Continental Construction Ltd vs Commissioner Of Income-Tax, Central-1 on 15 January, 1992
Equivalent 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
           PETITIONER:
CONTINENTAL CONSTRUCTION LTD.

	Vs.

RESPONDENT:
COMMISSIONER OF INCOME-TAX, CENTRAL-1

DATE OF JUDGMENT15/01/1992

BENCH:
RANGNATHAN, S.
BENCH:
RAMASWAMI, V. (J) II
OJHA, N.D. (J)

CITATION:
 1992 AIR  803		  1992 SCR  (1)	 57
 1992 SCC  Supl.  (2) 567 JT 1992 (1)	140
 1992 SCALE  (1)65

ACT:
 Income-tax Act, 1961 : Ss. 9(1)(vi),(vii),119(1),80-0,80-HHB :
     Assessee-Engineering    and    Construction    Company-
Undertaking of foreign projects-Approval by Central Board of
Direct Taxes-payments in respect of consideration for supply
of technical information for use outside India and rendering
Technical Services to foreign Government  Enterprise-Whether
`similar'   to	`royalty',  `Commission	 or   `free'   etc.-
Deductions-Scope  of  Assessee-Whether	entitled  to  relief
under  S.  80-O for assessment years earlier  to  1983-84  -
Whether	  eligible  for	 deductions  under  s.	80-HHB	 for
assessment years 1983-84 onwards.
     Assessee	Company-Foreign	  contracts-Execution	 of-
Construction  of  dam and irrigation project,  water  supply
project	  etc.-Services	 involving  specialised	  knowledge,
experience and skill in constructional operations-Whether ar
technical services.
     "Technical	 Services"-Whether can be  rendered  through
medium of employees, skilled and unskilled.
     Foreign  projects of `composite'  activities-Activities
falling partly under S. 80-HHB-Whether relief can be granted
under each sections separately.
     Activities of foreign contract falling under S. 80-0 as
well  as Section 80-HHB-Deductions-Whether can	be  computed
under s. 80-HHB only.
     Central  Board of Direct Taxes-Circulars No. 187  dated
23.12.1975 & 253 dated 30.4.1979. Letters dated 28.10.83 and
31.7.1985-Board's   power  to  grant  approval	to   foreign
contracts-Purpose  and	scope of:  Guidelines  for  approval
nature	of:  Approval once granted-Whether to  continue	 for
subsequent assessment years for the same agreement.
						  58
Words and phrases :
     `business	of execution of a foreign project',  profits
derived', `royalty', `similar', `technical services'-Meaning
of.

HEADNOTE:
     Section 80-O of the Income Tax Act, 1961 provides for a
deduction  in  computing  the total income,  in	 respect  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  the	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,
experience or skill made available or provided or agreed  to
be  made  available  or	 provided  to  such  Government	  or
enterprise by the assessee or in consideration of  technical
services rendered or agreed to be rendered outside India  to
such  government  or  enterprise by the	 assessee  under  an
agreement  approved by the Central Board of Direct Taxes  in
this behalf.
     The  appellant-assessee, a civil construction  company,
describing  itself as Engineers, and  contractors   executed
projects  overseas  and	 in  India.   It  undertook  certain
contracts  for	construction,  inter  alia,  of	 a  dam	 and
irrigation  project, a fibre-board factory and a huge  water
supply	project in foreign countries.  One of its  projects,
called the Karkh Project, which constituted a major  portion
of  its	 gross total income was with  the  Iraqi  Government
through the Baghdad Water Supply Administration (BWSA).	 The
contract was for the design, manufacture, delivery,  supply,
construction  and installation for the first stage of  Karkh
Water Supply Scheme.  Since tenders had been called for from
consortia the assessee associated with the State Contracting
Company	 for Water and Sewerage Projects, Baghdad (SCC)	 and
formed a consortium and the said consortium entered into  an
agreement  on  17.12.1980 with the  Iraqi  Government.	 The
terms  of the consortium between the assessee and  SCC	were
set  out in another agreement dated 18.12.1980 dividing	 the
areas  of responsibility (the packages) under  the  contract
between the two.
     The  assessee  applied to the Central Board  of  Direct
Taxes (CBDT) for latter's approval to the contracts "for the
supply	of Civil construction know-how to the Government  of
Iraq"  under Section 80-O of the Income-Tax Act,  1961.	  In
para 5(a)(ii) of the proforma of the application  prescribed
for  the purpose, the assessee indicated  that	"information
concerning  industrial, commercial, or scientific  knowledge
or  skill"  was being made available outside India;  and  in
Column	5(b)  thereof it mentioned that	 technical  services
would be rendered by the assessee to
						  59
BWSA,  Government  of  Iraq  through  its  Indian Engineers,
Scientists,  technicians  and semi-skilled  labours  to	 be
inducted for that purpose.
     Meanwhile, by the Finance Act, 1982, section 80-HHB was
inserted to the Act with effect from 1.4.1983, providing for
25%  deduction from the profits and gains derived  from	 the
business of execution of a foreign project undertaken by the
assessee with the government of a foreign  State-enterprise.
Sub-section   (5)  of  section	80-HHB	provided  that	 not
withstanding  any  provision in Chapter VIA of the  Act,  no
part of any consideration or of the income comprised in	 the
consideration  payable	to the assessee for execution  of  a
foreign	  project  shall  qualify  for	deduction  for	 any
assessment year under any such other provision.
     The CBDT accorded its approval on 28.10.1983.  However,
with  respect to Karkh and Diwaniyah projects, the  approval
was  granted for the assessment year 1982-83,  stating	that
for  the subsequent period section 80-HHB, which  came	into
force w.e.f. 1.4.1983, would be operative.
     The  assessee  claimed  and  obtained  deduction  under
section	 80-0  in respect of some of the contracts  in	some
assessment year between 1976-77 to 1980-81.
     For  the  year 1983-84, the assessee returned  a  gross
total  income  of Rs. 72,67,45,938 but as  against  this  it
claimed	 a  deduction  of Rs. 89,16,19,198 :  of  this,	 the
deduction claimed in respect of karkh and Diwaniyah projects
came  to Rs. 77,84,29,446 and Rs. 6,36,85,436  respectively.
As  Board's approval under section 80-0 in respect of  these
two  contracts was limited to the assessment  year  1982-83,
the  Inspecting	 Assistant Commissioner	 (IAC)	declined  to
grant the assessee any deduction under section 80-0 not only
in  respect of these two projects but also for	the  others,
holding	 that section 80-HHB, and not section 80-0,  applied
to  the	 agreements.  However, relief was not  granted	even
under  section	80-HHB	on the ground  that  conditions	 for
exemption specified thereunder were not fulfilled.  The	 IAC
determined  assessee's	total  income  at  Rs.	89,41,35,103
raising a tax demand of Rs. 66,07,72,982.
     On	 appeal, the Commissioner  of Income  Tax  (Appeals)
agreed	with the IAC to the extent that the assesse was	 not
entitled  to  relief under section 80-0 because	 :  (1)	 the
approval  of  the CBDT for three of the	 contracts  did	 not
extend	to  assessment year 1983-84; (2) all  the  contracts
undertaken  by the assessee were in the nature	of  `foreign
projects'  within  the meaning of section  80-HHB;  and	 (3)
notwithstanding the
						  60
approval of the CBDT section 80-HHB (5) ruled out the  grant
of  relief under section 80-O for any of the  projects.	  He
however,  set aside the assessment and directed the  IAC  to
reappraise assessee's claim for exemption under section	 80-
HHB  holding  that  the assessee, being	 under	a  bona-fide
belief	all  through that it was entitled  to  relief  under
section	 80-O, did not have a proper opportunity of  putting
forth its claim for relief under section 80-HHB.
     The  assessee  appealed  to the  Income  Tax  Appellate
Tribunal  (ITAT).  During the pendency of the appeal  before
ITAT,  the CBDT, by its letter dated 31.7.1985 modified	 the
original  letter of approval dated 28.10.1983 and  made	 the
approval  operative even for years subsequent to  assessment
year 1982-83.
     The  ITAT affirmed the order of the C.I.T. but, at	 the
request of the assessee, made a reference to the High Court.
The  High Court answered the reference against the  assessee
holding that the execution of the work by the assessee	fell
under  section	80-HHB	and  not  under	 section  80-O;	 the
receipts  of  the assessee from the contracts did  not	fall
within	the  category  of receipts for	which  deduction  is
provided  in section 80-O; that the Board's approval  was  a
qualified  one	which  fully authorised	 and  empowered	 the
officer	 to  determine	whether all the	 conditions  of	 the
section were fulfilled as well as the amount, if any,  which
could be deducted under section 80-O,
     In	 the  assessee's  appeal  to  this  Court,  it	 was
contended  by  the  Revenue that (1)  the  receipts  of	 the
assessee  under the contract were profits and gains  of	 its
business of execution of foreign projects under	 sub-clauses
(i) and (ii) of clause (b) of s. 80-HHB and did not  qualify
for  deduction	under section 80-O as the receipts  did	 not
fall  under  any  of  the  categories  either  of   royalty,
commission, fees or `any similar payment', and the  assessee
either	made  any information  available  nor  rendered	 any
technical  service to its foreign clients; (2) the  contract
for  Karkh  Water  Supply Project was in  the  nature  of  a
turnkey	 project  as  the client wanted the  project  to  be
executed  by  the consortium complete in  all  respects	 and
handed over to it, and the client was neither interested  in
the  details  of the information possessed or  the  services
rendered  by  the  contractor nor was the  assessee  as	 per
consortium  agreement,	concerned  with	 any  part  of	 the
contract  other	 than the "civil works";  (3)  the assessee
neither	 rendered  any	technical  service  nor	 made	such
information  available	either to the consortium or  to	 the
foreign government, but the information possessed by it	 and
the services rendered in these respects by its engineers and
other employees were utilised by the
						  61
assessee   itself;  (4)	 the  contract	being  an   integral
indivisible  one, it was not permissible to the assessee  to
dissect	 the  consideration as attributable to	its  several
ingredients and apportion a part of it as being payment	 for
information made available or technical services rendered to
the foreign government; (5) even assuming that the whole  or
atleast a part of the consideration payable to the  assessee
falls  under  section 80-O, still as per  sub-section  (5)of
section 80-HHB the assessee would be  eligible for deduction
under  section 80-HHB only; and (6) even if  the  assessee's
case falls under section 80-O to will be entitled to  relief
not  on	 the entire profits derived by it but only  to	that
portion	 of the receipts as can be described as	 having	 the
character enumerated in section 80-O
     On	 behalf of the assessee it was contended that  since
the  insertion	of section 80-HHB has not  resulted  in	 the
deletion  of section 80-O, the two sections should  be	read
harmoniously  and given effect to together  restricting	 the
operation of section 80-HHB to contracts entered into on  or
after  1.4.1983	 so as not to effect the  contracts  entered
into  before that date and approved by the Board; that	even
after  the  insertion of section 80-HHB there  is  room	 for
applicability  of section 80-O in relation to a contract  of
composite  activities  and section 80-HHB  applies  only  to
construction-installation  activity  simpliciter;  and	that
once an approval under section 80-O is granted (on  whatever
date it be) the approval should ensure for the entire period
of  contract  and  connot be restricted	 to  any  particular
assessment year or years.
     On	 the question whether the assessee is entitled to  a
deduction  under  section 80-O or section 80-HHB  or  partly
under one or partly under the other or under neither of	 the
provisions.
     Dismissing the assessee's appeal, this Court,
     HELD  :  1.1 The assessee was entitled  to	 the  relief
under  section 80-O for assessment years earlier to  1983-84
and the approval granted by the Board under that section was
right and proper.  However, for the assessment year 1983-84,
the assessee does not qualify for deduction on the terms  of
that  section as the contract receipts are fully covered  by
the  provisions	 of section 80-HHB and the  deduction  under
that  section will prevail over the relief that	 might	have
been otherwise available in view of the terms of section 80-
HHB(5). [p.116AB]
     1.2  The assessee's claim for exemption  under  section
80-HHB	deserves  to be considered afresh after	 giving	 the
assessee  an opportunity of being heard, as directed by	 the
CIT (Appeals) and confirmed by the ITAT and the High  Court.
[p. 86BC]
						  62
     Continental Construction Ltd. v. Commissioner of Income
Tax. (1990) 185 ITR 230, affirmed.
     2.1  Eligibility  of an item to tax  or  deduction	 can
hardly	be  made to depend on the label given to it  by	 the
parties.   An assessee cannot claim deduction under  section
80-O in respect of certain receipts merely on the basis that
they  are  described as royalty, fee or	 commission  in	 the
contract  between  the	parties.  By  the  same	 token,	 the
absence	 of  a specific label cannot be destructive  of	 the
right  of an assessee to claim a deduction, if in fact,	 the
consideration  for  the receipts can be	 attributed  to	 the
sources indicated in the section. [p. 100BC]
     2.2  The receipts by way of royalty, fees,	 commissions
and  `similar  payments' envisaged by section  80-O  may  be
derived	 in  the  course of a  business	 or  profession	 and
constitute part of the profits and gains of such business or
profession.  For instance, the fees received by a consulting
scientist,  an	architect  or  an  engineer  for   providing
technical services to others will nevertheless be assessable
as  part of the profits and gains from such profession.	 [p.
90DE]
     2.3  The  essence of the exemption under  section	80-O
lies,	not  in	 consigning  the  receipt  to  one  of	 the
pigeonholes  or	 `royalty', `commission' or  `fees'  but  in
examining whether the receipt is a payment in  consideration
of  one	 of the two situations envisaged in  the  section  :
e.g.,  where  the  assessee  is the owner  of  a  patent  or
invention,  he may generally permit another to make  use  of
patent	or  invention,	in  consideration  of  a   `royalty'
payment;  or,  where  the  assessee  is	 in  possession	  or
technical  know-how, he may be prepared to allow another  to
make  use  thereof  in	consideration  of  a  `fee'  to	 the
assessee; or he may stipulate a consideration in the form of
a  commission based on the sales of the products  the  other
party is able to manufacture with the aid of such  invention
or   know-how,	or  an	assessee  may  have  achieved	some
speciality  and	 he may agree to lend his services  to	some
other  person and stipulate a consideration  therefor  which
may be variously described. [p. 92E-G]
     Gestetner	Duplicators Pvt. Ltd. v. C.I.T., (1979)	 117
I.T.R. 1 (S.C.); Cloth Traders P. Ltd. v. C.I.T., (1979) 118
ITR 243 & Distributors (Baroda) P. Ltd. v. Union, (1985) 155
ITR 120, referred to.
     2.4  The  word  `similar'	occurring  in  section	80-O
connotes  that the payment made to the assessee need not  be
in the nature of royalty, commission or fees only; it  could
be any payment of like nature, made in
						  63
consideration  of  the	use  or supply	of  such  an  asset,
knowledge or services in the same manner as royalty, fees or
consideration  could  be.  Therefore, any  type	 of  payment
received by an assessee will qualify for deduction under the
section so long as it is a payment made in consideration  of
one  of	 the  two types of transaction referred	 to  in	 the
section. [p. 93AB]
     2.5 In column 5 of the applications for approval  under
section 80-O the assessee stated that the payments under the
contracts  did not come under category (a) (i) but they	 did
fall  under  categories a (ii) and (b)	enumerated  therein.
The  finding  of the Tribunal in this regard is not  one  of
fact  based  on an admission; it proceeds  on  an  incorrect
appreciation  of the contents of assessee's application	 for
approval.  [pp. 93G; 94AB]
     3.1  The  expression "technical services"	has  a	very
broad connotation and it has been used in section 9(1) (vii)
of  the	 Act also so widely as	to  comprehend	professional
services. [p. 98CD]
     3.2 Services involving specialised knowledge experience
and  skill  in the field of  constructional  operations	 are
"technical  services".	The Board's guidelines	specifically
say so. [p.98DE]
     3.3   Any	engineering  contract	involves   technical
services  more	so, a contract of the nature  and  magnitude
involved in the instant case.  The contract executed by	 the
assessee was no ordinary contract; the activities thereunder
involved  technical and expertise.  It was executed  jointly
with an enterprise that was nothing but an instrumentally of
the foreign State. [p. 95B-F]
     3.4   The	 assessee  had	made   available   technical
information to the foreign Government for use outside  India
and  had  also rendered technical services  to	the  foreign
Government of the nature outlined in section 80-O.  [pp.98F;
100F]
     4.1  The  assessee	 is  a	company	 and  any  technical
services  rendered by it can only be through the  medium  of
its employees, skilled and unskilled. [p. 97E]
     4.2  In  order  to	 say  that  a  person  is  rendering
technical services to another, it is not necessary that	 the
service should be rendered by the former personally and	 not
through the medium of others. [p.98EF]
     5.1 Section 80-HHB provides for an exemption in respect
of profits from a "foreign project" undertaken outside India
in the course of
						  64
business.   The	 expressions  "business of  execution  of  a
foreign project" or work forming part of it or the  `profits
derived'  from	the  business,	take in	 all  aspects  of  a
business involving than activities referred to in subsection
(2)  (b)  of section 80-HHB together  with  all	 activities,
commitments and obligation ancillary and incidental  thereto
and the profits flowing therefrom.  The definition cannot be
restricted to the mere	physical activity or putting up	 the
superstructure, machinery or plant but should be  understood
to  take  within  its  fold  all  utilisation  of  technical
knowledge  or rendering of technical services  necessary  to
bring about the construction, assembly and installation. [p.
102FG]
     5.2  Section  80-HHB comes into force on  1.4.1983	 and
should be applicable for assessment year 1983-84 onwards  in
all cases.  It does not contain even a reference to  section
80-O and so its applicability cannot depend on the formation
of  the contract subsequent to that date or to the  date  of
its approval under the latter section being after that date.
[p. 115A]
     5.3  Section  80-HHB  does	 not  confer  an  additional
benefit;  sub-section (5) in no uncertain terms states	that
the  benefit thereunder will take away the benefit, if	any,
under any other provision.  This has to be given effect	 to.
[p. 115F]
     5.4 The assessee is entitled to deduction under section
80-O  on  the  terms of that section even  for	1983-84	 and
subsequent years.  It becomes disentitled to the relief	 not
because it does not fulfil the requirements of section	80-O
but  only  because section 80-HHB(5) stands in the  way	 and
mandates  that	in  cases to which  both  provisions  apply,
relief	under  section 80-HHB will alone be  available.	 [p.
114G]
     5.5  The fact that the income in question	may  qualify
for  deduction	under section 80-HHB  does  not	 necessarily
exclude the applicability of the provisions of section 80-O.
The  language  of sub-section (5) of  section  80-HHB  which
gives  precedence to a claim under section 80-HHB  over	 one
under any other provision, itself necessarily postulates the
possibility  of	 the  whole or	part  of  the  consideration
payable	 to  an	 assessee for the  execution  of  a  foreign
project	 qualifying for deduction under any other  provision
as well. [pp.86G; 87A]
     5.6 The statutory interdict cannot be frustrated by the
terms of an approval of the Board under section 80-O.	Such
approval,  at  its best, cannot	 overreach  the	 limitations
imposed	 on  the relief available under that  section  as  a
consequence of section 80-HHB(5). [p.107BC]
						  65
     5.7   The	 legislature  has  clearly   envisaged	 the
possibility  of the same receipts qualifying  for  deduction
under section 80-HHB as well as under any other provision of
the Act and has specifically provided that, in such a  case,
the terms of Section 80-HHB will prevail over the provisions
of such other provision. [p. 106FG]
     5.8   One	cannot	decline	 to  give  effect   to	 the
applicability  of  a statutory provision on  the  ground  of
hardship  or  on  the ground that it  restricts	 the  relief
which, but for the insertion of the section, would have been
available  to  the assessee, particularly when	the  section
itself envisages the possibility of the assessee being	also
eligible for relief under another section and makes  special
provision for that eventuality. [p. 115BC]
     5.9 The assessee was able to get 100% relief in earlier
years  only because the contract is of such nature  that  it
consists only of the rendering or technical services so that
the fields of the two exemptions completely overlap.  On the
other  hand, it is possible to conceive of foreign  projects
wherein	  the  construction  and  installation	aspect	 and
information or technical services aspect are kept  separate.
Equally, there can be cases falling under section 80-O which
do not at all relate to a "foreign project" as defined under
section	 80-HHB.   In  such cases the  two  provisions	will
continue to operate independently. [p.115F-H]
     6.1  The Board was fully justified in  considering	 the
receipts  of the assessee as falling under section 80-O	 and
in granting approval to the contract. [p. 105BC]
     6.2  Board's approval for the purpose of  section	80-O
cannot be tentative or provisional or qualified.  The  Board
can  neither  limit the relief to certain  assessment  years
only nor can it restrict or enlarge the scope of the  relief
that can be granted under the section. [p. 106AB]
     6.3 Once a contract stands approved under section	80-O
in  relation  to  the first assessment	year,  the  approval
enures for the entire duration of the contract.	 Section 80-
O  does	 not  envisage an application for  approval  of	 the
contract  every	 assessment year or the	 limitation  of	 the
approval  granted by the Board to any particular  assessment
year. [p. 105DE]
     C.I.T.  v.	 Institute  of Public  Opinion,	 (1982)	 134
I.T.R. 23 (Del.), referred to.
     6.4 The Board's approval in respect of assessment years
earlier to
						  66
1983-84 will enable the assessee to claim like relief  under
section	 80-O for all subsequent years too.  But, after	 the
insertion  of  Section	80-HHB, in the	matter	of  receipts
government  both  by Section 80-HHB and	 Section  80-O,	 the
former and not the latter will prevail. [p. 106BC]
     6.5   The Board's decision of 31.7.1985  extending	 the
approval  beyond  1982-83 cannot be given effect to  in	 the
same  way as its earlier approval letter of  28.10.1983	 for
the reasons : (1) the jurisdiction of the Board is to  grant
approval  to  a	 contract cannot only  for  the	 purpose  of
section	 80-O,	it has no jurisdiction to pronounce  on	 the
availability or otherwise of an exemption under section	 80-
HHB  and the Board's opinion as to this, even  if  expressly
stated,	 cannot	 bind  the Officer,  (2)  the  relief  under
section 80-HHB is not dependent on the approval of the Board
and is for a totally different type of transaction; (3)	 the
letter of 31.7.1985 is also a decision in an individual case
and cannot be treated as a general circular incorporating  a
policy	decision  by  the  Board  that	in  all	 cases of  a
particular  type government by both sections relief  may  be
given  under section 80-O; (4) the Board in the 1985  letter
only  stated, and rightly, that the approval  under  section
80-O  would enure for 1982-83 onwards, for the approval	 of
the  Board  is to the contract and so long as  the  contract
subsists  the  relief  should be granted  on  the  terms  of
section 80-O; and (5) the approval which otherwise qualifies
the assessee for relief is no doubt still effective but	 its
power  to  qualify  for	 relief if taken  away	by  the	 new
statutory provision. [pp.114DG; 115B]
     6.6 The reasons to vest power of approval in the  Board
are   that  it	is  considered	better	equipped,  both	  on
considerations	of times as well as the technical  knowledge
needed	 to   examine	the   ramifications   of   technical
international  contracts  and decide how  far  the  relevant
contract  and  the  receipts thereunder are  of	 the  nature
intended to be covered by the exemption clause and that	 the
applicant is sure to take steps to obtain necessary approval
at a state earlier to the implementation of the contract and
he  can know well before-hand where he stands in the  matter
of tax exemption. [p. 110C-F]
     6.7  After	 the power of approval was  vested  in	 the
Board,	elaborate  guidelines, as provided, inter  alia,  in
Board's	 Circular NO. 187 dated 23.12.1975 and Circular	 No.
253  dated 30.4.79, were drawn up which clearly	 envisage  a
detailed  examination,	by the Board, of the  terms  of	 the
contract  submitted  to	 it for	 scrutiny  from	 all  angles
relevant  for  a decision as to	 eligibility  for  exemption
under  section	80-O.  These  guidelines  have	also   since
attained  statutory  recognition  as  the  proforma  earlier
prescribed  by the Board has virtually been incorporated  in
Rule
						  67
11E and Form prescribed thereunder.  The proforma calls	 for
details of the analysis of the receipts under the  contract.
[pp. 111AB; 113BC]
     6.8  The  Board  has  chalked  out	 for  itself,  quite
legitimately and properly, a very detailed and dominant rule
as  to	the availability of exemptions under  section  80-O.
The guidelines are of general nature, fully sanctioned by the
provisions   of	 section  119(1)  of  the  Act	and,   being
instructions  enuring to the benefit of the assessee, cannot
be gone back upon by the Department Officers subordinate  to
the  Board, particularly in a case where no steps have	been
taken  -  or even suggested as necessary to be	taken  -  to
revoke the approval already accorded. [p.112 FG]
     Navnitlal	Javeri's  case	(1965)	56  I.T.R.  198(SC),
relied on.
     6.9 While granting the approval under Section 80-O, the
Board	has   not  only	 the  jurisdiction  but	  also	 the
responsibility	of  examining the  agreement  submitted	 for
approval from all angles relevant to the deduction  provided
for  under  section  80-O and it is  not  competent  to	 the
Department to question the maintainability of the claim	 for
deduction under section 80-O in respect of the aspects	gone
into and decided upon by the Board. [p.113DE]
     6.10 However, the assessing officer is not deprived  of
his  functions.	  He  has to satisfy himself  that  (i)	 the
amounts	 in  respect  of which the  relief  is	claimed	 are
amounts arrived at in accordance with the formula, principle
or  basis  explained  in  the  assessee's  application	 and
approved  by  the Board; (ii) the deduction claimed  in	 the
relevant  assessment  year  relates  to	 the  items  and  is
referable  to the basis on which application  for  exemption
was  asked for and granted by the Board; (iii) the  receipts
(before	 the  1975  amendment) were  duly  certified  by  an
accountant  or	that,  thereafter,  the	 amounts  have	been
received  in  or brought into India in	convertible  foreign
exchange  within the specified period.	The second of  these
functions  is  particularly important as  the  approval	 for
exemption  granted  in principle has to be  translated	into
concrete  figures  for	the  purposes  of  each	 assessment.
Neither	 the introduction of the words "in  accordance	with
and  subject  to  the provisions of this  section"  nor	 the
various "conditions" outlined in the letter of approval	 add
anything  to  or  detract anything from	 the  scope  of	 the
approval. [p.113E-H]
     7.1  For  purposes	 of  income  tax,  a  principle	  of
apportionment has always been applied in different contexts.
Consolidated   receipts	 and  expenses	have   always	been
considered apportionable in the contexts; (a) of the capital
and revenue constituents comprised in them; (b) portions
						  68
of  expenditure	 attributable to business  and	non-business
purposes;  (c)	of places of accrual or arisal	and  (d)  of
agricultural and non-agricultural elements in such  receipts
or payments. [p.100DE]
     Kanga  & Palkhivala on the Law and Practice of  Income-
Tax (Vol. I Eighth Edition), referred to.
     7.2 Contracts of the type envisaged by section 80-O are
usually	  very	complex	 ones  and  cover  a  multitude	  of
obligations and responsibilities.  It is not always possible
or  worthwhile for the parties to dissect the  consideration
and  apportion	it to the various  ingredients	or  elements
comprised in the contract. [p. 100CD]
     7.3  If,  a  contract  obliges  the  assessee  to	make
available  information	and render services to	the  foreign
Government of the nature outlined in section 80-O, it is the
duty  of  the Revenue and the right of the assessee  to	 see
that the consideration paid under the contract	legitimately
attributable to such information and services is apportioned
and  the  assessee  given  the	benefit	 of  the   deduction
available   under  the	section	 to  the  extent   of	such
consideration. [p.100FG]

