\nApplication: \nNot to current assessment years.\n\nA. Y.: \n1977-78\n \n\nDt. Ord.: \n12-9-1996\n \n\nIncome Tax Act 1961 s.32(1)(vi) \n\nIncome Tax Act 1961 s.32A \n\n \n \n\nInvestment allowance--ALLOWABILITY--Assessee engaged in hiring of machinery. \n\nRatio: \n Assessee engaged in hiring of machinery is entitled \nto investment allowance as such hiring is not transfer for \npurpose of sub-section 5 of section 32A.\n\nHeld: \nThe assessee is wholly using the plant or machinery \nfor the purpose of his/its business which consists of leasing it \nto other parties. Sub-section (1) or (2) of section 32A does not \nrequire anywhere that the plant and machinery must be installed \nand used by the assessee himself for the manufacture or \nproduction of priority articles. Wherever legislature intended \nthat the assessee should itself engage in the particular \nbusiness, it has so provided. This would be evident from the \nlanguage of sub-section (2)(a) of section 32A which specifically \nrequires that the assessee, in order to claim investment \nallowance in respect of ships or aircraft, must be \"engaged in \nthe business of operation of ships or aircraft. The fact that \nsuch a qualification does not appear in sub-section (1) or \nsub-section 2(b)(iii) of section 32A shows that in order to claim \ninvestment allowance for machinery or plant, the assessee need \nnot by himself have the industrial undertaking engaged in the \nbusiness or manufacture or production of articles not specified \nin the Eleventh Schedule. If the interpretation sought to be \nplaced by the revenue, were to be accepted, then neither the \nassessee which hired out the plant or machinery nor the hirer \nwould be entitled to investment allowance. (The hirer will not be \nentitled to investment allowance because it does not own the \nplant or machinery). Such an interpretation must be avoided \nbecause it will defeat the very purpose of enactment of section \n32A. It is also settled law that giving plant or machinery on \nlicence or hire is one of the recognised modes of doing business \nas much as the use of the asset by the assessee himself for the \npurpose of manufacture or production. Even on the footing that \nthe term `otherwise transferred' would include such \"lease\" the \nsaid provision will not disentitle the assessee herein from \nsecuring investment allowance, since the said provision only \nspeaks of `machinery' or plant transferred by the assessee \"at \nany time before the expiry of eight years from the end of the \nprevious year in which it was acquired or installed\". The leases \nwere only during the previous year in which the plant or \nmachinery was acquired and not in the abovereferred to eight year \nperiod beginning from the end of the previous year. The Tribunal \nitself has found that the above said `lease' transaction by the \nassessee will not actually come under the terms `otherwise \ntransferred' found in section 32A sub-section (5) taking into \naccount the definition of the term `transfer' under section 2 \nclause (47) of the Act. \n\nCase Law analysis: \nCIT v. Shaan Finance (P) Ltd. (1992) \n109 CTR (Karn) 209 : (1993) 199 ITR 409 (Karn), CIT v. \nPandiyan Bank Ltd. (1969) 71 ITR 707 (Mad), CIT v. \nEastern Spinning Mills & Industries (1995) 125 Taxation 353 \n(Cal), CEPT v. Shri Lakshmi Silk Mills Ltd. (1951) 20 ITR 451 \n(SC) and Ajodhpya Prasad Tara Chand Khokra v. CIT (1967) 66 ITR 576 (All) relied on. \nBlue Bay Fisheries (P) Ltd. v. CIT (1987) 166 ITR 1 (Ker) distinguished.\n\nA. Y.: \n1977-78\n \n\nDt. Ord.: \n12-9-1996 \n\nIncome Tax Act 1961 s.32(1)(vi) \n\nIncome Tax Act 1961 s.32A \n\n \n \n\nDepreciation--INITIAL DEPRECIATION--Leasing of machinery. \n\nRatio & Held: \n Assessee engaged in leasing out machinery \nwas entitled to initial depreciation.\n\nApplication: \nNot to current assessment years.\n\nA. Y.: \n1977-78\n \n\nDt. Ord.: \n12-9-1996 \n\nIncome Tax Act 1961 s.32(1)(vi) \n\nIncome Tax Act 1961 s.32A \n\n \n\n\n\n\n\n \n\nORDER\n \n\nABDUL HADI, J. :\n\nIn all these tax case references under S. 256(1) of the IT Act, 1961, hereinafter referred to as the Act, one common question is involved (apart from certain other questions in one or other of the said cases) and hence they are heard together.\n\n2. Of these, one alone, viz., TC No. 786 of 1986 is by the assessee since the Tribunal below therein held against the assessee on the above said question. The other five tax case references are by the Revenue. The Tribunal, in the respective orders therein, held against the Revenue on the above said question.\n\n2(a) TC Nos. 491 and 492 of 1986, arising out of the said order dt. 8th May, 1985 of the Tribunal, in the appeal by the Revenue as well as cross-objection by the assessee, relate to the asst. yr. 1977-78. The assessee therein is the same as in TC No. 786 of 1986, which relates to the asst. yr. 1979-80 and arises out of the order dt. 31st Oct., 1983 of the Tribunal. TC No. 1651 of 1986 relates to another assessee in relation to the asst. yr. 1980-81 and arises out of the order dt. 30th Aug., 1985 of the Tribunal. TC No. 1242 of 1991 which relates to the asst. yr. 1983-84 and TC No. 1243 of 1991, which relates to the asst. yr. 1984-85, both arise out of the order dt. 8th Feb., 1990 of the Tribunal. Both these later two cases relate to yet another assessee.\n\n3. The abovesaid \"common question\" is about the investment allowance under S. 32A of the Act, which is one of the deductions allowed in computing \"total income\" chargeable to tax under the Act. The abovesaid allowance is given w.e.f. 1st April, 1976, the said provision having been inserted in the Act, by the Finance Act, 1976 and the said allowance has taken the place of development rebate allowance which was given earlier. The said allowance under S. 32A is given inter alia, in respect of plant and machinery. All the above said assessees, who admittedly owned the plant or machinery in question, only hired out the same to another for being exploited by the later. Therefore, the contention of the Revenue is that the assessee was not entitled to the said allowance, it having not exploited the said plant or machinery, itself. On the other hand, the contention of the above said assessees is that despite the above said fact, each one of that was entitled to the allowance under the said section. In view of these rival contentions, the above said question is whether the assessees were entitled to the above said investment allowance under the above said section in the above said relevant assessment years, in respect of the respective plant or machinery, which admittedly was owned by the respective assessees but hired out during the relevant previous years, as stated above.\n\n4. With reference to the said \"common question\" the sole question of law referred to us in TC No. 786 of 1986 runs as follows :\n\n\"Whether the Tribunal was right in holding that the assessee was not entitled to investment allowance under S. 32A of the Act ?\"\n\n5. Likewise, in both TC Nos. 1242 and 1243 of 1991 the question of law referred to us, runs as follows :\n\n\"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee is entitled to investment allowance under S. 32A on items of machinery and plant which have been leased out to others ?\"\n\n6. In TC No. 1651 of 1986 the question of law referred to us runs as follows :\n\n\"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee was entitled to investment allowance under S. 32A on the bulldozer purchased and hired to outsiders, even though the assessees business was only hiring of compressors and bulldozers ?\"\n\n(With reference to this question, another question also has to be considered in the light of the arguments advanced, viz., whether in respect of bulldozer, the assessee in the said case could claim the said allowance. This aspect would be considered after considering the above referred to \"common question\").\n\n7. In both TC Nos. 491 & 492 of 1986, actually speaking, two questions of law have been referred to us and the above said \"common question\" involved is reflected only in the second of the above said question referred to us, which runs as follows :\n\n\"Whether the Tribunal was correct in law in holding that the assessee is entitled to investment allowance under S. 32A and initial depreciation under S. 32(1)(iv) of the Act on machinery leased out ?\"\n\n(In the above question, referred to S. 32(1)(iv) is not correct; it must read as S. 32(1)(vi). The said question refers to initial depreciation. As per learned counsel for Revenue, the arguments advanced in respect of investment allowance would apply to the said initial depreciation also and the decisions to be given in respect of investment allowance in regard to the actual question at issue would also equally apply to initial depreciation). Then, the first of the above said two questions referred to us, runs as follows :\n\n\"Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding and had valid materials to hold that the reopening of the assessment under S. 147(b) of the Act was without jurisdiction and, therefore, invalid ?\"\n\nRegarding this first question, learned counsel for the Revenue submitted that if the above said \"common question\" is answered in favour of the assessee there may not be any necessity to answer this first question and so saying he deferred his arguments on the said first question till our decision is given on the abovereferred to common question. However, we may at this stage itself state that, since in view of the reasons given below we are going to decide in favour of the assessee on the above said common question, there is no necessity to answer the above referred to second question and the said second question has to be returned unanswered.\n\n8. Let us now deal with the above said \"common question\" first. The material portions of the said S. 32A of the Act run as follows :\n\n\"32A(1). In respect of a ship or an aircraft or machinery or plant specified in sub-s. (2) which is owned by the assessee and is wholly used for the purposes of the business carried on by him, there shall, in accordance with and subject to the provisions of this section, be allowed a deduction in respect of the previous year in which the ship or aircraft, was acquired or the machinery or plant was installed.....\n\n......\n\n......\n\n.......\n\n.......\n\n.........\n\nof a sum by way of investment allowance equal to 25 per cent of the actual cost of the ship, aircraft, machinery or plant to the assessee...\n\n(2) The ship or aircraft or machinery or plant referred to in sub-s. (1) shall be the following namely :\n\n(a) a new ship or new aircraft acquired after the 31st day of March, 1976, by an assessee engaged in the business of operation of ships or aircraft;\n\n(b) any new machinery or plant installed after the 31st day of March, 1976, -\n\n(i)................................... \t\t(ii)..................................\n\n(iii) in any other industrial undertaking for the purposes of business of construction, manufacture or production of any article or thing, not being an article or thing specified in the list in the Eleventh Schedule;\n\n(Note : This Eleventh Schedule contains non-priority articles or things).\n\n(2A)............... (2B)............... (2C)............... (2D)............... (3)................\n\n(4) The deduction under sub-s. (1) shall be allowed only if the following conditions are fulfilled, namely :\n\n(i)...... \t\t\t\t\t\t\t\t.........\n\n(ii) an amount equal to 75 per cent of the investment allowance to be actually allowed is debited to the P&L a/c and credited to a reserve account..... to be utilised -\n\n(a) for the purpose of acquiring, before the expiry of a period of ten years next following the previous year in which..... the machinery or plant was installed, a..... new machinery or plant.... for the purposes of the business of the undertaking and\n \n\n(b)..... \t\t\t\t\t\t..........\n\n(5) Any allowance made under this section in respect of any machinery or plant shall be deemed to have been wrongly made for the purposes of this Act -\n\n(a) if the..... machinery or plant is sold or otherwise transferred by the assessee to any person at any time before the expiry of eight years from the end of the previous year in which it was acquired or installed; or\n \n\n(b)..... \t\t.......... \t\t\t\t(c)..... \t\t\t\t\t..........\"\n\n9. Thus, the main conditions to be satisfied as per S. 32A(1) and (2) are :\n\n(1) the subject-matter is to be owned by the assessee;\n\n(2) is wholly used for the purpose of business of the assessee; and\n \n\n(3) the subject-matter should come under any of the enumerated categories of S. 32A(2).\"\n\nThat the plant or machinery in the present case is owned by the assessee is not disputed.\n\n10. As regards the second condition the assessee is wholly using it for the purpose of his/its business which consists of leasing it to other parties. Sub-s. (1) or (2) of S. 32A does not require anywhere that the plant and machinery must be installed and used by the assessee himself for the manufacture or production of priority articles.\n\n11. Wherever legislature intended that the assessee should itself engage in the particular business, it has so provided. This would be evident from the language of sub-s. (2)(a) of S. 32A which specifically requires that the assessee, in order to claim investment allowance in respect of ships or aircraft, must be \"engaged in the business of operation of ships or aircraft\". The fact that such a qualification does not appear in sub-s. (1) or sub-s. (2)(b)(iii) of S. 32A shows that in order to claim investment allowance for machinery or plant, the assessee need not by himself have the industrial undertaking engaged in the business or manufacture or production of articles not specified in the Eleventh Schedule. Further, even in S. 32A(4), which provides for keeping reserve, as a condition for securing the deduction, we do not find any phraseology to accept the contention of the Revenue.\n\n12. The object of all interpretation is to discover the intention of the Parliament but the intention of Parliament must be deduced from the language used. Where the language is plain and admits of only one meaning, the task of interpretation can hardly be said to arise. If the interpretation sought to be placed by the Revenue, were to be accepted, then neither the assessee which hired out the plant or machinery nor the hirer would be entitled to investment allowance. (The hirer will not be entitled to investment allowance because it does not own the plant or machinery). Such an interpretation must be avoided because it will defeat the very purpose of enactment of S. 32A.\n\n12A. The object of the enactment can also be seen from the Budget speech of the Finance Minister for the year 1976-77 while introducing S. 32A. The relevant portion of the speech is as follows :\n\n\"The present scheme of investment allowance will facilitate invest in priority industries and reduce the dependence of the corporate section on public financial institutions\" [Vide (1976) 102 ITR (St) 95].\n\nSo, one object of the introduction of S. 32A is to facilitate the investment in priority industries. This object will be fulfilled whether the assessee himself makes use of the plant or machinery in question or the hirer. Further, if a person who has enough funds, acquires plant or machinery and hires it out to a person who may not have such enough funds at his command. The necessity for the letter person to seek necessary funds from public financial institutions for acquiring the plant or machinery himself may not arise and to that extent the dependence on such institutions is reduced. In this way the second object also is satisfied.\n\n13. We may also point out that an identical question arose in CIT vs. Shaan Finance (P) Ltd. (1993) 199 ITR 409 (Kar) and the said Court has also upheld that investment allowance can be claimed by a person similarly placed as the present assessees. According to the said decision, the only requirement under S. 32(2)(b) is that the plant or machinery owned by the assessee should have been used by some one in the manner stated in the said sub-clause. It has also been held therein, in the context of the above said expression wholly used (finding place in both Ss. 33 and 32A) that the term wholly means entirely and not exclusively and that the machinery in its entirety may .... .... .... be used by its owner and it is possible for another also to use it. In this connection, the said decision also relied on similar observation of this Court in CIT vs. Pandiyan Bank Ltd. (1969) 71 ITR 707 (Mad).\n\n14. In CIT vs. Eastern Spinning Mills & Industries (1995) 125 Taxation 353 (Cal), the Calcutta High Court also held that the abovesaid investment allowance could be granted to an assessee even when he, the owner of the plant or machinery in question, leases it out to another person. No doubt, in that case the assessees sole business was not such leasing out of plant or machinery, but, its business was actually manufacture and sale of staples and synthetic blended yarn, etc., but, due to adverse conditions the assessee decided to give the plant and machinery used by it in the above said manufacture to a third party on leave and licence basis whereby the said third party got right of exploitation of the said plant and machinery, for an initial period of three years which could be extended. Taking into account the above said special feature in the Calcutta case, learned counsel for the Revenue seeks to argue that the said Calcutta decision turned on its facts and it cannot be applied to the present cases where the sole business of the assessee is only leasing out the plant or machinery. But, we do not think any such distinction could be made. In either case the principle is the same, it being that S. 32A does not disentitle such lessor or licensor of plant or machinery from claiming the said allowance.\n\nIt must be noted that even if this investment allowance is allowed to a person who simply hires out the plant or machinery, the abovesaid objects will be fulfilled since it is also likely he will hire out the plant or machinery at a lower rent as he is going to get this allowance in computing his total income of his leasing business.\n\n15. Any legislative provision is to be construed in the light of the purpose with which it has been introduced. This principle of purposive interpretation has been adopted in so many decisions of the Supreme Court like CIT vs. Gwalior Rayon Silk Mfg. Co. Ltd. (1992) 196 ITR 149 (SC); Bajaj Tempo Ltd. vs. CIT (1992) 196 ITR 188 (SC). In particular, we may point out that in (1992) 196 ITR 188 (SC) (supra), it has been held that a provision in the statute granting incentives for promoting growth and development should be construed liberally; and since a provision for promoting economic growth has to be interpreted liberally, the restriction on it too has to be construed so as to advance the objective of the provision and not to frustrate it.\n\n16. As already indicated, the present investment allowance has replaced the former development rebate allowance provided under S. 33 of the Act. The S. 33 gave the said development rebate allowance in respect of machinery or plant owned by the assessee and is wholly used for the purpose of the business carried on by him. In that context, several decisions have held that the said allowance under S. 33 of the Act could be given even to an assessee, who only hires out the above said plant and machinery in the course of business of leasing. We may point out one of them, viz., Ajodhya Prasad Tara Chand Khekra vs. CIT (1967) 66 ITR 576 (All). In that case the Court held that for kolhus (sugarcane crushing machine) such development rebate could be allowed. In that context the relevant observation is as follows :\n\n\"The kolhus on which development rebate is claimed once were admittedly let out and were, therefore, wholly used for the assessees business which consisted of hiring out of such kolhus. The assessee was neither a crusher of sugarcane nor was that his business, and, therefore, kolhus could not have been used by him for that purpose. His business was wholly that of hiring out of kolhus. The 50 new kolhus were in fact hired out, and, therefore, they were used wholly for the purpose of the assessees business. The fact that the person who hired the kolhus also made use of them would not make the kolhus any the less \"used wholly for the purpose of the assessees business.\"\n\n17. It is also settled law that giving plant or machinery on licence or hire is one of the recognised modes of doing business as much as the use of the asset by the assessee himself for the purpose of manufacture or production [vide CEPT vs. Shri Lakshmi Silk Mills Ltd. (1951) 20 ITR 451 (SC).\n\n18. Referring to the third main condition enumerated above, which also has to be satisfied for claiming the above said allowance under S. 32A, which provides that the said allowance is given in respect of the machinery or plant installed in any other industrial undertaking (i.e., other than the small scale industrial undertaking) for the purposes of business of construction, manufacture, or production of any article or thing, not being an article or thing specified in the list in the Eleventh Schedule, the above said Karnataka decision also observes as follows :\n\n\"The term \"installed\" is found in several sub-sections of S. 32A; but that does not aid the construction because, in the main sub-section, i.e., S. 32A(1), both the terms \"used\" and \"installed\" are referred to in relation to the subject-matter.\n\nHowever, we find some clue as to the legislatures intention comparing S. 32A(2B) with S. 33(1)(b)(B)(ii) and (iii). In the two sub-clauses (of S. 33), there is a specific reference to the assessees business premises where the machinery is to be installed.\"\n\nIn other words, while the relevant provisions in S. 33 provide that machinery or plant should be installed by the assessee in the premises used by it, or it is an asset or the said machinery or plant is an asset relating to the business carried on by the assessee, as the case may be, S. 32A(2B) does not have any such stipulation. That is why the said Karnataka decision concludes by saying thus :\n\n\"The benefit is given with reference to the actual user of the machinery, though the benefit may go to a person who does not exploit the machinery himself for manufacturing or producing any article. Such a situation is not entirely unknown in the field of taxation. If the object behind S. 32A is understood as to encourage industrial activities in investment in capital goods to facilitate industrial development, the provision would certainly bear the meaning we have attributed to it.\"\n\n19. Learned counsel for the Revenue also relies on S. 32A sub-s. (5)(a) and contends that since the plant or machinery in the present cases has been leased out by the assessee, it is hit by the above said provision in view of the fact that the terms otherwise transferred found therein would include such lease. So; according to him, the said allowance \"shall be deemed to have been wrongly made\". But, we are unable to accept this contention also. First of all, even on the footing that the term otherwise transferred would include such \"lease\" as given in the present cases, the said provision will not disentitle the assessees herein from securing investment allowance, since the said provision only speaks of machinery or plant transferred by the assessee \"at any time before the expiry of eight years from the end of the previous year in which it was acquired or installed\". In all the present cases, admittedly the leases were only during the previous year in which the plant or machinery was acquired and not in the abovereferred to eight year-period beginning from the end of the previous year.\n\n20. Further, learned counsel for the assessee points out that the Tribunal itself has found that the above said lease transaction by the assessees will not actually come under the terms otherwise transferred found in S. 32A sub-s. (5) taking into account the definition of the term transfer under S. 2 cl. (47) of the Act. The Special Bench of the Tribunal which decided the ITA No. 1951 of 1983 out of whose order arose the above said Tax Case Nos. 491 and 492 of 1986, has held in its impugned order dt. 8th May, 1985 thus :\n\n\"A perusal of the hire agreement shows that the ownership of the assets, which are leased out, vests only in the assessee. We are unable to hold, therefore, that there is extinguishment of any right when the assets are hired out, and only the benefit of user is obtained by the person who takes out the assets on hire. The assets cannot, therefore, be considered on being hired out, though the expression \"lease\" is used in the agreement, as having been otherwise transferred. The provisions of S. 32A(5) are also not attracted merely because the assets are leased out and no mistake would have been committed in granting investment allowance.\"\n\nSo, according to the said counsel, we cannot normally go beyond the abovesaid factual finding that there was no extinguishment of any right of the assessees when the plant or machinery in question was hired out. There is force in this argument also. No doubt, a copy of the lease agreement entered into by one of the assessees viz., Sundaram Finance Limited was produced before us wherein we also find the following passage as one of the terms of the lease deed :\n\n\"The lessee acknowledges..... that it holds the equipment as a mere bailee of the lessor and that it shall not have any property right, title or interest in the equipment or any part thereof and shall at all times, protect and detent as bailee/licence of the equipment.\"\n\n.......\"\n\n21. No doubt, learned counsel for the Revenue drew our attention to Blue Bay Fisheries (P) Ltd. vs. CIT (1987) 166 ITR 1 (Ker), but that turned down on its own facts. There, trawler was leased out and the Court held that the agreement between the parties indicated that the transaction was a lease of the trawler in favour of the transferee and that for a period of ten months the trawler was to remain in the exclusive possession of the transferee and at the end of the period it was to be sold to it. We do not think that the said decision would apply to the facts of the present case.\n\n22. Then, we now come to the aspect referred to in para 4B above, in relation to the question referred to us in Tax Case No. 1651 of 1986 viz., whether in respect of buldozer, the assessee therein could claim the above said allowance. According to learned counsel for the Revenue relying on the terminology used in S. 32A(2)(b)(iii) buldozer cannot be considered as a \"machinery or plant installed ...... in any other industrial undertaking for the purpose of business of construction, manufacture or production of any article or thing.....\"\n\nIn this connection, the decision in CIT vs. N.C. Budharaja & Co. etc. (1993) 204 ITR 412 (SC) relied on. According to the above decision of the Supreme Court, the word article and thing are used inter-changeably in the said provision and these words in the above context in which they are used, cannot comprehend or take within its ambit a dam, a bridge, a building, a road, a canal and so on. The Supreme Court so held that the assessee in that case was not entitled to the allowance under S. 32A. Therefore, in view of this Supreme Court decision and also Builders Associations of India vs. Union of India & Ors. (1994) 209 ITR 877 (SC) which also reiterated the same principle, it has to be held that the assessee in this Tax Case No. 1651 of 1986, is not entitled to the abovesaid investment allowance under S. 32A in relation to its hiring of buldozer.\n\n23. But, the learned counsel for assessee in this case argues that the abovesaid question does not at all arise out of the Tribunals order dt. 30th Aug., 1985, in ITA No. 2554 of 1984 out of TC No. 1651 of 1986 has arisen and, hence, this Court is not called upon to decide the question whether in respect of buldozer the abovesaid investment allowance could be claimed.\n\n24. No doubt, we find in the abovesaid Tribunals order that the only discussion is virtually only the following :\n\n\"After due consideration and in view of the decision of the Tribunal in the case of Abcoy and the Special Bench decision in the case of First Leasing Co. cited supra (13 ITD : 23 TTJ 469) we uphold the order of the CIT(A).\"\n\nSo it follows that the Tribunal has not actually considered the abovesaid question whether with reference to buldozer as such, the abovesaid investment allowance could be claimed. But, as pointed out by learned counsel for the Revenue, in VR. C.RM. Adaikkappa Chettiar vs. CIT (1970) 78 ITR 285 (Mad) at page 297, relying on CIT vs. Scindia Steam Navigation Co. Ltd. (1961) 42 ITR 589 (SC), inter alia, it has been held that when a question of law is raised before the Tribunal, but the Tribunal fails to deal with it, it must be deemed to have been dealt with by it and is, therefore, one arising out of its order. In this case, the question of law whether the allowance under S. 32A could be granted to the assessee was squarely before the Tribunal but, the Tribunal did not actually consider one aspect of it in the light of one of the statutory conditions prescribed in S. 32A(2)(b)(iii) of the Act, in relation to the buldozer hired out by the assessee. So as per the above said decision of the Supreme Court that aspect must be deemed to have been dealt with by the Tribunal and, therefore, it is one arising out of its order.\n\n25. The net result is, in TC Nos. 491 and 492 of 1986, the second question referred to us both in relation to investment allowance under S. 32A as well as initial depreciation under S. 32(1)(vi) is answered in the affirmative and against the Revenue. Insofar as the first question referred to us in both the said tax cases, in view of what is stated in para 7 above, it is held that there is no necessity to answer this first question and the said first question is returned unanswered accordingly.\n\n26. Insofar as TC No. 786 of 1986, the question referred to us is answered in the negative and against the Revenue.\n\n27. Insofar as TC No. 1651 of 1986 taking into account only the above referred to subsidiary question whether with reference to the bulldozer the assessee is entitled to the allowance under S. 32A, the question referred to us is answered in favour of the Revenue.\n\n28. Insofar as TC Nos. 1242 and 1243 of 1991 the question referred to us is answered in the affirmative and against the Revenue. No costs." }, { "title": "Commissioner Of Income-Tax vs Rayala Corporation (P.) Ltd. on 20 January, 1995", "url": "https://indiankanoon.org//doc/835773/", "text": "Commissioner Of Income-Tax vs Rayala Corporation (P.) Ltd. on 20 January, 1995\nEquivalent citations: [1995]215ITR883(MAD)\nORDER--Failure to notice assessee's recalcitrance. \n\nRatio : \n Where Tribunal instead of taking notice \nof assessee's recalcitrance treated it as a wronged person, the \nmatter is remitted back to the Tribunal for deciding afresh. \n \n\nFacts: \n While operating as an importer, the \nassessee-company was involved in siphoning valuable foreign \ncurrency to a named account in Sweden. It has been doing so, by \nover-invoicing to the extent of 40 per cent of the value of the \ngoods that it intended to import or imported and by receiving \nexcess money in foreign currency and keeping it calandestinely in \na bank in Sweden. The Enforcement Directorate and the Income Tax \nDepartment got some clue about the dealings of the assessee and \nas a result of the raid, startling disclosures followed. The \nassessee when called upon to produce materials for assessment in \naccordance with law by a notice under section 148 of the Act \ndeclined to the extent that it gave no care to any of the notices \nand letters of the assessing officer. The Tribunal, instead of \ntaking notice of the assessee's recalcitrance, has treated it as \na wronged person. \n \n\nHeld : \n The assessee has received a premium at the hands of \nthe Tribunal upon its recalcitrance. The matter is remitted back \nto the Tribunal to decide afresh and while deciding the matter \nthe Tribunal shall keep in mind the conduct of the assessee and \nevaluate accordingly whether there is any error in estimates of \nits income by the assessing officer under seciton 144 of the Act. \n \n\nApplication : \n Also to current assessment years. \n \n\nA. Y. : \n 1962-63\n \n\nIncome Tax Act 1961 s.254 \n\n \n\n \n \n\nAssessment--BEST JUDGMENT ASSESSMENT--Basis of deciding whether any error in the judgment. \n\nRatio & Held : \n Whether the assessing officer has committed \nany error in his judgment under section 144 of the Act can be \ndecided only on the basis of the materials gathered by him and \nnot on the basis of any materials that are later produced by the \nassessee. \n \n\nApplication : \n Also to current assessment year.\n \n\nA. Y. : \n 1961-62 to 1964-65\n \n\nIncome Tax Act 1961 s.144 \n\n \n\n \n \n\nAssessment--BEST JUDGMENT ASSESSMENT--Procedure and conditions precedent. \n\nRatio & Held : \n A best judgment assessment is called for \nonly when all the materials asked for the assessment are not \navailable with the assessing officer. The assessing officer \nrelies on the information gathered by him as well as the \nsurrounding circumstances of the case. \n \n\nCase Law Analysis: \n Commissioner of Sales-tax v. H. M. \nEsufali H. M. Abdulali (1973) 90 ITR 217 (SC) relied on.\n \n\nA. Y. : \n 1961-62 to 1964-65\n \n\nIncome Tax Act 1961 s.144 \n\n \n\n \n \n\nAssessment--BEST JUDGMENT ASSESSMENT--Putting additional evidence/material at appellate stage. \n\nRatio & Held : \n There cannot be a procedure wherein the best \njudgment of the assessing officer is subjected to the discretion \nof the assessee to produce evidence/material at the appellate \nstage and thus convert the proceeding of best judgment into a \nproceeding for regular assessment in which the assessee is served \nwith a notice under section 139(2) of the Act. \n \n\nApplication: \n Also to current assessment year.\n \n\nA. Y. : \n 1961-62 to 1964-65\n \n\nIncome Tax Act 1961 s.144 \n\n \n\n \n \n\nAssessment--BEST JUDGMENT ASSESSMENT--Validity. \n\nRatio : \n The assessee being a defaulter, who has not \nresponded to the notice under section 148 of the Act and who \nhas also not chosen to take advantage of the filing of the return \nor to respond to the notices and the letters of the assessing \nofficer, recourse to section 144 is valid. \n \n\nFacts : \n In a raid by the Officers of the Enforcement \nDirectorate and the Income Tax Department, it was found that the \nassessee had received money in a foreign land by over-invoicing \nits imports and manipulating accounts of payment of commission \nby it and also received kickbacks. A decision was taken to have \nrecourse to section 147 of the Act and, accordingly, a notice was \nissued to the assessee under section 148 of the Act. The assessee \nreceived the notice but ignored the same. The assessing officer's \ninsistence to the assessee to produce details regarding the import \nof raw materials, components, store items and also details \nregarding the number of typewriters supplied to its distributors \nwas also ignored by the assessee. Except for a reply letter at \nsome stage that it (assessee) had submitted in the concerned \nassessment year's returns and it accordingly had been assessed, \nthe assessee kept itself away from the proceedings before the \nassessing officer. The assessing officer took recourse to the \nbest judgment, as contemplated under section 144 of the Act. \n \n\nHeld : \n There is no error in the procedure adopted by the \nassessing officer, as a notice under section 148 of the Act was \nissued by him and since such a notice is guided by all the \nconsequences of a notice under sub-section (2) of section 139 of \nthe Act and in the case of an assessee, who has failed to make \nthe return, required by a notice issued under sub-section (2) of \nsection 139 of the Act procedure under sub-section (4) or \nsub-section (5) of that section can be followed and the assessing \nofficer can proceed to make the assessment of the total income or \nloss to the best of his judgment and to determine the sum \npayable by the assessee accordingly only if the assessee has not \ncared to act in response to the notice. \n \n\nApplication : \n Also to current assessment year.\n \n\nA. Y. : \n 1961-62 to 1964-65\n \n\nIncome Tax Act 1961 s.144 \n\n \n\n \n \n\nAppeal (Tribunal)--JURISDICTION--Conditions precedent. \n\nRatio & Held : \n The role of the Tribunal comes to \nexamine the contentions of the assessee or the revenue after all \nthe proceedings under the law, an enquiry before assessment, an \nenquiry after assessment, if any, under section 143 of the Act \nand hearing, if any, of the assessee by the assessing officer are \ncompleted and the remedy of a statutory appeal before the first \nappellate authority.\n \n\nApplication : \n Also to current assessment years.\n \n\nA. Y. : \n 1962-63\n \n\nIncome Tax Act 1961 s.253 \n\n \n\n \n \n\nAppeal (Tribunal)--POWER OF TRIBUNAL--Limitation. \n\nRatio & Held : \n The Tribunal can interfere with the orders \nof the lower authorities, but can do so only on judicial \nconsiderations and on the basis of reasons that suggest clearly \nthat the lower authorities had committed an error of law or such \nfact that had vitiated its considerations and gone perverse for \nsuch reasons. \n \n\nApplication : \n Also to current assessment years.\n \n\nA. Y. : \n 1962-63\n \n\nIncome Tax Act 1961 s.253 \n\n \n\n \n \n\nAppeal (Tribunal)--ADDITIONAL EVIDENCE--Reappraisal. \n\nRatio & Held : \n The Tribunal commits an error in \nentering into a reappraisal of evidence after taking into \nconsideration the additional evidence produced by the assessee \nbefore it in a proceeding arising out of a best judgment \nassessment under section 144 of the Act as such, the matter is \nremitted back to the Tribunal for deciding afresh. \n \n\nApplication : \n Also to current assessment years. \n \n\nA. Y. : \n 1962-63\n \n\nIncome Tax Act 1961 s.253 \n\n \n\n \n \n\nJUDGMENT \n \n\n Mishra, J.\n \n\n 1. Three questions of law are referred to this court under section 256(2) of the Income-tax Act, 1961 (hereinafter referred to as \"the Act\"), by the Income-tax Appellate Tribunal, 'B' Bench, at Madras, in the case of an assessee, who, according to the Revenue, had earned profit by allegedly over-invoicing of imports for the assessment years 1961-62 and 1962-63 and by receiving kickbacks from a supplier in Sweden. But before we reproduce the questions or reframe the questions for consideration, we propose to briefly recapitulate the facts. \n\n 2. The assessee, a private limited company, has allegedly been carrying on the business of manufacturing and selling typewriters having the trade name of \"Halda\" typewriters. The returns for the relevant financial years were assessed to tax on the income for the assessment year 1961-62 for the year ending on March 31, 1961, on January 31, 1964, and for the assessment year 1962-63 for the financial year ending on March 31, 1962, on March 26, 1964. In December, 1966, however, the Enforcement Directorate and the Income-tax Department conducted a raid in the premises of the assessee-company and the premises under the occupation of its managing directors and seized documents from their custody, which revealed that the assessee was systematically over-invoicing its imports of raw materials from Sweden and such over-invoiced amounts were credited to the account of Mr. M. R. Pratap, the managing director of the assessee in a Swedish bank, having the name Svenska Handelsbanken. In the pending assessment for the assessment year 1965-66, the Revenue took notice of several documents and the statements of one D. V. Jagga Rao in his deposition given on March 7, 1970, and March 10, 1970, and subsequently, cross-examination by the assessee's representative and made an addition of an income of Rs. 2,45,514 in the hands of the assessee on account of over-invoicing its imports from Sweden. During the appeal proceeding relating to the said year of assessment, some original materials were produced on behalf of the assessee before the Income-tax Officer. The assessee-company's ledgers relating to the assessment year 1961-62 disclosed that the assessee had imported raw materials, components, jigs, etc., from Facit AB to the extent of Rs. 11,80,872 and there was a diary seized in the course of the raid which contained certain entries. It was a diary belonging to Jagga Rao who explained the entries pertaining to the year 1963 in these words : \n \"The company was importing raw materials and components for manufacture of typewriters from A. B. Ativide-bergs Industries, Sweden (now known as \"Facit AB\"). The import prices were over-invoiced. The difference between the actual price and the over-invoiced price amounts to 7,56,539 s.k. up to August, 1963. This amount is shown on page opposite to calendar, 1963.\" \n\n 3. Jagga Rao was till 1971, a manager of the assessee-company and was looking after the import affairs of the company during the relevant period. The Appellate Assistant Commissioner upheld the addition made under over-invoicing substantially for the assessment year 1965-66 and with the approval of the Commissioner of Income-tax (Central), Madras, recourse was taken to section 147(a) of the Act and, accordingly, a notice under section 148 of the Act was issued on March 16, 1971, and duly served upon the assessee on March 16, 1971. The assessee made no response to the said notice and, accordingly, a letter was issued to it on November 9, 1971, reminding it about the return. The assessee, however, gave no response to the letter as well. On July 27, 1973, a fresh letter was addressed to the assessee and it was called upon to produce details regarding the import of raw materials, store items, components, etc., and details regarding the number of typewriters supplied to several distributors and others by it in the assessment years 1961-62 to 1964-65. The assessee sent its reply on August 8, 1973, that all the records including ledgers and vouchers for the period up to March 31, 1968, were with the Deputy Director of the Company Law Board. The Department made enquiries with the Company Law Board only to learn that a few ledgers available with them were of no concern to the Department and no vouchers and invoices, etc., were with them. The assessee, however, submitted no return. A fresh notice on behalf of the Department invoked no new response and the assessee repeated its saying that the records for the period up to March, 1968, were in the custody of the Company Law Board and that it would not be in a position to gather any particulars and furnish any information to the Department. It, however, maintained that full and complete particulars had been furnished already and on the basis of the same, assessment had already been completed. It contended that there was no concealment or escapement of income and the conditions for reopening the assessment were not satisfied. The Income-tax Officer who finally resorted to the best judgment assessment on information which disclosed that the assessee had not made a full disclosure of its income and that substantial income, diverted by it to a foreign bank, had escaped assessment, has recorded in his judgment as follows : \n \"After I took charge, I issued a notice under section 142(1) requiring the assessee to produce all account books and invoices, etc., relating to the assessment year 1962-63. The assessee was also asked to specify the exact accounts, ledgers and vouchers taken by the Company Law Board so that I could get the same from them. The assessee was also informed that the return in response to the notice under section 148 had not vet been filed and that the default was continuing. The case was posted for hearing on March 6, 1975. Once again the assessee in its reply dated March 4, 1975, reiterated what it stated in its letter dated August 8, 1975, and merely stated that 'without prejudice to our right to question the jurisdiction we have to state we stand by the return of income already filed by us on the basis of which the assessment had been completed. Since no valid return has been filed as on date, I have no other option but to complete the assessment under section 144 to the best of my judgment after gathering materials and after perusing the ledgers available in the Company Law Board.\" \n\n 4. After mentioning about the documents including pro forma invoice dated September 9, 1963, from Assab of Sweden with pencil entries showing that there was an inflation in the charging of imports from this firm by 40 per cent. of the actual price; Order No. 116 dated October 23, 1963, by the assessee on the basis of the pencil entries in the pro form invoice and a letter dated March 25, 1965, from Assab to Mr. Schussler, a director on the board of directors of the assessee-company, which revealed that the amounts by which the imports from Assab were inflated by over invoicing were credited to the account of M. R. Pratap in a Swedish bank and that the total amount as credited was stated to be Sw. Kr. 88,913 as well as a statement as enclosure to the letter showing the invoice-wise particulars of the above sum and Jagga Rao's statements aforementioned in his deposition in March, 1970, he (Income-tax Officer) found as follows : \n\n \"Taking into account the circumstances stated above, I have to hold that there was over-invoicing of imports made from Atvida-bergs Industries, Sweden, for the period relevant to the assessment year '1962-63. Taking into account the fact that there was 40 per cent. over-invoicing as revealed by the letter from Assab to L. Schussler dated March 25, 1965, and calculating the quantum of over-invoicing on the basis of the calculation made in the enclosure to the letter, the over-invoiced amounts work out to Rs. 3,37,392 .... As a result of the search, it came to light that the assessee has been receiving back the commission paid to some of its agents. This position was accepted by the company and in connection with the assessment for 1966-67, it was held that 'kickback commission' was received from Bangalore Trading Corporation, Chellur Corporation and Sarada Agencies. The managing director of India Manufacturers (Private) Limited, a part of which is Sarada Agencies had also deposed that that company had been returning part of the commission received from the assessee. Shri D. V. Jagga Rao, manager, also deposed that he was surrendering four-fifths of the commission to be paid to him. There was also definite evidence to show that such 'kickback commission' was received.during' the year relevant for 1962-63 assessment. When Mr. T. V. K. Shastry, an employee of the assessee, was specifically questioned on various self cheques drawn by the assessee which included the following cheques relating to the accounting year relevant for 1962-63 assessment : \n Date of cheque No. of cheque Amount\n Rs.\n 2-3-1962 951046 5,000\n13-3-1962 951890 5,000\n30-3-1962 949511 6,000\n\n \n\n He explained as follows : \n \n\n 'These cheques were supposed to be commission payments of the company to Mr. A. C. R. Menon, of Messrs. Chellur Corporation, Cochin. But these payments did not reach either Mr. A. C. R. Menon or Chellur Corporation. I can confidently say that these cheques were encashed by an office boy of our office by name A. Sambandan or by one Natarajan, estate manager of the company. These cheques were written by our chief cashier, Mr. V. Kannan. Under instructions from Mr. Pratap, I used to hand over the cheques to the persons mentioned above for encashing them and returning them to me so that I can disburse the amount to various persons as per Mr. Pratap's specific instructions. He never gave me instructions in writing; but orally gave me instructions to make payments to various persons. I have got vouchers to support the payments made to some of the parties which I am producing it before you now. These specific instructions as to how the amounts should be disbursed were mostly communicated to me directly. But sometimes they were communicated to me through Mr. Jagga Rao, general manager of the company.' Again with reference to the above cheques Mr. Jagga Rao was examined on oath. He deposed in his statement dated March 7, 1970, that these were discounts allowed mostly to Chellur Corporation and Sarada Agencies which were, however, not paid to them. According to him, these were claimed as discounts and cheques were encashed. He further stated : \n\n 'These cheques were prepared at the instance and direction of Mr. Pratap, managing director of the company. The encashed amounts were given to Mr. T. V. K. Shastry who disbursed the amount as per Mr. Pratap's instructions.' \n \n\n In view of the clear evidence available, I hold that the assessee has been receiving 'kickback commission' during this year also. The total commission paid to the three agents was Rs. 97,259. The exact number of machines sold to them is not ascertainable. However, it is gathered that out of the total sale of 4,468 typewriters about 30 per cent. would be the sales to these agents. On this basis, the number of machines sold to these persons could be taken at 1,340. At Rs. 40 per machine, the amount of 'kickback commission' is fixed at Rs. 53,600. To this four-fifths of the commission paid to Mr. Jagga Rao, viz., four-fifths of Rs. 28,145 or Rs. 22,516 shall be added.\" \n\n 5. The assessee preferred an appeal. The Appellate Assistant Commissioner found some reasons to hold as follows : \n\n \"In view of the evidence gathered by the Income-tax Officer, I hold that the assessee has been receiving 'kickback commission' during the year under consideration. There is no dispute that the total commission paid to three agents was in the order of Rs. 97,259. In the absence of further particulars, the Income-tax Officer estimated that 30 per cent. of the total sales would relate to the sales to the agents. On the basis thereof the number of machines sold to these three agents worked out to about 1,340 machines. The 'kickback commission' was accordingly estimated to Rs. 53,600, i.e., at Rs. 40 per machine. To this 4/5ths of commission paid to Sri Jagga Rao of Rs. 28,145 has been added. From the above, it is clear that the Income-tax Officer had some basis in estimating the 'kickback commission' received by the assessee at Rs. 76,116. The addition is accordingly, confirmed. \n\n With regard to the addition on account of inflation in imports, the materials referred to in the assessment order for the said addition are the same as referred to by the Income-tax Officer in his order of assessment for the year 1961-62. The very same issue carne up for consideration in the appeal filed by the assessee in respect of the assessment year 1961-62 and in my order in Income-tax Appeal No. 31 of 1974-75 of even date I have held as under : \n\n 'Pro forma invoice dated September 9, 1963, order dated October 23, 1963, and letter dated March 25, 1965, do not have any relevance to the imports made by the company in the relevant accounting year for the assessment year 1961-62. \n\n Sri D. V. Jagga Rao's statement does not go to establish that there has been over-invoicing of imports by the company or its managing director in the accounting year 1960-61, relevant to the assessment year 1961-62. ... \n\n Shri Jagga Rao's statement does not go to establish that there has been over-invoicing of imports by the company in the accounting year 1961-62 relevant to the assessment year 1962-63. That is so even in the adjudication proceedings before the Enforcement Directorate. In the above circumstances, and having regard to the fact that the Income-tax Officer has failed to establish that there has been over-invoicing by the company in the accounting year relevant to the assessment year 1962-63, I am of the opinion that no case has been made out by the Income-tax Officer to add a sum of Rs. 3,37,392 as inflation in imports. The addition is accordingly deleted.\" \n\n 6. The Tribunal has, however, found as follows : \n \"It is no doubt true that he had not specifically mentioned that such over-invoicing had been made by the assessee in the two previous years relevant to the assessment years 1960-61 and 1961-62. But then, the statement was that such over-invoicing amounted to 7,56,539 Sw. Krs. up to August, 1963, and according to him, it was that figure which he had noted in the diary in the page opposite to calendar August, 1963. The above statement, in our opinion, was sufficient and could have led the Income-tax Officer to believe that income had escaped assessment for the assessment years 1961-62 and 1962-63 also. The Appellate Assistant Commissioner is not justified in saying that Jagga Rao's statement did not go to establish that there had been over-invoicing of imports in the accounting year 1960-61, relevant to the assessment year 1961-62. He has observed after extracting the relevant portion of the statement that one could not presume, therefore, that the assessee-company had been over-invoicing the imports from the commencement of its business. It may be true. But the question is not whether the evidence is sufficient to establish that the assessee had got over-invoiced its imports from AB Atvidabergs Industries during the relevant previous years. The question is whether what Jagga Rao had stated could have made the Income-tax Officer to entertain a reasonable belief that the assessee might have got over-invoiced the imports made by it from the above company during the two relevant previous years. In our opinion, the above statement could have led the Income-tax Officer to entertain such a belief. We are, therefore, of the opinion that the reopening of the assessment for the assessment year 1961-62 under section 147(a) is proper and the contrary view of the Appellate Assistant Commissioner is not correct.\" \n\n 7. About the assessment year 1962-63, the Tribunal has, however, noted as follows : \n \"As already mentioned, Jagga Rao had stated there that the total amount of over-invoicing was Sw. Krs. 7,56,539 up to the end of August, 1963, and that the same was transferred to the personal account of Sri Pratap in the Swedish bank in September, 1963. There is nothing, however, therein to show that invoices made by the assessee-company from AB Atvidabergs Industries, Sweden, during the previous year relevant to the two assessment years under consideration had been over-invoiced. The said sum represents the over-invoicing made in respect of imports made in the earlier years. The Departmental representative also referred to certain answers given by Jagga Rao when he was cross-examined by the assessee's counsel on December 16, 1972. But, then, we find there is nothing therein to show that such over-invoicing had been made in respect of imports effected during the two relevant previous years.\" \n\n 8. The Tribunal, however, has rejected the assessee's contention that the Department had no case for the reopening of the assessment on the ground of concealment or escapement for the assessment year 1962-63, but interfered with the addition of Rs. 76,116 for the said assessment year in the income of the assessee on the ground that the Income-tax Officer had relied upon the statement of T. V. K. Shastry and Jagga Rao in respect of this matter and stated as follows : \n \"As already stated, the Income-tax Officer has relied upon the statements of T. V. K. Shastry and Jagga Rao in respect of this matter. But it is pointed out by the assessee that the affidavits filed by Messrs. Sarada Agencies, Chellur Corporation and Bangalore Trading Corporation to the effect that the entire commission due to them had been received by them and that no portion was paid back. The affidavit filed by R. S. Vengeswaran, the former chief accountant of the assessee-company, narrating the circumstances under which Rs. 3,75,908 was returned as income for the assessment year 1966-67 and the affidavit of Sri Pratap relating to the assessment year 1965-66 had not been referred to. He further stated that though T. V. K. Shastry had been examined by the Additional Director of Inspection as early as March 9, 1970, the assessee was not informed of the same, even though the Income-tax Officer required the assessee. by his letter dated July 27, 1973, to furnish the details of overriding commission paid to the agents. We find that the Income-tax Officer and the Appellate Assistant Commissioner had not considered all the materials relating to this matter. We think that, in the interest of justice, this question has to be considered afresh. We, accordingly. direct the Appellate Assistant Commissioner to consider the propriety of the addition of Rs. 76,116 taking into consideration only such materials as are available on record.\" \n\n 9. The Revenue has questioned the proceedings before the Appellate Assistant Commissioner and the Tribunal and obtained a reference on the following questions of law : \n\n \"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in law in deleting the addition of Rs. 3,37,392 representing the profit earned on the over-invoicing of imports for the assessment year 1962-63 ? \n\n (2) Whether the Tribunal having directed the Appellate Assistant Commissioner to consider whether an addition as warranted towards over-invoicing of imports for the assessment year 1961-62 was justified in deciding the same issue for the assessment year 1962-63 on merits thereby leaving no option to the Appellate Assistant Commissioner to dispose of the appeal, for 1962-63 on merits ? \n\n (3) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in restoring the assessee's appeal for the year 1962-63 with regard to the assessment of kickback commission to the file of the appellate Assistant Commissioner for fresh consideration especially when the assessment made for the year 1962-63 was a best judgment assessment under section 144 of the Income-tax Act and after considering all the materials available in the records ?\" \n\n 10. We are not surprised by the revelations in the instant proceeding that the assessee who was importing certain raw materials/components for manufacturing typewriters indulged in over-invoicing the import and got a substantial sum of money stacked as deposit in the name of its managing director in a foreign bank. It received kickbacks from its agents and maintained under-account for it. It passed through the yearly exercise of submission of returns and assessments and even payment of tax until the Enforcement Directorate acted and discovered that it (assessee) had received contributions from its foreign suppliers on account of over-invoicing of the imports by way of deposits in a foreign bank and that it had developed a system of kickbacks from its agents as a method of keeping a regular inflow of concealed income for which it never cared to account. What has surprised us, however, in the instant case, is the way the Appellate Commissioner has ignored the defiance of the assessee that in spite of the repeated notices and letters it never appeared before the Income-tax Officer with any information or material in response to the notice under section 148 of the Income-tax Act and the letters sent to it in this behalf. \n\n 11. The Appellate Tribunal is not a court. Its powers, however, are expressed in the widest possible terms under section 254 of the Act, \"may after giving both the parties to the appeal an opportunity of.being heard, and pass such orders thereon as it thinks fit\". Its powers, thus, are almost similar to the powers of an appellate court under the Code of Civil Procedure. A wide power, however, is not such that it can be exercised in any manner. The Tribunal can interfere with the orders of the lower authorities, but can do so only on judicial considerations and on the basis of reasons that suggest clearly that the lower authorities had committed an error of law or such fact that had vitiated its considerations and gone perverse for such reasons. The appellate courts which exercise wide powers to hear appeals both on issues of law as well as issues of fact, exercise the well known refrain that if two opinions are possible and one opinion is formed by the lower authority or court, although it is to arrive at a different opinion it shall not interfere with the order of the lower authority or reverse the order of the lower authority. The test which the courts apply for interference when an error of law is not evidenced is whether a reasonable person can take the opinion which the authority has, through the order under appeal, taken. Once it is found that a reasonable person could form the opinion, which the lower court or the authority had formed, the appellate court or authority shall desist from interfering with its order. \n\n 12. We have chosen to make some observations as to the role of the Appellate Tribunal, because the stage at which it comes to examine the contentions of the assessee or the Revenue is one after all the proceedings under the law, an enquiry before assessment, an enquiry after assessment, if any, under section 143 of the Act and hearing, if any, of the assessee by the Income-tax Officer are completed and the remedy of a statutory appeal before the Appellate Assistant Commissioner is availed of by the assessee or the Revenue ? Its primary task is not to go into the return of the assessee and decide what amount of tax should be levied upon his income, but to see whether the taxing authorities, including the Appellate Assistant Commissioner have committed any error of law or of fact and on account of such error, the assessee has suffered. A greater protection is extended by the law to the Revenue in the sense that, in cases where tax is found to have been short-levied, discretion is given to the competent authority (Commissioner) to reopen the whole matter, if it is in public interest to do so. The Tribunal has got to protect, on the one hand, the interest of the assessee in the sense that he is not subjected to any amount of tax in excess of what he is bound to pay, and on the other hand, it has a duty to protect the interests of the Revenue and to see that no one dodged the Revenue and escaped without paying the tax. We shall advert later to see whether, on the facts involved in the instant proceeding, the court should also decide a further question whether the Appellate Tribunal is right in entering into the evidence and for the reasons adduced under-assessment of evidence in setting aside the order of the Income-tax Officer and the Appellate Assistant Commissioner. We proceed further to recapitulate how the assessee and the Revenue have accorded in the instant proceeding leading to the discovery of facts. In a raid by the Officers of the Enforcement Directorate and the Income-tax Department, in December 1966, it was found that the assessee had received money in a foreign land by over-invoicing its imports and manipulating accounts of payment of commission by it and also received kickbacks. A decision was taken to have recourse to section 147 of the Act and, accordingly, a notice was issued to the assessee under section 148 of the Act. The assessee received the notice but ignored the same. The Income-tax Officer's insistence to the assessee to produce details regarding the import of raw materials, components, store items for the assessment years 1961-62 to 1964-65 and also details regarding the number of typewriters supplied to its southern distributors was also ignored by the assessee. Except for a reply letter at some stage that it (assessee) had submitted in the concerned assessment years' returns and it accordingly had been assessed, the assessee kept itself away from the proceedings before the Income-tax Officer. The Income-tax Officer took recourse to the best judgment assessment, as contemplated under section 144 of the Act. \n\n 13. There is no error in the procedure adopted by the Income-tax Officer, as a notice under section 148 of the Act was issued by him and since such a notice is guided by all the consequences of a notice under sub-section (2) of section 139 of the Act and in the case of an assessee, who has failed to make the return, required by a notice issued under sub-section (2) of section 139 of the Act procedure under sub-section (4) or sub-section (5) of that section can be followed and the Income-tax Officer can proceed to make the assessment of the total income or loss to the best of his judgment and to determine the sum payable by the assessee accordingly only if the assessee has not cared to act in response to the notice. Since the assessee is a defaulter, who has not responded to the notice under section 139(2) of the Act and who has also not chosen to take advantage of the filing of the return or to respond to the notices and the letters of the Income-tax Officer, he alone created the situation that the proceedings were taken under section 144 of the Act only on such materials, which the Income-tax Officer had gathered. The materials gathered by the Income-tax Officer are the documents found in the Enforcement Directorate's and the Department's raid, including the diary maintained by Jagga Rao who was then employed as the general manager of the assessee. Jagga Rao's statements during the course of various enquiries and some other material including the pro forma invoice dated September 9, 1963, with pencil marked entries showing that there was an inflation in the charging of imports by 40 per cent. of the actual price (dated September 9, 1963), order on the basis of the pencil entries in the pro forma invoice dated October 23, 1963, and the confirmation letter from Assab to Mr. Schussler, a director of the board of directors of the assessee company, that the amount covered by over-invoicing was credited to the account of M. R. Pratap of the assessee-company in a Swedish bank, are particularly referred to an inference is drawn on the basis of such transactions of over-invoicing during the relevant accounting years by him for assessment and law of tax and penalty under section 271(1)(c) of the Act. About kickbacks, there has undoubtedly been clear evidence and a reference to such evidence has been made by the Tribunal in its order. The Tribunal has taken evidence brought in the first instance before it by way of affidavits on behalf of the assessee and entertained arguments on behalf of the assessee that there were some materials before the Additional Director of Inspection, and the affidavit filed by M. R. Pratap in the assessment year 1965-66 which were not considered by the Income-tax Officer in these words : \n \"We find that the Income-tax Officer and the Appellate Assistant Commissioner have not considered all the materials relating to the matter. We think that in the interest of justice, this question has to be considered afresh.\" \n\n 14. The Supreme Court, in CIT v. Karam Chand Thapar and Brothers P. Ltd. [1989] 176 ITR 535, after considering the two earlier judgments, following the judgment in CIT v. Dalmia Jain and Co. Ltd. [1972] 83 ITR 438, has pointed out (at page 540) :\n \"In CIT v. Dalmia Jain and Co. Ltd. [1972] 83 ITR 438, this court held that whether a particular loss is a trading loss or a capital loss is primarily a question of fact. Where the Tribunal has come to a conclusion that the loss incurred by the assessee in the sale of shares held by it was a trading loss and it is not the case of the Department that in arriving at its decision, the Tribunal had taken into consideration any irrelevant material or failed to take into consideration any relevant material, there is no room for interference by the court. It is well-settled that the Tribunal is the final fact-finding body. The questions whether a particular loss is a trading loss or a capital loss and whether the loss is genuine or bogus are primarily questions, which have to be determined on an appreciation of facts. The findings of the Tribunal on these questions are not liable to be interfered with unless the Tribunal has taken into consideration any irrelevant material or has failed to take into consideration any relevant material or the conclusion arrived at by the Tribunal is perverse in the sense that no reasonable person, on the basis of the facts before the Tribunal, could have come to the conclusion to which the Tribunal has come. It is equally settled that the decision of the Tribunal is not to be scrutinised sentence by sentence merely to find out whether all the facts have been set out in detail by the Tribunal or whether some incidental fact which appears on the record has not been noticed by the Tribunal in its judgment. If the court, on a fair reading of the judgment of the Tribunal, finds that it has taken into account all relevant material and has not taken into account any irrelevant material in basing its conclusions, the decision of the Tribunal is not liable to be interfered with, unless, of course, the conclusions arrived at by the Tribunal are perverse.\"\n\n 15. The Tribunal's case in the instant case, when examined on the above touchstone discloses not only an overstepping of the constraints of law to catch hold of the materials that the assessee desired to adduce for the first time, but also putting into a proceeding under section 144 of the Act, the elements of an enquiry under section 143(3) of the Act and adding to the materials gathered by the Income-tax Officer, additional materials produced before it in the proceeding. Whether the Income-tax Officer has committed any error in his judgment under section 144 of the Act can be decided only on the basis of the materials gathered by him and not on the basis of any materials that are later produced by the assessee. There cannot be a procedure wherein the best judgment of the Income-tax Officer is subjected to the discretion of the assessee to produce evidence/material at the appellate stage and thus convert the proceeding of best judgment into a proceeding for regular assessment in which the assessee is served with a notice under section 139(2) of the Act. \n\n 16. A best judgment assessment is called for only when all the materials asked for the assessment are not available with the Income-tax Officer. The Income-tax Officer relies on the information gathered by him as well as the surrounding circumstances of the case. In the words of the Supreme Court in Commissioner of Sales-tax v. H. M. Esufali H. M. Abdulali [1973] 90 ITR 271, the assessments made on the basis of the assessee's accounts and those made on \"best judgment\" basis are totally different types of assessments. The Supreme Court in that case considered the scope of a \"best judgment\" under section 19(1) of the M.P. General Sales Tax Act, 1958, and observed as follows (at page 276) :\n \"Now, coming to the facts of this case, it is necessary to remember that at the initial stage, the assessee denied that the bill book seized was his bill book and the entries therein related to his dealings. He asserted that he had nothing to do with the bill book in question and the entries therein do not relate to his dealings. But, at a later stage, he conceded that that bill book was his and the entries therein related to his dealings. It is now proved as well as admitted that his dealings outside his accounts during a period of 19 days were of the value of Rs. 31,171.28. From this circumstance, it was open to the Sales Tax Officer to infer that the assessee had large-scale dealings outside his accounts. The assessee has neither pleaded nor established any justifiable reason for not entering in his accounts the dealings noted in the bill book seized. It is obvious that he was maintaining false accounts to evade payment of sales-tax. In such a situation, it was not possible for the Sales Tax Officer to find out precisely the turnover suppressed. He could only make an estimate of the sup-pressed turnover on the basis of the material before him. So long as the estimate made by him is not arbitrary and has nexus with facts discovered, the same cannot be questioned. In the very nature of things the estimate made may be an overestimate or an underestimate. But, that is no ground for interfering with his 'best judgment'.\" \n\n 17. The Supreme Court has clearly indicated that so long as the estimate made by the assessing authority is not arbitrary and has nexus with the facts discovered the same cannot be questioned. In the very nature of things the estimate made may be an over-estimate or an under-estimate. But, that is no ground for interfering with his best judgment. The Supreme Court also has pointed out that the assessee cannot be permitted to take advantage of his own illegal acts and that it was his duty to place all the facts truthfully before the assessing authority. If he fails to do his duty, he cannot be allowed to call upon the assessing authority to prove conclusively what turnover he had suppressed. That fact must be within his personal knowledge. Hence, the burden of proving that fact is on him. The Supreme Court disapproved the interference by the High Court in the best judgment assessment, saying 'the High Court was wrong in assuming that the assessing authority must have material before it to prove the exact turnover suppressed. Speaking on the principle of it, the Supreme Court further held that in estimating any escaped turnover, it is inevitable that there is some guesswork. The assessing authority, while making the \"best judgment\" assessment, no doubt, should arrive at its conclusion without any bias and must act on a rational basis. The authority should not be vindictive or capricious. If the estimate made by the assessing authority is a bona fide estimate and is based on a rational basis, the fact that there is no good proof in support of that estimate is immaterial. Prima facie, the assessing authority is the best judge of the situation. It is his \"best judgment\" and not of any one else. The High Court could not substitute its \"best judgment\" for that of the assessing authority. In the case of \"best judgment\" assessments, the courts will have to first see whether the accounts maintained by the assessee were rightly rejected as unreliable. If they come to the conclusion that they were rightly rejected, the next question that arises for consideration is whether the basis adopted in estimating the turnover has reasonable nexus with the estimate made. If the basis adopted is held to be a relevant basis even though the courts may think that it is not the most appropriate basis, the estimate made by the assessing authority cannot be disturbed. The Supreme Court has pointed out that \"the law relating to 'best judgment' assessment is the same both in the case of income-tax assessment as well as in the case of sales-tax assessment.\"\n\n 18. Learned counsel at the Bar have brought to our notice several other authorities in the periphery of the issues we have dealt with in the case : They do not appear to us very relevant except that they tell us that the income-tax authorities perform a judicial function under the Income-tax Act and they are invested with an authority to determine finally all questions of fact and that the Tribunal must, in deciding an appeal, consider with due care all the material facts and record its findings on all the contentions raised by the assessee and the Commissioner in the light of the evidence and the relevant law. We have however found that the Tribunal in the instant case assumed a role which it would advisedly have voided for, although it was sitting in appeal, it was in a proceeding arising out of a best judgment assessment under section 144 of the Act. The materials which otherwise were with the assessee, but he avoided to produce before the Income-tax Officer by not responding to the notice under section 148 of the Act thus, were alien to the proceeding. The Tribunal has confused a proceeding where it had to see whether on the materials before the Income-tax Officer it was possible to say he had acted with bias whether he had no rational basis, whether he was vindictive or capricious, whether the estimate by him was bona fide, etc., with proceedings in which the assessee had appeared and produced the relevant materials, but those materials were not considered by the assessing authority/Income-tax Officer or some materials by oversight or for some other valid reason were not produced before the Income-tax Officer. One question which is enough for the present, whether the Tribunal has committed any error in entering into a reappraisal of evidence after taking into consideration the additional evidence produced by the assessee before it in a proceeding arising out of a best judgment assessment under section 144 of the Act, must be answered in the affirmative. We accordingly answer the question against the assessee and in favour of the Revenue. This is a case, in our opinion, which must go back to the Tribunal for a fresh consideration of the matter in all its aspects strictly in accordance with law and for a decision whether the Income-tax Officer has committed any error in his best judgment assessment under section 144 of the Act by relying upon the materials that were available to him and drawing an inference from such materials. \n\n 19. We have felt in this case, that while operating as an importer, the assessee-company was involved in siphoning valuable foreign currency to a named account in Sweden. It has been doing so, by over-invoicing to the extent of 40 per cent. of the value of the goods that it intended to import or imported and by receiving excess money in foreign currency and keeping it clandestinely in a bank in Sweden. The Enforcement Directorate and the Income-tax Department got some clue about the dealings of the assessee and as a result of the raid, startling disclosures followed. The assessee when called upon to produce materials for assessment in accordance with law by a notice under section 148 of the Act declined to the extent that it gave no care to any of the notices and letters of the Income-tax Officer. The Appellate Tribunal, instead of taking notice of the assessee's recalcitrance, has treated it as a wronged person. Thus the assessee has received a premium at the hands of the Tribunal upon its recalcitrance. We hope and trust in proceeding further, the Tribunal shall keep in mind the conduct of the assessee and evaluate accordingly whether there is any error in estimates of its income by the Income-tax Officer under section 144 of the Act. \n\n 20. The instant case is accordingly disposed of. The case is remitted back to the Tribunal for a further hearing and disposal in accordance with law." }, { "title": "Commissioner Of Income-Tax vs Madras Stock Exchange Ltd. And Ors. on 15 April, 1976", "url": "https://indiankanoon.org//doc/230250/", "text": "Commissioner Of Income-Tax vs Madras Stock Exchange Ltd. And Ors. on 15 April, 1976\nEquivalent citations: [1976]105ITR547(MAD)\nAuthor: V. Ramaswami\nBench: V. Ramaswami\nJUDGMENT\n \n\n Sethuraman, J. \n \n\n1. This is a common reference in respect of four assessees of whom three are chambers of commerce and the fourth is the Madras Stock Exchange. Though the question that arose for determination of the Tribunal related to the construction of Section 2(15) of the Income-tax Act, 1961, still the facts in respect of each case are somewhat different. We would first state the facts with reference to the Andhra Chamber of Commerce and consider the legal issue involved in the light of those facts. We shall thereafter take up the case of each of the other assessees to find out whether the conclusion arrived at in the case of Andhra Chamber of Commerce is applicable to them. \n\n2. Andhra Chamber of Commerce is a company incorporated under the Indian Companies Act, 1913, and was permitted under Section 26 of that Act to omit the word \"limited\" from its name by an order of the appropriate Government. The principal objects of the assessee were: \n\n (a) To promote and protect trade, commerce and industries of India, in the Province of Madras and in particular in the Andhra country ; \n\n (b) To aid, stimulate and promote the development of trade, commerce and industries in India or any part thereof with capital principally provided by Indians or under the management of Indians ; \n\n (c) To watch over and protect the general commercial interests of India or any part thereof and the interests of the Andhras in particular\n\nengaged in trade, commerce or manufacture in India and in particular the Andhra Desa ; and\n \n\n (d) To do all such other things as may be conducive to the preservation and extension of trade, commerce, industries and manufactures or incidental to the attainment of the above objects or any of them. There are other incidental objects. By Clause 4 of the memorandum of association it was provided that the income and the property of the assessee was to be applied solely towards the promotion of its objects as set forth therein and no portion thereof was to be paid or transferred, directly or indirectly, by way of dividends, bonuses or otherwise howsoever by way of profit to its members. On 2nd December, 1944, the assessee purchased a building and made substantial alterations, additions and improvements thereto. It then moved its offices into that building on 14th May, 1947, and let out to tenants the portion not required for its own use. In the present reference we are concerned with the assessment year 1962-63, the relevant previous year being the calendar year 1961. The only source of income of the assessee related to the rent received from the aforesaid building. The net income from the property was a sum of Rs. 6,596. The assessee claimed exemption with reference to this income. At the time when the Income-tax Officer dealt with this assessment, there was a decision of this court in respect of a similar claim of the assessee for exemption under Section 4(3)(i) of the Indian Income-tax Act, 1922. The said claim had been accepted by this court in Andhra Chamber of Commerce v. Commissioner of Income-tax, [1961] 42 ITR 503 (Mad). At the time of assessment this decision was pending in appeal before the Supreme Court. The Income-tax Officer, therefore, brought to tax the aforesaid income mentioning that, pending decision of the Supreme Court; a precautionary assessment was made and that the tax would be held in abeyance till the decision was known. On appeal the Appellate Assistant Commissioner upheld the assessee's claim for exemption, as by the time he disposed of the appeal, the Supreme Court had confirmed the decision of this court. The Supreme Court's decision is reported in Commissioner of Income-tax v. Andhra Chamber of Commerce, .\n\n3. It has to be rioted here that the Supreme Court's decision was based on the language of Section 4(3)(i) of the 1922 Act read with the definition of \"charitable purpose\" occurring in the same provision. There was, however, an amendment of the definition in the Income-tax Act of 1961 and there were also some changes in Section 11 of the 1961 Act which corresponds to Section 4(3)(i) of the 1922 Act. \n\n4. The department appealed against this decision of the Appellate Assistant Commissioner to the Appellate Tribunal. When the matter came before the Tribunal, the appeals relating to the three other assessees were\nalso before it and, therefore, it considered all the appeals together in its order. Before the Tribunal the change in the definition of \"charitable purpose\" was highlighted and it was argued for the revenue that the amendment withdrew the exemption that was previously available to the assessee. The Tribunal did not agree with the submission of the revenue. It was of the view that if the dominant purpose was advancement of an object of general public utility, it could not be said that such object involved the carrying on by the trust of an activity for profit merely because its ancillary activities produced some income. In the view of the Tribunal, this was a case in which the dominant purpose was advancement of objects of general public utility and the earning of income was merely incidental thereto. According to the department the expression \"not involving the carrying on of any activity for profit\" occurring in Section 2(15) need not be read as referring only to the assessee and if the purpose of the chamber facilitated the carrying on of any activity for profit by anyone else also, then the exemption was not available under the amended definition. The Tribunal negatived this contention also. \n\n5. At the instance of the revenue, the following two questions have been referred in so far as this case is concerned; \n\n\"(1) Whether the Tribunal is right in law in holding that the test laid down in the expression 'not involving the carrying on of any activity for profit' in Section 2(15) of the Income-tax Act, 1961, is to be applied with reference to the carrying on of an activity by the assessee who claims the exemption under Section 11(1) of the Income-tax Act, 1961, and not with reference to any other person who is not a party to such claim for exemption under Section 11(1) ? \n\n (2) Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the objects of the Andura Chamber of Commerce constitute 'charitable purposes' as defined in Section 2(15) of the Income-tax Act, 1961, entitling it to exemption under Section 11(1) of the Income-tax Act, 1961, for the assessment year 1962-63 ?\" \n\n6. The learned counsel for the revenue submitted that though the assessee was exempt from tax under the provisions of the Act of 1922, this exemption was taken away under the Act of 1961, when in accomplishing its purpose, the assessee engaged itself in activities for profit. In the submission of the counsel, unless there was a written condition in the constitution of the assessee tabooing profits, the assessee could not enjoy the exemption and the mere prohibition of distribution of income by way of dividend, etc., being only a manner of application of the income, had no relevance. For the assessee, its learned counsel submitted that Section 2(15) had to be read with Section 11 and that if the contentions for the revenue were to be accepted, then Section 11 would be rendered otiose. In the submission of\n\nthe counsel, the provision for exemption would have scope for application only if there was income and, therefore, there was no need either in the constitution governing the assessee or otherwise to taboo profits. Reference was made to Section 11(4) of the Act as showing that a business undertaking was treated as property held under trust, whose income was exempt from assessment to the extent contemplated therein. It was, therefore, submitted that mere earning of income could not bring the case within the scope of the closing words of Section 2(15), and that this was not a case where there was any activity for profit, but there was a mere earning of income from the property held under trust which carne within the scope of the exemption under Section 11. \n\n7. The relevant provisions may now be extracted : \n\n \"11(1) ...... the following income shall not be included in the total\nincome of the previous year of the person in receipt of the income--\n\n (a) income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India; \n\n (b) income derived from property held under trust in part only for such purposes, the trust having been created before the commencement of this Act, to the extent to which such income is applied to such purposes in India,......... \n\n (4) For the purposes of this section 'property held under trust' includes a business undertaking so held,......\" \n\n8. Section 2(15).........\"charitable purpose\" includes relief of the poor,\neducation, medical relief, and the advancement of any other object of general public utility not involving the carrying on of any activity for profit. (Underlining ours*).\n\n9. The words underlined* above are the only additions to the definition of \"charitable purpose\" found in Section 4(3) of the Indian Income-tax Act, 1922. There is no dispute that, in the present case, the assessee fulfilled the \"charitable purpose\" as defined in the Act of 1922 in view of the decision of the Supreme Court in Commissioner of Income-tax v. Andhra Chamber of Commerce, . The assessee was established, it was held in that decision, for the \"advancement of any other object of general public utility\" The only point to be considered is whether the words \"not involving the carrying on of any activity for profit\" have the effect of the assessee forfeiting the exemption. The question has to be considered in the light of a proper construction to be placed on the words added in the definition.\n\n10. There are two decisions of the Supreme Court which had occasion to\nconsider the amended definition. The first decision is reported in Sole\n\nTrustee, Loka Shikshana Trust v. Commissioner of Income-tax, . The assessee in that case was a trust carrying on publication of a daily newspaper, Samyuktha Karnataka. The publication brought in large profits. The object of the trust was to educate the people of India in general and of Karnataka in particular by : (a) establishing and conducting institutions, calculated to educate the people by spread of knowledge on all matters of general interest; (b) founding and running reading rooms and libraries, etc.; (c) supplying the Kannada speaking people with an organ of educated public opinion and conducting journals ; and (d) helping directly and indirectly societies and institutions with similar objects. The trustee was given the power of deciding what purpose was allied to or what object was covered by the trust and how it was to be served by diversion of the trust properties and the fund, The assessee enjoyed exemption from income-tax till the Act of 1961 came into force. The Income-tax Officer brought to tax the income from the publication of the newspaper, etc., holding that though the object of the assessee was of general public utility, it involved the carrying on of an activity for profit so that the exemption was not available to it. Ultimately, the matter reached the Supreme Court. Khanna and Gupta JJ. held as follows at page 243 :\n \"Ordinarily, profit motive is a normal incident of business activity and if the activity of a trust consists of carrying on of a business and there are no restrictions on its making profits, the court would be well justified ill assuming, in the absence of some indication to the contrary, that the object of the trust involves the carrying on of an activity for profit.\" \n\n11. The fact that the assets of the trust in that case rose from Rs. 1,73,000 in 1947 to Rs. 22,55,000 in 1961 was emphasised as clearly showing that the company was not spending the income on any charitable purpose. Beg J., in a separate but concurring judgment, observed at page 255 as follows:\n \"As a rule, if the terms of the trust permit its operation 'for profit', they became, prima facie, evidence of a purpose falling outside charity. They would indicate the object of profit making unless and until it is shown that the terms of the trust compel the trustee to utilise the profits of business also for charity. This means that the test introduced by the amendment is: Does the purpose of a trust restrict spending the income of a profitable activity exclusively or primarily upon what is 'charity' in law ? If the profits must necessarily feed a charitable purpose, under the terms of the trust, the mere fact that the activities of the trust yield profit will not alter the charitable character of the trust. The test now is, more clearly than in the past, the genuineness of the purpose tested by the obligation created to spend the money exclusively or essentially on ' charity', If that obligation\nis there, the income becomes entitled to exemption. That, in our opinion, is the most reliable test.\" \n\n12. It may be seen that Beg J. has emphasised on the obligation of the trust to spend the money or income on charity. In that particular case except augmenting the resources of the trust, the trustees had not utilised the income for any charitable purpose as was clear from the extraordinary increase i n assets over a period of about fourteen years. The tax-free profit was merely ploughed back in the business. That was, if we may say so, a clear case against which the amendment was aimed. The speech of the Finance Minister has been reproduced by Beg J. to show the evil that was sought to be remedied by the amendment. The Finance Minister had referred, in particular, to the newspaper industry claiming exemption under the earlier provision while running its concern on commercial lines and thus misusing the definition till then in force. That was a case of a newspaper. \n\n13. The second decision of the Supreme Court is reported in Indian Chamber of Commerce v. Commissioner of Income-tax, . That was a case of the Indian Chamber of Commerce, a company registered under Section 26 of the Indian Companies Act, 1913, to promote and protect the Indian trade interests and other allied service operations, falling within the expression \"the advancement of any other object of general public utility\" in Section 2(15) of the Income-tax Act, 1961. The income of the Chamber was not to be paid directly or indirectly by way of profit to the members. The Chamber derived income, inter alia, from: (a) arbitration fees levied by the Chamber; (b) fees collected for issuing certificates of origin; and (c) share of profits in Messrs. Calcutta Licensed Measurers for issue of certificates of weighment and measurement. The question was whether the Chamber was exempt from income-tax under Section 11 read with Section 2(15) of the Act. It was held that the activities of the Chamber being activities carried on for profit, in the absence of any restriction in its memorandum or articles of association against the making of profit from those activities, the income of the Chamber from those activities was liable to income-tax. At page 803, Krishna Iyer J., speaking for the Bench, held that \"by the new definition, the benefit of exclusion from the total income is taken away where in accomplishing a charitable purpose the institution engaged itself in activities for profit\". The Calcutta decisions were held to be right in linking activities for profit with advancement of the object. Therefore, the emphasis is on accomplishing its objects by carrying on an activity for profit. In other words, if in the advancement of its objects, the Chamber resorts to carrying on of activities for profit, then necessarily Section 2(15) cannot confer cover. The advancement of charitable objects must not involve profit making\nactivities. That is considered to be the mandate of the new amendment. At page 805 the position was summed up as follows :\n \"To sum up, Section 2(15) excludes from exemption the carrying on of activities for profit even if they are linked with the objectives of general public utility, because the statute interdicts, for purposes of tax relief, the advancement of such objects by involvement in the carrying on of activities for profit.\" \n\n14. The dictionary meaning of the word \"involve\" is \"to envelop, to entangle, to include, to contain, to imply\". (See the Shorter Oxford Dictionary, 3rd edition, page 1042). The word \"involve\" thus contemplates the object of general public utility being sought to be achieved by carrying on an activity for profit. If we analyse properly the two decisions of the Supreme Court, it would be clear that both of them illustrate the different aspects of the provisions. In the Loka Shikshana Trust's case, the object of the trust could not be achieved without carrying on the business of publication of newspapers. If the profit making activity is thus the appointed means of achieving a charitable object of general public utility, then the profit would be taxable. One cannot carry on a business and claim exemption on the income therefrom by merely saying that it is for a charitable purpose. There is a distinction between: (a) a business being held under trust whose profits feed a charity ; and (b) the carrying on of a business in carrying out what is conceived as charitable purpose. In the former case, the income is clearly exempt. In the latter, the income may be taxable. The distinction is somewhat flue, but it has to be kept in mind. The proposition that one must run the activity on a \"no profit no loss basis\" is applicable to a case where in the course of carrying out a charitable purpose there is an activity. In such a case, if the aim was not to render the service on \"no profit no loss basis\", the profit would be taxable. Similarly, the test that the profit from a business which is taxable if carried on by a businessman, does not cease to be taxable by a charity indulging in it is also applicable primarily to a case where the profit-making activity is embarked upon as the appointed means of achieving the purpose of the trust. For instance, the fee for arbitration or the fee for issuing certificates of origin might have been conceived as part of its objects of assisting trade and commerce by the Indian Chamber of Commerce in Indian Chamber of Commerce v. Commissioner of Income-tax, . But there was no self-imposed embargo on making profits. It was, therefore, held that the activity was for making profits. If there was any such activity in the present case, then the Andhra Chamber of Commerce would not be exempt from tax. We have, therefore, to look into the facts of the present case to find out as to what the\nobjects of the Chamber were and whether it was seeking to accomplish the said objects by indulging in an activity for profit.\n\n15. The object of the Chamber was clearly to promote trade and industry. The construction of a building was for the purpose of locating its office. The Chamber fulfils many functions like arranging periodical meetings of its members in promotion of its objects, receiving officials and ministers so as to make representations in order to ensure smooth flow of trade, commerce and manufacture and helping the members in other ways conceived by it. It has necessarily to keep a house in which all these functions could be carried on. When the space avilable in the building was found to be surplus, it naturally made it available for rent by letting out part of it. By doing so, it was not carrying on any activity for profit as conceived by the provision. A person who lets out a property and enjoys the income therefrom, is more passive than active. It is not, therefore, reasonable to call it an activity for profit. As rightly pointed out by the learned counsel for the assessee, the whole of Section 11 would be rendered useless if the construction sought to be placed for the revenue is to be accepted. If merely because there is an income either from the property or from other investments it should be held that it is an activity for profit, then the exemption under Section 11 would have no scope to operate. It would be reduced to a dead letter. Any construction which would render a provision nugatory should be avoided. Therefore, it is necessary to give scope for the exemption under Section 11 keeping at the same time in mind the amendment to Section 2(15). It is possible to do so in the present case by holding that the assessee by purchasing a building and letting out some surplus area was not indulging in any activity for profit. Section 11 does not taboo the earning of profit as, unless there was profit, there would be no need for the exemption provision. It is only on the postulate of profits being there, that any exemption provision would find a place in the statute. The effect of the contention of the learned counsel for the revenue is to show that when once there was a profit, the exemption was taken away. This, in our opinion, could not be the intention of Parliament which has granted the exemption on the profits earned. A reading of Section 2(15) and Section 11 together shows that what is frowned upon is an activity for profit by a charity established for general objects of public utility in the course of accomplishing its objects. There is no activity here. The activity spoken of by the provision is not a mere act of purchase of a building or making an investment and getting income therefrom, but something more substantial and continuous. We are, therefore, of the opinion that the Tribunal rightly granted the exemption to the present assessee even after the definition was amended under the 1961 Act. This would answer\n\nquestion No. 2. The answer is in the affirmative and in favour of the assessee. \n\n16. As regards question No. 1, the contention that was urged before the Tribunal and taken before, us is that the Chamber has been established for the purpose of promoting the profitable activities of its members, that Section 2(15), especially the closing words thereof, does not say that the activity must be by the assessee as such, and that so long as there was a profit either by the assessee or by its members, it would be hit by the new amendment. We have no hesitation in rejecting this contention. Section 2(15) is merely a definition provision and the definition has to be applied for the purpose of granting the exemption under Section 11. The income that is exempt under Section 11(1) is the income derived from the property held under trust wholly for charitable or religious purposes. The purpose here would be the purpose of the trust. The activities of the members who promoted the trust are not relevant for the purpose of considering the exemption under Section 11(1)(a). The concentration of attention must be on the assessee as such and not on those who either promoted it or were benefited by (sic) from it. Therefore, merely because the members who constituted the Chamber were businessmen, it did not follow that their activity tainted the assessee as such. We have, therefore, to answer the first question also in the affirmative and in favour of the assessee. \n\n17. We now turn to the reference in the case of South Indian Film Chamber of Commerce. With reference to this assessee, the assessment years involved are 1962-63 and 1963-64. The assessment years 1964-65 to 1967-68 are covered by a different reference in Tax Case No. 87 of 1971. The assessee is a body registered under the Societies Registration Act, 1860. It was formed with the object of :\n\n (a) encouraging and developing the film industry in South India ; \n\n (b) watching, protecting and extending the rights and privileges of its members and of the film trade in general; \n\n (c) encouraging and facilitating film production, distribution and exhibition; \n\n (d) acting as a clearing house for information on all matters affecting the production, distribution and exhibition of films; \n\n (e) investigating problems peculiar to the film industry and affording its members support in protection and defence of their rights. The other objects are of an incidental nature. Clause 4 of the memorandum provides that the income and property of the society whensoever derived should be applied solely towards promotion of the objects of the society and that no portion should be paid or transformed directly or indirectly\n\nby way of dividend, bonus or otherwise. The income derived by this assesses falls into two parts as follows : \n\n Category of income\n 1962-63 \n Rs.\n 1963-64 \nRs.\n\n Property\n 14,663\n 14,382\n\n \n Other sources\n 4,584\n 16,434\n\n \n\n\n \n \n\n18. The property income, is derived from the building owned by it. In the building there are vaults wherein films are stored. The income from \"other sources\" was derived from the distribution of raw films and cinematograph films. At the instance of the Chief Inspector of Explosives the Chamber undertook the obligation of providing film vaults. Similarly, the Controller of Imports wanted the Chamber to take up the distribution of raw films, etc. Clause (k) of the memorandum of association provides that the assessee could act, if required, as an advisory body to the Government departments concerned with the use and control of films. \n\n19. Before the Income-tax Officer, the assessee claimed exemption under Section 11 of the Income-tax Act of 1961 for each of these years. Reliance was placed on the decision of the Madras High Court in the case of Andhra Chamber of Commerce reported in Andhra Chamber of Commerce v. Commis-sioner of Income-tax, [1961] 42 ITR 303 (Mad). The Income-tax Officer held that the income of the assessee was not exempt from tax. There is no discussion in the assessment order for these two years, but it is stated that the matter had been discussed in the orders for 1960-61 and 1961-62, which are not before us. \n\n20. On appeal, the Appellate Assistant Commissioner came to the conclusion that the object, for which the institution was created was to render service to film producers and the public and that if the assessee had earned any profit, it was only incidental to the primary object of its existence. He was of the view that the earning of profit would not detract from its character as an institution engaged in charitable activities. The department appealed to the Tribunal, which in its common order covering this and other assessees, held that the income was exempt from tax under Section 11(1) of the Act of 1961. \n\n21. At the instance of the revenue the following question has been referred: \n \"Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the objects of the South Indian Film Chamber of Commerce constitute 'charitable purpose' as defined in Section 2(15) of the Income-tax Act, 1961, entitling it to exemption under Section 11(1) of the Income-tax Act, 1961, for the assessment years 1962-63 and 1963-64?\" \n\n22. Question No. 1, already considered by us in discussing the case of Andhra Chamber of Commerce, is also relevant to this case and the cases of other assessees also who are before us. It is unnecessary to discuss the said question over again here. We have already given the answer to the said question. \n\n23. As far as the question extracted above is concerned, whatever we have said with reference to the Andhra Chamber of Commerce would equally apply here. The learned counsel for the revenue submitted that this is a case in which the assessee had undertaken activities for profit, which would bring it within the scope of the taxable ambit. For the assessee the submission was that it provided the film vaults and acted as distributor of raw films only at the instance of the Government and it did not indulge in any activity for profit. It was pointed out that merely because there is some surplus, it did not follow that it is taxable. In the submission of the counsel, the word \"profit\" implied the existence of the business, as in the Income-tax Act the word \"profit\" is used only in relation to a business, whereas with reference to the other categories the word \"income\" is used. The point sought to be made by the assessee is that the assessee did not act on its own with reference to these activities and that it undertook these activities at the instance of the Government not for the purpose of earning profit, but for the purpose of complying with the Government's objectives. \n\n24. The significance of the use of the word \"for\" in the closing words of Section 2(15) has been commented upon by the Supreme Court in Indian Chamber of Commerce v. Commissioner of Income-tax, . as follows :\n \"Further, what is an activity for profit depends on the correct connotation of the proposition. 'For' used with the active participle of a verb means ' for the purpose of ' (see judgment of Westbury C., 1127). 'For' has many shades of meaning. It connotes the end with reference to which anything is done. It also bears the sense of 'appropriate' or 'adapted to': ' suitable to purpose '--vide Black's Legal Dictionary. An activity which yields a profit or gain in the ordinary course must be presumed to have been done for profit or gain. Of course, an extreme case could be imagined where without intent or purpose an activity may yield profit. Even so, it may legitimately be said that the activity is ' appropriate or adapted to such profit'.\" \n\n25. The above passage appears to us to show that if the assessee itself indulges in an activity and that if profits arise from it, it could be legitimately said that the activity was adapted to such profit. But that is not the case here. The assessee was an instrument of the Government for the purpose of ensuring certain standards in the matter of storage of films or distribution thereof. We are unable to infer on the facts that these activi-\n\nties were for profit so as to be hit by the last portion of the definition in Section 2(15). This question is answered in the affirmative and in favour of the assessee. \n\n26. The Southern India Chamber of Commerce is the next of the assessees before us. The assessment year under consideration is 1962-63. The income derived by this assessee is as follows: \n\n Rs.\n Rs.\n\n Interest on securities\n \n 5,357\n\n \n Property\n \n 41,271\n\n \n Other sources :\n \n \n\n \n \u00a0\n (a)\n Exhibition\n 3,77,428\n \n\n \n \u00a0\n (b)\n Interest\n \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0120 \n \n\n \n \n \n 3,77,548 \n\n \n \n Total\n 4,24,176 \n\n \n\n\n \n\n27. There was a loss of Rs. 2,805 under the head \"Business\" which was accepted. The assessee claimed that the aforesaid income was exempted from assessment under Section 11(1) of the Act. The Income-tax Officer had considered a similar claim for exemption under Section 4(3)(i) of the 1922 Act for the year 1960-61 and for the same reasons as those given in that order, he rejected the assessee's claim for this year. He further pointed out that there were some receipts on account of conducting an exhibition and that this income was taxable under \"Other sources\".\n\n28. Against the assessment so made the assessee appealed to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner held that the business might be the means for effectuating the charity but not a charitable object itself and that the absolute exemption previously enjoyed by a charitable trust where income was applied or applicable to charitable purposes no longer held good. He held also that the accumulation of the income in excess of the prescribed limit (without being spent on charity) would have to be approved by the Income-tax Officer and that there was no such approval. He, therefore, confirmed the rejection of the assessee's claim for exemption. When the matter came on appeal to the Tribunal, it found that the principal objects of the assessee were to promote and protect trade, commerce and manufacture, to watch over and protect the general commercial interest of India or any part thereof, to encourage friendly feeling and unanimity among commercial field on all subjects involving their common good and to do all such other incidental things for the purpose of preservation and extension of trade, commerce and manufacture. The Tribunal proceeded on the basis that these objects were on a\n\npar with the objects in the case of Andhra Chamber of Commerce. Applying the conclusion already arrived at in dealing with the facts of the Andhra Chamber of Commerce, it was held that the assessee's claim for exemption would succeed. It, however, sent the matter back to the Appellate Assistant Commissioner so as to enable him to give a fresh opportunity to the assesses to produce the necessary particulars in regard to accumulation of income and then decide the question of quantum of exemption in accordance with law after hearing both the parties. \n\n29. At the instance of the revenue, the following question has been referred : \n \"Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the objects of the Southern India Chamber of Commerce constitute 'charitable purpose' as defined in Section 2(15) of the Income-tax Act, 1961, entitling it to exemption under Section 11(1) of the Income-tax Act, 1961, for the assessment year 1962-63 ?\" \n\n30. As mentioned earlier, question No. 1 considered in the case, of Andhra Chamber of Commerce is also relevant to this assessee and we have already answered the question. The income of this assessee falls into two parts, viz., (1) interest derived from securities, income from property and sundry interest, and (2) income from exhibition. The assessee owns a building part of which is occupied by itself and part is let out to tenants as in the case of Andhra Chamber of Commerce, We have earlier come to the conclusion that holding of property or making of investments and deriving income therefrom cannot be construed as an activity for profit. Therefore, with reference to the first category of income whatever we have said in the case of Andhra Chamber of Commerce in answering question No. 2 would apply to this case also. \n\n31. The assessee conducted an exhibition at the time of its golden jubilee. It was established in the year 1910 and on the completion of 50 years of its existence, it was responsible for organising a trade, industrial and engineering exhibition. The time of the exhibition almost synchronised with the termination of the second Five Year Plan development. The Island Ground in Madras was the venue. The exhibition was inaugurated by Pandit Jawaharlal Nehru, the then Prime Minister. It was intended as an opportunity for trade, commerce and industry in the public and private sectors to exhibit their wares and products and to publicise their achievements. It is from this exhibition that the assessee derived the income of Rs. 3,77,428. The learned counsel for the revenue submitted that this was clearly an activity for profit, so that the exemption could not be applied to it. For the assessee the submission was that this was not an activity for profit and that it was just an exhibition to mark the occasion\n\nof its completion of 50 years which synchronised with the end of the second Five Year Plan of development. The submission was that this exhibition was not organised with any motive for profit. The profit was said to be only incidental. \n\n32. Having considered the rival submissions, we are of the opinion that the assessee's claim deserves to be accepted, There is nothing to show that at the time when the exhibition was organised, the assessee thought of it as a profit making proposition. If really it had conceived the exhibition as a profit making activity, then it would have organised similar exhibitions subsequently. The fact that, in spite of such handsome surplus, it did not repeat organising any such exhibition goes to show that this was not an activity for profit. At the time when it started the exhibition, it could not have estimated the number of persons who would visit it so that it could fix the entrance fee in such a manner it derived no profit. That the assessee ultimately derived a profit was only fortuitous. The presumption spoken of at page 806 of Indian Chamber's case would apply only in the absence of any other indication from the facts as to why the activity was undertaken. In the Indian Chamber's case, there was no other indication on the facts as to why the three activities were undertaken except to make profits. In fact, such profits derived from members for services rendered were taxable under Section 28(ii)(c) of the Act. Such services to non-members would stand on an a fortiori footing. There is no such service here. The organising of the exhibition does not on the facts appear to be an activity for profit. On this point also, we are satisfied that the assessee's claim for exemption has to be upheld. The result is that the question extracted above is answered in the affirmative and in favour of the assessee.\n\n33. The Madras Stock Exchange is the last of the assessees in this batch, whose case is before us. On August 12, 1937, the Madras Stock Exchange Association (Private) Limited was registered under the Indian Companies Act, 1913. The Securities Contracts (Regulation) Act, 1956, was passed to prevent undesirable, transactions in securities by regulating the business of dealing therein, by prohibiting options and by providing for certain other matters connected therewith. \"Securities\" included shares, scrips, stocks, bonds, Government securities, etc. Section 13 of that Act provides that if the Central Government was satisfied, having regard to the nature or volume of transactions in securities in any State or area, that it was necessary so to do, it might, by notification in the Official Gazette, declare this section to apply to such State or area, and thereupon every contract in such State or area which was entered into after the date of the notification\notherwise than between members of a recognised stock exchange in such State or area or through or with such member would be illegal. This provision was applied to Madras and, therefore, the assessee-stock exchange, had to apply for being recognised under Section 3 of the said Act. Under Section 4 of that Act, the Central Government could require that the rules and bye-laws of a stock exchange applying for registration were in conformity with such conditions as might be prescribed with a view to ensure fair dealing and to protect investors. The stock exchange had also to comply with any other conditions, which the Government might impose. Accordingly, with the approval of the Government, the assessee-stock exchange was incorporated as a company in April, 1957, under the Companies Act, 1956. Its objects were, inter alia, (a) to facilitate, assist, regulate and control the trade or business in securities, (b) to support and protect the character and status of brokers, jobbers and dealers, and to further their interest as well as public interest in securities, and (c) to apply for and obtain from the Government of India recognition of the exchange as a recognised stock exchange for the purpose of regulating and controlling the business in securities within the meaning of the Securities Contracts (Regulation) Act, 1956. There are other objects like settlement of disputes by arbitration, provision of safe deposit vaults and others of an incidental nature. The assessee does not have any share capital. It is a company limited by guarantee. Every member of the exchange undertook to contribute to the assets of the exchange in the event of its being wound up while he was a member or within one year after he ceased to be a member, for payment of the debts and liabilities of the exchange contracted before he ceased to be a member, and the costs, charges and expenses of winding up and for adjustment of the rights of the contributories among themselves, such amount as might be required not exceeding one thousand rupees. Originally, in the articles of association there was no provision regarding the payment of dividends and as to how the property of the stock exchange was to be dealt with on dissolution. At the tenth annual general meeting held on June 23, 1967, long after the relevant year, article 167 of the articles was amended to provide for the way in which the income and property of the exchange and the surplus on dissolution were to be dealt with. It was provided that the income and property of the exchange was to be applied solely for the promotion of its objects set forth in the memorandum and that no portion of the income or property must be paid directly or indirectly by way of dividends to the members of the exchange. The stock exchange derived income from the following sources : \n\n Sources\n 1962-63 \n Rs.\n 1963-64 \nRs.\n\n Property\n 4,357\n 6,815\n\n \n Interest on securities\n 399\n 399\n\n \n Other sources\n 76,400\n --\n\n Business\n -- \n 58,722 \n\n\n \n \n 81,156 \n 65,936 \n\n \n\n\n \n\n34. The income which was derived under the head \"Other sources\" for 1962-63, and under the head \"Business\" for the assessment year 1963-64, was derived from (a) preparation and sale of year book, (b) market reports and (c) listing fees. Every year the assessee prepared what is called the 'year book' in which the detailed particulars of the companies whose shares were dealt with in the stock exchange was compiled. The market reports are what are issued every day when the market is opened giving the quotations of the shares and securities. The listing fees are derived from companies which want their shares being dealt with in the stock exchange. \n\n35. For the assessment year 1962-63, the assessee did not apparently make any claim before the Income-tax Officer, as there is no discussion of any such claim in his order. The Income-tax Officer brought to tax Rs. 81,156 which is composed of the three sources of the income mentioned earlier. For the assessment year 1963-64, the assessee, relying on the decision of the Madras High Court in Andhra Chamber of Commerce v. Commissioner of Income-tax, [1961] 42 ITR 503 (Mad) sought the exemption under Section 11 of the Act of 1961.\n\n36. The Income-tax Officer was of the view that the decision of the Andhra\nChamber of Commerce was not applicable to it and held that no part of the\nincome of the assessee-company was entitled to any exemption. The\nAppellate Assistant Commissioner on appeal distinguished the decision in\nthe Andhra Chamber of Commerce case, as he was of the view that the\nstock exchange was formed for the purpose of promoting the actual trade\ninterest of its constituent members. He rejected the claim for exemption\nfor both the years. The Tribunal, after referring to the amendment to\narticle 167 under which the profits were not to be distributed among the\nmembers and, after referring to the decision of the Bombay High Court in\nV.V. Ruia v. S. Dalmia, [1968] 38 Comp Cas 572 (Bom) came to the conclusion that the object of the\nassessee was advancement of general public utility and that its income was\nexempt. However, it was of the view that the assessee had no opportunity\nto place the facts on the question as to whether it had accumulated the\nprofits beyond the margin set out in Section 11. For this purpose, it sent\nback the matter to the Appellate Assistant Commissioner. On the above facts, the following question has been referred :\n \"Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the objects of the Madras Stock Exchange Limited constituted 'charitable purpose' as defined in Section 2(15) of the Income-tax Act, 1961, entitling it to exemption under Section 11(1) of the Income-tax Act, 1961, for the assessment years 1962-63 and 1963-64 ?\" \n\n37. As we have shown above, question No. 1, discussed in the case of Andhra Chamber of Commerce is also relevant here and our answer to that question would apply here also. With reference to the question given above, the learned counsel for the revenue submitted that there is no prohibition from distribution of profits in the relevant year and that, therefore, the assessee was in the same position as any other commercial concern which could make and distribute its profits. The amendment in 1967 was, in the submission of the counsel, ineffective as far as these years are concerned. For the assessee the submission was that this being a company limited by guarantee, there could be no distribution of profit at all to its members. His further submission was chat the amendment in 1967 was merely clarificatory. \n\n38. Section 37 of the Companies Act, 1956, relates to companies limited by guarantee. Section 37(1) to the extent material runs as follows: \n \" Section 37(1).--In the case of a company limited by guarantee and not having a share capital..... .every provision in the memorandum or\narticles or in any resolution of the company purporting to give any person a right to participate in the divisible profits of the company otherwise than as a member shall be void.\" \n\n39. What is prohibited is a right of participation in the divisible profits of the company otherwise than as a member. It follows that there is no prohibition against the distribution of profits among the members as such. Table C of Schedule I to the Companies Act contains the articles applicable to such companies limited by guarantee and not having a share capital. The articles in Table C do not contain any provision either enabling or preventing the distribution of dividends. However, there is no legal prohibition against the distribution of dividends in the case of a company limited by guarantee. This is also the view expressed in Palmer's Company Law, Twenty-first edition, at page 24: The relevant passage runs as follows: \n \"The amount of the guarantee has to be stated in the memorandum ; the Act further does not provide minimum or maximum limits. The Act further does not prohibit the creation of several classes of guarantees of different amount; it would, e.g., be possible to provide that the guarantee of one class of members shall be 2 and that of another shall be 1. Nevertheless a provision in the memorandum or articles purporting to give a person a right to partake in the profits, otherwise as a member, is void in\n\nthe case of a guarantee company not having a share capital and registered after January 1, 1901 (Section 21(1)). It is, however, submitted that it is lawful for the articles to give members the right to participate in the profits in accordance with the amount of their guarantee, so that in the preceding example members who have undertaken a guarantee of 2 will receive twice the dividends as those who have undertaken a guarantee of 1. Section 21(1) does not, it is submitted, apply to this case because the members partake in the profits still 'as members'; the section merely prohibits the creation of rights to profits disproportionate to the amount of the members' guarantee. Similarly, it is believed that, if there are various classes of guarantees notwithstanding article 20 of the articles in Table C, the right of members to vote can by the articles be made proportionate to the amount of their guarantee.\" \n\n40. Therefore, the fact that the assessee is limited by guarantee does not stand in the way of distribution of its profits to its members. The amendment in article 167 is not effective for this year. Profits could have been distributed to the members. \n\n41. However, even if the property held under trust was held only in part for such charitable purposes, exemption is available as contemplated by Section 11(1)(b). As this aspect has not been considered and decided by the Tribunal, it is necessary to leave it to the Tribunal to go into the point as to whether the assessee can be brought within the scope of Section 11(1)(b). In the event of the assessee being found to be eligible for the exemption under Section 11(1)(b) to the extent given therein, it would be necessary to go into the question as to whether the assessee's claim for exemption is lost by the words added in Section 2(15) as constrasted with the definition of \"charitable purposes\" indicated in Section 4(3) of the 1922 Act. We proceed to discuss this point only on the hypothesis of there being scope for exemption under Section 11(1)(b). We should not be understood as having expressed any opinion on the said point in the present judgment. \n\n42. As far as the property income and interest from securities are concerned, whatever we have stated in the case of Andhra Chamber of Commerce and other cases earlier would apply with equal force here. In other words, the income therefrom cannot be brought within the scope of \" activity for profit\" so as to take away the exemption under Section 11. \n\n43. The question that now remains is whether the income derived from the publication of the year book, market reports and the income from the listing fees could be taxed. We have pointed out earlier that the Income-tax Officer taxed the said receipts as income from \"other sources\" in 1962-63 and as income from \"business\" in 1963-64. The question as to whether the stock exchange is carrying on a business came up for decision before a learned single judge of the Bombay High Court in V. V. Ruia v. \nS. Dalmia, [1968] 38 Comp Cas 572 (Bom). That was a case between a broker and its constituent, The broker was a member of the Bombay Stock Exchange and there were disputes between the broker and the constituent. The dispute was liable to be referred to arbitration as provided by the rules of the Bombay Stock Exchange. The broker appointed his arbitrator and called upon the constituent to appoint an arbitrator on his behalf. The stock exchange also informed the constituent about it and called upon him to appoint his arbitrator in the manner contemplated by the rules. The constituent wrote that there was no agreement for arbitration between the parties and the broker had no right to call upon him to appoint his arbitrator. Thereupon, the broker filed a petition before the Bombay High Court under the Arbitration Act for a declaration that there was a valid arbitration agreement between the parties in respect of the disputes and for consequential relief. The constituent contended before the High Court that the Bombay Stock Exchange was an illegal association as it had more than twenty members and was carrying on business for profits and that its bye-laws relating to arbitration were not in accordance with the Arbitration Act. There were certain other contentions to which it is unnecessary to allude here. \n\n44. Section 11 of the Companies Act of 1956 provides that no company or association consisting of more than twenty persons could be formed for the purpose of carrying on any business, which had for its object the acquisition of gain by the company, association or partnership or by the individual members thereof, unless it was registered as a company under the Companies Act, or was formed in pursuance of some other Indian law. There was a stock exchange in Bombay under the name and style of \"The Bombay Native Share and Stock Brokers' Association\". At a meeting held on April 9, 1957, it was resolved by the said association to make an application to the Central Government for its recognition under the Securities Contracts (Regulation) Act, 1956. The Central Government granted the recognition. The Bombay Stock Exchange had not, however, registered itself under the Companies Act. The contention for the constituent was that it was an illegal body not having been registered under the Companies Act. The question for consideration before the Bombay High Court was whether the Bombay Stock Exchange was carrying on any business. At page 582 the learned judge held as follows, [1968] 38 Comp Cas 572 (Bom) : \n \"Mere owning of immovable property, however, can at the highest be an investment and not a business. It would be a business in immovable property only if there is buying and selling.\" \n\n45. The ownership of immovable, property in that particular case was held to be incidental to its main object of regulating and controlling transaction in\n\n\nsecurities. The Bombay Stock Exchange maintained a clearing house and the receipt of clearing house charges and also charges by way of rent for use of the safe deposit vault, it was contended, came within the scope of \"business receipts\". At page 584 the learned judge observed as follows : \n \"Business, moreover, has the motive or purpose or object of profit. But these activities of the stock exchange are only for effectually regulating and controlling transactions in shares and securities. Profit may, of course, result because the fees and charges which the stock exchange may levy cannot be so fixed that their aggregate would, every year, equal its anticipated expenses. Loss also may result if the fees and charges turn out to be less than the expenses in fact incurred. But what is more important is that these activities are not intended for the stock exchange making a profit or gain. The most significant factor which cannot be over emphasised is that there is no rule or by-law or regulation of the stock exchange which empowers or even envisages a distribution by the stock exchange of its profits between its members. When an association of persons carries on business, its fundamental aim would be to make profits for distribution between its members. There is, however, no such provision in the case of the Stock Exchange, Bombay.................................the\nstock exchange does not have for its object the acquisition of gain either for itself or for its members. Now, so far as the members are concerned, the activities of the stock exchange may result in benefit to its members, such benefit to the members being by reason of earning more profits or gains for themselves because of the beneficial control exercised by the stock exchange. But whatever its members may earn in that way would not be the direct result, but would only be an indirect result, of the activity of the stock exchange of regulating and controlling the transactions in shares and securities. As a matter of fact, it would really be only a benefit but not a gain.\" \n\n46. It was held that no business was carried on by the stock exchange and that, therefore, the prohibition under Section 11 did not apply. Agreeing with this view and applying the same reasoning, we consider that the assessee is not carrying on any business here. The compilation of the year book is only intended to give particulars to the brokers and their constituent public to know the nature and details of the shares that were dealt with in the stock exchange. It is a kind of an amenity for the benefit of the brokers and the public, so that they could decide on a rational basis the value of the shares so as to deal in them. The publication of market reports is also a beneficial activity so as to enable the public to know the price at which the shares were being dealt with in the stock exchange. There is nothing to show that these activities were undertaken with a view to making gain. \n\n47. We have now to deal with the facts relating to listing fees. Companies applied for inclusion in the list of companies whose shares were dealt with in the stock exchange. At the time of such application, they have to pay a prescribed fee, which is fixed by the governing body of the stock exchange. It may be mentioned that the governing body of the stock exchange includes a member nominated by the Government. The principal object of this listing is to provide ready marketability and impart liquidity and free negotiability to the stocks and shares. This would ensure proper supervision and control on the dealings therein and protect the interest of the shareholders as well as of the general public. A company derives also some advantage by getting its shires registered in the stock exchange, as the share price is an index of its prosperity, so that when it goes into the market either for fresh issue of shares or for raising money, the public would readily subscribe if the shares are quoted above par. The listing fee is fixed with reference to the capital of the company, subject to a maximum. The inclusion of a company in the list is thus in fulfilment of an object for regulating the contracts in relation to its shares. As the stock exchange is a body which has to obtain the prior approval of the Government before it could function as such and as the whole idea behind the bringing into existence of a stock exchange is to control and regulate the contracts relating to the shares and securities, the assessee, in listing the shares, carries on what can be called a statutory function. The provisions of the Securities Contracts (Regulation) Act, 1956, were not designed for the purpose of enabling the stock exchange to carry on any business as such or to allow it to make profits from the public. It was a regulatory measure to prevent speculation and any such unhealthy economic activities. It follows that the mere receipt of listing fees cannot be said to be an activity for profit. We, therefore, hold that the said receipt cannot be said to be from an activity for profit coming within the closing words of Section 2(15) of the Income-tax Act, 1961. \n\n48. In the result, the question as given above has to be answered in the affirmative and in favour of the assessee. As each case was separately argued, we consider it proper to award each of the assessee's costs. Counsel's fee Rs. 250 in the case of each assessee. \n\nTax Case No. 277 of 1970.\n\n49. The only question referred in this reference is as follows: \n \"Whether, on the facts and in the circumstances of the case, the\nAppellate Tribunal was right in law in holding that the object of the asses\nsee constituted 'charitable purpose' as defined in Section 2(15) of the\nIncome-tax Act, 1961, and that its income was exempt under Section 11(1)of the same Act ?\" \n\n50. We have discussed the facts of this assessee in our judgment in Tax Case No. 281 of 1970. The facts are identical. For the same reasons as those given therein, the question is answered in the affirmative and in favour of the assessee. There will be no separate order as to costs.\n\nTax Case No. 87 of 1971.\n\n51. The questions referred in this reference are as follows : \n\n\"1. Whether the Tribunal is right in law in holding that the test laid down in the expression 'not involving the carrying on of an activity for profit' in Section 2(15) of the Income-tax Act, 1961, is to be applied with reference to the carrying on of an activity by the assessee who claims the exemption under Section 11(1) of the Income-tax Act, 1961, and not with reference to any other person who is not a party to such claim for exemption under Section 11(1) ?\n\n2. Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the objects of the South Indian Film Chamber of Commerce constitute 'charitable purpose' as defined in Section 2(15) of the Income-tax Act, 1961, entitling it to exemption under Section 11(1) of the Income-tax Act, 1961, for the assessment years 1964-65 to 1967-68 ? \n\n52. We have discussed the facts of this assessee in our judgment in Tax Case No. 281 of 1970. The facts are identical. For the same reasons as those given therein, the questions are answered in the affirmative and in favour of the assessee. There will be no separate order as to costs." }, { "title": "Commissioner Of Income-Tax vs Union Carbide India Ltd. on 9 July, 1986", "url": "https://indiankanoon.org//doc/1979496/", "text": "Commissioner Of Income-Tax vs Union Carbide India Ltd. on 9 July, 1986\nEquivalent citations: [1987]165ITR550(CAL)\nJUDGMENT\n \n\n Dipak Kumar Sen, J. \n \n\n 1. The material facts and proceedings leading up to the present reference are as follows : \n\n 2. Union Carbide India Ltd., the assessee, carries on business of manufacture of various products. In the assessment year 1975-76, the relevant accounting year ending on December 25, 1971, the assessee acquired some trawlers with sophisticated equipment like echosounders, electronic fish finding equipment, trawlers, radars, etc., for deep sea fishing and set up a \"Deep Sea Fishing Division\" for fishing shrimps in the deep sea. \n\n 3. The trawlers and the equipments were utilised not only for fishing but also for decapitating, peeling and packing shrimps in special containers and freezing them in special quick-freezing chambers installed in the vessels. \n\n 4. In the assessment year 1975-76, the assessee was assessed to income-tax. In the assessment, the assessee claimed relief under Section 80J of the Income-tax Act, 1961, in respect of its undertaking, \"Deep Sea Fishing Division\". The Income-tax Officer, following the decision of the Bombay High Court in New India Fisheries Ltd. v. ITO [1971] 82 ITR 765, held that the profits and gains from the activity of catching fish in the deep sea with ships could not be regarded as profits and gains derived from ships and disallowed the claim.\n\n 5. Being aggrieved, the assessee preferred an appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner held that the term \"manufacture\" or \"processing\" of goods had not been defined in the Act. In its ordinary meaning, \"manufacture\" is a process which results in an alteration or a change of the goods subjected to manufacture and a commercially new article is produced. Under Section 80J, if the undertaking was not engaged in manufacturing or processing or production of the goods, the industrial undertaking would not be entitled to any relief. Following a decision of the Kerala High Court in CIT v. Casino (Pvt.) Ltd. [1973] 91 ITR 289, the Appellate Assistant Commissioner held that the Deep Sea Fishing Division of the assessee was not an industrial undertaking entitled to claim any deduction under Section 80J.\n\n 6. Being aggrieved, the assessee preferred a further appeal before the Income-tax Appellate Tribunal. It was contended before the Tribunal on behalf of the assessee that to find out whether the assessee was manufacturing or producing any article within the meaning of Section 80J, Schedule V of the Income-tax Act, 1961, which provided for concessions in respect of particular production and manufacture, should be looked into. One item, viz., item 30 in the said Schedule, refers to processed (including frozen) fish and fish products. It was contended that in view of the said item in the said Schedule, if an industrial undertaking was entitled to development rebate, on the same analogy, the same ought to be entitled to relief under Section 80J. \n\n 7. A decision of the Allahabad High Court in Tarai Development Corporation v. CIT [1979] 120 ITR 342 was relied on. On the facts on record, the Tribunal held that the assessee was engaged in the production of an article being processed fish and fish products. The Tribunal held further that the \"Deep Sea Fishing Division\" of the assessee fulfilled all the conditions of a new industrial undertaking as laid down in Section 80J(4). The only dispute raised by the Revenue was whether the said undertaking manufactured or produced articles. On the facts and in view of the operations carried on by the assessee in the said undertaking, the Tribunal held that the assessee was actually engaged in the production of articles, namely, frozen fish and fish products, if not manufacturing the same.\n\n 8. The Tribunal found further that the \"Deep Sea Fishing Division\" of the assessee was a separate undertaking and carried on an integrated activity for the purpose of marketing shrimps. The Tribunal found that unless the shrimps caught underwent the process carried out by the undertaking, they would not be marketable in the export market. The Tribunal held that if a particular item was required to be processed in order to become marketable, the operation involved was processing. The Tribunal followed and applied the decision of the Supreme Court in Chrestien Mica Industries Ltd. v. State of Bihar [1961] 12 STC 150 and held that the said undertaking of the assessee, namely, \"Deep Sea Fishing Division\", was engaged in manufacture and production. \n\n 9. The other contentions raised before the Tribunal by the assessee, namely, that the income was derived from ships and was thus otherwise entitled to relief under Section 80J and that the assessee was also operating a cold storage in its \"Deep Sea Fishing Division\" were not considered nor decided. \n\n 10. On an application of the Revenue under Section 256(2) of the Income-tax Act, 1961, the Tribunal, as directed, has referred the following question, as a question of law arising out of its order, for the opinion of this court : \n \" Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the Deep Sea Fishing Division of the assessee was an ' industrial undertaking ' within the meaning of Section 80J of the Income-tax Act, 1961 ?\" \n\n 11. At the hearing before us, the learned advocate for the Revenue contended that the Tribunal had erred in holding that the \"Deep Sea Fishing Division\" of the assessee was carrying on an activity of production or manufacture. He submitted that the operations carried on by the said division of the assessee in preparing the shrimps for the export market would not amount to either manufacture or production inasmuch as the item produced remained the same, namely, shrimps. He submitted that the\nassessee was not entitled to relief under Section 80J also on the ground that\nthe income involved arose from the ships of the assessee. In support of\nhis contentions, the learned advocate for the Revenue cited the following\ndecisions : \n\n (a) New India Fisheries Ltd. v. P. M. Mehra, ITO [1971] 82 ITR 765 (Bom). In this case, Tulzapurkar J. of the Bombay High Court, as his Lordship then was, held that the expression \"any profits and gains derived from a ship\" in Section 80J(1) of the Income-tax Act, 1961, was required to be construed as profits and gains directly derived from that source. Benefits of the section could not be availed of if the assessee was using the ship or ships as instruments for carrying on other business activities which produced the income. It was held further that profits and gains from a business activity like catching fish in deep sea with the aid of ships and selling the same could not be regarded as profits and gains derived from ships and deduction under Section 80J could not be claimed in respect of such income.\n\n (b) CIT v. Casino (Pvt.) Ltd. . In this case, it was held by a Division Bench of the Kerala High Court that the activity carried on in a hotel of preparing articles of food from raw materials would not constitute \"manufacture or processing of goods\" within the meaning of Section 2(6)(d) of the Finance Act, 1968. A company carrying on the above activity will not come within the definition of \"industrial company\" under the said section of the said Finance Act.\n\n The High Court held that the term \"manufacture or processing of goods\" had not been defined in the Finance Act, 1968, and in its ordinary meaning, the expression \"manufactured\" meant a process which resulted in alteration or change in the goods to the extent that a commercially new article was produced. It was, however, held that the term \"processing\" had a wider meaning than manufacture. \n\n (c) CIT v. Cochin Refineries Ltd. . In this case, the assessee was engaged in the business of refining mineral oils and for that purpose borrowed substantial funds from the U.S.A. for purchase of machinery and erection of a refinery plant. In carrying on the said business, it generated sufficient profits and had surplus cash in its hands from time to time. Such surplus cash was not utilised in repaying the loans forthwith as the same had not fallen due and were kept in deposit with banks. The assessee earned interest from such deposits and claimed that it was entitled to deduction under Section 80J on the amount of interest inasmuch as such interest was income arising from the industrial undertaking of the assessee engaged in the business of production or refining mineral oil. On these facts, it was held by the Kerala High Court that the expression occurring in Section 80J was \"derived from\". Such derivation of income must be directly connected with the business of the assessee : The fact, that, the income was generated by the exploitation of any particular asset of the business, would not be sufficient to entitle the assessee to claim relief under Section 80J. It was held that the interest earned was not derived from the business activity of the undertaking of the assessee.\n\n 12. The learned advocate for the assessee contended, on the other hand, that the Tribunal had categorically found that the assessee was engaged in production or manufacture of processed or frozen fish or fish products. This finding has not been challenged. It was further found by the Tribunal that the operations carried on by the assessee in its \"Deep Sea Fishing Division\" resulted in the processing of the goods to make it marketable and that, without such processing, the goods, namely, the shrimps, would not be marketable for export. This finding also remains unchallenged. \n\n 13. The learned advocate submitted further that the operations carried out by the assessee in its \"Deep Sea Fishing Division\" were an activity of production, if not manufacture. He submitted that production consisted of one or several processes from which some product other than the original products which were being processed came into existence. In the instant case, it could not be said that fresh or raw shrimps was the same thing as processed, packed and frozen shrimps which was an entirely different commercial commodity meant for the export market. \n\n 14. In support of his contentions, the learned advocate for the assessee cited the following decisions : \n\n (a) Tarai Development Corporation v. C1T . In this case, the assessee which carried on manufacture and sale of processed seeds claimed relief under Section 80J of the Income-tax Act, 1961. The operations carried out by the assessee consisted of obtaining harvested seeds, testing them for purity, viability and moisture content and thereafter subjecting them to grading and cleaning by mechanical process and sorting them out into categories. Thereafter, the seeds were treated with various chemicals, mixed mechanically, packed and stored. On these facts, a Division Bench of the Allahabad High Court held that the processing of seeds fell in the category of either manufacture or production. The High Court noted item 28 of Schedule V of the Income-tax Act, 1961, mentioning processed seeds which were treated as an article or thing to be manufactured or produced for the purpose of Section 33 of the Income-tax Act, 1961. The same item also appeared in Schedule VI of the Act which entitled it to relief under Section 80I. On the principle of interpretative uniformity, the High Court held that the item \"processed seeds\" should be held to be an article obtained either by the process of manufacture or production and an undertaking producing the said article would be eligible for relief under Section 80J. \n\n (b) Chrestien Mica Industries Ltd. v. State of Bihar [1961] 12 STC 150. In this case, the Supreme Court construed Section 2(g) of the Bihar Sales Tax Act, 1947, which, inter alia, laid down that the sale of any goods produced or manufactured in Bihar by the producer or manufacturer would, wherever the delivery or contract of sale was made, be deemed, for the purpose of the Act, to have taken place in Bihar. The assessee in the case before the Supreme Court carried on the business in Bihar in mining mica. The operations consisted of taking out crude mica from the mines and thereafter processing it into split mica, a commercial commodity. The processing consisted of splitting the crude mica into thinner plates and cutting to sizes. In respect of the split mica sold, the assessee was assessed to sales tax. The assessee contended that it did not produce or manufacture as the only operation carried out was splitting up of mica from crude mica, without any change in the product. \n\n 15. The Supreme Court after considering standard texts on mica and the operation of obtaining split mica from crude in detail, distinguished between the expressions \"production\" and \"manufacture\" and observed as follows (at page 153) : \n\n \"Neither of the words 'production' or 'manufacture' is defined in the Bihar Sales Tax Act but according to the Oxford English Dictionary, 'production' means, amongst other things, that which is produced ; a thing that results from any action, process or effort, a product ; a product of human activity or effort. \n\n It is obvious that what is described in the report above quoted would fall within the dictionary meaning of the word 'production'. It is unnecessary to decide what the word 'manufacture' means.\" \n\n 16. On the facts, it was held by the Supreme Court that the assessee was engaged in producing mica in Bihar and, as such, was exigible to Bihar sales ; tax. \n (c) Chowgule & Co. Pvt. Ltd. v. Union of India . In this case, it was held by the Supreme Court that though the blending of different qualities of ore possessing differing chemical and physical compositions in order to produce ore of the contractual specifications could not be said to involve the process of manufacture since the ore which was produced as a result of such blending could not be regarded as a commercially new and distinct commodity from the original ore of different specifications which were being blended, yet the operation of blending would amount to processing of ore within the meaning of Section 8(3)(b) of the Central Sales Tax Act, 1956, and rule 13 of the Central Sales Tax Rules. The Supreme Court further observed that whenever a commodity was subjected to any processing or treatment for the purpose of marketing, it would amount to a processing of the commodity and wherever a commodity underwent a change as a result of any operation performed on it, such operation would also amount to processing.\n\n 17. In the facts of this case, we are not inclined to interfere with the order of the Tribunal. The Tribunal has found as a fact that as a result of the operations carried on by the assessee in its \"Deep Sea Fishing Division\", the natural produce, i. e., the shrimps caught from the deep seas, were converted into frozen fish and fish products. The operations consisted of cleaning, peeling, packing and freezing the shrimps without which the same were not marketable. The unavoidable corollary is that by the result of such processing carried on by the assessee, a new commercial product comes into existence. This, in our view, results in production of an article. \n\n 18. In any event, in item 30 in Schedule V of the Income-tax Act, 1961, the entry covers processed (including frozen) fish and fish products. In view of the said entry, a person who owns machinery or plant engaged in manufacture or production of processed fish (including frozen) and fish products is entitled to development rebate under Section 33 of the Income-tax Act, 1961, at a higher rate. If for the purpose of higher development rebate under the said section, processed fish (including frozen) and fish products are the result of production or manufacture, on analogy, it should be held that for the purpose of Section 80J, such items should be capable of being produced or manufactured. \n\n 19. On both grounds, the assessee is entitled to succeed in this case. It is clear from the finding of the Tribunal that as a result of the operations carried on by the assessee in its \"Deep Sea Fishing Division\", a commercially new product comes into existence. This product is processed and frozen fish. On a construction of Section 80J and in view of the scheme of the Income-tax Act, 1961, we hold that for production or manufacture of processed and frozen fish, the assessee would be entitled to relief under Section 80J. \n\n 20. For the above reasons, we answer the question referredin the affirmative and in favour of the assessee. \n\n 21. There will be no order as to costs. \n\n Monjula Bose, J. \n\n 22. I agree." }, { "title": "Commissioner Of Income-Tax vs P. Muncherji And Company on 21 April, 1987", "url": "https://indiankanoon.org//doc/587144/", "text": "Commissioner Of Income-Tax vs P. Muncherji And Company on 21 April, 1987\nEquivalent citations: [1987]167ITR671(BOM)\nAuthor: S.P. Bharucha\nBench: S.P. Bharucha\nJUDGMENT\n \n\n Sugla, J. \n \n\n 1. The Tribunal has referred as many as five questions of law in this case at the instance of the Revenue. However, the main question of law revolves round the powers of the Appellate Assistant Commissioner in appeal against the order of assessment and the powers of the Commissioner under section 263 of the Income-tax Act, 1961. \n\n 2. The assessee is a firm. It was not hitherto assessed to income-tax and was, therefore, required to file the estimate of the advance tax payable for the assessment years 1965-66, 1966-67 and 1967-68 during the financial years 1964-65, 1965-66 and 1966-67. However, it did not do so. It had also to file its returns of income for the above three years on or before June 30, 1965, June 30, 1966, and June 30, 1967, respectively. However, the returns of income were filed on April 29, 1966, November 16, 1967, and December 27, 1967. The assessments for all the three years were completed on September 30, 1968. But the Income-tax Officer did not charge interest under section 139(8) of the Act for delay in the submission of the returns and interest under section 217 of the Act for failure to file the estimate of advance tax. The assessee filed appeals against all the three assessment orders which were disposed of the Appellate Assistant Commissioner on May 14, 1969. \n\n 3. On September 19, 1970, the Additional Commissioner of Income-tax, served the assessee with a combined notice for all the three years under section 263 of the Income-tax Act, 1961, requiring the assessee to show cause why the orders passed by the Income-tax Officer without levying interest under section 139 and under section 217 of the Act be treated as erroneous and prejudicial to the interests of the Revenue and the interest which were rejected. The Additional Commissioner held that since the Income-tax Officer did not call upon the assessee to pay interest under section 139 and under section 217 of the Income-tax Act, 1961, he must be deemed to have waived interest under those sections. He next held that the order of deemed waiver of interest under those sections. He next held that the order of deemed waiver of interest under those two provisions was a separate order from the order of assessment under section 143 of the Act and, therefore, the order of deemed waiver of interest was not the subject-matter of appeal before the Appellate Assistant Commissioner and the question of its merger with the orders of the Appellate Assistant Commissioner would not arise. He also rejected the alternative contention of the assessee that interest was chargeable, if at all, at the uniform rate of 6% and held that interest was chargeable at the rate of 6% up to September 30, 1967, and was chargeable at the rate of 9% with effect from October 1, 1967, as the relevant provision was amended with effect from that date. Referring then to the provisions for waiver of interest, he further held that the necessary factors for the exercise of discretion for waiver did not exist and the matter was not considered by the Appellate Assistant Commissioner. Mainly for the aforesaid reasons, the Additional Commissioner held that the deemed order of waiver of interest passed by the Income-tax Officer was erroneous in law and prejudicial to the interest of the Revenue. Accordingly, he set aside the order and directed the Income-tax Officer to pass appropriate orders in accordance with law after allowing the assessee reasonable opportunity of being heard and, if necessary, after referring the matter to the Inspecting Assistant Commissioner. \n\n 4. Further appeals filed by the assessee were allowed by the Tribunal. The Tribunal, it may be stated, accepted the Department's contention that the Income-tax Officer had constructively passed an order waiving interest under section 139 and under section 217 of the Income-tax Act, 1961. However, according to the Tribunal, the orders of the Appellate Assistant Commissioner on all points, including the deemed order of waiver of interest under section 139 and under section 217 of the Act. Following this court's decision in Mathuradas B. Mohta v. CIT [1965] 56 ITR 269, the Tribunal further held that the orders charging interest under section 139 and under section 217 of the Act were appealable orders. Further, in the view of the Tribunal, the fact that the Additional Commissioner had merely set aside the orders of the Income-tax Officer with a direction to consider the question of waiver of interest afresh indicated that he was not himself convinced that the orders of waiver were erroneous or prejudicial to the interests of the Revenue. The assessee's submission that the interest was chargeable under section 217 at the uniform rate of 6% was also accepted by the Tribunal.\n\n 5. The Tribunal has referred to this court the following five questions of law arising out of its impugned order : \n\n\"(1) Whether the Income-tax Officer constructively waived interest under section 139 and section 217 of the Income-tax Act, 1961, by an order in writing ? \n\n (2) Whether the orders of the Income-tax Officer merge with the order of the Appellate Assistant Commissioner on all points in respect of which an appeal have been filed before him or in respect of which the Appellate Assistant Commissioner could have modified the order ? \n\n (3) Whether an order charging interest under section 139 and an order charging interest under section 217 of the Income-tax Act, 1961, are appealable orders ? \n\n (4) Whether, on the facts and in the circumstances of the case, the order of the Additional Commissioner of Income-tax relating to the waiver of interest under section 139 and the one relating to the waiver of interest under section 217 of the Income-tax Act, 1961, for the assessment year 1967-68 were invalid and liable to be cancelled on the ground that he was not himself convinced that they were prejudicial to the interests of the Revenue ? \n\n (5) Whether interest under section 139 for the assessment year 1965-66 and interest under section 217 of the Income-tax Act, 1961, for the assessment year 1967-68 was chargeable at the rate of 6% for the entire period of default ?\" \n\n 6. It is evident from the statement of case that though the Tribunal passed a consolidated appellate order for the three assessment years and the statement of case was also drawn up apparently for all the three years, the questions of law in fact pertain to the assessment years 1965-66 and 1967-68 only and there again while the question of levy of interest under section 139 of the Act in the case of the assessment order is involved for the assessment year 1965-66, the question of levy of interest under section 217 of the Act is involved for the assessment year 1967-68. \n\n 7. The first question referred to us cannot be answered in this reference, in view of the Supreme Court decision in CIT v. V. Damodaran [1980] 121 ITR 572. The Tribunal had admittedly decided this issue in favour of the Revenue. The Revenue naturally cannot be aggrieved by this decision and the assessee, having hot filed a reference application, cannot raise such a question in a reference filed by the Revenue.\n\n 8. As regards the second question of law, Shri Jetly, learned counsel for the Revenue, submitted that the Tribunal fell into an error in holding that the orders of assessment merged in the orders of the Appellate Assistant Commissioner in its entirety. For this purpose, he placed strong reliance on the Supreme Court decision in State of Madras v. Madurai Mills Co. Ltd. [1967] 19 STC 144. The same view, he stated, was taken by the Supreme Court in CIT v. Amritlal Bhogilal & Co. [1958] 34 ITR 130. As regards the powers of the Appellate Assistant Commissioner, Shri Jetly invited our attention to this court's decision in Narrondas Manordas v. CIT [1957] 31 ITR 909. Lastly, he referred to this court's decision in CIT v. Sakseria Cotton Mills Ltd. [1980] 124 ITR 570, for the purpose of showing that irrespective of the powers of the Appellate Assistant Commissioner, what merges in the order of the superior tribunal is what is actually considered by the superior tribunal. Shri Toprani, learned counsel for the assessee, on the other hand, stated that the issue was squarely covered by this court's decision in CIT v. Tejaji Farasram Kharawala [1953] 23 ITR 412, and that the said decision, having not been overruled by the Full Bench of this court or the Supreme Court or even adversely commented upon, was binding on this Bench.\n\n 9. We have considered the rival contentions carefully. In our opinion, this court's decision in CIT v. Tejaji Farasram Kharawala [1953] 23 ITR 412, still holds the field and is binding on us. Chief Justice Chagla in that case has categorically held that the principle underlying section 33B of the 1922 Act, corresponding to section 263 of 1961 Act, is that it is only the order of the Income-tax Officer which can be revised by the Commissioner. Once the order of assessment is confirmed by the Appellate Assistant Commissioner or any order with regard to the assessment and the only right the Department has is the right of appeal to the Appellate Tribunal. The right of the Commissioner continues so long as the order of the Income-tax Officer is not merged in the order of the Appellate Assistant Commissioner. As regards the powers of the Appellate Assistant Commissioner, the learned Chief Justice has gone on to say that once an appeal was preferred by the assessee, it was open to the Commissioner to raise before the Appellate Assistant Commissioner any matter dealing with the assessment of the assessee. It is not as if the power of the Appellate Assistant Commissioner was confined only to those questions which had been raised before him by the assessee. He has widest jurisdiction. The Commissioner has no right of appeal from an order of assessment passed by the Income-tax Officer. The right of appeal is confined to the assessee only and until section 33B of the 1922 Act was enacted, the position in law was that if the assessee did not appeal against the order of assessment, that order became final and conclusive. If the assessee appealed against the order of the Income-tax Officer, the widest jurisdiction was given to the Appellate Assistant Commissioner in appeal. He had the power to confirm, reduce, enhance or annul the assessment; he had the power to direct the Income-tax Officer to make a fresh assessment and the only limitation on the exercise of jurisdiction was that if he wanted to enhance the assessment, he must give the assessee reasonable opportunity of being heard against enhancement.\n\n 10. It was concluded that the Commissioner completely went out of the picture once the Appellate Assistant Commissioner passed orders in appeal from the decision of the Income-tax Officer. It may not be out of place to mention that this court had delivered two judgments on the same day on the question of the powers of the Commissioner to revise the orders of the Income-tax Officer under section 33B. Both these judgments are reported in the same volume of ITR, i.e., CIT v. Tejaji Farasram Kharawala [1953] 23 ITR 412 (Bom) and CIT v. Amritlal Bhogilal and Co. [1953] 23 ITR 420 (Bom). The Department accepted the judgment in [1953] 23 ITR 412 and went to the Supreme Court against the other judgment reported in (1953) 23 ITR 420 (Bom). No doubt, the other judgement was reversed by the Supreme Court in CIT v. Amritlal Bhogilal and Co. . It is, however, seen that the Supreme Court has referred to this court's judgment in CIT v. Tejaji Farasram Kharawala [1953] 23 ITR 412 at page 134 of its judgment without adversely commenting upon it. On the contrary, from the statement of law at page 136 reading as :\n\n\"There can be no doubt that, if an appeal is provided against an order passed by a tribunal, the decision of the appellate authority is the operative decision in law. If the appellate authority modifies or reverses the decision of the tribunal, it is obvious that it is the appellate decision that is effective and can be enforced. In law, the position would be just the same even if the appellate decision merely confirms the decision of the tribunal. As a result of the confirmation or affirmance of the decision of the tribunal by the appellate authority, the original decision merges in the appellate decision and it is the appellate decision alone which subsists and is operative and capable of enforcement; but the question is whether this principle can apply to the Income-tax Officer's order granting registration to the respondent.\" \n\n 11. it appears clear that this court's decision in CIT v. Tejaji Farasram Kharawala [1953] 23 ITR 412 has been approved. It was only because the order granting registration was, according to the Supreme Court, distinct and separate from the order of assessment that it was held that the order of registration did not, rather could not, merge in the order of the Appellate Assistant Commissioner in an appeal filed against the order of assessment. It was for this reason that the Commissioner was held to have jurisdiction to revise the order granting registration in that case. In this context, it is desirable to refer to the manner in which the Supreme Court approached the question. It addressed itself to the question whether the order of registration passed by the Income-tax Officer could be challenged by the Department before the Appellate Assistant Commissioner in an appeal filed by the assessee against the order of assessment. It was in turn laid down in CIT v. Amritlal Bhogilal and Co. [1958] 34 ITR 130 at page 139 :\n\n\"Even after the appeal is decided and in consequence the appellate order is the only order which is valid and enforceable in law, what merges in the appellate order is the Income-tax Officer's order under appeal and not his order of registration which was not and could never become the subject-matter of an appeal before the appellate authority. The theory that the order of the Tribunal merges in the order of the appellate authority cannot therefore apply to the order of registration passed by the Income-tax Officer in the present case. .... When an appeal is taken before the Appellate Assistant Commissioner, undoubtedly he is bound to examine the case afresh, but that cannot bring within the purview of his appellate jurisdiction matters which are deliberately left out by the Act. If section 30(1) does not provide for an appeal against a particular order, the Legislature obviously intends that the correctness of the said order cannot be impeached before the appellate authority. The jurisdiction and powers of the appellate authority must inevitably be determined by the specific and relevant provisions of the Act.\" \n\n 12. Chief Justice Chagla has reiterated the same legal position as regards the powers of the Appellate Assistant Commissioner in appeal in Narrondas Manordass v. CIT [1957] 31 ITR 909. The relevant observations are at pages 919-920 as under :\n\n\"It is clear that the Appellate Assistant Commissioner has been constituted a revising authority against the decisions of the Income-tax Officer, a revising authority not in the narrow sense of revising what is the subject matter of the appeal, not in the sense of revising those matters about which the assessee makes a grievance, but a revising authority in the sense that once the appeal is before him he can revise not only the ultimate computation arrived at by the Income-tax Officer but he can revise every process which led to the ultimate computation or assessment. In other words, what he can revise is not merely the ultimate amount which is liable to tax, but he is entitled to revise the various decisions given by the Income-tax Officer in the course of the assessment and also the various incomes or deductions which came in for consideration of the Income-tax Officer.\" \n\n 13. It thus appears clear to us that the order of the Income-tax Officer under appeal merges completely in the order of the Appellate Assistant Commissioner. \n\n 14. As stated earlier, Shri Jetly has strongly relied on the decision of the Supreme Court in State of Madras v. Madurai Mills Co. Ltd. [1967] 19 STC 144 and this court's decision in CIT v.Sakseria Cotton Mills Ltd. [1980] 124 ITR 570. In particular, our attention was invited to the following observations of their Lordships in the Supreme Court case [1967] 19 STC 144 \n \n\"But the doctrine of merger is not a doctrine of rigid and universal application and it cannot be said that wherever there are two orders, one by the inferior tribunal and the other by a superior tribunal, passed in an appeal or revision, there is a fusion or merger of the two orders irrespective of the subject-matter of the appellate or revisional order and the scope of the appeal or revision contemplated by the particular statute. In our opinion, the application of the doctrine depends on the nature of the appellate or revisional order in each case and the scope of the statutory provisions conferring the appellate or revisional jurisdiction.\"\n\n 15. Superficially looked at, it might appear that this decision supports the Department's stand. It is, however, to be noted that the question involved in that case was whether the Board of Revenue was revising the order dated August 21, 1954, passed by the Deputy Commissioner in revision proceedings taken at the instance of the assessee or that of the Deputy Commercial Tax Officer dated November 28, 1958. To put it differently, the question was whether the order of the Deputy Commercial Tax Officer merged in its entirety with that of the Deputy Commissioner passed in revision proceedings taken at the instance of the assessee. Section 12(2) of the Madras General Sales Tax Act, 1939, is reproduced in the decision. It has two clauses. While clause (1) contemplates revision suo motu, clause (2) provides for revision at the instance of the assessee. The powers under clause (1) are exercised when the order of the Deputy Commercial Tax Officer is found to be erroneous and prejudicial to the interests of the Revenue. The powers under clause (2) are exercised with a view to give relief to the assessee, if possible. In that case, the Deputy Commissioner had exercised powers of revision under clause. (2). It was in that context that the Supreme Court made the above observations regarding merger. We find it difficult to accept that the Supreme Court in Madurai Mills Co.'s case [1967] 19 STC 144, has expressed a view different from its decision in CIT v. Amritlal Bhogilal & Co. [1958] 34 ITR 130.\n\n 16. This court in CIT v. Sakseria Cotton Mills Ltd. [1980] 124 ITR 570 at page 577 has observed :\n\n\"The effect of s. 31(3), therefore, appears to us, having regard to the provisions of the I.T. Act, to be that only that part of the order of the ITO merges or stands superseded by the order of the AAC in respect of which the AAC has exercised his appellate jurisdiction. So far as the remaining part of the order of assessment is concerned, that continues to be unaffected by the decision of the AAC and it continues to have its independent existence unaffected by any decision of the AAC. The doctrine of merger, therefore, is not wholly applicable in the case of such orders made under the I.T. Act.\" \n\n 17. It was stated on behalf of the Department that there is a conflict of view amongst the High Courts on the issue. The above decision was rendered in the context of section 35 of the 1922 Act. The earlier decision of this court in CIT v. Tejaji Farasram Kharawala [1953] 23 ITR 412 was, it appears, not brought to the notice of the court. The earlier decision holds good so far as the question of the Commissioner's powers under section 263 is concerned. We are inclined to take this view particularly because the Supreme Court has in CIT v. Amritlal Bhogilal & Co. [1958] 34 ITR 130, as pointed out by us in an earlier paragraph, affirmed this court's decision. This decision is on all fours and we must follow it. \n\n 18. The other aspect that requires consideration is that even if the order of assessment, which is the subject-matter of appeal, completely merges in the order of the Appellate Assistant Commissioner, whether it automatically follows that the deemed order of waiver of interest by the Income-tax Officer under section 139 and section 217 is or can be said to have merged in the order of the Appellate Assistant Commissioner. For this purpose, Shri Jetly, besides relying on the Supreme Court decision in CIT v. Amritlal Bhogilal & Co. [1958] 34 ITR 130, placed reliance on this court's decision in CIT v. Daimler Benz A. G. [1977] 108 ITR 961 [FB], and the Supreme Court decision in Central Provinces Manganese Ore Co. Ltd. v. CIT [1986] 160 ITR 961. He stated that the orders levying interest under section 139 and section 217 of the Income-tax Act, 1961, were separate and independent orders and were not even appealable. Here again we find ourselves against the Revenue. The pertinent question, to our mind, is whether in an appeal filed by the assessee against the order of assessment, the Appellate Assistant Commissioner could have modified the order of the Income-tax Officer in that behalf. As regards the first limb of the question, the Supreme Court in Central Provinces Manganese Ore Co. Ltd. [1386] 160 ITR 961 at page 966 held :\n\n\"Interest is levied under sub-section (8) of section 139 and under section 215 because, by reason of the omission or default mentioned in the relevant provision, the Revenue is deprived of the benefit of the tax for the period during which it has remained unpaid. The very period for which interest is levied under the relevant provision points to the nature of the levy. If that is borne in mind, it will be apparent that the levy of interest is part of the process of assessment. Although section 143 and section 144 do not specially provide for the levy of interest and the levy is, in fact, attributable to sub-section (8) of section 139 or section 215, it is nevertheless a part of the process of assessing the tax liability of the assessee. Where the Income-tax Officer considers that there is a case for levying interest under sub-section (8) of section 139 or under section 215, what he does in practice, is to make an order levying such interest after completing the assessment of the assessee's total income and the tax payable by him.\" \n\n 19. This being so, it has to be held that the deemed order of waiver of interest under section 139 and section 217 was part and parcel of the process of assessment and, therefore, merged with the order of the Appellate Assistant Commissioner on the same logic. Moreover, the Explanation to section 251 of the Act makes the position quite clear. The Explanation reads as under : \n\n\"Section 251. Explanation. - In disposing of an appeal, the Appellate Assistant Commissioner (or, as the case may be, the Commissioner (Appeals)) may consider and decide any matter arising out of the proceedings in which the order appealed against was passed, notwithstanding that such matter was not raised before the Appellate Assistant Commissioner or, as the case may be, the Commissioner (Appeals) by the appellant.\" \n\n 20. It cannot, therefore, be accepted that the Appellate Assistant Commissioner could not have interfered with this part of the order, having regard to his powers under section 251(1) read with the Explanation thereto, which have been held to be plenary and co-terminus with those of the Income-tax Officer by the Supreme Court in CIT v. Kanpur Coal Syndicate [1964] 53 ITR 225, and this court in CIT v. Tejaji Farasram Kharawala [1953] 23 ITR 412 and Narrondas Manordass v. CIT [1957] 31 ITR 909.\n\n 21. Accordingly, it has got to be held that the orders of assessment for the assessment years 1965-66 and 1967-68, including the deemed orders of waiver of interest under section 139 for assessment for the assessment year 1965-66 and under section 217 for the assessment year 1967-68, had merged in the orders of the Appellate Assistant Commissioner. Since at the time the Additional Commissioner was seeking to exercise powers of revision under section 263 of the Income-tax Act, 1961, the requisite orders had stood merged in those of the Appellate Assistant Commissioner could not have exercised jurisdiction under section 263 of the Act. \n\n 22. In the result, the second question of law is answered in the affirmative and in favour of the assessee. In the above view of the matter, the other questions of law do not need an answer and are returned unanswered. \n\n 23. No order as to costs." }, { "title": "Mettur Chemical And Industrial ... vs Commissioner Of Income-Tax on 21 April, 1976", "url": "https://indiankanoon.org//doc/1329764/", "text": "Mettur Chemical And Industrial ... vs Commissioner Of Income-Tax on 21 April, 1976\nEquivalent citations: [1977]110ITR822(MAD)\nJUDGMENT\n\n\n \n\n Ismail, J. \n \n\n 1. The Income-tax Appellate Tribunal, Madras Bench, has stated a case and referred the following two questions of law under Section 256(1) of the Income-tax Act, 1961, for the opinion of this court : \n\n \"(1) Whether, on the facts and circumstances of the case, the Tribunal was right in holding that there was a mistake apparent from the record which could be rectified by the Income-tax Officer under Section 154 in respect of the assessments relating to 1959-60 and 1960-61 ?\" \n\n (2) Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the order under Section 154 dated February 25, 1965, relating to the assessment for 1959-60 was not rendered illegal on the ground that it was barred by the period of limitation ?\" \n\n 2. These questions relate to two assessment years, viz., assessment years 1959-60 and 1960-61. The assessee is a public company. The assessment for 1959-60 was made on May 27, 1960, determining the total income at Rs. 15,03,585. This included income from the business determined at Rs. 14,43,495. Though there is no specific discussion in the assessment order about the admissibility of wealth-tax as a deduction in arriving at the business income, the figures found in the assessment order itself clearly showed that the income from the business was arrived at after deducting the wealth-tax paid by the assessee. The assessment was reopened under Section 147(b) and by an order dated November 23, 1962, passed under Section 143(3) read with Section 147 the total income was determined at Rs. 15,04,680 and income from the business was determined at Rs. 15,44,590.\n\nThough income was incurred on account of certain additions the deduction of wealth-tax for the computation of the income made by the Income-tax Officer by his original order remained untouched by this revised order. The assessment for 1960-61 was made under Section 23(3) on March 16, 1961. The total income was determined at Rs. 14,43,297 inclusive of income from business of Rs. 1,32,660. The order of assessment for this year also showed deduction of wealth-tax from the income from the business for arriving at the taxable income. The assessment for 1960-61 also was reopened and an order under Section 143(3) read with Section 147(b) was passed on November 23, 1962. In this case also though there were certain additions, the deduction of wealth-tax from the income of the business for arriving at the assessable income from the business remained untouched. There was one more occasion for reopening the assessment under Section 147 and by another order passed under Section 143(3) read with Section 147(b) dated November 23, 1964, the total income and business income were determined at Rs. 14,70,753 and Rs. 13,54,122, respectively. Here again the deduction of the wealth-tax from the income from the business remained untouched. However, subsequently the Income-tax Officer took proceedings in respect of both the assessment years under Section 154 of the Income-tax Act, 1961. Even though the notice issued by the Income-tax Officer on February 16, 1965, to the assessee conveyed the fact that he had noticed a mistake which was apparent from the record in relation to each of the two assessments for 1959-60 and 1960-61, inasmuch as the wealth-tax paid by the assessee was deducted from the income from the business and even though it did not specifically refer to the decision of this court in Kumbakonam Electric Supply Corporation Ltd. v. Commissioner of Income-tax [1963] 50 ITR 809 (Mad) holding that wealth-tax paid by the assessee was not deductible from the income from the business for arriving at the taxable income, still that judgment was the occasion for the issue of the notice on February 16, 1965, under, Section 154 of the Act. The assessee raised certain objections. The Income-tax Officer rejected them and passed two separate orders dated February 25, 1965, for the two years under Section 154 by which he added back the wealth-tax paid by the assessee to the total incpme from the business which he had originally deducted by way of rectifying the mistake said to apparent from the records. The assessee filed appeals against both the orders to the Appellate Assistant Commissioner and the said appeals were dismissed by the Appellate Assistant Commissioner. The assessee thereafter filed appeals to the Tribunal relating to both the years. The Tribunal heard both the appeals together and disposed of them by a common order. One of the contentions put forward before the Tribunal was that there was no mistake apparent from the records which could be rectified by the Income-tax Officer under Section 154. Another objection\n\nraised was that the proceedings under Section 154 were barred by limitation. The Tribunal rejected these contentions and dismissed the appeals. It is thereafter, at the instance of the assessee, the above two questions have been referred to this hon'ble court for its opinion.\n\n 3. As far as the first question is concerned, we are clearly of the opinion that the answer to the said question must be in the affirmative. Section 154 of the Act enables the Income-tax Officer to rectify any mistake apparent from the record. In this case, as we already pointed out, the Income-tax Officer had deducted the wealth-tax paid by the assessee from the business income for computing the assessable income from the business. The decision of this court referred to above, viz., Kumbakonam Electric Supply Corporation Ltd. v. Commissioner of Income-tax [1963] 50 ITR 809 (Mad) held that wealth-tax paid by a company under the provisions of the Wealth-tax Act, on the net wealth of the company is not an allowable expenditure in computing the taxable income of the company, either under Section 10(2)(xv) or under Section 10(1) of the Indian Income-tax Act, 1922. This decision of this court is an authoritative pronouncement as to the scope of Section 10(2) (xv) and Section 10(1) as far as the Income-tax Officer was concerned. Consequently, this decision made it clear that the Income-tax Officer has committed an error in deducting the wealth-tax paid by the assessee from the income from the business and that error wss apparent from the record. Consequently, the Income-tax Officer acted well within his jurisdiction in proceeding under Section 154 of the Income-tax Act, 1961, in order to rectify a mistake apparent from the record by adding back the wealth-tax which he had originally deducted. We are not referring to the subsequent decisions on this question and the retrospective amendment of the law in this behalf because at the time when the Income-tax Officer took proceedings under Section 154 this was the only binding decision in existence and, \"therefore, it was not merely the right but the duty of the Income-tax Officer to give effect to the law as declared by this court in the decision referred to above by correcting the mistake which he had already committed. Consequently, our answer to the first question referred to above is in the affirmative arid against the assessee.\n\n 4. This takes us to the second question-and that question is confined to the assessment for 1959-60. As we already pointed out the assessment for this year was originally completed on May 27, 1960, and the notice under Section 154 was issued for the first time only on February 16, 1965. Consequently, the notice was issued beyond the period oi four .years prescribed under Section 154(7) for the purpose of enabling the Income-tax Officer to exercise his jurisdiction under that section. Therefore, if the mistake was with reference to the order dated May 27, 19,60, the proceedings initiated on February 16, 1965, are obviously beyond the period of limitation\n\n\nand, consequently, the Income-tax Officer was not entitled to proceed under that section. However, the learned counsel for the department contended that the period of limitation should be computed not from the date of the original order of assessment, namely, May 27, 1960, but from the date of the subsequent order by which the assessment was reopened under Section 147(b) of the Income-tax Act. That order was dated November 23, 1962, and if the contention of the learned counsel for the revenue is correct on this point, certainly the notice under Section 154 dated February 16, 1965, will be well within the period of four years from the date of November 23, 1962. On the other hand, the argument advanced on behalf of the assessee is that the error had crept into the order dated May 27, 1960, itself, and notwithstanding the subsequent reopening of the assessment, that error remained untouched and, therefore, that error cannot be said to have crept into the order dated November 23, 1962, so as to enable the Income-tax Officer to compute the period of limitation from that date and that the period of limitation should be computed only from the date of the original order, viz., May 27, 1960. This was sought to be countered by the learned counsel for the revenue by putting, forward the argument that once the Income-tax Officer took proceedings under Section 147 and passed a fresh order of reassessment the original order has ceased to have an independent existence and it had merged in the subsequent order or it has become non-existent. \n\n 5. We are of the opinion that the contention of the learned counsel for the revenue is not correct. Before giving our reasons in this behalf we may refer to the only decision which is directly in point rendered by the Allahabad High Court. That decision is in Standard Chemical Co. Pvt. Ltd. v. Income-tax Officer (See Appendix page 832 infra). In that case the assessee was a limited company. For the assessment year 1966-67 in computing the total income the assessee was granted development rebate in respect of some machinery which had been installed by it in the calendar year 1964. The assessee had also claimed depreciation on certain assets including land. However, the Supreme Court in Commissioner of Income-tax v. Alps Theatre had held that the depreciation was allowable only on the value of buildings and not on the value of land. Consequently, the Income-tax Officer relying on the decision of the Supreme Court took proceedings tinder Section 147 of the Income-tax Act, 1961, and passed a supplemental assessment order on October 16, 1969, withdrawing the depreciation on the value of the land. Subsequently, the Income-tax Officer felt that the development rebate had also been wrongly allowed to the assessee inasmuch as the assessee had not created a reserve, for the, same during the year the machinery was installed. Therefore, he issued a notice under Section 154 of the Act on April 14, 1971, treating it as a case of\n\nrectification of mistake. He finally passed an order under that section on September 10, 1971, withdrawing the development rebate which has been allowed to the assessee in the original assessment order after overruling the assessee's objection that the proceedings were time-barred. Thereafter, the assessee approached the Allahabad High Court by a petition under article 226 of the Constitution of India to quash the order of the Income-tax Officer passed under Section 154 of the Act.\n\n 6. We may point out in this context that since the original order of assessment was dated 9th February, 1967, the notice issued under Section 154 on April 14, 1971, was beyond the period of four years just as in the present case. However, the contention of the department was that since the original order of assessment was reopened under Section 147 of the Income-tax Act, 1961, and a fresh order was passed on October 16, 1969, the four year period prescribed under Section 154(7) has to be computed from October 16, 1969, and if it is so done the notice dated April 14, 1971, was within four years. The reasoning advanced on behalf of the revenue in that case was that the original assessment order had merged in the order passed under Section 148 by the Income-tax Officer, and, therefore, the limitation should be counted from the date of the later order. The Bench of the Allahabad High Court rejected this contention. The Bench said :\n \" An order under Section 148 is a separate order dealing with an item of income which had escaped assessment. The original assessment order does not merge into an order passed under Section 148. Where reassessment is made under Section 148 (corresponding to Section 34 of the Indian Income-tax Act, 1922) the Income-tax Officer's jurisdiction is confined to the income which had escaped assessment and does not extend to revising, reopening and reconsidering the whole assessment. See Kashi Nath Bagla v. Commissioner of Income-tax [1950] 4 ITC 472 (All) and Kevaldas Ranchhodas v. Commissioner of Income-tax [1968] 68 ITR 842 (Bom). Likewise, in proceedings under Section 34 the assessee cannot reagitate questions which have been decided in the original assessment. So the original assessment cannot be challenged in appeal against an assessment order under Section 34. See Commissioner of Income-tax v. A.D. Shroff [1957] 31 ITR 284 (Bom). It is thus clear that the question of development rebate had become final when the original assessment order was passed. It was not the subject-matter of dispute in subsequent proceedings under Section 148 ; so the original assessment order cannot be said to have merged in the order under Section 148, which was restricted only to depreciation.\"\n\n 7. This decision of the Allahabad High Court is on all fours with the facts of the present case and, therefore, on the basis of this decision it must be held that the proceedings initiated by the Income-tax Officer in the present case under Section 154 was barred by limitation. \n\n 8. Realising this, Mr. Jayaraman, learned counsel for the revenue, who at one stage of the argument had contended that the original order has merged in the reassessment order made under Section 148, subsequently contended that as soon as an order under Section 148 is passed the original order has ceased to be in existence and, therefore, the only order that could be rectified under Section 154 was the subsequent order of reassessment. In support of this contention, the learned counsel drew our attention to a decision of this court and an observation of the Supreme Court in another decision. The decision of this court is Sundaram and Co. (P.) Ltd. v. First Additional Income-tax Officer [1964] 1 MLJ 1 (Mad). In that case a company was assessed to super-tax for 1956-57 in the sum of Rs. 2,47,325 after allowance of rebate under the Finance Act, 1956. The Income-tax Officer passed a distribution order under Section 23A of the Indian Income-tax Act, 1922, on the score that the company had not distributed dividends for the years 1946-47 to 1951-52. Pursuant to the distribution order, the company declared dividends out of the profits of the account year relevant to 1956-57. This entailed a reduction in the super-tax rebate already allowed. The officer reopened the assessment for 1956-57 under Section 34, and redetermined the super-tax at Rs. 3,28,304 after reducing the rebate. The reassessment was challenged in appeal by the assessee. Hence, the Income-tax Officer, by way of caution, also took action under Section 35, purporting to rectify the original order of assessment by reducing the rebate and enhancing the super-tax. The assessee-company filed a petition under article 226 of the Constitution of India before this court to quash the order of rectification. The court held that the Income-tax Officer had acted in excess of jurisdiction and the original order of assessment sought to be rectified did not subsist on the date when proceedings were initiated under Section 35, for the order was cancelled and set aside by the officer himself, and hence there was no order which could form the subject-matter of proceeding under Section 35. The Bench observed :\n \" It seems to us to be obvious that in the present case the Income-tax Officer acted in excess of his jurisdiction in passing the order of rectification under Section 35 of the Act. The order sought to be rectified dated 29th March, 1957, did not subsist on the date when proceedings were initiated under Section 35. That order was cancelled and set aside by the Income-tax Officer himself in the purported exercise of his jurisdiction under Section 34. As stated already, there was an appeal from that order to the Appellate Assistant Commissioner who modified it. The effect of the dismissal of the appeal by the Tribunal is to keep intact the order of the Appellate Assistant Commissioner. The only order that is now in force is that of the Appellate Assistant Commissioner who modified the reassessment order of the Income-tax Officer dated 28th March, 1959. There can-\n\nnot be any doubt that the Income-tax Officer could not rectify the order dated 29th March, 1957, which ceased to exist on and from 29th March, 1959, when the Income-tax Officer himself passed the order of reassessment under Section 34 of the Act. We are of the opinion that the above observations have to be understood in the context of the facts of that particular case and we are unable to hold that the Bench of this court in that case laid down a general proposition that once the Income-tax Officer takes action under Section 34 of the Indian Income-tax Act, 1922, to assess the escaped income or to reassess the income, the original order automatically ceased to exist for all purposes. If we may say so with respect, the decision of this court in that case is absolutely correct on facts. The scope of the action taken by the Income-tax Officer in that case under Sections 34 and 35 was the same, namely, redetermination of the super-tax after reducing the rebate. Once the. Income-tax Officer effects the same in the exercise of his jurisdiction under Section 34, there will be no order to be rectified under Section 35.\n\n 9. The next judgment relied on is that of the Supreme Court in Jaganmohan Rao v. Commissioner of Income-tax . That case referred to the condition precedent for the invocation of the jurisdiction of the Income-tax Officer under Section 34 of the Indian Income-tax Act, 1922. In the course of the judgment in that case the Supreme Court observed (page 380):\n \" It was stated on behalf of the appellant that in any case the Income-\ntax Officer could have legitimately assessed one-third share of the income\nwhich was due to the assessee according to the judgment of the Madras\nHigh Court and there was escape only to the extent of two-thirds share of\nthe income. This argument is not of much avail to the appellant because\nonce proceedings under Section 34 are taken to be validly initiated with\nregard to two-thirds share of the income, the jurisdiction of the Income-tax\nOfficer cannot be confined only to that portion of the income. Section 34\nin terms states that once the Income-tax Officer decides to reopen the\nassessment he could do so within the period prescribed by serving on the\nperson liable to pay tax a notice containing all or any of the requirements\nwhich may be included in a notice under Section 22(2) and may proceed to\nassess or reassess such income, profits or gains. It is, therefore, manifest\nthat once assessment is reopened by issuing a notice under Sub-section (2)\nof Section 22 the previous order of assessment is set aside and the whole\nassessment proceedings start afresh. \" \n\n 10. The above observations were made in the context of the extent of the jurisdiction of the Income-tax Officer under Section 34 and the Supreme Court was not considering a question whether after a reassessment has been made under Section 34 the original order has ceased to exist for\n\nall purposes or not. Consequently, we are unable to hold that the observation of the Supreme Court in the decisions referred to above are of any avail to the revenue in the present case.\n\n 11. As stated in the judgment of the Allahabad High Court referred to above by proceedings under Section 148. the original assessment order does not merge into the order passed under Section 148 because where reassessment is made under section- 148 of the Income-tax Act, 1961 (corresponding to Section 34 of the Indian Income-tax Act, 1922), the Income-tax Officer's jurisdiction is confined to the income which has escaped assessment and does not extend to revising, reopening and reconsidering the whole assessment and likewise in any proceedings under Section 34 the assessee cannot re-agitate questions which had been decided against him in the original assessment. The correctness of the legal position so stated by the Allahabad High Court was not challenged before us. We may also point out that against an order of assessment passed by the Income-tax Officer under Section 143 the assessee can certainly prefer an appeal to the Appellate Assistant Commissioner, and a further appeal to the Income-tax Appellate Tribunal in so far as the Income-tax Officer had negatived any contention which the assessee had put forward. But the pendency of that appeal does not preclude the Income-tax Officer from proceeding under Section 147 of the Income-tax Act, 1961, corresponding to Section 34 of the Indian Income-tax Act, 1922, in respect of a matter which was not the subject-matter of appeal. If so, it cannot be contended that as soon as the Income-tax Officer takes proceedings under Section 147 of the Income-tax Act, 1961, the appeal already preferred by the assessee lapses and the entire original assessment order had been nullified or set at naught or set aside by the fresh order passed by the Income-tax Officer with the consequence that the assessee has to file a fresh appeal against the order of reassessment questioning even matters decided against him by the officer in the original order of assessment itself. The restrictions and the limitations with regard to the scope of the jurisdiction of the Income-tax Officer under Section 147 are mutual. The Income-tax Officer purports to reassess an escaped income or withdraw an excess relief which he had already given to the assessee by taking proceed* ings under Section 147. In the course of the proceedings, it is not open to the assessee to contend that certain reliefs which had been denied to him already should have been granted and they were originally denied wrongly or illegally, because that should have been the subject-matter of appeal preferred by the assessee to the appellate authorities prescribed under the Act. Consequently, it cannot be held that once proceedings are initiated under Section 147 of the Income-tax Act, 1961, the entire order of assessment originally passed by the Income-tax Officer ceased to exist and the\n\nonly order that remains in force is the order passed by the Income-tax Officer under Section 148, for instance, with reference to the proceedings by way of appeal already initiated by the assessee, the original order of assessment is in existence and can be dealt with by the appellate authorities constituted under the Act. Therefore, we are unable to subscribe to the general and the wide proposition put forward by the learned counsel for the revenue that once the Income-tax Officer reopens the assessment under Section 147 and passes an order under Section 148 that puts an end to the original order of assessment completely and it totally replaces that order in all respects. If so, we are of the opinion--if we may say so with respect---that the decision of the Allahabad High Court which is directly in point is correct and following that judgment we hold that the proceedings of the Income-tax Officer initiated under Section 154 with regard to the assessment year 1959-60 were clearly barred by limitation and, therefore, the order passed by him under that section was without jurisdiction. We may point out that apart from the decision of the Allahabad High Court referred to above, counsel on both sides agree that there is no other decision of any court directly touching the point involved in this case.\n\n 12. We may also mention the fact that Mr. Jayaraman, at one stage, con\ntended that the mistake in the assessment order for the year 1959-60 dated\nMay 27, 1960, crept in only by the judgment of this court dated January 16,\n1963, and there was no mistake earlier and the period of limitation, therefore,\nhad to be computed from the date of that judgment. We are unable to\naccept this contention. Either there is a mistake in the order as passed on\nthe date when it was passed or there was no such mistake and there was\nno question of notional mistake creeping into an order as a result of the\ncourts in the country declaring the law subsequently. As a matter of fact,\nthe effect of the judgment of this court in Kumbakonam Electric Supply\nCorporation Ltd. v. Commissioner of Income-tax [1963] 50 ITR 809 (Mad) is\none to declare that, as the law stood always, the wealth-tax paid by an\nassessee could not be deducted in the computation of the business income\neither under Section 10(1) or Section 10(2)(xv) of the Indian Income-tax Act,\n1922, and this court did not intend to lay down any law for the first time by\nthe said judgment. Section 154(7) of the Income-tax Act, 1961, states that\nthe period of four years should be from the date of the order sought to be\namended' and not from the date when a mistake can be said to have crept\ninto that order. Therefore, even assuming that a mistake crept into the\norder only when the High Court delivered the judgment, certainly the date\nof the judgment of the High Court cannot be said to be the date of the order\nof the Income-tax Officer within the scope of Section 154(7) of the Income-tax\nAct, 1961.\n\n 13. Under these circumstances, our answer to the second question is-in the negative and against the revenue. Since both parties have succeeded in part, there will be no order as to costs." }, { "title": "Premchand Sitanath Roy vs Addl. Commissioner Of Income-Tax And ... on 19 December, 1975", "url": "https://indiankanoon.org//doc/232798/", "text": "Premchand Sitanath Roy vs Addl. Commissioner Of Income-Tax And ... on 19 December, 1975\nEquivalent citations: [1977]109ITR751(CAL)\nAuthor: Sabyasachi Mukharji\nBench: Sabyasachi Mukharji\nJUDGMENT\n\n\n\n \n\n Sabyasachi Mukharji, J. \n \n\n1. In this application under Article 226 of the Constitution, the petitioner challenges the notice under Section 263 of the Income-tax Act, 1961, issued by the Additional Commissioner of Income-tax, West Bengal-Ill, for the assessment year 1968-69. The assessee submitted his return for the assessment year 1968-69 on the 14th of May, 1969. Therefore', under proviso (iii) of Sub-section (1) of Section 139, the petitioner was liable to pay penal interest for the period 1st of January, 1969, to 14th of May, 1969, at the rate of 9% per annum on the amount of tax payable in the status of unregistered firm for the said assessment year. Under Sub-section (8) of Section 139, the Income-tax Officer had discretion to reduce or waive the interest payable in accordance with law and under conditions mentioned under Rule 117A of the Income-tax Rules, 1962. The Income-tax Officer did not charge any interest in terms of Section 139(1) of the said Act. According to the petitioner interest was not charged because of the demise of the two senior partners of the petitioner-firm. According to the petitioner the representation of the petitioner was duly submitted before the assessing Income-tax Officer that the delay of four and a half months for filing the return was only because of the situation created by the death of its partners. The Income-tax Officer, according to the petitioner, was satisfied with the explanation and, therefore, waived the said interest. From the order passed by the Income-tax Officer it is not manifest whether he at all considered this aspect of the matter or whether there was conscious or deliberate waiver on the part of the Income-tax Officer of the liability of the petitioner to pay interest. The petitioner preferred an appeal before the Appellate Assistant Commissioner and the Appellate Assistant Commissioner passed an order on the 31st of January, 1973, confirming the assessment. On the 22nd of February, 1974, the impugned notice was issued by the Additional Commissioner of Income-tax, West Bengal-Ill. In the said notice the Additional Commissioner of Income-tax, West Bengal-Ill, stated as follows: \n\n \"It appears from the assessment records of Messrs. Premchand Sita-nath Roy (URF) that the assessee submitted its return of income for the assessment year 1968-69 on May 14, 1969. It was, therefore, liable to pay penal interest under Section 139(1) of the Income-tax Act, 1961, for the period January 1,1969,10 May 14, 1969, at the rate of 9% per annum on the amount of tax payable in the status of unregistered firm for the said assessment year. The Income-tax Officer who made the assessment under Section 143(3) of the Income-tax Act, 1961, on March 3, 1972 for the said assessment year failed to charge the said interest. The records do not show any reason for waiver of the said interest by the Income-tax Officer in accordance with the provisions of Section 139(8) read with Rule 1I7A of the Income-tax Rules, 1962. The order of assessment as passed by the Income-tax Officer without charging the said interest thus appears to be erroneous and prejudicial to the interest of revenue. \n\n I, therefore, propose to pass such orders thereon under Section 263 of the Income-tax Act, 1961, as the circumstances of the case may justify, including an order enhancing or modifying the said assessment or cancelling the said assessment and directing the Income-tax Officer to make a fresh assessment according to law. \n\n Before, however, I do so I hereby give you an opportunity to appear before me on February 28, 1974, at 11 a.m. at my office at P-7, Chowringhee Sq., Calcutta-l, and show cause why the proposed order under Section 263 of the Income-tax Act, 1961, should not be made. If you do not wish to avail yourself of this opportunity of being heard in person or through your authorised representative you may show cause in writing on or before the said date which will be considered before any such order is made under Section 263 \". \n\n2. In support of this application two contentions were urged. It was urged, firstly, that there being an appeal from the said assessment order and the said assessment order having been confirmed by the Appellate Assistant Commissioner, the Additional Commissioner of Income-tax, West Bengal III was not competent or had no jurisdiction to issue any notice or pass any order under Section 263 of the Income-tax Act, 1961. It was contended that once an assessment order had been confirmed by the order of the Appellate Assistant Commissioner, the order of the Income-tax Officer merged with the order of the Appellate Assistant Commissioner and such Commissioner had no power or jurisdiction to revise the order passed by the Appellate Assistant Commissioner, he was, therefore, incompetent, in the facts and circumstances of the case, to interfere with the action of the\n\nIncome-tax Officer in not charging any interest. It is not necessary to set out the provisions of Section 263 of the Income-tax Act, 1961. It is indisputable that the Commissioner has no power to interfere or revise the order of the Appellate Assistant Commissioner. The only question is whether by the impugned notice the Commissioner was seeking to revise an order of the Income-tax Officer which had been merged in the order of the Appellate Assistant Commissioner. It is true that the assessment order was the subject-matter of appeal. But the appeal was from the assessment order. Under Clause (c) of Section 246 of the Income-tax Act, 1961, the assessee has a right of appeal if the assessee denies his liability to be assessed under the Act or against an order of assessment under Sub-section (3) of Section 143 or Section 144 only where he--(i) objected to the amount of income assessed or (ii) objected to the amount of tax determined, or (iii) objected to the amount of loss computed, or (iv) objected to the status under which he was assessed. It is only in the above-mentioned situations the right of appeal has been given to the assessee under Clause (c) of Section 246 of the Income-tax Act, 1961. Whether the interest should be charged or not is not one of the orders in which the assessee has a right of appeal under Section 246 of the Act. Indeed, under the Act, the liability was imposed by the proviso (iii) to Sub-section (1) of Section 139 of the Act. Only a discretion has been given under Sub-section (8) of section 139 of the Act to waive the charge of the interest, the legislature must have thought that the exercise of such discretion should not be a subject-matter of appeal. Therefore, it seems that no right of appeal on the proper or improper exercise of discretion under Sub-section (8) of Section 139 has been provided for in the Act. It is in this background that the question of merger of the order of the Income-tax Officer with the order of the Appellate Assistant Commissioner has to be judged in the facts and circumstances of this case. Counsel for the petitioner drew my attention to the observations of the Chief Justice, Chagla of the Bombay High Court in the case of Commissioner of Income-tax v. Tejaji Farasram Kharawala [1953] 23 ITR 412 (Bom). There the Division Bench of the Bombay High Court observed that whereas the power of revision was conferred upon the Commissioner under Section 33A of the Indian Income-tax Act, 1922, against the order passed by any authority subordinate to him, the power of revision conferred upon the Commissioner under Section 33B was restricted to any order passed by the Income-tax Officer. Section 33B did not confer upon the Commissioner the power to revise either the orders of the Appellate Assistant Commissioner or the Appellate Tribunal. When an appeal was provided from a decision of a Tribunal and the appeal court after hearing the appeal passed an order, the order of the original court ceased to exist and was merged in the order of the appeal court, and although the appeal court might merely confirm the\n\norder of the trial court, the order that stood and was Operative was not the order of the trial court but the order of the appeal court. Consequently, it was held that the Commissioner of Income-tax was not competent to pass any order under Section 33B enhancing an assessment in a matter in which appeal was preferred against the order of the Income-tax Officer and the\nsaid order was confirmed by the Appellate Assistant Commissioner of Income-tax. The aforesaid observations still hold good, with respect, so far as these go. But the observations will have to be viewed in the light of the theory of merger now developed by the Supreme Court. In the case of\nCommissioner of Income-tax v. Amritlal Bhogilal & Co. Ltd, , the Supreme Court had to consider whether an order granting registration to a firm under Section 26A of the Indian Income-tax Act, 1922, merely\naffected or governed the procedure in collecting or recovering the tax found due from a firm and was separate from and independent of the order of assessment. There the Supreme Court observed that, however wide the power of the Appellate Assistant Commissioner might be in an appeal from an order of assessment, these could be exercised only in respect of matters\nwhich were specifically made appealable under Section 31, and if any order had been deliberately left out from the jurisdiction of the Appellate Assistant Commissioner it was not open to him to entertain a plea about the correctness, propriety or validity of such an order. The Supreme Court further found that under Section 31 as there was no appeal from an order granting registration to a firm under Section 26A, the Appellate Assistant Commissioner could not cancel, in exercise of his appellate jurisdiction under Section 31, an order granting registration to a firm. The order granting registration to a firm stood outside the jurisdiction of the Appellate Assistant Commissioner and\ndid not directely form part of the proceedings before him. After an appeal from an order of assessment was decided by the Appellate Assistant Commissioner, what merged in the appellate order was the Income-tax Officer's order under appeal, and not his order of registration, which was not and could never become the subject-matter of an appeal before the appellate\nauthority. Therefore, an order of the Income-tax Officer registering a firm could be revised by the Commissioner under Sewction 33B whenever he considered that it had been erroneously passed and was prejudicial to the revenue, even while an appeal was pending from the order of assessment\nand even after the appeal was disposed of by the Appellate Assistant\nCommissioner. The Supreme Court further observed that whether or not the revisional power of the Commissioner could be exercised in a given case must be determined solely by reference to the terms of Section 33B itself, and the courts were not justified in imposing additional limitations on the\nexercise of the said power on hypothetical considerations of policy or the extraordinary nature of the power.\n\n3. In the case of State of Madras v. Madurai Mills Co. Ltd. the Supreme Court had considered this aspect of the matter. At page 736 of the Supreme Court Reports the court observed that the doctrine of merger was not a doctrine of rigid and universal application and it could not be said that wherever there were two orders, one by the inferior tribunal and the other by a superior tribunal, passed in an appeal or revision, there was fusion or merger of two orders irrespective of the subject-matter of the appellate or revisional order and the scope of the appeal or revision contemplated by the particular statute. The application of the doctrine, according to the Supreme Court, depended on the nature of the appellate or revisional order in each case and the scope of the statutory provisions conferring the appellate or revisional jurisdiction. There, in the case before the Supreme Court, for the assessment year 1950-51 the dealer had submitted a return under the Madras General Sales Tax Act, 1939, showing its net turnover to the Deputy Commercial. Tax Officer, who was the assessing authority. As he had determined the net turnover at a higher amount the dealer appealed to the Commercial Tax Officer who allowed the appeal with respect to one item. On the 28th of November, 1951, the assessing authority issued a revised assessment order as per the order of the Commercial Tax Officer. On the 27th of December, 1952, the dealer presented a revision petition before the Deputy Commissioner of Commercial Taxes raising the only objection as a new contention that it should not have been assessed to tax on amounts collected by it by way of tax. On the 21st of August, 1954, the Deputy Commissioner dismissed the petition on the ground that the dealer was not entitled to raise a new contention for the first time. On the 4th of August, 1958, the Board of Revenue issued a notice to the respondent stating that it proposed to revise the assessment by including in the net turnover a sum representing the value of cotton purchased by the respondent from outside the State and which was excluded by the assessing authority. After considering the respondent's objections the Board fixed the net taxable turnover by including that amount. The respondent's appeal to the High Court was allowed. It was held by the Supreme Court that the order of the Board of Revenue was invalid, because under section 12(4)(b) of the Madras General Sales Tax Act, 1939, the Board of Revenue could invoke its revisional jurisdiction only within four years from date on which the order of the assessing authority was communicated to the assessee or the dealer. The subject-matter of the revision proceedings before the Board of Revenue was only the revised assessment order of the assessing authority. It was further held that it could not be said that the order of the Deputy Commissioner of Commercial Taxes, in revision, was the only operative decision in law on the basis that the order of the inferior tribunal (order of the assessing authority) had merged in that of the\n\nsuperior tribunal, and the application of the doctrine ot merger depended on the nature of the appellate or revisional order in each case. In the circumstances of that case it could not be said, according to the Supreme Court, that there was a merger of the order of assessment dated November 28, 1952, with the order in revision dated 21st August, 1954, because the question of exclusion of the value of yarn purchased from outside the State was not the subject-matter of revision before the Deputy Commissioner of Commercial Taxes.\n\n4. Therefore, in the instant case, in order to apply the theory or concept of merger it is necessary to find out whether the fact that the interest was not charged in terms of Clause (iii) of the proviso to Sub-section (1) of Section 139 of the Act could have been the subject-matter of appeal before the Appellate Assistant Commissioner. The exercise of discretion under Subsection (8) of Section 139, articulate or inarticulate, cannot, in my view, be the subject-matter of an appeal in view of the provisions of Section 246 of the Act as indicated before. The question whether the interest that was liable to be charged had been properly waived or not, is a question which was not the subject-matter of appeal before the Appellate Assistant Commissioner. Therefore, there cannot be any question of merger of the order of the Income-tax Officer on this aspect of the matter and on the theory of merger it cannot be said that the Commissioner lost his jurisdiction in this case after the order of the Appellate Assistant Commissioner. In the aforesaid view of the matter I am unable to accept the first contention urged in support of this application. \n\n5. The second contention urged in support of this application was that Sub-section (8) of Section 139 gave a discretion to the Income-tax Officer. The exercise of such discretion one way or the other could not be the subject-matter of interference by the revisional power of the Commissioner under Section 263 of the Act. In aid of this submission reliance was placed on the observations of the Division Bench of the Allahabad High Court in the case of Lalloomal Dalai v. Income-tax Officer, District II(i), Kanpur [1959] 36 ITR 397 (All). There the Division Bench observed that it was a matter of discretion with the Income-tax Officer to reduce or waive the interest payable by the assessee, where the tax actually paid by the assessee in advance was less than 80 per cent. of the tax assessed, for the fifth proviso to Section 18A(6) of the Indian Income-tax Act, 1922, only contained an enabling provision giving the Income-tax Officer that power; there was no mandatory direction that he should always do so. In those circumstances the court expressed the view that no question could arise for interference by the court in respect of the exercise of the discretion by the Income-tax Officer. The proposition in the facts of that case cannot, in my view, with respect, be disputed. It cannot also be disputed that where a discretion\n\nhas been given to an officer concerned, the exercise of that discretion one way or the other, unless it is contrary to the settled principles of law or exercised mala fide or on improper materials, cannot be the subject-matter of interference by any revisional or an appellate authority. The question, however, in this case, is, that under proviso (iii) of Sub-section (1) of Section 139 of the Income-tax Act there is an obligation to charge interest from the assessee for late filing of the return. That pliability can only be exonerated in terms of Sub-section (8) of Section 139 of the Act and that exercise of discretion must also be in accordance with the provision of Rule 117A of the Rules. In this case there is no evidence that the Income-tax Officer concerned had exercised discretion or applied his mind to the facts of this case. Counsel for the petitioner contended that where the contention or the submission of the assessee was accepted it was not necessary that that order should be a speaking order. It was only where the contention or submission of the assessee was rejected that the principles of natural justice required that the order should be a speaking order. But where the order was in favour of the contention urged by the assessee, in that case it was not obligatory nor usual that the order should be a speaking order. The fact that there is no mention about this, counsel for the petitioner urged, indicated that the assessee's contention and/or submission was accepted on this point. I am unable to accept this contention. Where the statute gave an authority or jurisdiction for exercise of a discretion on certain objective factors, the exercise of such discretion must be manifest so that whether the discretion has been properly exercised or not could be gathered by all concerned. It is true that if the Income-tax Officer had exercised his discretion under Sub-section (8) of Section 139 of the Income-tax Act, 1961, then unless the Commissioner was of the view that such exercise of discretion was on improper or irrelevant materials or done mala fide, the Commissioner would not have jurisdiction to interfere with such exercise of the discretion. But in this case as apparent from the facts narrated it is not a question of the validity of the exercise of the discretion but it is a question of non-application of law to the facts of this case. If the interest that was liable to be charged under Clause (iii) of the proviso to Sub-section (1) of Section 139 of the Act has not been charged then the order of the Income-tax Officer would be certainly prejudicial to the interest of the revenue and as such the Commissioner has jurisdiction. In aid of the aforesaid view reliance may be placed on the observations of the Kerala High Court in the case of Commissioner of Income-tax v. Cochin Malabar Estates Ltd. . In the aforesaid view of the matter the second contention cannot be accepted. .\n\n6. In the aforesaid view of the matter the application fails and is\ndismissed.\n\n7. The rule nisi is discharged. \n\n8. Interim order is vacated. \n\n9. There will be no order as to costs. \n\n10. Let the operation of this order be stayed for a period of six weeks from the date." }, { "title": "Anand Kumar Saraf And Ors. vs Commissioner Of Income-Tax And Ors. on 29 July, 1993", "url": "https://indiankanoon.org//doc/1143224/", "text": "Anand Kumar Saraf And Ors. vs Commissioner Of Income-Tax And Ors. on 29 July, 1993\nEquivalent citations: [1995]211ITR562(CAL)\nJUDGMENT\n \n\nAjit K. Sengupta, J. \n \n\n1. This appeal arises out of an order passed on March 31, 1989, by a learned single judge of this court, dismissing the writ petition filed by the appellant petitioner. The relevant facts leading to this appeal are as under :\n\n The appellant is being assessed to both income-tax and wealth-tax for last several years. During the previous years relevant to the assessment years 1980-81 to 1985-86, the appellant writ petitioner derived income from proprietary business carried on by him at Surat in the names of Messrs. A.K. Textiles and Messrs. Rachna Textiles and at Calcutta in the name of Messrs. A.K. Saree Centre. The business of the said concerns was that of buying and selling sarees. During September 30, 1980, to January 17, 1983, the appellant writ petitioner operated a current account with the Oriental Bank of Commerce, Surat, in the name of his proprietary concern, Messrs. A.K. Textiles. During the period from June 9, 1983, onwards, the appellant writ petitioner operated another current account with the Oriental Bank of Commerce, Surat branch, in the name of Messrs. A.K. Textiles. During the period from October 9, 1983, the writ petitioner operated a current account with the State Bank of India, Tharpa Bazar, Surat, in the name of his proprietary business \"Rachna Textiles\". Further, during the period from May 3, 1979, to April 20, 1983, the appellant writ petitioner operated a current account with Catholic Syrian Bank Ltd., Burra Bazar Branch, Calcutta, in the name of his proprietary concern \"Messrs. A.K. Saree Centre\". \n\n2. It is an admitted fact that the appellant writ petitioner did not include the income derived by him from the aforesaid three proprietary concerns in his returns of total income filed in respect of the previous years relevant to the assessment years 1981-82 to 1985-86. \n\n3. On or about March 7, 1986, a search was conducted by the income-tax authorities in exercise of the powers vested in them under Section 132(1) of the Income-tax Act, 1961, at the residential premises of the appellant writ petitioner at P-2, Kalakar Street, Calcutta, as well as at the business premises of five different firms, namely, \"Jaree and Saree Stores\", \"Saraf Saree Centre\", \"Annapurna Textiles\", \"Sanwalram Raj Kumar\" and \"Gouri Shankar Saraf\" at 212, Mahatma Gandhi Road, as well as at Ramkumar Rakshit Lane, Calcutta, In the course of the said search, certain jewellery and ornaments and a sum of Rs. 2,600 in cash were found in the bedroom of the appellant writ petitioner. None of these items were seized by the income-tax authorities. On the same date, namely, March 7, 1986, the business premises of the partnership firm, Messrs. Annapurna Textiles, Surat, of which the appellant writ petitioner, was a partner in his capacity as karta of a Hindu undivided family was sealed by the income-tax authorities. Subsequently, on March 26, 1986, the seals on the said business premises of the said Annapurana Textiles, Surat, were removed and the\n\nsearching officials came across certain cheque books and pay-in-slips in respect of the two bank accounts, namely, Current Account No. 253 with the State Bank of India in the name of Messrs. Rachna Textiles and the Current Account No. 1469 with the Oriental Bank of Commerce in the name of Messrs. A.K. Textiles. These two were the proprietary concerns of the appellant writ petitioner. The income of these two proprietary businesses had not been disclosed by the appellant writ petitioner in the income-tax returns filed by him so far. These cheque books and pay-in-slips were seized from the office of Messrs. Annapurna Textiles and the fact of such seizure was noted in the panchnama drawn in the name of the said firm. \n\n4. On or about March 31, 1986, the appellant writ petitioner filed revised returns of income and wealth under the amnesty scheme administered by the Central Board of Direct Taxes through its various Circulars, bearing numbers 423(See [1985] 155 ITR (St.) 45), 432(See [1985] 156 ITR (St.) 162), 439(See [1985] 156 ITR (St.) 163), 440(See [1985] 156 ITR (St.) 164), 441(See [1985] 156 ITR (St.) 165), 450(See [1986] 158 ITR (St.) 134), 451(See [1986] 158 ITR (St.) 135), 453(See [1986] 159 ITR (St.) 9), 456(See [1986] 159 ITR (St.) 123), 472(See [1986] 162 ITR (St.) 17) and 474(See [1986] 162 ITR (St.) 57). Under the said amnesty scheme, taxpayers were invited to come forward and file returns of income and wealth disclosing therein their true income and wealth irrespective of what the assessees might have done earlier. It was represented by the Board that such taxpayers need not have any apprehension that they would be subjected to any penalty or prosecution so long as they came forward to declare their correct income and wealth suo motu before the Tax Department. The taxpayers were also invited to disclose their true income and wealth even in respect of past assessment years irrespective of whether the assessments for those years were pending or completed. It was represented by the Board that the taxpayers would have to pay taxes at the rates applicable to those years, but would not be subjected to any penalty or prosecution. \n\n5. It was further represented that interest would be waived in all such cases. The said amnesty scheme was extended from time to time up to March 31, 1987, and was made applicable in the case of returns of income and wealth for the assessment year 1986-87 and earlier assessment years. In its Circular bearing No. 451 (see [1986] 158 ITR (St.) 135), dated February 17, 1986, the Central Board of Direct Taxes issued certain clarifications on the Press Note issued by it in connection with the said amnesty scheme. Questions Nos. 7, 12, 19 and 30 contained in the said Circular bearing No. 451 (see [1986] 158 ITR (St.) 135) and the replies thereto are relevant for the purpose of this appeal and the same are set out hereunder (at pages 136, 137, 138, 139) : \n\n\"Question No. 7 : Where the investigations in the case of persons other than the assessee indicate concealment of income by the assessee and the assessee makes a true and full disclosure of his income, would he be entitled to immunity under these circulars ? \n\nAnswer : Yes.\" \n\n\" Question No. 12 : Can immunity given by the circulars be availed of by assessees whose premises have been searched by the tax authorities ? \n\nAnswer : No.\" \n\n\"Question No. 19 : Kindly clarify the expression 'before detection by the Department' ? \n\nAnswer : If the Income-tax Officer has already found material to show that there has been concealment, that would mean that the Department has detected the concealment. If the Income-tax Officer only had prima facie belief that would not mean concealment has been detected.\" \n\n\"Question No. 30 : Whether an assessee could make a declaration in respect of assets or income which is not the subject-matter of seizure ? \n\nAnswer : Yes, if it has not been already found out in the course of the search.\" \n\n6. In the covering letter dated March 31, 1986, accompanying the revised return filed by the appellant writ petitioner, it was, inter alia, stated that the income now declared in respect of the assessment years 1981-82 to 1985-86 included income derived from business done by him in the names of Messrs. A.K. Saree Centre, Messrs. A.K. Textiles, Surat, and Messrs. Rachna Textiles, Surat. It was also stated that this declaration covered all transactions which were incorporated in the books and documents seized by the Department in the course of search carried out in the office and residential premises on March 7, 1986. The assessee requested that no penalty should be initiated and all interest leviable under Sections 139(8), 215/217 of the Income-tax Act, 1961, should be waived. The appellant writ petitioner also filed wealth-tax returns in respect of the assessment years 1982-83 to 1985-86 including therein the assets represented by the income so disclosed in the revised returns of income filed as aforesaid.\n\n7. The Income-tax Officer completed both the income-tax and wealth-tax assessments of the appellant writ petitioner, but did not grant the benefit of amnesty scheme to the assessee on the ground that revised returns were filed after the search carried out by the authorities at the office and residential premises of the assessee and in the course of such search, certain documents relevant to the income and wealth now disclosed by the assessee had been duly seized. \n\n8. The appellant writ petitioner, however, contended before the tax authorities that he was entitled to declare the hitherto undisclosed income of his said two proprietary businesses, namely, Messrs. A.K. Textiles and Messrs. Rachna Textiles, under the amnesty scheme for the following reasons : \n\n(a) No books of account or documents were seized from the possession of the assessee writ petitioner in the course of the said search. The jewellery and cash found in the course of the search were also not seized, \n \n\n(b) The cheque books and pay-in-slips in respect of the said two bank accounts in the names of Messrs. A.K. Textiles and Messrs. Rachna Textiles were recovered from the possession of Messrs. Annapurna Textiles of Surat and included in the purported panchnama prepared in the name of the said firm. The said cheque books and pay-in-slips did not indicate the name of the proprietor. The said bank accounts were in existence from 1983 onwards. \n\n(c) No examination of the said bank accounts was made by the Income-tax Officer assessing the writ petitioner till March 31, 1986. The Income-tax Department did not have even a prima facie belief with regard to the said bank accounts. \n\n(d) Further, the Income-tax Department had no idea whatsoever as to whether the said bank accounts related to regular disclosed business transactions or not. \n\n(e) Until March 31, 1986, the Income-tax Department had not come to know that the said bank accounts belonged to the writ petitioner and/ or that these were not disclosed in the returns filed so far. \n\n(f) Furthermore, in the course of the said search, the searching officials did not at all come across the other two bank accounts being Account Nos. 507 and 884 with the Catholic Syrian Bank in the name of A.K. Saree Centre and with the Oriental Bank of Commerce, Surat, in the name of A.K. Textiles, respectively. Income disclosed through these\n\nbank accounts were not found by the Department but were being voluntarily disclosed by the/writ petitioner. \n\n9. On or about November 1, 1988, the appellant writ petitioner wrote a letter to the Commissioner of Income-tax, pointing out that although he had filed income-tax and wealth-tax returns under the amnesty scheme, the Assessing Officer had initiated penalty proceedings both under the Income-tax Act and the Wealth-tax Act and had also charged interest. The Commissioner of Income-tax was requested by the appellant writ petitioner to delete the interest charged by the Income-tax Officer and drop the penalty proceedings initiated in the course of the assessments already completed and not to charge interest or penalty in respect of the pending assessments. It appears that the Commissioner of Income-tax on November 11, 1988, passed the following order : \n\n\"Anand Kumar Saraf, assessment years 1980-81 to 1985-86 : \n\n Miscellaneous order : \n\nAfter going through the facts of the case, I am of the opinion that the benefit of amnesty scheme be given to the assessee for all the years for which the assessee has submitted the returns under that scheme both under the Income-tax Act and the Wealth-tax Act.\" \n\n10. On or about February 23, 1989, the Commissioner of Income-tax issued the impugned notice under Section 154 of the Income-tax Act, 1961, proposing to rectify certain errors, which, according to him, were apparent from the record in the Miscellaneous Order dated November 11, 1988, passed by his predecessor-in-office. The appellant writ petitioner through his tax consultant's letter of March 11, 1989, sought clarification as to the nature of mistakes which were sought to be rectified through the said impugned notice. The Commissioner of Income-tax, West Bengal-VI, Calcutta, issued necessary clarifications through his letter of March 7, 1989. It was stated by the Commissioner that the miscellaneous order passed by his predecessor-in-office on November 11, 1988, was erroneous and a mistake had crept therein inasmuch as the said order was passed under a mistaken belief that the income-tax and wealth-tax returns filed by the appellant writ petitioner were covered by the amnesty scheme. The succeeding Commissioner of Income-tax, West Bengal-VI, now felt that the returns filed by the appellant writ petitioner were not covered by the amnesty scheme and he, therefore, wanted to rectify the miscellaneous order passed by his predecessor-in-office under Section 154 of the Income-tax Act, 1961, as well as under Section 35 of the Wealth-tax Act, 1957.\n\n11. At this stage, the appellant writ petitioner moved a writ petition under Article 226 of the Constitution challenging, inter alia, the initiation of proceedings under Section 154 of the Income-tax Act, 1961, as well as Section 35 of the Wealth-tax Act, 1957, by the said impugned notice dated February 23, 1989, issued by the Commissioner of Income-tax, West Bengal-VI, Calcutta. This writ petition was dismissed by an order dated March 31, 1989, passed by Mr. Justice Manoj Kumar Mookherji. The said order was in the following terms : \n \"Having regard to the observations made by the Supreme Court in the case of Titaghur Paper Mills Co. Ltd. v. State of Orissa, and the fact that the Income-tax Act, 1961, provides for a complete machinery through which the petitioner will be able to challenge any order, if made adverse to his interest pursuant to the impugned notice and that the impugned notice does not suffer from any jurisdictional infirmities, I reject this application.\"\n\n12. The appellant writ petitioner thereafter filed an appeal with a stay petition. The following order was passed on such appeal by the Division Bench of this court on August 11, 1989 : \n\n\"It has been clarified on behalf of the Revenue that the grounds on which the impugned proceedings under Section 154 of the Income-tax Act, 1961, had been initiated have been precisely set out in the affidavit-in-opposition dated July 13, 1989, filed by Indu Kumar Nandi, and more particularly, in paragraphs 3 to 6 thereof and that the appellant-petitioner will require to meet only those grounds and none other. \n\nOn the facts and in the circumstances of the case, we are of the view that the appellant-petitioner should, without prejudice to his rights and contentions, and more particularly, without prejudice to the contention that the proceedings in question are wholly without jurisdiction, show cause against the proposed action. He will be at liberty to take the point of jurisdiction before the competent authority, who will decide the said issue without in any manner being inhibited or influenced by anything which has happened during the course of judicial proceeding in the trial court and the pendency of the present appeal. He will be afforded all reasonable opportunity to contest or controvert the materials sought to be relied on against him and also given personal hearing himself or through his accredited representative including a tax consultant or advocate. The order which may ultimately be passed in the course of such proceedings will not be enforced for a period of four weeks from the date of service thereof on the appellant-petitioner who will have liberty to challenge the\n\nsame by way of a supplementary affidavit in the present proceeding on all available grounds. \n\nThe applicant-petitioner will show cause on or before September 15, 1989. The proceedings will conclude in accordance with law and keeping in view the observations made in the course of this order by passing the final order on or before December 31, 1989. Liberty is reserved to the appellant-petitioner to file a fresh application seeking appropriate interim relief, if any, after the service of such order. \n\n The application is disposed of in terms of the foregoing order.\" \n\n13. Pursuant to the leave granted by the appeal court, the appellant writ petitioner appeared before the Commissioner of Income-tax, West Bengal-VI, Calcutta, and contested the validity of the rectificatory proceedings initiated by the said impugned notice dated February 23, 1989, proposing to rectify the miscellaneous order dated November 11, 1988, passed earlier in his case. The Commissioner of Income-tax, West Bengal-VI, Calcutta, however, felt that the initiation of rectificatory proceedings was in order and that the law nowhere provided for the passing of such an omnibus order like the miscellaneous order dated November 11, 1988, under any provision either of the Income-tax Act, 1961, or the Wealth-tax Act, 1957, The Commissioner felt that the search and seizure cases have been treated as a separate category under the amnesty circulars and in answer to question No. 12 of Circular No. 451 (see [1986] 158 ITR (St.) 135), dated February 17, 1986, it was made very clear by the Central Board of Direct Taxes that immunity under the amnesty scheme could not be availed of by persons whose premises had been searched. \n\n14. The Commissioner of Income-tax, therefore, passed the rectificatory order on January 1, 1990, holding that the miscellaneous order dated November 11, 1988, was not a legal and proper order and that the appellant writ petitioner was not entitled to the benefit of the amnesty scheme, since this was a case of search and seizure. \n\n15. The appellant-writ petitioner thereafter affirmed a supplementary affidavit also challenging the legality or validity of the said order dated January 1, 1990, passed by the Commissioner of Income-tax under Section 154 of the same Act along with an application seeking stay of operation of the said order dated January 1, 1990, passed by the Commissioner of Income-tax, West Bengal-VI, Calcutta. \n\n16. At the outset, we must observe that the learned judge dismissed the writ application solely on the ground that the appellant-writ petitioner\n\nhas an alternative remedy under the Income-tax Act, 1961. Existence of an alternative remedy is not an absolute bar to the issue of a writ. If the conditions precedent for assumption of jurisdiction under Section 154 were not satisfied, in that event, the concerned officer could not have any jurisdiction to initiate proceedings for rectification. If the absence of jurisdiction is apparent, the court should interfere in a writ proceeding. It has been laid down by the Supreme Court in Maharana Mills (P.) Ltd. v. ITO [1959] 36 ITR 350 that the question whether there is a mistake apparent from the record or not pertains to the question of jurisdiction of the concerned officer to initiate proceedings for rectification. In that view of the matter, we are unable to uphold the ground on which the writ application was dismissed.\n\n17. In this appeal, we are concerned with the legality and/or validity of the notice dated February 23, 1989, issued by the Commissioner of Income-tax, West Bengal-VI, Calcutta, under Section 154 of the Income-tax Act, 1961, and the subsequent order dated January 1, 1990, passed by his successor-in-office holding that the original miscellaneous order dated November 11, 1988, passed by his predecessor-in-office was not valid and it disclosed a mistake apparent from the records and that the appellant-writ petitioner was not entitled to any benefit of the amnesty scheme since this was a case of search and seizure. \n\n18. The short point for consideration in this case is whether an assessee whose premises had been searched before the filing of revised returns under the amnesty scheme is entitled to the benefits of the amnesty scheme. As already stated earlier, the amnesty scheme was announced by the Central Board of Direct Taxes through Press Notes and the same was administered through various Circulars issued by the Central Board of Direct Taxes from time to time. Circular No. 451 (see [1986] 158 ITR (St.) 135), dated February 17, 1986, purported to explain the various questions raised in connection with the amnesty scheme. Four questions, namely, questions Nos. 7, 12, 19 and 30, which are relevant in this context have already been quoted earlier. \n\n19. It is true that in answer to question No. 12, the Central Board of Direct Taxes clarified that no immunity given by the circular can be availed of by the assessees, whose premises had been searched by the tax authorities, the Central Board of Direct Taxes proceeded to clarify in answer to question No. 30 in the same circular that an assessee could make a disclosure in respect of assets or income which had not been found in the course of the search. In answer to question No. 19, seeking clarification\n\nas to the meaning of the expression \"before detection by the Department\", the Central Board of Direct Taxes further clarified that \"if the Income-tax Officer had already found materials to show that there had been concealment, that would mean that the Department had detected the concealment. If the Income-tax Officer had only prima facie belief that would not mean that the concealment had been detected\". \n\n20. A combined reading of the answers to all these questions and in particular to different questions and answers in the said Circular No. 451 (see [1986] 158 ITR (St.) 135), as a whole leads us to believe that an assessee whose premises had been searched could not claim immunity and other benefits given in the amnesty scheme only in respect of assets or income which had been found and/or seized by the tax authorities before the filing of revised returns by the assessee concerned and also in those cases where the tax authorities had looked into the seized papers and had carried out some investigation (before the furnishing of revised returns by the assessee) to show that the income now declared in the revised return had already been detected by the Department from the papers and documents found and seized in the course of the search. \n\n21. In this case, we find that the search was carried out at the residential premises of the petitioner on March 7, 1986, at Calcutta and on March 26, 1986, at Surat. It is true that certain documents had been found and seized in the course of the said search, but none of these documents had been scrutinised by the tax authorities prior to March 31, 1986, when the assessee-appellant herein filed revised returns both for income-tax and wealth-tax. \n\n22. It is an admitted fact that the assessee disclosed fully and truly his income and wealth in such revised returns and had also paid taxes in due time as provided under the amnesty scheme. Since the Department had not looked into the seized papers and had not carried out investigation prior to March 31, 1986, it cannot be said that by the mere fact of seizure, the tax authorities could be said to have even a prima facie belief that the concealment of income and wealth by the assessee had been detected. Even if there had been such prima facie belief, the existence of such belief could not deprive the assessee from claiming the immunity and benefits given under the amnesty scheme provided the assessee disclosed his true income and wealth in the revised returns and paid taxes based on such revised returns in due time as prescribed in the amnesty scheme. This has been clearly explained by the Central Board of Direct Taxes in reply to question No. 19 in the said Circular No. 451 (see [1986] 158 ITR (St.) 135), dated February 17, 1986.\n\n23. On the facts and circumstances of this case, it cannot be said that the tax authorities had detected concealment merely by having seized certain books and papers a few days before the furnishing of revised returns by the assessee. In order to show that a concealment had already been detected, it was obligatory on the tax authorities to look into the seized books and documents, verify the entries therein with the income already disclosed by the assessee in his original returns and thereafter if the tax authorities had found that certain income, although found to be reflected in the seized books and records, had not been disclosed by the assessee in the original returns, it could have been said that the concealment had already been detected by the Department prior to the furnishing of revised returns. This is not the case here. \n\n24. The mere stigma of search and seizure cannot shut out the assessee from the amnesty. The scheme is an inducement to evaders to make a clean breast of past evasions and square up accounts with the Revenue. The persons who are left out from this opportunity are those whose concealments have come to light beforehand by investigations and search and seizure operations carried out by the Revenue. The clarifications of the Board in its answer to question No. 19 as to the meaning of the expression \"before detection by the Department\" show that if the assessing authority has a prima facie belief that would not mean detection. The dictionary meaning of the word \"detect\" is \"to discover the true especially hidden or disguised character\" or \"to discover or determine the existence, presence or fact\" (see Webster's Third New International Dictionary, 1976 edition). In the instant case, certain documents and papers were seized. They might or might not reveal concealment. Even the seizure could not lead to a prima facie belief as to concealment as the contents, purport and the implications of the documents were yet to be gone into. Therefore, at the point of time the return under the amnesty scheme was filed, the Assessing Officer admittedly had no idea as to whether the seized papers would reveal any concealment. The mere fact that the petitioner-appellant's case was awaiting a probe with reference to his past records as well as extrinsic sources could not lead to his ouster from the scope of the scheme. \n\n25. Furthermore, the scope of proceedings under Section 154 of the Income-tax Act, 1961, is very limited. It is by now well-settled that an issue which is debatable or on which there could conceivably be two opinions cannot be the subject-matter of rectification. A glaring and obvious mistake either of fact or law can alone be corrected under Section 154.\n\n26. On the facts and circumstances of this case, in our view, the impugned notice issued by the Commissioner of Income-tax on February 23, 1989, was clearly without jurisdiction and, therefore, all proceedings taken in pursuance thereto including the impugned order dated January 1, 1990, passed in this case under Section 154 of the Income-tax Act, 1961, must be held to be without jurisdiction, illegal, invalid and void ab initio. \n\n27. We, accordingly, allow this appeal and quash both the impugned notices dated February 23, 1989, as well as the order dated January 1, 1990, passed by the Commissioner of Income-tax under Section 154 of the said Act in response thereto. \n\n 28. There will be no order as to costs. \n\n Bhagabati Prasad Banerjee ,J. \n\n29. I agree." }, { "title": "Commissioner Of Income-Tax vs Smt. V.J. Aleykutti, T.J. Joseph And Dr. ... on 31 January, 1991", "url": "https://indiankanoon.org//doc/414643/", "text": "Commissioner Of Income-Tax vs Smt. V.J. Aleykutti, T.J. Joseph And Dr. ... on 31 January, 1991\nEquivalent citations: [1991]189ITR711(KER)\nAuthor: K.S. Paripoornan\nBench: K.S. Paripoornan\nJUDGMENT\n \n\nK.S. Paripoornan, J. \n \n\n1. This batch of 13 references are at the instance of the Revenue. The respondents in this batch of cases are three different assessees, Smt. V.J. Aleykutty, Shri K.J. Mathew and Shri T.J. Joseph. Some important aspects that arise for consideration in these cases are common. So the cases were heard together as agreed to by the Revenue and the respondent-assessees. \n\n2. Before we advert to the question/questions of law referred in the various cases by the Income-tax Appellate Tribunal (in short, \"the Tribunal\") for the decision of this court, it will be useful to specify the different assessees in the different cases and the assessment years involved in the said cases. As stated earlier, in all the cases, the references are at the instance of the Revenue, the applicant.\n\n3. The details of the various cases are as follows : \n\n Income-tax References Nos. 71 and 72 of 1986 : \n Respondent-assessee\t... Smt. V.J. Aleykutty.\n Assessment years . . . 1969-70 and 1970-71.\n \n \n\n Income-tax References Nos. 64 and 65 of 1988 : \n Respondent-assessee\t... Sri T.J. Joseph.\nAssessment years ... 1969-70 and 1970-71.\n \n \n\n Income-tax References Nos. 68 and 69 of 1988 : \n Respondent-assessee\t.. , Sri K.J. Mathew.\nAssessment years ... 1969-70 and 1970-71. \n \n\n4. In the above batch of six cases, we are concerned with the interpretation to be placed on Section 64(1)(v) of the Income-tax Act, 1961, before the section was substituted by the Taxation Laws (Amendment) Act, 1975, with effect from April 1, 1976. \n\n5. In the next batch of cases, the details are as follows : \n\n Income-tax Reference No. 34 of 1986 : \n Respondent-assessee\t... Dr. K.J. Mathew.\n Assessment year . . . 1976-77. \n \n\n Income-tax Reference No. 141 of 1986 : \n Respondent-assessee\t... Smt V.J. Aleykutty.\nAssessment year ... 1978-79. \n \n\n Income-tax Reference No. 53 of 1987 : \n Respondent-assessee\t... Dr. K.J. Mathew.\nAssessment year ... 1978-79. \n \n\n Income-tax Reference No. 67 of 1988 : \n Respondent-assessee\t... Dr. K.J. Mathew.\nAssessment year ... 1977-78. \n \n\n Income-tax References Nos. 88 to 90 of 1988 : \n Respondent-assessee\t... Smt. V.J. Aleykutty.\nAssessment years ... 1980-81 to 1982-83. \n \n\n6. In this later batch of seven cases, we are concerned with the interpre\ntation to be placed on Section 64(1)(vii) of the Income-tax Act, 1961, after\nits amendment by the Taxation Laws (Amendment) Act, 1975, read along\nwith Explanation 3 to the section. \n\n7. We shall broadly state the facts in the first batch of six cases, Income-tax References Nos. 71 and 72 of 1986, 64 and 65 of 1988 and 68 and 69 of\n\n1988. The facts are substantially similar in all the cases. The assessees made gifts to three trusts. Their minor children are the beneficiaries in the trusts. From the statement of the case, it is seen as follows : \n\n Income-tax References Nos. 71 and 72 of 1986 : (Illustrative case) \n \n\n8. The assessee, an individual, gifted Rs. 12,500 on March 30, 1967, and a sum of Rs. 12,000 on March 30, 1968, to one \"KKM Trust\". The assessee gifted a sum of Rs. 25,000 on March 31, 1969, to one \"Oriental Trust\". Again, the assessee gifted the following sums to one \"Kudakaseri Trust\", which was formed on August 9, 1965 : \n\n Rs. 5,000 on August 9, 1965 ; \n\n Rs. 15,000 on March 22, 1966 ; and \n \n\n Rs. 12,000 on March 31, 1967. \n\n9. There were many beneficiaries in the above three trusts. Admittedly, the assessee's six children were entitled to 85% of the income of the KKM Trust. Similarly, the assessee's three minor children were entitled to 50% of the income in the Oriental Trust. The three minor children of the assessee were the sole beneficiaries in Kudakaseri Trust. The income due to the minor children of the assessee from the above three trusts was sought to be included in the income of the assessee under Section 64(v) of the Income-tax Act as it stood then. On an earlier occasion, in connection with the assessment years 1969-70 and 1970-71, the matter came up\" to this court at the instance of two of the assessees, Smt. K.J. Aleykutty and Sri K.J. Mathew, in Income-tax References Nos. 32 and 33 of 1976. By judgment dated June 16, 1978, this court opined that the Tribunal, in concurring with the decision of the authorities below, in the matter of the inclusion of the minors' income in that of the assessee's income, did not approach the question from a proper perspective and failed to advert to the decisions of the Supreme Court in CIT v. Prem Bhai Parekh [1970] 77 ITR 27 ; AIR 1970 SC 1518 and Smt. Mohini Thapar v. CIT [1972] 83 ITR 208. So, this court declined to answer the question whether the income arising to the minor children of the assessee by virtue of all being beneficiaries in the trust can rightly be included in the total income of the assessee under Section 64(v) of the Income-tax Act, 1961. The Tribunal was directed to dispose of the appeals in accordance with law and in the light of the observations contained in the said judgment. Thereafter, the matter was considered by the Tribunal in the appeals relating to one of the assessees, Sri K. J. Mathew, and an order was passed by the Tribunal for the assessment years 1969-70 and 1970-71. The order is dated June 30, 1979, which is the main order which has been followed in the case of the other two assessees also, and for all the subsequent years, by the Income-tax Appellate Tribunal.\n\n10. The main order passed by the Tribunal, dated June 30, 1979, is annex-ure C in Income-tax References Nos. 68 and 69 of 1988. After adverting to the history of the case, Section 64(v) of the Income-tax Act, and the decision of the Supreme Court in Prem Bhai Parekh's case [ 1970] 77 ITR 27, the Tribunal concluded thus :\n \"But, this is in pursuance of the provisions of the trust deed. It is true that a portion of the income of the trusts is derived from the amounts donated to them by the assessee. But then, in view of the principle laid down by the Supreme Court in Prem Bhai Parekh's case [1970] 77 ITR 27, it cannot be said that the income accruing to the minor children of the assessee which accrues to them by reason of the provisions of the trust deed had arisen either directly or indirectly from the amounts donated by the assessee to the two trusts.\"\n\n11. When the appeals of the other assessees for the years 1969-70 and 1970-71 came up for consideration before the Tribunal, as also when the appeals of the three assessees for the subsequent years came up, the Tribunal relied upon its main order dated June 30, 1979, rendered in I. T. A. Nos. 331(Coch) of 1970-71 and 423(Coch) of 1971-72, relating to the assessment years 1969-70 and 1970-71, the appeals relating to the assessee, Sri K.J. Mathew. \n\n12. We shall now extract the question/questions of law referred to this court in the above first batch of cases, Income-tax References Nos. 71 and 72 of 1986 ; 64 and 65 of 1988 and 68 and 69 of 1988--relating to the assessment years 1969-70 and 1970-71 of the assessees, Smt. V.J. Aleykutty, Sri T.J. Joseph and Sri K.J. Mathew, and they are as follows : \n\n Income-tax References Nos. 71 and 72 of 1986 : \n \"Whether, on the facts and in the circumstances of the case, the income from the three trusts accruing to the minor children of the assessee is assessable in the hands of the assessee under Section 64(v) of the Income-tax Act, 1961?\" \n\n Income-tax References Nos. 64 and 65 of 1988 : \n \"Whether, on the facts and in the circumstances of the case, the income from the three trusts accruing to the minor children of the assessee is assessable in the hands of the assessee under Section 64(v) of the Income-tax Act, 1961?\" \n\n Income-tax References Nos. 68 and 69 of 1988: \n \"Whether, on the facts and in the circumstances of the case, the income from the two trusts accruing to the minor children of the assessee is assessable in the hands of the assessee under Section 64(v) of the Income-tax Act, 1961?\" \n\n13. Section 64(1)(v) of the Income-tax Act which arises for consideration in these cases, as it stood at the relevant time, is to the following effect:\n\n \"Section 64 (Section 16(3) of 1922 Act) amendments.--Sub-section (1) was substituted for the following by the Taxation Laws (Amendment) Act, 1975, with effect from April 1, 1976 : \n\n (1) In computing the total income of any individual, there shall be included all such income as arises directly or indirectly-- ... \n\n (v) to any person or association of persons from assets transferred otherwise than for adequate consideration to the person or association of persons by such individual, to the extent to which the income from such assets is for the immediate or deferred benefit of his or her spouse or minor child (not being a married daughter) or both.\" \n\n14. The question/questions of law referred in the second batch of cases-Income-tax Reference No. 34 of 1986, (assessment year 1976-77, Dr. K. J. Mathew), Income-tax Reference No. 141 of 1986 (assessment year 1978-79, Smt V.J. Aleykutty), Income-tax Reference No. 53 of 1987 (assessment year 1978-79, Dr. K.J. Mathew), Income-tax Reference No. 67 of 1988 (assessment year 1977-78, Dr. K.J. Mathew) and Income-tax Reference Nos. 88 to 90 of 1988 (assessment years 1980-81, 1981-82 and 1982-83, Smt. V.J. Aleykutty) are to the following effect: \n\n Income-tax Reference No. 34 of 1986 : \n\n \"Whether, on the facts and in the circumstances of the case, the income of the minor children of the assessee from trusts of which they are the beneficiaries is includible in the total income of the assessee under Section 64(1)(vii) of the Income-tax Act, 1961? \n\n Whether, on the facts and in the circumstances of the case, and also in view of the fact that the comparable Section 64(1)(v) renumbered as 64(1)(vii) with effect from April 1, 1976, is Section 16(3)(b) and not Section 16(3)(a)(iv) of the 1922 Act, the Tribunal is right in relying on Prem Bhai Parekh's case [1970] 77 ITR 27 (SC), without relying on Sir Harinder Singh's case [1972] 83 ITR 416?\"\n\n Income-tax Reference No. 141 of 1986 : \n \"Whether, on the facts and in the circumstances of the case, the income received by the minor children of the assessee who are beneficiaries in a trust to which the assessee had transferred funds/assets could be assessed as the income of the assessee under Section 64 of the Income-tax Act, 1961?\" \n\n Income-tax Reference No. 53 of 1987: \n \"Whether, on the facts and in the circumstances of the case, the income received by the minor children of the assessee who are beneficiaries in a trust to which the assessee had transferred funds/assets could be assessed as the income of the assessee under Section 64 of the Income-tax Act, 1961?\"\n\n Income-tax Reference No. 67 of 1988 : \n\n \"(1) Whether, on the facts and in the circumstances of the case, the income of the minor children of the assessee from trusts of which they are the beneficiaries is includible in the total income of the assessee under Section 64(1)(vii) of the Income-tax Act, 1961? \n\n (2) Whether, on the facts and in the circumstances of the case and also in view of the fact that the comparable Section 64(1)(v) renumbered as 64(1)(vii) with effect from April 1, 1976, is Section 16(3)(b) and not Section 16(3)(a)(iv) of the 1922 Act, the Tribunal is right in relying on Prem Bhai Parekh's case [1970] 77 ITR 27 (SC), without relying on Sir Harinder Singh's case [1972] 83 ITR 416?\"\n\n Income-tax References Nos. 88 to 90 of 1988: \n \"Whether, on the facts and in the circumstances of the case, the income received by the minor children of the assessee who are beneficiaries in a trust to which the assessee had transferred funds/assets could be assessed as the income of the assessee under Section 64 of the Income-tax Act, 1961?\" \n\n15. In this later or second batch of cases, the provision of law which is relevant is Section 64(1)(vii) of the Income-tax Act, 1961. It is as follows : \n\n 64. Income of individual to include income of spouse, minor child, etc. -- (1) In computing the total income of any individual, there shall be included all such income as arises directly or indirectly -- ... \n\n (vii) to any person or association of persons from assets transferred directly or indirectly otherwise than for adequate consideration to the person or association of persons by such individual, to the extent to which the income from such assets is for the immediate or deferred benefit of his or her spouse or minor child (not being a married daughter) or both.\" \n\n16. We heard counsel for the Revenue, Mr. P.K.R. Menon, as also counsel for the respondent-assessee, Mr. George. Even at the outset, we expressed to counsel that it will be extremely difficult to answer the question/questions referred to this court by the Tribunal, in the absence of the various trust deeds under which income has been received by the children of the assessees. Counsel for the assessees has filed C. M. P. No. 933 of 1990 in Income-tax Reference No. 71 of 1986 along with an affidavit of the advocate, dated March 5, 1990, stating that, for a proper adjudication of the case, a perusal of the trust deeds referred to in the assessment order as well as in the appellate order are very much necessary and since the Revenue has not produced the relevant trust deeds, the assessee may be permitted to produce photostat copies of the relevant trust deeds of \"The K. K. M. Trust\", \"The Oriental Trust\" and \"The Kudakaseri Trust\" before this court. Photostat copies of the above trust deeds have also been filed along with the C. M. P. as annexures R1-(A), R1(B) and R1 (C). We are of the view that it is not permissible or proper to let in additional material in this court in a reference and at the time of the hearing. It is for the Tribunal to forward the above trust deeds along with the statement of the case, either on its own initiative or at the request of any of the parties to the reference application. If the trust deeds have not been included as annexures to the statement of the case by the Tribunal, it is not permissible for this court to permit any one of the parties either to produce copies of relevant documents or to peruse the same. We dismiss C. M. P. No. 933 of 1990 in Income-tax Reference No. 71 of 1986. \n\n17. We are of the opinion that, for satisfactorily answering the question referred to this court in the above cases, a perusal of the relevant trust deeds is necessary. In the main order passed by the Tribunal dated June 30, 1979, the Tribunal largely relied on the decision of the Supreme Court in CIT v. Prem Bhai Parekh [ 1970] 77 ITR 27 and held that it cannot be said that the income that accrued to the minor children of the assessee, by reason of the provisions of the trust deed, had arisen either directly or indirectly by the amounts donated by the assessee to the trust. The Tribunal concluded that the income accruing to the minor children of the assessee from the trust cannot be assessed in the hands of the assessee. In Prem Bhai Parekh's case [1970] 77 ITR 27 (SC), the assessee who was a partner of a firm having 7 as. share therein, retired from the firm on July 1, 1954. Thereafter, he gifted Rs. 75,000 to each of his four sons, three of whom were minors. There was a reconstitution of the firm with effect from July 2, 1954, whereby the major son became a partner and the minor sons were admitted to the benefits of partnership in the firm. The question was whether the income arising to the minors by virtue of their admission to the benefits of partnership in the firm could be included in the total income of the assessee under Section 16(3)(a)(iv) of the Income-tax Act which was to the following effect (at pp. 29, 30):\n\n \"In computing the total income of any individual for the purpose of assessment, there shall be included--(a) so much of the income of a wife or minor child of such individual as arises directly or indirectly .... \n\n (iv) from assets transferred directly or indirectly to the minor child, not being a married daughter, by such individual otherwise than for adequate consideration.\" \n\n18. In construing the above section, the Supreme Court held thus (at p. 30) : \n \"There is no dispute that the assessee had transferred to each of his minor sons, a sum of Rs. 75,000. It may also be that the amount contributed by those minors as their share in the firm came from those amounts. But the question still remains whether it can be said that the income with which we are concerned in this case arises directly or indirectly from the assets transferred by the assessee to those minors. The connection between the gifts mentioned earlier and the income in question is a remote one. The income of the minors arose as a result of their admission to the benefits of the partnership. It is true that they were admitted to the benefits of the partnership because of the contribution made by them. But there is no nexus between the transfer of the assets and the income in question. It cannot be said that that income arose directly or indirectly from the transfer of the assets referred to earlier. Section 16(3) of the Act created an artificial income. That section must receive strict construction as observed by this court in CIT v. Keshavlal Lallubhai Patel [1965] 55 ITR 637 (SC). In our judgment before an income can be held to come within the ambit of Section 16(3), it must be proved to have arisen--directly or indirectly--from a transfer of assets made by the assessee in favour of his wife or minor children. The connection between the transfer of assets and the income must be proximate. The income in question must arise as a result of the transfer and not in some manner connected with it.\"\n\n19. In a recent decision in CIT v. Prahladrai Agarwala [1989] 177 ITR 398 (SC) ; AIR 1990 SC 270, the scope of the above decision has been highlighted in paragraph 8 of the judgment thus :\n \"There is no doubt that the wife became a partner because of the capital contributed by her in the firm, but, as observed by the High Court, in the judgment under appeal, it was upon agreement by the remaining partners that she became a member of the partnership. The mere contribution of the capital by the wife to the firm would not automatically have entitled her to partnership in the firm. The partnership was based on agreement, and it is the event of agreement between the partners that brought the assessee's wife into the firm as a partner.\" \n\n20. It is largely by relying upon the decision in Prem Bhai Parekh's case [1970] 77 ITR 27 (SC) that the Tribunal held that the income accruing to the minors from the various trusts cannot be included in the income of the respective assessees. We should state that the language of Section 16(3)(a)(iv) of the Indian Income-tax Act, 1922, and Section 64(1)(v) of the Income-tax Act, 1961, seem to be different. Whether the dictum laid down in Prem Bhai Parekh' case [1970] 77 ITR 27 will ipso facto apply to the situation governed by Section 64(1)(v) of the Income-tax Act, 1961, requires further evaluation. That apart, the crucial aspect in Prem Bhai Parekh's case [1970] 77 ITR 27 (SC), as explained in CIT v. Prahladrai Agarwala [1989] 177 ITR 398 (SC), is that it is as a result of the agreement between the partners that the minor (or the wife) were entitled to the benefits or became a partner in the firm and as a result of such membership in the firm, the minor (or the wife) received the income. In other words, it is not the mere contribution of capital by the minor (or the wife) in the firm that entitled the minor (or the wife) to membership in the firm automatically. It is as a result of a further agreement between the partners that the minor (or the wife) became entitled to the benefits of the firm and received the income in question. The receipt of such an income was said to be not as a result of the transfer and the connection between the gift obtained by the minor (or the wife) and the income received by the minor (or the wife) from the firm was said to be remote. How far the ratio laid down in Prem Bhai Parekh's case [1970] 77 ITR 27 (SC) is applicable to the present case requires further appraisal.\n\n21. The Revenue contends that the decision of the Supreme Court in Col. H.H. Sir Harinder Singh v. CIT [1972] 83 ITR 416, which construed Section 16(3)(b) of the Indian Income-tax Act, 1922, is more relevant, so far as this case is concerned. Section 16(3)(b) of the Indian Income-tax Act, construed by the Supreme Court in the said decision, is as follows (at p. 422) :\n\n \"16. (3) In computing the total income of any individual for the purpose of assessment, there shall be included-- ... \n\n (b) so much of the income of any person or association of persons as arises from assets transferred otherwise than for adequate consideration to the person or association by such individual for the benefit of his wife or a minor child or both.\" \n\n22. In the said decision, the Supreme Court has made a distinction between a direct transfer of assets by the assessee to his wife or minor child and a transfer of the assets to any other person for the benefit of his wife or minor child or both and has analysed the scope of the section in that light (at p. 424) :\n\n \"The former provision clearly refers to assets transferred directly or indirectly to the wife by the husband and the latter, provision refers to assets transferred directly or indirectly to the minor child not being a married daughter.... \n\n From a plain reading of Section 16(3)(b) it is clear that what is to be included, in computing the total income of the assessee, is that part of the income of the trust which is received for the benefit, in this case, of the minor daughter.\" \n\n23. Placing heavy reliance on the decision of the Supreme Court in Col. H.H. Sir Harinder Singh's case [1972] 83 ITR 416, counsel for the Revenue contends that this is a single case where there is a transfer of assets to trustees under the deed of trust for the benefit of the settlor's minor children and the case is plainly hit by Section 64(1)(v) of the Income-tax Act, 1961, before April 1, 1976, and by Section 64(1)(vii) after April 1, 1976. It is true that Section 64(1) of the Income-tax Act should be strictly construed. Even so, the court cannot ignore the clear and unambiguous expression contained in the statute. All expressions used in the statute must receive a proper interpretation--Vide CIT v. Manilal Dhanji [1962] 44 1TR 876 (SC) and Col, H.H. Sir Harinder Singh's case [1972] 83 ITR 416 (SC) page 423. It appears that Section 64(1) of the Income-tax Act was enacted to guard against a growing tendency on the part of the assessees in making attempts to avoid or reduce tax liability by means of settlements and to provide against the disposal by the assessees of a part of their property in such a way that the income will no longer be received by them while, at the same time, retaining powers over or interest in the property or its income.--See Tulsidas Kilachand v. CIT [1961] 42 ITR 1 (SC) page 4.\n\n24. On a resume of the above, it is evident that it is essential to find out on what basis the minor children of the assessees received income from the various trusts. The various aspects that arise for consideration are : \n\n (1) Who created the trust ? \n\n (2) Who are its beneficiaries ? \n\n (3) What are the terms and conditions under which the beneficiaries received income ? \n\n (4) Who are all the persons who contributed to the corpus of the trusts; and what are the various clauses in the trust deeds by which the corpus is to be administered and income distributed to the various beneficiaries? \n\n25. These and other aspects are germane to the enquiry and also to consider whether the income received by the various beneficiaries are includible in the income of the different assessees. It does not appear from the order of the Tribunal that the various trust deeds were perused and their terms evaluated by the Tribunal before finding that the income that accrued to the various beneficiaries under the three different trusts are not includible in the income of the various assessees. What is more, in forwarding the statement of the case, the Tribunal has not chosen to annex the trust deeds as part of the statement of the case. An interpretation of the various trust deeds is highly essential to understand the basic facts and the applicability of the relevant provisions of law to the cases on hand. In the absence of the trust deeds, we are not in a position to answer the question/questions of law referred to this court. We should also indicate that the relevant statutory provision which falls to be considered in the first batch of cases--Income-tax References Nos. 71 and 72 of 1986, 64 and 65 of 1988 and 68 and 69 of 1988--is Section 64(1)(v) of the Income-tax Act, 1961, before its substitution by the Taxation Laws (Amendment) Act of 1975. The relevant statutory provision in the second batch of cases for the years subsequent to April 1, 1976, is Section 64(1)(vii) of the Income-tax Act, 1961. The phraseology of the above two provisions seems to be different. The decision which has been relied on to interpret Section 64(1)(v) of the Act as also Section 64(1)(vii) of the Act is one which was rendered in the context of Section 16(3)(a)(iv) of the Indian Income-tax Act, 1922, the language of which also seems to be a little different. These and other aspects have not been borne in mind at all by the Tribunal when it mechanically adopted the reasoning contained in the decision of the Supreme Court in Prem Bhai Parekh's case [1970] 77 ITR 27 (SC) and held that the income received from various trusts by the minor children of the different assessees is not includible in the income of the assessees. We are of the view that the Tribunal has not evaluated and appraised all basic facts and the relevant statutory provisions before reaching the decision it did. The decision rendered by the Appellate Tribunal is not in accordance with law.\n\n26. Therefore, we decline to answer, the question/questions of law referred to this court in this batch of 13 cases. We direct the Income-tax Appellate Tribunal to restore the respective appeals to file and dispose of the appeals afresh in accordance with law and in the light of the observations contained hereinabove. \n\n27. The references are answered as above. \n\n28. A copy of this judgment under the seal of this court and the signature of the Registrar will be forwarded to the Income-tax Appellate Tribunal, Cochin Bench." }, { "title": "Life Insurance Corporation Of India & ... vs Gangadhar Vishwanath Ranade (Dead) By ... on 8 September, 1989", "url": "https://indiankanoon.org//doc/47829/", "text": "Life Insurance Corporation Of India & ... vs Gangadhar Vishwanath Ranade (Dead) By ... on 8 September, 1989\nEquivalent citations: 1990 AIR 185, 1989 SCR SUPL. (1) 97, AIR 1990 SUPREME COURT 185, 1989 (4) SCC 297, (1989) 3 JT 637 (SC), (1990) 2 BANKLJ 177, 1989 3 JT 637, 1989 66 COM CAS 858, (1989) 180 ITR 1\nAuthor: Jagdish Saran Verma\nBench: Jagdish Saran Verma, N.D. Ojha\n PETITIONER:\nLIFE INSURANCE CORPORATION OF INDIA & ANR.\n\n\tVs.\n\nRESPONDENT:\nGANGADHAR VISHWANATH RANADE (DEAD) BY LRS.\n\nDATE OF JUDGMENT08/09/1989\n\nBENCH:\nVERMA, JAGDISH SARAN (J)\nBENCH:\nVERMA, JAGDISH SARAN (J)\nOJHA, N.D. (J)\n\nCITATION:\n 1990 AIR 185\t\t 1989 SCR Supl. (1) 97\n 1989 SCC (4) 297\t JT 1989 (3)\t637\n 1989 SCALE (2)499\n\n\nACT:\n Income Tax\t Act, 1961--Sections 226(3) (vi) and\t 281\n--Assignment of policies by insurer Assignment accepted by\nLIC--ITO of opinion that transfer of policy with intent to\ndefraud Revenue--Inordinate delay by LIC in making statement\non oath before ITO--Liability of LIC to pay\tinterest to\nassignee of policies\tfor delay in fulfilling statutory\nobligation.\n\n\n\nHEADNOTE:\n One\t Sh. G.V. Ranade took four policies on his own\tlife\nfrom the LIC during the period. 1958 to 1960. In April\t1969\nG.V. Ranade assigned absolutely all these four policies in\nfavour of his wife Smt. Kamalabai G. Ranade and the assign-\nment was duly registered by the LIC. These policies\twere\npaid up and the date of maturity of these were 14.9.72,\n28.12.73, 9.11.75 and 21.12.75.\n There were some income tax dues against the said\tG.V.\nRanade\tfor recovery of which income tax officer 'commenced\nrecovery proceedings.\tThe Income Tax\tOfficer\t on 27.1.71\nissued a notice under Section 226(3) of the Income Tax\tAct,\n1961 to the Manager of the LIC at Nagpur directing the\t LIC\nto pay to I.T.O. forthwith any amount due from the LIC to\nor, held by the LIC for or on account of the said Ranade to\nmeet the amount due from Ranade as arrears of\tincome\ttax.\nThe Divisional Manager of the LIC at Nagpur intimated\tthis\nfact of receipt of the notice under section 226(3) of\t the\nIncome\tTax Act 1961 to the assignee of these policies\tSmt.\nKamalabai G. Ranade, suggesting that she take steps to\t get\nthe notice vacated in order to safeguard her interest in the\npolicies. By further correspondence the ITO required the LIC\nto deposit the amount of Rs.3415.70 payable\tagainst\t the\nfirst policy which was to mature on 14.9.72 and the\t LIC\ninformed the assignee that the moneys due under the policies\nwill be paid to her only after her getting the notice served\non LIC by the ITO vacated.\n On 5.9.72 Smt. kamalabai G. Ranade flied a Writ Petition\nin the\t High Court of Bombay impleading LIC and the\t ITO\nclaiming several reliefs including a direction to the\t LIC\nfor payment of Rs.3415.70 and also to make a statement\tthat\nno part of the said amount is due to G.V.\n98\nRanade\tnor does the LIC hold any part of the sum for or on\naccount\t of Ranade. This Writ Petition was dismissed in\nlimine. Smt. Kamalabai G. Ranade filed an appeal by special\nleave in this court and this court disposed of the appeal on\nthe counsel for the LIC stating that he would file\t the\nnecessary statement on oath in accordance with S. 226(3)(vi)\nof the Income Tax Act, 1961 stating that no sum of money is\ndue to the Assessee, insured person, before the ITO except\none policy in respect of which the LIC having already\tpaid\nthe money to ITO no statement need be made and\tconsequently\nno order can\tbe made u/s 226(3)(vi) and the\t appeal\t was\ndisposed of accordingly.\n It\tappears\t that the ITO did not revoke the order of\nattachment inspite of the LIC making the requisite statement\non oath under section 226(3)(vi) of the Income Tax Act on\n5.12.75. This led to the filing of another Writ Petition in\nthe Bombay High Court by Smt. Kamalabai praying for a direc-\ntion to the ITO to revoke all notices issued under section\n226(3)\tto the LIC and to the LIC to pay her the amount\t due\nagainst the policies which had matured. On 4.4.1977 counsel\nfor the ITO produced before the High Court a copy of\t the\norder dated 1.4.77 passed by the ITO withdrawing the notice\nu/s 226(3) of the Income Tax Act and the Writ Petition\t was\ndismissed as withdrawn.\n Smt. Kamalabai then sent notice to the LIC demanding\npayment\t of the total amount due against the four policies\ntogether with interest @ 15% since the delay in payment\t had\nbeen occasioned by the default of the LIC. LIC made\t the\npayment\t of these amounts to her but disputed its liability\nto pay\t interest thereon for the period subsequent to\t the\ndate of maturity on the ground that the delay was occasioned\nby the ITOs notice u/s 226(3). This dispute regarding\t the\nLIC's liability to pay interest led to the filing of\tWrit\nPetition No. 1248 of 1977 decided on January 7, 1981 which\ngives rise to this appeal.\n The impugned judgment holds that the last two policies\nhaving matured on 9.11.75 and 21.12.75 a few days before or\nafter 5.12.75 when the statement on oath u/s 226(3) of\t the\nIncome Tax Act was made by the LIC did not qualify for award\nof such interest which was payable in respect of the first\ntwo which had matured earlier on 14.9.72 and 28.12.73.\tThis\nview of the High Court on which the award of\tinterest is\nbased is assailed on behalf of the appellant.\n The dispute in this appeal is only about the LIC's\nliability for payment of interest on the principal amount\nfrom the date\t of maturity of the first two\tpolicies to\n31.12.75 and the rate of 15% p.a. which is alleged to be\nexcessive.\n99\nDismissing the appeal with costs this Court,\n HELD: In the instant case, admittedly assignment of\t the\npolicies was made by the insured G.V. Ranade and the\tsame\nwas duly accepted and registered by the LIC in April 1969.\nIt is, therefore, obvious that the LIC was bound to act on\nthat assignment in favour of Smt. Kamalabai G. Ranade unless\nthe assignment was held to be invalid by a competent author-\nity on a proper proceeding taken for this purpose [111B]\n Mere issuance of notice under section 226(3) of\t the\nIncome Tax Act, 1961 did not have the effect of invalidating\nthe assignment nor did the casual mention of section 281 of\nthe Income Tax Act, 1961 by the ITO in his letter dated\n28.8.72 result in this consequence. Any further step towards\nformation of the final opinion by the ITO could be taken\nonly after the LIC had made the requisite statement on\toath\nunder section 226(3)(vi) of the Income Tax Act, 1961 on\t the\nbasis of the registered assignment of policies. [111C-D]\n The\t question of revocation of the notice under clause\n(vii) of subsection (3) of Section 226 of the\t Income\t Tax\nAct, 1961 arose in the present case only after the LIC\tmade\nthe requisite statement on oath under section 226(3)(vi) of\nthe Act in view of its consistent stand throughout that\t the\nmoneys\tdue under the policies were held by it for and on\nbehalf of the assignee and not the defaulter. Mere informa-\ntion of the assignment to the ITO and keeping the assignee\ninformed of the ITO's action did not amount to discharge of\nthe statutory obligation under section 226(3)(vi) of the Act\nby the LIC. Sub-section (3) of Section 226 of the Income Tax\nAct, 1961 clearly shows that on a notice thereunder being\nissued\tby the ITO to the LIC in the present case, it\t was\nincumbent on the LIC to make the requisite statement on oath\nunder clause (vi) thereof raising an objection on the basis\nof the\t registered assignment. It was then for the ITO to\nproceed\t further and form his final opinion and\t revoke\t the\nnotice under clause (vii). [112D-E; 113G-H]\n The inordinate delay in making the statement on oath by\nthe LIC under section 226(3)(vi) of the Income Tax Act, 1961\nwas the result of misconstruction of\tthe provisions\t and\nmisappreciation of its liability thereunder. [114B]\n Obviously the assignee of the policies who\t had become\nentitled to receive the amount due thereunder on the dates\nof their maturity must be compensated by the LIC for\t its\nfailure to perform its statutory\n100\nobligation under section 226(3)(vi) of the Income Tax\tAct,\n1961 within a reasonable time. Performance of this statutory\nobligation by the LIC in the present case being after inor-\ndinate delay award of interest to the assignee of the poli-\ncies to whom the payment thereunder had to be made\teven\naccording to the stand of the LIC is,\t therefore, clearly\njustified. [114C-D]\n\n\n\nJUDGMENT:\n CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1979 of\n1981.\n From the Judgment and Order dated 7.1.81 of the Bombay\nHigh Court in Civil Writ Petition No. 1248 of 1977.\nP.P. Rao, Kailash Vasdev and S. Murlidhar for\t the Appel-\nlants.\nA.K. Sanghi for the Respondent.\nThe Judgment of the Court was delivered by\n VERMA, J. This appeal by special leave is\tagainst\t the\njudgment dated January 7, 1981 in Writ Petition No. 1248 of\n1977 of the Nagput Bench of the Bombay High\t Court.\t The\nspecial\t leave\thas been confined only to the\tquestion of\nliability of the appellant, Life Insurance Corporation, to\npay interest for the period after date of maturity of insur-\nance policy, in case of delay in payment. Accordingly,\tthis\nis the only question arising for decision in this appeal.\n The\t writ petition in the High Court was filed by\tSmt.\nKamalabai G. Ranade, the wife of Gangadhar Vishwanath Ranade\nof Nagput. The said G.V. Ranade took four policies on\t his\nown life from\t the Life Insurance Corporation of India\n(hereinafter referred\tto as \"the LIC\") during\t the period\n1958 to 1960. These policies were paid up and the particu-\nlars thereof including their paid up value payable on\t the\ndate of maturity are as under:\n Policy\t Sum\t Paid up\t Date of\n Number\t Assured Value\t Maturity.\n 19620636\t 10,000.00 3415.70\t 14.9.72\n 13932229\t 3,500.00 1118.65\t 28.12.73\n 13969 144\t 5,000.00 892.20\t 9.11.75\n 13972300\t 2,000.00 557.70\t 21.12.75\nIn April 1969 G.V. Ranade assigned absolutely all these four\n101\ninsurance policies in favour of his wife Smt. Kamalabai G.\nRanade and the assignment so madewas duly registered by\t the\nLIC as under:\n\t \"In registering this Assignment the Corpora-\n\t tion makes no admission as to its validity.\n\t\t Nagpur\t\t sd/-\n\t\t Dt. 8.4.69\t P. Divisional Manag-\n\t er\"\n It appears that there were some income tax dues against\nthe said G.V. Ranade for recovery of which Income-tax Offi-\ncer had commenced recovery proceedings. Prior to the date of\nmaturity of these policies the Income-tax\tOfficer\t on\n27.1.1971 issued a notice under section 226(3) of the Income\nTax Act, 1961 to the Manager of the LIC at Nagpur directing\nthe LIC to pay to the ITO forthwith any amount due from\t the\nLIC to\t or, held by the LIC for or on account of the\tsaid\nG.V. Ranadeto meet the amount due from G.V. Ranade as\t ar-\nrears of income tax. This notice further mentioned\t the\nconsequences envisaged by section 226(3) of the Income\t Tax\nAct, 1961. The Divisional Manager of the LIC at Nagput\nintimated the fact of receipt of the notice under section\n226(3) of the Income Tax Act, 1961 to the assignee of these\npolicies, Smt. Kamalabai G. Ranade, suggesting that she take\nsteps to get the notice vacated in order to safeguard\t her\ninterest in the policies. The further correspondence in this\nbehalf between Income-tax Officer, the LIC and the assignee\nshows that the Income-tax Officer required the LIC to depos-\nit the amount of Rs.3415.70 payable against the first policy\nwhich was to mature on 14.9.72 and the LIC kept the assignee\ninformed of this demand by the ITO adding in\t its letter\ndated 27.7.1972 to the assignee that the moneys due under\nthe policies will be paid to her \"only after your getting\nthe notice served on us by the ITO vacated\". This was reit-\nerated by the LIC in its letter dated 11.8.72 to the assign-\nee.\n The\t assignee sent a notice dated 21.8.72\tto the\t LIC\nreiterating that the policies had been absolutely assigned\nto her\t as admitted by the LIC as a result of which\t the\namount\tpayable against the same had to be paid only to\t her\nsince the amount was not held by the LIC for or on account\nof G.V. Ranade. The LIC was also required by this notice to\ntake the necessary steps for revocation of the ITO's notice\nand to make the payment due in respect of all these policies\nto the assignee. The assignee sent a similar notice to\t the\nITO asserting her claim as the assignee to get\t the moneys\npayable\t under\tthe policies. The ITO\tin a letter dated\n28.7.72 addressed to the LIC had added that the alleged\n102\ntransfer of policies by G.V. Ranade to his wife are\tvoid\nwith an intention to defraud the revenue and the case falls\nwithin\tthe mischief of section 281 of the Income Tax\tAct,\n1961; and the LIC was requested to withhold any payment to\nSmt. Kamalabai G. Ranade till further communication from the\nITO.\n On 5.9.1972 Smt. Kamalubai G. Ranade filed a writ peti-\ntion, (S.C.A. No. 861 of 1972), in the High Court of Bombay\nimpleading the LIC and the ITO as respondents therein claim-\ning several reliefs which are mentioned at pages 33 to 35 of\nthe paper-book. The reliefs included a direction to the\t LIC\nfor payment of Rs.3415.70 due on 14.9.72 on maturity of\t the\nfirst policy to Smt. Kamalabai G. Ranade and also to make a\nstatement on oath as contemplated by section 226(3) of\t the\nIncome Tax Act, 1961 that no part of the said amount is\t due\nto G.V. Ranade nor does the LIC hold any part of the sum for\nor on account of G.V. Ranade. This writ petition was\tdis-\nmissed in limine by the High Court on 14.9.72. The amount of\nRs.3415.70 payable against the first policy which matured on\n14.9.72\t was paid by the LIC to the ITO. Smt. Kamalabai G.\nRanade\tfiled an appeal (C.A. No. 373.of 1973)\t by special\nleave in this Court against dismissal of her writ petition\nby the\t Bombay High Court. That appeal was disposed of by\nthis Court on October 6, 1975 as under:\n\t\t\t\"On behalf of the Life Insurance\n\t Corporation of India Mr. Rathi stated that he\n\t would file the necessary statement on oath in\n\t accordance with sub-cl. (vi) of CI. (3) of S.\n\t 226 of the Income Tax Act, 1961 and file it in\n\t Court within two months from today stating\n\t that no sum of money is due to the Assessee,\n\t insured person, before the Incometax Officer.\n\t It will thereafter be open to the Income-tax\n\t Officer to take such other proceedings as he\n\t might consider necessary in order to realise\n\t the amounts due from the assessee. It\t is,\n\t however, stated that in respect of one policy,\n\t the Life\t Insurance Corporation\thas already\n\t paid the money to the Income-tax Officer. In\n\t respect of it no statement need be made\t and\n\t consequently no\torder can be made under S.\n\t 226(3)(vi). The appeal is disposed of accord-\n\t ingly. There will be no order as to costs\".\n In\tpursuance of the above order of this Court, the\t LIC\nfiled on December 5, 1975 the requisite statement on\toath\nunder section\t226(3)(vi) of the Income Tax Act, L961 in\nrespect of the remaining three policies.\n103\n It\tappears\t that the ITO did not revoke the order of\nattachment in spite of the LIC making the requisite state-\nment on oath under section 226(3)(vi) of Income Tax\tAct,\n1961 on 5.12.75. This led to another writ petition (S.C.A.\n302 of 1977) filed in the Bombay High Court by Smt. Kamala-\nbai G. Ranade praying for a direction to the ITO to revoke\nall notices issued under section 226(3) to the LIC and to\nthe LIC to pay to her the amount due against the policies\nwhich had matured. On 4.4.71 counsel for the ITO produced\nbefore\tthe High Court a copy of the\torder dated 1.4.77\npassed\tby the Income-tax Officer withdrawing\t the notice\nunder section 226(3) of the Income Tax Act, 196 1 and\t the\nwrit petition was dismissed as withdrawn.\n Smt. Kamalabai G. Ranade then promptly sent a notice to\nthe LIC demanding payment of the total amount\tdue against\nthese four policies together with interest @ 15% since\t the\ndelay in payment had been occasioned by the default of\t the\nLIC. Admittedly the LIC had made the payment of these\namounts to Smt. Kamalabai G. Ranade in these circumstances.\nThe L.I.C. has not disputed at any stage its liability to\npay to Smt. Kamalabai G. Ranade the amounts due under these\npolicies. However, it has disputed its liability to\t pay\ninterest thereon for any period after the date of maturity\non the ground that the delay was Occasioned by the I.T.O.'s\nnotice under section 226(3). On the other hand, Smt. Kamala-\nbai G. Ranade claimed that the L.I.C. nad wrongfully refused\nto make the\tstatement as contemplated under section\n226(3)(vi) of the Income Tax Act, 1961 resulting in delay in\npayment\t of the moneys after maturity of the policies.\tThis\ndispute regarding the L.I.C.'s liability to pay interest led\nto the filing of the Writ Petition No. 1248 of 1977 decided\non January 7, 1981 which gives rise to this appeal.\n The\t impugned judgment of the Bombay High Court in\tWrit\nPetition No. 1248 of 1977 holds that the last two policies\nhaving\tmatured\t on 9.11. 1975 and 21.12.1975, i.e., a\t few\ndays before or after 5.12.75 when the\t statement on\toath\nunder section 226(3) of the Income Tax Act, 1961 was made by\nthe L.I.C. did not qualify for award of such interest which\nwas payable in respect of the first two which\thad matured\nmuch earlier on 14.9.72 and 28.12.73. For the\tperiod\tcom-\nmencing from the date of maturity of the policy ending\twith\nperformance of the L.I.C.'s obligation to make the statement\nunder section\t226(3)(vi) of the Income Tax Act, 1961 on\n5.12.75\t the L.I.C. has been held liable to pay interest on\nthe basis of its failure to perform\n104\nits statutory\tobligation. This view of the High Court on\nwhich the award of interest is based, is assailed on behalf\nof the appellant.\n The surviving dispute in this appeal is now only .about\nthe L.I.C.'s liability for payment of interest on the prin-\ncipal amount from the date of maturity of the first\t two\npolicies to 31.12.75, and the rate of 15 % per annum which\nis alleged to be excessive.\n Broadly stated, the contention of the appellant is\tthat\nthe appellant\twas not liable to pay any interest for\t the\nperiod\tduring which it was restrained from making the\tpay-\nment on account of the I.T.O.'s notice under section 226(3)\nof the Income tax Act, 1961 and the I.T.O. also adding\tthat\nthe matter fell within the ambit of S. 281 of the Act. On\nthis basis it was urged on behalf of the appellant that\t the\naward of interest on the first two policies from the date of\ntheir maturity\t till 31.12.1975 (statement on oath by\t the\nL.I.C. being made only. on 5.12.1975) is contrary to law.\n To support the main contention of the appellant, that it\nis not\t liable for payment of any interest for\t any period\nafter maturity\t of the policies, Shri\t P.P. Rao, learned\ncounsel\t for the appellant advanced several arguments.\t His\nfirst argument is that the Income-tax Officer was a neces-\nsary party in the writ petition giving rise to this appeal\nand in his absence no effective adjudication of this dispute\ncan be made. The second argument is that the High Court\t has\nmisconstrued section 226(3) of the Income Tax Act, 1961\t and\nthereby wrongly fastened the liability for payment of inter-\nest upto 31.12.75 on the appellant. The third\targument is\nthat the principle of res judicata or atleast\tconstructive\nres judicata,\tas a result of the earlier writ petitions,\nbars the claim for payment of interest in this\t writ peti-\ntion. The fourth argument is that the writ petition (S.C.A.\nNo. 302 of 1977) being withdrawn unconditionally without\nliberty\t to file a fresh petition, this writ petition (W.P.\nNo. 1248 of 1977) is not maintainable. The fifth argument is\nthat the rate of 15% p.a. at which interest has been awarded\nis excessive. The sixth and the last argument is that\t the\nappellant has\tbeen required to make\t double\t payment of\nRs.3415.70 due against the policy which matured on 14.9.1972\ninasmuch as the L.I.C. had already deposited\tthat amount\nearlier\t in September 1972 with the I.T.O. in pursuance to\nthe I.T.O. 's demand.\n In\treply,\tShri A.K. Sanghi, learned counsel for\t the\nrespondent contended that the liability for\t payment of\ninterest has been correctly fastened on the appellant\t be-\ncause of its failure to discharge the statu-\n105\ntory obligation of making the requisite statement on\toath\nunder section 226(3)(vi) of the Income Tax Act, 1961\ttill\n5.12.1975. He\targued that the L.I.C. having accepted\t and\nregistered the absolute assignment made by the insured\tG.V.\nRanade\tin favour of his wife Smt. Kamalabai G.\t Ranade, it\nwas the duty of the L.I.C. to promptly make the requisite\nstatement on oath under section 226(3)(vi) of the Income Tax\nAct, 1961 which it made much later on 5.12.75 in pursuance\nto the\t Court's order to enable the I.T.O. to\t revoke\t the\nnotice issued by him under section 226(3) of the Income\t Tax\nAct, 1961. Shri Sanghi stated that even though the special\nleave granted by this Court is confined only to the question\nof interest and therefore, does not extend to the question\nof alleged double payment of Rs.3415.70 by the\t L.I.C.\t yet\nthe respondent concedes that the amount of Rs.3415.70 depos-\nited by the L.I.C. with the I.T.O. may be refunded by\t the\nI.T.O. to the L.I.C. together with interest, if any, payable\non refund of that amount; and that the respondent does\t not\nlay any claim to that amount from the I.T.O. having obtained\nthat amount from the L.I.C.\n We\tshall first dispose of the last point\trelating to\ndouble payment by the L.I.C. of the amount of Rs.3415.70 in\nview of the express concession made by Shri Sanghi, learned\ncounsel for the respondent that the respondent does not\t lay\nany claim to it and that the L.I.C. may obtain\t its refund\nfrom the I.T.O. In view of this statement of learned counsel\nfor the respondent, Shri Sanghi, it is sufficient to observe\nthat it would be open to the L.I.C. to obtain refund of\t the\namount of Rs.3415.70 deposited by it with the I.T.O. togeth-\ner with interest, if any, payable on the refund by\t the\nIncome\tTax Department, since it has been conceded that\t the\nrespondent does not claim that amount from the I.T.O. We\nshall now deal with the remaining arguments of Shri\tRao,\nlearned counsel for the appellant.\n The first argument of the learned counsel for the appel-\nlant is that the I.T.O. was a necessary party in the\twrit\npetition giving rise\tto this appeal.. We are unable to\naccept this contention. The only claim made in Writ Petition\nNo. 1248 of 1977 decided on 7.1.1981 giving rise to\tthis\nappeal\tis for payment of interest by the appellant, and no\nrelief has been sought against the I.T.O. This being so, for\neffective adjudication of the L.I.C.'s liability towards the\nrespondent, the presence of the I.T.O. is not necessary. The\nrespondent's claim is only against the L.I.C.\twithout\t any\nclaim being made in the alternative or otherwise against the\nI.T.O. The respondent's claim has, therefore, to succeed or\nfail only on the basis of the L.I.C.'s liability vis-a-vis\nthe respondent without involving the I.T.O. or anyone\telse\nin that process. Merely\n106\nbecause the defence of the L.I.C. was based on an act of the\nI.T.O.,\t it was not incumbent for the respondent to implead\nthe I.T.O. in this proceeding when neither any\t relief\t was\nclaimed against the I.T.O. nor was any suggestion of I.T.O.\n's liability for payment of interest made in the writ peti-\ntion. This argument is, therefore, rejected.\n The second argument relating to construction of section\n226(3)\tof the\t Income Tax Act, 1961 is in fact the\tmain\nargument of Shri Rao and, therefore, we shall consider\t the\nsame after disposing of the remaining arguments which\t are\nshorter points.\n The\t third\targument is based on the principle of\t res\njudicata and constructive res judicata on the basis of\t two\nearlier\t writ petitions filed by Smt. Kamalabai\t G. Ranade.\nThe first writ petition was S.C.A. No. 861 of 1972 filed in\nthe Bombay High Court on 5.9.72 prior to the date of maturi-\nty of the first policy claim against,which was required to\nbe paid by the L.I.C. to the assignee, Smt.\t Kamalaba G\nRanade. This was after issuance of the notice under section\n226(3)\tof the Income Tax Act, 1961 by the I.T.O. to\t the\nL.I.C. One of the reliefs claimed therein was a direction to\nthe L.I.C. to make a statement on oath as required by\tsec-\ntion 226(3)(vi) of the Income Tax Act, 1961 that no part of\nthe amount due against the policy maturing on\t14.9.72\t was\ndue to the insured G.V. Ranade nor did the L.I.C. hold\t any\npart of that sum for or on account of the alleged defaulter.\nNo doubt some other reliefs including\t revocation of\t the\nnotice\tunder section 226(3) of the Income Tax Act,\t1961\nwere. also claimed including payment 01' the amount together\nwith the accretions thereto. This writ petition being\tdis-\nmissed,\t Smt. Kamalabai G. Ranade came to this Court by\nspecial leave and Civil Appeal No. 373 of 1973 was disposed\nof by\tthis Court's order dated 6.10.1975 requiting\t the\nL.I.C. to make the necessary statement on oath in accordance\nwith section 226(3)(vi) of the Income Tax Act, 1961 within\ntwo months. It is obvious that with this direction requiring\nthe L.I.C. to make the requisite statement on\t oath under\nsection\t 226(3)(vi) of the Income Tax Act, 1961, no further\nquestion survived in that writ petition and the consequent\ncivil appeal in this Court since the further questions\nincluding payment of interest on the principal amount\twere\nto arise only at a subsequent stage. Asking for any other\nrelief\twas obviously premature at that stage. It is appar-\nently for this reason that this Court did not at that stage\ngo into the other questions relating to the further reliefs\nspecified in that writ petition. That decision cannot,\ntherefore, preclude agitation of the question\tof interest\nsubsequently.\n107\n The next writ petition filed by Smt. Kamalabai G. Ranade\nwas S.C.A. No. 302 of 1977 in the Bombay High\t Court.\t The\nprayer made therein was for a direction to the L.I.C. to pay\nthe principal amount together with interest thereon. In this\nwrit petition also the I.T.O. was impleaded as a party. This\nwrit petition had to be filed because in spite of the L.I.C.\nhaving made the requisite statement under section 226(3)(vi)\nof the\t Income\t Tax Act, 1961 on 5.12.75, the Income-tax\nOfficer had not withdrawn the notice under section 226(3) of\nthe Income Tax Act, 1961 issued to the L.I.C.\tand, there-\nfore, the L.I.C. was not making the payment to the respond-\nent. On 4.4.77 that writ petition was dismissed as withdrawn\nas a result of the I.T.O .'s counsel filing a copy of\t the\norder dated 1.4.1977 withdrawing the I.T.O.'s notice under\nsection\t 226(3)\t of the Income Tax Act,\t 1961 enabling\t the\nL.I.C.\tto make the payment due against the policies to\t the\nrespondent. The operation of the notice under section 226(3)\nof the\t income Tax Act, 1961 by the I.T.O. being the\tonly\nreason\tgiven by the L.I.C. to support its action of\tnon-\npayment to the respondent, it was unnecessary to persue that\nwrit petition when the I.T.O. had made the order withdrawing\nthe notice under section 226(3) of the Act. Admittedly, it\nwas in consequence of the withdrawal of the I.T.O.'s notice\nby order dated 1.4.77 that payment was actually made by\t the\nL.I.C.\tto the respondent. It is, therefore, difficult to\nappreciate how the withdrawal of that writ petition can, in\nany manner, preclude the respondent from raising the ques-\ntion of the L.I.C.'s liability to pay\t interest when\t the\nprincipal amount alone was paid later.\n The\t L.I.C.\t having refused to pay the interest on\t the\nprincipal amount in spite of the inordinate delay in\tpay-\nment, the Writ Petition No. 1248 of 1977 had to be filed\ngiving\trise to this appeal raising only the\tquestion of\nL.I.C.'s liability to pay interest on the principal amount\ndue against the policies. The same is\t therefore, clearly\nmaintainable and the earlier writ petitions cannot, in\t any\nmanner,\t bar the adjudication of this point her,'in for\t the\nreasons\t already given. This contention of learned counsel\nfor the appellant is also, therefore, rejected.\n The fourth contention based on withdrawal of writ peti-\ntion (S.C.A. No. 302 of 1977) being covered by the discus-\nsion relating to the third contention, the same is rejected.\n The fifth argument relates to the rate of interest. Shri\nRao contended that the award of interest @15% p.a. is exces-\nsive even if the L.I.C. is held liable for payment of inter-\nest. Reference was made by\n108\nShri Rao to Section 244 of the Income Tax Act, 1961 provid-\ning for payment of interest on refund which prescribed\t the\nrate of 12% p.a. from 1.7.1972 to 1.10.1984, the increase to\n15% p.a. being made therein only from 1.10.84 by amendment\nof that section. It was urged that the period in question in\nthe present case being prior to 1.10.84 the rate of 15% p.a.\nin excess of the statutory provision of 12% p.a. in Section\n244 of the Income Tax Act, 1961 is unjustified.\t Admittedly,\nthe award of interest, in the present case, for payment by\nthe L.I.C. is not governed by Section 244 of the Income\t Tax\nAct, 1961. Apparently, for this reason, learned counsel\t for\nthe appellant relied on Section 244 of the Income Tax\tAct,\n1961 as of persuasive value. We are not impressed by\tthis\nargument. The High Court has relied on the fact that inter-\nest @ 15% p.a. is reasonable, in the present case, particu-\nlarly in view of the fact that the L.I.C. itself charges\ninterest at that rate. It is sufficient for us to state that\nthere is no material produced, in the present case, to\nsuggest\t that award of interest @ 15% p.a. is excessive to\npermit interference with the rate in this appeal particular-\nly when the High Court has come to the conclusion that\tthis\nis the reasonable rate. This argument also is, therefore,\nrejected.\n The\t only point remaining for consideration now is\t the\nconstruction of Section 226(3) of the Income Tax Act,\t1961\nthe relevant portion of which, reads as under:\n\t \"Other modes of recovery: 226.(1) Notwith-\n\t standing the issue of a certificate to the Tax\n\t Recovery\tOfficer under section 222, the\t In-\n\t come-tax\tOfficer may recover the tax by\t any\n\t one or more of the modes provided in\tthis\n\t section.\n............\n\t (3)(i) The Income-tax Officer may, at any time\n\t or from\ttime to time, by notice\t in writing\n\t require any person from whom money is due or\n\t may become due to the assessee or any person\n\t who holds or may subsequently hold money\t for\n\t or on account of the assessee, to pay to\t the\n\t Income-tax Officer either forthwith upon\t the\n\t money becoming due or being held or at or\n\t within the time specified in the notice\t(not\n\t being before the money becomes due or is held)\n\t so much of the money as is sufficient to\t pay\n\t the amount due by the assessee in respect of\n\t arrears or the whole of the money when it is\n\t equal to or less than that amount.\n\t 109\n\t\t\t(ii) A notice under this sub-section\n\t may be issued to any person who holds or\t may\n\t subsequently hold any money for or on account\n\t of the assessee jointly with any other person\n\t and for the purposes of this sub-section,\t the\n\t shares of the joint-holders in such account\n\t shall be\t presumed, until the\tcontrary is\n\t proved to be equal.\n\t\t\t(iii) A copy of the notice shall be\n\t forwarded to the assessee at his last address\n\t known to the Income-tax Officer, and in\t the\n\t case of\ta joint account to all\t the joint-\n\t holders at their last addresses known to\t the\n\t Income-tax Officer.\n\t\t\t(iv) Save as otherwise provided in\n\t this sub-section, every\t person\t to whom a\n\t notice is issued under this subsection. shall\n\t be bound to comply with such notice, and, in\n\t particular, where any such notice is issued to\n\t a post office, banking company or an insurer,\n\t it shall not be necessary for any pass book,\n\t deposit receipt, policy or any other document\n\t to be produced for the purpose of any entry,\n\t endorsement or the like\t being\tmade before\n\t payment is made, notwithstanding any rule,\n\t practice or requirement to the contrary.\n\t\t\t(v) Any claim respecting any proper-\n\t ty in relation to which a notice\t under\tthis\n\t sub-section has been issued arising after\t the\n\t date of the notice shall be void\t as against\n\t any demand contained in the notice.\n\t\t\t (vi)\tWhere a person\t to whom a\n\t notice under this subsection is sent objects\n\t to it by a statement on oath that the\t sum\n\t demanded or any part thereof is not due to the\n\t assessee\tor that he does not hold any money\n\t for or on account of the assessee, then,\n\t nothing contained in this sub-section shall be\n\t deemed to require such person to pay any\tsuch\n\t sum or part thereof, as the case may be,\t but\n\t if it is discovered that such statement\t was\n\t false in any material particular, such person\n\t shall be personally liable to the Income-tax\n\t Officer to the extent of his own liability to\n\t the assessee on the date of the notice, or to\n\t the extent of the assessee's liability for any\n\t sum due under this Act, whichever is less.\n\t (vii) The Income-tax Officer may, at any\ttime\n\t or\n\t 110\n\t from time to time, amend or revoke any notice\n\t issued under this sub-section or\t extend\t the\n\t time for making any payment in pursuance of\n\t such notice.\n\t\t\t(viii) The Income-tax Officer shall\n\t grant a receipt for any amount paid in compli-\n\t ance with a notice issued under this\tsub-\n\t section,\tand the person so paying shall be\n\t fully discharged\t from his liability to\t the\n\t assessee to the extent of the amount so paid.\n\t\t\t(ix) Any person discharging\t any\n\t liability\t to the assessee after receipt of a\n\t notice under this sub-section shall be person-\n\t ally liable to the Income-tax Officer to\t the\n\t extent of his own liability to the assessee so\n\t discharged or to the extent of the assessee's\n\t liability\t for any sum due under this\tAct,\n\t whichever is less.\n\t\t\t(x) If the person to whom a notice\n\t under this subsection is sent fails to\tmake\n\t payment in pursuance thereof to the Income-tax\n\t Officer, he shall be deemed to be an assessee\n\t in default in respect of the amount specified\n\t in the notice and further proceedings may be\n\t taken against him for the realisation of\t the\n\t amount as if it were an arrear of tax due from\n\t him, in the manner provided in sections 222 to\n\t 225 and the notice shall have the same effect\n\t as an attachment of a debt by the Tax Recovery\n\t Officer in exercise of his powers under\tsec-\n\t tion 222.\"\n\t\t\t\t\t .............\"\n The argument of the learned counsel for the appellant\nis that on receipt of the I.T.O.'s notice under section\n226(3) of the Income Tax Act, 1961, the L.I.C. was not\tleft\nwith the option to make the payment to assignee of\t the\npolicies since the L.I.C. or its officer making the state-\nment on oath under section 226(3)(vi) would thereby\thave\nbeen exposed to personal liability as the defaulter of\t the\nincome\ttax dues. It was argued that in these circumstances\nthe L.I.C. could make the payment only aftter revocation of\nthe notice by the I.T.O.'s Order dated 1.4.77\tand, there-\nfore, the L.I.C. cannot be held liable for payment of inter-\nest for any period prior to revocation of the\tnotice.\t The\nperiod\tfor which the L.I.C. has been held liable to\t pay\ninterest being\t prior to revocation of the notice by\t the\nI.T.O., it was urged that the same was unjustified.\n111\n Having given our anxious consideration to the argument\nwe cannot persuade ourselves to accept the same. On a close\nscrutiny of the provision we find that the benefit claimed\nby the L.I.C. is not available to it, in the facts of\t the\npresent case.\n Admittedly\tassignment of the policies was made by\t the\ninsured\t G.V. Ranade and the same was\t duly accepted\t and\nregistered by the L.I.C. in April 1969. It is, therefore,\nobvious that the L.I.C. was bound to act on that assignment\nin favour of Smt. Kamalabai G. Ranade unless the assignment\nwas held to be invalid by a competent authority in a proper\nproceeding taken for this purpose. It is significant\tthat\nthe L.I.C. never disputed the validity of the assignment and\nwas throughout prepared to act on it. It is undisputed\tthat\nthe assignment\t was not declared invalid by any competent\nauthority. Mere issuance of notice under section 226(3) of\nthe Income Tax Act, 1961 did not have the effect of invali-\ndating the assignment nor did the casual mention of Section\n281 of the Income Tax Act, 1961 by the I.T.O. in his letter\ndated 28.8.72 result in this consequence. Any further\tstep\ntowards\t formation of the final opinion by the I.T.O. could\nbe taken only after the L.I.C. had made the requisite state-\nment on oath under section 226(3)(vi) of the Income Tax Act,\n1961 on the basis of the registered assignment of policies.\nThis act was performed by the L.I.C. only on 5.12.75 which\nled to revocation of the notice under section 226(3) of\t the\nAct, by the I.T.O. The question is of the liability of\t the\nL.I.C. in these circumstances.\n Section 226 consists of several Sub-sections of which\nsub-sections (1) and (3) alone are relevant for our purpose.\nSub-section (1) enables the I.T.O. to recover the tax by\nanyone\tor more of the further modes provided in this\tsec-\ntion. Sub-section (3) deals with one such mode where\t the\ndefaulter's money is held by another person. Clause (i) of\nsub-section (3) enables the I.T.O. by notice in writing to\nrequire any person from whom money is due or may become\t due\nto the assessee or any person who holds or may\tsubsequently\nhold money for or on account of the assessee\tto pay\t the\nIncome-tax Officer that money or so much of it as is suffi-\ncient t6 pay the dues of the assessee in respect of\t the\narrears\t of tax. It is in exercise of this power that\t the\nI.T.O.\thad issued the notice to the L.I.C. in\tthe present\ncase. Obviously, the\tI.T.O. had assumed that the money\npayable\t on maturity of these policies belonged to the\t in-\nsured/assessee/defaulter G.V. Ranade overlooking the\tduly\nregistered assignment\tmade much earlier in favour of\t the\nassessee's wife in April 1969. The further clauses (ii) to\n(v) of sub-section (3) deal with ancillary matters and\talso\nprovide that any\n112\nclaim in respect of property covered by the notice shall be\nvoid after the date of the notice as\tagainst\t the demand\ncontained in the notice.\n Clause (vi) is relevant for the present\tpurpose\t and\nspeaks\tof the obligation of a person to whom such a notice\nhas been sent. Clause (vi) relieves the person receiving\nsuch a\t notice\t from the liability to pay any\tsum to\t the\nI.T.O. in obedience to the notice if he \"objects to it by a\nstatement on oath that the sum demanded or any part thereof\nis not\t due to the assessee or that he does not hold\t any\nmoney for or on account of the assessee\". This clause\tfur-\nther provides that \"if it is discovered that such statement\nwas false in any material particular\" such person shall be\npersonally liable to the I.T.O. to the extent of the asses-\nsee's liability on the date of notice. Clause\t (vii)\tthen\nprovides, inter alia, for amendment or revocation of\t the\nnotice\tissued\tunder this sub-section by the\tI.T.O.\tThis\nstage of amendment or revocation of the notice under clause\n(vii) is reached only after the stage provided in clause\n(vi), in a case where the notice objects that he does\t not\nhold the money for or on behalf of the defaulter of\t tax\ndues.\n It\tis, therefore, obvious that the question of revoca-\ntion of the notice under clause (vii) of sub-section (3) of\nsection 226 of the Income Tax Act, 1961 arose in the present\ncase only after the L.I.C. made the requisite statement on\noath under section 226(3)(vi) of the Act in view of\t its\nconsistent stand throughout that the moneys due under\t the\npolicies were held by it for and on behalf of the assignee\nand not the defaulter. Mere information of the assignment to\nthe I.T.O. and keeping the assignee informed of the I.T.O.'s\naction did not amount to discharge of the statutory obliga-\ntion under section 226(3)(vi) of the Act, by the L.I.C.\t The\nstatute\t having expressly provided the mode of raising\tsuch\nan objection in the form of a statement on oath specified in\nclause\t(vi), performance of that obligation by\t the notice\nhad to be made only in that manner. This statutory obliga-\ntion was performed by the L.I.C. only on 5.12.1975 as stated\nearlier. The personal liability arising after\t making\t the\nrequisite statement on oath as envisaged by clause (vi) is\nonly \"if it is discovered that such statement was false in\nany material particular and not otherwise.\n Learned counsel for the appellant argued that\t the\nrequisite statement under section 226(3)(vi) of the Income\nTax Act, 1961\t could not be made by the L.I.C. since it\ninvolved the risk of exposing the L.I.C. or\tits officer\nmaking\tthe statement on oath to personal liability for\t the\nincome\ttax dues of the assessee/defaulter G.V.\t Ranade. In\nthe first place, such a statement was in fact made without\nhesitation by the\n113\nL.I.C. on 5.12.75 after the assignee was compelled to obtain\nsuch a direction in a writ petition filed by her. That apart\nthe risk visualised on behalf of the L.I.C.,\tin ultimate\nanalysis, is entirely imaginary and not real. The risk of\npersonal liability envisaged in clause (vi) arises only\t \"if\nit is discovered that such statement was false in any mate-\nrial particular\". Thus, there is no risk of personal liabil-\nity of the person making the statement on oath\t unless\t any\nmaterial particular mentioned in the statement is false. The\nstatement on oath required to be made by clause (vi) is only\n\"that the sum demanded or any part thereof is not due to the\nassessee or that he does not hold any money for or on\t ac-\ncount of the assessee\". The L.I.C. itself has taken\t the\nstand throughout that the sum demanded by the notice issued\nunder section\t226(3) of the Income Tax Act, 1961 by\t the\nI.T.O.\tdid not belong to the assessee inasmuch as it\t was\npayable\t only to the assignee, Smt. Kamalabai G. Ranade by\nvirtue\tof the assignment made, accepted and registered in\nApril 1969 much earlier to the date of the notice.\tThis\nbeing so the\tmaking\tof this statement on oath of\t the\nL.I.C.'s own stand which in fact was so made on 5.12.75\t did\nnot involve even remotely the possibility of any risk of\npersonal liability.\n On\tthe contrary, real risk of the L.I.C. being treated\ndeemed\tdefaulter assessee under clause (x) of\t sub-section\n(3) of section 226 of the Act lay in its failure to pay to\nthe I.T.O. after receipt of notice under section 226(3), the\namounts of the matured policies within the time given by the\nI.T.O. or a reasonable time, without objecting to the demand\nby denying its liability to the assessee in\t the manner\nprescribed in clause (vi) thereof, instead of in doing\t so.