JUDGMENT:
     CIVIL APPELLATE JURISDICTION : Civil Appeal NO. 3458 of
1990.
     Appeal by certificate from the Judgment and Order dated
24.5.1990 of the Delhi High Court in I.T.R. No. 110 of 1987.
     F.S.  Nariman, Srinivasan, Bishamber Lal Khanna,  Harsh
Salve,	Subhash Sharma,	 D.N. Sawhney, Ms. Geetanjali  Mohan
and Vineet Kumar for the Appellant.
     S.C.  Manchanda, Ms. A. Subhashini and B.B.  Ahuja	 for
the Respondents.
     The Judgment of the Court was delivered by
     RANGANATHAN,  J.  This is an appeal preferred  by	M/S.
Continental  Construction  Ltd.	 (hereinafter  called	`the
assessee')  from  the judgment of the Delhi  High  Court  in
I.T.R.	110 to 112 of 1987 (reported in 1990-185  I.T.R.178)
answering, against the assessee, the following questions  of
law referred to it under section 256 of the Income Tax	Act,
1961 (`the Act') :
	 1.  "Whether on the facts and in the  circumstances
	 of  the case the Tribunal is right in holding	that
	 the income arising from the
							69
	 activities  pursuant  to the seven  agreement	with
	 foreign  governments	    /enterprises,  etc.	 are
	 governed by the provisions of section 80-HHB of the
	 Income-Tax  Act,  1961 and not of section  80-O  of
	 that Act?
	 2.  "Whether on the facts and in the  circumstances
	 of the case, the Tribunal was right in holding that
	 notwithstanding the approvals granted by the  Board
	 to the seven agreements for the purpose of  section
	 80-O, for the purpose of assessment for  assessment
	 year	1983-84,  the  income  arising	from   these
	 contracts  have to be brought under section  80-HHB
	 of the Income-Tax Act, 1961?"
	 3."Whether  on the facts of the case, the  Tribunal
	 is right in holding that the income from the entire
	 activities  under  the seven agreements  cannot  be
	 bifurcated and is wholly covered under section	 80-
	 HHB of the Income Tax Act, 1961?"
	 4."Whether on the facts and in the circumstances of
	 the case, the Tribunal is right in holding that the
	 assessee company is not an `industrial company'  as
	 defined in the Finance Act, 1982?"
      The  first two Income-Tax References were made  to  the
High  Court  at	 the  instance of  the	assessee  which	 was
dissatisfied  with the decision of the Income Tax  Appellate
Tribunal  on  these  qestions : there  were  two  references
because	 the above qestions arouse out of two  cross-appeals
before	the Tribunal - one by the assessee and the other  by
the  Department.  This appeal by the assessee, CA.  3458  of
1990 is disposed by the present judgment.
     The  third	 reference (I.T.R. 112/87) was made  by	 the
Tribunal  at  the instance of the Department  on  a  totally
different  question which related to the  interpretation  of
sections  40(c)	 and  40A(5) of the  Act.   The	 High  Court
answered all the three references in favour of the  assessee
and  the aggrieved Commissioner of Income Tax (C.I.T.)_	 has
preferred  an  appeal to this Court from that  part  of	 the
judgment  being C.A. 3458-A of 1990.  But that question	 has
no connection with the other four question set out  earlier.
We  have, therefore, delinked the appeal by the	 C.I.T.	 for
separate  hearing.  Also, of the four questions posed  above
in  the	 assessee's appeal, counsel for	 the  appellant	 has
stated that he is not pressing question No. 4 before us. We,
therefore,  do	not  express any opinion on  it	 and  merely
dismiss the appeal in so far as this question is  concerned.
In  the result, we confine this judgemnt  to the  assessee's
appeal and to the first three of the four questions set	 out
above.
     The questions arise out of the assessee's assessment to
income tax for
						  70
the  assessment year 1983-84 (the calendar year	 1982  being
the relevant previous year).  Section 80-O of the Act, under
which  the  assessee  claimed  deductions,  provides  for  a
deduction,  in	computing the total income , in	 respect  of
royalties etc. from certain foreign enterprises.  This topic
was originally dealt with by section 85-C. Section 80-O	 was
substituted in its place w.e.f. April 1, 1968.	The  section
has  since  undergone amendments from time to time.   As  on
1.4.83,	 the  provision, in so far as is  relevant  for	 our
purposes, was in the following terms :
 Section 80-O Deduction in respect of royalties etc.
	 from certain foreign enterprises.
	 "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  the 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,  experience or skill made  available  or
	 provided or agreed to be made available or provided
	 to  such Government or enterprise by the  assessee,
	 or in consideration of technical services  rendered
	 or  agreed  to be rendered outside  India  to	such
	 Government  or enterprise by the assesse, 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 on behalf of the assessee in accordance with any
	 law  for  the time being in  force  for  regulating
	 payments  and dealings in foreign  exchange,  there
	 shall be allowed, in accordance with and subject to
	 the provisions of this section, a deduction of	 the
	 whole	of  such income so received in,	 or  brought
	 into  India  in computing the total income  of	 the
	 assessee.
     During the currency of this provision, the Finance Act,
1982 introduced a new section 80-HHB w.e.f. 1.4.1983.	This
provision reads thus :
 Section 80-HHB Deduction in respect of profits	 and
	 gains from projects outside India -
	 (1)  Where  the gross total income of	an  assessee
	 being	an Indian company or a person (other than  a
	 company)  who	is resident in	India  includes	 any
	 profits and gains derived from the business of
						  71
	 (a)  the execution of a foreign project  undertaken
	 by the assessee in pursuance of a contract  entered
	 into by him, or
	 (b) the execution of any work undertaken by him  an
	 forming part of a foreign project undertaken by any
	 other	person	in pursuance of a  contract  entered
	 into by such other person, with the Government of a
	 foreign  State	 or any statutory  or  other  public
	 authority  or	agency	in a  foreign  State,  or  a
	 foreign enterprise, there shall, in accordance with
	 and  subject to the provision of this	section,  be
	 allowed,  in  computing  the total  income  of	 the
	 assessee,  a deduction from such profits and  gains
	 of an amount equal to twenty five per cent  thereof
	 :
	 Provided  that the consideration for the  execution
	 of  such  project or, as the case may be,  of	such
	 work is payable in convertible foreign exchange.
	 (2) For the purposes of this section -
	 (a)  "convertible foreign exchange"  means  foreign
	 exchange which is for the time being treated by the
	 reserve  bank	of  India  as  convertible   foreign
	 exchange  for the purposes of the Foreign  Exchange
	 Regulation  Act, 1973 (46 of 1973), and  any  rules
	 made thereunder :
	 (b) "foreign project" means a project for -
	 (i)  the construction of any building,	 road,	dam,
	 bridge or other structure outside India;
	 (ii) the assembly or installation of any  machinery
	 or plant outside India;
	 (iii) the execution of such other work (of whatever
	 nature) as may be prescribed.
	 (3)  The  deduction  under this  section  shall  be
	 allowed  only	if  the	 following  conditions	 are
	 fulfilled, namely :-
	 (i)  the  assessee maintains separate	accounts  in
	 respect  of the profits and gains derived from	 the
	 business  of the execution of the foreign  project,
	 or,  as the case may be, of the work  forming	part
	 of the foreign project undertaken by him and,
						  72
	 where the assessee is a person other than an Indian
	 company  or  a co-operative society,  such  amounts
	 have  been audited by an accountant as	 defined  in
	 the  Explanation below sub-section (2)	 of  section
	 288  and  the assessee furnishes,  along  with	 his
	 return	 or income, the report of such audit in	 the
	 prescribed  form duly signed and verified  by	such
	 accountant :
	 (ii) an amount equal to twenty five per cent of the
	 profits and gains referred to in sub-section (1) is
	 debited  to  the  profit and loss  account  of	 the
	 previous  year	 in respect of which  the  deduction
	 under this section is to be allowed and credited to
	 a  reserve  account  (to  be  called  the  "Foreign
	 Project  Reserve  Account") to be utilised  by	 the
	 assessee  during  a  period  of  five	years	next
	 following  for the purposes of his  business  other
	 than  for  distribution  by  way  of  dividends  or
	 profits;
	 (iii)	an amount equal to twenty five per  cent  of
	 the  profits and gains referred to  in	 sub-section
	 (1)  is  brought  by the  assessee  in	 convertible
	 foreign exchange into India, in accordance with the
	 provisions of the Foreign Exchange Regulation	Act,
	 1973  (46 of 1973), and any rules made	 thereunder,
	 within	 a period of six months from the end of	 the
	 previous year referred to in clause (ii) or,  where
	 the Chief Commissioner or Commissioner is satisfied
	 (for  reasons to be recorded in writing)  that	 the
	 assessee is, for reasons beyond his control, unable
	 to  do	 so within the said period  of	six  months,
	 within	  such	 further   period   as	 the   Chief
	 Commissioner  or  Commissioner may  allow  in	this
	 behalf :
	 Provided  that	 where the amount  credited  by	 the
	 assessee  to the Foreign Projects Reserve   Account
	 in  pursuance of clause (ii) or the amount  brought
	 into  India by the assessee in pursuance of  clause
	 (iii)	or  each of the said amounts  is  less	than
	 twenty	 five  per  cent of the	 profits  and  gains
	 referred to in sub-section (1), the deduction under
	 that sub-section shall be limited to the amount  so
	 credited in pursuance of clause (ii) or the  amount
	 so brought into India in pursuance of clause  (iii)
	 whichever is less.
	 (4) If at any time before the expiry of five  years
	 from  the  end of the previous year  in  which	 the
	 deduction  under  sub-section (1) is  allowed,
						     73
	 the  assessee utilises the amount credited  to	 the
	 Foreign  Projects Reserve Account for	distribution
	 by  way  of dividends or profits or for  any  other
	 purpose  which is not a purpose of the business  of
	 the  assessee,	 the  deduction	 originally  allowed
	 under sub-section (1) shall be deemed to have	been
	 wrongly  allowed, and the Income-tax  Officer	may,
	 notwithstanding  anything  contained in  this	Act,
	 recompute the total income of the assessee for	 the
	 relevant  previous  year  and	make  the  necessary
	 amendment; and the provisions of section 154 shall,
	 so far as may be, apply thereto, the period of four
	 years specified in sub-section (7) of that  section
	 being reckoned from the end of the previous year in
	 which the money was so utilised.
	 (5) Notwithstanding anything contained in any other
	 provision  of	this Chapter under the	heading	 "C-
	 Deductions in respect of certain incomes", no	part
	 of the consideration or of the income comprised  in
	 the  consideration payable to the assessee for	 the
	 execution  of	a  foreign project  referred  to  in
	 clause	 (a)  of  sub-section (1)  or  of  any	work
	 referred to in clause (b) of that sub-section shall
	 qualify for deduction for any assessment year under
	 any such other provision."
 .lm
     The  three	 questions which are now  for  consideration
before	us raise the issue whether the assessee is  entitled
to  a  deduction  under section 80-O or	 section  80-HHB  or
partly	under  one and partly under the	 other	or,  indeed,
under  neither of the provisions.  We shall now	 proceed  to
set out the factual background in which the issues arise.
     The  assessee  is a civil	construction  company  which
describes  itself  as  Engineers and  Contractors.   It	 has
executed  a large number of projects overseas and in  India,
its  projects include dams, irrigation and  hydel  projects,
water supply and sewerage plants, marine and harbour  works,
airports etc.  The assessee entered into eight contracts for
the  construction,  inter  alia, of  a	dam  and  irrigation
project	 in Libya, a fibre-board factory at Abu	 Sukhair  in
Iraq and the huge Karkh Water Supply Project n Baghdad which
was  of the total values of 534 million dollars.  For  these
contracts the assessee obtained the approval of the  Central
Board  of  Direct Taxes (Board' or `C.B.D.T.') in  terms  of
section	 80-O.	A  broad outline of these  projects  can  be
gathered from the following table :
						  74
-------------------------------------------------------------------------
S.  Name of   Date of  Name of the	    Date of    Period of
No. Project agreement  Other contrac-	    approval   approval as per
		       ing party	    by Board   Board's letter
1.Abu Sukhair 6.9.75  State Organisation    11.8.76    For assessment
  Project	      of Industrial Design	       years 1976-77
		      & Construction, Mini-	       to 1978-79
		      stry of Industry &
		      Minerals, Baghdad
		      (Iraq)
2.Wadi Ghan  8.8.77  Socialist people's Lib  31.8.78  For the assess-
  Dam		     -yan Arab Jamahiriya,	      ment years 1978-
		      Secretariat of Dams and	      79 and onwards
		      Water Resources, Tripoli,
		      (Libya)
3.Ammara   15.3.78   State Contracting Co.   22.2.79  "Assessment years
  Project	     for Water and Sewerage	       1979-80 to
		     Projects, Ministry of	       1982-83"
		     Municipalities, Republic
		     of Iraq
4.Nassir- 14.12.78    Ministry of Housing &   7.2.80   "Assessment years
  iyah		      Construcion, Govt of		1980-81 and onw-
  Project	      Iraq				 ards"
5.Sulaim-  10.10.79   Ministry of Housing &   31.5.80	"Assessment years
  aniyah	      Construction, Govt of		 1980-81 and onw-
  Project	      Iraq				 ards".
6.West Bank 12.4.80  Baghadad Sewerage Board  23.7.80	"Assessment years
  Project	      Construction, Govt of		 1980-81 and onw-
		      Iraq				 ards"
7.Karkh	   17.12.80   Amanat Al-Asima,	      28.10.83	"For the assessem-
  Project	      Baghdad Water Supply		 ent year 1982-83.
		      Administration, Govt.		 For the subseque-
		      of Iraq, Baghdad			 nt period your
							 attention is in-
							 vited to the pro-
							 ision of s. 80
							 HHB which are
							 operative w.e.f.
							 1.4.83"
8.Diwan-  10.1.81   Water & Sewerage	       28.10.83	   -do-
 iyah		    Projects, Baghdad
 Project
						  75
     In	 the light of these approvals, the assessee  claimed
and  obtained deduction under section 80-O in respect of the
receipts from the first six of the contracts in some of	 the
assessment years between 1976-77 to 1980-81.
     For the assessment year 1983-84, the assessee  returned
a  gross  total income or Rs. 72,67,45,938 but,	 as  against
this, it claimed a deduction of Rs. 89,16,19,198 in  respect
of  seven  of  the above contracts, the	 eight	having	been
completed  much earlier.  Of this, the deduction claimed  in
respect	 of  the Karkh and Diwaniyah projects  came  to	 Rs.
77,84,29,446  and Rs. 6,36,85,436 respectively.	 As  pointed
out above, the letter of approval of the Board under section
80-O  in respect of these two contracts dated  28.10.83	 was
limited	 to  the assessment year  1982-83.   The  Inspecting
Assistant  Commissioner	 (I.A.C.),  Sri	 Hari  Narain,	 who
completed the assessment on 26.3.1984 declined to grant	 the
assessee  any  deduction  under section	 80-O  not  only  in
respect	 of these two contracts but also in respect  of	 the
other  five.  He was of opinion that it was  section  80-HHB
that  applied  to  these agreements and	 not  section  80-O.
However,  he  declined to grant any relief to  the  assessee
even  under section 80-HHB as the conditions  for  exemption
specified  in that sub-section were not fulfilled.   In	 the
result,	 he  determined the assessee's total income  at	 Rs.
89,41,35,103  as  against  the NIL income  returned  by	 the
assessee, thus raising a tax demand of Rs. 66,07,72,982.
     On	 appeal,  the Commissioner of  Income-tax  (Appeals)
gave  the assessee partial relief.  He agreed with  the	 IAC
that  the assessee was not entitled to relief under  section
80-O  because  : (1) the approval of the CBDT for  three  of
the contracts did not extend to assessment year 1983-84; (2)
all  the  contracts undertaken by the assessee were  in	 the
nature	of `foreign projects' within the  maning of  section
80-HHB; and (3) even where the contracts had the approval of
the  CBDT the non-obstante provisions of section 80-HHB	 (5)
ruled out the grant of relief under section 80-O for any  of
the  projects.	 He however, felt that as the  assessee	 had
been  under  a	bonafide  belief all  through  that  it	 was
entitled  to  relief under section 80-O, it had	 not  had  a
proper	opportunity  of putting forth its claim	 for  relief
under  section	80  HHB.   He,	therefore,  set	 aside	 the
assessment  to enable both sides to marshall their  evidence
and to enable the IAC to reappraise the assessee's claim for
exemption  under  that section.	 The order of  the  CIT	 was
dated 26.3.85.
     The  Income-tax Appellate Tribunal (ITAT)	agreed	with
the CIT.  Its conclusion, set out succinctly in para 48	 of
its order was thus :
	 "To  conclude	this point, we would hold  that	 the
	 income	 and consideration received by the  assessee
	 in  the  execution of all the	seven  contracts  in
	 general and the Karkh work in particular fell
						  76
	 under	the  provisions	 of section  80-HHB  as	 the
	 contracts  were for execution of foreign  projects.
	 We  further hold that in view of the  provision  of
	 section 80-HHB (5) the claim of the assessee  under
	 section  80-O cannot be considered inspite  of	 the
	 approval  orders of the Board.	 This ground in	 the
	 assessee's  appeal has, therefore, to	be  rejected
	 and  the  conclusion  arrived	at  by	the  learned
	 Commissioner of Income-Tax (Appeals) is upheld,"
     It	 may be mentioned here that, before the	 appeal	 was
heard by the ITAT, the CBDT on a representation made by	 the
assessee  and after some enquiry and correspondence,  issued
on  31.7.85  a	letter	modifying  the	original  letter  of
approval  of 28.10.83 in respect of the Karkh and  Diwaniyah
contracts.    By   this	 letter,  the  CBDT   directed	 the
substitution  of  the following words in place of  the	word
quoted in the last column of the table set out earlier:
     "Assessment year 1982-83 and onwards".
     In other words, the CBDT lifted its earlier  limitation
of  approval  only to assessment year 1982-83  and  made  it
operative  even for subsequent assessment years.  There	 has
been  some  criticism,	on behalf of the  assessee,  of	 the
manner	in which the Department has sought to get  over	 the
effect	of  modification  letter  attributing  it  to	some
misunderstanding  or  confusion.   One	of  the	  assessee's
principal grievances is that the ITAT has erred in accepting
this  explanation, treating the approval of 28.10.1983 as  a
qualified one and ignoring the letter of 31.7.85.  We  shall
discuss this aspect later.
     The ITAT, at the request of the assessee, referred	 the
four questions of law which we have set out earlier for	 the
decision  of  the High Court.  The High Court  came  to	 the
conclusion  that  the  receipts of  the	 assessee  from	 the
contracts  did not fall within the category of receipts	 for
which deduction is provided in section 80-O.  It was of	 the
view  that  the Board's approval was a qualified  one  which
fully	authorised  and empowered the officer  to  determine
whether all the conditions of the section are fullfilled  as
well  as the amount, if any, which could be  deducted  under
section	 80-O.	The Court also came to the  conclusion	that
the  execution of the work by the assessee, in	the  present
case,  fall under section 80 HHB and not section  80-O.	  In
the  result,  questions	 1 to 3 were  answered	against	 the
assessee  and in favour of the Revenue.	 The assessee,	has,
therefore, preferred these appeals.
     As	 pointed  out  earlier,	 the  assessee's  claim	 for
deduction  relates  to seven contracts and  depends  on	 the
terms  and  conditions of each one of  them.   However,	 the
Karkh Water Supply scheme contracts has been taken as the
						  77
model  or specimen for purposes of discussion  both  because
the  terms and conditions of all the contracts are  more  or
less  similar  and  also because the  deduction	 claimed  in
respect of this contract constitutes an overwhelmingly	high
percentage  of the assessee's total claim.  We	shall  also,
therefore, proceed to discuss the issues raised in the light
of  the	 terms	and  conditions of  this  contract  and	 the
approval given therefor.  Before doing so, we would like  to
point out that for the assessment year 1983-84 with which we
are  concerned,	 a  discussion of the  relative	 spheres  of
section 80-HHB and section 80-O would be called for and	 the
assessee  may  get full or partial relief  under  either  or
neither	 of the sections for the said assessment  year;	 but
if,  in	 the  process, we come to the  conclusion  that	 the
provisions  of section 80-O can have no application  to	 the
contracts  in  question, such conclusion is  bound  to	have
repercussion also on the deductions claimed by, and  allowed
to, the assessee under that section in the earlier years  in
respect of some of the contracts.
     The Baghdad Water Supply Administration (BWSA)  invited
tenders	 from 'experienced engineering consortia" to  submit
tenders	 "for  the design,  manufacture,  delivery,  supply,
construction  and  installation,  complete  under  a  single
contract  of the works required" for the first stage of	 the
Karkh  Water  Supply Scheme.  The works comprised  'a  River
intake	and  pumping station on the west bank of  the  River
Tigris	about  30 kms. north of Baghdad; raw  water  pumping
through	 twin  1800 mm diameter pumping mains  to  a  nearby
treatment  works;  treatment  comprising  essentially	pre-
settlement,  clarification and chemical	 coagulation,  rapid
gravity	 sand  filtration and  disinfection  with  chlorine:
treated	 water storage; treated water pumping  through	twin
2200  mm diameter transmission pipelines to the	 city  area,
and  distribution and storage within the west bank  part  of
the  city area and within the municipalities of	 Abu  Ghraib
and   Taji".	Five   volumes	 of   documents	  containing
instructions,	conditions,   general	specifications	 and
requirements,  specifications  for plant  and  civil  works,
schedules, and supplementary information and a sixth  volume
containing  99	drawings were issued along with	 the  tender
documents.    Since  tenders  had  been	 called	  for	from
Consortia,   the  assessee  joined  hands  with	 the   State
Contracting Company for Water and Sewerage Projects, Baghdad
(SCC) to form a consortium and was able to bag the  contract
and  an agreement was entered into on 17.12.80	between	 the
Iraqi  Government  and	the Consortium.	 The  terms  of	 the
consortium between the assessee and SCC were set down in  an
agreement   dated  18.12.80  which  divided  the  areas	  of
responsibility (the packages) under the contract between the
two.  Broadly speaking, the SCC was made responsible for the
Reservoir works while the assessee was made responsible	 for
the  civil  works.   The total value  of  the  contract	 was
325,750,000 Iraq Dinars (ID) of which 65% was
						  78
payable	 in  U.S. dollars, pound sterling or  Swiss  francs.
The value of the package of the assessee was ID	 152,956,253
(75% of which was payable in the said foreign exchange).
     On	 3rd March, 1981, the assessee applied to  the	CBDT
for  according approval to the contract "for the  supply  of
civil construction know-how to the Government of Iraq" under
section	 80-O  of  the Act.  A proforma	 prescribed  by	 the
Revenue was filled up and enclosed to the application.	Para
5 to 11 of this proforma run as follows :
     5. Please state whether the income is
	received in consideration for-
    (a) the use outside India of
	 (i) any patent, invention model,
	 design , secret, formula or
	 process, or similar property
	 right :			     No
	 (ii) information concerning in-
	 dustrial, commercial or sci-
	 entific knowledge, experi-
	 ence, or skill made available	     Yes
     (b) technical services  rendered	 Techincal services will be
     or agreed to be rendered outside	 rendered by us to Baghadad
     India (Please also state the arr-	 Water Supply Administration,
     angements availabe with the appli-	 Government of Iraq in accord-
     cant for rendering such technical	 ance with the said agreement
     services and the mode of tendering	 dated 17.12.80. The technical
     such services).			 know-how and services will be
					 rendered by us through our qu-
					 alified experienced and skilled
					 Engineers, Scientists and Tech-
					 nicians, for that purpose, a
					 strength or about 1,800 Indian
					 Engineers, Tecnicians and semi-
					 skilled labours will be inducted.
     6.Does the Agreement provide for	 The agreement also provides for
     supply of technical know-how or	 the supply use of goods as per
     rendering of any services other	 details given below :
     than those covered by section
     80-0(e.g. use of trade marks
     or supply of goods) if so		 Machinery, plant, Equipment, Ve-
     please specify them and also	 hicles cement, steel-bars, Sand
     the amount of consideration	 Aggregate, Bitumen, Fencing-fabri
c,
     receivable/received in resp-	 Shuttering material, Steel pipes,
     ect of them.			 Patent items, projection cladding
					 ceiling, Joining, Steel Pipes wit
h
					 joining and aductile iron pipes e
tc.
					 The cost of
								      79
					 supply of these tiems will be det
er-
					 mined at the close of each year a
s
					 the work progresses. The total va
lue
					 of the contract is ID 152,956,253
.
					 After	taking	out  the  net  cos
t of
					 machinery & equipment and other e
mbed-
					 ded items, as mentioned above (in
 whi-
					 ch no profit elements is involved
),
					 from the total value of the Contr
act
					 the remaining amount will be the
					 value of technical know-how and s
erv-
					 ices to be rendered by us under t
his
					 contract, It is this amount for w
hich
					 we are seeking exemption u/s 80-O
.
     7.If technical know-how falls	Not applicable.
       under 5(a)(i) above, please
     indicate.
     (a) how the applicant acquired	Not applicable.
	 it or what arrangements he
	 has made for acquiring it
     (b) What are the applicant's own	 Not applicable.
	 rights in respect thereof
     (c) Whether its provision to the
	 other party to the agreement
	 involves :-
     (i) transfer of all or any rights
	 of the applicant in respect of	  Not applicable.
	 it, if so, please specify the
	 nature and extent of the right
	 transferred and the manner of
	 its transfer :
     (ii)the imparting of any information
	concerning its working or use; if
	so, please specify the information    Not applicable.
	imparted and the manner of its imp-
	arting;
     (iii)its use by the other person to the
	  agreement if so, please specify the
	  nature and manner of the use.		  Not applicable.
     8.If the technical know-how falls under
     (a)(ii) above, please specify
								 80
     (a) the arrangements available with the	 we have on our rolls qual
ifed
	 applicant for obtaining and impart-	 Engineers and Technicians
 who
	 ing it					 have already acquired the
 re-
						 quisite scientific knowle
dge,
						 experience and skill for
giv-
						 ing such technical know-h
ow
						 and it is they, who will
be
						 imparting the same to the
						 client by executing the w
orks
						 at the site in Iraq.
     (b) the manner of imparting it		The Engineers and Technici
ans
						will be working for about
5
						years at the site of const
r-
						uction to impart the techn
ical
						know-how and services on b
e-
						half of our Company.
     9. Has the applicant made any agree-
     ment or arrangement with any other
     person in India or abroad for obta-
     ining the technical know-how etc.,		Not applicable.
     to be provided under this agreement
     or for rendering technical services?
     If so please give the follwing infor-
     mation :
	(i) the name and address of such	Not applicable.
	    other person;
	(ii) details of the agreement or ar-
	     rangement together with a cer-	Not applicable.
	     tified copy of the written
	     agreement, if any.
	 (iii)the nature, and extent of appli-
	      cant's relationship association	 Not applicable.
	      with such other person.
     10. Please state the nature of the income	 Income out of imparting c
ivil
     in respect of which deducation is claimed,	 construction know-how and
     viz..,					 services for the connstru
c-
						 tion of work of Karkh Wat
er
						 Supply Scheme, Baghdad.
Royalty
Commissin
Fees
							      81
Any similar payment
11. Please indicate the portion/amount
(alongwith its computation) which is	    Please see our reply under
eligible for deduction under section	    S. No. 6 of this form.
80-O of the Act.
     On	 9.7.81,  the C.B.D.T. called upon  the	 assessee to
clarify four aspects of its application : (i) the details or
the  materials and equipment to be supplied by the  assessee
under the contract and the quantum of profit thereon; (ii)
whether	 any  engineers,  scientists  and  technicians	were
recruited  in  India and there was any fee  attributable  to
such  services	; (iii) whether any tests on  materials	 and
workmanship were carried out in India and there was any	 fee
attributable to such tests; and (iv) the break-up of the fee
relating to the supply of information/know-how and rendering
of  the	 technical services.  The assessee answered  in	 the
following terms on 4.8.1981 :
	 "As  desired,	the  information/  clarification  is
	 furnished below :-
	 (i)  Our  contract is for  civil  construction	 and
	      know-how.	 The use of materials and  equipment
	 is   part   of	 these	services.    There   is	  no
	 separate   supply  of	materials   and	  equipment.
	 As such the question of any separate quantum of
	      profit  on  the same does not arise.   As	 the
	      material	is purchased locally in Iraq,  there
	      is no possibility or making any profit on its
	      consumption in execution of the works.
	 (ii) The qualified experienced skilled	 engineers,
	      scientists  and technicians are our  employees
	 and sent to Iraq for executing the work under
	      contract.	 We do not avail of the	 service  of
	 any agency for the purpose.  As such there are
	      no recruitment expenses involved. Consequently
	      no  fee can be attributed on the	transfer  of
	      our workers to foreign country.
	 (iii)No  tests will ever be taken in India  because
	 all	   works  will	be executed  in	 Iraq.	 The
	 question      of attributing any fees to such	test
	 in  India,	therefore,  does not  arise.   These
	 tests	are	part of the  process  undertaken  to
	 render	    technical know-how
	 (Vi) The profits which will accrue to our  Company
	      will  be	the gross  contracts  receipts	less
	     expenses incurred in supplying technical  know-
	     how and execution of the works, It is
						  82
	    estimated  that  this will be about 25%  of	 the
	    contract  value.  The exact amount may vary	 and
	    will  be  known only after the works  have	been
	    completed."
     There   was  further  correspondence,  discussion	 and
hearing	 including a detailed letter of the  assessee  dated
24.12.1981   and  clarificatory	 letters  dated	  15.2.1982,
17.3.1982, 9.10.1982, some of the contents of which may have
to be referred to later.  Eventually, the C.B.D.T.  accorded
its  approval to the agreements, as already  maintained,  on
28.10.1983.   The  letter of approval has  to  be  extracted
here. It runs :
	 "I am	directed  to  refer  to	 your  application
	 3.3.1981 received with your letter No.	 601/IT/80-O
	 dated	3.3.1981 and to convey the approval  of	 the
	 Central  Board	 of Direct Taxes  to  the  agreement
	 entered  into between you and M/S. Amanat  Al-Asima
	 Baghdad Water Supply Administration, Government  of
	 Iraq,	Baghdad,  on 17.12.1980 for the	 purpose  of
	 section  80-O of the Income-Tax Act, 1961, for	 the
	 assessment  years  1982-83.   For  the	  subsequent
	 period	 your attention is invited to the  provision
	 of Sec. 80-HHB which are operative w.e.f. 1.4.1983.
	 2.  The  income allowable as a	 deduction  for	 the
	 assessment  year 1981-82 and onwards would  be	 the
	 income	 computed  after  accounting  for   expenses
	 incurred  in  earning such income i.e. net income.
	 3.  The  actual  deduction  to	 be  allowed   will,
	 however,  be such portion of the income  which	 has
	 been  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 in accordance with	 the
	 payment and dealings in foreign exchange.
	 4.  The  grant of deduction from the  total  Income
	 will  be  subject  to	your  fulfilling  the  other
	 conditions  laid  down in the Act in  this  behalf.
	 The   amount	eligible  for  deduction   will	  be
	 determined  by	 Income-tax Officer at the  time  of
	 assessment.
	 5. This approval is subject to any amendment in the
	 provisions  of the Income-tax Act, 1961, from	time
	 to time.
						  83
	 6.  I am further to add that the approval  accorded
	 by  this letter is only for the purpose of  section
	 80-O of the Income-tax Act, 1961, and should not be
	 construed  to	convey the approval of	the  Central
	 Government or Central Board of Direct Taxes or	 any
	 other statutory authority under the Government	 for
	 any other purposes."
     It	 may  be mentioned that even  while  the  assessee's
applications for approval to the Kharkh & Diwaniya contracts
were  pending, the Finance Act, 1982 had amended the Act  to
insert section 80-HHB with effect from 1.4.1983.
     This amendment compelled the assessee to send a  letter
to  the	 C.B.D.T.  on  9.10.82	explaining  that  this	 new
provision  would  not  stand in the way	 of  approval  being
accorded  to its contracts under section 80-O.	But  despite
the  pleas  in this letter the C.B.D.T., in para  1  of	 its
letter of approval of 28.10.1983 restricted the approval  to
assessment  year  1982-83.  The assessee,  therefore,  wrote
again  in  detail on 2.12.1983, urging the  Board  that	 the
reference  to section 80-HHB in the letter of  approval	 was
uncalled  for and that the approval granted should  be	made
valid for the entire duration of the contract.	The material
on record shows that this letter was the subject of  careful
consideration  by  the	C.B.D.T.  which	 finally  issued   a
clarification in the following terms on 31.7.1985, more than
a year and a half later :
	 "With	 reference  to	your  representation   dated
	 2.12.83 on the above subject, I am directed to	 say
	 that  for the words and figures  "assessment  years
	 1982-83.  For the subsequent period your  attention
	 is invited to the provision of section 80-HHB which
	 are operative w.e.f. 1.4.83," appearing at the	 end
	 of  para 1 of the Board's letter F. NO.  473/46/81-
	 FTD dated 28.10.83, the following words and figures
	 may please be substituted :
	 "assessment years 1982-83 and onwards"
     It	 appears  that though the above	 intimation  to	 the
assessee  was  cryptic, the CBDT had decided to	 extend	 the
period	of operativeness of its approval under section	80-O
only after consulting the Attorney General of India  (A.G.).
The CBDT had circulated the opinion of the A.G. in this case
along  with the statement of case put up to him for  opinion
to  all the officers of the Departments.  On 14.8.1985,	 the
CIT   Central-I), New Delhi wrote a letter to the  concerned
member	of the CBDT which makes interesting reading.  We  do
not  wish  to extract, or comment on, the contents  of	this
letter here.  Suffice
						  84
it to say that the writer of the letter was of opinion	that
the  CBDT should not have reviewed the decision taken by  it
on 28.10.83.  He stated that, on the strength of the  CBDT's
letter	dated  31.7.85,	 the  assessee	was  claiming	100%
exemption and requested that "clear instructions" should  be
issued	early  'on  the complications" pointed	out  in	 the
letter;	 Thereupon, a letter. dated 24.9.1985 was  addressed
by the Deputy Secretary (FTD), Government of India, (who, at
the time,  happened to be Sri Hari Narain, the IAC  who	 had
completed   the	  assessment  on  the	assessee)   to	 the
C.I.T.(Central), New Delhi to the following effect :
	 "Please  refer	 to your D.O. No.  77,	dated	14th
	 August,  1985	addressed to Member I.T.(J)  on	 the
	 above subject.
	 2.  Letter F. No. 473/644/83-FTD dated 31 st  July,
	 1985  was only in recognition of the position	that
	 the approval u/s 80-O is for the agreement as	such
	 and  the  mention  of any  time  limit	 therein  is
	 redundant, except for the starting year.
	 3.  As	 would	be noticed  from  all  the  approval
	 letters   themselves,	Board's	 approval   to	 the
	 agreements  is subject to the other  conditions  of
	 the Act being satisfied.  These have to be examined
	 carefully  by the assessing officers  while  making
	 the  assessments.  If the income does	not  satisfy
	 the requirements of section 80-O, it cannot be said
	 that the mere approval would automatically  entitle
	 the  assessee to relief u/s 80-O.  The quantum,  if
	 any,  of  the	income which would  be	entitled  to
	 relief	 under	section 80-O has necessarily  to  be
	 determined by them on the facts of each case.
	 4.  It would also be noticed from all the  approval
	 letters that they are subject to amendments enacted
	 in  the  Income-tax Act, 1961, from time  to  time.
	 Therefore,   notwithstanding  the  approval   under
	 section 80-O or the words "Assessment year 82-83 and
	 onwards",  if the project or work falls within	 the
	 definition  given  in section 80-HHB(1),  the	same
	 would be hit by the provision of section 80-HHB(5).
	 5.   Your apprehension	 that  the approval has been
	 modified  or  that  it ignores	 the  provisions  of
	 Section 80-HHB is, therefore, without any basis.
	 The   position	  in  respect  of  letter   F.	 No.
	 473/643/83-FTD	 dated 31.7.1985 for  the  agreement
	 dated	10.1.81 in respect of the same	assessee  is
	 also identical."
						  85
     Normally,	correspondence of this type would be  hardly
relevant for deciding question regarding the construction or
a section in the statute.  But, apparently, the	 Department,
before	the Tribunal, relief upon the letter of	 14.9.85  as
superseding  the effect of the approval granted on  31.7.85.
The  Tribunal,	in its appellate order,	 referred  to  these
letters.  It observed :
	 "It  is  that	in respect of  Karkh  and  Diwaniyah
	 Projects  confusion which has arisen in  this	case
	 could	have  been avoided.  In the  first  approval
	 letter	 the  Board  confined the  approval  to	 the
	 assessment year 1982-83 and referred to section 80-
	 HHB for the subsequent years.	On representation by
	 the  assessee the matter was considered for  almost
	 two  years  and meanwhile the assessment  was	also
	 made and the first appellate authority also decided
	 the  matter.	It was only in July, 1985  that	 the
	 Board	rectified their earlier order  removing	 the
	 reference  to	section 80-HHB	for  the  assessment
	 years 1983-84 onwards.	 The second order was likely
	 to  give an impression that the  rectification	 has
	 been made in view of the representation made by the
	 assessee about the scope and application of section
	 80-HHB.   This impression was not only	 created  in
	 the  minds  of the assessee but also  led  to	some
	 misunderstanding  in the mind of the  Commissioner.
	 When  he  sought a clarification the  Board  stated
	 that inspite of approval under section 80-O if	 the
	 income	 does not satisfy the requirements  of	that
	 section, the assessee would not be entitled to such
	 deduction.  In this letter it was also stated	that
	 the mention of the assessment years in the approval
	 orders	 was  redundant.  We have referred  to	this
	 clarification	given by the Board only because	 the
	 the learned counsel for the revenue has adopted the
	 arguments  given in this letter as his own.   There
	 is  no	 doubt	that the  first	 qualifies  approval
	 followed  by  the  modification  of  that  approval
	 coupled with this thinking on the part of the Board
	 as given to the Commissioner does indicate that the
	 position   was	 not  clear  in	 the  mind  of	 the
	 authorities  who approved or modified the  approval
	 of  the contracts.  Be that as it may, we  have  to
	 consider  the	matter from the angle of law  as  it
	 stands	 and we cannot decide on the basis  of	some
	 misunderstanding  or  confusions which	 might	have
	 been created at some stage."
     Learned counsel for the assessee vehemently  criticised
the  issue of the letter of 'clarification" by	the  officer
who had completed the assessment in the case.  He urged that
the Tribunal should not have taken into account the contents
of  this  letter at all and, in any event,  could  not	have
drawn an
						  86
     inference,	 because of this letter, that  the  position
was not clear in the mind of the CBDT.	He also pointed	 out
that he had sought for a reference of a "question of law" Of
the  High  Court on this aspect which the Tribunal  (in	 his
submission,  unjustifiably) declined on the ground  that the
letter had been considered only because it was adopted as an
argument  by counsel for the Revenue.  One aspect which	 may
need  consideration by us is the question how for the  issue
of  the letter of 14.9.85 affects the assessee's  claim	 for
exemption under section 80-O in the present case.
     There  does  not  seem  to	 be  much  doubt  that	 the
provisions  of	S.  80-HHB apply to  the  contracts  in	 the
present	 case and that, at the worst, the  assessee's  claim
for exemption under section 80-HHB deserves to be considered
afresh	after  giving the assessee an opportunity  of  being
hard,  as  directed by the CIT (Appeals)  and  confirmed  by
C.I.T.	and the High Court (see 1990 : 185 ITR 230).  It  is
possible  that, with section 80-HHB and 80-O, as they  stand
today,	it  might  not	make very  much	 difference  to	 the
assessee whether the relief is granted under the one section
or the other, as they both permit a deduction from the gross
total  income, of fifty per cent, of the profits in the	 one
case  and of the qualifying receipts in the other.  However,
till  1.4.1987, the relief under section 80-HHB was  25%  of
the  profits  whereas the deduction under section  80-O	 was
100%  of the qualifying receipts upto assessment year  1984-
85.   Thereafter the latter was reduced to 50%	only  w.e.f.
1.6.1987.  This has made it very material to decide  whether
the assessee is entitled to the deduction under section 80-O
and the question that really arises for our consideration is
whether	 the relief under that section is available  to	 the
assessee.   We	shall first discuss this question  only	 the
language  of  section 80-O without taking into	account	 the
insertion  of section 80-HHB or the complication  introduced
the case by the approvals of the CBDT referred to earlier.
     The  Department's case, urged with great  emphasis	 and
vehemence  by Sri B.B. Ahuja, is that a careful	 reading  of
section	 80-O will show that the deduction provided by	that
section	 is very limited in nature and not available to	 the
assessee.  He submits, on the other hand, that this case  is
clearly one falling under the terms of section 80-HHB  being
a  case	 of execution of a "foreign project" as	 defined  in
that  section.	We shall, however, consider the two  aspects
of  the argument separately for the fact that the income  in
question may qualify for deduction under section 80-HHB does
not necessarily exclude the applicability of the  provisions
of  section  80-O.  It is sufficient to point out  that	 the
language  of sub-section (5) of section 80-HHB	which  gives
precedence  to a claim under section 80-HHB over  one  under
any  other  provision,	itself	necessarily  postulates	 the
possibility of the whole or part of
						  87
the  consideration payable to an assessee for the  execution
of a foreign project qualifying for deduction under  section
80-HHB	falling	 for  consideration  also  under  any  other
provision as well.
     Sri Ahuja points out that Part C of Ch. VI-A of the Act
Permits	 deductions,  from  the gross  total  income  of  an
assessee,   of	various	 "species"  of	income,	 which	 are
carefully defined, in section 80H onwards.  Sections 80H  to
80-JJA,	 80QQ,80RR and 80S permit a deduction in respect  of
the  "profits and gains" or "profits" derived  from  various
types of business, undertakings or professions, sections 80K
to  80N and 80Q deal with income by way of  "dividends"	 and
"interest"  falling under certain categories; section  80-P,
which	grants	 a  deduction  to   cooperative	  societies,
classifies  the deductible income into "profits	 and  gains"
from  activities in the nature of business on the  one	hand
and  income  falling  under other heads	 such  as  interest,
dividends,  income  from house property etc. on	 the  other;
80QQA refers to income derived from a profession but only in
the  form  of  consideration  for  assignment  or  grant  of
copyright interests or royalties or copyright fees;  section
80R and 80RRA allow a deduction in respect of "remuneration"
:and  section  80T  relates to "capital	 gains".   In  other
words,	the scheme of this Part of Ch. VI-A is to  correlate
the deductions to specific heads of income.  Section  80-HHB
talks  of the profits and gains derived from a	business-and
the assessee here is seeking such a deduction - but  section
80-O  provides	for  a	deduction  only	 in  respect  of  an
assessee's receipts from a foreign Government or  enterprise
by  way	 of  "royalty,	commission,  fees  or  any   similar
payment."  Not only this; the section also requires that the
assessee  must have derived the receipts falling  under	 the
above categories in one of two ways -
     (i)  in  consideration for the 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,	 experience  or	 skill	made
	 available   or	 provided  or  agreed  to  be	made
	 available   or	 provided  to  such  Government	  or
	 enterprise by the  assessee; or
	 (ii)  in consideration of  technical  services
	 rendered or	       agreed to be rendered outside
	 India to such		 Government or enterprise by
	 the assessee.
     According	to  learned  counsel, the  receipts  of	 the
present, assessee do not fulfill these requirements.
     In	 support  of the contention that the claim  for	 the
assessee, on the facts,
					     88
is  only  for a deduction from the profits and	gains  of  a
business  carried  on  by it and that such a  claim  is	 not
referable to section 80-O at all.  Sri Ahuja first draws our
attention  to the treatment accorded to the receipts by	 the
assessee  in its books of account as well as the claim	made
in  the	 applications filed before the	CBDT.	The  balance
sheet of the company for the calendar year 1982 accounts for
"contract receipts" of Rs. 2,332,490,079 and "other receipt"
of  Rs.	 47,000,122.  Deducting a total expenditure  of	 Rs.
1,717,751,494	classified  under  three   headings   Direct
Contract    Expenses,	management   expenses	and    other
expenditure, a "net profit" of Rs.661,738,707 is arrived at.
While the details of the "direct contract expenses" set	 out
in  Schedule I include an item of "royalties" paid  and	 the
details of "other expenditure" set out in Schedule K include
an  item of payment of "technical consultation fees",  there
is  no	similar	 item  under  contract	receipts  or   other
receipts.   The	 assessee's balance sheet is thus one  of  a
company	 carrying on business as Engineers  and	 Contractors
and  reflects only the profits derived from  such  business.
It  is then pointed out that the assessee has not been	able
to identify the basis of the deduction claimed by it in	 the
application  made to the C.B.D.T.  In para 6 read with	para
11  of	the application, the assessee explains	that  it  is
claiming exemption under section 80-O of the contract on the
the  total  value  of  the contract less  the  net  cost  of
machinery,  equipment  and other items (on which  no  profit
element is involved (and, obviously, though not specifically
mentioned, all other expenses incurred on the contract).  In
other  words,  the  exemption claimed  is  on  the  contract
receipts less the contract expenses : that is to say, on the
entire profits from the contract.  Paras (i) and (iv) of the
letter	of the assessee to the CBDT dated 4.8.81 also  leave
no  doubt regarding this.  Para 10 of the proforma  requires
the assessee to give details of the receipts under the	four
headings  mentioned in section 80-O but the  assessee  side-
steps  the  query  with a vague answer.	 It  is,  therefore,
clear,	says  Sri  Ahuja,  that this  is  a  case  in  which
deduction  is  claimed	of  the "profits  and  gains"  of  a
"foreign project", a claim surely falling under section	 80-
HHB and totally outside the terms of section 80-O.
     Sri Ahuja, in this context, relied on the	observations
of this Court in Cloth Traders P. Ltd. v. C.I.T., (1979) 118
ITR  243.   There  the	question which	this  Court  had  to
consider  was whether the deduction provided for in  section
80-M  of  the  Act was of the gross  amount  of	 the  inter-
corporate dividend received by an assessee or the net amount
thereof arrived at after deducting the expenses incurred for
the  earning  of  such	income.	 The  Court  held  that	 the
deduction  was	available  for	the  gross  amount  of	 the
dividend.   This  question does not concern us	but  in	 the
course	of  the	 discussion, the Court	made  the  following
observations on which Sri Ahuja seeks to rely :
						  89
	 "Section 80M, sub-section (1), opens with the words
	 "where	 the  gross  total  income  of	an  assessee
	 ......includes any income by way of dividends	from
	 a  domestic  company" and proceeds to say  that  in
	 such a case there shall be allowed in computing the
	 total income of the assessee a deduction "from such
	 income	 by way of dividends" of an amount equal  to
	 the  whole  of such income or 60 per cent  of	such
	 income, as the case may be, depending on the nature
	 of  the domestic company from which the  income  by
	 way of dividends is received.	Now, the words "such
	 income	 by way of dividends" must be  referable  to
	 the  income  by way of dividends  from	 a  domestic
	 company  which	 is  included  in  the	gross  total
	 income.  The whole of such income, that is,  income
	 by  way of dividends from a domestic company or  60
	 per cent 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.	 The
	 words	 "where	 the  gross  total  income   of	  an
	 assessee.....includes	 any   income  by   way	  of
	 dividends  from  a domestic company"  are  intended
	 only  to  provide  that a  particular	category  of
	 income,  namely, income by way of dividends from  a
	 domestic  company, should form a component part  of
	 the   gross  total  income.   These  words   merely
	 prescribe a condition for the applicability of	 the
	 section,  namely, that the gross total income	must
	 include  the  category of income described  by	 the
	 words	"income by way of dividends from a  domestic
	 company".  If the gross total income includes	this
	 particular  category  of income,  whatever  be	 the
	 quantum  of  such income  included,  the  condition
	 would	be  satisfied  and  the	 assessee  would  be
	 eligible for deduction of the whole or 60 per	cent
	 of  "such  income."  Now, if the words	 "where	 the
	 gross total income of an assessee .......  includes
	 any  income  by way of dividends  from	 a  domestic
	 company"  in the opening part of the section  refer
	 only  to  the	inclusion of the  category   of	 the
	 income	 denoted  by  the words "income	 by  way  of
	 dividends  from a domestic company" and not to	 the
	 quantum of the income so included, the words  "such
	 income" cannot have reference to the quantum of the
	 income	  included,  that  is,	income	by  way	  of
	 dividends from a domestic company.  The words "such
	 income"  as  a	 matter of  plain  grammar  must  be
	 substituted   by  the	words  "income	by  way	  of
	 dividends  from  a domestic company"  in  order  to
	 arrive at a proper construction of the section	 and
	 if  that  is  done, it would be  obvious  that	 the
	 deduction  is to be in respect of the whole  or  60
	 per	cent	of   the   "income   by	   way	  of
	 90
	 dividends  from a domestic company" which can	only
	 mean  the full amount of dividends received from  a
	 domestic company."
 Sri  Ahuja	 is,  of course, fully	conscious  that	 the
decision  in Cloth Traders (supra) has since been  overruled
by  a larger bench of the Court in Distributors (Baroda)  P.
Ltd.  v. Union, (1985) 155 ITR 120 but he points out  -	 and
we agree he is right in this - that the latter decision does
not  affect  the  weight  of  the  above  observations.	  We
entirely  agree with Sri Ahuja is that the  deduction  under
section	 80-O  is  in respect of the  categories  of  income
specifically  referred to therein and this is an  aspect  to
which  we  shall advert later.	But we are unable  to  agree
with him that there is an antithesis between the  categories
of  income  so	specified and  the expression  'profits	 and
gains".	  It  is no doubt true that,  wherever	the  statute
refers	to the "profits and gains" of a business, it has  in
mind  the income chargeable under the Act under that head  -
head "D" specified in section 14 of the Act - but the  other
categories of income referred to in the various sections are
not correlated to the headwise classification of section 14.
It is well known that items of interest, dividends and other
items  of  remuneration	 are not  always  referable  to	 any
particular  head.   They  may be  assessable  as  "business"
income	or  income from other sources.	In  particular,	 the
receipts  by  way of royalty, fee, commissions	and  similar
payments  may  be  derived in the course of  a	business  or
profession  and constitute part of the profits and gains  of
such  business	or profession.	For instance,  a  consulting
scientist,  architect  or engineer might  provide  technical
services  to   others and receive what is styled  as  "fees"
from  them; the receipts will nevertheless be assessable  as
part of the profits and gains from his profession.  The mere
fact,  therefore, that the assessee is carrying on  business
as  engineers and contractors and the receipts	in  question
flow  to it in the course of its business as such  will	 not
necessarily  preclude relief under section 80-O if they	 can
be  brought within the categories of receipts  mentioned  in
the  section.	The  material question,	 therefore,  is	 not
whether	 the receipts form part of the business	 profits  of
the assessee but whether the entire receipts, or any part of
them, can be brought within the qualifying words in  section
80-O.  To this basic question we shall now turn.
     Sri Ahuja's point on this aspect is two fold.  He first
points	out  that the contract does not	 stipulate  for	 any
payment	 labelled  under  one  of  these  categories.	 The
expressions  royalty,  commission and fees  have  well-known
connotations  and the word "any similar payment",  he  says,
has  to be construed ejusdem generis and the receipts  under
the  contract answer none of these descriptions.  We do	 not
think  that  the  mere	fact  that  the	 contract  does	 not
specifically  assign  the  nomenclature	 mentioned  in	 the
section	 to  the  payments  made  to  the  assessee  can  be
conclusive of the assessee's claim to
						  91
exemption.  That apart, of the four expressions referred  to
in  the section there are referred to elsewhere in  the	 Act.
While  `royalty'  is generally a consideration paid  to	 the
owner of a right or asset - such as copyright patent  right,
mining right etc. - for the privilege of using it for  one's
own purposes, the other expressions are more  comprehensive.
The  expressions  `royalty' and `technical fees'  have	been
defined	 in section 9.	Though the definitions are only	 for
the  purposes  of  clauses (vi) and (vii)  of  section	9(1)
respectively,  they  may be set out here.   The	 definitions
read thus :
	 "S.9(1)(vi) - income by way of royalty payable by -
	 Explanation  2 : For the purposes of  this  clause,
	 "royalty"   means  consideration   (including	 any
	 lumpsum    consideration    but    excluding	 any
	 consideration	which  would be the  income  of	 the
	 recipient   chargeable	 under	the  head   "Capital
	 gains") for -
	 (i)   the transfer of all or any rights  (including
	       the  granting of a licence) in respect  of  a
	       patent,	invention,  model,  design,   secret
	       formula	or process or trade mark or  similar
	       property;
	 (ii)  the  imparting of any information  concerning
	       the  working  of, or the use  of,  a  patent,
	       invention, model, design, secret, formula  or
	       process or trade mark or similar property;
	 (iii) the  use	 of  any  patent,  invention,  model
	       design,	secret formula or process  or  trade
	       mark or similar property;
	 (iv)  the  imparting of any information  concerning
	       technical,    industrial,    commercial	  or
	 scientific knowledge, experience or skill;
	 (v)   the transfer of all or any rights  (including
	       the granting of a licence) in respect of	 any
	       copyright,  literary, artistic or  scientific
	       work  including films or video tapes for	 use
	       in  connection with television or  tapes	 for
	       use  in connection with	radio  broadcasting,
	       but not including consideration for the sale,
	       distribution	  or	  exhibition	  of
	       cinematographic films; or
						  92
	 (vi)  the rendering of any services in	 connection
	       with  the  activities  referred	to  in	sub-
	       clauses (i) to (v).
 Section  9  (1) (vii) - income by way of  fees	 for
	 technical services payable by -
	  xxx		    xxxx       xxx
	 Explanation (2) : For the purposes of	this clause,
	 "fees	  for	technical   services"	means	 any
	 consideration	   (including	 any	lump	 sum
	 consideration) for the rendering of any managerial,
	 technical  or consultancy services  (including	 the
	 provision   of	 services  of  technical  or   other
	 personnel)  but does not include consideration	 for
	 any construction, assembly, mining or like  project
	 undertaken by the recipient or consideration  which
	 would	be income of the recipient chargeable  under
	 the head `Salaries'.
 The   word	 `commission'  has  a	somewhat   different
connotation  and is used differently in different  contexts.
It has been explained by this Court in Gestetner Duplicators
Pvt.  Ltd.  v.	C.I.T., (1979) 117 I.T.R. 1  (S.C.)  in	 the
context	  of  the  definition  of  `salary'.   Black's	 Law
dictionary assigns very wide meaning to these expressions  :
See, for example, p. 614, 1369 and 1463 of the Sixth Edition
(1991).	 But we do not think that it is necessary to attempt
any  precise definition of each of these expressions  or  to
attempt to discern any common thread running through them so
as  to	restrict  the  meaning of  the	words  `any  similar
payment'.    In	  our  opinion,	 the  true   clue   to	 the
interpretation of this expression lies not in the  preceding
three  words but really in the second part of  the  section.
The  essence  of the exemption lies, not in  consigning	 the
receipt to one of these pigeonholes but in examining whether
the receipt is a payment in consideration of one of the	 two
situations envisaged in the section.  To illustrate :  where
the  assessee is the owner of a patent or invention, he	 may
generally  permit another to make use of the patent  or	 the
invention  in  consideration  of a  `royalty'  payment.	 Or,
again,	where  the assessee  is in possession  of  technical
know-how,  he may be prepared to allow another to  make	 use
thereof	 in consideration  of a `fee' to the  assessee.	  He
may  also  stipulate  a	 consideration	in  the	 form  of  a
commission  based  on the sales of the	products  the  other
or  know-how.	Again, an assessee may	have  achieved	some
other  person and stipulate a consideration therefore  which
may be variously described.  The nature of the asset, right,
information  or	 services which can be	brought	 under	this
provision may be varied and the considera-
					     93
tion  stipulated  for  allowing	 another  to  avail  of	 the
assess's  asset, knowledge or services can  likewise  assume
multi-farious  forms.  The word `similar' connotes that	 the
payment	 made to the assessee need not be in the  nature  of
royalty, commission or fees only; it could be any payment of
like nature i.e. made in consideration of the use or  supply
of  such an asset, knowledge or services in the same  manner
as  royalty,  fees  or	consideration  could  be.   We	are,
therefore, of the view that any type of payment received  by
an assessee will qualify for deduction under the section  so
long only as it is a payment made in consideration of one of
the two types of transactions referred to in the section.
     Sri  Ahuja then draws attention to the finding  of	 the
Tribunal in para 41 of its order :
	 "Admittedly in the present case, there is no  claim
	 under	the first part of the section and the  claim
	 was   that  the  assessee  company  was   receiving
	 payments  in  consideration of	 technical  services
	 rendered outside India."
     He	 submits that this is a finding of fact based on  an
admission which has not been specifically challenged by	 the
assessee in its application for reference to the High  Court
and  that it is not open to the assessee to go	behind	this
position at this stage.	 It seems to us that there has	been
some  misconception on the part of the Tribunal.  There	 are
actually two limbs to the first part of the relevant  clause
of the section which are clearly brought out in clolumn 5 of
the  application for approval made to the Board.  Col.	5(a)
refers	to consideration received for the use outside  India
(i) of any patent, invention, model, design, secret  formula
or process or similar property right and (ii) of information
experience  or	skill made available by the  assessee.	 The
second	part of the clause is dealt with in Col. 5(b)  which
refers	to  consideration for  technical  services  rendered
outside India to the foreign Government or enterprise.	 If,
in  this  context, we peruse the applications  for  approval
made by the assessee to the Board, it will be seen that	 the
assessee  had  no  doubt clearly stated	 that  the  payments
received  by  it did not come under category (a)  (i)  above
referred  to.  It was, however, claimed that they  did	fall
under (a) (ii) as well as category (b).	 In the application,
this  was further elaborated.  The second limb of the  first
clause	of  the	 section  (a)  (ii)  was,  it  was  claimed,
attracted  in  the manner set out in Col. 8 and	 the  second
part  of the section was explained to be attracted  set	 out
against	 sub-para  (v)	of Col. 5.   The  Tribunal,  in	 the
paragraph referred to by Sri Ahuja refers only to the  first
limb  of  the  first part of the section  -  which  we	have
referred to as "(a) (i)" - and has
					     94
overlooked the presence of the second limb referred to by us
as  "(a)  (ii)".   Sri Ahuja may not,  therefore,  be  quite
correct	 in asserting that the assessee had  restricted	 its
claim  before the Tribunal only to the ground of  "technical
services"  rendered  by the assessee outside  India  to	 its
client.	 The assessee's claim rested both on the second limb
of  the	 first	part as well as on the second  part  of	 the
relevant clause.  The finding of the Tribunal in this regard
is not one of fact based on an admission as suggested by Sri
Ahuja.	The finding proceeds on an incorrect appreciation of
the  contents  of the assessee's application  for  approval.
There  is no basis to put forward a contention that,  though
in  the application to the Board, the assessee	had  claimed
relief	on two grounds, it had given up a part of the  claim
before	the  Tribunal.	The word "Admittedly"  used  by	 the
Tribunal  in  the passage relied on by Sri  Ahuja  does	 not
appear	to  refer  to  any admission  over  and	 above	that
contained  in regard to column 5 (a)(i) of  the	 application
for  approval.	The question is whether the claim  has	been
substantiated under either of these headings.
     Sri  Ahuja	 vehemently  argues it	has  not  been.	  He
submits	 that the assessee has neither made any	 information
available  to  the foreign client nor has  it  rendered	 any
technical services to the said client.	He contends that the
contract in favour of the two members of the consortium	 was
in  the	 nature of a turnkey project.  This meant  that	 the
client was not interested in the details of the	 information
possessed or the services rendered by the contractor: all it
wanted	was  that  the	Water Supply  Project,	as  per	 the
detailed  specifications, designs and drawings furnished  by
the  BWSA should be executed by the consortium, complete  in
all  respects, and handed over to it.  Sri Ahuja points	 out
by analysing the provisions of the consortium agreement that
the assessee was not concerned with any part of the contract
other  than  the  "civil  works".   He	says  that  all	 the
"Reservoir  works"  which  involved the putting	 up  of	 the
reservoir   structures,	   the	trunk  pipelines   and	 the
mechanical  and	 electrical plant for the  project  was	 the
responsibility of the SCC and that the assessee had  nothing
to  do but put up a few buildings and  ancillary  pipelines.
The assessee was nothing more than an engineering contractor
and,   in  constructing	  pump-houses  or  laying   sanitary
fittings,  he  imparted	 no  information  and  rendered	  no
technical  services.   Such information as it  possessed  in
these  respects	 was utilised by itself and  such  technical
services,  as  were  rendered by  its  engineers  and  other
employees were rendered to it and not to either its  partner
in the consortium or to the foreign Government.
     We	 do  not  desire to encumber this  judgment  with  a
detailed  discussion of the large number of clauses  of	 the
contract  (tender)  document and the  consortium  agreement.
But it seems to us that while Sri Ahuja seems to be right in
saying	that the assessee was concerned only with the  civil
works
					     95
section	 of  the project, he has over  simplified  the	part
played by the assessee in the execution of the contract.  It
is not necessary to quarrel with Sri Ahuja's description  of
the contract as a "turn-key project" which, indeed, was	 the
description given to it by the assessee itself - in para  19
of the application to the Board and in para 2 of the  letter
dated  17.3.82	-  or his  consequent  suggestion  that	 the
foreign government was not interested in. the minute details
or  working of the contract but only in the  final  outcome.
Still the fact is that the contract executed by the assessee
is no ordinary contract.  It may be that a good part of	 the
contract  was executed by the SCC.  But this  cannot  render
the assessee's part insignificant.  If the State  enterprise
itself	was  a fully expert body capable of  completing	 the
entire project on its own, there would have been no need  to
call  for tenders from experienced consortia.  The  part  of
the contract entrusted to the assessee was therefore no less
significant.   The  value of the assessee's package  in	 the
contract was about ID 153 million as against the total value
of the contract estimated at ID 326 millions - more than  40
per  cent.   The job of the assessee involved  survey,	soil
investigation design, detailed drawings and construction  of
all civil works and pipelines (other than trunk	 pipelines).
Even  these  activities	 involve  technical  knowledge	 and
expertise.   It	 cannot	 therefore,  be	 doubted  that	 the
assessee,  under  the  contract, had to	 make  use,  outside
India,	 of  its  industrial,  commercial   and	  scientific
knowledge, experience and skill.   Sri Ahuja makes the point
that,  even  if this be so, the assessee made  available  no
information   regarding	 such  expertise  to   the   foreign
Government.   There is equally no doubt that,  in  executing
the  contract the assessee has rendered technical  services.
Any  engineering contract involves technical services;	more
so,  a contract of the nature and magnitude involved in	 the
present	 case.	 Here again, Sri Ahuja	says,  no  technical
services  were	rendered  by the  assessee  to	the  foreign
Government;  the  assessee only made use  of  the  technical
knowledge,  experience	and skill of its  own  employees  to
perform a task undertaken by it.
     We	 think	the approach of Sri Ahuja on this  issue  is
narrow	and unrealistic.  It would be far from	accurate  to
say  that no information of a technical nature was  imparted
or  made available to the foreign Government.  It cannot  be
forgotten  that	 the contract was executed jointly  with  an
enterprise  that was nothing but an instrumentality  of	 the
foreign	 state.	  The contract had to be executed  in  close
coordination  with  the	 SCC.	Every  single  step  in	 the
contract  was  done under the supervision  of  a  Consortium
Board  and  a  Project Management Board on  which  both	 the
partners  of the consortium were represented.  It  would  be
unpragmatic  to suggest that this close association was	 not
aimed  at enabling the foreign state to collect and  acquire
such  technical knowledge and know-how from the assessee  as
could be reasonably acquired in the process of execution  of
the project.  In our view, there is force
					     96
in the assessee's contention that  it would  not be possible
to  execute  the contract without imparting to	the  foreign
state  and enterprise information of the category  specified
in  the	 section.   The findings of  the  Tribunal  in	this
regard,	 which have not been challenged by  the	 Department,
and are contained in para 42 of the order, are as follows :
	 "42.  We have already extracted some parts  of	 the
	 contract  and the terms of the agreement  and	from
	 these extracts it appears that the contract was for
	 execution  of	Karkh Water Supply  Scheme  contract
	 Stage 1.  As already stated above "works" has	been
	 given	a  defined  meaning  for  interpreting	 the
	 contract  as it means all the works to be  executed
	 in  accordance with the provision of  the  contract
	 including   the  design,   manufacture,   delivery,
	 supply,  installation,	 construction,	setting	  to
	 work, commissioning , site testing, operations	 and
	 maintenance as the case may be.  Form of  agreement
	 also  makes it clear that the consideration of	 the
	 payment   to  be  made	 by  the  employer  to	 the
	 contractor   was  for	executing,  completing	 and
	 maintaining works in conformity in all respect with
	 the  provisions  of  the  contract.   The   general
	 specification	of  the work to be  done  gives	 the
	 details    about   head-works,	  making   of	 the
	 transmission  pipelines,  reservoir  works,  trunk-
	 pipelines  etc.   The tender  document	 itself	 had
	 given	 some  geological  hydrological	 and   other
	 information  for  assisting the contractor  at	 the
	 time  of  tendering but this  information  was	 not
	 guaranteed  by the employer and the contractor	 had
	 to  make use of and interprete the same on his	 own
	 responsibilities.    The  contract  comprised	 all
	 surveys  and site investigation and  also  detailed
	 design, manufacture, supply etc.  of all the  works
	 including mechanical plant and services,  pipelines
	 and  civil  and building works from  the  point  of
	 abstraction  at  the  river Tigris  intake  to	 the
	 connections of the proposed primary feeder  systems
	 to  the  existing  distribution  networks  in	 the
	 various  supply  areas.   The	surveys,   planning,
	 designing  and	 actual	 construction  as  well	  as
	 installations	were part of the whole contract	 and
	 the  assessee	company	 had to	 perform  all  these
	 functions and after completion of the work, had  to
	 commission  it and had to operate the works  for  a
	 period	  of  three  months  after  the	  issue	  of
	 Certificate of completion.  The various surveys and
	 design	 reports are contemplated as a part  of	 the
	 contract.  The contract also contemplated  training
	 the  employers	 personnel  for	 the  operation	 and
	 maintenance  of the whole of the work and had	also
	 to  conduct studies on water treatment	 process  to
	 optimise operations.
						   97
     Similar  objective	 observations  regarding   technical
competence, expertise and experience are also found in	para
44  of the order which is extracted a little later.  In	 the
context	 of these factors and findings, it is  difficult  to
say  that  no information of the type contemplated  in	col.
5(a)(ii) of the application form had been made available  by
the  assessee  to  the foreign Government  for	use  outside
India.	 What exactly would be the proportion of  the  total
consideration  that could reasonably  be attributed to	such
imparting  of  information  would, however,  be	 a  separate
question and may have to be reasonably estimate.
     But, even assuming that there could be some  difference
of opinion on the above issue, there can be no doubt at	 all
that,  under the contract, technical services were  rendered
by the assessee to the foreign Government.  In our  opinion,
the attempt of Sri Ahuja to differentiate technical services
rendered  to the assessee by its employees  and	 technicians
from  technical	 services  rendered by	the  assessee  to  a
foreign	 constituent  and  urge that the  latter  alone	 can
qualify	 for relief under section 80-O	on the	ground	that
the  project  in question was a turnkey	 project  which	 has
succeeded  before  the	High Court, proceeds  on  an  unduly
narrow	interpretation	of the section.	 In  our  view,	 the
assessee  was undoubtedly rendering services to the  foreign
Government  by	executing the water supply  project.   These
services were no doubt technical services, as they  required
specialised knowledge experience and skill for their  proper
execution.   The argument seems to be that the	services  in
the present case will not be covered by the section  because
there  was no privity of contract between the  employees  of
the  assessee who contributed their technical skill and	 the
foreign	 Government.   We  think  this	argument  cannot  be
accepted.   The	 assessee  is a company	 and  any  technical
services  rendered  by	it can only be through the medium of
its  employees,	 skilled  and unskilled,  and  even  if	 the
contract   had	not  related  to  a  turnkey  project,	 the
assessee's employees would have been answerable only to	 the
assessee  and none else though, perhaps, in such  an  event,
the  other party to the contract may have retained a  larger
degree	of control and supervision in the execution  of	 the
contract.   Even  where the contractor is an  individual  or
firm and not a company, a contract of this magnitude can  be
executed  only	through	 the medium of	employees  or  other
personnel   engaged  by	 the  assessee.	  The  facts   that,
physically  speaking, it is only such employees that  render
services and that, so far as they are concerned, they render
services  only	to  their  employer and	 not  to  the  other
contracting  party  are	 in no	way  inconsistent  with,  or
repugnant  to,	the  notion  that, so  far  as	the  foreign
Government  is concerned, it looks only to the assessee	 for
rendering of the technical services under the contract.	 The
High Court has pointed out that a person who manufactures  a
television  set ordered by another cannot be said to  render
technical					    services
98
to the latter.	In our view, that analogy is not apposite in
the  context  of  a contract of the  nature,  magnitude	 and
specialisation with which we are concerned.  Where a  person
employs an architect or an engineer to construct a house  or
some other complicated type of structure such as a  theatre,
scientific  laboratory or the like for him, it will  not  be
incorrect  to  say that the engineer is, in putting  up	 the
structure, rendering him technical services even though	 the
actual construction and even the design thereof may be	done
by  staff and labour employed by the engineer or  architect.
Where  a person consults a lawyer and seeks an opinion	from
him on some issue, the advice provided by the lawyer will be
a piece of technical service provided by him even though  he
may  have  got	the opinion drafted by a junior	 of  his  or
procured from another expert in the particular branch of the
law.  Shri Ahuja tried to negative this line of thinking  by
urging that "professional services" have been brought within
the  scope  of	section 80-O only by  an  amendment  by	 the
Finance	 (No.  2) Act, 1991 and that, too,  w.e.f.  1-4-1992
which  is  proposing to substitute the	word  "technical  or
professional  services"	 in  place of  the  word  "technical
services" now used in the section.  It seems to us that this
amendment  may	be  only of  a	clarificatory  nature.	 The
expression "technical services" has a very broad connotation
and  it has been elsewhere in the statute also so widely  as
to   comprehend	  professional	services  :   vide   section
9(1)(vii), referred to earlier.	 But we need not digress  on
this  aspect for two reasons.  Firstly, whatever may be	 the
position regarding other "professional services", there	 can
hardly	 be  any doubt that services  involving	 specialised
knowledge   experience	 and   skill   in   the	  field	  of
constructional	operations  are "technical  services".	 The
Board's	 guidelines,  to  which	 reference  is	made  later,
specifically   say  so.	  Secondly,  the  question   whether
"professional services" would be "technical services" or not
has  no impact on the point we are trying to make viz.	that
in order to say that a person is rendering such services  to
another,  it  is not necessary that the services  should  be
rendered by the former personally and not through the medium
of others.  For the reasons discussed above, we have come to
the  conclusion that, under the contracts in  question,	 the
assessee  had  made available technical information  to	 the
foreign	 Government  for  use outside  India  and  had	also
rendered  technical  services  to  the	foreign	  Government
outside India.
     All  the same, contends Sri Ahuja, the receipts of	 the
assessee  under	 the contract are just the  profits  of	 its
business   and	 cannot	  be  described	  as   received	  in
consideration  of such information or services as  discussed
above.	 If  what  Sri Ahuja means is that no  part  of	 the
payments  made to the consortium is specially  described  by
the contract, or even the consortium  agreement, as made  in
consideration of such information or services he is no doubt
correct and the consequence of such non-specification has to
be
						  99
considered.   But Sri Ahuja, like the Tribunal, seems to  go
even  further.	He says that the contract has been found  to
be  an	integral, indivisible contract and that	 it  is	 not
permissible for the assessee to dissect the consideration as
attributable to its several ingredients and apportion a part
of  the consideration as being payment for information	made
available to, or technical services rendered to, the foreign
Government.  The Tribunal observed :
	 "43.  Schedule	 11 to the contract  refers  to	 the
	 consideration	of  the work.	Though	the  lumpsum
	 price	is  indicated for different  works  but	 the
	 overall  consideration is for the work as  a  whole
	 and  it is made clear even before the tenders	were
	 given that the contract could not be bifurcated and
	 it could not be given in parts.  Separate  payments
	 are not contemplated for the surveys done,  designs
	 made and the other studies carried on they are made
	 an integral part of the work.	The assessee company
	 had  to give proposals for execution of  the  works
	 and  had  to submit a	preliminary  work  programme
	 showing the starting and completion dates for	each
	 complex    and	  major	   installation	   including
	 construction  of the preliminary works,  submission
	 of  functional	 plants	 and  general  designs	 and
	 periods  for manufacture, delivery, erection  etc.,
	 of  all  works required including plant  and  civil
	 works pipelines and services.	The price  schedules
	 were deemed to cover all expenses, costs risks	 and
	 all  material	necessary  for	the  contractor	  to
	 execute, operate and maintain the works.
	 44.  The  perusal of the contract  and	 its various
	 parts	very clearly shows that is was contract	 for
	 commissioning	of a turn-key project for the  Karkh
	 Water Supply Scheme.  It is true that for executing
	 this  work,  it was absolutely	 essential  for	 the
	 contractor  to have necessary technical  competence
	 and  they  had to use highly  experience  technical
	 personnel  for this purpose.  From the very  nature
	 of the work, it is clear that the execution of	 the
	 project   involved  a	high  degree  of   technical
	 competence  as	 well as expertise  and	 experience.
	 However,  reading  the	 contract as  a	 whole,	 the
	 intention of the parties was only to get the  whole
	 project  being made available on a  turn-key  basis
	 according  to the general specifications laid	down
	 by the Baghdad authorities.  It is not possible  in
	 this contract either to separate one part from	 the
	 other	or to bifurcate a part of consideration	 for
	 any particular service.  We have already considered
	 the  various case laws including certain  decisions
	 the  Hon'ble  Supreme Court in the case  of  Gannon
	 Donkerley & Co.  and Ram Singh Engineering
						  100
	 Works	(supra) which throw light on  interpretation
	 on  such contracts.  Various High Courts have	also
	 considered similar questions throwing light on	 the
	 nature of contracts.  Applying these principles, it
	 appears that this is an indivisible and  integrated
	 contract  for the whole work and has to be  treated
	 as such."
     In our view, neither of the propositions contended	 for
by  Sri	 Ahuja can be accepted as correct.  So	far  as	 the
first  proposition is concerned, it is sufficient for us  to
point	out  that  it  is  a  well-settled  principle	that
exigibility of an item to tax or tax deduction can hardly be
made to depend on the label given to it by the parties.	  An
assessee  cannot  claim	 deduction  under  section  80-O  in
respect	 of certain receipts merely on the basis  that	they
are described as royalty, fee or commission in the  contract
between	 the parties.  By the same token, the absence  of  a
specific  label	 cannot be destructive of the  right  of  an
assessee   to	claim  a  deduction,  if,   in	 fact,	 the
sources indicated in the section.  The second proposition is
equally	 untenable.   Contracts	 of the	 type  envisaged  by
section	 80-O  are  usually very complex ones  and  cover  a
multitude  of obligations and responsibilities.	 It  is	 not
always possible or worthwhile for the parties to dissect the
consideration and apportion it to the various ingredients or
elements  comprised in the contract.  The cases referred  to
by the Tribunal and Sri Ahuja as to the indivisibility of  a
contract  arose	 in  an	 entirely  different  context.	 For
purposes  of  income-tax, a principle of  apportionment	 has
always	been  applied in different  contexts.	Consolidated
receipts   and	 expenses  have	  always   been	  considered
apportionable  in  the	contexts : (a) of  the	capital	 and
revenue	 constituents  comprised in them;  (b)	portions  of
expenditure   attributable  to	business  and	non-business
purposes;  (c)	of places of accrual or arisal; and  (d)  of
or  payments.	This  is a point that  does  not  need	much
elaboration  and it is sufficient to refer to decided  cases
cited under the passages on this topic at pp. 47, 137,	264,
621 and 677 of Kanga & Palkhivala on the Law and Practice of
Income-tax  (Vol. I, Eigth Edition).  We are, therefore,  of
opinion	 that  if,  as we have held, the  contracts  in	 the
present	  case	oblige	the  assessee  to   make   available
information and render services to the foreign Government of
the  nature outlined in section 80-O, it is the duty of	 the
Revenue	 and  the  right of the assessee  to  see  that	 the
consideration	paid   under   the   contract	legitimately
consideration.
     So far, we have looked at the language of section	80-O
in isolation.  The question to be considered next is whether
the introduction of section 80-HHB
 101
has  made  a difference.  On behalf of the  Revenue,  it  is
urged that the facts of the present case squarely fall under
the  scope of this new Section.	 The assessee, it  is  said,
has  derived   profits	and  gains  from  its  business	  of
execution of a foreign project, as defined in clauses (b)(i)
and  (ii)  of sub-section (2) of the section.	Whether	 the
contract  is  viewed  as one directly entered  into  by	 the
assessee  with	the foreign Government or as  involving	 the
execution  of  work undertaken by it as part  of  a  foreign
project	 undertaken in pursuance of a contract entered	into
by  the consortium with the foreign Government, the  profits
and  gains  qualify  for  deduction  under  section  80-HHB,
subject to the conditions and to the extent, outlined in the
section.  Even assuming that the whole, or at least a  part,
of  the	 consideration	payable	 to  the  assessee  for	 the
execution  of  a  foreign  project  or	work  in  connection
therewith  can	be  said also to fall  under  the  terms  of
section 80-O, the terms of sub-section (5) of section 80-HHB
make  it  clear	 that the assessee  would  be  eligible	 for
deduction  under  section  80-HHB  only	 and  cannot   claim
deduction  under section 80-O in respect of any part of	 the
     Sri Nariman, on behalf of the assessee, seeks to  repel
this  contention  in several ways.  He	submitted,  firstly,
that since the insertion of section 80-HHB has not  resulted
in the deletion of section 80-O, the two sections should  be
read  harmoniously and given effect to together.   This,  he
says,  can be done by restricting the operation	 of  section
80-HHB	to  contracts entered into on or after	1-4-1983  on
which  date  that section came into force and so as  not  to
affect contracts  entered into before that date and approved
by  the	 Board.	  In this context, it is  pointed  out	that
section	 80-O envisages grant of approval to a contract	 and
once  such approval is granted (on whatever date it be)	 the
approval should enure  for the entire period of contract and
cannot	be restricted to any particular assessment  year  or
years.	 In  support  of this contention,  the	decision  in
C.I.T.	v.  Indian Institute of Public Opinion,	 (1982)	 134
I.T.R. 2 (Delhi) is relied upon.  It is urged that, once the
approval  is  granted to a contract,  Section  80-O  becomes
operative in respect of all sums received under the contract
of  the nature specified therein.  If the  applicability  of
section	  80-HHB  is thus restricted, it is  submitted,	 the
terms  of that section, including sub-section  (5)  thereof;
cannot	stand  in  the way of the relief  available  to	 the
assessee under section 80-O. Secondly, he contends that	 the
definition of "foreign project" in section 80-HHB (2)(b)  is
a  restrictive one; it covers only the construction  of	 the
nature	specified  in  sub-clause (i) or  the  assembly	 and
installation  of  the nature specified in  sub-clause  (ii),
there being no other prescribed work in terms of  sub-clause
(iii)  and  it is only the consideration  received  for	 the
carrying  out of these two activities that is excluded	from
the purview of relief under other sections under Heading `C'
of  Ch.	 VI-A.	In other words, it is said,  section  80-HHB
applies only to con-
						  102
struction/installation	 activity  simpliciter	and  not   a
"composite"  activity.	It is argued that where, as  in	 the
present	 case,	the  contract  envisages,  in  addition	  to
construction   of   buildings  or   other   structures	 and
installation  of  machinery  or plant  outside	India,	some
further	 acts  to  be done by the  assessee-such  as  making
available  information	on  rendering  of  services  to	 the
foreign	  Government  or  enterprise  -	 the   consideration
attributable to such action will not forfeit  the  deduction
otherwise  available under section 80-O.  Some	significance
is  sought to be attached to the use in sub-section  (5)  of
the  words "Notwithstanding anything contained in any  other
provision  under  this	Chapter"  and  not  "Notwithstanding
anything  done	or  any approval  granted  under  any  other
provision"  as also the use of the word "shall not  qualify"
at  the	 end  of the sub-section.  It  is  argued  that once
approval  is granted under section 80-O, the  receipts	have
already	 qualified  for	 deduction under  that	section	 and
section	 80-HHB	 (5) does not operate after that  stage.   A
reference  is  also made to the different language  used  in
section	 80-HHA(6) which specifically excludes relief  under
section 80 I and J and to the language used in section 80-MM
which  specifically excludes section 80-O.  Thirdly,  it  is
submitted   that,  if  the  Board,  after  considering	 the
arguments as to applicability of section 80-HHB put  forward
by  the assessee, accepted this as a plausible view  of	 the
relative  area	of  operation of  the  two  provisions,	 and
extended  the approval to assessment year 1983-84 onward  as
well, it could not be said to have exceeded its jurisdiction
and  it	 is not open to the Revenue to ignore the  order  of
approval merely for the reason that section 80-HHB has	been
introduced into	 the statute book.
     The  connection  of Sri Nariman that,  even  after	 the
insertion of section 80-HHB, there is room for	applicabilty
of section 80-O in relation to a contract of this type which
is  not	 a  construction/installation  contract	 simpliciter
appears attractive but we do not think section 80-HHB should
be  interpreted in such a narrow or pedantic  fashion.	 The
section	  provides  for an exemption in respect	 of  profits
from  a	 "foreign project" undertaken outside India  in	 the
course of business.  The expressions "business of  execution
of  a  foreign	project" or work forming part of  it  or the
`profits derived' from the business, take in all aspects  of
a  business  involving the activities referred	to  in	sub-
section	  (2)(b)  of  section  80-HHB  together	  with	 all
activities,   commitments  and	obligations  ancillary	 and
incidental  thereto and the profits flowing therefrom.	 The
definition  cannot  be	restricted  to	the  mere   physical
activity  or  putting up the  superstructure,  machinery  or
plant  but should be understood to take within its fold	 all
utilisation of technical knowledge or rendering of technical
services necessary to bring about the construction, assembly
and  installation.   However,  we  need	 not   theoretically
eliminate   all	  possibility  of   a	contract   involving
independent elements calling for consideration both under
						       103
section	 80-HHB and section 80-O. It is perhaps possible  to
envisage  cases where, While undertaking a foreign  project,
separate  contracts are entered into forming  two  different
sets  of activities involved viz. (i) construction of  works
and assembly or installation of plant and machinery and (ii)
the   transfer	of  rights  know-how,  the  impartation	  of
technical  knowledge  or information and  the  rendering  of
technical  services  and  providing  separate  consideration
under  each heading. It is perhaps possible to say  in	such
cases  that there are two contracts in respect of a  foreign
project,  one  of which will fall under section	 80-HHB	 and
another	 under section 80-O. Or it may be that	even  though
there is a single contract, it separately identifies the two
sets  of activities and provides separate consideration	 for
each.  In such a case also, it is perhaps, possible  to	 say
that  the  consideration for the foreign  project  does	 not
comprise  in  part or in whole of consideration	 that  would
fall  under  section 80-O. But where the contract is  for  a
single	indivisible  consideration for the  execution  of  a
foreign	 project  and does not spell out  the  imparting  of
information or the technical services and any  consideration
therefor,  it is difficult to segregate two parts of such  a
contract, artifically apportion the consideration under	 two
headings  referred  to above and then apportion	 the  relief
under section 80-HHB and section 80-O. This is	particularly
so  in the context of the fact that in the particular  case,
as  has	 been  pointed	out  earlier  the  impartation	 of
information was only indirect consisting of what the foreign
enterprise  of	Government could gather from the  manner  of
execution of the contract by the assessee and the  technical
services  rendered to the non-resident	principal  consisted
only of the execution of the project for it by the assessee.
In  other words, this is a case where the execution  of	 the
foreign project, in itself, comprises the elements  referred
to   in	 section  80-O.	 There	is  one	 single,   integral,
indivisible  contract  for executing a foreign	project	 and
the entire consideration is attributable to such execution.
     Sri Nariman drew our attention to columns 27 and 28  in
From 10F which read thus :
	 "27.  Whether	any part of the payment	 is  derived
	 from, -
	 (a) the execution of a foreign project	 undertaken
	 by  the  applicant in pursuance  of  the  agreement
	 under consideration, or
	 (b)  the  execution of any work undertaken  by	 the
	 applicant  and	 forming part of a  foreign  project
	 undertaken  by any other person in pursuance  of  a
	 contract  entered into by such other person with  a
	 foreign Government or any statutory or other public
	 authority or agency in a foreign State or a foreign
	 enterprise.
						       104
	 28.   With reference to 27(b) above, -
	 (a)   furnish the date of the contract entered into
	 by the other person with the foreign Government  or
	 enterprise   for  the	execution  of  the   foreign
	 project,
	 (b)   whether all the services were rendered by the
	 applicant -
	 (i)   before the signing of such contract; or
	 (ii)  after signing of contract."
     He	 sought to contend on the strength of these  columns
that  a	 part only of the payment derived  from	 a  contract
submitted  for approval under section 80-O may be  referable
to section 80-HHB leaving a balance, at least, eligible for
relief	under section 80-O. This is not the purport of	this
para.  On the other hand it seems to be clearly intended  to
ensure	while  granting	 approval  under  section  80-O	  in
pursuance of the application that section 80-HHB(5) is given
effect	to  and	 no part of the	 payment  derived  from	 the
execution  of  such a project is allowed  to  qualify  under
section 80-O.
     Sri Ahuja sought to make a further point that  even  if
the assessee's case falls under section 80-O, assessee	will
be  entitled to relief not on the entire profits derived  by
the assessee but only to that portion of the receipts as can
be ascribed the character in section 80-O. He suggested that
it may actually be more beneficial to the assessee to  claim
relief	for  25% of that whole under section  80-HHB  rather
than  claim  100% of say 10% attributable to  section  80-O.
There  is,  of course, a fallacy in this argument.  For	 the
assessee's  case  is that the contract falls  either  wholly
under section 80-O or partly under section 80-HHB and partly
section	 80-O.	Thus,  if  only	 10%  of  the  receipts	 are
attributable to section 80-O, the assessee would be entitled
to  relief  of 25% of the 90% under section 80-HHB  and	 the
whole of the 10% under section 80-O in other words a  relief
of 323-1/2% (which is more than 25%) of the whole. But,	 for
reasons,  we have already set down this is a case  in  which
the  impartation of information and provision  of  technical
services  arise directly from the execution of	the  project
and nothing else. This being so there is a complete identity
of  the matters governed by section 80-HHB and section	80-O
and  so the assessee will  be entitled to only and not	both
the  reliefs.
 The   assessee  has,  naturally,  placed	considerable
reliance on the approval granted by the Board under  section
80-O and, in particular, on the
						       105
Clarification  issued  by  the Board on	 31.7.85  after	 the
assessee's  representation,  by deleting  the  reference  to
section	 80-HHB. The Department has sought to  retaliate  by
taking	up the stand that the contracts in the present	case
do  not	 at all fall under section 80-O and that  the  Board
erred  altogether in  granting such approval.  The  Tribunal
accepted   a  suggestion  put  forward	on  behalf  of	 the
Department  that the clarification  was the result  of	some
confusion  and purported to obtain a  further  clarification
from  the  Board  in a manner that  has	 attracted  vehement
complaint  and criticism from the assessee. We do not  think
it  is necessary for us to enter into this realm  of  debate
for, apart from the  doubtful sustainability of a collateral
attack	by  the	 Department on an approval  granted  by	 the
highest	 administrative	 authority under the  Act,  we	have
endeavoured to point out that the Board was fully  justified
in considering the receipts of the assessee as falling under
section	 80-O and in granting approval to the  contract.  We
shall also proceed on the footing that the assessee is	also
right  in saying that the Board had, after  considering	 its
representations,  accepted  the position that  the  approval
under section 80-O would ensure also for the assessment year
1983-84 onwards. In fact, we think that, irrespective of the
Board's clarification of 1985, the correct position is that,
once  a	 contract  stands approved  under  section  80-O  in
relation  to the first assessment year in relation to  which
the approval is sought, the approval ensures for the  entire
duration  of the contract. This is the principle  enunciated
in C.I.T. v. Institute of Public Opinion, (1982) 134  I.T.R.
23 (Del.) the correctness of which cannot be doubted and is,
indeed,	 accepted  by both counsel before us.  Section	80-O
does  not  envisage  an	 application  for  approval  of	 the
year. The Board is approving of a contract having regard  to
the  nature of the receipts flowing therefrom and once	this
approval  is  granted, the assessee is entitled	 to  seek  a
deduction under section 80-O in respect of all the  receipts
under the contract the consideration for which is  traceable
to  the three ingredients discussed earlier irrespective  of
the   assessment  year	in  which  the	receipts  fall	 for
assessment.  The Board's approval of the contract - in	1983
as  well as in 1985 - has no doubt this effect. But this  is
not the same thing as  saying that relief under section 80-O
would  be available despite section 80-HHB. It seems  to  us
that  the Board's clarification of 31.7.1985  (which  merely
withdraws  the reference to section 80-HHB and	extends	 the
approval  beyond  1982-83)  cannot be read  as	involving  a
further decision that the assessee should be granted  relief
under section 80-O contrary to the terms of section  80-HHB.
Section	 80-O  only  empowers  the Board  to  approve  of  a
contract on being satisfied that it gives rise	to  receipts
qualifying  for	 deduction under section  80-O	and  nothing
more.  In  fact	 the various terms  and	 conditions  of	 the
Board's	 letter of approval (in relation to which  arguments
have been ad-
						       106
dressed	 before us) are totally redundant  and	unnecessary.
All  that the Board has to do is to approve of an  agreement
for the purposes of section 80-O. It has nothing more to do.
Its   approval	cannot	be  tentative  or   provisional	  or
qualified.  It	cannot	be hedged  in  with  conditions	 and
restrictions of the nature set out in the Board's letter. It
cannot limit the relief to certain assessment years only; it
cannot restrict or enlarge the scope of the relief that	 can
be granted under the section. The assessment years for which
relief is available, the extent of the receipts that qualify
for deduction and all other incidents flow from the language
of  the section. The position therefore is that the  Board's
approval  of the agreements in the present case,  originally
accorded legitimately and properly, as pointed out by us, in
respect	 of assessment years earlier to 1983-84 will  enable
the assessee to claim like relief under section 80-O for all
subsequent years too. But, after the insertion of S. 80-HHB,
section 80-O the matter of receipts governed both by section
80-HHB,	 in the former and not the latter will	prevail.  We
have  therefore	 come  to the conclusion  that	the  31.7.85
amendment  of the Board's approval cannot help the  assessee
to overcome the mandate of section 80-HHB(5). The Board,  by
its  31.7.1985 letter, could not have intended to  say	this
and, if it did, it acted outside the jurisdiction  conferred
on  it	by the statute. While the Board has every  right  to
declare	 that section 80-applies in respect of the  receipts
under  a  contract approved by it, it has  no  statutory  or
other right to supersede or limit the clear terms of section
80-HHB.We find ourselves unable to accede to the proposition
of   Sri  Nariman  that the scope of  S.  80-HHB  should  be
excluded  from	application to contracts approved  prior  to
1.4.1983. Indeed, a difficulty of this type could arise even
in respect of a contract entered into after 1.4.1983.  Since
section 80-O, continues to be in the statute book even after
1.4.1983, an application may be made and a contract approved
under  that section. In doing this the Board may  not  have,
and  certainly need not have, considered the  provisions  of
section	 80-HHB.  But, despite such approval,  the  receipts
under  the contract cannot qualify for relief under  section
80-O  if the assessing officer comes to the conclusion	that
the  case  falls under section 80-HHB. The  legislature	 has
clearly	 envisaged  the	 possibility of	 the  same  receipts
qualifying  for	 deduction under section 80-HHB as  well  as
under  any other provision of the Act and  has	specifically
provided  that, in such a case, the terms of section  80-HHB
will  prevail over the provisions of such  other  provision.
Sri Ahuja invited our attention to the fact that  subsection
(5)  was  not  part of section 80-HHB at the  stage  of	 the
Finance Bill but was inserted during the passage of the Bill
in Parliament. The Finance Minister explained the purpose in
his budget speech. He said :
	 "Indian  companies and resident  non-corporate	 tax
	 payers are entitled under the Bill to an  exemption
	 of 25 per cent of the
						   107
	 profits  desired  by  them from  the  execution  of
	 foreign  contracts undertaken by them. Some  doubts
	 have  been  raised that income	 derived  from	such
	 foreign projects may also be eligible for exemption
	 under section 80-O of the Income-tax Act. I propose
	 to make a provision to clarify that no part of	 the
	 consideration	 received  by  a  person   for	 the
	 execution  of	the foreign project  or	 the  income
	 comprised  in such consideration shall qualify	 for
	 deduction under any other provision in the  Income-
	 tax Act.
     The   statutory  interdict	 thus  inserted	 cannot	  be
frustrated  by the terms of an approval of the	Board  under
section 80-O. Such approval, at its best, cannot  overreach,
the  limitations imposed on the relief available under	that
section as a consequence of section 80-HHB(5).
     There was a good deal of discussion before us as to the
scope and effect of the approval granted by the Board to the
terms  of  a contract under section 80-O.  Sri	Ahuja  would
have   us   hold  that	the  approval  of  the	 Board	 has
significance  only  in	that,  without	such  approval,	 the
assessee's claim for relief under section 80-O could not all
be  entertained.  It  only  opens the  gate  to	 enable	 the
assessee to enter and seek a deduction under the section. It
is  not	 conclusive  on any other aspect  of  section  80-O,
certainly not on the merits of the assessee's claim. Despite
the  approval, the Income-tax Officer cannot be absolved  of
his functions and responsibility of deciding whether the any
part of the assessee's receipts fulfills the characteristics
prescribed  for deduction under the section and, if  so,  to
what  extent the assessee is entitled to get  the  deduction
in  accordance	with and subject to the	 provisions  of	 the
section. According to counsel, the Board is not competent to
decide	these issues in the process of granting approval  to
the agreement. He point out that, in the instant case,	the
assessee  has  not  identified the  receipts  or  any  parts
thereof	 as  having the characteristics	 enumerated  in	 the
section.  Nevertheless the assessee purported to claim	that
the  entirety  of such unidentified receipts  would  be	 the
value  of  the	technical information  and  services  to  be
imparted or rendered under the contract (vide col. 6 of	 the
application),  eligible	 for relief under section  80-O.  In
order, however, not to give an impression that exemption was
sought	for  the entire profits, the assessee  purported  to
exclude from the claim of exemption the net cost of  certain
machinery,  equipment and other items allegedly supplied  to
the  foreign  Government under the contract on	a  no-profit
basis. Sri Ahuja says, the calculations of the assessee	 are
incorrect  in  several	respects. These	 errors	 apart,	 the
consideration  for  services plus profits under	 the  entire
contract was estimated at 69. 893 million ID at the time  of
filing the application for approval as per a break-up  chart
placed on record. Of this the figure of profits
						       108
was estimated at 25.49 million IDS or Rs. 68 crores only. As
against	 this,	the assessment order shows that	 the  relief
claimed	 under section 80-O for the assessment year  1983-84
alone was to the tune of Rs. 77.84 crores in respect of	 the
Kirkh  contract. He also points out that the  aggregate	 net
profits	 shown	by the assessee from this contract  for	 the
assessment  years  1982-83 to 1989-90 were Rs.	165  crores,
almost	50%  of the total receipts from	 the  contract.	 Sri
Ahuja  says,  therefore, the application  for  approval	 was
based on wild estimates made before the contract began to be
worked	in right earnest and the Board could certainly	have
had  no possible material for accepting the basis  of  claim
for  exemption	set  out in col. 6  as	correct.  It  would,
therefore,   Sri  Ahuja	 urges,	 be  totally  untenable	  to
interpret  the Board's approval as a decision on the  merits
of  the assessee's claim putting the seal of finality as  to
the  basis  or quantum of the relief to be  granted  to	 the
assessee.  That	 is the exclusive domain  of  the  assessing
officer which the Board has no business to encroach upon.
     On the other hand, Sri Nariman contended that it  would
be  preposterous to attribute such an insignificant role  to
the  Board. The Board is the appex administrative  authority
under  the  Act	 and the  responsibility  of  approving	 the
contract was entrusted to such a high authority for  weighty
reasons with the clear intention that, once the contract  is
approved  by the Board, the assessee should be	entitled  to
exemption  subject  only to  the  arithmetical	computations
being  left to be done by the assessing officer.  He  points
out that the Board had prescribed an elaborate and  detailed
proforma  on  which the application for approval had  to  be
made, some portions of which have been extracted earlier  in
this judgment. It requires the assessee to give full details
of  the	 contract  (col. 2 to 4, 3 to 19)  explain  how	 the
receipts under contract fulfill each of the requirements  of
the section (col. 5 to 9), specify the nature and quantum of
the  exemption	claimed (col. 10 and 11)  and  indicate	 the
terms  and mode of payment (col. 12).  Elaborate  guidelines
were  drawn  up and publicised by Board's circular  no.	 187
dated  23.12.75,  (See	(1976) 102  I.T.R.  St.	 83).  These
guidelines, read with the proforma, clearly envisage a vital
role  to the Board to analyse the terms of the contract	 and
nature of the assessee's receipts carefully and ensure	that
they  qualify  for relief under the section. No	 doubt,	 the
approval is granted on the basis of the terms of the contact
and the actual quantification of the relief available  under
the  contract for any particular assessment year has  to  be
worked	out by the assessing officer under the contract.  It
is  also possible that the Board's approval is	obtained  by
fraud  or misrepresentation and the guidelines	provide	 for
revocation  of the approval in case some such  situation  is
found  to  exist. But, so long as the  approval	 lasts,	 the
assessing   officer  is	 bound	and  cannot  challenge	 the
correctness of the approval or take up the position that the
						       109
contract  itself falls outside the purview of  the  section.
Apart  from  this general position, Sri Nariman	 points	 out
that  the  approval of the Board had been accorded  in	this
case after full and detailed discussions, correspondence and
hearings  stretching from 3.3.1981 - the date on  which	 the
application  was  made	  to 28.10.1983	 when  approval	 was
given. These show that each and every aspect of the contract
was  examined. The assessee was questioned as to how it	 was
claiming  that	no  profit   was involved  in  the  sale  of
materials. Details regarding technical personnel engaged  by
the  assessee and the extent of fees attributable  to  their
recruitment in India were called for. A	 query was raised as
to how the contract can be said to involve the rendering  of
services  to  a	 foreign enterprise within  the	 meaning  of
section	 80-O.	The objection that the	services  under	 the
contract were rendered to self and not to a third party	 was
also  raised. These objection were duly answered and it	 was
only  after  applying  its mind and  deliberating  over	 the
matter	that Board approved the contract. If there had	been
any  misrepresentation	of facts on the basis of  which	 the
approval had been secured, it was open to the Board to	have
revoked the approval but this had not been done till  today.
In   the  circumstances,  Sri  Nariman	contends  that	 the
Department  should not be allowed to take up the stand	that
the  approval of the Board had no value at all and could  be
completely ignored by the assessing officer because, In	 his
opinion, it did not fulfill the requirements of section	 80-
O.
     we	 have considered the contentions urged on behalf  of
both parties. Since we have already expressed our conclusion
that  the contract in the present case does come within	 the
fold  of  section 80-O and that the Board acted	 rightly  in
granting  approval  to	the contract, it may  not  be  quite
necessary  for	us  to express any opinion  on	this  issue.
However, since the matter has been fully debated before	 us,
and is of some general importance we may indicate our  views
on this issue.
     At	 the  outset, it may be pointed	 out  that,  earlier
section 80-O (and certain other sections in the statute) had
provided  for  the approval of the Central Government  as  a
condition  precedent for the grant of relief or	 concessions
thereunder,  where the relief or concession was in  relation
to  a contract with a foreign party. At that stage,  it	 was
possible to take a view that the provision was intended only
as a safeguard to monitor contracts with foreigners as	such
contracts  may involve several aspects of  policy,  finance,
foreign	 exchange and other elements vital to the  country's
interests. But this power of approval has since been shifted
to  the Board which is the highest administrative  authority
under the Act. This is a very significant change. No  doubt,
even  after the change, the approval acts as a safety  valve
and  enables  the  Government to decline  its  approval	 for
various reasons the effect of
						       110
which,	inter  alia, would be that no relief be	 sought	 for
under the relevant provisions. But there is a change in	 the
content and purpose of the approval. The Board has to  grant
the  approval "in this behalf" that is for the	purposes  of
this section. It is true that, even earlier, the approval of
the  Central Government was to be granted "in  this  behalf"
but when the power is vested in the apex authority under the
Income-tax  Act, it is clear that the scope of	the  Board's
powers	is more extensive and should bear upon the terms  of
the  agreement	vis-a-vis  the claim for  relief  under	 the
section	 in relation to which relief is sought. It  is	also
interesting  to	 see that this power of approval  has  since
been  de-centralised and vested in the Director-General	 and
Chief  Commissioner  which are authorities at a	 lower	rung
than  the  Board  but at a higher rung	than  the  assessing
officer.  While,  at one time, the  Income-tax	Officer	 was
described as the king-pin of the tax administration and	 was
the   sole  repository	of  all	 functions   pertaining	  to
assessment,  the recent tendency has been to vest powers  of
assessment  even in  officers above the rank of the  Income-
tax  officer  either because of the amount involved  or	 for
other  reason.	Here again, there is good reason,  over	 and
above  the general need to have a surveillance over  foreign
contracts,  why the power to grant approval is vested  in  a
higher	authority  in the Income-tax hierarchy	itself.	 The
first is that the Board is considered better equipped,	both
on considerations of time as well as the technical knowledge
international  contracts and decide how far the contract  in
question  and  the  receipts thereunder are  of	 the  nature
intended  to be covered by the exemption clause; The  second
is  that,  with such a provision, the applicant is  sure  to
take steps to obtain necessary approval at a  stage  earlier
to  the	 implementation	 of  the contract  and	it  will  be
possible  to require the party, if modification	 or  changes
are called for, to modify the contract even at the outset so
as  to	bring  it within the range of  contracts  for  which
relief is intended. The third and perhaps and most important
reason	is  that such contracts are generally likely  to  be
long-term    contracts	and  it is of  the  essence  for  an
applicant  to  know well beforehand where he stands  in	 the
matter	of  tax	 exemption and whether	he  can	 proceed  to
execute the contract on the basis that he would be  eligible
for the relief he feels he is eligible for. It would  result
in  chaos  if  an  assessee's  contracts  were	left  to  be
scrutinised  at the time of assessment several	years  after
they  have  been  implemented and  the	availability  of  an
exemption provision which the assessee was banking upon	 and
on  the	 basis of which he had entered	into  the  contract,
denied	to  him	 for one reason	 or  another  whereas,	duly
forewarned by a disapproval, he could have backed out of the
contract,  if  necessary,  and	saved  his  skin.  In	this
situation,  we find it difficult to accept the plea  of	 Sri
Ahuja  that  the  approval  is nothing	but  a	measure	 for
screening  the cases which an assessing officer may have  to
consider.
						       111
     We are also reinforced in this conclusion by the manner
in  which the provision has been understood and	 implemented
by  the Board since its introduction. The Board	 had  issued
circulars  earlier  when  the  relief  had  been  introduced
originally  by	the insertion of section  85-C	and,  again,
later  in 1972. But, after the power of approval was  vested
in the Board, elaborate guidelines were drawn up as  pointed
out  by	 Sri Nariman. These guidelines	clearly	 envisage  a
under  section 80-O. The proforma calls for details  of	 the
analysis of the receipts under the contract. An	 examination
whether	 the receipts can be said to be by way	of  royalty,
commission,  fee  or  similar  payment	is  undertaken.	 The
receipts  are analysed under the three headings, as  earlier
referred to us, set out in paras 5(a)(i), 5(a)(ii) and	5(b)
of the proforma. Even the situation where the contract is  a
composite one has been dealt with by the guidelines and this
may  be referred to here in a little greater detail. In	 the
circular  of  23.12.75 (supra), the Board  decided  that  it
would  decline	approval  in cases  where  the	consolidated
consideration could not be legitimately attributed to  know-
how,  services	etc. envisaged in the section  but  that  in
cases  where such apportionment was considered	permissible,
it  would  grant  approval to the  agreement  and  have	 the
quantification	of  the	 exemption  to	be  decided  by	 the
assessing officer. It said :
	 "(ix)	 In  the  case	of  a  composite   agreement
	 specifying  a consolidated amount as  consideration
	 for  purposes	which include  matters	outside	 the
	 scope	of  section 80-O (e.g. use of  trade  marks,
	 supply	 of  equipment	etc.)  the  amount  of	 the
	 consideration	 relating   to	the   provision	  of
	 technical  know-how  or  technical  services,	etc.
	 qualifying  for purposes of section 80-O will	have
	 to   be  determined  by  the	Income-tax   Officer
	 separately  at	 the time of  assessment  after	 due
	 appreciation of the relevant facts. Where, however,
	 in  the  opinion  of  the Board,  it  will  not  be
	 possible  to properly ascertain and  determine	 the
	 amount	 of  the  consideration	 relatable  to	 the
	 provisions   of  the  know-how	 or  the   technical
	 services,  etc.,  qualifying of section  80-O,	 the
	 Board	may  not approve such an agreement  for	 the
	 purposes of section 80-O of the Act."
     It had also taken the view that a consideration for the
use  of	 the  assessee's trade-mark  would  be	outside	 the
purview	 of section 80-O. Subsequently, however,  the  Board
changed	 its line of approach on these two issues .  In	 its
circular No. 253 dated 30-4-1979, the Board clarified :
	 "Attention  is invited to the Board's Circular	 No.
	 187 (F. No. 473/
						       112
	 15/73-FTD)  dated 23rd December, 1975 on the  above
	 subject laying down the guidelines for the grant of
	 approval  under  section 80-O. The  Board  has	 had
	 occasion to re-examine the aforesaid guidelines and
	 it has been decided to modify the guidelines to the
	 extent indicated below :-
     XXX		      XXX		       XXX
	 (ii)	In  para (ix) of the said circular,  it	 was
	 mentioned that consideration for use of trade	mark
	 would be outside the scope of section 80-O. It	 has
	 now  been decided that payment made for the use  of
	 trade-marks  are  of  the nature  of  royalty,	 and
	 therefore, fall within the scope of section 80-O.
	 (iii)	 It  was also stated in para  3(ix)  of	 the
	 circular  dated  23.12.1975 that in the case  of  a
	 composite agreement which specified a	consolidated
	 amount as consideration for purposes which included
	 matters  outside  the scope of	 section  80-O,	 the
	 purposes of section 80-O of the Act if it' was	 not
	 provision  of	the know-how or	 technical  services
	 etc.,	 qualifying  for  section  80-O.  Thus	 the
	 benefits  of  section 80-O could be denied  to	 the
	 entire	 amount of royalty, commission,	 fees  etc.,
	 receivable  under such an agreement. It  has  since
	 been  decided that in such cases approval would  be
	 granted   by  the  Board  subject  to	a   suitable
	 disallowance for the non-qualifying services  after
	 taking	 into  consideration  the  totality  of	 the
	 agreement so that balance of the royalty'fees	etc.
	 which	is for the services covered by section	80-O
	 can be exempted."
     It	 is  thus clear that the Board has chalked  out	 for
itself,	 we  think quite legitimately and properly,  a	very
detailed  and  dominant	 rule  as  to  the  availability  of
exemptions under section 80-O. The guidelines are of general
nature, fully sanctioned by the provisions of section 119(1)
of the Act and, being instructions enuring to the benefit of
the  assessee, cannot be gone back upon by the	Departmental
Officer	 subordinate  to the Board, particularly in  a	case
where  no  steps  have been taken -  or	 even  suggested  as
necessary  to  be taken - to cancel or revoke  the  approval
already	 accorded.  This  is, indeed,  a  proposition  well-
settled	 by the series of judicial decisions  starting	from
Navnitlal  Javeri's case (1955) 56 I.T.R. 198 S.C.  In	fact
also, the Board has
						       113
followed only its own guidelines. Elaborate reference to the
correspondence, discussions and hearing is unnecessary.	 The
Board  had reached its decision to approve the contract	 and
the  basis of claim for exemption after	 full  consideration
and  analysis. We may, in this context, also point out	that
while  the  Board, in the present case, simply	approved  of
some of the contracts on the basis of the application filed,
it  has, in the case of some other contracts  modified	that
basis also. For instance, in regard to the Wadi Khan and Abu
Sukhair	 projects,  the	 letter	 of  approval  states	that
approval   is	granted	  subject  to	the   condition	  or
clarification that only the profits relating to rendering of
technical  services will qualify for the benefit of  section
80-O  of  the I.T. Act and not the profits relating  to	 the
supply	of  material/equipment. These guidelines  have	also
since attained statutory recognition as the proforma earlier
Rule 11E and Form prescribed thereunder.
     In fact Sri Nariman wants to utilise certain columns in
the  statutory	form  to support  his  contentions  that  an
approval under section 80-O is effective even after  section
80-HHB was introduced but to this argument, we shall  advert
a little later. We have, in view of the above discussion, no
doubt at all that, while granting the approval under section
80-O,  the Board has not only the jurisdiction but also	 the
for  under section 80-O and that it is not competent to	 the
deduction  under section 80-O of the aspects  gone into	 and
decided upon by the Board.
     We	 should, however, make it clear that our  conclusion
does  not  mean	 the deprivation of  all  functions  of	 the
assessing  officer  while  making  the	assessment  on	 the
applicant.  The Officer has to satisfy himself (i) that	 the
approved  by the Board; (ii) that the deduction	 claimed  in
the  relevant  assessment year relates to the items  and  is
was  asked  for	 and granted by the Board;  (iii)  that	 the
receipts (before the 1975 amendment) were duly certified  by
an  accountant	or that, thereafter, the amounts  have	been
exchange  within the specified period. The second  of  these
functions  is, particularly, important as the  approval	 for
and  subject  to the provisions of this	 sections"  nor	 the
approval
						       114
     As already mentioned, Sri Nariman also contended  that,
even  after  the insertion of S-HHB, the assessee  would  be
entitled  to claim the deduction under section 80-O in	view
of the Board's amendment to the letter of approval that	 the
approval  will	be  operative for  assessment  year  1982-83
onwards, rescinding the qualification in the earlier  letter
that  the provisions of S. 80-HHB will apply for  assessment
year   1983-84	onwards.  It  is  true	that   the   earlier
restriction  was lifted by the Board after  considering	 the
contentions  raised by the assessee in its letter  of  2-12-
1983 :
	 (a)	that  the two section operate  in  different
	 fields for exemption;
	 (b)   that the approval  once granted under section
	 80-O,	the exemption to which the  assessee  became
	 eligible  should ensure for the directions for	 the
	 entire contract; and
	  (c)	that  s.  80-HHB  should  be  restricted  to
	 agreements entered into before 1-4-1983.
     But  we  are  unable  to give  effect  to	the  Board's
decision  of  31-7-1985	 in the same way as  we	 have  given
effect to the Board's earlier approval letter of  28-10-1983
for a number of reasons. The first is that the	jurisdiction
of  a Board is to grant approval to a contract only for	 the
purposes  of  section  80-O;  it  has  no  jurisdiction	  to
pronounce  on the availability or otherwise of an  exemption
under  section	80-HHB and the Board's opinion as  to  this,
even  if  expressly  stated by the Board,  cannot  bind	 the
Officer. The relief under section 80-HHB is not dependent on
the  approval  of the Board and is for a  totally  different
type  of  transaction.	The  letter of	31.7.85	 is  also  a
decision  in an individual case and cannot be treated  as  a
general	 circular  incorporating a policy  decision  by	 the
Board  that  in all cases of a particular type	governed  by
both section relief may be given under section 80-O in which
event perhaps it could have been implemented by applying the
principle  of the Jhavari case (supra). The second  is	that
the  Board,  in the 1985 letter, has only  stated  that	 the
approval under section 80-O will enure for 1982-83  onwards.
This  is quite a correct statement of, as we have  explained
earlier, the approval by the Board is to the contract and so
long  as the contract subsists the relief should be  granted
on  the term of section 80-O. Thus the assessee is  entitled
to deduction under section 80-O on the terms of that section
even   for   1983-84  and  subsequent  years.	It   becomes
disentitled  to the relief not because it does	not  fulfill
the  requirements of section 80-O but only  because  section
80-HHB(5)  stands in the way and mandates that in  cases  to
which both provisions will apply relief under section 80-HHB
will alone be available. The argument that the applicability
of section 80-HHB should be
						       115
excluded  from contracts entered into, or those approved  of
under section 80-O, before 1.4.1983, is patently  untenable.
Section	 8   comes  into force on  1.4.1983  and  should  be
applicable for assessment year 1983-84 onwards in all cases.
It does not contain even a reference to section 80-O and  so
its  applicability  cannot depend on the  formation  of	 the
contract  subsequent  to that date or to the date  of  its
approval  under	 the latter section being after	 that  date.
Thirdly, the approval which otherwise qualifies the assessee
for  relief  is no doubt still effective but  its  power  to
"qualify"  for	relief is taken away by the  new   statutory
provision.  The	 argument that the assessee could  not	have
anticipated the insertion of section 80-HHB and is put to  a
hardship if that section is applied is no doubt correct. But
one  cannot decline to give effect to the  applicability  of
the statutory provision on the ground of hardship or on	 the
ground	that  it  restricts the relief which,  but  for	 the
insertion  of the section, would have been available to	 the
assessee, particularly when the section itself envisages the
possibility  of the assessee being also eligible for  relief
under  another section and makes special provision  of	that
eventuality.
     Sri  Nariman  submitted that we should not	 favour	 the
above  interpretation  as  it  would lead  to  an  anomalous
result. He says that the whole idea of section 80-HHB was to
enlarge	 the  benefits	to contractors	working	 abroad	 and
earning	 foreign  exchange  but	 that,	by  reason  of	 our
decision,  the	assessee  will now get relief  only  to	 the
extent	of  25% in  respect of a contract for which  it	 got
100%  benefit  in  earlier years. On  the  other  hand,	 the
department  would no doubt say that our conclusion that	 the
assessee was entitled, in earlier assessment year, to 100  %
relief on this type of contract is anomalous in the light of
the  fact  that subsequently  the  legislature	specifically
provided that only 25 % of the earnings on foreign  projects
should be exempted.  In our view, there is no force in these
contentions.   The anomaly, if it is one, arises because  of
the  specific language of the statute and the nature of	 the
contract we have to consider.  S. 80-HHB does not confer  an
additional  benefit; sub-section (5) in no  uncertain  terms
states	that  the  benefit thereunder  will  take  away	 the
benefit, if any, under any other provision.  This has to  be
given effect to. Equally, the assessee was able to get 100 %
relief in earlier years only because the contract here is of
such  nature  that  it consists only  of  the  rendering  of
technical services so that the fields of the two  exemptions
completely overlap. On the other hand, as discussed earlier,
it is possible to  conceive of foreign projects wherein	 the
construction  and  installation aspect	and  information  or
technical  services aspect are kept separate. Equally  there
can  be	 cases falling under section 80-O which do  not	 all
relate to a "foreign project" as defined in section  80-HHB.
In  such cases, the two provisions will continue to  operate
independently. There is, therefore, no anomaly or  absurdity
in the conclusion we have reached.
						       116
     For  the  reasons	discussed above, we  hold  that	 the
assessee  was entitled to the relief under section 80-O	 for
assessment  years earlier to 1983-84 and that  the  approval
granted	 by  the  Board under that  section  was  right	 and
proper.	 However,  for	the  assessment	 year  1983-84,	 the
assessee does not qualify for deduction on the terms of that
section	 as the contract receipts are fully covered  by	 the
provisions of s. 80-HHB and the deduction under that section
will prevail over the relief that might have been  otherwise
available  in  view of the terms of section  80-HHB(5).	 We,
therefore,  affirm the conclusion reached by the High  Court
and  dismiss  the appeal. We, however, make no order  as  to
costs.
R.P.					     Appeal dismissed.
						       117

Union Of India And Anr vs Azadi Bachao Andolan And Anr on 7 October, 2003
Equivalent 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
Bench: Ruma Pal, B.N. Srikrishna
           CASE NO.:
Appeal (civil)  8161-8162 of 2003
Appeal (civil)  8163-8164 of 2003

PETITIONER:
Union of  India and Anr.					

Azadi Bachao Andolan and Anr.			

DATE OF JUDGMENT: 07/10/2003

BENCH:
Ruma Pal & B.N. Srikrishna.

JUDGMENT:
J U D G M E N T

(Arising out of S.L.P.(C) Nos.20192-20193 of 2002)
(@ S.L..P.(C) Nos. 22521-22522 of 2002)

SRIKRISHNA,J.

	Leave granted.

These appeals by special leave arise out of the judgment of 
the Division Bench of Delhi High Court allowing Civil Writ 
Petition (PIL)No.5646/2000 and Civil Writ Petition No.2802/2000.  
The High Court by its judgment impugned in these appeals 
quashed and set aside  the circular No.789 dated 13.4.2000 issued 
by the Central Board of Direct Taxes (hereinafter referred to as 
"CBDT") by which certain instructions were given to the Chief 
Commissioners/Directors General of Income-tax with regard to the 
assessment of cases in which the Indo - Mauritius Double 
Taxation Avoidance Convention, 1983 (hereinafter referred to as 
'DTAC')  applied.  The High Court accepted the contention before 
it that the said circular is ultra vires  the provisions of Section 90 
and Section 119 of the Income-tax Act, 1961(hereinafter referred 
to as 'the Act') and also otherwise bad and illegal.

It would be necessary to recount some salient facts in order 
to appreciate the plethora of legal contentions urged.

FACTS
	A: The Agreement
	
The Government of India has entered into various 
Agreements (also called Conventions or Treaties)  with 
Governments of different countries for the avoidance of double 
taxation and for prevention of fiscal evasion.  One such Agreement  
between the Government of India and the Government of 
Mauritius  dated April 1, 1983, is the subject matter of the present 
controversy.  The purpose of this Agreement, as specified in the 
preamble, is "avoidance of double taxation and the prevention of 
fiscal evasion with respect to taxes on income and capital gains 
and for the encouragement of mutual trade and investment".  After 
completing the formalities prescribed in Article 28 this agreement 
was brought into force by a Notification dated 6.12.1983 issued in 
exercise of the powers of the Government of India under Section 
90 of the Act read with Section 24A of the  Companies (Profits) 
Surtax Act, 1964.  As stated in the  Agreement, its  purpose is  to 
avoid double taxation and to encourage mutual trade and 
investment between the two countries, as also to bring an 
environment of certainty in the matters of tax affairs in both 
countries.

	Some of the salient provisions of the Agreement need to be 
noticed at this juncture. The  Agreement defines a number of terms 
used therein and also contains a residuary clause.  In the 
application of the provisions of the Agreement by the contracting 
States any term not defined therein shall, unless the context 
otherwise requires, have the meaning which it has  under the laws 
in force in that contracting State, relating to the words which are 
the subject of the convention.  Article 1(e) defines 'person' so as to 
include an individual, a company and any other entity, corporate or 
non-corporate "which is treated as a  taxable unit under the 
taxation laws in force in the respective contracting States". The 
Central Government in the Ministry of Finance (Department of 
Revenue), in the case of India, and the Commissioner of Income 
Tax in the case of Mauritius, are defined as the "competent 
authority".  Article 4 provides the scope of  application of the 
Agreement.  The applicability of the Agreement is determined by 
Article 4 which reads as under;

"Article 4  Residents

1.	For the purposes of the Convention, the term 
"resident of a Contracting State" means any person 
who under the laws of that State, is liable to 
taxation therein by reason  of his domicile, 
residence, place or management or any other 
criterion of similar nature. The terms "resident of 
India" and "resident of  Mauritius" shall be 
construed accordingly.

2.	Where by reason of the provisions of 
paragraph 1, an individual is a resident of both  
Contracting States, then his residential status for 
the purposes of this Convention shall be 
determined in accordance with the following rules:

(a)	he shall be deemed to be a resident of 
the Contracting State in which he has 
a permanent home available to him; if 
he has a permanent home available to 
him in both Contracting States, he 
shall be deemed to be a resident of the 
Contracting State with which his 
personal and economic relations are 
closer (hereinafter referred to as his 
"centre of vital interests");

(b)	if the Contracting State in which he 
has his centre of vital interest cannot 
be determined, or if he does not have 
a permanent home available to him in 
either Contracting State  he shall be 
deemed to be a resident of the 
Contracting State in which he has an 
habitual abode;

(c)	if he has an habitual abode in both 
Contracting States or in neither of 
them, he shall be  deemed to be a 
resident of the Contracting State of 
which he is a national;

(d)	if he is a national of both Contracting 
States or of neither of them, the 
competent authorities of the 
Contracting States shall settle the 
question by mutual agreement.

3.	Where by reason of the provision of 
paragraph 1, a person other than an individual is a 
resident of both the Contracting States, then it shall 
be deemed to be a resident of the Contracting State 
in which its place of effective management is 
situated."

	The Agreement provides for allocation of taxing jurisdiction 
to different contracting parties in respect of different heads of 
income.   Detailed rules are stipulated  with regard to taxing of 
Dividends under  Article 10, interest under Article 11,  Royalties 
under Article 12,  Capital Gains under Article 13, income  derived 
from Independent Personal Services in Article 14, income from 
Dependent Personal Services in Article 15,  Directors' Fees in 
Article 16, income of Artists and Athletes in Article 17, 
Governmental Functions in Article 18, income of  students and 
Apprentices in Article 20, income of Professors, Teachers and 
Research Scholars in Article 21, and other income in Article 22.

Article 13 deals with the manner of taxation of capital gains. 
It provides that gains from the    alienation of  immovable   
property may be taxed in the Contracting   State  in which such 
property is situated. Gains derived by a  resident of a Contracting 
State  from the alienation of   movable property, forming part of 
the business property of a permanent establishment which an 
enterprise of a Contracting   State  has in the other Contracting 
State, or  of  movable property   pertaining to a fixed base available 
to a resident of a Contracting State  in the other Contracting State  
for the purpose of performing independent personal services, 
including such gains from the alienation of such a permanent 
establishment,  may be taxed in that other State. Gains from the 
alienation of ships and aircraft operated in international traffic  and 
movable property pertaining to the operation of such ships and 
aircraft, shall be taxable only in the Contracting State in which the 
place of effective management is situated.  With respect to capital 
gain derived by a resident in the Contracting State from the 
alienation of any property other   than the aforesaid is concerned, it 
is taxable only in the State in which such a person is a 'resident'.   

Article 25 lays down the Mutual Agreement Procedure. It 
provides  that where a resident of a Contracting State considers 
that the actions of one or both of the Contracting State  result or 
will result for him in taxation not in accordance with this 
Convention, he may, notwithstanding  the remedies provided by 
the national laws of those States, present his case to the competent 
authority of the Contracting State of which he is a resident.  This 
case must be presented within three years of the date of receipt of 
notice of the action which gives rise to taxation not in accordance 
with the Convention.  Thereupon, if the objection appears to be 
justified, the competent authority shall attempt to resolve the case 
by mutual agreement with the competent authority of the other 
Contracting State so as to avoid a situation of taxation not in 
accordance with the convention.   This Article also provides for 
endeavour  by the competent authorities of the Contracting States 
to resolve by mutual agreement any difficulties or doubts arising as  
the interpretation or application of the convention.  For this 
purpose,  the convention contemplates continuous or periodical 
communication between the competent authorities of the 
Contracting States and exchange of views and opinions.

B : The Circulars
By a Circular No.682 dated 30.3.1994 issued by the CBDT 
in exercise of its powers under Section 90 of the Act, the 
Government of India  clarified  that capital gains of any resident of 
Mauritius by alienation of shares of an Indian company shall be 
taxable only in Mauritius according to Mauritius taxation laws and 
will not be liable to tax in India.  Relying on this, a large number 
of Foreign Institutional Investors s (hereinafter referred to as  "the 
FIIs"), which were resident in Mauritius, invested large amounts of 
capital in shares of Indian companies with expectations of making 
profits by sale of such shares without being subjected to tax in 
India.  Sometime in the year 2000, some of the income tax 
authorities issued  show cause notices to some FIIs  functioning in 
India calling upon them to show cause as to why they should not 
be taxed for profits and for dividends accrued to them in India.  
The basis on which the show cause notice was issued was that the 
recipients  of the show cause notice were mostly  'shell companies' 
incorporated in Mauritius, operating through Mauritius, whose 
main purpose was investment of funds in India. It was alleged that 
these companies were controlled and managed from countries 
other than India or Mauritius and as such  they were not 
"residents" of Mauritius so as to derive the benefits of the DTAC.  
These show cause notices resulted in panic and consequent hasty 
withdrawal of funds by the FIIs. The Indian Finance Minister 
issued a Press note  dated April 4, 2000 clarifying that the views 
taken by some of the  income-tax officers pertained to specific 
cases of assessment and did not represent or reflect the policy of 
the Government of India with regard to denial of tax benefits to 
such FIIs.  
Thereafter, to further clarify the situation, the CBDT issued 
a Circular No.789 dated 13.4.2000.  Since this is the crucial 
Circular, it would be worthwhile reproducing its full text.  The 
Circular reads as under:
           "Circular No.789

F.No.500/60/2000-FTD
GOVERNMENT OF INDIA
MINISTRY OF FINANCE
DEPARTMENT OF REVENUE
CENTRAL BOARD OF DIRECT TAXES

New Delhi, the 13th April, 2000

To

All the Chief Commissioners/ Directors
General of Income-tax

Sub:	Clarification regarding taxation of income 
from dividends and capital gains under the 
Indo-Mauritius Double Tax Avoidance 
Convention (DTAC) - Reg.