\nPrudence also required the L.I.C. in its own interest, to\nobject\tto the demand according to clause (vi)\t instead of\nrefusing or delaying the objection. The argument that such a\nstatement was not made since it involved the likelihood of\nexposing the L.I.C. or any of its officers\tto personal\nliability has,\t therefore, no merit. This being the\tonly\nreason\tgiven by the L.I.C. to justify the inordinate delay\nin making the requisite statement under section 226(3)(vi)\nof the Income Tax Act, 1961, it is obvious that this defence\nis untenable.\n Sub-section\t (3) of section 226 of the Income Tax\tAct,\n1961 clearly shows that on a notice thereunder being issued\nby the\t I.T.O. to the L.I.C., in the present case, it\t was\nincumbent on the L.I.C. to make the requisite statement on\noath under clause (vi) thereof raising an objection on\t the\nbasis of the registered assignment. It was then for\t the\nI.T.O.\tto proceed further and form his final\topinion\t and\nrevoke\tthe notice under clause (vii). It was not possible\nfor the assignee of the\n114\npolicies to obtain revocation of the notice by\t the I.T.O.\nwithout\t the requisite statement on oath being made by\t the\nL.I.C.\tas envisaged in clause (vi) of sub-section (3) of\nsection\t 226 of the Income Tax Act. It is obvious that\t the\ninordinate delay in making the statement on oath by\t the\nL.I.C. under section 226(3)(vi) of the Income Tax Act,\t1961\nwas the result of misconstruction of\t the provision\t and\nmisappreciation of its liability thereunder.\n Obviously the assignee of the policies who\t had become\nentitled to receive the amounts due thereunder on the dates\nof their maturity must be compensated by the L.I.C. for\t its\nfailure\t to perform its statutory obligation under section\n226(3)(vi) of the Income Tax Act, 1961 within a reasonable\ntime. We have no doubt that this is the proper\tconstruction\nof section 226(3) of the Income Tax Act, 1961 and the conse-\nquential liability resulting from the failure of the notice\nto raise the objection in the prescribed manner under clause\n(vi) thereof within a reasonable time. Performance of\tthis\nstatutory obligation by the L.I.C., in the present case,\nbeing after inordinate delay, award of interest to\t the\nassignee of the policies to whom the payment thereunder\t had\nto be\tmade even according to the stand of the\t L.1.C.\t is,\ntherefore, clearly justified.\t This contention which is\nreally the main contention urged on behalf of the appellant,\ntherefore, fails and is rejected.\n Consequently, the appeal is dismissed with\t costs.\t The\ncosts are quantified at Rs.2,000.\nR.N.J.\t\t\t\t\t\tAppeal\tdis-\nmissed.\n115" }, { "title": "Sunil Sitaram Mahajan vs Suryakant Pandurang Badave And Ors on 13 June, 2018", "url": "https://indiankanoon.org//doc/125428819/", "text": "Sunil Sitaram Mahajan vs Suryakant Pandurang Badave And Ors on 13 June, 2018\nEquivalent citations: AIRONLINE 2018 BOM 822\nAuthor: R.D. Dhanuka\nBench: R.D. Dhanuka\n wp6778-17\n\nvai\n\n IN THE HIGH COURT OF JUDICATURE AT BOMBAY\n CIVIL APPELLATE JURISDICTION\n\n\n WRIT PETITION NO.6778 OF 2017\n\n\n Shri Sunil Sitaram Mahajan )\n Age 49 years, Occupation : Business, )\n R/At Radhakrishna Colony, Ichalkaranji, )\n Taluka Hatkanangale, District Kolhapur ) ...Petitioner\n\n ....Versus....\n\n 1). Suryakant Pandurang Badave, )\n Age Adult, Occupation : Business, )\n R/At 5/606, Date Mala, Ichalkaranji, )\n District Kolhapur. )\n )\n 2). District Deputy Registrar )\n Co-operative Societies, Kolhapur. )\n )\n 3). Recovery Officer, )\n Shahu Corner Nagari Sahakari )\n Path Sanstha Maryadit, )\n 5/44, Shahu Corner, Ichalkaranji, )\n District Kolhapur. )\n )\n 4). Sou.Pooja Annaso Jadhav, )\n Age Adult, Occupation : Household, )\n R/At Mahavir Housing Society, )\n Kolhapur Road, Ichalkaranji, )\n District Kolhapur. )\n )\n 5). Joint Registrar, )\n Co-operative Societies, Kolhapur )\n Division, Kolhapur. )\n )\n 6). Shivaji Dhondiram Powar, )\n Age Adult, R/At Behind Radha )\n Krishna Talkies, Ichalkaranji, )\n District Kolhapur. )\n )\n\n 1\n\n\n\n\n ::: Uploaded on - 13/06/2018 ::: Downloaded on - 15/06/2018 01:25:45 :::\n wp6778-17\n\n7). Shahu Corner Nagari Sahakari Pat )\n Sanstha Maryadit, Ichalkaranji, )\n 5/44, Near Venkatrao School, )\n Shahu Corner, Ichalkaranji - 416 115 )\n Taluka Hatkanangale, Dist. Kolhapur ) ...Respondents\n\n\nMr.Amit B. Borkar for the Petitioner.\n\nMr.Girish R. Agrawal for the Respondent No.1.\n\nMr.S.H. Kankal, A.G.P. for the State - Respondent Nos.2 and 5.\n\nMr.Pradeep D. Dalvi for the Respondent Nos.4 and 7.\n\nMr.N.J. Patil i/b Mr.Amey N. Patil for the Respondent No.6.\n\n CORAM : R.D. DHANUKA, J.\n RESERVED ON : 4TH MAY, 2018\n PRONOUNCED ON : 13TH JUNE, 2018\n\nJUDGMENT :-\n\n1. By this petition filed under Article 227 of the Constitution of\nIndia, the petitioner has impugned the order and judgment dated 1 st\nFebruary, 2017 passed by the learned Divisional Registrar, Co-\noperative Societies, Kolhapur Division, Kolhapur in Revision\nApplication Nos.373 and 374 of 2016 and the Revision Application\nNos. 409 and 420 of 2016. Learned counsel appearing for the\npetitioner states that all the respondents are served. The statement is\naccepted. Rule. Learned counsel for the respondents waive service.\nBy consent of parties, writ petition is heard finally.\n\n2. The respondent no.4 had obtained a loan from the\nrespondent no.7 i.e. Shahu Corner Nagari Sahakari Path Sanstha\nMaryadit. The respondent no.1 and one Ratanlal Madanlal Bamb\nwere the guarantors for the said loan obtained by the respondent no.4\n\n\n 2\n ::: Uploaded on - 13/06/2018 ::: Downloaded on - 15/06/2018 01:25:45 :::\n wp6778-17\n\nfrom the respondent no.7 society. The borrower as well as the\nguarantors committed default in making repayment of the said loan.\nThe respondent no.7 therefore, filed an application under section 101\nof the Maharashtra Co-operative Societies Act, 1960 (for short \"the\nM.C.S. Act.\") before the District Deputy Registrar, respondent no.2\nherein.\n\n3. On 1st June, 2010, the respondent no.2 issued a recovery\ncertificate in favour of the respondent no.7 society. The said recovery\ncertificate was neither challenged by the borrower nor by the\nguarantors. Pursuant to the said recovery certificate, the respondent\nno.3 attached the immovable property of the respondent no4. The\nproperty of the respondent no.1 bearing City Survey No.12029\nadmeasuring 459 sq. mtrs. at Date Mala, Ichalkaranji was also\nattached. On 26th December, 2012, the auction came to be held in\nrespect of the said property of the respondent no.1. The petitioner\nalong with other four bidders participated in the said auction. The bid\nof the petitioner was the highest. It is the case of the petitioner that\nthe bid of the petitioner was much more than the upset price and was\nthus accepted by the respondent no.3.\n\n4. The petitioner deposited an amount of Rs.5,47,500/-\ntowards 15% of the amount of bid by cheque No.012593 dated 26 th\nDecember, 2012 on the same date drawn on Kalappa Awade\nIchalkaranji Janata Sahakari Bank Limited and thereafter deposited\nthe balance 85% amount of Rs.31,02,500/- by cheque No.12598\ndated 7th January, 2013 drawn on the same Bank within a period of 15\ndays from the date of auction. The petitioner also deposited an\namount of Rs.2,20,000/- towards the stamp duty in respect of the\nproposed sale deed.\n\n 3\n ::: Uploaded on - 13/06/2018 ::: Downloaded on - 15/06/2018 01:25:45 :::\n wp6778-17\n\n\n5. It is the case of the petitioner that since the borrower or the\nguarantors did not pay the amount of auction along with costs plus\n5% amount within 30 days from the date of auction under Rule\n107(13) and other provisions of the Maharashtra Co-operative\nSocieties Rules (for short the \"M.C.S. Rules\"), the respondent no.3\nsent a proposal for confirmation of sale to the respondent no.2 i.e. the\nDistrict Deputy Registrar. The respondent no.2 however, by an order\ndated 21st December, 2013 refused to grant sale certificate in favour\nof the petitioner.\n\n6. The respondent no.3 addressed a letter to the respondent\nno.2 on 6th January, 2014 stating that due to factual incorrect\nstatement, the respondent no.2 had refused to confirm the sale in\nfavour of the petitioner and thus the respondent no.2 shall grant\nconfirmation of sale in respect of the said property in favour of the\npetitioner. The respondent no.2 accordingly issued a notice dated 23rd\nJanuary, 2014 to all the concerned parties to remain present in his\noffice on 3rd February, 2014 for hearing on the objections mentioned\nin the letter dated 6th January, 2014 addressed by the respondent\nno.3 i.e. the Recovery Officer of Shahu Corner Nagari Sahakari\nPath Sanstha Maryadit.\n\n7. Being aggrieved by the said communication dated 6 th\nJanuary, 2014 sent by the respondent no.2, the respondent no.1\nherein filed a Revision Application bearing No.51 of 2014 initially\nwithout making the petitioner a party respondent. The petitioner\nhowever, on his application was later on impleaded as one of the\nrespondent to the said revision application. The petitioner filed a\ndetailed reply raising various issues, including the issue of\n\n 4\n ::: Uploaded on - 13/06/2018 ::: Downloaded on - 15/06/2018 01:25:45 :::\n wp6778-17\n\nmaintainability of the said revision application. The petitioner also\npointed out that the respondent no.1 had already filed a suit (Regular\nCivil Suit No.199 of 2014) which suit was pending on the date of the\nsaid revision application filed by the respondent no.1.\n\n8. By an order dated 20th January, 2015 passed by the\nrespondent no.5 i.e. the Divisional Joint Registrar, Co-operative\nSocieties, the petitioner herein preferred a writ petition (11417 of\n2015) in this Court. By an order and judgment dated 18th March, 2016,\npassed by Shri Justice R.M. Savant, the said writ petition was made\nabsolute. This Court was pleased to set aside the letter dated 21 st\nDecember, 2013 of the District Deputy Registrar, holding that the said\nauthority had erroneously refused the permission on the grounds\nmentioned in the said order and judgment. This Court directed the\nDistrict Deputy Registrar to proceed on the basis of the notice of\nhearing dated 23rd January, 2014 and to conclude the proceedings.\nThe said order and judgment dated 18th March, 2016 was not\nimpugned by any of the respondents.\n\n9. Pursuant to the said order and judgment, the learned\nDistrict Deputy Registrar after hearing all the parties, issued a sale\ncertificate and confirmation of sale by an order dated 12 th September,\n2016 in favour of the petitioner. Being aggrieved by the said sale\ncertificate dated 12th September, 2016, the respondent no.1 filed a\nfresh Revision Application No.373 of 2016. The respondent no.6 filed\nRevision Application No.409 of 2016. By an order dated 1 st February,\n2017, the learned Divisional Joint Registrar, Co-operative Societies,\nKolhapur Division, Kolhapur allowed the said revision applications\nfiled by the respondent nos.1 and 6 and was pleased to set aside the\nsale confirmation order and sale certificate issued by the learned\n\n 5\n ::: Uploaded on - 13/06/2018 ::: Downloaded on - 15/06/2018 01:25:45 :::\n wp6778-17\n\nDistrict Deputy Registrar, Co-operative Societies on 12th September,\n2016 and various orders passed therein. Being aggrieved by the said\norder dated 1st February, 2017, the petitioner herein preferred this writ\npetition under Article 227 of the Constitution of India.\n\n10. Mr.Borkar, learned counsel appearing for the petitioner\ninvited my attention to various annexures to the writ petition including\nvarious orders passed by the authorities from time to time and the\norder and judgment dated 18th March, 2016 passed by this Court in\nWrit Petition No.11417 of 2015 filed by the petitioner thereby allowing\nthe said writ petition. It is submitted that neither the borrower nor the\nguarantors had challenged the recovery certificate dated 1st June,\n2010 issued by the learned District Deputy Registrar, Co-operative\nSocieties, in favour of the respondent no.7 society. Neither the\nborrower nor the guarantors invoked any of the provisions of Rule 107\nof the M.C.S. Rules and did not deposit any amount as contemplated\nunder those provisions for setting aside the sale in favour of the\npetitioner. He submits that the respondent no.1 thus could not have\nfiled the said revision application directly i.e. Revision Application (51\nof 2014) before the Revisional Authority thereby impugning the sale\nand confirmation certificates.\n\n11. Learned counsel strongly placed reliance on the order and\njudgment delivered by this Court on 18th March, 2016 in an earlier Writ\nPetition filed by the petitioner (11417 of 2015) against the order of the\nlearned Divisional Joint Registrar passed on 20 th January, 2015. He\nsubmits that this Court has already held in the said judgment that the\nnotice of hearing issued by the learned District Deputy Registrar by\nno stretch of imagination could be said to be a decision or order so\nas to entitle the respondent no.1 to invoke section 154 of the said\n\n 6\n ::: Uploaded on - 13/06/2018 ::: Downloaded on - 15/06/2018 01:25:45 :::\n wp6778-17\n\nM.C.S. Act. It is held by this Court that the learned Divisional Joint\nRegistrar has exceeded his jurisdiction under section 154 of the\nM.C.S. Act when none was vested in him and thus the said learned\nDivisional Joint Registrar had erred in setting aside the notice of\nhearing dated 23rd January, 2014.\n\n12. It is submitted that the revision application filed by the\nrespondent no.1 which was the subject matter of the Writ Petition\nNo.11417 of 2015 having been already held as not maintainable,\nupon remand of the proceedings before the respondent no.2 and\nupon adverse order passed by the respondent no.2 and in favour of\nthe petitioner upon such remand, could not have been challenged\nonce again by way of the revision application under section 154 of the\nM.C.S. Act. It is submitted by the learned counsel that the revision\napplication challenging the sale and confirmation certificate was not\nmaintainable in view of the respondent no.1 not having applied for\nsetting aside the sale under Rule 107 of the M.C.S. Rules. It is\nsubmitted that the impugned order thus passed by the learned\nDivisional Joint Registrar is in the teeth of the order and judgment\npassed of this Court which was delivered on 18 th March, 2016 in Writ\nPetition No.11417 of 2015 filed by the petitioner against the\nrespondents.\n\n13. In support of the submission that the revision application\nfiled by the respondent no.1 was not maintainable, learned counsel\nfor the petitioner also placed reliance on the judgment of this Court in\ncase of Manager, Adarsh Mahila Nagri Sahakari Bank Limited &\nAnr. vs. State of Maharashtra & Ors., 2012(2) Bom. C.R. 163 and\nin particular paragraphs 6 to 9. He submits that the judgment of this\nCourt in case of Manager, Adarsh Mahila Nagri Sahakari Bank\n\n 7\n ::: Uploaded on - 13/06/2018 ::: Downloaded on - 15/06/2018 01:25:45 :::\n wp6778-17\n\nLimited & Anr. (supra) has been followed by this Court in the said\njudgment dated 18th March, 2016. He submits that though the issue of\nmaintainability of the revision application was raised by the petitioner\nbefore the learned Divisional Joint Registrar, the said contention\nraised by the petitioner has been totally over looked by the Revisional\nAuthority.\n\n14. Learned counsel for the petitioner strongly placed reliance\non Rule 107 (12), (13), (14) and (19) and would submit that the\nrespondent no.1 could have exercised his remedy under one of these\nprovisions before the respondent no.3 itself if he was aggrieved by\nthe auction sale proposed by the respondent no.3 or even after such\nsale was effected within the time prescribed under those provisions\nand on the terms and conditions set out therein. The respondent no.1\nhowever, did not exhaust any of those remedies available in law to\nthe respondent no.1.\n\n15. Learned counsel for the petitioner placed reliance on the\njudgment of the Supreme Court in case of Commissioner of Income\nTax, Bombay South, Bombay vs. M/s.Ogale Glass Works\nLimited, AIR 1954, SC 429 and in particular paragraph 11. He also\nplaced reliance on section 269(SS) and 269(T) which provisions were\ninserted in the year 2004 and 2002 respectively in the Income Tax\nAct, 1961. It is submitted that the petitioner had already made a\ndeposit of amount of 15% on the date of auction by a cheque. Since\nthe amount involved in the said transaction was more than\nRs.20,000/- under the provisions of the Income Tax Act, 1961 and\nmore particularly section 269(SS) and 269(T), the petitioner could not\nhave deposited the said amount in cash.\n\n 8\n ::: Uploaded on - 13/06/2018 ::: Downloaded on - 15/06/2018 01:25:46 :::\n wp6778-17\n\n16. It is submitted that the cheque issued and deposited by the\npetitioner was accepted unconditionally by the respondent no.3. The\ncheque was admittedly encashed in the account of the respondent\nno.3 when deposited. He submits that thus the payment made by a\ncheque by the petitioner thus relate back to the date of the deposit of\ncheque and in law the date of payment was the date of the delivery of\nthe cheque and not when the cheque was honoured upon\npresentation. He submits that the impugned order passed by the\nlearned Divisional Joint Registrar is totally perverse and is contrary to\nthe provisions of the M.C.S. Act and said M.C.S. Rules. The petitioner\nhas already made the entire payment including the payment of stamp\nduty. The respondent no.1 not having raised any objection at any\npoint of time when the auction sale took place within the time\ncontemplated and in the manner as provided under the said Rules,\ncould not have raised an objection subsequently by filing a revision\napplication.\n\n17. Mr.Girish Agrawal, learned counsel appearing for the\nrespondent no.1 (one of the guarantors) on the other hand would\nsubmit that the petitioner had not complied with the mandatory\nrequirement of deposit of 15% on the date of the auction sale in cash\nor by demand draft or by R.T.G.S. The payment made by the\npetitioner by a cheque towards 15% deposit on the date of auction\ncould not even considered as compliance of mandatory requirement\nunder Rule 107(11)(g) of the M.C.S. Rules. He submits that\nadmittedly on the date of issuance of the said cheque, there was no\nsufficient balance in the account of the petitioner. It is submitted that\nthe said Rule 107(11)(g) of the M.C.S. Rules is in pari materia with\nOrder 21 Rule 84 of the Code of Civil Procedure, 1908. Since the\ncheque was admittedly honoured after three days of such deposit, the\n\n 9\n ::: Uploaded on - 13/06/2018 ::: Downloaded on - 15/06/2018 01:25:46 :::\n wp6778-17\n\nsaid deposit could not have been considered as in compliance of Rule\n107(11)(g) of the M.C.S. Rules.\n\n18. In support of this submission, the learned counsel for the\nrespondent no.1 placed reliance on the following judgments :-\n\na). This Court in case of Niranjan D. Woody vs. The South\nIndian Co-op. Bank Ltd. & Ors., 2006(6) ALL MR 144 (paragraphs\n11 to 13),\nb). The judgment of the Punjab & Haryana High Court in case\nof Margaret A. Skinner vs. M/s.Empire Store Connaught Place,\n1975(77) PunLR 64 (paragraphs 8),\n\n\nc). The judgment of the Allahabad High Court in case of Hira\nLal & Ors. vs. Mst.Champa & Ors., AIR 1955 Allahabad, 226\n(paragraphs 4),\nd). The judgment of the Himachal Pradesh High Court in case\nof State Bank of India vs. Mohini Devi, 1998 Law Suit (HP) 28\n(paragraph 25),\ne). The judgment of the Madhya Pradesh High Court in case\nof M/s.Progressive Industrial Enterprises vs. Bank of Baroda &\nOrs., AIR 1989 Madhya Pradesh 177 (paragraphs 7, 9 and 10),\nf). The judgment of the Supreme Court in case of Rao\nMahmood Ahmed Khan vs. Sh.Ranbir Singh & Ors., AIR 1995 SC\n2195 (paragraph 12) and\n\n\n\n 10\n ::: Uploaded on - 13/06/2018 ::: Downloaded on - 15/06/2018 01:25:46 :::\n wp6778-17\ng). The judgment of the Supreme Court in case of C.N.\nParamasivam & Anr. vs. Sunrise Plaza, Through Partner & Ors.,\n(2013)9 SCC 460 (Head Note \"B\").\n\n19. Insofar as the issue of maintainability of the revision\napplication is concerned, it is submitted by the learned counsel that\nthis Court while disposing of the writ petition by an order dated 18 th\nMarch, 2016 in Writ Petition No.11417 of 2015 had made prima-facie\nobservations about the maintainability of the said revision application\nand the said decision was not conclusive on the said issue. It is\nsubmitted that in any event since the order passed by the respondent\nno.2 confirming the sale and the sale certificate was nullity and ex-\nfacie in violation of the provisions of Rule 107, the sale of the property\nin favour of the petitioner was nullity, the revision application filed\nunder section 154 of the M.C.S. Act was maintainable. He placed\nreliance on an unreported judgment of this Court delivered on 7 th\nMarch, 2018 in case of Manisha Bijal Shah vs. Shankar Laxman\nSutar & Ors. in Writ Petition No.1965 of 2013 with companion writ\npetition.\n\n20. It is submitted by the learned counsel that Rule 107(11)(g)\nof the M.C.S. Rules is in pari materia with Order 21 Rule 84 of the\nCode of Civil Procedure, 1908. Since the petitioner had not deposited\n15% of the highest bid amount at the time of purchase of the property\nin auction in cash, the sale of the property in question could not have\nconfirmed in favour of the auction purchasers, in view of the sale\nbeing nullity and in violation of Rule 107(11(g) of the M.C.S. Rules.\nThe said property was required to be re-sold.\n\n21. Mr.Agrawal learned counsel for the borrower also placed\n\n 11\n ::: Uploaded on - 13/06/2018 ::: Downloaded on - 15/06/2018 01:25:46 :::\n wp6778-17\n\nreliance on the following judgments :-\n\na). The judgment of the Supreme Court in case of Assistant\nDirector of Inspection Investigation vs Kum. A.B. Shanthi, AIR\n2002 SC 2188 (paragraph 4),\nb). The judgment of the Supreme Court in case of Manilal\nMohanlal Shah & Ors. vs. Sardar Sayed Ahmed Sayed Mahmad &\nAnr., AIR 1954 SC 349 (paragraph 8),\nc). The judgment of the Supreme Court in case of Balram\nBhasa Ram vs. Ilam Singh & Ors., AIR 1996 SC 2781 (paragraphs\n8 and 9),\n\n\nd). The judgment of the Supreme Court in case of M/s.Shilpa\nShares & Securities & Ors. vs. National Co-operative Bank\nLimited & Ors., AIR 2007 SC 1874 (paragraphs 5 and 6),\ne). The judgment of the Punjab & Haryana High Court in case\nof Ramji Lal & Anr. vs. Sarab Singh (dead) through L.Rs. & Ors.\n2010(4) CCC 501 (P & H) (paragraph 21),\n\n\nf). The judgment of the Punjab & Haryana High Court in case\nof Mehtab Singh Malik vs. M/s.S.R. Buildcon India (P) Ltd. & Ors.,\n2009(4) CCC 417 (P & H) (paragraph 16),\n\n\ng). The judgment of this Court in case of Jagdish\nRadhakisan Kayasth vs. Ramesh N. Wagh & Ors., AIR 2001 Bom.\n152 (paragraph 24 to 29),\n\n\n\n 12\n ::: Uploaded on - 13/06/2018 ::: Downloaded on - 15/06/2018 01:25:46 :::\n wp6778-17\nh). The judgment of the Supreme Court in case of Sarguja\nTransport Service vs. State Transport Appellate Tribunal Gwalior\n& Ors., AIR 1987 SC 88 (paragraph 9),\ni). The judgment of the Supreme Court in case of Kiran\nSingh & Ors. vs. Chaman Paswan & Ors. AIR 1954 SC 340, and\n\n\nj). The judgment of the Supreme Court in case of Gurnam\nSingh (D) Thr. L.Rs. & Ors. vs. Gurbachan Kaur (D) by L.Rs. &\nOrs., AIR 2017 SC 2419 (paragraph 23).\n\n22. Learned counsel for the respondent no.1 distinguished the\njudgment of this Court in case of Shivangi D. Shah & Anr. vs.\nGreater Bombay Co-operative Bank Ltd. & Ors., 2008 SCC\nOnLine Bom. 20 on the ground that the facts before this Court in the\nsaid judgment were totally different. During the course of argument\nbefore this Court, I invited the attention of the learned counsel for the\nparties to an unreported judgment of this Court delivered on 31st\nJanuary, 2013 in case of Shri Daulat Babanrao Tarle & Ors. vs.\nShri Balasaheb Babanrao Tarle in Writ Petition No.5299 of 2012\nwith companion writ petition. Learned counsel for the respondent no.1\ndistinguished the said judgment on the ground that this Court has not\nconsidered the provisions of Order 21 Rule 84 of the Code of Civil\nProcedure, 1908 in the said judgment and on the ground that the\nfacts before this Court in the said judgment were totally different. He\nalso distinguished the other judgments relied upon by the learned\ncounsel for the petitioner, including the judgment of the Supreme\nCourt in case of Commissioner of Income Tax, Bombay South,\nBombay (supra) and would submit that reliance placed by the\nlearned counsel for the auction purchaser on section 269(SS) and\n\n 13\n ::: Uploaded on - 13/06/2018 ::: Downloaded on - 15/06/2018 01:25:46 :::\n wp6778-17\n\n269(T) of the Income Tax Act, 1961 is of no relevance to the facts of\nthis case.\n\n23. Mr.Patil, learned counsel appearing for the respondent\nno.6, who claims to have purchased the property in question from the\nrespondent no.1 submits that neither the auction purchaser nor the\nbank had raised an issue of maintainability of the revision application\nfiled by the respondent no.1 or his client before the Special Recovery\nOfficer and thus cannot be allowed to raise that issue for the first time\nin this writ petition. He placed reliance on section 21 of the Code of\nCivil Procedure, 1908 and Rule 57 of the said M.C.S. Rules in support\nof his submission that the auction of the suit property in favour of the\nauction purchaser is nullity. He submits that office bearers of the\nbank could not have remain present at the time of auction. He\nsubmits that the respondent no.1 has already entered into an\nagreement for sale with his client in respect of the property in\nquestion on 6th July, 2007 for a consideration of Rs.21,49,195/-. Out\nof the said consideration amount, the respondent no.6 has already\npaid a sum of Rs.5.00 lakh to the respondent no.1. Under the said\nagreement for sale, the respondent no.1 had agreed to execute a sale\ndeed in favour of his client on or before 10th November, 2007.\n\n24. It is submitted that the suit property has been auctioned by\nthe Special Recovery Officer without issuing any notice to his client.\nHis client has already filed a suit for various reliefs against the\nrespondent no.1 in a Civil Court which is still pending. His client is\nready and willing to deposit the entire dues of the bank within such\ntime as this Court may direct.\n\n25. Mr.Borkar, learned counsel for the auction purchaser in\n\n 14\n ::: Uploaded on - 13/06/2018 ::: Downloaded on - 15/06/2018 01:25:46 :::\n wp6778-17\n\nrejoinder submits that this Court in the order and judgment dated 18 th\nMarch, 2016 in Writ Petition No.11417 of 2015 has already held that\nthe revision application filed by the guarantor was not maintainable.\nHe submits that all the findings rendered by this Court in the said\njudgment were not prima-facie. He submits that the Revisional\nAuthority cannot set aside the registered document entered into in\nfavour of the petitioner.\n\n26. Insofar as the judgments relied upon by Mr.Agrawal,\nlearned counsel for the respondent no.1 are concerned, it is\nsubmitted that none of those judgments would assist the case of the\nrespondent no.1 or the respondent no.6, who is claiming through the\nrespondent no.1 in view of the fact that in none of those judgments,\nthe Supreme Court as well as the High Courts as the case may be\nhad considered the provisions of section 269(SS) and (TT) which\nwere inserted in the Income Tax Act, 1961 in the year 2004 and 2002\nrespectively. He submits that under the said provisions any payment\nabove Rs.20,000/- for any such transaction in cash was specifically\nprohibited. It is submitted that in any event, no prejudice of any nature\nwhatsoever had caused to any of the respondents even if the said\ncheque towards 15% of the amount was encashed by the bank after\nthree days from the date of deposit of such cheque by the petitioner.\nNo substantial injury is caused to any of the respondents as set out\nunder Rule 107 (14) of the M.C.S. Rules merely because the cheque\nwas encahsed by the bank after three days from the date of such\ndeposit.\n\n27. It is submitted that since the Central Act override the\nprovisions of the State Act i.e. the said M.C.S. Rules in case of\ninconsistency, the provisions of the Income Tax Tax would be binding\n\n 15\n ::: Uploaded on - 13/06/2018 ::: Downloaded on - 15/06/2018 01:25:46 :::\n wp6778-17\n\nand not the provisions of the said M.C.S. Rules. He submits that in\nany event the said Rule 107 of the said M.C.S. Rules does not\nprovide for any cash payment. He submits that even if it is construed\nthat the said Rule 107 of the M.C.S. Rules would contemplate\npayment of 15% of the highest bid amount to be deposited on the\ndate of auction in cash, the same would be contrary to the provisions\nof section 269(SS) and (TT) and 271(d) of the Income Tax Act, 1961.\nHe submits that the letter of the lender bank, if any, thus asking the\npetitioner to deposit the said 15% of the highest bid amount\nimmediately would not be binding upon him being contrary to law. He\nsubmits that in the said order and judgment dated 18 th March, 2016\npassed by this Court in the said Writ Petition No.11417 of 2015 filed\nby the petitioner herein, the impugned letters have been set aside. He\nsubmits that the said judgment would be thus binding on all the\nparties and in view of the said judgment, the revision applications filed\nby the respondent no.1 as well as the respondent no.6 were not\nmaintainable.\n REASONS AND CONCLUSIONS :\n\n28. It is not in dispute that the respondent no.4 had obtained a\nloan from the respondent no.7 society for which the respondent no.1\nand Mr.Ratanlal Madanlal Bamb were the guarantors. The borrowers\nas well as the guarantors committed default in making repayment of\nthe said loan. The recovery certificate was issued by the District\nDeputy Registrar on an application filed by the respondent no.7 under\nsection 101 of the MCS Act. The said recovery certificate dated 1 st\nJune, 2010 issued by the respondent no.2 was admittedly neither\nchallenged by the borrowers nor by the guarantors. The properties\nmortgaged in favour of the respondent no.7 were thereafter attached\nin execution of the said recovery certificate dated 1st June, 2010. The\n\n 16\n ::: Uploaded on - 13/06/2018 ::: Downloaded on - 15/06/2018 01:25:46 :::\n wp6778-17\n\nrespondent no.3 thereafter took steps to auction the said property in\nexecution of the said recovery certificate. Auction sale was admittedly\nconducted on 26th December, 2012 in respect of the property of the\nrespondent no.1.\n\n29. It is not in dispute that the petitioner along with the other\nfour bidders participated in the said auction and that the bid of the\npetitioner was the highest and was much more than the auction price.\nThe bid of the petitioner was accepted by the respondent no.3. It is\nalso not in dispute that on 26th December, 2012 itself the petitioner\ndeposited an amount of Rs.5,47,500/- towards 15% of the amount as\nbid with the respondent no.3 by cheque bearing No.012593 dated 26th\nDecember, 2012 drawn on Kalappa Awade Ichalkaranji Janata\nSahakari Bank Limited. The petitioner thereafter also deposited the\nbalance 85% amount of Rs.31,02,500/- by cheque No.12598 dated\n7th January, 2013 drawn on the same Bank within a period of 15 days\nfrom the date of auction. The said cheque was also honoured when\npresented. The petitioner also deposited an amount of Rs.2,20,000/-\ntowards the stamp duty in respect of the proposed sale deed.\n\n30. It is not in dispute that the said cheque of Rs.5,47,500/-\ntowards 15% of the amount of bid by cheque No.012593 dated 26 th\nDecember, 2012 deposited with the respondent no.3 on the date of\nauction was thereafter deposited by the respondent no.7 in its\naccount and was honoured on 28th December, 2012. The respondent\nno.3 as well as other respondents did not raise any objection when\nthe petitioner had deposited the said amount towards 15% of the\nhighest bid amount by cheque with the respondent no.3 on 26 th\nDecember, 2012 or even thereafter any time prior to the petitioner\ndepositing the balance 15% of the highest bid amount with the\n\n 17\n ::: Uploaded on - 13/06/2018 ::: Downloaded on - 15/06/2018 01:25:46 :::\n wp6778-17\n\nrespondent no.3.\n\n31. The questions that arise for consideration of this court is\n(a) whether the revision application filed by the respondent no.1 and\nthe respondent no.6 under section 154 of the Maharashtra Co-\noperative Societies Act, 1960 were at all maintainable or not ? (b)\nwhether payment of Rs.5,47,500/- made by the petitioner towards\n15% of the highest bid amount by a cheque dated 26th December,\n2012 on the date of auction with the respondent no.3 was in\ncompliance with Rule 107(11) (g) of the MCS Rules or not? (c)\nwhether the petitioner was required to deposit the said 15% amount\nunder Rule 107(11)(g) of the MCS Rules, only in cash or by bankers'\ncheque on the date of auction of the immoveable property.\n\n32. It is not in dispute that the respondent no.3 had sent a\nproposal to the respondent no.2 for confirmation of the sale in respect\nof the property auctioned in favour of the petitioner after the entire\nconsideration was received by the respondent no.3 from the\npetitioner. It is the case of the petitioner that no such proposal was\nrequired to be sent of the respondent no.3 to the respondent no.2 for\nconfirmation. It is not in dispute that by an order dated 21st December,\n2013, the respondent no.2 had refused to grant the sale certificate in\nfavour of the petitioner. Though the petitioner had already made\npayment of the entire amount i.e. the highest bid amount submitted by\nhim, the respondent no.2 refused to confirm and grant sale certificate\nin favour of the petitioner on the ground that the petitioner had not\ndeposited 15% amount of the highest bid on the date of auction.\n\n33. A perusal of the record indicates that the respondent no.3\nvide its letter dated 6th January, 2014 informed the respondent no.2\n\n 18\n ::: Uploaded on - 13/06/2018 ::: Downloaded on - 15/06/2018 01:25:46 :::\n wp6778-17\n\nthat due to factually incorrect statement made in the said order dated\n21st December, 2013, the respondent no.2 had refused to confirm the\nsale in favour of the petitioner and did not issue sale certificate in\nrespect of the said property in question. The respondent no.3\nconveyed to the respondent no.2 that thus it was necessary and in the\ninterest of justice that the confirmation of the sale shall be issued by\nthe respondent no.2 in favour of the petitioner. Pursuant to the said\nletter dated 6th January, 2014 from the respondent no.3, the\nrespondent no.2 issued a notice on 23rd January, 2014 calling upon all\nthe concerned parties to remain present in his office on 3rd February,\n2014 for hearing on the objection mentioned in the letter dated 6th\nJanuary, 2014 issued by the respondent no.3.\n\n34. The respondent no.1 had admittedly challenged the said\nnotice dated 6th January, 2014 issued by the respondent no.2 calling\nall the parties for hearing on the objection mentioned in the letter\ndated 6th January, 2014. The respondent no.1 filed a Revision\nApplication No.51 of 2014 before the Divisional Joint Registrar under\nsection 154 of the MCS Act. The respondent no.1 also filed a regular\ncivil suit bearing no.199 of 2014 for various reliefs. The respondent\nno.5 by an order dated 20th January, 2015 allowed the said Revision\nApplication No.51 of 2014 filed by the respondent no.1. It is not in\ndispute that the petitioner herein filed a writ petition bearing no.11417\nof 2015 in this court impugning the said order dated 20 th January,\n2015 passed by the respondent no.5 thereby allowing the Revision\nApplication No.51 of 2014 filed by the respondent no.1.\n\n35. The said writ petition filed by the petitioner came to be\nallowed. A perusal of the said judgment dated 18th March, 2016\ndelivered by this court on the said writ petition indicates that in the\n\n 19\n ::: Uploaded on - 13/06/2018 ::: Downloaded on - 15/06/2018 01:25:46 :::\n wp6778-17\n\nsaid writ petition, the petitioner had not only impugned the order dated\n20th January, 2015 passed by the respondent no.5 but had also\nchallenged the order dated 21st December, 2013 passed by the\nrespondent no.2 refusing to issue the sale certificate in favour of the\npetitioner on the ground that the petitioner had not paid the 15%\namount on the date of auction of the property in question and also on\nthe ground that the names of the witnesses to the auction were not\nmentioned. A perusal of the said judgment indicates that it is held by\nthis court that the auction proceedings had taken place pursuant to\nthe certificate issued under section 101 of the MCS Act. The record\nclearly disclosed that no recourse was taken against the said\ncertificate by the borrowers or the guarantors. The petitioner had paid\nan amount of Rs.5,47,500/- within the period stipulated and had paid\nthe balance 85% on 7th January, 2013.\n\n36. This court also noticed that the respondent no.1 had not\nchallenged the auction notice or the auction sale which recourse was\navailable under section 107 of the MCS Rules. This court accordingly\nin paragraph (9) of the said judgment observed that the objections as\nmentioned in the letter dated 21st December, 2013 prima facie did not\nhave any substance. The notice for confirmation of sale said to be a\nsequitter to the auction sale that had taken place pursuant to which\nthe purchase price had been paid by the petitioner. It is held that the\nnotice of hearing for confirmation of the sale is therefore a logical\nconsequence of the said auction proceedings and cannot be said to\nbe a \"decision\" or \"order\" so as to enable the respondent no.1 to\ninvoke the revisionary jurisdiction. This court held that the word\n\"decision\" appearing in section 154 would take its colour from the\nword \"order\" appearing in the said provision and therefore in the\ninstant case the notice regarding confirmation of sale is neither a\n\n 20\n ::: Uploaded on - 13/06/2018 ::: Downloaded on - 15/06/2018 01:25:46 :::\n wp6778-17\n\n\"decision\" or an \"order\".\n\n37. This court adverted to the judgment of this court in case of\nManager, Adarsh Mahila Nagri Sahakari Bank Limited & Anr.\n(supra) holding that the order confirming a sale was not an order\nwhich was capable of being challenged under section 154 of the MCS\nAct. This court accordingly held that the Divisional Joint Registrar has\nexceeded his jurisdiction under section 154 of the MCS Act when\nnone was vested in him and therefore erred in setting aside the notice\nof hearing dated 23rd January, 2014. This court accordingly was\npleased to set aside the letter/order dated 21st December, 2013 of the\nDistrict Deputy Registrar on the ground that the said District Deputy\nRegistrar had erroneously refused permission on the ground\nmentioned in the said order dated 21st December, 2013 which were\nuntenable. This court accordingly directed the Deputy Registrar to\nproceed on the basis of the notice hearing dated 23rd January, 2014\nand to conclude the proceedings. It is not in dispute that the said\njudgment delivered by this court thereby setting aside the letter/order\ndated 21st December, 2013 has not been impugned by the\nrespondents.\n\n38. Insofar as maintainability of the revision application filed by\nthe respondent no.1 is concerned, this court held that the notice of\nhearing issued by the District Deputy Registrar by no stretch of\nimagination could be said to be decided or ordered so as to entitle the\nrespondent no.1 to invoke section 154 of the MCS Act. The Divisional\nJoint Registrar has accordingly exceeded his jurisdiction under\nsection 154 of the M.C.S. Act.\n\n39. The question that however arises is whether the\n\n 21\n ::: Uploaded on - 13/06/2018 ::: Downloaded on - 15/06/2018 01:25:46 :::\n wp6778-17\n\nrespondent nos.1 and 6 could file a revision application under section\n154 against the order passed by the respondent no.5 issuing sale\ncertificate and thereby confirming the sale of the property in question\nin favour of the petitioner by an order dated 12th September, 2016. A\nperusal of the order dated 12th September, 2016 passed by the\nlearned District Deputy Registrar, Co-operative Societies, Kolhapur\nthereby confirming the sale and issuing sale certificate indicates that\nthe said order is a reasoned order. It is not in dispute that the\nrespondent no.1 or respondent no.6 had neither challenged the\nrecovery certificate issued by the Deputy Registrar under section 101\nof the MCS Act nor had challenged the auction sale at any point of\ntime.\n\n40. It is also not in dispute that neither the respondent no.1 nor\nthe respondent no.6 had exercised the recourse available under\nRules 107(12), (13), (14) and (19) of the said MCS Rules within the\ntime prescribed under those rules or otherwise. The subject matter of\nthe first revision application filed by the respondent no.1 was the\nnotice dated 23rd January, 2014 i.e. the notice of hearing dated 23rd\nJanuary, 2014 and the letter/order dated 21st December, 2013\nrefusing to grant sanction to the sale of the immoveable property in\nfavour of the petitioner. Insofar as the first revision application\nimpugning the said notice dated 23rd January, 2014 is concerned, the\nsame could not be considered as a decision or order which would\nentitle the respondent no.1 invoking under section 154 of the MCS\nAct.\n\n41. This Court in case of Manager, Adarsh Mahila Nagri\nSahakari Bank Limited & Anr. (supra) has construed section 154 of\nthe MCS Act and also Rule 107 of the MCS Rules and has held that\n\n 22\n ::: Uploaded on - 13/06/2018 ::: Downloaded on - 15/06/2018 01:25:46 :::\n wp6778-17\n\nthe revision application under section 154 of the MCS Act is possible\neither sue motu or on application in respect of only an order passed in\na inquiry or proceeding by a subordinate officer of the revisional\nauthority. It is held that since the borrower did not avail opportunity\nunder sub rule 13 and did not avail remedy available to her under sub\nrule 14, the order confirming the sale was mere formality. It is held\nthat the said order confirming the sale was thus not an order in real\nsense. The order is also an expression of opinion by judicial or quasi\njudicial authority after hearing the parties and after recording reasons\nfor the same. This court accordingly held that the order confirming\nthe sale could not be said to be an order contemplated under section\n154.\n\n\n42. This court in the above referred judgment also held that if\nthe borrower believed that the auction sale was tainted with\nirregularity/mistake or fraud and that because of such, sale she had\nsustained substantial injury etc., the borrower had an ample\nopportunities under sub-rule 14 (i) of Rule 107 to challenge the\nlegality of the sale on the grounds mentioned therein. In this case,\nthe respondent no.1 or respondent no.6 did not make out any case of\nfraud or nullity of the auction sale before this court or before the\nrevisionary authority.\n\n43. This Court in case of Ramchandra Sitaram Mulik & Ors.\nvs. Janata Nagari Sahakari Patsanstha Ltd. and Ors., 2018 (2)\nMh.L.J. 245 has after adverting to the judgment of this Court in case\nof Manager, Adarsh Mahila Nagri Sahakari Bank Limited & Anr.\n(supra) and various other judgments has held that the revision\napplication under section 154 of the MCS Act was not maintainable in\nview of the fact that the sale and confirmation certificate issued by the\n\n 23\n ::: Uploaded on - 13/06/2018 ::: Downloaded on - 15/06/2018 01:25:46 :::\n wp6778-17\n\nDeputy Registrar was not an order which would entitle the borrower or\nthe guarantor invoked under section 154 of the MCS Act. In the said\njudgment, this court also considered the fact that the borrower had not\nchallenged the legality of the sale on the grounds mentioned in Rule\n107(14)(i) of the MCS Rules. In my view the principles laid down by\nthis Court in case of Manager, Adarsh Mahila Nagri Sahakari Bank\nLimited & Anr. (supra) and in case of Ramchandra Sitaram Mulik &\nOrs. (supra) would squarely applies to the facts of this case. I am\nrespectfully bound by those judgments.\n\n44. In my view, the impugned order passed by the learned\nDistrict Deputy Registrar confirming the sale and issuing sale\ncertificate could not have been challenged by way of revision\napplication under section 154 of the MCS Act. The said order\nconfirming the sale was a mere formality and not an order in real\nsense. The order confirming the sale cannot be an order which would\nattract the remedy of the revision application under section 154 of the\nMCS Act.\n\n45. A perusal of the impugned order passed by the Divisional\nJoint Registrar indicates that though an objection of maintainability of\ntwo revision applications filed by the respondent nos. 1 and 6 was\nraised by the petitioner, the said issue of maintainability has not been\nconsidered by the revisioning authority in the impugned order at all.\nIn my view, since the revision application itself was not maintainable,\nthe entire order passed by the revisionary authority is without\njurisdiction and thus deserves to be set aside on that ground itself.\nThe remedy of the respondent nos. 1 and 6 was under Rules 107(12),\n(13), (14) and (19) of the said MCS Rules which the respondent nos.\n1 and 6 admittedly failed to invoke. The respondent nos. 1 and 6\n\n 24\n ::: Uploaded on - 13/06/2018 ::: Downloaded on - 15/06/2018 01:25:46 :::\n wp6778-17\n\ntherefore could not have filed a revision application only against the\norder of confirmation of sale passed by the concerned authority.\n\n46. Insofar as submission of the learned counsel for the\nrespondent no.1 that this court had only made prima facie\nobservations in order and judgment dated 18th March,2016 to the\neffect that the objections mentioned in the letter dated 21st December,\n2013 did not have any substance is concerned, a perusal of the said\njudgment clearly indicates that in later part of paragraph (9) of the\nsaid judgment, this court has set aside the said letter/order dated\ndated 23rd December, 2013 of the District Deputy Registrar on the\nground that the District Deputy Registrar had erroneously refused\npermission on the grounds indicated in the said judgment which were\nuntenable. There is thus no substance in this submission of the\nlearned counsel for the respondent no.1.\n\n47. Since both the parties have addressed this court also on\nthe issue as to whether the entire auction proceedings could be\nconsidered as nullity on the ground that the petitioner had not paid\n15% of the highest bid amount in cash or by bankers' cheque or\ndemand draft on the date of auction and whether the respondent nos.\n1 and 6 were entitled to file a revision application on the ground of\nnullity or fraud, this court will deal with the said issue also. Both the\nparties have relied upon several judgments in support of their rival\ncontentions on this issue which would be dealt with in the later part of\nthis judgment.\n\n48. The undisputed facts on this issue are that the auction of\nthe property in question took place on 26th December, 2012. The bid\nof the petitioner was much more than the upset price. The petitioner\n\n 25\n ::: Uploaded on - 13/06/2018 ::: Downloaded on - 15/06/2018 01:25:46 :::\n wp6778-17\n\nhad already deposited an amount of Rs.5,47,500/- towards 15% of\nthe amount of the highest bid submitted by him by cheque dated 26th\nDecember, 2012 on the date of auction after the petitioner was\ndeclared as the highest bidder. The said cheque was accepted by the\nrespondent no.3 without raising any objection. The said cheque was\nadmittedly deposited by the respondent no.7 subsequently and was\nadmittedly honoured on 28th December, 2012 in the account of the\nrespondent no.7.\n\n49. Neither the respondent no.1 nor the respondent no.7 could\npoint out any terms and conditions of sale requiring that the payment\nof 15% or 85% of the highest bid amount was required to be paid or\ndeposited in cash or by demand draft or by bankers' cheque. Neither\nthe respondent no.1 nor the respondent no.6 challenged the auction\nsale on the ground on nullity or otherwise by invoking any of the\nremedy provided under Rules 107(12), (13), (14) and (19) of the said\nMCS Rules. It is not the case of the respondent nos. 1, 6 or 7 that the\npetitioner had not deposited the 15% amount on the date of auction\nby cheque.\n\n50. A perusal of Rule 107(11)(g) indicates that it provides that\na sum of money equal to 15% of the price of the immoveable property\nshall be deposited by the purchaser in the hands of the recovery\nofficer at the time of the purchase, and in default of such deposit, the\nproperty shall forthwith be re-sold. Rule 107(11)(h) provides that the\nremainder of the purchase money and the amount required for the\ngeneral stamp for the sale certificate shall be paid within thirty days\nfrom the date of sale. It is not in dispute that the remainder amount of\nthe purchase money had been paid by the petitioner within the time\nprescribed in the said provision. The payment of requisite stamp duty\n\n 26\n ::: Uploaded on - 13/06/2018 ::: Downloaded on - 15/06/2018 01:25:46 :::\n wp6778-17\n\nwas also deposited by the petitioner within the time prescribed. The\nsaid rule 107(11)(g) and (h) does not indicate that either the payment\nof 15% or 85% is required to be paid in cash or by demand draft or\nbankers' cheque. In my view there is thus no substance in the\nsubmission of the learned counsel for the respondent nos.1 or 6 that\nthe petitioner having failed to deposit 15% amount on the date of\nauction in cash or by demand draft or by bankers' cheque, the auction\nsale in favour of the petitioner was nullity or illegal.\n\n51. Mr.Borkar, learned counsel for the petitioner placed\nreliance on sections 269SS and 269T of the Income Tax Act, 1961 in\nsupport of his submission that even otherwise since the amount\ntowards 15% highest bid amount under Rule 107(11)(g) was more\nthan Rs.20,000/- the petitioner could not have deposited the said\namount otherwise then by account payee cheque or account payee\nbank draft in view of the bar under sections 269SS and 269T of the\nIncome Tax Act, 1961. He also placed reliance on the judgment of\nSupreme Court in case of Commissioner of Income Tax, Bombay\nSouth, Bombay vs. Messrs Ogale Glass Works Ltd., Ogale Wadi,\nAIR 1954 SC 429.\n\n52. Supreme Court in the said judgment has while construing\nthe provisions of section 82 of the Negotiable Instruments Act, 1881\nhas held that when it is said that a payment by negotiable instrument\nis a conditional payment what is meant is that such payment is\nsubject to a condition subsequent that if the negotiable instrument is\ndishonoured on presentation, the creditor may consider it as waste\npaper and resort to his original demand. It is held that a cheque,\nunless dishonoured, is payment. The payment takes effect from the\ndelivery of the cheque, but is defeated by the happening of the\n\n 27\n ::: Uploaded on - 13/06/2018 ::: Downloaded on - 15/06/2018 01:25:46 :::\n wp6778-17\n\ncondition, i.e. non-payment at maturity.\n\n53. This court in an unreported judgment in case of Shri\nDaulat Babanrao Tarle & Ors. (supra) has adverted to the judgment\nof Supreme Court in case of Commissioner of Income Tax,\nBombay South, Bombay (supra) and also subsequent judgment of\nSupreme Court in case of K. Saraswathy vs. P.S.S.\nSomasundaram Chettiar, AIR 1989 SC 1553 in which it was held\nthat the payment by cheque realized subsequently on the cheque\nbeing honoured and encashed, relates back to the date of the receipt\nof the cheque, and in law the date of payment is the date of delivery\nof the cheque. Payment by cheque is an ordinary incident of the\npresent day life, whether commercial or private and unless it is\nspecifically mentioned that payment must be in cash, there is no\nreason why payment by cheque should not be taken to be due\npayment if the cheque is subsequently encashed in the ordinary\ncourse. In the said judgment, this court also rejected the submission\nof the respondent that on the date of issuance of the cheque, there\nwas no money in the account of the drawer and an arrangement was\nmade subsequently for realizing the cheque holding that there was\nnothing to suggest that the cheque was not honoured in due course\nand the bank had any time declined to honour the said cheque for\nwant of funds in the ordinary course.\n\n54. In my view, the principles of law laid down in the judgment\nof Supreme Court in case of Commissioner of Income Tax,\nBombay South, Bombay (supra) and judgment of this court in case\nof Shri Daulat Babanrao Tarle & Ors. (supra) would squarely apply\nto the facts of this case. In this case also it is not the case of any of\nthe respondents that the cheque deposited by the petitioner was\n\n 28\n ::: Uploaded on - 13/06/2018 ::: Downloaded on - 15/06/2018 01:25:46 :::\n wp6778-17\n\ndishonoured when presented by the respondent no.7 society for\npayment for want of sufficient balance in the account of the petitioner\nor for any other reason.\n\n55. In my view, in view of the specific bar under sections\n269SS and 269T of the Income Tax Act, 1961 from making/depositing\nany payment of Rs.20,000/- or above otherwise then by way of\naccount payee cheque or account payee bank draft, the petitioner\nwas not allowed to make any payment in cash on the date of auction\neven if there would have been a condition for payment of depositing\ncash which in this case did not exist. Not only the petitioner but also\nthe respondent no.7 society and the borrower and guarantors or the\nother bidders were bound to comply with the provisions of the Income\nTax Act, 1961 and the said provision being binding upon them. I am\nnot inclined to accept the submission of the learned counsel for the\nrespondent no.1 that the provisions of sections 269SS and 269T of\nthe Income Tax Act, 1961 was not applicable to the facts of this case\nor that the same were not relevant for the purpose of deciding\nwhether the auction sale confirmed in favour of the petitioner was\nnullity or not.\n\n56. In my view, since there was no specific condition in the\nconditions for sale of the property in question or under rule 107(11)(g)\nof the MCS Rules for depositing the amount in cash only or by\nbanker's cheque or demand draft, the payment deposited by the\npetitioner by cheque admittedly on the date of auction sale was a\nvalid payment in compliance with the provisions of rule 107(11)(g) of\nthe MCS Rules. Merely because the cheque was deposited by the\nbank in its bank account on the next day of such deposit made by the\npetitioner or that the amount was credited in the account of the\n\n 29\n ::: Uploaded on - 13/06/2018 ::: Downloaded on - 15/06/2018 01:25:46 :::\n wp6778-17\n\nrespondent no.7 after two days could not make the said deposit as if\nin contravention of rule 107(11)(g) of the MCS Rules. The\nencashment of the cheque in the account of the respondent no.7\nwould relate back to the date of the deposit of the said cheque by the\npetitioner with the respondent no.3 on the date of auction sale in\ncompliance with the obligation under rule 107(11)(g) of the MCS\nRules. The provisions of the Income Tax Act being Central Act, in\ncase of inconsistency if any between Income Tax Act, 1961 and the\nMCS Rules, the provisions of Income Tax Act would prevail.\n\n57. Be that as it may, since this court had already set aside the\nletter/order dated 21st December, 2013 issued by the learned District\nDeputy Registrar refusing to confirm the sale in favour of the\npetitioner on the condition that the petitioner did not make payment of\n15% of the highest bid amount on the date of auction, the learned\nDistrict Joint Registrar in the impugned order could not have rendered\na finding that the petitioner had not complied with the points\nmentioned in the said letter/order dated 21st December, 2013 or that\nthe auction was not conducted as per the provisions of rule 107(11)(g)\nof the MCS Rules. In my view, the order passed by the learned\nDivisional Joint Registrar is ex-facie contrary to the order and\njudgment dated 18th March, 2016 passed by this court setting aside\nthe letter/order dated 21st December, 2013 on the ground that the\nlearned District Deputy Registrar had erroneously refused permission\non the grounds which were totally untenable.\n\n58. Insofar as submission of the learned counsel for the\nrespondent no.1 that the observations made by this court in the order\nand judgment dated 18th March, 2016 about the maintainability of the\nsaid revision application filed by the respondent no.1 were prima facie\n\n 30\n ::: Uploaded on - 13/06/2018 ::: Downloaded on - 15/06/2018 01:25:46 :::\n wp6778-17\n\nis concerned, a perusal of the paragraph no.9 indicates that this court\nhad taken a view that the order passed by the District Deputy\nRegistrar was not a \"decision\" or \"order\" so as to enable the\nrespondent no.1 to invoke section 154 of the MCS Act and thus the\nDivisional Joint Registrar had exceeded his jurisdiction under section\n154 of the said MCS Act though the same was not vested in him and\ntherefore he had erred in setting aside the notice of hearing dated 23rd\nJanuary,2014. Be that as it may, by the said order, this court had set\naside the letter/order dated 21st December, 2013 which was subject\nmatter of the said revision application filed by the respondent no.1.\n\n59. Insofar as the judgment of this court in case of Manisha\nBijal Shah (supra) relied upon by the learned counsel for the\nrespondent no.1 is concerned, this court in the said judgment had\nrecorded a specific finding that the auction on the part of the auction\npurchaser and the authority was fraudulent and thus the entire auction\nsale was nullity. In this case, the respondent no.1 has not been able\nto demonstrate before this court that the auction sale in favour of the\npetitioner was fraudulent or nullity. The judgment of this court in case\nof Manisha Bijal Shah (supra) thus would not assist the case of the\nrespondent no.1.\n\n60. Insofar as the reliance placed by the learned counsel for\nthe respondent no.1 on the provisions of Order 21 Rule 84 in support\nof the submission that the said provision is in pari materia with the\nprovisions of rule 107(11)(g) of the MCS Rules and in support thereof\nreliance of various judgments of Supreme Court and this court is\nconcerned, in my view the reliance placed on the said provision under\nOrder 21 Rule 84 of the Code of Civil Procedure, 1908 and various\njudgments in support thereof would not assist the case of the\n\n 31\n ::: Uploaded on - 13/06/2018 ::: Downloaded on - 15/06/2018 01:25:46 :::\n wp6778-17\n\nrespondent no.1. In none of the judgments relied upon by the learned\ncounsel for the respondent no.1, the Supreme Court or this court had\nconsidered the provisions of sections 269SS and 269T of the Income\nTax Act, 1961. Be that as it may, this court will now deal with those\njudgments referred to and relied upon by the learned counsel for the\nrespondent no.1.\n\n61. Insofar as judgment of Supreme Court in case of Manilal\nMohanlal Shah & Ors. (supra) and judgment of Supreme Court in\ncase of Balram Bhasa Ram (supra) are concerned, the Supreme\nCourt has held that the provisions regarding deposit of 25% under\nOrder 21 Rule 85 of the Code of Civil Procedure by the purchaser\nother than the decree holder is mandatory and if the payment is not\nmade within the time prescribed, the court has discretion to forfeit the\ndeposit and the discretion ends, but the obligation of the court to re-\nsell the property is imperative. Similar view has been taken by the\nPunjab and Haryana High Court in case of Ramji Lal & Anr. (supra)\nand in case of Mehtab Singh Malik (supra), judgment of Allahabad\nHigh Court in case of Hira Lal & Ors. vs. Mst.Champa & Ors. (S)\nAIR 1955 Allahabad 226 (Vol.42,C.N.70) and judgment of Supreme\nCourt in case of C.N. Paramasivam & Anr. (supra). However, in\nnone of these judgments, the Supreme Court as well as the the other\nHigh Courts have neither considered the provisions of sections 269SS\nand 269T of the Income Tax Act, 1961 nor has considered the\nprovisions of rule 107(11)(g) of the MCS Rules or a situation where\nthe auction purchaser had admittedly deposited the 15% amount by\ncheque on the date of auction itself, which was subsequently cleared\nwhen presented. None of these judgments would assist the case of\nthe respondent no.1 and are clearly distinguishable in the facts of this\ncase.\n\n 32\n ::: Uploaded on - 13/06/2018 ::: Downloaded on - 15/06/2018 01:25:46 :::\n wp6778-17\n\n\n62. Insofar as judgment of Supreme Court in case of\nAssistant Director of Inspection Investigation (supra) relied upon\nby the learned counsel for the respondent no.1 is concerned, the said\njudgment would not assist the case of the respondent no.1 but would\nassist the case of the petitioner. In the said judgment, the Supreme\nCourt has held that sections 269SS was inserted in the Income Tax\nAct, 1961 by Finance Act, 1984 debarring persons from taking or\naccepting from any other person any loan or deposit otherwise than\nby account-payee cheque or account-payee bank draft, if the amount\nof such loan or deposit or the aggregate amount of such loan or\ndeposit is Rs. 10,000/- or more. Such restriction is neither violative of\narticle 14 of the Constitution of India, nor it can be said that section\n269SS was inserted without legislative competence.\n\n63. Insofar as judgment of Supreme Court in case of\nM/s.Shilpa Shares & Securities & Ors. (supra) relied upon by the\nlearned counsel for the respondent no.1 is concerned, Supreme Court\nhas held that under rule 107(11)(g) of the rules, 15% of the price of\nthe immovable property has to be deposited by the auction purchaser\nat the time of the purchase, and the remaining 85% of the purchase\nmoney has to be paid within 15 days from the date of such sale.\nSince, there was no compliance of the said provision, the Supreme\nCourt was of the opinion that the auction sale of the property was\nnullity and there was no valid auction sale. In the said judgment,\nSupreme Court did not consider the provisions of sections 269SS\nand 269T of the Income Tax Act, 1961 or that the payment of 15% of\nthe highest bid amount was required to be paid in cash or by demand\ndraft or cheque. The principles laid down by the Supreme Court in\nthe said judgment are not in dispute. However, in the fact of this\n\n 33\n ::: Uploaded on - 13/06/2018 ::: Downloaded on - 15/06/2018 01:25:46 :::\n wp6778-17\n\ncase, the said judgment would not assist the case of the respondent\nno.1.\n\n64. Insofar as judgment of this Court in case of Jagdish\nRadhakisan Kayasth (supra) is concerned, the executing court in\nthat matter while construing the provisions of Order 21 Rule 84 (1) of\nthe Code of Civil Procedure, 1908 had directed the auction purchaser\nto deposit the entire amount as contemplated under sub-rule(1) of\nRule 84 of Order 21 on the same day till 5.30 p.m. which the auction\npurchaser had failed to deposit. The auction purchaser though\ndeposited the amount on the next day, the same was accepted by the\nexecuting court. Supreme Court held that there was material\nirregularity committed by the executing court by accepting the amount\nfrom the auction purchaser on the next day. Supreme Court\naccordingly was pleased to set aside the auction sale after declaring\nthe auction sale nullity on the ground of material irregularity and\ndirected the executing court to hold a fresh auction sale. In my view,\nthe facts before this court in the said judgment were totally different\nand are distinguishable. In this case, the petitioner had deposited the\nrequisite amount on the day of auction sale itself with the respondent\nno.3 and not on the next date or in violation of any order of any court.\n\n65. Insofar as judgment of this court in case of Niranjan D.\nWoody (supra) relied upon by the learned counsel for the\nrespondents is concerned, this court in the said judgment had\nconstrued the provisions of rule 107(11)(g) of the said MCS Rules and\nheld that rule 107(11)(g) requires a deposit of sum of money equal to\n15% of the price at the time of purchase. The words, \"at the time of\npurchase\" in the case of an auction must mean the same thing as the\nwords \"on every sale of immovable property\" that are used in Rule\n\n 34\n ::: Uploaded on - 13/06/2018 ::: Downloaded on - 15/06/2018 01:25:46 :::\n wp6778-17\n\n84(1). \"At the time of purchase\" must necessarily mean at the time\nwhen the auction purchaser is informed of the acceptance of his bid. It\nis held that both the sets of provisions i.e. the provisions of Order 21\nbeing statutory and those of Rule 107 being subordinate legislation\nemphasize the fundamental principle that the mandate of deposit\nwithin the period stipulated has to be complied with strictly. In the\nabsence of compliance with the mandatory requirement, the sale itself\nis no sale in the eyes of law. In default of compliance, the sale is\nrendered a nullity.\n\n66. This court held that once the auction takes place and the\nhighest bid is accepted, the consequence thereof is to knock down\nthe sale in favour of the highest bidder. It is at that time that the\nhighest bidder must make a payment equivalent to 15% of the total\nprice of the immovable property. The time of purchase under Clause\n(g) is the time when the bid is accepted. This court held that the\nDivisional Joint Registrar has clearly lost sight of the fact that the\nmandatory requirement of Rule 107(11)(h) could not have been\nrelaxed by the said authority. This court accordingly recorded the\nfinding that 15% of the sale consideration was not deposited on 4 th\nNovember, 2005, at the time of purchase but thereafter. This court\naccordingly was pleased to set aside the order passed by the\nDivisional Joint Registrar and held that the sale in favour of the\nauction purchaser was in nullity. The principles laid down by this\ncourt in the said judgment are not in dispute. However, in the said\njudgment, this court does not consider a situation where the auction\npurchaser had deposited 15% amount by cheque on the same date\nwhich cheque was honoured when presented and the amount was\ncredited to the account of the respondent no.7 society.\n\n 35\n ::: Uploaded on - 13/06/2018 ::: Downloaded on - 15/06/2018 01:25:46 :::\n wp6778-17\n\n67. Insofar as judgment of Supreme Court in case of Rao\nMahmood Ahmed Khan (supra) is concerned, a perusal of the said\njudgment clearly indicates that the said judgment is delivered by the\nSupreme Court prior to the insertion of sections 269SS and 269T of\nthe Income Tax Act, 1961 which were inserted much later and thereby\nprohibiting making deposit of any amount above Rs.20,000/- after 30 th\nJune, 1984 otherwise then by way of account payee cheque or\naccount payee bank draft. In my view the provisions under sections\n269SS and 269T of the Income Tax Act, 1961 would be binding on all\nthe parties thereby barring deposit of Rs.20,000/- or above otherwise\nthan by way of account payee cheque or account payee bank draft.\nIn view of such statutory bar, the auction purchaser could not have\ndeposited all the said amount in cash which was much more than\nRs.20,000/- on the date of auction sale upon acceptance of his bid by\nthe respondent no.3. The judgment of Supreme Court thus in case of\nRao Mahmood Ahmed Khan (supra) would not apply to the facts of\nthis case and would not assist the case of the respondent no.1. Even\notherwise in view of the inconsistency in the provisions of sections\n269SS and 269T of the Income Tax Act, 1961 and rule 107(11)(g) of\nthe MCS Rules, the provisions of sections 269SS and 269T of the\nIncome Tax Act, 1961 would prevail.\n\n68. Insofar as the submission of Mr.Patil, learned counsel for\nthe respondent no.6 who claims to have purchased the property in\nquestion from the respondent no.1 that neither the auction purchasers\nnor the bank had raised an issue of maintainability of the revision\napplication filed by the respondent no.1 or his client before the special\nrecovery officer is concerned, there is no merit in this submission of\nthe learned counsel. Reliance placed by the learned counsel on Rule\n57 of the MCS Rules in support of the submission that the auction of\n\n 36\n ::: Uploaded on - 13/06/2018 ::: Downloaded on - 15/06/2018 01:25:46 :::\n wp6778-17\n\nthe suit property in favour of the petitioner was nullity is totally\nmisplaced. Even if the office bearers of the respondent no. 7 were\npresent at the time of auction that would not indicate that they were\ninterested in the auctioned properties personally. Insofar as the\nproceedings filed by the respondent no.6 in respect of the property in\nquestion is concerned, this court does not express any view on the\nmerits of the said proceedings. The fact remains that no adverse\norder is passed in respect of the property in question against the\npetitioner or in favour of the respondent no.6 in the said proceedings\ntill date. In my view, the revisional authority cannot set aside the\nregistered documents entered into in favour of the petitioner directly\nor indirectly.\n\n69. In my view, findings rendered by the learned Divisional\nJoint Registrar, Co-operative Societies, Kolhapur Division, Kolhapur in\nthe impugned order dated 1st February, 2017 are perverse and\ncontrary to the principles of law laid down by the Supreme Court and\nthis court and also contrary to the provisions of rule 107 of the MCS\nRules and various other provisions of MCS Act and thus deserve to\nbe set aside.\n\n70. I, therefore, pass the following order :-\n\na). Writ Petition No.6778 of 2017 is allowed in terms of prayer\nclause (a).\n\nb). Revision Application Nos.373 and 374 of 2016 and the\nRevision Application Nos. 409 and 410 of 2016 are dismissed.\n\nc). The confirmation order and sale certificate issued by\n\n 37\n ::: Uploaded on - 13/06/2018 ::: Downloaded on - 15/06/2018 01:25:46 :::\n wp6778-17\n\nthe District Deputy Registrar, Co-operative Societies, Kolhapur on 12th\nSeptember, 2016 in favour of the petitioner is upheld.\n\nd). Rule is made absolute in the aforesaid terms.\n\ne). There shall be no order as to costs.\n\n\n (R.D. DHANUKA, J.)\n\n\n71. At the request of Mr.Agrawal, learned counsel for the\nrespondent no.1, the operation of this order is stayed for a period of\nfour weeks from today. If any Special Leave Petition is filed by the\nrespondent no.1, a copy thereof shall be served upon the petitioner\nand other contesting respondents in advance.\n\n (R.D. DHANUKA, J.)\n\n\n\n\n 38\n ::: Uploaded on - 13/06/2018 ::: Downloaded on - 15/06/2018 01:25:46 :::" }, { "title": "Gulab Chand Sharma vs H.P. Sharma Etc. on 27 August, 1973", "url": "https://indiankanoon.org//doc/1001429/", "text": "Gulab Chand Sharma vs H.P. Sharma Etc. on 27 August, 1973\nEquivalent citations: ILR1974DELHI190, [1974]95ITR117(DELHI)\nJUDGMENT \n\n V.S. Deshpande, J. \n\n (1) These two petitions under section 561-A Criminal Procedure Code have been referred to the Division Bench mainly to consider the question whether the previous decision between the parties in C.W. 189-D/1965 acts as res judicata barring the petitioner from raising in these petitions those contentions which have been aiready decided against him in the writ petition. \n\n(2) The facts are not in dispute. The petitioner Sharma in his return under the Income-Tax Act 1922 for the assessment year 1959- 60 claimed deduction for the payment of a sum of Rs. 18,000.00 allegediy made to M/s. Modem Sanitation for electrical and sanitary supervising charges during the relevant year. On enquiry, the lncome-Tax Officer was of the view that the alleged payee did not exist at ail and no such payment had been made by the petitioner. Not only the petitioner's daim to the deduction was disallowed in the assessment but two further proceedings were taken against the petitioner under the Income-Tax Act 1961, which had in the meanwhile corne into force. Firstly, a penalty was imposed on the petitioner for having made a false rctum under section 274 read with sections 271 and 273 of the Income-Tax Act 1961. Secondiy, two identical complaints were filed against the petitioner-one by the Income-Tax Officer and the other by the Commissioner of IncomeTax for having committed offences punishable under (l) section 277 of the Income-Tax Act 1961 making a false statement which the petitioner knew to be false or did not believe to be true), (2) section 193 of the Indian Penal Code (giving or fabricating false evidence in a judicial proceeding) and (3) sections 467 and 471 Indian Penal Code (forging a document and using it as genuine). \n\n(3) In the proceedings for imposition of penalty under the IncomeTax Act 1922 the petitioner has paid the penalty but his appeal against it is said to be still pending. To checkmate the complaints filed against him, the petitioner filed writ petition No. 189-D/1965 praying that the complainants (the Income-tax Officer and the Commissioner of Income-Tax) be restrained from pursu ng the said complaints pending before a Magistrate on the grounds that section 277 of the Income-Tax Act 1961 could not apply to the alleged offence committed by the petitioner relating to the assessment year 1959-60 and the income-tax authorities could not resort to both the proceedings against the petitioner namely (l) imposition of penalty and (2) filing of complaints inasmuch as this would be in violation of Articles 14 and 20 of the Constitution. A Division Bench of this court dismissed the writ petition holding that:-(l) in view of section 297(2)(b) of the Income-tax Act 1961 the assessment of the petitioner had to be made in accordance with the procedure specified in the Income-Tax Act 1961 inasmuch as the retum for the assessment year 1959-60 had been iiled by the petitioner on 7-8-1962 i.e. after the commencement of the Income-Tax Act 1961, (2) section 277 of the Income-Tax Act 1961 was applicable to a false statement made in a retum filed on 7-8-1962 and (3) a person can be penalised under section 271 of the Income-Tax Act 1961 and can aiso be prosecuted for an offence in respect of the same facts. \n\n(4) Though the complaints against the petitioner had been filed as early as on 31-3-1965, they could not be proceeded with till the dismissal of the writ petition on 10-9-1969 in view of the stay order which had been issued by this court. Before the complaints could proceed thereafter, the petitioner has now filed th se two petitions under section 5 61-A Criminal Procedure Code on 7-10-1971 praying that the two complaints made against him be quashed on the following grounds:- (1) Two identical complaints one by the Income-Tax Officer and the other by the Commissioner of Income-Tax in respect of same offences could not be maintained against the petitioner. (2) The complaints were not accompanied by documents specified in section 173(4) Criminal Procedure Code . (3) The complainants were not examined nor were their statements recorded by the Magistrate under section 200 Criminal Procedure Code . (4) The complainants have not appeai-ed in person before the Magistrate nor has the Magistrate granted them exemption from personal appe raiiee and yet the complaints have not been dismissed for their default. (5) As the petitioner was being prosecuted under section 277 of the Income-Tax Act 1961 which was a special Act he could not be prosecuted at the same time under the provisions of the Indian Penal Code. (6) Cognizance of the complaints could not be taken because the Income-Tax Officer before whom the offences were a eged to have been committed was a \"Civil. Revenue or Criminal Court\" within the meaning of sections 476 and 479-A of the Criminal Procedure Code ., who could make the complaints against the petitioner oniy after complying with these provisions. Since this was not donc cognizance of the complaints by the Magistrale was barred by section 195(1) (a) (b) and (c) Criminal Procedure Code . (7) Proceedings for the imposition of penalty and prosecution could not both be taken against the petitioner simultaneousiy and the complaints could not be lodged particularly when an appeal in the penalty proceedings is still pending. \n\n(5) In their opposition to these petitions, it was pointed out by the income-tax authorities that firstly, those contentions of the petitioner which have aiready been rejected by this court in civil writ 189-D/65 cannot be raised again in view of the principle of res judicata and secondiy, there is no substance either in these or the other contentions. \n\n(6) The first question for consideration is whether the decision of this court in civil writ 189-D/65 acts as res judicata with the effect that the contentions rejected in the said writ petition cannot now be raised in these petitions under section 561-A Criminal Procedure Code . A part of the principle of res judiciala is embodied in section 11 Civil Procedure Code which applies oniy to suits. But section 11 Civil Procedure Code is not exhaustive. The wider principle of res jadicata is a part of Engiish Common Law and is applicable to India as a ruie of \"justice, equity and good conscience\" which have been equated with the principles of Engiish law. It continues to apply to India as \"Law in force in the territory of India immediately before the commencement of the Constitution\" by virtue of Article 372(1) of the Constitution. A writ petition is not a suit. What is its nature? In relation to Article 133 of the Constitution the writ petition has been held by the Supr me Court to be a \"civil proceeding\". The rcason, as observed in Ramesh v. Genda Lai is that \"ail proceedings affecting civil rights which are not criminal\" are civil proceedings. In Commissioner of Income-T x Bombay v. lshwarlal Bhagwandas (IA) a criminal proceeding was defined as one \"which if carried to its conclusion may result in the imposition of sentences such as death, imprisonrnent, fine or forfeiture of property. lt aiso includes proceedings in which in the larger interest of the State, orders to prevent apprehended breach of the peace, orders to bind down persons who are a danger to the maintenance of peace and order or orders aimed at preventing vagrancy are contemplated to be passed.\" \n\n(7) Since a writ petition in itself, judged by the above tests, cannot be a criminal proceeding, it may be generally regarded as a civil proceeding in the sense that it deals with the civil rights of a party. The nature of the decision of a High Court would thus differ according as it is given in a civil or criminal or some other proceeding. Its decision in a writ petition would be given in civil proceeding. On the other hand, when the High Court is acting under section 561-A Cr.P.C., its juridiction is exercised in a criminal proceeding inasmuch as a petition under section 561-A Criminal Procedure Code . can be filed oniy in a criminal proceeding. The question therefore is whether the decision in C.W. 189-D/65, though, given in a civil proceeding, acts as res judicata in the present petitions under section 561-A Criminal Procedure Code . though they arise ont of a criminal proceeding and may, therefore, be regarded as criminal proceedings. \n\n(8) Conflicting judicial decisions may be found cited in commentaries under section 40 to 43 of the Indian Evidence Act, section 403 Cr.P.C. and section 11 Civil Procedure Code as to whether a decision in a suit would act as res judicata in a criminal trial and vice-versa. In our view, the general principle of res judicata is based firstly on public policy and secondiy on private justice both of which apply to ail judicial proceedings whether civil, criminal or otherwise. Public policy general interest of the community litigation must come to an end and its conclusion must have a finality. Private justice requires that an individual should be protected from vexations multiplication of suits and prosecutions at the instance of an opponent whose superior power and resources may enabic him to abuse the process of court. The principle of res judicata should, therefore, apply equally to civil and criminal proceedings inasmuch as the decisions of courts in both the proceedings are justified by and rest upon \"the same theoretical basis of public policy and private justice\" (Spencer-Bower and Turner on Res Judicata 2nd Edition paragraph 13). \n\n(9) In Gulabchand v. State of Gujarat , it was contended that the decision in a previousiy decided writ petition should not act as res judicata in a subsequently institutcd suit between the same parties inasmuch as the scope of a suit is different from the scope of the writ petition. The Supr me Court, however, held that the principle of res judicata would apply and at page 1160 paragraph (29):- \"THEdifference in the nature of the two proceedings is immaterial if the matter decided inter parties in onc proceeding is the same which is to be determined in the subsequent proceedings and the parties to the suit were aiso parties to the writ petition.\"\n\n(10) Shri A. N. MuUa for the petitioner contends that an earlier decision can be looked into oniy for the purposes of sections 40 to 43 of the Indian Evidence Act and if not admissible there under, it cannot be used. While the general principle of res judicata is treated as a part of the principle of estoppel in 15 Halsbury's Laws of England part Ii section 11 pages 191 onwards^), the principle is partially embodied in three different statutes in India namely-section 11 Civil Procedure Code ., sections 40 to 43 Indian Evidence Act and section 403 Criminal Procedure Code . But none of these provisions exhaust the scope of the general principle of res judicata. Each of them is limited to its own purpose. None of them therefore eut down the rest of the principle of res judicata. The three essentials of the general principle of res judicata may be stated as foUows:- 1. A decision by a Competent Judicial Tribunal which is final, 2. it must determine the same questions as are sought to be controverter in the litigation in which the plea of res judicata is raised, and 3. parties to the proceedings in which the plea of res judicata is raised must be the same as were parties to the decision which acts as res judicata. \n\n(11) Therefore, when section 40 of the Evidence Act says that \"the existence of any judgment, order or decree which by law prevents any Court from taking cognizance of a suit or holding a trial\" as being a relevant fact when the question is whether such court ought to take cognizance of such suit or to hold such triai, it refers not only to the statutory law but to the non-statutory general law of res judicata also. Therefore, either the general principle of res judicata is not eut down by sections 40 to 43 or it is expressiy recognised by section 40. \n\n(12) Shri Mulla then contended that the principle of res judicata in criminal proceedings is confied to section 403 Criminal Procedure Code . In other words it is oniy if a person is convicted or acquitted of an offence that he cannot be again tried for the same offence or on the same facts for any other offence for which a different charge from the one made against him might have been framed. It is argued, therefore, that short of such conviction or acquittai, a mere finding of an issue between the parties does not operate as res judicata. This contention became untenable long ago. In Sambasivam v. Public Prosecutor 1950 Appeal Cases 458 at 479 the law was stated as follows: \"THEeffect of a verdict of acquittai pronounced by a Competent Court on a lawfui charge and after a lawfui trial is not completely stated by saying that the person acquitted cannot be tried again for the same offence. To that it must be added that the verdict is binding and conclusive in ail subsequent proceedings between the parties to the adjudication. The maxim \"res judicata pro veritale accipitur\" is no less applicable to criminal than to civil proceedings.\" \n\n(13) This statement of law was approved by the Supreme Court in Pritam Singh v. State of Punjab . The plea that the decision in Pritam Singh's case required reconsideration because the principle could have no application to India where section 403 Cr.P.C. must be taken to be exhaustive was rejected by the Supreme Court in Lalta v. State of U.P. . The binding nature of a finding arrived at between the parties in a previous litigation in a subsequent litigation between the same parties as applied to criminal proceedings is called \"issue estoppel\". The principle of issue estoppel outside the scope of section 403 Criminal Procedure Code . was held to apply to India in State of Andhra Pradesh v. Kokhiliagada Meerayya and anr. and Piara Singh v. State of Punjab .\n\n(14) It was then contended that the principle of issue estoppel is applicable only in favor of the accused but not against him. The general rule is that res judicata must apply in favor as well as against each of the parties. (15 Haisbury's Laws of England 201 paragraph 379). Issues estoppel is a branch of the law of res judicata applied to crirninal proceedings. This was the conclusion of the majority of the House of Lords in Connelly v. Director of Public Prosecutions 1964 Appeal Cases 1254 at 1321 and 1334(9). Logically it may be argued that issue estoppel applies not onlv in favor of the accused but aiso against him (spencer-Bower and Turner 'Res Judicata' paragraph 335). But in ail criminal proceedings, the principle of res judicata or issue estoppel may corne into conflict with another principle, naincly, that the prosecution must prove that the accused is guilty and uniess this is donc the accused presumed to be innocent. But principle of issue estoppel cannot over-ride the principle of presumption of innocence of the accused. Similarly, the following special featurcs of the criminal proceeding would further modify the application of issue estoppel. Firstly, in a criminal case there is no duty on the accused to adduce evidence in defense while in a civil case adverse inference may be drawn from the refusai of a party to adduce evidence in his possession or power. Secondiy, the burden of proof to prove the guilt of the accused is higher on the prosecution in a criminal case as compared to the burden of proof on the plaintiff to prove his case against the defendant in a civil case. Lastly, certain evidence such as confessions in certain circumstances cannot be proved in a criminal case against accused though there is no such restriction between the parties to a civil proceeding. The resuit is that a finding of fact arrived at in a civil proceeding may not be binding in a criminal proceeding against the accused. In Manipur Administration v. Thokchom Bira Singh A.T.R. 1965 S.C. 87 at 93 at the end of paragraph 12, thereforc, the Supr me Court observed as follows : \"THEquestion has sometimes been mooted as to whether the same principle of issue estoppel could be raised against an accused, the argument against its application being that the prosecution cannot succeed uniess it proves to the satisfaction of the Court trying the accused by evidence led before it that he is guilty of the offence charged. We prefer to express no opinion on this question since it does not arise for examination.\"\n\n(15) In Mohar Rai v. State of Bihar the trial Court and the High Court had held that the dismissal of a complaint by Mohar Rai finding certain allegations by him as unproved would act as res judicata to bar the defense on the same allegations in a subsequent prosecution of Mohar Rai. But the Supreme Court reversed the decision of the High Court holding at page 531 that \"it is doubtfui- though for the purpose of this case it is unnecessary to express any final opinion on this point-whether the nile in question could be pressed against an accused.\" The ruie could not be applied in that case at any rate because the previous decision was not between the same parties.\n\n(16) Generally speaking, the principle of issue estoppel is invoked to bar the adducing of evidence to prove facts which have been aiready adjudicated upon in a previous proceeding between the parties. It being casier (for the reasons stated above) to obtain a finding of fact for a plaintiff against a defendant in a civil proceeding than for the prosecution to do so against the accused in a criminal proceeding, the finding of fact given in a previous civil proceeding may not act as res judicata in a subsequent criminal proceeding. For the same reasons, therefore, a finding of fact in a criminal proceeding against an accused person should act as res judicafa m a subsequent civil proceeding between the same parties. Tn Hollington v. F. Hewthom & ??. Ltd., (1943) K.B. 587(\") the Court of Appeal in England, however, did not accord the effect of res judicata to a summary conviction of the accused for a traffic offence in a subsequent civil proceeding in which the accused was sued for damages by the person who was injured by the negligence of the accused in driving a car. Similarly, in Anil Behari Ghosh v.Smt. Latika Bala Dassi , the conviction by a criminal court of a person for the murder of his father was not regarded as conclusive in a subsequent proceeding Succession Act. These decisions apparently did not attach importance to the fact that the rules of procedure and evidence are more favorable to the accused in a criminal proceeding and, therefore, there should be no objection to a finding obtained against the accused in a criminal proceeding acting as res judicafa in a subsequent civil proceeding. It is interesting to note that the decision in Hollington v. F. Hewhorn & ??. Ltd. was regarded as being contrary to one's sense of justice by the Law Reforins Committee chaired by Lord Pearson in England. The Fifteenth Report of the said Committee presented to the Parliament in September 1967, therefore, recommends a change in the law to make a conviction of a criminal offence admissible in subsequent civil proceedings to show that the person concemed was guilty of the conduct constituting the offence. \n\n(17) However that may be, there is no question of presumption of innocence of the accused and no question of the ruies of procedure and evidence being more favorable to him when a pure question of law is decided in a criminal or a civil proceeding. In respect of a finding on a question of law, therefore, both the civil and the criminal proceedings ought to be on par. The finding of law in a previous civil proceeding should, therefore, act as res judicata in a subsequent criminal proceeding in accordance with the well established general law of res judicata. \n\n(18) In Civil Writ 189-D of 1965, the following questions of law were decided against the accused between the same parties, namely:- (1) The return by the accused having been field on 7-8-1962, the offence alleged to have been committed by the accused would be covered by the Income-Tax Act, 1961 in view of section 297(2)(b) thereof. (2) The imposition of penalty on the accused could also be only under the Income-Tax Act, 1961 and not under the Income-Tax Act of 1922. (3) Section 277 of the Income-Tax Act, 1961 was applicable to the making of a false statement in a retum filed on 7-8-62. The accused could, therefore, be prosecuted under section 277. Whatever may be his objection with regard to the prosecution under section 277, no objection could be made by him to his prosecution under the provisions of the Indian Penal Code. \n\n(19) As these findings of law are based on admitted facts, they would, in our view, operate as res judicata by way of an issue estoppel in the present petitions under section 561-A Criminal Procedure Code. The petitioner accused cannot, therefore, re-agitate those questions before us in these petitions. \n\n(20) Further, assuming for the sake of argument that these findings of law do not act as res judicata in these petitions under section 561-A Criminal Procedure Code, it is obvions that it would be an abuse of the process of court for the accused to be allowed to reagitate those questions again in this Court. Section 561-A Criminal Procedure Code itself recognises the inherent junsdiction of this Court to prevent an abuse of the process of court. Such inherent jurisdiction of the court is aiso recognised in the principles of English law. The Court thus has an inherent jurisdiction to disallow such abuse of its process and hold that the accused could be barred from re-agitating these questions of law which have been aiready decided against him between the parties by a competent court. (Reichol v. Magrath, (1889) 14 A.C. 665 Hl (13A), and the other decisions referred to in Appendix A in Spencer-Bower and Turner's book on Res Judicata, referred to abovc). We find so. \n\n(21) We may now consider seriatim the objections listed above specifically raised by the petitioner accused in these petitions:- (1) & (6). While On the one hand the offence punishable under section 277 of the Income-Tax Act, 1961 was allegedly committed by the accused before the Income-Tax Officer, the prosecution against the accused for that offence could not be lodged \"except at the instance of the Commissioner\" in view of section 279(1) of the said Act. The complaint under section 277 filed by the Income-Tax Officer at the instance of the Commissioner of Income-Tax would, therefore, satisfy the requirements of section 279(1). The Commissioner of Income-Tax has, however, filed an identical complaint so that no doubt may be left that the complaint was filed at his own instance. Both these complaints have to be regarded as one complaint signed by both these officers in the above circumstances. No prejudice can be caused to the petitioner accused merely because instead of one complaint signed by both of them, there are two identical complaints signed by each of them. Further, the accused is being prosecuted also under sections 193, 467 and 471 Indian Penal Code. Section 195(1)(b) of the Criminal Procedure Code in respect of section 193 of the Indian Penal Code and section 195(1)(c) of the Criminal Procedure Code in respect of section 471 India Penal Code require that if any of these offences is committed in relation to any proceeding in any court, then the cognizance of these offences can be taken by a criminal court only on a complaint in writing by such a court. According to section 136 of the IncomeTax Act, 1961, any proceeding under the said Act before an Income-Tax Officer shall be deemed to be a judicial proceeding within the meaning of sections 193 and 228 and for the purposes of section 196 of the Indian Penal Code. In Lalji Haridas v. State of Maharashtra, (1964) 52 Itr 423 it was held by the Supreme Court that the effect of section 37(4) of the Income-Tax Act, 1922 corresponding to section 136 of the Income-Tax Act, 1961 was that the proceeding before the Income-Tax Officer had to be treated as \"proceeding in any court\" within the meaning of section 195(1)(b) of the Criminal Procedure Code. The making of the complaint by the Income-Tax Officer, therefore, satisfies the requirement of section 195(1)(b) Criminal Procedure Code in respect of the complaint under section 193 Indian Penal Code. Shri Mulla argued that the Income-Tax Officer, if a court under section 195(1)(b) Criminal Procedure Code, should have followed the procedure laid down in sections 476 and 479-A Criminal Procedure Code before making the complaint against the accused. But the Supreme Court has clarified in Balwant Singh v. L. C. Bharupal, (1968) 70 Itr 89, that though an Income-Tax Officer may be a court for the purposes of section 195(l)(b) Criminal Procedure Code, he is not a \"civil, revenue or a criminal court\" for the purposes of sections 476 and 479-A Criminal Procedure Code. It was not necessary, therefore, for him to comply with sections 476 and 479A Criminal Procedure Code. (2) Compliance with section 173(4) Criminal Procedure Code regarding the filing of documents and giving copies of the same to the accused was not necessary inasmuch as the accused is being prosecuted on a complaint and not on a police report. (3) & (4). In respect of the offences punishable under sections 467 and 471 Indian Penal Code, the Income-Tax Officer was not a court within the meaning of section 195 Criminal Procedure Code. Shri Mulla, therefore, argued that the complainants in respect of these offences were in the position of private persons. They had to be, therefore, examined by the Magistrate under section 200 Criminal Procedure Code. They had also, therefore, to be personally present before the Magistrate. As this was not done, the complaints should have been dismissed by the Magistrate. But the proviso (aa) to section 200 exempts a public servant acting or purporting to act in the discharge of his official duties from such personal examination by the Magistrate. Section 279 of the Income-Tax Act, 1961 expressly required that the prosecution under section 277 against the accused could not be launched except at the instance of the Commissioner. It was, therefore, the duty of the Commissioner to either make the complaint himself or to authorise the Income-Tax Officer to do so. The Commissioner has done both these things. The Income-Tax Officer was bound to obey the orders of the Commissioner. Both the Commissioner and the Income-Tax Officer are, therefore, acting \"in the discharge of official duties\" within the meaning of the proviso (aa) to section 200 Criminal Procedure Code in respect of the complaints under section 277. Similarly, the Income-Tax Officer was a \"Court\" for the purposes of the offence punishable under section 193 Indian Penal Code and as held by the Supreme Court in Lalji Haridas case referred to above, the cognizance of the prosecution under section 193 Indian Penal Code could not be taken by the Magistrate except on a complaint by the court concerned. The Income-Tax Officer, was, therefore, required to make a complaint. In respect of section 193 Indian Penal Code also therefore, he was acting in the discharge of official duties. The offences alleged to have been committed under sections 467 and 471 Indian Penal Code related to the same proceeding and had, therefore, to be tried with the other two offences together. It was, therefore, a moral and a legal duty of the Income Tax authorities to include them also in the same complaints. In respect of them also, therefore, the Income-Tax Officer and the Commissioner were acting in discharge of their official duties. They were, therefore, exempted from personal examination by the Magistrate in respect of all the offences. Finally, the complainants had actually applied to the Magistrate for granting exemption from personal appearance and examination. If the Magistrate was in doubt as to whether the complainants were covered by the proviso (aa) to section 200 Criminal Procedure Code, he would have granted them exemption from personal appearance and examination. (5) Even if the offences punishable under section 277 Income-Tax Act, 1961 and section 193 Indian Penal Code may be somewhat similar, they are not identical. There is no legal bar to the prosecution of the accused for both these offences in view of section 26 of the General Clauses Act. (7) The proceedings for the imposition of penalty taken against the accused under the Income-Tax Act, 1961 are distinct from the criminal complaints filed against him. They can, therefore, continue simultaneuosly. Article 20(2) of the Constitution says that \"no person shall be prosecuted and punished for the same offence more than once\". The imposition of a penalty under the Income-Tax Act is neither a prosecution nor a punishment for any offence. The accused is not, therefore, exposed to any \"double jeopardy\".\n\n(22) None of the contentions raised by the petitioner accused has, therefore, any merit. ShriK. L. Arora for the State has invited our attention to the fact that the complaint against the accused was filed on 31-3-1965. The accused obtained a stay order in Civil Writ 189-D of 1965. After the dismissal of the writ petition on 10-9-1969, he further delayed the prosecution against him and filed these petitions under section 5 61-A. The delay in the prosecution is thus entirely due to the conduct of the accused himself. Now that the objections of the accused have been disposed of, the trial Magistrate shall give priority to the hearing of the complaints against the accused and ensure that they are speedily disposed of. With the above observations, these petitions (Criminal Misc. Main Nos. 116 and 118 of 1971) under section 561-A Criminal Procedure Code are dismissed. Parties to appear before the Additional Chief Judicial Magistrate, New Delhi on 17-9-1973." }, { "title": "Tata Tea Ltd. & Anr. Etc vs State Of West Bengal & Ors. Etc on 5 May, 1988", "url": "https://indiankanoon.org//doc/1701824/", "text": "Tata Tea Ltd. & Anr. Etc vs State Of West Bengal & Ors. Etc on 5 May, 1988\nEquivalent citations: 1988 AIR 1435, 1988 SCR (3) 961, AIR 1988 SUPREME COURT 1435, 1988 TAX. L. R. 1299, (1988) 2 JT 299 (SC), (1988) 39 TAXMAN 76, (1988) 2 KER LT 48, 1988 SCC(TAX) 263, (1988) 70 CURTAXREP 99, (1988) 173 ITR 18, 1988 SCC (SUPP) 316, 1988 2 JT 299, (1988) 90 TAXATION 17\nAuthor: M.H. Kania\nBench: M.H. Kania, R.S. Pathak\n PETITIONER:\nTATA TEA LTD. & ANR. ETC.\n\n\tVs.\n\nRESPONDENT:\nSTATE OF WEST BENGAL & ORS. ETC.\n\nDATE OF JUDGMENT05/05/1988\n\nBENCH:\nKANIA, M.H.\nBENCH:\nKANIA, M.H.\nPATHAK, R.S. (CJ)\n\nCITATION:\n 1988 AIR 1435\t\t 1988 SCR (3) 961\n 1988 SCC Supl. 316\t JT 1988 (2)\t299\n 1988 SCALE (1)867\n CITATOR INFO :\n R\t 1988 SC1450\t (1)\n\n\nACT:\n Bengal Agricultural Income-tax (Amendment) Act, 1980-\nChallenging constitutional validity of sections 3 and 5 of.\n Agricultural Income-tax (Amendment) Act,\t1980 (Kerala\nAct No.\t 17 of 1980)-Challenging amendment made by-Resulting\nin deletion of Explanation after clause (2) of section 2(a)\nof Agricultural Income-tax Act, 1950.\n Whether entire income of\tassessee from sale of\t tea\ngrown and manufactured by him is subject\tto levy of\nagricultural income-tax.\n\n\n\nHEADNOTE:\n These Writ\t Petitions, filed in this Court by Public\nLimited Companies growing, manufacturing and selling tea in\nthe States of West Bengal and Kerala raised common questions\nof law.\n The Writ Petitions relating to the State of West Bengal\nchallenged the\tconstitutional validity\t of sections 3 and 5\nof the Bengal Agricultural Income-tax (Amendment) Act, 1980,\nwhereby sub-section (2) and (2A) of section 8 of the Bengal\nAgricultural Income-tax\t Act, 1944 were omitted and always\ndeemed to be omitted.\tThe petitioners\t alleged that as a\nresult of the omission of the said Sub-sections (2) and (2A)\nof section 8, the State Legislature had sought to assume the\npower, competence and jurisdiction to impose\tagricultural\nincome-tax on the entire income from the sale of tea grown\nand manufactured by a\tseller and had thereby transgressed\nthe constitutional limitations contained in Article 246(3)\nof the Constitution of India. The petitioners contended that\nthe income derived from the sale\t of tea grown\t and\nmanufactured by them was derived partly from agriculture and\npartly\tfrom manufacture by elaborate processes through\nvaluable machinery. Prior to the said\t amendment Act,\t the\nposition was that the\tincome\tof an\tassessee who grew,\nmanufactured and sold tea in West Bengal, was computed under\nthe Indian Income-tax Act, 1922 (the Act of 1922) read with\nthe Income-tax\tRules, 1922, and agricultural income-tax was\nlevied only in respect of 60 per cent of that income. After\nthe coming into force\tof the\tIncome-tax Act, 1961 and the\nIncome-tax Rules, 1962 also a State Legislature\n962\ncould only legislate in respect of 60 per cent of\t the\nincome, treated\t as agricultural income. The object of the\nimpugned amendment Act, was to subject to the levy of\nagricultural income-tax, the entire income derived by an\nassessee from the sale of tea grown and manufactured by him.\n The writ petition relating to Kerala State challenged\nthe amendment\t made\tby the Agricultural\t Income-tax\n(Amendment) Act, 1980 (Kerala\tAct No. 17 of 1980) deleting\nthe Explanation\t after clause (2) of section 2(a) of\t the\nAgricultural Income-tax Act, 1950, with a view to making the\nentire income from sale of tea earned by an assessee who\ngrew and manufactured tea in that State subject to the levy\nof agricultural income-tax.\n The petitioners urged that these amendments, in so far\nas they purported to confer power\t on the respective\nlegislatures of\t the States of West Bengal and Kerala to\nlegislate regarding taxes on the income from the sale of tea\ngrown and manufactured by the assessees in excess of 60 per\ncent of\t such income computed in the manner prescribed under\nthe law\t relating to income-tax were void and\t beyond\t the\nlegislative competence\tof the legislatures of the States of\nWest Bengal and Kerala in view of the provisions of Article\n246 of\tthe Constitution of India read with the entry 82 in\nList I\tand Entry 46 in the List II of the Seventh Schedule\nto the\tConstitution and the relevant provisions of the law\nrelating to income-tax.\n The respondents contended that Article 366(1) of the\nConstitution merely stated that the\t term \"agricultural\nincome\"\t had the same\t meaning as given to\t it in\t the\nenactments relating to income-tax and the definition of the\nsaid term in Act of 1922 and the Act of 1961 did\t not\nprescribe that\tonly a particular part of the income derived\nby an assessee from the sale of tea grown and manufactured\nby him\tcould be regarded as agricultural income, and it was\nopen to the\tState\tLegislatures concerned to\tlevy\nagricultural income-tax on such entire income.\n Disposing of the petitions, the Court,\n^\n HELD: The\tmain question to be considered was whether\nthe impugned provisions in the Bengal Amendment Act of 1980\nwere in\t excess of the legislative competence of West Bengal\nState Legislature, and whether by\t deletion of\t the\nExplanation effected by the Kerala Amendment\tAct of 1980,\nthe definition\tof the\tterm \"agricultural income\" in\tsub-\nsection (a) of Section 2 of the Kerala Agricultural Income-\ntax Act\n963\nbecame void as in excess of the legislative competence of\nthe State Legislature. [978D-E]\n A perusal\tof Entry 82 of\t the List I in\t the Seventh\nSchedule and Entry 46 in the List II makes it clear that the\nLegislatures of\t the States of West Bengal and Kerala can\npass laws imposing taxes only in respect of\tagricultural\nincome, and in respect of income other than the agricultural\nincome, it is only the Parliament which has\tthe power to\nlegislate in respect of taxes on such income. Sub-article\n(1) of\t Article 366\t of the Constitution\tstates\tthat\n\"agricultural income\" means such income as is defined as\n\"agricultural income\" for the\tpurposes of the enactments\nrelating to Indian income-tax.\t It is\tsignificant that the\nwords used are not \"as defined by the enactments relating\nIndian Income-tax\" but are \"as defined for the purposes of\nthe enactments\t relating to\tIndian\tIncome-tax\"(emphasis\nsupplied).[978F-G]\n Although the Explanation has been deleted from clause\n(2) of\t Sub-section (a) of\t Section 2 of\t the Kerala\nAgricultural Income-tax\t Act, and in spite of the amendments\ncarried out by the Amendment Act of 1979 and the Amendment\nAct 1980 in the case of the West Bengal Agricultural Income-\ntax Act, an Agricultural Income Tax Officer acting under the\nKerala\t Agricultural\tIncome-tax Act or\tthe Bengal\nAgricultural Income tax Act\t has no power to\tlevy\nagricultural income tax except in respect of 60 per cent of\nthe income derived by an assessee from the sale of tea grown\nand manufactured by him and computed in the manner leid down\nunder the relevant Income-tax\tAct and the rules framed\nthereunder. [984B-C]\n The decision of this Court in Commissioner of Sales\nTax, Lucknow v. D.S. Bist, [1979] 44 S.T.C. 392, relied upon\nby the\tState of Kerala and the State of West Bengal was of\nno assistance to them\tas the ratio of that decision had no\napplication to present cases. [986A]\n Article 366(1) of the Constitution provides that the\nterm \"agricultural income\" has the same\t meaning as\nattributed to it for the purposes of enactments relating to\nIndian income-tax, and Rule 8 of the Income-tax Rules, 1962\nas well\t as Rule 24 of the Income-tax Rules 1922, pertain to\nand are bound up with the definition of the\tterm\n\"agricultural income\" for the purposes of laws or enactments\npertaining to Indian Income-tax and the provisions of those\nrules have to be taken into account\tin considering\t the\nmeaning of the term \"agricultural income\" under sub-article\n(1) of Article 366 of the Constitution. [987B-D]\n964\n Clause (b)\t of sub-section\t (2) of\t Section 295 of the\nIncome-tax Act, 1961 specifically confers power on the rule-\nmaking authority to make rules relating to the manner in\nwhich and the procedure by which income for the purposes of\nthe Act\t of 1961 would be arrived at in the case of income\nderived in part from agriculture and in part from business\nand Rule 8 clearly provides\t for the manner in which\ncomputation of income for the purposes of the Act of 1961 is\nto be made in\tthe case of income derived from the sale of\ntea grown and manufactured by a seller and it cannot be said\nthat the said rule goes beyond the scope of the rule-making\npower conferred\t under section\t295, as contended by counsel\nfor the two States. [987E-F]\n Although the Explanation to Section 2(a)\t (2) of\t the\nKerala Agricultural Income-tax Act has been deleted by the\nAmendment Act of 1980,\t the result would still be the same\nthat the Kerala State\tLegislature can\t impose tax only in\nrespect of 60 per cent of the income derived by an assessee\nwho sells tea grown and manufactured\tby him\tin India and\nsuch income has to be computed in the manner laid down in\nthe Act\t of 1922 and thereafter in the Act of 1961\t for\ncomputation of the business income. The same is the position\nin respect of the powers of the legislature of the State of\nWest Bengal in spite of the amendments made by\t the\nlegislature by\tthe Amendment Act of 1980 and earlier under\nthe amending Act of 1979 which was in force for one year. It\nis not\tnecessary to strike down the said amendments because\nthey do\t not directly conflict with the definition of the\nterm \"agricultural income\" under the Constitution, but they\ndo not\tconfer any wider power\t on the State Legislature to\nimpose taxes on the agricultural income then what is stated\nearlier. [987G-H;988A-B]\n The validity of\t the amendments to\tthe Bengal\nAgricultural Income-tax Act made in 1980 and the deletion of\nthe Explanation in Section\t 2(a)(2) of\tthe Kerala\nAgricultural Income-tax\t Act were challenged as being ultra\nvires and invalid in law on several other grounds but the\nCourt did not go into those grounds in view of what it held\nas set out above. [988C-D]\n Although none of the prayers in\t the petitions\t was\ngranted in terms, the petitioners substantially succeeded in\nthe petitions.[988E]\n Karimtharuvi Tea Estates Ltd. & Anr. v. State of Kerala\nJUDGMENT:\nTrading\t Co. Ltd. etc. v. Commissioner of\tAgricultural\nIncome-tax, Kerala, [1968] 69\tITR 667; State of Tamil Nadu\nv. Kannan Devan Hills Produce Co. Ltd.,\n965\n[1972]\t84 I.T.R. 475; Tea\t Estate\t India\tP. Ltd. v.\nCommissioner of\t Income-tax, West Bengal II,\t [1976]\t 103\nI.T.R. 785; Commissioner of Income-tax, Madras v.\tR.M.\nChidambaram Pillai etc., [1977] 106 I.T.R. 292; Commissioner\nof Sales Tax, Lucknow v. D.S. Bist & Ors., [1979] 44 S.T.C.\n392; and High\tLand Produces\tCo. Ltd. & Anr. etc. v.\nInspecting Asstt. Commr. of Agricultural Income-tax & Sales\nTax (Special),\tKottayam and Ors. etc., [1984] 148 I.T.R.\n746, referred to.\n\n&\n ORIGINAL JURISDICTION: Writ Petitions Nos. 5409-10,\n5411-12/80, 358 & 12807-12808/84.\n (Under Article 32 of the Constitution)\n Dr. Devi\t Paul,\tMs. M.\t Seal,\tH.K. Dutt for\t the\npetitioners in WP. Nos. 5409-12/80, 12807-12808/84.\n Dr. V. Gauri Shankar, P.N. Tiwari, Manoj Arora, S.\nRajappa and S.R. Srivastava for the petitioners in WP. No.\n358/84\n P.S. Poti, V.J. Francis and N.M. Popli, for Respondents\nin WP. Nos. 5411-12/80\n S.C. Manchanda, B.B. Ahuja and Ms. A. Subhashini for\nthe U.O.I.\n Tapas Ray,\t H.K. Puri, G.S. Chatterjee and Dalip Sinha\nfor Respondents in 12807-08, 5409-10/80\n D.P. Mukherjee, for the Intervenor.\n The Judgment of the Court was delivered by\n KANIA, J.\tThese writ petitions are filed by Public\nLimited Companies growing and\t manufacturing\ttea in\t the\nStates of West Bengal\tand Kerala respectively. Although,\nthere are some differences in the facts, the material facts\nare largely common and the questions raised in the petitions\ncan be fairly regarded as common questions of law. They are,\ntherefore, being disposed of together by\tthis common\njudgment.\n The Petitioners in Civil Writ Petitions Nos. 5409-10 of\n1980 are the Tata Tea Limited and a shareholder of the said\nCompany. These\tpetitions are directed against the State of\nWest Bengal, Commissioner of Agricultural Income-tax of West\nBengal, West Bengal Agricultural\n966\nIncome-tax Officer, Calcutta Range-I,\tUnion of India\t and\nIncome-tax Officer, O-Ward, Companies District-II, Calcutta.\nThe Petitioners in Civil Writ Petitions Nos. 5411-12 of 1980\nare also the Tata Tea Limited and a shareholder thereof. The\nRespondents are\t State of Kerala, Commissioner and Assistant\nCommissioner of\t Agricultural Income-tax at Kerala, Union of\nIndia and the concerned Income-tax Officer. The Petitioners\nin other writ petitions are Tea Companies and shareholders\nthereof and the Respondents are ranged on similar lines as\nabove.\n The Petitioners are Public Limited Companies growing as\nwell as\t manufacturing tea and selling\t the same. As far as\nthe petitions directed against the State of West Bengal are\nconcerned, the\tchallenge therein is to the constitutional\nvalidity of Sections 3\t & 5 of the\tBengal\tAgricultural\nIncome-tax (Amendment)\tAct, 1980. The Bengal\tAgricultural\nIncome-tax Act, 1944 provides for the levy and collection of\nagricultural income-tax\t in the then Province of Bengal, the\npredecessor Province to the present State of West Bengal\nand, after the coming\tinto force of the Constitution, the\nState of West Bengal.\tBy the\tsaid amending Act, for\t the\nfirst time, sub-sections (2) & (2A) of Section 8 of\t the\nBengal Agricultural Income-tax Act were omitted and always\ndeemed\tto have been\t omitted. It\tis alleged by\t the\nPetitioners that as a result of the omission of sub-sections\n(2) & (2A) of\tSection 8 of the Bengal Agricultural Income-\ntax Act, 1944, the State Legislature\thas sought to assume\nthe power, competence and\t jurisdiction\t to impose\nagricultural income-tax\t on the\t entire income\tderived from\nthe sale of tea grown and manufactured by a seller and has\nthereby\t transgressed\t the\tconstitutional\t limitations\ncontained in Article 246(3) of the Constitution of India\nread with Entry 46 of List II of the Seventh Schedule to the\nConstitution of India.\n In the aforesaid Writ Petitions Nos. 5409-10 of 1980\nthe process of manufacturing tea has been described in some\ndetail. To put it very briefly, the green tea grown by the\ntea growers is withered by exposure to air under natural or\ncontrolled conditions.\tCertain machinery and equipment is\nrequired for the aforesaid process. The object of withering\nis partial dehydration of shoots to make them leathery and\nflaccid\t for rolling\tand chemical changes.\t The change\nbrounght about\tis the increase in caffeline, soluble sugars\nand amino acids. The second process involves rupture\t and\ndistortion of tea shoots into smaller sizes to allow mixing\nof enzymes and substrates. This is known as\trolling. The\nprocess of rolling is\tcarried out by mechanical bruising,\ntearing, cutting, crushing breaking and twisting tea leaves\nfor which crank roller/\n967\nrotorvane/C.T.C. machines are employed. The third process is\nof fermentation which involves exposure to air under\ncontrolled temprature.\tFor this the equipment\t required is\nfermentation chamber/trags/floor/troughs. As a result of\nthis process, the colour of tea changes from green to\ncoppery. The next process is of drying or roasting\t for\nstoppage of fermentation: dehydration to ensure keeping the\nquality of the product. Drying or roasting has to be done at\na temperature of 30 degree celsius and humidity exposure to\nblast of hot air in a counter current dryer. The equipment\nrequired for this is a conventional tea dryer. As a result\nof this process, the moisture in the tea is reduced to 4 per\ncent and it becomes black in\tcolour.\t This manufacturing\nprocess is applied to\ttea leaves in a factory which is\nsituated within\t the garden area owned by the Petitioner and\nlicensed under\tthe Factories Act. It\tis averred that the\ncarrying out of the aforesaid processes is a\t specialised\noperation involving the application of modern\t methods of\nbio-chemical engineering. The cleaning\t of the\t tea is then\ndone with machines according to various sizes like broken\npekoe, broken orange pekoe, pekoe dust, dust, churmani dust\nand so on. There are other also other brands of tea produced\nby the\taforesaid process. It is needless to consider these\nprocesses in detail except to state that they are quite\nelaborate and, in the cases before us, valuable machinery is\nbeing used for\t carrying out\tthese processes which\t are\ncarried out in factories.\n The case of the Petitioners is that the income derived\nfrom the sale of tea grown and manufactured as aforesaid is\nderived partly from agriculture and partly from manufacture.\nUnder the Indian Income-tax\t Act,\t1922 (referred to\nhereinafter as\t\"the Act of 1922\") and the Rules framed\nthereunder the income derived from the sale of tea grown and\nmanufactured by\t a seller, has to be computed in the manner\nlaid down in Rule 24 of the Income-tax Rules, 1922 and 40\nper cent of the income so computed is treated as income\nother than agricultural income and the remaining 60 per cent\nis treated as agricultural income. In respect of the income\nother than agricultural income, it is the Union Parliament\nwhich has and before the\tcoming\tinto force of\t the\nConstitution the Centre Legislature which had the power to\nlegislate in respect of taxes; and\tin respect of\t the\nagricultural income, the legislative power in\t respect of\ntaxation was left to the Provinces under the Government of\nIndia Act, 1935 and to the States under the Constitution.\nThe Bengal Agricultural Income-tax Act, 1944 enacted by the\nProvincial Legislature of Bengal defined agricultural income\nin identical terms as\tcontained in Section 2(1) of the Act\nof 1922. The Bengal Agricultural Income-tax\tAct further\nprovided by sub-section (2) of\n968\nSection 8 that notwithstanding anything contained that Act,\nin the\tcase of\t tea grown in West Bengal and\t sold by the\ngrower\thimself\t or his agents after manufacture,\t the\nagricultural income derived therefrom shall be deemed to be\nthat portion of the income computed as aforesaid under the\nAct of\t1922 on\t which income-tax was not payable under the\nAct of\t1922 and agricultural income-tax was levied on the\nwhole of such agricultural income. As a result of this, the\nposition was that the\tincome\tof an\tassessee who grew,\nmanufactured and sold tea in West Bengal was computed in the\nmanner laid down in the Act of 1922\tread with Income-tax\nRules, 1922 and agricultural income-tax was levied only in\nrespect of 60 per cent of that income. On coming into force\nof the\tIncome-tax Act, 1961 which replaced the Act of 1922,\nthe position remained the same. The Income-tax Act,\t1961\n(referred to hereinafter as \"the Act\tof 1961\") came into\neffect from 1st April, 1962. The definition of agricultural\nincome in the Act of 1961 is contained in sub-section (1) of\nSection 2 of that Act and is in pari materia with\t the\ndefinition of the said\t term in the Act of 1922. Rule 8 of\nthe Income-tax\tRules, 1962 is in pari materia with Rule 24\nof the\tIncome-tax Rules, 1922. As a result of this\teven\nafter the Act of 1961 and the Income-tax Rules, 1962 came\ninto force, a State Legislature could\t only legislate in\nrespect of taxes regarding that part of the income computed\nby the\tIncome-tax Officer concerned as aforesaid which is\ntreated as agricultural income,namely, 60 per cent of it.\n In 1979, the Legislature\tof the\tState of West Bengal\nenacted the Bengal Agricultural Income-tax (Amendment) Act,\n1979. By the said Amendment Act, sub-section (2A) was added\nafter sub-section (2) in Section\t8 of\tthe Bengal\nAgricultural Income-tax\t Act, 1944. Very briefly put,\t the\nsaid sub-section (2A)\t gave powers to the\tAgricultural\nIncome-tax Officer to make the computation of income derived\nfrom tea in cases where it had not been computed for the\npurposes of assessment of income-tax under the Act of 1961\nor, although computed, the assessment under the Act of 1961\nhad been annulled or set aside under that Act and no order\nof assessment under Section 25 had been made\t within\t six\nyears from the end of the year in which the agricultural\nincome was first assessable in the manner and subject to the\nlimitations and\t conditions set out in the said sub-section.\nIt is not really necessary for us to consider this provision\nfurther in the view which we\thave taken. Moreover,\tthis\nAmendment Act remained in force only for the period 1979-80\nafter which it was replaced by the Amendment Act of 1980.\nThe West Bengal Legislature in 1980\tamended\t the Bengal\nAgricultural Income-tax Act by the\tBengal\tAgricultural\nIncome-tax (Amendment) Act, 1980. By the said Amendment Act,\nsub-sections\n969\n(2) and (2A) of Section 8 of the Bengal Agricultural Income-\ntax were deleted and always deemed to have been deleted as\nalready pointed\t out and Section 25(4) of that Act\t was\nomitted. Section 7 of\tthe Amendment Act provided for cases\nwhere the asessment\tunder\tthe Act of 1961 of\t any\nagricultural income derived from tea was made before coming\ninto force of the Amendment Act but we are not concerned\nwith that section. Under the petition, the challenge is to\nthe validity of Sections 3 and 5 of\t the Amendment\t Act\nwhereby the aforesaid sub-sections (2) and (2A) of Section 8\nwere omitted with retrospective effect and Section 25(4) was\nomitted. It is submitted in the petition that, from\t the\nspeech of the Finance\tMinister at the time of introducing\nthe Bill for carrying\tout the\t amendments, as well as from\nthe affidavit in reply filed by the State of West Bengal, it\nis clear that the entire object of the amendments was to\nsubject to the levy of agricultural income-tax, the entire\nincome derived by an assessee from the sale of tea grown and\nmanufactured by him.\n We come next to the petitions against the State of\nKerala. Under the Agricultural\t Income-tax Act, 1950 passed\nby the\tLegislature of\tthe State of Kerala, \"agricultural\nincome\" is defined in\tthe same maner as under the Act of\n1922 and there was an\t Explanation after clause (2) in\nSection 2 (a) stating that agricultural income derived from\nland used for agricultural purposes by the cultivation of\ntea leaves means that portion of the income derived from the\ncultivation, manufacture and sale of tea as is defined to be\nagricultural income for the purposes of enactments relating\nto the\t Indian\t Income-tax Act. By an Act\tcalled\t\"The\nAgricultural income-tax\t (Amendment) Act, 1980\" (Kerala Act\nNo. 17\tof 1980), the Kerala Agricultural Income-tax Act was\namended\t and the said\t Explanation was deleted. It\t was\nsubmitted that\tthis deletion was made\t with a view to make\nthe entire income earned by\tan assessee who grew\t and\nmanufactured tea from the sale of tea subject to the levy of\nagricultural income-tax. Here again, it was\tpointed\t out\nthat, from the speech of the Finance Minister at the time of\nintroducing the\t Bill concerned and the stand taken in Court\nby the\tState of Kerala, it was clear that the entire object\nof the amendment was to make the entire income derived by an\nassessee as aforestated liable\t to the levy of agricultural\nincome-tax. These submissions were adopted by\t the learned\nCounsel who appeared for the other Petitioners and by Mr.\nManchanda who\tappeare\t for the Union of India. It is\nsubmitted by Dr. Paul,\t learned Counsel for the Tata\t Tea\nCompany that the aforesaid amendments, in so far as they\npurport to confer power on the respective legislatures of\nthe State of West Bengal and the State of Kerala to\nlegislate regarding taxes on the income from the sale of tea\n970\ngrown and manufactured by an assessee\t in excess of 60 per\ncent of\t such income computed in the manner prescribed under\nthe law\t relating to income-tax are void and\tof no legal\neffect as they are beyond the legislative competence of the\nrespective legislatures\t of the\t States of West Bengal\t and\nKerala respectively in view of the provisions of Article 246\nof the\tConstitution read with Entry 82 in List I and Entry\n46 in List II\tin the\tSeventh Schedule to the Constitution\nand the\t relevant provisions of the law relating to income-\ntax.\n Dr. Paul, learned Counsel for Tata Tea Company and Tata\nFinlay Company\tfurther submitted that, if the entire income\nderived from the sale\tof tea\tgrown and manufactured by an\nassessee were to be regarded as agricultural income,\t the\nresult would be that the Parliament would not have\t any\ncompetence to legislate in respect of taxes on the same with\nthe result that the provisions of the Act of 1922 and the\nAct of\t1961 imposing the levy of income-tax on any part of\nsuch income would become ultra vires. This particular\nsubmission was\tnot supported\tby Dr.\t Gauri\tShankar\t who\nappeared for Petitioner in W.P. No. 358 of 1984 and\t was\nopposed by Mr. Manchanda who appeared\t for the Union of\nIndia.\n As far as the State of West Bengal and the State of\nKerala\tare concerned,\t they are represented\t by learned\nCounsel, Mr. Potti and\t Mr. Tapas Ray respectively. It was\nurged by Mr. Potti and Mr. Ray that Article 366(1) of the\nConstitution merely states that the\t term 'agricultural\nincome\"\t has the same\t meaning as given to\t it in\t the\nenactments relating to income-tax, that the definition of\nthe said term in the Act of 1922 and the Act of 1961 did not\nprescribe that\tonly a\tparticular portion of\t the income\nderived by an assessee\t from the sale\t of tea grown\t and\nmanufactured by\t him can be regarded as agricultural income\nand hence it was open to the State Legislatures concerned to\nlevy agricultural income-tax\t on such entire income.\nAlternatively, it was submitted by them that, in any event,\nin law, the entire income derived from the sale of tea by an\nassessee growing and manufacturing tea must be held to be\nagricultural income in view of the decision of the Supreme\nCourt in the case of Bist & Co. (which we propose to refer\nto more particularly\thereinafter) and hence the State\nLegislature was\t entitled to levy agricultural income-tax on\nthe same. The Parliament had\tno power to legislate in\nrespect of such income.\n In\t order\t to examine the correctness\t of these\ncontentions, certain relevant provisions of law may be noted\nat this\t stage. Under Article 246(1) of the Constitution,\nParliament has exclusive power to legislate\n971\nwith respect to any of the matters enumerated in List I in\nthe Seventh Schedule to the Constitution which is referred\nto in the Constitution\t as the\t \"Union List\". Clause (3) of\nthat Article prescribes that a Legislature of a State has\nexclusive power\t to make laws with respect to\t any of\t the\nmatters enumerated in\tList II in the Seventh Schedule\n(referred to in the Constitution as\tthe \"State List\").\nClause (2) of the said Article provides that both Parliament\nand State Legislatures have power to make laws with respect\nto any\tof the matters enumerated in List III in the Seventh\nSchedule called the \"Concurrent List\". Entry 82 in List I or\nthe Union List reads \"taxes on\tincome\tother\tthan\nagricultural income.\" Entry 46 of List II (State List) reads\n\"taxes\ton agricultural income\". Article 366 of\t the\nConstitution contains\t definitions and sub-Article\t (1)\nthereof reads as follows:\n\t \"Agricultural income\tmeans\tagricultural\n\t income as defined\tfor the purposes of\t the\n\t enactments relating to Indian Income-tax Act.\"\n The material portion of sub-section (1) of Section 2 of\nthe Act\t of 1922 (Indian Income-tax\tAct, 1922) defines\nagricultural income as follows:\n\t \"Agricultural income means:\n\t (a) any\trent or\t revenue derived from\tland\n\t which is used for agricultural purposes, and is\n\t either assessed to land-revenue in\tthe taxable\n\t territories or subject to a local rate assessed\n\t and collected\t by officers of the Government as\n\t such;\n\t (b) any income derived from such land by\n\t (i) agriculture, or\n\t (ii) the performance by a cultivator or\n\t\t receiver of\t rent-in-kind of any process\n\t\t ordinarily employed\t by a cultivator or\n\t\t receiver of\t rent-in-kind to render the\n\t\t produce raised or received by him fit to\n\t\t be taken to market, or\n\t (iii)the sale by a cultivator or receiver of\n\t\t rent-in-kind of the produce raised or\n\t\t received by\t him, in respect of which no\n\t\t process has been performed\n972\n\t\t other than\t a process of\t the nature\n\t\t described in sub-clause (ii);\n\t x\t x\t\t x\t\t x\"\n Clause (c)\t of the\t said sub-section and\tthe Proviso\nthereto are not material for our purposes.\n Section 59\t of the Act of 1922 deals with the powers to\nmake rules. Sub-section (1) confers power on the Central\nBoard of Revenue, subject to the control of\tthe Central\nGovernment, to\tmake rules for carrying out the purposes of\nthe Act\t of 1922 and for the ascertainment and determination\nof any\tclass of income. The material portion of sub-section\n(2) of that section runs as follows:\n\t \"Without prejudice to the generality of the\n\t foregoing power, such rules may\n\t (a) prescribe the manner in which, and the\n\t procedure by\twhich, the income, profits and gains\n\t shall be arrived at in the case of\n\t (i) incomes derived in part from agriculture\n\t and in part from business;\n\t x\t x\t\t x\t\t x\"\n Sub-section (5) of Section 59 reads as follows:\n\t \"Rules made under this section shall be published\n\t in the Official Gazette, and shall thereupon have\n\t effect as if enacted in this Act.\"\n Rule 24 of the Income-tax Rules,\t 1922 deals with the\ncomputation of income derived from the sale of tea grown and\nmanufactured by the seller and that rule runs as follows:\n\t \"Income derived\tfrom the sale of tea grown\n\t and manufactured by the seller in\tthe taxable\n\t territories shall be computed as if it were income\n\t derived from\tbusiness, and 40 per cent of\tsuch\n\t income shall\tbe deemed to be income, profits and\n\t gains liable to tax:\n973\n\t Provided that in computing such income an\n\t allowance shall be made in respect of the cost of\n\t planting bushes in replacement of bushes that have\n\t died or become permanently useless\tin an\tarea\n\t already planted, unless such\t area has previously\n\t been abandoned.\"\n Sub-section (1) of Section 2 of the Act of\t1961\n(Income-tax Act, 1961) defines the\t term \"agricultural\nincome\". The material portion of that definition is similar\nto the\tdefinition contained in the Act of 1922 and runs as\nfollows:\n\t \"(1) \"agricultural income\" means\n\t (a) any rent or revenue derived from land which is\n\t situated in India and is used for\tagricultural\n\t purposes;\n\t (b) any income derived from such land by\n\t (i) agriculture; or\n\t (ii) the performance by a cultivator or\n\t receiver\t of rent-in-kind of\tany process\n\t ordinarily employed by a cultivator or\n\t receiver\t of rent-in-kind to\t render\t the\n\t produce raised or received by him fit to be\n\t taken to market; or\n\t (iii) the sale by a cultivator or receiver of\n\t rent-in-kind of\t the produce\t raised\t or\n\t received by him, in respect of which no\n\t process\thas been performed other than a\n\t process of the nature described in paragraph\n\t (ii) of this sub-clause\".\n Clause (c)\t of the said sub-section is not material for\nour purpose. Section 295 of the Act of 1961 deals with the\npower to make rules. The relevant portion of that section\nruns as follows:\n\t \"(1) The Board may, subject to the control of\n\t the Central Government, by notification in\t the\n\t Gazette of India, make rules for the whole or any\n\t part of India for carrying out the purposes of\n\t this Act.\n\t (2) In particular, and\twithout prejudice to\n\t the generality of the foregoing power, such rules\n\t may provide for all\n974\n\t or any of the following matters\n\t (a) the\tascertainment and determination of\n\t any class of income;\n\t (b) the\tmanner in which and the procedure by\n\t which the income shall be arrived at in the case\n\t of-\n\t (i) income derived in part from agriculture\n\t and in part from business;\n\t x\t x\t\tx\t x\t x\"\nThe Board referred to in Section 295(1) is the Central Board\nof Direct taxes.\n Section 296 provides inter alia that a\trule framed\nunder Section 295 shall be laid, as soon as may be after the\nrule is made, before each House of Parliament and shall have\neffect subject\tto any modification or deletion made by both\nHouses of Parliament. Rule 7 of the Incometax Rules, 1962\nmade under Section 295 of the Act of 1961 deals with income\nwhich is partially agricultural and partially from business.\nRule 8 deals with income from the manufacture of tea and the\nsaid rule runs as follows:\n\t \"(1) Income derived from the sale of tea grown and\n\t manufactured by the\tseller\tin India shall be\n\t computed as\t if it\t were income derived\tfrom\n\t business, and\t forty per cent of such income shall\n\t be deemed to be income liable to tax.\n\t (2) In computing such income an allowance shall be\n\t made in respect of the cost of planting bushes in\n\t replacement of bushes that have died or become\n\t permanently useless in an area already planted, if\n\t such area has not previously been abandoned, and\n\t for the purpose of\tdetermining such cost, no\n\t deduction shall be made in respect of the amount\n\t of any subsidy which, under\t the provisions of\n\t clause (30) of Section 10, is not includible in\n\t the total income.\"\n Section 7\tof the\tBengal Agricultural Income-tax Act,\n1944 deals with the computation of tax and allowances under\nthe head \"AGRICULTURAL INCOME\tFROM AGRICULTURE\". Section 8\nof that\t Act deals with the computation of tax on mixed\nincome. Sub-section\n975\n(1) of\tSection 8, very briefly stated, prescribes that in\ncase of\t such mixed income which is partly agricultural and\nis assessable\t under\tthe said Bengal Act\t and partly\nchargeable under the Indian Income-tax Act of 1922 under the\nhead \"Business\", agricultural income-tax would be payable by\nan assessee in respect\t of the market value of agricultural\nproduce which has been raised by the assessee or received by\nhim as\trent-in-kind and which has been utilised by him as\nraw material in such business or the sale receipts of which\nare included in the accounts of the business\t subject to\nallowances permissible\tunder that Act. Clause\t (a) of\t the\nProviso to that sub-section makes it clear that if, for the\npurposes of assessment of income-tax under the Act of 1922,\nthe market value of the produce had been determined that\nwould be accepted as market value also for the said Bengal\nAct. Clause (b) of the Proviso deals with common charges on\nagricultural income and income\t chargeable under the Act of\n1922. The material portion of sub-sections (2) and (3) of\nthe said section ran as follows:\n\t \"(2) Notwithstanding anything contained in\n\t this Act, in the case of tea the plant Camellia\n\t Thea (Linn.)\tgrown in West Bengal and sold by the\n\t grower himself or his agent after manufacture, the\n\t agricultural income derived therefrom shall, as\n\t long as for the purposes of assessment of income-\n\t tax under the Indian\t Income-tax Act, 1922,\t the\n\t income derived therefrom is\tcomputed under\tthat\n\t Act in such manner as to include\tagricultural\n\t income, be deemed to\t be that portion of\tsuch\n\t income as so computed on which income-tax is not\n\t payable under\t that Act, and agricultural income-\n\t tax at the rates specified in the Schedule shall\n\t be payable on the whole of such\tagricultural\n\t income as so computed.\n\t X\t X\t\tX\t X\t X\n\t (3) For\tthe purpose of\t the assessment of\n\t agricultural income-tax under this section or any\n\t rule made thereunder a certified copy of an order\n\t of an\t assessment under the Indian Income-tax Act,\n\t 1922, or a certified\t copy of an order of\t any\n\t appellate or\trevising authority or of the\tHigh\n\t Court or of the Supreme Court altering or amending\n\t such order of assessment under the provisions of\n\t that Act shall be conclusive evidence of\t the\n\t contents of such order.\"\n The Bengal Agricultural Income-tax (Amendment) Act,1980\n976\n(referred to hereinafter as \"the Bengal Amendment Act of\n1980\") was passed by the Legislature\tof the State of West\nBengal and published in the Gazette on 31st March, 1980. By\nSection 2 of that Act, Section 7A was inserted into\t the\nBengal Agricultural Income-tax Act, 1944 and\tthat section\nruns as follows:\n\t \"7A:\tNotwithstanding\t anything to the contrary\n\t contained in\tthis Act, in the case of an assessee\n\t being a company or a firm or other association of\n\t persons, the\tagricultural income of such assessee\n\t shall be computed in accordance with the method of\n\t accounting regularly employed by such assessee for\n\t such computation:\n\t Provided that if, in any case, the method of\n\t accounting as\t aforesaid is\tsuch that, in\t the\n\t opinion of the Agricultural\tIncome-tax Officer,\n\t the agricultural income cannot be computed,\t the\n\t computation shall be made on such basis and in\n\t such manner as the Agricultural Income-tax Officer\n\t may determine.\"\n Section 3\tof the\tAmendment Act of 1980 provides that\nsubsections (2)\t and (2A) of Section 8 of the Bengal Act of\n1944 shall be omitted\tand shall be always deemed to have\nbeen omitted. Section 7 of the Bengal Amendment Act of 1980\nruns as follows:\n\t \"(7) Notwithstanding any judgment, decree or\n\t order of any court, tribunal, or authority to the\n\t contrary, where any assessment under the Income-\n\t tax Act, 1961 of any agricultural income derived\n\t from tea has been made before the\tcoming\tinto\n\t force of this Act, the proceeding relating to such\n\t assessment may be taken and continued under the\n\t principal Act as if this Act had not been passed.\"\n It\t may be mentioned here that by\tthe Bengal\nAgricultural Income-tax\t (Amendment) Act, 1979, sub-section\n(2A) was inserted after sub-section (2) in Section 8 of the\nBengal Act of 1944. That Act\tremained in force only for a\nperiod of one year. The material portion of sub-section (2A)\nran as follows:\n\t \"(2A) Where the computation of\t the income\n\t derived from\ttea has\t not been completed for the\n\t purposes of assessment of income-tax under\t the\n\t Income-tax Act, 1961, or where such\t computation\n\t has been completed but the\n977\n\t assessment under the Income-tax Act, 1961,\t has\n\t been annulled\t or set\t aside under that Act and no\n\t order of assessment under Section 25 has been made\n\t within six years from the end of the year in which\n\t the agricultural income was first assessable, the\n\t Agricultural\t Income-tax\t Officer shall,\n\t notwithstanding anything to the contrary contained\n\t in this Act, assess the\tagricultural income\n\t derived from\ttea in\tsuch manner and within such\n\t period as may be prescribed and shall determine\n\t the sum payable by the assessee on the basis of\n\t such assessment:\n\t X\t X\t\t X\t X\t\t X\"\n In the State of Kerala, agricultural income-tax\t was\nsought to be imposed by the Agricultural Income-tax\tAct,\n1950 passed by the Legislature of the State of Kerala. The\ndefinition of the term \"agricultural income\" is contained in\nsub-section (a)\t of Section 2 of the\tKerala\tAgricultural\nIncome-tax Act.\t The said definition is in line with\t the\ndefinition of the said term under the Act of 1922. There was\nan Explanation\tafter clause (2) of\tsub-section (a) of\nSection 2. The material part of sub-section (a) runs as\nfollows:\n\t \"2(a) \"agricultural income\" means-\n\t (1) any rent or revenue derived from land which is\n\t used for agricultural purposes;\n\t (2) any income derived from such land by\n\t (i) agriculture; or\n\t (ii) the performance by a cultivator or\n\t receiver\t of rent-in-kind of\tany process\n\t ordinarily employed by a cultivator or\n\t receiver\t of rent-in-kind to\t render\t the\n\t produce raised or received by him fit to be\n\t taken to market; or\n\t (iii) the sale by a cultivator or receiver of\n\t rent-in-kind of\t the produce\t raised\t or\n\t received by him, in respect of which no\n\t process\thas been performed other than a\n\t process of the nature described in sub-clause\n\t (ii);\n\t x\t x\t\t x\t x\t\t x\"\n978\n The Explanation referred\t to above, which followed\nclause 2 ran as follows:\n\t \"Agricultural income derived from such land by the\n\t cultivation of tea means that portion of\t the\n\t income derived from the cultivation, manufacture\n\t and sale of tea as is defined to be agricultural\n\t income for the purposes of the enactments relating\n\t to Indian Income-tax\"\n By Section\t 2 of the Agricultural Income-tax Amendment\nAct, 1980 (Kerala Act 17 of 1980), the said Explanation was\nomitted with effect from 1.4.1980. The affidavit in reply\nfiled on behalf of the State of Kerala as well as the speech\nof the\tFinance Minister of the said State at the time of\nintroducing of\tthe Bill which was passed as\t the Kerala\nAmendment Act of 1980,\t make it clear that the intention\nbehind deleting of Explanation was to make the entire income\nearned\tby a\tperson\tfrom the sale\t of tea grown\t and\nmanufactured by\t him in\t the State liable to the levy of\nagricultural income-tax.\n The main question which we have to consider is whether\nthe aforesaid provisios in the Bengal Amendment Act of 1980\nare in\texcess of the legislative competence of the\tWest\nBengal State Legislature. It will also have to be considered\nwhether\t by reason of the\tdeletion of the aforesaid\nExplanation effected by the Kerala Amendment Act of 1980 the\ndefinition of the term \"agricultural income\" in sub-section\n(a) of\tSection 2 of the Kerala Agricultural Income-tax\nbecame void as in excess of the legislative competence of\nthe State Legislature.\n A perusal of Entry 82 of List I in the Seventh Schedule\nand Entry 46 in List II makes it clear the respective\nLegislatures of\t the State of West Bengal and the State of\nKerala could pass laws\t imposing taxes\t only in respect of\nagricultural income; and in respect of income other\tthan\nagricultural income, it is only Parliament which has\t the\npower to legislate in respect of taxes on such income. sub-\narticle (1) of Article\t 366 of the Constitution states that\n\"agricultural income\" means such income as is defined as\n\"agricultural income\"\t for the purposes of enactments\nrelating to Indian income-tax.\t It is\tsignificant that the\nwords used are not \"as defined by the enactments relating to\nIndian income-tax\" but \"as defined for the purposes of the\nenactments relating to Indian income-tax.\" (emphasis\nsupplied). We have already set out the definition of the\nterm \"agricultural income\" under the Act of 1922 as well as\nthat in\t the Act of 1961 which replaced the Act of 1922. If\nthese definitions are\tread by themselves, it would be\ndifficult to say\n979\nthat there is any conflict between them and the definition\nof the\tterm \"agricultural income\" contained in the Bengal\nAgricultural Incometax Act, 1944 after its amendment in 1980\nor the\t definition of the\tsaid term in\t the Kerala\nAgricultural Income-tax Act of 1950, even after the deletion\nof the\taforesaid Explanation.\tHowever, it must be realised\nthat Section 59 of the Act of 1922 and Section 295 of the\nAct of 1961 both deal with rule making powers. Under the Act\nof 1922\t that power is given to the Central Board of Revenue\nand under the Act of 1961 that power is given to the Central\nBoard of Direct Taxes.\t Clause (a) of sub-section (2) of\nSection 59 of the Act of 1922 specifically confers powers on\nthe Central Board of Revenue to make rules prescribing the\nmanner in which and the procedure by which income, profits\nand gains shall be arrived at in the case of income derived\nin part\t from agriculture and\tin part from\tbusiness. A\nsimilar power is conferred under Section 295 of the Act of\n1961 on\t the Central Board of Direct Taxes to make rules in\nrespect of income derived in part from agriculture and in\npart from business. The only difference between Section 59\nof the\tAct of\t1922 and Section 295 of the Act of 1961 in\nthis connection, to which our attention was drawn by Mr.\nPotti, is that sub-section (5) of Section 59 provides that\nthe rules made under the said Section shall be published in\nthe Official Gazette and shall thereupon have effect as if\nenacted in the Act of 1922 whereas Section 296 of the Act of\n1961 provides that the rules made under the Act of 1961 have\nto be laid before each House\tof Parliament in the manner\nprescribed in Section 296 and both Houses of Parliament are\nentitled to make such changes therein as they may resolve or\nthey might direct that\t the rule should not be given effect\nto. This, however, does not make much difference. Rule 24 of\nthe Income-tax\tRules, 1922 and Rule 8 of the Income-tax\nRules; 1962 framed under Section 295 of the Act of 1961 are\nin pari materia.\n It may be mentioned here that Rule 7 of the Income-tax\nRules, 1962 deals with\t the computation of income which is\npartially agricultural\tand partially from business and Rule\n8 is the specific rule dealing with income derived from the\nsale of\t tea grown and manufactured by the seller in India.\nUnder sub-rule\t(1) of\tRule 8,\t it is\tprovided that\tsuch\nincome shall be computed as if it were income derived from\nbusiness and 40 per cent of such income is deemed to be\nincome liable to tax.\n A perusal\tof the\taforesaid Rule\t8(1) makes it clear\nthat under the said rule, income from the sale of tea grown\nand manufactured by a seller in India has to be computed as\nif it were income derived from\n980\nbusiness which\twould imply that the deductions allowable\nunder the Act of 1961 in respect of\tincome derived\tfrom\nbusiness would\tbe allowable in the case of income derived\nfrom the sale of tea grown and manufactured by a seller and\nfurther allowance would be granted as set out in Rule 8(2)\nand 40 per cent of the income so computed would be deemed to\nbe income liable to the levy of income-tax and the balance\nof the\tincome would be liable to tax as agricultural income\nsubject to such further deductions as the law pertaining to\nthe levy of\tagricultural income-tax might\t allow.\t The\nquestion is whether Rule 24 of the Income-tax Rules, 1922\nand Rule 8 of the Income-tax Rules, 1962 can be said to form\npart of\t the definition\t of the\t term \"agricultural income\"\nunder the Act of 1922 and the Act of 1961 respectively.\n In Karimtharuvi Tea Estates Ltd. & Anr. v. State of\nKerala & Ors., [1965]\t48 I.T.R. 85 a\t Bench comprising of\nfive learned Judges of this\tCourt was called upon to\nconsider the question of the power of a State Legislature to\nmake a\tlaw in\trespect\t of taxes on\tagricultural income\narising from tea plantations and the\tBench took the view\nthat the power of the State Legislatures in this connection\nis limited to\tlegislating with respect to\tagricultural\nincome determined in accordance with Rule 24 of the Indian\nIncome-tax Rules, 1922, under which income derived from the\nsale of tea grown and manufactured by the seller is first to\nbe computed under Section 10 of the Act of 1922, as if it\nwere income derived from business. Any expenditure by the\nassessee, not being an allowance described in clauses (i) to\n(xiv) of Section 10(2)\t of the Act of 1922 and not being in\nthe nature of capital\texpenditure or\tpersonal expenses of\nthe assessee, laid out\t or expended wholly and exclusively\nfor the\t purposes of such business would be deductible. Of\nthe income so computed, 40 per cent, being under Rule 24 of\nthe Indian Income-tax Rules, 1922 treated as income liable\nto income-tax,\t the other 60 per cent alone will be\n\"agricultural income\".\tThe State Legislature is free in the\nexercise of its plenary legislative power to allow further\ndeductions from\t such computed\tagricultural income in\t the\ncase of\t tea plantations as it\t considers fit but it cannot\nadd to\tthe amount of agricultural income so\tcomputed by\nproviding that\tcertain items of expenditure deducted in the\ncomputation of the income from business under the provisions\nof the\tIndian Income-tax Act, 1922 be not deducted and be\nconsidered to be a part of the taxable agricultural income.\nThe State Legislature cannot enact such a provision which\nwould make agricultural income\t from tea plantations higher\nthan what it would be if computed in accordance with Rule 24\nread with Section 10 of the Indian Income-tax Act. In that\ncase, the provision of\t the Kerala Agricultural Income-tax\nAct which had to be considered was\n981\nExplanation 2 to Section 5 added by an amending Act in 1961\nwhich deals with the computation of agricultural income. The\nprovisions of Section 2 of the Kerala Agricultural Income-\ntax Act which defines \"agricultural income\" for the purposes\nof that Act and the Explanation to clause (2) of sub-section\n(a) of\tthat Section, which Explanation has now been deleted\nby the\timpugned Amendment Act, were also considered. It was\npointed out (p. 91 of the Report) that:\n\t \"`Agricultural income' as\t defined in\t the\n\t Constitution means 'agricultural income for\t the\n\t purpose of the enactments relating to income-tax'.\n\t One such enactment is the Income-tax Act. Rule 24\n\t of the Income-tax Rules 1922 has been made under\n\t the power conferred by Section 59 of the Income-\n\t tax Act and has effect as if enacted in that Act.\n\t When Section 59 of the Income-tax Act provides for\n\t the Rules made under\t that Act to prescribe\t the\n\t proportions of income from business\t and income\n\t from agriculture in the entire income derived in\n\t part from agriculture and in part from business,\n\t the proportion so prescribed\t must be taken to be\n\t prescribed by the\tAct. These rules were in\n\t existence in 1950 when\t the\tConstitution\n\t incorporated\tthe definition of \"agricultural\n\t income\" from\tthe Income-tax Act by reference. The\n\t definition of\t the term was\tbound up with\t the\n\t Rules.\" (emphasis supplied).\n It was pointed out by Mr. Potti that\tthere is a\nreference in the aforesaid judgment to the said Explanation\ncontained in Section 2(a)(2) of the\tKerala\tAgricultural\nIncome-tax Act, which is\tnow deleted,\t and which\nsubstantially incorporated the provisions of Rule 24 of the\nIncome-tax Rules, 1922\t about\tthe computation of income\nderived by an assessee\t from the sale\t of tea grown\t and\nmanufactured by\t him and the respective proportions of the\nsame which could be regarded as agricultural\t income\t and\nother income respectively. It\tis, however, not possible to\nsay that the aforesaid decision is essentially based on the\nsaid Explanation as contended by Mr. Potti.\n The question whether computation\t of income by\t the\nCentral Income-tax authorities could be disregarded by an\nAgricultural Income-tax\t Officer acting under\t the Kerala\nAgricultural Income-tax Act came up for consideration before\nanother Bench of five learned Judges of this Court in Anglo-\nAmerican Direct Tea Trading Co. Ltd. etc. v. Commissioner of\nAgricultural Income-tax, Kerala, [1968] 69 I.T.R. 667. In\nthat case the year in question were 1958-59 to 1961-62,\n982\nwith the result that the provisions of the Act of 1922 as\nwell as the Act of 1961 and of the Income-tax Rules, 1922 as\nwell as\t the Income-tax\t Rules, 1962 had to be taken\tinto\naccount. This Court followed its decision in the case of\nKarimtharuvi Tea Estates Ltd.\t& Anr.\tv. State of Kerala &\nOrs., [1965] 48 I.T.R. 85 and held that income from the sale\nof tea\tgrown and manufactured by an assessee\t is derived\npartly from business and partly from agriculture.\tThis\nincome is computed as if it were income from business under\nthe Central Income-tax Act and the Rules made thereunder. Of\nthe income so computed\t as aforesaid, 40 per cent is deemed\nto be income derived from business and assessable to non-\nagricultural income-tax. The balance of 60 per cent of the\nincome so computed is agricultural income within the meaning\nof the\tCentral Income-tax Act and the Constitution of India\nand the\t power of the State Legislature to make a law in\nrespect of taxes on agricultural income arising from\t tea\nplantations is\tlimited to legislating with respect to the\nagricultural income so determined. It was also pointed out\nthat the Explanation to Section 2(a)(2) of\t the Kerala\nAgricultural Income-tax\t Act, 1950 adopted this rule of\ncomputation. It\t was held in that case that the Agricultural\nIncome-tax Officer acting under the Kerala Act was bound to\naccept the computation of the tea income already made by the\nCentral Income-tax authorities and to assess\tonly 60\t per\ncent of\t the income so computed, less deductions allowable\nunder Section 5 of the Kerala Act in so far as the same had\nnot been allowed in the assessment under the Central Income-\ntax Act. The Court also held\tthat if, before Agricultural\nIncome-tax Officer proceeds to make the assessment under the\nKerala Act, an\t assessment of\t income\t by the Income-tax\nOfficer under Rule 24 of the Income-tax Rules, 1922 or Rule\n8 of the Income-tax Rules, 1962 had been made, then\t the\nAgricultural Income-tax\t Officer acting under the Kerala Act\nis bound to accept the computation of the tea income already\nmade by\t the Central Income-tax Authorities as aforesaid. In\nthe case of State of Tamil Nadu v.\tKannan\tDevan Hills\nProduce Co. Ltd., [1972] 84 I.T.R. 475 a Division Bench\ncomprising of two learned Judges of this Court followed the\naforesaid decisions.\n In the case of Tea Estate India P. Ltd. v. Commissioner\nof Income-tax, West Bengal II, [1976] 103 I.T.R. 785 a Bench\ncomprising of two learned Judges of this Court observed (at\nP. 795) as follows:\n\t \"Income which\t is realised by sale of tea by a tea\n\t company which grows tea on its land and thereafter\n\t subjects it\t to manufacturing process in\t its\n\t factory is an integrated income.\tSuch income\n\t consists of two elements or com-\n983\n\t ponents. One\telement or component consists of the\n\t agricultural income which is\t yielded in the form\n\t of green leaves purely by the land over which tea\n\t plants are grown. The second element or component\n\t consists of non-agricultural income\twhich is the\n\t result of subjecting green leaves which\t are\n\t plucked from the tea plants grown on the land to a\n\t particular manufacturing process in the factory of\n\t the tea company.\"\n The decisions in the cases of Karimtharuvi Tea Estates\nLtd. & Anglo-American Direct Tea Trading Co. Ltd., [1968] 69\nI.T.R. 667, [1965] 48\tI.T.R. 85 referred to\tearlier have\nbeen cited with approval by a Division Bench of this Court\nin Commissioner\t of Income-tax,\t Madras v. R.M. Chidambaram\nPillai, etc., [1977] 106 I.T.R. 292.\n A reading of Article 245 of the Constitution with Entry\n82 of List I and Entry 46 of List II in the Seventh Schedule\nmakes it clear that the State\t Legislature has exclusive\njurisdiction to legislate in respect of\t taxes\t on\nagricultural income; and in respect\tof taxes on other\nincome, it is Parliament alone which can legislate. The term\n\"agricultural income\" used in that Entry has to be construed\nin accordance with the\t definition of\t the said term in\nArticle 366(1)\tof the\tConstitution of\t India and that sub-\narticle states\tthat agricultural income means \"agricultural\nincome\tas defined for the purposes\t of the enactments\nrelating to Indian Income-tax\". A scrutiny of the aforesaid\ndecisions of this Court in Karimatharuvi Tea Estates Ltd.\n(supra) and Anglo-American Direct Tea\t Trading Co. Ltd.,\n[1968] 69 I.T.R. 667 shows that this Court has consistently\ntaken the view that the definition of the term \"agricultural\nincome\" for the purposes of the Act of 1922 and tha Act of\n1961, being Acts pertaining to the levy of income-tax, has\nto be considered in the light of Rule 24 of the Income-tax\nRules, 1922 in the case of the Act of 1922 and Rules 7 and 8\nof the\tIncome-tax Rules, 1962 as far as the Act of 1961 is\nconcerned. An analysis of the said decisions shows that this\nCourt has taken the view that, in case of income from the\nsale of\t tea grown and manufactured by an assessee, Rule 24\nof the\tIncome-tax Rules, 1922 and Rule 8 of the Income-tax\nRules, 1962 although at first glance they appear to be rules\nof apportionment and\t computation, must be\t treated as\nincorporated in\t the definition\t of the\t term \"agricultural\nincome\" in the Act of 1922 and the Act of 1961 respectively.\nIt is true that in both the cases, Karimtharuvi Tea Estates\nLtd. (supra) & Anglo-American\tDirect Tea Trading Co. Ltd.,\n[1968] 48 I.T.R. 83 it has been noticed by this Court that\nthe said Explanation to Section 2(a)(2) to\t the Kerala\nAgricultural Income-tax Act\n984\nwas in line with the provisions of Rule 24 of the Income-tax\nRules, 1922 and Rule 8 of the Income-tax Rules, 1962 but\nthat by\t itself does not make any difference and the reading\nof the\taforesaid decisions makes it perfectly clear\tthat\neven without that Explanation\tthe position would have been\nthe same. The conclusion which must follow is that although\nthe Explanation\t has been deleted from\t clause (2) of sub-\nsection (a) of Section 2 of the Kerala Agricultural Income-\ntax Act\t and in\t spite of the amendments carried out by the\nAmendment Act of 1979\tand thereafter\tthe Amendment Act of\n1980 in\t the case of the Bengal Agricultural Income-tax Act,\nan Agricultural\t Income-tax Officer acting under the Kerala\nAgricultural Income-tax Act or the\tBengal\tAgricultural\nIncome-tax Act\thas no power to levy agricultural income-tax\nexcept in respect of 60 per cent of the income derived by an\nassessee from the sale of tea grown and manufactured by him\nand computed in the manner laid down under the relevant\nCentral Incometax Act and the Rules framed thereunder.\n It was, however, contended by Mr. Potti on behalf of\nthe State of Kerala and Mr. Tapas Ray on behalf of the State\nof West\t Bengal that the position as\t emerging from\t the\naforesaid decisions of this Court has\t been altered by the\ndecision of this Court in the case of Commissioner of Sales\nTax, Lucknow v. D.S. Bist & Ors., [1979] 44 S.T.C. 392. In\nthat case the assessee\t owned some tea gardens in the State\nof U.P.\t and sold the tea-leaves grown by him in his gardens\nafter processing and packing the same. A question arose\nwhether\t the tea leaves sold by\tthe assessee\twere\nagricultural produce grown by\thimself and the sales were,\ntherefore, not\texigible to sales tax\tunder the Proviso to\nSection 2(i) of the U.P. Sales Tax Act, 1948. The contention\nof the\trevenue was that the goods in question, namely, tea\nleaves grown and processed as aforestated had ceased to be\nan agricultural produce after processing\t and were,\ntherefore, exigible to sales tax. The\t processes to which\ntea-leaves were\t subjected by the assessee was described by\nthe Revising Authority as follows (p. 394):\n\t \"(1) The tea-leaves were first of all subjected to\n\t withering in shadow in\trooms on a wooden\n\t floor for about 14 hours.\n\t (2)\tThen they were crushed\t by hand or foot and\n\t were then roasted for about 15 minutes.\n\t (3)\tLater they were roasted on mats for about 15\n\t minutes.\n985\n\t (4) And then they were covered by wet sheets for\n\t generating fermentation.\t During this process\n\t\t the colour\tof leaves was changed\tfrom\n\t green\t to yellowish.\n\t (5) he leaves were then subjected to grading with\n\t sieves of various sizes. Fanning machines are\n\t\t also used\tin completing\tthe grading\n\t process.\n\t (6)\tThe produce was then finally roasted\twith\n\t charcoal for obtaining suitable\t flavour and\n\t colours.\n\t (7) It is this final product which was eventually\n\t sold by the assessee.\"\n It was observed by the Supreme Court that if the tea-\nleaves sold by\t the assessee\tsubstantially retained\t the\ncharacter of being an\tagricultural produce, the assessee's\nsales would not be exigible to sales tax. If, on the other\nhand, the leaves had\t undergone such vital\t changes by\nprocessing that\t they lost their character of being an\nagricultural produce and became a different commodity, then\nthe sales made by the assessee were exigible to sales tax.\nThe Court held\t that,\ton the\t findings recorded by\t the\nrevising authority, it could not be justifiably held in law\nthat the tea-leaves lost their character of being an\nagricultural produce and became something different. All the\nprocesses applied by the assessee were necessary for\t the\npurpose of saving the tea-leaves from perishing, making them\nfit for transporting and marketing them. It was submitted by\nlearned Counsel\t that this decision laid down that\t the\nprocesses involved in producing marketable tea were\tonly\nsuch as would be carried out by an agriculturist to make his\nproduce marketable and hence the entire income derived from\nthe sale of\tsuch tea leaves should be\tregarded as\nagricultural income. In our view, it is impossible to accept\nthis contention. In the first place, the question before the\nCourt in that case was not relating to agricultural income-\ntax at\tall but\t relating to sales tax. Moreover, what the\nCourt was called upon\tto consider, and what\t it did to\nconsider, was only whether the tea-leaves after undergoing\nthe processes set out\tearlier continued to be agricultural\nproduce or whether they became a different commodity which\ncould not be regarded\tas an agricultural produce. It is\nsignificant that the aforesaid decisions rendered by Benches\ncomparising five learned Judges of this\t Court\t in\nKarimatharuvi and Anglo-American's, Cases, as well the other\ndecisions referred to earlier, have not been referred to in\nthat decision at all,\tand rightly so, because the Division\nBench in Bist's Case was called upon to consider\n986\na question which was essentially a different question. The\nratio of the decision\tin Bist's Case has no application to\nthe cases before us. That decision is, therefore, of no\nassistance to learned Counsel\tfor the\t State of Kerala and\nthe State of West Bengal.\n We find that the\tjudgment in Bist's Case referred to\nabove has been distinguished by a learned Single Judge of\nthe Kerala High Court in High Land Produces Co. Ltd. & Anr.\netc. v.\t Inspecting Asstt. Commr. of Agricultural Income-tax\n& Sales\t Tax (Special),\t Kottayam, and Ors. etc., [1984] 148\nI.T.R. 746 in considering the scope of the power of\t the\nState Legislature to tax agricultural\t income. That\tcase\narose after the aforesaid amendment of Section 2(a) of the\nKerala\tAgricultural Income-tax Act,\t 1950\twhereby\t the\nExplanation at\tthe end of Section 2(a)(2)\tthereof\t was\ndeleted. It has been pointed out by the learned Judge that\nthe Explanation\t to Section 2(a) of the Kerala Agricultural\nIncome-tax Act,\t 1950 was, in substance, in harmony with the\nconcept of mixed income contemplated by Section 295(2)(b) of\nthe Act\t of 1961 and Rule 8 of Income-tax Rules, 1962. The\nExplanation specifically referred to that portion of\t the\nincome from tea as was defined by the Central Act and Rule 8\nto be agricultural income by exclusion from total income\ncomputed under\tthe Central Act. This\tExplanation has been\nomitted by the Amendment Act of 1980. The State Legislature\nis perfectly competent to omit any provision which it has\nenacted. However, it cannot thereby widen the ambit of the\nState Act so as to bring to tax the entire income derived\nfrom the sale of tea grown and manufactured by an assessee.\nIt has been pointed out by the learned Judge in his judgment\nthat none of the observations in Bist's Case could be read\nto mean\t that the entirety of\tthe income derived from the\nsale of\t tea grown and manufactured by the assessee would be\nchargeable to\t agricultural\tincome-tax, for such a\nconstruction would not only be unwarranted by the facts and\nreasoning of that case, but would also be\tdirectly in\nconflict with the Central statute and\t the principle\tlaid\ndown by\t a larger Benches comprising five learned Judges of\nthe Supreme Court in the aforesaid two decisions.\n It was contended by Mr. Potti and Mr. Ray, learned\nCounsel for the Respondent States that Rule 8 of the Income-\ntax Rules, 1962 was not a part of an enactment and could not\nbe regarded as an enactment and hence it need not be taken\ninto account in considering the definition of the\tterm\n\"agricultural income\" under the Constitution. It was pointed\nout by\tthem that, unlike sub-section\t(5) of Section 59 of\nthe Act of 1922 which provided that the rules made under the\nsaid section would have effect, after\t publication in\t the\nGazette, as if enacted in\n987\nthat Act, Section 296\tof the\tAct of\t1961 merely provided\ninter alia that a rule framed\t under Section 295 had to be\nlaid, as soon as may be, before each\t House of Parliament\nwhile it is in Session for a total period of thirty days and\nunless it was directed\t to be\tdeleted or amended by\tboth\nHouses of Parliament it would be given effect to. It was\npointed out by them that Rule\t 8, therefore,\tcould not be\nsaid to\t be enactment and hence it could not\t affect\t the\ndefinition of the term\t \"agricultural income\" under Article\n366(1) of the Constitution. We are unable to\t accept this\nsubmission. What Article 366(1) provides is that the term\n\"agricultural income\" has the same meaning as attributed to\nit for\t the purposes\tof enactments\trelating to Indian\nincometax and in our view, it is quite clear that Rule 8 of\nthe Income-tax Rules, 1962 as well as Rule 24 of the Income-\ntax Rules, 1922, pertain to and are\tbound up with\t the\ndefinition of\t the term \"agricultural income\" for\t the\npurposes of laws or enactments pertaining to Indian income-\ntax and hence the provisions of those rules have to be taken\ninto account\tin considering\t the meaning of the\tterm\n\"agricultural income\" under sub-article (1) of Article 366\nof the Constitution.\n It was next contended by Mr. Potti & Mr. Ray that Rule\n8 went\tbeyond the scope of the rule making power conferred\nby Section 295 of the Act of 1961 and hence was ultra vires.\nThis submission\t has to\t be rejected. Clause (b) of\tsub-\nsection (2) of Section 295 specifically confers power on the\nrule making authority to make rules relating to the manner\nin which and the procedure by which income for the purposes\nof the Act of 1961 would be arrived at in the case of income\nderived in part from agriculture and in part from business\nand Rule 8 clearly provides\t for the manner in which\ncomputation of income for the purposes of the Act of 1961 is\nto be made in\tthe case of income derived from the sale of\ntea grown and manufactured by a seller in India and hence we\ntotally fail to see how it can be said that the said rule\ngoes beyond the scope\tof the\trule-making power conferred\nunder Section 295.\n In view of what we have discussed above, it appears to\nus that\t although the Explanation to Section 2(a)(2) of the\nKerala Agricultural Income-tax Act, 1950 has been deleted by\nthe Amendment Act of 1980, the result would\tstill be the\nsame, namely, that the\t Kerala State Legislature can impose\ntax only in respect of 60 per cent of the income derived by\nan assessee who sells\ttea grown and manufactured by him in\nIndia and such income has to be computed in the manner laid\ndown in\t the Act of 1922 and thereafter in the Act of 1961\nfor computation of business income. The same is the position\nin respect of the powers of\n988\nthe legislature\t of the State of West Bengal in spite of the\namendments made by the said legislature by the Amendment Act\nof 1980 and earlier under the amending Act of 1979 which was\nin force only for one year as we have stated before. It is\nnot necessary to strike down the said amendments because\nthey do\t not directly conflict with the definition of the\nterm \"agricultural income\" under the Constitution as we have\npointed out earlier, but we may make it clear that they do\nnot confer any wider power on\t the State Legislature to\nimpose taxes on agricultural income than what we have set\nout earlier.\n Before parting with the matter, it must be mentioned\nthat the validity of the aforesaid amendments to the Bengal\nAgricultural Income-tax\t Act, 1944 made in 1980 and\t the\ndeletion of the Explanation in Section 2(a)(2) of the Kerala\nAgricultural Income-tax\t Act were challenged as being ultra\nvires and invalid in law on several other grounds. We have\nnot thought it necessary to go into these grounds in view of\nwhat we\t have held, as set out above. Dr. Pal on behalf of\nTata Tea Co. and Tata Finlay Co. also challenged\t the\namendment carried out in 1980 in the Bengal\tAgricultural\nIncome-tax Act\ton the\tground of being its retrospective in\noperation. It also appears to us unnecessary to go into this\nquestion in view of what we have already held.\n In the result, although none of\tthe prayers in\t the\npetitions is granted in terms, the Petitioners substantially\nsucceed in the Petitions. There will\tbe a declaration in\nterms of the last but\t one paragraph\t in favour of\t the\nPetitioners. Considering the facts and circumstances of the\ncase, however,\twe feel that the parties should bear and pay\ntheir own costs and we direct accordingly.\nS.L.\t\t\t\t Petitions disposed of.\n989" }, { "title": "Ahmed Ibrahim Sahigra Dhoraji vs Commissioner Of Wealth Tax, Gujarat on 7 April, 1981", "url": "https://indiankanoon.org//doc/484472/", "text": "Ahmed Ibrahim Sahigra Dhoraji vs Commissioner Of Wealth Tax, Gujarat on 7 April, 1981\nEquivalent citations: 1981 AIR 1562, 1981 SCR (3) 402, AIR 1981 SUPREME COURT 1562, 1981 TAX. L. R. 1127, 1981 SCC (TAX) 187, 1981 UPTC 1924, (1981) 21 CURTAXREP 356, (1981) 6 TAXMAN 51, 1981 (3) SCC 77, (1981) 61 TAXATION 61, (1981) 129 ITR 314, (1981) 2 SCWR 1\nAuthor: E.S. Venkataramiah\nBench: E.S. Venkataramiah, R.S. Pathak\n PETITIONER:\nAHMED IBRAHIM SAHIGRA DHORAJI\n\n\tVs.\n\nRESPONDENT:\nCOMMISSIONER OF WEALTH TAX, GUJARAT\n\nDATE OF JUDGMENT07/04/1981\n\nBENCH:\nVENKATARAMIAH, E.S. (J)\nBENCH:\nVENKATARAMIAH, E.S. (J)\nPATHAK, R.S.\n\nCITATION:\n 1981 AIR 1562\t\t 1981 SCR (3) 402\n 1981 SCC (3)\t77\t 1981 SCALE (1)694\n CITATOR INFO :\n RF\t 1981 SC1759\t (23)\n\n\nACT:\n Wealth Tax\t Act, 1957-Section 2(m)-Finance Act,\t1965\ngave incentives for\tvoluntary disclosure of concealed\nincome-Assessee declared large amount\tof such\t income\t and\npaid tax as provided by Finance Act-Tax so paid-Whether an\nallowable deduction as \"debt owed \" under the Wealth Tax\nAct.\n\n\n\nHEADNOTE:\n As part of a measure to\tmop up\tunaccounted money on\nwhich no income tax had been paid, an incentive scheme was\nprepared by the Government under which a person disclosing\nsuch income was required to pay a specified\trate of\t tax\nwithout attracting the penal provisions of the Income Tax\nAct. Section 68 of the Finance Act, 1965 provided that a\nperson\tmaking\t voluntary disclosure\t of his income in\naccordance with\t the provisions\t of the section would be\ncharged income\ttax at\t a specified rate notwithstanding\nanything contained in the Income Tax Act.\n The assessee had a large sum of such unaccounted money\nin his\tpossession. Without allocating the total sum amongst\nthe different assessment years, he declared that he had a\nsum of Rs. 7 lakhs in his possession which was earned by him\nduring the assessment years 1957-58 to 1964-65. Income Tax\nin respect of\tthis income computed\tin accordance\twith\nsection 68 of the Finance Act was paid by him.\n In the wealth tax\t returns filed by him in response to\nthe notice issued by\t the Wealth Tax officer for\t re-\nassessment consequent on the disclosure of his wealth the\nassessee claimed deductions of income-tax paid under section\n68 of the Finance Act. But the Wealth Tax officer disallowed\nthe claim holding that since the assessee had not shown the\nliability to pay income tax in his balance sheets for the\nrespective years the deductions claimed by him could not be\nallowed in any of the assessment years.\n The Appellate Assistant\tCommissioner dismissed\t the\nassessee's appeal. The Tribunal, on the other hand,\theld\nthat the liability constituted\t a \"debt owed\"\t because in\ntruth and substance, it was a liability under the Income Tax\nAct, 1922 or 1961 and not a new liability created by the\nFinance Act, 1965.\n On reference the High Court held\t in favour of\t the\nRevenue on the ground\tthat section 68 of the Finance Act\nenacted a new charge of tax on an ad hoc\n403\nbasis on disclosed income and, therefore, it was not a \"debt\nowed\" which could be allowed as a deduction under the Wealth\nTax Act.\n On behalf\tof the\tRevenue it was contended that since\nthe tax\t paid by the assessee under the voluntary disclosure\nscheme was in discharge of a liability created for the first\ntime by\t the Finance Act, 1965\t it was not an allowable\ndeduction under the Wealth Tax Act.\n Allowing the appeal,\n^\n HELD: The\tassessee was entitled to claim deduction of\nincome tax paid on the amounts added to his total wealth\nunder section 2 (m) of the Wealth Tax Act in the course of\nthe assessment proceedings. [418 B] C\n 1. Merely\tbecause the amounts were disclosed in a\ndeclaration under section 68 of the Finance Act, they did\nnot cease to be incomes not already charged to income tax.\nAlthough the Finance Act merely levied a fixed rate of tax\nin respect of all the income\tdisclosed without allowing\ndeductions, exemptions\tand such other allowances which are\nallowable under\t the Income Tax Acts,\tits function was no\nmore than that of an annual Finance Act despite the fact\nthat it\t made certain alterations in regard to the filing of\ndeclaration and computation of taxable income. [414 G-H]\n 2. The nature of the declaration which was dependent on\nthe volition of the\tdeclaring and\tthe fact that\t the\nliability to\ttax the amount was contingent upon\t the\nwillingness of\tthe declaring to disclose the amount would\nnot make a difference\tbecause such voluntary\t disclosure,\neven in\t the absence of section 68, would have exposed the\nassesseee to assessment or reassessment. The voluntary\ncharacter of the declaration cannot alter the character of\nthe tax. [415 A-B]\n 3. The true position is that the amount declared has\nthe liability to pay income tax embedded in\t it on\t the\nvaluation date\tbut only the ascertainment of that liability\nis postponed to a future date. [417 C]\n In the instant case its determination was allowed to be\ndone in\t accordance with the provisions of section 68. Even\nthough this section was a complete code in itself it was\nonly a scheme which provided a method for the liquidation of\nan already existing income tax liability which was present\non the relevant valuation date. [417 D]\n 4. Nor did the absence of allocation of\t the amount\ndisclosed amongst different assessment years detract the tax\nfrom being called a tax on income because such allocation\nwould not achieve any\tadditional purpose in the scheme of\nsection 68 This section is in the nature of a package deal.\nThe net\t result achieved was that the declarant was treated\nas having discharged all his liability in respect of such\nincome under the income tax law. [415E]\n404\n 5. The finding of\t the High Court that\t section 68\ncreated a fresh charge\t is incompatible with the foundation\nof the very reassessment proceedings under section 17 of the\nWealth Tax Act. [415 H]\n 6. Moreover section 68, at more than one place stated\nthat what was pay able was income tax which clearly showed\nthat what was payable under the section was income tax. [412\nB-C]\n C.I.T. v.\tKhalau\tMakanji\t Spinning and\tWeaving\t Co.\nLtd.,40 I.T.R.\t189. Madurai District\tCentral\t Cooperative\nBank Ltd. v. Third I.T.O. 101 I.T.R. 24, distinguished.\n C. K. Bahu Naidu v. Wealth Tax Officer, 112 ITR 34; C.\nIi T v. GirdhariLal, 99 ITR 79; C.W.T. v. B.K Sharma, 110\nI.T.R. 902; C.W.T. v.\tBansidhar Poddar. 112 ITR 957; D.C.\nShah v. C.W.T., 117 ITR 348; Bhagwandas Jain v. Addl. C.W.T.\n116 ITR\t 347 and Bhagwanidas Binani v. C.W.T., 124 ITR 783,\napproved.\n\n\n\nJUDGMENT:\n CIVIL APPELLATE JURISDICTION: Civil Appeal Nos.\t1217\n1222 of 1973.\n Appeals by\t certificate from the\tJudgment and order\ndated 21.12 1972 of the Gujarat High Court in Wealth Tax\nReference No. 2 of 1969.\n V. S. Desai, Shardul S. Shroff and H. S. Parihar for\nthe Appellant.\n S. T. Desai, P. A. Francis and Miss A. Subhashini for\nthe Respondent.\n The Judgment of the Court was delivered by\n VENKATARAMIAH, J. On the basis of a certificate granted\nunder section 29(1) of the Wealth-tax Act 1957 (hereinafter\nreferred to as the Act ) the appellant has\tfiled these\nappeals against\t the judgment and order dated December 21\n1972 of the High Court of Gujarat in Wealth-tax Reference No\n2 of 1969. The\t questions referred to the High Court under\nsection 27 of the Act by the In come-tax Appellate Tribunal\nAhmedabad Bench read thus:\n \"(1) Whether on the facts\t and in the circumstances of\n\t the case the liability in respect of income-tax\n\t payable on the concealed income disclosed by the\n\t assessee pursuant to section 68 of the Finance Act\n\t 1965 is deductible under section 2(m) of\t the\n\t Wealth-tax Act 1957 in computing the net wealth of\n\t the assessee for the\n405\n\t assessment years 1959-60 1960-61 1961-62 1962-63 A\n\t 1963-64 and 1964-65.\n (2) Whether the Tribunal was right in holding that the\n\t liability to pay tax on the amount disclosed under\n\t section 68 of the Finance Act 1965 arose not under\n\t that Finance Act but under section 3 of the Indian\n\t Income-tax Act 1922.\n Having regard to the assessment years in question the\nsecond question should be read as including within its scope\nalso the question whether the Tribunal was right in holding\nthat the liability to pay tax on the amount disclosed under\nsection 68 of the Finance Act, 1965 arose not under that\nFinance Act but under section 4 of the Income-tax Act 1961.\n The assessee who is the appellant in these appeals had\nbeen assessed on the basis of his returns of net wealth and\nthe statements\t filed\t therewith in\t the status of an\nindividual to wealth-tax under\t section 16(3)\tof the\t Act\nduring the assessment years 1957-58 t\t 1964-65 on various\ndates between January 15 1960 and July 14 1964. Subsequently\nthe assessee made a disclosure under\tsection\t 68 of\t the\nFinance Act 1965 (hereinafter\treferred to as the Finance\nAct) of Rs.7,00,000 which had been shown as having been\ncovered by some hundi\ttransactions with a concern known as\nM/s Abdul Razack & Co. in his books of account at the Bombay\nbranch\tof his\t business. Alongwith the declaration\t the\nassessee filed\ta statement that this\tconcealed income had\nbeen earned by him during the\t assessment years 1957-58 to\n1964-65. He however did not allocate the total sum disclosed\namongst different assessment years but showed it in a lump\nsum. The amount of income-tax was computed at 60% of the\ntotal concealed income and it was paid as contemplated under\nsection 68 of\tthe Finance Act. The\t Wealth-tax officer\nthereafter reopened the assessments or the\tassessee to\nwealth-tax for\tassessment years 1957-58 to 1964-65 on the\nground that he had reason to believe that certain wealth of\nthe assessee had escaped assessment during the said years\nand that his belief was founded on the disclosure made by\nthe assessee under section 68 of the Finance\t Act. We are\nconcerned in these appeals only with\tthe assessment years\n1959-60 to 1964-65. On scrutiny it was found on the basis of\npeak cash credits in each assessment year that the amounts\ncovered by hundies were as under:\n406\n Assessment\t years\t\t\t Peak cash credits\n 1959-60\t\t\t\t RS. 4,57,465/-\n 1960-61\t\t\t\t RS. 5,59,8231-\n 1961-62\t\t\t\t RS. 6,38,325/-\n 1962-63\t\t\t\t RS. 6,82,974/-\n 1963-64\t\t\t\t RS. 7,01,578/-\n 1964-65\t\t\t\t RS. 7,01,578/-\n As can be seen from the\tabove statement the assessee\nhad substantial sums with him in the years in question which\nhad not been\t disclosed earlier. Since these amounts\nconstituted the\t wealth which was liable to\ttax on\t the\nrespective valuation dates the\t assessee filed\t returns of\nwealth for the above mentioned years in compliance with the\nnotices issued\tto him\tand in\tthe course of the assessment\nproceedings he claimed the deduction for income- tax payable\nby him\tin respect of the sums which had been progressively\nearned by him from year to year and\twhich were liable to\nincome tax under the relevant income tax law in force during\nthe years relying upon the decision of this Court in Kesoram\nIndustries and\tCotton Mills Ltd v. Commissioner of Wealth-\ntax (Central), Calcutta. The Wealth-tax officer however held\nthat since in his balance selects the assessee had not shown\nthe liability to pay income-tax the deduction of the amounts\nclaimed could not be allowed in any of the assessment years\nand accordingly\t the orders of reassessment were passed by\nhim after disallowing the claim made\tby the\tassessee. He\nhowever included the sums mentioned in the above statement\nin the\tnet wealth of the respective assessment years and\ndetermined the\twealth-tax payable by\t the assessee.\t The\nappeals filed by the assessee against\t the orders of\t the\nWealth-tax officer\tbefore\t the Appellate Assistant\nCommissioner were dismissed.\tOn further appeal to\t the\nIncome-tax Appellate-Tribunal the Tribunal held that\t the\ndeduction claimed in respect of each assessment year was in\ntruth and substance a liability under the Indian Income-tax\nAct 1922 or the Income-tax Act 1961 as the case may be and\nnot a new liability created by the Finance Act and therefore\nit constituted a debt owed by the assessee on the respective\nvaluation dates\t within the meaning of\t section 2(m) of the\nAct and\t that the deduction claimed should be allowed while\ncomputing the net wealth\n407\nof the\t assessee. Accordingly\t the Tribunal\tallowed\t the\nappeals of the assessee. Thereafter at the instance of the\nCommissioner of Wealth-tax the Tribunal referred under\nsection 27 of the Act the two questions mentioned above to\nthe High Court. After\thearing the parties the High Court\nanswered both the questions in the negative and in favour of\nthe Revenue by its judgment dated December 21 1972. On a\ncertificate granted by the High Court under section 29(1) of\nthe Act the assessee has come up in appeal to this Court.\n The relevant part of section 2(m) of the Act reads:\n\t \"2. (m) net wealth means the amount by which the\n\t aggregate value computed in\taccordance with\t the\n\t provisions of\t this Act of all the assets wherever\n\t located belonging to the assessee on the valuation\n\t date including assets required to be included in\n\t his net wealth as on that date under this Act is\n\t in excess of the aggregate value of all the debts\n\t owed by the assessee\t on the valuation date other\n\t than\n In the case of Kesoram Industries and Cotton Mills Ltd.\n(supra.) this Court has held that income-tax other than that\nfalling under clause (iii) of\t section 2(m)\tof the\t Act\npayable on the valuation date is a debt owed by the assessee\nand hence is deductible from\t the total wealth of\t the\nassessee while determining the net wealth for the purpose of\nlevying wealth-tax.\n The principal question which arises for consideration\nin these appeals relates to the true character of the tax\npaid by\t the assessee in the proceedings under section 68 of\nthe Finance Act and the applicability\t of the ratio of the\ndecision of this Court in the case of Kesoram Industries and\nCotton Mills Ltd. (supra). Since it is contended by\t the\nassessee that the tax\tso paid\t was the tax which he\t was\nliable to pay under the relevant income-tax law in force\nduring the assessment years in question and it is urged by\nthe Department\tthat the said payment was in discharge of a\nliability created for the first time by the Finance Act it\nis necessary to examine the provisions of section 68 of the\nFinance Act in some detail in so far as they relate to the\nquestion involved in this case. The relevant part of section\n68 of the Finance Act which came into force on March 1 1965\nreads:\n408\n \"68. Voluntary disclosure of income-(1) Where\t any\nperson makes a declaration in accordance with sub-section\n(2) in respect of the amount representing income-\n (a) which he has failed\tto disclose in a return of\n\t income for any assessment year filed by him before\n\t the first day of March 1965 under\t the Indian\n\t Income-tax Act 1922 (Xl of 1922) or the Income-tax\n\t Act 1961 (XLIII of 1961) or\n (b) which has escaped assessment\t for any assessment\n\t year for which an assessment has been made before\n\t the 1st day of March 1965 under either of the said\n\t Acts or\n (c) for the assessment of which no proceeding under\n\t either of the said Acts has been taken before the\n\t 1st day of March 1965,\n he shall notwithstanding anything contained in the said\n Acts be charged income-tax at the rate specified in sub\n section (3) in respect of the amount so declared if he-\n (i) pays the amount of income-tax as computed at the\n\t said rate or\n (ii) furnishes adequate security for the payment there\n\t of in\t accordance with sub-section (4) and under\n\t takes to pay such income-tax within a period not\n\t exceeding six months from\t the date of\t the\n\t declaration as may be specified by him therein or\n (iii)On or\t before the 31st day of May 1965 pays such\n\t amount as is not less than one-half of the amount\n\t of income-tax\t as computed at the said rate or\n\t furnishes adequate security for the payment there-\n\t of in\t accordance with sub-section\t(4) and in\n\t either case assigns any shares in or debentures of\n\t a joint stock company or mortgages any immovable\n\t property in favour of the President\t of India by\n\t way o\t f security for the payment of the balance\n\t and undertakes to Fay such\tbalance\t within\t the\n\t period referred to in clause (ii).\n409\n (2) The declaration shall be made to the Commissioner\n\t and shall specify the period required to be\n\t specified under clause (ii)\tof sub-section\t (1)\n\t contain the name address and signature of\t the\n\t person making the\tdeclaration and also\tfull\n\t information in respect of the following matters\n\t namely:- B\n\t (a) Whether he was assessed to income-tax or not\n\t and if assessed the name of the Income-tax\n\t Circle in which he was assessed.\n\t (b) The amount of income declared giving where\n\t available details of the financial year or\n\t years in\t which the income was earned and the\n\t amount pertaining to each such year.\n\t (c) Whether the amount declared is represented by\n\t cash (including\t bank\t deposits) bullion\n\t investments in shares debts due from other\n\t persons commodities or any other assets and\n\t the name\t in which it is held and location\n\t thereof:\n\t Provided that\t the declaration shall be of no\n effect unless it is made after the 28th day of February\n 1965 and before the Ist day of June 1965. F\n (3) The rate of income-tax chargeable in respect of\n\t the amount referred to in sub-section (1) shall be\n\t sixty per cent of such amount:\n\t Provided that\t if before the Ist day of April 1965\n the tax on the amount declared is paid by the declarant\n at the rate of fifty seven per cent of such amount he\n shall not\tbe liable to pay any further\ttax on\tsuch\n amount.\n (4) A person shall not be considered to have furnished\n\t adequate security for the payment of the tax for\n\t the purposes of sub-section (I) unless the payment\n\t is guaranteed\t by a scheduled bank or the person\n\t makes an assignment in favour of the President of\n\t India of any security of the Central or State\n\t Government.\n\t Explanation-For the purposes of this sub-section\n where an assignment of Government securities is made in\n410\n favour of\tthe President the amount covered by\tsuch\n assignment shall be the market value of the securities\n on the date of the assignment.\n (5) Any amount of income-tax paid in pursuance of a\n\t declaration made under this\tsection shall not be\n\t refundable in\t any circumstances and no person who\n\t has made the declaration shall be entitled i n\n\t respect of any amount so declared or any amount of\n\t tax so paid to reopen any assessment\t or\n\t reassessment made under the Indian Income-tax Act\n\t 1922 (XI of 1922) or the Income-tax Act\t1961\n\t (XLIII of 1961) or the Excess Profits Tax Act 1943\n\t (XV of 1940) or the Business Profits Tax Act 1947\n\t (XXI of 1963) or the Companies (Profits) Surtax\n\t Act 194 (VII of 1964) or claim any\t set-off or\n\t relief in any appeal\t reference revision or other\n\t proceeding in\t relation to any such assessment -\n\t or reassessment.\n (6) (a) Any amount declared by any person under this\n\t section in respect of which the tax referred to in\n\t subsection (3) is paid shall not be included in\n\t his total income for\t any assessment under any of\n\t the Acts mentioned\thl sub-section\t (5) if he\n\t credits in the books of account if any maintained\n\t by him for any source of income or in any other\n\t record the amount declared as reduced by the tax\n\t paid thereon under this section...\n Section 68(1) of the Finance Act\t provides that where\nany person makes a declaration in accordance with section\n68(2) in respect of any amount represent n g income which he\nhas failed to disclose\t in his\t return or which has escaped\nassessment for\tany assessment\tyear for which an assessment\nhas been made before March 1, 1965 under either of the two\nActs namely the Indian\t Income-tax Act 1922 and the Income-\ntax Act 19 1 or for the assessment of which no proceeding is\ntaken before March 1, 1965 he shall notwithstanding anything\ncontained in the said Acts be charged income-tax at the rate\nspecified in sub-section (3) thereof\tin respect of\t the\namount so declared. If\t he pays the amount of income-tax as\ncomputed at the said rate or furnishes adequate security for\nthe payment thereof in accordance with sub-section\t (4)\nthereof and undertakes to pay such income-tax within\t the\nperiod specified in the section he would be absolved from\nthe liability under the relevant law of in\n411\ncome-tax. The declaration should however be filed with the\nparticulars mentioned\t in section 68(2). Section 68(3)\nprovides that the rate\t of income-tax chargeable in respect\nof the\tamount referred to in the declaration shall be sixty\npercent of such amount\t provided that\tif the\ttax is\tpaid\nwithin April 1, 1965 the tax\tpayable would be fifty seven\npercent. Sub-section (5) of section 68 of the Finance Act\nprovides that any amount of income-tax paid in pursuance of\na declaration\t made under that section shall not be\nrefundable in any circumstances nor a declarant is entitled\nin respect of any amount declared or tax paid thereon to\nreopen any assessment or reassessment made under the Indian\nIncome-tax Act\t1922 or Income-tax Act 1961 or any other Act\nmentioned therein. He cannot also claim any\t set-off or\nrelief in any appeal reference revision or other proceeding\nin relation to any such assessment or reassessment. Clause\n(a) of\tsub-section (6)\t of section 68 grants immunity from\nproceedings under the Acts mentioned in section 68(5) to the\nassessee by providing that any amount declared by any person\nunder section 68 in respect of which the tax referred to hl\nsub-section (3) thereof is paid shall not be included in his\ntotal income for any assessment under any of the assessments\nmade under any of the Acts mentioned in section 68(5) if he\ncredits in the books of account if any maintained by him for\nany source of income or hl any other\t record\t the amount\ndeclared as reduced by\t the tax paid thereon under section\n68.\n On an examination of the several provisions contained\nin section 68 of the Finance Act it becomes clear that they\nhad been enacted as a part of the measures adopted with a\nview to\t unearthing unaccounted\t money in possession of the\nmembers of the public on which income-tax had not been paid\nand also to create an incentive to such persons to\tmake\ndisclosure of their unaccounted incomes and\tto pay\t tax\nthereon at the specified rate without the liability to pay\nany interest thereon or penalties for\t non-compliance with\nthe law\t of income-tax.\t The declaration to be\t riled by a\nperson under section 68 is about an amount representing his\nincome earned in an earlier accounting period which has not\nbeen subjected\tto tax\t in the ordinary course although\nincome-tax was\tpayable hl respect of\tit. If the declarant\npays tax at the rate specified in sub-section (3) of section\n68 he would be absolved from any further liability to tax on\nsuch income. The declaration has to be made\t before\t the\nCommissioner of Income-tax and it should contain\tfull\ninformation namely whether he was assessed to income-tax or\nnot and\t if assessed the name\tof the\tIncome-tax circle in\nwhich he was assessed the\n412\namount of income declared giving w ere available details of\nthe financial year or\tyears in which the income was earned\nand the\t amount pertaining to each such year and whether the\namount declared\t is represented by cash (including\tbank\ndeposits) bullion investment in shares debts due from other\npersons commodities or any other assets and the name in\nwhich it is held and the location thereof. Section 68 also\nstates at more than one place that what is payable pursuant\nto a declaration is income-tax. Section 68 (1) contains\nwords such as he shall notwithstanding anything contained in\nthe said Acts be charged income tax at the rate specified in\nsub-section (3) . if he pays the amount of income-tax at the\nsaid rate and undertakes to pay such income-tax . Section\n68(3) contains the words: the rate of income-tax chargeable.\nSection 68(5) refers to: (a) any amount of income-tax paid\nand section 68(7) contains the words:\t paid the income-tax\nunder this section . These words show that Parliament was of\nthe view that what was payable under section 68 was income-\ntax.\n The points\t of difference\tbetween any Finance Act that\nmay be\tpassed annually\t fixing the rates of income tax and\nsection 68 of the Finance Act however relate to (i) the time\nwithin which and the manner in which information in regard\nto the\tincome\tis to\tbe furnished (ii) the method of\ncomputation of\ttaxable income\tand E(iii) the rate of tax\npayable on such income. The declaration which is equivalent\nto a return to be filed under the Indian Income-tax Act 1922\nor Income-tax Act 1961 need not contain all the particulars\nthat have to be furnished in\tsuch return. The declaration\ncan be\tfiled during the period mentioned in\t proviso to\nsection 68(2).\tThere is no provision to claim various\ndeductions exemptions set off etc. in respect of the income\ndisclosed in the declaration as in the case of income shown\nin an ordinary return.\t Since the rate of tax is a uniform\none and\t does not vary\t with the quantum of\t the income\ndisclosed there\t is no\tneed to\t trace it to any specific\nassessment year. Further the declaration is a voluntary one\nand it\t is not pursuant to\tany notice issued by\t the\nDepartment.\n The question is whether these distinguishing features\nmake the amount disclosed\tin a declaration anything\ndifferent from\tthe income of an assessee and the tax paid\nunder section 68 anything different from a tax on income. In\nother words does section 68 impose a new charge on\t the\nincome\tof the declarant for the\t first\ttime wholly\nindependent of\tthe levy under\t section 3 of\t the Indian\nIncome-tax Act\t192' or section 4 of the Income-tax Act 1961\n? The High\n413\nCourt has given the following reasons for holding that the\ntax paid under section 68 is not tax on income payable under\nthe Indian Income-tax Act 1922 and Income-tax Act 1961: (i)\nthe charge under the Income-tax Act is on the total income\nof the\tprevious year and not\ton any\tparticular item of\nincome but that is not so under section 68,(ii) payment of\ntax under section 68 has no reference to any assessment year\nand unless it is correlated to an assessment year it can not\nbe ordinary income-tax and (iii) the\tdisclosed income is\nchargeable to tax without allowing usual deductions\t and\nwithout providing for any procedure for qualification.\n The High Court proceeded\t to hold that\t section 68\nenacted a new charge of tax on an ad hoc basis on disclosed\nincome irrespective of the assessment year in which it was\nearned. The disclosure of concealed income coupled with the\npayment of tax as contemplated in clause (i) of sub-section\n(1) according to the High Court not only created a charge of\ntax but\t also satisfied\t it. In\t its view the disclosure of\nconcealed income coupled with\tfurnishing of security\t and\nundertaking as\tcontemplated in\t clause (ii) created a\t new\ncharge of tax and when the undertaking was carried out by\npayment of tax the liability arising from the charge of tax\nwas satisfied.\n one basic fallacy underlying the conclusion of the High\nCourt that a new charge is being levied under section 68\nappears to be the assumption that the amount in question in\nrespect of which tax is payable under that provision was not\nliable to income-tax earlier.\tlt should be borne in mind\nthat the declaration contemplated under section 68 is a\ndeclaration in\trespect of income of earlier years which had\nbeen concealed\tand on\twhich tax was\tpayable\t during\t the\nrelevant assessment years in the ordinary course. Section 3\nof the\tIndian Income-tax Act 1922 and section 4 of Income-\ntax Act\t 1961 which are couched more or less in the same\nlanguage state\tthat where any Central\t Act enacts that inc\nme-tax shall be charged for any year at any rate or rates\nincome-tax at that rate or those rates shall be charged for\nthat year in accordance with and subject to the provisions\nof the\trelevant Act in respect of the total income of the\nprevious year or previous years as the case may be of every\nperson. Now it is well settled by a\tseries\tof judicial\ndecisions that\tthe liability to income-tax arises by virtue\nof the\tcharging section in the relevant Income-tax Act and\nit arises not later than the close of the previous year even\nthough the rate of tax for the year\tof assessment may be\nfixed after the close of the previous year and\t the\nassessment has\tnecessarily to\tbe made\t after the previous\nyear.\n414\nThe quality of chargeability of any income to tax is not\ndependent upon\tthe passing of the Finance Act though its\nquantification may be governed\t by the\t provisions of\t the\nFinance Act in respect\t of any assessment year vide Wallace\nBrothers and Co. Ltd. v. Commissioner of Income-tax. Messers\nChatturam Horilram Ltd. v. Commissioner of Income-tax and\nOrs. and Kalwa Devadattam & Ors. v. The Union of India &\nOrs. In the case of Kesoram Industries and Cotton Mills Ltd.\n(supra) Subba Rao J. (as he then was) summarised the legal\nposition thus :-\n\t To summarize:\t A debt\t is a present obligation to\n pay an ascertainable sum\tof money, whether the amount\n is\t payable in prasenti\tor in\tfuturo:\t debitum in\n prsesenti, solvendum in futuro. But a Sum payable upon\n a contingency does not become a\tdebt until the said\n contingency has happened. A liability to pay income-tax\n is a present liability though it becomes payable after\n it is quantified in accordance with ascertainable data.\n There is a perfected debt at any rate on the last day\n of the accounting year and not a contingent liability.\n The rate\tis always easily ascertainable. If\ttile\n Finance Act is passe l it is the rate fixed by that\n Act; if the Finance Act has not yet been passed it is\n the rate\tproposed in Finance Bill pending before\n Parliament or the rate in force in the preceding year\n whichever is more favourable to the assessee. All the\n ingredients of a debt are present. It is a present\n liability of an ascertain able amount.\n It is thus clear\tthat it- the assessee had brought to\nthe notice of\tthe Department\t in the usual\t course\t the\nexistence of incomes which were later\t on declared under\nsection 68 they would\thave been taxed during the relevant\nassessment year. Hence merely because they are disclosed in\na declaration filed under section 68, they cannot cease to\nbe income not already\tcharged for income tax. It is true\nthat the Finance Act in question merely levied a fixed rate\nof tax\tin respect of\tall the income disclosed without\nallowing deductions exemptions and\t set-off under\t the\nrelevant income-tax law yet its function was no more than\nthat of\t a Finance Act passed\tannually even though it made\ncertain alterations with regard to filing of declaration and\ncomputation of taxable income\n415\n It was however urged on behalf of the Department that\nthe nature of the declaration which was dependent upon the\nvolition of the declarant and the fact that the liability to\ntax the\t amount mentioned therein was\tcontingent upon\t the\nwillingness of the declarant to disclose the amount ought to\nmake a\tdifference. We\tdo not\tthink so because any\tsuch\nvoluntary disclosure by an assessee even in the absence of\nsection 68 would have\texposed\t him to an assessment or\nreassessment as the case may be being made in respect of the\nsum disclosed\tas part of the income of the relevant\nassessment year\t and of course with the additional liability\nto payment of interest and levy of penalty and perhaps with\nthe right to claim deductions if any\t admissible in\t the\ncircumstances of the\t case\tand the benefit of other\nprocedural rights. The voluntary\tcharacter of\t the\ndeclaration cannot therefore alter the character of the tax.\nThere is also no substance in\t the contention\t that in the\nabsence of the allocation of the amount disclosed amongst\ndifferent assessment years the tax payable under section 68\ncannot be termed as a tax on income because such allocation\nwould not achieve any\tadditional purpose in the scheme of\nsection 68 Irrespective of the other income which may have\nbeen determined in an ordinary proceeding under the relevant\nlaw of\tincome-tax a fixed rate of tax is payable under\nsection 68(3) and hence the amount disclosed being treated\nas the\tincome of any particular year would not make\t any\ndifference regarding the quantum of tax. Nor is there any\nother purpose to be served by such allocation. Section 68 is\nin the\tnature of a package deal but the net result achieved\nis that\t the declarant\tis treated as having discharged all\nhis liability in respect of the said income under\t the\nincome-tax law.\n There is one other circumstance which may be noticed\nhere. The tax levied under section 68 can be only a tax on\nincome. If we hold it otherwise it may become a tax on\nwealth itself.\tThe basis of the liability in this case is\nthe admission made by the declarant that the amount declared\nwas his\t income earned\tin previous years but concealed from\nthe knowledge of the Department. In these circumstances it\ncannot be said that the amount declared under section 68 is\nnot income which was not taxable under the Indian Income-tax\nAct 1922 or the Income-tax Act 1961 as the case may be. The\nfinding of the High Court that section 68 created a fresh\ncharge is incompatible with the foundation of the\tvery\nreassessment proceedings under section\t 17 of\tthe Act. The\nbasis of these proceedings is the information which\t the\nWealth-tax officer acquired\n416\nfrom the declaration filed by the assessee in this case that\nthe assessee\twas in\t possession of unaccounted funds\nrepresented by the\t non-genuine\thundis\t which\t had\nprogressively reached the level of Rs. 7,01,578 during the\nassessment year\t 1964-65 from the level of Rs. 4,57;465 in\n1959-60 by gradual accumulation of income. But for\tthis\nassumption in the absence of any other material reassessment\nunder the Act would have been possible only in the last year\nin which the disclosure was made. That however is not the\ncase here.\n The High Court in support of its view has relied on the\ndecision of the Kerala\t High Court though not\t the reason\ngiven in support of that decision in C. K. Babu Naidu v.\nWealth-tax Officer. That decision has since been reversed in\nappeal by a Division Bench of that Court in C. K. Babu Naidu\nv. Wealth-tax Officer, 'A' Ward, Calicut & anr in which the\nKerala High Court has\theld that the\t liability for\t tax\narising under section 68 of the Finance Act\twas nothing\nother than the liability under the Income-tax Act\t1961\nitself and accordingly has allowed the deduction of tax paid\nunder section 68 as a debt owed on the valuation date. In\nCommissioner of\t Wealth-Tax, Haryana, H.P. & Delhi-III v.\nGirdhari Lal, Commissioner of\tWealth-tax v. B. K Sharma,\nCommissioner of\t Wealth tax, West Bengal-III,\tCalcutta v.\nBansidhar Poddar, D. C. Shah v. commissioner of Wealth-tax\nMysore and Shri Bhagwandas Jain v. Addl. Commissioner of\nWealth-tax, M.\tP., the High\tCourts\tof Delhi Allahabad\nCalcutta Karnataka and Madhya Pradesh have accepted the view\nthat the tax paid under section 68 of the Finance Act should\nbe treated as a debt owed for purposes of determining net\nwealth as denied in section 2(m) of the Act. The High Court\nof Bombay has also\t recalled the\tsame conclusion in\nBhagwandas Binani v. Commissioner of\t Wealth-tax, Bombay\nCity-III but in doing\tso it observed that it appears to us\nthat although it is not possible to say that the amount of\nincome-tax paid\t under section 68 of the Finance Act 1965 is\nincome-tax under the charging sec-\n417\ntion 3\tor section 4 of the I.T. Acts it must be regarded as\nincome-tax paid\t in lieu of such income-tax and would be\nentitled to the same considerations as lavished by\t the\nSupreme Court on the ordinary charge of income-tax. The High\nCourt of Bombay appears to take the view as the High Court\nof Gujarat has done in the decision under appeal that a new\nliability is created by section 68 but it however would not\nhave any adverse effect on the right of the assessee to\nclaim the deduction. While we approve\t of the conclusion\nreached by the High Court of\tBombay we feel that the said\ndecision to the extent\t it attempts to follow\t the reason\ngiven by the Gujarat High Court to hold that the liability\nunder section 68 is a fresh liability is not correct. The\ntrue position is that the amount declared has the liability\nto pay\tincome-tax imbedded in it on the valuation date but\nonly the ascertainment of that liability is postponed to a\nfuture date. In the instant\tcase its determination is\nallowed to he done in accordance with the provisions of\nsection 68. Even though it may appear to be itself a\ncomplete code it is only a scheme which provides a method\nfor the liquidation of an already\texisting income-tax\nliability which\t was present on the relevant valuation date.\nThe view does not in any way To counter to any observations\nmade by\t this Court in Commissioner of Income-Tax, Bombay\nCity I\tv. Khatau Makanji Spinning and Weaving Co. Ltd. In\nthat case this Court was concerned with the validity of a\ncharge\tlevied\tby the\t Finance Act 1951 in\t respect of\ndividends distributed in excess of the specified limit under\nclause (ii) of the proviso to\t Paragraph of Part I of the\nFirst Schedule to that Act as applied to the assessment year\n1953-54 by the Finance\t Act 1953. This Court held\tthat\nincome-tax was\ta tax on income of the previous year and it\nwould not cover some thing which was not the income of the\nprevious year or made\tfictionally so\tand according to the\nscheme of that provision it was impossible to say that the\nadditional income-tax was properly laid upon the total\nincome because\twhat was actually taxed was never a part of\nthe total income of the previous year. This\tdecision is\nclearly distinguishable\t from the present case where what is\ntaxed is the income which was ordinarily liable to tax but\nwhich had not been included in the return of the assessee or\nwhich had escaped assessment or which was still to be\nassessed to income-tax under the relevant Income-tax Act. It\nwas in\tfact a\tpart of the total income though not assessed\ntill the declaration was made. Merely because it is stated\nthat the rate of tax charged on the\n418\namount declared is sixty per cent or fifty-seven per cent as\nthe case may be it does not cease to be a part of the total\nincome. This is not a case where what was not in fact income\nhad been converted into income by section 68. For the same\nreason the Department cannot derive any support from\t the\nobservations made by this Court in Madurai District Central\nCo-operative Bank Ltd. v.\tThird Income tax officer,\nMadurai.(l) We\tare therefore of the view that the assessee\nwas entitled to claim deduction of income tax payable on the\namounts added to his total wealth under section 2(m) of the\nAct in the course of the reassessment proceedings.\n In the result these appeals are allowed the judgment of\nthe High Court is set aside and the questions referred to it\nare answered in the affirmative and\t in favour of\t the\nassessee. The\t Department will pay\t the costs of\t the\nappellant-assessee Hearing fee one set.\nP.B.R.\t\t\t\t\t Appeals allowed.\n419" }, { "title": "Union Of India & Ors vs M.V.Valliappan & Ors on 27 July, 1999", "url": "https://indiankanoon.org//doc/1156980/", "text": "Union Of India & Ors vs M.V.Valliappan & Ors on 27 July, 1999\nEquivalent citations: AIR 1999 SUPREME COURT 2526, 1999 (6) SCC 259, 1999 AIR SCW 2689, 1999 TAX. L. R. 799, 1999 (3) LRI 847, 1999 (6) ADSC 620, (1999) 105 TAXMAN 605, 1999 (8) SRJ 57, 1999 ADSC 6 620, (1999) 5 JT 134 (SC), (1999) 155 CURTAXREP 193, (1999) 238 ITR 1027, (1999) 4 SCALE 290, (1999) 152 TAXATION 496, (1999) 6 SUPREME 235\nAuthor: M.B.Shah\nBench: S.P.Bharucha, B.N.Kirpal, S.Rajendra Babu, S.S.M.Quadri, M.B.Shah\n CASE NO.:\nAppeal (civil) 1612 of 1988\n\nPETITIONER:\nUNION OF INDIA & ORS.\n\nRESPONDENT:\nM.V.VALLIAPPAN & ORS.\n\nDATE OF JUDGMENT: 27/07/1999\n\nBENCH:\nS.P.BHARUCHA & B.N.KIRPAL & S.RAJENDRA BABU & S.S.M.QUADRI & M.B.SHAH\n\nJUDGMENT:\nJUDGMENT\n\n\n\nDELIVERED BY:\nM.B.SHAH, J. \n\nM.B.Shah, J.\n\n These appeals by special leave are filed against\t the\njudgments and\torders\tpassed by the High Court of Madras\ndated 13.1.1988 in Writ Petition Nos.992 and 993 of 1981,\n162 & 6036 of 1983, 904-905, 994, 995, 5430, 6162 and\t9283\nof 1984, by the High Court of Karnataka dated 9.11.1993 in\nWrit Petition\tNos. 12312 to 12317\tof 1987 and dated\n25.11.1992 in W.P. No.23708 of 1992, and by the High Court\nof Gujarat dated 29.6.1993 in Income Tax Application\tNos.\n164 and 165 of 1993. By a common judgment and order passed\nin various writ petitions filed before the Madras High Court\n(M.V.\tValliappan & Ors. Vs.\tIncome-Tax Officer & Others\n170 ITR 238), the High Court struck down the provisions of\nSection\t 171(9) of the Income Tax Act, 1961 as violative of\nArticle\t 14 of the Constitution of India and that it suffers\nfrom the vice of legislative competence. In the High Court,\nnumber\tof writ petitions were filed\tinvolving questions\nrelating to the validity, scope and interpretation of\t the\nprovisions of\tSection 171 (9). For our purpose, it would\nsuffice to mention facts of Writ Petition No.994 of 1984 for\ndeciding the question involved in these appeals. In\t the\nsaid petition, it was the case of the petitioner that he was\na Karta of a Hindu undivided family consisting of himself,\nhis wife, his\t minor son and minor daughter.\tIt was\t his\ncontention that the Hindu undivided family was a partner in\na partnership\tfirm in which its funds were invested.\t On\n13th April, 1979, a partial partition of certain assets\nbelonging to the Hindu undivided family was effected\twith\neffect\tfrom that date by executing a deed of partition. An\napplication under Section 171(2) of the Income Tax Act, 1961\nfor recognition of the said partial partition came to be\nfiled before the Income Tax Officer. The Income Tax Officer\npassed\tan order dated 28th December, 1979 recognizing\t the\npartial\t partition. Thereafter for the assessment\tyear\n1980-81, a return was submitted on behalf of the Hindu\nundivided family on April 12, 1980 which did not include the\nincome\tfrom the property which was the subject matter of\npartial\t partition. The income derived from the assets that\nwere the subject matter of partial partition were declared\nby the respective individuals in their respective returns.\nIn accordance\t with the said return, assessment\t was\nfinalised. Similarly, wealth tax return for the assessment\nyear 1980-81 was also filed and accepted by the Income\t Tax\nOfficer. Thereafter,\ta notice dated March 4,\t 1983 under\nSection\t 148 of the Act was received\t by the petitioner\nstating that income of the petitioner had escaped assessment\nand the Income Tax Officer proposed to reopen the completed\nassessment for the year 1980-81. The assessee objected to\nthe re- opening of the assessment on the ground that order\nunder Section 171 of the Act recognising the partition\t not\nhaving\tbeen cancelled or revoked, continued to be effective\nand, thereafter, no income from the partitioned properties\ncould be assessed in\t the hands of the Hindu undivided\nfamily.\t These\t objections were rejected by the I.T.O.\t by\norder dated 30th November, 1983. Fresh assessment order for\nH.U.F.\t was made by including the income relating to\t the\nassets\twhich were partially partitioned and allotted to the\nindividual members of\t the Hindu undivided family.\tThat\nre-assessment order was challenged by filing writ petition.\nFacts in the other writ petitions were also similar to\t the\nfacts as stated above.\tThe High Court after considering the\nvarious contentions and decisions relied upon by the parties\narrived at and summarised its conclusion as under: -\n\n (1) Section 171(9) of the Income-tax\tAct, 1951,\ncannot\tbe sustained on the ground that it is a measure to\ncounteract the tendency to tax avoidance and it suffers from\nthe vice of legislative incompetence.\n\n (2) Section 171(9) of the Income-Tax Act, 1961, is\nalso void on the ground of violation of Article 14 of\t the\nConstitution of India.\n\n (3) Section 171(9) of\tthe Income-Tax\t Act, 1961,\nentrenches upon the charging provisions in Section 4 of the\nIncome-Tax Act, 1961, and purports to bring to charge\t the\nincome\twhich does not belong to the Hindu undivided family\nto be assessed in the hands of the Hindu undivided family.\nThe provision thus enlarges the scope of sections 4 and 5 of\nthe Act and is, therefore, invalid.\n\n (4) Section 171(9) of the Income-Tax Act, 1961 has the\neffect of fastening a penal liability on the Hindu undivided\nfamily when in fact, in the case of a partial partition, the\nliability for concealment of income is that of the member of\nthe Hindu undivided family who earned the income in his own\nright and not of the Hindu undivided family.\n\n (5) The\teffect of section 171(9) of the Income-Tax\nAct, 1961 is\tthat it virtually negatives the right of\npartition under the personal law only in certain cases of\npartition after December 31, 1978, and there is no valid\nbasis of justification for treating Hindu undivided families\nseparately in\ta hostile manner with reference to the\tdate\nDecember 31, 1978, the choice of the date being clearly\narbitrary.\n\n (6) The operation of Section 171(9) of the Income-Tax\nAct, 1961, is\t restricted only to cases where a claim in\nrespect\t of a\tpartial partition which\t is effected after\nDecember 31, 1978, is made for the\tfirst time in\t the\nassessment year 1980-81.\n\n (7) The provisions of Section 171(9) of the Income Tax\nAct, 1961, will not fasten any liability in respect of a\npartial\t partition which has already been recognised in\t the\nassessment year 1979-80 and a finding recorded in respect of\nsuch a\t claim for the assessment year 1979-80 will not be\naffected by the invalidating provision in clause (a) of\nsub-Section (9) of Section 171 of the Act.\n\n In Civil\t Appeal\t Nos.12590/95 & 5743-48 of 1995, a\nsimilar\t view has been taken by the Karnataka\t High Court\nfollowing the\tdecision rendered by the Madras High Court.\nThe Karnataka\tHigh Court has held Section 171(9) of\t the\nIncome\tTax Act, 1961 as unconstitutional and also declared\nSection\t 20A of the\tWealth\t Tax Act, 1957 which\t is\nsubstantially similar\tto Section 171(9) of the Income\t Tax\nAct as void\tbeing violative of Article 14 of\t the\nConstitution.\tThe Gujarat High Court has rejected\t the\nIncome\tTax Applications filed before it for\traising\t and\nreferring the following question:-\n\n whether on the facts and in the circumstances of the\ncase and in law, the Tribunal was right in coming to\t the\nconclusion that share\t income\t from the firm\tto the\t two\nsmaller\t HUFs cannot be clubbed in the hands of the bigger\nHUFs.\n\n In the said cases also, I.T.O. refused to recognise\npartial\t partition in\tview of the provisions\t of Section\n171(9)\tof the Act and added the share income of two smaller\nHUFs in the hands of the assessee bigger HUF.\t Since\tthe\nquestion involved in all these cases is of constitutional\nvalidity of Section 171(9) of the Income Tax Act, 1961, all\nthese matters were directed to be placed together before the\nConstitution Bench. Hence, these appeals are disposed of\nthis common judgment and order. Learned counsel appearing\non behalf of\tthe appellant-Revenue\tsubmitted that\t the\nfindings given\t by the High Court are, on the face of\t it,\nerroneous. He contended that there is no reason for holding\nthat Section 171(9) suffers from the vice of\t legislative\nincompetence or that the prescribed cut off date as\t31st\nDecember, 1978 is violative\t of Article 14 of\t the\nConstitution of India.\tThe cut off date is prescribed after\ntaking\tinto consideration the assessment year and is given\neffect\tfrom the assessment year 1980-81. It is his further\nsubmission that those who have partially partitioned\t HUF\nproperties prior to cut off date and those who have done it\nsubsequently are both distinct and different classes.\t As\nagainst\t this, learned Counsel for the respondents submitted\nthat the reasons recorded by the High Court\tfor holding\nsub-section (9) to be invalid do\tnot call for\t any\ninterference. Before appreciating the contentions raised by\nthe learned Counsel for the parties, it will be necessary to\nrefer to the relevant part of Section 171of the Act which is\nas under:\n\n 171(1) A Hindu family hitherto assessed as undivided\nshall be deemed for the purposes of this Act to continue to\nbe a Hindu undivided family, except where and in so far as a\nfinding\t of partition has been given under this section in\nrespect of the Hindu undivided family.\n\n (2) Where, at the time of making an assessment under\nSection 143 or Section 144, it is claimed by or on behalf of\nany member of\t Hindu family assessed as undivided that a\npartition, where total or partial, has taken place among the\nmembers\t of such family, the (Assessing) Officer shall\tmake\nan inquiry thereinto after giving notice of the inquiry to\nall the members of the family.\n\n (3) On the completion of the inquiry, the (Assessing)\nOfficer\t shall record a finding as to whether there has been\na total or partial partition of the joint family property,\nand, if there has been such a partition, the date on which\nit has taken place.\n\n (4) to (8) XX XX XX\n\n\n (9) Notwithstanding anything\t contained in\t the\nforegoing provisions of this\t section, where a partial\npartition has\ttaken place after the 31st day of December,\n1978, among the other members of a Hindu undivided family\nhitherto assessed as undivided, --\n\n (a) no claim that such partial partition has taken\nplace shall be inquired into under sub-Section (2) and no\nfinding\t shall\tbe recorded under sub-Section (3) that\tsuch\npartial\t partition had taken place and any finding recorded\nunder sub-Section (3) to that effect whether before or after\nthe 18th day of June, 1980, being the date of\tintroduction\nof the Finance (No.2) Bill, 1980, shall be null and void;\n\n (b) Such\t family\t shall continue to be liable to be\nassessed under this Act as if no such partial partition had\ntaken place;\n\n (c) Each\t member or group of members of\tsuch family\nimmediately before such partial partition and\t the family\nshall be jointly and severally liable for any tax, penalty,\ninterest, fine\t or other sum payable under this Act by\t the\nfamily\tin respect of any period, whether before or after\nsuch partial partition;\n\n (d) The\tseveral liability of any member or group of\nmembers aforesaid shall be computed according to the portion\nof the joint family property allotted to him or it at\tsuch\npartial partition,\n\n And the\t provisions of this\t Act shall apply\naccordingly.\n\n Explanation - --------\n\n From the aforesaid section, it is clear that for\t the\npurposes of income tax, the concept of partial partition of\nHUF was recognised, but is done away with by the amendment\nwhich specifically provides that where a partial partition\nhas taken place after 31st December, 1978 no claim of\tsuch\npartial\t partition having taken place shall be inquired into\nunder sub-Section (2) and no finding shall be recorded under\nsub-Section (3) that such partial partition has taken place.\nIf any\t such finding\tis recorded under sub-Section\t (3)\nwhether\t before\t or after 18th June, 1980 being the date of\nintroduction of Finance Bill (No. 2) 1980, the same shall\nbe null and void. The effect of the aforesaid\t sub-Section\nis that for the purposes of income- tax partial partitions\ntaking\tplace on or after 1-1-79 are not to be\t recognised.\nIf a partial partition has taken place after the cut\t off\ndate no inquiry as contemplated under sub-Section (2) by the\nIncome-Tax Officer shall be held. Even if the inquiry is\ncompleted and finding is given, it would be treated as null\nand void. In this view of the matter, contention raised in\nsome of the petitions by the learned Counsel for\t the\nrespondents that partial partition took place on 13th April,\n1979 and that in the assessment year it was recognised\t and\nbenefit\t was given to the assessee, has no significance in\nview of crystal clear language used in the sub-section that\npartial partition taking place after the cut off date is not\nto be\tinquired into and if inquired the findings would be\nnull and void. Such a family is to be assessed under\t the\nAct as\t if no partial partition has taken place. The\tnext\nquestion is whether the amendment to the aforesaid section\ncan be\t said to be in any way beyond the\t legislative\ncompetence. In our view, it is difficult to comprehend that\nthe said amendment can be termed as\t beyond\t legislative\ncompetence. The Parliament has the authority to delete or\namend any provision of the Income Tax Act and it cannot be\nsaid that it\t is beyond legislative competence.\t The\nlegislative competence is to be decided on the basis of the\nConstitution that empowers the Legislature to levy taxes on\nincome.\t The relevant\t item 82 of List I of\tthe Seventh\nSchedule to the Constitution empowers the Parliament to\nenact the legislation\t for imposition of taxes on income\nother than agricultural income. Further, the\t concept of\npartial partition of HUF was not recognised under the Income\nTax Act, 1922 and was recognised only under the Income\t Tax\nAct, 1961. All that is done by the amendment is to restore\nthe status quo ante that prevailed prior to 1961 Act. It is\nfor the legislature to decide whether the recognition of\npartial\t partition introduced in the Income-Tax Act should\ncontinue or not. If it considers that it has led to abuses\nor inconvenience, it is entitled to amend or delete. As per\nthe object and reasons of\tthe Amending Act, it\t was\nintroduced because multiple Hindu undivided families\twere\ncreated\t by effecting partial partitions as regards persons\nconstituting the joint family or as regards the properties\nbelonging to the joint family or both, which resulted in tax\nreduction or evasion\tand with a view to curbing\tthis\ncreation of multiple\tHindu undivided families by making\npartial\t partitions, it was proposed to de-recognise partial\npartitions of HUF effected after 31st December, 1978 for the\ntax purposes. By having multiple partial partitions qua the\nproperties or the members, it is possible to manipulate the\naffairs\t of the HUF for reduction of tax liability and to\nprevent such manipulation, sub-section (9) is added. Hence,\nit would be difficult to hold that addition of\t sub-Section\n171(9) is beyond the legislative competence. Further in the\ncase of Balaji vs. Income Tax\t Officer, Special\nInvestigation Circle,\tAkola and Others (1961) 63 ITR\t393,\nsimilar\t contention was considered by this Court and it\t was\nheld that it is settled law that entries in the Lists\t are\nnot powers but are only fields of legislation and Entry 82\ncan sustain law made to prevent the evasion of tax.\t The\nCourt dealt with the validity of Section 16 (3) (a) (i) &\n(ii) of the Income Tax Act, 1922 which provided that\t for\ncomputing the total income of any individual for the purpose\nof assessment,\t the shares in the profits of the\tfirm\nreceived by the wife and/or minor children shall be included\nin the total income of the individual if he is the partner\nof the said firm. The Court held that sub-section 3(a)(i)\nand (ii) was enacted for preventing evasion of tax and\t was\nwell within the competence of Federal Legislature. On\t the\nquestion of legislative competence, the Court referred to\nearlier\t decision in the case of Sardar Baldev Singh\t Vs.\nC.I.T.\t (1960) 40 ITR 605 and held as under:- So entry\t 54\n(Government of India Act, 1935) should be read not only as\nauthorising the imposition of a tax but also as authorising\nan enactment which prevents the tax imposed being evaded.\nIf it were not to be so read then the admitted power to tax\na person on his own income might often be made\t infructuous\nby ingenious contrivances.\n\n The decision holds that the said entry can sustain a\nlaw made to prevent the evasion of tax.\n\n The Court also dealt with\t the question\t of\nconstitutional\tvalidity on the ground of violation of\t the\ndoctrine of equality and negatived the contention that\t the\nlegislature ought to have classified genuine and non genuine\ncases of partnership by holding that demarcating a group any\nfurther, by sub classification as genuine and\t non-genuine\npartnerships, might defeat the purpose of the Act.\t The\nCourt observed as under: - This mode of taxation may be a\nlittle\thard on a husband or a father in the case of genuine\npartnership with wife or minor children, but that is offset,\nto a large extent, by the beneficient results that\tflow\ntherefrom to the public, namely, the prevention of evasion\nof income-tax, and also by the fact that, by and large, the\nadditional payment of tax made on the income of the wife or\nthe minor children will ultimately be borne by them in\t the\nfinal accounting between them.\n\n Next ground is with regard to violation of Article 14.\nThe amendment\tis brought with effect from 1st April,\t1980\nand is to apply in relation to assessment years 1980-81 and\nthereafter. It is true that two distinct\tclasses\t are\ncreated\t one of families having partial partition which has\ntaken place prior to the cut off date and other of partial\npartition taking place after the cut off date. Benefit\nwhich is conferred upon those assessees who have partially\npartitioned their property prior to the cut off date is not\nwithdrawn and\tothers who partitioned their property after\nthe cut off date would not get the same, but\t that would\nhardly\tbe a ground for holding it as violative of Article\n14. It is settled law that differentiation is not always\ndiscriminatory.\t If there is a rational nexus on the basis\nof which differentiation has been made with\t the object\nsought\tto be achieved by particular provision, then\tsuch\ndifferentiation\t is not discriminatory and does not violate\nthe principles\t of Article 14 of the\tConstitution.\tThis\nprinciple is too well- settled now to be reiterated by\nreference to cases. Further, whether the same result or\nbetter\tresult could have been achieved and better basis of\ndifferentiation could have been evolved is within the domain\nof Legislature\t and must be left to its wisdom. In\t the\npresent\t case, there is\t intelligible\tbasis\t for\ndifferentiation\t and the classification is having rational\nnexus of achieving the object of preventing the creation of\nfurther\t multiple Hindu undivided families for reduction of\ntax liabilities. Further, for the validity of the Section,\nit is\tnot necessary for the legislature to withdraw\t the\nbenefit\t which is already conferred. Secondly, cut off date\nof 31st December, 1978 cannot be said to be arbitrary.\t The\nAmending Bill\twas introduced in June, 1980 and is given\neffect\tto from the assessment year 1980-81. It is settled\nlaw that the choice of a date as a basis for classification\ncannot\talways be dubbed as arbitrary even if no particular\nreason\tis forthcoming for the choice unless it is shown to\nbe capricious\tor whimsical in the circumstances; while\nfixing\ta line, a point is necessary and there is no\nmathematical or logical way of fixing it; Precisely,\t the\ndecision of the Legislature or its delegate must be accepted\nunless\tit is\tvery wide off the reasonable\tmark.\t[Re:\nUniversity Grants Commission, etc. Vs. Sadhana Chaudhary\nand Others, etc. (1996) 10 S.C.C.\t536].\tThe learned\nCounsel\t for the Respondent was not in a position to point\nout any ground for holding that the said date is capricious\nor whimsical in the circumstances of the case.\tIn this view\nof the\t matter, the finding given by the High\t Court\tthat\nthere is no valid basis of justification for treating Hindu\nundivided family separately in a hostile manner\twith\nreference to the date, i.e., 31st December, 1978, is on the\nface of it erroneous.\t The next reason given by the\tHigh\nCourt is that it entrenches upon the charging provisions in\nSection\t 4 & 5 of the Income Tax Act and purports to charge\nthe income which does not belong to HUF to be assessed in\nthe hands of HUF. Hence, it enlarges the scope of Section 4\n& 5 of the Act. In our view, this reason is also devoid of\nany substance because charging Sections 4 & 5 are to be read\nwith the definition of the word person given in the Act,\nthat is, the tax is to be charged in respect of the total\nincome\tof the previous year of every person. Word person\nis given the meaning in Section 2 (31) which,\t inter-alia,\nincludes a Hindu undivided family.\tIt is open to\t the\nLegislature to give different meaning to the word person\nfor the purpose of the Act which may or may not include HUF\nor such other legal entities.\t In such a situation, it is\nopen to the HUF to take the benefit of the Act as available\nor to partition the HUF as a whole. It is to be stated that\neven prior to the amendment, all partial partitions were not\nrecognised under the Act. Partial partition which was only\nin accordance with the Explanation was recognised. Further,\nprior to Income Tax Act, 1961, there was no\tquestion of\nrecognising partial partition and the\t relevant provision\nunder the Income Tax Act, 1922 was Section\t25A. After\nconsidering the various decisions, this Court in the case of\nM/s. Kalloomal Tapeswari Prasad (HUF), Kanpur Vs. C.I.T.,\nKanpur\t(1982)\t133 I.T.R. 690 held that the substance of\ndecisions in Kalwa Devadattam Vs. Union of India (1963) 49\nITR (SC) 165, in Add. ITO Vs.\t A. Thimmayya (1965) 55 ITR\n666 (SC), and\t in Joint Family of Udayan Chinubhai\t Vs.\nC.I.T.\t (1967) 63 ITR 416 (SC) was that under Section\t25-A\nof the\t 1922 Act a Hindu undivided family which had\tbeen\nassessed to tax could be treated as undivided and subjected\nto tax\t under\tthe Act in that status unless and until an\norder was made under Section 25-A (I);\t if in the course of\nthe assessment\t proceedings it is claimed by\tany of\t the\nmembers\t of the Hindu undivided family that there has\tbeen\ntotal partition of the family property resulting in physical\ndivision thereof as it was\tcapable\t of, the assessing\nauthority should hold an inquiry and decide whether there\nhad been such a partition or not; If he held that such a\npartition had\ttaken place, he should proceed to make an\nassessment of\tthe total income of the family as if no\npartition had taken place and then proceed to apportion the\nliability as stated in Section 25-A amongst the individual\nmembers of the family.\tIf no claim was made or if the claim\nwhere it was made was disallowed after inquiry, the Hindu\nundivided family would continue to be liable to the assessed\nas such. This was the legal position under the 1922\tAct.\nThe Court further held as under: - Hindu law does\tnot\nrequire\t that the property must in every case be partitioned\nby metes and bounds or physically into different portions to\ncomplete a partition.\tDisruption of status can be brought\nabout by any of the modes referred to above and it is\topen\nto the\t parties to enjoy their share of\tproperty as\ntenants-in-common in any manner known to law according to\ntheir desire.\t But the income tax law\t introduces certain\nconditions of its own to give effect to the partition under\nSection 171 of the Act\"\n\n The Court also\theld: If a transaction does\tnot\nsatisfy\t the above additional\t conditions, it cannot be\ntreated as a partition under the Act even though under Hindu\nlaw there has\t been a partition total or partial.\tThe\nconsequence will be that the undivided family will be\ncontinued to be assessed as such by reason of\t sub-Section\n(1) of Section 171.\n\n From the aforesaid decisions, it is clear that prior\nto Income tax Act,\t1961,\tthere was no\tquestion of\nrecognising partial partition. Even with regard to total\npartition, it\twas required to satisfy all the conditions\nprescribed in\tSection 25A and an order was required to be\npassed\tfor that purpose under Section 25A(1).\tIf the claim\nof partition was disallowed after inquiry, the HUF\t was\nliable\tto be assessed as such.\t After the new Act, partial\npartition was\tnot recognised\t unless it satisfied\t the\nconditions laid down in the Explanation. Therefore,\t the\ncontention that sub-Section (9) entrenches upon charging\nprovision in Sections 4 & 5 of the Act is without any basis.\nThe aforesaid case of Kalloomal was relied upon in the case\nof I.T.O. Vs.\t N.K. Sarada Thampatty, (1991) 187 ITR 696,\nand the Court observed that in considering the factum of\npartition for\t the purpose of amendment,\tit is\t not\npermissible to\t ignore\t the special meaning\tassigned to\npartition under the Explanation to Section 171 even if the\npartition is to be effected by a decree of the Court.\t The\nLegislature has assigned special meaning to the\tword\nPartition under the Explanation which is different from\ngeneral\t principles of Hindu law and it contains the deeming\nprovision under which partition of the property of the\t HUF\ncould be accepted. In this view of the matter, it cannot be\nheld that by addition of sub-Section (9), scope of Sections\n4 and 5 of the Act is enlarged and, therefore, it is beyond\nlegislative competence. The\tlearned\t Counsel for\t the\nrespondent, inter alia, submitted that: -\t(1) Such a\ndrastic\t and sweeping provision was arbitrary and excessive\nand was not at all necessary to prevent the abuse of partial\npartition as a tax avoidance tool. (2) Partial partition\ncan be\t for absolute, genuine and bona fide need and if it\nwas not genuine or for bona fide need as per Explanation, it\nwas not recognised. Therefore, there was no necessity of\namending the Act. (3) Once, there is a partial partition\nand if\t it is not recognised, the income received from\t the\npartitioned assets would be taxable in the hands of HUF at a\nsignificantly higher rate of tax than the rate applicable to\nthe separated member.\t(4) Under the provisions of the Act,\nHUF can be liable to pay the tax without having control over\nthe assets which are partitioned. (5) Considering\tthis\nhardship and inequities resulting from Section 171(9),\t the\nCourt has rightly held the provisions to be arbitrary\t and\nviolative of Article 14 of the Constitution.\n\n In our view, the aforesaid submissions are without any\nsubstance and\tsimilar\t contentions are dealt with\t and\nrejected by this Court in the cases mentioned above.\n[Sardar\t Baldev\t Singh\t40 ITR 605 and Balaji\t63 ITR\t 393\n(supra)]. It is for the Legislature to recognise or not to\nrecognise partial partition of HUF property for the purpose\nof levy and collection of tax; it is also for\t the\nlegislature to\t decide whether only non bona fide partial\npartition undertaken for reducing the tax liability should\nnot be recognised or not to recognise all partial partitions\nof HUF\t properties. Further, consideration of hardship is\ntotally\t irrelevant for deciding the question of legislative\ncompetence. In the case of taxation, it is settled law that\nhardship or equity has no role to play in\t determining\neligibility to\t tax and it is for\tthe legislature to\ndetermine the same. Lastly, once the partial partition is\nnot recognized, tax is to be calculated as if the assets are\nheld by the HUF. Hence, the question whether the HUF is\nrequired to recover tax from the person to whom\t the\nproperties are allotted, is not required to be considered by\nthe Taxing authority as for the purpose of income tax\t the\nproperties belong to\tthe HUF. If\tthe HUF finds\t any\nhardship, it is for the members of HUF to have the partition\nof the\t entire\t estate and not to have\t partial partition.\nTherefore, there is no substance in the contentions raised\nby the learned Counsel for the Respondent.\n\n In this\tview of the matter, aforesaid\tappeals\t are\nallowed. The judgments and orders holding Section 171(9) of\nthe Income Tax Act, 1961 and Section 20A of the Wealth\t Tax\nAct, 1957 as unconstitutional are quashed and\t set aside.\nThe writ petitions filed by the respondents as mentioned\nabove before the Madras High Court and Karnataka High Court\nchallenging the validity of Section 171(9) of the Income Tax\nAct and for consequential reliefs are dismissed. The orders\nof the\t Gujarat High Court rejecting\t applications under\nSection\t 256(2)\t of the Income Tax Act, 1961 are also\t set\naside and in\tthe said matters, the Income Tax Appellate\nTribunal, Ahmedabad shall refer the questions to the\tHigh\nCourt for determination. Ordered accordingly.\t No order as\nto costs." }, { "title": "Sasadhar Chakravarty & Anr vs Union Of India & Ors on 4 November, 1996", "url": "https://indiankanoon.org//doc/1778113/", "text": "Sasadhar Chakravarty & Anr vs Union Of India & Ors on 4 November, 1996\nEquivalent citations: AIR 1997 SUPREME COURT 336, 1997 AIR SCW 93, 1997 TAX. L. R. 28, 1996 (135) TAXATION 463, (1997) 90 TAXMAN 121, 1996 (11) SCC 1, 1996 (136) CURTAXREP 258, 1997 (1) SERVLJ 76 SC, 1997 (90) FJR 337, 1997 (1) UPTC 182, (1997) 1 SERVLJ 76, 1997 UPTC 1 182, (1996) 10 JT 197 (SC), 1998 (3) LABLJ 36, 1997 (223) ITR 796, 1997 (1) SCT 428, (1996) 136 CURTAXREP 258, (1996) 135 TAXATION 463, (1997) 90 FJR 337, (1998) 3 LABLJ 36, (1997) 223 ITR 796, (1997) 1 SCT 428, 1997 SCC (L&S) 31\nAuthor: Sujata V. Manohar\nBench: A.M. Ahmadi, K.S. Paripoornan, Sujata V. Manohar\n PETITIONER:\nSASADHAR CHAKRAVARTY & ANR.\n\n\tVs.\n\nRESPONDENT:\nUNION OF INDIA & ORS.\n\nDATE OF JUDGMENT:\t04/11/1996\n\nBENCH:\nA.M. AHMADI, K.S. PARIPOORNAN, SUJATA V. MANOHAR\n\n\n\n\nACT:\n\n\n\nHEADNOTE:\n\n\n\nJUDGMENT:\n\t\t J U D G M E N T\n Mrs Sujata V. Manohar, J.\n The first\tpetitioner in this writ petition was an\nemployee of M/s Indian\t Oxygen\t Limited. He retired\tfrom\nservice at the end of March,\t1980 on attaining the age of\nsuperannuation.\t Indian\t Oxygen\t Ltd. has set\t up a\tnon-\ncontributory superannuation fund known as the Indian Oxygen\nLtd. Staff Pension Fund. It is a noncontributory approved\nsuperannuation fund set up under the\t provisions of\t the\nIncome-Tax Act,\t 1961. On retirement, under the rules of the\nfund, the first petitioner is receiving an annuity under a\npolicy purchased by the trustees of the Fund from the Life\nInsurance Corporation of India. The second petitioner is a\nsociety\t registered under the West\t Bengal Societies\nRegistration Act, 1961. Its\t membership constists\t of\npensioners of various\tnon-contributory approved\nsuperannuation funds. Petitioner No.1\tis the\tSecretary of\nthe Association.\n It is the contention of the petitioners that certain\nimprovements which have been effected in the executive staff\npension fund of Indian\t Oxygen Ltd. in 1985 should be made\navailable to the existing pensioners of the Indian Oxygen\nLtd. and that\tthe denial of\t the benefits\tof such an\nimprovement to\tthe existing pensioners of the said fund is\narbitrary and violative of Article 1\tof the Constitution.\nThe petitioners have also challenged Clause ll(cc) of Part B\nof schedule IV of the Income Tax Act, 1961 as conferring an\nunguided power\tto the\tBoard to frame rules. They have also\nchallenged Rules 89 and 91 of the Income Tax Rules, 1962 as\narbitrary and violative of Article 14. The petitioners have\nalso alleged that these rules\t suffer\t from the vice of\nexcessive delegation. They have further submitted that the\nappropriation of the purchase\tprice of annuities after the\ndeath of the annuitant/pensioner by\tthe Life Insurance\nCorporation of India (respondent No.4) is ultra vires Clause\n3 of Part B of Schedule IV of the Income Tax Act, 1961 and\nconstitutes an\tarbitrary or excessive use of\t power.\t The\npetitioners have contended that the scheme of\tsuch\nnoncontributory\t approved superannuation funds should be\nmodified so as to provide for disbursement of pension by the\nfunds themselves or in\t the alternative by a statutory body\nto be newly constituted under a new scheme.\n Under Section 2(6) of the Income\t Tax Act, 1961, an\napproved superannuation\t fund has been defined\t to mean a\nsuperannuation fund or any part of a superannuation\tfund\nwhich has been and\tcontinues to be approved by\t the\nCommissioner in\t accordance with the rules contained in Part\nB of the fourth Schedule. Under Section 36(1) of the Income-\ntax Act, 1961, deductions as provided\t in that sub-section\nshall be allowed in respect of the\tmatters\t dealt\twith\ntherein in computing the income of an assessee. Clause (iv)\nof sub-section\t(1) of\tSection 36 grants such deduction,\ninter alia, in respect of any sum paid by the assessee as an\nemployer by way of\t contribution towards\tan approved\nsuperannuation\tfund subject to such\t limits\t as may be\nprescribed for approving the superannuation fund and subject\nto such\t conditions as the Board may think fit to specify as\nset out\t therein. Therefore, any amount paid by an employer\nby way\tof contribution\t towards, inter\t alia,\tan approved\nsuperannuation fund, subject to such limits as may be\nprescribed is deductible in computing the income of\t the\nassessee employer.\n Part B of Schedule IV of the Income-Tax Act, 1961 deals\nwith approved superannuation funds. Under Clause 3 of Part\n8, in order that a superannuation fund may\treceive\t and\nretain approval, it shall satisfy the conditions set out in\nthe said clause as well as any other conditions which the\nBoard may, by rules, prescribe. Under\t clause 3 one of the\nconditions is to the effect that the fund shall be a fund\nestablished under an irrevocable trust in connection with a\ntrade or undertaking carried on in India. Another condition\nso prescribed is that\tthe fund shall have for its\tsole\npurpose, the provision of annuities for employees in\t the\ntrade or undertaking on their retirement at\tor after a\nspecified age or on their becoming incapacitated prior to\nsuch retirement or for the widows, children or dependants of\npersons who are or have been such employes on the death of\nthose persons. Contributions in respect of each employee are\nrequired to made by the employer or the fund so set up.\n The trustees of the superannuation fund are required to\nmake an application to the Assessing Officer for approval of\nthe fund under Clause 4 of the said Part B. Clause 11 deals\nwith the rule making power of\t the Board. Clause, 11(cc)\nempowers the\tBoard to make\t rules\tfor regulating\t the\ninvestment or\t deposit of the moneys of\tan approved\nsuperannuation fund.\n Part XIII\tof the Income-Tax Rules, 1962 covering Rules\n82 to 97 and dealing with Approved Superannuation Funds is\nframed in exercise of\tthe powers conferred,\tinter alia,\nunder clause 11 (cc) of Part B of Schedule IV. Under Rule 85\nof the\tIncome-Tax Rules, 1962 all moneys contributed to the\napproved superannuation\t fund are required to be invested in\na Post\tOffice Savings Bank Account in India or in a current\naccount or in a savings account with any scheduled bank or\nutilised in accordance with Rule 89 for making payments\nunder a\t scheme of insurance or for purchase\tof annuities\nreferred to in that Rule. Under Rule 87 the ordinary annual\ncontribution by\t the employer to a fund in respect of any\nparticular employee shall not exceed twenty-five per cent of\nhis salary for each year as\treduced\t by the employer's\ncontribution, if any,\tto any\t provident fund (whether\nrecognised or not) in respect of the same employee for that\nyear. Rule 89 provides as follows:\n Rule 89.\n \"Scheme of insurance or annuity.\n For the purpose of providing the\n annuities\tfor the beneficiaries,\n the trustees shall -\n (i) enter\t into\t a scheme of\n insurance with the Life Insurance\n Corporation established under the\n Life Insurance Corporation Act,\n 1956 (31 of 1956), or\n (ii) accumulate the contributions\n in respect\t of each beneficiary and\n purchase an annuity from\tthe said\n Life Insurance Corporation of India\n at the time of the retirement or\n death of each employee or on his\n becoming incapacitated prior to\n retirement.\"\n Rule 91 is as follows:\n \"Beneficiary not\t to have any\n interest in insurance and employer\n not have\tany interest in funds\n moneys.\n (1) No beneficiary shall\thave any\n interest in any insurance policy\n taken out by the trustees under the\n rules of a fund and he shall be\n entitled only to an annuity from\n the fund.\n (2) No money belonging to the fund\n shall be receivable by the employer\n under any\tcircumstances nor shall\n the employer have any\tlien or\n charge on the fund.\"\n Under the\tIndian Oxygen Executive Staff\tPension Fund\nwhich is an approved superannuation fund as per the above\nprovisions, for\t the purpose of providing annuities to the\nbeneficiaries, the trustees accumulate\t the contribution in\nrespect of each beneficiary and purchase an annuity from the\nLife Insurance\t Corporation of India at the time of\nretirement or death of\t each employee\t or on\t his become\nincapacitated prior to retirement as per\tRule 89(ii)\nTherefore, when an employee\t retires, all\t accumulated\ncontributions in respect of the concerned employee made by\nthe employer to the pension fund of the trust are utilised\nfor the\t purpose of purchasing an annuity from the\tLife\nInsurance Corporation of India for the benefit of\t the\nemployee. The right of\t the employee to receive the annuity\nand the\t quantum of this annuity get crystalised at the time\nof purchase of the annuity under hen existing scheme of the\nLife Insurance Corporation of India. This annuity is payable\nfor a minimum fixed period and thereafter as\t long as the\nrecepient is alive. The Life Insurance Corporation of India\nLtd. in\t its affidavit\thas set out that it is the common to\nprovide that the annuity would be payable for a selected\nnumber of years irrespective of whether the annuitant is\nalive or not. At the end of the selected number of years if\nthe annuitant is alive, the annuity is Continued throughout\nthe life-time of the annuitant.\n Rules 85 and 89 are meant to safeguard\t the moneys\ndeposited in the superannuation fund and to secure to the\nannuitant the annuity amount. Undoubtedly, Rule 89 requires\nthe trustees to purchase an annuity from the Life Insurance\nCorporation of\tIndia to the exclusion of anyone else,. But\nthis provision\tmust be\t judged in the context\t of the fact\nthat the contracts of life insurance which are entered into\nby the\tLife Insurance\tCorporation of India are backed by a\ngovernment guarantee which is provided by Section 37 of the\nLife Insurance Corporation Act, 1956. The payment of annuity\nis thus properly secured.\n The petitioners contend that any improvements made in\nthe existing pension scheme after the\t retirement of\t the\nemployees should also be made available to such retired\nemployees who are the\texisting pensioners of the Fund. The\ndenial of the benefit\tof such\t improvements in the pension\nschemes to the existing pensioners is ultra vires Articles\n14, 19,\t 21. 31\t and 300A of the Constitution of India. This\ncontention is based on\t a misunderstanding of the nature of\nthe annuity which is purchased in respect of each employee\nas and\twhen he retires. The right of an employee to receive\nthe annuity and the quantum of this annuity gets determined\nat the\ttime when the annuity\tis purchased. Any subsequent\nimprovements in\t a given Pension Fund\tscheme would not be\navailable to\tthose persons\t whose\trights\tare already\ncrystalised under the annuity\tscheme\tby which they\t are\ngoverned because the amounts contributed by the employer in\nrespect of such persons are already\twithdrawn from\t the\nPension\t Fund\tto purchase an annuity. Any subsequent\nimprovement in\tthe Pension Fund will\tbenefit\t only those\nwhose moneys form a part of the Pension Fund.\n As regards\t the improvements made in the Indian Oxygen\nLimited Executive Staff Pension Fund Scheme in 1585,\t the\ntrustees of the said fund in their affidavit have explained\nthat an\t improvement in\t the pension scheme of\t an approved\nsuperannuation fund is effected on the basis of the fund's\nfinancial position as\tdetermined by\tactuarial valuation\nbased on current resources\t of the fund\t and future\ncontributions to be received by the fund only in respect of\nthe existing members in service. An employer cannot make tax\ndeductible contributions to the fund in respect of its past\nemployees. Therefore, there is\t no scope for augmenting the\nresources of the fund to meet any obligation that may arise\non account of extending the benefit of improvement to the\npast employees\twho are\t existing pensioners.\tThe amounts\ncontributed in\tregard\tto such existing pensioners\thave\nalready been transferred from the corpus of the fund to the\nLife Insurance\tCorporation of\tIndia for the\t purpose of\npurchasing an annuity. Hence there is no accretion coming to\nthe said fund from out of the transferred corpus relating to\nsuch existing pensioners. Hence the improvements which are\ndetermined by actuarial valuation based on\tthe current\nresources of the fund and its future expectations cannot be\nmade available to the existing pensioners.\n In these circumstances the ratio of D.S. Nakara & Ors.\nv. Union of India (AIR 1983 SC 130)\tcannot be applied to\nextend the benefit of improvement in the pension schemes of\nsuch funds to the existing pensioners. By the very nature of\nthis scheme, such benefits are available only to members in\nservice. In the present case, the Pension Fund is created\nout of\tcontributions made by the employer in respect of its\nemployees who are in service in the manner provided under\nthe Income-Tax Act and the Rules. The contribution is in the\nform of\t a fixed percentage of salary of each of\t the\nemployees. There is, therefore, no provision for an employer\nmaking\tany additional\t payment in respect of its\tpast\nemployees who are the existing pensioners. In Nakara's case\n(supra) the increase in pension could ba met from\t the\ngeneral revenue\t of the\t Central Government. No such reserve\nof funds is available\t to the trustees of\tan approved\nsuperannuation fund. As soon as an employee retires and an\nannuity is purchased for his benefit\tunder Rule 89 there\nremains no scope for any fresh contribution on his account\nso as to entitle him to an increased pension prospectively\non the\tbasis of improvements\t made subsequently in\t the\npension scheme of a fund. Since the existing pensioners form\na distinct class, there is no question of any violation of\nArticle 14 in this connection or of any other Article of the\nConstitution.\n The Life\t Insurance Corporation\t of India in\t its\naffidavit has pointed out that with effect from 1.4.1985 the\nCorporation decided to increase the pensions payable under\ntheir annuity scheme. They decided to\t make this increase\navailable not only to\tnew pensionrers but also to\t the\nannuities which\t were in the course of payment. Accordingly,\nthe first petitioner's pension\t under his existing annuity\npolicies was increased\t with effect from 1.4.1985.\tThis\ndecision of the Life Insurance Corporation to enhance the\npension was only with a view to grant relief to the existing\npensioners and\twas not\t based on any contractual obligation\nof the\tCorporation. The Corporation has further pointed out\nin its\taffidavit that\tit has\tnow introduced a new annuity\nscheme. An option has been given to the existing members to\nswitch\tover to the new scheme. Under the\t new option\navailable to the pensioners the value\t of the\t outstanding\ninstalments is\tdetermined and\tthe same is applied in the\npurchase of an annuity. Such annuity would be payable during\nthe lifetime\tof the\t annuitant and\t the value of\t the\noutstanding instalments is returned\tto the\t annuitant's\nnominee on his death.\tThe benefit of changing over to the\nnew scheme is thus made available to the existing pensioners\nalso. There is, therefore, no discrimination in this regard\nas against the existing pensioners.\n The petitioners contend that Clause 11(cc) of Part B of\nSchedule IV of the Income-Tax Act. 1961 and Rules 85 and 91\nof the\tIncome-Tax Rules, 1962 which are framed under the\nrule-making power conferred\tby Clause 11(cc) are an\narbitrary and\t uncanalised exercise\tof power and\tare,\ntherefore, violative of Articles 14 and 19(1)(g) of\t the\nConstitution.\tNow, the entire scheme of approved\nsuperanuation funds is so framed as to ensure safety of the\nFund so that the beneficiaries are assured of an annuity for\nthe requisite period. Hence under Part B of Schedule IV of\nthe Income-Tax Act the approved superannuation funds require\nthe approval of the Chief Commissioner or the Commissioner\nof Income-tax.\tThe purpose of such approval is clearly to\nensure that the fund is established under an\t irrevocable\ntrust for the benefit of the employees of any establishment\nor undertaking\tand to\tensure that the fund shall have for\nits sole purpose provision of annuities for the employees on\ntheir retirement or on their becoming incapaciated or in the\nevent of their death for the benefit of their dependants. It\nis necessary that the\tfunds should be invested in a manner\nwhich secures them over a period of time for this purpose.\nClause 11 (1)(cc) gives to the Board the power to make rules\nfor the\t purpose of regulating the investment or deposit of\nmoneys of an approved\tsuperannuation fund. This cannot be\ncalled as an arbitrary conferment of power on the Board. By\nthe very nature of the scheme\t as framed, the purpose of\nregulating investment of the trust funds is to ensure their\nsafety.\n In pursuance of this rule-making\t power\tRule 89 is\nframed.\t Under\t Rule 89, for\t the purpose of providing\nannuities for\t the beneficiaries, the trustees of a\nsuperannuation fund are required either to enter into a\nscheme of insurance with the Life Insurance Corporation of\nIndia or they have\t the option to accumulate\t the\ncontributions in respect of each beneficiary and purchase an\nannuity from the Life Insurance Corporation of India at the\ntime of\t the retirement\t or death of each employee or on his\nbecoming incapacitated\tprior to retirement. The annuity is\npurchased from the accumulated contributions made in respect\nof each\t beneficiary which are a part of the approved\nsuperannuation fund. The petitioners have contended that the\ntrustees of the superannuation fund should not be compelled\nto purchase an annuity\t from the Life Insurance Corporation\nof India and that the investment of the contribution in\nrespect of each beneficiary could be made in another manner\nwhich would fetch to the beneficiary a higher return. It is\nhowever, pointed out by the Life Insurance Corporation that\nthe secruity which is provided by purchasing an annuity from\nthe Life Insurance Corporation of India is not comparable to\nother kinds of investments\t because all contracts of\ninsurance entered into by the Life Insurance Corporation are\nbacked by a government guarantee which is\tprovided by\nSection 37 of the Life Insurance Corporation\t Act, 1956.\nTherefore, from\t the point of view of safety and security of\nthe moneys of the superannuation fund, an investment in an\nannuity through\t the Life Insurance Corporation of India\nprovides valuable security to\ta beneficiary.\tBy ensuring\nthat the investment is\t made in a manner which ensures the\nsafety of the Fund and the payment of an annuity the Board\nhas ensured that the\t Fund is not\tmisutilised or\t the\npensioner is not deprived of his annuity. of course, it is\npossible to envisage other types of schemes and other types\nof investments,\t which may have varying safety and different\nreturns. But that does not mean that Rule 89 is arbitrary or\nunreasonable. The entire scheme is framed on the basis of\nrelevant considarations and cannot be called unreasonable or\narbitrary.\n Rule 91 provides that the beneficiary shall not have\nany interest in any insurance\t policy\t taken\tout by\t the\ntrustees under\tthe rules of a fund and he shall be entitled\nonly to the annuity. It is contended by the petitioners that\nthe Life Insurance Corproation appropriate,\tthe capital\npurchase price\ton the\tdeath of the\tannuitant and\tthis\namounts to an\tunjust\tenrichment of\tthe Life Insurance\nCorporation at\tthe cost of the beneficiary. The submission\nis based on a\tmisconception of the manner in which annuity\nis calculated.\tThe annual instalment does not consist only\nof the\tinterest which is earned on the capital used for the\npurchase of annuity. The annual instalment\tcontains an\nelement both of interest as also a part of the capital so\nthat over a period of years as actuarially calculated, the\nentire capital\tand the interest earned thereon are utilised\nfor the\t payment of annuities to the beneficiary. Secondly,\nthe Life Insurance Corporation has introduced a new annuity\nscheme under which an option has been given to the existing\nmembers to switch over\t to the\t new scheme. As per the new\noption available to the pensioners the value of outstanding\ninstalments is\tdetermined and this is used for the purchase\nof an annuity. This new annuity would be payable during the\nlife time of\t the beneficiary and\t the value of\t the\noutstanding instalments\t is returned to the beneficiary's\nnominee on his death.\tThe petitioners\t have the option to\nswitch\tover to this\t new scheme in respect of their\noutstanding instalments. Therefore, in\t any event there can\nbe no question of the\t L.I.C.\t appropriating\tthe capital\npurchase price\tof an annuity on the death of the annuitant.\nRule 91, therefore, in\t any event, cannot be considered as\ngiving any unjust gains to the Life Insurance Corporation of\nIndia.\n Moreover, under sub-clause (2) of Clause 11, all rules\nwhich are made under Clause 11 are subject to the provisions\nof Section 296. Section 296\tprovides that\tthe General\nGovernment shall cause every rule made under this Act to be\nlaid as\t soon as may be after the rule is made before each\nHouse of Parliament while it is in session for a total\nperiod of thirty days, and the rule shall, thereafter, have\neffect only in such modified form as Parliament may suggest,\nor if it so decides, may be of no effect, or may be brought\ninto effect without prejudice\tto the\tvalidity of anything\npreviously done\t under the rule. This\talso is an important\ncheck on any arbitrary\t exercise of rule-making power under\nClause 11.\n Hence, the\t challenge to these rules and to Clause 11\n(cc) has no substance.\n The petitioners have also raised some objections to the\nchanges made in the Indian Oxygen Limited Executive staff\nPension Fund in 1984 and 1985. the definition of \"salary\"\nunder the old Pension\tFund Rules of Indian Oxygen Ltd. did\nnot include commission\t payable to whole-time Directors.\nHowever, by a Deed of Variation dated 9.1.84 the definition\nof \"salary\" has been changed. \"Salary\" has been defined to\nmean the basic salary\tof a member and to have the\tsame\nmeaning as defined in\tRule 2(h) of Part A of the Fourth\nSchedule to the Income\t Tax Act, 1961. In the case of a\nwhole-time Director.\t\"salary\" now\talso includes\t the\ncommission on net profits payable to the Director provided\nthat such commission\t is a\t part\tand parcel of\t the\nremuneration of\t the whole-time\t Director according to\t the\nterms of his appointment as approved\tby the Central Govt.\nunder the Companies Act. The\tpetitioners object to\t the\ncommission being included in the salary of a whole-time\nDirector as now defined. This change\thas been made in the\nlight of a decision of this Court in the case of Gestetnet\nDuplicators P.\tLtd. v.\t Commissioner of Income Tax,\tWest\nBengal (117 ITR page 1) where this Court has held that the\ncommission payable as\tper the terms\t of a\tcontract of\nemployment at a fixed\tpercentage of turnover falls within\nthe term \"salary\" as defined in Rule 2(h) of Part A of the\nFourth Schedule\t to the\t Income-Tax Act, 1961. The change in\nthe definition is in accordance with the meaning assigned to\n\"salary\" under Rule 2(h). The question of any discrimination\non this\t score does not arise. In any case, the petitioners\nwho retired prior to 1984 are\t in no\tway affected by this\nchange.\n The approved superannuation fund\tis set\tup only from\nthe contributions made by the employer who is given certain\ntax benefits in order to encourage the setting up of such\nsuperannuation funds. We do not see any reason to strike\ndown any part of the scheme for such a superannuation fund\nprescribed under the Income-Tax Acts 1961 and the Income-\nTax Rules, 1962. The petition is therefore, dismissed. In\nthe circumstances, there will be no order as to costs." }, { "title": "Kapurchand Shrimal vs Tax Recovery Officer, Hyderabad & Ors on 14 August, 1968", "url": "https://indiankanoon.org//doc/53158/", "text": "Kapurchand Shrimal vs Tax Recovery Officer, Hyderabad & Ors on 14 August, 1968\nEquivalent citations: 1969 AIR 682, 1969 SCR (1) 691, AIR 1969 SUPREME COURT 682\nAuthor: J.C. Shah\nBench: J.C. Shah, V. Ramaswami, A.N. Grover\n PETITIONER:\nKAPURCHAND SHRIMAL\n\n\tVs.\n\nRESPONDENT:\nTAX RECOVERY OFFICER, HYDERABAD & ORS.\n\nDATE OF JUDGMENT:\n14/08/1968\n\nBENCH:\nSHAH, J.C.\nBENCH:\nSHAH, J.C.\nRAMASWAMI, V.\nGROVER, A.N.\n\nCITATION:\n 1969 AIR 682\t\t 1969 SCR (1) 691\n CITATOR INFO :\n R\t 1979 SC1588\t (7)\n\n\nACT:\nIncome-tax Act (11 of 1922)-Hindu undivided family--Defaults\nin payment of tax-Whether Karta can be detained.\n\n\n\nHEADNOTE:\nA Hindu undivided family committed default in\t payment of\nincome-tax, and a certificate for recovery of tax due to the\nfamily\twas issued by the Income Tax Office in\texercise of\nthe power conferred by\trule 76 of Sch. II of the Income Tax\nAct, 1961. The Tax Recovery Officer directed the arrest and\ndetention in prison of the karta of the family for\tnon-\npayment\t of tax. The Karta then moved a petition in\t the\nHigh Court of Andhra Pradesh challenging his detention on\nthe ground that he was not a defaulter. The petition\t was\nrejected. The\t Karta appealed. He also moved\t a petition\nunder Art. 32 of the Constitution in the Supreme Court\t for\nan order for his release from custody.\nHELD :--The Legislature having treated a Hindu undivided\nfamily\tas a taxable entity distinct from the individual\nmembers constituting it,. and proceedings,for assessment and\nrecovery of tax having been\t taken!\t against the Hindu\nundivided family, it\twas not open to the Tax Recovery\nOfficer\t to initiate proceedings against the manager of\t the\nHindu undivided family for his arrest and detention.\t The\nmanager\t by virtue of his status is competent to represent\nthe Hindu undivided family, but on that account he cannot\nfor the purpose of s. 222 of the Act of 1961 be deemed to\nbe. the assessee when assessment is made against the Hindu\nundivided family and certificate for recovery is also issued\nagainst the family. [695 B-D]\nFor the purposes of cl. (a) of s. 2(7)\tthe person against\nwhom, any proceeding under the Act has been taken is deemed\nan assessee: but that postulates that the proceeding should\nbe lawfully taken against the person before he may be deemed\nto be an assessee for the purpose of s. 222 or r. 2 and r.\n73. There is\t no provision in the Act which deems\t the\nmanager to be the assessee for the purpose of assessment and\nrecovery of tax, when the income of the Hindu undivided\nfamily of which he is the Manager is assessed to tax. Nor is\nthere any provision in the Act enabling the Income-tax\nOfficer or the Tax Recovery Officer to treat the manager of\nthe Hindu undivided family as an assessee in\t default in\nrespect\t of tax due by the Hindu undivided family.\t The\nLegislature has again made no provision for recovery of\t tax\nby resort to the personal property of the manager of\t the\nHindu undivided family assessed to tax or by his arrest\t and\ndetention for default by the family in paying the tax due.\n[695 H696D]\n\n\n\nJUDGMENT:\nCIVIL APPELLATE/ORIGINAL JURISDICTION: Civil Appeals\tNos.\n1319 and 1320 of 1966.\nAppeals by special leave from the judgments and orders dated\nFebruary 16, 1966 and February 1, 1966 of the Andhra Pradesh\nHigh Court in Writ Appeals Nos. 143 of 1966 and 166 of 1965\nrespectively and Writ Petition No. 103 of 1966.\n3Sup.C1/68-13\n692\nPetition under Art. 32 of the Constitution of India for\t the\nenforcement of fundamental rights.\nB.C. Misra, Om Prakash Gupta and M.V. Goswami, for\t the\nappellant/petitioner (in all the matters).\nB. Sen\t and R.N. Sachthey, for the respondent (in all\t the\nmatters ).\nThe Judgment of the Court was delivered by\nShah, J.. Kapurchand Shrimal\ta Hindu undivided family-\ncommitted default in payment of income-tax due by it for the\nassessment years 1955-56 to\t 1959-60. The\t Income-tax\nOfficer, Special Investigation Circle, Hyderabad, issued\ncertificate on ,June 16, 1959, under s. 46 of the Income-tax\nAct, 1922, fox' recovery of tax due by the family. Pursuant\nto the certificate, properties of the Hindu undivided family\nmovable\t and immovable and outstandings were attached\t for\nrealizing the tax dues.\nIn exercise of the powers conferred by r. 76 of Sch. II of\nthe Income-tax Act, 1961, the Tax Recovery Officer directed\non August 10, 1965, that Kapurchand Shrimal manager of\t the\nfamily\tbe detained in civil prison for fifteen\t days.\t The\nmanager\t then moved a petition in the High Court of Andhra\nPradesh\t against the order of detention. The petition\t was\nrejected by a single Judge of the High Court holding\tthat\nthe manager had, in contravention of r. 16(2) of Sch. II of\nthe Income-tax Act, 1961, dealt with the properties of\t the\nfamily\tafter receiving notice of the\t issue\tof the\t tax\nrecovery certificate.\t In appeal against that\t order,\t the\nmanager applied for leave to raise the contention that where\na Hindu undivided family had committed default in payment of\nthe tax, its Karta not being the assessee against whom\t the\ncertificate is\t issued,. is not liable to be detained\t for\nrecovery of tax due by the Hindu undivided family. The High\nCourt declined to allow the contention to be raised and held\nthat the manager having acted in contravention of r. 16(2)\nof Sch. II of the Income-tax Act, 1961, the ingredients of\nr. 73\twere attracted and he was liable to be\tdetained in\ncivil prison.\t A, day before this order was\t passed\t the\nappellant filed another petition under Art.\t226 of\t the\nConstitution challenging the validity of the\t proceedings\nagainst\t him on the ground that he was not a\t\"defaulter\".\nThat petition was dismissed by the High Court holding\tthat\nthe earlier judgment\tof the High Court operated to\t bar\ninvestigation into the plea raised.\nAppeals\t Nos. 1319 & 1320 of 1966 arise out of\t the orders\nmade by the High Court in the two petitions under Art.\t 226\nof the Constitution. The manager was, after the order of\nthe High\n693\nCourt,\tarrested and sent to prison for six months.\t The\nmanager\t then\t filed\tpetition under\t Art. 32 of\t the\nConstitution praying for a writ in the nature of habeas\ncorpus\tfor an order for his release from the\t custody of\nSuperintendent\tDistrict Prison, Hyderabad. In our judgment\nthe claim of\tthe manager that he is\t not liable to be\narrested and detained in prison for failure to satisfy\t the\ntax due by the Hindu undivided family in enforcement of\t the\ncertificate issued under s. 222 of the Income-tax\tAct,\n1961,, must be upheld.\nBy virtue of s. 297(2)(j), notwithstanding the repeal of the\nIndian\tIncome-tax Act, 1922, any stun payable\t by way of\nincome-tax, super-tax, interest, penalty or otherwise under\nthe Income-tax Act, 1922, may be recovered under the Act of\n1961, but without prejudice to any action already taken\t for\nthe recovery\t of such sum\tunder the repealed\tAct.\nProceedings could therefore be taken for recovery of the tax\ndue for the assessment years 1955-56 to 1959-60 by the Hindu\nundivided family under the Income-tax Act of 1961. Section\n220 of Act 1961 deals with payment of tax and the conditions\nin which an assessee may be deemed to' be in default. Under\nthe Act tax assessed has to be paid within thirty-five\tdays\nof the service of a notice of demand: if the amount is\t not\npaid within the time limited at the place and to the person\nmentioned in the said notice, the assessee shall be deemed\nto be\tin default. Section 222 provides for the issue of\ncertificate to the Tax Recovery Officer. It provides, in so\nfar as it is material:\n\t \"( 1 ) When an assessee is in default or is\n\t deemed to be in default in making a payment of\n\t tax, the Income-tax Officer may forward to the\n\t Tax Recovery Officer a certificate under\t his\n\t signature specifying the amount of arrears due\n\t from the\t assessee, and\t the Tax Recovery\n\t Officer on receipt of such certificate, shall\n\t proceed to recover from\t such assessee\t the\n\t amount specified therein by one or more of the\n\t modes mentioned below, in accordance with\t the\n\t rules laid down in the Second Schedule--\n\t\t (a) attachment and sale of the assessee's\n\t movable property;\n\t\t (b) attachment and sale of the assessee's\n\t immovable\n\t\t property;\n\t\t (c)\tarrest\tof the\t assessee and\t his\n\t detention in prison;\n\t\t (d)\t appointing a\treceiver for\t the\n\t management of\n\t\t the\tassessee's movable and immovable\n\t properties\".\nBy r.\t1 (b)\tof Sch.-II of the Income-tax\tAct, 1961,\n\"defaulter\"\" means the assessee\tmentioned in\t the\ncertificate. Rule 2 provides\n694\nthat when a certificate has been received\tby the\t Tax\nRecovery Officer from the Income-tax Officer for recovery of\narrears\t under Sch. II, the Tax Recovery Officer shah cause\nto be\tserved\tupon the defaulter a notice requiring\t the\ndefaulter to pay the amount specified in the\t certificate\nwithin\tfifteen days from the date of service of the notice\nand intimating\t that in default steps would b.e taken to\nrealise\t the amount under the Schedule. Rule\t16 provides\nthat where a notice has been served on a defaulter under r.\n2, the defaulter shall not be competent to mortgage, charge,\nlease or otherwise deal with any property belonging to\t him\nexcept\t with the permission of the Tax Recovery Officer.\nRule 73 provides that no order for the arrest and detention\nin civil prison of a defaulter shah be made unless the\t Tax\nRecovery Officer has, issued and served a notice upon\t the\ndefaulter calling upon him to appear on the date specified\nin the\t notice\t and to show cause why\t he should not be\ncommitted to the civil prison, and unless the Tax Recovery\nOfficer, for reasons to be recorded in writing, is satisfied\nand that the\tdefaulter with\t the object or effect of\nobstructing the execution of the certificate, has, after the\nreceipt of the certificate in the office of the Tax Recovery\nOfficer, dishonestly transferred, concealed, or removed\t any\npart of his property; and (b) that the defaulter has, or has\nhad since the receipt of the certificate in the office of\nthe Tax Recovery Officer, the means to pay the\t arrears or\nsome substantial part thereof and refuses or neglects or has\nrefused or neglected to pay the same. Rule 76 provides\t for\nthe issue of an order of detention of the defaulter by\t the\nTax Recovery Officer.\nThe scheme of the Income-tax Act, 1961, is to treat\t the\nassessee failing to pay the tax due\t within\t the period\nprescribed a defaulter. The Income-tax Officer may, where\nthe assessee\t is found to\t be in\t default, issue a\ncertificate for recovery and forward it to the Tax Recovery\nOfficer\t specifying the amount of arrears due from\t the\nassessee. The amount due may be recovered by resort to\t any\none or more of the four modes prescribed by s. 222 of\t the\nAct. If the defaulter fails to comply with a notice issued\nby the Tax Recovery Officer requiring the defaulter to\t pay\nthe amount within fifteen days from the date of the service\nof the notice, proceedings for recovery may be taken against\nthe assessee for recovery of 'the tax.\tBut under the scheme\nof the Act and the Rules, the assessee alone may be treated\nin default. The Act and the Rules contemplate that\t the\nnotice for payment of the tax arrears may be issued against\nthe assessee, and proceedings for recovery of the tax may be\ntaken against the assessee alone. Under the Income-tax\tAct,\n1961, a Hindu undivided family is a distinct taxable entity.\napart from the individual members who constitute\tthat\nfamily.\t Section 4 of the Income-tax Act charges tax for any\nassessment year, the total income of the previous\n695\nyear of every person and 'person' is defined in s. 2 (31 )\nas including--(i) an\tindividual, (u)\t a Hindu undivided\nfamily,\t (iii) a company, (iv ) a firm, (v ) an\t association\nof persons or a body of individuals, whether Incorporated or\nnot, (vi) a local authority and (vii) every artificial\njuridical person, not falling within any of the preceding\nsub-clauses.\tThe Legislature having treated a Hindu\nundivided family as a taxable entity\t distinct from\t the\nindividual members constituting it, and proceedings\t for\nassessment and recovery of tax having been taken against the\nHindu undivided family, it was not open to the Tax Recovery\nOfficer\t to initiate proceedings against the manager of\t the\nHindu undivided family for his arrest and detention. It is\ntrue that if properties of the family movable and immovable\nare to be attached, proceedings may be started against\t the\nHindu undivided family and the manager represents the family\nin proceedings before the Tax Recovery Officer.\t But by\t the\nclearest implication of the statute the assessee alone\t may\nbe deemed to be in default for non-payment of tax,\t and\nliability to arrest and detention on failure to pay the\t tax\ndue is also incurred by the assessee alone. The manager by\nvirtue\tof his status is competent to represent the Hindu\nundivided family, but on that account he cannot for\t the\npurpose\t of s. 222 of the Act of 1961 be deemed to be\t the\nassessee when\tthe assessment is made\t against the Hindu\nundivided family and certificate for\trecovery is issued\nagainst the family.\nCounsel\t for the Revenue invited our attention to s. 140(b)\nand s. 282(2) of the Income-tax Act, 1961, in support of his\ncontention that when\ttax is assessed\t against the Hindu\nundivided family there is no distinction between\t the\nrepresentative\tstatus of the manager of the family and\t his\npersonal status. Section 140(b) authorises the manager in\nthe case of a Hindu undivided farofly to sign and verify the\nreturn\tof income, and s. 282(2) provides for the mode of\nservice\t of notice or requisition issued under the\tAct,\namongst\t others, against a Hindu undivided\tfamily.\t But\nbecause\t the manager\tof a Hindu undivided\t family\t is\nauthorised to\tsign and verify the return of income and a\nnotice\tunder the Act could be served upon him when it is\naddressed to a Hindu undivided family and such\t service is\ntreated\t as service upon the Hindu undivided family for\t the\npurpose\t of the Act, the manager cannot be deemed to be\t the\nassessee where the income assessed is of the Hindu undivided\nfamily.\t The expression 'assessee' under s. 2(7) means a\nperson by whom any tax or any other sum of money is payable\nunder the Act, and includes--(a) every person in respect of\nwhom any proceeding under the Act has been taken for\t the\nassessment of\this income or of the income of any other\nperson in respect of which he is assessable, or of the\tloss\nsustained by him or by such other person, or of the amount\nof refund due to him or to such other\t person; (b) every\nperson who is deemed\n696\nto be an assessee under any provisions of the Act; (c) every\nperson who is deemed to be an assessee in default under\t any\nprovisions of the Act.\t For purposes of cl. (a) the person\nagainst whom any proceeding under the Act has been taken is\ndeemed an assessee: but that necessarily postulates that the\nproceeding should be\tlawfully taken\tagainst\t the person\nbefore he could be deemed to be an assessee for the purpose\nof s.. 222.or r. 2 and r.73. There is no provision in\t the\nAct which deems the manager to be the\t assessee, for\t the\npurpose\t of assessment and recovery of tax, when the income\nof the Hindu undivided family of which he is the manager is\nassessed to tax. Nor is there any provision enabling\t the\nIncome-tax Officer or the Tax Recovery Officer to treat\t the\nmanager\t of the Hindu undivided family as an\tassessee in\ndefault\t under\tthe provisions of the\t Act.\tSection\t 160\nprovides for treating a person as a representative assessee\nand s. 161 prescribes\t the liability of a representative\nassessee. Section 179 makes\t a special provision\t for\nrendering the Directors of private company in liquidation to\nbe jointly and severally liable for the payment of tax which\ncannot\tbe recovered from the assets of the private company\nin liquidation.\t The Legislature has made no such provision\nfor recovery of tax by resort to the personal\tproperty of\nthe manager of the Hindu undivided family, or by his arrest\nand detention for default by the family in paying the\t tax\ndue.\nSections 276, 276A, 277 and 278 on which reliance was placed\nby counsel for the Revenue in support of his argument\talso\ndo not\t assist\t him. These sections occur in a chapter\nrelating to penalties, and they seek to penalise failure to\ncarry out specific provisions mentioned therein. We\t are\nunable\tto hold that the expression \"person\" in ss.\t276,\n276A and 277 is used m the sense in which it is defined in\ns. 2 (31 ) of the Act. For each specific act which is\ndeemed\t to be\t an offence under those provisions,\t an\nindividual who without reasonable cause or excuse fails to\ndo the\t acts prescribed by statute or\t acts in a manner\ncontrary to the statute or makes a declaration on oath which\nhe believed to be false or does not believe to be true, is\nmade liable to be punished.\tSection\t 278 penalises\t the\nabetment or inducing\tany person to make and\t deliver an\naccount, statement of declaration relating to\t any income\nchargeable to tax which is false and which he either knows\nto be false or does not believe to. be true. In the context\nin which the expression \"person\" occurs in ss.\t 276, 276A,\n277 and 278, there can be no doubt that it seeks to penalise\nonly those individuals who fail to carry out the duty\tcase\nby the specific provisions of the statute. or are otherwise\nresponsible for the acts done.\tFor the default of the Hindu\nundivided family, therefore. in payment of tax. the Karta\ncannot be arrested and detained in prison.\n697\nThe High Court, we think, took a somewhat technical view in\ndeclining to allow the contention raised by the appellant in\nthe first writ petition presented before the High Court that\nhe was\t not liable to be arrested and imprisoned for\tnon-\npayment\t of the tax arrears, since he was not an assessee.\nand then in treating the judgment of the High Court in\t the\nfirst writ petition operating constructively as res judicata\nin the second petition.\nThe appeals are allowed and the order of detention passed by\nthe Tax Recovery Officer against the appellant is declared\nunauthorized.\tNo order in Petition No. 103 of\t 1966.\t The\nappellant will be entitled to his costs in Appeal No..\t1320\nof 1966 in all the three Courts. There will be no order as\nto costs in Appeal No. 1319 of 1966 and Writ Petition\t No.\n103 of 1966.\nY.P.\t\t\t\t\t Appeals allowed.\n698" }, { "title": "Commissioner Of Income-Tax vs A.K. Das on 27 August, 1969", "url": "https://indiankanoon.org//doc/1434033/", "text": "Commissioner Of Income-Tax vs A.K. Das on 27 August, 1969\nEquivalent citations: [1970]77ITR31(CAL)\nAuthor: Sabyasachi Mukharji\nBench: Sabyasachi Mukharji\nJUDGMENT\n\n\n \n\nP.B. Mukharji, J.\n \n\n 1. The Income-tax Appellate Tribunal has referred two points of law in the following manner, for answer by this court under Section 256(1) of the Income-tax Act, 1961:\n\n \"(1) At the instance of the Commissioner of Income-tax--Whether, on the facts and in the circumstances of the case and on a proper interpretation of Section 271(1)(iii) and Section 274(2) of the Income-tax Act, 1961, the Tribunal was right in reducing the penalty imposed on the assessee below the minimum prescribed under Section 271(1)(iii) of the said Act ? \n\n (2) At the instance of the assessee- \n Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the penalty proceedings were properly initiated and that the penalty orders passed by the Inspecting Assistant Commissioner were valid in law ?\" \n\n 2. The facts of this reference as appearing in the statement of the case may be briefly summarised as follows : The assessee is an individual. The assessment years concerned in this reference are 1955-56 to 1962-63. The original assessments for these years were completed on the basis of the returns filed by the assessee. Subsequently, some time in 1963 the Income-tax Officer received information that during these years there were substantial deposits in the assessee's account in the Hindustan Commercial Bank Ltd., Netaji Subhas Road Branch, amounting to about Rs. 2,26,000. The Income-tax Officer required the assessee to explain the deposits in his account in the said bank. Thereafter, the assessee made full disclosure of the deposits either in his name or in the names of other persons in this account during those assessment years to the extent of Rs. 3,70,208. What is more, the assessee also admitted that these were his concealed income. \n\n 3. The Income-tax Officer took proceedings under Section 147 of the Income-tax Act, 1961, for reassessment of the assessee's escaped income for these years. In response to the notices issued, the assessee filed returns giving full details of the deposits in his bank account in respect of those years. The Income-tax Officer passed orders of assessment under Section 143(3)/147 for the assessment years 1955-56 to 1962-63 on the 31st August, 1964, on the basis of the returns filed by the assessee. From the orders of penalty of the Inspecting Assistant Commissioner it appears that the total escaped income assessed in those reassessment proceedings came to Rs. 4,29,624 and the tax sought to be evaded in respect thereof came to Rs. 3,21,820. The Income-tax Officer in the assessment orders made on the 31st August, 1964, recorded that proceedings under Section 271(1)(c) have already been started separately. From the order-sheet of such assessment proceedings it also appears that on the 31st August, 1964, the Income-tax Officer gave direction for issue of show cause notice under Sections 274/271. There is also an entry in the order-sheet dated 29th August, 1964, to the effect that notice under Sections 274/271 was issued to the assessee and the cases were referred to the Inspecting Assistant Commissioner. It also appears from the statement of the case that a copy of the aforesaid notice dated 29th August, 1964, was served on Shri B. B. Das, the assessee's accountant and authorised representative, who was present in the income-office and the receipt of such notice had been acknowledged by the said Shri B. B. Das by putting his signature on a copy thereof. The intimation regarding the transfer of the case was received at the Inspecting Assistant Commissioner's office on the 29th August, 1964. It also appears that a further notice was issued by the Income-tax Officer under Section 274(1) requiring the assessee to show cause why the penalty should not be imposed and the hearing was fixed on the 22nd September, 1964. The demand notices in respect of the reassessment for the years 1955-56 to 1962-63 were served on the assessee on the 12th September, 1964, while assessment orders for these years were received by the assessee on the 24th September, 1964. \n\n 4. The Inspecting Assistant Commissioner came to the finding that the assessee had concealed the particulars of his income at the time of the original assessment and that the penal proceedings were attracted to his case. But in consideration of the co-operation extended by the assessee subsequently in the matter of reassessment proceedings, he restricted the amounts of the penalty to 33 1/3 per cent. of the tax sought to be evaded. The Inspecting Assistant Commissioner gave reasons for his decision in his order under Sections 274(2)/271(1)(c) for the assessment year 1955-56 while in his order for the other years he followed his earlier orders and mentioned the amount of penalty determined for those years. From this order of penalty the assessee appealed to the Income-tax Appellate Tribunal. In the original ground filed by the assessee he prayed for mitigation of the amounts of penalty. But with the leave of the Tribunal the assessee urged the additional ground before it, namely, that the penalty proceedings, not having been commenced in the course of the assessment proceedings, the penalty orders passed by the Inspecting Assistant Commissioner were bad in law. The point of that submission is that under Section 275 of the Income-tax Act, 1961, penalty proceedings must be commenced before the completion of the assessment proceedings. In this case the assessment proceedings were completed by the passing of the assessment orders on the 31st August, 1964, and as the notices to show cause under Section 274(2) were issued by the Inspecting Assistant Commissioner on the 11th March, 1965, the penalty proceedings were void. In addition or rather in the alternative it was also contended by the assessee before the Tribunal that even if the penalty proceedings were held to commence on the issue of the notices by the Income-tax Officer under Section 274(1), as such notices were served on the 2nd September, 1964, the penalty proceedings were still bad in law. The revenue, on the other hand, contended before the Tribunal that the penalty proceedings commenced with the Income-tax Officer's satisfaction and direction to issue a show cause notice to the assessee. Therefore, the revenue contended that such satisfaction was recorded and such direction was given on the 29th August, 1964, and, hence, the penalty proceedings were commenced in time. Following a former decision of another Bench of the Tribunal in I.T.A. No. 11877 of 1964-65 the Tribunal in this case held that the penalty proceedings commenced on a reference being made by the Income-tax Officer to the Inspecting Assistant Commissioner under Section 274(2) and as such reference was made on the 29th August, 1964, and the notice of the transfer was given to the assessee on that date, the penalty proceedings were properly initiated and the penalty orders passed by the Inspecting Assistant Commissioner were valid in law. \n\n 5. But the Tribunal accepted the alternative contention of the assessee, namely, that the quantum of the penalties was excessive. The Tribunal repelled the contention of the revenue that the minimum of 20 per cent. of the tax evaded as representing the penalty under Section 271(1)(iii) was not applicable either to the Inspecting Assistant Commissioner acting under Section 274 or to the Tribunal hearing appeals from penalty orders passed by the Inspecting Assistant Commissioner in such proceedings. The Tribunal held that the powers of the Inspecting Assistant Commissioner to impose a penalty were not confined by the provision of Section 271(1)(iii) and there can be no restriction on the powers of the Tribunal in hearing appeals from the orders of penalty imposed by the Inspecting Assistant Commissioner. As a result, the Tribunal reduced the amounts of the penalty much below the 20 per cent. limit. \n\n 6. On those facts the questions set out above have been referred to this court for an answer. \n\n 7. Long and elaborate arguments have been advanced from the Bar both by the assessee and the revenue, supported by the usual wealth of citations of case law. \n\n 8. There are certain preliminary points which require disposal at first. One is a matter of the form in which questions have been raised by the Tribunal in this reference and the statement of case. The question is, is it proper that the Tribunal should say while stating the question, \"At the instance of the assessee\" and \"At the instance of the Commissioner of Income-tax?\" This point may be disposed of briefly. Reference to this court is controlled by Section 256 of the Income-tax Act, 1961. The governing words in Section 256(1) of the Act on this point are, inter alia : \n \"The Appellate Tribunal shall within one hundred and twenty days of the receipt of such application, draw up a statement of the case and refer it to the High Court.\" \n\n 9. In acting under Section 256(1) the Tribunal acts at the instance of the assessee or the Commissioner no doubt. The Tribunal cannot act suo motu. Once the Tribunal is moved either by the assessee or the Commissioner in the manner laid down under Section 256(1) of the Act, which \"require the Appellate Tribunal to refer to the High Court any question of law arising out of such order, and subject to the other provisions contained in this section...\", the Tribunal has two courses open : either it shall refer as indicated above or it can refuse to refer in which event Section 256(2) will operate. It appears that when the Tribunal refers a case under Section 256(1). it must have to be satisfied that a question of law fit for reference to the High Court arises. That responsibility and that satisfaction must belong to the Tribunal. Therefore, the question raised in the statement of the case and referred to the High Court for an answer must in essence be the questions of the Tribunal and implies that the Tribunal is satisfied that a question of law has arisen. It is therefore inappropriate in such context when the Tribunal does refer the question of law under Section 256(1) to say that it is doing so at the instance of either the assessee or the revenue or the Commissioner of Income-tax. It is unnecessary to say anything further on this point. \n\n 10. But the other preliminary point raises a more important question. That question, in short, is: Can the Tribunal raise a question of law under Section 256(1) of the Income-tax Act, 1961, where there is no application by the aggrieved party as required and within the time thereunder ? Mr. Pal on behalf of the revenue contends that this practice is illegal but has been growing unnoticed without a formal decision by the courts deciding the exact point of controversy. The point arises directly in this case because the assessee did not make any application to raise question No. 2 asked before the Tribunal. What the assessee did was to state it in reply to the application made by the Commissioner of Income-tax raising question No. 1. The point is: Can it be done ? \n\n 11. It is contended by Mr. Pal on behalf of the revenue that this cannot be done and should not be permitted by the court. He emphasizes the expression \"by application in the prescribed form, accompanied where the application is made by the assessee by a fee of Rs. 100\" in Section 256(1) of the Act. The relevant portion of Section 256(1) of the Act on this point is, barring the unnecessary details for this purpose, as follows : \"The assessee or the Commissioner may, within 60 days of the date upon which he is served with notice of an order under Section 254, and by such application in the prescribed form require the Appellate Tribunal to refer the same to the High Court\". No doubt the word used is \"may\". But being a statutory procedure, this is the only procedure by which the assessee or the Commissioner may move in order to require the Appellate Tribunal to make the reference to the High Court. There is no other procedure. The procedure being entirely statutory, although the word \"may\" is used, there is no other available procedure allowed by the statute. The form prescribed is Form No. 37. These forms are prescribed under Rule 48 of the Income-tax Rules, 1962, which provides :\n \"An application under Sub-section (1) of Section 256 requiring the Appellate Tribunal to refer to the High Court any question of law shall be made in Form No. 37.\"\n\n12. Paragraph 4 of that form requires the applicant to state the questions of law that arise out of the order of the Appellate Tribunal. \n\n13. Apart from this requirement of an application in the prescribed form, the second condition flows from the limitation of time under Section 256(1) of the Act. The first limitation is that such an application in the prescribed form by the assessee or the Commissioner, as the case may be, has to be made \"within sixty days of the date upon which he is served with a notice of an order under Section 254\". The Tribunal, therefore, has to be enabled to do so by the application in the prescribed form within this period of 60 days. If this period of 60 days is allowed to expire, the statute does not provide, except in the proviso which we shall presently mention, to entertain such an application beyond that period. Now, the proviso expressly says : \n \"Provided that the Appellate Tribunal may, if it is satisfied that the applicant was prevented by 'sufficient cause ' from presenting the application within the period hereinbefore specified, allow it to be presented within a further period not exceeding 30 days.\" \n\n 14. The proviso means only this that a further period of 30 days in addition to the 60 days mentioned above might be available; but then this is not as a matter of right cither to the assessee or to the Commissioner but it depends on the satisfaction of the Appellate Tribunal that the applicant was prevented by sufficient cause from presenting the application within the prescribed period of 60 days. It follows that if there be no application in the prescribed form within the period of limitation mentioned in Section 256(1) read with the proviso, the Appellate Tribunal cannot entertain any other application to make a reference to the High Court or even cannot act suo motu, on its own, to make such a reference. Being matters of revenue, this period of limitation is clearly imposed by statute to close disputes and controversy as soon as possible and within a reasonable time from the order of the Tribunal. \n\n 15. From a reading of Section 256, the conclusion is that no question can be raised in a statement of the case by the Tribunal without an application in the prescribed form by the applicant within the prescribed time. It appears that neither of these statutory requirements was satisfied by the assessee to qualify him for raising the second question. The assessee's reply raising such a question is dated as late as the 6th December, 1966, which was about four months after the date of the order of the Tribunal of 5th August, 1966, and the assessee has not either shown that the service upon him was delayed in order to enable him to come within the time prescribed even on the basis of the date of his reply. We are of the opinion that when the applicant does not satisfy the requirements either of : (1) the application in the prescribed form with the fee, and (2) within the limitations expressly invoked, he disqualifies himself from asking for a reference under Section 256(1) of the Act by any other procedure unknown in law or in the statute. We need only say that where there is no application in the prescribed form and within the time imposed under Section 256(1) of the Act, the provision of Section 254(4) of the Income-tax Act comes into force, namely, as stated there : \n \"Save as provided in Section 256, orders passed by the Appellate Tribunal on appeal shall be final.\" \n\n 16. At this point we shall notice two authorities of the Supreme Court. One is Commissioner of Income-tax v. Scindia Steam Navigation Co. Ltd., The Supreme Court there, at pages 609-10, observed as follows :\n \"...the question must be one which the Tribunal was bound to refer under Section 66(1) and the applicant must have required the Tribunal to refer it. R(T) is the form prescribed under Rule 22A for an application under Section 66(i), and that shows that the applicant mast set out the questions which he desires the Tribunal to refer and that further, those questions must arise out of the order of the Tribunal. It is, therefore, clear that under Section 66(2), the court cannot direct the Tribunal to refer a question unless it is one which arises out of the order of the Tribunal and was specified by the applicant in his application under Section 66(1). Now, if we are to hold that the court can allow a new question to be raised on the reference, that would in effect give the applicant a right which is denied to him under Section 66(1) and (2) and enlarge the jurisdiction of the court so as to assimilate it to that of an ordinary civil court of appeal.\" \n\n 17. The Supreme Court in that case was dealing with Section 66 of the old Act. But the principles are found in the observations quoted. The other case is Commissioner of Income-tax v. Arunachalam Chettiar, . There also the Supreme Court discussed the principles which should guide references under the Income-tax Act to the High Court. The ratio of that decision also supports the principle quoted above.\n\n 18. It is now necessary to examine the arguments put forward on this point by Mr. Roy on behalf of the assessee, contending that the Tribunal has a right to allow cross-objections and regulate its own procedure. His first reliance is on Section 255(5) of the Income-tax Act, 1961, which reads as follows : \n \"Subject to the provisions of this Act, the Appellate Tribunal shall have power to regulate its own procedure and the procedure of Benches thereof in all matters arising out of the exercise of its powers or of the discharge of its functions, including the places at which the Benches shall hold their sittings.\" \n\n 19. On the basis of this provision it is said that the Appellate Tribunal has the power to treat the reply of the assessee in this case as a kind of cross-objection raising the second question under reference. Prima facie, there appears to be a good deal of force in such an argument. On closer scrutiny it appears that the significant words of that sub-section are \"subject to the provisions of this Act\" Necessarily, therefore, it must be subject to Section 256(1) of the Act. Equally necessarily, therefore, the power to regulate the procedure cannot override the express provision regarding (1) requirement of an application in the prescribed form, and (2) such application to be within the period of time mentioned there. Thirdly, the Appellate Tribunal cannot be said to have power in the name of regulating its own procedure to follow a procedure which is directly against Section 256 and the limitations imposed therein. Almost by the application of the doctrine of expressio unius it will appear that the Appellate Tribunal in making the reference to the High Court has no power at all to evolve a procedure for cross-objection as under the Civil Procedure Code. The Tribunal is a statutory institution and has to find its powers within the four corners of the statute and its relevant sections. Section 253(4) in dealing with the appeals to the Appellate Tribunal expressly provides for the case of filing a \"memorandum of cross-objections\". It expressly gives the party other than the appellant before it the right to file a memorandum of cross-objections verified in the prescribed manner against any part of the order of the Appellate Assistant Commissioner and it expressly provides, \"such memorandum shall be disposed of by the Appellate Tribunal as if it were an appeal presented, within the time specified in Sub-section (3)\". By sharp and deliberate contrast this provision for cross-objection has not been made in the case of reference to the High Court by the Tribunal under Section 256 of the Income-tax Act, 1961. That is recognised in the decision of the Madras High Court in Commissioner of Income-Tax v. Sundaram & Co. Private Ltd. .\n\n 20. It is a mistake to think that the Appellate Tribunal in making a reference to the High Court is either a regular court of appeal with all the powers available in the Civil Procedure Code or that in any other way it has any implied power to permit cross-objections, where it is not provided for in the Income-tax Act, and particularly where it is against the express provisions in the statute regarding limitation and form. \n\n 21. To support and illustrate this conclusion it will be necessary to refer to certain provisions in the statute and to certain authorities. Section 255(6) dealing with the procedure of the Appellate Tribunal makes it quite clear that the proceedings before the Appellate Tribunal shall be deemed to be judicial proceedings but within the meaning of Sections 193 and 288 and for the purpose of Section 196, Indian Penal Code, and that the Appellate Tribunal shall be deemed to be a civil court for all the purposes of Section 195 and Chapter XXXV of the Criminal Procedure Code, That provision implies that the Appellate Tribunal is not a regular court of appeal with all the powers of the court under the Civil Procedure Code, We have failed to find any particular section of the Income-tax Act vesting the Appellate Tribunal with all the powers of a civil court under the Civil Procedure Code. A reference to the cases on this point will be necessary. \n\n 22. In R.M. Seshadri v. Second Addl. Income-tax Officer a Division Bench of the Madras High Court came to the conclusion that the Income-tax Appellate Tribunal was not a court. (See the observations of the Madras High Court from page 403 to page 406 of that report). The Andhra Pradesh High Court in Bh. Satyanarayanamurthi v. Income-tax Appellate Tribunal expressed the same view, where Subba Rao C. J. at page 126 observed as follows:\n \"In either ordinary parlance or legal sense, the Income-tax Appellate Tribunal cannot be held to be a civil, criminal or revenue court.\" \n\n 23. The picture on the point gets confused by doctrines derived from analogy and similarity found in many of the law reports. In Kanpur Industrial Works v. Commissioner of Income-tax the observation was made by M. C. Desai C. J. at page 417 to the following effect:\n \"By its order an appellate court can dispose of the appeal and not something not included within its scope. In the department's appeal for an increase in the assessable income, the only question for its consideration is whether the increase or part of it should be allowed or not. Whether the amount already assessed was wrongly assessed or not or whether the assessee is liable to be assessed at all or not is a question quite outside the scope of the appeal and any decision on it cannot be said to be an order on the appeal.\" \n\n 24. Again at page 421 of the report the observation is as follows :\n \"If it prayed that the assessment order be quashed it was not entitled to be heard, whereas if it simply prayed that the department's appeal be dismissed it was entitled to be heard. What the assessee prayed before the Tribunal is essentially a question of fact, which cannot be investigated by this court and on which no finding can be given by it for the first time or given adversely to the finding recorded by the Tribunal.\"\n\n25. In Commissioner of Income-tax v. Hazarimal Nagji & Co. a Bench of the Bombay High Court expressed the view affirming the previous view expressed in the case of New India Life Assurance Co. v. Commissioner of Income-tax that \"the position of the Appellate Tribunal is the same as a court of appeal under the Civil Procedure Code and its powers are 'identical' with the powers enjoyed by an appellate court under the Code.\"\n\n26. Many of the above observations have been applied out of their context and the resulting confusion has been very misleading indeed in some cases. Whatever the position may be, this much is clear to our mind that so far as the Appellate Tribunal's jurisdiction to refer a case to the High Court under Section 256 is concerned, it is strictly limited by the statutory provision and it does not enjoy the powers of a full appellate court under the Civil Procedure Code.\n\n27. The sheet-anchor of Mr. Roy for the assessee on this point has been the decision of the Bombay High Court in Girdhardas & Co. Ltd. v. Commissioner of Income-tax . There, Chagla C.J., delivering the judgment of the Division Bench of the Bombay High Court, made the following observations at page 91 :\n\n \"It is obvious that there may be cases where a winning party would\nbe seriously prejudiced if it was precluded from raising a question of law\nmerely because it had not made an application for a reference and the\nreference was asked for at the instance of the losing party. The winning\nparty can never apply for a reference. But it may happen that if the\ncourt takes a particular view on the reference asked for by the losing party,\ncertain other questions of law may arise which may have to be decided in the interest of the winning party. Therefore, it would not be proper to shut out a party before the Tribunal from raising a question of law which clearly arises from the order of the Tribunal merely because it so happens that it has not made an application for a reference.\" \n\n \"In. making the above observations, the Bombay High Court was following one of its previous decisions, unreported, in Commissioner of Income-tax v. Banthia Bank Ltd. (I.T. Ref. No. 20 of 1950--decided on 10-10-50) and mentioned at page 90 of the report in Girdhardas. & Co. Ltd. v. Commissioner of Income-tax.\n\n28. This Bombay decision does not discuss, (1) the then existing Section 66 of the Income-tax Act, (2) the statutory provisions for the application in the prescribed form, and (3) the nature of jurisdiction o5 the Appellate Tribunal in respect of a reference and the character of advisory jurisdiction of this High Court in hearing a reference which necessarily limits ordinary appellate court's powers under the Civil Procedure Code, which are co-equal with the trial court even m the matter of taking evidence, and (4) it is doubtful how far it is good law after the subsequent decision of the Supreme Court in Commissioner of Income-tax v. Scindia Steam Navigation Co. which, we have already discussed.\n\n 29. This view of Chagla C. J. creates a conflict of decisions in the Indian High Courts. His Lordship's view was followed by the Rajasthan and the Gujarat High Courts and not followed in the Madhya Pradesh and Madras High Courts. In Educational & Civil List Reserve Fund through H.H. Maharana of Udaipur v. Commissioner of Income-tax the Rajasthan High Court came to the conclusion that it was open to the department also on an application for a reference made by the assessee to ask for a question which according to it arose from the order of the Tribunal to be referred to the High Court. At page 119 of the report the Rajasthan High Court followed the Bombay High Court decision in Girdhardas's case. Similar view was expressed by the Gujarat High Court in Smt. Dhirajben R. Amin v. Commissioner of Income-tax But the opposite view was taken by the Madhya Pradesh High Court in Commissioner of Income-tax v. Dr. Fida Hussain where the following observations were made at page 318:\n \"In regard to the second question we are of opinion that It could not have been referred to this court without an. application duly made by the assessee under Section 66(1) of the Act. We had occasion to consider an identical question in Commissioner of Income-tax v. Jiwaji Rao Sugar Co. Ltd. Having regard to this conflict of judicial opinion in the different High Courts in India, Mr. Pal for the revenue naturally insisted that it was essential that the point must be decided on this reference so far as this court is concerned. We have already expressed our conclusion on this point. We hold that section 256 of the Income-tax Act, 1961, lays down the whole procedure how reference has to be made. That procedure, in our view, does not give the Appellate Tribunal any jurisdiction or power to admit cross-objections within the meaning of the Civil Procedure Code to raise a question of law not raised by an application in the prescribed form and not within the time prescribed and make a reference of the same to this court. We hold further that it is a course which can never be taken specially where it is beyond the express limitation stated in Section 256 of the Income-tax Act. Our observations should not be understood as limiting any scope for argument on the question raised on the reference according to the procedure laid down in Section 256 even though that argument is not raised by way of a question. We would like to elaborate on this particular aspect. An argument has been advanced about related and unrelated questions. If a question is duly raised according to the procedure of Section 256 of the Income-tax Act, 1961, then different approaches and aspects of that question certainly will be open to argument in the reference and the question from that point of view may be reframed or appropriately framed. But that is not the same as saying that a wholly unrelated question can be allowed to be raised which was not raised by way of an application in the prescribed form and within the statutory limitation. This is acutely illustrated in the instant reference before us. The first question raised only relates to the power of reduction of the penalty below the statutory limit prescribed in Section 271(1)(iii) of the Income-tax Act, 1961. It proceeds on the assumption that Section 271(1)(iii) of the Act applied. What is now being said is that not the whole of Section 271 was inapplicable. For that purpose reliance was placed on the authority in Kanpur Industrial Works v. Commissioner of Income-tax already quoted. But, then, there, in that case, the increase of the assessment was the total ambit of the appeal. In fact, there it was held that the point of no assessability at all should not be allowed o be raised as against the whole assessment but confined only to the part of the increase in assessment which was the subject-matter of the appeal before the Tribunal. It was in that case that the word \"incongruity\" has been used and the incongruity was avoided by suggesting the course, that legal assessability was not generally to be the issue and not allowed to be raised but in so far as it affected the increase only in the assessment, it was allowed. To follow such a course in this case would be not only incongruous but completely illogical. If the penalty proceedings were invalid in law altogether, then there can be no question of the penalty being lower than the minimum statutory limit, for ex hypothesis the penalty did not come under the statute at all. We do not think that such a course is open, any further, to argument after the decision of the Supreme Court in Commissioner of Income-tax v. Scindia Steam Navigation Co. Ltd.\n\n 30. Although we are of the opinion that this question should not have been referred in the manner as it is done, we have allowed the assessee to address us on the merits of question No. 2 in order to find out and decide if they are a part and parcel of and are implicit in the first question. Question 2, as quoted above, is: \n \"...whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the penalty proceedings were properly initiated and that the penalty orders passed by the Inspecting Assistant Commissioner were valid in law ?\" \n\n 31. In order to appreciate the merits of this point urged by the assessee, it will be helpful to have the following calendar ;-- \n\n 1-4-62 : The new Income-tax Act, 1951, came into force.\n \n\n29-8-64 : I.T.O.'s reference under Section 274(2) of the I.T. Act, 1961, to the Inspecting\nAsstt. Commissioner.\n \n\n 31-8-64 : I.T.O.'s order of assessment and notice under Section 274(1) of the I.T, Act. \n \n\n 2-9-64 : Service of the above notice on the assessee.\n \n\n 22-9-64 : I.T.O.'s hearing of the assessee. \n \n\n 11-3-65 : Inspecting Asstt. Commissioner's notice under sec. 274(1) of the Act to the assessee. \n \n\n 32. We have already described the facts as appearing in the statement of the case. The assessee's point is that the penalty proceedings on those facts started on March 11, 1965, when the Inspecting Assistant Commissioner gave notice under Section 274(1) of the Income-tax Act, 1961. The Tribunal held that the penalty proceedings started from either August 29, 1964, or August 31, 1964. The point of contention, however, must not be missed. It is not that the order imposing the penalty was not within two years. The point of contention is that the penalty proceedings were initiated after the commencement of the assessment proceedings. \n\n 33. It will be necessary and helpful to have Section 275 to decide this question. Section 275 reads as follows : \n \"No order imposing a penalty under this Chapter shall be passed after the expiration of two years from the date of the completion of the proceedings in the course of which the proceedings for the imposition of penalty have been commenced.\" \n\n 34. It is followed by an Explanation with which we are not concerned. What is complained of by the assessee in this case is that the proceedings for the imposition of penalty have been commenced in this case after the completion of assessment proceedings. Therefore, it is contended that the whole penalty proceeding is bad and vitiated.\n\n 35. The Tribunal came to the following finding on this issue : \n \"In this case, assessment proceedings were completed by the passing of the assessment order on 31st August, 1964. ....\" \n\n 36. Learned counsel for the assessee contended that, though usually penalty proceedings would be commenced by the issue and service of notice under Section 274 of the Income-tax Act by the Income-tax Officer, yet in the case where the penalty proceedings are transferred to the Inspecting Assistant Commissioner under Section 274(2), such proceedings are commenced by the issue and service of the notice by the Inspecting Assistant Commissioner on the assessee to show cause. Having noticed this, the Tribunal proceeds to record the finding in these terms : \n \"The proceedings are initiated by the Income-tax Officer and transferred to the Inspecting Assistant Commissioner and that the provision for imposition of penalty are attracted must be to the satisfaction of the Income-tax Officer under Section 271(1)(c). This argument overlooks the fact that under Section 274(2) the Inspecting Assistant Commissioner has all the powers conferred under Chapter XXI, which also includes Section 271 for the imposition of penalty. As in this case, the penalty proceedings were referred to the Inspecting Assistant Commissioner on 29th August, 1964, which was before the completion of the assessment proceedings, and the notice of the transfer was given to the assessee on that date, it must be held that the penalty proceedings were properly initiated and the penalty orders passed by the Inspecting Assistant Commissioner are valid in law.\" \n\n 37. In coming to that conclusion, the Tribunal distinguished a Bombay Tribunal Bench decision on the ground that that was not a case of imposition of the penalty by the Inspecting Assistant Commissioner on transfer but of a penalty imposed by the Income-tax Officer. \n\n 38. The answer to this question really turns on the interpretation of the expression ''proceedings for the imposition of penalty have been commenced\" appearing in Section 275 of the Income-tax Act, 1961. In other words, what is the commencement of the penalty proceedings ? When do the penalty proceedings commence ? Again, in our view, these questions must be answered on the terms of the statute and by strict reference to the relevant sections which govern the procedure for and imposition of the penalty. Analogies we consider to be misleading and inappropriate. Before dealing with the numerous authorities and various analogies placed before us by Mr. Roy, appearing for the assessee, a close look at\" the sections relevant for this purpose is the first step. The three sections relevant for this purpose are: Sections 271, 274 and 275 of the Income-tax Act, 1961. \n\n 39. Chapter 21 of the Income-tax Act, 1961, deals with \"penalties imposable.\" Section 271(1) of the Income-tax Act, 1961, lays down, inter alia, as follows: \n\n \"If the Income-tax Officer or the Appellate Assistant Commissioner in the course of any proceedings under this Act is satisfied that any person--... \n (c) has concealed the particulars o! his income or deliberately furnished inaccurate particulars of such income, \n \n\n he may direct that such person shall pay by way of penalty--. \n (iii) .... a sum which shall not be less than 20% but which shall not exceed one and a half times the amount of the tax, if any, which would have been avoided if the income as returned by such person had been accepted as the correct income.\" \n\n In quoting the above section I have left out the irrelevant or immaterial portions for the purpose of this question. The dominant features are plain from the sections as quoted. They are three in number. In the first place, the Income-tax Officer has to be satisfied. In the second place, such \"satisfaction\" of the Income-tax Officer must be \"in the course of any proceedings under this Act\". Thirdly, he may direct that such person shall pay by way of penalty a certain amount. The overall condition is that there has to be a \"concealment\". \n\n 40. Certain results follow from a provision of this nature. The first is that the authority, prima facie, belongs to the Income-tax Officer, It is before him that the first foundations of penalty are laid. That foundation is his \"satisfaction\" in the course of assessment proceedings that there has been concealment. He is therefore the fons et origo of this penalty proceeding. Unless he initiates or the Appellate Assistant Commissioner initiates, the Inspecting Assistant Commissioner cannot initiate. In the natural context that is what should be when one remembers that after all the assessment proceedings are being held by the Income-tax Officer or the Appellate Assistant Commissioner who are the persons likely at all to know whether there has been a concealment and not the Inspecting Assistant Commissioner who, not dealing with the regular assessment proceedings, would have little or no knowledge of concealment. It is significant to emphasise also that Section 271 of the Income-tax Act does not breathe a word about Inspecting Assistant Commissioner. \n\n 41. The next stage is reached in Section 274 which is described as the \"procedure\". Section 274 reads as follows: \n\n \"(1) No order imposing a penalty under this Chapter shall be made unless the assessee has been heard or has been given a reasonable opportunity of being heard. \n\n (2) Notwithstanding anything contained in Clause (iii) of Sub-section (1) of Section 271, if in a case falling under Clause (c) of that sub-section, the minimum penalty imposable exceeds a sum of Rs. 1,000, the Income-tax Officer shall refer the case to the Inspecting Assistant Commissioner who shall, for the purpose, have all the powers conferred under this Chapter for the imposition of penalty.\" \n\n42. Section 274(1) makes it clear that ''no order imposing a penalty can be made unless the assessee has been heard or given a reasonable opportunity of being heard\". Its plain meaning is that no order of penalty can be imposed upon the assessee without his being heard or given a reasonable opportunity of being heard. It does not mean that no proceeding can be taken against him without those two conditions of \"hearing\" or \"reasonable opportunity of being heard\", nor does it posit or stipulate for a notice when the penalty proceeding is commenced. Sub-section (2) of Section 274 is significant in many ways. In the first place, it is the proverbial non-obstante clause beginning with the words \" notwithstanding anything contained in Clause (iii) of Sub-section (1) of Section 271, if in a case falling under Clause (c) of that sub-section...\" The language of this \"notwithstanding\" clause on a proper interpretation can only mean this that the entire provision of Section 271(1) is not wiped out. It only prevails in the limited case mentioned under Section 271(1) (c) and (iii) and for the particular case where the penalty imposable exceeds the sum of Rs. 1,000 and that only so far as the Income-tax Officer is concerned and not the Appellate Assistant Commissioner as mentioned in Section 271(1). That is the scope and ambit of limitation of the non-obstante expression under Section 274(2) of the Income-tax Act, 1961. The conclusion follows that all cases of penalty and penalty proceedings have their source originally with the Income-tax Officer. \n\n 43. The operation of Section 274(2) of the Act comes into play when the minimum penalty imposable exceeds Rs. 1,000. This can only mean that the Income-tax Officer has to find initially that the minimum penalty imposable exceeds Rs. 1,000 because none else can make this initial finding under the scheme of the Income-tax Act. That means a judicial consideration by the Income-tax Officer when the minimum penalty imposable in a particular case exceeds the sum of Rs. 1,000. This is the second feature of Section 274(2) of the Act. Thirdly, the significant expression in Section 274(2) of the Act is : \"The Income-tax Officer shall refer the case to the Inspecting Assistant Commissioner.\" The words \"refer the case\" plainly indicate that the case is with the Income-tax Officer and he is referring that case to the Inspecting Assistant Commissioner. It follows again, therefore, that it is the Income-tax Officer before whom \"the case\" originates and he is referring that case to the Inspecting Assistant Commissioner. In other words, the penalty proceedings in this context commence before the Income-tax Officer. Fourthly, when the Income-tax Officer has referred \"the case\" to the Inspecting Assistant Commissioner, the power and the function of the Inspecting Assistant Commissioner are controlled by the expression that follows, viz., \"who shall for the purpose have all the powers conferred under this Chapter for the imposition of penalty\". That means that after the Income-tax Officer refers the case to the Inspecting Assistant Commissioner, he has all the powers under Chapter 21 given to the Income-tax Officer and the Appellate Assistant Commissioner under Section 271 of the Act. It is necessarily so because in that particular case where the minimum penalty imposable exceeds Rs. 1,000, the case is transferred by the Income-tax Officer to the Inspecting Assistant Commissioner and who, in order to discharge his functions, must, a fortiori, be clothed with the powers given under the statute under Section 271 of the Act or else he could not function. From this, it follows that what the Inspecting Assistant Commissioner does is to take over the pending case before the Income-tax Officer with regard to the penalty proceedings on the ground that the minimum penalty imposable exceeds Rs. 1,000. In that view of the matter, Section 274(2) read with Section 271 of the Income-tax Act, 1961, does not suggest that the Inspecting Assistant Commissioner is the institutional authority where penalty proceedings are or can be commenced. The Inspecting Assistant Commissioner in this view is really a transferee authority whose jurisdiction is dependent on the condition that the Income-tax Officer must make the reference of the case where the minimum penalty imposable exceeds Rs. 1,000. Under Section 28 of the old Income-tax Act of 1922, the Income-tax Officer had no power to impose any penalty without any previous approval of the Inspecting Assistant Commissioner and it is significant that the new Income-tax Act of 1961 does not require the Income-tax Officer to obtain such sanction in any case. It confirms the conclusion that we are reaching that the Income-tax Officer is the institutional authority- where the penalty proceedings are commenced. All that the present Act does is that, if the case falls within Section 271(1) concerning a case of concealment read with Sub-clause (c) thereof and where the minimum penalty imposable exceeds Rs. 1,000, he is bound to refer the case to the Inspecting Assistant Commissioner who is then empowered to impose a penalty in that case. It has to be emphasized in this context that the Income-tax Officer's jurisdiction to impose a penalty in any case falling outside Section 271(1)(c) is not in any way affected or qualified by Section 274(2) of the new Income-tax Act of 1961. The words \"for the purpose\" under Section 274(2) of the Income-tax Act, 1961, can only mean for the purpose of imposing the penalty and not for commencing the penalty proceeding but for concluding it, \n \n\n 44. It will be necessary now to come to the next section, Section 275. This has already been quoted. Mr. Roy for the assessee argues that this section contemplates two different proceedings which he describes as : (1) the assessment proceedings and (2) the penalty proceedings. His argument suggests that they are two independent and entirely different proceedings. No water-tight distinction of this nature appears possible in the scheme of the Act. It will be unnecessary to discuss the old controversy whether penalty is an additional tax or not which culminated in the two Supreme Court decisions in C.A. Abraham v. Income-tax Officer, Kottayam, and Commissioner of Income-tax v. Bhikaji Dadabhai & Co. Mr. Roy for the assessee contends that the transfer of the case by the Income-tax Officer to the Inspecting Assistant Commissioner is in the nature of an administrative or departmental act and only after that transfer the penalty proceeding before the Inspecting Assistant Commissioner starts. Therefore, his submission is that the commencement of the proceedings really starts with the Inspecting Assistant Commissioner, on the basis of this distinction between penalty proceedings and the assessment proceedings. The opening words of Section 274(1) of the Act are clear enough to say that the requirement that the assessee shall be heard or be given a reasonable opportunity of being heard is a requirement before an order imposing a penalty under Chapter 21 of the Income-tax Act, 1961, is made. The order imposing the penalty requires that condition to be satisfied but there is no such limitation for initiating or commencing penalty proceedings with the notice. This is an important difference because under other sections like Sections 22 and 34 of the old Income-tax Act with corresponding provisions in the new Act require such notices as statutory conditions and, therefore, commencement of proceedings under those sections is bound to be different from commencement of proceedings under Section 271 read with Sections 274 and 275 of the Income-tax Act of 1961. When we come to the discussion of the relevant authorities on that subject we shall deal with the point in further detail. Modern statutes have many provisions for penalty proceedings and specially in the case of dismissal of public servants. Such penalty proceedings assume and also are required to satisfy particular statutory conditions of giving two notices, such as, a preliminary notice why the public servant should not be discharged or dismissed and a second notice why a particular penalty should not be imposed upon him. These considerations, however, are clearly inapplicable to penalty proceedings under Chapter 21 of the Income-tax Act, 1961.\n\n 45. The reason why the Income-tax Act, 1961, in Section 274(1) requires\nthat no order of penalty shall be made without hearing the assessee or\ngiving him a reasonable opportunity, and the reason for dispensing with any such requirement or comparable notice at the initial stage of the penalty proceeding under Section 271 of the Act are plain and can he sensibly and rationally justified. The justification lies in this fact that Section 271(1) of the Income-tax Act, 1961, begins with this requirement that this satisfaction of the Income-tax Officer must arise \"in the course of any proceeding under this Act\" ; that means that the Income-tax Officer who is dealing with the assessment proceedings under the scheme of the Income-tax Act which are not ex parte but on notice and opportunities given to the assessee mentioned in that Act. It is only in such course of assessment proceedings that the Income-tax Officer is satisfied that a concealment has occurred under Section 271(1)(c). Therefore, the initial notice about the commencement is dispensed with because the notice is already there as the assessee is appearing before the Income-tax Officer in connection with the assessment proceedings. Therefore, the argument that the assessment proceedings and the penalty proceedings are two separate independent proceedings cannot really be sustained. One flows from the other. There cannot be a penalty proceeding which does not spring from the assessment proceeding. They are in that sense inseparably connected. It is not open to the Income-tax Officer or the Appellate Assistant-Commissioner under Chapter 21 of the Act to take penalty steps against the assessee which does not arise out of the assessment proceedings. In that sense it is not an unrestrained or unqualified power of penalty. In that sense it is not possible to separate the two proceedings completely and describe the penalty proceedings in that sense as independent of the assessment proceeding. I understand the Division Bench decision in Commissioner of Income-tax v. Anwar Ali, only in that context. Were it necessary to express any difference with the view expressed in Commissioner of Income-tax v. Anwar Ali, we would have certainly referred it to a Fuller Bench but it is not necessary to do so in the instant reference before us, for we are only considering here the commencement of the penalty proceedings and whether in that context the commencement has the soil of origin in the assessment proceedings.\n\n 46. The conclusion is also enforced by an analysis and scrutiny of the powers, functions and jurisdiction of the Inspecting Assistant Commissioner under the Income-tax Act, 1961. A broad analysis of the Act shows six specific powers or functions or jurisdiction of the Inspecting Assistant Commissioner. In the first place, he acts under the direction of the Commissioner under Section 123 of the Act. In the second place, he has the power to call for information under Section 133. In the third place, he has the power to inspect the register of companies under Section 134. Fourthly, he has the power to give permission for levy of super-tax on undistributed income of certain companies under Section 104 of the Act. Fifthly, he has the power to impose a penalty under Section 274(2) of the Act in cases of concealment and referred to by the Income-tax Officer. Sixthly, he has the power to accord \"previous approval in connection with the under-statement of the consideration for transfer of capital asset\" under Section 52 of the Act. This analysis of the powers and jurisdiction of the Inspecting Assistant Commissioner under the Income-tax Act, 1961, shows that he has not any power to commence the penalty proceedings as in this case. He is an institutional authority with very strictly enumerated powers. Section 2(27) of the Income-tax Act, 1961, says that the Inspecting Assistant Commissioner means a person appointed to be such under Section 117(1) of the Act. He is more or less--to use a kind of non-technical language--a kind of a supervisor, superintendent, although we would not call him a watch-dog. \n\n 47. On the interpretation and construction of Section 271, Section 274 and Section 275 we have come to the conclusion that the penalty proceedings commence and are initiated before the Income-tax Officer of, as the case may be, with the Appellate Assistant Commissioner under the statute and not with the Inspecting Assistant Commissioner. \n\n 48. It will be now necessary to examine the various authorities on which Mr. Roy for the assessee relied and also examine the analogies he tried to draw with regard to the concept and procedure for penalty from other branches of law. \n\n 49. In the first place, he submits that penalty is quasi-criminal. The reason for his submission is that he wanted to draw upon the criminal law and Criminal Procedure Code for elucidating the expression \"commencement of the proceedings\" with a view to apply them to this particular Income-tax Act of 1961. For this purpose, he relied on the observations of D. Basu J. in Commissioner of Income-tax v. Anwar Ali . Penalty in this context should always be construed within the terms and language of the particular statute. Penalties in modern law are always statutory. Therefore, the statute creating the penalty is the first and the last consideration in this respect. Analogies are often misleading, because these statutes are not in pari materia. The popular and literary notion about penalty and the concepts associated with it have to subordinate themselves to the actual words and terms used in the statute creating the penalty and laying down the procedure for its imposition. It will be trite to say that penalty is penal. It is confusing to say that penalty is criminal or quasi-criminal. Penalty is statutory just as much as legal misconduct is not necessarily the popular misconduct.\n\n 50. Secondly, Mr. Roy for the assessee has drawn analogies from the Sales Tax Act, the Arms Act and the Ticca Tenancy Act. In support of his submission on these analogies, he has referred to three cases. The first case is Hossein Kasam Duda (India) Ltd. v. State of Madhya Pradesh, . This is a decision construing Section 22(1), proviso, of the C.P. and Berar Sales Tax Act and was concerned with the problem whether the amendment of that proviso by Act 17 of 1949 applied to proceedings commenced before the amendment. It has nothing to do with the point for decision in this instant reference before us. Neither its adumbration of the law nor discussion of facts has any relevance or application to the points for decision in the present reference before us. The observations of that report at page 225 about \"lis\" have no application in the present context for the simple reason that here the penalty proceedings under Chapter 21 of the Income-tax Act, 1961, spring from the assessment proceedings before the Income-tax Officer.\n\n 51. The second case on which Mr. Roy relied is Emperor v. Gulam Nabi, A.I.R. 1928 Pat. 146 which was concerned with Section 417 of the Criminal Procedure Code on the point of appeal against acquittal and Section 29 of the Arms Act where proceedings of that Act were construed to mean legal proceedings in court. We are not prepared to apply the analogy of Section 29 of the Arms Act to Sections 271, 274 and 275 of the Income-tax Act, 1961, which we consider are entirely different.\n\n 52. The third case on which Mr. Roy relied, is Abdul Gani v. David Jacob Cohen, [1953] 57 C.W.N. 313 which only decided the point that taking out of a summons or notice of motion under the practice of the court was not making of an application. We do not think that that case has any application to the points before us. \n\n 53. But the next group of authorities on which Mr. Roy for the assessee relied relates to the Income-tax Act and is nearer the field. These decisions, however, are not on penalty proceedings under the Income-tax Act but under other sections of the Income-tax Act. All these authorities are on Sections 22 and 34 of the old Income-tax Act of 1922. We shall briefly notice these authorities now. Mr. Roy opens this branch of citation with the case in D.P. Wadia & Sons v. Commissioner of Income-tax . In particular, he relies on the observations of Desai J. at pages 762 and 763. This case supplied Mr. Roy with the \"open the arena\" expression. That expression was used in that authority. Mr. Roy, therefore, suggests that all the proceedings before the Income-tax Officer under Section 271, until he refers the case to the Inspecting Assistant Commissioner under Section 274(2) of the Act, are all only steps to \"open the arena\". The phrase is attractive and liable to seduce. But, on the particular sections of the Income-tax Act, in this case, like Sections 271, 274 and 275, the attraction loses its force and glamour. This decision of D. P. Wadia v. Commissioner of Income-tax, was given on Section 22(2) and the notice was under the old Act. The ratio of that decision was that the issue of a public notice under Section 22(1) did not mark the start of assessment proceeding against an individual assesses and the public notice only opened the arena as it were for the proceedings to commence and was anterior to the commencement of assessment proceedings against any individual assessee. The controversy about public notice and individual notice for assessment proceeding has been the subject-matter of many judicial decisions but that is not the point here before us. Whether proceedings are commenced by public notice or by individual notice is not the point calling for an answer on this reference. We do not think that it is possible to argue on the relevant sections operating on penalty proceedings to suggest that proceedings only start under notice under Section 274(1) road with Section 274(2). We do not wish to repeat the reasons which we have already given.\n\n 54. The authority of this decision also is now in dubio because it is contrary to the observations made by the Supreme Court in Commissioner of Income-tax v. Ranchhoddus Karsondas,\n 55. The next case on which Mr. Roy relied is Dr. Onkar Dutt Sharma v. Commissioner of Income-tax and the observations made at pages 362-63. That case decided that initiation of proceedings under Section 34 of the Income-tax Act commenced only with the issue of notice under the section and did not commence when the Income-tax Officer applied for sanction of the Commissioner to issue such notice. It is essential to recall and emphasise that the provisions contained in Section 34 of the old Income-tax Act 1922, are very different from Sections 271, 274 and 275 of the Income-tax Act, 1961.\n\n 56. Neither Section 22 nor Section 34 of the old Income-tax Act of 1922 used the expression \"commencement of the proceedings\". \n\n 57. To continue with the authorities cited by Mr. Roy some more references have to be examined. The decision in Harakchand Makanji & Co. v. Commissioner of Income-tax was a case under Section 34 again of the old Income-tax Act of 1922. There Chagla C.J., at page 122, observed :\n \"Therefore once a public notice is given under Sub-section (1) the assessment proceedings have commenced and there is no obligation upon the Income-tax Officer to serve an assessee individually as well.\" \n\n 58. The other case cited by Mr. Roy is Y. Narayana Chetty v. Income-tax Officer, Nellore, [1959] 35 I T.R. 388 of the Supreme Court. Mr. Roy relied on the observations of Gajendragadkar J., at page 392, where it was observed that notice prescribed under Section 34 could not be regarded as a mere procedural requirement and that the service of the requisite notice on the assessee was a condition precedent to the validity of any reassessment made under Section 34. It was held by the Supreme Court in that case that the notice prescribed by Section 34 of the Income-tax Act for the purpose of initiation of reassessment proceedings was not merely a procedural requirement but was a condition precedent going to the very validity of the reassessment proceedings and if no such notice was issued or was invalid then the entire proceedings by the Income-tax Officer were illegal and void. These last two decisions in Harakchand Makanji & Co. v. Commissioner of Income-tax and v. Narayana Chetty v. Income-tax Officer, Nellore, were followed with approval by the Supreme Court subsequently in Commissioner of Income-tax v. Ranchhoddas Karsondas.\n\n 59. The next case cited is a decision of the Supreme Court in S. Narayanappa v. Commissioner of Income-tax . That again was a case on Section 34 of the old Income-tax Act of 1922. There the Supreme Court had expressed the view that the words \"reason to believe\" under Section 34 did not mean purely a subjective satisfaction but that the belief must be in good faith and cannot be a mere pretence and it was open to the court to examine whether the reasons for the belief had a rational connection or a relevant bearing to the formation of the belief and were not extraneous or irrelevant. The Supreme Court also expressed the view that proceedings for assessment or reassessment under Section 34(1)(a) started with the issue of a notice and it was only after the service of the notice that the assessee, whose income was sought to be assessed or reassessed, became a party to those proceedings. The relevant observations of Ramaswami J., who delivered the judgment, may be seen at pages 222-223. The opinion was expressed that the earlier stage of the proceedings for recording the reasons of the Income-tax Officer for obtaining the sanction of the Commissioner are administrative in character and not quasi-judicial. It was this part of the judgment which was used by Mr. Roy for the assessee in his argument to submit that the part or role played by the Income-tax Officer under Section 271 of the Income-tax Act, 1961, until the case was referred by him to the Inspecting Assistant Commissioner, was administrative in character and not quasi-judicial. Now, we have already said that Section 34 in structure and purpose is entirely different from Sections 271, 274 and 275 of the Income-tax Act, 1961. The word in Section 271 is not \"reason to believe\" as in old Section 34. The word in Section 271 is \"satisfaction\". The further controlling expressions\" in the course of any proceedings under this Act\" are always with notice to the assessee.\n\n 60. The other case to which reference was made by Mr. Roy is S.S. Gadgil v. Lal & Co. a decision of the Supreme Court, and the observations are at pages 237-239. It will be unnecessary to discuss that case again in detail because that was also under Section 34 of the old Income-tax Act of 1922 and the foregoing remarks apply also to distinguish that from the instant case before us. We need only refer to another aspect of the decision appearing from the judgment of Shah J. that the \"income-tax authorities who have power to assess and recover taxes are not acting as judges deciding a litigation between the citizen and the State ; they arc administrative authorities whose proceedings are regulated by the statute, but whose function is to estimate the income of the taxpayer and to assess him to tax on the basis of that estimate.\"\n\n 61. We can conclude our analysis of these authorities by referring to the decision of the Supreme Court on which Mr. Pal for the revenue relied and which is nearest to the point. That is the decision of the Supreme Court in Commissioner of Income-tax v. S.V. Angidi Chettiar, . This decision was rendered on the somewhat comparable Section 28 of the old Income-tax Act of 1922. Shah J., delivering the judgment of the Supreme Court in that case, made the following observations at page 745 of the report:\n \"The power to impose penalty under Section 28 depends upon the satisfaction of the Income-tax Officer in the course of proceedings under the Act; it cannot be exercised if he is not satisfied about the existence of conditions specified in Clauses (a), (b) or (c) before the proceedings are concluded. The proceeding to levy penalty has, however, not to be commenced by the Income-tax Officer before the completion of the assessment proceeding by the Income-tax Officer. Satisfaction before conclusion of the proceedings under the Act, and not the issue of a notice or initiation of any step for imposing penalty is a condition for the exercise of the jurisdiction.\" \n\n 62. From the above authority, it follows that \"satisfaction\" of the Income-tax Officer is the first step. As we have already indicated, Section 271 of the Income-tax Act, 1961, does not rest only with the \"satisfaction\" but proceeds further to say that the Income-tax Officer \"on being satisfied may direct that such a person must pay by way of penalty\". On that ground, we are satisfied that the initiation of penalty proceedings commences with the Income-tax Officer. \n\n 63. It will be unnecessary to discuss in detail an English decision cited at the Bar, viz.. Turner v. Jacaranda Clubs Ltd., [1953] 2 All E.R. 548 construing the expression \"action commenced\" where the action was commenced in the county court but transferred to the High Court under the County Courts Act in England. It cannot be over-emphasised that analogies in this respect in construing taxing statutes on particular procedure are as misleading and should generally be avoided. We can do no better than quote the observation of the Pareq J. in Cross v. British Oak Insurance Co. Ltd., [1938] 1 All E.R. 383 where interpreting the words \"commencement of proceedings\" under the British Road Traffic Act, 1938, the learned judge at page 386 observed as follows :\n \"I do not think that great assistance is to be obtained from earlier cases dealing with other sections of other Acts of Parliament.\" \n\n 64. We, therefore, hold that the Tribunal was right in coming to the conclusion that the penalty proceedings in this case and in the facts and circumstances stated above commenced on August 29, 1964, which is the date when the Income-tax Officer referred the case under Section 274(2) of the Income-tax Act, 1961, or, at any rate, on August 31, 1964, with the passing of the assessment orders and notice under Section 274(1) of the Income-tax Act, 1961. In this case, the Tribunal at page 18 of the paper book records the finding :\n \"In this case such satisfaction was recorded and such direction was given on August 31, 1964, as recorded in the assessment orders themselves; the order sheet shows that on August 31, 1964, the Income-tax Officer directed the issue of notice under Section 271/ 274 . Therefore, the penalty proceedings commenced on that date.\"\n\n 65. The facts are not challenged. But here a point was raised by Mr. Roy for the assessee by trying to suggest that the Income-tax Officer gave a notice on August 29, 1964, under Section 274(2) of the Income-tax Act, 1961, and again the Income-tax Officer gave a notice on September 2, 1964, asking the assessee to show cause why an order imposing a penally should not be passed under Section 271. Therefore, he suggests that the second notice of September 2, 1964, is illegal because by that time the Income-tax Officer had become functus officio, having made the reference on August 29, 1964, to the Inspecting Assistant Commissioner. We do not think that Mr. Roy is entitled to raise these questions of fact if he is disputing the dates of notices. But we have failed to see how even then there is any question of illegality and how it helps the assessee's argument on the point of commencement of proceedings. \n\n 66. For the reasons and on the authorities stated above we hold that the penalty proceedings were properly initiated and that the penalty orders passed by the Inspecting Assistant Commissioner were valid in law, We, therefore, answer the second question in the affirmative. \n\n 67. We shall now deal with the first question raised in the statement of the case. This relates to the reduction of penalty. Mr. Pal for the revenue contends that the following conclusion of the Tribunal is wrong in, law : \n \"Section 271(1)(iii) provides a minimum of 20 per cent. of the tax sought to be evaded in case of imposition of a penalty by the Income-tax Officer or the Appellate Assistant Commissioner. The minimum prescribed above is not applicable to the Inspecting Assistant Commissioner acting under Section 274 or the Tribunal hearing appeals from the penalty orders passed by the Inspecting Assistant Commissioner in such proceedings. Section 274(2) provides that notwithstanding anything contained in Section 271(1)(iii), if in a case falling under Clause (c) of that sub-section, the minimum penalty imposable exceeds a sum of Rs. 1,000, the Income-tax Officer has to refer the case to the Inspecting Assistant Commissioner who was to have all the powers conferred under that Chapter. It would appear from a simple reading of that sub-section that the powers of the Inspecting Assistant Commissioner to impose a penalty are not confined by the provisions of Clause (iii) of Sub-section (1) of Section 271. If that be so, the powers of the Tribunal in hearing the appeals from penalties imposed by the Inspecting Assistant Commissioner under Section 274(2) would also not be restricted to the amount prescribed in Section 271(1)(iii). In our opinion in this case the penalties imposed are excessive. While therefore sustaining the orders of penalty, we reduce the amounts as follows .....\" On a careful consideration of the law and the interpretation of the relevant sections we have come to the conclusion that the Tribunal came to a wrong decision in law on the above point. Section 274(2) of the Income-tax Act, 1961, has already been set out and its interpretation given elsewhere in this judgment. The jurisdiction of the Inspecting Assistant Commissioner under Section 274(2) arises on the three conditions mentioned, namely, (1) it must be a case of concealment under Section 271(1)(iii) the minimum penalty imposable exceeds a sum of Rs. 1,000, and (3) that the Income-tax Officer shall refer his case to the Inspecting Assistant Commissioner. When these three conditions are satisfied it is only then that the Inspecting Assistant Commissioner acquires the jurisdiction. But that jurisdiction is expressly qualified by the language of Section 274(2) saying \"who shall for the purpose have all the powers conferred under this Chapter for the imposition of penalty\". There has been in the Tribunal's order a confusion between the statutory limits of penalty and the powers of the officers. As we read Section 271 and Section 274 the limit is on the quantum of penalty, not on the power of the officer dealing with it except in the case that, so far as the Income-tax Officer is concerned, if the penalty imposable exceeds Rs. 1,000, it goes to the Inspecting Assistant Commissioner. That does not mean that the Inspecting Assistant Commissioner has a free hand in the matter and can disregard the minimum or maximum limits of penalty clearly stated and prescribed in Section 271(1)(iii). The maximum and the minimum limits in Clause (iii) of Section 271(1) of the Income-tax Act are attached to the penalty and whoever imposes the penalty has to observe those statutory limits. It is wrong, in our view, to interpret Section 271 and Section 275 of the Income-tax Act, 1961, in such a way as to confine the statutory limits mentioned in Clause (iii) of Section 271(1) of the Income-tax Act, 1961, only to the Income-tax Officer or the Appellate Assistant Commissioner but when the Inspecting Assistant Commissioner or the Tribunal deals with the matters, these last two authorities or institutions can act without limit and beyond the limits specified by the statute. This conclusion is further reinforced by the interpretation of the clear words in Section 274 which definitely limits the power of the Inspecting Assistant Commissioner by saying that he has all the powers but only \"for the purpose\". That is for the purpose of Section 271(1)(iii) and no more. It is also enforced by the words \"all the powers\". All these powers mean those powers which are mentioned under Section 271 and no more powers. It does not confer unlimited powers to disregard statutory limits of maximum and minimum penalties prescribed and laid down in mandatory language in Clause (iii) of Section 271(1) of the Income-tax Act, 1961. The scope of the non obstante clause beginning with the word \"Notwithstanding\" has already been indicated by us to say that it does not wipe out the whole of Section 271 of the Act to such an extent, that it also wipes out the statutory limits in Clause (iii) of Section 271(1) of the Act, but only to the extent it conflicts with Section 271, namely, the Income-tax Officer cannot deal with it where the penalty imposable is over Rs. 1,000.\n\n68. To accept the argument of Mr. Roy for the assessee would also mean another odd conclusion and that is while the Appellate Assistant Commissioner under Section 271(1) of the Act would be bound by the minimum and maximum statutory limits of the penalty, the -Inspecting Assistant Commissioner will be free to disregard such statutory limits, a conclusion which seems to us to be inconsistent with the principles of the Act. The further consideration on this point is that penalties are not the normal features. They arise only in certain cases, such as in the case of concealment. The penalty should always be strictly construed. Courts should be reluctant to construe a power of penalty without any limitation unless the words are clear or create an inescapable compelling implication. We are, therefore, not inclined to hold that the Tribunal and the Inspecting Assistant Commissioner have unfettered powers to impose whatever penalty they consider necessary. Penalties are strictly creatures of statute. No doubt under Section 253(1)(b) an assessee may appeal to the Appellate Tribunal against an order passed by the Inspecting Assistant Commissioner under Section 274(2). Equally no doubt, Section 254(1) of the Act gives the Appellate Tribunal the power to \"pass such orders thereon as it thinks fit\". The expression \"such orders as it thinks fit\" cannot mean an order against the statutory mandate imposing limits of penalty under Section 271(1)(iii) of the Act of 1961. The words \"as it thinks fit\" in Section 254(1) of the Income-tax Act, 1961, even then will have to observe the prohibitions of the Income-tax Act, and do not mean that the Tribunal can think \"fit\" to disregard the clear mandates of the statute. The Tribunal as much as any other authority has to carry out the dictates of the statute. If the statute says, and as we interpret that it does so, that the limitation is on the penalty and not on the officer or the institution, then whoever administers the penalty, whether it is the Inspecting Assistant Commissioner or the Tribunal, must have to observe the maximum and minimum limits of penalty imposed under Clause (iii) of Section 271(1) of the Income-tax Act, 1961.\n\n69. Lastly, Mr. Roy for the assessee raised the new contention before us that except for the assessment of 1962-63, the penalty imposed in respect of the years l'955-56 to 1961-62 can be imposed in this case only in terms of Section 28(1)(c) of the old Income-tax Act, 1922, for that was the Act which was in operation in those years. His next step in the argument was that as the old Income-tax Act, 1922, did not provide for the lower limit, therefore, the Tribunal was within its legal competence to lower the penalty below the minimum limit imposed by the Income-tax Act of 1961, which came subsequently. \n\n 70. This argument was ingenious and resourceful. But the point is that this was not argued before the Tribunal when the whole question of penalty was argued before it to say that not only was the penalty illegal but that the old Act applied and the new Act did not. This is not merely a technical point of not arguing or raising the question any time before but it also involves the practical difficulty on the ground that necessary facts have to be found with regard to the exact time and dates of the assessments of those previous years. The answer, however, to this contention is provided by Section 297(2)(g) of the Income-tax Act, 1961, which provides that \"any proceeding for the imposition of a penalty in respect of any assessment for the year ending on 31st day of March, 1962, or any earlier year, which as completed on or after the 1st day of April, 1962, may be initiated and any such penalty may be imposed under this Act\". We are, therefore, unable to accept this argument of Mr. Roy. \n\n 71. For these reasons, we hold that the Tribunal was wrong in reducing the penalty imposed on the assessee below the minimum prescribed under Section 271(1)(iii) of the Income-tax Act, 1961. We answer question No. 1 in the negative in favour of the revenue. Question No. 2 is answered in the affirmative and in favour of the revenue.\n\n72. Each party will bear his own costs. \n\nSabyasachi Mukharji, J.\n\n I agree." }, { "title": "Addl. Commissioner Of Income-Tax, ... vs I.M. Patel And Co. on 3 May, 1976", "url": "https://indiankanoon.org//doc/940304/", "text": "Addl. Commissioner Of Income-Tax, ... vs I.M. Patel And Co. on 3 May, 1976\nEquivalent citations: [1977]107ITR214(GUJ)\nJUDGMENT\n \n\n B.J. Divan, C.J. \n \n\n 1. In this case by an order of reference dated September 4, 1974, the following question has been referred to this Full Benc : \n \"When by a taxation statute, sanction of penalty is provided in order to enforce compliance with a particular provision of the Act and the section providing for penalty requires that the non-performance of the obligation without reasonable cause shall attract that particular penalty, (i) is absence of reasonable cause an ingredient of the offence for which the penalty is provided; and (ii) has the taxing authority to prove absence of reasonable cause or has the party in default to prove the presence of reasonable cause ?\" \n\n 2. The order of reference makes it clear that it was in the context of section 271(1)(a) of the Income-tax Act, 1961, that this question arose before the Division Bench and, therefore, in order to answer correctly the question that has been canvassed before us, we reframe the question as follow : \n \"When section 271(1)(a) of the Income-tax Act, 1961, provides for sanction of penalty in order to enforce compliance with a particular provision of the Act and the section requires that non-performance of the obligation without reasonable cause shall attract that particular penalty, (i) is reasonable cause an ingredient of the offence for which the penalty is provided; and (ii) has the taxing authority to prove absence of reasonable cause or has the party in default to prove the presence of reasonable cause ?\" \n\n 3. The matter was referred to the Full Bench because the Division Bench found itself unable to agree with the view taken by J. B. Mehta and T. U. Mehta JJ. in Morvi Cotton Merchants' Industrial Corporation Ltd. v. State of Gujarat, since reported in [1975] 36 STC 347 (Guj), and in Special Application No. 1059 of 1972 decided by the same bench on July 18, 1974 [Motilal Joitaram Patel v. Sales Tax Officer [1975] TLR 1589 (Guj)]. In those two cases the Division Bench, consisting of J. B. Mehta and T. U. Mehta JJ., had taken the view that in provisions similar to section 271(1)(a) of the Income-tax Act, 1961, in the Sales Tax Act, where also the words \"without reasonable cause\" have been set out in the section providing for penalty, the burden is on the revenue to prove absence of reasonable cause. The Division Bench felt that since those decisions had a direct bearing on the point arising in the instant case, since the Division Bench was unable to agree with that view, the particular question set out above was referred to this larger Bench.\n\n 4. It is not necessary to refer to the facts of the particular case before us because it is only as a point of law arising on a construction of the statute that the matter comes before us as a Full Bench. \n\n 5. Section 271(1)(a) of the Income-tax Act, 1961, is in these term : \n\n \"271. Failure to furnish returns, comply with notices, concealment of income, etc. - (1) If the Income-tax Officer or the Appellate Assistant Commissioner in the course of any proceedings under this Act, is satisfied that any person - \n\n (a) has without reasonable cause failed to furnish the return of total income which he was required to furnish under sub-section (1) of section 139 or by notice given under sub-section (2) of section 139 or section 148 or has without reasonable cause failed to furnish it within the time allowed and in the manner required by sub-section (1) of section 139 or by such notice, as the case may be, -........ \n\n he may direct that such person shall pay by way of penalty, - \n\n (i) in the cases referred to in clause (a), in addition to the amount of the tax, if any, payable by him, a sum equal to two per cent. of the tax for every month during which the default continued, but not exceeding in the aggregate fifty per cent. of the assessed tax.\" \n\n 6. It may be pointed out that section 271 is one of the sections included in Chapter XXI and that Chapter XXII which consists of sections 275A to section 280 deals with offences and prosecutions. Under section 271(1)(a), failure without reasonable cause to furnish the return of total income attracts penalty. Under sub-clause (b) of section 271(1), failure without reasonable cause to comply with a notice under sub-section (1) of section 142 or sub-section (2) of section 143 attracts penalty. Under section 276 of the Act, if a person fails without reasonable cause or excuse to produce, or cause to be produced, on or before the date mentioned in any notice under sub-section (1) of section 142, such accounts and documents as are referred to in the notice; and under clause (b) to furnish in due time any of the returns or statements mentioned in section 133, sub-section (2) of section 139, section 206, section 285 or section 286, is liable to be punished with fine which may extent to ten rupees for every day during which the default continues. It may be noticed that under section 276 the words are \"without reasonable cause\". Under section 271A which was inserted in the Act by the Taxation Laws (Amendment) Act, 1975, any person failing without reasonable cause to keep and maintain such books of account and other documents as required by section 44AA or the rules made thereunder in respect of any previous year or to retain such books of account and other documents for the period specified in the said rules, is liable to pay by way of penalty, a sum which shall not be less than then ten per cent. but which shall not exceed fifty per cent. of the amount of the tax, if any, which would have been leviable. Under section 272A, sub-section (2), which was also introduced by the Taxation Laws (Amendment) Act, 1975, penalty has been provided for failure without reasonable cause or excuse to furnish the return in due course of time as mentioned in section 133, section 206, section 285, section 285B or section 286. Similarly, the words \"without reasonable cause\" are used in section 272B for failure without reasonable cause to comply with the provisions of section 139A. Under section 273, clause (b), failure to furnish an estimate of the advance tax payable by an assessee in accordance with the provisions of sub-section (3) of section 212 attracts penalty. Similarly, again under clause(c) of section 273, failure without reasonable cause to furnish an estimate of the advance tax payable by him in accordance with the provisions of sub-section (3A) of section 212 also attracts penalty. under Chapter XXII dealing with offences and prosecutions, the words used are \"without reasonable cause or excuse\" in respect of different offences set out in section 276, 276A and 276B whereas the element of \"wilfully\" is introduced as regards the failure to furnish the return under sub-section (1) of section 139 in section. 276C. Similarly, under section 276CC, the element of wilfulness has also been brought in with reference to the offence mentioned therein. Same element of wilfulness is to be found prescribed in section 276D. The reason why we are pointing out these different provisions is to emphasize that in certain provisions of the Income-tax Act dealing with penalty, the failure without reasonable cause to decided on one thing or the other attracts penalty. In some of the other provisions, the penalty is attracted when the failure is without reasonable cause or excuse and as regards offences and prosecutions, the words used are \"without reasonable cause or excuse\" and \"wilfully.\" \n\n 7. The learned Advocate-General appearing on behalf of the assessee has contended that in the same statute, that is, in the Income-tax Act, the words \"without reasonable cause\" or excuse\" are occurring in sections dealing with penalty as well as in sections dealing with penal offences. He further contended that since Chapter XXII deals with offences and prosecutions where the accused concerned has to be tried in a regular court of law and if found guilty, is liable to be punished even with imprisonment in certain cases, the words \"without reasonable cause\" or \"without reasonable cause or excuse\" occurring in one or the other sections of Chapter XXII must be interpreted as constituting an ingredient of the offence in question. He further contended that penalties imposable under Chapter XXI are imposed in quasi-criminal proceedings and, therefore, the words \"without reasonable cause\" occurring in section 271(1)(a) must also be held to constitute an ingredient of this particular wrongful action which is sought to be penalised by section 271(1)(a). His main contention is that the same words should be given the same meaning and should be interpreted in the same manner in the different sections of the same Act unless the subject or context otherwise requires. Before we can decide this contention of the learned Advocate-General, it is necessary to ascertain the exact nature of the penalty proceedings under section 271(1)(a) and other similar provisions. \n\n 8. In C. A. Abraham v. Income-tax Officer [1961] 41 ITR 425 (SC) the Supreme Court had observed that penalty was an additional tax and that the penalty imposed under the Income-tax Act was merely an additional tax imposed in certain circumstances on account of the assessee's conduct. These observations in C. A. Abraham's case [1961] 41 ITR 425 (SC) were explained by the Supreme Court in Commissioner of Income-tax v. Anwar Ali [1970] 76 ITR 696 (SC). At page 700, Grover J., delivering the judgment of the Supreme Court observe :\n \"The first point which falls for determination is whether the imposition of penalty is in the nature of a penal provision. The determination of the question of burden of proof will depend largely on the penalty proceedings being penal in nature or being merely meant for imposition of an additional tax, the liability to pay such tax having been designated as penalty under section 28. One line of argument which has prevailed particularly with the Allahabad high Court in Lal Chand Gopal Das's case [1963] 48 ITR 324 (ALL) is that there was no essential difference between tax and penalty because the liability for payment of both was imposed as a part of the machinery of assessment and the penalty was merely an additional tax imposed in certain circumstances on account of the assessee's conduct. The justification of this view was founded on certain observations in C. A. Abraham v. Income-tax Officer [1961] 41 ITR 425 (SC). It is true that penalty proceedings under section 28 (of the Act of 1922 equivalent to section 271 of the Act of 1961), are included in the expression 'assessment\" and the true nature of penalty has been held to be additional tax. But one of the principal objects in enacting section 28 is to provide a deterrent against recurrence of default on the part of the assessee. The section is penal in the sense that its consequences are intended to be an effective deterrent which will put a stop to practices which the legislature considers to be against the public interest. It is significant that in C. A. Abraham's case [1961] 41 ITR 425 (SC) the court was not called upon to determine whether penalty proceedings were penal or of quasi-penal nature and the observations made with regard to penalty being an additional tax were made in a different context and for a different purpose. It appears to have been taken as settled by now in the sales tax law that an 'order imposing penalty is the result of quasi-criminal proceedings [Hindustan Steel Ltd. v. State of Orissa [1972] 83 ITR 26; [1970] 26 STC 211 (SC)]. In England also it has never been doubted that such proceedings are penal in character [Fattorini (Thomas) (Lancashire) Ltd. v. Inland Revenue Commissioner\" [1942] AC 643; [1943] 11 ITR (Suppl) 50 (HL)].\" \n\n 9. In Hindustan Steel Ltd. v. State of Orissa [1972] 83 ITR 26; [1970] 26 STC 211 (SC) the Supreme Court was concerned with certain provisions of the Orissa Sales Tax Act providing for penalty under certain circumstances and Shah, Acting C.J., delivering the judgment of the Supreme Court, observed at page 29 of the repor :\n \"Under the Act penalty may be imposed for failure to register as a deale : section 9(1), read with section 25(1)(a) of the Act. But the liability to pay penalty does not arise merely upon proof of default in registering as a dealer. An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding, and penalty will not ordinarily be imposed unless the party obliged, either acted deliberately in defiance of law or was guilty of conduct, contumacious or dishonest, or acted in conscious disregard of its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty, when there is a technical or venial breach of the provisions of the Act or where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute.\" \n\n 10. It must be noted that at page 28 of the report, the questions referred by the Sales Tax Tribunal to the High Court of Orissa have been set out and question(F) i : \n \"Whether the Tribunal is right in holding that penalties under section 12(5) of the Act had been rightly levied and whether in view of the serious dispute of liability it cannot be said that there was sufficient cause for not applying for registration ?\" \n\n and question (3) which the Supreme Court formulated for itself wa : \n \"Whether imposition of penalties for failure to register as a dealer was justified ?\" \n\n Section 9(1) of the Orissa Sales Tax Act, 1947, provide : \n \"No dealer shall, while being liable under section 4 to pay tax under this Act, carry on business as a dealer unless he has been registered under this Act and possesses a registration certificate.\" \n\n Section 12(2) provide : \n \"If upon information which has come into his possession, the Commissioner is satisfied that any dealer has been liable to pay tax under this Act in respect of any period and has nevertheless, without sufficient cause, failed to apply for registration, the Commissioner shall, after giving the dealer a reasonable opportunity of being heard, assess, to the best of his judgment, the amount of tax, if any, due from the dealer in respect of such period and all subsequent periods and the Commissioner may direct that the dealer shall pay, by way of penalty, in addition to the amount so assessed, a sum not exceeding one and a half times that amount.\" \n\nSection 25(1)(a) provide : \n\n \"Whoever (a) carries on business as a dealer in contravention of sub-section (1) of section 9 - ... \n\n shall be punishable with imprisonment of either description which may extend to six months or with fine not exceeding one thousand rupees or with both, and when the offence is a continuing one, with a daily fine not exceeding fifty rupees during the period of the continuance of the offence.\" \n\n It is, therefore, clear that the reference to section 25(1)(a) at page 29 of the report is, really speaking, to section 12(5) of the Orissa sales Tax Act because the Supreme court in the passage which we have extracted above was not dealing with the question of an offence but with the question of penalty to be imposed and the question (F) referred by the Sales Tax Tribunal to the High Court of Orissa and question (3) formulated by the supreme Court in Hindustan Steel Ltd.'s case [1972] 83 ITR 26; [1970] 26 STC 211 (SC) was considering the question of imposition of penalty and not the question of punishment under section 25(1)(a). We are emphasizing this aspect of the obviously wrong reference to section 25(1)(a) at page 29 of the report because we find that in a Full Bench case, Commissioner of Income-tax v. Gangaram Chapolia [1976] 103 ITR 613 (Orissa) [FB], the High Court of Orissa has considered this reference to section 25(1)(a) on page 621 of the report.\n\n 11. In Khemka & Co. (Agencies) Pvt. Ltd. v. State of Maharashtra [1975] 35 STC 571 (SC) the Supreme Court was considering the question of penalty under the Sales Tax Act and Ray C.J., who along with Khanna and Beg JJ. delivered the majority decision, observed (page 581 :\n\n \"The Income-tax Act, 1961, imposes penalty under section 270 and 271. These sections in the Income-tax Act provide for imposition of penalty on contumacious or fraudulent assessees. Penalty is in addition to income-tax, if any, determined as payable by the assessee. Tax and penalty like tax and interest are distinct and different concepts under the Indian Income-tax Act. The word 'assessment' could cover penalty proceedings if it is used to denote the whole procedure for imposing liability on the taxpayer as happened in Abraham's case [1961] 41 ITR 425 (SC). Penalty is within assessment proceedings just as tax is within assessment proceedings when the relevant Act by substantive charging provision levies tax as well as penalty.\n\n Penalty is not merely sanction. It is not merely adjunct to assessment. It is not merely consequential to assessment. It is not merely machinery. Penalty is in addition to tax and is a liability under the Act. Reference may be made to section 28 of the Indian Income-tax Act, 1922, where penalty is provided for concealment of income. Penalty is in addition to the amount of income-tax. This court in Jain Brothers v. Union of India [1970] 77 ITR 107 (SC) said that penalty is not a continuation of assessment proceedings and that penalty partakes of the character of additional tax.\"\n\n 12. In Khemka & Company's case [1975] 35 STC 571 (SC), Beg J., one of the three learned judges delivering the majority decision, observed at page 59 :\n\n \"On a consideration of the provisions mentioned above, it seems to me to be clear that whatever may be the objects of levying a penalty, its imposition gives rise to a substantive liability which can be viewed either as an additional tax or as a fine for the infringement of the law. The machinery or procedure for its realization comes into operation after its imposition. In any case it is an imposition of a pecuniary liability which is comparable to a punishment for the commission of an offence. It is a well-settled canon of construction of statutes that neither a pecuniary liability can be imposed nor an offence created by mere implication. It may be debatable whether a particular procedural provision creates a substantive right or liability. But, I do not think that the imposition of pecuniary liability, which takes the form of a penalty or fine for a breach of a legal obligation, can be relegated to the region of mere procedure an machinery for the realization of tax. It is more than that. Such liabilities much be created by clear, unambiguous, and express enactment. The language used should leave no serious doubts about its effect so that the persons who are to be subjected to such a liability for the infringement of law are not left in a state of uncertainty as to what their duties or liabilities are. This is an essential requirement of a good Government of laws. It is implied in the constitutional mandate found in article 265 of our Constitution. \n\n \"No tax shall be levied or collected except by authority of law\" \n\n It is thus clear in view of these decisions in Khemka & Company's case [1975] 35 STC 571 (SC), Hindustan Steel Ltd.'s case [1972] 83 ITR 26 (SC) and Anwar Ali's case [1970] 76 ITR 696 (SC) that the penalty which can be imposed under section 271(1) of the Act is to be imposed on contumacious or fraudulent assessees. It is a quasi-criminal proceeding as has been held in Anwar Ali's case [1970] 76 ITR 696 (SC) and the section is penal in the sense that its consequences are intended to be an effective deterrent which will put a stop to practices which the legislature considers to be against the public interest. In view of these clear pronouncements of the Supreme Court, there is no doubt whatsoever that though penalty contemplated by section 271(1)(a) and other sections in Chapter XXI of the Income-tax Act, 1961, can be imposed by Income-tax Officers as distinguished from regular criminal courts, the penalty proceedings before the income-tax authorities are quasi-criminal proceedings and they provide for offences which can be dealt with by the departmental authorities.\n\n 13. The question then arises, whether the words \"without reasonable cause\" occurring in section 271(1)(a) are an ingredient of the offence or an exception to the offence of failing to file one or the other type of returns contemplated in section 271(1)(a). It was contended by Mr. Kaji on behalf of the revenue that the substance of the default is the failure to file the return within the time specified and that this is the only ingredient to be established by the revenue. According to him the phrase \"without reasonable cause\" is an exception and not a part of the ingredients of the offence. The learned Advocate-General, on the other hand, has contended that since section 271(1)(a) provides penalty for an offence although it is a penalty imposable by the income-tax authorities, the ingredients of the offence are that there should be failure without reasonable cause to furnish one or the other of the returns specified in section 271(1)(a) and only after all the ingredients are established can the penalty be imposed. \n\n 14. In Nimmo v. Alexander Cowan & Sons Ltd. [1968] AC 107 (HL) the House of Lords was concerned with the interpretation of section 29, sub-section (1) of the Factories Act, 1961 which provide : \n \"There shall, so far as is reasonably practicable, be provided and maintained safe means of access to every place at which any person has at any time to work, and every such place shall, so far as is reasonably practicable, be made and kept safe for any person working there.\" \n\n 15. The question was whether the words \"so far as is reasonably practicable\" constituted an ingredient of section 29, sub-section (1). It is obvious that the determination of the question whether these words constituted and ingredient or not, would shift the burden, both legal as well as evidentiary, from one side to the other. There the House of Lords held by majority that in that particular section the onus of pleading and proving that it was not reasonably practicable to keep the place safe lay on the employers and accordingly the workman's case was properly pleaded and disclosed a cause of action. It must be pointed out that the House of Lords was not considering in that case the question of any criminal liability. The main question was, whether in the complaint preferred by the workman who had suffered an injury while unloading bales from a railway wagon on a siding at a factory, he had to aver in his pleading that his place of work was not kept safe as required under section 29(1) but he did not aver that it was reasonably practicably to make it safe. On an interpretation of section 29(1), the majority of the House of Lords held that onus of pleading and proving that it was not reasonably practicable to keep the place safe lay on the employers and accordingly the workman's case was properly pleaded and disclosed a cause of action. Lord Reid and Lord Wilberforce both held in their dissenting opinions that the words \"so far as is reasonably practicable\" constituted an ingredient of the cause of action. Lord Reid observed (page 118 : \n \"And I do not think that the question whether this was reasonably practicable is a matter peculiarly within the knowledge of the defender - an expert witness for the pursuer should be just as well able to deal with this as the defender.\" \n\n 16. The majority view on the other hand was that the expressions of opinion in England have been consistently to the effect that in cases under sections in somewhat similar terms of section 29(1), the onus is upon the employer to establish that the precautions desiderated were not reasonably practicable. And the majority of the law Lords held that the means of achieving the end were more likely to be within the knowledge of the employer than that of the employees and hence it was in the fitness of things that the onus should be cast upon the employer and the factor that it was reasonably practicable to keep the place safe was not an ingredient of this particular cause of action. It seems that before our learned brothers. J. B. Mehta and T. U. Mehta JJ., in Morvi cotton Merchants' Industrial Corporation Ltd. v. state of Gujarat [1975] 36 STC 347 (Guj) reliance was placed on the minority view in Nimmo's case [1968] AC 107 (HL). In our opinion, it is not necessary to apply the reasoning which appealed either to the majority or the minority of the House of Lords in Nimmo's case [1968] AC 107 (HL) because the House of Lords in that case was not concerned with an ingredient of an offence. They were considering merely the words of a section which imposed civil liability and hence we will have to arrive at our own conclusions independently of the reasoning of the House of Lords in Nimmo's case [1968] AC 107 (HL). \n\n 17. It is well-settled law that whenever a statute defines an offence and provides a punishment for it, it is for the prosecution to prove all the ingredients of the offence. It is possible, as for example, in several offences under the Indian Penal Code, that the legislature provided for the state of mind of the accused but even this ingredient of the state of mind of the accused, whether intentionally, or wilfully, or negligently or whatever the requirement of the section in question may be, has to be established by the prosecution. The absence of that particular state of mind has not to be proved by the accused. In the penalty proceedings under section 271(1)(a), the assessee upon whom the penalty is sought to be imposed, is in the position of an accused in a criminal trial and, therefore, all the ingredients of the offence for which the penalty can be imposed must be established by the department. It is from this aspect that one has to consider the question whether these words \"failure without reasonable cause\" constitute an ingredient of the offence or not. Since the gravamen of the offence is failure without reasonable cause to file one or the other of the returns mentioned in section 271(1)(a), the prosecutor, that is, the department, must establish the absence of the reasonable cause. It is not for the assessee to show in the first instance that there was reasonable cause on his part. It is for the department to show the absence of reasonable cause. \n\n 18. In Collector of Customs v. D. Bhoormull AIR 1974 SC 859 the Supreme Court was concerned with a case of penalty under the Sea Customs Act, 1878, and with the question of fact within the knowledge of the delinquent or the person charged with the smuggling of goods before the customs authorities. In paragraph 30 at page 864 of the report, Sarkaria J., delivering the judgment of the Supreme Court, observe :\n\n \"It cannot be disputed that in proceedings for imposing penalties under clause (8) of section 167, to which section 178-A does not apply, the burden of proving that the goods are smuggled goods, is on the department. This is a fundamental rule relating to proof in all criminal or quasi-criminal proceedings, where there is no statutory provision to the contrary. But in appreciating its scope and the nature of the onus cast by it, we must pay due regard to other kindred principles, no less fundamental, of universal application. One of them is that the prosecution or the department is not required to prove its case with mathematical precision to a demonstrable degree, for, in all human affairs, absolute certainty is a myth, and as Prof. Brett felicitously puts it - 'all exactness is a fake'. El Dorado of absolute proof being unattainable, the law accepts for it probability as a working substitute in this work-a-day world. The law does not require the prosecution to prove the impossible. All that it requires is the establishment of such a degree of probability that a prudent man may, on its basis, believe in the existence of the fact in issue. Thus legal proof is not necessarily perfect proof; often it is nothing more than a prudent man's estimate as to the probabilities of the case. \n\n The other cardinal principle having an important bearing on the incidence of burden of proof is that sufficiency and weight of the evidence is to be considered-to use the words of Lord Mansfield in Blatch v. Archer, [1774] 1 Cowp 63 at page 65 'according to the proof which it was in the power of one side to prove and in the power of the other to have contradicted'. Since it is exceedingly difficult, if not absolutely impossible for the prosecution to prove facts which are especially within the knowledge of the opponent or the accused, it is not obliged to prove them as part of its primary burden. \n\n Smuggling is clandestine conveying of goods to avoid legal duties. Secrecy and stealth being its covering guards, it is impossible for the preventive department to unravel every link of the process. Many facts relating to this illicit business remain in the special or peculiar knowledge of the person concerned in it. On the principle underlying section 106, Evidence Act, the burden to establish those facts is cast on the person concerned; and if he fails to establish or explain those facts, an adverse inference of fact may arise against him, which, coupled with the presumptive evidence adduced by the prosecution or the department, would rebut the initial presumption of innocence in favour of that person, and in the result prove him guilty. As pointed out by Best in Law of Evidence, 12th edition, article 320, page 291, the 'presumption of innocence is, no doubt, presumption juri : but every day's practice shows that it may be successfully encountered by the presumption of guilt arising from the recent (unexplained) possession of stolen property', though the latter is only a presumption of fact. Thus the burden on the prosecution or the department may be considerably lightened even by such presumption of fact arising in their favour. However, this does not mean that the special or peculiar knowledge of the person proceeded against will relieve the prosecution or the department altogether of the burden of producing some evidence in respect of that fact in issue. It will only alleviate that burden to discharge which very slight evidence may suffice.\" \n\n 19. It is true, as the learned Advocate-General has emphasized, that what is known as the legal burden as distinct from evidentiary burden is on the department throughout but since the facts constituting reasonable cause are bound to be within the knowledge of the assessee himself, once the department establishes by leading some evidence in respect of the failure without reasonable cause, then the burden will shift on to the assessee to establish that there was reasonable cause for him not to file one or the other of the returns mentioned in section 271(1)(a) within the time specified therein. The factor that the facts constituting reasonable cause are especially within the knowledge of the assessee does not mean that this special or peculiar knowledge of the assessee will relieve the department altogether of the burden of producing some evidence in respect of the offence sought to be established against the assessee, namely, failure without reasonable cause to file one or the other of the returns specified in section 271(1)(a) within the time specified in connection with that return. However, once the department has produced some evidence which rebuts the initial presumption of innocence in favour of the assessee, it is for the assessee to establish the facts within his special knowledge which would go to show that there was reasonable cause on his part. As the Supreme Court has pointed out, very slight evidence may suffice to discharge the initial burden which rests on the department in such a case but that initial burden and what is called the \"legal burden\" rests on the department and not on the assessee. \n\n 20. It may be pointed out that in connection with an offence made punishable under the Companies Act, 1956, a Full Bench of the Delhi High Court has also arrived at a similar conclusion regarding the scope of section 106 of the Indian Evidence Act. The Full Bench of the Delhi High Court in Official Liquidator, Security & Finance P. Ltd. v. B. K. Bedi [1974] 44 Comp Cas 499 (Delhi) [FB] was concerned with the provisions of section 454 of the Companies Act and particularly sub-section (5). Section 454, sub-section (1) provides that where the court has made a winding-up order or appointed the official liquidator, as provisional liquidator, unless the court in its discretion otherwise orders, there shall be made out and submitted to the official liquidator a statement as to the affairs of the company in the prescribed form, Sub-section (2) specifies the persons, including the directors at the relevant date, who are to submit the statement. Sub-section (3) requires that the statement shall be submitted within twenty-one days from the relevant date or within such extended time not exceeding three months from that date as the official liquidator or the court may, for special reasons, appoint. Sub-section (4) provides that any person making or concurring in making the statement and affidavit required by this section shall be allowed and shall be paid by the official liquidator or provisional liquidator, as the case may be, out of the assets of the company such costs and expenses incurred in and about the preparation and making of the statement and affidavit as the official liquidator may consider reasonable. Sub-section (5) of section 454 provides \n \"If any person, without reasonable excuse, makes default in complying with any of the requirements of this section, he should be punishable with imprisonment for a term which may extend to two years, or with fine which may extend to one hundred rupees for every day during which the default continues, or with both.\"\n\n 21. The question before the Full Bench of the Delhi High Court was whether in a prosecution under section 454, sub-section (5) of the Companies Act, 1956, the burden of proving that the accused had no reasonable excuse for making the default in respect of which he is being prosecuted lies upon the prosecution. Rajendra Sachar J., delivering the judgment of the Full Bench, pointed out that if the section had been differently framed, it could have been argued that all that the official liquidator had to prove was that the default had been committed in complying with the requirements of section 454, and thereafter if the director pleaded any exception to bring his case within the proviso, the burden to prove that would be on him. But the phraseology of sub-section (5), in the opinion of the Full Bench, did not support this contention. He observed at page 506 of the report-see [1974] 44 Comp Cas 499 (Delhi) [FB : \n\n \"It appears to us that the very provisions which were referred to by the learned judge requiring the notice to be sent to the concerned director and a provision enabling the director to seek extension from the official liquidator or the court would show that the burden, if placed on the official liquidator, is not onerous or insuperable one. It appears to us that the official liquidator need only prove that notice was sent to the concerned director to submit a statement of affairs, that the prescribed time has lapsed and that no extension has been sought for from him or from the court and that the necessary books of the company were available for inspection by the concerned director. These are facts which are conveniently available to the official liquidator and if he shows these facts, prima facie, he would have proved that the director has, without reasonable excuse, made the default in complying with the requirements of section 454. In such a case it would obviously be for the concerned director to prove circumstances to justify his conduct and to show that he had a reasonable excuse in making the default. Support for the contention that the burden of proving that there was reasonable excuse for making a default should be on the accused is drawn by making reference to section 106 of the Evidence Act which states that where any fact is especially within the knowledge of any person, the burden of proving that fact is upon him and suggesting that it may not be practicable for the official liquidator to prove anything and further in terms of illustration (a) to section 106 of the Evidence Act the non-filing of the statement of affairs within the time prescribed and the absence of application by the accused within the prescribed time shows that he had committed default and that it was for the accused in these circumstances to show that the default by him was for reasonable excuse. We do not see how illustration (a) is applicable to the facts of the present case. Late filing or non-filing of the statement of affairs only shows that a default has been made. By itself it is consistent equally with there being a reasonable excuse as well as there being no reasonable excuse at all. This by itself has relevancy to the question of onus. The Supreme court in Shambhu Nath Mehra v. State of Ajmer AIR 1956 SC 404 cautioned against invoking section 106 ofthe Evidence Act so as to place the burden of proof on the accused and pointed out that section 106 is an exception to section 101 which lays down that whoever desires any court to give judgment as to any legal right or liability dependent on the existence of facts which he asserts must prove that those facts exist and referred to illustration (a) which says that if A desires a court to give judgment that B shall be punished for a crime which A says B has committed, A must prove that B has committed the crime and went on to observ :\n\n 'That section 106 of the Evidence Act does not abrogate the well-established rule of criminal law that except in very exceptional classes of cases the burden that lies on the prosecution to prove its case never shifts and section 106 is not intended to relieve the prosecution of that burden. On the contrary it seeks to meet certain exceptional cases where it is impossible or disproportionately difficult, for the prosecution to establish facts which are especially within the knowledge of the accused and which can be proved by him without difficulty or inconvenience. But when knowledge of such facts is equally available to the prosecution if it chooses to exercise due diligence, they cannot be said to be especially within the knowledge of the accused and the section cannot apply.'\" \n\n 22. The supreme Court in T. K. Gangi Reddy v. M. C. Anjaneya Reddy [1961] 22 ELR 261, at page 267, has pointed out the distinction between the two distinct meanings of burden of proof, namely, burden of proof as a matter of law and pleadings and burden of proof as a matter of adducing evidence. Section 101 deals with the burden of proof as understood as a matter of law and pleadings whereas section 102 deals with the burden of proof as a matter adducing evidence. The Full Bench of the Delhi High Court held that on a plain reading of section 454(5) which creates an offence the requirement of absence of reasonable excuse is made an ingredient of the offence and not an exception to the main provision. Normally, it is for the prosecution to prove each and every ingredient. No exception having been provided in the statute, there was no compelling reason to supply that exception by the court. The legislature has not so provided and it is not permissible for the court to recast the statute and provide the same. It may be that considering the necessity of compelling the officers of the company to submit the statement of affairs as to the company the legislature may have made their liability absolute. But Parliament not having so provided, the court cannot supply that necessity as it would be beyond its province. Thus, it is obvious that the initial burden, or, what may be called, the \"legal burden\", is on the department to establish by leading some evidence, the fact that the assessee had without reasonable cause failed to file one or the other of the returns mentioned in section 271(1)(a) within the time specified in connection with that return. Some evidence, even though it may be slight, must be led by the prosecution since this is like the requirement of \"without reasonable excuse\" in section 454(5) of the Companies Act, and is an ingredient of the offence for which penalty is sought to be imposed. We are unable to accept the contention of Mr. Kaji for the revenue that failure to file the return within the time specified itself is an offence and that the words \"without reasonable cause\" constitute an exception. Looking to the wording of the section and on a plain reading of section 271(1)(a), it is obvious first that the failure to file the return may be with reasonable cause or without reasonable cause but the offence for which the penalty is imposable is failure without reasonable cause to file the return within the time specified in the section and, therefore, it is for the department to establish as an ingredient that the failure in the particular case was without reasonable cause. Once the department has discharged that initial burden, it will be for the assessee, as the Supreme Court has pointed out in D. Bhoormull's case AIR 1974 SC 859, to prove that there was reasonable cause on his part in failing to furnish return within time. On the principles underlying section 106, since the facts which constitute a reasonable cause are especially within the knowledge of the assessee, it will be for him to establish those fact but the department must first lead evidence which would go to show prima facie, that the assessee had no reasonable cause in failing to file the returns within the time specified. The department may discharge this initial burden by leading evidence to show, for example, that the assessee had applied for extension from time to time and yet had failed to file the return within the extended time or the department may be a position to show that the assessee concerned was habitually filing returns beyond the time specified in every assessment year or on every possible occasion or the department may be able to show that the assessee was aware of the need to file the return within the time specified and yet had failed to do so. But mere failure to file the return within the time without anything more will not expose him to the penalty.\n\n 23. We must also point out, as was done by Chagla C.J., in Commissioner of Income-tax v. Gokuldas Harivallabhdas [1958] 34 ITR 98 (Bom), that mere falsity of the explanation on the part of the assessee is not enough to constitute offence under section 28(1)(c) of the Act of 1922, equivalent to section 271(1)(c) of the Act of 1961. Chagla C.J., in that case, pointed out that there was not an iota of evidence on the record except the explanation given by the assessee which explanation had been found to be false. He observed at page 10 :\n \"Now, it does not follow that because the particular explanation given by the assessee is false, therefore, necessarily the receipt of Rs. 15,203 constitutes a taxable income of the assessee. There may be a hundred and one other possibilities as to how this receipt came into the books of account of the assessee..... Therefore, it becomes obvious that when you eliminate the explanation of the assessee, which it is open to the department to do, something must be left which will lead to the inference that the receipt of Rs. 15,203 constitutes an income. Now, if you wipe off from the slate this evidence, nothing whatever remains, and as we have just said, the very basis of the decision against the assessee is that the explanation he gave was a false one.\" \n\n This reasoning of Chagla C.J. was approved by the Supreme Court in Anwar Ali's case [1970] 76 ITR 696 (SC) and there Grover J., delivering the judgment of the Supreme Court, has observed in connection with the burden of proof at page 70 :\n \"The next question is that when proceedings under section 28 are penal in character what would be the nature of the burden upon the department for establishing that the assessee is liable to payment of penalty. As has been rightly observed by Chagla C.J. in Commissioner of Income-tax v. Gokuldas Harivallabhdas [1958] 34 ITR 98 (Bom) the gist of the offence under section 28(1) (c) is that the assessee has concealed the particulars of his income or deliberately furnished inaccurate particulars of such income and, therefore, the department must establish that the receipt of the amount in dispute constitutes income of the assessee. If there is no evidence on the record except the explanation given by the assessee, which explanation has been found to be false, it does not follow that the receipt constitutes his taxable income.\"\n\n 24. The requirements of section 28(1)(c) were somewhat different from the requirements of section 271(1)(a) that regarding the burden of proof (sic) applies to all clauses of section 28 of the Act of 1922, though the observations regarding conscious concealment or deliberate furnishing of inaccurate particulars of income under section 28(1)(c) may not help us in our conclusion regarding the requirements of section 271(1)(a). However, in view of these two decisions, one of the Bombay High Court and another of the Supreme Court, it is clear that the burden of proving all the ingredients of the offence is upon the department and if the department fails to lead and evidence on the point besides merely pointing out that there was failure to furnish the returns within time, the department would fail so far as the penalty proceedings under section 271(1)(a) are concerned. \n\n 25. It must also be pointed out that even in criminal cases, whenever any evidentiary burden is upon the accused, that burden can be said to be discharged by the accused by establishing the facts as in a civil case, that is on a balance of probabilities. Even in criminal cases, the accused is not required to prove such facts beyond reasonable doubt in order to claim the benefit of an exception in his favour. All the greater reason, therefore, that when the assessee in a case under section 271(1)(a) has to establish reasonable cause after the initial burden has been discharged by the department, if he establishes the facts, which as in a civil case would decide the matter in his favour on a balance of probabilities, he can be said to have discharged that burden. He is not bound to prove these facts within his knowledge regarding the presence of reasonable cause beyond reasonable doubt. In view of the peculiar requirements of absence of reasonable cause having to be established by the prosecution, even the initial burden of the prosecution will not be very heavy but that burden, light as it may be, must be discharged by the department. \n\n 26. We may notice that a Full Bench of the Orissa High Court and a Full Bench of the Kerala High Court had occasion to consider the very point which has arisen for consideration before us. In Commissioner of Income-tax v. Gangaram Chapolia [1976] 103 ITR 613 (Orissa) [FB], a Full Bench of the Orissa High Court has held that the burden of proof under section 271(1)(a) is on the assessee and not on the revenue. This burden can be discharged by adducing evidence as in a civil case. The burden would be discharged by preponderance of probabilities and not by proof beyond reasonable doubt. It may be pointed out that in this case the Full Bench of the Orissa High Court considered the decision of the Supreme Court in Hindustan Steel Ltd.,'s case [1972] 83 ITR 26; [1970] 26 STC 211 (SC) and observed (page 622 :\n \"This decision is no authority for the proposition that under section 12(5) of the Orissa Sales Tax Act the expression 'without sufficient cause' carries an import of mens rea or that the burden of proof is on the revenue to establish absence of sufficient cause.\" \n\n 27. The Orissa High Court took the view that in Hindustan Steel Ltd.'s case [1972] 83 ITR 26 (SC), the Supreme Court inadvertently referred to section 25(1). A penalty proceeding is a quasi-criminal proceeding as concluded by the aforesaid observation. But the Full Bench felt that the decision in Hindustan Steel Ltd.'s case [1972] 83 ITR 26(SC) could not be considered to mean that the burden of proof is on the revenue and that proof of mens rea was essential in a penalty proceeding. According to the learned judges of the Orissa High Court in the Full Bench, the observations of Hindustan Steel Ltd.'s case [1972] 83 ITR 26 (SC) were couched in very strong language only to emphasize that mere failure to furnish the return in time or a technical or venial breach of the provisions of the statute would not be enough. Something more is necessary to prove absence of sufficient cause to impose penalty. The Orissa High Court also considered the decisions which came to this conclusion. The Orissa high Court and the Kerala High Court in its Full Bench decision in Commissioner of Income-tax v. Gujarat Travancore Agency [1976] 103 ITR 149 (Ker) [FB], to which we will shortly refer, have proceeded upon the footing of the requirement of mens rea. In our opinion, once the legislature has provided for a particular requirement, namely, \"without reasonable cause\", and once the Supreme Court in the decisions which we have pointed out clearly indicated that section 271 is intended to impose penalty on contumacious or fraudulent assessees (vide Khemka & Company's case [1975] 35 STC 571 (SC) the question of the general principles regarding reading mens rea in a section providing for penalty does not survive. All that we have to consider is, whether the requirement of absence of reasonable cause is an ingredient of the offence or not. For the reasons that we have set out herein above we are unable to agree with the reasoning of the learned judges of the Orissa High Court in Commissioner of Income-tax v. Gangaram Chapolia [1976] 103 ITR 613 (Orissa) [FB].\n\n 28. In Commissioner of Income-tax v. Gujarat Travancore Agency [1976] 103 ITR 149 (Ker) [FB], the Full Bench of the Kerala High Court has held that the provisions for imposition of penalty are independent of the provisions for prosecution and punishment, in the sense that the proceedings under the one will not bar action under the other. A mere use of the expression \"without reasonable cause\" cannot import a mental element of mens rea. Before imposition of a penalty under section 271(1)(a) of the Act, what is required is that the officer must be satisfied-not arbitrarily but judicially-that any person has without reasonable cause, failed to furnish the return (clause(a)); or has concealed the particulars of income or furnished inaccurate particulars (clause(c)). The element of deliberation required by section 28(1)(c) of the Indian Income-tax Act, 1922, has been deleted in section 271(1)(c) of the Income-tax Act 1961. Where the two sections (271 and 276C) themselves seem to draw a difference between the requirements for imposition of a penalty an punishment for an offence, there is no justification in reading into the earlier section, the requirements of any mens rea expressly provided for in the later one. It would not be correct to regard the ingredients of the misconduct under the two provisions as identical. Penalty is exacted not because an act or omission is an offence but because it is an attempt at evasion of tax on the part of the assessee. The penalty provisions under the Act are not provisions of a criminal nature which warrant the requirement of mens rea in the sense in which the same is required for an offence by the criminal law. Therefore, mens rea need not be established before imposition of penalty under section 271(1)(a) of the Act. The Full Bench of the Kerala High Court considered the earlier decision of a Division Bench of that court in Marikar (Motors) Ltd. v. Sales Tax Officer [1971] 31 STC 201 (Ker). That decision was in connection with section 10A of the Central Sales Tax Act and the Full Bench observe : (See [1976] 103 ITR 149, 164 (Ker) [FB]).\n \"The same case considered the question whether 'without reasonable excuse' is an ingredient to be established for taking action under section 10A and on whom the burden lay of establishing the same. It held that this was an essential ingredient, and that the burden of proving the same was on the persons charged. The department having first shown that the contravention was according to it, without reasonable excuse, it is for the person proceeded against, to show that he in fact had reasonable excuse. In this sense, we think the Division Bench was right.\" \n\n Thus, the Full Bench of the Kerala High Court approved of the principles that the words \"without reasonable excuse\" under section 10A of the Central Sales Tax Act comparable to the words \"without reasonable cause\" occurring in section 271(1) of the Income-tax Act, 1961, were an essential ingredient and the department must first show that the contravention was, according to it, without reasonable cause and that it was for the person proceeded against to show that he had in fact a reasonable cause. This decision of the Kerala High Court in the passage at page 164 of [1976] 103 ITR 149 (Ker) regarding ingredient is practically the same as the conclusion to which we have arrived at by a different process of reasoning. With respect to the learned judges of the Kerala High Court, we are unable to agree with their conclusion regarding the element of means rea in section 271(1)(a) of the Act. When the Supreme Court says in Khemka & Company's case [1975] 53 STC 571 (SC) that section 271 provides for imposition of penalty on contumacious or fraudulent assessees, it clearly wants to indicate the factor of means rea in proceedings under section 271. Again, when the Supreme Court observed in Hindustan Steel Ltd.'s case [1972] 83 ITR 26 (SC) that penalty will not ordinarily be imposed unless the party obliged, either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation, it was clearly bringing in the element of means rea. The words \"conscious disregard\", \"contumacious conduct\" or \"dishonest conduct\" in Hindustan Steel Ltd.'s case [1972] 83 ITR 26 (SC) which were approved by the Supreme Court in the context of penalty sections in the Indian Income-tax Act in Anwar Ali's case [1970] 76 ITR 696 (SC) clearly go to show that the Supreme Court has clearly laid down that the element of mens rea has to be read in the penalty proceedings in section 271. With utmost respect to the learned judges of the Kerala High Court, therefore, we are unable to agree with their conclusions regarding absence of mens rea.\n\n 29. A number of decisions regarding the requirement of the presence of mens rea and consequences following from that requirement were cited before us. Besides, passages from Maxwell were also cited in this connection. But in view of the decisions of the Supreme Court in Hindustan Steel Ltd.'s case [1972] 83 ITR 26 (SC), Anwar Ali's case [1970] 76 ITR 696 (SC) and Khemka & Company's case [1975] 35 STC 571 (SC), it is not necessary to refer to any of these decisions for the purpose of arriving at the conclusion regarding the requirement of mens rea having to be read in the provisions relating to penalty in section 271.\n\n 30. In the light of the above discussion, our conclusions are as follows : \n\n (1) Under section 271(1)(a) of the Income-tax Act, 1961, failure without reasonable cause to furnish the return in question is an ingredient of the offence; \n\n (2) Section 271(1)(a) provides for penalty in cases where the assessee has either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of this obligation; \n\n (3) The legal burden in on the department to establish by leading some evidence that, prima facie, the assessee has without reasonable cause failed to furnish the furnish the return within the time specified in section 271(1)(a) read with the relevant other section referred to in that section. Once this initial burden, which may be slight, has been discharged by the department, it is for the assessee to show as in a civil case on balance of probabilities that he had reasonable cause in failing to file the return within the time specified; \n\n (4) Mere falsity of the explanation furnished by the assessee cannot help the department in establishing its case against the assessee at the time of imposition of penalty. \n\n In view of the above discussion and in view of our conclusion, we answer the question as reframed by us as follow : \n \"Reasonable cause is an ingredient of the offence for which the penalty is provided and the taxing authority has prima facie to prove absence of reasonable cause in the sense that has been explained above.\" \n\n 31. The matter will now go before the Division Bench for disposing of the case in accordance with law." }, { "title": "Ahmedabad Urban Development Authority vs Assistant Commissioner Of Income Tax ... on 2 May, 2017", "url": "https://indiankanoon.org//doc/100553479/", "text": "Ahmedabad Urban Development Authority vs Assistant Commissioner Of Income Tax ... on 2 May, 2017\nBench: M.R.\u00a0Shah, B.N.\u00a0Karia\n O/TAXAP/423/2016 CAV JUDGMENT\n\n\n\n IN\u00a0THE\u00a0HIGH\u00a0COURT\u00a0OF\u00a0GUJARAT\u00a0AT\u00a0AHMEDABAD\n\n TAX\u00a0APPEAL\u00a0\u00a0NO.\u00a0423\u00a0of\u00a02016\n With\u00a0\n TAX\u00a0APPEAL\u00a0NO.\u00a0424\u00a0of\u00a02016\n TO\u00a0\n TAX\u00a0APPEAL\u00a0NO.\u00a0425\u00a0of\u00a02016\n With\u00a0\n CIVIL\u00a0APPLICATION\u00a0(OJ)\u00a0NO.\u00a0211\u00a0of\u00a02016\n \u00a0In\u00a0\u00a0\n TAX\u00a0APPEAL\u00a0NO.\u00a0423\u00a0of\u00a02016\n TO\n CIVIL\u00a0APPLICATION\u00a0(OJ)\u00a0NO.\u00a0213\u00a0of\u00a02016\n \u00a0\u00a0In\u00a0\u00a0\u00a0\u00a0\n TAX\u00a0APPEAL\u00a0NO.\u00a0425\u00a0of\u00a02016\n \u00a0\n\n FOR\u00a0APPROVAL\u00a0AND\u00a0SIGNATURE:\u00a0\n HONOURABLE\u00a0MR.JUSTICE\u00a0M.R.\u00a0SHAH\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0sd/\u00ad\n and\n HONOURABLE\u00a0MR.JUSTICE\u00a0B.N.\u00a0KARIA\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0sd/\u00ad\n =========================================\n 1\u00a0\u00a0\u00a0\u00a0\u00a0 Whether\u00a0Reporters\u00a0of\u00a0Local\u00a0Papers\u00a0may\u00a0be\u00a0allowed\u00a0to\u00a0see\u00a0 YES\n the\u00a0judgment\u00a0?\n\n 2\u00a0\u00a0\u00a0\u00a0\u00a0 To\u00a0be\u00a0referred\u00a0to\u00a0the\u00a0Reporter\u00a0or\u00a0not\u00a0? YES\n\n 3\u00a0\u00a0\u00a0\u00a0\u00a0 Whether\u00a0their\u00a0Lordships\u00a0wish\u00a0to\u00a0see\u00a0the\u00a0fair\u00a0copy\u00a0of\u00a0the\u00a0 NO\n judgment\u00a0?\n\n 4\u00a0\u00a0\u00a0\u00a0\u00a0 Whether\u00a0this\u00a0case\u00a0involves\u00a0a\u00a0substantial\u00a0question\u00a0of\u00a0law\u00a0as\u00a0 NO\n to \u00a0 the \u00a0 interpretation\u00a0 of \u00a0 the \u00a0 Constitution\u00a0 of \u00a0 India\u00a0 or \u00a0 any\u00a0\n order\u00a0made\u00a0thereunder\u00a0?\n\n =============================================\n AHMEDABAD\u00a0URBAN\u00a0DEVELOPMENT\u00a0AUTHORITY....Appellant(s)\n Versus\n ASSISTANT\u00a0COMMISSIONER\u00a0OF\u00a0INCOME\u00a0TAX\u00a0(EXEMPTION)....Opponent(s)\n =============================================\n Appearance:\n MR.\u00a0S.N.\u00a0SOPARKAR,\u00a0LD.\u00a0SR\u00a0ADV\u00a0WITH\u00a0MR\u00a0B\u00a0S\u00a0SOPARKAR,\u00a0ADVOCATE\u00a0for\u00a0\n the\u00a0Appellant(s)\u00a0No.\u00a01\n Mr.\u00a0MANSIH\u00a0R\u00a0BHATT\u00a0LE\u00a0SR\u00a0ADV\u00a0WITH\u00a0MRS\u00a0MAUNA\u00a0M\u00a0BHATT,\u00a0ADVOCATE\u00a0\n for\u00a0the\u00a0Opponent(s)\u00a0No.\u00a01\n =============================================\n CORAM:\u00a0HONOURABLE\u00a0MR.JUSTICE\u00a0M.R.\u00a0SHAH\n and\n HONOURABLE\u00a0MR.JUSTICE\u00a0B.N.\u00a0KARIA\n\n\n Page 1 of 57\n\nHC-NIC Page 1 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n\n\n\n \u00a0Date\u00a0:\u00a002/05/2017\n CAV\u00a0JUDGMENT\n \u00a0\u00a0(PER\u00a0:\u00a0HONOURABLE\u00a0MR.JUSTICE\u00a0M.R.\u00a0SHAH)\n\n\n 1.0. As\u00a0common\u00a0question\u00a0of\u00a0law\u00a0and\u00a0facts\u00a0arise\u00a0in\u00a0this\u00a0group\u00a0\n of\u00a0appeals\u00a0and\u00a0as\u00a0such\u00a0with\u00a0respect\u00a0to\u00a0same\u00a0assessee\u00ad\u00a0Ahmedabad\u00a0\n Urban\u00a0Development\u00a0Authority\u00a0(hereinafter\u00a0referred\u00a0to\u00a0as\u00a0\"AUDA\")\u00a0\n and \u00a0 arising \u00a0 out \u00a0 of \u00a0 the \u00a0 impugned \u00a0 common \u00a0 judgment \u00a0 and \u00a0 order\u00a0\n passed\u00a0by\u00a0the\u00a0learned\u00a0Income\u00a0Tax\u00a0Appellate\u00a0Tribunal\u00a0(hereinafter\u00a0\n referred \u00a0 to \u00a0 as \u00a0 the \u00a0 \"ITAT\") \u00a0 with \u00a0 respect \u00a0 to \u00a0 different \u00a0 assessment\u00a0\n years,\u00a0all\u00a0these\u00a0appeals\u00a0are\u00a0decided\u00a0and\u00a0disposed\u00a0of\u00a0together\u00a0by\u00a0this\u00a0\n common\u00a0judgment\u00a0and\u00a0order.\u00a0\n\n 2.0. Feeling\u00a0 aggrieved \u00a0 and\u00a0 dissatisfied\u00a0 with\u00a0 the \u00a0 impugned\u00a0\n judgment \u00a0 and \u00a0 order \u00a0 passed \u00a0 by \u00a0 the \u00a0 learned \u00a0 ITAT \u00a0 passed \u00a0 in \u00a0 ITA\u00a0\n No.712/AHD/2013 \u00a0 for \u00a0 AY \u00a0 2009\u00ad10, \u00a0 by \u00a0 which, \u00a0 learned \u00a0 ITAT \u00a0 has\u00a0\n held\u00a0that\u00a0the\u00a0activities\u00a0of\u00a0appellant\u00ad\u00a0assessee\u00a0cannot\u00a0be\u00a0said\u00a0to\u00a0be\u00a0\n for\"charitable\u00a0purpose\"\u00a0within\u00a0the\u00a0definition\u00a0of\u00a0Section\u00a02(15)\u00a0of\u00a0the\u00a0\n Income\u00a0Tax\u00a0Act\u00a0and\u00a0therefore,\u00a0not\u00a0entitled\u00a0to\u00a0deduction\u00a0claimed\u00a0\n under\u00a0Section\u00a011\u00a0of\u00a0the\u00a0Income\u00a0Tax\u00a0Act,\u00a0the\u00a0assessee\u00a0has\u00a0preferred\u00a0\n the\u00a0present\u00a0Tax\u00a0Appeal\u00a0No.\u00a0423\u00a0of\u00a02016\u00a0to\u00a0consider\u00a0the\u00a0following\u00a0\n questions\u00a0of\u00a0law.\n\n \"(1)Whether\u00a0the\u00a0Income\u00adtax\u00a0Appellate\u00a0Tribunal\u00a0has\u00a0erred\u00a0in \u00a0\n law \u00a0 and \u00a0 on \u00a0 facts \u00a0 in \u00a0 holding \u00a0 that \u00a0 the \u00a0 activity \u00a0 of \u00a0 the \u00a0\n appellant\u00a0was\u00a0in\u00a0the\u00a0nature\u00a0of\u00a0trade,\u00a0commerce\u00a0or\u00a0business \u00a0\n and\u00a0hence\u00a0it\u00a0cannot\u00a0be\u00a0regarded\u00a0as\u00a0activity\u00a0for\u00a0charitable \u00a0\n purpose \u00a0 in \u00a0 view \u00a0 of \u00a0 the \u00a0 proviso \u00a0 to \u00a0 section \u00a0 2(15) \u00a0 of \u00a0 the \u00a0\n Income\u00adtax\u00a0Act,\u00a01961?\n (2)\u00a0Whether\u00a0the\u00a0Income\u00adtax\u00a0Appellate\u00a0Tribunal\u00a0has\u00a0erred\u00a0in \u00a0\n law\u00a0and\u00a0on\u00a0facts\u00a0in\u00a0disallowing\u00a0the\u00a0claim\u00a0of\u00a0exemption\u00a0of \u00a0\n\n\n Page 2 of 57\n\nHC-NIC Page 2 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n\n\n\n\n the\u00a0appellant\u00a0under\u00a0section\u00a011\u00a0of\u00a0the\u00a0Income\u00adtax\u00a0Act,\u00a01961, \u00a0\n and\u00a0assessing\u00a0the\u00a0income\u00a0of\u00a0the\u00a0appellant\u00a0under\u00a0sections\u00a028 \u00a0\n to\u00a044\u00a0of\u00a0the\u00a0Income\u00adtax\u00a0Act,\u00a01961?\"\n\n 2.1. \u00a0 Feeling\u00a0aggrieved\u00a0and\u00a0dissatisfied\u00a0with\u00a0the\u00a0impugned\u00a0\n judgment \u00a0 and \u00a0 order \u00a0 passed \u00a0 by \u00a0 the \u00a0 learned \u00a0 ITAT \u00a0 passed \u00a0 in \u00a0 ITA\u00a0\n No.647/AHD/2014 \u00a0 for\u00a0 AY\u00a02010\u00ad11,\u00a0 by\u00a0which, \u00a0 learned\u00a0 ITAT\u00a0 has\u00a0\n held\u00a0that\u00a0the\u00a0activities\u00a0of\u00a0the\u00a0appellant\u00ad\u00a0assessee\u00a0cannot\u00a0be\u00a0said\u00a0to\u00a0\n be\u00a0for\u00a0\"charitable\u00a0purpose\"\u00a0within\u00a0the\u00a0definition\u00a0of\u00a0Section\u00a02(15)\u00a0of\u00a0\n the \u00a0 Income \u00a0 Tax \u00a0 Act \u00a0 and \u00a0 therefore, \u00a0 not \u00a0 entitled \u00a0 to \u00a0 deduction\u00a0\n claimed\u00a0under\u00a0Section\u00a011\u00a0of\u00a0the\u00a0Income\u00a0Tax\u00a0Act,\u00a0the\u00a0assessee\u00a0has\u00a0\n preferred\u00a0the\u00a0present\u00a0Tax\u00a0Appeal\u00a0No.\u00a0424\u00a0of\u00a02016\u00a0to\u00a0consider\u00a0the\u00a0\n following\u00a0question\u00a0of\u00a0law.\n\n \"(1)Whether\u00a0the\u00a0Income\u00adtax\u00a0Appellate\u00a0Tribunal\u00a0has\u00a0erred\u00a0in \u00a0\n law \u00a0 and \u00a0 on \u00a0 facts \u00a0 in \u00a0 holding \u00a0 that \u00a0 the \u00a0 activity \u00a0 of \u00a0 the \u00a0\n appellant\u00a0was\u00a0in\u00a0the\u00a0nature\u00a0of\u00a0trade,\u00a0commerce\u00a0or\u00a0business \u00a0\n and\u00a0hence\u00a0it\u00a0cannot\u00a0be\u00a0regarded\u00a0as\u00a0activity\u00a0for\u00a0charitable \u00a0\n purpose \u00a0 in \u00a0 view \u00a0 of \u00a0 the \u00a0 proviso \u00a0 to \u00a0 section \u00a0 2(15) \u00a0 of \u00a0 the \u00a0\n Income\u00adtax\u00a0Act,\u00a01961?\n (2)\u00a0Whether\u00a0the\u00a0Income\u00adtax\u00a0Appellate\u00a0Tribunal\u00a0has\u00a0erred\u00a0in \u00a0\n law\u00a0and\u00a0on\u00a0facts\u00a0in\u00a0disallowing\u00a0the\u00a0claim\u00a0of\u00a0exemption\u00a0of \u00a0\n the\u00a0appellant\u00a0under\u00a0section\u00a011\u00a0of\u00a0the\u00a0Income\u00adtax\u00a0Act,\u00a01961, \u00a0\n and\u00a0assessing\u00a0the\u00a0income\u00a0of\u00a0the\u00a0appellant\u00a0under\u00a0sections\u00a028 \u00a0\n to\u00a044\u00a0of\u00a0the\u00a0Income\u00adtax\u00a0Act,\u00a01961?\"\n\n 2.2. \u00a0 Feeling\u00a0aggrieved\u00a0and\u00a0dissatisfied\u00a0with\u00a0the\u00a0impugned\u00a0\n judgment \u00a0 and \u00a0 order \u00a0 passed \u00a0 by \u00a0 the \u00a0 learned \u00a0 ITAT \u00a0 passed \u00a0 in \u00a0 ITA\u00a0\n No.2335/AHD/2015\u00a0for\u00a0AY\u00a02011\u00ad12,\u00a0by\u00a0which,\u00a0learned\u00a0ITAT\u00a0has\u00a0\n held\u00a0that\u00a0the\u00a0activities\u00a0of\u00a0appellant\u00ad\u00a0assessee\u00a0cannot\u00a0be\u00a0said\u00a0to\u00a0be\u00a0\n\n\n\n Page 3 of 57\n\nHC-NIC Page 3 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n\n\n\n for\u00a0\"charitable\u00a0purpose\"\u00a0within\u00a0the\u00a0definition\u00a0of\u00a0Section\u00a02(15)\u00a0of\u00a0\n the \u00a0 Income \u00a0 Tax \u00a0 Act \u00a0 and \u00a0 therefore, \u00a0 not \u00a0 entitled \u00a0 to \u00a0 deduction\u00a0\n claimed\u00a0under\u00a0Section\u00a011\u00a0of\u00a0the\u00a0Income\u00a0Tax\u00a0Act,\u00a0the\u00a0assessee\u00a0has\u00a0\n preferred\u00a0the\u00a0present\u00a0Tax\u00a0Appeal\u00a0No.\u00a0425\u00a0of\u00a02016\u00a0to\u00a0consider\u00a0the\u00a0\n following\u00a0question\u00a0of\u00a0law.\n\n \"(1)Whether\u00a0the\u00a0Income\u00adtax\u00a0Appellate\u00a0Tribunal\u00a0has\u00a0erred\u00a0in \u00a0\n law \u00a0 and \u00a0 on \u00a0 facts \u00a0 in \u00a0 holding \u00a0 that \u00a0 the \u00a0 activity \u00a0 of \u00a0 the \u00a0\n appellant\u00a0was\u00a0in\u00a0the\u00a0nature\u00a0of\u00a0trade,\u00a0commerce\u00a0or\u00a0business \u00a0\n and\u00a0hence\u00a0it\u00a0cannot\u00a0be\u00a0regarded\u00a0as\u00a0activity\u00a0for\u00a0charitable \u00a0\n purpose \u00a0 in \u00a0 view \u00a0 of \u00a0 the \u00a0 proviso \u00a0 to \u00a0 section \u00a0 2(15) \u00a0 of \u00a0 the \u00a0\n Income\u00adtax\u00a0Act,\u00a01961?\n (2)\u00a0Whether\u00a0the\u00a0Income\u00adtax\u00a0Appellate\u00a0Tribunal\u00a0has\u00a0erred\u00a0in \u00a0\n law\u00a0and\u00a0on\u00a0facts\u00a0in\u00a0disallowing\u00a0the\u00a0claim\u00a0of\u00a0exemption\u00a0of \u00a0\n the\u00a0appellant\u00a0under\u00a0section\u00a011\u00a0of\u00a0the\u00a0Income\u00adtax\u00a0Act,\u00a01961, \u00a0\n and\u00a0assessing\u00a0the\u00a0income\u00a0of\u00a0the\u00a0appellant\u00a0under\u00a0sections\u00a028 \u00a0\n to\u00a044\u00a0of\u00a0the\u00a0Income\u00adtax\u00a0Act,\u00a01961?\"\n\n 3.0. The\u00a0facts\u00a0leading\u00a0to\u00a0the\u00a0present\u00a0appeals\u00a0in\u00a0nutshell\u00a0are\u00a0\n as\u00a0under;\n\n 3.1. That \u00a0 the \u00a0 assessee \u00a0 AUDA \u00a0 is \u00a0 constituted \u00a0 as \u00a0 Urban\u00a0\n Development \u00a0 Authority, \u00a0 constituted \u00a0 by \u00a0 the \u00a0 State \u00a0 Government \u00a0 in\u00a0\n exercise\u00a0of\u00a0powers\u00a0under\u00a0Section\u00a022\u00a0of\u00a0the\u00a0Gujarat\u00a0Town\u00a0Planning\u00a0\n and\u00a0Urban\u00a0Development\u00a0Act,\u00a01976\u00a0(hereinafter\u00a0referred\u00a0to\u00a0as\u00a0the\u00a0\n \"Town\u00a0 Planning\u00a0Act\"). \u00a0The\u00a0powers\u00a0and\u00a0function \u00a0of\u00a0 the\u00a0 AUDA\u00a0as\u00a0\n Urban\u00a0Development\u00a0Authority\u00a0are\u00a0as\u00a0per\u00a0Section\u00a023\u00a0of\u00a0the\u00a0Town\u00a0\n Planning\u00a0 Act. \u00a0As \u00a0 per\u00a0 \u00a0 Section \u00a0 23 \u00a0of\u00a0 the \u00a0Town\u00a0Planning\u00a0 Act, \u00a0the\u00a0\n AUDA\u00a0as\u00a0a\u00a0Urban\u00a0Development\u00a0Authority\u00a0is\u00a0required\u00a0to\u00a0undertake\u00a0\n\n\n Page 4 of 57\n\nHC-NIC Page 4 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n\n\n\n the\u00a0development\u00a0of\u00a0the\u00a0Urban\u00a0Area\u00a0having\u00a0jurisdiction\u00a0as\u00a0per\u00a0the\u00a0\n Notification\u00a0issued\u00a0by\u00a0the\u00a0State\u00a0Government.\u00a0The\u00a0function\u00a0of\u00a0the\u00a0\n AUDA\u00a0as\u00a0Urban\u00a0Development\u00a0Authority\u00a0are\u00a0as\u00a0under:\u00a0\n (i)\u00a0To\u00a0undertake\u00a0the\u00a0preparation\u00a0of\u00a0development\u00a0plans\u00a0under\u00a0the\u00a0\n provisions\u00a0of\u00a0this\u00a0Act,\u00a0for\u00a0the\u00a0urban\u00a0development\u00a0area;\u00a0\n\n (ii) \u00a0 To \u00a0 undertake \u00a0 the \u00a0 preparation \u00a0 2 \u00a0 [and \u00a0 execution] \u00a0 of \u00a0 town\u00a0\n planning\u00a0schemes\u00a0under\u00a0the\u00a0provisions\u00a0of\u00a0this\u00a0Act,\u00a0if\u00a0so\u00a0directed\u00a0by\u00a0\n the\u00a0State\u00a0Government;\u00a0\n\n (iii)\u00a0To\u00a0carry\u00a0out\u00a0surveys\u00a0in\u00a0the\u00a0urban\u00a0development\u00a0area\u00a0for\u00a0the\u00a0\n preparation\u00a0of\u00a0development\u00a0plans\u00a0or\u00a0town\u00a0planning\u00a0schemes;\u00a0\n\n (iv)\u00a0To\u00a0guide,\u00a0direct\u00a0and\u00a0assist\u00a0the\u00a0local\u00a0authority\u00a0or\u00a0authorities\u00a0and\u00a0\n other\u00a0 statutory \u00a0 authorities \u00a0 functioning\u00a0 in\u00a0 the\u00a0 urban \u00a0 development\u00a0\n area\u00a0in\u00a0matters\u00a0pertaining\u00a0to\u00a0the\u00a0planning,\u00a0development\u00a0and\u00a0use\u00a0of\u00a0\n urban\u00a0land;\u00a0\n\n (v)\u00a0To\u00a0control\u00a0the\u00a0development\u00a0activities\u00a0in\u00a0accordance\u00a0with\u00a0the\u00a0\n development\u00a0plan\u00a0in\u00a0the\u00a0urban\u00a0development\u00a0area;\u00a03\u00a0[(v\u00ada)\u00a0to\u00a0levy\u00a0\n and\u00a0collect\u00a0such\u00a0security\u00a0fees\u00a0for\u00a0secrutiny\u00a0of\u00a0documents\u00a0submitted\u00a0\n to\u00a0the\u00a0appropriate\u00a0authority\u00a0for\u00a0permission\u00a0for\u00a0development\u00a0as\u00a0may\u00a0\n be\u00a0prescribed\u00a0by\u00a0regulations;]\n\n (vi)\u00a0To\u00a0execute\u00a0works\u00a0in\u00a0connection\u00a0with\u00a0supply\u00a0of\u00a0water,\u00a0disposal\u00a0\n of\u00a0sewerage\u00a0and\u00a0provision\u00a0of\u00a0other\u00a0services\u00a0and\u00a0amenities;\u00a04\u00a0[(vi\u00ada)\u00a0\n to\u00a0levy\u00a0and\u00a0collect\u00a0such\u00a0fees\u00a0for\u00a0the\u00a0execution\u00a0of\u00a0works\u00a0referred\u00a0to\u00a0\n in\u00a0clause\u00a0(vi)\u00a0and\u00a0for\u00a0provision\u00a0of\u00a0other\u00a0services\u00a0and\u00a0amenities\u00a0as\u00a0\n may\u00a0be\u00a0prescribed\u00a0by\u00a0regulations;]\n\n (vii)\u00a0To\u00a0acquire,\u00a0hold,\u00a0manage\u00a0and\u00a0dispose\u00a0of\u00a0property,\u00a0movable\u00a0or\u00a0\n immovable,\u00a0as\u00a0it\u00a0may\u00a0deem\u00a0necessary;\u00a0\n\n Page 5 of 57\nHC-NIC Page 5 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n (viii) \u00a0 To \u00a0 enter \u00a0 into \u00a0 contracts, \u00a0 agreements \u00a0 or \u00a0 arrangements, \u00a0 with\u00a0\n any \u00a0 local \u00a0 authority, \u00a0 person \u00a0 or \u00a0 organisation \u00a0 as \u00a0 the \u00a0 urban\u00a0\n development\u00a0authority\u00a0may\u00a0consider\u00a0necessary\u00a0for\u00a0performing\u00a0its\u00a0\n functions;\u00a0\n\n (ix) \u00a0 To \u00a0 carry \u00a0 any \u00a0 development \u00a0 works \u00a0 in \u00a0 the \u00a0 urban \u00a0 development\u00a0\n area\u00a0as\u00a0may\u00a0be\u00a0assigned\u00a0to\u00a0it\u00a0by\u00a0the\u00a0State\u00a0Government\u00a0from\u00a0time\u00a0to\u00a0\n time;\u00a0\n\n (x)\u00a0To\u00a0exercise\u00a0such\u00a0other\u00a0powers\u00a0and\u00a0perform\u00a0such\u00a0other\u00a0functions\u00a0\n as \u00a0 are \u00a0 supplemental, \u00a0 incidental \u00a0 or \u00a0 consequential \u00a0 to \u00a0 any \u00a0 of \u00a0 the\u00a0\n foregoing\u00a0powers\u00a0and\u00a0functions\u00a0or\u00a0as\u00a0may\u00a0be\u00a0directed\u00a0by\u00a0the\u00a0State\u00a0\n Government.\n\n 3.2. That\u00a0prior\u00a0to\u00a0AY\u00a02002\u00ad03\u00a0the\u00a0assessee\u00a0was\u00a0enjoying\u00a0the\u00a0\n exemption\u00a0under\u00a0Section\u00a010(20A)\u00a0of\u00a0the\u00a0Income\u00a0Tax\u00a0Act.\u00a0However,\u00a0\n subsequently \u00a0 Section \u00a0 10(20A) \u00a0 of \u00a0 the \u00a0 Act \u00a0 came \u00a0 to \u00a0 be \u00a0 deleted \u00a0 /\u00a0\n omitted \u00a0 by \u00a0 the \u00a0 Finance \u00a0 Act, \u00a0 2002 \u00a0 w.e.f. \u00a0 1.4.2003. \u00a0 That\u00a0\n simultaneously,\u00a0exemption\u00a0granted\u00a0under\u00a0Section\u00a010(20A)\u00a0of\u00a0the\u00a0\n Income\u00a0Tax\u00a0Act\u00a0also\u00a0came\u00a0to\u00a0be\u00a0withdrawn\u00a0by\u00a0Finance\u00a0Act,\u00a02002.\n\n Tax\u00a0Appeal\u00a0No.\u00a0423\u00a0of\u00a02016\u00a0\n\n 4.0. That\u00a0the\u00a0assessee\u00a0filed\u00a0return\u00a0of\u00a0income\u00a0for\u00a0the\u00a0year\u00a02009\u00ad10\u00a0\n declaring\u00a0total\u00a0income\u00a0at\u00a0Rs.\u00a0NIL\u00a0after\u00a0claiming\u00a0deduction\u00a0under\u00a0\n Section \u00a0 11 \u00a0 r.w.s, \u00a0 2(15) \u00a0 of \u00a0 the \u00a0 Income \u00a0 Tax \u00a0 Act. \u00a0 The \u00a0 case \u00a0 of \u00a0 the\u00a0\n assessee\u00a0was\u00a0taken\u00a0up\u00a0for\u00a0scrutiny\u00a0assessment\u00a0and\u00a0the\u00a0assessment\u00a0\n order\u00a0came\u00a0to\u00a0be\u00a0passed\u00a0under\u00a0Section\u00a0143(3)\u00a0of\u00a0the\u00a0Act.\u00a0The\u00a0AO\u00a0\n determined\u00a0the\u00a0income\u00a0of\u00a0the\u00a0assessee\u00a0at\u00a0Rs.\u00a0359,95,83,000/\u00ad\u00a0by\u00a0\n\n\n Page 6 of 57\n\nHC-NIC Page 6 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n\n\n\n disallowing \u00a0 the \u00a0 deduction \u00a0 claimed \u00a0 under \u00a0 Section \u00a0 11 \u00a0 of \u00a0 the \u00a0 Act.\u00a0\n That\u00a0the\u00a0AO\u00a0\u00a0held\u00a0that\u00a0activities\u00a0of\u00a0the\u00a0assessee\u00a0cannot\u00a0be\u00a0said\u00a0to\u00a0be\u00a0\n for\u00a0\"charitable\u00a0purpose\"\u00a0as\u00a0contained\u00a0in\u00a0Section\u00a02(15)\u00a0of\u00a0the\u00a0Act,\u00a0in\u00a0\n light\u00a0of\u00a0the\u00a0proviso\u00a0to\u00a0Section\u00a02(15)\u00a0of\u00a0the\u00a0Act\u00a0and\u00a0therefore,\u00a0the\u00a0\n assessee\u00a0is\u00a0not\u00a0entitled\u00a0to\u00a0deduction\u00a0claimed\u00a0under\u00a0Section\u00a011\u00a0of\u00a0\n the\u00a0Act.\u00a0\n\n 4.1. Feeling\u00a0aggrieved\u00a0and\u00a0dissatisfied\u00a0with\u00a0the\u00a0order\u00a0passed\u00a0\n by\u00a0the\u00a0AO,\u00a0the\u00a0assessee\u00a0preferred\u00a0appeal\u00a0before\u00a0the\u00a0learned\u00a0CIT(A).\u00a0\n That\u00a0the\u00a0learned\u00a0CIT(A)\u00a0confirmed\u00a0the\u00a0disallowance\u00a0made\u00a0under\u00a0\n Section\u00a011\u00a0A\u00a0of\u00a0the\u00a0Act\u00a0on\u00a0the\u00a0ground\u00a0that\u00a0the\u00a0case\u00a0of\u00a0the\u00a0assessee\u00a0\n is\u00a0covered\u00a0by\u00a0proviso\u00a0to\u00a0Section\u00a02(15)\u00a0of\u00a0the\u00a0Act.\u00a0Feeling\u00a0aggrieved\u00a0\n and \u00a0 dissatisfied \u00a0 with \u00a0 the \u00a0 order \u00a0 passed \u00a0 by \u00a0 the \u00a0 learned \u00a0 CIT(A)\u00a0\n confirming\u00a0the\u00a0disallowance\u00a0made\u00a0under\u00a0Section\u00a011A\u00a0of\u00a0the\u00a0Act,\u00a0\n the \u00a0 assessee \u00a0 preferred \u00a0 appeal \u00a0 before \u00a0 the \u00a0 learned \u00a0 ITAT. \u00a0 By\u00a0\n impugned\u00a0judgment\u00a0and\u00a0order,\u00a0the\u00a0learned\u00a0ITAT\u00a0has\u00a0dismissed\u00a0the\u00a0\n said \u00a0appeal \u00a0 by \u00a0 observing \u00a0 that \u00a0 considering \u00a0 the \u00a0 proviso \u00a0to \u00a0 Section\u00a0\n 2(15)\u00a0of\u00a0 the\u00a0 Act,\u00a0 the\u00a0 assessee\u00a0shall\u00a0 not\u00a0be\u00a0 entitled\u00a0to\u00a0deduction\u00a0\n under\u00a0Section\u00a011\u00a0of\u00a0the\u00a0Act\u00a0as\u00a0the\u00a0activities\u00a0of\u00a0assesee\u00a0can\u00a0be\u00a0said\u00a0\n to\u00a0be\u00a0in\u00a0the\u00a0nature\u00a0of\u00a0trade,\u00a0commerce\u00a0and\u00a0business.\u00a0\n\n 4.2. Feeling\u00a0 aggrieved \u00a0 and\u00a0 dissatisfied\u00a0 with\u00a0 the \u00a0 impugned\u00a0\n judgment\u00a0and\u00a0order\u00a0passed\u00a0by\u00a0the\u00a0learned\u00a0ITAT,\u00a0the\u00a0assessee\u00a0has\u00a0\n preferred\u00a0the\u00a0present\u00a0Tax\u00a0Appeal\u00a0No.\u00a0423\u00a0of\u00a02016\u00a0to\u00a0consider\u00a0the\u00a0\n following\u00a0question\u00a0of\u00a0law.\n\n \"(1)Whether\u00a0the\u00a0Income\u00adtax\u00a0Appellate\u00a0Tribunal\u00a0has\u00a0erred\u00a0in \u00a0\n\n\n\n Page 7 of 57\n\nHC-NIC Page 7 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n\n\n\n\n law \u00a0 and \u00a0 on \u00a0 facts \u00a0 in \u00a0 holding \u00a0 that \u00a0 the \u00a0 activity \u00a0 of \u00a0 the \u00a0\n appellant\u00a0was\u00a0in\u00a0the\u00a0nature\u00a0of\u00a0trade,\u00a0commerce\u00a0or\u00a0business \u00a0\n and\u00a0hence\u00a0it\u00a0cannot\u00a0be\u00a0regarded\u00a0as\u00a0activity\u00a0for\u00a0charitable \u00a0\n purpose \u00a0 in \u00a0 view \u00a0 of \u00a0 the \u00a0 proviso \u00a0 to \u00a0 section \u00a0 2(15) \u00a0 of \u00a0 the \u00a0\n Income\u00adtax\u00a0Act,\u00a01961?\n (2)\u00a0Whether\u00a0the\u00a0Income\u00adtax\u00a0Appellate\u00a0Tribunal\u00a0has\u00a0erred\u00a0in \u00a0\n law\u00a0and\u00a0on\u00a0facts\u00a0in\u00a0disallowing\u00a0the\u00a0claim\u00a0of\u00a0exemption\u00a0of \u00a0\n the\u00a0appellant\u00a0under\u00a0section\u00a011\u00a0of\u00a0the\u00a0Income\u00adtax\u00a0Act,\u00a01961, \u00a0\n and\u00a0assessing\u00a0the\u00a0income\u00a0of\u00a0the\u00a0appellant\u00a0under\u00a0sections\u00a028 \u00a0\n to\u00a044\u00a0of\u00a0the\u00a0Income\u00adtax\u00a0Act,\u00a01961?\" \u00a0\n\n 4.3. Similar\u00a0orders\u00a0are\u00a0passing\u00a0in\u00a0the\u00a0case\u00a0of\u00a0very\u00a0assessee\u00a0\n for\u00a0AY\u00a02010\u00ad11\u00a0&\u00a02011\u00ad12,\u00a0 \u00a0which\u00a0are\u00a0the\u00a0subject\u00a0matter\u00a0of\u00a0Tax\u00a0\n Appeal\u00a0Nos.\u00a0424\u00a0of\u00a0\u00a02016\u00a0and\u00a0425\u00a0of\u00a02016.\n\n 5.0. Therefore, \u00a0 the \u00a0 short \u00a0 question \u00a0 which \u00a0 is \u00a0 posed \u00a0 for \u00a0 the\u00a0\n consideration\u00a0of\u00a0this\u00a0Court\u00a0is\u00a0whether\u00a0the\u00a0activities\u00a0of\u00a0the\u00a0assessee\u00ad\u00a0\n AUDA\u00a0can\u00a0be\u00a0said\u00a0to\u00a0be\u00a0in\u00a0nature\u00a0of\u00a0trade,\u00a0commerce\u00a0and\u00a0business\u00a0\n and\u00a0 \u00a0hence\u00a0it\u00a0cannot\u00a0be\u00a0regarded\u00a0as\u00a0activity\u00a0for\u00a0charitable\u00a0purpose\u00a0\n in \u00a0 view \u00a0 of \u00a0 the \u00a0 proviso \u00a0 to \u00a0 section \u00a0 2(15) \u00a0 of \u00a0 the \u00a0 Income\u00adtax \u00a0 Act,\u00a0\n 1961\u00a0?\n\n 6.0. Shri\u00a0S.N.\u00a0Soparkar,\u00a0learned\u00a0Senior\u00a0Advocate\u00a0has\u00a0appeared\u00a0on\u00a0\n behalf \u00a0 of \u00a0 the \u00a0 assessee \u00a0 and \u00a0 Shri \u00a0 Manish \u00a0 R \u00a0 Bhatt, \u00a0 learned \u00a0 Senior\u00a0\n Advocate \u00a0 has \u00a0 appeared \u00a0 on \u00a0 behalf \u00a0 of \u00a0 the \u00a0 revenue \u00a0 in \u00a0 all \u00a0 these\u00a0\n appeals.\u00a0\n\n 7.0. Shri\u00a0S.N.\u00a0Soparkar,\u00a0learned\u00a0Senior\u00a0Advocate\u00a0for\u00a0the\u00a0assessee\u00a0\n has\u00a0vehemently\u00a0submitted\u00a0that\u00a0in\u00a0the\u00a0facts\u00a0and\u00a0circumstances\u00a0of\u00a0the\u00a0\n\n Page 8 of 57\n\nHC-NIC Page 8 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n\n\n\n case,\u00a0the\u00a0learned\u00a0Tribunal\u00a0has\u00a0materially\u00a0erred\u00a0in\u00a0holding\u00a0that\u00a0the\u00a0\n activities\u00a0of\u00a0the\u00a0assessee\u00a0is\u00a0in\u00a0the\u00a0nature\u00a0of\u00a0trade,\u00a0commerce\u00a0and\u00a0\n business\u00a0and\u00a0therefore,\u00a0the\u00a0case\u00a0of\u00a0the\u00a0assessee\u00a0would\u00a0fall\u00a0under\u00a0\n the\u00a0proviso\u00a0to\u00a0Section\u00a02(15)\u00a0of\u00a0the\u00a0Act\u00a0so\u00a0to\u00a0as\u00a0deny\u00a0the\u00a0deduction\u00a0\n claimed \u00a0 under \u00a0 Section \u00a0 11 \u00a0 of \u00a0 the \u00a0 Income \u00a0 Tax \u00a0 Act, \u00a0 as\"Charitable\u00a0\n Institute\".\u00a0\n\n 7.1. It\u00a0is\u00a0vehemently\u00a0submitted\u00a0by\u00a0Shri\u00a0Soparkar,\u00a0learned\u00a0Senior\u00a0\n Advocate\u00a0for\u00a0the\u00a0assessee\u00a0that\u00a0while\u00a0holding\u00a0that\u00a0the\u00a0activities\u00a0of\u00a0\n the\u00a0assessee\u00a0can\u00a0be\u00a0said\u00a0to\u00a0be\u00a0in\u00a0the\u00a0nature\u00a0of\u00a0trade,\u00a0commerce\u00a0and\u00a0\n business, \u00a0 the \u00a0 learned \u00a0 Tribunal \u00a0 has \u00a0 not \u00a0 properly \u00a0 appreciated \u00a0 the\u00a0\n object\u00a0and\u00a0purpose\u00a0for\u00a0which,\u00a0the\u00a0AUDA\u00a0as\u00a0an\u00a0Urban\u00a0Development\u00a0\n Authority \u00a0 has \u00a0 been \u00a0 constituted \u00a0 under \u00a0 the \u00a0 provisions \u00a0 of \u00a0 Town\u00a0\n Planning\u00a0Act.\u00a0It\u00a0is\u00a0further\u00a0submitted\u00a0by\u00a0Soparkar,\u00a0learned\u00a0Senior\u00a0\n Advocate\u00a0for\u00a0the\u00a0assessee\u00a0that\u00a0while\u00a0holding\u00a0the\u00a0activities\u00a0of\u00a0the\u00a0\n assessee \u00a0 can \u00a0 be \u00a0 said \u00a0 to \u00a0 be \u00a0 in \u00a0 the \u00a0 nature \u00a0 of \u00a0 trade, \u00a0 commerce \u00a0 or\u00a0\n business,\u00a0the\u00a0learned\u00a0Tribunal\u00a0has\u00a0not\u00a0appreciated\u00a0the\u00a0object\u00a0and\u00a0\n purpose\u00a0for\u00a0which,\u00a0the\u00a0assessee\u00a0has\u00a0been\u00a0constituted\u00a0as\u00a0an\u00a0Urban\u00a0\n Development\u00a0Authority\u00a0under\u00a0Section\u00a022\u00a0of\u00a0the\u00a0Town\u00a0Planning\u00a0Act\u00a0\n and \u00a0 learned \u00a0 Tribunal \u00a0 has \u00a0 not \u00a0 properly \u00a0 appreciated \u00a0 and \u00a0 / \u00a0 or\u00a0\n considered\u00a0the\u00a0activities\u00a0and\u00a0the\u00a0services\u00a0rendered\u00a0by\u00a0the\u00a0assessee.\u00a0\n\n 7.2. Shri\u00a0Soparkar,\u00a0learned\u00a0Senior\u00a0Advocate\u00a0for\u00a0the\u00a0assessee\u00a0has\u00a0\n further \u00a0 submitted \u00a0 that \u00a0 learned \u00a0 Tribunal \u00a0 has \u00a0 not \u00a0 properly\u00a0\n appreciated\u00a0the\u00a0fact\u00a0that\u00a0the\u00a0assessee\u00a0has\u00a0been\u00a0constituted\u00a0as\u00a0an\u00a0\n Urban\u00a0Development\u00a0Authority\u00a0under\u00a0the\u00a0provision\u00a0of\u00a0Section\u00a022\u00a0of\u00a0\n the\u00a0Town\u00a0Planning\u00a0Act\u00a0to\u00a0carry\u00a0out\u00a0the\u00a0development\u00a0of\u00a0the\u00a0area\u00a0\n included\u00a0in\u00a0the\u00a0Urban\u00a0Development\u00a0Plan\u00a0/\u00a0Scheme.\u00a0It\u00a0is\u00a0submitted\u00a0\n\n Page 9 of 57\n\nHC-NIC Page 9 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n\n\n\n that\u00a0therefore,\u00a0the\u00a0assessee\u00a0has\u00a0been\u00a0performing\u00a0the\u00a0statutory\u00a0duty\u00a0\n to\u00a0carry\u00a0out\u00a0the\u00a0development\u00a0work\u00a0in\u00a0the\u00a0urban\u00a0area,\u00a0for\u00a0which,\u00a0the\u00a0\n Urban \u00a0 Development \u00a0 Authority \u00a0 has \u00a0 been \u00a0 constituted \u00a0 by \u00a0 the \u00a0 State\u00a0\n Government.\u00a0\n\n 7.3. \u00a0Shri\u00a0Soparkar,\u00a0learned\u00a0Senior\u00a0Advocate\u00a0for\u00a0the\u00a0assessee\u00a0has\u00a0\n taken\u00a0us\u00a0to\u00a0various\u00a0provisions\u00a0of\u00a0the\u00a0Town\u00a0Planning\u00a0Act\u00a0in\u00a0support\u00a0\n of \u00a0 his \u00a0 submissions \u00a0 that \u00a0 activities \u00a0 of \u00a0 the \u00a0 assessee\u00ad \u00a0 AUDA \u00a0 is \u00a0 the\u00a0\n statutory \u00a0 duty \u00a0 under \u00a0 the \u00a0 provision \u00a0 of \u00a0 Town \u00a0 Planning \u00a0 Act \u00a0 and\u00a0\n therefore,\u00a0activities\u00a0carried\u00a0out\u00a0by\u00a0the\u00a0assessee\u00ad\u00a0AUDA\u00a0cannot\u00a0be\u00a0\n said \u00a0 to \u00a0 be \u00a0 in \u00a0 the \u00a0 nature \u00a0 of \u00a0 trade, \u00a0 commerce \u00a0 or \u00a0 business. \u00a0 It \u00a0 is\u00a0\n vehemently\u00a0submitted\u00a0that\u00a0therefore,\u00a0the\u00a0activities\u00a0of\u00a0the\u00a0assessee\u00ad\u00a0\n AUDA\u00a0cannot\u00a0be\u00a0said\u00a0to\u00a0be\u00a0in\u00a0the\u00a0nature\u00a0of\u00a0trade,\u00a0commerce\u00a0and\u00a0\n business\u00a0and\u00a0therefore,\u00a0the\u00a0proviso\u00a0to\u00a0Section\u00a02(15)\u00a0shall\u00a0not\u00a0be\u00a0\n applicable. \u00a0 It \u00a0 is \u00a0 submitted \u00a0 that \u00a0 it \u00a0 cannot \u00a0 be \u00a0 disputed \u00a0 that \u00a0 the\u00a0\n services \u00a0 provided \u00a0 by \u00a0 the \u00a0 appellant \u00a0 \u00adassessee \u00a0 can \u00a0 be \u00a0 said \u00a0 to \u00a0 be\u00a0\n providing\u00a0\u00a0public\u00a0utility\u00a0and\u00a0therefore,\u00a0the\u00a0activities\u00a0of\u00a0the\u00a0assessee\u00ad\u00a0\n AUDA \u00a0 can \u00a0 be \u00a0 said \u00a0 to \u00a0 be \u00a0 for \u00a0 \"charitable \u00a0 purpose\" \u00a0 within \u00a0 the\u00a0\n definition\u00a0of\u00a0Section\u00a02(15)\u00a0of\u00a0the\u00a0Income\u00a0Tax\u00a0Act\u00a0and\u00a0therefore,\u00a0the\u00a0\n assessee\u00a0\u00ad\u00a0AUDA\u00a0is\u00a0entitled\u00a0to\u00a0deduction\u00a0under\u00a0Section\u00a011\u00a0of\u00a0the\u00a0\n Income\u00a0Tax\u00a0Act.\u00a0\n\n 7.4. Shri\u00a0Soparkar,\u00a0learned\u00a0Senior\u00a0Advocate\u00a0for\u00a0the\u00a0assessee\u00a0has\u00a0\n further\u00a0 submitted\u00a0 that \u00a0 the \u00a0 assessee \u00a0 is \u00a0 entitled\u00a0 to\u00a0 be \u00a0 regarded \u00a0 as\u00a0\n charitable \u00a0 institution \u00a0 because \u00a0 the \u00a0 assessee \u00a0 is \u00a0 not \u00a0 a \u00a0 trading\u00a0\n corporation\u00a0and\u00a0is\u00a0established\u00a0under\u00a0a\u00a0statute\u00a0for\u00a0carrying\u00a0out\u00a0the\u00a0\n development \u00a0 work \u00a0 that \u00a0 too \u00a0 within \u00a0 four \u00a0 corners \u00a0 of \u00a0 the \u00a0 Town\u00a0\n Planning\u00a0Act.\u00a0\n\n Page 10 of 57\nHC-NIC Page 10 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n\n\n\n 7.5. Shri\u00a0Soparkar,\u00a0learned\u00a0Senior\u00a0Advocate\u00a0for\u00a0the\u00a0assessee\u00a0has\u00a0\n further\u00a0submitted\u00a0that\u00a0in\u00a0the\u00a0case\u00a0of\u00a0Commissioner\u00a0of\u00a0Income\u00a0Tax\u00a0\n vs. \u00a0 Gujarat \u00a0 Maritime \u00a0 Board \u00a0 reported \u00a0 in \u00a0 295 \u00a0 ITR \u00a0 561 \u00a0 (SC), \u00a0 the\u00a0\n Hon'ble\u00a0Supreme\u00a0Court\u00a0has\u00a0held\u00a0that\u00a0Gujarat\u00a0Maritime\u00a0Board\u00a0being\u00a0\n a \u00a0 statutory \u00a0 authority \u00a0 established \u00a0 under \u00a0 the \u00a0 provisions \u00a0 of \u00a0 Gujarat\u00a0\n Maritime \u00a0 Board \u00a0 Act, \u00a0 1981 \u00a0 and \u00a0 has \u00a0 been \u00a0 constituted \u00a0 for\u00a0\n predominant \u00a0 purpose \u00a0 of \u00a0 development \u00a0 of \u00a0 minor \u00a0 ports \u00a0 within \u00a0 the\u00a0\n State \u00a0 of \u00a0 Gujarat \u00a0 and \u00a0 management \u00a0 and \u00a0 control \u00a0 of \u00a0 the \u00a0 Gujarat\u00a0\n Maritime\u00a0Board\u00a0was\u00a0essentially\u00a0with\u00a0the\u00a0State\u00a0Government\u00a0having\u00a0\n no\u00a0profit\u00a0motive,\u00a0Gujarat\u00a0Maritime\u00a0Board\u00a0is\u00a0entitled\u00a0to\u00a0exemption\u00a0\n under\u00a0Section\u00a011\u00a0in\u00a0light\u00a0of\u00a0the\u00a0definition\u00a0of\u00a0the\u00a0words\u00a0\"charitable\u00a0\n purposes\"\u00a0as\u00a0defined\u00a0under\u00a0Section\u00a02(15)\u00a0of\u00a0the\u00a0Act.\u00a0It\u00a0is\u00a0submitted\u00a0\n that\u00a0in\u00a0the\u00a0aforesaid\u00a0decision,\u00a0it\u00a0is\u00a0held\u00a0that\u00a0even\u00a0if\u00a0\u00a0it\u00a0had\u00a0ceased\u00a0to\u00a0\n be \u00a0 a \u00a0 local \u00a0 authority \u00a0 under \u00a0 Section \u00a0 10(20) \u00a0 of \u00a0 the \u00a0 Act, \u00a0 it \u00a0 is \u00a0 not\u00a0\n precluded \u00a0 from \u00a0 claiming \u00a0 exemption \u00a0 under \u00a0 Section \u00a0 11 \u00a0 (1) \u00a0 of \u00a0 the\u00a0\n Act. \u00a0It\u00a0 is\u00a0submitted\u00a0that\u00a0in\u00a0the\u00a0aforesaid\u00a0 decision,\u00a0 it\u00a0is\u00a0 held\u00a0and\u00a0\n observed\u00a0that\u00a0Section\u00a010(20)\u00a0and\u00a011\u00a0of\u00a0the\u00a0Act\u00a0\u00a0operate\u00a0in\u00a0totally\u00a0\n different\u00a0spheres.\u00a0\n\n 7.6. Shri\u00a0Soparkar,\u00a0learned\u00a0Senior\u00a0Advocate\u00a0for\u00a0the\u00a0assessee\u00a0\n has \u00a0 also \u00a0 heavily \u00a0 relied \u00a0 upon \u00a0 another \u00a0 decision \u00a0 of \u00a0 the \u00a0 Hon'ble\u00a0\n Supreme\u00a0Court\u00a0in\u00a0the\u00a0case\u00a0of\u00a0Shri\u00a0Ramtanu\u00a0Cooperative\u00a0Housing\u00a0\n Society \u00a0 Ltd \u00a0 and \u00a0 Another \u00a0 vs. \u00a0 State \u00a0 of \u00a0 Maharastra \u00a0 and \u00a0 Another\u00a0\n reported\u00a0in\u00a01970(3)\u00a0SCC\u00a0323\u00a0in\u00a0support\u00a0of\u00a0his\u00a0above\u00a0submission.\u00a0It\u00a0\n is\u00a0submitted\u00a0that\u00a0in\u00a0the\u00a0case\u00a0of\u00a0\u00a0Shri\u00a0Ramtanu\u00a0Cooperative\u00a0Housing\u00a0\n Society\u00a0Ltd\u00a0and\u00a0Another\u00a0(supra)\u00a0the\u00a0activities\u00a0of\u00a0the\u00a0assessee,\u00a0it\u00a0was\u00a0\n constituted \u00a0 under \u00a0 the \u00a0 provisions \u00a0 of \u00a0 Maharastra \u00a0 Industrial\u00a0\n Development\u00a0Act\u00a0is\u00a0held\u00a0to\u00a0be\u00a0non\u00a0profit\u00a0making.\u00a0It\u00a0is\u00a0submitted\u00a0\n\n Page 11 of 57\n\nHC-NIC Page 11 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n\n\n\n that\u00a0in\u00a0the\u00a0aforesaid\u00a0decisions,\u00a0it\u00a0is\u00a0observed\u00a0and\u00a0held\u00a0that\u00a0merely\u00a0\n because \u00a0 the \u00a0 assessee \u00a0 corporation \u00a0 is\u00a0 selling \u00a0 the \u00a0 plots, \u00a0 considering\u00a0\n the \u00a0 underlying \u00a0concept \u00a0 of \u00a0 a \u00a0 trading \u00a0 Corporation \u00a0 i.e. \u00a0 buying \u00a0 and\u00a0\n selling\u00a0,\u00a0there\u00a0is\u00a0no\u00a0aspect\u00a0of\u00a0buying\u00a0or\u00a0selling\u00a0by\u00a0the\u00a0Corporation.\u00a0\n That\u00a0the\u00a0Corporation \u00a0carries\u00a0 out\u00a0the\u00a0purpose \u00a0of\u00a0the\u00a0 Act,\u00a0 namely\u00a0\n development\u00a0of\u00a0Industry\u00a0in\u00a0the\u00a0State.\u00a0\n\n 7.7. It\u00a0is\u00a0further\u00a0submitted\u00a0by\u00a0Shri\u00a0Soparkar,\u00a0learned\u00a0Senior\u00a0\n Advocate \u00a0 for \u00a0 the \u00a0 assessee \u00a0 that \u00a0 assessee \u00a0 cannot \u00a0 be \u00a0 denied \u00a0 the\u00a0\n benefit\u00a0of\u00a0being\u00a0a\u00a0charitable\u00a0institution\u00a0 \u00a0on\u00a0the\u00a0ground\u00a0of\u00a0that\u00a0its\u00a0\n objects\u00a0involve\u00a0\"the\u00a0carrying\u00a0on\u00a0of\u00a0an\u00a0activity\u00a0in\u00a0the\u00a0nature\u00a0of\u00a0trade,\u00a0\n commerce\u00a0or\u00a0business.\u00a0It\u00a0is\u00a0submitted\u00a0that\u00a0even\u00a0the\u00a0circular\u00a0issued\u00a0\n by\u00a0the\u00a0CBDT\u00a0dated\u00a019.12.2008\u00a0also\u00a0clarifies\u00a0that\u00a0the\u00a0amendment\u00a0to\u00a0\n Section \u00a0 2(15) \u00a0 is \u00a0 meant \u00a0 to \u00a0 cover \u00a0 only \u00a0 those \u00a0 commercial\u00a0\n establishments\u00a0who\u00a0hide\u00a0their\u00a0real\u00a0identity\u00a0as\u00a0a\u00a0\"mask\"\u00a0of\u00a0charity.\u00a0\n\n 7.8. Shri \u00a0 Soparkar, \u00a0 learned \u00a0 Senior \u00a0 Advocate \u00a0 has \u00a0 heavily\u00a0\n relied\u00a0upon\u00a0the\u00a0decision\u00a0of\u00a0the\u00a0Director\u00a0of\u00a0Income\u00a0Tax\u00a0(Exemption)\u00a0\n vs.\u00a0Sabarmati\u00a0Ashram\u00a0Gaushala\u00a0trust\u00a0reported\u00a0in\u00a0362\u00a0Itr\u00a0539\u00a0(Guj),\u00a0\n more\u00a0particularly,\u00a0para\u00a05\u00a0to\u00a09\u00a0and\u00a012\u00a0and\u00a013\u00a0as\u00a0well\u00a0as\u00a0decision\u00a0of\u00a0\n the \u00a0 Delhi \u00a0 High \u00a0 Court \u00a0 in \u00a0 the \u00a0 case \u00a0 of \u00a0 Institute \u00a0 of \u00a0 Chartered\u00a0\n Accountants \u00a0 of \u00a0 India \u00a0 vs. \u00a0 Direct \u00a0 General \u00a0 of \u00a0 Income \u00a0 Tax\u00a0\n (Exemptions), \u00a0 Delhi \u00a0 reported \u00a0 in \u00a0 347 \u00a0 ITR \u00a0 99 \u00a0 (para \u00a0 14 \u00a0 to \u00a0 33) \u00a0 in\u00a0\n support \u00a0 of \u00a0 his \u00a0 submissions \u00a0 that \u00a0 the \u00a0 activities \u00a0 carried \u00a0 on \u00a0 by \u00a0 the\u00a0\n assessee\u00a0cannot\u00a0be\u00a0said\u00a0to\u00a0be\u00a0in\u00a0the\u00a0nature\u00a0of\u00a0trade,\u00a0commerce\u00a0or\u00a0\n business.\u00a0\n\n 7.9. It\u00a0is\u00a0further\u00a0submitted\u00a0by\u00a0Shri\u00a0Soparkar,\u00a0learned\u00a0Senior\u00a0\n\n Page 12 of 57\n\nHC-NIC Page 12 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n\n\n\n Advocate\u00a0 \u00a0for\u00a0the\u00a0assessee\u00a0that\u00a0by\u00a0impugned\u00a0judgment\u00a0and\u00a0order\u00a0\n the\u00a0learned\u00a0ITAT\u00a0has\u00a0held\u00a0that\u00a0activities\u00a0carried\u00a0on\u00a0by\u00a0the\u00a0assessee\u00a0\n in\u00a0the\u00a0nature\u00a0of\u00a0trade,\u00a0commerce\u00a0or\u00a0business\u00a0on\u00a0one\u00a0of\u00a0the\u00a0ground\u00a0\n that \u00a0 the \u00a0 assessee \u00a0 is \u00a0 collecting \u00a0 cess \u00a0 or \u00a0 fees. \u00a0 It \u00a0 is \u00a0 vehemently\u00a0\n submitted \u00a0 by \u00a0 Shri \u00a0 Soparkar, \u00a0 learned \u00a0 Senior \u00a0 Advocate \u00a0 \u00a0 for \u00a0 the\u00a0\n assessee \u00a0 that \u00a0 the \u00a0 assessee \u00a0 cannot \u00a0 be \u00a0 denied \u00a0 the \u00a0 status \u00a0 of \u00a0 a\u00a0\n charitable\u00a0institution\u00a0on\u00a0the\u00a0ground\u00a0that\u00a0it\u00a0is\u00a0rendering\u00a0any\u00a0service\u00a0\n in\u00a0relation\u00a0to\u00a0any\u00a0trade,\u00a0commerce\u00a0or\u00a0business\u00a0for\u00a0a\u00a0case\u00a0or\u00a0a\u00a0fee\u00a0or\u00a0\n any\u00a0other\u00a0consideration\u00a0because\u00a0(1)\u00a0the\u00a0assessee\u00a0collects\u00a0regulatory\u00a0\n fee\u00a0for\u00a0the\u00a0objects\u00a0of\u00a0the\u00a0act\u00a0(2)there\u00a0is\u00a0no\u00a0element\u00a0of\u00a0profiteering\u00a0\n in\u00a0the\u00a0said\u00a0collection\u00a0(3)\u00a0no\u00a0services\u00a0are\u00a0rendered\u00a0to\u00a0any\u00a0particular\u00a0\n trade,\u00a0commerce\u00a0or\u00a0business.\u00a0In\u00a0support\u00a0of\u00a0his\u00a0above\u00a0submissions,\u00a0\n he\u00a0has\u00a0relied\u00a0upon\u00a0the\u00a0following\u00a0decisions\u00a0of\u00a0Delhi\u00a0High\u00a0Court.\n (1)\u00a0GSI\u00a0India\u00a0vs.\u00a0DGIT\u00a0reported\u00a0in\u00a0(2014)\u00a0360\u00a0ITR\u00a0138\u00a0(Delhi)\n (2) \u00a0 Indian \u00a0 Trade \u00a0 Promotion \u00a0 Organization \u00a0 vs. \u00a0 Director \u00a0 of\u00a0 Income\u00a0\n Tax\u00a0(Exemption)\u00a0reported\u00a0in\u00a0(2015)\u00a0371\u00a0ITR\u00a0333\u00a0(Delhi).\u00a0\n\n 7.10. \u00a0It\u00a0is\u00a0further\u00a0submitted\u00a0by\u00a0Shri\u00a0Soparkar,\u00a0learned\u00a0Senior\u00a0\n Advocate\u00a0\u00a0for\u00a0the\u00a0assessee\u00a0that\u00a0one\u00a0another\u00a0reason\u00a0assigned\u00a0by\u00a0the\u00a0\n learned \u00a0 Tribunal \u00a0 while \u00a0 holding \u00a0 that \u00a0 activities \u00a0 carried \u00a0 out \u00a0 by \u00a0 the\u00a0\n assessee\u00a0is\u00a0in\u00a0the\u00a0nature\u00a0of\u00a0trade,\u00a0commerce\u00a0or\u00a0business\u00a0is\u00a0that\u00a0the\u00a0\n assessee\u00a0is\u00a0selling\u00a0lands\u00a0by\u00a0public\u00a0auction.\u00a0It\u00a0is\u00a0submitted\u00a0that\u00a0while\u00a0\n holding\u00a0so,\u00a0learned\u00a0ITAT\u00a0has\u00a0not\u00a0properly\u00a0appreciated\u00a0the\u00a0fact\u00a0that\u00a0\n sale\u00a0of\u00a0land\u00a0by\u00a0the\u00a0assessee\u00a0is\u00a0in\u00a0the\u00a0mode\u00a0to\u00a0recover\u00a0the\u00a0cost\u00a0of\u00a0the\u00a0\n scheme\u00a0and\u00a0is\u00a0expressly\u00a0prescribed\u00a0under\u00a0Section\u00a040(3)(jj)(a)(iv)\u00a0\n r.w.s.\u00a040(3)(jj)(b)\u00a0of\u00a0the\u00a0Gujarat\u00a0Town\u00a0Planning\u00a0Act.\u00a0It\u00a0is\u00a0submitted\u00a0\n that\u00a0the\u00a0lands\u00a0are\u00a0sold\u00a0by\u00a0public\u00a0auction\u00a0as\u00a0mandated\u00a0in\u00a0catena\u00a0of\u00a0\n decisions\u00a0of\u00a0the\u00a0Hon'ble\u00a0Supreme\u00a0Court\u00a0as\u00a0well\u00a0as\u00a0this\u00a0Court\u00a0and\u00a0so\u00a0\n\n Page 13 of 57\n\nHC-NIC Page 13 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n\n\n\n as\u00a0to\u00a0avoid\u00a0any\u00a0allegation\u00a0of\u00a0favoritism\u00a0and\u00a0so\u00a0as\u00a0to\u00a0get\u00a0maximum\u00a0\n amount, \u00a0 which \u00a0 is \u00a0 required \u00a0 to \u00a0 be \u00a0 used \u00a0 only \u00a0 to \u00a0 carry \u00a0 out \u00a0 the\u00a0\n development\u00a0in\u00a0the\u00a0Urban\u00a0Development\u00a0Area.\u00a0It\u00a0is\u00a0submitted\u00a0that\u00a0\n while\u00a0selling\u00a0the\u00a0lands\u00a0by\u00a0auction\u00a0and\u00a0that\u00a0too\u00a0as\u00a0permitted\u00a0under\u00a0\n the \u00a0 provision \u00a0 of \u00a0 Town \u00a0 Planning \u00a0 Act \u00a0 there \u00a0 is \u00a0 no \u00a0 element \u00a0 of\u00a0\n profitering\u00a0but\u00a0it\u00a0is\u00a0only\u00a0for\u00a0recovery\u00a0of\u00a0cost\u00a0only.\u00a0It\u00a0is\u00a0submitted\u00a0\n that \u00a0 even \u00a0 the \u00a0 entire \u00a0 amount \u00a0 realized\u00a0 by \u00a0 selling\u00a0 the \u00a0 lands\u00a0 to\u00a0 the\u00a0\n extent\u00a0of\u00a015%\u00a0of\u00a0the\u00a0Urban\u00a0Development\u00a0Area,\u00a0is\u00a0required\u00a0to\u00a0be\u00a0\n used\u00a0by\u00a0the\u00a0assessee\u00a0only\u00a0to\u00a0carry\u00a0out\u00a0the\u00a0development\u00a0work\u00a0and\u00a0\n other\u00a0amenities\u00a0/\u00a0facilities\u00a0to\u00a0be\u00a0provided\u00a0like\u00a0road,\u00a0drainage,\u00a0street\u00a0\n light\u00a0etc.\u00a0It\u00a0is\u00a0submitted\u00a0that\u00a0therefore,\u00a0the\u00a0activities\u00a0carried\u00a0out\u00a0by\u00a0\n the\u00a0assessee\u00a0cannot\u00a0be\u00a0said\u00a0to\u00a0be\u00a0profitering\u00a0\u00a0and\u00a0/\u00a0or\u00a0in\u00a0the\u00a0nature\u00a0\n of \u00a0 trade, \u00a0 commercial \u00a0 or \u00a0 business. \u00a0 In \u00a0 support \u00a0 of \u00a0 his \u00a0 above\u00a0\n submission,\u00a0he\u00a0has\u00a0relied\u00a0upon\u00a0the\u00a0decision\u00a0of\u00a0the\u00a0Division\u00a0Bench\u00a0\n of\u00a0this\u00a0Court\u00a0in\u00a0the\u00a0case\u00a0of\u00a0Ahmedabad\u00a0Green\u00a0Belt\u00a0Khedut\u00a0Mandal\u00a0\n vs.\u00a0State\u00a0of\u00a0Gujarat\u00a0through\u00a0Secretary\u00a0reported\u00a0in\u00a02001(1)\u00a0GLR\u00a0888\u00a0\n (para\u00a037\u00a0&\u00a038(.\u00a0\n\n 7.11. It \u00a0 is \u00a0 submitted \u00a0 by \u00a0 Shri \u00a0 Soparkar, \u00a0 learned \u00a0 Senior\u00a0\n Advocate\u00a0for\u00a0the\u00a0assessee\u00a0that\u00a0by\u00a0permitting\u00a0the\u00a0AUDA\u00a0to\u00a0sell\u00a0the\u00a0\n plots \u00a0 that \u00a0 is \u00a0 on \u00a0 element \u00a0 of \u00a0 profiter \u00a0 has \u00a0 been \u00a0 negatived \u00a0 by \u00a0 the\u00a0\n Hon'ble \u00a0 Supreme \u00a0 Court \u00a0 in \u00a0 the \u00a0 case \u00a0 of \u00a0 Ahmedabad \u00a0 Municipal\u00a0\n Corporation \u00a0 and \u00a0 Another \u00a0 vs. \u00a0 \u00a0 Ahmedabad \u00a0 Green \u00a0 Belt \u00a0 Khedut\u00a0\n Mandal\u00a0reported\u00a0in\u00a0(2014)\u00a07\u00a0SCC\u00a0357.\n It\u00a0is\u00a0submitted\u00a0that\u00a0therefore,\u00a0also\u00a0the\u00a0activities\u00a0carried\u00a0out\u00a0by\u00a0\n the\u00a0assessee\u00a0cannot\u00a0be\u00a0said\u00a0to\u00a0be\u00a0in\u00a0the\u00a0nature\u00a0of\u00a0trade,\u00a0commerce\u00a0\n or\u00a0business,\u00a0which\u00a0can\u00a0take\u00a0away\u00a0the\u00a0assessee\u00a0from\u00a0the\u00a0purview\u00a0of\u00a0\n charitable\u00a0institution\u00a0/\u00a0charitable\u00a0purpose\u00a0as\u00a0per\u00a0Section\u00a02(15)\u00a0of\u00a0\n\n Page 14 of 57\n\nHC-NIC Page 14 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n\n\n\n the\u00a0Act.\u00a0\n\n 7.12. Shri\u00a0Soparkar,\u00a0learned\u00a0Senior\u00a0Advocate\u00a0for\u00a0the\u00a0assessee\u00a0\n has\u00a0relied\u00a0upon\u00a0the\u00a0\u00a0decision\u00a0of\u00a0the\u00a0Allahbad\u00a0High\u00a0Court\u00a0in\u00a0the\u00a0case\u00a0\n Commissioner \u00a0 of \u00a0 Income \u00a0 Tax, \u00a0 Luknow \u00a0 vs. \u00a0 Luknow \u00a0 Development\u00a0\n Authority\u00a0reported\u00a0in\u00a0(2013)\u00a038\u00a0Taxmann.\u00a0com\u00a0246\u00a0(All)and\u00a0the\u00a0\n decision\u00a0of\u00a0the\u00a0Rajasthan\u00a0High\u00a0\u00a0Court\u00a0in\u00a0the\u00a0case\u00a0of\u00a0Commissioner\u00a0\n of \u00a0 Income \u00a0 Tax \u00a0 I, \u00a0 Jodhpur \u00a0 vs. \u00a0 Jodhpur \u00a0 Development \u00a0 Authority,\u00a0\n Jodhpure\u00a0rendered\u00a0in\u00a0Tax\u00a0Appeal\u00a0No,\u00a063\u00a0of\u00a02012\u00a0by\u00a0which,\u00a0with\u00a0\n respect\u00a0to\u00a0other\u00a0development\u00a0authorities,\u00a0the\u00a0Courts\u00a0have\u00a0held\u00a0that\u00a0\n activities\u00a0carried\u00a0out\u00a0by\u00a0such\u00a0development\u00a0authority\u00a0cannot\u00a0be\u00a0said\u00a0\n to \u00a0 be \u00a0 in \u00a0 the \u00a0 nature \u00a0 of \u00a0 trade, \u00a0 commerce \u00a0 or \u00a0 business \u00a0 and \u00a0 their\u00a0\n activities\u00a0is\u00a0for\u00a0charitable\u00a0purpose\u00a0is\u00a0within\u00a0the\u00a0meaning\u00a0of\u00a0Section\u00a0\n 2(15) \u00a0 and \u00a0 therefore, \u00a0 all \u00a0 such \u00a0 development \u00a0 authorities \u00a0 shall \u00a0 be\u00a0\n entitled\u00a0to\u00a0exemption\u00a0/\u00a0deduction\u00a0under\u00a0Section\u00a011\u00a0of\u00a0the\u00a0Income\u00a0\n Tax\u00a0Act.\u00a0\n\n 7.13. \u00a0 It \u00a0 is \u00a0 submitted \u00a0 by \u00a0 Shri \u00a0 Soparkar, \u00a0 learned \u00a0 Senior\u00a0\n Advocate \u00a0 for \u00a0 the \u00a0 assessee \u00a0 that \u00a0 that \u00a0 even \u00a0 otherwise \u00a0 the \u00a0 reasons\u00a0\n assigned\u00a0by\u00a0the\u00a0learned\u00a0ITAT\u00a0in\u00a0the\u00a0impugned\u00a0judgment\u00a0and\u00a0order\u00a0\n and\u00a0while\u00a0holding\u00a0that\u00a0the\u00a0activities\u00a0carried\u00a0out\u00a0by\u00a0assessee\u00a0can\u00a0be\u00a0\n said \u00a0 to \u00a0 be \u00a0 trade, \u00a0 commerce \u00a0 or \u00a0 business \u00a0 are \u00a0 not \u00a0 germane. \u00a0 It \u00a0 is\u00a0\n submitted\u00a0that,\u00a0the\u00a0considering\u00a0the\u00a0object\u00a0and\u00a0purpose\u00a0for\u00a0which\u00a0\n AUDA\u00a0has\u00a0been\u00a0constituted\u00a0as\u00a0Urban\u00a0Development\u00a0Authority\u00a0and\u00a0\n considering \u00a0 the \u00a0 activities \u00a0 carried \u00a0 out \u00a0 by \u00a0 the \u00a0 assessee \u00a0 which \u00a0 is\u00a0\n statutory \u00a0in\u00a0nature\u00a0 and\u00a0 to\u00a0carry\u00a0out\u00a0 the\u00a0 development \u00a0as\u00a0per\u00a0the\u00a0\n Gujarat \u00a0 Town \u00a0 Planning \u00a0 Act, \u00a0 the \u00a0 activities \u00a0 carried \u00a0 out \u00a0 by \u00a0 the\u00a0\n assessee\u00a0cannot\u00a0be\u00a0said\u00a0to\u00a0be\u00a0in\u00a0the\u00a0nature\u00a0of\u00a0trade,\u00a0commerce\u00a0or\u00a0\n\n Page 15 of 57\n\nHC-NIC Page 15 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n\n\n\n business\u00a0and\u00a0therefore,\u00a0the\u00a0proviso\u00a0to\u00a0Section\u00a02(15)\u00a0of\u00a0the\u00a0Act\u00a0shall\u00a0\n not\u00a0be\u00a0applicable\u00a0and\u00a0therefore,\u00a0 \u00a0assessee\u00ad\u00a0AUDA\u00a0shall\u00a0be\u00a0entitled\u00a0\n to\u00a0exemption/\u00a0deduction\u00a0under\u00a0Section\u00a011\u00a0of\u00a0the\u00a0Act.\n\n Making\u00a0above\u00a0submissions\u00a0and\u00a0relying\u00a0upon\u00a0above\u00a0decisions,\u00a0\n it \u00a0 is \u00a0 requested \u00a0 to \u00a0 allow \u00a0 the \u00a0 present \u00a0 Appeals \u00a0 and \u00a0 held \u00a0 that \u00a0 the\u00a0\n activities\u00a0carried\u00a0out\u00a0by\u00a0the\u00a0assessee\u00a0cannot\u00a0be\u00a0said\u00a0to\u00a0be\u00a0in\u00a0the\u00a0\n nature \u00a0 of \u00a0 trade, \u00a0 commerce \u00a0 or \u00a0 business \u00a0 and\u00a0 therefore, \u00a0 proviso \u00a0 to\u00a0\n Section\u00a02(15)\u00a0of\u00a0the\u00a0Act\u00a0shall\u00a0not\u00a0be\u00a0applicable\u00a0and\u00a0activities\u00a0of\u00a0the\u00a0\n assessee\u00a0can\u00a0be\u00a0said\u00a0to\u00a0be\u00a0in\u00a0the\u00a0nature\u00a0of\u00a0public\u00a0utility\u00a0services\u00a0and\u00a0\n therefore,\u00a0can\u00a0be\u00a0said\u00a0to\u00a0be\u00a0charitable\u00a0purpose\u00a0within\u00a0the\u00a0meaning\u00a0\n of \u00a0 Section \u00a02(15)\u00a0 of \u00a0the\u00a0Act \u00a0and\u00a0 therefore, \u00a0 the \u00a0assessee \u00a0AUDA \u00a0is\u00a0\n entitled\u00a0to\u00a0exemption\u00a0/\u00a0deduction\u00a0under\u00a0Section\u00a011\u00a0of\u00a0the\u00a0Act\u00a0as\u00a0\n claimed.\u00a0\u00a0\n\n 8.0. All\u00a0these\u00a0submissions\u00a0are\u00a0vehemently\u00a0opposed\u00a0by\u00a0Shri\u00a0Manish\u00a0\n R\u00a0Bhatt,\u00a0learned\u00a0Senior\u00a0Advocate\u00a0for\u00a0the\u00a0Revenue.\u00a0\n\n 8.1. It\u00a0is\u00a0vehemently\u00a0submitted\u00a0by\u00a0Shri\u00a0Manish\u00a0R\u00a0Bhatt,\u00a0learned\u00a0\n Senior \u00a0 Advocate \u00a0 for \u00a0 the \u00a0 Revenue \u00a0 that \u00a0 in \u00a0 the \u00a0 facts \u00a0 and\u00a0\n circumstances\u00a0of\u00a0the\u00a0case\u00a0learned\u00a0Tribunal\u00a0has\u00a0rightly\u00a0held\u00a0that\u00a0the\u00a0\n activities \u00a0 of \u00a0 the \u00a0 appellant \u00a0 were \u00a0 in \u00a0 the \u00a0 nature \u00a0 of \u00a0 trade \u00a0 and\u00a0\n commerce \u00a0 and \u00a0 therefore, \u00a0 the \u00a0 activities \u00a0 cannot \u00a0 be \u00a0 said \u00a0 to \u00a0 be \u00a0 for\u00a0\n charitable\u00a0purpose\u00a0in\u00a0view\u00a0of\u00a0proviso\u00a0to\u00a0Section\u00a02(15)\u00a0of\u00a0the\u00a0Act.\u00a0\n\n 8.2. \u00a0 It\u00a0is\u00a0vehemently\u00a0submitted\u00a0by\u00a0Shri\u00a0Manish\u00a0R\u00a0Bhatt,\u00a0learned\u00a0\n Senior \u00a0 Advocate \u00a0 for \u00a0 the \u00a0 Revenue \u00a0 that \u00a0 the \u00a0main \u00a0 object \u00a0 of \u00a0 the\u00a0\n appellant\u00ad\u00a0assessee\u00a0is\u00a0contribution\u00a0towards\u00a0planned\u00a0and\u00a0controlled\u00a0\n\n Page 16 of 57\n\nHC-NIC Page 16 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n\n\n\n development \u00a0 for \u00a0 the \u00a0 entire \u00a0 urban \u00a0 development \u00a0 area \u00a0 and \u00a0 clearly\u00a0\n such \u00a0 activity \u00a0 falls \u00a0 under \u00a0 the \u00a0 category \u00a0 'advancement \u00a0 of \u00a0 general\u00a0\n public\u00a0utility'.\u00a0It\u00a0is\u00a0submitted\u00a0that\u00a0however,\u00a0when\u00a0the\u00a0activities\u00a0of\u00a0\n the\u00a0assessee\u00a0can\u00a0be\u00a0said\u00a0to\u00a0be\u00a0in\u00a0the\u00a0nature\u00a0of\u00a0trade,\u00a0commerce\u00a0and\u00a0\n business,\u00a0considering\u00a0the\u00a0proviso\u00a0to\u00a0Section\u00a02(15),\u00a0the\u00a0activities\u00a0of\u00a0\n the \u00a0 assessee \u00a0 cannot \u00a0 be \u00a0 said \u00a0 to \u00a0 be \u00a0 for \u00a0 charitable \u00a0 purpose \u00a0 and\u00a0\n therefore,\u00a0the\u00a0assessee\u00a0is\u00a0not\u00a0entitled\u00a0to\u00a0exemption\u00a0as\u00a0claimed.\u00a0\n\n 8.3. \u00a0 \u00a0It\u00a0is\u00a0vehemently\u00a0submitted\u00a0by\u00a0Shri\u00a0Manish\u00a0R\u00a0Bhatt,\u00a0learned\u00a0\n Senior \u00a0 Advocate \u00a0 for \u00a0 the \u00a0 Revenue \u00a0 that \u00a0 the \u00a0 Tribunal \u00a0 being \u00a0 a \u00a0 fact\u00a0\n finding\u00a0authority\u00a0has\u00a0given\u00a0following\u00a0findings\u00a0on\u00a0facts\u00a0in\u00a0its\u00a0order.\n (1). The\u00a0plots \u00a0of \u00a0land\u00a0 have\u00a0been\u00a0acquired\u00a0by\u00a0 the\u00a0Assessee\u00a0 at\u00a0 a\u00a0\n very\u00a0nominal\u00a0price\u00a0in\u00a0the\u00a0name\u00a0of\u00a0town\u00a0planning\u00a0scheme,\u00a0but\u00a0have\u00a0\n been\u00a0given\u00a0lease\u00a0at\u00a0a\u00a0very\u00a0high\u00a0premium\u00a0by\u00a0means\u00a0of\u00a0auction\u00a0to\u00a0the\u00a0\n highest\u00a0bidder.\u00a0\n (2). The\u00a0land\u00a0is\u00a0given\u00a0on\u00a0lease\u00a0not\u00a0even\u00a0at\u00a0its\u00a0jantri\u00a0rate\u00a0(stamp\u00a0\n value),\u00a0but\u00a0at\u00a0a\u00a0commercial/\u00a0market\u00a0rate.\u00a0This\u00a0virtue\u00a0of\u00a0the\u00a0land\u00a0\n transactions \u00a0 is \u00a0 very \u00a0 characteristic \u00a0 of \u00a0 commercial \u00a0 activity \u00a0 with \u00a0 a\u00a0\n profit\u00a0motive.\u00a0The\u00a0said\u00a0activity\u00a0of\u00a0the\u00a0Assessee\u00a0can\u00a0by\u00a0no\u00a0stretch\u00a0of\u00a0\n imagination\u00a0be\u00a0treated\u00a0as\u00a0charitable\u00a0activity\u00a0within\u00a0the\u00a0meaning\u00a0of\u00a0\n education, \u00a0 medical \u00a0 relief, \u00a0 relief \u00a0 of \u00a0 poor, \u00a0 and \u00a0 preservation \u00a0 of\u00a0\n environment\u00a0or\u00a0reservation\u00a0of\u00a0monuments.\n (3). The\u00a0plots\u00a0of\u00a0land\u00a0were\u00a0acquired\u00a0from\u00a0the\u00a0public\u00a0at\u00a0nominal\u00a0\n rates\u00a0and\u00a0sold\u00a0to\u00a0various\u00a0commercial\u00a0entities\u00a0at\u00a0market\u00a0rate,\u00a0and\u00a0\n this\u00a0systematic,\u00a0regular\u00a0and\u00a0organised\u00a0activity\u00a0indicates\u00a0that\u00a0AUDA\u00a0\n is \u00a0 involved \u00a0 in \u00a0 carrying \u00a0 on \u00a0 the \u00a0 activity \u00a0 which \u00a0 is \u00a0 in \u00a0 the \u00a0 nature \u00a0 of\u00a0\n trade,\u00a0commerce\u00a0or\u00a0business.\n\n Page 17 of 57\nHC-NIC Page 17 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n\n\n\n 8.4. It\u00a0is\u00a0submitted\u00a0that\u00a0since\u00a0the\u00a0assessee\u00a0sold\u00a0the\u00a0plots\u00a0of\u00a0land\u00a0at\u00a0\n a \u00a0 premium \u00a0 and \u00a0 at \u00a0 market \u00a0 rates, \u00a0 to \u00a0 various \u00a0 commercial \u00a0 entities,\u00a0\n with\u00a0a\u00a0motive\u00a0to\u00a0earn\u00a0profit,\u00a0the\u00a0learned\u00a0Tribunal\u00a0has\u00a0rightly\u00a0held\u00a0\n activities\u00a0of\u00a0the\u00a0assessee\u00a0as\u00a0a\u00a0business\u00a0transaction.\u00a0It\u00a0is\u00a0submitted\u00a0\n that\u00a0therefore,\u00a0\u00a0provisos\u00a0to\u00a0Sec\u00a02(15)\u00a0of\u00a0the\u00a0Act\u00a0\u00a0shall\u00a0be\u00a0squarely\u00a0\n applicable\u00a0to\u00a0the\u00a0facts\u00a0of\u00a0the\u00a0case.\n\n 8.5. \u00a0 It\u00a0is\u00a0vehemently\u00a0submitted\u00a0by\u00a0Shri\u00a0Manish\u00a0R\u00a0Bhatt,\u00a0learned\u00a0\n Senior\u00a0Advocate\u00a0for\u00a0the\u00a0Revenue\u00a0that\u00a0\u00a0two\u00a0major\u00a0characteristics\u00a0of\u00a0\n any \u00a0 business \u00a0 activity \u00a0 are \u00a0 profit \u00a0 motive \u00a0 and \u00a0 continuity. \u00a0 It \u00a0 is\u00a0\n submitted\u00a0that\u00a0from \u00a0the\u00a0 \u00a0purchase \u00a0and\u00a0sale \u00a0details\u00a0pertaining\u00a0to\u00a0\n A.Y.\u00a02007\u00ad\u00a008,\u00a02008\u00ad09\u00a0and\u00a02009\u00ad10,\u00a0it\u00a0is\u00a0clear\u00a0that\u00a0the\u00a0appellant\u00ad\u00a0\n assessee \u00a0 is \u00a0 engaged \u00a0 in \u00a0 the \u00a0 business \u00a0 of \u00a0 giving \u00a0 land \u00a0 on \u00a0 \u00a0 sale/\u00a0\n leasehold\u00a0at\u00a0a\u00a0high\u00a0premium\u00a0on\u00a0a\u00a0continuous\u00a0basis\u00a0and\u00a0on\u00a0profit\u00a0\n basis.\u00a0\n\n 8.6. It\u00a0is\u00a0further\u00a0submitted\u00a0by\u00a0Shri\u00a0Bhatt,\u00a0learned\u00a0Senior\u00a0Advocate\u00a0\n for\u00a0the\u00a0appellant\u00adassessee\u00a0that\u00a0the\u00a0decision\u00a0of\u00a0the\u00a0Division\u00a0Bench\u00a0of\u00a0\n this\u00a0Court\u00a0in\u00a0the\u00a0case\u00a0of\u00a0\u00a0Sabarmati\u00a0Ashram\u00a0Gaushala\u00a0Trust\u00a0(supra)\u00a0\n which\u00a0has\u00a0been\u00a0heavily\u00a0relied\u00a0upon\u00a0by\u00a0the\u00a0learned\u00a0counsel\u00a0for\u00a0the\u00a0\n assessee\u00a0is\u00a0\u00a0distinguishable\u00a0on\u00a0facts\u00a0and\u00a0therefore,\u00a0not\u00a0applicable\u00a0to\u00a0\n the \u00a0 facts \u00a0 of \u00a0 the \u00a0 present \u00a0 case. \u00a0 It \u00a0 is\u00a0 submitted \u00a0 that \u00a0 in \u00a0 the \u00a0 case \u00a0 of\u00a0\n Sabarmati\u00a0Ashram\u00a0Gaushala\u00a0Trust\u00a0(supra),\u00a0the\u00a0assessee\u00a0trust\u00a0was\u00a0\n created\u00a0with\u00a0object\u00a0to\u00a0breed\u00a0the\u00a0cattles\u00a0and\u00a0to\u00a0improve\u00a0the\u00a0quality\u00a0\n of\u00a0the\u00a0cows\u00a0and\u00a0oxen.\u00a0The\u00a0income\u00a0was\u00a0generated\u00a0by\u00a0the\u00a0assessee\u00a0\n from\u00a0the\u00a0activity\u00a0of\u00a0milk\u00a0production\u00a0and\u00a0sale\u00a0thereof.\u00a0The\u00a0assessee\u00a0\n was \u00a0 thus \u00a0 marketing \u00a0 products \u00a0 which \u00a0 were \u00a0incidental\u00a0 to \u00a0 its \u00a0 main\u00a0\n activity\u00a0of\u00a0improving\u00a0breeding\u00a0of\u00a0milch\u00a0cows,\u00a0and\u00a0therefore,\u00a0it\u00a0was\u00a0\n\n Page 18 of 57\n\nHC-NIC Page 18 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n\n\n\n held\u00a0as\u00a0non\u00adcommercial\u00a0activity.\u00a0It\u00a0is\u00a0submitted\u00a0that\u00a0therefore,\u00a0 \u00a0in\u00a0\n the \u00a0 aforesaid \u00a0 facts, \u00a0 the \u00a0 Division \u00a0 Bench \u00a0 has \u00a0 held \u00a0 that \u00a0\"merely\u00a0\n because\u00a0while\u00a0carrying\u00a0out\u00a0activities\u00a0for\u00a0the\u00a0purpose\u00a0of\u00a0achieving\u00a0\n objects\u00a0of\u00a0trust,\u00a0certain\u00a0incidental\u00a0surpluses\u00a0were\u00a0generated,\u00a0would\u00a0\n not\u00a0render\u00a0activity\u00a0in\u00a0nature\u00a0of\u00a0trade,\u00a0commerce\u00a0or\u00a0business\".\u00a0\u00a0It\u00a0is\u00a0\n submitted \u00a0 that \u00a0 in \u00a0 the \u00a0 aforesaid \u00a0 decision \u00a0 the \u00a0 Division \u00a0 Bench\u00a0\n considered \u00a0 the \u00a0 CBDT \u00a0 circular \u00a0 of \u00a011/2008 \u00a0 dated \u00a0 19\u00ad12\u00ad2008 \u00a0 in\u00a0\n which,\u00a0it\u00a0has\u00a0been\u00a0clarified\u00a0that\u00a0the\u00a0proviso\u00a0aims\u00a0to\u00a0attract\u00a0those\u00a0\n activities \u00a0 which \u00a0 are \u00a0 truly \u00a0 in \u00a0 the \u00a0 nature \u00a0 of \u00a0 trade, \u00a0 commerce \u00a0 or\u00a0\n business \u00a0 but \u00a0 are \u00a0 carried \u00a0 out \u00a0 under \u00a0 the \u00a0 guise \u00a0 of \u00a0 activities \u00a0 in \u00a0 the\u00a0\n nature\u00a0of\u00a0'public\u00a0utility'.\u00a0It\u00a0is\u00a0submitted\u00a0that\u00a0thereafter\u00a0after\u00a0taking\u00a0\n into \u00a0 account \u00a0 the \u00a0 object \u00a0 of \u00a0 the \u00a0 trust, \u00a0 which \u00a0 was \u00a0 admittedly\u00a0\n charitable\u00a0in\u00a0nature,\u00a0this\u00a0Court\u00a0has\u00a0held\u00a0that\u00a0surplus\u00a0generated\u00a0was\u00a0\n wholly \u00a0 secondary \u00a0 in \u00a0 the \u00a0 case \u00a0 of\u00a0 the \u00a0 assessee\u00ad \u00a0 Sabarmati \u00a0 Ashram\u00a0\n Gaushala\u00a0Trust\u00a0(supra)\u00a0and\u00a0that\u00a0\u00a0if\u00a0there\u00a0is\u00a0any\u00a0surplus\u00a0generated\u00a0\n at \u00a0 the \u00a0 end \u00a0 of \u00a0 the \u00a0 year, \u00a0 that \u00a0 by \u00a0 itself \u00a0 would \u00a0 not \u00a0 be \u00a0 the \u00a0 sole\u00a0\n consideration \u00a0 for \u00a0 judging \u00a0 whether \u00a0 any \u00a0 activity \u00a0 was \u00a0 trade,\u00a0\n commerce\u00a0or\u00a0business\u00a0particularly\u00a0if\u00a0generating\u00a0'surplus'\u00a0is\u00a0wholly\u00a0\n incidental\u00a0to\u00a0the\u00a0principal\u00a0activities\u00a0of\u00a0the\u00a0trust;\u00a0which\u00a0is\u00a0otherwise\u00a0\n for\u00a0general\u00a0public\u00a0utility,\u00a0and\u00a0therefore,\u00a0of\u00a0charitable\u00a0nature.\u00a0\n It\u00a0is\u00a0submitted\u00a0that\u00a0in\u00a0the\u00a0present\u00a0case\u00a0the\u00a0principal\u00a0source\u00a0of\u00a0\n receipts \u00a0 is \u00a0 akin \u00a0 to \u00a0 a \u00a0 real \u00a0 estate \u00a0 developer. \u00a0 It \u00a0 is \u00a0 submitted \u00a0 that\u00a0\n learned \u00a0 Tribunal \u00a0 in \u00a0 the \u00a0 impugned \u00a0 judgment \u00a0 and \u00a0 order \u00a0 has\u00a0\n discussed\u00a0the\u00a0above\u00a0and\u00a0brought\u00a0out\u00a0this\u00a0fact\u00a0in\u00a0great\u00a0detail\u00a0that\u00a0\n the \u00a0 assessee \u00a0 functions \u00a0 as \u00a0 an \u00a0 effective \u00a0 and \u00a0 efficient \u00a0 real \u00a0 estate\u00a0\n development\u00a0entity\u00a0with\u00a0a\u00a0view\u00a0to\u00a0maximize\u00a0profit.\u00a0It\u00a0is\u00a0submitted\u00a0\n that \u00a0 some \u00a0 of \u00a0 the \u00a0 activities \u00a0 of \u00a0 assessee \u00a0 may \u00a0 be \u00a0 those \u00a0 related \u00a0 to\u00a0\n Governance, \u00a0 but \u00a0 a \u00a0 large \u00a0 number \u00a0 of \u00a0 activities \u00a0 and \u00a0 the \u00a0 receipts\u00a0\n\n Page 19 of 57\n\nHC-NIC Page 19 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n\n\n\n generated\u00a0by\u00a0them\u00a0were\u00a0from\u00a0activities\u00a0which\u00a0were\u00a0in\u00a0the\u00a0\"nature\u00a0\n of\u00a0trade,\u00a0commerce\u00a0and\u00a0business.\"\n\n 8.7. It\u00a0is\u00a0further\u00a0submitted\u00a0by\u00a0Shri\u00a0Bhatt,\u00a0learned\u00a0Senior\u00a0Advocate\u00a0\n for\u00a0the\u00a0revenue\u00a0that\u00a0even\u00a0from\u00a0the\u00a0income\u00a0expenditure\u00a0account\u00a0and\u00a0\n Balance\u00a0sheet\u00a0 \u00a0it\u00a0is\u00a0founed\u00a0that\u00a0the\u00a0appellant\u00a0was\u00a0engaged\u00a0in\u00a0the\u00a0\n business\u00a0of\u00a0development,\u00a0leasing\u00a0out\u00a0and\u00a0sale\u00a0of\u00a0plots\u00a0of\u00a0land.\u00a0It\u00a0is\u00a0\n submitted \u00a0 that \u00a0 the \u00a0 plots \u00a0 of \u00a0 land \u00a0 have \u00a0 been \u00a0 acquired \u00a0 by \u00a0 the\u00a0\n appellant\u00a0at\u00a0a\u00a0very\u00a0nominal\u00a0price\u00a0and\u00a0have\u00a0been\u00a0given\u00a0on\u00a0lease\u00a0or\u00a0\n sold\u00a0at\u00a0a\u00a0very\u00a0high\u00a0premium.\u00a0It\u00a0is\u00a0submitted\u00a0that\u00a0the\u00a0sale\u00a0of\u00a0plots\u00a0of\u00a0\n land \u00a0 were \u00a0 also \u00a0affected \u00a0 by \u00a0 conducting \u00a0 auction \u00a0 after \u00a0 fixing \u00a0 base\u00a0\n price. \u00a0 That \u00a0 the \u00a0 assessee \u00a0 also \u00a0 charges \u00a0 for \u00a0 the \u00a0 services \u00a0 such \u00a0 as\u00a0\n providing\u00a0drainage,\u00a0charges\u00a0for\u00a0FSI,\u00a0charges\u00a0for\u00a0additional\u00a0Height\u00a0\n and\u00a0charges\u00a0for\u00a0betterment.\n\n 8.8. It\u00a0is\u00a0further\u00a0submitted\u00a0by\u00a0Shri\u00a0Bhatt,\u00a0learned\u00a0Senior\u00a0Advocate\u00a0\n for\u00a0the\u00a0Revenue\u00a0that\u00a0\u00a0the\u00a0business\u00a0model\u00a0of\u00a0the\u00a0assessee\u00a0has\u00a0been\u00a0\n aptly \u00a0been\u00a0 discussed\u00a0 by\u00a0 the\u00a0 Tribunal. \u00a0 It\u00a0 is\u00a0 submitted\u00a0 that\u00a0 \u00a0 main\u00a0\n excerpts\u00a0are\u00a0as\u00a0under:\n A. \"Whenever \u00a0 a \u00a0 town \u00a0 planning \u00a0 scheme \u00a0 is\u00a0 conceived, \u00a0 the \u00a0 land\u00a0\n belonging\u00a0to\u00a0various\u00a0persons/entities\u00a0are\u00a0put\u00a0into\u00a0a\u00a0common\u00a0pool,\u00a0\n and\u00a0thereafter,\u00a0the\u00a0scheme\u00a0in\u00a0a\u00a0planned\u00a0way\u00a0is\u00a0drawn.\u00a0\n B. 40%\u00a0of\u00a0the\u00a0land\u00a0is\u00a0to\u00a0be\u00a0taken\u00a0from\u00a0the\u00a0land\u00a0owners\u00a0and\u00a0the\u00a0\n same\u00a0is\u00a0to\u00a0be\u00a0used\u00a0as\u00a0(i)\u00a0fifteen\u00a0per\u00a0cent\u00a0for\u00a0roads,\u00a0(ii)\u00a0five\u00a0per\u00a0cent\u00a0\n for\u00a0parks,\u00a0play\u00a0grounds,\u00a0gardens\u00a0and\u00a0open\u00a0space,\u00a0(iii)\u00a0five\u00a0per\u00a0cent\u00a0\n for \u00a0 social \u00a0 infrastructure \u00a0 such \u00a0 as \u00a0 school, \u00a0 dispensary, \u00a0 fire \u00a0 brigade,\u00a0\n public \u00a0 utility \u00a0 place \u00a0 as \u00a0 earmarked \u00a0 in \u00a0 the \u00a0 Draft \u00a0 Town \u00a0 Planning\u00a0\n Scheme,\u00a0and\u00a0(iv)\u00a0fifteen\u00a0per\u00a0cent\u00a0for\u00a0sale\u00a0by\u00a0appropriate\u00a0authority\u00a0\n\n Page 20 of 57\n\nHC-NIC Page 20 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n\n\n\n for\u00a0 residential, \u00a0commercial\u00a0 or\u00a0industrial \u00a0use\u00a0 depending\u00a0upon\u00a0 the\u00a0\n nature \u00a0 of \u00a0 development. \u00a0 15% \u00a0 land \u00a0 would \u00a0 vest \u00a0 in \u00a0 the \u00a0 Assessee,\u00a0\n i.e.AUDA.\n C. However, \u00a0 such \u00a0 land \u00a0 of \u00a0 15% \u00a0 of \u00a0 share \u00a0 retained \u00a0 out \u00a0 of \u00a0 40%\u00a0\n appropriated\u00a0from\u00a0the\u00a0original\u00a0land\u00a0owners\u00a0is\u00a0not\u00a0free\u00a0of\u00a0cost.\u00a0The\u00a0\n cost\u00a0is\u00a0incurrence\u00a0of\u00a0expenditure\u00a0on\u00a0the\u00a0development\u00a0of\u00a0remaining\u00a0\n 85%\u00a0of\u00a0the\u00a0land.\u00a0The\u00a0land\u00a0owners\u00a0have\u00a0sacrificed\u00a0their\u00a040%\u00a0land,\u00a0\n the \u00a0 potentiality \u00a0 of \u00a0 60% \u00a0 would \u00a0 increase. \u00a0 In \u00a0 other \u00a0 words,\u00a0\n relinquishment \u00a0 value, \u00a0 representing \u00a0 40% \u00a0 of \u00a0 the \u00a0 land \u00a0 by \u00a0 the \u00a0 land\u00a0\n owners,\u00a0would\u00a0be\u00a0compensated\u00a0by\u00a0enhancing\u00a0the\u00a0value\u00a0of\u00a0balance\u00a0\n 60%\u00a0land\u00a0being\u00a0developed\u00a0land\u00a0in\u00a0a\u00a0township.\n D. As \u00a0 per \u00a0 Section \u00a0 52(3) \u00a0 of \u00a0 the \u00a0 T.P. \u00a0 Act, \u00a0 the \u00a0 Town \u00a0 Planning\u00a0\n Officer\u00a0shall\u00a0estimate\u00a0the\u00a0cost\u00a0of\u00a0this\u00a0scheme\u00a0(development)\u00a0and\u00a0\n the\u00a0contribution\u00a0to\u00a0be\u00a0levied\u00a0on\u00a0each\u00a0owner\u00a0of\u00a0the\u00a0plan\u00a0is\u00a0to\u00a0be\u00a0\n notified.\u00a0It\u00a0is\u00a0wrong\u00a0to\u00a0suggest\u00a0that\u00a0the\u00a0Assessee\u00a0got\u00a0the\u00a0land\u00a0free\u00a0of\u00a0\n cost.\u00a0The\u00a0cost\u00a0of\u00a0land\u00a0is\u00a0embedded\u00a0in\u00a0the\u00a0expenditure\u00a0required\u00a0to\u00a0\n be\u00a0incurred\u00a0on\u00a0development\u00a0of\u00a0scheme.\n E. Supposing, \u00a0 after \u00a0 notification \u00a0 of \u00a0 the \u00a0 scheme, \u00a0 the \u00a0 law \u00a0 had\u00a0\n stipulated \u00a0 and \u00a0 the \u00a0 government \u00a0 had \u00a0 decided \u00a0 to \u00a0 outsource \u00a0 the\u00a0\n development\u00a0work\u00a0to\u00a0a\u00a0third\u00a0party\u00a0(a\u00a0infrastructure\u00a0company\u00a0with\u00a0\n similar\u00a0rights\u00a0and\u00a0entitlement\u00a0as\u00a0given\u00a0to\u00a0AUDA),\u00a0could\u00a0it\u00a0be\u00a0urged\u00a0\n that \u00a0 infrastructure \u00a0 development \u00a0 company \u00a0 doing \u00a0 similar \u00a0 work, \u00a0 as\u00a0\n AUDA\u00a0was\u00a0not\u00a0engaged\u00a0in\u00a0the\u00a0activity\u00a0in\u00a0the\u00a0nature\u00a0of\u00a0trade?\u00a0\n F. The\u00a0most\u00a0crucial\u00a0factor\u00a0which\u00a0proves\u00a0that\u00a0the\u00a0Assessee\u00a0has\u00a0\n been\u00a0working\u00a0with\u00a0profit\u00a0motive\u00a0is\u00a0that\u00a0the\u00a0Town\u00a0Planning\u00a0Officer\u00a0\n is\u00a0well\u00a0aware\u00a0about\u00a0the\u00a0cost\u00a0of\u00a0development.\u00a0In\u00a0spite\u00a0of\u00a0that\u00a0the\u00a0\n Assessee \u00a0 has \u00a0 never \u00a0 sold \u00a0 the \u00a0 15% \u00a0 of \u00a0 the \u00a0 land \u00a0 on \u00a0 cost \u00a0 basis. \u00a0 For\u00a0\n example, \u00a0 the\u00a0 Assessee\u00a0 has\u00a0 developed \u00a0 1500 \u00a0 sq.yards\u00a0 of\u00a0 land\u00a0 in \u00a0 a\u00a0\n\n Page 21 of 57\n\nHC-NIC Page 21 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n\n\n\n scheme,\u00a0the\u00a0cost\u00a0to\u00a0develop\u00a0a\u00a0scheme\u00a0is\u00a0Rs.60000/\u00ad.\u00a0The\u00a0Assessee\u00a0\n should\u00a0have\u00a0allotted\u00a015%\u00a0of\u00a01500\u00a0sq.yards\u00a0of\u00a0land\u00a0at\u00a0the\u00a0rate\u00a0of\u00a0\n 400\u00a0per\u00a0sq.yards\u00a0to\u00a0the\u00a0needy\u00a0persons/institutions\u00a0by\u00a0draw\u00a0of\u00a0lots.\u00a0\n Instead\u00a0of\u00a0this,\u00a0the\u00a0Assessee\u00a0has\u00a0fixed\u00a0a\u00a0base\u00a0price,\u00a0and\u00a0thereafter,\u00a0\n put\u00a0the\u00a0land\u00a0on\u00a0auction.\u00a0It\u00a0allotted\u00a0the\u00a0land\u00a0to\u00a0the\u00a0highest\u00a0bidder.\u00a0It\u00a0\n has\u00a0sold\u00a0the\u00a0land\u00a0keeping\u00a0in\u00a0view\u00a0the\u00a0profit\u00a0in\u00a0mind.\n G. It \u00a0 may \u00a0 be \u00a0 noted\u00a0 that \u00a0 huge \u00a0 profits \u00a0 have \u00a0 been \u00a0 made \u00a0 by \u00a0 the\u00a0\n Assessee \u00a0 in \u00a0 these \u00a0 years \u00a0 out \u00a0 of \u00a0 the \u00a0 above\u00adsaid \u00a0 real \u00a0 estate\u00a0\n development\u00a0activity.\u00a0If\u00a0that\u00a0be\u00a0so,\u00a0where\u00a0is\u00a0the\u00a0element\u00a0of\u00a0charity?\u00a0\n The\u00a0activity\u00a0of\u00a0developing\u00a0roads,\u00a0park\u00a0or\u00a0laying\u00a0of\u00a0sewerage\u00a0land\u00a0\n are \u00a0 not \u00a0 to \u00a0 be \u00a0 seen \u00a0 representing \u00a0 a \u00a0 charitable \u00a0 act \u00a0 as \u00a0 the \u00a0 assessee\u00a0\n levies\u00a0charges\u00a0for\u00a0their\u00a0use\u00a0from\u00a0the\u00a0plot\u00a0owners.\u00a0Moreover,\u00a0it\u00a0has\u00a0\n claimed\u00a0depreciation\u00a0on\u00a0these\u00a0assets\u00a0on\u00a0business\u00a0lines,\u00a0and\u00a0if\u00a0an\u00a0\n independent\u00a0infrastructure\u00a0company\u00a0would\u00a0be\u00a0given\u00a0such\u00a0rights,\u00a0it\u00a0\n could\u00a0not\u00a0be\u00a0held\u00a0that\u00a0the\u00a0same\u00a0is\u00a0for\u00a0charitable\u00a0purposes.\u00a0These\u00a0\n are\u00a0just\u00a0to\u00a0demonstrate\u00a0that\u00a0the\u00a0Assessee\u00a0shall\u00a0perform\u00a0the\u00a0activity\u00a0\n of\u00a0advancement\u00a0of\u00a0any\u00a0other\u00a0objects\u00a0of\u00a0general\u00a0public\u00a0utility.\u00a0But\u00a0\n auction \u00a0 of \u00a0 land \u00a0 to \u00a0 the \u00a0 highest \u00a0 bidder \u00a0 is \u00a0 an \u00a0 activity, \u00a0 which \u00a0 is\u00a0\n specifically, \u00a0 keeping \u00a0 in \u00a0 view, \u00a0 the \u00a0 profit \u00a0 in \u00a0 mind \u00a0 and \u00a0 the \u00a0 levy \u00a0 of\u00a0\n cess/charges/fees \u00a0 are \u00a0 designed \u00a0 in \u00a0 lines \u00a0 of \u00a0 an \u00a0 professional \u00a0 and\u00a0\n business\u00a0oriented\u00a0infrastructure\u00a0development\u00a0real\u00a0estate\u00a0entity.\n H. It\u00a0may\u00a0be\u00a0noted\u00a0that\u00a0there\u00a0are\u00a0surplus\u00a0and\u00a0reserves\u00a0which\u00a0are\u00a0\n continuously\u00a0swelling.\u00a0These\u00a0are\u00a0generated\u00a0by\u00a0the\u00a0Assessee\u00a0by\u00a0way\u00a0\n of\u00a0this\u00a0activity\u00a0sale/lease\u00a0of\u00a0land\u00a0and\u00a0charging\u00a0fees.\u00a0The\u00a0Assessee\u00a0\n has\u00a0not\u00a0been\u00a0charging\u00a0nominal\u00a0fees\u00a0or\u00a0selling\u00a0the\u00a0land\u00a0at\u00a0a\u00a0nominal\u00a0\n rate.\u00a0It\u00a0has\u00a0been\u00a0making\u00a0money\u00a0by\u00a0putting\u00a0the\u00a0land\u00a0on\u00a0auction\u00a0after\u00a0\n taking\u00a0a\u00a0reserve\u00a0price.\u00a0This\u00a0activity\u00a0cannot\u00a0be\u00a0said\u00a0to\u00a0be\u00a0a\u00a0charitable\u00a0\n activity.\n\n Page 22 of 57\nHC-NIC Page 22 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n\n\n\n\n 8.9. It \u00a0 is \u00a0 submitted \u00a0 that \u00a0 having \u00a0 noted \u00a0 the \u00a0 above \u00a0 facts \u00a0 \u00a0 and\u00a0\n activities\u00a0of\u00a0the\u00a0assessee\u00a0which\u00a0is\u00a0in\u00a0the\u00a0nature\u00a0of\u00a0trade\u00a0or\u00a0business,\u00a0\n the\u00a0learned\u00a0Tribunal\u00a0has\u00a0rightly\u00a0applied\u00a0proviso\u00a0to\u00a0Section\u00a02(15)\u00a0of\u00a0\n the \u00a0 Act \u00a0 and \u00a0 has \u00a0 rightly \u00a0 held \u00a0 that \u00a0 the \u00a0 activities \u00a0 of \u00a0 the \u00a0 assessee\u00a0\n cannot\u00a0be\u00a0said\u00a0to\u00a0be\u00a0\"charitable\u00a0purpose\".\n\n 8.10. It \u00a0 is \u00a0 further \u00a0 submitted \u00a0 that \u00a0 by \u00a0 Shri \u00a0 Bhatt, \u00a0 learned \u00a0 Senior\u00a0\n Advocate \u00a0 for \u00a0 the \u00a0 Revenue \u00a0 that \u00a0 it \u00a0 is \u00a0 true \u00a0 that \u00a0 the \u00a0 assessee \u00a0 has\u00a0\n helped \u00a0 in \u00a0 planned \u00a0 development \u00a0 in \u00a0 vicinity \u00a0 of \u00a0 Ahmedabad. \u00a0 \u00a0 It \u00a0 is\u00a0\n submitted \u00a0 that \u00a0 however \u00a0 if \u00a0 a \u00a0 private \u00a0 developer \u00a0 would \u00a0 have \u00a0 been\u00a0\n given\u00a0the\u00a0same\u00a0mandate\u00a0by\u00a0the\u00a0government,\u00a0it\u00a0would\u00a0have\u00a0done\u00a0\n equally\u00a0better.\u00a0It\u00a0is\u00a0submitted\u00a0that\u00a0the\u00a0assessee\u00a0is\u00a0also\u00a0required\u00a0to\u00a0\n make\u00a0a\u00a0planned\u00a0development\u00a0of\u00a0the\u00a0city\u00a0under\u00a0a\u00a0scheme\u00a0approved\u00a0\n by\u00a0the\u00a0State\u00a0Government.\u00a0It\u00a0is\u00a0\u00a0creating\u00a0a\u00a0number\u00a0of\u00a0infrastructure\u00a0\n facilities \u00a0 and \u00a0 public \u00a0 utility \u00a0 services \u00a0 are \u00a0 being \u00a0 rendered. \u00a0 It \u00a0 is\u00a0\n submitted\u00a0that\u00a0these\u00a0services\u00a0are\u00a0also\u00a0being\u00a0provided\u00a0for\u00a0a\u00a0fee\u00a0or\u00a0\n consideration.\u00a0It\u00a0is\u00a0submitted\u00a0that\u00a0in\u00a0the\u00a0final\u00a0scheme\u00a0of\u00a0things,\u00a0the\u00a0\n Authority\u00a0does\u00a0incur\u00a0a\u00a0cost\u00a0for\u00a0such\u00a0land\u00a0which\u00a0may\u00a0be\u00a0adjusted\u00a0\n against\u00a0the\u00a0recoveries\u00a0due\u00a0to\u00a0the\u00a0assessee\u00a0or\u00a0against\u00a0the\u00a0amount\u00a0\n payable\u00a0for\u00a0the\u00a0area\u00a0by\u00a0way\u00a0of\u00a0compensation.\u00a0It\u00a0is\u00a0submitted\u00a0that\u00a0\n the\u00a0mode\u00a0of\u00a0payment\u00a0of\u00a0cost\u00a0of\u00a0acquisition\u00a0whether\u00a0by\u00a0cash\u00a0or\u00a0by\u00a0\n way\u00a0of\u00a0adjustment\u00a0against\u00a0the\u00a0value\u00a0of\u00a0final\u00a0plot\u00a0to\u00a0be\u00a0allotted\u00a0to\u00a0\n the\u00a0original\u00a0owners\u00a0will\u00a0not\u00a0alter\u00a0the\u00a0fact\u00a0that\u00a0the\u00a0land\u00a0is\u00a0acquired\u00a0\n for\u00a0a\u00a0cost.\u00a0It\u00a0is\u00a0submitted\u00a0that\u00a0by\u00a0virtue\u00a0of\u00a0the\u00a0provisions\u00a0of\u00a0the\u00a0\n Town\u00a0Planning\u00a0Act,\u00a0 \u00a015%\u00a0of\u00a0the\u00a0total\u00a0notified\u00a0area\u00a0is\u00a0sold\u00a0by\u00a0the\u00a0\n appellant \u00a0 and \u00a0 from \u00a0 such \u00a0 sale \u00a0 huge \u00a0 profits \u00a0 are \u00a0 derived. \u00a0 It \u00a0 is\u00a0\n submitted\u00a0that\u00a0the\u00a0\u00a0acquisition\u00a0and\u00a0sale\u00a0of\u00a0the\u00a0landa\u00a0is\u00a0in\u00a0the\u00a0nature\u00a0\n\n Page 23 of 57\n\nHC-NIC Page 23 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n\n\n\n of\u00a0a\u00a0trade\u00a0or\u00a0business\u00a0and\u00a0the\u00a0activity\u00a0is\u00a0not\u00a0different\u00a0from\u00a0a\u00a0normal\u00a0\n purchase\u00a0or\u00a0sale\u00a0activity\u00a0by\u00a0a\u00a0real\u00a0estate\u00a0developer.\u00a0\n\n 8.11. \u00a0It\u00a0is\u00a0further\u00a0submitted\u00a0by\u00a0Shri\u00a0Bhatt,\u00a0learned\u00a0Senior\u00a0Advocate\u00a0\n for \u00a0 the \u00a0 Revenue \u00a0 that \u00a0 as \u00a0 can \u00a0 be \u00a0 seen \u00a0 from \u00a0 the \u00a0 financial \u00a0 of \u00a0 the\u00a0\n assessee,\u00a0 \u00a0the\u00a0cost\u00a0 \u00a0for\u00a0the\u00a0land\u00a0has\u00a0been\u00a0incurred\u00a0and\u00a0has\u00a0been\u00a0\n capitalized\u00a0as\u00a0cost\u00a0of\u00a0acquisition.\u00a0That\u00a0the\u00a0said\u00a0practice\u00a0\u00a0is\u00a0followed\u00a0\n from \u00a0year\u00a0 to\u00a0 year. \u00a0That\u00a0the\u00a0 assessee \u00a0has\u00a0become \u00a0 entitled\u00a0to\u00a0sell\u00a0\n 15%\u00a0of\u00a0the\u00a0land\u00a0by\u00a0virtue\u00a0of\u00a0the\u00a0provisions\u00a0of\u00a0the\u00a0Town\u00a0Planning\u00a0\n Scheme. \u00a0 That \u00a0 the \u00a0 said \u00a0 entitlement \u00a0 comes \u00a0 for \u00a0 a \u00a0 cost \u00a0 and \u00a0 has\u00a0\n resulted\u00a0in\u00a0huge\u00a0profits.\u00a0That\u00a0therefore,\u00a0the\u00a0activity\u00a0in\u00a0respect\u00a0of\u00a0\n 15%\u00a0of\u00a0the\u00a0land\u00a0sold\u00a0by\u00a0the\u00a0assessee,\u00a0thus,\u00a0is\u00a0in\u00a0the\u00a0nature\u00a0of\u00a0trade\u00a0\n or\u00a0business\u00a0and\u00a0therefore,\u00a0the\u00a0first\u00a0limb\u00a0of\u00a0proviso\u00a0to\u00a0Section\u00a02(15)\u00a0\n of\u00a0the\u00a0Act\u00a0is\u00a0satisfied.\u00a0It\u00a0is\u00a0submitted\u00a0that\u00a0every\u00a0\u00a0part\u00a0of\u00a0the\u00a0cost\u00a0of\u00a0\n development \u00a0 is \u00a0 recovered \u00a0 from \u00a0 the \u00a0 owners \u00a0 of \u00a0 the \u00a0 plots \u00a0 of \u00a0 land.\u00a0\n That\u00a0the\u00a0amount\u00a0of\u00a0final\u00a0compensation\u00a0is\u00a0determined\u00a0after\u00a0making\u00a0\n adjustment \u00a0 of \u00a0 the \u00a0 development \u00a0 cost. \u00a0 That \u00a0 all \u00a0 \u00a0 kinds \u00a0 of \u00a0 civic\u00a0\n amenities/services\u00a0that\u00a0are\u00a0being\u00a0provided\u00a0are\u00a0not\u00a0free\u00a0but\u00a0for\u00a0a\u00a0\n cost.\u00a0It\u00a0is\u00a0submitted\u00a0that\u00a0therefore,\u00a0even\u00a0second\u00a0limb\u00a0of\u00a0the\u00a0proviso\u00a0\n to\u00a0section\u00a02(15)\u00a0is\u00a0also\u00a0satisfied..\u00a0\n\n 8.12. \u00a0It\u00a0is\u00a0further\u00a0submitted\u00a0by\u00a0Shri\u00a0Bhatt,\u00a0learned\u00a0Senior\u00a0Advocate\u00a0\n for\u00a0the\u00a0Revenue\u00a0that\u00a0suppose,\u00a0after\u00a0notification\u00a0of\u00a0the\u00a0scheme,\u00a0the\u00a0\n law\u00a0had\u00a0stipulated\u00a0and\u00a0the\u00a0government\u00a0had\u00a0decided\u00a0to\u00a0outsource\u00a0\n the \u00a0 development \u00a0 work \u00a0 to \u00a0 a\u00a0 third \u00a0 party \u00a0 \u00ad \u00a0 infrastructure \u00a0 company\u00a0\n with\u00a0similar\u00a0rights\u00a0and\u00a0the\u00a0entitlements\u00a0as\u00a0given\u00a0to\u00a0AUDA,\u00a0could\u00a0it\u00a0\n be\u00a0urged\u00a0that\u00a0the\u00a0Infrastructure\u00a0Development\u00a0Company\u00a0doing\u00a0the\u00a0\n same \u00a0 work \u00a0 as \u00a0 AUDA \u00a0 is \u00a0 not \u00a0 engaged \u00a0 in \u00a0 activity \u00a0 in \u00a0 the \u00a0 nature \u00a0 of\u00a0\n\n Page 24 of 57\n\nHC-NIC Page 24 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n\n\n\n trade\u00a0or\u00a0business?\u00a0It\u00a0is\u00a0submitted\u00a0that\u00a0it\u00a0would\u00a0have\u00a0been\u00a0definitely\u00a0\n constituted\u00a0as\u00a0its\u00a0business\u00a0income.\u00a0It\u00a0is\u00a0submitted\u00a0that\u00a0therefore,\u00a0it\u00a0\n is\u00a0\u00a0then,\u00a0not\u00a0possible\u00a0to\u00a0urge\u00a0otherwise\u00a0to\u00a0suggest\u00a0that\u00a0the\u00a0activity\u00a0is\u00a0\n not\u00a0in\u00a0the\u00a0nature\u00a0of\u00a0trade\u00a0or\u00a0business.\u00a0It\u00a0is\u00a0submitted\u00a0that\u00a0nature\u00a0of\u00a0\n the \u00a0 activities \u00a0 of \u00a0 the \u00a0 assessee \u00a0 \u00a0 are \u00a0 no \u00a0 different \u00a0 from \u00a0 that \u00a0 of \u00a0 a\u00a0\n developer\u00a0of\u00a0a\u00a0real\u00a0estate.\u00a0It\u00a0is\u00a0submitted\u00a0that\u00a0 \u00a0difference\u00a0in\u00a0the\u00a0\n scale\u00a0of\u00a0operation\u00a0or\u00a0the\u00a0mode\u00a0of\u00a0recovery\u00a0or\u00a0degree\u00a0of\u00a0profits\u00a0or\u00a0\n how \u00a0 such \u00a0 profits \u00a0 are \u00a0 utilised \u00a0 would \u00a0 not \u00a0 alter \u00a0 the \u00a0 nature \u00a0 of \u00a0 the\u00a0\n activity.\u00a0\n\n 8.13. t\u00a0is\u00a0further\u00a0submitted\u00a0by\u00a0Shri\u00a0Bhatt,\u00a0learned\u00a0Senior\u00a0Advocate\u00a0\n for \u00a0 the \u00a0 Revenue \u00a0 that \u00a0 the \u00a0 object \u00a0 of \u00a0 the \u00a0 proper \u00a0 development \u00a0 or\u00a0\n redevelopment\u00a0of\u00a0any\u00a0urban\u00a0area\u00a0is\u00a0of\u00a0the\u00a0state\u00a0government\u00a0and\u00a0\n the\u00a0choice\u00a0of\u00a0either\u00a0constituting\u00a0an\u00a0authority\u00a0for\u00a0the\u00a0development\u00a0\n or \u00a0 entrusting \u00a0 it \u00a0 to \u00a0 a \u00a0 third \u00a0 party \u00a0 is \u00a0 of \u00a0 the \u00a0 Government. \u00a0 It \u00a0 is\u00a0\n submitted\u00a0that\u00a0the\u00a0object\u00a0of\u00a0the\u00a0urban\u00a0development\u00a0is\u00a0of\u00a0the\u00a0State\u00a0\n Government.\u00a0It\u00a0is\u00a0submitted\u00a0that\u00a0the\u00a0Authority\u00a0is\u00a0only\u00a0carrying\u00a0out\u00a0\n and\u00a0executing\u00a0the\u00a0state's\u00a0object.\u00a0It\u00a0is\u00a0submitted\u00a0that\u00a0there\u00a0are\u00a0many\u00a0\n activities \u00a0 in \u00a0 the \u00a0 nature \u00a0 of \u00a0 infrastructure \u00a0 development \u00a0 like \u00a0 roads,\u00a0\n power,\u00a0housing,\u00a0etc\u00a0where\u00a0the\u00a0government,\u00a0instead\u00a0of\u00a0constituting\u00a0\n an \u00a0 authority, \u00a0 enters \u00a0 into \u00a0 agreement \u00a0 with \u00a0 Infrastructure\u00a0\n Development \u00a0 companies. \u00a0 It \u00a0 is \u00a0 submitted \u00a0 that \u00a0 these \u00a0 private\u00a0\n companies\u00a0are\u00a0allowed\u00a0to\u00a0recover\u00a0their\u00a0cost\u00a0and\u00a0earn\u00a0profits\u00a0as\u00a0a\u00a0\n concessionaires\u00a0or\u00a0the\u00a0Govt.\u00a0may\u00a0also\u00a0make\u00a0direct\u00a0payments.\u00a0It\u00a0is\u00a0\n submitted\u00a0that\u00a0the\u00a0income\u00a0in\u00a0all\u00a0such\u00a0cases\u00a0would\u00a0undoubtedly\u00a0be\u00a0\n assessed\u00a0on\u00a0profits\u00a0from\u00a0business.\u00a0It\u00a0is\u00a0submitted\u00a0that\u00a0the\u00a0mere\u00a0fact\u00a0\n that\u00a0the\u00a0same\u00a0activity\u00a0is\u00a0done\u00a0by\u00a0an\u00a0instrumentality\u00a0of\u00a0the\u00a0state\u00a0will\u00a0\n not \u00a0 alter \u00a0 the \u00a0 character \u00a0 of \u00a0 the \u00a0 activity. \u00a0 It \u00a0 is \u00a0 submitted \u00a0 that \u00a0 the\u00a0\n\n Page 25 of 57\n\nHC-NIC Page 25 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n\n\n\n activity\u00a0will\u00a0still\u00a0be\u00a0in\u00a0the\u00a0nature\u00a0of\u00a0business\u00a0or\u00a0trade.\n\n 8.14. It \u00a0 is \u00a0 further \u00a0 submitted \u00a0 that \u00a0 the \u00a0 requirement \u00a0 of \u00a0 the\u00a0\n provisions\u00a0is\u00a0not\u00a0that\u00a0there\u00a0should\u00a0be\u00a0a\u00a0business\u00a0per\u00a0se,\u00a0but\u00a0the\u00a0only\u00a0\n requirement\u00a0is\u00a0that\u00a0the\u00a0activity\u00a0is\u00a0in\u00a0the\u00a0nature\u00a0of\u00a0business\u00a0or\u00a0trade.\u00a0\n The\u00a0word\u00a0\"Business\"\u00a0as\u00a0defined\u00a0in\u00a0section\u00a02(13)\u00a0is\u00a0of\u00a0wide\u00a0import\u00a0\n and\u00a0would\u00a0cover\u00a0the\u00a0activities\u00a0of\u00a0the\u00a0appellant.\u00a0It\u00a0is\u00a0submitted\u00a0that\u00a0\n besides,\u00a0the\u00a0condition\u00a0stipulated\u00a0in\u00a0the\u00a0Proviso\u00a0to\u00a0section\u00a02(15)\u00a0is\u00a0\n not\u00a0the\u00a0carrying\u00a0of\u00a0business\u00a0per\u00a0se,\u00a0but\u00a0only\u00a0the\u00a0activity\u00a0being\u00a0in\u00a0the\u00a0\n nature \u00a0 of \u00a0 trade \u00a0 or \u00a0 business\u00a0 which\u00a0 further \u00a0 widens\u00a0 the \u00a0 width\u00a0 and\u00a0\n amplitude\u00a0of\u00a0the\u00a0proviso.\n It \u00a0 is \u00a0 submitted \u00a0 that \u00a0 the \u00a0 learned \u00a0 Tribunal \u00a0 in \u00a0 the \u00a0 impugned\u00a0\n judgment\u00a0and\u00a0order\u00a0which\u00a0discussing\u00a0at\u00a0length\u00a0that\u00a0an\u00a0activity\u00a0in\u00a0\n nature\u00a0of\u00a0\"Trade,\u00a0Commerce \u00a0or\u00a0Business\"\u00a0has\u00a0observed\u00a0following\u00a0\n attributes\u00a0and\u00a0that\u00a0the\u00a0activities\u00a0of\u00a0appellant\u00a0does\u00a0squarely\u00a0satisfies\u00a0\n each\u00a0of\u00a0the\u00a0same:\n (i). It\u00a0should\u00a0be\u00a0a\u00a0continuous\u00a0and\u00a0systematic\u00a0exercise\u00a0of\u00a0activity\u00a0\n of\u00a0purchase\u00a0and\u00a0sale\u00a0with\u00a0a\u00a0view\u00a0to\u00a0make\u00a0profit.\u00a0If\u00a0a\u00a0person\u00a0buys\u00a0\n goods\u00a0with\u00a0a\u00a0view\u00a0to\u00a0sell\u00a0them\u00a0for\u00a0profit,\u00a0it\u00a0is\u00a0an\u00a0ordinary\u00a0case\u00a0of\u00a0\n trade.\u00a0If\u00a0the\u00a0transactions\u00a0are\u00a0on\u00a0a\u00a0large\u00a0scale\u00a0it\u00a0is\u00a0called\u00a0commerce.\n (ii). Business \u00a0 vocation \u00a0 connotes \u00a0 some \u00a0 real, \u00a0 substantive \u00a0 and\u00a0\n systematic\u00a0 course \u00a0 of \u00a0activity \u00a0 or \u00a0 conduct \u00a0 with\u00a0 a\u00a0 set \u00a0 purpose. \u00a0 The\u00a0\n second \u00a0 essential \u00a0 characteristic \u00a0 is \u00a0 profit \u00a0 motive \u00a0 or \u00a0 capable \u00a0 of\u00a0\n producing\u00a0profit.\u00a0To\u00a0regard\u00a0an\u00a0activity\u00a0as\u00a0business,\u00a0there\u00a0must\u00a0be\u00a0a\u00a0\n course \u00a0 of \u00a0 dealings \u00a0 continued, \u00a0 or \u00a0 contemplated \u00a0 to \u00a0 be \u00a0 continued,\u00a0\n normally \u00a0 with \u00a0 an \u00a0 object \u00a0 of \u00a0 making \u00a0 profit \u00a0 and \u00a0 not \u00a0 for \u00a0 sport \u00a0 or\u00a0\n pleasure\u00a0(Bharat\u00a0Development\u00a0P.\u00a0Ltd.\u00a0v.\u00a0CIT\u00a0[1982]\u00a0133\u00a0ITR\u00a0470\u00a0\n (Delhi)).\n\n Page 26 of 57\nHC-NIC Page 26 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n (iii). The\u00a0third\u00a0essential\u00a0characteristic\u00a0is\u00a0that\u00a0a\u00a0business\u00a0transaction\u00a0\n must\u00a0be\u00a0between\u00a0two\u00a0persons.\u00a0Business\u00a0is\u00a0not\u00a0a\u00a0unilateral\u00a0act.\u00a0It\u00a0is\u00a0\n brought\u00a0about\u00a0by\u00a0a\u00a0transaction\u00a0between\u00a0two\u00a0or\u00a0more\u00a0persons.\u00a0\n (iv) And, \u00a0 lastly, \u00a0 the \u00a0 business \u00a0 activity \u00a0 usually \u00a0 involves \u00a0 a \u00a0 twin\u00a0\n activity. \u00a0 There\u00a0 is \u00a0 usually \u00a0 an\u00a0 element\u00a0 of\u00a0 reciprocity \u00a0 involved \u00a0 in \u00a0 a\u00a0\n business\u00a0transaction.\n\n 8.15. It \u00a0 is \u00a0 further \u00a0 submitted \u00a0 by \u00a0 Shri \u00a0 Bhatt, \u00a0 learned \u00a0 Senior\u00a0\n Advocate\u00a0for\u00a0the\u00a0Revenue\u00a0that\u00a0even\u00a0the\u00a0learned\u00a0Tribunal\u00a0has\u00a0taken\u00a0\n into\u00a0\u00a0consideration\u00a0and\u00a0analyzed\u00a0the\u00a0background\u00a0and\u00a0framework\u00a0of\u00a0\n the\u00a0law\u00a0governing\u00a0taxability\u00a0of\u00a0\u00a0charitable\u00a0institution.\u00a0\n\n 8.16. It \u00a0 is \u00a0 submitted \u00a0 that \u00a0 definition \u00a0 of \u00a0 \"charitable \u00a0 purpose\" \u00a0 as\u00a0\n contained\u00a0in\u00a0Section\u00a02(15)\u00a0originally\u00a0enacted\u00a0was\u00a0circumscribed\u00a0by\u00a0\n the \u00a0 expression \u00a0 'any \u00a0 other \u00a0 object \u00a0 of \u00a0 general \u00a0 public \u00a0 utility \u00a0 not\u00a0\n involving\u00a0carrying\u00a0on\u00a0any\u00a0activity\u00a0for\u00a0profit.\"\u00a0It\u00a0is\u00a0submitted\u00a0that\u00a0\n this \u00a0 \u00a0 expression \u00a0 had \u00a0 created \u00a0 various \u00a0 difficulties \u00a0 to \u00a0 certain\u00a0\n institutions.\u00a0The\u00a0restrictions\u00a0provided\u00a0in\u00a0the\u00a0phrase\u00a0\"not\u00a0involving\u00a0\n carrying\u00a0on\u00a0any\u00a0activity\u00a0for\u00a0profit'\u00a0was\u00a0omitted\u00a0by\u00a0the\u00a0Finance\u00a0Act,\u00a0\n 1983\u00a0w.e.f.\u00a001.04.1984,\u00a0but\u00a0another\u00a0restrictions\u00a0was\u00a0imposed\u00a0on\u00a0\n the\u00a0business\u00a0activities\u00a0carried\u00a0out\u00a0by\u00a0any\u00a0\"charitable\u00a0institution\".\u00a0It\u00a0\n is\u00a0submitted\u00a0that\u00a0these\u00a0\u00a0restrictions\u00a0were\u00a0introduced\u00a0by\u00a0way\u00a0of\u00a0sub\u00ad\u00a0\n section\u00a0(4A)\u00a0of\u00a0section\u00a011\u00a0of\u00a0the\u00a0Act.\u00a0\u00a0That\u00a0the\u00a0assessee,\u00a0who\u00a0was\u00a0in\u00a0\n the\u00a0business\u00a0also\u00a0is\u00a0required\u00a0to\u00a0keep\u00a0separate\u00a0books\u00a0of\u00a0account\u00a0for\u00a0\n business\u00a0activities\u00a0under\u00a0sub\u00adsection(4)\u00a0of\u00a0Section\u00a011\u00a0of\u00a0the\u00a0Act.\u00a0\n That \u00a0 certain \u00a0 instrumentalities \u00a0 of \u00a0 the \u00a0 State \u00a0 like \u00a0 local \u00a0 authorities,\u00a0\n housing\u00a0boards,\u00a0urban\u00a0development\u00a0authorities,\u00a0various\u00a0boards\u00a0like\u00a0\n tea\u00a0board,\u00a0coffee\u00a0board,\u00a0rubber\u00a0board\u00a0etc.\u00a0were\u00a0enjoying\u00a0blanket\u00a0\n\n Page 27 of 57\n\nHC-NIC Page 27 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n\n\n\n exemption\u00a0from\u00a0tax\u00a0under\u00a0section\u00a010\u00a0of\u00a0the\u00a0Act\u00a0and\u00a0their\u00a0incomes\u00a0\n did\u00a0not\u00a0form\u00a0part\u00a0of\u00a0the\u00a0taxable\u00a0income.\u00a0It\u00a0is\u00a0submitted\u00a0that\u00a0these\u00a0\n entities \u00a0 were \u00a0 not \u00a0 regarded \u00a0 as \u00a0 charitable \u00a0 institutions \u00a0 subject \u00a0 to\u00a0\n regime\u00a0of\u00a0section\u00a011\u00a0of\u00a0the\u00a0Act,\u00a0but\u00a0were\u00a0given\u00a0complete\u00a0exemption\u00a0\n under\u00a0section\u00a010\u00a0on\u00a0their\u00a0own\u00a0right.\u00a0That\u00a0the\u00a0present\u00a0Assessee\u00a0was\u00a0\n enjoying\u00a0this\u00a0exemption\u00a0under\u00a0section\u00a010(20A),\u00a0as\u00a0the\u00a0said\u00a0section\u00a0\n allowed\u00a0the\u00a0exemption\u00a0to\u00a0any\u00a0authority\u00a0constituted\u00a0by\u00a0or\u00a0under\u00a0any\u00a0\n law \u00a0 enacted \u00a0 for \u00a0 the \u00a0 purpose \u00a0 of \u00a0 planning \u00a0 and \u00a0 development \u00a0 or\u00a0\n improvement\u00a0of\u00a0cities,\u00a0town\u00a0or\u00a0villages.\u00a0It\u00a0is\u00a0submitted\u00a0that\u00a0Section\u00a0\n Section\u00a010(20A)\u00a0of\u00a0the\u00a0Act\u00a0came\u00a0to\u00a0be\u00a0omitted\u00a0by\u00a0the\u00a0Finance\u00a0Act,\u00a0\n 2002 \u00a0 w.e.f. \u00a0 1.4.2013. \u00a0 Therefore, \u00a0 the \u00a0 exemption \u00a0 enjoyed \u00a0 by \u00a0 the\u00a0\n housing \u00a0 board \u00a0 was \u00a0 taken \u00a0 away. \u00a0 It \u00a0 is \u00a0 submitted \u00a0 that \u00a0 similar\u00a0\n exemption \u00a0enjoyed\u00a0by \u00a0sports\u00a0 bodies\u00a0 like \u00a0 cricket, \u00a0 hockey, \u00a0football\u00a0\n etc.\u00a0under\u00a0section\u00a010(23),\u00a0the\u00a0authority\u00a0for\u00a0marketing\u00a0commodities\u00a0\n under\u00a0section\u00a010(29)\u00a0was\u00a0also\u00a0withdrawn\u00a0under\u00a0section\u00a010(29)\u00a0\u00a0by\u00a0\n Finance\u00a0Act,\u00a02002.\u00a0Similarly,\u00a0the\u00a0scope\u00a0of\u00a0local\u00a0authority\u00a0enjoying\u00a0\n exemption \u00a0 under \u00a0 section \u00a0 10(20) \u00a0 was \u00a0 limited \u00a0 to \u00a0 only \u00a0 Panchayat,\u00a0\n Municipality, \u00a0 Municipal \u00a0 committee \u00a0 and \u00a0 Cantonment \u00a0 board \u00a0 by\u00a0\n introducing\u00a0an\u00a0exhaustive\u00a0definition\u00a0of\u00a0local\u00a0authorities,\u00a0which\u00a0was\u00a0\n hitherto \u00a0 not \u00a0 there, \u00a0 thereby \u00a0 denying \u00a0 any \u00a0 room \u00a0 for \u00a0 broader\u00a0\n interpretation\u00a0of\u00a0the\u00a0term.\u00a0It\u00a0is\u00a0submitted\u00a0that\u00a0the\u00a0 \u00a0principle\u00a0that\u00a0\n such\u00a0authorities\u00a0should\u00a0enjoy\u00a0exemption\u00a0merely\u00a0because\u00a0these\u00a0were\u00a0\n created \u00a0 as \u00a0 an \u00a0 instrument \u00a0 of \u00a0 the \u00a0 State \u00a0 or \u00a0 these \u00a0 were \u00a0 engaged \u00a0 in\u00a0\n public \u00a0good\u00a0was\u00a0derecognized\u00a0by\u00a0the\u00a0Parliament.\u00a0It\u00a0is\u00a0submitted\u00a0\n that\u00a0the\u00a0legislative\u00a0intent\u00a0was\u00a0explicit\u00a0that\u00a0these\u00a0were\u00a0not\u00a0to\u00a0get\u00a0\n indirect\u00a0support\u00a0of\u00a0the\u00a0government\u00a0through\u00a0tax\u00a0exemption\u00a0route.\u00a0It\u00a0\n is \u00a0submitted\u00a0that \u00a0therefore, \u00a0 the \u00a0parliament \u00a0intervened\u00a0again \u00a0and\u00a0\n introduced\u00a0proviso\u00a0to\u00a0section\u00a02(15)\u00a0of\u00a0the\u00a0Finance\u00a0Act,\u00a02008\u00a0w.e.f.\u00a0\n\n Page 28 of 57\nHC-NIC Page 28 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n\n\n\n 1.4.2009. \u00a0 It \u00a0 is \u00a0 submitted \u00a0 that \u00a0 this \u00a0 proviso \u00a0 provides \u00a0 that\u00a0\n \"advancement\u00a0of\u00a0any\u00a0other\u00a0object\u00a0of\u00a0general\u00a0public\u00a0utility\"\u00a0shall\u00a0not\u00a0\n be\u00a0a\u00a0charitable\u00a0purpose,\u00a0if\u00a0it\u00a0involves\u00a0the\u00a0carrying\u00a0on\u00a0any\u00a0activity\u00a0in\u00a0\n the \u00a0 nature, \u00a0 trade, \u00a0 commerce \u00a0 or \u00a0 business \u00a0 or \u00a0 any \u00a0 activity \u00a0 of\u00a0\n rendering \u00a0 any \u00a0 service \u00a0 in \u00a0 relation \u00a0 to \u00a0 any \u00a0 trade, \u00a0 commerce \u00a0 or\u00a0\n business,\u00a0for\u00a0a\u00a0cess,\u00a0fee\u00a0or\u00a0any\u00a0other\u00a0consideration,\u00a0irrespective\u00a0of\u00a0\n the \u00a0 nature \u00a0 or \u00a0 application \u00a0 of \u00a0 such \u00a0 income. \u00a0 It \u00a0 is \u00a0 submitted \u00a0 that\u00a0\n therefore,\u00a0amendment\u00a0in\u00a0Section\u00a02(15)\u00a0of\u00a0the\u00a0Act,\u00a0the\u00a0omission\u00a0of\u00a0\n Sections \u00a0 10(20A), \u00a0 10(29) \u00a0 and \u00a0 10(23) \u00a0 is \u00a0 also \u00a0 required \u00a0 to \u00a0 be\u00a0\n considered.\u00a0It\u00a0is\u00a0submitted\u00a0that\u00a0therefore,\u00a0even\u00a0proviso\u00a0to\u00a0Section\u00a0\n 2(15)\u00a0of\u00a0the\u00a0Act\u00a0\u00a0is\u00a0not\u00a0read\u00a0as\u00a0the\u00a0revenue\u00a0suggest\u00a0and\u00a0/\u00a0or\u00a0as\u00a0the\u00a0\n learned \u00a0 Tribunal \u00a0 has \u00a0 read, \u00a0 intention \u00a0 of \u00a0 the \u00a0 Parliament \u00a0 to \u00a0 omit\u00a0\n Section \u00a0 10(20A), \u00a0 Section \u00a0 10(23) \u00a0 and \u00a0 10(29) \u00a0 of \u00a0 the \u00a0 Act \u00a0 will \u00a0 be\u00a0\n frustrated.\n\n 8.17. It \u00a0 is \u00a0 further \u00a0 submitted \u00a0 by \u00a0 Shri \u00a0 Bhatt, \u00a0 learned \u00a0 Senior\u00a0\n Advocate \u00a0 for \u00a0 the \u00a0 Revenue \u00a0 that \u00a0 Parliament \u00a0 has \u00a0 subsequently\u00a0\n revisited\u00a0the\u00a0issue,\u00a0and\u00a0a\u00a0complete\u00a0exemption\u00a0of\u00a0their\u00a0income\u00a0has\u00a0\n again\u00a0been\u00a0provided\u00a0to\u00a0them\u00a0under\u00a0section\u00a010\u00a0by\u00a0introduction\u00a0of\u00a0\n clause\u00a0(46)\u00a0by\u00a0Finance\u00a0Act,\u00a02011\u00a0w.e.f.\u00a01.6.2016.\u00a0It\u00a0is\u00a0submitted\u00a0\n that \u00a0 said \u00a0 section \u00a0 provides \u00a0 that \u00a0 the \u00a0 specified \u00a0 income \u00a0 to \u00a0 a \u00a0 board,\u00a0\n authority, \u00a0 body \u00a0 or \u00a0 trust, \u00a0 established/constituted \u00a0 by \u00a0 the\u00a0\n Central/State\u00a0Government\u00a0for\u00a0the\u00a0benefit\u00a0of\u00a0general\u00a0public\u00a0will\u00a0be\u00a0\n exempt\u00a0from\u00a0tax,\u00a0\u00a0subject\u00a0to\u00a0its\u00a0non\u00adengagement\u00a0in\u00a0any\u00a0commercial\u00a0\n activity, \u00a0 and \u00a0 also \u00a0 subject \u00a0 to \u00a0 its \u00a0 being \u00a0 notified \u00a0 by \u00a0 the \u00a0 Central\u00a0\n Government\u00a0for\u00a0the\u00a0purpose.\u00a0It\u00a0is\u00a0submitted\u00a0that\u00a0therefore,\u00a0assessee\u00a0\n could \u00a0 apply \u00a0for \u00a0 exemption\u00a0 under\u00a0 section \u00a0 10 \u00a0 after\u00a0 1.6.2016.\u00a0 It \u00a0 is\u00a0\n submitted \u00a0 that \u00a0 however \u00a0 for \u00a0 the \u00a0 earlier \u00a0 years, \u00a0 the \u00a0 pre\u00adamended\u00a0\n\n Page 29 of 57\n\nHC-NIC Page 29 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n\n\n\n provisions\u00a0will\u00a0apply\u00a0and\u00a0the\u00a0Assessee\u00a0will\u00a0have\u00a0to\u00a0pass\u00a0the\u00a0test\u00a0of\u00a0\n proviso \u00a0 to \u00a0 section \u00a0 2(15). \u00a0 \u00a0 It \u00a0 is \u00a0 submitted \u00a0 that \u00a0 therefore, \u00a0 with\u00a0\n respect\u00a0to\u00a0past\u00a0years,\u00a0as\u00a0the\u00a0activities\u00a0of\u00a0the\u00a0assessee\u00a0is\u00a0found\u00a0to\u00a0be\u00a0\n in\u00a0the\u00a0nature\u00a0of\u00a0trade,\u00a0commerce\u00a0or\u00a0business,\u00a0proviso\u00a0to\u00a0Section\u00a0\n 2(15)\u00a0of\u00a0the\u00a0Act\u00a0shall\u00a0be\u00a0applicable\u00a0and\u00a0therefore,\u00a0activities\u00a0of\u00a0the\u00a0\n assessee\u00a0cannot\u00a0be\u00a0said\u00a0to\u00a0be\u00a0for\u00a0charitable\u00a0purpose\u00a0and\u00a0therefore,\u00a0\n the\u00a0assessee\u00a0is\u00a0not\u00a0entitled\u00a0\u00a0to\u00a0exemption\u00a0as\u00a0claimed\u00a0under\u00a0Section\u00a0\n 11\u00a0of\u00a0the\u00a0Act.\u00a0\n\n 8.18. It \u00a0 is \u00a0 further \u00a0 submitted \u00a0 by \u00a0 Shri \u00a0 Bhatt, \u00a0 learned \u00a0 Senior\u00a0\n Advocate\u00a0for\u00a0the\u00a0Revenue\u00a0that\u00a0the\u00a0proviso\u00a0to\u00a0Section\u00a02(15)\u00a0only\u00a0\n needs\u00a0an\u00a0assessee\u00a0to\u00a0carry\u00a0on\u00a0activities\u00a0in\u00a0the\u00a0nature\u00a0of\u00a0business,\u00a0\n commerce\u00a0or\u00a0trade\u00a0irrespective\u00a0of\u00a0whether\u00a0the\u00a0assessee\u00a0generates\u00a0\n profits\u00a0from\u00a0such\u00a0activities\u00a0or\u00a0not\u00a0and\u00a0irrespective\u00a0of\u00a0whether\u00a0profit\u00a0\n making \u00a0 is \u00a0 prime \u00a0 motive \u00a0 or \u00a0 not. \u00a0 Section \u00a0 2(15) \u00a0 has \u00a0 defined\u00a0\n charitable\u00a0purpose\u00a0to\u00a0include\u00a0(i)\u00a0relief\u00a0of\u00a0the\u00a0poor,\u00a0(ii)\u00a0education,\u00a0\n (iii) \u00a0 medical \u00a0 relief, \u00a0 (iv)preservation \u00a0 of \u00a0 monuments \u00a0 or \u00a0 places \u00a0 or\u00a0\n objects\u00a0of\u00a0artistic\u00a0or\u00a0historic\u00a0interest\u00a0and\u00a0(v)\u00a0the\u00a0advancement\u00a0of\u00a0\n any\u00a0other\u00a0\"object\u00a0of\u00a0general\u00a0public\u00a0utility\".\n It\u00a0is\u00a0submitted\u00a0that\u00a0the\u00a0proviso\u00a0(i)\u00a0and\u00a0(ii)\u00a0to\u00a0Section\u00a02(15)\u00a0\n would \u00a0 apply \u00a0 if \u00a0 the \u00a0 activity \u00a0 of \u00a0 the \u00a0 trust \u00a0 is \u00a0 deemed \u00a0 to \u00a0 be \u00a0 that \u00a0 of\u00a0\n \"advancement \u00a0 of \u00a0 any \u00a0 other \u00a0 object \u00a0 of \u00a0 general \u00a0 public \u00a0 utility\" \u00a0 The\u00a0\n proviso\u00a0further\u00a0provides\u00a0that\u00a0such\u00a0activities\u00a0will\u00a0not\u00a0be\u00a0charitable\u00a0if\u00a0\n it\u00a0involves\u00a0the\u00a0carrying\u00a0on\u00a0of\u00a0any\u00a0activity\u00a0in\u00a0the\u00a0nature\u00a0of\u00a0trade,\u00a0\n commerce\u00a0or\u00a0business,\u00a0or\u00a0any\u00a0activity\u00a0of\u00a0rendering\u00a0any\u00a0service\u00a0in\u00a0\n relation\u00a0to\u00a0any\u00a0trade,\u00a0commerce\u00a0or\u00a0business,\u00a0for\u00a0a\u00a0cess\u00a0or\u00a0fee\u00a0or\u00a0any\u00a0\n consideration,\u00a0irrespective \u00a0of\u00a0the\u00a0nature\u00a0of\u00a0use\u00a0or\u00a0application,\u00a0or\u00a0\n retention,\u00a0of\u00a0the\u00a0income\u00a0from\u00a0such\u00a0activity\u00a0.\n\n Page 30 of 57\nHC-NIC Page 30 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n\n\n\n It\u00a0is\u00a0submitted\u00a0that\u00a0neither\u00a0the\u00a0provision\u00a0of\u00a0Section\u00a02(15)\u00a0nor\u00a0\n the \u00a0 proviso \u00a0 thereto \u00a0 differentiate \u00a0 the \u00a0 Assessee \u00a0 trust \u00a0 as \u00a0 a \u00a0 trust\u00a0\n enacted\u00a0under\u00a0any\u00a0Government\u00a0legislature\u00a0or\u00a0gazette\u00a0or\u00a0Act.\u00a0Nor\u00a0\n these \u00a0 provisions \u00a0 specify \u00a0 that \u00a0 they \u00a0 will \u00a0 not \u00a0 be \u00a0 applicable \u00a0 to \u00a0 any\u00a0\n authority\u00a0carrying\u00a0on\u00a0the\u00a0activities\u00a0of\u00a0development\u00a0of\u00a0any\u00a0industrial\u00a0\n area\u00a0or\u00a0a\u00a0town/city.\n\n 8.19. \u00a0It\u00a0is\u00a0further\u00a0submitted\u00a0by\u00a0Shri\u00a0Bhatt,\u00a0learned\u00a0Senior\u00a0Advocate\u00a0\n for \u00a0 the \u00a0 Revenue \u00a0 that \u00a0 the \u00a0 appellant \u00a0 has \u00a0 not \u00a0 claimed \u00a0 itself \u00a0 to \u00a0 be\u00a0\n carrying\u00a0on\u00a0of\u00a0any\u00a0activity\u00a0in\u00a0the\u00a0nature\u00a0of\u00a0(i)\u00a0relief\u00a0of\u00a0the\u00a0poor,\u00a0(ii)\u00a0\n education,\u00a0(iii)\u00a0medical\u00a0relief,\u00a0(iv)\u00a0preservation\u00a0of\u00a0monuments\u00a0or\u00a0\n places \u00a0 or \u00a0 objects \u00a0 of \u00a0 artistic \u00a0 or \u00a0 historic \u00a0 interest. \u00a0 The \u00a0 Appellate\u00a0\n authorities\u00a0have\u00a0all\u00a0agreed\u00a0that\u00a0the\u00a0authorities\u00a0like\u00a0AUDA\u00a0are\u00a0all\u00a0\n carrying\u00a0on\u00a0activities\u00a0which\u00a0are\u00a0those\u00a0of\u00a0\"advancement\u00a0of\u00a0any\u00a0other\u00a0\n object \u00a0 of \u00a0 general \u00a0 public \u00a0 utility\". \u00a0 It \u00a0 is \u00a0 therefore \u00a0 succinct \u00a0 that \u00a0 the\u00a0\n authorities\u00a0like\u00a0the\u00a0appellant\u00a0will\u00a0have\u00a0to\u00a0fulfill\u00a0the\u00a0conditions\u00a0laid\u00a0\n down\u00a0in\u00a0the\u00a0proviso\u00a0in\u00a0order\u00a0to\u00a0claim\u00a0the\u00a0activities\u00a0to\u00a0be\u00a0charitable\u00a0\n in\u00a0the\u00a0nature.\u00a0It\u00a0is\u00a0submitted\u00a0that\u00a0the\u00a0proviso\u00a0do\u00a0not\u00a0specify\u00a0that\u00a0the\u00a0\n activities\u00a0carried\u00a0on\u00a0by\u00a0the\u00a0appellant\u00a0need\u00a0to\u00a0be\u00a0with\u00a0profit\u00a0motive\u00a0\n to\u00a0be\u00a0not\u00a0deemed\u00a0to\u00a0be\u00a0charitable.\u00a0It\u00a0is\u00a0submitted\u00a0that\u00a0all\u00a0it\u00a0states\u00a0is\u00a0\n that\u00a0the\u00a0activities\u00a0should\u00a0be\u00a0in\u00a0the\u00a0'nature\u00a0of\u00a0trade,\u00a0commerce\u00a0or\u00a0\n business'.\n\n 8.20. Shri \u00a0 Bhatt, \u00a0 learned \u00a0 Senior \u00a0 Advocate \u00a0 for \u00a0 the \u00a0 Revenue \u00a0 has\u00a0\n relied \u00a0 upon \u00a0 the \u00a0 decision \u00a0 of \u00a0 the \u00a0 Delhi \u00a0 High \u00a0 Court \u00a0 in \u00a0 the \u00a0 case \u00a0 of\u00a0\n Indian\u00a0Trade\u00a0Promotion\u00a0Organization\u00a0vs.\u00a0Director\u00a0of\u00a0Income\u00a0Tax\u00a0\n (Exemption)\u00a0reported\u00a0in\u00a0(2015)\u00a0371\u00a0ITR\u00a0333\u00a0(Delhi)(para\u00a045\u00a0to\u00a0\n 48)\u00a0and\u00a0decision\u00a0of\u00a0the\u00a0Punjab\u00a0&\u00a0Hariyana\u00a0High\u00a0Court\u00a0in\u00a0the\u00a0case\u00a0\n\n Page 31 of 57\n\nHC-NIC Page 31 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n\n\n\n of\u00a0Tribune\u00a0v.\u00a0Commissioner\u00a0of\u00a0Income\u00a0Tax,\u00a0Chandigarh,\u00a0390\u00a0ITR\u00a0\n 547 \u00a0 (Punjab \u00a0 and \u00a0 Haryana) \u00a0 \u00a0 (para \u00a0 48 \u00a0 to \u00a0 61), \u00a0 in \u00a0 support \u00a0 of \u00a0 his\u00a0\n submissions\u00a0that\u00a0considering\u00a0the\u00a0definition\u00a0of\u00a0\"business\"\u00a0contained\u00a0\n in\u00a0Section\u00a02(13)\u00a0of\u00a0the\u00a0Act\u00a0even\u00a0the\u00a0activities\u00a0of\u00a0the\u00a0assessee\u00a0can\u00a0be\u00a0\n said\u00a0to\u00a0be\u00a0business\u00a0activities.\u00a0\n Making \u00a0 above \u00a0 submissions \u00a0 and \u00a0 relying \u00a0 upon \u00a0 the \u00a0 following\u00a0\n decisions,\u00a0it\u00a0is\u00a0requested\u00a0to\u00a0dismiss\u00a0the\u00a0present\u00a0appeals\u00a0and\u00a0answer\u00a0\n the\u00a0question\u00a0of\u00a0law\u00a0in\u00a0favour\u00a0of\u00a0revenue\u00a0and\u00a0against\u00a0the\u00a0assessee.\u00a0\n 1. Indian\u00a0Trade\u00a0Promotion\u00a0Organization\u00a0vs.\u00a0Director\u00a0of\u00a0Income\u00a0\n Tax\u00a0(Exemption)\u00a0reported\u00a0in\u00a0(2015)\u00a0371\u00a0ITR\u00a0333\u00a0(Delhi).\n 2. Tribune \u00a0 v. \u00a0 Commissioner \u00a0 of \u00a0 Income \u00a0 Tax, \u00a0 Chandigarh, \u00a0 390\u00a0\n ITR\u00a0547\u00a0(Punjab\u00a0and\u00a0Haryana).\n 3. Jammu\u00a0Development\u00a0Authority\u00a0vs.\u00a0Union\u00a0of\u00a0India\u00a0and\u00a0ors\u00a0in\u00a0\n ITA\u00a0No.\u00a0164\u00a0of\u00a02014\u00a0dated\u00a07.11.2013\u00a0rendered\u00a0by\u00a0the\u00a0Jammu\u00a0and\u00a0\n Kashmir\u00a0High\u00a0Court.\n 4. Raja \u00a0 Rameshwar \u00a0 Rao \u00a0 Vs._Commissioner \u00a0 of \u00a0 Income \u00a0 Tax\u00a0\n reported\u00a0in\u00a042\u00a0ITR\u00a0179\u00a0(SC).\u00a0\n 5. Jalandhar\u00a0Development\u00a0Authority\u00a0vs.\u00a0CIT\u00a0reported\u00a0in\u00a0(2010)\u00a0\n 35\u00a0SOT\u00a015\u00a0(ARS)\u00a0(URO)\u00a0of\u00a0ITAT\u00a0Amristar\u00a0Bench.\n 6.\n 9.0. Heard \u00a0 the \u00a0 learned \u00a0 advocates \u00a0 for \u00a0 the \u00a0 respective \u00a0 parties \u00a0 at\u00a0\n length.\u00a0\n 10. The \u00a0 short \u00a0 but \u00a0 interesting \u00a0 question \u00a0 of \u00a0 law \u00a0 posed \u00a0 for \u00a0 the\u00a0\n consideration \u00a0 of \u00a0 this \u00a0 Court \u00a0 in \u00a0 the \u00a0 present \u00a0 appeal \u00a0 is \u00a0 whether \u00a0 the\u00a0\n activities\u00a0of\u00a0the\u00a0 \u00a0of\u00a0the\u00a0Assessee\u00ad\u00a0AUDA\u00a0can\u00a0be\u00a0said\u00a0to\u00a0be\u00a0in\u00a0the\u00a0\n nature\u00a0of\u00a0trade,\u00a0commerce\u00a0or\u00a0business\u00a0so\u00a0as\u00a0to\u00a0deny\u00a0the\u00a0status\u00a0of\u00a0\n the \u00a0 assessee \u00a0 as \u00a0 a \u00a0 charitable \u00a0 institution \u00a0 within \u00a0 the \u00a0 definition \u00a0 of\u00a0\n Section\u00a02(15)\u00a0of\u00a0the\u00a0Act\u00a0?\u00a0\u00a0\n\n Page 32 of 57\nHC-NIC Page 32 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n\n\n\n The\u00a0second\u00a0question\u00a0which\u00a0is\u00a0posed\u00a0for\u00a0the\u00a0consideration\u00a0of\u00a0\n this\u00a0Court\u00a0is\u00a0whether\u00a0the\u00a0\u00a0the\u00a0activity\u00a0of\u00a0the\u00a0assessee\u00a0can\u00a0be\u00a0said\u00a0to\u00a0\n be \u00a0 activity \u00a0 of \u00a0 rendering \u00a0 any \u00a0 service \u00a0 in \u00a0 relation \u00a0 to \u00a0 any \u00a0 trade,\u00a0\n commerce\u00a0or\u00a0business,\u00a0for\u00a0cess\u00a0or\u00a0fees\u00a0or\u00a0any\u00a0other\u00a0consideration,\u00a0\n as\u00a0the\u00a0assessee\u00a0is\u00a0collecting\u00a0/\u00a0recovering\u00a0fees\u00a0by\u00a0performing\u00a0duty\u00a0\n under\u00a0the\u00a0provision\u00a0of\u00a0Gujarat\u00a0Town\u00a0Planning\u00a0Act\u00a0and\u00a0therefore,\u00a0\n whether\u00a0second\u00a0part\u00a0of\u00a0the\u00a0proviso\u00a0to\u00a0Section\u00a02(15)\u00a0of\u00a0the\u00a0Act\u00a0shall\u00a0\n be\u00a0applicable\u00a0so\u00a0as\u00a0to\u00a0deny\u00a0the\u00a0exemption\u00a0claimed\u00a0by\u00a0the\u00a0assessee,\u00a0\n claim\u00a0under\u00a0Section\u00a011\u00a0of\u00a0\u00a0the\u00a0Act?\n\n 11. While \u00a0 considering \u00a0 the \u00a0 aforesaid \u00a0 questions, \u00a0 the \u00a0 relevant\u00a0\n provisions \u00a0 of \u00a0 the \u00a0 Gujarat \u00a0 Town \u00a0 Planning \u00a0 Act, \u00a0 under \u00a0 which, \u00a0 the\u00a0\n Assessee\u00a0has\u00a0been\u00a0constituted\u00a0as\u00a0Urban\u00a0Development\u00a0Authority\u00a0and\u00a0\n powers \u00a0 and \u00a0 functions \u00a0 of \u00a0 the \u00a0 Assessee \u00a0 as \u00a0 an \u00a0 Urban \u00a0 Development\u00a0\n Authority \u00a0 are \u00a0 required \u00a0 to \u00a0 be \u00a0 considered, \u00a0 so \u00a0 as \u00a0 to \u00a0 appreciate\u00a0\n whether \u00a0 the \u00a0 activities \u00a0 of \u00a0 the \u00a0 Assessee \u00a0 being \u00a0 Urban \u00a0 Development\u00a0\n Authority\u00a0can\u00a0be\u00a0said\u00a0to\u00a0be\u00a0in\u00a0the\u00a0nature\u00a0of\u00a0trade,\u00a0commerce \u00a0or\u00a0\n business\u00a0?\n The \u00a0 relevant \u00a0 provisions \u00a0 of \u00a0 the \u00a0 Gujarat \u00a0 Town \u00a0 Planning \u00a0 Act,\u00a0\n under \u00a0 which, \u00a0 the \u00a0 Assessee \u00a0 AUDA \u00a0 has\u00a0 been \u00a0 constituted \u00a0 as\u00a0 Urban\u00a0\n Development\u00a0Authority\u00a0are\u00a0as\u00a0under:\u00a0\n Section\u00a02(viii): \u00a0\"Development\",\u00a0with\u00a0all\u00a0its\u00a0grammatical \u00a0\n variations \u00a0 and \u00a0 cognate \u00a0 expressions, \u00a0 means \u00a0 the \u00a0 carrying \u00a0\n out \u00a0 of \u00a0 any \u00a0 building, \u00a0 engineering, \u00a0 mining, \u00a0 or \u00a0 other \u00a0\n operations\u00a0in,\u00a0or\u00a0over,\u00a0or\u00a0under\u00a0land\u00a0or\u00a0the\u00a0making\u00a0of\u00a0any \u00a0\n material\u00a0change\u00a0in\u00a0any\u00a0building\u00a0or\u00a0land\u00a0or\u00a0in\u00a0the\u00a0use\u00a0of \u00a0\n any \u00a0 building \u00a0 or \u00a0 land, \u00a0 and \u00a0 includes \u00a0 layout \u00a0 and \u00a0 sub\u00ad\n division\u00a0of\u00a0any\u00a0land;\n Section\u00a02(xxviii):\"Urban \u00a0development \u00a0authority\" \u00a0means \u00a0\n an\u00a0urban\u00a0development\u00a0authority\u00a0constituted\u00a0under\u00a0section \u00a0\n 22;\n\n Page 33 of 57\nHC-NIC Page 33 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\nSection \u00a0 2(xxix):\"Urban \u00a0 development \u00a0 area\" \u00a0 means \u00a0 an \u00a0\n area \u00a0 declared \u00a0 to \u00a0 be \u00a0 an \u00a0 urban \u00a0 development \u00a0 area \u00a0 under \u00a0\n section\u00a022.\n Section\u00a022:\u00a0 Declaration\u00a0Of\u00a0Urban\u00a0Development\u00a0Area \u00a0\n And\u00a0Constitution\u00a0Of\u00a0Urban\u00a0Development\u00a0Authority\u00a0 :\u00ad\n (1) \u00a0Where \u00a0the \u00a0State \u00a0Government \u00a0is\u00a0of\u00a0opinion \u00a0that\u00a0the \u00a0\n object \u00a0 of \u00a0 proper \u00a0 development \u00a0 or \u00a0 redevelopment \u00a0 of \u00a0 any \u00a0\n urban\u00a0area\u00a0or\u00a0group\u00a0of\u00a0urban\u00a0areas\u00a0in\u00a0the\u00a0State\u00a0together \u00a0\n with\u00a0such\u00a0adjacent\u00a0areas\u00a0as\u00a0may\u00a0be\u00a0considered\u00a0necessary, \u00a0\n whether \u00a0 covered \u00a0 under \u00a0 a \u00a0 development \u00a0 area \u00a0 already \u00a0\n declared\u00a0as\u00a0such\u00a0under\u00a0section\u00a03\u00a0or\u00a0not,\u00a0will\u00a0be\u00a0best\u00a0served \u00a0\n by\u00a0entrusting\u00a0the\u00a0work\u00a0of\u00a0development\u00a0or\u00a0redevelopment \u00a0\n thereof \u00a0 to \u00a0 a \u00a0 special \u00a0 authority, \u00a0 instead \u00a0 of \u00a0 to \u00a0 an \u00a0 area \u00a0\n development \u00a0 authority, \u00a0 the \u00a0 State \u00a0 Government \u00a0 may, \u00a0 by \u00a0\n notification, \u00a0 declare \u00a0 such \u00a0 area \u00a0 to \u00a0 be \u00a0 an \u00a0 urban \u00a0\n development \u00a0 area \u00a0 and \u00a0 constitute \u00a0 an \u00a0 authority \u00a0 for \u00a0 such \u00a0\n area\u00a0to\u00a0be\u00a0called\u00a0the\u00a0urban\u00a0development\u00a0authority\u00a0of\u00a0that \u00a0\n area,\u00a0and\u00a0thereupon\u00a0all\u00a0the\u00a0powers\u00a0and\u00a0functions\u00a0of\u00a0an \u00a0\n area\u00a0development \u00a0authority \u00a0relating \u00a0to\u00a0the \u00a0development \u00a0\n or \u00a0 redevelopment \u00a0of \u00a0a\u00a0development \u00a0area \u00a0under \u00a0this \u00a0Act \u00a0\n shall, \u00a0 in \u00a0 relation \u00a0 to \u00a0 such \u00a0 urban \u00a0 development \u00a0 area, \u00a0 be \u00a0\n exercised \u00a0 and \u00a0 performed \u00a0 by \u00a0 such \u00a0 urban \u00a0 development \u00a0\n authority1***\n (2)\u00a0Every\u00a0notification\u00a0issued\u00a0under\u00a0sub\u00adsection\u00a0(1)\u00a0shall \u00a0\n define \u00a0the\u00a0limits \u00a0of\u00a0the\u00a0area\u00a0to\u00a0which\u00a0it\u00a0relates.\u00a02[(2A) \u00a0\n The\u00a0State\u00a0Government\u00a0may,\u00a0by\u00a0notification\u00a0in\u00a0the\u00a0Official \u00a0\n Gazette, \u00a0include \u00a0in\u00a0or \u00a0exclude \u00a0any \u00a0area \u00a0from \u00a0an \u00a0urban \u00a0\n development \u00a0 area, \u00a0 amalgamate \u00a0 two \u00a0 or \u00a0 more \u00a0 urban \u00a0\n development\u00a0areas\u00a0into\u00a0one\u00a0urban\u00a0development\u00a0area,\u00a0sub\u00ad\n divide \u00a0any\u00a0urban\u00a0development \u00a0area\u00a0into\u00a0different\u00a0urban \u00a0\n development \u00a0 areas \u00a0 and \u00a0 include \u00a0 such \u00a0 sub\u00addivided \u00a0 urban \u00a0\n development\u00a0area\u00a0in\u00a0any\u00a0other\u00a0urban\u00a0development\u00a0area.]\u00a0\n (3)\u00a0Every\u00a0urban\u00a0development\u00a0authority\u00a0constituted\u00a0under \u00a0\n sub\u00adsection \u00a0 (1) \u00a0 shall \u00a0 be \u00a0 a \u00a0 body \u00a0 corporate \u00a0 by \u00a0 the \u00a0 name \u00a0\n aforesaid, \u00a0 having \u00a0 perpetual \u00a0 succession \u00a0 and \u00a0 a \u00a0 common \u00a0\n seal,\u00a0with\u00a0power\u00a0to\u00a0acquire,\u00a0hold\u00a0and\u00a0dispose\u00a0of\u00a0property, \u00a0\n both\u00a0movable\u00a0and\u00a0immovable,\u00a0and\u00a0to\u00a0contract,\u00a0and\u00a0by\u00a0the \u00a0\n said\u00a0name\u00a0sue\u00a0and\u00a0be\u00a0sued.\n (4)\u00a0The\u00a0urban\u00a0development\u00a0authority\u00a0shall\u00a0consist\u00a0of\u00a0the \u00a0\n following \u00a0 members \u00a0 namely:\u00ad \u00a0 (i) \u00a0 a \u00a0 Chairman \u00a0 to \u00a0 be \u00a0\n appointed\u00a0by\u00a0the\u00a0State\u00a0Government;\u00a0(ii)\u00a0such\u00a0persons,\u00a0not \u00a0\n exceeding3[four\u00a0in\u00a0number]\u00a0who\u00a0are\u00a0members\u00a0of\u00a0the\u00a0local \u00a0\n authority \u00a0 or \u00a0 authorities \u00a0 functioning \u00a0 in \u00a0 the \u00a0 urban \u00a0\n development \u00a0 area, \u00a0 as \u00a0 may \u00a0 be \u00a0 nominated \u00a0 by \u00a0 the \u00a0 State \u00a0\n Government; \u00a0 (iii)4[Three \u00a0 officials] \u00a0 of \u00a0 the \u00a0 State \u00a0\n Government, \u00a0 to \u00a0 be \u00a0 nominated \u00a0 by \u00a0 that \u00a0 Government, \u00a0 ex\u00ad\n officio; \u00a0 (iv) \u00a0 the \u00a0 Presidents \u00a0 of \u00a0 the \u00a0 district \u00a0 panchayats \u00a0\n\n\n\n Page 34 of 57\n\nHC-NIC Page 34 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n\n\n\n functioning\u00a0in\u00a0the\u00a0urban\u00a0development\u00a0area,\u00a0or,\u00a0as\u00a0the\u00a0case \u00a0\n may \u00a0 be, \u00a0 part \u00a0 thereof, \u00a0 ex\u00adofficio; \u00a0 (v) \u00a0 the \u00a0 Chief \u00a0 Town \u00a0\n planner \u00a0 or \u00a0 his \u00a0 representative, \u00a0 ex\u00adofficio; \u00a0 (vi) \u00a0 the \u00a0 Chief \u00a0\n Engineer \u00a0 or \u00a0 Engineers \u00a0 (Public \u00a0 Health) \u00a0 of \u00a0 the \u00a0 local \u00a0\n authority \u00a0 or \u00a0 authorities \u00a0 functioning \u00a0 in \u00a0 the \u00a0 urban \u00a0\n development\u00a0area\u00a0or\u00a0his\u00a0or\u00a0their\u00a0nominee\u00a0or\u00a0nominees,\u00a0ex\u00ad\n officio; \u00a0 5[(vi\u00ada) \u00a0 the \u00a0 Municipal \u00a0 Commissioner \u00a0 of \u00a0 the \u00a0\n Municipal\u00a0Corporation,\u00a0if\u00a0any,\u00a0functioning \u00a0in\u00a0the\u00a0urban \u00a0\n development\u00a0area,\u00a0ex\u00adofficio;]\u00a0(vii)\u00a0a\u00a0member\u00a0secretary\u00a0to\u00a0\n be\u00a0appointed\u00a0by\u00a0the\u00a0State\u00a0Government\u00a0who\u00a0shall\u00a0also\u00a0be \u00a0\n designated\u00a0as\u00a0the\u00a0Chief\u00a0Executive\u00a0Authority\u00a0of\u00a0the\u00a0Urban \u00a0\n Development\u00a0Authority.\u00a0\n (5)\u00a0The\u00a0provisions\u00a0of\u00a0sub\u00adsections\u00a0(5)\u00a0to\u00a0(12)\u00a0of\u00a0section\u00a05 \u00a0\n shall\u00a0apply\u00a0in\u00a0relation\u00a0to\u00a0an\u00a0urban\u00a0development\u00a0authority \u00a0\n as \u00a0 they \u00a0 apply \u00a0 in \u00a0 relation \u00a0 to \u00a0 an \u00a0 area \u00a0 development \u00a0\n authority, \u00a0 with \u00a0 the \u00a0 modification \u00a0 that \u00a0 references \u00a0 to \u00a0 an \u00a0\n area\u00a0development\u00a0authority\u00a0in\u00a0the\u00a0said\u00a0subsection\u00a0shall\u00a0be \u00a0\n construed \u00a0 as \u00a0 references \u00a0 to \u00a0 an \u00a0 urban \u00a0 development \u00a0\n authority.\n Section \u00a0 23: \u00a0Powers \u00a0 And \u00a0 Function \u00a0 Of \u00a0 Urban \u00a0\n Development \u00a0 Authority\u00a0 :\u00ad\n (1)\u00a0\u00a0[The\u00a0powers\u00a0and\u00a0functions\u00a0of]\u00a0an\u00a0urban\u00a0development \u00a0\n authority\u00a0shall\u00a0be:\u00ad\u00a0(i)\u00a0To\u00a0undertake \u00a0the\u00a0preparation\u00a0of \u00a0\n development\u00a0plans\u00a0under\u00a0the\u00a0provisions\u00a0of\u00a0this\u00a0Act,\u00a0for\u00a0the \u00a0\n urban \u00a0 development \u00a0 area; \u00a0 (ii) \u00a0 To \u00a0 undertake \u00a0 the \u00a0\n preparation \u00a0 [and \u00a0 execution] \u00a0 of \u00a0 town \u00a0 planning \u00a0 schemes \u00a0\n under\u00a0the\u00a0provisions\u00a0of\u00a0this\u00a0Act,\u00a0if\u00a0so\u00a0directed\u00a0by\u00a0the\u00a0State \u00a0\n Government; \u00a0 (iii) \u00a0 To \u00a0 carry \u00a0 out \u00a0 surveys \u00a0 in \u00a0 the \u00a0 urban \u00a0\n development \u00a0 area \u00a0 for \u00a0 the \u00a0 preparation \u00a0 of \u00a0 development \u00a0\n plans\u00a0or\u00a0town\u00a0planning\u00a0schemes;\u00a0(iv)\u00a0To\u00a0guide,\u00a0direct\u00a0and \u00a0\n assist \u00a0 the \u00a0 local \u00a0 authority \u00a0 or \u00a0 authorities \u00a0 and \u00a0 other \u00a0\n statutory \u00a0 authorities \u00a0 functioning \u00a0 in \u00a0 the \u00a0 urban \u00a0\n development\u00a0area\u00a0in\u00a0matters\u00a0pertaining\u00a0to\u00a0the\u00a0planning, \u00a0\n development \u00a0and \u00a0use \u00a0of\u00a0urban \u00a0land; \u00a0(v) \u00a0To \u00a0control \u00a0the \u00a0\n development\u00a0activities\u00a0in\u00a0accordance\u00a0with\u00a0the\u00a0development \u00a0\n plan\u00a0in\u00a0the\u00a0urban\u00a0development\u00a0area;\u00a03\u00a0[(v\u00ada)\u00a0to\u00a0levy\u00a0and \u00a0\n collect \u00a0 such \u00a0 security \u00a0 fees \u00a0 for \u00a0 secrutiny \u00a0 of \u00a0 documents \u00a0\n submitted\u00a0to\u00a0the\u00a0appropriate\u00a0authority\u00a0for\u00a0permission\u00a0for \u00a0\n development\u00a0as\u00a0may\u00a0be\u00a0prescribed\u00a0by\u00a0regulations;]\u00a0(vi)\u00a0To \u00a0\n execute\u00a0works\u00a0in\u00a0connection\u00a0with\u00a0supply\u00a0of\u00a0water,\u00a0disposal \u00a0\n of\u00a0sewerage\u00a0and\u00a0provision\u00a0of\u00a0other\u00a0services\u00a0and\u00a0amenities; \u00a0\n 4\u00a0[(vi\u00ada)\u00a0to\u00a0levy\u00a0and\u00a0collect\u00a0such\u00a0fees\u00a0for\u00a0the\u00a0execution\u00a0of \u00a0\n works\u00a0referred\u00a0to\u00a0in\u00a0clause\u00a0(vi)\u00a0and\u00a0for\u00a0provision\u00a0of\u00a0other \u00a0\n services \u00a0 and \u00a0 amenities \u00a0 as \u00a0 may \u00a0 be \u00a0 prescribed \u00a0 by \u00a0\n regulations;]\u00a0(vii)\u00a0To\u00a0acquire,\u00a0hold,\u00a0manage\u00a0and\u00a0dispose \u00a0\n of \u00a0 property, \u00a0 movable \u00a0 or \u00a0 immovable, \u00a0 as \u00a0 it \u00a0 may \u00a0 deem \u00a0\n necessary; \u00a0 (viii) \u00a0 To \u00a0 enter \u00a0 into \u00a0 contracts, \u00a0 agreements \u00a0 or \u00a0\n\n\n\n Page 35 of 57\n\nHC-NIC Page 35 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n\n\n\n arrangements, \u00a0 with \u00a0 any \u00a0 local \u00a0 authority, \u00a0 person \u00a0 or \u00a0\n organisation \u00a0 as \u00a0 the \u00a0 urban \u00a0 development \u00a0 authority \u00a0 may \u00a0\n consider \u00a0 necessary \u00a0 for \u00a0 performing \u00a0 its \u00a0 functions; \u00a0 (ix) \u00a0 To \u00a0\n carry\u00a0any\u00a0development \u00a0works \u00a0in\u00a0the\u00a0urban\u00a0development \u00a0\n area\u00a0as\u00a0may\u00a0be\u00a0assigned \u00a0to\u00a0it\u00a0by\u00a0the\u00a0State \u00a0Government \u00a0\n from\u00a0time\u00a0to\u00a0time;\u00a0(x)\u00a0To\u00a0exercise\u00a0such\u00a0other\u00a0powers\u00a0and \u00a0\n perform \u00a0 such \u00a0 other \u00a0 functions \u00a0 as \u00a0 are \u00a0 supplemental, \u00a0\n incidental\u00a0or\u00a0consequential\u00a0to\u00a0any\u00a0of\u00a0the\u00a0foregoing\u00a0powers \u00a0\n and \u00a0 functions \u00a0 or \u00a0 as \u00a0 may \u00a0 be \u00a0 directed \u00a0 by \u00a0 the \u00a0 State \u00a0\n Government.\u00a0\n (2) \u00a0 The \u00a0 urban \u00a0 development \u00a0 authority \u00a0 may, \u00a0 with \u00a0 the \u00a0\n approval\u00a0of\u00a0the\u00a0State\u00a0Government,\u00a0delegate\u00a05\u00a0[any\u00a0of\u00a0its \u00a0\n powers\u00a0and\u00a0functions]\u00a0to\u00a0the\u00a0local\u00a0authority\u00a0or\u00a0authorities \u00a0\n functioning\u00a0in\u00a0the\u00a0urban\u00a0development\u00a0area.\u00a0\n (3)\u00a0The\u00a0urban\u00a0development\u00a0authority\u00a0shall\u00a0have\u00a0its\u00a0office \u00a0\n at\u00a0such\u00a0place\u00a0as\u00a0the\u00a0State\u00a0Government\u00a0may\u00a0specify\u00a0in\u00a0this \u00a0\n behalf.\n Section\u00a0 40.\u00a0 Making \u00a0 And \u00a0 Contents \u00a0 Of \u00a0 A \u00a0 Town \u00a0\n Planning \u00a0 Scheme\u00a0 :\u00ad\n (1)\u00a0Subject\u00a0to\u00a0the\u00a0provision\u00a0of\u00a0this\u00a0Act\u00a0or\u00a0any\u00a0other\u00a0law \u00a0\n for\u00a0the\u00a0time\u00a0being\u00a0in\u00a0force,\u00a0the\u00a0appropriate\u00a0authority\u00a0may \u00a0\n make \u00a0 one \u00a0 or \u00a0 more \u00a0 town \u00a0 planning \u00a0 schemes \u00a0 for \u00a0 the \u00a0\n development\u00a0area\u00a0or\u00a0any\u00a0part\u00a0thereof,\u00a0regard\u00a0being\u00a0had\u00a0to \u00a0\n the\u00a0proposals\u00a0in\u00a0the\u00a0final\u00a0development\u00a0plan,\u00a0if\u00a0any.\u00a0\n (2)\u00a0A\u00a0town\u00a0planning\u00a0scheme\u00a0may\u00a0be\u00a0made\u00a0in\u00a0accordance \u00a0\n with \u00a0 the \u00a0 provisions \u00a0 of \u00a0 this \u00a0 Act \u00a0 in \u00a0 respect \u00a0 of \u00a0 any \u00a0 land \u00a0\n which\u00a0is\u00ad\u00a0(i)\u00a0In\u00a0the\u00a0course\u00a0of\u00a0development;\u00a01\u00a0[(ii)\u00a0likely\u00a0to \u00a0\n be\u00a0used\u00a0for\u00a0residential\u00a0or\u00a0commercial\u00a0or\u00a0industrial\u00a0or\u00a0for \u00a0\n building \u00a0 purposes; \u00a0 or] \u00a0 (iii) \u00a0 Already \u00a0 built \u00a0 upon. \u00a0\n Explanation:\u00ad \u00a0 For \u00a0 the \u00a0 purpose \u00a0 of \u00a0 this \u00a0 sub\u00adsection \u00a0 the \u00a0\n expression\u00a0\"land\u00a0likely\u00a0to\u00a0be\u00a0used\u00a0for\u00a0building\u00a0purposes\" \u00a0\n shall \u00a0 include \u00a0 any \u00a0 land \u00a0 likely \u00a0 to \u00a0 be \u00a0 used \u00a0 as, \u00a0 or \u00a0 for \u00a0 the \u00a0\n purpose \u00a0of\u00a0providing, \u00a0open \u00a0spaces, \u00a0roads,\u00a0streets, \u00a0parks, \u00a0\n pleasure\u00a0or\u00a0recreation\u00a0grounds,\u00a0parking\u00a0spaces\u00a0or\u00a0for\u00a0the \u00a0\n purpose \u00a0of\u00a0executing \u00a0any \u00a0work \u00a0upon \u00a0or \u00a0under \u00a0the \u00a0land \u00a0\n incidental \u00a0 to \u00a0 a \u00a0 town \u00a0 planning \u00a0 scheme, \u00a0 whether \u00a0 in \u00a0 the \u00a0\n nature\u00a0of\u00a0a\u00a0building\u00a0work\u00a0or\u00a0not.\u00a0\n (3)\u00a0A\u00a0town\u00a0planning\u00a0scheme\u00a0may\u00a0make\u00a0provision\u00a0for\u00a0any \u00a0\n of\u00a0the\u00a0following\u00a0matters,\u00a0namely:\u00ad\u00a0(a)\u00a0The\u00a0laying\u00a0out\u00a0or \u00a0\n relaying\u00a0out\u00a0of\u00a0land,\u00a0either\u00a0vacant\u00a0or\u00a0already\u00a0built\u00a0upon; \u00a0\n (b)\u00a0The\u00a0filling\u00a0up\u00a0or\u00a0reclamation\u00a0of\u00a0low\u00adlying,\u00a0swampy\u00a0or \u00a0\n unhealthy \u00a0areas, \u00a0or \u00a0levelling \u00a0up \u00a0of\u00a0land; \u00a0(c)\u00a0Lay\u00adout\u00a0of \u00a0\n new \u00a0 streets \u00a0 or \u00a0 roads, \u00a0 construction, \u00a0 diversion, \u00a0 extension, \u00a0\n alteration, \u00a0 improvement \u00a0 and \u00a0 closing \u00a0 up \u00a0 of \u00a0 streets \u00a0 and \u00a0\n roads \u00a0 and \u00a0 discontinuance \u00a0 of \u00a0 communications; \u00a0 (d) \u00a0 The \u00a0\n construction,\u00a0alteration\u00a0and\u00a0removal\u00a0of\u00a0buildings,\u00a0bridges \u00a0\n and\u00a0other\u00a0structures;\u00a0(e)\u00a0The\u00a0allotment\u00a0or\u00a0reservation\u00a0of \u00a0\n\n\n\n Page 36 of 57\n\nHC-NIC Page 36 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n\n\n\n land\u00a0for\u00a0roads,\u00a0open\u00a0spaces,\u00a0gardens,\u00a0recreation\u00a0grounds, \u00a0\n schools,\u00a0markets,\u00a0green\u00adbelts,\u00a0dairies,\u00a0transport\u00a0facilities, \u00a0\n public \u00a0 purposes \u00a0 of \u00a0 all \u00a0 kinds; \u00a0 (f) \u00a0 Drainage, \u00a0 inclusive \u00a0 of \u00a0\n sewerage, \u00a0 surface \u00a0 or \u00a0 sub\u00adsoil \u00a0 drainage \u00a0 and \u00a0 sewage \u00a0\n disposal; \u00a0 (g) \u00a0 Lighting; \u00a0 (h) \u00a0 Water \u00a0 supply; \u00a0 (i) \u00a0 The \u00a0\n preservation\u00a0of\u00a0objects\u00a0of\u00a0historical\u00a0or\u00a0national\u00a0interest\u00a0or \u00a0\n natural \u00a0 beauty, \u00a0 and \u00a0 of \u00a0 buildings \u00a0 actually \u00a0 used \u00a0 for \u00a0\n religious \u00a0 purposes; \u00a0 (j) \u00a0 The \u00a0 reservation \u00a0 of \u00a0 land \u00a0 to \u00a0 the \u00a0\n extent\u00a0of\u00a0ten\u00a0per\u00a0cent.\u00a0or\u00a0such\u00a0percentage\u00a0as\u00a0near\u00a0thereto \u00a0\n as\u00a0possible\u00a0of\u00a0the\u00a0total\u00a0area\u00a0covered\u00a0under\u00a0the\u00a0scheme,\u00a0for \u00a0\n the\u00a0purpose \u00a0of\u00a0providing \u00a0housing\u00a0accommodation \u00a0to\u00a0the \u00a0\n members\u00a0of\u00a0socially\u00a0and\u00a0economically\u00a0backward\u00a0classes\u00a0of \u00a0\n people;\u00a02\u00a0[3\u00a0[(jj)\u00a0(a)\u00a0the\u00a0allotment\u00a0of\u00a0land\u00a0from\u00a0the\u00a0total \u00a0\n area \u00a0 covered \u00a0 under \u00a0 the \u00a0 scheme, \u00a0 to \u00a0 the \u00a0 extent \u00a0 of.\u00ad \u00a0 (i) \u00a0\n Fifteen \u00a0per\u00a0cent. \u00a0for \u00a0roads, \u00a0(ii) \u00a0five \u00a0per \u00a0cent. \u00a0for \u00a0parks, \u00a0\n play\u00a0grounds,\u00a0gardens\u00a0and\u00a0open\u00a0space,\u00a0(iii)\u00a0five\u00a0per\u00a0cent. \u00a0\n for \u00a0 social \u00a0 infrastructure \u00a0 such \u00a0 as \u00a0 school, \u00a0 dispensary, \u00a0 fire \u00a0\n brigade, \u00a0 public \u00a0 utility \u00a0 place \u00a0 as \u00a0 earmarked \u00a0 in \u00a0 the \u00a0 Draft \u00a0\n Town\u00a0Planning\u00a0Scheme,\u00a0and\u00a0(iv)\u00a0fifteen\u00a0per\u00a0cent.\u00a0for\u00a0sale \u00a0\n by \u00a0 appropriate \u00a0 authority \u00a0 for \u00a0 residential, \u00a0 commercial \u00a0 or \u00a0\n industrial\u00a0use\u00a0depending\u00a0upon\u00a0the\u00a0nature\u00a0of\u00a0development: \u00a0\n Provided \u00a0 that \u00a0 the \u00a0 percentage \u00a0 of \u00a0 the \u00a0 allotment \u00a0 of \u00a0 land \u00a0\n specified \u00a0 in \u00a0 paragraphs \u00a0 (i) \u00a0 to \u00a0 (iii) \u00a0 may \u00a0 be \u00a0 altered \u00a0\n depending \u00a0 upon \u00a0 the \u00a0nature \u00a0 of \u00a0 development \u00a0 and \u00a0 for \u00a0the \u00a0\n reasons\u00a0to\u00a0be\u00a0recorded\u00a0in\u00a0writing;\u00a0(b)\u00a0the\u00a0proceeds\u00a0from \u00a0\n the\u00a0sale\u00a0of\u00a0land\u00a0referred\u00a0to\u00a0in\u00a0para\u00a0(iv)\u00a0of\u00a0sub\u00adclause\u00a0(a) \u00a0\n shall\u00a0be\u00a0used\u00a0for\u00a0the\u00a0purpose\u00a0of\u00a0providing\u00a0infrastructural \u00a0\n facilities;\u00a0(c)\u00a0the\u00a0land\u00a0allotted\u00a0for\u00a0the\u00a0purposes\u00a0referred\u00a0to \u00a0\n in\u00a0paragraphs\u00a0(ii)\u00a0and\u00a0(iii)\u00a0of\u00a0sub\u00adclause\u00a0(a)\u00a0shall\u00a0not\u00a0be \u00a0\n changed \u00a0by\u00a0variation \u00a0of\u00a0schemes \u00a0for \u00a0the \u00a0purposes \u00a0other \u00a0\n than \u00a0public \u00a0 purpose;]] \u00a0 (k) \u00a0 the \u00a0imposition \u00a0of \u00a0 conditions \u00a0\n and \u00a0 restrictions \u00a0 in \u00a0 regard \u00a0 to \u00a0 the \u00a0 open \u00a0 space \u00a0 to \u00a0 be \u00a0\n maintained\u00a0around\u00a0buildings,\u00a0the\u00a0percentage\u00a0of\u00a0building \u00a0\n area\u00a0for\u00a0a\u00a0plot,\u00a0the\u00a0number,\u00a0size,\u00a0height\u00a0and\u00a0character\u00a0of \u00a0\n building \u00a0allowed \u00a0in\u00a0specifiedares, \u00a0the\u00a0purposes \u00a0to\u00a0which \u00a0\n buildings \u00a0 or \u00a0 specified \u00a0 areas \u00a0 may \u00a0 or \u00a0 may \u00a0 not \u00a0 be \u00a0\n appropriated,\u00a0the\u00a0sub\u00addivision\u00a0of\u00a0plots,\u00a0the\u00a0discontinuance \u00a0\n of \u00a0 objectionable \u00a0 uses \u00a0 of \u00a0 lands \u00a0 in \u00a0 any \u00a0 area \u00a0 in \u00a0 specified \u00a0\n periods,\u00a0parkings\u00a0space\u00a0and\u00a0loading\u00a0and\u00a0unloading\u00a0space \u00a0\n for\u00a0any\u00a0building\u00a0and\u00a0the\u00a0sizes\u00a0or\u00a0locations\u00a0of\u00a0projections \u00a0\n and\u00a0advertisement\u00a0signs;\u00a0(l)\u00a0the\u00a0suspension,\u00a0so\u00a0far\u00a0as\u00a0may \u00a0\n be\u00a0necessary,\u00a0for\u00a0the\u00a0proper\u00a0carrying\u00a0out\u00a0of\u00a0the\u00a0scheme,\u00a0of \u00a0\n any\u00a0rule,\u00a0bye\u00adlaw,\u00a0regulation,\u00a0notification\u00a0or\u00a0order\u00a0made \u00a0\n or\u00a0issued\u00a0under\u00a0any\u00a0Act\u00a0of\u00a0the\u00a0State\u00a0Legislature\u00a0or\u00a0any\u00a0of \u00a0\n the \u00a0 Acts \u00a0 which \u00a0 the \u00a0 State \u00a0 Legislature \u00a0 is \u00a0 competent \u00a0 to \u00a0\n amend: \u00a0 Provided \u00a0 that \u00a0 any \u00a0 suspension \u00a0 under \u00a0 this \u00a0 clause \u00a0\n shall \u00a0 cease \u00a0 to \u00a0 operate \u00a0 in \u00a0 the \u00a0 event \u00a0 of \u00a0 the \u00a0 State \u00a0\n\n\n\n Page 37 of 57\n\nHC-NIC Page 37 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n\n\n\n Government\u00a0refusing\u00a0to\u00a0sanction\u00a0the\u00a0preliminary\u00a0scheme, \u00a0\n or \u00a0 in\u00a0 the \u00a0 event \u00a0 of \u00a0 the \u00a0 withdrawal \u00a0 of \u00a0 the \u00a0 scheme \u00a0 under \u00a0\n section \u00a0 66, \u00a0 or \u00a0 on \u00a0 the \u00a0 coming \u00a0 into \u00a0 force \u00a0 of \u00a0 the \u00a0 final \u00a0\n scheme;\u00a0(m)\u00a0such\u00a0other\u00a0matters\u00a0not\u00a0inconsistent\u00a0with\u00a0the \u00a0\n objects\u00a0of\u00a0this\u00a0Act\u00a0as\u00a0may\u00a0be\u00a0prescribed.\n Section\u00a0 91:\u00a0 Fund \u00a0 Of \u00a0 The \u00a0 Appropriate \u00a0 Authority\u00a0 :\u00ad\n (1)\u00a0An\u00a0appropriate\u00a0authority\u00a0shall\u00a0have\u00a0and\u00a0maintain\u00a0its \u00a0\n own \u00a0 fund \u00a0 to \u00a0 which \u00a0 shall \u00a0 be \u00a0 credited\u00ad \u00a0 (a) \u00a0 All \u00a0 moneys \u00a0\n received \u00a0 by \u00a0 the \u00a0 authority \u00a0 by \u00a0 way \u00a0 of \u00a0 grants, \u00a0\n loans,1[advances, \u00a0 fees, \u00a0 development \u00a0 charges \u00a0 or \u00a0\n otherwise;]\u00a0(b)\u00a0All\u00a0moneys\u00a0derived\u00a0from\u00a0its\u00a0undertakings, \u00a0\n projections \u00a0 and \u00a0 other \u00a0 sources; \u00a0 (c) \u00a0 Such \u00a0 amount \u00a0 of \u00a0\n contributions \u00a0 from \u00a0 local \u00a0 authorities \u00a0 as \u00a0 the \u00a0 State \u00a0\n government\u00a0may\u00a0specify\u00a0from\u00a0time\u00a0to\u00a0time\u00a0to\u00a0be\u00a0credited \u00a0\n to \u00a0 the \u00a0 fund \u00a0 of \u00a0 the \u00a0 authority. \u00a0 (2) \u00a0 The \u00a0 fund \u00a0 of \u00a0 an \u00a0\n appropriate \u00a0authority\u00a0shall\u00a0be\u00a0applied \u00a0towards \u00a0meeting\u00ad \u00a0\n (a) \u00a0 Expenditure \u00a0 incurred \u00a0 in \u00a0 the \u00a0 administration \u00a0 of \u00a0 this \u00a0\n Act;\u00a0(b)\u00a0Cost\u00a0of\u00a0acquisition\u00a0of\u00a0land\u00a0for\u00a0the\u00a0purposes\u00a0of\u00a0this \u00a0\n Act;\u00a0(c)\u00a0Expenditure\u00a0for\u00a0any\u00a0development\u00a0of\u00a0land\u00a0in\u00a0the \u00a0\n development \u00a0 area; \u00a0 (d) \u00a0 Expenditure \u00a0 for \u00a0 such \u00a0 other \u00a0\n purposes \u00a0 as \u00a0 the \u00a0 State \u00a0 Government \u00a0 may \u00a0 direct. \u00a0 (3) \u00a0 An \u00a0\n appropriate\u00a0authority\u00a0may\u00a0keep\u00a0in\u00a0current\u00a0account\u00a0with \u00a0\n the\u00a0State\u00a0Bank\"\u00a0of\u00a0India\u00a0or\u00a0any\u00a0other\u00a0bank\u00a0approved\u00a0by \u00a0\n the\u00a0State\u00a0Government\u00a0in\u00a0this\u00a0behalf,\u00a0such\u00a0sums\u00a0of\u00a0money \u00a0\n out\u00a0of\u00a0its\u00a0fund\u00a0as\u00a0may\u00a0be\u00a0prescribed \u00a0and\u00a0any\u00a0money\u00a0in \u00a0\n excess\u00a0of\u00a0the\u00a0said\u00a0sum\u00a0shall\u00a0be\u00a0invested\u00a0in\u00a0such\u00a0manner\u00a0as \u00a0\n may\u00a0be\u00a0approved\u00a0by\u00a0the\u00a0State\u00a0Government.\u00a0(4)\u00a0The\u00a0State \u00a0\n Government\u00a0may,\u00a0make\u00a0such\u00a0grants,\u00a0advances\u00a0and\u00a0loans \u00a0\n to\u00a0an\u00a0appropriate\u00a0authority\u00a0as\u00a0the\u00a0State\u00a0Government\u00a0may \u00a0\n deem\u00a0necessary\u00a0for\u00a0the\u00a0performance\u00a0of\u00a0its\u00a0functions\u00a0under \u00a0\n this\u00a0Act\u00a0and\u00a0all\u00a0grants,\u00a0loans\u00a0and\u00a0advances\u00a0so\u00a0made\u00a0shall \u00a0\n be \u00a0 made \u00a0 on \u00a0 such \u00a0 terms \u00a0 and \u00a0 conditions \u00a0 as \u00a0 the \u00a0 State \u00a0\n Government\u00a0may\u00a0determine.\n Section \u00a0 95:Accounts \u00a0 And \u00a0 Audit \u00a0:\u00ad\n (1) \u00a0 An \u00a0 appropriate \u00a0 authority \u00a0 shall \u00a0 maintain \u00a0 proper \u00a0\n accounts \u00a0 and \u00a0 other \u00a0 relevant \u00a0 records \u00a0 and \u00a0 prepare \u00a0 an \u00a0\n annual\u00a0statement\u00a0of\u00a0accounts\u00a0including\u00a0the\u00a0balance\u00a0sheet \u00a0\n in\u00a0such\u00a0form\u00a0as\u00a0the\u00a0State\u00a0Government\u00a0may\u00a0prescribe.\u00a0(2) \u00a0\n The\u00a0accounts\u00a0of\u00a0an\u00a0appropriate\u00a0authority\u00a0shall\u00a0be\u00a0subject \u00a0\n to\u00a0audit\u00a0annually\u00a0by\u00a0the\u00a0Accountant\u00a0General\u00a0of\u00a0the\u00a0State \u00a0\n and\u00a0any\u00a0expenditure\u00a0incurred\u00a0by\u00a0him\u00a0in\u00a0connection\u00a0with \u00a0\n such \u00a0 audit \u00a0 shall \u00a0 be \u00a0 payable \u00a0 by \u00a0 the \u00a0 authority \u00a0 to \u00a0 the \u00a0\n Accountant\u00a0General.\u00a0(3)\u00a0The\u00a0Accountant\u00a0General\u00a0or\u00a0any \u00a0\n person\u00a0appointed\u00a0by\u00a0him\u00a0in\u00a0connection\u00a0with\u00a0the\u00a0audit\u00a0of \u00a0\n accounts\u00a0of\u00a0an\u00a0appropriate\u00a0authority\u00a0shall\u00a0have\u00a0the\u00a0same \u00a0\n rights, \u00a0privileges \u00a0and \u00a0authority \u00a0in\u00a0connection \u00a0with \u00a0such \u00a0\n audit\u00a0as\u00a0the\u00a0Accountant \u00a0General\u00a0has\u00a0in\u00a0connection\u00a0with \u00a0\n\n\n\n Page 38 of 57\n\nHC-NIC Page 38 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n\n\n\n Government \u00a0 accounts \u00a0 and \u00a0 in \u00a0 particular \u00a0 shall \u00a0 have \u00a0 the \u00a0\n right \u00a0 to \u00a0 demand \u00a0 the \u00a0 production \u00a0 of \u00a0 books, \u00a0 accounts, \u00a0\n connected\u00a0vouchers\u00a0and\u00a0other\u00a0documents\u00a0and\u00a0papers\u00a0and \u00a0\n to\u00a0inspect\u00a0the\u00a0office\u00a0of\u00a0the\u00a0appropriate\u00a0authority.\u00a0(4)\u00a0The \u00a0\n accounts \u00a0of\u00a0an \u00a0authority \u00a0 as \u00a0certified \u00a0by\u00a0the \u00a0 Accountant \u00a0\n General \u00a0 or \u00a0 any \u00a0 other \u00a0person \u00a0 authorised \u00a0 by \u00a0 him \u00a0 in \u00a0 this \u00a0\n behalf, \u00a0 together \u00a0 with \u00a0 the \u00a0 audit \u00a0 report \u00a0 thereon, \u00a0 shall \u00a0be \u00a0\n forwarded\u00a0annually\u00a0to\u00a0the\u00a0State\u00a0Government.\n\n 12. From\u00a0the\u00a0 aforesaid\u00a0provisions\u00a0of\u00a0the\u00a0Town\u00a0Planning\u00a0Act,\u00a0it\u00a0\n can \u00a0 be \u00a0 \u00a0 gathered \u00a0 that \u00a0 Assessee \u00a0 has \u00a0 been \u00a0 constituted \u00a0 as \u00a0 Urban\u00a0\n Development\u00a0Authority\u00a0under\u00a0the\u00a0provisions\u00a0of\u00a0Section\u00a022\u00a0of\u00a0the\u00a0\n Town\u00a0Planning\u00a0Act.\u00a0The\u00a0purpose\u00a0and\u00a0object\u00a0of\u00a0constitution\u00a0of\u00a0the\u00a0\n Urban \u00a0 Development \u00a0 Authority \u00a0 is \u00a0 proper \u00a0 development \u00a0 or \u00a0 re\u00ad\n development \u00a0 of \u00a0 urban \u00a0 area. \u00a0 Even \u00a0 Urban \u00a0 Development \u00a0 Authority\u00a0\n consists \u00a0 of \u00a0(i) \u00a0 a \u00a0 Chairman \u00a0 to \u00a0 be \u00a0 appointed \u00a0 by \u00a0 the \u00a0 State\u00a0\n Government; \u00a0 (ii) \u00a0 such \u00a0 persons, \u00a0 not \u00a0 exceeding \u00a0 [four \u00a0 in \u00a0 number]\u00a0\n who\u00a0are\u00a0members\u00a0of\u00a0the\u00a0local\u00a0authority\u00a0or\u00a0authorities\u00a0functioning\u00a0\n in\u00a0the\u00a0urban\u00a0development\u00a0area,\u00a0as\u00a0may\u00a0be\u00a0nominated\u00a0by\u00a0the\u00a0State\u00a0\n Government; \u00a0(iii) \u00a0 Three \u00a0 officials \u00a0 of\u00a0 the \u00a0State \u00a0Government, \u00a0 to\u00a0 be\u00a0\n nominated \u00a0by \u00a0 that \u00a0 Government, \u00a0 ex\u00adofficio; \u00a0 (iv) \u00a0 the \u00a0 Presidents\u00a0 of\u00a0\n the\u00a0district\u00a0panchayats\u00a0functioning\u00a0in\u00a0the\u00a0urban\u00a0development\u00a0area,\u00a0\n or,\u00a0as\u00a0the\u00a0case\u00a0may\u00a0be,\u00a0part\u00a0thereof,\u00a0ex\u00adofficio;\u00a0(v)\u00a0the\u00a0Chief\u00a0Town\u00a0\n planner\u00a0or\u00a0his\u00a0representative,\u00a0ex\u00adofficio;\u00a0(vi)\u00a0the\u00a0Chief\u00a0Engineer\u00a0or\u00a0\n Engineers \u00a0 (Public \u00a0 Health) \u00a0 of \u00a0 the \u00a0 local \u00a0 authority \u00a0 or \u00a0 authorities\u00a0\n functioning\u00a0in\u00a0the\u00a0urban\u00a0development\u00a0area\u00a0or\u00a0his\u00a0or\u00a0their\u00a0nominee\u00a0\n or\u00a0nominees,\u00a0ex\u00adofficio;\u00a05[(vi\u00ada)\u00a0the\u00a0Municipal\u00a0Commissioner\u00a0of\u00a0the\u00a0\n Municipal \u00a0 Corporation, \u00a0 if \u00a0 any, \u00a0 functioning \u00a0 in \u00a0 the \u00a0 urban\u00a0\n development \u00a0 area, \u00a0 ex\u00adofficio;] \u00a0 (vii) \u00a0 a \u00a0 member \u00a0 secretary \u00a0 to \u00a0 be\u00a0\n appointed\u00a0by\u00a0the\u00a0State\u00a0Government\u00a0who\u00a0shall\u00a0also\u00a0be\u00a0designated\u00a0as\u00a0\n the\u00a0Chief\u00a0Executive\u00a0Authority\u00a0of\u00a0the\u00a0Urban\u00a0Development\u00a0Authority.\u00a0\n\n Page 39 of 57\nHC-NIC Page 39 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n\n\n\n Thus, \u00a0 the \u00a0 constitution \u00a0 of \u00a0 the \u00a0 Urban \u00a0 Development \u00a0 Authority \u00a0 is\u00a0\n subject \u00a0to\u00a0 the\u00a0 control\u00a0 of\u00a0 the\u00a0State\u00a0Government.\u00a0 The\u00a0 powers\u00a0 and\u00a0\n functions \u00a0 of \u00a0 the \u00a0 Urban \u00a0 Development \u00a0 Authority \u00a0 as \u00a0 \u00a0 contained \u00a0 in\u00a0\n Section\u00a023\u00a0are\u00a0reproduced\u00a0herein\u00a0above.\u00a0Considering\u00a0Section\u00a040\u00a0of\u00a0\n the\u00a0Town\u00a0Planning\u00a0Act,\u00a0the\u00a0Town\u00a0Planning\u00a0Scheme\u00a0prepared\u00a0by\u00a0the\u00a0\n Urban\u00a0Development\u00a0Authority\u00a0which\u00a0has\u00a0been\u00a0prepared\u00a0subject\u00a0to\u00a0\n sanction\u00a0by\u00a0the\u00a0State\u00a0Government\u00a0for\u00a0development\u00a0of\u00a0the\u00a0Urban\u00a0\n Development\u00a0Area,\u00a0also\u00a0provide\u00a0for\u00a0 \u00a0roads,\u00a0open\u00a0spaces,\u00a0gardens,\u00a0\n recreation\u00a0grounds,\u00a0schools,\u00a0markets,\u00a0green\u00adbelts,\u00a0dairies,\u00a0transport\u00a0\n facilities, \u00a0 public \u00a0 purposes \u00a0 of \u00a0 all \u00a0 kinds; \u00a0 drainage, \u00a0 inclusive \u00a0 of\u00a0\n sewerage, \u00a0 surface \u00a0 or \u00a0 sub\u00adsoil \u00a0 drainage \u00a0 and \u00a0 sewage \u00a0 disposal;\u00a0\n Lighting; \u00a0 Water \u00a0 supply \u00a0 etc. \u00a0 The \u00a0 Town \u00a0 Planning \u00a0 Scheme \u00a0 also\u00a0\n provide\u00a0for\u00a0\u00a0historical\u00a0or\u00a0national\u00a0interest\u00a0or\u00a0natural\u00a0beauty,\u00a0and\u00a0of\u00a0\n buildings\u00a0actually\u00a0used\u00a0for\u00a0religious\u00a0purposes.\u00a0\u00a0The\u00a0Scheme\u00a0are\u00a0also\u00a0\n provide\u00a0for\u00a0reservation\u00a0of\u00a0land\u00a0to\u00a0the\u00a0extent\u00a0of\u00a0ten\u00a0percent,\u00a0or\u00a0such\u00a0\n percentage \u00a0 as \u00a0 near \u00a0 thereto \u00a0 as \u00a0 possible \u00a0 of \u00a0 the \u00a0 total \u00a0 area \u00a0 covered\u00a0\n under \u00a0 the \u00a0 scheme, \u00a0 for \u00a0 the \u00a0 purpose \u00a0 of \u00a0 providing \u00a0 housing\u00a0\n accommodation \u00a0 to \u00a0 the \u00a0 members \u00a0 of \u00a0 socially \u00a0 and \u00a0 economically\u00a0\n backward \u00a0 classes \u00a0 of \u00a0 people. \u00a0 As \u00a0 per \u00a0 Section \u00a0 40(i)(jj) \u00a0 for \u00a0 the\u00a0\n aforesaid\u00a0purposes\u00a0certain\u00a0percentage\u00a0of\u00a0total\u00a0area\u00a0covered\u00a0under\u00a0\n the\u00a0scheme\u00a0are\u00a0\u00a0allotted\u00a0earmarked.\u00a0Fifteen\u00a0percent\u00a0of\u00a0total\u00a0area\u00a0is\u00a0\n allotted \u00a0 for \u00a0 the \u00a0 purpose \u00a0 of \u00a0 \u00a0 roads, \u00a0 \u00a0 five \u00a0 percent \u00a0 for \u00a0 parks, \u00a0 play\u00a0\n grounds, \u00a0 gardens \u00a0 and \u00a0 open \u00a0 space, \u00a0 five \u00a0 percent \u00a0 for \u00a0 social\u00a0\n infrastructure\u00a0such\u00a0as\u00a0school,\u00a0dispensary,\u00a0fire\u00a0brigade,\u00a0public\u00a0utility\u00a0\n place\u00a0as\u00a0earmarked\u00a0in\u00a0the\u00a0Draft\u00a0Town\u00a0Planning\u00a0Scheme\u00a0and\u00a0Fifteen\u00a0\n percent \u00a0 for \u00a0 sale \u00a0 by \u00a0 appropriate \u00a0 authority \u00a0 for \u00a0 residential,\u00a0\n commercial \u00a0 or \u00a0 industrial \u00a0 use \u00a0 depending \u00a0 upon \u00a0 the \u00a0 nature \u00a0 of\u00a0\n development. \u00a0 Last \u00a0 Fifteen \u00a0 percent \u00a0 is \u00a0 earmarked \u00a0 under \u00a0 the \u00a0 Town\u00a0\n\n Page 40 of 57\n\nHC-NIC Page 40 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n\n\n\n Planning\u00a0Scheme\u00a0for\u00a0sale,\u00a0by\u00a0appropriate\u00a0authority\u00a0for\u00a0residential,\u00a0\n commercial \u00a0 or \u00a0 industrial \u00a0 use. \u00a0 The \u00a0 appropriate \u00a0 authority \u00a0 /\u00a0 Urban\u00a0\n Development\u00a0Authority\u00a0is\u00a0permitted\u00a0to\u00a0sale\u00a0the\u00a0said\u00a0plots\u00a0/\u00a0lands\u00a0to\u00a0\n the\u00a0extent\u00a0of\u00a015%\u00a0of\u00a0the\u00a0total\u00a0area\u00a0to\u00a0meet\u00a0with\u00a0the\u00a0expenditure\u00a0\n towards\u00a0drainage,\u00a0roads,\u00a0gardens,\u00a0schools,\u00a0markets,\u00a0water\u00a0supply\u00a0\n etc.\u00a0So\u00a0that\u00a0maximum\u00a0price\u00a0can\u00a0be\u00a0fetched\u00a0and\u00a0the\u00a0same\u00a0can\u00a0be\u00a0\n utilized\u00a0for\u00a0the\u00a0development\u00a0of\u00a0the\u00a0Urban\u00a0Development\u00a0Area\u00a0and\u00a0so\u00a0\n as\u00a0to\u00a0avoid\u00a0any\u00a0allegation\u00a0of\u00a0favoritism\u00a0and\u00a0nepotism,\u00a0the\u00a0plots\u00a0are\u00a0\n sold\u00a0by\u00a0public\u00a0auction.\u00a0It\u00a0is\u00a0required\u00a0to\u00a0be\u00a0noted\u00a0the\u00a0entire\u00a0amount\u00a0\n realized\u00a0by\u00a0the\u00a0assessee\u00a0being\u00a0Urban\u00a0Development\u00a0Authority\u00a0either\u00a0\n by \u00a0 selling \u00a0 plots \u00a0 or \u00a0 by \u00a0 recovery \u00a0 of \u00a0 some \u00a0 fees \u00a0 / \u00a0 charges, \u00a0 Urban\u00a0\n Authority\u00a0is\u00a0required\u00a0to\u00a0use\u00a0only\u00a0for\u00a0the\u00a0purpose\u00a0of\u00a0development\u00a0in\u00a0\n the\u00a0Urban\u00a0Development\u00a0Area\u00a0and\u00a0not\u00a0for\u00a0any\u00a0other\u00a0purpose.\u00a0The\u00a0\n learned \u00a0 Tribunal \u00a0 has \u00a0 observed \u00a0 and \u00a0 held \u00a0 that \u00a0 as \u00a0 the \u00a0 assessee \u00a0 is\u00a0\n selling \u00a0 \u00a0 the \u00a0 plots, \u00a0 to \u00a0 the \u00a0 extent \u00a0 of \u00a0 15% \u00a0 of \u00a0 total \u00a0 area, \u00a0 by \u00a0 public\u00a0\n auction\u00a0and\u00a0gets\u00a0maximum\u00a0amount,\u00a0it\u00a0amounts\u00a0to\u00a0profitering\u00a0and\u00a0\n therefore, \u00a0 the \u00a0 activities \u00a0 of \u00a0 the \u00a0 Assessee \u00a0 can \u00a0be \u00a0 said\u00a0 to\u00a0 be \u00a0 in \u00a0 the\u00a0\n nature \u00a0 of \u00a0 business. \u00a0 However, \u00a0 while \u00a0 holding \u00a0 so, \u00a0 learned \u00a0 Tribunal\u00a0\n has\u00a0not\u00a0properly\u00a0appreciated\u00a0the\u00a0object\u00a0and\u00a0purpose\u00a0of\u00a0permitting\u00a0\n the\u00a0Urban\u00a0Development\u00a0Authority\u00a0to\u00a0sale\u00a0the\u00a0plots,\u00a0maximum\u00a0to\u00a0\n the\u00a0extent\u00a0of\u00a015%\u00a0of\u00a0the\u00a0total\u00a0area\u00a0i.e.\u00a0to\u00a0meet\u00a0with\u00a0the\u00a0expenditure\u00a0\n for \u00a0 providing \u00a0 them \u00a0 infrastructural \u00a0 facilities \u00a0 like \u00a0 gardens, \u00a0 roads,\u00a0\n lighting,\u00a0water\u00a0supply,\u00a0drainage\u00a0system\u00a0etc.\u00a0The\u00a0learned\u00a0Tribunal\u00a0\n has\u00a0also\u00a0not\u00a0properly\u00a0appreciated\u00a0the\u00a0reasons\u00a0for\u00a0selling\u00a0the\u00a0plot\u00a0by\u00a0\n holding\u00a0public\u00a0auction\u00a0i.e.;\u00a0(1)\u00a0to\u00a0avoid\u00a0any\u00a0further\u00a0allegation\u00a0of\u00a0\n favoritism\u00a0and\u00a0nepotism\u00a0and\u00a0 \u00a0(2)\u00a0so\u00a0that\u00a0maximum\u00a0market\u00a0price\u00a0\n can \u00a0 be \u00a0 fetched, \u00a0 which \u00a0 can \u00a0 be \u00a0 used \u00a0 for \u00a0 the \u00a0 development \u00a0 of \u00a0 the\u00a0\n Urban\u00a0Development\u00a0Area.\n\n Page 41 of 57\nHC-NIC Page 41 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n\n\n\n\n 12.1. At\u00a0this\u00a0stage\u00a0decision\u00a0of\u00a0the\u00a0Hon'ble\u00a0Supreme\u00a0Court\u00a0in\u00a0the\u00a0\n case\u00a0of\u00a0 \u00a0Ahmedabad\u00a0Green\u00a0Belt\u00a0Khedut\u00a0Mandal\u00a0(supra)\u00a0((2014)\u00a07\u00a0\n SCC\u00a0357)\u00a0is\u00a0required\u00a0to\u00a0be\u00a0referred\u00a0to.\u00a0Before\u00a0the\u00a0Hon'ble\u00a0Supreme\u00a0\n Court,\u00a0it\u00a0was\u00a0contended\u00a0on\u00a0behalf\u00a0of\u00a0original\u00a0land\u00a0owners\u00a0whose\u00a0\n lands\u00a0were\u00a0included\u00a0in\u00a0the\u00a0TP\u00a0Scheme\u00a0that\u00a0by\u00a0permitting\u00a0the\u00a0Area\u00a0\n Development\u00a0Authority\u00a0/\u00a0Urban\u00a0Development\u00a0Authority\u00a0to\u00a0sell\u00a015%\u00a0\n of\u00a0the\u00a0total\u00a0area,\u00a0by\u00a0that\u00a0the\u00a0Urban\u00a0Development\u00a0Authority\u00a0will\u00a0be\u00a0\n making \u00a0 profit, \u00a0 the \u00a0 Hon'ble \u00a0 Supreme \u00a0 Court \u00a0 has \u00a0 negatived \u00a0 the\u00a0\n aforesaid \u00a0 and \u00a0 has \u00a0 observed \u00a0 that \u00a0 the \u00a0 activities \u00a0 of \u00a0 the \u00a0 Urban\u00a0\n Development\u00a0Authority\u00a0/\u00a0Area\u00a0Development\u00a0Authority\u00a0while\u00a0selling\u00a0\n the\u00a0land\u00a0to\u00a0the\u00a0extent\u00a0of\u00a015%\u00a0to\u00a0the\u00a0total\u00a0area\u00a0covered\u00a0under\u00a0the\u00a0\n scheme\u00a0cannot\u00a0be\u00a0said\u00a0to\u00a0be\u00a0profitering. \u00a0It\u00a0is\u00a0observed\u00a0and\u00a0held\u00a0\n that\u00a0sale\u00a0upto\u00a015%\u00a0 \u00a0is\u00a0from\u00a0total\u00a0area\u00a0covered\u00a0under\u00a0the\u00a0scheme\u00a0\n and \u00a0 not \u00a0 in \u00a0 respect \u00a0 of \u00a0 every \u00a0 plot \u00a0 of \u00a0 land. \u00a0 In \u00a0 order \u00a0 to \u00a0 generate\u00a0\n financial \u00a0 resources \u00a0 for \u00a0 the \u00a0 development \u00a0 of \u00a0 infrastructure, \u00a0 the\u00a0\n salable \u00a0 plot \u00a0 for \u00a0 residential, \u00a0 commercial \u00a0 and \u00a0 industrial \u00a0 use \u00a0 are\u00a0\n allotted\u00a0by\u00a0the\u00a0appropriate\u00a0authority.\u00a0It\u00a0is\u00a0further\u00a0observed\u00a0that\u00a0the\u00a0\n provision\u00a0of\u00a0the\u00a0Act\u00a0have\u00a0to\u00a0be\u00a0read\u00a0as\u00a0a\u00a0whole\u00a0and\u00a0therefore,\u00a0the\u00a0\n provision \u00a0 of \u00a0 Section \u00a0 40(3)(jj)(a)(iv) \u00a0 for \u00a0 sale \u00a0 is \u00a0 to \u00a0 be \u00a0 in\u00a0\n consonance\u00a0/\u00a0conjointly\u00a0with\u00a0other\u00a0statutory\u00a0provisions\u00a0and\u00a0not\u00a0in\u00a0\n isolation.Under \u00a0 the \u00a0 circumstances, \u00a0 the \u00a0 learned \u00a0 Tribunal \u00a0 has\u00a0\n committed\u00a0gross\u00a0error\u00a0in\u00a0considering\u00a0the\u00a0activities\u00a0of\u00a0the\u00a0appellant\u00a0\n Urban \u00a0 Development \u00a0 Authority \u00a0 for \u00a0 profiter \u00a0 by \u00a0 selling \u00a0 15% \u00a0 of \u00a0 the\u00a0\n total\u00a0 area\u00a0 and\u00a0thereby\u00a0 has\u00a0 committed\u00a0gross \u00a0error \u00a0in\u00a0 holding\u00a0the\u00a0\n activities \u00a0 of \u00a0 the \u00a0 assessee \u00a0 in \u00a0 the \u00a0 nature \u00a0 of \u00a0 trade, \u00a0 commerce \u00a0 or\u00a0\n business.\u00a0\u00a0\u00a0\u00a0\n\n Page 42 of 57\nHC-NIC Page 42 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n\n\n\n 12.2. Whether\u00a0the\u00a0activities\u00a0of\u00a0the\u00a0appellant\u00a0AUDA\u00a0can\u00a0be\u00a0said\u00a0to\u00a0\n be\u00a0in\u00a0the\u00a0nature\u00a0of\u00a0trade,\u00a0commerce\u00a0or\u00a0business\u00a0as\u00a0occurring\u00a0in\u00a0the\u00a0\n first \u00a0 proviso \u00a0 to \u00a0 Section \u00a0 2(15) \u00a0 of \u00a0 the \u00a0 Act, \u00a0 few \u00a0 decisions \u00a0 of \u00a0 the\u00a0\n Hon'ble\u00a0Supreme\u00a0Court\u00a0as\u00a0well\u00a0as\u00a0other\u00a0High\u00a0Courts\u00a0are\u00a0required\u00a0to\u00a0\n be\u00a0referred\u00a0to\u00a0at\u00a0this\u00a0stage.\n\n 12.3. In\u00a0the\u00a0case\u00a0of\u00a0Khoday\u00a0Distilleries\u00a0Ltd\u00a0and\u00a0Others\u00a0vs.\u00a0State\u00a0of\u00a0\n Karnataka\u00a0and\u00a0others\u00a0reported\u00a0in\u00a0(1995)\u00a01\u00a0SCC\u00a0574,\u00a0the\u00a0Hon'ble\u00a0\n Supreme\u00a0Court\u00a0had\u00a0an\u00a0occasion\u00a0to\u00a0consider\u00a0the\u00a0word\u00a0\"trade\".\u00a0In\u00a0the\u00a0\n said \u00a0 decision, \u00a0 the \u00a0 Hon'ble \u00a0 Supreme \u00a0 Court \u00a0 has \u00a0 held \u00a0 that \u00a0 \"the\u00a0\n primary\u00a0meaning\u00a0of\u00a0the\u00a0word\u00a0\"trade\"\u00a0is\u00a0the\u00a0exchange\u00a0of\u00a0goods\u00a0for\u00a0\n goods\u00a0or\u00a0goods\u00a0for\u00a0money\".\n 12.4. In\u00a0the\u00a0case\u00a0of\u00a0State\u00a0of\u00a0Andhra\u00a0Pradesh\u00a0vs.\u00a0Abdul\u00a0Bakhi\u00a0and\u00a0\n Bros\u00a0reported\u00a0in\u00a01964(5)\u00a0STC\u00a0644\u00a0(SC)\u00a0while\u00a0considering\u00a0the\u00a0word\u00a0\n \"business\", \u00a0 the \u00a0 Hon'ble \u00a0 Supreme \u00a0 Court \u00a0 has \u00a0 held \u00a0 that \u00a0 \"the \u00a0 word\u00a0\n \"business\"\u00a0was\u00a0of\u00a0indefinite\u00a0import\u00a0and\u00a0in\u00a0a\u00a0taxing\u00a0statute,\u00a0it\u00a0is\u00a0used\u00a0\n in \u00a0 sense \u00a0 of \u00a0 an \u00a0 occupation, \u00a0 or \u00a0 profession \u00a0 which \u00a0 occupies \u00a0 time,\u00a0\n attention\u00a0or\u00a0labour\u00a0of\u00a0a\u00a0person,\u00a0and\u00a0is\u00a0clearly\u00a0associated\u00a0with\u00a0the\u00a0\n object\u00a0of\u00a0marking\u00a0profit\".\n\n 12.5 In \u00a0 the \u00a0 case \u00a0 of \u00a0 Institute \u00a0 of \u00a0 Chartered \u00a0 Accountants \u00a0 of \u00a0 India\u00a0\n (supra) \u00a0 while \u00a0 considering \u00a0 the \u00a0 whether \u00a0 activities \u00a0 of \u00a0 Indian \u00a0 Trade\u00a0\n promotion \u00a0 \u00a0 organization \u00a0 can \u00a0 be \u00a0 said \u00a0 to \u00a0 be \u00a0 in \u00a0 the \u00a0 nature \u00a0 of\u00a0\n \"business\",\u00a0despite\u00a0the\u00a0fact\u00a0that\u00a0the\u00a0said\u00a0organization\u00a0was\u00a0collecting\u00a0\n rent \u00a0 for \u00a0 providing \u00a0 the \u00a0 space \u00a0 at \u00a0 trade, \u00a0 fair \u00a0 and \u00a0 exhibitions \u00a0 and\u00a0\n though\u00a0was\u00a0receiving\u00a0income\u00a0by\u00a0way\u00a0of\u00a0sale\u00a0of\u00a0tickets\u00a0and\u00a0income\u00a0\n from\u00a0tickets\u00a0and\u00a0sale\u00a0in\u00a0Pragati\u00a0Maidan\u00a0etc.,\u00a0after\u00a0considering\u00a0the\u00a0\n various\u00a0decisions\u00a0of\u00a0the\u00a0Hon'ble\u00a0Supreme\u00a0Court\u00a0as\u00a0well\u00a0as\u00a0decisions\u00a0\n\n Page 43 of 57\n\nHC-NIC Page 43 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n\n\n\n of \u00a0 the \u00a0 other \u00a0 High \u00a0 Courts, \u00a0 it \u00a0 is \u00a0 held \u00a0 that \u00a0 activities \u00a0 of \u00a0 the \u00a0 said\u00a0\n organization\u00a0cannot\u00a0be\u00a0considered\u00a0as\u00a0\"business\".\u00a0While\u00a0holding\u00a0so,\u00a0\n Delhi\u00a0High\u00a0Court\u00a0has\u00a0observed\u00a0and\u00a0held\u00a0as\u00a0under:\n \"An \u00a0 activity \u00a0 would \u00a0 be \u00a0 considered \u00a0 'business' \u00a0 if \u00a0 it \u00a0 is\u00a0\n undertaken\u00a0with\u00a0a\u00a0profit\u00a0motive,\u00a0but\u00a0in\u00a0some\u00a0cases,\u00a0\n this\u00a0may\u00a0not\u00a0be\u00a0determinative.\u00a0Normally,\u00a0the\u00a0profit\u00a0\n motive\u00a0test\u00a0should\u00a0be\u00a0satisfied,\u00a0 but\u00a0in\u00a0a\u00a0given\u00a0case\u00a0\n activity \u00a0 may \u00a0 be \u00a0 regarded \u00a0 as \u00a0 a \u00a0 business\u00a0 even \u00a0 when\u00a0\n profit\u00a0motive\u00a0cannot\u00a0be\u00a0established\u00a0/\u00a0proved.\u00a0In\u00a0such\u00a0\n cases,\u00a0there\u00a0should\u00a0be\u00a0evidence\u00a0and\u00a0material\u00a0to\u00a0show\u00a0\n that \u00a0 the \u00a0 activity \u00a0 has \u00a0 continued \u00a0 on \u00a0 sound \u00a0 and\u00a0\n recognized \u00a0 business \u00a0 principles \u00a0 and \u00a0 pursued \u00a0 with\u00a0\n reasonable \u00a0 continuity. \u00a0 There \u00a0 should \u00a0 be \u00a0 facts \u00a0 and\u00a0\n other\u00a0circumstances\u00a0which\u00a0justify\u00a0and\u00a0show\u00a0that\u00a0the\u00a0\n activity \u00a0 undertaken \u00a0 is \u00a0 in \u00a0 fact \u00a0 in \u00a0 the \u00a0 nature \u00a0 of\u00a0\n business.\"\n\n 12.6. In\u00a0the\u00a0aforesaid\u00a0decision,\u00a0after\u00a0considering\u00a0the\u00a0decision\u00a0of\u00a0the\u00a0\n Hon'ble\u00a0Supreme\u00a0Court\u00a0in\u00a0the\u00a0case\u00a0of\u00a0Commissioner\u00a0of\u00a0Sales\u00a0Tax\u00a0\n vs.\u00a0Sai\u00a0Publication\u00a0Fund\u00a0reported\u00a0in\u00a0(2002)\u00a0258\u00a0ITR\u00a070(SC),\u00a0it\u00a0is\u00a0\n held\u00a0by\u00a0the\u00a0Delhi\u00a0High\u00a0Court\u00a0that\u00a0\"thus,\u00a0if\u00a0the\u00a0dominant\u00a0activity\u00a0of\u00a0\n the \u00a0 assessee \u00a0 was \u00a0 not \u00a0 business, \u00a0 then \u00a0 any \u00a0 incidental \u00a0 or \u00a0 ancillary\u00a0\n activity \u00a0 would \u00a0 also \u00a0 not \u00a0 fall \u00a0 within \u00a0 the \u00a0 definition \u00a0 of \u00a0 business.\" \u00a0In\u00a0\n para\u00a064,\u00a067,\u00a069,\u00a070,\u00a071\u00a0and\u00a072\u00a0the\u00a0Delhi\u00a0High\u00a0Court\u00a0has\u00a0observed\u00a0\n and\u00a0held\u00a0as\u00a0under:\n \"64.\u00a0It\u00a0is\u00a0not\u00a0necessary\u00a0that\u00a0a\u00a0person\u00a0should\u00a0give \u00a0\n something \u00a0 for \u00a0 free \u00a0 or \u00a0 at \u00a0 a \u00a0 concessional \u00a0 rate \u00a0 to \u00a0\n qualify \u00a0 as \u00a0 being \u00a0 established \u00a0 for \u00a0 a \u00a0 charitable \u00a0\n purpose.\u00a0If\u00a0the\u00a0object\u00a0and\u00a0purpose\u00a0of\u00a0the\u00a0institution \u00a0\n is \u00a0charitable, \u00a0the \u00a0fact \u00a0 that \u00a0the \u00a0 institution \u00a0 collects \u00a0\n certain\u00a0charges,\u00a0does\u00a0not\u00a0alter\u00a0the\u00a0character\u00a0of\u00a0the \u00a0\n institution.\u00a0\u00a0\n\n 67.The\u00a0expressions\u00a0trade,\u00a0commerce\u00a0and\u00a0\u2015business \u00a0\n as\u00a0occurring\u00a0in\u00a0the\u00a0first\u00a0proviso\u00a0to\u00a0section\u00a02(15)\u00a0of \u00a0\n the\u00a0Act\u00a0must\u00a0be\u00a0read\u00a0in\u00a0the\u00a0context\u00a0of\u00a0the\u00a0intent \u00a0\n and\u00a0purport\u00a0of\u00a0section\u00a02(15)\u00a0of\u00a0the\u00a0Act\u00a0and\u00a0cannot \u00a0\n be\u00a0interpreted\u00a0to\u00a0mean\u00a0any\u00a0activity\u00a0which\u00a0is\u00a0carried \u00a0\n on\u00a0in\u00a0an\u00a0organised\u00a0manner.\u00a0The\u00a0purpose\u00a0and\u00a0the \u00a0\n dominant\u00a0object\u00a0for\u00a0which\u00a0an\u00a0institution\u00a0carries\u00a0on \u00a0\n\n\n Page 44 of 57\n\nHC-NIC Page 44 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n\n\n\n its\u00a0activities \u00a0is\u00a0material\u00a0to\u00a0determine \u00a0whether \u00a0the \u00a0\n same \u00a0 is \u00a0 business \u00a0 or \u00a0 not. \u00a0 The \u00a0 purport \u00a0 of \u00a0 the \u00a0 first \u00a0\n proviso\u00a0to\u00a0section\u00a02(15)\u00a0of\u00a0the\u00a0Act\u00a0is\u00a0not\u00a0to\u00a0exclude \u00a0\n entities\u00a0which\u00a0are\u00a0essentially\u00a0for\u00a0charitable\u00a0purpose \u00a0\n but \u00a0 are \u00a0 conducting \u00a0 some \u00a0 activities \u00a0 for \u00a0 a\u00a0\n consideration\u00a0or\u00a0a\u00a0fee.\u00a0The\u00a0object\u00a0of\u00a0introducing\u00a0the \u00a0\n first\u00a0proviso\u00a0is\u00a0to\u00a0exclude\u00a0organizations\u00a0which\u00a0are \u00a0\n carrying \u00a0 on \u00a0 regular \u00a0 business \u00a0 from \u00a0 the \u00a0 scope \u00a0 of \u00a0\n charitable\u00a0purpose.\u00a0The\u00a0purpose\u00a0of\u00a0introducing\u00a0the \u00a0\n proviso \u00a0 to \u00a0Section \u00a0 2(15)\u00a0 of \u00a0 the \u00a0 Act \u00a0 can \u00a0 be \u00a0\n understood\u00a0from\u00a0the\u00a0Budget\u00a0Speech\u00a0of\u00a0the\u00a0Finance \u00a0\n Minister \u00a0while \u00a0introducing \u00a0the\u00a0Finance \u00a0Bill\u00a02008. \u00a0\n The\u00a0relevant\u00a0extract\u00a0to\u00a0the\u00a0Speech\u00a0is\u00a0as\u00a0under:\u00ad\u00a0\n\n Charitable \u00a0 purpose \u00a0 includes \u00a0 relief \u00a0 of \u00a0 the \u00a0 poor, \u00a0\n education, \u00a0 medical \u00a0 relief \u00a0 and \u00a0 any \u00a0 other \u00a0 object \u00a0 of \u00a0\n general \u00a0 public \u00a0 utility. \u00a0 These \u00a0 activities \u00a0 are \u00a0 tax \u00a0\n exempt,\u00a0as\u00a0they\u00a0should\u00a0be.\u00a0However,\u00a0some\u00a0entities \u00a0\n carrying\u00a0on\u00a0regular\u00a0trade,\u00a0commerce\u00a0or\u00a0business\u00a0or \u00a0\n providing \u00a0 services \u00a0 in \u00a0 relation \u00a0 to \u00a0 any \u00a0 trade, \u00a0\n commerce \u00a0 or \u00a0 business \u00a0 and \u00a0 earning \u00a0 incomes \u00a0 have \u00a0\n sought\u00a0to\u00a0claim\u00a0that\u00a0their\u00a0purposes\u00a0would\u00a0also\u00a0fall \u00a0\n under\u00a0charitable\u00a0purpose.\u00a0Obviously,\u00a0this\u00a0was\u00a0not \u00a0\n the\u00a0intention\u00a0of\u00a0Parliament\u00a0and,\u00a0hence,\u00a0I\u00a0propose\u00a0to \u00a0\n amend \u00a0 the \u00a0 law \u00a0 to \u00a0 exclude \u00a0 the \u00a0 aforesaid \u00a0 cases. \u00a0\n Genuine \u00a0 charitable \u00a0 organizations \u00a0 will \u00a0 not \u00a0 in \u00a0 any \u00a0\n way\u00a0be\u00a0affected.'\u00a0The\u00a0expressions\u00a0business,\u00a0trade\u00a0or \u00a0\n commerce\u00a0as\u00a0used\u00a0in\u00a0the\u00a0first\u00a0proviso\u00a0must,\u00a0thus,\u00a0be \u00a0\n interpreted \u00a0 restrictively \u00a0 and \u00a0 where \u00a0 the \u00a0 dominant \u00a0\n object \u00a0 of \u00a0 an \u00a0 organisation \u00a0 is \u00a0 charitable \u00a0 any \u00a0\n incidental \u00a0 activity \u00a0 for \u00a0 furtherance \u00a0 of \u00a0 the \u00a0 object \u00a0\n would \u00a0 not \u00a0 fall \u00a0 within \u00a0 the \u00a0 expressions \u00a0 business, \u00a0\n trade\u00a0or\u00a0commerce.\u00a0\u00a0\n\n 69. \u00a0In \u00a0the \u00a0case \u00a0of\u00a0Addl. \u00a0Commissioner \u00a0of\u00a0Income \u00a0\n Tax \u00a0 v. \u00a0 Surat \u00a0 Art \u00a0 Silk \u00a0 Cloth \u00a0 Manufacturers \u00a0\n Association:\u00a0[1980]\u00a0121\u00a0ITR\u00a01\u00a0(SC),\u00a0the\u00a0Supreme \u00a0\n Court\u00a0held\u00a0as\u00a0under:\u00ad\u00a0\n\n The\u00a0test\u00a0which\u00a0has,\u00a0therefore,\u00a0now\u00a0to\u00a0be\u00a0applied\u00a0is \u00a0\n whether \u00a0 the \u00a0 predominant \u00a0 object \u00a0 of \u00a0 the \u00a0 activity \u00a0\n involved\u00a0in\u00a0carrying\u00a0out\u00a0the\u00a0object\u00a0of\u00a0general\u00a0public \u00a0\n utility \u00a0is\u00a0to\u00a0subserve \u00a0the \u00a0charitable \u00a0purpose \u00a0or\u00a0to \u00a0\n earn \u00a0 profit. \u00a0 Where \u00a0 profit\u00admaking \u00a0 is \u00a0 the \u00a0\n predominant \u00a0 object \u00a0 of \u00a0 the \u00a0 activity, \u00a0 the \u00a0 purpose, \u00a0\n though \u00a0 an \u00a0 object \u00a0 of \u00a0 general \u00a0 public \u00a0 utility \u00a0 would \u00a0\n cease\u00a0to\u00a0be\u00a0a\u00a0charitable\u00a0purpose.\n\n Page 45 of 57\nHC-NIC Page 45 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n\n\n\n But\u00a0where\u00a0the\u00a0predominant\u00a0object\u00a0of\u00a0the\u00a0activity\u00a0is \u00a0\n to\u00a0any\u00a0out\u00a0the\u00a0charitable\u00a0purpose\u00a0and\u00a0not\u00a0to\u00a0earn \u00a0\n profit,\u00a0it\u00a0would\u00a0not\u00a0lose\u00a0its\u00a0character\u00a0of\u00a0a\u00a0charitable \u00a0\n purpose\u00a0merely\u00a0be\u00a0cause\u00a0some\u00a0profit\u00a0arises\u00a0from\u00a0the \u00a0\n activity.'\u00a0\n\n 70.\u00a0Although\u00a0in\u00a0that\u00a0case\u00a0the\u00a0statutory\u00a0provisions \u00a0\n being \u00a0 considered \u00a0 by \u00a0 the \u00a0 Supreme \u00a0 Court \u00a0 were \u00a0\n different \u00a0 and \u00a0 the \u00a0 utilisation \u00a0 of \u00a0 income \u00a0 earned \u00a0 is, \u00a0\n now, \u00a0 not \u00a0 a \u00a0 relevant \u00a0 consideration \u00a0 in \u00a0 view \u00a0 of \u00a0 the \u00a0\n express\u00a0words\u00a0of\u00a0the\u00a0first\u00a0proviso\u00a0to \u00a0section\u00a02(15)\u00a0\n of\u00a0the\u00a0Act,\u00a0nonetheless\u00a0the\u00a0test\u00a0of\u00a0dominant\u00a0object \u00a0\n of \u00a0 an \u00a0 entity \u00a0 would \u00a0 be \u00a0 relevant \u00a0 to \u00a0 determine \u00a0\n whether\u00a0the\u00a0entity\u00a0is\u00a0carrying\u00a0on\u00a0business\u00a0or\u00a0not.\u00a0In \u00a0\n the \u00a0 present \u00a0 case, \u00a0 there \u00a0 is \u00a0 little \u00a0 doubt \u00a0 that \u00a0 the \u00a0\n objects\u00a0of\u00a0the\u00a0activities\u00a0of\u00a0the\u00a0petitioner\u00a0are\u00a0entirely \u00a0\n for\u00a0charitable \u00a0purposes. \u00a0WP(C) \u00a01872/13 \u00a0Page \u00a048 \u00a0\n of\u00a055\u00a0Finally\u00a0in\u00a0ICAI(II)\u00a0(supra),\u00a0this\u00a0court,\u00a0with \u00a0\n reference \u00a0 to \u00a0 H. \u00a0 Abdul \u00a0 Bakhi \u00a0 and \u00a0 Bros \u00a0 (supra) \u00a0\n observed\u00a0as\u00a0under:\u00ad\u00a0\n\n 71.\u00a0Although,\u00a0it\u00a0is\u00a0not\u00a0essential\u00a0that\u00a0an\u00a0activity\u00a0be \u00a0\n carried \u00a0 on \u00a0 for \u00a0 profit \u00a0 motive \u00a0 in \u00a0 order \u00a0 to \u00a0 be \u00a0\n considered \u00a0 as \u00a0 business, \u00a0 but \u00a0 existence \u00a0 of \u00a0 profit \u00a0\n motive \u00a0 would \u00a0be \u00a0a\u00a0 vital \u00a0indicator \u00a0in \u00a0determining \u00a0\n whether\u00a0an\u00a0organisation\u00a0is\u00a0carrying\u00a0on\u00a0business\u00a0or \u00a0\n not. \u00a0 In \u00a0 the \u00a0 present \u00a0 case, \u00a0 the \u00a0 petitioner \u00a0 has \u00a0\n submitted \u00a0 figures \u00a0 to \u00a0 indicate \u00a0 that \u00a0 expenditure \u00a0 on \u00a0\n salaries \u00a0 and \u00a0 depreciation \u00a0 exceeds \u00a0 the \u00a0 surplus \u00a0 as \u00a0\n generated \u00a0 from \u00a0 holding \u00a0 coaching \u00a0 classes. \u00a0 In\u00a0\n addition, \u00a0 the \u00a0 petitioner \u00a0 institute \u00a0 provides \u00a0 study \u00a0\n material \u00a0 and \u00a0 other \u00a0 academic \u00a0 support \u00a0 such \u00a0 as \u00a0\n facilities \u00a0 of \u00a0 a \u00a0 library \u00a0 without \u00a0 any \u00a0 material \u00a0\n additional\u00a0costs.\u00a0The\u00a0Supreme\u00a0Court\u00a0in\u00a0the\u00a0case\u00a0of \u00a0\n State \u00a0 of \u00a0 Andhra \u00a0 Pradesh \u00a0 v. \u00a0 H. \u00a0 Abdul \u00a0 Bakhi \u00a0 and \u00a0\n Bros.\u00a0(supra)\u00a0held\u00a0as\u00a0under:\u00a0\n\n The\u00a0expression\u00a0\"business\"\u00a0though\u00a0extensively\u00a0used\u00a0a \u00a0\n word \u00a0of\u00a0indefinite \u00a0import, \u00a0in\u00a0taxing \u00a0statutes \u00a0it\u00a0is \u00a0\n used \u00a0in\u00a0the \u00a0sense \u00a0of\u00a0an\u00a0 occupation, \u00a0or \u00a0profession \u00a0\n which\u00a0occupies\u00a0the\u00a0time,\u00a0attention\u00a0and\u00a0labour\u00a0of\u00a0a \u00a0\n person,\u00a0normally\u00a0with\u00a0the\u00a0object\u00a0of\u00a0making\u00a0profit. \u00a0\n To\u00a0regard\u00a0an\u00a0activity\u00a0as\u00a0business\u00a0there\u00a0must\u00a0be\u00a0a \u00a0\n course \u00a0 of \u00a0 dealings, \u00a0 either \u00a0 actually \u00a0 continued \u00a0 or \u00a0\n contemplated\u00a0to\u00a0be\u00a0continued\u00a0with\u00a0a\u00a0profit\u00a0motive, \u00a0\n and\u00a0not\u00a0for\u00a0sport\u00a0or\u00a0pleasure.\u00a0(Underlining\u00a0added)\u00a0\n\n\n\n\n Page 46 of 57\n\nHC-NIC Page 46 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n 72. \u00a0 There \u00a0 is \u00a0 nothing \u00a0 on \u00a0 record \u00a0 to \u00a0 indicate \u00a0 the \u00a0\n assertion\u00a0of\u00a0the\u00a0petitioner\u00a0that\u00a0its\u00a0activities\u00a0are\u00a0not \u00a0\n fuelled \u00a0 by \u00a0 profit \u00a0 motive \u00a0 is \u00a0 incorrect. \u00a0 Absence \u00a0 of \u00a0\n profit\u00a0motive,\u00a0though\u00a0not\u00a0conclusive,\u00a0does\u00a0indicate \u00a0\n that\u00a0the\u00a0petitioner\u00a0is\u00a0not\u00a0carrying\u00a0on\u00a0any\u00a0business.\"\n\n 12.7. Identical\u00a0question\u00a0came\u00a0to\u00a0be\u00a0considered\u00a0by\u00a0the\u00a0Delhi\u00a0High\u00a0\n Court\u00a0in\u00a0the\u00a0case\u00a0of\u00a0Bureau\u00a0of\u00a0India\u00a0Standard\u00a0vs.\u00a0Director\u00a0General\u00a0\n of\u00a0Income\u00a0Tax\u00a0(Exemptions)\u00a0reported\u00a0in\u00a0(2013)\u00a0212\u00a0Taxman\u00a0210\u00a0\n (Delhi).\u00a0In\u00a0the\u00a0said\u00a0decision,\u00a0the\u00a0Delhi\u00a0High\u00a0Court\u00a0was\u00a0considering\u00a0\n whether\u00a0the\u00a0activities\u00a0of\u00a0the\u00a0Bureau\u00a0of\u00a0Indian\u00a0Standards\u00a0(supra)\u00a0in\u00a0\n granting\u00a0licenses\u00a0and\u00a0trading\u00a0certificates\u00a0and\u00a0charging\u00a0amounted\u00a0to\u00a0\n carrying\u00a0on\u00a0business,\u00a0trade\u00a0or\u00a0commerce\u00a0and\u00a0while\u00a0considering\u00a0the\u00a0\n said\u00a0question,\u00a0it\u00a0is\u00a0observed\u00a0as\u00a0under:\n \"\u00a0In\u00a0these \u00a0circumstances,rendering \u00a0any \u00a0service \u00a0in \u00a0\n relation\u00a0to\u00a0trade,\u00a0commerce\u00a0or\u00a0business\u00a0cannot,\u00a0in \u00a0\n the \u00a0 opinion \u00a0 of \u00a0 the \u00a0 Court, \u00a0 receive \u00a0 such \u00a0 a \u00a0 wide \u00a0\n construction\u00a0as\u00a0to\u00a0enfold\u00a0regulatory\u00a0and\u00a0sovereign \u00a0\n authorities, \u00a0 set \u00a0 up \u00a0 under \u00a0 statutory \u00a0 enactments, \u00a0\n and\u00a0tasked\u00a0to\u00a0act\u00a0as\u00a0agencies\u00a0of\u00a0the\u00a0State\u00a0in\u00a0public \u00a0\n duties \u00a0 which \u00a0 cannot \u00a0 be \u00a0 discharged \u00a0 by \u00a0 private \u00a0\n bodies.\u00a0Often,\u00a0apart\u00a0from\u00a0the\u00a0controlling\u00a0or\u00a0parent \u00a0\n statutes, \u00a0 like \u00a0 the \u00a0 BIS \u00a0 Act, \u00a0 these \u00a0 statutory \u00a0 bodies \u00a0\n (including\u00a0BIS)\u00a0are\u00a0empowered\u00a0to\u00a0frame\u00a0\u00a0rules\u00a0or \u00a0\n regulations, \u00a0 exercise \u00a0 coercive \u00a0 powers, \u00a0 including \u00a0\n inspection,\u00a0raids;\u00a0they\u00a0possess\u00a0search\u00a0and\u00a0seizure \u00a0\n powers \u00a0 and \u00a0 are \u00a0 invariably \u00a0 subjected \u00a0 to \u00a0\n Parliamentary \u00a0 or \u00a0 legislative \u00a0 oversight. \u00a0 The \u00a0\n primary \u00a0 object \u00a0 for \u00a0 setting \u00a0 up \u00a0 such \u00a0 regulatory \u00a0\n bodies \u00a0would \u00a0be \u00a0to\u00a0ensure \u00a0general \u00a0public \u00a0utility. \u00a0\n The\u00a0prescribing\u00a0of\u00a0standards,\u00a0and\u00a0enforcing\u00a0those \u00a0\n standards, \u00a0 through \u00a0 accreditation \u00a0 and \u00a0 continuing \u00a0\n supervision \u00a0 through \u00a0 inspection \u00a0 etc., \u00a0 cannot \u00a0 be \u00a0\n considered \u00a0 as \u00a0 trade, \u00a0 business \u00a0 or \u00a0 commercial \u00a0\n activity,\u00a0merely\u00a0because\u00a0the\u00a0testing\u00a0procedures,\u00a0or \u00a0\n accreditation \u00a0 involves \u00a0 charging \u00a0 of \u00a0 such \u00a0 fees. \u00a0 It \u00a0\n cannot \u00a0 be \u00a0 said \u00a0 that \u00a0 the \u00a0public \u00a0 utility \u00a0 activity \u00a0of \u00a0\n evolving, \u00a0 prescribing \u00a0 and \u00a0 enforcing \u00a0 standards, \u00a0\n involves \u00a0 the \u00a0 carrying \u00a0 on \u00a0 of \u00a0 trade \u00a0 or \u00a0 commercial \u00a0\n\n\n\n Page 47 of 57\n\nHC-NIC Page 47 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n\n\n\n activity.\"\n\n 12.8. Circular \u00a0 No.11 \u00a0 of \u00a0 2008 \u00a0 issued \u00a0 by \u00a0 the \u00a0 CBDT \u00a0 \u00a0 fell \u00a0 for\u00a0\n consideration\u00a0by\u00a0the\u00a0Delhi\u00a0High\u00a0Court\u00a0in\u00a0the\u00a0case\u00a0of\u00a0M/s\u00a0G.S.\u00a01\u00a0\n India\u00a0\u00a0\u00a0\u00a0v.\u00a0Director\u00a0General\u00a0of\u00a0Income\u00adtax\u00a0(Exemption)\u00a0and\u00a0Another\u00a0:\u00a0\n WP(C) \u00a0 7797/2009, \u00a0 decided \u00a0 on \u00a0 26.09.2013 \u00a0 (2013) \u00a0 219 \u00a0 Taxman\u00a0\n 205.\u00a0It\u00a0is\u00a0held\u00a0that\u00a0even\u00a0as\u00a0per\u00a0the\u00a0said\u00a0circular,\u00a0proviso\u00a0to\u00a0Section\u00a0\n 2(15) \u00a0 of \u00a0 the \u00a0 Act \u00a0 is \u00a0 applicable \u00a0 to \u00a0 assessee, \u00a0 who \u00a0 are \u00a0 engaged \u00a0 in\u00a0\n commercial\u00a0activities\u00a0i.e.\u00a0carrying\u00a0on\u00a0business,\u00a0trade\u00a0or\u00a0commerce,\u00a0\n in\u00a0the\u00a0garb\u00a0of\u00a0'public\u00a0utilities'\u00a0to\u00a0avoid\u00a0tax\u00a0liability\u00a0as\u00a0it\u00a0was\u00a0noticed\u00a0\n that \u00a0 the \u00a0 object \u00a0 'general \u00a0 public \u00a0 utility' \u00a0 was \u00a0 sometimes \u00a0 used \u00a0 as \u00a0 a\u00a0\n mask \u00a0 or \u00a0 device \u00a0 to \u00a0 hide \u00a0 the \u00a0 true \u00a0 purpose, \u00a0 which \u00a0 was \u00a0 'trade,\u00a0\n commerce \u00a0 or \u00a0 business'. \u00a0 \u00a0 Thus, \u00a0 it \u00a0 is \u00a0 evident \u00a0 that \u00a0 introduction \u00a0 of\u00a0\n proviso\u00a0to\u00a0Section\u00a02(15)\u00a0by\u00a0virtue\u00a0of\u00a0the\u00a0Finance\u00a0Act,\u00a02008\u00a0was\u00a0\n directed\u00a0to\u00a0prevent\u00a0the\u00a0unholy\u00a0practice\u00a0of\u00a0pure\u00a0trade,\u00a0commerce\u00a0\n and\u00a0business\u00a0entities\u00a0from\u00a0masking\u00a0their\u00a0activities\u00a0and\u00a0portraying\u00a0\n them\u00a0in\u00a0the\u00a0garb\u00a0of\u00a0an\u00a0activity\u00a0with\u00a0the\u00a0object\u00a0of\u00a0a\u00a0general\u00a0public\u00a0\n utility.\u00a0It\u00a0is\u00a0not\u00a0designed\u00a0to\u00a0hit\u00a0at\u00a0those\u00a0institutions,\u00a0which\u00a0had\u00a0the\u00a0\n advancement\u00a0of\u00a0the\u00a0objects\u00a0of\u00a0general\u00a0public\u00a0utility\u00a0at\u00a0their\u00a0hearts\u00a0\n and \u00a0 were \u00a0 charity \u00a0 institutions. \u00a0 The \u00a0 attempt \u00a0 was \u00a0 to \u00a0 remove \u00a0 the\u00a0\n masks \u00a0 from \u00a0 the \u00a0 entities, \u00a0 which \u00a0 were \u00a0 purely \u00a0 trade, \u00a0 commerce \u00a0 or\u00a0\n business\u00a0entities,\u00a0and\u00a0to\u00a0expose\u00a0their\u00a0true\u00a0identities.\u00a0\n\n . In\u00a0the\u00a0case\u00a0of\u00a0\u00a0M/s\u00a0G.S.\u00a01\u00a0India\u00a0(Supra),\u00a0in\u00a0para\u00a021,\u00a022\u00a0and\u00a0\n 27,\u00a0the\u00a0Delhi\u00a0High\u00a0Court\u00a0has\u00a0observed\u00a0and\u00a0held\u00a0as\u00a0under:\n \"21. \u00a0 ... \u00a0 As \u00a0 observed \u00a0 above, \u00a0 legal \u00a0 terms, \u00a0 trade, \u00a0 commerce \u00a0 or \u00a0\n business\u00a0in\u00a0Section\u00a02(15),\u00a0mean\u00a0activity\u00a0undertaken\u00a0with\u00a0a\u00a0view \u00a0\n to \u00a0 make \u00a0 or \u00a0 earn \u00a0 profit. \u00a0 Profit \u00a0 motive \u00a0 is \u00a0determinative \u00a0and \u00a0 a \u00a0\n critical\u00a0factor\u00a0to\u00a0discern\u00a0whether\u00a0an\u00a0activity\u00a0is\u00a0business,\u00a0trade\u00a0or \u00a0\n commerce.\u00a0The\u00a0court\u00a0further\u00a0held:\u00ad\u00a0\n\n\n\n Page 48 of 57\n\nHC-NIC Page 48 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n 22. \u00a0 Business \u00a0 activity \u00a0 has \u00a0 an \u00a0 important \u00a0 pervading \u00a0 element \u00a0 of \u00a0\n self\u00adinterest, \u00a0 though \u00a0 fair \u00a0 dealing \u00a0 should \u00a0 and \u00a0 can \u00a0 be \u00a0 present, \u00a0\n whilst \u00a0 charity \u00a0 or \u00a0 charitable \u00a0 activity \u00a0 is \u00a0 anti\u00adthesis \u00a0 of \u00a0 activity \u00a0\n undertaken\u00a0with\u00a0profit\u00a0motive\u00a0or\u00a0activity\u00a0undertaken\u00a0on\u00a0sound \u00a0\n or\u00a0recognized\u00a0business\u00a0principles.\u00a0Charity\u00a0is\u00a0driven\u00a0by\u00a0altruism \u00a0\n and\u00a0desire\u00a0to\u00a0serve\u00a0others,\u00a0though\u00a0element\u00a0of\u00a0self\u00adpreservation \u00a0\n may\u00a0be\u00a0present.\u00a0For\u00a0charity,\u00a0benevolence\u00a0should\u00a0be\u00a0omnipresent \u00a0\n and\u00a0demonstrable \u00a0but\u00a0it\u00a0is\u00a0not\u00a0equivalent\u00a0to\u00a0self\u00adsacrifice \u00a0and \u00a0\n abnegation.\u00a0The\u00a0antiquated\u00a0definition\u00a0of\u00a0charity,\u00a0which\u00a0entails \u00a0\n giving\u00a0and\u00a0receiving\u00a0nothing\u00a0in\u00a0return\u00a0is\u00a0outdated.\u00a0A\u00a0mandatory \u00a0\n feature \u00a0 would \u00a0 be; \u00a0 charitable \u00a0 activity \u00a0 should \u00a0 be \u00a0 devoid \u00a0 of \u00a0\n selfishness\u00a0or\u00a0illiberal\u00a0spirit.\u00a0Enrichment\u00a0of\u00a0oneself\u00a0or\u00a0self\u00adgain \u00a0\n should\u00a0be\u00a0missing\u00a0and\u00a0the\u00a0predominant\u00a0purpose\u00a0of\u00a0the\u00a0activity \u00a0\n WP(C)\u00a01872/13\u00a0Page\u00a052\u00a0of\u00a055\u00a0should\u00a0be\u00a0to\u00a0serve\u00a0and\u00a0benefit \u00a0\n others.\u00a0A\u00a0small\u00a0contribution\u00a0by\u00a0way\u00a0of\u00a0fee\u00a0that\u00a0the\u00a0beneficiary \u00a0\n pays \u00a0 would \u00a0 not \u00a0 convert \u00a0 charitable \u00a0 activity \u00a0 into \u00a0 business, \u00a0\n commerce \u00a0 or \u00a0 trade \u00a0 in \u00a0 the \u00a0 absence \u00a0 of \u00a0 contrary \u00a0 evidence. \u00a0\n Quantum \u00a0 of \u00a0 fee \u00a0 charged, \u00a0 economic \u00a0 status \u00a0 of \u00a0 the \u00a0 beneficiaries \u00a0\n who\u00a0pay,\u00a0commercial\u00a0value\u00a0of\u00a0benefits\u00a0in\u00a0comparison\u00a0to\u00a0the\u00a0fee, \u00a0\n purpose\u00a0and\u00a0object\u00a0behind\u00a0the\u00a0fee\u00a0etc.\u00a0are\u00a0several\u00a0factors\u00a0which \u00a0\n will\u00a0decide\u00a0the\u00a0seminal\u00a0question,\u00a0is\u00a0it\u00a0business?\u00a0\n\n 27. \u00a0 As \u00a0 observed \u00a0 above, \u00a0 fee \u00a0 charged \u00a0 and \u00a0 quantum \u00a0 of \u00a0 income \u00a0\n earned\u00a0can\u00a0be\u00a0indicative\u00a0of\u00a0the\u00a0fact\u00a0that\u00a0the\u00a0person\u00a0is\u00a0carrying \u00a0\n on\u00a0business\u00a0or\u00a0commerce\u00a0and\u00a0not\u00a0charity,\u00a0but\u00a0we\u00a0must\u00a0keep\u00a0in \u00a0\n mind \u00a0 that \u00a0 charitable \u00a0 activities \u00a0 require \u00a0 operational/running \u00a0\n expenses\u00a0as\u00a0well\u00a0as\u00a0capital\u00a0expenses\u00a0to\u00a0be\u00a0able\u00a0to\u00a0sustain\u00a0and \u00a0\n continue\u00a0in\u00a0long\u00a0run.\u00a0The\u00a0petitioner\u00a0has\u00a0to\u00a0be\u00a0substantially\u00a0self\u00ad \u00a0\n sustaining \u00a0 in \u00a0 long\u00adterm \u00a0 and \u00a0 should \u00a0 not \u00a0 depend \u00a0 upon \u00a0\n government,\u00a0in\u00a0other\u00a0words\u00a0taxpayers\u00a0should\u00a0not\u00a0subsidize\u00a0the \u00a0\n said\u00a0activities,\u00a0which\u00a0nevertheless\u00a0are\u00a0charitable\u00a0and\u00a0fall\u00a0under \u00a0\n WP(C)\u00a01872/13 \u00a0Page\u00a053\u00a0of\u00a055\u00a0the\u00a0residuary\u00a0clause\u00a0\u00ad\u00a0general \u00a0\n public \u00a0 utility. \u00a0 The \u00a0 impugned \u00a0 order \u00a0 does \u00a0 not \u00a0 refer \u00a0 to \u00a0 any \u00a0\n statutory\u00a0mandate\u00a0that\u00a0a\u00a0charitable\u00a0institution\u00a0falling\u00a0under\u00a0the \u00a0\n last\u00a0clause \u00a0should\u00a0be\u00a0wholly, \u00a0substantially\u00a0or\u00a0in\u00a0part\u00a0must\u00a0be \u00a0\n funded \u00a0 by \u00a0 voluntary \u00a0 contributions. \u00a0 No \u00a0 such \u00a0 requirement \u00a0 has \u00a0\n been\u00a0pointed\u00a0out\u00a0or\u00a0argued.\u00a0A\u00a0practical\u00a0and\u00a0pragmatic\u00a0view\u00a0is \u00a0\n required\u00a0when\u00a0we\u00a0examine\u00a0the\u00a0data,\u00a0which\u00a0should\u00a0be\u00a0analyzed \u00a0\n objectively \u00a0 and \u00a0 a \u00a0 narrow \u00a0 and \u00a0 coloured \u00a0 view \u00a0 will \u00a0 be \u00a0 counter\u00ad\n productive\u00a0and\u00a0contrary\u00a0to\u00a0the\u00a0language\u00a0of\u00a0Section\u00a02(15)\u00a0of\u00a0the \u00a0\n Act.\"\n\n 12.9. While\u00a0upholding\u00a0the\u00a0constitutional\u00a0validity\u00a0of\u00a0the\u00a0proviso\u00a0to\u00a0\n Section\u00a0 2(15)\u00a0 \u00a0 of\u00a0 the\u00a0 Act,\u00a0 the\u00a0Division \u00a0 Bench\u00a0of\u00a0the\u00a0Delhi\u00a0 High\u00a0\n Court \u00a0 in \u00a0 the \u00a0 case \u00a0 of\u00a0 Indian \u00a0 Trade \u00a0 Promotion \u00a0 Organization \u00a0 vs.\u00a0\n\n\n Page 49 of 57\n\nHC-NIC Page 49 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n\n\n\n Director\u00a0of\u00a0Income\u00a0Tax\u00a0(Exemption)\u00a0in\u00a0WP(C)\u00a0No.1872\u00a0of\u00a02013\u00a0\n decided\u00a0on\u00a022.01.2015\u00a0has\u00a0observed\u00a0in\u00a0para\u00a058\u00a0as\u00a0under:\n \"As \u00a0 defined \u00a0 in \u00a0Section \u00a0 2(15)\u00a0 cannot \u00a0 be \u00a0 construed \u00a0\n literally\u00a0and\u00a0in\u00a0absolute\u00a0terms.\u00a0It\u00a0has\u00a0to\u00a0take\u00a0colour\u00a0and \u00a0\n be\u00a0considered\u00a0in\u00a0the\u00a0context\u00a0of \u00a0Section\u00a010(23C)(iv)\u00a0 of \u00a0\n the \u00a0 said \u00a0 Act. \u00a0 It \u00a0 is \u00a0 also \u00a0 clear \u00a0 that \u00a0 if \u00a0 the \u00a0 literal \u00a0\n interpretation\u00a0is\u00a0given\u00a0to\u00a0the\u00a0proviso\u00a0to\u00a0Section\u00a02(15)\u00a0of\u00a0\n the \u00a0 said \u00a0 Act, \u00a0 then \u00a0 the \u00a0 proviso \u00a0 would \u00a0 be \u00a0 at \u00a0 risk \u00a0 of \u00a0\n running \u00a0 fowl \u00a0 of \u00a0 the \u00a0 principle \u00a0 of \u00a0 equality \u00a0 enshrined \u00a0in \u00a0\n Article\u00a014\u00a0of\u00a0the\u00a0Constitution\u00a0India.\u00a0In\u00a0order\u00a0to\u00a0save\u00a0the \u00a0\n Constitutional \u00a0 validity \u00a0 of\u00a0 the \u00a0 proviso, \u00a0the \u00a0same \u00a0would \u00a0\n have\u00a0to\u00a0be\u00a0read\u00a0down\u00a0and\u00a0interpreted\u00a0in\u00a0the\u00a0context\u00a0of \u00a0\n Section\u00a010(23C)(iv)\u00a0 because, \u00a0in\u00a0our \u00a0 view, \u00a0the \u00a0context \u00a0\n requires \u00a0 such \u00a0 an \u00a0 interpretation. \u00a0 The \u00a0 correct \u00a0\n interpretation\u00a0of\u00a0the\u00a0proviso\u00a0to\u00a0Section\u00a02(15)\u00a0of\u00a0the\u00a0said \u00a0\n Act\u00a0would \u00a0be\u00a0that\u00a0it\u00a0carves\u00a0out\u00a0an\u00a0exception\u00a0from\u00a0the \u00a0\n charitable\u00a0purpose\u00a0of\u00a0advancement\u00a0of\u00a0any\u00a0other\u00a0object\u00a0of \u00a0\n general \u00a0 public \u00a0 utility \u00a0 and \u00a0 that \u00a0 exception \u00a0 is \u00a0 limited \u00a0 to \u00a0\n activities\u00a0in\u00a0the\u00a0nature\u00a0of\u00a0trade,\u00a0commerce\u00a0or\u00a0business\u00a0or \u00a0\n any\u00a0activity\u00a0of\u00a0rendering\u00a0any\u00a0service\u00a0in\u00a0relation\u00a0to\u00a0any \u00a0\n trade, \u00a0 commerce \u00a0 or \u00a0 business \u00a0 for \u00a0 a \u00a0 cess \u00a0 or \u00a0 fee \u00a0 or \u00a0 any \u00a0\n other\u00a0consideration.\u00a0In\u00a0both\u00a0the\u00a0activities,\u00a0in\u00a0the\u00a0nature \u00a0\n of \u00a0 trade, \u00a0 commerce \u00a0 or \u00a0 business \u00a0 or \u00a0 the \u00a0 activity \u00a0 of \u00a0\n rendering\u00a0any\u00a0service\u00a0in\u00a0relation\u00a0to\u00a0any\u00a0trade,\u00a0commerce \u00a0\n or\u00a0business,\u00a0the\u00a0dominant\u00a0and\u00a0the\u00a0prime\u00a0objective\u00a0has\u00a0to \u00a0\n be \u00a0 seen. \u00a0 If \u00a0 the \u00a0 dominant \u00a0 and \u00a0 prime \u00a0 objective \u00a0 of \u00a0 the \u00a0\n WP(C)\u00a01872/13\u00a0Page\u00a054\u00a0of\u00a055\u00a0institution,\u00a0which\u00a0claims \u00a0\n to\u00a0have\u00a0been\u00a0established\u00a0for\u00a0charitable\u00a0purposes,\u00a0is\u00a0profit \u00a0\n making,\u00a0whether\u00a0its\u00a0activities\u00a0are\u00a0directly\u00a0in\u00a0the\u00a0nature \u00a0\n of \u00a0 trade, \u00a0 commerce \u00a0 or \u00a0 business \u00a0 or \u00a0 indirectly \u00a0 in \u00a0 the \u00a0\n rendering \u00a0 of \u00a0 any \u00a0 service \u00a0 in \u00a0 relation \u00a0 to \u00a0 any \u00a0 trade, \u00a0\n commerce\u00a0or\u00a0business,\u00a0then\u00a0it\u00a0would\u00a0not\u00a0be\u00a0entitled\u00a0to \u00a0\n claim\u00a0its\u00a0object\u00a0to\u00a0be\u00a0a\u00a0'charitable\u00a0purpose'.\u00a0On\u00a0the\u00a0flip \u00a0\n side,\u00a0where\u00a0an\u00a0institution\u00a0is\u00a0not\u00a0driven\u00a0primarily\u00a0by\u00a0a \u00a0\n desire \u00a0 or \u00a0 motive \u00a0 to \u00a0 earn \u00a0 profits, \u00a0 but \u00a0 to \u00a0 do \u00a0 charity \u00a0\n through\u00a0the\u00a0advancement\u00a0of\u00a0an\u00a0object\u00a0of\u00a0general\u00a0public \u00a0\n utility, \u00a0 it \u00a0 cannot \u00a0 but \u00a0 be \u00a0 regarded \u00a0 as \u00a0 an \u00a0 institution \u00a0\n established\u00a0for\u00a0charitable\u00a0purposes.\n\n 13. Applying\u00a0the\u00a0aforesaid\u00a0decisions\u00a0to\u00a0the\u00a0facts\u00a0of\u00a0the\u00a0case\u00a0on\u00a0\n hand\u00a0and\u00a0with\u00a0respect\u00a0to\u00a0the\u00a0activities\u00a0of\u00a0the\u00a0AUDA\u00a0\u00ad\u00a0Ahmedabad\u00a0\n Urban\u00a0Development\u00a0Authority\u00a0under\u00a0the\u00a0provisions\u00a0of\u00a0the\u00a0Gujarat\u00a0\n\n\n Page 50 of 57\n\nHC-NIC Page 50 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n\n\n\n Town\u00a0Planning\u00a0Act\u00a0by\u00a0no\u00a0stretch\u00a0of\u00a0imagination,\u00a0it\u00a0can\u00a0be\u00a0said\u00a0that\u00a0\n the\u00a0activities\u00a0of\u00a0the\u00a0assessee\u00a0(AUDA)\u00a0can\u00a0be\u00a0said\u00a0to\u00a0be\u00a0in\u00a0the\u00a0nature\u00a0\n of\u00a0trade,\u00a0commerce\u00a0or\u00a0business\u00a0and\u00a0/\u00a0or\u00a0its\u00a0object\u00a0and\u00a0purpose\u00a0is\u00a0\n profiteering.\u00a0Merely\u00a0because\u00a0under\u00a0the\u00a0statutory\u00a0provisions\u00a0and\u00a0to\u00a0\n meet \u00a0 with \u00a0 the \u00a0 expenditure \u00a0 of \u00a0 Town \u00a0 Planning \u00a0 Scheme \u00a0 and \u00a0 / \u00a0 or\u00a0\n providing\u00a0various\u00a0services\u00a0under\u00a0the\u00a0Town\u00a0Planning\u00a0Scheme,\u00a0such\u00a0\n as\u00a0road, \u00a0drainage,\u00a0electricity, \u00a0water\u00a0supply\u00a0etc.\u00a0if\u00a0the\u00a0assessee\u00a0is\u00a0\n permitted\u00a0to\u00a0sale\u00a0the\u00a0plots\u00a0(land)\u00a0to\u00a0the\u00a0extent\u00a0of\u00a015%\u00a0of\u00a0the\u00a0total\u00a0\n area\u00a0under\u00a0the\u00a0Town\u00a0Planning\u00a0Scheme\u00a0and\u00a0while\u00a0selling\u00a0the\u00a0said\u00a0\n plots\u00a0they\u00a0are\u00a0sold\u00a0by\u00a0holding\u00a0the\u00a0public\u00a0auction,\u00a0it\u00a0cannot\u00a0be\u00a0said\u00a0\n that\u00a0activities\u00a0of\u00a0the\u00a0assessee\u00a0is\u00a0profiteering,\u00a0to\u00a0be\u00a0in\u00a0the\u00a0nature\u00a0of\u00a0\n trade,\u00a0commerce\u00a0and\u00a0business.\n\n 13.1. \u00a0 In \u00a0 the \u00a0 case \u00a0 of \u00a0 \u00a0 Lucknow \u00a0 Development \u00a0 Authority, \u00a0 Gomti\u00a0\n Nagar \u00a0 (supra), \u00a0 it \u00a0 is \u00a0 held \u00a0 by \u00a0 the \u00a0 Allahabad \u00a0 High \u00a0 Court \u00a0 that \u00a0 the\u00a0\n activities \u00a0 of \u00a0 the \u00a0 authority \u00a0 cannot \u00a0 be \u00a0 said \u00a0 to \u00a0 be \u00a0 in \u00a0 the \u00a0 nature \u00a0 of\u00a0\n trade,\u00a0commerce\u00a0or\u00a0business\u00a0and\u00a0/\u00a0or\u00a0profiteering\u00a0and\u00a0therefore,\u00a0\n proviso\u00a0to\u00a0Section\u00a02(15)\u00a0of\u00a0the\u00a0Act\u00a0shall\u00a0not\u00a0be\u00a0applicable.\n\n 13.2. Similar, \u00a0 view \u00a0 has \u00a0 been \u00a0 expressed \u00a0 by \u00a0 the \u00a0 Rajasthan \u00a0 High\u00a0\n Court \u00a0in\u00a0the\u00a0case\u00a0of\u00a0Commissioner\u00a0of\u00a0Income\u00a0Tax\u00adI,\u00a0Jodhpur\u00a0vs.\u00a0\n Jodhpur\u00a0 Development \u00a0Authority, \u00a0 Jodhpur\u00a0\u00adTax\u00a0Appeal\u00a0 No.\u00a063\u00a0of\u00a0\n 2012\u00a0decided\u00a0on\u00a0\u00a05.7.2016.\n\n 14. Considering\u00a0the\u00a0aforesaid\u00a0facts\u00a0and\u00a0circumstances\u00a0and\u00a0more\u00a0\n particularly,\u00a0considering\u00a0the\u00a0fact\u00a0that\u00a0the\u00a0assessee\u00a0is\u00a0 \u00a0a\u00a0statutory\u00a0\n body \u00a0 \u00ad \u00a0 Urban \u00a0 Development \u00a0 Authority \u00a0 constituted \u00a0 under \u00a0 the\u00a0\n provisions \u00a0 of \u00a0 the \u00a0 Act, \u00a0 constituted \u00a0 to \u00a0 carry \u00a0 out \u00a0 the \u00a0 object \u00a0 and\u00a0\n purpose\u00a0of\u00a0Town\u00a0Planning\u00a0Act\u00a0and\u00a0collects\u00a0regulatory\u00a0fees\u00a0for\u00a0the\u00a0\n\n\n Page 51 of 57\n\nHC-NIC Page 51 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n\n\n\n object\u00a0of\u00a0the\u00a0Acts;\u00a0no\u00a0services\u00a0are\u00a0rendered\u00a0to\u00a0any\u00a0particular\u00a0trade,\u00a0\n commerce\u00a0or\u00a0business;\u00a0whatever\u00a0the\u00a0income\u00a0is\u00a0earned\u00a0/\u00a0received\u00a0by\u00a0\n the\u00a0assessee\u00a0even\u00a0while\u00a0selling\u00a0the\u00a0plots\u00a0(to\u00a0the\u00a0extent\u00a0of\u00a015%\u00a0of\u00a0\n the \u00a0 total \u00a0 area \u00a0 covered \u00a0 under \u00a0 the \u00a0 Town \u00a0 Planning \u00a0 Scheme) \u00a0 is\u00a0\n required\u00a0to\u00a0be\u00a0used\u00a0only\u00a0for\u00a0the\u00a0purpose\u00a0to\u00a0carry\u00a0out\u00a0the\u00a0object\u00a0and\u00a0\n purpose\u00a0of\u00a0Town\u00a0Planning\u00a0Act\u00a0and\u00a0to\u00a0meet\u00a0with\u00a0expenditure\u00a0while\u00a0\n providing\u00a0general\u00a0utility\u00a0service\u00a0to\u00a0the\u00a0public\u00a0such\u00a0as\u00a0 \u00a0electricity,\u00a0\n road,\u00a0drainage,\u00a0water\u00a0etc.\u00a0and\u00a0even\u00a0the\u00a0entire\u00a0control\u00a0is\u00a0with\u00a0State\u00a0\n Government \u00a0 and \u00a0 even \u00a0 accounts \u00a0 are \u00a0 also \u00a0 subjected \u00a0 to \u00a0 audit \u00a0 and\u00a0\n there \u00a0 is \u00a0 no \u00a0 element \u00a0 of \u00a0 profiteering \u00a0 at \u00a0 all, \u00a0 the \u00a0 activities \u00a0 of \u00a0 the\u00a0\n assessee\u00a0cannot\u00a0be\u00a0said\u00a0to\u00a0be\u00a0in\u00a0the\u00a0nature\u00a0of\u00a0trade,\u00a0commerce\u00a0and\u00a0\n business\u00a0and\u00a0therefore,\u00a0proviso\u00a0to\u00a0Section\u00a02(15)of\u00a0the\u00a0Act\u00a0shall\u00a0not\u00a0\n be \u00a0 applicable \u00a0 so \u00a0 far \u00a0 as \u00a0 assessee \u00a0 is \u00a0 concerned \u00a0 and \u00a0 therefore, \u00a0 the\u00a0\n assessee\u00a0is\u00a0entitled\u00a0to\u00a0exemption\u00a0under\u00a0Section\u00a011\u00a0of\u00a0the\u00a0Income\u00a0\n Tax\u00a0Act.\u00a0Therefore,\u00a0the\u00a0question\u00a0no.1\u00a0is\u00a0to\u00a0be\u00a0held\u00a0in\u00a0favour\u00a0of\u00a0the\u00a0\n assessee\u00a0and\u00a0against\u00a0the\u00a0revenue.\u00a0\n\n 15. Now, \u00a0 so \u00a0 far \u00a0 as \u00a0 another \u00a0 question \u00a0 which \u00a0 is \u00a0 posed \u00a0 for \u00a0 the\u00a0\n consideration\u00a0of\u00a0this\u00a0Court\u00a0i.e.\u00a0whether\u00a0while\u00a0collecting\u00a0the\u00a0cess\u00a0or\u00a0\n fees, \u00a0 activities \u00a0 of \u00a0 the \u00a0 assessee \u00a0 can \u00a0 be \u00a0 said \u00a0 to \u00a0 be \u00a0 rendering \u00a0 any\u00a0\n services \u00a0 in \u00a0 relation \u00a0 to \u00a0 any \u00a0 trade, \u00a0 commerce \u00a0 or \u00a0 business \u00a0 is\u00a0\n concerned, \u00a0 for \u00a0 the \u00a0 reasons \u00a0 stated \u00a0 above, \u00a0 merely \u00a0 because \u00a0 the\u00a0\n assessee\u00a0is\u00a0collecting\u00a0cess\u00a0or\u00a0fees\u00a0which\u00a0is\u00a0regulatory\u00a0in\u00a0nature,\u00a0the\u00a0\n proviso \u00a0 to \u00a0 Section \u00a0 2(15)of \u00a0 the \u00a0 Act \u00a0 shall \u00a0 not \u00a0 be \u00a0 applicable. \u00a0 As\u00a0\n observed\u00a0herein\u00a0above\u00a0neither\u00a0there\u00a0is\u00a0element\u00a0of\u00a0profiteering\u00a0nor\u00a0\n the\u00a0same\u00a0can\u00a0be\u00a0said\u00a0to\u00a0be\u00a0in\u00a0the\u00a0nature\u00a0of\u00a0trade,\u00a0commerce \u00a0or\u00a0\n business.\u00a0At\u00a0this\u00a0stage,\u00a0decision\u00a0of\u00a0the\u00a0Division\u00a0Bench\u00a0of\u00a0this\u00a0Court\u00a0\n in\u00a0the\u00a0case\u00a0of\u00a0Sabarmati\u00a0Ashram\u00a0Gaushala\u00a0Trust\u00a0(supra)\u00a0is\u00a0required\u00a0\n\n\n Page 52 of 57\n\nHC-NIC Page 52 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n\n\n\n to \u00a0 be \u00a0 referred \u00a0 to. \u00a0 In \u00a0 the \u00a0 case \u00a0 before \u00a0 the \u00a0 Division \u00a0 Bench, \u00a0 the\u00a0\n assessee\u00a0Trust\u00ad\u00a0Sabarmati\u00a0Ashram\u00a0Gaushala\u00a0Trust\u00a0was\u00a0engaged\u00a0in\u00a0\n the\u00a0activity\u00a0of\u00a0breeding\u00a0milk\u00a0cattle;\u00a0to\u00a0improve\u00a0the\u00a0quality\u00a0of\u00a0cows\u00a0\n and\u00a0oxen\u00a0and\u00a0other\u00a0related\u00a0activities.\u00a0The\u00a0Assessing\u00a0Officer\u00a0denied\u00a0\n the \u00a0 exemption \u00a0 to \u00a0 the \u00a0 trust \u00a0 under \u00a0 Section \u00a0 11 \u00a0 of \u00a0 the \u00a0 Act \u00a0 on \u00a0 the\u00a0\n ground\u00a0that\u00a0considerable\u00a0income\u00a0was\u00a0generated\u00a0from\u00a0the\u00a0activities\u00a0\n of\u00a0milk\u00a0production\u00a0and\u00a0sale\u00a0and\u00a0therefore,\u00a0considering\u00a0the\u00a0proviso\u00a0\n to\u00a0Section\u00a02(15)\u00a0of\u00a0the\u00a0Act,\u00a0the\u00a0said\u00a0Trust\u00ad\u00a0assessee\u00a0was\u00a0denied\u00a0the\u00a0\n exemption \u00a0 under \u00a0 Section \u00a0 11 \u00a0 of \u00a0 the \u00a0 Act. \u00a0 While \u00a0 holding \u00a0 that \u00a0 the\u00a0\n activities\u00a0of\u00a0the\u00a0assessee\u00a0trust\u00a0still\u00a0can\u00a0be\u00a0said\u00a0to\u00a0be\u00a0for\u00a0charitable\u00a0\n purpose\u00a0within\u00a0the\u00a0meaning\u00a0of\u00a0Section\u00a02(15)\u00a0of\u00a0the\u00a0Act\u00a0and\u00a0same\u00a0\n cannot\u00a0be\u00a0said\u00a0to\u00a0be\u00a0in\u00a0the\u00a0nature\u00a0of\u00a0trade,\u00a0commerce\u00a0or\u00a0business\u00a0\n for\u00a0which\u00a0proviso\u00a0to\u00a0Section\u00a02(15)\u00a0of\u00a0the\u00a0Act \u00a0 \u00a0is\u00a0required\u00a0to\u00a0be\u00a0\n applied.\u00a0In\u00a0para\u00a06,\u00a07,\u00a08\u00a0and\u00a012,\u00a0it\u00a0is\u00a0observed\u00a0and\u00a0held\u00a0as\u00a0under:\u00a0\n\n 6.The\u00a0legal\u00a0controversy\u00a0in\u00a0the\u00a0present\u00a0Tax\u00a0Appeal\u00a0centers\u00a0\n around\u00a0the\u00a0first \u00a0proviso.\u00a0In\u00a0the\u00a0plain\u00a0terms,\u00a0the \u00a0proviso\u00a0\n provides \u00a0 for \u00a0 exclusion \u00a0 from \u00a0 the \u00a0 main \u00a0 object \u00a0 of \u00a0 the\u00a0\n definition \u00a0 of \u00a0 the \u00a0 term \u00a0Charitable \u00a0 purposes\u00a0 and \u00a0 applies\u00a0\n only \u00a0 to \u00a0 cases \u00a0 of \u00a0 advancement\u00a0 of \u00a0 any \u00a0 other \u00a0 of \u00a0 general\u00a0\n general\u00a0 public\u00a0 utility. \u00a0 If \u00a0 the \u00a0 conditions\u00a0 provided\u00a0 under\u00a0\n the \u00a0proviso\u00a0 are\u00a0satisfied,\u00a0any\u00a0entity,\u00a0even\u00a0if\u00a0involved\u00a0in\u00a0\n advancement\u00a0of\u00a0any\u00a0other\u00a0object\u00a0of\u00a0general\u00a0public\u00a0utility\u00a0\n by \u00a0 virtue \u00a0 to \u00a0proviso, \u00a0would \u00a0 be \u00a0 excluded \u00a0 from \u00a0 the\u00a0\n definition\u00a0of\u00a0charitable\u00a0trust.\u00a0However,\u00a0for\u00a0the\u00a0application\u00a0\n of\u00a0the\u00a0proviso,\u00a0what\u00a0is\u00a0necessary\u00a0is\u00a0that\u00a0the\u00a0entity\u00a0should\u00a0\n be \u00a0 involved \u00a0 in \u00a0 carrying \u00a0 on \u00a0 activities \u00a0 in \u00a0 the \u00a0 nature \u00a0 of\u00a0\n trade,\u00a0commerce\u00a0or\u00a0business,\u00a0or\u00a0any\u00a0activity\u00a0of\u00a0rendering\u00a0\n services\u00a0in\u00a0relation\u00a0to\u00a0any\u00a0trade,\u00a0commerce\u00a0or\u00a0business,\u00a0\n for\u00a0a\u00a0cess\u00a0or\u00a0fee\u00a0or\u00a0any\u00a0other\u00a0consideration.\u00a0In\u00a0such\u00a0a\u00a0\n situation,\u00a0the\u00a0nature,\u00a0use\u00a0or\u00a0application,\u00a0or\u00a0retention\u00a0of\u00a0\n income\u00a0from\u00a0such\u00a0activities\u00a0would\u00a0not\u00a0be\u00a0relevant.\u00a0Under\u00a0\n the\u00a0circumstances,\u00a0the\u00a0important\u00a0elements\u00a0of\u00a0application\u00a0\n of \u00a0proviso\u00a0 are \u00a0 that \u00a0 the \u00a0 entity \u00a0 should \u00a0 be \u00a0 involved \u00a0 in\u00a0\n carrying \u00a0 on \u00a0 the \u00a0 activities \u00a0 of \u00a0 any \u00a0 trade, \u00a0 commerce \u00a0 or\u00a0\n business\u00a0or\u00a0any\u00a0activities\u00a0of\u00a0rendering\u00a0service\u00a0in\u00a0relation\u00a0\n to\u00a0any\u00a0trade,\u00a0commerce\u00a0or\u00a0business,\u00a0for\u00a0a\u00a0cess\u00a0or\u00a0fee\u00a0or\u00a0\n\n\n\n Page 53 of 57\n\nHC-NIC Page 53 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n\n\n\n any\u00a0other\u00a0consideration.\u00a0Such\u00a0statutory\u00a0amendment\u00a0was\u00a0\n explained \u00a0 by \u00a0 the \u00a0 Finance \u00a0 Ministers \u00a0 speech \u00a0 in \u00a0 the\u00a0\n Parliament.\u00a0Relevant\u00a0portion\u00a0of\u00a0which\u00a0reads\u00a0as\u00a0under\u00a0:\n I \u00a0 once \u00a0 again \u00a0 assure \u00a0 the \u00a0 House \u00a0 that\u00a0\n genuine \u00a0 charitable \u00a0 organizations \u00a0 will\u00a0\n not\u00a0in\u00a0any\u00a0way\u00a0be\u00a0affected.\u00a0The\u00a0CBDT\u00a0\n will,\u00a0following\u00a0the\u00a0usual\u00a0practice,\u00a0issue\u00a0\n an \u00a0 explanatory \u00a0 circular \u00a0 containing\u00a0\n guidelines\u00a0for\u00a0determining\u00a0whether\u00a0any\u00a0\n entity\u00a0is\u00a0carrying\u00a0on\u00a0any\u00a0activity\u00a0in\u00a0the\u00a0\n nature \u00a0 of\u00a0 trade,\u00a0 commerce\u00a0 or \u00a0 business\u00a0\n or\u00a0any\u00a0activity\u00a0of\u00a0rendering\u00a0any\u00a0service\u00a0\n in \u00a0 relation \u00a0 to \u00a0 any \u00a0 trade, \u00a0 commerce \u00a0 or\u00a0\n business. \u00a0 Whether \u00a0 the \u00a0 purpose \u00a0 is \u00a0 a\u00a0\n charitable \u00a0 purpose \u00a0 will \u00a0 depend \u00a0 on \u00a0 the\u00a0\n totality \u00a0 of \u00a0 the \u00a0 facts \u00a0 of \u00a0 the \u00a0 case.\u00a0\n Ordinarily,\u00a0Chambers\u00a0of\u00a0Commerce\u00a0and\u00a0\n similar\u00a0organizations\u00a0rendering\u00a0services\u00a0\n to\u00a0their\u00a0members\u00a0would\u00a0not\u00a0be\u00a0affected\u00a0\n by \u00a0 the \u00a0 amendment\u00a0 and \u00a0 their \u00a0 activities\u00a0\n would \u00a0 continue \u00a0 to \u00a0 be \u00a0 regarded \u00a0 as\u00a0\n advancement \u00a0 of \u00a0 any \u00a0 other \u00a0 object \u00a0 of\u00a0\n general\u00a0public\u00a0utility.\n\n 7.In \u00a0 consonance \u00a0 with \u00a0 such \u00a0 assurance \u00a0 given \u00a0 by \u00a0 the\u00a0\n Finance\u00a0Minister\u00a0on\u00a0the\u00a0floor\u00a0of\u00a0the\u00a0House,\u00a0CBDT\u00a0issued\u00a0\n a \u00a0 Circular\u00a0 No.\u00a0 11 \u00a0 of \u00a0 2008\u00a0 dated\u00a0 19th\u00a0 December\u00a0 2008\u00a0\n explaining\u00a0the\u00a0amendment\u00a0as\u00a0under\u00a0:\u00ad\n 3.\u00a0 The\u00a0 newly\u00a0 inserted\u00a0 proviso\u00a0 to\u00a0section\u00a0 2\u00a0\n (15) \u00a0 will \u00a0 apply \u00a0 only \u00a0 to \u00a0 entities \u00a0 whose\u00a0\n purpose\u00a0is \u00a0advancement \u00a0of\u00a0any\u00a0other \u00a0object \u00a0\n of\u00a0general\u00a0public\u00a0utility\u00a0ie.,\u00a0the\u00a0fourth\u00a0limb\u00a0of\u00a0\n the \u00a0 definition \u00a0 of \u00a0charitable \u00a0 purpose\u00a0\n contained \u00a0 in \u00a0 section \u00a0 2 \u00a0 (15). \u00a0 Hence, \u00a0 such\u00a0\n entities \u00a0 will \u00a0 not \u00a0 be \u00a0 eligible \u00a0 for \u00a0 exemption\u00a0\n under\u00a0section\u00a011\u00a0or\u00a0under\u00a0section\u00a010\u00a0(23C)\u00a0\n of \u00a0 the \u00a0 Act \u00a0 if \u00a0 they \u00a0 carry \u00a0 on \u00a0 commercial\u00a0\n activities.\u00a0Whether\u00a0such\u00a0an\u00a0entity\u00a0is\u00a0carrying\u00a0\n on \u00a0 any \u00a0 activity \u00a0 in \u00a0 the \u00a0 nature \u00a0 of \u00a0 trade,\u00a0\n commerce\u00a0or\u00a0business\u00a0is\u00a0a\u00a0question\u00a0of\u00a0fact\u00a0\n which\u00a0will\u00a0be\u00a0decided\u00a0based\u00a0on\u00a0the\u00a0nature,\u00a0\n scope,\u00a0extent\u00a0and\u00a0frequency\u00a0of\u00a0the\u00a0activity.\n 3.1 \u00a0 There \u00a0 are \u00a0 industry \u00a0 and \u00a0 trade\u00a0\n associations\u00a0who\u00a0claim\u00a0exemption\u00a0from\u00a0tax\u00a0\n under\u00a0section\u00a011\u00a0on\u00a0the\u00a0ground\u00a0that\u00a0their\u00a0\n objects\u00a0are\u00a0for\u00a0charitable\u00a0purpose\u00a0as\u00a0these\u00a0\n are \u00a0 covered \u00a0 under \u00a0any \u00a0 other \u00a0 object \u00a0 of \u00a0\n general\u00a0public\u00a0utility.\u00a0Under\u00a0the\u00a0principle\u00a0of\u00a0\n\n\n Page 54 of 57\n\nHC-NIC Page 54 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n\n\n\n mutuality, \u00a0 if \u00a0 trading \u00a0 takes \u00a0 place \u00a0 between\u00a0\n persons \u00a0 who \u00a0 are \u00a0 associated \u00a0 together \u00a0 and\u00a0\n contribute \u00a0 to \u00a0 a \u00a0 common \u00a0 fund \u00a0 for \u00a0 the\u00a0\n financing\u00a0of\u00a0some\u00a0venture\u00a0or\u00a0object\u00a0and\u00a0in\u00a0\n this \u00a0 respect \u00a0 have \u00a0 no \u00a0 dealings \u00a0 or \u00a0 relations\u00a0\n with \u00a0 any \u00a0 outside \u00a0 body, \u00a0 then \u00a0 any \u00a0 surplus\u00a0\n returned \u00a0 to \u00a0 the \u00a0 persons \u00a0 forming \u00a0 such\u00a0\n association\u00a0is\u00a0not\u00a0chargeable\u00a0to\u00a0tax.\u00a0In\u00a0such\u00a0\n cases, \u00a0 there \u00a0 must \u00a0 be \u00a0 complete \u00a0 identity\u00a0\n between \u00a0 the \u00a0 contributors \u00a0 and \u00a0 the\u00a0\n participants. \u00a0 Therefore, \u00a0where \u00a0 industry \u00a0 or \u00a0\n trade \u00a0 associations \u00a0 claim \u00a0 both \u00a0 to \u00a0 be \u00a0\n charitable \u00a0 institutions \u00a0 as \u00a0 well \u00a0 as \u00a0 mutual \u00a0\n organizations \u00a0 and \u00a0 their \u00a0 activities \u00a0 are \u00a0\n restricted \u00a0 to \u00a0 contributions \u00a0 from \u00a0 and \u00a0\n participation \u00a0 of \u00a0 only \u00a0 their \u00a0 members, \u00a0 these \u00a0\n would \u00a0 not \u00a0 fall \u00a0 under \u00a0 the \u00a0 purview \u00a0 of \u00a0 the \u00a0\n proviso \u00a0 to \u00a0 section \u00a0 2 \u00a0 (15) \u00a0 owing \u00a0 to \u00a0 the \u00a0\n principle \u00a0 of \u00a0 mutuality. \u00a0 However, \u00a0 if \u00a0 such\u00a0\n organizations \u00a0 have \u00a0 dealings \u00a0 with \u00a0 non\u00ad\n members, \u00a0 their \u00a0 claim \u00a0 to \u00a0 be \u00a0 chargeable\u00a0\n organizations \u00a0 would \u00a0 now \u00a0 be \u00a0 governed \u00a0 by\u00a0\n the \u00a0 additional \u00a0 conditions\u00a0 stipulated \u00a0 in \u00a0 the\u00a0\n proviso\u00a0to\u00a0section\u00a02\u00a0(15).\n 3.2\u00a0In\u00a0the\u00a0final\u00a0analysis,\u00a0however,\u00a0whether\u00a0\n the \u00a0 assessee \u00a0 has \u00a0 for \u00a0 its \u00a0 object \u00a0 the\u00a0\n advancement\u00a0of\u00a0any\u00a0other\u00a0object\u00a0of\u00a0general\u00a0\n public\u00a0utility\u00a0is\u00a0a\u00a0question\u00a0of\u00a0fact.\u00a0If\u00a0such\u00a0\n assessee \u00a0 is\u00a0 engaged\u00a0 in\u00a0 any\u00a0 activity\u00a0 in\u00a0 the\u00a0\n nature \u00a0 of\u00a0 trade,\u00a0 commerce\u00a0 or \u00a0 business\u00a0 or\u00a0\n renders \u00a0 any \u00a0 service \u00a0 in \u00a0 relation \u00a0 to \u00a0 trade,\u00a0\n commerce \u00a0 or \u00a0 business, \u00a0 it \u00a0 would \u00a0 not \u00a0 be\u00a0\n entitled\u00a0to\u00a0claim\u00a0that\u00a0its\u00a0object\u00a0is\u00a0charitable\u00a0\n purpose. \u00a0 In \u00a0 such \u00a0 a \u00a0 case, \u00a0 the \u00a0 object \u00a0 of\u00a0\n general\u00a0public\u00a0utility\u00a0will\u00a0be\u00a0only\u00a0a\u00a0mask\u00a0or\u00a0\n a\u00a0device\u00a0to\u00a0hide\u00a0the\u00a0true\u00a0purpose\u00a0which\u00a0is\u00a0\n trade, \u00a0 commerce \u00a0 or \u00a0 business \u00a0 or \u00a0 the\u00a0\n rendering\u00a0of\u00a0any\u00a0service\u00a0in\u00a0relation\u00a0to\u00a0trade,\u00a0\n commerce \u00a0 or \u00a0 business. \u00a0 Each \u00a0 case \u00a0 would,\u00a0\n therefore,\u00a0be\u00a0decided\u00a0on\u00a0its\u00a0own\u00a0facts\u00a0and\u00a0\n no \u00a0 generalization \u00a0 is \u00a0 possible. \u00a0 Assessees,\u00a0\n who \u00a0 claim \u00a0 that \u00a0 their \u00a0 object \u00a0 is \u00a0 charitable\u00a0\n purpose \u00a0 within \u00a0 the \u00a0 meaning \u00a0 of \u00a0 section\u00a0\n 2(15),\u00a0would\u00a0be\u00a0well\u00a0advised\u00a0to\u00a0eschew\u00a0any\u00a0\n activity \u00a0 which \u00a0 is \u00a0 in \u00a0 the \u00a0 nature \u00a0 of \u00a0 trade,\u00a0\n commerce\u00a0or\u00a0business\u00a0or\u00a0the\u00a0rendering\u00a0of\u00a0\n any \u00a0 service \u00a0 in \u00a0 relation \u00a0 to \u00a0 any \u00a0 trade,\u00a0\n commerce\u00a0or\u00a0business.\u00a0\n\n Page 55 of 57\nHC-NIC Page 55 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n 8.What\u00a0 thus \u00a0 emerges\u00a0 from\u00a0 the \u00a0 statutory\u00a0 provisions,\u00a0 as\u00a0\n explained \u00a0 in \u00a0 the \u00a0 speech \u00a0 of \u00a0 Finance \u00a0 Minister \u00a0 and \u00a0 the\u00a0\n CBDT\u00a0Circular,\u00a0is\u00a0that\u00a0the\u00a0activity\u00a0of\u00a0a\u00a0 trust\u00a0 would\u00a0be\u00a0\n excluded\u00a0from\u00a0the\u00a0term\u00a0charitable\u00a0purpose\u00a0if\u00a0it\u00a0is\u00a0engaged\u00a0\n in \u00a0 any \u00a0 activity \u00a0 in \u00a0 the \u00a0 nature \u00a0 of \u00a0 trade, \u00a0 commerce \u00a0 or\u00a0\n business \u00a0 or \u00a0 renders \u00a0 any \u00a0 service \u00a0 in \u00a0 relation \u00a0 to \u00a0 trade,\u00a0\n commerce\u00a0or\u00a0business\u00a0for\u00a0a\u00a0cess,\u00a0fee\u00a0and/or\u00a0any\u00a0other\u00a0\n consideration.\u00a0It\u00a0is\u00a0not\u00a0aimed\u00a0at\u00a0excluding\u00a0the\u00a0genuine\u00a0\n charitable\u00a0trusts\u00a0of\u00a0general\u00a0public\u00a0utility\u00a0but\u00a0is\u00a0aimed\u00a0at\u00a0\n excluding\u00a0activities\u00a0in\u00a0the\u00a0nature\u00a0of\u00a0trade,\u00a0commerce\u00a0or\u00a0\n business\u00a0which\u00a0are\u00a0masked\u00a0as\u00a0charitable\u00a0purpose.\n\n 12.All\u00a0these\u00a0were\u00a0the\u00a0objects\u00a0of\u00a0the\u00a0general\u00a0public\u00a0utility \u00a0\n and\u00a0would\u00a0squarely\u00a0fall\u00a0under\u00a0section\u00a02\u00a0(15)\u00a0of\u00a0the\u00a0Act. \u00a0\n Profit\u00a0making\u00a0was\u00a0neither\u00a0the\u00a0aim\u00a0nor\u00a0object\u00a0of\u00a0the\u00a0Trust. \u00a0\n It \u00a0 was \u00a0 not \u00a0 the \u00a0 principal \u00a0 activity. \u00a0 Merely \u00a0 because \u00a0 while \u00a0\n carrying\u00a0out\u00a0the\u00a0activities\u00a0for\u00a0the\u00a0purpose\u00a0of\u00a0achieving\u00a0the \u00a0\n objects \u00a0 of \u00a0 the \u00a0 Trust, \u00a0 certain \u00a0 incidental \u00a0 surpluses \u00a0 were \u00a0\n generated,\u00a0would\u00a0not\u00a0render\u00a0the\u00a0activity\u00a0in\u00a0the\u00a0nature\u00a0of \u00a0\n trade,\u00a0commerce\u00a0or\u00a0business.\u00a0As\u00a0clarified\u00a0by\u00a0the\u00a0CBDT\u00a0in\u00a0\n its\u00a0Circular\u00a0No.\u00a011/2008\u00a0dated\u00a019th\u00a0 December\u00a02008\u00a0the \u00a0\n proviso\u00a0aims\u00a0to\u00a0attract\u00a0those\u00a0activities\u00a0which\u00a0are\u00a0truly\u00a0in \u00a0\n the\u00a0nature\u00a0of\u00a0trade,\u00a0commerce\u00a0or\u00a0business\u00a0but\u00a0are\u00a0carried \u00a0\n out \u00a0under \u00a0the \u00a0guise \u00a0of\u00a0activities \u00a0in\u00a0the \u00a0nature \u00a0of\u00a0public \u00a0\n utility.\n\n 15.1. \u00a0 Applying\u00a0the\u00a0aforesaid\u00a0decision\u00a0to\u00a0the\u00a0facts\u00a0of\u00a0the\u00a0case\u00a0on\u00a0\n hand \u00a0 and \u00a0 the \u00a0 object \u00a0 and \u00a0 purpose \u00a0 for \u00a0 which \u00a0 the \u00a0 assessee \u00a0 is\u00a0\n established\u00a0/\u00a0constituted\u00a0under\u00a0the\u00a0provisions\u00a0of\u00a0the\u00a0Gujarat\u00a0Town\u00a0\n Planning\u00a0 Act \u00a0 and\u00a0 collection \u00a0 of\u00a0 fees\u00a0 and\u00a0 cess\u00a0 is\u00a0 incidental\u00a0 to\u00a0the\u00a0\n object\u00a0and\u00a0purpose\u00a0of\u00a0the\u00a0Act,\u00a0even\u00a0the\u00a0case\u00a0would\u00a0not\u00a0fall\u00a0under\u00a0\n second\u00a0part\u00a0of\u00a0proviso\u00a0to\u00a0Section\u00a02(15)\u00a0of\u00a0the\u00a0Act.\n\n 15.2. Considering\u00a0the\u00a0aforesaid\u00a0facts\u00a0and\u00a0circumstances\u00a0of\u00a0the\u00a0case,\u00a0\n we\u00a0are\u00a0of\u00a0opinion\u00a0that\u00a0the\u00a0learned\u00a0Tribunal\u00a0has\u00a0committed\u00a0a\u00a0grave\u00a0\n error\u00a0in\u00a0holding\u00a0the\u00a0activities\u00a0of\u00a0the\u00a0assessee\u00a0in\u00a0the\u00a0nature\u00a0of\u00a0trade,\u00a0\n commerce\u00a0or\u00a0business\u00a0and\u00a0consequently\u00a0holding\u00a0that\u00a0the\u00a0proviso\u00a0to\u00a0\n Section \u00a0 2(15) \u00a0 of \u00a0 the \u00a0 Act \u00a0 shall \u00a0 be \u00a0 applicable \u00a0 and \u00a0 therefore, \u00a0 the\u00a0\n\n\n Page 56 of 57\n\nHC-NIC Page 56 of 57 Created On Wed Aug 16 05:49:41 IST 2017\n O/TAXAP/423/2016 CAV JUDGMENT\n\n\n\n assessee\u00a0is\u00a0not\u00a0entitled\u00a0to\u00a0exemption\u00a0under\u00a0Section\u00a011\u00a0of\u00a0the\u00a0Act.\u00a0\n For\u00a0the\u00a0reasons\u00a0stated\u00a0above,\u00a0it\u00a0is\u00a0held\u00a0that\u00a0the\u00a0proviso\u00a0to\u00a0Section\u00a0\n 2(15)\u00a0of\u00a0the\u00a0Act\u00a0shall\u00a0not\u00a0be\u00a0applicable\u00a0so\u00a0far\u00a0as\u00a0assessee\u00ad\u00a0AUDA\u00a0is\u00a0\n concerned\u00a0and\u00a0as\u00a0the\u00a0activities\u00a0of\u00a0the\u00a0assessee\u00a0can\u00a0be\u00a0said\u00a0to\u00a0be\u00a0\n providing\u00a0general\u00a0public\u00a0utility\u00a0services,\u00a0the\u00a0assessee\u00a0is\u00a0entitled\u00a0to\u00a0\n exemption \u00a0 under \u00a0 Section \u00a0 11 \u00a0 of \u00a0 the \u00a0 Act. \u00a0 Both \u00a0 the \u00a0 questions \u00a0 are\u00a0\n therefore, \u00a0 answered \u00a0 in \u00a0 favour \u00a0 of \u00a0 the \u00a0 assessee \u00a0 and \u00a0 against \u00a0 the\u00a0\n revenue.\n\n 16. \u00a0 In\u00a0view\u00a0of\u00a0the\u00a0above\u00a0and\u00a0for\u00a0the\u00a0reasons\u00a0stated\u00a0above,\u00a0the\u00a0\n impugned\u00a0 order \u00a0 passed\u00a0 order \u00a0 passed\u00a0 by\u00a0 the \u00a0 learned\u00a0 Tribunal \u00a0 in\u00a0\n respective \u00a0 appeals \u00a0 for \u00a0 different \u00a0 assessment \u00a0 year \u00a0 are \u00a0 hereby\u00a0\n quashed\u00a0and\u00a0set\u00a0aside.\u00a0Accordingly,\u00a0all\u00a0these\u00a0appeals\u00a0are\u00a0allowed\u00a0\n and\u00a0answered\u00a0both\u00a0the\u00a0questions\u00a0in\u00a0favour\u00a0of\u00a0assessee\u00a0and\u00a0against\u00a0\n the\u00a0revenue.\u00a0No\u00a0costs.\n\n sd/\u00ad\n (M.R.\u00a0SHAH,\u00a0J.)\u00a0\n\n sd/\u00ad\n (B.N.\u00a0KARIA,\u00a0J.)\u00a0\n Kaushik\n\n\n\n\n Page 57 of 57\n\nHC-NIC Page 57 of 57 Created On Wed Aug 16 05:49:41 IST 2017" }, { "title": "Lakhmani Mewal Das vs Income-Tax Officer, 'I' Ward And Ors. on 13 January, 1972", "url": "https://indiankanoon.org//doc/1961562/", "text": "Lakhmani Mewal Das vs Income-Tax Officer, 'I' Ward And Ors. on 13 January, 1972\nEquivalent citations: [1975]99ITR296(CAL)\nAuthor: Arun K. Mukherjea\nBench: Arun K. Mukherjea, Sabyasachi Mukharji\nJUDGMENT\n \n\n Arun K. Mukherjea J. \n \n\n 1. In the present application which has been referred to us under Chapter V, rule 2, of the Original side Rules of this High Court the petitioner has challenged the validity of a notice issued under Section 148 of the Income-tax Act, 1961, for the purpose of reopening an assessment of the income of the petitioner for the assessment year 1958-59. \n \n\n 2. The petitioner was assessed for the assessment year 1958-59, under Section 23(3) of the Indian Income-tax Act, 1922, on 14th June, 1960, when his total income was computed by the respondent No. 1 at Rs. 37,872. In the year of assessment the Income-tax Officer allowed the deduction of a sum of Rs. 15,991 by way of expenses claimed by the assessee. The expenses that were allowed appear from page 13 of the paper book and include one item of Rs. 10,494-4-3 by way of interest. A complete list of the creditors to whom interest had been paid on account of loans taken from them appears from pages 15 to 16 of the paper book. The petitioner states that at the time of the original asssessment proceedings he had produced through his authorised representative all books of account, bank statements and other necessary documents in connection with his returns and the assessment was made by respondent No. 1 after he had been satisfied \"on a due consideration of all the necessary materials produced by\" the petitioner. Almost six years after the completion of the said assessment the petitioner was served with a notice dated 8th March, 1967, issued by respondent No. 2, Income-tax Officer, \"E\" Ward, Hundi Circle, under Section 148 of the Income-tax Act, 1961. The petitioner has, by that notice, been called upon to submit within 30 days from the date of service of the notice a return in the prescribed form of the petitioner's income for the assessment year 1958-59. The notice states that the Income-tax Officer concerned had reason to believe that the petitioner's income which was chargeable to tax for the assessment year 1958-59, has escaped assessment within the meaning of Section 147 of the Income-tax Act, 1961, and that the notice was being issued \"after obtaining the necessary satisfaction of the Commissioner of Income-tax, West Bengal (I), Calcutta\". On 2nd May, 1967, the petitioner through his lawyer told the respondent No. 2 that according to him there is no material on which \"the said Income-tax Officer had reason to believe that the petitioner's income had escaped assessment and, therefore, \"the condition precedent for the assumption of jurisdiction\" by the Income-tax Officer concerned had not been satisfied. The petitioner asserted that the Income-tax Officer was merely starting a fishing investigation and had no competence, jurisdiction and/or authority to reopen the assessment under Section 147 of the Income-tax Act, 1961, \"on a mere change of opinion\". The petitioner further asked the officer concerned to furnish all the materials on which he had reason to believe that income had escaped assessment. Apparently, the petitioner did not receive any satisfaction from the Income-tax Officer and made an application before this court and obtained a rule nisi on 30th May, 1967. \n \n\n 3. An affidavit-in-opposition was, in due course, filed on behalf of the respondents in answer to the aforesaid rule. Only two paragraphs, namely, paragraphs 5 and 6 of the affidavit, are important for the purposes of this application. In paragraph 5 it was denied that all materials relevant and necessary for the assessment of the petitioner's income for the assessment year 1958-59, had been produced before the Income-tax Officer at the time of the original assessment. In paragraph 6 the principal case of the respondents for reopening of the assessment was made out in the following language: \n \"Subsequent to the assessment for the assessment year 1958-59, it was discovered, inter alia, that some of the loans shown to have been taken and interests alleged to have been paid thereon by the petitioner during the relevant assessment year were not genuine. The Income-tax Officer had reason to believe and bona fide believed that the said alleged loans and the interest alleged to have bean paid thereon are not genuine. If necessary, I crave leave to produce before the hon'ble judge hearing the application, the relevant records on the basis of which the said Income-tax Officer had reason to believe that the income of the petitioner escaped assessment as aforesaid at the hearing of this application.\" \n \n\n 4. The contents of this paragraph were verified in paragraph 30 of the same affidavit: it is stated there that the last sentence of paragraph 6 was true to the knowledge of the deponent respondent No. 2 and that all the other statements of paragraph 6 were based on information derived by him from the records of the case. At the time of hearing of the arguments Dr. Pal pointed out that on the basis of this verification paragraph 6 would not warrant the action taken by the Income-tax Officer. Mr. Balai Pal, appearing for the revenue authorities, made an application for leave to amend the verification clause. According to the amendment which he sought for all the statements in paragraph 6 would be to the knowledge of the deponent. After hering counsel on both sides we allowed this amendment on 23rd August, 1971. \n \n\n 5. The petitioner's reply to the allegation in paragraph 6 of the affidavit-in-opposition is to be found in paragraph. 8 of his affidavit of 15th September, 1967. After general denial the petitioner avers as follows: \n \"In particular I deny that some of the loans shown to have been taken and interests paid thereon during the relevant assessment year were not genuine as alleged or at all. I say that at the time of the original assessment I not only produced the balance-sheet, profit and loss account of the relevant year but did also produce the loan account of each and every creditor from whom I obtained the loans. I also produced the confirmation letters of the said parties and gave to the Income-tax Officer the address of the different parties. I also produced the discharged hundies. Thus, the Income-tax Officer had full and ample opportunity of considering all the materials relating to the hundi loans. The Income-tax Officer in fact went into the question about the genuineness of the loans very throughly and on a due consideration of the materials held the loans to be genuine and allowed the interests as deductible one. Thus, all the primary facts which are relevant and/or material for the relevant assessment year were disclosed by me and as such there has been no omission or failure, to disclose the primary facts necessary for the relevant assessment year. The allegation that some of the loans are not genuine is an after-thought and in any event is a matter of inference from the primary facts disclosed. The said allegation that some of the loans are not genuine is baseless.\" \n \n\n 6. The application was heard before T. K. Basu J. in June, 1970. His Lordships, after considering the materials placed before his Lordship in the petition and in the affidavits and after considering the effect of a large number of decisions including the decision of the Supreme Court in the case of Calcutta Discount Company Ltd., came to the finding that the petitioner had disclosed all the primary and relevant facts in connection with his assessment for the year 1958-59 at the time of the original assessment and that it was for the Income-tax Officer concerned to come to \"the correct inference as to the genuineness of the loan or otherwise\" and that the Income-tax Officer cannot expect any assistance from the assessee in this behalf. On this view of the matter, Basu J. thought that the petitioner ought to succeed. But, when his Lordship was about to deliver judgment in this case his Lordship was informed that the late K. L. Roy J. had already delivered a judgment involving the same question of fact and law where his Lordship had accepted the contention of the revenue authorities and rejected the application of the assessee. His Lordship after considering the judgment of K. L. Roy J. made a reference under Chapter V, rule 2, of the Original Side Rules to a larger Bench. \n \n\n 7. Before we embark upon an examination of the questions involved in this case it is necessary to set out the provisions of Sections 147 and 148 of the Income-tax Act, 1961 : \n \n\n \"147. Income escaping assessment.--If- \n \n\n (a) the Income-tax Officer has reason to believe that, by reason of the omission or failure on the part of an assessee to make a return under Section 139 for any assessment year to the Income-tax Officer or to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year, or \n \n\n (b) notwithstanding that there has been no omission or failure as mentioned in Clause (a) on the part of the assessee, the Income-tax Officer has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of Sections 148 to 153, assess or reassess such income or recompute the loss or the depreciation allowance, as the case may be, for the assessment year concerned (hereinafter in Sections 148 to 153 referred to as the relevant assessment year). \n \n\n Explanation 1.--For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely:-- \n \n\n (a) where income chargeable to tax has been under-assessed ; or (b) where such income has been assessed at too low a rate ; or \n \n\n (c) where such income has been made the subject of excessive relief under this Act or under the Indian Income-tax Act, 1922 (11 of 1922); or \n \n\n (d) where excessive loss or depreciation allowance has been computed. \n \n\n Explanation 2.--Production before the Income-tax Officer of account books or other evidence from which material evidence could with due deligence have been discovered by the Income-tax Officer will not necessarily amount to disclosure within the meaning of this section.\" \n \n\n \"148. Issue of notice where income has escaped assessment.--(1) Before making the assessment, reassessment or recomputation under Section 147, the Income-tax Officer shall serve on the assessee a notice containing all or any of the requirements which may be included in a notice under sub-Section (2) of Section 139 ; and the provisions of this Act shall, so far as may be, apply accordingly as if the notice were a notice issued under that sub-section. \n (2) The Income-tax Officer shall, before issuing any notice under this section, record his reasons for doing so.\" \n \n\n 8. It remains for me to point out that under Section 149 of the Act a notice under Section 148 cannot be issued in cases falling under Clause (b) of Section 147 after the lapse of four years from the end of the relevant assessment year and in respect of cases falling under Clause (a) of Section 147 after the lapse of eight years except in very special circumstances. That is to say, it is only where the income has escaped assessment because of an omission or failure on the part of the assessee that the reopening of the assessment can be made after four years. If, however, there has been no omission or failure on the part of the assessee, the reopening of the assessment is possible only up to four years from the end of the relevant assessment year. \n \n\n 9. Dr. Pal, appearing for the petitioner, challenged the validity of the notice issued by the Income-tax Officer under Section 148 of the Act on two grounds. First, he contended that since the petitioner had made a full and complete disclosure of all material facts at the time of the first assessment he had discharged all his obligations and even if there was any escapement of any part of his income from assessment it cannot be said that such escapement happened because there was an omission or failure on the part of the assessee and consequently it was not permissible to reopen the assessment after four years from the end of the relevant assessment year. Secondly, Dr. Pal contended on the materials in the instant case it cannot be said that the Income-tax Officer had reason to believe that there was an escape of income from assessment by reason of an omission or failure on the part of the assessee. He argued that the conditions precedent to the issue of a notice under Section 148 which are contained in Sections 147 and 151 have not been complied with and the issue of the notice under Section 148 was, therefore, invalid. \n \n\n 10. Dr. Pal developed the first part of his argument in the following manner : Under Section 147(a) of the Act the Income-tax Officer can have jurisdiction to reopen an assessment that has been already completed if only two essential conditions are satisfied, viz., first, that there is an escape from assessment of some income of the assessee during the relevant assessment year and, secondly, that the escapement must have been caused by omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment of that year. According to Dr. Pal, the notices in this case which have been issued after the lapse of four years can be justified only if they are issued under the provisions of Section 147(a) as opposed to Section 147(b). Therefore, it is essential for the Income-tax Officer to show that he had reasons to believe not only that there has been some element of escapement of income from taxation but that the escapement was due to an omission or failure on the part of the assessee. Dr. Pal argued that in the facts and circumstances of the case it is not possible to say that the second condition precedent to the exercise of power under Section 147(a) has been fulfilled. According to him, the assessee in this case had done all that he could or need do in the matter. He had produced his own accounts relating to the hundi loans which are now sought to be treated as sham transactions by the Income-tax Officer. He had produced even letters of confirmation from each of the creditors individually and had given the addresses of all the creditors and all other particulars regarding the hundi loans which the Income-tax Officer might require before coming to a decision regarding the admissibility of interests on these hundi loans as deductible expenses. In other words, Dr. Pal argued, all material facts in connection with these loans had been fully disclosed by the assessee and it was for the Income-tax Officer to satisfy himself upon proper scrutiny of the materials supplied to him by the assessee as to whether the loans were genuine and whether the interests on those loans would be deductible expenses. In fact, in this case the Income-tax Officer had already done so. The question whether the loans are genuine and whether the interest could be allowed as deductible expenses are all, Dr. Pal says, matters of inference and it is no part of the assessee's duty to help the Income-tax Officer in deciding as to what the legal infer-rences should be. Relying on the decision of the Supreme Court in the case of Calcutta Discount Company Ltd. v. Income-tax Officer, , Dr. Pal says that the assessee discharged his duty completely as soon as he disclosed all the material facts necessary for his assessment and he was under no obligation either to help the Income-tax Officer in making correct legal inferences from the facts supplied to him or in correcting any erroneous inferences that the Income-tax Officer may make in making the assessment. Dr. Pal argued that the Income-tax Officer cannot act perfunctorily at the time of original assessment and then seek to correct his error by reopening the assessment when that error was not caused by any failure on the part of the assessee in disclosing the material facts. Dr. Pal further argued that, if the Income tax Officer in making his original assessment has committed an error in coming to a decision regarding the genuineness of the loan, an error which could have been avoided by the exercise of due care and caution and by intelligent enquiries, he cannot on the discovery of subsequent information or on subsequent after-thought make use of the machinery under Section 147(a) for reopening the assessment. This part of Dr. Pal's case is sought to be based largely on the principles formulated by the Supreme Court in Calcutta Discount Company's case : and they do not, in our opinion, take us anywhere beyond the scope of that decision. \n \n\n 11. We have very carefully considered the ratio as well as the facts and circumstances of the Calcutta Discount Company's case and we have no doubt in our minds that the present case is not one which comes strictly within the scope of that decision. Section 34(1)(a) of the Indian Income-tax Act, 1922, is, of course, more or less in the same terms as Section 147(a). Under both sections whenever an Income-tax Officer has reason to believe, first, that there is an escapement of tax and, secondly, that the escapement has been caused by an omission or failure on the part of the assessee to disclose fully and truly all material facts for the assessment of that relevant year, the Income-tax Officer has jurisdiction to reopen the assessment. It is to be noted that the sections postulate a duty on every assessee not only to disclose fully all the material facts necessary for his assessment but also to disclose them truly. The controversy that arose in the Calcutta Discount Company's case was as to whether all the material facts had been fully disclosed. Their Lordships of the Supreme Court found that all the primary facts in the possession of the assessee had been disclosed. After that, it was for the Income-tax Officer to draw inferences as regards certain other facts which have been described as inferential facts and then ultimately to draw the proper legal inference from the primary facts disclosed by the assessee as well as the further inferential facts deduced from the primary facts by the officer concerned and then to ascertain on a correct interpretation of the taxing enactment the proper tax to be levied. The following passage which occurred at page 201 and at pages 202 to 203 of the report are quoted very often in judgments while dealing with the Calcutta Discount Company's case and I think it will not be inappropriate if I quote in extenso those passages : \n \n\n \"Does the duty, however, extend beyond the full and truthfull disclosure of all primary facts? In our opinion, the answer to this question must be in the negative. Once all the primary facts are before the assessing authority, he requires no further assistance by way of disclosure. It is for him to decide what inferences of facts can be reasonably drawn and what legal inferences have ultimately to be drawn. It is not for somebody else--far less the assessee--to tell the assessing authority what inferences, whether of facts or law, should be drawn. Indeed, when it is remembered that people often differ as regards what inferences should be drawn from given facts, it will be meaningless to demand that the assessee must disclose what inferences--whether of facts or law--he would draw from the primary facts. \n \n\n If from primary facts more inferences than one could be drawn, it would not be possible to say that the assessee should have drawn any particular inference and communicated it to the assessing authority. How could an assessee be charged with failure to communicate an inference, which he might or might not have drawn ?......... \n \n\n We have, therefore, come to the conclusion that while the duty of the assessee is to disclose fully and truly all primary relevant facts, it does not extend beyond this.\" (At page 201 of the report). \n \n\n \"It is the duty of the assessee to disclose all the facts which have a bearing on the question but whether the assessee had the intention to make a business profit as distinguished from the intention to change the form of the investments is really an inference to be drawn by the assessing authority from the material facts taken in conjunction with the surrounding circumstances. The law does not require the assessee to state the conclusion that could reasonably be drawn from the primary facts. The question of the assessee's intention is an inferential fact and so the assessee's omission to state his 'true intention behind the sale of shares ' cannot by itself be considered to be a failure or omission to disclose any material facts within the meaning of Section 34. Indeed, an assessee whose contention is that the shares were sold to change the form of investment and not with the intention of making a business profit cannot be expected to say that his true intention was other than what he contended it to be.\" (At pages 202 and 203 of the report). \n \n\n12. Dr. Pal relied mainly on those observations of the Supreme Court which I have set out above. The following are the twin pillars of his argument before us: (i) first, there is no other fact regarding the hundi loans which the assessee was in a position to disclose, that is to say, all material facts about the hundi loans had been fully and completely disclosed, and (ii) secondly, the assessee has no obligation to help the Income-tax Officer in coming to correct inferences regarding any transaction from the material facts disclosed about those transactions. It think, however, that the instant case is not one which is covered by the observations quoted above or by the decision in Calcutta Discount Company's case. In the latter case the question arose as to what was the true intention behind the sale of certain shares by the assessee. Was the intention merely to change the form of the investment or was the intention to make a business profit ? All material facts concerning the sale of shares had been admittedly disclosed by the assessee. The Supreme Court held that it was entirely for the assessing authority to infer from the primary facts as well as the surrounding circumstances as to what could be the intention of the assessee and it was no part of the assessee's duty to help the officer to come to any particular inference. In the instant case, however, it is not a matter of inference which the Income-tax Officer had to do in determining the total income of the assessee. We are concerned in this case with the truth or falsity of a primary statement made by the assessee. Tbe assessee made a statement that he had taken certain loans. For the present we will assume that this statement was a false statement and that the assessee did not take any loan, that is to say, he did not receive any monetary advances from the persons who, he told the Income-tax Officer, were his creditors. Let us further assume that, though the assessee received no money as loans, all the formalities were observed and the hundis were executed and discharged. Since no money passed between the parties on any occasion, the discharged hundis represent certain sham transactions. In other words, the hundis could tend to show as if certain transactions had taken place but, in reality, the transactions never took place. In such a case, the discharged hundis are not evidence of facts. They are mere papers fabricated to giv.e the false appearance of certain monetary transactions which never took place. As mere formal evidence, the discharged hundis are genuine ; but they are genuine in the sense that they are genuine documents and the tenor of their contents is such as if there had been real transactions. Even so it cannot be said that they represent true facts. In such a case, though the assessee discloses the discharged hundis before the Income-tax Officer or gives the list of the addresses of the spurious creditors and though he discovers books of accounts falsely showing as if actual transactions had taken place between the spurious creditors and himself, one can hardly say that the assessee has made a full and true disclosure of the material facts. The volume of disclosure cannot lend facthood to transactions which did not in fact take place. In such circumstances how can it be said that the assessee has disclosed all the primary material facts ? What he has done is to disclose certain spurious papers, and particulars regarding certain transactions which were themselves not facts. It is, in my opinion, a mockery to hold that the assessee has in such a case made a full and true disclosure of facts. By this logic, the disclosures made by the assessee in the instant case are formal evidence of fictitious transactions which never took place ; they are a mere cloak to cover up the facts. The fullness and completeness of such disclosures is immaterial. Indeed, the more copious the materials disclosed in a case like this, the more solid is the crust covering up the real facts. It is futile to argue that this kind of disclosure will protect the assessee from subsequent reopening of his assessment under the provisions of Section 34 of the old Act or Section 147 of the new Act. Such an argument overlooks, in my opinion, the fundamental point that the duty that is imposed upon the assessee either under Section 34(1)(a) of the Indian Income-tax Act, 1922, or under Section 147(a) of the Income-tax Act, 1961, is a duty not merely of disclosing fully all material facts but also of disclosing them truly. Therefore, if in any particular case the Income-tax Officer has reason to believe that there has been an escape from assessment of income caused by the fact that the assessee in that case did not disclose the material fact truly, that would certainly be a case where the Income-tax Officer would have jurisdiction to reopen the assessment under the provisions of those Sections. The point seems to me to be so fundamental that I find it difficult to understand how the principle enunciated by the Supreme Court in Calcutta Discount Company's case can at all be invoked in the instant case. It was argued before Basu J., as we find from the judgment which his Lordship delivered at the time of making the reference, that \"to demand from the assessee that he should disclose to the Income-tax Officer whether the loans were genuine or not, is to cast on the assessee an intolerable burden\". It was further argued that \"this is a matter of inference which the Income-tax Officer has to draw. It is no part of the duty of the assessee to assist the Income-tax Officer in this inferential process\". I find it difficult to see the logic of this argument. It is true that one cannot expect an assessee who has stated that he has made certain loans to make another statement to the effect that the loans were not genuine. Such conduct would not be intelligible in ordinary circumstances. But why should the, assessee make a false statement to start with ? If the loans are not genuine and if he had not actually received moneys as loans on which he had to pay interest, why should he say that he had taken those loans and had to pay those interests ? The question that Dr. Pal posed before Basu J. proceeds on the assumption that the assessee was within his rights to make a false statement and having once made a false statement it was unnatural and illegitimate on the part of the assessing officer to expect the assessee to confess that he had made a false statement. The real answer to that argument is that the assessee was under an obligation not to make a false statement of fact, I repeat: the duty of an assessee is not merely to make a full disclosure of all the material facts ; his duty is also to make a true disclosure of facts, that is to say, not to mislead the assessing officer by disclosing certain things which do not represent facts. Once an assessee infringes this rule, any subsequent discovery of fact by the assessing officer which would raise a reasonable belief in his mind that the assessee had not made a true and correct disclosure of the facts and has thereby been responsible for escape of some income from assessment, will at once attract Section 147 of the Income-tax Act, 1961. \n \n\n 13. Dr. Pal's attempt to sidetrack the difficulty by trying to argue that the truth or falsity of a statement is a matter of inference is totally without substance. A simple proposition which states a primary fact is more often than not incapable of yielding any inference. When a man says: A gave me Rs. 1,000 or A lives in, say, \"Calcutta\" or, I paid A Rs. 10 by way of interest, these are all statements of primary facts. Whether they are true or false cannot possibly be inferentially deduced from these statements themselves. In case the statements are false, they cease to be statements of facts. In the language of logic, they will each be \"false propositions\" and it will be incorrect to describe them as disclosure of facts. If the loan is not a fact any amount of false evidence to create an appearance as if the loan is true will not amount to disclosure of material facts regarding such loan. They will merely amount to disclosure of materials relating to something which is not a fact. The truth or falsity of a bare proposition can never be the subject-matter of an inference from the proposition itself or from false materials created to justify that proposition. I have no doubt in my mind that no amount of logical refinement will bring the instant case within the ambit of the principle laid down by the Supreme Court in Calcutta Discount Company's case. \n \n\n 14. When Dr. Pal was confronted with this difficulty he fell back upon a recent decision of the Supreme Court where, he said, the principles enunciated in Calcutta Discount Company's case were applied in favour of the assessee in circumstances which are very similar to the circumstances of the instant case. I refer to the decision of Commissioner of Income-tax v. Burlap Dealers Ltd., . Dr. Pal argued that this decision of the Supreme Court clearly supports his contention that the instant case is one which comes within the scope of the principles laid down by the Supreme Court in Calcutta Discount Company's case. In order to understand Dr. Pal's argument it is necessary to refer to the facts of the case as well as to the ratio of the Supreme Court decision in some detail. \n \n\n 15. In the case of Burlop Dealers Ltd., the assessee, Burlop Dealers Ltd.