	The provisions of the Indo-Mauritius DTAC 
of 1983 apply  to 'residents' of both India and  
Mauritius .  Article 4 of the DTAC defines a 
resident of one State to mean any person who, 
under the laws of that State is liable to taxation 
therein by reason of his domicile, residence, 
place of management or any other criterion of a 
similar nature. Foreign Institutional Investors and 
other investment funds etc. which are operating 
from Mauritius are invariably incorporated in 
that country.  These entities are 'liable to tax' 
under the Mauritius Tax law and are therefore to 
be considered as residents of Mauritius in 
accordance with the DTAC.

	Prior to 1st June, 1997, dividends distributed 
by domestic companies were taxable in the hands 
of the shareholder and tax was deductible at 
source under the Income-tax Act, 1961.  Under 
the DTAC, tax was deductible at source on the 
gross dividend paid out at the rate of 5% or 15% 
depending upon the extent of shareholding of the 
Mauritius resident.  Under the Income-tax Act, 
1961, tax was deductible at source at the rates 
specified under section 115A etc. Doubts have 
been raised regarding  the taxation of dividends 
in the hands of investors from Mauritius. It is 
hereby clarified that wherever a Certificate of 
Residence is issued by the Mauritian Authorities, 
such Certificate will constitute  sufficient 
evidence for  accepting the status of residence as 
well as beneficial ownership for applying the 
DTAC accordingly.

	The test of residence mentioned above 
would also apply in respect of income from 
capital gains on sale of shares. Accordingly, FIIs 
etc., which are resident in Mauritius would not be 
taxable in India on income from capital gains 
arising in India on sale of shares as per paragraph 
4 of article 13.

	The aforesaid clarification shall apply to all 
proceedings which are pending at various levels."

C: The Writ Petitions

	Circular  No. 789 was challenged before the High Court of 
Delhi by two writ petitions, both said to be by way of Public 
Interest Litigation. The petitioner in CWP 2802 of 2000 (Azadi 
Bachao Andolan) prayed for quashing and declaring as illegal and 
void Circular No.789 dated 13.4.2000 issued by the CBDT. The 
petitioner in CWP 5646 of 2000 sought an appropriate 
direction/order or writ to the Central Government and made the 
following prayers:

"(a)	issue such appropriate direction /order / writ 
as the Court  deem proper, under the circumstances  
brought to the knowledge of the Hon'ble Court, to the 
Central Government to initiate a process whereby the 
terms of the  Indo-Mauritius Double Taxation 
Avoidance Agreement are revised, modified, or 
terminated and /or effective steps taken by the High 
Contracting Parties so that the NRIs and FIIs and such 
other interlopers do not maraud the resources of the 
State.

(b)		declare and delimit the powers of the 
Central Government under section 90 of the Income 
Tax Act, 1961 in the matter of entering into an 
agreement with the Government of any country 
outside India;

(c)		declare and delimit the powers of the 
Central Board of Direct  Taxes in the matter of the 
issuance of instructions through circulars to the 
statutory authorities  under the Income tax Act, 
specially through such circulars  which are beneficial 
to certain individual taxpayers but injurious to Public 
Interest.

(d)		declare the illegality of Circular No.789 of 
April 13, 2000 issued by the Central Board of Direct 
Taxes and to quash it as a matter of consequence;

(e)		issue mandamus so that the respondents 
discharge their statutory duties of conducting 
investigation and collection of tax as per law;

(f)		issue appropriate direction/ order or writ of 
the nature of mandamus, as the Court deem fit, so that 
all remedial actions to undo the effects of the acts 
done to the prejudice or Revenue in pursuance of 
Circular No.789 are taken by the authorities under the 
Income tax Act, 1961"

D :  High Court's findings
	The High Court has quashed the circular on the following 
broad grounds:
(A)	Prima facie, by reason of the impugned circular no direction 
has been issued. The circular does not show that it has been issued 
under section 119 of the Income-tax Act, 1961 and as such it 
would not be legally binding on the Revenue;
(B)	The Central Board of Direct Taxes cannot issue any 
instruction, which would be ultra vires the provisions of the 
Income-tax Act, 1961. Inasmuch as the impugned circular directs 
the income-tax authorities to accept a certificate of residence 
issued by the authorities of Mauritius as sufficient evidence as 
regards status of resident and beneficial ownership, it is ultra vires 
the powers of the CBDT;
(C)	The Income-tax Officer is entitled to lift the corporate veil in 
order to see whether a company is actually a resident of Mauritius 
or not and whether the company is paying income-tax in Mauritius  
or not and this function of the Income-tax Officer is quasi-judicial.  
Any attempt by the CBDT to interfere with the exercise of this 
quasi-judicial power is contrary to intendment of the Income-tax 
Act.
(D)	Conclusiveness of a certificate of residence issued by the 
Mauritius Tax Authorities is neither contemplated under the 
DTAC, nor under the Income-tax Act; whether a statement is 
conclusive or not, must be provided under a legislative enactment 
such as the Indian Evidence Act and cannot be determined by a 
mere circular issued by the CBDT;
(E)	"Treaty Shopping", by which the resident of a third country 
takes advantage of the provisions of the Agreement, is illegal and 
thus necessarily forbidden;
(F)	Section 119 of the Income-tax Act, 1961 enables the 
issuance of a circular for a strictly limited purpose. By a circular 
issued thereunder, neither  can the essential legislative function  be 
delegated, nor arbitrary, uncanalized  or naked power be conferred;
(G)	Political expediency cannot be a ground for not fulfilling the 
constitutional obligations inherent in the Constitution of India and 
reflected in section 90 of the Act.  The circular confers power to 
lay down a law which is not contemplated under the Act on the 
ground of political expediency, which cannot but be ultra vires.
(H)	Any purpose other than the purpose contemplated by section 
90 of the Act, however bona fide it be, would be ultra vires the 
provisions of section 90 of the Income tax Act.
(I)	While political expediency will have a role to play in terms 
of Article 73 of the Constitution, the same is not true when a 
Treaty is entered into under the statutory provision like section 90 
of the Act.  
(J)	Avoidance of double taxation is a term of art and means that 
a person has to pay tax at least in one country; avoidance of double 
taxation would not mean that a person does  not have to pay tax in 
any country whatsoever.
(K) Having regard to the law laid down by the Supreme Court in 
McDowell & Company  v C.T.O , it is open to the Income-tax 
Officer in a given case to lift the corporate veil for finding out 
whether the purpose of the corporate veil is avoidance of tax or 
not. It is one of the functions of the assessing officer to ensure that 
there is no conscious avoidance of tax by an assessee, and such 
function being quasi-judicial in nature, cannot be interfered with or 
prohibited. The impugned circular is ultra vires as it interferes with 
this quasi judicial function of the assessing officer.

(L)	By reason of the impugned  circular  the power of the 
assessing  authority to pass appropriate orders in this connection to 
show that the assessee is a resident of a third country having only 
paper existence in Mauritius, without any economic impact, only  
with a view to take advantage of the double taxation avoidance 
agreement, has been taken away.
THE SUBMISSIONS
	The learned Attorney General and Mr. Salve, for the 
appellants, have assailed the judgment of the Delhi High Court on 
a number of grounds, while the respondents through Mr.Bhushan, 
and in person, reiterated their submissions made before the High 
Court and prayed for dismissal of these appeals. 

Purpose and consequence of Double Taxation Avoidance 
Convention

	To appreciate the contentions urged, it would be necessary 
to understand the purpose and necessity of a Double Taxation 
Treaty, Convention or Agreement,  as diversely called.  The 
Income-tax Act, 1961, contains a special Chapter IX which is 
devoted to the subject of 'Double Taxation Relief".  
Section 90, with which we are primarily concerned, provides 
as under:

"90.  Agreement with foreign countries.
(1)		The Central Government may enter 
into an agreement with the Government of any 
country outside India-

(a)		for the granting of relief in respect of  
income on which have been paid both income-
tax under this Act and income-tax in that 
country, or 

(b)		for the avoidance of double taxation 
of income under this Act and under the 
corresponding law in force in that country, or

(c)		for exchange of information for the 
prevention of evasion or avoidance of income-
tax chargeable under this Act or under the 
corresponding law in force in that country, or 
investigation of cases of such evasion or 
avoidance, or 

(d)		for  recovery of income-tax under this 
Act and under the corresponding law in force in 
that country, 

and may, by notification in the Official Gazette, 
make provisions as may be necessary for 
implementing the agreement.

(2)		Where the Central Government has 
entered into an agreement with the Government 
of any country outside India under sub-section 
(1) for granting relief of tax, or as the case may 
be, avoidance of double taxation, then, in 
relation to the assessee to whom such 
agreement applies, the provisions of this Act 
shall apply to the extent they are more 
beneficial to that assessee."

(Explanation omitted as not relevant)

Section 4 provides for Charge of Income-tax. Section 5 
provides that the total income of a resident includes all income 
which : (a) is received, deemed to be received in India or (b) 
accrues, arises or deemed to accrue or arise in India, or (c) accrues 
or arises outside India, during the previous year. In the case of a 
non-resident, the total income includes "all income from whatever 
source derived" which (a) is received or is deemed to be received 
or, (b) accrues or is deemed to accrue in India, during such year.  A 
person 'resident' in India would be liable  to income-tax on the 
basis of his global income unless he is a person who is 'not 
ordinarily' resident within the meaning of section 6(b).  The 
concept of residence in India is indicated in section 6. Speaking 
broadly, and with reference to a company, which is of  concern 
here, a company is said to be 'resident' in India in any previous 
year, if it is an Indian company or if during that year  the control 
and management of its affairs is situated wholly in India.

	Every country seeks to tax the  income generated within its 
territory on the basis of one or more connecting factors such as 
location of the source, residence of the taxable entity, maintenance 
of a permanent establishment, and so on. A country might choose  
to emphasise one or the other of the aforesaid factors for exercising 
fiscal jurisdiction to tax the entity. Depending on which of the 
factors is considered to be the connecting factor in different 
countries, the same income of the same entity might become liable 
to taxation in different countries. This would give rise to harsh 
consequences and impair economic development.  In order to 
avoid  such an anomalous and incongruous  situation, the 
Governments of different countries enter into bilateral treaties, 
Conventions or agreements for granting relief against double 
taxation.  Such treaties, conventions or agreements are called 
double taxation avoidance treaties, conventions or agreements.

The power of entering into a treaty is an inherent part of  the 
sovereign power of the State. By article 73, subject to the 
provisions of the Constitution, the executive  power of the Union 
extends to the matters with respect to which the Parliament has 
power to make laws. Our Constitution  makes no provision making 
legislation a  condition for the entry into an international treaty in 
time either of war or peace.  The executive power of the Union is 
vested in the President and is exercisable in accordance with the 
Constitution. The Executive is qua the State competent to represent 
the State in all matters international and may by agreement, 
convention or treaty incur obligations which in international law 
are binding upon the State. But the obligations arising under the 
agreement or treaties are not by their own force binding upon 
Indian nationals. The power to legislate in respect of treaties lies 
with the Parliament under entries 10 and 14 of List I of the Seventh 
Schedule. But making of law under that authority is necessary 
when the treaty or agreement operates to restrict the rights of 
citizens or others or modifies the law of the State. If the rights of 
the citizens or others which are justiciable are not affected, no 
legislative measure is needed to give effect to the agreement or 
treaty. 
When it comes  to fiscal treaties dealing with double 
taxation avoidance, different countries have varying procedures.  
In the United States  such a treaty becomes a part of municipal law  
upon ratification by the  Senate.  In the United Kingdom such a 
treaty  would have to be  endorsed by an order made by the Queen 
in Council.  Since in India such a treaty would have to be 
translated into an Act of Parliament, a procedure which would be 
time consuming and cumbersome, a special procedure was evolved 
by enacting section 90 of the Act.  
The purpose of section 90 becomes clear by reference to its 
legislative history. Section 49A of the Income-tax Act, 1922 
enabled the Central Government to enter into an agreement with 
the government of  any country outside India for the granting of 
relief in respect of income on which, both income-tax (including 
super-tax) under the Act and income-tax in that country, under the 
Income-tax Act and the corresponding law in force in that country, 
had been paid.  The Central Government could make such 
provisions as necessary for implementing the agreement by 
notification in the Official Gazette.  When the Income-tax Act, 
1961 was introduced, section 90 contained therein initially was a 
reproduction of section 49A of 1922 Act.  The Finance Act, 1972 
(Act 16 of 1972) modified section 90 and brought it into force with 
effect from 1.4.1972.  The object and scope of the substitution was 
explained by a circular of the Central Board of Taxes (No.108 
dated 20.3.1973) as to empower the Central Government to enter 
into agreements with foreign countries, not only for the purpose of 
avoidance of double taxation of income, but also for enabling the 
tax authorities to exchange information for the prevention of 
evasion or avoidance of taxes on income or for investigation of 
cases involving tax evasion or avoidance or for recovery of taxes 
in foreign countries on a reciprocal basis.  In 1991, the existing 
section 90 was renumbered as sub-section(1) and sub-section(2) 
was inserted by Finance Act, 1991 with retrospective  effect from 
April 1, 1972. CBDT  Circular No. 621 dated 19.12.1991 explains 
its purpose as follows:

"Taxation of foreign companies and other non-
resident taxpayers -

43.  Tax treaties generally contain a provision 
to the effect that the laws of the two contracting 
States will govern the taxation of income in the 
respective State except when express provision  
to the contrary is made in the treaty. It may so 
happen that the tax treaty with a foreign country 
may contain a provision giving concessional 
treatment to any income as compared to the 
position under the Indian law existing at that 
point of time. However, the Indian law may 
subsequently be amended, reducing the 
incidence of tax to a level lower than what has 
been provided in the tax treaty.

43.1.   Since the tax treaties are intended to 
grant tax relief and not put residents of a 
contracting country at a disadvantage vis-à-vis 
other taxpayers, section 90 of the Income-tax 
Act has been amended to clarify that any 
beneficial provision in the law will not be 
denied to a resident of a contracting country 
merely because the corresponding provision in 
the tax treaty is less beneficial."
	The provisions of Sections 4 and 5  of the Act are expressly 
made "subject to the provisions of this Act", which would include 
Section 90 of the Act. As to what would happen in the event of a 
conflict between the provision of the Income-tax Act and a 
Notification issued under Section 90, is no longer res-integra.

 The Andhra Pradesh High Court  in Commissioner of 
Income Tax v. Visakhapatnam Port Trust   held that  provisions of 
section 4 and 5 of Income-tax Act are expressly made 'subject to 
the provisions of the Act' which means that they are subject to 
provisions of section 90.   By necessary implication, they are 
subject to the terms of the Double Taxation Avoidance Agreement,  
if any, entered into by the Government of India.  Therefore, the 
total income specified  in Sections 4 and 5 chargeable to income 
tax is also subject to the provisions of the agreement to the 
contrary, if any.

 In Commissioner of Income Tax v. Davy Ashmore India 
Ltd. , while dealing with the correctness of a circular no.333 dated 
April 2, 1982, it was held  that the conclusion is inescapable that in 
case of inconsistency between the terms of the Agreement and the 
taxation statute, the Agreement alone would prevail.   The Calcutta 
High Court expressly approved the correctness  of the CBDT 
circular No.333 dated April 2, 1982 on the question as to what  the 
assessing officers would have to do when they found that the 
provision of the Double Taxation  was not in conformity with the 
Income-tax Act, 1961.  The said circular provided as follows 
(quoted  at p.632):

	"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.

Thus, 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."

	The Calcutta High Court  held that the circular reflected the 
correct legal position inasmuch as the convention or agreement is 
arrived at by the two Contracting States   "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. 

 In  Commissioner of Income Tax v. R.M. Muthaiah  the 
Karnataka High Court was concerned with the DTAT  between  
Government of India and Government of Malaysia.  The High 
Court held that under the terms of agreement, if there was a 
recognition of the power of taxation with the Malaysian 
Government,  by implication it takes away the corresponding 
power of the Indian Government.  The Agreement was thus held to 
operate as a bar on the power of the Indian Government to tax and 
that the bar would operate on Sections 4 and 5 of the Income Tax 
Act, 1961, and take away the power of the Indian Government to 
levy tax on the income in respect of certain categories as referred 
to in certain Articles of the Agreement.  The High Court summed 
up the situation by observing (at p.512-513):

"The effect of an "agreement" entered into by 
virtue of section 90 of the Act would be : (1) If 
no tax liability is imposed under this Act, the 
question  of resorting to the agreement would not 
arise. No provision of the agreement can 
possibly fasten a tax liability where the liability 
is not imposed by this Act; (ii) if a tax liability is 
imposed  by this Act, the agreement may be 
resorted to for negativing or reducing it; (iii) in 
case of difference between the provisions of the 
Act and of the agreement, the provisions of the 
agreement prevail over the provisions  of this 
Act and can be enforced by the appellate 
authorities and the court."

	It also approved of the correctness of the Circular No. 333  
dated April 2, 1982 issued by the Central Board of Direct Taxes on 
the subject.

	In Arabian Express Line Ltd. of United Kingdom and Others 
v. Union of India   the Gujarat High Court,  interpreting section 90, 
in the light of circular No.333 dated April 2, 1982 issued by  the 
CBDT, held that the procedure of assessing the income of a NRI 
because of his occasional activities in establishing business in 
India would not be applicable in a case where there is a convention 
between the Government of India and the foreign country as 
provided under Section 90 of the Income-tax Act, 1961. In case of 
such an agreement, section 90 would have an overriding effect.  
Interestingly,  in this case a certificate issued by the H.M. Inspector 
of Taxes  certifying that the company was a resident of the United 
Kingdom for purposes of tax and that it had paid advance 
corporate tax in the office of the English Revenue Accounts 
Office, was held to be sufficient to take away the jurisdiction of the 
Income-tax Officer.
	A survey of the aforesaid cases makes it clear that the 
judicial consensus in India has been that section 90 is specifically 
intended to enable and empower the Central Government to issue a 
notification for implementation of the terms of a double taxation 
avoidance agreement. When that happens, the provisions of such 
an agreement, with respect to cases to which where they apply, 
would operate even if inconsistent with the provisions of the 
Income-tax Act.  We approve of the reasoning in the decisions 
which we have noticed. If it was not  the intention of the legislature  
to make a departure from the general principle of chargeability to 
tax under section 4 and the general principle of ascertainment of 
total  income under section 5 of the Act, then there was no purpose 
in making those sections "subject to the  provisions" of the Act".  
The very object of grafting the said two sections with the said 
clause is to enable the Central Government to issue a notification 
under section 90 towards implementation of the terms of the DTAs 
which would automatically override the provisions  of the Income-
tax Act in the matter of ascertainment of chargeability to income 
tax and ascertainment of total income, to the extent of 
inconsistency with the terms of the DTAC.

	The contention of the respondents, which weighed with the 
High Court viz. that the impugned circular No.789 is inconsistent 
with the provisions of the Act, is a total non-sequitur.  As we have 
pointed out,  Circular No.789 is a circular  within the meaning of 
section 90; therefore, it must have the legal consequences 
contemplated by sub-section (2) of section 90. In other words, the 
circular shall prevail even if inconsistent with the provisions of 
Income-tax Act, 1961 insofar as assessees covered by the 
provisions of the DTAC are concerned. 

	Though a number of interconnected and diffused arguments 
were addressed, broadly the argument of the respondents appears 
to be as follows: By reason of Article 265  of the Constitution, no 
tax can be levied or collected except by authority of law.  The 
authority to levy tax or grant exemption therefrom vests absolutely 
in the Parliament and no other body, howsoever high, can exercise 
such power.  Once Parliament has enacted the  Income-tax Act, 
taxes must be levied and collected in accordance  therewith  and no 
person has power to grant any exemption therefrom.  The treaty 
making power under Article 73 is confined  only to such matters as 
would not fall within the province of Article 265.  With respect to 
fiscal treaties, the contention is that they cannot be enforced in 
contravention of the provisions of the Income-tax Act, unless 
Parliament has made an enabling law in support.  The respondents 
highlighted the provisions of the OECD models with regard to tax 
treaties and how tax treaties were enunciated, signed and 
implemented  in America, Britain and other countries.  Placing 
reliance on the observations of Kier and Lawson  , it was 
contended that in England it has been recognised  that "there are, 
however, two limits to its capacity; it cannot legislate  and it 
cannot tax without the concurrence of the Parliament".  It is urged 
that the situation is the same in India; that unless there is a specific 
exemption granted by the Parliament, it is not open for the Central 
Government to grant any exemption from the tax payable under the 
Income-tax Act.  

In our view, the contention is wholly misconceived.   
Section 90, as we have already noticed  (including its precursor 
under the 1922 Act), was brought on the statute book precisely to 
enable the executive to negotiate  a DTAC and quickly implement 
it. Even accepting the contention of the respondents that the 
powers exercised by the Central Government under section 90 are 
delegated powers of legislation, we are unable to see as to why a 
delegatee of legislative power in all cases has no power to grant 
exemption.  There are provisions galore in statutes made by 
Parliament and State legislatures wherein the power of conditional 
or unconditional  exemption from the provisions of the statutes are 
expressly delegated to the executive.  For example, even in fiscal 
legislation like the Central Excise Act and Sales Tax Act, there are 
provisions for exemption from the levy of tax.  Therefore we are 
unable to accept the contention that the delegate of a legislative 
power cannot exercise the power of exemption in a fiscal statute.  
The niceties of the OECD model of tax  treaties or the report 
of the Joint Parliamentary Committee on the State Market Scam 
and Matters Relating thereto,  on which considerable time was 
spent  by Mr. Jha, who appeared in person, need not detain us for 
too long, though we shall advert to them later.  This  Court is not 
concerned with the manner in which   tax treaties are negotiated or 
enunciated; nor  is it concerned with  the wisdom of any particular 
treaty.  Whether the Indo-Mauritius  DTAC ought to have been 
enunciated in the present form, or in any other particular form, is 
none of our concern.  Whether section 90 ought to have been 
placed on the statute book, is also not our concern.  Section 90, 
which delegates powers to the Central Government, has not been 
challenged before us, and, therefore, we must proceed on the 
footing that the section is constitutionally valid. The challenge 
being only to the exercise of the power emanating from the section, 
we are of the view that section 90 enables the Central Government 
to enter into a DTAC with the foreign Government. When the 
requisite notification has been issued thereunder, the provisions of 
sub-section (2) of section 90 spring into operation and an assessee 
who is covered by the provisions of the DTAC is entitled to seek 
benefits thereunder, even if the provisions of the DTAC are 
inconsistent with the provisions of Income-tax Act, 1961.

STARE DECISIS
The learned Attorney General justifiably relied on the 
observations of this Court in Mishri Lal  v. Dhirendra Nath (Dead) 
by Lrs. and Others   in which this Court referred to its earlier 
decision in Muktul v. Manbhari  on the scope of the doctrine of 
stare decisis with reference to Halsbury's Law of England and 
Corpus Juris Secundum, pointing out that a decision which has 
been followed for a long period of time, and has been acted upon 
by persons in the formation of contracts or in the disposition of 
their property, or in the general conduct of affairs, or in legal 
procedure or in other ways, will generally be followed by courts of 
higher authority other than the court establishing the rule, even 
though the court before whom the matter arises afterwards might  
be of a different view.  The learned Attorney General contended 
that the interpretation given to section 90 of the Income-tax Act, a 
Central Act, by several High Courts  without dissent has been 
uniformally followed; several transactions have been entered into 
based upon the said exposition of the law; that several tax treaties 
have been entered into with different foreign Governments based 
upon this law, hence, the doctrine of stare decisis  should apply or 
else it will result in chaos and open up a Pandora's box of 
uncertainty. 
We think that this submission is sound and needs to be 
accepted.  It is not possible for us to say that the judgments of the 
different High Courts noticed have been wrongly decided by 
reason of the arguments presented by the respondents.   As 
observed in Mishrilal   even if  the  High  Courts  have 
consistently taken an erroneous view, (though we do not say that 
the view is erroneous) it would be worthwhile to let the matter rest, 
since large numbers of parties have modulated their legal 
relationship based on this settled position of law.

Effect of circular under Section 119 

Much of the argument centred around the effect of the 
circular issued by the CBDT under Section 119 of the Act and its 
binding nature. 
Section 119, strategically placed in Chapter XIII which deals 
with  'Income-Tax Authorities'  is an enabling power of the 
CBDT, which is recognised as an authority under the Income-tax 
Act under section 116(a).  The CBDT  under this section is 
empowered  to issue such orders instructions  and directions to 
other income-tax authorities  "as it may deem fit for proper 
administration  of this Act".  Such authorities and all other persons 
employed in the execution of this Act are bound to observe and 
follow such orders, instructions and directions of the CBDT.  The 
proviso to sub-section (1) of section 119 recognises  two 
exceptions to this power.  First, that the CBDT cannot require any 
income-tax authority to make a particular assessment or to  dispose 
of a particular case in a particular manner.   Second, is  with regard 
to  interference with the discretion of the  Commissioner (Appeals) 
in exercise of his appellate functions.  Sub-section(2) of Section 
119 provides for the exercise of power in certain special  cases and 
enables the CBDT, if it considers it necessary  or expedient so to 
do for the purpose of proper and efficient management of the work 
of assessment and collection of revenue, to issue general or special 
orders in respect of any class of incomes of class of cases , setting 
forth directions  or instructions as to the guidelines, principles or 
procedures to be followed by other income-tax authorities in the 
discharge of their work relating to assessment or initiating 
proceedings for imposition of penalties.  The powers of the CBDT 
are wide enough to enable it to grant relaxation from the provisions 
of several sections enumerated in clause (a). Such orders may be 
published in the Official Gazette in the prescribed manner, if the 
CBDT is of the opinion that it is so necessary.  The only bar on the 
exercise of power is that it is not prejudicial to the assessee.  We 
are not concerned with the provisions in clauses (b) and (c)  in the 
present appeals.
In K.P. Varghese v. Income-Tax Officer, Ernakulam  it was 
pointed out by this Court that not only are the circulars and 
instructions, issued by the CBDT in exercise of the power under 
section 119, binding on the authorities administering the tax 
department, but they are also clearly in the nature of   
contemporanea expositio furnishing legitimate aid to the 
construction of the Act.

The Rule of contemporanea expositio is that  
"administrative construction (i.e. contemporaneous construction 
placed by administrative or executive officers) generally should be 
clearly wrong before it is overturned; such a construction  
commonly referred to as practical construction, although non-
controlling, is nevertheless entitled to  considerable weight, it is 
highly persuasive."  

The validity of this principle was recognised in Baleshwar 
Bagarti v. Bhagirathi Dass  where the  Calcutta High Court  stated 
the rule in the following words :
"It is a well-settled principle of 
interpretation that courts in construing a statute 
will give much weight to the interpretation put 
upon it, at the time of its enactment and since, 
by those whose duty it has been to construe, 
execute and apply it."

 The  statement of this rule has also been quoted with 
approval by this Court in Deshbandhu Gupta & Company v. Delhi 
Stock Exchange Association Ltd .

In K.P. Varghese  this Court held that the circulars of the 
CBDT  issued in exercise of its power under section 119 are 
legally binding on the revenue and that this binding character 
attaches to the circulars  "even if they be found not in accordance 
with the  correct interpretation of sub-section (2) and they  depart 
or deviate from such construction."	

Navnit Lal C. Javeri v. K.K.Sen  and Ellerman Lines Ltd. v. 
CIT    clearly establish the principle that circulars issued by the 
CBDT under section 119 of the Act are binding on all officers and 
employees employed in the execution of the Act, even if they 
deviate from the provisions of the Act.

In UCO Bank v. Commissioner of Incom-Tax , dealing 
with  the legal status of such circulars, this Court observed:
"Such instructions may be by way of relaxation 
of any of the provisions of the sections 
specified there or otherwise. The Board thus 
has power, inter alia, to tone down the rigour of 
the law and ensure a fair enforcement of its 
provisions, by issuing circulars in exercise of 
its statutory powers under section 119 of the 
Income-tax Act which are binding on the 
authorities  in the administration of the Act. 
Under section 119(2) however, the circulars as 
contemplated therein cannot be adverse to the 
assessee.  Thus the authority which wields the 
power for its own advantage under the Act is 
given the right to forgo the advantage when 
required to wield it in a manner it considers just 
by relaxing the rigour of the law or in other 
permissible manners as laid down in section
119.  The power is given for the purpose of 
just, proper and efficient management of the 
work of assessment and in public interest. It is a 
beneficial power given to the Board for proper 
administration of fiscal law so that undue 
hardship may not be caused to the assessee and 
the fiscal laws may be correctly applied. Hard 
cases which can be properly categorised as 
belonging to a class, can thus be given the 
benefit of relaxation of law by issuing circulars 
binding on the taxing authorities."

 In Commissioner of Income-Tax v. Anjum M.H.Ghaswala 
and Others  it was  pointed out  that the circulars issued by CBDT 
under Section 119 of the Act have statutory force and would be 
binding on every income-tax authority although such may not be 
the case with regard to press releases issue by the CBDT for 
information of the public.

 In Collector of Central Excise Vadodra v. Dhiren Chemical 
Industries , this Court, interpreting the phrase  'appropriate', 
observed :
"We need to make it clear that, regardless of 
the interpretation that we have placed on the 
said phrase, if there are circulars which have 
been issued by the Central Board of Excise and 
Customs which place a different interpretation 
upon the said phrase, that interpretation will be 
binding upon the Revenue."

	While commenting adversely upon the validity of the 
impugned  circular,  the High Court says "that the circular itself 
does not show that the same has been issued under Section 119 of 
the Income-tax Act. Only in a case where the circular is issued 
under Section 119 of the Income-tax Act, the same would be 
legally binding on the revenue.  The circular does not deal with the 
power of the ITO to consider the question as to whether although 
apparently a company is incorporated in Mauritius but whether the 
company  is also a resident of India and/or not a resident of 
Mauritius at all."    It is trite law that as long as an authority has 
power, which is traceable to a source, the mere fact that source of 
power is not indicated in an instrument does not render the 
instrument invalid.   

Is the impugned circular ultra-vires Section 119 ?

It was contended successfully before the High Court that the 
circular is ultra vires the provisions of section 119.   Sub-section(1) 
of section 119 is deliberately worded in general manner so that the 
CBDT is enabled to issue appropriate orders, instruction or 
direction to the subordinate authorities "as it may deem fit for the 
proper administration of the Act". As long as the circular emanates 
from the CBDT and contains orders, instructions or directions 
pertaining to proper administration of the Act, it is relatable to the 
source of power under section 119 irrespective of its nomenclature.  
Apart from sub-section(1), sub-section(2) of section 119 also 
enables the CBDT "for the purpose of proper and efficient 
management of the work of assessment and collection of revenue, 
to issue appropriate orders, general or special in respect of any 
class of income or class of cases, setting  forth directions or 
instructions (not being prejudicial to assessees) as to the 
guidelines, principles  or procedures to be followed by other 
income tax authorities in the work relating to assessment or 
collection of revenue or the initiation of proceedings for the 
imposition of penalties".  In our view, the High Court was not 
justified  in reading the circular as not complying with the 
provisions of section 119.  The circular falls well within the 
parameters of the powers  exercisable  by the CBDT under Section 
119 of the Act.  

The High Court persuaded itself to hold that the circular is 
ultra vires the powers of the CBDT on completely erroneous 
grounds. The impugned circular provides  that whenever a 
certificate of residence is issued by the Mauritius Authorities, such 
certificate will constitute sufficient evidence for  accepting the 
status of residence as well as beneficial ownership for applying the 
DTAC accordingly. It also provides that the test of residence 
mentioned above would also apply in respect of income from 
capital gains on sale of shares.   Accordingly, FIIs etc., which are 
resident in Mauritius would not be taxable in India  on income 
from capital gains arising in India on sale of shares as per 
paragraph 4 of Article 13. This, the High Court thought amounts to 
issuing instructions "de hors the provisions of the Act".

	In our view,   this thinking of the High Court is erroneous. 
The only restriction on the power of the CBDT is to prevent it 
from interfering  with the course of assessment of any particular 
assessee or the discretion of the Commissioner of Income-Tax 
(Appeals). It would be useful to recall the background against 
which this circular was issued. 

The Income-tax authorities were seeking to examine  as to 
whether the assessees were actually residents of a third country on 
the basis of alleged control of management therefrom.  
We have already extracted the relevant provisions of Article 
4 which provide that, for the purposes of the agreement, the term 
'resident of a contracting State' means any person who under the 
laws of that State is liable to taxation therein by reason of his 
domicile, residence, place of management or any other criterion of 
similar nature.  The term 'resident of India' and 'the resident of 
Mauritius' are to be construed accordingly.  Article 13 of the 
DTAC lays down detailed rules with regard to taxation of capital 
gains. As far as capital gains resulting from alienation of shares are 
concerned, Article 13(4) provides  that the gains derived by a 
'resident' of a contracting State  shall be taxable only in that State. 
In the instant case, such capital gains derived by a resident of 
Mauritius shall be taxable only in Mauritius.  Article 4, which we 
have already referred to, declares that the term resident of 
Mauritius' means any person who under the laws of Mauritius is 
'liable to taxation' therein by reason, inter alia, of his residence. 
Clause (2) of Article 4 enumerates detailed rules as to how the 
residential status of an individual resident in both contracting 
States has to be determined for the purposes of DTAC.  Clause(3) 
of Article 4 provides that if, after application of the detailed rules 
provided in Article 4, it is found that a person other than an 
individual is a resident of both the contracting States, then it shall 
be deemed to be a resident of the contracting State  in which its 
place of effective management is situated.  The DTAC requires the 
test of 'place of effective management' to be applied only for the 
purposes of the tie-breaker  clause in Article 4(3) which could be 
applied only when it is found that a person other than an individual 
is a resident both of  India  and Mauritius.  We see no purpose or 
justification in the DTAC for application of this test in any other 
situation.  

The High Court has held, and the respondents so contend, 
that the assessing officer under the Income-tax Act is entitled to lift 
the corporate veil, but the circular effectively bars the exercise of 
this quasi-judicial function by reason of a presumption with regard 
to the certificate issued by the competent authority in Mauritius; 
conclusiveness of such a certificate of residence granted by the 
Mauritius tax authorities is neither contemplated under the DTAC, 
nor under the Income-tax Act a provision as to conclusiveness of a 
certificate is a matter of legislative action and cannot form the 
subject matter of a circular issued by a delegate of legislative 
power.

As early as on March 30, 1994, the CBDT had issued 
circular no.682 in which it had been emphasised that any resident 
of Mauritius deriving income from alienation of shares of an 
Indian company would be liable to capital gains tax only in 
Mauritius as per Mauritius tax law and would not have any capital 
gains tax liability in India. This circular was a clear enunciation of 
the provisions contained in the DTAC, which would have 
overriding effect over the provisions of sections 4 and 5 of the 
Income-tax Act,1961 by virtue of section 90(1) of the Act.  If, in 
the teeth of this clarification, the assessing officers chose to ignore 
the guidelines and spent their time, talent and energy on 
inconsequtial matters, we think that the CBDT was justified in 
issuing 'appropriate' directions vide circular no.789,  under its 
powers under section 119, to set things on course by eliminating 
avoidable  wastage of time, talent and energy of the assessing 
officers discharging the onerous public duty of collection of 
revenue.  The circular no.789 does not in any way   crib, cabin or 
confine the powers of the assessing officer with regard to any 
particular assessment. It merely formulates broad guidelines to be 
applied in the matter of assessment  of assessees covered by the 
provisions of the DTAC.

We do not think  the circular in any way takes away or 
curtails the  jurisdiction of the assessing officer to assess the 
income of the assessee before him.  In our view, therefore, it is 
erroneous to say that the impugned circular No.789 dated 
13.4.2000 is ultra vires  the provisions  of section 119 of the Act.  
In our judgment, the powers conferred upon the CBDT  by sub-
sections (1) and (2) of Section 119 are wide enough to 
accommodate such a circular. 

Is the DTAC bad for excessive delegation ?

	The respondents contend that a tax treaty entered   into      
within the umbrella of section 90 of the Act is essentially delegated 
legislation;    if it involves granting of exemption from tax,  it would 
amount to delegation of legislative powers,  which is bad. The 
legislature must declare the policy of the law and the legal principles 
which are to control  any given case and must provide a procedure to 
execute the law.    

The question whether a particular delegated legislation is in 
excess of the power of the supporting legislation conferred on the 
delegate, has to be determined  with regard not only to specific 
provisions contained in the relevant statute conferring the power to 
make rule or regulation, but also the object and purpose of the Act  as 
can be gathered from the various provisions of the enactment.  It 
would be wholly wrong for the Court to substitute its own opinion as 
to what principle or policy would best serve the objects and purposes 
of the Act, nor is it open to the Court to sit in  judgment of the  
wisdom, the effectiveness or otherwise  of the policy, so as to declare 
a regulation to be ultra vires merely on the ground that, in the view of 
the Court, the impugned provision will not help to carry through the 
object and purposes of the Act.  This court reiterated the legal 
position,  well established by a long series of decisions, in 
Maharashtra State Board of Secondary and Higher Secondary 
Education  and another v. Paritosh Bhupeshkumar Sheth and Others :
"So long as the body entrusted with the task of 
framing the rules or regulations acts within the 
scope of the authority conferred on it, in the 
sense that the rules or regulations made by it 
have a rational nexus with the object and 
purpose  of the statute, the court should not 
concern itself with the wisdom or 
efficaciousness of such rules or regulations. It 
is exclusively within the province  of the 
legislature and its delegate to determine, as a 
matter of policy, how the provisions of the 
statute can best be implemented and what 
measures, substantive as well as procedural 
would have to be incorporated in the rules or 
regulations for the efficacious achievement of 
the objects and purposes  of the Act. It is not 
for the Court to examine the merits or 
demerits of such a policy because its scrutiny 
has to be limited to the question as to whether 
the impugned regulations fall  within the 
scope of the regulation-making power 
conferred on the delegate by the statute."

	Applying this test, we are unable to hold that the impugned 
circular amounts to impermissible delegation of legislative power. 
That the amendment made in section 90 was intended to empower 
the Government to  enter into agreement with foreign Government, 
if necessary, for relief from or avoidance of double taxation, is also 
made clear by the Finance Minister in his Budget Speech, 1953-54

Is the Double Taxation Avoidance Convention 'DTAC') illegal 
and ultra vires the powers of the Central Government u/S 90

	Although the High court has not made any finding of this 
nature, the respondents have strenuously contended before us that 
the Indo-Mauritius Double  Taxation  Avoidance Convention, 
1983 is itself ultra vires the powers of the Government  under 
Section 90 of the Act.  This  argument deserves short shrift.  

Section 90 empowers the Central Government to enter into 
agreement with the Government of any other country outside India 
for the purposes enumerated in clauses  (a) to (d) of sub-section (1) 
. While clause (a) talks of granting relief in respect of income on 
which income-tax has been paid in India as well as in the foreign 
country,  clause (b) is wider and deals with 'avoidance of double 
taxation of income' under the Act  and under the corresponding 
law in force in the foreign country. We are not concerned with 
clauses (c) and (d).  

There are two hurdles against accepting the arguments 
presented on behalf of the respondents. Even if we accept the 
argument of the respondent that the DTAC is delegated legislation,  
the test of its validity is to be determined, not by its efficacy, but 
by the fact that it is within the parameters of the legislative 
provision delegating the power. That the purpose of the DTAC is 
to effectuate the objectives in clauses (a) and (b) of sub-section (1) 
of Section 90, is evident upon a reasonable construction of the 
terms of the DTAC.  As long as these two objectives are sought to 
be effectuated, it is not possible to say that the power vested in the 
Central  Government, under section 90, even if it is delegated 
power of legislation, has been used for a purpose ultra vires the 
intendment of  the section. The respondents tried to highlight a 
number of unintended deleterious consequences which, according 
to them, have arisen as a result of implementation of the DTAC. 
Even if they be true, it would not enable this Court to strike down 
the delegated legislation  as ultra vires.  The validity and the vires 
of the legislation, primary, or delegated, has to be tested on the 
anvil of  the law  making power.  If an authority lacks the power, 
then the legislation is bad.  On the contrary, if the authority is 
clothed with the requisite power, then irrespective of whether the 
legislation fails in its object or not, the vires of the legislation is not 
liable to be questioned.  We are, therefore,  unable to accept  the 
contention  of the respondents that the DTAC is ultra vires the 
powers of the Central Government under Section 90 on account of 
its susceptibility to 'treaty shopping' on behalf of the residents of 
third   countries.  

The High Court seems to have heavily relied on an 
assessment order made by the assessing officer in the case of Cox 
and Kings Ltd. drawing inspiration therefrom.  We are afraid that it 
was impermissible for the High Court to do so. An assessment 
made in the case of a particular assessee is liable to be challenged 
by the Revenue or by the assessee by the procedure available under 
the Act. In a Public Interest Litigation it would be most unfair to 
comment on the correctness of the assessment order made in the 
case of a particular assessee, especially when the assessee is not a 
party before the High Court.  Any observation made by the Court 
would result in prejudice to one or the other party to the litigation.  
For this reason, we refrain from making any observations about the 
correctness or otherwise of the assessment order made in Cox and 
Kings Ltd.  Needless to say, we decline to draw inspiration 
therefrom, for our inspiration is drawn from principles of law as 
gathered from statutes and precedents.

What is "liable to  taxation"
Fiscal Residence

The concept of 'fiscal residence' of a company assumes 
importance in the application and interpretation of double taxation 
avoidance treaties.  
In  Cahiers De Droit Fiscal International  it is said that 
under the OECD and UNO Model Convention, 'fiscal residence' is 
a place where a person amongst others a corporation is subjected to 
unlimited fiscal liability and subjected to taxation for the 
worldwide profit of the resident company.    At para 2.2 it is 
pointed out :

"The UNO Model Convention takes these two 
different concepts into account. It has not 
embodied the second sentence  of article 4, 
paragraph  1 of the OECD Model Convention, 
which provides that the term 'resident' does 
not include any person who is liable to tax in 
that State in respect only of income from 
sources in that State. In fact, if one adhered to 
a strict interpretation  of this text, there would 
be no resident in the meaning of the 
convention in those States that apply the 
principle of territoriality."

	Again in paragraph 3.5 it is said :

"The existence of a company from a company 
law standpoint is usually determined under 
the law of the State of incorporation or of the 
country where the real seat is located.  On the 
other hand, the tax status of a corporation is 
determined under the law of each of the 
countries where it carries on business, be it as 
resident or non-resident."

In paragraph  4.1 it is observed that the principle of 
universality of taxation i.e. the principle of worldwide taxation,  
has been adopted by a majority of States.  One has to consider the 
worldwide income of a company to determine its taxable profit. In 
this system it is crucial to define the fiscal residence of a company 
very accurately. The State of residence is the one entitled to levy 
tax on the corporation's worldwide profit. The company is  subject 
to unlimited fiscal liability in that State. In the case of a company,  
however, several factors enter the picture and render the decision 
difficult.  First, the company  is necessarily incorporated and 
usually registered under the tax law  of a State that grants it 
corporate status. A corporation has administrative activities, 
directors and managers  who reside, meet and take decisions  in 
one or several places.  It has activities and carries on business.  
Finally, it has shareholders who control it. Hence, it is opined :
"When all these elements coexist in the same 
country, no complications arise. As soon as 
they are dissociated and "scattered" in 
different States, each country may want to 
subject the company to taxation on the basis 
of an element to which it gives preference; 
incorporation procedure,  management 
functions, running of the business, 
shareholders' controlling power. Depending 
on the criterion adopted, fiscal residence will 
abide in one or the other country.

All the European countries concerned, except 
France, levy tax on the worldwide profit at the 
place of  residence of the company 
considered.

South Korea, India and Japan in Asia, 
Australia and New Zealand in Oceania follow 
this principle."

In paragraph 4.2.1 it is pointed out that  the Anglo-Saxon 
concept of a company's  'incorporation test', which is applied in 
the United States, has not been adopted by other countries like 
Australia, Canada, Denmark, New Zealand and India and instead 
the criterion of incorporation amongst other tests has been adopted 
by them. 
	The judgment in Ingemar Johansson et al v. United State of 
America , on which the respondent place reliance, is easily 
distinguishable. In this case the appellant, Johansson,  was a citizen 
of Switzerland and a heavyweight boxing champion by profession. 
He had earned some money by boxing in the United States for 
which he was called upon to pay tax. Johansson floated a company 
in Switzerland of which he became an employee and contended 
that all professional fee paid for his boxing bouts  were received by 
his employer company  in Switzerland for which he was 
remunerated as an employee of the said company. He sought to 
take advantage of the DTAT between USA and Switzerland which 
provided "an individual resident of Switzerland shall be exempt 
from  United States Tax upon  compensation  for labour personal 
services performed in the United States.... if he is temporarily 
present in the United States for a period or periods not exceeding a  
total of 183 during the taxable year..."   There was no doubt that 
the appellant was not present in the United States  for more than 
183 days and that he had floated the Swiss company motivated 
with the desire to minimise his tax burden.  As conclusive proof of 
residence he relied upon a determination by the Swiss Tax 
Authority that he had become a resident of Switzerland on a 
particular date.  The United States Court of Appeal  rejected the 
claim of the appellant pointing out that the term "resident" had not 
been defined in the US-Swiss treaty, but under article II(2) each 
country was authorised to apply its own definition to terms not 
expressly defined 'unless the context otherwise requires'.   The 
Court, therefore, held that the determination of the appellant's 
residence statues by the Swiss tax authority, according to Swiss 
law, was not conclusive and that the U.S. tax authorities were 
entitled to decide it in accordance with the US laws under the 
treaty. Hence, it was held that Johansson  was not a resident of 
Switzerland during the period in question and  that the tax 
exemption in the treaty was not available to him.  
In our view, this judgment, though relied upon very heavily 
by the respondents, is of no avail. The Indo-Mauritius DTAC, 
Article 3, clearly defines the term 'residence' in  a 'Contracting 
State'.  Interestingly, even in this judgment,  the Court observed : 
"Of course, the fact that Johansson was motivated in his actions by 
the desire to minimize his tax burden can in no way be taken to 
deprive him of an exemption to which an applicable treaty entitles 
him",  which will have some relevance to the contention of the 
respondents with regard to the motivation to avoid tax.

The respondents contend that the FIIs incorporated and 
registered under the provisions of the law in Mauritius are carrying 
on no business there; they are, in fact, prevented from  earning any 
income there;  they are not liable to income tax on capital gains 
under the Mauritius Income-tax Act. They are liable to pay 
income-tax under Indian Income-tax Act, 1961, since they do not 
pay any income-tax on capital gains in Mauritius, hence, they are 
not entitled to the benefit of avoidance of double taxation under the 
DTAC.
	Some of the assumptions underlying this contention, which 
prevailed with the High Court, need greater critical appraisal.
	Article 13(4) of the DTAC  provides that gains derived by a 
resident of a Contracting State from alienation of any property, 
other than those specified in the paragraphs 1, 2 and 3 of the 
Article, shall be taxable only in that State. Since most of the 
arguments centred around capital gains made on transactions in 
shares on the stock exchange in India, we may leave out of 
consideration capital gains on the type of properties contemplated 
in paras 1, 2 and 3 of Article 13 of the DTAC. The residuary clause 
in para 4 of Article 13 is relevant.  It provides that capital gains 
made on sale of shares shall be taxable only in the State of which 
the person is a 'resident' taking us back to the meaning of the term 
'resident' of a contracting State.  According to Article 4, this 
expression means any person who under the laws of that State is 
"liable to taxation" therein by reason of his domicile, residence, 
place of management or any other criterion of a similar nature.  
The terms 'resident of India' and 'resident of Mauritius' are 
required to be construed accordingly.  This takes us to the test to 
determine when a company is 'liable to taxation' in Mauritius. 

Mauritian Income Tax Act, 1995

Section 4 of the Income Tax Act, 1995 (Mauritian Income-
tax Act) provides that, subject to the provisions of the Act, income-
tax shall be paid to the Commissioner of Income-tax by  every 
person on all income other than exempt income derived by him 
during the preceding year and be calculated  on the chargeable 
income of the person at the appropriate rate specified in the First 
Schedule. 
Section 5 defines as to when income is deemed to be 
derived.

Section 7 provides that the income specified in the Second 
Schedule shall be exempt from income-tax.  
Part IV of the Mauritian Income Tax Act deals with 
Corporate Taxation. 
	Section 44 of the Act provides that every company shall be 
liable to income tax on its 'chargeable income' at the rate specified 
in Part II, Part III or Part IV of the First Schedule, as the case may 
be.
 Section 51 defines the 'gross income' of a company as 
inclusive of income referred to in section 10(1)(b) (income derived 
from business), 10(1)(c) (any  income from rent, premium or other 
income derived from property), 10(1)(d) (any dividend, interest, 
charges, annuity or pension other than a pension referred to in 
paragraph a(ii)) and 10(1)(e) (any other income derived from any 
other source).
 Section 73 (b) provides that for the purposes of the Act the 
expression 'resident', when applied to a 'company', means  a 
company which is incorporated in Mauritius or has its central 
management and control in Mauritius.
	Part II of the First Schedule prescribes the rate of tax on 
chargeable income at 15% in the case of Tax Incentive companies 
and at other rates for other types of companies. Part V of the First 
schedule  enumerates the list of tax incentive companies and item 
16 is : "a corporation certified to be engaged in international 
business activity by the Mauritius Offshore Business Activities 
Authority established under the Mauritius Offshore Business 
Activities Act, 1992".  The second Schedule to the Mauritius 
Income-tax Act in Part IV enumerates miscellaneous income 
exempt from income-tax. Item 1 reads "gains or profits derived 
from the sale of units or of securities  quoted on the Official List  
or on such Stock Exchanges or other exchanges and capital 
markets as may be approved by the Minister".
	A perusal of the aforesaid provisions of the Income Tax Act 
in Mauritius does not lead to the result that tax incentive 
companies are not liable to taxation, although they have been 
granted exemption from income-tax in respect of  a specified head 
of income, namely, gains from transactions in shares and 
securities.  The respondents contend that the FIIs are not "liable to 
taxation" in Mauritius;  hence they are not 'residents' of Mauritius 
within the meaning of Article 4 of the DTAC.  Consequently, it is 
open to the assessing officers under the Indian Income-tax Act, 
1961 to determine where the taxable entities are really resident by 
investigating the centre of their management and thereafter to 
apply the provisions of Income-tax Act, 1961 to the global income 
earned by them by reason of sections 4 and 5 of the Income-tax 
Act, 1961.
	It is urged by the learned Attorney General and Shri Salve 
for the appellants that the phrase 'liable to taxation' is not the same 
as 'pays tax'.  The test of liability for taxation is not to be 
determined on the basis of an exemption granted in respect of any 
particular source of income,  but by taking into consideration the 
totality  of the provisions of the income-tax law that prevails in 
either of the Contracting States.   Merely because, at a given time, 
there may be an exemption from income-tax in respect of any 
particular head of income, it cannot be contended  that the taxable 
entity is not liable to taxation.  They urge that upon a proper 
construction of the provisions of Mauritian Income Tax Act it  is 
clear that the FIIs incorporated under Mauritius laws are liable to 
taxation; therefore, they are 'residents' in Mauritius within the 
meaning of the DTAC.

 For the appellants reliance is placed on the judgment of this 
Court in  Wallace Flour Mills Contracting State. Ltd. v. Collector 
of Central Excise, Bombay Division II , a case under the Central 
Excise Act.  This Court held that though the taxable event for levy 
of excise duty is the manufacture or production, the realisation of 
the duty my be postponed for administrative convenience  to the 
date of removal of the goods from the factory.     It was held that 
excisable goods do not become non-excisable merely because of 
an exemption given under a notification.  The exemption merely 
prevents the excise authorities  from collecting tax when the 
exemption is in operation.
 In  Kasinka Trading and Another v. Union of India and 
Another   this principle was reiterated in connection with an 
exemption under the Customs Act.  This Court observed :"The 
exemption notification issued under section 25 of the Act had the 
effect of suspending the collection of customs duty. It does not 
make items which are subject to levy of customs duty etc. as items 
not leviable  to such duty. It only suspends the levy and collection 
of customs duty, wholly or partially,  and subject to such 
conditions as may be laid down in the notification by the 
Government in 'public interest'.  Such an exemption by its very 
nature  is susceptible of being revoked or modified or subjected to 
other conditions."

We are inclined to agree with the submission of the 
appellants that, merely because exemption has been granted in 
respect of taxability of a particular source of income, it cannot be 
postulated that the entity is not 'liable to tax' as contended by the 
respondents.

Effect of MOBA, 1992
The respondents, shifted ground to contend that the fact that 
a company incorporated in Mauritius is liable to  taxation under the 
Income Tax Act there may be true only in respect of certain class 
of companies incorporated there.  However, with respect to 
companies which are incorporated within the meaning of  the 
Mauritius Offshore Business Activities Act, 1992 (hereinafter 
referred to as "MOBA"), this would be wholly incorrect.  

MOBA was enacted "to provide for the establishment and 
management of the MOBA Authority to regulate offshore business 
activities from within Mauritius  and for the issue of offshore 
certificates, and to provide for other ancillary or incidental 
matters", as its preamble suggests. 'Offshore business activity'  is 
defined as the business or other activity referred to in section 33 
and includes activity conducted by an international company.  
'Offshore company' is defined as a corporation in relation to which 
there is a valid certificate and which carries on offshore business 
activity. 
In part II,  MOBA establishes an Offshore Business Activity 
Authority entrusted, inter alia, with the duty of overseeing offshore 
business activities and also issuing permits, licences or  any other 
certificate as may be required, and other authorisation which may 
be required by an offshore company through which they may 
communicate with any of the public sector companies.

 Section 16 of MOBA prescribes the procedure for issuing of 
a certificate. Section 15 requires maintenance of confidentiality 
and non-disclosure of information contained in applications and 
documents filed with it except where such information is bona fide 
required for the purpose of any enquiry or trial  into or relating to 
the trafficking of narcotics and dangerous drugs, arms, trafficking 
or money laundering under the Economic Crime and Anti Money 
Laundering Act, 2000.  
Part II of MOBA contains the statutory provisions 
applicable to offshore companies.  Section 26 provides that an 
offshore company shall not hold immovable property in Mauritius   
and shall not hold any share  or any interest in any company 
incorporated under the Companies Act, 1984, other than in a 
foreign company or in another offshore company or in an offshore 
trust or an international company.  An offshore company shall not 
hold any account in a domestic bank in Mauritian Rupees, except   
for the purpose of its day to day transactions arising from its 
ordinary operations in Mauritius.
Sections 26 and 27 of MOBA  are important and read as 
under:
"26. Property of an offshore company

(1)	Subject to sub-section(2), an offshore 
company shall not hold -

(a)    immovable property in Mauritius ;

(b)	any share, or any interest in any 
company incorporated under the 
Companies Act, 1984 other than in a 
foreign  company or in another 
offshore company or in an offshore 
trust or an international company ;

(c) any account in a domestic bank in 
Mauritian Rupee

(2) An offshore company may -

(a) open and maintain with a domestic 
bank an account in Mauritian rupees 
for the purpose of its day to day 
transactions arising from its ordinary 
operations in Mauritius ;

(b)  open and maintain with a domestic 
bank an account in foreign currencies 
with the approval of the Bank of 
Mauritius ;

(c)  where authorised by the terms of its 
certificate, or where otherwise 
permitted under any other enactment, 
lease, hold, acquire or dispose of an 
immovable property or any interest in 
immovable property situated in 

(d) invest in any securities listed in the 
stock Exchange established under the 
Stock Exchange Act 1988 and in other 
debentures.

27.	Dealings with residents

Notwithstanding any other enactment, the 
Minister, on the recommendation of the 
Authority may authorise any offshore 
company engaged in any offshore business 
activities to deal or transact with residents on 
such terms and conditions as it thinks fit."

	On the basis of these provisions, it is urged by the 
respondents that any company which is registered as an offshore 
company under MOBA can hardly carry out any business activity 
in Mauritius, since it cannot hold any immovable property or any 
shares or interest in any company registered in Mauritius  other 
than a foreign company or another offshore company and cannot 
open an account in a domestic bank in Mauritius.  The respondents 
urge that such a company cannot transact any  business whatsoever 
within Mauritius as the purpose of such a  company would be to 
carry out  offshore business activities and nothing more.  The 
respondents contend that when the possibility of such a company  
earning income within Mauritius is almost nil, there is hardly any 
possibility of its paying  tax in Mauritius, whatever be the 
provisions of the Mauritian Income-Tax Act.

	In our view, the contention of the respondents proceeds on 
the fallacious premise  that liability to taxation is the same as 
payment of tax. Liability to taxation is a legal situation;   payment 
of tax is a fiscal fact. For the purpose of application of Article 4 of 
the DTAC,  what is relevant is the legal situation, namely, liability 
to taxation, and not the fiscal fact of actual payment of tax. If this 
were not so, the DTAC would not have used the words 'liable to 
taxation', but would have used some appropriate words like 'pays 
tax'.  On the language of the DTAC, it is not possible to accept the 
contention of the respondents that offshore companies incorporated 
and registered under MOBA are not 'liable to taxation' under the 
Mauritius Income-tax Act; nor is it possible to accept the 
contention that such  companies would not be 'resident' in 
Mauritius within the meaning of Article 3 read with Article 4 of 
the DTAC.

	There is a further reason in support of our view. The 
expression 'liable to taxation' has been adopted from the 
Organisation for Economic Co-operation and Development 
Council (OECD) Model Convention 1977.  The OECD 
commentary on article 4, defining 'resident', says: "Conventions 
for the avoidance of double taxation do not normally concern 
themselves with the domestic laws of the Contracting States laying 
down the conditions under which a person is to be treated fiscally 
as "resident" and, consequently, is fully liable to tax in that State". 
The expression used is 'liable to tax therein', by reasons of various 
factors.  This definition has been carried over even in Article 4 
dealing with 'resident' in the OECD Model Convention 1992.

	In  A Manual on the OECD Model Tax Convention on 
Income and On Capital,  at paragraph 4B.05, while commenting 
on Article 4 of the OECD  Double Tax Convention, Philip Baker 
points out that the phrase 'liable to tax' used in the first sentence of 
Article 4.1 of the Model Convention has raised a number of issues, 
and observes:
"It seems clear that a person does not have 
to be actually paying tax to be "liable to tax" 
- otherwise a person who had deductible 
losses or allowances, which reduced his tax 
bill to zero would find himself unable to 
enjoy the benefits of the convention.  It also 
seems clear that a person who would 
otherwise be subject to comprehensive 
taxing but who enjoys a specific exemption 
from tax is nevertheless liable to tax, if the 
exemption were repealed, or the person  no 
longer qualified for the exemption, the 
person would be liable to comprehensive 
taxation."

	Interestingly, Baker refers to the decision of  the Indian 
Authority for Advance Ruling in  Mohsinally Alimohammed 
Rafik.   An assessee, who resided in Dubai and claimed the 
benefits of UAE-India Convention of April 29, 1992, even though 
there was no personal income-tax in Dubai to which he might be 
liable.  The Authority concluded that  he was entitled to the 
benefits  of the convention. The Authority subsequently reversed 
this position in the case of Cyril Eugene Pereira   where a contrary 
view was taken.
	The respondents placed great reliance  on the decision by the 
Authority for  Advance Rulings constituted under section 245-O of 
the Income-Tax Act, 1961 in Cyril Eugene Pereira's case .  
Section 245S of the Act provides that the Advance Ruling  
pronounced by the Authority under section 245R shall be binding 
only :
"(a) on the applicant who had sought it;
(b) in respect of the transaction in relation to 
which the ruling had been sought; and

(c) on the Commissioner, and the income-tax 
authorities subordinate to him, in respect of 
the applicant and the said transaction."

	It is therefore obvious that, apart from whatever its 
persuasive value, it would be of no help to us.  Having perused the 
order of the Advance Rulings Authority, we regret that we are not 
persuaded. 

	There is substance in the contention of Mr. Salve  learned 
counsel for one of the appellants, that  the expression 'resident' is 
employed in the DTAC as a term of limitation, for otherwise a 
person who may not be 'liable to tax' in a Contracting State  by 
reason of domicile, residence, place of management or any other 
criterion of a similar nature may also claim the benefit of the 
DTAC. Since the purpose of the DTAC is to eliminate double 
taxation, the treaty takes into account only persons who are 'liable 
to taxation'  in the Contracting States.  Consequently,  the benefits 
thereunder are not available to persons who are not liable to 
taxation and the words 'liable to taxation' are intended to act as 
words of limitation.

In John N. Gladden v. Her Majesty the Queen    the 
principle of liberal interpretation of tax treaties was reiterated by 
the Federal Court, which observed :

"Contrary to an ordinary taxing statute a 
tax treaty or convention must be given a liberal 
interpretation with a view to implementing the 
true  intentions of the parties. A literal or 
legalistic interpretation must be avoided when 
the basic object of the treaty might be defeated 
or frustrated  insofar as the particular item 
under consideration is concerned."

	Gladden   was a case where an American citizen resident in 
U.S.A. owned shares in two privately controlled Canadian 
companies. Upon his death, the question arose as to the capital 
gains which would arise as a result of the deemed disposition of 
the said shares. The Canadian Revenue took the position that there 
was a deemed disposition  of the shares on the death of the tax 
payer and capital gains tax was chargeable on account of the 
deemed disposition.  This view of the Revenue was upheld in 
appeal by the Tax Court of Canada. Upon further appeal to the 
Federal Court it was held that capital gains were exempt from tax 
under the Canada-U.S.A. Tax Treaty as Canada had no capital 
gains tax when it entered the treaty and it could not unilaterally 
amend its legislation.  The argument which prevailed with the trial 
court in this case was similar to the one which prevailed with the 
High Court in the matter before us. Interpreting the relevant Article 
of the Double Taxation Avoidance Treaty the trial court held : 
"The parties could not have negotiated to avoid double taxation on 
a tax which did not exist in Canada".  The Federal Court 
emphasised that in interpreting and applying treaties the Courts 
should be prepared to extend "a liberal and extended construction" 
to avoid an anomaly  which a contrary construction would lead to.  
The Court recognized that "we cannot expect to find the same 
nicety or strict definition as in modern documents, such as deeds, 
or Acts of Parliament; it has never been the habit of those engaged 
in diplomacy to use legal accuracy but rather to adopt more liberal 
terms".
	Interpreting  the Article of the Treaty against avoidance of 
double taxation,  the Federal Court said  (at p.5):
"The non-resident can benefit from the 
exemption regardless of whether or not he is 
taxable on that capital gain in his own country. 
If Canada  or the U.S. were to abolish capital 
gains completely, while the other country did 
not, a resident of the country which had 
abolished capital gains would still be exempt 
from capital gains in the other country."

The appellants rely on this judgment to contend that, 
irrespective of the exemption from income-tax on capital gains 
upon alienation of shares under the Mauritius Income-tax Act, the 
benefits of the DTAC would apply.
The appellants contend that, acceptance of the respondents' 
submission that double taxation avoidance is not permissible 
unless tax is paid in both countries is contrary to the intendment of 
section 90.  It is urged that clause (b) of sub-section(1) of Section 
90 applies to a situation to grant relief where income tax has been 
paid in both countries, but clause (b) deals with a situation of 
avoidance of double taxation of income. Inasmuch as Parliament 
has distinguished between the two situations, it is not open to a 
Court of law to interpret  clause (b) of section 90 sub-section(1) as 
if it were the same as the situation contemplated under clause (a).

According to Klaus Vogel "Double Taxation Convention 
establishes an independent mechanism to avoid double taxation 
through restriction of tax  claims in areas where overlapping tax-
claims are expected, or at least theoretically possible. In other 
words, the Contracting States mutually bind themselves not to levy 
taxes or to tax only to a limited extent in cases when the treaty 
reserves taxation for the other contracting States either entirely or 
in part. Contracting States are said to 'waive' tax claims or more 
illustratively to divide 'tax sources', the 'taxable objects', amongst 
themselves."  Double taxation avoidance treaties were in vogue 
even from the time of the League of Nations. The experts 
appointed in the early 1920s by the League of Nations describe this 
method of classification of items and their assignments to the 
Contracting States.  While the English lawyers called it 
'classification and assignment rules', the German jurists called it 
'the distributive rule' (Verteilungsnorm).  To the extent that an 
exemption is agreed to, its effect is in principle independent of 
both whether the other contracting State imposes a tax in the 
situation to which the exemption applies, and of whether that State 
actually levies the tax.  Commenting particularly on German 
Double Taxation Convention with the United States, Vogel  
comments: "Thus,  it is said that the treaty prevents not only 
'current', but also merely 'potential' double taxation".  Further, 
according to Vogel, "only in exceptional cases, and only when 
expressly agreed to by the parties, is exemption in one contracting 
State dependent upon whether the income or capital is taxable in 
the other contracting state, or upon whether it is actually taxed 
there."   
It is, therefore, not possible for us to accept the contentions 
so strenuously urged  on behalf of the respondents that avoidance 
of double taxation can arise only when tax is actually paid in one 
of the Contracting States.
The decision of Federal Court of Australia in Commissioner 
of Taxation v. Lamesa Holdings  is illuminating.  The issue before 
the Federal Court was whether a Netherlands company was liable 
to income-tax under the Australian Income Tax Act on profits from 
the sale of shares in an Australian company and whether such 
profits fell within Article 13 (alienation of property) of the 
Netherlands-Australia Double Taxation Agreement, so as to be 
excluded from Article 7 (business profits) of that Agreement.  One  
Leonard Green, a principal of Leonard Green and Associates a 
limited partnership established in the United States, became aware 
of a potential investment opportunity in Australia. Arimco 
Resources and Mining Company NL ('Armico'), a company listed 
on the Australian Stock Exchange, which had a subsidiary  called 
Armico Mining Pty. Limited engaged in gold mining activities, 
was the subject of a hostile takeover bid, at a price which Green 
was advised  was less than the real value of the Armico. With this 
knowledge Green decided to mount a takeover offer for the 
subsidiary company. Then followed a series of steps of formation 
of a number of companies with interlocking share holdings where 
each company owned 1005 shares of a different subsidiary 
company.  Lamesa Holdings  was one such intermediary company 
of which 100% shares were held by Green Equity Investments Ltd.  
The share transactions brought about a profit to Lamesa Holdings 
which would be assessable to tax under the Australian Income Tax 
Act. Lamesa, however, relied on the provisions of the Article 13(2) 
of the Double Taxable Avoidance Convention ('DTAC') between 
Netherlands and Australia and claimed that the income was not 
taxable in Australia by reason thereof.  This income was wholly 
exempt from tax in Netherlands by  reason of the Income Tax Law 
applicable therein. The Federal Court found that  under Article 
13(2) (a) (ii) of the DTAC shares in a company were treated as 
personalty, that since the place of incorporation of a company or 
the place of situs of a share may be the subject of choice,  the place 
of incorporation or the register upon which shares were registered 
would not form a particularly close connection with shares to 
ground the jurisdiction to tax share profits.  It was held:
"It happens to be the case, because of 
unilateral relief granted by the law of the 
Netherlands, that no tax will be payable in the 
Netherlands. That of itself can not affect the 
interpretation of the Agreement.  If the relevant 
mining property had happened to be in the 
Netherlands so that the issue was between 
taxation there on the one hand  and taxation in 
Australia on the other, the situation would have 
been one where tax would clearly have been 
payable on the alienation of the shares in 
Australia without the benefit of any exemption. 
Yet the Agreement must operate uniformly, 
whether the realty is in the Netherlands or in 
Australia."

	In this view of the matter, it was held that there was no tax 
payable in Australia.

	Chong v. Commissioner of Taxation   holds similarly.  
Australia and Malaysia have an agreement to avoid double 
taxation. An Australian resident was paid pension by Malaysian 
Government for services rendered to Malaysian Government  
while he was in service there.   This pension was taxed in Malaysia 
and the issue was whether the right to tax Government pensions 
under the Agreement could be exercised  by the Australian 
Government and the effect of the domestic law on the agreement. 
Article 18 of the double taxation avoidance agreement provided 
that pension paid to a resident of a contracting State  shall be 
taxable only  in that State.  Upon a proper construction of Article 
18(2) of the Treaty it was held that pension paid by Malaysia is 
taxable in Australia inasmuch as the said Article did not provide 
that Malaysia alone was to have the power to tax Government 
pension, nor did it restrict  Australia from doing so.  Rather it 
provided for the Contracting State paying the pension to have the 
power to tax the pension if it so desired and did not limit or restrict 
the taxing power of the other Contracting State  in that respect.  
The Federal Court pointed out   "Whether one uses the language of 
allocation of power or the language of limitation of power, the 
result is the same; there is designated or agreed who shall have the 
right under the agreement to impose taxation in the particular 
area".

	The Estate of Michel Hausmann v. Her Majesty The 
Queen    is another Canadian judgment which throws light on the 
principle that the benefits of a double taxation agreement would be 
available even if the other contracting  State in  which a particular 
head of income is to be taxed,  chooses not to impose tax on the 
same. 
	The central question in this case was whether the pension 
received by Mr.Hausmann from the pension office of the Belgium 
Government was taxable in Canada. The facts indicated that there 
was no tax withheld at source in Belgium.  The argument of the 
Canadian Tax Authority was that if Belgium was not going to tax 
the pension, Canada should.  Otherwise, the unthinkable might 
occur and the amount might not be taxed  by anyone. This would 
be anathema.  The facts indicated that the payment received by Mr. 
Hausmann fell below the prescribed threshold  and therefore was 
not taxed in Belgium.  The Canadian Court rejected the argument 
that if Belgium did not tax the payment, it must be taxed by the 
Canada as plainly wrong by relying on the terms of the treaty.  On 
the basis of the material available, the Federal Court came to the 
inference that in negotiating the Belgium treaty both Canada and 
Belgium unquestionably regarded pensions paid under their social 
security legislation, such as the CPP or the corresponding Belgian 
statutory scheme, to be taxable only in the country from which 
they emanated  and not the country  of residence of the recipient.  
Hence, it was held that the pension payments received by Mr. 
Hausmann from the office of Belgium were social security pension 
and such allowances could be taxable only in Belgium.  The fact 
that Belgium did not choose to tax them was held to be totally 
irrelevant.  

 Mr. Salve contended that a profit made by sale of shares 
may not invariably amount to capital gains, as for example if the 
shares were part of the trading assets of the company. If such be 
the case, the gains may amount to trading income of such a 
company. He also relied on the observations of this Court in  
Commissioner of Income Tax Nagpur v. Sutlej Cotton Mills 
Supply Agency Limited .  It is not necessary for us to go into this 
question as it would depend upon as to whether the shares are held 
by a company as an investment or as a trading asset.  The 
possibility urged by the learned counsel certainly exists and cannot 
be ruled out without examination of facts.

Treaty Shopping - Is it illegal ?
	The respondents vehemently urge that the offshore 
companies  have been incorporated under the laws of Mauritius  
only as shell companies, which carry on no business therein, and 
are incorporated only with the motive of taking undue advantage of 
the DTAC between India and Mauritius. They also urged that 
'treaty shopping' is both unethical and illegal and amounts to a 
fraud on the treaty and that this Court must be astute to interdict all 
attempts at treaty shopping. 

'Treaty shopping' is a graphic expression used to describe 
the act of a resident of a third country taking advantage of  a fiscal 
treaty between two Contracting States.  According to Lord 
McNair, "provided that any necessary implementation by 
municipal law has been carried out, there is nothing to prevent the 
nationals of "third States", in the absence of any expressed or 
implied provision to the contrary, from claiming the right or 
becoming subject to the obligation created by a treaty" .  
Reliance is also placed on the following observations of 
Lord  McNair : 
"that any necessary implementation  by 
municipal law has been carried out, there is 
nothing to prevent the nationals of 'third  
States', in the absence of any express or 
implied provision to the contrary, from 
claiming the rights, or becoming subject to the 
obligations, created by a treaty; for instance, if 
an Anglo-American Convention provided that 
professors on the staff of the universities of 
each country were exempt from taxation in 
respect of fees earned for lecturing in the other 
country, and any necessary changes in the tax 
laws were made, that privilege could be 
claimed by, or on behalf of, professors of those 
universities  who were the nationals of 'third 
States'."

	It is urged by the learned counsel for the appellants, and 
rightly in our view, that if it was intended that a national of a third 
State should be precluded from the benefits of the DTAC, then a 
suitable term of limitation to that effect should have been 
incorporated therein.  As a contrast, our attention was drawn to the 
Article 24 of the Indo-US Treaty on Avoidance of Double 
Taxation which specifically provides the limitations subject to 
which the benefits under the Treaty can be availed of. One of the 
limitations is that more than 50% of the beneficial interest, or in 
the case of a company more than 50%  of the number of shares of 
each class of the company, be owned directly or indirectly by one 
or more individual residents of one of the contracting States. 
Article 24 of the Indo-U.S. DTAC is in marked contrast with the 
Indo-Mauritius DTAC. The appellants  rightly contend that in the 
absence of a limitation  clause, such as the one contained in Article 
24 of the Indo-U.S. Treaty, there are no disabling or disentitling 
conditions under the Indo-Mauritius  Treaty  prohibiting the 
resident of a third nation from deriving benefits thereunder.  They 
also urge that motives  with which the residents have been 
incorporated  in Mauritius are wholly irrelevant and cannot in any 
way affect the legality of the transaction. They urge that there is 
nothing like equity in a fiscal statute. Either the statute applies 
proprio vigore  or it does not. There is no question of applying a 
fiscal statute by intendment, if the expressed words do not apply. 
In our view, this contention of the appellants has merit  and 
deserves acceptance. We shall have occasion to examine the 
argument based on motive a little later.

The decision of the Chancery Division in Re F.G. Films 
Ltd.  was pressed into service as  an example of the mask of 
corporate entity being lifted and account be taken of what lies 
behind in order to prevent 'fraud'.  This decision only emphasises  
the doctrine of piercing the veil of incorporation. There is no doubt 
that, where necessary, the Courts are empowered to lift the veil of 
incorporation while applying the domestic law. In the  situation 
where the terms of the  DTAC  have been made applicable by 
reason of section 90 of the Income-Tax Act, 1961, even if they 
derogate from the provisions of the Income-tax Act, it is not 
possible to say that this principle of lifting the veil of incorporation 
should be applied by the court. As we have already emphasised, 
the whole purpose of the DTAC is to ensure that the benefits 
thereunder are available even if they are inconsistent with the 
provisions of the Indian Income-tax Act. In our view, therefore, the 
principle of piercing  the veil of incorporation can hardly apply to a 
situation as the one before us.

	The respondents banked on certain observations made in 
Oppenheim's  International Law . All that is stated therein is a 
reiteration of the general rule in municipal law that contractual 
obligations bind the parties to  their contracts and not a third party 
to the contract.  In international law also, it has been pointed out 
that the Vienna Convention on the Laws of Treaties ,1969  
reaffirms the general rule that a treaty does not create either 
obligations or rights for a third party state without its consent, 
based on the general principle pacta tertiis nec nocent nec prosunt.  
It is true that  an international treaty  between States A & B is 
neither intended to confer benefits nor impose obligations on the 
residents of State C, but, here we are not concerned with this 
question at all.  The question posed for our consideration is: If the 
residents of State C qualify for  a benefit under the treaty, can they 
be denied the benefit on some theoretical ground that 'treaty 
shopping' is unethical and illegal ?  We find no support for this 
proposition in the passage cited from Oppenheim. 

	The respondents then relied on observations of Philip 
Baker  regarding a seminar at the IFI Barcelona in 1991, wherein 
a paper was presented on "Limitation of treaty benefits for 
companies" (treaty shopping).  He points out  that the Committee 
on Fiscal Affairs of the OECD in its report styled as "Conduit 
Companies Report 1987" recognised that a conduit company 
would generally be able to claim treaty benefits.