\n(hereinafter referred to as \"the company\"), disclosed for the assessment\nyear 1949-50, a profit of Rs. 1,75,875 from a joint venture with H. M. Ltd.\nin plywood chests. The company claimed that the sum of Rs. 87,937, being\nhalf the aforesaid profit, had been paid to Ratiram Tansukhrai under an\nagreement dated 7th October, 1948, under which Ratiram Tansukhrai had\nagreed to finance the transactions in the joint venture. The Income-tax Officer accepted this claim and brought to 'tax only the sum of Rs. 87,937 as the profit earned by the company from the joint venture. For the assessment year 1950-51 also, the company claimed similarly that it had paid half its profits from the joint venture to Ratiram Tansukhrai. The Income-tax Officer, however, upon an examination of the transaction refused to accept this claim and held that the agreement of 7th October, 1948, was a got-up device to reduce the profits. The Income-tax Officer taxed the entire profit of the venture. This assessment was ultimately upheld. In the meantime, on 13th May, 1955, the Income-tax Officer issued a notice under Section 34(1)(a) of the Indian Income-tax Act, 1922, for reopening the company's assessment during the earlier year, i.e., 1949-50, and brought to tax the sum of Rs. 87,937 which had been originally left out on the ground that it had been paid to Ratiram Tansukhrai under the financing agreement. The assessee took the matter to the Tribunal which held that since the assessee had produced all the relevant facts, accounts and documents necessary for completing the assessment and was under no obligation to inform the officer about the true nature of the transaction, there is no justification for reopening the assessment under Section 34(l)(a). On this basis, the Tribunal directed that the amount of Rs. 87,937 which was sought to be brought to tax at the time of reassessment should be excluded. The revenue authorities made an application under Section 66(1) and under Section 66(2) before the Tribunal and the High Court respectively. They were both rejected. The revenue authorities went up on appeal to the Supreme Court. The Supreme Court also upheld the Tribunal's decision. Shah C.J., who delivered the judgment of the Supreme Court, after reciting the facts of the case, held that this case would appropriately fall under Section 34(l)(b) and observed as follows: \n \"The assessee had disclosed his books of account and evidence from which material facts could be discovered : it was under no obligation to inform the Income-tax Officer about the possible inferences which may be raised against him. It was for the Income-tax Officer to raise such an inference and if he did not do so the income which has escaped assessment cannot be brought to tax under Section 34(1)(a).\" \n \n\n 16. Shah C.J. further observed that : \n \"...whereon the evidence and the materials produced the Income-tax Officer could have reached a conclusion other than the one which he had reached, a proceeding under Section 34(1)(a) will not lie merely on the ground that the Income-tax Officer has raised an inference which he may later regard as erroneous.\" \n \n\n 17. Dr. Pal strongly relied on this decision and developed his argument on the following lines. In Burlap Dealers Ltd. case, what weighed with the Supreme Court is the fact that the first Income-tax Officer who had made the original assessment for 1949-50 and the second Income-tax Officer who assessed for 1950-51 came to different views about the same financing agreement and there is no allegation that there was any lack of disclosure of evidence and materials at the time of the first assessment. Both assessments having been based on the same materials it was purely a matter of inference from the materials that had been furnished before the Income-tax Officers. The two officers made different inferences and the second officer thought that the first officer was erroneous in coming to the inference which he had made. In that situation the Supreme Court held that the assessee was under no obligation to help the assessing Income-tax Officer to make a correct inference from a set of facts. Dr. Pal contended that there is actually no distinction between the case of Burlop Dealers Ltd. and the present case. Here also the assessee had disclosed all the materials before the first Income-tax Officer. Even assuming that the first Income-tax Officer had come to a wrong inference on the materials disclosed by the assessee it is not permissible to reopen the assessment on the ground that the first officer's inference was wrong. Dr. Pal's argument, in substance, is this that both Burlop Dealers Ltd. case and the instant case are really cases where the second Income-tax Officer seeks to reopen an assessment and to make a fresh assessment on the basis of a fresh evaluation of identical facts and materials on which on an earlier occasion an assessment has already been made. Dr. Pal's argument in substance is, therefore, this that both cases are cases where reassessment is sought to be made on a mere change of opinion or after-thought and this cannot be done on the principles enunciated in the Calcutta Discount Company's case. In answer to this argument of Dr. Pal it was contended on behalf of the revenue authorities that there is a qualitative distinction between the present case and the Burlop Dealers Ltd, case, in so far as in the present case reassessment is sought to be made on the ground that the assessee had made certain untrue statements in his disclosure at the time of the first assessment while in the Burlop Dealers Ltd. case, there is no allegation that the assessee had made any statement which was false. Dr. Pal sought to meet this contention of Mr. Balai Pal by pointing out that even in the Burlop Dealers Ltd, case, the assessee had made certain false statements at the time of making the original assessment. In proof of this proposition Dr. Pal made use of certain documents which Mr. Balai Pal on behalf of the revenue authorities had made available to us in order that we could have all the facts of Burlop Dealers Ltd. case at our disposal. Following are some of the documents which Mr. Balai Pal produced before us in this connection: \n\n \n\n (i) The judgment and order dated 15th, April, 1964, passed by the Income-tax Appellate Tribunal by which the Tribunal had set aside the reassessment made by the second Income-tax Officer for the assessment year 1949-50, (This incidentally is the order which ultimately came up before the Supreme Court and was finally disposed of by that court in the judgment we are just now discussing). \n \n\n (ii) A paper book of Income-tax Reference No. 64 of 1957 before this High Court under Section 66(1) of the Indian Income-tax Act, 1922: This reference relates to the assessment of M/s. Burlop Dealers Limited for the assessment year 1950-51. \n \n\n (iii) The judgment of this High Court in the aforesaid reference which has been reported in 48 I.T.R. 153 (Burlop Dealers Ltd. v. Commissioner of Income-tax, [1963] 48 ITR 153 (Cal)). \n \n\n 18. With the help of these documents Dr, Pal tried to show that the assessee had made certain statements which could be described as incorrect at the time of the original assessment for the year 1949-50. He argued that there had been some suppression of facts by the assessee during the assessment for 1949-50. He referred, in particular, to paragraph 4 of the order of the Income-tax Tribunal and relied on the following observation of the Tribunal: \n \n\n \"In the instant case, as we have stated above, the assessee at the original stage of the assessment, produced before the Income-tax Officer the relevant agreements between itself and M/s. Manory Ltd. as also with M/s. Ratiram Tansukhrai. It also did produce the relevant extracts from the accounts relating to these two parties. In fact, in the audited balance sheet as on the 31st December, 1948, which was also produced before the Income-tax Officer, a sum of Rs. 1,55,225 was shown as unsecured loan due to M/s. Ratiram Tansukhrai. Thus, the assessee produced all the relevant materials which were necessary for completing the assessment and also for determining the nature of the particular claim by the assessee. It is of course true that beyond producing those documents and extracts from the accounts, the assessee did not say to the Income-tax Officer that on those facts besides other conclusions, one of the conclusions that could possibly be drawn was that the said M/s. Ratiram Tansukhrai did not advance any finances and yet shared the profits earned by the assessee. \n \n\n It appears from the paper book of the Income-tax Reference No. 64 of 1957 and the judgment of the High Court in that case, Burlap Dealers Ltd. v. Commissioner of Income-tax, that no part of the money which had been advanced by the assessee-company to H. M. Company Ltd. really came from Ratiram Tansukhrai and that three loans alleged to have been given by Ratiram Tansukhrai of Rs. 50,000 on May 24, 1948, Rs. 17,500, on July 7, 1948, and Rs. 1,00,000 on June 23, 1948, were really payments from others. It also appears that all the moneys came in before 7th October, 1948, which was the date of the alleged financing agreement between the assessee-company and Ratiram Tansukhrai. Dr. Pal contended that the statement in the audited balance-sheet produced by the assessee-company during the assessment of 1949-50, which showed a sum of Rs. 1,55,225 as unsecured loan due to Ratiram Tansukhrai, was a false statement. Dr. Pal further argued that the assessee must have suppressed that part of his accounts which would have shown the loans that he had taken from Kothari and Omkarmal Jagdish Prasad, for, the assessee had produced only the relevant extracts from the accounts relating to M/s. H. M. Ltd. and M/s. Ratiram Tansukhrai. These accounts could not possibly have shown the loans received from Kothari and Omkarmal. Dr. Pal, therefore, said that even though the assessee had produced materials containing a false statement before the Income-tax Officer at the time of the original assessment and had suppressed certain facts the Supreme Court did not permit a reopening of the assessment on the ground that the Income-tax Officer who had made the original assessment could have reached a correct conclusion regarding the story of the financing agreement put up by the assessee. \n \n\n We have carefully considered; Dr. Pal's argument but we cannot persuade ourselves to accept his contention that the Supreme Court in Burlap Dealers Ltd. case disallowed a reopening of the assessment even with the knowledge that the disclosure made by the assessee at the time of assessment contained false statements. We are really concerned with the principles that are enunciated by the Supreme Court and the ratio of its judgment. There is nothing in the judgment of the Supreme Court which shows that the additional documents which were presented before us and which seem to indicate that the assessee's disclosures before the original assessing authority contained false statements were also present before the Supreme Court and that the Supreme Court dealt with that case with full knowledge that the assessee had made such false statements. Each court acts on the materials before it and until and unless there is conclusive evidence to show that certain documents or certain facts were present before a court giving a judgment it is not permissible to assume that in delivering a judgment the court concerned must have taken note of those facts and circumstances. All that we can derive from the Supreme Court judgment of Burlap Dealers Ltd. case is that since the Income-tax Officer who had made the original assessment could have reached a correct conclusion regarding the financing agreement on which the assessee sought to rely, the second officer who sought to reassess and, in fact, did the reassessment on identical facts and materials must be regarded as having acted on the basis of a changed opinion. It was on this ground that the Supreme Court held that it was not open to the Income-tax Officer who subsequently disbelieved the story of the financing agreement to reopen the assessment under Section 34(1)(a). We have not found anything in the judgment of the Supreme Court in Burlop Dealers Ltd's case, to suggest that their Lordships would disallow a reopening of the assessment even where the assessing officer who seeks to reopen has reason to believe that at the time of the original assessment the assessee had made false statements and had failed or omitted to give true particulars regarding his income. We cannot, therefore, accept the Burlop Dealers Ltd. case as an authority to induce us to treat the present case as one coming within the scope, of the principles enunciated in the Calcutta Discount Company's case. \n \n\n We now come to the second ground of challenge which Dr. Pal made out against the notice under Section 148. For this part of his argument Dr. Pal relied on the Supreme Court decision in Chhugamal Rajpal v. S. P. Chaliha, , the facts of which very closely resemble the facts of the instant case. The assessee which was a partnership firm executed contracts under the Railways. While submitting its return of income for the accounting year 1959-60 corresponding to the assessment year 1960-61, the assessee produced a statement showing that it had various creditors from whom it had borrowed on hundis during, the accounting year. The full names and addresses of the alleged creditors were produced before the Income-tax Officer. The assessee also produced its books of accounts. The Income-tax Officer, after enquiry, accepted the story of the assessee about the alleged loans and assessed its total income for that year at Rs. 69,886. Subsequently, on 3rd June, 1966, a notice was issued by the Income-tax Officer under Section 148 of the Income-tax Act, 1961, telling the assessee that the Income-tax Officer had reason to believe that the assessee's income for the year 1960-61 had escaped assessment within the meaning of Section 147 of the, Income-tax Act, 1961. The assessee was asked to deliver another return for the assessment year 1960-61. The notice mentioned that it was being issued after obtaining the necessary satisfaction of the Commissioner of Income-tax, Bihar and Orissa, Patna. We might as well say here that this notice is almost verbatim the same as was served on the assessee in the instant case before us. Upon receipt of that notice, Chhugamal Rajpal challenged on various grounds the validity of the notice as well as the proceeding commenced on the strength of that notice in a writ petition before the High Court of Patna. One of the grounds of challenge was that the notice did not comply with the requirement of section 151(2) of the Income-tax Act. This ground of challenge was not accepted by the Patna High Court which dismissed the petition. The matter then went up on appeal to the Supreme Court which directed the revenue authorities to produce before them the records connected with the notice to show that the Income-tax Officer had in fact complied with Sections 147 and 151(2) of the Act of 1961. The revenue authorities produced before the Supreme Court the report that had been submitted by the Income-tax Officer to the Commissioner and the Commissioner's order on that report. After considering these materials the Supreme Court held that the Income-tax Officer had not come to a prima facie conclusion that the loan transactions to which he made a reference in his report were not genuine transactions and that he had merely a vague suspicion that they might be bogus transactions. According to the Supreme Court such suspicions did not fulfil the requirements of Section 151(2) in so far as the reasons given by the Income-tax Officer for issuing a notice under Section 148 do not disclose prima facie grounds before him for taking action under Section 148. The Supreme Court came to the further finding that the Commissioner in giving his permission had acted mechanically. \n \n\n Dr. Pal argued with reference to this decision that there is practically no distinction between the facts and circumstances of this case and those of the case before us. He pointed out that the Income-tax Officer's report to the Commissioner in the Supreme Court case is almost identical with the report that the Income-tax Officer gave in the instant case. The Commissioner's orders are also exactly the same. Therefore, it was argued, on the strength of this Supreme Court decision, we must declare that in the instant case before us also, the notice under Section 148 did not satisfy the requirements of Section 151(2) and that this was not a fit case for issuing a notice under Section 148. \n \n\n We have already stated that so far as the notice is concerned there is practically no distinction between what was issued in the Supreme Court case and what has been issued in the case before us. This similarity is explained by the fact that both the two notices are in the same form which apparently is a standard form used by all Income-tax Officers in connection with these proceedings. Let us, however, compare the two reports of the respective Income-tax Officers in some detail. The report in either case commences with certain particulars given in a tabular form. The particulars include, for instance, (1) the name and address of the assessee, (2) status, (3) assessment year for which notice under Section 148 is proposed to be issued, (4) whether it is a new case or one in which reassessment has to be made, (5) in the case of reassessment the income which was originally assessed or determined, (6) whether the case falls under Clause (a) or Clause (b) of Section 147, (7) brief reasons for starting the proceedings under Section 147 (including the items which are believed to have escaped assessment), (8) whether the Commissioner is satisfied that it is a fit case for the issue of notice under Section 148, (9) whether the assessing officer is satisfied that it is a fit case for issue of notice under Section 148. \n \n\n All the particulars are given in a tabular form except with regard to item No. 7 for which the reasons are given separately. The reasons in both cases are recorded on the back of the tabular form used by the Income-tax Officer for the report. Both the reports confirm that the Commissioner was satisfied. So far as the tabular form is concerned there is no manner of doubt that there is no material difference between the two reports : the factual details, e.g., the names of the assessee or the amounts assessed must, of course, be necessarily different. The most vital item of the report is, of course, the reasons recorded by the Income-tax Officer in regard to item No. 7 of the tabular statement indicating the grounds for initiating the proceedings. It is convenient if the two reasons are set out side by side for the purpose of comparison. Here are the two sets of reasons. \n\n \n \n \n In the Supreme Court case\n In the instant case\n \n \n \n \n \n\nDuring the year the assessee\n had shown to\n have taken loans from various parties of Calcutta. From D.I.'s\n Inv. No. A/P/Misc. (5) D.I./ 63-64/5623 dated August 13, 1965, forwarded to this office under C.I.T., Bihar\n and Orissa, Patna's letter No. Inv.-(Inv) 15/65-66/H.C./ M/-709E/1953-2017 dated Patna\n September 24, 1965, it appears that these persons are name-lenders and the\n transactions are bogus. Hence, proper investigation regarding these loans is\n necessary. The names of some of the persons from whom money is alleged to\n have been taken on loan on hundis are:\n \n\n1. Seth Bhagwan Singh Sri-charan.\n \n\n2. Radhakissen Shyam Sunder.\n \n\n3. Lakha Singh Lal Singh.\n \n \n \n\nThere are hundi loan credits in\n the names of Narain Singh Nanda-lal, D. K. Naraindas, Bagwandas Srichand, etc.,\n who are known name-lenders, and also hundi loan credit in the name of\n Mohansingh Kanayalal who has since confessed he was doing only name-lending.\n In the original assessment these creditors were not investigated in detail. As\n the information regarding the bogus nature of these credits is since known, action\n under section 147(a) is called for to reopen the assessment and assess\n these credits as the undisclosed income of the assessee. The assessee is\n still claiming that the credits are genuine in the assessment proceedings for\n 1962-63. Commissioner's\n sanction is solicited to reopen the assessment for 1958-59 under\n section 147(a).\n \n \n \n Sd/- S. P. Chaliha\n N.S. Raghuthaman.\n \n \n 30-4-66\n I.T.O., \"E\" Ward, H.C. Cal.\n \n \n Income-tax Officer,\n 13-2-67.\n \n \n A-Ward, Mazaffarpur.\n \n \n\n \n\n In each of these cases the Income-tax Officer refers to certain loans which the assessee had claimed to have taken during the relevant accounting year. In each case there is an allegation that the alleged lenders are name-lenders and the names of some of these name-lenders have been mentioned in each. In the Supreme Court case there is a statement that \"it appears...... that the transactions are bogus\"; in the instant case before us the same statement is made in an oblique manner by the phrase \"information regarding the bogus nature of these things\". In the instant case there is, however, a reference to one lender who is supposed to have confessed that he was doing only name-lending. In the Supreme Court case there is a statement of the Income-tax Officer \"hence, proper investigation regarding these loans is necessary\". Such a statement is, however missing in the case before us. In neither of the two cases does the Income-tax Officer state clearly that he had reason to believe that, (a) part of the income of the assessee had escaped assessment, and (b) that such an escapement was caused by an omission or failure on the part of the assessee. There is a statement in the present case that \"the assessee is still claiming that the credits are genuine\" in the assessment proceedings of 1962-63. There is no such statement in the Supreme Court case. The Supreme Court case has specified the amount of escapement involved as Rs. 1,00,000. There is no such specification in the present case though the form requires that the items which are believed to have escaped assessment should be specified by the Income-tax Officer. In the case before us, the Income-tax Officer says that information regarding the bogus nature of the credits is since known. In the Supreme Court case there is no reference to the information but the same statement is made in a more categorical form, namely, \"it appears that these persons are name-lenders and the transactions are bogus\". \n \n\n 19. Hegde J., who delivered the judgment of the Supreme Court, condemned the Income-tax Officer's report as one which does not satisfy the requirements of Section 151(2). Let us see what are the reasons for which he condemned the report in the Supreme Court case and we can then ascertain whether the corresponding report in our case also suffers from the same infirmities. Here are the defects which Hegde J. points out: \n \n\n (a) The Income-tax Officer does not set out any reason for coming to the conclusion that this is a fit case to issue a notice under Section 148. \n \n\n (b) The material that the Income-tax Officer had before him for issuing a notice under Section 148 is not mentioned in the report. He vaguely refers to certain communications received by him from the Commissioner of Income-tax, Bihar and Orissa. \n \n\n (c) The Income-tax Officer does not mention the facts contained in those communications. All that he says is that from those communications it appears that the persons are name-lenders and the transactions are bogus. \n \n\n (d) He has not even come to a prima facie conclusion that the transactions to which he referred are not genuine transactions. He appears to have had only a vague feeling that they are perhaps bogus transactions. Such a conclusion does not fulfil the requirements of Section 151(2). The Income-tax Officer must have prima facie grounds before him for taking action under Section 148. \n \n\n (e) The Income-tax Officer mentioned that proper investigation is necessary. This is not the same thing as saying that there are reasons to issue a notice under Section 148. \n \n\n (f) Before issuing a notice under Section 148 the Income-tax Officer must have reason to believe that income chargeable to tax has escaped assessment for any assessment year and that it was due to omission or failure on the part of the assessee. These requirements have not been satisfied. From the report of the Income-tax Officer it is clear that he could not have had such reasons. \n \n\n (g) Hegde J. was not satisfied that the Income-tax Officer had any material before him which could satisfy the requirements of either Clause (a) or Clause (b) of Section 147. Therefore, he could not have issued a notice under Section 148. \n \n\n 20. The Supreme Court also observes that the Commissioner has accorded his permission mechanically. This was not enough. He should have recorded that he was himself satisfied that this was a fit case for the issue of a notice under Section 148. The report of the Income-tax Officer as well as the circular of the Commissioner indicate, according to the Supreme Court, that the officers gave no importance to the provisions of Section 147 and Section 151 and that they have substituted the form for the substance. \n \n\n 21. We shall now discuss, with reference to these criticisms made by Hegde J., of the Income-tax Officer's report in the Supreme Court case, the corresponding report in the case before us and try to ascertain if there is any qualitative distinction between the two reports. \n \n\n Deject (a). \n \n\n There is nothing in the Income-tax Officer's report in either case regarding the reason for concluding that the case concerned was a fit case to issue a notice under Section 148. This defect, therefore, is common to both reports. \n \n\n Defect (b). \n \n\n This defect is also present in the Income-tax Officer's report in the instant case. In fact, the defect is more serious in the case before us, for, in the Supreme Court case there was at least a reference to \"certain communications\" received by the Income-tax Officer from the Commissioner of Income-tax, Bihar and Orissa. In the instant case there is merely a reference to \"certain information\". There is no doubt a reference to a confession of one of the alleged creditors, namely, Mohan Singh Kanayalal that he was acting only as a name-lender. But there is no indication that the name-lending was in connection with the loans involved in the assessment under consideration. \n \n\n Defect (c). \n \n\n This defect is also common to both cases. In the Supreme Court case, the report states:\" it appears that the creditors are name-lenders and the transactions are bogus\". In the instant case the report states: \"information regarding bogus nature of these credits is since known\". \n \n\n Defect (d). \n \n\n This defect about the lack of a tentative conclusion on the part of the Income-tax Officer is common to both reports. In the Supreme Court case the Income-tax Officer says: \"It appears that these persons are name-lenders and the transactions are bogus\". In the instant case the Income-tax Officer does not even say that. He says that in the original assessment the credits were not investigated in detail and that since \"information regarding the bogus nature of the credit is since known, action under Section 147(a) is called for\". The Income-tax Officer in the instant case merely sets out the content of the information received by him and does not state what is his own belief or tentative conclusion about it. \n \n\n Defect (e). \n \n\n This defect is also common to both cases. In the Supreme Court case the Income-tax Officer merely records his feeling that a proper investigation was necessary to find out whether the information about the bogus nature of the transactions was correct. In the instant case also the Income-tax Officer merely states that the information is known and, therefore, action under Section 147(a) is called for. The Income-tax Officer in this case does not even give any hint about his own feeling regarding the prima facie credibility of the information. It is clear that the Income-tax Officer in the instant case is far less specific and far less definite in the matter of recording his belief as to the alleged bogus nature of the transactions. \n \n\n Defect (f). \n \n\n This defect is also common to both cases. In neither report is there any reference to the omission or failure on the part of the assessee or to any reason to believe that the income has escaped assessment. In the instant case, of course, there is a statement that action under Section 147(a) is called for to reopen the assessment and assess the credits as the undisclosed income of the assessee. This may perhaps be taken as an oblique reference to escapement of income from assessment. \n \n\n Defect (g). \n \n\n In view of the earlier defects, it is obvious that defect (g) is also common to both reports. \n \n\n22. I have read both the reports and compared them repeatedly to find out if there is any real and qualitative distinction between the two reports. I confess I have found none. There is, of course, some difference in the language of the two reports. But the essential characteristics of both the reports are exactly the same. In the Supreme Court case I have found at least some vague hint about an undefined doubt in the mind of the Income-tax Officer regarding the genuineness of the credit transactions disclosed by the assessee in his earlier report. In the instant case, however, I have missed even that vague hint. In fact, the whole report discloses nothing about the belief or disbelief or about the mental state of the Income-tax Officer. After merely stating that the creditors in whose names the hundi loans have been disclosed are known as name-lenders and that one of them had confessed that he was doing only name-lending, the Income-tax Officer passes immediately to the next statement that action under Section 147(a) is called for. In the Supreme Court case the Income-tax Officer refers to the source of information and then states that from the materials disclosed in the information it appeared to him that the creditors were name-lenders and the transactions were bogus. He gives his own subjective conclusion, however prima facie and tentative it may be, and says : \"hence, proper investigation regarding his loans is necessary\". The use of the word \"hence\" is significant. It is to be read with reference to the earlier words \"it appears\". First, there is a prima facie belief in the mind of the Income-tax Officer and then, as a consequential step, the decision to investigate into the transactions. This is certainly a far more logical approach to an action under Section 148 than what we find in the action of the Income-tax Officer who dealt with the case before us. But even so, because other details, particulars and statements are lacking in the report of the Income-tax Officer in the Supreme Court case, that report has been condemned as bad and insufficient to sustain an action under Section 148. I have no doubt that the report of the Income-tax Officer in the case before us must be condemned as still more insufficient and inadequate to justify an action under Section 148. \n \n\n 23. So far as the Supreme Court's criticism regarding the Commissioner's action is concerned it is clear that the order recorded by the Commissioner in the instant case is open to the same criticism. Here also the Commissioner while he accorded his permission acted mechanically, for the Commissioner did not record that he was satisfied that this was a fit case for the issue of notice under Section 148. In both cases what the Commissioner has done is just to note the word \"Yes\" and affixed his signature thereunder against the question in column 8 of the report of the Income-tax Officer which reads : \"Whether the Commissioner is satisfied that it is a fit case for the issue of notice under Section 148.\" In the Supreme Court case Hegde J. observed that if the Commissioner had read the report carefully he could never have come to the conclusion on the material before him that it was a fit case to issue a notice under Section 148. Hegde J. further observes. \n \"The important safeguards provided in Sections 147 and 151 were lightly treated by the Income-tax Officer as well as by the Commissioner. Both of them appear to have taken the duty imposed on them under these provisions as of little importance. They have substituted the form for the substance.\" \n \n\n 24. These observations apply with equal force and vigour to the action of the Income-tax Officer and the Commissioner of Income-tax in the instant case. \n \n\n 25. This branch of Dr. Pal's argument suffers from one infirmity. The contention that the notice under Section 148 was issued without a proper satisfaction of the Commissioner on the reasons recorded by the Income-tax Officer to the effect that it was a fit case for the issue of such a notice had not been made out specifically in the original petition. We are not, however, inclined to ignore this serious defect in the proceedings on this technical ground alone. In any event, the petitioner had specifically made out a case that the condition for the exercise of the jurisdiction by the Income-tax Officer under Section 147 read with Section 158 had not been satisfied. In the Supreme Court decision in Chhugamal Rajpal v. S. P. Chalia the notices were condemned as bad and invalid not merely because of the defective order by the Commissioner of Idcome-tax but also because of the inherent defects in the report of the Income-tax Officer, which, according to Hegde J., betrayed non-compliance with the conditions laid down in Section 147 of the Act. Besides, in our opinion, ground \"d\" (in paragraph 9 of the petition) is wide enough to bring within its ambit an objection that the conditions precedent as are formulated in Section 151(2) for the assumption of jurisdiction under Section 147 read with Section 148 of the new Act have not been complied with. \n \n\n 26. After the conclusion of the hearing of this application another decision\nof the Supreme Court which involves a similar question about the fulfil\nment of the conditions precedent to a reassessment proceeding has become\navailable to us, viz., the case of Sheo Nath Singh v. Appellate Assistant\nCommissioner of Income-tax, . In that case the assessee had been served with a notice under Section 34(1A) of the Indian Income-tax Act of 1922, which was in similar terms as the present Section 147 of the Income-tax Act, 1961. The assessee challenged the notice and the proceedings under Section 34(1A) in a writ application before this High Court. The matter was decided by a Full Bench of this High Court and it was held that since the assessee had filed appeals to the Appellate Assistant Commissioner he could not pursue the writ petition. However, the Full Bench also decided on merits the question that was raised on behalf of the assessee relating to the satisfaction of the preconditions under Section 34(1A). The Full Bench upon examination of the materials held that the petitioner-assessee had failed to establish his contention that there was an initial lack of jurisdiction on the part of the Income-tax Officer on the ground that the preconditions in Section 34(1A) had not been fulfilled. The matter went up to the Supreme Court on appeal. It appears that the department produced before the Supreme Court the report of the Income-tax Officer in Form B to the Central Board of Revenue. This report contained the following reasons for starting the proceedings under Section 34(1A): \n \n\n \"For the reasons hereinafter recorded I believe that income, profits and gains earned by the assessee in his personal capacity and in conjunction with others and chargeable to income-tax have escaped assessment and that the amount of such concealed income relating to the accounting years covering the period beginning on the 1st day of September, 1939, and ending on the 31st day of March, 1949, amount to or is likely to amount to Rs. 1,00,000. The reasons for such belief, inter alia, is as follows : \n \n\n (1) The assessee who is or was at the relevant time a managing director in about a dozen limited companies along with \"Oberois\" is believed to have made some secret profits which were not offered for assessment. \n \n\n (2) The assessee is believed to have received a sum of Rs. 22 lakhs from \"Oberois\" and this sum or at least part of which represents income which has escaped assessment. \n \n\n(Sd.) A. K. Bhowmik, \n\nIncome-tax Officer, \n\n Dist. II(2), Calcutta.\" \n \n\n27. The Supreme Court held that these reasons \"hopelessly\" failed to satisfy the requirements of the statute. The Supreme Court referred to its earlier decision in Chhugamal Rajpal v. 5. P. Chaliha, which we have dealt with elaborately just now, and following that decision held that in this case also the requisite reasons to believe were lacking. The Supreme Court observed, : \n\n \"There can be no manner of doubt that the words 'reason to believe' suggest that the belief must be that of an honest and reasonable person based upon reasonable grounds and that the Income-tax Officer may act on direct or circumstantial evidence but not on mere suspicion, gossip or rumour. The Income-tax Officer would be acting without jurisdiction if the reason for his belief that the conditions are satisfied does not exist or is not material or relevant to the belief required by the section. The court can always examine this aspect though the declaration or sufficiency of the reasons for the belief cannot be investigated by the court.\" \n \n\n 28. After making these observations the Supreme Court holds that there was in this case no material or fact on which any belief could be founded of the nature contemplated by Section 34(1A). \"The so-called reasons are stated to be beliefs, thus leading to an obvious self contradiction\". On this ground the Supreme Court was satisfied\" that the requirements of Section 34(1A) were not satisfied and, therefore, the notices which had been issued were wholly illegal and invalid\". The Supreme Court upheld the assessee's appeal and quashed the proceedings. \n \n\n 29. It is abundantly clear that, according to the (Supreme Court, if the Income-tax Officer in stating his reasons to believe refers to certain other beliefs it amounts to \"an obvious self-contradiction\". By this standard the report of the Income-tax Officer in the instant case is much worse because it not only does not include an interim conclusion on the part of the Income-tax Officer as was present for instance in the case of Chhugamal Rajpal but it does not even say that by reason of the information mentioned in the report the Income-tax Officer had any belief at all. It merely states that action under Section 147(a) is called for. To my mind this latest decision of the Supreme Court in the case of Sheo Nath Singh fortifies our conclusion that the preconditions for the exercise of jurisdiction by the Income-tax Officer under Section 147 read with Section 148 have not been fulfilled in the instant case. \n \n\n 30. Various cases were cited before us on behalf of the revenue authorities at the time of hearing. For the sake of completeness I shall very briefly refer to some of the more important cases on which the counsel relied strongly. Thus, great reliance was placed on the decision of the Supreme Court in S. Narayanappa v. Commissioner of Income-tax, . In this judgment the Supreme Court has indicated why the reasons for issuing a notice under Section 34 of the old Income-tax Act are not open to investigation by the court. Mr. Balai Pal argued that in the light of this particular judgment of the Supreme Court, as soon as there are some reasonable grounds for the Income-tax Officer to believe that there had been any non-disclosure as regards any fact which could have a material bearing on the question of under-assessment, that would be sufficient to give' jurisdiction to the Income-tax Officer to issue a notice under Section 34 of the old Act. Relying on the principle that adequacy of the grounds is not a justiciable issue, Mr. Balai Pal argued, that it is not open to us to scan the grounds adduced by the Income-tax Officer as reasons to believe that there has been a non-disclosure. We do not think, however, that Mr. Pal is quite correct in his contention. The Supreme Court in the same judgment in Narayanappa's case has also clearly stated that it is open to the court to examine whether the reasons for the belief have a rational nexus or a relevant bearing to the formation of the belief and are not extraneous or irrelevant to the purpose of the section. The Supreme Court held further that, in any event, it must be established on behalf of the revenue authorities in such cases that there was the belief and that the belief was held in good faith and was not a mere pretence. Presumably, it is this enquiry which the Supreme Court made in Chhugamal Rajpdl's case. By proceeding on exactly similar lines we have found that the preconditions laid down in Section 147 have not been satisfied in the present case. Therefore, we are not infringing the limits of justiciability laid down by the Supreme Court in Narayanappa's case and in many other subsequent decisions. \n \n\n 31. Mr. Balai Pal then relied on the Supreme Court decision in Income-tax Officer v. Bachu Ltd Kapoor, . Mr. Pal contended that this decision of the Supreme Court was a clear authority for the proposition that even a full disclosure by an assessee cannot operate as a bar to a reopening under Section 34(1A) of the old Act when the document disclosed showed an apparent condition and not the real condition. It may be mentioned here in this connection that the late K. L. Roy J, had strongly relied on this case in his judgment in the matter of Lakhmani Mewal Das v. Income-tax Officer, which incidentally is the judgment which induced T. K. Basu J. to make the present reference under Chapter V, rule 2 of the Rules of this court. I have carefully considered the Supreme Court decision in Bachu Lal Kapoor's case and I have no doubt at all that this decision of the Supreme Court cannot be of any assistance to us in the instant case. In Bachu Lal Kapoor's case certain individuals had been assessed to income-tax in their individual capacity for the assessment years 1953-54 to 1955-56. Later on, the Income-tax Officer issued a notice under\" Section 34 to Bachu Lal Kapoor and sought to assess Bachu Lal Kapoor as the karta of the Hindu undivided family in regard to the assessment year 1955-56. This notice was challenged under article 226 of the Constitution on two grounds. First, it was argued, since the income for the assessment year 1955-56 had already been assessed in the hands of the individual members of the joint Hindu family it could not be assessed again as the income of the family. This contention was, of course, based on the principle of \"avoidance of double taxation\". The second contention was that the Hindu undivided family did not legally exist until the order under Section 25(a) of the Indian Income-tax Act, 1922, had been set aside. The Allahabad High Court accepted the first contention of the assessee and quashed the notice. The Allahabad High Court did not, however, decide the second contention. On appeal, the Supreme Court rejected the first contention and remanded the case to the Allahabad High Court for decision on the second contention of the assessee. In that case there was no ground made out by the assessee before the Allahabad High Court on the basis of Section 34 of the old Act. In fact, the question of impropriety of reopening of an assessment under Section 34 on the ground that there was no reason to believe that some income had escaped assessment was not argued before the Allahabad High Court at all. Therefore, the decision of the Supreme Court in Bachu Lal Kapoor's case is not relevant for our purposes at all. \n \n\n 32. Mr. Balai Pal made a very brief reference to the case of Kantamani Venkata Narayana & Sons v. First Additional Income-tax Officer, Rajahmundry, . This decision also is not of any assistance to Mr. Pal, so far as that decision reaffirms the principles of the earlier Supreme Court decision in Namyanappa v. Commissioner of Income-tax. I have already discussed how the limits of justiciability indicated in that decision are not infringed by an examination of the grounds adduced by the Income-tax Officer in order to ascertain whether he had a genuine belief about some income having escaped assessment. In fact, in this case I have done no more than follow exactly the lines of enquiry which the Supreme Court has followed in Chhugamal Rajpal's case. \n \n\n 33. Mr. Balai Pal also relied on the judgment of the Supreme Court in the case of Sowdagar Ahmed Khan v. Income-tax Officer, Nellore, . In that case the Income-tax Officer found that the assessee had failed to disclose a current account in a bank in the name of his father-in-law until the father-in-law had died and that the assessee had failed to disclose the advance of a sum of Rs. 70,000 and certain other items of income from property in the names of his sons, wife and daughter though such property had been purchased by him in their names. The Income-tax Officer also suspected in the light of materials that were newly gathered that certain cash credit in the assessee's books of account to the extent of Rs. 5 lakhs were not genuine. The Income-tax Officer then issued a notice under section 34(1A) of the Indian Income-tax Act, 1922, to reopen the assessments for the years 1943-44 to 1949-50. The assessee filed a petition under article 226 of the Constitution in the High Court challenging the legality of the notice. The petition was dismissed by the Andhra Pradesh High Court and the assessee came on appeal to the Supreme Court. On the facts of that case the Supreme Court held that there were enough materials before the Income-tax Officer on which he could form a prima facie belief that the assessee had omitted to disclose fully and truly all material facts and that in consequence of such non-disclosure some income had escaped assessment. The assessee's contention that notices for reassessment were invalid on the ground that the original assessment orders showed that the cash credits in question had already been considered and accepted by the Income-tax Officer was rejected by the Supreme Court by pointing out that the assessee does not discharge his duty to disclose fully and truly material facts necessary for the assessment of the relevant year by merely producing the books of account or other evidence and that he has to bring to the notice of the Income-tax Officer particular items in the books of account or portions of document which are relevant. This is a decision in an entirely different context of facts and does not, in our opinion, help, Mr. Pal. At best, this is a case which supports Mr. Balai Pal in meeting the first contention of Dr. Pal in which he tried to make out a case on the authority of the Calcutta Discount Company's case that the assessee having disclosed all particulars about the hundis the Income-tax Officer had no jurisdiction to commence reassessment proceedings. I have already rejected that contention of Dr. Pal and, therefore, it is not necessary for Mr. Balai Pal to rely on this decision to counter Dr. Pal's argument on this aspect of the matter. Mr. Balai Pal relied on a judgment of S. P. Mitra J. in Madnani Engineering Works (P.) Ltd. (judgment dated June 17 and 18, 1970, in Matter No. 523 of 1968). In that case the Income-tax Officer had issued a notice under Section 148 of the Income-tax Act, 1961, on the ground that he had reason to believe that the petitioner's income chargeable to tax for the assessment year 1959-60 had escaped assessment. The income which was alleged to have escaped assessment was the total of various sums of money which, according to the petitioner, he had obtained as loans from different persons. The assessee contended that since the assessee had given a full list of the persons from whom the loans had been obtained with their names and addresses and had further produced confirmation of all loans in writing by the various lenders and since all these materials had been considered by the Income-tax Officer at the time of the first assessment, the Income-tax Officer had no jurisdiction to reopen the assessment. Reliance was again placed on behalf of the petitioner on the Supreme Court judgment in the case of Calcutta Discount Company Ltd. S. P. Mitra J. rejected the contention of the assessee. In so far as his Lordship refused to apply the Calcutta Discount Company's case we are in complete agreement with his Lordship. But we do not think that his Lordship's decision can be supported any longer in view of the recent decision of the Supreme Court in Chhugamal Rajpal's case. \n \n\n 34. There are various other decisions which were referred to both on behalf of the assessee and on behalf of the revenue authorities at the time of argument. It is not, in our opinion, necessary to refer to them all. Most of them were cited to vindicate the application of the principles in Calcutta Discount Company's case. I have already discussed fully the reasons why in our opinion, the instant case cannot at all come within the ambit of the principle enunciated by the Supreme Court in the Calcutta Discount Company's case. Indeed, in view of the fact that we have very closely followed the Supreme Court decisions in Chhugamal Rajpal's case, it is not necessary for us to refer to the other decisions. \n \n\n 35. I repeat that, in view of the latest Supreme Court decisions in Chhugamal Rajpal's case and Sheo Nath Singh's case, there is no doubt that the notice that was issued under Section 148 in the instant case was issued without jurisdiction. In the result, this application succeeds. The rule is made absolute and the impugned notice quashed. In the facts and circumstances of the case, I make no order, as to costs. \n \n\n Sabyasacht Mukharji, J. \n \n\n 36. I had the advantage of reading the judgment delivered by my Lord. With great respect, I am, however, unable to agree with the conclusions arrived at by my Lords. \n\n 37. This application under article 226 of the Constitution has been referred to this Bench as a result of the report made by T. K. Basu J., under Chapter V, rule 2, of the Rules of the Original Side of this court. The question with which we are concerned in this application is whether the Income-tax Officer had jurisdiction to initiate proceedings against the petitioner for the assessment year 1958-59. Before, however, that question is considered, it would be necessary to refer to certain facts. The petitioner carries on business of manufacturing bricks and construction works. For the assessments year 1958-59, the petitioner was assessed under Section 23(3) of the Indian Income-tax Act, 1922, and the total income was computed at Rs. 37,872. According to the petitioner, at the time of the original assessment, the petitioner's authorised representative appeared before the Income-tax Officer, \"I\" Ward, and produced all the relevant books of accounts, statements of the Bank of India, Barabazar Branch, Calcutta, and other documents. The assessment was thereafter completed. On the 14th of March, 1967, the petitioner received a notice dated 8th of March, 1967, issued under Section 148 of the Income-tax Act by the Income-tax Officer, \"E\" Ward, Hundi Circle, for the assessment year 1958-59, whereby the petitioner was called upon to submit a return of income for the aforesaid year inasmuch as it was stated that the said Income-tax Officer, \"E\" Ward, Hundi Circle, had reason to believe that the income of the petitioner has escaped assessment within the meaning of Section 147 of the said Act. The said notice was issued after obtaining the necessary satisfaction of the Commissioner of Income-tax, West Bengal-I. The petitioner, by his letter dated 2nd of May, 1967, contended that, as all the materials had been fully and truly disclosed, there could not be any reason to believe that the petitioner's income had escaped assessment and as such the Income-tax Officer could not have any reason to issue the notice. According to the petitioner, the condition precedent for the issuance of the notice had not been fulfilled. Upon this a rule nisi was issued by this court under article 226 of the Constitution on the 13th of May, 1967. An affidavit-in-opposition on behalf of the respondents in answer to this rule nisi was field by one Nanjaitha-layur Sethumadhova Raghuthaman, affirmed on 23rd August, 1967. The notice under Section 148 of the Income-tax Act, 1961, had been issued by this person. Apart from raising certain legal contentions and denying the allegations that all the material and relevant facts had been disclosed by the petitioner at the time of the original assessment and that the Income-tax Officer did not have and/or could not have any reason to form the belief, the relevant paragraph of the said affidavit states as follows: \n\n \"Save what appears from the assessment order for the assessment year 1958-59 allegations made in paragraphs 2 and 3 of the petition are denied. It is denied particularly that all materials relevant and necessary to the assessment were produced before the Income-tax Officer as alleged or at all. \n\n Save what appears from the notice dated March 8, 1967, and save what are matters of records, allegations made in paragraph 4 of the petition are denied. Subsequent to the assessment for the assessment year 1958-59, it was discovered, inter alia, that some of the loans shown to have been taken and interests alleged to have been paid thereon by the petitioner during the relevant assessment year were not genuine. The Income-tax Officer had reason to believe and bona fide believed that the said alleged loans and the interests alleged to have been paid thereon are not genuine. If necessary I crave leave to produce before the hon'ble judge hearing the application, the relevant records on the basis of which the said Income-tax Officer had reason to believe that the income of the petitioner escaped assessment as aforesaid at the hearing of this application.\" \n\n 38. In the original verification of the said affidavit it was stated that the last sentence of paragraph 6 was true to the knowledge of the deponent and the other part of paragraph 5 was based on information derived from the records of the case and believed to be true by the deponent. At the time of the hearing of this matter before us, counsel for the revenue contended that the verification of paragraph 6 was defective and might obviously have been made through inadvertence, because, according to counsel for the revenue, the deponent in paragraph 6 had stated facts relating to his own knowledge. Counsel for the assessee on the other hand contended that we should not allow the revenue to contend that the verification was defective through inadvertence. Counsel for the assessee contended that in the verification there was a deliberate omission to state that the facts stated in paragraph 6 were true to the knowledge of the deponent. In view of the conflicting contentions, we asked both the revenue and the assessee to put their respective cases upon affidavit and that was done during the course of the hearing before us. Upon this we gave leave to the dependent to reverify paragraph 6 and since then the facts stated in paragraph 6 of the said affidavit have been re-verified as being true to the knowledge of the deponent. There was an affidavit in reply on behalf of the petitioner affirmed on the 15th of September, 1967, wherein the petitioner had stated that at the time of the original assessment the petitioner not only produced the balance-sheet and profit and loss account of the relevant year but also produced the loan account of each and every creditor from whom the petitioner had obtained loans. The petitioner had also stated that the petitioner had produced the confirmation letters of the said creditors and gave to the Income-tax Officer the addresses of the said different parties. It was also stated that the petitioner produced discharged hundies at the time of the original assessment. It is not disputed that at the time of the original assessment, these materials mentioned in the affidavit-in-reply were produced by the petitioner before the Income-tax Officer concerned. As a matter of fact, the certified copies of these documents, namely, the loan accounts of the different creditors, the copies of the discharged hundies, the confirmation letters by the different creditors and lists and addresses of different creditors as well as the accounts of the different cteditors were produced before T. K. Basu J. It has to be further noticed that at the time of the hearing of this application we asked counsel for the revenue if he wanted to produce or rely on any document or materials and counsel for the revenue produced before us the report in connection with the starting of proceedings under Section 147 of the Income-tax Act, 1961. We directed a copy of the said report to be filed as an exhibit to this proceeding and a supplementary paper book should be filed containing the aforesaid document. The reasons that have been recorded in the report are as follows: \n\n \"There are hundi loan credits in the name of Narayansingh Nandalal, D. K, Naraindas, Bagwandas Srichand, etc., who are known name-lenders, and also hundi loan credit in the name, Mohansingh Kanayalal, who has since confessed he was doing only name-lending. In the original assessment these credits were not investigated in detail. As the information regarding the bogus nature of these credits is since known, action under Section 147(a) is called for to reopen the assessment and assess these credits as the undisclosed income of the assessee. The assessee is still claiming that the credits are genuine in the assessment proceedings for 1962-63. Commissioner's sanction is solicited to reopen the assessment for 1958-59, under Section 147(a).\" \n\n 39. The question with which we are concerned in this application is whether the Income-tax Officer had properly initiated proceedings under Section 148 of the Income-tax Act, 1961. T. K. Basu J. was of the opinion that the Income-tax Officer had no jurisdiction to initiate the proceedings under Section 148 of the Income-tax Act, 1961. According to the learned judge all the material and relevant facts about the genuineness of the loans taken by the petitioner had been disclosed. Therefore, if upon those facts the Income-tax Officer concerned had taken the view that these loans were genuine, then subsequently it could not be questioned by another Income-tax Officer on the ground that these were not genuine, and the completed assessment could not be reopened under Section 147(a) of the Act. The learned judge was of the view that all primary facts necessary for the assessment had been disclosed as would be apparent from the facts stated hereinbefore and the Income-tax Officer was subsequently trying to act on a mere change of opinion. In the aforesaid view of the matter, the learned judge was inclined to hold that the condition precedent for the initiation of the proceedings under Section 148 of the Income-tax Act had not been fulfilled. In respect of another assessment year, namely, assessment year 1960-61, proceedings under Section 148 of the Act had also been taken against the petitioner for the reopening of the said assessment. The facts were more or less almost identical with the facts of the assessment year 1958-59. In respect of the said reopening for the assessment year 1960-61, the petitioner had also moved this court under article 226 of the Constitution and obtained a rule nisi. The said matter being Matter No. 234 of 1969 (Lakhmani Mewal Das v. Income-tax Officer), in the meantime came up for hearing before K. L. Roy J. and by a judgment delivered on the 20th of February, 1970, K. L. Roy J. has discharged the rule nisi and has held that the Income-tax Officer had jurisdiction to initiate proceedings under Section 148 of the Income-tax Act, 1961, for the assessment year 1960-61. The aforesaid judgment of K. L. Roy J. was placed before T.K. Basu J. and as T. K. Basu J. was unable to agree with the conclusions reached by K. L. Roy J., T. K. Basu J. made a report to the learned Chief Justice under Chapter V, rule 2, of the Rules of the Original Side of this court. We have carefully considered the judgments of T. K. Basu J. as well as of K. L. Roy J., as mentioned hereinbefore. Our attention was also drawn to a judgment by Sankar Prasad Mitra J., dated 17th and 18th of June, 1970, in matter No. 523 of 1968 in the case of Madnani Engineering Works (P.) Ltd. v. Income-tax Officer. I will deal with the aforesaid judgments later. Before the question is considered further, however, it is necessary to consider the relevant statutory provision. Relevant portion of Section 147 of the Income-tax Act, 1961, provides as follows : \"147. Income escaping assessment.--If- \n\n (a) The Income-tax Officer has reason to believe that, by reason of the omission or failure on the part of an assessee to make a return under Section 139 for any assessment year to the Income-tax Officer, or to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year, or \n \n\n (b) notwithstanding that there has been no omission or failure as mentioned in Clause (a) on the part of the assessee, the Income-tax Officer has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year, \n \n\n he may, subject to the provisions of Section 148 to 153, assess or reassess such income or recompute the loss or the depreciation allowance, as the case may be, for the assessment year concerned (hereafter in Sections 148 to 153 referred to as the relevant assessment year) .... \n\n Explanation 2.--Production before the Income-tax Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Income-tax Officer will not necessarily amount to disclosure within the meaning of this section.\" \n\n 40. Section 148 provides for the issue of notice. Section 149 prescribes the time limit for issue of such notice. It provides that in cases falling under Clause (b) of Section 147, such notice could not be issued after the expiry of four years from the end of the relevant assessment year. In cases falling in Clause (a) of Section 147 it provides that such notice could be issued within eight years except where the income chargeable to tax which has escaped assessment amounts to or is likely to amount to rupees fifty thousand or more for that year, such notice could be issued within a period of sixteen years. Section 150 makes provision for cases where assessment is in pursuance of an order on appeal, etc. Section 151 provides for sanction for issue of notice, in some cases by the Board and in other cases by the Commissioner. \n\n 41. The provisions of the said Sections 147 and 148 of the Act and in the corresponding section in the Indian Income-tax Act, 1922, namely, Section 34, have come up for consideration by the Supreme Court on more than one occasion. In the case of Calcutta Discount Company Ltd. v. Income-tax Officer, the Supreme Court had occasion to consider exhaustively the provisions of Section 34 of the Indian Income-tax Act, 1922. That was a case where proceedings were sought to be reopened under Section 34(1)(a) of the 1922 Act, corresponding to Section 147(1)(a) of the Income-tax Act, 1961, on the ground that the assessee had failed to disclose the true intention behind the sale of certain shares. The question was whether the assessee was a trader in shares or an investor in shares. At the time of the original assessment, the Income-tax Officer accepted the company's version that the sales of the shares were casual transactions and were in the nature of mere change of investment. Subsequently, the results of the company's trading from year to year showed that the company had really been carrying on trade in the sale of shares. It was, however, found by the Supreme Court that there was no non-disclosure of any primary fact regarding the sales of these shares. The Supreme Court held that in order to confer jurisdiction under Section 34(1)(a) of the Indian Income-tax Act, 1922, two conditions had to be satisfied. The first was that the Income-tax Officer must have reason to believe that income, profits or gains, chargeable to income-tax had been under assessed. The second was that he must also have reason to believe that such under-assessment had occurred by reason of either, (i) omission or failure on the part of the assessee to make the return of his income under Section 22, or (ii) omission or failure on the part of the assessee to disclose fully and truly all material facts for his assessment for that year. Both these conditions, the Supreme Court held, were conditions precedent to be satisfied before the Income-tax Officer could have jurisdiction to issue a notice for the assessment or reassessment under Section 34(1)(a). The Supreme Court further observed that \"omission or failure to disclose fully and truly all material facts necessary for his assessment for that year\" used in the section postulated a duty on every assessee to disclose fully and truly all material facts for his assessment. What facts were material and necessary for assessment differ from case to case. From the primary facts in his possession, whether on the disclosure by the assessee or discovered by him on the basis of the facts disclosed or otherwise, the assessing authority had to draw inferences as regards certain other facts, and ultimately from the primary facts and further facts inferred from them, the authority had to draw the proper legal inference and ascertain on a correct interpretation of the taxing enactment the proper tax leviable. The duty, however, of the assessee did not extend beyond the full and truthful disclosure of all primary facts. Once all the primary facts were before the assessing authority it was for him to decide what inferences of fact could reasonably be drawn and what legal inference ultimately had to be drawn. It was not the duty of the assessee to tell the assessing authority what inference either of facts or law should be drawn. The Supreme Court further observed that if there were in fact some reasonable grounds for the Income-tax Officer to think that there had been any non-disclosure as regards any primary fact, which could have a material bearing on the question of under-assessment, that would be sufficient to give jurisdiction to the Income-tax Officer to issue notice under Section 34. Whether these grounds were adequate or not for arriving at the conclusion that there had been non-disclosure of material facts was not open for the court's investigation. All that was necessary to give the Income-tax Officer this jurisdiction was that the Income-tax Officer had when he assumed jurisdiction some prima facie grounds for thinking that there had been some non-disclosure of material facts. This position was again examined by the Supreme Court in the case of 5, Narayanappa v. Commissioner of Income-tax. There the Supreme Court observed that two conditions must be satisfied in order to confer the jurisdiction on the Income-tax Officer to issue notice under Section 34(l)(a) of the Indian Income-tax Act, 1922, namely, (i) the Income-tax Officer must have reason to believe that income, profits or gains, chargeable to income-tax had been under-assessed ; and (ii) he must have reason to believe that such .\"under assessment\" had occurred by reason of either, (a) omission or failure on the part of the assessee to make a return of his income under Section 22, or (b) omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment of that year. Both these conditions were conditions precedent to be satisfied. The Supreme Court further observed that the expression \"reason to believe\" under Section 34 did not mean a purely subjective satisfaction on the part of the Income-tax Officer. The belief must be held in good faith ; it could not be a pretence. It was open to the court to examine whether the reasons for the belief had a rational connection or a relevant bearing to the formation of the belief and were not extraneous or irrelevant to the purpose of the section. To that limited extent the action of the Income-tax Officer instituting proceedings under Section 34 of the Act was open to challenge in a court of law. At page 221 of the report the Supreme Court observed :\n \"But the legal position is that if there are in fact some reasonable grounds for the Income-tax Officer to believe that there had been any nondisclosure as regards any fact, which could have a material bearing on the question of under-assessment, that would be sufficient to give jurisdiction to the Income-tax Officer to issue the notice under Section 34.\" \n\n 42. The position has been further examined by the Supreme Court in several other decisions, some of which were placed before us. It is, however, not necessary to refer to them all except two of them on which great reliance was placed by counsel for the petitioner. I would at the relevant time examine the said two decisions in detail. Before, however, the position is further considered, it would be relevant to refer to a decision of the Supreme Court on the question of what are the inferential facts. In the case of Sree Meenakshi Mills Ltd. v. Commissioner of Income-tax, [1957] 31 ITR 28 (SC), the Supreme Court observed that even in a case where the finding was one of fact, which itself was an inference from other basic facts, that would not alter its character as a finding of fact. The relevancy of this decision for the present purpose is to consider the argument of counsel for the assessee that inferences can be drawn from facts which might be either legal inference or an inference of fact. When an inference is drawn from certain basic and primary facts, if the inference be an inference of fact, then it is an inferential fact. Counsel for the assessee stressed that the distinction between the primary facts and the inferential facts should be borne in mind in examining the question of non-disclosure by the assessee under Section 147(a) of the Act. Counsel for the assessee was right in stressing the distinction between a basic fact and an inferential fact. In this connection reference may be made to the observation of Denning L.J. in the case of British Launderer's Research Association v. Central Middlesex Assessment Committee and Hendon Ration Authority, [1949] 1 All ER 21 (CA). The obligation under Section 147(a) is not to disclose inferential facts but primary facts. Analysing the section in the light of the Supreme Court decisions, it appears to me that Section 147(a) of the Income-tax Act, 1961, with which we are concerned in this application, enjoins that before a notice is issued the Income-tax Officer must- \n\n (i) form a belief, \n \n\n (ii) that belief must not be a pretence, but must be held in good faith, \n \n\n (iii) that belief must be formed on some reasons or materials, and (iv) the materials must be such as would have a rational connection to the formation of the belief that income had escaped assessment or had been under-assessed as a result of either--(a) omission or failure on the part of the assessee to make a return, or (b) to disclose truly and fully all material facts necessary for assessment at the time of the original assessment, and \n \n\n (v) such facts must be basic primary facts and not inferential facts.\nThe above conditions, in my opinion, are the true effect of Section 147(a) of the Income-tax Act, 1961, as explained by the Supreme Court. It has also been further held that when a challenge is thrown by the assessee, the revenue must satisfy the court that the conditions precedent for the issuance of the notice have been fulfilled. \n\n 43. In the aforesaid background, it would be necessary to examine the facts of this case to consider whether the aforesaid conditions have been fulfilled. It is not the case here that the assessee did not file any return. The case here is that the assessee did not fully and truly disclose all material facts. The contention on behalf of the assessee has been that all material facts relevant for the assessment existing at the time of the original assessment had been disclosed, namely, the existence of the alleged creditors, their names and addresses, accounts of those creditors, confirmation letters of those creditors, as well as the discharged hundis, It was contended on behalf of the assessee that, upon these facts, it was open to the Income-tax Officer at the time of the original assessment to draw the inference that these loans were either genuine or not genuine. It was no part of the duty of the assessee to tell the taxing authority what inference he should draw. It was contended that if the Income-tax Officer had drawn the inference that these loans were genuine upon those facts, then a completed assessment could not be reopened under Section 147(a) of the Act because the Income-tax Officer now wanted to draw a different inference on the plea that the assessee did not disclose fully and truly all facts at the time of the original assessment as the assessee did not tell the officer that these loans were not genuine. It was contended further that the alleged information about some of these hundi loans and the alleged confession of one of the alleged creditors were subsequent informations which might justify action under Clause (b) of Section 147 of the Income-tax Act, 1961. But the receipt of these subsequent informations did not indicate that at the time of the original assessment the assessee did not fully and truly disclose all primary facts. The assessee was contending that these loans were genuine. It was contended further on behalf of the assessee that whether a loan was a genuine one or not was always an inference to be drawn either from certain basic and primary facts or a legal inference. In respect of these loans it was contended that all primary and basic facts had been disclosed at the time of the original assessment and the inference whether these were genuine or not genuine was a matter upon which the assessee could not be charged with omission. It was further contended that the reasons recorded indicated that the Income-tax Officer did not form the belief that the income had escaped assessment because of such omission or failure and further there could not be any belief formed upon the materials disclosed. In this connection reliance was placed on the decision of the Supreme Court in the case Commissioner of Income-lax v. Burlop Dealers Ltd. and it was contended that the facts of that case were identical with the facts of the instant case. Reliance was also placed on the decision in the case of Chhugamal Rajpal v, S. P. Chaliha. It was contended that upon facts more or less similar the Supreme Court had held that the Income-tax Officer did not form the belief and could not have formed the belief. It was contended that in the instant case as in the last mentioned case that the Income-tax Officer was using the machinery under Section 147 for the purpose of investigation in the instant case to find out whether these loans were genuine or not. It was urged that this could not give the Income-tax Officer jurisdiction to reopen a completed assessment. Explanation (2) of Section 147 provides that mere production before the Income-tax Officer of account books and other evidence from which material facts could with due diligence have been discovered by the Income-tax Officer will not necessarily amount to disclosure within the meaning of the section. In this case, counsel for the assessee contended that it was not a case of mere production of the evidence of the books of account. Attention had been drawn to the particular entries in the accounts and evidence in support of the entries and the claim of the petitioner in respect of these loans were produced and considered. Therefore, it was urged that the assessee in this case would not come within the mischief of the Explanation for the purpose of reopening.\n\n 44. It is, therefore, necessary to examine first whether the Income-tax Officer had formed the belief. I have set out before the grounds and the relevant paragraphs of the affidavits. It appears to me, reading the affidavits along with the grounds, that the Income-tax Officer had formed the belief that the loans were not genuine and as such the income had escaped assessment. The reason for my coming to that conclusion is that in the report the Income-tax Officer had observed : \n \"As the information regarding the bogus nature of these credits is since known, action under Section 147(a) is called for to reopen the assessment and assess these credits as the undisclosed income of the assessee.\" \n\n 45. Reading this sentence fairly and reasonably, it appears to me that what the Income-tax Officer had tried to say therein was that the bogus nature of these credits was now known to the officer, that is to say, he had formed a belief upon certain information that these loans were not genuine and as such he had reason to believe that the income of the assessee had escaped or had been under-assessed in respect of these loans. Paragraph 6 of the affidavit-in-opposition filed by the said Income-tax Officer also, in my opinion, says the same thing. As mentioned hereinbefore, there were some arguments about the verification of the said paragraph. Reading the statement in the said paragraph along with the statement contained in the report and knowing through the experience of this court, how carelessly verifications of the affidavits are often made (which is no doubt unfortunate) it appears to me that the original verification was defective and we are justified in allowing reverification in the facts and circumstances mentioned hereinbefore. The next question that falls for consideration, therefore, is whether there were materials which have been disclosed from which the Income-tax Officer could have formed the belief that the assessee did not truly and fully disclose all facts necessary for the assessment. The materials indicated are--(a) that some of the alleged creditors of the petitioner in respect of whose loans interest had been allowed in the original assessment were known name-lenders, and (b) that one of the creditors, namely, Mohansingh Kanayalal, had since confessed that he was doing \"only name-lending\". Mohansingh Kanayalal is one of the creditors of the petitioner in respect of whose loans interest had been alleged to have been paid. So far as the first material is concerned, namely, that some of the creditors were known name-lenders, no basis have been indicated as to how it became known that they were known name-lenders and when it was known. Therefore, in my opinion, counsel for the assessee can legitimately contend, specially in view of the decision of the Supreme Court which I shall notice later, that this could not be a material upon which a belief could have been formed that the assessee did not truly or fully disclose material facts at the time of the original assessment. But there is also this information and material that Mohansingh Kanayalal had confessed that he was doing \"only name-lending\" meaning thereby that he did not lend any money to any one and did not necessarily lend any money to the petitioner and necessarily meaning thereby that no interest could have been paid in respect of the alleged loan to him. This, in my opinion, can certainly be a material upon which a belief could reasonably be formed that the disclosure made by the assessee of the basic facts at the time of the original assessment was not true. Counsel for the assessee contended that there was nothing to indicate that Mohansingh Kanayalal was examined in connection with this particular assessment, and he had not stated that he did not lend any money in the transaction relating to the petitioner. I am, however, unable to accept this contention. Because, the meaning of the expression \"only name-lending\" can only be that Mohansingh Kanayalal had stated that he did nothing else but name-lending. If Mohansingh did nothing else but name-lending, then he could not have lent any money to the petitioner and did lend any money to the petitioner. If the statements contained in the confessions are true, about which it is not necessary to express any opinion at this stage, can it be said that at the time of the original assessment the assessee had truly and fully disclosed all basic and primary facts ? It is true that the assessee had disclosed certain evidence and facts from which it was possible to draw certain inferences about the genuineness of these loans. But it is also true that the petitioner did not, if the information mentioned in the report of the Income-tax Officer be correct, disclose the facts truly. It was contended by counsel for the assessee that under the section it was not obligatory for the assessee to disclose the true intention of the assessee behind a particular transaction. It was urged that when an assessee was contending that certain loans were genuine he could not in the natural course of events be expected to inform the Income-tax Officer further that these loans were not genuine. The question, however, in my opinion, cannot and should not be looked at from that point of view. It is undoubtedly true that, if an assessee was contending that there were certain loans from creditors, it could not be expected that the assessee would further inform the assessing authority that these loans were bogus, but the section enjoins the assessee not only to disclose facts fully but to disclose them truly. Whether a fact is true or false, whether a transaction is genuine or not genuine, sham or real, may often depend upon the inference to be drawn from certain basic and primary facts but all the necessary primary facts for drawing a proper inference or conclusion must be truly and fully disclosed. If an assessee did not receive any sum of money from a particular creditor and did not pay to that person any sum as interest, then if that assessee had said or suggested that he had paid any sum as interest to that person, at the time of the original assessment, then it can certainly be said that the assessee did not at the time of the original assessment disclose all facts truly. It may be that, in some cases, the question whether a transaction is money-lending or not or whether an assessee received any sum as income or not may depend upon inferences to be drawn from certain facts and may also depend in certain cases upon certain legal inferences. But that does not absolve, in my opinion, the assessee of the obligation to disclose truly and fully all primary facts. Otherwise, without receiving a sum of money or without making any payment, it can be contended that money was paid or interest was paid. This fact of making payment of interest to the alleged creditors, which was the disclosure made at the time of the original assessment, and which information now received by the Income-tax Officer, if true, appears to be false would make the disclosure made by the assessee at the time of the original assessment false as regards the primary and basic facts. By disclosing the primary and basic facts falsely the assessee does not discharge his obligation. It is true also that in this case, the assessee disclosed receipts, but the assessee disclosed receipts from a particular source, that is, the receipts from the alleged creditors, when in fact the assessee, it appears from the information, did not receive those sums from the said alleged creditors. Therefore, in disclosing that these alleged sums of money were received by the assessee from the alleged creditors, the assessee was not making a true disclosure if the information recorded in 'the reasons of the Income-tax Officer, be true. Again, if the assessee had stated that the assessee had paid certain interests to certain creditors when in fact, such payment had not been made, then it cannot be contended that the assessee had truly disclosed the primary facts. Whether a particular payment would be allowed or not, as an interest or as a deduction, may be a question of inference, but whether a payment at all was made to an alleged creditor is certainly a primary fact. The materials on the records disclosed by the Income-tax Officer, in my opinion, were such from which a belief could be formed prima facie that the assessee did not disclose truly the primary facts about the receipt of loans from the alleged creditors and the payments of interest to the alleged creditors. After all, as I have noted hereinbefore, the jurisdiction of the court is very limited ; can it be contended that there were no reasonable grounds for the Income-tax Officer to believe there had been any non-disclosure as regards any fact which could have a material bearing on the question of under-assessment or escapement ? (See the observations of the Supreme Court in the case of S. Narayanappa v. Commissioner of Income-tax). Judged by the above test in the facts and circumstances of this case, in my opinion, it could not be said that there were no reasonable grounds to form the belief.\n\n 46. As mentioned hereinbefore, counsel for the assessee placed strong reli\nance on the case of Chhugamal Rajpal v. S. P. Chaliha. It is, therefore,\nnecessary to examine the said decision in detail. In proceedings for assess\nment for the assessment years 1960-61, the assessee-firm had produced its\nbooks of accounts and also a statement giving the full names and addresses\nof the various creditors from whom it had claimed to have borrowed on\nhundies during the accounting year in question. Assessment was completed\nafter enquiry. Thereafter, on June 3, 1966, the Income-tax Officer issued\na notice under Section 148 of the Income-tax Act, 1961, initiating\nreassessment proceedings for that year. The assessee-firm filed a writ petition in the High Court at Patna, challenging the validity of that notice,\ninter alia, on the ground that the requirements of Section 151(2) of the Act\nhad not been complied with. But the writ petition was dismissed by the\nHigh Court. The Supreme Court has noted that, at the time of the original\nassessment, the assessee produced before the Income-tax Officer a statement\nshowing the various creditors from whom it had borrowed on hundis during\nthe accounting year in question. In that statement it had given full names\nand addresses of the alleged creditors. When the appeal came up for hearing\nbefore the Supreme Court, the Supreme Court found that the affidavit filed\nby the Income-tax Officer was vague and indefinite. The Supreme Court accordingly directed counsel for the department to produce before the Supreme Court records of the Income-tax Officer to show that the Income-tax Officer had complied with the requirements of Section 148 and Section 151(2) of the Act. When the appeal finally came up for hearing before the Supreme Court, the report submitted by the Income-tax Officer to the Commissioner and the order of the Commissioner were produced. The order sheet recording the reasons of the Income-tax Officer as required by Section 148(2) were not produced. From the report of the Income-tax Officer the Supreme Court found that it was stated that during the year the assessee had shown certain loans from various parties of Calcutta. From a communication received from the office of the Commissioner of Income-tax, Bihar and Orissa, the Income-tax Officer had stated that it appeared to him that these persons were name-lenders and the transactions were bogus. Under these circumstances, the Income-tax Officer had stated proper investigation regarding these loans was necessary. The Supreme Court was of the opinion that the Income-tax Officer did not set out any reason for coming to the conclusion that that was a fit case for issue of notice under Section 148 of the Act. The material that the Income-tax Officer had before him had not been mentioned. In his report, the Supreme Court found, the Income-tax Officer had vaguely referred to certain communications received from the Commissioner of Income-tax, Bihar and Orissa. The Supreme Court noted that the Income-tax Officer did not mention the facts mentioned in those communications. The Supreme Court also noted that it appeared to the Income-tax Officer that those persons were name-lenders and the transactions were bogus. The Supreme Court was of the opinion that the Income-tax Officer had not even come to a prima facie conclusion that the transactions referred to were not genuine transactions. The Income-tax Officer appeared to have only a vague feeling that these might be bogus transactions. Such, a conclusion, according to the Supreme Court, did not fulfil the requirements of Section 151(2) of the Act. The Supreme Court then noted that the Income-tax Officer had stated that investigation was necessary. From the aforesaid statement of the Income-tax Officer, the Supreme Court concluded that the Income-tax Officer thought that that was a case for investigation, which according to the Supreme Court could not be the reason for issue of notice under Section 148 of the Act. Upon those facts, the Supreme Court came to the conclusion that the Income-tax Officer had no material before him which would satisfy the requirements of either Clause (a) or (b) of Section 147 and the Supreme Court held that the notices were without jurisdiction. As mentioned hereinbefore, counsel for the assessee contended that the facts of the instant case were similar to the facts before the Supreme Court. It is undoubtedly true that there are various features of the instant case which are similar to the case before the Supreme Court. But, on a closer examination of the decision of the Supreme Court it will be clear what the Supreme Court was deciding in the aforesaid decision. In my opinion, the Supreme Court was deciding that Section 148 could not be utilised as a machinery for investigation. Investigation must be carried out before and a prima facie belief should be formed that there had been omission or failure on the part of the assessee to disclose fully and truly all relevant facts, before a notice under Section 147(a) could be issued. Unless such a prima facie belief was formed, there would be no jurisdiction for the Income-tax Officer to issue a notice under Section 148 of the Act. The Supreme Court was also deciding that in that case the materials were such which could not lead to the formation of such a belief. The Income-tax Officer had only a vague feeling based upon facts not disclosed before the Supreme Court. The said decision is not a decision dealing with the question as to what are the primary facts in respect of these hundi loans which should have been disclosed at the time of the original assessment. In the instant case before us the facts are significantly and materially different. Firstly, there is a positive fact which the Income-tax Officer had recorded in his reason, namely, the confession of Mohansingh Kanyalal. The confession of Mohansingh Kanayalal read properly and fairly can mean only one thing, that is to say, that the alleged loan shown in the accounts of the petitioner was not true and Mohansingh Kanayalal did not lend any money to the petitioner and did not receive any interest in respect thereof, if the fact stated in the confession be true. This positive information, in my opinion, is certainly a very relevant factor which entitles the Income-tax Officer to form the belief that the facts were not truly and fully disclosed at the time of the original assessment. Secondly, in the instant case before us, the Income-tax Officer has not stated that investigation was necessary to find out whether these loans were genuine or not. He has made a categorical statement, in my opinion, that the bogus nature Of these credits had since been known. Therefore, he had recommended action under Section 147(a) of the Indian Income-tax Act for the purpose of taxing these credits as undisclosed income of the assessee. This statement read with the averments made in paragraph 6 of the affidavit-in-opposition by the Income-tax Officer, who had issued the notice, in my opinion, makes it abundantly clear that in the instant case the Income-tax Officer had formed a prima facie belief which was the condition precedent necessary for the issue of the notice. Furthermore, in the instant case, unlike the case before the Supreme Court, there were materials upon which such a belief as aforesaid could reasonably be formed. In the aforesaid view of the matter, it appears to me that the said decision of the Supreme Court cannot be of assistance to the assessee in the instant case.\n\n 47. Reliance was placed by counsel for the assessee on the decision in the case of Commissioner of Income-tax v. Burlop Dealers Ltd., where on the evidence and the materials produced during the original assessment for the assessment year 1949-50, the assessee disclosed a profit of Rs. 1,75,875 from a joint venture in plywood chests and claimed the sum of Rs. 87,937 being half the profit which was paid to one Ratiram Tansukhrai under an agreement dated October 7, 1948, for financing the transactions in the joint venture. The Income-tax Officer brought to tax only Rs. 87,937 as the profit earned from the joint venture. For the assessment year 1950-51, the respondent had similarly claimed that it had paid half of the profits from the joint venture to Ratiram Tansukhrai, but on examination of the transaction the officer held that the agreement of October 7, 1948, was a got-up device to reduce profits and taxed the entire profit from the venture ; and this was ultimately upheld by this court in a reference which is reported in [1963] 48 I.T.R. 153 (Burlop Dealers Ltd. v. Commissioner of Income-tax). Meanwhile on May 13, 1955, the officer issued a notice under Section 34(l)(a) for reopening the assessment for the year 1949-50 and brought to tax the sum of Rs. 87,937, allowed as having been paid to Ratiram Tansukhrai. The Tribunal found that the respondent had produced all the relevant accounts and documents necessary for completing the assessment and it was under no obligation to inform the officer about the true nature of the transactions, and directed that the amount of Rs. 87,937 be excluded. The Tribunal and the High Court respectively rejected the appellant's application under Section 66(1) and Section 66(2) of the Indian Income-tax Act, 1922. The revenue preferred an appeal to the Supreme Court. The Supreme Court dismissed the appeal and held that the respondent had disclosed its books of account and evidence from which material facts could have been discovered ; it was under no obligation to inform the Income-tax Officer about the possible inferences that might be raised against it. It was for the officer to raise such an inference and if he had not done so in the original assessment, the income that escaped assessment could not be brought to tax under Section 34(1)(a) of the 1922 Act. Counsel for the assessee contended that the facts in this case were similar to the facts before the Supreme Court. He placed reliance on the observation of the Supreme Court at page 612 of the said report wherein the Supreme Court observed:\n \"The Income-tax Officer had, in consequence of information in his possession that the agreement with Ratiram Tansukhrai was a sham transaction, reason to believe that income chargeable to tax had escaped assessment. Such a case would appropriately fall under Section 34(lXb) of the Act.\" \n\n48. Counsel for the assessee contended that in the instant case also the information of the Income-tax Officer was that the loans were sham and not genuine. In the circumstances, it was urged, action could not be taken under Section 147(a) of the Income-tax Act, 1961. I have examined the facts of that case very carefully. Counsel for the revenue placed before us the decision of the Tribunal out of which the said application to the Supreme Court arose. Counsel for the revenue also drew our attention to the decision relating to the subsequent year for the same assessee, namely, the assessment year 1950-51, which is reported at [1963] 48 ITR 153 (Burlop Dealers Ltd. v. Commissioner of Income-tax). It appears to me that the information that the agreement between the assessee and Ratiram Tansukhrai in that case was a sham transaction was the information derived from closer examination or revaluation of all the material facts which had been disclosed at the time of the original assessment. That was not a case of any objective information coming into the possession of the Income-tax Officer subsequent to the assessment indicating that the statement made in the original assessment was untrue. This position is made clear if one carefully reads the decision. At the penultimate paragraph of the judgment, the Supreme Court has observed:\n \"Mere production of the books of account or other evidence from which material facts could with diligence have been discovered does not necessarily amount to disclosure within the meaning of Section 34(1), but where on the evidence and the materials produced, the Income-tax Officer could have reached a conclusion other than the one which he has reached, a proceeding under Section 34(1)(a) will not lie merely on the ground that the Income-tax Officer has raised an inference which he may later regard as erroneous. The assessee had disclosed his books of account and evidence from which material facts could be discovered.\" \n\n49. In the aforesaid observation the Supreme Court was noticing that whether the transaction with Ratiram Tansukhrai and the assessee in that case was a genuine or a sham transaction could have been found out from the examination of the materials disclosed at the time of the original assessment. Indeed, the Income-tax Officer for the subsequent year on a closer examination discovered that position and drew a different inference about the transaction. There was no information emanating from any outside source indicating that the facts stated in the evidence or books of account by the assessee at the time of the original assessment were not true or correct. In the instant case, however, there is the positive information which makes the statement of the basic facts about the payment of interest and receipt of money from Mohansingh Kanayalal untrue. Therefore, in my opinion, because of the facts of that case, the said decision also does not help the assessee in the instant case before us. \n\n 50. In the aforesaid view of the matter, in my opinion, it is not necessary to examine in detail the several decisions where on facts of each particular case learned judges have come to different conclusions. Counsel for the assessee drew our attention to the observations of the Supreme Court in the case of Commissioner of Income-tax v. Bhanji Lavji, , on the question of onus. In the instant case inasmuch as I have decided the facts on the basis of the materials produced, it is not necessary for me to discuss the question of onus. Counsel for the assessee also drew our attention to the decision of the Andhra Pradesh High Court in the case of Commissioner of Income-tax v. Jes Karan Bhuvalka, , and relied on the observation at page 139 of the report, the decision of the Assam High Court in the case of Seth Kirorimal Adwani v. Income-tax Officer, [1970] 77 ITR 789 (Assam), the decision of the Delhi High Court in the case of Rai Singh Deb Singh Bist v. Union of India, and the decision of K.L. Roy J. of this court in the case of Calcutta Credit Corporation Ltd. v. Income-tax Officer, . In view of the fact, however, whether in a particular case there had been any omission or failure of material facts, would essentially depend on the facts of each case, it is not necessary, in my opinion, to discuss the aforesaid decisions.\n\n 51. Counsel for the revenue drew our attention to the decision of the Supreme Court in the case of Income-tax Officer v. Bachu Lal Kapur. Counsel for the revenue contended that the facts of that case were identical with the facts of the instant case. It is true that there the Supreme Court had observed that, if a Hindu undivided family had been assessed after partition as a result of the compromise decree, and the information regarding the continued existence of the joint family had been withheld, the compromise was a make believe and if that information was true, then that would be a case for reopening under Section 34(1). The Supreme Court in that case, in my opinion, had no occasion to decide whether it would be a case of an omission to file return or a case of failure to disclose facts fully and truly or whether that was a case under Section 34(1)(a) or Section 34(1)(b), nor was it urged before the Supreme Court that there were no grounds to fulfil the conditions precedent for the issuance of the notice. In view of the aforesaid features with the said case before the Supreme Court, I am of the opinion that in deciding the present controversy, the said decision could not be availed of by the revenue. Counsel for the revenue also drew our attention to the decision in the case of Sowdagar Ahmed Khan v. Income-tax Officer, Nellore, . There the Supreme Court on examining all the facts upheld the reopening of the assessment made. It appears to me that the facts of that case were significantly different and as such it is not necessary for us to discuss the aforesaid decision in detail. Reliance was also placed by counsel for the revenue on the decision in the case of Commissioner of Income-tax v. T.S. Pl. P, Chidambaram Chettiar, . There also, in my opinion, the facts were significantly different. There the question was whether, in the absence of a definite information, even though the Income-tax Officer had some doubt at the time of the original assessment, later, on receipt of definite information, the Income-tax Officer could take action for reopening the assessment. That controversy, in my opinion, does not arise in the instant case before us. \n\n 52. As mentioned hereinbefore, T.K. Basu J. has held that the conditions precedent had not been fulfilled. It must be noted that the grounds for the initiation of proceedings were not produced before T.K. Basu J. which were produced before us. It has also to be noted that the revenue did not seek to re-verify paragraph 6 of the affidavit before T.K. Basu J. as they have done before us. Furthermore, it was contended before T.K. Basu J. that non-genuineness of the loan was an additional fact of which there was no full or true disclosure by the assessee. (Paper book--page 61, lines 20 to 22). It was not disputed on behalf of the revenue before T.K. Basu J. that \" all the facts \" relating to the loan transactions were disclosed by the assessee at the time of the original assessment. These contentions on behalf of the revenue, in my opinion, were unfortunate. What had been disclosed by the assessee at the time of the original assessment were not facts but fictions, if the informations now received be true. Furthermore, all facts were not disclosed. The assessee was not being charged with omission to disclose truly all facts not because the assessee did not inform that these loans were not genuine when it was contending that these were genuine, the assessee was being charged for having made an untrue disclosure because the assessee had stated that it had received certain sums of moneys from certain persons as loans when in fact the assessee did not receive any money at all from these persons, because the assessee stated at the time of the original assessment that it had paid interest to certain persons when in fact it did not, if the information now received be true. As I have viewed the facts of this case in the aforesaid light, I am unable with respect to agree with the conclusions reached by T.K. Basu J. \n\n 53. Our attention was drawn to the judgment of K.L. Roy J. in Matter\nNo. 234 of 1969 (Lakhmini Mewal Das v. Income-tax Officer ) between the\nsame parties as mentioned hereinbefore. I am in respectful agreement\nwith the conclusion reached by his Lordship. In view of the several\ndecisions mentioned hereinbefore, it is not, however, necessary to refer to\nhis Lordship's judgment in greater detail. Counsel for the assessee criticised the observation of the learned judge about the change in the judicial trend. Without, however, going into the question whether there has in fact been any change in the judicial trend or not, in my opinion, in view of the several decisions of the Supreme Court noted above, the principles applicable to this case are clear. Our attention was also drawn to the judgment of Sankar Prasad Mitra J. in the case of Madnani Engineering Works Private Ltd. v. Income-tax Officer (Matter No. 523 of 1968). I respectfully agree with the conclusions reached by Sankar Prasad Mitra J. in the aforesaid judgment. Counsel for the assessee, however, contended that the ratio of the said decision was that the assessee would be guilty of omission if he tried to conceal a part of his income by showing that it was a loan. Counsel for the assessee contended that the learned judge was holding that the income character of the receipts should be disclosed by the assessee at the time of the original assessment. This, according to counsel for the assessee, was not the correct position in law, because whether a particular receipt would be income or not would be an inference both of law as well as of fact, as was noted by the Supreme Court in the case of Calcutta Discount Company Ltd. v. Income-tax Officer. As I have understood the learned judge's observations, what was meant was that all the primary facts relating to the receipts which would have a material bearing on the character of the receipts should be truly and fully disclosed. If, however, by the aforesaid observation, it was meant that even when an assessee had truly and fully disclosed all basic and primary facts about a receipt, failure to indicate the income character of the receipt would make the assessee guilty of omission under the section, then I respectfully cannot agree. But, as mentioned hereinbefore, in my opinion, the judgment read in its proper perspective does not mean what was contended above by counsel for the assessee. Our attention was also drawn to the decision in the case of Income-tax Officer v. Sudhir Kumar Bhose, (the decision of D. Basu and A.K. Basu JJ.). The facts of that case were entirely different and it is not necessary for us to discuss the aforesaid decision in detail. Before I conclude it is necessary to refer to certain aspects of the matter. It was contended by counsel for the assessee during the course of the argument that in the instant case provisions of Section 151(2) of the Act had not been complied with. In my opinion we should not entertain this point as such point was not taken in the petition. It is true that in the petition it was stated that the conditions precedent for the issue of the notice had not been fulfilled but that was stated only in the context of the assertion that the Income-tax Officer did not have materials to form the belief and he did not in fact form the belief. There is no indication in the petition about the ground of non-compliance with the provisions of Section 151(2) of the Act by the Commissioner. This point was also not urged before T.K. Basu J. Had this point been taken the Commissioner might have filed an affidavit explaining the position. In the premises we should not entertain this ground about the non-compliance with the provisions of Section 151(2) of the Act. It is for the assessee to establish what are the conditions precedent for the issue of the notice that have not been fulfilled. Furthermore, I am of the opinion, that in the facts of this case it cannot be said that there has been non-compliance with the provisions of Section 151(2) of the Act. In the case of Chhugamal Rajpal v. S.P. Chaliha, the Supreme Court has held that the sanction had not been properly given in that case in terms of Section 151(2) of the Act. But from the observations of the Supreme Court at page 608 of the report it is clear that as the Supreme Court found that the Income-tax Officer had no material to form the belief and did not form the belief to satisfy the requirements of either Clause (a) or Clause (b) of Section 147 of the Act and further as the Income-tax Officer in his report to the Commissioner had not mentioned any reason for coming to the conclusion that it was a fit case for the issue of notice under Section 148, the Commissioner could not have accorded sanction and had acted mechanically in giving sanction. But, in a case as in this case, in the view I have taken, when the Income-tax Officer has formed the belief and there were materials to form the belief it cannot be said that the Commissioner has acted improperly in giving sanction. I should note a recent decision of the Supreme Court in the case of Sheo Nath Singk v. Appellate Assistant Commissioner of Income-tax. The Supreme Court found in that case that only two grounds had been mentioned for initiating proceedings under Section 34(1A) of the 1922 Act. One was that the assessee was believed to have made some profits which had not been offered for original assessment, and the other was that the assessee was believed to have received a sum of Rs. 22 lakhs from a named associate which represented income which had escaped assessment. But no material or fact had been stated on which the belief was founded. In those circumstances, the Supreme Court struck down the proceedings for reassessment. But the Supreme Court observed that the words \" reason to believe \" in Section 34(1A) of the said Act suggested that the belief should be of an honest and reasonable person based upon reasonable grounds and the Income-tax Officer might act on direct or circumstantial evidence but not on mere suspicion, gossip or rumour. But the facts of the instant case before us, in my view, are entirely different. In this case there is the positive evidence of one of the alleged creditors which makes the disclosure made by the assessee at the time of the original assessment untrue. If on that evidence the Income-tax Officer acts and forms the belief it cannot be said that the Income-tax Officer is acting unreasonably or on mere suspicion, gossip or rumour.\n\n 54. In the aforesaid view of the matter I would hold that the conditions\nprecedent for the issue of the notice under Section 148 of the Act have\nbeen made out and would dismiss/this application without any order as to\ncosts." }, { "title": "Commissioner Of Income-Tax vs Ms. Monica Oswal, Jawahar Lal Oswal And ... on 15 September, 2003", "url": "https://indiankanoon.org//doc/458629/", "text": "Commissioner Of Income-Tax vs Ms. Monica Oswal, Jawahar Lal Oswal And ... on 15 September, 2003\nEquivalent citations: (2004)190CTR(P&H)56, [2004]267ITR308(P&H)\nAuthor: Ashutosh Mohunta\nBench: Ashutosh Mohunta\nJUDGMENT\n\n \n\nJawahar Lal Gupta, J.\n \n\n1. There are two gifts of $ 200,000 each by two donors who are not related to the assessee in favour of the assessee's two daughters, through two banks drafts bearing consecutive numbers, issued by the Midland Bank, London, on March 22, 1994. Mr. O. S. Gill who is a British citizen and a resident of the U. K. made a gift of $ 200,000 to Ms. Ruchika Oswal. Similarly, Mr. B. P. Bhardwaj, another resident of the U. K. is alleged to have made a gift of $ 200,000 in favour of the assessee's daughter, Ms. Monica Oswal. The assessee had received the two drafts on behalf of his daughters in England, to save gift-tax, the amounts were credited to the accounts of the two donees.\n\n2. The Revenue alleges that the gifts are bogus. The amount of the gifts represents the concealed income of the assessee. The Tribunal has erred in accepting the claim of the respondent-assessee and deleting the addition. The assessee claims that these are valid gifts made by two friends. The Tribunal has recorded a finding of fact. The amount is not his concealed income. Thus, the appeals filed by the Revenue deserve to be dismissed. These are the contending claims of the parties in the three income-tax appeals filed under Section 260A of the Income-tax Act, 1961.\n\n3. Counsel for the parties have referred to the facts in I. T. A. No. 49 of 1999. These may be briefly noticed.\n\n4. The respondent-Mr. Jawahar Lal Oswal is the managing director of Oswal Woollen Mills Limited, Ludhiana. He filed his income-tax return for the assessment year 1994-95. He declared a total income of Rs. 7,74,210. This included income from salary, dividend, interest and capital gain. Vide order dated February 28, 1997, the Assessing Officer made various additions to the income declared by the assessee. He found that the assessee had \"simply introduced his own concealed income under the garb of the alleged gifts in the name of the daughters so that the funds of the family may remain within the family itself without paying any tax thereon.\" Thus, an addition of Rs. 1,24,24,864 was made in the income of the respondent on account of the two gifts of $ 200,000 each made by M/s. O. S. Gill and B. P. Bhardwaj in favour of his two daughters, Ms. Ruchika and Ms. Monica, respectively. His taxable income was fixed at Rs. 1,32,15,070. The assessment for the amount of gift was also made \"on protective basis in the hands of his daughters . . .\"\n\n5. The assessee filed an appeal. Vide order dated December 19, 1997, the Commissioner of Income-tax (Appeals) (Central), accepted the assessee's claim in respect of the gift made by Mr. O. S. Gill in favour of Ms. Ruchika Oswal. However, the addition on account of the gift made by Mr. B. P. Bhardwaj to Ms. Monica was confirmed.\n\n6. The Revenue as well as the respondent-assessee challenged the order of the appellate authority before the Income-tax Appellate Tribunal. Vide order dated January 29, 1999, the Tribunal accepted the appeal filed by the assessee and rejected the claim of the Revenue. Aggrieved by the order, the Revenue has filed the three appeals. It prays that the following substantial question of law arises in these appeals and may be answered in the affirmative :\n \"Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in deciding the deletion of the two foreign gifts of two lakhs US dollars each received by the assessee on behalf of his daughters as on substantive basis and simultaneously deleting the addition made on protective basis in the hands of his daughters, Monica Oswal and Ruchika Oswal, because the financial capability of the donors has not been proved at any stage, either at the assessment stage or at the appellate stage ?\"\n\n7. Mr. R. P. Sawhney, learned counsel for the Revenue contended that the gifts as claimed by the assessee are bogus. The donors did not have the financial capability to make the gifts. The amount of the gifts is in fact the concealed income of Mr. Oswal himself. He placed reliance on various decisions.\n\n8. Mr. G. C. Sharma, who appeared for the assessees in all the three cases, controverted the claim made on behalf of the Revenue. He contended that the Tribunal has recorded findings of fact. These are based on the appreciation of evidence on the record. The gifts have been held to be valid. There is no evidence that the funds for the gifts were provided by Mr. Oswal. Thus, no question of law much less than a substantial question of law arises for the consideration of this court. Consequently, the appeals filed by the Revenue deserve to be dismissed.\n\n9. Mr. Sharma had himself proposed the following three questions :\n\n\"(i) Whether there was no evidence before the Income-tax Appellate Tribunal to hold that Shri O. S. Gill and Shri B. P. Bhardwaj had made gifts abroad each of $ 2,00,000 to Monica Oswal and Ruchika Oswal through their father, the respondent-assessee ?\n\n(ii) Whether the assessee-respondent had discharged the onus, if any placed on him for establishing that valid gifts as aforesaid were received from abroad by his daughters through him ?\n\n(iii) Assuming that the answer to any of the aforesaid two questions was against the assessee, could it be held that the amounts gifted were provided by the assessee liable to be deemed as his income, under the provisions of Section 69A of the Income-tax Act ?\"\n\n10. In the circumstances of these cases, the above questions represent the core of the controversy. The first two questions can be considered together.\n\n11. Reg : (i and ii)\n \n\n12. Mr. Sawhney contended that the financial status of the two donors has not been established. The evidence on record shows that the gifts are bogus. Mr. Sharma disputes this.\n\n13. It is undoubtedly correct, as pointed out by Mr. Sharma that the two gifts have been made through two bank drafts. These had been handed over to Mr. Oswal in London. The amounts had been credited to the respective bank accounts of the two donees. It also appears that the marriage ceremonies of the two donees were performed in April and December, 1994. The gifts were ostensibly made at the wedding.\n\n14. Yet, what stares us in the face is that the gifts are of $ 200,000 each. Both the drafts bear consecutive numbers. These have been issued on one-day, viz., March 22, 1994, by the Midland Bank. The gifts are for equal amounts of money. These have been given by persons who are not even remotely related to the donees.\n\n15. Mr. Sharma contended that the donors are the friends of Mr. Oswal. Thus, they had made gifts on the occasion of the marriage of his daughters.\n\n16. How close is the friendship ?\n\n17. Mr. O. S. Gill had appeared before the Income-tax Officer. He was questioned. He stated that he has no property in India. He maintains no bank account in India. He has no relationship with Mr. Oswal. The gift was made \"out of love, affection and regard ...\" Is there any evidence of love, affection and regard ? Nothing was pointed out. I find none whatsoever.\n\n18. Mr. Sharma contended that Mr. Gill is a close friend of Mr. Oswal. Thus, he had made the gift. Is it so ?\n\n19. A photocopy of the passport issued to Mr. Gill is on record at page 134 of the file. He is a British citizen. It appears that he had lived in Nairobi also. He had visited India for one day prior to May 24, 1996, when his statement was recorded. He had not attended the wedding of the donee. Still further, he was specifically asked if he had made a gift to \"any member\" of his own family. His answer was a plain \"No\". It is true that he claims to have known Mr. Oswal for about 15 years while the latter claims to have known him for 10-12 years. Yet, the two have no business dealings. Mr. Gill was not even able to give the names of the ladies of the house. The two are not shown to have even exchanged a letter. Still, it is claimed that he made a gift of $ 200,000 in favour of Ms. Ruchika. It may be a tonic for the assessee. To me, it is a bitter pill. I find it difficult to swallow.\n\n20.It is true that sometimes a friend can do more than a blood relation. But on examination of the statement of Mr. Gill in its entirety, there appears to be nothing that may give an indication of any kind of friendship much less than a close one. Not even of a casual kind.\n\n21. Still further, Mr. Bhardwaj--the other donor was not even produced before the Income-tax Officer. Yet, it was claimed that the evidence on record establishes a close friendship. This evidence consists of the self-serving statement of Mr. Oswal himself.\n\n22. He was questioned by the Income-tax Officer on February 20, 1997. He stated that he was dealing in wool, textile, cotton, steel, oil and sugar. However, he had no branch in any foreign country except an \"accreditation office in Moscow.\" This too \"is not functioning for the last seven years.\" He claimed to have known both the donors \"for 10-12 years.\" He has no business dealings \"with either of the donors for the last ten years.\" Mr. Gill had visited India in 1996 and stayed with him. Mr. Bharadwaj had visited India in the beginning of 1995 and stayed with him for one night. He categorically admitted that he had \"not gifted any amount to the donors since there was no occasion so far for a gift\". He had never stayed with either of them during his visits to their country. He had discussed the issue regarding gifts with his daughters in the year 1993 after visiting London. However, he did not know as to why they had decided to give gifts for equal amounts and got the drafts from one bank. The fact that the two drafts have consecutive numbers was stated to be a coincidence. He did not even know the listed telephone numbers of the donors. He refused to disclose the numbers, which were \"ex-directory.\"\n\n23. On a perusal of the entire statement, there does not appear to be even a whisper that Mr. Oswal had ever exchanged a letter with either of the two donors. Nor a suggestion that they had been in touch with each other on the phone. The statement does not disclose anything which may even indicate a friendship. Admittedly, the two donors were said to have stayed with Mr. Oswal on two different occasions. Nothing more. There is no evidence to prove anything beyond a casual visit to the assessee's house.\n\n24. Still further, it is the admitted position that Mr. Oswal had never made any gift to the two donors. Not even a token gift. Why this one-way traffic ? Why this generosity towards Mr. Oswal or his daughters ? That too by a person like Mr. Gill who has never made a gift to any of his own family members. Or even Mr. Bhardwaj who had got the draft after getting money from Mr. Varinder Sharma. There are too many questions for which the assessee has given no answer. The onus has not been discharged.\n\n25. Mr. Sharma claimed that the gifts were made out of love, affection and regard. But there is no evidence to support the assertion. Actually, neither of the two donors had even attended any of the weddings. That is not the conduct of a person who makes a substantial gift. In the absence of evidence, it is difficult to uphold the claim and the finding.\n\n26. Mr. Sawhney was vehement in contending that even the financial capability of the two donors has not been established. Mr. Sharma pointed out that Mr. O. S. Gill was very well off. He was drawing an annual salary of 1,20,000 sterling. Thus, he had the means to make the gift. Is it so ?\n\n27. It is true that Mr. Gill claims to be drawing an annual salary of 1,20,000 pounds. He had come all the way from England to appear before the Income-tax Officer. However, he was specifically asked by the Assessing Officer to disclose the particulars of his bank account. He did not remember the number. He had not got a copy of the bank account nor any evidence with regard to his creditworthiness. He was asked if he could produce it. He was clearly reluctant. He had to discuss it with his accountant. Why ? The reason is not difficult to imagine.\n\n28. Even Mr. Oswal was questioned with regard to the financial position of the donors. He knew about the business of both. However, with regard to the financial capability, his answer was--\"nobody tells his capability but they are of good financial capability\". He was unable to produce any evidence.\n\n29. As for Mr. Bhardwaj, he did not even appear. However, it appears from the record that the Department of Revenue, Ministry of Finance, Government of India, had taken up the matter with the Inland Revenue in London. There was detailed correspondence. One of the various letters received from the \"Inland Revenue\" is on record at page 105. Its contents, on which great reliance had been placed on behalf of the assessees by Mr. Sharma, can be usefully noticed. It reads as under :\n\nDated : 15 October, 1996.\n \"Inland Revenue\nOur ref. : SCO4/F38233/R11\nYour ref. : DOF No. 501/27/95-FTD\nDear Mr. Srinivasan,\nUK/India Double Taxation Convention--Exchange of Information\nUK-B. P. Bharadwaj\nIndia--Miss Monica Oswal.\n\nI refer to your letter of 26 June, 1996, in which you requested information concerning the abovenamed, I am now able to provide you with an interim report.\n\nOur investigator contacted Mr. B. P. Bhardwaj concerning gifts made to Miss Monica Oswal. He has replied that a gift of US dollars 200,000 was made to Miss Oswal \"on the occasion of her forthcoming marriage\" on or around 22 March, 1994.\n\nThe funds were provided by Mr. Varinder Sharma of Flat No. 184, Building 9A, Raminki, Moscow. Mr. Sharma arranged the draft and gave it to Mr. Bhardwaj. Mr. Bhardwaj handed it over to Miss Oswal's father who was at the time passing through London.\n\nOur enquiries are continuing in respect of Dr. Gill and a further report will be made as soon as possible. This information is provided in accordance with Article 28 of our Double Taxation Convention and its use and disclosure must be governed accordingly.\n\nYours sincerely, \n(Sd.) ............\n\nJean Courtney\".\n\n30. This letter discloses that the funds were provided to B. P. Bhardwaj by Mr. Varinder Sharma. He had got the draft prepared and given it to Mr. Bhardwaj who had in turn handed it over to Mr. Oswal. Beyond this, there is no evidence, which may even remotedly suggest that Mr. Bhardwaj even had the means to make a gift of a substantial amount of $ 200,000. Even Mr. Oswal has given out nothing.\n\n31. Mr. Sharma was vehement in contending that the gifts had been made by the two donors. They are engaged in business. They had the means to make the gifts.\n\n32. Admittedly, Mr. Oswal had known about the intention of the two donors to make the gifts in the year 1993. He had even discussed the matter with his daughters. In this situation, the easiest course for him was to produce the copies of the bank accounts of the two donors to show that they had the means and the money. Or that the money had been actually drawn by at least one of the two donees, viz., Mr. Gill, from his account. Mr. Bhardwaj had admittedly taken the money from Mr. Sharma. A person making a gift of two hundred thousand dollars by taking money from another person ? Why ? Who is Mr. Sharma ? Why did he give the money and get the draft prepared ? There is no answer or evidence. Obviously there is more than meets the eye.\n\n33. There is another aspect. Mr. Oswal could have easily requested his friends to disclose their income-tax returns or bank accounts so that the financial status and the actual withdrawal of the amount for the making of gifts could have moved from the realm of conjecture to that of a semblance of certainty. He chose not to. Why ? Again, there is no answer. Surely, a straightforward gift would not have required a cover of so much of secrecy. Good and generous friends would not have hesitated to give the supporting evidence. Yet, they have withheld it.\n\n34. Truth is violated not only by falsehood but also by silence. These cases are an instance.\n\n35. After consideration of the evidence on record, it is difficult to uphold the claim of the assessee that the two gifts had been made bona fide by the two donors as alleged by him.\n\n36. Mr. Sharma contended that the question of gift given by one party to another is a pure finding of fact. It is based on documentary, investigative and oral evidence. Thus, no question of law much less a substantial question of law as envisaged under Section 260A of the Act arises. Consequently, the appeal is not maintainable. He referred to various decisions.\n\n37. It is undoubtedly true that the High Court cannot \"substitute its own opinion for that of the first appellate court unless it finds that the conclusions drawn by the lower court were erroneous being ... based upon inadmissible evidence or no evidence.\" There is no quarrel with the proposition. The scope of a second appeal has been considered by their Lordships of the Supreme Court in various cases. However, the issue is--What is the evidence to show that the donors had the means and also a reason to make the gifts to the donees ? There appears to be none.\n\n38. It is true that the memorandums of gift dated March 22, 1994, are on record. The donors had also confirmed in writing that they had made the gifts. The bank drafts had been deposited in the accounts of the two daughters of the assessee. Vide letters dated October 7, 1995, and October 15, 1996, the Inland Revenue had sent its reports. Yet, on an examination of the entire material on the file, it is not possible to hold that the gifts had been duly made by the two donors. Their financial capability has not been established. There is no evidence to support the claim that the gifts were made on account of love, affection and regard. On the basis of the evidence, the conclusion recorded by the Tribunal that the gifts had been validly made was impossible.\n\n39. Mr. Sharma was at pains to contend that on an examination of the evidence, the Commissioner of Income-tax (Appeals) in one case and the Tribunal have recorded a finding of fact that the gifts had been given by the donors. No ground for interference in an appeal under Section 260A of the Income-tax Act is made out.\n\n40. Section 260A provides for appeal to the High Court. The appeal lies when \"the High Court is satisfied that the case involves a substantial question of law\". The aggrieved party has to precisely state the question. When the court is satisfied about the question posed, it can proceed to formulate the precise issue and hear the parties. Mr. Sharma pointed out that the scope of the appeal is limited. He referred to the decisions of the apex court in Kondiba Dagadu Kadam v. Savitribai Sopan Gujar [1999] 3 SCC 722 and Hari Singh v. Kanhaiya Lal [1999] 7 SCC 288. He also relied upon the decision of the Rajasthan High Court in the case of Deputy CIT v. Marudhar Hotels Pvt. Ltd. [2000] 245 ITR 138 to contend that the principles governing a second appeal under Section 100 of the Code of Civil Procedure shall also apply to an appeal under Section 260A of the Income-tax Act, 1961. In these cases, it has been held that in view of the provisions of Section 100, the High Court cannot substitute its own opinion for that of the court. The jurisdiction of the court is limited to \"the extent conferred by the Legislature\". Thus, the High Court can interfere in an appeal under Section 260A only when there is a substantial question of law.\n\n41. Indisputably, the court can interfere when the finding is perverse. Or in a case where there is no evidence to support a finding. What is the position in the present case ? On an examination of the case, it appears that there is no evidence on the file to show that--\n\n(i) The two donors had actually got $ 200,000 each on March 22, 1994, in their bank accounts or that they had the financial capability to make the alleged gifts.\n\n(ii) There is no evidence to show that any money, much less $ 200,000 each was withdrawn from the accounts of the two donors for the preparation of the bank drafts. In fact, the report of the Inland Revenue clearly shows that Mr. Bharadwaj had got the money from Mr. Varinder Sharma. He had \"arranged\". Who was this person ? What was the arrangement ? Why would he give the money ? Did he have any reason to do so ? Did he give a loan or a gift ? Did he know Mr. Oswal ? Is there a Moscow connection ? There is no answer. The truth is being intentionally withheld from the court.\n\n(iii) The evidence on record is not such from which any reasonable person may be able to conclude that the donors and Mr. Oswal were friends. The pretence of love, affection and regard is not supported by any evidence on the file.\n\n(iv) The Tribunal had not appreciated the cumulative effect of the evidence in its entirety.\n\n42. Thus, the findings recorded by the Tribunal are clearly untenable.\n\n43. Mr. Sharma referred to the decision of a Bench of this court in Lal Chand Kalra v. CIT (22 STR 135 (P & H)) to contend that the findings of the Tribunal cannot be interfered with by this court.\n\n44. This was a case where the genuineness of the two gifts of Rs. 10,000 each was in issue. The High Court held that the alleged donees could not furnish any proof regarding their annual income. The donors were total strangers to the assessee. There was \"no reason why he should make a gift of Rs. 10,000 to him.\" Thus, the finding of the Tribunal was upheld. This decision does not support the case of the assessee in any manner whatsoever. In fact, it supports the Revenue. In the present case, as already noticed, the source of money has not been established. The donors were strangers. They had no reason to part with even a penny.\n\n45. In view of the above, it is clear that the gifts are not genuine. The assessee and the two donors are not shown to have exchanged even one letter in ten to twelve years. There is not even a suggestion that the two friends had spoken to each other ten times in ten years. The assessee only knows them well enough to take but not to give.\n\n46. Self-interest talks in all sorts of tongues and plays all sorts of roles. The indifference is indicative of the truth. Friendship is only a facade. Not a reality. The gifts are only a device. The assessee has not discharged the onus. Thus, questions Nos. (i) and (ii) as noticed above are answered in favour of the Revenue and against the assessee.\n\n47. Reg : (iii)\n \n\n48. Mr. Sharma contended that even if the gifts are disbelieved, there is no evidence to show that the money had been provided by Mr. Oswal. Thus, it is not the assessee's concealed income. Consequently, it could not have added to his taxable income. Is it so ?\n\n49. Admittedly, the amount involved is $ 400,000. There is no evidence to show that the alleged donors had so much money. In this situation, the question that arises is--Who could have provided the funds ? A stranger would have no reason to part with this money. It was Mr. Sharma's claim that Mr. Oswal was running business worth Rs. 2,000 crores. In this situation, the inference is obvious.\n\n50. Mr. Sharma is right in contending that the onus is on the Revenue. It is also correct that the court cannot proceed on surmises and suspicions. However, one cannot lose sight of the fact that dark deeds are performed under the cover of darkness. Direct evidence can never be available for everything. Sometimes, the facts speak loud and clear. Very often the courts have to draw inferences from attendant circumstances. The case in hand is an instance. Two gifts of $ 400,000 from two persons who are not in any way related to the donees and have not made a gift to any one else are too difficult to believe. This is all the more so in view of the fact that Mr. Gill has not made a gift even to a member of his family ever. Why would he part with a substantial amount to Mr. Oswal's daughter ? In the absence of any evidence to show that the donors had the money or even the reason to do so, the inevitable inference is that the funds were provided by the assessee.\n\n51. Mr. Sharma submitted that the Tribunal had taken a possible view. The High Court should not interfere.\n\n52. In principle, counsel is correct. Whenever an authority takes a view on the basis of the evidence on the file, the court does not substitute its own opinion for that of the Tribunal. However, when there is no evidence to support a finding, as in the present case, the court cannot remain silent.\n\n53. Thus, even the third question is answered in favour of the Revenue and against the assessee.\n\n54. Mr. Sharma also submitted that there was no reason for the Revenue to assess the amount of gifts as income in the hands of the three appellants.\n\n55. Admittedly, all the three have taken the position that the amount of $ 200,000 is not his or her income. The Revenue maintains that it is the income of Mr. Oswal. It has only made protective assessment in the hands of the assessee's two daughters. The authority had merely acted cautiously, with the avowed object of protecting the financial interest of the State and the public at large. For no other consideration. In doing so it has committed no error or illegality.\n\n56. No other point was raised.\n\n57. In view of the above, the appeals are allowed. The three questions as posed above are answered in favour of the Revenue. No costs.\n\nAshutosh Mohunta, J.\n\n58. These appeals have been filed by the Commissioner of Income-tax, Ludhiana, under Section 260A of the Income-tax Act, 1961, against the common order of the Income-tax Appellate Tribunal, Chandigarh Bench, passed in I. T. A. Nos. 62 and 74 of 1998 dated January 29, 1999, relating to the assessment year 1994-95, raising the following almost identical question in the three appeals :\n \"Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in deciding the deletion of the two foreign gifts of two lakhs US $ each received by the assessee on behalf of his daughters as on substantive basis and simultaneously deleting the addition made on protective basis in the hands of his daughters, Monica Oswal and Ruchika Oswal, because the financial capability of the donors have not been proved at any stage, either at the assessment stage or at the appellate stage ?\"\n\n59. The salient facts of the case in brief are :\n\n60. That two gifts amounting to Rs. 2 lakhs dollars each were received in the United Kingdom by Mr. J. L. Oswal on behalf of his daughters through account payee drafts, one from Mr. B. P. Bhardwaj and the other from Mr. O. S. Gill, both residing in the U. K. These drafts were credited in the bank accounts of the daughters in India. The Assessing Officer asked the assessee to prove the creditworthiness and financial capacity of the donors and also carried out extensive enquiries through the Central Board of Direct Taxes, Ministry of Finance, New Delhi, who approached the Inland Revenue in the U. K. The assessee on his part having been asked by the Assessing Officer to produce the donors, produced Mr. O. S. Gill for examination and his statement was recorded by the Assessing Officer. The other donor, Mr. B. P. Bhardwaj, could not be produced before the Assessing Officer as he was a foreigner. However, he also was contacted by the Inland Revenue in the U. K. Mr. O. S. Gill in his statement to the Assessing Officer clearly stated that the account payee drafts purporting to be gifts in favour of Ruchika Oswal, one of the daughters, was obtained from his bank account in London, whose particulars were given. Mr. O. S. Gill's statement was also recorded by the U. K. tax authorities on a specific requisition made by the Central Board of Direct Taxes regarding the genuineness of the gifts.\n\n61. Likewise, Mr. B. P. Bhardwaj's statement was also recorded by the U, K. tax authorities on a similar requisition having been made. He also testified to the genuineness of the gift made to Monica Oswal. Final reports from the U. K. tax authorities were received and the Central Board of Direct Taxes was apparently satisfied in relation to the queries made and the replies received.\n\n62. Mr. Jawahar Lal Oswal was also personally examined and he confirmed about his long friendship with the said donors and the fact of receiving gifts through account payee drafts given by the said donors. Thus, the assessee had placed the undermentioned pieces of evidence before the Assessing Officer with respect to the gift of Mr. O. S. Gill and Mr. B. P. Bhardwaj.\n\n63. Evidence filed in the case of Miss Ruchika Oswal :\n\n1. Copy of memorandum of gift;\n\n2. Affidavit of Mr. B. P. Bhardwaj;\n\n3. Statement confirming gift received through Inland Revenue Services;\n\n4. Copy of bank certificate confirming that the draft amount was credited to her account;\n\n5. Copy of her capital account;\n\n6. Statement of Mr. J. L. Oswal recorded by Income-tax Officer ; and\n \n\n7. Copy of power of authority in favour of Mr. J. L. Oswal to receive gift on her behalf.\n\n64. Evidence filed in the case of Miss Monica Oswal :\n\n1. Memorandum of gift;\n\n2. Certificate of the bank ;\n\n3. Affidavit of Mr. O. S. Gill;\n\n4. Statement of Mr. O. S. Gill ;\n\n5. Letter received from the Inland Revenue U. K. ;\n\n6. Copy of the capital account where the amount is credited ;\n\n7. Power of attorney favouring Mr. J. L. Oswal to receive gift; and\n \n\n8. Statement of Mr. J. L. Oswal confirming gift.\n\n65. However, the Assessing Officer without finding any fault with the authenticity of such evidence or negating it by bringing any contrary evidence reached the conclusion based on no evidence that since the financial capacity of the donors had not been proved, it could be presumed that Mr. Jawahar Lal Oswal had introduced his own concealed income in the garb of the gifts in the name of his daughters. The Assessing Officer did not bring on record any evidence to show why the evidence gathered by the Central Board of Direct form the Inland Revenue in the U. K. could not be accepted as clinching the issue of genuineness of the gifts especially when the final report after exchange of correspondence between the two authorities had been received with reference to the specific queries raised by the Revenue to test the genuineness of the gifts. In this connection the relevant correspondence between the Central Board of Direct Taxes and the Inland Revenue, U. K., may be reproduced :\n\n\"I. Letter No. 504/27/95--From FTD--CBDT (Delhi) dated 7th October, 1995 to U. K. Inland Revenue Authority--with its enclosure :\n\nThe Indian income-tax authorities are enquiring into the genuineness of certain gifts received by Ms. Ruchika Oswal and Ms. Monica Oswal, daughters of Mr. J. L. Oswal of Oswal Woollen Mills Ltd., Ludhiana, Punjab, India.\n\nGifts of US $ two hundred thousand each have been received from the donors in the U. K. There is no relationship between the donors and donees and investigations have revealed that drafts have been purchased from the same bank and bear consecutive numbers in spite of the fact that donors are living at different places. Relevant details of the gifts are given in the annexure to this letter.\"\n\n\"II. Letter from the Inland Revenue to the Central Board of Direct Taxes dated October 15, 1996, in respect of Mr. B. P. Bhardwaj :\n I refer to your letter of 26 June, 1996, in which you requested information concerning the above-named. I am now able to provide you with an interim report.\n\nOur investigator contacted Mr. B. P. Bhardwaj concerning gifts made to Miss Monica Oswal. He has replied that :\n\n* A gift of US dollars 2,00,000 was made to Miss Oswal 'on the occasion of her forthcoming marriage' on or around 22 March, 1994.\n\n* The funds were provided by Mr. Virender Sharma of Flat No. 184, Building 9A, Raminki, Moscow.\n\n* Mr. Sharma arranged the draft and gave it to Mr. Bhardwaj. Mr. Bhardwaj handed it over to Miss Oswal's father who was at the time passing through London.\"\n\n\"III. Letter from the Inland Revenue to the Central Board of Direct Taxes dated February 10, 1997, in respect of Mr. O. S. Gill :\n I refer to my letter of 15 October, 1996, and am now able to provide you with a final report.\n\nWe have managed to contact Dr. Gill and he has stated :\n\n1. The gift was given to Miss Oswal on the occasion of her forthcoming marriage. The amount given was $ 2,00,000.\n\n2. The amount was given as a gift and was by means of a bank draft.\n\n3. There is no agreement between Dr. Gill and Miss Oswal on repayment of any of the amounts given.\n\nThis information is provided in accordance with Article 28 of our Double Taxation Convention and its use and disclosure must be governed accordingly.\"\n\n66. Regarding the financial capacity of the donors, the Tribunal in relation to the gift made by Mr. O. S. Gill noted that Gill had stated that he was running a company named Fresh Mark Ltd., giving its full address and was drawing an annual salary of 120 thousand sterling pounds per annum which came to about Rs. 75 lakhs in terms of rupees. Regarding the gift from Mr. B. P. Bhardwaj, the Tribunal noted from Mr. Oswal's examination that he was doing international trading of all commodities mostly in computers and electronics and he had also obtained drafts from the bank in London where he was residing close by to O. S. Gill. The Tribunal was of the opinion that the burden placed on the assessee, if any, to prove the financial capacity of the donors was sufficiently discharged observing further that in the case of non-residents the burden was lighter because it was impracticable, rather impossible for the resident assessee to require a donor residing abroad to give out all information regarding his wealth and financial capacity. The assessee could not be asked to lead an evidence which was impossible. Further, it was a case where the identity and credibility of the donors had been fully established by the Inland Revenue, U. K., at the behest of the Central Board of Direct Taxes and nothing more was required to be done in that behalf.\n\n67. Mr. R. P. Sawhney, counsel for the Revenue, urged that it was a fit case for the High Court to interfere with the decision of the Tribunal by admitting/allowing the appeals as the substantial question raised by the Revenue did arise. For this he relied, inter alia, on the decisions reported as CIT v. Indian Woollen Textiles Mills [1964] 51 ITR 291 (SC); B.M. Desai v. V. Ramamurthy, ITO [1958] 34 ITR 409 (Bom); CIT v. A.M. Zainalabdeen Musaliar [1995] 212 ITR 188 (Ker) and McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148 (SC).\n\n68. I have gone through all these decisions carefully. In my opinion, none of them deals with the provisions of Section 260A which is a new provision inserted in the Income-tax Act, 1961, with effect from October 1, 1998, with the clear object of reducing the multiplicity and pendency of references under Section 256 of the Act in the High Courts relating to tax disputes. However, it may be noted that in the case reported as CIT v. Indian Woollen Textiles Mills [1964] 51 ITR 291 (SC), the Tribunal had refused reference under Section 66(1) of the repealed Act, which is analogous to Section 256(1) of the Act, 1961, and the High Court also declined to direct the Tribunal to state the case. However, the hon'ble apex court found that the Tribunal did not consider the evidence covering all essential matters and based its findings upon some evidence only. Such action on the part of the Tribunal was construed to be a misdirection in law and the findings of the Tribunal gave rise to a question of law which ought to have been referred under Section 256 of the Act. The Supreme Court further held that as the Tribunal had assumed only one fact on which its conclusion was formed and had ignored all other relevant facts, the Tribunal's decision was misdirected in law in arriving at its findings. It has not been pointed out to us as to which facts have been ignored here. On the contrary, the Tribunal has considered all the materials in detail and met with the arguments of both the sides exhaustively.\n\n69. Moreover, none of the other cases cited by counsel has any relevance to decide whether a substantial question of law within the framework of Section 260A of the Act arises out of the Appellate Tribunal's decision.\n\n70. Mr. R. P. Sawhney, counsel for the Revenue, also laid some stress on the case of McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148 where the apex court was pleased to observe whether the transaction was a device to avoid tax and was such that the judicial process may accord its approval to it. These observations of the court came to be made on an entirely different set of facts. The facts of that case were entirely different and the ultimate decision rested on the view of the court that payment of excise duty was a condition precedent to the removal of the liquor from the distillery and the purchase was on account of the purchaser. Hence, the excise duty, according to normal practice, should have been reflected in the assessee's bill. Therefore, the court held that the excise duty paid by the purchaser was part of the consideration for sale and was includible in the turnover of the appellant. The facts of this case have hardly any bearing on the facts of the case under consideration. Apart, there is no evidence that the tax has been avoided by adopting any legal device. Here, the case is not of avoidance of any tax but centres on the question whether any tax is leviable on the amounts gifted. There is no evidence that the money gifted emanated from Mr. Jawahar Lal Oswal. If there was any evidence to hold that the gifts emanated from Mr. J. L. Oswal that will straightaway lead to the conclusion that it was his taxable income, but undisclosed. But, there is no evidence, whatsoever, in this case to support the allegations of the income-tax authorities.\n\n71. Mr. G. C. Sharma, counsel for the respondents, has urged at the first instance that the object of introducing Section 260A in the Income-tax Act, 1961, was to limit the jurisdiction of the High Court for reducing the litigation arising out of the references under Section 256 of the Act. He pointed out that the provisions of Section 260A of the Act were pari materia to Section 100 of the Code of Civil Procedure, as accepted by the Rajasthan High Court in the case of Deputy CIT v. Marudhar Hotels (P.) Ltd. [2000] 245 ITR 138.\n\n72. For deciding whether a substantial question of law arose from the order of the Appellate Tribunal, warranting the maintainability of appeals filed before us, counsel laid emphasis on the two Supreme Court decisions reported as CIT v. Cynamid India Ltd. [1999] 237 ITR 585 ; [1999] 3 SCC 727 and Hari Singh v. Kanhaiya Lal [1999] 7 SCC 288, where the Supreme Court had categorically held as under :\n (i) The High Court in second appeal cannot substitute its own opinion for that of the first appellate court unless it finds that the conclusions drawn by the lower court were erroneous being (i) contrary to the mandatory provisions of applicable law ; or (ii) contrary to the law as pronounced by the apex court; or (iii) based upon inadmissible evidence or no evidence. A question arising between parties in the absence of factual format should not be allowed to be raised as a substantial question of law.\n\n73. Again counsel relied on the important observations of the Supreme Court in the case of Hari Singh v. Kanhaiya Lal [1999] 7 SCC 288, particularly, on their Lordships' observations in paragraphs 9, 12 to 14 of the judgment where the court had referred to its various previous judgments. He further placed reliance on the Delhi High Court's judgment reported in Mahavir Woollen Mills v. CIT [2000] 245 ITR 297, wherein the High Court had followed the tests laid down in the Supreme Court judgment reported as Sir Chunnilal Lal V. Mehta and Sons Ltd. v. Century Spinning and Manufacturing Co. Ltd., AIR 1962 SC 1314, which had to be applied in deciding whether a substantial question of law arose on the facts found by the Appellate Tribunal. He went to the extent of saying that on the facts there not even a question of law arose, what to say of a \"substantial question of law.\" In short, his submission was that the High Court in reference under Section 256 or in appeal under Section 260A of the Act could not interfere with pure findings of fact arrived at after considering all relevant evidence, even if the High Court were to reach a different conclusion on the same facts. In support of his submission, he placed great reliance on the observations of the apex court in the case of CIT v. Daulat Ram Rawatmull [1973] 87 ITR 349. He said that this decision supported his submission on the facts also in so far as the question of taxability of the gifted amounts in the hands of Mr. J. L. Oswal was to be adjudicated upon.\n\n74. Without prejudice to the pleadings as stated above, learned counsel for the respondents submitted that the question of law formulated by the appellant was wholly defective and could not form the basis of real issues involved.\n\n75. In the present case, the evidence adduced by the parties has already been appraised by the Commissioner of Income-tax (Appeals). Thereafter, the evidence has been reappraised by the Income-tax Appellate Tribunal Thus, it cannot be said that the findings of the courts below were perverse or that the findings are based on inadmissible evidence. The present appeals are absolutely covered by the decisions of the hon'ble Supreme Court in CIT v. Cynamid India Ltd. [1999] 237 ITR 585 and Hari Singh v. Kanhaiya Lal [1999] 7 SCC 288 against the Revenue. I am, thus, inclined to hold that the questions of law formulated by the appellant in all the three appeals, which are identical, are wholly defective.\n\n76. It was also argued by counsel for the appellant that the financial capacity of the donors had not been proved at any stage either at the assessment stage or at the appellate stage, and further it brings into consideration the theory of \"substantial and protective\" assessment. This has no application here, as none of the respondents has admitted that the income belongs to him or her. The theory is applicable only where one assessee, say \"A\", admits a certain item to be his income and declares it in his return, whereas the Assessing Officer is of the opinion that the income so declared belongs to another assessee, say \"B\", and proceeds to assess the declared income of \"A\" in the hands of the assessee \"B\". In this case it was obvious that none of the assessees admitted the gifted amount as his or her income. Further, the Tribunal had accepted the financial capacity of the donors. Hence, the question formulated by the appellant was wholly erroneous.\n\n77. It was also argued before the Tribunal and before us by the respondent's counsel that since there was no evidence to show that the amounts gifted emanated from Mr. Jawahar Lal Oswal or he was found to be the owner of the gifted amounts or its beneficiary Section 69A of the Act did not apply to his individual case. It was further argued that the onus to prove that the amounts of gifts emanated from Mr. Jawahar Lal Oswal fell squarely on the shoulders of the Revenue which they had completely failed to discharge by leading any evidence. Counsel brought to our notice the case of Parimisetti Seetharamamma v. CIT [1965] 57 ITR 532 (SC), in this connection. Counsel submitted the following propositions for our consideration :\n\n1. Whether \"A\" has given a gift to \"B\" or not is a pure finding of fact, in this case based on documentary evidence, oral evidence and even investigative evidence, No principle of law in appraising such evidence has been violated. Thus, no question of law far less a substantial question of law warranting maintainability of appeal arises.\n\n2. Such findings of fact cannot be interfered with whether the matter comes before the High Court in a reference under Section 256 or in second appeal under Section 260A of the Income-tax Act, 1961.\n\n3. Such finding of fact can only be asserted before the High Court if there is no evidence to support it or any vital evidence has been ignored by the Tribunal in reaching the conclusion. The question of law could be formulated only on the basis of \"no evidence\". Reaching a conclusion after considering the pros and cons of evidence cannot be assailed even if the High Court could have reached a different conclusion after considering the same material.\n\n4. In this case, all the evidence considered by the Tribunal has been placed before the court. This can again be seen as per chart submitted. The Tribunal has also considered the question of onus and held that the Revenue failed to discharge it as regards the allegation that the gifted money was provided by Mr. J. L. Oswal.\n\n5. Whatsoever be the decision regarding the genuineness of the gifts received by the two daughters, it cannot provide any basis for holding that the gifted moneys were provided by the father. It would be as bad to say that they were provided by their mother or brother or anybody else. There is absolutely no evidence, even an iota of evidence to reach such a conclusion. The Revenue has failed to discharge the onus in asserting that the gifted moneys were provided by Mr. J. L. Oswal from his secret income abroad.\n\n6. In the light of the submissions as above, no question of law arises from the order of the Tribunal which has recorded pure findings of fact.\n\n78. Having considered the rival submissions on both sides. I am firmly of the opinion that the Tribunal's decision is founded on good and relevant evidence; there being no evidence adduced by the Revenue to the contrary that the money for gifts was provided by Mr. J. L. Oswal. Even if this court may be rightly or wrongly advised to entertain such a suspicion there is no corroborative evidence to strengthen the suspicion about the source of gifts. It is well settled that an assessment made on conjectures and surmises would be void.\n\n79. After going through the entire record, it is clear that the Tribunal has considered all the evidence on record. It has not ignored any relevant piece of evidence. After considering all the arguments and submissions made before it by the parties, it has recorded pure findings of fact. Indeed, so far as the amount of gift received from Mr. O. S. Gill goes, there are concurrent findings of the first appellate authority, i.e., the Commissioner of Income-tax (Appeals), and the second appellate authority, i.e., the Tribunal. Even in respect of the amount of gift received from Mr. Bhardwaj, the Tribunal has discussed the issue threadbare after considering all the evidence on record, including the statements of the donors, the documents in support of the gifts through bank drafts drawn from banks, in the U. K., identity, credit-worthiness and financial capacity and report of the Inland Revenue in the U. K. In any event, the view taken by the Tribunal is plausible and reasonable, based on relevant materials. There is no perversity in the view taken and I find no material to disturb the findings of fact arrived at by the Tribunal after taking into consideration all the relevant material. I would like to add that in these cases the Revenue attempted to get all evidence, if any, to support the Assessing Officer's assessments through the U. K. Revenue authorities, yet could not find any piece of evidence for impugning the genuineness of the gifts.\n\n80. It may be noted that the Assessing Officer deemed the amounts gifted as income of Mr. Jawahar Lal Oswal under Section 69A of the Income-tax Act, 1961, and the amount gifted to the daughters as their income under Section 68 of the Act. I have examined the provisions of Sections 69A and 68. In my view, Section 69A can only be applied after it has been found that the assessee is the owner of a certain amount of money and he cannot explain how he became the owner thereof. It has already been held that there is no evidence to support that he was the owner of the gifted amounts. Section 69A of the Act is, therefore, clearly inapplicable.\n\n81. Turning to Section 68 of the Act, as applied in the cases of the two daughters by the Assessing Officer, the same would also be inapplicable as it is nobody's case that the daughters obtained loans from any party and credited the amounts in their account books. Indeed the Assessing Officer, made a protective assessment in the case of the two daughters and did not go into the question of the genuineness of the amounts received by them in their own right and bring the sole beneficiary thereof. I agree that a protective assessment was not permissible in their cases as they never admitted gifts to be their income in their returns. In any event, as the allegation of the Revenue that the gifts were not genuine has been successfully rebutted by the assessee before the Tribunal, the question of applicability of Sections 69A and 68 of the Act becomes only academic.\n\n82. In the context of what has been stated above, it is held that no substantial question of law arises in these appeals, within the meaning of Section 260A of the Income-tax Act, 1961, and the present appeals are squarely covered by the decisions of the Supreme Court in CIT v. Cynamid India Ltd. [1999] 237 ITR 585 and Hari Singh v. Kanhaiya Lal [1999] 7 SCC 288. These appeals are, consequently dismissed. No costs.\n\nG. S. Singhvi, J.\n\n83. These appeals have been placed before me in pursuance of order dated September 15, 2001, passed by the hon'ble Chief Justice in view of the difference of opinion among the members of the Division Bench which had heard the matter at the motion stage.\n\n84. When the appeals were heard in the month of February, 2002, Shri R. P. Sawhney, senior counsel appearing for the Revenue-appellant had raised an objection to the maintainability of reference on the ground that the Division Bench had not framed the point of law as required by Section 260B(2) of the Income-tax Act, 1961 (for short, \"the Act\"). The objection of Shri Sawhney was overruled by a detailed order dated April 8, 2002, and the following points of law were framed ;\n\n\"(i) Whether the assessee had discharged the onus of establishing that gifts of $ 200,000 made in favour of Miss Monica Oswal and Miss Ruchika Oswal through him by Shri O. S. Gill and Shri B. P. Bhardawaj were valid ?\n\n(ii) Whether the amounts gifted by Shri O. S. Gill and Shri B. P. Bhardawaj to Miss Monica Oswal and Miss Ruchika Oswal are to be treated as the income of the assessee under Section 69A of the Act ?\"\n\n85. Shri G. C. Sharma, learned counsel for the assessees, submitted that the court shall first determine whether any substantial question of law arises in these appeals within the meaning of Section 260A of the Act and if in the opinion of the court, any such question arises, then the appeals should be admitted for regular hearing by a Division Bench, else the same should be dismissed as not maintainable.\n\n86. For deciding whether or not any substantial question of law arises for determination in these appeals, it will be useful to notice the relevant facts.\n\n87. The assessees in these appeals are related to each other, inasmuch as, Jawahar Lal Oswal (respondent in I. T. A. No. 49 of 1999) is the father of the respondents in the remaining two appeals, namely, Miss Monica Oswal and Miss Ruchika Oswal. Two gifts of $ 2,00,000 each were received by Jawahar Lal Oswal in the United Kingdom on behalf of his daughters through account payee draft. One of the gifts was given by Shri B. P. Bhardawaj and the other was given by Shri O. S. Gill. These drafts were credited in the bank accounts of Miss Monica Oswal and Miss Ruchika Oswal in India. In the course of assessment proceedings for the assessment year 1994-95, the Assessing Officer asked the assessee, namely, Jawahar Lal Oswal to prove the creditworthiness and financial capacity of the donors. He also carried out extensive enquiries through the Central Board of Direct Taxes, Ministry of Finance, New Delhi, who approached the Inland Revenue in the United Kingdom. The assessee-Jawahar Lal Oswal produced Shri O. S. Gill for examination and his statement was recorded by the Assessing Officer. However, the other donor, namely, Shri B. P. Bhardawaj, was not produced before the Assessing Officer.\n\n88. After considering the material produced before him, the Assessing Officer framed the assessment under Section 143(3) of the Act. He assessed the income of Miss Monica Oswal at Rs. 65,05,792 which included the addition made on account of unexplained foreign gift of $ 2,00,000 equivalent of Rs. 62,12,432 on protective basis. In the case of Miss Ruchika Oswal, the Assessing Officer assessed her income at Rs. 65,20,795 which included an addition of Rs. 62,12,432 on protective basis on account of unexplained foreign gift of $ 2,00,000. In the case of Jawahar Lal Oswal, the Assessing Officer made addition of Rs. 1,24,40,864 including the addition of two foreign gifts amounting to Rs. 1,24,24,864 made on protective basis in the hands of his daughters.\n\n89. The assessees filed appeals against the orders dated February 28, 1997, passed by the Assessing Officer. The Commissioner of Income-tax (Appeals), Ludhiana (for short, \"the CIT (Appeals)\"), vide his orders dated December 19, 1997, deleted the addition of $ 2,00,000 received by Miss Ruchika Oswal in the form of gift from Shri O. S. Gill but confirmed the addition made by the Assessing Officer in lieu of the gift received by Miss Monica Oswal from Shri B. P. Bhardawaj. Accordingly, he partly allowed the appeals filed by the assessees.\n\n90. Dissatisfied with the order of the Commissioner of Income-tax (Appeals), the Revenue filed appeals before the Income-tax Appellate Tribunal, Chandigarh (for short, \"the Tribunal\"). The assessees also filed appeals against the addition made on account of the gift of $ 2,00,000 received by Miss Monica Oswal from Shri B. P. Bhardawaj. The Tribunal deleted the additions made by the Assessing Officer under Section 69A of the Act on account of foreign gifts received by Miss Monica Oswal, it held that such addition can be made only on the basis of unimpeachable evidence and not on the basis of suspicion, surmises and conjectures, as was done by the Assessing Officer. Accordingly, the Tribunal dismissed the appeals of the Revenue and allowed those filed by the assessees.\n\n91. The appeals filed by the Revenue under Section 260A of the Act were heard by the Division Bench consisting of Jawahar Lal Gupta J. and Ashutosh Mohunta, J. While Jawahar Lal Gupta J. held that the finding recorded by the Tribunal on the issue of the genuineness of the gifts allegedly made by Shri O. S. Gill and Shri B. P. Bhardawaj was clearly untenable and that the additions made in the income of Jawahar Lal Oswal under Section 69A of the Act was justified, Ashutosh Mohunta J., held that the finding recorded by the Tribunal on the genuineness of the gifts made by Shri O. S. Gill and Shri B. P. Bhardawaj was a pure finding of fact and the Assessing Officer gravely erred in applying Section 69A of the Act for the purpose of assessing the income of Jawahar Lal Oswal. The relevant portions of the opinions expressed by the two hon'ble judges are reproduced below :\n\n\"Jawahar Lal Gupta J.--Section 260A provides for appeal to the High Court. The appeal lies when the High Court is satisfied that the case involves a substantial question of law. The aggrieved party has to precisely state the question. When the court is satisfied about the question posed, it can proceed to formulate the precise issue and hear the parties. Mr. Sharma pointed out that the scope of the appeal is limited. He referred to the decisions of the apex court in Kondiba Dagadu Kadam v. Savitribai Sopan Gujar [1999] 3 SCC 722 and Hari Singh v. Kanhaiya Lal [1999] 7 SCC 288. He also relied upon the decision of the Rajasthan High Court in the case of Deputy CIT v. Marudhar Hotels (P.) Ltd, [2000] 245 ITR 138 to contend that the principles governing a second appeal under Section 100 of the Code of Civil Procedure shall also apply to an appeal under Section 260A of the Income-tax Act, 1961. In these cases, it has been held that in view of the provisions of Section 100, the High Court cannot substitute its own opinion for that of the court. The jurisdiction of the court is limited to the extent conferred by the Legislature. Thus, the High Court can interfere in an appeal under Section 260A only when there is a substantial question of law.\n\nIndisputably, the court can interfere when the finding is perverse. Or in a case where there is no evidence to support a finding. What is the position in the present case ? On an examination of the case, it appears that there is no evidence on the file to show that--\n\n(i) The two donors had actually got $ 200,000 each on March 22, 1994, in their bank accounts or that they had the financial capability to make the alleged gifts.\n\n(ii) There is no evidence to show that any money, much less $ 200,000 each was withdrawn from the accounts of the two donors for the preparation of the bank drafts. In fact, the report of the Inland Revenue clearly shows that Mr. Bhardawaj had got the money from Mr. Varinder Sharma. He had arranged. Who was this person ? What was the arrangement ? Why would he give the money ? Did he have any reason to do so ? Did he give a loan or a gift ? Did he know Mr. Oswal ? Is there a Moscow connection ? There is no answer. The truth is being intentionally withheld from the court.\n\n(iii) The evidence on record is not such from which any reasonable person may be able to conclude that the donors and Mr. Oswal were friends, the pretence of love, affection and regard is not supported by any evidence on the file.\n\n(iv) The Tribunal had not appreciated the cumulative effect of the evidence in its entirety.\n\nThus, the findings recorded by the Tribunal are clearly untenable.\n\nMr. Sharma referred to the decisions of a Bench of this court in Lal Chand Kalra v. CIT (22 STR 135 (P&H)) to contend that the findings of the Tribunal cannot be interfered with by this court.\n\nThis was a case where the genuineness of two gifts of Rs. 10,000 each was in issue. The High Court held that the alleged donees could not furnish any proof regarding their annual income. The donors were total strangers to the assessee. There was no reason why he should make a gift of Rs. 10,000 to him. Thus, the finding of the Tribunal was upheld. This decision does not support the case of the assessee in any manner whatsoever. In fact, it supports the Revenue. In the present case, as already noticed, the source of money has not been established. The donors were strangers. They had no reason to part with even a penny.\n\nIn view of the above, it is clear that the gifts are not genuine. The assessee and the two donors are not shown to have exchanged even one letter in ten to twelve years. There is not even a suggestion that the two friends had spoken to each other ten times in ten years. The assessee only knows them well enough to take but not to give.\n\nSelf-interest talks in all sorts of tongues and plays all sorts of roles. The indifference is indicative of the truth. Friendship is only a facade. Not a reality. The gifts are only a device, the assessee has not discharged the onus. Thus, questions Nos. (i) and (ii) as noticed above are answered in favour of the Revenue and against the assessee.\n\nMr. Sharma contended that even if the gifts are disbelieved, there is no evidence to show that the money had been provided by Mr. Oswal. Thus, it is not the assessee's concealed income. Consequently, it could not have added to his taxable income. Is it so ?\n\nAdmittedly, the amount involved is $ 400,000, there is no evidence to show that the alleged donors had so much money. In this situation, the question that arises is--who could have provided the funds ? A stranger would have no reason to part with this money. It was Mr. Sharma's claim that Mr. Oswal was running business worth Rs. 2,000 crores. In this situation, the inference is obvious.\n\nMr. Sharma is right in contending that the onus is on the Revenue. It is also correct that the court cannot proceed on surmises and suspicions. However, one cannot lose sight of the fact that dark deeds are performed under the cover of darkness. Direct evidence can never be available for everything. Sometimes, facts speak loud and clear. Very often the courts have to draw inferences from attendant circumstances. The case in hand is an instance. Two gifts of $ 400,000 from two persons who are not in any way related to the donees and have not made a gift to any one else are too difficult to believe. This is all the more so in view of the fact that Mr. Gill has not made a gift even to a member of his family ever. Why would he part with a substantial amount to Mr. Oswal's daughter ? In the absence of any evidence to show that the donors had the money or even the reason to do so, the inevitable inference is that the funds were provided by the assessee.\n\nMr. Sharma submitted that the Tribunal had taken a possible view. The High Court should not interfere.\n\nIn principle, counsel is correct. Whenever an authority takes a view on the basis of the evidence on the file, the court does not substitute its own opinion for that of the Tribunal. However, when there is no evidence to support a finding, as in the present case, the court cannot remain silent.\n\nThus, even the third question is answered in favour of the Revenue and against the assessee.\n\nMr. Sharma also submitted that there was no reason for the Revenue to assess the amount of gifts as income in the hands of the three appellants.\n\nAdmittedly, all the three have taken the position that the amount of $ 200,000 is not his or her income. The Revenue maintains that it is the income of Mr. Oswal. It has only made protective assessment in the hands of the assessee's two daughters. The authority had merely acted cautiously. With the avowed object of protecting the financial interest of the State and the public at large. For no other consideration. In doing so, it has committed no error or illegality.\n\nAshutosh Mohunta J.\n\n92. After going through the entire record, it is clear that the Tribunal has considered all the evidence on record. It has not ignored any relevant piece of evidence. After considering all the arguments and submissions made before it by the parties, it has recorded pure findings of fact. Indeed, so far as the amount of gift received from Mr. O. S. Gill goes, there are concurrent findings of the first appellate authority, i.e., the Commissioner of Income-tax (Appeals), and the second appellate authority, i.e., the Tribunal. Even in respect of the amount of gift received from Mr. Bhardawaj, the Tribunal has discussed the issue threadbare after considering all the evidence on record, including the statements of the donors, the documents in support of the gifts through bank drafts drawn from banks in the U. K., identity, credit-worthiness and financial capacity and report of the Inland Revenue in the U. K. In any event, the view taken by the Tribunal is plausible and reasonable, based on relevant materials. There is no perversity in the view taken and I find no material to disturb the findings of fact arrived at by the Tribunal after taking into consideration all the relevant material I would like to add that in these cases the Revenue attempted to get all evidence, if any, to support the Assessing Officer's assessments through the U. K. Revenue authorities, yet could not find any piece of evidence for impugning the genuineness of the gifts.\n\n93 It may be noted that the Assessing Officer deemed the amounts gifted as income of Mr. Jawahar Lal Oswal under Section 69A of the Income-tax Act, 1961, and the amount gifted to the daughters as their income under Section 68 of the Act. I have examined the provisions of Sections 69A and 68. In my view, Section 69A can only be applied after it has been found that the assessee is the owner of a certain amount of money and he cannot explain how he became the owner thereof. It has already been held that there is no evidence to support that he was the owner of the gifted amounts. Section 69A of the Act, is therefore, clearly inapplicable.\n\n94. Turning to Section 68 of the Act, as applied in the cases of the two daughters by the Assessing Officer, the same would also be inapplicable as it is nobody's case that the daughters obtained loans from any party and credited the amounts in their account books. Indeed the Assessing Officer, made a protective assessment in the case of the two daughters and did not go into the question of the genuineness of the amounts received by them in their own right and bring the sole beneficiary thereof. I agree that a protective assessment was not permissible in their cases as they never admitted the gifts to be their income in their returns. In any event, as the allegation of the Revenue that the gifts were not genuine has been successfully rebutted by the assessee before the Tribunal, the question of applicability of Sections 69A and 68 of the Act becomes only academic.\"\n\n95. Shri R. P. Sawhney, learned senior counsel for the Revenue, supported the order passed by Jawahar Lal Gupta J. and argued that the finding recorded by the Tribunal on the genuineness of the gifts made by Shri O. S. Gill and Shri B. P. Bhardawaj has been rightly held by the learned judge to be perverse. He read out the evidence produced by Jawahar Lal Oswal and submitted that the scheme devised by him to convert black money into white money by showing the gifts of $ 2,00,000 each by Shri O. S. Gill and Shri B. P. Bhardawaj in favour of his daughters was rightly declared as a sham transaction by the Assessing Officer and the Tribunal gravely erred in interfering with the finding recorded by the Assessing Officer. Shri Sawhney relied on the judgments in CIT v. Durga Prasad More [1971] 82 ITR 540 (SC) and Sumati Dayal v. CIT [1995] 214 ITR 801 (SC) and argued that in such case, the court should test the veracity of the evidence on the touch-stone of human probabilities for deciding whether or not the gift was genuine. He then referred to CIT v. Smt. Durgawati Singh [1998] 234 ITR 249 (All) and argued that the Assessing Officer did not commit any illegality by making protective assessment in the hands of Miss Ruchika Oswal and Miss Monica Oswal. In the end, he submitted that the question framed by the Revenue is a substantial question of law which merits consideration by this court.\n\n96. Shri G. C. Sharma, learned senior counsel for the assessees, vehemently argued that the finding recorded by the Tribunal on the genuineness of the gifts made by Shri O. S. Gill and Shri B. P. Bhardawaj to the two daughters of Jawahar Lal Oswal is essentially a finding of fact based on appreciation of evidence and the mere possibility of this court expressing a different opinion than the one formed by the Tribunal is not sufficient for holding that a substantial question of law arises in these appeals, Shri Sharma referred to Section 100(1) of the Code of Civil Procedure and Section 260A of the Act and argued that an appeal filed under Section 260A of the Act cannot be entertained unless this court comes to the conclusion that a substantial question of law arises for consideration by the court. In support of this argument, Shri Sharma relied on the judgments of the Supreme Court in Sir Chunilal V. Mehta and Sons Ltd. v. Century Spinning and Manufacturing Co. Ltd., AIR 1962 SC 1314; Reserve Bank of India v. Ramkrishna Govind Morey, AIR 1976 SC 830; Panchugopal Barua v. Umesh Chandra Goswami [1997] 4 SCC 713 ; Kshitish Chandra Purkait v. Santosh Kumar Purkait [1997] 5 SCC 438 ; Ram Prasad Rajak v. Nand Kumar and Bros. [1998] 6 SCC 748; Kondiba Dagadu Kadam v. Savitribai Sopan Gujar [1999] 3 SCC 722; Hari Singh v. Kanhaiya Lal [1999] 7 SCC 288; Santosh Hazari v. Purushottam Tiwari [2001] 251 ITR 84 (SC); Deputy CIT v. Marudhar Hotels (P.) Ltd. [2000] 245 ITR 138 (Raj); Mahavir Woollen Mills v. CIT [2000] 245 ITR 297 (Delhi); Chaman Lal v. CIT [2000] 245 ITR 730 (Delhi); CIT v. Satinder Kumar [2001] 250 ITR 484 (P&H) and CIT v. Burma Electro Corporation [2001] 252 ITR 344 (P&H). Shri Sharma then argued that the doctrine of human probability can be applied only when no evidence is produced by the parties or where the evidence led by the parties is palpably unreliable and not in a case where two opinions are possible on the evidence produced by the parties. In the end, Shri G. C. Sharma submitted that he had not suggested framing of any question of law, as is mentioned at pages 5 and 6 of the order of Jawahar Lal Gupta J. and, at any rate, the appeals could not have been finally disposed of without framing the substantial question of law.\n\n97. Section 260A of the Act under which the present appeal has been filed reads as under :\n\n\"260A. (1) An appeal shall lie to the High Court from every order passed in appeal by the Appellate Tribunal, if the High Court is satisfied that the case involves a substantial question of law.\n\n(2) The Chief Commissioner or the Commissioner or an assessee aggrieved by any order passed by the Appellate Tribunal may file an appeal to the High Court and such appeal under this sub-section shall be--\n\n(a) filed within one hundred and twenty days from the date on which the order appealed against is received by the assessee or the Chief Commissioner or Commissioner ; . . .\n\n(c) in the form of a memorandum of appeal precisely stating therein the substantial question of law involved.\n\n(3) Where the High Court is satisfied that a substantial question of law is involved in any case, it shall formulate that question.\n\n(4) The appeal shall be heard only on the question so formulated, and the respondents shall, at the hearing of the appeal, be allowed to argue that the case does not involve such question :\n Provided that nothing in this sub-section shall be deemed to take away or abridge the power of the court to hear, for reasons to be recorded, the appeal on any other substantial question of law not formulated by it, if it is satisfied that the case involves such question.\n\n(5) The High Court shall decide the question of law so formulated and deliver such judgment thereon containing the grounds on which such decision is founded and may award such cost as it deems fit.\n\n(6) The High Court may determine any issue which--\n\n(a) has not been determined by the Appellate Tribunal; or\n \n\n(b) has been wrongly determined by the Appellate Tribunal, by reason of a decision on such question of law as is referred to in subsection (1).\n\n(7) Save as otherwise provided in this Act, the provisions of the Code\nof Civil Procedure, 1908 (5 of 1908), relating to appeals to the High Court shall, as far as may be, apply in the case of appeals under this section.\"\n\n98. Sub-section (1) of Section 260A of the Act is substantially similar to Section 100(1) of the Code of Civil Procedure which reads as under :\n\n \"100. Second appeal--(1) Save as otherwise expressly provided in the body of this Code or by any other law for the time being in force, an appeal shall lie to the High Court from every decree passed in appeal by any court subordinate to the High Court, if the High Court is satisfied that the case involves a substantial question of law.\"\n\n99. The expression \"substantial question of law\" which appears in Sub-sections (1), (2)(c) and (3) of Section 260A of the Act and Sub-section (1) of Section 100 of the Code of Civil Procedure has not been defined in either of the statutes. Therefore, it will be appropriate to notice the judicial precedents in which the said expression has been interpreted in the context of Section 100 of the Code of Civil Procedure (as amended in 1976).\n\n100. In Panchugopal Barua v. Umesh Chandra Goswami [1997] 4 SCC 713, their Lordships of the Supreme Court interpreted Section 100 of the Code of Civil Procedure, as amended in the year 1976, and observed (page 719) :\n \"A bare look at Section 100 of the Code of Civil Procedure shows that the jurisdiction of the High Court to entertain a second appeal after the 1976 amendment is confined only to such appeals as involve a substantial question of law, specifically set out in the memorandum of appeal and formulated by the High Court. Of course, the proviso to the section shows that nothing shall be deemed to take away or abridge the power of the court to hear for reasons to be recorded, the appeal on any other substantial question of law, not formulated by it, if the court is satisfied that the case involves such a question. The proviso presupposes that the court shall indicate in its order the substantial question of law which it proposes to decide even if such substantial question of law was not earlier formulated by it. The existence of a 'substantial question of law' is thus, the sine qua non for the exercise of the jurisdiction under the amended provisions of Section WO of the Code of Civil Procedure.\"\n\n101. In Ram Prasad Rajak v. Nand Kumar and Bros. [1998] 6 SCC 748, the Supreme Court held (page 751) :\n \"Unless there was a substantial question of law, the High Court had no jurisdiction to entertain the second appeal and consider the merits. It has been held by this court in Panchugopal Barua v. Umesh Chandra Goswami [1997] 4 SCC 713 and Kshitish Chandra Purkait v. Santosh Kumar Purkait [1997] 5 SCC 438 that existence of a substantial question of law is sine qua non for the exercise of jurisdiction under Section 100 of the Code of Civil Procedure. In both the aforesaid cases, one of us (Dr. Anand J.) was a party to the Bench and in the former, he spoke for the Bench.\"\n\n102. In Kondiba Dagadu Kadam v. Savitribai Sopan Gujar [1999] 3 SCC 722, their Lordships of the Supreme Court lamented that the High Courts were deciding second appeals without formulating substantial questions of law and observed (page 725) :\n\n\"It is not within the domain of the High Court to investigate the grounds on which the findings were arrived at, by the last court of fact, being the first appellate court. It is true that the lower appellate court should not ordinarily reject witnesses accepted by the trial court in respect of credibility but even where it has rejected the witnesses accepted by the trial court, the same is no ground for interference in second appeal when it is found that the appellate court has given satisfactory reasons for doing so. In a case where from a given set of circumstances two inferences are possible, one drawn by the lower appellate court is binding on the High Court in second appeal. Adopting any other approach is not permissible. The High Court cannot substitute its opinion for the opinion of the first appellate court unless it is found that the conclusions drawn by the lower appellate court were erroneous being contrary to the mandatory provisions of law applicable or its settled position on the basis of pronouncements made by the apex court, or was based upon inadmissible evidence or arrived at without evidence.\n\nIf the question of law termed as a substantial question stands already decided by a larger Bench of the High Court concerned or by the Privy Council or by the Federal Court or by the Supreme Court, its merely wrong application on the facts of the case would not be termed to be a substantial question of law. Where a point of law has not been pleaded or is found to be arising between the parties in the absence of any factual format, a litigant should not be allowed to raise that question as a substantial question of law in second appeal. The mere appreciation of the facts, the documentary evidence or the meaning of entries and the contents of the document cannot be held to be raising a substantial question of law. But where it is found that the first appellate court has assumed jurisdiction which did not vest in it, the same can be adjudicated in the second appeal, treating it as a substantial question of law. Where the first appellate court is shown to have exercised its discretion in a judicial manner, it cannot be termed to be an error either of law or of procedure requiring interference in second appeal.\"\n\n103. In Hari Singh v. Kanhaiya Lal [1999] 7 SCC 288, the Supreme Court referred to its earlier judgments and observed (headnote) :\n \"The purpose of amending Section 100 by the 1976 amending Act was to further limit the jurisdiction of the High Court. Prior to the amendment the interference could have been where an order was contrary to law or some usage having the force of law. But now it can only be if any substantial question of law arises. The words 'substantial question of law' brought in have significance and are not superfluous. So now interference cannot be only because the order is contrary to law, but when the disputed issues raise a substantial question of law. Creation of powers or limiting such powers in the appellate authorities is always a decision based on public policy expressed in the maxim interest reipublicae ut sit finis litium. This policy brings to finality some issues or a litigation at some point of time. If no appeal is provided, the original order becomes final. Thus it is open for the Legislature to bring finality to the adjudication on question of facts up to the stage of first appeal and limit the second appeal to question of law or to the substantial question of law or to such other limitation which the Legislature deems fit and proper.\" \n\n104. In Santosh Hazari v. Purushottam Tiwari [2001] 251 ITR 84, their Lordships of the Supreme Court referred to the report of the Select Committee and the Statement of Objects and Reasons contained in the Bill vide which the amendment in Section 100 of the Code of Civil Procedure was proposed and observed (page 89) :\n\n\"The phrase 'substantial question of law', as occurring in the amended Section 100 is not defined in the Code. The word substantial, as qualifying 'question of law', means--of having substance, essential, real, of sound worth, important or considerable. It is to be understood as something in contradiction with technical, of no substance or consequence, or academic merely. However, it is clear that the Legislature has chosen not to qualify the scope of 'substantial question of law' by suffixing the words 'of general importance' as has been done in many other provisions such as Section 109 of the Code or Article 133(1)(a) of the Constitution. The substantial question of law on which a second appeal shall be heard need not necessarily be a substantial question of law of general importance. In Guran Ditta v. T. Ram Ditta, AIR 1928 PC 172, the phrase 'substantial question of law' as it was employed in the last clause of the then existing Section 110 of the Civil Procedure Code (since omitted by the Amendment Act, 1973) came up for consideration and their Lordships held that it did not mean a substantial question of general importance but a substantial question of law which was involved in the case as between the parties. In Sir Chunilal V. Mehta and Sons Ltd. v. Century Spinning and Manufacturing Co. Ltd., AIR 1962 SC 1314; [1962] Supp. 3 SCR 549, the Constitution Bench expressed agreement with the following view taken by a Full Bench of the Madras High Court in Rimmalapudi Subba Rao v. Noony Veeraju, AIR 1951 Mad 969; ILR 1952 Mad 264 [FB] (page 1318) :\n\n'. . . when a question of law is fairly arguable, where there is room for difference of opinion on it or where the court thought it necessary to deal with that question at some length and discuss alternative views, then the question would be a substantial question of law. On the other hand, if the question was practically covered by the decision of the highest court or if the general principles to be applied in determining the question are well settled and the only question was of applying those principles to the particular facts of the case it would not be a substantial question of law.'\n \n\nand laid down the following test as proper test, for determining whether a question of law raised in the case is substantial (page 1318) :\n\nThe proper test for determining whether a question of law raised in the case is substantial would, in our opinion, be whether it is of general public importance or whether it directly and substantially affects the rights of the parties and if so whether it is either an open question in the sense that it is not finally settled by this court or by the Privy Council or by the Federal Court or is not free from difficulty or calls for discussion of alternative views. If the question is settled by the highest court or the general principles to be applied in determining the question are well settled and there is a mere question of applying those principles or that the plea raised is palpably absurd the question would not be a substantial question of law.' ...\n\nA point of law which admits of no two opinions may be a proposition of law but cannot be a substantial question of law. To be 'substantial', a question of law must be debatable, not previously settled by law of the land or a binding precedent, and must have a material bearing on the decision of the case, if answered either way, in so far as the rights of the parties before it are concerned. To be a question of law 'involved in the case' there must be first a foundation for it laid in the pleadings and the question should emerge from the sustainable findings of fact arrived at by court of facts and it must be necessary to decide that question of law for a just and proper decision of the case. An entirely new point raised for the first time before the High Court is not a question involved in the case unless it goes to the root of the matter. It will, therefore, depend on the facts and circumstances of each case whether a question of law is a substantial one and involved in the case, or not; the paramount overall consideration being the need for striking a judicious balance between the indispensable obligation to do justice at all stages and impelling necessity of avoiding prolongation in the life of any lis.\"\n\n105. In my opinion, the expression \"substantial question of law\" appearing in Section 260A of the Act deserves to be interpreted in the light of the propositions laid down in the above noted cases and the following guiding principles must be kept in view while entertaining an appeal under that section :\n\n(a) An appeal under Section 260A of the Act cannot be entertained unless a substantial question of law arises for consideration by the High Court.\n\n(b) To be substantial, a question of law must be debatable and must have a material bearing on the decision of the case and the rights of the parties. Where a question of law is fairly arguable or where there is a difference of\n \n\nopinion on the question of law, the same has to be treated as a substantial question of law.\n\n(c) A point of law which admits of no two opinions may be a proposition of law but cannot be treated as a substantial question of law.\n\n(d) If the question raised in the appeal is already settled by the highest court of the country or the jurisdictional High Court, then the same cannot be regarded as a substantial question of law. Similarly, if the general principles to be applied in determining the question are well settled and the only issue relates to application of those principles to the particular facts of the case, then no substantial question of law can be said to arise in the appeal.\n\n(e) If the conclusions recorded by the Tribunal in the particular facts of the case are plausible, then it would not be a case of substantial question of law.\n\n(f) The finding of fact recorded by the Assessing Officer or the first appellate authority or the Tribunal cannot be disturbed by the High Court in exercise of powers under Section 260A of the Act unless such finding is perverse or is such which no person of reasonable prudence could arrive at in the given facts of the case.\n\n106. In the present case, the two judges constituting the Bench expressed divergent opinions on the genuineness and validity of the gifts made by Shri O. S. Gill and Shri B. P. Bhardawaj in favour of Miss Ruchika Oswal and Miss Monica Oswal, respectively. One of them--Jawahar Lal Gupta J., held that the gifts were not genuine. He further held that the Assessing Officer had rightly treated the amount of gifts received from Shri O. S. Gill and Shri B. P. Bhardawaj as the income of the assessee. The other judge (Ashutosh Mohunta J.) held that the finding recorded by the Tribunal on both the issues was correct. It is, thus, clear that the hon'ble judges constituting the Bench disagreed on the issue of maintainability of the appeals. Therefore, by applying the ratio of the judgment of the Full Bench of the Madras High Court in Rimmalapudi Subba Rao v. Noony Veeraju, AIR 1951 Mad 969 which was approved by the Constitution Bench of the Supreme Court in Sir Chunilal V. Mehta and Sons Ltd. v. Century Spinning and Manufacturing Co. Ltd., AIR 1962 SC 1314, which was, in turn, followed by a three-judge Bench of the Supreme Court in Santosh Hazari v. Purushottam Tiwari [2001] 251 ITR 84, I hold that the following questions of law arise for determination in these appeals :\n\n(i) Whether the assessees had discharged the onus of establishing that gifts of $ 2,00,000 made in favour of Miss Monica Oswal and Miss Ruchika Oswal by Shri O. S. Gill and Shri B. P. Bhardawaj were genuine ?\n\n(ii) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in deciding the deletion of the gifts of two lakhs US dollars each received by the assessees through their father, Shri Jawahar Lal Oswal, on protective basis in their hands and simultaneously deleting the addition made on substantive basis in the hands of their father, Shri Jawahar Lal Oswal, because the financial capability of the donor has not been proved at any stage, either at the assessment stage or at the appellate stage.\n\n107. In the result, the appeals are admitted for hearing and determination of the aforementioned questions of law." }, { "title": "Balwant Singh And Tohers vs R. D. Shah, Director Of Inspection, ... on 22 March, 1968", "url": "https://indiankanoon.org//doc/1276396/", "text": "Balwant Singh And Tohers vs R. D. Shah, Director Of Inspection, ... on 22 March, 1968\nEquivalent citations: [1969]71ITR550(DELHI)\nJUDGMENT\nKAPUR J. - It will nto be an unfaithful summary of the history to say that for ages searches and seizure of documents and objects alleged to be incriminating have been responsible for many a battle at the bar. The safeguards of liberty of the subject in this behalf have been forged out of conflicts between over-zealous prosecutors on the one had and nto very nice people on the toher. In preserving this liberty of the subjects, the courts always bear in mind that under our Constitution the concept of liberty is wider and the prisoners dream of freedom from custody alone is nto liberty.\n\nThe present writ petition is directed against searches conducted on 10th August, 1966, at the residence of the petitioners at No. 35, Rajpur Road, Delhi, and toher places occupied by the petitioners in connection with their business by a group of officers headed by Shri Rajendra Mohan, Income-tax Officer, respondent No. 2. The search was held in pursuance of the various authorisations issued by the Director of Inspection (Investigation) under section 132 of the Income-tax Act, 1961, and rule 112(1) of the Income-tax Rules, 1962. It is sufficient to reproduce one of the authorisation forms signed by the Director of Inspection (Investigation) as all toher forms are exactly in the same language :\n\n&quto;(See rule 112)\n \n\nWarrant of authorisation under section 132 of the Income-tax Act, 1961, and Rule 112(1) of the Income-tax Rules, 1962.\n\nThe Income-tax Officers,\n \n\nS/Shri R. P. Gautam, P. K. Sharan, Rajendra Mohan, Govind Ram, S. N. Tandon, P. L. Madan, P. Ranganathan, R. R. Gupta, Miss S. Ghosh and Miss M. Sehgal, I.T. Os., Delhi.\n\nWhereas information has been laid before me and on the consideration thereof, I have reason to believe that :\n\nIf a summons under sub-section (1) of section 37 of the Indian Income-tax Act, 1922, or under sub-section (1) of section 131 of the Indian Income-tax Act, 1961, or a ntoice under sub-section (4) of section 22 of the Indian Income-tax Act, 1922, or under sub-section (1) of section 142 of the Income-tax Act, 1961, is issued to S. Balwant Singh to produce, or cause to be produced, books of account or toher documents which will be useful for, or relevant to, proceedings, under the Indian Income-tax Act, 1922, or under the Income-tax Act, 1961, he would nto produce, or cause to be produced, such books of account or toher documents as required by such summons or ntoice;\n\nS. Balwant Singh is in possession of any money, bullion, jewellery or toher valuable article or thing and such money, bullion, jewellery or toher valuable article or thing represents either wholly or partly income or property which has nto been disclosed for the purposes of the Indian Income-tax Act, 1922, or the Income-tax Act, 1961;\n\nAnd whereas I have reason to suspect that such books of account, toher documents, money, bullion, jewellery or toher valuable article or thing have been kept and are to be found at the premises of S. Balwant Singh at Bawa House No. 35, Rajpur Road, Delhi, including outhouses, garages and toher appurtenances thereto;\n\nThis is to authorise and require you as overleaf (name of the Inspecting Assistant Commissioner of Income-tax or the Income-tax Officer) -\n\n(a) to enter and search the said premises;\n\n(b) to place identification marks on such books of account and documents as may be found in the course of the search and as you may consider relevant to or useful for the proceedings aforesaid and to make, a list thereof together with particulars of the identification marks;\n\n(c) to examine such books of account and documents and make, or cause to be made, copies or extracts from such books of account and documents;\n\n(d) to seize any such books of account, documents, money, bullion, jewellery or toher valuable article or thing found as a result of such search and take possession thereof;\n\n(e) to make a ntoe or an inventory of any such money, bullion, jewellery or toher valuable article or thing;\n\n(f) to convey such books of account, documents, money, bullion, jewellery or toher valuable article or thing to the office of the Inspecting Assistant Commissioner of Income-tax or any toher authority nto below the rank of the Income-tax Officer employed in the execution of the Income-tax Act, 1961; and\n \n\n(g) to exercise all toher powers and perform all toher functions under section 132 of the Income-tax Act, 1961, and the rules relating thereto.\n\nYou may requisition the services of any police officer or any officer of the Central Government, or of btoh, to assist you for all or any of the purposes specified in sub-section (1) of section 132 of the Income-tax Act, 1961.\n\nSd/- R. D. Shah\n \n\n22-7-66.\n\nSeal Director of Inspection (Investigation)&quto;\n\nIn pursuance of the said authorisation a number of Income-tax Officers went to the various premises set out in the authorisation forms, searched the said premises and seized a large number of documents. There has been some controversy at the bar as to how many people were comprised in the raiding party and that controversy will be dealt with later. There has, however, been no dispute about the documents seized.\n\nPetitioners Nos 1 to 5 are brtohers and petitioner No. 6 is their mtoher. All the petitioners live at No. 35, Rajpur Road, Delhi. Petitioners Nos. 1 to 5 have antoher brtoher who is nto a petitioner. It is alleged that petitioners Nos. 1 to 4 and 6 carry on business while the fifth petitioner is engaged in cultivating land. There was no authorisation for search and seizure of any documents belonging to the fifth petitioner. It is also nto in dispute that assessments of the petitioners were completed in some cases up to the assessment year 1962-63, and in some cases up to the assessment year 1963-64. The assessments were completed at Calcutta as the petitioners gave a Calcutta address to the revenue and the respondents assert that it was a &quto;ghost address&quto; as in fact the petitioners neither resided nto had any office in Calcutta and that was done to facilitate the petitioners escaping assessment or detection of various activities nto disclosed to the revenue. The respondents have to their affidavit dated 24th October, 1966, sworn by Shri R. D. Shah, Director of Inspection (Investigation), annexed various charts showing, inter alia, as to which assets and income had been disclosed and which concealed. It has also been asserted by the respondents that the petitioners all along maintained that they had no bank account while, according to the information received by the respondents, the petitioners had a large number of accounts with banks. The petitioners have by their writ petition raised several points challenging the search and seizure and even the constitutionality of section 132 of the Income-tax Act. They have also challenged the right of the respondent to retain the books and documents illegally seized or to use any information derived there from. I will deal with the various points raised one by one.\n\nMr. Veda Vyasa, the learned counsel for the petitioners, first contended that the search and seizure were bad in law as the condition precedent to the applicability of section 132, namely, the existence of &quto;reason to believe&quto; in the mind of the Director of Inspection was missing. Since admittedly section 132, as amended by Act 1 of 1965, applied to this case, I propose to confine myself to that section, except to the extent it may be necessary to refer to the legislative history in aid of its interpretation. The said section reads :\n\n&quto;(1) Where the Director of Inspection or the Commissioner, in consequence of information in his possession, has reason to believe that -\n\n(a) any person to whom a summons under sub-section (1) of section 37 of the Indian Income-tax Act, 1922 (11 of 1922), or under sub-section (1) of section 131 of this Act, or a ntoice under sub-section (4) of section 22 of the Indian Income-tax Act, 1922 (11 of 1922), or under sub-section (1) of section 142 of this Act was issued to produce, or cause to be produced, any books of account or toher documents has omitted or failed to produce, or cause to be produced, such books of account, or toher documents as required by such summons or ntoice, or\n \n\n(b) any person to whom a summons or ntoice as aforesaid has been or might be issued will nto, or would nto, produce or cause to be produced, any books of account or toher documents which will be useful for, or relevant to, any proceeding under the Indian Income-tax Act, 1922 (11 of 1922), or under this Act, or\n \n\n(c) any person is in possession of any money, bullion, jewellery or toher valuable article or thing and such money, bullion, jewellery or toher valuable article or thing representing either wholly or partly income or property which has nto been disclosed for the purpose of the Indian income-tax Act, 1922 (11 of 1922), or this Act (hereinafter in this section referred to as the undisclosed income or property),\n \n\nhe may authorise any Deputy Director of Inspection, Inspecting Assistant Commissioner, Assistant Director of Inspection or Income-tax Officer (hereinafter referred to as the authorised officer) to -\n\n(i) enter and search any building or place where he has reason to suspect that such books of account, toher documents, money, bullion, jewellery or toher valuable article or thing are kept;\n\n(ii) break open the lock of any door, box, locker, safe, almirah or toher receptacle for exercising the powers conferred by clause (i) where the keys thereof are nto available;\n\n(iii) seize any such books of account, toher documents, money, bullion, jewellery or toher valuable article or thing found as a result of such search;\n\n(iv) place marks of identification on any books of account or toher documents or make or cause to be made extracts or copies there from;\n\n(v) make a ntoe or an inventory of any such money, bullion, jewellery or toher valuable article or thing.\n\n(2) The authorised officer may requisition the services of any police officer or of any officer of the Central Government, or of btoh, to assist him for all or any of the purposes specified in sub-section (1) and it shall be the duty of every such officer to comply with such requisition.\n\n(3) The authorised office may, where it is nto practicable to seize any such books of account, toher documents, money, bullion, jewellery or toher valuable article or thing, serve an order on the owner or the person who is in immediate possession or control thereof that he shall nto remove, part with or toherwise deal with it except with the previous permission of such officer and such officer may take such steps as may be necessary for ensuring compliance with this sub-section.\n\n(4) The authorised officer may, during the course of the search or seizure, examine on oath any person who is found to be in possession or control of any books of account, documents, money, bullion, jewellery or toher valuable article or thing and any statement made by such person during such examination may thereafter be used in evidence in any proceeding under the Indian Income-tax Act, 1922 (11 of 1922), or under this Act.\n\n(5) Where any money, bullion, jewellery or toher valuable article or thing (hereinafter in this section and section 132-A referred to as the assets) is seized under sub-section (1), the Income-tax Officer, after affording a reasonable opportunity to the person concerned for being heard and making such enquiry as may be prescribed, shall, within ninety days of the seizure, make an order, with the previous approval of the Commissioner, -\n\n(i) estimating the undisclosed income (including the income from the undisclosed property) in a summary manner to the best of his judgment on the basis of such materials as are available with him;\n\n(ii) calculating the amount of tax on the income so estimated in accordance with the provisions of the Indian Income-tax Act, 1922 (11 of 1922), or this Act;\n\n(iii) specifying the amount that will be required to satisfy any existing liability under this Act and any one or more of the Acts specified in clause (a) of sub-section (1) of section 230-A in respect of which such person is in default or is deemed to be in default,\n \n\nand retain in his custody such assets or part thereof as are in his opinion sufficient to satisfy the aggregate of the amounts referred to in clauses (ii) and (iii) and forthwith release the remaining portion, if any, of the assets to the person from whose custody they were seized :\n\nProvided that if, after taking into account the material available with him, the Income-tax Officer is of the view that it is nto possible to ascertain to which particular previous year or years such income or any part thereof relates, he may calculate the tax on such income or part, as the case may be, as if such income or part were the ttoal income chargeable to tax at the rates in force in the financial year in which the assets were seized :\n\nProvided further that where a person has paid or made satisfactory arrangements for payments of all the amounts referred to in clauses (ii) and (iii) or any part thereof, the Income-tax Officer may, with the previous approval of the Commissioner, release the assets or such part thereof as he may deem fit in the circumstances of the case.\n\n(6) The assets retained under sub-section (5) may be dealt with in accordance with the provisions of section 132A.\n\n(7) If the Income-tax Officer is satisfied that the seized assets or any part thereof were held by such person for or on behalf of any toher person, the Income-tax Officer may proceed under sub-section (5) against such toher person and all the provisions of this section shall apply accordingly.\n\n(8) The books of account or toher documents seized under sub-section (1) shall nto be retained by the authorised officer for a period exceeding one hundred and eighty days from the date of the seizure unless the reasons for retaining the same are recorded by him in writing and the approval of the Commissioner for such retention is obtained :\n\nProvided that the Commissioner shall nto authorise the retention of the books of the account and toher documents for a period exceeding thirty days after all the proceedings under the Indian Income-tax Act, 1922, (11 of 1922), or this Act in respect of the years for which the books of account or toher documents are relevant are completed.\n\n(9) The person from whose custody any books of account or toher documents are seized under sub-section (1) may make copies thereof, or take extracts there from, in the presence of the authorised officer or any toher person empowered by him in this behalf, at such place and time as the authorised officer may appoint in this behalf.\n\n(10) If a person legally entitled to the books of account or toher documents seized under sub-section (1) objects for any reason to the approval given by the Commissioner under sub-section (8), he may make an application to the Board stating therein the reasons for such objection and requesting for the return of the books of account or toher documents.\n\n(11) If any person objects for any reason to an order made under sub-section (5), he may, within thirty days of the date of such order, make an application to such authority, as may be ntoified in this behalf by the Central Government in the Official Gazette (hereinafter in this section referred to as the ntoified authority), stating therein the reason for such objection and requesting for appropriate relief in the matter.\n\n(12) On receipt of the application under sub-section (10) the Board, or on receipt of the application under sub-section (11) the ntoified authority, may, after giving the applicant an opportunity of being heard, pass such orders as it thinks fit.\n\n(13) The provisions of the Code of Criminal Procedure, 1898 (5 of 1898), relating to searches and seizure shall apply, so far as may be, to searches and seizure under sub-section (1).\n\n(14) The Board may make rules in relation to any search or seizure under this section; in particular, and without prejudice to the generality of the foregoing power, such rules may provide for the procedure to be followed by the authorised officer -\n\n(i) for obtaining ingress into such building or place to be searched where free ingress thereto is nto available;\n\n(ii) for ensuring safe custody of any books of account or toher documents or assets seized.\n\nExplanation 1. - In computing the period of ninety days for the purposes of sub-section (5), any period during which any proceeding under this section is stayed by an order or injunction of any court shall be excluded.\n\nExplanation 2. - In this section, the word &quto;proceeding&quto; means any proceeding in respect of any year, whether under the Indian Income-tax Act, 1922 (11 of 1922), or this Act, which may be pending on the date on which a search is authorised under this section or which may have been completed on or before such date and includes also all proceedings under this Act which may be commenced after such date in respect of any year.&quto;\n\nSection 131, which had section 37(1) as its predecessor in the Indian Income-tax Act, 1922, gives power to the Income-tax Officer, Appellate Assistant Commissioner and Commissioner of Income-tax, regarding discovery and production of evidence, etc. Section 132A prescribed the mode of application of the assets retained by the revenue under section 132(5). Section 135 provides that the Director of Inspection, the Commissioner and the Inspecting Assistant Commissioner shall be competent to make any enquiry under this Act, and for this purpose shall have all the powers that an Income-tax Officer has under this Act in relation to the making of enquiries. Section 37(2) of the Indian Income-tax Act, 1922, conferred powers on the Income-tax Officers specially authorised by the Commissioner to search any building or place and seize any books of account or documents. Section 37(2) was as under :\n\n&quto;(2) Subject to any rules made in this behalf, any Income-tax Officer specially authorised by the Commissioner in this behalf may, -\n\n(i) enter and search any building or place where he has reason to believe that any books of account or toher documents which in his opinion will be useful for, or relevant to, any proceeding under this Act may be found and examine them, if found;\n\n(ii) seize any such books of account or toher document or place marks of identification thereon on make extracts or copies there from;\n\n(iii) make a ntoe or an inventory of any toher article or thing found in the course of any search under this section which in his opinion will be useful for, or relevant to, any proceeding under this Act; and the provisions of the Code of Criminal Procedure, 1898, relating to searches shall apply so far as may be to searches under this section.&quto;\n\nMr. Veda Vyasa, the learned counsel for the petitioner, presented two alternative arguments regarding the scope of the expression &quto;has reason to believe&quto; in section 132. He said :\n\n(1) in view of the fact that the provisions of the Criminal Procedure Code relating to searches and seizures apply &quto;so far as may be&quto; to searches and seizures under sub-section (1) of section 132, even the sufficiency of the grounds leading to the reason to believe are justiciable; and\n \n\n(2) in any case, even if the scrutiny by courts as to the existence of reason to believe is limited in any manner, the courts can still strike down search and seizure carried out in pursuance of an authorisation if the court finds that -\n\n(a) the reason to believe was nto bona fide;\n\n(b) there are no grounds justifying the existence of the reason to believe;\n\n(c) the grounds given in support of such existence of the reason to believe are extraneous to the cause; and\n \n\n(d) at least some of such grounds are irrelevant or extraneous to the matter in issue.\n\nThe arguments on the justiciability of the sufficient of grounds were put by Mr. Veda Vyasa thus : Under sub-section (13) of section 132 of the Income-tax Act, 1961, the provisions of the Code of Criminal Procedure relating to searches and seizure apply, so far as may be, to searches and seizure under section 132(1). Sub-section (2) of section 4 of the Criminal Procedure Code provides that &quto;all words and expressions used herein and defined in the Indian Penal Code, and nto hereinbefore defined, shall be deemed to have the meanings respectively attributed to them by that Code.&quto; The expression &quto;reason to believe&quto; has been defined in section 26 of the Indian Penal Code, which section reads : &quto;A person is said to have reason to believe a thing if he has sufficient cause to believe that thing but nto toherwise.&quto; Whether or nto a person has reason to believe is fully justiciable and even the sufficiency of grounds can be gone into by the court where such question arises under the Indian Penal Code, and consequently the same meaning should be attributed to the said expression in section 132(1).\n\nThis argument of Mr. Veda Vyasa suffers from several fallacies :\n\n(1) &quto;Reason to believe&quto; in section 26 of the Indain Penal Code and the various provisions thereof, such as sections 202, 411, 412, 413 and 414, has been used in the Penal Code in a different context; that is to say, in the context of means read for the purpose of finding out whether or nto a person has committed an offence, while in section 132 of the Income-tax Act, 1961, power has been given to an authority to authorise the search and seizure to certain conditions if he has reason to believe that it is necessary so to do under section 132.\n\n(2) Under section 26 of the Indain Penal Code a person is said to have reason to believe a thing if &quto;he&quto; has sufficient cause to believe that thing. In this context, therefore, the courts have to see whether the person concerned had sufficient cause to believe. Take a case where grounds exist on which two views may reasonably be possible. The court will nto hold a person guilty if it comes to the conclusion that, though the grounds may provide to the offender sufficient cause to believe, the court holds a different opinion. This section, therefore, is confined to finding out whether an alleged offender could have sufficient cause to believe and, therefore, could be said to have &quto;reason to believe&quto;. Such a provision cannto obviously be equated with a provision like section 132(1); and\n \n\n(3) The search and seizure provisions of the Criminal Procedure Code apply only &quto;so far as may be&quto;, which means that those provisions should be applied only consistently with the scheme and the purpose of section 132 and the said Act. When so applied, the power to issue search warrants has been, subject to fulfillment of certain conditions, made dependent on the reason to believe of the specified authorities.\n\nMr. Veda Vyasa referred to K. Hoshide v. Emperor and said that even the adequacy of the grounds on which courts issue search warrants under section 96 of the Criminal Procedure Code is justiciable. I prefer nto to express any opinion on the question whether the adequacy of grounds on which the court issues search warrants under the Code of Criminal Procedure is open to scrutiny by courts particularly in such collateral proceedings and I would rather decide this question assuming that it is so. For the purposes of this case, it is sufficient to say that the language of section 132 does nto permit the interpretation suggested by Mr. Veda Vyasa. I cannto also lose sight of the fact that we are nto sitting in appeal over the decision of the Director of Inspection regarding the existence of the reason to believe, for none has been provided, and when exercising writ jurisdiction, the courts cannto, in my opinion, test the adequacy of grounds as a court of appeal. The existence of &quto;reason to believe&quto; in section 132 is subject only to a limited scrutiny and the courts cannto substitute their own opinion for that of the Director of Inspection. Of course, the Director of Inspection must nto lightly or arbitrarily invade the privacy of a subject. Before he acts, he must be reasonably satisfied that it is necessary to do so but the decision must still remain his and nto that of the courts. If the grounds on which reason to believe is founded are non-existent or are irrelevant or are such on which no reasonable person can come to that belief, the exercise of power would be bad; but short of that the courts cannto interfere with the reason to believe bona fide arrived at by the Director of Inspection. It is also open to the courts to examine whether the reasons for the belief have a rational connection or a relevant bearing to the formation of the belief.\n\nIn that sense the expression &quto;reason to believe&quto; is btoh subjective and objective but the area of objectivity is limited.\n\nIn S. Narayanappa v. Commissioner of Income-tax, their Lordships of the Supreme Court, while dealing with the same expression as used in section 34 of the Indian Income-tax Act, said :\n\n&quto;Again the expression reason to believe in section 34 of the Income-tax Act does nto mean a purely subjective satisfaction on the part of the Income-tax Officer. The belief must be held in good faith; it cannto be merely a pretence. To put it differently, it is open to the court to examine the question whether the reasons for the belief have a rational connection or irrelevant to the purpose of the section. To this limited extent, the action of the Income-tax Officer in starting proceedings under section 34 of the Act is open to challenge in a court of law.&quto;\n\nIn Barium Chemicals Ltd. v. Company Law Board Hidayatullah J. (as he then was) observed :\n\n&quto;No doubt the formation of opinion is subjective but the existence of circumstances relevant to the inference as the sine qua non for action must be demonstrable. If the action is questioned on the ground that no circumstances leading to an inference of the kind contemplated by the section exist, the action might be exposed to interference unless the existence of the circumstances is made out. As my brtoher Shelat has put it trenchantly :\n\nIt is nto reasonable to say that the clause permitted the Government to say that it has formed the opinion on circumstances which it thinks exist......\n\nSince the existence of circumstances is a condition fundamental to the making of an opinion, the existence of the circumstances, if questioned, has to be proved at least prima facie. It is nto sufficient to assert that the circumstances exist and give no clue to what they are, because the circumstances must be such a to lead to conclusion of certain definiteness.&quto;\n\nSimilarly, Shelat J., while dealing with the expression &quto;reason to believe&quto;, observed :\n\n&quto;Therefore, the words, reason to believe or in the opinion of, do nto always lead to the construction that the process of entertaining reason to believe or the opinion is an altogether subjective process nto lending itself even to a limited scrutiny by the court that such a reason to believe or opinion was nto formed on relevant facts or within the limits, or, as Lord Radcliffe and Lord Reid called, the restraints of the statute as an alternative safeguard to rules of natural justice where the function is administrative.&quto;\n\nMr. Veda Vyasa also referred to Shibban Lal Saksena v. State of Uttar Pradesh and said that, even if some of the grounds leading to the formation of the opinion are extraneous or irrelevant, the exercise of power must be struck down. It is unnecessary to resolve this controversy as I am satisfied on perusal of the grounds that there is no extraneous ground on which the opinion has been formed. I, therefore, propose to scrutinise these grounds within the area of objectivity mentioned by me.\n\nThe Director of Inspection has filed his affidavit supported by the charts about which I have mentioned already. In the said affidavit, it is stated that -\n\n&quto;(a) the statements of account filed before the Income-tax Officer in support of the income-tax returns of the petitioners who were being assessed clearly show that the books of account containing their complete and true financial affairs and income have never been produced before the Income-tax Officer;\n\n(b) the petitioners, who were being assessed, had been filing returns and getting assessed by giving a fictitious address at Calcutta though their principal place of business was in Delhi;\n\n(c) a person connected with the affairs of the petitioners have information making various allegations of extensive tax evasion and he made the following points :\n\n(i) the petitioners have acquired wealth, and have been spending, on a scale quite disproportionate to their declared incomes;\n\n(ii) the petitioners have filed returns before an Income-tax Officer of Calcutta though they do nto have their business at the address given at Calcutta and have extensive business in Delhi and elsewhere;\n\n(iii) the petitioners have nto disclosed large transactions through bank accounts;\n\n(iv) the petitioners have nto disclosed business activity in various names; and\n \n\n(v) the petitioners have been closely connected with toher persons for making manipulations by virtue of which they could make extensive secret profits for themselves and such toher persons;\n\n(d) the assessment records of the petitioners No. 1, 2, 3 and 4 disclosed certain peculiar features such as declaration of income almost entirely from brokerage, denial of any bank accounts and failure to disclose assets proportionate to apparent wealth;\n\n(e) the ghost address in Calcutta was adopted so as to keep the income-tax authorities in the dark as to the real extent of their financial activities and income;\n\n(f) independent enquiries were also made by the officers of the Directorate of Inspection (Intelligence), New Delhi, which showed the following :\n\n(i) the petitioners were carrying on extensive business at various places which had apparently nto been disclosed;\n\n(ii) the petitioners had acquired several licenses in several scarce commodities and had disposed them of secretly and at fantastic profits;\n\n(iii) the petitioners had been incurring lavish expenditure which was quite inconsistent with their declared resources;\n\n(iv) the petitioners had acquired assets worth several lakhs of rupees which is also inconsistent with their declared resources;\n\n(v) the petitioners co-accused in a certain case filed by the Special Police Establishment, Central Bureau of Investigation, and some of their books of account were still in the custody of the Special Police Establishment, Central Bureau of Investigation. Scrutiny of these books of account had disclosed that while the petitioners had acquired qutoas in stainless steel in a number of trading names and the books of account kept for this purpose showed substantial profits, these activities and this income had nto been disclosed to the income-tax authorities. Moreover, there were hundi loans of about Rs. 10,50,000 introduced in these books of account and there was reason to believe that these were really a disguise for introduction of secret moneys of the petitioners; and\n \n\n(vi) it was gathered that Shri Balwant Singh in particular had been instrumental in organising affairs in such a manner that in violation of normal laws and rules secret profits could be made by him and a number of persons associated with him in the matter of import of nylon yarns in Bombay against entitlements for export promtoion qutoa, and import of mtoor spare parts, brandy, pharmaceutical goods, etc., against customs clearance permits obtained by various persons of Pondicherry. The profits made by the syndicate formed for such purposes were reported to be enormous, running into crores of rupees.\n\nEnquiries also showed that the petitioners, their brtohers, their mtoher and toher relatives had been freely intermingling in their financial affairs and adopting one antoher name for various activities in benami trade names.\n\n(g) On the basis of the information mentioned above, the first respondent came to the following conclusion :\n\n(i) the petitioners had been completely misleading the income-tax authorities and there was no occasion for the assessing Income-tax Officer to suspect that the real state of financial affairs and the real books of account and documents which would show the same were being withheld from his knowledge. There was no occasion, therefore, for the Income-tax Officer to call for any such books of account or documents;\n\n(ii) the petitioners had been deliberately following the policy of nto producing before the Income-tax Officer the books of the accounts and documents which would show their real state of financial affairs and their income. It was also evident that, if called up to produce such books of account and documents the petitioners would nto comply and would, on the contrary, destroy all such evidence; and\n \n\n(iii) the petitioners were in possession of money, bullion, jewellery and toher valuable articles and things which respondent wholly or partly the income or property which was nto disclosed for the purpose of assessment to income-tax.&quto;\n\nMr. Veda Vyasa strenuously urged that &quto;reason to believe&quto; must exist when authorisations were issued under section 132 and formulation of the reasons in the counter-affidavit could be of no avail to the revenue. It was for this reason that we directed the revenue to file the grounds in court and Mr. Desai, the learned counsel for the revenue, immediately, on our enquiry, expressed complete willingness to do so. We were taken through the grounds and I find that they are such as could lead any reasonable man to believe that action under section 132 was called for. It is nto necessary to discuss them in detail as they are now part of the record and it is sufficient to say that the reasons would meet even the scrutiny of adequacy. Reasons and the counter-affidavit further show that the Director of Inspection fully applied his mind to the matter before issuing the authorisations.\n\nMr. Veda Vyasa next contended that the Director of Inspection and the Income-tax Officers did nto apply their minds to the various aspects which required their attention. Before I deal with this argument, it is necessary to consider the scope of section 132 in so far as this has a bearing on this question. Under section 132, the Director of Inspection or the Commissioner can authorise search and seizure, if he has reason to believe that any person to whom a summons or ntoice under any of the provisions of the Income-tax Act, 1961, mentioned in sub-section (1)(a), has been or might be issued, will nto or would nto, produce or cause to be produced, any books of account or documents which will be useful for or relevant to any proceedings. The reason to believe must, therefore, be that the person concerned will nto produce any books or documents and those books and documents will be useful for or relevant to any proceedings. This aspect of the matter will be considered further when dealing with the argument regarding specification of documents in the authorisations. The authorisation may authorise certain officers specified in the section to enter and search any building or place where the authorised officer has reason to &quto;suspect&quto; that such books of account or toher documents, etc., that is to say, books of account and documents, etc., which will be useful for or relevant to any proceedings, are kept. While conducting the search the authorised officer has, therefore, necessarily to apply his mind and look for only such books of account and documents which will be relevant or useful to any proceedings. This scheme of the section shows that the mind has to be applied by two officers at two different stages :- (1) by the Director of Inspection or the Commissioner when authorising an officer to search. Such application of mind extends to two matters - (a) that the person concerned will nto produce the books of account; and (b) he will nto produce the books which will be useful or relevant to any proceedings; and (2) by the authorised officer that the books searched or seized will be useful or relevant to any proceedings. That follows from the use of the words &quto;such books of account&quto;, etc., in clauses (i) and (ii) of sub-section (1) of section 132. The question, therefore, is, whether or nto, the Director of Inspection in this case applied his mind as expected of him under the provisions of sub-section (1) of section 132. The extracts from the counter-affidavit of the Director of Inspection and the reasons for search qutoed above clearly show that the Director of Inspection did apply his mind and could have reason to believe that search and seizure was necessary.\n\nMr. Veda Vyasa, the learned counsel for the petitioner, emphasised two aspects in this behalf - (1) the assessments up to 1962-63 having been completed, there could have been no occasion to issue any ntoice under section 37 of the Indian Income-tax Act, 1922, or sub-section (4) of section 22 of the Income-tax Act and, yet, in the authorisation qutoed above, these sections have been mentioned which shows that the Director of Inspection blindly qutoed the authorisation form, being Form No. 45, prescribed under the Rules without applying his mind as to which provisions could be attracted in the case. Mr. Veda Vyasa drew our attention to section 297 of the Income-tax Act, 1961, and said that, even if action is to be taken against any person for escaped assessment, the sections applicable would be sections 147 and 148 of the 1961 Act and, therefore, sections 37 and 22(4) of the 1922 Act could, in no case, apply. And (2) the respondents had failed to show that the director applied his mind and came to the conclusion that relevant or useful books existed as were likely to be withheld.\n\nMr. Desai, the learned counsel for the revenue, on the toher hand, drew our attention to the following :\n\n(a) the authorisation has been issued in Form No. 45, the prescribed form;\n\n(b) sub-rule (14) of rule 112 provides that the authorisation &quto;shall be in Form No. 45&quto;;\n\n(c) in the cyclostyled form of authorisation two inapplicable clauses have been struck off indicating the care bestowed upon the matter by the Director of Inspection;\n\n(d) even in the part of authorisation retained, the section cyclostyled is &quto;137&quto; but figure &quto;1&quto; has been struck off; and\n \n\n(e) merely because sections 37 and 22 have been added to avoid the possibility of any omission, it does nto show that the Director of Inspection did nto apply his mind.\n\nThe fact that authorisation has been issued in the statutory form in accordance with the requirements of sub-rule (14) of rule 112 does nto, however, necessarily lead to the conclusion that the Director of Inspection applied his mind, as the mandate of sub-rule (14) of rule 112 extends to no more than reciting only the applicable provisions in the Form. But the toher factors pointed out by Mr. Desai read with the grounds and the counter-affidavit do lead me to the conclusion that the Director of Inspection applied his mind. On the second aspect also there is abundant material on the record to show that the director considered the matter and came to the conclusion that search and seizure was necessary.\n\nSo far as the authorised officers are concerned, various circumstances were relied on by btoh sides in support of their respective pleas. Mr. Veda Vyasa said that - (1) the seizure list showed that bundles of papers were seized without scrutiny; (2) papers like medicine bills, prescriptions, writ petitions and copies of the judgments of courts had been seized, although merely signing them or putting on them marks of identification and leaving them with the petitioners would have served the purpose, because such like records could never have been destroyed or withheld by the petitioners, and (3) even the plan of a building to be made in Faridabad was seized, showing that the authorised officers searched and seized all the papers upon which they could lay their hands without considering whether or nto they were useful or relevant. According to Mr. Veda Vyasa, it was impossible for an authorised officer to scrutinise thousands of papers in one day. The authorised officers have filed affidavits in which they say that the seizure was made under a reasonable belief that the papers seized belonged to the petitioners and were relevant or useful for the &quto;income-tax purposes&quto;. They have also denied that the seizure was indiscriminate.\n\nShri Rajinder Mohan, respondent No. 2, in his affidavit also stated that petitioners Nos. 2 and 3 were present at the time of the search, the authorisations were shown to them and he took their signatures thereon. The fact that the authorisations are signed by them has nto been denied.\n\nMr. Desai, learned counsel for the respondents, in support of his plea that there was a proper application of mind, mainly relied on the circumstance that some documents were nto seized while on some marks of identification were put and the documents left with the petitioners, and that showed that the authorised officers considered their relevance or usefulness before seizing them. With respect to the bundles of papers and several files, Mr. Desai contended that it was sufficient compliance with the Act and the Rules if the authorised officer broadly looked into the files and found that some of the papers, in any event, were relevant or useful and the entire file should be taken so that the order of the papers of the petitioners was nto disturbed and the files nto dismantled. Mr. Desai conceded that looking into the contents of each every paper was practically impossible but said that the authorised officers did broadly look into every file and bundle and seized the same only when satisfied that they had a bearing on the proceedings pending or proposed to be taken.\n\nBefore I proceed to answer the question, it is important to mention the particular papers seized which, according to Mr. Veda Vyasa, would have nto even a remtoe connection with any assessment proceedings taken or ever to be taken. He underlined in the list of seizures the following :\n\n(1) One file styled Dass Commission Inquiry containing some correspondence in the case regarding A. S. Kalia.\n\n(2) Papers regarding Mars, Rubber and General Industries -shifting of factory.\n\n(3) File - Metro Engineering and Metal Works -Electricity.\n\n(4) Metro Engineering and Metal Works writ petition.\n\n(5) List of phtoostat copies 12 - Import license application.\n\n(6) Several files containing statements and documents in the case - State v. N. S. Giani.\n\n(7) Petition under article 226 in the Punjab High Court -Baldeo Singh v. Director General, Development Wing.\n\n(8) File containing correspondence with Chief Settlement Officer.\n\n(h) one bundle of papers showing transactions of Roshan Lal Jali for the years 1952-56, which include general power of attorney and various petitions addressed to civil court and share certificates; and\n \n\n(i) copy of the letter from Chief Controller of Imports and Exports addressed to Shri Sadhu Singh, Advocate.\n\nMr. Desai said that in the petition there was only a general allegation that some irrelevant papers were seized and, therefore, the respondents had no opportunity to deal with specific items. He, however, sought to justify the seizure of each and every document. He said that, for instance, A. S. Kalia was an ex-partner of the petitioners. Similarly, petitioners Nos. 1 and 3 and N. S. Giani are being prosecuted in connection with stainless steel qutoa. Files containing the names of different firms would be relevant to show that the petitioners were engaged in business under their name and style as one of the allegations against the petitioners is that they have been carrying on business in various names without disclosing the income there from. Books of 1949 and of toher earlier years as well as well as the ntoe-book relating to poultry would be relevant to arrive at the capital structure of the petitioners and find out whether the expenses on their living are within their disclosed resources.\n\nAccording to Mr. Veda Vyasa, however, it was enough for the petitioners to allege that irrelevant papers were seized and it was always for the respondents to justify the seizure of each and every document. Once I am satisfied that the authorised officers applied their mind to the usefulness or relevance of the documents, the matter assumes a different shape. For, then the decision will have to be left to the authorised officers to see whether or nto the documents were useful or relevant. If the conclusion is that a reasonable man acting bona fide could believe that the documents were useful or relevant, it will nto b be open to the courts to substitute their own opinion or sit in appeal over the judgment of the authorised officer. Of course, if the courts come to the conclusion that the documents have no connection with any proceedings, the seizure would be bad. Similarly, if the seizure is held to be nto bona fide, it will be struck down. Looking from that angle a reasonable man acting bona fide could, in the circumstances of this case, come to the conclusion that books and files relating to several years back would be useful and relevant for constructing the capital structure or the income accumulations of the petitioners. Similarly, the writ petitions and judgments of the courts may be useful sources of information. Papers relating to qutoa licenses would also indicate the extent of business done by the petitioners or toher concerns in which they were interested. Even the signatures of some persons on blank papers may serve a useful clue to several relevant matters. There may be a few documents - one or two - like prescriptions and medicine bills which may have no bearing, but such seizure cannto and does nto go to show that there was a complete absence of the application of mind. At the most, the appropriate order may be in such cases to return those documents. Mr. Veda Vyasa also us some of the documents which have returned and used that factor to show that even the department did nto consider those documents relevant or useful. That may nto be necessarily so, for they may have returned them after gathering the necessary information. In any case, where, by and large, all the documents seized appear to be such as could lead a reasonable man to believe that they were useful and relevant, the search and seizure itself cannto be struck down on the ground of absence of application of mind. Mr. Desai expressed his inability to show the relevance of each and every document by reference his inability to show the relevance of each and every document by reference thereto as the documents are lying sealed under the orders of this courts. In these circumstances, it must be held that the authorised officers also properly applied their minds.\n\nMr. Veda Vyasa then contended that, although a few Income-tax Officers had been authorised, yet a large number searched and seized the documents. This argument bears no merit because the affidavits filed by the authorised officers show that they conducted the search and seizure and applied their minds to the documents to be seized. Regarding the contention that even copied of the official records such as writ petitions and judgments were seized showing the arbitrariness at the hands of the authorised officers, Mr. Desai contended that it was entirely for the authorised officers under clause 3 of sub-section (1) of section 132 to decide which of the relevant or useful books and documents should be seized and which left with the petitioners by only placing marks of identification. I am nto prepared to accept that broad proposition. Search and seizure is a serious invasion on the rights of the subjects. The search and seizure was really nto known at earlier stages to common law. When it was for the first time introduced, it was confined only to stolen goods, but its usefulness soon forced its recognition and was, from time to time, extended to such like searches and seizures. It is true that sometimes the over-zealousness of the authorities led to its abuse and it appears that for this reason the Fourth Amendment was introduced in the American Constitution in recognition of the fact that a mans house is his castle nto to be invaded by any general authority to search and seize his goods and papers. The only legal means that can be applied to search a persons abode is a search warrant and, in the absence thereof, neither any private person nor any officer can invade the privacy of a home and subject its occupants to indignity. It is, therefore, imperative that the over-zealousness of the searching officers is nto permitted to cross the permissible limits. Such provisions must, therefore, be necessarily construed in the light of this background and when two alternatives, namely, to seize the books or place marks of identification and leave then with the persons concerned are available, the seizure will be struck down on the ground that it is arbitrary and nto in the public interest. I say so because every provision of the Act has to be construed in the light of article 19 of the Constitution. My conclusion is that when two alternatives are equally possible, namely, either to seize the books or to leave them with the petitioners after placing marks of identification, the latter course must be resorted to. But whether or nto seizure is the only alternative depends on the facts and circumstances of each case. For instance, there may be cases where immediate information is necessary to void destruction of relevant materials by the assessed, or to avoid any assessments becoming time-barred. In that situation, even the seizure of such like documents would be justified. Similarly, if the authorised officers are of the opinion that obtaining records from different courts will be difficult and/or would cause delay thereby frustrating the object of search, they may seize the doncuments. Mr. Veda Vyasa did nto press for the return of any particular document possibly because btoh the parties were handicapped in view of the fact that the documents are lying sealed with the Commissioner of Income-tax and none of them could have access thereto. He merely underlined certain documents to show that the search was arbitrary, high-handed and without the authorised officers applying their minds. Mr. Veda Vyasa strongly relied on a decision of the Punjab High Court in N. K. Textile Mills v. Commissioner of Income-tax. In the circumstances that obtained in that case, it was held that the search and seizure was illegal as being arbitrary and an abuse of power. That case was decided having regard to the fact that all documents were seized indiscriminately and there was no proper affidavit showing that the authorised officers applied their minds. That is nto the case here. In the circumstances of this case and in the light of the discussion hereinbefore, it must be held that the authorised officers did apply their minds. In searching or seizing the documents they may have erred slightly here or there and seized the documents which, on closer scrutiny, may ultimately turn out to be irrelevant but that cannto vitiate the search.\n\nThat takes me to the next contention of Mr. Veda Vyasa that search and seizure under section 132(1) can be resorted to only if there are pending proceedings and nto merely a remtoe possibility of some proceedings being taken at a later stage. The argument of Mr. Veda Vyasa was this : Section 131 applies only to pending proceedings and so does section 132(1)(a). Clause (b) of sub-section (1) of section 132 is only in aid of section 131 and section 132(1)(a) and must necessarily be limited within the area of sections 131 and 132(1)(a). When faced with the second Explanation to section 132 that the word &quto;proceeding&quto; includes proceedings which may be pending on the date of the search or which may have been completed on or before much date and includes also all proceedings which may be commenced after such date in respect of any year, Mr. Veda Vyasa sought to overcome this difficulty by suggesting that, though the proceedings might be commenced after the date of the search, those proceedings must be in a pending case. That, in my opinion, would be cutting down the scope of the second Explanation. From the Explanation it is obvious that the proceedings may nto be pending. In terms, the Explanation expands the meaning of the word &quto;proceeding&quto; and extends the power to issue search warrants where proceedings &quto;have been completed&quto;. The words &quto;have been completed&quto; obviously show that there may be no proceeding pending when the search warrant is issued. Mr. Veda Vyasa emphasized the words &quto;a summons or ntoice as aforesaid has been or might be issued&quto; and said that the summons or ntoice refers to summons or ntoice mentioned in clause (a) of sub-section (1) of section 132 which are all in pending proceedings. That again is nto the correct reading of clause (b) of sub-section (1) of section 132. Clause (a) refers to, for instance, a ntoice under section 142(1). That ntoice may be issued nto only when proceedings for assessment are pending with respect to a particular assessment year but even when action is taken for reassessment for that assessment year by resort to sections 147 and 148. Consequently, even if assessment for a particular year has been made, a ntoice under section 142 may still issue for that very year after re-opening of the assessment. Similarly, there may be cases where a person has nto filed a return and the income has escaped assessment as a result thereof. In that case also a ntoice under section 148 may have to be issued followed by a ntoice under section 142. Read with the second Explanation, clause (b) of section 132(1) would necessarily mean that a warrant for search or seizure can issue even in a case where any proceedings have been closed or may be commenced later. Mr. Dang, who followed Mr. Veda Vyasa for a short while, suggested that, in any case, the proceedings must be imminent and a remtoe possibility of the taking of proceedings will nto suffice. The section, however, does nto require that the proceedings should be imminent. All that is necessary is that the Director of Inspection or the Commissioner must, in consequence of the information, have reason to believe that the ntoices or summonses as mentioned in clause (a) of sub-section (1) of section 132 might have to be issued. If there is only a remtoe possibility of such summonses or ntoices being issued the section would nto be satisfied, nto because there are no proceedings imminent, but because a reasonable person could nto have, in those circumstances, reason to believe that the person concerned will nto produce the documents if summonses or ntoices are issued to him. In that sense it may be said that search warrants cannto be issued merely with a view to making a roving or fishing enquiry, but can be issued only when there exists a good ground for believing that further proceedings may have to be taken. Having regard, however, to the facts of this case it cannto be said that search warrants were issued when there was nto even a remtoe possibility of further proceedings.\n\nThe next argument urged on behalf of the petitioners was that the Director of Inspection or the Commissioner must specify the documents to be searched or seized. This argument was based again on the existence of the words &quto;to whom a summons or ntoice as aforesaid has been or might be issued&quto; in clause (b) of sub-section (1) of section 132. Mr. Veda Vyasa said that the reason to believe must be that the assessed concerned will nto produce relevant or useful books of account, etc., when summoned to do so under any of the provisions mentioned in section 132(1)(a), and since ntoices and summonses mentioned in section 132(1)(a) must necessarily specify the books and documents, the authorisation must also do so and that the authorisation had to be confined only to useful and relevant books and documents, etc., and therefore, the authorised officer must be told exactly what those useful and relevant books and documents are. According to Mr. Veda Vyasa, the Director of Inspection or the Commissioner must firstly be satisfied, having regard to the particular documents, that they will be useful or relevant to any proceedings and are such as could be called for by ntoices or summonses mentioned in clause (a) of sub-section (1) of section 132. Mr. Veda Vyasa sought to seek further support from the use of the expression &quto;such books of account&quto; in section 132(1)(i). I am nto convinced that any such specification is necessary. Sections 22(4) and 142(1) themselves do nto require precise specification of the documents to be produced. For instance, under section 142(1) the Income-tax Officer may require an assessed to produce all books of account and even require the production of documents generally showing that the assessed was carrying on business in a particular name and style. Such ntoice would be in compliance with section 142(1). That apart, it appears to me that section 132 has been made wider still and the Director of Inspection or the Commissioner is expected only to have reason to believe that the person concerned will nto, or would nto, produce, or cause to be produced, any books or documents, which will be useful for, or relevant to, any proceedings. In toher words, the authority concerned must show that he had reason to believe on the materials before him that the person concerned is likely to withhold books and documents and those books and documents will be useful or relevant to the proceedings. Take a case where the Director of Inspection or the Commissioner of Income-tax has information that someone is carrying on business in 20 different names and that he has nto disclosed those businesses to the revenue. There can be no doubt that section 132 is intended to meet such a situation as well and yet it will be impossible for the authorities to specify the documents. All that the authority issuing authorisation must believe is that there are useful and relevant documents available in the premises to be searched. In Durga Prasad v. Supdt. (Prevention), Central Excise, Nagpur, the Supreme Court construed section 105 of the Customs Act, which reads :\n\n&quto;105. (1) If the Assistant Collector of Customs, or in any area adjoining the land frontier or the cost of India an officer of customs specially empowered by name in this behalf by the Board, had reason to believe that any goods liable to confiscation, or any documents or things which in his opinion will be useful for or relevant to any proceeding under this Act, are secreted in any place, he may authorised any officer of customs to search or may himself search for such goods, documents or things.\n\n(2) The provisions of the Code of Criminal Procedure, 1898, relating to searches shall, so far as may be, apply to searches under this section subject to the modification that sub-section (5) of section 165 of the said Code shall have effect as if for the word Magistrate, wherever it occurs, the words `Collector of Customs were substituted.&quto;\n\nTheir Lordships observed :\n\n&quto;It was further submitted on behalf of the appellant that the power of search under section 105 of the Customs Act cannto be exercised unless the authorisation specifies a document for which search is to be made. In toher words, it is contended that the power of search under section 105 of the Customs Act is nto of general character. We do nto accept this argument as correct. The object of grant of power under section 105 is nto search for a particular document but of documents or things which may be useful or necessary for proceedings either pending or contemplated under the Customs Act. At that stage it is nto possible for the officer to predict or even to know in advance what documents could be found in the search and which of them may be useful or necessary for the proceedings. It is only after the search is made and documents found therein are scrutinised that their relevance or utility can be determined. To require, therefore, a specification or description of the documents in advance is to misapprehend the purpose for which the power is granted for effecting a search under section 105 of the Customs Act. We are, therefore, of opinion that the power of search granted under section 105 of the Customs Act is a power of general search. But it is essential that, before this power is exercised, the preliminary conditions required by the section must be strictly satisfied, that is, the office concerned must have reason to believe that any documents or things, which in his opinion are relevant for any proceeding under the Act, are secreted in the pace searched. We have already mentioned the reasons for holding that this condition has been satisfied in the present case.&quto;\n\nMr. Veda Vyasa relied on R. S. Seth Gopikishn Agarwal v. R. N. Sen, Assistant Collector of Customs and Central Excise, Raipur, which was again a case, inter alia, under section 105 of the Customs Act, and referred to the following observation :\n\n&quto;Doubtless he has to indicate broadly the nature of the documents and the goods in regard to which the officer authorised by him should make a search, for without that his mandate cannto be obeyed.&quto;\n\nThe above observation has to be read in the context. Their Lordships said :\n\n&quto;Obviously, no question of giving of particulars arises if he himself makes the search, but if he authorises any officer to do so, he cannto give the particulars of the documents, for they will be known only after the search is made. Doubtless he has to indicate broadly the nature of the documents and the goods in regard to which the officer authorised by him should make a search, for without that his mandate cannto be obeyed. The authorization issued by the Assistant Collector of Customs in this case clearly mentioned that on information received it appeared that the appellant was in possession of contraband goods and documents relating thereto and also described the office and the residential premises wherein those goods and documents would be found. In the circumstances of the case, we are satisfied that the specifications are sufficient to enable the officer authorized to make the search.&quto;\n\nIn this case also the authorisation said that the person concerned will nto produce or cause to be produced books of account or toher documents which will be useful for or relevant to the proceedings under the Income-tax Act, 1922, or the Income-tax Act, 1961. That specification was, in any case, sufficient so far as the requirements of section 132 go.\n\nMr. Veda Vyasa then contended that provisions of section 165 of the Criminal Procedure Code had nto been complied with inasmuch as (1) the search and seizure was nto conducted in the presence of punches as required by sub-section (4) of section 165; (2) copies of the records made at the time of search and seizure were nto sent to the nearest Magistrate as required by sub-section (5) of section 165.\n\nIn the alternative, Mr. Veda Vyasa said that, even if under the Income-tax Act, 1961, the copies may nto be required to be sent to the nearest Magistrate, sub-section (5) must be applied mutates mutants to the searches under the Income-tax Act and, therefore, copies of the record made should have been sent to some higher authority such as the Director of Inspection or the Commissioner of Income-tax; and (3) no reasons were recorded by the authorised officer.\n\nRegarding the search being conducted in the presence of witnesses, Mr. Veda Vyasa relied on the various affidavits filed by the witnesses to the search. There is no firm allegation in the petition that the search or seizure was nto conducted in the presence of the witnesses. Subsequently, however, affidavits were filed on behalf of the witnesses to the search wherein it has been stated that at the time of the search the witnesses were made to sit in one room from where it was practically impossible to keep a watch on the search and that the members of the search party were constantly coming in and going out of the premises searched. The facts alleged in these affidavits have been denied and on the basis of the material it is impossible to conclude that the petitioners are right, particularly having regard to the fact that there is no controversy between the parties that the list contains an accurate statement of the documents searched and seized. Regarding the reasons to be recorded by the authorised officers, there is no such requirement in section 132 or rule 112. The section and the rule merely require the authorising officer to give reasons. Mr. Desai did nto dispute that, having regard to the provisions of section 165, Criminal Procedure Code, and rule 112, the authorising officer must record reasons. He, however, disputed the contention that even the authorised officer must record reasons. Mr. Veda Vyasa suggested that under section 165(1) of the Criminal Procedure Code the officer in charge of a police-station, etc., is required to record in writing the grounds of his belief and, applying section 165, it must he held that the authorised officers must also record reasons in writing. There is no warrant for this proposition. Under section 132 of the Income-tax Act, the search warrants can be issued upon reason to believe by the Director of Inspection or the Commissioner. The section does nto require the Director or the Commissioner to record reasons though he may have to do so because, if the action is challenged in court, the authorising officer will have to justify his action within the limited are of objectivity. Rule 112, however, provides this safeguard in terms and requires the Director of Inspection or the Commissioner to record reasons for authorising the search a seizure. Section 165 of the Criminal Procedure Code applies only &quto;so far as may be&quto; and at the most it can be said that the effect of section 165(1) is that the person issuing the authorisation must record reasons. The said section 165 cannto be held to require the authorised officer to record reasons. Under the said section the police officer concerned may either make the search or cause it to be made. Even there the officer, who is authorised to make the search by the police officer concerned, need nto record reasons. All that is to be seen under section 132 of the Income-tax Act is that the authorised officer searches or seizes only such documents and books of account, etc., which are useful or relevant to any proceedings. So far as sending of the copies of the record to the nearest Magistrate or to a senior official of the income-tax department is concerned, sub-section (5) of section 165, cannto, in terms, apply because that sub-section requires copies of the record made under sub-section (1) of section 165, that is, record of search or seizure conducted in pursuance of the belief that anything is necessary for the purpose of an investigation into any offence to the court. In investigations like the present there is no investigation into any offence. Under sub-rule (8) of rule 112 a list of all the things taken possession of has to be prepared and copies thereof sent to the Director of Inspection or the Commissioner, as the case may be. There is no allegation on behalf of the petitioners that this sub-rule was nto obeyed and, even if the argument of Mr. Veda Vyasa is to be accepted that by applying section 165 mutates mutants the copies must be sent to a senior official, it must be held that that was complied with. Again, in sub-section (5) of section 165 of the Criminal Procedure Code, the copies of the record have to be forwarded to the nearest Magistrate empowered to take cognizance of the offence. For this reason also no copies can be sent to any Magistrate. This argument of the learned counsel for the petitioners must also, therefore, fail. It may, however, be pointed out that search being carried out in the presence of witnesses and the reasons to be recorded by the authorising officer are the requirements of rule 112 itself and, therefore, it is unnecessary to take recourse to section 165 or the Criminal Procedure Code for that purpose. Mr. Desai wanted leave to file an affidavit, which he actually did, showing that the authorised officers were properly briefed on the merits of the case so that they could apply their minds to the documents to be searched or seized. The petitioners filed a counter-affidavit and then Mr. Desai stated that &quto;in view of the lengthy and irrelevant contents of the counter-affidavit I do nto press for filing of the affidavit and want to withdraw the same.&quto; Mr. Veda Vyasa contended that the affidavit having been placed on the record it could nto be withdrawn and relied on In re Quartz Hill & c. Company : Ex parte Young. No permission was given to Mr. Desai to place the affidavit on the record and the matter had yet to be decided when the affidavit was withdrawn. In view of my decision that the authorised officers did apply their minds it is unnecessary to go into this question. Mr. Veda Vyasa also pressed on us to permit him to cross-examine the deponents on behalf of the respondents. He said that, apart from the fact that the affidavits were vague and nto properly verified, he would be able to show that the statements made therein are nto correct and neither had the Director of Inspection reason to believe nor did the authorised officers apply their minds. I see no justification or allowing that request. Paragraph 10, sub-paragraphs (a), (c) and (e) of paragraph 13, and sub-paragraphs (e) and (g) of paragraph 14 have been sworn by R. D. Shah as true to his knowledge. Paragraph 10 of the affidavit deals with the prtoest letters, etc., by the petitioners and the offer by respondent No. 1 that the petitioners might approach the officers concerned for inspecting the books and documents. In sub-paragraph (c), which has been mentioned in detail above, respondent No. 1 swears to the conclusions that he arrived at on the basis of the information mentioned in the earlier paragraphs. In sub-paragraph (e) of paragraph 13 he says that he had sufficient information in his possession to give him reason to believe that action under section 132 was necessary, and these paragraphs have been sworn as true to the knowledge of the Director of Inspection. Having regard to the nature of scrutiny by the court into the question of reason to believe, these are the relevant paragraphs and have been properly sworn.\n\nMr. Veda Vyasa principal objection was that the Director of Inspection had, with respect to some of the paragraphs, stated that &quto;they are true to my knowledge based on official record and believed to be true&quto; without disclosing the said records. We have been taken though those paragraphs at length and I am nto satisfied that cross-examination should be allowed. Similarly, in the affidavits by Rajinder Mohan, V. S. Rastogi, V. P. Mital, P. N. Malik and R. C. Narang, the facts have been sworn as true to their knowledge. I am nto unmindful of the fact that if a proper case is made out, this court has power to direct cross-examination of the deponents but in the light of the discussion on various aspects I am satisfied that this is nto a case where such permission should be accorded.\n\nI then proceed to discuss the contention of Mr. Veda Vyasa that section 132 of the Income-tax Act is unconstitutional, being violative of articles 14 and 19. In support of this contention he relied on the majority judgment of the Assam High Court in Senairam Doongarmal Agency (P.) Ltd. v. K. E. Johnson. In that case a majority of their Lordships held that section 37(2) of the Indian Income-tax Act, 1922, was violative of articles 14 and 19(1)(g) of the Constitution. The majority of the learned judges in coming to that conclusion expressed dissent from Surajmull Nagarmull v. Commissioner of Income-tax. So far as article 14 is concerned, the ratio of the Assam decision is that section 37(1) and section 37(2) are two distinct, different and independent powers and the power under section 37(2) is much more drastic and onerous with the result that if action is permitted under section 37(2) instead of section 37(1), it would involve discrimination. Regarding article 19, the majority view is that there were no guidelines provided as to when and in what circumstances the power in question was to be exercised or for the purpose or object of the exercise of the power. The power could be exercised without ntoice to the person concerned and there was no provision for an aggrieved party to make a representation and, therefore, the restriction imposed on the fundamental rights was nto reasonable. In Surajmull Nagarmull v. Commissioner of Income-tax, the Special Bench of the Calcutta High Court, however, came to the conclusion that section 37(2) did nto violate either article 14 or article 19 of the Constitution. In Commissioner of Commercial Taxes v. Ramkishan Srikishan Jhaver, their Lordships of the Supreme Court upheld the validity of section 41(2) and (3) of the Madras General Sales Tax Act relating to search and seizure of accounts and documents on the ground that there were sufficient safeguards provided, particularly in view of the applicability of section 165, Criminal Procedure Code, and, therefore, article 19 was nto violated. One of the factors taken by their Lordships of the Supreme Court into consideration was that the officer seizing the books of account, etc., had to record his reasons. I have mentioned this fact specifically because Mr. Veda Vyasa sought to distinguish this decision on the ground that, if the authorised officers are nto expected to record their reasons, that safeguard, which existed in section 41, did nto exist in section 132. Again, in R. S. Seth Gopikishn Agarwal v. R. N. Sen, Assistant Collector of Customs and Central Excise, Raipur, their Lordships of the Supreme Court held that section 105 of the Customs Act, 1962, did nto violate article 14 of the Constitution and observed :\n\n&quto;The legislative policy reflected n the section s that the search must be in regard to the two categories mentioned therein, namely, goods liable to be confiscated and documents relevant to a proceeding under the Act. No doubt the power can be abused. But that is controlled by toher means. Though under the section the Assistant Collector of Customs need nto give the reasons, if the existence of belief is questioned in any collateral proceedings, he has to produce relevant evidence to sustain his belief. That apart, under section 165(5) of the Code of Criminal Procedure, read with section 105(2) of the Act, he has to send forthwith to the Collector of Customs a copy of any record made by him. The Collector would certainly give necessary directions if the Assistant Collector went wrong, or if his act was guided by mala fides.&quto;\n\nIn C. Venkata Reddy v. Income-tax Officer, (Central) I, Bangalore, a Division Bench of the Mysore High Court held that section 132 of the Income-tax Act, 1961, did nto violate article 14 or 19 of the Constitution. Mr Veda Vyasa contended on the lines of the Assam decision that section 132 violated articles 14 and 19 of the Constitution because t had been left to the absolute discretion of the authorities concerned to either take recourse to section 131 or to section 132, which is a more drastic provision and no criterion had been laid down as to in which cases section 132 had to be applied. Section 131 is a general power given to the Income-tax Officer, etc., for enforcing the attendance of persons, for issuing commissions or compelling the production of accounts or toher documents. Under section 131, for instance, the Income-tax Officer may even compel a witness to produce books of account and toher documents which he may consider to be helpful to the enquiry. Section 132, on the toher hand, is directed to compel compliance with ntoices already issued or which may be issued. Section 131, therefore, gives powers to compel production of persons production of persons and books while section 132 is intended to give power to search or seize documents which the persons concerned are likely to withhold. There is, therefore, a valid classification and a distinction based on the reason to believe by senior officials, which reason is, to a certain extent, subject to judicial scrutiny, that the books will nto be produced. Section 132 cannto be struck down as discriminatory, particularly when sufficient safeguards have been provided. The object of the legislature in enacting section 132 is btoh to avoid tax evasion and facilitate enquiry in proceedings. Search warrants may be issued against an assessed who has filed a return or has failed to file a return and the apprehension is that he will destroy the books so that the proper income-tax is nto assessed against him. It can also be issued to witnesses who are possessed of books and documents which may help the assessed in arriving at a correct assessment but it is apprehended that, inter alia, out of vindictiveness or illwill or even indifference towards the assessed, such person, if summoned as a witness, will nto produce the documents or may destroy the same. There is, therefore, in my opinion, a valid classification of persons against whom proceedings under section 132 may be taken.\n\nIt was then contended by Mr. Veda Vyasa that search and seizure may by ordered at the sweet will of the Director of Inspection or the Commissioner. That is nto so. The Director of Inspection and the Commissioner are very senior officials. They must have reason to believe that relevant or useful books or documents will nto be produced. The existence of reason to believe is, to a certain extent, justiciable, as discussed hereinbefore. The search and seizure is confined to relevant or useful books of account. The provisions of the Criminal Procedure Code have been made applicable and by virtue thereof and of rule 112 the search has to be conducted in the presence of witnesses and the Director of Inspection or the Commissioner has to record reasons. No official below he rank of the Income-tax Officer can be authorised to search or seize and that also only the useful and relevant books. Under sub-section (8) of section 132 the books of account or toher documents cannto be retained by the authorised officer for a period exceeding 180 days except after recording reasons in writing and taking the approvals of the Commissioner, and the Commissioner cannto authorised the retention for a period exceeding 30 days from the completion of the relevant proceedings. The persons concerned are entitled to object to the order of the Commissioner by an application to the Board of Direct Taxes. They are also entitled to make copies or take extracts from the books or documents seized. Search of a premises by itself no doubt offends the right of a subject to hold property guaranteed under article 19 but searches necessitated for avoiding tax evasion or facilitating the making of assessment cannto but be termed as reasonable restrictions on the rights of the subjects. Similarly, seizure of documents for a limited period for the purpose of assessment would also constitute reasonable restriction. It follows that the section is nto hit either by article 14 or by article 19 of the Constitution.\n\nHaving come to the conclusion that the search and seizure in this case was legal I need nto decide the question as to whether the documents searched and seized in violation of article 19 or of section 132 can be retained or nto. It is, however, necessary to decide one toher question, namely, whether the information collected by the department in pursuance of an illegal search can be used as evidence and this is so because in two toher writ petitions, being Writ Petitions Nos. 798-D of 1966 and 800-D of 1966, we heard arguments only on this question and nto on the question whether the search or seizure in those cases was legal or illegal, while Civil Writ No. 58 of 1966 was compromised without prejudice to the contention of the petitioners that such evidence cannto be used, and, therefore, if the conclusion is that such documents can be used, it will be unnecessary to decide the question of legality of the search in those cases. In Weeks v. United States, it was held that the Federal Court could nto use as evidence something unreasonably seized by a Federal Officer. In Burdeau v. McDowell, however, it was decided that if something was seized by someone acting without complicity on the part of the United States and gives that to the Government, the prosecution was entitled to use it. The exception made to the Federal exclusionary rule in McDowell case to the effect that the evidence obtained by an illegal search made by the State officers without federal participation is admissible was, however, repudiated in a later decision. Similarly, it has been held in several cases that documents or things seized in violation of the Fourth Amendment could nto be used in evidence even in State courts. Mr. Veda Vyasa relied on Dollree Mapp, etc. v. Ohio and Winston Massiah v. United States in support of his proposition that any document seized in violation of the Forth Amendment in the United States and articles 14 or 19 in India could nto be used in evidence. The reason of the rule, according to Mr. Veda Vyasa, is that, unless forbidden, the over-zealous prosecutors or the investigators will cease to have any regard for the Constitution and seize documents in violation thereof believing that, even if the seizure is held to be illegal, they will at least be entitled to use the evidence. It was, therefore, necessary, according to Mr. Veda Vyasa, to exclude such evidence wherever the seizing officer blundered so that the Constitution and the laws were obeyed. Mr. Veda Vyasa reminded us that the courts are the guardians of the Constitution and prtoection against arbitrary searches and seizures was to give effect to the determination by the people that they would for ever be secure in the persons and effects from intrusion by the State except under a proper warrant and, if use of such evidence were to be allowed, it will create a big hole in the Constitution. Mr. Desai, on the toher hand, relied on Kuruma v. Queen, where it was held that the law did nto reject relevant evidence on the ground that it had been obtained by illegal means. Lord Goddard C.J., referring to some of the American decisions, said :\n\n&quto;Certain decisions of the Supreme Court of the United States of America were also cited in argument. Their Lordships do nto think it necessary to examine them in detail. Suffice it to say that there appears to be considerable difference of opinion among the judges btoh in the State and Federal courts as to whether or nto the rejection of evidence obtained by illegal means depends on certain articles in the American Constitution. At any rate, in Olmstead v. United States, the majority of the Supreme Court were clearly of opinion that the common law did nto reject relevant evidence on that ground.&quto;\n\nThough in Ohio case the Supreme Court of the United States said that the rule which excludes unconstitutional evidence from being admitted is an essential part btoh of the Fourth and Fourteenth Amendments, Mr. Veda Vyasa suggested that the said rule as developed in the United States was nto only a command of the Forth Amendment but also a judicially created rule of evidence and there was no reason why the same rule of evidence should nto be created by the courts in India because article 19 in our Constitution is intended also to serve the same purpose as the Fourth Amendment in the United States. There are two ways of looking at the American decisions. One way of looking at those decisions may be, as suggested by Mr. Veda Vyasa, that the exclusionary rule is a judicially created rule of evidence. If that be so, then it would be open to the Legislature to override that rule and permit use of evidence illegally obtained. In that situation the matter will depend on the provisions of the Indian Evidence Act. Of course, it would be a different matter as to what value should be attached to an evidence illegally seized. No provision of the Evidence Act has been shown to us by Mr. Veda Vyasa which excluded such evidence. It is the toher angle which creates difficulty. If it be held that the exclusionary rule is based on the Fourth Amendment, then an illegal seizure would be in as much violation of article 19 in India as it would be in violation of the Fourth Amendment in the United States. Even so, article 19 does nto, in my opinion, forbid the use of evidence obtained as a result of an illegal search. It may be argued in support of the exclusionary rule that article 19 makes the right to acquire and hold completely restored. There is no restoration unless the parties are placed in a position in which they stood before the seizure and that, unless such evidence is completely excluded, there will nto be any perfect restitution. It is true that in appropriate cases the court may order restoration of the property illegally seized, but, so far as the use of information gathered as a result of such seizure is concerned, the court, or the appropriate authority, has, in any case, acting within the law, the power to call for such information and property and use the same in evidence. If it is done in accordance with law, no violation of article 19 arises. The information gathered, therefore, can toherwise be reached by the courts or toher concerned authorities. The information gathered serves as a check on the person subjected to search and seizure that he will nto destroy the records or conceal the information. If he produces it in pursuance of summons or ntoice, it can undoubtedly be used. If, on the toher hand, he withholds it, it cannto be said that article 19 will exclude such evidence because he has no fundamental right to withhold the records and information. My conclusion, therefore, is that information gathered as a result of illegal search and seizure can be used subject to the value to be attached to it or its admissibility in accordance with the law relating to evidence. I will take an extreme case where documents are illegally seized and nto only is the information kept in the minds of the concerned authorities but complete copies thereof are kept. On the one hand, article 19 may be construed to mean that complete restitution of property would require restitution of those copies as well. On the toher hand, it may be said that, since the court or the authority has still the power to call for the information, the authority may use those copies if the information or the documents are nto produced. In that situation it cannto be argued that article 19 forbids the use of such copies completely. What will be the situation if there is no power in law in the authority concerned to call for such information or documents does nto arise before us and I need nto consider that. I would like to make it clear that I am expressing no opinion on the impact of article 20 on the use of such information.\n\nIn the circumstances, this petition fails and is dismissed but with no order as to costs.\n\nANDLEY J. - I entirely agree.\n\nPetition dismissed." }, { "title": "The Commissioner Of Income Tax vs Divine Holdings Pvt. Ltd on 7 March, 2012", "url": "https://indiankanoon.org//doc/114401339/", "text": "The Commissioner Of Income Tax vs Divine Holdings Pvt. Ltd on 7 March, 2012\nAuthor: D.Y.Chandrachud\nBench: D.Y. Chandrachud, M.S. Sanklecha\n PNP 1/11 ITXA3334-2010.sxw\n\n\n IN THE HIGH COURT OF JUDICATURE AT BOMBAY\n\n ORDINARY ORIGINAL CIVIL JURISDICTION\n\n\n\n\n \n INCOME TAX APPEAL NO.3334 OF 2010\n\n\n\n\n \n The Commissioner of Income Tax-\n Central II, Mumbai ..Appellant.\n versus\n Divine Holdings Pvt. Ltd. ..Respondent.\n .....\n\n\n\n\n \n Mr. A.R. Malhotra with Ms. Padma Divakar for the Appellant.\n Mr. R.A. Shaikh for the Respondent.\n ......\n\n CORAM : DR.D.Y.CHANDRACHUD &\n\n\n\n\n \n M.S. SANKLECHA, JJ.\n ig 7 March 2012.\n\n ORAL JUDGMENT (Per. DR.D.Y.CHANDRACHUD, J.) :\n 1. This Appeal arises from a decision of the Income Tax Appellate\n Tribunal dated 3 November 2009; the Assessment Year in question\n being Assessment Year 2005-06. The Appeal raises the following\n \n\n substantial questions of law :\n \"1. Whether on the facts and in the circumstances of the case,\n \n\n\n\n the Tribunal, in law, was right in holding that the assessee being\n a notified person under the Special Court (Trial of Offences\n relating to Transactions in Securities) Act, 1992 is not liable to\n pay interest u/s. 234A, 234B, & 234C of the IT Act, 1961;\n\n 2. Whether on the facts and in the circumstances of the case\n and in law, the Tribunal was right in holding that interest under\n Sections 234A, 234B & 234C is not chargeable in the assessee's\n case being notified person under Special Court (Trial of Offences\n relating to Transactions in Securities) Act, 1992 without\n\n\n\n\n\n appreciating that the said Act has not ruled that the provisions of\n Sections 234A, 234B, and 234C are not applicable to the notified\n persons or they are exempted from the liability of payment of\n interest under these sections of Income Tax Act, 1961.\"\n\n 2. The Appeal is admitted on the aforesaid questions and is taken\n up for hearing and final disposal by consent.\n\n ::: Downloaded on - 09/06/2013 18:16:26 :::\n PNP 2/11 ITXA3334-2010.sxw\n\n\n 3. The assessee is a notified person under the Special Court (Trial of\n Offences relating to Transactions in Securities) Act 1992. The assets of\n\n\n\n\n \n the assessee including its bank accounts were attached and vested in\n the Custodian under the Act. The return of income for Assessment\n\n\n\n\n \n Year 2005-06 which was due on 31 October 2005 was filed on 26\n February 2007 declaring a total income of Rs.37.54 lacs. The\n assessment was completed under Section 143(3) on 13 December\n\n\n\n\n \n 2007, determining a total income of Rs.45.73 lacs. The Commissioner\n (Appeals) disposed of the appeal by an order dated 29 August 2008.\n The Commissioner held that the provisions of Sections 234A, 234B and\n 234C of the Income Tax Act, 1961 were mandatory. In appeal, the\n\n\n\n\n \n Tribunal relied upon its decision in the case of Orion Travels Private\n \n Limited rendered on 9 October 2009, in coming to the conclusion that\n interest under Sections 234A, 234B and 234C should not be levied on\n \n the assessee for the Assessment Year under reference. The appeal\n filed by the Revenue from the decision of the Income Tax Appellate\n Tribunal in the case of Orion Travels Private Limited (supra) is also\n before the Court in this batch of appeals which has been heard\n \n\n\n together.\n\n 4. Counsel appearing on behalf of the Revenue urges that -\n (i) The provisions of Sections 234A, 234B and 234C are mandatory\n\n\n\n\n\n in nature;\n (ii) The decision of the Tribunal in Orion Travels relied on the view\n taken by the Special Court to the effect that no interest could be\n imposed on a notified party for the non-fulfillment of an act\n\n\n\n\n\n which a notified party is prevented from doing by reason of the\n Special Court Act. This would include the liability to pay interest\n under Section 234B;\n (iii)The Tribunal, however, it was urged, did not consider the\n judgment of the Supreme Court in Harshad Shantilal Mehta v.\n Custodian1 which specifically took the view that interest or\n\n\n 1 (1998) 231 ITR 871.\n\n ::: Downloaded on - 09/06/2013 18:16:26 :::\n PNP 3/11 ITXA3334-2010.sxw\n\n\n penalty for any action or default after the date of the\n notification would not be covered by the Special Court Act. The\n\n\n\n\n \n Special Court, according to the judgment of the Supreme Court,\n is required to consider this question only from the point of view\n\n\n\n\n \n of distribution of any part of the surplus assets in the hands of\n the custodian after the discharge of liabilities under Section11(2)\n (a) and 11(2)(b) of the Special Court Act. That, however, would\n\n\n\n\n \n have no bearing on the principal question as regards the liability\n to pay interest under Sections 234A, 234B and 234C as the case\n may be, which does not fall within the domain of the Special\n Court;\n\n (iv)The Central Board of Direct Taxes has issued a direction on 26\n \n June 2006 in pursuance of the provisions of Section 119(2)(a) of\n the Income Tax Act, 1961, regarding the waiver of interest under\n \n Sections 234A, 234B and 234C by which the Chief Commissioner\n of Income Tax has been vested with the power to reduce or\n waive interest charged under those provisions in certain\n specified cases. Consequently, a remedy would still be open to\n \n\n\n the notified party to apply to the Chief Commissioner for a\n \n\n\n\n waiver or reduction of interest in terms of the directions issued\n on 26 June 2006.\n\n 5. On the other hand, it has been urged on behalf of the\n Respondent that -\n (i) The provisions of the Special Court Act would override the\n provisions of the Income Tax Act, 1961;\n\n (ii) A notified person by virtue of the notification under Section 3 of\n the Special Court Act loses right and control over his assets and\n is unable to discharge his statutory obligations as a result of a\n legal disability cast upon him;\n (iii)Interest under Sections 234A, 234B and 234C enjoys the last\n priority in payment under Section 11(2)(c). Reliance was sought\n to be placed on the decisions of the Supreme Court in Tax\n\n\n\n\n ::: Downloaded on - 09/06/2013 18:16:26 :::\n PNP 4/11 ITXA3334-2010.sxw\n\n\n Recovery Officer v. Custodian2 and in Solidaire India\n Limited v. Fairgrowth Financial Services Ltd.3.\n\n 6. In Harshad Shantilal Mehta (supra) the decision of the\n\n\n\n\n \n Supreme Court dwelt on six questions of which two, questions 5 and 6,\n have a bearing on the issues which arise in this appeal. Those\n questions were :\n\n i) Whether the expression 'tax' in Section 11(2)(a) of the Special\n Court (Trial of Offences relating to Transactions and Securities)\n Act 1992 includes penalty or interest; and\n ii) Whether the Special Court has the power to absolve a notified\n\n\n\n\n \n person from the payment of penalty or interest from the period\n \n subsequent to the date of the notification under Section 3. In\n the alternative, is the notified person liable to pay interest or\n \n penalty arising from his inability to pay tax after his notification.\n\n 7. As regards the first of the aforesaid two questions, the Supreme\n Court held that the expression 'tax' under Section 2(43) of the Income\n \n\n\n Tax Act, 1961 is a concept which is distinct from penalty and interest\n \n\n\n\n since tax within the definition does not include penalty or interest.\n The provisions for the imposition of penalty and interest are distinct\n from those for the imposition of tax. The Supreme Court therefore\n\n\n\n\n\n held that neither penalty nor interest can be considered as tax within\n the meaning of Section 11(2)(a) of the Special Court Act. On the\n second question, the Supreme Court held that interest or penalty for\n any action or default after the date of the notification, are not covered\n\n\n\n\n\n by the Special Court Act. The Supreme Court held that a taxing statute\n is a code in itself for the imposition of tax, penalty or interest. Hence,\n the remedy of a notified person who is assessed to penalty or interest\n after the notified period would be to move the appropriate authority\n under the taxing statute in that connection. In that context the\n Supreme Court held as follows :\n\n 2 (2007) 7 SCC 461\n 3 (2001) 3 SCC 71.\n\n ::: Downloaded on - 09/06/2013 18:16:26 :::\n PNP 5/11 ITXA3334-2010.sxw\n\n\n \"If it is open to him under the relevant taxing statute to\n contend that he was unable to pay his taxes on account of the\n attachment of all his properties under the Special Court Act,\n\n\n\n\n \n and that there is a valid reason why penalty or interest\n should not be imposed upon him after the date of notification,\n the concerned authorities under the Taxing Statute can take\n\n\n\n\n \n notice of these circumstances in accordance with law for the\n purpose of deciding whether penalty or interest can be\n imposed on the notified person. The Special Court is required to\n consider this question only from the point of view of\n distributing any part of the surplus assets in thehands of\n\n\n\n\n \n the Custodian after the discharge of liabilities under\n Section 11(2)(a) and 11(2)(b). The Special Court\n has full discretion under Section 11(2)(c) to decide\n whether such claim for penalty or interest should be paid\n out of any surplus funds in the hands of the Custodian.\"\n\n 8.\n \n After the decision of the Supreme Court, a direction has been\n issued by the Central Board of Direct Taxes under Section 119(2)(a) of\n the Income Tax Act, 1961 on 26 June 2006 directing that the Chief\n \n Commissioner of Income Tax and the Director General may reduce or\n waive interest charged under Sections 234A, 234B or 234C in the\n classes of cases or of income specified in paragraph 2 or the order for\n \n\n\n the period and to the extent that the Chief Commissioner / Director\n \n\n\n\n General may deem fit. However, it has been directed that no\n reduction or waiver of interest shall be ordered unless the assessee\n files a return of income for the relevant Assessment Year and pays the\n\n\n\n\n\n entire income tax due on the income as assessed. Both the authorities\n may impose any other conditions as deemed fit for reduction or waiver\n of interest. Paragraph 2 of the direction contains classes of income or\n classes of cases in which reduction or waiver of interest under Section\n\n\n\n\n\n 234A, 234B or 234C can be considered and which are as follows :\n \"(a) Where during the course of proceedings for search and\n seizure under section 132 of the Income-tax Act, or otherwise,\n the books of account and other incriminating documents have\n been seized, and the assessee has been unable to furnish the\n return of income of the previous year, during which the action\n under section 132 has taken place, within the time specified in\n this behalf, and the Chief Commissioner / Director-General is\n satisfied, having regard to the facts and circumstances of the\n case, that the delay in furnishing such return of income cannot\n reasonably be attributed to the assessee.\n\n ::: Downloaded on - 09/06/2013 18:16:26 :::\n PNP 6/11 ITXA3334-2010.sxw\n\n\n\n (b) Any income chargeable to income-tax under any head of\n income other than \"Capital gains\" is received or accrued after\n\n\n\n\n \n due date of payment of the first or subsequent installments of\n advance tax which was neither anticipated nor was in the\n contemplation of the assessee, and the advance tax on such\n\n\n\n\n \n income is paid in the remaining installment or installments, and\n the Chief Commissioner/ Director-General is satisfied on the facts\n and circumstances of the case that this is a fit case for reduction\n or waiver of the interest chargeable under section 234C of the\n Income-tax Act.\n\n (c) Where any income was not chargeable to income-tax in\n the case of an assessee on the basis of any order passed by the\n High Court within whose jurisdiction he is assessable to income-\n tax, and as a result, he did not pay income-tax in relation to such\n\n\n\n\n \n income in any previous year, and subsequently, in consequence\n of any retrospective amendment of law or the decision of the\n \n Supreme Court of India, or as the case may be, a decision of a\n larger Bench of the jurisdictional High Court (which was not\n challenged before the Supreme Court and has become final), in\n \n any assessment or reassessment proceedings the advance tax\n paid by the assessee during such financial year is found to be\n less than the amount of advance tax payable on his current\n income, and the assessee is chargeable to interest under section\n 234B or section 234C, and the Chief Commissioner/ Director-\n\n General is satisfied that this is a fit case for reduction or waiver\n of such interest.\n\n (d) Where a return of income could not be filed by the\n assessee due to unavoidable circumstances and such return of\n income is filed voluntarily by the assessee or his legal heirs\n without detection by the Assessing Officer.\"\n\n The circular clarifies further that the cases referred to in paragraphs\n 2(a) and 2(d) are specified only for the purposes of waiver of interest\n under Section 234A. The circular was issued in supercession of earlier\n\n\n\n\n\n orders dated 23 May 1996 and 30 January 1997.\n\n 9. The levy of interest under the provisions of Sections 234A, 234B\n and 234C is mandatory in nature. The Constitution Bench of the\n Supreme Court in Commissioner of Income Tax v. Anjum M.H.\n Ghaswala4 held that the provision for the levy of interest\n\n\n 4 (2001) 252 ITR 1.\n\n ::: Downloaded on - 09/06/2013 18:16:26 :::\n PNP 7/11 ITXA3334-2010.sxw\n\n\n contemplated under Sections 234A, 234B and 234C is mandatory in\n nature and a power of waiver or reduction has not been expressly\n\n\n\n\n \n conferred upon the Settlement Commission under Chapter XIX A of the\n Income Tax Act, 1961. The Supreme Court held that the Settlement\n\n\n\n\n \n Commission does not have the power to reduce or waive interest\n statutorily payable under those provisions except to the extent of\n granting relief under the circulars issued by the Board under Section\n\n\n\n\n \n 119. Section 119 statutorily confers a power upon the Board to issue\n general or special orders inter alia in respect of any class of income or\n class of cases, where it considers it is necessary or expedient to do so\n for the proper and efficient management of assessment and collection\n\n\n\n\n \n of revenue, on the guidelines, principles or procedures to be followed\n \n by other income tax authorities whether by way of realisation of the\n provisions of Sections 234A, 234B, 234C or otherwise. It is in\n \n pursuance of this power that the Central Board of Direct Taxes has\n issued its direction dated 23 June 2006 in which power has been\n specifically conferred upon the Chief Commissioner / Director General\n in the circumstances set out in paragraph 2 of the direction.\n\n 10. The submission which has been urged on behalf of the\n Respondent, however, is that the provisions of the Special Court Act,\n would override those of the Income Tax Act, 1961 and that\n\n\n\n\n\n consequently the provisions of Sections 234A, 234B and 234C would\n not be attracted.\n\n 11. In order to consider this submission, a brief reference to the\n\n\n\n\n\n provisions of the Special Court Act would be in order. Under Section\n 3(2) the Custodian is empowered, on being satisfied on information\n received that any person has been involved in any offence relating to\n transactions in securities after 1 April 1991 and on or before 6 June\n 1992, to notify the name of such person in the official gazette. Under\n sub section (3) of Section 3 with effect from the notification under sub\n section (2) any property belonging to a person notified shall stand\n\n\n\n\n ::: Downloaded on - 09/06/2013 18:16:26 :::\n PNP 8/11 ITXA3334-2010.sxw\n\n\n attached simultaneously with the issuance of the notification. The\n property attached is thereafter required to be dealt with by the\n\n\n\n\n \n Custodian in such manner as the Special Court may direct. Under\n Section 9A, the Special Court can exercise all the jurisdiction, power\n\n\n\n\n \n and authority as were exercisable by a Civil Court in relation to any\n matter or claim relating to any property standing attached under\n Section 3(3). Under Section 11(1) the Special Court is entrusted with\n\n\n\n\n \n the jurisdiction to make such orders as it may deem fit directing the\n Custodian in regard to the disposal of property under attachment.\n Section 11(2) provides as follows :\n \"11(2) The following liabilities shall be paid or discharged in\n\n\n\n\n \n full, as far as may be, in the order as under -\n\n (a)\n \n All revenues, taxes, ceases and rates due from the persons\n notified by the Custodian under sub-section (2) of section 3 to\n the Central Government or any State Government or any local\n \n authority;\n\n (b) All amounts due from the person so notified by the\n Custodian to any bank or financial institution or mutual fund;\n\n (c) Any other liability as may be specified by the Special Court\n from time to time.\"\n\n Under Section 13 the provisions of the Act are to have effect\n notwithstanding anything inconsistent therewith contained in any\n\n\n\n\n\n other law for the time being in force or in any instrument having effect\n by virtue of any law, other than the Act, or in any decree or order of\n any Court, tribunal or other authority.\n\n 12. In Commissioner of Income Tax v. A.K. Menon5 the Supreme\n Court held that the Special Court has no power to sit in appeal over or\n overrule the orders of the tax authorities, the Income Tax Appellate\n Tribunal or the Courts in regard to the tax liabilities of notified persons.\n The only power of the Special Court is to determine the priorities in\n which claims upon the property under attachment shall be paid. There\n is no provision in the Special Court Act which governs the\n 5 (1995) 5 SCC 200.\n\n ::: Downloaded on - 09/06/2013 18:16:26 :::\n PNP 9/11 ITXA3334-2010.sxw\n\n\n determination of tax liabilities. The determination of tax liabilities\n under the Income Tax Act, 1961 is not governed by the provisions of\n\n\n\n\n \n the Special Court Act. Section 11 of the Special Court Act provides for\n the discharge of liabilities and empowers the Special Court to make\n\n\n\n\n \n such order as it may deem fit directing the custodian in regard to the\n disposal of the property under attachment. Sub-section (2) of Section\n 11 provides for the liabilities which shall be paid or discharged in full.\n\n The Supreme Court has held that the expression 'tax' in clause (a) of\n sub-section (2) of Section 11 would not include penalty or interest.\n The expression \"any other liability as may be specified by the Special\n Court from time to time\" in clause (c) of sub-section (2) has been dealt\n\n\n\n\n \n with by the Supreme Court in Harshad Shantilal Mehta (supra)\n \n where the Court held that the Special Court would have the full\n discretion to decide as to whether such claim for penalty or interest\n \n should be paid out of any surplus in the hands of the Custodian. In\n other words, it is evident that the jurisdiction of the Special Court\n under Section 11(2)(c) is to determine if and if so, the extent of which\n the liability on account of penalty or interest should be paid out of any\n \n\n\n surplus funds in the hands of the Custodian. The determination of the\n \n\n\n\n liability to pay penalty or interest under the Income Tax Act, 1961 does\n not fall within the domain of the Special Court.\n\n 13. In the judgment of the Supreme Court in Solidaire India\n Limited (supra), the Supreme Court held that both the Special Court\n Act and the Sick Industrial Companies (Special Provisions) Act 1985 are\n special Acts and in the event of a conflict, the later Act namely the\n\n\n\n\n\n Special Court Act would prevail. In the Tax Recovery Officer v.\n Custodian (supra) the Custodian in exercise of powers under Section\n 3(2) notified Dhanraj Mills Private Limited as a notified person. The\n assets of the notified person stood attached. Killick Nixon Private\n Limited together with its group companies owed money to the notified\n person and the custodian filed suits for recovery. The suits were\n decreed by the Special Court. In execution, the Special Court\n\n\n\n\n ::: Downloaded on - 09/06/2013 18:16:26 :::\n PNP 10/11 ITXA3334-2010.sxw\n\n\n appointed a Receiver for taking charge of the assets of Killick Nixon\n and its group companies and thereafter certain properties were put to\n\n\n\n\n \n auction and money was realised. The Tax Recovery Officer filed an\n application for intervention before the Special Court with a prayer that\n\n\n\n\n \n the Custodian be directed to consider a claim for the recovery of\n arrears of income tax from Killick Nixon on a priority basis before the\n distribution of the sale proceeds to any other creditor. The\n\n\n\n\n \n intervention applications were dismissed by the Special Court. The\n Supreme Court observed that under clause (a) of sub-section (1) of\n Section 9A, on and from the commencement of the Special Court (Trial\n of offences relating to Transactions in Securities) Amendment Act\n\n\n\n\n \n 1994, the Special Court shall exercise all such jurisdiction, powers and\n authority as were\n ig exercisable immediately before\n commencement by any Civil Court in relation to any matter or claim\n such\n \n relating to any property standing attached under sub-section (3) of\n Section 3. The Supreme Court held that the jurisdiction of the Special\n Court is confined to the property of the notified person which stands\n attached under section 3(3). In paragraph 14 of the judgment, the\n \n\n\n Supreme Court observed as follows :\n\n \"In Solidaire India Ltd.3 the provisions of Section 13 of the\n Special Court (Trial of Offences Relating to Transactions in\n Securities) Act, 1992 and Section 32 of the Sick Industrial\n Companies (Special Provisions) Act 1985 were examined and it\n\n\n\n\n\n was held that both these Acts are special Acts and in such an\n event it is the later Act, namely, the Special Courts (Trial of\n Offences Relating to Transactions in Securities) Act, 1992 which\n must prevail. Thus there can be no manner of doubt that the\n provisions of the Special Courts Act, wherever they are\n applicable, shall prevail over the provisions of the Income Tax\n\n\n\n\n\n Act.\"\n\n The Supreme Court held that the Special Court could not have\n entertained the application moved by the Income Tax Department\n under Section 26(4) of the Income Tax Act, 1961 for the realisation of\n its income tax dues from Killick Nixon Private Limited which was not a\n notified party.\n\n 3 (2001) 3 SCC 71.\n\n ::: Downloaded on - 09/06/2013 18:16:26 :::\n PNP 11/11 ITXA3334-2010.sxw\n\n\n\n\n 14. In paragraph 14 of the judgment, extracted above, the Supreme\n\n\n\n\n \n Court has held that the provisions of the Special Court Act, wherever\n they are applicable shall prevail over the provisions of the Income Tax\n\n\n\n\n \n Act, 1961. The words \"wherever they are applicable\" are crucial. The\n Special Court Act makes no provision in regard to the determination of\n the liability to pay interest under the Income Tax Act, 1961. That\n\n\n\n\n \n liability is clearly referable to the provisions embodied in Sections\n 234A, 234B and 234C. In the circumstances, the Tribunal, in our view,\n was in error in coming to the conclusion that interest under Sections\n 234A, 234B and 234C cannot be levied on an assessee who is a\n\n\n\n\n \n notified party under the Special Court Act. By the circular which has\n \n been issued by the Board, the power to grant such a waiver or\n remission has been vested with the Chief Commissioner. In terms of\n \n the judgment of the Supreme Court in Harshad Shantilal Mehta\n (supra) the notified person, the assessee in the present case, is not\n without remedy since it is open to the assessee to take recourse to the\n remedy available under the direction dated 26 June 2006. We\n \n\n\n accordingly answer the questions of law as framed in the negative.\n\n However, we clarify that it would be open to the notified person to\n seek a waiver or reduction by making an application to the Chief\n Commissioner of Income Tax in terms of the order dated 26 June 2006\n\n\n\n\n\n of the Central Board of Direct Taxes. The appeal is accordingly\n disposed of.\n\n There shall be no order as to costs.\n\n (Dr. D.Y. Chandrachud, J.)\n\n\n (M.S. Sanklecha, J.)\n\n\n\n\n ::: Downloaded on - 09/06/2013 18:16:26 :::" }, { "title": "Mahaveer Enterprises vs Union Of India (Uoi) And Ors. on 30 April, 1997", "url": "https://indiankanoon.org//doc/637629/", "text": "Mahaveer Enterprises vs Union Of India (Uoi) And Ors. on 30 April, 1997\nEquivalent citations: [2000]244ITR789(RAJ)\nAuthor: Bhagwati Prasad\nBench: Bhagwati Prasad\nJUDGMENT\n \n\nM.G. Mukherji, C.J. \n \n\n 1. This writ application has been filed by the Mahaveer Enterprises, Pindwara, District Sirohi, impugning certain assessment orders whereby the taxing authority levied tax on the writ petitioner as regards the sale of agricultural lands by the writ petitioner. There was a further prayer for quashing of the impugned penalty orders and a further prayer directing the respondents to refund the entire amount of tax, interest and penalty recovered from the petitioner on this account with interest. A general prayer was made so as to hold that the sale of agricultural lands does not give rise to any taxable income under the Income-tax Act irrespective of the fact of the location of the agricultural lands within or outside the municipal limits. There was a challenge to the vires of the Explanation inserted in Section 2(1A) of the Income-tax Act incorporated by the Finance Act, 1989, with retrospective effect from April 1, 1970, contending, inter alia, that the same was illegal and unconstitutional. There was also a further prayer restraining the respondents from recovering any tax, interest and penalty from the writ petitioner in this perspective. \n\n 2. The writ petitioner-firm sold during the relevant assessment year certain agricultural lands which were being used for agricultural operations. The assessing authority imposed income-tax treating the same as business income of the writ petitioner and also imposed penalty for non-payment of advance tax. The contention of the writ petitioner is that it has already paid the disputed amount of tax under protest, but it has not paid the penalty in question imposed on the writ petitioner as well as its partners by the assessing authority and the writ petitioner prayed for stay of recovery of such penalty imposed by the assessing authority contending, inter alia, that the same was illegal and perverse levy and the retrospective amendment of law could not confer any mens rea on the writ petitioner and, therefore, there could be no justification for any penalty. The writ petitioner also disputes the very levy of tax on the sale of agricultural lands. \n\n 3. The agricultural lands are admittedly within the municipal limits of Pindwara. The writ petitioner also submits that it had sold it as agricultural lands to various persons, who, of course, got it later converted into purposes other than agricultural, but the writ petitioner-firm was in no way connected with such later activities. Such later activities were so done with the help of another concern, Arihant Enterprises, and the writ petitioner is not by any stretch of imagination disputing the liability of that firm, Arihant Enterprises, which is a sister concern of the writ petitioner-firm for its income being treated as business income. The main question involved in the present writ application is whether on the sale of agricultural land it could give rise to taxable business income/capital gains under the Income-tax Act. \n\n 4. In order to understand the implication of the contentions, it would be necessary for us to advert to the appropriate provisions of the Income-tax Act pertaining to agricultural income which are quoted hereinbelow : \n\n \"2. (1A) 'agricultural income' means--(a) any rent or revenue derived from land which is situated in India and is used for agricultural purposes ; \n\n (b) any income derived from such land by- \n\n (i) agriculture ; or \n \n\n (ii) the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised or received by him fit to be taken to market; or \n \n\n (iii) the sale by a cultivator or receiver of rent-in-kind of the produce raised or received by him, in respect of which no process has been performed other than a process of the nature described in paragraph (ii) of this sub-clause ; \n\n (c) any income derived from any building owned and occupied by the receiver of the rent or revenue of any such land, or occupied by the cultivator or the receiver of rent-in-kind, of any land with respect to which, or the produce of which, any process mentioned in paragraphs (ii) and (iii) of Sub-clause (b) is carried on : \n\n Provided that- \n\n (i) the building is on or in the immediate vicinity of the land, and is a building which the receiver of the rent or revenue or the cultivator, or the receiver of rent-in-kind, by reason of his connection with the land, \n\nrequires as a dwelling house, or as a store-house, or other out-building, and \n \n\n (ii) the land is either assessed to land revenue in India or is subject to a local rate assessed and collected by officers of the Government as such or where the land is not so assessed to land revenue or subject to a local rate, it is not situated-\n\n (A) in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee or by any other name) or a cantonment board and which has a population of not less than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year ; or \n \n\n (B) in any area within such distance, not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (A), as the Central Government may, having regard to the extent of, and scope for, urbanisation of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette.\" \n\n 5. Under the Finance Act, 1989, an Explanation was added which was brought into force with retrospective effect from April 1, 1970, and the same is quoted hereinbelow : \n \"Explanation.--For the removal of doubts, it is hereby declared that revenue derived from land shall not include and shall be deemed never to have included any income arising from the transfer of any land referred to in item (a) or item (b) of Sub-clause (iii) of Clause (14) of this section.\" \n\n 6. Under Section 2(14) of the Income-tax Act, we find the definition of \"capital asset\". Section 2(14) is quoted hereinbelow : \n\n \"(14) 'capital asset' means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include- \n\n (i) any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession ; \n\n (ii) personal effects, that is to say, movable property (including wearing apparel and furniture, but excluding jewellery) held for personal use by the assessee or any member of his family dependent on him. \n\n Explanation--For the purposes of this sub-clause, 'jewellery' includes- \n\n (a) ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious of semi-precious stone, and whether or not worked or sewn into any wearing apparel ; \n\n (b) precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel; \n\n (iii) agricultural land in India, not being' land situate- \n\n (a) in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year ; or \n \n\n (b) in any area within such distance, not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (a), as the Central Government may, having regard to the extent of, and scope for, urbanisation of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette ; \n\n (iv) 61/2 per cent. Gold Bonds, 1977, or 7 per cent. Gold Bonds, 1980, or National Defence Gold Bonds, 1980, issued by the Central Government; \n\n (v) Special Bearer Bonds, 1991, issued by the Central Government.\" In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included as per the provisions contained in Section 10 of the Income-tax Act : \n \"(1) agricultural income ;\" \n\n 7. Similarly, capital gain on transfer of land used for agricultural purposes is not to be charged in certain cases, as per the provisions contained in Section 54B of the Income-tax Act, which is quoted hereinbelow : \n\n \"54B. (1) Subject to the provisions of Sub-section (2), where the capital gain arises from the transfer of a capital asset being land which, in the two years immediately preceding the date on which the transfer took place, was being used by the assessee or a parent of his for agricultural purposes (hereinafter referred to as the original asset), and the assessee has, within a period of two years after that date, purchased any other land for being used for agricultural purposes, then, instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this section, that is to say,-- \n\n (i) if the amount of the capital gain is greater than the cost of the land so purchased (hereinafter referred to as the new asset), the difference between the amount of the capital gain and the cost of the new asset shall be charged under Section 45 as the income of the previous year ; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase, the cost shall be nil ; or \n \n\n (ii) if the amount of the capital gain is equal to or less than the cost of the new asset, the capital gain shall not be charged under Section 45 ; and for the purpose of computing in respect of the new asset any capital\n\ngain arising from its transfer within a period of three years of its purchase, the cost shall be reduced by the amount of the capital gain. \n\n (2) The amount of the capital gain which is not utilised by the assessee for the \"purchase of the new asset before the date of furnishing the return of income under Section 139, shall be deposited by him before furnishing such return (such deposit being made in any case not later than the due date applicable in the case of the assessee for furnishing the return of income under Sub-section (1) of Section 139), in an account in any such bank or institution as may be specified in, and utilised in accordance with, any scheme which the Central Government may, by notification in the Official Gazette, frame in this behalf and such return shall be accompanied by proof of such deposit ; and, for the purposes of Sub-section (1), the amount, if any, already utilised by the assessee for the purchase of the new asset together with the amount so deposited shall be deemed to be the cost of the new asset : \n\n Provided that if the amount deposited under this sub-section is not utilised wholly or partly for the purchase of the new asset within the period specified in Sub-section (1), then,-- \n\n (i) the amount not so utilised shall be charged under Section 45 as the income of the previous year in which the period of two years from the date of the transfer of the original asset expires ; and \n \n\n (ii) the assessee shall be entitled to withdraw such amount in accordance with the scheme aforesaid.\" \n\n 8. We quote hereinbelow the impugned amendment effected by the Finance Act, 1989 (see [1989] 177 ITR (St.) 167, 172) : \n\n \"3. Amendment of Section 2.--In Section 2 of the Income-tax Act (as amended by Section 3 of the Direct Tax Laws (Amendment) Act, 1987 (4 of 1988)), in Clause (1A), the following Explanation shall be inserted at the end and shall be deemed to have been inserted with effect from the 1st day of April, 1970, namely :-- \n 'Explanation.--For the removal of doubts, it is hereby declared that revenue derived from land shall not include and shall be deemed never to have included any income arising from the transfer of any land referred to in item (a) or item (b) of Sub-clause (iii) of Clause (14) of this section'.