	There is elaborate discussion in Baker's treatise on  the anti 
abuse provisions in the OECD model and the approach of different 
countries to the issue of 'treaty shopping'.  True that several 
countries like the USA, Germany, Netherlands, Switzerland  and 
United Kingdom have taken suitable steps, either by way of 
incorporation of appropriate provisions in the international 
conventions as to double taxation avoidance, or by domestic 
legislation, to ensure  that the benefits of a treaty/convention are 
not available to residents of a third State.  Doubtless, the treatise by 
Philip Baker is an excellent guide as to how a state should 
modulate its laws or incorporate suitable terms in tax conventions 
to which it is party so that the possibility of a resident of a third 
State deriving benefits thereunder is totally eliminated.  That may 
be an academic approach to the problem to say how the law should 
be.  The maxim "Judicis est jus dicere, non dare"   pithily 
expounds the duty of the Court. It is to decide what the  law is, and 
apply it; not to make it.

Report of the working group on non-resident taxation

	The respondents contend that anti-abuse provisions need not 
be incorporated in the treaty since it is assumed that the treaty 
would only be used for the benefit of the parties.  
They also strongly rely  on the 'Report of the working group 
on Non-Resident Taxation' dated 3rd January, 2003. In Chapter 3, 
para 3.2 of the report  it is stated:
	"3.2 Entitlement to avail DTAA benefit:
Presently a person is entitled to claim 
application of DTAA if he is 'liable to tax' in the 
other Contracting State. The scope of liability to tax 
is not defined. The term "liable to tax" should be 
defined to say that there should be tax laws in force 
in the other State, which provides for taxation of 
such person, irrespective that such tax fully or 
partly exempts such persons from charge of tax on 
any income in any manner."

In para 3.3.1, after noticing the growing practice amongst 
certain entities, who are not residents of either of the two 
Contracting States, to try and avail of the beneficial provisions of 
the DTAAs and indulge in what is popularly known as 'treaty 
shopping', the report says :

"3.3.1  ....there is a need to incorporate suitable 
provisions in the chapter on interpretation of 
DTAAs, to deal with treaty shopping, conduit 
companies and thin  capitalization. These may be 
based on UN/OECD model or other best global 
practices."

In para 3.3.2, the working group recommended 
introduction of anti-abuse provisions in the domestic law.
Finally, in paragraph  3.3.3 it is stated  "The Working 
Group recommends that in future negotiations, provisions 
relating to anti-abuse/limitation of benefit may be incorporated in 
the DTAAs also."
We are afraid that the weighty recommendations of the 
Working Group on Non-Resident Taxation are again about what 
the law ought to be, and a pointer to the Parliament and the 
Executive for incorporating suitable limitation provisions in the 
treaty itself or by domestic legislation.  This per se does not 
render an attempt by resident of a third party to take advantage of 
the existing provisions of the DTAC illegal. 

J.P.C. Report
	
Strong reliance is placed by the respondents on the report of 
the Joint Parliamentary Committee (hereinafter referred to as 
"JPC") on the Stock Market Scam and Matters Relating thereto 
which was presented in the Lok Sabha and Rajya Sabha on 
December 19, 2002. 
While considering the causes which led to the Stock Market 
scam, the JPC   had occasion to consider the working of the Indo-
Mauritius DTAC.    It noticed  that area-wise foreign direct 
investment  inflow from Mauritius increased from 37.5 million 
Rupees in 1993  to 61672.8 million Rupees  in the year 2001. The 
CBDT had approached the Indian High Commissioner at Mauritius 
to take up the matter with the Mauritian authorities  to ensure that 
benefit of the bilateral   tax treaty were not allowed to be misused, 
by suitable amendment in Article 13 of the agreement. The 
Mauritian  authorities, however, were of the view that, though the 
beneficiaries of such capital funds domiciled in Mauritius may be 
residing in third countries, these funds had been invested in the 
Indian stock market in accordance  with SEBI norms and 
regulations and that the Finance Minister of India had himself 
encouraged such FIIs as a channel for promoting capital flow to 
India in a meeting between himself and the Finance Minister of 
Mauritius.  The Ministry of finance was willing to have regular 
joint monitoring of the situation to avoid possible misuse of the tax 
treaty by unscrupulous elements. It was pointed out by the 
Mauritian authorities that  DTAC between the two countries "had 
played a positive role in covering the higher cost of investing in 
what was then assessed as 'high risk security' and being decisive 
in making possible public  offerings in U.S.A.  and Europe of 
funds investing in India".  In the absence of such a facility, as 
afforded  by the Indo-Mauritius DTAC, the cost of raising such 
investment would have been capital  prohibitive. The JPC  report 
points out that the negotiations between the Government of India 
and Government of Mauritius resulted in a situation in which the 
Mauritius Government felt that any change in the provisions of the 
DTAC would adversely affect the perception of potential investors 
and would prejudicially  affect their financial interests.
The issue still appears to be the subject matter of 
negotiations between the two Governments, though no final 
decision has been taken thereupon. The JPC took notice of the 
facts that MOBA has since been repealed by Mauritius and 
Financial Services Development Act has been promulgated with 
effect from 1.12.2001, which has to some extent removed the 
drawback of MOBA, and led to greater transparency  and  facility 
for obtaining information under the DTAC, which was hitherto not 
available. 

	Taking notice of the facts, and the reluctance of the 
Government of Mauritius in the matter to renegotiate the terms of 
treaty, the Committee recommended as under (vide para 12.205):
"The Committee find that though the exact  
amount of revenue loss due to the 'residency 
clause' of the treaty cannot be quantified, but 
taking into account the huge 
inflows/outflows, it could be assumed to be 
substantial. They therefore recommend that 
Companies investing in Indian through 
Mauritius, should be required to file details 
of ownership with RBI and declare that all 
the Directors and effective management is in 
Mauritius. The Committee suggest that all 
the contentious issues should be resolved by 
the Government with the Government of 
Mauritius urgently through dialogue."

	In our view, the recommendations of the Working Group of 
the JPC  are intended for Parliament to take appropriate action. The 
JPC might have noticed  certain consequences, intended or 
unintended, flowing from the DTAC and has made appropriate 
recommendations. Based on them, it is not possible for us to say 
that the DTAC or the impugned circular are contrary to law, nor 
would it be possible to interfere with either of them on the basis of 
the report of the  JPC.

Interpretation of Treaties
The principles adopted in interpretation of treaties are not 
the same as those in interpretation of statutory legislation. While 
commenting on the interpretation of a treaty imported into a 
municipal law, Francis Bennion observes:
"With indirect enactment, instead of the 
substantive legislation taking the well-known 
form of an Act of Parliament, it has the form 
of a treaty. In other words the form and 
language found suitable for embodying  an 
international agreement become, at the stroke 
of a pen, also the form and language of a 
municipal legislative instrument. It is rather 
like saying that, by Act of Parliament, a 
woman shall be a man.  Inconveniences may 
ensue. One inconvenience is that the 
interpreter is likely to be required to cope 
with disorganised composition instead of 
precision drafting.  The drafting of treaties is 
notoriously sloppy usually for very good 
reason.  To get agreement, politic uncertainty 
is called for.

.....The interpretation of a treaty imported 
into municipal law by indirect enactment was 
described by Lord  Wilberforce as being 
'unconstrained by technical rules of English 
law, or by English legal precedent, but  
conducted on broad principles of general 
acceptation. This echoes the optimistic 
dictum of Lord Widgery CJ that the words 
'are to be given their general meaning, 
general to lawyer and layman alike... the 
meaning of the diplomat rather than the 
lawyer." 

	An important principle which needs to be kept in mind in the 
interpretation of the provisions of an international treaty, including 
one for double taxation relief, is that treaties are negotiated and 
entered into at a political level and have several considerations as 
their bases.   Commenting on this aspect of the matter, David R. 
Davis in Principles of International Double Taxation Relief ,  
points out that the main function of a Double Taxation Avoidance 
Treaty should be seen in the context of aiding commercial relations 
between treaty partners and as being essentially a bargain between 
two treaty countries as to the division of tax revenues between 
them in respect of income falling to be taxed in both jurisdictions. 
It is observed (vide para 1.06):

"The benefits and detriments of a double tax 
treaty will probably  only be truly reciprocal 
where the flow of trade and investment 
between treaty partners is generally in 
balance.  Where this is not the case, the 
benefits of the treaty may be weighted  more 
in favour of one treaty partner than the other, 
even though the provisions of the treaty are 
expressed in reciprocal terms. This has been 
identified as occurring in relation to tax 
treaties between developed and developing 
countries, where the flow of trade and 
investment is largely one way.

		Because treaty negotiations are largely 
a bargaining process with each side seeking 
concessions from the other, the final 
agreement will often represent a number of 
compromises,  and it may be uncertain as to 
whether a full and sufficient quid pro quo is 
obtained by both sides."

And, finally, in paragraph 1.08:

"Apart from the allocation of tax between the 
treaty partners, tax treaties can also help to 
resolve problems and can obtain benefits 
which cannot be achieved unilaterally."

	Based on these observations, counsel for the appellants 
contended that the preamble of the Indo-Mauritius DTAC recites 
that it is for the "encouragement of mutual trade and investment" 
and this aspect of the matter cannot be lost sight of while 
interpreting the treaty.

Many developed countries tolerate or encourage treaty 
shopping, even if it is unintended, improper or unjustified, for 
other non-tax reasons, unless it leads to a significant loss of tax 
revenues.  Moreover, several of them allow the use of their treaty 
network to attract foreign enterprises and offshore activities. Some 
of them favour treaty shopping for  outbound investment to reduce 
the foreign taxes of their tax  residents but dislike their own loss of 
tax revenues on inbound investment or trade of non-residents. In 
developing countries, treaty shopping is often regarded as a tax  
incentive to attract scarce foreign capital or technology. They are 
able to grant tax concessions exclusively to foreign investors over 
and above the domestic tax law provisions. In this respect, it does 
not differ much from other similar tax incentives given by them, 
such as tax holidays, grants, etc.   
	Developing countries need foreign investments, and the 
treaty shopping opportunities can be an additional factor to attract 
them. The use of Cyprus as a treaty haven has helped capital 
inflows into eastern Europe. Madeira (Portugal) is attractive for 
investments into the European Union. Singapore is developing 
itself as a base for investments in South East Asia and China.  
Mauritius today provides a suitable treaty conduit for South Asia 
and South Africa.   In recent years, India has been the beneficiary 
of significant foreign funds through the "Mauritius conduit". 
Although  the Indian economic reforms since 1991 permitted such 
capital transfers, the amount would have been much lower without 
the India-Mauritius tax treaty. 

Overall, countries need to take, and do take, a holistic view.  
The developing countries allow treaty shopping to encourage 
capital and technology inflows, which developed countries  are 
keen to  provide to them.  The loss of tax revenues could be 
insignificant  compared to the other non-tax benefits to their 
economy. Many of them do not appear to be too concerned unless 
the revenue losses are significant compared to the other tax and 
non-tax benefits from the treaty, or the treaty shopping leads to 
other tax abuses. 
	There are many principles in fiscal economy which, though 
at first  blush might appear to be evil, are tolerated in a developing 
economy,  in the interest of long term development.   Deficit 
financing, for example, is one; treaty shopping, in our view, is 
another. Despite the sound and fury of the respondents over the so 
called 'abuse' of 'treaty shopping', perhaps, it may have been 
intended at the time when Indo-Mauritius DTAC was entered into. 
Whether it should continue, and, if so, for how long, is a matter 
which is best left to the discretion of the executive as it is 
dependent upon several economic and political considerations. 
This Court  cannot judge the legality of treaty shopping merely 
because one section of thought considers it improper. A holistic 
view has to be taken to adjudge what is perhaps regarded in 
contemporary thinking as a necessary evil in a developing 
economy.

Rule in McDowell
	The respondents strenuously criticized the act of 
incorporation  by FIIs under the Mauritian Act as a 'sham' and 'a 
device' actuated  by improper  motives. They contend  that this 
Court  should interdict such arrangements and, as if by waving a 
magic wand, bring about a situation  where the incorporation 
becomes non est.   For this they heavily rely on the judgment of the 
Constitution Bench of this Court in McDowell and  Company Ltd. 
v.  Commercial Tax Officer .  Placing strong reliance  on 
McDowell   it is argued  that McDowell  has changed the 
concept  of fiscal jurisprudence in this country and any tax 
planning which is intended to and results in avoidance of tax must 
be struck down by the Court.  Considering the seminal nature  of 
the contention, it is necessary to consider in some detail  as to why 
McDowell ,  what it says, and what it does not say.

	In the classic words of Lord Sumner in IRC V. Fisher's 
Executors  ,  
"My Lords, the highest authorities have 
always recognised that the subject is entitled 
so to arrange his affairs as not to attract taxes 
imposed by the Crown, so far as he can do so 
within the law, and that he may legitimately 
claim the advantage of any expressed terms 
or any omissions that he can find in his 
favour in taxing Acts.  In so doing, he neither 
comes under liability nor incurs blame."

	Similar views were expressed by Lord Tomlin in IRC v. 
Duke of Westminster   which reflected the prevalent attitude 
towards tax avoidance:
"Every man is entitled if he can to order his 
affairs so that the tax attaching under the 
appropriate  Acts is less than it otherwise 
would be. If he succeeds in ordering them so 
as to secure this result,  then, however, 
unappreciative the Commissioners of Inland 
Revenue or his fellow taxgatherers may be of 
his ingenuity, he cannot be compelled to pay 
an increased tax."

	These were the pre second world war sentiments expressed 
by the British Courts.  It is urged that McDowell  has taken a new 
look at fiscal jurisprudence  and "the ghost of Fisher  (supra) and 
Westminster  have been exorcised in the country of its origin".  It 
is also urged that  McDowell's  radical departure was in tune with 
the changed thinking on fiscal jurisprudence by the English Courts, 
as evidenced in W.T. Ramsay Ltd. v. IRC , Inland Revenue 
Commissioners v. Burman Oil Company Ltd  and  Furniss v. 
Dawson .
	As we shall show presently, far from being exorcised in its 
country of origin, Duke of Westminster  continues to be alive and 
kicking in England. Interestingly, even in McDowell ,  though 
Chinnappa Reddy,J., dismissed the observation of J.C. Shah,J. in 
CIT v. A. Raman and Company  based on Westminster   and 
Fisher's Executors ,  by saying "we think that the time has come 
for us to depart from the Westminster principle as emphatically as 
the British courts have done and to dissociate ourselves from the 
observations of Shah J., and similar observations made elsewhere", 
it does not appear that the rest of the learned Judges of the 
Constitutional Bench contributed to this radical thinking. Speaking 
for the majority, Ranganath Mishra,J,(as he then was) says in 
McDowell :
"Tax planning may be legitimate provided it 
is within the framework of law. Colourable 
devices cannot be part of tax planning and it 
is wrong to encourage or entertain  the belief 
that it is honourable to avoid the payment of 
tax by resorting to dubious methods.  It  is the 
obligation of every citizen  to  pay  the  taxes

 honestly  without resorting to subterfuges."

				(Emphasis supplied)

	This opinion of the majority is a far cry from the view of 
Chinnappa Reddy,J: "In our view the proper way to construe a 
taxing statute, while considering a device to avoid tax, is not to ask 
whether  a provision should be construed liberally or principally, 
nor whether the transaction is not  unreal and not  prohibited by the 
statute,  but whether the transaction is a device to avoid tax, and 
whether the transaction is such that the judicial process may accord 
its approval to it."   We are afraid that we are unable to read or 
comprehend the majority judgment in McDowell   as having 
endorsed  this extreme view of Chinnappa Reddy,J, which, in  our 
considered opinion,  actually militates against the observations of 
the majority of the Judges which we have just extracted from the 
leading judgment of Ranganath Mishra,J (as he then was).

	The basic assumption made in the judgment of Chinnappa 
Reddy,J. in McDowell   that the principle in Duke of 
Westminster  has been departed from subsequently by the House 
of Lords in England,   with respect, is not correct. In Craven v. 
White    the  House of Lords  pointedly considered the impact of 
Furniss ,  Burma Oil  and Ramsay .  The Law Lords were at 
great pains  to explain away each of these judgments. Lord  Keith 
of Kinkel says, with reference to the trilogy  of these cases, (at 
p.500):
"     My Lords, in my opinion the nature of the 
principle to be derived from the three cases is 
this : the court must first construe the relevant 
enactment in order to ascertain its meaning; it 
must then  analyse the series of transactions in 
question, regarded as a whole, so as to ascertain 
its true effect in law; and finally it must apply 
the enactment as construed to the true effect of 
the series of transactions and so decide whether 
or not the enactment was intended to cover it.  
The most important feature of the principle is 
that the series of transactions is to be regarded 
as a whole. In ascertaining the true legal effect 
of the series it is relevant to take into account, if 
it be the case, that all the steps in it were 
contractually agreed in advance or had been 
determined on in advance by a guiding will 
which was in a position, for all practical 
purposes, to secure that all of them were carried 
through to completion.  It is also relevant to 
take into account, if it be the case, that one or 
more of the steps was introduced into the series 
with no business purpose other than the 
avoidance of tax.

	The principle does not involve, in my opinion, 
that it is part of the judicial function to treat as 
nugatory any step whatever which a taxpayer 
may take with a view to the avoidance or 
mitigation or tax. It remains true in general that 
the taxpayer, where he is in a position to carry 
through a transaction in two alternative ways, 
one of which will result in liability to tax and 
the other of which will not, is at liberty to 
choose the latter and to do so effectively in the 
absence of any specific tax avoidance provision 
such as s.460 of the Income and Corporation 
Taxes Act, 1970.

	In Ramsay and in Burmah  the result of 
application of the principle was to demonstrate 
that the true legal effect of the series of 
transactions entered into, regarded as a whole, 
was precisely nil."

Lord Oliver (at p.518-19) says:

"It is equally important  to bear in mind what 
the case did not decide. It did not decide that a 
transaction entered into with the motive of 
minimising the subject's burden of tax is, for 
that reason, to be ignored or struck down.  Lord 
Wilberforce  was  at pains to stress that the fact 
that the motive for a transaction may be to 
avoid tax does not invalidate it unless a 
particular enactment so provides (see (1981) 1 
All ER 865, (1982) AC 300 at 323). Nor did it 
decide that the court is entitled, because of the 
subject's motive in entering into a genuine 
transaction, to attribute to it a legal effect which 
it did not have. Both Lord Wilberforce and 
Lord Fraser emphasise the continued validity 
and application of the principle of IRC v. Duke 
of Westminster (1936) AC 1 (19350 All ER 
Rep.259, a principle which Lord Wilberforce 
described as a 'cardinal principle'. What it did 
decide was  that that cardinal principle does 
not, where it is plain that a particular 
transaction is but one step in a connected series 
of interdependent steps designed to produce a 
single composite overall result, compel the 
court to regard it as otherwise than what it is, 
that is to say merely a part of the composite 
whole."

Lord Oliver  (at p.523 ) observes:

"My Lords, for my part I find myself unable to 
accept that Dawson either established or can 
properly be used to support a general 
proposition that any transaction which is 
effected for the purpose of avoiding tax on a 
contemplated subsequent transaction and is  
therefore 'planned' is, for that reason, 
necessarily  to be treated as one with that 
subsequent transaction and as having no 
independent effect even where that is 
realistically and logically impossible."

Continuing, (at page 524) Lord Oliver 
observes:

"Essentially, Dawson  was concerned with a 
question which is common to all successive 
transactions where an actual transfer of 
property has taken place to a corporate entity 
which subsequently carries out a further 
disposition to an ultimate disponee. The 
question is : when is a disposal not a disposal 
within the terms of the statute ? To give to that 
question the answer 'when, on an analysis of 
the facts, it is seen in reality to be a different 
transaction altogether' is well within the 
accepted canons of construction. To answer it 
'when it is effected with a view to avoiding tax 
on another contemplated transaction' is to do 
more than simply to place a gloss on the words 
of the statute. It is to  add a limitation or 
qualification which the legislature itself  has not 
sought to express and for which there is no 
context in the statute. That, however, desirable 
it may seem, is to legislate, not to construe, and 
that is something which is not within judicial 
competence.  I can find nothing in Dawson   or 
in the cases which preceded it which causes me 
to suppose that that was what this House, was 
seeking to do."

	Thus we see that even in the year 1988  the House of  Lords 
emphasised the continued validity and application of the principle 
in Duke of Westminster  . 

While Chinnappa Reddy, J.  took the view that Ramsay , 
was an authoritative  rejection of principle in the Duke of 
Westminster ,  the House of Lords, in the year 2001, does not 
seem to consider it to be so, as seen from MacNiven (Inspector of 
Taxes) v. Westmoreland Investments Ltd .  Lord Hoffmann  
observes:
"In the Ramsay case both Lord Wilberforce 
and Lord Fraser of Tullybelton, who gave the 
other principal speech, were careful to stress 
that the House was not departing from the 
principle in IRC v. Duke of Westminster 
(1936) AC 1, (1935) All ER Rep.259. There 
has nevertheless been a good deal of 
discussion about how the two cases are to be 
reconciled. How, if the various juristically 
discrete acquisitions and disposals which 
made up the scheme were genuine, could the 
House collapse them into a composite self-
cancelling  transaction without being guilty of 
ignoring the legal position and looking at the 
substance of the matter?

My Lords, I venture to suggest that some of 
the difficulty which may have been felt in 
reconciling the Ramsay case with the Duke of 
Westminster's  case  arises out of an 
ambiguity in Lord Tomlin's  statement that 
the courts cannot ignore  'the legal position' 
and have regard to 'the substance of the 
matter'. If 'the legal position' is that the tax is 
imposed by reference to a legally defined 
concept, such as stamp duty payable on a 
document which constitutes a conveyance on 
sale, the court cannot tax a transaction which 
uses no such document on the ground that it 
achieves the same economic effect.  On the 
other hand, if the legal position is that tax is 
imposed by reference to a commercial 
concept, then to have regard to the business 
'substance' of the matter is not to ignore the 
legal position but to give effect to it.

The speeches in the Ramsay case and 
subsequent cases contain numerous 
references to the 'real' nature of the 
transaction and to what happens in 'the real 
world'.  These expressions are illuminating in 
their context, but you have to be careful about 
the sense in which they are being used. 
Otherwise you land in all kinds of 
unnecessary philosophical difficulties about 
the nature  of reality and, in particular, about 
how a transaction can be said not to be a 
'sham' and yet be 'disregarded' for the 
purpose of deciding what happened in 'the 
real world'. The point to hold on to is that 
something may be real for one purpose but 
not for another. When people speak of 
something being a 'real' something, they 
mean that it falls within some concept which 
they have in mind, by contrast with 
something else which might have been 
thought to do so, but does not. When an 
economist says that real incomes have fallen, 
he is not intending to contrast real incomes 
with imaginary incomes. The contrast is 
specifically between incomes which have 
been adjusted for inflation and those which 
have not. In order to know what he means by 
'real', one must first identify the concept 
(inflation adjustment) by  reference to which 
he is using the word.

Thus in saying that the transactions in the 
Ramsay case were not sham transactions, one 
is accepting the juristic categorisation of the 
transactions as individual and discrete and 
saying that each of them involved no 
pretence. They were intended to do precisely 
what they purported to do.  They had a legal 
reality. But in saying that they did not 
constitute a 'real' disposal giving rise to a 
'real' loss, one is rejecting the juristic 
categorisation as not being necessarily  
determinative for the purposes of the statutory 
concepts of 'disposal' and 'loss' as properly 
interpreted. The contrast here is with a 
commercial meaning of these concepts. And 
in saying that the income tax legislation was 
intended  to operate 'in the real world', one is 
again referring to the commercial context 
which should influence the construction of 
the concepts used by Parliament."

 With respect, therefore, we are unable to agree with the  
view that Duke of Westminster  is dead, or that its ghost has been 
exorcised in England. The House of Lords does not seem to think 
so, and we agree, with respect.  In our view, the principle in Duke 
of Westminster   is very much alive and kicking in the country of 
its birth.  And as far as this country is concerned,  the observations 
of Shah,J., in CIT v. Raman  are very much relevant even today.

 We may in this connection usefully refer to the judgment of 
the Madras High Court in  M.V.Vallipappan and others  v. ITO  , 
which  has rightly concluded  that the decision in McDowell  
cannot be read as laying down that every attempt  at tax planning  
is illegitimate  and must be ignored, or that every transaction or 
arrangement which is perfectly permissible under law, which has 
the effect of reducing the tax burden of the assessee, must be 
looked upon with disfavour.  Though the Madras High  Court had 
occasion to refer to the judgment of the Privy Council in IRC v. 
Challenge Corporation Ltd. ,  and did not have the benefit of the 
House of Lords's pronouncement in Craven , the view taken by 
the Madras High Court appears to be correct and we are inclined to 
agree with it.  
We may also refer to the judgment of Gujarat High Court in  
Banyan and Berry v. Commissioner of Income-Tax  where 
referring to McDowell , the Court observed:
"The court nowhere  said that every action or 
inaction on the part of the taxpayer which 
results in reduction of tax liability to which he 
may be subjected  in future, is to be viewed 
with suspicion and be treated as a device for 
avoidance of tax irrespective of legitimacy or 
genuineness  of the act; an inference which 
unfortunately, in our opinion, the Tribunal 
apparently appears to have drawn from the 
enunciation made in McDowell case (1985) 
154 ITR 148 (SC). The ratio of any decision 
has to be understood  in the context it has been 
made. The facts and circumstances which lead 
to McDowell's decision leave us in no doubt 
that the principle  enunciated in the above case 
has not affected the freedom of the citizen to 
act  in a manner according to his requirements, 
his wishes in the manner of doing any trade, 
activity or planning his affairs with 
circumspection, within the framework of law, 
unless the same fall in the category of 
colourable device which may properly be 
called a device or a dubious method or a 
subterfuge clothed with apparent dignity." 

	This accords with our own view of the matter. 
In   CWT v. Arvind Narottam ,  a case under the Wealth 
Tax Act, three trust deeds for the benefit of the assessee, his wife 
and children in identical terms  were prepared under section 21(2) 
of the Wealth Tax Act. Revenue placed reliance on McDowell  .  
Both the learned Judges of the Bench of this Court gave separate 
opinions.
Chief Justice Pathak, in his opinion said (at p.486):

"Reliance was also placed by learned 
counsel for the Revenue on McDowell and 
Company Ltd. v. CTO (1985) 154 ITR 
148(SC). That decision cannot advance the 
case of the Revenue because the language of 
the deeds of settlement is plain and admits 
of no ambiguity."

Justice S. Mukherjee said, after noticing 
McDowell's case, (at page 487):

"Where the true effect on the construction of 
the deeds is clear, as in this case, the appeal 
to discourage  tax avoidance is not a relevant 
consideration. But since it was made, it has 
to be noted and rejected."

 In Mathuram Agrawal v. State of Madhya Pradesh  another 
Constitution Bench had occasion to consider the issue. The Bench 
observed:
"The intention of the legislature in a taxation 
statute is to be gathered from the language of 
the provisions particularly where the language  
is plain and unambiguous. In a taxing Act it is 
not possible to assume any intention or 
governing purpose of the statute more than 
what is stated in the plain language. It is not 
the economic results sought to be obtained by 
making the provision which is relevant in 
interpreting a fiscal statute. Equally 
impermissible is an interpretation which does 
not follow from the plain, unambiguous 
language of the statute. Words cannot be 
added to or substituted so as to give a meaning 
to the statute which will serve the spirit and 
intention of the legislature."

 The Constitution Bench reiterated the observations in Bank 
of Chettinad Ltd. v. CIT ,  quoting with approval the observations 
of  Lord  Russell of Killowen in IRC v. Duke of Westminster   
and the observations of Lord Simonds in Russell v. Scott 

	It  thus appears to us that not only is the principle in Duke of 
Westminster   alive and kicking in England, but it also seems to 
have acquired judicial benediction of the Constitutional Bench in 
India, notwithstanding the temporary turbulence created in the 
wake of McDowell .
	Hence, reliance on  Furniss , Ramsay  and Burmah Oil   
by the respondents  in support of their submission is of no avail.
	The situation is no different in United States  and other 
jurisdictions too. 
	The situation in the United State is reflected in the following 
passage from    American Jurisprudence :
"The legal right of a  taxpayer to decrease 
the amount of what otherwise would be his 
taxes,  or altogether to avoid them,  by 
means which the law permits, cannot be 
doubted. A tax-saving motivation does not 
justify the taxing authorities or the courts in 
nullifying or disregarding a taxpayer's 
otherwise proper and bona fide choice 
among courses of action, and the state 
cannot complain, when a taxpayer resorts to 
a legal method available to him to compute 
his tax liability,  that the result is more 
beneficial to the taxpayer than was intended. 
It has even been said that it is common 
knowledge that not infrequently changes in 
the basic facts affecting liability to taxation 
are made for the purpose of avoiding 
taxation, but that where such changes are 
actual and not merely simulated, although 
made for the purpose of avoiding taxation, 
they do not constitute evasion of taxation. 
Thus, a man may change his residence to 
avoid taxation, or change the form of his 
property by putting his money into non-
taxable securities, or in the form of property 
which would be taxed less, and not be guilty 
of fraud. On the other hand, if a taxpayer at 
assessment time converts taxable property 
into non-taxable property for the purpose of 
avoiding taxation, without intending a 
permanent change, and shortly after the time 
for assessment has passed, reconverts the 
property to its original form, it is a 
discreditable evasion of the taxing laws, a 
fraud, and will not be sustained."

Several  judgments of the US Courts were cited in respect of 
the proposition that motive of tax avoidance is irrelevant in 
consideration of the legal efficacy of a transactional situation.  

We may recapitulate the observations of the Federal Court in 
Johansson  as to the irrelevance of the motive for Johansson.  To 
similar effect are the observations of the US Court in Perry R. Bas 
v. Commissioner of Internal Revenue :

"we infer that Stantus was created by 
petitioners with a view to reducing their 
taxes  through qualification of the 
corporation under the convention.  The test, 
however, is not the personal purpose of a 
taxpayer in creating a corporation.  Rather, it 
is whether that purpose is intended to be 
accomplished through a corporation carrying 
out substantive business functions.  If the 
purpose of the corporation is to carry out 
substantive business functions, or if it in fact 
engages in substantive business activity, it 
will not be disregarded for Federal tax 
purposes."

In Barber-Greene Americas, Inc. v. Commissioner of  
Internal Revenue  it was observed  that a corporation will not be 
denied Western Hemisphere trade corporation tax benefits  merely 
because it was purposely created and operated in such way as to 
obtain such benefits. Similarly, a corporation otherwise qualified 
should not  be disregarded merely because it was purposely created 
and operated to obtain the benefits of the United States-Swiss 
Confederation Income Tax Convention.
Though the words 'sham', and 'device' were loosely used in 
connection with the incorporation under the Mauritius law, we 
deem it fit to enter a caveat here.  These words are not intended to 
be used as magic mantras or catchall phrases to defeat or nullify the 
effect of a legal situation. As Lord Atkin pointed out in Duke of 
Westminster :
"I do not use the word device in any sinister 
sense; for it has to be recognised that the 
subject, whether poor and humble or wealthy 
and noble, has the legal right so to dispose of 
his capital and income as to attract upon 
himself the least amount of tax.  The only  
function of a court of law is to determine the 
legal result of his dispositions so far as they 
affect tax."

Lord Tomlin  said :

"There may, of course, be cases where 
documents are not bona fide nor intended to 
be acted upon, but are only used as a cloak to 
conceal a different transaction."

In Snook vs. London and West Riding Investments Ltd.   
Lord Diplock L.J., explained the use of the word 'sham' as a legal 
concept in the following words:
"it is, I think, necessary  to consider  
what, if any, legal concept is involved in the 
use of this popular and pejorative word.  I 
apprehend that, if it has any meaning in law, it 
means acts done or documents executed by the 
parties to the 'sham' which are intended by 
them to give to third parties or to the court the 
appearance of creating between the parties legal 
rights and obligations different from the actual 
legal rights and obligations (if any) which the 
parties intend to create. One thing  I think, 
however, is clear in legal principle, morality 
and the authorities  (see Yorkshire Railway 
Wagon Contracting State. V.  Maclure  (1882) 
21 Ch.D.309 ; Stoneleigh Finance, Ltd. v. 
Phillips (1965) 1 All ER 513) that for acts or 
documents to be a "sham", with whatever legal 
consequences follow from this, all the parties  
thereto must have a common intention that the 
acts or documents are not to create the legal 
rights and obligations which they give the 
appearance of creating. No unexpressed 
intentions of a "shammer" affect the rights of a 
party whom he deceived."

 In Waman Rao and others v. Union of India & Ors.  and  
Minerva Mills Ltd. and others v. Union of India and Ors.   this 
Court considered the import of the word "device' with reference to 
Article 31B which provided that the Acts and Regulations specified 
Ninth Schedule shall not be deemed to be void or even to have 
become void on the ground that they are inconsistent with the 
Fundamental Rights. The use of the word 'device'  here was not 
pejorative, but to describe a provision of law intended to produce a 
certain legal result.

If the Court finds that notwithstanding a series of legal steps 
taken by  an assessee,  the intended legal result has not been 
achieved, the Court might be justified in overlooking the 
intermediate steps, but it would not be permissible  for the Court  to 
treat the intervening legal steps as non-est based upon some 
hypothetical assessment of the 'real motive' of the assessee.  In our 
view, the court must deal with what is tangible in an objective 
manner and cannot afford to chase a will-o'-the-wisp.

	The judgment  of the Privy Council in Bank of Chettinad   , 
wholeheartedly approving the dicta in the passage from the opinion 
of Lord Russel  in Westminster ,  was the law in this country 
when the Constitution came into force. This was the law in force 
then, which continued by reason of Article 372. Unless abrogated 
by an Act of Parliament, or by a clear pronouncement of this Court, 
we think that this legal principle would continue to hold good. 
Having anxiously scanned McDowell , we find no reference 
therein to having dissented from or overruled the decision of the 
Privy Council in Bank of Chettinad.   If any,  the principle 
appears to have been reiterated with approval by the Constitutional 
Bench of this Court in Mathuram .  We are, therefore, unable to 
accept the contention of the respondents that there has been a very 
drastic change in  the  fiscal  jurisprudence, in India,   as would 
entail a departure.  In our judgment, from Westminster  to Bank 
of Chettinad  to Mathuram , despite the hiccups of 
McDowell , the law has remained the same. 

We are unable to agree with the submission that an act which 
is otherwise  valid in law  can be treated as non-est merely on the 
basis of some underlying motive supposedly resulting in some 
economic detriment or prejudice to the national interests, as 
perceived by the respondents.  

In the result, we  are of the view that Delhi High Court erred 
on all counts in quashing the impugned circular.  The judgment 
under appeal is set aside and it is held and  declared  that  the 
circular No. 789  dated  13.4.2000 is valid and efficacious. 

We cannot part with this judgment without expressing our 
grateful appreciation to the Learned Attorney General, Mr. Harish 
Salve, Mr. Prashant Bhushan as also the party in person, Mr. S.K. 
Jha, all of whom by their industrious research produced a wealth of 
material and by their meticulous arguments rendered immense 
assistance.

  [1985] 154 ITR 148.
   See in this connection Maganbhai Ishwarbhai Patel & Others. v. Union of India & Another 
(1970) 3 SCC 400.
  [1988] 144 ITR 146.
  [1991]  190 ITR 626.
 See also in this connection  Leonhardt Andra Und Partner, Gmbh v. Commissioner of Income Tax   
[2001] 249 ITR 418.
  [1993] 202 ITR 508.
  [1995] 212 ITR 31.
  Cases in Constitutional Law, D.L. Kier and F.H. Lawson, Pg.53-54, 159-163 (ELBS & 
Oxford University Press 5th Ed.).
    See Section  5A of Central Excise Act, 1944 and Section 8(5) of the Central Sales Tax Act, 1956.
  (1999) 4  SCC 11, para 14 to 22.
  (1959) SCR 1099.
  Supra note 10.
  [1981] 131 ITR 597.
  Crawford on Statutory Construction, 1940 Ed, as in Supre note 13.
  [1908] ILR 35 Cal 701, 713.
  [1979] 4 SCC 565.
  Supra note 13.
  [1965] 56 ITR 198.
  [1971] 82 ITR 913.
  [1999] 237 ITR 889 at  896.
  [2001] 252 ITR 1.
  [2002] 2 SCC 127 at para 11.
 See in this connection State of Sikkim v. Dorjee Tshering Bhutia and Others (1991) 4 SCC 243 at para 16;  N.B. 
Sanjana, Assistant Collector of Central Excise, Bombay and Others v. Elphinshone Spinning and Weaving Mills Co. 
Ltd.(1971) 1 SCC 337; B. Balakotaiah v. Union of India & Others (1968) SCR 1052 and Afzal Ullah v. State of U.P 
(1964) 4 SCR 991.
 See in this connection  the observations of this Court in Harishankar Bagla and Another v. The 
State of Madhya Pradesh 1955 SCR 380 and  Kishan Prakash Sharma v. Union of India and 
Others (2001) 5 SCC 212.

  (1984) 4 SCC 27 at para 14.
  Jean-Maic Rivier, Cahiers de droit fiscal international, VolLXXIIa at pp.47-76.
  336F.2d.809.
 See in this connection Ramanathan Chettiar v. Commissioner of Income Tax, Madras [1973] 88 ITR 169.
  (1989) 4 SCC 592.
 See also in this connection the judgment of Madras High Court in  Tamil Nadu (Madras State) 
Handloom Weavers Contracting State-operative Society Ltd. v. Assistant Collector of Central Excise 1978 
ELT 57 (Mad HC).
  (1995) 1 SCC 274.
  [1994] 213 ITR 317.
  [1999] 239 ITR 650.
  Ibid
  85 D.T.C.5188 at 5190.
   Ibid
  See in this connection  Klaus Vogel, Double Taxation Convention,  Pg.26-29 (3rd ed).
  (1997) 785 FCA.
  (2000) FCA 635.
  1998 Can. Tax Ct.LEXIS 1140.
  [1975] 100 ITR 706.
  Lord McNair, The Law of Treaties, Pg.336 (Oxford, at the Clarendan Press, 1961).
  Ibid.
  53 (1) WLR 483.
  L.Oppenheim, Oppenheim's International Law, Article 626 (9th Ed.).
  Philip Baker, Double Taxation Convention and International Law,  Pg.91 ((1994) 2nd Ed.).
  Francis Bennion, Statutory Interpretation, Pg. 461 [Butterworths, 1992 (2nd Ed.)].
  David R. Davis, Principles of International Double Taxation Relief,  Pg.4 (London Sweet & Maxwell, 
1985).
  Roy Rohtagi, Basic International Taxationt Pg.373-374 (Kluwer Law International).
  Ibid.
  Ibid. 
  Supra note 1.
  Ibid. 
  Ibid.
  Ibid .
  (1926) AC 395 at 412.
  (1936) AC 1; 19 TC 490.
  Supra note 56.
  Supra note  57.
  (1982) AC 300.
  (1982) STC 30.
  (1984) 1 All ER 530.
   Supra note 57.
  Supra  note 1.
  [1968] 67 ITR 11. 
  Supra note 57.
  Supra note 1 at Pg. 171.
  Ibid
  (1988) 3 All ER 495. 
  Supra note 64.
  Supra note 63.
  Supra note 62.
  (2001) 1 All ER 865 at 877-878.
  Ibid.
  Supra note 67.
  (1988) 170 ITR 238.
  (1987) 2 WLR 24.
  Supra note 74.
  (1996) 222 ITR 831 at 850.
  (1988) 173 ITR 479.
  (1999) 8 SCC 667 at para 12.
  (1940) 8 ITR 522 (PC).
  (1948) 2 All ER 15.
  Supra note 1.      
    Supra note 64.
    Supra note 62.
   Supra note 63.
   American Jurisprudence (1973 2nd Ed. Vol.71).
  See in this connection Gregory v. Helvering 293 US465, 469  55 S.Ct. 226, 267, 78 
L.ed.566, 97 ALR 1335; Helvering v. St. Louis Trust Company 296 US 48, 56 S. Ct. 78, 80L; 
Becker v. St.Louis Union Trust Company 296 US 48, 56 S.Ct. 78, 80L. 
   Supra note 27.
  (1968) US 50 TC 595.
  (1960) 35 T.C.365, 383,384.
  (1967) All ER 518 at 528.
  (1981) 2 SCC 362 at para 45.
  (1980) 3 SCC 625 at para 91.
  Supra note 94.
  Supra note 93.

1

R.K. Garg Etc. Etc vs Union Of India & Ors. Etc on 20 October, 1981
Equivalent citations: 1981 AIR 2138, 1982 SCR (1) 947
Author: A.C. Gupta
Bench: A.C. Gupta, Y.V.  Chandrachud, P.N. Bhagwati, Syed Murtaza Fazalali, Amarendra Nath  Sen
R.K. GARG ETC. ETC.

	Vs.

UNION OF INDIA & ORS. ETC.

DATE OF JUDGMENT20/10/1981

BENCH:
GUPTA, A.C.
BENCH:
CHANDRACHUD, Y.V. ((CJ)
BHAGWATI, P.N.
FAZALALI, SYED MURTAZA
SEN, AMARENDRA NATH (J)

CITATION:
 1981 AIR 2138		  1982 SCR  (1) 947
 1981 SCALE  (3)1601
 CITATOR INFO :
 F	    1982 SC 710	 (32)
 R	    1983 SC 937	 (37)
 R	    1984 SC1130	 (46)
 RF	    1985 SC 551	 (32)
 RF	    1985 SC 724	 (13)
 R	    1987 SC 251	 (33)
 R	    1990 SC 334	 (98)
 RF	    1992 SC1033	 (39)

ACT:
     Special  Rcarer   Bonds  (Immunities   and	 Exemptions)
ordinance, 1981	 and Special  Bearer Bonds  (Immunities	 and
Exemptions)  Act,   1981-Constitution  validity	  of-Whether
infringes Art. 14-Act whether puts a premium on dishonesty.
     Constitution of India, 1950.
     Art.   14-Validity	   of	classification-How   to	  be
determined.
     Art. 32-Judicial  review-Discharge of-Principles  to be
followed.
     Art. 123-ordinance	 making power  of  President-Whether
can extend to tax laws.
     Interpretation  of	  statutes-Legislation	on  economic
matters-Effect of crudities, inequities and possibilities of
abuse-Whether renders legislation invalid.

HEADNOTE:
     The Special  Bearer Bonds	(Immunities and	 Exemptions)
ordinance, 1981	 was promulgated  on January 12,1981. It was
repealed  and	replaced  by   the  Special   Bearer   Bonds
(Immunities and	 Exemptions) Act, 1981. The Act received the
Presidential assent  on March  27,1981. Section	 1(3) of the
Act stated  that the  Act was deemed to have come into force
on January 12, 1981. The provisions of the ordinance and the
Act were  similar except  section 4(2)	of the Act which was
worded slightly differently from the corresponding provision
of The ordinance. The Act provided for certain immunities to
holders of  Special Bearer  Bonds,  1981,  and	for  certain
exemptions from	 direct taxes  in relation to such Bonds and
for matters  connected therewith. The object and purpose for
which the  Act was  passed was	to canalise  for  productive
purposes black	money, which  had become a serious threat to
the national  economy and  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.
     Section 3 of the Act provided for certain immunities to
a person who had subscribed to or otherwise acquired Special
Bearer Bonds.  Clause (a) protected such a person from being
required to disclose for any purpose whatsoever the I nature
and source  of acquisition  of	the  Special  Bearer  Bonds.
Clause (b)  prohibited the  commencement of  any inquiry  or
investigate on against a person on the
948
ground of his having subscribed to or otherwise acquired the
Special Bearer	Bonds. Clause  (c) provided 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.  Sub-section (2)  of section (3)
provided that  the immunity  granted under  sub-section	 (1)
shall not  be available	 in relation  to prosecution for any
offence punishable  under Chapter  9 or	 Chapter 17  of	 the
Indian Penal  Code or the Prevention of Corruption Act, 1957
or other similar law.
     Section  4	 provided  that	 without  prejudice  to	 the
provisions of  section 3  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, the Wealth-tax Act 1957 or the Gift-tax Act,
1958 and  that no  person  who	has  subscribed	 to  or	 has
otherwise acquired  the said  Bonds shall be entitled to (a)
claim any  set-off under the Income-tax 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; (b)  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, and (c) that any asset held
by  him	  represents  the  consideration  received  for	 the
transfer of such Bonds.
     In their  writ petitions  to this	Court assailing	 the
constitutional validity	 of the ordinance and the Act it was
contended on  behalf of	 the petitioners that: (I) since the
ordinance had  the effect  of amending	the tax	 laws it was
outside the  competence of  the President under Article 123,
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, the	President had 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 and (2) that the provisions of the Act were
violative of Article 14 of the Constitution.
     It was  also contended:  (a) 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, (b)  an abuse  which special  bearer bonds might lend
themselves to  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  special bearer  bonds and  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,	 (c)
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
949
the immunity granted under section 3 sub-section (1) and his
black money  would be  converted into  white, (d) 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 is clearly
immoral and unwarranted by the Constitution.
     Dismissing the petitions,
^
     HELD :
     [Per majority Chandrachud, C. J., Bhagwati, Fazal Ali &
Amarendra Nath Sen, J.J.]
     [Gupta, J, dissenting]
     None of  the provisions  of The  Special  Bearer  Bonds
(Immunities and Exemption) Act, 1981 is violative of Article
14 and its constitutional validity must be upheld. [989 B]
     l(i). There  is no substance in The contention that the
President has  no  power  under	 Article  123  to  issue  an
ordinance amending  or altering	 the tax  laws and  that the
ordinance was outside the legislative power of the President
under that Article. [967 E]
     l(ii). Under Article 123 legislative power is conferred
on the	President exercisable when both Houses of Parliament
are not	 in session.  It is possible that when neither House
of Parliament  is in  session, a  situation may	 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. 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.  The  legislative  power
conferred on  the President  under  the	 Article  is  not  a
parallel power	of legislation.	 This power  is 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. 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  can  not  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. [954 E-G, 965 G-966 B]
     1(iii). If parliament can by enacting legislation after
or amend  tax laws,  equally can  the  President  do  so  by
issuing an  ordinance under  Article 123.  There  have	been
numerous  instances   where  the  President  has  issued  an
ordinance replacing  with retrospective	 effect	 a  tax	 law
declared void by the High Court or
950
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. [967 B-C]
     State of  Punjab v.  Mohar	 Singh	[1955]	1  SCR	893,
referred to.
     2(i). Certain  well established  principles  have	been
evolved by Courts as rules of guidance in discharge of their
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.	 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.
Another rule  of equal	importance is  that laws relating to
economic activities  should be	viewed with greater latitude
than laws  touching civil  rights such as freedom of speech,
religion etc.  The court  should feel  more inclined to give
judicial deference  to legislative  judgment in the field of
economic regulation  than in  other areas  where fundamental
human rights are involved. [969 A-G]
     Morey v. Dond, 354 US 457, referred to.
     2(ii). 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  f;  always
possible and  that "judgment  is largely a prophecy based on
meagre	and  uninterpreted  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. [970 C.D]
     Secretary	of  Agriculture	 v.  Central  Reig  Refining
Company, 94 Lawyers' Edition 381. referred to.
     2(iii). The court must adjudge the constitutionality of
legislation by	the generality	of its provisions and not by
its crudities or inequities or by the possibilities of abuse
of any	of its	provision. 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. [970 G-H]
     3(i). 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
951
a just	and reasonable	relation to  the object sought to be
achieved by the legislature.
     3(ii). 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.
     4(i). The	Preamble of  the Act 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. 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  reached  such  staggering
proportions that  it is	 causing havoc to the economy of the
country and  poses a serious challenge to the fulfillment of
objectives of  distributive justice  and setting  up  of  an
egalitarian society.
     4(ii). The first casualty of the 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. It  also leads	 to  leakage  of  foreign  exchange,
making 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.  Urgent  measures	were
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.
     4(iii). 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 under the Income Tax Act, 1961. The Voluntary
Disclosure  Scheme  of	1951  was  made	 to  facilitate	 the
disclosure  of	 suppressed  income   by  affording  certain
immunities from penal provisions, Nearly a decade and a half
later a second scheme of voluntary disclosure was introduced
by section  68 of  the Finance Act, 1965, popularly known as
the sixty  forty scheme	 which was a little more successful.
Closely following  on the  heels of this scheme came another
under section  24 of  the Finance  (No. 2)  Act	 1965-'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. Then
came  the   Taxation  Laws   (Amendment	 and   Miscellaneous
Provisions) ordinance 1965 followed by an Act which provided
for exemption from
952
tax in	certain cases  of  undisclosed	income	invested  in
National Defence  Gold Bonds  1980. Later  on, the Voluntary
Disclosure of  Income and  Wealth ordinance  1975 which	 was
followed  by   an  Act	introduced  a  scheme  of  voluntary
disclosure  of	 income	 and  wealth  and  provided  certain
immunities   and    exemptions.	  All	 these	 legal	 and
administrative measures	 were introduced  by the  Government
and did	 not have  any appreciable effect with regard to the
problem of black money which continued unabated
     4 (iv).  All efforts  to  detect  black  money  and  to
uncover it  having failed  and the  problem of	black  money
being  an   obstinate  economic	  issue	 which	was  defying
solution, the  impugned legislation  providing for  issue of
Special Bearer	Bonds was  enacted with a view to mopping up
black money  and bringing  it out  in  the  open,  so  that,
instead	 of   remaining	 concealed  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  it	is  to	be  determined	whether	 any
impermissible differentiation is made in the Act.
     4 (v).  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.
     4 (vi). 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. 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
     5. Section	 4(c) is  calculated  to  act  as  a  strong
deterrent against  negotiability of Special Bearer Bonds for
disclosed or  'white' money.  The immunily 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.
Even if special bearer bonds are transferred against receipt
of black  money it  will not  have the	effect of legalising
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
953
purchaser by  way of  consideration would  become  white  by
reason of being converted into special bearer bonds.
     6. 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
purchaser 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 it is assumed that in some rare and exceptional
cases the  assessee may	 be able  to establish	that he sold
special bearer	bonds against  receipt of  black  money	 the
purchaser would	 straight away 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. C
     7. 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   legalising	 more  black  money  into  while  or
encouraging further generation of black money.
     8. 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 of  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.
     9. 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.
     10. 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.
     11.   The	  legislature	had   obviously	  only	 two
alternatives: either to allow the black money to remain idle
and unproductive or to induce those in possession
954
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  lo 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.
     12. 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.
     13. The  court must  while examining the constitutional
validity of  a legislation "be resilient, not rigid, forward
looking, not static, liberal, not verbal" and the court must
always bear  in mind  the constitutional  proposition  "that
courts do  not substitute  their social and economic beliefs
for the judgment of legislative bodies".
     14. 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.
[ Per A.C. Gupta, J. dissenting ]
     1. 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. [1002 A]
     2 The  Act puts  a premium on dishonesty without even a
justification of necessity-that the situation in the country
left no option. [1000 H-1001 A]
     3. The  basis on  which the  holders of  Special Bearer
Bonds have  been classified to give certain advantage to one
class and deny them to the other, has no rational nexus with
the object of the Act. [996 A]
     4 (i). Article 14 forbids class legislation but permits
classification-Permissible  classification,   it   is	well
established, must  satisfy two	conditions viz.	 (i) li that
The  classification  must  be  founded	on  an	intelligible
differential which  distinguishes  those  that	are  grouped
together from others and: (2) that the
955
differential must  have a  rational relation  to the  object
sought to be achieved by A the Act. [993 G-994 A]
     4	(ii).	The  differential   that  is  the  basis  of
classification and  the	 object	 of  the  Act  are  distinct
things, it is not enough that the differential 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 differential
must be	 intelligible. If  the basis of classification is on
the face  of it	 arbitrary in  the sense that it is palpably
unreasonable it	 is not	 possible to  call the	differential
intelligible. [997 B-C]
     The State	of West	 Bengal v.  Anwar Ali Sarkar, [1952]
SCR 284;  E. P.	 Royappa v. State of Tamil Nadu and another,
[1974] 2 SCR 348 and Maneka Gandhi v. Union of India, [1978]
2 SCR 621, referred to.
     5. The  preamble of the Act 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 however does not define black money. [990
F]
     6. 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".
None of	 These immunities  is required	by a  person who has
paid 'white'  money, that  is, money that has been accounted
for to	acquire the 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. [994 B-D]
     7. 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. [995 C-D]
     8. The Act distinguishes between two classes of holders
of Special  Bearer Bonds; tax evaders and honest tax-payers.
The  object  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-evader	 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. [995
E-F]
     9. Terms  like 'reasonable',  'just' or  'fair'  derive
their significance  from  the  existing	 social	 conditions.
Expressions like a 'reasonable and fair price' or 'fair
956
and  equitable	 restitution'  means   nothing,	 except	  in
conjunction with  the social  conditions of  the time.	That
action	 is   called   'reasonable'   which   an   informed,
intelligent, just  minded  civilised  Man  could  rationally
favour. [998 F-G]
     Quaker City  Cab Co. v. Commonwealth of Pennsylvania 72
Law. Ed. 927, referred to.
     10. What  is arbitrary and offends Article 14 cannot be
called intelligible.  It is clear from the provisions of the
Act that the advantage which the tax evaders derive from the
immunities provided  by the  Act are  not available 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 passing  of the  Bonds from	 hand to  hand is  likely to
operate as  parallel currency  and be  used for	 any kind of
transaction. [999 F-G]
     11. 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
initiating 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  underground 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. [1000 B-D]
     12. Any  law that	rewards law breakers and tax dodgers
is bound to invite criticism. No law can be struck down only
on the ground that it is unethical. However, 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. The principle of reasonableness is an
essential element of equality. The concept of reasonableness
does not  exclude notions  of morality and ethics. It cannot
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. [1001 B-D]

JUDGMENT:
     ORlGlNAL JURISDICTION:  Writ Petition  Nos.  355,	360,
863, 994 & 3624 of 1981.
     (Under article 32 of the Constitution of India)
     Petitioner in person in WP. No. 350/81
     R.K Garg, A.R. Gupta, Brij Bhushan, Miss Renu Gupta and
S.K Jain for the Petitioner in W.P. 360/81.
957
     Soli J.  Sorabjee, Harish	Salve, S.K  Dholakia &	Mrs.
Ranjana Anand for the Petitioners in W.P. 863/81.
     Soli  J.	Sorabjee,  Harish  Salve,  P.H.	 Parekh,  R.
Karanjawala. K.K.  Lahiri &  R. Swamy  for the Petitioner in
W.P. 994/81.
     R.S. Sodhi for the Petitioner in WP 3624/81.
     L.N. Sinha, Attorney General in WPs. 355 & 360/81.
     K Parasaran, Sol. General in WPs. 863 & 994/81.
     K.	 S.   Gurumoorthi  &  Miss  A.	Subhashini  for	 the
Respondents.
     U.N. Banerjee for the intervener-Mr. K.B. Kastia
     V.J.  Francis  for	 the  intervener-All  India  L.I.C.,
Employees Federation.
     The following Judgments were delivered
     BHAGWATI,	J.  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.
     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
958
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 proceeded  by a  Preamble which indicates the object and
purpose of the Act in the following words:
	  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;
	  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;
	  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;
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:
     3. (1)  Notwithstanding anything contained in any 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
959
     such person has subscribed to or has otherwise acquired
     Special Bearer Bonds; and
     (c)  the fact  that a  person has	subscribed to or has
	  other wise 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) 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.
Explanation   : 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.
     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-
     (a)  to claim  any set-off or relief in any assessment,
	  reassessment appeal, reference or other proceeding
	  under	 the   Income-tax  Act	 or  t	reopen	any
	  assessment or	 reassessment 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 Act has been
	  converted into the said Bonds: or
960
     (c)  to claim,  in relation  to any  period before	 the
	  held by  him or  any sum  credited in his books of
	  account or  other wise  held by him represents the
	  consideration received  by him for the transfer of
	  the said Bonds.
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 S 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 (I) 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 S  sub-section (I)  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.
 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
961
of the	A 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 Art. 109 and 1
10 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 1  academic, since  the Act  has been
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
retrospective 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
962
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 ]957  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:
	  "Even 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:
	       'All 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.'
     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."
 In this connection we may refer to the case reported as
Abdul Majid v. P.R. Nayak, A.I.R. 1951 Bom. 440.  In	that
case section  58 of  Act XXXI of 1950 repealed Ordinance No.
XXVII of 1949 and provided as follows:
	  'The 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
963
     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:
	  'The language	 used in  s. 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.'
     The rules	have not  been challenged  to be ultra vires
the 1957 Act in the instant case."
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.
     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:
964
123 (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.
    (2)	  An Ordinance	promulgated under this article shall
	  have the  same force	and  effect  as	 an  Act  of
	  Parliament, but every such Ordinance:-
	  (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
	  (b)  may  be	 withdrawn  at	 any  time   by	 the
	       President.
    (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.
It will be noticed that under this Article legislature power
is conferred  on the  President exercisable 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
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
965
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  ejected
representatives	 of   the  people  aud	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 starting, 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
966
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
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-
	  ".... 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."
     These words  provide a complete answer to the criticism
of Mr. R.K. Garg.
     Now  once	 it  is	 accepted  that	 the  President	 has
legislative  power   under  Article  123  to  promulgate  an
Ordinance and this legis-
967
lative	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,
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. lt  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
Ordinance amending  or altering	 the tax  laws and  that the
Ordinance was therefore outside the legislative power of the
President under that Article.
     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 platitudinous. 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
968
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:
     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, (1) 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.
     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.
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
969
satisfies  the	 aforesaid  test  or  it  is  arbitrary	 and
irrational and	hence A	 violative of  the equal  protection
clause in Article 14.
     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
order to  sustain it,  the court may take into consideration
which can be conceived existing at the time of legislation.
     Another rule  of equal importance is that laws relating
to  economic   activities  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 judgement in the field of
human rights  are involved. Nowhere has this admonition been
more felicitously  expressed than  in Morey  v.	 Dond  where
Frankfurter, J. said in his inimitable style:
	  "In the  utilities, tax  and	economic  regulation
     cases,  there  are	 good  reasons	for  judicial  self-
     restraint if  not	judicial  deference  to	 legislative
     judgment. The legislature after all has the affirmative
     responsibility. The courts
970
     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."
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 adaption of
remedy are not always possible and that "judgment is largely
a prophecy  based on  meagre and  uninterpreted 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, 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
of any	of its	provisions. If	any crudities, inequities or
issues.
971
     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
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	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 there
is considerable	 amount	 of  black  money,  unaccounted	 and
concealed? in the hands of a few persons
972
and it	is causing incalculable damage to the economy of the
country.
     The first	casualty cf  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	equality 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.
     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
973
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 demonetised 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. 52.1 l 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 fiat 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 Wanchoo 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
974
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  dimensions. 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.
     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.
     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
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
975
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
976
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 stratagems  like suppression  of  sales  or
understatement 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
977
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 undisclosed 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  subsection (2) of section 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 XVlI  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.
     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
978
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
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
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 lax 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)
979
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
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
980
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  undisclosed  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	legalising  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
981
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 legalising more
black money  into white or encouraging further generation of
black money.
     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
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
982
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.
     It was  then urged	 on behalf  of the  petitioners that
section clause	(c) operates  only in  relation to  a period
after the  date of  maturity, the  holder of  special bearer
bonds can  sell such  bonds, and,  without running any risk,
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
983
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.  rt
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  ii
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 (l) were available
to him	after the  date of  maturity, he  will still  be  in
trouble, because the disclosure made by
984
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 legalising 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 of 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.
     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
985
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 cl. (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
     It was  then contended that the Act is unconstitutional
as it  offends against	morality by  according to  dishonest
assesses 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
986
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  constitutional 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
987
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 augment  in, 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 subjected, 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.
     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
988
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(l) namely, "that
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,(2)"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
989
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	the view  that none of the provisions of the
Act is	violative  of  Article	14  and	 its  constitutional
validity must be upheld.
     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.
      GUPTA,  J. 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 Art.
14 of  the Constitution",  and I made the following order on
the same day:-
	  "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	 Art.  14   of	 the
     Constitution and are there- fore invalid. I would allow
     the writ petitions with costs.
	  I shall give my reasons later."
     Here briefly are my reasons.
     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 1 2, 1981 was
repealed and  replaced by  the Act.  The  Act  received	 the
President's assent on March 27. 1981. Section I
990
(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.
     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:-
	  "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:
     1991 of  the face	value of  ten  thousand	 rupees	 and
     rupees;
     immunities and exemptions to render it possible for per
     sons in possession of black money to invest the same in
     the said Bonds ;"
     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:
	  "It  [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
991
     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.
	  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."
 The Act  contains nine  sections. The sections that are
relevant for the present purpose are set out below.
Immuni-	  3.   (1)	 Notwithstanding anything contained
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	 other wise 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
992
Acquisition.4.	    Without prejudice  to the generality  of
etc., of	    the	 provisions   of  section   3,	 the
Bonds not to	    subscription  to,	or  acquisition	 of,
be taken into	    Special  Bearer   Bonds  by	 any  person
account for	    shall not  be taken into account for the
certain proc-	    purpose  of	 any  proceeding  under	 the
eedings.	    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-
		    (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 or re-
			 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 Act	 has 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.
Amendment      5.   In the  Income-tax Act,-  (a) in section
of Act 43	    2, in  clause (14), after sub clause Act
of 1961		    (iv), the  following sub-clause shall be
		    inserted, namely:-	"(v) Special  Bearer
		    Bonds,  1991   issued  by	the  Central
		    Government,"
993
	       (b)  in section	10, in	clause	(15),  after
		    sub-cluase	 (ia),	the  following	sub-
		    clause shall be inserted, namely:-
		    (ib)  premium   on	the   redemption  of
			 Special Bearer Bonds, 1991 :" .
Amendment      6.   In section	of 5  of the Wealth-tax Act,
of Act 27	    in sub-section (1), after clause (xvia),
of 1957.	    the following  clause shall be inserted,
		    namely :-
		    (xvib) Special Bearer Bonds, 1991 ;" .
Amendment      7.   In section	5 of  the Gift-tax  Act,  in
of Act 18	    sub-section	  (1), after  clause (iiia),
of 1958		    the following  clause shall be inserted,
		    namely:-
		  (iiib) "of property in the form of Special
			 Bearer Bonds, 1991."."
     The  marginal  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.
 The Act  has been	challenged mainly on the ground that
it infringes  Art. 14  of the  Constitution. Art. 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 Ali Sarkar(l) as follows:-
     "(1) that	the classification  must be  founded  on  an
	  intelligible differentia which distinguishes those
	  that are grouped together from others and,
994
      (2)  that the differentia must have rational relation.
	  to the object sought to be achieved by the Act."
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:
     (a)  any manner  of relief	 under the Income-tax Act on
	  the ground that he has acquired the Bonds; or
     (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
     (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.
Mr. Salve  appearing for  the petitioners  in writ petitions
Nos. 863 and 994 of 1981 contended that section 4(c) did not
constitute an
995
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 by 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.
 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
996
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.
     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 classification  were thus satisfied ? I am afraid not.
In State  of West Bengal v. Anwar Ali Sarkar, (supra) Das J.
points out:
	  "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 [Art.
     14]  forbids  class  legislation  in  sense  of  making
     improper 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 liability  proposed to be imposed, it
     does not  forbid  classification  for  the	 purpose  of
     legislation.. "
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:
 "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
997
     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
     classes of cases.''
     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:
	  "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."
The scope  of Art.  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 another(l) says:
	  "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
998
     concept with  many aspects and dimensions 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 arbitrary it is implicit in it that it
     is	 unequal  both	according  to  political  logic	 and
     constitutional law	 and is	 therefore violative of Art.
     14."
Bhagwati J. reiterates in Maneka Gandhi v. Union of India(l)
what he had said in Royappa's case and adds:
	  "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 . . . "
     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(2)   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
999
thing in  holing that  the West Bengal Special Courts Act of
1950 offends Art. 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 ?"
     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  Art. 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
who have  acquired the	Bonds with  'white' money.  The	 Act
possession of  the  Bonds.  The	 Bonds	can  be	 transferred
freely, and  the apprehension  expressed by  the petitioners
cannot he 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
1000
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
initiating a  chain of	black money  investments There is no
shape of  Special Bearer  Bonds goes  under-ground again and
of taxation  of 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.
     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 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 justi-
1001
fication of necessity-that the situation in the country left
no  option.
 The Act  has been	criticised as immoral and unethical.
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 norlns of the social order
are absorbed  into the	general	 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.
     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 E 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.
     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
elause in Art. 14 requires.
1002
     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 Art. 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 Art. 123
of the Constitution.
N.V.K.				  Petitions dismissed.
1003

Indian And Eastern Newspaper Society ... vs Commissioner Of Income Tax, New Delhi on 31 August, 1979
Equivalent 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
Author: R.S. Pathak
Bench: R.S. Pathak, P.N. Bhagwati, V.D. Tulzapurkar
INDIAN AND EASTERN NEWSPAPER SOCIETY NEW DELHI

	Vs.

COMMISSIONER OF INCOME TAX, NEW DELHI

DATE OF JUDGMENT31/08/1979

BENCH:
PATHAK, R.S.
BENCH:
TULZAPURKAR, V.D.

CITATION:
 1979 AIR 1960		  1980 SCR  (1) 442
 1979 SCC  (4) 248

ACT:
     Income Tax	 Act 1961-S.  147(b)-Scope  of-"Information"
"Reason to  believe"-Meaning of-Opinion	 of audit  party  of
Income Tax Department-If would constitute "information".

HEADNOTE:
     Section 147(b)  of the  Income Tax	 Act, 1961  provides
that if	 an  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 assess or reassess such income.
     The internal  audit  organisation	of  the	 income	 tax
department, in the course of auditing the income tax records
pertaining to  the assessee  for  certain  assessment  years
stated that  the assessee's income on account of letting out
of halls  and rooms  should not have been assessed as income
from business  but an assessment should have been made under
the head  "Income from	property". Treating  the  report  as
information in his possession under s. 147(b) the Income Tax
officer re-assessed  the  assessee's  income  The  Appellate
Assistant Commissioner	reversed  the  Income  Tax  officers
order. On  the other  hand, the	 Appellate Tribunal took the
view that the Income Tax officer had jurisdiction to proceed
under s.147(b). In a reference under s.257 of the Income Tax
Act the	 question was  whether the  Income Tax	officer	 was
legally justified  in  reopening  the  assessment  under  s.
147(b) on  the basis  of the  view expressed by the Internal
Audit party  received by  him  subsequent  to  the  original
assessment.
     Allowing the appeal,
^
     HELD: The opinion of the internal audit organization of
the Department	on a  point of	law cannot  be	regarded  as
information within  the meaning	 of s.	147(b) of  the	Act.
[455A].
     1. (a)  An assessment  proceeding, which  is  a  quasi-
judicial proceeding,  acquires finality	 on  the  assessment
order being  made. The	finality of  such an  order  can  be
disturbed only	in proceedings,	 and  within  the  confines,
provided by  law. An  appeal, revision and rectification are
proceedings in	which the  finality of the assessment may be
questioned. Section  147, under	 which an  assessment may be
reopened, is  a proceeding  for assessing  income which	 has
escaped assessment. [446F-G]
     2. In cases falling under s. 147(b) "information" is an
indispensable ingredient.  The word ''information'' has been
interpreted by	this Court to mean not only facts or factual
material but  include information as to the true and correct
state of  the law and, therefore, information as to relevant
judicial  decisions.   The   term   is	 also	defined	  as
"instruction" or  Knowledge derived  from an external source
concerning facts  or particular, or as to law, relating to n
matter bearing on the assessment. [447D-F]
     Mahaaraj Kamal  Singh v.  Commissioner of Income Tax 35
I.T.R. 1  (S.C.)= [1959]  Sup. I  SCR  10,  Commissioner  of
Income Tax  v. Raman & Company 67 I.T.R. Il(SC)=[1968] I SCR
10, referred to.
443
     3.(a) By  its inherent  nature,  a	 fact  has  concrete
existence. It  influences the  determination of	 an issue by
the mere  circumstance of  its	relevance.  It	requires  no
further authority to make it significant. [447-H].
     (b) The  term 'law'  is used  in the  sense of norms or
guiding	  principles   having	legal	effect	 and   legal
consequences.  To   possess  legal   significance  for	that
purpose, law  must be  enacted or  declared by	a  competent
authority. The legal sanction vivifying it imparts to it its
force and  validity and binding nature. Law may be statutory
law enacted  by a competent legislative authority, or it may
be judge made law emanating from a declaration or exposition
of the content of a legal principle or the interpretation of
a statue  and may in particular cases extend to a definition
of the	status of  a party or the legal relationship between
the parties,  the declaration  being rendered by a competent
judicial or  quasi-judicial authority  empowered  to  decide
questions of law between contending parties. The declaration
or exposition  is ordinarily  set forth in the judgment of a
court or  the order  of	 a  tribunal.  Such  declaration  or
exposition in  itself bears  the character  of law. In every
case, therefore, to be law it must be a creation by a formal
source,	 either	  legislative  or   judicial  authority.   A
statement by  a person	or body	 not competent to create, or
define the law cannot be regarded as law. [448A-D]
     (c)  Where	  s.  147(b)   is  read	  as  referring	  to
'information'  as   to	law,   what   is   contemplated	  is
'information' as  to the  law created by a formal source. It
is law which, because it issues from a competent legislature
or  a	competent  judicial   or  quasi-judicial  authority,
influences the	course of the assessment and decides any one
or more	 of these matters which determine the assessee's tax
liability [448G]
     4. The  Internal Audit  organisation of  the Income Tax
Department was	set up	primarily for  imposing a check over
the arithmetical  accuracy of  the computation of income and
the determination  of tax.  The audit of income tax receipts
having been entrusted to the Comptroller and Auditor-General
of India, it is intended as an exercise in removing mistakes
and errors  in income  tax records before they are submitted
to the	scrutiny of the Comptroller and Auditor General. The
audit by  the Comptroller  and Auditor General is, by virtue
of s.  16 of  the Comptroller  and Auditor  General (Duties,
Powers and  Conditions of  Service) Act,  1971	intended  to
ensure	the  sufficiency  or  otherwise	 of  the  rules	 and
procedures  prescribed	 for  the  purpose  of	securing  an
effective check	 on the	 assessment, collection	 and  proper
allocation of revenue and to ascertain whether the rules and
procedure are  being fully  observed  and  L  nothing  more.
Therefore the contents of an internal audit report cannot be
construed as  enjoying the  status of  a declaration  of law
binding on  the Income	Tax Officer. Both the internal audit
party of  the Income Tax Department and	 the Audit report of
the Comptroller	 and  Auditor  General	perform	 essentially
administrative	or   executive	functions   and	 cannot	  be
attributed the	power of    judicial  supervision  over	 the
quasi-judicial acts  of income	tax authorities. The statute
does not  contemplate such  power The  opinion of  the audit
party in  regard to  the application  of one  section of the
Income Tax  Act instead of another by the Income Tax officer
is not	law because  it is  rot	 a  declaration	 by  a	body
authorised to declare the law. [450B-F]
444
     5. While the law may be enacted or laid down only by a.
body or	 person with  authority in that behalf, knowledge or
awareness of  the law  may be  communicated by	any one.  No
authority is  required	for  the  purpose  of  communicating
knowledge or awareness of the law. [450G]
     6 (a)  In	every  case  the  Income  Tax  officer	must
determine for himself what the effect and consequence of the
law  mentioned	 in  the  audit	 note  are  and	 whether  in
consequence of	the law	 which has come to his notice he can
reasonably believe  that income	 had escaped assessment. The
basis of  his belief  must be  the law	of which  he has now
become aware.  The true evaluation of the law in its bearing
on the	assessment must	 be made  directly and solely by the
Income Tax officer. [451C-D]
     Maharaj Kamal  Singh v.  Commissioner of  Income Tax 35
I.T.R. I  (SC)= [1959] Sup. I SCR 10, Commissioner of Income
Tax v.	Raman &	 Company 67  I.T.R. 11 (SC)=[1968] 1 SCR 10,
Bankipur Club  Ltd. v.	Commissioner of Income Tax [1971] 82
I.T.R. 831 followed
     R. K. Malhotra, Income Tax officer, Croup Circle 11(1),
Ahmedabad v.  Kasturbhai Lalbhai,  109 I.T.R.  537, Kalyanji
Mavji &	 Co. v.	 Commissioner of Income Tax, 102 I.T.R. 287,
over-ruled.
     Assistant Controller  of Estate  Duty Y.  Nawab Sir Mir
Osman Ali Khan Bahadur, 72 I.T.R, 376 referred to.
     Commissioner of Income Tax v. H. H. Smt. Chand Kanwarji
Alwar 84  I.T.R 584, Commissioner of Income Tax v. Kalukutty
85 I.T.R  102, Vashist	Bharghava v.  Income Tax officer, 99
I.T.R. 148,  Muthukrishna Reddier  v Com missioner of Income
Tax, Kerala,  90 I.T.R	503,  Raj  Kumar  Shrawan  Kumar  v.
Central Board  of Direct  Taxes & Anr. 107 I.T.R. 570, Elgin
Mills Co. Ltd., v. Income Tax officer, Companies Circle, 'A'
Ward, Kanpur, 111 I.T.R. 287 not approved.
     (b) The  error discovered	by the Income Tax Officer on
a. reconsideration  of the  same material (and nothing more)
does not give the Income Tax Officer the power to reopen the
assessment. [451G]
     (c) The  submission of the Revenue that upon receipt of
the audit  note the Income Tax officer discovers or realises
that a mistake has been committed in the original assessment
and  therefore	 the  discovery	 of  the  mistake  would  be
"information"  within	the  meaning   of   s.	 147(b)	  is
inconsistent with  the terms	of  the	 section.  What	 the
section envisages  is that the Income Tax officer must first
have information  in his  possession and then in consequence
of such	 information he	 must have  reason to  believe	that
income has  'escaped assessment. The realisation that income
has escaped  assessment is  covered by	the words "reason to
believe", and  it follows from the "information" received by
him. The information is not the realisation; the information
gives birth to the realisation. [452C-D]

JUDGMENT:
     CIVIL APPELLATE JURISDICTION: Tax Reference Case Nos. 1
to 4 of 1973.
     Income Tax	 Reference under  section 257  of Income Tax
Act 1961  made by T T. Appellate Tribunal Delhi Bench 'C' in
R.A. Nos.  491 to  494 of  1971-72 (I.T.A.  NOS. 6992,19629-
19631 of 1967-68).
445
     V. S.  Desai, (Mrs.)  A. M. Verma, A. N. Haskar an(3 J.
B. Dadachanji for the appellant.
     T. A.  Ramachandran and  Miss  A.	Subhashini  for	 the
respondent.
     (Dr.) Devi	 Pal, Ravinder	Narain and  J. B. Dadachanji
for the Intervener.
     The Judgement of the Court was delivered by
     PATHAK, J.-Can  the view expressed by an internal audit
party of  the Income  Tax Department  on a  point of  law be
regarded as  ''information' for	 the purpose  of  initiating
proceedings under section 147(b) of the Income Tax Act, 1961
? opinion  on the  question has	 been divided among the High
Courts, and accordingly the present cases have been referred
by the	Income-tax Appellate  Tribunal under  s. 257  of the
Act.
     The assessee,  Messrs.  Indian  and  Eastern  Newspaper
Society, is  a society registered under the Indian Companies
Act.  It   is  a   professional	 association  of  newspapers
established with  the  principal  object  of  promoting	 the
welfare and  interest of all newspapers. The assessee owns a
building in which a conference hall and rooms are let out on
rent lo	 its members  as well as to outsiders. Certain other
services are  also provided  to the members. The income from
that source  was assessed  to tax  all along  as income from
business. It was so assessed for the years 1960-61, 1961-62,
1962-63 and 1963-64 also.
 The Income	 Tax Department	 includes an  internal audit
organisation whose  function it	 is  to	 examine  income-tax
records	 and   check  mistakes	made  therein  with  a	view
ultimately to  improve the  quality of	assessments. In	 the
course of  auditing the income-tax records pertaining to the
assessee for  the assessment  years 1960-61  to 1963-64, the
internal audit	party expressed	 the  view  that  the  money
realised by the assessee on account of the occupation of its
conference hall	 and rooms  should not have been assessed as
income from business. It said that an assessment should have
been made  under the head "Income from property". The Income
Tax  Officer   treated	the   contents	of   the  report  as
"information" in his possession for the purpose of s. 147(b)
of the	Income Tax  Act. 1961,	and reassessed the income on
that basis. The Appellate Assistant Commissioner allowed the
appeals filed  by the  assessee holding, inter alia, that in
law it could not be said that the Income Tax officer had any
"information" in  his possession enabling him to take action
under s.  147(b). On  appeal by	 the Revenue, the Income Tax
Appellate  Tribunal,  Delhi  Bench  noticed  a	conflict  of
judicial opinion on the question whether the internal audit
446
report could  be treated as "information" for the purpose of
s. 147(b).  The Gujarat	 High Court in Kasturbhai Lalbhai v.
R. K.  'Malhotra, Income-tax  Officer, Group  Circle  11(1),
Ahmedabad had  held that  an internal audit report could not
be regarded  as "information", while the Delhi High Court in
Commissioner of	 Income-tax v.	H. H.  Smt.  Chand  Kanwarji
Alwar has  expressed a	contrary view.	Following  the	view
adopted by  the Delhi High Court, the Tribunal held that the
Income Tax  officer had	 jurisdiction to  proceed  under  s.
147(b). The  assessee applied  for a  reference, and  having
regard to  the difference  between the	High Courts  on	 the
point, the Tribunal has considered it expedient to refer the
following question of law directly to this Court:-
	  "Whether, on the facts and in the circumstances of
     the case,	the Income-tax officer was legally justified
     in reopening  the assessments under section 147 (b) for
     the years	1960-61, 1961-62, 1962-63 and 1963-64 on the
     basis of the view expressed by the Internal Audit party
     and  received   by	 him   subsequent  to  the  original
     assessment ?"
 Since then,  the judgment	of the Gujarat High Court in
Kasturbhai Lalbhai's  case  (supra)  has,  on  appeal,	been
reversed by  this  Court  in  R.  K.  Malhotra,	 Income	 Tax
Officer, Group Circle 11(1) Ahmedabad v. Kasturbhai Lalbhai.
It has	been strenuously  contended that  the view  taken by
this Court calls for further consideration. Having regard to
the dimensions	of the controversy and the importance of the
question, we have been persuaded to take a fresh look at the
point.
     An	 assessment   proceeding   is	a   quasi   judicial
proceeding. It	acquires finality  on the  assessment  order
being made.  And the  finality	of  such  an  order  can  be
disturbed  only	 in  proceeding,  and  within  the  confines
proceedings in	which the  finality may	 be questioned.	 The
assessment may	also be	 reopened under	 section 147  of the
Act. It	 is a  proceeding for  assessing  income  which	 has
"escaped assessment". Section 147 reads:-
	  "147. If-
	  (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
447
	  assessment year  to the  Income Tax  officer or Lo
	  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
     (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."
     In cases  falling under  section 147(b), the expression
"information" prescribes  one of the conditions upon which a
concluded assessment  may be  reopened under that provision.
It is  an indispensable	 ingredient which  must exist before
the section  can be  availed of.  What does "information" in
section	 147(b)	  connote  ?  In  Maharaj  Karnal  Singh  v.
Commissioner  of   Income-tax  this  Court,  construing	 the
corresponding section  34(1) (b)  of the  Indian Income	 Tax
Act, 1922 held the word "information" to mean not only facts
or factual  material but  to include  also information as to
the true  and correct  state  of  the  law  and,  therefore,
information as	to relevant  judicial decisions. Thereafter,
in Commissioner	 of Income-tax v. Raman & Company, the Court
defined the  expression "information"  in section  147(b) of
the Income-Tax Act 1961 as "instruction or knowledge derived
from an	 external source concerning facts or particulars, or
as to  law, relating to a matter bearing on the assessment."
That definition has been reaffirmed in subsequent cases, and
with it as the point of departure we shall now proceed.
     In so  far as  the word "information" means instruction
or know-  ledge concerning  facts or  particulars, there  is
little difficulty.  By	its  inherent  nature,	a  fact	 has
concrete existence.  It influences  the determination  of an
issue by the mere circumstance of its relevance. It requires
no further  authority to  make	it  significant.  Its  quint
essential value lies in its definitive vitality.
448
     But  when	 "information"	is   regarded	as   meaning
instruction or	knowledge as  to law  the position  is	more
complex. When  we speak	 of "law",  we ordinarily  speak  of
norms or  guiding principles  having legal  effect and legal
purpose,  it  must  be	enacted	 or  declared  by  competent
law or,	 what is  popularly described as, judge-made law. In
the former  case, it  proceeds	from  enactment	 having	 its
source in  competent legislative  authority. Judge  made law
emanates from  a declaration or exposition of the content of
a legal	 principle or  the interpretation  of a statute, and
may in particular cases extend to a definition of the status
of a  party or	the legal  relationship between parties, the
declaration being rendered by a competent judicial or quasi-
judicial authority  empowered to  decide  questions  of	 law
between contending parties. The declaration or exposition is
ordinarily set forth in the judgment of a court or the order
of a  tribunal. Such  declaration or  exposition  in  itself
bears the  character of law. In every case, therefore, to be
law it	must be	 a  creation  by  a  formal  source,  either
legislative or	judicial authority.  A statement by a person
or body	 not competent to create or define the law cannot be
regarded as  law. The  suggested interpretation	 of  enacted
legislation and	 the elaboration of legal principles in text
books and  journals do not enjoy the status of law. They are
merely opinions	 and, at  best, evidence  in regard  to	 the
state of the law and in themselves possess no binding effect
as law. The forensic submissions of professional lawyers and
the seminal  activities of  legal academics  enjoy no higher
status. Perhaps	 the  only  exception  is  provided  by	 the
writings of  publicists in international law, for in the law
of nations  the	 distinction  between  formal  and  material
sources is difficult to maintain.
     In that  view, therefore,	when section  147(b) of	 the
Income Tax  Act is  read as referring to "information" as to
law, what  is contemplated  is information  as	to  the	 law
created by  a formal  source. It  is law,  we must remember,
which because  it issues  from a  competent legislature or a
competent judicial  or quasi-judicial  authority,  influence
the course  of the assessment and decides any one or more of
those matters which determine the assessee's tax liability.
     In determining  the status of an internal audit report,
it is  necessary to  consider the  nature and  scope of	 the
functions of  an internal  audit party.	 The internal  audit
organisation  of  the  Income  Tax  Department	was  set  up
primarily  for	 imposing  a  check  over  the	arithmetical
accuracy of  the computation of income and the determination
of tax, and now,
449
because of  the audit of income-tax receipts being entrusted
to the A Comptroller and Auditor-General of India from 1960,
it is  intended as  an exercise	 in  removing  mistakes	 and
errors in  income tax  records before  they are submitted to
the  scrutiny	of  the	  Comptroller  and  Auditor-General.
Consequently, the  nature of its work and the scope of audit
have assumed  a dimension  ca-extensive with that of Receipt
Audit. The  nature and scope of Receipt Audit are defined by
section 16 of the Comptroller and Auditor General's-(Duties,
Powers and Conditions of Services) Act, 1971.
     Under that	 section, the  audit by	 the Comptroller and
Auditor General	 is principally intended for the purposes of
satisfying him	with regard  to the sufficiency of the rules
and procedures	prescribed for	the purpose  of securing  an
allocation  of	revenue.  He  is  entitled  to	examine	 the
accounts  in  order  to	 ascertain  whether  the  rules	 and
procedures are being duly observed, and he is required, upon
such examination,  to submit a report. His powers in respect
of the audit of income-tax receipts and refunds are outlined
in the	Board's Circular  No. 14/19/  56-II dated  July	 28,
1960. Paragraph	 2 of the Circular repeats the provisions of
section 16 of the Comptroller and Auditor General's (Duties,
Powers and Conditions of Service) Act, 1971. And paragraph 3
warns that  "the Audit	Department should  not	in  any	 way
substitute  itself   for  the  revenue	authorities  in	 the
performance  of	  their	 statutory   duties."  Paragraph   4
declares:
	  "4. Audit  does not  consider it  any part  of its
     duty to  pass in  review the  judgment exercised or the
     decision  taken   in  individual	cases  by   officers
     entrusted with  those duties, but it must be recognised
     that an  examination of  such cases may be an important
     factor  in	 judging  the  effectiveness  of  assessment
     procedure ..  It  is  however,  to	 forming  a  general
     judgment rather  than to  the detection  of  individual
     errors of	assessment, etc.  that the  audit  enquiries
     should be
450
     directed. The  detection of  individual  errors  is  an
     incident rather than the object of audit."
Other provisions  stress that  the primary function of audit
in relation  to assessments and refunds is the consideration
whether the internal procedures are adequate and sufficient.
It is  not intended  that the purpose of audit should go any
further.  Our	attention  has	 been  invited	 to  certain
provisions of  the Internal  Audit Manual  more specifically
defining the  functions of  internal audit in the Income Tax
Department. While  they speak  of  the	need  to  check	 all
assessments and	 refunds in  the light	of the	relevant tax
laws, the  orders of the Commissioners of Income Tax and the
instructions of	 the Central  Board of Direct Taxes, nothing
contained therein  can be  construed as	 conferring  on	 the
contents of  an	 internal  audit  report  the  status  of  a
declaration of	law  binding  on  the  Income  Tax  Officer.
Whether it  is the  internal audit  party of  the Income Tax
Department or an audit party of the Comptroller and Auditor-
General,  they	 perform   essentially	 administrative	  or
executive functions  and cannot	 be attributed the powers of
judicial supervision  over the quasi-judicial acts of income
tax authorities.  The Income  Tax Act  does not	 contemplate
such power  in any internal audit organisation of the Income
Tax Department;	 it recognises	it in those authorities only
which are  specifically authorised  to exercise adjudicatory
functions. Nor	does  section  16  of  the  Comptroller	 and
Auditor-General's (Duties, Powers and Conditions of Service)
Act, 1971  envisage such  a power  for the attainment of the
objectives incorporated	 therein. Neither  statute  supports
the conclusion that an audit party can pronounce on the law,
and that  such pronouncement amounts to "information" within
the meaning of section 147(b) of the Income Tax Act, 1961.
     But although  an audit party does not possess the power
to so  pronounce on  the law,  it nevertheless	may draw the
attention of the Income Tax officer to it. Law is one thing,
and its	 communication another.	 If the	 distinction between
the source  of the  law and  the communicator  of the law is
carefully maintained,  the confusion  which often results in
applying section 147(b) may be avoided. While the law may be
enacted or laid down only by a person or body with authority
in that behalf, the knowledge or awareness of the law may be
communicated by	 anyone. No  authority is  required for	 the
purpose.
     In the  present case,  an internal	 audit party  of the
Income Tax  Department expressed  the view that the receipts
from the occupation of the conference hall and rooms did not
attract section 10 of the Act and that the assessment should
have been made under section 9. While
451
sections 9  and 10  can be  described as law, the opinion of
the audit A party in regard to their application is not law.
It is  not a declaration by a body authorised to declare the
law. That  part alone  of the  note of	an audit party which
mentions the  law which escaped the notice of the Income Tax
officer constitutes  "information"  within  the	 meaning  of
section 147(b);	 the part  which embodies the opinion of the
audit parts  in regard	to the application or interpretation
of the	law cannot  be taken  into account by the Income Tax
Officer.  In   every  case,  the  Income  Tax  officer	must
determine for  himself what is the effect and consequence of
the  law   mentioned  in  the  audit  note  and	 whether  in
consequence of	the law	 which has now come to his notice he
can reasonably	believe that  income has escaped assessment.
The basis  of his belief must be the law of which he has now
become aware.  The opinion  rendered by	 the audit  party in
regard to the law cannot for the purpose of such belief, add
to or  colour the  significance of  such law.  In short, the
true evaluation	 of the law in its bearing on the assessment
must be made directly and solely by the Income Tax officer.
 Now, in the case before us, the Income Tax officer had,
when  he   made	 the  original	assessment,  considered	 the
provisions of sections 9 and 10. Any different view taken by
him afterwards	on the application of those provisions would
amount to a change of opinion of material already considered
by him.	 The Revenue  contends that  it is open to him to do
so, and on that basis to reopen the assessment under section
147(b). Reliance  is placed  on	 Kalyanji  Mavji  &  Co.  v.
Commissioner of	 Income Tax,  where a  Bench of	 two learned
Judges of  this Court  observed that a case where income had
escaped assessment  due to  the "oversight,  inadvertence or
mistake" of  the Income Tax officer must fall within section
34(1) (b)  of the Indian Income Tax Act, 1922. It appears to
us, with  respect, that the proposition is stated too widely
and travels  farther than  the statute warrants in so far as
it can	be said	 to lay	 down that  if, on  reappraising the
material considered  by him  during the original assessment,
the Income  Tax officer	 discovers that	 he has committed an
error in  consequence of which income has escaped assessment
it is  open to him to reopen the assessment. In our opinion,
an  error  discovered  on  a  reconsideration  of  the	same
material (and  not more)  does not give him that power. That
was the	 view taken  by this Court in Maharaj Kamal Singh v.
Commissioner of	 Income Tax  (supra), Commissioner of Income
Tax v.	Raman and  Company (supra) and Bankipur Club Ltd. v.
Commissioner of Income Tax. and we do not believe that
452
the law has since taken a different course. Any observations
in Kalyanji Mavji & Co. v Commissioner of Income Tax (supra)
suggesting the	contrary do  not, we  say with	respect, lay
down the correct law.
     A further	submission raised  by the Revenue on section
147(b) of  the Act  may be  considered at  this stage. It is
urged that  the expression  "information" in  section 147(b)
refers to  the realisation by the Income Tax officer that he
has committed  an error when making the original assessment.
It is  said that,  when upon  receipt of  the audit note the
Income Tax  officer discovers or realizes that a mistake has
been committed	in the original assessment, the discovery of
the mis	 take would  be "information"  within the meaning of
section 147(b).	 The submission	 appears to  us inconsistent
with the  terms of  section 147(b).  Plainly, the  statutory
provision envisages  that the  Income Tax officer must first
have information  in his possession, and then in consequence
income has  escaped assessment.	 The realisation that income
believe'. and  it follows from the "information" received by
the  Income   Tax  officer.   The  information	is  not	 the
realisation, the information gives birth to the realisation.
 The recent	 decision of this Court in R. K. Malhotra v.
Kasturbhai Lalbhai (supra) may be examined now. While making
an assessment  on a  Hindu undivided  family, the Income Tax
officer	 allowed   a  deduction	  of  municipal	  taxes	  in
determining  the   annual  value  of  two  house  properties
occupied by  the  assessee.  Subsequently,  the	 Income	 Tax
officer re-opened the assessment on receipt of a report from
the office  of the  Comptroller and Auditor-General of India
that on	 a true interpretation of s. 23(2) of the Income Tax
Act,  1961,   the  deduction  of  municipal  taxes  was	 not
admissible in  the computation	of the annual value of self-
occupied house	properties. The	 assessee contended that the
report did  not constitute  "information" within the meaning
of section  147(b) of  the Act,	 and the  Gujarat High Court
accepted the  plea in  the view	 that information  as to law
would consist  of a statement by a person, body or authority
competent and  authorised to  pronounce	 upon  the  law	 and
invested with  the authority  to do  so, and  that the Audit
Department was	not such  competent or authorised authority.
On appeal  by the  Revenue, a Bench of two learned Judges of
this Court,  although endorsing	 the principle enunciated by
the High  Court, said  that the	 audit	department  was	 the
proper machinery  to  scrutinise  assessments  made  by	 the
Income Tax  officer and to point out errors of law contained
therein, and the High Court had
453
erred in  taking the  strict view  which it  did. The  Court
rested its  decision on	 Assistant Controller of Estate Duty
v. Nawab  Sir Mir  Osman Ali  Khan Bahadur,  Commissioner of
Income	Tax   v.  H.   H.  Smt.	  Chand	 Kanwarji   (supra),
Commissioner of Income Tax v. Kalukutty and Vashist Bhargava
v. Income Tax officer.
 In Assistant Controller of Estate Duty v. Nawab Sir Mir
osman Ali  Khan Bahadur (supra), this Court held the opinion
of the	Central Board  of Revenue  as  regards	the  correct
valuation of securities for the purpose of estate duty to be
"information" within the meaning of section 59 of the Estate
Duty Act,  1953 on  the basis  of which	 the  Controller  of
Estate Duty  was held  entitled to  entertain  a  reasonable
belief that property assessed to estate duty had been under-
valued. The  circumstance that	the opinion of the Board was
rendered in  an appeal filed before it under the Estate Duty
Act against  the assessment made by the Assistant Controller
of Estate  Duty was  apparently not brought to the notice of
this Court  when it  heard  R.	K.  Malhotra  v.  Kasturbhai
Lalbhai (supra).  The opinion  of the  Board represented its
view as	 a quasi-judicial  authority possessing jurisdiction
to lay	down the law. Although the Board did not enhance the
valuation of  the securities  in  the  appellate  proceeding
because	 of   the  argument   advanced	by   the  appellant,
nonetheless its	 observations amounted	to information as to
the law.  It was  not a case where the Board was functioning
as an  extrajudicial authority, performing administrative or
executive functions,  and not  competent  or  authorised  to
pronounce upon the law. The Delhi High Court in Commissioner
of Income Tax v. H. H. Smt. Chand Kanwarji (supra) held that
the scrutiny note of Revenue Audit constituted "information"
within the  meaning of	section 147(b) of the Income Tax Act
because the  Comptroller and  Auditor-General of  India	 was
empowered by  statute to  scrutinise the  proceedings of the
Income Tax  Department and to point out defects and mistakes
which  adversely   affected  the  Revenue.  The	 High  Court
considered that the view that information as to law could be
gathered only  from the	 decisions  of	judicial  or  quasi-
judicial authorities was unduly restrictive. In Commissioner
of Income-tax  v. Kalukutty  (supra), the  Kerala High-Court
also regarded  the note	 put up	 by Audit  as  "information"
within the  meaning of	section 147(b)	of the	Act, but  it
appears to  have assumed,  without anything  more,  that  an
audit note  would fall	within that  expression. As  regards
Vashist	 Bhargava   v.	Income	 Tax  officer	(supra)	 the
"information" consisted in a note of the Revenue Audit
454
and the	 Ministry of Law that the payment of interest by the
assessee was  in  fact	made  to  his  own  account  in	 the
Provident Fund and, therefore, in law the money paid did not
vest in	 the  Government  and,	consequently,  the  original
assessment was	erroneous  in  so  far	as  it	allowed	 the
deduction  of  the  interest  as  expenditure  made  by	 the
assessee. The  Delhi High  Court upheld	 the reassessment on
the finding  that the  note of	the Revenue  Audit  and	 the
Ministry of  Law had  to be taken into account by the Income
Tax officer,  because in his executive capacity he had to be
guided by  the advice rendered by the Ministry of Law and he
had to	pay due	 regard to  the note  of the  Revenue  Audit
because the  officers of  the Audit  Department were experts
empowered to  examine and  check upon the work of the Income
Tax officers.  It seems	 to us	that the  considerations  on
which the  Delhi High  Court rested  its  judgment  are	 not
correct. But  the decision  of the  case can be supported on
the ground  that the  basic information	 warranting the	 re-
opening of  the assessment  was the fact that the payment of
interest was  made to  the Provident  Fund  account  of	 the
assesses himself. That the money so paid did not vest in the
Government was	a conclusion  which  followed  automatically
upon that  fact, and  no controversy  in law  could possibly
arise on that point.
 On the  considerations prevailing	with us,  we are  of
opinion that  the view taken by the Delhi High Court and the
Kerala High  Court in  the aforementioned cases is wrong and
we must,  with great  respect, hold  that this	Court was in
error in  the conclusion reached by it is. R. K. Malhotra v.
Kasturbhai Lalbhai (supra).
 Our attention has been drawn to the further decision of
the  Kerala   High  Court   in	 Muthukrishna	Reddier	  v.
Commissioner of	 Income Tax, Kerala and the decisions of the
Allahabad High	Court in  Raj Kumar Shrawan Kumar v. Central
Board of  Direct Taxes	& Anr  and Elgin  Mills Co.  Ltd. v.
Income Tax  officer, Companies Circle, "A" Ward, Kanpur. The
Kerala High  Court merely  followed its	 earlier judgment in
Commissioner of	 Income Tax  v. Kalukutty  (supra)  and	 the
Allahabad High	Court was  impressed  by  the  same  reasons
substantially which  persuaded the  Delhi High Court and the
Kerala High Court in the cases referred to above.
     Therefore, whether	 considered on	the basis  that the.
nature and  scope of  the functions  of the  internal  audit
organisation of	 the Income  Tax Department are co-extensive
with that of Receipt Audit or on the
455
basis of the provisions specifically detailing its functions
in the Internal Audit Manual, we hold that the opinion of an
internal audit party of the Income Tax Department on a point
of law	cannot	be  regarded  as  "information"	 within	 the
meaning of section 147(b) of the Income Tax Act, 1961.
     The question  referred  by	 the  Income  Tax  Appellate
Tribunal is  answered in  the negative,	 in  favour  of	 the
assessee and against the Revenue The assessee is entitled to
one set of costs in these appeals.
P.B.R.					   Appeals allowed .
456

T. S. Balaram, Income Tax ... vs M/S. Volkart Brothers, Bombay on 5 August, 1971
Equivalent citations: 1971 AIR 2204, 1972 SCR (1) 30, AIR 1971 SUPREME COURT 2204, 1971 TAX. L. R. 1508
Author: K.S. Hegde
Bench: K.S. Hegde, A.N. Grover
T. S. BALARAM, INCOME TAX OFFICER,COMPANY CIRCLE IV, BOMBAY

	Vs.

M/S.  VOLKART BROTHERS, BOMBAY

DATE OF JUDGMENT05/08/1971

BENCH:
HEGDE, K.S.
BENCH:
GROVER, A.N.

CITATION:
 1971 AIR 2204		  1972 SCR  (1)	 30

ACT:
Income	tax  Act,  1961, s. 154-Mistake	 apparent  from	 the
record must he a patent mistake on which there can be no two
opinions-Whether s. 17(1) of Income-tax Act, 1922 applied to
firms  is  not	a  question on which there  can	 be  no	 two
opinions.

HEADNOTE:
The respondent firm was duly registered under the Income-tax
Act,  1922  as	well as the Income tax Act,  1961.   In	 the
original  assessments  of the firm for	the  years  1958-59,
1960-61,  1961-62 and 1962-63 assessments were made  on	 the
slab  rates  prescribed under the  respective  Finance	Acts
applicable  to registered firms.  In the individual  assess-
ments of the partners, their respective shares in the income
of the firm were included and assessed at the maximum  rates
since  their  assessment,,;  were  made	 in  the  status  of
nonresident.   On February 1, 1965 the respondent  firm	 was
served with notices dated January 29, 1965 by the Income-tax
Officer	 intimating  to it that in its assessments  for	 the
four years in question there were mistakes apparent from the
record	inasmuch  as the firm had not been  charged  at	 the
maximum	 rates of tax under s. 17(1) of the Income tax	Act,
1922  and  that	 therefore  he	proposed  to  rectify  those
assessments  under  s.	154 of the  Income  tax	 Act,  1961.
Thereafter  the Income-tax Officer assessed  the  respondent
firm by applying the provisions of s. 17(1) of the 1922 Act.
The respondent challenged the validity of She said orders in
a  writ	 petition under Art. 226 of the	 Constitution.	 The
High Court held that there was no obvious and patent mistake
in  the original assessment orders and therefore the  Income
tax  Officer was not competent to pass the  impugned  orders
under s. 154.  In appeal by certificate,
HELD:A mistake apparent on the record must be an obvious and
patent mistake and not something which can be established by
a  long drawn process of reasoning on points on which  there
may conceivably be two opinions. [34E]
The applicability of s. 17(1) to the respondent would depend
an  the	 decision  of the question whether  a  firm  can  be
considered as a 'person' within the meaning of that section.
The term 'person' was defined in the 1922 Act as including a
Hindu  Undivided Family and a local authority.	In the	1961
Act the definition has been expanded and includes firm.	  It
is  a  matter for consideration whether the  new  definition
contained  in  s.. 2(31) of the Income-tax Act, 1961  is  an
amendment  of  the law or is merely declaratory of  the	 law
that was in force earlier.  To pronounce upon this  question
it may be necessary to examine various provisions in the Act
as  well  as  its scheme.  The Income-tax  Officer  it)	 the
present case was not justified in thinking that there  could
be no two
31
opinions  about	 the  applicability of s.  17(1)  .  He	 was
therefore  wholly wrong in holding that there was a  mistake
apparent   from	 the  record  of  the  assessments  of	 the
respondent. [33F-34D]
Satyanarayan Laxminarayan Hegde & Ors. v. Milikarjiun Bhava-
nappa  Thirumale,  [1960] 1 S.C.R. 890 and  Sidhrainappa  v.
Commissioner  of Income-tax, Bombay, 21 T.I.R. 333  referred
to

JUDGMENT:
CIVIL  APPELLATE  JURISDICTION : Civil Appeal  No.  1170  of
1968.
Appeal	from  the judgement and order dated February  3,  6,
1967 of the Bombay High Court in Misc.	Petition No. 104  of
1965.
S.Mitra	 J. Ramamurthi, R. N. Sachthey and B.  D.  Sharma
for the Appellant.
M.   C. Chagla, N.A. Palkhivala, Bhuvanesh Kumari, J.  B.
Dadachanji  and	 Ravinder Narain for  the  respondent.	 The
Judgment of the Court was delivered by
Hegde,	J.-This	 appeal	 by  certificate  arises  from	 the
decision of the High Court of Bombay in Misc.  Petition	 No.
104 of 1968 on its file.  That was a petition under Art. 226
of the Constitution.  Therein the respondents challenged the
validity of the orders of rectification made by the  Income-
tax  Officer, Company Circle, Bombay in the  assessments  of
the  respondents for the assessment years 1958-59,  1960-61,
1961-62	 and  1962-63 under S. 154 of  the  Income-tax	Act,
1961.	Respondents  Nos. 2 and 3 are the  partners  in	 the
first  respondent-firm.	 The first respondent-firm was	duly
registered  under the Indian Income-tax Act 1922 as well  as
under  the Income-tax Act 1961. In the original	 assessments
of  the firm for the concerned assessment years	 assessments
were made on the salb rates prescribed under the  respective
Finance	 Acts  applicable  to  registered  Firms.   In	 the
individual assessments of the partners for their  respective
share in the income of the firm was included and assessed at
the  maximum rates since their assessments were made in	 the
status	of non-resident.  On February, 11, 1965,  the  first
respondent  firm was served with notices dated	January	 29,
1965 by the Income-tax Officer intimating to it that in	 its
assessments  for  the assessment years	1958-59,  1960-61  ,
1961-62	 and 1962-63, there are mistakes apparent  from	 the
record inasmuch as the firm
32
had  not  been charged at the maximum  rates  of  income-tax
under  S.  17(1)  of the Indian	 Income-tax  Act,  1922	 and
therefore he proposes to rectify those assessments under  S.
154  of the Income-tax Act, 1961.  The respondents in  their
reply  to  those notices denied that there was	any  mistake
apparent  or otherwise in those orders of assessment.	They
disputed  the  Income-tax Officer's authority  to  make	 any
correction.   The  Income-tax  Officer did  not	 accept	 the
contention of the respondents and assessed them by  applying
the provisions of S. 17(i) of the 1922 Act.  The respondents
challenged  the	 validity  of  the  orders  rectifying	 the
assessments,  before the High Court of Bombay  as  mentioned
earlier.   The	High Court took the view that  the  original
assessments  made  on the respondents were  prima  facie  in
accordance with law and at any rate as there was no  obvious
or patent mistake in those orders of assessment, the Income-
tax Officer was incompetent to pass the impugned orders.
The first question that we have to decide is whether oil the
facts and in the circumstances of the 'case.  The Income-tax
Officer	 was  within  his 'powers  in  making  the  impugned
rectifications.	  He purported to make those  rectifications
under  s. 154 of the Income-tax Act, 1961.  That section  to
the extent material for our present purpose reads:
	      "154 (1) With a view to rectifying any mistake
	      apparent from the record
	      (a)   the	 Income-tax  Officer may  amend	 any
	      order of assessment or of refund or any  other
	      order passed by him:
The  corresponding  section in the Indian  Income-tax Act,
1922 is S. 35.
We  have  now  to see whether  the  Income-tax	Officer	 was
justified  in  opining that in the original orders  of	ass-
essment, there was any apparent mistake.  As seen earlier in
the  original  assessments  of the  firm  for  the  relevant
assessment  years, the Income-tax Officer adopted  the	slab
rates  applicable  to registered firms.	  The  question	 for
decision is whether the first respondent's firm
33
came within the mischief of S. 17(1) of the Indian  Income--
tax Act, 1922.	Section 17(1) reads:
	      "Where a person is not resident in the taxable
	      territories  and	is not a company,  the	tax,
	      including super-tax, payable by him or on	 his
	      behalf on his total in come shall be an amount
	      equal to
	      (a)   the income-tax which would be payable on
	      his total income at the maximum rate, plus
	      (b)   either.  the  super-tax which  would  be
	      payable  on  his total income at the  rate  of
	      nineteen	per  cent, or  the  super-tax  which
	      would  be	 payable on his total income  if  it
	      were the total income of a person resident  in
	      the    taxable   territories   whichever	  is
	      greater....". (Provision to the section is not
	      relevant for our present purpose).
Section	 17(1)	can  apply to a	 "person".   The  expression
"Person" is defined in s. 2(9) of the Indian Income-tax Act,
1922 thus:
"  "Person"  includes a Hindu undivided family and  a  local
authority".
Unless	a  firm can be considered as a	"Person",  S.  17(1)
cannot govern the assessment of the first respondent. In the
Income-tax  Act,  1961 [S. 2(31)].,  the  expression  person
is defined differently.	 That definition reads:
		     "person" includes-
(i)  an individual,
(ii) a Hindu undivided family,
(iii)	  a company,
(iv) a firm,
(v)  an	 association  of persons or a body  of	individuals,
whether incorporated or not,
 (vi)	  a local authority and
34
(vii)	  every	 artificial juridicial person,	not  falling
within any of the preceding sub clauses.,
It  is	a matter for consideration  whether  the  definition
contained  in  S. 2(31) of the Income-tax Act,	1961  is  an
,amendment  of the law or is merely declaratory of  the	 law
that  was  in  force,  earlier.	  To  pronounce	 upon	this
question, it may be necessary to examine various  provisions
in the Act as well as its scheme.
Section	 113 of the Income-tax Act, 1961 corresponded to  S.
17(1)  of the Indian Income-tax Act, 1922 but  that  section
has  now  been omitted with effect from April 1, 1965  as  a
result of the Finance Act, 1965.
From what has been said above, it is clear that the question
whether	 S.  17(1) of the Indian Income-tax  Act,  1922	 was
applicable  to the case of the first respondent is not	free
from  doubt.   Therefore  the  Income-tax  Officer  was	 not
justified in thinking that on that question there can be  no
two opinions.  It was not open to the Income-tax Officer  to
go into the true scope of the relevant provisions of the Act
in a proceeding under S. 154 of the Income-tax Act, 1961.  A
mistake apparent on the record must be an obvious and patent
mistake	 and  not ,something which can be established  by  a
long drawn process of reasoning on points on which there may
conceivably  be	 two opinions.	As seen	 earlier,  the	High
Court of Bombay opined that the original assessments were in
accordance with law though in our opinion the High Court was
not justified in going into that question.  In	Satyanarayan
Laxminarayan  Hegde  and  ors.	v.  Millikarjun	  Bhavanappa
Tirumale(1)  this Court while Spelling out the scope of	 the
power  of  a High Court under Art. 226 of  the	Constitution
ruled  that an error which has to be established by  a	long
drawn  process	of  reasoning on  points where	there  may
conceivably  be two opinions cannot be said to be  an  error
apparent  on  the  face	 of the record.	  A  decision  on  a
debatable  point of law is not a mistake apparent  from	 the
record-see  Sidhamappa	v..  Commissioner-  of	 Income-tax,
Bombay(2).  The power of the officers mentioned in S. 154 of
the  Income-tax Act, 1961 to correct "any  mistake  apparent
from the record" is
(1) [1960] 1 S.C.R. 890.
(2) 21 I.T.R. 333.
35
undoubtedly  not  more	than  that  of	the  High  Court  to
entertain a writ petition on the basis of an "error apparent
on  the	 face  of  the record".	 In  this  case	 it  is	 not
necessary  for us to spell out the distinction	between	 the
expressions 66 error apparent on the face of the record" and
"mistake  apparent from the record".  But suffice it to	 say
that  the  Income tax Officer was wholly wrong	in  holding
that  there  was a mistake apparent from the record  of	 the
assessments of the first respondent.
For the reasons mentioned above we dismiss this appeal	with
costs.
G.C.				   Appeal dismissed.
36

Mon Mohan Kohli vs Assistant Commissioner Of Income Tax & ... on 15 December, 2021
Author: Manmohan
Bench: Manmohan, Navin Chawla
                              $~
                              *        IN THE HIGH COURT OF DELHI AT NEW DELHI
                              +        W.P.(C) 6176/2021

                                       MON MOHAN KOHLI                                            ..... Petitioner
                                                                  Versus

                                       ASSISTANT COMMISSIONER OF INCOME TAX & ANR..
                                                                            ..... Respondents

                                                                  WITH
                              W.P.(C) Nos. 6442/2021, 6443/2021,            6451/2021,   6465/2021,   6563/2021,
                              6531/2021, 6596/2021, 6607/2021,             6645/2021,    6665/2021,   6667/2021,
                              6668/2021, 6705/2021, 6717/2021,             6718/2021,    6777/2021,   6799/2021,
                              6800/2021, 6801/2021, 6805/2021,             6822/2021,    6830/2021,   6832/2021,
                              6857/2021, 6877/2021, 6880/2021,             6888/2021,    6889/2021,   6890/2021,
                              6894/2021, 6896/2021, 6897/2021,             6898/2021,    6904/2021,   6905/2021,
                              6906/2021, 6910/2021, 6917/2021,             6918/2021,    6920/2021,   6922/2021,
                              6924/2021, 6931/2021, 6950/2021              6954/2021,    6955/2021,   6962/2021,
                              6963/2021, 6965/2021, 6966/2021,             6968/2021,    6972/2021,   6976/2021,
                              7015/2021, 7016/2021, 7018/2021,             7027/2021,    7028/2021,   7030/2021,
                              7031/2021, 7037/2021, 7038/2021,             7039/2021,    7041/2021,   7047/2021,
                              7049/2021, 7054/2021, 7055/2021,             7058/2021,    7062/2021,   7066/2021,
                              7071/2021, 7072/2021, 7075/2021,             7076/2021,    7078/2021,   7079/2021,
                              7080/2021, 7083/2021, 7097/2021,             7098/2021,    7102/2021,   7104/2021,
                              7107/2021, 7109/2021, 7111/2021,             7130/2021,    7131/2021,   7132/2021,
                              7134/2021, 7138/2021, 7139/2021,             7140/2021,    7141/2021,   7143/2021,
                              7144/2021, 7145/2021, 7147/2021,             7158/2021,    7163/2021,   7165/2021,
                              7168/2021, 7169/2021, 7170/2021,             7171/2021,    7172/2021,   7173/2021,
                              7174/2021, 7175/2021, 7177/2021,             7178/2021,    7180/2021,   7181/2021,
                              7190/2021, 7191/2021, 7193/2021,             7196/2021,    7200/2021,   7201/2021,
                              7203/2021, 7205/2021, 7206/2021,             7208/2021,    7210/2021,   7211/2021,
                              7212/2021, 7213/2021, 7215/2021,             7217/2021,    7219/2021,   7220/2021,
                              7225/2021, 7229/2021, 7231/2021,             7257/2021,    7259/2021,   7262/2021,
                              7263/2021, 7267/2021, 7269/2021,             7273/2021,    7274/2021,   7275/2021,
                              7277/2021, 7278/2021, 7287/2021,             7292/2021,    7300/2021,   7301/2021,
                              7302/2021, 7303/2021, 7304/2021,             7305/2021,    7306/2021,   7307/2021,

Signature Not Verified        W.P.(C) 6176/2021 & connected matters                                   Page 1 of 106
Digitally Signed By:JASWANT
SINGH RAWAT
Signing Date:15.12.2021
14:05:36
                               7308/2021,        7309/2021,        7311/2021,   7312/2021,   7313/2021,   7317/2021,
                              7318/2021,        7319/2021,        7320/2021,   7321/2021,   7324/2021,   7327/2021,
                              7333/2021,        7337/2021,        7346/2021,   7348/2021,   7359/2021,   7361/2021,
                              7362/2021,        7363/2021,        7364/2021,   7366/2021,   7367/2021,   7368/2021,
                              7369/2021,        7370/2021,        7374/2021,   7378/2021,   7383/2021,   7385/2021,
                              7386/2021,        7387/2021,        7388/2021,   7389/2021,   7391/2021,   7392/2021,
                              7393/2021,        7394/2021,        7397/2021,   7398/2021,   7399/2021,   7400/2021,
                              7401/2021,        7402/2021,        7404/2021,   7405/2021,   7406/2021,   7408/2021,
                              7409/2021,        7410/2021,        7411/2021,   7412/2021,   7419/2021,   7420/2021,
                              7421/2021,        7423/2021,        7425/2021,   7428/2021,   7429/2021,   7430/2021,
                              7431/2021,        7433/2021,        7434/2021,   7435/2021,   7436/2021,   7438/2021,
                              7440/2021,        7442/2021,        7443/2021,   7447/2021,   7450/2021,   7451/2021,
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                              7783/2021,        7786/2021,        7787/2021,   7789/2021,   7790/2021,   7791/2021,

Signature Not Verified        W.P.(C) 6176/2021 & connected matters                                      Page 2 of 106
14:05:36
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Signature Not Verified        W.P.(C) 6176/2021 & connected matters                                      Page 3 of 106
14:05:36
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                              9047/2021,        9050/2021,        9052/2021,   9059/2021,   9060/2021,   9061/2021,

Signature Not Verified        W.P.(C) 6176/2021 & connected matters                                      Page 4 of 106
14:05:36
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                              9629/2021,        9632/2021,        9634/2021,   9635/2021,   9636/2021,   9641/2021,

Signature Not Verified        W.P.(C) 6176/2021 & connected matters                                      Page 5 of 106
14:05:36
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                              10580/2021,      10581/2021,        10588/2021,   10626/2021,   10627/2021,   10628/2021,
                              10640/2021,      10643/2021,        10650/2021,   10653/2021,    6152/2021,   10396/2021,
                              10414/2021,      10533/2021,        10565/2021,   10587/2021,   10608/2021,   10609/2021,
                              10612/2021,      10613/2021,        10615/2021,   10618/2021,   10619/2021,   10620/2021,
                              10621/2021,      10642/2021,        10661/2021,   10662/2021,   10663/2021,   10683/2021,

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                               10684/2021, 10685/2021,             10687/2021,   10688/2021,   10692/2021,   10693/2021,
                              10694/2021, 10695/2021,             10696/2021,   10697/2021,   10700/2021,   10702/2021,
                              10704/2021, 10706/2021,             10734/2021,   10735/2021,   10739/2021,   10741/2021,
                              10744/2021, 10748/2021,             10752/2021,   10756/2021,   10757/2021,   10761/2021,
                              10764/2021, 10766/2021,             10767/2021,   10783/2021,   10799/2021,   10802/2021,
                              10803/2021, 10811/2021,             10819/2021,   10820/2021,   10827/2021,   10829/2021,
                              10841/2021, 10843/2021

                              PRESENT FOR THE PETITIONERS:

                              Mr. S. Ganesh, Senior Advocate with Ms. Archana Sahadeva, Advocate.
                              Mr. Percy Pardiwalla, Senior Advocate with Mr. Salil Kapoor, Ms. Ananya
                              Kapoor, Mr. Sumit Lalchandani, Ms. Soumya Singh, Mr. Sanat Kapoor,
                              Advocates.
                              Ms. Kavita Jha, Mr. Vaibhav Kulkarni, Mr. Udit Naresh, Mr. Anant Mann,
                              Mr. Aditeya Bali, Mr. Rahul Unnikrishnan, Mr. Himanshu Aggarwal and
                              Ms. Shwetha Prabhakar, Advocates.
                              Mr. Ved Jain, Ms. Richa Mishra, Advocates.
                              Mr. Rohit Jain with Mr. Neeraj Jain, Mr. Aniket D. Agrawal, Ms. Manisha
                              Sharma, Advocates.
                              Mr. Aseem Chawla, Mr. Manu K. Giri, Mr. Ashish Dhunna & Ms. Soniya
                              Dodeja, Advocates.
                              Mr. Piyush Kaushik, Advocate.
                              Mr. Sachit Jolly, Ms. Anuradha Dutt, Mr. Rohit Garg, Ms. Disha Jham,
                              Ms. Mehak Sachdeva, Mr. Sohum Dua, Advocates .
                              Mr. Kapil Gupta, Advocate.
                              Mr. Puneet Agarwal, Mr. Yuvraj Singh, Mr. Prem Kandpal, Mr. Chetan
                              Kumar Shukla, Ms. Hemlata Rawat, Advocates.
                              Mr. Gaurav Gupta, Mr. Jaspal Singh Sethi, Mr. Gaurav Gupta & Ms. Sahiba
                              Pantel, Advocates.
                              Mr. T.M. Shivakumar, Advocate.
                              Mr. Manibhadra Jain, Advocate.
                              Dr. Rakesh Gupta, Mr. Somil Agarwal, Mr. Tani Malik, Mr. Anshul Mittal
                              Mr. Mayank Nagi, Advocate.
                              Mr. Arvind Kumar & Ms. Devina Sharma, Advocates.
                              Mr. Sunil K.Mukhi, Mr. Ishan Garg, Mr.T.S Nerwal, Advocates.
                              Mr. P.C. Yadav, Advocate.
                              Mr. Raghvendra Singh and Mr Satish kumar, Advocates.

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                               Mr. Rahul Chaudhary, Mr. Avesh Chaudhary, Mr. Abhay Shankar Dubey,
                              Mr. Navin Kumar with Mr. Deepak and Mr. Rohit Pal, Advs.
                              Mr. Kamal Sawhney with Mr. Prashant Meharchandani, Mr. Nikhil
                              Agarwal, Mr. Arun Bhaduria, Mr. Divyansh Singh, Advocates .
                              Mr. Inder Paul Bansal and Mr. Vivek Bansal. Adv.
                              Mr. Suresh Chandra Sati, Advocate.
                              Mr.Sushil Tekriwal & Dr. Mamta Tekriwal, Advs.
                              Mr. Piyush Singhal, Mr. Risabh Sharma, Advs.
                              Mr. Rajiv Kumar Virmani, Mr. Abhinav Agrawal, Mr. Rishi Vohar, Ms.
                              Swati Bhardwaj, Advs.
                              Mr.Rishabh Ostwal, Adv.
                              Mr. Rano Jain with Mr. Venketesh Chaurasia, Advs.
                              Mr.Sourav Vig and Mr.Tushar Gupta, Advs.
                              Mr. Virender Mehta Adv.
                              Mr. Manish Paliwal, Mr. Vikas Kumar, Mr. Vishal Aggarwal, Advs.
                              Mr.Anish Sarna, Adv.
                              Mr. Pankaj Gupta and Ms. Rimpy Gupta, Advs.
                              Mr. Harshit Batra and Mr. Ritesh Bajaj, Advs.
                              Mr. A.K. Babbar, Mr. V.K. Sabharwal, Mr. Surendra Kumar, Mr. B.K.
                              Tripathi, Advs.
                              Ms. Vanita Bhargava, Mr. Ajay Bhargava, Ms. Shweta Kabra, Ms. Prerna
                              Singh, Advs.
                              Ms. Rashmi Chopra, Advocate
                              Mr. Kishore Kunal, Mr. Manish Rastogi, Mr. Parth and Mr. Sumit Khadaria,
                              Advs.
                              Mr. Amol Sinha, Mr. Anshum Jain, Mr. Ashvini Kumar, Advs.
                              Mr. Ashvini Kumar, Mr. Rahul Kochar, Mr. Kshitiz Garg, Mr. Abhinav
                              Arya, Advs.
                              Ms. Shreya Jain & Mr. Gaurav Tanwar, Advs.
                              Mr. Pulkit Deora with Mr. Arnav Vidyarthi, Advs.
                              Sh. Pankaj Jain, Sr. Advocate with Mr. Gaurav Mittal, Ms. Divya Suri and
                              Mr. Sachin Bhardwaj, Advs
                              Mr. Bhupinder Jit Kumar, Adv.
                              Ms. Jyoti Taneja, Mr. Vidur Kamra Advoacte Advs.
                              Mr. Neeraj Jain, Mr. Aditya Vohra, Advs.
                              Mr. Divyanshu Agrawal, Ms. Ritika Chawla and Mr. Vaibhav Niti, Advs.

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                               Mr. Jitesh Talwani, Mr. Abhimanyu Goyal, Mr. Sahil Mahajan and
                              Ms. Anjali, Advs.
                              Mr Krishna kumar Agarwal, Mr. Sharad Agarwal, Ms. Monika Ghai, Advs.
                              Ms. Poonam Ahuja, Adv.
                              Mr. R. Madhav Bera, Mr. Divyansh Jain, Mr. Dennis T Panmei, Mr. Aakash
                              Bhardwaj, Mr. Rishi Jaiswal, Mr. Keshav Maheshwari, Ms. Akansha Gupta
                              and Ms. Tanya Minocha, Advs.
                              Mr.Udai Khanna, Adv.
                              Mr. Ritambhara Narang and Mr. Pranay Mohan Govil, Advs.
                              Mr. Sagar Rohatgi, Adv.
                              Mr. Manuj Sabharwal, Adv.
                              Mr. Ankur Bansal alongwith Mr. Mukul Rawal and Mr. Devendra Dang,
                              Advs.
                              Mr. Mukesh Gupta and Mr. Shashi Gandhi, Advs.
                              Mr. Prakash Kumar along with Mrs. Rashmi Singh, Advs.
                              Mr. Ansh Singh Luthra, Mr. Harmanpreet Singh Kohli and Mr. Abhishek
                              Samal, Advs.
                              Mr. Nitin Gulati, Adv.
                              Mr. Arnav Kumar, Mr. Rajat Mittal, Mr. Devrath Arora and Mr. Lakshay
                              Virmani, Advs.
                              Mr. Sagar Rohatgi, Mr. Anil Kumar Chunduru & Mr. Neeraj Kumar Jha,
                              Advs.
                              Mr. Kapil Hirani, & Mr. Shakul R. Ghatole, Mr. Sumit K Batra, Mr. Manish
                              Khurana, Advocates.
                              Mr. Bharat Beriwal, Ms. Priyadarshini Dewan, Mr. Shankari Mishra,
                              Priyesh Srivastava, Advs.
                              Ms. Jaya Goyal & Ms. Manpreet Kaur, Advs.
                              Mr. Yogesh K. Jagia, Mr. Amit Sood, Mr. Rishabh Nangia, Advs.
                              Mr. Gautam Jain and Mr. Piyush Kumar Kamal, Advs.
                              Mr. Nagesh Kumar Behl, Mr.Mayank Pachauri & Mr. Vishal Gourav, Advs.
                              Mr. Simran Mehta, Adv.
                              Shri Tejasvi Goel, Adv.
                              Mr. K. Sampath & Mr. S. Krishnan, Advs.
                              Mr. S. Krishnan & Mr. Rakesh Kumar, Adv.
                              Mr. Mayank Nagi, Mr.Tarun Singh & Mr.Pulkit Verma, Advs.
                              Mr. Ruchesh Sinha, Mr. Gautam Khaitan, Mr. AT Patra, Mr. Aditya
                              Ghadge, Mr. Ramaditya Tiwari & Ms.Divya, Advs.
                              Ms.Priamvada Surolia, Ms.Lakshita Arora & Mr. Abhishek Parmar, Advs.

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                               Mr. Shafiq Khan, Adv.
                              Ms. Ranjana Roy Gawai, Mr. Ujjwal Jain & Mr. Shikher Upadhyay, Advs.
                              Mr. P.R Rajhans, Mr. Ankur Vats & Mr. Vivek Singh, Advs.
                              Mr. Sekhar Gupta & Mr. Mehendra Pratap, Advs.
                              Mr. Deepanshu Jain & Mr. Shaantanu Jain, Advs.
                              Mr. Gagan Kumar, Adv.
                              Mr. Abhimanyu, Mr. Ankit Panwar, Mr. Parth Dixit & Mr. Abhishek Singh
                              & Ms. Leena Kalra, AR of the Company.
                              Mr. Hemant Shah and Saurabh Pal, Advs.
                              Mr. R. K. Handoo, Mr.Yoginder Handoo, Mr.Ashwin Kataria, Mr.Aditya
                              Chaudhary and Mr.Raghav Bhalla, Advs.
                              Mr. Rahul Malhotra, Mr. Manas Tripathi and Ms. Diksha Singh Dhakre,
                              Mr. K.R. Manjani & Mr.Tarun Aswani, Advs.
                              Mr. Vishal Kalra, Mr. S.S. Tomar and Mr. Ankit Sahni, Advs.
                              Mr. Rajeev Sharma, Adv.
                              Mr. Kapil Goel and Mr.Sandeep Goel, Advocates
                              Mr. Rohit Bansal, Adv.
                              Mr. Amit Kaushik, Adv.
                              Mr. Vikas Arora, Ms. Radhika Arora and Mr. Mohit Dagar, Advocates
                              Mr. Satyen Sethi & Mr. Arta Trana Panda, Advs.
                              Mr. Rupesh Kumar with Ms. Neelam Sharma, Mr. Pankhuri Shrivastava,
                              Mr. Pravesh Bahuguna, Mr. Alekshendra Sharma, Advs.
                              Mr. Sougat Sinha & Mr. Manoj Kumar, Advs.
                              Mr. Hemant Singh, Mridul Chakravarty, Mr. Tushar Srivastava, Ms. Shruti
                              Gupta, Lavanya Panwar, Advs.
                              Dr. Shashwat Bajpai with Mr Vishal Aggarwal, Advs.
                              Mr. Rakesh Jain, Adv.
                              Mr. Pragyan Pradip Sharma and Ms. Gurnoor Kaur, Advs.
                              Ms. Surbhi Chandra, Adv.
                              Mr. Kanishk Agarwal with Mr. Mayank Patni, Ms. Nidhi Bhuwania Advs.
                              Mr. Rajiv K. Garg and Mr. Ashish Garg, Advs.
                              Mr. R. K. Handoo, Mr. Garvit Solanki, Advs.
                              Mr. Deepak Chopra with Mr. Harpreet Singh Ajmani, Mr. Rashi Khanna,
                              Ms. Priya Tandon and Mr. Manasvine Bajpai, Advs.
                              Mr. Shekhar Gupta, Adv.
                              Mr. Mani Bhadra Jain, Adv.
                              Mr. Vishnu Langwat with Ms. Nidhi Tomar & Mr. Vinay Pal, Advs.

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                               Mr. Vaibhav Sharma, Adv.
                              Ms. Bandana Grover, Adv.
                              Mr. Sumit Singh, Adv.
                              Mr. Debesh Panda & Ms. Anandita Sharma, Advs.
                              Mrs. Harvinder Oberoi, Adv.
                              Mr. Purav Middha, Adv.
                              Mr. Akarsh Garg, Mr. Parth Davar, Mr. Sushant Singhal & Mr. Himanshu
                              Aggarwal, Advs.
                              Mr. Sabhay Choudhary, Adv.
                              Mr. Harpreet Singh & Mr. Gagan Kumar Singhal, Advs.
                              Mr. Gaurav Jain & Mr.Gautam Jain, Advs.
                              Mr. Anirudh Bakhru, Mr. Ayush Puri, Mr. Umang Tyagi & Mr. Tejaswini
                              Chandrasekhar, Adv.
                              PRESENT FOR THE RESPONDENTS:
                              Mr Zoheb Hossain, Sr. Standing Counsel with Mr. Vipul Agarwal,
                              Jr. Standing Counsel, Mr. Parth Semwal, Jr. Standing Counsel for Revenue.
                              Mr. Sunil Agarwal, Sr. Standing Counsel, Tushar Gupta, Jr. Standing
                              Counsel and Mr. Samarth Chaudhari, Adv.
                              Mr. Puneet Rai, Sr. Standing Counsel along with Adeeba Mujahid, Jr.
                              Standing Counsel.
                              Mr. Ruchir Bhatia, Sr Standing Counsel.
                              Mr. Abhishek Maratha, Sr. Standing Counsel.
                              Mr. Sanjay Kumar, Sr. Standing Counsel with Ms. Easha Kadiyan, Jr.
                              Standing Counsel for Revenue.
                              Ms. Vibhooti Malhotra, Sr. Standing counsel Mr Shailender Singh, Jr St
                              counsel and Mr.Udit Sharma, Adv.
                              Mr. Harpreet Singh, Sr SC with Mr. Arunesh Sharma & Ms.Suhani Mathur,
                              Advs.
                              Mr. Kunal Sharma, Sr. Standing Counsel with Ms. Zehra Khan, Jr. Standing
                              Counsel and Mr. Shubhendu Bhattacharya, Adv.
                              Mr. Ajit Sharma, Sr. Standing Counsel with Mr. Anant Ram Mishra, Adv.
                              Mr. Sanjeev Sabharwal, Sr. panel counsel for UOI.
                              Mr. Avnish Singh with Ms. Pushplata Singh, Advs. for UOI.
                              Mr. P.C Yadav, Sr Panel Counsel, UOI.
                              Mr. Vivek Goyal, CGSC for UOI.
                              Mr. Nawal Kishore Jha, Adv. for Respondents/UOI.
                              Mr. Dilbag Singh Sr. CGC for Respondents/UOI.
                              Mr. Kamal Kant Jha, Senior Panel Counsel for UOI.

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                               Mr. Ranvir Singh, (CGSC) for UOI.
                              Mr. D.S.Mehandru, Sr. Panel Counsel for UOI.
                              Mr. Anil Dabas, Adv. for UOI.
                              Mr. Praveen Kumar Jain, Adv.
                              Ms. Richa Dhawan, Senior Panel counsel for UOI.
                              Ms. Aakanksha Kaul, Mr. Manek Singh, Mr. Aman Sahani, Advs.
                              Mr. Nitin Khanna, Advocate for R-4/UOI.
                              Ms. Arti Bansal for Respondent No.3/ UOI.
                              Mr. Prakash Kumar, Sr. Central Govt. Counsel.
                              Mr. Narendra Kumar Srivastava Senior Panel Counsel for the respondent
                              No. 3.
                              Ms. Talish Ray, Adv. for UOI.
                              Ms. Sunieta Ojha, Adv. for UOI.
                              Mr. Neeraj, Mr. Sahaj Garg , Mr. Vedansh Anand, Mr. Rudra Paliwal and
                              Mr. Sanjay Pal, Advs.
                              Mr.Ajay Digpaul CGSC with Kamal R. Digpaul Adv.
                              Mr. Ravi Prakash CGSC with Mr. Gurtejpal Singh, Ms. Shruti Shivkumar,
                              Advs.
                              Mr. Ashwani Kumar Sharma, CGSC.
                              Mr.Sushil Kumar Pandey, Adv. with Mr. Rahul Mourya, Ms. Sweety Singh
                              Chauhan & Ms. Anjum Kaur, Advs.
                              Mr. Jitesh Vikram Srivastava, Mr. Prajesh Vikram Srivastava, Adv.
                              Mr. Ajay Digpaul, Adv.
                              Mr. Vivekanand Mishra, Senior Panel Counsel UOI.
                              Mr. Ruchir Mishra and Mr. Mukesh Kumar Tiwari, Advs.
                              Mr. Shankar Kumar Jha, Adv.
                              Mr. Manoj Kumar Tyagi, Adv.
                              Mr. Chiranjiv Kumar, Adv.
                              Mr. Tanveer Ahmed Ansari, Adv.
                              Mr. Pradeep Kumar Sharma, Adv.
                              Mr. Siddharth Khatana, Adv.
                              Ms. Leena Tuteja, Adv.
                              Mr. T. P.Singh, Adv.
                              Mr. Bhagvan Swarup Shukla (CGSC) with Mr. Sarvan Kumar, Advs.
                              Mr. Dev P Bhardwaj, CGSC with Ms. Anubha Bhardwaj, Adv.
                              Mr. Satyendra Kumar, Adv.

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                               Mr. Satya Ranjan Swain, Senior Panel Counsel, Mr. Kautilya Birat, Adv.
                              Mr. Farman Ali, Senior Panel Counsel and Mr.Athar Raza Farooquei, Adv.
                              Mr. Sushil Kumar Pandey, Senior Panel Counsel for respondent No.1/UOI.
                              Mr. Aman Malik, Senior Panel Counsel.
                              Mr. Jivesh Tiwari, Adv. for UOI.
                              Mr. Manisha Agrawal Narain, Mr. Rakshita Goyal, Mr. Aditya Deshwal,
                              Advs.
                              Ms. Suman Chauhan, Adv.
                              Mr. Rishabh Sahu, Adv.
                              Mr. Gigi C George, Adv.
                              Mr Ayush Agrawal, Senior Panel Counsel (UOI), Mr. Vikrant Singh Bloria,
                              and Mr. Sushant Tomar, Advs.
                              Mr. Naginder Benipal, SPC with Mr. Naveen Chawla and Mr. Harithi
                              Kambiri, Advs.
                              Mr. B.N.P. Pathak Sr. Central Govt. Counsel for UOI.
                              Mr. Vikrant N Goyal, Adv.
                              Mr. Jaswant Rai Aggarwal, Adv.
                              Mr. Akshay Amritanshu, Adv.with Mr. Kartikey Singh, Adv.
                              Mr. Ghanshyam Mishra & Ms. Vinita Sharma, Advs. for UOI/R-3.
                              Mr. Satyanand, SPC for UOI.
                              Mr. Rajesh Kumar, Adv. for UOI.
                              Mr. Harish Kumar Garg, Adv.
                              Mr. Rajesh Gogna, CGSC with Mr. Vaibhav Anand, Adv.
                              Mr. Chiranjiv Kumar, Adv. for UOI.
                              Mr. Sandeep Tyagi, SPC for UOI.
                              Mr. Akhilesh Kumar, Adv.
                              Ms. Nidhi Banga, Senior Panel Counsel for UOI with Ms. Kirti Arora, Adv.
                              Ms. Anju Gupta, Adv. for UOI.
                              Mr. Shashank Bajpai, SPC, Mrs. Shakun Sudha Shukla, Mr. Dhananjay
                              Tiwari, Advs. for UOI.
                              Mr. Niraj Kumar, Sr. Central Govt. Counsel for UOI/R-4.
                              Mr. S.S. Rai, SPC for UOIfor R-3 & R-4 alongwith Mrs. Roopam Rai, Adv.
                              Mr. Alok Singh, SPC for UOI along with Ms. Sonam Awasthi, Mr. Gaurav
                              Bhardwaj, Advs.
                              Mr. Prasanta Varma, Sr. PC, Government Counsel with Mrs. Prativa Varma,
                              Mr. Amrit Singh Khalsa, Ms. Hiteshi Kakkar, Advocates.
                              Mr. G. D. Sharma, Adv.
                              Mr. Asheesh Jain, CGSC with Mr. Adarsh Kr. Gupta, Advocates.

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                               Mr. Saroj Bidawat, Sr. Panel counsel
                              Ms. Archana Gaur, Adv.
                              Mr. Ayush Agrawal, Senior Panel Counsel (UOI), Vikrant Singh Bloria,
                              Adv.
                              Mr. P. S. Singh, Advocate
                              Mr. Ashish Verma and Mr. Debopriyo Moulik, Advs.
                              Ms. Sonu Bhatnagar, Sr. SC with Ms. Venus Mehrotra, Ms. Kanak Grover,
                              Advs.
                              Mr. Rajesh Gogna, CGSC with Mr. Arihant Jain, Adv.
                              Mr. Kirtiman Singh CGSC with Mr. Taha Yasin, Adv.
                              Ms. Sarika Singh, Adv.
                              Mr. Rahul Sharma, Central Government Counsel Panel and Mr. C.K.Bhatt,
                              Adv.
                              Mr.Virender Pratap Singh Charak with Ms.Shubhra Parashar,
                              Mr. Pushpender Singh Charak, Mr. Kapil Gaur, Mr. Vaishnav Kirti Singh,
                              Mr. Shubham Ahuja, Mr. Sanjay Singh Chauhan, Mr. Ram Pal Singh
                              Tomar, Mr. Gyanwardhan Singh & Mr. Vivek Nagar, Advs. for UOI.
                              Mr.Nirvikar Verma, Adv. for UOI.
                              Mr.Rajesh Kumar, Adv. for UOI.
                              Mr. Manish Mohan, CGSC with Ms. Manisha Saroha, Adv.
                              Mr. Shyam Sundar Rai, Adv.

                                                                         Reserved on:- 30th October, 2021
                              %                                       Date of decision:- 15th December, 2021
                              CORAM:
                              HON'BLE MR. JUSTICE MANMOHAN
                              HON'BLE MR. JUSTICE NAVIN CHAWLA
                                                                       JUDGMENT
                              MANMOHAN, J:
                              1.       Various issues arise for consideration in the present batch of one
                              thousand three hundred and forty six (1346) writ petitions, yet in essence,
                              the questions of law that arise for consideration are whether the
                              Government/Executive can make or change law of the land by way of
                              Explanations to Notifications without specific Authority from the

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14:05:36
                               Legislature to do so and whether the Government/Executive can impede the
                              implementation of law made by the Legislature.
                              2.       It is pertinent to mention that in the present batch of matters, the
                              petitioners-assessees have sought quashing of the re-assessment Notices
                              issued post 31st March, 2021 by the Respondents-Revenue under Section
                              148 of the Income Tax Act, 1961. The petitioners-assessees also seek a
                              declaration declaring Explanations A(a)(ii)/A(b) to the Notification No.20
                              [S.O.1432(E)] dated 31st March, 2021 and Notification No.38 [S.O.1703(E)]
                              dated 27th April, 2021 to the extent that the same extend the applicability of
                              the "provisions of Section 148, Section 149 and Section 151 of the Act, as
                              the case may be, as they stood as on the 31st day of March, 2021, before the
                              commencement of the Finance Act, 2021" to the period beyond 31st March,
                              2021 as ultra vires the parent legislation, viz., The Taxation and Other Laws
                              (Relaxation and Amendment of Certain Provisions) Act, 2020 (hereinafter
                              referred to as 'Relaxation Act, 2020').

                              ADMITTED FACTS

                              3.       The procedure governing initiation of reassessment proceedings prior
                              to coming into force of the Finance Act, 2021 was governed by the
                              following provisions:-
                                       "Income escaping assessment.

                                            147. 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

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14:05:36
                                             section, or recomputed 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):

                                            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:
                                            Provided further that nothing contained in the first
                                            proviso shall apply in a case where any income in
                                            relation to any asset (including financial interest in any
                                            entity) located outside India, chargeable to tax, has
                                            escaped assessment for any assessment year:
                                            Provided also that the Assessing Officer may assess or
                                            reassess such income, other than the income involving
                                            matters which are the subject matters of any appeal,
                                            reference or revision, which is chargeable to tax and has
                                            escaped assessment.

                                            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.
                                            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 :--

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14:05:36
                                                  (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;
                                                 (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;
                                                 (ba) where the assessee has failed to furnish a
                                                 report in respect of any international transaction
                                                 which he was so required under section 92E;
                                                 (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
                                                      (iv) excessive loss or depreciation
                                                      allowance or any other allowance under
                                                      this Act has been computed;
                                                 (ca) where a return of income has not been
                                                 furnished by the assessee or a return of income has
                                                 been furnished by him and on the basis of
                                                 information or document received from the
                                                 prescribed income-tax authority, under sub-section
                                                 (2) of section 133C, it is noticed by the Assessing
                                                 Officer that the income of the assessee exceeds the
                                                 maximum amount not chargeable to tax, or as the
                                                 case may be, the assessee has understated the

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                                                  income or has claimed excessive loss, deduction,
                                                 allowance or relief in the return;
                                                 (d) where a person is found to have any asset
                                                 (including financial interest in any entity) located
                                                 outside India.
                                            Explanation 3.--For the purpose of assessment or
                                            reassessment under this section, the Assessing Officer
                                            may assess or reassess the income in respect of any issue,
                                            which has escaped assessment, and such issue comes to
                                            his notice subsequently in the course of the proceedings
                                            under this section, notwithstanding that the reasons for
                                            such issue have not been included in the reasons
                                            recorded under sub-section (2) of section 148.
                                            Explanation 4.--For the removal of doubts, it is hereby
                                            clarified that the provisions of this section, as amended
                                            by the Finance Act, 2012, shall also be applicable for any
                                            assessment year beginning on or before the 1st day of
                                            April, 2012.
                                     Issue of notice where income has escaped assessment.

                                            148.(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, 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:
                                            Provided that in a case--
                                                 (a) where a return has been furnished during the
                                                 period commencing on the 1st day of October,

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                                                  1991 and ending on the 30th day of September,
                                                 2005 in response to a notice served under this
                                                 section, and
                                                 (b) subsequently a notice has been served under
                                                 sub-section (2) of section 143 after the expiry of
                                                 twelve months specified in the proviso to sub-
                                                 section (2) of section 143, as it stood immediately
                                                 before the amendment of said sub-section by the
                                                 Finance Act, 2002 (20 of 2002) but before the
                                                 expiry of the time limit for making the assessment,
                                                 re-assessment or recomputation as specified in
                                                 sub-section (2) of section 153, every such notice
                                                 referred to in this clause shall be deemed to be a
                                                 valid notice:
                                            Provided further that in a case--
                                                 1991 and ending on the 30th day of September,
                                                 2005, in response to a notice served under this
                                                 clause (ii) of sub-section (2) of section 143 after the
                                                 expiry of twelve months specified in the proviso to
                                                 clause (ii) of sub-section (2) of section 143, but
                                                 before the expiry of the time limit for making the
                                                 assessment, reassessment or recomputation as
                                                 specified in sub-section (2) of section 153, every
                                                 such notice referred to in this clause shall be
                                                 deemed to be a valid notice.
                                            Explanation.--For the removal of doubts, it is hereby
                                            declared that nothing contained in the first proviso or the
                                            second proviso shall apply to any return which has been
                                            furnished on or after the 1st day of October, 2005 in
                                            response to a notice served under this section.
                                            (2) The Assessing Officer shall, before issuing any notice
                                            under this section, record his reasons for doing so.

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                                        Time limit for notice.
                                            149. (1) No notice under section 148 shall be issued for
                                            the relevant assessment year,--
                                               (a) if four years have elapsed from the end of the relevant
                                               assessment year, unless the case falls under clause (b) or
                                               clause (c);
                                               (b) if four years, but not more than six years, have elapsed from
                                               the end of the relevant assessment year unless the income
                                               chargeable to tax which has escaped assessment amounts to or
                                               is likely to amount to one lakh rupees or more for that year;
                                               (c) if four years, but not more than sixteen years, have elapsed
                                               from the end of the relevant assessment year unless the income
                                               in relation to any asset (including financial interest in any
                                               entity) located outside India, chargeable to tax, has escaped
                                               assessment.
                                            Explanation.--In determining income chargeable to tax
                                            which has escaped assessment for the purposes of this
                                            sub-section, the provisions of Explanation 2 of section
                                            147 shall apply as they apply for the purposes of that
                                            section.
                                            (2) The provisions of sub-section (1) as to the issue of
                                            notice shall be subject to the provisions of section 151.
                                            (3) If the person on whom a notice under section 148 is to
                                            be served is a person treated as the agent of a non-
                                            resident under section 163 and the assessment,
                                            reassessment or recomputation to be made in pursuance
                                            of the notice is to be made on him as the agent of such
                                            non-resident, the notice shall not be issued after the
                                            expiry of a period of six years from the end of the relevant
                                            assessment year.
                                            clarified that the provisions of sub-sections (1) and (3), as
                                            amended by the Finance Act, 2012, shall also be
                                            applicable for any assessment year beginning on or
                                            before the 1st day of April, 2012.

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                                        Sanction for issue of notice.
                                            151. (1) No notice shall be issued under section 148 by an
                                            Assessing Officer, after the expiry of a period of four
                                            years from the end of the relevant assessment year, unless
                                            the Principal Chief Commissioner or Chief Commissioner
                                            or Principal Commissioner or Commissioner is satisfied,
                                            on the reasons recorded by the Assessing Officer, that it
                                            is a fit case for the issue of such notice.
                                            (2) In a case other than a case falling under sub-section
                                            (1), no notice shall be issued under section 148 by an
                                            Assessing Officer, who is below the rank of Joint
                                            Commissioner, unless the Joint Commissioner is satisfied,
                                            on the reasons recorded by such Assessing Officer, that it
                                            (3) For the purposes of sub-section (1) and sub-section
                                            (2), the Principal Chief Commissioner or the Chief
                                            Commissioner or the Principal Commissioner or the
                                            Commissioner or the Joint Commissioner, as the case
                                            may be, being satisfied on the reasons recorded by the
                                            Assessing Officer about fitness of a case for the issue of
                                            notice under section 148, need not issue such notice
                                            himself."
                              4.       Due to the onset of Covid-19 pandemic followed by nationwide
                              lockdown in March, 2020, the citizens and authorities inter alia faced
                              difficulties in complying with the statutory time limits. To provide
                              relaxation as well as to avoid any adverse consequence to either party, the
                              Government of India announced various relaxations by way of The Taxation
                              and Other Laws (Relaxation of Certain Provisions) Ordinance, 2020
                              (hereinafter referred to as the 'Relaxation Ordinance, 2020'). The objects
                              and reasons as well as the relevant portion of the Relaxation Ordinance,
                              2020 are reproduced herein below:-

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                                            "THE TAXATION AND OTHER LAWS (RELAXATION OF
                                                      CERTAIN PROVISIONS) ORDINANCE, 2020
                                                          NO. 2 of 2020, DATED 31-3-2020
                                       Promulgated by the President in the Seventy-first Year of the Republic
                                       of India.

                                       An Ordinance to provide relaxation in the provisions of certain Acts
                                       and for matters connected therewith or incidental thereto.

                                       WHEREAS, in view of the spread of pandemic COVID-19 across
                                       many countries of the world including India, causing immense loss to
                                       the lives of people, it has become imperative to relax certain
                                       provisions, including extension of time limit, in the taxation and other
                                       laws;

                                       AND WHEREAS, Parliament is not in session and the President is
                                       satisfied that circumstances exist which render it necessary for him to
                                       take immediate action;

                                       NOW, THEREFORE, in exercise of the powers conferred by clause
                                       (1) of article 123 of the Constitution, the President is pleased to
                                       promulgate the following Ordinance: --

                                                                        CHAPTER I
                                                                      PRELIMINARY
                                       Short title and commencement
                                       1. (1) This Ordinance may be called the Taxation and Other Laws
                                       commencement. (Relaxation of Certain Provisions) Ordinance, 2020.
                                       (2) Save as otherwise provided, it shall come into force at once.

                                       Definitions
                                       2. (1) In this Ordinance, unless the context otherwise requires,--
                                       (a) "specified Act" means--
                                              (i) the Wealth-tax Act, 1957 (27 of 1957);
                                              (ii) the Income-tax Act, 1961 (43 of 1961);
                                              (iii) the Prohibition of Benami Property Transactions Act, 1988
                                              (45 of 1988);
                                              (iv) Chapter VII of the Finance (No. 2) Act, 2004 (22 of 2004);

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                                                 (v) Chapter VII of the Finance Act, 2013 (17 of 2013);
                                                (vi) the Black Money (Undisclosed Foreign Income and Assets)
                                                and Imposition of Tax Act, 2015 (22 of 2015);
                                                (vii) Chapter VIII of the Finance Act, 2016; (28 of 2016) or
                                                (viii) the Direct Tax Vivad se Vishwas Act, 2020 (3 of 2020);

                                       (b) "notification" means the notification published in the Official
                                       Gazette.
                                       (2) The words and expressions used herein and not defined, but
                                       defined in the specified Act, the Central Excise Act, 1944 (1 of 1944),
                                       the Customs Act, 1962 (52 of 1962), the Customs Tariff Act, 1975 (51
                                       of 1975) or the Finance Act, 1994 (32 of 1994), as the case may be,
                                       shall have the meaning respectively assigned to them in that Act.

                                                       CHAPTER II
                                     RELAXATION OF CERTAIN PROVISIONS OF SPECIFIED ACT

                                       Relaxation of certain provision of specified Act
                                       3. (1) Where, anytime limit has been specified in, or prescribed or
                                       notified under, the specified Act which falls during the period from the
                                       20th day of March, 2020 to the 29th day of June, 2020 or such other
                                       date after the 29th day of June, 2020 as the Central Government may,
                                       by notification, specify in this behalf, for the completion or
                                       compliance of such action as--

                                                (a) completion of any proceeding or passing of any order or
                                                issuance of any notice, intimation, notification, sanction or
                                                approval or such other action, by whatever name called, by any
                                                authority, commission or tribunal, by whatever name called,
                                                under the provisions of the specified Act; or
                                                (b) filing of any appeal, reply or application or furnishing of
                                                any report, document, return, statement or such other record,
                                                by whatever name called, under the provisions of the specified
                                                Act; or
                                                (c) in case where the specified Act is the Income-tax Act, 1961
                                                (43 of 1961), --
                                                        (i) making of investment, deposit, payment, acquisition,
                                                        purchase, construction or such other action, by whatever

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                                                          name called, for the purposes of claiming any deduction,
                                                         exemption or allowance under the provisions contained
                                                         in--
                                                              (I) sections 54 to 54GB or under any provisions of
                                                              Chapter VI-A under the heading "B.--Deductions
                                                              in respect of certain payments" thereof; or
                                                              (II) such other provisions of that Act, subject to
                                                              fulfillment of such conditions, as the Central
                                                              Government may, by notification, specify; or

                                                         (ii) beginning of manufacture or production of articles or
                                                         things or providing any services referred to in section
                                                         10AA of that Act, in a case where the letter of approval,
                                                         required to be issued in accordance with the provisions
                                                         of the Special Economic Zones Act, 2005 (28 of 2005),
                                                         has been issued on or before the 31st day of March, 2020
                                                         (28 of 2005),
                                       and where completion or compliance of such action has not been
                                       made within such time, then, the time limit for completion or
                                       compliance of such action shall, notwithstanding anything contained
                                       in the specified Act, stand extended to the 30th day of June, 2020, or
                                       such other date after the 30th day of June, 2020, as the Central
                                       Government may, by notification, specify in this behalf:

                                       Provided that the Central Government may specify different dates for
                                       completion or compliance of different actions.

                                       Provided further that such action shall not include payment of any
                                       amount as is referred to in sub-section (2)."

                              5.       As the pandemic and problems arising therefrom did not show any
                              sign of abatement, the Legislature enacted Relaxation Act, 2020 in
                              September, 2020. By way of Relaxation Act, 2020, various due dates/time
                              limits/limitations prescribed in different Central Acts, including the Income
                              Tax Act, 1961, were relaxed. Additionally, Section 3 of Relaxation Act,
                              2020 enabled the Central Government to issue Notifications for further

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                               relaxing the time limits/limitations prescribed in the 'Specified Acts'. The
                              Statement of Objects and Reasons as well as the relevant portion of the
                              Relaxation Act, 2020 are reproduced herein below:-

                                                "STATEMENT OF OBJECTS AND REASONS
                                       The outbreak of Novel Corona Virus (COVID-19) pandemic across
                                       many countries of the world, including India, has caused immense
                                       loss to lives of people and given rise to unprecedented humanitarian
                                       and economic crisis in the country. Due to vagaries of pandemic, a
                                       national lockdown was imposed which had to be further extended.
                                       Due to very rapid spread of pandemic, social distancing had to be
                                       ensured immediately to prevent society at large from its disastrous
                                       consequences. This necessitated ease of compliance under certain tax
                                       and other laws.

                                       2. As Parliament was not in session and in view of the urgency, the
                                       Taxation and Other Laws (Relaxation of Certain Provisions)
                                       Ordinance, 2020 (Ord. 2 of 2020) was promulgated on the 31st day of
                                       March, 2020 which, inter alia, relaxed certain provisions of the
                                       specified Acts relating to direct taxes, indirect taxes and prohibition
                                       of Benami property transactions. Further, certain notifications were
                                       also issued under the said Ordinance.