\" \n\n 9. It is thus evident that clause 3 seeks to amend Section 2 of the Income-tax Act so as to insert an Explanation at the end of Clause (1A) in order to clarify that the revenue derived from land shall not include and shall be deemed never to have included any income arising from the transfer of any land referred to in item (a) or item (b) of Sub-clause (iii) of Clause (14) of this section. \n\n 10. It would be necessary for us to understand the historical background as regards the clarificatory amendment of the provisions relating to agricultural income. \n\n 11. Prior to April 1, 1970, the capital gains arising from the transfer of agricultural land was not subjected to tax as the agricultural land was excluded from the definition of \"capital asset\" in Section 2(14) of the Income-tax Act. By virtue of an amendment of Sub-clause (iii) of Clause (14) of Section 2 with effect from April 1, 1970, the agricultural land situated in any area comprised within the jurisdiction of the municipality or Cantonment Board (having a population of not less than ten thousand) or in any area outside the limits of the municipality or Cantonment Board (having a population of not less than ten thousand) up to a maximum distance of 8 kms. from such limits as notified by the Central Government was included in the definition of \"capital asset\" and hence, any gain arising from transfer of such agricultural land was brought within the purview of capital gains taxation. Some courts, however, have held that the profits from the sale of agricultural land constitute \"agricultural income\" and, therefore, it is exempt, from tax under Section 10 of the Income-tax Act. Some courts, however, have held a contrary view that such income is taxable. With a view to effecting a settlement as regards the judicial controversy instead of waiting for a final verdict of the Supreme Court which may take a long time and to eliminate uncertainty in law which was not desirable, as a measure of rationalisation, Parliament proposed to clarify by way of insertion of an Explanation that capital gains arising from the transfer of the agricultural land would not constitute \"revenue\" within the meaning of Section 2(1A) of the Income-tax Act. This amendment took effect retrospectively from April 1, 1970, and accordingly, applied in relation to the assessment year 1970-71 and subsequent years. \n\n 12. It would not be out of place to mention here that entry 82 in the First List of the Seventh Schedule is as regards \"Taxes on income other than agricultural income\". Entry 46 in List II of the Seventh Schedule is as regards \"Taxes on agricultural income\". Article 366(1) defines \"agricultural income\" as \"(i) 'agricultural income' means agricultural income as defined for the purposes of the enactments relating to Indian income-tax\". \n\n 13. Mr. Kothari, learned advocate appearing for the writ petitioner, cited before us the decision in Manubhai A. Sheth v. N. D. Nirgudkar, Second ITO [1981] 128 ITR 87 (Bom), which was a decision of the Bombay High Court, where it was observed as follows (headnote) :\n\n \"Entry 82 in List I of the Seventh Schedule to the Constitution empowers Parliament to levy tax on income other than agricultural income. The word 'income' should be given its widest connotation in view of the fact that it occurs in a legislative head which confers legislative power. Clause (24) of Section 2, which defines the word 'income', includes within it 'any capital gains chargeable under Section 45'. Under the proviso to Sub-section (3) of Section 10, capital gains chargeable under Section 45 is not includible in receipts of a casual and non-recurring nature which are not included in the total income. In view of these statutory provisions it cannot be said that capital gains are a capital receipt and not revenue receipt and hence not income. Profits and gains arising from the transfer of a capital asset are, therefore, income : Navinchandra Mafatlal v. CIT [1954] 26 ITR 758 (SC) relied on. \n\n Profits or gains on sale of agricultural land would be 'revenue' within the meaning of Section 2(1)(a). The word 'revenue' has been used in a very wide sense as is shown by that sub-clause itself. The sub-clause states 'any rent or revenue derived from land ...' The word 'any' qualifies not merely the word 'rent' but also the word 'revenue'. The word 'revenue' means 'income, especially of a large amount from any source'. Thus, the expression 'any revenue' would mean income of every kind. The word 'revenue' is not used as a synonym for the word 'rent' but in contradistinction to it and to cover all income from land, which is used for agricultural purposes, other than rent and income of the types specified in Sub-clauses (b) and (c) of Section 2(1). The source of capital gains on the transfer of agricultural land is the same as the source of other types of agricultural income referred to in Section 2(1), namely, the land, and it is gain which has sprung up or arisen from land like any other gain or income referred to in Section 2(1)(a): CIT v. Kameshwar Singh [1935] 3 ITR 305 (PC) ; Nawabzadi Mehar Bano Khanum v. Secretary of State for India [1925] ILR 53 Cal 34 ; [1925] AIR 1925 Cal 929 [FB] and CIT v. All India Tea and Trading Co. Ltd. [1978] 113 ITR 545 (Cal) applied, \n \n\n Capital gains arising from sale of land situate in India, which land is used for agricultural purposes, would be revenue derived from such land and, therefore, agricultural income within the meaning of Section 2(14)~INCOME TAX ACT, 1961~^ of the Income-tax Act, 1961, and Parliament would have no legislative competence to tax such agricultural income. Therefore, to the extent that sub- Clause (iii) of Section 2(14) as amended retrospectively by the Finance Act, 1970, read with Section 45 makes the profits or gains arising from the transfer of such lands situate in the areas mentioned in paras, (a) and (b) of Section 2(14), subject to the levy of capital gains tax by Parliament, it would be beyond the legislative competence of Parliament, inasmuch as capital gains on the transfer of lands used for agricultural purposes and situate within these areas would fall within the legislative field of State Governments by reason of entry 46 in List II of the Seventh Schedule to the Constitution . . .\n\n Sub-clause (iii) of Clause (14) of Section 2 does not operate, read with the other relevant sections of the Act, to levy capital gains tax on profits or gains arising from the transfer of land which is used for agricultural purposes and must be read down so as to exclude from the operation of the said sub-clause land which is used for agricultural purposes even though, it may be situate in any of the areas mentioned in paras, (a) and (b) \n\nof Sub-clause (iii) or, in other words, Sub-clause (iii) of Section 2(14) should be read as if the brackets and words 'other than land which is used for agricultural purposes' occurred in the sub-clause after the words 'not being land'.\" \n\n 14. In J. Raghottama Reddy v. ITO [1988] 169 ITR 174, at pages 175 and 176, the Andhra Pradesh High Court held as follows (headnote) :\n \"The amendment of the definition of 'agricultural income' in Section 2(1) by the Taxation Laws (Amendment) Act, 1970, was altogether for a different purpose. As a result of the amendments, the expression 'capital asset' includes all agricultural lands situated within the limits of a municipality and a radius of 8 kms. thereof, but the definition of 'agricultural income' has not been correspondingly amended. Even today, in spite of the amendment of the definition of 'agricultural income' in Section 2(1) by the Taxation Laws (Amendment) Act, 1970, the income derived from agricultural land (which includes income derived from sale of such land) situated within the limits of a municipality--and its 8 kilometres' radius, if notified-continues to be agricultural income.\" \n\n 15. However, in B.S. Jayachandra v. ITO [19861 161 ITR 190 (Kar), it was held as follows (headnote) :\n \"Legislation by Parliament providing for taxation of capital gains, that is, on income within the scope of entry 82 in List I of the Seventh Schedule, would be a piece of legislation, the pith and substance of which is the tax on income other than agricultural income and if that piece of legislation also affects lands which have ceased to have all the characteristics of agricultural land and thus acquired other characteristics, such encroachment on the other field of legislation is purely incidental and the doctrine of pith and substance would certainly apply to such a piece of legislation. Parliament is, therefore, competent to define the terms 'agricultural income', 'agricultural land' and 'capital asset' and thus bring to tax capital gains arising or accruing from agricultural lands situated within municipal limits and 8 kms. of notified municipal areas, which had ceased to be agricultural lands. Section 2(14)(iii) of the Income-tax Act, 1961, is valid.\" \n\n 16. The decision of the Kerala High Court in CITv. T.K. Sarala Devi [1987] 167 ITR 136 also held a similar view. \n\n 17. Mr. Kothari, learned advocate appearing for the writ petitioner, admitted that indeed there was a divergence of opinion between the various High Courts as to the taxability of sale of agricultural lands within the municipal limits, but the sale of agricultural lands outside the municipal limits did not attract the income-tax even now. \n\n 18. The writ petitioner produced along with its writ application the following documents which were made annexures to the writ application : \n\n \"1. Copy of the return of income for the assessment year 1987-88 was made annexure-1. \n\n 2. Copy of the return of income for the assessment year 1988-89 was made annexure-2. \n\n 3. Copy of the assessment order for the assessment year 1987-88 was made annexure-3. \n\n 4. Copy of the assessment order for the assessment year 1988-89 was made annexure-4. \n\n 5. Copy of the first appeal order for the assessment years 1987-88 and 1988-89 was made annexure-5. \n\n 6. Copy of penalty order under Section 273(2)(b) of the Income-tax Act for the assessment year 1987-88 was made annexure-6. \n\n 7. Copy of penalty order under Section 273 for the assessment year 1988-89 was made annexure-7. \n\n 8. Copy of penalty order under Section 273(2)(aa) in the case of the partner for the assessment year 1988-89 was made annexure-8. \n\n 9. Copy of written submission of the assessee before the Income-tax Officer was made annexure-9. \n\n 10. Copy of the memo of appeal before the Income-tax Appellate Tribunal in Form No. 36 for the assessment year 1988-89 was made annexure-10. \n\n 11. Copy of reply to penalty notice dated January 4, 1992, was made annexure-11. \n\n 12. Copy of the application for grant of stay to the Deputy Commissioner of Income-tax dated March 16, 1992, was made annexure-12. \n\n 13. Copy of the application for grant of stay to the Deputy Commissioner of Income-tax dated March 30, 1992, was made annexure-13. \n\n 14. Copy of the application for stay to the Commissioner of Income-tax dated March 30, 1992, was made annexure-14. \n\n 15. Copy of the application for grant of stay to the Income-tax Officer dated March 30, 1992, was made annexure-15. \n\n 16. Copy of the order dated March 25, 1992, of the Income-tax Officer rejecting the stay application was made annexure-16. \n\n 17. Copy of the order of the Deputy Commissioner of Income-tax dated March 26, 1992, rejecting the stay application was made annexure-17.\" \n\n 19. It was thus evident that the respondents-authorities refused to grant stay of penalty in question and have resorted to coercive measures for recovery of various penalties imposed by the Assessing Officer and at that stage the writ petitioner moved this court contending, inter alia, that the sale of agricultural lands in question could not give rise to any taxable income under the Income-tax Act and the same being in the nature of revenue from the agricultural lands could not be taxed under the Income-\n\ntax Act, 1961. The relevant provisions of the Income-tax Act including the impugned amendment effected by the Finance Act, 1989, with retrospective effect from April 1, 1970, should therefore be declared ultra vires, unconstitutional and without legislative competence. The power to tax agricultural income lies within the State Government as per entry 46 of List II of Schedule Seven and entry 82 of List I did not envisage any power to levy income-tax on such agricultural income. The impugned amendment could not even be said to be actually removing the defects or anomalies as pointed out by various High Courts holding, inter alia, that the profits derived on the sale of agricultural lands amounted to revenue from such agricultural lands. It was exempt under Section 10(1) of the Income-tax Act. Parliament had no legislative competence to impose tax on such profits or revenue. It is not that it is merely an incidental encroachment on the legislative field occupied by the State Government, but it was a clear and typical legislation apparently in colourable exercise of power by Parliament. The profit derived from the sale of agricultural land did not alter the character of the income which continued to be agricultural income and was as good as income derived from agricultural operations. Therefore, if Parliament could not tax the income derived from agricultural operations, Parliament could not also impose tax on the sale of agricultural land. The insertion of the Explanation by the Finance Act, 1989, which was only clarificatory in nature could not be said to be removing the defects by the Legislature as pointed out by the courts of law. Moreover, if the Legislature or Parliament has no legislative competence to enact a particular law much less it can be said to be competent to remove such defects. It was the contention of Mr. Kothari that so long as the income from agricultural land irrespective of the area where it is situated continues to be agricultural income, Parliament remains without any legislative competence to impose any tax thereon. \n\n 20. It was further urged that the retrospective amendment effected by the Finance Act, 1989, with retrospective effect from April 1, 1970, was absolutely illegal, confiscatory, ultra vires and unconstitutional. There is no rational nexus for giving retrospective effect to such amendment particularly when it hits prejudicially persons like the writ petitioner-firm with great hardship and the impugned penalty on the writ petitioner-firm and its partners is only on account of the retrospective effect of the amendment. It is well settled that the penalty could not be imposed with retrospective effect unless the writ petitioner could be said to be imbued with the guilty mind or mens rea. Even the impugned retrospective amendment could not have been envisaged by the writ petitioner-firm and there was no question of paying any advance income-tax on such income. Therefore, the imposition of impugned penalty was wholly illegal and without jurisdiction. \n\n 21. It was further urged that there was no rational nexus for the cut-off date being given as April 1, 1970, and, therefore, the said date was without any reasonable basis or rational nexus. There was no justification for making any distinction between one class of agricultural lands merely because some particular agricultural lands fall within or outside the municipal limits. The agricultural land remains the same and partakes of the character even though the character of the income derived from the agricultural operations as well as sale of agricultural lands remained the same irrespective of the fact whether it was located within or outside the municipal limits. It was, therefore, urged that there could be no justification for making any discrimination or classification between the two types of such lands similarly situated to each other. It was contended that such discrimination and/or classification would also amount to violation of Article 14 of the Constitution of India. \n\n 22. It was further submitted that the impugned amendment effected in the Income-tax Act particularly with retrospective effect that the sale of agricultural lands situated within the municipal limits would give rise to taxable income and not agricultural income was a colourable exercise of power by Parliament. There was thus violation of Article 14 of the Constitution of India. \n\n 23. It was further submitted that the income from a sale of agricultural lands treated as business income by the assessing authority was obviously illegal and without jurisdiction. Merely because a partnership firm was formed to sell the agricultural lands in question where admittedly agricultural operations were being carried on, the same cannot be converted into or changed into the character of income. There was no prohibition for a partnership firm to derive agricultural income. It was accordingly prayed by the writ petitioner that the impugned assessment orders as also the penalty proceedings be quashed and the amount already realised be refunded back to the writ petitioner. \n\n 24. It was further contended that the impugned rejection of the stay application by the authorities of the Income-tax Department by a wholly non-speaking and cryptic order was illegal. \n\n 25. The respondents contested the writ application by filing a reply. It was submitted by the respondents that the tax in question was never disputed. It was a legal and valid tax and the penalties imposed were within the due process of law. \n\n 26. It was submitted that the assessee-firm did not carry out any agricultural operations on the land in question and the land was contributed by the partners as their capital. The assessee-firm divided the land in suitable sizes of the plots and such plots were sold to a large number of persons and in the process, the assessee-firm earned profits thereon. The process of division/development of the land into smaller plots for the purposes of sale as residential plots amounted to business activity. Moreover, the asses-see itself has filed land trading account along with the returns filed wherein the value of the land as opening stock, sale of land, land in closing stock and gross profit has been shown. The other expenses incurred on account of interest and miscellaneous expenses have further been deducted from such profit to arrive at the net profit. This shows that the assessee itself has treated the land contributed by the partners as stock-in-trade. Moreover, the aims and objects of the assessee-firm given in the partnership deed also indicated that the firm was constituted for carrying on business of purchase and sale amongst others of agricultural land. \n\n 27. It was submitted by the respondents that the controversy has been set at rest by the decision in G.M. Omer Khan v. CIT (Addl) [1992] 196 ITR 269 (SC).\n\n 28. In the said reported decision, the appellant was the owner of a property known as Khader Bagh comprising buildings and lands measuring 45 acres. This property was situated in a village which had a population of less than ten thousand, but that village was part of the Hyderabad municipality. An extent of this property was under requisition by the Central Government under the Requisitioning and Acquisition of Immovable Property Act, 1952. Later, the Government acquired 36 acres and 22 guntas of the land and passed a formal order on February 27, 1970. The publication of the formal order in the Official Gazette was made on March 13, 1970. The appellant claimed, inter alia, that the land was agricultural land and that it was not a capital asset because it was situated in a village with a population of less than ten thousand and that the transfer for purposes of capital gains took place prior to March 1, 1970, when the definition of \"capital asset\" was amended to include certain types of agricultural land. The High Court of Andhra Pradesh held that the land acquired was a \"capital asset\" within the meaning of Section 2(14)(iii)(a) of the Income-tax Act, 1961, as the words \"which has got a population of more than ten thousand\" qualified \"the municipality or cantonment\" and not the expression \"area\", and that the transfer took place only on March 13, 1970, on the publication of the order in the Official Gazette. On an appeal to the Supreme Court, it was held affirming the decision of the Andhra Pradesh High Court (i) that the interpretation put upon Section 2(14)(iii)(a) by the Andhra Pradesh High Court was unexceptionable and rational and (ii) that, in view of Section 7(2) of the Requisitioning and Acquisition of Immovable Property Act, 1952, the date of publication of the notification for acquisition was the date when the property vested absolutely in the Government and that was the date of transfer for purposes of capital gains. \n\n 29. It was further submitted that the writ petitioner has not exhausted the other remedies as provided under the Income-tax Act before approaching\n\nthis court and in view of the alternative remedy being available to the writ petitioner, the present writ application is liable to be dismissed in limine. \n\n 30. It was further contended that the sale of agricultural land does give rise to taxable income in view of the amendment incorporated in the statute by the Finance Act, 1989, which came into operation with retrospective effect from April 1, 1970. It was further contended that the writ petitioner cannot even seek relief in the garb of the land being used for agricultural purposes because it was not so used at all. Article 366(1) of the Constitution of India defines \"agricultural income\". For the purposes of the Constitution, unless the context otherwise requires, the meaning of the term \"agricultural income\" had to be gathered from the definition of the term in the income-tax law of the country as is in force. With this also under Article 246(1) read with entry 82 of List I, the Union List as given in the Seventh Schedule to the Constitution, the Union Parliament was competent to define the term for the purposes of the Constitution and the Act and the power to define comprehends in itself the power to amend and modify the same. \n\n 31. The legislation by Parliament providing for taxation of capital gains, i.e., on income within the scope of entry 82 in List I of the Seventh Schedule would be a piece of legislation, the pith and substance of which is the tax on income other than agricultural income and if that piece of legislation also affects lands which have ceased to have all the characteristics of agricultural land and have already acquired other characteristics, such encroachment on the other field of legislation is purely incidental and the doctrine of pith and substance would certainly apply to such a piece of legislation. Parliament is, therefore, competent to define the term \"agricultural income\", \"agricultural land\" and \"capital asset\" and thus, bring to tax, capital gains arising or accruing from agricultural lands situated within the municipal limits and within 8 kms. of notified municipal areas, which had ceased to be agricultural lands. Thus, it was contended that there was no violation of Article 14 of the Constitution of India. It was further contended that the Assessing Officer was right in law in holding the income as a \"business income\". The Commissioner of Income-tax (Appeals) while confirming the order of the Income-tax Officer has also rightly held that when the land in question was never put to agricultural use, it was always the business income of the assessee. The orders of the Tax Tribunal/CIT (Appeals) cannot be challenged in the High Court in the garb of challenging the vires of the statutory provisions. The writ petitioner had other equal and adequate alternative remedies by way of appeal under the Income-tax Act and, hence, the present writ application was liable to be dismissed on this score. \n\n 32. In Sarifabibi Mohmed Ibrahim v. CIT [19931 204 ITR 631, it was held by the Supreme Court that whether a piece of land is agricultural land or not \n\n\nis essentially a question of fact. Several tests have been evolved in the decisions of the Supreme Court and the High Courts, but all of them are more in the nature of guidelines. The question has to be answered in each case, having regard to the facts and circumstances of that case. There may be factors both for or against a particular point of view. The court has to answer the question on a consideration of all of them a process of evaluation. The inference has to be drawn on a cumulative consideration of all the relevant facts.\n\n 33. The appellants in the said reported case were co-owners of a plot of land inherited from an ancestor through their father. On March 15, 1967, they agreed to sell the land to a housing co-operative society and, to enable them to complete the transaction, they applied in June, 1968, and March, 1969, for permission to transfer the land for a non-agricultural purpose and the permission was granted in April, 1969. A number of sale deeds were executed in May, 1969, and the purchasing society applied for conversion of the land to non-agricultural purposes, viz., construction of buildings. The question was whether the profit from the sale of the land was assessable to capital gains tax. The facts in favour of the appellants were that the land was registered as agricultural land in the revenue records and the land revenue had been paid in respect thereof till the year 1968-69, there was no evidence that the land was put to non-agricultural use and the land was actually cultivated till and including the agricultural year 1964-65, there were agricultural lands abutting the land and the appellants had no other source of income except the income from those lands. The facts against the appellant were that the land was situated within the municipal limits of the Surat Municipality and at a distance of one kilometre from the Surat railway station, the land was not cultivated from 1965-66 until it was sold in 1969, the appellants had entered into an agreement with a housing co-operative society to sell the land for construction of houses, they had applied in June, 1968, and March 1969, for permission to sell the land for non-agricultural purposes and soon after obtaining permission they executed the sale deeds in May, 1969, and the land was sold at a rate of Rs. 23 per sq. yard and the purchasing society commenced construction operations within three days of purchase. On a consideration of the contending factors, the Gujarat High Court held that the land was non-agricultural land and tax was leviable on the capital gains arising from the transfer. On an appeal to the Supreme Court, it was held affirming the decision of the High Court that the entering into the agreement to sell the land for housing purposes, the applying for and obtaining permission to sell the land for non-agricultural purposes, and its sale soon thereafter and the fact that the land was not cultivated for a period of four years prior to its sale, coupled with its location and the price at which it was sold outweighed the circumstances appearing in \n\nfavour of the appellant's case and established that the land was not agricultural land when it was sold. The appellants had no intention to bring it under cultivation at any time after 1965-66 and certainly not after they entered into the agreement to sell the land to the housing co-operative society. It was further observed by the Supreme Court that the High Court was right in holding that the land was not agricultural land at the time of its sale and the profit arising from its sale was liable to capital gains tax. \n\n 34. The Gujarat High Court in the self-same case being CIT v. Sarifabibi Mohmed Ibrahim [1982] 136 ITR 621, held that the fact that a particular piece of land is entered as agricultural land in the revenue records and assessed as such under the Land Revenue Code would raise a presumption that the land is agricultural land, but the presumption can be rebutted by other circumstances pointing to the contrary conclusion. The fact that agricultural operations were carried on in the past or were carried on currently and that it was not converted to non-agricultural user would also raise a presumption that the land is agricultural. However, these factors are not decisive inasmuch as agricultural crop can be raised even on building sites and sometimes a crop is grown in order not to allow the land to remain idle while awaiting sale for non-agricultural purposes or in order to avoid payment of revenue at a higher rate or in order to avoid payment of capital gains tax. The facts that raise a presumption that the land is non-agricultural are--(i) situation of the land, for example, land situated in an urban area within the municipal limits in the proximity of buildings and building sites, (ii) sale of land to a non-agriculturist for non-agricultural purposes, (iii) sale of land on a square yard basis at a price comparable to prices fetched by building sites, (iv) sale at price at which no bona fide agriculturist would purchase for genuine agricultural operations, and (v) when the price is such that no prudent owner would sell it at a price worked out on the capitalisation method taking into account its optimum agricultural yield in the most favourable circumstances. When the question arises as to the real nature of land in the context of land situated in urban areas, the crucial two-fold test would be to find out if any prudent agriculturist would purchase the land in order to carry on agricultural operations having regard to the price he would have to pay and whether the owner of such land would sell it by valuing it as property yielding agricultural produce on the capitalisation method even on the basis of optimum yield and maximum sale price. The effect of the totality of the circumstances must be considered. It was held in the facts of the case that the land was non-agricultural land and capital gains tax could be levied on the profits arising from its sale and this finding was affirmed by the Supreme Court.\n\n 35. In a similar case in Gopal C. Sharma v. CIT [1994] 209 ITR 946 (Bom), where there was transfer of land used in the past for agricultural purposes\n\nsituated in the industrial area and not intended for agricultural purposes in future was sought to be the subject-matter of transaction and the question arose as to whether gains on transfer of land would be agricultural income and subject to the Income-tax Act, it was observed that the business was in the nature of trade. Even though the lands were acquired by the assessee from his father and part of the lands was subject to the acquisition proceedings and part of the lands was subject to sale agreement, the transfer of lands is not an adventure in the nature of trade and the gains are assessable as capital gains. It was further held that the expression \"agricultural land\" is not defined in the Income-tax Act, 1961. The underlying object of the Act to exempt \"agricultural income\" from income-tax is to encourage actual cultivation or de facto agricultural operations. The actual user of the land for agricultural purpose or absence thereof at the relevant time is undoubtedly one of the crucial tests for the determination of the issue. It is well-settled that the nature and character of land may undergo a change depending upon its situation, growth of the locality or zone in which it is situated and its potentiality. The fact that the land is sold or transferred to a non-agriculturist for a non-agricultural purpose or that it is likely to be used for non-agricultural purposes soon after its transfer is also a relevant factor germane to the determination of the issue. Merely because the land was used for agricultural purposes in the remote past or it continues to be assessed to land revenue as agricultural land is not decisive. In order to ascertain the true character and nature of the land it must be seen whether the land had been put to use for agricultural purposes for a reasonable span of time prior to the relevant date and further as to whether on the date of the transfer the land in question was intended to be put to use by the purchaser for agricultural purposes for a reasonable span of time in future. The profit motive of the assessee selling the land without anything more by itself can never be decisive for determination of the issue as to whether the transaction amounted to an adventure in the nature of trade. The Income-tax Officer, the Appellate Assistant Commissioner and the Tribunal held that the lands could not be considered as agricultural lands. The Appellate Assistant Commissioner held that the transfers in question did not constitute adventure in the nature of trade, but that the gains could be taxed as capital gains. The Tribunal held that the transactions concerning the transfer of reference lands constituted adventure in the nature of trade and the profits and gains thereof were liable to be taxed as business income. On a reference, it was held by the Bombay High Court that the finding as arrived at by the Appellate Assistant Commissioner and the Tribunal that the lands had not in fact been used or intended to be used for agricultural purposes at the relevant time since several years was such a finding of fact which could not be characterised as perverse or unsupported by evidence or erroneous in law\n\njudged from the original inference drawn by the Income-tax Officer. The lands could not be considered as agricultural lands on the date of transfer. It was further held that the lands did not constitute stock-in-trade of the assessee. As far as the reference lands were concerned, the assessee had no choice, but to complete the sale of lands in favour of the company and file a claim for compensation with the Special Land Acquisition Officer in respect of the lands under acquisition. These transactions did not constitute an adventure in the nature of trade and were liable to be taxed to capital gains tax and not on the footing of \"business income\",\n 36. At one stage, the High Court of Madras in T. Sarojini Devi v. T. Sri Kristna, AIR 1944 Mad 401, had taken a view that any land which was capable of being used for agriculture was liable to be considered as agricultural land. This view was in terms overruled by the Supreme Court in its judgment in CWT v. Officer-in-Charge (Court of Wards), Paigah [1976] 105 ITR 133. The latest judgment of the Supreme Court in Smt. Sarifabibi Mohmed Ibrahim v. CIT [1993] 204 ITR 631 clinched the issue. In the former case of CWT v. Officer-in-Charge (Court of Wards), Paigah [1976] 105 ITR 133 (SC), the Constitutional Bench of the Supreme Court had in terms observed that the expression \"agricultural land\" could not be given a wide meaning as desired by the assessee in view of the underlying object of the Act providing for exemption of land being to encourage cultivation of the land. In this case, the Supreme Court also overruled the Full Bench judgment of the High Court of Andhra Pradesh which was the subject-matter of the appeal before the Supreme Court in the case of CWT v. Officer-in-Charge (Court of Wards), Paigah [1976] 105 ITR 133. The apex court emphasised that the object of the Legislature in exempting agricultural land from tax was to encourage the cultivation of agricultural land and agricultural operations. The Supreme Court considered the object of the Legislature in exempting agricultural land from taxation for purposes of the Wealth-tax Act, 1957, and it is obvious that the same is the object of exemption for granting exemption in respect of \"agricultural income\" for purposes of the Income-tax Act, 1961 as well. After laying down the narrower test for the purposes of determining the nature and character of land at the time of transfer for the purpose of the Income-tax Act, 1961, and the Wealth-tax Act, 1957, the apex court remanded the matter to the Tribunal for fresh determination of the issue in the light of the principles laid down. In para-graph 13 (page 640 of 204 ITR) of its judgment, the Supreme Court referred to the judgment of the Bombay High Court in CIT v. V.A. Trivedi [1988] 172 ITR 95 and approved the ratio of the said judgment. In paragraph 14 (page 641 of 204 ITR) of its judgment, the Supreme Court referred with approval to the observations made by the Division Bench of the Bombay High Court in CIT v. V.A. Trivedi [1988] 172 ITR 95 to the effect that to ascertain the true character and the nature of the land,\n\n\nit must be seen whether the land had been put to use for agricultural purposes for a reasonable span of time prior to the relevant date and further as to whether on the date of the transfer the land in question was intended to be put to use by the purchaser for agricultural purposes for a reasonable span of time in future. The relevancy of the test of \"factual user\" of the land for agricultural purposes was emphasised by the Division Bench of the Bombay High Court in Trivedi's case [1988] 172 ITR 95 after interpreting and applying the ratio of the judgment of the Supreme Court in the case of CWT v. Officer-in-Charge (Court of Wards), Paigah [1976] 105 ITR 133. The said test was duly approved by the Supreme Court in its latest decision in Sarifabibi's case [1993] 204 ITR 631.\n\n 37. Be that as it may, we do not think that the writ petitioner is entitled to succeed on the question of lack of constitutional vires of the Explanation inserted in Section 2(1A) of the Income-tax Act, 1961, by way of addition of the said Explanation that the revenue derived from the land should not include and should never be deemed to have included any income arising from the transfer of any land referred to in item (a) or item (b) of sub- Clause (iii) of Clause (14) of this section. \n\n 38. The present writ petition is being instituted by the petitioner when his assessment order passed by the Income-tax Officer was challenged by him before the Commissioner of Income-tax (Appeals) and the appeals were dismissed. The appellate order was again challenged by the petitioner before the Income-tax Tribunal and during the pendency of the appeal before the Income-tax Tribunal, the Tribunal refused to stay the operation of the order of assessment. The petitioner while challenging the assessment orders in the writ petition raised the question of vires of the amendment inserted by the Finance Act of 1989. The ground of challenge to the amendment is the Explanation added to the statute for removal of doubts whereby it was sought by the Legislature that the revenue derived from the land shall not include and should never be deemed to have included any income arising from the transfer of any land referred to in certain clauses of the Act. The petitioner has made the basis of its challenge to this Explanation a case decided by the Bombay High Court in the matter of Manubhai A. Sheth [1981] 128 ITR 87. The petitioner wants this court that as the Bombay High Court has read down the Explanation inserted in the year 1970, the present Explanation should also be read down and the income of the petitioner which has come from the source of the sale of agricultural land should not be included in the income. It was on account of the challenge to the vires of the Explanation that the petitioner came to this court directly before waiting for the result of its appeal before the Income-tax Appellate Tribunal. The contention of the petitioner is that it chooses to come to this court because unless the Explanation is held to be ultra vires, the result of the appeal before the Income-tax Appellate Tribu-\n\nnal is almost a forgone one. The Appellate Tribunal cannot go into the question of the constitutionality of the Explanation inserted since the petitioner challenges the legislative competence of Parliament in introducing the Explanation and under reference, the present writ petition is filed. During the pendency of the present writ petition, the Income-tax Appellate Tribunal decided the appeal of the petitioner and dismissed the same. The petitioner made an application for amendment in the writ petition and sought to implead a challenge to the order of the Income-tax Appellate Tribunal as well. The amendment application filed by the petitioner was opposed by the respondents, inter alia, on the ground that the order of the Income-tax Appellate Tribunal is not liable to be challenged directly in a writ petition and the same can only be challenged before this court by preferring an application for making reference. The amendment application was not decided and was kept pending, which is being also disposed of along with the writ petition. \n\n 39. A fundamental question which determines the fate of this case is the character of the land in question. The land in question was held jointly by five of the nineteen partners of the firm. These five co-owners along' with fourteen others entered into a partnership and at the time when the co-owners of the land joined the partnership, the land stood transferred to the firm at a consideration of Rs. 21.5 per square yard. According to the respondent authorities and the Income-tax Appellate Tribunal, the manner and the mode of bringing in the land into partnership holds out the intention of the petitioner that it never intended to use the land in question for agricultural purpose. It was not in the agricultural denomination that the land was included in the partnership assets. It was included as stock-in-trade in denomination of yards. That agricultural land is not measured in yards and the very nature of measurement suggests that the intention of the petitioner was trading activity in land. That being the position, the stock-in-trade in terms of land measured in yards suggests that the land was never intended to be used for agricultural purpose when it was brought into the partnership assets, it was converted into plots and it had been given measurement in yards. That being the position, the land ceased to have the character of agricultural land used for agricultural purpose. Since the land has lost the character of agricultural land used for agricultural purpose, the reading down applied by the Bombay High Court of the Explanation inserted in the 1970 offers no guideline as the land has lost its character of being agricultural land. That being the position, the land having lost its character as agricultural land, it is not necessary for us to go into the niceties of the interpretation of the definition and adjudge the argument advanced by the petitioner that the definition inserted in 1990 has to be read in the same manner as the Bombay High Court read the Explanation of 1970. Since we are concurring with the findings of the\n\nincome-tax authorities on the basis of the detailed examination of the facts involved in the case, the question sought to be raised by the petitioner regarding the vires is not necessary to be decided. The detailed examination of the facts, the character of land and the memorandum of incorporation of the firm clearly hold out that the petitioner firm was to do business in the sale and purchase of agricultural lands and the agricultural produce, etc. The agricultural activities were not defined in its partnership deed and in the trading account filed by the firm, no expenditure was shown to have been incurred on any such operations which has the colour of agricultural operations. Therefore, the character of the land has rightly been held not to be of agricultural nature and in this background, the legislative competence of Parliament in introducing the Explanation in Section 2(1A) of the Income-tax Act of 1961, by the Amendment Act of 1989 is not required to be gone into, since the ground which was sought to be raised by the petitioner was the ground of vires of the Explanation and on the question of nature of the land, after a detailed examination, we do not find that it is at all necessary to judge the vires as the land has lost its character as agricultural land, therefore, the writ petition cannot be entertained by this court. The question of vires, therefore, is not gone into and the petitioner is not permitted to raise this question. Since we have not allowed the amendment and have treated the amendment application as rejected, the judgment of the Income-tax Appellate Tribunal which was sought to be assailed before us in the writ petition, is also not permitted to be assailed in the writ petition. The writ petitioner must seek its relief on merits before the appropriate forum. \n\n 40. The writ petition, having no force, is dismissed." }, { "title": "Income-Tax Officer vs Roshni Cold Storage (P.) Ltd. And Ors. on 20 July, 1998", "url": "https://indiankanoon.org//doc/1639304/", "text": "Income-Tax Officer vs Roshni Cold Storage (P.) Ltd. And Ors. on 20 July, 1998\nEquivalent citations: [2000]245ITR322(MAD)\nJUDGMENT\n\n \n\nV. Kanakaraj, J.\n \n\n 1. The above criminal appeals have been directed against the judgment dated March 9, 1987, made in respectively E. O. C. C. No. 1374 to 1380 of 1985 and E. O. C. C. No. 1381 and 1382 of 1985 by the Court of Additional Chief Metropolitan Magistrate, Egmore, Madras, finding the accused therein not guilty of the offences under Section 276B and Section 276B read with Section 278B of the Income-tax Act, 1961, and under Sections 120B, 420 and 511 of the Indian Penal Code in the case concerned with C. A. No. 524 of 1987 and under Section 276B and Section 276B read with Section 278B of the Income-tax Act, 1961, regarding the case concerned with C. A. No. 525 of 1987, Since the parties and the nature of the offences are one and the same both the above appeals have been jointly heard and common judgment is delivered herein. \n\n 2. The charge, as framed by the trial court against the respondents/ accused is that A1-company failed to deduct the full amount of income-tax at source or having deducted it failed to remit the tax deducted at source from the interest amount paid to New India Maritime Agencies (P.) Ltd., represented by the fifth accused as required under Section 194A of the Income-tax Act, 1961, for the financial years ended with December 31, 1973, to December 31, 1979 (in the case concerned with C. A. No. 524 of 1987), Rs. 37,108, Rs. 42,891, Rs. 55,806, Rs. 63,469, Rs. 60,195, Rs. 65,109 and Rs. 68,728, respectively, into the credit of the Central Government and (in the case concerned with C. A. No. 525 of 1987) the financial year ended with December 31, 1980, and December 31, 1981, Rs. 57,338 and Rs. 50,706, respectively, into the credit of the Central Government within the period of two months specified in Rule 30(1)(b) of the Income-tax Rules, 1962, read with Sections 200 and 204 of the Income-tax Act, 1961, and thereby committed an offence punishable under Section 276B(ii) (7 counts) (concerned with C. A. No. 524 of 1987) and (2 counts) (concerned with C. A. No. 525 of 1987) of the Income-tax Act, 1961. \n\n 3. Secondly, that A2 to A5 being directors of the first accused company from January 1, 1973, to December 31, 1979 (concerned with C. A. No. 524 of 1987), and January 1, 1980, to December 31, 1981 (concerned with C. A. No. 525 of 1987), responsible to the first accused company for the conduct of the business, have by their failure to deduct or after deduction failure to remit the tax deducted at source to the credit of the Central Government from the interest amount paid to the New India Maritime Agencies (P.) Ltd., represented by the fifth accused as required under Section 194A read with Section 200 of the Income-tax Act, 1961, the sum as aforementioned in charge No. 1, thereby committing an offence punishable under Section 276B(ii) read with Section 278B (7 counts) concerned with C. A. No. 524 of 1987 (2 counts) and C. A. No. 525 of 1987 and \n \n\n Thirdly (C. A. No. 524 of 1987 alone) that A2 being the managing director of A-1 company and A3 to A5 being the directors of A1 responsible for its management and A7 being the sister concern of A1 and A5 being its managing director and A3 and A4 being directors of A7, being responsible for its management between December, 1973, to December, 1979, agreed to do an illegal act, namely, failing to deduct or having deducted failing to remit into the credit of the Central Government within two months specified in Rule 30(1)(b) of the Income-tax Rules, 1962, read with Sections 200 and 204 of the Income-tax Act, 1961, and the tax deductible at source on interest for the period from 1973 to 1979, respectively, the sum of Rs. 37,108, Rs. 42,891, Rs. 55,806, Rs. 63,469, Rs. 60,195, Rs. 65,109 and Rs. 68,728 and thereby attempted to cheat the Income-tax Department from levying interest due on the tax deducted at source and thereby A1 to A5 and A7 committed an offence punishable under Section 420 read with Section 511 of the Indian Penal Code (7 counts). \n\n 4. In proof of the case concerned with C. A. No. 524 of 1987 the appellant/ prosecution had examined five witnesses for oral evidence as P. Ws. Nos. 1 to 5 and had marked 29 documents for documentary evidence as exhibits P1 to P29 and the accused named therein are seven in number, whereas, the case concerned with C. A. No. 525 of 1987. In proof of the above charge the prosecution had examined four witnesses for oral evidence as P.Ws. Nos. 1 to 4 and had marked 18 documents for documentary evidence as exhibits P1 to P18, wherein the accused are six in number. The only alteration being the seventh accused, New India Maritime Agencies (P.) Ltd., concerned in C. A. No. 524 of 1987, has not been made an accused in the other case concerned With C. A. No. 525 of 1987 and all the other six accused have been arrayed in the same manner in both the cases. \n\n 5. With the above evidence placed before the trial court and weighing the same with the legal yardstick and appreciating the said evidence in its own way in the context of the position of law pertaining to the subject, ultimately the trial court had arrived at the conclusion to acquit all the accused therein in both the above matters, challenging which the complainant/Department has come forward to file the two separate memorandums of criminal appeals but in both offering the same grounds which are common to both such as: (i) that the lower court misdirected itself on question of law relating to Section 278B of the Income-tax Act, and its application thereof; (ii) that the trial court failed to appreciate the evidence of prosecution that once the deduction of tax deducted at source is done under Section 194A it is the duty of the company to remit the same to the Government account within the time prescribed under Rule 30 of the Income-tax Rules; (iii) that the lower court failed to note that Section 194A clearly states that any interest paid to any person either in cash or by issue of cheque or by draft or by any other mode, shall deduct income-tax thereon at rates and its finding that in cases of transferring into the accounts of the persons, the offence is not committed and the company or the director is not liable is contrary to law ; (iv) that the lower court failed to note that in a private company which the directors and the managing director who are responsible for the planning of the company and they are responsible under the statute to carry out the duty to deduct the tax at source as required by the law ; (v) that the finding of the trial court that the directors are not responsible for the deduction and payment of the tax at source is complete misunderstanding of the law especially in view of Section 278B of the Income-tax Act; (vi) that the lower court holding that in the absence of a notice under Section 2(35) of the Income-tax Act issued by the Income-tax Officer to the directors, they cannot be made liable for the non-deduction is incorrect especially when the decision on which the trial court has been challenged and pending before the Supreme Court and especially a petition for special leave has been granted and the case having been admitted and kept pending; (vii) that the lower court was in complete error to state that the company was not in a position to pay because of financial stringency and hence the delay is not wilful is incorrect and is contrary to law ; (viii) that the interpretation of without reasonable cause or excuse in Section 276B by the lower court is incorrect and is not in consonance with the principle of interpretation of statutes ; (ix) that the lower court holding that it is for the prosecution to prove there was no reasonable cause or excuse for the non-deduction or after deduction non-payment within the time is contrary to the established principle of law ; (x) that the lower court has failed to note that the circumstances under which the delay in payment has occurred are exclusively within the knowledge of the accused and it is for the accused to prove the said circumstances under Section 106 of the Evidence Act ; (xi) that the lower court ought to have held that accused Nos. 1 to 6 clearly conspired in the postings of the interest due on payment of interest in such a manner as to evade interest payable to the Department on the tax deducted at source. \n\n 6. Prior to entering to dissect the merits of the above appeals it is relevant to note the guidelines provided by the apex court as per its judgment reported in S. Madhavan Nair v. State of Kerala [1975] MLJ (Crl.) 239, 243, wherein it has been held that \"in an appeal under Section 417 of the Code of Criminal Procedure, against an order of acquittal, the High Court has full power to review at large the evidence on which the order of acquittal was founded and to reach the conclusion that upon the evidence the order of acquittal should be reversed. No limitation should be placed upon that power unless it be found expressly stated in the Code, but in exercising the power conferred by the Code and before reaching its conclusion upon facts the High Court should give proper weight and consideration to such matters, as (1) the view of the trial judge as to the credibility of the witnesses ; (2) the presumption of innocence in favour of the accused, a presumption certainly not weakened by the fact that he has been acquitted at his trial; (3) the right of the accused to the benefit of any real and reasonable doubt; and (4) the slowness of an appellate court in disturbing a finding of fact arrived at by a judge who had the advantage of seeing the witnesses. The High Court should also take into account the reasons given by the court below in support of its order of acquittal and must express its reasons in the judgment which led it to hold that the acquittal is not justified. Further if two conclusions can be based upon the evidence on record, the High Court should not disturb the finding of acquittal recorded by the trial court and if acquitting the accused is not unreasonable, the occasion for the reversal of that view would not arise.\"\n\n 7. In the light of the above judgment and in consideration of the arguments advanced on the part of learned counsel for the respondents/ accused and on perusal of the judgment of the trial court, the grounds of the above appeals and the other facts and circumstances connected to the case and of course the evidence made available before the trial court, if this court is to go into the merits of the case, it is relevant to consider\nthose points brought forth by the respondents in the form of written sub\nmissions, wherein it is contended that the trial court has based its acquittal judgment mainly on three grounds : They are : \n\n (i) that the Department did not issue the statutory notice to respondents/accused Nos. 2 to 5 as required under Section 2(35) of the Income-tax\nAct, 1961, treating them as the principal officers before launching a prosecution for the offence under Section 276B of the Income-tax Act, 1961,\nwhich requirement is mandatory ; \n\n (ii) that the ingredients of Section 490 of the Indian Penal Code, has not been attracted and the prosecution has not let in any evidence in this regard. None of the prosecution witnesses speak anything about this aspect ; \n\n (iii) that the respondent/accused No. 1-company, Roshni Cold Storage\n(P.) Ltd., has been incurring heavy losses from the date of its incorporation\nand hence there was reasonable cause and excuse for the delayed remittance of the tax deducted at source which fact was admitted by the Department. \n\n Ground No. 1 : The statutory notice as required under Section 2(35) of the Income-tax Act, 1961, was not issued to respondents Nos. 2 to 5/ accused Nos. 2 to 5 treating them as the principal officers of the accused No. 1-company before launching the prosecution for an offence under Section 276B of the Income-tax Act, 1961. Such a notice as contemplated under Section 2(35)(b) of the Income-tax Act, 1961, is a mandatory requirement in view of the meaning of \"person responsible for payment\" under Section 204. Section 194A imposes liability to deduct tax at source on the credit or payment of interest other than \"interest on securities\". Section 194A(4) uses the expression \"the person responsible for making payment\". Under Section 204(iii), the expression \"person responsible for paying\" means--. . .\"if the payer is a company, the company itself including the principal officer thereof\". The contravention of Section 194A is made an offence punishable under Section 276B. If the offence is committed by the company, the prosecution for the offence under Section 276B has to be launched against the company itself and its principal officer. The expression \"principal officer\" is defined under Section 2(35) wherein under Sub-clause (a) the persons mentioned therein become liable for any violation as the principal officer. The managing director or director is not included within the ambit of Sub-clause (a) of Section 2(35). In the case of the Income-tax Officer seeking to prosecute the managing director or director along with the company for an offence under Section 276B, then he has to issue a notice under Sub-clause (b) of Section 2(35) expressing his intention to treat the managing director or director as the principal officer of the company. It is an admitted fact that no notice as required under Section 2(35)(b) was issued to respondents/accused Nos. 2 to 5 and their acquittal on this ground is supported by the ruling rendered by this court in M.R. Pratap v. V. M. Muthuramalingam, ITO [1984] 149 ITR 798, wherein it was held (headnote) :\n \"Consequently, the managing director of a company cannot be held liable under Section 276B unless the Income-tax Officer has served a notice on him under Section 2(35)(b) and informed him of his intention to treat him as the principal officer of the company.\" \n\n The introduction of Section 278B into the statute book with effect from October 1, 1975, by the Taxation Laws (Amendment) Act, 1975, does not alter or take away the mandatory requirement of issuing notice as contemplated under Section 2(35)(b) for an offence under Section 276B. While inserting Section 278B, no corresponding changes have been introduced either under Section 2(35)(b) or under Section 204(iii) of the Income-tax Act, 1961. Thus, such a statutory notice as contemplated under Section 2(35)(b) is mandatory only for offence under Section 276B in view of the meaning of \"person responsible for paying\", \"if the payer is a company, the company itself including the principal officer thereof\" in Section 204(iii). For other offences under the Income-tax Act, 1961, such as under Sections 276C, 277, 276CC, etc., such a notice as contemplated under Section 2(35)(b) to either the managing director or director is not necessary as there was no expression akin to the expression used in Section 204 in any of the provisions related to those offences under Sections 276C, 276CC, 277, etc. This position is made clear in the decision reported in Geethanjali Mills Ltd. v. V. Thiruvengadathan [1989] 179 ITR 558 (Mad), wherein, his Lordship, after taking note of the ruling rendered in M. R. Pratap v. V. M. Muthuramalingam, ITO [1984] 149 ITR 798 (Mad), has Ruled that the (page 568) \"determination of the 'principal officer' is necessary only in the case of deduction of tax at source as in the case of salaries and interest other than interest on securities, etc., and not otherwise.\" In the case reported in Geethanjali Mills Ltd. v. V. Thiruvengadathan [1989] 179 ITR 558 (Mad), the offence alleged in the complaint is under Sections 276C(1), 277 and 278B of the Income-tax Act, 1961. Relying on this decision in Geethanjali Mills Ltd. v. V. Thiruvengadathan [1989] 179 ITR 558 (Mad), extracting the Sections 194A, 200 and 204, his Lordship observed in para. 2 at page 568 :\n \"From a cursory perusal of all the Sections extracted above, as rightly pointed out by learned counsel for the Revenue, the determination of the 'principal officer' is necessary only in the case of deduction of tax at source as in the case of salaries and interest other than interest on securities, etc., and not otherwise.\" \n\n Further, it was made clear in the above ruling that non-issuance of individual notices for other offences such as Section 276C, 276CC or 277 is of no consequence. Therefore it is very clear that even after the introduction of Section 278B with effect from October 1, 1975, it is mandatory to issue notice under Section 2(35)(b) in case the prosecution is for the offence under Section 276B and not otherwise. \n\n Endorsing the above view of this court, the Punjab and Haryana High Court, in the case reported in Greatway (P.) Ltd. v. Asst. CIT [1993] 199 ITR 391, has Ruled (headnote) \"that in the absence of appointment of a principal officer by issuing a notice by the Assessing Officer, the prosecution, if any, could only be launched against the petitioner-company\".\n\n At page 397 in the ruling, it was observed in para. 1: \"The complaint is significantly silent as to whether any person had been appointed as the principal officer of the petitioner-company. In the absence of such an appointment, a director or the managing director of the company could not be prosecuted. It appears that the Assessing Officer was himself at fault and that fault has been tried to be covered by an argument by learned counsel for the respondent that the managing director and the directors will be deemed as agents of the company. However, an agent of the company cannot be equated with the principal officer as defined in Section 2(35) of the Act. The prosecution of the persons other than the petitioner-company, would, thus, be bad on this short ground alone.\" \n\n In view of the above three rulings, the prosecution of the managing director and other directors without issuing notice under Section 2(35)(b) is bad in law. \n\n Ground No. 2 : The trial court finding on the other charge under Section 420 of the Indian Penal Code, is well founded. It is highly misconceived that the charge under Section 420 of the Indian Penal Code, could be levelled in the matter of levying interest, especially when the statute stipulates that such charging of interest is mandatory, and after the collection of such interest. The trial court has rightly held that the ingredients of Section 420 of the Indian Penal Code are not made out. The prosecution has not let in any evidence to prove the charge under Section 420 of the Indian Penal Code. The charge is based on mere surmises and not on any evidence. None of the prosecution witnesses speak anything about this aspect. The charge is very vague and the same is quite contrary to the facts of the case. Accused No. 7-company, New India Maritime Agencies Pvt. Ltd. has been paying its advance tax in huge amounts very promptly. Its contribution by way of payment of tax is enormous. The payment of advance tax during the relevant assessment years is stated as hereunder : \n\n Details\n of advance tax paid from 1973 to 1982\n \n \n \n \n \n \n For\n the year ended\n \n \n \n Assessment\n year\n \n \n \n Advance\n tax>\n \n \n \n \n \n \n 30-6-1973\n \n \n \n \n 1974-75\n \n \n \n \n 1,25,482\n \n \n \n \n \n \n 30-6-1974\n \n \n \n \n 1975-76\n \n \n \n \n 1,74,147\n \n \n \n \n \n 30-6-1975\n \n \n \n 1976-77\n \n \n \n 2,38,885\n \n \n \n \n \n 30-6-1976\n \n \n \n 1977-78\n \n \n \n 4,38,330\n \n \n \n \n \n 30-6-1977\n \n \n \n 1978-79\n \n \n \n 1,79,106\n \n \n \n \n \n 30-6-1978\n \n \n \n 1979-80\n \n \n \n 2,86,650\n \n \n \n \n \n 30-6-1979\n \n \n \n 1980-81\n \n \n \n 2,19,704\n \n \n \n \n \n 30-6-1980\n \n \n \n 1981-82\n \n \n \n 2,47,135\n\n \n \n \n \n 30-6-1981\n \n \n \n 1982-83\n \n \n \n 3,01,450\n \n \n \n \n \n 30-6-1982\n \n \n \n 1983-84\n \n \n \n 2,37,490\n \n \n \n \n \n\n\n \n\n Levelling a charge under Section 420 of the Indian Penal Code, against accused No. 7-company and its directors, the respondents/accused Nos. 2 to 5 would amount to killing the goose which lays golden eggs. There is no necessity for accused No. 7-company to indulge in any kind of activity as alleged. The payment of tax structure by accused No. 7-company as stated above clearly disproves, the charges under Section 420 of the Indian Penal Code. The trial court's finding in dismissing the charge under Section 420 of the Indian Penal Code, is very well founded. \n\n Ground No. 3 : The trial court has found that accused No. 1-company had been incurring heavy losses right from the date of its incorporation, i.e., February 10, 1972, and, therefore, it had reasonable cause or excuse for the delayed remittance of tax deducted at source. On the other hand, the prosecution has not established that accused No. 1-company acted without any reasonable cause or excuse. By exhibits P5, P9 and P12, accused No. 1-company had proved that it has sufficient cause for the delayed remittance of tax deducted at source. P.W. 2 in his cross-examination has admitted that accused No. 1-company incurred a loss of Rs. 1,83,397 for the year ending December 31, 1973, relevant for the assessment year 1974-75, loss of Rs. 3,59,041 for the year ending December 31, 1975, relevant for the assessment year 1975-76, loss of Rs. 3,14,013, for the year ending December 31, 1977, for the assessment year 1977-78 loss of Rs. 4,04,086 for the year ending December 31, 1978, relevant for the assessment year 1978-79. \n\n 8. Thus accused No. 1-company had been incurring heavy losses from the assessment year 1974-75 to 1982-83 and the loss was carried over every year was assessed to nil (NA) for the assessment years 1974-75 to 1982-83. A1ong with the written statement, accused No. 1-company has also filed the challans for payment of tax deducted at source, interest, etc. Thus, accused No. 1 demonstrated that it had reasonable cause or excuse for the delayed remittance of tax deducted at source. The trial court has rightly relied upon the decision in PNB Finance and Industries Ltd. v. Miss Gita Kripalani, ITO ; ITO v. Taurus Equipment (P.) Ltd. [1979] 118 ITR 982 (Patna) and Sequoia Construction Co. P. Ltd. v. P. P. Suri, ITO [1986] 158 ITR 496 (Delhi) and Ruled that accused No. 1-company had reasonable cause or excuse for the delayed remittance of tax deducted at source. The decision of the Punjab and Haryana High Court reported in Greatway (P.) Ltd. v. Asst. CIT [1993] 199 ITR 391, also lends support to the above view. The prosecution witnesses themselves have admitted that accused No. 1-company was in terrific financial stringency. The trial court has rightly come to the conclusion that accused No. 1-company has had reasonable cause and excuse in the delayed remittance of tax deducted at source. For conclusion, the trial court has based its reliance on the following three rulings.\n\n (1) PNB Finance and Industries Ltd. v. Miss Gita Kripalani, ITO ;\n\n (2) ITO v. Taurus Equipment (P.) Ltd. [1979] 118 ITR 982 (Patna); and \n \n\n (3) Sequoia Construction Co. P. Ltd. v. P. P. Suri, ITO [1986] 158 ITR 496 (Delhi).\n\n 9. The Punjab and Haryana High Court has also held that it is the duty of the prosecution to prove that there was no reasonable cause or excuse in the case reported in Greatway (P.) Ltd. v. Asst CIT [1993] 199 ITR 391. In this regard, the cumulative or carry over of accused No. 1 is stated hereunder :\n \n \n \n \n \n \u00a0\n \n \n \n Rs.\n\n 31-12-1975\n loss\n \n \n 16,73,264\n \n \n \n \n 31-12-1976\n loss\n \n \n 18,52,732\n \n \n \n \n 31-12-1977\n loss\n \n \n 22,91,340\n \n \n \n \n 31-12-1980\n loss\n \n \n 28,66,198\n \n \n \n \n 31-12-1981\n loss\n \n \n 16,70,517\n \n \n \n \n 31-12-1982\n loss\n \n \n 13,74,410\n \n \n \n \n\n \n\n 10. In view of the colossal loss incurred and carried over by accused No. 1-company every year, it made a request to its sister company, New India Maritime Agencies P. Ltd. (accused No. 7) to waive the interest on the outstanding amounts. Accused No. 7-company after some negotiations agreed and waived the interest with effect from January 1, 1982. In the meantime, accused No. 1-company had paid and deducted tax on interest erroneously. Further, the assessments of the creditor company, New India Maritime Agencies P. Ltd. itself for all the assessment years in question have been completed and the income-tax was paid by the creditor on the whole of its income including \"interest income\" which it had earned from accused No. company at the end of each accounting year in question. In CIT v. Divisional Manager, New India Assurance Co. Ltd. [1983] 140 ITR 818, the Madhya Pradesh High Court has observed (headnote) :\n \"Where the regular assessment of an employee has been completed and the amount of tax fully paid by him, the Income-tax Officer, Salaries Circle, has no jurisdiction under Section 201 of the Income-tax Act, 1961, to demand further tax from the employer in respect of the tax alleged to have been short deducted in respect of the employee.\" \n\n 11. The statute requires that either the creditor or the debtor should pay the full income-tax payable on the interest amount. In this case, the ereditor, New India Maritime Agencies P. Ltd. had given a certificate that for all the years in question, it had already paid the income-tax on the whole of its income including the interest income. Hence, the ends of justice require that the whole matter should get extinguished. Therefore, there is no loss to the exchequer caused in any way. \n\n 12. In conclusion, the appeal against the acquittal is liable to be dismissed on the following grounds : \n\n (1) No statutory notice as contemplated under Section 2(35)(b) of the Income-tax Act, 1961, was issued to accused Nos. 2 to 5 as discussed supra and, hence, the acquittal of accused Nos. 2 to 5 relying on this court's ruling rendered in M.R. Pratap v. V. M. Muthuramalingam, ITO [1984] 149 ITR 798 (Mad), cannot be canvassed ;\n\n (2) Accused No. 1-company had incurred colossal loss and carry over losses during the relevant years which fact was admitted by the Department by itself and accused No. 1-company was assessed to \"nil\" assessment (NA) in the impugned assessment years, and, therefore, accused No. 1-company had reasonable cause or excuse in the delayed remittance of tax deducted at source. Paucity of funds and financial stringency are reasonable cause as Ruled in (1) PNB Finance and Industries Ltd. v. Miss. Gita Kripalani, ITO ; (2) ITO v. Taurus Equipment (P.) Ltd. [1979] 118 ITR 982 (Patna); (3) Sequoia Construction Co. P. Ltd. v. P. P. Sun, ITO [1986] 158 ITR 496 (Delhi) and (4) Greatway (P.) Ltd. v. Asst. CIT [1993] 199 ITR 391 (P&H). Hence, the acquittal of accused No. 1 is fully justified ;\n\n (3) The creditor company, accused No. 7, has waived the interest on the outstanding amounts due from accused No. 1-company. Further, in the regular assessment, the creditor company has already paid the income-tax on the whole of its income including the interest income for the relevant assessment years. Therefore, \"when once it was referred by the creditor himself in his regular assessment, the right to recover the same from the debtor who should have deducted the same the lapse of the debtor simply becomes extinguished.\" \n\n 13. Further, it is now 23 years from the alleged date of the commission of the offence. In Kuldip Rai Chopra, ITO v. Sohan Singh Dhiman , it has been observed (headnote) :\n \"Held further, that in an appeal against acquittal the High Court cannot be called upon to reassess the credibility of the evidence, when the view taken by the trial court was not shown to be so patently erroneous as to cause miscarriage of justice.\" \n\n 14. In Banwari v. ITO , the Supreme Court has Ruled by observing (headnote) :\n\n \"(i) that, for more than a decade, the proceedings were pending in the trial court and no useful purpose would be served by proceeding with the complaint after the lapse of such a long time ; the matter had become stale; \n\n (ii) that, on the facts, the Magistrate could not be said to have been grossly wrong in inferring that the mention of the wrong date was merely a bona fide mistake.\" \n\n 15. Relying on the aforesaid ruling of the apex court, this court in Fourth ITO v. A.K. Srinivasan [1994] 205 ITR 64 has Ruled (headnote) :\n \"However, that since the offence was said to have been committed in the year 1976-77 and the order of acquittal was passed in 1984, no useful purpose would be served by ordering re-trial at this length of time especially when the respondent has already undergone imprisonment till the rising of the court and paid the fine in respect of the offences committed in connection with the same transaction.\" \n\n 16. In the case on hand, the first assessment year in which the offences are alleged to have been committed was in 1974-75 and the accused were acquitted by the trial court on March 18, 1987. Not only the interest had been waived by the creditor but also the entire tax had been paid by the creditor company in its regular assessment and, hence, there was no loss to the exchequer. \n\n 17. For the aforesaid reasons, the acquittal of the accused by the trial court is based on sound principles of law and the rulings rendered by various High Courts and the Supreme Court. \n\n 18. P.W. 3 was the complainant and the Income-tax Officer, Headquarters (TDS) from January 1, 1985, who filed the complaint based on exhibit P17, authorisation dated October 30, 1985, under Section 279(1) of the Income-tax Act, passed in his favour by the Chief Commissioner of Income-tax, Madras. P.W. 4 was one, who was the predecessor of P.W. 3 and this witness on perusal of the file in respect of A1-company submitted exhibit P18 office note, dated December 7, 1984, stating thereby that in spite of repeated correspondence there was no proper response from A1-company for which the reply given by A1 is in exhibit P19, dated April 6, 1984, in respect of tax deducted at source, informing part payment and seeking further time for the balance payment and that after going through the procedures, penalty of Rs. 52,000 for the accounting years ending with December 51, 1973, to December 31, 1981, was levied on September 17, 1984, and that had not been paid by A1-company till January 18, 1985 ; that on July 2, 1984, he issued exhibit P20 show-cause notice to A1-company, as to why he should not be prosecuted for contravention of Section 276B of the Income-tax Act. \n\n 19. P.W. 5, the Income-tax Officer, in his evidence would depose that A7-company was the income-tax assessee under his jurisdiction ; that for the year ending with June 30, 1974, in the assessment year 1975-76, A7-com-pany filed the income-tax returns in respect of the assessment order passed on that return and the matter was pending in appeal before the Tribunal, that A5 was the managing director of A7-company and he filed A7's income-tax returns for the year ending with June 30, 1975, showing Rs. 38,497 as income-tax deducted at source and exhibit P21 is the return for the year 1975, that along with exhibit P21, A7-company also filed exhibit P22 under Form No. 19A by A1-company showing Rs. 38,497 as tax deducted at source payable on or before March 1, 1975, and the same had been paid only on August 5, 1977. Hence, the tax deducted at source was not given credit for the assessment year 1976-77 for A7-company, but given credit to only in the actual year of payment of A1-company. Similarly A5 the managing director A7-company, filed for the accounting year ending with June 30, 1976. Assessing the evidence of the prosecution witnesses 1 to 5 who were examined before the trial court, P.W. 1, the Income-tax Officer, Head Quarters, besides stating that A1 is a private limited company, of which A2 is the managing director, A3 to A5 are the directors, A6 is the manager and A7 is the private limited company and sister concern of A1 and in A7-company A3 and A4 are the directors, and A5 is the managing director, the officers of both A1 and A7-companies are located at one and the same place ; that A7-company had been lending money to A1 for which A1 had credited annual interest in favour of A7-company ; that on receipt of exhibit P1 letter from P.W. 5 the immediate predecessor he issued exhibit P2 show-cause notice dated March 2, 1983, to A1; that since there was no response, exhibit P3 notice dated March 14, 1983, had been sent ; that A1-company sent exhibit P-5 covering letter dated March 21, 1983, enclosing exhibit P4 and exhibit P6 series which are the xerox copies of the tax deducted at source remittance challans for the year ending with December 31, 1977, pleading thereby that want of liquid funds had caused delayed remittance of tax deducted at source amounts. Due to borrowings from A7-company that the secretary of A7-company appeared as the representative of A1-company and in spite of direction to file further details it was not done. Exhibit P7, dated June 27, 1983, was the letter addressed to the A1-company. \n\n 20. P. W. 2 was the additional in-charge of the office of the Income-tax Officer, headquarters, during the relevant period and he would depose that under exhibit P8 letter A1-company was fixed for hearing on November 26, 1983, and under exhibit P9 requisition dated November 24, 1983, of A1 sought further time and hence he sent summons to A1 under exhibit P10, dated December 16, 1983, and after little more correspondence on January 14, 1984, issued to A1-company exhibit P14, letter/notice demanding Rs. 2,88,863 as arrears and Rs. 2,84,489 towards interest thus making a total demand of Rs. 5,74,352, that notice had also been sent to A7-company under exhibit P15 series (8 in number) by his successor confirming his demand, made under exhibit P14 ; exhibit P23, is the income-tax returns, dated June 21, 1979, showing Rs. 61,128 as tax deducted at source and along with exhibit P23, income-tax returns; A7-company filed exhibit P24 tax deducted at source certificate dated March 27, 1979, issued by A1-com-pany in respect of Rs. 53,128 as tax deducted at source as not yet paid. Later on January 4, 1982, this witness wrote to P.W. 1's predecessors under the original of exhibit P1, requisition, requesting to look into the matter. A5 filed for the year ending with June 30, 1977, exhibit P25 income-tax returns dated December, 11, 1980, claiming Rs. 1,26,045 as tax deducted at source, for other interests; that along with exhibit P25 income-tax returns A7-company filed exhibit P26 tax deducted at source certificate, dated December 31, 1976, for Rs. 64,981 intimating that it would be paid later by A1-company. A5 also filed for the accounting year ending June 30, 1978, exhibit P27, income-tax returns, dated February 17, 1982, showing Rs. 61,628 as tax deducted at source for other interests ; that along with exhibit P27 income-tax returns, A7-company also filed exhibit P28 tax deducted at source certificate, dated December 10, 1978, intimating that this sum would be paid by A1-company that A5 also filed for the accounting year ending with June 30, 1979, exhibit P29 income-tax return dated December 15, 1982, showing Rs. 1,27,193 as tax deducted at source for other interests ; that under Section 139(8) of the Income-tax Act, interest can be charged for delayed filing of income-tax returns and such interest could be charged on balance of income-tax due that since the income-tax due on interest was not paid in time in respect of A7-company by A1-company, the credit for such tax deducted at source was given only for the years of payment by A1-company in respect of the assessment for A7-com-pany, thus interest under Section 139(8) charged against A7-company was reduced giving indirect benefit to A7-company. \n\n 21. The trial court in consideration of the above evidence placed before it and in further consideration of the pleading of the accused during the questioning by the court under Section 315 of the Criminal Procedure Code, and further considering the facts, figures and circumstances of the case as projected by the prosecution and ultimately to weigh the evidence in terms of the requirements of law, has framed five points which are : \n\n (i) Whether after introduction of Section 278B of the Income-tax Act on October 1, 1975, notice under Section 2(35)(b) to the directors of the company is necessary ? \n\n (ii) Whether A2 as managing director and A3 to A5 as directors of A1-company are liable for delayed remittance of income-tax deducted at source on the interest on borrowings from A7-company ? \n\n (iii) Whether A1 to A5 and A7-company attempted to cheat from levying interest on tax deducted at source ? \n\n (iv) Whether A1-company's delayed remittance of tax deducted at source was without reasonable cause or excuse ? and \n \n\n (v) Is exhibit P17 authorisation to prosecute valid ? \n\n 22. The trial court considering point No. 5 whether the authorisation granted to prosecute the case is valid has cited the case reported in Swarna Mahal v. Central Excise and Customs Department [1977] MLJ (Crl.) 175, wherein it has been held that though for a sanction to prosecute application of mind is necessary, for an authorisation to be granted such application of mind is unnecessary and has accepted the same considering the other cases reported in T.S. Baliah v. T.S. Rangachari, ITO . wherein it has been held that the authorising authority need not file the complaint himself, but can depute a subordinate to file the complaint for an offence under the Income-tax Act. The trial court would conclude ultimately that in this case the authorisation given under exhibit P17 is valid thus deciding point No. 5 in favour of the prosecution.\n\n 23. Dealing with point No. 1, citing a decision of this court reported in M.R. Pratap v. V.M. Muthuramalingam,, ITO [1984] 149 ITR 798, wherein it has been held that notice under Section 2(35)(b) of the Income-tax Act is necessary for the managing director of a company to be treated as principal officer, to make him liable for being prosecuted for an offence under Section 276B of the Act committed by the company. Further noting that there is no contra-decision available from any other quarter and in spite of objection by the other side on the ground that the said judgment was on appeal in the Supreme Court, since the trial court thought that it was still binding on it, considered the view to decide the said point and after wide discussions would ultimately arrive at the conclusion upholding\" the ruling of this court rendered by Justice S. Natarajan (as he then was) and would end up saying that as long as Section 2(35)(b) is applicable to a company, introduction of Section 278B does not alter the position to get out of the said ruling in respect of an offence under Section 276B and thus deciding point No. 1 against the prosecution.\n\n 24. So far as point No. 2 that tax deducted at source deducted for interest on borrowings from A7-company by A1-company were not remitted within the time allowed and, hence, the accused became liable to be dealt with under Section 276B of the Income-tax Act, the trial court would further contend in para 24 of its judgment that already under point No. 1 it has been concluded that A2 to A5 as managing directors and directors of A1-company cannot be found guilty unless there is an allegation in the complaint and established by evidence that they, in respect of this tax deducted at source in any way consented, connived or neglected this statutory obligation of A1-company. There is no such allegation in the complaint or any acceptable evidence on this aspect against A2 to A5. The further contention of the complainant that Section 204 is only an inclusive definition and does not exclude Section 278B, by the aforestated decision of Justice S. Natarajan (as he then was) and it has been concluded that the managing director and directors cannot be made liable for the commission of the offence. Further citing the contention of A2 that on the death of one P.C. Kachapeswaran Iyer, alias P.C.K. Iyer, who was the accountant of A1-company that he had been caused to attend to the correspondence for the tax deducted at source liability to have been shown in the balance-sheet as contingent liability, there is no evidence to that effect. Furthermore, notice under Section 2(35)(b) since being held necessary, and further since there is no material to raise the rebuttable presumption either under Section 278B(1) or (2) against the directors of A1-company, Section 278B cannot be invoked against A2 to A5 for the first two years ending with December 31, 1973, and December 31, 1974, since Section 278B which came into existence on October 1, 1975, not being retrospective in operation. The trial court would ultimately answer point No. 2 in favour of the accused. \n\n 25. So far as point No. 3 whether A1 to A5 and A7-company attempted to cheat from levy of interest on tax deducted at source, the trial court dealing with the same in para. 25 of its judgment, would contend that admittedly A7 is the sister concern of A1 and A3 to A5 are the common directors of both companies ; that the allegations in respect of attempt to cheat is itself vague and the evidence of P.W. 5 in this regard is not clear. There is not even an allegation of conspiracy or attempt to cheat. It is not only the interest under Section 201(1A) for delayed remittance of tax deducted at source had been given credit in respect of A7 company's assessment only during the years when tax deducted at source amounts were paid, but not in the years when the interest was shown in the income-tax return of A7-company, which is made clear in the evidence of P.W. 5. Hence, the tax deducted at source amount with A1 and A7 was not given credit till the actual payment of tax deducted at source by A1-company and hence in the opinion of the trial court the ingredients of Section 420 of the Indian Penal Code could not be appreciated at all either against A1 to A5 or against A7-company and that at best it would be temporary misappropriation by A1-company falling under Section 409 of the Indian Penal Code. But there is no allegation or evidence to that effect. Hence, the trial court had concluded that Ai to A5 joining hands with A7 attempted to cheat the Income-tax Department for levying Section 201(1A) interest or even penalty due to tax deducted at source under Section 221 for the relevant seven years had not been established thus answering this point in favour of the accused. \n\n 26. Ultimately, dealing with point No. 4 whether A1-company delayed remittance of tax deducted at source was without reasonable cause or excuse in para. No. 26 of its judgment, the trial court discussing the said point and contending thereby that admittedly, A1 and A7 were sister concerns with A3 to A5 as their common directors and the interest credited had been correctly shown as receipts in A7's income-tax returns though according to the accused it was only mercantile system of credit without actual payment of interest to A7-company. But the burden of proof \"without reasonable cause or excuse\" since cast on the prosecution the burden that A1-company acted with reasonable cause or excuse promptly and the delay had occurred on account of reasonable cause or excuse and this proof is not as onerous proof as it has been cast on the prosecution ; that default for delayed tax deducted at source payment should be deliberate and conscious as held in the case reported in PNB Finance and Industries Ltd. v. Miss Gita Kripalani, /TO [1986] 157 ITR 385 at page 406, by the Delhi High Court, that failure to deduct or failure to pay if deducted has not been by itself made penal and such an act if done without reasonable cause or excuse alone can be made penal. Further, stating that there was no evidence on record as to whether the accused acted without reasonable cause or excuse and the trial court ultimately arrived at the conclusion that the prosecution had failed to prove this aspect of the case also beyond reasonable doubt. The trial court would ultimately arrive at the conclusion to decide this point also in favour of the accused. Ultimately, the trial court finding that none of the accused had been found guilty of any of the offences that they were charged under, would order their acquittal.\n\n 27. It cannot be denied that the general provisions of criminal law and the norms of criminal jurisprudence the Rules and procedures that are adopted are the same for the case arising on violation of the provisions of the income-tax laws as any case put up in every other criminal case. A case arising out of the Income-tax Act is also subject to the Rule that the accused is presumed innocent and that the burden to discharge the said innocence is paramountly on the prosecution. However strong the suspicion against the accused, if every reasonable possibility of innocence has not been excluded, he is entitled to acquittal. Whenever circumstances arise, they must be proved and not by themselves presumed. No single item of evidence can be singled out and given prominence nor the accused's theory of the case can be withdrawn from consideration. What constitutes failure or causing delay or evasion in the payment of income-tax is a question of law whether on evidence the particular crime has been committed is a question of fact. If, therefore, the evidence regarding either failure or causing delay or evasion in payment of the income-tax leaves room for doubt and does not displace the presence of innocence wholly, the charge cannot be said to have been established. Only because innocent and honest Government servants should not be made scapegoats on baseless and make-believe allegations or charges of the prosecuting officials to make out a case for reasons many, the law as laid down by various judicial pronouncements requires strong corroborative evidence that could be gathered either from oral or documentary evidence or even from the circumstances encircling the whole case. The standard of evidence and the proof required by law from the Department being proof beyond reasonable doubts, unless each and every aspect of the case is proved with such abundant and overwhelming evidence, the case cannot be said to have been proved to sustain a conviction.\n\n 28. Hence, for all the above discussions held scrutinising carefully the reasons assigned by the trial court for each and every point of which the trial court has appreciated the evidence in the context of the position of law based on the propositions arrived at by different courts, this court does not see any reason to interfere with the well considered and well merited judgment passed by the trial court. No patent errors of law nor perversity in approach by the trial court in any manner has been brought forth by the appellant/Department so as to make this court reasonably to interfere with the decision of the trial court. \n\n 29. In the result, the above criminal appeals in Criminal Appeal No. 524 of 1987 and 525 of 1987 fail and the same are dismissed. The judgment dated March 18, 1987, respectively, made in E. O. C. C. Nos. 1374 to 1380 of 1985 and E. O. C. C. Nos. 1381 and 1382 of 1985, by the Court of Additional Chief Metropolitan Magistrate, Egmore, Madras-8, are hereby confirmed." }, { "title": "Commissioner Of Income-Tax vs Shree Nirmal Commercial Ltd. (And Vice ... on 27 April, 1994", "url": "https://indiankanoon.org//doc/1666454/", "text": "Commissioner Of Income-Tax vs Shree Nirmal Commercial Ltd. (And Vice ... on 27 April, 1994\nEquivalent citations: [1995]213ITR361(BOM)\nJUDGMENT \n \n\n I.G. Shah, J. \n \n\n 1. Income-tax Reference No. 1 of 1982 has been made by the Income-tax Appellate Tribunal under section 256(1) of the Income-tax Act, 1961, both at the instance of the Revenue and the assessee. It pertains to the assessment years 1971-72 and 1972-73. \n\n2. The following three questions have been referred at the instance of the Revenue : \n\n \"(1) Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that the compensation received from the shareholders was to be taxed as income from business and not as income from property and also in holding that the Income-tax Officer was not entitled to enhance the compensation to the extent of the compensation received by the shareholders in their own right ? \n\n (2) Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in cancelling the order passed under section 104 of the Income-tax Act, 1961, thereby deleting the additional demand of Rs. 22,242 for the assessment year 1970-71 ? \n\n (3) Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that the Income-tax Officer was not entitled to enhance the compensation to the extent of compensation received by the shareholders in their own right ?\" \n\n The following three questions have been referred at the instance of the assessee : \n\n \"(4) Whether, on the facts and in the circumstances of the case, the sum of Rs. 2,96,285 and Rs. 77,100 received by the applicant during the relevant assessment years 1971-72 and 1972-73, respectively, as 'non-refundable' deposits were income of the applicant ? \n\n (5) Whether, on the facts and in the circumstances of the case, the claim of the applicant that the amount of Rs. 4,77,395 and Rs. 4,79,176 for the assessment years 1971-72 and 1972-73, respectively, are allowable as deduction either under section 28 or under section 37 of the Act has been rightly rejected by the Tribunal ? \n\n \"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the amounts of Rs. 2,87,250, Rs. 13,000 and Rs. 2,87,250 received by the assessee during the assessment years 1973-74, 1974-75 and 1975-76, respectively; as non-refundable deposits were assessable as income of the assessee ? \n\n (2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the claim of the assessee to deduct a sum of Rs. 4,47,399 for the assessment year 1973-74, Rs. 4,16,775 for the assessment year 1974-75 and Rs. 3,24,694 for the assessment year 1975-76; being payment of interest on deposits either under section 28 and/or under section 37 of the Act was not allowable ?\" \n\n3. The said references came up before the Division Bench consisting of learned brothers Dr. B. P. Saraf and D. R. Dhanuka JJ., of this court. The Division Bench on consideration of the references in the background of the facts and circumstances of the case and various authorities placed by counsel for both the sides, felt that for a proper determination of the various legal issues arising in the case, it was necessary to scrutinise some of the legal propositions already laid down by some of the Division Benches of this court, more particularly in the cases referred to in CIT v. Mahendra J. Shah [1979] 118 ITR 902 (Bom), CIT v. Shah Construction Co. Ltd. [1983] 142 ITR 696 and the assessee's own case reported in Shree Nirmal Commercial Ltd. v. CIT [1992] 193 ITR 694 (Bom); and to take a fresh decision in case some of these decisions were felt to be in conflict with others, it was necessary to refer the matter to a larger Bench. They were also of the opinion that the decision in the case of the assessee itself needs reconsideration in the light of the Supreme Court decision, earlier decision of this court and the provisions of the Income-tax Act, Transfer of Property Act, Registration Act, etc. The Division Bench, therefore, without expressing any opinion on the merits of the rival contentions of the parties directed that the Hon'ble Chief Justice be moved for forming a Full Bench for the decision of these two references. Accordingly, two references are placed before us after obtaining necessary orders from the Hon'ble Chief Justice.\n\n 4. The brief facts giving rise to these two references are as under : \n\n By an agreement of lease dated November 28, 1964, the Government of Maharashtra agreed to grant a long-term lease in respect of certain plots of land situate at the Backbay Reclamation, Nariman Point, Bombay, in favour of the assessee. The assessee has constructed a multi-storeyed building on the said plots of land known as \"Nirmal\". The assessee is the owner of the said building and lessee of the said plots. The assessee collected large amounts from its shareholders during the course of years under the caption \"non-refundable deposits\". The assessee allotted floor space in the said building to its shareholders and conferred rights on the shareholders allottees to transfer their occupancy rights to the third parties. The shareholders-allottees are liable to pay periodical amounts to the assessee labelled as \"compensation\" as fixed by the assessee, mainly having regard to the object of covering maintenance charges and liabilities for municipal taxes, etc., payable for the property. The shareholders-allottees charge higher \"compensation\" to the third party occupants. The third party occupants are inducted in the premises forming part of the building. Income-tax References Nos. 108 of 1977 and 216 of 1977 - Shree Nirmal Commercial Ltd. v. CIT [1992] 193 ITR 694 (concerning the assessee) for the assessment years 1967-68, 1968-69 and 1969-70 were decided by this court by its judgment and order dated April 10-25, 1991. By the said judgment and order, this court, inter alia, held -\n\n \"(1) Notwithstanding the use of the nomenclature of 'deposit', the so-called non-refundable deposits were in essence the consideration paid by the shareholder for sale of occupancy rights. The amounts of the so-called deposits were liable to be treated as 'revenue receipts' in the hands of the assessee. The so-called deposits were taxable as 'business income of the assessee' after deducting therefrom the cost of construction. \n\n (2) The assessee continued to retain the residuary ownership rights in the building although the 'occupancy rights' were sold out by the assessee to its shareholders. \n\n (3) Section 22 of the Income-tax Act was inapplicable as the property was inherently incapable of being let out by the assessee even though the assessee had retained ownership rights in the building with itself while making allotments of floor space in the building to the shareholders concerned. \n\n (4) 'Compensation' received by the assessee from shareholders was liable to be taxed as business income and not as income from house property under section 22 of the Act. \n\n (5) For determination of the income of the assessee-company, the Income-tax Officer cannot enhance the compensation to the extent of the compensation received by the shareholders from other parties for occupation of the premises allotted to them by the assessee.\" \n\n 5. The contention of the assessee is that the controversy concerning questions Nos. 1, 4 and 6 pertaining to the assessment years 1971-72 and 1972-73 and question No. 1 pertaining to the assessment years 1973-74, 1974-75 and 1975-76 stands concluded by the above referred judgment of this court since reported in Shree Nirmal Commercial Ltd. v. CIT [1992] 193 ITR 694. The assessee contends that the said judgment was delivered in the assessee's own case and, therefore, is binding and the ratio of the said decision must be followed in this reference. The assessee therefore in short contends that the only question which needs to be considered in the present references is : \"whether the assessee is entitled to deduction of interest payable on the amounts of 'non-refundable deposits' despite the so-called deposits themselves having been held by this court as trading receipt/revenue receipts in the hands of the assessee\".\n\n6. The Division Bench of this court which has referred the matter to the Full Bench has expressed that there appears to be some inconsistency in the views expressed by this court earlier in the earlier decisions in CIT v. Union Land and Building Society Pvt. Ltd. [1972] 83 ITR 794 and CIT v. Zorostrain Building Society Ltd. [1976] 102 ITR 499 on one side and Shree Nirmal Commercial Ltd. v. CIT [1992] 193 ITR 694. In the decisions in CIT v. Union Land and Building Society Pvt. Ltd. [1972] 83 ITR 794 (Bom) and CIT v. Zorostrain Building Society Ltd. [1976] 102 ITR 499 (Bom), it was held that the liability of an owner to pay any tax under section 22 of the Income-tax Act, 1961, does not depend either on the power of the owner to earn the income therefrom or on the power or the capacity of the person to let out or his own power to receive rent or income from bona fide annual value. Even the decision of the Supreme Court in Nawab Sir Mir Osman Ali Khan v. CWT [1986] 162 ITR 888 which is relied upon lays down that the assessee-company is construed to be the owner of the property arid the annual letting value of the said property computed in the manner laid down in section 23 of the said Act is assessable in the hand of the owner under the head \"Income from house property\". In view of this, first it would be proper to consider whether any such conduct really exists or not. On behalf of the Revenue also, the contention is raised that there is conflict as indicated by the learned Division Bench and the view taken by the Division Bench in the decision in Shree Nirmal Commercial Ltd. v. CIT [1992] 193 ITR 694 (Bom) being in conflict with the earlier decisions at the Division Bench of this court is not correct. It would be proper to state here only that the decision in Shree Nirmal Commercial Ltd. v. CIT [1992] 193 ITR 694 (Bom) is in fact accepted by the Revenue as they have not appealed against the said decision.\n\n7. To wriggle out of this situation, an attempt is made to contend on behalf of the Revenue that there is no principle of res judicata applicable in the matter of assessment under the Income-tax Act. There is no doubt that the said contention is legally sound. However, at the same time, Shri Dastur, learned counsel appearing for the assessee, has invited our attention to a decision of our court in H. A. Shah and Co. v. CIT [19S6] 3D ITR 618, wherein Chagla C.J. held that the effect of revising an earlier decision should not lead to injustice and the court must always be anxious to avoid injustice being done to the assessee and, therefore, the present case is not a fit case for which the issue referred by the Division Bench to the Full Bench should be gone into. It is further rightly contended by Shri Dastur that the Department having accepted the decision, there is no occasion to take a different view. We do feel that there is considerable force in the argument of Shri Dastur. Having urged earlier that the income in the, earlier assessment years was income from business or trade, it would not be proper to allow the Department to completely turn around and now contend that the income of the assessee is taxable under the head \"House property\" so as to disallow the deductions claimed by the assessee in respect of interest paid on the non-refundable deposits of the shareholders either under section 28 or section 37 of the Income-tax Act, 1961. The income of the assessee must be treated as income from trade or business. \n\n8. The second limb of the argument of Shri Jetley, learned counsel appearing for the Department, is based on the decisions in CIT v. Union Land and Building Society Pvt. Ltd. [1972] 83 ITR 794 (Bom) and CIT v. Zorostrain Building Society Ltd. [1976] 102 ITR 499 (Bom). Relying on these two decisions, he urged that it is already conclusively held that the non-refundable deposits are sale proceeds and income of the assessee. The third limb of the argument of Shri Jetley is that the property of \"Nirmal\" building is of the ownership of the assessee as no conveyance is executed and, therefore, the assessee is still the owner and, therefore, the assessee is required to be held liable to pay tax under the head \"House property\". Not only that it is further urged that as the assessee under the head of the property is liable to pay tax on the annual letting value, in the present case, if the shareholders have let out the premises at the higher rate, the annual letting value being the basis for assessing the income from the house property, the owner of the property is liable to pay tax on that annual letting value. Shri Dastur, on the other hand, has urged that in fact the Department cannot be allowed now to contend that the assessee is liable to be assessed on the basis of income under the head of house property. The assessee not being the owner of the property, the assessee is not liable to be assessed under section 22 of the Income-tax Act, 1961, under the head \"House property\".\n\n 9. Relying on the decisions in CIT v. Mahendra J. Shah [1979] 118 ITR 902 (Bom); CIT v. Shah Construction Co. Ltd. [1983] 142 ITR 696 (Bom); CIT v. R. B. Jodhamal Kuthiala [1968] 69 ITR 598 (Delhi) [FB]; R. B. Jodha Mal Kuthiala v. CIT ; Sir Currimbhoy Ebrahim Baronetcy Trust v. CIT [1963] 48 ITR 507 (Bom) and D. M. Vakil v. CIT [1946] 14 ITR 298 (Bom), Shri Dastur contended that the decisions relied upon by Shri Jetley have no application to the present case on the facts. The cases relied upon by Shri Jetley were in respect of classical property of house and land, while in the present case the property is not such classical property. Shri Dastur for the assessee pointed out that in CIT v. Shah Construction Co. Ltd. [1983] 142 ITR 696 (Bom), a building was constructed by a limited company called Khetan Estate Ltd. The assessee-company, viz., Shah Construction Co. Ltd., as shareholder had been allotted a flat. Shareholders were required to pay monthly rent to the company, viz., Khetan Estate Ltd., for the flats allotted to them. The High Court held that in view of the decision in CIT v. Mahendra J. Shah [1979] 118 ITR 902 (Bom) the assessee, viz., Shah Construction Co., was the real owner of the flat in question. In CIT v. Mahendra J. Shah [1979] 118 ITR 902 (Bom), the question which was referred directly was as to whether the assessee, Mr. Mahendra J. Shah, who was allotted a flat as a shareholder of the same company Khetan Estate Ltd., was assessable to tax in respect of the said property as income from house property under section 9 of the Indian Income-tax Act, 1922 (corresponding to section 22 of the Income-tax Act, 1961). The High Court answered the question in the affirmative. It was submitted that the facts in the two decisions cited above and the present case before us turn on their own facts and the peculiar position emerging from the right of occupancy arising from ownership of shares in a company and the principles to be applied in such a case were wholly different from the principles to be applied in the case of agreement to sell classical immovable property in the form of land and structure which was considered by our court in CIT v. Union Land and Building Society Ltd. Pvt. Ltd. [1972] 83 ITR 794 and CIT v. Zorostrian Building Society Ltd. [1976] 102 ITR 499. Shri Dastur strenuously pointed out that in these two earlier decisions the agreement for sale was entered into but conveyance which was necessary to be executed for vesting title in the transferee had not been executed. He further pointed out that in CIT v. Mahendra J. Shah [1979] 118 ITR 902 (Bom) and CIT v. Shah Construction Co. Ltd. [1983] 142 ITR 696 (Bom) and in the present case, there is nothing which has remained to be executed, as a conveyance is not at all contemplated and by virtue of ownership of shares being transferred, full ownership is vested in the shareholder for occupying and enjoying the unit which goes with the holding of the shares. Shri Dastur, therefore, pointed out that there is no conflict to be resolved in the earlier two decisions and the decision in Shree Nirmal Commercial Ltd. v. CIT [1992] 193 ITR 694 (Bom). In the decision reported in CIT v. Mahendra J. Shah [1979] 118 ITR 902 (Bom), the court held that where a building was constructed with the monies of the flat owners who were in actual possession of the respective flats in the building, it was the flat owners who should be regarded as owners of the area occupied by them and the company to whom the land initially belonged could not claim ownership rights. Without prejudice to the above contentions, Shri Dastur also submitted that the earlier decisions of the High Court in CIT v. Union Land and Building Society Pvt. Ltd. [1972] 83 ITR 794 (Bom) and CIT v. Zorostrian Building Society Ltd. [1976] 102 ITR 499 (Bom) required reconsideration in the light of the decision of the Supreme Court in R. B. Jodha Mal Kuthiala v. CIT [1971] 82 ITR 570. The Supreme Court in the said decision pointed out that for the purposes of section 9 of the Indian Income-tax Act, 1922, the owner of a property is a person who can exercise the rights of the owner in his own right. The Supreme Court confirmed the decision of the Full Bench of the Delhi High Court in CIT v. R. B. Jodhamal Kuthiala [1968] 69 ITR 598. In the abovesaid decision, the Supreme Court noted particularly at page 579 the consequences of taking a contrary view. In the present case also, according to Shri Dastur, if a contrary view is taken, it would mean that in a case where a person purchases a share in a company and where the shares entitle him to occupy a certain unit, he would not be regarded as the owner and accordingly the benefit conferred by section 54 of the Income-tax Act, 1961; where a residential house is sold and another residential house is purchased, may not be held to be available to him. He conceded that the consequences of interpretation are not determinative of the issue normally, but according to him they would be useful to fix the meaning of the statutory language where it is of some doubt. To support this proposition, Shri Dastur relied upon a decision in Add. CIT v. Surat Art Silk Cloth Manufacturers' Association . He also submitted that it is for this very reason that the court observed in R. B. Jodha Mal Kuthiala v. CIT : \"It is therefore, that equitable considerations are irrelevant in interpreting the tax laws. But those laws, like all other laws, have to be interpreted reasonably and in consonance with justice. \"Shri Dastur also submitted that it is necessary to note that in CIT v. Union Land and Building Society Pvt. Ltd. [1972] 83 ITR 794 (Bom), the High Court has noticed that the decision of the Full Bench of the Delhi High Court was contrary to the earlier decisions of the High Court of Bombay in Sir Currimbhoy Ebrahim Baronetcy Trust v. CIT [1963] 48 ITR 507 and D. M. Vakil v. CIT [1946] 14 ITR 298. He, therefore, pointed out that the decision in CIT v. Union Land and Building Society Pvt. Ltd. [1972] 83 ITR 794 (Bom) was based on the earlier decisions of this court in Sir Currimbhoy Ebrahim Baronetcy Trust v. CIT [1963] 48 ITR 507 and D. M. Vakil v. CIT [1946] 14 ITR 298. Shri Dastur, therefore, contended that it is clear from the decision in R. B. Jodha. Mal Kuthiala v. CIT and the decision of the Delhi High Court in CIT v. Jodhamal Kuthiala (R.B.) [1968] 69 ITR 598 [FB], that the decision in CIT v. Union Land and Building Society Pvt. Ltd. [1972] 83 ITR 794 (Bom) is no longer good law. He also pointed out that in CIT v. Zorostrian Building Society Ltd. [1976] 102 ITR 499 (Bom), this apparent conflict was pointed out to the High Court, but the High Court took the view that there was no contradiction and unless a conveyance was executed the original owner continues to be the owner of the house property. Shri Dastur then was at pains to point out that in view of the decisions relied upon by him, the said view is erroneous and in the present case this court should, if necessary, correct the said earlier decisions. According to Shri Dastur, the said decisions overlook the fact that a person would be assessable on income from house property even when he does not enjoy any income from the property and even though someone else enjoys that income and has been assessed thereon. He also contended that it would lead to double assessment which is repugnant to the basic principles of the law of taxation. Shri Dastur tried to contend by giving an example that if 'A' has agreed to sell the land and building to 'B' and 'B' is in possession and lets out the same to another, 'B' would be chargeable to tax in respect of the income as he earns the same, but according to the Department 'A' would be also chargeable as the alleged owner of the property if the contention of the Department is acceptable. Shri Dastur also relied upon the decision in Saiffuddin v. CIT [1985] 156 ITR 127 of the Rajasthan High Court wherein it is held that the person who met the cost of construction was to be recorded as the owner at the immovable property and the Rajasthan High Court had followed the decision of this court in Fazalbhoy Investments' case [1977] 109 ITR 802 and also the decision of the Punjab and Haryana High Court in Kala Rani v. CIT [1981] 130 ITR 321. He pointed out that the said courts have applied the principles laid down in Kuthiala's case , that the owner must be the person who can exercise the rights of the owner. He also pointed out that a similar view has been taken by the Calcutta High Court in Madgul Udyog v. CIT [1990] 184 ITR 484. In that case, he pointed out, that a builder had built a building and sold the individual flats to buyers and the conveyance had not been executed. But it was held that individual purchasers of the flats were to be regarded as the owners of the flats holding that the word \"owner\" appearing in section 22 of the Income-tax Act, 1961, must be construed in the setting of socio-economic development in the concept of ownership and it was also pointed out that there cannot be and should not be a double assessment of the same income, once in the hands of the assessee-firm and again in the hands of the buyers. Shri Dastur also very strenuously pointed out that at page 502 of the said decision, after referring to the decision in Kuthiala's case , it is stated that the decision in CIT v. Ganga. Properties Ltd. , should be read and understood in the light of the subsequent decision in Kuthiala's case and that Ganga Properties Ltd.'s case did not deal with all aspects of ownership and did not consider the recent development of the concept of multi-storeyed buildings and issues incidental\nthereto and he also further pointed out that in both the decisions, i.e., CIT v. Zorostrain Building Society Ltd. [1976] 102 ITR 499 (Bom), and CIT v. Union Land and Building Society Pvt. Ltd. [1972] 83 ITR 794 (Bom), this court had placed great reliance on the decision of the Calcutta High Court in Ganga Properties Ltd.'s case [1970] 77 ITR 637 while the Calcutta High Court itself in Madgul Udyog v. CIT [1990] 184 ITR 484 stated that the decision in Ganga Properties Ltd.'s , would have to be read in the context of the decision in Kuthiala's case , and should not be regarded as laying down the final law. Similarly, he also further pointed out that the Calcutta High Court again in Chitpore Golabari Co. Pvt. Ltd. v. CIT [1971] 82 ITR 753, held that the decision in Ganga Properties Ltd.'s case , has not considered all aspects of ownership.\n\n 10. The decisions relied upon by Shri Dastur support his contention that, the property of the assessee in the present case is of a different nature than that of classical property where a conveyance is necessary. Real owner ship in fact is to be taken as the basis according to the decisions relied upon by Shri Dastur and in the present ease the assessee cannot be considered as the real owner of the property. At the highest, the assessee has only some residuary interest in the property. Therefore, the assessee in the present case cannot. be assessed under the head \"Income from house property\". The income of the assessee has to be assessed as trading or business income. \n\n11. The next question that arises is whether the assessee in view of the fact that his income is to be assessed as income from trade or business is entitled to deduction of interest payable by him on non-refundable deposits under section 28 or section 37 of the Income-tax Act, 1961. On behalf of the Department, the said claim is strenuously resisted on the ground that under section 28 of the Income-tax Act deduction of interest is allowed on borrowed capital only : In view of the fact that the non-refundable deposits are already held to be the income of the assessee, they are the property of the assessee and hence interest cannot be allowed to be deducted under section 28 of the Income-tax Act. Shri Dastur, however, tried to contend that even if the non-refundable deposits are held by the Department as revenue receipts or trading receipts for the purposes of tax, their basic nature of being deposits cannot be lost or forgotten, and they continue to be non-refundable deposits on which under contractual obligation the assessee has to pay interest, at 6 per cent. as per terms of the contract and hence the same must be allowed as deduction permissible under section 28 of the Income-tax Act. Alternatively, according to Shri Dastur, the interest payable being a payment for business or trade in any case would be required to be allowed as deductible under section 37 of the Income-tax Act. The contention of Shri Dastur needs to be accepted. Shri Dastur has rightly pointed out that the Department has never disputed the terms of the contract and, therefore, the argument of Shri Jetley that by this arrangement the assessee is trying to siphon off the taxable income will have to be negatived. Shri Dastur contended that there is not even a whisper at any point of time from the side of the Department that the agreement for payment of interest was fraudulent. He was at pains to point out that the Department had not even contended so at any point of time and this, according to him, is apparent from the observations made by the Tribunal also. He relied upon the observations made by the Tribunal at page 116 of the paper book wherein it is stated as under : \n \"It is of course true that nobody has doubted the genuineness of the agreement or clause 3 under which the interest is said to have been paid on the said initial deposits.\" \n\n 12. Shri Dastur also pointed out that even the High Court at page 707 in the decision reported in Shri Nirmal Commercial Ltd. v. CIT [1992] 193 ITR 694 (Bom) has observed :\n \"The Department had not produced any material to show that the agreements between the assessee and its members were collusive arrangements.\" \n\n 13. Shri Dastur, therefore, is right in inviting us to hold that the payment of interest being accepted as genuine, the same would be required to be allowed as deductible at least under section 37 if not under section 28 of the Income-tax Act. Shri Jetley in the last tried to contend that there was no occasion for payment of interest at all as the amounts are \"non-refundable deposits\" and there was no necessity to agree to pay any interest at all. Shri Dastur tried to meet the said argument by contending that such an argument is untenable as it is for the assessee to decide as to what expenditure should be incurred for the betterment of the business of the assessee, and nobody can challenge the assessee's decision unless it is claimed to be a fraudulent claim which obviously is not the case of the Department in view of the material already on record. To substantiate this contention, Shri Dastur has relied upon a number of decisions. He has first pointed out that this court in the assessee's own case reported in Shree Nirmal Commercial Ltd. v. CIT [1992] 193 ITR 694, at page 700, has observed that the arrangement arrived at by the assessee in the present case was devised for raising finance as the assessee-company was faced with the stupendous task of raising funds of about Rs. 80 lakhs which was the estimated cost of construction of a commercial building and that the arrangement between the assessee-company and its shareholder was a genuine and bon fide arrangement for payment of a sum of money designated as interest in return for the company obtaining finance for construction of the building. Shri Dastur also pointed out that the Income-tax Department and the Tribunal did not allow the assessee's claim for deduction of the sum of Rs. 4.77 lakhs and Rs. 4.79 lakhs for the two years on the ground that the deposits were trading receipts and accordingly the interest would not be payable on what constituted the assessee's trading receipt or income. Shri Dastur contended that the fact that the said receipts were considered as trading receipts did not alter the situation at all. They were part of the arrangement for obtaining funds for carrying its activities under which the assessee-company received the deposits and also collected monthly sums from the occupants. The sums were paid under the contractual liability. The payment was in no way excessive as it was only at the rate of 6 per cent. of the amount deposited, and, as pointed out earlier, the genuineness and bona fides of the arrangement are not under dispute at all and the Tribunal has found that there is no device or scheme in the said arrangement and though the amounts were deposits they partook of the character of trading receipts and have been taken into account in determining the business profit or loss of the assessee-company and what has been held is that the nature of the amount paid by way of deposit was a trading receipt and the High Court had set out how the amount was to be dealt with in the books of the assessee-company, i.e., it was to remain to the credit of the unitholder. This court in the assessee's case has observed that the Tribunal was right in holding that the said deposits were in essence the consideration paid by the shareholders for allotment of the floor space and that the Tribunal was right in its view that this was in the nature of sale proceeds. Shri Dastur, however, contended that this does not mean that the said deposits completely lose their character as deposits. Relying upon the decisions reported in Punjab Distilling Industries Ltd. v. CIT and CIT v. Punjab Distilling Industries Ltd. , wherein the Supreme Court while determining the character of empty bottles return security deposit account held that the receipts reflected under that account partook of the character of trading receipts. But that, however, did not mean that as between the parties the said amount would cease to be a deposit. The Supreme Court also observed in the said case that the amount described as security deposits were also returned as and when the bottles were returned and, therefore, though they were treated as trading receipts in the hands of the manufacturers, they did not cease to be deposits as between the parties to the agreement. Shri Dastur contended that in the present case also the interest at the rate of 6 per cent. has in fact been paid as per the terms of the agreement between the assessee and the shareholders on the said non-refundable deposits and, therefore, even if the said deposits were considered as taxable income on account of trade or business the interest paid thereon treating them as deposits, on which interest as per the terms of the contract was payable, cannot be disallowed as claimed by the Department. Reliance was also placed on the decision reported in CIT v. Tata Sons Ltd. [1939] 7 ITR 195 (Bom), wherein n annual amount payable to a lender of money which was needed by the assessee was held to be deductible even if it was payable after the entire loan had been repaid. Shri Dastur relied upon the observation made in Tata Sons Ltd. v. CIT [1950] 18 ITR 460, 467 (Bom), wherein it has been observed that \"one has to consider the deductibility of the amount claimed by the assessee-company by taking into account commercial expediency and the principles of ordinary commercial trading and whether the expenditure was a part of the process of profit making\". He also relied upon the observations made in Eastern Investments Ltd. v. CIT , wherein it is observed that in order to claim a deduction it is enough if it is shown that the money was expended not of necessity but voluntarily and on the ground of commercial expediency and in order to facilitate the carrying on of the business. Reliance was also placed on the observations made in Tata Sons Ltd. v. CIT [1950] 18 ITR 460, 468 (Bom), wherein it was observed \"Even a voluntary payment, if for commercial expediency, would still be an expenditure for the purpose of business.\" Shri Dastur has also relied upon the observations made in the case of Eastern Investments Ltd. , cited above to point out that it was observed in the said decision \"one is not concerned with the legality-or propriety of a transaction or whether the result could have been achieved in another way. What one is concerned with is whether the transaction was done in the ordinary course of business, however mistaken the directors and shareholders may have been\", and also the further observations \"It is irrelevant that a transaction was forced on the company by its principal shareholders.\" Shri Dastur also relied upon the observations made in F. E. Dinshaw Ltd. v. CIT [1959] 36 ITR 114, 121 (Bom), wherein it has been held that in the absence of fraud, the questions whether the transaction has the effect of diminishing an assessee's taxable income and whether it was necessary for the assessee to enter into the transaction are irrelevant. Shri Dastur also relied upon the decision in CIT v. Nainital. Bank Ltd. Ltd. , wherein it is held that \"the sole question for determination is whether in incurring the expenditure the assessee-company acted in the interests of and for the purpose of its business. Even if it is held-which is not at all admitted-that the assessee-company was under no legal liability to make the payment, still if it made the payment for the purpose of its business the same would have been deductible\". In Sasoon J. David and Co. Pvt. Ltd. v. CIT , it has been held that \"Payment for the purposes of business is deductible whatever be the motive behind the payment, and it is for the assessee to decide whether the expenditure should be incurred in the course of its business. Such expenditure may be incurred voluntarily and without any necessity, and if it is incurred for promoting the business and to earn profit, the same can be claimed as deduction\". The above said decisions no doubt clearly support the contention of Shri Dastur and view of the same the proposition advanced by Shri Dastur in this respect has got to be accepted. We, therefore, hold that the payment of interest on non-refundable deposits will have to be allowed as deductible expenditure under section 37 if not under section 28 of the Income-tax Act, 1961. In the view which we have taken on the basis of the above discussion, it must be held that the Income-tax Officer was not entitled to enhance the compensation to the extent of the compensation received by the share-holders in their own right.\n\n 14. The next question arises for consideration as to whether the claim of the assessee that losses of the past years should be carried forward and adjusted against the income of the assessee for the assessment years 1971-72 and 1972-73 has been rightly rejected by the Tribunal. The said claim of the assessee was rejected merely because the matter was finally not decided. In the view which we have taken, the losses would be required to be carried forward and adjusted against the income of the assessee for the assessment years 1971-72 and 1972-73. \n\n 15. In the result, the questions in Income-tax Reference No. 1 of 1982 are answered as under : \n\n (1) Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that the compensation received from the shareholders was to be taxed as income from business and not as income from property and also in holding that the Income-tax Officer was not entitled to enhance the compensation to the extent of the compensation received by the shareholders in their own right ? \n\n Answered in the affirmative in favour of the assessee. \n\n (2) Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in cancelling the order passed under section 104 of the Income-tax Act, 1961, thereby deleting the additional demand of Rs. 22,242 for the assessment year 1970-71 ? \n\n Answered in the affirmative in favour of the assessee. \n\n (3) Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that the Income-tax Officer was not entitled to enhance the compensation to the extent of compensation received by the shareholders in their own right ? \n\n Answered in the affirmative in favour of the assessee. \n\n (4) Whether, on the facts and in the circumstances of the case, the sum of Rs. 2,96,285 and Rs. 77,100 received by the applicant during the relevant assessment years 1971-72 and 1972-73, respectively, as 'non-refundable' deposits were income of the applicant ? \n\n Answered in the affirmative, as income from business and trade. \n\n (6) Whether, on the facts and in the circumstances of the case, the claim of the applicant that losses of past years should be carried forward and adjusted against the income of the applicant for the assessment years 1971-72 and 1972-73 has been rightly rejected by the Tribunal ? \n\n Answered in the negative and against the Revenue. \n\n 16. The following questions in Income-tax Reference No. 138 of 1982 are answered as under : \n\n (1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the amounts of Rs. 2,87,250, Rs. 13,000 and Rs. 2,87,250 received by the assessee during the assessment years 1973-74, 1974-75 and 1975-76, respectively, as non-refundable deposits were assessable as income of the assessee ? \n\n Answered in the affirmative in favour of the Revenue. \n\n (2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the claim of the assessee to deduct a sum of Rs. 4,47,399, for the assessment year 1973-74, Rs. 4,16,775 for the assessment year 1974-75 and Rs. 3,24,694 for the assessment year 1975-76, being payment of interest on deposits either under section 28 or under section 37 of the Act was not allowable ? \n\n Answered in the negative and against the Revenue. \n\n 17. No order as to costs." }, { "title": "Steel Containers Ltd. vs Commissioner Of Income-Tax on 27 November, 1974", "url": "https://indiankanoon.org//doc/1726969/", "text": "Steel Containers Ltd. vs Commissioner Of Income-Tax on 27 November, 1974\nEquivalent citations: [1978]112ITR995(CAL)\nAuthor: Sabyasachi Mukharji\nBench: Sabyasachi Mukharji\nJUDGMENT\n \n\nSabyasachi Mukharji, J. \n \n\n1. This is a reference under Section 256(1) of the Income-tax Act, 1961. This reference relates to the assessment years 1962-63 and 1963-64, the relevant previous years for which were calendar years 1961 and 1962, respectively. It appears that there was a company known as Indian Galvanizing Co (1926) Ltd., which has been referred to briefly by the Tribunal as I.G., and we shall follow the same pattern. It was a subsidiary of Balmer Lawrie & Co. Ltd., which has been referred to shortly as B.L, B.L. held 1,95,722 out of 3,69,459 ordinary shares of I.G. and was carrying on business in the manufacture of steel containers and drums in the factories at Bombay and at Calcutta. B.L. were its managing agents appointed as such under an agreement dated 8th December, 1926. This agreement of managing agency expired on the 14th January, 1957, but by an agreement dated the 11th March, 1957, I.G. reappointed B.L. as managing agents for a period of 10 years as and from 15th January, 1957. In the year 1958, the remuneration that was paid by I.G. to B.L, for acting as managing agent was Rs. 40,000 and the directors' remuneration was Rs. 8,000. In the calendar year 1959, I.G.'s profits were Rs. 90,167. The remuneration that was paid to B.L. amounted to the same figure of Rs. 40,000, while the directors' remuneration came to Rs. 8,600. It has to be mentioned that the sum actually paid to B.L. in these years was the minimum remuneration as per Clause 5 of the said managing agency agreement. Some time in 1958, the management of I.G. appears to have decided to start three new concerns, i.e., the assessee-company took over the factory of I.G. at Bombay, a company called Industrial Containers Ltd. to take over its Calcutta factory and a third company known as Hopes Metal Windows (India) Ltd- to start a new business in metal windows. In pursuance of the aforesaid desire the assessee-company was incorporated in Calcutta on the 16th June, 1958, with a share capital of Rs. 14,00,070 comprised of 1,40,007 shares of Rs. 10 each. A company known as Industrial Containers was also formed. The assessee-company in pursuance of the scheme took over with effect from 1st January, 1959, the factory of I G. at Bombay in consideration of which the assessee was allotted 1,40,000 ordinary shares of I.G. and thus became a subsidiary of I.G. and hence of B.L. The Industrial Containers took over the Calcutta organisation of I.G. and allotted 31,000 out of 31,014 shares to I.G. in consideration thereof. The business of metal windows, however, did not materialise. On the 30th December, 1960. I.G. went into voluntary liquidation. In 1961, out of its assets some of the shares held by it in the assessee-company and in the Industrial Containers were distributed to B.L. 76,942 shares of the assessee-company came into the hands of B.L. and the assessee directly became a subsidiary of B.L. It may incidentally be mentioned that in the relevant years with which we are concerned, the assessee had not actually become the subsidiary of B.L. but for all practical purposes that does not make any material difference in this case. As a result of winding up, B.L. ceased to be the managing agents of I.G. The assessee-company commenced business on the 1st January, 1959. For the two years the assessee-company had no secretaries or managing agents though it was claimed on behalf of the assessee that B.L. was looking after its affairs as the assessee was one of its subsidiaries. On the 29th December, 1960, the board of directors of the assessee-company passed a resolution approving the execution of the agreement appointing B.L. as secretaries of the company for a period of five years from 1st January, 1961. It would be necessary to refer to some of the relevant provisions of the said agreement : \n\n\" 2. It is hereby expressly declared that notwithstanding anything contained in this agreement the secretaries shall not at any time during the currency of this agreement whether subject to the superintendence, control and direction of the board of directors of the company or otherwise have or be entitled to the management of the whole or substantially the whole of the affairs of the company. \n\n3. The secretaries shall be responsible for the keeping and custody of the books and papers of the company and shall duly make, keep, file or cause to be made, kept and filed all such registered returns, statements and accounts as under the provisions of the Companies Act, 1956, or any statutory modification thereof for the time being in force are required to be made, kept and filed by the company or its officers and the secretaries shall perform all such duties for the company as are ordinarily performed by secretaries. \n\n4. The secretaries may subject to the provisions of Clause 2 hereof in addition to their duties as secretaries of the company perform any other duties and work for the company as the board of directors of the company may determine. \n\n5. The secretaries shall have power to perform all the duties which may be performed by a secretary under the Companies Act, 1956, or subject to the provisions of Clause 2(m) hereof in the performance of their duties under this agreement. \n\n6. The secretaries shall be entitled to receive from the company by\nway of remuneration for its services as secretaries the sum of, or in respect\nof any period of less than one calendar month, calculated at the rate of\nrupees ten thousand per calendar month, such sum being payable in arrear\non the last day of each calendar month. \n\n7. The remuneration payable under Clause 6 hereof shall not be regarded as in any manner or to any extent intended to reimburse the secretaries in respect of any expenses incurred or to be incurred by the secretaries on behalf of the company and the secretaries, in addition to receiving such remuneration, shall be entitled to be reimbursed by the company in respect of any expenses incurred by the secretaries on behalf of the company and sanctioned by the board of directors of the company. \" \n\n2. It appears that under Clause 6 of the said agreement B.L. became entitled to remuneration of Rs. 10,000 per month and under Clause 7 of the reimbursement of the expenses incurred by them on behalf of the assessee. In accordance with the agreement the assessee paid Rs. 1,20,000 each in the calendar years 1961 and 1962, and these items were included as part of debit of Rs. 3,68,946 and Rs. 4,76,025 shown in the assessee's balance-sheet for the two years against the head \" Miscellaneous expenses \". In addition to the above remuneration the assessee paid to B.L. sums of Rs. 41,319 and Rs. 38,991, respectively, for the aforesaid two previous years by way of reimbursement of expenses in respect of various services rendered by them to the asses see-company. \n\n3. The Income-tax Officer in making the assessment for the relevant assessment years 1962-63 and 1963-64 was of the opinion that the entire remuneration paid to B.L. should be disallowed in view of the provisions of Section 37 as well as Section 40(c)(i) of the Income-tax Act, 1961. He held, inter alia : \n\n(i) B.L, rendered various managerial services to the assessee-company and other concerns for which it charged fees. The assessee had paid Rs. 41,319 and Rs. 38,991 to B.L. by way of such fees ; \n\n(ii) The assessee did not, despite several opportunities given, show any satisfactory evidence of the necessity for the appointment of B.L. as secretaries when there was no such necessity in the earlier years and when it was otherwise being remunerated for services rendered by it ; \n\n(iii) B.L. had not rendered any additional service than in the earlier year and had no responsibility in the management. It was being appointed as secretaries and remunerated only because it held the majority of the shares in the assessee-company. \n\n4. There was some correspondence with regard to this matter between the Income-tax Officer and the assessee, namely, the assessee's letter to the Income-tax Officer dated the 30th October, 1963, the Income-tax Officer's reply dated 3rd December, 1963, and the assessee's reply thereto dated 19th December, 1963. These three letters have been made part of the statement of case in this reference before us. We may shortly refer to these three letters. By the letter dated the 30th October, 1963, the assessee had written to the Income-tax Officer that no single person in the office of the secretary devoted his whole time to the secretarial work but the categories of persons mentioned in the said letter rendered their several export knowledge in the service o! the company as was required, namely, the directors, senior executives, chief accountant, chief personal officer, junior executive, taxation officer, sales tax officer. On receipt of this letter the Income-tax Officer wrote back on the 3rd December, 1963, enquiring of the assessee whether apart from specific duties mentioned in the said agreement any other duties were allotted to the secretaries as part of Clause 4 of the said agreement and if so, to produce the necessary resolution of the board of directors. The Income-tax Officer further stated that the main duties as under the said agreement were that the secretaries should be responsible for keeping and the custody of the books and the statutory returns as required under the various provisions of the Indian Companies Act. It was mentioned that separate charges were made by these secretaries for centralised services rendered by them. The Income-tax Officer enquired whether there were any separate services rendered by the secretaries for which no separate bill had been submitted. He enquired of the assessee what were the specialised service that was required of the secretaries. On the 19th December, 1963, the assessee wrote back to the Income-tax Officer setting out the list of specific duties alleged to have been performed by the secretaries. \n\n5. In view of the aforesaid order of the Income-tax Officer the assessee preferred an appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner found that the sums of Rs. 31,319 and Rs. 38,991 paid by the assessee to B. L. did not include any element of remuneration to the directors and senior executives of B.L. and the assessee did not pay any remuneration to its own directors. The Appellate Assistant Commissioner was of the view that the remuneration paid to B.L. was excessive in terms of Section 40(c) and that it could be fixed at Rs. 3,000 per month in view, inter alia, of the following facts : \n\n(a) that no remuneration had been paid to B. L. in 1959 and 1960, though there were huge profits and though the extent of reimbursement was smaller; \n\n(b) that in reimbursing the expenses, the element of services rendered by the staff of B.L. was taken into account and it was only the remuneration attributable to some supervisory duties or managerial functions that could be allotted to the secretaries ; \n\n(c) that the appellant had no competitors in the market and its high profits were due not to the secretaries but to the monopolistic nature of the business; and \n \n\n(d) that B.L. was now getting substantial remuneration as secretaries of threre subsidiaries of I,G. whereas they did not get even a fraction of the remuneration in the past as the managing agents of I.G.\n\nThe assessee preferred further appeal to the Tribunal. In view of the controversy that has been canvassed before us, it would be necessary to set out some of the ground3 of appeal before the Tribunal. The grounds of appeal before the Tribunal, inter alia, were as follows : \n\n\"(1) that the Appellate Assistant Commissioner erred in upholding the disallowance of Rs. 84,000 out of Rs. 1,20,000 paid as secretaries' remuneration to Balmer Lawrie & Co. Ltd. ; \n\n(2) on the facts and in the circumstances of the case, the Appellate Assistant Commissioner should have allowed the entire amount of Rs. 1,20,000 and not merely Rs. 36,000 was an admissible deduction ; \n\n(3) that the Appellate Assistant Commissioner's decision that the sum of Rs. 1,20,000 paid as remuneration to the secretaries is excessive and that the reasonable remuneration for their services would be Rs. 36,000 is wholly arbitrary and not at all justified having regard to the nature and extent of the services rendered by the secretaries;......\n\n(6) that the sum of Rs. 1,20,000 paid to the secretaries in terms of the agreement entered into by the appellant and the secretaries as normal business appointment was laid out wholly and exclusively for the purpose of the appellant's business and no part of it was disallowable under the provisions of Section 40(c) of the Income-tax Act, 1961.\" \n\n 6. \n It was contended on behalf of the assessee that the provisions of Section 40(c)(i) were applicable only in the case of an individual whether he was a director or shareholder substantially interested in the assessee-company and had no application where the remuneration was paid or allotted to corporate entity. It was contended that the reasons given by the Appellate Assistant Commissioner for disallowing a portion of the remuneration were unsustainable because, inter alia : \n\n(i) in the earlier years B.L. had looked after the assessee's work as the managing agents of I.G. The assessee was wholly the subsidiary of I.G. and hence no separate remuneration was paid to B.L. \n \n\n(ii) That the Appellate Assistant Commissioner erred in saying that only managerial services were rendered by the company whereas in fact their functions were extensive. \n\n(iii) The assessee had no monopoly in the trade and the large profits were due to the expert services of B.L. \n \n\n(iv) The fact that B.L. got remuneration from other companies for\nservices rendered to them was irrelevant in judging the remuneration paid\nby the assessee-company. Also on the basis of the managing agency agree\nment with I.G. it would have been entitled to have in the years under\nappeal Rs. 1,34,445 and Rs. 2,19,218 and the remuneration actually paid\nto them was much less.\n\n7. \nThe Tribunal considered the assessee's contention that Section 40(c)(i) of the 1961 Act had no application and accepted the said contention. The Tribunal was of the view that Section 40(c)(i) could not apply to the allowance or remuneration paid to a corporate entity. The Tribunal has set out its reasons in its order for coming to that conclusion; inasmuch as we are not concerned, for the reasons mentioned hereinafter, with the said question, it is not necessary for us to refer in detail to the reasonings of the Tribunal on this aspect of the matter. The Tribunal, however, examined the facts in detail and came to the conclusion that under the terms of the agreement dated the 9th January, 1961, B.L. became only the secretary of the company as contemplated by the Companies Act. The allocation of duties other than those of the secretaries according to that agreement would have required the resolution of the company and the Tribunal noted that though opportunity had been given and the assessee was called upon to produce such a resolution, none was produced. Nor was there any evidence of any additional payments made to B.L. which would have been consistent with the allotment of additional duties in fact entrusted to them. The Tribunal found that the specialised services as per list given by the assessee did not amount to any variation of the normal duties of a secretary of a company. It was true, the Tribunal noted, that B. L. was reimbursed only for the services rendered by its staff but not towards the remuneration paid to its directors and senior executives but the Tribunal observed that B.L. was having several activities of its own and its directorial and top executive establishment was concerned with its own affairs and management. The expenses incurred in respect of the services rendered by the several departments of B.L. including those of taxation and personal officers and the Delhi representative were got reimbursed from the several companies. In fact, the Tribunal found the services of B.L. to the assessee for which they had to be remunerated under the agreement were in fact only those of a secretary of a company. Having regard to the facts that B.L. had got much less remuneration in the earlier two years, that their responsibilities as secretary were much less than before and there was no secretary of the company in the earlier two years, the Tribunal was of the opinion that the remuneration paid from 1961 onwards needed scrutiny. The Tribunal recorded that there was no evidence to support the assessee's contention that in the earlier years also B.L. was rendering services to the assessee as the managing agents of I.G. as claimed by the assessee. The Tribunal also noted that the assessee's establishment expenses had increased progressively and the Tribunal had given a break-up of the said increase in its order. The Tribunal referred to the annual reports of the assessee from which, according to the Tribunal, it appeared that the assessee's business,\n\nwhether it was monopoly or not, needed no special impetus. The remuneration paid to a secretary, according to the Tribunal, should be much less than that paid to the managing agents or secretaries and treasurers and could be reasonably fixed at Rs. 2,000 to Rs. 3,000 per month. The Tribunal, however, took into account that there was a company which was acting as the secretary and there were pooled services available. In the premises, the Tribunal fixed the remuneration at Rs. 5,000 per month. The Tribunal relied mainly on the following factors :\n\n(i) The payment was made to the company which was the assessee's holding company;\n\n(ii) The services rendered were purely secretarial;\n\n(iii) The services rendered had no direct and immediate impact on the company's trade or extent of business;\n\n(iv) As the managing agents were doing much heavier work, the payee company did not derive such a large remuneration;\n\n(v) That there were no secretaries in the first two years of the company's working; and \n \n\n(vi) B. L. had been engaged as secretaries in the third year of the company's work while they were on the point of losing their managing agency.\n\n8. For the reasons mentioned in the Tribunal's order and for the said factors indicated as before, the Tribunal came to the conclusion that the entire remuneration paid to B.L. was not wholly and exclusively for the purpose of the assessee's business, tn the premises, the Tribunal disallowed a sum of Rs. 60,000, namely, Rs. 5,000 per month, for each of the two years under appeal.\n\n9. In the background of the aforesaid facts and circumstances of the case on an application being made, the Tribunal has referred the following questions at the instance of the assessee :\n\n\" (1) In the appeal by the assessee against the disallowance sustained by the Appellate Assistant Commissioner of Income-tax under Section 40(c) of the Income-tax Act, 1961, and without a cross-appeal or cross-objections by the department, and after finding that Section 40(c) was not applicable was it open to the Tribunal yet to sustain the disallowance partially under Section 37 ?\n\n(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the entire remuneration allowed to the secretaries was not laid out wholly and exclusively for the purpose of the assessee's business and in determining the allowable amount of such remuneration at Rs. 60,000 ? \"\n\n10. At the instance of the revenue, the Tribunal has also referred a third question, namely :\n\n\" Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the provisions of Section 40(c) of the Income-tax Act, 1961, could not be invoked to disallow any portion of the remuneration paid to Messrs. Balmer Lawrie & Co. Ltd. ? \"\n\n11. The first question with which we are concerned in this case is whether the Tribunal was competent to disallow a portion of the remuneration paid to B. L. under Section 37 of the Income-tax Act, 1961, in the facts and circumstances of the case. As mentioned hereinbefore, the Income-tax Officer had disallowed the entire amount both under Section 40(c)(i) as well as under Section 37 of the Act. In appeal from the said order the Appellate Assistant Commissioner had only relied upon Section 40(c)(i) in making the partial disallowance of the remuneration paid to B. L. In the further appeal the Tribunal found that Section 40(c) was not applicable in the facts and circumstances of the case because the remuneration was paid to a corporate entity. The Tribunal, however, on examination of the facts came to the conclusion that the entirety of the remuneration paid was not wholly and exclusively for the purpose of the assessee's business and in the premises had disallowed a part It is the propriety and validity of this action that is in controversy by the first question placed before us. Counsel for the assessee contended that inasmuch as the Appellate Assistant Commissioner had only relied upon Section 40(c)(i) of the Income-tax Act, 1961, the only question open before the Appellate Tribunal was whether any part of the allowance was to be allowed or disallowed under the said section ; whether the allowance was to be made or disallowance was to be made under any other provisions of the Act was not the subject-matter of the appeal before the Appellate Tribunal. In that context, it was contended that the respondent had got a point in their favour and it was not open to the appellate authority to dislodge the assessee of the point. It was further contended that it was possible with the leave of the court for an applicant to expand the appeal but the appeal could not be expanded to the prejudice of the assessee in the manner it had been done. Counsel drew our attention to the provisions of Sections 253 and 254 of -the Act and contended that the power and jurisdiction of the Appellate Tribunal was to pass such order which it thought fit thereupon and it was contended that the affect-matter of the appeal was the propriety or validity of allowance under Section 40(c)(i) of the Act and not whether allowance or disallowance could be upheld on any other provisions of law. In this connection, counsel drew our attention to the decisions in the case of. Indira Balakrishna v. Commissioner of Income-tax [1956] 30 ITR 320 (Bom), in the case of Puranmal Radhakishan and Company v. Commissioner of Income-tax [1957] 31 ITR 294 (Bom), in the case of V. Ramaswamy Iyengar v. Commissioner of Income-tax [1960] 40 ITR 377 (Mad), in the case of F. Y. Khambhaty v. Commissioner\n\nof Income-tax [1966] 61 ITR 30 (Guj) and in the case of Seth Champalal Ramswarup v. Commissioner of Income-tax [1964] 52 ITR 201 (All). Reliance was placed on the decision in the case of Pathikonda Balasubba Setty v. Commissioner of Income-tax [1967] 65 ITR 252 (Mys). These decisions reiterate the principle there that the power of the Tribunal is limited to the subject-matter of the appeal and the scope of the respondent's right to support the order appealed from is also limited. The question, therefore, is what is the subject-matter of the appeal. We have noted the grounds of the appeal before the Tribunal. The assessee's grievance before the Tribunal was in fact that as the assessee stated in the grounds of appeal that the Appellate Assistant Commissioner erred in upholding the disallowance of Rs. 84,000 out of Rs. 1,20,000, so the grievance that was before the Tribunal was the disallowance of the sum of Rs. 84,000. It is not so much the grounds of disallowance that was appealed from but the factum of disallowance for which the assessee was aggrieved and that was the subject-matter of the appeal before the Tribunal. If we look at the ground No. 6 it would be clear that the assessee was contending that the entire expenditure had been wholly and exclusively laid out for the assessee's business. Therefore, whether that was so or not was a question canvassed before the appellate authority. This position in our opinion can be examined from the principle of the decision of the Supreme Court in the case of Commissioner of Income-tax v. Mahalakshmi Textile Mills Ltd. . There what had happened was that the assessee which had carried on the business of manufacture and sale of cotton yarn, had spent Rs. 93,215 for introduction of \" casablauca conversion system \" in its spinning plant. Substantially this involved leplacement of certain roller stands and fluted roller fitted with rubber aprons to the spinning machinery, removal of ring frames from certain existing parts, introduction, inter alia, of ball-bearing, jockey-pulleys for converting the original band drivers to tape drivers and other additions and alterations in the drafting mechanism. The assessee claimed development rebate on the ground that introduction of the \"casablanca conversion system\" involved installation of new machinery and for the first time before the Appellate Tribunal claimed in the alternative that the amount laid out was in any event expenditure for current repairs allowable under Section 10(2)(v) of the Indian Income-tax Act, 1922. The Tribunal inspected the factory, studied the working of the machinery and considered the literature of the manufacturers and held that though the development rebate was not admissible the amount spent was admissible under Section 10(2)(v) since as a result of the stress and strain of production over a long period there was need for change in the plant and that the assessee had replaced old parts. It was held by the court that the Tribunal had evidence before it from which it could be concluded that by\n\nintroducing the \" casablanca conversion system \" the assessee made current repairs to the machinery and plant and the sum of Rs. 93,215 was allowable as an expenditure incurred for current repairs under Section 10(2)(v) of the Act. The Supreme Court further held that because the Tribunal rejected the assessee's claim for development rebate, it was not bound to disallow the claim of the assessee for allowance of the amount spent, if it was a permissible allowance on another ground. Whether the allowance was admissible under one head or another of Sub-section (2) of Section 10, the subject-matter of the appeal remained the same and the Tribunal having held that the expenditure incurred fell within the terms of Section 10(2)(v), though not under Section 10(2)(vib), it had jurisdiction to admit that expenditure as permissible allowance in the computation of the taxable income of the assessee. The Supreme Court observed that tinder Section 33(4) of the Indian Income-tax Act, 1922, which is in similar terms to Section 254 of the Income-tax Act, 1961, the Tribunal was competent to pass such orders on appeal \" as it thinks fit \". There was nothing in the Income-tax Act which restricted the Tribunal to the determination of the questions raised before the departmental authority. All questions, whether of law or of fact, which related to the assessment of the assessee might be raised before the Tribunal. If for reasons recorded by the departmental authority in respect of a contention raised by the assessee, grant of relief to him on another ground was justified, it would be open to the departmental authority and the Tribunal, and indeed they would be under a duty, to grant that relief. Similarly, if the disallowance of certain expenditure to an assessee was warranted by certain provision of law where the allowance and disallowance were the subject-matter of the appeal, in our opinion, the Tribunal was competent under Section 254 to deal with that question and decide the same in accordance with law. Therefore, the first question referred to this court must be answered in the affirmative and in favour of the revenue.\n\n12. The next question, as mentioned hereinbefore, is directed against the propriety of the Tribunal's action in disallowing Rs. 60,000 under Section 37 of the Income-tax Act, 1961. The first contention on behalf of the assessee before us was that Section 37 had no application to the facts of the case. It was contended that the question of applicability of Section 40(c)(i) would arise only where an expenditure was held to be exclusively and wholly for the purpose of the assessee's business. It was, secondly, urged that the question of reasonableness of expenditure or whether the expenditure was excessive or not was not for consideration under Section 37 of the Income-tax Act, 1961. It was contended further that it was possible if the Tribunal came to the conclusion that the money was not paid or that the money had not been spent wholly or exclusively for the assessee's business to disallow the entire amount spent but it was not within the jurisdiction of the revenue or of the Tribunal to estimate a part of it and disallow a part. In other words, it was contended that if an expenditure was for the purpose of the assessee's business, it was not for the revenue to dictate how the expenditure was to be incurred so long as the expenditure was for the purpose of the assessee's business. It was the assessee who had to see what sum was required to be spent for the purpose of the business. Therefore, it was contended that the revenue and the Tribunal had no jurisdiction at all to determine the reasonableness of the expenditure and to determine whether the sum that was paid was excessive or disproportionate to the requirement. \n\n13. In this connection we might refer to the relevant provisions of Section 37 of the Act as well as Section 40(c)(i) of the Act. \n\n \" 37. General.--(1) Any expenditure (not being expenditure of the nature described in Sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head ' Profits and gains of business or profession '. \n\n (2) Notwithstanding anything contained in Sub-section (1), no expenditure in the nature of entertainment expenditure shall be allowed in the case of a company, which exceeds the aggregate amount computed as hereunder : \n\n (i)\n \n\nOn the first Rs. 10,00,000 of the profits and gains of the business (computed before making any allowance under section 33 or in respect of entertainment expenditure)\n \n\nat the rate of 1% or Rs. 5,000, which-ever is higher.\n\n (ii)\n \n\nOn the next Rs. 40,00,000 of the profits and gains of the business (computed in the manner aforesaid)\n at the rate of %\n \n \n (iii)\n \n\non the next Rs. 1,20,00,000 of the profits and gains of the business (computed in the manner aforesaid)\n at the rate of 1/4%\n \n \n (iv)\n \n\non the balance of the profits and gains of the business (computed in the manner aforesaid)\n nil.\"\n\n \" 40. Amounts not deductible.--Notwithstanding anything to the contrary in Sections 30 to 39, the following amounts shall not be deducted in computing the income chargeable under the head ' Profits and gains of business or profession'.--... \n\n (c) in the case of any company--\n\n (i) any expenditure which results directly or indirectly in the provision of any remuneration or benefit or amenity to a director or to a person who has a substantial interest in the company or to a relative of the director or of such person, as the case may be.......\" \n\n14. It may incidentally be mentioned that Section 37 is to the same effect as Section 10(2)(xv) of the Indian Income-tax Act, 1922, and Section 40(c)(i) is also to the same effect as Section 10(4A) of the Indian Income-tax Act, 1922. Therefore, in order to be entitled to deduction as allowance under Section 37 of the Act the expenditure must be laid out wholly and exclusively for the purpose of the business or profession. If it was found that an expenditure was incurred wholly and exclusively for the purpose of the business then it was not for the revenue to determine the reasonableness of that expenditure incurred. It was so held in the case of Newtone Studios Ltd. v. Commissioner of Income-tax [1955] 28 ITR 378 (Mad). It was held by the Madras High Court, in that case, that it was not open to the income-tax authorities to adopt a subjective standard of reasonableness of the amount paid and in order that an expenditure might be one incurred wholly aud exclusively for the purpose of earning profit, it was not necessary to show that it was incurred of necessity. It was sufficient if it was incurred voluntarily and on the ground of commercial expediency and in order to indirectly facilitate the carrying on of the business and the test of commercial expediency was required to be applied to determine whether the expenditure was wholly and exclusively laid out for the purpose of the business. The reasonableness of expenditure should be considered from the point of view of the business and not from the point of view of an outsider including the Income-tax Officer. The revenue had no power to examine what they thought reasonable and to say that the expenditure was necessary. Soon thereafter there was the introduction of Section 10(4A) of the Income-tax Act and about the scope of the new section, which is in similar terms to Section 40(c)(ii), there are expressions of judicial opinions. It was held by this court in the case of Mercantile Express Company (Private) Ltd. v. Commissioner of Income-tax [1963] 47 ITR 125 (Cal), the effect of Section 10(4A) of the Indian Income-tax Act, 1922, was given by the Finance Act, 1956. After the introduction of the said sub-section it was for the Income-tax Officer to decide whether remuneration paid to a director was excessive or unreasonable and if there was no suggestion that the Income-tax Officer had travelled beyond the provisions laid down in the section, legitimate business needs of the company and the benefit derived by or accruing to the company therefrom and there was also no suggestion that the decision of the Income-tax Officer was arbitrary or capricious, no question of law could be said to arise from the decision of the Income-tax Officer for reference to the High Court. This court observed that the result of the introduction of the new section was to get round the effect of the provision of the previous decision under Section 10(2)(xv) and similar expression used in Section 12(2) of the Indian Income-tax Act, 1922, reflected in the decision of the Newtone Studios Ltd. v. Commissioner of Income-tax [1955] 28 ITR 378 and Eastern Investments Ltd. v. Commissioner of Income-tax .\n\n15. In the case of Commissioner of Income-tax v. Raman and Raman Ltd. [1969] 71 ITR 345 (Mad), the Madras High Court observed that Section 10(4A) of the Indian Income-tax Act, 1922, was not merely clarificatory of Section 10(2)(xv) as it would come into play even where the expenditure was wholly and exclusively laid out for the purpose of the business as discretion was given to the revenue to see whether the allowance was excessive or reasonable in the case of a closed company. Under Section 10(2)(xv) there was no discretion, according to the Madras High Court, on the revenue and once it was shown that a certain amount was wholly and exclusively laid out for the purpose of the business, there was no option for the department but to grant the allowance.\n\n16. Therefore, it is first necessary in this case to determine whether the expenditure was wholly and exclusively necessary for the purpose of the business of the assessee. That naturally would depend upon the facts and circumstances of each case. \n\n17. In the case of Commissioner of Income-tax v. Walchand and Co. P. Ltd, [1967] 65 ITR 381, the Supreme Court observed that in applying the test of commercial expediency or determining whether an expenditure was wholly and exclusively laid out for the purpose of the business, reasonableness of the expenditure had to be adjudged from the point of view of the businessman and not of the revenue. It was open to the Tribunal to come to the conclusion either that the alleged payment was not real or that it was not incurred by the assessee in the character of a trader or that it was not laid out wholly and exclusively for the purpose of the business of the assessee and to disallow it. But it was not the function of the Tribunal to determine the remuneration, which in their view, should be paid to an employee of the assessee. An employer in fixing the remuneration of the employees was entitled to consider the extent of his business, the nature of the duties to be performed and the special aptitude of the employee, future prospects of extension of the business and a host of other related circumstances. It was erroneous to think that the increased remuneration could only be justified if there was a corresponding increase in the profits of the employer.\n\n18. Similar views were expressed in the case of J.K, Woollen Manufacturers v. Commissioner of Income-tax . In the case of Bengal Enamel Works Ltd. v. Commissioner of Income-tax [1970] 77 ITR 119, the Supreme Court observed that where an amount paid to an employee pursuant to an agreement was excessive because of \"extra-commercial considerations\", the taxing authority had jurisdiction to disallow a part of the amount as expenditure not incurred wholly and exclusively for the purpose of the business. Indisputably an employer in fixing the remuneration, according to the Supreme Court, of his employee was entitled to take into consideration the extent of his business, the nature of duties to be performed, the special aptitude of the employee, the future prospects of the business and other related circumstances and the taxing authorities could not substitute their own view as to the reasonable remuneration which should have been agreed to be paid to the employees. But the taxing authority might disallow an expenditure claimed on the ground that the payment was not real or was not incurred by the assessee in the course of his business or that it was not laid out wholly and exclusively for the purpose of the business of the assessee. According to the Supreme Court thereby, the authority did not substitute his own view as to how the assessee's business affairs should be managed, but proceeded to disallow the expenditure because the condition as to the admissihility was absent. For the assessment years 1951-52 to 1953-54, the appellant-company had claimed under Section 10(2)(xv) of the Indian Income-tax Act, 1922, deduction of the sums respectively of Rs. 52,947, Rs. 64,356 and Rs. 79,227 paid as remuneration to one Dr. Ganguly as technical adviser under the terms of a resolution of the board of directors. A sum of Rs. 42,000 per year alone was allowed and the balance was disallowed on the ground that the payment was influenced by \"extra-commercial considerations\". Dr. Ganguly and his father-in-law were able to control the voting power in the board of directors. Dr. Ganguly was not trained in the technique of \" enamelled-ware \" and had no special qualification for the post. The remuneration agreed to be paid was much in excess of the amount normally payable and also of what Dr. Ganguly was earning by practising his profession as a doctor of medicine. It was held by the Supreme Court that the disallowance of the part of the remuneration was permissible under Section 10(2)(xv) of the Act. The Supreme Court referred to the decision in the case of Swadeshi Cotton Mills Ltd. v. Commissioner of Income-tax and observed that in computing the taxable income of the assessee whether an amount claimed as expenditure was laid out or expended wholly and exclusively for the purpose of the business, profession or vocation of the a&sessee must be decided on the facts in the light of the circumstances of each case. The resolution of the assessee fixing the remuneration to be paid to an employee and production of vouchers for payment together with proof of rendering services did not exclude an enquiry whether an expenditure was laid out wholly and exclusively for the purpose of the assessee's business. It was still open to the taxing officers to hold tinder Section 10(2)(xv) of the Act--an agreement to pay and payment notwithstanding--that the expenditure was not laid out wholly and exclusively for the purpose of business.\n\n19. In this case we have noticed the facts upon which the Tribunal has relied. \n\n20. The validity of the primary facts found by the Tribunal cannot be challenged and have not been challenged before us by the assessee. Therefore, we must proceed on these facts. These facts were that the payments were made to a company which was the assessee's holding company or a company which could influence the assessee's voting power or decision. This is not in dispute. It was contended that so far as the Tribunal had held that the services rendered by the assessee was purely secretarial the said conclusion was an inferential conclusion and the same was open for examination in the frame of the question that has been posed before us. In this connection reliance was placed on the decision in the case of Commissioner of Income-tax v. S. P. fain Without entering into any detailed examination of the said decision we are of the opinion that the inference drawn by the Tribunal on the said agreement is a possible one. The other facts, as mentioned in the beginning of the judgment, upon which the Tribunal has relied, cannot be termed as irrelevant and are not inferential findings. Therefore, having regard to the facts and circumstances of the case, if the Tribunal has come to the conclusion that the entirety of the expenditure was not wholly and exclusively for the purpose of the assessee's business in view of the principles enunciated by the Supreme Court, we cannot say that such a conclusion was not either possible in law or was a perverse conclusion on the facts of this case.\n\n21. In this connection, before we conclude, we must note that counsel for the assessee referred us to several decisions on this point, namely, in the cases of (1) Roman and Roman Ltd. v. Commissioner of Income-tax [1962] 46 ITR 400 (Mad), (2) Commissioner of Income-tax v. Chari and Chari Ltd. , (3) 5. Veeriah Reddiar v. Commissioner of Income-tax [1960] 38 ITR 152 (Ker), (4) Craddock (H. M. Inspector of Taxes) v. Zevo Finance Co. Ltd [1946] 27 TC 267 (HL), (5) Sanjeevi & Co. v. Commissioner of Income-tax [1966] 62 ITR 156 (Mad), (6) Commissioner of Income-tax v. A.K. Das , (7) J.R. Patel and Sons (P.) Ltd. v. Commissioner of Income-tax [1968] 69 ITR 782 (Guj), (8) Walchand & Co. P. Ltd. v. Commissioner of Income-tax [1963] 48 ITR 638 (Bom) and (9) Sree Meenakshi Mills Ltd. v. Commissioner of Income-tax . In the view we have taken and the principles enunciated by the Supreme Court as mentioned before, it is not necessary to examine these decisions in detail.\n\n22. In the premises, question No. 2 must be answered in the affirmative and in favour of the revenue. \n\n23. So far as question No. 3 is concerned, in view of the decision of this court in the case of Commissioner of Income-tax v. A. K, Das , it must be held that such a question was not competent in the application by the assessee at the instance of the revenue. We, therefore, decline to answer such a question.\nIn the facts and circumstances of the case, each party will pay and bear its own costs. \n\nR.N. Pyne, J. \n\n24. I agree." }, { "title": "Additional Commissioner Of Income-Tax vs Central Bank Of India on 18 February, 1984", "url": "https://indiankanoon.org//doc/1598208/", "text": "Additional Commissioner Of Income-Tax vs Central Bank Of India on 18 February, 1984\nEquivalent citations: (1984)43CTR(BOM)329, [1986]159ITR756(BOM), [1984]18TAXMAN119(BOM)\nAuthor: Sujata V. Manohar\nBench: Sujata V. Manohar\nJUDGMENT\n\n \n\nSujata V. Manohar, J. \n \n\n 1. This is a reference under section 256(1) of the Income-tax Act, 1961, and the following questions of law have been referred to us for determination : \n\n Re : Assessment year 1963-64. \n\n \"(1) Whether, on the facts and in the circumstances of the case, the assessee was entitled to relief/rebate under sections 85, 99(1)(iv), 101(2) and 235 of the Income-tax Act, 1961, on gross dividends, that is, without reducing them by proportionate management or other expenses ? \n\n (2) Whether, on the facts and in the circumstances of the case, the assessee was entitled to relief on the entire portion of tax-free dividend from the State Financial Corporation, that is, without reducing it by proportionate management or other expenses ?\" \n\n Re : Assessment Year 1964-65 : \n\n \"(1) Whether, on the facts and in the circumstances of the case, the assessee was entitled to relief under sections 85, 99(1)(iv), 101(2) and 235 of the Income-tax Act, 1961, on the gross dividends, that is, without reducing them by proportionate managenlent and other expenses ? \n\n (2) Whether, on the facts and in the circumstances of the case, the assessee was entitled to relief/rebate on the entire portion of tax-free dividend from the State Financial Corporation, that is, without reducing them by proportionate management and other expenses ? \n\n (3) Whether, on the facts and in the circumstances of the case, any portion of the business expenditure could be set off against the income of the assessee by way of interest on foreign securities/investments ? \n\n (4) Whether the assessee was entitled to set off capital loss, if any, on the sale of property at Rangoon during the previous year relevant to the assessment year 1960-61, which could not be claimed by the assessee and determined by the Income-tax Officer in that year against the capital gain on the sale of property at Karachi during the accounting year relevant to the assessment year 1964-65 ?\" \n\n Re : Assessment year 1965-66 : \n\n \"(1) Whether, on the facts and in the circumstances of the case, the assessee was entitled to relieflrebate under sections 85, 85A and 235 of the Income-tax Act, 1961, on gross dividend, that is, without reducing them by proportionate management or other expenses ? \n\n (2) Whether, on the facts and in the circumstances of the case, the assessee was entitled to relief on the entire portion of tax-free dividend from the State Financial Corporation, that is, without reducing it by proportionate management or other expenses ? \n\n (3) Whether, on the facts and in the circumstances of the case, any portion of the business expenditure could be set off against the income of the assessee by way of interest on foreign securities/investments ?\" \n\n Re : Assessment year 1966-67 : \n\n \"(1) Whether, on the facts and in the circumstances of the case, the assessee was entitled to relieflrebate under sections 85, 85A and 235 of the Income-tax Act, 1961, on gross dividend, that is, without reducing them by proportionate management or other expenses ? \n\n (2) Whether, on the facts and in the circumstances of the case, the assessee was entitled to relief on the entire portion of tax-free dividend from the State Financial Corporation, that is, without reducing it by proportionate management or other expenses ?\" \n\n 2. Questions for the assessment year 1963-64, question Nos. 1 to 3 for the assessment year 1964-65 and all questions for the assessment years 1965-66 and 1966-67 relate to rebate claimed by the assessee in respect of its dividend income under the relevant sections which are referred to in those questions. According to the assessee, they are entitled to relief on the total gross dividend received by them; while according to the Department, the relief is admissible only on net dividend, that is to say, gross dividend as reduced by (proportionate) management or other expenses. It is an accepted position that in view of the principles laid down in the decision of this court in CIT v. New Great Insurance Co. Ltd. [1973] 90 ITR 348, as also the decision of the Supreme Court in Cloth Traders (P.) Ltd. v. Addl. CIT , the assessee is entitled to relief on the gross dividend received by it. Accordingly, questions Nos. 1 and 2 for the assessment year 1963-64 are answered in the affirmative, that is to say, in favour of the assessee and against the Department.\n\n 3. Questions Nos. 1 and 2 for the assessment year 1964-65 are answered in the affirmative, that is to say, in favour of the assessee and against the Department. \n\n 4. In view of the answers to questions Nos. 1 and 2, answer to question No. 3 for the assessment year 1964-65 becomes academic and it is not necessary to answer the same. \n\n 5. Question Nos. 1 and 2 for the assessment year 1965-66 are answered in the affirmative, that is to say, in favour of the assessee and against the Department. \n\n 6. In view of the answers to questions Nos. 1 and 2, answer to question No. 3 for the assessment year 1965-66 becomes academic and we decline to answer the same. \n\n 7. For the assessment year 1966-67, questions Nos. 1 and 2 are answered in the affirmative, that is to say, in favour of the assessee and against the Department. \n\n 8. The only question that requires consideration is question No. 4 for the assessment year 1964-65. In that assessment year, the assessee had sold its property at Karachi at a profit of Rs. 3,50,343. The assessee claimed to set off against this amount of capital gains a sum of Rs. 3,57,250 being a capital loss suffered by the assessee in respect of transfer of its property at Rangoon during the assessment year 1960-61. It seems that in 1959, a property of the assessee at Rangoon had been sold for a sum of Rs. 1,25,000 (brokerage for sale was Rs. 6,250), whereas, according to the assessee, its fair market value as on January 1, 1954, was Rs. 4,76,000. This resulted in a capital loss of Rs. 3,57,250 to the assessee. It is, however, mentioned in paragraph 10 of the statement of case that the Rangoon property was taken over by the Burma Government during the assessment year 1960-61 and the assessee had no knowledge as to what compensation would be given to it by the Burma Government in respect of the said property. The assessee bank, therefore, could not put in any claim for capital loss during the assessment year 1960-61. The amount of compensation was determined and paid to the assessee in a subsequent assessment year. We have to determine whether it was open to the assessee to set off its capital loss in respect of the Rangoon property suffered during the previous year relevant to the aseessment year 1960-61 as against the capital gains of the assessee on the sale of its property at Karachi during the previous year relevant to the assessment year 1964-65. The question which is framed on this issue proceeds on the basis that the capital loss suffered during the assessment year 1960-61 could not be claimed by the assessee during that relevant assessment year. \n\n 9. It is the case of the Department that unless the loss suffered in respect of a sale of a capital asset is computed in the assessment for the year in which such a loss arises, it cannot be carried forward or set off against a capital gain in a subsequent year. This submission requires to be examined. \n\n 10. In the present case, it is necessary to bear in mind that the loss in question arose in the assessment year 1960-61 when the rights of the assessee were governed by the Indian Income-tax Act, 1922. While the set-off claimed by the assessee is during the assessment year 1964-65 when the Income-tax Act, 1961, had come into operation. Section 24 of the Indian Income-tax Act, 1922, provides for a right to set off a loss in computing the aggregate income as provided in that section. Section 24(2) deals with carrying forward and set-off of business losses. Sub-section (2A) of section 24 reads as under : \n \"24. (2A) Notwithstanding anything contained in sub-section (1), where the loss sustained is a loss falling under the head 'Capital gains', such loss shall not be set off except against any profits and gains falling under that head.\" \n\n 11. Sub-section (2B) of section 24 reads as under : \n \"24. (2B) Where an assessee sustains a loss such as is referred to in sub-section (2A) and the loss cannot be wholly set off in accordance with the provisions of that sub-section, the portion not so set off shall be carried forward to the following year and set off against capital gains for that year, and if it cannot be so set off, the amount thereof not so set off shall be carried forward to the following year and so on, so however, that no such loss shall be carried forward for more than eight years.\" \n\n 12. In view of these provisions, the assessee was entitled to set off the loss suffered by it and falling under the head \"Capital gains\" in the assessment year 1960-61 against capital gains in the eight subsequent years in the manner provided in sub-section (2B). \n\n 13. Under the Income-tax Act, 1961, the relevant provisions relating to set off or carry forward of loss are contained in sections 70 to 80 of the Income-tax Act, 1961. The relevant section in the present case is section 74. The relevant provisions of section 74 are as under : \n\n \"74. (1)(a) Where in respect of any assessment year, the net result of the computation under the head 'Capital gains' is a loss, such loss shall, subject to the other provisions of this Chapter, be dealt with as follows :- \n\n (i) such portion of the net loss relating to short-term capital assets as cannot be or is not wholly set off against income under any head in accordance with the provisions of section 71 shall be carried forward to the following assessment year and set off against the capital gains, if any, relating to short-term capital assets assessable for that assessment year and, if it cannot be so set off, the amount thereof not so set off shall be carried forward to the following assessment year and so on; \n\n (ii) such portion of the net loss as relates to capital assets other than short-term capital assets shall be carried forward to the following assessnlent year and set off against the capital gains, if any, relating to capital assets other than short-term capital assets assessable for that assessment year and, if it cannot be so set off, the amount thereof not so set off shall he carried forward to the following assessrnent year and so on.\" \n\n 74 (1)(b) Notwithstanding anything contained in the Indian Income-tax Act, 1922 (11 of 1922), any loss computed under the head 'Capital gains' in respect of the assessment year commencing on the 1st day of April, 1961, or any earlier assessment year which is carried forward in accordance with the provisions of sub-section (2B) of section 24 of that Act, shall be dealt with in the assessment year commencing on the 1st day of April, 1962, or any subsequent assessment year as follows :- \n\n (i) in so far as it relates to short-term capital assets, it shall be carried forward and set off in accordance with the provisions of sub-clause (i) of clause (a) and sub-section (2); and \n \n\n (ii) in so far as it relates to capital assets, other than short-term capital assets, it shall be carried forward and set off in accordance with the provisions of sub-clause (ii) of clause (a) and sub-section (2). \n\n (2)(a) No loss referred to in sub-clause (i) of clause (a) of sub-section (1) or sub-clause (i) or sub-clause (ii) of clause (b) of that sub-section shall be carried forward under this section for more than eight assessment years immediately succeeding the assessment year for which the loss was first computed under this Act, or, as the case may be, the Indian Income-tax Act, 1922 (11 of 1922). \n\n (b) No loss referred to in sub-clause (ii) of clause (a) of sub-section (1) shall be carried forward under this section for more than four assessment years immediately succeeding the assessment year for which the loss was first computed under this Act.\"\n\n 14. Thus, under the provisions of section 74(1)(b) of the Income-tax Act, 1961, any capital loss which is carried forward in accordance with the provisions of sub-section (2B) of section 24 of the Indian Income-tax Act, 1922, is to be separated into short-term capital loss and long-term capital loss and set off against short-term capital gains and long-term capital gains respectively in the manner set out in section 74(1)(b). This provision became necessary because under the Indian Income-tax Act 1922, no distinction was made between short-term capital gains or losses and long-term capital gains or losses. The right to carry forward a capital loss for a period of eight years under the Indian Income-tax Act, 1922, is, however, preserved under section 74(2) of the Income-tax Act, 1961. \n\n 15. The first question that requires determination is whether the capital loss which the assessee bank suffered in the assessment year 1960-61 has been carried forward by the assessee under the provisions of the Indian Income-tax Act, 1922, or under the Income-tax Act, 1961. The loss occurred in the assessment year 1960-61 at a time when the Indian Income-tax Act, 1922, was applicable. Under section 24(2A) of the Indian Income-tax Act, 1922, loss falling under the head \"Capital gains\" may be set off against any profits or gains falling under that head. It is nobody's case that during the assessment year 1960-61, the assesseecompany had any profits or gains falling under the head \"Capital gains\" against which this loss could have been set off during the same assessment year. Under sub-section (2B) of that section, when such a loss cannot be set off in accordance with the provisions of sub-section (2A), the portion not so set off shall be carried forward to the following year and set off against capital gains for that year and so on, except that such a loss cannot be carried forward for more than eight years. The right to carry forward the capital loss and set it off against a capital gain in a subsequent year, therefore, accrued to the assessee under the provisions of sub-section (2B) of section 24 of the Indian Income-tax Act, 1922. From the assessment year 1962-63, however, the Income-tax Act, 1961, came into operation. We have, therefore, to see whether there is any provision under the Income-tax Act, 1961, which affects this right which accrued to the assessee under sub-section (2B) of section 24 of the Indian Income-tax Act, 1922. \n\n 16. According to Mr. Joshi, learned counsel for the Department, the right under section 24(2B) of the Indian Income-tax Act, 1922, came to an end on the coming into operation of the Income-tax Act, 1961. He submitted that the right to carry forward and set off the loss which the assessee company had is now conferred on it only by section 74 of the Income-tax Act, 1961. This submission does not appear to be correct. If one examines the scheme relating to set off or carry forward of loss under sections 70 to 80 of the Income-tax Act, 1961, one finds that under section 70, a provision is made for a set-off of loss from one source of income against another source of income arising under the same head of income. This section deals with set off during the same assessment year. Section 70 obviously cannot apply to any assessment year prior to 1962-63 because assessments for the years prior to 1962-63 would be governed by the Indian Income-tax Act, 1922. Section 70 would apply to the year in which the Income-tax Act, 1961, became applicable, that is to say, the assessment year 1962-63. \n\n 17. Similarly, section 71 deals with set off of loss from one head of income against another head of income in the same assessment year. Once again, the provisions of section 71 would apply to those assessment years in which the Income-tax Act, 1961, became applicable. Section 72 deals with carry forward and set off of business losses. Section 72 in terms provides that when there is a loss which cannot be or is not wholly set off in accordance with the provisions of section 71, so much of the loss as has not been so set off can be carried forward as laid down in that section. Since this section has a direct reference to the previous section, quite clearly, the scheme of section 72 also will apply to those assessment years which are covered by the Income-tax Act, 1961. Section 74 deals with losses under the head \"Capital gains\" and how these losses are to be carried forward to subsequent years. Section 74, sub-section (1)(a)(i), lays down that where the net loss relating to short-term capital assets as cannot be or is not wholly set off in accordance with the provisions of section 71, shall be carried forward as prescribed in that section. Here, once again, section 74 refers to the provision for set off as provided in section 71. Itcan only apply to the assessment year to which the Income-tax Act, 1961, became applicable. Section 74(1)(a)(ii) deals with net loss as relates to capital assets other than short-term capital assets and it is required to be carried forward and set off as prescribed in that section. Section 74(1)(a), therefore, deals with carry forward of loss relating to capital assets in respect of assessment years after 1962-63. \n\n 18. Does section 74(1)(b) provide any new rights to the assessees who have suffered loss on their capital assets during the assessment years covered by the Indian Income-tax Act, 1922 ? Section 74(1)(b) in terms deals with losses computed under the head \"Capital gains\" which are carried forward in accordance with the provisions of sub-section (2B) of section 24 of the Indian Income-tax Act, 1922. It does not prescribe that such losses will, after coming into operation of the Income-tax Act, 1961, be carried forward not under sub-section (2B) of section 24 of the Indian Income-tax Act, 1922, but under section 74 of the Income-tax Act, 1961. On the contrary, it assumes that such loss arising in an assessment year prior to 1962-63 is carried forward under the provisions of sub-section (2B) of section 24 of the Indian Income-tax Act, 1922. All that section 74(1)(b) provides is that losses which are being carried forward under section 24(2B) of the Indian lncome-tax Act, 1922, will have to be set off in the subsequent years to which the Income-tax Act, 1961, applies in the manner prescribed in that section. This part of section 74 merely prescribes that loss relating to short-term capital assets and loss relating to long-term capital assets will be set off against the corresponding capital gains. Section 74(2) also preserves the right under the Indian Income-tax Act, 1922 to carry forward such a loss for a period of eight years from the year in which the loss arose. This is important because under sub-section (2)(b) of section 74, loss relating to long-term capital assets which arises under the Income-tax Act, 1961, can be carried forward only for four assessment years. The right of the assessee to carry forward such a loss for eight years under the Indian Income-tax Act, 1922, is thus preserved. It is, therefore, not possible to accept the submission that the right of the assessee company to carry forward and set off of the loss in question arose under section 74 of the Income-tax Act, 1961. Such a right accrued under section 24(2B) of the Indian Income-tax Act, 1922. At the highest, it is modified to some extent by section (1)(b). \n\n 19. Under section 6 of the General Clauses Act, 1897, when any Central Act is repealed, such a repeal does not affect any right acquired under any enactment so repealed unless a different intention appears in the repealing Act. No such different intention appearsunder the Income-tax Act, 1961. The provisions of section (1)(b), far from expressing any such different intention, in fact, preserve the right of the assessee company under section 24(2B) of the Indian Income-tax Act, 1922. Similarly, section 297 of the Income-tax Act, 1961, which repeals the Indian Income-tax Act, 1922, does not contain any provision which affects the right to carry forward loss and set it off under the Indian Income-tax Act, 1922. The right, therefore, of the assessee company to carry forward and set off the loss under section 24(2B) of the Indian Income-tax Act, 1922, continues. The manner of set off is modified by section 74(1)(b) of the Income-tax Act, 1961. \n\n 20. In this connection reference may be made to a decision of the Supreme Court in the case of T.S. Baliah v. T.S. Rangachari, ITO . In that case the Supreme Court considered the provisions of section 6 of the General Clauses Act and section 297(2) of the Income-tax Act, 1961, and held that the right of instituting prosecutions in respect of offences committed under the Indian Income-tax Act, 1922, is not taken away under the Income-tax Act, 1961. This right can be exercised even after the coming into operation of the Income-tax Act, 1961. The same principles apply in the present case.\n\n 21. It is the contention of the Department that as the loss suffered by the assessee company under the head \"Capital gains\" in the assessment year 1960-61 was not computed in the assessment year 1960-61, the assessee company had no right to carry forward and set off that loss in a subsequent assessment year. The assessee company had filed a return for the assessment year 1960-61. It is the case of the assessee company that the loss could not be shown in the assessment year 1960-61, because no compensation had been either determined or received by the assessee company in respect of the property which was taken over in that assessment year It is also not the case of the Department that in the assessment year 1960-61 or in any subsequent assessment year till 1964-65, there was any capital gain against which this capital loss could have been set off. In the absence of computation of such a loss in the assessment year in which the loss occurred, can the assessee company carry forward and set off this loss in the subsequent assessment year ? \n\n 22. Section 80 of the Income-tax Act, 1961, provides as follows : \n\n \"80. Notwithstanding anything contained in this Chapter, no loss which has not been determined in pursuance of a return filed under section 139, shall be carried forward and set off under sub-section (1) of section 72 or sub-section (2) of section 73 or sub-section (1) of section 74 or sub-section (3) of section 74A.\" \n\n 23. In the first place, section 80 deals with carry forward and set off of a loss under sections 72(1), 73(2), 74(1) and 74A(3). It does not apply to a loss carried forward and set off under section 24(2B) of the Indian Income-tax Act, 1922, read with section 74(1)(b) of the Income-tax Act, 1961. \n\n 24. Secondly, section 80 requires that a loss should be determined in pursuance of a return filed under section 139. Returns can be filed under section 139 only in respect of the assessment years to which the Income-tax Act, 1961, applies. The assessee company could obviously not have filed a return under section 139 in respect of assessment year 1960-61. There was, therefore, no question of the loss being determined in pursuance of a return filed under section 139. Section 80 also refers to such a loss determined under a return filed under section 139 being carried forward and set off as provided under sections 72, 73, 74 and 74A. All these sections relate to losses which arise in the assessment years in which the Income-tax Act, 1961, applies and which are carried forward in accordance with the provisions of the Income-tax Act, 1961. It is true that in respect of a loss which arises in the assessment year covered by the provisions of the Income-tax Act, 1961, such a loss will have to be determined pursuant to a return filed under section 139 and carried forward as prescribed under the Act. Otherwise, under the provisions of section 80, such a loss cannot be carried forward and set off. Section 80, however has no application to losses which arose before the coming into operation of the Income-tax Act, 1961, and are carried forward and set off under section 24(2B) of the Indian Income-tax Act, 1922, or (after the coming into force of the Income-tax Act, 1961) are carried forward and set off under section 24(2B) of the Indian Income-tax Act, 1922, read with section 74 of the Income-tax Act, 1961. If section 80 were to apply to losses arising in the assessment years to which the Indian Income-tax Act, 1922, applies, such losses could never be carried forward and set off after the coming into operation of the Income-tax Act, 1961. Because, such losses cannot possibly be determined under a return filed under section 139 of the Income-tax Act. 1961. Section 74, however, clearly contemplates carry forward and set off of such losses after the coming into operation of the Income-tax Act, 1961. Thus, section 80 has no application to losses arising during the assessment years governed by the Indian Income-tax Act, 1922. \n\n 25. We have not been able to find any provision under the Indian Income-tax Act, 1922, which is similar to section 80 of the Income-tax Act, 1961. The only provision under the Indian Income-tax Act, 1922, which can be considered in this connection is section 22(2A). Section 22 of the Indian Income-tax Act, 1922, deals with the return of income. It is comparable to section 139 of the Income-tax Act, 1961. Under section 22(2A) which came into operation, by an amendment, with effect from 1st April, 1952, it is provided as follows : \n\n \"22. (2A) If any person, who has not been served with a notice under sub-section (2) has sustained a loss of profits or gains in any year under the head 'Profits and gains of business, profession or vocation', and such loss or any part thereof would ordinarily have been carried forward under sub-section (2) of section 24, he shall, if he is to be entitled to the benefit of the carry forward of loss in any subsequent assessment, furnish within the time specified in the general notice given under sub-section (1) or within such further time as the Income-tax Officer in any case may allow, all the particulars required under the prescribed form of return of total income and total world income in the same manner as he would have furnished a return under sub-section (1) had his income exceeded the maximum amount not liable to income-tax in his case, and all the provisions of this Act shall apply as if it were a return under sub-section (1).\" \n\n 26. Section 139, sub-section (3), of the Income-tax Act, 1961, contains a somewhat similar provision. It is not necessary to examine whether the provisions of section 22(2A) are mandatory or not and whether unless a person files a return under section 22(2A), he cannot claim the benefit of the right to carry forward business losses. The Supreme Court in the case of CIT v. Kulu Valley Transport Co. P. Ltd. has held that it is section 24(2) of the Indian Income-tax Act, 1922, which confers the benefit of business losses being carried forward and set off, and there is no provision in section 22 under which business losses have to be determined for the purpose of section 24(2). Section 22(2A) simply says that in order to get the benefit of section 24(2), the assessee must submit his loss return within the time specified by section 22(1). That provision must be read with section 22(3) for the purpose of determining the time within which a return has to be filed. Be that as it may, what is important to note is that section 22(2A) only deals with losses under the head \"Profits and gains of business, profession or vocation\". Section 22(2A) has no application to loss arising under the head \"Capital gains\". Since the loss suffered by the assessee was a loss under the head \"Capital gains\", section 22(2A) had no application. There is no other provision under the Indian Income-tax Act, 1922, under which it could be said that it was necessary for the assessee company to have the loss under the head \"Capital gains\" determined or computed in the assessment year in which such a loss arose, before the assessee company could exercise its right to carry forward and set off that loss under the provisions of section 24(2B) of the Indian Income-tax Act, 1922.\n\n 27. In the case of CIT v. Govindalal Dutta 1958] 33 ITR 630, the Calcutta High Court was required to consider a case where the assessee had filed voluntary returns in respect of five assessment years 1946-47 to 1950-51. The Income-tax Officer ignored the returns for the years 1946-47 and 1947-48, as they were voluntary returns and showed business losses. He made an assessment only for the assessment year 1948-49, without determining or taking into account the business losses of the earlier years. The Calcutta High Court held that the assessee had an unqualified right, subject only to the limitations contained in section 24(2) of the Indian Income-tax Act, 1922, to have his business losses carried forward and set off against the business profits of subsequent years irrespective of whether assessments were made in respect of the earlier years. The court also held that the Income-tax Officer had to determine in the assessment for the year 1948-49 the losses incurred by the assessee in the earlier years and allow a set off. This was a decision relating to carry forward and set off of business losses prior to the amendment of 1952 under which section 22(2A) was inserted. The principles, however, laid down in this decision continue to apply to losses under the head \"Capital gains\", since the right to carry forward and set off the loss under section 24(2B) is not in any manner affected by the provisions of section 22(2A).\n\n 28. Similarly in the case of Udaya Ltd. v. CIT [1959] 36 ITR 469, a Full Bench of the Madras High Court was required to consider the right of the assessee to carry forward and set off business loss under the provisions of the Indian Income-tax Act, 1922. The Full Bench of the Madras High Court held that section 24(2) of the Indian Income-tax Act, 1922 (before the amendment of 1952 bringing in section 22(2A)) entitled the assessee to carry forward his business losses for a period of six years. The Act did not impose a further condition that the ascertainment of the losses should have been made anterior to the time when the claim to carry forward was made.\n\n 29. Similarly, in the present case, the assessee has an unqualified right to carry forward its loss arising under the head \"Capital gains\" under the provisions of section 24(2B) of the Indian Income-tax Act, 1922, read with section 74(1)(b) of the Income-tax Act, 1961, subject only to the limitation that such loss is not to be carried forward for more than eight years. Neither of the two Income-tax Acts imposes a further condition that the ascertainment of this loss should have been made anterior to the time when the assessee claims a right to carry forward and set off the loss. \n\n 30. In the case of CIT v. Manmohandas , the Supreme Court was required to consider a case where the assessee had claimed a certain amount as a business loss in the year in which that loss arose. The Income-tax Officer held that it was not a business loss and the assessee had no right to carry forward that loss. Under section 24(2) of the Indian Income-tax Act, 1922, in a subsequent assessment year, the assessee claimed to set off this loss against his profits in that assessment year. The Supreme Court held that whether the loss of profits or gains in any year may be carried forward to the following year and set off against the profits and gains of the same business, profession or vocation under section 24(2) has to be determined by the Income-tax Officer who deals with the assessment for the subsequent year. It is for this Income-tax Officer to determine whether the loss of the previous year may be set off against the profits of that year. A decision recorded by the Income-tax Officer who computes the loss in the previous year that the loss cannot be set off against the income of any subsequent year is not binding on the assessee. The Supreme Court, therefore, was of the view that the question of carry forward and set off of loss had to be determined by the Income-tax Officer who had to deal with the subsequent assessment in which such a right to carry forward and set off was being exercised. Applying the same principle, the loss in the present case can be determined for the purpose of its being carried forward and set off in the assessment year 1964-65.\n\n 31. To conclude, there is no provision under the Indian Income-tax Act, 1922, or under the Income-tax Act, 1961, which requires the assessee-company which has suffered a loss under the head \"Capital gains\" in a previous year relevant to an assessment year to which the Indian Income-tax Act, 1922, was applicable, to have this loss ascertained or determined in the assessment year in which it arose. The assessee can, therefore, exercise the right to carry forward and set off such a \"Capital loss\" in a subsequent year against the capital gains of that year. The loss will have to be computed or determined in the year in which the assessee claims the right of set off. \n\n 32. In the premises, question No. 4 is answered in the affirmative, that is to say, in favour of the assessee and against the Department. \n\n 33. The applicant will pay to the respondent the costs of the reference." }, { "title": "Shahdara (Delhi) Saharanpur Light ... vs Commissioner Of Income-Tax on 9 July, 1993", "url": "https://indiankanoon.org//doc/955939/", "text": "Shahdara (Delhi) Saharanpur Light ... vs Commissioner Of Income-Tax on 9 July, 1993\nEquivalent citations: [1994]208ITR882(CAL)\nJUDGMENT\n \n\nAjit Kumar Sengupta, J.\n \n\n 1. This reference under Section 256(1) relates to two series of assessment years, one from 1972-73 to 1974-75, and the other from 1976-77 to 1981-82. Thus there are nine assessment years involved and some of the questions raised are common to all the years and some common to some of the years. We have arranged the questions in the following manner : \n\n Assessment years : 1972-73 to 1974-75 and 1976-77 to 1981-82 : \n\n\" 1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that non-computation of tax in the body of the assessment order under Section 143(3) or 144 of the Income-tax Act, 1961, did not invalidate the order when the amount of tax was mentioned in the demand notice ? \n\n 2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in rejecting the stand of the assessee : \n\n (a) That the return of income signed and verified by one of the liquidators was non est in law and the assessment made on that basis was ab initio void ? \n\n (b) That the assessee-company, a company in liquidation, had no taxable income within the meaning of Section 5 of the Income-tax Act, 1961 ? \n\n (c) That there being no rate of tax prescribed for a company in liquidation in any of the relevant Finance Acts, no income of the assessee could be charged to tax under Section 5 of the Income-tax Act, 1961 ?\" \n\n For assessment years 1972-73, 1976-77 and 1980-81 : \n \"(d) That, in view of winding of the assessee-company with effect from February 10, 1970, no capital assets were held by it after December 10, 1970. As such, no capital gains tax could be imposed upon it or the liquidators ?\" \n\n For assessment year 1972-73 : \n\n \"3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding :-- \n\n (a) That Section 144B was applicable to reassessment proceedings under Section 147 of the Income-tax Act, 1961 ? \n\n (b) That remitting of the draft assessment order by the Inspecting Assistant Commissioner to the Income-tax Officer for further consideration and if necessary for resubmission did not debar the Income-tax Officer from forwarding another draft assessment order to the Inspecting Assistant Commissioner under Section 144B of the Income-tax Act, 1961? \n\n (c) That the second reference under Section 144B by the Income-tax Officer to the Inspecting Assistant Commissioner was valid and as such the time taken in issuing directions under Section 144B(4) was to be excluded under Section 153(3), Explanation 1(iv) of the Income-tax Act, 1961 ? As such, the reassessment was not barred by limitation ? \n\n 4. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the Income-tax Officer was justified in estimating the cost of acquisition of the capital assets even though reference was made to the Valuation Officer under Section 55A of the Income-tax Act, 1961, who did not pass any order and expressed inability to ascertain the market value of the assets ? \n\n 5. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding : \n\n (a) That the Income-tax Officer was justified in rejecting the estimate of cost of acquisition of the capital assets made by the approved valuer ? \n\n (b) That the Income-tax Officer correctly estimated the cost of acquisition as on January 1, 1954, by setting off depreciation against inflation in the price and thereby taking the book value (purchase price) of the said assets as their cost of acquisition on January 1, 1954 ?\" \n\n For assessment years 1973-74, 1974-75 and 1976-77 to 1981-82 : \n \"6. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was not entitled to deduction of entire expenses on salaries, audit fees, miscellaneous expenses and bank charges out of income of interest on fixed deposits assessed under the head 'Income from other sources' except the proportionate expenses incurred for earning the income of interest ?\" \n\n For assessment years 1973-74 and 1974-75 : \n \"7. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was not entitled to deduction of interest paid on debentures out of income by way of interest on fixed deposits assessed under the head 'Income from other sources'?\" \n\n For assessment year 1974-75 : \n \"8. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that reference under Section 144B was not necessary while making reassessment in compliance with the order of the Commissioner under Section 263 of the Income-tax Act, 1961, when the variation in the income was less than Rs. 1 lakh ?\" \n\n For assessment year 1976-77 : \n \"9. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the initiation of proceeding by the Income-tax Officer under Section 147(a) of the Income-tax Act, 1961, was legal ?\" \n\n For assessment year 1979-80 : \n \"10. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessment was not barred by limitation ?\" \n\n2. The first question is now concluded by the decision of the Supreme Court in Kalyankumar Ray v. CIT [1991] 191 ITR 634. Following the said decision, we answer the first question in the affirmative and in favour of the Revenue. \n\n Question No. (2)(a) is concluded by the decision of a Division Bench of this court in United Provinces Electric Supply Co. Ltd. (In liquidation) v. CIT [1993] 204 ITR 794 (Income-tax Reference No. 393 of 1980), where the judgment was delivered on August 4, 1989. Following the said decision, we answer question No. 2(a) by saying that the Tribunal was right in rejecting the stand of the assessee and the question is answered in the affirmative and against the assessee.\n\n Questions Nos. 2(b), 2(c) and 2(d) are concluded by the decision of this court in Income-tax Reference No. 319 of 1982 (United Provinces Electric Supply Co. Ltd. (In liquidation) v. CIT), where the judgment was delivered on April 4 and 5, 1990. Following the said decision, we answer the aforesaid questions by saying that the Tribunal was right in rejecting the stand of the assessee. Thus the questions are answered in the affirmative and against the assessee.\n\n3. The third and sixth questions are answered in the affirmative and in favour of the Revenue following the judgment delivered by this court on April 7, 1992. Income-tax Reference No. 229 of 1987 (Arrah Sasaram Light Railway Co. Ltd. v. CIT [1993] 204 ITR 807).\n\n4. Questions Nos. 8 and 10 have not been pressed. \n\n5. Thus, we are now left with questions Nos. 4, 5, 7 and 9. \n\n6. The fourth question and the fifth question are inter-related and can be combined into one question : Whether, after reference to the Valuation Officer under Section 55A, the Income-tax Officer could determine the value himself rejecting the assessee's valuer's report and the valuation so made is wrong with regard to quantum. \n\n7. The facts leading to these questions are that the assessee, subsequent to the completion of its assessment for 1972-73 on November 30, 1973, at nil, voluntarily filed a return on March 4, 1976, showing capital gains of Rs. 3,24,931. The return was again revised by filing another return on May 31, 1976, showing the capital gains at a higher figure of Rs. 3,52,931. The Income-tax Officer thereupon reopened the assessment proceedings by issue of a notice under Section 148 which was served on the assessee on March 9, 1976. The assessee informed the Income-tax Officer that the return filed on March 4, 1976, and revised on March 31, 1976, should be treated as the return filed in compliance with the notice under Section 148. The Income-tax Officer found that the assessee had sold plant and machinery, locomotives, railway engines, permanent railway tracks, wagons, stores and spare parts, stations and buildings, permanent weigh bridges and trees standing on the land belonging to it. There is no dispute as regards the amount of the sale proceeds realised by the sale. The assessee exercised its option under Section 55 of the Act and took the services of a valuer, of Messrs. Talbot and Co., recognised approved valuers. The valuer of Talbot and Co. was examined under Section 131. It transpired that the said valuer made the valuation on the assumption that all the assets were new as on January 1, 1954, without taking any depreciation into account for their previous use specially when the assets were all acquired much before January 1, 1954, and had been in use of the business for several years. It was further found that the said private valuer gave the report without examining the layout plan of the properties sold and without checking the actual measurement of the buildings and properties involved. It was further found that the valuer did not verify the quantities of all the assets stated in the list supplied to him by the assessee on the ground that the same was not practicable. This led to the non-acceptance of the valuation report of the registered valuer. The officer referred the question of valuation to the DVO of the locality where the property was situated calling for a report on the market value of the assets as on January 1, 1954. The Valuation Officer could not, however, enquire into the probable market value of the property as they had no opportunity of any inspection of the assets sold as those assets were already despatched from the assessee's workshop to their respective purchasers. The DVO also reported against the assessee not giving the valuation wing access to plans and drawings, relevant particulars and measurements of the property sold. They could not even ascertain the whereabouts of the properties. This fact was intimated to the Assessing Officer by a letter dated August 30, 1978. In a letter, the DVO complained that no records requisite for a proper valuation were available. Thus, the fair market value of the property could not be determined by the DVO, Kanpur. He wrote a letter dated August 30, 1978, reporting as follows : \n \"It is to intimate that no record required for valuation has been made available to the undersigned by you or by the assessee. Moreover, the property under valuation does not exist at the sight at present. Under these circumstances, it is not possible to give the fair market value of the property and the case referred by you, vide your P. No. 11-30-CQ 1785/ 1972-73/(Cal)/CV(D) dated February 15, 1976, has been closed.\" \n\n8. The Valuation Officer, Delhi, by his letter dated November 3, 1987, wrote as follows : \n \"In continuation to my above letter (letter dated September 15, 1978), it is further to intimate that, during my recent visit to Calcutta, I had a discussion with Sri T. V. George, Chief Accounts Officer, Shahdara (Delhi), Sharanpur Light Railway Co. Ltd., on October 24, 1978, on the above subject. It was made clear by Sri George that physical inspection of the plant and machinery was not possible as the entire machinery had been sold out to other firms. You will appreciate that, without physical inspection, it will not be possible to do the valuation. In view of the above, you are requested to advise me as to what steps are considered necessary. In case this office is not intimated about further action within a fortnight, the case will be treated as closed.\" \n\n9. In the absence of the report of the Valuation Officers, the Income-tax Officer himself proceeded to estimate the fair market value of the assets as on January 1, 1954. The assets which were sold were partly acquired prior to January 1, 1954, and partly after January 1, 1954. In the books of the assessee, the cost price of the assets of the assessee was entered since, in view of notification dated June 11, 1927, under the Indian Income-tax Act, 1922, no depreciation was allowed on the assets of the railway companies, but the actual expenditure on repairs, replacement and renewal was allowed as revenue deductions. The Income-tax Officer, however, took into account the fact that the use of an asset necessarily led to the depreciation of its value in the commercial sense even though, for income-tax purposes, no depreciation was allowed. However, he assumed that depreciation in the value of the assets because of their long user would be equal to the inflation in the prices and as such the book value of the asset would be their fair market value. He, therefore, setting off the depreciation against the inflation, accepted the book value of the asset as fair market value on January 1, 1954. On that basis, the Income-tax Officer prepared a draft assessment order and arrived at a capital gains of Rs. 86,77,433. \n\n10. The draft assessment order was referred by the Income-tax Officer for approval to the Inspecting Assistant Commissioner of Income-tax under Section 144B of the Act on February 7, 1979. The assessee raised a number of objections against the draft assessment order before the Inspecting Assistant Commissioner. However, at that stage, there was no dispute between the assessee and the Income-tax Officer relating to the capital gains arising out of stores and spare parts. The Inspecting Assistant Commissioner, by letter dated March 20, 1979, returned the draft assessment order to the Income-tax Officer with the observation that it would be necessary to get the matter processed by the Valuation Officer. The Inspecting Assistant Commissioner mentioned that the draft assessment order could not, therefore, be further considered at that stage. He further mentioned that the Income-tax Officer should get the valuation of the assets made by the Valuation Officer under Section 55A of the Act and redraft the assessment order suitably after giving adequate opportunity to the assessee. It was also mentioned by the Inspecting Assistant Commissioner in his letter to the Income-tax Officer that a reference might be made to him under Section 144B, if found necessary, at a later stage and the present reference was considered as closed. On receipt of the letter from the Inspecting Assistant Commissioner, the Income-tax Officer proceeded to make the assessment afresh. \n\n11. Under the circumstances, the Valuation Officers expressed their inability to submit a valuation report in the absence of actual inspection and non-availability of the material on which the valuation was to be made, the Income-tax Officer reached the conclusion that he himself had to estimate the fair market value as on January 1, 1954, of the assets. He, therefore, prepared a similar draft assessment order dated February 27, 1980, as the earlier one dated February 7, 1979, proposing to assess similar income and sent the case to the Inspecting Assistant Commissioner under Section 144B of the Act. The Inspecting Assistant Commissioner, after considering the objections of the assessee, issued the following direction before July 3, 1980, under Section 144B : \n\n \"First contention of the assessee is that the directions of my pre-decessor-in-office, Sri Narurkar, are binding and I have no jurisdiction. Mr. Narurkar did not give directions for this year and the draft order for this year under consideration, being the first one, is validly referred to me under Section 144B. \n\n 2. The next contention is that proceedings are not valid as the liquidator is not authorised to sign the return. The matter has been discussed in detail in 1977-78 assessment order. As the Act contemplates taxation of companies in liquidation, return, assessment and tax are inescapable. \n\n 3. The third contention is that valuation made by the Company's Valuer, Messrs. Talbot and Co., is binding as the Departmental valuer has declined to make a valuation on the facts and circumstances of the case. The assets in question do not exist now, in any case, they are not in the possession of the assessee. As such, it is not possible for him to inspect and value them. The assessee has not been able to help him in this respect. As regards Talbot's valuation, it is based on conjectures and surmises. It was made without physical inspection. It is based on the hypothesis as if the articles were new as on January 1, 1954, while in fact, they were worn out. Keeping in view depreciation, on the one hand, and appreciation on account of inflation, on the other, as well as the facts of acquisition of a few items after January 1, 1954, the Income-tax Officer has rightly adopted the book value as the prima facie value. \n\n 4. The last contention of the assessee is that the sale did not take place during the relevant period. This also has no substance as the agreements for sale are executed during the previous year. Merely because the vendor lifted the goods at their convenience and the sale consideration was paid in instalments, it cannot be said that the sale did not take place during the accounting period.\" \n\n12. On the basis of the above directions, the Income-tax Officer completed the assessment on total income of Rs. 86,77,433 under the head \"Capital gains\" for the assessment year 1972-73. \n\n13. The assessee appealed to the Commissioner of Income-tax (Appeals) on the quantum of capital gains. The Commissioner of Income-tax (Appeals) held that the fair market value of the standing trees which existed on January 1, 1954, had some commercial value and he estimated such value at 25 per cent. of their sale proceeds. Accordingly, he directed that the quantum of capital gains should be reduced by 25 per cent. of the sale proceeds of the trees. Aggrieved, the assessee came up in appeal before the Tribunal. Before the Tribunal, a question was raised as to whether the draft order dated February 7, 1979, and not the draft order dated February 27, 1980, was the only operative draft order under Section 144B of the Act. The draft order dated February 27, 1980, could not be a valid draft order in the eye of law. The Tribunal noted that the consequence of the assessee's submission is that if the first draft order is taken as the valid one, the assessment would be barred by limitation because the time taken for making the assessment beyond the date of limitation, i.e., March 31, 1980, was more than the time taken to obtain the instruction on the draft order dated February 7, 1979. On the other hand, in the case of the later draft order, being the operative one, the assessment would be within the time because the time taken for obtaining instructions was of sufficient length to cover the delay in making assessment beyond the ordinary date of limitation, namely, March 31, 1980. In that connection, the Tribunal observed as follows : \n\n \"Paragraph 19. We have carefully gone through the letter dated March 20, 1979, of the Inspecting Assistant Commissioner addressed to the Income-tax Officer returning the draft order dated February 7, 1979. In our considered opinion, this is not a direction under Section 144B of the Act. A draft order under Section 144B proposes certain additions and the direction under Section 144B must be confined to either the approval or disapproval of those proposed additions. We find that the letter dated March 20, 1979, is totally silent on the proposed additions. On the contrary, it clearly states that the reference of the draft order dated February 7, 1979, was returned for being sent afresh in future, if necessary, and that the matter was closed at the end of the Inspecting Assistant Commissioner. The tone, tenor, language and contents of the letter show that the Inspecting Assistant Commissioner did not intend thereby to give any valid instructions under Section 144B. Hence, we come to the conclusion that there was no instruction of the Inspecting Assistant Commissioner on the draft order of February 7, 1979. The letter dated March 20, 1979, of Sri Nerurkar (Inspecting Assistant Commissioner) effectively killed the draft order dated February 7, 1979, in the sense that the said draft order became infructuous and non-existent. It was neither an instruction in the way required under Section 144B nor was it kept pending with the Inspecting Assistant Commissioner. Hence, it follows : (1) that there was only one draft order dated February 27, 1980, sent by the Income-tax Officer under Section 144B of the Act, (2) that the assessment made on July 3, 1980, was not barred by limitation, and (3) that the statement of Sri M. P. Agarwal, the Inspecting Assistant Commissioner, was quite correct. \n\n 20. We find that the facts in the case of Sudhir Sareen are distinguishable from the facts of this case because no valid direction was given by the Inspecting Assistant Commissioner under Section 144B prior to the sending of the draft order dated February 27, 1980. We do not find any force in the other contentions raised for the assessee. On the other hand, we agree with Sri S. K. Jha that minor discrepancies in the statements, as pointed out by Sri Guha, were of no consequence and had no bearing on the validity of the assessment. For the above reasons, we reject these grounds\". \n\n14. The arguments as urged before the Tribunal were reiterated before us. We quite agree that the facts in the case are quite distinguishable from the facts of Sudhir Sareen v. ITO because it could not be said that the Inspecting Assistant Commissioner issued any directions which could be directions within the meaning of Section 144B in pursuance of the draft order dated February 7, 1979. It is a fact that the directions which the Inspecting Assistant Commissioner issued on the draft order dated February 7, 1979, did not at all consider any of the additions proposed in the said draft. The letter which the Inspecting Assistant Commissioner addressed to the Assessing Officer in pursuance of the draft order dated February 7, 1979, merely returned the draft order for being sent afresh at a future date if necessary and that the matter was closed for the time being at the Inspecting Assistant Commissioner's end. The drift and tenor of the letter clearly shows that the Inspecting Assistant Commissioner did not intend thereby to issue any instructions under Section 144B. True, the said letter dated March 20, 1979, brought to an end the order of February 7, 1979, in that the order became infructuous and non-existent. It is at any rate neither a direction in the way of a direction within the requirement of Section 144B nor could it be the case that the Inspecting Assistant Commissioner meant it to be a direction within the meaning of Section 144B. Therefore, the inevitable consequence is that the only draft order on which the directions were issued was the one dated February 27, 1980, in pursuance of which the assessment was completed on July 3, 1980, This also nullifies the assessee's plea that the assessment made on July 3, 1980, was barred by limitation because the normal limitation was to expire on March 31, 1980. But the draft in law, was sent on February 27, 1980, and the direction from the Inspecting Assistant Commissioner was received on July 3, 1980, and the same day the order was finalised. Therefore, the entire period taken in the reference to the Inspecting Assistant Commissioner under Section 144B should be the extended period of the limitation and the assessment remains unassailable on the ground of limitation.\n\n 15. As for the validity of the reference of the question of valuation of the property sold and the advancing of the cost of acquisition as on January 1, 1954, on the basis of the market value, the argument as urged before the Tribunal was that, in view of the reference made by the Income-tax Officer under Section 55A, it was the DVO alone who had the jurisdiction to value the asset and the Income-tax Officer became functus officio. Therefore, after a reference to the DVO, the Income-tax Officer is barred from adopting his own estimation of the market value. The only course open to him is to accept the value given by the assessee's valuer. It is further urged that the Income-tax Officer did not follow the scheme laid down in Section 144B because he acted contrary to the instruction given by the Inspecting Assistant Commissioner under Section 144B in the aforesaid letter dated March 20, 1979. Because he did not have the value determined by the DVO. The Income-tax Officer, instead of accepting the value submitted by the assessee, resumed his jurisdiction for estimating the asset himself. This is not permitted. Once he refers the question of value to the DVO, he relinquishes his power to estimate the value on his own.\n\n16. It is further urged that the refusal of the DVO to value the property on the ground of lack of opportunity of inspection is not valid. It is urged that the DVO did not have any power to inspect the asset because Section 38A of the Wealth-tax Act has not been incorporated in Section 55A of the Income-tax Act. It is the contention made on behalf of the assessee that the DVO himself should have estimated the value of the asset instead of declining to do so. Reference was made to the case of M.C. Khunnah v. Union of India for the proposition that only the DVO has the jurisdiction to value the assets once the reference is made under Section 16A of the Wealth-tax Act or Section 55A of the Income-tax Act.\n\n 17. It has also been urged that, where the cost of acquisition of an asset is incapable of determination, the entire legislative machinery under Section 45 breaks down and there could not be any charge on capital gains even though such gains may arise in the transfer. If the DVO finds that the cost of acquisition is not determinable, the only valid act on the part of the Assessing Officer would be to compute no capital gains at all. \n\n 18. It was contended by learned counsel for the Revenue that the valuation of a property necessarily postulates the right of inspection of the property by the valuer. The property can be valued only after ascertaining the nature and the extent of the property. This view is correct because the Supreme Court in State of Madras v. Gannon Dunkerley and Co. (Madras) Ltd., , has held that, when the Valuation Officer is asked to value an asset, he gets all the powers essential for making the valuation including the power to inspect the asset. The non-incorporation of Section 38A of the Wealth-tax Act in Section 55A of the Income-tax Act is immaterial because, such power of inspection is inherent in the power to value the property.\n\n19. Therefore, the contention that the DVO has no power of inspection and his abstention from submitting a report on the value of the property on the ground of not having inspection of the property is unlawful, is not valid. \n\n 20. The reliance on the decision of the Supreme Court in CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294 is also misplaced. In Srinivasa Setty, the substantive provision for computation of capital gains itself became unworkable in respect of certain assets like goodwill by reason of such asset not having any cost of acquisition. There, the provision did not contemplate a situation where the capital asset transferred may be an asset that has, by its very nature, no acquisition value. That is not the case before us. Here, a practical difficulty arose that had prevented the Valuation Officer from having inspection of the asset which is a prerequisite for valuation. No valuer can value a property unless he has the sight of the property for comprehension of its nature, condition, state of repair, functional capacity and so on. It is not the case that the property, namely, plant and machinery, did not have a cost of acquisition or that they were self-generated assets like goodwill. Therefore, the contention urged on behalf of the assessee that the capital gains could not be computed in a transfer of plant and machinery, if the plant and machinery are removed from the scope of inspection or are not accessible to the valuer for inspection. The assets here are tangible assets and they are neither free commodity nor are they generated on their own as in the case of goodwill. In such a case, a mere practical obstacle to the valuation cannot defeat the charge of tax in respect of the gains arising. If valuation by inspection and empirical examination is not possible, other methods of valuation have to be admitted. One has then to go by the book value or go by the market value as on the date of acquisition with such adjustments as the circumstances of the case may call for. Therefore, the assessee cannot get away with not paying any tax on the capital gains taking advantage of the DVO's practical barrier to reporting the value.\n\n 21. On the contention as regards the Assessing Officer becoming functus officio, it can be said that this effect of being shorn of his power in the matter of valuation emerges only where the Valuation Officer makes a report of the valuation. If the Valuation Officer does not submit his report, it cannot be said that the fetter of Sub-section (6) of Section 16A shall still be operating. This is very clear from Sub-section (6) of Section 16A because it clearly says that the Wealth-tax Officer shall take the value as determined by the Valuation Officer in his report when the Valuation Officer passes an order of valuation under Sub-section (3) of Section 16A. The limitation power of the Assessing Officer as we find in Section 16A of the Wealth-tax Act, 1957, cannot be an inexorable one. If it is construed rigidly that the binding nature of Section 16A(3) shall deter the Assessing Officer from completing the assessment and let the assessment\" be barred by limitation of time simply because the Valuation Officer, for reasons good or bad, fails or elects to abstain from making a report of valuation, it shall be against the very object of the provisions of the Act. No procedural provision of the Act should be interpreted in a manner to defeat the very goal which the procedure seeks to achieve. The entire procedure of Section 16A is to facilitate the determination of the value of various assets to expedite the completion of the assessment. The said provision cannot be interpreted in a negative manner so that the provision becomes counterproductive and a clog in the proceeding. Far from promoting and advancing the cause of a speedy and just manner of completion of assessment, it cannot stall the proceeding of assessment. Therefore, we are not impressed with the argument advanced by learned counsel for the assessee that, once having referred the case of valuation of an asset to the Departmental Valuation Officer, the Assessing Officer is totally robbed of his jurisdiction even on the brink of limitation for failure on the part of the Departmental Valuation Officer either to report or not being enabled to report on the value of the asset referred to him. As an alternative, in such contingencies, the power of valuation has to revert to the Assessing Officer. Unless the Valuation Officer sends his report, there is no bar to the Assessing Officer's completing the assessments taking the value of the asset referred for valuation in the best possible method he can take in the limiting circumstances of the situation. So, if, till the expiry date of the limitation, no report of valuation comes from the DVO, the original power of the Assessing Officer to value the asset himself revives. Therefore, in this case, the Income-tax Officer was right in valuing the property in the best manner possible on the facts of the case to save the case from limitation because the ultimate statutory duty to complete assessment before the expiry of the limitation period rests with the Assessing Officer and not with the Valuation Officer. \n\n 22. We have already seen that in the present case, there was no direction received by the Income-tax Officer on the first draft order made and forwarded to the assessee. The Inspecting Assistant Commissioner merely intimated his intention not to issue any direction in his letter dated March 20, 1979, addressed to the Income-tax Officer. He merely gave administrative instructions as a superior officer so as to guide the Income-tax Officer as to the future course of action that would be proper to take. That was not a statutory direction under Section 144B but merely an administrative instruction. It has been also argued before the Tribunal that the Assessing Officer should not have taken upon himself the duty of valuing the property when he found that the report from the DVO would not be forthcoming. In that situation, it was the report of the assessee's valuer which should have been taken by him as the proper guide and he should not have ventured out to make any valuation. We are not impressed by this reasoning ; the Income-tax Officer has taken the value on a basis which cannot be said to be arbitrary or impractical. We hold that the Income-tax Officer had no alternative other than estimating the cost of the asset himself and the mere fact that a reference was made under Section 55A of the Act cannot operate as a bar against the estimation of the value by the Income-tax Officer himself when the report of the DVO was not forthcoming. \n\n 23. Question No. 5 relates to the quantum of the cost of acquisition of the asset as on January 1, 1954, as determined by the Income-tax Officer. The question has two parts, the first part challenges the rejection of the valuation report of the assessee's approved valuer. The second part is on the quantum that has been determined by the Income-tax Officer and the method of such determination. \n\n 24. The Income-tax Officer rejected the valuation made by Talbot and Co. for the defects already stated earlier and proceeded to estimate the value of the assets on January 1, 1954, and arrived at the figure of Rs. 68,41,397. The first question that has to be settled is whether the report of Talbot and Co. the assessee's valuer, was correct in estimating the value at Rs. 1,90,63,250 as on January 1, 1954. The first aspect that was pointed out to us, as has also been observed by the Tribunal, is that the actual value of the sale of the asset which took place in 1970 was Rs. 1,46,30,900. The value determined as on January 1, 1954, at a higher figure than the figure of actual sale value in 1970 was considered by the Revenue as patently anomalous. It has been urged before us on behalf of the Revenue that the replacement value of plant and machinery could not be lower than its value in 1954. Again, it is not that the assets were new as on January 1, 1954, so as to be valued at that high figure. On January 1, 1954, the assets had already been in use for several years and their life expectancy got substantially reduced. Therefore, the original cost which is also the book value as on January 1, 1954, could, by no means, be the cost of acquisition on the basis of the market value as on January 1, 1954, as it does not take into account the depreciation. There ought to have been reduction in the original cost of acquisition by the depreciation which was not charged in the books. Besides that, as already mentioned, the inflationary impact since acquisition till January 1, 1954, and the resultant appreciation should also be given due consideration and thus both discount in depreciation and appreciation for inflationary trends are to be factors to play a substantial role in the fixation of the price as both the factors must have worked on the market value of the assets as on January 1, 1954. The Income-tax Officer, however, considered that the offsetting forces working in opposite directions must have due place in value determination though there could be no workable criteria to ascertain the precise offset effect, the Income-tax Officer adopted the book value as on January 1, 1954, to be the fair market value as on that date taking as a rational hypothesis that the effects of depreciation and price appreciation are equally counter-balancing. \n\n 25. The matter of valuation is quite complicated because the total assets include those assets which were acquired after indexation date, namely, January 1, 1954, yet the Income-tax Officer, to avoid complexity, adopted their book value to be the fair market value as on January 1, 1954. The Commissioner of Income-tax (Appeals) confirmed the method as already stated and included the consideration only in respect of the fair market value of the standing trees as on January 1, 1954. \n\n 26. It is also urged before us that the registered valuer's estimate should not have been rejected by the Income-tax Officer. The valuers rightly estimated the value of the assets as on January 1, 1954, on the basis of the price of the new assets on that date because the assessee maintained all its assets in an ideal condition and all renewals and repairs had been carried out and the assets were as good as new. It was only in the later years that the plant and machines deteriorated and the value in 1970 became lesser. It was further submitted that the method adopted by the Income-tax Officer was wrong because it cannot be said that the depreciation and the rise in the value for inflation exactly offset each other both being on an even rate ; it was further submitted on behalf of the assessee that, where, in the absence of details for determination of the value as on January 1, 1954, the market value is not ordinarily ascertainable, the Income-tax Officer could not determine the value except by application of mind to the particulars furnished by the assessee and in such a situation the burden is on the Income-tax Officer to prove that whatever is determined as market value is correctly determined as such. \n\n 27. Reference was invited by learned counsel for the Revenue to the decision in CWT v. Tungabhadra Industries Ltd. in support of his contention that the onus of proof is on the assessee who has to produce reliable material to show that the written down value of the assets and not the book figure is the true value of the assets. In that case, while estimating the value of the assets of the assessee under Section 7 of the Wealth-tax Act, the Wealth-tax Officer took the value shown by the assessee in the balance-sheet to be the fair market value. The assessee claimed that the market value should be the written down value as per the income-tax records. The Supreme Court held that Section 7(2) of the Wealth-tax Act applies to the assessee carrying on business and maintaining accounts regularly. In such case, the Income-tax Officer has the option of valuing the assets of the business as a whole having regard to the balance-sheet of such business as on the valuation date. If the assessee insists on the adoption of some other figures, then the assessee has to prove that the figures stated in its own balance-sheet were not true. Reference was also made to the decision in Mahmudabad Properties (P.) Ltd. v. CIT , where the same principle was initiated that, in a wealth-tax assessment, the assessee will be bound by the figures shown in its books unless the assessee discharges the burden which lay on him to show that the figures shown in its books were not the correct value. In the same decision, it has also been laid down that the expert's valuation is not decisive specially where it suffers from material defects.\n\n 28. In any case, in the present case, there is no evidence brought to us to show that the assets were really brand new assets on January 1, 1954, as claimed by the assessee. Repairs and renewals appear to have been effected as evident from the revenue expenditure incurred. But that cannot lead one to the conclusion that the assets were in a condition comparable to brand new assets. In point of fact, it has not been contested that a large part of the assets have been in use since 1937 and in 1954, the addition was only to the extent of Rs. 9,54,654 as against old assets worth Rs. 51,77,936. It could be said that only 20 per cent. of the assets in question could be said to be new assets in 1954. The rest 80 per cent. of the assets were in use prior to 1954. \n\n 29. As per the contention of the assessee, the provision of Section 2(42A)(ii) does not apply to the assets sold by the assessee, if the value of the assets were actually ascertained in 1970 at the time of their sale, there is no reason that could bar the ascertainment of this value as on January 1, 1954. Section (ii)(42A) (sic) refers to works of arts, antiques, curios, etc., to which no norm or fixed commercial value attaches. Any way, the absurdity of the valuation of the assessee's value is palpable. As a matter of fact, the period of 1970 was a period marked by a general trend of rising prices of building materials, iron scrap, etc. There being no dispute about the fairness of the price of Rs. 1,46,30,900 in 1970 a process of backtracking the inflation rate year by year would quite probably show the same figure as adopted by the Income-tax Officer for the value as on January 1, 1954. The Income-tax Officer has adopted the value in 1954 as Rs. 68,41,397. Thus there is an increase in the value between the years 1954 and 1970 by Rs. 77,89,503. This would give the average rate of inflation at 4.5 per cent. The rate of inflation cannot be said to be unreasonably reckoned. In any case we fail to be persuaded by the submissions of learned counsel for the assessee that the Income-tax Officer committed an error in rejecting the report of the assessee's valuer, Talbot and Co. There are sufficient reasons for rejecting the said report. As we have already said that the determination of the value of the assets as on January 1, 1954, at a figure higher than the sale proceeds of the year 1970 is unsupportable. In fact, if the cost of acquisition would have to be taken on the basis that the assets are subjected to depreciation, in that case, the cost of acquisition of the assets as reduced by the annual depreciation since the date of acquisition or, in other words, the written down value of the assets as on January 1, 1954, and not the price of the assets as brand new assets would be the cost of acquisition. We have also seen that the basis that the Income-tax Officer has taken is a reasonable basis not assailable as unrealistic or totally opposed to the economic realities. Even the fact that the assets were kept in an excellent state of repair as claimed by learned counsel for the assessee is not of much consequence so long as it cannot be denied that, by the user of the assets for about 80 years, the longevity or effective life of the assets got materially exhausted. Of course, there were some machineries which were new in 1954, but they accounted for a mere 20 per cent. of the total assets. So, that fact is also of little consequence and does not detract from the merits of the estimate adopted by the Assessing Officer. There is also the question of inflation and the contrary force of depreciation, the two opposites pulling on the price of the assets were quite reasonably assumed to be neutralising in effect. So the adoption of the book value as on January 1, 1954, was quite a rational approach. In fact, if the assets were really subjected to depreciation, in that event, we would have directed the Assessing Officer to adopt the written down value of the assets as on January 1, 1954, as the value of the assets on that date. In fact, there are decisions to the effect that, in the case of determining the capital gains of a depreciable asset, in the event of its transfer, the cost of acquisition when requiring advancement to the date as on January 1, 1954, it is the written down value of the assets on that date which is to be taken and not the market value of the same assets as new assets could be such value. We notice in that connection the decision in Prime Products (P) Ltd. v. CIT and CIT v. Upper Doab Sugar Mills .\n\n 30. We, therefore, answer question No. 4 and question No. 5 as a whole in the affirmative and against the assessee. \n\n 31. The seventh question relates to the assessee's entitlement to deduction of interest income from fixed deposits. The facts leading to the question are as follows : \n\n \"Before the Income-tax Officer, the assessee claimed that the expenses incurred by the liquidators on salaries, debenture interest, bank charges, miscellaneous expenses and audit fees should have been allowed either as a business loss or as a deduction against the interest received by the assessee on the fixed deposit with the bank which has been assessed under the head 'Income from other sources'. The Income-tax Officer did not agree. He stated that the assessee had stopped the business by passing a resolution and had gone into liquidation voluntarily. Hence, the assessee did not have any income from business. Consequently, the expenses claimed by the assessee could not be allowed under the business head. Coming to the claim for deduction under Section 57 of the Act, he observed that there was no provision for allowing these expenses against the income from interest because none of these expenses can be said to have been incurred wholly and exclusively for the purpose of earning the interest income. In so far as the argument of the assessee regarding the claim of debenture interest against the income from other sources was concerned, the Income-tax Officer observed that the debenture funds were not directly invested in the fixed deposits because they were already utilised in acquiring business assets long back. Hence, there was no direct and immediate nexus between the payment of the debenture interest and the earning of the interest from the bank on fixed deposits. In this view of the matter, the Income-tax Officer rejected the claim of the assessee. \n\n The assessee appealed to the Commissioner of Income-tax (Appeals) and contended that the Income-tax Officer erred in his decision. The Commissioner of Income-tax (Appeals) confirmed the action of the Income-tax Officer and dismissed the appeal. He observed that the liquidators were not carrying on any business but were engaged only in releasing the assets in the course of liquidation proceedings. Hence, the expenses under consideration could not be allowed for the non-existent business. Further, Section 57 allows a deduction only if the expenses are incurred wholly and exclusively for the purpose of earning the income. As it cannot be said that the debenture funds were raised for being deposited in the bank as fixed deposits, the said expenses could not be allowed under the head 'Other sources'.\" \n\n 32. It has been urged before us that expenses necessary for keeping the corporate status intact are allowable. The specific item in dispute before us is the interest paid on debentures. It is claimed to be a revenue deduction. Learned counsel for the assessee relied on the decision in CIT v. Crawford Bayley and Co. [1977] 106 ITR 884 (Bom) to impress that the interest payable to the debenture-holders involves the application of the rule of diversion of income, by overriding charge. He further cited the decisions of the Supreme Court in CIT v. Sitaldas Tirathdas [1961] 41 ITR 367 and Raja Bejoy Singh Dudhuria v. CIT [1933] 1 ITR 135 (PC). The contention is that the debenture-holders had a charge over the assets of the company and, by virtue of the trust deed in favour of the debenture-holders, the income of the company to the extent of the debenture interest payable was diverted at source before it reached the assessee-company as its income.\n\n 33. In this connection, paragraph 8 of the trust dated May 4, 1986, was referred to. Learned counsel for the Revenue, however, submitted that the decision of the Madras High Court in South Arcot Electricity Distribution Co. Ltd. v. CIT [1974] 94 ITR 469 is the ratio directly on the issue. In that case, the business of the company was taken over by the Madras State Government and the assessee was not carrying on any business. However, some income from interest on deposits with bank arose to the company against which expenses were claimed. The Madras High Court held that the expenses were not admissible as deduction as they were not incurred solely for the purpose of earning the interest income and the nexus with earning is too remote for consideration.\n\n 34. After the company stopped its business, expenses could not be allowed under the head \"business\". The position, however, will be different if the company does not go into liquidation but there is merely a temporary stoppage of the business. In that case, it cannot be said that the business was terminated. Therefore, the Allahabad High Court in CIT v. Rampur Timber and Turnery Co. Ltd. [1973] 89 ITR 150, in such circumstances, held that expenses necessary to keep the corporate existence intact would be business expenditure.\n\n 35. We have heard the rival contentions, we are in agreement with the Tribunal's view that the assessee's case is distinguishable from that of Rampur Timber . Here the assessee is a company in liquidation, its business is terminated. In the teeth of total stoppage, the claim for business expenditure is unsupportable. At the same time, it cannot also be said that any expenditure was incurred for earning the interest income because the company had willy-nilly some deposit in bank which fetched interest income. The argument that payment to the debenture-holders is supposed to be a diversion of the interest income arising from the deposit in the bank is not tenable. There is no link between the debenture interest liability and the interest income on deposits received from the bank. The principle of diversion applies only in a case where the Income-tax Officer brings to tax a certain income as income of the assessee which is really diverted to other destinations before the same could become the assessee's income. That is not the case here. It is not that the debenture interest has been brought to tax. Here the debenture interest is a payment by the assessee and not a receipt. Therefore, the doctrine of diversion is altogether a misconception as diversion can be only of certain sum which is a receipt. It is a far-fetched argument that the interest income from bank has to be taken as diverted before it could become the assessee's income. The real position with regard to the interest income is that it became the interest of the assessee all right and also remained an income of the assessee. On the other hand, the assessee incurred liability on account of debenture interest. The two factors are absolutely unrelated. \n\n 36. Therefore, we find that the Tribunal was correct in the view it has taken about the inadmissibility of the debenture interest as a deduction from income. Therefore, the seventh question is answered in the affirmative and against the assessee. \n\n 37. The ninth question is about the validity of the initiation of proceedings under Section 147(a) of the Income-tax Act, 1961. The facts relating to the question as found by the Tribunal are as follows : \n \"The assessee filed a return on July 29, 1976, showing a loss. It filed a revised return on September 14, 1977, showing capital gains of Rs. 36,625. This amount represented capital gains arising to the assessee on the sale of trees. The assessee had sold other capital assets also. But the capital gains thereon was not shown in the revised return. Shri D. K. Guha pointed out that the Income-tax Officer made out a draft assessment order on February 7, 1979, proposing to assess the capital gains on the sale of trees as shown in the revised return on a protective basis. This draft assessment order was dated February 7, 1979. Then he took us through the papers relating to the proceedings under Section 144B of the Act for the assessment years 1972-73 to 1976-77 contained at pages 59, 60, 62, 76, 79, 3, 9 and 4 of the assessee's paper book No. 1. He stated that the Income-tax Officer dropped the proceedings on March 26, 1979, on the basis of the directions received from the Inspecting Assistant Commissioner on the draft assessment order sent by him on February 7, 1979. On March 30, 1979, the Income-tax Officer issued a notice under Section 148 to reopen the assessment under Section 147(a) of the Act. According to him, the Income-tax Officer did not have any valid reason to reopen the assessment because he had dropped the proceedings only four days before. He stated that an assessment cannot be reopened merely on a change of opinion. He pointed out that a provisional assessment was made in this case and the assessee paid the tax. But, when the Income-tax Officer proposed rectification, the assessee resisted the same. He strongly urged that the assessee did not conceal any particulars necessary for making its assessment. He referred to page 28 of the assessee's paper book No. 1 wherein all the particulars relating to sale of all the assets have been disclosed. The draft assessment order dated February 7, 1979, also recognises this fact, though it relates to the assessment year 1972-73. He also stated that the return filed earlier was invalid and if the assessment had to be dropped on that ground, the reassessment was not justified on the basis of an equally invalid return. Shri D. K. Guha further stated that the assessee was not supplied with a copy of the reasons recorded by the Income-tax Officer for reopening the assessment.\" \n\n 38. The reasons recorded by the Income-tax Officer before issuing the notice under Section 148 are in the following terms : \n\n \"Grounds for reopening under Section 147(a) of the Income-tax Act. For this year, a return was filed on July 29, 1976, in the name of the assessee but signed and verified by the liquidator. Thereafter, a revised return was filed on September 14, 1977, signed and verified by the liquidator. A draft of the proposed assessment order for this year was forwarded to the assessee under Section 144B of the Income-tax Act. While arguing the case before the Inspecting Assistant Commissioner, Range XXIV, Calcutta, with reference to this draft assessment order, the assessee submitted a written statement dated March 1/2, 1979, where it had claimed that the return having been signed and verified by the liquidator is non est in law and, upon such return, no valid proceedings can be or could have been initiated and no lawful demand can be made on the basis thereof. The Inspecting Assistant Commissioner, Range XXIV, by his communication No. R.XXIV/1-A/218/78-78/3040, dated March 19/20, 1979, informed this office that, in the light of the provisions of Section 140(c) of the Income-tax Act, the draft assessment as forwarded to him under Section 143(3)/144B cannot be considered at his end. This is because, according to the provision of Section 140(c) of the Act, the return in the assessee's case is required to be signed and verified by the managing director. As, in this case, the return is signed by the liquidator, no valid assessment can be made on the basis of that return. \n\n (2) It is further found from the records that no notice under Section 139(2) was issued and served on the assessee. Thus it appears that neither any notice under Section 139(2) was issued nor any valid return was filed by the assessee. So, for statistical purposes, the proceedings were filed on March 26, 1979. \n\n (3) It will be found from the draft of the assessment order that the assessee's total income was estimated at Rs. 4,47,819. This income has escaped assessment by reason of omission or failure on the part of the assessee-company to make a valid return under Section 139 for the assessment year 1976-77 within the meaning of Section 147(a) of the Act. \n\n (4) In view of the aforesaid facts, I have reason to believe that, by reason of omission or failure on the part of the assessee to make a valid return under Section 139 of the Act for the said assessment year, the assessee-company's income chargeable to tax has escaped assessment for this year. So, I reopen the assessment proceedings under the provisions of Section 147(a) of the Income-tax Act. \n\n Issue notice under Section 148.\" \n\n 39. The Tribunal upheld the initiation of the proceedings observing as follows : \n \"We have gone through the reasons for reopening the assessment recorded by the Income-tax Officer, as reproduced above. In our opinion, the Income-tax Officer could have reasonably entertained an honest belief that the income had escaped assessment on the basis of the reasons recorded by him. Thus, we find that there was a direct nexus or a live link between the reasons recorded and the formation of a reasonable belief of the Income-tax Officer to the effect that income assessable during this year had escaped assessment. It is evident from the above that the test laid down by the Supreme Court in the case of ITO v. Ldkhmani Mewal Das [1976] 103 ITR 437 is fully satisfied in this case. We, therefore, uphold the reopening of the assessment. For the above reasons, we reject these grounds.\"\n\n40. We have heard the rival contentions. We have also examined the facts which are as follows. The assessee had sold certain assets to the Railway Board and the sale was effected on April 21, 1977. We also find that the assessee declared a capital gain only with respect to one asset, the trees, while filing its return for the assessment year 1976-77. No other capital gains were declared in the return arising out of sale of other assets. The Department's case is that, to the extent capital gains are attributable to the sale of assets other than the trees were not declared in the return and, to that extent, there was non-disclosure of all materials necessary for making the assessment. \n\n41. This position is very plain from the facts. It is not in dispute that the sale of assets and the capital gain therefrom have not been fully and truly disclosed in the return. The fact that the same sales were disclosed in connection with other proceedings would not efface and detract from the fact that there was failure to disclose fully and truly necessary material for making the assessment and such non-disclosure also resulted in escapement of assessment. That disclosure in an indirect and incidental manner in some other proceedings cannot absolve the assessee of his duty to disclose truly and fully is an established principle. Reference may be made to Malegaon Electricity Co. P. Ltd. v. CIT . The assessee also raised certain issues regarding the validity of the return it had originally filed but the question of invalidity does not appeal to us. If the returns were invalid and non est that would recoil on the assessee. In that event, the assessee has to be taken to have filed no return at all which will strengthen the case for initiating proceedings for assessment. The assessee's counsel also raised the question of absence of fresh information, the proceeding thereby attracting an infirmity in the very initiation. This approach is also misconceived because the Income-tax Officer in the case took resort to Section 147(a). The question of fresh information coming into possession of the Income-tax Officer subsequent to the completion of the assessment arises only where the reassessment is proposed to be made under Section 147(b). That is the provision which entitles the Income-tax Officer to commence reassessment proceeding simply by reason of the information in his possession, regardless of the fact that there was no default or failure on the part of the assessee. Therefore, this contention against the validity of the proceeding under Section 148 for the purpose of reassessment of the escaped income also fails.\n\n 42. For the reasons aforesaid, we answer the ninth question as well in the affirmative and against the assessee. \n\n 43. There will be no order as to costs.\n\nShyamal Kumar Sen, J.\n\n I agree." }, { "title": "Sundaram Industries Ltd. vs Commissioner Of Income-Tax on 29 January, 1986", "url": "https://indiankanoon.org//doc/644018/", "text": "Sundaram Industries Ltd. vs Commissioner Of Income-Tax on 29 January, 1986\nEquivalent citations: [1986]159ITR646(MAD)\nJUDGMENT\n\n\n\n \n\n Chandurkar, J. \n \n\n 1. The following question has been referred to this court under section 256(1) of the Income-tax Act, 1961, at the instance of the assessee : \n \"Whether, on the facts and in the circumstances of the case, the sum of Rs. 2,69,218 being the surtax paid under the Companies (Profits) Surtax Act, 1964, is an admissible deduction in computing the assessee's income from business ?\" \n\n 2. The assessment year in question is 1971-72 relevant to the accounting year ended on March 31, 1971. For this assessment year, the company claimed a deduction of Rs. 2,69,218 representing the amount of surtax paid by it in the computation of its profits liable for income-tax. The admissibility of this deduction by an additional ground was raised before the Appellate Assistant Commissioner who negatived the claim on the ground that the surtax paid was not expenditure incidental to the carrying on of the business. \n\n 3. The matter was taken to the Tribunal. A similar question was already before the Tribunal in an appeal filed by Messrs. Industrial Chemicals Ltd., Madras. The Tribunal had already taken the view in the case of Messrs. Industrial Chemicals Limited that the liability to pay tax becomes an allowable deduction only if the payment is made for the purpose of the business and if the expenditure is laid out by the assessee as owner-cum-trader and if it is really incidental to the carrying on of the business. It was found that the surtax was in a sense a surcharge levied on the assessee in addition to the income-tax paid by the assessee and computed in accordance with the formula laid down in the Act and surcharge was also a tax on the chargeable profits, the basis of which is the total income as worked out for income-tax purposes. Applying the ratio of the decision of the Supreme Court in CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140, the Tribunal took the view that the tax payable on the total income of the company could not be claimed as a deduction from the business income included in the total income and consequently the surtax paid or payable also could not be deducted from the business income or the total income of the assessee. The learned Accountant Member of the Tribunal who delivered the main judgment held that in view of the earlier finding, it was not necessary to consider whether the deductibility of surtax was excluded by the provisions of section 40(a)(ii) of the Income-tax Act, 1961. However, he was inclined to take the view that surtax was not calculated on the profits and gains of a business or profession or referable to it and it was based on the total income of the assessee being a company and even in a case where the assessee has no business income or a business loss, surtax might become payable if its total income was such as to give rise to chargeable profits. The learned Accountant Member, therefore, took the view that the main condition necessary for the applicability of section 40(a)(ii), namely, relation of the tax or rate to a business or profession was completely absent and section 40(a)(ii) may not, therefore, be fatal to the assessee's claim. The learned Judicial Member who agreed with the view of the Accountant Member that the surtax paid or payable cannot be deducted from the business income or the total income of the assessee did not think it necessary to consider the question as to whether in the event of the surtax paid or payable being held as allowable either under section 37 or section 28 of the Income-tax Act, 1961, the same had to be disallowed under section 40(a)(ii). The Tribunal in the case of the present assessee followed this decision and rejected the claim for deduction made by the assessee. That is how the question reproduced above has been referred to this court for opinion. In the case of Messrs. Industrial Chemicals Limited, Madras, also the same question has been referred in T. C. No. 287 of 1979. The question being common, we have heard Mr. S. V. Subramaniam for the assessee also.\n\n 4. Mr. Swaminathan who has appeared for the assessee has contended that the payment of surtax must be treated as incidental to the carrying on of the business and unless there was a prohibition made expressly by the statute, the liability for surtax must be treated as business expenditure. Heavy reliance has been placed before us on the decision of the Supreme Court in Indian Aluminium Co. Ltd. v. CIT [1972] 84 ITR 735, in which it was held that the wealth-tax paid by the assessee which was a trading company on assets held by it for the purpose of its business was deductible as a business expense in computing the assessee's income from business. Some decisions were cited by way of illustration to indicate that taxes paid are permissible deductions under section 37 of the Income-tax Act, 1961 (hereinafter referred to as 'the Act'). In that context, reference was made to the decision in Jaipuria Samla Amalgamated Collieries Ltd., v. CIT , Dehra Dun Tea Co. Ltd. v. CIT and Mitsui Steamship Co. Ltd. v. CIT . In the case of Jaipuria Samla Amalgamated Collieries Ltd., the question was whether the cess paid under the Bengal Cess Act, 1880, and education cess under the Bengal (Rural 'Primary Education Act, 1930, in relation to the coal mines which the assessee company had taken on lease was deductible or whether such deduction was prohibited under section 10(4) of the Indian Income-tax Act, 1922. The Supreme Court held that the profits arrived at according to the provisions of the two Cess Acts could not be equated to the profits which were determined under section 10 of the Act and, therefore, section 10(4) was not attracted; and the cesses paid by the assessee were allowable as deductions in computing its business profits. In the same decision, while considering the provision under section 10(4) of the Indian Income-tax Act, 1922, the Supreme Court held that the words \"profits and gains of any business, profession or vocation\" in section 10(4) can, in the context, have reference only to profits or gains as determined under section 10 and could not cover the net profits or gains arrived at or determined in a manner other than that provided by section 10. Section 10(4) was construed as excluding only a tax or cess or rate, the assessment of which would follow the determination or assessment of profits or gains of any business, profession or vocation in accordance with the provisions of section 10 of the Act. This part of this decision would really become relevant when we come to the question of construction of section 40(a)(ii) of the Income-tax Act, 1961. In Dehra Dun Tea Co. Ltd. v. CIT [1973] 88 ITR 197, the Supreme Court held that the tax paid by the appellants, tea companies, on their tea garden lands under the U. P. Large Land Holdings Tax Act, 1957, was deductible under section 10(2)(xv) of the Indian Income-tax Act, 1922, in computing their business income and such tax was not a wealth-tax or any of the other taxes referred to in the Explanation to sub-clause (iia) inserted in section 40(a) of the Income-tax Act, 1961, by section 2 of the Income-tax (Amendment) Act, 1972. The Supreme Court relied on the ratio of the decision in Indian Aluminium Company Limited v. CIT [1972] 84 ITR 735 in which it was held that if the expenditure laid out by the assessee is as an owner-cum-trader and the expenditure is really incidental to the carrying on of his business, it must be treated to have been laid out by him as a trader and as incidental to his business and held that the lands owned by the assessee companies were its business assets and the tax paid thereon under the U. P. Act XXXI of 1957 was an item of expenditure laid out by the assessee companies as traders and as incidental to their business. The same principle was applied in the Mitsui Steamship Company's case , where the assessee which was a Japanese shipping company had to pay municipal property tax on their vessels which was held to be allowable as a deduction under section 10(2)(xv) of the Income-tax Act, 1922.\n\n 5. The substantial argument of the learned counsel for the assessee in this case is that if payment of tax is to be treated as incidental to the business, then by the very terms of section 37 of the Income-tax Act, 1961, the expenditure so incurred must be treated as wholly and exclusively for the purpose of business. In pointing out the meaning of the word \"incidental\", the learned counsel has referred us to the observations of Griffith C.J. in Moffatt v. Webb [1913] 16 CLR 120, which had been cited with approval by the Supreme Court in the Indian Aluminium Company Ltd.'s case [1972] 84 ITR 735. The observations are as follows (p. 743) :\n \"'The possession of land is necessarily incidental to carrying on the business of a grazier; the payment of land tax is a necessary consequence of the possession of land of taxable value, whether the land is freehold or leasehold; the payment of land tax is therefore a necessary incident of carrying on the business of grazing. The case, therefore, seems to me to come within the exact words of the first paragraph of section 9.' (Section 9 is substantially similar to section 10(2)(xv) of the Indian Income-tax Act, 1922.\" \n\n 6. The learned counsel, therefore, pointed out that having regard to these observations, the liability to pay surtax must be treated as incidental to the carrying on of business and, therefore, by virtue of section 37, the amount must be permitted as deductible. The learned counsel also contended that the ratio of the decision of the House of Lords in British Insulated and Helsby Cables Ltd. v. Atherton [1925] 10 TC 155, that in order to claim deduction, it is enough to show that the money was expended \"not of necessity\" and with a view to a direct and immediate benefit to the trade, but voluntarily and on the ground of commercial expediency, and in order indirectly to facilitate the carrying on the business, has been approved by the Supreme Court in Eastern Investments Ltd. v. CIT and in CIT v. Chandulal Keshavlal & Co. . The argument, therefore, was that surtax which is a statutory exaction had to be paid by the assessee, so as to facilitate the carrying on of the business by the assessee. It must be said in fairness to the learned counsel for the assessee that he has himself brought to our notice two decisions which take a view contrary to his contentions. In Molins of India Ltd. v. CIT [1983] 144 ITR 317, the Calcutta High Court held that the tax imposed by the Companies (Profits) Surtax Act, 1964, was essentially of the same character as income-tax or excess profits tax and liability to pay this tax depends upon whether profits are made or not. It was held that taxes such as these are not paid for the purposes of earning profits of the trade, but they are an application of those profits after they have been earned. The Division Bench of the Calcutta High Court also held that surtax was not also allowable in view of the provisions of section 40(a)(ii) of the Income-tax Act, 1961, and the term \"tax\" in the said provision could not be understood to mean only income-tax. It was held that the tax sought to be imposed on a company by the Companies (Profits) Surtax Act comes within the mischief of section 40(a)(ii). The other decision is CIT v. International Instruments P. Ltd. [1983] 144 ITR 936 (Kar). The Division Bench of the Karnataka High Court held that the surtax levied on the chargeable profits under the Companies (Profits) Surtax Act, 1964 (hereinafter referred to as the \"Surtax Act\") was nothing but an additional tax on the profits and gains of an assessee's business and since surtax was a charge on the profits and gains of the business of companies, the company was not entitled to claim deduction of surtax payable by it in computing its total income under the Income-tax Act. This decision does not refer to the decision of the Calcutta High Court and the conclusions have been independently arrived at. \n\n 7. Mr. Subramaniam who appeared in the other tax case has adopted the arguments of Mr. Swaminathan on the question whether the surtax liability was deductible under section 37 of the Act but submitted with regard to the construction of section 40(a)(ii) of the Act that the word \"tax\" is defined in section 2(43) and it must have the same meaning in section 40(a)(ii). According to him, since \"tax\" as defined in section 2(43) of the Act, in so far as the year of assessment in the instant case is concerned, meant \"income-tax chargeable under the provisions of this Act\", the scope of section 40(a)(ii) must be restricted only to income-tax and section 40(a)(ii) cannot be invoked by the Revenue to contend that surtax is not deductible in view of the provisions of section 40(a)(ii) of the Act. The learned counsel appearing on behalf of the Revenue has pointed out that the Income-tax Act is an all India statute and since the question of deductibility of surtax under section 37 has already been construed by two High Courts against the assessees, this court should accept the same construction and reference has been made to the decision of the Bombay High Court in CIT v. T. Maneklal Mfg. Co. Ltd. [1978] 115 ITR 725, to which one of us was a party. The Bombay High Court has taken the view that the Income-tax Act being an all India statute, uniformity in the construction of its statutory provisions is eminently desirable and the considered opinion of any other High Court should be followed unless there are overriding reasons for taking a divergent view. Apart from this decision of the Bombay High Court, there are a large number of decisions which take this view to which reference has been made in Kanga and Palkhivala's Law and Practice of Income Tax, seventh edition, volume 1, page 5 in foot-note (iv). The learned counsel for the Revenue has also relied on the two decisions of the Calcutta and Karnataka High Courts referred to above and has contended that these two decisions are well-considered decisions. Even otherwise, according to the learned counsel, when an assessee carries on a business, that business is carried on for the purpose of profit and not for payment of tax and consequently, the tax paid cannot be treated as expenditure incurred wholly and exclusively for the purpose of business and reference was made to the decision in East India Pharmaceutical Works Ltd. v. CIT . In that decision, while dealing with the concept of \"business expenditure\", it was pointed out that an expenditure cannot be allowed as a business expenditure under section 37(1) of the Income-tax Act, 1961, unless it was incurred or laid out directly or indirectly by the assessee wholly and exclusively for the purpose of his business. The Division Bench observed that a trader carries on the business for the purposes of earning profits and not for the purposes of paying income-tax and though the earning of profits and the payment of taxes are not isolated and independent activities of a business, yet the expenditure incurred or laid out for the purpose of the payment of income-tax would not fall within the scope of the expression for the purpose of the business\".\n\n 8. With reference to the definition of \"tax\" in section 2(43), it was contended that the definition section commences with the usual phraseology \"unless the context otherwise requires\". Thus, according to the learned counsel for the Revenue, the term \"tax\" must be given a wide meaning and should not be restricted to mean only \"income-tax\". \n\n 9. It is now an accepted principle in the matter of construction of an Indian statute that as far as possible, there must be uniformity of construction and if the provisions of law which fall for consideration before the court have already been construed by another High Court or High Courts, unless there are compelling reasons to depart from that view, normally that construction should be accepted. Therefore, before we consider the arguments elaborately advanced by Mr. Swaminathan, it becomes necessary to consider in detail the decision of the Calcutta High Court in Molins of India Ltd. v. CIT [1983] 144 ITR 317. The question involved in that case is identical to the one that is before us. One of the arguments advanced in that case on behalf of the assessee was that the surtax liability was a statutory charge on the income of the company and the income of the assessee had been statutorily diverted at source. This argument was rejected. We are in this case not concerned with this argument because no such argument has been advanced before us and indeed rightly so. The Calcutta High Court on a construction of the scheme of the Surtax Act took the view that it was basically an additional tax levied on the income of the company and the court took the view that the computation of income for the purpose of the Income-tax Act must precede an assessment under the Surtax Act. At page 332, the Division Bench observed as follows :\n \"The computation of income for the purpose of I.T. Act must precede an assessment under C. (P.) S. T. Act. The total income under the I.T. Act must be calculated, the tax payable under the I.T. Act has to be determined and then only the question of computation of chargeable profits of the company will arise. In computing the chargeable profits, the amount of income-tax has to be deducted. There is no provision similar to s. 12 of the Excess Profits Tax Act or s. 10 of the Business Profits Tax Act wherein it was specifically provided that these two taxes will be deductible from the total income for the purpose of computation of income-tax.\" \n\n 10. The Calcutta High Court referred to the decision of the Supreme Court in Indian Aluminium Company's Ltd. case , and posed the question at page 335 of 144 ITR as follows :\n \"The real question is whether a tax which has been imposed on the total income of a company after some adjustments can be allowed as a deduction in computing total income of that company under the I.T. Act. Is it a business expenditure of the company ?\" \n\n 11. The Calcutta High Court referred to the judgment of Beg J., as he then was, in the Indian Aluminium Company Ltd.'s case , in which the distinction between income-tax and wealth-tax was pointed out as follows at p. 335 of 144 ITR :\n \"In other words, where profits, the net gains of business determined after making all permissible deductions, are taxed, the disbursements to meet such taxes cannot be deducted. But, where the tax was levied, as it was in Harrods' case ([1964] 41 TC 450 (CA)], on capital or assets used for the purpose of earning these profits, it was a permissible deduction in calculating profits.\" \n\n 12. At page 338, the Calcutta High Court dealt with the argument advanced on behalf of the assessee that the earning of profit and payment of taxes are not isolated and independent activities and those activities are continuous and take place from year to year and since the liability to pay income-tax and surtax arises because a person is carrying on the business by which he earns profits, the liability to pay the tax is an incidence of carrying on of the business through which he earns profits. Negativing this argument, the Calcutta High Court observed as follows (at page 338 of 144 ITR) : \n \"The question in this case is whether a tax imposed on the profits of a company is allowable as deduction in computing the total income of the company. The subject-matter of the tax is profits. Whatever profits the company has made are being brought to the charge of surtax. The tax will be calculated according to the amount of profits that the assessee has earned. It is very difficult to see how the tax proposed to be levied on the profits can be deducted from the profits as expenditure wholly and exclusively laid out for business. Without an express provision to that effect, there is no scope for deducting the estimated amount of surtax from the profits for the purpose of arriving at the taxable income.\" \n\n 13. With regard to the construction of section 40(a)(ii), the Calcutta High Court pointed out that the preamble of the Surtax Act stated that the Act was to impose a special tax on the profits of certain companies. It was held that the surtax imposable has to be calculated on the basis of the total income of the assessee-company after making statutory adjustments and if the tax that is sought to be imposed is not on the profits or gains of the business of the assessee, it is certainly levied on the basis of the profits or gains made by the assessee-company in its business and, therefore, it could not be said that the tax sought to be imposed by the Surtax Act will not come within the mischief of section 40(a)(ii) of the Income-tax Act. The decision of the Calcutta High Court is a well considered decision. The Calcutta High Court also negatived the argument which is advanced before us now by Mr. Subramaniam that the definition of \"tax\" in section 2(43) must be read in section 40(a)(ii) of the Act. The relevant observations are as follows (p. 328 of 144 ITR) : \n \"We are unable to accept the contention that 'tax' in s. 40(a)(ii) must be understood to mean only income-tax. The definition given in s. 2(43) only will apply 'unless the context otherwise requires'. The expression 'any rate or tax' in s. 40(a)(ii) means any rate or any tax and not income-tax only. That the section is not confined to income-tax only is made clear by the words 'levied on the profits or gains of any business or profession or assessed at a proportion of or otherwise on the basis of any such profits or gains'.\" \n\n 14. The decision of the Calcutta High Court is a well-considered decision and unless it is shown that the view taken by the Calcutta High Court is not at all possible to be taken, we would normally accept that view. The decision of the Karnataka High Court in CIT v. International Instruments P. Ltd. [1983] 144 ITR 936, also takes a similar view. The Karnataka High Court referred to the observations of the Privy Council in Ashton Gas Co. v. Attorney-General [1906] AC 10 (HL) (at p. 12), which were as follows (p. 940) : \n \"The income-tax is a charge upon the profits; the thing which is taxed is the profit that is made, and you must ascertain what is the profit that is made before you deduct the tax - you have no right to deduct the income-tax before you ascertain what the profit is.\" \n\n 15. After referring to the provisions of the Surtax Act, the Division Bench of the Karnataka High Court observed as follows (p. 941) : \n \"It is thus seen from the above provisions that the surtax levied on the chargeable profits under the Surtax Act is nothing but an additional tax on the profits and gains of the assessee's business. The total income computed under the I.T. Act undergoes a further process of computation under the Surtax Act to arrive at the chargeable profits, but, none the less, the surtax remains ultimately a charge on the profits and gains of the companies.\" \n\n 16. Though the argument with regard to the provisions of section 40(a)(ii) of the Act was noticed by the Division Bench, the argument has been rejected. But the rejection of the argument seems to be mainly on the ground that the Bench had already taken the view that the surtax levied or leviable could not be considered as an admissible deduction in the computation of the business profits of the company and if that argument was accepted, then section 15 of the Surtax Act would become superfluous. \n\n 17. Apart from the fact that the decision of the Calcutta High Court appears to us to lay down the correct law, even on merits, it is difficult for us to accept the contention of the learned counsel for the assessee that the surtax should be treated as a permissible deduction under section 37 of the Act. Since the matter has been exhaustively argued by the learned counsel for the assessee in reference, we will deal with his arguments. The Surtax Act, 1964, is described in the preamble as an Act to impose a special tax on the profits of certain companies. The charging provision is in section 4 which reads as follows : \n \"Charge of tax. - Subject to the provisions contained in this Act, there shall be charged on every company for every assessment year commencing on and from the first day of April, 1964, a tax (in this Act referred to as the surtax) in respect of so much of its chargeable profits of the previous year or previous years, as the case may be, as exceed the statutory deduction, at the rate or rates specified in the Third Schedule.\" \n\n 18. The charging provision will show that the subject-matter of the charge is so much of the chargeable profits of the previous year or previous years, as the case may be, as exceed the statutory deduction and the rate at which the charge is levied is specified in the Third Schedule. Chargeable profits are defined in section 2(5) as follows : \n \"'chargeable profits' means the total income of an assessee computed under the Income-tax Act, 1961 (XLIII of 1961), for any previous year or years, as the case may be, and adjusted in accordance with the provisions of the First Schedule;\" \n\n 19. Reading the definition of \"chargeable profits\" and the charging provision, the subject-matter of the charge on which surtax is levied is clearly the total income of an assessee computed under the Income-tax Act, 1961. That income has to be adjusted in accordance with the provisions of the First Schedule. In the First Schedule, a procedure is laid down for computing the chargeable profits. Adjustments as indicated in the First Schedule are to be made but those adjustments are to he made in \"the total income computed for that year under the Income-tax Act\". Rule 1 refers to certain exclusions. Rule 2, which operates after rule 1 is given effect to, deals with certain further deductions. Under rule 3, the net amount of income calculated in accordance with rule 2 has to be increased as indicated therein. It is, therefore, clear that the Act is expressly intended to impose a special tax on the profits of certain companies and chargeable profits for the purpose of surtax have to be determined primarily with reference to the total income of the assessee-company computed under the Income-tax Act, 1961. It is difficult to see why the surtax cannot be considered as an additional tax imposed on the subject-matter of the charge which is to be computed taking the total income of an assessee computed under the Income-tax Act, 1961, as the basis. \n\n 20. Undoubtedly, the liability to pay tax arises on the determination of the profits in accordance with the provisions of the Income-tax Act. When such is the position, it is difficult to see how for the purpose of determination of profits which are the subject matter of the tax to be levied, the surtax should itself be deducted. The observations of Buckley J. in Ashton Gas Company's case [1904] 2 Ch 621 (CA) and of Lord Halsbury made in the House of Lords [1906] AC 10, when the same case went up in appeal are, in our view, very instructive. In Ashton Gas Company's case, Buckley J., observed as follows (at p. 624) : \n \"The profits are not arrived at after deducting income-tax. The income-tax is part of the profits - namely, such part as the Revenue is entitled to take out of the profits. A sum which is an expense which must be borne whether profits are earned or not, may no doubt be deducted before arriving at profit. But a proportionate part of the profits payable to the Revenue is not a deduction before arriving at, but a part of, the profits themselves.\" \n\n 21. In appeal, Lord Halsbury observed in [1906] AC 10 (HL) at p. 12 as follows : \n \"Profit is a plain English word; that is what is charged with income-tax..... The income-tax is a charge upon the profits; the thing which is taxed is the profit that is made, and you must ascertain what is the profit that is made before you deduct the tax - you have no right to deduct the income-tax before you ascertain what the profit is. I cannot understand how you can make the income-tax part of the expenditure. I share Buckley J.'s difficulty in understanding how so plain a matter has been discussed in all the courts at such extravagant length.\" \n\n 22. These observations, in our view, apply with full force to the case before us. The surtax is a tax on chargeable profits. Therefore, what must be determined is the chargeable profit and the chargeable profits are determined only with reference to the profits determined in accordance with the Income-tax Act. The surtax is, therefore, a part of the profits which, in addition to the income-tax, the Revenue claims by virtue of a statutory provision. Surtax cannot, therefore, be an item which becomes deductible even before the profits are determined. \n\n 23. The argument based on the phraseology to be found in section 37 does not seem to be of much assistance to the assessee. The phraseology \"expenditure.. laid out or expended wholly and exclusively for the purpose of such business, profession or vocation\" in section 10(2)(xv) of the Indian Income-tax Act, 1922, is identical to the phraseology used in section 37 of the Income-tax Act, 1961. This phraseology was originally considered by the Supreme Court in CIT v. Malayalam Plantations Ltd. . Undoubtedly, in that decision, the Supreme Court observed that the expression \"for the purpose of the business\" is wider in scope than the expression \"for the purpose of earning profits\". At page 150 of that decision, the observations are as follows :\n \"The aforesaid discussion leads to the following result : The expression 'for the purpose of the business' is wider in scope than the expression 'for the purpose of earning profits'. Its range is wide : it may take in not only the day to day running of a business but also the rationalization of its administration and modernization of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commence or for carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business. However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business. It cannot include sums spent by the assessee as agent of a third party, whether the origin of the agency is voluntary or statutory; in that event, he pays the amount on behalf of another and for a purpose unconnected with the business.\" \n\n 24. It is important to point out that notwithstanding the wide scope of the words \"for the purpose of the business\", the Supreme Court also laid down that, however wide the meaning of the expression may be, its limits are implicit in it. The limit of the scope of the said expression is laid down by the purpose for which the expenditure is incurred and that purpose, as the Supreme Court points out, shall be \"for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business. The question, therefore, which falls for consideration is, where a statutory tax is paid, can it, by any stretch of imagination, be considered as an expenditure incurred for the carrying on of the business ? Undoubtedly, in the Indian Aluminium Company Ltd.'s case [1972] 84 ITR 735, the Supreme Court has observed that the observation made in the decision in the Travancore Titanium's case , that \"to be a permissible deduction, there must be a direct and intimate connection between the expenditure and the business, i.e., between the expenditure and the character of the assessee as a trader, and not as owner of assets, even if they are assets of the business\" needed to be qualified by stating that if the expenditure is laid out by the assessee as owner-cum-trader, and the expenditure is really incidental to the carrying on of his business, it must be treated to have been laid out by him as a trader and as incidental to his business. These observations have to be understood in the light of the question which fell for consideration before the Supreme Court, namely, whether wealth-tax in respect of property which constituted the assets of the business was paid as owner or as trader and it is in that context the observations of Griffith C.J. in Moffatt v. Webb [1913] 16 CLR 120, on which reliance has been placed, were referred to by the Supreme Court. The land in respect of which tax was paid in Moffatt v. Webb [1913] 16 CLR 120, was the land which was put to use for the purpose of business as a grazier. Indeed, that was the sole use as will appear from the observations of Barten J., which are reproduced by the Supreme Court at page 743. They are as follows : \n \"... the sole use to which the appellant puts the land is for the purposes of his business as a grazier. He needs a large area of land for that purpose, and this area of about 18,000 acres is applied to his business needs. It seems too much altogether to say that he would have to pay the federal tax on this land if he did not carry on the grazing business. Somebody would be taxed, no doubt, but would it be the appellant ? It cannot be predicated that he would own the land at all if he carried on any other business. It is scarcely an inference from the case to say that he holds the land simply as an instrument essential to the proper conduct of his business : I think it is the fair meaning of the first paragraph at which we can arrive without inserting anything not imported by the words. If I am right there, then is the land tax payment a disbursement or expense wholly and exclusively laid out or expended for the purposes of the business ? It may not be so if the criterion is whether the business could be carried on without payment of the tax. But, I do not think that is the criterion. Is the payment wholly and exclusively incidental to the carrying on of the business ? Well, it is only by reason of the necessity of land for his business that he holds this land, and it is only because of his holding it for his business that he necessarily pays the tax, for without the business it cannot be said that he would hold the land at all. In view, then, of the particular facts, I think the payment is incidental to the conduct of his business, and that it is money wholly and exclusively expended for the purposes of his trade.\" \n\n 25. The concluding observations of Barten J. will show that the concept of payment being incidental to the conduct of the business was made on account of the fact that the land was a business asset and that it was only by reason of the necessity of land for his business that he holds the land and because of his holding it for his business, the assessee had paid the tax. What is important is the further observation that \"without the business, it cannot be said that he would hold the land at all.\" The word \"incidental\" used in the context of \"conduct of his business\" must, therefore, be understood in that context. In Indian Aluminium Company Ltd.'s case [1972] 84 ITR 735, the Supreme Court observed as follows (P. 747) :\n \"In our view, the test adopted by this court in Travancore Titanium's case [1966] 60 ITR 277 that 'to be a permissible deduction, there must be a direct and intimate connection between the expenditure and the business, i.e., between the expenditure and the character of the assessee as a trader, and not as owner of assets, even if they are assets of the business' needs to be qualified by stating that if the expenditure is laid out by the assessee as owner-cum-trader, and the expenditure is really incidental to the carrying on of his business, it must be treated to have been laid out by him as a trader and as incidental to his business.\" \n\n 26. It appears to us that these observations have to be read as indicating that the payment became incidental to the business because the tax was paid as owner-cum-trader in respect of the assets of the business These observations, cannot be read, in our view, with respect, as meaning that surtax required to be paid only after determination of profits will be a payment incidental to the business. This aspect is highlighted in the judgment of Beg J., as he then was, in which the learned Judge observed as follows (p. 749 of 84 ITR) : \n \"The Court of Appeal quoted passages from the opinions of the law Lords in Rushden Heel Co.'s case 11948] 30 TC 298 (HL) and Smith's Potato Estate's case [1948] 30 TC 267 (HL) to show that the ratio decidendi of these two decisions confined the principle applied there to cases where taxes, like the income-tax and excess profits tax, had to be paid upon and after a calculation of profits and did not extend to other cases. In other words, where profits, the net gains of business determined after making all permissible deductions, are taxed, the disbursements to meet such taxes cannot be deducted. But, where the tax was levied, as it was in Harrods' case [1964] 41 TC 450 (CA), on capital or assets used for the purpose of earning these profits, it was a permissible deduction in calculating profits.\" \n\n 27. The decision in Indian Aluminium Company Ltd.'s case must, therefore, be read as merely laying down that where capital or assets used for the purpose of earning the profits are taxed, then payment of such tax was a permissible deduction in calculating profits. If that was the ground on which wealth-tax was held to be a permissible deduction, that analogy cannot be made applicable to a case where the subject matter of the tax is the profits themselves and not the assets which are necessary for the earning of the profits. The three Supreme Court decisions in Jaipuria Samla Amalgamated Collieries Ltd. v. CIT [1971] 82 ITR 580, Dehra Dun Tea Co. Ltd. v. CIT [1973] 88 ITR 197 and Mitsui Steamship Co. Ltd. v. CIT [1975] 99 ITR 7 are, in our view, illustrations of the tax being levied either on the assets which are to be used for the purpose of trade or business or by way of payment to be made before the business can legally be started.\n\n 28. We are, therefore, not inclined to accept the submission that surtax is a deduction permissible under section 37 of the Income-tax Act. Strictly speaking, this is enough to answer the question against the assessee. However, since the question as to whether section 40(a)(ii) bars such a deduction has also been argued, we will proceed to consider that argument. \n\n 29. Section 40(a)(ii) reads as follows : \n\n \"40. Notwithstanding anything to the contrary in sections 30 to 39, the following amounts shall not be deducted in computing the income chargeable under the head 'Profits and gains of business or profession', - \n\n (a) in the case of any assessee - ...... \n\n\n (ii) any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains;\" \n \n\n 30. Our attention has been invited to the decision in Jaipuria Samla Amalgamated Collieries Ltd. v. CIT , where a similar provision contained in section 10(4) of the Indian Income-tax Act, 1922, was considered by the Supreme Court. That was a case in which the assessee was carrying on business of raising coal from coal mines and selling it. He had paid road and public works cess under the local State Cess Act as well as education cess under the local State Cess Act in relation to the coal mines which had been taken on lease. The cess was leviable under the respective statutes on the annual net profits which had to be calculated on the average of the annual net profits for the last three years for which accounts had been made up. The question was whether the deduction of these payments was prohibited by section 10(4) of the Indian Income-tax Act, 1922. In that context, the Supreme Court held that the profits arrived at according to the provisions of the two local statutes could not be equated to the profits which were determined under section 10 of the Act and, therefore, section 10(4) was not attracted; and the cesses paid by the assessee were allowable as deductions in computing its business profits. The Supreme Court construed the words \"profits and gains of any business, profession or vocation\" in section 10(4) as having reference only to profits or gains as determined under section 10 and cannot cover the net profits or gains arrived at or determined in a manner other than that provided by section 10. The Supreme Court held that section 10 (4) excluded only a tax or cess or rate, the assessment of which would follow the determination or assessment of profits or gains of any business, profession or vocation in accordance with the provisions of section 10 of the Act. Relying on this provision it was contended by Mr. Swaminathan that the surtax is not levied on the profits or gains of any business or profession as assessed under the Income-tax Act because unless the chargeable profits are determined in accordance with the Surtax Act, surtax cannot be levied at all. Therefore, according to the learned counsel, the deductibility of surtax is not covered by section 40(a)(ii). This argument, in our view, overlooks the fact that for determination of chargeable profits, the total income of an assessee computed under the Income-tax Act, 1961, is the basic figure. Merely because the basic figure of total income of the assessee computed in accordance with the Income-tax Act is modified by certain adjustments, the surtax will not cease to be a tax which is levied on the basis of such total income of the assessee. What is really applicable in the instant case is the residuary part in sub-clause (ii) of section 40(a). That clause, in so far as the facts of the present case are concerned, will read as follows :\n\n \"Notwithstanding anything to the contrary in sections 30 to 39, the following amounts shall not be deducted in computing the income chargeable under the head 'Profits and gains of business or profession', - \n\n (a) in the case of any assessee - \n\n\n (ii) any sum paid on account of any rate or tax levied on the basis of, any such profits or gains;\" \n \n\n 31. It is true that the word \"tax\" has been defined in section 2(43) as already indicated. But having regard to the purpose and the context in which that word is used in section 40, it is obvious that the words \"any rate or tax levied\" must be read as \"any rate or any tax levied\". The word \"any\" will, therefore, qualify both \"rate\" and \"tax\" and once we hold that the word \"any\" will qualify \"tax\" also, then \"any tax\" will necessarily take in taxes other than the tax under the Income-tax Act also. It is also true that the Legislature by a specific amendment brought in by the Income-tax (Amendment) Act, 1972, made wealth-tax also non-deductible by adding a new clause after clause (a) in section 40 follows : \n \"(iia) any sum paid on account of wealth-tax.....\" (\"Explanation\" is not relevant for our purpose). \n\n 32. This amendment has given rise to an argument that where the Legislature contemplated that certain taxes should not be deducted for the purpose of computation of total income, which has been specifically so enacted, and since reference is made only to wealth-tax, the other taxes, if any, must necessarily be considered as deductible. The argument cannot be accepted because we have to construe section 40(a) and its clauses harmoniously and if in view of the general provision in section 40(a)(ii) it would not be permissible to allow surtax to be deducted, merely because wealth-tax alone is mentioned by an amendment, the scope of the general provision in section 40(a)(ii) cannot in any way be restricted. Having considered the arguments of the learned counsel for both the assessees, we must, therefore, hold that the amount of surtax paid or payable by the assessee-company was not deductible under section 37 and further that section 40(a)(ii) also prohibited such a deduction. The question referred to us is, therefore, answered in the negative and against the assessee. The assessee will pay the costs of this reference Rs. 500. \n\n 33. T.C. No. 287 of 1979 : The question referred at the instance of the assessee in this reference is as follows : \n \"Whether, on the facts and in the circumstances of the case, the sum of Rs. 52,765, provision for surtax, was a proper deduction in computing the total income under the Income-tax Act, 1961, for the year under appeal ?\" \n\n 34. In view of our decision rendered just now in T.C. No. 636 of 1978 in which we have also heard the counsel for the assessee, the question has to be answered in the negative and against the assessee. Assessee to pay the costs of this reference - Rs. 500." }, { "title": "K.P. Varghese vs Income-Tax Officer, B-Ward And Ors. on 3 April, 1970", "url": "https://indiankanoon.org//doc/1456887/", "text": "K.P. Varghese vs Income-Tax Officer, B-Ward And Ors. on 3 April, 1970\nEquivalent citations: [1970]77ITR719(KER)\nJUDGMENT\n\n \n\nM.U. Isaac, J.\n\n \n\n 1. The question arising for decision in this case is whether Section 52 of the Income-tax Act, 1961, has any application in computing capital gains arising from the transfer of a capital asset for a consideration lesser than its fair market value; in other words, whether the capital gains is to be computed on the basis of the actual consideration arising to the assessee or on the basis of the fair market value of the asset transferred. The facts, in so far as they are necessary for the decision of the above question, are not in dispute. The petitioner is an assessee to income-tax. For the year 1966-67, his total income during the year ending on 31st December, 1965, was fixed at Rs. 97,890, and he was assessed accordingly. He had purchased an item of house property situate within the municipal town of Ernakulam in 1958, for a consideration of Rs. 16,500. On 25th December, 1965, he sold it for the same consideration in favour of a daughter-in-law and five of his children. On 4th April, 1968, the Income-tax Officer issued a notice, exhibit P-1, to the petitioner under Section 148 of the Act, stating that he had reason to believe that the petitioner's income chargeable to tax for the year 1966-67 had escaped assessment, and he proposed to reassess the said income, and requiring the petitioner to submit a return in the prescribed form within 30 days of the service of the notice. Exhibit P-l did not disclose any particulars of the income alleged to have escaped assessment. The petitioner, however, filed a return. Subsequently, the Income-tax Officer, by his letter, exhibit P-3, dated 4th March, 1969, disclosed to the petitioner what was the escaped income, which he proposed to assess. Exhibit P-3 stated that the Income-tax Officer proposed to fix the fair market value of the property sold by him on 25th December, 1965, at Rs. 65,000 as against the consideration of Rs. 16,500 for which it was transferred, and to assess the difference of Rs. 48,500 as capital gains. The petitioner was also required to file his objections, if any, to the said proposal with necessary evidence on or before 12th March, 1969. The petitioner submitted his objections, exhibit P-4, on the same day. By his order, exhibit P-5, dated 31st March, 1969, the Income-tax Officer overruled all the objections raised by the petitioner, and reassessed him by including the said sum of Rs. 48,500 as part of his total income for the year 1966-67. This writ petition has been filed to quash exhibit P-5. \n\n 2. The main objection raised by the petitioner before the Income-tax Officer was that there was no question of any capital gains, when a capital asset is transferred for the same consideration as for which it was originally acquired. There is no dispute that the petitioner actually received only Rs. 16,500 by the sale of the property. The difference between the fair market value and the actual consideration received by the petitioner was treated as gift under Section 4 of the Gift-tax Act, 1958, and assessed under that Act. The Income-tax Officer, however, held that Section 52 of the Act applied to the case, and that capital gains had accordingly to be computed on the basis of the fair market value of the asset. The only question pressed before me by the learned counsel for the petitioner is whether Section 52 has any application to the case. The point does not appear to be covered by any judicial pronouncements. The learned counsel for the petitioner and for the department have argued the case with ability and thoroughness. \n\n 3. In order to appreciate the respective contentions of the learned counsel, it is now necessary to refer to the relevant statutory provisions. Section 2(24) of the Income-tax Act, 1961 defines \"income\". It is an inclusive definition ; according to which income includes eight specific items enumerated therein. Item (vi) is \"any capital gains chargeable under Section 45\". Section 4 contains the charging provision ; and income-tax is charged for any assessment year in respect of \"the total income\" of the previous year. Section 5(1) deals with the total income of a resident in India, and it reads : \n\n \"5. Scope of total income.--(1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which- \n\n (a) is received or is deemed to be received in India in such year by or on behalf of such person ; or \n \n\n (b) accrues or arises or is deemed to accrue or arise to him in India during such year ; or \n \n\n (c) accrues or arises to him outside India during such year : \n Provided that, in the case of a person not ordinarily resident in India within the meaning of Sub-section (6) of Section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India. \" \n\n 4. Sections 7, 8 and 9 of the Act deal with \" deemed incomes \" which I may have to consider later. Chapter IV of the Act contains Sections 14 to 39, and it deals with computation of total income. Section 14 enumerates the heads of income, and it reads as follows: \n\n \"14. Heads of income.--Save as otherwise provided by this Act, all income shall, for the purposes of charge of income-tax and computation of total income, be classified under the following heads of income :-- \n\n A.--Salaries. \n\n\n B.--Interest on securities. \n\n\n C.--Income from house property. \n\n\n D.--Profits and gains of business or profession. \n\n\n E.--Capital gains. \n\n\n F.--Income from other sources. \" \n\n\n 5. The fifth head is \"Capital gains\", and Sections 45 and 55 deal with this matter. It is sufficient to read Sections 45, 48 and 52. \n\n \"45. Capital gains--(1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in Sections 53 and 54, be chargeable to income-tax under the head 'Capital gains', and shall be deemed to be the income of the previous year in which the transfer took place. \n\n 48. Mode of computation and deductions.--The income chargeable under the head 'Capital gains' shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely :-- \n\n (i) expenditure incurred wholly and exclusively in connection with such transfer; \n \n\n (ii) the cost of acquisition of the capital asset and the cost of any improvement thereto. \n \n\n 52. Consideration for transfer in cases of under statement.--(1) Where the person who acquires a capital asset from an assessee is directly or indirectly connected with the assessee and the Income-tax Officer has reason to believe that the transfer was effected with the object of avoidance or reduction of the liability of the assessee under Section 45, the full value of the consideration for the transfer shall, with the previous approval of the Inspecting Assistant Commissioner, be taken to be the fair market value of the capital asset on the date of the transfer. \n\n (2) Without prejudice to the provisions of Sub-section (1), if in the opinion of the Income-tax Officer the fair market value of a capital asset transferred by an assessee as on the date of the transfer exceeds the full value of the consideration declared by the assessee in respect of the transfer of such capital asset by an amount of not less than fifteen per cent. of the value so declared, the full value of the consideration for such capital asset shall with the previous approval of the Inspecting Assistant Commissioner, be taken to be its fair market value on the date of its transfer.\" \n\n 6. Section 47 of the Act provides that nothing contained in Section 45 shall apply to the transfers mentioned therein ; and one of them is \"any transfer of a capital asset under a gift or a will or an irrevocable trust.\" The word \"gift\" is not defined in this Act. But it is defined both in Section 122 of the Transfer of Property Act, 1882, and Section 2(xii) of the Gift-tax Act, 1958. Section 122 of the Transfer of Property Act reads: \n\n \"'Gift' is the transfer of certain existing movable or immovable property made voluntarily and without consideration, by one person, called the donor, to another, called the donee, and accepted by or on behalf of the donee. \n\n Such acceptance must be made during the lifetime of the donor and while he is still capable of giving. \n\n If the donee dies before acceptance, the gift is void.\" \n\n 7. Section 2(xii) of the Gift-tax Act reads : \n \"'gift' means the transfer by one person to another of any existing movable or immovable property made voluntarily and without consideration in money or money's worth, and includes the transfer of any property deemed to be a gift under Section 4.\" \n\n 8. Section 4 of the Gift-tax Act reads : \n\n \"Gift to include certain transfers.--For the purposes of this Act,-- \n (a) where property is transferred otherwise than for adequate consideration, the amount by which the market value of the property at the date of the transfer exceeds the value of the consideration shall be deemed to be a gift made by the transferor ; ... \" \n \n\n (Clauses (b), (c) and (d) are omitted, being unnecessary for the present discussion). \n\n 9. To some extent, both the definitions are substantially the same; but the inclusion in the definition of gift in the Gift-tax Act of the transfer of any property deemed to be a gift under Section 4 makes a vital difference. For example, if a property having a market value of Rs. 1,00,000 is transferred for a consideration of Rs. 10,000, it is not a gift as defined in the Transfer of Property Act; it is a sale. But under the Gift-tax Act, it is a gift in respect of Rs. 90,000 which represents the difference between the market value of the property and the actual consideration for which it is transferred. It is on this basis that the petitioner was assessed under the Gift-tax Act on a sum of Rs. 48,500. This is the identical amount which has been now included in the total income of the assessee and assessed as escaped income as per the impugned order, exhibit P-5. \n\n 10. Now I shall state the respective contentions of the learned counsel. Shri C. T. Peter, the learned counsel for the petitioner, contended that we are in this case concerned only with item (vi) included in the definition of income in Section 2(24) of the Income-tax Act, 1961, \"any capital gains chargeable under Section 45\", and that under Section 45, what is chargeable to income-tax under the head \"Capital gains\" is only \"any profits or gains arising from the transfer of a capital asset\". He further submitted that no profits or gains arose to the petitioner in the case from the transfer of the capital asset, as admittedly he transferred it for the same amount for which he acquired it, and no manner of benefit arose to him out of the said transaction. Shri P.K. Krishnankutty Menon, the learned counsel for the revenue, met this argument by stating that what is chargeable to income-tax under Section 4 of the Act is \"the total income\" of the previous year, and the total income of a person as stated in Section 5 of the Act includes not only all income which is received by or accrues or arises to him, but also all income which is deemed to be received by, or to accrue or arise to him. He, therefore, submitted that what is chargeable under the head \"Capital gains\" is not only \"any profits or gains arising from the transfer of a capital asset\" as provided in Section 45, but also any profits or gains deemed to arise from the transfer of a capital asset under any provision of the Act. Then he relied on Section 48, which lays down the method of computation of \"Capital gains\", and Section 52 which deals with consideration for transfer in cases of under-statement. Section 48 provides that capital gains shall be computed by deducting from the full value of the consideration \"received or accrued\" as a result of the transfer of the capital asset, the cost of its acquisition and improvements thereto and the expenditure incurred in connection with the said transfer. Now I come to the controversial Section 52, which I have already quoted. According to the learned counsel for the revenue, the case falls under Sub-section (1) and, at any rate, it falls under Sub-section (2); and, in either case, the full value of the transfer shall be taken to be the fair market value of the capital asset on the date of its transfer. The term \"fair market value\" is defined in Section 2(22A) of the Act, and it is as follows: \n\n \"(22A) ' fair market value ', in relation to a capital asset, means- \n\n (i) the price that the capital asset would ordinarily fetch on sale in the open market on the relevant date ; and \n \n\n (ii) where the price referred to in Sub-clause (i) is not ascertainable, such price as may be determined in accordance with the rules made under this Act.\" \n\n 11. There is no dispute that the transfer in this case was for a consideration, much less than the fair market value. So, if Section 52 applies to the case, the learned counsel for the revenue is right in his submission that what is chargeable under the head \"Capital gains\" is not only profits or gains arising from the transfer of a capital asset, but also profits or gains deemed to arise from the said transfer under Section 52; and the controversy is whether this section applies. \n\n 12. The learned counsel for the petitioner submitted first, that one of the conditions for the application of Sub-section (1) of Section 52 is that the Income-tax Officer has reason to believe that the transfer was effected with the object of avoidance or reduction of the liability of the assessee under Section 45 and that he has not stated so either in the notice, which he issued for reassessment, or in the impugned order of assessment, that he had reason to believe any such thing, and that Sub-section (1) has no application to the case. I do not think that it is necessary to state expressly this jurisdictional fact either in the notice initiating the proceeding or in the order of assessment. If the proceeding is questioned for want of jurisdiction, the Income-tax Officer may have to satisfy the court of the existence of facts on the basis of which he acted. But the question whether the transfer was effected with the object of avoidance or reduction of the liability of the assessee under Section 45 depends on whether by the said transfer he has avoided or reduced any such liability. In other words, a person is entitled to make a gift of any capital asset belonging to him or sell it for a price less than its fair market value ; and if he does so, does he thereby incur a liability under Section 45 ? If he does not, there is no question of such a transfer being with the object of avoidance or reduction of any such liability. This takes me back to the main question whether a person is chargeable on capital gains not only on profits or gains arising under Section 45, but also on profits or gains which would be deemed to have arisen to him under Section 52. \n\n 13. The learned counsel for the petitioner next contended that this being a case where the transferee is directly or indirectly connected with the assessee, it must fall under Sub-section (1) provided the other conditions mentioned therein are satisfied, and that Sub-section (2) has no application to such a case. I am unable to accept this argument. Sub-section (2) is \"without prejudice to the provisions of Sub-sections (1)\" ; and the question whether Sub-section (2) applies to a case depends on its own provisions. It would obviously apply to a case where the fair market value of the capital asset transferred exceeds \"the full value of the consideration declared by the assessee\" in respect of the said transfer. The question is whether this is such a case. I again come back to the same question whether income-tax is chargeable on capital gains not only on profits or gains arising under Section 45, but also on profits or gains which would be deemed to have arisen under Section 52. \n\n 14. The learned counsel for the revenue submitted that income-tax is chargeable under the Income-tax Act not only on income received by, or accruing or arising to, a person, but also on income deemed to be received by, or to accrue or arise to, him under the Act. In other words, even if an income does not arise, an amount can be deemed to be income, if the Act so provides, and would be chargeable. In this context he referred me to Sections 7, 8, 9 and 64 of the Act, and submitted that Section 52 contains a similar provision in respect of capital gains. I am unable to accept the general proposition that income-tax can be charged on income which does not actually exist, but which may be deemed as income under this Act. The Income-tax Act is a law made by Parliament in exercise of its legislative power falling under entry 82 in List 1 of the VIIth Schedule to the Constitution, namely, \"Taxes on income other than agricultural income\". Obviously Parliament can make law under this entry to tax only income ; it cannot by law provide that something which is not income, or a non-existing income would be deemed income and charge a tax on it. The classical statement of Lord Macnaghten in London County Council v. Attorney-General, [1901] A.C. 26; 4 T.C. 265, 293 (H.L.) may be quoted in this context. The Learned law Lord said: \n \"Income-tax, if I may be pardoned for saying so, is a tax on income. It is not meant to be a tax on anything else.\" \n\n 15. The statement may appear to be very elementary; but it is very meaningful. \n\n 16. I shall now examine some of the provisions in the Income-tax Act relating to deemed income. First is Section 7. It deals with income accruing to an assessee in relation to a recognised provident fund. The next is Section 8 and it deals with dividends declared or paid by a company. Both these sections deal with the incomes actually arising or accruing to an assessee and they seem to have been enacted for the purpose of clarification and particularly to fix the year of the receipt of such incomes for the purpose of assessment. The next section referred to is Section 9 and it provides that the incomes mentioned therein shall be deemed to accrue or arise in India. Four kinds of incomes are mentioned in the said section and all of them are incomes actually accruing or arising to the assessee. The deeming provision is only with regard to the place where they accrue. This section appears to have been enacted for the purpose of providing clearly that the incomes mentioned therein shall be deemed to accrue or arise in India, on account of the special features relating to the said incomes. Section 64 of the Act also does not deal with any deemed income. It provides that, in computing the total income of any individual, there shall be included all such incomes as arising directly or indirectly to the spouse or a minor child of the individual or to any other person under the special circumstances mentioned therein. So the provisions contained in the above sections do not lend any support to the contention of the learned counsel for the revenue. It is relevant to note in this context that the validity of the corresponding provision in the Indian Income-tax Act, 1922, was sustained by the Supreme Court in Balaji v. Income-tax Officer, [1961] 43 I.T.R. 393 [1962]; 2 S.C.R. 983 (S.C.), on the ground that it was a provision enacted for preventing evasion of tax and was, therefore, within the competence of the Central Legislature.\n\n 17. I am, however, concerned only with the provisions in the Income-tax Act, 1961, relating specifically to \"capital gains \"; and in my view Section 45 is categorical that profits or gains arising from the transfer of a capital asset alone are chargeable to income-tax under the head \"Capital gains\". The words \"any profits or gains arising from the transfer of a capital asset\" used in Section 45 can mean only what they plainly state. They cannot mean, as the learned counsel for the revenue contends, not only any such profits or gains, but also any profits or gains deemed to arise from such transfer. If that was ever intended. Parliament could have achieved that object by using the words \" any profits or gains arising or deemed to arise from the transfer of a capital asset\" in Section 45 of the Act. The definition of \"income\" in Section 2(24) of the Act also makes it abundantly clear that income under the head \" Capital gains \"includes only\" any capital gains chargeable under Section 45\". I have to construe Section 52 of the Act on this fundamental background. \n\n 18. In my view that section has application only to a case where the consideration in a transfer is under-stated. Sub-section (1) of Section 52 deals with a case where the transfer is between persons directly connected and the Income-tax Officer has reason to believe that it was effected with the object of avoiding or reducing the liability of the transfer under Section 45, Avoidance or reduction of such liability is possible only by understating the consideration. In this context, reference may be made to the decision of the Madras High Court in Sundaram Industries Private Ltd. v. Commissioner of Income-tax, [1969] 74 I.T.R. 243, 247 (Mad.). In that case, the assessee, who had purchased some shares for a sum of Rs. 93,660 sold them to three ladies who were closely related to the directors of the assessee for a sum of Rs. 66,900. The market value of these shares on the date of sale was determined by the Income-tax Officer to be Rs. 1,56,964. Accordingly, he treated the difference between the cost and market prices, namely, Rs. 62,404 as capital gains, by virtue of the first proviso to Section 12B(2) of the Indian Income-tax Act, 1922. This proviso contains a provision similar to Sub-section (1) of Section 52 of the Income-tax Act, 1961. The assessee contended that, though the sale was for a consideration much less than the market value, the transaction was honest and real and it was intended to benefit the transferees, and that in such a case no capital gains arose to the assessee and there was no scope for the application of the proviso. The court in upholding the above contention stated :\n \"What the proviso gets at for charge is the actual capital gain which\nthe vendor should, in the circumstances, have made but is made to appear\nthat the gain as shown by the consideration for the transaction to be much\nless or nil. We are not persuaded to think that the proviso discourages or\navoids honest transactions made out of love and affection or for other\nconceivable reasons on pain of being on an assumption, hauled up, if we\nmay use the expression, for having attempted to avoid or reduce the tax\nliability and on that basis made liable to tax on the difference between the\nconsideration for the transaction and the fair market value. That simply,\nas we read the proviso, is not its purpose. It does not treat what is not an\nactual capital gain as a deemed capital gain. In fact, occurring as it does as\nthe first proviso to Sub-section (2) dealing with the procedural aspect of\ncomputation, it should, we think, be interpreted as limited to escaped\ncapital gain, which is so in truth and in fact, and not intended to bring\nabout fictional gain on an assumption and charge the same.\" \n\n 19. The position is the same with regard to Section 52(1) of the Income-tax Act, 1961, and the sentence, which I have underlined in the above passage exactly agrees with my view on the question. The following statement appearing in the decision of the Supreme Court in Killick Nixon and Co. v. Commissioner of Income-tax, [1967] 66 I.T.R. 714, 719 (S.C.) also indicates that Section 52(1) has application only to a case of understatement of consideration. In the above decision, dealing with the scope of the first proviso to Section 12B(2) of the Indian Income-tax Act, 1922, the court said :\n \"It is open to the Income-tax Officer, if it appears to him, that with the object of avoiding or reducing the liability of the assessee to pay tax, the full value of the consideration for which the sale, exchange or transfer is made is understated and the person acquiring the capital asset is a person with whom the assessee is directly or indirectly connected, to determine the fair market value of the capital asset on the date on which the sale, exchange or transfer took place.\" \n\n 20. Sub-section (2) of Section 52 applies if, in the opinion of the Income-tax\nOfficer, the fair market value of the capital asset transferred by an assessee\nexceeds the value of the consideration declared by the assessee in respect of\nthe transfer. \"To declare\" means, to make known, to announce. The use\nof the words \"declared by the assessee\" in the sub-section is significant.\nThey are not equivalent to \"received by or accrued to the assessee\" or\n\"arising to the assessee\". They are different ideas; and, in my view, Sub-section (2) also relates to a case of under-statement of the true consideration\nin the deed of transfer. \n\n 21. The heading of Section 52 of the Act also lends support to the above view. The headings given to the various sections in the Act were there in the Bill introduced in Parliament; and they form part of the statute. These headings have, therefore, to be regarded as preambles to the sections; and they indicate the subject-matter intended to be dealt with in the sections which follow the headings. The language employed in Section 52 of the Act is unhappy and lacks in clarity; and, in such a case, the heading of the section affords a key in construing the section. Maxwell on the Interpretation of Statutes, twelfth edition, at page 11, states : \n \"The headings prefixed to sections or sets of sections in some modern statutes are regarded as preambles to those sections. They cannot control the plain words of the statute, but they may explain ambiguous words.\" \n\n 22. Sir Richard Henn Collins M.R. in Fletcher v. Birkenhead Corporation, [1907] 1 K.B. 205 (C.A.) stated: \n\n \"The head-note to the report of the case of Hammersmith and City Ry, Co. v. Brand, [1868] L.R. 4 H.L. Cas. 171, 203 seems to me to state fairly the result of that decision, as being that the headings of different portions of a statute are to be preferred to, to determine the sense of any doubtful expression in a section ranged under any particular heading.' Lord Chelmsford said, in giving judgment : \n 'The sections of the Railways Clauses Acts are, as your Lordships know, arranged in order under different heads, which indicate the general object of the provisions immediately following : and these may be usefully referred to, to determine the sense of any doubtful expression in a section ranged under a particular heading.'\" \n \n\n 23. The following statement appearing in the speech of Lord Dilhorne in Fisher v. Raven, [1964] A.C. 210, 232 (H.L.) would also indicate the extent to which the heading of a section can be put to use in construing that section. The House of Lords was in that case concerned with the construction of Section 13 in the Debtors Act, 1869. The learned Lord stated : \n \"It is also to be noted that the Debtors Act, 1869, is entitled 'An Act for the Abolition of Imprisonment for Debt, for the punishment of fraudulent debtors, and for other purposes'. Section 13 of this Act is included in Part II, which is headed ' Punishment of Fraudulent Debtors'. The long title of the Act and the heading of Part II support the view that the Act was only intended to deal with those who owe money, debtors in the ordinary sense of the word, and the view that 'obtained credit' in Section 13 means, and only means, credit for the payment of money.\" \n\n 24. There is another reason which compels me to reject the construction\ncanvassed by the learned counsel for the revenue to be given to Section 52\nof the Income-tax Act. Suppose an assessee has a capital asset, whose cost\nof acquisition including improvements thereto is Rs. 20,000; he transfers\nit for a consideration of Rs. 25,000; the expenditure incurred by him in\nconnection with the transfer is Rs. 5,000; and the fair market value of the\nasset on the date of transfer is Rs. 1,00,000. By the above transfer, the\nassessee does not make any capital gains according to the plain language of Sections 45 and 48 of the Act; but according to the construction which the\nlearned counsel for the revenue puts on Section 52, the assessee has derived\ncapital gains amounting to Rs. 75,000. The same is the position, even if\nthe transfer was made for a nominal consideration of rupee one; but if he\ntransfers it without any consideration, Section 47(iii) of the Act operates ;\nand the assessee does not derive any capital gains at all. In all these three\ninstances, the assessee is liable to pay gift-tax on the difference between\nthe market value of the asset and the actual consideration for which it is\ntransferred. This is a very illogical, if not an absurd, position. I cannot\nassume that Parliament intended that, unless the language used in the\nstatute plainly states so; and, in that case, there is no scope for any interpretation, and the court has to give effect to what the legislature had plainly stated. Certainly, this is not the position with regard to Section 52 of the Act. \n\n 25. In this context, it is interesting to notice what the Central Board of Revenue has stated in its departmental circular regarding the scope of Section 52 of the Income-tax Act, 1961. The relevant instructions appear in paragraph 62 in the \"Board's Income-tax Circulars and Letters, etc.\" No. X/II/56 at page 142 of the above publication. \n\n \"62. Section 13 of the Finance Act has introduced a new Sub-section (2) in Section 52 of the Income-tax Act with a view to countering evasion of tax on capital gains through the device of an understatement of the full value of the consideration received or receivable on the transfer of a capital asset. \n\n The provision existing in Section 52 of the Income-tax Act before the amendment (which has now been renumbered as Sub-section (1)), enables the computation of capital gains arising on transfer of a capital asset with reference to its fair market value as on the date of its transfer ignoring the amount of the consideration shown by the assessee, only if the following two conditions are satisfied : \n\n (a) the transferee is a person who is directly or indirectly connected with the assessee; and \n \n\n (b) the Income-tax Officer has reason to believe that the transfer was effected with the object of avoidance or reduction of the liability of the assessee to tax on capital gains. \n \n\n In view of these conditions, this provision has a limited operation and does not apply to other cases where the tax liability on capital gains arising on transfer of capital assets between parties not concerned with each other, is sought to be avoided or reduced by an understatement of the consideration paid for the transfer of the asset\". \n\n 26. The Board of Revenue has also quoted the observations of the Minister of Finance in regard to the provisions of Section 52(2) during his reply to the debate in the Lok Sabha, at the time of the clause by clause consideration of the Finance Bill, 1964. They appear in paragraph 65 at page 143 of the above publication. The Hon'ble Minister stated : \n \"Today, practically every transaction of the sale of property is for a much lower figure than what is actually received. The deed of registration mentions a particular amount; the actual money that passes is considerably more. It is to deal with these classes of sales that this amendment has been drafted ..... It does not aim at perfectly bona fide transactions.... but essentially relates to the day-to-day occurrences that are happening before our eyes in regard to the transfer of the property. I think, this is one of the key sections that should help us to defeat the free-play of unaccounted money and cheating of the Government.\" \n\n 27. Neither the speech of the Minister nor the circular of the Central Board of Revenue is a guide for the interpretation of the section. But the speech discloses the object of the Government in getting the particular provision enacted; and the Board's circular shows how the department has understood and interpreted the particular provision. Both these things do not support the construction contended for by the revenue's learned counsel. On the other hand, they are in agreement with the view that I have expressed, namely, Section 52 is intended to operate only in cases of understatement of consideration, done with a view to dishonestly escape from liability. \n\n 28. The learned counsel for the petitioner put forward an alternative argument in support of his contention that capital gains can be computed only on the basis of the actual consideration received by or arising to, an assessee from the transfer of a capital asset, and not on the basis of its fair market value. Neither the Income-tax Act, 1961, nor the General Clauses Act defines \"gift\". Section 47(iii) of the Income-tax Act, 1961, provides that nothing contained in Section 45 shall apply to any transfer of a capital asset under a gift. According to the learned counsel, in the absence of a definition of \"gift\" in the Income-tax Act and the General Clauses Act, the definition in the Gift-tax Act should be adopted for the purposes of the Income-tax Act in preference to the definition in the Transfer of Property Act. Then the difference between the fair market value and the actual consideration received by or accruing to an assessee, from the transfer of a capital asset is a gift as defined in the Gift-tax Act; and it is excluded in computing capital gains by virtue of Section 47(iii) of the Income-tax Act. In other words, the capital gains has to be computed on the basis of the actual consideration. I find considerable force in this argument. In the first place, if the definition in the Gift-tax Act is adopted, Section 52 of the Income-tax Act can never yield to the interpretation which the learned counsel for the revenue seeks to put on it; and the unreasonable result which arises from such an interpretation of the said section, which I have already indicated, can be avoided. Secondly, the income-tax, the wealth-tax, the gift-tax and the expenditure-tax form different heads of an integrated system of taxation; and they are all administered by officers of the income-tax department. The imposition of tax under one head must have a relevancy to the liability under the other heads of tax. It is, therefore, reasonable to think, particularly having due regard to the exclusion of gift from the field of capital gains, that the legislature did not intend to charge income-tax on an amount which is liable to gift-tax. This is also a weighty circumstances to adopt for the purposes of the Income-tax Act the definition of gift in the Gift-tax Act in preference to the one given in the Transfer of Property Act. In the result, I hold that capital gains has to be computed on the basis of the actual consideration arising to a person from the transfer of a capital asset, and not on the basis of its fair market value, and that Section 52 of the Income-tax Act, 1961, has no application to this case. \n\n 29. Now I come to a preliminary objection raised by the learned counsel for the revenue to the maintainability of this writ petition. The objection was raised after the petitioner's learned counsel completed his arguments on the merits of the case. The respondent's learned counsel contended that the question whether capital gains is to be computed on the basis of the actual consideration or on the basis of the fair market value of the capital asset transferred is one within the competence of the Income-tax Officer to decide, that the Act provides for an assessee aggrieved by the order of the Income-tax Officer an adequate remedy by way of appeal, that the petitioner has availed of this remedy by filing an appeal from the order of assessment, and it is pending, and that, under these circumstances, this court should not exercise its jurisdiction under Article 226 of the Constitution to grant relief to the petitioner. The learned counsel for the petitioner submitted that the appeal was filed after the filing of this writ petition, that the appeal has raised other questions also, and that in view of the objection raised to the maintainability of this writ petition, the petitioner has withdrawn the appeal. The learned counsel further submitted that the question raised in this writ petition is one relating to the jurisdiction of the Income-tax Officer, that he cannot by an erroneous decision assess under the head \"Capital gains\" something which is not capital gains under the Act, and if he does so, his order is liable to be quashed by a writ of certiorari. A large number of decisions were cited by the learned counsel on both sides in support of the rival contentions. \n\n 30. It is well established that the relief under Article 226 of the Constitution is discretionary. This article confers very wide powers on the High Courts; but it has to be exercised along recognised lines and subject to certain self-imposed limits. Existence of an alternative remedy does not bar the jurisdiction of the court to issue a writ under Article 226; but it is a material circumstance to be taken into consideration in exercising the discretion in granting the writs. S.R. Das C.J. in State of U. P. v. Mohammad Nooh, A.I.R. 1958 S.C. 86, 93 stated:\n \"It is well established that, provided the requisite grounds exist, certiorari will lie although a right of appeal has been conferred by statute, (Halsbury's Laws of England, 3rd edition, volume 11, page 130, and the cases cited there). The fact that the aggrieved party has another and adequate remedy may be taken into consideration by the superior court in arriving at a conclusion as to whether it should, in exercise of its discretion, issue a writ of certiorari to quash the proceedings and decisions of inferior courts subordinate to it and ordinarily the superior court will decline to interfere until the aggrieved party has exhausted his other statutory remedies, if any. But this rule requiring the exhaustion of statutory remedies before the writ will be granted is a rule of policy, convenience and discretion rather than a rule of law and instances are numerous where a writ of certiorari has been issued in spite of the fact that the aggrieved party had other adequate legal remedies.\" \n\n 31. In Thansingh Nathmal v. Superintendent of Taxes, [1964] 15 S.T.C. 458, 474 ; [1964] 6 S.C.R. 654 (S.C.), the Supreme Court said:\n \"The jurisdiction of the High Court under Article 226 of the Constitution is couched in wide terms and the exercise thereof is not subject to any restrictions except the territorial restrictions which are expressly provided in the articles. But the exercise of the jurisdiction is discretionary; it is not exercised merely because it is lawful to do so. The very amplitude of the jurisdiction demands that it will ordinarily be exercised subject to certain self-imposed limitations. Resort to that jurisdiction is not intended as an alternative remedy for relief which may be obtained in a suit or other mode prescribed by statute. Ordinarily the court will not entertain a petition for a writ under Article 226, where the petitioner has an alternative remedy, which without being unduly onerous, provides an equally efficacious remedy.\" \n\n 32. The principles governing the exercise of jurisdiction under Article 226 of the Constitution in entertaining petitions against the orders of taxing authorities have been stated by the Supreme Court in Bhopal Sugar Industries v. Sales Tax Officer, [1964] 14 S.T.C. 410, 414; [1964] 1 S.C.R. 488 (S.C.). The court said :\n \"The legislature has set up an elaborate and self contained machinery for investigating whether a transaction is liable to be taxed because it is of the nature of a retail sale within the meaning of the Act. The taxing officer is invested with authority to determine the nature of the transaction and its liability to tax, and against his decision there is an appeal to the appellate authority and a further right of revision to the Commissioner, It is true that the jurisdiction of the High Court under Article 226 is extensive, but, normally, the High Court does not exercise that jurisdiction by entertaining petitions against the order of taxing authorities, when the statute under which tax is sought to be levied provides a remedy by way of an appeal or other proceeding to a party aggrieved and thereby bypass the statutory machinery. That is not to say that the High Court will never entertain a petition against the order of the taxing officer. The High Court has undoubtedly jurisdiction to decide whether a statute under which a tax is sought to be levied is within the legislative competence of the legislature enacting it or whether the statute defines constitutional restrictions or infringes any fundamental rights, or whether the taxing authority has arrogated to himself power which he does not possess, or has committed a serious error of procedure which has affected the validity of his conclusion or even where the taxing authority threatens to recover tax on an interpretation of the statute which is erroneous. The High Court may also in appropriate cases determine the exigibility to tax of transactions the nature of which is admitted, but the High Court normally does not proceed to ascertain the nature of a transaction which is alleged to be taxable. The High Court leaves it to the taxpayer to obtain an adjudication from the taxing authorities in the first instance.\" \n\n 33. Reference may also be made to another decision of the Supreme Court in Commissioner of Income-tax v. A. Raman and Co., [1968] 67 I.T.R. 11, 15; [1968] 1 S.C.R. 10 (S.C.). In that case, their Lordships upheld the decision of the High Court quashing the notices issued by the Income-tax Officer under Section 147 of the Income-tax Act, 1961, requiring the assessee to show cause why certain assessments made against the assessee should not be reopened, on the ground that, on the materials on record, the Income-tax Officer had no reason to believe that income chargeable to tax had escaped assessment. Speaking of the scope of the discretionary powers which the High Court may exercise under Article 226 of the Constitution, the Supreme Court said :\n \"The High Court exercising jurisdiction under Article 226 of the Constitution has power to set aside a notice issued under Section 147 of the Income-tax Act, 1961, if the condition precedent to the exercise of the jurisdiction does not exist. The court may, in exercise of its powers, ascertain whether the Income-tax Officer had in his possession any information : the court may also determine whether from that information the Income-tax Officer may have reason to believe that income chargeable to tax had escaped assessment. But the jurisdiction of the court extends no further.\" \n\n 34. The learned counsel for the revenue relied strongly on the following passage appearing in the decision of the Supreme Court in Lalji Haridas v. R.H. Bhatt, [1965] 55 I.T.R. 415, 418 (S.C.) in support of his contention that I should not entertain this writ petition, as the point raised by the petitioner is one properly falling for the decision of the departmental authorities :\n\n \"Mr. Pathak for the appellant attempted to argue that the notice issued against the appellant is, on the face of it, invalid, because it is barred by time. We did not allow Mr. Pathak to develop this point, because we took the view that a plea of this kind must ordinarily be taken before respondent No. 1 himself. The jurisdiction conferred on the High Court under Article 226 is not intended to supersede the jurisdiction and authority of the Income-tax Officers to deal with the merits of all the contentions that the assessees may raise before them, and so it would be entirely inappropriate to permit an assessee to move the High Court under Article 226 and contend that a notice issued against him is barred by time. That is a matter which the income-tax authorities must consider on the merits in the light of the relevant evidence. \n\n Apart from this aspect of the matter, however, the plea of limitation sought to be raised by Mr. Pathak was not even specifically made as it should have been in the writ petition filed before the High Court. One of the grounds taken in the writ petition was that the Appellate Assistant Commissioner had 'instead of treating the assessment order as a nullity and having the same set aside, illegally remanded the case back to the Income-tax Officer to save limitation'. It would be noticed that, at its highest, this ground can mean that the result of the remand order was to attempt to save limitation ; it has no relevance on the point sought to be raised by Mr. Pathak that the notice issued against his client initially was barred by time. But, as we have already indicated, a plea of this kind cannot be permitted to be raised in writ proceedings, and so we refused Mr. Pathak permission to develop this point.\" \n\n 35. The learned counsel submitted that bar of limitation is a matter which affects the jurisdiction of the Income-tax Officer, and that the above decision is an authority for the proposition that even such a matter falls properly for the decision of the Income-tax Officer and the High Court should not interfere with the proceedings of an Income-tax Officer on this ground.\n\n 36. The learned counsel for the revenue also relied on a Division Bench decision of this court in Income-tax Officer v. R. M. Subramania Iyer, [1970] 77 I.T.R. 453 (Ker.), which reversed my decision in O.P. 805 of 1966, R. M. Subramania Iyer v. I.T.O. [1968] 68 I.T.R. 863 (Ker.). In that case, I quashed a notice issued by the Income-tax Officer under Section 147 of the Income-tax Act, 1961, holding that the proposed proceeding was time-barred. The Division Bench held that the writ petition should not have been entertained, as this was a matter within the jurisdiction and competence of the Income-tax Officer to decide. The Division Bench quoted the passage extracted above from the decision of the Supreme Court in Lalji Haridas's case and observed that the full impact of the said decision was not realised as the last sentence in the above passage was not extracted in my judgment. The learned counsel for the petitioner pointed out that this sentence is only a repetition of what is stated in the second and third sentences in the above passage, and that the above decision of the Supreme Court does not lay down any proposition that the jurisdiction of the High Court under Article 226 of the Constitution should not be exercised to prohibit an Income-tax Officer from pursuing an action which he has no authority to initiate on account of the bar of limitation. The learned counsel also submitted that the decision in that case was influenced by the peculiar facts and circumstances of the case, which are relevant in deciding whether the discretionary jurisdiction under Article 226 of the Constitution should be exercised or not. In that case, the Income-tax Officer, having reason to believe that the income of the appellant assessable for the year 1949-50 escaped assessment, issued a notice to him requiring him to submit a return of his income. The appellant, thereupon, made a return showing an income of Rs. 46. The Income-tax Officer assessed his income at Rs. 4,74,046. The appellant filed an appeal before the Appellate Assistant Commissioner and urged that the assessing authority did not give the appellant the opportunity to examine all his witnesses. The appellate authority partly accepted this contention and remanded the case to the Income-tax Officer directing him to submit a report after examining the witnesses cited by the appellant. While making this order, the appellate authority commented that the appellant appeared to be determined to adopt dilatory proceedings and delay the final disposal of the proceedings taken against him. The appellant filed an appeal from the remanding order before the Appellate Tribunal. When these matters were pending, the writ petition was filed by him to quash the order of assessment and the notices sent to him by the Income-tax Officer pursuant, to the order of remand, requiring the appellant to appear before the Income-tax Officer and give his evidence. The High Court summarily dismissed the petition. Special leave was obtained to appeal from the decision of the High Court on the ground that the statute under which the impugned proceedings had been commenced was invalid; and the appellant obtained also an order of stay of proceedings from the Supreme Court. This was the only ground of law and jurisdiction taken in the petition for special leave. At the hearing of the appeal, Mr. Pathak, the learned counsel for the appellant, conceded that he was not in a position to justify or substantiate that contention; and he attempted to raise and argue a new point, namely the proceedings initiated by the Income-tax Officer were time-barred. The Supreme Court did not permit the learned counsel to develop this point; and in doing so, it also pointed out that this ground was neither taken in the writ petition nor in the appeal before the Appellate Assistant Commissioner.\n\n 37. The learned counsel for the petitioner may be within his rights to argue that the above decision of the Supreme Court is based on the peculiar facts and circumstances of the case, though he contended for a contrary position before the Division Bench in Income-tax Officer v. R.M. Subramania Iyer, [1970] 77 I.T.R. 453 (Ker.). The said decision is binding on me ; and I take it as an authority for the proposition that this court should not interfere in exercise of its jurisdiction under Article 226 of the Constitution with a proceeding of an Income-tax Officer on the ground that it is time-barred. I cannot accept the contention that in the light of the decisions of the Supreme Court referred to above, the Division Bench decision of this court does not lay down the correct law.\n\n 38. I am, however, of the opinion that the decision in Income-tax Officer v. R.M. Subramania Iyer does not apply to the instant case. The question whether a proceeding initiated by the Income-tax Officer is time-barred or not is a matter, as pointed out by the Division Bench, within the competence and jurisdiction of that authority to decide. The question whether the difference between the fair market value of a capital asset and the actual consideration for which it is transferred is capital gains or not under the Income-tax Act, is also a question for the Income-tax Officer to decide; but it is a preliminary question, on the correct decision of which his jurisdiction to deal with it depends. He cannot, by an erroneous decision, whether on a question of fact or of law, bring the subject within his jurisdiction and assess something which is not income or does not exist as income under the Act. If he does so, he acts without jurisdiction and his proceeding is liable to be quashed under Article 226 of the Constitution. This proposition is well-established by the decisions of the Supreme Court in Bhopal Sugar Industries v. Sales Tax Officer and the Commissioner of Income-tax v. A. Raman and Co., to which reference has been already made. The decisions of the Supreme Court in State of Bombay v. United Motors (India) Ltd., [1953] 4 S.T.C. 133 ; [1953] S.C.R. 1069 (S.C.), Himmatlal v. State of Madhya Pradesh, [1954] 5 S.T.C. 115; [1954] S.C.R. 1122 (S.C.) and Bengal Immunity Co. v. State of Bihar, [1955] 6 S.T.C. 446; [1955] 2 S.C.R. 603 (S.C.), have also laid down the above proposition. These are cases where tax was attempted to be levied under an invalid law. The same would be the position if a tax is attempted to be levied without any authority of law. It would be an infringement of Articles 265 and 19(1)(f) of the Constitution. In Shivram Poddar v. Income-tax Officer, [1964] 51 I.T.R. 823 (S.C.), the Supreme Court stated that the Income-tax Act provides a complete machinery for the assessment of tax and relief in respect of improper or erroneous orders made by the revenue authorities, and that resort to the High Court in exercise of its extraordinary jurisdiction under Article 226 of the Constitution in matters relating to assessment, levy and collection of income-tax may be permitted only when questions of infringement of fundamental rights arise or when on undisputed facts the taxing authorities are shown to have assumed jurisdiction which they do not possess. In the present case the facts are not disputed; and in my view what the Income-tax Officer has assessed as capital gains is something which is neither capital gains nor income falling under any other head under the Income-tax Act. The petitioner is, therefore, entitled to invoke the jurisdiction of this court under Article 226 of the Constitution.\n\n 39. In the result, I allow this original petition and quash exhibit P-5, the impugned order of assessment. The parties will bear their own costs." }, { "title": "Lally Jacob vs Income-Tax Officer And Ors. on 10 April, 1992", "url": "https://indiankanoon.org//doc/1458900/", "text": "Lally Jacob vs Income-Tax Officer And Ors. on 10 April, 1992\nEquivalent citations: [1992]197ITR439(KER)\nAuthor: K.S. Paripoornan\nBench: M. Jagannadha Rao, K.S. Paripoornan\nORDER\n\n\n \n\n K.S. Paripoornan, J. \n \n\n1. This original petition is coming up before us on a reference made by one of us by order of reference dated December 21, 1089. The said order of reference contains in brief the facts of the case and the questions of law that arise for consideration. Placing reliance on the decision of the Supreme Court in Central Provinces Manganese Ore Co. Ltd. v. CIT [1986] 160 ITR 961 at page 968, counsel for the Revenue contends that it may not be necessary to resolve the conflict between the Bench decisions of this court in Gates Foam and Rubber Co. v. CIT [1973] 90 ITR 422 and Kerala Kaumudi (P) Ltd. v. CIT [1990] 181 ITR 30.\n\n2. We shall advert to the said plea first. In the original petition, the challenge was against exhibit P-l order of assessment as also exhibits P-3 and P-5 orders passed by the Inspecting Assistant Commissioner of Income-tax and the Commissioner of Income-tax. The petitioner is aggrieved by denial of relief by way of waiver of interest under Section 217 of the Income-tax Act for the assessment year 1980-81. The Inspecting Assistant Commissioner of Income-tax, by exhibit P-3, held that Rule 40 is inapplicable. The Commissioner of Income-tax, in exhibit P-5, held that that is not a fit case for waiver of interest and declined to interfere. Counsel for the Revenue submits that, according to the assessee, she was prevented by sufficient cause from filing the return and so interest should not have been levied under Section 217 of the Act. Counsel for the Revenue contends that, unless the assessee concedes or admits that interest levied was lawful or exigible, the assessee cannot plead for waiver or reduction of interest. In other words, the assessee should admit that the return has been furnished with delay. Here, the plea is that there was sufficient cause for not filing the return, which means that there was no delay. Relying on the following observations of the Supreme Court in Central Provinces Manganese Ore Co. Ltd.'s case [1986] 160 ITR 961 at page 968 :\n \"... In cases where the jurisdictional fact attracting the levy cannot be disputed, for example, that the return has been furnished under Section 139 with delay, it will be a question merely of satisfying the relevant authority that there are circumstances calling for a reduction or waiver of the interest ...\" \n\n3. Counsel for the Revenue contended that the jurisdictional fact attracting the levy is disputed herein and so the application filed for waiver of interest under Rule 40 of the Income-tax Rules is unsustainable. We should state that this was not a ground on which the Inspecting Assistant Commissioner and the Commissioner of Income-tax denied relief to the assessee ; nor was this ground taken specifically in the counter-affidavit disabling the petitioner from putting forward the plea entitling her to the relief by way of waiver of interest. So, on the facts and circumstances of this case, we see no reason to entertain this belated and new plea at this juncture. We decline to entertain the said plea.\n\n4. If the new plea is not entertained, the question as to whether interest is exigible under Section 217 of the Income-tax Act falls for adjudication.\n\n5. Section 217 of the Income-tax Act states that where, on making the\" regular assessment\", the Assessing Officer finds the default specified in the section, interest is leviable. The plea put forward by the assessee herein is that the assessment in the instant case stemmed from a notice issued under Section 148 of the Income-tax Act and so an assessment made in pursuance of such a notice is not a regular assessment within the ambit of Section 2(40) of the Act. Section 2(40) of the Act states that \"regular assessment\" means the assessment made under Section 143 or Section 144. Counsel for the assessee vehemently contends that an assessment which had as its origin a notice issued under Section 148 of the Income-tax Act is not an assessment under Section 143 or Section 144 of the Act and the assessment made in such circumstances is not an assessment under Section 143 of the Act and so not a \"regular assessment\". The assessee's counsel is fortified in stating so by a Bench decision of this court in Gates Foam' and Rubber Co.'s case [1973] 90 ITR 422. But, a later Bench decision of this court has taken a different view and has held that, even in proceedings initiated in pursuance of the notice issued under Section 148 read with Section 147 of the Income-tax Act, an assessment can be made only under Section 143(3) or Section 144 of the Income-tax Act and an assessment under Section 148 of the Income-tax Act is not contemplated. (See Kerala Kaumudi (P) Ltd. v. CIT [1990] 181 ITR 30 (Ker)). (It should be stated that exhibit P-1 assessment order specifies only Section 143(3) of the Act). The decision in Prakash Lal Khandelwal v. ITO [1989] 180 ITR 604 (Pat) is also in accord with the decision Gates Foam and Rubber Co.'s case [1973] 90 ITR 422 (Ker).\n\n6. Prima facie, the assessee is entitled to succeed on this aspect if the decision in Gates Foam and Rubber Co.'s case [1975] 90 ITR 422 (Ker) represents the correct law. In view of the later decision of this court in Kerala Kaumudi (P) Ltd.'s case [1990] 181 ITR 30, the ratio laid down in the earlier decision in Gates Foam and Rubber Co.'s case [1973] 90 ITR 422 is open to doubt. There is a direct conflict between the two Bench decisions of this court. The matter is of vital importance to the Revenue as also to the assessees and is likely to arise in a large number of cases.\n\n7. In this view of the matter and in view of the conflicting Bench decisions, we are of the view that this case should be referred to a Full Bench of this court under Section 4 of the High Court Act. We hereby do so.\n\n8. The office is directed to place the papers before the Honourable Chief Justice for passing appropriate orders.\n\nCase Note: \n\nDirect Taxation regular assessment - Sections 139, 140A, 143, 144, 147, 148, 215 and 217 of Income Tax Act, 1961 whether assessment made for first time by resort to Section 147 is regular assessment for purpose of charging interest under Section 217 it was contended that assessment under Section 147 even if an assessment for first time it will be regarded as regular assessment only from 01.04.1985 even in absence of Section 215 (6) such assessment will be regular assessment Section 215 (6) is only clarification of earlier law as different High Courts have expressed different opinions on said question by inclusion of that Sub-section alone it cannot be said that for assessment year in question such assessment cannot be treated as regular assessment. \n\nHead Note:\n\nINCOME TAX \n\nAdvance tax--INTEREST UNDER S. 217 PAYABLE BY ASSESSEE WHEN NO ESTIMATE MADE--Assessment for first time made under s. 147--Is regular assessment for the purposes of invoking s. 217.Gopalaswami Mudaliar v. ITO (1963) 49 ITR 322 (Mad), Agrl.\nMarketing Federation v. Union of India (1981) 130 ITR 928 (Del) \nand CIT v. Pratap Singh of Nabha (1982) 138 ITR 27 (Del) \nconcurred with. Not to current assessment years as s. 217 has \nbecome inoperative w.e.f. 1-4-1988.\n\nIncome Tax Act 1961 s.217 \n\nIncome Tax Act 1961 s.147 \n\n \n \n\nJUDGMENT\n \n\n P. Krishnamoorthy, J. \n\n9. The question involved in this writ petition is as to whether an assessment made for the first time by resort to Section 147 of the Income-tax Act, 1961, is a \"regular assessment\" for the purpose of charging interest under Section 217 of the above Act. A reference to the Full Bench was necessitated as the Division Bench which heard the matter felt that there is a direct conflict between two Bench decisions of this court in Gates Foam and Rubber Co. v. CIT [1973] 90 ITR 422 and Kerala Kaumudi (P) Ltd. v. CIT [1990] 181 ITR 30, in regard to the scope and import of the expression \"regular assessment\" occurring in Section 217 of the Income-tax Act, 1961 (hereinafter referred to as \"the Act\").\n\n10. The petitioner is an assessee to income-tax on the file of respondent No. 1. She is a partner of the firm, M/s. Thamarapilly Brothers, Cochin, and Cochin Wood Industries. For the assessment year 1980-81 (accounting year ending March 31, 1980), the petitioner was liable to pay advance tax under the Act. The petitioner submitted an estimate of her income as required under Section 209A(1) of the Act on March 15, 1980, as she was not an assessee till then ; but no payment of advance tax was made in accordance with the estimate. Though the petitioner was bound to submit a return of her income for the assessment year 1980-81 on or before July 1, 1980, the return could not be filed in time. Later, the petitioner was served with a notice under Section 147 of the Act, for submission of the return which was filed by her on February 19, 1983. Along with the return, she produced the challan for having paid self-assessment tax in full under Section 140A of the Act, The first respondent issued a notice under Section 143(2) and completed the assessment by exhibit P1 order dated October 12, 1983. While completing the assessment, the first respondent levied interest under Section 217 in the sum of Rs. 56,368. Aggrieved by the levy of interest under Section 217, the petitioner requested the second respondent, the Inspecting- Assistant Commissioner of Income-tax, Ernakulam, by an application to reduce or waive the interest under Section 217 on the ground that such interest could not be levied, and there were circumstances which permitted waiver of such interest pursuant to Rule 40 of the Income-tax Rules. By exhibit P-3 order, the second respondent rejected the application and confirmed the levy of interest. Aggrieved by exhibit P-3, the petitioner filed a revision petition under Section 264 of the Act before the third respondent. The third respondent declined to interfere and dismissed the revision petition by his order (exhibit P-5) dated July 23, 1986. The petitioner is challenging the above orders with regard to levy of interest under Section 217 of the Act alone.\n\n11. The only ground of attack against the levy of interest under Section 217 of the Act raised by counsel for the petitioner is that, in order to levy interest under the aforesaid section, the assessment should be a \"regular assessment\". According to counsel, the assessment made by resort to Section 147 read with Section 148 is not a regular assessment as defined in the Act and, accordingly, the petitioner is not liable for any interest under Section 217. In support of the aforesaid contention, counsel relied on a Division Bench decision of this court in Gates Foam and Rubber Co.'s case [1973] 90 ITR 422. According to counsel for the petitioner, assessment for the assessment year 1980-81 having been made by resort to Section 147, it is not a \"regular assessment\" and, accordingly, the first respondent has no jurisdiction to levy interest as contemplated under Section 217 of the Act. Thus, the only question to be considered in this case is as to whether an assessment made for the first time by resort to Section 147 of the Act is a \"regular assessment\" for the purpose of Section 217 of the Act.\n\n12. The main argument of counsel for the petitioner for contending that an assessment as in the present case is not a regular assessment is based on the definition of \"regular assessment\" in Section 2(40) of the Act and certain other relevant provisions contained in the Act. \"Regular assessment\" is defined in Section 2(40) of the Act as follows :\n \"'regular assessment' means the assessment made under Section 143 or Section 144;\" \n\n13. Section 147 of the Act deals with income escaping assessment and, according to counsel for the petitioner, power is given to the Income-tax Officer to assess such income under Section 147 if the conditions mentioned in Clauses (a) and (b) are satisfied. On that basis, counsel contended that an assessment made by resort to Section 147 is not an assessment under Section 143 or Section 144 of the Act. It is his case that a distinction is made in the Act between an assessment under Section 143 or Section 144 and an assessment under Section 147 of the Act and he relied on the provisions contained in Section 153 and Section 246 for the above purpose. The income escaping assessment has to be assessed subject to the provisions of Sections 148 to 153. Section 153 of the Act deals with the time limit for completion of assessments and reassessments. According to counsel, a distinction is made in Section 153 between an assessment made under Section 143 or Section 144 and an assessment made under Section 147 as they are separately dealt with under Sub-section (1) and Sub-section (2) of the aforesaid section. Section 246 which confers a right of appeal against an order of assessment also makes a distinction between an order of assessment made under Section 143 or Section 144 on the one hand and an assessment made under Section 147 on the other. Section 246(c) provides for an appeal against an assessment under Section 143 or Section 144 whereas Sub-clause (e) provides for an appeal against an order of assessment made under Section 147 or Section 150. Based on these provisions, counsel for the petitioner maintains that there is a distinction between an assessment and a regular assessment and that only an assessment made under Section 143 or Section 144 will come under the definition of\" regular assessment\". On the other hand, counsel for the Revenue contended that any assessment made \"for the first time\", whether it be under Section 143 or Section 144 or by resort to Section 148 is a regular assessment within the meaning of the Income-tax Act. Counsel for the Revenue further contended that, on the wording of Sections 147 and 148, it is clear that any notice under Section 148 has to be deemed to be a notice under Section 139(2) of the Act and, thereafter, all the other provisions of the Act shall apply accordingly for the assessment. It is further submitted by him that there is no section other than Sections 143 and 144 for making an order of assessment and as such the assessment as in the present case has also to be treated as an order of assessment under Section 143 or 144 thereby making it a regular assessment. Counsel for the Revenue relied on the provisions contained in Section 140A of the Act which deals with self-assessment. Sub-section (1) of Section 140A provides that if any tax is payable on the basis of any return required to be furnished under Section 139 or Section 148, after taking into account the amount of tax, if any, already paid, the assessee has to pay the tax before furnishing the return and the return shall be accompanied by proof of payment of such tax. Whether the return is filed under Section 139 or in pursuance of a notice under Section 148, the assessee has to pay the, admitted tax along with the return, no doubt taking into account the tax already paid by him. Sub-section (2) of Section 140A provides that, after a regular assessment under Section 143 or Section 144 has been made, any amount paid under Sub-section (1) shall be deemed to have been paid towards the regular assessment. The provisions contained in Section 140A(2), according to counsel for the Revenue, make it absolutely clear that even an assessment made by resort to Section 147 is a regular assessment under Section 143 or Section 144.\n\n14. As far as this case is concerned, we are concerned only with the question as to whether an assessment made for the first time by resort to Section 147 is a regular assessment or not. It will be advantageous to understand the general scheme of the Act before going into this question and the decisions on that aspect. Under Section 139 of the Act, every person who is assessable under the Income-tax Act has to file a return of his income within the time stipulated therein. If a person having assessable income omits to file a return and if the Income-tax Officer is of the opinion that such a person is assessable under the Act, he may, before the end of the relevant assessment year, issue a notice and serve the same on him, requiring him to furnish, within 30 days from the date of service of notice, a return of his income verified in the prescribed manner and setting forth such other particulars as may be necessary under Section 139(2) of the Act. It is clear from the aforesaid sub-section that notice under Section 139(2) has to be issued before the end of the relevant assessment year. Under Section 140A of the Act, any tax payable on the basis of any return filed voluntarily by the assessee or in pursuance of a notice under Section 139(2) has also to be paid along with the return. Section 142 deals with the enquiry to be made by the Income-tax Officer before making an assessment on any person who has filed a return. Section 143 authorises the Income-tax Officer to determine the sum pay able by the assessee and to make an order of assessment. The Income-tax Officer is authorised to pass an order of assessment without requiring the presence of the assessee or the production of any evidence in support of the return or after an enquiry under Section 142. Section 144 deals with best judgment assessments and the Income-tax Officer is given power to make a best judgment assessment if a person fails to make a return required by any notice given under Sub-section (2) of Section 139 or fails to comply with any of the terms of a notice issued under Sub-section (1) of Section 142 or, even after filing a return, the assessee fails to comply with all the terms of a notice issued under Sub-section (2) of Section 143. Thus, Sections 139 to 144 deal with the filing of returns, enquiry by the Income-tax Officer and the order of assessment to be made by the Income-tax Officer.\n\n15. Section 147 of the Act deals with income escaping assessment. According to that section, if the Income-tax Officer has reason to believe that, by reason of the omission or failure on the part of an assessee to make a return under Section 139 for any assessment year, or to disclose all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year, he may assess a person to income-tax subject to the provisions contained in Sections 148 to 153. So also, even if a person has filed a return, if the Income-tax Officer has, on the basis of information in his possession, reason to believe that income chargeable to tax has escaped assessment for any assessment year, he may reassess such income or recompute the loss or the depreciation allowance, as the case may be, for the assessment year, subject to the provisions of Sections 148 to 153. Thus, under Section 147 of the Act, the Income-tax Officer has power and jurisdiction to make an assessment for the first time if a person has not filed any return at all or to reassess the income even if an assessment order has already been made on the basis of the return filed by him, if there are materials available with him to come to the conclusion that income chargeable to tax has escaped assessment. As stated earlier, in this case, we are concerned only with assessment made for the first time under Section 147. Section 148 of the Act deals with the procedure to make an assessment by resort to Section 147. Section 148 enjoins the Income-tax Officer to serve a notice on the assessee containing all or any of the requirements which may be included in a notice under Sub-section (2) of Section 139. Section 148 further provides that, on the issuance of such a notice, all the other provisions of the Act, in so far as they relate to assessment, shall apply as if the notice was a notice issued under Sub-section (2) of Section 139. Sections 149 to 153 of the Act deal with the time limit for such a notice and other incidental matters. Sections 207 to 213 of the Income tax Act, 1961, deal with the liability, computation and mode of payment of advance tax payable under the Act. Section 214 provides for payment of interest by the Government on the amount by which the aggregate amount of advance tax paid during any financial year exceeds the amount of tax determined on regular assessment. Section 215 provides for payment of interest by the assessee if the advance tax paid by him under Section 209A or 212 on the basis of his own estimate is less than 75% of the tax assessed on the regular assessment. Section 216 makes an assessee liable to pay interest if he has underestimated the income. Section 217 provides for payment of interest by an assessee where he has not sent the statement or estimate of income as provided in Section 209A. Section 217, so far as it is relevant to this case, is as follows :\n\n\"217. (1) Where, on making the regular assessment, the Income-tax Officer finds--\n\n(a) that any such person as is referred to in Clause (a) of Sub-section (1) of Section 209A has not sent the statement referred to in that clause or the estimate in lieu of such statement referred to in Sub-section (2) of that section ; or\n \n\n(b) that any such person as is referred to in Clause (b) of Sub-section (1) of Section 209A has not sent the estimate referred to in that clause, \n \n\nsimple interest at the rate of twelve per cent. per annum from the 1st day of April next following the financial year in which the advance tax was payable in accordance with the said Sub-section (1) or Sub-section (2) up to the date of the regular assessment shall be payable By the assessee upon the amount equal to the assessed tax as defined in Sub-section (5) of Section 215.\" \n\n16. The true ambit and import of the expression \" regular assessment\" has been the subject-matter of judicial interpretation in various cases, both under the Indian Income-tax Act, 1922, and under the 1961 Act. Some High Courts have taken the view that an assessment made by resort to Section 147 is not a \"regular assessment\". Some other High Courts have taken the view that an assessment made for the first time by resort to Sections 147 and 148 is a \"regular assessment\". The Bombay High Court alone has taken the view that an assessment under Section 147, whether it be an assessment for the first time or a reassessment, will also be a regular assessment as contemplated under the Income-tax Act, 1961. A question has also arisen in interpreting Section 214 of the Act as to whether an assessment made in pursuance of an appellate or revisional order will be a regular assessment or not, and all the High Courts, including a Full Bench of this court in CIT v. G. B. Transports [1985] 155 ITR 548, have taken the view that such an assessment will not be a regular assessment and that only the first assessment will be a regular assessment. Gates Foam and Rubber Co.'s case [1973] 90 ITR 422 (Ker), CIT v. Ram Chandra Singh [1976] 104 ITR 77 (Patna), Smt. Kamla Vati v. CIT [1978] 111 ITR 248 (P & H), CIT v. Smt. Jagjit Kaur [1980] 126 ITR 540 (All), CIT v. Ganeshram Nayak [1981] 129 ITR 43 (Orissa), Monohar Gidwany v. CIT [1983] 139 ITR 498 (Cal), Charles D'Souza v. CIT [1984] 147 ITR 694 (Kar) and CIT v. Padma Timber Depot [1988] 169 ITR 646 (AP) are cases coming under the first category. K. Gopalaswami Mudaliar v. Fifth Addi ITO [1963] 49 ITR 322 (Mad), National Agricultural Cooperative Marketing Federation of India Ltd. v. Union of India [1981] 130 ITR 928 (Delhi) and CIT v. Pratap Singh of Nabha [1982] 138 ITR 27 (Delhi) are cases coming under the second category. In Deviprasad Kejriwal v. CIT [1976] 102 ITR 180, the Bombay High Court has taken the view that any assessment mad,e in pursuance of a proceeding under Section 147, whether it is an assessment for the first time or a reassessment will be a \"regular assessment\" under the Act. It is not necessary for us to go to the extent the Bombay High Court has gone for the purpose of this case, nor does he question arise in the present case. Here, we are concerned only with the question as to whether an assessment made for the first time by resort to Section 147 is a regular assessment or not.\n\n17. In the first category of cases--Smt. Kamla Vati's case [1978] 111 ITR 248 (P & H), Smt. Jagjit Kaur's case [1980] 126 ITR 540 (All), Ganeshram Nayak's case [1981] 129 ITR 43 (Orissa), Charles D'Souza's case [1984] 147 ITR 694 (Kar) and Padma Timber Depot's case [1988] 169 ITR 646 (AP)~ the question arose as to whether an assessment made for the first time by resort to section ,147 is a regular assessment or not. The other cases were cases of reassessment under Section 147. The Division Bench case of our High Court (Gates Foam and Rubber Co.'s case [1973] 90 ITR 422 (Ker)) was not a case of assessment for the first time under Section 147 but a case of reassessment under Section 147. In all the decisions wherein the question regarding assessment for the first time arose, apart from relying on the definition in Section 2(40) and the other provisions of the Act, reliance was placed on the Division Bench decision of this court aforementioned. But it is to be noted that Gates Foam and Rubber Co.'s case [1973] 90 ITR 422 (Ker) was concerned with penalty proceedings under Section 273 of the Act, and it arose in a proceeding for reassessment under Section 147 of the Act. This court was considering the case of reassessment under Section 147 and Govindan Nair J. (as he then was) made it clear that they have not considered the question as to whether any distinction has to be drawn on the basis of the provisions of the Income-tax Act, 1961, in respect of an assessment for the first time made under Section 147. It is pertinent to note the following observations made by the learned judge (at page 425) :\n \"Our attention has been drawn to a decision of the Madras High Court in Natarajan Chettiar v. 1TO, Karaikudi [1961] 42 ITR 29 (Mad), and a later decision of the same High Court in Gopalaswami Mudaliar v. Fifth Addl. 1TO, Coimbatore [1963] 49 ITR 322 (Mad). In both these cases the section that was considered was Section 18A(6) of the Indian Income-tax Act, 1922. In the former decision the view taken was that 'regular assessment' mentioned in Section 18A(6) will refer only to assessment made without resort to Section 34 of that Act. This view appears to have been practically dissented from in the decision in Gopalaswami Mudaliar v. Fifth Addl. ITO, Coimbatore [1963] 49 ITR 322, and a distinction has been sought to be drawn between cases where there has been a previous assessment and cases in which there had been no previous assessment. The decision in Gopalaswami Mudaliar v. Fifth Addl. ITO, Coimbatore [1963] 49 ITR 322 (Mad), related to a case where there had not been any previous assessment and it was held therein that interest can be charged under Section 18A(6). In the later decision it was suggested that when there had been no previous assessment, the assessment made by resort to Section 34 is a regular assessment and that, therefore, Section 18A(6) will apply to such assessment ; but that section may not apply to a case where there had been previous assessment, before action was taken under Section 34 of the Act. It is not for us to consider whether any such distinction can be drawn on the basis of the provisions of the Indian income-tax Act, 1922, nor are we called upon to consider the correctness of the view taken in Natarajan Chettiar v. ITO, Karaikudi [1961] 42 ITR 29 (Mad).\" .\n\n18. It is thus clear from the aforesaid observations that this court has not considered the question as to whether an assessment made for the first time by resort to Section 147 will be a \"regular assessment\" or not. This court has not decided that question as it did not arise and the case before the Division Bench was one of reassessment under Section 147. There are certain observations in the said judgment which are of very wide import and may include even assessments which are made for the first time in proceedings under Section 147 of the Act. But we should state that the said observations were not germane to the issue involved in that case.\n\n19. In Gopalaswami Mudaliar's case [1963] 49 ITR 322, a Division Bench of the Madras High Court had to consider the question as to whether an assessment made for the first time by resort to Section 34 of the Indian Income tax Act, 1922, corresponding to the present Section 147 is a regular assessment or not. In support of the argument that such assessments cannot be regular assessments, reliance was placed on the decision of Rajamannar C. J. in Natarajan Chettiar v. ITO [1961] 42 ITR 29 (Mad). The later Division Bench distinguished that case and held that the above decision must be confined to cases where there has been an initial assessment under Section 23 of the 1922 Act which is, however, reopened under Section 34 and a reassessment made and that those principles will not apply to an assessment for the first time made under Section 34. After elaborately considering various corresponding provisions of the 1922 Act, it was held by their Lordships (at page 327) :\n \"It seems to us that this decision is only of limited application. It does not lay down any principle that penal interest is not leviable in cases where even the initial assessment of the assessee is made by resort to Section 34. As we understand the decision it must be confined to cases where there has been an initial assessment under Section 23, which is, however, reopened under Section 34 and a reassessment is made. As we have pointed out, the expression 'regular assessment' is used in contrast with a provisional assessment. An initial assessment, though made by resort to Section 34, is none the less a regular assessment.\" \n\n20. A Division Bench of the Delhi High Court in National Agricultural Co-operative Marketing Federation of India Ltd. v. Union of India [1981] 130 ITR 928, elaborately considered the scope and content of the expression \"regular assessment\" in the light of the provisions contained in the Indian Income-tax Act of 1922 and the 1961 Act. Though the case arose under Section 214 of the Income-tax Act, 1961, dealing with the right of an assessee to get interest on the excess advance tax paid, the matter was elaborately considered and it was held that an assessment made for the first time by resort to Section 34 of the 1922 Act or under Section 147 of the 1961 Act will be a regular assessment. This was followed by the same High Court in Pratap Singh's case [1982] 138 ITR 27. The Bombay High Court in Deviprasad's case [1976] 102 ITR 180, went further and held that even a reassessment made under Section 34 of the 1922 Act or under Section 147 of the 1961 Act would also be a regular assessment for the purpose of Section 273. Anyhow, it is not necessary to go to that extent as we are concerned in this case only with an assessment made for the first time.\n\n21. After considering the various provisions of the Act and the decisions rendered in the matter, we are clearly of the opinion that the view taken by the Madras High Court in Gopalaswami Mudaliar's case [1963] 49 ITR 322 and those of the Delhi High Court in National Agricultural Co-operative Marketing Federation of India Ltd. v. Union of India [1981] 130 ITR 928 and Pratap Singh's case [1982] 138 ITR 27 (Delhi) lays down the correct law. As stated earlier, this court has not considered in Gates Foam and Rubber Co.'s case [1973] 90 ITR 422 the content and import of the expression \"regular assessment\", vis-a-vis an assessment for the first time made under Section 147. A reading of Sections 147 and 148 makes it clear that, at any rate, an assessment for the first time made by resort to Section 147 is a regular assessment. Section 148 enjoins the Income-tax Officer before making an assessment under Section 147 to serve a notice on the assessee containing all or any of the requirements which may be included in a notice under Sub-section (2) of Section 139. The further provision in that section is very significant which provides that the aforesaid notice has to be treated as if it is a notice under Section 139(2) and that all the provisions of the Act shall apply to the subsequent procedure and the final assessment. In other words, the notice issued under Section 148 has to be deemed to be a notice under Section 139(2) and, if the other provisions of the Act have to be applied, an assessment in pursuance of that can be made only under Section 143 or Section 144. We were not shown any other provision by which the Income-tax Officer is authorised to make an order of assessment under the Act. The provisions contained in Section 140A also give an indication that an assessment made in pursuance of a notice under Section 148 is a regular assessment under Section 143 or Section 144, for Section 140A(2) provides that any admitted tax paid in pursuance of Section 140A(1) shall be deemed to have been paid towards the regular assessment under Section 143 or Section 144. It is pertinent to note that Section 140A(1) deals with a return required to be furnished under Section 139 or Section 148. That makes the provision clear that an assessment made under Section 147 also will be a regular assessment under Section 143 or Section 144. Accordingly, we hold that any assessment made for the first time by resort to Section 147 will also be a regular assessment for the purpose of invoking Section 217 of the Act. With great respect, we dissent from the view expressed in certain decisions referred to earlier in this judgment which take a contrary view.\n\n22. If this interpretation is not given to the expression \"regular assessment\", it may lead to an anomalous position. Section 217 authorises the Income-tax Officer to levy interest for non-payment of, or deficit payment of, advance tax under the Act. If an interpretation is given to the expression \"regular assessment\" as contended by counsel for the petitioner, the result would be that a person who actually files a return within the assessment year will be liable to pay interest if he does not pay advance tax or if there is deficiency in the amount of advance tax, whereas if a person fails to file a return within the assessment year but files it after the assessment year, he is not liable to pay interest at all under Section 217. Courts have to interpret the sections in a statute in a reasonable manner which would not defeat the avowed object. It should not lead to absurd results and, in that view of the matter also, we are clearly of the opinion that an assessment as in the present case will be a regular assessment for the purpose of Section 217 of the Income-tax Act, 1961.\n\n23. It was pointed out that there is an observation in a Full Bench decision of this court in G.B. Transports' case [1985] 155 ITR 548 to the effect that an assessment or reassessment under Section 147 is not a regular assessment. That decision was regarding the interpretation of Section 214 of the Income-tax Act, 1961, and the question as in this case did not arise at all therein. Any observation made in a decision has to be understood in the context in which it is made and, in the context in which it was made in the aforesaid decision, it was only an obiter dictum and did not actually arise. That decision cannot be taken as an authority for the proposition that an assessment made for the first time even if it is by resort to Section 147 is not a regular assessment.\n\n24. We make it clear that we have interpreted the expression \"regular assessment\" only in the context of an assessment for the first time made under Section 147 and for the purpose of Section 217 of the Act and that we have not expressed any opinion as to whether the same meaning will have to be given to the case of a \"reassessment\" by resort to Section 147 or of an assessment under the Act in any other situation.\n\n25. By the Taxation Laws (Amendment) Act, 1984, Sub-section (6) was added to Section 215 of the Income-tax Act, 1961, with effect from April 1, 1985, which reads as follows :\n \"Where, in relation to an assessment year, an assessment is made for the first time under Section 147, the assessment so made shall be regarded as a regular assessment for the purposes of this section and Sections 216, 217 and 273.\" \n\n26. On the basis of the above amendment, it was contended that the assessment under Section 147 even if it is an assessment for the first time, will be regarded as a regular assessment only from April 1, 1985, and, for the assessment year 1980-81 with which we are concerned, such assessments cannot be treated as regular assessments. We are not inclined to agree with this contention. In the view that we have taken, even in the absence of Sub-section (6) of Section 215, such assessments will be regular assessments. Sub section (6) of Section 215 is only a clarification of the earlier law as different High Courts have expressed different opinions on the question and by the inclusion of that sub-section alone, it cannot be said that, for the assessment year in question, such assessments cannot be treated as regular assessments.\n\n27. In view of what is stated above, the original petition has only to be dismissed and we do so but, in the circumstances, without any order as to costs." }, { "title": "Commissioner Of Income-Tax vs H.H. Maharaja Sahib Shri Lokendra ... on 6 January, 1986", "url": "https://indiankanoon.org//doc/495219/", "text": "Commissioner Of Income-Tax vs H.H. Maharaja Sahib Shri Lokendra ... on 6 January, 1986\nEquivalent citations: [1986]162ITR93(MP)\nJUDGMENT\n 1. The Income-tax Appellate Tribunal, Indore Bench, Indore, at the instance of the Commissioner of Income-tax, Bhopal, has made this reference under Section 256(1) of the Income-tax Act, 1961, for the opinion of this court on the following question of law: \n \"Whether, on the facts and in the circumstances of the case, and having regard to the provisions of Section 55(2) of the Income-tax Act, the Income-tax Appellate Tribunal was correct in law in holding that no capital gains accrued to the assessee ? \" \n\n 2. The facts giving rise to this reference, as per the statement of case received, may be stated in brief, thus : The respondent-assessee is an ex-ruler of the erstwhile State of Ratlam, which was founded by the late Maharaja Ratansinghji. A jagir was conferred upon Shri Ratansingh with the rank of seh-hazari (commander of 3,000 horses), the insignia of the chaur (yak's tail), morchal (peacock plumes) suraj-mukhi (representation of the sun and the moon on fans), and mahimaratib (insignia of the fish) in the 17th century. During the accounting year for the period ending March 31, 1977, the present Maharaja of Ratlam, on June 22, 1976, by a registered sale deed sold land within the compound of Shri Ranjit Vilas Palace, Ratlam, for Rs. 6,12,958. The Income-tax Officer got the property valued by the Valuation Officer and ultimately accepted the sale price at this figure, besides the land at Lokendra Bhawan Palace at Rs. 48,000. The Income-tax Officer took the cost of acquisition of the palace as on January 1, 1954, at Rs. 1,51,200 and the market value of the said land at Rs. 3,000. So the total cost of acquisition was taken at Rs. 1,54,220 allowing brokerage of Rs. 24,488 and the exemption and other allowances, the Income-tax Officer assessed the assessee to tax a sum of Rs. 3,57,953 on account of capital gains on this sale, though the assessee had shown a loss of Rs. 94,471 in the matter of capital gains. \n\n 3. The assessee took up the matter in appeal and the Commissioner (Appeals) after hearing, estimated the fair market value of the land in question as on January 1, 1954, at Rs. 2,58,207 against Rs. 1,51,200 adopt\ned by the Income-tax Officer. Against this order of the Commissioner\n(Appeals), both the assessee and the Department came up in second appeal before the Tribunal. \n\n 4. The assessee, before the Tribunal, for the first time took the additional ground that there was no cost of acquisition of the asset in question and as such there could be no capital gain as a result of the transfer of the property in dispute. The Tribunal permitted the assessee to take up this additional ground. \n\n 5. After hearing the representatives of the parties and considering the entire facts and circumstances of the case including the history of the Ratlam State which has been considered by the Tribunal elaborately and in great detail by tracing its origin, came to the conclusion that no capital gain arose in the present case as a result of the sale of land and building in question. Hence this reference. \n\n 6. The learned counsel for the Revenue did not dispute that Ratlam State was received in gift by Shri Ratan Singh, the forefather of the assessee. Shri Ratan Singh attacked with dagger a mad elephant and as a result of the blow of the dagger, the said elephant was killed. The then Emperor Shajahan was pleased with the daring feat showed by Shri Ratan Singh and he gave the entire Ratlam State to him. The property in question is included in the said State and the said property was inherited by the assessee. \n\n 7. The learned counsel for the Revenue contended that the Tribunal has committed an error in holding that no capital gain arose in the present case. According to learned counsel, the main controversy in the present case is whether the sale proceeds of the lands in question situated within the compound of Shri Ranjit Vilas Palace, Ratlam, and within the compound of Shri Lokendra Bhavan are in the nature of capital receipts and, if so whether such receipts attract the provisions of Section 45 of the Income-tax Act, 1961. \n\n 8. In order to appreciate the contentions raised on behalf of the Revenue, it would be relevant to reproduce the relevant provisions of the Income-tax Act: \n\n 9. Section 2(14) of the Act is as follows : \n\n \"capital asset\" means property of any kind held by an assessee whether or not connected with his business or profession, but does not include- \n\n (i) any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession; \n\n (ii) personal effects, that is to say, movable property (Including wearing apparel and furniture, but excluding jewellery) held for personal use by the assessee or any member of his family dependent on him.\" \n\n 10. Section 2(47) of the Income-tax Act, 1961, is as follows : \n \" transfer \", in relation to a capital asset, includes the sale, exchange\nor relinquishment of the asset or the extinguishment of any rights therein\nor the compulsory acquisition thereof under any law. \" \n\n 11. Section 45 of the said Act, with which we are directly concerned is as follows: \n \"45. Capital gains.--(1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in Sections 53, 54, 54B, 54D, 54E and 54F be chargeable to income-tax under the head 'Capital gains' and shall be deemed to be the income of the previous year in which the transfer took place.\" \n\n 12. The learned counsel for the Revenue also placed reliance on Section 49 and Section 55, which are as under: \n\n \"49. Cost with reference to certain modes of acquisition.--(1) Where the capital asset became the property of the assessee- \n\n (i) on any distribution of assets on the total or partial partition of a Hindu undivided family; \n\n (ii) under a gift or will; \n\n (iii) (a) by succession, inheritance or devolution, or \n \n\n (b) on any distribution of assets on the dissolution of a firm, body of individuals or other association of persons, or \n \n\n (c) on any distribution of assets on the liquidation of a company, or \n \n\n (d) under a transfer to a revocable or an irrevocable trust, or \n \n\n (e) under any such transfer as is referred to in Clause (iv) or Clause (v) or Clause (vi) of Section 47; \n\n (iv) such assessee being a Hindu undivided family, by the mode referred to in Sub-section (2) of Section 64 at any time after the 31st day of December, 1969, \n \n\n the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the asset incurred or borne by the previous owner or the assessee, as the case may be. \n\n Explanation.--In this sub-section, the expression 'previous owner of the property' in relation to any capital asset owned by an assessee means the last previous owner of the capital asset who acquired it by a mode of\n\nacquisition other than that referred to in Clause (i) or Clause (ii) or Clause (iii) or Clause (iv) of this sub-section. \n\n (2) Where the capital asset being a share or shares in an amalgamated company which is an Indian company became the property of the assessee in consideration of a transfer referred to in Clause (vii) of Section 47, the cost of acquisition of the asset shall be deemed to be the cost of acquisition to him of the share or shares in the amalgamating company.\" \n\n \"55. Meaning of 'adjusted', 'cost of improvement' and 'cost of acquisition'.--(1) For the purposes of Sections 48, 49 and 50, \n \n\n (a) 'adjusted' in relation to written down value or fair market value means diminished by any loss deducted or increased by any profit, assessed under the provisions of Clause (iii) of Sub-section (1) or Clause (ii) of Sub-section (1A) of Section 32 or Sub-section (2) or Sub-section (2A) of Section 41, as the case may be, the computation for this purpose being made with reference to the period commencing from the 1st day of January, 1964, in cases to which Clause (2) of Section 50 applies; \n\n (b) 'cost of any improvement' in relation to a capital asset, \n \n\n (i) where the capital asset became the property of the previous owner or the assessee before the 1st day of January, 1964, and the fair market value of the asset on that day is taken as the cost of acquisition at the option of the assessee, means all expenditure of a capital nature incurred in making any additions or alterations to the capital asset on or after the said date by the previous owner or the assessee, and \n \n\n (ii) in any other case, means all expenditure of a capital nature incurred in making any additions or alterations to the capital asset by the assessee after it became his property, and where the capital asset became the property of the assessee by any of the modes specified in Sub-section (1) of Section 49, by the previous owner, \n \n\n but does not include any expenditure which is deductible in computing the income chargeable under the head 'Interest on securities', 'Income from house property', 'Profits and gains of business or profession', or 'Income from other sources', and the expression 'improvement' shall be construed accordingly, \n \n\n (2) For the purposes of Sections 48 and 49, 'cost of acquisition', in relation to a capital asset,-- \n\n (i) where the capital asset became the property of the assessee before the 1st day of January, 1964, means the cost of acquisition of the asset to the assessee or the fair market value of the asset on the 1st day of January 1964, at the option of the assessee; \n\n (ii) where the capital asset became the property of the assessee by any of the modes specified in Sub-section (1) of Section 49, and the capital asset became the property of the previous owner before the 1st day of January, 1964, means the cost of the capital asset to the previous owner or the fair market value of the asset on the 1st day of January, 1964, at the option of the assessee; \n\n (iii) where the capital asset became the property of the assessee on the distribution of the capital assets of a company on its liquidation and the assessee has been assessed to income-tax under the head 'Capital gains' in respect of that asset under Section 46, means the fair market value of the asset on the date of distribution; \n\n (v) where the capital asset, being a share or a stock of a company, became the property of the assessee on- \n\n (a) the consolidation and division of all or any of the share capital of the company into shares of larger amount than its existing shares, \n \n\n (b) the conversion of any shares of the company into stock, \n \n\n (c) the re-conversion of any stock of the company into shares, \n \n\n (d) the sub-division of any of the shares of the company into shares of smaller amount, or \n \n\n (e) the conversion of one kind of shares of the company into another kind, means the cost of acquisition of the asset calculated with reference to the cost of acquisition of the share or stock from which such asset is derived. \n\n (3) Where the cost for which the previous owner acquired the property cannot be ascertained, the cost of acquisition to the previous owner means the fair market value on the date on which the capital asset became the property of the previous owner.\" \n\n 13. The learned counsel, therefore, submitted that as the assessee had received the said property by way of inheritance and as he himself had opted for the cost of the capital asset as on January 1, 1954, (which was the relevant date at that time), the Tribunal has committed an error in coming to the conclusion that in the present case there being no cost of acquisition of the said property to the initial owner, there is no question of any capital gain. The learned counsel, therefore, relied on the passage from \"Income Tax Law\" by Chaturvedi (3rd Edn), page 1763, which is as follows : \n \" Cost of acquisition when the cost to the previous owner cannot be ascertained--Section 55(3).--In cases where the cost to the previous owner is to be taken as the basis of determination of the cost of the asset to the assessee and the assessee does not produce evidence by which such cost to the\n\nprevious owner can be ascertained, the Income-tax Officer is to take such cost at a figure which, in his opinion, was the fair market value [ defined in Section 2(22A) ] of the asset on the date the capital asset became the property 6f the previous owner. The provisions of Section 55(3) cannot be applied to a case where \"the cost for which the previous owner acquired the property can be ascertained.\" \n\n 14. In this connection, the learned counsel for the Revenue also placed reliance on Circular No. 31 dated September 21, 1962, issued by the Board which is as follows : \n\n \" 2. Under Clause (ii) of Sub-section (2) of Section 55, where the capital asset became the property of the assessee by any of the modes specified in Section 49, including inheritance, and the capital asset became the property of the previous owner before January 1, 1954, ' cost of acquisition ' means the cost of the capital asset to the previous owner or the fair market value of the asset on January 1, 1954, at the option of the asses-see. It has been argued that in case of successive inheritance (of the type referred to in the preceding paragraph) the provisions of Section 55(2)(ii) would not apply and that these provisions would apply only to a case where some actual cost was incurred in the immediate by previous year. \n\n 3. The Board have, however, been advised that the above view is not correct. Where Section 49 applies, the provisions of Section 55(2) also become applicable and in the context the expression 'the previous owner' need not be taken to mean the immediate preceding owner but may be considered as including 'the previous owners'. In such a case, where an assessee acquires an asset by inheritance before January 1, 1954, the assessee has the option of substituting the fair market value of the asset as on January 1, 1954, in place of the original cost, if it is to his advantage.\" \n\n 15. The learned counsel for the Revenue, therefore, submitted that in view of this circular also, the Tribunal was not right in deciding the point raised in favour of the assessee. \n\n 16. On the other hand, the learned counsel for the assessee submitted that though the property in question is a capital asset, there is no \" gain \" as such because admittedly the forefathers of the assessee were not required to pay any cost in terms of money for acquiring the said property, looking into the history of the Ratlam State, and consequently the provisions of Section 45 of the Income-tax Act, 1961, are not attracted because Section 45 uses the words \" any profits or gains \". Obviously this is not a case of profits. So far as gains are concerned, it is necessary to find out that the property sold was acquired at some cost in terms of money and the difference in the cost of acquisition and the price at which the property was sold could be the basis for levying capital gains. But in a case as the present one where the forefathers of the assessee did not acquire the said property by paying any money, in the absence of any cost of acquisition, even though the assessee has sold it at a high price, no liability to capital gains could be fastened on him even though he may have accepted the valuation as on January 1, 1954, and even though he may have on account of this sale shown a loss of Rs. 94,471 by showing his net income at Rs. 19,223, he cannot claim the said loss in his returns as the stand taken by the assessee regarding the said loss is not proper and that amount has to be included in his income. In support of his contentions, the learned counsel for the assessee placed reliance on a number of decisions. \n\n 17. In CIT v. Home Industries and Co. [1977] 107 ITR 609, a Division Bench of the Bombay High Court has held as under (headnote at pp. 610 &611) :\n \"The goodwill in the instant case was a self-created and self-generated asset of the assessee created or generated by the activities of the assessee-firm and probably by the name which the firm had earned and the goodwill it had created among its customers. It grew along with the business which was carried on by the assessee-firm right up to April 9, 1959, on which day the business together with the goodwill was transferred by the firm to the company. The goodwill of the assessee-firm, though a capital asset of the firm, could not be said to have been acquired by it at any particular point of time or for any cost in terms of money and the question arises whether this type of capital asset of the assessee-firm is one whose transfer will give rise to chargeable capital gains under Section 12B(1) of the Act.\" \n\n 18. It will be clear on a reading of both the charging provisions, Section 12B(1) of the 1922 Act and Section 45 of the 1961 Act, that the incidence of tax is on 'profits or gains' arising from the transfer or sale of a capital asset. The concept of 'profit or gain' arising from transfer or sale necessarily implies that there is something received in excess of the cost of the capital asset which is transferred or sold. The charging provision in both the Acts itself brings in the concept of actual cost to the assessee of the capital asset and what is done by the machinery provision which is contained in Section 12B(2) of the 1922 Act and Section 48 of the 1961 Act, is to elaborate that concept and lay down the mode or method by which such profit or gain is to be computed : the machinery provision reiterates what is contained in the charging provision and goes on to indicate that capital gain is to be arrived at after deducting the actual cost from the full value of the consideration for which the transfer of the\ncapital asset is made. If the capital asset is such that it has cost nothing,\nin terms of money to the assessee, the charging provision must be interpret\ned as being not referable to such capital asset and a self-created or self-\ngenerated goodwill being such an asset, will be outside the purview of the\ncharging section. Therefore, on a proper interpretation of the charging\nprovision itself, it seems clear that the concept of actual cost expressed in\nterms of money to the assessee of the capital asset at some particular point\nof time would be a necessary ingredient before the transfer of that capital\nasset can give rise to chargeable gain. Since self-created or self-generated\ngoodwill is not a capital asset which could be said to have been acquired\nby the assessee-firm at any particular point of time and is not a capital\nasset which could be said to have cost something in terms of money to the\nassessee, such goodwill will not be a capital asset the transfer of which\nwill give rise to chargeable capital gain under Section 12B(1) of the 1922\nAct or Section 45 of the 1961 Act. \n\n 19. Therefore, there was no transfer or sale of goodwill to the private limited company so as to attract Section 12B(1) of the 1922 Act.\" \n\n 20. In CIT v. Jaswantlal Dayabhai [1978] 114 ITR 798, a Division Bench of this court has held as under (headnote):\n \"Section 45 of the Income-tax Act, 1961, which is the charging section for levy of tax on capital gains, shows that the charge is on 'any profits and gains arising from the transfer of a capital asset' and not on the capital asset itself. The concept of 'profits and gains' made chargeable under Section 45 itself implies that there is something received in excess of the cost of the capital asset which is transferred. In the case of a self-created or self-generated goodwill, the assessee incurs no cost in terms of money. On the transfer of such goodwill, the assessee makes no profits or gains chargeable under Section 45. If the whole of the consideration received on such a transfer is taken to be 'profits or gains' of the assessee within the meaning of Section 45, it would amount to taxing the capital asset itself and not 'profits or gains' arising from its transfer. This construction of Section 45 is supported by the scheme of Section 48 which provides that the income chargeable under Section 45 is to be computed by deducting from the full value of the consideration ' the cost of acquisition of the capital asset and the cost of any improvements thereto '. The mode of computation provided in Section 48 shows that the capital asset, the transfer of which is taxable under Section 45, is one which costs in terms of money to the assessee, and is also one which can be improved by investing money. Self-created or self-generated goodwill is not that\n\ntype of capital asset and its transfer cannot be the subject of taxation under Section 45 of the Act.\nTherefore, the amount obtained by the assessee, a partner of a firm, in consideration of his interest in the goodwill of the firm at the time of his retirement, was not liable to capital gains tax.\" \n\n 21. In CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294, the Supreme Court has held as under (headnote):\n\n \"Goodwill generated in a newly commenced business cannot be described as an 'asset' within the terms of Section 45 of the Income-tax Act, 1961 (or of Section 12B of the Indian Income-tax Act, 1922), and the transfer of goodwill initially generated in a business does not give rise to a capital gain for the purposes of income-tax. \n\n Goodwill denotes the benefit arising from connection and reputation. A variety of elements goes into its making, and its composition varies in different trades, and in different businesses in the same trade, and while one element may preponderate in one business, another may dominate in another business. Its value may fluctuate from one moment to another depending on changes in the reputation of the business. It is affected by everything relating to the business, the personality and business rectitude of the owners, the nature and character of the business, its name and reputation, its location, its impact on the contemporary market, the prevailing socio-economic ecology, introduction to old customers and agreed absence of competition. There can be no account in value of the factors producing it. It is also impossible to predicate the moment of its birth. The benefit to the business varies with the nature of the business and also from one business to another. No business commenced for the first time possesses goodwill from the start. It is generated as the business is carried on and may be augmented with the passage of time. \n\n The charging section and the computation provisions together constitute an integrated code. When there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section. \n\n All transactions encompassed by Section 45 must fall under the governance of its computation provisions. A transaction to which those provisions cannot be applied must be regarded as never intended by Section 45 to be the subject of the charge. What is contemplated by Section 48(ii) is an asset in the acquisition of which it is possible to envisage a cost : it must be an asset which possesses the inherent quality of being available on the expenditure of money to a person seeking to acquire it. None of the provisions pertaining to the head 'capital gains' suggests that they include an asset in the acquisition of which no cost at all can be conceived. When goodwill generated in a new business is sold and the consideration brought to tax, what is charged is the capital value of the asset and not any profit or gain. Further, the date of acquisition of the asset is a material factor in applying the computation provisions pertaining to capital gain; but in the case of goodwill generated in a new business, it is not possible to determine the date when it comes into existence.\" \n\n 22. In Bawa Shiv Charan Singh v. CIT [1984] 149 ITR 29 (Delhi), which relates to surrender of tenancy rights, it has been held as under (head-note) :\n\n \"The assessee, an advocate, had taken certain permises on rent in 1947-48. He had not paid anything for the acquisition of the tenancy right or for being let into possession of the premises. During the accounting period relevant to the assessment year 1966-67, the assessee surrendered the tenancy rights of the first floor of the premises and received a sum of Rs. 30,000 therefor. The question was whether the assessee was liable to capital gains tax on the net amount of Rs. 25,000 after statutory deduction. The Tribunal held that the tenancy right represented a capital asset and the surrender thereof for consideration would amount to a transfer of a capital asset. Though the assessee had not exercised any option in this regard, the Tribunal held that from the gross amount should be deducted that amount which the assessee would have got if he had surrendered the tenancy rights on January 1, 1954, and there would be no difficulty in determining the market value of the tenancy right as on that date. On a reference : \n\n Held, (i) that the assessee's tenancy right was a capital asset and its surrender would result in the right being extinguished and would, therefore, amount to a transfer of a capital asset within the meaning of the Act; \n\n (ii) that when the interest of the lessor is parted with, the price paid therefor would be premium or salami, but the periodical payments by the lessee for the continuous enjoyment of the benefits under the lease were in the nature of rent: the former was a capital receipt and the latter a revenue receipt. What distinguished rent from premium was that the latter represented money paid as price or a consideration for being let in possession. The periodic payments of rent made by the assessee were not for the acquisition of the capital asset of leasehold rights; \n\n (iii) that a variety of elements contributed to the making of the value of the tenancy rights, but there could be no account in value of the factors producing it. It was a composite thing referable in part to its\n\nlocality, in part to the use to which the premises were put, in part to the nature of the business carried on, if commerical premises, in part to the success of the business conducted, in part to the trend of the customers or litigants, in part to the likelihood of competition and in part to several other unpredictable factors like whims and eccentricities of persons wanting to acquire the tenancy rights. The value might fluctuate from one day to another day depending upon the uncertain demand and supply of comparable premises. In the year 1947-48, there was no premium. It was not possible to predicate as to the exact moment of its birth and the rate or period of its growth. The process of the growth in value was imperceptible. It was self-created without any contribution by the assessee, monetarily or otherwise. The fact remained that the capital asset had been acquired by the assessee without the payment of any money. It was, therefore, not possible to ascertain, when the assessee did not pay any amount for the acquisition of the tenancy rights, as to what was the 'cost of acquisition' or 'cost of improvement' for the purpose of computation of capital gains under Section 48. If the whole of the value of the capital asset transferred was brought to tax, then what was charged would be the capital value of the asset and not any profits or gains as contemplated by Section 45. Therefore, it could not be said that any capital gains had arisen on the receipt by the assessee of Rs. 30,000 on surrendering the tenancy rights of the first floor of the premises. \n\n (iv) that the authorities under the Act had no jurisdiction or power to direct the ascertainment of the cost of acquisition in relation to a capital asset. The option was given to the assessee whether to adopt the cost of acquisition of the asset to the assessee or the fair market value of the asset on January 1, 1954. The assessee had not exercised the option I he had not even been called upon to do so. Therefore, there was no basis for directing the determination of the value of the tenancy rights as on January 1, 1954. \n\n It is not possible to apply the computation sections for quantifying the profits and gains on the transfer of leasehold rights which were acquired by assessee without any cost. The mode of computation and deduction set forth in Section 45 provided the principal basis for quantifying the income chargeable under the head 'Capital gains'. What is contemplated is an asset in the acquisition of which it is possible to envisage a cost. In the case of self-created value of a tenancy right, it is not possible to determine the date of acquisition of the asset. \" \n\n 23. In CIT v. Mrs. Shirinbai P. Pundole [1981] 129 ITR 448, a Division Bench of the Bombay High Court has held as under (headnote):\n\n The assessee was a tenant occupying a flat in a building under a lease taken in 1964. The tenancy was terminated by a notice to quit given in 1965. The assessee thereafter occupied the flat as a statutory tenant. The building in which the flat was situated was sold to a company, which served on the assessee a notice to quit under Section 13(1)(hh) of the Bombay Rents, Hotel and Lodging House Rates (Control) Act, 1947. The assessee disputed the validity of the notice to quit. Ultimately, pursuant to an arrangement arrived at between the company and the assessee, the assessee handed over vacant possession of the flat to the company and was given alternate accommodation in the shape of an ownership flat of a lesser area in another building. On the question whether the transaction attracted any liability to capital gains tax under Section 45 of the Income-tax Act, 1961: \n Held, that the surrender of the tenancy right to the company in exchange for an ownership flat in the building did not attract capital gains tax under Section 45 of the Act. \" \n\n 24. A similar view has been taken in Vaidhyanathswami v. CIT [1979] 119 ITR 369 (Mad) which related to the sale of a motor permit. Also see CIT v. Upper Doab Sugar Mills [1979] 116 ITR 240 (All).\n\n 25. It is no doubt true that none of these cases relate to the sale of immovable property as in the present case. But the gist of all these decisions has been the same that if there is no cost of acquisition, then the sale price would not attract the provisions of capital gains. Thus, it would be clear that the liability for capital gains tax would arise in respect of only those capital assets in the acquisition of which the element of cost is either actually present or is capable of being reckoned and not in respect of those assets in the acquisition of which the element of cost is altogether inconceivable, as in the present case. The circular of the Board referred to above on which learned counsel for the Revenue placed reliance--though not binding on this court--only indicates that the section does not relate to only the immediate past owner but to past owners in succession.\n\n 26. Thus, we are not persuaded to agree with the submission made by learned counsel for the Revenue that in such a case as the present one, according to the provisions of Section 55 of the Income-tax Act, 1961, where cost cannot be ascertained, the fair market price has to be taken into consideration because the very basis of capital gains to us appears to be that at some point of time, the person who initially acquires acquires the property at some cost in terms of money. For instance, if A acquires the property for Rs. 10,000 and gives it to B who in turn by a will gives it to C and if C sells that property for Rs. 50,000 then the initial cost of acquisition will be\n\ncalculated at Rs. 10,000 and the difference between Rs. 10,000 and Rs. 50,000 would be treated as a capital gain. However, in a case where A acquires some property by way of gift or reward, for instance, jagirs from a ruler, and the property passes on by inheritance to (succeeding) generations and the same is sold even though for a valuable consideration, in such a case because A had not acquired it at some cost in terms of money, it would not attract capital gain in such a transaction of sale, there being no \"gain\" as such. \n\n 27. In the result, the reference is answered in favour of the assessee and against the Revenue with no order as to costs. Our answer to the question referred, therefore, is : \n \"That on the facts and in the circumstances of the case and having regard to the provisions of Section 55(2) of the Income-tax Act, 1961, the Income-tax Appellate Tribunal was correct in law in holding that no capital gains accrued to the assessee.\"" }, { "title": "Madgul Udyog vs Commissioner Of Income-Tax on 5 July, 1989", "url": "https://indiankanoon.org//doc/969291/", "text": "Madgul Udyog vs Commissioner Of Income-Tax on 5 July, 1989\nEquivalent citations: [1990]184ITR484(CAL)\nJUDGMENT\n\n\n \n\nAjit K. Sengupta, J. \n \n\n 1. In this reference under Section 256(1) of the Income-tax Act, 1961, at the instance of the assessee, the following common questions of law arising out of the consolidated order of the Tribunal for the assessment years 1978-79, 1979-80 and 1980-81 have been referred for the opinion of this court:\n\n\"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee was the owner of the flats within the meaning of section 22 of the Income-tax Act, 1961, and, as such, the annual value of the said flats should be chargeable to income-tax in the hands of the assessee ?\n\n(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the annual value of those flats should \n\nbe determined in accordance with Clause (a) of Section 8(1) of the West Bengal Premises Tenancy Act, 1956, and it should not be taken at nil ?\" \n\n2. The relevant facts are as under :\n\nThe applicant, Madgul Udyog, is a registered partnership firm observing its accounting period ending on Dewali day each year. The assessee-firm is engaged in the business of construction of multi-storeyed buildings and sales of flats therein. In the course of its aforesaid business activities, the assessee-firm started construction of a multi-storeyed building at 19, Bally-gunge Circular Road, Calcutta, during the previous year relevant to the assessment year 1975-76. In all, 24 units of flats were constructed by the assessee-firm in addition to three shops and car parking space in the ground floor. By the end of the previous year relevant to the assessment year 1979-80, 24 units and one shop in the ground floor, including car parking space, had already been sold to different persons under separate agreements for sale entered into with each of them. The assessee-firm received consideration from the purchasers of flats from time to time in accordance with the agreed terms and on final payment, possession was \nhanded over to the respective buyers as indicated hereinbelow :\n\n Previous year\n Assessment year\n No. of flats\n\n \n \n Diwali 1975\n 1976-77\n 5\n\n \n \u00a0\u00a0\u00a0\u00a0\"\u00a0\u00a0\u00a0\u00a01976\n 1977-78\n 11\n\n \n \u00a0\u00a0\u00a0\u00a0\"\u00a0\u00a0\u00a0\u00a01977\n 1978-79\n 3\n\n \n \u00a0\u00a0\u00a0\u00a0\"\u00a0\u00a0\u00a0\u00a01978\n 1979-80\n 2\n\n \n \u00a0\u00a0\u00a0\u00a0\"\u00a0\u00a0\u00a0\u00a01979\n 1980-81\n 2\n\n \n \u00a0\u00a0\u00a0\u00a0\"\u00a0\u00a0\u00a0\u00a01980\n 1981-82\n 1 + 1 shop \n\n \n \n Total :\n 24 \n3. Two shops on the ground floor remain unsold till date.\n\n4. The assessee-firm was duly assessed to income-tax in respect of profits and gains arising on construction and sale of flats as aforesaid in the years in which the construction was completed and the possession of the flats in question was handed over to the purchasers concerned notwithstanding the fact that the deeds of conveyance had not been executed and registered in favour of the purchasers. It may be noted that save and except two flats for which the deeds of conveyance were executed and registered in the previous year relevant to the assessment year 1977-78, the rest of the purchasers did not come forward to pay the registration charges and get the flats registered in their respective names. The income from construction \n\nand sale of flats was assessed as business income and the assessee-firm has always treated the constructed and unsold area as stock-in-trade.\n\n5. The buyers of the respective flats are in full and exclusive possession of the respective units purchased by them against payment of full and valuable consideration to the assessee-firm. Each of them has been occupying and/or enjoying the rents, issues and profits of the respective units purchased by them since the date of their respective possession. The buyers are also being assessed to income-tax in respect of the notional /actual income arising from the said flats since the date of their respective possession.\n\n6. The Income-tax Officer assessed the assessee-firm on the so-called notional income in respect of the flats sold by it and for which possession was duly handed over to the respective buyers against payment of full consideration only on the ground that no deeds of conveyance had been registered in respect of these units in favour of the buyers. The assessment of notional income was made by the Income-tax Officer for the first time in the assessment order for the assessment year 1976-77 and the same principle was followed in subsequent years too. The Income-tax Officer mainly relied on the following decisions :\n\n(a) CIT v. Zorostrian Building Society Ltd. [1976] 102 ITR 499 (Bom).\n\n(b) CIT v. Union Land and Building Society (P.) Ltd. [1972] 83 ITR 794 (Bom).\n\n(c) CIT v. Bhurangya Coal Company .\n\n(d) CIT v. Ganga Properties Ltd. .\n\n(e) East India Housing and Land Development Trust Ltd. v. CIT .\n\n7. The Commissioner of Income-tax (Appeals), vide his order dated October 6, 1983, for the assessment years 1976-77 and 1977-78, deleted the assessment of notional income made by the Income-tax Officer as aforesaid. The Department appealed against the said order to the Tribunal. The Tribunal, by its order dated December 6, 1985, remanded the matter to the Income-tax Officer with a direction to re-examine the whole issue in the light of the terms of the agreements as well as the various High Court decisions, including the decision of the Calcutta High Court in the case of Ganga Properties Ltd. [1970] 77 ITR 637 and the Special Bench of the Tribunal in the case of R. K. Sawney as well as other decisions that may be cited before the Income-tax Officer.\n\n8. In the meantime, the appeals for the assessment years 1978-79, 1979-80 and 80-81 which had been similarly decided in favour of the \n\nassessee-firm by the Commissioner of Income-tax (Appeals), Calcutta, by His order dated January 30, 1985, came up for hearing before the Tribunal. These appeals were heard and disposed of by the Tribunal by its order dated September 4, 1986. The present reference arises out of the aforesaid order of the Tribunal.\n\n9. Two issues were raised before the Tribunal. Firstly, whether the asses-see was liable to be taxed on the annual value of the flats and, secondly, whether the annual value of the flats should be determined in terms of the West Bengal Premises Tenancy Act, 1956.\n\n10. The first issue was decided by the Tribunal against the assessee-firm. The relevant findings of the Tribunal may be summarised as under :\n\n(i) Sale of immovable property is governed by Section 54 of the Transfer of Property Act and there cannot be any departure from the said provisions. There cannot be a valid transfer of ownership of immovable property of the value of more than Rs. 100 by mere delivery of possession and acceptance of price thereof. The sale must be evidenced by a registered instrument.\n\n(ii) What has been acquired by the purchaser without a registered instrument is only a right to enforce specific performance of the contract of sale and not ownership in the property. The assessee cannot claim that, by mere transfer of possession, it was divested of ownership of the property.\n\n(iii) The word \"owner\" used in Section 22 cannot be construed otherwise than how it appears in general law, The Income-tax Act in that regard does not depart from the general law.\n\n(iv) The plea that income from these flats had been assessed in the hands of the purchasers is of no relevance. The theory of evidence of dpiible taxation has no relevance in such a situation. A wrong order, if any, in the case of any other assessee does not and cannot enure to the benefit of the assessee.\n\n(v) The fact that the Income-tax Officer, for the purpose of assessment of business profits under Section 28 of the Income-tax Act, 1961, in the hands of the assessee-firm, has already treated the flats as having been sold in the relevant years in which the construction was completed and possession handed over and the assessee has already been assessed to tax on such business income although conveyance deeds had not been executed and registered, is of no assistance to the assessee. The questions arising in the instant assessment years need to be decided in the light of the facts obtaining here and any incompatible and inconsistent stand taken by the Department in the earlier years has no relevance.\n\n(vi) Section 53A of the Transfer of Property Act has been misinterpreted by the Commissioner of Income-tax (Appeals). The said Section \n\ndoes not give any title to the transferee. It merely protects the possession of the transferee in terms of the contract. Execution and registration of a deed of conveyance is not a formality but is a mandatory requirement of law for completion of a sale and transfer of title in favour of the purchaser.\n\n(vii) The Tribunal relied on the following decisions :\n\n(a) Sushil Ansal v. C1T [1986] 160 ITR308 (Delhi) ; \n\n(b) CIT v. Ganga Properties ;\n\n(c) CIT v. Union Land and Building Society (P.) Ltd. [1972] 83 ITR 794 (Bom) ;\n\n(d) Kartar Singh (S.) v. CIT ;\n\n(e) CIT v. D. L. F. Housing Construction (P.) Ltd. ;\n\n(f) Anand (D. C.) and Sons v. CIT ; and\n \n\n(g) CIT v. Biman Behari Shaw Shebait [1968] 68 ITR 815 (Cal).\n\n11. As regards the second issue relating to the quantum of annual value, the Tribunal did not agree with the submissions of the assessee-firm that such annual value was nil since it was not in a position to derive any rent, or profits from the flats which were already in the lawful possession of the buyers and who were also being assessed to income-tax in respect of rents and profits therefrom in their respective hands. The Tribunal also did not agree with the submission of the assessee-firm that the annual value cannot exceed the municipal valuation. This submission was based on the decision of this court in CIT v. Prabhabati Bansali [1983] 141 ITR 419. The Tribunal held that, after the amendment in Section 23 by virtue of the Taxation Laws (Amendment) Act, 1975, with effect from April 1, 1976, the said decision of this court was no longer good law and was not applicable in the instant case. The Tribunal held that if the valuation determined under the Calcutta Municipal Act was accepted, the assessee gets an allowance of 10% for the cost of repairs and again the assessee claims deduction of l/6th of the annual value under Section 24 of the Income-tax Act, 1961. The Tribunal further observed that the assessment made by the authorities of the Calcutta Municipality is only secondary evidence, which should not be preferred and that the Income-tax Officer should make his own assessment in the light of the provisions of the Income-tax Act and Section 8(1)(e) of the West Bengal Premises Tenancy Act, 1956. Accordingly, the Tribunal remanded the matter to the Income-tax Officer for redetermination of the annual value in the light of Section 8(1)(e) of the West Bengal Premises Tenancy Act, 1956.\n\n12. Mr. N. K. Poddar, learned counsel appearing on behalf of the assessee, has submitted that the assessee is engaged in the business of construction \n\nof multi-storeyed buildings and sale of flats. The flats were held by the firm as stock-in-trade and not as capital assets. The income from such sale having been assessed as business profits, the assessee cannot be assessed once again notionally on the bona fide annual value of the flats under Section 22 of the Income-tax Act, 1961, on the ground that, unless the deeds of conveyance with the respective purchasers have been executed and registered, the assessee remains the owner for the purpose of assessment under Section 22 of the Income-tax Act, 1961. He has relied on several decisions in support of his contentions to which we shall presently refer. He has contended that the decisions relied on by the Tribunal, and in particular, the decision of this court in Ganga Properties Ltd. [1970] 77 ITR 637, have no application to the facts of this case. According to him, Ganga Properties Ltd. [1970] 77 ITR 637, no longer holds the field in view of the decision of the Supreme Court in Jodha Mal Kuthiala [1971] 82 ITR 570.\n\n13. Mr. A. C. Moitra, learned counsel appearing on behalf of the Revenue, supported the order of the Tribunal. It was contended on behalf of the Revenue that the Indian law does not recognise beneficial ownership. There can be only one owner and where the properties are vested in a trustee, the owner must be the trustee. The title in respect of the immovable property can pass only when conveyance is executed and registered. Heavy reliance was placed by Mr. Moitra on the recent decision of the Supreme Court in Nawab Sir Mir Osman All Khan v. CWT [1986] 162 ITR 888 and it was contended that, by this decision, the Supreme Court has already upheld the principles laid down by this court in Ganga Properties Ltd [1970] 77 ITR 637, as well as in S. B. (House and Land) Pvt. Ltd. v. CIT [1979] 119 ITR 785. It was further contended that the income-tax law has not been amended in respect of the assessment years 1978-79 to 1979-80 and 1980-81 now under consideration and, therefore, according to the Revenue, the assessee-firm was liable to be assessed on a notional basis in respect of the bona fide annual value of the property in question.\n\n14. The rival contentions have to be examined in the light of the decisions cited at the Bar.\n\n15. In R. B. Jodha Mal Kuthiala v. CIT [1971] 82 ITR 570, the Supreme Court was dealing with the case of an assessee whose property remained vested in the Custodian of Evacuee Property by virtue of Section 6(1) of the Pakistan (Administration of Evacuee Property) Ordinance, 1949, as evacuee property. The assessee was held not to be the owner of the property for the purposes of Section 9 of the Indian Income-tax Act, 1922. It may be noted that the assessee was the legal owner. But the Supreme Court held that since the assessee was not in a position to exercise the rights of ownership, he could not be assessed on the notional \n\nincome under Section 9 of the 1922 Act, corresponding to Section 22 of the\n1961 Act. The following observations of the Supreme Court are of great\nsignificance (at page 575) :\n\n\"The question is who is the 'owner' referred to in this section. Is it the person in whom the property vests or is it he who is entitled to some beneficial interest in the property ? It must be remembered that Section 9 brings to tax the income from property and not the interest of a person in the property. A property cannot be owned by two persons, each one having independent and exclusive right over it. Hence, for the purpose of Section '9, the owner must be that person who can exercise the rights of the owner, not on behalf of the owner, but in his own right.\n\nFor a minute, let us look at things from the practical point of view. If the thousands of evacuees, who left practically all their properties as well as businesses in Pakistan had been considered as the owners of those properties and businesses as long as the 'Ordinance' was in force, then those unfortunate persons would have had to pay income-tax on the basis of the annual letting value of their properties and on the income, gains and profits of the businesses left by them in Pakistan though they did not get a paisa out of those properties and businesses. Fortunately, no one in the past interpreted the law in the manner Mr. Mahajan wants us to interpret it. It is true that equitable considerations are irrelevant in interpreting tax laws. But those laws, like all other laws, have to be interpreted reasonably and in consonance with justice.\" \n\n16. At pages 576 and 577 of the Reports, the Supreme Court referred to an old judgment of this court in Official Assignee's case [1937] 5 ITR 233 and observed at page 577 as under :\n \"For determining the person liable to pay tax, the test laid down by the court was to find out the person entitled to that income. An attempt was made by Mr. Mahajan to distinguish this case on the ground that under the corresponding English statute, the liability to tax in respect of income from property is not laid on the owner of the property. It is true that Section 82 of the English Income-tax Act, 1952, is worded differently. But the principles underlying the two statutes are identical...\" \n\n17. Again, the Supreme Court observed as under (at pp. 578, 579) :\n \". . .As mentioned earlier that section seeks to bring to tax income of the property in the hands of the owner. Hence, the focus of that section is on the receipt of the income. The word 'owner' has different meanings in different contexts. Under certain circumstances, a lessee may be considered as the owner of the property leased to him. In Stroud's Judicial Dictionary, 3rd edition, various meanings of the word 'owner' are given. It is not necessary for our present purpose to examine what the word 'owner' means in different contexts. The meaning that we give to the word 'owner' in Section 9 must not be such as to make that provision capable of being made an instrument of oppression. It must be in consonance with the principles underlying the Act.\" \n\n 18. In Sushil Ansal v. CIT [1986] 160 ITR 308, the Delhi High Court \nheld (at p. 314) :\n \"... that apart, the more important aspect which is relevant for the purposes of this case is that the decision in R. B. Jodha Mal Kuthiala , even if interpreted in the manner in which the assessee in this case seeks to do, only helps the original owner of the property and not the present assessee. That decision may be directly in point to help Ansal and Sehgal (P.) Ltd. to contend that the income from the properties (in fact, from all the flats contained in the building 'Akash-deep') cannot be assessed in its hands, merely because regular sale deeds have not been executed by it in favour of the various 'purchasers' like the assessee. It can be contended, in view of the agreements of sale and the handing over of the possession to various, persons, who are, in fact, entitled to enjoy these flats and the income therefrom in any manner they like and against whom the company has lost all rights of recourse because of the provisions of Section 53A of the Transfer of Property Act, that the company is the owner of nothing but the husk of title over the property and should not be assessed on the principle of the decision of the Supreme Court and this contention may perhaps have to be accepted. The decision of the Supreme Court could be said to be a complete answer to an attempt to assess the company.\" \n\n19. Heavy reliance was placed on the decision of the Patna High Court in Addl. CIT v. Sahay Properties and Investment Co. (P.) Ltd. [1983] 144 ITR 357, wherein the Patna High Court was concerned with a case of a company which acquired certain immovable property in February, 1962. The assessee paid the entire consideration and was in actual physical possession of the entire properties contracted to be sold. The assessee was empowered by the vendor to use the properties in whatsoever manner the assessee liked and to receive and enjoy the entire usufructs thereof, with the only reservation that a formal deed of conveyance with registration in conformity with the Indian Registration Act would follow at the request of the assessee and once that request was made, it was incumbent upon the transferor to execute such a deed of conveyance and to get it registered. The assessee was assessed under Section 22 of the Income-tax Act, 1961, in respect of the income from the property but the Tribunal held that the assessee was not the owner of the property and was not liable to be assessed as such. There, the Patna High Court held that the focus of Section 22 of the Income-tax Act, 1961, is on the receipt of income. The meaning given to the term \"owner\" in Section 22 must not be such as to make that provision capable of being made an instrument of oppression. It must be in consonance with the principles underlying the Act. One of the most important powers of ownership is the right to exclude others \n\nfrom possession and the property right is essentially a guarantee of the\nexclusion of other persons from the use or handling of the thing.\n\n20. The Patna High Court then proceeded to hold that the consideration money had been paid in full and the assessee had been put in exclusive and absolute possession of the property. It had been empowered to dispose of and even alienate the property. The assessee had the right to get the conveyance duly registered and executed in its favour, but had not exercised the option. The assessee was not entitled to say that, because of its own default in having a deed registered, it was not the owner of the property. In the circumstances, the assessee must be deemed to be the owner of the property within the meaning of Section 22 and was assessable as such on the income from the property.\n\n21. In CIT v. Modern Flats (P.) Ltd. [1967] 65 ITR 67, the Bombay High Court held that although no conveyance deed was executed by the assessee-builder in favour of the flat-holders, since it had transferred all its right, title and interest in the various flats to each one of the flat-holders, it cannot have any further ownership in the flats left in them and hence the assessee-builder was not the owner of any part of the building and was not liable to be assessed on notional basis.\n\n22. In Smt. Kala Rani v. CIT [1981] 130 ITR 321, the Punjab and Haryana High Court held that before a person can be assessed under Section 22 of the Income-tax Act, 1961, it is not necessary that he must be the owner of the property by virtue of a sale deed in his favour. What is being taxed under Section 22 is the income from house property or the annual value of the property of which the assessee is the owner. The focus of the section is on the receipt of income from house property. If, in a given case, it is found as a fact that the buyer is in occupation of the building as owner for all intents and purposes, except for the registration of the sale deed in his favour, then he is liable to tax under Section 22, It may be noted that the buyers of the flats have already been assessed to tax in the case of the assessee-firm.\n\n23. In Addl. CIT v. U. P. State Agro Industrial Corporation Ltd. [1981] 127 ITR 97, the Allahabad High Court applied the principles laid down by the Supreme Court in Jodha Mal's case [1971] 82 ITR 570 and held that the assessee was entitled to claim depreciation in respect of assets even though the conveyance deeds had not been executed and registered in its favour. The court noted that the company was already in possession of the property and was in a position to realise the income from the property and appropriate the same for itself. The court, therefore, held that even though the ultimate title in the property had not yet vested in it, the assessee was nothing but the owner of the property and was entitled to claim depreciation.\n\n24. In P. Joseph Swaminathan [1984] 145 ITR 198, the Madras High Court held that, under the scheme of the Income-tax Act, 1961, the basis of liability for income from property is the ownership of the property by the assessee concerned. The Act does not, however, pin down the assessing authorities to the registered owner of the house property as decisive of the question of assess ability. In whosoever's name the house property may stand or get registered, it would yet be the duty of the Income-tax Officer to find out who the real owner of the property is, so as to fix the liability for income-tax on that owner in respect of that property. In this case, it was found that although the house property stood in the name of the assessee's son, on investigation, it was proved that the assessee was the real owner of the property. The court, therefore, upheld the assessment of income from the property in the hands of the assessee.\n\n25. In Smt. Savita Mohan Nagpal v. CIT [1985] 154 ITR 449, the Rajas-than High Court applied the principles of overriding title even in the case of assessment of income under the head \"Income from house property\". It was submitted, relying on this decision that, in view of the agreement for sale and the right of the buyers to enjoy the rents, issues and profits of the property and to possess the property to the entire exclusion Of the assessee firm, the rental income by the principles of overriding title is assessable in the hands of the buyers and not in the hands of the assessee firm. Since the buyers have already been assessed to income-tax in respect of such rental income, there should be no question of assessing the same in the hands of the assessee-firm once again.\n\n26. In Chitpore Golabari Co. (P.) Ltd. v. CIT [1971] 82 ITR 753, the Division Bench of this court referred to the earlier judgment in the case of Ganga Properties Ltd. , and held that all aspects of ownership involved under Section 9 of the Indian Income-tax Act, 1922, had not been decided and/or discussed in Ganga Properties' case . The court also observed that a decision on other points must await proper facts. In Chitpore Golabari's case [1971] 82 ITR 753 (Cal), the decision went against the assessee, because it was found by the court that the assessee continued to be in possession of the property even after executing the agreements for sale. This is not the case here. The assessee-firm has already parted with possession in accordance with the agreements for sale against payment of full and valuable consideration and the buyers are in possession of the flats and are enjoying the rents, issues and profits thereof to the entire exclusion of the assessee-firm.\n\n27. Mr. Moitra for the Revenue relied on a decision of the Supreme Court in CIT v. Bhurangya Coal Co. [1958] 34 ITR 802. This does not touch the controversy involved in this case.\n\n28. Similarly, the decision of the Supreme Court in East India Housing and Land Development Trust Ltd. v. CIT [1961] 42 ITR 49 deals with an altogether different controversy. The question in that case was whether the income from stalls and shops in the market built by the assessee-company was assessable as business income or income from house property. The Supreme Court held that since the rental income was directly assessable under the head \"Income from house property\", which was a specific head, the assessment could not be done treating it as business income.\n\n29. The decision of the Delhi High Court in Sushil Ansal's case [1986] 160 ITR 308, referred to by the Tribunal, does not also support the Revenue's case. The observations at page 314 of the Reports, which we have already extracted earlier, clearly show that the decision supports the case of the assessee.\n\n30. The decision of the Delhi High Court in Kartar Singh (S.) v. CIT [1969] 73 ITR 438, relied on by the Tribunal, is clearly distinguishable on facts. That was a case where the assessee executed a deed of settlement in favour of his father in respect of only the income from the property but did not transfer the property itself. The court held that, in view of the provisions of Section 16 of the 1922 Act corresponding to Section 60 of the 1961 Act, there was nothing but a transfer of income and there being no transfer of property, the transferor's son continued to be assessable to income-tax in respect of the rental income.\n\n31. In CIT v. DLF Housing Construction (P.) Ltd. [1981] 128 ITR 773, the Delhi High Court found that, in accordance with the terms of the sale deed, the vendor was allowed to possess and use the premises as a licensee without payment of any fee although the deed of conveyance was duly executed and registered in favour of the buyer of the property. The court held that, in view of the execution and registration of the deed of conveyance, the buyer was the owner of the property and, therefore, he was liable to be assessed in respect of the rental income. This case has no application to the facts and circumstances of the instant case.\n\n32. In D. C. Anand and Sons v. CIT , the assessee had sold the property to the tenant company. Full consideration had not been paid by the tenant company. The sale deed was executed on May 31, 1966. But the tenant stopped paying the rent from May, 1965. The sale deed did not make any reference to any earlier agreement between the parties for waiver of rent by the landlord-assessee in favour of the tenant company. There was nothing to show that the income from the property had been diverted from the assessee by an overriding title. The court found \n\nthat the landlord-assessee was entitled in law to receive the rent between May, 1965, and May, 1966, but it did not voluntarily do so. On these facts, the court held that the landlord could not avoid charge of tax on the rent which he did not realise for the period May, 1965, to May, 1966. This case is also clearly distinguishable on facts and has no application to the instant case.\n\n33. In CIT v. Biman Behari Shaw Shebait [1968] 68 ITR 815, the Division Bench of this court was considering the case of a property which was dedicated to a deity by will and was not to be let allowed in view of certain restrictions contained in the will. The court held that even though a property is not allowed to be let and does not produce any income, the Income-tax Officer was entitled to assess the notional income. While any restrictions in a will on the letting of the property may reduce the letting value, it cannot be said that, because of the restrictions, there cannot be any annual income which can be deemed to arise from the property. In our view, the facts of that case are also clearly distinguishable and this decision has no application to the instant case.\n\n34. The Supreme Court, in Nawab Sir Mir Osman Ali Khan v. CWT [1986] 162 ITR 888, dealt with the meaning of the expression \"belonging to\" as appearing in Section 2(m) of the Wealth-tax Act, 1957. Although Mr. Moitra, for the Revenue, has relied heavily on this decision, in our view, this decision has no relevance to the present controversy. This has been made clear by the Supreme Court.\n\n35. The Supreme Court observed (at p. 893) :\n\n\"... It is not necessary, in our opinion, for the purpose of this case, to be tied down to the controversy whether in India there is any concept of legal ownership apart from equitable ownership or not or whether, under Sections 9 and 10 of the Indian Income-tax Act, 1922, and Sections 22 to 24 of the Income-tax Act, 1961, where 'owner' is spoken of in respect of house properties, the legal owner is meant and not the equitable or beneficial owner ...\".\n\n\"In the instant appeal, however, we are concerned with the expression 'belonging to' and not with the expression 'owner'.\" (p. 894).\n\n\"In the instant case, as we have noticed, the position is different. We are concerned with whether the assets, in the facts and circumstances of the case, belonged to the assessee any more ... (p. 895)\"\n\n\"We are, however, not concerned in this controversy at the present moment. It has to be borne in mind that in interpreting the liability for wealth-tax, normally equitable considerations are irrelevant . . . Therefore, the fact that the Legislature has deliberately and significantly not used the \n\nexpression 'assets owned by the assessee' but 'assets belonging to the assessee', in our opinion, is an aspect which has to be borne in mind.\" (p. 896). \n\n36. It is also not correct to say that the Supreme Court in Nawab Sir Osman Ali Khan [1986] 162 ITR 888, approved the decision of this court in Ganga Properties Ltd. . The Supreme Court discussed the Calcutta decision at page 896 of the Reports and clearly observed that this case was concerned with Section 9 of the Indian Income-tax Act, 1922, and was not relevant lor the purposes of the Wealth-tax Act, 1957. The Supreme Court also referred to the decision of this court in S. B. (House and Land) Pvt. Ltd. v. CIT [1979] 119 ITR 785 and observed that this decision was based upon the particular facts of the case and was not relevant for the purposes of the Wealth-tax Act, 1957. The submissions made by learned counsel for the Revenue are not borne out from the decision of the Supreme Court in Nawab Sir Mir Osman Ali Khan's case [1986] 162 ITR 888. Furthermore, the Supreme Court had no occasion to decide on the question of ownership for the purposes of Sections 22 to 24 of the Income-tax Act, 1961. The decision of the Supreme Court, therefore, does not help the Revenue.\n\n37. The decision of this court in S. B. (House and Land) Pvt. Ltd. [1979] 119 ITR 785 proceeds on peculiar facts and is clearly distinguishable. In that case, the court found that the assessee, a private limited company, had taken on lease certain lands and premises for a period of 84 years with an option for renewal for a further period of seven years. The assessee constructed a two-storeyed building on the land and, by a deed of assignment, sub-leased the same to another person. The assessee-company, as it appears, did not divest itself of all right, title and interest in the property. The right of reversion of the assessee was still there and it remained with the assessee-company and such right was not transferred by the sublease. It was a case of a lease of the superstructure and not a sale denuding the transfer of all rights of ownership in respect of the superstructure. In view of the peculiar facts, it was observed by this court that the principles laid down by the Supreme Court in R. B. Jodha Mal Kuthiala [1971] 82 ITR 570 had no application to the case of the assessee.\n\n38. It is an admitted fact that the assessee-firm, in the instant case, has transferred all the right, title and interest in the flats sold by it. It has also been assessed to income-tax in respect of business profit arising from the sale. In the instant case, the assessee has only an obligation to register the deeds of conveyance in favour of the purchasers of flats as and when such purchasers come forward to pay registration charges and stamp duty. It is, therefore, clear that the decision in S. B. (House and Land) P. Ltd. has no manner of application to the facts of this case.\n\n39. The term \"ownership\" is not merely a word of technical legal meaning but it is to be interpreted in its broadest possible meaning. It consists of a bundle of rights. What rights would constitute \"ownership\" in a given case would depend on the context in which it is used. Broadly \"ownership\" is that of one who has dominion over the property which is the subject of ownership. If the ownership itself is a criterion of assessment under Section 22 of the Income-tax Act, 1961, one must find out whether the assessee has income from such property or not. Mere interest of a person in the property will not be enough. In the socio-economic perspective, the problem of providing housing accommodation to millions has assumed importance. But land being scarce, to minimise the pressure on land, multi-storeyed buildings have come up providing residential accommodation to many. It is difficult, if not impossible, for people belonging to the low income group or middle income group or even high income group to buy land and build houses on it having regard to the availability and the prohibitive price of land. The builders build and sell flats to individual buyers. Upon payment of full consideration, a buyer of a flat has the right to possess it to the exclusion of others. A buyer has exclusive right of possession, enjoyment and disposal of the flat. He has the right to control, handle and dispose. This right, even if it is not perfect in the sense that there has been no change of ownership from the builder to the buyer by a registered deed of conveyance, his right as owner is in no way encumbered. The flat is not charged with any real right towards a third person. Accordingly, the word \"owner\" appearing in Section 22 of the Income-tax Act, which is comprehensive and generic, must be construed in the setting of the socio-economic development in the concept of ownership. We respectfully agree with the views taken by the Patna High Court in Sahay Properties' case [1983] 144 ITR 357, where the Patna High Court observed as follows (at p. 364) :\n \"Thus, the juristic principle from the view-point of each one is to determine the true connotation of the term 'owner' within the meaning of Section 22 of the Act in its practical sense, leaving the husk of the legal title beyond the domain of ownership for the purpose of this statutory provision. The reason is obvious. After all, who is to be taxed or assessed to be taxed more accurately--a person in receipt of money having actual control over the property with no person having better right to defeat his claim of possession or a person in legal parlance who may remain a remainderman, say, at the end or extinction of the period of occupation after, again say, a thousand years ? The answer to this question in favour of the asses-see would not merely be doing palpable injustice but would cause absurd inconvenience and would make the Legislature to be dubbed as being a party to a nonsensical legislation. One cannot reasonably and logically visualise as to when a person in actual physical control of the property realising the entire income and usufruct of the property for his \n\nown use and not for the use of any other person, having the absolute power of disposal of the income so received, should be held not liable to tax merely because a vestige of legal ownership or a husk of title in the long run may yet clothe another person with the power of a residual ownership when such contingency arises which is not the case even here.\" \n\n40. Let us now turn to the facts of this case. The assessee-firm is engaged in the business of construction of multi-storeyed buildings and the flats in question were held by it as stock-in-trade and not as capital assets. The assessee-firm has already sold and delivered possession of the flats to the respective buyers against payment of full consideration in terms of the agreements for sale entered into by the assessee-firm in the course of its said business. The income arising from the sale of these flats has already been assessed by the Income-tax Officer as business profits in the hands of the assessee-firm under Section 28 of the Income-tax Act, 1961, in the years in which the construction was completed and possession of flats was handed over to the respective buyers against payment of full consideration in spite of the fact that the conveyance deeds had not been executed and registered. In other words, the Income-tax Officer has himself treated these very flats as having been already sold for assessing business profits although conveyance deeds had not been executed. The buyers of the respective flats are lawfully occupying and/or enjoying the rents, issues and profits since the date of their taking over of possession of the flats in question on payment of full and valuable consideration in terms of valid agreements for sale. The buyers are being assessed to income-tax on notional/actual rental income, as the case may be, arising from the said flats since the date of their taking over of possession. There cannot be and should not be a double assessment of the same income-once in the hands of the assessee-firm and again in the hands of the buyers. The assessee-firm has been left with no right, title or interest in the said flats, except an obligation like a trustee to execute and register the conveyance deeds in favour of the buyers (who in this easy are the beneficiaries in exclusive possession of the flats) when they come forward to pay the stamp duly and registration charges, etc. As such, the assessee at best could be assessed in the like manner and to the same extent as the beneficiaries, who are the buyers of the flats in this case. Since the buyers have already been assessed to tax, there is no further question of assessing the assessee-firm on the same income over again. The right to occupy and let out the property is with the purchasers. The stamp duty has to be paid by the purchasers. If the purchasers do not want to incur the expenditure by way of payment of stamp duty required for registration, the assessee cannot be penalised through assessment on notional basis. The Income-tax Act also provides for direct assessment of income in the hands of beneficiaries who are the purchasers of the flats in this case. Such direct assessment in the hands of the \n\nbuyers has already been made. For the purposes of Section 9 of the 1922 Act, corresponding to Section 22 of the 1961 Act, the owner must be that person who can exercise the rights of the owner, not on behalf of the owner, but in his own right. It is true that equitable considerations are irrelevant in interpreting tax laws. But those laws, like all other laws, have to be interpreted reasonably and in consonance with justice. As the Supreme Court laid down in Jodha Mal Kuthiala's case [1971] 82 ITR 570, the meaning to be given to the word \"owner\" must not be such as to make that provision capable of being made an instrument of oppression. It must be in consonance with the principles underlying the Act. The decision of this court in CIT v. Ganga Properties Ltd. [ 1970] 77 ITR 637 should be read and understood in the light of the subsequent decision of the Supreme Court in Kuthiala's case [1971] 82 ITR 570. It does not deal with all aspects of ownership as noted by this court in Chitpore Golabari Co. (P.) Ltd. v. CIT [1971] 82 ITR 753. Ganga Properties' case does not consider the recent development of the concept of multi-storeyed buildings and issues incidental thereto. All cases so far decided relate to the holding and sale of property by an assessee as capital assets. The assessee-firm in this case was carrying on the business of construction of multi-storeyed buildings and sale of flats therein. The flats in question were constructed and sold as stock-in-trade and not as capital-assets. Earlier cases including the case of Ganga Properties are, therefore, clearly distinguishable on facts. The question of notional income should not arise in relation to stock-in-trade particularly when the business income arising on sale has already been assessed in the hands of the assessee-firm in the respective years in which the construction was completed and possession was handed over.\n\n41. As regards the second question, it was submitted by Mr. Poddar that, in the facts and circumstances of this case, when the assessee-firm is neither in possession of the flats nor is in a position to derive any rents, issues and/or profits therefrom, the so-called notional annual value cannot be anything but nil. If this contention is not accepted, such annual value cannot exceed the municipal valuation as laid down by this High Court in CIT v. Prabhabati Bansali [1983] 141 ITR 419. The Tribunal has distinguished this decision on the ground that, after the amendment by the Taxation Laws (Amendment) Act, 1975, with effect from April 1, 1976, that decision is no longer good law.\n\n42. The views of the Tribunal do not apear to be correct. The amendment Act only seeks to provide that, in case the actual rent received by an asses-see is higher than the annual value, the actual rent received would itself be considered as the annual value. In the present case, it is an admitted fact that the assessee-firm did not receive any rent. Therefore, there is no \n\nhigher amount. In other words, we are still concerned with the provisions of Section 23(1)(a). We need not consider the amendment in Section 23(1)(b) by the said Amendment Act inasmuch as the assessee-firm has not let out the property and has neither received nor is entitled to receive any rent in respect of the flats so sold by it.\n\n43. Section 23(1)(a) which is relevant for our purpose reads as under :\n \"23. Annual value how determined.--(1) For the purposes of Section 22, the annual value of any property shall be deemed to be--(a) the sum for which the property might reasonably be expected to be let from year to year.\" \n\n44. Section 168 of the Calcutta Municipal Act, 1951, which corresponds to Section 23(1)(a) of the Income-tax Act, 1961, reads as under :\n \"168. The amount of consolidated rate, how to be fixed.--(i) For the purpose of assessment of the consolidated rate, the annual value of any land or building shall be deemed to be the gross annual rent at which the land or building might, at the time of assessment, be reasonably be expected to be let from year to year, less in the case of a building, an allowance of 10% for the cost of repairs and for all other expenses necessary to maintain the building in a state to command such gross rent.\"' \n \n\n45. It would thus be seen that, in all, Section 23(1)(a) of the Income-tax Act is in pari materia with Section 168 of the Calcutta Municipal Act, 1951, as well as Section 154 of the Bombay Municipal Corporation Act, 1988. These matters were duly considered by this court in Prabhabati Bansali [1983] 141 ITR 419.\n\n46. The Tribunal was not right in saying that there will be a double deduction for repairs in case the municipal valuation was adopted. The Tribunal failed to appreciate that the rateable value fixed by the municipality has to be increased by l/9th so as to determine the annual value being the gross annual rent at which the property is reasonably expected to be let from year to year.\n\n47. The view that the annual value cannot exceed the municipal valuation is supported by the decision in CIT v. R. Dalmia , CIT v. M. R. Alagappan [1987] 164 ITR 690 (Mad) and C. J. George v. CIT .\n\n48. The Tribunal has referred to the provisions of Section 8(1)(e) of the West Bengal Premises Tenancy Act, 1956, which reads as under :\n \"(e) where the provisions of Clause (a) or Clause (b) or Clause (c) or Clause (d) do not apply, such rent as would be reasonable having regard to the situation, locality and condition of the premises and the amenities \n\nprovided therein and where there are similar or nearly similar premises in the locality, having regard also to the rent payable in respect of such premises.\" \n\n49. Section 8(1)(e) of the West Bengal Premises Tenancy Act, 1956, again refers to that rent which would be reasonable.\n\n50. Since there is no material difference between Section 168 of the Calcutta Municipal Act and Section 23(1)(a) of the Income-tax Act, there is no reason why the Tribunal should disregard the municipal valuation. In this context, it may be relevant to refer to the decision of the Supreme Court in Guntur Municipal Council's case, . There, the court held that the test in municipal laws relating to annual value is the same, namely, what rent the premises can lawfully fetch if let out to a hypothetical tenant. The municipality is thus not free to assess any arbitrary annual value and has to look to arid is bound by the theory of standard rent which would be payable for a particular premises under the Rent Control Act in force during the year of assessment.\n\n51. Learned counsel for the Revenue has relied upon the decision of the Supreme Court in Liquidator of Mahamudabad Properties (P.) Ltd. v. CIT [1980] 124 ITR 31. There, the Supreme Court was dealing with two matters--one relating to the determination of annual value in respect of property in uninhabitable condition and the second whether vacancy was available when the property was not let at any time during the relevant previous year. None of these two controversies arose in this case. Furthermore, learned counsel for the Revenue has not explained as to how the decision of this court in Prabhabati Bansali's case [1983] 141 ITR 419 is not applicable to the facts of this case. In our opinion, the annual value cannot exceed the municipal valuation fixed by the Corporation of Calcutta.\n\n52. For the reasons aforesaid, the first question is answered in the negative and in favour of the assessee. In view of our answer to the first question in the manner aforesaid, the second question does not call for any answer. We, therefore, decline to answer the second question.\n\n53. On the oral prayer of Mr. Mukherjee, appearing for the Commissioner, we grant leave to appeal to the Supreme Court under Section 261 of the Income-tax Act, 1961, inasmuch as this judgment raises a substantial question of law of public importance. Let the certificate be drawn up and issued separately.\n\nK. M. Yusuf, J. \n\n 54. I agree." }, { "title": "Isha Beevi And Ors. vs Tax Recovery Officer And Ors. on 30 September, 1969", "url": "https://indiankanoon.org//doc/1920074/", "text": "Isha Beevi And Ors. vs Tax Recovery Officer And Ors. on 30 September, 1969\nEquivalent citations: [1971]80ITR82(KER)\nAuthor: K.K. Mathew\nBench: K.K. Mathew\nJUDGMENT\n\n \n\nK.K. Mathew, J.\n\n \n\n 1. The appellants are the wives and children of one Thangal Kunju Musaliar, who died on February 19, 1966. At the time of his death, he was in arrears of income-tax due both under the Travancore Income-tax Act, 1121, and the Indian Income-tax Act, 1922. By an order passed on June 10, 1968 (marked as exhibit P-1 in all the writ petitions), the Additional Personal Assistant to the District Collector, Quilon, functioning as Tax Recovery Officer, attached the immovable properties scheduled to the order, by prohibiting the appellants from transferring or otherwise dealing with them under Rule 48 of the Second Schedule to the Income-tax Act, 1961, on the basis of 22 certificates covering a total amount of Rs. 50,42,970.34. Some of the certificates were issued under Section 46(2) of the Income-tax Act, 1922, and the others under Section 221(1) of the Income-tax Act, 1961. \n\n 2. Thangal Kunju Musaliar had before his death executed gift deeds of immovable properties in 1947, 1953, 1954 and 1956 in favour of his wives and children. He had also executed a mortgage, exhibit D-4, on March 17, 1957, in favour of the Governor of the State of Kerala, for 20 lakhs of rupees in consideration of the State Government guaranteeing an overdraft accommodation for the amount by the Central Bank of India in order to enable him to reopen his factories which were closed at the time. \n\n 3. By the writ petitions in question the appellants challenged the validity of exhibit P-1 order and prayed for an appropriate direction or order quashing the order, and restraining the respondents from proceeding further on the basis of the attachment. \n\n 4. The main contentions in the writ petitions were : (1) that the attachment was for recovery of arrears of income-tax due from Thangal Kunju Musaliar both under the Travancore Income-tax Act and the Indian Income-tax Act, 1922, that so far as the arrears due under the Travancore Income-tax Act were concerned, they could be recovered only under the provisions of that Act, and, therefore, the proceedings attachment under the Income-tax Act, 1961, for recovery of the arrears due under the Travancore Income-tax Act are bad ; (2) that out of the 22 certificates, 11 were issued only after the death of Thangal Kunju Musaliar mentioning him as the assessee, and, therefore, they were invalid as neither Section 66(3) of the Travancore Income-tax Act, nor Section 221 of the Income-tax Act, 1961, authorised the issue of certificates in the name of the assessee after his death, and that, as the amounts covered by these certificates have been tacked on to the amounts covered by the other certificates, the attachment was invalid in entirety; and (3) that by the gift deeds executed by Musaliar in favour of his wives and children, the title to the properties comprised in them passed to the donees, and, therefore, the revenue cannot attach the properties as if they belonged to Thangal Kunju Musaliar on the date of his death. \n\n 5. The learned judge overruled all these contentions. He said that, although the order of attachment was passed under Rule 48 of the Second Schedule to the Income-tax Act, 1961, the officer had authority also to proceed under the Travancore Income-tax Act to recover the arrears due under that Act by resorting to the Travancore-Cochin Revenue Recovery Act, and the fact that he purported to act under a wrong provision of law, for recovery of those arrears would not affect his jurisdiction. In other words, the learned judge said that although the Tax Recovery Officer referred to the wrong provision of law for the recovery of the arrears due under the Travancore Income-tax Act, as he had authority to recover the amount, it is merely a case of citing a wrong provision of law for exercising an authority which the officer had. He was also of opinion that the arrears of income-tax due for the years 1119 and 1120 M.E. being covered by exhibit D-3, an order was made under Section 3 of Central Act 33 of 1950, and that order having authorised the revenue to resort to the provisions of the Travancore Income-tax Act or any other law for their realisation, in any event the proceedings for recovery of the arrears due for those years under the provisions of the Income-tax Act, 1961, are immune from attack. As regards the second contention, the learned judge was of the view that although there was no provision for issuing certificates mentioning the name of a deceased assessee, since the appellants did not object to the validity of the certificates on this ground when notices were served upon them under Rule 85 of the Second Schedule to the Income-tax Act, 1961, they were precluded from taking the ground in the writ petitions. And in respect of the third contention, the learned judge said that since the appellants had resorted to the alternative remedy of suits in respect of sum of the properties attached under exhibit P-1, and as it is still open to them to file claim petitions in respect of the other properties under Rule 11 of the Second Schedule to the Income-tax Act, 1961, it was not proper that the writ court should entertain the objection especially as it involved resolution of disputed questions of fact. \n\n 6. Counsel for the appellants contended that, for recovery of arrears of income-tax due under the Travancore Income-tax Act, proceedings can be taken only under the provisions of that Act, and since the respondents maintain that the attachment was made under Rule 48 of the Second Schedule to the Income-tax Act, 1961, the order of attachment was bad. \n(1) Opium and Revenue Laws (Extension of Application) Act, 1950,--See [1950] 18 I.T.R. (Statutes) 100.\n\n 7. He further submitted that the view of the learned judge that the Tax Recovery Officer who passed exhibit P-1 had authority to proceed on the basis of the certificates mentioning the arrears due under the Travancore Income-tax Act under the provisions of that Act and attach the properties, is not correct. \n\n 8. The Indian Income-tax Act, 1922, was extended to the Travancore-Cochin State on April 1, 1950, by the Indian Finance Act, 1950. Section 13 of that Act reads : \n\n \"(1) If immediately before the 1st day of April, 1950, there is in force in any Part B State other than Jammu and Kashmir or in Manipur, Tripura or Vindhya Pradesh or in the merged territory of Cooch-Behar any law relating to income-tax or super-tax or tax on profits of business, that law shall cease to have effect except for the purposes of the levy, assessment and collection of income-tax and super-tax in respect of any period not included in the previous year for the purposes of assessment under the Indian Income-tax Act, 1922 (XI of 1922), for the year ending on the 31st day of March, 1951, or for any subsequent year, or, as the case may be, the levy, assessment and collection of the tax on profits of business for any chargeable accounting period ending on or before the 31st day of march, 1949 : \n Provided that any reference in any such law to an officer, authority, tribunal or court shall be construed as a reference to the corresponding officer, authority, tribunal or court appointed or constituted under the said Act, and if any question arises as to who such corresponding officer, authority, tribunal or court is, the decision of the Central Government thereon shall be final: .... \" \n\n 9. It is clear from Section 13 that the arrears of income-tax due from Thangal Kunju Musaliar under the Travancore Income-tax Act for the years 1119 to 1125 M. E. could be recovered under the provisions of the Travancore Income-tax Act. The operation of that Act was saved for the purposes of the levy, assessment and collection of income-tax for the period specified in Section 13(1) of the Indian Finance Act, 1950 : see the decisions in Union of India v. Madan Gopal Kabra, [1954] 25 I.T.R. 58; [1954] S.C.R. 541 (S.C.) A.N. Lakshman Shenoy v. Income-tax Officer, [1958] 34 I.T.R. 275; [1959] S.C.R. 751 (S.C.) Annamma Kunjacko v. Tax Recovery Officer, [1967] 64 I.T.R. 85 (Ker.) and Commissioner of Income-tax v. Bhikaji Dadabai and Co., [1961] 42 I.T.R. 123; [1961] 3 S.C.R. 923 (S.C.) There was no provision in the Indian Income-tax Act, 1922, which was extended to the Travancore, Cochin State on April 1, 1950, for the levy, assessment and collection of arrears of income-tax due under the Travancore Income-tax Act, Section 46(2) of that Act provides :\n\n\"The Income-tax Officer may forward to the Collector a certificate under his signature specifying the amount of arrears due from an assessee, and the Collector, on receipt of such certificate, shall proceed to recover from such assessee the amount specified therein as if it were an arrear of land revenue:\n Provided that without prejudice to any other powers of the Collector in this behalf, he shall, for the purpose of recovering the said amount, have the powers which under the Code of Civil Procedure 1908 (V of 1908), a civil court has for the purpose of the recovery of an amount due under a decree.\" \n\n10. The word ''assessee\" has been defined in the Act as follows :\n\n\"'Assessee' means a person by whom income-tax or any other sum of money is payable under this Act, and includes every person in respect of whom any proceeding under this Act has been taken for the assessment of his income or of the loss sustained by him or the amount of refund due to him.\" [See Section 2(2)].\n\nSub-section (2) of Section 46 only enables the collection of the arrears of income-tax due under that Act, and not arrears due under the Travancore Income tax Act. There is likewise no provision in the Income-tax Act, 1961, for the levy, assessment and collection of income-tax due under the Travancore Income-tax Act. Section 297(2)(j) of the Act, upon which reliance was placed by the respondents, may not be of any assistance to them because that sub-section only provides for recovery of arrears of income-tax due under the Income-tax Act, 1922, As the arrears of income-tax due under the Travancore Income-tax Act for the years 1119 to 1125 M.E. could not have been recovered under the provisions of the Indian Income-tax Act, 1922, no proceedings for recovery of those arrears under the provisions of the Income-tax Act, 1961, can be taken. Therefore, it follows that proceedings could be taken for the collection of those arrears only under the Travancore Income-tax Act. We, however, think that the learned judge was right in his view that, although the Tax Recovery Officer purported to pass exhibit P-1 order under Rule 48 of the Second Schedule to the Income-tax Act, 1961, he had power to proceed to recover those arrears under the provisions of the Travancore Income-tax Act. But it was contended on behalf of the appellants that the Division Peishkar alone would have been competent to initiate proceedings to recover the arrears of income-tax under Section 66(3) of the Travancore Act, that the corresponding officer at the time when exhibit P-1 order was passed was the Collector of the District, that the relevant certificates should have been forwarded to him, and that he should have initiated the proceedings for the recovery. We do not think that the submission is correct. The proviso to Section 13(1) of the Indian Finance Act, 1950, would make it clear that the authority constituted under the corresponding provision under the Income-tax Act, 1922, would have had authority to take proceedings for recovery of arrears of tax due under the Travancore Income-tax Act, Section 46(2) of the Income-tax Act, 1922, provided that the certificate has to be forwarded to the Collector and that he shall proceed to recover the amount from the assessee. Just as the Division Peishkar, an officer not appointed under the Travancore Income-tax Act, was constituted as the authority to recover the arrears of tax due under that Act, so also the Collector was constituted as the authority to recover the arrears due under the Income-tax Act, 1922. They were authorities because they were invested with part of the sovereign power of the State, namely, the power to collect tax. (See the decision in Rajasthan State Electricity Board Mohan Lal, A.I.R. 1967 S.C. 1857). Since the Income-tax Act, 1961, repealed and re-enacted with modifications the provisions of the Income-tax Act, 1922, the authority constituted under the corresponding provision of the Income-tax Act, 1961, to recover arrears of tax under that Act, would be the authority competent to proceed to recover the arrears of tax due under the Travancore Income-tax Act. Section 8(1) of the General Clauses Act reads;\n \"Where this Act, or any Central Act or Regulation made after the commencement of this Act, repeals and re-enacts, with or without modification, any provision of a former enactment, then references in any other enactment or in any instrument to the provision so repealed shall, unless a different intention appears, be construed as references to the provision so re-enacted.\" \n\n11. That would indicate that the reference in the proviso to Section 13(1) of the Indian Finance Act, 1950, to the authority constituted under the provisions of the Income-tax Act, 1922, must now be read as a reference to the authority constituted under the corresponding provision in the Income-tax Act, 1961, as the latter Act has repealed and re-enacted the provisions of the Income-tax Act, 1922, with modifications. The Additional Personal Assistant to the Collector, being a Tax Recovery Officer within the meaning of Section 2(44) of the Income-tax Act, 1961, is an authority constituted under Section 221 of the Income-tax Act, 1961, to recover arrears of income-tax due under that Act, and, therefore, he is the corresponding authority referred to in the proviso to Section 13(1) of the Indian Finance Act, 1950, and is competent to take proceedings to recover the arrears to tax due under the Travancore Income-tax Act.\n\n12. It was contended that under Section 66(3) of the Travancore Income-tax Act, the Division Peishkar could have recovered the arrears of income-tax due under that Act only by taking proceedings under the Travancore Revenue Recovery Act, and that under the provisions of the Travancore-Cochin Revenue Recovery Act, 1951, which repealed the Travancore Revenue Recovery Act, only the Tahsildar is competent to attach the immovable property of a defaulter, and not the Additional Personal Assistant to the Collector, and, therefore, the latter had no authority to pass exhibit P-1 order. We do not think that the submission is correct. The proviso to Section 66(3) of the Travancore Income-tax Act provides that the Division Peishkar shall have all the powers of a civil court executing a decree. That would mean that in proceeding to recover the arrears of income-tax, under the relevant Revenue Recovery Act, he can pass an order of attachment which a civil court is competent to pass while executing a decree. Although the Tax Recovery Officer as the corresponding authority is competent only to recover the arrears of tax as if it were an arrear of land revenue, still as he has all the powers of a civil court, executing a decree, he was competent to pass the order of attachment. See the decision of the Supreme Court in Purshottam Govindji Halai v. Additional Collector of Bambay, [1955] 28 I.T.R. 891; [1955] 2 S.C.R. 887 (S.C.)\n13. So far as the arrears of income-tax due under the Travancore Income-tax Act for the years 1119 and 1120 M. E. are concerned, they are covered by exhibit D-1 order dated September 25, 1957, passed by the Central Government in pursuance of Section 3 of the Central Act 33 of 1950. Section 3 modified the provisions of the Travancore Income-tax (Investigation Commission) Act XIV of 124. Section 3 provides :\n\n\"If immediately before the commencement of this Act there is in force in any Part B State other than Jammu and Kashmir any law (hereinafter in this section referred to as 'the State law') corresponding to the Taxation on Income (Investigation Commission) Act, 1947 (XXX of 1947), that law shall continue to remain in force with the following modifications, namely :--....\n (d) the report of the Central Commission shall be submitted to the Central Government, and the Central Government may, by order in writing, direct that such proceedings as it thinks fit under the law in force in the State relating to income-tax, super-tax or excess profits tax or any other law, shall be taken against the person to whose case the report relates in respect of his income other than agricultural income, and upon such a direction being given, all such proceedings may be taken and completed under the appropriate law applicable in the State, as if the direction had been given and the proceedings had been instituted thereunder....\" \n\n 14. Exhibit D-l directed the Income-tax Officer concerned to take \"all proceedings against Thangal Kunju Musaliar under the Travancore Income-tax Act or any other proceedings under any other law as may be necessary with a view to enforce the payment of the demand notice Governing a sum of Rs. 9,15,458\" as arrears of income-tax for those years. The appellants' counsel argued that the expression \"any other law\" in exhibit D-1 can take in only laws passed by the Travancore Sovereign and cannot, therefore, refer to the Income-tax Act, 1922. We think that the amount covered by exhibit D-l could have been recovered under the Income-tax Act, 1922, and therefore, could be recovered under the Income-tax Act 1961. The expression \"any other law\" is wide enough to cover the Income-tax Act, 1922, especially when it is seen that exhibit D-l was passed after that Act was extended to the Travancore-Cochin State. Nor having regard to the fact that Section 3 of Act 33 of 1950 is a law made by Parliament, do we see any reason for confining the expression \"any other law\" therein to laws made by the Travancore Sovereign, although that expression might have had that limited meaning in Travancore Act, XIV of 1122, which Section 3 modified. Section 3, in so far as it authorised the recovery of the arrears of tax by proceedings under any other law, provided an additional remedy, additional to the remedy provided by Section 13 of the Finance Act, 1950, when it saved the provisions of the Travancore Income-tax Act for purposes of the levy, collection and recovery of tax in respect of the period specified in Section 13. \n\n 15. The appellant's counsel argued that there was excessive delegation of authority by the Central Government to the Income-tax Officer, in that there was no specification by the Central Government of the law under which the proceedings should be taken by him. We think that the power vested in the Central Government under Section 3 of the Act 33 of 1950 was plenary in character. The Central Government thought that for taking effective steps against the defaulter according to the exigencies of the situation, the Income-tax Officer should have the choice of the law under which the proceedings should be taken. The plenary power to proceed under any law, having been granted to the Central Government, there was nothing wrong in the Central Government leaving the choice of the law to the Income-tax Officer. After all, so long as the recovery can be only in accordance with law, the choice of alternative laws substantially similar in character can well be left to the authority effecting the recovery. We think that the arrears of income-tax due for these two years could have been recovered under the Income-tax Act, 1922, and can now be recovered under the provisions of the Income-tax Act, 1961. \n\n 16. We are not satisfied that by reason of exhibit D-2 settlement, the revenue is precluded from recovering the arrears of income-tax due for the period covered by the settlement under the provisions of the Income-tax Act, 1961. As the terms of the settlement binding on the assesses have been broken by him, the revenue cannot be held to be bound by the terms of the settlement binding on them. \n\n 17. The next question for consideration is whether the 11 out of the 22 certificates, namely, certificates Nos. 12 to 22 (both inclusive), annexed to exhibit P-1 were validly issued. It was contented on behalf of the appellants that, since these certificates were issued after the death of Thangal Kunju Musaliar, they were void. Reliance was placed upon Section 66(3) of the Travancore Income-tax Act for this purpose. Section 66(3) provides that the Income-tax Officer may forward a certificate under his signature to the Division Peishkar, specifying the amount of arrears due from an assesses, and the Division Peishkar, on receipt of such certificate, shall proceed to recover from such assessee the amount specified therein as if it were an arrear of land revenue. This would indicate that the certificate should be issued specifying the arrears due from the assessee and that the Division Peishkar should proceed to realise them from such assessee, in other words, from the person named in the certificate. Now, if the assessee was dead, no amount could be recovered from him, and, therefore, we think that these certificates were not validly issued, at any rate no recovery can be made from the legal representatives, since they are not named in the certificates as persons from whom the tax is to be collected. There is also no provision for issue of certificates in the name of a deceased assessee, and for the Tax Recovery Officer proceeding against his legal representatives in the Income-tax Act, 1922 or 1961. Rule 84 in the Second Schedule to the Income-tax Act, 1961, provides that no certificate shall cease to be in force by the death of the defaulter. Rule 85 says that if, at any time after the issue of the certificate, the defaulter dies, proceedings may be continued against the legal representative of the defaulter, and the provisions of the Schedule shall apply as if the legal representatives were the defaulter. These provisions imply that the certificate must be against a defaulter who is alive--they make provision only for recovery on the defaulter's death after the issue of the certificate. We, therefore, hold that the Tax Recovery Officer cannot proceed to recover the amounts specified in these certificates in pursuance of the attachment. \n\n 18. It was contended for the appellants that because the attachment was made for the amounts covered by these certificates also, the attachment is invalid. The argument was that, since the amounts specified in these certificates could not have been recovered, as the certificates were not validly issued, the attachment effected on the basis that these amounts could also be recovered on the basis of the certificates is bad. In Sriramiah v. Income-tax, Officer, Kolar, [1964] 52 I.T.R. 408 (Mys.) it was held that if the amount for the recovery of which an assessee's properties are sold in tax recovery proceedings is higher than what is really due from the assessee, the sale would be invalid and the Collector could be restrained by an order from confirming the sale. In Collector of North Arcot v. V.K. Kannan, [1967) 65 I.T.R. 301 (Mad.). the certificate for recovery was for a sum, which was substantially in excess of what was actually due, and it was held that the error would go to the root of the jurisdiction of the Collector to recover the arrears, and the proceedings taken by the Collector for recovery of the arrears would be invalid. For this proposition the learned judges relied on the decision in Santosha Nadar v. First Additional Income-tax Officer, Tuticorin, [1961] 42 I.T.R. 715 (Mad.) where Rajagopalan, Offg. C.J., and Srinivasan J., laid down that where a certificate is issued under Section 46(2) of the Income-tax Act, 1922, for a sum which is substantially in excess of the sum that was actually due, that error would go to the root of the jurisdiction of the Collector to recover the amount. In V.K. Kannan v. Collector of North Arcot, [1966] 61 I.T.R. 293(Mad.). it was held that a certificate showing an amount in excess of what was actually due from the assessee would be invalid and that the proceedings taken under that certificate would also be invalid. These rulings cited by counsel for the appellants have no application to the facts of the present case. The case of a sale for an amount in excess of what is actually due stands on a different footing. So the decision in Sriramiah v. Income-tax Officer is easily distinguishable. There is no case that the amount mentioned in any of the certificates is in excess of the amount that was actually due from the assessee. The only question, here, is whether exhibit P-1 order is vitiated for the reason that the 11 certificates which were issued after the death of Thangal Kunju Musaliar were tacked on to the other certificates, and the order of attachment passed on the basis that all the certificates were validly issued. Even if the amounts due under the certificates issued after the death of the assessee could not be recovered in the proceedings, the attachment would not be invalid for that reason. The appellants relied on the decision in Vimlaben Khimji v. H.S. Manvikar, [1964] 51 I.T.R. 29 (Bom.) where a learned judge of the Bombay High Court held that a prohibitory order issued by the Collector under Order XXI, Rule 54, of the Civil Procedure Code, 1908, in pursuance of a certificate forwarded to him by the Income-tax Officer under Section 46(2) of the Income-tax Act, 1922, for recovery of tax would be invalid, and liable to be quashed by the High Court if the amount sought to be recovered by the said prohibitory order is in excess of the liability of the assessee. He said that the mere fact that the assessee is liable to pay tax, even though of a lesser amount would not make the order valid. With great respect, we find ourselves unable to agree with the proposition. We do not think that it is necessary to specify in an order of attachment of immovable property the amount for which the attachment is effected, (See, for instance, Order 21, Rule 42, Civil Procedure Code). Form 24 in Appendix C of the Civil Procedure Code would indicate that the statement as to the amount of the decree is not an indispensable part of an order of attachment. The operative part of the order only prohibits transfer or other dealings with the property attached. The validity of an order of attachment of immovable property is not dependent upon the correctness of the statement of the amount due in the order of attachment. An attachment would not become invalid even if the decree amount is reduced in an appeal preferred from it. Nor is an attachment before judgment rendered invalid merely because the amount for which the decree is passed is less than the amount shown in the plaint as due.\n\n 19. Counsel also relied upon the ruling of a Division Bench of this court in Annamma Kunjacko v. Tax Recovery Officer. That was a case where a defaulter was arrested for arrears of income-tax due from him both under the Travancore Income-tax Act, 1121, as well as under the Income-tax Act, 1922. There was no provision for arrest of a defaulter in the Travancore Income-tax Act, although there was a provision for it in the Income-tax Act, 1922. So, the contention was raised that because the arrest was made for arrears of tax due both under the Travancore Act and the Indian Act, the arrest was illegal. The contention was upheld. In doing so the learned judges relied upon Article 21 of the Constitution, which says that no person can be deprived of his life or personal liberty except according to the procedure established by law. Their Lordships said that the arrest was illegal as the arrest was also for an amount for which the defaulter could not be arrested. Their Lordships also said that the defaulter would have had an opportunity to avoid the arrest by tendering the amount, if the amount for which he could be arrested had been correctly shown. In Thangal v. State of Kerala, [1961] I.L.R. 1 Ker. 279; A.I.R. 1961 Ker. 331, 334. it was held that :\n \"Even assuming that the amount shown in exhibit P-1 (warrant) is not correct, that by itself would not affect the validity of the warrant. Under Order 21, Rule 38, the judgment-debtor has to pay the amount ordered to be paid in the warrant and if a mistake has been committed in calculating the figure it is open to the judgment-debtor to take appropriate proceedings in court to see that the mistake is rectified and it does not make the warrant on that account illegal.\" \n\n 20. We are not called upon to express any opinion whether a defaulter is entitled to be released from arrest, even without paying the amount of tax admittedly due, as we are only dealing with the legality of an attachment.\n\n 21. We need only say that the reasons which compelled their Lordships in Annamma Kunjacko v. Tax Recovery Officer to hold that the arrest was illegal would not apply in the case of an attachment of immovable property. Sale and arrest affect a man's proprietary and personal rights. Not so, a mere attachment which only affects the right of disposal as against claims enforceable under the attachment. The amount mentioned as due in the prohibitory order is, therefore, of no significance unlike the amount mentioned in the sale proclamation or the arrest warrant. In the case of the latter the debtor can avert the sale or the arrest by paying the amount due and if the amount shown is substantially higher than the amount really due, he suffers prejudice thereby, for, whereas he might have been able to pay the smaller sum really due, he might not be in a position to pay the higher sum shown. We see no reason to hold that the attachment is invalid. No doubt, as we have indicated, the claim enforceable under the attachment would not include the amounts covered by the certificates Nos. 12 to 22 (both inclusive) annexed to exhibit P-1. In other words, the amounts covered by these certificates cannot be recovered in pursuance of the attachment. We express no opinion on the question whether these certificates could be corrected or whether fresh certificates for the amounts could be issued and the properties attached in pursuance thereof.\n\n 22. It was contended for the appellants that Thangal Kunju Musaliar had\nexecuted four gift deeds during his life that the title to the properties\nincluded in the gift deeds passed to the donees, and that the revenue\nshould not have proceeded to attach the properties as if they belonged to\nThangal Kunju Musaliar at the time of his death. It is contended that the\nrevenue should have filed a suit and obtained an adjudication that the gift\ndeeds were either sham or intended to defeat or delay his creditors before\nproceeding to attach the properties. Reliance was placed in this connection\nupon the ruling of this court in Abdulla v. State of Kerala, [1962] I.L.R. 1 Ker. 396 where\nVaidialingam J. held that when a dealer assessed to sales tax transferred\nhis property, the amount assessed cannot be recovered from the property\ntransferred, unless there is an adjudication by a civil court that the transfer\nwas either intended to defeat or delay the creditors or that it was sham.\nWe are not satisfied that it was necessary for the revenue to have filed a\nsuit for declaration that the gift deeds executed by Thangal Kunju Musaliar\nwere either sham or intended to defeat or delay the creditors before proceeding to attach the properties, on the basis that they belonged to him on the\ndate of his death. We think that the revenue was entitled to proceed as if\nthe properties belonged to Thangal Kunju Musaliar on the date of his death. The appellants, if they are aggrieved, could file claims before the concerned authority, and get an adjudication of the claims; and if dissatisfied with the adjudication, they can approach the civil court for appropriate relief. The revenue is in the position of a decree-holder who is entitled to attach property which he believes to be his judgment-debtor's ignoring a sham transfer, or be the attachment avoiding a fraudulent transfer leaving it to the person interested to make a claim or institute a suit to establish his rights. In this case, for part of the properties covered by one of the gift deeds, suits were filed in the sub-court, Quilon, and in the munsif's court, Quilon, as O. S. Nos. 14 of 1968 and 76 of 1967, respectively. Although the courts passed decrees declaring the title of the appellants to the suit properties, the district court, in appeals filed by the revenue, reversed the decrees and declared the gift deeds as not binding on the revenue, in the enforcement of their claim for recovery of the arrears of lax against the properties. It is represented that second appeals from these decrees filed by the appellants are pending in this court. We are of opinion that the proper forum for adjudicating the question, so far as the properties covered by the suits are concerned, is the court in which the appeals are pending. In respect of the properties not covered by the suits, the remedy of the appellants, as stated by the learned judge, is to file claim petitions and get an adjudication of the question, and then, if so advised, approach the civil court, if the decision in the claim enquiry is adverse to them. As the appellants have effective alternative remedy and as the claims involve resolution of disputed questions of fact, we think, the learned judge was right in declining to adjudicate on this controversy.\n\n23. In the result, we declare that the claim enforceable under exhibit P-1 attachment will not include the arrears of income-tax specified in the 11 certificates which were issued after the death of Thangal Kunju Musaliar, and modify the order of the learned judge to this extent. Subject to the modification indicated, we dismiss the writ appeals. In the circumstances, of the case, we do not make any order as to costs." }, { "title": "Grindlays Bank Ltd. vs Commissioner Of Income-Tax. on 5 September, 1989", "url": "https://indiankanoon.org//doc/1334954/", "text": "Grindlays Bank Ltd. vs Commissioner Of Income-Tax. on 5 September, 1989\nEquivalent citations: (1992)94CTR(CAL)46, [1992]193ITR457(CAL)\nJUDGMENT\nSUHAS CHANDRA SENT J. - The Tribunal has referred the following questions of law under section 256 (1) of the Income-tax Act, 1961 :\n\n\"1. Whether, on the facts and circumstances of the case, the Tribunal was justified in holding that it was obligatory on the part of the assessee to deduct income-tax at source under section 192 of the Income-tax Act, 1961, from furlough pay which was payable in terms of the contract of service and was paid to the expatriate officers of the assessee in sterling in the U. K. outside the territories of India ?\n\n2. Whether the Tribunal was justified in holding that the fact that the tax could not be recovered from the assessee because of the provisions of section 231 of the Income-tax Act, 1961, would not stand in the way of the liability of the assessee to pay interest; under section 201 (1A) of the Income-tax Act, 1961, and the proceedings initiated by the Income-tax Officer for levy of interest under section 201 (1A) of Act are not barred by limitation ?\n\n3. Whether the Tribunal was justified in holding that although the return regarding the deduction of tax in respect of the employees could have been filed to the Income-tax Officer mentioned in the Notification issued by the Central Board of Direct Taxes dated May 13, 1968, under section 126 of the Income-tax Act, 1961, the assumption of jurisdiction to treat the assessee as in default under section 201 and to levy interest under section 201 (1A) of the Income-tax Act, 1961, by the Income-tax Officer, H-Ward, Companies Dist. IV, Calcutta, cannot be said to be bad in law ?\n\n4. Whether the Tribunal was justified in holding that the jurisdiction of the Income-tax Officer to pass the impugned order could not be challenged by the assessee at the appellate stage because at the most it could be said to be a case of concurrent jurisdiction and the objection should have been taken earlier ?\n\n5. Whether, on the facts and circumstances of the case, the Tribunal was justified in holding that proceedings under section 201 can be initiated and continued and interest under section 201 (1A) of the Income-tax Act, 1961, can be recovered from the employer-bank ?\"\n\nThe facts of the case have been stated by the Tribunal in the statement of case as under :\n\nThe assessee-bank had a number of expatriate officers working in India during the year 1973. These officers were entitled to proceed on furlough on completion of a specific period of service in India and while on furlough they were entitled to furlough pay being disbursed outside India. Consequently, furlough pay was disbursed in pound sterling in the U. K. According to the Income-tax Officer as the furlough pay was received by the expatriate officers for the period of furlough, to which they were entitled on account of their service rendered in India, such pay was assessable in the hands of the officers under the head \"Salary\". The assessee should have, therefore, deducted tax at source on this pay under section 192 (1) read with section 192 (6) and section 9 (1) (ii) of the Income-tax Act, 1961. Since it had not deducted any tax, it was liable to pay interest under section 201 (1A) of the Income-tax Act on the amount thereof. He, therefore, directed the bank to show cause as to why interest should not be levied accordingly. The bank, however, urged that the interest was not leviable and wanted time to verify the statement sent by the Income-tax Officer in this behalf. Therefore it did not take any further steps in the matter. Accordingly, the Income-tax Officer held that the tax on furlough pay was deductible under section 192 of the Income-tax Act and the bank not having done so, interest was chargeable under section 201 (1A) and, ultimately, levied a sum of Rs. 1,70,331 as interest and issued a demand notice therefor. The said order was confirmed on appeal by the Commissioner of Income-tax (Appeals).\n\nThe assessee came in second appeal before the Tribunal before which a number of contentions were raised by the assessee. The Tribunal ultimately rejected the assessees appeal by its order in question with the following observations :\n\n\"To our mind, the entire legislation has to be interpreted harmoniously. If the appellant was not bound to deduct the tax under Chapter XVII payable in respect of the salaries at all, even if it chose to deduct the tax from the salaries of its own, it cannot be said to be strictly a deduction under Chapter XVII. However, it cannot be seriously disputed that the assessee would get benefit of these payments as deductible amounts notwithstanding section 40 (iii) and, therefore, if follows that the mere fact that the amounts in question were payable outside India would not take these payments out of the ambit of Chapter XVII. In this behalf, we may also refer to sub-section (6) of section 192 of the Income-tax Act which provides that for the purpose of deduction of tax on salary payable in foreign currency, the value in rupees of such salary shall be calculated at the prescribed rate of exchange. Though the mere existence of this provision does not mean that Chapter XVII necessarily applied to all these payments outside India, the fact that it finds place in section 192 shows it was intended to be applicable in case of salary payments.\"\n\nThe Tribunal dealt with the argument that no interest could be charged. It held :\n\n\"In the present case, the appellant should be deemed to be in default in the year 1973 and, therefore, no proceedings could be taken after the expiry of one year therefrom. For this purpose, reliance was placed on decision of the Calcutta High Court in CIT v. Dunlop Rubber Co. (India) Ltd. [1980] 121 ITR 476 (Cal). We are afraid, this argument again does not carry weight. The matter was thoroughly considered by the B-Bench of the Tribunal to which one of us was a party in the assessees own case in Grindlays Bank Ltd. v. ITO [1982] 1 ITD 1100 (Cal). Of course, in that case a different question, viz., liability for interest on salaries disbursed to resident employees, was involved and there was another question as to when the liability under chapter XVII arose for the purpose of computation of interest and it was held the same arose only from the time of payment and not on the date of credit itself. But it was clearly held that for the purpose of levy of interest under sub-section (1A) of section 201 the fact that no recovery could be made from the assessee because of section 231 of the Income-tax Act, was not material inasmuch as interest had to be calculated to the date of actual payment whether by the assessee or by the employees and the provisions of section 201 (1A) were without prejudice to the provisions of sub-section (1). Therefore, the mere fact that the tax could not be recovered from the assessee because of section 231 would not stand in the way of its liability under section 201 (1A).\"\n\nThe Tribunal went on to observe :\n\n\"Lastly, it was argued that the Income-tax Officer had no jurisdiction in this matter. Reference was made in this behalf to notification No. 12 (F. No. 55/31/68-II (AII)) issued by the Central Board of Direct Taxes on 13th May, 1968, by which covenanted officers of National and Grindlays bank stationed anywhere in India were to be handled by the Income-tax Officer, E-Ward, Dist. VA, Calcutta. It was argued that the present order was passed by the Income-tax Officer, H-Ward, Comp. Dist. IV, Calcutta, who, therefore, had no jurisdiction to do so. This matter was also taken up by him before the Commissioner of Income-tax (Appeals) who was of the opinion that no specific objection against jurisdiction had been raised during the proceedings. In other words, the assessee had surrendered to the jurisdiction of the Income-tax Officer by way of giving explanation, etc., and, therefore, it was not entitled to raise such a preliminary issue before the appellate authority. The contention of the assessees representative in this behalf was that the provisions of sub-section (5) of section 124 were not applicable to the present case inasmuch as, according to this sub-section, the bar against questioning the jurisdiction of the Income-tax Officer came into operation after the expiry of one month from the date of the return filed under section 139 (1) or after the completion of the assessment which ever was earlier or where no return was filed, after the expiry of the time allowed by the notice under section 139 (2) or section 148. In the present case, there was no return under section 139 (1) or assessment nor was any notice under section 139 (2) or section 148 ever issued. therefore, sub-section (5) was not at all applicable to the case of the present assessee and apart from this there was no bar upon the assessee to challenge the notice in question. It was also contended that the question of jurisdiction is one which cannot be waived by the assessee and if an Income-tax Officer concerned had no jurisdiction, the entire proceedings Income-tax Officer concerned had no jurisdiction, the entire proceedings are bad in law. Reliance was placed upon a decision of the Calcutta High Court in B. K. Gooyee v. CIT [1966] 62 ITR 109 for the proposition that submission of a return in response to a notice without any objection to jurisdiction is not sufficient relinquishment of the right to take objection to the validity of the notice.\"\n\nThe Tribunal thereafter observed as follows :\n\n\"After carefully considering the legal position on the subject, we are of the opinion that the ground raised in this behalf has no substance. While jurisdiction over the employees of the assessee-bank may have been vested in some other Income-tax Officer by the notification in question, the jurisdiction over the assessee itself is that of the Income-tax Officer who has passed the order in question. According to sub-section (7) of section 2, \"assessee\" means any person by whom any tax or any other sum of money is payable under this Act and clause (c) of this sub-section includes the case of every person who is deemed to be an assessee in default under any of the provisions of this Act. In the present case, the interest is being levied upon the assessee after treating him as an assessee in default under section 201 (1) of the Income-tax Act. There is no specific section which gives any particular Income-tax Officer jurisdiction to make an assessment. According to section 124 (1), the Income-tax Officers shall perform their functions in respect of such areas or of such persons or classes of persons or of such income or classes of income as the Commissioner may direct. According to section 130, in respect of any function to be performed by the Income-tax Officer under any provision of this Act in relation to an assessee the Income-tax Officer under any provision of this Act in relation to an assessee the Income-tax Officer has jurisdiction over such assessee be such Income-tax Officer. Obviously, the Income-tax Officer, Company Circle, Dist. IV, had jurisdiction over the present assessee and, therefore, this case could be dealt with by him. Clause (b) or (c) of this section would not apply inasmuch as no other Income-tax Officer had jurisdiction over this assessee and the jurisdiction conferred by the notification referred to by the representative of the assessee relates only to the covenanted officers of the assessee-bank and not the bank itself which is an altogether different entity.\n\nAssuming for the sake of argument that the Income-tax Officer referred to in the notification had also concurrent jurisdiction over this assessee, all that can be said for the assessee was that he could have raised an objection to the jurisdiction of the present Income-tax Officer and under sub-section (6) of section 124, the Income-tax Officer if not satisfied with the correctness of the assessees claim could refer the matter to the Commissioner of Income-tax for determination of the question as to whether he had jurisdiction to make the present assessment. This again would be subject to the provisions of sub-section (5), i.e., it was for the assessee to call in question the jurisdiction of the present Income-tax Officer. It also cannot be argued for the assessee that he had no opportunity to challenge the jurisdiction because a notice was issued by the present Income-tax Officer to the assessee of the proposal to levy interest under section 201 (1A) and the views of the assessee were invited in this regard. No objection to the jurisdiction of the Income-tax Officer was taken by the assessee, although a reply was filed to this letter on 5th June, 1978, contending that no interest was at all chargeable. In these circumstances, while it may be correct that the return regarding the deduction of tax in respect of the employees could have been filed to the Income-tax Officer mentioned in the notification referred to by the representative of the assessee, the assumption of jurisdiction to treat the assessee as in default under section 201 and to levy interest under section 201 (1A) by the Income-tax Officer cannot be said to be bad in law. At any rate, it cannot be challenged by the assessee at this stage because at the most it can be said to be a case of concurrent jurisdiction and the objection should have been taken earlier.\"\n\nThereafter, at the instance of the assessee, the Tribunal referred to this court the five questions of law mentioned hereinbefore.\n\nThe first question relates to the liability of the employer-bank to deduct income-tax, at source under section 192 from the furlough pay of some of the employees. The case of the assessee was that this amount was paid in sterling in the United Kingdom outside the territories of India. Therefore, this payment could not come within the ambit of the Income-tax Act. The jurisdiction of the income-tax authorities did not travel beyond India. The payments made by the bank to its employees outside India could not attract the provisions of the Income-tax Act.\n\nWe are unable to uphold that argument. Section 4 of the Income-tax Act imposes a charge of tax in respect of the total income of the previous year of every person. In sub-section (2) of section 4, it has been made clear that income-tax shall be deducted at source or paid in advance where it is deductible or payable under the provisions of this Act.\n\nSection 5 (1) lays down :\n\n\"5. Scope of total income. - (1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which -\n\n(a) is received or is deemed to be received in India in such year by or on behalf of such person; or\n \n\n(b) accrues or arises or is deemed to accrue or arise to him in India during such year; or\n \n\n(c) accrues or arises to him outside India during such year.\"\n\nSub-section (2) of section 5 limits the scope of total income of a non-resident to income which is received or deemed to be received in India during such year by or on behalf of such person or accrues or arises or is deemed to accrue or arise to him in India during such year.\n\nIn this case, the bank is the employer. It pays a portion of the salary to its employees in the United Kingdom. There is no dispute that the employees were residents in India at the material time. Therefore, the entire salary income, which was payable because of the services rendered by the employees in India, accrued or arose in India.\n\nIt has been argued by Dr. Pal that only that portion of the salary, which was received by the employees in India, came within the scope of \"total income\" assessable under the Income-tax Act.\n\nThis argument overlooks the fact that the salary income which was received by the employee outside India arose on account of rendering of services in India. It cannot be said that what was paid in the United Kingdom was without any consideration. It that event, the amount of salary or the furlough pay which was paid in the United Kingdom would become gifts to the employees and not part of their salary income. The only consideration for payment of the furlough pay in the United Kingdom was the rendering of services by the employees in India.\n\nDr. Pal referred me to section 9 of the Act. But section 9 is a deeming section. This section need not be considered in a case where the income in question squarely comes within the ambit of section 5. Section 9 is a deeming provision. Certain types of income which might not come within the ambit of section 5 have been brought within the fold of the definition of \"total income\" by virtue of the provisions of section 9. Section 9 (1) lays down that certain categories of income shall be deemed to accrue or arise in India. The material part of section 9 for the purpose of this case is as under :\n\n\"9. Income deemed to accrue or arise in India. - (1) The following incomes shall be deemed to accrue or arise in India - ....\n\n(ii) income which falls under the head Salaries if it is earned in India;\n\n(iii) income chargeable under the head Salaries payable by the Government to a citizen of India for service outside India;....\n\n(2) Notwithstanding anything contained in sub-section (1), any pension payable outside India to a person residing permanently outside India shall not be deemed to accrue or arise in India, life the pension is payable to a person referred to in article 314 of the Constitution or to a person who, having been appointed before the 15th day of August, 1947, to be a Judge of the Federal Court or of a High Court within the meaning of the Government of India Act, 1935, continues to serve on or after the commencement of the Constitution as a Judge in India.\"\n\nEven if the language of section 9 is considered carefully, it does not come to the aid of the argument advanced by Dr. Pal. Section 9 (1) (ii) lays down that income which falls under the head \"Salaries\", if it is earned in India, shall be deemed to accrue or arise in India. The question is where was the furlough pay received by the employee in the United Kingdom earned. The earning must have taken place where the services to the bank were rendered by the employees. It is because of services rendered in India that the employees earned their salaries. There may be an arrangement to pay a portion of the salary in the United Kingdom. But that does not mean that the salary was earned in the United Kingdom.\n\nThe meaning of the word \"earn\" according to Websters New International Dictionary of the English Language, Second Edition, Unabridged, is :\n\n(1) To merit or deserve as by labour or service; to do that which entitles one to (a reward whether the reward is received or not); as, to earn a reputation for generosity.\n\n(2) to acquire by labour, service or performance; to deserve and receive as compensation; as, to earn a good living.\n\nThe labour or the service which entitled the employees to the furlough pay was rendered in India. It is difficult to see how it can be contended that the earning of the furlough pay took place in England. This construction cannot be given except by distorting the meaning of the word \"earn\" and making it equivalent to \"receive\". The amount which was received by the employees in England was not earned in England but was merely paid in England. The employees got it because they had rendered service in India. In other words, they received in the United Kingdom what they had earned in India.\n\nI was referred to a judgment of the Gujarat High Court in the case of CIT v. S. G. Pgnatale [1980] 124 ITR 391 (Guj). In that case, it was pointed out by the Gujarat High Court that the word \"earned\" had two meanings. One is the narrow meaning of rendering of service, etc. The word \"earned\" is also used in the wide sense of treating income as \"earned\" only if the assessee has contributed to its accrual or arising by rendering services and in respect of which a debt is created in his favour. Unless there is a debt in favour of the assessee by reason of his rendering services, it cannot be said to be \"income earned\" in the wide sense.\n\nThe distinction drawn by the Division Bench of the Gujarat High Court between the narrow meaning and the wide meaning of the word \"earned\" is of no significance in the present case. The services to the bank were rendered by the employees in India. The liability to pay arose as soon as the services were rendered and such liability arose in India. By agreement of the parties, the liability could be discharged by making payment in England. But that is a matter of discharging a liability that has already arisen by virtue of rendering of services in India. Therefore, even if a portion of the salary was payable in England, it cannot be said that the liability to pay salary had arisen in England because the salary had been earned in England. What has happened in this case is that the salary has been earned in India by rendering services to the bank in India. From the point of view of the bank, the liability to pay has arise in India because the services have been rendered in India. There was a contract of service which stipulated that services must be rendered in India. Even otherwise if services are rendered by the employees to the employer and there was no intention of rendering such services gratuitously, the bank has a liability to pay for such services already rendered. Looked at from any point of view, the liability of the bank to pay clearly arose in India. If the liability to pay arose in India, whether the liability was discharged in England or somewhere else becomes immaterial for the purpose of deciding whether there was accrual of income in India.\n\nThe facts of the case that came up for consideration before the Gujarat High Court in the case of CIT v. S. G. Pgnatale [1980] 124 ITR 391 were entirely different from the facts of the instant case.\n\nIt must, however, be noted that the scope of clause (iii) of section 9 (1) is quite different from the scope of clause (ii) of section 9 (1). The word \"earned\" has deliberately not been used by the Legislature in section 9 (1) (iii). Section 9 (1) (iii) is merely confined to payment of salary by the Government to a citizen of India. If the Government pays salary to a citizen of India for services rendered outside India, then even though the income may be earned outside India, by virtue of the deeming provision, it has been brought within the ambit of \"total income\" as defined by the Income-tax Act. But if income is earned by a person who is not a citizen of India by rendering services outside India, then section 9 (1) (iii) will have no application. Similar will be the case if salary is payable to a person by a private organisation for rendering services outside India.\n\nTherefore, a narrow meaning cannot be given to the scope of section 9 (1) (ii) by referring to the provision of section 9 (1) (iii).\n\nThe position is abundantly made clear by section 9 (2). A pension is earned by a person because of services rendered in the course of employment. When the term of employment comes to an end, lit is said that the man has earned his pension. The earning takes place where the services had been rendered. Because of the fact that the provision of section 9 (1) (ii), if logically extended, would affect the persons who were residing permanently outside India in respect of pension payable to such persons, it had to be specifically provided that such pension payable to persons mentioned in sub-section (2) shall not be deemed to accrue or arise in India.\n\nTherefore, the first question must be answered in the affirmative and in favour of the Revenue.\n\nThe second question has been dealt with at length in the judgment delivered on September 5, 1989, in the case of British Airways v. CIT by us in Income-tax Reference No. 212 of 1983 ([1922] 193 ITR 439). In view of that decision, the second question must also be answered in the affirmative and in favour of the Revenue.\n\nThe Third question relates to the jurisdiction of the Income-tax Officer to pass an order under section 201 (1A) of the Income-tax Act, 1961. The order was passed by the Income-tax Officer, \"H\" Ward, Companies District IV. At the time of hearing of the case before the Income-tax Officer, the question of jurisdiction of the Income-tax Officer was not challenged. It was only before the Appellate Assistant Commissioner, for the first time, that the assessee raised the plea of jurisdiction. The Appellate Assistant Commissioner declined to hold in favour of the assessee on this ground. The Tribunal was also of the view that the question of jurisdiction could not be raised at such a belated stage. Moreover, the Tribunal has pointed out that the jurisdiction of the Income-tax Officer is concurrent and it is not a case of lack of inherent jurisdiction. Section 125A of the Income-tax Act lays down categorically that an Income-tax Officer will have concurrent jurisdiction with any other officer.\n\nSection 201 (1A) of the Act merely makes a declaration that the person, principal officer or the company, as the case may be, shall be liable to pay simple interest at 12 percent. per annum on the amount of tax which has not been paid in accordance with law. The amount of such tax has to be deposited with such officer as may be notified. The dispute that has been raised is that in the instant case the proper officer was not the Income-tax Officer assessing and making the assessment.\n\nThat the Income-tax Officer, H-Ward, District-IV, had the jurisdiction to assess the assessee-company is not in dispute. It also cannot be disputed that the word \"assessment\" has to be construed in a wide sense. In the case of Kalawati Devi Harlalka v. CIT [1967] 66 ITR 680 (SC), it was held that the assessment would include every type of computation of income and mostly all liabilities under Chapter IV of the Income-tax Act.\n\nMoreover, this is not a question of instrinsic or inherent lack of jurisdiction as has been specified by the statute. It is not that the Income-tax Officer will have no concurrent jurisdiction. The jurisdiction that has been vested in the Income-tax Officer may be exercised in accordance with an administrative order issued by the Board or the Commissioner, as the case may be. These provisions are really provisions of administrative convenience and it is not a case of inherent lack of jurisdiction. Reference may be made in this connection to the case of Wallace Brothers and Co. Ltd. v. CIT [1945] 13 ITR 39 (FC) at 45, which was followed by the Patna High Court in the case of Raja Bahadur Kamakhya Narain Singh v. Union of India [1964] 51 ITR 596 (Pat.) In the case of Wallace Brother and Co. Ltd. [1945] 13 ITR 39, the Federal Court observed as under (p. 45). :\n\n\"These provisions clearly indicate that the matter is more one of administrative convenience than of jurisdiction and that in any event it is not one for adjudication by the court.\"\n\nThis passage was quoted with approval by the Supreme Court in the case of Pannalal Binjraj v. Union of India [1957] 31 ITR 565 (SC) and also in the case of Rai Bahadur Seth Teomal v. CIT [1959] 36 ITR 9 (SC). In view of the fact that the assessee did not raise any objection at the time of hearing of the case by the Income-tax Officer or within the period of one month of filling of the return and in view of the clear finding of the Tribunal and the statutory provisions conferring upon the Income-tax Officer concurrent jurisdiction, we are of the view that the Tribunal has taken a correct view of the matter.\n\nA point has been made by the assessee that as a result of this deduction, the Department is realising the tax twice on the same income. It does not appear that this point was agitated before the Tribunal. We, however, make it clear that if the amount of tax has already been realised from the employees concerned directly, there cannot be any question of further realisation of tax as the same income cannot be taxed twice. If the tax has been realised once, it cannot be realised once again, but that does not mean that the assessee will not be liable for payment of interest or any legal consequence for their failure to deduct or to pay in accordance with law to the Revenue.\n\nUnder these circumstances, the third question is answered in the affirmative and in favour of the Revenue. Fourth and fifth questions are also answered in the affirmative and in favour of the Revenue. There will be no order as to costs.\n\nBHAGABATI PRASAD BANERJEE J. - I agree." }, { "title": "Rameswar Sirkar vs Income-Tax Officer, \"A\" Ward And Ors. on 6 August, 1971", "url": "https://indiankanoon.org//doc/62136/", "text": "Rameswar Sirkar vs Income-Tax Officer, \"A\" Ward And Ors. on 6 August, 1971\nEquivalent citations: [1973]88ITR374(CAL)\nJUDGMENT\n \n\nSabyasachi Mukherji, J. \n \n\n1. The petitioner carries on business under the name and style of Messrs. P. B. Sirkar & Sons, at 89, Chowringhee Road, Calcutta. The petitioner stated that the business styled as Messrs. P. B. Sirkar & Sons, at 89, Chowringhee Road, Calcutta, was started as a proprietary concern by one Gour Mohan Sirkar, who, it is further stated,\n\nmet with a tragic death as a result of gun shot wounds in the year 1957. After the death of Gour Mohan Sirkar serious differences and disputes arose according to the petitioner amongst the members of the family consisting of the heirs of the said Gour Mohan Sirkar, namely, Sm. Chhabi Rani Sirkar and others, Jagatjyoti Sirkar, Ratanlal Sirkar, Kanchanlal Sirkar, Rameswar Sirkar and the youngest brother and also their mother, Smt. Sarashi Bala Sirkar. Rameswar Sirkar is the petitioner in this case. Smt. Sarashi Bala Sirkar, it is stated, filed a partition suit as a result of the said dispute in this court in February, 1957, being Partition Suit No. 532 of 1957. In course of the said suit an arbitrator was appointed by an order of this court and in order to avoid the disputes the business at 89, Chowringhee Road, Calcutta, was treated according to the petitioner as part of the joint family property. Thereafter, all the parties to the said suit effected a settlement to which all of them agreed. Such a mutual and amicable settlement of the properties including the business was decreed by this court in the said partition suit and the business styled as Messrs. P. B. Sirkar & Sons, at 89, Chowringhee Road, Calcutta, was allotted to the petitioner and the petitioner was given possession in June, 1958, by the receiver appointed by the High Court and since then he had become the sole proprietor of the concern. According to the petitioner the said joint family affairs used to be controlled from 131/B, Bowbazar Street, Calcutta, which was also the family residence where Smt. Sarashi Bala Sirkar, his mother, used to reside. It has been stated that Smt. Sarashi Bala Sirkar died in or about February, 1966. It was further stated in the petition that it was the case of the income-tax department that a notice under Section 148 of the Income-tax Act, 1961, was served in respect of the said joint family on the 31st March, 1964, by affixation. In the affidavit on behalf of the Revenue it was stated that it was served on the petitioner by affixation. That unfortunately is an incorrect statement about which I would refer later in detail. It appears to have been served by affixation at the address of Bepin Behary Ganguly Street. The petitioner, it is stated, received another notice dated the 13th February, 1968, under Section 142(1) of the Income-tax Act, 1961, asking the petitioner to appear. In this application under Article 226 of the Constitution the initiation\" of the proceedings by the service of the notice under Section 148 of the Income-tax Act, 1961, on the said joint family has been challenged. The assessment year is 1955-56. The partition suit was filed in February, 1957, and in June, 1958, the receiver in the said partition suit handed over the said properties to the petitioner. Smt. Sarashi Bala Sirkar died in 1966. The notice under Section 148 of the Income-tax Act, 1961, was served by affixation on the 31st March, 1964. It has to be stated that the said Hindu undivided family was never assessed to tax before. It has further to be\n\nborne in mind that this Hindu undivided family is governed by the Dayabhaga system of Hindu law. \n\n2. In this application under Article 226 of the Constitution it was challenged that there was no reason for re-opening the said assessment. I am unable to accept this contention. It is not disputed by the petitioner in the petition that the Hindu undivided family of which family the petitioner was a member at the relevant time did have taxable income. It has also not been stated that any return of the said Hindu undivided family was filed for the relevant assessment year. Therefore, it cannot be disputed that for the failure of the assessee, that is to say, the Hindu undivided family, to file the return and to disclose fully and truly all materials and relevant facts, there has been escapement of income and there were materials for the Income-tax Officer to issue the notice under Section 148 of the Income-tax Act, 1961. This point though taken in the petition was not seriously urged in this application. Counsel for the petitioner then urged that the Hindu undivided family after its dissolution could not be taxed. It was further urged that after a suit for partition had been filed, the Hindu undivided family had been dissolved. Counsel for the Revenue, on the other hand, contended that in the case of families governed by the Dayabhaga system of Hindu law the dissolution of the Hindu undivided family did not take place merely on the institution of a suit for partition or declaration of shares of the parties. In order to effectuate a severance of a Hindu undivided family under the Dayabhaga School of law, something more was required, it was urged. In the context of the facts of this case this broad contention is not necessary to be decided. In the instant case the assessment was sought to be re-opened in respect of a Hindu undivided family which had been admittedly a joint family. Counsel for the petitioner drew my attention to the Division Bench judgment in the case of Srilal Bagri v. Commissioner of Wealth-tax, to which I was a party. That was a case under Section 20 of the Wealth-tax Act. That was also a case where assessment was sought to be made in respect of the assessment year in which a Hindu undivided family had disrupted. In the instant case, the assessment sought to be re-opened was in respect of a year when undoubtedly there was a joint undivided family. Disruption is claimed to have taken place after the institution of the partition suit in 1957, that is to say, subsequent to the relevant accounting year for which the proceedings for re-opening have been taken. In the premises it is not necessary for me to consider the aforesaid decision in detail. It is not a case of attempting to assess a Hindu undivided family after disruption in respect of a year in which it had disrupted. The instant case is a case where it is sought to assess admittedly a family in respect of a year when it was joint but at the time when the proceedings for assessment have been taken up, it had\n\n\ndisrupted. In this instant case there was a suit for partition of properties in respect of which a receiver was appointed and, furthermore, partition had taken place and the receiver had handed over to the petitioner the business which was separated from the joint family. Therefore, the question whether in the case of Hindu undivided family, governed by the Dayabhaga School of Hindu law, something more than a mere declaration of shares was necessary to cause the disruption of the Hindu undivided family, is not necessary to be decided in this case. Counsel for the Revenue drew my attention to the decision in the case of Bijoy Kumar Burman v. Income-tax Officer, E-Ward, Dist. IV, . That again was a case where facts were different. That was also an attempt to tax the income of a year in which disruption had taken place. That was also a case of a family governed by Mitakshara School of Hindu law. But the fundamental question that requires consideration in this application is whether a Hindu undivided family which had never been assessed before under the Indian Income-tax Act, 1922, or the Income-tax Act, 1961, can be assessed as such after the partition of the said Hindu undivided family. Incidentally it calls for decision as to whether the individual members of the Hindu undivided family can be made liable for the alleged income, if any, of the Hindu undivided family during the period when the Hindu undivided family was in existence if that Hindu undivided family had never been taxed before. This is the main contention that was urged in respect of this application. Counsel for the petitioner states that there is no machinery or method by which such assessment can be made.\n\n3. Section 297, Clause (d)(ii) of the Income-tax Act, 1961, provides that in respect of any income chargeable to tax which had escaped assessment within the meaning of that expression in Section 147 and no proceedings under Section 34 of the repealed Act in respect of any such income are pending at the commencement of the said Act, a notice under Section 148 may, subject to the provisions contained in Section 149 or Section 150, be issued with respect to that assessment year and all the provisions of said Act shall apply accordingly. Therefore, in respect of the relevant assessment year the Act of 1961 has to be applied. In this connection reference may be made to Section 171 of the Income-tax Act, 1961. The relevant portion of Section 171 provides as follows: \n\n \"171. Assessment after partition of a Hindu undivided family.--(1) A Hindu family hitherto assessed as undivided shall be deemed for the purposes of this Act to continue to be a Hindu undivided family, except where and in so far as a rinding of partition has been given under this section in respect of the Hindu undivided family. \n\n (2) Where, at the time of making an assessment under Sectional 43 or Section 144, it is claimed by or on behalf of any member of a Hindu family\n\n\nassessed as undivided that a partition, whether total or partial, has taken place among the members of such family, the Income-tax Officer shall make an inquiry thereinto after giving notice of the inquiry to all the members of the family. \n\n (3) On the completion of the inquiry, the Income-tax Officer shall record a finding as to whether there has been a total or partial partition of the joint family property, and, if there has been such a partition, the date on which it has taken place. \n\n (4) Where a finding of total or partial partition has been recorded by the Income-tax Officer under this section, and the partition took place during the previous year,-- \n\n (a) the total income of the joint family in respect of the period up to the date of partition shall be assessed as if no partition had taken place; and \n \n\n (b) each member or group of members shall, in addition to any tax for which he or it may be separately liable and notwithstanding anything contained in Clause (2) of Section 10, be jointly and severally liable for the tax on the income so assessed. \n\n (5) Where a finding of total or partial partition has been recorded by the Income-tax Officer under this section, and the partition took place after the expiry of the previous year, the total income of the previous year of the joint family shall be assessed as if no partition had taken place; and the provisions of Clause (b) of Sub-section (4) shall, so far as may be, apply to the case. \n\n (6). Notwithstanding anything contained in this section if the Income-tax Officer finds after completion of the assessment of a Hindu undivided family that the family has already effected a partition, whether total or partial, the Income-tax Officer shall proceed to recover the tax from every person who was a member of the family before the partition, and every such person shall be jointly and severally liable for the tax on the income so assessed. \n\n (7) For the purposes of this section, the several liability of any member or group of members thereunder shall be computed according to the portion of the joint family property allotted to him or it at the partition, whether total or partial. \n\n (8) The provisions of this section shall, so far as may be, apply in relation to the levy and collection of any penalty, interest, fine or other sum in respect of any period up to the date of the partition, whether total or partial, of a Hindu undivided family as they apply in relation to the levy and collection of tax in respect of any such period.\" \n\n4. This section is a machinery section and not a charging section and it has been so held in numerous decisions. It is not necessary for me to refer to\n\nthe same. This section corresponds to Section 25A of the Indian Income-tax Act, 1922, with certain amount of variation. It is also not material for me to note the variation, except the variations in Sub-section (6) of Section 171, which is a new introduction. As mentioned hereinbefore, under Section 171(2), in case of an assessment made under Section 148 of the Income-tax Act, 1961, the provisions of Section 139 are attracted and it would be an assessment, therefore, made under Section 143 or Section 144 of the Income-tax Act, 1961. Reference may be made to the decision in the case of Lakshminarain Bhadani v. Commissioner of Income-tax, [1951] 20 I.T.R. 59 (S.C.). There the Supreme Court was concerned with the case of reassessment proceedings under Section 34 of the Indian Income-tax Act, 1922, read with Section 25A of the said Act, There Kania C.J. observed as follows at page 596 of the report:\n \" It does not appear necessary, when proceedings are initiated under Section 34 read with Section 22 of the Income-tax Act, to issue notice to every member of the family. The position is as if the Income-tax Officer was proceeding to assess the income of the Hindu undivided family as in 1939-40. In our opinion, therefore, that contention must be rejected. \" \n\n5. The Supreme Court further held that on construction of Section 25A(1) it must be held that the Income-tax Officer had to make an assessment of the total income as if no partition had taken place. The Supreme Court further held that in a re-opening proceeding under Section 34 it was not necessary to serve notice to every member of a Hindu undivided family. It has to be however observed that in the case before the Supreme Court the Hindu undivided family that was sought to be assessed was in fact assessed to tax under the Act prior to the said relevant assessment year. In the case oi Commissioner of Income-tax v. K.K.M.N. Swaminathan Chettier, [1947] 15 I.T.R, 430 (Mad.) the Madras High Court also had the occasion to consider the question. Patanjali Sastri J., as his Lordship then was, held that the concluding words \" ' the provisions of this Act shall, so far as may be, apply accordingly as if the notice were a notice issued under that sub-section' in Section 34(1) of the Indian Income-tax Act attracted the provisions of Section 25A to assessments made under Section 34. Consequently if several years after a joint Hindu family had come to an end, any portion of its income was found to have escaped assessment and such income was sought to be assessed under the special provisions of Section 34, the fiction of continued existence of the family imported by Section 25A was available to the income tax authorities in making such supplementary assessment. \"\n\n6. In the case before the Madras High Court also the said Hindu family\nwas assessed to tax prior to the relevant assessment year in question.\nIt has to be noted that Sub-section (2) of Section 171 deals with the cases of assessments under Section 143 or Section 144 when it is claimed by any member of a Hindu family \" assessed as undivided \". Therefore, in order to attract the provisions of Sub-section (2) of Section 171, it is necessary for a Hindu undivided family to have been assessed under the Act prior thereto. Sub-section (3) of Section 171 deals with the enquiry mentioned in subsection (2). Sub-section (4) also deals with similar enquiry and subsection (5) also deals with the said enquiry. Sub-section (6) of Section 171 provides: \n \"Notwithstanding anything contained in this section, if the Income-tax Officer finds after completion of the assessment of a Hindu undivided family that the family has already effected a partition, whether total or partial, the Income-tax Officer shall proceed to recover the tax from every person who was a member of the family before the partition and every such person shall be jointly and severally liable for the tax on the income so assessed. \" \n\n7. In this case, as mentioned hereinbefore, no assessment has been made. In this case also, this Hindu undivided family had never been assessed before. Sub-section (7) and Sub-section (8) of Section 171 deal with the collection and imposition of liability of the members assessed. Therefore, in order to attract the machinery or the method provided by Section 171, it has to be a family which prior to the relevant claim for partition was assessed to tax. In this connection reference may also be made to Sub-section (4) of Section 170 which is in the following terms: \n \" (4) Where any business or profession carried on by a Hindu undivided family is succeeded to, and simultaneously with the succession or after the succession there has been a partition of the joint family property between the members or groups of members, the tax due in respect of the income of the business or profession succeeded to up to the date of succession, shall be assessed and recovered in the manner provided in Section 171, but without prejudice to the provisions of this section. \" \n\n8. In the facts of the instant case the provisions of Sub-section (4) of Section 170 cannot also be applied. \n\n9. In the case of Kalwa Devadattam v. Union of India, ; [1954] 3 S.C.R. 191 (S.C.) the Supreme Court had occasion to consider Section 34 read with Section 25A of the Indian Income-tax Act, 1922. There the Supreme Court held that the liability of the undivided family arose not later than the close of each accounting year relevant to the assessment to be made on the Hindu undivided family after disruption under Section 25A. There also the family had been assessed to tax before. In the case of Roshan Di Hatti v. Commissioner of Income-tax, [1968] 60 I.T.R. 177 (S.C) the Supreme Court had the occasion to construe the expression \" hitherto assessed as undivided \" in Section 25A of the Indian Income-tax Act, 1922.\n\nThe Supreme Court did not express any opinion as it was a case of an appeal from the High Court refusing to direct the Tribunal to refer a question. The Supreme Court, however, observed that when the claim made was that the joint status of the Hindu undivided family had dissolved before any order of assessment was made by the Income-tax Officer, the decision of the Supre me Court in the case of Kalwa Devadattam would have no application. The Supreme Court in that case was not called upon to interpret the expression \"hitherto assessed as undivided family in Sub-sections(i)and (3) real with Section 25A of the Indian Income-tax Act, 1922\" and the Supreme Court further observed that the Supreme Court had not laid down that a family not previously assessed to tax might be assessed after partition in the status of the family until an order under Section 25A(1) was passed by the Income-tax Officer. In the context of the position, therefore, that apart from Section 171 of the Income-tax Act, 1961, and perhaps to a certain extent, Sub-section (4) of Section 170 of the Income-tax Act, 1961, there is no machinery to assess a Hindu undivided family which had disrupted and the said machinery provides only in the case of \"families hitherto assessed as undivided \", it is difficult to find any machinery to assess a Hindu undivided family which had never been assessed before, after it had disrupted. A Hindu undivided family is a taxable entity and is a juristic person. It can only be proceeded against in the manner provided in the Act or under the general principles of the Hindu law after the disruption of the family. The general law does not provide for any machinery to determine the liability of the individual members of the undivided family before disruption. The Income-tax Act, 1961, and the Indian Income-tax Act of 1922 do not also provide that machinery. The position in my opinion would become clear if reference is made to some other sections. Under Section 2(31), the definition of the person includes a Hindu undivided family. Section 282 provides for service of notice in the case of proceedings against the Hindu undivided family. It has been stated that in the case of a Hindu undivided family notice may be forwarded to any member of the arm or the manager or an adult member of the family. Except to the limited extent of the machinery provided under Section 171 after the disruption of the family, it cannot be said that any person is a member of that family nor can any person be described as manager of the Hindu undivided family. In the case of firms or association of persons the Income-tax Act has made ample provisions in Sections 170, 177 and 187 and Section 188 of the Act. Unfortunately, the machinery provisions of Section 171 and the corresponding provisions in Section 25A are limited in scope to tax only the Hindu undivided family, which has been \"hitherto assessed\". Undoubtedly, after 1958, this Hindu undivided family had \ndisrupted and in view of the fact that proceedings were taken in 1964, it must be held, therefore, that the proceedings were irregular and without jurisdiction. The notice under Section 148 on the undivided Hindu family must, therefore, be quashed.\n\n10. The next contention of counsel for the petitioner was that there was no proper service of notice under Section 148 of the Income-tax Act, 1961. In paragraph 4 of the petition, it has been stated that notice under Section 34 of the Indian Income-tax Act, 1922, had been served by affixation but the petitioner did not receive such notice. In the affidavit on behalf of the Revenue, filed by one Sudhanya Kumar Bhakta, affirmed on 21st April, 1970, it was stated in paragraph 3 that the said notice was served on the petitioner by affixation on 31st March, 1954. Counsel for the Revenue placed before me the report of service in respect of the said notice. The question is, has there been service in compliance with provision of the law ? Service of notice under Section 148 of the Income-tax Act is a condition precedent for re-opening, Shri Promode Ch. Paul, notice-server of the income-tax office, went to serve notice on Smt. Sarashi Bala Sirkar on 23rd March, 1964, between the hours 1-30 p.m. but he could not serve the notice. The process-server has used the language \"he\" in relation to Smt. Sirkar. I will not make much of the transformation of the gender of Smt. Sarashi Bala Sirkar. But for the assessment year 1958-59 the process-server stated that he made attempts to find out Smt. Sarashi Bala Sirkar on 30th March, 1966, but could not find her and as such the notice was affixed. Smt. Sirkar had died prior thereto. Unfortunately for the department, the department has not been given the power to make a dead person alive to receive a notice of the department. Leaving aside this aspect of the matter, the question is, was there any reasonable attempt to serve the notice ? Under Section 282 of the Income-tax Act service has to be in the manntr as provided in the Code of Civil Procedure. Under the Code, the service can be made by affixation but either after reasonable attempts had been made to find the assessee bat could not be found or after the assessee had refused to accept service. What is reasonable attempt must of course be determined on the facts and circumstances of each case. Counsel for the petitioner drew my attention to the decision in the case of Commissioner of Income-tax v. Thayaballi Mulla Jeevaji Kapasi, where the Supreme Court observed that the service of notice prescribed by Section 34 of the Indian Income-tax Act, 1922, for the purpose of commencing proceedings in reassessment was not a mere procedural requirement ; it was a condition precedent to the initiation of proceedings for assessment under Section 34. If no notice was issued or if the notice issued was*shown to be invalid, then the proceedings taken by the Income-tax Officer would\n\n\nbe illegal or void. The Supreme Court in that case affirmed the principles laid\ndown by the Division Bench judgment of this court in the case of Gopiram\nAgarwalla v. First Addl. Income-tax Officer, [1959] 37 I.T.R. 493 (Cal.). There the Supreme Court\nobserved that the mere fact that the serving officer did not find the assessee\nto be served with the notice at his address was not sufficient to establish\nthat he could not be found. It must be shown not only that the serving\nofficer went to that place at a reasonable time when the assessee was\nexpected to be present but also that if he was not found proper and reason\nable attempts had been made to find him either at that address or\nelsewhere. If after such reasonable attempts, if any, made, the position\nstill was that the party was not found, then and then only could it be said\nthat he could not be found. The question is, therefore, from the service\nreturns even if these are accepted to be correct can it be said that reason\nable attempts had been made to find the assessee. The process-server in\nhis statement states that he went to serve between a particular period; but\nhe mentions one period only. He further stated that having failed in his\nattempt to serve the notice he served the notice by affixation. He does\nnot state how he made his attempts and if there was any prospect to find\nout the person in some other place or on some other date. In that light\nit must be held that no reasonable attempts had been made to serve the\nassessee. Counsellor the Revenue contended that whether the assessee had\nreasonable opportunity or not was a question of fact better suited to be\ndecided in the income-tax proceeding itself. He drew my attention to the\ndecision of the Supreme Court in the case of Champalal Binani v. Commissioner of Income-tax, . There the Supreme Court had occasion to consider\nwhether reasonable opportunity had been given to the assessee to make\nrepresentation against an order under Section 33B of the Indian Income-tax\nAct, 1922. The Supreme Court observed that the notice was affixed at\ntwo places of which the addresses were furnished by the assessee in his\nreturns, and it was not suggested that the assessee was not carrying on his\nbusiness at those two places. It was held that there was a proper service\nof notice. The Supreme Court further observed that if the assessee had\nany grievance about the sufficiency of the opportunity given to him to\nmake his representations, his obvious remedy was to appeal against the\norder under Section 33B of the 1922 Act. The service of the notice under Section 33B of 1922 Act is not mandatory. What is mandatory is that the\nassessee should be given reasonable opportunity. How that reasonable\nopportunity should be afforded to the assessee would depend upon the facts\nand circumstances of each case and as to whether reasonable opportunity\nhas been granted or not to a particular assessee in a particular case the\nSupreme Court observed that the Income-tax Act provided the machinery,\n \n\nresort to which must be made in the first instance. Here, the service of the notice under Section 148 is mandatory and is a condition precedent to the initiation of the proceeding. Here also if there was any dispute about the statement made by Promode Pal, the process-server, it might have been urged that the writ jurisdiction was not the proper forum to: agitate the dispute. But accepting the statements of the said process-server it is manifest that no reasonable attempts had been made to find out the assessee. Upon that finding it cannot be said that there was any disputed question of fact to be gone into. In the premises, in view of the peculiar nature of this case, it must be held that there was no proper service of the notice. There is a ring of similarity with the method of service of notice for 1955-56, 1956-57, 1957-58 and 1958-59. For these two subsequent years notices were alleged to have been served in March, 1966. On those dates again Smt. Surashi Bala Sirkar was dead. This also would indicate what kind of attempt, if any, which is very doubtful the process-server made to find out Smt. Surashi Bala Sirkar because he mentions nothing about the same. Counsel for the revenue also drew my attention to the case of Lilooah Steel & Wire Co. Ltd. v. Income-tax Officer, \"B\" Ward. Dist, II(I), Calcutta, where I held that on the question of service if there were disputed questions of facts the proper remedy for the assessee was to take proceedings under the Income-tax Act. In view of the facts of this case I do not think it necessary to discuss the aforesaid decision in greater detail.\n\n11. In the view I have taken this application must succeed and the notices must be quashed. Notice under Section 148 of the Income-tax Act to the disrupted Hindu undivided family was without jurisdiction and it was not properly served. The said notice for the assessment year 1955-56 is hereby quashed and consequently the notice under Section 142(1) of the Income-tax Act, 1961, is also hereby quashed and set aside. The rule is made absolute to the extent indicated above. The respondents are restrained from giving any further effect to the said notices. Let writs in the nature of mandamus and certiorari issue accordingly. There will be no order as to costs. \n\n12. There will be a stay of operation of this order for three weeks after the ensuing long vacation and during the period of stay the interim order will continue. If pursuant to the liberty granted by this court assessment has been made in pursuance of the impugned notices the said assessment order is also set aside and quashed and the respondents are restrained from giving effect to the same." }, { "title": "Income-Tax Officer, \"A\" Ward And Ors. vs Eastern Coal Co. Ltd. (In Liquidation) on 4 December, 1973", "url": "https://indiankanoon.org//doc/1986114/", "text": "Income-Tax Officer, \"A\" Ward And Ors. vs Eastern Coal Co. Ltd. (In Liquidation) on 4 December, 1973\nEquivalent citations: [1975]101ITR477(CAL)\nAuthor: Sabyasachi Mukharji\nBench: Sabyasachi Mukharji\nJUDGMENT\n\n \n\nSabyasachi Mukharji, J.\n \n\n1. In this appeal the question involved is the validity of the notice dated the 7th December, 1965, issued under Section 148 of the Income-tax Act, 1961, for the assessment year 1958-59. It appears that Eastern Coal Company sold its colliery to Bhowrah Kankanee Colleries Ltd., by an indenture dated the 28th of September, 1957. This sale was made effective on and from the 1st of January, 1955. The consideration for the sale was Rs. 62 lakhs with an abatement of Rs. 5 lakhs on the ground of retrenchment compensation. On the 26th of June, 1958, Eastern Coal Company went into voluntary liquidation. On the 29th of December, 1960, the assessment of the Eastern Coal Company for the assessment year 1956-57, accounting year being 1st of October, 1954, to 30th of September, 1955, was completed. The assessee offered for taxation the said sum of Rs. 62 lakhs for the said assessment year and was accordingly taxed under Section 10(2)(vii) of the Indian Income-tax Act, 1922, for a sum of Rs. 2,21,057. The difference between the written down value and the actual sale consideration was the figure which was subjected to tax on this account. It is stated that the assessment was made on the basis of the documents and evidence furnished by the assessee. Thereafter, on the 28th of February, 1961, the assessment for the assessment year 1958-59 was completed on the basis of the return filed by the assessee. The assessee claimed that its business and its collieries had been sold with effect from the 1st January, 1955. The assessee also produced certain evidence in support of the said claim and was taxed only on interest on security and dividend income. The assessee's claim for expenses under the head \"Loss on working\" was disallowed on the ground that in the relevant year the assessee was not carrying on any business. On the 21st of July, 1965, the assessee was allowed to take a supplementary ground before the Income-tax Appellate Tribunal in its appeal for the assessment year 1956-57, contending that the profit which was the subject-matter of taxation under Section 10(2)(vii) of the Indian Income-tax Act, 1922, for the assessment year 1956-57 was not liable to by taxed in the said assessment year. The Tribunal came to the conclusion following the decision of the Supreme Court in the case of Commissioner of Income-tax v. Bhurangya Coal Co., that the sale was concluded on the 28th of September, 1957, when the deed of conveyance was registered. The Tribunal accordingly held that the profits under Section 10(2)(vii) were, therefore, liable to be included in the assessment of the assessee for the assessment year 1958-59 and not in the assessment year 1956-57 under appeal. It appears that thereafter on being moved under Section 35 of the Indian Income-tax Act, 1922, the Tribunal rectified the order by deleting the words \"liable to be included in the total income of the appellant in the assessment year 1958-59\" in view of the decision of the Supreme Court in the case of Income-tax Officer, \"A\" Ward, Sitapur v. Murlidhar Bhagwan Das, . On the 7th of December, 1965, the Income-tax Officer issued a notice under Section 148 of the Income-tax Act, 1961, in respect of the assessment year 1958-59 and on the 4th February, 1966, this rule was obtained under Article 226 of the Constitution challenging the validity of the notice. The rule ultimately came up for hearing before K. L. Roy J. and by a judgment delivered and an order passed on the 6th of October, 1969 the rule nisi was made absolute and the notice under Section 148 was quashed. This appeal has been preferred from the said judgment.\n\n2. The first ground of challenge to the said notice is that all primary facts had been disclosed. We directed the income-tax department to produce before us the recorded reasons for the reopening of the said assessment. The said reasons were produced; the reasons were shown to counsel for the assessee. The reasons are as follows :\n\n\"In this case the Tribunal have deleted the profits under Section 10(2)(vii) amounting to Rs. 2,21,057 in respect of immovable properties from the assessment year 1956-57, on the ground that under the second proviso to Section 10(2)(vii) such profits are includible in the total income of the previous year in which the sale took place. In the instant case the sale of immovable properties was concluded on 28-9-1957 when the conveyance was executed and registered. Therefore, the profits under Section 10(2)(vii) in respect of the immovable properties are liable to be included in the total income of the assessee in the assessment year 1958-59 and not in the assessment year 1956-57.\n\nAt the time of the assessment year 1958-59, the assessee had failed to disclose fully and truly all material facts necessary for his assessment for that year. As each assessment is a separate and distinct entity, disclosure of the fact of sale in connection with the assessment year 1956-57 is not disclosure for the assessment year 1958-59. The assessee did not, in fact, offer the income arising from sale of property in respect of the assessment year 1958-59 nor did he even specifically disclose the fact of sale. In such circumstances, therefore, this income of Rs. 2,21,057 which has escaped assessment requires to be assessed. Hence, the action under Section 148(a) is proposed.\" \n\n3. As a matter of fact the substance of these reasons has been stated in the affidavit-in-opposition filed in answer to the rule nisi. It appears that the Income-tax Officer has proceeded on the basis of failure and omission on the part of the assessee to disclose fully and truly all primary facts and as a result of which, according to the Income-tax Officer, the income of the assessee for the assessment year 1958-59 has escaped assessment. Therefore, it appears that the Income-tax Officer was proposing action under Clause (a) of Section 147 of the Income-tax Act, 1961. The learned trial judge has come to the conclusion that Clause (a) of Section 147 of the Income-tax Act, 1961, cannot be applied in this case, because, according to the learned judge, all primary facts had been disclosed and were in possession of the department at the time of the original assessment for the assessment year 1958-59. We are in agreement with the learned judge on this aspect of the matter. It appears to us that the primary facts in connection with this transaction are the sale, the consideration, the date of conveyance and the date of registration. All these facts were disclosed to the department and/or were otherwise in the possession or knowledge of the department because of the disclosure or otherwise at the time of the original assessment for the assessment year 1958-59. It has to be borne in mind that assessment for the year 1956-57 had been completed already at the time of the original assessment for the year 1958-59. There is no obligation on the assessee to disclose the correct legal inference in respect of a particular transaction. The principles upon which Clause (a) of Section 147 of the Income-tax Act, 1961, or Section 34(1)(a) of the Income-tax Act, 1922, can be invoked are well-settled by the provisions of these sections as well as by the decisions of the courts. In view of the principles which are well-established we are of the opinion that in this case there was no failure on the part of the assessee to disclose fully or truly all primary facts, and in any event the income which has escaped assessment was not due to failure or omission on the part of the assessee to disclose fully and truly all the material facts because all relevant and material facts were in the possession of the department at the time of the original assessment of 1958-59, So, escapement, if any, has happened not as a result of the failure of the assessee but because both the assessee as well as the department drew wrong inference from the facts disclosed. In such a case Clause (a) of Section 147 of the Income-tax Act, 1961, cannot be invoked. Reliance may be placed on the decisions of the Supreme Court in the case of Calcutta Discount Co. Ltd. v. Income-tax Officer, and Kantamani Venkata Narayana & Sons v. First Additional Income-tax Officer, and the decision of this court in the case of Commissioner of Income-tax v. Kallu Babu Lalchand, .\n\n4. Counsel for the revenue, then, contended that in view of the provisions of Section 279(2)(d)(ii) read with Section 150(2) and Section 153, Explanation 2 of the Income-tax Act, 1961, the action taken in this case could be justified on the ground of Clause (b) of Section 147 of the Income-tax Act, 1961. To this the first submission of the assessee is that Clause (b) of Section 147 cannot be invoked in this case because the Income-tax Officer had purported to take action under Clause (a) of Section 147 of the Income-tax Act, 1961. As it is not necessary, the notice does not mention under which clause the action was taken but counsel for the assessee can justifiably claim that the grounds indicated in the reasons recorded as well as in the affidavit-in-opposition establish that the Income-tax Officer was proceeding on the basis of Clause (a) of Section 147 of the Income-tax Act, 1961. The first question in this case is whether where the Income-tax Officer has proceeded under Clause (a) of Section 147 if it transpires later that such a course was not justified but action could have been taken under Clause (b) of Section 147 of the Act, can such action be upheld by court ? It has been held by the Supreme Court in the case of Johri Lal v. Commissioner of Income-tax, that where action has been taken under Section 34(1)(b) of the Income-tax Act, 1922, it was not possible for the court to transform such an action and treat the notice issued as one under Section 34(1)(a) of the Income-tax Act, 1922. It is true that a notice issued on the ground of Clause (b) of Section 147 of the Income-tax Act, 1961, cannot be later on treated as one issued under Clause (a) of Section 147 of the said Act. But that is because certain specific and special conditions are required to be complied with in cases under Clause (a) of Section 147 which normally and in ordinary course are not required to be complied with in respect of cases under Clause (b) of Section 147 of the Act. But a notice under Section 147 which has been proposed under Clause (a) can be treated as one, if the material conditions are fulfilled, under Clause (b) of Section 147 of the Income-tax Act, 1961. It was so held by this court in the Income-tax Reference No. 89 of 1968, Mriganka Mohan Sur v. Commissioner of Income-tax, [1974] 45 ITR 503 (Cal). In this case it is apparent that the information that the income-tax for the assessment year 1958-59 has escaped assessment came as a result of the appellate order of the Tribunal which was passed subsequent to the original assessment for the assessment year 1958-59. Therefore, there was information coming into the possession of the department that income of the assessee has escaped assessment which came as a result of the decision of the Tribunal. The Income-tax Officer, however, thought that the assessee had failed to disclose fully and truly all material facts but that position was not correct. The assessee had not failed to disclose fully and trully all material facts and in any event the income did not escape as a result of such alleged failure on the part of the assessee, but there was escapement and that information came subsequent to the original assessment and there was information to that effect. If these are the conditions fulfilled and if reasons have been recorded, then in such a case, there is no impediment in treating a notice issued under Clause (a) of Section 147 of the Income-tax Act, 1961, as one under Clause (b) of the Income-tax Act, 1961.\n\n5. The next question is whether this action can be held to be valid in\nview of the provisions of Section 297(2)(d)(ii) of the Income-tax Act, 1961,\nread with Section 150(2) and Section 153, Explanation 2, of the said Act,\nCounsel for the assessee contended that Section 297(2)(d)(ii) of the Income-\ntax Act, 1961, did not apply because, firstly, it was submitted that it was\nin conflict with the provisions of Section 297(2)(a) of the Income tax Act,\n1961, and it was submitted that assessment under that Act included\nreassessment. Therefore, it was urged that inasmuch as a return for the\noriginal assessment had been filed before the coming into operation of the\nIncome-tax Act, 1961, Clause (a) of Sub-section (2) of Section 297 applied to this case because reassessment was a part and continuation of the process of assessment and not Clause (d), Sub-clause (ii) of Section 297(2) of the Act. It is true that by definition \"assessment\" could include reassessment, but Clause (a) of Sub-section (2) of Section 297 deals with the general situation, namely, where a return has been filed but no assessment has been made as yet before the commencement of the 1961 Act. And Clause (d) of Section 297 deals with two specific situations, namely, under Clause (i) where on the belief of escapement of income a notice under Section 34 of the 1922 Act though given, yet action pursuant thereto remains incomplete, and under Clause (ii) where income chargeable to tax has escaped assessment but no notice under Section 34 of the 1922 Act had yet been served when the 1961 Act came into operation. The last situation contemplated by Sub-clause (ii) of Clause (d) of Sub-section (2) of Section 297 of the Act is the present position in the instant case. In such a situation the harmonious way of construction is to consider that a special provision should be applicable to a special case and the special case mentioned in the later part of the same Act is an exception to the earlier general provision of the same Act. Therefore, in view of the fact that in this case no notice had been issued under Section 34 of the Indian Income-tax Act, 1922, prior to the coming into operation of the 1961 Act, Sub-clause (ii) of Clause (d) of Sub-section (2) of Section 297 would apply in our opinion.\n\n6. It was then contended that Section 297(2)(d) was ultra vires because it discriminated between the persons who had been served with notices under Section 34 of the Income-tax Act, 1961, and those who had not been served with such notices. It was further urged that provisions of the 1961 Act were more onerous than the provisions of the 1922 Act. It has been held by this court that those whose income had escaped assessment and in respect of whom notices had been issued prior to the coming into operation of this Act and those whose income had escaped assessment and no notices had been issued in respect thereof are two different and distinct classes to be dealt with by two different methods of the procedure, and the difference in the procedure has a rational connection with the differentiation made, and as such does not amount to discrimination. Reference may be placed on the decision of this court in the case of M. M. Ispahani Ltd. v. Commissioner of Income-tax, [1970] 75 ITR 479 (Cal). It has been held in the aforesaid decision that it could not be said that the provisions of the one Act were more onerous than the other because these two Acts made different provisions for two contingencies. In the premises, this contention of the assessee cannot be accepted.\n\n7. The next question that requires consideration is whether under Section 150 of the Income-tax Act, 1961, this notice can be treated as valid. Counsel for the revenue contended that in view of Sub-section (1) of Section 150 the period of limitation prescribed under Section 149 would not be a bar for taking action in this case. It was submitted that it was to give effect to the finding or direction contained in the order of the Appellate Tribunal that the present action was taken; the first question that requires consideration is whether it was to give effect to any finding or direction. As mentioned hereinbefore the Tribunal following the decision of the Supreme Court given under the provisions of the 1922 Act in the case of Income-tax Officer, \"A\" Ward, Sitapur v. Murlidhar Bhagwan Das subsequently deleted the direction contained in the appellate order as indeed specific direction could not be given by the Tribunal in respect of another year when hearing an appeal in respect of one year, but there was a finding in the year 1956-57 that the income in question though liable to be taxable was not taxable in the year 1956-57. The question is what is the effect of that finding. As a result of that finding it became apparent that this income escaped assessment. Explanation 2 to Sub-section (3) of Section 153 provides that where by an order referred to in Clause (ii) of Sub-section (3) any income is excluded from the total income of the assessee for an assessment year, then assessment of such income for another assessment year shall, for the purposes of Section 150 and this section, namely, section 153, be deemed to be one made in consequence of or to give effect to any finding or direction contained in the said order. It appears that in order to avoid the mischief spoken of by the Supreme Court in the aforesaid decision of Income-tax Officer, \"A\" Ward, Sitapur v. Murlidhar Bhagwan Das, this Act specifically made a direction in one year or a finding made in one year to be valid for taking action in respect of a subsequent year or another year. The first contention of counsel for the assessee, however, is that Sub-section (1) of Section 152 speaks of a finding or a direction contained in an order passed by an authority in a proceeding under \"this Act\" by way of appeal, reference or revision, namely, the Income-tax Act, 1961. It was contended that the decision of the Income-tax Appellate Tribunal for the assessment year 1956-57 was not given under \"this Act\", namely, 1961 Act, but was given under the provisions of the Indian Income-tax Act, 1922. We have referred to the provisions of section 297(2)(d)(ii) and we have held that under the said provisions the present Act would apply to the present proceedings. But the question is to what extent this 1961 Act is to be applied. It appears to us that when the section speaks \"that all the provisions of this Act shall apply accordingly\" in Sub-clause (ii) of Clause (d) of Sub-section (2) of Section 297 of the Income-tax Act, 1961, the provisions must be read mutatis mutandis in applying the provisions, otherwise these will lead to incongruous results. It has been so held by the Supreme Court in the case Third Income-tax Officer, Mangalore v. M. Damodar Bhat, Jain Brothers v. Union of India, Commissioner of Income-tax v. Singh Engineering Works (P) Ltd., and Kalawati Devi Harlalka v. Commissioner of Income-tax, . Our attention, however, was drawn to the decision of the Supreme Court in the case of R.B. Seth Gujarmal Modi v. Commissioner of Income-tax, . There a notice under Section 34(1)(b) of the Indian Income-tax Act, 1922, was issued on November 7, 1958, to reopen the assessment of the deceased assessee for assessment year 1957-58. It was served only on the appellant No. 2. On June 15, 1963, the Appellate Assistant Commissioner set aside the assessment made pursuant to that notice on the ground that it was necessary to issue notice to all the legal representatives of the deceased assessee. In the meantime, the Income-tax Act, 1961, came into force on April 1, 1962. Thereafter, on January 7, 1964, the Income-tax Officer issued a notice under Section 148 of the Act of 1961 to the appellants. It was held by the Supreme Court that since the proceedings under Section 34(1)(b) of the 1922 Act were pending since April 1, 1962, it was not open to the Income-tax Officer to issue notice under Section 148 of the Income-tax Act, 1961, and since the Appellate Assistant Commissioner's order was not passed under the 1961 Act, the department could not take the support from Section 150(1) of the 1961 Act. It appears as is evident from the facts stated before that notice was issued under Section 148 of the Income-tax Act, 1961, on January 7, 1964, when a notice under Section 34(1)(b) of the Indian Income-tax Act, 1922, was pending. Therefore, the action taken by the notice under Section 148 was really a continuation of the action taken under Section 34(1)(b) of the Indian Income-tax Act, 1922. In construing the validity of such action the provision of Section 297(2)(d)(ii) cannot be applied and, therefore, as it was really a continuation of the proceedings under the old Income-tax Act no question can arise of invoking the provision of Section 150(1) of the Income-tax Act, 1961. In those circumstances, the Supreme Court observed that since the Appellate Assistant Commissioner's order was not passed under the 1961 Act, the department could not take any support from Section 150(1) of the 1961 Act. Therefore, we are of the opinion that the provision of Section 150(1) of the Income-tax Act, 1961, would apply in respect of a notice issued under the 1961 Act even though the direction or the finding out of which this notice was issued was passed under the provisions of the Act of 1922.\n\n8. The next question that was urged in this case was that even if Section 150(1) of the 1971 Act applied the notice had become barred. It was contended that a notice would become barred even under Section 150(1) if on the date of the appellate order the time for taking action for assessment for that year had become barred by the other provisions of the Act. The correct date in this connection would be the date when the order, which is the subject-matter of the appeal, was passed. If on that date the reassessment proceedings could have been validly taken then because of subsequent lapse of time the said reassessment proceedings do not become barred by time. In this case on the 29th of December 1960, the original order for assessment was passed and, therefore, on that date action could have been taken for reassessment for the assessment year 1958-59. That was the date when the order which was the subject-matter of appeal was passed. In that view of the matter, in our opinion, the provisions of Section 150(1) of the Income-tax Act, 1961, would apply on the facts of this case. It was lastly contended that Explanation 2 to Sub-section (3) of Section 153 could not be invoked in this case, firstly, because it dealt with a different section and, secondly, according to counsel for the assessee. Explanation 2 of that section did not come into play. Explanation 2 created a fiction by deeming an assessment to be made in consequence of an order or to give effect to a finding or direction which was not there. But there was no provision that the proceedings under the 1922 Act should be deemed to be proceedings under the new Act. But for this no fiction or deeming provision, in our opinion, is necessary because Section 297(2)(d)(ii) read properly with the provisions of the new Act would apply mutatis mutandis to the present case. Therefore, even though in respect of an order passed under the 1922 Act, action could be taken under the 1961 Act, the said provision would be applicable. Counsel for the assessee contended that this would result in double deeming which was not permitted. Reliance was placed on a decision of the Supreme Court in the case of Commissioner of Income-tax v. Elphinstone Spinning and Weaving Mills Co. Ltd., [1960] 40 ITR 153 (SC) and Amarchand N. Shroff's case, . On the other hand it has been clearly laid down by the Supreme Court that when a statute creates a fiction the situation in which the fiction can work should be postulated. Reliance may be placed on the decisions of the Supreme Court in the case of Commissioner of Income-tax v. Girdhardas and Co. Private Ltd., In the aforsaid view of the matter we are of opinion that the action in this case was valid and the notice cannot be challenged in this case.\n\n9. Our attention was drawn to several decisions, viz., Niranjan & Co. (P.) Ltd. v. Commissioner of Income-tax, Gopichand Sarjuprasad v. Union of India, S. B. Jain, Income-tax Officer v. Mahendra and Commissioner of Income-tax v. Rajinder Nath. But in the view we have taken it is not necessary for us to discuss the aforsaid decisions in detail.\n\n10. In the aforesaid view of the matter this appeal is allowed and the judgment and order of the learned trial judge are set aside and the rule nisi is discharged.\n\n11. There will be no order as to costs.\n\nSankar Prasad Mitra, C.J.\n\nI agree." }, { "title": "Commissioner Of Income Tax vs M/S H.P. State Co-Operative Bank Ltd on 19 April, 2017", "url": "https://indiankanoon.org//doc/62980446/", "text": "Commissioner Of Income Tax vs M/S H.P. State Co-Operative Bank Ltd on 19 April, 2017\nBench: Mansoor Ahmad Mir, Sandeep Sharma\n IN THE HIGH COURT OF HIMACHAL PRADESH AT SHIMLA\n\n ITA No. 14 of 2012\n Reserved on: April 6, 2017\n Decided on: April 19, 2017\n --------------------------------------------------------------------------------------------\n\n .\n Commissioner of Income Tax, Shimla ...Appellant\n\n\n\n\n\n Versus\n\n\n\n\n\n M/s H.P. State Co-operative Bank Ltd., Shimla ...Respondent\n --------------------------------------------------------------------------------------------\n Coram\n Hon'ble Mr. Justice Mansoor Ahmad Mir, Chief Justice\n Hon'ble Mr. Justice Sandeep Sharma, Judge\n\n\n\n\n\n Whether approved for reporting? Yes.\n --------------------------------------------------------------------------------------------\n For the appellant : Ms. Vandana Kuthiala, Advocate.\n\n For the respondent : Mr. Vishal Mohan and Mr. Sanjay Prashar,\n r Advocates.\n\n --------------------------------------------------------------------------------------------\n Per Sandeep Sharma, Judge\n\n This appeal under Section 260-A of the Income-Tax Act,\n\n\n 1961 has been filed thereby laying challenge to order dated\n\n 21.6.2011, passed by the Income Tax Appellate Tribunal\n\n\n\n\n Chandigarh Bench 'A', Chandigarh (in short, 'Tribunal'), in setting\n\n\n\n\n\n aside order of Commissioner Income Tax (Appeals).\n\n 2. Briefly stated the facts necessary for the adjudication of\n\n\n\n\n\n the present appeal are that the H.P. State Co-operative Bank Ltd.\n\n (hereafter, 'assessee') is a credit institution within the meaning of\n\n Section 2(5A) of the Interest-Tax Act, 1974 and as such it was\n\n under obligation to furnish the return of chargeable interest for the\n\n relevant year under Section 7(1) of the Interest-Tax Act, 1974,\n\n before 31.12.1992. Under sub-section (3) of Section 7, the assessee\n\n could furnish its return of chargeable interest before the expiry of\n\n\n\n\n ::: Downloaded on - 20/04/2017 23:58:00 :::HCHP\n 2\n\n\n one year from the end of the relevant assessment year or before the\n\n completion of the assessment, whichever is earlier. However, the\n\n fact remains that assessee failed to furnish return within stipulated\n\n\n\n\n .\n period as prescribed under Section 7 of the Act ibid. Assessing\n\n\n\n\n\n Officer issued notice under Section 10 of the Interest-Tax Act,\n\n 1974, upon the assessee on 12.9.1995. Assessee, in response to\n\n\n\n\n\n notice as referred above, filed return of interest tax on 19.2.1996\n\n declaring therein chargeable interest of `7,18,86,395/-. Assessing\n\n\n\n\n\n Officer passed assessment order under Section 8 (2) on 26.2.1998\n\n determining therein chargeable interest amounting to\n\n `15,21,18,010/- and raised tax demand of `93,89,057/-. Vide\n\n\n rectification order under Section 17, he further demanded\n\n `1,54,162. Perusal of Annexure P-3 placed on record by the\n\n appellant suggests that the Commissioner Income Tax, Shimla,\n\n\n\n vide order dated 1.3.2000 passed under Section 19 of the Interest-\n\n Tax Act, 1974, set aside aforesaid order of assessment having been\n\n\n\n\n passed by the Assessing Officer under Section 8 (2) of the Interest-\n\n Tax Act, 1974, holding same to be erroneous and prejudicial to the\n\n interests of revenue and, accordingly, directed him to make fresh\n\n\n\n\n\n assessment after affording opportunity of hearing to the assessee.\n\n 3. Being aggrieved and dissatisfied with the aforesaid\n\n order, Assessee preferred an appeal before Commissioner Income\n\n Tax (Appeals), Shimla: Panchkula, which came to be registered as\n\n Appeal No. IT/4/97-98/SML. However, the same was dismissed as\n\n infructuous, by the Commissioner Income Tax (Appeals), vide order\n\n dated 2.8.2000, on the ground that Commissioner Income Tax,\n\n\n\n\n ::: Downloaded on - 20/04/2017 23:58:00 :::HCHP\n 3\n\n\n Shimla has already set aside assessment directing the Assessing\n\n Officer to complete fresh assessment, points of objection as raised\n\n in the appeal, no longer survive. It further emerges from the record\n\n\n\n\n .\n that the assessee Bank did not contest the chargeable interest\n\n\n\n\n\n assessed by the Assessing Officer. Perusal of Annexure P-6\n\n suggests that during the pendency of the aforesaid assessment\n\n\n\n\n\n proceedings, proceedings under Section 13 of the Interest-Tax Act,\n\n 1974, were also initiated by the Department for levying penalty\n\n\n\n\n\n upon the assessee Bank and, accordingly, vide order dated\n\n 29.8.2002, penalty of `1,49,67,486/- i.e. penalty equal to three\n\n times the interest sought to be evaded, was imposed by the Dy.\n\n Commissioner of Income Tax, Circle Shimla.\n\n 4. Being aggrieved with the penalty having been imposed\n\n by the Assessing Officer under Section 13 of the Interest-Tax Act,\n\n\n\n 1974, assessee Bank preferred an appeal before Commissioner\n\n Income Tax (Appeals), Shimla. However, the fact remains that the\n\n\n\n\n learned Commissioner Income Tax (Appeals) upheld the penalty\n\n\n\n\n\n imposed by the authority concerned but held that the penalty of\n\n 300% is harsh upon the assessee, accordingly, modified penalty to\n\n\n\n\n\n 100% of tax evaded.\n\n 5. Being further aggrieved and dissatisfied with the\n\n aforesaid order passed by the learned Commissioner Income Tax\n\n (Appeals), both the parties filed appeals bearing Intt. Tax Apl. No.\n\n 3/Chandi/2003 (A.Y. 1992-93) and Intt. Tax Apl. No.\n\n 4/Chandi/2003 (A.Y. 1992-93), before the Tribunal below. Perusal\n\n of Annexure P-8, placed on record, suggests that both the appeals\n\n\n\n\n ::: Downloaded on - 20/04/2017 23:58:00 :::HCHP\n 4\n\n\n were heard together by the Tribunal and Tribunal, while allowing\n\n appeal of the assessee, held as under:\n\n \"When we compare the provisions of Section 13 of the\n Interest-Tax Act, 1974 and Explanation 3 to Section\n\n\n\n\n .\n 271(1)(c), it is observed that there is no such provision\n\n\n\n\n\n under the Interest-Tax Act, 1974 corresponding to\n Explanation 3 to Section 271(1)(c).\"\n\n 6. It is seen that there is no such provision under the\n\n\n\n\n\n Interest-Tax Act, 1974 corresponding to Explanation 3 to 271(1)(c)\n\n of the Income-Tax Act, 1961 and as such basis adopted for\n\n\n\n\n\n imposition of penalty by revenue authority is not in accordance\n\n with provisions of Interest-Tax Act, 1974 and, accordingly,\n\n cancelled the same.\n\n 7. Appellant being aggrieved and dissatisfied with the\n\n aforesaid order having been passed by the Tribunal, preferred an\n\n appeal under Section 260-A of the Income-Tax Act, 1961 before\n\n\n\n this Court, wherein following question of law was formulated:\n\n \"Whether absence of proviso in section 13 of the Interest tax\n\n\n\n\n Act, 1974 corresponding to explanation 3 to section 271(1)(c)\n of the Income-Tax Act, 1961, could render the case ineligible\n\n\n\n\n\n for penalty u/s 13 of the Interest tax Act even on the\n differential amount of tax sought to evaded i.e. the difference\n of tax sought to evaded on chargeable interest assessed by\n the A.O. and chargeable returned by the assessee?\"\n\n 8. This Court taking note of the fact that the Tribunal only\n\n took into consideration Section 271 (1)(c) while holding that there is\n\n no basis for imposition of penalty under Section 13, and ignored\n\n other grounds, which were taken into consideration by the\n\n Assessing Officer, remanded matter to the Assessing Officer to\n\n determine the question as to whether assessee was liable to pay\n\n penalty and if so, to what extent, strictly in consonance with the\n\n\n\n\n ::: Downloaded on - 20/04/2017 23:58:00 :::HCHP\n 5\n\n\n provisions of Section 13 of the Interest-Tax Act, 1974, totally being\n\n uninfluenced by the provisions of Section 271(1)(c) of the Income-\n\n Tax Act, 1961.\n\n .\n 9. Subsequent to passing of aforesaid order by this Court,\n\n\n\n\n\n Assessing Officer passed fresh penalty order (Annexure P-9 dated\n\n 28.5.2010) under Section 13 of the Interest-Tax Act, 1974, levying\n\n\n\n\n\n therein 100% penalty of the amount of `49,89,162, i.e. tax sought\n\n to be evaded.\n\n 10. Assessee being aggrieved with the aforesaid imposition\n\n of penalty vide order dated 28.5.2010, preferred an appeal before\n\n Commissioner Income Tax (Appeals), who vide order dated\n\n\n 30.11.2010 in Appeal No. IT/119/2010-11/Sml, dismissed the\n\n appeal of the assessee and as such assessee was compelled to\n\n prefer an appeal before the Tribunal below. Learned Tribunal\n\n\n\n below, while allowing appeal of the assessee held that penalty\n\n under Section 13 of the Interest-Tax Act, 1974 is/was leviable,\n\n\n\n\n where assessee had concealed its interest chargeable to tax or\n\n\n\n\n\n furnished inaccurate particulars of tax chargeable. Learned\n\n Tribunal below, taking note of the fact that interest became\n\n\n\n\n\n chargeable only pursuant to Board's Instructions No. 1923 dated\n\n 14.3.1995, that too for the period from October, 1991 to 31.3.1992\n\n and that the assessee had declared total interest levied by it in its\n\n profit and loss account, held that there was no merit in the levying\n\n of penalty under Interest-Tax Act, 1974 and accordingly set aside\n\n the order of Assessing Officer, levying penalty. In the aforesaid\n\n\n\n\n ::: Downloaded on - 20/04/2017 23:58:00 :::HCHP\n 6\n\n\n background, appellant has approached this Court, by way of\n\n instant appeal.\n\n 11. The appeal was admitted on following substantial\n\n\n\n\n .\n question of law, on 21.5.2012:\n\n \"i) Whether the finding of the Ld. ITAT to the effect that\n the assessee has neither concealed the particulars of interest\n nor furnished inaccurate particulars of interest is perverse\n\n\n\n\n\n even though the assessee had not disclosed or furnished\n such interest until escapement of the interest was detected\n by the department?\n ii) Whether on the facts and circumstances of the case the\n ITAT is correct in deleting penalty on the grounds that the\n\n\n\n\n\n interest become chargeable to tax only after Board's inst. No.\n 1923 dated 14.3.1995 and hence non disclosure of such\n interest in assessment years prior to this date could not be\n termed as concealment or furnishing inaccurate particulars,\n even though the assessee had filed his return after the date?\"\n\n 12. Ms. Vandana Kuthiala, learned counsel representing\n\n the appellant vehemently argued that impugned order dated\n\n 21.6.2011 (Annexure P-A) having been passed by the Tribunal\n\n\n\n below is not sustainable as the same is not based upon correct\n\n appreciation of evidence adduced on record by the respective\n\n\n\n\n parties as well as provisions of law applicable in the instant case.\n\n Ms. Kuthiala, strenuously argued that the Tribunal while holding\n\n that there is no merit in levying of penalty under Section 13 of the\n\n\n\n\n\n Interest-Tax Act, 1974, has failed to consider the fact that the\n\n interest on securities, interest on head office investment account\n\n and interest on loan to primary agriculture cooperative societies\n\n was chargeable interest under Interest-Tax Act, 1974. She further\n\n stated that Board's Instructions No. 1923 dated 14.3.1995 were\n\n clarificatory in nature and no benefit, if any, could be available\n\n pursuant to aforesaid instructions to the assessee before he filed\n\n\n\n\n ::: Downloaded on - 20/04/2017 23:58:00 :::HCHP\n 7\n\n\n return of interest tax, that too pursuant to the notice under Section\n\n 10 of the Interest-Tax Act, 1974. Learned counsel representing the\n\n appellant forcefully contended that the learned Tribunal below\n\n\n\n\n .\n failed to take note of the fact that return of chargeable interest was\n\n\n\n\n\n not filed voluntarily but was filed in response to notice under\n\n Section 10 of the Interest-Tax Act, 1974 and there was difference in\n\n\n\n\n\n the chargeable interest of the assessee and interest as assessed by\n\n the Assessing Officer. To substantiate her aforesaid arguments,\n\n\n\n\n\n learned counsel representing the appellant invited attention of this\n\n Court to assessment order (Annexure P-9) having been passed by\n\n the Assessing Officer under Section 13 of the Interest-Tax Act,\n\n\n 1974, to demonstrate that the assessee had concealed interest\n\n chargeable to tax and had furnished inaccurate particulars to the\n\n tune of `16,63,05,388/- and as such penalty was rightly imposed\n\n\n\n upon the assessee at the rate of 100% of the interest sought to be\n\n evaded.\n\n 13. Mr. Vishal Mohan, learned counsel representing the\n\n\n\n\n\n respondent, supported the impugned order passed by the learned\n\n Tribunal and stated that there is no illegality or infirmity in the\n\n\n\n\n\n same, as such, there is no scope of interference. While specifically\n\n referring to the questions of law referred to herein above, Mr.\n\n Mohan strenuously argued that the learned Tribunal below has\n\n returned specific findings of fact that assessee neither concealed\n\n particulars of interest nor furnished inaccurate particulars of\n\n interest, that too on the basis of record made available to it by the\n\n Department, during the proceedings of the appeal, as such, same\n\n\n\n\n ::: Downloaded on - 20/04/2017 23:58:00 :::HCHP\n 8\n\n\n can not be gone into by this Court especially in the present\n\n proceedings. Mr. Mohan, further contended that bare perusal of\n\n orders passed by Assessing Officer clearly suggests that penalty\n\n\n\n\n .\n has been levied on entire amount of interest assessed to tax as\n\n\n\n\n\n 16.63 Crore, ignoring the fact that advance tax amounting to\n\n `23,50,000/- was paid by the assessee, prior to initiation of\n\n\n\n\n\n aforesaid proceedings. While specifically inviting attention of this\n\n Court to the impugned order passed by the learned Tribunal below,\n\n\n\n\n\n Mr. Mohan, contended that it is undisputed before the authority\n\n concerned that since no return form was available, return was\n\n delayed but the fact remains that advance tax as referred to above,\n\n\n was paid by the assessee. Learned counsel representing the\n\n respondent further contended that bare perusal of order passed by\n\n the Assessing Officer clearly suggests that initially interest on\n\n\n\n securities totaling to `3.74 Crores was not subjected to tax but the\n\n same was included lateron pursuant to order passed under Section\n\n\n\n\n 19 of the Interest-Tax Act, 1974. Learned counsel representing the\n\n\n\n\n\n respondent strenuously argued that penalty, if any, under Section\n\n 13 of the Act could be levied against the assessee, had he concealed\n\n\n\n\n\n particulars of chargeable interest or furnished inaccurate\n\n particulars of such interest. Mr. Vishal Mohan, further contended\n\n that provisions of Section 271 (1)(c) of the Income Tax Act, 1961,\n\n could also not be made applicable in the case of assessee, which\n\n lays down presumption against the assessee, in case of non-filing of\n\n return within particular time. In this regard, he invited attention of\n\n this Court to para-10 of the impugned order, to demonstrate that\n\n\n\n\n ::: Downloaded on - 20/04/2017 23:58:00 :::HCHP\n 9\n\n\n provisions of Section 271(1)(c) of Income-Tax Act, 1961, which lay\n\n down presumption against assessee in non-filing of return within\n\n particular time, are not applicable to the interest tax proceedings.\n\n .\n While concluding his arguments, learned counsel representing the\n\n\n\n\n\n respondent contended that there is nothing on record suggestive of\n\n the fact that assessee concealed particulars of interest or furnished\n\n\n\n\n\n inaccurate particulars of interests, rather record clearly suggests\n\n that assessee had declared total interest received by it in its profit\n\n\n\n\n\n and loss account. Learned counsel representing the respondent\n\n further contended that assessee had furnished return of chargeable\n\n interest for the financial year 1991-92 relating to assessment year\n\n\n 1992-93 and had declared chargeable interest of `7.18 Crores. In\n\n the aforesaid background, he prayed for dismissal of the appeal.\n\n 14. We have heard the learned counsel representing the\n\n\n\n parties and gone through the record.\n\n 15. While exploring answer to the questions of law\n\n\n\n\n reproduced herein above, as well as submissions made by the\n\n\n\n\n\n learned counsel representing the parties, this Court had an\n\n occasion to peruse material adduced on record by the appellant-\n\n department as well as impugned order having been passed by the\n\n learned Tribunal below, perusal whereof certainly suggest that\n\n there is no dispute, if any, with regard to chargeable interest\n\n assessed by the Assessing Officer, which was determined by\n\n Assessing Officer on 5.2.2002 by way of revised assessment order\n\n (Annexure P-5), whereby assessee was held liable to pay chargeable\n\n interest at `16,63,05,388/- as against interest of `7,18,86,385/-.\n\n ::: Downloaded on - 20/04/2017 23:58:00 :::HCHP\n 10\n Dispute, if any, inter se parties is with regard to imposition of\n\n penalty under Section 13 of Interest-Tax Act, 1974, whereby,\n\n initially penalty of `1,49,67,486 i.e. three times of the interest tax\n\n\n\n\n .\n sought to be evaded, came to be imposed by the Assessing Officer,\n\n\n\n\n\n however, quantum of same was reduced to `49,89,162/- i.e. 100%\n\n of tax, sought to be evaded, by the Commissioner Income Tax\n\n\n\n\n\n (Appeals), vide order dated 20.8.2003.\n\n 16. This Court, while allowing ITA No. 33 of 2006, having\n\n\n\n\n\n been preferred by appellant department, has already held that\n\n Section 271 (1)(c) of the Income-Tax Act, 1961 can not be taken\n\n into consideration while imposing penalty under Section 13 of the\n\n\n Interest-Tax Act, 1974. This Court has further held that though\n\n Section 21 of the Interest-Tax Act, 1974 makes certain provisions\n\n of Income-Tax Act, 1961 applicable to proceedings under Interest-\n\n Tax Act, 1974 but Section 271 is not included therein, as such, this\n\n Court came to conclusion that provisions contained in Section\n\n\n\n\n 271(1)(c) were wrongly invoked by the Assessing Officer and\n\n\n\n\n\n Commissioner Income Tax while imposing penalty under Section 13\n\n of the Interest-Tax Act, 1974 against respondent Bank. However,\n\n\n\n\n\n the fact remains that this Court in the aforesaid appeal, while\n\n holding that provisions contained in Section 271 (1)(c) of Income-\n\n Tax Act, 1961 are not applicable to proceedings under Interest-Tax\n\n Act, 1974, categorically held that Section 13 of the Act provides for\n\n imposition of penalty in case assessee conceals particulars of\n\n chargeable interests or furnishes inaccurate particulars of such\n\n interest. After careful examination of judgment passed by this\n\n\n\n\n ::: Downloaded on - 20/04/2017 23:58:00 :::HCHP\n 11\n\n\n Court in ITA No. 33 of 2006, dated 28.10.2009, there can not be\n\n any dispute that penalty, if any, under Section 13 of the Interest-\n\n Tax Act, 1974 could be imposed against assessee in case Assessing\n\n\n\n\n .\n Officer comes to definite conclusion that assessee concealed\n\n\n\n\n\n particulars of chargeable interest or furnished inaccurate\n\n particulars of such interest.\n\n 17. Careful perusal of impugned order having been passed\n\n clearly suggests that learned Tribunal below had an occasion to go\n\n\n\n\n\n through the complete record pertaining to the proceedings of the\n\n imposition of penalty under Section 13 of the Interest-Tax Act,\n\n 1974, against the respondent. Paras 16 and 17 of the impugned\n\n\n order passed by learned Tribunal below clearly suggest that before\n\n passing impugned order, it carefully examined/ analyzed order\n\n passed by Assessing Officer imposing therein penalty under Section\n\n\n\n 13 of the Interest-Tax Act, 1974. It clearly emerges from the\n\n impugned order, which is admittedly based upon record of the\n\n\n\n\n appellant that assessee had furnished return of chargeable interest\n\n\n\n\n\n for the financial year 1991-92 relating to assessment year 1992-93\n\n and declared chargeable interest at `7.18 Crores, which was\n\n\n\n\n\n accepted in its entirety. It is also not disputed that assessee had\n\n paid advance tax of `23,50,000/- against aforesaid income before\n\n closure of financial year i.e. `1,10,000/- on 7.2.1992 and\n\n `12,50,000/- on 16.3.1992. Similarly, there is no dispute that\n\n return of chargeable interest as referred above was not filed within\n\n stipulated time by assessee, rather same was filed pursuant to\n\n issuance of notice of re-assessment issued by Assessing Officer\n\n\n\n\n ::: Downloaded on - 20/04/2017 23:58:00 :::HCHP\n 12\n\n\n under Section 10 of the Interest-Tax Act, 1974. Similarly, it clearly\n\n emerges from record that further additional amount of tax on\n\n securities and head office investment account was ordered by the\n\n\n\n\n .\n Commissioner Income Tax, while exercising powers under Section\n\n\n\n\n\n 19 of the Interest-Tax Act, 1974, pursuant to Board's instructions\n\n No. 1923 dated 14.3.1995\n\n\n\n\n\n 18. Similarly, it emerges from the order of Assessing Officer\n\n itself that assessee in its profit and loss account had declared\n\n\n\n\n\n interest received as `39.98 Crores, which was duly considered by\n\n the Assessing Officer and details relating to interest on approved\n\n securities i.e. chargeable for the period of six months i.e. from\n\n\n 1.10.1991 to 31.3.1992 was duly assessed as income of the\n\n assessee. At this stage, it would be profitable to refer to Section 13\n\n of the Interest-Tax Act, 1974, which is reproduced below:\n\n \"Penalty for concealment of chargeable interest\n 13. If the Assessing Officer or the Commissioner (Appeals)\n in the course of any proceeding under this Act, is satisfied\n\n\n\n\n that any person has concealed the particulars of chargeable\n interest or has furnished inaccurate particulars of such\n\n\n\n\n\n interest, he may direct that such person shall pay by way of\n penalty, in addition to any interest-tax payable by him, a sum\n which shall not be less than, but shall not exceed three times,\n the amount of interest-tax sought to be evaded by reason of\n\n\n\n\n\n the concealment of particulars of his chargeable interest or\n the furnishing of inaccurate particulars of such chargeable\n interest.\"\n\n 19. True it is that provisions contained in Section 13 of\n\n Interest-Tax Act, 1974 clearly suggest that penalty is leviable on\n\n the assessee where he/she has concealed its interest chargeable to\n\n tax or furnished inaccurate particulars of interest chargeable to\n\n income tax. It clearly emerges from the record that assessee had\n\n\n\n\n ::: Downloaded on - 20/04/2017 23:58:00 :::HCHP\n 13\n\n\n furnished return of chargeable interest for the financial year 1991-\n\n 92 relating to assessment year 1992-93. At the cost of repetition, it\n\n may be taken note at this stage that assessee had also paid\n\n\n\n\n .\n advance tax of `23,50,000/-, against aforesaid income before\n\n\n\n\n\n closure of the financial year. It also emerges from the record that\n\n return was delayed on account of non-availability of return form.\n\n Averments with regard to non-availability of return form with the\n\n department at relevant time, has been nowhere disputed by the\n\n\n\n\n\n representative of the department, who conducted case before\n\n learned Tribunal below.\n\n 20. Their lordships of the Supreme Court in Commr. of\n\n\n Inc.-Tax v. Angidi Chettiar reported in (1962) 44 I.T.R. 739 have\n\n held as under:\n\n \"The penalty provisions under section 28 would therefore in the event\n of the default contemplated by clause (a), (b) or (c) be applicable in the\n course of assessment of a registered firm. If a registered firm is\n exposed to liability of paying penalty, by committing any of the\n\n\n\n\n defaults contemplated by clause (a), (b) or (c) by virtue of section 44,\n notwithstanding the dissolution of the firm the assessment proceedings\n are liable to be continued against the registered firm, as if it has not\n\n\n\n\n\n been dissolved.\n\n Counsel contended that in any event, penalty for the assessment year\n\n\n\n\n\n 1949-50 could not be imposed upon the assessee firm because there\n was no evidence that the Income-Tax Officer was satisfied in the court\n of any assessment proceedings under the Income-Tax Act that the firm\n had concealed the particulars of its income or had deliberately\n furnished inaccurate particulars of the income. The power to impose\n penalty under section 28 depends upon the satisfaction of the Income-\n Tax Officer in the course of proceedings under the Act; it cannot be\n exercised if he is not satisfied about the existence of conditions\n specified in clauses (a), (b) or (c) before the proceedings are\n concluded. The proceeding to levy penalty has, however, not to be\n commenced by the Income-Tax Officer before the completion of the\n assessment proceedings by the Income-Tax Officer. Satisfaction before\n conclusion of the proceeding under the Act, and not the issue of a\n notice or initiation of any step for imposing penalty is a condition for\n the exercise of the jurisdiction. There is no evidence on the record that\n\n\n\n\n ::: Downloaded on - 20/04/2017 23:58:00 :::HCHP\n 14\n\n\n the Income-Tax Officer was not satisfied in the course of the\n assessment proceedings that the firm had concealed its income. The\n assessment order is dated the 10th November, 1951, and there is an\n endorsement at the foot of the assessment order by the Income-Tax\n Officer that action under S. 28 had been taken for concealment of\n income indicating clearly that the Income-Tax Officer was satisfied in\n the course of the assessment proceedings that the firm had concealed\n\n\n\n\n .\n its income.\n\n In our view, the High Court was in error in holding that penalty could\n not be imposed under section 28 (1) (c) upon the firm Messrs. S. V.\n Veerappan Chettiar & Co. after its dissolution.\"\n\n 21. Their lordships of Supreme Court in K.C. Builders v.\n\n Asstt. C.I.T. (S.C.) reported in (2004) 265 I.T.R. 562 have held as\n\n\n\n\n\n under:\n\n \"Section 147 of the Act deals with income escaping assessment.\n Section 148 deals with issue of notice where income has escaped\n assessment. Section 254 deals with orders of Appellate Tribunal.\n\n Section 256 deals with statement of case to the High Court (reference).\n\n Section 271 (1)(c) reads as follows:- \"Section 271. Failure to furnish\n returns, comply with notices, concealment of income, etc. (1) If the\n Assessing Officer or the Commissioner(Appeals) in the course of any\n proceedings under this Act, is satisfied that any person \n\n\n (a) ..\n\n (b) .\n\n (c) has concealed the particulars of his income or furnished inaccurate\n particulars of such income, he may direct that such person shall pay by\n way of penalty, -\n\n (i) .\n\n (ii) \n\n\n\n\n\n (iii) in the cases referred to in clause (c), in addition to any tax payable\n by him, a sum which shall not be less than, but which shall not exceed\n three times, the amount of tax sought to be evaded by reason of the\n concealment of particulars of his income or the furnishing of\n inaccurate particulars of such income.\"\n\n One of the amendments made to the abovementioned provisions is the\n omission of the word \"deliberately\" from the expression \"deliberately\n furnished inaccurate particulars of such income\". It is implicit in the\n word \"concealed\" that there has been a deliberate act on the part of the\n assessee. The meaning of the word \"concealment\" as found in Shorter\n Oxford English Dictionary, 3rd Edition, Volume I, is as follows:- \"In\n\n\n\n\n ::: Downloaded on - 20/04/2017 23:58:00 :::HCHP\n 15\n\n\n law, the intentional suppression of truth or fact known, to the injury or\n prejudice of another.\"\n\n The word \"concealment\" inherently carried with it the element of mens\n rea. Therefore, the mere fact that some figure or some particulars have\n been disclosed by itself, even if takes out the case from the purview of\n non-disclosure, it cannot by itself take out the case from the purview of\n\n\n\n\n .\n furnishing inaccurate particulars. Mere omission from the return of an\n\n\n\n\n\n item of receipt does neither amount to concealment nor deliberate\n furnishing of inaccurate particulars of income unless and until there is\n some evidence to show or some circumstances found from which it can\n be gathered that the omission was attributable to an intention or desire\n\n\n\n\n\n on the part of the assessee to hide or conceal the income so as to avoid\n the imposition of tax thereon. In order that a penalty under Section\n 271(1) (iii) may be imposed, it has to be proved that the assessee has\n consciously made the concealment or furnished inaccurate particulars\n of his income. Where the additions made in the assessment order, on\n\n\n\n\n\n the basis of which penalty for concealment was levied, are deleted,\n there remains no basis at all for levying the penalty for concealment\n and, therefore, in such a case no such penalty can survive and the same\n is liable to be cancelled as in the instant case. Ordinarily, penalty\n cannot stand if the assessment itself is set aside. Where an order of\n\n assessment or reassessment on the basis of which penalty has been\n levied on the assessee has itself been finally set aside or cancelled by\n\n the Tribunal or otherwise, the penalty cannot stand by itself and the\n same is liable to be cancelled as in the instant case ordered by the\n Tribunal and later cancellation of penalty by the authorities.\"\n\n 22. Similarly, Division Bench of Delhi High Court in CIT v.\n\n Bacardi Martini India Ltd. (Delhi) reported in (2007) 288 ITR 585\n\n\n\n\n (Delhi) have held as under:\n\n \"14. We have heard the counsel for the parties and perused the record.\n It has been observed by the Supreme Court in K.C. Builders and Anr v.\n Assistant Commissioner of Income Tax- 2004 ITR Vol. 265 page 562,\n that concealment inherently carries with it the element of means ria. It\n\n\n\n\n\n is implied in the word 'concealment' that there has been a deliberate act\n on the part of the assessed. The meaning of word 'concealment' as\n found in Shorter Oxford Dictionary III Edition, Vol-I is \"in law the\n intentional suppression of truth or fact known, to the injury or\n prejudice of another\". Supreme Court further observed that mere\n omission from the return of an item of receipt does neither amount to\n concealment nor deliberate furnishing of inaccurate particulars of\n income, unless and until there is some evidence to show or some\n circumstances found from which it can be gathered that the omission\n was attributable to an intention or desire on the part of the assess to\n hide or conceal the income so as to avoid imposition of tax thereon. In\n order that a penalty under Section 271(1)(iii) may be imposed, it has to\n be proved that assessed has consciously made the concealment or\n furnished inaccurate particulars of his income.\n\n ::: Downloaded on - 20/04/2017 23:58:00 :::HCHP\n 16\n 15. It is clear from the law laid down by the Supreme court that\n concealment must be accompanied with the intention of the assessed to\n evade his tax liability. The assessed in this case had uniformly claimed\n expenditure against four heads in three assessment years. When the\n appeal against the order of Assessing Officer before CIT (A) in respect\n of assessment order 1998-1999 failed the assessed instead of preferring\n appeal considered it proper not to litigate further as it was running into\n\n\n\n\n .\n heavy losses and even if the appeal had been allowed, the assessed\n\n\n\n\n\n would not have paid any tax. The assessed in any case would have\n remained in heavy losses. The assessed therefore thought it proper not\n to prefer an appeal and after receipt of order, assessed made an\n application on 4.2.2003 to correct the income returns of subsequent\n\n\n\n\n\n years in accordance with order of CIT for the year 1998-1999. The\n assessed, therefore, filed revised returns deleting the expenses which\n were disallowed by the CIT (A). In the relevant year assessed had also\n claimed expenses of Rs. 2 crores paid by the assessed in terms of the\n agreement entered into by the assessed with the leasing Lesser. The\n\n\n\n\n\n assessed claimed the entire amount of Rs. 2 crores as deduction since\n the assessed had paid this amount of Rs. 2 Crores to the Lesser. There\n is no dispute that the assessed had disclosed all particulars. It was only\n difference of opinion between the assessed and the Assessing Officer\n and the assessed accepted the opinion of the Assessing Officer instead\n\n of preferring an appeal.\n\n 16. It is not a case where assessed had not been able to explain any\n expenditure or had failed to give any details and the Assessing Officer\n had added the same into the income. In Durga Timber v. CIT 197 ITR\n Page 63, relied upon by the appellant, during the course of the\n assessment proceedings the Income Tax Officer had noticed cash\n\n\n credits and investments shown in the books of account and asked the\n assessed to give explanation. The assessed could not give explanation\n of entires nor could explain the source of income and admitted that the\n two amounts be treated as his concealment. Under these circumstances\n\n\n\n\n court observed that there was concealment of income and penalty was\n justified. In the present case assessed had explained all the expenditure\n\n\n\n\n\n and had actually incurred the expenditure but the expenditures were\n disallowed because of difference of opinion between the assessed and\n the Assessing Officer. This is not a case where revised return was filed\n as a result of discovery of some facts by the Assessing Officer or\n\n\n\n\n\n inability of the assessed to explain the expenditure. The revised return\n was filed because some of the expenditure were disallowed by the CIT\n (A) appeal for year 1998-99 although the expenditure were not\n doubted. There are cases where an expenditure is disallowed by the\n Assessing Officer and it is allowed by the CIT (A). It is again\n disallowed by the ITAT and in appeal allowed by the High Court and\n may be disallowed by the Supreme Court. Merely because there is\n difference of opinion for allowing or disallowing the expenditure\n between the assessed and Assessing Officer, it cannot be said that\n assessed had intention to conceal the income. The filing of the revised\n return excluding some of the disallowed expenditure and claiming\n expenditure of Rs. 2 crores which was actually spent by the assessed in\n the relevant assessment year as deduction, does not amount to\n concealment or furnishing inaccurate particulars. The assessed had\n given all particulars of expenditure and income and had disclosed all\n\n\n\n\n ::: Downloaded on - 20/04/2017 23:58:00 :::HCHP\n 17\n\n\n facts to the Assessing Officer. It is not the case of the Assessing Officer\n or the appellant that in reply to the questionnaire of the Assessing\n Officer, some new facts were discovered or Assessing Officer had dug\n out some information which was not furnished by the assessed.\n\n 17. We find that appellant's contention of concealment of income\n by the assessed or furnishing of false particulars by the assessed has no\n\n\n\n\n .\n basis. There is no force in the appeal and the appeal deserves to be\n\n\n\n\n\n dismissed and is hereby dismissed. No order as to costs.\"\n\n 23. Similarly, this Court sees substantial force in the\n\n\n\n\n\n arguments having been made by the learned counsel representing\n\n the respondent that there was no occasion for the respondent Bank\n\n to show interest on securities and interest on head office\n\n\n\n\n\n investment account, because same was made chargeable pursuant\n\n to Board's instructions No. 1923 dated 14.3.1995 and that too for\n\n the period October, 1991 to 31.3.1992 and as such there is no\n\n concealment, if any, on the part of assessee. Learned counsel\n\n representing the appellant was unable to dispute that interest on\n\n\n securities and interest on head office investment account was made\n\n chargeable pursuant to Board's instructions No. 1923 dated\n\n\n\n\n 14.3.1995 and as such, this Court sees no occasion for assessee\n\n\n\n\n\n Bank to declare same in its profit and loss account, wherein it had\n\n declared interest of `39.98 Crores, on approved securities for the\n\n\n\n\n\n period 1.10.1991 to 31.3.1992. Otherwise also, penalty order dated\n\n 28.5.2010 passed under Section 13 of the Interest-Tax Act, 1974,\n\n nowhere suggests that appellant was able to prove on record that\n\n assessee concealed particulars of interest or furnished inaccurate\n\n particulars of interest, rather, careful examination of material\n\n available on record clearly suggests that assessee had furnished\n\n complete particulars of its income in the profit and loss account\n\n\n\n\n ::: Downloaded on - 20/04/2017 23:58:00 :::HCHP\n 18\n\n\n and as such, there is no illegality or infirmity in the order passed\n\n by learned Tribunal below, whereby it has held that there is no\n\n merit in holding assessee liable to pay penalty under Section 13 of\n\n\n\n\n .\n the Interest-Tax Act, 1974.\n\n 24. Thus, this Court sees no illegality or infirmity in the\n\n order passed by learned Tribunal below, whereby it has deleted\n\n\n\n\n\n penalty on the ground that interest became chargeable to tax only\n\n after Board's instructions No. 1923 dated 14.3.1995, because,\n\n\n\n\n\n admittedly, interest on securities and interest on head office\n\n investment account was made chargeable pursuant to Board's\n\n instructions, which could certainly be not made applicable to the\n\n\n assessment made for the period October, 1991 to 31.3.1992.\n\n 25. In these circumstances, we answer both the substantial\n\n questions of law in favour of the respondent and against the\n\n\n\n appellant.\n\n 26. Accordingly, impugned order is upheld and appeal is\n\n\n\n\n dismissed. Pending applications, if any, are also disposed of.\n\n (Mansoor Ahmad Mir)\n Chief Justice\n\n (Sandeep Sharma)\n Judge\n April 19, 2017\n (vikrant)\n\n\n\n\n ::: Downloaded on - 20/04/2017 23:58:00 :::HCHP" }, { "title": "The Tamil Nadu Cricket Association vs The Director Of Income Tax (Exemptions) on 21 October, 2013", "url": "https://indiankanoon.org//doc/177417659/", "text": "The Tamil Nadu Cricket Association vs The Director Of Income Tax (Exemptions) on 21 October, 2013\nAuthor: Chitra Venkataraman\nBench: Chitra Venkataraman, T.S.Sivagnanam\n \n\n \n\n \n\n \n \n IN THE HIGH COURT OF JUDICATURE AT MADRAS\nDated : 21.10.2013\nCoram\nThe Honourable Mrs.Justice CHITRA VENKATARAMAN\nand\nThe Honourable Mr.Justice T.S.SIVAGNANAM\n\nTax Case (Appeal).No.450 of 2013\nand M.P.No.1 of 2013\n---\nThe Tamil Nadu Cricket Association\nNo.5, M.A.Chidambaram Stadium\nVictoria Hostel Road\nChepauk, Chennai-600 005\t\t\t\t\t\n\t\t\t\t\t\t\t\t ... Appellant\n-vs-\n\n1.The Director of Income Tax (Exemptions)\n No.121, Mahatma Gandhi Road\n Nungambakkam, Chennai-600 034\n\n2.The Deputy Director of Income Tax\n Exemptions-I\n 121, Mahatma Gandhi Road\n Chennai-600 034\n\n3.The Joint Director of Income Tax (Exemptions)\n 121, Mahatma Gandhi Road\n Nungambakkam, Chennai-34\t\t\t \n\t\t\t\t\t\t\t ... Respondents\n\n\tTax Case (Appeal) filed under Section 260A of the Income Tax Act, 1961 against the order dated 22.02.2013 passed by the Income Tax Appellate Tribunal, 'B' Bench, Chennai in ITA.No.396(Mds)/2012.\n\n\tFor appellant\t : Mr.P.S.Raman, Senior counsel\n\t\t\t\t for Mr.P.R.Raman\n\tFor respondent : Mr.J.Narayanaswamy\n\t\t\t\t Standing Counsel for I.T.Department.\n\nJ U D G M E N T\n\n(The Judgment of the Court was made by\nCHITRA VENKATARAMAN, J.)\n\tThe assessee is on appeal as against the order of the Income Tax Appellate Tribunal and seeks admission of Tax Case (Appeal) on the following substantial questions of law:-\n\t\"1. Whether the Tribunal was right in upholding the cancellation of registration under Section 12AA(3) of the Income Tax Act, 1961 on the ground that the activities of the appellant could not be said to be genuine after the amendment of the definition of 'charitable purpose' ?\n\t2. Whether the Tribunal was right in law in holding that the activities of the appellant could be said to be \"not genuine\", when the appellant was carrying on activities in accordance with its objects and similar to its activities in earlier years, merely on account of the amendment to the definition of 'charitable purpose' in the Act ?\n\t3. Whether the Tribunal was right in not following the decisions of the jurisdictional High Court and coordinate benches of the Tribunal, on the ground that certain aspects had not been high-lighted before the Hon'ble High Court and the coordinate Benches ?\"\n\t2. The assessee is a Society registered under the Tamil Nadu Societies Registration Act. The said Society was granted registration under Section 12AA of the Income Tax Act, 1961 on 28.03.2003. As is evident from the reading of the Memorandum of Association, the objects of the Association are as follows:-\n\t(a) to maintain a general control of the game of cricket in the State and the Union Territory of Pondicherry and give its decision on all matters concerning the game either when referred to or suo moto. \n\t(b) to spread the game throughout the State by organizing tournaments, including Inter-University, Inter-School and Inter-Association matches, to educate young sportsmen in the game generally and also in the field of physical culture and the spirit of sportsmanship. The benefits would be available to the General Public irrespective of caste, creed, religion or sex. \n\t(c) to maintain a library of books, publications and periodicals of interest of sportsmen and to diffuse knowledge of cricket and its ideals of sportsmanship. \n\t(d) to communicate with public authorities and various sports organizations in India and abroad and concert and promote measures for the development of the game and to provide social security safe guards for the players, officials such as Managers, Coaches, Umpires, Selectors and others who are directly connected with the game. \n\n\t3. Apart from this, yet another object is to afford required facilities for the cricketers, officials such as Managers, Coaches, Umpires, Selectors and others who are directly connected with the game, members to acquire by purchase, lease, hire or otherwise suitable playgrounds, stadia and any other property, movable and immovable, rights or privileges etc. \n\n\t4. The objects further seek to impart physical education through the medium of cricket and take all steps to assist the citizens to develop their physique and have a healthy mind and a healthy body; to establish, promote or assist in establishing and promoting and to subscribe to and become a member of any other Association or Club whose objects are similar or in part to the objects of the Association; to create, foster and maintain friendly relations with and among the population of the area under its control through sports, tournaments and competitions connected therewith, to create, develop and foster a healthy spirit of sportsmanship and a broad and generous outlook devoid of all prejudices and to mould the character of citizen through the medium of sports in general and cricket in particular; to spread the ideals of cricket and all that it stands for throughout the length and breadth of its area by arranging schools for coaching, lectures, tournaments and run international matches between India and other leading foreign countries so as to develop mutual goodwill and better understanding between India and other countries; to collect funds and whenever necessary borrow with or without security for purposes of the Association and in particular by the issue of debentures or debenture stock perpetual or otherwise charged upon all or any of the Association's property both or future and to purchase, redeem or payoff any such securities and to utilise such funds in such manner as the General Body may consider desirable for the fulfillment of the objects of the Association; to invest monies and funds of the Association as per the provisions of the Income Tax Act, 1961; to maintain a panel of approved cricket umpires and to do such acts as may be necessary for this purpose including holding of prescribed periodical tests with a view to enable them to qualify themselves as first class umpires; to organise a proper coaching scheme for the benefit of cricketers in the City and in the Districts under the supervision of coaches from India and abroad; to take such action as may be necessary to coordinate the activities of affiliated club, District Associations and institutions and their members in relation to the Association and amongst themselves. \n\n\t5. To achieve the objects, the assessee takes steps to arrange, supervise, regulate and finance visits of State teams or Foreign teams under the auspices of bodies like the Board of Control for Cricket in India; to draw up and organise a proper coaching scheme for the benefit of young and promising cricketers within the State and the Union Territory of Pondicherry, to draw up a scheme of net practice whether free of charge or on payment for members of affiliated clubs, District Associations and for players selected to represent the Association in various competitions within or outside State, and to arrange for group coaching lectures, exhibition of cricket films for this purpose, etc; to engage a person or persons as a professional or amateur cricket or cricketers and to pay remuneration or honorarium to him or them; to start or sponsor charity or benefit matches and/or to subscribe to funds for the benefit of cricketers, coaches, umpires Staff of the Association or their families; to do all such other acts, deeds, and things as are incidental to or as the Association may deem conducive to the attainment of the objects of the Association. \n\n\t6. After Considering the genuineness of these objects, as early as 2003 ,the assessee was granted registration as a Trust under Section 12AA of the Income Tax Act, 1961 (hereinafter called as the \"Act\"). However, on 19.07.2011. a notice was issued by the Director of Income Tax (Exemptions) under Section 12AA(3) of the Act that the statement of income and expenditure revealed that the assessee derived income from the following activities:-\n1.Subscription\n2.Rent for hiring cricket ground, rooms and premises\n3.Fees for providing services to IPL\n4.Income from advertisement\n5.Subsidy from BCCI\n6.Sale of ticket for conducting of matches\n7.Restaurant and catering income etc.