                                       3. In view of stakeholders' representations received after enactment of
                                       the Finance Act, 2020, and due to need for further rationalisation of
                                       some provisions of certain Acts, further amendments are considered
                                       necessary to be incorporated in the proposed Bill replacing the
                                       Ordinance.

                                       4. The Taxation and Other Laws (Relaxation and Amendment of
                                       Certain Provisions) Bill, 2020 which seeks to replace the said
                                       Ordinance, inter alia, provides for extension of various time limits for
                                       completion or compliance of actions under the specified Acts and
                                       reduction in interest, waiver of penalty and prosecution for delay in
                                       payment of certain taxes or levies during the specified period.

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                                        5. Further, the Bill proposes amendments to the Income-tax Act, 1961
                                       which, inter alia, include providing of tax incentive for Category-III
                                       Alternative Investment Funds located in the International Financial
                                       Services Centre (IFSC) to encourage relocation of foreign funds to
                                       the IFSC, deferment of new procedure of registration and approval of
                                       certain entities introduced through the Finance Act, 2020, providing
                                       for deduction for donation made to the Prime Minister's Citizen
                                       Assistance and Relief in Emergency Situations Fund (PM CARES
                                       FUND) and exemption to its income, incorporation of Faceless
                                       Assessment Scheme, 2019 therein, empowering the Central
                                       Government to notify schemes for faceless processes under certain
                                       provisions by eliminating physical interface to the extent
                                       technologically feasible and to provide deduction or collection at
                                       source in respect of certain transactions at threefourth's rate for the
                                       period from 14th May, 2020 to 31st March, 2021.

                                       6. The Bill also proposes to amend the Direct Tax Vivad se Viswas
                                       Act, 2020 to extend the date for payment without additional amount to
                                       31st December, 2020 and to empower the Central Government to
                                       notify certain dates relating to filing of declaration and making of
                                       payment.

                                       7. The Finance Act, 2020 is also proposed to be amended to clarify
                                       regarding capping of surcharge at 15 per cent on dividend income of
                                       the Foreign Portfolio Investor.

                                       8. The Bill also proposes to empower the Central Government to
                                       remove any difficulty up to a period of two years and provide for
                                       repeal and savings of the Taxation and Other Laws (Relaxation of
                                       Certain Provisions) Ordinance, 2020.

                                       9. The Bill seeks to achieve the aforesaid objectives.

                                       NEW DELHI;                            NIRMALA SITHARAMAN
                                       The 11th September, 2020.

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                                        THE TAXATION AND OTHER LAWS (RELAXATION AND
                                       AMENDMENT OF CERTAIN PROVISIONS) ACT, 2020
                                                    NO. 38 OF 2020
                                                                       [29th September, 2020.]

                                       AN ACT to provide for relaxation and amendment of provisions of
                                       certain Acts and for matters connected therewith or incidental
                                       thereto.

                                            BE it enacted by Parliament in the Seventy-first Year of the
                                       Republic of India as follows:--

                                                                       CHAPTER I

                                       1. (1) This Act may be called the Taxation and Other Laws
                                       (Relaxation and Amendment of Certain Provisions) Act, 2020.

                                       (2) Save as otherwise provided, it shall be deemed to have come into
                                       force on the 31st day of March, 2020.

                                       2. (1) In this Act, unless the context otherwise requires,--
                                              (a) "notification" means the notification published in the
                                              Official Gazette;
                                              (b) "specified Act" means--
                                                      (i) the Wealth-tax Act, 1957;
                                                      (ii) the Income-tax Act, 1961;
                                                      (iii) the Prohibition of Benami Property Transactions
                                                      Act, 1988;
                                                      (iv) Chapter VII of the Finance (No. 2) Act, 2004;
                                                      (v) Chapter VII of the Finance Act, 2013;
                                                      (vi) the Black Money (Undisclosed Foreign Income and
                                                      Assets) and Imposition of Tax Act, 2015;
                                                      (vii) Chapter VIII of the Finance Act, 2016; or
                                                      (viii) the Direct Tax Vivad se Vishwas Act, 2020.

                                       defined in the specified Act, the Central Excise Act,1944, the Customs

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                                        Act, 1962, the Customs Tariff Act,1975 or the Finance Act,1994, as
                                       the case may be, shall have the same meaning respectively assigned to
                                       them in that Act.

                                                                      CHAPTER II
                                       3. (1) Where, any time-limit has been specified in, or prescribed or
                                       20th day of March, 2020 to the 31st day of December, 2020, or such
                                       other date after the 31st day of December, 2020, as the Central
                                       Government may, by notification, specify in this behalf, for the
                                       completion or compliance of such action as--
                                                approval, or such other action, by whatever name called, by
                                                any authority, commission or tribunal, by whatever name
                                                called, under the provisions of the specified Act; or
                                                any report, document, return or statement or such other record,
                                                Act; or
                                                (c) in case where the specified Act is the Income-tax Act,
                                                1961,--
                                                      (i) making of investment, deposit, payment, acquisition,
                                                      purchase, construction or such other action, by whatever
                                                      name called, for the purposes of claiming any deduction,
                                                      exemption or allowance under the provisions contained
                                                      in--
                                                            (I) sections 54 to 54GB, or under any provisions of
                                                            Chapter VI-A under the heading "B.--Deductions
                                                            in respect of certain payments" thereof; or
                                                            (II) such other provisions of that Act, subject to
                                                            fulfilment of such conditions, as the Central
                                                            Government may, by notification, specify; or

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                                                          (ii) beginning of manufacture or production of articles or
                                                         of the Special Economic Zones Act, 2005, has been
                                                         issued on or before the 31st day of March, 2020,
                                                         and where completion or compliance of such action has
                                                         not been made within such time, then, the time-limit for
                                                         completion or compliance of such action shall,
                                                         notwithstanding anything contained in the specified Act,
                                                         stand extended to the 31st day of March, 2021, or such
                                                         other date after the 31st day of March, 2021, as the
                                                         Central Government may, by notification, specify in this
                                                         behalf:

                                                     Provided that the Central Government may specify
                                                     different dates for completion or compliance of different
                                                     actions:
                                                xxxx          xxxx            xxxx              xxxx
                                       10. (1) If any difficulty arises in giving effect to the provisions of this
                                       Act, the Central Government may, by order, not inconsistent with the
                                       provisions of this Act, remove the difficulty:

                                             Provided that no such order shall be made after the expiry of a
                                       period of two years from the end of the month in which this Act has
                                       received the assent of the President.

                                       (2) Every order made under this section shall be laid before each
                                       House of Parliament.

                                       11. (1) The Taxation and Other Laws (Relaxation of Certain
                                       Provisions) Ordinance, 2020 is hereby repealed.

                                       (2) Notwithstanding such repeal, anything done, any notification
                                       issued or any action taken under the said Ordinance, shall be deemed
                                       to have been done, issued or taken under the corresponding
                                       provisions of this Act."

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                               6.       In pursuance to the power vested under Section 3 of Relaxation Act,
                              2020, the Central Government issued following Notifications inter-alia
                              extending the time lines prescribed under Section 149 for issuance of
                              reassessment notices under Section 148 of the Income Tax Act, 1961:

                                          Date of      Original limitation for Extended
                                          Notification issuance of notice under Limitation
                                                       Section 148 of the Act
                                          31.03.2020 20.03.2020 to 29.06.2020   30.06.2020

                                          24.06.2020           20.03.2020 to 31.12.2020    31.03.2021

                                          31.03.2021           31.03.2021                  30.04.2021
                                          27.04.2021           30.04.2021                  30.06.2021

                              7.       The Explanations to the Notifications dated 31st March, 2021 and 27th
                              April, 2021 issued under Section 3 of Relaxation Act, 2020 also stipulated
                              that the provisions, as existed prior to amendment by Finance Act, 2021,
                              shall apply to the reassessment proceedings initiated thereunder. The
                              Explanations to the Notifications dated 31st March, 2021 and 27th April,
                              2021 are impugned in the present proceedings. The said Notifications are
                              reproduced hereinbelow:-

                                       "A. NOTIFICATION                S.O.1432(E)    [NO.20/2021/F.NO.370142/
                                       35/2020-TPL]
                                       SECTION 3 OF THE TAXATION AND OTHER LAWS
                                       (RELAXATION       AND     AMENDMENT    OF     CERTAIN
                                       PROVISIONS) ACT, 2020, READ WITH SECTIONS 139AA,
                                       144C, 148, 149 AND 151 OF THE INCOME-TAX ACT, 1961 AND
                                       SECTION 168 OF THE FINANCE ACT, 2016 - RELAXATION
                                       OF CERTAIN PROVISIONS OF SPECIFIED ACT -

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                                        EXTENSION OF DUE DATE FOR COMPLETION OF ACTION
                                       UNDER SPECIFIED ACTS
                                       NOTIFICATION S.O.1432(E) [NO.20/2021/F.NO.370142 /35/2020-
                                       TPL], DATED 31-3-2021
                                       In exercise of the powers conferred by sub-section (1) of section 3 of
                                       the Taxation and Other Laws (Relaxation and Amendment of Certain
                                       Provisions) Act, 2020 (38 of 2020) (hereinafter referred to as the said
                                       Act), and in partial modification of the notification of the Government
                                       of India in the Ministry of Finance, (Department of Revenue) No.
                                       93/2020 dated the 31st December, 2020, published in the Gazette of
                                       India, Extraordinary, Part II, Section 3, Sub-section (ii), vide number
                                       S.O. 4805(E), dated the 31st December, 2020, the Central Government
                                       hereby specifies that,--

                                       (A) where the specified Act is the Income-tax Act, 1961 (43 of 1961)
                                       (hereinafter referred to as the Income-tax Act) and, --
                                             (a) the completion of any action referred to in clause (a) of sub-
                                             section (1) of section 3 of the Act relates to passing of an order
                                             under sub-section (13) of section 144C or issuance of notice
                                             under section 148 as per time-limit specified in section 149 or
                                             sanction under section 151 of the Income-tax Act, --
                                                    (i) the 31st day of March, 2021 shall be the end date of
                                                    the period during which the time-limit, specified in, or
                                                    prescribed or notified under, the Income-tax Act falls for
                                                    the completion of such action; and
                                                    (ii) the 30th day of April, 2021 shall be the end date to
                                                    which the time-limit for the completion of such action
                                                    shall stand extended.

                                                  Explanation.-- For the removal of doubts, it is hereby
                                                  clarified that for the purposes of issuance of notice under
                                                  section 148 as per time-limit specified in section 149 or
                                                  sanction under section 151 of the Income-tax Act, under this
                                                  sub-clause, the provisions of section 148, section 149 and
                                                  section 151 of the Income-tax Act, as the case may be, as they
                                                  stood as on the 31st day of March 2021, before the
                                                  commencement of the Finance Act, 2021, shall apply.

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                                                 (b) the compliance of any action referred to in clause (b) of
                                                sub-section (1) of section 3 of the said Act relates to intimation
                                                of Aadhaar number to the prescribed authority under sub-
                                                section (2) of section 139AA of the Income-tax Act, the time-
                                                limit for compliance of such action shall stand extended to the
                                                30th day of June, 2021.
                                      (B) where the specified Act is the Chapter VIII of the Finance Act,
                                      2016 (28 of 2016) (hereinafter referred to as the Finance Act) and the
                                      completion of any action referred to in clause (a) of sub-section (1) of
                                      section 3 of the said Act relates to sending an intimation under sub-
                                      section (1) of section 168 of the Finance Act, --

                                                (i) the 31st day of March, 2021 shall be the end date of the
                                                period during which the time-limit, specified in, or prescribed
                                                or notified under, the Finance Act falls for the completion of
                                                such action; and
                                                (ii) the 30th day of April, 2021 shall be the end date to which the
                                                time-limit for the completion of such action shall stand
                                                extended.

                                       B. NOTIFICATION S.O.1703(E)[NO.38/2021/F.NO. 370142/ 35
                                       /2020-TPL]

                                       (RELAXATION   AND    AMENDMENT    OF   CERTAIN
                                       PROVISIONS) ACT, 2020 - RELAXATION OF CERTAIN
                                       PROVISIONS OF SPECIFIED ACT - EXTENSION OF DUE
                                       DATE FOR COMPLETION OF ACTION UNDER SPECIFIED
                                       ACTS

                                       NOTIFICATION S.O. 1703 (E) [NO. 38 /2021/ F. NO. 370142/
                                       35/2020-TPL], DATED 27-4-2021
                                       Act), and in partial modification of the notifications of the
                                       Government of India in the Ministry of Finance, (Department of
                                       Revenue) No. 93/2020 dated the 31st December, 2020, No. 10/2021

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                                        dated the 27th February, 2021 and No. 20/2021 dated the 31st March,
                                       2021, published in the Gazette of India, Extraordinary, Part-II,
                                       Section 3, Subsection (ii), vide number S.O. 4805(E), dated the 31st
                                       December, 2020, vide number S.O. 966(E) dated the 27th February,
                                       2021 and vide number S.O. 1432(E) dated the 31st March, 2021,
                                       respectively (hereinafter referred to as the said notifications), the
                                       Central Government hereby specifies for the purpose of sub-section
                                       (1) of section 3 of the said Act that, --

                                                (a) the completion of any action, referred to in clause (a) of
                                                sub-section (1) of section 3 of the said Act, relates to passing of
                                                any order for assessment or reassessment under the Income-tax
                                                Act, and the time limit for completion of such action under
                                                section 153 or section 153B thereof, expires on the 30th day of
                                                April, 2021 due to its extension by the said notifications, such
                                                time limit shall further stand extended to the 30th day of June,
                                                2021;

                                                (b) the completion of any action, referred to in clause (a) of
                                                an order under sub-section (13) of section 144C of the Income-
                                                tax Act or issuance of notice under section 148 as per time-limit
                                                specified in section 149 or sanction under section 151 of the
                                                Income-tax Act, and the time limit for completion of such action
                                                expires on the 30th day of April, 2021 due to its extension by the
                                                said notifications, such time limit shall further stand extended
                                                to the 30th day of June, 2021.

                                                Explanation.-- For the removal of doubts, it is hereby clarified
                                                that for the purposes of issuance of notice under section 148 as
                                                per time-limit specified in section 149 or sanction under section
                                                151 of the Income-tax Act, under this sub-clause, the provisions
                                                of section 148, section 149 and section 151 of the Income-tax
                                                Act, as the case may be, as they stood as on the 31st day of
                                                March 2021, before the commencement of the Finance Act,
                                                2021, shall apply.

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                                       (B) where the specified Act is the Chapter VIII of the Finance Act,
                                      completion of any action, referred to in clause (a) of sub-section (1) of
                                      section 3 of the said Act, relates to sending an intimation under sub-
                                      section (1) of section 168 of the Finance Act, and the time limit for
                                      completion of such action expires on the 30th day of April, 2021 due to
                                      its extension by the said notifications, such time limit shall further
                                      stand extended to the 30th day of June, 2021."
                                                                                          (emphasis supplied)

                              8.       Parliament introduced reformative changes to Sections 147 to 151 of
                              the Income Tax Act, 1961 governing reassessment proceedings by way of
                              the Finance Act, 2021, which was passed on 28th March, 2021. The relevant
                              portions of the Budget Speech 2021-2022 of the Minister of Finance, Union
                              of India as well as Memorandum explaining the provisions in the Finance
                              Bill, 2021, the Notes on clauses to the Finance Bill, 2021 and the Finance
                              Act, 2021 are reproduced hereinbelow:-

                                      "A. BUDGET SPEECH 2021-2022 OF THE MINISTER OF
                                      FINANCE

                                      Direct Tax Proposals
                                      149. Keeping this in mind, our Government introduced a series of
                                      reforms in the Direct tax system for the benefit of our taxpayers and
                                      economy. Few months prior to the pandemic, in order to attract
                                      investments we slashed our Corporate tax rate to make it among the
                                      lowest in the world. The Dividend Distribution Tax too was abolished.
                                      The burden of taxation on small taxpayers was eased by increasing
                                      rebates. In 2020, the return filers saw a dramatic increase to 6.48
                                      crore from 3.31 crore in 2014.

                                      150. In the Direct Tax administration, we had recently introduced the
                                      Faceless Assessment and Faceless Appeal. I now seek to take further
                                      steps to simplify the tax administration, ease compliance, and reduce
                                      litigation.

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                                                                            "Annex to Part B of Budget Speech

                                                                      Direct Tax Proposals

                                          Sl.No. Proposals                 Proposed Amendments in brief

                                          1.                 xxx                      xxx
                                          2.         Reduction in Time In order to reduce compliance
                                                     Limits            burden, the time-limit for re-
                                                                       opening of assessment is being
                                                                       reduced to 3 years from the
                                                                       current 6 years from the end of
                                                                       the relevant assessment year. Re-
                                                                       opening up to 10 years is
                                                                       proposed to be allowed only if
                                                                       there is evidence of undisclosed
                                                                       income of ₹50 lakh or more for a
                                                                       year. Further, it is proposed to
                                                                       completely remove discretion in
                                                                       re-opening and henceforth re-
                                                                       opening shall be made only in
                                                                       cases flagged by system on the
                                                                       basis of data analytics, objection
                                                                       of C&AG and in search/survey
                                                                       cases.
                                                                           Further, in order to bring
                                                                           certainty      in  income     tax
                                                                           proceedings at the earliest, it is
                                                                           also proposed to reduce the time
                                                                           limits for general assessment or
                                                                           processing of income tax return
                                                                           by three months and also for
                                                                           filing of returns.

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                                        B. MEMORANDUM EXPLAINING THE PROVISIONS IN THE
                                       FINANCE BILL, 2021
                              \

                                      Income escaping assessment and search assessments
                                      Under the Act, the provisions related to income escaping assessment
                                      provide that if the Assessing Officer has reason to believe that any
                                      income chargeable to tax has escaped assessment for any assessment
                                      year, he may assess or reassess or recompute the total income for
                                      such year under section 147 of the Act by issuing a notice under
                                      section 148 of the Act. However, such reopening is subject to the time
                                      limits prescribed in section 149 of the Act.

                                      In cases where search is initiated u/s 132 of the Act or books of
                                      account, other documents or any assets are requisitioned under
                                      section 132A of the Act, assessment is made in the case of the
                                      assessee, or any other person, in accordance with the special
                                      provisions of sections 153A, 153B, 153C and 153D, of the Act that
                                      deal specifically with such cases. These provisions were introduced by
                                      the Finance Act, 2003 to replace the block assessment under Chapter
                                      XIV-B of the Act. This was done due to failure of block assessment in
                                      its objective of early resolution of search assessments. Also, the
                                      procedural issues related to block assessment were proving to be
                                      highly litigation-prone. However, the experience with this procedure
                                      has been no different. Like the provisions for block assessment, these
                                      provisions have also resulted in a number of litigations.

                                      Due to advancement of technology, the department is now collecting
                                      all relevant information related to transactions of taxpayers from
                                      third parties under section 285BA of the Act (statement of financial
                                      transaction or reportable account). Similarly, information is also
                                      received from other law enforcement agencies. This information is
                                      also shared with the taxpayer through Annual Information Statement
                                      under section 285BB of the Act. Department uses this information to
                                      verify the information declared by a taxpayer in the return and to
                                      detect non-filers or or those who have not disclosed the correct
                                      amount of total income. Therefore, assessment or reassessment or re-
                                      computation of income escaping assessment, to a large extent, is
                                      information-driven.

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                                       In view of above, there is a need to completely reform the system of
                                      assessment or reassessment or re-computation of income escaping
                                      assessment and the assessment of search related cases.

                                      The Bill proposes a completely new procedure of assessment of such
                                      cases. It is expected that the new system would result in less litigation
                                      and would provide ease of doing business to taxpayers as there is a
                                      reduction in time limit by which a notice for assessment or
                                      reassessment or re-computation can be issued. The salient features of
                                      new procedure are as under:-
                                              (i) The provisions of section 153A and section 153C, of the Act
                                             are proposed to be made applicable to only search initiated
                                             under section 132 of the Act or books of accounts, other
                                             documents or any assets requisitioned under section 132A of
                                             the Act, on or before 31st March 2021.
                                             (ii) Assessments or reassessments or in re-computation in cases
                                             where search is initiated under section 132 or requisition is
                                             made under 132A, after 31st March 2021, shall be under the
                                             new procedure.
                                             (iii) Section 147 proposes to allow the Assessing Officer to
                                             assess or reassess or re-compute any income escaping
                                             assessment for any assessment year (called relevant assessment
                                             year).
                                             (iii) Before such assessment or reassessment or re-
                                             computation, a notice is required to be issued under section
                                             148 of the Act, which can be issued only when there is
                                             information with the Assessing officer which suggests that the
                                             income chargeable to tax has escaped assessment in the case of
                                             the assessee for the relevant assessment year. Prior approval of
                                             specified authority is also required to be obtained before
                                             issuance of such notice by the Assessing Officer.
                                             (iv) It is proposed to provide that any information which has
                                             been flagged in the case of the assessee for the relevant
                                             assessment year in accordance with the risk management
                                             strategy formulated by the Board shall be considered as
                                             information which suggests that the income chargeable to tax
                                             has escaped assessment. The flagging would largely be done by
                                             the computer based system.

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                                                 (v) Further, a final objection raised by the Comptroller and
                                                Auditor General of India to the effect that the assessment in the
                                                case of the assessee for the relevant assessment year has not
                                                been in accordance with the provisions of the Act shall also be
                                                considered as information which suggests that the income
                                                chargeable to tax has escaped assessment.
                                                (vi) Further, in search, survey or requisition cases initiated or
                                                made or conducted, on or after 1st April, 2021, it shall be
                                                deemed that the Assessing officer has information which
                                                suggests that the income chargeable to tax has escaped
                                                assessment in the case of the assessee for the three assessment
                                                years immediately preceding the assessment year relevant to
                                                the previous year in which the search is initiated or requisition
                                                is made or any material is seized or requisitioned or survey is
                                                conducted.
                                                (vii) New Section 148A of the Act proposes that before issuance
                                                of notice the Assessing Officer shall conduct enquiries, if
                                                required, and provide an opportunity of being heard to the
                                                assessee. After considering his reply, the Assessing Office shall
                                                decide, by passing an order, whether it is a fit case for issue of
                                                notice under section 148 and serve a copy of such order along
                                                with such notice on the assessee. The Assessing Officer shall
                                                before conducting any such enquiries or providing opportunity
                                                to the assessee or passing such order obtain the approval of
                                                specified authority. However, this procedure of enquiry,
                                                providing opportunity and passing order, before issuing notice
                                                under section 148 of the Act, shall not be applicable in search
                                                or requisition cases.
                                                (viii) The time limitation for issuance of notice under section
                                                148 of the Act is proposed to be provided in section 149 of the
                                                Act and is as below:
                                                     in normal cases, no notice shall be issued if three years
                                                       have elapsed from the end of the relevant assessment
                                                       year. Notice beyond the period of three years from the
                                                       end of the relevant assessment year can be taken only in
                                                       a few specific cases.
                                                     in specific cases where the Assessing Officer has in his
                                                       possession evidence which reveal that the income

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                                                       escaping assessment, represented in the form of asset,
                                                      amounts to or is likely to amount to fifty lakh rupees or
                                                      more, notice can be issued beyond the period of three
                                                      year but not beyond the period of ten years from the end
                                                      of the relevant assessment year;
                                                     Another restriction has been provided that the notice
                                                      under section 148 of the Act cannot be issued at any time
                                                      in a case for the relevant assessment year beginning on
                                                      or before 1st day of April, 2021, if such notice could not
                                                      have been issued at that time on account of being beyond
                                                      the time limit prescribed under the provisions of clause
                                                      (b), as they stood immediately before the proposed
                                                      amendment.
                                                     Since the assessment or reassessment or re-computation
                                                      in search or requisition cases (where such search or
                                                      requisition is initiated or made on or before 31st March
                                                      2021) are to be carried out as per the provision of
                                                      section 153A, 153B, 153C and 153D of the Act, the
                                                      aforesaid time limitation shall not apply to such cases.
                                                     It is also proposed that for the purposes of computing the
                                                      period of limitation for issue of section 148 notice, the
                                                      time or extended time allowed to the assessee in
                                                      providing opportunity of being heard or period during
                                                      which such proceedings before issuance of notice under
                                                      section 148 are stayed by an order or injunction of any
                                                      court, shall be excluded. If after excluding such period,
                                                      time available to the Assessing Officer for passing order,
                                                      about fitness of a case for issue of 148 notice, is less than
                                                      seven days, the remaining time shall be extended to seven
                                                      days.

                                                (ix) The specified authority for approving enquiries, providing
                                                opportunity, passing order under section 148A of the Act and
                                                for issuance of notice under section 148 of the Act are proposed
                                                to be--
                                                       (a) Principal Commissioner or Principal Director or
                                                           Commissioner or Director, if three years or less than

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                                                              three years have elapsed from the end of the relevant
                                                             assessment year;
                                                         (b) Principal Chief Commissioner or Principal Director
                                                             General or where there is no Principal Chief
                                                             Commissioner or Principal Director General, Chief
                                                             Commissioner or Director General, if more than
                                                             three years have elapsed from the end of the relevant
                                                             assessment year.

                                                (x) Once assessment or reassessment or re-computation has
                                                started the Assessing officer is proposed to be empowered (as
                                                at present) to assess or reassess the income in respect of any
                                                issue which has escaped assessment and which comes to his
                                                notice subsequently in the course of the proceeding under this
                                                procedure notwithstanding that the procedure prescribed in
                                                section 148A was not followed before issuing such notice for
                                                such income.
                                      These amendments will take effect from 1st April, 2021.
                                       xxxx                xxxx            xxxx                xxxx

                                       C. NOTES ON CLAUSES TO THE FINANCE BILL, 2021

                                      ......
                                             Clause 35 of the Bill seeks to amend section 147 of the Income-
                                       tax Act relating to income escaping assessment.
                                             It is proposed to substitute the said section so as to provide that
                                       if any income chargeable to tax, in the case of an assessee, has
                                       escaped assessment for any assessment year, the Assessing officer
                                       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 such assessment year.
                                                This amendment will take effect from 1st April, 2021.

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                                              Clause 36 of the Bill seeks to amend section 148 of the Income-
                                       tax Act relating to issue of notice where income has escaped
                                       assessment.
                                               It is proposed to substitute the said section so as to provide that
                                       before making the assessment, reassessment or recomputation under
                                       section 147, and subject to the provisions of section 148A, the
                                       Assessing Officer shall serve on the assessee a notice along with a
                                       copy of order passed under clause (d) of section 148A, requiring him
                                       to furnish within such period, as may be specified in such 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, provided that no notice
                                       under the said section shall be issued unless there is information with
                                       the Assessing Officer which suggests that the income chargeable to
                                       tax has escaped assessment in the case of the assessee for the relevant
                                       assessment year and prior approval of the specified authority to issue
                                       such notice has been obtained by the Assessing Officer. The proposed
                                       Explanation 1 to the said section provides for the purposes of the said
                                       section and section 148A, that information which suggests that the
                                       income chargeable to tax has escaped assessment means any
                                       information flagged in the case of the assessee for the relevant
                                       assessment year in accordance with the risk management strategy
                                       formulated by the Board from time to time or any final objection
                                       raised by the Comptroller and Auditor General of India to the effect
                                       that the assessment in the case of the assessee for the relevant
                                       assessment year has not been made in accordance with the provisions
                                       of this Act. The proposed Explanation 2 provides that where (i) a
                                       search is initiated under section 132 or books of account, other
                                       documents or any assets are requisitioned under section 132A, on or
                                       after the 1st day of April, 2021, in the case of the assessee; or (ii)
                                       survey is conducted under section 133A in the case of the assessee; or
                                       (iii) the Assessing Officer is satisfied, with the prior approval of
                                       Principal Commissioner or Commissioner, that any money, bullion,
                                       jewellery or other valuable article or thing, seized or requisitioned in

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                                        case of any other person on or after the 1st day of April, 2021,
                                       belongs to the assessee; or (iv) the Assessing officer is satisfied, with
                                       the prior approval of Principal Commissioner or Commissioner, that
                                       any books of account or documents, seized or requisitioned in case of
                                       any other person on or after the 1st day of April, 2021, pertains or
                                       pertain to, or any information contained therein, relate to, the
                                       assessee, the Assessing officer shall be deemed to have information
                                       which suggests that the income chargeable to tax has escaped
                                       assessment in the case of the assessee for the three assessment years
                                       immediately preceding the assessment year relevant to the previous
                                       year in which the search is initiated or books of account, other
                                       documents or any assets are requisitioned or survey is conducted or
                                       money, bullion, jewellery or other valuable article or thing or books
                                       of account or documents are seized or requisitioned in case of any
                                       other person. The proposed Explanation 3 provides that the
                                       "specified authority" shall mean the specified authority referred to in
                                       section 151.
                                             Clause 37 of the Bill seeks to insert a new section 148A in the
                                       Income-tax Act relating to Conducting inquiry, providing opportunity
                                       before issue of notice under section 148.
                                              It is proposed to insert a new section 148A, which seeks to
                                       provide that the Assessing Officer shall, before issuing any notice
                                       under section 148, - (a) conduct any enquiry, if required, with the
                                       prior approval of specified authority, with respect to the information
                                       which suggests that income chargeable to tax has escaped
                                       assessment; (b) provide an opportunity of being heard to the assessee,
                                       with the prior approval of specified authority, by serving upon him a
                                       notice to show cause within such time, as may be specified in the
                                       notice, being not less than seven days but not exceeding thirty days
                                       from the date on which such notice is issued, or such time, as may be
                                       extended by him on the basis of an application in this behalf, as to
                                       why a notice under section 148 should not be issued on the basis of
                                       information which suggests that income chargeable to tax has
                                       escaped assessment in his case for the relevant assessment year and
                                       results of enquiry conducted, if any, as per clause (a); (c) consider the
                                       reply of assessee furnished, if any, in response to the show-cause

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                                        notice referred to in clause (b); and (d) decide, on the basis of
                                       material available on record including reply of the assessee, whether
                                       or not it is a fit case to issue a notice under section 148, by passing an
                                       order, with the prior approval of specified authority, within one
                                       month from the end of the month in which the reply referred to in
                                       clause (c) is received by him, or where no such reply is furnished,
                                       within one month from the end of the month in which time or extended
                                       time allowed to furnish a reply as per clause (b) expires, provided
                                       that the provisions of this sub-section shall not apply in a case, where
                                       a search is initiated under section 132 or books of account, other
                                       documents or any assets are requisitioned under section 132A in the
                                       case of the assessee on or after the 1st day of April, 2021 or the
                                       Assessing officer is satisfied, with the prior approval of the Principal
                                       Commissioner or Commissioner that any money, bullion, jewellery or
                                       other valuable article or thing, seized in a search under section 132
                                       or requisitioned under section 132A, in the case of any other person
                                       on or after the 1st day of April, 2021, belongs to the assessee; or the
                                       Commissioner or Commissioner that any books of account or
                                       documents, seized in a search under section 132 or requisitioned
                                       under section 132A, in case of any other person on or after the 1st day
                                       of April, 2021, pertains or pertain to, or any information contained
                                       therein, relates to, the assessee. Explanation 3 to the said section
                                       provides that "Specified authority" shall mean specified authority
                                       referred to in section 151.

                                               This amendment will take effect from 1st April, 2021.
                                              Clause 38 of the Bill seeks to amend section 149 of the Income-
                                       tax Act relating to time limit for notice.
                                              It is proposed to substitute the said section so as to provide that
                                       no notice under section 148 shall be issued for the relevant
                                       assessment year - (a) if three years have elapsed from the end of the
                                       relevant assessment year, unless the case falls under clause (b); (b) if
                                       three years, but not more than ten years, have elapsed from the end of
                                       the relevant assessment year unless the Assessing Officer has in his
                                       possession books of accounts or other documents or evidence which
                                       reveal that the income chargeable to tax, represented in the form of
                                       asset, which has escaped assessment amounts to or is likely to amount

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                                        to fifty lakh rupees or more for that year. Provided that no notice
                                       under section 148 shall be issued at any time in a case for the relevant
                                       assessment year beginning on or before 1st day of April, 2021, if such
                                       notice could not have been issued at that time on account of being
                                       beyond the time limit prescribed under the provisions of clause (b), as
                                       they stood immediately before the commencement of the Finance Act,
                                       2021. Further, the provisions of this section shall not apply to cases
                                       where a notice under section 153A or section 153C read with section
                                       153A is required to be issued in relation to a search initiated under
                                       section 132 or books of account, other documents or any assets
                                       requisitioned under section 132A on or before the 31st day of March,
                                       2021 and for the purposes of computing the period of limitation as per
                                       this section, the time or extended time allowed to the assessee, as per
                                       show-cause notice under clause (b) of section 148A; or the period
                                       during which the proceeding under section 148A is stayed by an order
                                       or injunction of any court shall be excluded and also where
                                       immediately after the exclusion of such period, the period of
                                       limitation available to the Assessing Officer for passing an order
                                       under clause (d) of section 148A is less than seven days, such
                                       remaining period shall be extended to seven days and the period of
                                       limitation in sub-section (1) shall be deemed to be extended
                                       accordingly.
                                             Clause 39 of the Bill seeks to substitute of a new section for
                                       section 151 relating to sanction for issue of notice.
                                       for the purpose of section 148, specified authority shall be (i)
                                       Principal Commissioner of Income-tax or Principal Director of
                                       Income-tax or Commissioner of Income-tax or Director of Income-
                                       tax, if three years or less than three years have elapsed from the end
                                       of the relevant assessment year; (ii) Principal Chief Commissioner of
                                       Income-tax or Principal Director General of Income-tax, or where
                                       there is no Principal Chief Commissioner of Income-tax or Principal
                                       Director General of Income-tax, Chief Commissioner of Income-tax
                                       or Director General of Income-tax, if more than three years have
                                       elapsed from the end of the relevant assessment year.
                                               This amendment will take effect from 1st April, 2021...

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                                        D. RELEVANT EXTRACT OF THE FINANCE ACT, 2021

                                                     MINISTRY OF LAW AND JUSTICE
                                                       (Legislative Department)
                                                New Delhi, the 28th March, 2021/Chaitra 7, 1943 (Saka)

                                            The following Act of Parliament received the assent of the
                                      President on the 28th March, 2021, and is hereby published for
                                      general information:--
                                                         THE FINANCE ACT, 2021
                                                                NO. 13 OF 2021
                                      An Act to give effect to the financial proposals of the Central
                                      Government for the financial year 2021-2022.
                                            BE it enacted by Parliament in the Seventy-second Year of the
                                      Republic of India as follows:--
                                                                   CHAPTER I
                                                                             PRELIMINARY
                                      1. (1) This Act may be called the Finance Act, 2021.

                                         (2) Save as otherwise provided in this Act,--
                                              (a) sections 2 to 88 shall come into force on the 1st day of
                                              April, 2021;
                                              (b) sections 108 to 123 shall come into force on such date as
                                              the Central Government may, by notification in the Official
                                              Gazette, appoint.
                                               xxxx                   xxxx          xxxx           xxxx
                                      40. For section 147 of the Income-tax Act, the following section shall
                                      be substituted, namely:--

                                                "147. If any income chargeable to tax, in the case of an
                                                assessee, has escaped assessment for any assessment year, the
                                                Assessing Officer may, subject to the provisions of sections 148
                                                to 153, assess or reassess such income or recompute the loss or
                                                the depreciation allowance or any other allowance or
                                                deduction for such assessment year (hereafter in this section

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                                                 and in sections 148 to 153 referred to as the relevant
                                                assessment year).

                                                Explanation.--For the purposes of assessment or reassessment
                                                or recomputation under this section, the Assessing Officer may
                                                assess or reassess the income in respect of any issue, which has
                                                escaped assessment, and such issue comes to his notice
                                                subsequently in the course of the proceedings under this
                                                section, irrespective of the fact that the provisions of section
                                                148A have not been complied with.".

                                      41. For section 148 of the Income-tax Act, the following section shall
                                                "148. Before making the assessment, reassessment or
                                                recomputation under section 147, and subject to the provisions
                                                of section 148A, the Assessing Officer shall serve on the
                                                assessee a notice, along with a copy of the order passed, if
                                                required, under clause (d) of section 148A, requiring him to
                                                furnish within such period, as may be specified in such 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:
                                                      Provided that no notice under this section shall be issued
                                                unless there is information with the Assessing Officer which
                                                assessment in the case of the assessee for the relevant
                                                assessment year and the Assessing Officer has obtained prior
                                                approval of the specified authority to issue such notice.
                                                      Explanation 1.--For the purposes of this section and
                                                section 148A, the information with the Assessing Officer which
                                                assessment means,--

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                                                        (i) any information flagged in the case of the assessee for
                                                 the relevant assessment year in accordance with the risk
                                                 management strategy formulated by the Board from time to
                                                 time;
                                                       (ii) any final objection raised by the Comptroller and
                                                 Auditor-General of India to the effect that the assessment in
                                                 the case of the assessee for the relevant assessment year has
                                                 not been made in accordance with the provisions of this Act.
                                                      Explanation 2.--For the purposes of this section,
                                                where,--
                                                      (i) a search is initiated under section 132 or books of
                                                   account, other documents or any assets are requisitioned
                                                   under section 132A, on or after the 1st day of April, 2021,
                                                   in the case of the assessee; or
                                                      (ii) a survey is conducted under section 133A, other than
                                                   under sub-section (2A) or sub-section (5) of that section, on
                                                   or after the 1st day of April, 2021, in the case of the
                                                   assessee; or
                                                      (iii) the Assessing Officer is satisfied, with the prior
                                                   approval of the Principal Commissioner or Commissioner,
                                                   that any money, bullion, jewellery or other valuable article
                                                   or thing, seized or requisitioned under section 132 or under
                                                   section 132A in case of any other person on or after the 1st
                                                   day of April, 2021, belongs to the assessee; or
                                                      (iv) the Assessing Officer is satisfied, with the prior
                                                   approval of Principal Commissioner or Commissioner, that
                                                   any books of account or documents, seized or requisitioned
                                                   under section 132 or section 132A in case of any other
                                                   person on or after the 1st day of April, 2021, pertains or
                                                   pertain to, or any information contained therein, relate to,
                                                   the assessee,
                                                the Assessing Officer shall be deemed to have information
                                                which suggests that the income chargeable to tax has escaped
                                                the previous year in which the search is initiated or books of
                                                account, other documents or any assets are requisitioned or

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                                                 survey is conducted in the case of the assessee or money,
                                                bullion, jewellery or other valuable article or thing or books of
                                                account or documents are seized or requisitioned in case of any
                                                other person.
                                                       Explanation 3.--For the purposes of this section,
                                                specified authority means the specified authority referred to in
                                                section 151."
                                      42. After section 148 of the Income-tax Act, the following section shall
                                      be inserted, namely:--

                                                "148A. The Assessing Officer shall, before issuing any notice
                                                under section 148,--
                                                     (a) conduct any enquiry, if required, with the prior
                                                     approval of specified authority, with respect to the
                                                     information which suggests that the income chargeable to
                                                     tax has escaped assessment;
                                                     (b) provide an opportunity of being heard to the assessee,
                                                     with the prior approval of specified authority, by serving
                                                     upon him a notice to show cause within such time, as may
                                                     be specified in the notice, being not less than seven days
                                                     and but not exceeding thirty days from the date on which
                                                     such notice is issued, or such time, as may be extended by
                                                     him on the basis of an application in this behalf, as to why a
                                                     notice under section 148 should not be issued on the basis
                                                     of information which suggests that income chargeable to tax
                                                     has escaped assessment in his case for the relevant
                                                     assessment year and results of enquiry conducted, if any, as
                                                     per clause (a);
                                                     (c) consider the reply of assessee furnished, if any, in
                                                     response to the show-cause notice referred to in clause (b);
                                                     (d) decide, on the basis of material available on record
                                                     including reply of the assessee, whether or not it is a fit case
                                                     to issue a notice under section 148, by passing an order,
                                                     with the prior approval of specified authority, within one
                                                     month from the end of the month in which the reply referred
                                                     to in clause (c) is received by him, or where no such reply is
                                                     furnished, within one month from the end of the month in

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                                                      which time or extended time allowed to furnish a reply as
                                                     per clause (b) expires:
                                                        Provided that the provisions of this section shall not
                                                     apply in a case where,--
                                                      (a) a search is initiated under section 132 or books of
                                                      account, other documents or any assets are requisitioned
                                                      under section 132A in the case of the assessee on or after
                                                      the 1st day of April, 2021; or
                                                      (b) the Assessing Officer is satisfied, with the prior
                                                      approval of the Principal Commissioner or Commissioner
                                                      that any money, bullion, jewellery or other valuable article
                                                      or thing, seized in a search under section 132 or
                                                      requisitioned under section 132A, in the case of any other
                                                      person on or after the 1st day of April, 2021, belongs to
                                                      the assessee; or
                                                      (c) the Assessing Officer is satisfied, with the prior
                                                      that any books of account or documents, seized in a search
                                                      under section 132 or requisitioned under section 132A, in
                                                      case of any other person on or after the 1st day of April,
                                                      2021, pertains or pertain to, or any information contained
                                                      therein, relate to, the assessee.

                                                      Explanation.--For the purposes of this section, specified
                                                authority means the specified authority referred to in section
                                                151."
                                      43. For section 149 of the Income-tax Act, the following section shall
                                                '149. (1) No notice under section 148 shall be issued for the
                                                relevant assessment year,--
                                                    (a) if three years have elapsed from the end of the relevant
                                                    assessment year, unless the case falls under clause (b);
                                                    (b) if three years, but not more than ten years, have elapsed
                                                    from the end of the relevant assessment year unless the
                                                    Assessing Officer has in his possession books of account or
                                                    other documents or evidence which reveal that the income
                                                    chargeable to tax, represented in the form of asset, which

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                                                      has escaped assessment amounts to or is likely to amount to
                                                     fifty lakh rupees or more for that year:
                                                         Provided that no notice under section 148 shall be issued
                                                     at any time in a case for the relevant assessment year
                                                     beginning on or before 1st day of April, 2021, if such notice
                                                     could not have been issued at that time on account of being
                                                     beyond the time limit specified under the provisions of
                                                     clause (b) of sub-section (1) of this section, as they stood
                                                     immediately before the commencement of the Finance Act,
                                                     2021:

                                                        Provided further that the provisions of this sub-section
                                                     shall not apply in a case, where a notice under section
                                                     153A, or section 153C read with section 153A, is required
                                                     to be issued in relation to a search initiated under section
                                                     132 or books of account, other documents or any assets
                                                     requisitioned under section 132A, on or before the 31st day
                                                     of March, 2021:
                                                        Provided also that for the purposes of computing the
                                                     period of limitation as per this section, the time or extended
                                                     time allowed to the assessee, as per show-cause notice
                                                     issued under clause (b) of section 148A or the period during
                                                     which the proceeding under section 148A is stayed by an
                                                     order or injunction of any court, shall be excluded:
                                                        Provided also that where immediately after the exclusion
                                                     of the period referred to in the immediately preceding
                                                     proviso, the period of limitation available to the Assessing
                                                     Officer for passing an order under clause (d) of section
                                                     148A is less than seven days, such remaining period shall
                                                     be extended to seven days and the period of limitation under
                                                     this sub-section shall be deemed to be extended
                                                     accordingly.
                                                    Explanation.--For the purposes of clause (b) of this sub-
                                                section, "asset" shall include immovable property, being land
                                                or building or both, shares and securities, loans and advances,
                                                deposits in bank account.

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                                                 (2) The provisions of sub-section (1) as to the issue of notice
                                                shall be subject to the provisions of section 151.'
                                      44. For section 151 of the Income-tax Act, the following section shall

                                                "151. Specified authority for the purposes of section 148 and
                                                section 148A shall be,--
                                                    (i) Principal Commissioner or Principal Director or
                                                    Commissioner or Director, if three years or less than three
                                                    years have elapsed from the end of the relevant assessment
                                                    year;
                                                    (ii) Principal Chief Commissioner or Principal Director
                                                    General or where there is no Principal Chief Commissioner
                                                    or Principal Director General, Chief Commissioner or
                                                    Director General, if more than three years have elapsed
                                                    from the end of the relevant assessment year."

                                      45. In section 151A of the Income-tax Act, in sub-section (1), in the
                                      opening portion, after the words and figures "issuance of notice
                                      under section 148", the words, figures and letter "or conducting of
                                      enquiries or issuance of show-cause notice or passing of order under
                                      section 148A" shall be inserted."

                              9.       As, despite the substituted Sections 147 to 151 of the Income Tax Act,
                              1961 coming into force on 1st April, 2021, the respondents issued
                              reassessment notices to the petitioners-assessees under the erstwhile
                              Sections 148 to 151 of the Income Tax Act, 1961 relying on Explanations in
                              the Notifications dated 31st March, 2021 and 27th April, 2021, the petitioners
                              filed the present writ petitions challenging the legality and validity of the
                              said Explanations as well as the reassessment notices issued pursuant
                              thereto.

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                               10.      In the present batch of writ petitions, this Court passed interim stay
                              orders. The relevant portion of one such interim order passed in W.P.(C)
                              6442/2021 is reproduced hereinbelow:-

                                      ".......Learned counsel for the petitioners states that the impugned
                                      notices are invalid in the eyes of law and void from inception as
                                      they were issued without following the process of issuance of
                                      prior notice under section 148A of the Act. He submits that the
                                      impugned notices are invalid as they have been issued under the
                                      pre-amended provisions of the Act, which were no longer in force
                                      on the date of the impugned notices. He emphasises that the
                                      amendments are applicable to all the notices issued under
                                      Section 148 of the Act post 01st April, 2021.
                                             Learned counsel for the petitioners states that the
                                      impugned notifications issued by the Respondent-2 are ultra
                                      vires the Act insofar as they contain the 'explanation' clarifying
                                      that the pre-amended Sections 148, 149 and 151 of the Act shall
                                      govern the issue of notice under Section 148 post 01st April,
                                      2021. According to him, Section 3(1) of the Taxation and Other
                                      Laws (Relaxation and Amendment of Certain Provisions) Act,
                                      2020 authorizes the Central Government to only extend the time
                                      limits and nothing more.
                                             He further states that the respondents cannot indirectly
                                      extend the operation of the old provisions of the Act beyond
                                      31st March, 2021 in the guise of a clarification under delegated
                                      legislation.
 He also relies upon interim stay orders passed by the
                                      Bombay High Court as well as by the learned predecessor
                                      Division Bench of this Court in Mon Mohan Kohli vs. Assistant
                                      Commissioner of Income Tax & Anr., W.P. (C) 6176/2021 dated
                                      07th July, 2021.
                                            Issue Notice. Mr. Sanjay Kumar, Advocate, Mr.Ajit
                                      Sharma, Advocate and Mr.Kunal Sharma, Advocate accept
                                      notice on behalf of the respondents in W.P.(C) Nos.6442/2021,
                                      6443/2021 and 6451/2021 respectively.

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                                             Learned counsel for the respondents state that in the
                                      present cases, the time limit for issuing the notices under Section
                                      148 of the Act stood expired and, therefore, any action under
                                      Section 148 would have been time barred by virtue of the proviso
                                      to Section 149(1) of the Act. They submit that by virtue of
                                      introduction of Section 3(1) of the Taxation and Other Laws
                                      (Relaxation and Amendment of Certain Provisions) Act, 2020,
                                      the time limit for taking action under Section 148 has been
                                      extended till 30th June, 2021. Consequently, according to them,
                                      the impugned notifications only provide that as the time limit for
                                      issuing notice under Section 148A of the Act has been extended
                                      by deemed fiction, the procedure to be followed till 30th June,
                                      2021 would be the old procedure mentioned under the Act. In
                                      support of their submission, they also rely upon Section 6 of the
                                      General Clauses Act, 1897.
                                             Having heard learned counsel for the parties, this Court is
                                      of the prima facie view that the impugned notification is contrary
                                      to settled principle of statutory interpretation, namely, that any
                                      action taken post the amendment of a procedural section would
                                      have to abide by the new procedures stipulated in the amended
                                      Act.
                                            Further, this Court is of the prima facie view that by virtue
                                      of a notification, which is a delegated legislation, the date for
                                      implementation of statutory provision, as stipulated in the Act,
                                      cannot be varied or changed.
                                            This Court is also of the prima facie opinion that Section 6
                                      of the General Clauses Act, 1897 offers no assistance to the
                                      respondents as the new Section 148A demonstrates an intent 'to
                                      destroy' the old procedure.
 Consequently, following the interim orders passed by the
                                      learned predecessor Division Bench in Mon Mohan Kohli vs.
                                      Assistant Commissioner of Income Tax & Anr., W.P. (C)
                                      6176/2021 dated 07th July, 2021 as well as similar interim order
                                      passed by the Bombay High Court, this Court directs that there
                                      shall be a stay of the operation of the impugned notices dated
                                      09th June, 2021, 30th June, 2020 and 28th June, 2020 passed in
                                      W.P. (C) 6442/2021, 6443/2021 and 6451/2021 respectively..."

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                               ARGUMENTS ON BEHALF OF THE PETITIONERS

                              11.      Mr. S. Ganesh and Mr. Percy Pardiwalla, learned Senior counsel as
                              well as Ms. Kavita Jha, Mr. Ved Jain, Mr. Rohit Jain, Mr. Neeraj Jain, Mr.
                              Aseem Chawla, Mr. Piyush Kaushik, Mr. Sachit Jolly, Mr. Salil Kapur, Mr.
                              Kapil Gupta, Mr. Puneet Agrawal, Mr. Gaurav Gupta, Mr. T.M.
                              Shivakumar, Mr. Manibhadra Jain, Dr. Rakesh Gupta, Mr. Mayank Nagi,
                              Mr. Arvind Kumar, Mr. Mukhi, Mr. P.C. Yadav, Mr. Raghvendra Singh and
                              Mr. Rahul Chaudhary, learned counsel addressed arguments on behalf of the
                              petitioners.
 12.      Learned counsel for the petitioners submitted that as the Finance Act,
                              2021 had substituted / replaced the earlier provisions, being Sections 147,
                              148, 149 & 151 of the Income Tax Act, 1961, with the new provisions, the
                              same would result in repeal of the earlier provisions and, therefore, the
                              earlier provisions could not be relied upon or referred to. In support of their
                              submission, they relied upon the judgment passed by the Supreme Court in
                              PTC India Limited Vs. Central Electricity Regulatory Commission,
                              Through Secretary, (2010) 4 SCC 603. The relevant portion of the said
                              judgment is reproduced hereinbelow:-
                                       "91. In this connection, it may be seen that Section 121 of the
                                      original Act stood substituted by Amendment Act 57 of 2003.
                                      Substitution of a provision results in repeal of the earlier
                                      provision and its replacement by the new provision. Substitution
                                      is a combination of repeal and fresh enactment. (See Principles
                                      of Statutory Interpretation by G.P. Singh, 11th Edn., p. 638.)
                                      Section 121 of the original Electricity Act, 2003 was never
                                      brought into force. It was substituted by new Section 121 by
                                      Amendment Act 57 of 2003 which was brought into force by a
                                      Notification dated 27-1-2004. Substitution, as stated above,
                                      results in repeal of the old provision and replacement by a new

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                                       provision. Applying these tests to the facts of the present case,
                                      we find that the Electricity (Amendment) Act, 2003 (57 of 2003)
                                      was brought into force by Notification dated 27-1-2004. That,
                                      notification was issued under Section 1(2) of the Electricity
                                      (Amendment) Act, 2003 (57 of 2003). If one reads Section 1(2)
                                      of the Electricity (Amendment) Act, 2003 (57 of 2003) with
                                      Notification dated 27-1-2004 issued under Section 1(2) of the
                                      amended Act, 2003, it becomes clear that on coming into force
                                      of the Electricity (Amendment) Act, 2003 (57 of 2003) all
                                      provisions amended by it also came into force. Hence, there
                                      was no requirement for a further notification under Section
                                      1(3), consequently, Section 121 in its amended form came into
                                      force with effect from 27-1-2004."
                              13.      Learned counsel for petitioners pointed out that as per clause (a) of
                              the new Section 149, reassessment proceedings could be initiated within
                              three years from the end of relevant Assessment Year and as per clause (b),
                              the reassessment proceedings, in exceptional circumstances, could be
                              initiated within ten years from the end of relevant year; however, the
                              extended time limit of ten years was fettered with preconditions, as under:
                                           a. The Assessing Officer has in his possession books of accounts
                                           or other documents or evidence;
                                           b. Such documents/evidence in possession of the Assessing
                                           Officer reveal escapement of income chargeable to tax in the
                                           form of an 'asset';
                                           c. Such 'asset', as defined, amounts to Rs. 50 lakhs or more.

 14.      Learned counsel for petitioners pointed out that this Court in C.B.
                              Richards Ellis Mauritius Ltd. vs. Assistant Director of Income-Tax: 208
                              Taxman 322 (Delhi), while interpreting the applicability of an earlier
                              amendment to Section 149 of the Income Tax Act, 1961 vide Finance Act,

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                               2001, (whereby the earlier existing time limit of ten years was reduced to six
                              years), has held that the reduced time limit applied with effect from the
                              Finance Act coming into force.
                              15.      Thus, according to them, under Section 149 clause (a) prescribing
                              three years' time limit, reassessment from Assessment Year 2018-19
                              onwards could only be reopened on or after 1st April, 2021 and prior years
                              were barred. Further, for initiation of reassessment proceedings for any
                              Assessment Year prior to Assessment Year 2018-19, exceptional conditions
                              of Section 149 clause (b) were required to be satisfied by the Revenue.
                              Importantly, satisfaction of the aforesaid preconditions prescribed by clause
                              (b) could be ascertained only when the procedure prescribed under Section
                              148A had been followed prior to issuance of notice under Section 148 of the
                              Income Tax Act, 1961.
                              16.      Learned counsel for petitioners submitted that once the Parliament
                              had exercised its powers of legislation (enactment of Finance Act, 2021),
                              then any action, such as issuance of Notifications dated 31st March, 2021
                              and 27th April, 2021 contrary to said legislation, taken by any other
                              agency/wing of the Government was bad in law as the same fell foul of the
                              doctrine of 'Occupied Field'. They submitted that the entire law stood
                              substituted and was specifically made applicable from a particular date.
                              Accordingly pursuant to the Legislature occupying the field governing
                              initiation of reassessment proceedings, no authority was vested in
                              Government to issue the Notifications dated 31st March, 2021 and 27th April,
                              2021, so as to disturb/intrude into the field occupied by the Legislature.
 17.      Learned counsel for petitioners also submitted that the impugned
                              Notifications were subservient to the substituted Sections 147 to 151 by the

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Finance Act, 2021 and the Notifications to the extent they contradicted
                              Section 149 were deemed to have been impliedly repealed by operation of
                              the Finance Act, 2021. In support of their submission, they relied upon the
                              Judgment passed by this Court in Fibre Boards (P.) Ltd., Bangalore vs.
                              Commissioner of Income-tax, Bangalore: (2015) 376 ITR 596 (SC),
                              wherein it has been held as under:
                                     "13. Repeal by implication has been dealt with by at least two
                                     judgments of this Court. In State of Orissa v. M.A. Tulloch &
                                     Co. [1964] 4 SCR 461, this Court considered the question as to
                                     whether the expression "repeal" in Section 6 of the General
                                     Clauses Act would be of sufficient amplitude to cover cases of
                                     implied repeal. This Court stated:

 "The next question is whether the application of that principle
                                        could or ought to be limited to cases where a particular form of
                                        words is used to indicate that the earlier law has been
                                        repealed. The entire theory underlying implied repeals is that
                                        there is no need for the later enactment to state in express
                                        terms that an earlier enactment has been repealed by using any
                                        particular set of words or form of drafting but that if the
                                        legislative intent to supersede the earlier law is manifested by
                                        the enactment of provisions as to effect such supersession, then
                                        there is in law a repeal notwithstanding the absence of the
                                        word 'repeal' in the later statute." (at page 483)
                                     Similarly in Ratan Lal Adukia v. Union of India, [1989] 3 SCC
                                     537, this Court held that the substituted Section 80 of the Code of
                                     Civil Procedure repealed by implication, insofar as the railways
                                     are concerned, Section 20 of the self-same code. In so holding,
                                     this Court stated:--
                                        "The doctrine of implied repeal is based on the postulate that
                                        the legislature which is presumed to know the existing state of
                                        the law did not intend to create any confusion by retaining
                                        conflicting provisions. Courts, in applying this doctrine, are
                                        supposed merely to give effect to the legislative intent by

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                                         examining the object and scope of the two enactments. But in a
                                        conceivable case, the very existence of two provisions may by
                                        itself, and without more, lead to an inference of mutual
                                        irreconcilability if the later set of provisions is by itself a
                                        complete code with respect to the same matter. In such a case
                                        the actual detailed comparison of the two sets of provisions
                                        may not be necessary. It is a matter of legislative intent that the
                                        two sets of provisions were not expected to be applied
                                        simultaneously. Section 80 is a special provision. It deals with
                                        certain class of suits distinguishable on the basis of their
                                        particular subject matters." (at para 18)"

                              18.      Learned counsel for petitioners further submitted that Notifications
                              dated 31st March, 2021 and 27th April, 2021 were ultra vires the Income Tax
                              Act, 1961 as amended by Finance Act, 2021 and in excess of the enabling
                              powers prescribed under Section 3 of Relaxation Act, 2020. They stated that
                              Legislature by virtue of Section 3 of Relaxation Act, 2020 had bestowed
                              upon the Central Government very specific and limited power to issue
                              Notifications extending time limits which fell during the period specified
                              therein. They further stated that Explanation (A)(a)(ii) of Notification dated
                              31st March, 2021 and Explanation to clause (A)(b) of Notification dated 27th
                              April, 2021 had illegally prescribed that the repealed Sections 148, 149 &
                              151 of the Income Tax Act, 1961 would be applicable. According to them,
                              the following points were apparent on face of the said Notifications:-
                                       a. The Notifications were in excess of the enabling powers
                                           prescribed under Section 3 of Relaxation Act 2020, as
                                           Relaxation Act 2020 did not delegate the power to legislate on
                                           provisions to be followed for initiation of reassessment
                                           proceedings; and

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                                        b. The Notifications were ultra vires the provisions of Sections
                                           147, 148, 148A, 149 & 151 of the Income Tax Act, 1961, as
                                           amended by the Finance Act, 2021, as the said provisions had
                                           been substituted /inserted with effect from 1st April, 2021,
                                           effectively repealing old provisions that existed prior thereto.
                              19.      Learned counsel for petitioners submitted that the impugned
                              Explanations had attempted to revive and keep in existence two different
                              schemes governing the initiation of reassessment proceedings, which were
                              substantially different from each other and thus could not co-exist at the
                              same time.
 20.      Learned counsel for the petitioners submitted that the impugned
                              reassessment notices issued between 1st April, 2021 and 30th June, 2021 had
                              been issued in violation of the mandatory procedure prescribed under
                              Section 148A of the Income Tax Act, 1961, as substituted by the Finance
                              Act, 2021. They submitted that though the new Section 148A gave a
                              legislative recognition to the procedure laid down in various judicial
                              precedents such as GKN Driveshafts (India) Ltd. v. Income Tax Officer &
                              Ors., 259 ITR 19 (SC) and created a vested right in favour of the assessee of
                              being heard prior to issuance of notice under Section 148 as well as receipt
                              of formal order considering the objections with inbuilt check in the form of
                              mandatory sanction by the prescribed authority under Section 151 of the
                              Income Tax Act, 1961, yet the impugned notices had been issued in
                              violation of the same.
                              21.      They emphasised that in the present batch of cases, the Revenue had
                              not followed the procedure prescribed under Section 148A and no books of
                              accounts/ evidence/ documents had been revealed to be in possession of the

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                               Assessing Officer. Additionally, the other preconditions prescribed for
                              invoking clause (b) had not been stated to be satisfied and thus, it was clear
                              that the Assessing Officer had no ground to invoke clause (b) of the newly
                              incorporated Section 149 of the Income Tax Act, 1961.
                              22.      In the alternative, learned counsel for the petitioners submitted that
                              Sections 147 to 151 were procedural provisions, inasmuch as, they primarily
                              amended limitation period and therefore applied retrospectively i.e. to
                              reassessment notices deemed to have been issued within the limitation
                              period.
                              ARGUMENTS ON BEHALF OF THE RESPONDENTS
                              23.      Per contra, Mr. Sunil Agarwal, Mr. Zoheb Hossain, Mr. Puneet Rai,
                              Mr. Sanjay Kumar, Mr. Shailender Singh, Mr. Ruchir Bhatia, learned
                              counsel for the respondents, contended that the present batch of writ
                              petitions challenged the legality and validity of only the Explanations to the
                              two Notifications, being Notification No.20/2021 dated 31st March, 2021
                              and Notification No.38/2021 dated 27th April, 2021, issued by Central
                              Government in exercise of powers vested under Section 3(1) of Relaxation
                              Act, 2020. They emphasized that petitioners had not challenged either the
                              main Clause of the said Notifications to which 'Explanations' were
                              appended or the Relaxation Ordinance, 2020 or Relaxation Act, 2020, which
                              enabled the Central Government to extend dates as a measure of relief
                              contingent upon on-ground analysis of Covid-19 situation.
 24.      They stated that the arguments advanced by the petitioners were in
                              complete ignorance of the background of once-in-hundred years emergency
                              called Global Covid-19 pandemic and the fact that all the three organs of the
                              State and also the world at large were unanimous in their perception of the

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                               threat to human life which was continuing with severe intensity [second
                              wave] at the time when the impugned Notifications were issued. They
                              pointed out that the Supreme Court by way of a series of orders in
                              'Cognizance of Limitation' extended limitation and Legislature by
                              promulgating Relaxation ordinance in March, 2020 and conversion of
                              Relaxation Ordinance into Relaxation Act, 2020 had extended dates for
                              compliance and issuance of notices. They submitted that management of
                              Covid-19 was akin to a war-time emergency measure and therefore had to
                              be construed more liberally in favour of the State than peace time
                              legislations. They stated that in State of Bombay vs. Virkumar Gulabchand
                              Shah, AIR 1952 SC 335, the Supreme Court had held as under:-
                                      "16. It is also perhaps relevant to note that the term which was
                                      under consideration in those cases occurred in a war-time
                                      measure, namely, a Proclamation promulgated on the 4th of
                                      August, 1914, the day on which the first world war started. There
                                      is authority for the view that war-time measures, which often
                                      have to be enacted hastily to meet a grave pressing national
                                      emergency in which the very existence of the State is at stake,
                                      should be construed more liberally in favour of the Crown or the
                                      State than peace time legislation....."
                              25.      Learned counsel for respondents submitted that Section 3(1) of
                              Relaxation Act, 2020 was an example of conditional legislation and not
                              delegated legislation. They emphasised that jurisprudentially, conditional
                              legislation is treated at par with plenary legislation and therefore is immune
                              from attack on grounds on which delegated legislation can be attacked.
                              According to them, the petitioners had failed to keep the said distinction in
                              mind in the instant petitions. In support of their submission, they relied
                              upon the judgments passed by the Supreme Court in Re Delhi Laws Act,

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                               1912, Ajmer-Merwara (Extension of Laws) Act, 1947 Vs. The Part 'C'
                              States (Laws) Act, 1950, 1951 SCR 747 and I.T.C. Bhadrachalam
                              Paperboards & Anr. vs. Mandal Revenue Officer, Andhra Pradesh & Ors.,
                              (1996) 6 SCC 634.                The relevant portions of the said judgments are
 A. Re Delhi Laws Act, 1912, Ajmer-Merwara (Extension of Laws)
                                          Act, 1947 (supra)
                                          "301. Broadly speaking, the question of delegated legislation
                                          has come up for consideration before courts of law in two
                                          distinct classes of cases. One of these classes comprises what
                                          is known as cases of "conditional legislation", where
                                          according to the generally accepted view, the element of
                                          delegation that is present relates not to any legislative
                                          function at all, but to the determination of a contingency or
                                          event, upon the happening of which the legislative provisions
                                          are made to operate. The other class comprises cases of
                                          delegation proper, where admittedly some portion of the
                                          legislative power has been conferred by the legislative body
                                          upon what is described as a subordinate agent or authority.
                                                     xxx                xxx                xxx
                                          306. Thus, conditional legislation has all along been treated
                                          in judicial pronouncements not to be a species of delegated
                                          legislation at all. It comes under a separate category, and, if
                                          in a particular case all the elements of a conditional
                                          legislation exist, the question does not arise as to whether in
                                          leaving the task of determining the condition to an outside
                                          authority, the legislature acted beyond the scope of its
                                          powers...

 B. I.T.C. Bhadrachalam Paperboards & Anr. (supra)
                                          "24. We may in this connection refer to the decision of the
                                          Supreme Court of United States in Field v. Clark [143 US
                                          649 : 36 L Ed 294 (1892)]. The Tariff Act of 1890 empowered
                                          the President to suspend the operation of the Act, permitting
                                          free import of certain products within United States, on being
                                          satisfied that the duties imposed upon such products were

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                                             reciprocally unequal and unreasonable. It was submitted that
                                            the said power transfers the legislative and treaty-making
                                            power to the President and, hence, unlawful. The attack was
                                            repelled holding that the President was a mere agent of the
                                            Congress to ascertain and declare the contingency upon
                                            which the will of the Congress was to take effect....
                                            26. What is, however, relevant is that the power to bring an
                                            Act into force as well as the power to grant exemption are
                                            both treated, without a doubt, as belonging to the category of
                                            conditional legislation. Very often the legislature makes a
                                            law but leaves it to the executive to prescribe a date with
                                            effect from which date the Act shall come into force. As a
                                            matter of fact, such a course has been adopted even in the
                                            case of a constitutional amendment, to wit, the Constitution
                                            (Forty-fourth Amendment) Act, 1978, insofar as it pertains to
                                            amendment of Article 22 of the Constitution. The power given
                                            to the executive to bring an Act into force as also the power
                                            conferred upon the Government to exempt persons or
                                            properties from the operation of the enactment are both
                                            instances of conditional legislation and cannot be described
                                            as delegated legislation."

                              26.      They further submitted that Section 3(1) of Relaxation Act, 2020
                              creates a legal fiction by virtue of which the Revenue was entitled to invoke
                              Section 148 of the Income Tax Act, 1961, as it existed prior to 31st March,
                              2021 during the extended period between 1st April, 2021 and 30th June,
                              2021. They submitted that the fiction under Section 3(1) of Relaxation Act,
                              2020 was evident from its object namely, 'In view of the spread of pandemic
                              Covid-19 across many countries of the world including India, causing
                              immense loss to the lives of people, it had become imperative to relax
                              certain provisions, including extension of time-limit'. They submitted that
                              the limited fiction which came into play by virtue of Section 3(1) of
                              Relaxation Act, 2020 was that 'such action' which was due for completion

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                               or compliance between 20th March, 2020 and 31st December, 2020 or such
                              other date after 31st December, 2020 as the Central Government may by
                              Notification specify, which in this case is 31st March, 2021 [later modified
                              to 30th April, 2021] stood 'extended' for the purpose of compliance or
                              completion of 'such action' [which could not be completed] to a date
                              beyond 31st March, 2021, which was finally specified by the Central
                              Government to be 30th June, 2021. They submitted that it was this liminal
                              period of 1st April, 2021 till 30th June, 2021 that the fiction came into play.
                              27.      According to them, the two expressions vital for the purpose of
                              understanding the fiction at play were 'such action' and 'extended'. They
                              submitted that one could not be read in isolation of the other without doing
                              violence to the plain language of Section 3(1) of Relaxation Act, 2020. They
                              pointed out that neither the vires of Section 3(1) of Relaxation Act, 2020 nor
                              the power conferred by Section 3(1) of Relaxation Act, 2020 upon the
                              Central Government to fix the terminal dates were under challenge. They
                              emphasized that the Central Government was conferred with the power to
                              fix two terminal dates or outer time limits under Section 3(1) - the expiry
                              date by which compliance was required to be made under the specified Act
                              but could not be made and the extended date by which such compliance
                              could be made.
                              28.      They submitted that a legal fiction must be taken to its logical
                              conclusion with all its natural corollaries and consequences. Therefore,
                              according to them, the expressions 'such action' under the specified Act and
                              'extension' used in Relaxation Act, 2020 meant that the power to issue
                              notice under Section 148 [as it existed prior to the coming into force of the
                              Finance Act, 2021] was available to the Revenue by way of the fiction in

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                               Relaxation Act, 2020, which extended the time limit for completion or
                              compliance of 'such action' which would have otherwise expired between
                              20th March, 2020 and 31st March, 2021. In support of their submission, they
                              relied upon the judgment passed by the Supreme Court in M. Venugopal vs.
                              Divisional             Manager,         Life   Insurance   Corporation   of      India,
                              Machilipatnam, A.P. & Anr., (1994) 2 SCC 323, wherein it has been held
                              as under:-
                                       "11. The effect of a deeming clause is well-known. Legislature
                                       can introduce a statutory fiction and courts have to proceed on the
                                       assumption that such state of affairs exists on the relevant date. In
                                       this connection, one is often reminded of what was said by Lord
                                       Asquith in the case of East End Dwellings Co. Ltd. v. Finsbury
                                       Borough Council that when one is bidden to treat an imaginary
                                       state of affairs as real, he must surely, unless prohibited from
                                       doing so, also imagine as real the consequences and incidents
                                       which inevitably have flowed from it -- one must not permit his
                                       "imagination to boggle" when it comes to the inevitable
                                       corollaries of that state of affairs. In view of the amendments
                                       aforesaid introduced in Section 48 it has to be held that
                                       Regulation 14 referred to above in respect of termination of the
                                       service of an employee of the Corporation within the period of
                                       probation shall be deemed to be a rule framed under Section
                                       48(2)(cc) having overriding effect over Section 2(oo) and Section
                                       25-F of the Industrial Disputes Act."
                              29.      They submitted that as a result of the fiction created by Section 3 of
                              Relaxation Act, 2020, the Revenue had available to it the "power" in cases
                              where the limitation for issuance of notice was expiring between 20th March,
                              2020 and 31st March, 2021 [later modified to 30th April, 2021], to take "such
                              action" i.e. the issuance of Notice under Section 148, on or before 30th June,
                              2021. The jural co-relative of "power", as per Hohfeld's theory on Jural
                              Relations, is "liability". Therefore, where there is a power, it follows that

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                               there is a liability imposed on the person against whom the power exists. If
                              the power under the erstwhile Section 148 existed, then consequently, the
                              corresponding liability to be reopened under unamended Section 148
                              continued.
                              30.      They also submitted that there was no conflict between Relaxation
                              Act, 2020 and Finance Act, 2021 due to their specific text, context, scheme
                              and object. They submitted that the principles of harmonious construction
                              and ut res magis valeat quam pereat lead to an inexorable conclusion that if
                              there was some conflict, alleged or real, between two provisions of law, the
                              Courts were enjoined to make all out efforts to save both the provisions,
                              rather than declaring any of them as a useless lumber.
                              31.      In the alternative, they further submitted that if there was a conflict
                              between the two statutes, Relaxation Act, 2020 would override the Finance
                              Act, 2021, not only on ground of being a special Act but also for the reason
                              that Section 3(1) of Relaxation Act contains a non-obstante clause giving the
                              enacting part of Section 3(1) an overriding effect over the Income Tax Act,
                              1961. In support of their submission, they relied upon the judgment passed
                              by the Supreme Court in Union of India & Ors. vs. Exide Industries
                              Limited & Anr., (2020) 5 SCC 274, wherein it has been held as under:-
                                       "21. Section 43-B bears heading "certain deductions to be
                                       only on actual payment". It opens with a non obstante
                                       clause. As per settled principles of interpretation, a non
                                       obstante clause assumes an overriding character against any
                                       other provision of general application. It declares that within
                                       the sphere allotted to it by Parliament, it shall not be
                                       controlled or overridden by any other provision unless
                                       specifically provided for. Out of the allowable deductions,
                                       the legislature consciously earmarked certain deductions
                                       from time to time and included them in the ambit of Section

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                                        43-B so as to subject such deductions to conditionality of
                                       actual payment. Such conditionality may have the inevitable
                                       effect of being different from the theme of mercantile system
                                       of accounting on accrual of liability basis qua the specific
                                       head of deduction covered therein and not to other heads.
                                       But that is a matter for the legislature and its wisdom in
                                       doing so."
                              32.      Consequently, according to them, in case of conflict between the
                              Relaxation Act, 2020 and the Income Tax Act, 1961, Relaxation Act, 2020
                              would prevail.
                              33.      They submitted that even the Finance Act, 2021 did not apply to the
                              substituted Sections 147 to 151 of the Income Tax Act, 1961 retrospectively
                              and was applicable only with effect from 1st April, 2021. They further
                              submitted that Section 147, being a right to assess, is a substantive right,
                              while Sections 148 to 151 are the machinery provisions. According to them,
                              Finance Act, 2021 had amended the entire scheme of reassessment from
                              Sections 147 to 151 making both substantive and procedural amendments
                              and, therefore, could not apply retrospectively. They submitted that there is
                              a vested right in favour of the Revenue under the old regime of Sections 147
                              to 151, which could not be taken away by applying retrospectively a shorter
                              period of limitation in a new provision i.e., the substituted Section 149. In
                              support of their submissions, they relied upon the judgment passed by the
                              Supreme Court in M.P Steel Corporation vs. Commissioner of Central
                              Excise (2015) 7 SCC 58, wherein it has been held, "....The new law of
                              limitation providing a longer period cannot revive a dead remedy. Nor can
                              it suddenly extinguish a vested right of action by providing for a shorter
                              period of limitation...a new law of limitation providing for a shorter period
                              cannot certainly extinguish a vested right of action."

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                               34.      Learned counsel for the respondents contended that the Relaxation
                              Act, 2020 maintains equality ensuring that notices under old Section 148
                              were issued to all similarly placed assessees i.e. the assessees to whom
                              notices were issued prior to March, 2020 and those to whom notices could
                              not be issued due to the pandemic. According to them, if the assessees'
                              arguments were accepted, it would lead to unreasonable classification
                              between those assessees who could not be issued notices only due to
                              pandemic, who would be treated more favourably and unequally than those
                              set of assessees in whose favour notices stood issued prior to March, 2020,
                              for escapement of income for the same set of assessment years.
                              35.      In the alternative, they submitted that Section 3(1) of Relaxation Act,
                              2020 is a 'stop-the-clock' provision somewhat similar to the U.S. legal
                              doctrine known as 'Tolling' which allows for the pausing or delaying of the
                              running of the period of time set forth by a statute containing limitation. In
                              support of their submission, they relied upon the judgment passed by the
                              Supreme Court of United States in Carlos CHARDON etc. et al. vs. Juan
                              Fumero SOTO, et al., 1983 SCC OnLine US Sc 135 : 462 US 650 (1983),
                              wherein it has been held as under:-
                                       "1. Petitioners, Puerto Rican educational officials, demoted
                                       respondents from nontenured supervisory positions to teaching or
                                       lower-level administrative posts in the public school system
                                       because of respondents' political affiliations. Shortly before
                                       Puerto Rico's one-year statute of limitations would have expired, a
                                       class action was filed against petitioners on respondents' behalf
                                       under 42 U.S.C. § 1983. Subsequently class certification was
                                       denied because the class was not sufficiently numerous. The
                                       parties agree that the statute of limitations was tolled during the
                                       pendency of the § 1983 class action, but they disagree as to the
                                       effect of the tolling. [This opinion uses the word "tolling" to mean

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                                        that, during the relevant period, the statute of limitations ceases to
                                       run. "Tolling effect" refers to the method of calculating the
                                       amount of time available to file suit after tolling has ended. The
                                       statute of limitations might merely be suspended; if so, the plaintiff
                                       must file within the amount of time left in the limitations period. If
                                       the limitations period is renewed, then the plaintiff has the benefit
                                       of a new period as long as the original. It is also possible to
                                       establish a fixed period such as six months or one year during
                                       which the plaintiff may file suit, without regard to the length of the
                                       original limitations period or the amount of time left when tolling
                                       began.] Did the one-year period begin to run anew when class
                                       certification was denied, or was it merely suspended during the
                                       pendency of the class action? We must decide whether the answer
                                       is provided by Puerto Rican law or by federal law.
                                                         xxx              xxx               xxx
                                       21. In American Pipe the Court rejected the claim that antitrust
                                       claims brought by various Utah public agencies and
                                       municipalities was barred by the four-year limitations period of §
                                       4B of the Clayton Act, reasoning that the running of this period
                                       had been tolled on three occasions. As to two of these occasions,
                                       involving periods during which federal litigation was pending, the
                                       Court's reasoning simply applied § 5(b) of the Clayton Act.
                                       Section 5(b) explicitly addressed the effect of pending federal
                                       litigation, stating unambiguously that "Whenever any civil or
                                       criminal proceeding is instituted by the United States to prevent,
                                       restrain, or punish violations of any of the antitrust laws, . . . the
                                       running of the statute of limitations in respect of every private
                                       right of action arising under said laws . . . shall be suspended
                                       during the pendency thereof and for one year thereafter." 15
                                       U.S.C. § 16(b). The first two periods in which American Pipe held
                                       that § 4B had been tolled followed simply from a straightforward
                                       application of § 5(b)          .