\nThus, these receipts were held to be in the nature of trade or commerce or business and hit by the proviso to Section 2(15) of the Income Tax Act, 1961 (hereinafter called as the \"Act\"). In the circumstances, notice was issued proposing to withdraw the registration granted to the assessee under Section 12AA of the Income Tax Act, 1961. \n\n\t7. Immediately, on the receipt of the notice, the assessee replied that the receipts were not in the nature of trade or commerce or business, since, the income of the assessee included interest income earned from Fixed Deposits with Banks; subsidy from BCCI was a voluntary grant from the parent body for promotion and development of the game of cricket in Tamil Nadu; there was no commercial activity involved in the conduct of the IPL matches for which only subsidy was received by the assessee from BCCI like other cricket associations; thus, the receipt of subsidy was not a payment for carrying on of any trade, commerce or business; the TV subsidy was given to all State Associations and was part of the scheme of BCCI, being a voluntary donation, there was no commercial character attached to these receipts; so too, the donations and contributions and the sale of tickets in conducting matches organised by BCCI. Pointing out that the Association was not running any canteen or restaurant,the assesse submitted that as far as fee for providing services to IPL is concerned, the entire income from the sale of tickets belonged to the franchisee, and therefore, there was no service rendered or charges made by the assessee. \n\n\t8. Referring to the satisfaction recorded as to the genuineness of the objects of the association under the provision contained in Section 12AA of the Act, the assessee pointed out that the genuineness of the objects of the trust, thus not being in question and the objects of the trust thus remaining the same as before and the activities also being in accordance with the objects of the trust, there was no case made out for cancelling the Registration. \n\n\t9. After hearing the assessee, the respondent passed the order under Section 12AA (3) rejecting the claim of the assessee and thereby cancelling the registration as trust. \n\n\t10. The Director of Income Tax (Exemptions) viewed that though BCCI confirmed the payment to the assessee on IPL matches as grant of subsidy , the same was not in the nature of grant. It was also pointed out that most of the advertisements through TV telecasting are received by the BCCI, it being the apex body, thus the so called subsidy given by the BCCI is nothing but some sort of sharing of the advertisement income on account of holding of international test matches and ODI matches, due to which the BCCI has gathered huge advertisement income; thus, the nature of receipt, even though called subsidy by the assessee was necessarily in the nature of income received by the activity of the assessee. \n\n\t11. As regards the entrance fee charged, the the Director of Income Tax (Exemptions) held that the receipts out of IPL matches by giving its ground for conducting those matches were commercial in nature. \n\n\t12. Referring to Section 12AA(3) read with Section 2(15) of the Income Tax Act, 1961, the respondent/Director of Income Tax (Exemptions) viewed that even if the activities were carried on in accordance with the arrangement with the other party, the activities being not charitable, it was hit by Section 12AA(3) of the Income Tax Act, 1961; thus it was held that the activities were not carried on in accordance with the objects of the trust; the activities not being charitable, the same could not be held to be genuine and the institution was not a charitable institution. Reading genuineness into the activities of the trust and looking at the the objects of the trust, the Director of Income Tax (Exemptions) held that \"genuineness\" was a term used only to find out whether the institution was charitable or not; thus once the institution was held as not for charitable purpose, Section 12AA registration had to be necessarily cancelled. In the circumstances, the registration originally granted to the assessee stood cancelled with effect from 01.04.2009. \n\n\t13. The assessee contended before the Income Tax Appellate Tribunal that since its inception and the date of granting of the registration under the Act, the objects of the Association ever remained same and it has not undergone any change to question its genuineness. The assessee contended that the view of the Director of Income Tax (Exemptions) that the assessee was not carrying on charitable activity as per Section 2(15) of the Act is erroneous in law; in any event, all that Section 12AA(3) of the Act prescribes for cancellation is the genuineness of the activities of the trust or that the activities are not carried on in accordance with the objects of the trust. The assessee contended that it conducts National and International matches including the District League. In addition to the income arrived by sale of tickets, income out of advertisement revenue arising out of the telecast rights auctioned to different visual media, obtained from BCCI in India was distributed among the different States in India and this is in the nature of grant/subsidy from BCCI which had been confined by BCCI. \n\n\t14. The Income Tax Appellate Tribunal pointed out that the physical play of cricket game was not the sole point which would decide as to whether the asssessee association was carrying on its activities as stated in the memorandum of association or the activities were genuine or not. The Tribunal pointed out that the activities were genuine; however the matches conducted did not go to the extent of \"advancement of any other object of general public utility\". The Tribunal also pointed out that the activities did not come within the conceptual framework of charity, vis-a-vis the activity of general public utility as given under Section 2(15) and the activities were all commercial in character. Thus the matches conducted were not conducted in accordance with the objects of the association and as explained in the proviso to the provision in Section 2(15). Thus, according to the Tribunal, when the assessee's case was fully covered by the proviso, the proceedings taken under Section 12AA(3) were justified. Thus the Tribunal viewed that the provisions under Section 12 AA (3) could not be read in disregard of Section 2(15) first proviso. It further held that after the insertion of first proviso to Section 2(15) of the Income Tax Act, 1961, effective from 1st April, 2009, every activity on the advancement of the general public utility to be called as for \"charitable purpose\" has to qualify itself as charitable activity within the meaning of the expression 'charitable purpose'. As such, the activities of the assessee could not be considered as for a charitable purpose. The Income Tax Appellate Tribunal pointed out that the proviso inserted with effect from 01.04.2009 clearly pointed out that advancement of any other object of general public utility shall not be a charitable purpose, if it involved the carrying on of any activity in the nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity. Considering the said amendment and looking at the activities of the assessee, the Income Tax Appellate Tribunal held that the conduct of the matches by cricket associations could be nothing but in the nature of commercial ventures and the assessee was selling the game for the highest amount of revenue and the effect and the thrust of the assessee was towards maximising the revenue. Citing IPL matches held and the manner of selection of players, the Income Tax Appellate Tribunal held that the matches were big game with big money involved; in the words of the Income Tax Appellate Tribunal, \"In fact it is an entertainment industry by itself\". It pointed out that 78% of the total receipts came out of advertisement revenue and in the background of the nature of activity undertaken, the entire activity of commercial nature were oriented towards earning hyper profits and these activities contributed 86.5% of the receipts of the assessee in the Financial Year 2008-09. In this background, the Income Tax Appellate Tribunal referred to the decision reported in 77 ITR 435 in the case of Bangalore Race Club Vs. Commissioner of Income Tax, which related to the case of horse racing and held the same could not be held to be of public utility or interest. After referring to the decision of this Court reported in 343 ITR 300 in the case of CIT Vs. Sarvodaya Ilakkiya Pannai, wherein, this Court considered the effect of Section 12AA(3) of the Act, the Income Tax Appellate Tribunal held that this Court had not considered the effect of Section 2(15) proviso and the necessary facts of the case relating to charitable purpose was not highlighted. It also referred to the decision of the Ahmedabad Bench-A rendered in the case of Gujarat Cricket Association Vs. DIT (Exemption) in ITA.No.93(Ahd)/2011 dated 31.01.2012 as well as other decision of the Nagpur Bench rendered in the case of M/s.Vidarbha Cricket Association Vs. Commissioner of Income Tax-I, Nagpur in ITA.No.3/Nag/10 dated 30.05.2011, which were against the similar rejection order passed and reversed by the Income Tax Appellate Tribunal and held that these orders had considered only the physical aspect of the cricket game promoted by the assessee; however, all the assessee's activities centered around the celebrated game of cricket.\n\n\t15. As far as on the crucial question of general public utility was concerned, the Income Tax Appellate Tribunal held that the activities of the assessee are all commercial activities. The Income Tax Appellate Tribunal held that the activities of the association are not in the nature of activities for advancement of any object of general public utility; consequently, the appeal has to be dismissed. The Income Tax Appellate Tribunal upheld the rejection order passed under Section 12AA of the Income Tax Act. The Income Tax Appellate Tribunal further viewed that there was no conflict between the first proviso to Section 2(15) of the Act and the conditions laid down under Section 12AA(3) of the Act for cancelling the registration; thus, when the assessee's case is hit by Section 2(15) of the Act, consequential action is automatic to pass an order under Section 12AA(3) of the Income Tax Act, 1961. It further pointed out that when the assessee was given registration originally, it was on the ground that it was a charitable institution inasmuch as it engaged itself in the advancement of an object of general public utility; however, when the Revenue had found the assessee's activities were oriented towards generating income by converting the sport of cricket into a celebrated industry, the activities not being genuine, rightly, the Revenue had cancelled the registration granted under Section 12AA of the Income Tax Act, 1961. Aggrieved by the same, the present appeal has been preferred by the assessee. \n\n\t16. Learned Senior counsel appearing for the assessee took us through the various objects of the Association and pointed out to the clear distinct words used in Section 12AA(1) and 12AA(3) of the Act as well as the first proviso to Section 2(15) of the Act and pointed out that the grant of registration originally as early as 2003 clearly pointed out the satisfaction of the authorities that the assessee was public charitable trust under Section 12AA of the Act. Referring to Section 12AA (3) of the Act, he further pointed out that the cancellation of registration granted is possible only under the stated circumstances, viz., on the Commissioner recording his satisfaction that the activities of the trust are not genuine or are not being carried out in accordance with the objects of the trust or institution; thus unless and until the show cause notice issued contained the grounds and materials as prescribed under Section 12AA(3) of the Act, the question of cancellation of registration, per se, does not arise. \n\n\t17. Learned Senior Counsel appearing for the appellant further pointed out that the appellant was granted registration under Section 12AA of the Act only on the Commissioner satisfying himself on the objects of the trust and the genuineness of the activities. The nature of activity carried on by the assessee continues to be the same without any change till this date and if any of the activities carried on by the assessee resulted in an income not incidental and not connected with the main activity or main object of the Trust, it would be a matter for assessment. Thus what has to be a subject matter for assessment cannot be considered as a ground for cancelling the registration under Section 12 AA (3).\n\n\t18. Taking us through Circular No.11 of 2008 of Central Board of Direct Taxes dated 19.12.2008 issued immediately in the wake of the insertion of proviso to Section 2(15) of the Income Tax Act, 1961, learned Senior counsel appearing for the assessee submitted that as is evident from the reading of the circular, the question of rejection of registration under Section 12AA(3) would arise only in those cases where an entity uses this status of charitable institution with a charitable object of general public utility as a mask or a device to hide the true purpose and that object is nothing other than trade, commerce or business or the rendering of any service in relation to trade, commerce or business; as far as the present case is concerned, Revenue has not substantiated with any material to show the absence of genuineness; all that the Revenue alleges is by conduct of matches, it has exhibited a sense of business or commercial character. This according to the assessee is not a good ground for cancelling the registration under Section 12AA of the Income Tax Act, 1961. \n\n\t19. Going by the tenor of the language in Section 12AA(3) of the Act and Section 12AA(1) of the Act, the cancellation of the registration under Section 12AA of the Income Tax Act, 1961 is without any substance. He further pointed out that when in a similar assessee's case viz., Gujarat Cricket Association Vs. DIT (Exemption) in ITA.No.93(Ahd)/2011 and in the case of M/s.Vidarbha Cricket Association Vs. Commissioner of Income Tax-I, Nagpur the Income Tax Appellate Tribunal Ahmedabad Bench-A dated 31.01.2012 and in I.T.A.No.3/Nag/10 dated 30.05.2011 of the Nagpur Bench, respectively on the very same allegations for cancellation of registration under Section 12AA(3) had held that the cancellation of the registration under Section 12AA of the Income Tax Act, 1961 was contrary to law, the Chennai Bench of the ITAT ought to have followed these decisions, which were rendered as early as 2011 and 2012. He further pointed out to the unreported decision of this Court in the case of Gowri Ashram Vs. Director of Income Tax (Exemptions) in T.C(A).No.91 of 2013 dated 29.04.2013 as well as 315 ITR 428 in the case of Commissioner of Income Tax Vs. National Institute of Aeronautical Engineering Educational Society and submitted that they stand on a different line, they being the decisions rendered on the rejection of the application for registration. He also referred to the decision of this Court reported in 343 ITR 300 in the case of CIT Vs. Sarvodaya Ilakkiya Pannai, wherein, under similar circumstances, this Court had held that when a trust is registered with definite objects to carry on its activities and under Section 12AA of the Income Tax Act, 1961, the Commissioner is empowered to cancel registration only on two conditions laid down under Section 12AA(3) of the Income Tax Act, 1961. He further pointed out that whether the income derived from such transaction would be assessed to tax or whether the trust would be entitled to exemption under Section 11 of the Income Tax Act, 1961 are entirely matters to be considered at the time of assessment. Thus, placing reliance on the decision of this Court reported in 343 ITR 300 (CIT Vs. Sarvodaya Ilakkiya Pannai), learned Senior Counsel appearing for the assessee submitted that the Income Tax Appellate Tribunal committed serious error in upholding the rejection order passed by the Director of Income Tax (Exemptions).\n\n\t20. Countering the claim made by the learned Senior Counsel appearing for the assessee, learned Standing counsel appearing for the Revenue, however, submitted that the condition for continuance of the registration depends on the satisfaction of the conditions given under the definition of \u0011charitable purpose\u0012 laid down under Section 2(15) of the Act; when the assessee's activities do not go hand in hand with the objects of the assessee's assessment, rightly, the Revenue had cancelled the registration. He further pointed out that at the time of grant of registration, the Commissioner is empowered to look into the objects of the trust, for the purpose of grant of registration. However, after granting registration, if the Revenue finds that the activities of the trust are not genuine and that the advancement of the object of the general public utility is not in terms of the objects of the trust and that the objects are in the nature of carrying on trade, commerce or business, the grant of registration originally given may be cancelled; thus, rightly, the registration was cancelled, hence, no exception could be taken to the order of the Income Tax Appellate Tribunal. \n\n\t21. Heard learned Senior counsel appearing for the assessee and learned Standing counsel appearing for the Revenue and perused the materials available on record.\n\n\t22. We had already extracted in the preceding paragraph, the objects of the association. Going by the objects , we find that the trust falls under the head of \"any other object of general public utility\" and hence falls within the meaning of charitable purpose under Section 2(15) of the Act. Section 2(15) of the Act defines \"charitable purpose\" as it originally stood at the time of grant of registration as under:-\n\t\" 'charitable purpose' includes relief of the poor, education, medical relief and the advancement of any other object of general public utility.\"\n\n\t23. Section 2(15) was amended under Finance Act,2008, with effect form 1.4.2009 by substituting the following provision which reads s under:\n\t\"2. Definitions.\n\t\t....\n\t(15) \"charitable purpose\" includes relief of the poor, education, medical relief, preservation of environment (including waterheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest, and the advancement of any other object of general public utility. \nProvided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity;)\n\n 24. Section 2(15) as it stood prior to 1983 defined 'charitable purpose' to include relief of the poor, education, medical relief, and the advancement of any other object of general public utility not involving the carrying on of any activity for profit. The phrase \"not involving the carrying on of any activity for profit\" was omitted from the Section by the Finance Act 1983, with effect from 01.04.1984, consequent on the amendment to Section 11, where under profits and gains of business in the case of charitable or religious trust and institutions would not be entitled to exemption under that Section, except in cases where the business fulfilled the conditions under Section 11 (4). The Section was once again amended by substitution in the year 2008 under the Finance Act, 2008, with effect from 01.04.2009, streamlining the definition of 'charitable purpose', considering the fact that taking advantage of the phrase 'advancement of any other object of general public utility', number of entities operating on commercial lines claimed exemption on their income either under Section 20(23c) or under Section 11 of the Act. Thus, to limit the scope of this expression, Section was amended in the year 2008 that the advancement of any other object of general public utility shall not be a charitable purpose, if the object involved the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity. Though the section as it stood prior to the substitution in 2008 contained no provision as in the proviso under the 2008 amendment, yet the Supreme Court held that that if the primary or dominant purpose of a trust or institution is charitable, another object which by itself may not be charitable but which is merely ancillary or incidental to the primary or dominant purpose would not prevent the trust or institution from being a valid charity: vide CIT v. Andhra Chamber of Commerce [1965] 55 ITR 722 (SC) (referred to in the decision reported in (1980) 121 ITR 1(Addl. Commissioner of Income-tax v. Surat Art Silk Cloth Manufacturers Association). Thus if the dominant object or the primary object was charitable, the subsidiary object for the purpose of securing the fulfillment of the dominant object would not militate against its charitable character and the purpose would not be any the less charitable. The amendment in the year 2008 made a drastic amendment to deny the status of a charitable purpose to an institution with the object of general public utility, having any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration.\n\n\t25. Proviso to Section 2(15) of the Income Tax Act states that if the objects involve the carrying on any activity in the nature of trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity, the status of the institution will not be one for 'charitable purpose'.\n\n\t26. The Central Board of Direct Taxes, in paragraph 3.2 pointed out to the scope of the circular as under:-\n\t\" In such a case, the object of 'general public utility' will be only a mask or a device to hide the true purpose, which is trade, commerce or business or the rendering of any service in relation to trade, commerce or business. Each case would, therefore, be decided on its own facts and no generalization is possible. Assessees, who claim that their object is 'charitable purpose' within the meaning of Section 2(15), would be well advised to eschew any activity which is in the nature of trade, commerce or business or the rendering of any service in relation to any trade, commerce or business.\"\n\n\t27. Thus, the anxiety of the Parliament in introducing the proviso to Section 2(15) of the Act is only to check those institution, which attempt to gain exemption under the cloak of a trust.\n\n\t28. Section 11 of the Act states that income from property held for religious or charitable purposes shall not be included in the total income of the previous year. Section 12 deals with income of trusts or institutions from contributions. Section 12A deals with making application for registration of the trust/association so that the said institution will have the benefit of exemption under Section 11 and 12 of the Act. \n\n\t29. Section 12AA of the Act prescribes procedure for registration. As per this, on receipt of the application for registration, the Commissioner is to call for such documents or information from the trust or institution in order to satisfy himself about the genuineness of activities of the trust or institution. The Section further empowers the Commissioner to make such enquiry as he deems necessary in this regard. Once the Commissioner is satisfied himself about the objects of the trust or institution and the genuineness of the activities of the trust, he has to pass an order in writing registering the trust or institution; if he is not so satisfied, he has to pass an order in writing refusing to register the trust or institution. \n\n\t30. Section 12AA(3) of the Act inserted with effect from 01.10.2004 under the Finance (No.2) Act, 2004 and the amendment inserted by Finance Act, 2010, with effect from 01.06.2010 therein empowering the Commissioner to cancel the registration granted under the stated circumstances, reads as under:-\nProvision inserted under Finance Act, 2004:\n Section 12AA(3):- Where a trust or an institution has been granted registration under clause (b) of sub-section (1) and subsequently the Commissioner is satisfied that the activities of such trust or institution are not genuine or are not being carried out in accordance with the objects of the trust or institution, as the case may be, he shall pass an order in writing cancelling the registration of such trust or institution. \n\nProvided that no order under this sub-section shall be passed unless such trust or institution has been given a reasonable opportunity of being heard.\n\n 31. After amendment in the year 2010, Section 12AA(3) of the Income Tax Act reads as follows:\n\t\"Section 12AA(3):- Where a trust or an institution has been granted registration under clause (b) of sub-section (1) or has obtained registration at any time under section 12A as it stood before its amendment by the Finance (No.2) Act, 1996 (33 of 1996) and subsequently the Commissioner is satisfied that the activities of such trust or institution are not genuine or are not being carried out in accordance with the objects of the trust or institution, as the case may be, he shall pass an order in writing cancelling the registration of such trust or institution:\nProvided that no order under this sub-section shall be passed unless such trust or institution has been given a reasonable opportunity of being heard.\"\n\n\t32. Thus in contrast to Section 12AA(1)(b) of the Income Tax Act, 1961, where the grant of registration requires satisfaction about the objects of the trust as well as genuineness of the activities, for the cancellation of the registration under Section 12AA(3), all that it is insisted upon is the satisfaction as to whether the activities of the trust or institution are genuine or not and whether the activities are being carried on in accordance with the objects of the trust. Thus, even if the trust is a genuine one i.e., the objects are genuine, if the activities are not genuine and the same not being carried on in accordance with the objects of the trust, this will offer a good ground for cancellation. Thus, in every case, grant of registration as well as cancellation of registration rests on the satisfaction of the Commissioner on findings given on the parameters given in Section 12AA(1) and 12AA(3) of the Act, as the case may be. \n\n\t33. Registration of the trust under the Act, confers certain benefits from taxation under the provisions of the Act. The conditions under which the income of the trust would be exempted under the provisions of the Act are clearly laid down under Section 11 as well as in Section 12 of the Act. Section 11 of the Act specifically points out the circumstances under which income of the trust is not to be included in the total income of the previous year of the person. So too, Section 12 of the Act on the income derived from property held for charitable or religious purposes. \n\n\t34. Thus, when the assessee is in receipt of income from activities, which fits in with Sections 11 and 12 of the Act as well as from sources which do not fall strictly with the objects of the trust, would not go for cancellation of registration under Section 12AA of the Act on the sole ground that the assessee is in receipt of income which does not qualify for exemption straight away by itself. All that ultimately would arise in such cases is the question of considering whether Section 11 of the Act would at all apply to exempt these income from liability. These are matters of assessment and has nothing to do with the genuineness of the activity or the activities not in conformity with the objects of the trust. As rightly pointed out by learned Senior counsel appearing for the assessee, as is evident from the reading of Circular No.11 of 2008 dated 19.12.2008, the object of the insertion of first proviso to Section 2(15) of the Act was only to curtail institution, which under the garb of 'general public utility', carry on business or commercial activity only to escape the liability under the Act thereby gain unmerited exemption under Section 11 of the Act. \n\n\t36. In the decision reported in (2012) 343 ITR 23 (Bom) (Sinhagad Technical Education Society V. Commissioner of Income Tax (Central), Pune & Anr), the Bombay High Court held as follows:\n\t\"As a result of the amendment, which has been brought about by the Finance Act of 2010, Subsection (3) of Section 12AA has been amended specifically to empower the Commissioner to cancel a registration obtained under Section 12A as it stood prior to its amendment by the Finance (No.2) Act, 1996. SubSection (3) was inserted into the provisions of Section 12AA by the Finance (No.2) Act, 2004 with effect from 1 October 2004. As it originally stood, under subsection (3), a power to cancel registration was conferred upon the Commissioner where a trust or an institution had been granted registration under clause (b) of subsection (1) of Section 12AA. The Commissioner, after satisfying himself that the objects of the trust or an institution are not genuine or are not being carried out in accordance with the objects of the trust or institution, as the case may be, was vested with the power to pass an order in writing cancelling the registration of such trust or institution. By the Finance Act of 2010, subsection (3) was amended so as to empower the Commissioner to cancel the registration of a trust or an institution which has obtained registration at any time under Section 12A (as it stood before its amendment by the Finance (No.2) Act, 1996). As a result of the amendment, a regulatory framework is now sought to be put in place so as to cover also a trust or an institution which has obtained registration under Section 12A as it stood prior to its amendment in 1996. \n...........\npower under Section 12AA(3) can be exercised by the Commissioner in respect of a trust registered prior to 1 June 2010. The mere fact that a part of the requisites for the action under Section 12AA (3) is drawn from a time prior to its passing namely registration as a charitable trust under Section 12A prior to 2010 would not make the amendment retrospective in operation. The amendment does not take away any vested right nor does it create new obligations in respect of past actions.\"\n\n 37. As already pointed out earlier, the question as to whether the particular income of trust is eligible for exemption under Section 12 of the Act is a matter of assessment and this Court had pointed out in the decision reported in 343 ITR 300 in the case of CIT Vs. Sarvodaya Ilakkiya Pannai, as under:-\n\t\" In order to avail the benefit of exemption under Section 11 of the Income Tax Act, 1961, a Trust can make an application to the Commissioner for registration under Section 12A of the Income Tax Act, 1961. On receipt of the said application for registration of a trust or institution, the Commissioner should satisfy himself about the genuineness of the activities of the trust or institution. In order to satisfy himself, the Commissioner may also make such enquiry as he may deem necessary in that behalf. In the event the Commissioner satisfies himself that the trust is entitled to registration keeping in mind the objects, shall grant registration in writing in terms of Section 12AA(1)(b)(i) of the Income Tax Act, 1961. In the event the Commissioner is not satisfied, he shall refuse such registration in terms of Section 12AA(1)(b)(ii) of the Income Tax Act, 1961. Once such a satisfaction is arrived at by the Commissioner to grant, such registration cannot be cancelled by following the very same provision of section 12AA(b)(i) of the Income Tax Act, 1961 to go into the genuineness of the activities of the trust. However, the Commissioner is empowered to revoke the certificate in terms of Section 12AA(3) of the Income Tax Act, 1961. As Commissioner is empowered to revoke the certificate in terms of section 12AA(3) of the Income Tax Act, 1961. As per the said provision, in the event the Commissioner is satisfied subsequently i.e., after registration that the activities of such trust or institution are not genuine or not being carried out in accordance with the objects of the trust or the institution as the case may be, he shall pass an order in writing cancelling the registration of such trust or institution.\"\n\n\t38. After the grant of registration, if the Commissioner is satisfied subsequently that the activities of the institution are not genuine or they are not carried on in accordance with the trust/ institution, he could pass an order in writing cancelling the registration of such trust or institution. \n\n\t39. Referring to Section 11 and 12A of the Act, this Court pointed out that the act of granting registration under Section 12AA(1) itself is a result of a satisfaction recorded by the Commissioner as regards the genuineness of the objects of the trust as well as the activities of the trust and once a satisfaction is arrived at by the Commissioner, the cancellation could only be in terms of Section 12AA(3) of the Income Tax Act, 1961. \n\n\t40. This Court pointed out that the cancellation made in the case of assessee therein was not on the ground that the activities were not genuine, but the activities of the trust in publication and sale and spread of Sarvodaya Literature and Gandhian Ideologies was not the objects of the trust. This Court pointed out that the cancellation was made not on the ground that the activities of the trust were not genuine but the activities of the trust were not in accordance with the objects of the trust; when the trust was registered with definite objects, carrying on such activities would be in terms of the objects for which registration was granted. \n\n\t41. Referring to Section 12AA of the Income Tax Act, 1961, this Court has held as under:-\n\t\" 9. Under section 12AA, the Commissioner is empowered to grant or refuse the registration and after granting registration, would be empowered to cancel and that too, only on two conditions laid down under Section 12AA(3) of the Income Tax Act, 1961. Whether the income derived from such transaction would be assessed for tax and also whether the trust would be entitled to exemption under section 11 are entirely the matters left to the assessing officer to decide as to whether it should be assessed or exempted.\"\n\n 42. In the light of the law declared by this Court in the above said decision, we do not find that the scope of Section 12AA(3) of the Act is of any doubt for a fresh look. It is relevant herein to point out that in two other assessee's case, the Income Tax Appellate Tribunal, Ahmedabad Bench-A rendered in the case of Gujarat Cricket Association Vs. DIT (Exemption) in ITA.No.93(Ahd)/2011 dated 31.01.2012 and that of the Nagpur Bench rendered in the case of M/s.Vidarbha Cricket Association Vs. Commissioner of Income-tax-I, Nagpur in ITA.No.3/Nag/10 dated 30.05.2011, considered the said decision reported in 343 ITR 300 in the case of CIT Vs. Sarvodaya Ilakkiya Pannai rendered under Section 12AA(3) of the Act. On appeal before the respective High Courts, the decision of the Income Tax Appellate Tribunal was confirmed.\n\n\t43. Leaving that aside, there being no dispute raised by the Revenue as to the genuineness of the trust, or as to the activities of the trust not being in accordance with the objects of the trust, the question of cancellation under Section 12AA of the Act does not arise. We further hold that at the time of grant of registration on 28.3.2003, the same was made taking into consideration the objects of the institution fitting in with the definition of 'charitable purpose' defined under Section 2(150 of the Act and the substitution of the Section itself came only 2008, with effect from 01.04.2009. As rightly pointed out by the learned senior counsel appearing for the assessee, the circular clearly brings out the object of the amendment and the amended provision has no relevance to the case . The power regarding cancellation, hence has to be seen with reference to the registration and the object satisfying the definition on 'charitable purpose', as it stood at the time of registration and not by the subsequent amendment to Section 2(15) of the Income Tax Act.\n\n\t44. Learned Standing counsel appearing for the Revenue placed heavy reliance on the proviso to Section 12AA(3) of the Act and submitted that when the assessee has income received from conduct of the matches, which are commercial in nature, as had been found by the Income Tax Appellate Tribunal, the objects of the trust ceased to be charitable. He submitted that going by the definition of Section 2(15) of the Act, rightly, the Commissioner assumed jurisdiction under Section 12AA(3) of the Act to cancel the registration. He further pointed out that for the finding to be recorded that the activities of the trust are not genuine, one must necessarily look into the objects of the association; if the objects of the association reveal commercial nature in the conduct of matches, the association cannot be one for charitable purpose as defined under Section 2(15) of the Act. Thus, there could be no inhibition for the Commissioner to assume jurisdiction to issue show cause notice calling upon the assessee to state whether the association is genuine or not. He further submitted that on looking at the activities of the association, the Commissioner had rightly come to the conclusion that the assessee's registration was liable to be withdrawn. \n\n\t45. We do not accept the submission of learned Standing counsel appearing for the Revenue. As rightly observed by learned Senior counsel appearing for the assessee, the Revenue granted registration under Section 12AA of the Act satisfying itself as to the objects of the association befitting the status as charitable purpose as defined under Section 2(15), as it stood in 2003 and after granting the registration, if the registration is to be cancelled, it must be only on the grounds stated under Section 12AA(3) of the Act with reference to the objects accepted and registered under Section 12AA, as per the law then stood under the definition of Section 2(15) of the Income Tax Act. Even therein, Courts have defined as to when an institution could be held as one for advancement of any other object of general public utility. Thus, if a particular activity of the institution appeared to be commercial in character, and it is not dominant, then it is for the Assessing Officer to consider the effect of Section 11 of the Act in the matter of granting exemption on particular head of receipt. The mere fact that the said income does not fit in with Section 11 of the Act would not, by itself, herein lead to the conclusion that the registration granted under Section 12AA is bad and hence, to be cancelled. \n\n\t46. It may be of relevance to note the language used in the definition \"charitable purpose\" in Section 2(15) of the Act, which states that charitable purpose includes relief of the poor, education, medical relief and advancement of any other object of general public utility. The assessee's case falls within the phrase of the definition \u0011general public utility\u0012 . In the decision reported in (2000) 246 ITR 188 in the case of Hiralal Bhagwati Vs. Commissioner of Income Tax, the Gujarat High court considered the said phrase in the context of Section 12AA registration and held that registration of the charitable trust under Section 12AA of the Act is not an idle or empty formality; the Commissioner of Income-tax has to examine the objects of the trust as well as an empirical study of the past activities of the applicant; the Commissioner of Income-tax has to examine that it is really a charitable trust or institution eligible for registration; the object beneficial to a section of the public is an object of \"general public utility\". The Gujarat High Court held that to serve as a charitable purpose, it is not necessary that the object must be to serve the whole of mankind or all persons living in a country or province; it is required to be noted that if a section of the public alone are given the benefit, it cannot be said that it is not a trust for charitable purpose in the interest of the public; it is not necessary that the public at large must get the benefit; the criteria here is the objects of general public utility. Thus, the Gujarat High Court held that in order to be charitable, the purpose must be directed to the benefit of the community or a section of the community; the expression \"object of general public utility\", however, is not restricted to the objects beneficial to the whole of mankind; an object beneficial to a section of the public is an object of general public utility; the section of the community sought to be benefited must undoubtedly be sufficiently defined and identifiable by some common quality of a public or impersonal nature.\n\n 47. The above said decision (2000) 246 ITR 188 - Hiralal Bhagwati Vs. Commissioner of Income Tax) came up on April 18, 2000. Evidently, the Revenue has not gone on appeal as against this judgment. In the decision reported in (2008) 300 ITR 214(SC) in the case of Assistant Commissioner of Income Tax Vs. Surat City Gymkhana, reference was made about this decision and the Apex Court pointed out that the Revenue did not challenge this case and it attained finality.\n\n 48. It is no doubt true that the decision reported in (2008) 300 ITR 214(SC) in the case of Assistant Commissioner of Income Tax Vs. Surat City Gymkhana, was in the context of Section 10(23) of the Income Tax Act, 1961, nevertheless, the fact remains that the understanding of the scope of the expression \"general public utility\" would nevertheless is of relevance herein. Admittedly when the assessee was granted registration, the Revenue recorded its satisfaction that the objects are of charitable purpose. Thus only possible enquiry under Section 12AA of the Act for cancellation is to find out whether the activities of the trust are genuine or in accordance with the objects of the trust. If any of the income arising on the activities are not in accordance with the objects of the trust, the assessee\u0012s income, at best, may not get the exemption under Section 11 of the Act. But this, by itself, does not result in straight rejection of the registration as 'trust' under Section 12AA of the Act. Consequently, we reject the prayer of the Revenue that Section 12AA(1) of the Income Tax Act, 1961 must be read along with Section 12AA(3) of the Income Tax Act, 1961 before considering the cancellation.\n\n 49. As far as the unreported decision of this Court in T.C(A).No.91 of 2013 dated 29.04.2013 (Gowri Ashram Vs. Director of Income Tax (Exemptions) is concerned, on which heavy reliance was placed by the Revenue, the said decision relates to the rejection of the registration at the threshold of the application filed for registration. So too the decision of the Apex court reported in 315 ITR 428 in the case of Commissioner of Income Tax Vs. National Institute of Aeronautical Engineering Educational Society, wherein, rejection was made on the threshold of application for registration made by the assessee. The decisions relied on is thus distinguishable and has no relevance to the facts of the present case. \n\n 50. As far as unreported decision of this Court in T.C(A).No.91 of 2013 dated 29.04.2013 (Gowri Ashram Vs. Director of Income Tax (Exemptions) is concerned, while rejecting the appeal filed by the assessee on the rejection of the application for registration, this Court observed that it was open for the assessee Society to renew its application as and when it expanded the objects of the Society and were approved by the competent Court. The rejection order passed by the Revenue was on the ground that the objects of the trust were not charitable in character. This decision also has no relevance to the case on hand.\n\t51. As already noted in the preceding paragraphs, considering the provision under Section 12AA(3) of the Act, the cancellation or registration in a given case could be done only under the stated circumstances under Section 12AA(3) of the Act and in the background of the definition relevant to the particular year of registration. As rightly pointed out by the assessee, Revenue does not allege anything against the genuineness of the objects of the assessee or its activities. It rests its order only on the ground of the assessee receiving income from holding of matches which according to the assessee were not held by it. Thus, as regards the question as to whether the particular income qualified under Section 11 of the Act or not is not the same as activity being genuine or not. In the circumstances, we do not agree with the view of the Income Tax Appellate Tribunal that the order passed by the Director of Income Tax (Exemptions) was in accordance with the provisions of the Income Tax Act, 1961. He viewed that the conduct of test matches and ODI are in the nature of commerce or business. Though the assessee claimed their activities for promotion of sports, he held that the dominant feature is evident from the huge profits received and hence the amount received from BCCI as subsidy are commercial. As regards conducting of IPL Matches, he pointed out that though no services are rendered by the assessee for conducting the matches, the ground where the matches are played are given for rent which is a commercial venture. The subsidy received from BCCI included mainly TV Advertisements sold by BCCI for the conduct of IPL and their commercial receipts arising for IPL transactions. Therefore, the nature of receipt was important than the name of account under which it was accounted. Thus he viewed that the objects and activities would no longer come within the definition of Section 2(15) of the Act after the amendment come in effect from 01.04.2009. \n\n\t52. As rightly pointed out by the assessee, the Revenue does not question the objects of the Association as not genuine or are in accordance with the objects. All that the Revenue stated was that the nature of receipt could not be called a subsidy. Thus Revenue came to the conclusion that the objects and activities could not come within the meaning of 'charitable purpose' under Section 2(15) of the Act. \n\n\t53. On going through the materials, the Income Tax Appellate Tribunal pointed out that instead of promoting and developing the game of cricket, the assessee was promoting and developing cricket as an entertainment and the tickets are highly priced; here, the assessee has shifted the activities of general public utility to commercial activity for generating revenue; the public merely participate to view costly matches; hence the conditions of Section 12AA(3) were satisfied. The Income Tax Appellate Tribunal agreed with the Director of Income Tax (Exemptions) that the expression 'subsidy from BCCI' was a misleading nomenclature and it was a share from the revenue collected by BCCI from the sale of telecast rights. The surplus from IPL Season-I worked out to 8.5% of the total receipts. It further held that 78% of the total receipt came out of advertisement revenue. \n\n\t54. The Income Tax Appellate Tribunal pointed out that the physical aspect of the game was one in accordance with the objects of the assessee and the activities are genuine. However, the matches held were not in advancement of any specific object of general public utility. The pattern of receipt is commercial in character and the matches conducted are not in accordance with the objects of the Association. Thus, it rejected the assessee's case and held that both the conditions under Section 12AA(3) of the Act stood attracted. \n\n\t55. As seen from the observation of the Income Tax Appellate Tribunal, although generally it accepted the case of the assessee that the physical aspect of the game was one in accordance with the objects, the quantum of receipt apparently led the Income Tax Appellate Tribunal and the Revenue to come to the conclusion that the activities are commercial and hence by Section 2(15) proviso to the Act, the receipt from BCCI could not be called as subsidy. As for the observation of the Income Tax Appellate Tribunal that the twin conditions stood satisfied is concerned, it is not denied by the Revenue that at the time of granting registration, the Commissioner had satisfied himself about the objects of the trust and the genuineness of the activities as falling within the meaning of 'charitable purpose', as it stood in 2003. The Revenue does not deny as a matter of fact that the objects remain as it was in 2003 and there is no change in its content to call the assessee's object as not genuine. There are no materials to indicate that the grant of registration was not based on materials indicating objects of general public utility. \n\n\t56.The assessee is a member of Board of Control for Cricket in India (BCCI), which in turn is a member of ICC(International Cricket Council). BCCI allots test matches with visiting foreign team and one day international matches to various member cricket association which organise the matches in their stadia. The franchisees conduct matches in the Stadia belonging to the State Cricket Association. The State Association is entitled to all in-stadia sponsorship advertisement and beverage revenue and it incurs expenses for the conduct of the matches. BCCI earns revenue by way of sponsorship and media rights as well as franchisee revenue for IPL and it distributes 70% of the revenue to the member cricket association. Thus the assessee is also the recipient of the revenue. Thus, for invoking Section 12AA read with Section 2(15) of the Act, Revenue has to show that the activities are not fitting with the objects of the Association and that the dominant activities are in the nature of trade, commerce and business. We do not think that by the volume of receipt one can draw the inference that the activity is commercial. The Income Tax Appellate Tribunal's view that it is an entertainment and hence offended Section 2(15) of the Act does not appear to be correct and the same is based on its own impression on free ticket, payment of entertainment tax and presence of cheer group and given the irrelevant consideration. These considerations are not germane in considering the question as to whether the activities are genuine or carried on in accordance with the objects of the Association. We can only say that the Income Tax Appellate Tribunal rested its decision on consideration which are not relevant for considering the test specified under Section 12AA(3) to impose commercial character to the activity of the Association. In the circumstances, we agree with the assessee that the Revenue has not made out any ground to cancel the registration under Section 12AA(3) of the Act. \t\n\n\t57. As regards the observation of the Income Tax Appellate Tribunal that IPL Matches and Celebrity Cricket Matches are also being held by the Association and hence it is an entertainment industry, we need not go into these aspects, for, the order of the Director of Income Tax (Exemptions) casts no doubt on the genuineness of the objects of the trust. Hence, it is for the Assessing Officer to take note of all facts, while considering the same under Section 11 of the Income Tax Act, 1961. We disapprove the approach of the Tribunal in this regard. In the above said circumstances, we set aside the order of the Income Tax Appellate Tribunal. \n\n\t58. In the result, the Tax Case (Appeal) stands allowed. No costs. Consequently, connected MP is closed.\n\nIndex:Yes\t\t\t\t\t (C.V.,J) (T.S.S.,J)\nInternet:Yes\t\t\t\t\t\t 21.10.2013\t\nnvsri\n\n\nTo\n\n1. The Director of Income Tax (Exemptions)\n No.121, Mahatma Gandhi Road\n Nungambakkam, Chennai-600 034\n\n2.The Deputy Director of Income Tax\n Exemptions-I, 121 Mahatma Gandhi Road\n Chennai-600 034\n\n3.The Joint Director of Income Tax (Exemptions)\n 121, Mahatma Gandhi Road, Nungambakkam\n Chennai-600 034\n\n4.The Income Tax Appellate Tribunal\n B Bench, Chennai.\n\t\t\t\t\tCHITRA VENKATARAMAN, J.\n\t\t\t\t\t\t\t\t\tand\t\n\t\t\t\t\t\tT.S.SIVAGNANAM, J.\n\n\nnvsri\n\n\n\n\n\n\n\n\n\n\n\nTax Case (Appeal) No.450 of 2013\n\n\n\n\n\n\n\n\n\n\n21.10.2013" }, { "title": "C.N. Paramasivam vs Sunrise Plaza on 31 March, 2010", "url": "https://indiankanoon.org//doc/1250198/", "text": "C.N. Paramasivam vs Sunrise Plaza on 31 March, 2010\nAuthor: C.Nagappan\nBench: C. Nagappan\n \n\n \n\n \n\n \n \n IN THE HIGH COURT OF JUDICATURE AT MADRAS\n\n\nDATED: 31.03.2010\n\nC O R A M\n\nTHE HONOURABLE MR. JUSTICE C. NAGAPPAN\n\nand\n\nTHE HONOURABLE MR. JUSTICE T.S.SIVAGNANAM\n\nWrit Petition No.14594 of 2007\nand\nM.P.Nos.1 and 2 of 2007\n\n\n1. C.N. Paramasivam\n2. E.M.C. Palaniappan\t\t \t ... Petitioners \n\nVs\n\n1. Sunrise Plaza,\nrepresented by its Partner \n Kalyanasundaram\nNo.637-638 (321-C),\nPoonamallee High Road\nAminjikarai, Chennai-600 029.\n\n2. S.Kalyanasundaram\nNo.637-638 (321-C),\nPoonamallee High Road\nAminjikarai, Chennai-600 029.\n\n3. Mrs.Vasantha Kalyanasundaram\nNo.637-638 (321-C),\nPoonamallee High Road\nAminjikarai, Chennai-600 029.\n\n4. Indian Bank\nAnna Nagar Branch,\nChennai-600 040.\n\n5. The Debts Recovery Appellate Tribunal,\nChennai.\t\t\t\t \t ... Respondents\n\n\n Prayer:- Writ petition filed under Article 226 of the Constitution of India praying for issuance of a Writ of Certiorari calling for the records of the Debt Recovery Appellate Tribunal, Chennai in MA.No.90 of 2006 and quashing the order of the Debt Recovery Appellate Tribunal, dated 28.2.2007 in MA.No.90 of 2006.\n\n\n\t\t For Petitioners ... Mr. R. Murari\n\n\t For Respondents ... Mr.T.V.Ramanujam, \t\n\t\t\t\t Senior Counsel \n\t\t\t\t for M/s.S.Ramesh\t\n\t\t\t\t for Respondents 1 to 3\n\n\t\t\t\t Mr.M.Vijayan\n\t\t\t\t for M/s.King & Partridge\n\t\t\t\t\tfor R4.\t\n\t\n O R D E R\nC.NAGAPPAN, J.\n\n\tThe petitioners have sought for issuance of a Writ of Certiorari to quash the order dated 28.2.2007 passed by the Debt Recovery Appellate Tribunal, Chennai in MA.No.90 of 2006.\n\n\t2. The facts which led to the filing of the writ petition are as follows. The first respondent is a Partnership Firm and respondents 2 and 3 are its partners. The first respondent availed loan from the fourth respondent Bank to the limit of Rs.90 lakhs on 9.9.1991. The respondents 2 and 3 also created equitable mortgage on their properties by depositing the title deeds for the said loan. There was default in repayment and for recovery, the fourth respondent herein filed Original Application in O.A.No.238 of 1998 on the file of Debts Recovery Tribunal at Chennai and it was re-numbered as O.A.No.1098 of 2001.\n\n\t 3. Respondents 1 to 3 were set exparte on 25.2.1999 and exparte Decree also came to be passed on 20.9.1999. The respondents 1 to 3 filed Application in I.A.No.2240 of 1999 for setting aside the exparte order and Application in I.A.No.2606 of 1999 for setting aside the exparte Decree. The Applications were dismissed for default on 20.11.2001. The respondents 1 to 3 herein filed I.A.Nos.897 and 898 of 2001 to restore the Interlocutory Applications in I.A.Nos.2240 and 2606 of 1999 and they were dismissed on 1.5.2002.\n\n\t 4. In the meanwhile, in execution of the Recovery Certificate, the immovable property was brought to sale by public auction held on 7.3.2003 and the petitioners herein took part in the auction and purchased the property. The respondents 1 to 3 filed I.A.No.146 of 2003 for setting aside the auction held on 7.3.2003 and I.A.No.150 of 2003 seeking for not to confirm the sale. The Debts Recovery Tribunal passed a conditional order, dated 10.4.2003 in I.A.No.150 of 2003 to defer the confirmation of sale on condition the respondents 1 to 3 paying a sum of Rs.10 lakhs to the Bank or to the Recovery Officer on or before 25.4.2003. The Tribunal dismissed I.A.No.146 of 2003 on 15.4.2003 as not maintainable. When the matter was called on 25.4.2003, the respondents 1 to 3 sought for extension of time and the Debts Recovery Tribunal rejected the request and allowed the Recovery Officer to proceed further in accordance with law. Sale Certificates were issued to the petitioners on 28.5.2003. \n\n\t 5. The respondents 1 to 3 herein filed appeal in IN.No.197 of 2003 challenging the orders passed by the Debts Recovery Tribunal-II, Chennai in I.A.Nos.897 and 898 of 2001 and the Debts Recovery Appellate Tribunal, by order dated 29.8.2003 directed the appellants therein/respondents 1 to 3 herein to pay requisite Court fee if they want to challenge the final order of Debts Recovery Tribunal. Challenging the abovesaid order of the Appellate Tribunal, the respondents 1 to 3 herein filed Writ Petition in W.P.No.28235 of 2003 without notice to the Court auction purchasers viz. the petitioners herein and this Court by Order dated 14.10.2003 set aside the exparte Decree passed by the Debts Recovery Tribunal subject to payment of costs of Rs.10,000/- to the fourth respondent Bank. The order was complied with and the Original Application is still pending.\n\n\t 6. Challenging the Order of this Court in W.P.No.28235 of 2003, the fourth respondent Bank has preferred Special Leave Petition before the Supreme Court and it was dismissed by Order dated 8.7.2004. Thereafter, the fourth respondent Bank filed Review Application No.13 of 2004 and the petitioners herein filed Review Application No.19 of 2004 seeking for review of the Order dated 14.10.2003 passed in W.P.No.28235 of 2003 and this Court dismissed the Review Applications by Order dated 5.10.2004 by observing that the auction purchasers are free to represent their case before the Debts Recovery Tribunal in the main Original Application.\n\n\t7. Based on the above observation, the petitioners herein filed Application in I.A.No.20 of 2005 on the file of Debts Recovery Tribunal-II, Chennai seeking for delivery of possession of the property purchased by them. The Debts Recovery Tribunal, by order dated 28.3.2006, allowed the Application by directing the Recovery Officer to put the petitioners in possession of the property. The respondents 1 to 3 herein challenged the said order by preferring Appeal in M.A.No.90 of 2006 before the Debts Recovery Appellate Tribunal, Chennai and the Appellate Tribunal by order, dated 13.7.2006, allowed the appeal and set aside the order and directed the Debts Recovery Tribunal to take up the Interlocutory Application in I.A.No.20 of 2005 along with O.A.No.1098 of 2001 and dispose of them in accordance with law. Challenging the said order, the petitioners herein preferred writ petition in W.P.No.29356 of 2006 and a Division Bench of this Court, by Order dated 29.11.2006, set aside the order of the Appellate Tribunal and remitted the case to Debts Recovery Appellate Tribunal to decide the issue whether the rights of the bonafide purchasers stand curtailed or not even after the exparte Decree is set aside. On remand, the Debts Recovery Appellate Tribunal held that the petitioners herein are not bonafide purchasers of the property and set aside the sale and directed the respondents 1 to 3 to deposit the entire amount claimed in Original Application. The said impugned order is challenged in the present writ petition.\n\n\t8. Mr.R.Murari, learned counsel for the petitioners, submitted that the petitioners were not made parties to any Application filed by respondents 1 to 3 and the question of being aware of any such Application at the time when the sale was confirmed in their favour would not arise and the finding of the Debts Recovery Appellate Tribunal that the petitioners were live to the litigation between the Decree Holder and the Judgment Debtors and purchased the properties with a view to make a capital out of it and they are not bonafide purchasers and their purchase cannot be lawfully protected is totally incorrect and liable to be set aside. It is his further contention that though the petitioners were not aware of the petitions filed by the respondents 1 to 3/Judgment debtors to set aside the sale, it however transpires that the Recovery Officer had passed conditional order directing them to deposit a sum of Rs.10 lakhs as pre-condition for the sale not being confirmed and they failed to comply with such a condition and the petitions were dismissed and the sale was confirmed and therefore the respondents 1 to 3 could not be permitted to rely upon any such application at this point of time and the petitioners who are strangers to the Court proceedings have purchased the properties in the Court auction sale and the sale has been confirmed and they are bonafide purchasers and the sale in their favour is protected and they cannot be asked to restitute the properties to the Judgment Debtors even if the Decree is set aside and as bonafide purchasers, they are entitled to possession of the properties and the order of the Appellate Tribunal is erroneous and liable to be set aside. In support of his submission, he relied on the following decisions of the Supreme Court and this Court.\n\n\"1.JANAK RAJ V. GURDIAL SINGH (AIR 1967 SUPREME COURT 608)\n2. GURJOGINDER SINGH VS. JASWANT KAUR (SMT) AND ANR. (SC) (1994) 2 SCC 368)\n3. PADANATHIL RUQMINI AMMA V. P.K.ABDULLA (1996) 7 SCC 668)\n4. ASHWIN S.MEHTA AND ANOTHER V. CUSTODIAN AND OTHERS (2006) 2 SCC 385)\n5. JANATHA TEXTILES AND ORS. VS. TAX RECOVERY OFFICER AND ANR. (2008)\t8 SCALE 76)\n6. S. CHOKALINGAM ASARI V. N.S.KRISHNA IYER AND OTHERS (A.I.R. 1964 MADRAS 404)\"\n\n 9. Per contra, Mr. T.V. Ramanujam, learned Senior Counsel appearing for the respondents 1 to 3/Judgment Debtors submitted that the petitioners are not bonafide purchasers for valid consideration and the properties have been sold for a pittance while the actual value is more than Rs.8 Crores and the petitioners were well aware of the Applications filed by the respondents 1 to 3 herein for setting aside the exparte Decree and to stay the sale and with the knowledge of pending litigation, the purchase has been made and such purchase is not legally protected and in any event the Application seeking possession has been filed beyond the statutory period of limitation viz. one year, as prescribed under Article 134 of the Limitation Act and it is hit by limitation and hence it is not maintainable. The learned Senior Counsel further contended that the auction sale proceedings became void due to operation of Rule 57 Second Schedule to Income Tax Act, 1961, when the Auction Purchasers failed to deposit 25% of the auction amount on the date of auction after declaration as successful bidders and even after default of such deposit, the property was not re-sold and further the Auction purchasers had failed to deposit the balance of purchase money within a period of fifteen days as mandated in Rule 57 as well as in the Terms and Conditions of sale and the Sale had become null and void and the Sale proceedings are completely wiped out as if they do not exist in the eye of law and the petitioners are not entitled to possession and order of the Appellate Tribunal is sustainable. In support of his submission, the learned Senior Counsel relied on the following decisions of the Apex Court and High Court.\n\n\"1. MANILAL MOHANLAL SHAH AND OTHERS V. SARDAR SAYED AHMED SAYED MAHMAD AND ANOTHER (AIR 1954 SUPREME COURT 349)\n2. RAO MAHMOOD AHMED KHAN V. Sh. RANBIR SINGH AND OTHERS (AIR 1995 SUPREME COURT 2195)\n3. BALRAM SON OF BHASA RAM V. ILAM SINGH AND OTHERS (AIR 1996 SUPREME COURT 2781)\n\n4. NARAYANA KARWA V. UNION OF INDIA [2008] 296 ITR 0545]\"\n\n\t10. In reply, Mr. Murari, the learned counsel for the petitioners submitted that the respondents 1 to 3/Judgment Debtors have for the first time raised the plea that the sale had become null and void because of non-compliance of provisions of Rule 57 of Second Schedule to the Income-Tax Act, 1961 in the additional counter filed by the respondents 1 to 3 on 5.11.2009 and the sale proceedings would be conducted by the Recovery Officer as per the procedure contained in Second Schedule to Income-Tax Act and the Recovery Officer would follow such Rules contained in Second Schedule as far as possible with necessary modifications to the extent necessary and there is a discretion conferred on the Recovery Officer under Section 29 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, to follow Rule 57 as far as possible and it makes Rule 57 as directory only and the petitioners had deposited 25% of the bid amount by Draft and Cheque on the date of sale itself and the balance of the purchase money has also been deposited and it is not open to the respondents to challenge the sale proceedings on the ground of violation in conduct of sale and valuable rights have accrued to the Auction purchasers and there is no force in the submission made by the learned Senior Counsel appearing for the respondents 1 to 3. In support of this submission, the learned counsel for the petitioners relied on the decision of a Division Bench of Andhra Pradesh High Court in P.MOHANREDDY AND ORS. VS. DEBTS RECOVERY APELLATE TRIBUNAL AND ORS. (AIR 2004 AP 94).\n\n\t11. From the submissions made at the Bar, it would emerge that the sale proceedings are challenged on the ground of non-compliance of provision of Rule 57 of Second Schedule to Income-Tax Act, 1961 for recovering the amount of debt due.\n\n 12. Section 29 of Recovery of Debts Due to Banks and Financial Institutions Act, 1993 makes the Second and Third Schedules to the Income-Tax Act , 1961 applicable for recovery of debt due under the Act. Rules 57 and 58 of Second Schedule to the Income-Tax Act, 1961 are relied upon to have the auction sale set aside for breach of the said Rules. The said Rules read as under.\n\n\t\"57. Deposit by purchaser and resale in default:- (1) On every sale of immovable property, the person declared to be the purchaser shall pay, immediately after such declaration, a deposit of twenty five per cent on the amount of his purchase money, to the Officer conducting the sale; and, in default of such deposit, the property shall forthwith be resold.\n\n(2) The full amount of purchase money payable shall be paid by the purchaser to the Tax Recovery Officer on or before the fifteenth day from the date of sale of the property.\n\n\t58. Procedure in default of payment:- In default of payment within the period mentioned in the preceding rule, the deposit may, if the Tax Recovery Officer thinks fit, after defraying the expenses of the sale, be forfeited to the Government, and the property shall be resold, and the defaulting purchaser shall forfeit all claims to the property or to any part of the sum for which it may subsequently be sold.\"\n\nSimilar provisions are contained in Code of Civil Procedure, 1908 also. Rule 57 is identically worded as that of Rules 84 and 85 of Order 21 of CPC and Rule 58 is identically worded as that of Rule 86 of Order 21 of CPC. The principles and decisions interpreting Rules 84, 85 and 86 of Order 21 of CPC would squarely apply in case of Rules 57 and 58 of Second Schedule to Income-Tax Act, 1961. \n 13. The Supreme Court considered Rules 84, 85 and 86 of Civil Procedure Code in the decision in MANILAL MOHANLAL SHAH'S CASE (AIR 1954 SUPREME COURT 349) and laid down as follows.\n \"8. The provision regarding the deposit of 25 per cent by the purchaser other than the decree-holder is mandatory as the language of the rule suggests. The full amount of the purchase money must be paid within fifteen days from the date of the sale but the decree-holder is entitled to the advantage of a set-off. The provision for payment is, however, mandatory (Rule 85). If the payment is not made within the period of fifteen days, the court has the discretion to forfeit the deposit and there the discretion ends but the obligation of the court to re-sell the property is imperative. A further consequence of non-payment is that the defaulting purchaser forfeits all claim to the property ... (Rule 86).\n\n 9. ..... There was default in depositing 25 percent of the purchase money and further there was no payment of the full amount of the purchase money within fifteen days from the date of the sale. Both the deposit and the payment of the purchase money being mandatory under the combined effect of rules 84 and 85, the Court has the discretion to forfeit the deposit but it was bound to re-sell the property with the result that on default the purchaser forfeited all claim to the property. These provisions leave no doubt that unless the deposit and the payment are made as required by the mandatory provisions of the rules there is no sale in the eye of law in favour of the defaulting purchaser and no right to own and possess the property accrues to him.\n 10. ....\n 11. Having examined the language of the relevant rules and the judicial decisions bearing upon the subject we are of opinion that the provisions of the rules requiring the deposit of 25 per cent of the purchase money immediately on the person being declared as a purchaser and the payment of the balance within 15 days of the sale are mandatory and upon non-compliance with these provisions there is no sale at all. The rules do not contemplate that there can be any sale in favour of a purchaser without depositing 25 per cent of the purchase money in the first instance and the balance within 15 days. When there is no-sale within the contemplation of these rules, there can be no question of material irregularity in the conduct of the sale. Non-payment of the price on the part of the defaulting purchaser renders the sale proceedings as a complete nullity. The very fact that the court is bound to re-sell the property in the event of a default shows that the previous proceedings for sale are completely wiped out as if they do not exist in the eye of law. We hold, therefore, that in the circumstances of the present case there was no sale and the purchasers acquired no rights at all.\"\n\nThe above decision has been followed by the Supreme Court in the subsequent decision in BALRAM SON OF BHASA RAM'S CASE (AIR 1996 SUPREME COURT 2781) and it was held that the duty to pay the full amount of purchase money within the prescribed period of 15 days from the date of sale is cast on the purchaser by virtue of Rule 85 of Order XXI CPC and therefore, the entire responsibility to make full compliance of the mandatory provision is his and non-compliance of the same would render the sale a nullity.\n\n 14. The Auction Sale Notice, in the present case, is found in the typed set filed by respondents 1 to 3 and the Upset Price fixed was Rs.1,15,00,000/- (Rupees One Crore and Fifteen Lakhs only) and the Conditions mentioned therein are as follows.\n\n\"1. The intending bidders should pay 10% of the upset price of the property as EMD by means of a D.D. Drawn in favour of the Recovery Officer, Chennai Debts Recovery Tribunal-II, Chennai payable at Chennai before 12 Noon on the date of auction. They can inspect the property between 11.00 A.M., and 3.00 P.M. on 8.2.2003.\n\n2. The successful bidder should pay 25% of the bid amount (less the E.M.D) immediately on the sale being knocked down in his favour and the balance money within 15 days.\n\n3. The successful bidder should bear the charges/fee payable for conveyance such as Registration fee, stamp duty etc as applicable as per law in addition to poundage fee.\n\n4. The Recovery officer has the absolute right to accept or reject a bid or postpone/cancel the sale.\n\n5. .......\"\n\nThe auction was held on 7.3.2003 at 3.30 pm and the petitioners bid for a sum of Rs.1,15,50,000/- (Rupees One Crore and Fifteen Lakhs and Fifty thousand only) was accepted.\n\n\t15. The petitioners claim that they have paid the deposit of 25% on the amount of purchase money on the date of sale itself. As per the order of the Recovery Officer dated 7.3.2003, a copy of which is found in the typed set filed by the respondents 1 to 3, the deposit of 25% of the purchase money is made by the petitioners in the following manner and for better appreciation, the order is reproduced below.\n\"DRC 164/2001\t\n Received Rs.28,87,500/- (Rupees twenty eight lakhs eighty seven thousand five hundred only) consisting 2 DDs for 11,50,000/- and 2 cheques for Rs.17,37,500/- towards 25% bid amount from Mr.C.N.Paramasivam, 16, TTK Road, 1st Cross Street, Alwarpet, Chennai-18 and Mr.E.M.C.Palaniappan, 46, Prakasam Street, T.Nagar, Chennai-17 for the properties auctioned on 7-3-2003 in the above DRC proceedings and the balance bid amount and 1% poundage payable by the bidders within 15 days is Rs.87,78,000/-.\"\n\nFrom the above, it is seen that the petitioners have paid a sum of Rs.17,37,500/- (Rupees seventeen lakhs thirty seven thousand five hundred only) by two cheques while making the deposit of 25% of the amount of the purchase money.\n\n\t16. The Supreme Court, in the decision in RAO MAHMOOD AHMED KHAN'S CASE (AIR 1995 SUPREME COURT 2195), while interpreting Rule 285-D of the U.P. Zamindari Abolition and Land Reforms Rules, which is regarded as parimateria to Rule 84 of Order XXI of CPC held that the deposit of 25 per cent of bid amount by cheque will not be a valid tender within the meaning of the Rule and the Rule does not contemplate any payment by cheque but a cash deposit of 25 per cent of the bid amount and there was non-compliance of the rule. For better appreciation, the relevant observation made by Their Lordships in the said decision are as follows:\n \"11. Thus, it is settled law that the provisions of Order 21, Rule 84, 85 and 86 of the Code of Civil Procedure are mandatory and the provisions of Rules 285-D and 285-E being similar in terms of the aforementioned corresponding provisions of the Code of Civil Procedure and in view of the aforesaid discussion there is no escape from declaring the sale a nullity if Rule 285-D is not complied with.\n\n 12. ..... The question is whether such a payment by cheque could be regarded as a valid deposit within the meaning of Rule 285-D. As discussed above Rule 285-D is a mandatory rule according to which if 25 per cent of the bid amount is not deposited immediately the land shall forthwith be again put up and sold. In other words on the failure of the purchaser to deposit 25 per cent of the bid amount immediately the land shall be resold immediately after such failure the very same day. If for instance the 25 per cent of the bid amount is accepted by cheque and subsequently the purchaser changes his mind and advises his banker not to encash the cheque or there is no amount in the account of the purchaser in the bank and the cheque is bounced, the purpose of Rule 285-D would be frustrated and thus the mandatory provisions would be rendered nugatory. The result would be that neither the authorities would be in a position to forfeit any amount of the purchaser nor the authority would be in a position to defray the expenses of the sale as contemplated by Rule 285-E. The other consequence that will follow is that the re-sale of land will have to be delayed and a fresh proclamation for sale has to be issued as provided by Rule 285-G. It, therefore, appears to us that Rule 285-D does not contemplate any payment by cheque but a cash deposit of 25 per cent of the bid amount has to be made in accordance with the requirement of the rule, otherwise the very purpose of the mandatory rule 285-D would be frustrated and rendered nugatory. In these facts and circumstances we are of the view that deposit of 25 per cent of the bid amount by cheque will not be a valid tender within the meaning of the rule.\"\n\n 17. Rule 57 of Second Schedule to Income-Tax Act, 1961 is a mandatory Rule directing a deposit of 25 per cent on the amount of the purchase money immediately on being declared to be the purchasers and it does not contemplate any payment by cheque but a cash deposit of 25 per cent of the purchase money and hence part payment of deposit of 25 per cent of the purchase money by cheques will not be a valid tender within the meaning of the Rule and there was no compliance of Rule 57(1) as well as the Conditions of auction sale.\n\n\t18. The second limb of the contention of the learned Senior Counsel appearing for the respondents 1 to 3 pertaining to non-compliance of provision of Rule 57(2) is that the Auction purchasers viz. the petitioners had failed to deposit the balance purchase money within a period of fifteen days from the date of sale and hence there was no sale at all.\n\n\t19. The payment of balance of purchase money within fifteen days from the date of sale is mandatory as per Rule 57 and it is also mandatory condition stipulated in the Auction Sale Notice. Moreover, the Recovery Officer in his order dated 7.3.2003, referred above, has also reiterated that the balance of bid amount and one per cent poundage fee payable by the petitioners within 15 days is Rs.87,78,000/- (Rupees eighty seven lakhs and seventy eight thousand only). The period of fifteen days from the date of sale lapsed on 22.3.2003. Admittedly, the auction purchasers/petitioners did not pay the balance of purchase money till 22.3.2003. They did not also file any petition seeking for extension of time.\n\n\t20. The petitioners in their letter dated 2.5.2003 addressed to the Recovery Officer, a copy of which is found in the typed set, have stated that after the payment of deposit of 25 per cent of the purchase money, they have paid a sum of Rs.10 lakhs on 30.4.2003 and they are remitting on the said date, viz. 2.5.2003, a sum of Rs.15,00,000/- (Rupees fifteen lakhs only) by Pay Order dated 2.5.2003, drawn on Indus Ind Bank; a Cheque for Rs.2,00,000/- (Rupees two lakhs only) dated 2.5.2003 , drawn on HDFC Bank and a Cheque for Rs.1,89,000/- (Rupees one lakh and eighty nine thousand only) dated 2.5.2003, drawn on Citi Bank and they have further stated in their letter that there is a balance of purchase money to the tune of Rs.50,00,000/- (Rupees fifty lakhs only) as on that date and a loan has been sanctioned to them by LIC Housing Finance Limited, Teynampet Branch for a sum of Rs.50,00,000/- (Rupees fifty lakhs only) subject to condition that the Debts Recovery Tribunal would register the property individually in the names of the petitioners conveying 50% undivided share of the property in each person's favour and the balance amount of Rs.50 lakhs would be remitted by LIC Housing Finance Limited, Teynampet Branch on their behalf and the petitioners requested for issuance of letters individually to them stating the balance and that the property would be registered individually in their names as undivided share of land. The petitioners also filed individual memo dated 6.5.2003 before Debts Recovery Tribunal-II stating that they have paid a sum of Rs.59 lakhs approximately constituting 50% of the bid amount and the balance of 50% remains to be paid and LIC Housing Finance Limited, Teynampet Branch has sanctioned loans in their individual names for the above amount and they pray for issuance of Certificate of Sale representing 50% of undivided share in respect of the property to each of them. Pursuant to the above request of the petitioners, the Recovery Officer issued individual Certificate to each of the petitioners certifying that they are joint successful bidders of the properties in the Auction held on 7.3.2003 and balance of Rs.25 lakhs is payable by each of the petitioners. Thereafter, on 28.5.2003, individual Sale Certificate in the names of the petitioners were issued by the Recovery Officer. From the above, it is clear that the Auction purchasers/petitioners did not pay the balance of purchase money within fifteen days of sale viz. 22.3.2003 and no payment was made during that period and they have paid the full amount of purchase money only in the month of May, 2003. There was clear non-compliance of Rule 57 and also the Conditions of sale.\n\n\t21. A Division Bench of the Bombay High Court in the decision in NARAYAN KARWA'S CASE [2008] 296 ITR 545) considered Rule 57 of Second Schedule of Income-Tax Act, 1961 and held that failure to deposit the entire purchase money on or before the fifteenth day from the date of sale not only renders the sale invalid but also renders the 25 per cent purchase price deposited on the date of auction liable to be forfeited. For better appreciation, the relevant portion of the above decision is extracted below.\n\n \"However, in the present case, it is an admitted fact that respondent No.4 has failed to deposit the entire purchase price within the time stipulated under the Act. According to the petitioners, failure to deposit the entire purchase price within the stipulated time, not only renders the sale invalid but also renders the 25 per cent deposit made on the date of auction liable to be forfeited.\n It is not necessary for us to go into the question as to whether the failure on the part of the auction purchaser to deposit the entire purchase price within the stipulated time renders the 25 per cent purchase price deposited on the date of auction sale liable to be forfeited. Suffice it to say that the order of the Tax Recovery Officer in confirming the auction sale on July 11, 1991, is wholly unjustified because, in the present case, respondent No.4 has not deposited the entire purchase price on or before the fifteenth day from the date of sale, in spite of the specific provision contained in rule 57 of the Second Schedule to the Act and in spite of specific clause No.24 contained in the terms and conditions of sale.\n..... .....\nThere is no merit in this contention, because there is neither any provision under the Act which permits the auction purchaser to deposit the entire purchase price beyond the period of fifteen days from the date of sale nor there is any provision empowering any authority to grant extension of time. Therefore, the Tax Recovery Officer could not have accepted the balance purchase price beyond the period of fifteen days from the date of sale. The argument that respondent No.4 had the requisite money and that he was ready and willing to pay the entire purchase price within the stipulated time cannot be accepted, because, in our opinion, under rule 57 read with the terms and conditions of sale, it was mandatory on the part of respondent No.4 to deposit the entire purchase price on or before the fifteenth day from the date of sale. Once it is admitted that the entire purchase price has not been deposited within the stipulated time, then, it must be held that the sale had become invalid and the Tax Recovery Officer could not have confirmed the sale.\"\n\nThe ratio of the above decision is applicable to the facts of the present case.\n\n 22. There is no separate procedure laid down in Recovery of Debts Due to Banks and Financial Institutions Act, 1993 for recovering the debt due. Section 29 of the Act makes Second and Third Schedules to Income-Tax Act, 1961 and the Income-Tax (Certificate Proceedings) Rules, 1962 as in force from time to time, as far as possible applicable with necessary modifications as if the said provisions and the Rules referred to the amount of debt due under the Act instead of to the Income-Tax.\n\n\t23. A Division Bench of the Andhra Pradesh High Court in the decision in P.MOHANREDDY AND OTHER'S CASE (AIR 2004 AP 94) held that Section 29 of the Act does not enjoin upon the Recovery Officer to follow the provisions of Recovery of Tax Rules provided in Second Schedule to Income-Tax Act in letter and spirit but gives him discretion to follow the same as far as possible and Section 29 of the Act makes Rule 57 as directory only and the belated payment of purchase money will not affect the legality and validity of the sale.\n\n\t24. With respect, we are not in agreement with the view taken by the Division Bench of Andhra Pradesh High Court in the above decision.\n\n\t25. Section 29 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 makes the Second Schedule to the Income Tax Act applicable for recovery of the debt due and the Recovery Officer is bound to follow the said rule. In the absence of any rule under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 modifying the Second Schedule to Income-Tax Act, 1961, it is not open to the Recovery Officer to deviate from the said rules and make modifications of his own. The rules do not contemplate that there can be any sale in favour of a purchaser without depositing 25% of the purchase money in the first instance and the balance within 15 days. The very fact that the Recovery Officer is bound to resell the property in the event of default shows that the previous proceedings for sale are completely wiped out. The only discretion conferred on the Recovery Officer is whether to forfeit the deposit of defaulting purchaser or not. \n\n \t26. Keeping in view the intent and object of Recovery of Debts Due to Banks and Financial Institutions Act, 1993, in our view, the Recovery Officer is obliged to follow the provisions of Second and Third Schedules to the Income-Tax Act, 1961 with regard to recovery of debt due and in the absence of any modification, Rule 57 is mandatory only.\n\n\t27. The petitioners, being auction purchasers, failed to deposit 25% of the purchase money on the date of sale and the full amount of purchase money within 15 days from the date of sale and having not complied with the mandatory provision under Rule 57 read with the conditions of sale have forfeited all claim to the properties. \n\n 28. In view of our conclusion that there was no sale and the purchasers acquired no rights at all to the properties, there is no need to go into the merits of the contentions as to whether the petitioners are bonafide purchasers and as to whether the claim of the petitioners is barred by the provisions of the Limitation Act.\n\n\t29. The conclusion of the Debts Recovery Appellate Tribunal that the sale in favour of the petitioners cannot be legally protected and liable to be set aside, is sustainable albeit for the reasons stated above.\n\n\t30. The Writ Petition is dismissed. However, there shall be no order as to costs. Connected M.P.Nos.1 and 2 of 2007 are closed.\n\n \t\t\t\t (C.N., J.) (T.S.S., J.) \t\t\t\t\t\t \t\t\t\t \t 31 .3.2010 \n\nIndex: Yes.\nInternet: Yes. \nvks\n\n\nTo\n\n1. Indian Bank\nAnna Nagar Branch,\nChennai-600 040.\n\n2. The Registrar,\nDebts Recovery Appellate Tribunal,\nChennai.\t\n \n\n\n\nC.NAGAPPAN, J.\nand \nT.S.SIVAGNANAM, J.\nvks\n\n\n\n\n\nW.P.No.No.14594 of 2007\nand\nM.P.Nos.1 and 2 of 2007\n\n\n\n\n\n\n\n\n\n 31.3.2010" }, { "title": "Chowgule And Co. Ltd. vs Commissioner Of Income-Tax And Others on 3 March, 1992", "url": "https://indiankanoon.org//doc/353111/", "text": "Chowgule And Co. Ltd. vs Commissioner Of Income-Tax And Others on 3 March, 1992\nEquivalent citations: 1992(3)BOMCR256, [1992]195ITR810(BOM)\nJUDGMENT\n \n\n M.L. Dudhat, J. \n \n\n 1. The petitioners in this writ petition have challenged the order passed by respondent No. 1 on March 30, 1989, and also have challenged the vires of rule 115(c) of the Income-tax Rules, 1962, under the Income-tax Act, 1961. \n\n 2. The only point to be decided in this petition is whether, on the facts and circumstances of the case, respondent No. 1, while passing an order in revision under section 263 of the Income-tax Act, was right in holding that the amount of income received in foreign exchange by the assessee during the period from July 1, 1982, to June 30, 1983, should be converted into rupees on the basis of the exchange rates prevailing as on the last date of the previous accounting year i.e., June 30, 1983. In order to understand the aforesaid controversy, it is desirable to go through certain facts of this case. \n\n3. The petitioners in this case are a company incorporated under the Companies Act, 1956. The petitioners are exporting iron ore to foreign countries, more particularly to Japan. The petitioners entered into agreements for sale of iron ore with foreign buyers at certain prices. As per he arrangements between the foreign buyers and the petitioners, the foreign buyers opened a letter of credit with a bank in India. As soon as the iron ore is loaded into the ship, the bill of lading is signed by the master of the ship and the petitioners raise invoices against the foreign buyers for the price of the ore shipped. Thereafter, these documents are presented by the petitioners to their banker in rupees at the rate of exchange prevailing then. If on the date of closing of the financial year any amount of sale proceeds remains outstanding, it is converted into Indian repees at the rate of exchange prevailing of the last day of the financial year and is entered in the books of the petitioners and accounted for as their income. The petitioners further contended in the petition that, for the last many years, this method of accounting of income in respect of export sales has been accepted by the respondents and by other income-tax authorities all over the country. \n\n 4. For the assessment year 1984-85, the Assessing Officer accepted the income from the exports of the petitioners returned on the aforesaid basis of accounting and passed an assessment order dated February 19, 1987. However, on March 22, 1989, the petitioners received a notice stating that the assessment order dated February 19, 1987, passed by the Assessing Officer was prejudicial to the interests of the Revenue within the meaning of the provisions of section 263 of the Income-tax Act, 1961. It was also stated in the aforesaid notice that, while arriving at the value of the sales made to various foreign companies, the Assessing Officer should have applied rule 115(c) of the Income-tax Rules, 1962, and the export earnings should have been converted into Indian rupees accordingly which the Assessing Officer failed to do. Respondent No. 1, therefore, proposed to amend the assessment order for the assessment year 1984-85 on the aforesaid grounds. To the aforesaid show-cause notice which is at annexure P-1, the present petitioners replied by their letter which is at annexure P-2, dated March 23, 1989, stating in it that the Assessing Officer was right in passing the order date February 19, 1987, and that the provisions of rule 115(c) of the Income-tax Rules, 1962, are not applicable to the facts and circumstances of the present case. \n\n 5. However, by order dated March 30, 1989, respondent No. 1 rejected the contention of the present petitioners and held that the petitioners should have converted their earnings at the rate of exchange as required under rule 115 of the Income-tax Rules, 1962. According to respondent No. 1, the petitioners are not entitled to convert their foreign exchange earnings at the rate actually prevailing on the various dates on which the amount of earnings had actually been received by the petitioners in the previous year. According to respondent No. 1, the petitioners ought to have converted their export earnings at the rate of exchange prevailing as on June 30, 1983, being the last date of the previous year as per rule 115 of the Income-tax Rules, 1962. The first respondent, therefore, directed the Assessing Officer to modify the assessment in the light of this decision. \n\n 6. The petitioners, in paragraph 8 of their petition, have stated as under : \n\n \"The application of rule 115 of the Income-tax Rules, 1962, to the petitioners' export earnings will yield the following result : \n\n The petitioners' accounting year relevant to the assessment year 1984-85 was July 1, 1982, to June 30, 1983. Suppose goods worth 100 dollars were exported in the month of July, 1082, when the rate of exchange was Rs. 9.50 per dollar. The petitioner actually received Rs. 950 and accounted for the same as income in the books of the petitioner. If, however, on June 30, 1983, the rate moved to Rs. 10.06 per dollar then, by virtue of rule 115, the petitioner would be assessed on the amount of Rs. 1,006 even though in fact he had realised only Rs. 950 and there was no possibility or question whatsoever of recovering the additional amount of Rs. 56 which was clearly a notional figure. The petitioner would thus be taxed on an amount which was not only not received, but to which he was not entitled at any time and which the petitioner would not be able to realise and which really did not exist.\" \n\n 7. After going through the aforesaid contentions of the petitioners as mentioned in paragraph 8 of the petition, it becomes clear that, if the petitioners are directed to pay tax on their income in foreign exchange as per rule 115 of the Income-tax Rules, 1962, they will be required to pay tax on an amount which was not received by them and also to which they were not entitled and which amount the petitioners would not have been able to realise at any time. It is the case of the petitioners that, by applying rule 115 of the Income-tax Rules, 1962, virtually they will have to pay tax on income which was never received by them. The petitioners, therefore, contended that rule 115 is ultra vires as, by application of the same, the petitioners are made liable to pay income-tax not only on the actual income they received but also on the income which they have neigher receive nor can they realise in future. This being the position, according to the petitioners, this rule 115(c) of the Income-tax Rules, 1962, has a tendency to go beyond the scope of section 4 read with section 28 of the Income-tax Act, 1961, and, therefore, the said rule is ultra vires. \n\n 8. The petitioners have also contended that the aforesaid rule 115 was amended on April 1, 1990, and sub-rule (2) to rule 115 was added. As per the said sub-rule (2) of rule 115, nothing contained in sub-rule (1) shall apply in respect of income referred to in clause (c) of the Explanation to sub-rule (1) where such income is received in, or brought into India by the assessee or on his behalf before the specified date in accordance with the provisions of the Foreign Exchange Regulation Act, 1973 (hereinafter referred to as \"the FERA, 1973\"). By referring to the aforesaid amendment, it was contended on behalf of the petitioners that the aforesaid amendment being declaratory in nature or by necessary implication, declaratory as corrective in measure, is retrospective in operation. It is not in dispute in the present petition that the petitioners have received the income on or before the specified dates. Therefore, it is the contention of the petitioners that the amendment dated April 1, 1990, to rule 115 is retrospective in nature and the respondents are not entitled to apply the said rule 115(c) to the facts and circumstances of the present case. \n\n 9. On the other hand, Mr. Dias, the learned Advocate-General appearing on behalf of the respondents, contended that rule 115 of the Income-tax Rules, 1962, is completely valid. According to him, in order to avoid the laborious exercise of finding out the rate of exchange at different points of time, the rule-making power thought it wise to convert all the earnings of the previous year at the rate of foreign exchange prevailing on the last day of the previous year, which is June 30, 1989, in the present case. Therefore, the said rule does not go beyond section 4 read with section 28 of the Income-tax Act, 1961, and the rule-making power was correctly exercised under section 295. Secondly, it was also contended by Mr. Dias, the learned Advocate-General, that the amendment dated April 1, 1990, is prospective and there is nothing in the amendment to show that it is retrospective in nature. Thirdly, it was also submitted by the learned Advocate-General that if the court come to the conclusion that the said amendment is retrospective, then the same will be applicable only if it is shown that the profits of business are received in accordance with the provisions of the FERA, 1973, more particularly, section 18 of the said Act. \n\n 10. In the light of the aforesaid facts and the submissions made by learned counsel appearing on both the sides, we will now discuss the arguments as advanced to arrive at our ultimate finding. \n\n 11. Firstly, we will consider the arguments of Mr. Kakodkar, learned counsel appearing on behalf of the petitioner, that rule 115(c) of the Income-tax Rules 1962, is ultra vires, bad in law and has a tendency to override the charging provisions of section 4 read with section 28 of the Income-tax Act, 1961. Mr. Kakodkar contended that the object of the Income-tax Act is to tax the assessee on his income. The preamble to the Act also states : \"An Act to consolidate and amend the law relating to income-tax and super-tax.\" Mr. Kakodkar further argued quoting various provisions under the Income-tax Act, 1961, to show that the power or authority to charge income-tax is given by the Legislature under section 4 read with section 28 of the Income-tax Act, 1961. It was further contended that after going through the substantive provisions of the Income-tax Act, 1961, income-tax is a tax on actual income received and not on an imaginary income. According to him, under section 295, the power to make rules is conferred on the Board but the said power is conferred on the Board to make the rules carry out the purposes of the Act, which is clear from section 295(1) of the Income-tax Act, 1961. The same reads as under : \n \"295. (1) The Board may, subject to the control of the Central Government, by notification in the Gazette of India, make rules for the whole or any part of India for carrying out the purposes of this Act.\" \n\n12. After referring to the aforesaid provisions, it was contended by Mr. Kakodkar, learned counsel for the petitioners, that under the said provisions, the Board is vested with the power to make rules only to carry out the purposes of the Act. However, according to him, in any case, these rules cannot go beyond the circumscribed limits of the substantive provisions of the Income-tax Act, 1961. Therefore, according to him, if any rule is framed under section 295 of the Income-tax Act, 1961, which goes beyond the scope of the substantive provisions in the main Act, to that extent, the said rule will be bad in law. We do not find any difficulty in accepting this argument. But, the only question is whether, in fact, the concerned rule 115(c) has any overriding effect over section 4 read with section 28 of the Income-tax Act, 1961. To come to a right conclusion about this question, we will have to see in what manner the petitioners receive income and at what point of time income-tax is leviable. In the present case, the petitioners entered into agreements for the sale of iron ore to the foreign buyers at a certian price. This price is agreed in advance. The mode of payment is in foreign currency through the Indian banker who is authorised to give foreign exchange. Under the contract, the payment is made to the petitioners through their bankers in India. According to the petitioners, it is at this point of time when the petitioners receive money under the contract that they are liable to be taxed. the petitioners have further stated that, during the previous accounting year from July 1, 1982, to June 30, 1983, the petitioners have received various payments on different dates and the petitioners have paid tax on the actual income they received from the bank in Indian currency. It is also contended on behalf of the petitioners that, in fact, the petitioners received the money on various dates at the rate of foreign exchange prevailing on the date of the receipt of the money. The petitioners have also supplied a chart showing therein as to how, during the said relevant period, they have received the payment in Indian currency on each date as per the value of the rate of foreign exchange prevailing on the date of the receipt. The petitioners, therefore, contended that it is the actual money which they have received during the said period which is liable to be taxed under the Act and not any notional income or income which they have never received and there is no possibility of realising the same. to support this contention that, under the Act, they are liable to pay income-tax only on the amount they have actually received, the petitioners have relied upon a decision of the Supreme Court in the case of CIT v. Bangalore Transport Co. Ltd. . The Supreme Court has observed in paragraph 6 of this judgment as under (at page 375) :\n\n \"There is no warrant for his argument in the scheme of the Income-tax Act, Under section 10(1) of the Income-tax Act, 1922, tax is payable by an assessee under the head 'Profits and gains of business, profession or vocation' in respect of the profits or gains of any business, profession or vacation carried on by him. There is nothing in the Act which supports the argument that for profits of the business to be taxable, the business must be actively carried on for the whole of the previous year, or till the end of the previous year. Under the scheme of the Income-tax Act, whenever an assessee receives in the course of his business money or money's worth, income embedded therein accrues or arises to him, and becomes subject to an ambulatory charge. If at the end of the previous year, on making up accounts, there is no overall income, the charge does not crystallise because there is no income on which the charge of tax may settle. In Turner Morrison and Co. Ltd. v. CIT , this court, in dealing with a case of a business of selling salt in India, observed at page 160 of 23 ITR) :\n\n \"There can..... be no question that when the gross sale proceeds were received by the agents in India they necessarily received whatever income, profits and gains were lying dormant or hidden or otherwise embedded in them. Of course, if one the taking of account it be found that there was no profit during the year then the question of receipt of income, profits and gains would not arise but if there were income, profits and gains, then the proportionate part thereof attributable to the sale proceeds received by the agents in India were income, profits and gains received by them at the moment the gross sale proceeds were received by them in India and that being the position the provisions of section 4(1)(a) were immediately attracted and the income, profits and gains so receive became chargeable to tax under section 3 of the Act.' \n \n\n The same principle applies to receipts in the course of business of a transport operator.\" \n\n 13. In the aforesaid paragraph 6 of the judgment, a reference is made by the Supreme Court to section 10(1) of the Income-tax Act, 1922. The same provision in there at present in section 28 of the Income-tax Act, 1961. Therefore, in our opinion, whatever has been observed by the Supreme Court in the said paragraph 6 of the judgment will also be applicable to the facts and circumstances of the present case. According to the aforesaid decision of the Supreme Court, under the scheme of the Income-tax Act, whenever an assessee receives in the course of his business money or money's worth, income embedded therein accrues or arises to him, and the same becomes subject to an ambulatory charge. If, at the end of the previous year, on making up accounts, there is no overall income, the charge does not crystallise because there is no income on which the charge of tax may settle. From the aforesaid ratio as decided by the Supreme Court, it is abundantly clear that, under the scheme of the Income-tax Act, 1961, immediately after the receipt of the income by the assessee, the assessee is subjected to an ambulatory charge. In the same decision, in paragraph 7, the Supreme Court has observed as under (at page 376 of 66 ITR) : \n \"The total taxable profits may, under the scheme of the Act, be determined at the end of the previous year : but it does not follow therefrom that to profits earned during the year, the charge of tax does not attach.\" \n\n 14. In paragraph 8 of the aforesaid judgment, the Supreme Court had reiterated the aforesaid proposition by observing as follows (at page 376) : \n \"Counsel for the company relied upon a recent decision of this court in CIT v. Ashokbhai Chimanbhai , and contended that profits of a business which are liable to tax under the Income-tax Act, can only accrue at the end of the previous year and not before. But that case lays down no such proposition.\"\n\n 15. After going through the aforesaid relevant paragraphs from the Supreme Court judgment, it becomes clear that at the point of actual receipt of the payment to the petitioners, the same income becomes the subject-matter of an ambulatory charge. Therefore, the provisions of the Income-tax Act are attracted the moment the income is received and the profits, if any, from the business are to be taxed subject to the other provisions of the Act. Therefore, there is nothing in the substantive provisions of the Act that income-tax is to be charged only at the end of the previous year and not before. \n\n 16. After going through the aforesaid observations and after taking them into consideration, we are of the opinion, that under the Income-tax Act, the liability to pay income-tax in respect of the petitioners arises only as and when the petitioners receive payment from the bank under the contract and it is only the actual payment which the petitioners receive from the bank that is liable to be taxed. After considering the objects and the provisions of the Income-tax Act from the point of view as to at what point of time the provisions of the Income-tax Act are attracted to the facts and circumstances of the present case, we will try to see the effect of rule 115(c) of the Income-tax Rules, 1962. Rule 115(c) of the Income-tax Rules, 1962, reads as under : \n\n \"115. The rate of exchange for the calculation of the value in rupees of any income accruing or arising or deemed to accrue or arise to the assessee in foreign currency or received or deemed to be received by him or on his behalf in foreign currency shall be telegraphic transfer buying rate of such currency as on the specified date. . . . . . \n\n (c) in respect of income chargeable under the heads 'Income from house property', 'Profits and gains of business or profession' (not being income referred to in clause (d)) and 'Income from other sources' (not being income by way of dividends), the last day of the previous year of the assessee.\" \n\n 17. On a fair reading of the aforesaid rule, if we apply the said rule to the facts and circumstances of the present case, then even when the petitioner have received payments from the buyer much before the specified date as per clause (c) of rule 115, for conversion of the foreign exchange to Indian currency, the petitioners will have to pay the tax on the basis of the rates of exchange prevailing on June 30, 1983, i.e., the last date of the previous year. And, from the contents of paragraph 8 of the petition and also from the contents of the charts of various receipts of payment from the bank during the year July 1, 1982, to June 30, 1983, if the petitioner are called upon to pay income-tax by applying rule 115(c), then the petitioners will be required to pay the tax on a far larger sum than they have actually received. As we have already seen, the assessee is liable to pay the tax on the income which he has actually received, and certainly he cannot be made to pay the tax on the income which he has not received or is not entitled to recover in future. In view of this and in view of the facts and circumstances of the case, we are of the opinion that rule 115(c) which was in existence at the relevant time is beyond the scope of section 4 read with section 28 of the Income-tax Act, 1961. Therefore, if the impugned order passed by the first respondent is allowed, then, it will amount to allowing rule 115(c) to impose tax on the petitioners on the income which they have not received or which they are not entitled to receive in future, and that is not contemplated by the substantive provisions of the statute. \n\n 18. Mr. Kakodkar, learned counsel appearing on behalf of the petitioners, has also relief upon a decision of the Supreme Court in the case of Bimal Chandra Banerjee v. State of Madhya Pradesh [1971] 81 ITR 105, wherein it is observed by the Supreme Court that no tax can be imposed by any bye-law or rule or by regulation unless the statute under which the subordinate legislation is made specially authorises the imposition, even if it is assumed that the power to tax can be delegated to the executive. The basis of the statutory power conferred by the statute cannot be transgressed by the rule-making authority. A rule-making authority has no plenary power; it has to act within the limits of the power granted to it. \n\n 19. Mr. Dias, learned Advocated-General appearing on behalf of the respondents, strongly contended that rule 115(c) which was in existence at the relevant time does not impose any new tax. According to him, the said rule only gives guidelines as to how the foregin exchange received by the petitioners during the relevant period is to be converted into Indian currency. It was further contended by learned Advocate-General that the said rule is framed under Act from the point of view of convenience as it is very difficult for the Assessing Officer to follow different rates of foreign exchange of different countries at different time and, in order to avoid this exercise, it is contended by learned Advocate-General that the said rule has fixed the modality as to how the foreign exchange earned by the assessee during the assessment year is to be converted and taxed, i.e., on the last date which is June 30, 1983, in the present case. The reasons given by learned Advocate-General are definitely very attractive at first glance. However, as pointed out earlier, if the said rule is applied to the fact and circumstance of the present case, virtually it would amount to compelling the petitioners to pay tax on income which they have not earned and will never earn in future. It was further contended by learned Advocate-General that, in fact, there is no obligation on the part of the petitioners to convert the foreign exchange on the date on which they receive and that being so, the petitioners could have converted their foreign exchange into Indian currency on the last day of the previous accounting year, i.e., on June 30, 1983. In our opinion, though there is no obligation under the Income-tax Act or the Rules framed thereunder compelling the petitioners to convert their foreign exchange into Indian currency, as alleged by the respondents, there is also no prohibition on the petitioners as to at what point of time they should not obtain the receipts of the amounts due to them. On the contrary we are of the opinion that if any such blanket compulsion is put, the same would be violative or article 19 of the Constitution of India and, therefore, according to us, there is no substance in the contentions of learned Advocate-General. \n\n 20. On the other hand, Mr. Kakodkar contended that, in fact, under the law, more particularly as decided by the Supreme Court in the case of CIT v. Bangalore Transport Co. Ltd. [1967] 66 ITR 373, there is a compulsion on the part of the petitioners to receive the amounts due to them against the receipts of foreign exchange.\n\n 21. Mr. Dias, the learned Advocate-General appearing on behalf of the respondents, further relied upon a decision of the Madras High Court in the case S. M. Syed Mohsin v. CIT [1979] 119 ITR 826 and contended that, in the aforesaid case, the applicability of rule 115 of the Income-tax Rules, 1962, was challenged for converting Ceylon currency into Indian currency and the Madras High Court had rejected the arguments advanced by the petitioners. In the said case, the assessee, an individual, had income in India as well as in Ceylon. While accepting the return for the assessment year 1969-70, the Income-tax Officer converted the Ceylon rupees into Indian currency by adopting the official exchange rate of 1 Ceylon rupee as equivalent to 1.2658 Indian rupees. The income so earned in Ceylon in the relevant year was Rs. 10,311 and the converted amount came to Rs. 13,051. Similarly, for the assessment year 1970-71, the Ceylon income was 10,782 and, after converting into Indian rupees, the amount came to Rs. 13,648, and the assessee was charged/taxed accordingly. Against the said assessment, the assessee preferred an appeal and the decision given by the lower authority was confirmed by the Tribunal. Against the said decision, the assessee filed a tax reference and it was mainly contended on behalf of the assessee that rule 115(b)(1)(ii) of the Income-tax Rules, 1962, was applicable only to the income earned either in the country with sterling currency or in a country with a dollar currency. According to the assessee in that case, since the rate of conversion from Ceylon currency to Indian currency was not mentioned in the said rule 115, the same did not apply in his case. In the said facts and circumstances, the Madras High Court had held that the rule-making authority was interested in providing for the rate of conversion with reference to income earned in the particular currencies. There is also no particular reason as to why the rule-making authority should have singled out the sterling and dollar currency for the purpose of rule-making and leave out the other currencies. From the aforesaid facts of the case as decided by the Madras High Court, it is clear that the only argument advanced by the assessee in that case was that rule 115 as it stood then was not applicable to him as, in the said rule, the rate of conversion from Ceylon currency to Indian currency was not mentioned as has been done in the case of sterling and dollar. The argument advanced in the present case is altogether different, i.e., by applying rule 115(c), the petitioners will be required to pay tax on the income which they have not earned and which they will never earn or realise. Therefore, in our opinion, the ratio given in the above case does not support that argument advanced by the learned Advocate-General.\n\n 22. Mr. Kakodakr, learned counsel appearing on behalf of the petitioners, further contended that in fact the ratio as laid down by the aforesaid Madras High Court S. M. Syed Mohsin v. CIT [1979] 119 ITR 826, supports the contention of the petitioners that, independent of rule 115, as per the scheme of the Income-tax act, the tax is due to the income-tax authorities as and when income is received by the assessee, and that being so, if the said rule provides otherwise, to that extent, the said rule is bad in law Mr. Kakodkar has also relied on the ratio of the aforesaid case that the rate of conversion of foreign exchange into Indian currency is the rate which was preavailing at the time of the actual point of receipt. Mr. Kakodakar has further relied very strongly on the decision in the case of D. A. Graham and N. G. F. Graham v. CIT [1985] 154 ITR 879 (Kar), to reiterate his contention that the rate of conversion is not postponed from the date of receipt to the last date of the previous accounting year. In this particular case, the assessee was a British who was a resident Indian. The assessee had sold on different dates in the United Kingdom certain shares and securities prior to November 19, 1967, and the remaining shares and securities were sold by him but prior to March 31, 1968. Prior to November 18, 1967, the official exchange rate of pound sterling to Indian rupee was 1 : 21. On November 18, 1967, the United Kingdom devalued pound sterling and, therefore, the official exchange rate on and from November 19, 1967, was fixed at 1 : 18. In that year, for the assessee, the previous accounting year ended on March 31, 1968, corresponding to the assessment year 1968-69. It was contended by the assessee in that case that, for the assessment year 1968-69, the capital gains accruing from the sale of shares and securities in U. K. including dividends from U. K. should be computed at the official exchange rate prevailing as on March 31, 1968, and not as on the very dates they were received, arose of accrued either in U. K. or in India. As against this argument, it was contended on behalf of the Income-tax Department that the official exchange rate prevailing as on the dates of receipt of capital gains and dividends should recognised the same fact. In this case, the Karnataka High Court has observed that the assessee in that particular case had realised, on different dates, pound sterling prior to devaluation, i.e., before November 18, 1967, and, therefore, the rate of conversion must only be with reference to the date of actual receipt and cannot normally be anything else. It was further observed in that case that taking any other view of the matter would be somewhat illogical and even divorced from the realities and the factual situation. It was further observed that aggregation of all receipts as on the last day of accounting year does not create any incongruity or antithesis in the chargeability of the receipt. What really happens is the postponement of the accounting, chargeability and determination and quantification of the liability to tax due thereon with reference to that and other receipts. If this is the true position of receipts, then, it must necessarily follow that the official exchange rates prevailing with reference to those receipts must inevitably be the basis in computing the chargeability to taxes under the Act. While deciding the aforesaid case, the Karnataka High Court has also relied upon the observations made in the case of CIT v. Banglore Transport Co. Ltd. . We also concur with the observations made by the Karnataka High Court in the aforesaid case and come to the conclusion that the rate of conversion from one currency to another should be at the rate prevailing on the last date of the previous accounting year which is June 30, 1983, in the present case.\n\n 23. Mr. Kakodkar, learned counsel appearing on behalf of the petitioners, has also relied upon the amendment to rule 115 of the Income-tax Rules, 1962, which came into effect from April 1, 1990, wherein sub-rule (2) is added as under : \n \"Nothing contained in sub-rule (1) shall apply in respect of income referred to in clause (c) of the Explanation to sub-rule (1) where such income is received in, or brought into, India by the assessee or on his behalf before the specified date in accordance with the provisions of the Foreign Exchange Regulation Act, 1973 (46 of 1973).\" \n\n 24. By referring to the aforesaid sub-rule (2), it was contended on behalf of the petitioners that nothing contained in sub-rule (1) shall apply in respect of income referred to in clause (c) of the Explanation to sub-rule (1) where such income is received in or brought into India by the assessee or on behalf of the assessee before the specified date in accordance with the provisions of the FERA 1973. It was contended on behalf of the petitioners have received this amount as per the FERA, 1973, and the said amount was received before the specified date, i.e., June 30, 1983. According to Mr. Kakodakar, the aforesaid amendment is declaratory in nature and, therefore, the same is applicable retrospectively. Mr. Dias, the learned Advocate-General on behalf of the respondents, on the other hand, submitted that the said amendment is not declaratory in nature and there is nothing in the amendment to show that the same is retrospective in application. It is an admitted position that, if the aforesaid amendment is made applicable retrospectively, then, in that event, rule 115(c) of the Income-tax Rules, 1962, will not be applicable. At this point of time, we may further point out that the learned Advocate General also had contended that the said amendment is applicable provided the petitioners have complied with the FERA 1973 and not otherwise. He has further contended that the petitioners must show that they received the aforesaid foreign exchange under section 18 of the FERA, 1973. However, according to our opinion, the petitioners have clearly stated that all the receipts which they have received during the relevant period were as per the FERA, 1973, and to which there is no challenge by the other side. However, we are not dealing with the controversy as to whether the aforesaid amendment which was brought into force on April 1, 1990, is retrospective or prospective as, on the first point itself, we have already arrived at a conclusion that clause (c) of rule 115 of the Income-tax Rules, 1962, is illegal as the same overrides the substantive provisions of the Act. \n\n 25. In vies of the aforesaid findings of ours, we quash the order dated March 30, 1989, passed by respondent No. 1 and make the rule absolute in terms of prayer clauses (a) and (b) and allow this writ petition with no order as to costs." }, { "title": "Mahendra Kumar Agrawalla vs Income-Tax Officer And Ors. on 12 September, 1974", "url": "https://indiankanoon.org//doc/1520149/", "text": "Mahendra Kumar Agrawalla vs Income-Tax Officer And Ors. on 12 September, 1974\nEquivalent citations: [1976]103ITR688(PATNA)\nAuthor: Nagendra Prasad Singh\nBench: Nagendra Prasad Singh\nJUDGMENT\n\n\n \n\n S.N.P. Singh, J. \n \n\n 1. These ten writ applications under Articles 226 and 227 of the Constitution have been heard together as the facts are common and identical questions of law have been raised in all of them. All the ten writ applications are, therefore, being disposed of by this common judgment. \n\n 2. The petitioner, Shri Mahendra Kumar Agrawalla, has filed these writ applications for quashing the notices, copies whereof have been made annexure \"3\" to the writ applications, issued by the Income-tax Officer, Ward B, Colliery Circle, Dhanbad, under Section 148 of the Income-tax Act, 1961, for the assessment years 1960-61, 1961-62, 1962-63, 1963-64, 1964-65, 1965-66, 1966-67, 1967-68, 1968-69 and 1969-1970. The notices in respect of the assessment years 1960-61, 1961-62, 1962-63, 1963-64, 1964-65 and 1965-66 were issued on the 31st March, 1969; the notices in respect of the assessment year 1966-67 were issued on the 31st March, 1971, and the notices in respect of the assessment years 1967-68, 1968-69 and 1969-70 were issued on the 3rd of December, 1971. \n\n 3. There is a colliery in Jharia which is known as \"Central Sulunga Colliery\". One Sri Arjun Agrawalla was the owner of the said colliery. On the 1st January, 1953, Sri Arjun Agrawalla executed a deed of gift in respect of the said colliery in the names of petitioner, Sri Mahendra Kumar Agrawalla, and his brother, Sri Yogendra Kumar Agrawalla. According to the petitioner, by the deed of gift he was given half share in the colliery whereas his brother, Sri Yogendra Kumar Agrawalla, was given the remaining half share. It appears that even after the execution\n\n\nof the deed of gift by Sri Arjun Agrawalla, the Central Sulunga Colliery continued to be assessed to income-tax as an \"association of persons\" till the assessment year 1956-57. It further appears that on the 18th of February, 1958; the petitioner and his brother made an application before the Inspecting Assistant Commissioner of Income-tax, Southern Range, Ranchi, for treating them as tenants-in-common and assessing them as \"individuals\". The learned Inspecting Assistant Commissioner on perusing the records of the cases sent instructions to the Income-tax Officer, \"B\" Ward, Colliery Circle, Dhanbad, to treat the petitioner and his brother as tenants-in-common and to make separate assessments on them in respect of the shares deemed to have been received by them. The petitioner and his brother thereafter began to submit returns of income in the status of \"individuals\" and from the. assessment year 1957-58, they were being assessed as \"individuals\". Annexure \"1\" of all the writ applications are copies of the assessment orders passed by the Income-tax Officer and they show that the petitioner has been assessed in the status of an \"individual\". \n\n 4. In the writ applications the petitioner has alleged that there was never any omission or failure on his part to disclose fully and truly all material facts necessary for the assessment of the petitioner's income but nevertheless the Income-tax Officer, Ward B, Colliery Circle, Dhanbad (respondent No. 1), issued notices purporting to be under Section 148 of the Income-tax Act, 1961, to M/s. Central Sulunga Colliery, Jharia. The petitioner has further alleged that the notices were not served on him or on his brother but were delivered to one R. P. Sinha, who was a mere clerk employed in connection with the colliery business and had no authority to receive the notices. The petitioner has challenged the validity of the notices (annexure \"3\" to the writ applications) on the aforesaid ground as well as on some other grounds. \n\n 5. Mr. T. P. Mukherjee, learned counsel appearing for the petitioner, raised the following contentions : \n\n(1) The petitioner and his brother being minors up to the assessment year 1964-65 were incapable of exercising any volition to associate themselves to produce income and as such they were incapable of forming an \"association of persons\", and the mere fact of common management is no justification for assessment as \"association of persons\". \n\n (2) Even assuming that the petitioner and his brother, Sri Yogendra Kumar Agrawalla, constituted an \"association of persons\" since their minority, the Income-tax Officer having realised tax from them individually cannot now proceed to assess them on the same income as \"association of persons\". \n\n (3) The Income-tax Officer had no jurisdiction to issue the notices under Section 148 inasmuch as his jurisdiction came to an end when he made the assessment against the petitioner and his brother. \n\n (4) The requisite conditions to reopen the assessment being not present, the Income-tax Officer had no jurisdiction to issue the impugned notices. \n\n (5) The Commissioner of Income-tax mechanically granted sanction for issuing the notices without applying his mind and as such the notices are invalid. \n\n (6) The notices under Section 148 having not been validly served, no reassessment proceeding can be started on the basis of the notices (annexure \"3\" to the writ application). \n\n Before dealing with the contentions which have been raised on behalf of the petitioner, I would briefly indicate the stand which has been taken by the respondents. In the counter-affidavits, which have been filed on behalf of the respondents in the ten cases, an assertion has been made to the effect that the assessee to whom the notices have been issued as the \"association of persons\" is M/s. Central Sulunga Colliery Company, Jharia, and not its members, Sri Mahendra Kumar Agrawalla and Sri Yogendra Kumar Agrawalla, because M/s. Central Sulunga Colliery Company did not file any return of its income for the various assessment years. As the Income-tax Officer had reason to believe that income in the hands of the \"association of persons\", namely, M/s. Central Sulunga Colliery Company, Jharia, had escaped assessment, he recorded reasons for starting a proceeding under Section 147 and after obtaining the requisite sanction of the Commissioner of Income-tax, issued notices under Section 148 of the Income-tax Act, 1961. It has also been asserted that even after the deed of gift, M/s. Central Sulunga Colliery continued to be run as one unit as before. Regarding the service of notices it has been asserted that the notices were properly served. Alternatively, the stand has been taken that even if the service of notices was not proper, Sri Yogendra Kumar Agrawalla having filed certain petitions before the Income-tax Officer in pursuance of those notices accepted the service of notices as valid and waived the irregularity, if any. The other facts which have been stated in the counter-affidavits will be referred to subsequently. \n\n 6. Now, I proceed to consider the points which have been raised by learned counsel appearing for the petitioner. Neither in the Indian Income-tax Act, 1922, nor in the Income-tax Act, 1961, the term \"association of persons\" has been defined. In the case of Commissioner of Income-tax v. Indira Balkrishna, [1960] 39 ITR 546 (SC), it was held by the Supreme Court that the word \"associate\" means \"to join in common purpose, or to join in an action\". Therefore, \"association of persons\" must be one in which two or more\n\n\n\npersons join in a common purpose or common action. It was further held that as the words occur in a section which imposes a tax on income, the association must be one the object of which is to produce income, profits or gains. Mr. Justice S. K. Das, who spoke for the court, however, added some words of caution by observing as follows:\n\n\"There is no formula of universal application as to what facts, how many of them and of what nature, are necessary to come to a conclusion that there is an association of persons within the meaning of Section 3; it must depend on the particular facts and circumstances of each case as to whether the conclusion can be drawn or not.\" \n\n 7. In that case it was suggested on behalf of the revenue that \"the real test is the existence of a common source of income in which two or more persons are interested as owner or otherwise and it is immaterial whether their shares are specific and definite or whether there is any scheme of management or not\". It was further submitted that \"if the persons so interested come to an arrangement, express or tacit, by which they divide the income at a point of time before it emanates from the source, then the association ceases ; otherwise it continues to be an \"association\". It was held by the Supreme Court that the test suggested by learned counsel for the revenue was neither conclusive nor determinative of the question before it. In that case the facts were as follows. The co-widows of a Hindu governed by the Mitakshara law inherited the estate of the deceased which consisted of immovable properties, shares, money lying in deposit and share in a registered firm. The question was whether the widows could be assessed in the status of an \"association of persons\" within the meaning of Section 3 of the Indian Income-tax Act, 1922, in regard to the income derived from the properties inherited by them. The Appellate Tribunal had found that they had not exercised their right to separate enjoyment and that except for receiving the dividends from the shares and the interest from the deposits jointly, they had done no act which had helped to produce the income. It was held by the Supreme Court that as there was no finding that the three widows had combined in a joint enterprise to produce income and as they had done no act which had helped to produce the income, it could not be held that they had the status of an \"association of persons\" within the meaning of Section 3 of the Indian Income-tax Act, 1922. Learned counsel, appearing for the petitioner, strongly relied on the decision of the Supreme Court in the above-mentioned case and submitted that in the absence of any material to show that the petitioner and his brother, Sri Yogendra Kumar Agrawalla, had combined in a joint enterprise to produce income, it cannot be held that they had the status of an \"association of persons\". In my opinion, the question whether there has been a combination on behalf of the petitioner and his brother to produce income, profits\n\nand gains or not is a pure question of fact. There is nothing in the decision of the Supreme Court on the basis of which it can be urged that an \"association of persons\" to produce income cannot be formed on behalf of a minor. In the case of J.V. Saldhana v. Commissioner of Income-tax, [1932] 6 ITC 114 (Mad) [FB] the Madras High Court held that where a guardian or trustee carried on a business, though the persons ultimately deriving the benefit of the business may be some wards or beneficiaries or partly the guardian and partly the minors, the business can be regarded as a business carried on by the trustees or guardian and can be assessed as a single business., In a case, however, where no business is carried on and the trustees or guardians act as bare trustees or guardians merely receiving the incomes and handing them over to the wards or beneficiaries, these considerations will not be available. \n\n8. In the counter-affidavits filed on behalf of the respondents it has been asserted that the business of the colliery is being done under the style of M/s. Central Sulunga Colliery Company and the colliery is being run as one colliery. It has also been stated therein that the raising and despatches of coal are being done together; expenses are incurred jointly; monthly statements of raising and despatches for the entire colliery are submitted to the mining department; royalties are paid on the entire sales and cess is also paid together. It is also stated in the counter-affidavits that though the petitioner has been filing his returns in the status of \"individual\" from the assessment year 1956-57, he has shown half share from the firm of M/s. Central Sulunga Colliery Company. It has been stated in paragraph 8 of the counter-affidavit that one Sri H. L. Varma was taken as a partner. A reference has been made in that connection to the Appellate Assistant Commissioner's order dated November 21, 1966, in Appeal No. 62/CCD/65-66 in the case of Shri Mahendra Kumar Agrawalla for the assessment year 1964-65. The relevant portion of the order reads as follows : \n\n\"As per a letter dated 29-3-1958 Shri H. L. Varma was taken as a partner in the above firm by Shri. B. L. Agrawalla who is the father and guardian of the appellant. One of the terms embodied in the said letter was as under :\n\n......You will be paid a fixed profit of Rs. 1,500 yearly as your share\nonly when there is a profit in the business......\" \n \n\n9. It was submitted before us on behalf of the revenue that the above extract from the order of the Appellate Assistant Commissioner clearly shows that the business was being run on behalf of the minors by their father and guardian and Shri H. L. Varma was taken as a partner in the firm as joint enterprise. Learned counsel appearing for the petitioner, however, urged that the facts stated in the counter-affidavits would only show that there was a common management of the entire colliery. According to his\n\n\nsubmission, the mere fact of common management of the colliery would not make the owners liable to be assessed as an \"association of persons\". In support of this contention he relied on a Bench decision of the Madras High Court in the case of State of Madras v. S. Subramania Iyer, [1966] 61 ITR 613 (Mad). In that case the Madras High Court after reviewing a number of decisions held that in order that persons owning lands may be assessed to tax as an \"association of individuals\" the essential requirement is that, as between themselves, they should have associated together and decided upon the common exploitation of the lands for their common benefit. The mere fact that all of them had appointed the same person as manager or given the lands on lease to the same person and the manager or lessee was jointly cultivating all the lands would not make the owners liable to be assessed as an \"association of individuals\". That was a case under the Madras Agricultural Income-tax Act, 1955. Learned counsel is correct in his submission that the mere fact of common management of the colliery would be no justification for the assessment of the owners as an \"association of persons\". It appears from the counter-affidavits filed on behalf of the revenue, however, that the mere fact of common management is not the basis for issuance of notices under Section 148 of the Income-tax Act, 1961, to the colliery. On the contrary, from the facts stated in the counter-affidavits it is clear that the basis for the issuance of notices is a number of factors. It would be for the petitioner to show before the Income-tax Officer that the facts stated in the counter affidavits are not sufficient to justify assessment of M/s. Central Sulunga Colliery as an \"association of persons\" and to establish that the petitioner and his brother did not join in any common action under the guardianship of their father with the object of producing income, profits or gains. As the question, whether there is an \"association of persons\" or not, is a pure question of fact depending upon the facts and circumstances of each case, it will not be proper for this court to express any final opinion on the question when all the materials are not available.\n\n 10. The next point which falls for consideration is whether the Income-tax Officer can legally assess M/s. Central Sulunga Colliery as an \"association of persons \"having already assessed the petitioner and his brother, Yogendra Kumar Agrawalla, in the status of individuals. It was submitted on behalf of the petitioner that once the income of the association was charged to income-tax in the hands of the members individually and the assessment of the members remained valid assessments, there could be no fresh assessments of the income in the hands of the association because that would amount to double taxation of the same income. In support of this contention learned counsel relied on the decisions in Joti Prasad Agarwal v. Income-tax Officer, [1959] 37 ITR 107 (All), Commissioner of Income-tax v. Kanpur Coal \n\n\nSyndicate, [1964] 53 ITR 225 (SC) and Commissioner of Income-tax v. Murlidhar Jhawar and Purna Ginning and Pressing Factory, [1966] 66 ITR 95 (SC). In Joti Prasad Agrawal's case, one of the points which was raised was that under Section 3 of the Indian Income-tax Act, 1922, income-tax was chargeable for a particular year in respect of the total income of the previous year of every individual, Hindu undivided family, company and local authority, and of every firm and other association of persons or the partners of the firm or the members of the association individually, and once an income has been charged td tax in the hands of one of the entities mentioned in Section 3, it could not be charged in the hands of another of these entities subsequently. In that case the income which was earned by the association had been assessed and charged to tax in the hands of the members of the association individually under one of the alternatives provided under Section 3 of the Indian Income-tax Act, 1922. The Allahabad High Court on construing the provisions of Section 3 of the Indian Income-tax Act, 1922, which was the main charging section, held that the Income-tax Officer having exercised the discretion to assess income-tax in the hands of the individual members of the association could not make fresh assessment of tax on that income in the hands of the association. In the case of Commissioner of Income-tax v. Kanpur Coal Syndicate, it was held by the Supreme Court that Section 3 of the Indian Income-tax Act, 1922, impliedly gave an option to assess the total income of either an \"association of persons\" or the members of the association individually. In the case of Commissioner of Income-tax v. Murlidhar Jhawar and Purna Ginning and Pressing Factory, referred to above, it was held that the partners of an unregistered, firm might be assessed individually or they might be assessed collectively in the status of an unregistered firm but the Income-tax Officer could not assess the one income twice, once in the hands of the partners and again in the hands of the unregistered firm. That was also a case in which the charging section was Section 3 of the Indian Income-tax Act, 1922.\n\n 11. In the Income-tax Act, 1961, the charging section is Section 4, which reads thus: \n\n\"4. (1) Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions of, this Act in respect of the total income of the previous year or previous years, as the case may be, of every person : \n\n Provided that where by virtue of any provision of this Act income-tax is to be charged in respect of the income of a period other than the previous year, income-tax shall be charged accordingly. \n\n \n\n (2) In respect of income chargeable under Sub-section (1), income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of this Act.\" \n \n\n 12. The new Section 4 imposes income-tax upon \"every person\" in respect of his income. The definition of \"person\" has been given in Section 2(31). According to that definition, \"person\" includes an \"individual\" as well as \"an association of persons or a body of individuals, whether incorporated or not\". It was submitted on behalf of the revenue that the decisions relied upon by the petitioner were based on the language of Section 3 of the Indian Income-tax Act, 1922, which gave the option to the Income-tax Officer to assess either the association of persons or the members of the association individually but no such option having been given to him under Section 4 read with Section 2(31) of the Income-tax Act, 1961, the Income-tax Officer has jurisdiction to initiate a proceeding under Section 147 and to issue a notice under Section 148 if the association of persons has escaped assessment. There is substance in the above contention. In the cases referred to above, in the terms of Section 3 of the Indian Income-tax Act, 1922, it was held that the Income-lax Officer had the option to assess either of the two units of assessment and once having exercised the option to assess one unit, it was not open to him to assess the other unit. In the charging Section 4 of the Income-tax Act, 1961, no such option of election between the two taxable units has been given to the Income-tax Officer and as such he is quite competent to initiate proceedings under Section 147 of the Act with a view to tax the income of an assessable unit if it has escaped assessment. I am fully fortified in the above view by a decision of the Supreme Court in the case of Income-tax Officer, \"A\" Ward, Lucknow v. Bachu Lal Kapoor, [1966] 60 ITR 74 (SC). In that case the members of a Hindu undivided family had been assessed to tax as individuals for the various assessment years including the assessment year 1955-56. Subsequently, on March 24, 1960, the Income-tax Officer issued a notice under Section 34 of the Indian Income-tax Act, 1922, to the karta of the Hindu undivided family requiring him to file a return within the prescribed time of his world income on the ground that the income chargeable to tax for the assessment year 1955-56 had escaped assessment and also was under-assessed. The Allahabad High Court had held the notice to be invalid on the ground that it offended the principle against double taxation. The decision of the Allahabad High Court was challenged by the revenue in an appeal to the Supreme Court by special leave. Before the Supreme Court it was contended on behalf of the respondent that under Section 3 of the Indian Income-tax Act, 1922, the Income-tax Officer had the option to assess either the Hindu undivided family or the members\n\nseparately and that as the said officer, in exercise of the option, had assessed the individual members of the family, he had no longer any jurisdiction to assess the Hindu undivided family. Reliance was placed on the decision of the Supreme Court in the case of Commissioner of Income-tax v. Kanpur Coal Syndicate, which I have already referred to. The Supreme Court repelled that contention and it was held that it was not a case of election between two alternative units of assessment but an attempt to bring to tax the income of an assessable entity which had escaped assessment. Subba Rao J. (as he then was) observed as follows:\n\n\"That apart, under Section 3 of the Act, in the matter of assessment, there is no question of any election between a Hindu undivided family and a member thereof in respect of the income of the family. If a Hindu undivided family exists, under Section 3 of the Act the Income-tax Officer has to assess it in respect of its income. Indeed, under Section 14(1) of the Act, any part of the income received by its members cannot be assessed over again. While Section 3 confers an option on the Income-tax Officer to assess either the association of persons or the members of the association individually, no such option is conferred on him thereunder in the case of a Hindu undivided family, as its existence excludes the liability of its members in respect of the income of the former received by the latter.\" \n\n 13. From the above observation it is absolutely clear that under Section 3 of the Indian Income-tax Act, 1922, the Income-tax Officer had an option to assess either the association of persons or the members of the association individually but there was no such option in the case of a Hindu undivided family and the members thereof. In that case it was argued before the Supreme Court that the above view would be \"subversive of the doctrine of \"double taxation\". The Supreme Court rejected that contention also by making the following observation I \n \n\n\"It was said that as the orders of assessment on the individual members of the said family had become final, if the Income-tax Officer was permitted to assess the Hindu undivided family for the same assessment year, tax would be imposed on the same income twice over. It is true that the Act does not envisage taxation of the same income twice over 'on one passage of money in the form of one sort of income', It is equally true that Section 14(1) of the Act expressly debars the imposition of tax on any part of the income of a Hindu undivided family received by its members. The fact that there is no provision in the Act dealing with a converse position does not affect the question, for the existence of such a converse position is legally impossible under the Act. So long as the Hindu undivided family exists, the individuals thereof cannot separately\n\nbe assessed in respect of its income. None the less, if, under some mistake, such income was assessed to tax in the hands of the individual members, which should not have been done, when a proper assessment was made on the Hindu undivided family in respect of that income, the revenue had to make appropriate adjustments ; otherwise, the assessment made in respect of that income on the Hindu undivided family would be contrary to the provisions of the Act, particularly Section 14(1) of Act. We, therefore, hold that if the assessment proceedings initiated under Section 34 of the Act culminates in the assessment of the Hindu undivided family, appropriate adjustments have to be made by the Income-tax Officer in respect of the tax realised by the revenue in respect of that part of the income of the family assessed on the individuals of the said family. To do so is not to reopen the final orders of assessment, but in reality to arrive at the correct figure of tax payable by the Hindu undivided family.\" \n\n 14. As provided under Section 86(v) of the Income-tax Act, 1961, income-tax is not payable by an assessee, who is a member of an association of persons, in respect of the income which he is entitled to receive from the association on which income-tax has already been paid by the association. Thus, under Clause (v) of Section 86 the income received by the member from the association is eligible for rebate. In view of the decision of the Supreme Court referred to above, if the assessment proceedings initiated under Section 147 of the Income-tax Act, 1961, would culminate in the assessment of the association of persons, appropriate adjustments will have to be made by the Income-tax Officer in respect of the tax realised by the revenue for that part of the income of the association which has been assessed on the members of the association. There will, therefore, be no question of double taxation in respect of the same income to the prejudice of the petitioner. \n\n 15. The Income-tax Act, 1961, came into force on the 1st of April, 1962. The provisions of the Income-tax Act, 1961, therefore, became applicable from the assessment year 1962-63. As the provisions of the Income-tax Act, 1922, were applicable in respect of the assessment years 1960-61 and 1961-62, it has to be held that the Income-tax Officer has no jurisdiction now to assess M/s. Central Sulunga Colliery as an association of persons because he had exercised his option to assess its members, namely, the petitioner and his brother, individually, for these two years. C.W.J.C. No. 1647 of 1971 relates to the assessment year 1960-61 and C.W.J.C. No. 1643 of 1971 relates to the assessment year 1961-62. These two writ applications, therefore, will have to be allowed. This disposes of the second and third contentions which have been raised on behalf of the petitioner. \n\n 16. \n Now, I proceed to consider the fourth contention which has been raised on behalf of the petitioner, namely, that the requisite conditions to reopen the assessment being not present, the Income-tax Officer had no jurisdiction to issue the impugned notices. \n\n 17. The impugned notice issued under Section 148 of the Income-tax Act, 1961, reads as follows: \n\n \"To \n \n\n\u00a0 \u00a0 \u00a0 \u00a0M/s. Central Sulunga (A.O.P.) \n\n\u00a0 \u00a0 \u00a0 \u00a0 Colliery, Jharia. \n\n\u00a0 \u00a0 \u00a0 \u00a0Whereas I have reason to believe that your income chargeable to tax for the assessment year (1966-67) has escaped assessment within the meaning of Section 147 of the Income-tax Act, 1961. \n\n I therefore, propose to reassess the income for the said assessment year and I hereby require you to deliver to me within 30 days from the date of service of this notice a return in the prescribed form of your income for the said assessment year. \n\n 2. The notice is being issued after obtaining the necessary satisfaction of the Commissioner of Income-tax, Bihar, Patna. \n\n(Sd.) Illegible, \u00a0 \u00a0 \u00a0 \u00a0 \n\n Income-tax Officer.\" \n\nAlthough in the notice it is not indicated as to whether the proceedings have been initiated under Section 147(a) or under Section 147{b) of the Income-tax Act, 1961, in the counter-affidavits it has been clearly stated that the Income-tax Officer, Dhanbad, had reason to believe that the income of the association of persons, M/s, Central Sulunga Colliery, for the relevant years had escaped assessment by reason of its failure to file the returns. According to the statements made in the counter-affidavits, the proceedings have been initiated under Section 147(a) of the Income-tax Act, 1961. As provided in Section 147(a), the requisite conditions for initiating a proceeding are: (1) that the Income-tax Officer must have reason to believe that income chargeable to tax has escaped assessment for the relevant year ; and (2) that the escapement has been due to (i) the omission or failure on the part of the assessee to make a return of the income under Section 139 for the year in question, or (ii) the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the year in question. It was submitted by learned counsel appearing for the petitioner that there was no material before the Income-tax Officer to show that the income chargeable to tax had escaped assessment for the various years due to the failure on the part of the petitioner and his brother to disclose fully and truly all the material facts necessary for their assessment for the years in question. That may be so but the fact that separate returns on behalf of M/s. Central Sulunga\n\n\nColliery as association of persons had not been filed for the assessment years in question is not in dispute. Thus, there was an omission or failure on the part of the assessee to make a return under Section 139 for the years in question. The only question which is in dispute is whether M/s. Central Sulunga Colliery constituted an association of persons during the years in question. As I have already held, it is a pure question of fact which is to be decided by the Income-tax Officer after due enquiry. I must, however, observe that in view of the facts stated in paragraphs 4, 6, 7, 8 and 9 of the counter-affidavits I am satisfied that it will not be a fishing enquiry. The belief of the Income-tax Officer that the income in the hands of M/s. Central Sulunga Colliery as association of persons has escaped assessment appears to be based upon reasonable grounds and not on mere suspicion. That being the position, it is difficult to hold that the requisite conditions for initiating proceedings under Section 147(a) were not present and as such the notices under Section 148 are invalid. Thus, there is no substance in the fourth contention which has been raised on behalf of the petitioner. \n\n 18. Now it remains to consider the last two contentions which have been raised on behalf of the petitioner. In the writ applications it has been stated that to the best of the belief of the petitioner, the Commissioner of Income-tax mechanically granted sanction for issuing the notices without applying his mind to the facts and circumstances of the case. Mr. Mukherjee appearing for the petitioner, at the close of his argument asked us to direct the department to produce before the court the original order of sanction passed by the Commissioner to find out whether the Commissioner had applied his mind before granting the sanction or he had mechanically done so. As we are satisfied on the statements made in the counter-affidavits that the Commissioner did not pass the order mechanically, we did not ask for production of the original order of sanction. In paragraph 22 of the counter-affidavit filed in C.WJ.C. No. 1645 of 1971, it has been stated that the Income-tax Officer, \"B\" Ward, Colliery Circle, Dhanbad, while submitting his report for starting proceedings under Section 147(a) stated the facts of the case in his letter dated March 19, 1969, addressed to the Commissioner of Income-tax, Bihar, Patna. A copy of that letter has been made annexure \"F\" to that counter-affidavit and it reads as follows: \n\n\u00a0 \u00a0 \u00a0 \u00a0 \"Government of India \n \n\n Office of the Income-tax Officer, Colliery Circle, \n \n\n Dhanbad. \n\n--------- \n\nNo. Con. B. CC/68-69/2752 \n\nDated Dhanbad the 19th March, 1969. \n\n To \n \n\n\u00a0\u00a0\u00a0\u00a0The Commissioner of Income-tax, \n\n\u00a0\u00a0\u00a0\u00a0Bihar, Patna. \n \n\n Sir, \n \t\t\tSub: M/s, Central Sulunga Colliery--proposal u/s 147.\n \n\n-------------- \n \n\n I beg to submit herewith proposal under Section 147(a) for assessment years 1960-61 to 1965-66, in respect of the above assessee. \n\n On going through the records of the case it is found that Sri Yogendra Kr. Agrawalla and Sri Mahendra Kr. Agrawalla have been shown as equal partners of M/s. Central Sulunga Colliery. But there is no separate file of the aforesaid firm, rather income of the colliery was computed and it was allocated among the two aforesaid partners in equal shares and assessed separately although there does not exist any partnership deed or any agreement to that effect. I am of opinion that in the absence of any partnership deed M/s. Central Sulunga Colliery should have been assessed as \"A.P.\" and share of the members of the \"A.P.\" should have been allocated to their respective files. On going back to the history of the case it is found that Shri Arjun Agrawalla gifted Central Sulunga Colliery to his two minor nephews, Sri Mahendra Kumar Agrawalla and Yogendra Kumar Agrawalla, by a deed of gift executed on 1-1-53 who took the colliery in equal shares without executing any partnership deed among themselves. Evidently the status of Central Sulunga Colliery should have been taken as \"A.O.P.\" instead of allocating the shares of income from the said colliery to the separate owners. The colliery is being worked out as one unit and all accounts of the colliery are as a whole and not separately for both the alleged partners. \n\nYours faithfully, \n\n (Sd.) S. P. Varma, \n\nIncome-tax Officer, Ward-B, \n\nColliery Circle, Dhanbad.\" \n\n 19. It is stated in the counter-affidavit that the Commissioner after considering the facts of the case mentioned in the letter granted the sanction. In my opinion, the facts as disclosed in the letter were sufficient to justify the sanction of the Commissioner. It is, therefore, difficult to hold that the Commissioner granted the sanction mechanically. Thus, there is no merit in the fifth contention which has been raised on behalf of the petitioner. \n\n 20. Now, I will examine the question whether the impugned notices under Section 148 were validly served, and, if not validly served, whether it will\n\n\naffect the jurisdiction of the Income-tax Officer to proceed with the assessments under Section 147. \n\n 21. It is stated in the applications that the notices were not served on the petitioner and on enquiry the petitioner also learnt that the notices were not served on his brother, Sri Yogendra Kumar Agrawalla. The notices were delivered to one Sri R.P. Sinha, who is a mere clerk employed in the colliery, and he had no authority to receive the notices on behalf of the petitioner or his brother, Sri Yogendra Kumar Agrawalla. Therefore, there was no valid service of the notices. The fact that notices under Section 148 were served on Sri R. P. Sinha is admitted in the counter-affidavits but it has been asserted that they were served on him at the instance of either the petitioner of Sri Yogendra Kumar Agrawalla. Section 282(1) of the Income-tax Act, 1961, provides that a notice or requisition under the Act may be served either (1) by post, or (2) in any other way a summons issued by a court can be served under the Code of Civil Procedure. As provided under Sub-section (2) of Section 282, any such notice or requisition may be addressed in the case of ah association or body of individuals to the principal officer or any member thereof. \"Principal Officer\" has been defined in Section 2(35) of the Income-tax Act, 1961, and it means: \n\n\"(a) the secretary, treasurer, manager or agent of the authority, company, association or body, or \n \n\n (b) any person connected with the management or administration of the local authority, company, association or body upon whom the Income-tax Officer has served a notice of his intention of treating him as the principal officer thereof.\" It was submitted on behalf of the petitioner that Sri R. P. Sinha was admittedly not a member of the association. He was neither the secretary nor treasurer nor manager nor agent of M/s. Central Sulunga Colliery. The Income-tax officer having not served notices of his intention of treating him as the principal officer of the association, he could not be deemed to be a principal officer under Clause (b) of Section 2(35) of the Income-tax Act, 1961. In my opinion, it is not necessary to go into those questions and to. refer to the decisions cited by the learned counsel appearing for the petitioner. In the instant cases though the notices in respect of the assessment years 1960-61, 1961-62, 1962-63, 1963-64, 1964-65 and 1965-66 were received by Sri R. P. Sinha, Sri Yogendra Kumar Agrawalla, a member of the association, accepted those notices and acted upon them. It appears that in pursuance of those notices he made applications for time to enable them to reply. As a sample, the application which he sent for the assessment year 1962-63 (annexure \"D-3\" to C. W. J. C. No. 1645 of 1971) is reproduced below : \n\n \"Central Sulunga Colliery Co. \n\n\nP.O. Jharia (Dhanbad), \n\nDated May 6, 1969. \n\n\n Ref. No......... \n\nThe Income-tax Officer, \n\nWard-B, \n\nColliery Circle, \n\nDhanbad. \n \t\t\tSub: Your notice dated 31-3-69 u/s 148 of the I.T. Act, 1961,\n\t\t\tfor the assessment year 1962-63. \n\n\n Dear Sir, \n \n\n With reference to your above-quoted notice, we beg to inform you that the file relating to the above assessment year is lying with our lawyer at Calcutta in connection with the above notice. The same could not be completed for various reasons beyond our control. \n \n\n We, therefore, pray that at least one month's time may kindly be granted to enable us to reply in the matter. \n \n\n And for this act of grace, we shall pray. \n\n\nYours faithfully, \u00a0 \u00a0 \u00a0 \u00a0 \n\nFor Central Sulunga Colliery Co. \n\n(Sd.) Yogendra Kumar Agrawalla. \n\nCo-Partner.\" \u00a0 \u00a0 \u00a0 \u00a0 \n\n\n 22. The above letter clearly shows that he accepted the notice on behalf of M/s. Central Sulunga Colliery and acted upon it. With respect to the assessment year 1966-67 though the notice dated the 31st of March, 1971, was served upon Sri R. P. Sinha, it was also acted upon and the same objections had been filed. The Income-tax Officer overruled those objections and sent the reply dated the 26th of October, 1971, a copy whereof has been made annexure \"4\" to C.W.J.C. No. 1646 of 1971. With respect to the assessment years 1967-68, 1968-69 and 1969-70, the notices were delivered to one Sri Nalin Vaisnab. According to the petitioner, he was also not authorised to receive the notices on behalf of the association of persons and the service of notices on him was also invalid. It appears, however, that the petitioner and his brother acted on those notices and made a joint application on the 22nd of August, 1972, praying therein to stay the .proceedings till the disposal of C.W.J.Cs. Nos. 1643 of 1971 to 1649 of 1971. A copy of that letter has been made annexure \"E\" to the counter-affidavit in C.WJ.C. No. 1224 of 1972. It is clear from what I have stated above that action has been taken in all the cases on behalf of the association of persons in pursuance of the impugned notices issued under Section 148 of the Income-tax Act, 1961. It is, therefore, idle to contend that the invalid service of notices would affect the jurisdiction of\n\n\nthe Income-tax Officer to proceed with the assessment under Section 147 of the Income-tax Act, 1961. \n\n 23. I may refer in this connection to the two decisions of the Bombay High Court in the case of K.C. Tiwari & Sons v. Commissioner of Income-tax, [1962] 46 ITR 236 (Bom) and in the case of Commissioner of Income-tax v. Bhanji Kanji's Shop, [1968] 68 ITR 416 (Guj). In the case of K.C. Tiwari & Sons, there was a procedural irregularity in serving the notice inasmuch as notice was served on the manager who had no written authority to accept service. It was held in that case that the mode of service of notice or requisition provided in Section 63(1) of the Indian Income-tax Act, 1922, was not exhaustive and it was permissible to have the notice effected in a way other than the two modes mentioned in Section 63(1). It was further held that if the assessee admits that he has received the notice and asks for adjournment, the assessee cannot subsequently be allowed to plead that there was no valid and legal service. In the case of Commissioner of Income-tax v. Bhanji Kanji's Shop, a notice under Section 34(1)(a) of the Indian Income-tax Act, 1922, was served on a temporary agent of an assessee, who was not an authorised agent for receipt of notice on behalf of the assessee. The assessee filed a return in pursuance of the notice and an order of reassessment was passed. In an appeal against the order the assessee contended that the notice of reassessment had been improperly served and so the order of reassessment was bad in law, The Bench of the Bombay High Court held that in view of the fact that a return had been filed by the assessee in pursuance of the notice served on his temporary employee, it was clear that the notice had been received by him. The reassessment proceedings had, therefore, been properly instituted. The decisions in the aforesaid two cases fully support the view which I have taken with regard to the service of notices under Section 148 of the Income-tax Act, 1961. Thus, there is no substance even in the last contention which was raised on behalf of the petitioner.\n\n 24. Having considered all the points raised on behalf of the petitioner, I am of the view that there is no valid ground to quash the notices in respect of the assessment years 1962-63, 1963-64, 1964-65, 1965-66, 1966-67, 1967-68, 1968-69 and 1969-70. The notices in respect of the assessment years 1960-61 and 1961-62 must, however, be held to be invalid for the reasons already stated. \n\n 25. In the result, C.W.J.C. No. 1647 of 1971, which relates to the assessment year 1960-61, and C.W.J.C. No. 1643 of 1971, which relates to the assessment year 1961-62, are allowed and the impugned notices (annexure \"3\" to the two writ applications) are quashed. The other writ applications, namely, C.W.J.Cs. Nos. 1644, 1645, 1646, 1648 and 1649\nof 1971 and C.W.J.Cs. Nos. 1222, 1223 and 1224 of 1972 are dismissed. There will be no order as to costs in any of the applications. \n\n Nagendra Prasad Singh, J. \n\n 26. I agree." }, { "title": "Akola Electrical Supply Co. Pvt. Ltd. vs Commissioner Of Income-Tax, Bombay ... on 5 August, 1977", "url": "https://indiankanoon.org//doc/233063/", "text": "Akola Electrical Supply Co. Pvt. Ltd. vs Commissioner Of Income-Tax, Bombay ... on 5 August, 1977\nEquivalent citations: [1978]113ITR265(BOM)\nAuthor: V.D. Tulzapurkar\nBench: V.D. Tulzapurkar\nJUDGMENT\n \n\n Kantawala, C.J. \n \n\n 1. The Akola Eletric Supply Co. Pvt. Ltd., the assessee, was granted a licence by the local Government under the provision of section 3(1) of the Indian Electricity Act, 1910, as applied t Berar (hereinafter referred to as \"the Electricity Act\") to supply electrical energy within the area in the manner menner mentioned in and on terms and conditions stated in the agreement of licence dated December 7, 1929. The terms of the licence, inter alia, provided that if the licensee failed to comply with the provisions contained therein or should in the opinion of the Government the progress made during any portion of the said period of two years be unsatisfactory, the licence may be revoked and the security paid forfeited. Another term of the licence confirmed the right to exercise the option given to the Government under section 7(1) of the Electricity Act. Such option was to be exercised on expiration of 30 years computed from the date of notification of the licence. The licence further provided that in case the Government exercised the option to purchase, the purchase value would be determined in the manner laid down in the first proviso to section 7(1), of the Electricity Act. Under the second proviso to section 7(1), 20% was fixed as the amount to be added to the value of lands, buildings, works, materials and plant, determined under the first proviso to section 7(1) on account of the compulsory purchase. The period of 30 years expired on December 6, 1959. By a notice dated November 27, 1957, the local Government represented by the Bombay State Electricity Board (hereinafter referred as \"the Board\") intimated to the assessee that in exercise of the powers conferred on it under section 7(1) of the Electricity (supply) Act of 1948 read with section 7 of the Electricity Act, it had exercised the option to purchase the assessee's undertaking on the expire of the assessee's licence on December 6, 1959. After discussions between the Board and the assessee it was agreed that the assessee should hand over its assets to the representative of the Board on December 6, 1959, along with stores and spares. As per the agreement possession was handed over and the same was acknowledged by a letter written by the Executive Engineer of the Board on December 7, 1959. \n\n2. At a meeting of the board of directors of the assessee its secretary informed the board of directors that they had handed over to the Board possession of the undertaking including the distributing mains, works and certain civil assets of the company. Under the arrangement, the assessee was allowed to keep the manager's bungalow and guest house without liability to pay any compensation. As regards payment, it was pointed out that though the Board was not under any obligation to make any payment till the sale value was determined, as a measure of co-operation the Board agreed to make a provisional payment equivalent to 65% of the book value on receipt of all the assets. Accordingly, a sum of Rs. 3,47,126.06 representing 65% of the depreciated value of the assets was paid to the assessee as a provisional payment by a cheque drawn on the State Bank of India on June 7, 1961. Ultimately, by a letter dated March 31, 1962, the Board informed the assessee that the sale value of the assets was by mutual agreement fixed at Rs. 11.35 lakhs inclusive of solatium of Rs. 1.89 lakhs payable in terms of the licence. \n\n3. In the previous year relevant to the assessment year 1962-63, besides the solatium of Rs. 1.89 lakhs the assessee received from the Board a further sum of Rs. 2,30,200 (Rs. 1,92,000 plus proportionate solatium of Rs. 38, 200) for the land which was transferred by the assessee to the Board. The cost of the said land to the assessee was Rs. 3,804. \n\n4. In the accounting years ending March 31, 1961, and March 31, 1962, relevant to the assessment years 1961-62 and 1962-63, the assessee incurred expenditure of Rs. 47, 917 and Rs. 55,292 by way of establishment expenses, salaries and allowances paid to staff. The assessee claimed deduction of those expenses in the computation of its income-tax liability. The claim was made on the footing that negotiations were going on between the assessee and the Board during the relevant previous years as a result of which the sale price was finally settled in March, 1962, and the expenses which were claimed as deduction were incurred during such period under commercial expediency. It was also the case of the assessee that the Explanation to section 41(2) of the Income-tax Act,1961, created a legal fiction of the continuance of the business and once such fiction came into existence, it should be carried to its logical conclusion and for all purposes the business should be deemed to have been in existence during the relevant accounting years. On this ground the assessee claimed deduction of the establishment expenses either under section 10 of the Indian Income-tax Act, 1922, or against the profit determined under section 41(2) of the Income-tax Act, 1961. \n\n5. IN the assessment of the assessee for the assessment years 1961-62 and 1962-63 for which the relevant accounting years ended on March 31,1961, and March 31, 1962, respectively, the Income-tax Officer rejected the claim of the assessee for deduction of the establishment expenses. He took the view that the assessee's business came to an end by termination of the licence and that no expenditure could be allowed under the head \"business\" unless and unless and until the business was being carried on in the relevant accounting years and that commercial expediency did not enter into the computation of the profit under section 10(2)(vii) of the Indian Income-tax Act, 1922. He further took the view that the concept of legal fiction was only for the limited purpose of ascertaining and taxing the profits under section 41(2) and it could not be stretched beyond that for allowance of expenses, etc. \n \n\n6. In the assessment year 1962-63, the assessee claimed that the solatium of Rs. 1.89 lakhs received by it form the Board was casual and non-recurring receipt or a capital receipt and was, in any view of the matter, not taxable in law. The said contention on behalf of the assessee was rejected by the Income-tax Officer. He held that solatium was only a part of the consideration received from the Board and was, therefore, a part of the sale proceeds of the assets handed over by the assessee to the Board and was taxable. The Income-tax Officer also determined the profits under section 41(2) of the Income-tax Act, 1961, corresponding to section 10(2)(vii) of the Indian Income-tax Act, 1922, at Rs. 5,95,218 and brought the said amount to tax for the assessment year 1962-63. In the appeals filed by the assessee, the Appellate Assistant Commissioner upheld the order of the Income-tax Officer as regards disallowance of establishment expenses for both the aforesaid years, rejected the contention of the assessee that the amount of Rs. 1.89 lakhs received by it as solatium was either casual or non-recurring receipt or a capital receipt and held that in the present case the provisions of section 41(2) of the Income-tax Act, 1961, were applicable for the assessment year 1962-63 and the amount under that section could be brought to tax even after the cessation of the business. \n\n7. In further second appeals before the Tribunal, the Tribunal, confirmed the order of the taxing authorities as regards disallowance of establishment expenses for both the assessment years. The Tribunal took the view that under the provisions of section 41(2) of the Income-tax Act, 1961, it was only for the purpose of taxing the balancing charge that the business was deemed to be in existence in the relevant previous years and not for any other purpose. According to the Tribunal the expenditure incurred by the assessee on the establishment could not be considered as admissible when the business had ceased to exist long time ago. The Tribunal also confirmed that the sum of Rs. 1.89 lakhs was also rightly subjected to tax by the taxing authorities. So far as taxing the balancing charge of Rs. 5,95,218 was concerned, the Tribunal took the view that it could be subjected to tax under section 41(2) of the Income-tax Act, 1961, for the assessment year 1962-63 as the moneys were due and payable and actually received in March, 1962. Such balancing charge, according to the Tribunal, was liable to be brought to tax even after the cessation of the business because under that section a fiction was created that the business was in existence in the relevant previous year for the purpose of bringing to tax the balancing charge. \n\n8. Out of this order of the Tribunal the following three questions are referred to us for our determination at the instance of the assessee : \n\n \"1. Whether, on the facts and in the circumstances of the case, the applicant was entitled to deduct a sum of Rs. 47,917 and Rs. 55,292 being the expenses incurred by the applicant during the assessment years 1961-62 and 1962-63, respectively, in the computation of its total income or in the computation of profit under section 41(2) in the respective assessment years under the Income-tax Act ? \n\n2. Whether the solatium of Rs. 1,89,000 received by the assessee company was a casual or non-recurring receipt or a capital receipt or a part of the sale price of the assets for the purpose of determining the liability under section 41(2) of the Income-tax Act, 1961, for the assessment year 1962-63 ? \n\n3. Whether, on the facts and in the circumstances of the case, the applicant has been rightly held liable to balancing charge under section 41(2) in respect of the sum of Rs. 5,95, 218 for the assessment year 1962-63 ?\" \n\n9. For the sake of convenience we will take up question No. 3 first. There is no controversy in the present case that the sum of Rs. 5,95,218 had been received by way of balancing charge as understood under section 41(2) of the Income-tax Act, 1961. \n\n10. So far as this question is concerned, Mr. Munim on behalf of the assessee has urged that the undertaking that the assessee possessed was handed over to the Board on December 6, 1959, and having regard to the relevant provisions of the Electricity Act the undertaking together with its assets upon taking of such possession vested in the Board and the Board became the owner thereof. His submission is that since the Board became the ower of the property the sale is complete and moneys payable by way of price in respect thereof became due and payable on December 6, 1959, irrespective of the fact that the actual amount that may be payable for the price may be determined either by an agreement or as a result of arbitration proceedings at a much later date. He urged that merely because for quantification of the amount to be paid to the assessee some time was required that does not mean that notwithstanding the acquisition of the undertaking and the vesting of the assets thereof in the Board, the purchase price became due and payable at a later date, i.e., after December 6, 1959. His submission was that if proper regard be had to the relevant provisions of the Electricity Act and the provisions of section 41(2) of the Income-tax Act, 1961, it is quite clear that the sum of Rs. 5,95,218 which was admittedly received as balancing charge was not capable of being subjected to tax in the assessment year 1962-63. According to his submission, this amount became due and payable on December 6, 1959, when the undertaking together with its assets vested in the Board and cannot be subjected to tax in any, assessment year other than the assessment year 1960-61. In short, his submission so far as this thing is concerned is that the taxing authorities and the Tribunal were in error in taking the view that simply because the amount of the purchase price was fixed and received in March, 1962, it became chargeable to tax for the assessment year 1962-63. Alternatively, he contended that if a particular amount is capable of being subjected to charge for the year 1960-61, when the Indian Income-tax Act, 1922, was in force, then simply because it was not subjected to charge in that year, it cannot be again subjected to tax in the subsequent year merely because it is capable of falling within the provisions of section 41(2) of the Income-tax Act, 1961. As regards this alternative contention his submission is that in view of the provisions of section 10(2)(vii) of the Indian Income-tax Act, 1922, it was open to the taxing authorities to charge this amount for the assessment year 1960-61 and they having failed to do so, it cannot be subjected to tax under section 41(2) of the Income-tax Act, 1961, for the assessment year 1962-63. Mr. Joshi, on the other hand, on behalf of the revenue submitted that the taxing authorities and the Tribunal were right in taking the view that the amount of balancing charge could only be subjected to tax under section 41(2) of the Income-tax Act, 1961, for the assessment year 1962-63, because the actual amount of purchase price was fixed in the month of march, 1962, and was received in that month. He submitted that this amount became due and payable only in March, 1962, when it was ascertained or quantified or fixed by agreement between the parties and to such a case the provisions of section 41(2) are directly applicable. So far as the alternative contention of Mr. Munim is concerned, he submitted that on a plain reading of the provisions of section 10(2)(vii) of the Indian Income-tax Act, 1922, it is not possible for anybody to rationally contend that it was open to the taxing authorities to tax the amount of the balancing charge in the assessment year 1960-61 simply because the undertaking together with its assets were taken charge of and vested in the Board on December 6, 1959. He submitted that if regard be had to the provisions of section 10(2)(vii) then it was not open to the taxing authorities to tax the amount of the balancing charge under that section for the assessment year 1960-61. \n\n11. Before we actually deal with the relevant provisions of the indian income-tax Act, 1922, and the Income-tax Act, 1961, a brief reference may be made to the provisions of the Electricity Act. Section 5 of the Electricity Act contains provisions relating to the circumstances under which the licence of a licensee can be revoked and the transfer thereof to the Board can be effected. Section 6 of the Electricity Act provides for purchase of undertaking either as a result of revocation of the licence under section 5 or upon exercise of option to purchase on expire of the period of the licence. Under the scheme of the Electricity Act purchase can be effected authority. There is no controversy in the present case that the option of purchasing the undertaking was exercised by the Board by giving a proper statutory notice. Sub-section (6) of section 6 of the Electricity Act, prior to its amendment by the Maharashtra Act No. 63 of 1974, provided as under : \n \"6. (6) Where a notice exercising the option of purchasing the undertaking has been served upon the licensee under this section, the licensee shall deliver the undertaking to the State Electricity Board, the State Government or the local authority, as the case may be, on the expiration of the relevant period referred to in sub-section (1) pending the determination and payment of the purchase price.\" \n\n12. Sub-section (7), prior to the amendment, provided as under : \n \"6(7) Where an undertaking is purchased under this section, the purchaser shall pay to the licensee the purchase price determined in accordance with the provisions of sub-section (4) of section 7A.\" \n\n13. The provisions of sub-section (6) and (7) of section 6 were amended retrospectively by the Maharashtra Act No. 63 of 1974. After amendment the above sub-section (6) of the Electricity Act was substituted by the following sub-section : \n \"(6) Where a notice exercising the option of purchasing the undertaking has been served upon the licensee under this section, the licensee shall deliver the undertaking to the State Electricity Board, the State Government or the local authority, as the case may be, on the expiration of the relevant period referred to in sub-section (1) pending the determination and payment of the purchase price and interest.\" \n\n14. At the end of sub-section (7) the following words were added - \n \"and interest at the Reserve Bank of India rate ruling at the time of the delivery of the undertaking less 1% on the purchase price of the undertaking for the period from the date of delivery of the undertaking to the date of payment of the purchase price.\" \n\n15. These amendments have been given retrospective operation from the inception. Section 7 of the Electricity Act provides for the vesting of the undertaking in the purchaser. Its provisions are as under : \n\n \"7. Where an undertaking is sold under section 5 or section 6, then completion of the sale or on the date on which the undertaking is delivered to the intending purchaser under sub-section (3) of section 5, or under sub-section (6) of section 6, as the case may be, whichever is earlier - \n\n(i) the undertaking shall vest in the purchaser or the intending purchaser, as the case may be, free from any debt, mortgage or similar obligation of the licensee or attaching to the undertaking : \n Provided that any such debt, mortgage or similar obligation shall attach to the purchase money in substitution for undertaking : \n\n(ii) the rights, powers, authorities, duties and obligations of the licensee under his licence shall stand transferred to the purchaser and such purchaser shall be deemed to be the licensee : Provided that were the undertaking is sold or delivered ot a state Electricity Borad or the state goverment, the licence shall case to have futher operation.\" Section 7A of the Electricity Act provides for determination of the purchase price. Under sub-section (1) the price of the undertaking shall be the market value of the undertaking at the time of purchase or where the undertaking has been delivered before the purchase under sub-section (3) of section 5, at the time of the delivery of the undertaking. In case of any difference or dispute regarding such purchase price, the same shall be determined by arbitration. Sub-section (2) provides how the market value is to be determined and what assets are to be taken into account and what assets are to be excluded therefrom. Sub-section (4) provides that where an undertaking of a licensee is purchased under section 6, i.e., upon exercise of option to purchase, the purchase price shall be the value thereof as determined in accordance with the provisions of sub-section (1) and (2) of section 7A, provided that there shall be added to such value such percentage, if any, not exceeding twenty per centum of that value as may be specified in the licence on account of compulsory purchase. \n\n16. It is pursuant to these provisions that possession of the undertaking was delivered on December 6, 1959, and after negotiations initially the first payment of 65% of the written down value was made and later on the balance of the price was fixed and paid in March, 1962, inclusive of the 20% solatium. \n\n17. The first contention that we have to consider in relation to question No. 3 is whether having regard to the language of section 41(2) of the Income-tax Act, 1961, the amount of the balancing charge was assessable in the assessment year 1962-63. Section 41 provides for profits chargeable to tax. Sub-section (2) thereof is as under : \n\n \"41(2) Where any building, machinery, plant or furniture which is owned by the assessee and which was or has been used for the purpose of business or profession is sold, discarded, demolished or destroyed and the moneys payable in respect of such building, machinery, plant or furniture, as the case may be together with the amount of scrap value, if any, exceed the written down value, so much of the excess as does not exceed the difference between the actual cost and the written down value shall be chargeable to income-tax as income of the business or profession of the previous year in which the moneys payable for the building, machinery, plant or furniture became due : \n Provided that where the building sold, discarded, demolished or destroyed is a building to which Explanation 5 to section 43 applies, and the moneys payable in respect of such building, together with the amount of scrap value, if any, exceed the actual cost as determined under that Explanation, so much of the excess as does not exceed the difference between the actual cost so determined and the written down value shall be chargeable to income-tax as income of the business or profession of such previous year. \n\nExplanation. - Where the moneys payable in respect of the building, machinery, plant or furniture referred to in this sub-section become due in a previous year in which the business or profession for the purpose of which the building, machinery, plant or furniture was being used is no longer in existence, the provisions of this sub-section shall apply as if the business or profession is in existence in that previous year.\" \n\n18. Sub-section (3) and (4) are not relevant for the present purpose but Explanation to sub-section (4) is relevant and is as under : \n \"Explanation. - The expression 'moneys payable' and the expression 'sold' in sub-sections (2) and (3) shall have the same meanings as in sub-section (1) of section 32.\" \n\n19. Sub-section (5) contains provisions as regards writing off of the loss of the earlier years and its provisions are as under : \n \"(5) Where the business or profession referred to in this section is no longer in existence and there is income chargeable to tax under sub-section (1), sub-section (2), sub-section (2A), sub-section (3) or sub-section (4) in respect of that business or profession, any loss, not being a loss sustained in speculation business or under the head \"capital gains\", which arose in that business or profession during the previous year in which it ceased to exist and which could not be set off against any other income of that previous year shall, so far as may be, be set off against the income chargeable to tax under the sub-sections aforesaid.\" \n\n20. In these provisions the expression \"moneys payable\" and the expression \"sold\" shall have the same meanings as in sub-section (1) of section 32 of which the relevant provisions are as under : \n\n\"Explanation. - For the purposes of this clause, - \n\n(1) 'moneys payable' in respect of any building, machinery, plant or furniture includes - \n\n(a) any insurance, salvage or compensation moneys payable in respect thereof; \n\n(b) where the building, machinery, plant or furniture is sold, the price for which it is sold..... \n\n(2) 'sold' includes a transfer by way of exchange or a compulsory acquisition under any law for the time being in force...\" \n\n21. The argument of Mr. Munim on behalf of the assessee is that for the purpose of the Explanation to section 41(2), what is required to be determined is when did the moneys payable in respect of the undertaking become due and his submission is that if regard be had to the meaning given in Explanation to section 32(1), such moneys payable became due when the vesting took place and the Board became the owner of the undertaking and its assets. His submission is that in such a case the price for which it is sold is due and payable on the date of such vesting, that is, the date on which the licensee, who was earlier the owner thereof, was divested of its ownership. Mr. Joshi on behalf of the revenue submitted that this question had been concluded by the decision of the Delhi High Court in the case of P. C. Gulati, Voluntary Liquidator, Panipat electric Supply Co. Ltd, v. Commissioner of Income-tax [1972] 86 501 and that with a view to preserve uniformity in respect of all-India taxation statute this court normally should not depart from the ordinary convention to follow such a decision irrespective of the fact whether the view taken therein is accepted by this court as correct or not. Before the Delhi High Court the crucial question that came up for consideration was whether the amount of balancing charge was chargeable to tax in the year in which the moneys in respect of the purchase price became due and payable or when the undertaking was taken possession of. That question had been directly considered by the Delhi High Court and no special reason is pointed out to us why we should depart from the normal or ordinary convention which is followed by all courts in respect of all-India taxation statute to preserve uniformity of opinion. We do not propose to go into the correctness of this decision and only relying upon the ordinary convention will like to follow the same to preserve uniformity in law. The facts of the case before the Delhi High Court as noted in the headnote are as under :\n\nIn 1934, the assessee-company obtained a licence under the Indian Electricity Act, 1910, to generate and distribute electricity in Panipat. Under clause 9 of the licence the Punjab Government had adoption to purchase its electrical undertaking at the expire of the period of the licence. The Government exercised the option, giving the requisite notice under the Act on July 4, 1952, and took possession of the undertaking on July 16, 1954. The assessee filed a suit for recovery of more than Rs. 13 lakhs as compensation. This suit was eventually compromised on April 7, 1962, the assessee agreeing to accept Rs.2 and half lakhs, one of the terms of the compromise being that the State Electricity Board would discharge a loan advanced by the Governement to the assessee. For the assessment year 1963-64, the Income-tax Officer brought to tax as profit under section 41(2) of the Income-tax Act, 1961, the excess over the depreciated value of the assets. The question was whether the excess was rightly chargeable under section 41(2) for the assessment year 1963-64. The Delhi High Court held that the provision of law by which the Governement acquired the undertaking was somewhat different from the ordinary law in the Transfer of Property Act, 1882. Though taking over of possession might have vested the undertaking in the Government without a price being settled, the transaction became a \"sale\" only when the price became settled and it was only after the price had been settled that it became due to the assessee. The High Court also held that the second proviso to section 10(2)(vii) did not make the amount taxable in the assessment year 1955-56. According to the High Court, the amount die to the assessee remained inchoate and unknown till it was ascertained as result of the compromise. As soon as it was determined it became payable and due within the meaning of section 41(2). Therefore, the amount became due to the assessee only in the previous year relevant to the assessment year 1963-64, and the excess was assessable to tax for that assessment year. According to the Delhi High Court, under section 41, the point of time at which the excess realised over the written down value of assets sold has to be taxed, is not the previous year in which the \"sale\" took place or the previous year in which the money was \"received\", but the previous year in which the money \"became due\". No amount can be said to be due, within the meaning of that section, till it has become ascertained. At page 512, the High Court observed : \n \"In applying a provision like the present, we have to make a reasonable construction based on the practical method by which the assessee can claim a deduction. If the property is compulsorily acquired for less than its written down value, the assessee has to get a deduction under section 32(2)(iii) of the Act. If the price exceeds the written down value the assessee has to be taxed on the excess, or, at least that part of the excess which does not exceed the difference between the actual cost and the written down value. There must be some point of time at which the assessee can say that the amount is now payable. He cannot say that the amount is payable on the date of the sale in the present case, because he does not know what the amount is. He cannot say that there is an excess or a deficit. He cannot, therefore, make an entry in his books of account showing the amount. Similarly, if he wishes to make a deduction under section 32(1)(iii) he cannot claim any deduction merely on the ground that the price may be less than the written down value. He does not know whether to ask for a deduction or whether he is liable to tax till the amount is actually ascertained. An amount can be said to be payable when a definite amount is ascertainable as being due. In the instant case, the suit filed by the company claimed an amount of over Rs. 13 lakhs, but the final payment received after the compromise was much less. No amount could be said to be due till it had become ascertained. This seems to be the only reasonable construction that can be made on the words \"became due\" occurring in the provision we are called upon to construe. \n\n22. Thus, the amount that was due to the assessee remained inchoate and unknown, till it was actually ascertained as a result of the compromise between the parties. As soon as it was determined, it became payable and, therefore, due. When the amount was ascertained the assessee was able to say that the amount to be paid exceeded the written down value. If the amount had been less than the written down value the assessee could then have said that he was entitled to a deduction under section 32(1)(iii) of the Act.\" -(See- ). \n\n23. In this case the Delhi High Court has clearly taken the view that the moneys payable became due when they were ascertained. There is no controversy in the present case that the amount was ascertained only in March, 1962, even though the possession of the undertaking together with the assets was taken on December 6, 1959. Since it was ascertained in March, 1962, the amount of balancing charge as contemplated by section 41(2) of the Income-tax Act, 1961, became chargeable to tax in the assessment year 1962-63. \n\n24. It was urged by Mr. Munim that this decision of the Delhi High Court ought not to be regarded as good law in view of the decision of the Supreme Court in the case of Godhra Electricity Co. Ltd. v. State of Gujarat, . This was a case where the Supreme Court was merely concerned with the constitutionality of sections 6, 7, and 7A of the Electricity Act as violating or contravening the fundamental rights contained in article 19(1)(f) of the Constitution of India. There is nothing in this judgment to indicate that the Supreme Court was even remotely concerned with the interpretation of the words \"when the moneys payable became due\", nor are there any observations in this judgment which throw any light thereon.\n\n25. It was, however, urged by Mr. Munim that as by the Maharashtra Act, No. 63 of 1974, the provisions of sub-sections (6) and (7) of section 6 of the Electricity Act are retrospectively amended so as to entitle the licensee to payment of interest at the rate therein prescribed on the purchase price of the undertaking for the period from the date of delivery of the undertaking to the date of payment of the purchase price, it is quite evident that the sale became complete when possession of the undertaking together with the asset was taken charge of and moneys became payable and due thereon. He, therefore, submitted that unless the moneys had become payable and due there could have been no provision for payment of interest from the date of taking delivery thereof and he, therefore, submitted that in view of the retrospective operation given to the provision of sub-sections (6) and (7) of section 6 of the Electricity Act by the Maharashtra Act, No. 63 of 1974, the decision of the Delhi High Court should not be regarded as applicable to this case. Here the Delhi High Court was not concerned with any provision which provided for payment of interest and after the amendment is made by the Maharashtra Act, No. 63 of 1974, one thing is clear that no provision for payment of interest could have been made unless the moneys became due and payable from the date of taking delivery. It is not possible for us to accept this contention. so far as payment of interest is concerned, there is a general principle of equitable consideration to the effect that the act of taking possession of any property generally implied an agreement to pay interest on the value of the property. The right to receive interest took the place of the right to retain possession. Rererence in this connection can be had to the decision of the Supreme Court in the case of Satinder Singh v. Umrao Singh . This was a case of land acquisition under the provisions of the East Punjab Acquisition and Requisition of Immovable Property (Temporary Powers) Act, 1948. In that case, the Punjab High Court had disallowed interest on the amount of compensation on the ground that there was no provision in the statute under which the property was acquried permitting payment of interest. Notwithstanding this statutory provision the Supreme Court took the view that the act of taking possession of immovable property generally implied an agreement to pay interest on the value of the property. The Supreme Court has referred tp several English decisions and pointed out that this principle has been uniformly accepted. In Swift & Co. v. Board of Trade [1925] AC 520, it has been held by the House of Lords that \"on a contract for the sale and purchase of land it is the practice of the Court of Chancery to require the purchaser to pay interest on his purchase money from the date when he took, or might safely have taken, possession of the land\". Reference was, inter alia, made to a decision of the Privy Council in the case of Inglewood Pulp and paper Co. Ltd. v. New Brunswick Electric Power Commission [1928] AC 492, where their Lordships of the Privy Council took the view that \"upon the expropriation of land under statutory power, whether for the purpose of private gain or of good to the public at large, the owner is entitled to interest upon the principal sum awarded from the date when possession was taken unless the statute clearly shows a contrary intention.\" Thus, it is a general principle well recognised both in India as well as in England that the act of taking possession of an immovable property implies an agreement to pay interest on the value of the property. It is as a result of this recognition of this general principle that by the Maharashtra Act, No. 63 of 1974, the provision for payment of interest has been made in the statute. Such right to interest also existed irrespective of the said provision. Thus, it is not possible for us to take the view that simply because interest was payable as a result of the amendment introduced by the Maharashtra Act, No. 63 of 1974, the moneys in respect of the acquisition of the undertaking became due and payable on the date of delivery of possession thereof. \n\n26. Coming to the alternative contention of Mr. Munim we have to consider whether the amount of balancing charge was capable of being subjected to tax in the assessment year 1960-61. Reliance was placed by him upon the provisions of section 10(2)(vii) of the Indian Income-tax Act, 1922. The relevant provisions of that section are as under : \n\n \"10. (1) The tax shall be payable by an assessee under the head 'profits and gains of business, profession or vocation' in respect of the profits or gains any business, profession or vocation carried on by him. \n\n(2) Such profits or gains shall be computed after making the following allowances, namely :-...... \n\n(vii) in respect of any such building, machinery or plant which has been sold or discarded or demolished or destroyed, the amount by which the written down value thereof exceeds the amount for which the building, machinery or plant, as the case may be, is actually sold or its scrap value :...... \n\nProvided further that where the amount for which any such building, machinery or plant is sold, whether during the continuance of the business or after the cessation thereof, exceeds the written down value, so much of the excess as does not exceed the difference between the original cost and the written down value shall be deemed to, be profits of the previous year in which the sale took place :....... \n\nProvided further that where any insurance, salvage or compensation moneys are received in respect of any such building, machinery or plant as aforesaid, and the amount of such moneys exceeds the difference between the written down value and the scrap value no amount shall be allowable under this clause and so much of the excess as does not exceed the difference between the original cost and the written down value less the scrap value shall be deemed to be profits of the previous year in which such moneys were received :.....\" \n\n27. Relying upon the language of the second proviso above referred to, the argument of Mr. Munim is that in view of the said provisions it was open to the taxing authorities when they passed the assessment order for the year 1960-61, to include the amount of the balancing charge as a part of the profits of that year. He submitted that this proviso is wide enough to permit inclusion of the amount of the balancing charge as the profits of the previous year irrespective of the fact whether the purchase price is quantified or not. Such a contention in our opinion cannot be accepted. The first condition essential before the second proviso can be invoked is that the amount for which any building, machinery or plant is sold must be known. Neither on December 6, 1959, nor at any time prior to March 31, 1960, the purchase price was ascertained in the present case. At no time prior to the assessment year 1960-61, was it possible for the assessee to say the actual amount for which the undertaking together with the assets was sold to the Board. If it is not possible to specify the amount it will be impossible for any assessee or the taxing authorities to treat an imaginary figure as the profits of the previous year on the footing that the sale took place in that year. There is no controversy in the present case that the actual amount payable for acquisition of the undertaking and the assets was ascertained only in March, 1962. So the amount for which the undertaking together with the assets was sold became known or ascertained for the first time in March, 1962. At that time only whether there was deficiency or balancing charge could be ascertained and until the amount payable is ascertained nobody knows the price for which the undertaking together with the assets is sold. Thus, the alternative contention of Mr. Munim cannot be accepted. In our opinion, therefore, question No. 3 has to be answered in the affirmative and in favour of the revenue. \n\n28. That takes us to question No. 1. That question relates to allowance of expenses incurred during the previous year relevant to the assessment years 1961-62 and 1962-63, respectively. It is the case of the assessee that in the previous year relevant to the assessment year 1961-62, the assessee incurred an expenditure of Rs. 47,917 and in the previous year relevant to the assessment year 1962-63, he incurred an expenditure of Rs. 55,292. The submission of Mr. Munim is that as under the provisions of section 41(2) of the Income-tax Act, 1961, by a legal fiction with a view to bring the balancing charge to tax the business is deemed to be in existence in the previous year in which the moneys became due and payable in respect of the acquisition of the undertaking, the expenses incurred in the intervening period should be allowed to be deducted, because as a result of this fiction the business continues to be in existence right up to the accounting year relevant to the assessment year 1962-63. Such a question will have to be considered having regard to the relevant provisions of the Indian Income-tax Act, 1922, in so far as it relates to the assessment year 1961-62, and to the Income-tax Act, 1961, in so far as it relates to the assessment year 1962-63. For the assessment year 1961-62, reliance was placed by Mr. Munim upon the language of the second proviso to section 10(2)(vii) of the Indian Income-tax Act, 1922. He submitted that in view of the said proviso, the assessee would be entitled to the expenses incurred in the relevant accounting year relating to assessment year 1961-62, because of the legal fiction. It may, however, be said that when the attention of Mr. Munim was drawn to the language of the second proviso to clause (vii) of section 10(2) of the Indian Income-tax Act, 1922, he fairly conceded that proviso will have no application in the present case because no balancing charge arose at any time during the accounting year relevant to the assessment year 1961-62. Then we will have to consider whether the expenses incurred in the accounting year relevant to the assessment year 1962-63 are permissible to be deducted. Such a claim depends upon the language of section 41(2) read with the Explanation. The operative part of sub-section (2) of section 41 merely provides that the amount of the balancing charge shall be chargeable to income-tax as income of the business of the previous year in which the moneys payable became due. It is, however, not disputed that unless the business is continued in the relevant previous year either actually or by legal fiction, the balancing charge cannot be subjected to tax. It is by legal fiction which is contained in the Explanation that business is treated as in existence in the relevant previous year in order to bring the balancing charge to tax. In effect, the Explanation provides that where moneys payable in respect of the acquisition of the undertaking become due and payable in a previous year in which the business for the purpose of which the building, machinery, plant, etc., was being used is no longer in existence, the provisions of this sub-section shall apply as if the business or profession is in existence in that previous year. This Explanation by a legal fiction treats the business in existence in the previous year for the purpose of bringing the balancing charge to tax even though there is cessation of operation. It is a well-settled principle that a legal fiction is to be limited for the purpose for which it has been created and cannot be extended beyond that legitimate frame. See the decision of this court in Arvind Bhogilal v. Commissioner of Income-tax [1976] 105 ITR 764 (Bom). The question that we have to consider is, what is the purpose for which the legal fiction is created in the present case; even under the Indian Incom-tax Act, 1922, in the corresponding provisions prior to the amendment of section 10(2)(vii), second proviso, by section 11 of the Taxation Laws (Extension to Merged States and Amendment) Act, 1949 (Act No. 67 of 1949), there was no legal fiction and judicial opinion was clear on the point that, unless business continues to exist in the previous year in which the balancing charge arose, it cannot be subjected to tax. To get rid of this lacuna by the said Act No. 67 of 1949, in the second proviso to section 10(2)(vii) a legal fiction was created by adding the words \"whether during the continuance of the business or after the acssation thereof\". It is the same legal fiction which has been continued by the Explanation to section 41(2) of the Income-tax Act, 1961. Under this legal fiction the businessm is deemed to be in existence only for the purpose of bringing the balancing charge to tax and for no other purpose . This legal fiction cannot be extended so as to permit deduction of expenses incurred in the business. Reference was made by Mr. Munim to sub-section (5) of section 41 of the Income-tax Act, 1961, whereunder set-off is permissible under the circumstances therein mentioned. He urged that its provisions are of no assistance in interpreting the provisions of section (5), a claim for set-off could not have been permissible in any of the cases which are covered by that section. Thus, as the legal fiction in the Explanation to section 41(2) is restricted to subjecting the balancing charge to tax it is not possible for us to extend its scope so as to permit the deduction of the expenses incurred as claimed by the assessee. Thus, our answer to question No. 1 is in the negative and in favour of the revenue.\n\n29. Coming then to question No. 2, it deals with solatium of Rs. 1,89,000. Whether it can be treated as a casual or non-recurring receipt or a capital receipt or a part of the sale price of the assets for the purpose of determining the liability under section 41(2). An identical question arose before the High Court under section 10(2)(vii) of the Indian Income-tax Act, 1922, in the case of Sonepat Light Power and General Mills Ltd. v. Commissioner of Income-tax [1966] 59 ITR 392 (Punj). There it is clearly held that for the purposes of the second proviso to section 10(2)(vii) the amount for which the building, machinery or plant was actually sold included their fair market value as well as the addition of 20 per cent. thereof received by the assessee. Thus, in view of this decision, the sum of Rs. 1,89,000 will have to be regarded as a part of the sale price of the assets for the purpose of determining the liability under section 41(2). Accordingly, our answer to question No. 2 is that the solatium of Rs. 1,89,000 received by the assessee is a part of the sale price of the assets for the purpose of determining the liability under section 41(2) of the Income-tax Act, 1961, for the assessment year 1962-63.\n\n30. The assessee shall pay the costs of the revenue." }, { "title": "Income Tax Officer vs Mrs. Dwarika Prasad Trust. on 2 June, 1989", "url": "https://indiankanoon.org//doc/1295246/", "text": "Income Tax Officer vs Mrs. Dwarika Prasad Trust. on 2 June, 1989\nEquivalent citations: [1989]30ITD84(DELHI)\nORDER\nPer Shri S. K. Chander, Accountant Member - These appeals by the Revenue are directed against the orders of the AAC for the asst. years 1975-76, 1978-79 and 1981-82. All these orders are made by the learned AAC on 5- 9-1984. However, the main speaking order is made the year 1975-76. From both the sides, the parties agreed that arguments for the asst. Year 1975-76 shall apply mutates mutants to other years and our decision, in this case, for this year, will cover the wealth-tax assessments for the asst. years 1974-75 and 1975-76. We have, therefore, heard the parties, in parties in this case and proceed to decide the issues brought in appeal before us. 2. The assessed before us is a trust known as Mrs. Dwarika Prasad Trust, 56 Civil Lines, Bareilly. This trust was created by late Shri Girish Prasad by will dated 15-8-1972, registered on 3-4-1973. After making the will, but before registration, the settlor died on 22-1-1973. But the Trust was to take effect from the date of his death. The Trust was for Charitable purposes. There is no dispute that but for clause (d) in the will, the other provisions were considered by the ITO as charitable in character. However, with regard to clause (d) in the will which provided that 1/4th of the property shall be utilised for the help of the deserving members of the family and for their studies and shall also be utilized for the marriages of the girls of the family, was interpreted by the ITO as the powers reserved by the settlor for the trustees for application of the Trust money for non-charitable purposes. On 8-9-1980, the beneficiaries of the Trust had executed a deed of renunciation whereby they relinquished all their beneficial rights, title and interest in the will and it was provided that such interest of the beneficiaries could also be utilized by the trustees for charitable purposes mentioned in the will.\n\n3. The Income-tax officer observed that the amendment in the deed was without any authority provided in the original will and as such, not applicable, in view of the judgments cited by him including that of madras High Court in the case of CIT v. S. Ramaswamy Iyer [1977] 110 ITR 364. According to him, if any change was to be made in the original objects of the Trust, the provisions of Civil Procedure Code in this regard should have been availed of. His other objection was that the renunciation deed having been made on 8-9-1980 could not be made retrospective in operation and applied for the asst. year 1975-76 and according to him, the matter must be decided upon the deed and the position, which existed during the relevant year.\n\n4. The Trust had applied for registration with the Commissioner on 12-9- 1980 and the Commissioner had registered the Trust as charitable, vide certificate dated 17-9-1983. The Income-tax Officer, however, noted that the application in the context as of no avail. According to him, if the position of the deed was, thus, taken, the trustees were entitled to certain benefits forbidden u/s. 13(1) (c) of the Act and hence, the exemption u/s. 11 cannot be granted.\n\n5. The Income-tax Officer also took into consideration while examining the claim for exemption by the assessed certain other circumstances. According to him, form No. 10, which was in the form of a notice for accumulation of income to be applied should be filed with the ITO within the time prescribed for filing the return but it was inordinately delayed as it was filed on 24-11-1979. Similarly, on a Resolution by the Board of Trustees, which was to be attached with form No. 10 had not been attached and was field only on 24-11-1979. Thus, according to him, the mandatory conditions laid down in the Act and the rules regarding permissibility of accumulation of funds of the Trust had not strictly been followed. Since, the specified percentage of income, according to him, had not been applied for charitable purposes and the conditions for accumulation of funds, had not been fulfillled, the Trust was not entitled to exemption, he held so. Thereafter the Income-tax Officer took the status of the Trust as Association of Persons and computed the total income at Rs. 55,290. According to him, the shares of the beneficiaries were indeterminate and therefore the tax had to the charged on that income at the maximum marginal rate as per provisions of 164 f the Act. This assessment was made on Jan 31, 1984.\n\n6. When the matter came up in appeal before the learned AAC, he heard the parties, considered the order of the ITO and came to the conclusion with the detailed reasons given in his order that the Trust was entitled to exemption as a charitable institution and the other conditions regarding accumulation and application of the other conditions regarding accumulation and application of income had also been fulfillled, The appeal of the assessed was, therefore, allowed by treating the entire income of the Trust as exempt. Hence, the grievance of the Revenue.\n\n7. We find after careful consideration of the rival submissions and that orders of the authorities below along with the authorities cited that the Income-tax Officer did not appreciate the provisions the will, the deed of renunciation and other relevant provision of law in the proper perspective. In the case of s. Ramaswamy Iyar (supra), the Madras High Court was deciding a case where a Trust was created under a deed wholly for charitable purposes and, there was a supplemental deed providing for expenditure in favor of poor relations of the founder. There was no provision in the original deed providing for alteration of terms and the High Court held that supplemental deed was not valid. In the case before us it is clear that the deed of reunification was by the beneficiaries giving up their rights endowed upon them by the original deed and thus, something more was being added to the corpus or income of the Trust for charitable purposes rather than being taken away. This was, therefore, not to be viewed with the type of suspicion that the Income- tax Officer entertained for the purposed of the book containing income and expenditure accounts and balance factually no application of income or usages of assets in any manner contravening the provisions of section 13(1) (c) of the Income-tax Act, Act, 1961. Thus, even if in the original will that formed the document creating the Trust there was reservation for family members in clause (d) that never became operative, in fact, and in view of the judgment of the Supreme court in the case of CIT kv. Dharmodayam co. [1977] 109 ITR 527, it will not be fatal to the claim of exemption by the assessed.\n\n8. We also find that the incordinate delay in filing form No. 10 which is a notice of accumulation to be filed with the ITO cannot rob the assessed form claim of exemption because of the judgments mentioned in the impugned order of the AAC, such as the case of CIT v. Shree Padmanbhaswami Temple Trust [1979] 120 ITR 138 (Mad.), etc. Since the section does not lay down any time limit for application of income, the delay in filing form No. 10 prescribed in the rules cannot override the main provisions in the section. This was, therefore, inconsequential in determining the claim of exemption. The AAC, therefore, rightly allowed the exemption despite the delay.\n\n9. Since the assessed is a charitable trust or charitable institution, as its objects are of charitable purposes as defined in sec. 2(15) of th Act, it would be covered by the provisions of section 1, ibid. In the case of the charitable institution even the capital expenditure can be allowed as a deduction in view of the ratio of the Gujarat High Court judgment in the case of Satya Vijay Patel HIndu Dharmshala Trust v. CIT [1972] 86 ITR 683. Hence computation of the income in the impugned order of the learned AAC also does not call for an interference by which he determined total income as nil. The appeal for the asst. year 1975-76 is, therefore, dismissed.\n\n10. For the reasons assigned supra, which we apply with necessary changes to the asst. years 1978-79 and 1980-81, the appeals of the revenue are dismissed Per Shri M. C. Agarwal, JM - I have read, with advantage, the order proposed by my learned brother Shri S. K. Chander and since I have not been able to agree with the findings, I record my views as below : 2. This is a case of a trust that claims to be one for charitable purposes. The trust therefore claims that its income ia exempt from tax. 3. The trust in question christened as Mrs. Dwarika Prasad Trust was created under a will dated 15-8-1972 executed by late Shri Girish Prasad, who died on 22-1-1973. By the will the testator Girish Prasad bequeathed all his property to the seven trustees to be utilised as under : (i) 1/4th of the income from the property to be utilised byu giving financial aid to medical students. (ii) 1/4th of the income to be spent on providing medical aid to poor persons. (iii) 1/4th of the income to be used for helping deserving members o f the family of the testator/settler in their studies or for any oth er purpose and \"shall be utilised for the marriages of girls of my family members\". (iv) 1/4th of the income to be utilised for the maintenace and further development of settlers property. (v) A sum of Rs. 1,000 p.m. has to be paid to one Tapan Chakravorty. This has been made an overriding charge as the settlor provided that only the remaining income shall be trust property. 4. The other important provisions in the will/trust deed are (i) the trustee shall have no right to transfer, sell or mortgage to the property in any circumstance; and (ii) a Kothis at Nainital and a residential flat at Bereilly \"shall only be used by the trustees and their families for thier use and they will not be let out to any third person. 5. A copy of the aforesaid will forms part of the paper book. The provisions in the will clearly indicate that it is a trust partly for charitable purposes and partly for private purposes i.e. for the benefit of family members and friends of the testator/settler. This is a trust created after the commencement of Income-tax Act, 1961 and u/s 11(1) (a) of the Act, only income from property \"held under trust wholly for charitable or religious purposes\", can be exempt. The terms of the trust as cited above indicate that it is not a trust \"wholly for charitable or religious purposes\" and therefore the income of this trust could not be exempt.\n\n6. Probably to overcome the above difficulty, the trustees executed a document called \"Relinquishment Deed\" on the 8th of September, 1980. On the basis of this document it was argued on behalf of the assessed that now it is a trust wholly for charitable purposes as the beneficiaries have given up and and relinquished their beneficial interest in favor of chairty. The relinquishment is only by a few persons out of the entire body of beneficiaries. The document is executed only by the beneficiaries who are the trustees as well. The remaining beneficiaries who are members of the family of the testator/settler have not relinquished their beneficial interest. A list of such existing beneficiaries is given at pages 14 and 15 of the paper book. Tapan Chakravorty was a special beneficiary under the trust and the settlor had created an overriding title in him over the income of the trust by providing that a sum of Rs. 1,000 per month shall be paid to him and the income remaining after the payment shall be applied to the other purposes specified in the trust. This beneficiary is not at all a party to the relinquishment deed. This relinquishment did not extinguish the private or non-charitable character of the trust. The learned AAC has not looked into this aspect of the matter and has wrongly accepted the argument that all the private beneficiaries have given up their interest. The perfunctory manner in which he has looked at the documents is also evident from the observation that \"the seven trustees are non-relative.\" The fact is that out of the seven trustees five are close relatives of the settlor being his mother, brother and three nephews. The relinquishment deed have not been executed by the entire body of beneficiaries, I hold that the trust in question continues to be a trust partly for private purposes and partly for charitable purposes. I further hold that income of such a trust is not exempt u/s 11 of the Income-tax Act.\n\n7. The learned AAC has observed that since the Commissioner of Income-tax has registered the trust in question u/s 12A of the Income-tax Act as a charitable institution it was not proper for the ITO to have different findings. The learned AAC does not appear to have read section 12A carefully. It merely provides that sections 11 and 12 will not apply to a trust unless the trustees have made an application for registration of the trust within a certain time. There are no provision specifying how the Commissioner shall deal with the application. Therefore, section 12A merely prescribes one of the various other formalities which a trust has to fulfill before being entitled to claim exemption. There is no warrant for the view that if a trust is registered by the Commissioner u/s 12A as a charitable institution, the Income-tax Officer is debarred from enquiring into the nature of the institution and its eligibility for exemption. The learned AAC has also laid stress on the fact that no money has been spent on non-charitable purposes. This is only one view of the matter and is my veer not a very proper one. What is important is that not a single shell has been spent for carrying out the purposes specified in the will-cum-trust deed. All the money is being accumulated. Even Tapan Chakravorty, for whom the settler had special concern, has not been paid anything. The fact, therefore, that no money has been spent on non-charitable purposes does not do any favor to the assessed in the circumstances of the case.\n\n8. For the above reasons, I hold that the trust in question is not one \"wholly for charitable or religious purposes\" and was therefore not entitled to exemption u/s 11 of the Income-tax Act.\n\n9. However, I find that so far as Tapan Chakravorty is concerned, there is a specific trust in his favor and therefore with regard to Rs. 12,000 per annum payable to him, the assessment could be u/s 161 of the Act and not u/s 164. Therefore from the income assessed by the ITO in each of the three years in question, a sum of Rs. 12,000 shall be excluded. The Income-tax Officer may take steps permissible under the law for assessment of the income.\n\n10. In the result, I would allow the revenues appeal, set aside the orders passed by the AAC and confirm the orders passed by the ITO with the modification that a sum of Rs. 12,000 shall be excluded from the assessed income of each of the years under consideration.\n\nORDER UNDER SECTION 225(4) OF THE INCOME-TAX ACT, 1961\n \n\nIn the abovementioned appeals filed by the revenue against the order of the AAC dated 5-9-1984, the grievance projected by the revenue is that the erred in law and on face in holding that the income of the trust is exempt. We have heard the appeals but have a difference of opinion on the following point :-\n\n\"Whether, on the facts and in the circumstances of the case, the assessed-trust is entitled to exemption under the Income-tax Act, 1961 or not ?\"\n\n2. Therefore, u/s 255(4), we refer the above point of difference to the President of the Income-tax Appellate Tribunal for action u/s 255(4) of the Act, as the Honorable president may deem fit.\n\nTHIRD MEMBER ORDER\n \n\nPer Ch. G. Krishnamurthy, President - In these appeals filed by the Revenue, the question for consideration before the Tribunal was whether the Appellate Asstt. Commissioner had erred in law and on facts in holding that the income of the trust was exempt from tax alleging at the same time that the Appellate Asstt. Commissioner was silent on numerous contentions, which he has not referred to in his appellate order.\n\n2. The relevant facts are that the assessed was a charitable trust registered with the Commissioner of Income-tax vide certificate date 17-9-1983 and as such its income should be exempt from tax under the provisions of sections 11 to 13 of the Income-tax Act, 1961. One late Shri Girish Prasad was the owner of propertied at 56, Civil Lines, Bareilly and a kothi at Nainital. He executed a will, under which he bequeathed certain propertied to the trustees named in the will, the income of which was to be spent in the manner provided in the will. He executed the will on 15-8-1972 but before the will could be registered, he died on 22-1-1973. After his death the will was submitted for registration before the District Judge and it was duly registered on 3-4-1973, after giving the necessary particulars required by the District Judge particularly on properties he settled on trust. The will provided among others that 1/4th of the income of the trust property shall be utilised for the help of the deserving members of the family of the trustees either for their studies or for any other purposes and shall be utilised for the marriages of the girls of the testators family members excluding certain members of his brothers family, who predeceased the testator. When the Income-tax Officer examined this question of exemption, he found that in addition to this clause providing for the utilisation of 1/4th of the income of the trust property for the help of the desiring members of the family of the 1,000 was to be paid to one Shri Tapan Chakravorty, a close friend of the settlor, for whom the settlor had expressed so much of concern in the will. Subsequently on 8-9-1980 the beneficiaries of the trust, who happened to be the trustees in this case executed a relinquishment deed relinquishing their beneficial rights, title and interest, that accrued to them under the will making a specific provision in the renunciation deed that the beneficial interest of the beneficiaries could be utilised by the trustees for charitable purposes mentioned in the will. Thus the beneficiaries surrendered their beneficial interest in the corpus as will as in the income under the renunciation deed. The Income-tax Officer observed that since the trust provided for the benefit of the settlors family and his friedn, the trust was not wholly and exclusively for charitable purposes and even though a deed of renunciation was executed by the trustee, i.e., the beneficiaries renouncing their beneficial interest in the trust, it could not have any effect because under the provisions of the will, there was no authority given to the trustees to amend the original instrument of will. Placing reliance upon a judgment of the Madras High Court in the case of S. Ramaswamy Iyer (supra) the Income-tax Officer more or less ignored the effect of the renunciation deed. The Income-tax Officer was also of the opinion that even if the renunciation deed was held to be valid, still it could not have any retrospective operation because that was registered on 12-9-1980 and that could not have covered the period under assessment, namely, assessment year 1975-76, for which relevant previous year ended on 31-3-1975. For this proposition, he relied upon a decision of the Calcutta High Court in the case of Sm. Charusila Dassi, In re. [1946] 14 ITR 362. Along with the return of income, the assessed claimed that it proposes to accumulate certain income for the purpose of the trust. Under section 11(2) of the Income-tax Act, the assessed has to give a notice to the Income-tax Officer about the accumulation. That notice has to be given within the time prescribed for filing the return originally fixed or the extended period from time to time. While the return in this case was due to be filed on 30-6-1975, it was filed on 24-11-1979 along with form No. 10 but the Income-tax Officer held that the form No. 10 filed on 24-11-1979 was unduly belated. As a consequence, the mandatory provisions laid down in the Act regarding conditions for accumulation of funds were not satisfied. For these reasons and for the additional reason that the income and expenditure account filed along with the return of income showed that there was no income, which could be held to have been applied for charitable purposes because the expenditure incurred was on various items of establishment such as traveling, postage, telephones etc. The claim for exemption was rejected and the income was computed at Rs. 55,290 and treating the status of the assessed as Association of Persons, tax was levied at the maximum marginal rate as per the provisions of section 164 of the Income-tax Act. This section was invoked on the ground that the shares of the beneficiaries were indeterminate. This is how the Income-tax Officer completed the assessment for the assessment year 1975-76.\n\n3. But on appeal the assessment made by the Income-tax Officer was not approved of by the Appellate Asstt. Commissioner. He held that even though there was some benefit originally conferred upon the trustees, i.e., the beneficiaries having given up their beneficial interest in the trust and permitted that to be accumulated along with other income of the trust, it could not any more be said that the trust was ensuring for the benefit of the family members of the settlor. Though he did not discuss about the payment of Rs. 1,000 to Shri Tapan Chakravorty, he held that as per the income and expenditure account filed on record, no amount was paid to Shri Tapan Chakravorty at any time nor was any amount spent for the benefit of the trustees. Therefore this provision could not have the effect of rendering the trust as one made for the benefit of the family members of the settlor. For this purpose reliance was placed on a decision of the Supreme Court in the case of Dharmodayam Co. (supra) whereunder the Supreme Court pointed out that if there is a provision for the application of the money for non-charitable purpose and if in fact no amount was spent for non-charitable purpose, the trust should not fall and the mere provision of that nature would not vitiate the charitable character of the trust. As regards the filing of form No. 10 belatedly, the Appellate Asstt. Commissioner found that rule 17 was amended with effect from 1-4-1971 providing for time limits for the filing of the said form and according to that rule, form No. 10 has to be filed before the return was due originally or before the extended time and since the return in this case was filed on 24-11-1979 and was accepted by the Income-tax Officer as valid and processed for assessment, it must be held that the time for the filing of the return was extended and therefore there was no delay in the filing of the form No. 10. Therefore the accumulation was proper and legal. An argument was taken up before him that the income of the trust was not spent for charitable purposes as the expenditure included amounts spent on capital expenditure. Placing reliance upon two judgments of the High Courts, one in the case of Satya Vijay Patel Hindu Dharamshala Trust (supra) and Dayal Bagh Medical Relief Society v. ITO 1973 Tax LR 1082 (All.), he held that amounts spent on capital expenditure could be regarded as an expenditure and the application of the income for the purpose of the trust. Thus he revised the computation of income and found that the expenditure incurred was more than the income and therefore the question of levying tax on the income of the trust did not arise. He also placed strong reliance upon the fact that when the trust was registered by the Commissioner of Income-tax under section 12A of the Income-tax Act, the trust must be deemed to have compiled with all the formalities and the requirements of section 11 and no further investigation was permissible by the Income-tax Officer and therefore the income of the trust was exempt from tax even otherwise.\n\n4. Against this order of the Appellate Asstt. Commissioner, the department filed a further appeal before the Tribunal raising the questions noted above.\n\n5. The learned Accountant Member agreed with the view expressed by the Appellate Asstt. Commissioner. He held that the Income-tax Officer did not appreciate the provisions of the will the deed, of renunciation and other relevant provisions of the law in the proper perspective. He distinguished the decision of the Madras High Court in the case of S. Ramaswamy Iyer (supra) by pointing out that where a trust was created under a deed only for charitable purposes and if a supplemental deed was executed providing for expenditure in favor of poor relations of the settlor and if there was no provision in the original deed providing for the alteration of the terms, the supplemental deed could not be said to be valid unlike in a case where by a deed of renunciation executed by the beneficiaries under the trust, the beneficiaries give up their rights endowed upon them irrespective of the fact whether there was a provision in the original deed for making alterations or not the renunciation deed executed by the trustees would be valid and binding and that would not take away the character of the charitable nature of the trust. He also agreed that when the accounts showed no payments either to the beneficiaries or to Shri Tapan Chakravorty in any manner, the mere provision for payment to them in the trust deed did not rob the trust of its character of charitable nature as held by the judgment of the Supreme Court in the case of Dharmodayam Co. (supra). Since all the objects were admittedly found to be charitable, the assesseds case was covered by the provisions of section 11 of the Income-tax Act.\n\n6. But the learned Judicial Member held differently. He held that the trust was partly for charitable purpose and partly for private purpose, i.e., for the benefit of the family members and friends of the settlor. According to him the renunciation deed executed by the beneficiaries on 8-9-1980 did not provide for the renunciation of the benefit under the will by all the beneficiaries. According to him only the trustees were parties to the renunciation deed and not the members of the family of the trustees and since the member of family of the parties to the renunciation deed, they could not be held to have renounced their interest in the trust and in the absence of a renounced their interest in the trust and in the absence of a special mention regarding Shri Tapan Chakravorty, it must be held that he continued to have interest in the trust. Thus a relinquishment of beneficial interest only by a few of the beneficiaries did not extinguish the private or non-charitable character of the trust and this aspect of the matter was not looked into by the Appellate Asstt. Commissioner. This is the main reason advanced by the learned Judicial Member for his view that the trust in question continued to be a trust partly for private purposes and partly for charitable purposes. Regarding the registration granted by the Commissioner of Income-tax to the trust under section 12A, the learned Judicial Member held that the registration of the trust with the Commissioner of Income-tax was only a procedural formality and the completion of those formalities namely grant of certificate did not mean that either an examination namely grant of certificate did not mean the Commissioner of Income-tax under section 11 and the certificate given in those circumstances could not mean that it was recognised under the Act that the trust was a charitable institution and in any case the Income-tax Officer was not debarred from enquiring into the nature of the institution and its eligibility for exemption. He did not agree with the view that the fact that no money was spent on non-charitable purpose, did not vitiate the charitable character of the trust. For these reasons, he came to the conclusion that the trust was liable to income-tax but in regard to the income that has to be spent on Shri Tapan Chakravorty, the assessment should be made not under section 164 but under section 161 and therefore that amount must be excluded from the total income computed by the Income-tax Officer.\n\n7. On account of these different opinions, the matter was referred to a Their Member by the learned Members formulating their difference of opinion in the following words;-\n\n\"Whether, on the facts and in the circumstances of the case, the assessed-trust is entitled to exemption under the Income-tax Act, 1961 or not ?\"\n\nAs the matter was of considerable importance, the President has constituted a Three-Member Bench to hear this difference of opinion. That was how the matter came before us.\n\n8. After carefully considering the arguments advanced by both the sides and the relevant documents and the law bearing on the subject, we are of the view that the trust is entitled to exemption and therefore we are in agreement with the view expressed by the learned Accountant Member. We shall first take up the effect of grant of certificate under section 12A of the Income-tax Act.\n\n9. Section 12A of the Income-tax Act, 1961 provides :\n\n\"12A. The provisions of sections 11 and 12 shall not apply in relation to the income of any trust or institution unless the following conditions are fulfillled, namely :-\n\n(a) the person in receipt of the income has made an application for registration of the trust or institution in the prescribed form and in the prescribed manner to the Commissioner before the 1st day of July, 1973, or before the expiry of a period of one year from the date of the creation of the trust or the establishment of the institution whichever is later :\n\nProvided that the Commissioner may, in his discretion admit an application for the registration of any trust or institution after the expiry of the period aforesaid.\n\n(Sub-clause (b) is not quoted here as it is not relevant for our present purpose.)\n \n\nRule 17A prescribes the procedure for making an application. It provides :\n\n\"17A. An application under clause (a) of section 12A for registration of a charitable or religions trust or institution shall be made in duplicate in Form No. 10A and shall be accompanied by the following documents, namely :-\n\n(a) where the trust is created, or the institution is established, under an instrument, the instrument, in original, together with one copy thereof;\n\nand where the trust is created, or the institution is established, otherwise than under an instrument, the document evidencing the creation of the trust or the establishment of the institution, together with one copy thereof :\n\nProvided that if the instrument or document in original cannot conveniently be produced, it shall be open to the Commissioner to accept a certified copy in lieu of the original :\n\n(b) where the trust or institution has been in existence during any year or years, prior to the financial year in which the application for registration is made, two copies of the account of the trust or institution relating to such prior year or years (not being more than three years immediately preceding the year in which the said application is made) for which such accounts have been made up.\"\n\nIt is under this Rule that from No 10A was prescribed, which provides for furnishing such information, namely, the name of the trust, the address, date of creation of the trust of establishment of the institution and names and address of the trustees and the documents to be enclosed along with it are two copies of the trust accounts for the last one, two or three years. The prescription by Rule 17A to furnish the deed of trust and the copies of the accounts and prescribing the time limits for furnishing of this information and a provision made empowering the Commissioner to accept certified copies in lieu of the originals, does not convey that the intention of the Legislature is that this procedure was prescribed not to mechanically grant the registration but to grant registration only after making an enquiry into the charitable or religious nature of the trust or the institution. Had it not been the purpose of the Rule, to confer a duty upon the Commissioner of Income-tax to grant a certificate of registration of the trust only after the enquiry, we do not think that the Rule had provided for such elaborate procedure and time limits just as idle formality. It is not as if every trust, whether charitable or not, that applies to the Commissioner of Income-tax will be granted a certificate of registration. When the grant of exemption was made dependent upon the fulfilllment the grant of exemption was made depend upon the fulfilllment of the conditions provided in section 12A, namely, the registration, that condition could not be said to be an idle formality without investing the Commissioner with a duty to enquire into the genuineness of the trust and the applicability of the provisions of section 11. The grant of a certificate under section 12A is a power conferred upon the Commissioner and it is implied that every power granted under a statute carries a duty to do all such things, which would effectuate that power. It is, therefore, in our opinion, wrong to think that section 12A merely prescribed a mere formality to be complied with in a routine way without investigation and that grant of certificate did not mean that the trust was not otherwise entitled to exemption under section 11 and that it would still confer upon the Income-tax Office a power to enquire into the character of the institution and deny exemption under section 11. We find ourselves unable to agree with this broad proposition. We are therefore of the opinion that the grant of certificate of registration by the Commissioner under section 12A has some pertinent significance and legal sanction behind it for the purposes of grant of exemption under section 11 and it could not be by-passed as mere idle formality. We cannot attribute idleness to the provisions made by the Legislature. This also a fundamental rule of interpretation. The grant of certificate by the Commissioner of Income-tax under section 12A has therefore the significance of conferring upon the trust the right to claim that its income was entitled to exemption. In this aspect of the matter, the learned Accountant Member and the Appellate Asstt. Commissioner seem to us to be right in attaching importance to the grant of the certificate.\n\n10. We have not extracted in our order the full copy of the will and we have extracted above only the relevant portion, which had become controversial. When though on 8-9-1980 the beneficiaries entitled to the benefits under the trust gave up their beneficial interest by executing a valid document, it could not any more be said that the beneficiaries were still entitled to the benefits under the trust created by the will. For the beneficiaries to give up his or her or their interest in the corpus or income of the trust, there need not be a provision in the will authorising the beneficiaries to give up their beneficial interest. The power to renounce the interest under the trust is available to the beneficiaries under the general law and under he Indian Trusts Act and it was recognised under the Indian Trust Act by section 58 and the only condition imposed is that the beneficiaries must be competent to contract. It is an inherent right of a beneficiary under the trust to accept or not to accept the beneficial interest. In case he accepts, the trustees have to act according to the provisions in the trust deed. In case the interest is renounced and the renunciation is valid according to law, then no trustee can enforce the beneficial interest and the interest thus released would ensure to the benefit of the trust. A beneficiary under the trust possesses the same power of alienation or disposition with respect to estate or interest there under as a legal owner has over his legal estate or interest in property and he can exercise it by similar instruments and similar formalities. It is therefore incorrect to state that the renunciation was not valid, and their reference to the Madras High Court decision in S. Ramaswamy Iyers case (supra) in ill founded. The learned Accountant Member is therefore right is distinguishing that case as inapplicable to the facts of this case. It is also very relevant at this point to note that in the relinquishment deed executed on 8-9-1980, which was a duly registered document on a properly stamped paper, that the trustees had confirmed that they had irrevocably surrendered, released, quit and assigned unto the Trustees all their rights, title and interest as from the date of the will from the trust funds or investments for the time being representing the same including their liberty to occupy and representing the same including their liberty to occupy and enjoy the rent-free quarters at Nainital and residential flat at Bareilly as described in the will and that the beneficial interest would thereafter vest in the trust trustees and that the trustees should utilise the same for charitable purposes mentioned in the said will. This shows that the relinquishment took effect right from the date the will was executed, namely, 15-8-1972. In view of this unequivocal surrender of their right and interest under the will, it cannot any more be said, in our opinion, that the relinquishment deed had no retrospective effect. As a consequence of the execution of the relinquishment deed, we think it is even open to the trustees to demand from the beneficiaries restitution of the benefits they derived under the trust right from the time the trust was executed even by instituting a suit for its recovery. Such being the position, it is in our opinion idle to say that the relinquishment had no retrospective operation.\n\n11. The trust deep provided in clause (d), which is the controversial clause, as under :\n\n\"That 1/4th income of my property shall be utilised for the help of the deserving members of the family of the above Trustees either for their studies or for any other purpose and shall be utilised for the marriage of the girls of my family members excluding that of Shri Vishnu Prasad and his family.\"\n\nIt will be seen from the above that 1/4th of the income of the property has to be utilised (before relinquishment) for the help of the deserving members of the family of the above trustees either for their studies or for any other purpose and therefore the members of the family derived their right to get the benefit under the trust only through the trustees. When the right of the members of the family of the trustees is referable and traceable to the trustees and not de hors them, we do not think it is proper to say that all the members of the family of the trustees should also join together as a body relinquishing their rights, which may be contingent right or which may be right in expectation. When the trustees through whom the rights have to be passed on to the members of their family had relinquished their right, we think it would put a stop on the flow of the right to the members of the family of the trustees to claim any benefit under clause (d). Their rights to claim any benefit under clause (d) came to a close with the execution of the renunciation deed. The effect of executing the renunciation deed is therefore that the entire interest goes to the trustees for being utilised for other charitable purposes, which are enumerated in clauses (a), (b) and (c), which were undisputedly for charitable purpose. The further effect of the renunciation deed is to effect the effect of clause (d) permanently from the will as if it never existed. It cannot therefore be said, in our opinion, that the trust still enures for the benefit of the family members of the trustees and therefore the trust is partly for private purposes.\n\n12. As regards the amount payable to Shri Tapan Chakravorty, the fact that nothing was paid to him is a relevant factor to consider whether by such a provision the trust could be said to be a trust executed for a private purpose. If Shri Tapan Chakravorty is considered as an employee or a friend, the benefit given to him cannot be said to be a personal benefit to the settlor. Even otherwise as laid down by the Supreme Court in Dharmodayam Co. (supra), if no money was spent for that purpose, even if it is considered to be non-charitable, that does not vitiate the character of the charitable nature of the trust. The trust does not therefore fail to seek exemption. In that case one of the objects of the company which claimed exemption u/s 11 of the Income-tax Act, 1961 read with section 2(15) of the Income-tax Act provided that the company could do the needful for the promotion of industries. The argument was that since the objects provided for the promotion of industries, the trust cannot be said to be wholly for charitable purpose and therefore was not entitled to exemption under section 11 of the Income-tax Act. The Supreme Court found that although the objects clause provided for doing the needful for the promotion of industries, nothing was spent on industry or the company never engaged itself in any industry or in any other activity and therefore no importance could be attached to its objects relating to this particular object. Dealing with the effect of the presence of this object in the Memorandum of Association on the charitable nature, the Supreme Court pointed out at page 537 :\n\n\"The second question presents no difficulty. The apprehension that in exercise of the power conferred by article 39 of the articles of association, the general meeting may set apart the entire profit or a substantive part of it for reserves is unfounded. If and when the affairs of the respondent take that shape, the department will have ample powers and opportunity to deny the exemption to the respondent. For the time being it is enough to state that the High Court has found that the respondent has spent the income for charitable purposes. The answer to the second question must, therefore, be that the power to set apart reserves under article 39 will not without more, vitiate the charitable nature of the institution.\"\n\nThe second question posed for consideration before the Supreme Court was :\n\n\"2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that setting apart reserves under article 39 of the assesseds memorandum did not vitiate the charitable purpose of the institution ?\"\n\nThus to a direct question posed for decision before the Supreme Court, as to whether the presence of an object of a non-charitable nature would vitiate the charitable purpose of the institution, the ruling of the Supreme Court was that it would not vitiate the charitable nature of the institution if no funds were spent for that purpose. It therefore means that even in this case also one must see as to whether any amount was spent in payment of any sum to Shri Tapan Chakravorty. The finding of fact recorded by both the Members as well as by the Appellate Asstt. Commissioner, perhaps even by the Income-tax Officer, was that no money was spent on payment to Shri Tapan Chakravorty. Therefore the presence of this provision will not vitiate the charitable nature of the trust. As has been rightly held by the learned Accountant Member that the application in form No. 10A was filed within time i.e. along with the return of income and it could not be said that there was any delay in filing From No. 10A before the Income-tax Officer giving notice of accumulation. The learned Judicial Member did not express any view on this aspect. We therefore take it that he agreed with the view expressed by the learned Accountant Member or for that matter the view expressed by the Appellate Asstt. Commissioner.\n\n13. Thus on all the points raised by the Revenue to deny exemption to the assessed, we find that their understanding of the law and the provisions of the will, according to us, was not in a proper perspective. The learned Judicial Member, in our opinion, is not right in taking the view that the trust still enures partly for personal purposes and not existing wholly for charitable or religious purposes. We do not wish to express any opinion of the question of treating the sum paid to Shri Tapan Chakravorty as falling for assessment under section 161 of the Income-tax Act, 1961 because that was not a point of difference of opinion referred to us, in any case not covered by the reference made to us.\n\n14. For the above reasons, we are of the view that the assessed trust is entitled to exemption under the Income-tax Act, 1961 and denial of exemption is not proper.\n\n15. The matter will now go before the regular Bench for deciding the appeals according to the opinion of the majority." }, { "title": "Sandersons & Morgans vs Income-Tax Officer, \"A\" Ward And Ors. on 23 December, 1971", "url": "https://indiankanoon.org//doc/1747581/", "text": "Sandersons & Morgans vs Income-Tax Officer, \"A\" Ward And Ors. on 23 December, 1971\nEquivalent citations: [1973]87ITR270(CAL)\nAuthor: Sabyasachi Mukharji\nBench: Sabyasachi Mukharji\nJUDGMENT\n \n\n Sabyasachi Mukhakji, J. \n \n\n 1. The petitioner is a firm of solicitors. This firm is registered under the Indian Partnership Act. According to the petitioner the petitioner-firm had been continuously carrying on profession as solicitors constituted as a partnership firm for a period of 4/5 years and even for lesser periods at a time. Usually, according to the petitioner, at the end of each period if some of the partners retired, new partners were taken in the place of the retired partners and also in case of death of any one of them. During the period 1st January, 1956, to 3Ist January, 1960, the petitioner-firm consisted of one David Platt (since deceased), Adwaita Nath Sil (since deceased), Heramba Nath Bhattacharjee (since deceased), Framjee Cursetjee Hierjeebhoy Rustomjee, Sudhir Kumar De Mullick and Basil Gill (since deceased). From 1st January, 1956, till 31st December, 1960, the petitioner-firm was constituted and/or evidenced by a partnership deed and was registered as a partnership firm under the Income-tax Act, 1922. On the expiry of the said period the said Basil Gill (since deceased) retired from the said partnership. The petitioner-firm during the period from 1st January, 1961, till 31st January, 1963, consisted of five partners mentioned above as well as one Subodh Kumar Mullick and Dina Nath Mullick. The said partnership firm was evidenced by a deed of partnership executed by the said partners on the 17th July, 1961. It would be necessary to set out certain relevant portions of the said partnership deed. Clause 3 of the said deed provides as follows : \n \"The partnership commenced on the 1st day of January one thousand nine hundred and sixty-one and shall continue for a period of three years subject to the provisions hereinafter contained provided that if the business shall continue to be carried on after the expiration of the said period, without any break, either by the parties hereto or by some one or more of them the partnership shall not be deemed to have been dissolved at the expiration of the said period. \" \n\n 2. Clause 4 is very material and is to the following effect: \n \"The death or retirement of any partner shall not dissolve the partnership as to the other partners. \" \n\n 3. Clause 8 stipulated: \n\n \" The furniture, fans, fittings and fixtures, office equipment and motor cars (hereinafter called ' the movables') belonging to the firm on the 1st day of January one thousand nine hundred and sixty-one shall be taken to be of the value of Rs. 40,000 (rupees forty thousand) (increased by the cost of any movables bought and by the net cost of any movables sold by the previous partnership between the first day of January one thousand nine hundred and fifty-six and the thirty-first day of December one thousand nine hundred and sixty inclusive and reduced by seven and a half per cent. per annum as on the thirty-first day of December of each year of the previous partnership) and the parties hereto shall be entitled thereto as at the commencement of the partnership in the percentage shares specified in the second column of the table contained in Clause 12 hereof. The said sum of Rs. 40,000 (rupees forty thousand) increased and reduced as aforesaid shall be credited to a movables capital account in the books of the firm and the cost of any new or additional movables bought after the thirty-first day of December one thousand nine hundred and sixty and the net sale proceeds of any movables sold after that date shall be credited to such account. \n\n The amount (other than cash) at credit of such account on the thirty-first day of December in each year shall be reduced by a sum equivalent to seven and a half per cent. per annum thereof by way of depreciation. \n\n On the retirement or death of a partner the amount at credit of such account on the thirty-first day of December preceding the date of his retirement or death (if he retires or dies on or before the thirtieth day of June in any year) or on the thirty-first day of December of the year of his retirement or death (if he retires or dies after the thirtieth day of June in any year) shall be taken into account as hereinafter provided in ascertaining the value of his interest in the firm.\" \n\n 4. Clause 12 stated that \"the partners would be entitled to the goodwill and other assets of the firm and the net profits of the business would be divided among them and they would bear the losses as on and from the first day of January one thousand nine hundred and sixty-one in the manner indicated in the said clause.\" The said clause further provided that \" such proportion of percentage shares becoming available on retirement of a partner (as hereinafter provided) as the majority of the then continuing partners would decide should be allocated for acquisition among the continuing partners and any additional partner or partners as the majority of the continuing partners might think fit to admit in the partnership and in the event of no additional partner or partners being then admitted into the partnership then the whole of such percentage share would be acquired by the continuing partners proportionately to their then existing shares or as they might otherwise mutually agree.\" \n\n 5. Clause 24(a) is also relevant and provides as follows : \n \" If a partner shall die during the currency of the partnership and the surviving partners decide to continue to carry on the business of the firm either alone or in conjunction with an additional partner or partners, the surviving and additional partner or partners (if any) shall purchase the percentage shares of the deceased partner in such proportion as between themselves as they may mutually agree upon and in the event of the surviving partners deciding not to continue to carry on the business of the firm after the death of a partner or failing agreement among the surviving and additional partner or partners (if any) as to the proportion of the deceased partner's percentage shares which each of them is to purchase within six months after the death of the deceased partner, the firm shall stand dissolved as at the date of such death or as at the expiration of such period of six months as the case may be. In the event of the surviving partners either alone or with any additional partner or partners deciding to purchase the deceased partner's percentage shares and agreeing upon the number of such percentage shares each of them is to purchase, the provisions of Clause 23 shall apply mutatis mutandis to the purchase of the deceased partner's percentage shares.\" \n\n 6. Clause 26 provides as follows : \n \" Notwithstanding any provision of law as between a retiring partner (or the representatives of a deceased partner) and the continuing and any incoming partners the retiring partner (or the estate of a deceased partner as the case may be) shall be liable for all income-tax and super-tax (including surcharges, if any) calculated on his share of the profits up to the last day of the month in which such retirement or death shall occur and which shall not already have been taxed after giving credit for all sums set aside by the firm on account of income-tax on his share of untaxed profits and shall keep the continuing and incoming partners saved harmless and indemnified against all claims for such taxes.\" \n\n 7. The accounting year and/or previous year of the petitioner-firm for the purpose of assessment year under the Income-tax Act, 1922, as well as under the Income-tax Act, 1961, was and is the calendar year, from 1st January to 31st December each year. In respect of the assessment year 1962-63, the previous year was the calendar year 1961. The petitioner-firm was duly registered as a firm under the provisions of the Income-tax Act, 1961, for the said assessment year and/or the said previous year. Thereafter, according to the petitioner, there was no change in the constitution of the petitioner-firm and it had duly submitted a declaration to that effect in the prescribed form for the assessment year 1963-64 and the registration of the petitioner-firm for the assessment year 1962-63 continued to be effective for the assessment year 1963-64 and/or the previous year 1962. For each of the said assessment years the petitioner-firm was assessed to income-tax as a firm registered under the Income-tax Act, 1961, in the same manner as it had been treated for the previous assessment years under the Income-tax Act, 1961. On the 7th December, 1963, Sri Heramba Nath Bhattacharjee, one of the partners of the petitioner-firm, died. According to the petitioner the surviving partners continued to carry on the business of the petitioner-firm in terms of the said partnership deed for the remaining period of the said partnership agreement, that is to say, 31st December, 1963, without any fresh agreement. The petitioner contends that there was no change in the constitution of the petitioner-firm before the close of the business on 31st December, 1963. According to the petitioner, the said partnership deed dated 17th July, 1961, continued to remain in force and governed the rights and obligations of the said surviving partners as well as of the said deceased partners in all matters including their shares of the profits, losses and assets in accordance with the provisions of the partnership deed dated 17th July, 1961, which remained unaltered for the said agreed period. At the close of the business on the 31st December, 1963, the said David Piatt Dunderdale retired from the partnership. The petitioner further states that the partners under the said partnership deed dated 17th July, 1961, duly filed their individual returns of income from the petitioner-firm comprising the total net profit or income of the petitioner-firm allocated to and distributed amongst the partners according to their respective shares and made advance payments of taxes including those on self-assessment basis totalling Rs. 1,05,763.45. A new partnership deed was executed on the 14th May, 1964, for a period of 4 years. The said firm evidenced by the deed dated 14th May, 1964, was duly registered under the Income-tax Act, 1961. On the 29th June, 1964, the said surviving partners of the petitioner-firm for the calendar year 1963, after the death of Heramba Nath Bhattacharjee, as mentioned hereinbefore, duly filed an estimated return for the assessment year 1964-65 in respect of the previous year 1963. At that time the accounts of the petitioner-firm for the year 1963 had not been audited by the auditors, Messrs. Price Waterhouse Peat & Company. The said estimated return was submitted to the Income-tax Officer, \" A\" Ward, District III(1), Calcutta, being respondent No. 1. Along with the said return a declaration, as prescribed, according to the petitioner, under Section 184(7) of the Income-tax Act, was filed and the prescribed form which was duly submitted was duly signed by the surviving partners in the year 1963. The petitioner has annexed a copy of the declaration form. The said declaration form is dated 29th June, 1964, and is signed by David Platt Dunderdale, Adwaita Nath Sil, Framjee Cursetjee Heerjeebhoy Rustomjee, Sudhir Kumar Dey Mullick, Subodh Kumar Mullick and Dinanath Mullick. The said form stated that the firm had been granted registration for the assessment year 1962-63 by an order dated 12th May, 1964, passed by the Income-tax Officer, \"A\" Ward, District III(1), and that there had been no change in the constitution of the firm or the shares of the partners since the last day of the previous year relevant to the assessment year 1962-63 up to the last date of the previous year relevant to the assessment year 1964-65 or the date of dissolution of the firm. It was further stated that the information given was complete and correct. The said declaration was given in Form No. 12 which was under rule 24 of the Indian Income-tax Rules, 1962. According to the petitioner in September, 1964, the petitioner-firm filed another estimated return for the year 1964-65. Price Water-house Peat & Co., Chartered Accountants, audited the accounts of the petitioner-firm for the year 1963, and submitted their report dated 9th February, 1965. The summary of the partner's current accounts and distribution of reserves, profits, etc., for the year ending 31st December, 1963, show that the auditors treated the said Heramba Nath Bhattacharjee, deceased, as a partner of the petitioner firm till 31st December, 1963. On the 23rd August, 1968, the petitioner-firm submitted to respondent No. 1, a revised return for the assessment year 1964-65, with regard to the calendar year 1963. In the revised return in view of the provisions of the partnership deed dated 17th July, 1961, all the partners named in the said deed including Heramba Nath Bhattacharjee, deceased, were shown as partners during the year 1963. Thereafter, according to the petitioner, in the course of interview with the Income-tax Officer in connection with the assessment proceedings for the assessment year 1964-65, the petitioner-firm's representative was informed by the said Income-tax Officer that the application for the continuation of registration by the submission of declaration in Form No. 12 was not traceable. \n\n 8. Thereupon the petitioner-firm wrote a letter dated 2Ist November, 1968, stating that Form No. 12, dated 29th June, 1964, was submitted along with the estimated return filed in June, 1964. By the said letter the Income-tax Officer was further informed that the petitioner-firm's assistant-in-charge of the particular section had left the employment and the relevant office records were mislaid and, as such, the petitioner-firm was unable to trace the receipt evidencing the filing of the said Form No. 12. Accordingly, along with the said letter the petitioner-firm submitted its office copy of the said declaration in Form No. 12, for the assessment year 1964-65 to validate registration in accordance with the provisions of the Income-tax Act, 1961, in case the original could not be traced in the office of the Income-tax Officer. According to the petitioner the original as well as the office copy of the said declaration in Form No. 12 had been duly signed by all the surviving partners as appearing in the said partnership deed dated the 17th July, 1961. Thereafter there was discussion between the Income-tax Officer and the representative of the petitioner and the petitioner wrote a letter dated 5th December, 1968, a copy whereof is annexed with the petition. In reply the Income-tax Officer informed the petitioner that the petitioner should make a mercy petition for condonation of delay. By a letter dated 9th January, 1969, the petitioner-firm wrote to the Income-tax Officer on the lines suggested by the Income-tax Officer. On the 17th March, 1969, the Income-tax Officer assessed the net total income of the petitioner-firm for the assessment year 1964-65 treating the petitioner-firm as unregistered for the relevant assessment year. The Income-tax Officer issued notices to the partners and to the executors or heirs of the deceased partners under the said deed of partnership dated 17th July, 1961, to take refund of the said advance taxes paid by the partners aforesaid. Along with the said assessment order dated 17th March, 1969, the respondent No. 1 made an order. Inasmuch as the said order is the subject-matter of impugned challenge in this application under Article 226 of the Constitution it would be necessary to set out the said order : \n\n \" Order regarding Regulation Under Section 184(4). \n\n During the accounting year following the death of one of the partners on the first week of December, 1963, there was a change in the constitution of the firm. It was found that the assessee has not submitted the original instrument of partnership deed during the accounting year. Hence registration is refused for the year.\" \n\n9. In the said order under Section 184(4) of the Income-tax Act, 1961, as mentioned hereinbefore, it was stated that there was a change in the constitution of the firm during the first week of December, 1963, by the death of one of the partners--death of Shri Heramba Nath Bhattacharjee in this case. It was stated in the said order that the assessee had not submitted the original instrument of partnership deed during the accounting year. Hence the registration was being refused. Thereafter, the Income-tax Officer issued the notice of demand for payment of taxes of Rs. 2,77,362, as the tax payable for the assessment year 1964-65 by the petitioner-firm. By a letter dated 3rd April, 1969, the petitioner-firm applied to the Income-tax Officer for rectification of the said order dated 17th March, 1969, refusing registration of the petitioner-firm. The reasons for which rectification was sought have been mentioned in the said letter dated 3rd April, 1969, copy whereof has been annexed to the petition. Thereafter, no order has been passed rectifying the order. The petitioner preferred an appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner passed an order on the 28th January, 1970, to the following effect: \n\n \" Appellate order and ground of decision. \n\n This is an appeal against order under Section 184(4) of the Income-tax Act, 1961, refusing registration to the appellant for the assessment year 1964-65. \n\n 2, Since an order under Section 184(4) cannot be appealed against under Section 246, I am not in a position to interfere with the order of the Income-tax Officer. Under the circumstances, the appeal is dismissed.\" \n\n 10. As mentioned hereinbefore, being aggrieved by the aforesaid two orders the petitioner moved this application under Article 226 of the Constitution. \n\n 11. Three questions require determination in this case, namely, firstly, in the facts and circumstances of this case, whether there was a change in the constitution of the firm prior to 31st December, 1963; secondly, was the order passed by the Income-tax Officer on 17th March, 1969, proper and valid; and, thirdly, was the order of the Appellate Assistant Commissioner in accordance with law. Special provisions applicable to firms, so far as the assessment of firms is concerned, are provided by Section 182 to Section 189 of the Income-tax Act, 1961. Section 182 provides that notwithstanding anything contained in Sections 143 and 144 and subject to the provisions of Sub-section (3), in the case of a registered firm, after assessing the total income of the firm, the income-tax payable by the firm itself shall be determined and the share of each partner in the income of the firm shall be included in his total income and assessed to tax accordingly. If such share of any partner is a loss it shall be set off against any other income or carried forward and set off according to the provisions of Sections 70 to 75 of the Act. Section 183 provides for the assessment of an unregistered firm. Section 184 provides for an application for registration of a firm. It would be necessary to set out the provisions of Sections 184 and 185. \n\n Section 184: \n\n \" (1) AN application for registration of a firm for the purposes of this Act may be made to the Income-tax Officer on behalf of any firm if--(i) the partnership is evidenced by an instrument; and (ii) the individual shares of the partners are specified in that instrument. \n\n (2) Such application may, subject to the provisions of this section, be made either during the existence of the firm or after its dissolution. \n\n (3) The application shall be made to the Income-tax Officer having jurisdiction to assess the firm, and shall be signed- \n\n (a) by all the partners (not being minors) personally; or \n \n\n (b) in the case of a dissolved firm, by all persons (not being minors) who were partners in the firm immediately before its dissolution and by the legal representative of any such partner who is deceased,\" \n\n Section 185: \n\n \" On receipt of an application for the registration of a firm, the Income-tax Officer shall inquire into the genuineness of the firm and its constitution as specified in the instrument of partnership, and- \n\n (a) if he is satisfied that there is or was during the previous year in existence a genuine firm with the constitution so specified, he shall pass an order in writing registering the firm for the assessment year; \n\n (b) if he is not so satisfied, he shall pass an order in writing refusing to register the firm. \n\n (2) The Income-tax Officer shall not reject an application for registration merely on the ground that the application is not in order, but shall intimate the defect to the firm and give it an opportunity to rectify the defect in the application within a period of one month from the date of such intimation. \n\n (3) If the defect is not rectified within such time, the Income-tax Officer may reject the application.\" \n\n 12. Section 186 deals with the cancellation of registration. It provides that if, where a firm has been registered or its registration has the effect under Sub-section (7) of Section 184 for an assessment year, the Income-tax Officer was of opinion that during the previous year no genuine firm was in existence as registered, he might, after giving the firm a reasonable opportunity of being heard and with the previous approval of the Inspecting Assistant Commissioner, cancel the registration of the firm for the assessment year. It also provides for consequential amendment of the assessment. Section 187 provides for changes in the constitution of the firm and states that where at the time of making an assessment under Section 143 or Section 144 it is found that a change has occurred in the constitution of a firm, the assessment shall be made on the firm as constituted at the time of making the assessment. Sub-section (2) of Section 187 provides that: \n\n \" For the purposes of this section, there is a change in the constitution of the firm- \n\n (a) if one or more of the partners cease to be partners or one or more new partners are admitted, in such circumstances that one or more of the persons who were partners of the firm before the change continue as partner or partners after the change; or \n \n\n (b) where all the partners continue with a change in their respective shares or in the shares of some of them.\" \n\n13. Section 188 deals with succession of one firm by another firm and Section 189 deals with the firm dissolved or business discontinued. The expression \" constitution of the firm \" is not defined in the Income-tax Act, 1961. It was also not defined in the Indian Income-tax Act, 1922. Sub-section (2) of Section 187 provides a meaning to the expression \" change in the constitution of the firm\", for that section. The expression \"constitution of the firm \" is also not defined in the Partnership Act though in Sections 17, 38 and 47 of the Indian Partnership Act reference is made to the said expression \"constitution of the firm \". Counsel for the petitioner contended that every change was not a change of the constitution of the firm for the purpose of the Income-tax Act, 1961, or for the purpose of the provisions of Section 184 or Section 185 of the Income-tax Act, 1961. According to counsel for the petitioner \" constitution of the firm \" is dependent upon the agreement between the partners. If the agreement of the parties provided that the death or retirement of one of the partners would not necessarily affect the structure and the function of the partnership firm, then according to counsel for the petitioner, it could not be contended unless there was a contrary indication in the Income-tax Act itself simply that by mere physical death a change had occurred in the constitution of the firm. Every alteration in the partnership of the firm was not contemplated by the expression \"change in the constitution of the firm\" under Section 184 or Section 185 of the Income-tax Act, 1961. Constitution of a firm,--indeed constitution of anything--was a matter sometimes of very wide import. But, whether in a particular context the expression should be construed in that wider import or not, would depend on the purpose for which that expression had been used. Counsel for the petitioner contended that every minor alteration which did not affect the revenue or the tax liability would not be \" change in the constitution of the firm \" as contemplated in Sections 184 and 185 of the Partnership Act. In this connection, counsel for the petitioner drew my attention to the relevant passages on construction of statutes. He referred to Maxwell on the Interpretation of Statutes, 10th edition and relied on the observations appearing at page 76 of the said book. Reliance was placed also on the decision in the case of Bearmans Ltd. v. Metropolitan Police District Receiver, [1961] 1 W.L.R. 634 (C.A.) and the observations appearing at page 655. There the court observed that the word \" interested \" was not a word which had any well-defined meaning and anybody who was asked what it meant would at once want to learn the exact context in which it was used before he could venture any opinion. It might mean a direct financial interest on the one hand, and on the other hand it might mean nothing more than the ordinary human interest which everybody had in the outcome of the proceedings in which he was likely to be a witness. Just as in ordinary speech one would require to know the context, so in construing the word in an Act of Parliament it was essential --more necessary in this case than in most--to look at the scope and purpose of the Act. Reliance was also placed on the decision in the case of Lion Mutual Marine Insurance Association Ltd. v. Tucker, [1884] 12 Q.B.D. 176 (C.A.) and reliance was placed at the observations appearing at page 186. There Brett M.R. observed that whenever one had to construe a statute or document, one did not construe it according to the mere ordinary general meaning of the. words but according to the ordinary meaning of the words as applied to the subject-matter with regard to which they were used, unless there was something which obliged one to read them in a sense which was not their ordinary sense in the English language. Reliance was also placed on the decision in the case of Legal Aid Committee No. 1. Ex parte Rondel, [1967] 2 Q.B. 482. It was contended that the expression \" change in the constitution of the firm \" should receive a beneficial construction. It was next contended that the ground upon which the order dated 17th March, 1969, had been made was not proper because Section 184(4) did not contemplate passing of an order in the manner done. Section 184(4) was in respect of an application for registration. In the instant case there was no application for registration but only a declaration had been given in accordance with the legal requirements for firms which had already been registered. It was contended that the order, having been passed by the Income-tax Officer in the manner, had deprived the petitioner of his right to move in appeal. It was, thirdly, contended that in the order there was no discussion on the question as to whether, in the facts and circumstances of the case, there was any change in the constitution of the firm, but the order proceeded on the basis that the original copy of the registration of the partnership deed had not been: supplied. It was submitted that a new application with fresh grounds should have been made. On the other hand, counsel for the petitioner, however, contended that in view of the facts of this case and the clauses mentioned in the partnership deed, there was no change in the constitution of the firm. The firm continued to be the same up to the end of 1963, and the rights and liabilities of the partners were the same till the end of 1963. \n\n 14. Counsel for the respondents on the other hand contended that in the facts and circumstances of the case and in view of the death of Heramba Nath Bhattacharjee, there was in fact and in effect a change in the constitution of the firm. It was contended, secondly, that the application was not incompliance with rule 22 of the Income-tax Rules, 1962, and Form No. 12, inasmuch as the application was not signed by all the partners. Reliance was also placed on several decisions which I shall note later. \n\n 15. As mentioned hereinbefore, in the instant case, the main question of substance is what is meant by \"the change in the constitution of the firm \". The said expression is not defined either in the Income-tax Act or in the Partnership Act. Therefore, the expression \" change in the constitution of the firm \" must be construed in the light of the ordinary meaning unless the language of the section or the purpose of the Act compels one to hold otherwise. \" Change in the constitution of the firm \" normally and ordinarily would mean every alteration in the set-up of the firm, viz., death, retirement, incapacity of partners, alteration of the shares of the partners in the firm, etc. Whether any particular alteration would amount to a change in the constitution of the firm would depend upon the context of the use of that expression. Partnership is the relationship between persons who have agreed to share the profits of a business carried on by all or any of them acting for all, according to the definition of the Partnership Act. Therefore, constitution of the firm is a matter of agreement between the parties, subject, however, to the fact that the parties cannot contract out of the legal obligations. In this context the contract between the parties, viz., the instrument of partnership deed dated 17th July, 1961, has to be referred. Clauses 3 and 4 indicate that on the death of a partner the business would continue and on the death or retirement of a partner, the partnership would not be dissolved as between the other partners. Under Section 42 of the Partnership Act subject to the contract between the parties a firm is dissolved on, inter alia, the death of a partner. But, change in the constitution of a firm can occur even without dissolution--dissolution is not the only change in the constitution of a firm. Clauses 3 and 4 of the partnership deed, in my opinion, fall short of providing that on the death of a partner there would be no change in the constitution of the firm. On the other hand these clauses in my opinion indicate that on the death or retirement of a partner there would be change 'in- the constitution of the firm but the effect of such changes of death or retirement is limited to a certain extent in the manner indicated in the different provisions made in the different clauses of the partnership deed, viz., clauses 2, 3 and 4. Equally indicative of the same intention is clauses 10, 24 and 26. I, therefore, find nothing in the agreement between the parties to indicate that by the death of a partner there would be no change at, all in the constitution of the firm. I also find nothing in the purpose of the Income-tax Act or in the context of Section 184 of the Act any indication of the fact that by death or retirement of a partner there would be no change in the constitution of a firm. On the other hand, Section 187, in my opinion, is an indication of the fact that the changes by death or retirement of the partners would be a relevant factor so far as the purpose of the Income-tax Act is concerned. In this case, counsel for the respondents contended that Sub-section (2) of Section 187 was an indication of the fact that in case of death, there would be a change in the constitution of the firm. To this, counsel for the petitioner contended that that was an indication only for the limitation purpose of that section. It is true that the definition provided in Sub-section (2) of Section 187 is for a limited purpose, but it is also true that the expression \" cease to be partners \" cannot indicate a further change by the death, which is covered by the ordinary connotation of that expression. But, having regard to the purpose of the Act and having found nothing to indicate to the contrary to the ordinary meaning in this case, I must construe the expression \" constitution of the firm \" by its ordinary connotation and construe by that connotation that death would certainly indicate a \" change in the constitution of the firm \", \n \n\n 16. Counsel for the respondents contended that the application was not in conformity with the Rules, inasmuch as it was not signed by all the partners. , Counsel for the petitioner on the other hand contended that the meaning of the section should not be construed with reference to the Rules framed under the Act. In this connection counsel for the petitioner is right because of the provision under which Rules have been. framed under the Income-tax Act, 1961, unlike the Indian Income-tax Act, 1922. Rules have been framed under the Income-tax Act, 1961, by virtue of Sections 295 and 296 of the Act. It is not provided in those sections that rules when framed become part of the statute. In the Indian Income-tax Act, 1922, by Sub-section (4) of Section 59 it is provided that Rules framed under the Act would become part of the statute. Such Rules, that is, the Rules which become part of the statute, should be construed in the manner which would lead to a harmonious construction and for that purpose, it would be relevant to refer to the Rules. But, in the facts and circumstances of this case, as such Rules do not form part of the statute and as such it would not be proper to refer to the Rules for the construction of the statute. In that view of the matter if it was possible for me to hold that there was no \" change in the constitution of the firm \" then in that case it would have been necessary for me to seriously consider the question as to whether the application in this case was in compliance with the requirement of law or not. Counsel for the respondents contended that registration is a right given to the assessee. In order to exercise that right, the assessee must strictly comply with the provisions of the Act and Rules. If the expression \" change in the constitution of the firm.\" did not cover death in the facts and circumstances of this case, then it might have been possible to hold that the application was in order. But, in the view I have taken already, it is not necessary for me to consider this aspect any further. I must, therefore, also hold in the instant case that the application was not in conformity with the form, viz., it was not signed by all the partners. \n\n 17. The next point that was urged was that the order was under wrong heading. Section 184(4) provides for an application for registration. Sub-section (7) of Section 184 provides, however, that registration granted to any firm for any assessment year shall have effect for every subsequent year provided certain conditions are fulfilled. As a matter of fact no separate order under Section 184(7) is required. It is necessary only to refer to that fact if it is found after giving the assessee a reasonable opportunity that the assessee has not complied with the requirement of Section 184(7). Then at the time of the assessment order by a separate order the Income-tax Officer should record that fact and when the assessee prefers an appeal from the assessment, the assessee is entitled to contend that that finding of the Income-tax Officer is invalid. In view, however, of the fact that there was no appeal either from an order under Sub-section (4) of Section 184, or Sub-section (7) of Section 184, the order of the Appellate Assistant Commissioner cannot be considered to be without jurisdiction. \n\n 18. Counsel for the petitioner drew my attention to a decision of the Lahore High Court in the case of Rai Saheb Chiranjilal & Sons v. Commissioner of Income-tax, [1937] 5 I.T.R. 44 (Lah.), a decision of this court in the case of Moolji Sicka, In re (No. 2), [1938] 6 I.T.R. 234 (Cal.), a decision in the case of In re Makerwal Colliery, [1942] 10 I.T.R. 422 (Lah.), and a decision in the case of Panna Lal Babulal v. Commissioner of Income-tax, [1969] 73 I.T.R. 503 (All.). In the view, I have taken, it is not necessary for me to refer to the aforesaid decisions.\n\n 19. In the aforesaid view and for the reasons mentioned hereinbefore, I am of the opinion that the petitioner is not entitled to any order in this application. The application, therefore, fails and is accordingly dismissed. The rule nisi is discharged and the interim order is vacated. There will be no order as to costs. There will be stay of operation for four weeks after the Christmas vacation." }, { "title": "Singho Mica Mining Co. Ltd. vs Commissioner Of Income-Tax, Central on 27 June, 1975", "url": "https://indiankanoon.org//doc/1321672/", "text": "Singho Mica Mining Co. Ltd. vs Commissioner Of Income-Tax, Central on 27 June, 1975\nEquivalent citations: [1978]111ITR231(CAL)\nJUDGMENT\n \n\n Dipak Kumar Sen, J. \n \n\n 1. This reference arises in respect of the assessment year 1961-62. The facts found are that Singho Mica Mining Co. Ltd., the assessee, filed its return for the said assessment year on the 28th June, 1962, on which assessment was made on the 4th March, 1966. Subsequently, it was found that the assessee bad not complied with the provisions of Section 18A(3) of the Indian Income-tax Act, 1922, and failed to file its estimate but in the original assessment the Income-tax Officer did not charge any interest under Section 18A(8) of the Indian Income-tax Act, 1922. The Commissioner considered that this omission to charge interest has resulted in prejudice to the interest of the revenue and after hearing the assessee passed an order under, Section 263 of the Income-tax Act, 1961, directing\nthe Income-tax Officer to compute and recover such interest. Interest was levied accordingly.\n\n2. In the meantime, the assessee had preferred an appeal from the original order of assessment before the Appellate Assistant Commissioner which was disposed of by the latter by his order dated the 12th August, 1968.\n\n3. The assessee preferred an appeal before the Tribunal from the order of the Commissioner. It was contended before the Tribunal that the assessment order dated the 4th March, 1966, had merged with the order of the Appellate Assistant Commissioner in appeal and consequently Section 263 of the Income-tax Act, 1961, could not apply.\n\n4. It was also contended that the Income-tax Officer should be deemed to have exercised the discretionary power vested in him under rule 48(1) of the Income-tax Rules, 1922, and to have waived interest under the said Section 18A(8).\n\n5. It was further contended that with effect from the 1st April, 1962, the Income-tax Act of 1922 had been repealed by the new Act of 1961 and as such Section 18A(8) of the earlier Act had ceased to exist from that date and the Commissioner's order directing the levy of interest under that section could not be sustained.\n\n6. The department contended before the Tribunal that the appeal from the assessment was on points entirely unconnected with the question of levy of interest and that merger, if any, was only in respect of the points adjudicated upon in the appeal and not in respect of the entire order.\n\n7. It was also contended that Section 18A(8) of the earlier Act was the appropriate section under which interest was leviable and as in any event if the power to levy interest existed the same could be made under the appropriate section of the new Act.\n\n8. Lastly, it was contended that there was nothing in the records suggesting that the Income-tax Officer had in fact exercised his discretion to waive the interest and ex facie there was no waiver.\n\n9. The Tribunal held that merely because there has been an appeal it would be incorrect to hold that the order of the Income-tax Officer had merged with that of the Appellate Assistant Commissioner in its entirety. Merger was only in respect of those issues which had been adjudicated upon by the appellate authority. The admitted position was that the levy or non-levy of the interest was not in issue in the appeal and, therefore, this issue could be validly revised by the Commissioner under Section 263 of the Income-tax Act, 1961.\n\n10. On the authority of the Supreme Court in the case of Singh Engineering Works Private Ltd. , the Tribunal held that interest in this case was leviable and to be considered as having been levied under Section 217 of the Income-tax Act, 1961, and not under Section 18A(8) of the\nIndian Income-tax Act, 1922. Mislabelling or mentioning a wrong section did not vitiate the order as the requisite power was otherwise vested and exercise thereof was referable to a jurisdiction, which conferred validity upon it.\n\n11. The Tribunal did not accept that the Income-tax Officer would be deemed to have waived interest and found that there was no material to establish such waiver.\n\n12. The Tribunal upheld the order of the Commissioner but directed that the Income-tax Officer would charge interest under Section 217 of the new Act only after considering whether there was a case for reduction or waiver as provided for in rule 40 of the Income-tax Rules, 1962.\n\n13. The questions which have been referred under Section 256(1) of the Income-tax Act, 1961, in this reference are as follows :\n\n\"(1) Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the Income-tax Officer's order got merged with that of the Appellate Assistant Commissioner only in respect of those issues which had been adjudicated upon by the Appellate Assistant Commissioner ?\n\n(2) Whether, on the facts and circumstances of the case, the assessment order was merged with that of the Appellate Assistant Commissioner and, if so, whether the Commissioner of Income-tax was competent to pass the order under Section 263 on 31st October, 1967 ?\n\n(3) Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the penal interest should be charged under Section 217 of the Income-tax Act, 1961, only after considering whether there was a case for a reduction or waiver as provided for in rule 40 of the Income-tax Rules, 1962 ?\n\n(4) Whether, on the facts and circumstances of the case, the Income-lax Officer should be deemed to have exercised the discretionary power vested in him under rule 48(1) of the Income-tax Rules, 1922 ?\" \n\n14. Mr. S.B. Mukherjee, learned counsel on behalf of the assessee, submitted that Section 250(7) of the Income-tax Act, 1961, provided for communication of the order passed in appeal by the Appellate Assistant Commissioner to the assessee and the Commissioner, and hence when the latter exercised his powers of revision he had or would be deemed to have notice of the order passed in appeal. He further submitted that Section 251 of the Act conferred wide powers on the Appellate Assistant Commissioner, who could confirm, reduce, enhance or annul the assessment which could also be set aside and referred back to the Income-tax Officer for a fresh assessment. After necessary enquiry the Appellate Assistant Commissioner could pass any order in the appeal as he thought fit and could consider and decide any matter arising out of the proceedings notwithstanding that the same was not raised before him by the appellant.\n\n15. \nMr. Mukherjee contended that, in view of the wide ambit of the section, the entire matter relating to this assessment and the order appealed from in its entirety and in all its aspects were before the Appellate Assistant Commissioner,\n \n\n16. This appeal having been disposed of, the order of assessment in its entirety had merged in the order passed in appeal and the Commissioner had no power under Section 263 of the Income-tax Act, 1961, to revise this assessment. Under Section 263, the power of revision by the Commissioner was confined to orders passed by the Income-tax Officer arid not to the order of any other authority.\n\n17. In support of his contentions Mr. Mukherjee cited the decision of the Bombay High Court in the case of Commissioner of Income-tax v. Tejaji Farasram Kharawala [1953] 23 ITR 412. Here, the assessee, a Hindu undivided family, was assessed to income-tax for the year ending 12th November, 1947. In the assessment, the Income-tax Officer included capital gains on account of transfer of goodwill computed under Section 12B of the Indian Income-tax Act, 1922, The assessee appealed from the order of assessment to the Appellate Assistant Commissioner. One of the grounds in the appeal related to the computation of capital gains. The Appellate Assistant Commissioner rejected this contention in the appeal. Thereafter the Commissioner, acting under Section 33B(1) of the Indian Income-tax Act, 1922, computed the capital gain at Rs. 10 lakhs. The question which was referred to the Bombay High Court was (page 415):\n\n\"Whether the Commissioner of Income-tax is competent to pass an order under Section 33B enhancing an assessment in a matter in which appeal was preferred against the order of the Income-tax Officer and the said order was confirmed by the Appellate Assistant Commissioner of Income-tax ?\" \n\n18. The High Court held that in enhancing the computation of goodwill the Commissioner was revising the appellate order. In his judgment, Chagla C.J. observed as follows (page 420):\n\n\"The principle underlying Section 33B is that it is only the order of the Income-tax Officer that can be revised by the Commissioner. Once the assessment is confirmed by the Appellate Assistant Commissioner or any order with regard to the assessment has been made by the Appellate Assistant Commissioner, that becomes a final order of assessment, and the only right that the department has is the right to appeal to the Appellate Tribunal. The right of the Commissioner continues so long as the order of the Income-tax Officer is not merged in the order of the Appellate Assistant Commissioner, but once the order is merged, the Commissioner cannot deal with the assessment of the assessee at all.\" \n\n19. \nMr. Mukherjee, also cited the case of Shantilal Rawji v. M.C. Nair, IVth Income-tax Officer [1958] 34 ITR 439 (Bom). This case deals with the scope of rectification proceedings by the Income-tax Officer and is not of much assistance on the point in issue here.\n\n20. Mr. Suhas Sen, learned counsel on behalf of the revenue, contended, on the other hand, that the decision of the Bombay High Court in the case of Tejai Farasram Kharawala's case [1953] 23 ITR 412 has to be read in the light of the subsequent decisions of the Supreme Court on the point. He cited the case of Commissioner of Income-tax v. Amritlal Bhogilal & Co. . The facts of this case before the Supreme Court were that the assessee, a firm registered under Section 26A of the Indian Income-tax Act, 1922, had preferred appeals against the assessments for the assessment years 1947-48, 1948-49 and 1949-50. The Appellate Assistant Commissioner passed orders and reduced the assessments for the years 1947-48 and\n1948-49. The appeal in respect of the assessment year 1949-50 remained\npending.\n\n21. In the meantime the Commissioner of Income-tax issued notices under Section 33B(1) of the Act and, after hearing, passed an order cancelling the registration of the firm, under, Section 26A and directed the Income-tax Officer to make fresh assessments of the assessee as an unregistered firm for all the assessment years. \n\n22. The questions which were mooted before the Supreme Court were as\nfollows:\n\n\"(1) Did the order passed by the Income-tax Officer granting registration to the assessee-firm continue to be an order passed, by the Income-tax Officer even after, the assessee's appeal against the assessment made by the Income-tax Officer, on the basis that the assessee was a registered firm, had been disposed by the Appellate Assistant Commissioner ?\n\n(2) Did the order of registration along with the subsequent order of\nassessment merge in the appellate order? \n\n(3) Whether the order of registration, in respect of the assessment year\n1949-50 may be made the subject-matter of the exercise of the Commissioner's revisional power even though the assessee's appeal against the assessment for the said year was pending before the Appellate Assistant Commissioner at the material time ? \" \n\n23. The Supreme Court held that where an appeal was preferred the decision of the appellate authority was the subsisting, operative and enforceable decision. By affirmance or confirmation the original decision merged in the appellate decision,\n \n\n24. But in the case before it the order granting registration to a firm under Section 26A was an independent and separate order.\n\n25. \nNo appeal could be filed by the department against an order granting registration. Therefore, an order of the Income-tax Officer granting registration to a firm could not be the subject-matter of an appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner could not cancel an order granting registration and that such an order remained outside the appellate jurisdiction and did not strictly form part of the proceedings before the appellate authority. The order of registration was not and could never become the subject-matter of an appeal before the appellate authority and could not merge in the appellate order. Such an order could be revised by the Commissioner under Section 33B whenever be considered that it was erroneously passed.\n\n26. The next decision of the Supreme Court cited by Mr. Sen was in the case of Commissioner of Income-tax v. Rai Bahadur Hardutroy Motilal Chamaria . In this case, the Appellate Assistant Commissioner had, in an appeal preferred by the assessee, enhanced the assessment. It was held that the Appellate Assistant Commissioner had no jurisdiction under Section 31(3) of the Indian Income-tax Act, 1922, to assess a source of income which was not disclosed either in the returns filed by the assessee or in the assessment order and that it was not open to the Appellate Assistant Commissioner to travel outside the records with a view to find out new sources of income and enhance the assessment on that basis. This decision does not appear to be of much assistance in the facts of the case before us.\n\n27. Another decision of the Supreme Court in the case of State of Madras v. Madurai Mills Co. Ltd. was cited by Mr. Sen. Here, the assessee had been assessed to sales tax on a certain turnover and his appeal to the Commercial Tax Officer for exclusion of certain items from the turnover was partly allowed. Thereafter, the Deputy Commercial Tax Officer made a revised assessment on the 28th November, 1952. The assessee preferred a revision therefrom to the Deputy Commissioner of Commercial Taxes objecting to the inclusion in the turnover of a certain sum collected on account of a tax. No other objection was raised. This revision petition was dismissed by the Deputy Commissioner of Commercial Taxes. Thereafter, the Board of Revenue issued a notice to the assessee proposing to revise the assessment of the Deputy Commercial Tax Officer by including in the net turnover a further sum on the ground that it was wrongly excluded in the computation of turnover.\n\n28. The assessee objected to the proposed revision, inter alia, on the ground of limitation. The Board of Revenue rejected the contentions of the assessee and passed an order. The High Court on appeal set aside the order on the ground that it was barred by limitation. In the further appeal to the Supreme Court the department contended that the proceedings were\nnot barred by limitation as the order which was sought to be revised was the order dated 21st August, 1954, of the Deputy Commissioner and not that of the Commercial Tax Officer or the Deputy Commercial Tax Officer.\n\n29. The question arose whether the order of the Deputy Commissioner of Commercial Taxes passed in revision resulted in the merger of the earlier order of the Commercial Tax Officer. The Supreme Court observed that the doctrine of merger was not a doctrine of rigid and universal application and that it could not be said that wherever there were two orders, one by an inferior tribunal and the other by a superior tribunal, passed in an appeal or revision, there was a fusion or merger of the two orders irrespective of the subject-matter of the appellate or revisional order and the scope of the appeal or revision contemplated by the particular statute. The application of the doctrine, according to the Supreme Court, depended on the nature of the appellate or revisional order in each case and the scope of the statutory provisions conferring the appellate or revisional jurisdiction. The Supreme Court found that the only point which was urged before the Deputy Commissioner was that a sum collected by way of tax should not be included in the taxable turnover. Before the Board of Revenue the question which arose was whether the Deputy Commercial Tax Officer was right in excluding from the net taxable turnover of the assessee another sum on another transaction. The Supreme Court held that the doctrine of merger could not be invoked in those circumstances.\n\n30. Mr. Sen referred to Section 246 of the Income-tax Act, 1961, which specified the orders of an Income-tax Officer which were appealable and from which appeal could be preferred to the Appellate Assistant Commissioner. In this section an order under Section 216 of the Act providing for payment of interest in the case of under estimation of income has been made specifically appealable but no such appeal has been provided from an order levying interest in a case where no estimate has been submitted by the assessee. In the corresponding Section 30(1) of the old Act an order levying interest under Section 18A(8) had not been made appealable.\n\n31. Mr. Sen contended that in the instant case there was no question of merger inasmuch as under the statute the order for payment of interest under Section 18A(8) or Section 217 was not made appealable. He contended further that, in any event, the dispute regarding such interest was never mooted nor decided by the Appellate Assistant Commissioner, and, therefore, there was no question of any merger.\n\n32. The contentions of Mr. Sen appear to be of some substance. In the case of Amritlal , referred to above, an order granting registration under Section 26A of the Indian Income-tax Act, 1922, was found to be non-appealable and on that basis it was held that in a dispute regarding registration an order passed could not have been made a\nsubject-matter of the appeal and could not be said to have merged in the appellate order. Applying the same reasoning we find that in the instant case an order for payment of interest under Section 18A(8) of the 1922 Act or Section 217 of the 1961 Act is not appealable and also the dispute relating to payment of interest was never made the subject-matter of the appeal before the Appellate Assistant Commissioner. In Kharawala's case [195,3] 23 ITR 412 (Bom), before the Bombay High Court the assessment itself was the subject-matter of the appeal and the said appeal having been disposed of, the order of the assessment was held to be merged in the appellate order. It cannot be said that such merger has taken place or could have taken place in the instant case. It follows, therefore, that omission to levy interest for non-submission of estimate could be a subject of revision by the Commissioner of Income-tax under Section 263 of the new Act.\n\n33. At the hearing a new point was raised whether in the absence of any order under Section 18A(8) there could be any revision. We do not propose to go into this question as the same has not been agitated earlier. The original order of assessment in any event has not been included in the paper book.\n\n34. The other contention whether the Income-tax Officer could be deemed to have exercised his discretion under rule 48(1) of the Income-tax Rules, 1922, and had waived interest in the instant case next falls for consideration. Mr. Mukherjee for the assessee relied on the case of Shantilal Rawji v. M. C. Nair, IVth Income-tax Officer [1958] 34 ITR 439 (Bom), referred to earlier also in support of this contention. In this case, the assessee had paid advance tax on his own estimate under Section 18A and after the order of assessment was passed, the Income-tax Officer discovered that the assessee had not paid the correct amount of advance tax and interest had not been charged under Section 18A(6). The Income-tax Officer thereupon issued a notice and passed an order of rectification levying penal interest. It was contended on behalf of the assessee that as the matter had not been dealt with in the assessment order at all there was no case for rectification. The Bombay High Court decided the case on the basis that under the statute it was obligatory upon the Income-tax Officer to levy such penal interest and as he had not done so the mistake or error was apparent on the face of the records.\n\n35. In the meantime the relevant Section 18A(6) had been amended with retrospective effect and in certain circumstances conferred power on the Income-tax Officer to reduce or waive the interest payable. The High Court observed that if the amendment was in force at the relevant time and the Income-tax Officer did not impose a penalty the court would lean in favour of the view, that the Income-tax Officer had exercised his discretion. In that event, in the absence of any mention bf levy of penal interest in the\nassessment order it could not be said that there was an error on the part of the Income-tax Officer.\n\n36. Mr. Sen, on behalf of the revenue; cited a decision of the Kerala High-Court ill the case of Commissioner of Income-tax v. Cochin-Maldbar Estates Lid. . In this case, the Kerala High Court construed Section 213(4) of the Income-tax Act, 1961, which enabled the Income-tax Officer to waive the interest payable by an assessee completely or to reduce it. The Kerala High Court held that the judicial exercise of discretion was necessary to find out what interest if at all should be charged. Reduction or waiver of interest was held to be a quasi-judicial act and hence an order under Section 215(4) must state the reason for it.\n\n37. In that case, the Income-tax Officer h-ad not charged any interest under Section 215(1) of the Act and the assessment orders were silent as to interest. The Commissioner acting suo motu under Section 263 of the Act took the view that this was clearly due to oversight and inadvertence and set aside the assessment orders to the extent that they failed to charge interest.\n\n38. The High Court noted the observations of the Bombay High Court in Shantilal's case [1958] 34 ITR 439, but held that the jurisdiction of the Commissioner under Section 263 of the Act remained unaffected. If an order was prejudicial to the interest of the revenue and erroneous, the Commissioner could set aside the same. An order which did not charge interest where chargeable was, prima facie, prejudicial and whether it was erroneous or not would depend upon the grounds on the basis of which such omission might be supported. In such a case the Commissioner would be entitled to know on what grounds interest had been waived. The Kerala High Court held that the finding of the Tribunal in that case that the Income-tax Officer had exercised his discretion and decided not to levy penal interest was erroneous.\n\n39. It appears to us that the observations in Shantilal's case [1958] 34 ITR 439 by the Bombay High Court were in the nature of obiter. The proviso on which the argument was based was found to be not in force at the relevant time. We respectfully agree with the observations of the Kerala High Court. It appears to us that in the instant case the order is absolutely silent and it is not possible to infer therefrom that the Income-tax Officer had in fact considered the matter at all or had exercised his discretion in any manner. An order under Section 217 is not appealable but the same can be revised by the Commissioner either in favour of the revenue under Section 263 or in favour of the assessee under Section 264,\n40. On the preceding reasons we answer the questions as follows ;\n\nWith reference to question No. 1 we hold that only the assessment order which was the subject-matter of the appeal merged with the order\nof the Appellate Assistant Commissioner and there was no merger in respect of levy of penal interest under Section 18A(8) and/or Section 217 of the two Acts, We answer question No. 1 in the affirmative and in favour of the revenue. \n\nQuestion No. 2 has to be answered with reference to question No. 1 and we answer the same in the affirmative and in favour of the revenue.\n\nQuestion No. 3 is answered also in the affirmative and in favour of the\nrevenue.\n\n41. As to question No. 4 the Tribunal has found as a fact that the Income-tax Officer did not apply his mind to the question. This finding has not been challenged. Therefore, this question is answered in the negative and also in favour of the revenue. We return our answer accordingly.\n\n42. In the facts and circumstances there will be no order as to costs.\n\nDeb, J. \n\n43. I agree." }, { "title": "In The Matter Of: National Conduits (P) ... vs The Official Liquidator, New Delhi Of ... on 24 September, 1973", "url": "https://indiankanoon.org//doc/423287/", "text": "In The Matter Of: National Conduits (P) ... vs The Official Liquidator, New Delhi Of ... on 24 September, 1973\nEquivalent citations: [1974]44COMPCAS219(DELHI), ILR1974DELHI535, [1974]94ITR378(DELHI)\nJUDGMENT \n\n D.K. Kapur, J. \n\n (1) M/S. National Conduits (P) Ltd., is a company which has gone into liquidation. Shri S. S. Arora one of its directors was drawing a salary from the company. For the period covered by the assessment years 1961-62 to 1965-66, assessments were made by the Income Tax Officer in respect of the income of Shri Arora, who consequently, became liable to pay, in the aggregate, a sum of Rs. 46,719.00 as tax. Shri Arora submitted certificates of deductions showing that a sum of Rs. 44,000.00 had been deducted by the company at source. It seems that this amount was never paid by the company. The Income Tax Officer, Special Circle Ix, served the Official Liquidator with a notice under Section 226(3) of the Income Tax Act, 1961, calling upon the Official Liquidator to pay a sum of Rs. 44,000.00. This was by notice dated 12th January. 1970 Later, the Income Tax Officer 11(2) (Collection). New Delhi, dealt with the case and corresponded with the Official Liquidator, who informed him that as the company was being wound up, leave of the Court under Section 446 of the Companies Act, 1956, was necessary. \n\n(2) In these circumstances, the Income Tax Officer, District 11(2) Additional has moved this Court under Section 446 of the Companies Act, 1956 and has at the same time stated that the provisions of that section do not apply to the case. The petitioner has explained that the salary of the director in question, Shri Arora, was Rs. 36.000.00 annually and the deductions which should have been made under Section 192 of the Income Tax Act, 1961, amounted to Rs. 44,000.00, which should have been deposited in the Treasury. Having not made the deposit, the company was an assessed in default as provided by Section 201 of the Income Tax Act, 1961. A further sum was claimed as interest under Section 201(IA) of that Act. The petitioner also explained that after tax had been deducted at source, Shri Arora could not be called upon to pay tax. The prayer in the application is that the Liquidator should be directed to pay a sum of Rs. 44,000.00 with interest thereon to the Income Tax Officer and also, this Court should permit the petitioner to take proceedings under the Income Tax law for the recovery of the amount. The petition has been contested by the Official Liquidator who has Complained that the account books and the records of the company had not been handed over to the Official Liquidator and a statement of the affairs had also not been filed. It was further stated that the Official Liquidator was not in a position to know whether any tax was deducted at source from the salary of Shri Arora. Lastly, it was stated that the applicant should file a claim before the Official Liquidator as and when invited under Sections 529 and 530 of the Companies Act, 1956. It was submitted that the application should be dismissed. \n\n(3) The principal question which arises for consideration in this case is, whether the Income Tax Officer can be permitted to take proceedings under the Income Tax Act for the realisation of the amount in question, or whether the arrears of tax due have to be treated in exactly the same way as any other debt due from the company In liquidation. I had passed a preliminary order in this case on 1st August, 1973, after referring to some of the case law. I had particularly referred to the judgment of the Supreme Court in S. V. Kondaskar, Official Liquidator and Liquidator of the Colaba Land and Mills Co. Ltd. (in liquidation) V. V. M. Deshpande, Income Tax Officer, Companies Circle 1(8) Bombay and another, where it was observed that the provisions of the Section 446 of the Income Tax Act, 1961, did not debar the Income Tax Department from taking re-assessment proceedings, but the realisation of tax determined had to be made in the same manner as any other debt of the company. I had thought at that stage that the department was to be treated as a creditor of the company and had given the Official Liquidator time to disclose the state of assets of the company in his hands. I have since heard further arguments in which other cases have also been referred to. I now proceed to determine whether the Income Tax Officer was entitled to take steps under the Income Tax Act, or alternatively, if he cannot be permitted to do so, whether this Court can order the Official Liquidator to pay out the amount in question from any other assets that may be available to him.\n\n(4) Section 446 of the Companies Act, 1956, is concerned with the effect of a winding up order on pending suits and other legal proceedings. Sub-section (1) of that Section provides :- \"(1) When a winding up order has been made or the Official Liquidator has been appointed as provisional liquidator, no suit or other legal proceedings shall be commenced, or if pending as the date of the winding up order, shall be proceeded with, against the company, except by leave of the Court and subject to such terms as the Court may impose.\" \n\nThe effect of this Section in relation to income tax proceedings has been considered by the Supreme Court in S. V. Kondaskar, Official Liquidator and Liquidator of the Colaba Land and Mills Co. Ltd. (in liquidation) V. V. M. Deshpande, Income Tax Officer, Companies Circle 1(8) Bombay and another, referred to above. In that case, the question was whether re-assessment proceedings under Section 147 of the Income Tax Act, 1961, required the leave of the Liquidating Court. It was held that the Income Tax Officer was not performing a function of a court within the meaning of Section 446(2) and a winding up order would therefore not result in the stay of such proceedings. It was further observed that the Court in which the liquidation proceedings were pending could not perform the functions of an Income Tax Officer and there would be an anomalous situation if the result of a winding up was to be a transfer of pending income tax proceedings to the liquidation Court. In the present case, there arc no pending proceedings before the Income Tax Authorities, and the question that I am concerned with, is what is the method to be used by the Income Tax authorities in collecting arrears of tax due from a company in liquidation. On this point, the judgment did make some observations at page 886 of the report, It said :- \"THE fact that after the amount of tax payable by an assessed has been determined or quantified its realisation from a company in liquidation is governed by the Act because the income-tax payable also being a debt has to rank pari passu with other debts due from the company docs not mean that the assessment proceedings for computing the amount of tax must be held to be such other legal proceedings as can only be started or continued with the leave of the liquidation court under Section 446 of the Act.\"\n\nLater on, in the same judgment it was stated :- \"THE liquidation Court would have full power to scrutinise the claim of the revenue after income-tax has been determined and its payment demanded from the liquidator. It would be open to the liquidation court then to decide how far under the law the amount of income-tax determined by the Department should be accepted as a lawful liability of the funds of the company in liquidation. At that stage the winding up Court can fully safeguard the interests of the company and its creditors under the Act.\" \n\nThese two observations clearly indicate that the Supreme Court considered that the realisation of arrears of income-tax was to be effected in the same manner as the realisation of any other debt due from a company in liquidation. This would thus support the case of the Official Liquidator that the Income Tax Officer should proceed to prove his debt in the same manner as any other creditor of the company. The observations in question were made without reference to the provisions of Section 537(2) of the Companies Act, 1956, on the basis of which certain further submissions have been made by counsel for the applicant, with which I shall deal subsequently, in this judgment. \n\n(5) The next question that has been contested before me is the question whether the demand for arrears of tax referred to above are a preferential debt as far as the Official Liquidator is concerned. In this respect, reference is first necessary to Governor-General in Council V. Shiramani Sugar Mills Limited (in liquidation), Air (33) 1946, Federal Court 16, wherein it was held that the debts owed to the Crown could not claim priority in the matter of payment on account of the administrative scheme provided by the Companies Act. On referring to Section 230 and Section 232(2) of the Companies Act, 1913, the Federal Court held that income-tax arrears could not be collected as arrears of land revenue under a certificate granted under Section 46(2) of the Income-Tax Act, 1922, That procedure being ultra vires of the Companies Act. In other words, it was held that as a result of the Companies Act. the claim of the Crown to get priority in the matter of payment of its dues was over-ruled by statute.\n\n(6) A similar question was considered in Builders Supply Corporation V. Union of India and others , which also related to the priority of debts due to the Government of India for arrears of income-tax over other debts due to unsecured creditors, It was held that the doctrine of priority of Crown debts was a law in force within the meaning of Article 372(1) of the Constitution of India and continued to be in force even thereafter. The case before the Court was not a case arising out of company law proceedings, but reference was made in the judgment to the aforementioned judgment of the Federal Court. There are no observations in this judgment of the Supreme Court, showing that the view of the Federal Court based on the provisions of the Companies Act, 1913, was overruled. Thus, I come to the view that the question of priority has to be decided on a consideration of the provisions of the Companies Act, 1956, and particularly to the provisions corresponding to Section 230 (1) (a) and 232(2) of the Companies Act, 1913. Turning now to the provisions of the Companies Act, 1956, I find that the question of priority is dealt with in Section 530 of the Act. As far as revenues, taxes, cesses and rates are concerned, priority has been granted in sub-clause (a) of sub-section (1), only to debts which became due and payable within 12 months before the winding up order. It is admitted that the present claim does not stand on this footing because it relates to a tax liability of an earlier period. It thus remains to be seen whether there is any other proceeding which makes the arrears of income-tax rank pari passu with any other unsecured debts. The provisions of Section 530(1)(a) are the same as those of Section 230(1) (a) of the Act of 1913 \n\n(7) Section 232(2) of the Companies Act, 1913, provided an exception to Section 232(1). The whole section ran as follows - \"232. Avoidance of certain attachments, executions, etc. (1) Where any Company is being wound up by or subject to the supervision of the Court, any attachment, distress or execution put in force without leave of the Court against the estate or effects or any sale held without leave of the Court of any of the properties of the Company after the commencement of the winding up shall be void. (2) Nothing in this section applies to proceedings by the Crown.