                                       ....The more orthodox inquiry, however, would seem to be what
                                       the Court actually decided then, not what we now think it needed
                                       to decide. And, as the discussion above plainly
                                       demonstrates, American Pipe concluded that Rule 23 contains a
                                       tolling rule that suspends (but does nothing more) the running of

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                                        limitations periods during the pendency of class actions. [The
                                       Court correctly recognizes that Board of Regents v. Tomanio, 446
                                       U.S. 478, 100 S.Ct. 1790, 64 L.Ed.2d 440 (1980), is
                                       distinguishable. That case did not involve a class action, and, thus
                                       the Court had no occasion to consider whether Rule 23 creates a
                                       federal tolling rule, or the character of that rule. Thus, there was
                                       "a void . . . in federal statutory law," id., at 483, 100 S.Ct., at
                                       1794, and state aw was called upon to fill the void. Owing
                                       to American Pipe and its interpretation of Rule 23, there is no
                                       comparable void in this case, and federal law is therefore
                                       applicable.]"

                              36.      Without prejudice and in the alternative to all of the above, they
                              submitted that even Section 6 of the General Clauses Act, 1897 would allow
                              notices to be issued and proceedings to be instituted, since by operation of
                              Section 3(1) of Relaxation Act, 2020, a right had accrued in favour of the
                              Revenue to re-open the assessment within an extended time period in such
                              cases where limitation to reopen under Section 148/149 expired on 31st
                              March, 2021. They submitted that by virtue of Section 6(c) of the General
                              Clauses Act, 1897, the mere substitution of the erstwhile Section 148 did not
                              take away the aforesaid incurred right. According to them, by virtue of
                              Section 6(c) of the General Clauses Act, 1897, in all such cases wherein the
                              limitation for issuance of notice under Section 148 was expiring on 31st
                              March, 2021, the Revenue could initiate proceedings for the re-opening of
                              assessment under the erstwhile Section 148, as if the same had not been
                              substituted. In support of their submission, learned counsel for the
                              respondents relied upon the judgment passed by the Supreme Court in T.S.
                              Baliah vs. T.S. Rangachari, Income Tax Officer, Central Circle VI,
                              Madras, (1969) 3 SCR 65 wherein it has been held as under:-

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                                        "....But when the repeal is followed by fresh legislation on the
                                       same subject the Court would undoubtedly have to look to the
                                       provisions of the new Act, but only for the purpose of determining
                                       whether they indicate a different intention. The question is not
                                       whether the new Act expressly keeps alive old rights and liabilities
                                       but whether it manifests an intention to destroy them. Section 6 of
                                       the General clauses Act therefore will be applicable unless the
                                       new legislation manifests an intention incompatible with or
                                       contrary to the provisions of the section. Such incompatibility
                                       would have to be ascertained from a consideration of all the
                                       relevant provisions of the new statute and the mere absence of a
                                       saving clause is by itself not material...."

                              37.      Learned counsel for respondents lastly relied upon the judgment
                              passed by the High Court of Chhattisgarh in Palak Khatuja vs. Union of
                              India and Ors., W.P.(T) No. 149 of 2021 upholding the legality and validity
                              of similarly issued reassessment notices. In the said judgment, the
                              Chhattisgarh High Court has held, "....legislative delegation which is
                              exercised by the Central Government by notification to uphold the
                              mechanism as prevailed prior to March, 2021 is not in conflict with any Act
                              and notification by executive i.e. Ministry of Finance would be the part of
                              legislative function."

                              REJOINDER

                              38.      In rejoinder, learned counsel for the petitioners submitted that the
                              reasoning given by the Chhattisgarh High Court in the case of Palak
                              Khatuja (supra) that the impugned Notifications issued under Relaxation
                              Act, 2020 deferred the operation of Section 148A of the Income Tax Act,
                              1961 was a startling conclusion, apart from repeated references in the said
                              judgments to the Covid-19 pandemic.

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 39.      Learned counsel for the petitioners pointed out that the Division
                              Bench of Allahabad High Court had taken a diametrically opposite view in
                              its judgment dated 30th September, 2021 passed in Writ Tax No. 524/2021
                              titled Ashok Kumar Agarwal Vs. Union of India through its Revenue
                              Secretary North Block. In the said judgment, the Allahabad High Court has
                              upheld the submission of the petitioner-assessee that Section 148 notices
                              issued after 1st April, 2021, which did not comply with post 31st March,
                              2021 provisions of the Income Tax Act, 1961, were illegal, bad in law as
                              well as null and void.
                              40.      They re-emphasised that the Relaxation Act, 2020 and the
                              Notifications issued thereunder only extended the time limits for initiating
                              re-assessment, but did not otherwise touch or affect the applicable
                              provisions which mandatorily had to be complied with in respect of such re-
                              assessment.

                              SUR-REJOINDER

                              41.      In sur-rejoinder, learned counsel for the respondents submitted that
                              Allahabad High Court in Ashok Kumar Agarwal Vs. Union of India
                              through its Revenue Secretary North Block (supra) had erroneously held
                              that Section 3(1) of Relaxation Act, 2020 was meant to protect proceedings
                              already underway or that may have become time-barred between 20th March,
                              2021 and 30th June, 2021. They pointed out that it was not the impugned
                              Notifications but Section 3(1) of Relaxation Act, 2020 which permitted
                              extension of time for compliance or completion of action which expired
                              between 20th March, 2020 and 31st March, 2021 to be extended to a date
                              beyond 31st March, 2021. Therefore, according to them, fixation of a date

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                               beyond 31st March, 2021 was, in fact, permitted by the principle legislation
                              - the Relaxation Act, 2020 itself.

                                                                  COURT'S REASONING

                              AS THE LEGISLATURE HAS PERMITTED RE-ASSESSMENT TO BE
                              MADE ONLY IN ACCORDANCE WITH THE SUBSTITUTED
                              PROVISIONS, IT CAN ONLY BE DONE IN THIS MANNER, OR NOT AT
                              ALL.
                              42.      Having heard learned counsel for the parties, this Court is of the view
                              that by virtue of Section 1(2)(a) of the Finance Act, 2021, the substituted
                              Sections 147, 148, 149 and 151 of the Income Tax Act, 1961 pertaining to
                              reopening of assessments came into force on 1st April, 2021. The
                              significance of the expression 'shall' in Section 1(2)(a) of the Finance Act,
                              2021 cannot be lost sight of. This is in contrast to the language under
                              Section 1(2)(b) which states that Sections 108 to 123 of the Finance Act,
                              2021 shall come into force on such date, as the Central Government may, by
                              Notification in the Official Gazette, appoint. The Memorandum to the
                              Finance Bill, 2021, too, clarifies that its Sections 2 to 88 which included the
                              substituted Sections 147 to 151 of the Income Tax Act, 1961 will take effect
                              from       1st    April,       2021.    There   is   also   no   power    with       the
                              Executive/Respondents/Revenue to defer/postpone the implementation of
                              Sections 2 to 88 of the Finance Act, 2021 which includes the substituted
                              Sections 147 to 151 of the Income Tax Act, 1961.
 43.      It is settled law that the law prevailing on the date of issuance of the
                              notice under Section 148 has to be applied. [See: Foramer Vs. CIT (2001)
                              247 ITR 436 (All.), affirmed by the Supreme Court in (2003) 264 ITR 566
                              (SC), Varkey Jacob Co. Vs. CIT and Anr. (2002) 257 ITR 231 (Ker), Smt.

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                               N.Illamathy vs. ITO (2020) 275 taxman 25/195 CTR 543 (Mad)(HC), RK
                              Upadhyay v Shanabhai, (1987) 166 ITR 163 (SC); CIT v Rameshwar
                              Prasad, (1991) 188 ITR 291 (All HC); Dr. Onkar Dutt Sharma v CIT,
                              (1967) 65 ITR 359 (All HC)].
                              44.      This Court is of the view that had the intention of the Legislature been
                              to keep the erstwhile provisions alive, it would have introduced the new
                              provisions with effect from 1st July, 2021, which has not been done.
                              Accordingly, the notices relating to any assessment year issued under
                              Section 148 on or after 1st April, 2021 have to comply with the provisions of
                              Sections 147, 148, 148A, 149 and 151 of the Income Tax Act, 1961 as
                              specifically substituted by the Finance Act, 2021 with effect from 1st April,
                              2021.
                              45.      Consequently, this Court is of the opinion that as the Legislature has
                              permitted re-assessment to be made in this manner only, it can be done in
                              this manner, or not at all1.

                              SECTION 3(1) OF RELAXATION ACT EMPOWERS THE
                              GOVERNMENT/EXECUTIVE TO EXTEND ONLY THE TIME LINES.
                              CONSEQUENTLY, THE GOVERNMENT/EXECUTIVE CAN NEITHER
                              MAKE OR CHANGE LAW OF THE LAND NOR CAN IT IMPEDE THE
                              IMPLEMENTATION OF LAW MADE BY THE PARLIAMENT.

 46.      Upon perusal of Section 3(1) of Relaxation Act, 2020, this Court is of
                              the view that it extends only the time lines. Section 3(1) of the Relaxation
                              Act, 2020 stipulates that where, any time limit has been stipulated in a

                              1
                                This Court in Principal Commissioner of Income Tax-4 Vs. Headstrong Services India (P.) Ltd.,
                              [2021] 125 taxman.com 262 (Del), has held, "It is further settled law that when a power is given to do
                              certain thing in a certain way, the thing must be done in that way or not at all and other methods of
                              performance are forbidden. [See: Taylor Vs. Taylor,1875) 1 Ch.D.426; Nazir Ahmad Vs. King Emperor,
                              AIR 1936 PC 253, AIR 1975 SC 985; Babu Verghese Vs. Bar Council of Kerala, (1999) 3 SCC 422]."

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                               specified Act which falls between the period 20th day of March, 2020 and
                              31st day of December, 2020 for the completion or compliance of such action
                              as issuance of any notice under the provisions of the specified Acts and
                              where completion or compliance of such action has not been made within
                              such time, then the time limit for completion or compliance of such action
                              shall, notwithstanding anything contained in the specified Acts, stand
                              extended. It is important to bear in mind that Section 3(1) of the Relaxation
                              Act, 2020 does not empower the Central Government to postpone the
                              applicability of any provision which has been enacted from a particular date.
                              There is a difference between extension of time of an action which is getting
                              time barred and applicability of a provision which has been enacted and
                              notified by the Legislature. Relaxation Act, 2020 nowhere delegates power
                              to the Central Government to postpone the date of applicability of a new law
                              enacted by the Legislature. Relaxation Act, 2020 also does not put any
                              embargo on the power of the Legislature to legislate.

 47.      Also, the impugned Explanations in the Notifications dated 31st
                              March, 2021 and 27th April, 2021 are beyond the power delegated to the
                              Government, as the Relaxation Act does not give power to Government to
                              extend the erstwhile Sections 147 to 151 beyond 31st March, 2021 and/or
                              defer the operation of substituted provisions enacted by the Finance Act,
                              2021. Accordingly, the provisions of Section 148A had to be complied with
                              before issuing notices under Section 147 of the Income Tax Act, 1961 and
                              the submission of the respondents-Revenue based on the judgment passed
                              by Chhattisgarh High Court in Palak Khatuja Vs. UOI (supra) does not find
                              favour with this Court. After all, it is settled law that Executive cannot make

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                               or change law of the land without specific Authority from Parliament to do
                              so.2
                              48.      Consequently, the Relaxation Act, 2020 and Notifications issued
                              thereunder can only change the time-lines applicable to the issuance of a
                              Section 148 notice, but they cannot change the statutory provisions
                              applicable thereto which are required to be strictly complied with. Further,
                              just as the Executive cannot legislate, it cannot impede the implementation
                              of law made by the Legislature.
 THE IMPUGNED EXPLANATIONS IN THE NOTIFICATIONS DATED
                              31ST MARCH, 2021 AND 27TH APRIL, 2021 ARE ULTRA VIRES THE
                              PARENT STATUTE I.E. THE RELAXATION ACT. THIS COURT IS
                              RESPECTFULLY NOT IN AGREEMENT WITH THE VIEW OF THE
                              CHHATTISGARH HIGH COURT IN PALAK KHATUJA (SUPRA), BUT
                              WITH THE VIEWS EXPRESSED BY THE ALLAHABAD HIGH COURT IN
                              ASHOK KUMAR AGARWAL (SUPRA) AND RAJASTHAN HIGH COURT
                              IN BPIP INFRA PRIVATE LIMITED VS. INCOME TAX OFFICER,
                              WARD 4(1), S.B. CIVIL WRIT PETITION 13297/2021
                              49.      Further, the impugned Explanation is not only beyond the power
                              delegated to the Government, but also in conflict with the provisions of the
                              Income Tax Act, 1961 which had specifically made the new reassessment
                              scheme applicable from 1st April, 2021. It is settled law that the delegation
                              of authority must be express. There is no scope for any implied delegation of
                              authority. The delegated authority must act strictly within the parameters of
                              the authority delegated to it. The delegated authority cannot override the Act
                              either by exceeding the authority or by making provisions inconsistent with
                              the Act. The distinction between conditional legislation or delegated
                              legislation is irrelevant to the controversy at hand, as the person to whom the

                              2
                                 R (on the application of Miller and Another) V. Secretary of State for Exiting the European Union
                              (2017) UKSC 5) popularly known as Miller No.1.

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                               power is entrusted in either situation can do nothing beyond the limits which
                              circumscribe the power.3 Subordinate legislation cannot be contrary to the
                              parent statute4. Consequently, this Court is respectfully not in agreement
                              with the finding of Chhattisgarh High Court in Palak Khatuja (supra) that
                              the legislative delegation exercised by the Central Government by impugned
                              Notifications to uphold the mechanism as prevailing prior to March, 2021 is
                              not in conflict with any Act. To be fair to Chhattisgarh High Court, there
                              was no challenge in the petitions filed before it to the legality and validity of
                              the impugned Notifications dated 31st March, 2021 and 27th April, 2021. On
                              the contrary, this Court is in agreement with the views of the Allahabad
                              High Court and Rajasthan High Court (Bench at Jaipur) in Ashok Kumar
                              Agarwal (supra) and Bpip Infra Private Limited vs. Income Tax Officer,
                              Ward 4(1), S.B. Civil Writ Petition 13297/2021, respectively.
                              50.      Consequently, Explanations A(a)(ii)/A(b) to the Notifications dated
                              31st March, 2021 and 27th April, 2021 are ultra vires the Relaxation Act,
                              2020 and are therefore, bad in law and null and void.

                              FINANCE ACT, 2021 HAS MERELY CHANGED THE PROCEDURE OF
                              ISSUING  NOTICE.    CONSEQUENTLY,   THE   "POWER"   OF
                                                                      ST
                              REASSESSMENT THAT EXISTED PRIOR TO 31       MARCH, 2021
                              CONTINUES TO EXIST EVEN THEREAFTER.
                              51.      Hohfeld's theory on Jural Relations does not come to the aid of the
                              Revenue. It is not disputed that as per Hohfeld's theory, the jural correlative
                              of "power" is "liability". Where there is power, there is corresponding
                              liability imposed upon the person against whom such power exists.

                              3
 Lachmi Narain vs. UOI AIR 1976 SC 714, St. John's Teachers Training Institute vs. Regional
                              Director (2003) 3 SCC 321.
                              4
 Indian Express Newspapers vs. UOI AIR 1986 SC 515, State of Tamil Nadu vs. P Krishnamurthy
                              (2006) 4 SCC 517.

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                               However, with the coming into force of the Finance Act, 2021 w.e.f. 1st
                              April, 2021, there has been no curtailing or taking away the power of the
                              Revenue. It has merely changed the procedure of issuing notice.
                              Consequently, the "power" as per Hohfeld's theory that existed prior to 31st
                              March, 2021 continues to exist even thereafter.
                              TO IGNORE THE LEGISLATIVE INTENT OF FINANCE ACT, 2021
                              WOULD NOT BE IN ACCORDANCE WITH PAST PRACTICE.
                              52. It is pertinent to mention that the Legislature had even prior to
                              Finance Act, 2021 enhanced/reduced time limit specified in Section 149 of
                              the Income Tax Act, 1961, by way of Finance Acts, 1961, 1989, 2001, 2012
                              and pertinently such enhancement/reduction to the time limit was made
                              effective from different dates of the relevant financial year. A tabular chart
                              showing previous changes to time limits under Section 149 is reproduced
                              hereinbelow:-
                                       Amendments to Section 149 of the Income Tax Act, 1961
                              Amending Act                Permissible Time limit (from Effective Date of
                                                          the end of assessment year) for coming into force
                                                          issuance of notice under
                                                          Section 148
                              Income        Tax      Act, -8 years                              01.04.1962
                                                          -16 years
                              1961
                                                          -4 years
                              Direct          Tax -4 years                                      01.04.1989
                              Amendment       Act, -7years
                              1987                 -10 years
                                                   (All the provisions             were
                                                   substituted)
                              Finance Act, 2001    -4 years                                     01.06.2001
                                                   -6 years

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Finance Act, 2012              -4 years                              01.07.2012
                                                             -6 years
                                                             -16 years
                                                             (16 years condition has been
                                                             newly inserted, rest were
                                                             undisturbed)
                              Finance Act, 2021              -3 years                              01.04.2021
                                                             -10 years
                                                             (All    the  provisions  are
                                                             substituted)

 53.      This Court in C.B. Richards Ellis Mauritius Ltd. (supra), while
                              interpreting the applicability of an earlier amendment to Section 149 of the
                              Income Tax Act, 1961 vide Finance Act, 2001, whereby the earlier existing
                              time limit of ten years was reduced to six years, has held that the reduced
                              time limit applied with effect from the Finance Act coming into force. The
                              relevant portion of the said judgment is reproduced hereinbelow:-
                                                "7. Having considered the contentions of the parties and the
                                                legal issues raised therein, we feel that the petitioner is
                                                entitled to succeed. Section 6 of General Clauses Act deals
                                                with effect of repeal of an enactment and stipulates that
                                                unless a different intention appears, the repeal will not
                                                affect the previous operation of any enactment so repealed
                                                or any right, privilege, obligation or liability acquired,
                                                accrued or affect any penalty, investigation, legal
                                                proceeding or remedy. The said Section deals with
                                                substantive rights and liabilities. It is also subject to
                                                intention to the contrary. Intention can be implied. The
                                                procedural law when it is repealed should be applied from
                                                the date the new provision or procedure comes into force.
                                                The reason is that no person has a vested right or an
                                                accrued right in the procedure. No obligation or liability is
                                                normally imposed by a procedure. Sometime distinction is
                                                drawn between the right acquired or accrued and legal
                                                proceedings to acquire a right. In the latter case, there is

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                                                 only hope which is destroyed by the repeal. What is
                                                protected is the preserved right and privileges acquired and
                                                accrued and corresponding obligation and liability incurred
                                                on the other party. The legal process or the procedure for
                                                the enjoyment of the said right is not protected. Section 6,
                                                normally does not apply to procedural law. The procedural
                                                law when amended or substituted is generally retroactive
                                                and applies from the day of its enforcement and to this
                                                extent it can be retrospective. The question raised is
                                                whether the amendment/substitution of the period with
                                                effect from 1.6.2001 in Section 149 of the Act, is procedural
                                                or substantive....
                                                              xxx         xxx          xxx           xxx
                                                11. Law of limitation, therefore, being procedural law has
                                                to be applied to the proceedings on the date of
                                                institution/filing. No person can have a vested right in the
                                                procedure. Therefore, the procedural law on the date when
                                                it was enforced is applied. Bennion Statutory interpretation
                                                (1st addition page 446 para 191) has elucidated:-
                                                       "Because a change made by the legislator in
                                                       procedural provisions is expected to be for the
                                                       general benefit of litigants and others, it is
                                                       presumed that it applies to pending as well as
                                                       future proceedings."
                                                12. Law of limitation does not create any right in favour of
                                                a person or define or create any cause of action, but simply
                                                prescribes that the remedy can be exercised or availed of by
                                                or within the period stated and not thereafter. Subsequently,
                                                the right continues to exist but cannot be enforced. The
                                                liability to tax under the Act is created by the charging
                                                Section read with the computation provisions. The
                                                assessment proceedings crystallize the said liability so that
                                                it can be enforced and the tax if short paid or unpaid can be
                                                collected. If this difference between liability to tax and the
                                                procedure prescribed under the Act for computation of the
                                                liability (i.e. the procedure of assessment), is kept in mind,
                                                there would be no difficulty in understanding and

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                                                 appreciating the fallacy and the error in the primary
                                                argument raised by the Revenue. It is a settled position that
                                                liability to tax as a levy is normally determined as per
                                                statute as it exists on the first day of the assessment year,
                                                but this is not the issue or question in the present case. The
                                                issue or question in the present case relates to assessment
                                                i.e. initiation of re-assessment proceedings and whether the
                                                time/limitation for initiation of the re-assessment
                                                proceedings specified by the Finance Act, 2001 is
                                                applicable. We are not determining/deciding the liability to
                                                tax but have to adjudicate and decide whether the re-
                                                assessment notice is beyond the time period stipulated. This
                                                is a matter/issue of procedure i.e. the time period in which
                                                the assessment or re-assessment proceedings can be
                                                initiated. Thus the time period/limitation period prescribed
                                                on the date of issue of notice will apply. In our opinion, the
                                                answer is clear and has to be in affirmative, i.e. in favour of
                                                the assessee.
                                                13. This question is not debatable or res integra and was
                                                examined and answered with lucid and clear reasoning in
                                                the opinion expressed by Hidayatullah, J. on behalf of
                                                himself     and       Raghubar     Dayal,     J.      in S.C.
                                                Prashar v.Vasantsen Dwarkadas Hunger for Investment
                                                Trust Ltd. [1963] 49 ITR 1 (SC). The relevant portion
                                                reads:-
                                                      "93. ....If the 1948 Amendment could be treated
                                                      as enabling the Income Tax Officer to take
                                                      action at any point of time in respect of back
                                                      assessment years within eight years of March 30,
                                                      1948 then such cases were within his power to
                                                      tax. We have such a case here in CA No. 509 of
                                                      1958 where the notice was issued in 1949 to the
                                                      lady whose husband had remitted Rs 9180 to her
                                                      from Bangkok in the year relative to Assessment
                                                      Year 1942-43. That lady was assessable in
                                                      respect of this sum under Section 4(2) of the
                                                      Income Tax Act. She did not file a return. If the
                                                      case stood governed by the 1939 Amendment the

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                                                         period applicable would have been four years if
                                                        she had not concealed the particulars of the
                                                        income. She had of course not deliberately
                                                        furnished inaccurate particulars thereof. If the
                                                        case was governed by the 1948 Amendment she
                                                        would come within the eight-year rule because
                                                        she had failed to furnish a return. Now, we do
                                                        not think that we can treat the different periods
                                                        indicated under Section 34 as periods of
                                                        limitation, the expiry of which grant prescriptive
                                                        title to defaulting tax-payers It may be said that
                                                        an assessment once made is final and conclusive
                                                        except for the provisions of Sections 34 and 35
                                                        but it is quite a different matter to say that a
                                                        "vested right" arises in the assessee. On the
                                                        expiry of the period the assessments, if any, may
                                                        also become final and conclusive but only so
                                                        long as the law is not altered retrospectively.
                                                        Under the scheme of the Income Tax Act a
                                                        liability to pay tax is incurred when according to
                                                        the Finance Act in force the amount of income,
                                                        profits or gains is above the exempted. That
                                                        liability to the State is independent of any
                                                        consideration of time and, in the absence of any
                                                        provision restricting action by a time limit, it can
                                                        be enforced at any time. What the law does is to
                                                        prevent harassment of assessees to the end of
                                                        time by prescribing a limit of time for its own
                                                        officers to take action. This limit of time is
                                                        binding upon the officers, but the liability under
                                                        the charging section can only be said to be
                                                        unenforceable after the expiry of the period
                                                        under the law as it stands. In other words,
                                                        though the liability to pay tax remains it cannot
                                                        be enforced by the officers administering the tax
                                                        laws. If the disability is removed or according to
                                                        a new law a new time limit is created
                                                        retrospectively, there is no reason why the

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                                                         liability should not be treated as still
                                                        enforceable. The law does not deal with
                                                        concluded claims or their revival but with the
                                                        enforcement of a liability to the State which
                                                        though existing remained to be enforced."

                              54.      Consequently, in the present cases to ignore the legislative intent of
                              Finance Act, 2021 would neither be legal nor reasonable.
                              IT IS A PRINCIPLE OF LEGAL POLICY THAT CHANGES IN THE
                              SUBSTANTIVE LAW SHOULD NORMALLY NOT TAKE EFFECT
                              RETROSPECTIVELY EXCEPT IN RELATION TO PROCEDURAL
                              MATTERS.

                              55.      It is a cardinal principle of construction that every statute is prima
                              facie prospective, unless it is expressly or by necessary implication made to
                              have retrospective operation.5 There is a presumption of prospectivity
                              articulated in the legal maxim 'nova constitutio futuris formam imponere
                              debet non praeteritis', i.e., 'a new law ought to regulate what is to follow,
                              not the past', and this presumption operates unless shown to be contrary by
                              express provision in the statute or is otherwise discernible by necessary
                              implication6 .
                              56.      In contrast to statutes dealing with substantive rights, statutes dealing
                              with merely matters of procedure are presumed to be retrospective, unless

                              5
Keshavan Madhava Menon v. State of Bombay, 1951 SCR 228; Janardan Reddy and Others v. State,
                              1950 SCR 940; Mahadeolal Kanodia v. Administrator General of W.B., (1960) 3 SCR 578; State of
                              Bombay v. Vishnu Ramchandra, (1961) 2 SCR 924; Rafiquennessa (Mst.) v. Lal Bahadur Chetri, (1964)
                              6 SCR 876; Arjan Singh v. State of Punjab, (1969) 2 SCR 347; Ex,-Capt. K.C. Arora and Another v.
                              State of Haryana and Others, (1984) 3 SCC 281; Mithilesh Kumari and Another v. Prem Bahadur
                              Khare, (1989) 2 SCC 95; State of Madhya Pradesh and Others v. Rameshwar Rathod, (1990) 4 SCC 21;
                              Shyam Sunder and Others v. Ram Kumar and Another, (2001) 8 SCC 24; Zile Singh v. State of Haryana
                              and Others, (2004) 8 SCC 1; Gem Granites v. Commr. of Income Tax, (2005) 1 SCC 229; C. Gupta v.
                              Glaxo-Smithkline Pharmaceuticals Ltd., (2007) 7 SCC 171; J.S. Yadav v. State of Uttar Pradesh and
                              Another, (2011) 6 SCC 570
                              6
                                Monnet Ispat & Energy Ltd. v. Union of India & Ors., (2012) 11 SCC 1

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                               such a construction is textually inadmissible.7 As stated by Lord Denning:
                              "The rule that an Act of Parliament is not to be given retrospective effect
                              applies only to statutes which affect vested rights. It does not apply to
                              statutes which only alter the form of procedure or the admissibility of
                              evidence, or the effect which the courts give to evidence".8 If the new Act
                              affects matters of procedure only, then, prima facie, "it applies to all actions
                              pending as well as future".9 In fact, there is line of authority to the effect
                              that, in the absence of contrary intention, procedural changes apply to
                              pending as well as future proceedings10. The nature of the exception was
                              also clearly encapsulated in R. v. Makanjuola, (1995) 2 Cr. App. R. 469 at
                              472A-B, where Lord Taylor of Gosforth CJ held, "The general rule against
                              the retrospective operation of statutes does not apply to procedural
                              provisions...Indeed, a general presumption is that a statutory change in
                              procedure applies to pending as well as future proceedings."11

                              RATIONALE BEHIND THE PRINCIPLE THAT                                                  CHANGE            IN
                              PROCEDURAL LAW OPERATES RETROSPECTIVELY
                              57.      In stating the principle that "a change in the law of procedure
                              operates retrospectively and unlike the law relating to vested right is not

                              7
                                Gardner v. Lucas (1878) 3 AC 582 (HL); Delhi Cloth & General Mills Co. Ltd. v. CIT, Delhi, AIR 1927
                              PC 242; Jose De Costa v. Bascora Sadashiva Sinai Narcornim, (1976) 2 SCC 917; Gurbachan Singh v.
                              Satpal Singh, (1990) 1 SCC 445
                              8
                                Blyth v. Blyth, (1966) 1 All ER 524
                              9
                                 A.G. v. Vernazza, (1960) 3 All ER 97; K. Eapin Chako v. Provident Fund Investment Company (P)
                              Ltd., (1977) 1 SCC 583
                              10
                                 Athlumney, Re, ex p Wilson [1898] 2 QB 54 per R S Wright J at 551-552; Kensinghton International
                              Ltd. v. Republic of the Congo [2007] EWHC, 1632 (Comm), [2007] All ER (D) 209 (Jul) at [74]
                              11
                                 See also: R. v. Bradley [2005] EWCA Crim. 20. Also Justice GP Singh in his treatise Principles of
                              Statutory Interpretation states, "Fiscal legislation imposing liability is generally governed by the normal
                              presumption that it is not retrospective and it is a cardinal principle of the tax law that the law to be
                              applied is that in force in the assessment year unless otherwise provided expressly or by necessary
                              implication. The above rule applies to the charging section and other substantive provisions such as a
                              provision imposing penalty and does not apply to machinery or procedural provisions of a taxing Act
                              which are generally retrospective and apply even to pending proceedings."

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                               only prospective"12, the Supreme Court has quoted with approval the reason
                              of the rule as expressed in MAXWELL.[MAXWELL: Interpretation of
                              Statutes, 11th Edition, p. 216]. "No person has a vested right in any course
                              of procedure. He has only the right of prosecution or defence in the manner
                              prescribed for the time being by or for the Court in which the case is
                              pending, and if, by an Act of Parliament the mode of procedure is altered, he
                              has no other right than to proceed according to the altered mode". In the
                              opinion of this Court, this is because a procedural change is expected to
                              improve matters for everyone concerned (or at least to improve matters for
                              some, without inflicting detriment on anyone else who uses ordinary care,
                              vigilance and promptness).
                              FOR DETERMINING WHETHER THE AMENDMENT IS A
                              PROCEDURAL OR A SUBSTANTIVE LAW ONE WILL HAVE TO
                              EXAMINE THE INTENT, PURPOSE AND SCOPE OF THE
                              AMENDMENTS.
                              58.      Though the Black's Law Dictionary defines a procedural law as "that
                              which prescribes method of enforcing rights or obtaining redress for their
                              invasion" and a substantive law is one that which "fixes duties, establish
                              rights and responsibilities among and for persons natural or otherwise", yet
                              the question whether legislation is procedural or substantive in the context of
                              retrospectivity needs to be considered by the reference to the facts of each
                              particular case.
                              59.      The same provision may be procedural in one context and substantive
                              in another. Lord Brightman said in Yew Bon Tew v. Kenderaan Bas Mara.

                              12
 Anant Gopal Sheorey v. State of Bombay, 1959 SCR 919; Union of India v. Sukumar Pyne, 1966 (2) SCR 34;
                              Tikaram & Sons v. Commr. of Sales Tax, U.P., (1968) 3 SCR 512; State of Madras v. Lateef Hamid & Co. (1971) 3
                              SCC 560; Balumal Jamnadas Batra v. State of Maharashtra, (1975) 4 SCC 645; Rai Bahadur Seth Sriram
                              Durgaprasad v. Director of Enforcement, (1987) 3 SCC 27; Gurbachan Singh v. Satpal Singh, (1990) 1 SCC 445

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                               [1983] 1 AC 553 at 558, '....these expressions "retrospective" and
                              "procedural," though useful in a particular context, are equivocal and
                              therefore can be misleading ... and an Act which is procedural in one sense
                              may in particular circumstances do far more than regulate the course of
                              proceedings, because it may, on one interpretation, revive or destroy the
                              cause of action itself....' Consequently, the Court will have to examine the
                              intent, purpose and scope of the amendments.
                              THE INTENT, PURPOSE AND SCOPE OF THE AMENDMENTS
                              INTRODUCED BY THE FINANCE ACT, 2021 WAS TO PROTECT THE
                              RIGHTS AND INTERESTS OF ASSESSEES AS WELL AS PROMOTE
                              PUBLIC INTEREST. IT IS SETTLED LAW THAT IF LEGISLATION IS
                              INTRODUCED TO REMEDY THE DEFECTIVE RULE AND NO ONE
                              SUFFERS THEREBY, IT IS SENSIBLE TO APPLY IT TO PENDING
                              PROCEEDINGS.

                              60.      The Finance Minister in her Budget Speech clearly stated that the
                              object behind the amendment to the Income Tax Act, 1961 was "to simplify
                              the tax administration, ease compliance, and reduce litigation."
                              61.      In the memorandum explaining the provisions in the Finance Bill,
                              2021, it was categorically admitted that it "proposes a completely new
                              procedure of assessment of such cases. It is expected that the new system
                              would result in less litigation and would provide ease of doing business to
                              taxpayers as there is a reduction in time limit by which a notice for
                              assessment or reassessment or re-computation can be issued..."
                              62.      In fact, the unamended Sections 147 to 149 and 151 of the Income
                              Tax Act, 1961 prescribed the procedure governing initiation of reassessment
                              proceedings. However, the same gave rise to numerous litigations,
                              particularly on the issues that reassessment proceedings were often initiated:

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 (a) without recording any valid 'reason to believe', (b) in absence of any
                              tangible/reliable material/information in possession the Assessing Officer
                              leading to formation of belief that income has escaped assessment, (c)
                              without any enquiry being conducted by the Assessing Officer prior to the
                              issuance of notice, (d) without following the mandatory procedure laid down
                              by the Supreme Court in the case of GKN Driversafts (India) Ltd. Vs. ITO
                              (supra) etc. Further, since reopening was permissible maximum up to six
                              years and in some cases up to sixteen years, there was continuing
                              uncertainty for a considerable long time.
                              63.      The Legislature, being conscious of the shortcomings in the
                              unamended Sections 147 to 151 of the Income Tax Act, 1961, which were
                              relaxed by the aforesaid provisions of the Relaxation Act and the
                              Notifications issued thereunder, introduced reformative changes to the said
                              Sections governing the procedure for reassessment proceedings by way of
                              the Finance Act, 2021 passed on 28th March, 2021.
                              64.      The reformative substitutions carried out by the Finance Act, 2021
                              with effect from 1st April, 2021 can be summarized as under:-
                                       a. Section 147: The earlier existing concept of income escaping
                                           assessment was simplified by substituting a new provision;
                                       b. Section 148: The provision governing issuance of notice for
                                           initiation of reassessment proceedings was substituted with a
                                           new provision, inter alia, prohibiting issuance of such notice, (a)
                                           in absence of any 'information' [as explained in Explanation 1]
                                           with the Assessing Officer suggesting escapement of income;
                                           (b) in absence of approval from the specified authority & (c)
                                           without following the procedure prescribed under Section 148A
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                                            of the Income Tax Act, 1961. Moreover, the said notice issued
                                           under Section 148 was now required to be served along with
                                           order passed under Section 148A of the Income Tax Act, 1961;
                                       c. Section 148A: New provision was introduced in the Income Tax
                                           Act, 1961, inter alia prescribing, (a) Assessing Officer to
                                           conduct inquiry, if required, with prior approval; (b) opportunity
                                           of heard to be given to the assessee, with prior approval; (c)
                                           Assessing Officer to consider reply of assessee; and (d) order to
                                           be passed as to whether it was a fit case for issuance of notice
                                           under Section 148 of the Income Tax Act, 1961;
                                       d. Section 149: The provisions governing time limit for issuance of
                                           notice under Section 148 of the Income Tax Act, 1961 were
                                           replaced with new provisions, inter alia, reducing the
                                           permissible time limit for issuance of such notice to three years
                                           [and ten years only in exceptional cases] and further changing
                                           the earlier existing criteria governing such time limit;
                                       e. Section 151: The earlier existing provision prescribing the
                                           sanctioning authorities for issuance of notice under Section 148
                                           was replaced with new provisions prescribing the sanctioning
                                           authorities for the purposes of Sections 148 & 148A; pertinently
                                           for issuance of notice after three years from the end of relevant
                                           Assessment Year, wherein reopening is permitted in exceptional
                                           cases, sanction from the highest level of Income Tax
                                           Department is required to be obtained.

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                               65.      Based on the aforesaid substituted provisions as well as the speech of
                              Finance Minister and the Memorandum explaining the provisions in the
                              Finance Bill, 2021, it is apparent that the legislative intent behind the
                              aforesaid substitutions/amendments is to reduce the time limit in ordinary
                              cases to three years and to increase the threshold amount of income having
                              escaped assessment to Rs.50 lakhs for invoking extended time limit of ten
                              years is to reduce litigation and compliance burden, remove discretion,
                              impart certainty and promote ease of doing business.
                              66.      This Court is of the opinion that the new provisions are remedial and
                              benevolent provisions which are meant and intended to protect the rights and
                              interests of assessees as well as promote public interest. In Imperial
                              Tobacco Ltd v. Attorney General [1979] QB 555 at 581, Omrod LJ said,
                              'The object of all procedural rules is to enable justice to be done between
                              the parties consistently with the public interest'. If the procedural rules are
                              defective, the legal apparatus works less efficiently and the public interest
                              suffers. If legislation is introduced to remedy the defective rule and no one
                              suffers thereby, it is sensible to apply it to pending proceedings.
 67.      Consequently, this Court is of the view that the Finance Act, 2021
                              introduces a new regime regarding the procedure to be complied with in
                              respect of the re-opening of an Income-tax assessment and accordingly, the
                              benefit of the new provisions must necessarily be made available even in
                              respect of proceedings relating to past Assessment Years provided,
                              of course, Section 148 notice has been issued on or after 1st April, 2021. 13

                              13
M.D. Frozen Foods Exports Private Limited and Others Vs. Hero Fincorp Limited, (2017) 16 SCC
                              741.
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                               NEITHER THE CONCEPT OF VESTED RIGHT IN FAVOUR OF THE
                              REVENUE NOR THE JUDGMENT OF THE SUPREME COURT IN M.P.
                              STEEL CORPORATION V. CCE (2015) 7 SCC 58 HAS ANY
                              APPLICATION.
                              68.      In the opinion of this Court, neither the concept of vested right in
                              favour of the Revenue nor the judgment passed by the Supreme Court in
                              M.P. Steel Corporation v. CCE (2015) 7 SCC 58 has any application to the
                              present batch of matters.
                              69.      Admittedly, time limit to issue notices for re-assessment under the
                              Income Tax Act, 1961 stood expired long time ago. The Legislature by
                              virtue of the Relaxation Act, 2020 had extended the time limit till 31st
                              December, 2020 and had given discretion to the executive to issue
                              Notification to extend the timeline alone. However, extending the time limit
                              or giving power to issue Notification to extend the time cannot be taken to
                              be a vested right of the respondents.
                              70.      Consequently, this Court is of the view that vested right in favour of
                              the Revenue stood exhausted/expired long ago and no vested right of the
                              respondents has been infringed leave alone violated.
                              THE ARGUMENT OF THE RESPONDENT THAT THE SUBSTITUTIONS
                              MADE BY THE FINANCE ACT, 2021 IS NOT APPLICABLE TO PAST
                              ASSESSMENT YEARS, AS IT IS SUBSTANTIAL IN NATURE IS
                              CONTRADICTED BY ITS OWN CIRCULAR 549 OF 1989 AND ITS OWN
                              SUBMISSION THAT FROM 1ST JULY, 2021, THE SUBSTITUTIONS
                              MADE BY THE FINANCE ACT, 2021 WILL BE APPLICABLE.
                              71.      Circular 549 of 1989 issued by the CBDT explaining the provisions of
                              the Direct Tax Laws (Amendment Act), 1989 amending erstwhile Sections
                              147 to 152 clarified that the said provisions were procedural in nature and
                              would have retrospective effect, unless the amending statute provides

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                               otherwise. The relevant provisions of Circular 549 of 1989 issued by the
                              CBDT is reproduced hereinbelow:-
                                                "...7.13 Amendments to have retrospective effect. - These
                                                amendments come into force with effect from the 1st day of
                                                April, 1989. However, it may be clarified that since the
                                                provisions of sections 147 to 152 lay down procedural law,
                                                these have retrospective effect, unless the amending statute
                                                provides otherwise. Therefore, the amendments made to
                                                these sections by the Amending Acts, 1987 and 1989,
                                                discussed in the preceding paragraphs, which came into
                                                force with effect from 1st April, 1989, will be retrospective
                                                in the sense that these will apply to all matters which were
                                                pending on 1st April, 1989 and had not become closed or
                                                dead on this date.
                                                7.14 Thus, from 1st April, 1989 onwards, any action for
                                                opening or re-opening an assessment for the assessment
                                                year 1988-89 and earlier assessment years will have to be
                                                taken in accordance with the amended provisions. The
                                                following examples will clarify the position:-
                                                (i) No notice under section 148 can now be issued for the
                                                assessment years 1973-74 to 1978-79 even if the escaped
                                                income is Rs. 50,000 or more in each year, although under
                                                the old provisions this could have been done with Board's
                                                approval.
                                                (ii) Notice under section 148 can now be issued for any of
                                                the assessment years 1979-80 to 1981-82 if the following
                                                conditions are ful-filled:-
                                                       (#) In a scrutiny case [i.e., where an assessment
                                                       order had been passed under section 143(3) or 147],
                                                       if the escaped income is Rs. 1 lakh or more in each
                                                       year and approval of the Chief Commissioner or
                                                       Commissioner has been obtained.
                                                       (c) In a non-scrutiny case, if the escaped income is
                                                            Rs. 50,000 or more in each year, and approval of
                                                            the Deputy Commissioner has been obtained.

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                                                 (Under the old provisions, there was no distinction between
                                                a scrutiny and a non-scrutiny case. Action could have been
                                                taken in respect of both types of cases for the assessment
                                                year 1981-82, with the approval of the Chief Commissioner
                                                or Commissioner, whatever be the amount of escaped
                                                income, while for the assessment years 1979-80 and 1980-
                                                81, action could have been taken with Board's approval if
                                                the escaped income was Rs. 50,000 or more in each year.
                                                These old provisions, however, have no application now
                                                from 1-4-1989 onwards)."
                              72.      On the one hand, the Respondents are contending that the amendment
                              made by the Finance Act, 2021 shall not be applicable to past assessment
                              years, while on the other hand, they are contending that from 1st July, 2021,
                              the amendments made by the Finance Act, 2021 will be applicable. This is
                              contradictory inasmuch as for three months starting on or after 1st April,
                              2021, the amendment made by the Finance Act, 2021 shall be considered as
                              substantive in nature and hence applicable prospectively, while from 1st
                              July, 2021, the amendment made by the Finance Act, 2021 will be
                              considered as procedural and hence will be applicable retrospectively for
                              any assessment year including earlier years.
                              73.      Keeping in view its own submission and past precedent to treat
                              Sections 147 to 152 of the Income Tax Act, 1961 as procedural, the
                              respondents are estopped from contending to the contrary.
                              IF THE ARGUMENT OF THE RESPONDENTS THAT THE
                              EXPLANATION IN NOTIFICATION NO. 20 DATED 31ST MARCH, 2021
                              EXTENDED THE APPLICABILITY OF OLD PROCEDURE OF
                              REASSESSMENT BEYOND 31ST MARCH, 2021 IS ACCEPTED, THE
                              SAME SHALL LEAD TO MANIFEST ARBITRARINESS AND CONFLICT.

                              74.      Further, if the argument of learned counsel for the respondents that
                              the Explanation in Notification No. 20 dated 31st March, 2021 extended the

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                               applicability of old procedure of reassessment beyond 31st March, 2021 is
                              accepted the same shall lead to patent arbitrariness since:

                                       a. during the period from 1st April, 2021 to 30th June, 2021, both
                                           old as well as new procedure as enacted by Finance Act, 2021
                                           shall simultaneously operate [more so, since there is no statutory
                                           provision deferring the implementation of the new/mandatory
                                           procedure];

                                       b. for example: For A.Y.'s 2015-16 to 2017-18 [with limitation
                                           upto March, 22 to 24], in case of two identically placed
                                           taxpayers (say A & B) with "information" of having asset above
                                           Rs.50 lakh, Assessing Officer shall have absolute discretion to
                                           choose either the old or the new mechanism;

                                       c. 'doctrine of election' normally confers two separate alternative
                                           statutory powers/remedies (like Sections 154, 147, 263) for
                                           same/similar cause, but same provision (Section 147) with two
                                           opposite procedure for same cause can never be envisaged and
                                           shall necessarily lead to manifest arbitrariness and conflict.
                              75.      Also, the new scheme of reassessment provides for a uniform manner
                              of reassessment of two categories of cases, namely, regular reassessments
                              and search/survey cases. Insofar as search/survey cases are concerned, the
                              provisions are clear that the new scheme is to apply where the proceedings
                              are initiated after 1st April, 2021 as Explanation 2 to Section 148 states that
                              the Assessing Officer will be deemed to have 'information' for the purposes
                              of Section 148/148A when search/survey is initiated on or after 1st April,
                              2021 and the first proviso to Section 148A states that the procedure in

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Section 148A will not apply to cases where search/survey is initiated after
                              1st April, 2021. Also, the second proviso to Section 149 states that the new
                              limitation will not apply where search/survey is initiated on or before 1st
                              April, 2021. In fact, the department's interpretation would also make the
                              provisions relating to search cases completely unworkable. As per Sections
                              153A and 153C, the provisions of these two sections will not apply where
                              search/survey is done after 1st April, 2021. Department contends that the
                              erstwhile law continues to apply from 1st April, 2021 to 30th June, 2021. The
                              erstwhile law on reopening did not cover search/survey cases. Consequently,
                              for the search/survey done from 1st April to 30th June, there can neither be an
                              assessment under sections 153A/153C or under 147, which cannot be the
                              case. Further, Sections 148, 148A and 149 specifically cover cases where
                              search/survey is done after 1st April, 2021. If department's interpretation is
                              accepted, this specific date in all three Sections will have to be changed and
                              read as 1st July, 2021, which cannot be done. Moreover, as the new
                              provisions seek to bring uniformity between regular reassessments and
                              search/survey cases, it follows that the cut off date for initiation of
                              reassessment proceedings even for regular reassessment is 1st April, 2021.
                              REVENUE CANNOT RELY ON COVID-19 FOR CONTENDING THAT
                              THE NEW PROVISIONS SHOULD NOT OPERATE DURING THE
                              PERIOD 1st APRIL, 2021 TO 30th JUNE, 2021.
                              76.      When Finance Minister moved the Finance Bill, 2021 in Parliament
                              on 1st February, 2021 and the Finance Act, 2021 was enacted in March,
                              2021, COVID-19 was widely prevalent and Parliament was fully aware of
                              the same. Nevertheless, with the objective of promoting ease of doing
                              business and reducing litigation, Parliament specifically enacted that the

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                               new reassessment provisions would come into operation on 1st April, 2021.
                              The Revenue cannot, therefore, rely on COVID-19 for contending that the
                              new provisions should not operate during the period 1st April, 2021 to 30th
                              June, 2021 or that Relaxation Act, 2020 deals with the situation arising out
                              of Covid-19 and the Finance Act, 2021 was passed being oblivious of the
                              Covid-19 Pandemic.
                              NON-OBSTANTE CLAUSE HAS TO BE CONSTRUED STRICTLY.
                              SECTION 3(1) OF RELAXATION ACT IS EXPRESSLY CONFINED TO
                              AND ONLY SUPERSEDES THE TIME LIMITS. IT DOES NOT EXCLUDE
                              THE APPLICABILITY OF PROVISIONS SUBSTITUTED BY FINANCE
                              ACT, 2021.

                              77.      It is settled law that the non-obstante clause in a statute has to be
                              given a contextual interpretation and cannot be interpreted in a way which
                              defeats or extends the object and purpose of the enactment. In Nawal Singh
                              vs. State of U.P. & Anr.14, the Supreme Court has held that the non-obstante
                              clause has to be construed strictly and has an overriding effect over the other
                              statutes only to the limited extent that it expressly so provides. In other

                              14
                                 2003(8) SCC 117. In this case, the Supreme Court held, "...However, we would refer to the decision
                              in A.G. Varadarajulu v. State of T.N. [(1998) 4 SCC 231] which was relied upon by the learned Senior
                              Counsel Mr Dwivedi, wherein (in para 16) this Court held as under: (SCC p. 236)
                                     "16. It is well settled that while dealing with a non obstante clause under which the legislature
                                     wants to give overriding effect to a section, the court must try to find out the extent to which the
                                     legislature had intended to give one provision overriding effect over another provision. Such
                                     intention of the legislature in this behalf is to be gathered from the enacting part of the section.
In Aswini Kumar Ghose v. Arabinda Bose [AIR 1952 SC 369] Patanjali Sastri, J. observed:
                                             'The enacting part of a statute must, where it is clear, be taken to control the non obstante
                                             clause where both cannot be read harmoniously.'
                               In Madhav Rao Scindia v. Union of India [(1971) 1 SCC 85] (SCC at p. 139) Hidayatullah, C.J.
                              observed that the non obstante clause is no doubt a very potent clause intended to exclude every
                              consideration arising from other provisions of the same statute or other statute but 'for that reason alone
                              we must determine the scope' of that provision strictly. When the section containing the said clause does
                              not refer to any particular provisions which it intends to override but refers to the provisions of the
                              statute generally, it is not permissible to hold that it excludes the whole Act and stands all alone by itself.
                              'A search has, therefore, to be made with a view to determining which provision answers the description
                              and which does not.' "

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                               words, the remaining parts of the other statutes are left untouched by the
                              non-obstante clause.
                              78.      In the present case, the ambit of the non-obstante clause in Section
                              3(1) of Relaxation Act, 2020 is expressly confined to and supersedes the
                              time limits only for the completion or compliance of actions which are laid
                              down in the specified Acts and Relaxation Act, 2020 only provides that
                              these time limits shall stand extended as provided. The intent and purpose
                              behind enactment of Section 3 of Relaxation Act, 2020 is relaxation of
                              statutory timelines in various provisions of the specified Acts and thus, as a
                              natural corollary the relaxation provided in Section 3 of Relaxation Act,
                              2020 inherently conflicts with various timelines provided in the specified
                              Acts. To get over this inherent conflict between Section 3 of Relaxation Act,
                              2020 and various timelines provided in provisions prescribed in the
                              specified Acts, the legislature has carefully incorporated the non-obstante
                              clause in the said Section. Consequently, this non-obstante provision only
                              operates to prevail over the time lines laid down in the specified Act. Apart
                              from these timelines, no other provision of any specified Act is suspended or
                              overridden. This non-obstante clause cannot, therefore, possibly be relied
                              upon by the Revenue to contend that a Notification issued under Section 3 of
                              Relaxation Act, 2020 overrides any provision of the Income-tax Act, 1961
                              other than the applicable time-lines. Any Notification issued under
                              Relaxation Act, 2020 cannot possibly have a reach and ambit wider than the
                              Relaxation Act, 2020 itself for that would be contrary to the settled canons
                              of construction of statutes.
                              79.      It is also necessary to appreciate that the Relaxation Act, 2020 was
                              enacted long before the Finance Act, 2021. Consequently, it cannot possibly

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                               be contended that any provision of Relaxation Act, much less of any
                              Notification issued thereunder, can be so construed as amending or
                              modifying or excluding the applicability of the yet to be enacted Finance
                              Act, 2021. Further, as the Petitioners are not questioning any of the time
                              extensions made by or under Relaxation Act, 2020, the said non-obstante
                              clause is totally irrelevant to controversy at hand.

                              THE REVENUE'S CHOOSING AND PICKING OF TWO TERMS VIZ.
                              "SUCH ACTION" & "EXTENSION/EXTENDED" IS CONTRARY TO
                              BASIC PRINCIPLES OF INTERPRETATIONS WHICH PROHIBITS
                              SELECTIVELY   CHOOSING/IGNORING   WORDS   FROM   THE
                              STATUTORY LANGUAGE AS WELL AS THE FACT THAT THE
                              RELAXATION ACT, 2020 WAS ENACTED LONG BEFORE FINANCE
                              ACT, 2021.

                              80.      To substantiate its stand that the impugned notices are not barred by
                              limitation, the Revenue without even considering the pre-condition
                              prescribed by Section 3 of Relaxation Act, 2020 has selectively chosen and
                              picked up two terms viz. "such action" & "stand extended" to put forward
                              an interpretation which could not have been contemplated by the Legislature
                              at the time of enactment of the said provision, namely, that notices under
                              Section 148 will relate back and be governed by old law. In the opinion of
                              this Court, the submission of the Revenue is completely flawed, as the same
                              is contrary to basic principles of interpretations, which prohibits selectively
                              choosing/ignoring words from the statutory language.
                              81.      It is settled law that when the words of a statute are clear and
                              unambiguous, it is not permissible for the Court to read words into the

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                               statute15. In fact, the principle of interpretation of taxing statutes was best
                              enunciated by Rowlatt J. in his classic statement in Cape Brandy Syndicate
                              v I.R.C. (1 KB 64, 71), "In a taxing statute one has to look merely at what is
                              clearly said. There is no room for any intendment. There is no equity about
                              a tax. There is no presumption as to a tax. Nothing is to be read in, nothing
                              is to be implied. One can look fairly at the language used."
 82.      The Judiciary cannot transgress into the domain of policy making by
                              re-writing a statute, however strong the temptations maybe16. The Supreme
                              Court in A.V Fernandez vs. State of Kerala (AIR 1957 SC 657) has held,
                              "In construing fiscal statutes and in determining the liability of a subject to
                              tax one must have regard to the strict letter of law. If the revenue satisfies
                              the court that the case falls strictly within the provisions of the law, the
                              subject can be taxed. If, on the other hand, the case is not covered within the
                              four corners of the provisions of the taxing statute, no tax can be imposed by
                              inference or by analogy or by trying to probe into the intentions of the
                              legislature and by considering what was the substance of the matter".
                              83.      Further, the Relaxation Act, 2020 received the President's assent on
                              29th September, 2020, whereas the Finance Act, 2021 received the assent on
                              31st March, 2021. Consequently, it cannot be contended that any provision
                              of the Relaxation Act, 2020, much less of any Notification issued

                              15
                                  A Constitution Bench of the Supreme Court in Padma Sundara Rao and Others v State of Tamil
                              Nadu and Others (2002) 3 SCC 533 has observed: "12.....the court cannot read anything into a statutory
                              provision which is plain and unambiguous. A statute is an edict of the legislature. The language
                              employed in the statute is determinative factor of legislative intent. The first and primary rule of
                              construction is that the intention of the legislation must be found in the words used by the legislature
                              itself. The question is not what may be supposed and has been intended but what has been
                              said.......14.While interpreting a provision the court only interprets the law and cannot legislate it. If a
                              provision of law is misused and subjected to the abuse of process of law, it is for the legislature to
                              amend, modify or repeal it, if deemed necessary....."
                              16 Saregama India Ltd. vs. Next Radio Limited & Ors., 2021 SCC OnLine SC 817

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                               thereunder, should be so construed as amending or modifying or excluding
                              the applicability of the yet to be enacted Finance Act, 2021.
                              THE CONSEQUENCE OF NOT MENTIONING SUBSTITUTED SECTION
                              147 OF THE INCOME TAX ACT, 1961 IN THE IMPUGNED
                              EXPLANATIONS.
                              84.      Even if it is assumed that the impugned Explanations in the two
                              Notifications are valid, still the impugned notices are bad in law, as the
                              impugned Explanations only seek to effectuate the erstwhile Sections 148,
                              149 and 151 and they do not cover Section 147. However, the conditions
                              provided for in the substituted Section 147 were not considered while
                              issuing notices by the Assessing Officer. In fact, the said Section 147 is
                              itself subject to Sections 148 to 153, which would include Section 148A.

                              THE "LEGAL FICTION" ARGUMENT IS WITHOUT ANY FOUNDATION.
                              THERE IS NO PROVISION IN RELAXATION ACT STATING THAT IF
                              THE "ACTION" IS TAKEN WITHIN THE EXTENDED TIME LIMIT, IT
                              WOULD BE DEEMED TO HAVE BEEN TAKEN BEFORE THE EXPIRY
                              OF THE ORIGINAL (UN-EXTENDED) TIME LIMIT.

                              85.      The "legal fiction" argument is without any foundation. A statute can
                              be said to enact a legal fiction when it assumes the existence of something
                              which is known not to exist. The extension of time for completing an
                              assessment or issuing a Section 148 notice has no element of legal fiction in
                              it. The only effect and consequence of this extension of the time limit is that
                              if the act in question is performed within the extended time limit, it will be
                              considered to be legally compliant. However, there is no assumption that the
                              act in question is deemed to have been performed within the original time
                              limit, as wrongly contended by the learned counsel for the Respondents. For
                              achieving that result, clear and unequivocal language was required in the

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                               Relaxation Act, 2020 - which is missing. In fact, there is no provision in
                              Relaxation Act, 2020 laying down that if the "action" is taken within the
                              extended time limit, it would be deemed to have been taken before the
                              expiry of the original (un-extended) time limit.

                              THE ESSENTIAL CONDITION FOR A PROVISION TO BE TERMED AS
                              STOP THE CLOCK PROVISION IS ABSENT INASMUCH AS THE TIME
                              DURING WHICH SUCH CLOCK IS STOPPED HAS NOT BEEN
                              STIPULATED TO BE EXCLUDED.
                              86.      Section 3 of the Relaxation Act, 2020 is not a 'stop the clock'
                              provision, as it only relaxes the time limit, so as to facilitate the cases in
                              which the Revenue/assessee has not been able to take the specified action
                              within the statutory timelines. The essential condition for a provision to be
                              termed as stop the clock provision is that the time during which such clock
                              is stopped, such period has to be excluded. In the present instance, time limit
                              is extended, not excluded or stopped.

                              IT CANNOT BE THAT A FICTION IS CREATED OR CLOCK STOPPED
                              ONLY FOR REASSESSMENT AND NOT FOR ASSESSMENT AND/OR
                              FACELESS PENALTY SCHEME.
                              87.      Further, if the interpretation being placed by the Respondent that
                              Section 3(1)(a) creates a fiction and the clock gets stopped because of
                              Section 3(1) of Relaxation Act, 2020 is correct, then all the actions and
                              procedures should have been under that law and procedure which were on
                              the day when the fiction was created or the clock stopped.
                              88.      It may be relevant to point out that Section 144B was inserted in the
                              Income Tax Act, 1961 by Relaxation Act, 2020 w.e.f. 1st April, 2021 for
                              making faceless assessment. By virtue of Section 144B, the entire procedure
                              for assessment under Sections 143(3) and 144 has changed. The time period

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                               for both assessment as well as reassessment was extended under
                              Notifications issued under Relaxation Act, 2020 itself. If the Respondent's
                              stand is to be accepted that all such assessments had to be made under the
                              unamended law, then assessments orders should not have been passed under
                              the amended Section 144B of the Act. However, all the assessments after
                              31st March, 2021 have been made following the new procedure prescribed
                              for the assessment after the amendment. In fact, it is pertinent to mention
                              that CBDT itself vide its order No. 187/3/2020-ITA-1 dated 31st March,
                              2021 has directed that all pending assessments as on 31st March, 2021 are to
                              be completed under Section 144 B i.e. the new procedure applicable w.e.f.
                              01st April, 2021.
                              89.      Similar to assessment and reassessment, the time limit for levying
                              penalty was also extended under Relaxation Act itself even up to 31st March,
                              2022. If the clock has stopped or fiction has been created as is being
                              contended by the Respondents, then all the penalty orders passed under
                              Section 274(2A) - Faceless Penalty Scheme till 31st March, 2022, following
                              the new procedure will be bad in law. Consequently, it cannot be said that a
                              fiction is created or clock stopped only for reassessment and not for
                              assessment and/or Faceless Penalty Scheme.
 90.      In fact, wherever the Legislature intended that the old procedure is to be
                              followed in respect of any assessment year as against the new procedure post
                              the amendment, then it has specifically provided so. For instance, the Direct
                              Laws (Amendment) Act, 1987 had introduced a new scheme for best judgment
                              assessment (ex parte) under Section 144 w.e.f. 1st April 1989. However, in
                              order to ensure that the assessments for years before coming into force of the
                              new law is done under the old law, a specific sub-Section (2) was inserted in

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Section 144 to provide that the provisions of this Section as they stood
                              immediately before their amendment by the Direct Tax Laws (Amendment)
                              Act, 1987, shall apply to and in relation to any assessment for the assessment
                              year commencing on the 1st day of April, 1988, or any earlier assessment year.
                              \

                              THE PRINCIPLE THAT A SPECIAL ACT OVERRIDES A GENERAL ACT
                              HAS NO APPLICATION TO THE PRESENT CASE BECAUSE RELAXATION
                              ACT AND THE FINANCE ACT OPERATE IN DISTINCT AND SEPARATE
                              SPHERES.
                              91.      It is equally well-settled law that a special Act overrides a general
                              Act. But this principle has no application whatsoever in the present case
                              because Relaxation Act, 2021 and the Finance Act, 2021 operate in their
                              distinct and separate spheres. Consequently, the question whether one
                              prevails over and supersedes the other does not arise at all.

                              THE ARGUMENT OF THE RESPONDENTS THAT RELAXATION ACT
                              PROMOTES THE EQUALITY PRINCIPLES UNDER ARTICLE 14 OF THE
                              CONSTITUTION IS UNTENABLE IN LAW.

                              92.      The argument of the Respondents that Relaxation Act, 2020,
                              promotes the equality principles under Article 14 of the Constitution and
                              that if Petitioner's arguments are accepted, it would lead to unreasonable
                              classification with those assessees who could not be issued notices earlier is
                              untenable in law. If this is taken to the logical end, then any amendment in
                              the procedural law will create inequality since procedural law will be
                              applicable for all pending assessments as on that date. In UOI vs. VKC
                              Footsteps India Pvt. Ltd.: CA No.4810/2021, the Supreme Court has held,
                              "'Perfect uniformity and perfect equality of taxation' in all aspects in which
                              "the human mind can view it, is a baseless dream".

Signature Not Verified        W.P.(C) 6176/2021 & connected matters                              Page 102 of 106
14:05:36
                               THE SUBMISSION OF THE REVENUE THAT SECTION 6 OF THE
                              GENERAL CLAUSES ACT SAVES NOTICES ISSUED UNDER SECTION
                              148 POST 1ST APRIL, 2021 IS UNTENABLE IN LAW, AS IN THE
                              PRESENT CASE, THE REPEAL IS FOLLOWED BY A FRESH
                              LEGISLATION ON THE SAME SUBJECT AND THE NEW ACT
                              MANIFESTS AN INTENTION TO DESTROY THE OLD PROCEDURE.

                              93.      The provisions of the Finance Act, 2021 have not only repealed the
                              erstwhile provisions of Sections 147, 148, 149 and 151 of the Income Tax
                              Act, 1961 but also "substituted" them by new provisions. The process of
                              'substitution' consists of two steps: first, the rule is made to cease and the
                              next, the new rule is brought into existence in its place.
                              94.      'Substitution' has to be distinguished from 'suppression' or a mere
                              repeal of an existing provision. Substitution of a provision results in repeal
                              of the earlier provision and its replacement by the new provision.17
                              95.      Consequently, the submission of the revenue that Section 6 of the
                              General Clauses Act saves notices issued under Section 148 of the Income
                              Tax Act, 1961 is untenable in law, as in the present case, the repeal is
                              followed by a fresh legislation on the same subject and the new Act
                              manifests an intention to destroy the old procedure.18

                              APPRECIATION
 96.      Before parting with this case, this Court places on record its deep
                              appreciation for the assistance rendered by all the learned counsel, who
                              appeared in the present batch of matters, in particular, Ms.Kavita Jha,
                              Mr.Ved Jain, Mr.Sunil Agarwal and Mr.Zoheb Hossain, as they filed not

                              17
Zile Singh vs. State of Haryana, (2004) 8 SCC 1.
                              18
 State of Punjab vs. Mohar Singh: AIR 1955 SC 84; Jayantilal Amrathlal vs UOI: (1972) 4 SCC 174;
                              Brihan Maharashtra Sugar Syndicate Limited vs. Janardan Ramachandran Kulkarni: AIR 1960 SC
                              794.
Signature Not Verified        W.P.(C) 6176/2021 & connected matters                                             Page 103 of 106
14:05:36
                               only compilation of documents and judgments but they also ensured that the
                              virtual hearing was conducted in an organized and proper manner.
                              CONCLUSION
                              97.      This Court is of the view that as the Legislature has introduced the
                              new provisions, Sections 147 to 151 of the Income Tax Act, 1961 by way of
                              the Finance Act, 2021 with effect from 1st April, 2021 and as the said
                              Section 147 is not even mentioned in the impugned Explanations, the
                              reassessment notices relating to any Assessment Year issued under Section
                              148 after 31st March, 2021 had to comply with the substituted Sections.
                              98.      It is clarified that the power of reassessment that existed prior to 31st
                              March, 2021 continued to exist till the extended period i.e. till 30th June,
                              2021; however, the Finance Act, 2021 has merely changed the procedure to
                              be followed prior to issuance of notice with effect from 1st April, 2021.
 99.      This Court is of the opinion that Section 3(1) of Relaxation Act
                              empowers the Government/Executive to extend only the time limits and it
                              does not delegate the power to legislate on provisions to be followed for
                              initiation of reassessment proceedings. In fact, the Relaxation Act does not
                              give power to Government to extend the erstwhile Sections 147 to 151
                              beyond 31st March, 2021 and/or defer the operation of substituted provisions
                              enacted by the Finance Act, 2021. Consequently, the impugned
                              Explanations in the Notifications dated 31st March, 2021 and 27th April,
                              2021 are not conditional legislation and are beyond the power delegated to
                              the Government as well as ultra vires the parent statute i.e. the Relaxation
                              Act. Accordingly, this Court is respectfully not in agreement with the view
                              of the Chhattisgarh High Court in Palak Khatuja (supra), but with the views

Signature Not Verified        W.P.(C) 6176/2021 & connected matters                                Page 104 of 106
14:05:36
                               of the Allahabad High Court and Rajasthan High Court in Ashok Kumar
                              Agarwal (supra) and Bpip Infra Private Limited (supra) respectively.
                              100. The submission of the Revenue that Section 6 of the General Clauses
                              Act saves notices issued under Section 148 post 31st March, 2021 is
                              untenable in law, as in the present case, the repeal is followed by a fresh
                              legislation on the same subject and the new Act manifests an intention to
                              destroy the old procedure. Consequently, if the Legislature has permitted
                              reassessment to be made in a particular manner, it can only be in this
                              manner, or not at all.
                              101. The argument of the respondents that the substitution made by the
                              Finance Act, 2021 is not applicable to past Assessment Years, as it is
                              substantial in nature is contradicted by Respondents' own Circular 549 of
                              1989 and its own submission that from 1st July, 2021, the substitution made
                              by the Finance Act, 2021 will be applicable.
                              102. Revenue cannot rely on Covid-19 for contending that the new
                              provisions Sections 147 to 151 of the Income Tax Act, 1961 should not
                              operate during the period 1st April, 2021 to 30th June, 2021 as Parliament
                              was fully aware of Covid-19 Pandemic when it passed the Finance Act,
                              2021. Also, the arguments of the respondents qua non-obstante clause in
                              Section 3(1) of the Relaxation Act, 'legal fiction' and 'stop the clock
                              provision' are contrary to facts and untenable in law.
                              103. Consequently,                this   Court   is   of   the   view     that      the
                              Executive/Respondents/Revenue cannot use the administrative power to
                              issue Notifications under Section 3(1) of the Relaxation Act, 2020 to
                              undermine the expression of Parliamentary supremacy in the form of an Act
                              of Parliament, namely, the Finance Act, 2021. This Court is also

Signature Not Verified        W.P.(C) 6176/2021 & connected matters                                   Page 105 of 106
14:05:36
                               of the opinion that the Executive/Respondents/Revenue cannot frustrate the
                              purpose of substituted statutory provisions, like Sections 147 to 151 of
                              Income Tax Act, 1961 in the present instance, by emptying it of content or
                              impeding or postponing their effectual operation.

                              RELIEF:
                              104. Keeping in view the aforesaid conclusions, Explanations A(a)(ii)/A(b)
                              to the Notifications dated 31st March, 2021 and 27th April, 2021 are declared
                              to be ultra vires the Relaxation Act, 2020 and are therefore bad in law and
                              null and void.
                              105. Consequently, the impugned reassessment notices issued under
                              Section 148 of the Income Tax Act, 1961 are quashed and the present writ
                              petitions are allowed. If the law permits the respondents/revenue to take
                              further steps in the matter, they shall be at liberty to do so. Needless to state
                              that if and when such steps are taken and if the petitioners have a grievance,
                              they shall be at liberty to take their remedies in accordance with law.

                                                                                           MANMOHAN, J

                                                                                      NAVIN CHAWLA, J
                              DECEMBER 15, 2021
                              rn/KA/js/TS/AS

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14:05:36

Naresh Trehan vs Rakesh Kumar Gupta on 24 November, 2014
Author: Vibhu Bakhru
Bench: Vibhu Bakhru
            THE HIGH COURT OF DELHI AT NEW DELHI
%                                                Judgment delivered on: 24.11.2014
+        W.P.(C) 85/2010 & CM Nos.156/2010 & 5560/2011
         NARESH TREHAN                                                   ..... Petitioner
                                     versus
         RAKESH KUMAR GUPTA                                              ..... Respondent
                                                   AND
+        W.P.(C) 251/2010 & CM No.526/2010
         AAA PORTFOLIO PVT LTD AND ANR.                                  ..... Petitioners
                                     versus
                                                   AND
+        W.P.(C) 206/2010 & CM No.392/2010
         ESCORTS LTD                                                     ..... Petitioner
                                     versus
                                                   AND
+        W.P.(C) 214/2010 & CM No.445/2010
         CPIO CUM ASSISTANT COMMISSIONER
         OF INCOME TAX                                                   ..... Petitioner
                                     versus
                                                   AND
+        W.P.(C) 202/2010 & 389/2010
         ESCORTS HEART INSTITUTE AND
         RESEARCH CENTRE                                                 ..... Petitioner

W.P.(C) Nos. 85/2010 & other connected matters                                  Page 1 of 29
                                      versus
         RAKESH KUMAR GUPTA                               ..... Respondent
                                                 AND
+        W.P.(C) 207/2010 & CM No.394/2010
         RAJAN NANDA                                      ..... Petitioner
                                     versus
Advocates who appeared in this case:
For the Petitioners   : Mr Rajiv Nayar, Sr. Advocate with Ms Shyel
                       Trehan and Ms Manjira Dasgupta in W.P.(C)
                       85/2010.
                       Mr Sandeep Sethi, Sr. Advocate with Mr Simran
                       Mehta and Mr Prabhat Kalia in W.P.(C) Nos.
                       251/2010, 206/2010 & 207/2010.
                       Mr Rohit Puri in W.P.(C) 202/2010.
For the Respondent   : In person.

CORAM:-
HON'BLE MR JUSTICE VIBHU BAKHRU

                                            JUDGMENT

VIBHU BAKHRU, J

1.       These petitions are filed inter alia impugning a common order dated
14.12.2009 passed by the Central Information Commission (hereafter
'CIC') directing the Public Information Officers, Commissioner of Income-
tax (hereafter 'PIO') to provide inspection of the records and also other
information sought for by the respondent relating to the income tax returns
filed by the petitioners (other than the petitioner in W.P.(C) No.214 of
2010).

W.P.(C) Nos. 85/2010 & other connected matters                   Page 2 of 29
 2.       Brief facts which are relevant for examining the controversy in the
present petitions are that on 13.01.2009, Rakesh Kumar Gupta -
respondent, who is stated to be an informer to the income tax department,
filed an application under the Right to Information Act, 2005 (hereafter the
'Act') with the PIO inter alia seeking information and all the records
available with the Income tax department in respect of nine assessees (out
of the said assesses one assessee was deleted due to repetition) for various
assessment years. The respondent had also sought:-

         "1. Inspection of all records in above respect.

         2. Kindly provide the copies of the documents mentioned at
         the time of inspection.

         3. Kindly provide the officers (from assessing officers to
         CCIT), who are the officers to take action on "Tax Evasion
         Petition" given by me from 1/8/2003 till date.

         Request
         4      If you want to treat the above information as third
         party information and want to send the notice to so called
         third parties inviting their objection, then kindly send the
         complete request to them including all the annexure e.g.
         citing public interest by me due to which information should
         be given to me."

3.        The details sought by the respondent of the eight assessees
(hereinafter collectively referred to as 'assessees') including the details of
the assessment years are as under:-

  i)     Dr. Naresh Trehan - petitioner in W.P.(C) No.85/2010 pertaining to
         Assessment Year 1998-99 to 2005-06

W.P.(C) Nos. 85/2010 & other connected matters                   Page 3 of 29
   ii)    Mr. Rajan Nanda - petitioner in W.P.(C) No.207/2010 pertaining to

  iii) AAA Portfolio Pvt. Ltd. - petitioner in W.P.(C) No.251/2010
         pertaining to Assessment Year 1998-99 to 2005-2006

  iv) Big Apple Clothing Pvt. Ltd. - petitioner in W.P.(C) No.251/2010
         pertaining to Assessment Year 1998-99 to 2005-06

  v)     Escorts Ltd. - petitioner in W.P.(C) No.206/2010 pertaining to
         Assessment Year 1998-99 to 2005-06.

  vi) Escorts Heart Institute & Research Centre Ltd. (Delhi) - petitioner in
         W.P.(C) No.202/2010 pertaining to Assessment Year 1998-99 to
         2001-02.

  vii) Escorts Heart Institute & Research Centre Chandigarh (Society)
         pertaining to Assessment Year (2001-2002)

  viii) Escorts Heart Institute & Research Centre Limited, Chandigarh
         pertaining to Assessment Year 2000-01 to 2005-06.

4.       Since the information sought by the respondent is third party
information, the Deputy Commissioner of Income-tax issued separate
notices dated 04.02.2009 under Section 11(2) of the Act to the assessees.
The assessees submitted their separate objections and objected to the
inspection and furnishing of the information. PIO considered the objections
of the assessees and rejected the RTI application of the respondent, by its
common order dated 16.02.2009, on the ground that the respondent has
failed to substantiate the public interest involved in disclosing the

W.P.(C) Nos. 85/2010 & other connected matters                  Page 4 of 29
 information relating to third parties. PIO, however, held that the Tax
Evasion Petition is under compilation and would be provided in due course.

5.       The respondent preferred separate appeals before the First Appellate
Authority - Addl. Commissioner of Income-tax (hereafter the 'FAA')
against the order of PIO. By a common order dated 08.05.2009, FAA
rejected the appeal of the respondent. Aggrieved by the order dated
08.05.2009 of FAA, the respondent preferred an appeal before the CIC. By
the impugned order dated 14.12.2009, the CIC allowed the appeal and
directed PIO to provide inspection of the records and also other information
sought for by the respondent.

6.        The learned counsel for the petitioner contended:-

6.1      that the information sought for by the respondent such as income tax
returns are personal information and are exempt from disclosure under
Section 8(1)(j) of the Act. Reliance was placed on decision of Supreme
Court in Girish Ramchandra Deshpande v. Central Information Commr.:
(2013) 1 SCC 212, decision of Full Bench of this Court in Secretary
General, Supreme Court of India v. Subhash Chandra Agarwal & Anr.:
166 (2010) DLT 305 and decision of Full Bench of the CIC in G R Rawal
v. Director General of Income Tax (Investigation): Appeal No.
CIC/AT/A/2007/00490, decided on 05.03.2008.