\"\n\nUnder the first part of this section, an attachment, distress or execution against a company in liquidation or a sale of its property would be void unless with the leave of the Court. The second sub-section provided that this would not apply to proceedings by the Crown. The corresponding section in the present Act is Section 537. The second sub-section, as it now stands after the amendment in 1960, states:- \"NOTHING in this section applies to any proceedings for the recovery of any tax or impost or any dues payable to the Government.\" \n\nThus, section 537, as it now stands, is for all practical purposes the same as Section 232 of the Act of 1913. On this analysis it would appear that the provisions of the Companies Act of 1913 have been reproduced in the Companies Act of 1956. Reverting now again to the Federal Court's judgment in Shiromani Sugar Mill's case) it is necessary to examine the reasoning which led the Federal Court to hold that in spite of Section 232(2) of the Act, arrears of income tax could not be recovered by the Collector as arrears of land revenue. The scheme of Section 230(l)(a) of the Act of 1913 and the other portions of that provisions showed that certain creditors of the company in liquidation were to be treated as prior claimants. The same provision is now to be found in Section 530(1). The Court concluded that the prerogative of the Crown to claim priority of Crown debts had been over-ruled by a special priority contained in Section 230. The Court relied on the decision of the House of Lords in Food Controller V. Cork, 1923, A.C. 647. A further reason was given by the Federal Court at a later stage in the judgment. It was stated thus:- \"WE agree with the learned Judges of the Allahabad High Court in holding that the words \"other legal proceeding\" in Section 171, Companies Act, 1913, comprise any proceeding by the revenue authorities under Section 46 (2), Income-tax Act, and that accordingly before forwarding the requisite certificate under Section 46 (2) to the Collector, which would put the machinery for the collection of the arrears of income-tax as arrears of land revenue into motion, the appellant should have applied in the liquidation under Section 171, Companies Act, for leave of the winding up Court.\" \n\n(8) The provisions of Section 171 have now been reproduced in Section 446(1) of the Companies Act, 1956. It, therefore, follows that before proceedings can be taken by the Income-tax authorities to realise the taxes which have not been deposited by the company in the manner stated above, leave of the Court has to be sought. This is an application for leave and I am treating it as such. \n\n(9) The legal position that thus emerges is that the Income-tax authorities cannot proceed to realise arrears of tax without the leave of the Court. Moreover, by virtue of Section 530(1)(a) as interpreted in the aforementioned judgment of the Federal Court, which was interpreting the corresponding Section in the Companies Act of 1913, it would appear that the Income-tax authorities cannot claim any priority for the realisation of the aforementioned debt. This priority is only given in respect of debts which are due in the immediate 12 months before the date of the winding up. This has a great bearing on the question whether leave should be granted to the Income-tax authorities to proceed in this case. \n\n(10) I now proceed to refer again to the Judgment of the Supreme Court in S. V. Kondaskar's case, . in that case, the Supreme Court made a distinction between the procedure in assessing tax and the procedure for Realizing the tax as determined. As far as the assessment proceeding were concerned, the Court held that the proceedings were not to be stayed by operation of Section 446(1) of the Act. On the other hand, as far as the realisation of tax dues were concerned, the Court observed that the same procedure had to be followed as the realisation of any other dues by any other creditor. It would, therefore, appear that the procedure to be followed by the Income-tax authorities will depend on whether leave is granted under Section 446 (1) of the Companies Act, 1950, or not. In case the authorities are granted leave, they may proceed to realise the tax by reference to the procedure prescribed by the Income-tax Act, 1961, or as arrears of land revenue, or by other means available to the authorities. On the other hand, if leave is refused, then, the Income-tax authorities will be placed in the same position as any other creditor of the company. As in the present case, the dues to be realised arc arrears of tax which were not deposited by the company in liquidation for the period covered by the assessment years 1961-62 to 1965-66, I would hold that no priority was involved in these realisations. If any part of the sum of Rs. 44.000.00 is entitled to priority under Section 530(1)(a) of the Act, the Income-tax Officer is entitled to get leave. No indication has been made in the application as to whether any part of the sum claimed is entitled to priority and hence I am unable to determine this question on the present record. I permit the Income-tax Officer to apply for leave under Section 446(1) to proceed under the Income-tax Act, 1961, in relation to any debts due from the company which are entitled to priority under the provisions of Section 530(l)(a) of the Companies Act, 1956. This will have to be by a subsequent application. If the Income-tax Officer is able to show that the said priority has to be granted, I would grant leave to the authorities to proceed under the Income-tax Act, 1961. For the moment, I am refusing leave under Section 446(1) of the Companies Act, 1956, on account of the fact that either the whole of the sum of Rs. 44,000.00 or a substantial part of it is not entitled to priority under Section 530(1)(a) of the Companies Act, 1956.\n\n(11) I now deal with the last contention raised on behalf of the applicant, which is based on an interpretation of Section 537(2) of the Companies Act, 1956. This section, i.e., Section 537 read as a whole shows that any attachment, distress or execution effected without leave of the Court against the estate or assets of a company is void. So too is any sale made without the leave of the Court. The exception made by Section 537(2) is that it wilt not apply to any recoveries or impost or other dues payable to the Government. This means that if any attachment, distress or execution is levied by the Income-tax Officer without leave of the Court, or if a sale is effected without leave of the Court, then the sale will not be void by reason of Section 537 of the Companies Act. 1956. Learned counsel for the Department strongly relies on this provision to submit that this means that (he Income-tax authorities can realise arrears of tax without recourse to the Court and, therefore, it is unnecessary to even ask for the leave of the Court either under Section 446 or under Section 537 of the Act. I cannot help feeling that there is an inconsistency between the provisions of Section 537 and Section 446 of the Companies Act, for if proceedings are stayed under Section 446(1) it will not be possible for proceedings for Realizing tax arrears to end in execution or sale to which Section 537(1) or (2) could apply. These two provisions have to be read with the provisions of Section 530(1)(a), which entitles preferential payments to be made only in respect of certain taxes cesses and rates. If the contention of the Department were to prevail, the Department could proceed to realise all taxes without recourse to the liquidator and without seeking priority. In other words, the Income-tax Department could get priority merely by exercising its statutory powers under the Income Tax Act, 1961. In my view, this inconsistency existed even when the Federal Court delivered its aforementioned judgment. The Federal Court resolved the incojnsistency by holding that the Government was not entitled to a preferential payment for arrears of tax except in so far Section 230(1) (a) of the Companies Act. 1913. permitted. Correspondingly, it would follow that the Income-lax Department cannot claim priority except to the extent permitted by the law now in force, i.e., by Section 530(1)(a) of the Companies Act, 1956. As regards the realisation of taxes in general, the Federal Court held that the provisions of Section . 171 of the Act of 1913, corresponding to the provisions of Section 446(1) of the present Act, operated to stay the realisation of lax except with the leave of the Court, It would, therefore, follow that unless the leave of the Court was granted under Section 446(1) of the present Act, the Income-tax authorities could not proceed to follow the proccedure laid down in the Income-tax Act, 1961. This being the position, Section 536(2) of the present Act does not entitle the Income-tax authorities to effect a sale or attachment unless leave is granted under Section 446(1) of the Act. The view of the Federal Court is confirmed by the observations of the Supreme Court in the case already referred to (S. V. Kondaskar's case) which have been reproduced already. It would, therefore, follow that in spite of the provisions of Section 537(2), the Income-tax authorities cannot proceed against the assets of the company in the hands of the liquidator without the leave of this Court being granted under Section 446(1) of the Companies Act, 1956. I have already indicated that such leave cannot be granted in the present case, because the debt in question, i.e., the arrears of income Tax unpaid are not entitled to priority. I have also indicated that it is possible that a portion of the amount of Rs. 44,000.00 may be entitled to priority by reason of Section 530(1)(a) of the Companies Act, 1956, and if this is so, leave will be granted to that extent. If the applicant moves a petition showing that any portion of the sum of Rs. 44,000.00 is entitled to priority, I shall make an order granting leave under Section 446(1) of the Act. I cannot help observing that the matter has been very fully and fairly placed before me by the learned counsel, Miss Deshpande and Miss Goel. I make no order as to costs," }, { "title": "Commissioner Of Income-Tax vs Pratap Chand Maheshwari on 9 November, 1979", "url": "https://indiankanoon.org//doc/396432/", "text": "Commissioner Of Income-Tax vs Pratap Chand Maheshwari on 9 November, 1979\nEquivalent citations: [1980]124ITR653(P&H)\nJUDGMENT\n \n\n S.S. Dewan, J. \n \n\n 1. This judgment will decide I.T. Reference Nos. 2, 10 to 17 of 1979 and 38, 39, 40 and 46 of 1978 which contain similar questions of law. The facts are being given in the judgment from I.T. Ref. No. 15/1979. The Income-tax Appellate Tribunal, Amritsar, referred to us the following questions for the opinion of this court under Section 256(1) of the I.T. Act, 1961 (hereinafter called the \" 1961 Act\"): \n\n 1. (Arising out of I.T. Ref. Nos. 14, 15, 16 and 17 of 1979) Assessment year 1972-73 \n \n\n \" (i) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the assessee cannot be said to have filed an estimate of his income under Section 212 of the Income-tax Act, 1961, which he knew or had reason to believe to be untrue? \n\n (ii) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that when a firm has been penalised under Section 273(1)(a) of the Income-tax Act, 1961, no penalty can be imposed under the said section on its partners ? \" \n\n 2. (Arising out of I.T. Ref. No. 2 of 1979)\nAssessment year 1973-74 \n \n\n \" (i) Whether a wrong estimate of income filed by a firm under Section 212 would constitute a reasonable cause ;in the case of the partner\n\nfor the purpose of levy of penalty under Section 273(1)(a) of the Income-tax Act, 1961 ? \n\n (ii) Whether, on the facts and in the circumstances of the case, the Tribunal is right in deleting the penalty imposed under Section 273(1)(a) of the Income-tax Act ? \" \n\n 3. Arising out of LT. Ref. Nos. 10, 11, 12 and 13 of 1979) Assessment year 1970-71 \n \n\n \" (i) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that non-filing of an estimate under Section 212(3A) of the Income-tax Act, 1961, by the firm would constitute a sufficient cause within the meaning of Section 273(1)(c) of the Income-tax Act, 1961, for not filing an estimate under Section 212(3A) of the Act by the partners ? \n\n (ii) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that when a firm has been penalised under Section 273(1)(a) of the Income-tax Act, 1961, no penalty can be imposed under the said section on its partners ? \" \n\n 4. (Arising out of I.T. Ref. Nos. 38, 39 and 40 of 1978) Assessment year 1973-74 \n \" Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that non-filing of an estimate under Section 212(3A) of the Income-tax Act, 1961, by the firm would constitute a reasonable cause within the meaning of Section 273(c) of the Income-tax Act, 1961, for not filing an estimate under Section 212(3A) of the Act by the assessee-partner and in cancelling the penalty of Rs. 9,550 (Rs. 6,780 in I.T. Ref. Nos. 39 and 40) imposed under Section 273(c)? \" \n\n 5. (Arising out of LT. Ref. No. 46 of 1978) Assessment year 1973-74 \n \" Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that non-filing of an estimate under Section 212(3A) of the Income-tax Act, 1961, by the firm would constitute a reasonable cause within the meaning of Section 273(c) of the Income-tax Act, 1961, for not filing an estimate under Section 212(3A) of the Act by the assessee-partner?\" \n\n2. The facts in the context of which the aforesaid questions are to be considered are not in dispute and can be stated thus : \n\n3. The firm, M/s. Pratap Steel Rolling Mills, Amritsar, consisted of four partners one of whom was Pratap Chand Maheshwari. The assessment year involved was 1972-73. The ITO issued a notice under Section 210 of the 1961 Act on August 19, 1971, requiring the assessee to deposit advance tax of Rs. 2,96,285. The assessee filed an estimate on September 15, 1971, declaring his income at Rs. 1,10,000 and accordingly paid Rs. 53,037. The tax on regular assessment was determined at Rs. 1,32,774. As the estimate\n\nof the advance tax filed by the assessee on September 15, 1971, was found to be incorrect, proceedings were taken under Section 273(1)(a) of the 1961 Act and the ITO imposed a penalty of Rs. 4,654 on the assessee. The contention of the assessee before the ITO as also before the AAC of Income-tax was that the only source of income of the assessee was the share out of the estimated income from the firm and, therefore, he had reasons to believe that the estimate filed by the firm was true and correct and hence his estimate was also true and correct. It was also submitted that the ITO did not prove that the assessee had consciously underestimated his advance tax liability and in these circumstances no penalty should be imposed. The ITO as also the AAC rejected the contention of the assessee and they held that the explanation offered by the assessee was not acceptable and that the failure to furnish the estimate of advance tax was without reasonable cause. Feeling aggrieved, the assessee went up in second appeal. The Income-tax Appellate Tribunal placed reliance on the decision in Venkateswara Power Rolling Mills v. CIT [1974] 97 ITR 168 (Mys) and Addl. CIT v. Smt. Triveni Devi [1974] 97 ITR 390 (All) and accepted the appeal. The Tribunal while accepting the assessee's pleas observed as under:\n \" In our opinion, the contention of the learned counsel for the assessee has considerable force. Since the assessee's main source of income was share from the firm, M/s. Pratap Steel Rolling Mills and the assessee filed his own estimate of advance on the basis of the estimate filed by the firm on 15-9-1971, it cannot be said that the assessee under Section 212 of the Income-tax Act, 1961, furnished an estimate of advance tax which he knew or had reasons to believe to be untrue. On the other hand, on 15-9-1971 when the assessee filed his own estimate of advance tax he depended on the estimate filed by the firm and in these circumstances it cannot be said that the assessee was actuated by any dishonest intention to underestimate the advance, tax payable by him. This apart, we find that in the case of the firm, M/s. Pratap Steel Rolling Mills, a penalty under Section 273(1)(a) has already been imposed by the Income-tax Officer for default of the provisions of Section 212 of the Income-tax Act, 1961, and in these circumstances we are of the opinion that no penalty can be imposed on the partner for the same offence as it would amount to double punishment.\" \n\n4. This is how the matter is before us. \n\n5. Coming now to the first question in I.T.R. No. 15 of 1979, Mr. D. N. Awasthy, learned counsel for the department, has submitted that the accounting period of the firm had ended on July 31, 1971, and as such on September 15, 1971, the assessee should have known his share of profits in the firm and since he did not file his estimate correctly on September 15, 1971, the provisions of Section 273(1)(a) have been rightly attracted in this case. To fortify his argument, he has cited a decision of the Gujarat High Court\n\nin Mulji Laxmidas v. CIT [1976] 43 Tax (1)-26, wherein penalty imposed under Section 271(1)(a) of the 1961 Act was justified. We have gone through this decision and find that it has no applicability to the facts and circumstances of the present case.\n\n 6. In order to determine the question it will be essential to refer to the relevant part of Section 273 of the 1961 Act, which runs as under : \n\n \" If the Income-tax Officer, in the course of any proceedings in connection with the regular assessment for the assessment year commencing on the 1st day of April, 1970, or any subsequnet year, is satisfied that any assessee- \n\n (a) has furnished under Section 212 an estimate of the advance tax payable by him which he knew or had reason to believe to be untrue, or...... \n\n (e) has without reasonable cause failed to furnish an estimate of the advance tax payable by him in accordance with the provisions of Sub-section (3A) of Section 212, \n \n\n he may direct that such person shall, in addition to the amount of tax, if any, payable by him, pay by way of penalty... \" \n\n7. Section 271 of the 1961 Act is a similar section authorising the imposition of penalty for filing a return in which particulars furnished of his income by the assessee are inaccurate or such particulars are concealed. The relevant part of this section is as follows ! \n \n\n \" (1) If the Income-tax Officer or the Appellate Assistant Commissioner, in the course of any proceedings under this Act, is satisfied that any person--... \n\n (c) has concealed the particulars of his income or furnished inaccurate particulars of such income, \n \n\n he may direct that such person shall pay by way of penalty...... \" \n\n8. The provisions of Sections 271 and 273 are in pari materia. The imposition of penalty under Section 271 is of penal nature, so is the penalty which is imposed under Section 273 of the Act. \n\n9. After hearing the learned counsel for the parties we are of the considered view that the matters involved in I.T. Ref. No. 15 of 1979 are not res integra. The subject-matter of question No. 1 stands covered by an authoritative decision of the Supreme Court in CIT v. Anwar Ali [1970] 76 ITR 696, and we see no distinguishing features as to take the matter away from the cover of the ratio of the said decision as would be presently shown. Prior to the decision in Anwar Ali's case [1970] 76 ITR 696 (SC), different views were taken as to on whom lies the burden of proving that the income has been concealed or that incorrect particulars have been given. In Anwar Ali's case while making assessment for the year 1947-48.\n\nthe ITO found certain undisclosed cash deposits aggregating to Rs. 87,000 as having been made by the assessee in the bank during the accounting year on 21st November, 1946. The. explanation of the assessee that he had received certain amounts from his relations and he had deposited them in the joint names of himself and his minor sons was not accepted and the taxing authority came to the conclusion that this amount of Rs. 87,000 represented the income from undisclosed sources. The amount was consequently added to the income of the assessee and he was taxed accordingly. The assessee was unsuccessful up to the Tribunal. Penalty proceedings were started and a penalty of Rs. 66,000 was imposed. The department did not lead any further evidence to show that the return was false except that a sum of Rs. 87,000 had been added to the income which was not disclosed. The Tribunal took the view that penalty proceedings were of a criminal nature and the onus lay on the department to show by adequate evidence that the amount of the cash stated to have been concealed by the assessee was of revenue nature and was assessable as income and that the assessee had concealed it or deliberately furnished false particulars in regard thereto. Then it was observed as follows (p. 699): \n \"This onus, in the opinion of the Tribunal, was not discharged by the income-tax authorities by showing merely that the explanation given by the assessee in the assessment proceedings was found to be unacceptable. The Income-tax Officer, according to the Tribunal, must find some material apart from the falsity of the assessee's explanation to support his finding that the receipt from undisclosed sources was income. \" \n\n10. The Mulji Laxmidas's case [1976] 43 Tax (1)-26, relied on by Mr. Awasthy, is clearly distinguishable and the facts therein are not applicable to this case. In that case, the explanation given by the assessee which was offered even at the stage of the second appeal before 'the Income-tax Appellate Tribunal was that the default was on account of the failure on the part of the three partnership firms to make up their accounts in time and no material was produced even before the Tribunal to show that the assessee was vigilant and diligent. The Tribunal relied upon these and other grounds set out in support of its conclusion that the failure to furnish return within time was without reasonable cause. Their Lordships of the Supreme Court, while accepting the plea of the revenue, observed that on an overall view of all the circumstances of the case, the Tribunal's finding that the default in the case was without reasonable cause was unassailable. To the case in hand, the decisions of this court in Addl. CIT v. Bipan Lal Kuthiala [1975] 98 ITR 343 and that of Addl. CIT v. Smt. Triveni Devi [1974] 97 ITR 390 (All) aptly apply. The ratio of these decisions is clearly attracted and has been rightly followed by the Tribunal. The question whether or not the assessee failed without reasonable cause to furnish estimate of advance tax within time is primarily and essentially a question of fact to be decided in each case on a consideration of all the relevant circumstances. In the present case, there is nothing on the record to show if the assessee had deliberately furnished inaccurate particulars. The books of accounts of the firm had not been finalised by September 15, 1971, and in fact, the return of income was filed by the firm only on July 29, 1971. Since the firm's accounts were not closed and the assessee was not in a position to know his share of income from the firm by September 15, 1971, he had to depend upon the estimate of advance tax filed in the case of the firm and it was on this basis that he filed his own estimate of advance tax on the same date on which the firm filed its estimate. There is no mens rea and as such the Tribunal was right in holding that the burden was on the department to show that the estimate was false to the knowledge of the assessee or was believed to be inaccurate by the assessee. The answer to this question would obviously be in the affirmative in view of the decision of the Supreme Court in Anwar Ali's case [1970] 76 ITR 96 (SC), that is, in favour of the assessee and against the department.\n\n11. Now, we advert to question No. (ii) in I.T. Ref. No. 15 of 1979. The ratio of the decision in the case of Addl. CIT v. Smt. Triveni Devi [1974] 97 ITR 390 (All) is clearly attracted and this has rightly been followed by the Tribunal. \" In fact, as pointed out by the Supreme Court in C.A. Abraham v. ITO [1961] 41 ITR 425 (SC), a penalty is nothing but an additional tax and the principle contained in Clause (iii) of Section 86 would apply as much to penalty as to tax. Even if penalty is regarded as punishment, a person cannot be punished more than once in respect of the same offence.\"\n\n 12. In Dulichand Laxminarayan v. CIT [1956] 29 ITR 535 (SC), it was observed that a firm even though it is an assessable unit for the purposes of income-tax is riot a legal person or a juridical entity.\n\n 13.Mr. Awasthy relied on a case of the Madhya Pradesh High Court, Amritlal Somabhai v. CIT [1979] 116 ITR 833 (MP). The case referred to by Mr. Awasthy does not help in resolving the controversy because in that case the question of double penalty was not considered at all and, moreover, Dulichand Laxminarayan's case [1956] 29 ITR 535 (SC) was not referred. On the other hand, Mr. Desai, learned counsel for the assessee, has contended that when a firm has been penalised no penalty can be imposed on its partners. He has placed reliance on the decision in the case of Addl. CIT v. Smt. Triveni Devi [1974] 97 ITR 390 (All), wherein it was observed as follows (headnote) :\n \" A firm, even though it is an assessable unit for purposes of income-tax, is not a legal person or a juridical entity. Thus, any tax imposed upon a firm is, in fact, a tax upon the partners. Penalty is nothing but an additional tax and the principle contained in Section 86(iii) of the Income-tax\nAct, 1961, would apply as much to penalty as to tax. Even if penalty is\nregarded as punishment, a person cannot be punished more than once in\nrespect of the same offence. Hence, penalty for concealment of income\ncannot be levied once in the hands of the firm and again in the hands of its\npartners. \n\n14. Similar view was adopted in the decision of this court in Pearl Woollen Mills v. CIT [1980] 123 ITR 658. With respect, we entirely concur in the view aforesaid. Once that is so, the case of the assessee is clearly within the ratio of the cases upon which reliance has been rightly placed by Mr. Desai.\n\n15. In view of our answer to questions Nos. (i) and (ii) in I.T. Ref. No. 15 of 1979, we answer the questions referred for opinion in I.T. Refs. Nos. 2, 10 to 14, 16, 17 of 1979 and 38, 39, 40 and 46 of 1978, in favour of the assessees and against the department and dispose of the references accordingly. The parties are left to bear their own costs. \n\nB.S. Dhillon, J. \n\n 16. I agree." }, { "title": "Presidency Medical Centre (P.) Ltd. vs Commissioner Of Income-Tax on 8 October, 1974", "url": "https://indiankanoon.org//doc/1299041/", "text": "Presidency Medical Centre (P.) Ltd. vs Commissioner Of Income-Tax on 8 October, 1974\nEquivalent citations: [1977]108ITR838(CAL)\nAuthor: Sabyasachi Mukharji\nBench: Sabyasachi Mukharji\nJUDGMENT\n \n\n Sabyasachi Mukharji, J. \n \n\n 1. In this reference under Section 256(1) of the Income-tax Act, 1961, we are concerned with the assessment year 1964-65. The relevant accounting year is the period which ended on the 31st March, 1964. One of the contentions that arose in the appeal before the Tribunal for the assessment year 1964-65 was that the revenue authorities were wrong in not directing the carry forward of the loss sustained in relation to that year. It appears that the return for that year was filed on the 3rd October, 1964, showing a loss of Rs. 15,890. The Income-tax Officer completed the assessment and determined the loss at Rs. 8,387. He did not allow the carry forward of the loss, inter alia, holding : \n \"Assessee will not get benefit of carry forward of loss as notice under Section 139(2) was not served and return showing loss was not filed within the time allowed under Section 139(1) of the Income-tax Act, 1961.\" \n\n 2. The assessee on appeal before the Appellate Assistant Commissioner urged this as one of the grounds amongst other grounds and it was contended that the time for filing of the return could have been extended. The Appellate Assistant Commissioner observed that there was no automatic extension of time and it could only be done on the application made by the assessee and, referring to the provision of Section 139(3) of the Income-tax Act, 1961, the Appellate Assistant Commissioner held that the benefit of carry forward was available only to an assessee who had furnished the return within the time allowed under Section 139(1) and, therefore, he upheld the Income-tax Officer's finding on this aspect of the matter. There were other items in dispute in appeal before the Appellate Assistant Commissioner but the appeal was dismissed. \n\n 3. The assessee, thereafter, preferred an appeal to the Tribunal. It was urged before the Tribunal that the return had been signed on the 30th September, 1964, and sent by registered post on the 1st October, 1964, but it was delivered to the Income-tax Officer only on the 3rd October, 1964. In those circumstances, the time should have been extended, it was urged. It was further submitted that notice under Section 143(2) had been issued and, therefore, return should have been treated as a return filed under Section 139(1) and under Section 139(3) the provisions of the Act applied as if it was a return under Sub-section (1) and the loss should have been allowed to be carried forward. It was submitted that an oral request had been made before the Income-tax Officer and the Appellate Assistant Commissioner for extending the time. The Tribunal found that no written application had been filed for extension of time to file the return of loss. The Tribunal noticed that there was no reference to any request by the assessee for extension of time either in the assessment order or in the order of the Appellate Assistant Commissioner and in those circumstances did not accept the contention that such requests had been made. It was not disputed that no notice under Section 139(2) of the Income-tax Act, 1961, had been issued. The Tribunal held that the section was clear that if the assessee wanted the loss to be carried forward, the assessee must file the return within the time prescribed under Section 139(1). The return should have been filed within six months from 21st March, 1964. The Tribunal was accordingly of the opinion that the posting of the return on the 1st October, 1964, would not fulfil the requirements of Section 139(3) in this behalf. In this connection the Tribunal relied on and referred to the decision of the Mysore High Court in the case of B. B. Danganavar v. Income-tax Officer [1967] 65 ITR 370 (Mys), a decision upon which reliance was also placed before us at the hearing of the reference and with which we shall deal later on. According to the Tribunal in that decision it was held that there was no discretion vested in the Income-tax Officer to extend the time. The Tribunal, accordingly, affirmed the order of the Income-tax Officer on this aspect of the matter.\n\n 4. On an application having been made in the aforesaid circumstances the Tribunal under Section 256(1) of the Income-tax Act, 1961, has referred the following question to this court: \n \"Whether, on the facts and circumstances of the case, the loss determined in respect of the assessment for the assessment year 1964-65 should have been directed to be carried forward under Section 72(1) read with Section 80 of the Income-tax Act, 1961 ?\" \n\n 5. In view of the contentions urged before us we will have to refer to some of the relevant provisions of the Indian Income-tax Act, 1922, as well as the corresponding provisions and the relevant provisions of the Income-tax Act, 1961. Section 22 of the Indian Income-tax Act, 1922, which we shall hereinafter refer to as \"1922 Act\", provided for the return of the income. Sub-section (1) of that section provided for issue of a general notice by publication in the prescribed manner requiring every person whose total income during the previous year exceeded the maximum amount which was not chargeable to income-tax to furnish within such period, not being less than sixty days, as might be specified in the notice mentioned in Sub-section (1) of Section 22, a return in the prescribed form along with such other particulars as may be required by the notice of his total income and total world income during that period. Sub-section (1) of Section 22 of the 1922 Act contained a proviso to the following effect: \n \"Provided that the Income-tax Officer may in his discretion extend the date for the delivery of the return in the case of any person or class of persons.\" \n\n 6. Sub-section (2) of Section 22 of the 1922 Act dealt with what was loosely described as individual notice which provided that in case of any person whose total income was in the opinion of the Income-tax Officer of such an amount as to render that person liable to income-tax, the Income-tax Officer might serve a notice upon him requiring him to furnish within such period, not being less than thirty days, as may be specified in the notice, a return in the prescribed form of his total income during the previous year. In this sub-section there is also a similar proviso giving discretion to the Income-tax Officer to extend the date of the delivery of the return. Subsection (2A) which was introduced by Section 14 of the Indian Income-tax (Amendment) Act, 1953, with effect from 1st April, 1952, provided as follows: \n \"If any person who has not been served with a notice under Subsection (2) has sustained a loss of profits or gains in any year under the head 'Profits and gains of business, profession or vocation', and such loss or any part thereof would ordinarily have been carried forward under subsection (2) of Section 24, he shall, if he is to be entitled to the benefit of the carry forward of loss in any subsequent assessment, furnish within the time specified in the general notice given under Sub-section (1) or within such further time as the Income-tax Officer in any case may allow, all the particulars required under the prescribed form of return of total income and total world income in the same manner as he would have furnished a return under Sub-section (1) had his income exceeded the maximum amount not liable to income-tax in his case, and all the provisions of this Act shall apply as if it were a return under Sub-section (1).\" \n\n 7. Sub-section (3) of Section 22 merely provided that if any person had not furnished a return within the time allowed by Sub-section (1) or Subsection (2) or having furnished a return under either of those Sub-sections, discovered any omission or wrong statement therein, he might furnish a return or a revised return at any time before the assessment was made. Section 23 dealt with the assessment with which we need not detain ourselves. The return of income has been dealt with under Section 139 of the Income-tax Act, 1961, hereinafter referred to as the 1961 Act. In the 1961 Act the first significant change that was introduced was that there was no provision made for issue of a general notice in the press as was contemplated under Section 22(1) of the Indian Income-tax Act, 1922. Sub-section (2) of Section 139 of the 1961 Act provided for the issue of individual notice which was covered by Section 22(2) of the Indian Income-tax Act, 1922. Section 139(1) provided that every person if his total income in respect of which he was assessable under the Act during the previous year exceeded the maximum amount which was not chargeable to income-tax, should furnish a return of his income or the income of such other person during the previous year in the prescribed form setting out the particulars as might be prescribed. The time for filing of the return was altered. We need not detain ourselves with that alteration for the purpose of this case. Clauses (a) and (b) dealt with two different classes of assessees, namely, those whose income included income from profession or business--they were dealt with in Clause (a) and others were dealt with in Clause (b). But it may be necessary to set out the proviso to Sub-section (1) of Section 139. The proviso to Section 139(1) provided as follows: \n\n \"Provided that, on an application made in the prescribed manner, the Income-tax Officer may, in his discretion, extend the date for furnishing the return- \n\n (i) in the case of any person whose total income includes any income from business or profession the previous year in respect of which expired on or before the 31st day of December of the year immediately preceding the assessment year, and in the case of any person referred to in Clause (b), up to a period not extending beyond the 30th day of September of the assessment year without charging any interest; \n\n (ii) in the case of any person whose total income includes any income from business or profession the previous year in respect of which expired after the 31st day of December of the year immediately preceding the assessment year, up to the 31st day of December of the assessment year without charging any interest; and \n \n\n (iii) up to any period falling beyond the dates mentioned in Clauses (i) and (ii), in which case, interest at six per cent. per annum shall be payable from the 1st day of October or the 1st day of January, as the case may be, of the assessment year to the date of the furnishing of the return- \n\n (a) in the case of a registered firm or an unregistered firm which has been assessed under Clause (b) of Section 183, on the amount of tax which would have been payable if the firm had been assessed as an unregistered firm; and \n \n\n (b) in any other case, on the amount of tax payable on the total income, reduced by the advance tax, if any, paid or by any tax deducted at source, as the case may be.\" \n\n 8. A similar question with which we are concerned came up for consideration before the Supreme Court under the provisions of the Indian Income-tax Act, 1922, in the case of Commissioner of Income-tax v. Kulu Valley Transport Co. (P.) Ltd. . In that case what happened was that in January, 1956, the assessee had filed voluntarily returns disclosing loss for the assessment years 1953-54 and 1954-55 and the question that arose was whether the loss had to be determined and carried forward under Section 24(2) of the Indian Income-tax Act, 1922, though the returns were not filed within the time specified in the general notice under Section 22(1) and the time had not been extended by the Income-tax Officer. No notice had been served under Section 22(2) of the Act. The Supreme Court by a majority judgment held that the losses had to be determined and carried forward. It was held by the Supreme Court that Section 24(2) conferred the benefit of losses being set off and carried forward and there was no provision in Section 22 under which losses had to be determined for the purpose of Section 24(2). Section 22(2A) simply stated that in order to get the benefit of Section 24(2) the assessee should submit his loss return within the time specified by Section 22(1). The provision had to be read with Section 22(3) for the purpose of determining the time within which a return had to be submitted. It could well be said, the Supreme Court further said, that Section 22(3) was merely a proviso to Section 22(1). Thus, a return submitted at any time before assessment was made was a valid return. In considering whether the return made was within the time, Sub-section (1) of Section 22 must be read along with Subsection (3) of that section. A return whether it was a return of income, profits or gains or of loss must be considered as having been made within the time prescribed if it was made within the time specified in Section 22(3). In other words, if Section 22(3) was complied with Section 22(1) must be held to have been complied with. If compliance had been made with the latter provision the requirements of Section 22(2A) of the Indian Income-tax Act, 1922, would stand satisfied. The Supreme Court further observed that even if two views were possible, the view which was favourable to the assessee must be accepted while construing the provisions of a taxing statute. Shah J., as the learned judge then was, however, expressed a different opinion. In that decision the Supreme Court analysed the history of introduction of Sub-section (2A) of Section 22 of the Act, and noted the differences of opinion in the different High Courts which were set at naught by the decision of the Supreme Court in the case of Commissioner of Income-tax v. Ranchhoddas Karsondas . About the procedure for making the return which will be relevant for the present purpose in view of the alteration in the new Act it might be appropriate to refer to certain observations made by the Supreme Court at page 527 of the report. The Supreme Court observed as follows--See :\n\n \"It is well-settled by now that a return can always be filed at any time before the assessment is made. The Income-tax Officer has to make the assessment on that return and he could not choose to ignore it. The question that immediately arises is whether, in case of a voluntary return in which loss has been shown and determined, the Income-tax Officer can decline to give the benefit under Section 24(2) of carrying forward the loss on the ground that the assessee did not comply with the provisions of Section 22(2A) of the Act. In other words, when there is an express provision in that sub-section which must be availed of if the assessee is to be entitled to the benefit of carrying forward of loss in any subsequent assessment can he take advantage of the provisions of Section 22(3) and claim that since he has filed a voluntary return before any assessment has been made and, if it be determined that he has suffered a loss, he is entitled to carry forward that loss. \n\n The argument on behalf of the assessee is that Section 24(2) confers the right to carry forward the loss to the following year provided the conditions contained in the sub-section are satisfied. There is no further requirement that has to be fulfilled so far as the substantive law is concerned. Section 22(2A) is merely a procedural provision and it also provides that once a return has been furnished in accordance therewith all the provisions of the Act become applicable as if it were a return under Subsection (1). That would attract Section 22(3) and, therefore, a voluntary return can be filed even after the period mentioned in Sub-section (2A) has expired so long as the assessment has not taken place. It is pointed out that, supposing a return is filed showing income but the Income-tax Officer in the assessment proceedings holds that there has been a loss and the assessee was mistaken in showing a profit, the assessee in such circumstances can certainly claim the benefit of Section 24(2). If that is possible, there is no reason or justification for holding that, although he could claim the benefit of Section 24(2) by filing a voluntary return in the given illustration, he would be deprived of that benefit if he filed a return voluntarily showing a loss except in compliance with Section 22(2A). On the other hand, the contention on behalf of the revenue is that Section 22 before its amendment in the year 1953 did not make any provision for the filing of a loss return voluntarily. Under Section 22(1), returns which were invited were only of taxable income. No return which in the opinion of the person making it was a loss return was intended to be filed under Section 22(1). It was only under Section 22(2) that the return that was required to be filed was in pursuance of the individual notice given by the Income-tax Officer. Since by this notice a return in the prescribed form had to be filed by a person to whom the notice was issued whether it was profit or loss, a loss return could, therefore, be filed only in pursuance of a notice served under Section 22(2) but not voluntarily. It is by virtue of the provisions contained in Section 22(2A) that a loss return can be filed where a person has not been served under Sub-section (2) in order to get the benefit of the carrying forward of the loss under Section 24(2). This is indeed expressly provided by Sub-section (2A) of Section 22.\" \n\n 9. The Supreme Court thereafter referred to the amendment and observed that the amendment in 1953 seemed to have been made to clarify the law about the filing of a return showing a loss voluntarily. It was declared, according to the Supreme Court, that such a return could be validly made. The time which was specified for filing the return was on the same lines as in Sub-section (1) of Section 22 and all the provisions of the Act would have applied as if it was a return under Sub-section (1). The Supreme Court thereafter came to the conclusion that Section 24(2) conferred the benefit of the losses being set off and carried forward and there was no provision in Section 22 under which losses had to be determined for the purpose of Section 24(2). The question which normally arose was whether Section 22(2A) placed any limitation on that right. This sub-section, according to the Supreme Court, which had been reproduced before, simply stated that in order to get the benefit of Section 24(2) the assessee must submit his loss return within the time specified by Section 22(1). The proviso must be read with Section 22(3) for the purpose of determining the time within which the return had to be submitted. It could well be said that Section 22(3) was merely a proviso to Section 22(1). The Supreme Court further observed that a return whether it would be a return of income, profits or gains or of loss must be considered as having been made within the time specified if it was made within the time specified in Section 22(3). In other words according to the Supreme Court if Section 22(3) was complied with, Section 22(1) must also be held to be complied with. If compliance had been made with the latter provision, the requirements of Section 22(2A) would stand satisfied. The Supreme Court also noted that a voluntary return could not, however, be filed beyond the period specified in Section 34(3) of the Act. We have noticed the changes made by the Income-tax Act, 1961. The main significant change seems to be that the discretion that was given to the Income-tax Officer to extend the time for filing the return has been taken away. But the right of the assessee to file the return before the period of assessment and before the period mentioned in Sub-section (4) of Section 139, if it is made within the period stipulated in Sub-section (1) of Section 139, which is similar to the time mentioned in Sub-sections (1) and (2) of Section 22 of the 1922 Act, is not in any way affected. If that is the position the return can be filed within the time specified by Sub-section (4) of Section 139 and once that return is filed within that time, it would be deemed to be in accordance with law and then loss had to be determined under the relevant provisions of the 1961 Act which embodies principles similar to Section 24(2) of the old Act in this respect. If that is the position, in our opinion, the alteration in the new Act by which there has been curtailment of right of the Income-tax Officer to extend the time, does not materially affect the situation in this case. In this connection we may refer to the decision of the Mysore High Court in the case of B.B. Danganavar v. Income-tax Officer [1967] 65 ITR 370 (Mys). That, however, was a decision which was not under the new Act but the Mysore High Court was of the opinion that having regard to the alterations made in the new Act, if the return had not been filed under Section 139(1) the assessee lost the right to carry forward the loss in a particular year. The Mysore High Court did not have the advantage of the judgment of the Supreme Court mentioned before which the Supreme Court delivered subsequently even in respect of the previous enactment. In view of the aforesaid reasons and in view of the principles enunciated by the Supreme Court, which we are of the opinion are applicable in this case, we are unable, with respect, to accept the conclusion arrived at by the Mysore High Court on this aspect. In this case the return was filed. As a matter of fact, the assessment under Section 143 has been made. If that is the position, then the assessee is entitled to demand that the loss should be determined and carried forward as a matter of course.\n\n 10. In that view of the matter, the question referred to this court is answered in the affirmative and in favour of the assessee. \n\n 11. Each party will pay and bear their own costs. \n\n Pyne, J. \n\n 12. I agree." }, { "title": "Mohindra Mohan Sirkar vs Income-Tax Officer And Anr. on 2 June, 1977", "url": "https://indiankanoon.org//doc/317785/", "text": "Mohindra Mohan Sirkar vs Income-Tax Officer And Anr. on 2 June, 1977\nEquivalent citations: 81CWN876, [1978]112ITR47(CAL)\nAuthor: M.M. Dutt\nBench: M.M. Dutt\nJUDGMENT\n \n\n M.M. Dutt, J. \n \n\n 1. This appeal is directed against the judgment of the learned trial judge discharging the rule nisi obtained by the appellant on his petition under Article 226 of the Constitution. \n\n 2. The appellant carries on his business as a Government contractor, and he is an assessed under the Income-tax Act, 1961. He filed his return for the assessment years 1967-68, 1968-69 and 1969-70 within the period prescribed therefor. He was served with a notice under Section 143(2) of the Income-tax Act, 1961, on May 25, 1971, whereby he was called upon by the Income-tax Officer to appear and produce the relevant evidence in support of the returns filed by him. The date of hearing of the assessment proceedings was fixed on June 17, 1971, which was subsequently adjourned to September 22, 1971. On that date, the appellant was heard by the Income-tax Officer. He produced before the Income-tax Officer the payment certificate in original as given to him by the Government, the bank pass book and other relevant documents in connection with the heating of the assessment proceedings. No order of assessment was, however, passed and no notice of demand was sent to the appellant. On June 15, 1973, the appellant made an application for income-tax clearance certificate. On June 16, 1973, a certificate was given to the appellant by one P. K. Chatterjee, Income-tax Officer, Project Circle, North Bengal, Siliguri. In paragraph A(ii) of page 2 of the certificate it was inserted in ink by the said P. K. Chatter-jee that the returns of income filed by the appellant for the assessment years 1967-68 to 1969-70 were invalid. It is the case of the appellant that on coming to know of the said insertion he, by his letter dated August 22, 1973, addressed to the said Income-tax Officer, stated that all the returns in question were submitted by him in time, but he was not informed of the alleged invalidity of the returns filed by him. Further, it was stated by him in the said letter that he was not given any opportunity of being heard as to the alleged invalidity of the returns and requested the Income-tax Officer to issue to him a fresh income-tax clearance certificate without any such remark. \n\n 3. The appellant did not receive any reply to his said letter dated August 22, 1973, but on March 18, 1974, he was served with three notices under Section 148 of the Income-tax Act, 1961, all dated March 14, 1974, and issued by the said P. K. Chatterjee, wherein it was alleged that the said Income-tax Officer had reasons to believe that the income of the appellant chargeable to tax for the nssessment years 1967-68, 1968-69 and 1969-70 had escaped assessment within the meaning of Section 147 of the Act, and the appellant was called upon to file returns for the said assessment years within 30 days of the date of the receipt of the said notices. Immediately on receipt of the aforesaid notices, on March 29, 1974, the appellant wrote to the Income-tax Officer contending, inter alia, that, since the returns for the said assessment years were already submitted by him and the assessment proceedings were pending, the Income-tax Officer had no jurisdiction to issue notices under Section 148 of the Act. It was the case of the appellant that there, was absolutely no material before the Income-fax Officer on which he could form a reasonable belief that the appellant's income had escaped assessment for the said assessment years or that the alleged escapement of income was on account of any omission or failure on the part of the appellant to file his returns for the assessment years in question. By a writ petition, the appellant challenged the legality of the said notices under Section 148 of the Act. \n\n 4. The respondents filed an affidavit-in-opposition which was sworn by the Income-tax Officer, the respondent No. 1. The respondents admitted the filing of the returns by the appellant for the said assessment years. It was, however, alleged that on scrutiny of the returns, the Income-tax Officer found that the particulars of profits and gains from business were not submitted by the appellant along with the returns, although in the note appended to the annexure to each return it was clearly mentioned that such particulars must accompany the return. It was contended that a return which was not properly verified was not valid and if the requisite particulars, balance-sheet, etc., were not appended to the return, the same would also be invalid in law. \n\n5. The learned judge held that the returns filed by the appellant did not\nshow the prescribed particulars and, therefore, the revenue was entitled to\nignore the returns and proceed to issue notices under Section 148 of the\nIncome-tax Act, 1961. Upon the said findings, the learned judge discharged\nthe rule. Hence, this appeal. \n\n6. Before proceeding to consider the respective contentions of the parties on the merits of the case, we may first of all dispose of a preliminary objection taken by Mr. Nanda Lal Pal, learned advocate appearing on behalf of the respondents. It was contended by him that by virtue of the provisions of Section 58(2) of the Constitution (Forty-Second Amendment) Act, 1976, the petition under Article 226 of the Constitution on which the rule nisi was issued had abated. lu order to consider this contention we may refer to Clause (1) and Clause (3) of Article 226 as substituted by Section 38 of the Constitution (Forty-Second Amendment) Act, 1976. The said provisions are as follows : \n\n \"226. Power of High Courts to issue certain writs.--(1) Notwithstanding anything in Article 32 but subject to the provisions of Article 131A and Article 226A, every High Court shall have power, throughout the territories in relation to which it exercises jurisdiction, to issue to any person or authority, including in appropriate cases, any Government, within those territories directions, orders or writs, including writs in the nature of habeas corpus, mandamus, prohibition, quo warranto and certiorari, or any of them,-- \n\n (a) for the enforcement of any of the rights conferred by the provisions of Part III; or \n \n\n (b) for the redress of any injury of a substantial nature by reason of the contravention of any other provision of this Constitution or any provision of;any enactment or Ordinance or any order, rule, regulation, bye-law or other instrument made thereunder ; or \n \n\n (c) for the redress of any injury by reason of any illegality in any proceedings by or before any authority under any provision referred to in Sub-clause (b) where such illegality has resulted in substantial failure of justice..... \n\n (3) No petition for the redress of any injury referred to in Sub-clause (b) or Sub-clause (c) of Clause (1) shall be entertained if any other remedy for \n\nsuch redress is provided for by or under any other law for the time being\nin force.\" \n\n7. Section 58(2) provides as follows : \n\n \"(2) In particular, and without prejudice to the generality of the provisions of Sub-section (1), every pending petition before a High Court which would not have been admitted by the High Court under the provisions of Article 226 as substituted by Section 38 if such petition had been made after the appointed day, shall abate and any interim order (whether by way of injunction or stay or in any other manner) made on, or in any proceedings relating to such petition shall stand vacated : \n\n Provided that nothing contained in this Sub-section shall affect the right of the petitioner to seek relief under any other law for the time being in force in respect of the matters to which such petition relates and in computing the period of limitation, if any, for seeking such relief, the period during which the proceedings relating to such petition were pending in the High Court shall be excluded.\" \n\n8. Under Clause (3) of Article 226 no petition shall be entertained if any other remedy for such redress is provided for by or under any other law for the time being in force. In the instant case, the appellant has challenged the jurisdiction of the Income-tax Officer to reopen the assessment by the service of notices under Section 148 of the Income-tax Act, 1961. The said Act does not contain any provision providing for any remedy for the redress of which the appellant sought by the petition under Article 226. It was, however, argued on behalf of the respondents that although the said Act did not contain any such provision still, if the assessment had been reopened and an order making the assessment passed, the appellant could have preferred an appeal against the order of assessment, and in such appeal he could also challenge the jurisdiction of the Income-tax Officer to issue the impugned notices under Section 148. It was contended that the appellant was not without any remedy for such redress and, accordingly, by virtue of the provisions of Sub-section (2) of Section 58 of the Constitution (Forty-Second Amendment) Act, 1976, the writ petition stood abated. We are unable to accept this contention. The redress which was sought for by the appellant by filing the writ petition in this court was against an injury;that he might suffer by the reopening of the assessments. In other words, he challenged the jurisdiction of the Income-tax Officer to issue the impugned notices under Section 148. The remedy referred to in Clause (3) of Article 226 contemplates an immediate remedy for the redress of the injury complained of and not a remote or a farfetched remedy. The appellant has prayed for restraining the respondents from reopening the assess-ments on the ground that the Income-tax Officer has no jurisdiction to reopen the assessments. The injury complained of is the reopening of the\n\nassessments and not the assessment orders that will be passed after the assessments are reopened. The remedy for appeal as provided for in Section 246 of the Income-tax Act, 1961, is against the injury that might be caused to the appellant by the assessment orders. There is, however, no provision in the Income-tax Act, 1961, providing for any remedy for the redress of the injury that might be caused to the appellant if the assessments are allowed to be reopened. Even under the unamended Article 226, the provision for appeal against an order of assessment was not considered as an alternative remedy which would bar a writ petition challenging the jurisdiction of the Income-tax Officer to issue a notice under Section 148. We do not, therefore, think that Clause (3) of Article 226 is attracted. \n\n9. It was, however, contended on behalf of the respondents that, in spite of the absence of any provision in the Income-tax Act, 1961, the appellant could still get redress against the injury complained of by instituting a suit in a civil court. There can be no doubt that a suit may be instituted by the appellant challenging the jurisdiction of the Income-tax Officer to issue the impugned notices under Section 148 ; but, in our view, when the challenge is against the action of the Income-tax Officer purporting to act under the provisions of the Income-tax Act, 1961, Clause (3) of Article 226 will be applicable only if the said Act provides for remedy against the illegal act of the Income-tax Officer. The remedy for the redress sought for by the appellant not having been provided for by or under the Income-tax Act, 1961, it would be unreasonable to drive the appellant to a separate suit which is not, in the facts and circumstances of the case, contemplated by Clause (3). It is no doubt true that in certain cases, particularly those involving disputed questions of fact or disputed questions of title, the High Court would not entertain a petition under Article 226. In such cases, the remedy of the aggrieved parties would be by suits. There is hardly any matter or any dispute which cannot be decided or any relief which cannot be granted in a suit of a civil nature, and if, in all cases, the suit is considered to be a remedy for redress against the injury as mentioned in Clauses (b) and (c) of Article 226(1), we are afraid, no petition under Article 226 would be maintainable for the redress of any injury under Clauses (b) and (c). In our opinion, by amending Article 226 the legislature never intended to take, away in an indirect way the jurisdiction of the High Court to issue writs. The maintainability of a petition under Article 226, in our view, depends on the facts and circumstances of each particular case. But when any act or omission of a statutory authority is challenged, and the statute concerned does not provide for any remedy against such act or omission, the writ petition would be maintainable. In the instant case, we do not think that the appellant had or has any remedy for the redress of the injury by or under any other law for the time being in force. In these\n\ncircumstances, in our view, the petition under Article 226 had not abated as contended on behalf of the respondents. \n\n10. We may now consider the case on merits. It was contended by Mr. Sanjoy Kumar Bhattacharyya, learned advocate appearing on behalf of the appellant, that the returns were not invalid as alleged by the respondents and as found by the learned judge, and that when the appellant had filed returns, the Income-tax Officer had no jurisdiction to ignore the same and to proceed to issue notices under Section 148 of the Act without completing the assessments. On the other hand, it was urged by Mr. Pal that as the returns did not include the prescribed particulars, the same were invalid and could not be regarded as returns of income, and so the Income-tax Officer had jurisdiction to issue notices under Section 148. \n\n 11. There can be no doubt that when there is no question as to the validity of a return filed by an assessee, the Income-tax Officer has to complete the assessment in accordance with Section 143 of the Act and before such completion he would not have any jurisdiction to ignore the return and to issue a notice under Section 148. But the question is whether the Income-tax Officer has such jurisdiction when the return is not strictly in accordance with the provisions of the Act. Under section 147(a) of the Act one of the grounds which enables the Income-tax Officer to assess or reassess the income of an assessee by issuing a notice under Section 148 is that the Income-tax Officer has reason to believe that, by reason of the omission or failure on the part of assessee to make a return under Section 139 of the Act for any assessment year, income chargeable to tax has escaped assessment for that year. Section 139 provides, inter alia, that the assessee shall furnish a return of his income during the previous year in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed. Section 143 of the Act, as it stood before its amendment in 1970, runs as follows : \n\n \"143. (1) Where a return has been made under Section 139 and the Income-tax Officer is satisfied without requiring the presence of the assessee or the production by him of any evidence that the return is correct and complete, he shall assess the total income or loss of the assessee, and shall determine the sum payable by him or refundable to him on the basis of such return. \n\n (2) Where a return has been made under Section 139 but the Income-tax Officer is not satisfied without requiring the presence of the assessee or the production of evidence that the return is correct and complete, he shall serve on the assessee a notice requiring him, on a date to be therein specified, either to attend at the Income-tax Officer's office or to produce, or to cause to be there produced, any evidence on which the assessee may rely in support of the return. \n\n (3) On the day specified in the notice issued under Sub-section (2), or as soon afterwards as may be, the Income-tax Officer, after hearing such evidence as the assessee may produce and such other evidence as the Income-tax Officer may require on specified points, and after taking into account all relevant material which the Income-tax Officer has gathered, shall, by an order in writing, assess the total income or loss of the assessee, and determine the sum payable by him or refundable to him on the basis of such assessment.\" \n\n12. The expression \"that the return is correct and complete\" is significant. It obviously refers to Section 139 of the Act, for a return is not correct and complete if it does not conform to the provisions of that section. In other words, if a return is not verified in the prescribed manner and does not contain the prescribed particulars, it is not correct and complete. Section 143 lays down the procedure to be followed by the Income-tax\" Officer when a return filed by an assessee is not correct and complete or when it is so, as the case may be. There is a distinction between the case of non-filing of a return and the case of filing an incorrect and incomplete return. The former contemplates when no return has been actually filed by the assessee, while the latter contemplates the presence of a return which is not correct and complete. An incomplete return, that is, a return which does not comply with the provisions of Section 139, may be said to be an invalid return. But the Act does not contain any provision for the rejection of an invalid return ; on the contrary, under Section 143(3) a duty is cast on the Income-tax Officer to assess the total income or loss of the assessee after serving on him a notice under Section 143(2) and after hearing such evidence as the assessee may produce or the Income-tax Officer may gather. We should not, however, be understood to lay down this proposition that whenever a return is filed the Income-tax Officer must proceed in accordance with Section 143, no matter whether or not the return conforms to the provision of Section 139. For instance, there may be cases where the returns are incomplete to such an extent that they cannot be regarded as returns in the eye of law, namely, where the return is not signed by the assessee or where a blank return signed by him is filed. In either case, though the return is filed, it will not be treated as a return under the law, and the Income-tax Officer may proceed to issue a notice under Section 148 on the footing that the assessee has not filed any return. \n\n 13. In the instant case, however, the appellant filed returns, but they did not include certain particulars regarding the profits and gains of his business. After having looked into the returns, we find that the same were signed and verified by the assessee. We are unable to subscribe to the view of the learned judge that because the returns did not state the particulars of the profits and gains of the business of the assessee they were\n\ninvalid and should be regarded as non-existent. If it is laid down that an incorrect and incomplete return is not a return in the eye of law and should be ignored or disregarded, then Section 143 would become nugatory. If that was the intention of the legislature, there would not have been any necessity for it to provide for the procedure which the Income-tax Officer is to follow when a return is not correct and complete. \n\n14. In the case of Commissioner of Income-tax v. S. Raman Chettiar , a return was filed pursuant to a notice under Section 34 of the Indian Income-tax Act, 1922. The said notice was invalid as the sanction of the Commissioner of Income-tax was not obtained. The income shown by the assessee in the return was below the taxable limit and consequently the assessment proceeding was dropped as infructuous. Subsequently, another notice was issued under Section 34 of the said Act and the Income-tax Officer made the assessment assessing the assessee to tax. It was held by the Supreme Court that although the first notice under Section 34 was invalid, the return submitted by the assessee pursuant to that notice was a return within the meaning of Section 22(3) of the said Act, and the Income-tax Officer could not ignore or disregard that return and issue another notice under Section 34 on the assumption that there had been an omission or failure on the part of the assessee to make a return of his income under Section 22 of the said Act. In the case before the Supreme Court, the notice under Section 34 was an invalid notice pursuant to which the return was filed by the assessee. Even then it was held by the Supreme Court that the Income-tax Officer could not ignore the return and issue a fresh notice under Section 34.\n\n15. In Hargovindsing Narainsing v. Commissioner of Income-tax [1973] 90 ITR 435 (Bom), the Income-tax Officer issued a notice under Section 22(2) of the Indian Income-tax Act, 1922, in the name of the Hindu undivided family on the court receiver for the assessment year 1956-57. In response to the notice, the court receiver filed returns. The Income-tax Officer did not pass any order on the ground that the notice served on the court receiver and the returns submitted by him were invalid. But he proceeded to initiate proceedings under Section 34 of the said Act. It was held by the Bombay High Court that even if it were assumed that the returns were invalid that would not authorise the Income-tax Officer to initiate proceedings under Section 34. Further, it was observed that it could not be regarded as a case where no return had been filed by the assessee or that his income had escaped assessment.\n\n 16. Mr. Pal, however, strongly relied on a decision of the Lahore High Court in Lal Mohammed Sardar Mohammad v. Commissioner of Income-tax [1934] 2 ITR 358. In that case, it was held that the return was invalid and the Income-tax Officer was justified in making an assessment under\n\nSection 23(4) of the said Act, namely, the best judgment assessment. We are unable to agree with the view expressed by the Lahore High Court in Lal Mohammed Sardar's case [1934] 2 ITR 358. It does not appear that the Lahore High Court considered the provisions of Sub-sections (1), (2) and (3) of Section 23 of the Indian Income-tax Act, 1922, which were somewhat similar to Section 143 of the Income-tax Act, 1961. Moreover, the facts of that case are different from those cf the present case before us. The respondents also relied on a decision of the Allahabad High Court in Behari Lal Chatterji v. Commissioner of Income-tax [1934] 2 ITR 377. In our opinion, the law that has been laid down by the Allahabad High Court does not at all militate against the view taken by us, but it supports the same. It has been held in that case that when a return was not signed and verified there was no valid return at all and the Income-tax Officer would be justified in making an assessment to the best judgment under Sec- tion 23(4) of the Indian Income-tax Act, 1922.\n\n17. It thus appears to be well settled that when a return has been filed by an assessee, it cannot be ignored by the Income-tax Officer and he will have no jurisdiction to issue a notice under Section 148 without completing the assessment on the return filed by the assessee. Even though a return is invalid in the sense that it is not correct and complete within the meaning of Section 139 of the Income-tax Act 1961, the Income-tax Officer cannot ignore or disregard the same for the purpose of issuing a notice under Section 148 of the Act, unless the return can be regarded as not a return in the eye of law as in the case of the two illustrations given above, In the instant case, the Income-tax Officer acted on the returns filed by the appellant, issued notices under Section 143(2) and heard the appellant for the assessment years in question under Section 143(3), but without completing the assessments he took recourse to reopen the assessments under Section 147 by issuing the impugned notices under Section 148 of the Act. In our view, the Income-tax Officer has acted without jurisdiction in issuing the impugned notices. \n\n18. For the reasons aforesaid, we set aside the judgment of the learned judge and make the rule absolute. We direct that a writ in the nature of certiorari issue quashing the impugned notices under Section 148 of the Income-tax Act, 1961. Further, we direct that a writ in the nature of mandamus issue commanding the respondents not to give any effect or further effect to the said notices or to any proceedings started thereon or any orders made pursuant to the same. \n\n19. The appeal is allowed, but in view of the facts and circumstances of the case, there will be no order for costs. \n\n Sharma, J. \n\n 20. I agree." }, { "title": "Commissioner Of Income-Tax vs Hindustan Gum And Chemicals Ltd. on 1 August, 1989", "url": "https://indiankanoon.org//doc/1426434/", "text": "Commissioner Of Income-Tax vs Hindustan Gum And Chemicals Ltd. on 1 August, 1989\nEquivalent citations: [1990]182ITR396(CAL)\nJUDGMENT\n \n\n Ajit K. Sengupta, J. \n \n\n1. In this reference under Section 256(1) of the Income-tax Act, 1961, for the assessment year 1972-73, the following questions of law have been referred to this court: \n\n \"(1) Whether, on the facts and in the circumstances of the case and on a correct interpretation of Rule 1 (viii) of the First Schedule to the Companies (Profits) Surtax Act, 1964, in computing the chargeable profits under the said Act and the rules made thereunder, the assessee-company deriving income by way of dividend from another Indian company is entitled to the exclusion of the gross dividend amount received unaffected by the provisions of Section 80M of the Income-tax Act, 1961? \n\n 2. Whether, on the facts and in the circumstances of the case, rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, is applicable for proportionately reducing the capital apportionable to dividend deduction under Section 80M of the Income-tax Act, 1961?\" \n\n2. The second question is concluded by the decision of this court in Income-tax Reference No. 131 of 1978 (CIT v. Britannia Industries Co. Ltd. [1990] 182 ITR 113) where judgment was delivered on April 10, 1989, holding that rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, cannot be invoked for proportionately reducing the capital apportionable to deduction made under Chapter VI-A of the Income-tax Act, 1961. Following the said decision, we answer the second question in the negative and in favour of the assessee.\n\n3. The facts so far as relevant to the controversy raised in the first question are that the assessee earned dividend income totalling Rs. 27,500 which was credited to the profit and loss account. A deduction of Rs. 16,500 out of the said dividend income was allowed under Section 80M of the Act in the income-tax assessment of the assessee. The Income-tax Officer, while computing the chargeable profit in the surtax assessment of the assessee, has taken the said net dividend of Rs. 11,000 only as deductible from the chargeable profit against the stand of the assessee that the gross and not the net dividend should be so deducted. \n\n4. Aggrieved by the said order of the Income-tax Officer, the assessee brought the matter by way of appeal before the Commissioner of Income-tax (Appeals) XII, Calcutta, who, following certain decisions, directed the Income-tax Officer to allow the said sum of Rs. 27,500 as a deduction under Rule 1(viii) of the First Schedule to the Act for computing the chargeable profit. \n\n5. In the appeal before the Tribunal, the arguments of the departmental representative and the representative for the assessee proceeded on the same lines as were canvassed before the Tribunal in S.T.A. No. 6/Cal of 1974-75. In addition, the departmental representative, basing his arguments on the decision of the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. [1978] 113 ITR 84, urged that what had been excluded in computing the total income of the assessee under the Income-tax Act could not be included for determining the chargeable profit as had been held by the Appellate Assistant Commissioner. This stand of the Revenue was controverted by the assessee. The Tribunal, however, upheld the order of the Commissioner of Income-tax (Appeals). \n\n6. The controversy relates to the interpretation of Rule 1(viii) of the First Schedule to the Companies (Profits) Surtax Act, 1964. The First Schedule contains the rules for computing the chargeable profits of a previous year. It, inter alia, provides as follows : \n\n \"In computing the chargeable profits of a previous year, the total income computed for that year under the Income-tax Act shall be adjusted as follows : \n\n (1) Income, profits and gains and other sums falling within the following clauses shall be excluded from such total income, namely: \n\n (viii) income by way of dividends from an Indian company or a company which has made the prescribed arrangements for the declaration\nand payment of dividends within India....\" \n\n7. Thus, Rule 1(viii) provides that income by way of dividends from an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends within India shall be excluded from the income, profits and gains. \n\n8. The question for consideration is the true scope and meaning of the words \"income by way of dividends\". In other words, the question is whether, in computing the income by way of dividend, the dividend income falling under Section 80M of the Income-tax Act, 1961, in respect of which deduction is allowed under Chapter VI-A should be deducted from such dividend income. Dr. Pal argued that the decision of the Supreme Court in Distributors (Baroda) P. Ltd. v. Union of India [1985] 155 ITR 120, has no application to the facts of this case. According to Dr. Pal, the income by way of dividend, whether it means gross or net dividend, must be the whole of the dividend without any deduction in respect .of the dividend which is exempt under Section 80M of the Act.\n\n9. The Explanation to Rule 1(viii) of the First Schedule of the Companies (Profits) Surtax Act relied on by the Revenue was introduced by the Finance Act of 1981, which is as follows : \n \"Explanation.--Notwithstanding anything contained in any clause of this rule, the amount of any income or profits and gains which is required to be excluded from the total income under that clause shall be only the amount of such income or profits and gains as computed in accordance with the provisions of the Income-tax Act (except Chapter VI-A thereof) and in a case where any deduction is required to be allowed in respect of any such income or profits and gains under the said Chapter VI-A, the amount of such income or profits and gains computed as aforesaid as reduced by the amount of such deduction.\" \n\n10. The said Explanation has come into effect on and from April 1, 1981. \n\n11. The said Explanation provides that, where any income or profits or gains are required to be excluded from the total income under any clause of Rule 1, the amount of such income or profits or gains as computed in accordance with the provisions of the Income-tax Act and in a case where any deduction is required to be allowed under Chapter VI-A in respect of such income or profits or gains, the amount of such income or profits and gains computed as aforesaid as reduced by the amount of such deduction, shall alone be deemed to be the amount of income or profit or gain required to be excluded from such total income. \n\n12. Dr. Pal has drawn our attention to Section 80AA of the Income-tax Act inserted by the Finance (No. 2) Act of 1980 with effect from April 1, 1968. The said section lays down that where any deduction is required to be allowed under Section 80M in respect of any income by way of dividends from a domestic company which is included in the gross total income of the assessee, then the deduction under that section shall be computed with reference to the income by way of such dividends as computed in accordance with the provisions of the Income-tax Act, before making any deduction under Chapter VI-A and not with reference to the gross amount of such dividends. It is urged that significantly the Finance Act of 1981 which introduced the Explanation to Rule 1 of the First Schedule to the Companies (Profits) Surtax Act, unlike Section 80AA of the Income-tax Act, 1961, has not been, given retrospective effect. The said Explanation comes into force only with effect from April 1, 1981. \n\n13. It is also contended that in the Explanation, for the first time, it has been introduced that in a case where any deduction is required to be allowed in respect of any such income or profit and gain under Chapter VI-A, the amount of such income or profit or gain computed as aforesaid is to be reduced by the amount of such income. Therefore, the said portion of the Explanation does not appear in Section 80AA of the Income-tax Act. The said portion of the Explanation can be given effect only from April 1, 1981, and not for any earlier period. The decision in Distributors (Baroda) P. Ltd., did not at all consider the question whether the deduction in respect of intercorporate dividend which is allowed under Section 80A appearing in Chapter VI-A should also be deducted from the dividend income. The said decision decides only the question that the expression appearing in Section 80M, viz., \"where the gross total income of an assessee . . . includes any income by way of dividends from a domestic company\" describes the condition which must be fulfilled in order to attract the applicability of the provision contained in Section 80M of the Income-tax Act. The condition is that the gross total income of the assessee must include income by way of dividends from a domestic company. Therefore, the expression \"such income by way of dividends\" must be referable not only to the category of income included in the gross total income but also to the quantum of the income so included. In other words, the dividend income as computed in accordance with the provisions of the Income-tax Act has to be taken into account and not the gross dividend. No question was raised in that case as to whether the dividend income should also be reduced by the deduction which is allowable under Section 80M of the Income-tax Act in respect of intercorporate dividend. In fact, the said question could not be raised and was not decided in the aforesaid decision because that case was concerned only with the interpretation of Section 80M of the Income-tax Act itself. \n\n14. It is, therefore, submitted that the decision in Distributors (Baroda)\nP. Ltd. does not cover the present question and\nis no authority for the point which is to be decided in the present reference. \n\n15. It has been contended that this question is concluded by the decision of this court in CIT v. Jiyajeerao Cotton Mills Ltd. [1985] 154 ITR 323. There, the following question was referred to this court (at page 324) :\n \"Whether, on the facts and in the circumstances of the case and on a correct interpretation of Rule 1(viii) of the First Schedule to the Companies (Profits) Surtax Act, 1964, in computing the chargeable profits under the said Act and the rules made thereunder, the assessee-company deriving income by way of dividends from another Indian company is entitled by the exclusion of the gross dividend amount received, unaffected by the provisions of sections 57, 80K, 80L and 80M of the Income-tax Act, 1961?\" \n\n16. There the Division Bench held as follows (at page 327) : \n\n \"It appears to us that the real controversy centres round the word such income by way of dividends'. If the words 'such income by way of dividends are referable to the quantum of income included in the total income, then the contention of the Revenue has to be accepted inasmuch as what is included in the total income should be excluded in view of Rule 1(viii) of the 1964 Act. However, the interpretation as contended by the Revenue cannot be accepted in view of the judgment of the Supreme Court in the case of Cloth Traders (P.) Ltd. [1979] 118 ITR 243. The Supreme Court held that the words 'income by way of dividends' refer only to the category of the income included in the total income, and not to the quantum of the income so included. It, therefore, follows that if the total income includes a particular category of income, e.g., income by way of dividends from an Indian company, whatever might be the quantum of such income included in the income-tax assessment, the company would be entitled to exclusion of the entire dividend income, that is to say, the gross dividend received from an Indian company. It is true that the Supreme Court in Cloth Traders (P.) Ltd.'s case [1979] 118 ITR 243 was considering the case of deduction under Section 80M of the Income-tax Act, 1961, but the principles laid down in that case will apply in construing the provisions of Rule 1 (viii) of the First Schedule.\n\n We may add that in Cloth Traders (P.) Ltd.'s case [1979] 118 ITR 243, the Supreme Court held that, in computing the taxable income for purposes of the Income-tax Act, the deduction in respect of intercorporate dividends should be allowed on the gross amount of such dividends received by the company and not with reference to the net amount With a view to grant such deduction with reference to the net income by way of dividends only, the Finance (No. 2) Act, 1980, inserted a new Section 80AA to the Income-tax Act, 1961, with retrospective effect from 1st April, 1968. Since in several cases, the High Courts, following the said decision of the Supreme Court, held that even for purposes of determining the chargeable profits under the Companies (Profits) Surtax Act, the gross amount of dividend should be excluded from the total income, Rule 1 has since been amended by the Finance Act, 1981, adding an Explanation at the end of Rule 1. This Explanation provides that in computing the chargeable profits, the amount of income or profits and gains referred to in Rule 1, which stands included in the total income, will alone be deducted from the chargeable profits. The amendment takes effect from April 1, 1981, and will apply in relation to the assessment year 1981-82 and the subsequent years. The Explanation added by the Finance Act, 1981, cannot be construed as clarifying the legislative intent. It declares the legislative intent to exempt from surtax the amount of dividends which has actually been included in the total income from the assessment year 1981-82.\"\n\n17. The Revenue has contended to the contrary. Heavy reliance has been placed on Distributors (Baroda) P. Ltd. . \n\n18. We have given our anxious consideration to the rival contentions. \n\n19. The concept of net dividend in the Explanation added to Rule 1 of the First Schedule has two distinct aspects. The first aspect is that the net dividend is the dividend computed in accordance with the provisions of the Income-tax Act (except Chapter VI-A). Such computation is made allowing expenditure, if any, incurred in earning such dividend income. This is relevant for the purpose of the income-tax assessment. Dr. Pal does not dispute that in view of the decision in Distributors (Baroda) P. Ltd. , the full amount of dividend received by the assessee would not be included in the gross total income, but what would be included would only be the amount of dividend as computed in accordance with the provisions of the Act. In other words, the net dividend, after allowing any expenditure for earning such dividend income, shall be included. The deduction required to be allowed under Section 80M is liable to be calculated with reference to the amount of dividend computed in accordance with the provisions of the Act and forming part of the gross total income and not with reference to the full amount of dividend received by the assessee. \n\n20. The second aspect is that the net dividend will mean the net dividend computed under the provisions of the Act but as reduced by the amount of deduction under Chapter VI-A. We are concerned with the second type of net dividend. The question is whether the deduction which is allowed under Section 80M should be excluded for the purpose of adjustment of the total income determined under the Income-tax Act, 1961. In other words, the question is whether the dividend income as computed under the Income-tax Act and before allowing any deduction under Chapter VI-A (Section 80M in this case) should be excluded. \n\n21. As indicated earlier, Dr. Pal has made his submission only on this aspect that the dividend income as computed after allowing the expenditure in connection therewith should be excluded from the order of assessment under the Income-tax Act for the purpose of determining the chargeable profit. In other words, his contention is that the relief which is granted under Section 80M at the prescribed percentage shall be ignored and only the dividend before the deduction under Chapter VI-A but as computed under the other provisions of the Act shall be taken into account. \n\n22. It has been contended that although the decision in Cloth Traders (P.) Ltd. has been overturned by the Supreme Court in its subsequent decision in Distributors (Baroda) P. Ltd. [1985] 155 ITR 120, in view of the decision of this court in Jiyajeerao Cotton Mills Ltd. [1985] 154 ITR 323, the Explanation added to Rule 1 by the Finance Act, 1981, cannot be construed as clarifying the legislative intent. On the other hand, the contention of the Revenue is that the Division Bench proceeded to decide the case in Jiyajeerao Cotton Mills Ltd. on the basis of the decision in Cloth Traders (P.) Ltd. , and in that context, the court also considered the Explanation added by the Finance Act, 1981. The Supreme Court in Distributors (Baroda) P. Ld. [1985] 155 ITR 120 held (at page 141) : \n\n \"The decision in Cloth Traders' case is inconsistent with that in Cambay Electric Supply Co.'s case. Both cannot stand together. If one is correct, the other must logically be wrong and vice versa. It is, therefore, necessary to resolve the conflict between these two decisions and harmonise the law and that necessitates an inquiry into the correctness of the decision in Cloth Traders' case. It is for this reason that we have reconsidered and reviewed the decision in Cloth Traders' case and on such reconsideration and review, we have come to the conclusion that the decision in Cloth Traders' case is erroneous and must be overturned. \n\n It is obvious that, on this view, it becomes unnecessary to consider the question of constitutional validity of the retrospective operation of Section 80AA. Section 80AA in its retrospective operation is merely declaratory of the law as it always was since April 1, 1968, and no complaint can validly be made against it.\" \n\n23. It will be evident from the decision of the Supreme Court in Distributors (Baroda) Pvt. Ltd. [1985] 155 ITR 120 that the Supreme Court considered the scope and effect of Section 80M not with reference to the amendment which was effected with retrospective effect from April 1, 1968, but on the true interpretation of Section 80M itself. The Supreme Court also held that the amendment which was effected was only clarificatory in nature. In our judgment, in view of the decision of the Supreme Court in Distributors (Baroda) Pvt. Ltd. [1985] 155 ITR 120, the decision of this court in Jiyajeerao Cotton Mills Ltd. [1985] 154 ITR 323 must be held to be no longer good law. The law declared by the Supreme Court must be deemed to be the law and accordingly Distributors (Baroda) Pvt. Ltd. shall have overriding effect on all the decisions rendered following the now overturned decision in Cloth Traders Pvt. Ltd. . \n\n24. Firstly, in that case, this court proceeded to construe the provisions of the Explanation in the light of the decision of the Supreme Court in Cloth Traders Pvt. Ltd, [1979] 118 ITR 243. The said decision had been overturned. Accordingly, the reasoning and conclusion based on the said decision in Cloth Traders Pvt. Ltd. must be held to be not correct. Secondly, the Supreme Court, in Distributors (Baroda) Pvt. Ltd. [1985] 155 ITR 120, affirmed the decision in Cambay Electric Supply Co.'s case [1978] 113 ITR 84, a decision rendered in 1978 which would hold the field. It is no doubt true that the amendment to the Surtax Act has been incorporated with effect from April 1, 1981, but, as held by the Supreme Court, if such amendment is only declaratory in nature, the declaration of the law as it always was, in that event, cannot be said to be statement of law on the date of insertion of the Explanation. In any event, the Division Bench in Jiyajeerao Cotton Mills Ltd. did not have any occasion to consider the second aspect of net dividend so far as is material for the surtax assessment. It proceeded on the footing that if gross dividend was included for the purpose of income-tax assessment, then for the purpose of adjustment under Rule 1, such gross dividend has to be excluded in arriving at the chargeable profit. Therefore, Jiyajeerao Cotton Mills Ltd. does not advance the case of the assessee.\n\n25. The contention of the assessee cannot be accepted for more than one\nreason. The starting point of the assessment under the Surtax Act is the order of assessment under the Income-tax Act. The Income-tax Officer has to take the assessment order and has to find out the total income as computed under the provisions of the Income-tax Act. In computing the total income, reliefs are granted to the assessee. One of such reliefs is by way of deduction from the net dividend under Section 80M. In the assessment, therefore, dividend income is first computed in accordance with the provisions of the Income-tax Act and where any expenditure is incurred for earning the dividend, such expenditure is deducted from the gross dividend and the net dividend is included in the assessment. \n\n26. Thereafter, deduction under Section 80M is allowed. It is the net dividend after computation of the dividend income under the provisions of the Act and after allowing deduction under Section 80M which is included in the total income. This will be clear from the following observations of the Supreme Court in Distributors (Baroda) P. Ltd. at page 137 of 155 ITR : \n \"There is also one other strong indication in the language of Sub-section (1) of Section 80M which clearly compels us to take the view that the deduction envisaged by that provision is required to be made with reference to the income by way of dividends computed in accordance with the provisions of the Act and not with reference to the full amount of dividend received by the assessee. This indication was also unfortunately lost sight of by the court in Cloth Traders Pvt. Ltd. , presumably because it was not brought to the attention of the court. The court observed in Cloth Traders' case [1979] 118 ITR 243, that the whole of the income by way of dividends from a domestic company or 60% of such income, as the case may be, would be deductible from the gross total income for arriving at the total income of the assessee. We are afraid this observation appears to have been made under some misapprehension, because what Sub-section (1) of Section 80M requires is that the deduction of the whole or a specified percentage must be made from 'such income by way of dividends' and not from the gross total income. Sub-section (1) of Section 80M provides that in computing the total income of the assessee, there shall be allowed a deduction from 'such income by way of dividends' of an amount equal to the whole or a specified percentage of such income. Now, when, in computing the total income of the assessee, a deduction has to be made from 'such income by way of dividends', it is elementary that 'such income by way of dividends' from which deduction has to be made must be part of the gross total income. It is difficult to see how the language of this part of Sub-section (1) of Section 80M can possibly fit in if 'such income by way of dividends' were interpreted to mean the full amount of dividend received by the assessee. The full amount of dividend received by the assessee would not be included in the gross total income; what would be included would only be the amount of dividend as computed in accordance with the provisions of the Act. If that be so, it is difficult to appreciate how for the purpose of computing the total income from the gross total income, any deduction should be required to be made from the full amount of the dividend. The deduction required to be made for computing the total income from the gross total income can only be from the amount of dividend computed in accordance with the provisions of the Act which would be forming part of the gross total income. It is, therefore, clear that whatever might have been the interpretation placed on Clause (iv) of Sub-section (1) of Section 99 and Section 85A the correctness of which is not in issue before, us, so far as Sub-section (1) of Section 80M is concerned, the deduction required to be allowed under that provision is liable to be calculated with reference to the amount of dividend computed in accordance with the provisions of the Act and forming part of the gross total income and not with reference to the full amount of dividend received by the assessee.\" (underlined by us). \n\n27. Under the First Schedule, in computing the chargeable profits of the previous year, the total income computed under the Income-tax Act for that year has to be adjusted and income by way of dividend shall be excluded. In computing the total income under the Income-tax Act, deduction under Chapter VI-A has to be allowed and it is the net dividend after such deduction that forms part of the total income as computed. In the gross total income, the dividend after allowing any deduction under the provisions of Income-tax Act excepting Chapter VI-A has to be included and from the net dividend included in the gross total income, deduction under Chapter VI-A is allowed for the purpose of arriving at the total income. Accordingly, the dividend included in the total income is liable to be excluded under the First Schedule. The Surtax Officer has to take into account the total income as computed under the provisions of the Income-tax Act for the purpose of adjustment under the Surtax Act. Therefore, whatever has not been included in the assessment cannot be excluded. In other words, only the amount which has been included can be excluded. Otherwise, although net dividend is included in the total income, the assessee gets adjustment of a higher amount being the amount of dividend included in the gross total income. What Dr. Pal says is that the total income as computed before allowing deduction under Section 80M shall be taken into account. But that is not the intention of the Legislature. The total income as computed must, in the context, mean the total income as assessed after all reliefs and deductions are allowed. \n\n28. This view which we have taken is also supported by the provisions contained in Rule 2 of the First Schedule. It provides as follows : \n\n \"The balance of the total income arrived at after making the exclusions mentioned in Rule 1 shall be reduced by-- \n\n (i) the amount of income-tax payable by the company in respect of its total income under the provisions of the Income-tax Act after making allowance for any relief, rebate or deduction in respect of income-tax to which the company may be entitled under the provisions of the said Act or the annual Finance Act and after excluding from such amount-- \n\n (a) the amount of income-tax, if any, payable by the company in respect of any income referred to in Clause (i) or Clause (ii) or Clause (iii) or Clause (viii) of Rule 1 included in the total income ; \n\n (b) the amount of income-tax, if any, payable by the company under the provisions of the annual Finance Act with reference to the relevant amount of distributions of dividends by it.\" \n\n29. Therefore, the amount of income-tax has to be excluded from the total income as adjusted under Rule 1 but after excluding from such amount, the amount of income-tax payable on the dividend included in the total income. The reason is this that from the income which is excluded, proportionate tax on that income shall also be excluded. The company has to pay income-tax only on the dividend which is included in the total income as assessed after allowing all permissible deductions including the deduction under Section 80M and not on the dividend included in the gross total income, if the amount of tax on the gross dividend is deducted, the result will be that although the assessee has not paid tax on such dividend, the chargeable profits will thereby get further reduced. The assessee will get a deduction of tax which it has not paid. \n\n30. We may also refer to the form of return to be submitted under the Surtax Rules. Part II provides as follows (See [1964] 53 ITR (St.) 41) : \n\n PART II\n\n \n COMPUTATION OF CHARGEABLE PROFITS.\n\n (Copies of the audited profit and loss account and balance-sheet must be attached to this return).\n\n \n \n \u00a0\n \u00a0\n Rs.\n Rs.\n\n 1.\n Total income computed in accordance with the provisions of the Income-tax Act, 1961.\n Profit\u00a0 + \nLoss\u00a0\u00a0\u00a0 -\n \u00a0\n \u00a0\n\n \n \u00a0\n (i)\n Interest on securities\n \n \u00a0\n \u00a0\n\n \n \u00a0\n (ii)\n Income from house property\n \n \u00a0\n \u00a0\n\n \n \u00a0\n (iii)\n Profits and gains of business\n \n \u00a0\n \u00a0\n\n \n \u00a0\n (iv)\n Capital gains\n \n \u00a0\n \u00a0\n\n \n \u00a0\n (v)\n Income from other sources\n \n \u00a0\n \u00a0\n\n \n \u00a0\n \n\n \n \u00a0\n Total income\n \u00a0\n \u00a0\n \u00a0\n\n \n\n\n\n \n\nPlease see Note 2.\n \n\nNote 2 (See item 1 of Part II)\n \n\nAgainst each of the entries (i) to (v), there should be shown the income as computed under the respective heads of income under the Income-tax Act, 1961, after taking into account all deductions permissible under that Act,\" \n\n31. It will, therefore, be evident that the dividend income as computed after taking into account all deductions permissible under the Income-tax Act will only be shown and taken into account under item No. (v), i.e., \"income from other sources\". Therefore, the amount which will be deducted is the dividend income so computed and which has to be shown and included in the return against item No. (v) in Part II of the form prescribed under the Surtax Rules. \n\n32. For the foregoing reasons, we are unable to accept the contentions of Dr. Pal. In the result, the first question in this reference is answered in the negative and in favour of the Revenue. \n\n33. There will be no order as to costs. \n\n J.N. Hore, J. \n\n34. I agree." }, { "title": "Commissioner Of Income-Tax vs Globe Transport Corporation, Shambhu ... on 31 January, 1991", "url": "https://indiankanoon.org//doc/1929731/", "text": "Commissioner Of Income-Tax vs Globe Transport Corporation, Shambhu ... on 31 January, 1991\nEquivalent citations: [1992]195ITR311(RAJ), 1991(1)WLC232\nJUDGMENT\n\n\n \n\nN.C. Sharma, J. \n \n\n 1. This order will dispose of three D. B. Civil Miscellaneous Applications Nos. 332 of 1988, 331 of 1988 and 329 of 1988 filed by the Commissioner of Income-tax, Jaipur, under Sections 151 and 152 of the Code of Civil Procedure by a common order as all these three applications involve a common question of law.\n\n2. M/s. Globe Transport Corporation carried on a business of transportation. With respect to the previous year ending Deepawali Samvat 2032 relevant to the assessment year 1976-77, it filed return of its income disclosing an income of Rs. 94,660. The Income-tax Officer, 'B' Ward, Jaipur, passed an assessment order on February 19, 1979. The assessee had debited an amount of Rs. 19,485.28 under the head \"Expenses\" in its profit and loss account. The account showed that these expenses had \n\nbeen incurred on tea, betel, cigarettes, etc. The Income-tax Officer disallowed an amount of Rs. 15,000 on estimate treating it as expenses on entertainment. On appeal, the Commissioner of Income-tax (Appeals), Jaipur, by his order dated June 18, 1979, reduced the additions made by the Income-tax Officer on account of entertainment expenditure to Rs. 10,000 from Rs. 15,000. The assessee filed a further appeal before the Income-tax Appellate Tribunal and before the Tribunal, it was contended on its behalf that the expenditure in question was incurred in providing tea, cigarettes, pan, etc., to drivers, agents, customers and employees and that these expenses were customary and incidental to the business. The Tribunal held that these expenses were incurred in providing drinks, tea, coca cola, etc., to the constituents, customers and employees of the assessee and that they were incidental to the business. It was held by the Tribunal that such expenditure cannot be said to be in the nature of entertainment. On an application being made by the Commissioner of Income-tax, the Income-tax Appellate Tribunal, Jaipur Bench, by its order dated July 1, 1981, referred the following question of law to this court :\n \"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the expenses of Rs. 10,000 are not in the nature of entertainment expenditure ?\" \n\n3. M/s. Shambhu Dayal Ram Pal was a partnership firm carrying on a business at Chomu in sugar, jaggery, khand and arat. In relation to the accounting period ending Deepawali relevant to the assessment year 1978-79, it declared an income of Rs. 85,234 in its return. The case of the assessee was that the up country constituents visited its business premises and that it was customary for the assessee to provide food, tea, cool drinks, snacks, etc., to them. The assessee claimed a total expenditure of Rs. 14,950 as expenses incurred on these items for its constituents. The Income-tax Officer, J-Ward, Jaipur, by his order dated October 31, 1979, disallowed a sum of Rs. 9,900 in terms of Section 37(2A) of the Income-tax Act as, in his opinion, such expenditure was in the nature of entertainment. On appeal, the Appellate Assistant Commissioner, '13' Range, Jaipur, by his order dated March 21, 1980, held that these expenses were customary in nature in the assessee's line of business and did not constitute entertainment expenses within the meaning of Section 37(2A) of the Income-tax Act and, therefore, allowed the deduction of the amount of Rs. 9,900 from the assessee's income. On appeal by the Revenue, the Income-tax Appellate Tribunal, Jaipur Bench, by its order dated March 26, 1981 upheld the order of the Appellate Assistant Commissioner. On an application being \n\nmoved by the Commissioner of Income-tax, Jaipur, the Income-tax Appellate Tribunal, Jaipur Bench, by its order dated March 3, 1982, referred the following question of law to this court :\n \"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the expenses of Rs. 9,900 incurred on providing food, tea, coffee, etc., to the assessee's constituents are not in the nature of entertainment expenditure under Section 37(2B) of the Income-tax Act, 1961 ?\" \n\n4. So far as the third assessee, M/s. Rameshwur Dayal and Co., is concerned, it was a registered firm and derived its income from arat in gur and khandsari. In relation to the accounting period Deepawali Samvat 2032 relevant to the assessment year 1976-77, the assessee claimed deduction of a total amount of Rs. 15,009 as \"choka expenses\" (i.e., mess expenses) on the ground that they were incurred to earn \"arat\". According to him, the adatias came from U.P. to effect sales of goods and he had to provide amenities to \"aratias\". The Income-tax Officer, \"C\" Ward, Jaipur, disallowed the deduction of this amount having regard to the provisions contained in Section 37(2B) of the Income-tax Act, 1961. On appeal, the Commissioner of Income-tax (Appeals) upheld the order of the Income-tax Officer in this regard. He held that, in view of the decision of the Allahabad High Court in Brij Raman Dass and Sons v. CIT [1976] 104 ITR 541, the Income-tax Officer was right in holding that these expenses were in the nature of entertainment expenditure which was not allowable according to the provisions of Section 37(2B) of the Income-tax Act, 1961. The assessee went in further appeal before the Income-tax Appellate Tribunal which was allowed by the Tribunal. The Tribunal held that the expenditure incurred by the assessee was by way of providing hot, cold drinks, lunch, etc., to its customers which was customary in nature in the line of business carried on by the assessee and. it did not constitute \"entertainment expenditure\". On an application being moved by the Commissioner of Income-tax, the Tribunal, by its order dated April 29, 1981, referred to this court the following question of law :\n \"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that messing expenses of Rs. 15,000 do not constitute entertainment expenditure within the meaning of Section 37(2B) of the Income-tax Act, 1961 ?\" \n\n5. All these three references were registered in this court as D. B. Income-tax References Nos. 135 of 1981, 79 of 1982 and 85 of 1981, \n\nrespectively, and were answered by similar orders passed on 2nd, 3rd and 6th May, 1988. This court held :\n\n\"Following these decisions, it has to be held that these expenses are allowable as business expenditure under Section 37(213) of the Income-tax Act, 1961. The Tribunal's view in the assessee's favour is, therefore, justified.\n\nConsequently, the reference is answered in the affirmative, in favour of the assessee and against the Revenue by holding that the Tribunal's view is justified.\" \n\n6. Thereafter, on July 4, 1988, the Commissioner of Income-tax, Jaipur, filed the present three D. B. Civil Miscellaneous Applications Nos. 332 of 1988, 331 of 1988 and 329 of 1988, under Sections 151 and 152 of the Code of Civil Procedure with the prayer to rectify/modify/review this court's orders dated 2nd, 3rd and 6th May, 1988, in the above three references and it may be answered in them that the expenses to the extent of Rs. 5,000 only are allowable and the balance expenses are not allowable to the assessee as deductions.\n\n7. It was urged by Mr. V. K. Singhal, appearing for the Revenue, that the provisions of Section 37(2A) as inserted by the Taxation Laws (Amendment) Act, 1967, were not noticed and considered at the time of deciding the three references whereby on the first Rs. 10,00,000 of the profits and gains of the business, the maximum amount allowable as entertainment expenditure was only Rs. 5,000. Moreover, Explanation 2 below Section 37(2A) was inserted by the Finance Act, 1983, with retrospective effect from April 1, 1976, to declare the meaning of \"entertainment expenditure\" as including expenditure on provision of hospitality of every kind by the assessee to any person excluding expenditure on food or beverages provided by the assessee to his employees in the office, factory or other place of their work. On this basis, it was urged that the assessee was entitled to the relief of Rs. 5,000 only and that the excess expenditure allowed by the Tribunal is liable to be disallowed in view of the Second Explanation read with Section 37(2A) of the Act. Learned counsel urged that this court may, accordingly, rectify or modify its orders answering the three references accordingly.\n\n8. The main question which arises for determination is that the references under Section 256(1) having already been answered by this court in the affirmative, can this court, under Section 151 or Section 152, C. P. C., rectify, modify or review its answer even if there is an error in \n\nthe answer on account of the fact that the provision contained in Section 37(2A) with Explanation 2 thereto was not taken into consideration. It is clear from the provisions of the Income-tax Act, 1961, that the Code of Civil Procedure as such does not apply to the proceedings under the Income-tax Act, 1961. Section 131 of the Income-tax. Act would go to show that, for a limited purpose of discovery and inspection, enforcing the attendance of any person including any officer of a banking company and examining him on oath, compelling the production of books of account and other documents and issuing commissions, the Assessing Officer, Deputy Commissioner (Appeals), Deputy Commissioner, Commissioner (Appeals) and Chief Commissioner or Commissioner have, for the purposes of the Act, been given the same powers as are vested in a court under the Code of Civil Procedure when trying a suit.\n\n9. So far as reference to the High Court is concerned, all that is provided in Section 259 of the Income-tax Act is that, when any case has been referred to the High Court under Section 256, it shall be heard by a Bench of not less than two judges of the High Court, and shall be decided in accordance with the opinion of such judges or of the majority, if any, of such judges. Then, it is provided in Section 260 that the High Court, upon hearing any such case, shall decide the questions of law raised therein, and shall deliver its judgment thereon containing the grounds on which such decision is founded, and a copy of the judgment shall be sent under the seal of the court and the signature of the Registrar to the Appellate Tribunal which shall pass such orders as are necessary to dispose of the case conformably to such judgment.\n\n10. As regards rectification of mistakes, there is provision in Section 154 of the Income-tax Act, 1961, which states that, with a view to rectifying any mistake apparent from the record, an income-tax authority referred to in Section 116 may--(a) amend any order passed by it under the provisions of the Act; (b) amend any intimation sent by it under Section 143, or enhance or reduce the amount of refund granted by it under that section. The authority concerned can make amendments of its own motion and also when the mistake has been brought to its notice by the assessee or, where the authority concerned is the Deputy Commissioner (Appeals) or the Commissioner (Appeals), by the Assessing Officer also. The income-tax authorities referred to in Section 116 of the Act are the Central Board of Direct Taxes, Director-General of Income tax or Chief Commissioners of Income-tax, Directors of Income-tax or Commissioners of Income-tax or Commissioners of Income-tax (Appeals), Deputy Directors of Income-\n\ntax or Deputy Commissioners of Income-tax or Deputy Commissioners of Income-tax (Appeals), Assistant Directors of Income-tax or Assistant Commissioners of Income-tax, Income-tax Officers, Tax Recovery Officers and Inspectors of Income-tax. The High Court exercising powers under Sections 256 and 258 to 260 of the Act on a reference made to it by the Appellate Tribunal by drawing up a statement of the case is not included amongst the \"income-tax authorities\" referred to in Section 116 of the Act and, consequently, the High Court cannot exercise the power of rectifying any mistake apparent from the record under Section 154 of the Act.\n\n11. The power of review is not inherent in a court or Tribunal. It is a creature of the statute. A court or Tribunal cannot review its own decision unless it is permitted to do so by statute. The courts having general jurisdiction like civil courts have inherent power. But the courts or Tribunals of limited jurisdiction created under special statutes have no inherent power. (See Gopinath Deb v. Budhia Swain, AIR 1983 Orissa 31, 33).\n\n12. Section 152, C. P. C., equally has no application in the case. It is also clear that, under Section 152 of the Code, only clerical errors or arithmetical mistakes or errors arising from any accidental slip or omission can be corrected. The present is not a case where any clerical or accidental error has taken place. The references were answered by a conscious decision after referring to two earlier decisions of the court in Pratap Cotton Trading Co. v. C1T [1987] 167 ITR 36 (Raj) and Mangilal Vijay Kota v. CIT [1987] 167 ITR 37 (Raj).\n\n13. We may refer to the decision of their Lordships of the Privy Council in CIT v. Tehri-Garhwal State [1934] 2 ITR 1, wherein the Privy Council observed at page 8 :\n \"It is to be noticed that under Section 66(5) of the Indian Income-tax Act, 1922, the judgment of the High Court is to contain the grounds upon which the decision is founded : that a copy of the judgment is to be sent to the Commissioner, and that the case is to be disposed of by the income-tax authorities 'conformably to such judgment'. Under this provision, their Lordships think that the judgment as a whole is binding between the parties in the particular case. If the judgment expounded a wrong construction of the Act, as the appellant now contends, an appeal against it was open, and there is no other procedure by which it could be corrected.\" \n\n14. In Seth Mathuradas v. CIT [1940] 8 ITR 412, a Division Bench of the Nagpur High Court held that an application for a review of the \n\njudgment passed in a reference under Section 66 of the Indian Income-tax Act, 1922, was not maintainable, for a Tribunal which determines the questions referred under that section does not operate as a civil court so as to attract the provisions of the Civil Procedure Code.\n\n15. In Emperor v. Kajori Mal Kalyan Das [1930] 4 ITC 60 ; AIR 1930 All 211, it was held that, for the reason that this kind of an opinion is not a decree or order, there could be no review of such a judgment.\n\n16. The Calcutta High Court, in CIT v. Hungerford Investment Trust Ltd. [1935] 3 ITR 188, have also laid down the same proposition where it was held that the court, when acting under the powers conferred by Section 66 of the Indian Income-tax Act, 1922, was exercising a special jurisdiction and that its proceedings were not governed by the Code of Civil Procedure and that no review lay.\n\n17. We may also refer to a Division Bench decision of the Allahabad High Court in Addl. CIT v. Hasmat Rai Raj Pal [1988] 170 ITR 191 (in which his Lordship K. C. Agarwal J., at present Chief Justice of this court was a party). It was observed at page 196 of the reported judgment :\n \"We are of the view that the jurisdiction, which the High Court exercises under Section 256. of the Income-tax Act, 19G1, is only an advisory jurisdiction and not that of original, appellate or revisional jurisdiction. Under the Income-tax Act, there is no power of review conferred on the High Court and we are not inclined to hold that in the absence of such specific conferment of such power, this court can exercise the power of review or of recalling its previous judgment purporting to exercise power under Order 47, Rule 1, or Section 151, CPC. We are conscious of the fact that the High Court may exercise its inherent jurisdiction in order to do justice in special circumstances, such as to rectify a mistake of clerical nature which had crept in by inadvertence or restore a case when dismissed in default on the cause being shown reasonable or even when the case was decided on merits without due notice to parties or to a party concerned on account of the mistake of the High Court office. The exercise of such power is different from those conferred under Order 47, Rule 1, or under Section 151, CPC. The grounds on which the present application has been moved seeking review or recalling of our order dated January 22, 1987, are not of the type on which any review can be sought invoking the inherent jurisdiction of this court.\" \n\n18. The decision in L. Hirday Narain v. ITO [1970] 78 ITR 2G (SC) relied upon by Mr. V. K. Singhal, appearing for the Revenue, has no relevance \n\nwhatsoever to the present case as this decision dealt with the power of the Income-tax Officer to rectify an error apparent from the record in exercise of the powers conferred by Section 35 of the Indian Income-tax Act, 1922, corresponding to the powers of the income-tax authorities under Section 154 of the Income-tax Act, 1961.\n\n19. Mr. V. K. Singhal referred to us two orders dated May 25, 1988 of this court in D. B. Income-tax Reference Application No. 53 of 1982, and D. B. Civil Miscellaneous Application No. 299 of 1988, wherein the earlier orders passed by this court in income-tax references were modified even after the questions of law referred being answered. Suffice it to state that, in neither of these two cases (CIT v. Indian Dairy Entrepreneurs and CIT v. Sunil Synchem Ltd.), was the question whether this court, after answering the reference, has the power to review the answer or to rectify mistakes in the answer or not raised or decided. Moreover, in CIT v. Indian Dairy Entrepreneurs (Reference Application No. 53 of 1982), two questions were required to be answered in the reference but the court on April 1, 1988 answered only one question. By oversight, the second question was not answered. Both the Revenue as well as the assessee had applied for modification of the order dated April 1, 1988, and to answer the second question. The modification was thus made on the common request made on behalf of both the sides. In CIT v. Sunil Synchem Ltd., Alwar (Misc. Application No. 299 of 1988), the point involved was exactly similar to the point in CIT v. Indian Dairy Entrepreneurs. Since the question whether Order 47, Rule 1, or Section 151 or 152, CPC, could be invoked after a reference under Section 256 of the Income-tax Act, 1961, has been answered by the High Court was neither raised nor decided in these two cases, the order dated August 25, 1988, passed therein would not assist the Revenue.\n\n20. In view of the above discussions, we hold that the three D. B. Civil Miscellaneous Applications Nos. 332 of 1988, 331 of 1988 and 329 of 1988 for rectification/modification or review of this court's order dated 2nd, 3rd and 6th May, 1988, respectively, passed by this court in D.B. Income-tax References Nos. 135 of 1981, 79 of 1982 and 85 of 1981 do not lie and are, consequently, dismissed. No order as to costs." }, { "title": "Bokaro Steel Ltd. vs Commissioner Of Income-Tax (No. 2) on 21 October, 1987", "url": "https://indiankanoon.org//doc/92977/", "text": "Bokaro Steel Ltd. vs Commissioner Of Income-Tax (No. 2) on 21 October, 1987\nEquivalent citations: [1988]170ITR545(PATNA)\nJUDGMENT\n \n\n Uday Sinha, J. \n \n\n 1. These are two references under Section 256(1) of\nthe Income-tax Act, 1961 (hereinafter referred to as \" the Act\"). They\nrelate to the assessment year 1972-73. Taxation Case No. 41 of 1978 is\nat the instance of the assessee and Taxation Case No. 42 of 1978 is at the\n\ninstance of the Revenue. The Income-tax Appellate Tribunal was seized of fourteen appeals bearing Nos. 1537 to 1543 (Pat) and Nos. 1463 to 1469 (Pat) of 1973-74. They were all disposed of by a common judgment. Those appeals gave rise to fourteen references to this court which were numbered as Taxation Cases Nos. 34 to 47 of 1977. Taxation Cases Nos. 34 to 40 of 1977 were at the instance of the Commissioner of Income-tax, Bihar-II, Patna, while the other cases were at the instance of the assessee. Those references were disposed of by a Bench of this court presided over by S.K. Jha and A.K. Sinha JJ., [1988] 170 ITR 522 (supra). All the questions referred to in those references were answered in favour of the assessee and against the Revenue. In the present references, all except one are common to the eaflier cases disposed of by the earlier Bench by judgment dated August 7, 1987. For that purpose, I must set out the questions referred to us. A consolidated reference has been made to us, at the instance of the Revenue as well as the assessee. The questions referred at the instance of the assessee are the following : \n\n\"(1) Whether, on the facts and in the circumstances of the case, the receipts arising from the letting out of the quarters to the outsiders, such as employees of the contractors engaged in the construction of the plant can be treated as the income of the assessee and/or, in any event, should be adjusted against the cost of construction so as to reduce such cost ? \n\n (2) Whether, on the facts and in the circumstances of the case, the receipts from the letting out of the properties to outsiders, such as the employees of the contractors engaged in the construction of the plant are to be assessed as income from property under Section 22 of the Income-tax Act, 1961, or the said income should be assessed under Section 28 of the Income-tax Act, 1961, as business income or in any event, under Section 56 of the Income-tax Act, 1961, as income from other sources ? \n\n (3) Whether, on the facts and in the circumstances of the case, the interest received by the assessee from sums advanced to its own employees is liable to be assessed as income from other sources in the hands of the assessee or whether, on the facts and in the circumstances of the case, such interest would reduce the cost of construction of the assessee and should not be treated as income chargeable to tax ? \n\n (4) Whether, on the facts and in the circumstances of the case, the interest received from the bank on short-term deposits is liable to be assessed as the income of the assessee or such interest should reduce the cost of construction of the assessee and, therefore, would not constitute the income of the assessee ? \" \n\n 2. The questions referred at the instance of the Revenue are the following :\n\n\" (1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that interest received by the assessee-company on the amounts advanced to contractors was not taxable ? \n\n (2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the hire charges received by the assessee-company for letting out plant and machinery to contractors were not taxable ? \n\n (3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the royalty received by the assessee-company for allowing contractors to raise stone chips from company's land, was not taxable ? \n\n (4) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the miscellaneous receipts were not taxable ? \" \n\n 3. Two of the questions referred to this court read as follows : \n\n\"(1) Whether, on the facts and in the circumstances of the case, the receipts arising from the letting out of the quarters to outsiders, such as employees of the contractors engaged in the construction of the plant, can be treated as the income of the assessee and/or, in any event, should be adjusted against the cost of construction so as to reduce such cost ? \n\n (2) Whether, on the facts and in the circumstances of the case, the receipts from the letting out of the properties to outsiders, such as, the employees of the contractors engaged in the construction of the plant are to be assessed as income from property under Section 22 of the Income-tax Act, 1961, or the said income should be assessed under Section 28 of the Income-tax Act, 1961, as business income or, in any event, under Section 56 of the Income-tax Act, 1961, as income from other sources ?\" \n\n 4. These very questions form questions Nos. (1) and (2) on behalf of the assessee in the present references. In relation to the assessment year 1970-71, the first question related to the receipt of interest by the assessee-company on the sums advanced to the contractor. The answer given by this court in the earlier case was that they were not taxable. In the present case, question No. (3) at the instance of the assessee is whether interest received by the assessee from the sums advanced by it to its own employees was liable to be assessed as income from other sources in the hands of the assessee or wheth'er such interest would reduce the cost of construction of the assessee and should not be treated as income chargeable to tax. On a parity of reasoning, the answer to the third question referred to us at the instance of the assessee must be answered in the same terms as in the earlier taxation cases. Since interest received by the\n\nassessee from contractors was not liable to tax, the interest received by the assessee-company from its own employees would also not be taxable. This question is thus answered in the same terms as in the earlier cases. \n\n 5. Question No. (4) on behalf of the assessee, quoted above, is the only question not covered by the earlier decision of this court. So far as the questions referred at the instance of the Revenue in these references are concerned, they are all covered by the earlier decision of this court. We see no reason to take a different view of the matter. Relying upon the earlier decision of this court, I hold that the Tribunal was right in deciding all but one question in favour of the assessee and against the Revenue. The references in regard to those questions are accordingly answered. \n\n 6. As stated earlier, the only question not covered by the earlier decision related to interest received by the assessee from banks on short-term deposits. The stand of the assessee was that those sums would reduce the cost of construction of the assessee and was, therefore, not liable to income-tax. \n\n 7. The assessee is a Central Government undertaking wholly owned by the Government of India. It received sums from Government. Those sums used to be deposited in banks on short-term deposits and earned interest thereon. The question is will it be income or not ? Learned senior standing counsel for the Income-tax Department contended that it would clearly be income liable to tax. He relied upon Madhya Pradesh State Industries Corporation Ltd. v. CIT, [1968] 69 ITR 824 (MP). The assessee in this case was Madhya Pradesh Industries Corporation Ltd., a Government private limited company. It was incorporated on April 11, 1961, for taking over and running certain concerns of the Government of Madhya Pradesh. The shares of the company were held by the Government of Madhya Pradesh, the Madhya Pradesh Electricity Board, and the Director of Industries, Madhya Pradesh Government. During the assessment year 1962-63, the accounting year of which ended on March 31, 1962, the Company did not actually carry on any business; there was also no production. That was a period of capital expenditure and installation of machinery and plant. The share money which the company received from the Madhya Pradesh Government being not immediately required by it, was deposited in call-deposits in certain banks. On these deposits, the company received during the accounting year a total amount of Rs. 20,763-92 as interest. The company showed this amount of interest as \" cash and bank balances \" in its accounts. In the profit and loss account, the amount was shown as \" interest on deposits\". In the return of income for the assessment year in question, the assessee showed\n\na total loss of Rs. 15,110. Before the Income-tax Officer the assessee contended that being a newly established undertaking, it did not have income liable to tax, and that further the interest receipts should be assessed as income from business as it was authorised to do money-lending business also under Clause 13 of the memorandum of association. The Income-tax Officer held that though the company was authorised to do money-lending business, the interest received by it on deposits from the banks was not income received from money-lending business. He treated the interest income as income from \" other sources \" under Section 56 of the Act. No doubt, he allowed deduction of a part of the expenses incurred in earning this interest income. In those circumstances, the question referred to the High Court was as follows :\n\n\"Whether, on the facts and in the circumstances of this case, the sum of Rs. 20,856 received by way of interest by the assessee should be taxed under Section 28 as business income or under Section 56 as income from 'other sources ' ? \" \n\n 8. The Madhya Pradesh High Court held that the moneys deposited by the company with the bank were plainly not in the ordinary course of its business of making investment under Sub-clause 20 of Clause III of the memorandum of association or Article 72(1) of the articles of association. It was merely a transaction relating to share capital and not an act in the course of its business. The High Court observed as follows (p. 829): \n\n\" If, therefore, the deposits made by the assessee in a certain bank did not constitute any business of the company, then it follows that the interest earned by the assessee on those deposits cannot be regarded as income under the head ' Profits and gains of business or profession ' under Section 28 of the Act.\" \n\n 9. The situation in the present case is similar. The earning of interest from banks was not in the ordinary course of the assessee's business and it was, therefore, liable to tax. \n\n 10. The decision of the Madhya Pradesh High Court was considered and followed by the Kerala High Court in Traco Cable Company Ltd. v. CIT, [1969] 72 ITR 503. That was a case where the object of the company was manufacture and sale of all types of electric wires, cables, etc. It obtained the certificate of commencement of business on July 30, 1961. It had a collaboration arrangement with a Canadian company. On September 24, 1962, the directors submitted their report for the year ending March 31, 1962. It was stated in that report that the Kerala Government had issued orders for acquisition of 46 acres of land for the use of the company and that the collaborating company had commenced preliminary work on the project. The preparation of the design and\n\nblue-print for the machinery had been taken on hand. The company was expected to go into production before the end of 1963. The assessee had collected share capital and the amount therefrom was deposited by it in banks. The company earned a sum of Rs. 68,013 as interest on the deposits. The assessee incurred expenditure during the same period of Rs. 34,000 by way of salary and wages of its employees, printing, stationery, postage, etc. Article 3 of the memorandum of association of the assessee enumerated its objects and Clause (v) there of read as follows :\n\n\" To invest and deal with the funds of the company not immediately required upon such security and in such manner as may from time to time be determined.\" \n\n 11. In the assessment for the assessment year 1962-63, the assessee claimed that the deposit of the share capital was carried on by the company, as empowered by the Clause mentioned above. The claim was rejected by the Income-tax Officer. The assessee had claimed Rs. 34,139, mentioned above, as an allowable deduction. The assessee company further contended that even if the bank interest was not income from business, it was entitled to deduct the said expenditure under Section 57 of the Act. This was also rejected by the Appellate Assistant Commissioner and the Tribunal. A reference having been made to the High Court in regard to the receipt of interest from bank deposits, the Kerala High Court rejected the contention of the assessee in the following words (p. 505); \n\n\" But the short question for decision in this case is whether, as a matter of fact, the company carried on such a business during the accounting year concerned. All that it did was to deposit in banks the share capital received by the company instead of keeping it in its own safe. This was done because the company had not commenced business and the amounts were not immediately required for any business. The receipt of income by interest was only incidental or consequential to the deposit. It can hardly be contended that if an individual, who carries on any business other than a business of banking or dealing in money, deposits his surplus funds in a bank and receives interest thereon, the interest thus received would be income from business. The position cannot at all be different if the assessee happens to be an incorporated company instead of an individual. On the facts of this case, the finding of the Tribunal that the deposit of the share capital by the company in banks was not a business carried on by the company is perfectly right. Learned counsel for the Revenue brought to our notice a decision of the Madhya Pradesh High Court in Madhya Pradesh State Industries Corporation Ltd. v. CIT, [1968] 69 ITR 824. This decision fully supports \"the view we have expressed above.\"\n\n 12. The decision of the Kerala High Court with which I am inclined to agree supports the stand of the Revenue. The same view was taken by a single Judge of the Kerala High Court in a writ application: Collis Line Pvt. Ltd. v. ITO, [1982] 135 ITR 390.\n\n 13. The assessee is a steel factory. The finding of fact recorded by the Tribunal is that the income was interest earned by utilising the surplus money, wherever it was not required in the business. It was not expenditure to reduce the cost of construction. It would thus obviously be \" income from other sources \" covered by Section 56 of the Income-tax Act. \n\n 14. Learned counsel for the assessee, on the other hand, contended that the interest received from banks was not income chargeable to tax at all. Reliance was placed by him upon the decision of the Supreme Court in Nalinikant Ambalal Mody v. S.A.L. Narayan Row, CIT, [1966] 61 ITR 428. I regret, the reliance placed is misplaced. In order to bring out the difference between the case before us and the case before the Supreme Court, some facts need be stated. In the case of Nalinikant Ambalal Mody [1966] 61 ITR 428 (SC), the assessee was an advocate of the Bombay High Court till March 1, 1957, when he was elevated to the Bench of that court. Before elevation, his income was being assessed as income from profession. The assessee had some outstanding dues from his erstwhile clients the fees for which he received after his elevation during the calendar years 1958 and 1959, during no part of which he had carried on any profession. The assessee contended that the sums received as fees for work done as lawyer were not income from profession and was, therefore, not liable to tax. The Revenue, on the other hand, contended that although it could not be taxed as income from profession, since the assessee had ceased to be a lawyer, it could certainly be assessed as income from the residuary head \" Income from other sources \" mentioned in Section 6(v) of the Indian Income-tax Act, 1922. The central question, therefore, was whether an income which does not fall under any other could be assessed under the residuary head \" Income from other sources \". In that connection, Sarkar C.J., with whom Mudholkar J. concurred (Bachawat J. dissenting), observed that the several heads mentioned in Section 6 were mutually exclusive. In that connection, his Lordship observed that an item of income cannot change its character with the passage of time and an income which specifically falls under one category cannot be assessed to tax under the residuary head. In that connection, his Lordship observed as follows (p. 431): \n\n\" As to the general principles, we first observe that as the heads of income are mutually exclusive, if the receipts can be brought under the fourth head, they cannot be brought under the residuary head. It is\n\nsaid by the Revenue that as the receipts cannot be brought to tax under the fourth head, they cannot fall under that head and must therefore fall under the residuary head. This argument assumes, in our view, without justification, that an income falling under one head has to be put under another head if it is not chargeable under the computing section corresponding to the former head. If the contention of the Revenue is right, the position would appear to be that professional income of an assessee who keeps his account on the cash basis would fall under the fourth head if it was received in a year in which the profession was being carried on, but it would take a different character and fall under the residuary head if received in a year in which the profession was not being carried on. We are unable to agree that this is a natural reading of the provisions regarding the heads of income in the Act. Whether an income falls under one head or another has to be decided according to the common notions of practical men for the Act does not provide any guidance in the matter. The question under which head an income comes cannot depend on when it was received. If it was the fruit of professional activity, it has always to be brought under the fourth head irrespective of the time when it was received. There is neither authority nor principle for the proposition that an income arising from a particular head ceases to arise from that head because it is received at a certain time. The time of the receipt of the income has nothing to do with the question under which particular head of income it should be assessed. \" (emphasis has been supplied by me) \n \n\n 15. In the ease before us, the interest from bank deposits were never income from business. They were never incidental to the business of the assessee. If the income had been incidental to the business of the assessee at any point of time, the time of receipt would not have made any difference. That would not change the character of the income. In that situation, the income would have remained income from business and would not be thrown under the head of the residuary item \" income from other sources \". It is well established that a source of income cannot be brought under the residuary head, if it comes under any of the specific heads. In the instant case, the income from bank deposits was never income from business. It would, therefore, fall in the category of Section 14(f) \" income from other sources \" and computed in terms of Section 56(1) of the Income-tax Act, 1961. \n\n 16. Learned counsel for the assessee then placed reliance upon the decision of the Supreme Court in Challapalli Sugars Ltd. v. CIT, [1975] 98 ITR 167. In that case the question was whether payment of interest\n\nbefore the commencement of production on amounts borrowed by the assessee represented an element of the actual cost of machinery, plant, etc., and as such whether depreciation allowance and development rebate was admissible on interest paid by the assessee. The Supreme Court observed that the accepted accountancy rule for determining cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition. In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets created as a result of such expenditure. The question thus before the Supreme Court in that case was entirely different. This case, therefore, cannot be of any assistance to the assessee.\n\n 17. Learned counsel for the assessee then placed reliance upon Addl. CIT v. Indian Drugs and Pharmaceuticals Ltd., [1983] 141 ITR 134 (Delhi). The facts of that case were absolutely different. During the assessment year in question, in that case, the plant and machinery was in the process of installation. The business had not been set up and none of the units had commenced production. The assessee realised Rs. 40,540 by the supply of tender forms regarding construction and erection of plant and machinery to contractors by sale of grass, stones and boulders, which was consequential to the land being cleared for the construction of the factory. The Income-tax Officer held those sums as \" Income from other sources.\" The Tribunal held that the receipts resulted in reducing the cost of construction and erection and should be treated as deduction from such cost and not as revenue receipts. It also held that the receipts on account of the sale of trees, grass, stones and boulders were in connection with the clearance of the land to be used for the erection of the factory. The receipts were thus directly related to the capital structure of the business which was being set up, and that was inextricably linked with the process of setting up the business. The situation in the case before us is entirely different. Here the finding of the Tribunal is well founded that the interests received from bank deposits were not incidental to the construction of the factory. It was not derived by any activity which was part and parcel of constructional activity. In that situation, the decision of the Delhi High Court is not in pari materia with the one before us. The two cases are distinguishable on facts.\n\n 18. Lastly, learned counsel for the assessee placed reliance upon D.L.F. Housing and Construction (P) Ltd. v. CIT, [1983] 141 ITR 806 (Delhi). That was a case where the assessee was a housing and construction company. It carried on the business of colonisation, i.e., it used to purchase lands situate in villages contiguous to the city of Delhi\n\nand sell them as commercial or residential plots. During 1950 to 1956, the assessee purchased land in two villages and developed them into a residential colony. Subsequently, during October 26, 1956, to April 4, 1957, the assessee also purchased about 300 bighas and odd agricultural land and raised a farm thereon. The land was shown by the assessee in its accounts under the head \" Stock-in-trade \". No steps were taken by the assessee to develop any part of those 300 bighas and carve out plots. Out of the lands owned by the assessee, nearly 300 bighas were acquired and compensation of Rs. 7,90,540 was paid to the assessee during the accounting year ending September 30, 1980, resulting in a profit of Rs. 1,65,660. The question was whether it was a trading asset or it was a capital receipt exempted from taxation. The Delhi High Court held that since at no stage the assessee had made any attempt to convert or alter the character of the land and had used it for agriculture alone, it was not a trading asset and the compensation received was a capital receipt and the profit resulting therefrom was not assessable to tax as profit of the assessee's business. The question thus before the Delhi High Court was whether the income was capital receipt or profit of the assessee's business. The conclusion of the Delhi High Court being that it was a capital receipt, the natural corollary would be that it would not be liable to tax. In the case before us, it has not been contended on behalf of the assessee, and in my view rightly, that the interest from bank deposits were capital receipts. Not being capital receipts, they must be treated as income of the assessee. It cannot be income from business as the receipt was not incidental to the business of the assessee. It had, therefore, to be assessed as \" income from other sources\". The Tribunal was thus right in holding, in the facts and circumstances of the present case, that the income from bank deposits was liable to tax. Since that income was not incidental to the construction of the assessee, it would not reduce the cost of construction of the assessee. In my view, therefore, the interest received would constitute income of the assessee assessable in terms of Section 56 of the Act.\n\n 19. For the reasons stated above, I am of the view that the fourth question referred to us for our opinion in regard to interest income from bank deposits must constitute income of the assessee. That question, therefore, must be answered in favour of the Revenue and against the assessee. The other questions, either at the instance of the assessee or of the Revenue, must be answered in favour of the assessee and against the Revenue. The references are disposed of accordingly. Since most of the questions have been decided in favour of the assessee, there shall be no order as to costs.\n\n 20. Let a copy of this judgment be transmitted to the Assistant Registrar,\nIncome-tax Appellate Tribunal, in terms of Section 260 of the Income-tax\nAct, 1961. \n\n S.B. Sanyal \n \n\n 21. I agree." }, { "title": "Income-Tax Officer, \"I\" Ward And Ors. vs Mahadeo Lal Tulsyan on 25 May, 1977", "url": "https://indiankanoon.org//doc/1463062/", "text": "Income-Tax Officer, \"I\" Ward And Ors. vs Mahadeo Lal Tulsyan on 25 May, 1977\nEquivalent citations: [1978]111ITR25(CAL)\nAuthor: M.M. Dutt\nBench: M.M. Dutt\nJUDGMENT\n \n\n M.M. Dutt, J. \n \n\n 1. This appeal is at the instance of the revenue and it is directed against the judgment of Amiya Kumar Mookerjee J. whereby the rule nisi obtained by the respondent on his application under Article 226 of the Constitution was made absolute. The principal question that is involved in this appeal is whether the Income-tax Officer had jurisdiction to reopen the assessment of the respondent for the assessment year 1962-63 by serving a notice under Section 148 of the Income-tax Act, 1961, \n \n\n 2. The respondent is a partner of the firm, M/s. Calcutta Hardware Stores, and carries on business as a dealer in black-sheet, sheet-cutting and plates and is an assessee under the Income-tax Act, 1961. The said firm filed its return for the assessment year in question together with copies of the profit and loss account and balance-sheet. In the course of hearing of the assessment proceeding for the said year, the firm, in compliance with the notice under Sections 142(1) and 143(2) of the Income-tax Act, 1961, produced books pf accounts, list of loans, list of interest paid, etc., as required by the Income-tax Officer for the purpose of assessment. It is alleged that the facts relevant to the assessment were fully and truly disclosed and brought to the knowledge of the Income-tax Officer. The Income-tax Officer, by his order dated September 26, 1963, completed the assessment of the firm under Section 143(2) on the total income of Rs. 82,101. Thereafter, a notice under Section 148 of the Income-tax Act, 1961, dated March 20, 1971, was issued by the Income-tax Officer to the firm alleging that he\n\nhad reason to believe that income chargeable to tax for the assessment year 1962-63 had escaped assessment within the meaning of Section 147 of the Income-tax Act, 1961. By the said notice, it was proposed to reassess the income for the said assessment year, and the assessee was also called upon to file a return for the purpose of reassessment. In compliance with the said notice under Section 148, the respondent filed a return under protest on April 21, 1971, in respect of the assessment year in question showing an income from business to the extent of Rs. 81,789 as originally assessed by the Income-tax Officer. \n\n 3. The respondent moved this court by a petition under Article 226 of the Constitution challenging the jurisdiction of the Income-tax Officer to issue the notice under Section 148 and to reopen the assessment for the assessment year 1962-63. On the said petition of the respondent, a rule nisi, out of which the present appeal arises, was issued. At this stage, it may be stated that prior to the said rule another rule was obtained by the respondent being C. R. No. 607(W) of 1971 [Mahadeo Lal Tulsyan v. ITO challenging a similar notice under Section 148 whereby the assessment for the year 1961-62 was sought to be reopened by the Income-tax Officer. That rule was made absolute by Amiya Kumar Mookerjee J., by his judgment dated March 22, 1974. The present rule, relating to the assessment year 1962-63 also came up for hearing before Amiya Kumar Mookerjee J., and in view of his decision in the said C. R. No. 607(W) of 1971 [Mahadeo Lal Tulsyan v. ITO , his Lordship made the present rule absolute. An appeal was preferred by the revenue against the judgment of the learned judge in Civil Rule No. 607(W) of 1971. The said appeal was heard by a Bench consisting of Anil Kumar Sen and Manash Nath Roy JJ., and their Lordships, by their judgment dated September 21, 1976 (ITO v. Mahadeo Lal Tulsyan [DB]) set aside that of the learned judge and discharged the rule.\n\n 4. The appellant did not file any affidavit-in-opposition in the trial court. It was stated before us by Mr. Nanda Lal Pal, learned advocate on behalf of the appellants, that the appellants did not get an opportunity to file an affidavit-in-opposition. He submitted that he would place reliance on the application for stay filed in this appeal. The said application was sworn by the Income-tax Officer, who issued the notice under Section 148. Mr. Pal\nalso produced before us the relevant records for the assessment year 1962-63 which included a statement of the Income-tax Officer containing reasons for reopening the assessment for the year 1962-63. The statement is as follows: \n\n \"It appears from records that the assessee obtained hundi loans from various parties during the relevant year. These loans are found to have been accepted in the original assessment as genuine as claimed by the\n\nassessee without making any verification. Now, it transpires that the alleged loan credits also include credits in the names of Bhagawandas Arjundas, Kanailal Ramchand, Naraindas Pitambardas, Arjunlal, Bhagawandas, Banshidhar Gourishankar, M/s. Indermal Biswanath, which have subsequently been found to be not genuine. \n\n Therefore, I have reasons to believe that the loans in question are not genuine and these are the assessee's concealed income which has escaped assessment for the assessee's failure to disclose truly and fully all material facts that were necessary for its original assessment.\" \n\n 5. The above statement is a cyclostyled one excepting that the names of the creditors mentioned in the statement are typewritten. One of the grounds which weighed with the learned judge in making the earlier rule absolute was that cyclostyled reasons were recorded by the Income-tax Officer. The rule out of which this appeal arises was made absolute by the learned judge on the same ground. \n\n 6. Section 147 of the Income-tax Act, 1961, inter alia, provides as follows : \n\n \" 147. If- \n\n (a) the Income-tax Officer has reason to believe that, by reason of the omission or failure on the part of an assessee to make a return under Section 139 for any assessment year to the Income-tax Officer, or to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year, or \n \n\n (b) notwithstanding that there has been no omission or failure as mentioned in Clause (a) on the part of the assessee, the Income-tax Officer has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year, \n \n\n he may, subject to the provisions of Sections 148 to 153, assessor reassess such income or recompute the loss or the depreciation allowance, as the case may be, for the assessment year concerned.......\" \n\n 7. Section 148 runs as follows : \n\n \"(1) Before making the assessment, reassessment or recomputation under Section 147, the Income-tax Officer shall serve on the assessee a notice containing all or any of the requirements which may be included in a notice under Sub-section (2) of Section 139; and the provisions of this Act shall, so far as may be, apply accordingly as if the notice were a notice issued under that sub-section. \n\n (2) The Income-tax Officer shall, before issuing any notice under this section, record his reasons for doing so.\" \n\n 8. The principles underlying Section 147 are now well-settled. The words \"if the Income-tax Officer has reason to believe\" suggest that the belief must be that of an honest and reasonable person based upon reasonable\n\ngrounds, and that the Income-tax Officer may act under this section on direct or circumstantial evidence but not on mere suspicion, gossip or rumour--Sheo Nath Singh v. Appellate Assistant Commissioner , Lakshman Shenoy v. Income-tax Officer . The assesses must disclose fully and truly all material primary facts, and if any such fact is suppressed, misrepresented or falsified, reassessment will be justified--Malegaon Electricity Co. Ltd. v. Commissioner of Income-tax , Commissioner of Income-tax v. Chidambaram Chettiar and Commissioner of Income-tax v. Gillanders Arbuthnot & Co. .\n\n 9. Keeping in view the above principles as laid down by the Supreme Court, we may now proceed to consider whether there were materials before the Income-tax Officer justifying the reopening of the assessment for the assessment year 1962-63. In paragraph 7 of the application for stay filed by the appellants in this court, it has been stated as follows:\n\n \"7. That subsequently during the course of the assessment for the assessment year 1964-65, completed on 28th August, 1968, and also for the assessment year 1965-66, it was found by the Income-tax Officer concerned that the assessee-firm introduced cash credits in its books of accounts in the form of hundi loans. Enquiries in the matter revealed that the said hundi loans were not genuine inasmuch as no confirmation letter was issued by the parties advancing the loans nor any other evidence about the said loan transactions were furnished and produced before the assessing Income-tax Officer.\" Paragraph 8 of the said application states as follows : \n\n \"8. That as after the completion of the assessment for the year 1962-63, and during the course of the assessment for the years 1964-65 and 1965-66, it came to light that the hundi loans introduced in the year 1961-62 were not genuine and as the assessee failed to disclose truly and fully all material facts that were necessary for its original assessment for the year 1962-63, a proposal was sent under Section 147(a) to the Commissioner of Income-tax, West Bengal, for his approval for Initiation of the appropriate proceedings in the matter. The said Commissioner of Income-tax gave his approval on 20th March, 1971, and on that very day, the notice under Section 148 of the Income-tax Act, 1961, was issued calling upon the assessee to file its return in respect of the said assessment year for the purpose of reassessment on the ground of reasonable belief that the income of the assessee-firm had escaped assessment.\" \n\n 10. It is clear from paragraphs 7 and 8 that the Income-tax Officer issuing the notice under Section 148 relied on the assessment order for the assessment year 1964-65. It may be stated in this connection that the cash credits entered in the books of accounts of the assessee in the form of hundi\n\nloans for all these assessment years, namely, 1961-62, 1962-63 and 1964-65, were received from the identical firms. A copy of the assessment order for the assessment year 1964-65 has been produced before us by the respondent. In paragraph 6 of the assessment order, the Income-tax Officer concerned observed as follows : \n \"6. Scrutiny of the assessment records of almost all the hundi merchants from whom the assessee has alleged to have taken loans show that they have no capital worth the name and no means from which they could possibly have advanced huge amounts as loans to different parties. None of them had discounting facilities with banks. They never maintained any accounts, not even a hundi purchase and sale register, without which it is unbelievable that they could do extensive business in hundis. None of them even show any closing stock of hundis. The returns filed were on the basis of the estimated income alleging that they earned certain margin being the difference between the interest received on purchase of hundis and interest paid on sale of hundis. These drawee bankers thus purported to have sold all the hundis to third parties.\" \n\n 11. The above statement in the assessment order related to hundi merchants from whom the respondent was alleged to have taken loans in the assessment year 1962-63. Further, by the said assessment order, the Income-tax Officer found that the discharged hundis produced by the respondent for the assessment year 1964-65 were fictitious, false and collusive. The Income-tax Officer also recorded the names of some hundi merchants who were doing name-lending business. The names of such merchants as mentioned in the said order of the Income-tax Officer also include the names of Kanailal Ramchand and Bhagawandas Arjundas. In the reasons recorded by the Income-tax Officer referred to above, the said two names also appear. \n\n 12. It was contended on behalf of the appellants that, in view of the said assessment order and reasons recorded therein, the Income-tax Officer had ample justification for his belief that the income for the assessment year in question had escaped assessment. On the other hand, it was contended on behalf of the respondent that there was no material before the Income-tax Officer for the formation of a reasonable belief. In any event, it was submitted, the belief that was formed by the Income-tax Officer was not an honest belief but it was a mere suspicion. Further, it was contended that the assessee had filed all documents including the receipts, balance-sheet, profit and loss account, etc., and the Income-tax Officer could have with due diligence found out the genuineness or otherwise of the hundi loans. Because the hundi loans were not believed and accepted by another Income-tax Officer to be genuine, the Income-tax Officer issuing the notice under\n\nSection 148 was not justified in relying on the opinion of the other Income-tax Officer which was merely a change of opinion. \n\n 13. Strong reliance was placed on behalf of the respondent on the decision of the Supreme Court in Income-tax Officer v. Lakhmani Mewal Das , which affirmed the majority decision of a Full Bench of\nthis court [FB]. The facts of that case are that the original assessment for the assessment year 1958-59 was made on the respondent before the Supreme Court, after allowing deduction of a sum of Rs. 10,491 towards the interest to certain creditors. Thereafter, by\na notice under Section 148 of the Income-tax Act, 1961, dated March 8, 1967, and served on the respondent on March 14, 1967, the Income-tax Officer sought to reopen the assessment. In his report made in February, 1967, to the Commissioner for reopening the assessment for the assessment year 1958-59 after four years under Section 147(a), two reasons were mentioned : (i) that Mohansing Kanayalal, who was shown to be one of the creditors of the assessee, had since confessed that he was doing only name-lending ; and (ii) that Narayansing Nandalal, D.K. Naraindas, Bhagawandas Shrichand, etc., whose names too were mentioned in the list of the creditors of the assessee, were known name-lenders. This court, by a majority, held that the pre-conditions for the exercise of jurisdiction under Section 147 were not fulfilled. So far as the second ground was concerned, neither the majority of the judges of the Full Bench nor the learned judge who was in the minority relied upon that ground. So far as the first ground, was concerned, the majority of the judges also rejected the same. The Supreme Court, while affirming the majority view, observed as follows :\n \"This ground relates to Mohansing Kanayalal, against whose name there was an entry about the payment of Rs. 74, annas 3 as interest in the books of the assessee, having made a confession that he was doing only name-lending. There is nothing to show that the above confession related to a loan to the assessee and not to someone else, much less to the loan of Rs. 2,500 which was shown to have been advanced by that person to the assessee-respondent. There is also no indication as to when that confession was made and whether it relates to the period from April 1, 1957, to March 31, 1958, which is the subject-matter of the assessment sought to be reopened. The report was made on February 13, 1967. In the absence of the date of the alleged confession, it would not be unreasonable to assume that the confession was made a few weeks or months before the report. To infer from that confession that it relates to the period from April 1, 1957, to March 31, 1958, and that it pertains to the loan shown to have been advanced to the assessee, in our opinion, would be rather far fetched.\" \n\n 14. Further, the Supreme Court observed : \n \"As stated earlier, the reasons for the formation of the belief must have a rational connection with or relevant bearing on the formation of the belief. Rational connection postulates that there must be a direct nexus or live-link between the material coming to the notice of the Income-tax Officer and the formation of his belief that there has been escapement of the income of the assessee from assessment in the particular year because of his failure to disclose fully and truly all material facts.\"\n\n 15. In the instant case before us, the assessment order and the findings made therein for the year 1964-65, upon which the Income-tax Officer issuing the notice under Section 148 has placed reliance as materials for the formation of his belief, are not based merely on the confession of the hundi merchants that they were doing only name-lending. The hundi loans for the assessment years 1961-62 and 1964-65 were found to be bogus. We have already quoted the observation of the Income-tax Officer in the assessment order for the year 1964-65. The Income-tax Officer had scrutinised the assessment records of the hundi merchants and found that they were only doing name lending inasmuch as they had no capital worth the name and no means to advance huge amounts as loans. Thus, it is apparent that the Income-tax Officer did not rely only on the confession made by the hundi merchants, but the findings were made by him on the scrutiny of their assessment records. The findings of the Income-tax Officer related to the assessment proceeding of the respondent for the assessment year 1964-65. In our view, the assessment order and the findings and observations of the Income-tax Officer are materials which furnished the Income-tax Officer with reasons to believe that the income of the respondent for the assessment year 1962-63 had escaped assessment. In our opinion, there was a direct nexus or live-link between the assessment order for the year 1964-65, and the formation of the belief by the Income-tax Officer that there had been escapement of the income of the respondent from assessment for the year in question because of his failure to disclose fully and truly all material facts. Lakhmani's case , referred to above, does not help the respondent;\n\n 16. It is also difficult for us to accept the contention of the respondent that the belief which was formed by the Income-tax Officer in issuing the notice under Section 148 was not an honest belief, but it was a mere suspicion. If the materials upon which the Income-tax Officer had placed reliance for the purpose of issuing the notice under Section 148 are considered to be insufficient in the formation of a reasonable belief, we do not know upon what materials such a belief can be formed. Where there is no nexus or live-link between the materials available to the Income-tax Officer and the assessment which is sought to be reopened, issuance of a notice under\n\nSection 148 may be said to be on the basis of a mere suspicion. In the instant case, the materials, namely, the findings made in the assessment proceeding for the assessment year 1964-65 relate to the respondent in respect of the hundi loans from identical hundi merchants. In such a case, it is difficult to hold that the notice was issued merely on suspicion. In the case of Chhugamal Rajpal v. S.P. Chaliha , the facts were different. In that case, the Income-tax Officer relied on certain communications received by him from the Commissioner of Income-tax _from which it appeared that the creditors were name-lenders. The distinction between Chhugamal's case and the present one before us is that, while in the former it was not found that the creditors were name-lenders in respect of loan transactions with the assessee, in the latter it was so found. It has been already stated that the hundi merchants from whom the respondent was alleged to have taken loans were found to be name-lenders relating to the alleged loan transactions between them and the respondent,\n 17. It was contended on behalf of the respondent that when he had disclosed the primary facts and the Income-tax Officer, after taking a particular view of the said primary facts, made the assessment, he could not, on a mere change of opinion on those facts, reopen the assessment. In Commissioner of Income-tax v. Bhanji Lavji , on which reliance was placed on behalf of the respondent, it was held by the Supreme Court that when the primary facts necessary for assessment were fully and truly disclosed to the Income-tax Officer at the stage of the original assessment proceedings he was not entitled, on a change of opinion, to reopen the assessment. The question is whether the respondent had disclosed fully and truly the primary facts. It is the case of the respondent that he produced all documents before the Income-tax Officer including the discharged hundis. When a person is said to have disclosed a fact, it means that he has disclosed a true fact. Similarly, when a document is said to have been disclosed, it implies that the document is a genuine one. To place before the Income-tax Officer any fact which is untrue or any document which is not genuine, is not to disclose a primary fact. If the hundi loans which were disclosed by the respondent to the Income-tax Officer as primary facts are found to be not genuine, in our view, there was no disclosure of primary facts. The Income-tax Officer reasonably believes that the hundi loans disclosed by the respondent at the time of the original assessment are bogus transactions. It is true that at the time of the original assessment the Income-tax Officer did not doubt the genuineness of the said transactions, but if, subsequently, he has reasons to believe that the transactions are not genuine at all, it is difficult to say that it is a mere change of opinion. A change of opinion by the Income-tax Officer contemplates\n\nformation of two different opinions or to make two different inferences at two stages on the same set of primary facts which are true. In these circumstances, we are unable to accept the contention of the respondent that the formation of the belief by the Income-tax Officer is based on a mere change of opinion.\n\n 18. The case of Commissioner of Income-tax v. Burlop Dealers Ltd. does riot also help the respondent. It that case, it has been held that if the assessee had disclosed primary facts relevant to the assessment, he is under no obligation to assist the Income-tax Officer about the inference which the Income-tax Officer may make from those facts. From the discussion made above, it is clear that the reason of the Income-tax Officer for issuing the notice under Section 148 is that the respondent did not disclose the primary facts. The condition for the application of the above principle laid down by the Supreme Court in Burlop Dealer's case is disclosure of primary facts relevant to the assessment which necessarily means disclosure of true primary facts. If such facts are disclosed then the assessee is not required to assist the Income-tax Officer in making his inference from the same. But the condition precedent is the disclosure of true primary facts. The Income-tax Officer in the present case has reason to believe that such facts were not disclosed by the assessee at the time of the original assessment. In this connection, we may refer to a Bench decision of the Gauhati High Court in Bhadarmal Hazarimal v. Income-tax Officer [1975] 100 ITR 159 (Gauhati). It has been observed in that case that if, on subsequent enquiry or investigation, the Income-tax Officer has reason to believe that the material facts or primary facts disclosed by the assessee were false or non-existent, then the Income-tax Officer gets jurisdiction to issue a notice under Section 148. Further, it has been observed that the words \"to disclose fully and truly all material facts\" cannot mean to disclose some material facts which are false or non-existent. Most respectfully, we agree with the said observation of the Gauhati High Court.\n\n 19. We may now consider the ground on which the rule nisi was made absolute by the learned judge. The ground is that the reasons recorded by the Income-tax Officer are cyclostyled. Obviously, the learned judge seemed to think that the Income-tax Officer merely signed a cyclostyled sheet of paper containing the reasons without any application of mind. In our opinion, it cannot be laid down as a general proposition of law that whenever the reasons are cyclostyled, it will be presumed that there was non-application of the mind of the Income-tax Officer whose reasons they purport to be. In our view, the determination of this question whether or not the Income-tax Officer has applied his mind, will defend on the\n\nscrutiny of the records and the existence, of the materials forming the basis of the reasons. It has been earlier noticed that the names of the hundi merchants appearing in the statement of the Income-tax Officer containing his reasons are not cyclostyled, but they are type-written. Of the eighteen hundi merchants alleged to have advanced hundi loans to the respondent, the names of only six have been mentioned in the statement of reasons of the Income-tax Officer. Moreover, it has been found by us that the Income-tax Officer had relevant materials before him justifying the issuance of the notice under Section 148. In these circumstances, in our opinion, there is no scope for presuming non-application of mind by the Income-tax Officer before he assigned the reasons in support of his proposal to reopen the assessment. It appears from the Bench decision in Income-tax Officer v. Mahadeo Lal Tulsian [DB] disposing of the appeal of the respondent from the judgment of the learned judge in the said C.R. No. 607(w) of 1971 [Mahadeo Lal Tulsyan v. Income-tax tax Officer that a similar contention was made on behalf of the respondent, but Anil K. Sen J., who delivered the judgment of the Bench, could not accept the contention of the respondent that because the reasons were cyclostyled, it should be held that the Income-tax Officer acted mechanically and did not apply his mind. Most respectfully, we agree with his Lordship. The contention of the respondent, therefore, fails.\n\n 20. Next, it was contended on behalf of the respondent that the Additional Commissioner of Income-tax did not at all apply his mind when he endorsed his satisfaction that it was a fit case for the issue of a notice under Section 148. It appears that the records were before the Additional Commissioner along with the reasons of the Income-tax Officer. It would be mere speculation to hold that the Commissioner did not apply his mind before he granted permission to the Income-tax Officer to issue a notice under Section 148. This contention of the respondent cannot be accepted. \n\n 21. Lastly, it was argued on behalf of the respondent that under Section 151(2) of the Income-tax Act, 1961, it was the Commissioner who\ncould grant permission for the issue of a notice under Section 148, but in\nthe instant case, the permission was granted by the Additional Commissioner of Income-tax and, accordingly, the notice was invalid. This argument\nis devoid of any merit, for Section 2(16) of the Income-tax Act, 1961,\ndefines the word \"Commissioner\" as meaning a person appointed to be a\nCommissioner of Income-tax under Sub-section (1) of Section 117, and\nincludes a person appointed to be an Additional Commissioner of Income-\ntax under that sub-section. No other point has been argued on behalf of\neither party.\n\n 22. In view of the discussion made above, we set aside the judgment of the learned trial judge and discharge the rule. The appeal is allowed, but there will be no order as to costs. \n\n 23. Let the operation of this judgment remain stayed for a period of six weeks from date, as prayed for by the learned advocate for the respondent, so as to enable the respondent to prefer an appeal to the Supreme Court. \n\n Sharma, J. \n\n 24. I agree." }, { "title": "Kumari A.B. Shanthi (Alias) Vennira ... vs Assistant Director Of Inspection, ... on 21 April, 1992", "url": "https://indiankanoon.org//doc/562044/", "text": "Kumari A.B. Shanthi (Alias) Vennira ... vs Assistant Director Of Inspection, ... on 21 April, 1992\nEquivalent citations: [1992]197ITR330(MAD)\nAuthor: Pratap Singh\nBench: Pratap Singh\nJUDGMENT\n \n\nPratap Singh, J.\n \n\n 1. The accused in E.O.CC. No. 207 of 1988 on the file of the Additional Chief Metropolitan Magistrate, Economic offences Egmore, Madras, has filed this petition under section 482, Criminal Procedure Code, 1973, praying to call for the records in the aforesaid case and quash the same. \n\n 2. The respondent has filed the complaint against the petitioner arraying her as accused under section 276DD of Income-tax Act, 1961, for failure to comply with the provisions of section 269SS of the Income-tax Act, 1961. The allegations in it are briefly as follows : \n\n 3. The accused is a cine actress. The All India Anna D. M. K. Party, Madras, granted a loan of Rs. 4,65,000 to the accused as per the entry made in their ledger folio on April 17, 1986. The said loan amount was received by the accused on April 18, 1986. She has admitted the same in her sworn statement given before the Assistant Director of Inspection (Investigation) Madras - 600 034, on April 23, 1986. As per section 269SS of the Income-tax Act, 1961, no person shall after June 30, 1984, take or accept from any other person any loan or deposit otherwise than by an account payee cheque or account payee bank draft if the amount of loan is Rs. 10,000 or more. As the said loan received by the accused exceeded Rs. 10,000 and it was taken otherwise than by an account payee cheque or bank draft, the accused has violated section 269SS of the Income-tax Act, 1961, and, therefore, she is liable to be punished under section 276DD and hence the complaint. \n\n 4. Mr. N. C. Raghavachari, learned senior counsel appearing for the petitioner submitted : \n\n (i) The transaction was not a borrowing made by the petitioner but it was the payment made against future performances and hence it will not fail within the ambit of section 269SS of Income-tax Act, 1961 (which I shall hereafter refer to as the \"Income-tax Act\"). \n\n (ii) The sworn statement dated April 23, 1986, referred to in the complaint was a wrong statement and it was obtained by compulsion and it is violative of article 20(3) of the Constitution and hence it should not be acted upon. \n\n (iii) Section 269SS is violative of article 14 of the Constitution. \n\n (iv) The punishment provided in section 276DD of the Income-tax Act, 1961, is draconian is nature and hence it has been repealed subsequently. \n\n 5. Per contra, Mr. K. Ramasamy, learned counsel appearing for the respondent, submitted that it was only a borrowing made by the petitioner, that the statement given by the petitioner was not a wrong statement and that it was not obtained by compulsion. He further submitted that section 269SS of the Income-tax Act, 1961, is not violative of article 14 of the Constitution and section 276DD is not draconian in nature and the repeal thereof would not affect the prosecution. I have carefully considered the submission made by rival counsel. \n\n 6. Regarding Points Nos. 1 and 2 urged by Mr. N. C. Raghavachari, it is yet to be established in evidence that it was not a borrowing but payment against future performances and that the statement given by the petitioner was obtained by compulsion and that if contained wrong particulars. Establishment of these facts will arise only at the time of the trial. That stage has not yet come. So, these two points cannot be considered at the threshold. \n\n 7. Regarding the third point, Mr. N. C. Raghavachari, submitted that the transaction of loan is a single transaction consisting of lending by one person and borrowing by another person and, while so, the borrower alone is put under the obligation of taking the loan amount only by an account payee cheque or account payee bank draft if the amount of loan is Rs. 10,000 or more by virtue of section 269SS of the Income-tax Act, 1961, and contravention thereof is made punishable under section 276DD of the Act and it imposes a very severe punishment of imprisonment for a term which may extend to two years and the borrower shall also be liable to fine equal to the amount of such loan, whereas the lender is not place under any such obligation or subjected to any penalty for contravention thereof and that this is a hostile discrimination violating article 14 of the Constitution. He further submitted that, in a transaction of loan, the lender will be the dominant party and the borrower who is in need of money and seeks a loan would not be the party to command the nature of payment and, if we take that factor into consideration it would further demonstrate that the discrimination is very unfair harsh and ex facie discriminatory. Mr. K. Ramasamy, repelled this contention by stating that borrowers are a class by themselves and that no discrimination was shown amongst the borrowers. He would further submit that the object 269SS of the Income-tax, 1961, was curb black money and there is reasonable nexus between the purposes of legislation and classification. \n\n 8. In order to appreciate the respective contentions, the relevant provisions of the Income-tax Act, 1961, need extraction and the law laid down by the apex court and the High Courts regarding the cases wherein violation of article 14 of the Constitution are complained of need be referred to. Section 269SS of the Income-tax Act, 1961 reads thus : \n\n \"269SS. Mode of taking or accepting certain loans and deposits. - No persons shall, after the 30th day of June, 1984, take of accept from any other person (hereafter in this section referred to as 'the depositor'), any loan or deposit otherwise than by a account payee cheque of account payee bank draft if, - \n\n (a) the amount of such loan or deposit or the aggregate amount of such loan and deposit; or \n \n\n (b) on the date of taking or accepting such loan or deposit, any loan or deposit taken or accepted earlier by such person from the depositor is remaining unpaid (whether repayment has fallen due or not) the amount or the aggregate amount remaining unpaid (whether repayment has fallen due or not) the amount of the aggregate amount remaining unpaid; or \n \n\n (c) the amount or the aggregate amount referred to in clause (a) together with amount or the aggregate amount referred to in clause (b), is ten thousand rupees or more : \n\n Provided that the provisions of this section shall not apply to any loan or deposit taken or accepted from, or any loan or deposit taken or accepted by, - \n\n (a) Government; \n\n (b) any banking company, post office savings bank or co-operative bank; \n\n (c) any corporation established by a Central, State or Provincial Act; \n\n (d) any Government company as defined in section 617 of the Companies Act, 1956 (1 of 1956); \n\n (e) such other institution association or body or class of institutions, associations, or bodies which the Central Government may, for reasons to be recorded in writing, notify in this behalf in the Official Gazette.\" \n\n 9. Section 276DD reads as follows : \n\n \"276DD. Failure to comply with the provisions of section 269SS. - If a person without reasonable cause or excuse, takes or accepts any loan or deposit in contravention of the provisions of section 269SS, he shall be punishable with imprisonment for a term which may extend to two years and shall also be liable to fine equal to the amount of such loan or deposit.\" \n\n 10. By a reading of the above, it is clear that failure to follow the procedure as stipulated in section 269SS would entail punishment under section 276DD. It is further clear that only the borrower is put under an obligation to take a loan by an account payee cheque of account payee bank draft, if it is for Rs. 10,000 or more under section 269SS and if he violates the said provision, he would be made liable for the penalty provided in section 276DD. Before considering further whether it would amount to ex facie harsh and hostile discrimination inasmuch as the lender was not brought within its fold, I shall refer to the rulings of the apex court and the High Court touching on this point. \n\n 11. Before going into the merits of the rival contentions, at the outset I shall refer to the ruling relied upon Mr. N. C. Raghavachari to show that in a proceeding under section 482, Criminal Procedure Code, this aspect of the can be considered. In Rayala Corpn. (P.) Ltd. v. Director of Enforcement, AIR 1970 SC 494, in a proceeding under section 561A of the Code of Criminal Procedure (old Code), it was contended that section 23(1)(b) of the Foreign Exchange Regulation Act is ultra view article 14 of the Constitution on certain grounds. On merits, that the contention was not accepted. The point is that the vires of section 23(1)(b) of the said Act were questioned as offending article 14 of the Constitution in a proceeding under section 561A of the (old Code) Criminal Procedure Code and considered. Mr. K. Ramasamy, learned counsel appearing for the responded did not dispute the proposition that, in a proceeding under section 482, Criminal Procedure Code, this aspect can be considered.\n\n 12. In ITO v. N. Takin Roy Rymbai [1976] 103 ITR 82, the apex court has held that a taxation law cannot claim immunity from the equality clause in article 14 of the Constitution and has to pass, like any other law, the equality test of that article. The apex court has laid as follows (at page 88) :\n\n \"While it is true that law cannot claim immunity from the equality clause in article 14 of the Constitution and has to pass the any other law the equality test of that article, it must be remembered that the state has, in view of the intrinsic complexity of fiscal adjustments of diverse elements a considerably wide discretion in the matter of classification for taxation purposes. Given legislative competence, the legislature has ample freedom to select and classify persons, districts goods properties, income and objects which it would tax and which it would not tax. So long as the classification made within this wide and flexible range by a taxing statute does no transgress the fundamental principles underlying the doctrine of equality, it is not vulnerable on the ground of discrimination merely because it taxes or exempts from tax some incomes or objects and not others and not others. Nor is the mere fact that a tax falls more heavily on some in the same category, by itself a ground to render the law invalid. It is only when, within the range of its selection, the law operates unequally and cannot be justified on the basis of a valid classification, that there would be a violation of article 14.\"\n\n 13. In T. S. Nataraj v. Union of India [1985] 155 ITR 81, the Karnataka High Court has held that the provision for compulsory audit by a chartered accountant is a provision to prevent evasion of tax and facilitate administration and it is not violative of article 14 or 19(1) of the Constitution and the provisions are valid. In that case, the validity of section 44AB of the Income-tax Act, 1961, was challenged by the income-tax practitioners. Section 44AB provides for compulsory statutory audit of accounts of certain class of persons carrying on business or profession by chartered accountants who are on the Register of Members maintained by the Institute of Chartered Accountants of India (Institute) established and functioning from July 1, 1949, under the Chartered Accountants Act of 1949. On the ground that the said exclusive right or privilege conferred on chartered accountants has affected their interests, and hence section 44AB is violative of the fundamental rights guaranteed to them by articles 14 and 19(1)(g) of the Constitution, it was challenged. It was held that section 44AB is a reasonable provision and that furthers the object and purpose of the Act and is not violative of article 14 of the Constitution. It has held that income-tax practitioners who belong to a separate class cannot themselves with the class of chartered accountants who have special qualifications and expertise to do the job or auditing more efficiently. On that finding of fact it was held that there is no violation of article 14 of the Constitution. The learned judges had considered a catena of cases and has deduced the proposition as follows (at page 104) :\n\n \"1. The classification must not be arbitrary but must be rational that is to say it must not only be based on some qualities or characteristics which are to be found in all the persons grouped together and not in others who are left out but those qualities or characteristics must have a reasonable relation of the object of the legislation. In order to pass the test, two conditions must be fulfilled, namely, (1) that the classification must be founded on an intelligible differentia which distinguishes those that are grouped together from others, and (2) that that differentia must have a rational relation to the object sought to be achieved by the Act. \n\n 2. The differentia which is the basis of the classification and the object of the Act are distinct things and what is necessary is that there must be a nexus between them. In short, while article 14 forbids class discrimination by conferring privileges or imposing liabilities upon persons arbitrarily selected out of a large number of other persons similarly situated in relation to the privileges sought to be conferred or the liabilities proposed to be imposed, it does not forbid classification for the purpose of legislation, provided such classification is not arbitrary in the sense above mentioned.\" \n\n 14. In K. S. Muthukali Chettiar v. IAC of I.T. [1986] 159 ITR 477, the Karnataka High Court had considered the concept of article 14 of the Constitution. The learned judge has stated as follows (at pages 481) : \n\n \"In order to appreciate the contentions, it is necessary to bear in mind the concept of article 14.\n\n Article 14 provides : \n 'The State shall not deny to any person equality before the law or the equal protection of the laws within the territory or India.' \n \n\n The two expressions 'equality before the law' and equal protection of the laws' may mean different things, but the entire concept is, however, fundamentally the same; that is, 'like should be similarly treated. As different persons should be treated differently, the law has evolved a theory of reasonable classification but not class legislation. This has been well established by a string of decisions of the Supreme Court from Charanjit Lal v. Union of India, , to the 'Special Bearer Bonds' case Garg v. Union of India [1982] 133 ITR 239 (SC).\"\n\n 15. In Anandji Haridas and Co. P. Ltd. v. S. P. Kushare, STO , it was held that to be a valid classification the same must not only be founded on an intelligible differentia which distinguishes persons and things that are grouped together from others left out of the group but that differentia must have a reasonable relation to the object sought to be achieved. It was further held that the State can by a classification determine who should be regarded as a class for the purpose of legislation and in relation to a law enacted on particular subject, but the classification must be based on some real and substantial distinction bearing a just and reasonable relation to the object sought to be attained and cannot be made arbitrarily and without any substantial basis.\n\n 16. In State of Andhra Pradesh v. Nalla Raja Reddy, , the apex court has laid down as follows (at page 1468) :\n\n \"A statutory provision may offend article 14 of the Constitution both by finding differences where they are none and by making no differences where there is one. Decided cases laid down two tests to ascertain whether a classification is permissible or not, viz., (i) the classification must be founded on an intelligible differentia which distinguishes persons or things that are grouped together from others left out of the group; and \n \n\n (ii) that the differentia must have a rational relation to the object sought to be achieved by them statute in question. The said principles have been applied by this court to taxing statutes.\" \n\n 17. In Shashikant Laxman Kale v. Union of India [1990] 185 ITR 104, the apex court has held that there is a clear distinction between legislative intention and the purpose or object of the legislation. While the purpose or object of the legislation is to provide a remedy for the malady, the legislative intention relates to the meaning or exposition of the remedy as enacted. Wile dealing with the validity of a classification, the rational nexus of the differentia on which the classification is based has to exist with the purpose or object of the legislation so determined. For determining the purpose or object of the legislation, it is permissible to look into the circumstances which prevailed at the time when the law was passed and which necessitated the passing of that law.\n\n 18. From the above, the following principles emerge : \n\n (i) A taxation law cannot claim immunity from the equality clause in article 14 of the Constitution and has to pass like any other law, the equality test of that article. It is only when, within the range of its selection, the law operates unequally and cannot be justified on the basis of a valid classification that there would be violation of article 14.\n\n (ii) Article 14 does not forbid reasonable classification of persons objects and transactions by the Legislature for the purpose of attaining a specific end. What is necessary in order to pass the test to permissible classification under article 14 is that the classification must not be \"arbitrary, artificial pr evasive\" but must be based on some real and substantial distinction bearing a just and reasonable relation to the object sought to be achieved by the Legislature. \n\n (iii) The entire concept of article 14 is fundamentally the same, viz., 'like should be treated alike'. \n\n (iv) The classification must be based on some real and substantial distinction bearing a just and reasonable relation to the object sought to be attained and cannot be made arbitrarily and without any substantial basis. While dealing with the validity of a classification, the rational nexus of the differentia on which the classification is based has to exist with the purpose or object of the legislation so determined. \n\n 19. Mr. K. Ramasamy, learned counsel appearing for the respondent submitted that the object of section 269SS was to curb the circulation of black money and put an effective check upon it. In such a case, if the object was to bring in a transaction of loan in regular accounts by making it obligation to evidence the transaction of loan of Rs. 10,000 or more only by means of an account payee cheque or by an account payee draft, such an obligation should be imposed not only on the borrower but also must be imposed on the lender. The transaction of loan is a single transaction. It is the giving of money by the lender and as well the taking of money by borrower. These two ingredients are to be necessarily present in a transaction of loan. While so, only the taker of a loan, viz., the borrower, is put under obligation by not taking the loan except by way of an account payee cheque or an account payee draft, if the loan was for Rs. 10,000 or more. No such obligation was cast on the lender who is an integral part of a loan transaction. This differentia looks all the more hostile, harsh and discriminatory when we take into account the normal circumstance that the borrower would be at the mercy of the lender. Ordinarily, he cannot dictate terms to the lender as to the manner in which he should advance the loan amount to him. While so, leaving the lender out of the purview of section 269SS and placing the borrower alone within the ambit of the same would amount to a classification which is not a rational one. It is not based on any intelligible differentia which distinguishes those that are grouped together from others, viz., the lenders. Furthermore, the differentia does not have a rational relation to the object sought to be achieved by this provision. The principle that \"like should be treated alike\" has been very clearly and grossly violated. The fundamental principle that those who are similarly situated should be similarly treated has not been followed. It has transgressed the fundamental principle underlying the doctrine of equality. When the lender and borrower stand on the same footing in a transaction of loan, to some extent the borrower on a worse footing, the borrower alone was placed under an obligation, leaving the lender out of the scope of the section and furthermore non-compliance of section 269SS is made punishable under 276DD of the Income-tax Act, which provides a very stringent punishment, viz., imprisonment for a period up to two years and fine equivalent to the amount of the borrowing. While so, it clearly infringes article 14 of the Constitution and hence is ultra vires. \n\n 20. Mr. K. Ramasamy submitted that no distinction was made amongst the borrowers and that lenders are a class by themselves. I am unable to accept this argument for the simple reason that what is intended to be dealt with is a transaction of loan and a transaction of loan cannot exist without a lender and both lender and borrower are integral parts of a single transaction of loan. Considering the object of the section, as has been stated by Mr. K. Ramasamy, this contention would not hold good. \n\n 21. In W.P. No. 3919 of 1985 (K. R. M. V. Ponnuswamy Nadar Sons (Firm) v. Union of India [1992] 196 ITR 431) and batch of writ petitions, a Division Bench of this court had occasion to consider the question as to whether section 269SS is unconstitutional. The only ground taken by the petitioners for attacking section 269SS as unconstitutional was that section 269SS imposes an obligation on the part of a person who, should he accept a loan or deposit over and above Rs. 10,000 otherwise than by an account payee cheque or account payee bank draft, will be punishable under section 276DD and this does not even provide a reasonable cause and straightaway a punishment is sought to be imposed and, therefore, the said section is draconian in its nature. This argument was repelled by the advocate appearing for the Income-tax Department who stated that section 276AA provides for reasonable cause and even otherwise the power to prosecute has been conferred upon the highest functionary of the Income-tax Department under section 279 and there are sufficient safeguards and one cannot say that section 269SS is draconian in nature or arbitrary in character. Section 278AA provides that, notwithstanding anything contained in section 276DD, no person shall be punished for any failure referred to in the said provision if he proves that there was reasonable cause for such failure. Section 279 provides that a person can be proceeded against for an offence under section 276DD only at the instance of the Chief Commissioner or Commissioner. So, it was held that there was provision of reasonable cause and that there was safeguard against unjustifiable prosecution and so the contention put forth for the petitioner does not hold good. The point now taken before me, viz., that section 269SS is violative of article 14, was not taken in those batch of writ petitions nor was that aspect touched upon. The petitioner herein was not party in those writ proceedings. So the ruling rendered in that batch of writ petitions will not be a bar for consideration of the present contention put forth before me. \n\n 22. Mr. K. Ramasamy made a faint plea that the lender also is covered by the penal provision, viz., section 276DD. I have no hesitation to reject this contention because, on a plain reading of that section, it would be obvious that only a borrower, viz., a taker of a loan is made liable. The giver of the loan, viz., the lender is not brought within section 276DD. \n\n 23. Mr. K. Ramasamy relied upon [1990] 184 ITR (St.) 141. In it, the constitutional validity of clause (10C) of section 10 of the Income-tax Act, 1961, was considered. The employees of a private sector undertaking challenged the constitutional validity of the said clause (10C) which provides that any payment received by an employee of a public sector company at the time of his voluntary retirement in accordance with any scheme which the Government may, having regard to the economic viability of such company and other relevant circumstances, provide in this behalf, shall not be included in his total income for the purposes of income-tax on the ground of discrimination, arbitrariness and lack of nexus with the object since an employee of a private sector company who was similarly placed and who gets a benefit under similar circumstances was denied that benefit. The apex court has observed that they see no reason why insertion of clause (10C) in section 10 cannot also be described as an incentive for growth and modernisation being a measure for improvement of the public sector and obviously, the incentive given thereby is to the employees of the public sector companies to resort more readily to the voluntary retirement scheme which would enable improvement of the public sector by streamlining its staff. The learned judges had further observed that keeping in view the true object of the impugned enactment, there is no doubt that employees of the private sector who are left out of the ambit of the impugned provision do not fall in the same class as employees of the public sector and the benefit or the fallout of the provision being available only to public sector employees cannot render the classification invalid or arbitrary. Thus, on the facts of the case, it was found that the classification is quite valid, in view of the avowed object of that enactment. The case before me stands on an entirely different footing. The transaction concerned is a loan of which the two limbs are the lender and borrower and one is left out for no obvious reason. So this ruling would not be relevant to the facts of the case before me. \n\n 24. Mr. K. Ramasamy further relied upon T. S. Nataraj v. Union of India (S. L. P. Civil Nos. 9828 and 9838 of 1985) in which the special leave petition against the judgment of the Karnataka High Court which was reported in [1985] 155 ITR 81, referred to supra, was dismissed by the apex court, holding that there was no discrimination against the petitioners. He further relied upon the judgment of the apex court had dismissed several appeals by various assessees against judgment of High Courts holding that section 40A(3) of the Income-tax Act, 1961, and rule 6DD of the Income-tax Rules, 1962, had to be read together, and so read, the provisions (which provide that any payment made by an assessee in excess of Rs. 2,500, which was not by a crossed cheque or demand draft would not be allowed as deduction in computing his income) were not ultra vires and did not curtail the freedom of trade or business of the assessee. This ruling does not have any relevancy to the facts of the case before me. \n\n 25. The fourth plea put forth by Mr. N. C. Raghavachari, viz., that the punishment provided in section 276DD is draconian in nature is to be negatived in view of the finding in the batch of writ petitions, viz., W. P. No. 3919 of 1985 and others (see [1992] 196 ITR 431 (Mad), which I have referred to supra, where this question was raised and negatived. \n\n 26. In view of my acceptance of point No. 3 put forth by Mr. N. C. Raghavachari, the prosecution against the petitioner is quashed and this petition is allowed accordingly. \n27. Mr. K. Ramasamy, learned counsel appearing for the respondent, makes an oral application under article 134A of the Constitution for a certificate under article 132(1) stating that the case involves a substantial question of law as to the interpretation of the Constitution. For hearing in this regard, post on April 22, 1992.\n28. Mr. K. Ramasamy, learned counsel appearing for the respondent, makes an oral application under article 134A of the Constitution for a certificate under article 132(1) stating that the case involves a substantial question of law as to the interpretation of the Constitution. For hearing in this regard, post on April 22, 1992.\n29. Mr. K. Ramasamy states that this is the first time it is held that section 269SS of the Income-tax Act, 1961, is violative of article 14 of the Constitution and hence ultra vires and that this involves a substantial question of law as to the interpretation of the Constitution. I accept his submission and grant the request made by him in his oral application and hereby grant the certificate under article 134A of the Constitution." }, { "title": "Laxmi Industries And Cold Storage Co. ... vs Income-Tax Officer, \"A\" Ward And Ors. on 8 May, 1970", "url": "https://indiankanoon.org//doc/1970775/", "text": "Laxmi Industries And Cold Storage Co. ... vs Income-Tax Officer, \"A\" Ward And Ors. on 8 May, 1970\nEquivalent citations: [1971]79ITR248(ALL)\nAuthor: R.S. Pathak\nBench: R.S. Pathak\nJUDGMENT\n \n\n Pathak, J. \n \n\n 1. The petitioner is a private limited company carrying on business in cold storage and the manufacture of catechu. For the assessment year 1961-62, the petitioner filed a return of its income of the relevant previous year disclosing a loss of Rs. 1,52,860. The Income-tax Officer took proceedings under Section 23(2) of the Indian Income-tax Act, 1922, after serving notice under that provision. While the assessment proceeding was yet pending he issued a notice under Section 143(2) of the Income-tax Act, 1961, and after affording the petitioner a hearing he completed the assessment by an order dated March 26, 1966. In the assessment order, which was expressed to he under Section 143(3) of the Act of 1961, he held that instead of the loss claimed by the petitioner there was an income of Rs. 1,03,848. Against the assessment order the petitioner preferred an appeal. One of the grounds taken by the petitioner was that the Income-tax Officer had no jurisdiction to proceed under the Act of 1961, and that by virtue of Section 297(2)(a) of the Act the proceeding lay under the Act of 1922. It was also urged that the Income-tax Officer had not afforded sufficient opportunity to the petitioner to explain the cash credits by reason of which the Income-tax Officer had found that income had arisen to the petitioner. The Appellate Assistant Commissioner allowed the appeal by his order dated June 19, 1961. He came to the conclusion that, by virtue of Section 297(2)(a) of the Act of 1961, the Income-tax Officer should have proceeded under the Act of 1922, and that he had no jurisdiction to proceed under the Act of 1961. But on the finding that the Income-tax Officer had jurisdiction under the Act of 1922, he observed that the assessment order could be treated as one made under that Act. On the merits of the case, he held that the Income-tax Officer had not proceeded on any positive material and should provide a proper opportunity to the petitioner to prove that the deposits represented by the cash credits were genuine. Accordingly, while setting aside the assessment, he directed the Income tax Officer to frame a fresh assessment on the basis set out in the appellate order. The petitioner, aggrieved by the order of remand, preferred a second appeal before the Income-tax Appellate Tribunal, and contended that inasmuch as the assessment proceedings taken under the Act of 1961 was a nullity, the\n\nAppellate Assistant Commissioner was in error in treating the proceeding as one under the Act of 1922, and remanded the case. It was urged that the assessment proceedings taken under the Act of 1961 being ab initio void there was nothing which could be remanded. The Tribunal, however, rejected the contention of the petitioner and, while holding that the Income tax Officer had deliberately adopted the jurisdiction conferred by the Act of 1961, it observed that the Appellate Assistant Commissioner was right in treating the assessment as one under the Act of 1922. It explained that the assessment order, \" which mistakenly purported to be an order tinder Section 143(3) of the new Act was, in fact and in law, an order under Section 23(3) of the old Act right from the beginning \". \n\n 2. This petition has now been filed under Article 226 of the Constitution praying for certiorari and prohibition. \n\n 3. There was considerable debate before us on the question whether the petitioner should be heard on the merits of this petition inasmuch as a remedy was open to him by way of reference to this court. Indeed, it was admitted by learned counsel for the petitioner that an application had been moved before the Tribunal praying for a reference to this court and that the application was pending, I was inclined at one stage to refrain from entering upon the merits of the case on the ground that an adequate alternative remedy existed. But learned counsel for the petitioner has contended that this is a case where the existence of an alternative remedy should not act as a bar and has vigorously pressed for a decision on the merits. As, in my judgment, even on the merits of the case, the petitioner is not entitled to relief. I need express no opinion on the objection based on the existence of an alternative remedy. \n\n4. The sole question for consideration is whether the assessment order made by the Income-tax Officer is a nullity and, therefore, there could have been no appeal to, and consequently no remand of the case by, the Appellate Assistant Commissioner. \n\n 5. At the outset, I may note the circumstance, of which the petitioner seeks to make a point, that the Income-tax Officer in proceeding to make the assessment under the Act of 1961, did so deliberately and not inadvertently. It makes no difference, I think, to the problem before us whether the Income-tax Officer preferred to proceed under the Act of 1961 by inadvertent error or upon careful deliberation. And I say so because of considerations to which I shall now advert. The Income-tax Officer was invested with jurisdiction to proceed in an appropriate case under the Act of 1922. He was also empowered to proceed in an appropriate case under the Act of 1961. The same Income-tax Officer had jurisdiction to take an assessment proceeding, either under the Act of 1922 or under the Act of 1961, depending on the particular case before him. Whether the case\n\nattracted the provisions of the one Act or the other fell to be determined by reference to Section 297 of the Act of 1961. Whether he should proceed under the Act of 1922 or under the Act of 1961 was not to be decided at his option. It was the case before him which determined which Act applied. The position is not one where an alternative jurisdiction is available to the Income-tax Officer, it is one where only the right jurisdiction can be exercised ; it is not a question of which Act he should apply, it is a question of which Act he could apply. Clearly, inasmuch as the return related to the assessment year 1961-62 and was filed before the Act of 1961 came into force, the Income-tax Officer was obliged to apply the Act of 1922, as if the Act of 1961 did not exist. In other words, if he could exercise any jurisdiction at all it was only the jurisdiction conferred under the Act of 1922. \n\n6. The petitioner contends that the Income-tax Officer having exercised the jurisdiction conferred by the Act of 1961, the validity of the proceeding cannot be saved by referring it to the Act of 1922. It is urged that the assessment proceeding cannot be considered as one under the Act of 1922. I am of opinion that it can. The principle on which such cases fall to be decided was considered and applied by the Supreme Court in L. Hazari Mal Kuthiala v. Income-tax Officer, Special Circle, Ambala Cantt, [1961] 41 I.T.R. 12 ; [1961] 1 S.C.R. 892 (S.C.). It was contended there by the assessee that the order of the Commissioner of Income-tax transferring his case from one Income-tax Officer to another was incompetent inasmuch as in doing so he purported to act under Sub-sections (5) and (7A) of Section 5 of the Indian Income-tax Act when properly his jurisdiction lay under the corresponding provisions of the Patiala Income-tax Act. The contention was repelled by the Supreme Court with the following observation :\n \" This argument, however, loses point, because the exercise of a power will be referable to a jurisdiction which confers validity upon it and not to a jurisdiction under which it will be nugatory. This principle is well-settled : see Pitambar Vajirshet v. Dhondu Navlapa, [1888] I.L.R. 12 Bom. 486, 489. \"\n\n7. To appreciate the decision in Pitambar Vajirshet, it is necessary to set out a few facts of that case. The suit was tried by a subordinate judge who was also invested with the jurisdiction of a judge of a small cause court. Although the suit was of the nature of a small cause, it was tried according to the Code of Civil Procedure. An appeal against the decision of the subordinate judge was allowed by the district judge. Upon a revision application before the Bombay High Court it was urged that the appeal before the district judge was not maintainable because the subordinate judge must be considered to have employed his jurisdiction as a judge of a small cause court. West J., who spoke for the court, pointed out: \n \" The suit was filed in a court having a double jurisdiction. But the jurisdiction under which cognizance could be taken of the claim was one and one only, not a double or an alternative jurisdiction. Having the small cause court jurisdiction the subordinate judge must have dealt with this case under that jurisdiction, even if he was not quite alive to it at the time--Dr. Groenvelt v. Dr. Burwell, 1 Ld. Raym. 454. We must ascribe his acts to an actual existing authority under which they would have validity rather than to one under which they would be void.\" \n\n8. The decision in this case is instructive even as it is apposite to the facts before us. Like the subordinate judge, the Income-tax Officer also enjoyed a double jurisdiction, jurisdiction in respect of proceedings under the Indian Income-tax Act, 1922, and jurisdiction in respect of proceedings under the Income-tax Act, 1961. Like the subordinate judge, who tried the suit under the Code of Civil Procedure in the exercise of his normal civil jurisdiction when he should have tried it as a judge of a small cause court, the Income-tax Officer completed the assessment under the Act of 1961, when properly he should have done so under the Act of 1922. Inasmuch as he did enjoy jurisdiction to proceed under the Act of 1922, he must be considered to have dealt with the case under that jurisdiction and \"even if he was not quite alive to it at the time\" the proceedings must be ascribed to the jurisdiction existing in him which would give them validity rather than to the jurisdiction under which they would be void. \n\n 9. We may refer to the decision of this court in Ram Chand and Sons v. Commissioner of Income-tax, [1967] 63 I.T.R. 252 (All.) where the Income-tax Officer had erroneously considered that the assessment could be made on the assessee-firm under Section 23(3) read with Section 44 of the Act. The court held that an erroneous reference to Section 44 did not invalidate the assessment.\n\n10. Reference may also be made to P.M. Bharucha and Co. v. G. S. Venkatesan, Income-tax Officer, Bhavnagar, [1969] 74 I.T.R. 513, 520 (Guj.). In that case the Income-tax Officer pursued a rectification proceeding believing it to lie under Section 154 of the Income-tax Act, 1961. The assessee contended that the order of rectification was null and void, there being no jurisdiction in the Income-tax Officer under Section 154 of the Act of 1961, although there was jurisdiction under Section 35 of the Act of 1922. The contention that the rectification order was null and void on that ground was repelled by the Gujarat High Court which, after holding that the proceedings would be governed by Section 35 of the Act of 1922, observed:\n \"But that does not necessarily lead to the conclusion that the order of rectification made by the respondent was without jurisdiction. It is now well-settled that a wrong reference to the power under which an order is made does not per se vitiate the order, if there is some other power under which the order could lawfully be made. The validity of the order has to be tested by reference to the question whether the Income-tax Officer had any power at all to make the order. If the power is otherwise established, the fact that the source of the power has been incorrectly described would not make the order invalid: the order cannot fail merely because it purports to be made under a wrong provision if it can be shown to be within the power of the Income-tax Officer under some other provision of law.\" \n\n10. The petitioner relied upon the observations of the Supreme Court in Ram Narain v. State of U.P., A.I.R. 1957 S.C. 18, 20. In our opinion, the principle laid down in that case is not attracted here. The question before the Supreme Court was whether the assessing authority, having levied a tax under Section 14(1)(f) of the U.P. Town Areas Act, 1914, could say that the tax was legally valid under a different clause, namely, Section 14(1)(d). The Supreme Court held that it could not. The court observed : \n \"...... so far as the present appellant is concerned, the list prepared\nunder Section 15 must have shown him as assessed to a certain amount of tax under Clause (f) of Sub-section (1) of Section 14 and the assessment must have been confirmed on that basis by the District Magistrate. Therefore, the legality of the tax imposed on the appellant must be considered with reference to the clause under which the assessment was actually made, and a different clause under which the assessment might have fallen cannot be called in aid of the assessment. \" \n\n11. It seems to me that the decision proceeded on the view that, while the tax contemplated under Section 14(1)(d) is a tax on trades, callings, or professions, the tax mentioned in Section 14(1)(f) is a tax on persons assessed according to their circumstances and property. The two provisions refer to two different taxes, taxes different in nature and respecting which different considerations came into play. The considerations called into play when the District Magistrate proceeds to confirm the assessment of circumstances and property tax cannot be substituted by considerations which arise in the levy of a tax on trades, callings or professions. It is not a case where, as here, the tax imposed under the Act of 1922 and under the Act of 1961 is of the same nature, namely, a tax on income. \n\n12. There was considerable argument on behalf of the petitioner that the assessment order, having been made by the Income-tax Officer under the Act of 1961 when he had no jurisdiction to do so, must be held to be a nullity, and, consequently, so the argument goes, the appeal against that order must also be treated as a null and void proceedings and on that ground the remand order made in the appeal must be treated as a nullity. A number of cases have been cited, and they include Minakshi Naidu v. Subramanya Sastri, [1887] I.L.R. 11 Mad. 26 (P.C.) and Ram Swarup v. Shikar Chand, A.I.R. 1966 S.C. 893. As I am of opinion that the asssessment order should be attributed to the jurisdiction of the Income-tax Officer under the Act of 1922, this contention on behalf of the petitioner cannot survive. Taking the case further from that point, namely, that it is an assessment order under the Act of 1922, the appeal entertained and decided by the Appellate Assistant Commissioner must be considered as a valid proceeding and the remand order as an order within the jurisdiction of the Appellate Assistant Commissioner.\n\n13. An attempt was made on behalf of the petitioner to show that the assessment procedure under the Act of 1922 is different from that under the Act of 1961, and that, therefore, it is not possible to attribute the assessment proceeding contemplated by the Income-tax Officer under the Act of 1961 to his jurisdiction under the Act of 1922. I have carefully considered the matter and I do not find any material difference between the two jurisdictions in this regard. It is then urged that the measure of penalty which may be imposed under the Act of 1961 in cases falling under Section 276 of that Act is much heavier than that attracted in corresponding cases under the Act of 1922. In my opinion, that is a consideration which does not arise in this case. When the jurisdiction under the Act of 1961 cannot be invoked at all, no question can arise of applying the penalty provisions of that Act. If penalty is attracted at all, it must be under the Act of 1922, \n \n\n14. Finally, it is urged on behalf of the petitioner that the case falls to be disposed of on the rule enunciated by the Supreme Court in P. Balakotaiah v. Union of India, A.I.R. 1958 S.C. 232, 236. But even in that case the Supreme Court accepted the principle that: \n \"...... when an authority passed an order which is within its\ncompetence, it cannot fail merely because it purports to be made under a wrong provision if it can be shown to be within its powers under any other rule, and that the validity of an order should be judged on a consideration of its substance and not its form. \" \n\n15. It is true that ultimately the Supreme Court did not decide the case on\nthe bafts of that principle, but that was because its application was\nprecluded by certain distinguishing considerations, which included Rule 3 of\nthe Railway Services (Safeguarding of National Security) Rules, and also\nbecause the respondent was content to have the validity of the impugned\norders determined on the looting that they were passed under Rule 3 with\nout reference to the alternative provision under Rule 148 of the Railway\nEstablishment Code. No such distinguishing feature exists in the case\nbefore us. \n\n16. In my judgment, the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal were plainly right in holding that, although the assessment was completed under the Income-tax Act, 1961, it must be attributed to the jurisdiction vested in the Income-tax Officer under the Indian Income-tax Act, 1922. Upon that, the contention that the order of remand is without jurisdiction must be rejected and this petition must fail. The petition is dismissed with costs. \n\n T.P. Mukherjee, J. \n\n 17. This is a petition under Article 226 of the Constitution for the issue of an appropriate writ to quash the order of assessment dated March 26, 1966, made by the Income-tax Officer under Section 143(3) of the Income-tax Act, 1961. Briefly stated, the material facts are that the petitioner is a company limited by shares. For the assessment year 1961-62, a return of income was filed on its behalf on August 26, 1961, showing a loss of Rs. 1,74,585. The Income-tax Officer, in the first instance, issued a notice under Section 23(2) of the Indian Income-tax Act, 1922, asking the petitioner to produce evidence in support of the loss claimed by it and the Income-tax Officer gave two hearings to the petitioner's representative. Subsequently, however, the Income-tax Officer, changed his mind and issued a fresh notice under Section 143(2) of the Income-tax Act, 1961, and gave further hearing to the assessee's representative in pursuance of such notice. Eventually, the Income-tax Officer completed the assessment under Section 143(3) on March 26, 1966. The net assessable income of the petitioner was computed at Rs. 1,03,848. In making the assessment the Income-tax Officer rejected the explanation put forward on behalf of the petitioner in regard to cash credits and deposits appearing in its account to the extent of Rs. 1,16,540 and assessed the amount as the income of the petitioner from undisclosed sources. The Income-tax Officer also directed the issue of notice under Section 274, read with Section 271(1)(c), for the purpose of levy of penalty. \n\n18. The petitioner appealed to the Appellate Assistant Commissioner. The main contention put forward on its behalf was that the Income-tax Officer had no jurisdiction to make the assessment under the provisions of the Income-tax Act of 1961, when the return had been filed by the petitioner before April 1, 1962. The Appellate Assistant Commissioner, however, rejected the contention. The Appellate Assistant Commissioner held that the Income-tax Officer should have ordinarily assessed the income of the petitioner for the assessment year 1961-62, under Section 23(2) of the Indian Income-tax Act of 1922, but he purported to make the assessment under Section 143(3) of the Income-tax Act of 1961. This was, in the opinion of the Appellate Assistant Commissioner, a case of reference to a wrong section which did not vitiate the assessment. The Appellate Assistant Commissioner, however, found that the Income-tax Officer had not given adequate opportunity to the petitioner to explain the credits and\n\ndeposits appearing in the names of various persons in the books of account. The Appellate Assistant Commissioner, therefore, set aside the assessment and remitted the case to the Income-tax Officer to scrutinise the materials regarding the cash credits and to make a fresh assessment according to law. \n\n19. Before the Tribunal the contention of the petitioner was that the Appellate Assistant Commissioner was not justified in making the order of remand for a fresh assessment. It was urged that the Income-tax Commissioner had no jurisdiction to make the assessment under the Act of 1961 and, therefore, the Appellate Assistant Commissioner should have annulled the assessment altogether. The Tribunal, however, rejected the contention and upheld the order of the Appellate Assistant Commissioner. \n\n 20. At the hearing before us, Sri Ashok Gupta appearing for the petitioner raised the same contention, namely, the order of the Income-tax Officer being without jurisdiction, it should be quashed and the order of remand passed by the Appellate Assistant Commissioner should be vacated. On the other hand, Dr. Misra appearing for the revenue argued that the petition for a writ under Article 226 of the Constitution was not maintainable because there was an alternative remedy by way of reference to the High Court under Section 66(1) of the Act of 1922, or under Section 256(1) of the Act of 1961. Dr. Misra submitted that the petitioner has actually availed itself of the alternative remedy by filing appeals and an application for reference. Dr. Misra further contended that the petitioner had no case on the merits also inasmuch as the assessment made by the Income-tax Officer should be referred to the jurisdiction possessed by him. He submitted that mere reference to the various sections of the Income-tax Act of 1961 did not vitiate the order of assessment. \n\n 21. I have had the opportunity of going through the order prepared by my learned brother, Pathak J. Brother Pathak had disposed of the case on the merits. He held that the Income-tax Officer could have acted only under the Indian Income-tax Act, 1922, and not under the Income-tax Act of 1961. My learned brother has referred to a number of authorities, including the decision of the Supreme Court in Hazari Mal Kuthiala v. Income-tax Officer, [1961] 41 I.T.R. 12 ; [1961] 1 S.C.R. 892 (S.C.) and held that the assessment, which purports to have been made under the Income-tax Act of 1961, must be attributed to the jurisdiction vested in the Income-tax Officer under the Indian Income-tax Act, 1922. That being so, Pathak J. held that the order of remand made by the Appellate Assistant Commissioner was intra vires of his powers as the appellate authority.\n\n22. I think the present case can be disposed of without entering into the merits. In this case, the petitioner has already availed itself of the remedies provided in the taxing statute; it has filed an appeal against the \nassessment to the Appellate Assistant Commissioner and also a second appeal to the Appellate Tribunal. Having lost both the appeals, the petitioner has tiled an application for reference to the High Court of the question of law arising from the order of the Tribunal and the application is awaiting decision. It is abundantly clear that the petitioner has already resorted to an alternative, and equally efficacious, legal remedy. The petitioner should, therefore, be required to pursue that remedy and it should not be allowed to invoke the special jurisdiction of the High Court under Article 226. of the Constitution. It is true, no doubt, as laid down by the Supreme Court in State of U. P. v. Mohammad Nooh, A.I.R. 1958 S.C. 86, 94 the existence of an alternative legal remedy does not necessarily oust or affect the jurisdiction of the High Court to issue a writ, but it is well settled that, where a party has resorted to an alternative proceeding for relief, it would be a sound exercise of discretion to refuse to interfere in a petition under Article 226 of the Constitution unless there are very good grounds for it. I am unable to hold that this is an appropriate case in which the court should exercise its extraordinary jurisdiction. The position might have been different if the petitioner had filed an application under Article 226 for quashing the impugned order of assessment directly after it had been passed by the Income-tax Officer.\n\n23. I would dismiss the petition on this ground alone with costs. \n\nBY THE COURT \n \n\n 24. For the reasons contained in our respective judgments, the writ petition is dismissed with costs." }, { "title": "Andhra Pradesh State Road Transport ... vs Commissioner Of Income-Tax on 3 December, 1971", "url": "https://indiankanoon.org//doc/1034197/", "text": "Andhra Pradesh State Road Transport ... vs Commissioner Of Income-Tax on 3 December, 1971\nEquivalent citations: [1975]100ITR392(AP)\nJUDGMENT\n \n\n A.D.V. Reddy, J. \n \n\n 1. The Andhra Pradesh Road Transport Corporation established by a notification under the Road Transport Corporations\n\nAct, 1950 (Central Act LXIV of 1950), has been functioning with effect from January 11, 1958, providing road transport facilities to the general public in the State with a net work of bus routes and a fleet of buses plying thereon, with depots, workshops, equipment, tools, accessories, etc., for its maintenance. For the assessment years 1960-61, 1961-62 and 1962-63, the income of the Corporation was subject to tax under the relevant provisions of the Income-tax Acts of 1922 and 1961. On appeal the Appellate Assistant Commissioner held that the assessee could claim the benefit of the provisions of Section 4(3Xi) of the. Indian Income-tax Act of 1922 for the assessment years 1960-61 and 1961-62 and under Section 11 of the Income-tax Act of 1961 for the assessment year 1962-63 and their income will be exempt from the tax. On appeal, the Tribunal held that the dominant motive of the assessee was to trade by running the transport service on business lines just as any other owner of a road transport service would do and, therefore, they would not attract the provisions of Section 4(3)(i) of the Indian Income-tax Act, 1922, and Section 11 of the Income-tax Act, 1961. Hence this reference. \n\n 2. The question referred to us for our decision is as follows: \n \" Whether, on the facts and in the circumstances of the case, the assessee's income for the assessment years 1960-61 and 1961-62 was exempt from income-tax under Section 4(3)(i) of the Indian Income-tax Act of 1922, and for the assessment year 1962-63, under Section 11 of the Income-tax Act, 1961 ? \" \n\n 3. Though the assessee is the same, the question whether the assessee's income is exempt from tax for the assessment years 1960-61, 1961-62 and for assessment year 1962-63 have to be considered separately, as there has been a change in the law applicable to the assessments. The assessment for the first of the two years 1960-61 and 1961-62 is governed by the provisions of Section 4(3)(i) of the Indian Income-tax Act, 1922, which reads as follows: \n\n \" 4. (3) Any income, profits or gains falling within the following classes shall not be included in the total income of the person receiving them : \n (i) subject to the provisions of Clause (c) of Sub-section (1) of Section 16 any income derived from property held under trust or other legal obligation wholly for religious or charitable purposes, in so far as such income is applied or accumulated for application to such religious or charitable purposes as relate to anything done within the taxable territories, and in the case of property so held in part only for such purposes, the income applied or finally set apart for application thereto......\" \n\n In the closing part of Section 4(3) it was provided that \"'charitable purposes' includes relief of the poor, education, medical relief and the advancement of any other object of general public utility......\" \n\n 4. It has, therefore, to be seen for the first two years, viz., 1960-61 and 1961-62, whether the income of the assessee'-Corporation falls under this provision. \n\n 5. Under the Income-tax Act of 1961, Section 11(1) provides that the income of the assessee shall not be included in the total income of the previous year if its income is derived from property held under trust \" wholly for charitable or religious purposes......\" and the definition which was\nformerly found in Section 4(3)(i) of the 1922 Act regarding charitable trusts and institutions has not been included in Section 11(1) of 1961 Act, but finds a place in Section 2 of the Act among the definitions. Under Section 2(15) of the 1961 Act \" charitable purposes \" includes relief of the poor, education, medical relief and the advancement of any other object of general public utility, not involving the carrying on of any activity for profit (the words newly added being those extracted by us in italics). Therefore, on account of this difference, the assessment for the year 1962-63, has to be considered separately from the assessment for the years 1960-61 and 1961-62. \n\n 6. We have, however, first to consider whether the assessee is an institution created for any charitable purpose, which includes the advancement of any object of general public utility. The assessee in this case has been created under the provisions of a statute, i.e., the Road Transport Corporations Act, 1950. The objects of the assessee are those contained in the said Act. Under Section 3 of the Act, a Road Transport Corporation may be established by the State Government having regard to (a) the advantages offered to the public, trade and industry by the development of road transport ; (b) the desirability of co-ordinating any form of road transport with any other form of transport; (c) the desirability of extending and improving the facilities for road transport in any area and of providing an efficient and economical system of road transport service therein. \n\n 7. Section 18 again repeats the object by stating that the general duty of the Corporation is to exercise its powers so as to progressively provide or secure or promote the provision of, an efficient, adequate, economical and properly co-ordinated system of road transport service in the State. \n\n 8. Section 19 details the powers of the Corporation for operating the road transport service. Section 22 provides that the general principle of the Corporation should be that, in carrying on its undertaking, it shall act on business principles. Section 23, Sub-section (1), relates to providing of capital to the Corporation that may be required by it for purpose of carrying on the undertaking by the State or Central Government. Under Sub-section (2), if no such capital is provided, the Corporation may raise, by issue of shares, such capital as may be authorised in this behalf by the State Government. Section 24 provides for raising of additional capital of the Corporation by\n\nthe issue of new shares, in a case where the capital was made up of shares. \n\n 9. Section 27 provides for the deposit of all the funds of the Corporation in the Reserve Bank of India; or investing them in such securities as may be approved by the State Government. Section 28 provides for the payment of interest on the capital provided by the Government, where such capital was furnished under Section 23(1) and payment of dividends in the case where the capital is raised by issuing shares. Under Section 30, whatever money that remains after payment of interest or dividends and providing for depreciation reserve and other funds, the Corporation may set apart a certain percentage for the provision of amenities to the passengers using the road transport services, welfare of labour employed by the Corporation and for such other purposes as may be prescribed. Out of the balance, such amount as may be approved of by the State or Central Government, may be utilised for financing the expansion programmes of the Corporation and the remainder, if any, shall be made over to the State Government for the purpose of road development. \n\n 10. It can be seen from the above provisions that not only the dominant but the sole purpose of the assessee-Corporation is providing transport facilities to the public, trade and industry. This is, therefore, a public utility service and as such is for a charitable purpose. \n\n 11. There is room for contending that as the Act provides for raising the capital by issuance of shares and also for payment of dividends on those shares, there is a profit motive and as such it cannot be said that this is an enterprise meant only for a charitable purpose. But in the case of the assessee-Corporation we are dealing with, admittedly no share capital has been raised under the provisions of Section 23(2) of the Road Transport Corporations Act, and the entire capital has been furnished by the State Government under Section 23(1) and what the State Government is paid is only interest for the monies due, as if it were a debt under Section 28(1) of the Act. Whatever balance is left over after meeting the expenses, as provided under Section 30, are to be made over to the State Government for purposes of road development, which is again a benefit to the public. Therefore, there can be no doubt in this case that the assessee-Corporation is meant for the advancement of general public utility and as such is meant for a charitable purpose. \n\n 12. The decisions in In re Trustees of the Tribune, [1939] 7 ITR 415 (PC), All India Spinners' Association v. Commissioner of Income-tax, [1944] 12 ITR 482 (PC), Commissioner of Income-tax v. Breach Candy Swimming Bath Trust, [1955] 27 ITR 279 (Bom), all of the Privy Council, as well as the decisions in Commissioner of Income-tax v. Andhra Chamber of Commerce, of the Supreme Court and Hyderabad Stock Exchange Ltd. v. Commissioner of Income-tax, [1967] 66 ITR 195 (AP) of a Bench of this court, all help us to come to the same conclusion, that the assessee-Corporation caters for providing the general public with an efficient, adequate, economical and properly co-ordinated system of road transport services, and, as such, it is an enterprise of public utility. It was contended relying on the provisions of Section 22 that as the general principle of the Corporation is that, in carrying on its undertaking, it shall act on the business principles, an element of profit is involved. But what is contemplated is running the enterprise on business lines with regard to the working of the various sections and not that it implies an element of profit motive. No doubt, as pointed out in the above cases, profit may result in the running of the enterprise, but as already stated, Section 30 provides that the balance of the income by way of profit is again to be spent for a purpose of public utility, i.e., the development of roads. Therefore, we have no hesitation to find that the assessee is a pulic utility service and as such attracts the provisions of Section 4(3)(i) of the Indian Income-tax Act, 1922, and its income is exempt from assessment under that Act for the years 1960-61 and 1961-62.\n\n 13. With regard to the assessment for the year 1962-63, different considerations arise, as there is a change in the provisions of the Act. What has now to be seen is whether the assessee-Corporation satisfies the provisions of Section 2(15) of the 1961 Income-tax Act to claim exemption under Section 11(1) of the Act. The relevant portion of the definition already extracted that applies to the assessee is the advancement of any other object of general public utility not involving the carrying on of any activity for profit. The underlined* portion is the one introduced by this new Act. It is one of the fundamental principles in legislation and the drafting of statutes that the provisions contained therein should be clear and cogent and, more so, with regard to the fiscal statutes which impose a burden on the public. But in this case, what 'we find is that the amendment, instead of being clear and cogent, is complicated and courts have taken different views in interpreting the same. In Commissioner of Income-tax v. Indian Chamber of Commerce, [1971] 80 ITR 645 (Ker) the Kerala High Court, while dealing with the assessment of the Indian Chamber of Commerce, Cochin, the object of which was to promote and protect the trade, commerce and manufacture in India and was deriving certain income by the issuance of weighment certificates and also by conducting survey of the goods to be exported, held as follows :\n \" A plain reading of the section makes it clear that in order to take an object of general public utility outside the scope of the definition that object must involve the carrying on of any activity for profit. ' Involve ' means comprise or imply and it, therefore, follows that the object must imply the carrying on of an activity for profit ; it is not sufficient, we think, if there is some activity carried on which results in profit. There must be an activity in the form of business because the activity must be for profit and that activity for profit must be involved in the objects of general public utility......\" \n\n 14. On the circumstances of the case, they held : \n \" ......even when an activity is in furtherance of the objects of a trust\nand even if such activity results in profits, the definition will not be attracted unless the objects involve the carrying on of an activity for profit. The objects of this association (Chamber of Commerce) do not involve the carrying on of any activity for profit. What has been done by the Chamber has not been suggested to be not in furtherance of the objects of the Chamber. If in carrying on such objects there is resulting excess of income over expenditure that cannot be brought in as income liable to tax under the Act by virtue of Section ll(1)(a) of the Act. \" \n\n 15. The Calcutta High Court, while dealing with a similar situation also relating to the assessment of the Calcutta Chamber of Commerce in Commissioner of Income-tax v. Indian Chamber of Commerce, , where also the objects were similar to those of the Kerala Chamber of Commerce and certain incomes were derived from weighment collections, measurement charges, arbitration fees and miscellaneous receipts, etc., held that an appropriate interpretation of Section 2(15) of the Income-tax Act, 1961, is to consider the expression \" not involving the carrying on of any activity for profit \" as qualifying the expression \"the advancement of any other object of general public utility\" and not the other classes of charitable purpose mentioned in that section like relief of the poor, education, and medical relief and that as there are enterprises run by the assessee-company for profit, they do not conform to the definition under Section 2(15) and cannot get the benefit of Section 11(1) of the Income-tax Act, 1961. To the same effect is the decision of the Mysore High Court in Commissioner of Income-tax v. Sole Trustee, Loka Shikshana Trust, [1970] 77 ITR 61 (Mys) dealing with a trust for helping directly or indirectly institutions calculated to educate people by spread of knowledge on all matters of general interest and welfare by publication of books pamphlets, running reading rooms and libraries, etc., which institution was deriving certain income from the publication of books and periodicals, it was held that, by reason of the income, the trust forfeited the benefit under Section 11(1) of the Income-tax Act of 1961.\n\n 16. Examining the provisions of Section 2(15) as well as Sections 11 and 28 of the Income-tax Act of 1961, we are inclined to take a different view from the one taken by the Calcutta and Mysore High Courts. What we have under Section 2(15) is an inclusive definition: It is, in fact, only illustrative of what is meant by \" charitable purpose \". The illustrations given are : relief of the poor, education, medical relief and advancement of any other object of general public utility not involving the carrying on of any activity for profit. What was contained in Section 4(3) of the Indian Income-tax Act of 1922 with regard to the public utility was the advancement of any other object of general public utility. There are no words to further qualify the term \" public utility \", The scope of cases falling within that omnibus term has been elaborately discussed by the House of Lords in Inland Revenue Commissioners v. Baddeley, [1955] 2 WLR 552 (HL). Viscount Simonds J. has this to say : \n\n \" ...while no comprehensive definition of legal charity has been given either by the legislature or in judicial utterance, there is no limit to the number and diversity of the ways in which man will seek to benefit his fellowmen. To determine, whether the privileges, now considerable, which are accorded to charity in its legal sense, are to be granted or refused in a particular case, is often a matter of great nicety, and I think that this house can perform no more useful function in this branch of the law than to discourage a further excess of refinement where already so many fine distinctions have been made.\" \n\n \" Object of public utility \" is one of the categories of charity, as classified by Lord Macnaghten along with the other categories, relief of poverty, advancement of education, etc., in Commissioners for Special Purposes of the Income-tax v. Pemsel, [1891] AC 531 (HL), now incorporated in Section 4(3) of the Indian Income-tax Act, 1922, and Section 2(15) of the Income-tax Act of 1961. \" Object of public utility \" is a term of very wide import and may become applicable to a variety of cases. For instance, even till recently the railways and tramways in India were privately owned for purposes of profit, though they are institutions of general public utility. There are very many private owners of a fleet of buses, run for profit, though the service is for general public benefit and as such is a public utility service. Institutions like the private medical clinics though catering to a large public and as such public utility undertakings are run for gain. Therefore, there are very many associations, enterprises and institutions which serve the public though the objects of which are private gain. To avoid cases of this type claiming the benefit of the exemption, the wider scope of the definition has been narrowed down by the restrictive clause \" not involving the carrying on of any activity for profit \". \n\n 17. To go further and so interpret it as to embrace all public utility services acquiring some income indirectly would mean denying the benefit to an institution, though meant as a public utility with no profit motive, which gets some income in its ancillary activities. This interpretation will result in reducing the exemption sought to be given to a shadow and. make the benefit sought to be granted illusory as a public utility concern which does not acquire some sort of income from its subsidiary activities is very rare. The clause \" the advancement of any other object of general public utility \" is correlated to the term \"charitable purpose\" which it seeks to illustrate and, therefore, should be read with and not independently of it. So read, it would mean that the purpose or object of the institution or concern should be public utility and not profit making. Therefore, if the object is not to make a gain but to serve the public as a public utility concern, it should fall within the definition. The object of the statute is obviously not to completely eschew or bar any business activity from a public utility concern in order to qualify it for the benefit under Section 2(15) of the Income-tax Act, 1961, but only to restrict the benefit-to those concerns whose object is not to make a profit but to be of utility to the public. As can be seen from Section 11(4), which is in Chapter III relating to exemptions, \" for the purposes of this section \", \" property held under trust\" includes a business undertaking so held......for charitable\nand religious purposes also...... Section 28 in Chapter IV relating to\ncomputation of total income seeks to include income derived by a trade and by professional or similar associations. But, as can be seen from Section 14 of the Act, this is subject to the other provisions of the Act, i.e., subject to the exemptions under Section 11. Therefore, the interpretation of the clause relating to \"general public utility not involving the carrying on of any activity for profit\", as stated by us, is in consonance with the other provisions of the Act. \n\n 18. The assessee in this case has no other income except what it gets by running the enterprise. Under Section 30 of the Road Transport Corporations Act, after meeting its expenses as detailed in it, whatever is left has to be made over to the State Government for the purpose of road development, which is again an object of general public utility. The object of the assessee, as stated earlier, is to run the transport service by providing an efficient, adequate, economical and properly co-ordinated system of road transport for the benefit of the public. Therefore, under these circumstances, we hold that the assessee is an institution meant for the advancement of the object of general public utility, not involving the carrying on of any activity for profit and its income is exempt from assessment to tax under Section 4(3)(i) of the Income-tax Act of 1922 and Section 11 of the Income-tax Act of 1961. \n\n 19. The question referred to us is, therefore, answered in the affirmative and in favour of the assessee. The assessee will have its costs in this case. Advocate's fee, Rs. 250." }, { "title": "Surendra Prasad Singh And Ors. vs Commissioner Of Income-Tax on 16 June, 1988", "url": "https://indiankanoon.org//doc/620293/", "text": "Surendra Prasad Singh And Ors. vs Commissioner Of Income-Tax on 16 June, 1988\nEquivalent citations: [1988]173ITR510(GAUHATI)\nAuthor: S.N. Phukan\nBench: S.N. Phukan\nORDER--Scope--Order to charge interest under s. 139 and/or s. 217 cannot be passed in revision--However, direction can be issued to the ITO \n\nHELD: \n No duty is imposed on ITO to charge interest under s. 217. It is open for him to consider if circumstances warrant that he may charge such interest. -Central Provinces Manganese Ore. Co. Ltd. v. CIT (1986) 58 CTR (SC) 112 : (1986) 160 ITR 961 (SC) relied on. \n\nIncome Tax Act 1961 s.263 \n\n \n\n \n \n\nRevision under s. 263--ERRONEOUS AND PREJUDICIAL ORDER--Scope--Direction to levey penalty under s. 271(1) and s. 273--Cannot be given \n\nHELD: \n To pass order in such terms may in a given case, be an abuse of power or in the parlance of administrative law, a colourable exercise of power. Such an underqualified direction to the ITO to initiate proceeding to levy penalty cannot be justified. \n\n \n\nNOTE- \n When SLP (Civil) Nos. 11391-11392 of 1981 were filed against th eorder in -Addl. CIT v. J.K. D'Costa (1982) 133 ITR 7 (Del), leave was rejected on 2-3-1984 [See (1984) 147 ITR (St) 1]. \n\nIncome Tax Act 1961 s.263 \n\n \n\n \n \n\nJUDGMENT\n\n \n\n A. Raghuvir, C.J. \n \n\n1. These references were consolidated in the statement of cases. Therefore, we propose to dispose of all the cases in one order. \n\na. The following two questions have been referred under Sub-section (1) of Section 256 of the Income-tax Act, 1961 : \n\n \"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in upholding the orders of the Additional Commissioner of Income-tax under Section 263 of the Income-tax Act, 1961, to the extent of charging of interest under Section 139 and Section 217 of the Income-tax Act, 1961, relating to the assessment years involved in the various appeals ? \n\n (2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the Additional Commissioner of Income-tax was not justified in setting aside the assessments in order to restore to the Income-tax Officer the right to commence the proceedings of\n\npenalty under Sections 271(1)(a), 271(1)(c) and 273 of the Income-tax Act, 1961, which had already become barred by limitation on account of failure of the Income-tax Officer to commence these proceedings within the prescribed time-limit relating to the assessment years as mentioned in the various consolidated orders of the Tribunal ? \" \n\n3. The assessment orders in all the cases were finalised on March 14, 1972, for the years 1964-65, 1966-67, 1967-68, 1968-69, 1969-70, 1970-71 and as respects 1965-66, the order was finalised on March 18, 1971. The Additional Commissioner of Income-tax, exercising his power of revision, scrutinised the records to find out whether the orders resulted in the detriment of the interests of the Revenue. In the course of the order, the following points were formulated : \"(i) The Income-tax Officer has erred in not initiating penalty proceedings under Section 271(1)(a) for all the seven assessment years and under Section 271(1)(c) of the Income-tax Act, 1961, for all the years except 1965-66 assessment year, (ii) The Income-tax Officer has erred in not initiating penalty proceedings under Section 273 for default of payment of advance tax under Section 212 of the Income-tax Act, 1961, for all the seven assessment years, (iii) The Income-tax Officer has not charged interest under Section 139 for the assessment years 1964-65, 1965-66, 1967-68 and 1968-69 and interest under Section 217 of the Income-tax Act, 1961, for all the seven assessment years ; and (iv) Annuity Deposits have not been charged in respect of the assessment years 1964-65 to 1966-67\" and he held \"Considering all these defects in the assessment orders, I would hold that the assessments have not been proper in the face of non-initiation of penalty proceedings under Section 271(1)(a) and Section 273 for all the seven assessment years 1964-65 to 1970-71, for non-initiation of penalty proceedings under Section 271(1)(c) for the assessment years 1966-67 to 1970-71 and for non-charging of interest leviable under Section 139 for the assessment years 1964-65, 1965-66, 1967-68 and 1968-69 as also of interest under Section 217 of the Income-tax Act, 1961, for all the seven assessment years. All the assessments are, therefore, set aside with a direction that penalty proceedings should be initiated as directed in respect of the relevant years, proper interest chargeable under Section 139 for the assessment years mentioned and under Section 217 for all the above years should be charged. Besides, charging of additional income-tax in lieu of Annuity Deposits payable should also be verified in respect of the assessment years 1964-65 to 1966-67 \". \n\n4. The assesses assailed the orders in appeal. The Income-tax Appellate Tribunal held--\"the order of the Additional Commissioner of Income-tax under Section 263 for the assessment years 1965-66 is cancelled\n\nwhile for the other assessment years, it is upheld only to the extent that directions may be given to the Income-tax Officer for charge of interest under Sections 139 and 217 in accordance with the provisions of the Act and the rules made thereunder\". Thereafter, two questions are referred to this court. \n\n5. We may now take the first question. The assessee in this case urged that a direction to charge interest cannot be ordered to the Income-tax Officer, as the decision to charge or not to charge depends on the facts of the case. We see the Additional Commissioner of Income-tax did not, in emphatic terms, order the Income-tax Officer to do so. What was held was that the Income-tax Officer had not waived the interest and \" waiver by the Income-tax Officer would be clearly erroneous and prejudicial to the interests of the Revenue on the facts and circumstances of the case \". \n\n6. The Appellate Tribunal, however, made such an error and directed that interest be charged by the Income-tax Officer. \n\n7. The Supreme Court in Central Provinces Manganese Ore Co. Ltd. v. CIT [1986] 160 ITR 961 considered this very aspect and held (p. 968):' \n \n\n \" In cases where the jurisdictional fact attracting the levy cannot be disputed, for example, that the return has been furnished under Section 139 with delay, it will be a question merely of satisfying the relevant authority that there are circumstances calling for a reduction or waiver of the interest. If an opportunity to do so has not been made available to the assessee before the order levying interest is made, it will be open to the assessee to apply to the Income-tax Officer after such order has been made to show that a reduction or waiver of interest is justified. We have been referred to the judgment by one of us (Sabya-sachi Mukharji J.) in Premchand Sitanath Roy v. Addl. CIT [1977] 109 ITR 751 (Cal). In that case, the question was a very different one. The question was whether a right of appeal was available in regard to the improper exercise of discretion under Sub-section (8) of Section 139. We think that in holding that no right of appeal lay in such a case, the High Court was plainly right.\n\n As the assessee has made no application to the Income-tax Officer for reduction or waiver of interest under Sub-section (8) of Section 139 or under Section 215, no question arises of the relevant authority having denied improperly a reduction or waiver of the interest and that being so, no revision petition can be maintained in that regard by the assessee before the Commissioner of Income-tax,\" \n\n8. Following the above decision, we answer the first question in favour of the Revenue but qualify the answer by saying that the Income-tax\n\nOfficer is not to understand that a duty is imposed on him to charge interest under Section 217. It is open to him to consider whether the circumstances warrant charge of interest. Therefore, we answer the first question in favour of the Revenue and against the assessee with the above qualification. \n\n9. The next question is regarding levy of penalty under Sections 271(1)(a) and 273 of the Income-tax Act. The order of the Additional Commissioner of Income-tax shows that the Income-tax Officer has not initiated penalty proceedings under Sections 271(1 )(a) and 273 and, therefore, assessments are held vitiated. We experience no hesitation in not sustaining the order. We may add that to pass an order in such terms may, in a given case, be an abuse of power or in the parlance of administrative law, a colourable exercise of power. Such an unqualified direction to the Income-tax Officer to initiate proceedings to levy penalty cannot be justified. \n\n10. The Delhi High Court in CIT v. J. K. D'Costa [1982] 133 ITR 7 held and we quote the long passage which explains itself (p. 11): \" Here, we find over selves in complete agreement with the view taken by the Tribunal. It is well established that proceedings for the levy of a penalty, whether under Section 271(1)(a) or under Section 273(b), are proceedings independent of and separate from the assessment proceedings. Though the expression ' assessment' is used in the Act with different meanings in different contexts, so far as Section 263 is concerned, it refers to a particular proceeding that is being considered by the Commissioner and it is not possible, when the Commissioner is dealing with the assessment proceedings and the assessment order, to expand the scope of these proceedings and to view the penalty proceedings also as part of the proceedings which are being sought to be revised by the Commissioner. There is no identity between the assessment proceedings and the penalty proceedings; the latter are separate proceedings that may, in some cases, follow as a consequence of the assessment proceedings. As the Tribunal has pointed out, though it is usual for the Income-tax Officer to record in the assessment order that penalty proceedings are being initiated, this is more a matter of convenience than of legal requirement. All that the law requires, so far as the penalty proceedings are concerned, is that they should be initiated in the course of the proceedings for assessment. It is sufficient if there is some record somewhere, even apart from the assessment order itself, that the Income-tax Officer has recorded his satisfaction that the assessee is guilty of concealment or other default for which penalty action is called for. Indeed, in certain cases, it is possible for the Income-tax Officer to issue a penalty notice or initiate penalty\n\nproceedings even long before the assessment is completed though the actual penalty order cannot be passed until the assessment is finalised. We, therefore, agree with the view taken by the Tribunal that the penalty proceedings do not form part of the assessment proceedings and that the failure of the Income-tax Officer to record in the assessment order his satisfaction or the lack of it in regard to the leviability of penalty cannot be said to be a factor vitiating the assessment order in any respect. An assessment cannot be said to be erroneous or prejudicial to the interests of the Revenue because of the failure of the Income-tax Officer to record his opinion about the leviability of penalty in the case. We, therefore, answer the first question referred to us in the affirmative and in favour of the assessee.\"\n\n11. We are in respectful agreement with the reasoning and conclusion reached by the Delhi High Court. We may add that when S.L.P. (Civil) Nos. 11391-11392 of 1981 were filed against the order in CIT v. J. K. D'Costa [1982] 133 ITR 7, leave was rejected on March 2, 1984--See [1984] 147 ITR (St.) 1.\n\n12. We thus answer the second question in the affirmative and hold that the Additional Commissioner of Income-tax was not justified in setting aside the assessment order. The answer is recorded in favour of the assessee and against the Revenue. No costs." }, { "title": "Dawn & Co. vs Commissioner Of Income-Tax on 17 August, 1971", "url": "https://indiankanoon.org//doc/111137/", "text": "Dawn & Co. vs Commissioner Of Income-Tax on 17 August, 1971\nEquivalent citations: [1973]87ITR71(KER)\nAuthor: K.K. Mathew\nBench: K.K. Mathew\nJUDGMENT\n \n\nKrishnamoorthy Iyer, J. \n \n\n 1. The Income-tax Appellate Tribunal has at the instance of the assessee referred under Section 256(1) of the Income-tax Act, 1961, the following question : \n\n\" Whether, on the facts and in the circumstances of the case, the levy of penalty under Section 271(1)(a) is justified in law?\" \n\n 2. The reference relates to the assessment year 1963-64. The Income-tax Officer served a notice on the assessee under Section 139(2) of the Income-tax Act, 1961, on June 28, 1963, requiring him to file a return of his total income for the assessment year 1963-64. The assessee should have filed the return in pursuance to the notice on July 28, 1963, but he\" filed the return only on December 2,1963. The assessment was completed on February 27, 1964. \n\n 3. The Income-tax Officer issued a notice to the assessee under Section 271(1)(a) to show cause why a penalty should not be imposed for failure to furnish the return of total income within 30 days from the date of service of notice under Section 139(2) of the Income-tax Act, 1961. The assessee filed his explanation to the effect that he had a statutory right to file the return on or before September 30, 1963, under Section 139(1) of the Income-tax Act, 1961, and hence the notice issued by the Income-tax Officer calling upon him to file the return before September 30, 1963, is invalid. The assessee also pointed out circumstances to explain the delay in filing the return in pursuance to the notice under Section 139(2) of the Income-tax Act. \n\n 4. The Income-tax Officer being not satisfied with the reasons given by the assessee imposed on him a penalty of Rs. 5,166. The decision of the Income-tax Officer was confirmed by the Appellate Assistant Commissioner and by the Tribunal. \n\n 5. The plea that the imposition of penalty is illegal because the day fixed in the notice under Section 139(2) of the Income-tax Act, 1961, for filing the return was earlier than the day on which the return should have been filed under Section 139(1) of the Act, was not pressed before us. The return in pursuance to Section 139(1) should have been filed on September 30, 1963. Section 139(1) applies only to cases where a notice under Section 139(2) has not been issued. The said plea of the assessee cannot also legally stand. The finding of the Tribunal is stated thus : \n\n\" It is also not possible to accept the plea that the assessee was under a bona fide impression that the return need be filed only later. Such a wrong impression will not save the assessee from the penal consequences for not filing the return within the time and such plea cannot be countenanced.\" \n\n 6. Section 271(1)(a) of the Income-tax Act, 1961, reads : \n\n\"271. (I) If the Income-tax Officer or the Appellate Assistant Commissioner, in the course of any proceedings under this Act, is satisfied that any person- \n\n(a) has without reasonable cause failed to furnish the return of total income which he was required to finish under Sub-section (1) of Section 139 or by notice given under Sub-section (2) of Section 139 or Section 148 or has without reasonable cause failed to furnish it within the time allowed and in the manner required by Sub-section (1) of Section 139 or by such notice, as the case may be, or...... \n\n he may direct that such person shall pay by way of penalty,-- \n\n(i) in the cases referred to in Clause (a), in addition to the amount of the tax, if any, payable by him, a sum equal to two per cent, of the tax for every month during which the default continued, but not exceeding in the aggregate fifty per cent, of the tax; ... .\" \n\n 7. It is clear from the above provision that to attract the penalty the failure to file the return within the time fixed in the notice under Section 139(2) should have been without reasonable cause. What is reasonable cause should depend upon the circumstances of each case. On a mere reading of the section it is clear that a mere omission to file the return will not entitle the imposition of penalty as the section is not absolute in terms. It was submitted on behalf of the assessee that in the nature of the wording of Section 271, some blameworthy mental condition constituting the default should be proved by the department against the assessee before the imposition of the penalty. It was also pointed out by the assessee that the provision being penal in character the burden is on the department to prove that the default was due to some deliberate act on the part of the assessee as a result of some blameworthy mental condition. \n\n8. The words \" has without reasonable cause failed to furnish it within the time allowed \" in Section 271(1)(a) of the Income-tax Act, 1961, show that mens rea is an ingredient to be proved by the department before the imposition of penalty. In Commissioner of Income-tax v. Anwar Ali, [1970] 76 I.T.R. 696, 700 (S.C.) their Lordships of the Supreme Court in considering the nature of the proceedings under Section 28 of the Indian Income-tax Act, 1922, which corresponds to Section 171 of the Income-tax Act, 1961, observed :\n\n\" The first point which falls for determination is whether the imposition of penalty is in the nature of a penal provision. The determination of the question of burden of proof will depend largely on the penalty proceedings being penal in nature or being merely meant for imposition of an additional tax, the liability to pay such tax having been designated as penalty under Section 28... . It is true that penalty proceedings under Section 28 are\nincluded in the expression ' assessment' and the true nature of penalty has been held to be additional tax. But, one of the principal objects in enacting Section 28 is to provide a deterrent against recurrence of default on the part of the assessee. The section is penal in the sense that its consequences are intended to be an effective deterrent which will put a stop to practices which the legislature considers to be against the public interest. ... It appears to have been taken as settled by now in the the sales tax law that an order imposing penalty is the result of quasi-criminal proceedings (Hindustan Steel Ltd. v. State of Orissa, [1970] 25 S.T.C. 211 (S.C.).). In England also it has never been doubted that such proceedings are penal in character : Fattorini (Thomas) (Lancashire) Ltd. v. Inland Revenue Commissioners, [1942] A.C. 643, [1942] 1 All E.R. 619, 24 T.C. 328, [1943] 11 I.T.R. (Supp.) 50.\n\nThe next question is that when proceedings under Section 28 are penal in character what would be the nature of the burden upon the department for establishing that the assessee is liable to payment of penalty. As has been rightly observed by Chagla C.J., in Commissioner of Income-tax v. Gokuldas Harivallabhdas, [1958] 34 I.T.R. 98 (Bom.) the gist of the offence under Section 28(1)(c) is that the assessee has concealed the particulars of his income or deliberately furnished inaccurate particulars of such income and therefore, the department must establish that the receipt of the amount in dispute constitutes income of the assessee. If there is no evidence on the record except the explanation given by the assessee, which explanation has been found to be false, it does not follow that the receipt constitutes his taxable income.\"\n\n9. Hindustan Steel Ltd. v. State of Orissa had to consider the scope of Section 25(1)(a) of the Orissa \"Sales Tax Act, 1947, which provides for imposition of penalty for failure to register as a dealer under Section 9(1) of the Act. Their Lordships of the Supreme Court observed :\n\n\" But the liability to pay penalty does not arise merely upon proof of default in registering as a dealer. An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding, and penalty will not ordinarily be imposed unless the party obliged either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of a discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty, when there is a technical or venial breach of the provisions of the Act or where the breach\nflows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute.\" \n\n10. Unlike Section 271(1) of the Income-tax Act, 1961, the provision of the Orissa Sales Tax Act considered by the Supreme Court is absolute in terms in that it rules out mens rea as an essential ingredient for the imposition of penalty. Yet their Lordships of the Supreme Court stressed the necessity of mens rea or knowledge of the wrongfulness of the act before imposing the penalty. \n\n 11. Counsel for the department contended that Anwar Ali's case was concerned with Section 28(1)(c) of the Indian Income-tax Act, 1922, corresponding to Section 271(1)(c) of the Income-tax Act, 1961, and it has no application to Section 271(1)(a) of the Act. It was also argued that on account of the Explanation to Section 271(1) of the Income-tax Act, 1961, the statute itself gives rise to a presumption of mens rea or knowledge of the wrongful act against the assessee even for purposes of Section 271(1)(c) in cases covered by the Explanation and that is an indication to show that the very omission to file the return will give rise to a presumption of conscious violation of Section 139(2) by the assessee. It was also pointed out that if the burden is cast on the department to prove want of reasonable cause for failure of the assessee to furnish the return of total income , in effect it will be placing an onus on the department which it will be impossible for them to discharge. According to counsel for the department, a reasonable interpretation of the provision will be to hold that the duty is on the assessee to explain his default and convince the department that it was occasioned by reasonable cause. It is not necessary for us to examine the merits of these contentions, however interesting and plausible they may be, in view of these categorical statement of law by the Supreme Court. At the same time we do not interpret Anwar Ali's case or the case of Hindustan Steel Ltd. to mean that even in cases where an assessee does not offer any explanation to a notice to show cause against the imposition of penalty for default in filing the return in time under Section 139(2), it is not open to the Income-tax Officer to infer dishonest disregard of law on the part of the assessee for the imposition of the penalty. The principle of the decision of the Supreme Court is only to the effect that by the mere rejection of the explanation of the assessee to the show cause notice it does not automatically follow that the necessary ingredient of Section 271(1)(a) of the Income-tax Act, 1961, has been made out. It is the duty of the department to point out circumstances from which an inference that the assessee acted deliberately in violation of law can be drawn.\n\n 12. If examined in the light of the principles stated, the finding of the Tribunal cannot stand. The order of the Tribunal has proceeded on the basis that a more default in the filing of the return will attract penalty and then proceeded to consider the explanation of the assessee. The approach made is, therefore, not warranted either by the wording of the section or by the decisions of the Supreme Court. The view of the Tribunal that even if the assessee bona fide thought that he need file the return only according to Section 139(1) in spite of the, notice under Section 139(2) it will not constitute sufficient cause to take the assessee out of Section 271(1) is also not correct. It only means that the assessee was not ignorant of law but misunderstood the provision. Such a bona fide impression will prove absence of mens rea or a deliberate disobedience of the provisions of law, which is necessary for the imposition of penalty. \n\n 13. There are no circumstances pointed out by the Tribunal apart from the finding we referred to, to justify the imposition of penalty. We, therefore, hold that the levy of penalty under Section 271(1)(a) is not justified in law. We answer the question referred in the negative, that is in favour of the assessee and against the department. There will be no order as to costs. \n\n 14. A copy of this judgment will be sent by the Registrar under his signature and the seal of this court to the Income-tax Appellate Tribunal, Cochin Bench." }, { "title": "Commissioner Of Income-Tax vs Darbhanga Marketing Co. Ltd. on 14 April, 1969", "url": "https://indiankanoon.org//doc/348649/", "text": "Commissioner Of Income-Tax vs Darbhanga Marketing Co. Ltd. on 14 April, 1969\nEquivalent citations: [1971]80ITR72(CAL)\nAuthor: Sabyasachi Mukharji\nBench: Sabyasachi Mukharji\nJUDGMENT\n\n\n \n\nSabyasachi Mukharji, J. \n \n\n 1. This reference arises out of the assessment for the assessment year 1962-63, for which the previous year is the year ending on the 31st March, 1962. The assessee is accompany mainly deriving income from dividends. The assessee filed a return of income declaring business loss of Rs. 20,905 and income from other sources of Rs. 1,76,584. The Income-tax Officer found that the gross amount of dividend amounted to Rs. 1,76,584 and allowed deduction of Rs. 21,326 being interest paid to various parties on moneys borrowed in connection with investments. The Income-tax Officer then worked out the chargeable dividend income at \n\nRs. 1,55,258 inasmuch as the assessee was entitled to exemption under Section 89(1)(ii) (sic. 99(1)(iv), of the Income-tax Act, 1961, the Income-tax Officer worked out the gross amount of dividend income exempt under that Section at Rs. 85,201 and reduced it by a sum of Rs. 10,290, being the amount paid in so far as it was attributable to the aforesaid dividend income. The Income-tax Officer, therefore, worked out that as against the gross amount of dividend of Rs. 85,201, the assessee was entitled to exemption under Section 99(1)(iv) of the said Act only in respect of Rs. 74,911.\n\n2. There was an appeal before the Appellate Assistant Commissioner. It was contended that exemption from super-tax under Section 99(1)(iv) of the Income-tax Act, 1961, was limited to the amount specified in the sub-section in so far as they were included in the total income. Since the amount of dividend exempt under Section 99(1)(iv) of the Income-tax Act, 1961, included in the income was only Rs. 74,911 as worked out by the Income-tax Officer, the Appellate Assistant Commissioner upheld the order of the Income-tax Officer.\n\n3. The assessee preferred a further appeal before the Tribunal. The Tribunal held that Section 99(1)(iv) of the Income-tax Act, 1961, conferred exemption from super-tax in respect of \"any dividend received\" by the assessee-company and not in respect of \"any dividend income\". The Tribunal, therefore, held that as the dividend received by the assessee covered by Section 99(1)(iv) was Rs. 85,201, the relief was not liable to be reduced merely because the \"dividend income\" after deduction of interest of money borrowed for earning the said dividend would be worked out at a lesser figure. The Tribunal, therefore, held that the assessee was entitled to relief on the whole of the amount of dividend it received and not on the said amount received by interest on money borrowed for earning the said dividend. The Tribunal, therefore, allowed the appeal.\n\n4. On an application being made, the Tribunal has referred the following question to this court under Section 256(1) of the Income-tax Act, 1961 :\n \"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was entitled to relief under Section 99(1)(iv) of the Income-tax Act, 1961, in respect of Rs. 85,201 and not on the said amount reduced by Rs. 10,290 being interest on money borrowed for earning the said dividend?\" \n\n5. Mr. B. L. Pal, learned counsel for the revenue, contended that Section 99 of the Act under which this question has been decided is in Chapter II with the heading \"Income forming part of the total income on which no supertax is payable\". Mr. Pal contended that income which formed part of those incomes have been computed in accordance with the provisions of the Act, According to the learned counsel for the revenue in the computation \n\n\nof the total income only the net dividend has been considered and not the gross dividend earned by the assessee. It is, therefore, clear that by that provisions of Section 99 what was to be exempted from super-tax was the net dividend and not the gross dividend. Therefore, whatever amount was exempted as expended for earning the dividends should be deducted to arrive at the dividend income over which super-tax should not be calculated under Section 99 of the Income-tax Act, 1961. Mr. Pal drew our attention to the various provisions of the Indian Income-tax Act, 1922, namely, Section 2(15), Section 6, Section 12(1A), Section 12(2), Section 16, Section 4 (3)(i) and Section 14 of the Indian Income-tax Act, 1922. He also drew our attention to the provisions of Section 2(45), Section 56 and Section 66 of the Income-tax Act, 1961. Mr. Pal also drew our attention to the decision of the Bombay High Court in the case of Ambika Silk Mills Co. Ltd. v. Commissioner of Income-tax, [1952] 22 I.T.R. 58 (Bom.). There it was held that under Section 17(7) of the Indian Income-tax Act, 1922, the relief to which a company was entitled in respect of super-tax was on the amount which was included as income chargeable under the head of \"Capital gains\". Consequently, when the total income in any year of a company consisted entirely of a residue of capital gains remaining after set-off against the total capital gains of that year of loss from business, the amount by which the super-tax payable by them should be reduced should be computed on the total amount of the capital gains and not on the residue of capital gains remaining after set-oil. In view of what the Bombay High Court were considering and the language of the present provision, we do not think that it will be relevant to discuss the case in detail. The next case relied on by Mr. Pal was the decision of the Calcutta High Court in the case of Commissioner of Income-tax v. Samnugger Jute Factory Co. Ltd., [1953] 24 I.T.R. 265 (Cal.) where it was held that the words \"any sums\" in Section 15B(1) of the Indian Income-tax Act, 1922, must be sums assessable in their nature, being parts of the assessable income of the relative accounting year and sums brought into the assessment and brought to charge. Consequently, it was held that there could be no question of granting an exemption under Section 15B in respect of a contribution to the Gandhi National Memorial Fund, if the sums representing the contribution were not part of the income assessable for the year at all. Chakravartti C. J. observed at page 274 of the judgment :\n \"Those words are, as I have already said, 'the tax shall not be payable by an assessee, etc.' It follows that if the exemption is to be asked \nfor in respect of 'any sum' that must be a sum about which it is possible \nto say that the tax shall not be payable upon it which can be possible only \nif it is a part of the income of the year and is liable to tax.\" \n\n6. The next case relied on by Mr. Pal was a decision of the Supreme Court in the case of Commissioner of Income-tax v. Manilal Dhanji , . Mr. Pal relied on the judgment, at page 881, where the Supreme Court has observed:\n \"We shall presently read Section 16(3), but before we do so it is necessary to refer to the scheme of Section 16 of the Income-tax Act. The section deals with the computation of total income as defined in Section 2(15) of the Act, and provides what sums are to be included or excluded in determining the total income. The definition of total income in Section 2(15) involves two elements--(a) the income must comprise the total amount of income, profits and gains referred to in Section 4(1), and (b) it must be computed in the manner laid down in the Act.\"\n\n7. Mr. Pal drew inspiration from this passage in support of his argument that anything which was not entered into the computation of the total income cannot merit calculation in determining the exemption from supertax as contemplated under Section 99 of the Income-tax Act, 1961. The next case on which reliance was placed by Mr. Pal was the decision of the Supreme Court in the case of Nalinikant Ambalal Mody v. S. A. L. Narayan Row, Commissioner of Income-tax, . Mr. Pal relied on this decision of the Supreme Court for the argument that there is no warranty for the assumption that whatever is included in the total income under Section 4 must be liable to tax. Section 3 does not provide that the entire total income shall be chargeable to tax. It says that the chargeability of the income has to be in accordance with and subject to the provisions of the Act. The income has, therefore, to be brought under one of the heads in Section 6 of the Act and can be charged to tax only if it is so chargeable under the computing section of that Act. Mr. Pal contended that to hold contrary to his submission would amount to giving double relief to the assessee, which according to him was not warranted by the provision of the statute.\n\n8. Dr. Devi Prasad Pal, learned counsel for the assessee, on the other\nhand, contended that on a proper and strict interpretation of the language\nof the provision it would be manifest that relief was contemplated under Section 99(1)(iv) of the said Act in respect of dividend received. To exclude\nfrom the dividend something which the assessee has received would be\ncontrary to the express provision of the language of the statute. He further\nsubmitted that if the revenue's contention is accepted in respect of the\nother sub-clauses of the same section, it would result in anomalies. In\nrespect of the heading, he urged that the expression \"income forming part\nof the total income\" was descriptive of the heads of the income included in\nthe total income of an assessee in respect of which exemption was being\n\n\ngranted and was not meant to indicate the quantum of income included. Dr. Pal drew our attention to the decision of the Supreme Court in the case of Commissioner of Income-tax v. South Indian Bank Ltd, . He particularly referred to the passage at page 766 where the Supreme Court has observed:\n \"The expression 'interest receivable on income-tax free loans' is clear and unambiguous..... 'Interest receivable' can only mean the amount of interest calculated as per the terms of the securities. It cannot obviously mean interest receivable minus the amount spent in receiving the same\" \n\n9. It has to be observed, however, that Mr. B. L. Pal made some argument to the effect that that case has to be understood specially under the notification which fell for consideration before the Supreme Court in respect of that case. Dr. Pal also drew our attention to the decision of the Bombay High Court in the case of Commissioner of Income-tax v. Industrial Investment Trust Co. Ltd., [1968] 67 I.T.R. 436 (Bom.) The said decision of the Bombay High Court, however, was mainly based on the decision of the Supreme Court referred to hereinbefore.\n\n10. It is relevant at this stage to set out the relevant provisions of the Act. Section 99 with which we are concerned as mentioned hereinbefore, is in Chapter XI of the said Act and is in the following terms:\n\n\"B--Incomes forming part of total income on which no super-tax is payable.\n\n99. Incomes not chargeable to super-tax--(1) Super-tax shall not be payable by an assessee in respect of the following amounts which are included in his total income--\n\n(i) if the assessee is a partner of an unregistered firm, any portion of the assessee's share in the profits and gains of the firm computed in the manner laid down in Section 67 on which super-tax has already been paid by the firm;\n\n(ii) if the assessee is a member of an association of persons or any other body of individuals, any portion of the amount which he is entitled to receive from the association or body, on which super-tax has already been paid by the association or body, as the case may be;\n\n(iii) any dividends received by assessee from a co-operative society as a member thereof;\n\n(iv) if the assessee is a company, any dividend received by it from an Indian company, subject to the provision contained in the Fifth Schedule....\" \n\n11. The relevant sub-clause which falls for consideration in the instant reference is Sub-clause (iv) of Section 99 (1) of the said Act which exempts \n\nany dividend received by it from any Indian company, subject to the provisions contained in the Fifth Schedule. The Fifth Schedule provides that the super-tax shall not be payable \"by any company in respect of any dividend which is assessable for the assessment year commencing on the 1st day of April, 1962, upon certain terms and conditions.\n\n12. In order to merit exemption from super-tax the amount must clearly come within the provisions of the section dealing with that exemption, namely, Section 99 of the said Act. Provisions of this nature must receive strict construction. Bearing that in mind, it is manifest, in our opinion, that under Section 99, super-tax shall not be payable by an assessee in respect of the \"amounts\" of \"any dividend received by it\". Therefore, it means the amount of dividend received by the assessee. It cannot mean dividend received minus the amount of interest on moneys borrowed for earning the same. The expression \"which are included in his total income\" in Sub-section (1) of Section 99 and \"incomes forming part of total income\" in the heading are descriptive of the items included in the computation of the total income and not indicative of the quantum of the amounts included under the different items in the computation of total income. Such a construction of these expressions would be in harmony with the obvious meaning of these expressions \"dividend received\". Any other construction would result in an anomaly. The construction we have reached is in consonance with the scheme of the section and from one point of view with the purpose behind it. It is true from another point of view for it amounts to excessive relief to an assessee. But that is a matter of legislative policy. In view of the language used we are not concerned with the same. We are further of the opinion that the ratio of the decision of the Supreme Court in the case of Commissioner of Income-tax v. South Indian Bank Ltd. supports the above view we are taking. In view of the fact that the language used in Section 15B(1) of the Indian Income-tax Act, 1922, is \"any sum\" which is different from the expression \"incomes\" in Section 99(1), we are of the opinion that the observations of Chakravartti C. J. in the case of Commissioner of Income-tax v. Samnugger Jute Factory Co. Ltd., cannot be availed of in aid of the revenue.\n\n13. The question is, therefore, answered in the affirmative and in favour of the assessee. The Commissioner of Income-tax will pay the costs of this reference.\n\nDeb, J. \n\n 14. I agree." }, { "title": "Commissioner Of Income-Tax vs Dunlop India Ltd. on 8 January, 1990", "url": "https://indiankanoon.org//doc/1877088/", "text": "Commissioner Of Income-Tax vs Dunlop India Ltd. on 8 January, 1990\nEquivalent citations: [1992]197ITR34(CAL)\nAuthor: Suhas Chandra Sen\nBench: Suhas Chandra Sen\nJUDGMENT\n\n\n \n\n Suhas Chandra Sen, J. \n \n\n 1. The case was originally heard and decided on March 21, 1989. Later on, it was decided to rehear the case because certain relevant facts and law and in particular the latest Supreme Court judgments were not cited in the course of hearing of the case. The\n\njudgment and order passed on March 21, 1989, are recalled. The case has been heard de novo. \n\n 2. The following four questions of law have been referred to this court by the Tribunal under Section 256 of the Income-tax Act, 1961 : \n\n \"1. Whether, on the facts and in the circumstances of the case and in view of the provisions of Section 35B(1) of the Income-tax Act, 1961, the assessee was entitled to weighted deduction in terms of Section 35B on the emoluments paid by it in each of the accounting periods relevant to the assessment years 1972-73 and 1973-74 to its employees in its export promotion department ? \n\n 2. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the relief in terms of Section 80J of the Income-tax Act, 1961, for each of the accounting periods relevant to the assessment years 1972-73 and 1973-74 should be computed in accordance with the decisions of the Calcutta High Court in the cases of Century Enka Ltd. and C. R. No. 6564(W) of 1974 dated April 29, 1976 (Century Enka Ltd. v. ITO )?\n\n 3. Whether, on the facts and in the circumstances of the case, the sum of Rs. 2,97,72,039 representing actuarial valuation of the liability on account of gratuity payable by the assessee to its employees was an allowable deduction in computing the profits and gains of the assessee's business for the accounting period relevant to the assessment year 1972-73 ? \n\n 4. Whether, on the facts and in the circumstances of the case, the deduction under Section 80-I of the Income-tax Act, 1961, was allowable in the assessment of the assessee for the accounting period relevant to the assessment year 1972-73 in respect of its income of Rs. 1,80,601 from interest on securities and insurance commission?\" \n\n 2. The assessment years involved in this reference are the assessment years 1972-73 and 1973-74, for which the corresponding period of accounting are the financial years ending on December 31, 1971, and December 31, 1972. \n\n 3. The Income-tax Officer had disallowed the assessee's claim for weighted deduction under Section 35B on two grounds. The staff engaged by the assessee in the export division performed a variety of functions not all of which were of the prescribed nature, viz., active exploration of export potential. It would be impossible to segregate the expenditure that was relatable only to export development from the routine functions. Secondly, it was pointed out that salaries paid to the export personnel\n\nbeing incurred in India were specifically excluded by Section 35B(1)(b)(iii) from expenditure eligible for relief. The Income-tax Officer allowed the expenditure incurred actually for export promotion as deduction. The Appellate Assistant Commissioner, on appeal, held : \" Another point which is also common to both the assessment years relates to the refusal of the Income-tax Officer to grant weighted deduction under Section 35B in respect of the expenditure on emoluments of personnel exclusively employed for the promotion of export. It is stated that there was a separate export promotion department and the expenses claimed duly fulfilled the conditions prescribed in Section 35B(1)(b). I have gone through the details furnished and I find that the appellant was maintaining an exclusive independent export promotion department. The nature of the expenses also shows that they qualified for the weighted deduction under Section 35B(1). I, therefore, allow deductions of Rs. 1,14,215 and Rs. 1,33,279 on this account for the assessment years 1972-73 and 1973-74, respectively \". \n\n 4. The Tribunal has really not applied its mind to the problem. The Tribunal is the last fact-finding authority. It is also the last appellate court under the Income-tax Act, 1961. The jurisdiction of the Tribunal in the appeal is quite different from the jurisdiction of the High Court on a reference. The question of the assessee's entitlement to get weighted deduction under Section 35B of the Income-tax Act, 1961, was specifically raised before the Tribunal. It was specifically argued by the Departmental representative that, in order to succeed in its claim under Section 35B of the Act, the assessee had to satisfy the Income-tax Officer about the purpose of the expenditure. Reference was made to the language of Clause (b) of Sub-section (1) of Section 35B of the Act. \n\n 5. The Tribunal held : \n \"We have given consideration to the above arguments. As already stated, the assessee is maintaining an exclusive independent export promotion department for dealing with its exports. The Appellate Assistant Commissioner had gone through the details furnished and had been satisfied about the nature of the expenses qualified for weighted deduction under Section 35B(1) of the Act. The said finding has not been challenged by the Department. Rather, the ground, accepted those findings, as correct, because it proceeds with the opening words : 'That, on the facts and in the circumstances of the case.' Nor has the departmental representative been able to satisfy us that the said finding of the Appellate Assistant Commissioner is not correct. Furthermore, as rightly argued\n\nby Dr. Pal, the assessee cannot be denied the benefit under Section 35B(1) of the Act simply because the emoluments were paid by the assessee to its employees in India, as that view of the Income-tax Officer does not appear to be correct in view of the decision of the Bombay High Court in CIT v. Eldee Wire Ropes Ltd. [1978] 114 ITR 485. We, therefore, after due deliberation, uphold the order of the Appellate Assistant Commissioner.\"\n\n 6. The Tribunal really sidetracked the issue raised by the Departmental representative. The point of allowability of the assessee's claim under Section 35B was specifically taken in the grounds of appeal before the Tribunal. The point was argued by the Departmental representative. The Tribunal had to come to a finding about the correctness of the Appellate Assistant Commissioner's decision both on facts and in law. In reference jurisdiction, the High Court may decline to answer a question of fact unless the facts have been specifically challenged by a specific question raised. That is because of the limited jurisdiction of the High Court sitting in reference. In the absence of challenge, the finding of fact must be taken to be correct. If a question is raised on the basis of the facts and the circumstances of the case, the High Court cannot go behind the facts found by the Tribunal because the Tribunal is the final fact-finding authority. \n\n 7. But the Tribunal sitting in appeal cannot treat the finding of fact made by the Appellate Assistant Commissioner as final. If the question of allowability of weighted deduction under Section 35B has been raised before the Tribunal, the Tribunal has to examine the question both on facts and in law. Merely because the ground of appeal starts with the phrase \"whether, on the facts and in the circumstances of the case\", the Tribunal cannot decline to investigate the facts and come to a conclusion as to the correctness of the Appellate Assistant Commissioner's finding. \n\n 8. Moreover, even assuming that the ground of appeal was of limited nature, the question still remains as to whether, on the basis of the finding made by the Appellate Assistant Commissioner, the claim of the assessee could be allowed under Section 35B. The Appellate Assistant Commissioner has merely stated that the assessee maintained an export department and the nature of the expenses showed that they qualified for the weighted deduction under Section 35B(1). The nature and purpose of the expenses were not analysed. The specific sub-clause under which the expenses were allowable was not mentioned or examined. It is true that\n\nsome expenses incurred in India qualified for weighted deduction under Section 35B. But all expenses incurred in India do not qualify for such deduction. Therefore, the nature of the expenditure has to be examined and a decision has to be taken as to under which sub-clause of Section 35B(1)(b) the expenditures are allowable. The Appellate Assistant Commissioner has merely said : \"I have gone through the details. I find that the appellant was maintaining an exclusive export promotion department and, therefore, the expenditure is allowable\". The Appellate Assistant Commissioner must come to a definite finding about the exact nature of the expenditure and the exact sub-clause under which such expenditure is allowable. \n\n 9. Even assuming that the facts found by the Appellate Assistant Commissioner were binding on the Tribunal, the Tribunal could not have held that the expenditure was allowable or that the Appellate Assistant Commissioner was right in allowing the expenditure without examining the nature and details of the expenditure. Whether the expenditure is allowable or not under Section 35B will depend upon whether the expenditure was incurred wholly and exclusively on the specific activities mentioned in sub-clauses (i) to (viii) of Section 35B(1)(b). If the assessee is claiming a relief, the onus lies upon the assessee to establish facts which will entitle it to obtain that relief. It was for the assessee to establish that the expenditure was of a nature that specifically fulfilled the conditions and was for the particular purposes mentioned in the various sub-clauses under Section 35B(1)(b). \n\n 10. Therefore, the answer to question No. 1 must be in the negative and in favour of the Revenue. The case will have to be remanded to the Tribunal and the Tribunal will examine the question of allowability of these items of expenditure afresh. The assessee must be able to satisfy the Tribunal that the expenditure was of the nature mentioned in Sub-clauses (i) to (viii) of Sub-section (1)(b) of Section 35B. \n\n 11. Question No. 2 is already concluded by the judgment of the Supreme Court in the case of Lohia Machines Ltd. v. Union of India and, following the principles laid down in that case, the question has to be answered in the negative and in favour of the Revenue.\n\n 12. Question No. 3 is also concluded by the judgment of this court in the case of CIT v. Eastern Spinning Mills Ltd. [1980] 126 ITR 686 and, following the principles of law laid down in that case, the question has to be answered in the affirmative and in favour of the assessee.\n\n 13. \nQuestion No. 4 relates to the deduction claimed under Section 80-I in respect of interest on securities and insurance commission. The case of the assesses is that interest on securities and insurance commission received by the assessee come within the phrase \"profits and gains attributable to any priority industry\". The Tribunal's findings of fact on these questions are as under : \n\n \"The last ground of appeal by the Revenue pertains to the appeal for the accounting period relevant to the assessment year 1972-73. The Income-tax Officer, in .the assessment order, has held that the deduction under Section 80-I of the Act was not available in respect of the income from interest on securities and insurance commission totalling Rs. 1,88,601 as the said income from the said sources does not constitute income arising from the manufacture and sale of priority goods. \n\n On appeal, the Appellate Assistant Commissioner of Income-tax, following the order of this Bench of the Tribunal, decided on November 30, 1976, in the case of the assessee for the accounting period relevant to the assessment years 1968-69 and 1969-70, has directed the Income-tax Officer to recompute the relief admissible under Section 80-I of the Act in the light of the said decision of the Tribunal.\n\n In the appeal before us, the arguments on the point at issue by the parties have proceeded on the same lines as were canvassed before the Tribunal on the earlier occasions. For the reasons stated in our earlier order with which we agree, we uphold the order of the Appellate Assistant Commissioner on this point also.\" \n\n 14. For the assessment years 1968-69 and 1969-70, the question of allowability of the reliefs under Section 80-I was gone into at length by the Tribunal. The orders passed by the Tribunal for the assessment years 1968 69 and 1969-70 have been annexed to the statement of the case. \n\n 15. On the point of insurance commission, the Department's case was that the commission was earned by the assessee as an agent of the insurance company and not as the owner of a priority industry. \n\n 16. The Tribunal held : \n \"The position in regard to the other two sums of commission receipts and interest receipts is quite different. The facts as stated by the appellant in relation to these commission receipts clearly show that the appellant did not carry on any business activity in insurance agency as contended by the Revenue. Admittedly, the appellant had serviced the insurance policies relating to its business asset only, viz., its factory\n\nbuildings, plant and machinery, raw materials, stock-in-trade, etc. To facilitate this work, it has its own insurance department for which it has also taken a licence from the Controller of Insurance. It is not the case of the Department that the appellant carries on any business activity as an insurance agent by canvassing business from outsiders and earned commission thereon. On the other hand, the facts of the case conclusively established that the entire commission receipts were from the assessee's own payments of insurance premium and that they were in the nature of rebate allowed to the assessee from the insurance premium paid by it on its own policies. Further, the Department is not entitled to take only the gross receipts of commission ignoring the expenses incurred by the assessee on its insurance department which are, admittedly, debited under the head 'Selling and administrative expenses, manufacturing expenses and salaries and wages account' as contended by the appellant. We are unable to agree with the Revenue that it was not open to the appellant to take up this plea merely because this aspect was not placed by it before the lower authorities. In fact, the appellant was contending throughout that these commission receipts were part of its business receipts and should not be excluded for the purpose of allowing deduction under Section 80-I of the Act. We are, therefore, satisfied that these commission receipts are part of the business activity of the priority industry carried on by the appellant.\" \n\n 17. This order of the Tribunal was passed in a rectification proceeding. The Tribunal ultimately held in those cases that substantial questions of law were involved on these two points and that the errors, if any, committed were not rectifiable errors under Section 154. If the Income-tax Officer had allowed the claim of the assessee inadvertently and erroneously, even then, such errors could not be corrected under the provisions of Section 154 of the Income-tax Act, 1961. \n\n 18. The reasoning given in the earlier part of this order for allowing the claim of the assessee under Section 80-I has, however, been followed by the Tribunal in the instant case. No separate reason has been given by the Tribunal. \n\n 19. On the point of insurance commission, two facts were emphasised by the Tribunal. The appellant did not carry on any insurance business other than servicing its own factory building, plant and machinery, raw materials, stock-in-trade, etc. The company has its own insurance department for which a licence has been taken from the Controller of Insurance. The second important fact noted by the Tribunal is that the entire\n\ncommission receipts were from the assessee's own payment of insurance premium and that they were in the nature of rebate allowed to the assessee from the insurance premium paid by it on its own policies. \n\n 20. The first question that arises is this : did the assessee receive any payment by way of commission ? The answer must be in the affirmative. The assessee had two roles to play. As a client of the insurance company, it paid premium for the insurance cover provided to it by the insurance company. It also acted as an agent of the insurance company by virtue of a licence obtained by it specifically for this purpose. As an insurance agent, it was entitled to get commission for the business procured by it. It was agreed between the insurance company and the assessee that, instead of direct payment of the agency commission separately, a rebate would be granted on the amount of the premium payable by the assessee. If the agent was an outsider, the assessee-company would have paid the full amount of the insurance premium and the insurance company in its turn would have separately paid the usual commission to the insurance agent. \n\n 21. In this case, the assessee and the insurance company came to an agreement that the commission would be paid by granting a rebate on the premium payable. That is a mutually agreed mode of payment of the insurance commission. Merely because the amount of commission is adjusted or set off by way of rebate against the premium payable by the assessee, it does not mean that there has not been any accrual of income to the assessee. In the case of Coren v. Keighley [1972] 48 TC 370 (Ch. D.), it was held that, where two cross demands for money were set off against each other, each set-off constituted payment in cash. \n\n 22. Therefore, in our view, the insurance company, in effect, paid commission to the assessee by way of granting rebate on the insurance premium. The amount of commission which was given by way of rebate was income in the hands of the assessee and was taxable as such. \n\n 23. The next aspect of the question is that, even if it be held that the rebate granted by the insurance company is to be treated as income, can it be described as part of \"profits and gains attributable to any priority industry\" under Section 80-I ? Commission is usually paid by the insurance company to its agent for procuring business. The agent acts as a middleman between the insured and the insurance company. The payment of commission may be calculated on the basis of a percentage of the total amount of premium paid by the insured. But the commission that an insurance agent receives is nothing but a consideration payable\n\nfor procuring business and servicing the insurance policies. The accrual of income takes place not on account of any activity of the priority industry but because of the service rendered by the insurance agent to the insurance company. However widely the phrase \"profits and gains attributable to any priority industry\" is construed, the commission received for the services rendered by an insurance agent to an insurance company cannot come within the ambit of that phrase merely because the insurance cover is in respect of the plant and machinery and stock-in-trade of the priority industry. \n\n 24. The fact that the assessee-company has been treated as a priority industry and had itself acted as an insurance agent will not make any difference to the principle. When the assessee was acting as an insurance agent, it was carrying on an activity which was quite distinct and separate from the business of the priority industry. In fact, the Tribunal has pointed out that in order to carry on business as an insurance agent, it was necessary to obtain a licence. The assessee had actually taken out a licence from the Controller of Insurance for this purpose. On the strength of this licence, the assessee acted as an insurance agent. The insurance agency business of the assessee may have been confined to the priority industry only. But that will not alter the position in any way. The agency business of the assessee was quite a distinct and separate business and did not form part of the priority industry. The income from the agency business cannot be treated as part of \"profits and gains attributable to any priority industry\". \n\n 25. I am unable to uphold the contention that the commission was paid out of income attributable to a priority industry. A rebate was granted on the amount of premium and, therefore, the rebate, even if it can be treated as income, must be treated as income attributable to a priority industry. \n\n 26. There are two reasons why the assessee's contention cannot be accepted. In the eye of law, it is the insurance company which has paid the commission to the assessee. The mode of payment may be by book adjustment. But such adjustment in the eye of law must be regarded as cash payment. The payment was made by the insurance company out of its own monies. The payment cannot be treated as having been made out of the income of any priority industry or out of profits and gains attributable to any priority industry. \n\n 27. Moreover, the amount of premium received by the insurance company must be treated as its own monies. If fees are paid by a priority\n\nindustry to a lawyer or an accountant on account of professional services rendered, such fees in the hands of the recipient cannot be treated as income attributable to a priority industry. Similarly, if an insurance company receives payment from a priority industry, the money in the hands of the insurance company does not become income attributable to a priority industry. If any payment is made by the insurance company to an agent, the payment received by the agent cannot be treated as income of the priority industry even though the premiums were paid out of income attributable to a priority industry. \n\n 28. A similar question was examined by the Judicial Committee of the Privy Council in the case of Premier Construction Co. Ltd. v. CIT [1948] 16 ITR 380. In that case, the assessee-company was the managing agent of the principal company whose business was to manufacture sugar from cane grown on its own farms as well as cane bought from outside. There was no dispute that the income derived by the principal company from sugar manufactured from its own cane was agricultural income and as such was exempt from income-tax. The assessee-company as managing agent of the principal company was entitled to a commission at the rate of ten per cent. per annum on the annual net profits of the principal company after making all proper allowances and deductions from revenue for working expenses chargeable against profits but without making any deduction for depreciation or in respect of any amount carried to reserve or sinking fund or any payment on account of super-tax or any deduction for expenditure on capital account provided that such commission should not in any year amount to a less sum than rupees ten thousand. The assessee claimed that a portion of the income received by the assessee from the principal company was agricultural income and as such, exempt from assessment under the Income-tax Act, 1961. Sir John Beaumont repelled this contention in the following words (at page 384) :\n \". . . . where an assessee receives income, not itself of a character to fall within the definition of agricultural income contained in the Act, such income does not assume the character of agricultural income by reason of the source from which it, is derived, or the method by which it is calculated. But if the income received falls within the definition of agricultural income it earns exemption, in whatever character the assessee receives it. In the present case, the assessee received no agricultural income as defined by the Act ; it received remuneration under a contract for personal services calculated on the amount of profits earned by the employer, payable, not in specie out of any item of such profits, but out\n\nof any moneys of the employer available for the purpose. The remuneration therefore is not agricultural income and is not exempt from tax.\" \n\n 29. In the instant case, the commission income was received by the assessee under a contract for personal service. The commission was payable by the insurance company. The character in which the assessee received the money was that of an insurance agent. The mode of payment or the fact that the assessee had no other agency business is quite irrelevant for the determination of the question of accrual of income and the character of the income. \n\n 30. On the question of interest received from Government securities, the finding of fact made by the Tribunal is that these deposits were made with the excise department and the electricity boards in West Bengal and Tamil Nadu. The deposits that were made with the excise department was for obtaining manufacturing facilities under the Central Excise laws and the deposits that were made with the electricity boards were for the purpose of obtaining industrial power connection. It cannot be disputed that these deposits made were incidental to and for the purpose of carrying on the business of priority industry. The Tribunal has found that the deposits were made in the form of Government securities which were kept deposited with the excise department and the electricity boards. The case of the assessee is that it had to purchase these Government securities to furnish deposits only for the purpose of carrying on its business. The Tribunal has held that the interest earned on these Government securities will form part of the income of the priority industry. We have no hesitation in upholding this conclusion of the Tribunal. If the securities had to be furnished for the purpose of carrying on the business of the priority industry, then the interest receipts earned from these securities will have to be treated as part of the profits and gains attributable to a priority industry. \n\n 31. Therefore, the questions raised are answered in the following manner : \n\n Question No. 1 is answered in the negative and in favour of the Revenue. The Tribunal will examine the question of allowability of the expenditure under Section 35B afresh as directed hereinabove. \n\n Question No. 2 is answered in the negative and in favour of the Revenue. \n\n Question No. 3 is answered in the affirmative and in favour of the assessee.\n\n Question No. 4 is in two parts and is answered in the following manner : \n The income from interest on securities received by the assessee qualifies for deduction under Section 80-I of the Income-tax Act, 1961. The amount received by the assessee as insurance commission does not qualify for deduction under Section 80-I of the Income-tax Act, 1961. \n\n 32. There will be no order as to costs. \n\n Bhagabati Prasad Banerjee, J. \n\n 33. I agree." }, { "title": "Commissioner Of Income-Tax vs Baker Mercer India P. Ltd. on 8 August, 1990", "url": "https://indiankanoon.org//doc/1937372/", "text": "Commissioner Of Income-Tax vs Baker Mercer India P. Ltd. on 8 August, 1990\nEquivalent citations: [1992]196ITR667(BOM)\nAuthor: Sujata V. Manohar\nBench: Sujata V. Manohar\nJUDGMENT\nMRS. Sujata V. Manohar J.\n\n1. At the instance of the Department, the following questions are sought to be raised under section 256(2) of the Income-tax Act, 1961, for the purpose of directing the Tribunal to refer these question to us :\n\n\"1. Whether, on the facts and the circumstances of the case, the Tribunal was justified in law in cancelling the order of the Commissioner of Income-tax under section 263 of the Income-tax Act, 1961, holding that the provisions of section 263 were not correctly invoked in this case ?\n\n2. Whether, on the fact and in the circumstances of the case the Tribunal was justified in law in holding that the provisions of rule 115 of the Income-tax Rules, 1962, were not correctly applied to the facts of this case and that no adjustments to the cost of the plant and machinery on account of exchange fluctuations is called for the purposes of allowing depreciation under section 43A of the Income-tax Act, 1961 ?\n\n3. Whether on the fact and in the circumstances of the case, and in law the Tribunal was justified in holding that no adjustment of the cost or written down value of depreciable assets on account of exchange fluctuation is called for arriving at the 'capital employed' in the new industrial undertaking for the purpose of working out the relief under section 80J of the Income-tax Act, 1961 ?\n\n4. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the assessee is entitled to investment allowance under section 32A in respect of technical know-how and that no withdrawal of such allowance granted by the Income-tax Officer in the assessment is called for ?\n\n2. Questions Nos. 2 and 3 relate to the plant and machinery which the assessee had purchased from abroad through the Industrial Credit and Investment Corporation of India Ltd. (ICICI). Loans were advanced for this purpose by the ICICI, repayable in foreign currency. The repayment was made by the assessee by installments. Rupee payments for equivalent foreign currency were made at the exchange rates intimates by the ICICI. On account of upward revision of the value of the foreign currency vis-a-vis the rupee, the assessee has was required to pay more in terms of rupee while repaying the loans. The assessee, accordingly, had to adjust upwards the cost of its plant and machinery from time to time on account of fluctuations in the exchange rates. The assessee also claimed depreciation on the basis of such additional cost arising as a result of adjustment in the rates of exchange.\n\n3. In view of the clear provision of section 43A of the Income-tax Act, 1961, which are directly applicable to the present case, it is clear that, when an assessee has acquired an asset from a country outside India for the purposes of his business and, in consequence of a change in the rate of exchange at any time after the acquisition of such asset, there is an increase in the liability of the assessee as expressed in Indian currency for making payment towards the cost of the asset or for repayment of the whole or a part of the moneys borrowed by him in any foreign currency specifically for the purpose of acquiring the asset, the amount by which the liability is so increased shall be added to the actual cost of the asset for the various purpose which are set out in section 43A and the increased cost shall be the cost of acquisition of the asset. The answer to question No.3 is, therefore, obvious.\n\n4. Rule 115 of the Income-tax Rules, 1962, which is the basis for question No. 2, has no application because the said rule is in respect of income accruing or arising and not in respect of the valuation of plant and machinery. Question No. 2 is, therefore, wholly misconceived and does not arise out of the order of the Tribunal.\n\n5. Question No. 4 relates to investment allowance under section 32A of the Income-tax Act, 1961, in respect of technical know-how. Our High Court, in the case of CIT v. Emco Electro Pvt. Ltd. [1979] 118 ITR 864, considered the meaning of the word \"plant\" for the purpose of depreciation and development rebate. It said that \"plant\" is a word of wide import and must be broadly construed. It held that \"plant\" would include technical know-how also. The Supreme Court, in the case of Scientific Engineering House P. Ltd. v. Ltd. v. CIT , has also held that, for purposes of depreciation, the term \"plant\" is wide enough to include techinical know-how and documentation such as drawings, designs, plans, processing data, etc.\n \n\n6. In Income-tax Application No. 106 of 1988 CIT v. Deepa Aromatic Pvt. Ltd., however, by an order dated August 3, 1990, we had granted rule on the question whether investment allowance under section of 32A of the Income-tax Act, 1961, can be allowed in respect of technical know-how because, under section 32A, the phrase used is \"machinery or plant installed\". This would prima facie exclude technical know-how which cannot be installed. Mr. Dastur, learned counsel for the assessee, has, however, drawn our attention, in the present case, to the decision of our court in CIT v. Saraspur Mills Ltd. [1959] 36 ITR 580, where similar provisions relating to development rebate under section 10(2)(vib) of the Indian Income-tax Act, 1922, were considered. The court the expression \"plant installed\" in that section and said that it did not necessarily mean something fixed in position but it should be constructed widely in the sense of \"inducted or introduced\". This decision has been expressly approved by the Supreme Court in CIT v. Mir Mohammed Ali [1964] 53 ITR 165. The Supreme Court also said that \"machinery installed\" should be interpreted as used in the sense of something which is inducted or introduced.\n\n7. In view of the above decisions which were not pointed out to us in the earlier income-tax application, in our view, the question does not now need any further consideration. Simply because the word \"installed\" is used in section 32A of the Income-tax Act, 1961, technical know how does not get excluded from the term \"plant\". Section 32A, therefore, applies to technical know-how also. The ratio of the decisions in CIT v. Emco Electro Pvt. Ltd. (1979) 118 ITR 864 (Bom) as well as in Scientific Engineering House Pvt. Ltd. v. CIT , therefore, applies to the present case. In view of these judgments, the answer to question No. 4 is also obvious. No useful purpose can, therefore, be served now by referring this question under section 256(2) of the Income-tax Act, 1961, for being framed by the Tribunal.\n\n8. As far as question No. 1 is concerned, in our view, the Tribunal has rightly come to a conclusion, in the above circumstances, that no occasion has arisen to invoke the provisions of section 263 of the Income-tax Act, 1961. The answer to question No. 1 is also, therefore, obvious and no purpose would be served by asking the Tribunal to frame this question.\n\n9. The rule is, therefore, discharged, with no order as to costs." } ]