6.2      that the disclosure of the income tax returns is prohibited under
Section 138 of the Income Tax Act, 1961 and can be made only if the
Commissioner is satisfied that the disclosure is in public interest, which in
the present case was rejected by the Commissioner. Reference was made to

W.P.(C) Nos. 85/2010 & other connected matters                   Page 5 of 29
Hanuman Pershadganeriwala v. The Director of Inspection, Income Tax,
New Delhi: (1974) 10 DLT 96.

6.3      that the disclosure of information is also exempted under Section
8(1)(e) of the Act as the income tax department is holding the information
of the assessees in fiduciary capacity.

6.4      that the respondent has failed to disclose the public interest which is
a mandatory requirement under Section 11 of the Act for disclosure of
confidential and personal third party information.

6.5      that the disclosure of the information sought for would be violative
of the right to privacy, which has been read into Article 21 of the
Constitution of India. Reference was made to paragraph 110 to 112 of the
decision of this court in Secretary General, Supreme Court of India v.
Subhash Chandra Agarwal & Anr.: 166 (2010) DLT 305.

6.6      that the disclosure of income tax returns is expressly forbidden to be
published by a tribunal, in the present case and the CIC               therefore,
exempted under Section 8(1)(b) of the Act.

7.       The respondent contended:-

7.1      that he is an informer with the income tax department and sought the
information in public interest in order to recover the tax evaded by the
petitioners, to recover the properties mis-appropriated by the petitioners and
to curb corruption and therefore, the exemptions provided under Section
8(1)(e) and (j) of the Act are not applicable.

W.P.(C) Nos. 85/2010 & other connected matters                      Page 6 of 29
 7.2      that the bank details and tax details should be given to public, where
prima facie wrong doing is detected by the government. Reliance was
placed on Ram Jethmalani & Ors. v. Union of India: (2011) 8 SCC 1.

7.3      that the activities performed by the income tax department are public
in nature and the income tax records are public documents. Reliance was
placed on Bhagat Singh v. Chief Information Commissioner and Ors.:
146 (2008) DLT 385.

7.4      that the disclosure of information under Section 3 of the Act is the
rule and exemption under Section 8 of the Act is the exception.

8.       The controversy that needs to be addressed is whether income tax
returns and the information provided to the income tax authorities during
the course of assessment and proceedings thereafter, are exempt under the
provision Section 8(1) of the Act and further whether in the given
circumstances of this case, the CIC was correct in holding that such
information was required to be disclosed in public interest.

9.       By virtue of Section 3 of the Act all citizens have a right to
information subject to provisions of the Act. The expression "information"
is defined under Section 2(f) of the Act as under:-

         "2(f) "information" means any material in any form, including
         records, documents, memos, e-mails, opinions, advices, press
         releases, circulars, orders, logbooks, contracts, reports, papers,
         samples, models, data material held in any electronic form and
         information relating to any private body which can be accessed
         by a public authority under any other law for the time being in
         force;"

W.P.(C) Nos. 85/2010 & other connected matters                      Page 7 of 29
                                                         (emphasis provided)

10.      It is also relevant to note that by virtue of Section 22 of the Act, the
provisions of the Act have an overriding effect over any other inconsistent
law or instrument.

11.      The petitioners have contended that the income tax returns and other
information provided by the assessees during the course of assessment
would be exempt from disclosure by virtue of section 8(1)(d), Section
8(1)(e) and 8(1)(j) of the Act. It is thus necessary to examine the
applicability of each of the above provisions with respect to the information
sought by the respondent.

12.      Section 8(1)(d) of the Act expressly provides an exemption in respect
of such information. At this stage, it is necessary to refer to Section 8(1)(d)
of the Act which reads as under:-

         "8. Exemption from disclosure of information.-- (1)
         Notwithstanding anything contained in this Act, there shall be
         no obligation to give any citizen,--

         xxxx              xxxx                  xxxx   xxxx       xxxx

         (d) information including commercial confidence, trade secrets
             or intellectual property, the disclosure of which would harm
             the competitive position of a third party, unless the
             competent authority is satisfied that larger public interest
             warrants the disclosure of such information;

13.      Certain petitioners had specifically pleaded that information provided
in the income tax returns could not be disclosed as the information was
provided in confidence. The CIC rejected the same by holding that the
parties had failed to explain as to how that ground could apply or how

W.P.(C) Nos. 85/2010 & other connected matters                            Page 8 of 29
 disclosure of information relating to commercial confidence would harm
their competitive interest.

14.      The income tax returns filed by an assessee and further information
that is provided during the assessment proceedings may also include
confidential information relating to the business or the affairs of an
assessee. An assessee is expected to truly and fairly disclose particulars
relevant for the purposes of assessment of income tax. The nature of the
disclosure required is not limited only to information that has been placed
by an assessee in public domain but would also include information which
an assessee may consider confidential. As a matter of illustration, one may
consider a case of a manufacturer who manufactures and deals in multiple
products for supplies to different agencies.     In the normal course, an
Assessing Officer would require an assessee to disclose profit margins on
sales of such products. Such information would clearly disclose the pricing
policy of the assessee and public disclosure of this information may clearly
jeopardise the bargaining power available to the assessee since the data as
to costs would be available to all agencies dealing with the assessee. It is,
thus, essential that information relating to business affairs, which is
considered to be confidential by an assessee must remain so, unless it is
necessary in larger public interest to disclose the same. If the nature of
information is such that disclosure of which may have the propensity of
harming one's competitive interests, it would not be necessary to
specifically show as to how disclosure of such information would, in fact,
harm the competitive interest of a third party. In order to test the
applicability of Section 8(1)(d) of the Act it is necessary to first and

W.P.(C) Nos. 85/2010 & other connected matters                   Page 9 of 29
 foremost determine the nature of information and if the nature of
information is confidential information relating to the affairs of a private
entity that is not obliged to be placed in public domain, then it is necessary
to consider whether its disclosure can possibly have an adverse effect on
third parties.

15.      Insofar as the applicability of Section 8(1)(e) of the Act is concerned,
I am unable to accept the contention that a fiduciary relationship within the
meaning of Section 8(1)(e) of the Act can be attributed to a relationship
between an assessee and the income tax authority. The Supreme Court in
the case of CBSE v. Aditya Bandopadhyay: (2011) 8 SCC 497 had
explained that the words "information available to a person in its fiduciary
relationship" could not be construed in a wide sense but has to be
considered in the normal and recognized sense. The relevant extract of the
said decision is quoted below:-

         "41. In a philosophical and very wide sense, examining bodies
         can be said to act in a fiduciary capacity, with reference to the
         students who participate in an examination, as a Government
         does while governing its citizens or as the present generation
         does with reference to the future generation while preserving
         the environment. But the words "information available to a
         person in his fiduciary relationship" are used in Section 8(1)(e)
         of the RTI Act in its normal and well-recognised sense, that is,
         to refer to persons who act in a fiduciary capacity, with
         reference to a specific beneficiary or beneficiaries who are to be
         expected to be protected or benefited by the actions of the
         fiduciary--a trustee with reference to the beneficiary of the
         trust, a guardian with reference to a minor/physically
         infirm/mentally challenged, a parent with reference to a child, a
         lawyer or a chartered accountant with reference to a client, a
         doctor or nurse with reference to a patient, an agent with

W.P.(C) Nos. 85/2010 & other connected matters                      Page 10 of 29
          reference to a principal, a partner with reference to another
         partner, a Director of a company with reference to a
         shareholder, an executor with reference to a legatee, a Receiver
         with reference to the parties to a lis, an employer with reference
         to the confidential information relating to the employee, and an
         employee with reference to business dealings/transaction of the
         employer. We do not find that kind of fiduciary relationship
         between the examining body and the examinee, with reference
         to the evaluated answer books, that come into the custody of the
         examining body."
16.      The information provided by an assessee in its income tax return is in
compliance of the provisions of the Income Tax Act, 1961 and thus, could
not be stated to be information provided in course of a fiduciary
relationship.

17.      Four of the petitioners (Dr Naresh Trehan, Escorts Heart Institute and
Research Center, Delhi, Escorts Heard Institute and Research Center,
Chandigarh and Escorts Heart Institute and Research Center Ltd.) had
further contended that information sought by the respondent was exempt
under Section 8(1)(j) of the Act.                       Section 8(1)(j) of the Act exempts
information which relates to personal information.                      The said clause is
quoted below for ready reference:-

         xxxx              xxxx                  xxxx         xxxx       xxxx

         (j) information which relates to personal information the
             disclosure of which has not relationship to any public
             activity or interest, or which would cause unwarranted
             invasion of the privacy of the individual unless the Central

W.P.(C) Nos. 85/2010 & other connected matters                                  Page 11 of 29
                Public Information Officer or the State Public Information
               Officer or the appellate authority, as the case may be, is
               satisfied that the larger public interest justifies the
               disclosure of such information:"

18.      The question whether the information provided by an individual in
his income tax returns is exempt from disclosure under Section 8(1)(j) of
the Act is no longer res integra in view of the decision of the Supreme
(2013) 1 SCC 212. The relevant extract of the said judgment is quoted
below:

         "11. The petitioner herein sought for copies of all memos,
         show-cause notices and censure/punishment awarded to the
         third respondent from his employer and also details viz.
         movable and immovable properties and also the details of his
         investments, lending and borrowing from banks and other
         financial institutions. Further, he has also sought for the details
         of gifts stated to have been accepted by the third respondent, his
         family members and friends and relatives at the marriage of his
         son. The information mostly sought for finds a place in the
         income tax returns of the third respondent. The question that
         has come up for consideration is: whether the abovementioned
         information sought for qualifies to be "personal information" as
         defined in clause (j) of Section 8(1) of the RTI Act.

         12. We are in agreement with the CIC and the courts below that
         the details called for by the petitioner i.e. copies of all memos
         issued to the third respondent, show-cause notices and orders of
         censure/punishment, etc. are qualified to be personal
         information as defined in clause (j) of Section 8(1) of the RTI
         Act. The performance of an employee/officer in an organization
         is primarily a matter between the employee and the employer
         and normally those aspects are governed by the service rules
         which fall under the expression "personal information", the
         disclosure of which has no relationship to any public activity or

W.P.(C) Nos. 85/2010 & other connected matters                       Page 12 of 29
          public interest. On the other hand, the disclosure of which
         would cause unwarranted invasion of privacy of that individual.
         Of course, in a given case, if the Central Public Information
         Officer or the State Public Information Officer or the appellate
         authority is satisfied that the larger public interest justifies the
         disclosure of such information, appropriate orders could be
         passed but the petitioner cannot claim those details as a matter
         of right.

         13. The details disclosed by a person in his income tax returns
         are "personal information" which stand exempted from
         disclosure under clause (j) of Section 8(1) of the RTI Act,
         unless involves a larger public interest and the Central Public
         Information Officer or the State Public Information Officer or
         the appellate authority is satisfied that the larger public interest
         justifies the disclosure of such information.

         14. The petitioner in the instant case has not made a bona fide
         public interest in seeking information, the disclosure of such
         information would cause unwarranted invasion of privacy of
         the individual under Section 8(1)(j) of the RTI Act."
19.      The CIC rejected the aforesaid contention by holding that the
expression "personal information" would necessarily only apply to an
individual and could not be applicable in case of corporate entities.

20.      It has been contended by the petitioners that the expression "personal
information" must also extend to information relating to corporate entities.
Inasmuch as they may also fall within the definition of expression "person"
under the General Clauses Act, 1897 as well as under the Income Tax Act,
1961. However, I am unable to accept this contention for the reason that the
expression "personal information" as used in clause (j) of Section 8(1) of
the Act has to be read in the context of information relating to an
individual. A plain reading of the aforesaid clause would indicate that the

W.P.(C) Nos. 85/2010 & other connected matters                        Page 13 of 29
 expression "personal information" is linked with "invasion of privacy of the
individual".        The use of the word "the" before the word "individual"
immediately links the same with the expression "personal information"

21.      Black's law dictionary, sixth edition, inter alia, defines the word
"personal" as under:-

         "The word "personal" means appertaining to the person;
         belonging to an individual; limited to the person; having the
         nature or partaking of the qualities of human beings, or of
         movable property."
22.      A perusal of the above definition also indicates that the ordinary
usage of the word "personal" is in the context of an individual human being
and not a corporate entity. The U.S. Supreme Court has also interpreted the
expression "personal" to be used in the context of an individual human
being and not a corporate entity. In the case of Federal Communications
Commission v. AT&T Inc: 2011 US LEXIS 1899 the US Supreme Court
considered the meaning of the expression "personal privacy" in the context
of the Freedom of Information Act, which required Federal Agencies to
make certain records and documents publically available on request. Such
disclosure was exempt if the records "could reasonably be expected to
constitute an unwarranted invasion of personal privacy".          The U.S.
Supreme Court held that the expression "Personal" used in the aforesaid
context could not be extended to corporations because the word "personal"
ordinarily refers to individuals. The Court held that the expression
"personal" must be given its ordinary meaning. The relevant extract of the
said judgment is as under:

W.P.(C) Nos. 85/2010 & other connected matters                  Page 14 of 29
          ""Person" is a defined term in the statute; "personal" is
         not. When a statute does not define a term, we typically "give
         the phrase its ordinary meaning." Johnson v. United States, 559
         U.S. ___, ___, 559 U.S. 133, 130 S. Ct. 1265, 176 L. Ed. 2d 1,
         8 (2010). "Personal" ordinarily refers to individuals. We do not
         usually speak of personal characteristics, personal effects,
         personal correspondence, personal influence, or personal
         tragedy as referring to corporations or other artificial entities.
         This is not to say that corporations do not have correspondence,
         influence, or tragedies of their own, only that we do not use the
         word "personal" to describe them.
         Certainly, if the chief executive officer of a corporation
         approached the chief financial officer and said, "I have
         something personal to tell you," we would not assume the CEO
         was about to discuss company business. Responding to a
         request for information, an individual might say, "that's
         personal." A company spokesman, when asked for
         information about the company, would not. In fact, we often
         use the word "personal" to mean precisely the opposite of
         business-related: We speak of personal expenses and business
         expenses, personal life and work life, personal opinion and a
         company's                                               view.

         Dictionaries also suggest that "personal" does not ordinarily
         relate to artificial "persons" such as corporations. See, e.g., 7
         OED 726 (1933) ("[1] [o]f, pertaining to . . . the individual
         person or self," "individual; private; one's own," "[3] [o]f or
         pertaining to one's person, body, or figure," "[5] [o]f, pertaining
         to, or characteristic of a person or self-conscious being, as
         opposed to a thing or abstraction"); 11 OED at 599-600 (2d ed.
         1989) (same); Webster's Third New International Dictionary
         1686 (1976) ("[3] relating to the person or body"; "[4] relating
         to an individual, his character, conduct, motives, or private
         affairs"; "[5] relating to or characteristic of human beings as
         distinct from things"); ibid. (2002) (same)."

W.P.(C) Nos. 85/2010 & other connected matters                       Page 15 of 29
 23.      In my view, the aforesaid reasoning would also be applicable to the
expression "personal" used in Section 8(1)(j) of the Act. The expression
'individual' must be construed in an expansive sense and would include a
body of individuals. The said exemption would be available even to
unincorporated entities as also private, closely held undertaking which are
in substance alter egos of their shareholders. However, the expression
individual cannot be used as a synonym for the expression 'person'. Under
the General Clauses Act, 1897 a person is defined to "include any company
or association or body of individuals, whether incorporated or not". Thus,
whereas a person would include an individual as well as incorporated
entities and artificial persons, the expression 'individual' cannot be
interpreted to include such entities. The context in which, the expression
"personal information" is used would also exclude it application to large
widely held corporations. While, confidential information of a corporation
is exempt from disclosure under Section 8(1)(d) of the Act, there is no
scope to exclude other information relating to such corporations under
Section 8(1)(j) of the Act as the concept of a personal information cannot in
ordinary language be understood to mean information pertaining to a public
corporation.

24.      It would also be relevant to refer to the decision of a Division Bench
of this Court in the case of Ashok Kumar Goel v. Public Information
Officer Vat Ward No. 64 & Anr.: (2012) 188 DLT 597 whereby it was
held that information of the returns made to the Sales Tax Commissioner in
relation to a firm was exempt under Section 8(1) of the Act. The relevant
portion of the said judgment is quoted as under:-

W.P.(C) Nos. 85/2010 & other connected matters                     Page 16 of 29
          "7. It is not in dispute that the information in the form of returns
         filed by the respondent No. 2's firm is in the nature of
         commercial confidence which is clearly inferable from Section
         98 of the Act. Such information can be given only if larger
         public interest warrants the disclosure of this information. All
         the authorities below including the learned Single Judge has
         held and rightly so that no public interest is at all involved in
         seeking of this information by the appellant from the
         Sales Tax Commissioner. What to talk of public interest, the
         finding is that the information is sought with oblique motive to
         settle personal scores."
25.      Indisputably, Section 8(1)(j) of the Act would be applicable to the
information pertaining to Dr Naresh Trehan (petitioner in W.P.(C) 88/2010)
and the information contained in the income tax returns would be personal
information under Section 8(1)(j) of the Act. However, the CIC directed
disclosure of information of Dr Trehan also by concluding that income tax
returns and information provided for assessment was in relation to a "public
activity." In my view, this is wholly erroneous and unmerited. The act of
filing returns with the department cannot be construed as public activity.
The expression "public activity" would mean activities of a public nature
and not necessarily act done in compliance of a statute. The expression
"public activity" would denote activity done for the public and/or in some
manner available for participation by public or some section of public.
There is no public activity involved in filing a return or an individual
pursuing his assessment with the income tax authorities. In this view, the
information relating to individual assesse could not be disclosed. Unless,
the CIC held that the same was justified "in the larger public interest"

W.P.(C) Nos. 85/2010 & other connected matters                        Page 17 of 29
 26.      At this stage, it may be appropriate to consider the nature of
information that is provided by an assesse to its Assessing Officer. In case
of Income from business and profession, the income tax returns mainly
disclose the final accounts (i.e. profit and loss account and balance sheets)
This information is otherwise also liable to be disclosed by companies and
is available in public domain since it is necessary for a company to file its
annual accounts with the Registrar of Companies. Other incorporated
entities are similarly required to also publically disclose their final
accounts. However, an Assessing Officer may call for further information
while determining the assessable income, which may include all books and
papers maintained by an entity. Such information may also have
information relating to other parties, the disclosure of which may be exempt
under Section 8(1) of the Act. As a matter of illustration, the books of
accounts would record transactions of commercial nature which may enjoin
the parties to the transactions to keep the information confidential. Further,
the books of accounts would also record salaries and other payments to
other individuals. Disclosure of such information would affect not just the
assessee but also other parties. In the circumstances, it would be necessary
to examine the details of information that are sought from the public
authority. In the present case, the respondent seems to have sought for an
omnibus disclosure of all records and returns. In my view, the same could
not be allowed without examining the nature of information contained
therein.

27.      The Supreme Court in the case of Thalappalam Ser. Coop. Bank Ltd.
and others v. State of Kerala and others: Civil Appeal No. 9017 of 2013,

W.P.(C) Nos. 85/2010 & other connected matters                   Page 18 of 29
 decided on 07.10.2013. considered the question whether a society
registered would fall within the definition of a public authority under
Section 2(h) of the Act. The Court also clearly stated that the information
supplied by a society to the Registrar of Societies could be disclosed except
for the information that was exempt under Section 8(1) of the Act and that
included accounts maintained by members of society. The relevant passage
from the said judgment is quoted below:-

         "52. Registrar of Cooperative Societies functioning under the
         Cooperative Societies Act is a public authority within the
         meaning of Section 2(h) of the Act. As a public authority,
         Registrar of Co-operative Societies has been conferred with lot
         of statutory powers under the respective Act under which he is
         functioning. He is also duty bound to comply with the
         obligations under the RTI Act and furnish information to a
         citizen under the RTI Act. Information which he is expected to
         provide is the information enumerated in Section 2(f) of the
         RTI Act subject to the limitations provided under Section 8 of
         the Act. Registrar can also, to the extent law permits, gather
         information from a Society, on which he has supervisory or
         administrative control under the Cooperative Societies Act.
         Consequently, apart from the information as is available to him,
         under Section 2(f), he can also gather those information from
         the Society, to the extent permitted by law. Registrar is also not
         obliged to disclose those information if those information fall
         under Section 8(1)(j) of the Act. No provision has been brought
         to our knowledge indicating that, under the Cooperative
         Societies Act, a Registrar can call for the details of the bank
         accounts maintained by the citizens or members in a
         cooperative bank . Only those information which a Registrar of
         Cooperative Societies can have access under the Cooperative
         Societies Act from a Society could be said to be the information
         which is "held" or "under the control of public authority". Even
         those information, Registrar, as already indicated, is not legally
         obliged to provide if those information falls under the exempted

W.P.(C) Nos. 85/2010 & other connected matters                      Page 19 of 29
          category mentioned in Section 8(j) of the Act. Apart from the
         Registrar of Co-operative Societies, there may be other public
         authorities who can access information from a Co-operative
         Bank of a private account maintained by a member of Society
         under law, in the event of which, in a given situation, the
         society will have to part with that information. But the demand
         should have statutory backing.

         53. Consequently, an information which has been sought for
         relates to personal information, the disclosure of which has no
         relationship to any public activity or interest or which would
         cause unwarranted invasion of the privacy of the individual, the
         Registrar of Cooperative Societies, even if he has got that
         information, is not bound to furnish the same to an applicant,
         unless he is satisfied that the larger public interest justifies the
         disclosure of such information, that too, for reasons to be
         recorded in writing."

28.      It is apparent that information submitted by an assessee in the course
of assessment, may also include information relating to other persons. The
exclusions available under Section 8(1) of the Act, would also be available
in respect of that information.

29.      Section 137 of the Income Tax Act, 1961 provided that the
information furnished by an assessee was confidential and was not liable to
be disclosed. Section 137 of the Income Tax Act, 1961 was deleted by the
Finance Act, 1964 and simultaneously, Section 138 the Income Tax Act,
1961 was substituted. Section 138 of the Income Tax Act, 1961 is quoted
below:-

         "138. Disclosure of information respecting assessees.- (1)(a)
         The Board or any other income-tax authority specified by it by
         a general or special order in this behalf may furnish or cause to
         be furnished to-

W.P.(C) Nos. 85/2010 & other connected matters                        Page 20 of 29
            (i) any officer, authority or body performing any functions
               under any law relating to the imposition of any tax, duty
               or cess, or to dealings in foreign exchange as defined in
               clause (n) of section 2 of the Foreign Exchange
               Management Act, 1999 (42 of 1999); or

           (ii) such officer, authority or body performing functions
                under any other law as the Central Government may, if in
                its opinion it is necessary so to do in the public interest,
                specify by notification in the Official Gazette in this
                behalf,

         any such information received or obtained by any income-
         tax authority in the performance of his functions under this
         Act, as may, in the opinion of the Board or other income-tax
         authority, be necessary for the purpose of enabling the
         officer, authority or body to perform his or its functions
         under that law.

         (b) Where a person makes an application to the Chief
         Commissioner or Commissioner in the prescribed form for any
         information relating to any assessee received or obtained by any
         income-tax authority in the performance of his functions under
         this Act, the Chief Commissioner or Commissioner may, if he
         is satisfied that it is in the public interest so to do, furnish or
         cause to be furnished the information asked for and his decision
         in this behalf shall be final and shall not be called in question in
         any court of law.

         (2) Notwithstanding anything contained in sub-section (1) or
         any other law for the time being in force, the Central
         Government may, having regard to the practices and usages
         customary or any other relevant factors, by order notified in
         the Official Gazette, direct that no information or document
         shall be furnished or produced by a public servant in respect of
         such matters relating to such class of assessees or except to
         such authorities as may be specified in the order."

W.P.(C) Nos. 85/2010 & other connected matters                        Page 21 of 29
 30.       In the case of Hanuman Pershad (supra), this Court considered the
question whether there was any bar on the Income Tax Department from
disclosing records produced during the assessment proceedings. The said
controversy was answered by the following words:-

         "It is undoubtedly open to the authorities to disclose
         information received by them from assessments or other
         proceedings under the Act. However, there are restrictions
         contained in Section 138 as now existing concerning the
         manner in which that information is to be disclosed. Leaving
         aside sub-clause (a) of sub-section (1) it seems that under sub-
         clause (b), the Commissioner can disclose information if he is
         satisfied that it is within the public interest to do so. Hence, if
         some other authority applies to the Commissioner to obtain
         information, the same may be disclosed in the discretion of the
         Commissioner. Under Sub-clause (a) there is also a power to
         furnish information to other authorities. As this matter has not
         been fully argued or discussed in the present case, it is
         sufficient to note that there is no power to disclose information
         to other authorities and officers outside the provisions of the
         Section. As far as the information already given is concerned,
         we have no power to give any direction concerning the same."

31.      Although by virtue of Section 22 of the Act, the provisions of the Act
have an overriding effect over any other inconsistent law, the said
provisions of the Act insofar as they are not inconsistent with other statutes
must be read harmoniously. Undoubtedly, the income tax returns and
information provided to Income Tax Authorities by assessees is
confidential and not required to be placed in public domain. Given the
nature of the income tax returns and the information necessary to support
the same, it would be exempt under Section 8(1)(j) of the Act in respect of
individual and unincorporated assessees. The information as disclosed in

W.P.(C) Nos. 85/2010 & other connected matters                       Page 22 of 29
 the income tax returns would qualify as personal information with regard to
several private companies which are, essentially, alter egos of their
promoters. However, in cases of widely held companies most information
relating to their income and expenditure would be in public domain and the
confidential information would be exempt from disclosure under Section
8(1)(d) of the Act. Further, even in cases of corporate entities, the income
tax returns and other disclosure made to authorities would also include
transactions with other parties and those parties can also claim the
exception under Section 8(1) of the Act. One has to also bear in mind that
an authority may not have any obligation to provide any information other
than in the form in which it is available and the information provided by an
assessee may not have been edited to remove references to other persons.
Keeping all the aforesaid considerations in view, the parliament has enacted
Section 138 of the Income Tax Act, 1961 to provide for disclosure only
where it is necessary in public interest. Similar provisions are enacted
under the Act and clauses (d), (e) and (j) of Section 8(1) of the Act that
specify that information exempt from disclosure under those clauses, could
be disclosed in larger public interest. Section 8(2) of the Act also provides
for a non obstante clause which permits disclosure of information in larger
public interest.

32.      It would also be necessary to refer to Section 11 of the Act, which
provides for a notice to a third party before any third party information is
disclosed.        The proviso to Section 11 of the Act also specifies that
disclosure of trade or commercial secrets, which are protected by law

W.P.(C) Nos. 85/2010 & other connected matters                   Page 23 of 29
 would not be allowed unless their disclosure is necessary in public interest.
Section 11(1) of the Act reads as under:-

         "11. Third party information.--(1) Where a Central Public
         Information Officer or the State Public Information Officer, as
         the case may be, intends to disclose any information or record,
         or part thereof on a request made under this Act, which relates
         to or has been supplied by a third party and has been treated as
         confidential by that third party, the Central Public Information
         Officer or State Public Information Officer, as the case may be,
         shall, within five days from the receipt of the request, give a
         written notice to such third party of the request and of the fact
         that the Central Public Information Officer or State Public
         Information Officer, as the case may be, intends to disclose the
         information or record, or part thereof, and invite the third party
         to make a submission in writing or orally, regarding whether
         the information should be disclosed, and such submission of the
         third party shall be kept in view while taking a decision about
         disclosure of information:
         Provided that except in the case of trade or commercial secrets
         protected by law, disclosure may be allowed if the public
         interest in disclosure outweighs in importance any possible
         harm or injury to the interests of such third party."

33.      In the above context where the nature of income tax returns and other
information provided for assessment of income is confidential and its
disclosure is protected under the Income Tax Act, 1961 it is not necessary
to read any inconsistency between the Act and Income Tax Act, 1961. And,
information furnished by an assesse can be disclosed only where it is
necessary to do in public interest and where such interest outweighs in
importance, any possible harm or injury to the assesse or any other third
party. However, information furnished by corporate assessees that neither

W.P.(C) Nos. 85/2010 & other connected matters                      Page 24 of 29
 relates to another party nor is exempt under Section 8(1)(d) of the Act, can
be disclosed.

34.      In view of the aforesaid, the principal question that is to be addressed
is whether the CIC has misdirected itself in concluding that disclosure of
income tax returns and other information relating to assessment of income
of the petitioners was in public interest.

35.      In order to address this controversy, it is important to understand the
purpose of the respondent in seeking such information. The proceedings
under the Income Tax Act, 1961 with respect to assessment of income are
at different stages. It is stated that in some cases, assessment is complete
and appeal proceedings are pending in other fora.            In one case, it is
contended that the Appellate Authorities have remanded the matter of
assessment to the Assessing Officer. It is apparent that the assessment
proceedings have thrown up contentious issues which are being agitated
between the income tax authorities and the assessees. The respondent,
essentially, wants to intervene in those proceedings by adding and
providing his contentions or interpretation as to the information provided
by the asseesees or otherwise available with the Income Tax Authorities.

36.      In my view, the CIC has misdirected itself in concluding that this
was in larger public interest. The CIC arrived at this conclusion by noting
that disclosure of information was in larger public interest in increasing
public revenue and reducing corruption. The assessment proceedings are
not public proceedings where all and sundry are allowed to participate and
add their opinion to the proceedings. Merely because a spirited citizen

W.P.(C) Nos. 85/2010 & other connected matters                      Page 25 of 29
 wishes to assist in assessment proceedings, the same cannot be stated to be
in larger public interest. On the contrary, larger public interest would
require that assessment proceedings are completed expeditiously and by the
authorities who are statutorily empowered to do so.

37.      In the present case, there was no material to indicate that there was
any corruption on the part of the income tax authorities which led to a
justifiable apprehension that the said authorities were not performing their
function diligently. In any event, the CIC has not found that the
proceedings relating to assessment were not being conducted in accordance
with law and/or required the intervention of the respondent. Assessment
proceedings are quasi-judicial proceedings where assessee has to produce
material to substantiate their return of income.      Income tax has to be
assessed by the income tax authorities strictly in accordance with the
Income Tax Act, 1961 and based on the information sought by them. In the
present case, the respondent wants to process the information to assist and
support the role of an Assessing Officer.         This has a propensity of
interfering in the assessment proceedings and thus, cannot be considered to
be in larger public interest. The CIC had proceeded on the basis that the
income tax authorities should disclose information to informers of income
tax departments to enable them to bring instances of tax evasion to the
notice of income tax authorities. In my view, this reasoning is flawed as it
would tend to subvert the assessment process rather than aid it. If this idea
is carried to its logical end, it would enable several busy bodies to interfere
in assessment proceedings and throw up their interpretation of law and facts
as to how an assessment ought to be carried out. The propensity of this to

W.P.(C) Nos. 85/2010 & other connected matters                    Page 26 of 29
 multiply litigation cannot be underestimated. Further, the proposition that
unrelated parties could intervene in assessment proceedings is wholly alien
to the Income Tax Act, 1961. The income tax returns and information are
provided in aid of the proceedings that are conducted under that Act and
there is no scope for enhancing or providing for an additional dimension to
the assessment proceedings.

38.      The Supreme Court in Bihar Public Service Commission v. Saiyed
Hussain Abbas Rizwi: (2012) 13 SCC 61 held that the statutory exemption
provided under Section 8 of the Act is the rule and only in exceptional
circumstances of larger public interest the information would be disclosed.
It was also held that 'public purpose' needs to be interpreted in the strict
sense and public interest has to be construed keeping in mind the balance
between right to privacy and right to information. The relevant extract from
the said judgment is quoted below:

         "21. ...... Another very significant provision of the Act is
         Section 8(1)(j). In terms of this provision, information which
         cause unwarranted invasion of the privacy of the individual
         would fall within the exempted category, unless the authority
         concerned is satisfied that larger public interest justifies the
         disclosure of such information. It is, therefore, to be understood
         clearly that it is a statutory exemption which must operate as a
         rule and only in exceptional cases would disclosure be
         permitted, that too, for reasons to be recorded demonstrating
         satisfaction to the test of larger public interest. It will not be in
         consonance with the spirit of these provisions, if in a
         mechanical manner, directions are passed by the appropriate
         authority to disclose information which may be protected in
         terms of the above provisions. All information which has come

W.P.(C) Nos. 85/2010 & other connected matters                         Page 27 of 29
          to the notice of or on record of a person holding fiduciary
         relationship with another and but for such capacity, such
         information would not have been provided to that authority,
         would normally need to be protected and would not be open to
         disclosure keeping the higher standards of integrity and
         confidentiality of such relationship. Such exemption would be
         available to such authority or department.

 22. The expression "public interest" has to be understood in its
         true connotation so as to give complete meaning to the relevant
         provisions of the Act. The expression "public interest" must be
         viewed in its strict sense with all its exceptions so as to justify
         denial of a statutory exemption in terms of the Act. In its
         common parlance, the expression "public interest", like "public
         purpose", is not capable of any precise definition. It does not
         have a rigid meaning, is elastic and takes its colour from the
         statute in which it occurs, the concept varying with time and
         state of society and its needs (State of Bihar v. Kameshwar
         Singh [AIR 1952 SC 252] ). It also means the general welfare
         of the public that warrants recognition and protection;
         something in which the public as a whole has a stake [Black's
         Law Dictionary (8th Edn.)].
         23. The satisfaction has to be arrived at by the authorities
         objectively and the consequences of such disclosure have to be
         weighed with regard to the circumstances of a given case. The
         decision has to be based on objective satisfaction recorded for
         ensuring that larger public interest outweighs unwarranted
         invasion of privacy or other factors stated in the provision.
         Certain matters, particularly in relation to appointment, are
         required to be dealt with great confidentiality. The information
         may come to knowledge of the authority as a result of
         disclosure by others who give that information in confidence
         and with complete faith, integrity and fidelity. Secrecy of such
         information shall be maintained, thus, bringing it within the
         ambit of fiduciary capacity. Similarly, there may be cases
         where the disclosure has no relationship to any public activity
         or interest or it may even cause unwarranted invasion of privacy
         of the individual. All these protections have to be given their

W.P.(C) Nos. 85/2010 & other connected matters                       Page 28 of 29
          due implementation as they spring from statutory exemptions. It
         is not a decision simpliciter between private interest and public
         interest. It is a matter where a constitutional protection is
         available to a person with regard to the right to privacy. Thus,
         the public interest has to be construed while keeping in mind
         the balance factor between right to privacy and right to
         information with the purpose sought to be achieved and the
         purpose that would be served in the larger public interest,
         particularly when both these rights emerge from the
         constitutional values under the Constitution of India."

39.      Applying the aforesaid judgment to the facts of this case, it is
apparent that disclosure of information as directed has no discernable
element of larger public interest.

40.      Accordingly, the petitions are allowed and the impugned order is set
aside. The parties are left to bear their own costs.

                                                       VIBHU BAKHRU, J
NOVEMBER 24, 2014
RK

W.P.(C) Nos. 85/2010 & other connected matters                     Page 29 of 29

Shri Sunil Siddharthbhai Etc vs Commissioner Of Income Tax, Ahmedabad ... on 27 September, 1985
Equivalent 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
Bench: R.S. Pathak, P.N.  Bhagwati, Amarendra Nath  Sen
SHRI SUNIL SIDDHARTHBHAI ETC.

	Vs.

COMMISSIONER OF INCOME TAX, AHMEDABAD ETC.

DATE OF JUDGMENT27/09/1985

BENCH:
BENCH:
BHAGWATI, P.N. (CJ)

CITATION:
 1986 AIR  368		  1985 SCR  Supl. (3) 102
 1985 SCC  (4) 519	  1985 SCALE  (2)755

ACT:
      Transfer of a capital asset - When the assessee brings
the shares  of the  limited companies  into the	 partnership
firm as his contribution to its capital, whether there was a
transfer within	 the definition of section 2 (47) of capital
asset within  the terms of section 45 of the Income Tax Act,
1961.
     Capital gains,  scheme of	- Sections  45 and 48 of the
Income Tax,  1961, scope  of - When the assessee transferred
his shares  to the  partnership firm, whether he can be said
to have	 received a  consideration  within  the	 meaning  of
section 48  of the Income Tax Act, 1961 and that a profit of
gain accrued to him for the purpose of section 45 ibid.

HEADNOTE:
       In  Civil Appeal	 No. 1841  of 1981,  the  appellant-
assessee was  a partner	 in Messrs  Suvas Trading Company, a
partnership firm  constituted under  a deed  of	 partnership
dated September 27, 1973. As his contribution to the capital
of the	partnership firm,  the assessee	 made  over  certain
shares of  limited companies  which were  held by him as his
capital assets.	 The book  value of  the said  shares in his
account books was shown as Rs. 1,60,279 but on the date when
he contributed	those shares  to  the  partnership  firm  he
revalued the shares at the market value of Rs. 1,49,819, and
debited the  resulting	difference  of	Rs.  10,460  to	 his
capital account.  Since the Income Tax Officer, when drawing
up the	assessment order  for the assessment year 1974-75 in
respect of  the assessee  did not  include the difference in
the assessable income, the Commissioner of Income Tax, being
of the	opinion that the difference between the market value
of the	shares and  the cost of acquisition of the shares to
the assessee is liable to tax as capital gains under section
45 of  the Income  Tax Act,  1961 exercised  his  revisional
jurisdiction and reopening the assessment, remanded the case
to the	Income Tax  Officer  directing	him  to	 revise	 the
assessment after  computing the capital gains arising out of
the transfer.  The  assessee  appealed	to  the	 Income	 Tax
Appellate Tribunal,  which held	 that while  the transaction
did amount  to a  transfer within the meaning of sub-section
(47) of
103
section 2  of the Income Tax Act, 1961, it did not result in
capital gains  liable to  tax.	Subsequently  the  Appellate
Tribunal referred  the case to the High Court of Gujarat for
its opinion on the said two issues.
       In  Civil Appeal	 No. 1777/1981,	 the appellant was a
partner	 in  a	registered  partnership	 firm,	M/s.  Rajka,
constituted under  an agreement	 dated February	 24, 1973 of
which the  other partner  was his  wife. The assessee had in
his  possession	  580  ordinary	  shares  of  the  Ahmedabad
Manufacturing and  Calico Printing  Co. Ltd. and 82 ordinary
shares of  Karamchand Premchand Private Ltd., the total cost
of purchase  being Rs.	1,81,106. On  March  22,  1973,	 the
assessee  introduced   the  two	  share	 holdings   in	 the
partnership firm  as his  capital contribution	ant the firm
credited his  account with  the market	value of the shares,
namely Rs.  475,136. In	 the assessment	 proceedings for the
assessment year	 1973-74, the  Income Tax  Officer took	 the
view that  the contribution by the assessee of the shares to
the assets  of the partnership constituted a transfer within
the meaning of sub-section (47) of D section 2 of the Income
Tax Act, 1961 and that the assessee was liable to income tax
on a  capital gain  of Rs.  2,94,030, being  the  difference
between the market price at which the shares were entered in
the books of the partnership firm and the cost of the shares
to the	assessee. The  appeal before the Appellate Assistant
Commissioner failed,  but in  second appeal,  the  Appellate
Tribunal took  the view	 that there  was no  transfer  of  a
capital asset  within the  meaning of  section 45  read with
sub-section (47)  of section  2 of  the Income	Tax Act	 and
consequently deleted  the item	from the  assessment. In the
circumstances the  Tribunal did	 not go	 into  the  question
whether the  transfer  was  without  consideration.  At	 the
instance of  the Commissioner  of Income Tax a reference was
made to	 the High Court on the correctness of the Tribunal's
views. By a common judgment dated April 30/May 1 and 4, 1981
the High  Court answered the questions referred in favour of
the Revenue  ant against  the assessee. Hence the appeals by
special leave of the Court,
     Allowing the appeals in part, the Court
^
       HELD: 1.1 When the assessee brought the shares of the
limited	 companies   into  the	 partnership  firm   as	 his
contribution to its capital, there was a transfer within the
meaning of  sub-section (47)  of section 2 of the Income Tax
Act, 1961, of a capital asset within the terms of section 45
of the Act.
104
     1.2 It is well settled that a partnership firm is not a
separate legal	entity ant  that the  assets  owned  by	 the
partner ship are collectively owned by the partners and that
when  a	  partner  hands   over	 a  business  asset  to	 the
partnership firm  as his  contribution to  its	capital,  he
cannot be said to have effected a sale. [113 A-B; G-H]
       Malabar	Fisheries Co. v. Commissioner of Income Tax,
Kerala, (1979)	120 ITR 49; Commissioner of Income Tax, West
Bengal v.  Hind Construction  Ltd. (1972)  83 ITR  211	(SC)
     Commissioner of  Income Tax,  Madras v.  Janab N. Hyath
Batcha Sahiv,  (1969) 72  ITR 528  (Madras); Commissioner of
Income Tax  (Madras) -	I v.  Abdul Khader  Motor and  Lorry
Service (1978)	112 ITR	 360 (Madras);	Dr. M.C.  Kackkar v.
Commissioner of Income Tax, Kanpur and Ors. (1973) 92 ITR 87
(Allahabad); Commissioner  of Income  Tax,  Kerala  v.	C.M.
Khunhameed (1974) 94 ITR 179 (Kerala) approved.
     1.3 But while the transaction may not amount to a sale,
it can	be described  as a  transfer of some other kind. m e
definition of the expression transfer in sub-section (47) of
section 2  of the  Income Tax  Act, 1961 is inclusive merely
and does not exhaust other kinds of transfer. [114 A-B]
       1.4  In its general sense, the expression transfer of
property" connotes  the passing	 of rights  in the  property
from one  person to  another. In  one case  there may  be  a
passing of  the entire	bundle of rights from the transferor
to the transferee. In another case, the transfer may consist
of one of the estates only out of all the estates comprising
the totality  of rights	 in the	 property. In  a third case,
there may  be a	 reduction of  the exclusive interest in the
totality of  rights of	the original  owner into  a joint or
shared interest with other persons. An exclusive interest in
property is a larger interest than a share in that property.
To the	extent to which the exclusive interest is reduced to
a shared  interest it would seem that there is a transfer of
interest. Therefore  when a  partner brings  in his personal
asset into  the capital	 of  the  partnership  firm  as	 his
contribution to	 its capital he reduces his exclusive rights
in the	asset to shared rights in it with the other partners
of the	firm. While he does not lose his rights in the asset
altogether what	 he enjoys  now is  an abridged	 right which
cannot be  identified with the fulness of the right which he
enjoyed in the asset
105
before it  entered the	partnership capital.  When a partner
brings	in his personal asset into a partnership firm as his
contribution to	 its capital,  an asset which originally was
subject to  the entire	ownership of  the partner  becomes w
subject to  the rights of other partners in it. It is not an
interest which	can  be	 evaluated  immediately.  It  is  an
interest  which	 is  subject  to  the  operation  of  future
transactions of	 the partnership,  and it  may	diminish  in
value depending	 on accumulating liabilities and losses with
a fall	in the	prosperity  of	the  partnership  firm.	 The
evaluation of  a partner's  interest takes  place only	when
there is  a dissolution	 of the	 firm or upon his retirement
from it.  Upon the  dissolution of  the	 firm  or  upon	 the
partner retiring  from the  firm,  the	partner's  right  to
realise the  interest and  receive its value arises. What is
realized is  the interest  which the  partner enjoys  in the
assets during  the subsistence	of the	partnership firm  by
virtue of his status as a partner and in accordance with the
terms of  the partnership  agreement.  It  is  because	that
interest  exists   already  before   dissolution  that	 the
distribution of the assets on dissolution does not amount to
a transfer  to the erstwhile partners. What the partner gets
upon dissolution  or upon retirement is the realisation of a
pre-existing right or interest. It is nothing strange in the
law that  a right  or interest should exist in praesenti but
its realisation	 or exercise should be postponed. Therefore,
what was the exclusive interest of a partner in his personal
asset is, upon its introduction into the partnership firm as
his share  in the  partnership capital	transformed  into  a
shared interest	 with the  other partners in that asset. Qua
that  asset,   there  is   a  shared  interest.	 During	 the
subsistence of	the partnership the value of the interest of
each partner qua that asset cannot be isolated or carved out
from the  value of the partner's interest in the totality of
the partnership	 assets. And  in regard	 to the	 latter, the
value will  be represented by his share in the net assets on
the  dissolution   of  the   firm  or	upon  the  partner's
retirement. But	 the position  is different  when a  partner
retires or  the partnership  is dissolved.  What the partner
receives then  is his  share in	 the  partnership.  What  is
contemplated here  is a	 share of  the partner	qua the	 net
assets of the partnership firm. On evaluation, that share in
a particular case may be realised by the receipt of only one
of all	the assets.  What happens  here	 is  that  a  shared
interest in  all the  assets of	 the firm  is replaced by an
exclusive interest  in an  asset of equal value. That is why
it has	been held  that there  is no  transfer.	 It  is	 the
realisation  of	  a  pre-existing  right.  The	position  is
different, when a partner brings his personal asset into the
partnership firm as
106
his contribution  to its capital. An individual asset is the
sole subject  of consideration.	 An exclusive interest in it
before it  enters the  partnership is  reduced on such entry
into a shared interest. [114 D-G; 116 A-F; 117 B-D]
      Addanki Narayanappa &  Anr. v. Bhaskara Krishtappa and
13  Ors.   [1966]  3  SCR  400;	 Malabar  Fisheries  Co.  v.
Commissioner of	 Income Tax,  Kerala (1979)  120 ITR 49 (SC)
       Commissioner  of Income-Tax, Madras-I v. Abdul Khader
Motor and  Lorry Service  (1978) 112  ITR 360  (Madras); and
Commissioner of	 Income Tax,  Tamil Nadu  IV, Madras  v.  H.
Kannan (1984) 149 ITR 545 (Madras) partly overruled.
      Commissioner of Income Tax, Madhya Pradesh, Nagpur and
Bhandara v.  Dewas Cine	 Corporation (1968) 68 ITR 240 (SC);
Commissioner of	 Income Tax, Kerala v. Nataraj Motor Service
(1972) ITR  109 (Kerala) Commissioner of Income Tax, Gujarat
v.  Mohanbhai	Pamabhai  (1973)   91  ITR   393   (Gujarat)
distinguished.
       A.  Abdul Rahim,	 Travancore Confectionery  Works  v.
Commissioner of	 Income	 Tax,  Kerala  (1977)  110  ITR	 595
(Kerala); Addl. Commissioner of Income Tax, Mysore v. M.A.J.
Vasanaik (1979) 116 ITR 110 (Kerala) approved.
       Firm  Ram  Sahay	 Mall  Rameshwar  Dayal	 &  Ors.  v.
Bishwanath Prasad,  AIR 1963  Patna 221;  Sudhansu Kanta  v.
Manindra Nath, AIR 1965 Patna 144 explained.
       2.1  When the  Assessee transferred his shares to the
partnership firm  he received  no consideration	 within	 the
meaning of  section 48	of the	Income Tax Act, 1961 nor did
any profit  or gain accrue to him for the purpose of section
45 of the Income Tax Act, 1961- [118 A-B]
      2.2 The consideration for the transfer of the personal
assets is  the right  which arises or accrues to the partner
during the  subsistence of  the partnership to get his share
of the	profits from time to time and, after the dissolution
of  the	  partnership  or   with  his  retirement  from	 the
partnership, to	 get  the  value  of  a	 share	in  the	 net
partnership assets  as on  the date  of the  dissolution  or
retirement  after  a  reduction	 of  liabilities  ant  prior
charges. The  credit entry  mate in  the  partner's  capital
account in  the books  of  the	partnership  firm  does	 not
represent the  true value  of the  consideration.  It  is  a
notional value only,
107
intended to be taken into account at the time of determining
the A  value of	 the partner's	share in the net partnership
assets on  the date  of dissolution  or on his retirement, a
share which  will depend upon a deduction of the liabilities
and prior  charges existing  on the  date of  dissolution or
retirement. It is not possible to predicate before hand what
will be	 the position  in  terms  of  monetary	value  of  a
partner's share	 on that  date. At the time when the partner
transfers his  personal asset to the partnership firm, there
can be	no reckoning of the liabilities ant losses which the
firm may  suffer in  the years to come. All that lies within
the womb  of the  future. It  is impossible  to conceive  of
evaluating the consideration acquired by the partner when he
brings his  personal asset  into the  partnership firm	when
neither	 the  date  of	dissolution  or	 retirement  can  be
envisaged nor  can there by any ascertainment of liabilities
and prior  charges which  may  not  have  even	arisen	yet.
Therefore, the	consideration which  a partner	acquires  on
making over  his personal  asset to  the partnership firm as
his contribution to its capital cannot fall within the terms
of section  48. And  as that provision is fundamental to the
computation machinery incorporated in the scheme relating to
the determination of the charge provided in section 45, such
a case	must be	 regarded as  falling outside  the scope  of
capital gains taxation altogether. [118 E-H; 119 A-C]
     Commissioner of Income Tax, Bangalore v. B.C. Srinivasa
Setty (1981) 128 ITR 294 referred to.
      2.3 Applying the principle that profits or gains under
the Income  Tax Act  must be understood in the sense of real
profits or  gains, that	 is to say, on the basis of ordinary
commercial principles  on which actual profits are computed,
a sense	 in which no commercial man would misunderstand, and
having regard to the nature and quality of the consideration
which the  partner may be said to acquire on introducing his
personal asset into the partnership firm as his contribution
to its	capital, it  cannot be	said that any income or gain
arises or  accrues to  the assessee  in the  true commercial
sense which a businessman would understand as real income or
gain. Of  course, the partnership firm in question mu t be a
genuine firm  and  not	the  result  of	 a  sham  or  unreal
transaction, and the transfer by the partner of his personal
asset to  tee partnership  firm	 must  represent  a  genuine
intention to contribute to the share capital of the firm for
the purpose of carrying on the partnership business. [120 A-
B; 119 C-D]
       Miss Dhun Dadabhoy Kapadia v. Commissioner of Income-
Tax, Bombay  (1967) 63	ITR 651	 (SC); Calcutta	 Co. Ltd. v.
Commissioner of Income-Tax, West Bengal, (1959) 37 ITR 1 SC;
Commissioner of
108
Income Tax  v. Bai  Shirinbai K. Kooka, (1962) 46 ITR 86 SC;
Poona Electric	Supply Co.  Ltd. v.  Commissioner of Income-
Tax, Bombay  City I,  (1965) 57	 ITR 521 SC; Commissioner of
Income-Tax, West  Bengal II v. Birla Gwalior (P) Ltd. (1973)
89 ITR	266  SC;  Bafna	 Textiles  v.  Income  Tax  Officer,
Assessment-4, Circle  II, Bangalore  (1975) 98	ITR  209  SC
     2.4 If the transfer of a personal asset by the assessee
to a  partnership in  which he	is or  becomes a  partner is
merely a  device or ruse for converting the asset into money
which would  substantially remain  available for his benefit
without liability  to income  tax on a capital gain, it will
be open	 to the	 income tax  authorities to  go	 behind	 the
transaction and	 examine whether the transaction of creating
the partnership is a genuine or a sham transaction and, even
where  the   partnership  is  genuine,	the  transaction  of
transferring the  personal asset  to  the  partnership	firm
represents a real attempt to contribute to the share capital
of the	partnership firm  for the purpose of carrying on the
partnership business  or is  nothing but a device or ruse to
convert the  personal asset into money substantially for the
benefit of  the assessee while evading tax on a capital gain
121 E-G]

JUDGMENT:
     CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1841 of
1981.
     From the Judgment and Order dated 30.4.1981, 1/4.5.1981
of the Gujarat High Court in Income Tax Reference No. 235 of
1980.
			     AND
	       Civil Appeal No. 1777 of 1981.
       From the Judgment and Order dated 30.4.1981, 4.5.1981
of the	Gujarat High Court in Income Tax Reference No. 34 of
1980.
       V.S.  Desai, J.P. Shah, P.H. Parekh and Gautam Phliph
for the Appellant in C.A. No. 1841 of 1981.
       M.K.  Vanerjee, Additional  Solicitor  General,	S.T.
Desai,	P.A.   Francis,	 and  Miss  A.	Subhashini  for	 the
Respondent in C.A. No. 1841 of 1981.
       J.P.  Shah and P.H. Parekh for the Intervener in C.A.
No. u 1841 of 1981.
109
       V.S.  Desai, S.P.  Mehta and  Mrs. A.K. Verma for the
Appellant in C.A. No. 1777 of 1981.
       S.T. Desai, and Miss A. Subhashini for the Respondent
in C.A. No. 1777 of 1981.
      T.A. Ramachandran, Mrs. J. Ramachandran, H.K. Kaji and
S.C. Patel for the Intervener in C.A. No. 1777 of 1981.
       PATHAK,	J. This	 and the  connected appeal, filed by
certificate granted by the High Court, raise the interesting
question whether  the capital  contribution by	a partner to
the assets of a partnership firm at an appreciated value can
be said	 to give  rise to a capital gain in his hands liable
to income-tax.
       In  Civil Appeal	 No. 1841  of 1981, the facts are as
follows. The  appellant, who  is the assessee, was a partner
in  Messrs.   Suvas  Trading  Company,	a  partnership	firm
constituted under  a deed of partnership dated September 27,
1973. As  his contribution to the capital of the partnership
firm the  assessee  made  over	certain	 shares	 of  limited
companies which	 were held by him as his capital assets. The
book value of those shares in his account books was shown as
Rs. 1,60,279,  but on  the date	 when he  contributed  those
shares to the partnership firm he revalued the shares at the
market value  of Rs.  1,49,819	and  debited  the  resulting
difference of Rs. 10,460 to his capital account.
      The Income Tax Officer, when drawing up the assessment
order for  the assessment  year 1974-75	 in respect  of	 the
assessee, did  not include  the difference in the assessable
income. The  Commissioner of  Income-Tax, however,  being of
opinion that  the difference between the market value of the
shares and  the cost  of acquisition  of the  shares to	 the
assessee should have been brought to tax as capital gains in
view of	 s. 45	of the	Income Tax  Act, 1961, exercised his
revisional jurisdiction,  and reopening	 the  assessment  he
remanded the case to the Income Tax Officer directing him to
revise the  assessment after  computing	 the  capital  gains
arising out  of the  transfer. The  assessee appealed to the
Income Tax  Appellate Tribunal,	 and the  Appellate Tribunal
held that  while the  transaction did  amount to  a transfer
within the  meaning of	sub-s.(47) of  s.2 of the Income Tax
Act it	did not	 result in  capital gains liable to tax. The
Appellate Tribunal  allowed the	 appeal and  set  aside	 the
order of the Income
110
Tax Officer.  Subsequently the	Appellate Tribunal  referred
the case to the High Court of Gujarat for its opinion on the
following questions of law:
	  1 Whether,  on the  facts and in the circumstances
	  of the case, the Income Tax Appellate Tribunal was
	  right in  law in  holding that  no  capital  gains
	  resulted from	 the transfer  of the shares held by
	  the  assessee	 to  the  partnership  firm  as	 his
	  capital contribution,	 the cost  of acquisition of
	  the shares  to the assessee being Rs. 1,49,819 and
	  the market value of the shares being Rs. 1,60,279?
	  2. Whether,  on the facts and in the Circumstances
	  of the  case, the  Tribunal was  right in  law  in
	  holding that	there  was  a  transfer	 within	 the
	  meaning of  sub-s.(47) of  s.2 of  the Income	 Tax
	  Act,	1961   of  the	shares	contributed  by	 the
	  assessee as  capital to  the partnership  firm  in
	  which he was a partner?
       In Civil Appeal No. 1777 of 1981, the appellant was a
partner in  a registered partnership firm, Messrs. Rajka, or
which the  other partner  was his  wife. m e partnership was
constituted under  an agreement dated February 25, 1973. The
partnership deed  recited that	the partnership business had
commenced on  January 1,  1973, that it was a partnership at
will and  further provided that the assessee would initially
contribute Rs.	9,000 in  cash to  the share  capital of the
firm and his wife would contribute Rs. 1,000 in cash. It was
provided that  when any addition to the capital was required
for the	 purposes of  the partnership,	the  partners  would
contribute such additional capital from time to time. It was
further provided  that if  any asset  was brought  in  by  a
partner as  capital contribution the account of such partner
would be credited with the fair market value on the date the
asset was  brought in. The assessee had in his possession 80
ordinary shares	 of the	 Ahmedabad Manufacturing  and Calico
Printing Company  Limited which	 had been  purchased at	 Rs.
1,55,440. He  had-also	82  ordinary  shares  of  Karamchand
Premchand Private Limited purchased at Rs. 25,666. The total
cost was Rs. 1,81,106
       on  March 22, 1973 the market value of a share of the
Ahmedabad Manufacturing	 and Calico Printing Company Limited
was Rs.	 442 and  that of  a share  of Karamchand  Premchand
Private Limited	 was Rs.  2,668. On  that day,	the assessee
introduced the
111
two shareholdings  in the  partnership firm  as his  capital
contribution, and  the firm  credited his  account with	 the
market value of the shares, namely Rs. 4,75,136.
       In the assessment proceedings for the assessment year
1973-74, the  Income Tax  Officer took	the  view  that	 the
contribution by	 the assessee  of the shares to the asset of
the partnership	 firm  constituted  a  transfer	 within	 the
meaning of  sub-s.(47) of  s. 2	 of the Income Tax Act, 1961
and that  the assessee was liable to income tax on a capital
gain of Rs. 2,94,030 being the difference between the market
price at  which the  shares were entered in the books of the
partnership firm and the cost of the shares to the assessee.
The   assessee	 appealed   to	 the   Appellate   Assistant
Commissioner of Income Tax, but the appeal was dismissed. In
second appeal,	however, the  Income Tax  Appellate Tribunal
took the  view that there was no transfer of a capital asset
within the  meaning of	s.45 read  with sub-s.(47) of s.2 of
the Income Tax Act and consequently he deleted the item from
the assessment. In the circumstances, the Appellate Tribunal
did not	 go into  the  question	 whether  the  transfer	 was
without	 consideration.	  The  Commissioner  of	 Income	 Tax
obtained a  reference to  the High  Court of  Gujarat on the
	  1. Whether,  on the facts and in the circumstances
	  of E the case, the Appellate Tribunal was right in
	  law in  holding that	the contribution in the form
	  of shares  of the  value of  Rs. 4,75,136  by	 the
	  assessee in  the partnership firm of Messrs. Rajka
	  did not amount to a transfer within the meaning of
	  sub-s.(47) of s. 2 of the Act resulting in capital
	  gains chargeable to tax?
	  2. If	 the reply to question No. 1 is in favour of
	  the Revenue,	whether the  Tribunal erred  in	 not
	  considering  whether	 the  transfer	is  with  or
	  without consideration?
By a  common judgment  dated April  30/May 1 and 4, 1981 the
High Court  answered the  questions in favour of the Revenue
and against the assessee.
 Section 45 of the Income Tax Act, 1961 provides:
	  "45. (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,
112
54 and  54B and  54D, 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".
 Section 48 of the Act provides:-
	  "48. 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:-
	  (i) expenditure incurred wholly and exclusively in
	  connection with such transfer;
	  (ii) the  cost of  the acquisition  of the capital
	  asset and the cost of any improvement thereto.
     Learned counsel for the assessee contends that in order
to attract  tax under the head Capital gains , s. 45 must be
read with  s.48 and  therefore three  cumulative  conditions
must be fulfilled:-
	  1. There  must be  a transfer	 of a capital asset,
	  either  under	  the  general	law  or	 within	 the
	  definition in	 sub-s.(47) of s.2 of the Income Tax
	  Act.
	  2. Consideration  must be  received or must accrue
	  as a result of the transfer, and the consideration
	  must be  capable of  being determined	 in monetary
	  terms in  order that	the computation	 of  capital
	  gains may be as required by s. 48.
	  3. Profits  or gains	must arise from the transfer
	  and must be embedded in the consideration.
     It is urged that if any of the three conditions remains
unfulfilled no	charge can be levied under the head "Capital
gains .
 In  support  of	the  submission	 that  there  is  no
"transfer" in  the general sense of that term when a partner
brings his personal assets into-the firm as his contribution
towards its capital,
113
learned counsel	 points out that a partnership firm is not a
separate legal	entity and  that the  assets  owned  by	 the
partnership are	 collectively owned by the partners. We have
no hesitation  in accepting  that proposition for in Malabar
Fisheries Co.  v. Commissioner	of Income-Tax, Kerala (1979)
120 I.T.R. 49 SC, this Court observed:-
	  .......... It seems to us clear that a partnership
	  firm under  the Indian  Partnership Act,  1932, is
	  not  a   distinct  legal  entity  apart  from	 the
	  partners constituting	 it and	 equally in  law the
	  firm as  such has  no separate right of its own in
	  the partnership  assets and  when one talks of the
	  firm's property or firm's assets all that is meant
	  is property  or assets  in which  all the partners
	  have a Joint or common interest.
 Our  attention has  been invited	 to Commissioner  of
Income Tax, West Bengal v. Hind Construction Ltd., (1972) 83
I.T.R. 211.  In	 that  case  the  assessee  entered  into  a
partnership and	 as its	 share of the capital it transferred
the stock  of machinery	 to the partnership firm. This Court
held that  when the  assessee made over its machinery to the
partnership firm  there was no sale and the assessee did not
derive any  income. In Commissioner of Income-Tax, Madras v.
Janab N.  Hyath Batcha	Sahib, (1969) I.T.R. 528, the Madras
High Court  held that when a partner introduces his property
into a	partnership firm  as his contribution to its capital
the transaction does not involve a sale of the property. The
High Court  referred to	 B. 14 of the Indian Partnership act
and observed:-
	  When a  partnership is  formed for  the first time
	  and one  of the  members of the partnership brings
	  into the  firm assets, they become the property of
	  the firm,  not by  any transfer,  but by  the very
	  intention of	the parties evinced in the agreement
	  between them	to treat  such property belonging to
	  one or  more of  the members of the partnership as
	  that of the firm-
The view  that when a partner hands over a business asset to
the partnership	 firm as  his contribution to its capital he
cannot be said to have effected a sale was also taken by the
Allahabad High	Court in Dr. M.C. Kackkar v. Commissioner of
Income-Tax, Kanpur  and Others,	 (1973) 92  I.T.R.  87,	 the
Kerala High  Court in  Commissioner of Income-Tax, Kerala v.
C.M. Kunhammed	(1974) 94  I.T.R. 179 and by the Madras High
Court in  Commissioner	of  Income-Tax,	 Madras-l  v.  Abdul
Khader Motor ant Lorry Service,
114
(1978) 112  I.T.R. 360.	 We find  no difficulty in accepting
that proposition.  But while  the transaction may not amount
to a  sale, can	 it be described as a transfer of some other
kind? Illustrations  of other kinds of transfer are provided
by sub-s.(47) of s.2 of the Income Tax Act which defines the
expression transfer  in	 relation  to  a  capital  asset  as
including the  sale exchange  or relinquishment of the asset
or  the	  extinguishment  of   any  rights  therein  or	 the
compulsory acquisition thereof under any law. The definition
is inclusive  merely, and  does not  exhaust other  kinds of
transfer. Its  inclusive character  was	 overlooked  by	 the
Madras High  Court in  Commissioner of	Income-Tax, Madras-I
(supra) and  in Commissioner  of Income-Tax,  Tamil Nadu-IV,
Madras v.  H. Rajan and H. Kannan, (1984) 149 I.T.R. 545. In
both cases  the High  Court confined  itself to	 considering
whether the  transaction before it was covered by any of the
express terms  used in the definition, that is to say, sale,
exchange relinquishment	 or extinguishment,  and taking	 the
view that  it did  not fall  under any	of them it held that
there was no transfer.
       In  its general	sense, the  expression	transfer  of
property connotes the passing of rights in the property from
one person to another. In one case there may be a passing of
the entire  bundle of  rights from  the	 transferor  to	 the
transferee. In another case, the transfer may consist of one
of the	estates only  out of  all the estates comprising the
totality of  rights in	the property. In a third case, there
may be a reduction of the exclusive interest in the totality
of rights  of the  original owner  into a  joint  or  shared
interest  with	other  persons.	 An  exclusive	interest  in
cannot be identified with the fullness of the right which he
enjoyed in  the asset  before  it  entered  the	 partnership
capital.  In   Addanki	Narayanappa   &	 Anr.	v.  Bhaskara
Krishtappa and	13 Ors.	 [1966] 3  S.C.R. 400.,	 this  Court
explained:-
	  ........ whatever  may be  the  character  of	 the
	  property which  is brought in by the partners when
	  the partnership is formed or which may be acquired
	  in the
115
	  course of  the  business  of	the  partnership  it
	  becomes the  property	 of  the  firm	and  what  a
	  partner is entitled to is his share of profits, if
	  any,	accruing,   to	the   partnership  from	 the
	  realisation of this property, and upon dissolution
	  of  the  partnership	to  a  share  in  the  money
	  representing the  value of the property. No doubt,
	  since	 a   firm  has	 no  legal   existence,	 the
	  partnership property will vest in all the partners
	  and in that sense every partner has an interest in
	  the  property	  of  the  partnership.	 during	 the
	  subsistence  of   the	 partnership,	however,  no
	  partner can  deal with any portion of the property
	  as his  own. Nor  can he  assign his interest in a
	  specific  item  of  the  partnership	property  to
	  anyone. His  right is	 to obtain  such profits, if
	  any, as  fall to  his share  from time to time and
	  upon the dissolution of the firm to a share in the
	  assets of  the firm  which remain after satisfying
	  the  liabilities   set  out  in  cl.(a)  and	sub-
	  cls.(i),(ii) of cl.(b) of s. 48.
      The position was elaborated later in the same judgment
as follows:
	  The whole concept of partnership is to embark upon
	  a joint  venture and	for that purpose to bring in
	  as  capital	money  or  even	 property  including
	  immovable property.  Once that is done whatever is
	  brought  in	would  cease  to  be  the  exclusive
	  property of the person who brought it in. It would
	  be the  trading asset	 of the partnership in which
	  all the partners would have interest in proportion
	  to  their  share  in	the  joint  venture  of	 the
	  business of partnership. The person who brought it
	  in would,  therefore, not  be	 able  to  claim  or
	  exercise any	exclusive right	 over  any  property
	  which he  has brought in, much less over any other
	  partnership property.	 He would  not	be  able  to
	  exercise his right even to the extent of his share
	  in the  business of  the partnership.	 As  already
	  stated, his  right during  the subsistence  of the
	  partnership is  to get  his share  of profits from
	  time to  time as  may be  agreed  upon  among	 the
	  partners  and	  after	 the   dissolution  of	 the
	  partnership	or    with   his   retirement	from
	  partnership of  the value  of his share in the net
	  partnership assets  as on  the date of dissolution
	  of retirement after a deduction of liabilities and
	  prior charges.
116
It is apparent, therefore, that when a partner brings in his
personal asset	into a	partnership firm as his contribution
to its capital, an asset which originally was subject to the
entire ownership  of the  partner becomes now subject to the
rights of  other partners in it. It is not an interest which
can be	evaluated immediately,	it is  an interest  which is
subject to  the operation  of  future  transactions  of	 the
partnership, and  it may  diminish  in	value  depending  on
accumulating liabilities  and losses  with  a  fall  in	 the
prosperity of  the partnership	firm. The  evaluation  of  a
partner's  interest   takes  place  only  when	there  is  a
dissolution of	the firm  or upon his retirement from it. It
has some times been said, and we think erroneously, that the
right of  a  partner  to  a  share  in	the  assets  of	 the
partnership firm arises upon dissolution of the firm or upon
the partner retiring from the firm. We think it necessary to
state that  what is  envisaged here  is merely	the right to
realise the interest and receive its value. What is realised
is the	interest which	the partner  enjoys  in	 the  assets
during the  subsistence of the partnership firm by virtue of
his status  as a partner and in accordance with the terms of
the partnership	 agreement.  It	 is  because  that  interest
exists already before dissolution, as was held by this Court
in Malabar  Fisheries Co.  (supra), that the distribution of
the assets  on dissolution  does not amount to a transfer to
the  erstwhile	 partners.  What   the	partner	  gets	upon
dissolution or	upon retirement is the realisation of a pre-
existing right or interest. It is nothing strange in the law
that a	right or  interest should exist in praesenti but its
realisation or exercise should be postponed. Therefore, what
was the	 exclusive interest  of a  partner in  his  personal
his share  to the  partnership capital,	 transformed into  a
retirement.
 Learned counsel for the assessee has attempted to draw
an analogy  between the	 position arising  when	 a  personal
asset is  brought by  a partner	 into a	 partnership as	 his
contribution to	 the  partnership  capital  and	 that  which
arises when  on dissolution  of the  firm or on retirement a
share in the partnership assets
117
passes to  the erstwhile  partner. It  has been held by this
Court in  Commissioner of Income-Tax, Madhya Pradesh, Nagpur
and Bhandra v. Dewas Cine Corporation, (1968) 68 I.T.R. 240,
Commissioner of	 Income-Tax,  U.P.  v.	Bankey	Lal  Vaidya,
(1971) 79  I.T.R. 594  and recently in Malabar Fisheries Co.
(supra) as  well as  by the Punjab and Haryana High Court in
Kay Engineering	 Co. v. Commissioner of Income-Tax, Patiala,
(1971) 82  I.T.R. 950  the Kerala High Court in Commissioner
of Income  Tax, Kerala	v. Nataraj  Motor Service  (1972) 86
I.T.R. 109,  and the  Gujarat High  Court in Commissioner of
Income-Tax Gujarat  v. Mohanbhai  Pamabhai (1973)  91 I.T.R.
393 that  when a  partner  retires  or	the  partnership  is
dissolved what	the partner  receives is  his share  in	 the
partnership. What  is contemplated  here is  a share  of the
partner qua  the net  assets of	 the  partnership  firm.  On
evaluation, that  share in a particular case may be realised
by the	receipt of  only one of all the assets. What happens
here is that a shared interest in all the assets of the firm
is replaced  by an  exclusive interest	in an asset of equal
value. That  is why  it has  been  held	 that  there  is  no
transfer. It is the realisation of a pre-existing right. The
position is different, it seems to us, when a partner brings
his  personal	asset  into  the  partnership  firm  as	 his
contribution to its capital. An individual asset is the sole
subject of consideration. An exclusive interest in it before
it enters  the partnership  is reduced	on such entry into a
shared interest.
 Our  attention has also been invited to clause (b) of
sub-s.(l) of  s. 17  of the  Registration Act which requires
the  registration   of	non-testamentary  instruments  which
purport	 or  operate  to  create  declare  assign  limit  or
extinguish whether in present or in future, any right, title
or interest  whether vested  or contingent,  of the value of
one hundred rupees and upwards, to or in immovable property,
and to	the view  taken by  the courts	in this country that
when a	person brings  in even his immovable property as his
contribution to	 the capital of the firm no written document
or registration	 is required  under that  clause. That view,
was expressed  in Firm	Ram Sahay  Mall Rameshwar  Dayal and
Others v.  Bishwanath Prasad,  A.I.R. 1963  Patna  221.	 The
learned Judges	relied on  the English law that the personal
assets	introduced  by	a  partner  into  the  firm  as	 his
contribution to its capital becomes the property of the firm
by reason of the intention and agreement of the parties. The
view does not spring from the consideration that there is no
transfer. The  view is	that  no  document  of	transfer  is
required and  that, therefore,	registration is unnecessary.
The Patna  High Court reiterated that view in Sudhansu Kanta
v. Manindra Nath A.I.R. 1965 Patna 144.
118
     Accordingly we  hold that when the assessee brought the
shares of the limited companies into the partnership firm as
his contribution  to its  capital there	 was a transfer of a
capital asset  within the  terms of  s.45 of  the Income Tax
Act. In this view of the matter we agree with the conclusion
reached	 by  the  Kerala  High	Court  in  A.  Abdul  Rahim,
Travancore Confectionery  Works v.  Commissioner of  Income-
Tax, Kerala,  (1977) 110 I.T.R. 595 the Karnataka High Court
in  Addl. Commissioner	 of  Income-Tax,  Mysore  v.  M.A.J.
Vasanaik, (1979)  116 I.T.R.  110 and  by the  Gujarat	High
Court in the judgment under appeal.
     The second question is whether the assessee can be said
to have	 received any  consideration as	 that expression  is
understood in  the scheme of capital gains under the Income-
Tax Act.  In Commissioner  of Income-Tax,  Bangalore v. B.C.
Srinivasa Setty,  (1981) 128 I.T.R. 294, this Court observed
that the  charging section  and the  computation  provisions
under each head of income constitute an integrated code, and
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. On the basis
of that	 proposition learned  counsel for  the assessee	 has
urged that s.45 is not attracted in the present case because
to compute  the profits or gains under s.48 the value of the
consideration received by the assessee or accruing to him as
a result  of the  transfer of  the  capital  asset  must  be
capable	  of	ascertainment	in   monetary	terms.	 The
consideration for the transfer of the personal assets is the
right which  arises or	accrues`to the	partner	 during	 the
subsistence of	the partnership	 to get	 his  share  of	 the
profits from  time to time and, after the dissolution of the
partnership or	with his retirement from the partnership, to
get the value of a share in the net partnership assets as on
the date  of the dissolution or retirement after a deduction
of liabilities	and prior  charges. The credit entry made in
the  partner's	 capital  account   in	the   books  of	 the
partnership firm  does not  represent the  true value of the
consideration. It  is notional	value only,  intended to  be
taken into  account at	the time of determining the value of
the partner's  share in	 the net  partnership assets  on the
date of dissolution or on his retirement, a share which will
depend upon a deduction of the liabilities and prior charges
existing on the date of dissolution or retirement. It is not
possible to  predicate before hand what will be the position
in terms  of monetary  value of	 a partner's  share on	that
date. At  the time  when the  partner transfers his personal
asset to  the partnership firm, there can be no reckoning of
the liabilities	 and losses which the firm may suffer in the
years to
119
come. All  that lies  within the  womb of  the future. It is
impossible  to	conceive  of  evaluating  the  consideration
acquired by  the partner  when he  brings his personal asset
into  the   partnership	 firm	when  neither  the  date  of
dissolution or	retirement can be envisaged nor can there be
any ascertainment of liabilities and prior charges which may
not have  even arisen  yet. In	the  circumstances,  we	 are
unable to  hold	 that  the  consideration  which  a  partner
acquires  on   making  over   his  personal   asset  to	 the
partnership firm as his contribution to its capital can fall
within	the   terms  of	 s.48.	And  as	 that  provision  is
fundamental to the computation machinery incorporated in the
scheme relating	 to the determination of the charge provided
in s.45, such a case must be regarded as falling outside the
scope of capital gains taxation altogether.
       The  third contention  of  learned  counsel  for	 the
assessee is  that no profit or gain car. be said to arise to
a  partner   when  he  brings  his  personal  asset  into  a
partnership firm  as his  contribution to its capital. It is
urged that  the capital gains chargeable under s.45 are real
capital	 gains	 computed  on  the  ordinary  principles  of
commercial accounting  and that	 the capital  gains must  be
embedded in the capital asset. In Miss Dhun Dadabhoy Kapadia
v. Commissioner	 of Income-Tax,	 Bombay, (1967)	 63  I.T.R..
651, the  appellant held  by way of investment some ordinary
shares in  a limited  company. An  offer  was  made  by	 the
company to  her by  which she  was entitled  to apply for an
equal number  of new  ordinary shares  at a  premium with an
option of  either taking  the shares  or renouncing  them in
favour of  others. The appellant renounced her rights to all
the shares  and realised Rs. 45,262.50. When this amount was
sought to  be wholly  taxed as	a capital gain the appellant
claimed that on the issue of the new shares the value of her
old  shares   depreciated  and	that  as  a  result  of	 the
depreciation she  suffered a  capital loss in the old shares
which she  was entitled	 to set off against the capital gain
of Rs.	45,262.50. In  the alternative	she claimed that the
right to  receive the  new shares  was	a  right  which	 was
embedded  in  her  old	shares	and  consequently  when	 she
realised the  sum of Rs. 45,262.50 by selling her right, the
capital gain  should be	 computed after	 deducting from that
amount	the   value  of	 the  embedded	right  which  became
liquidated. This  Court upheld	the claim  of the  appellant
that she  was  entitled	 to  deduct  from  the	sum  of	 Rs.
45,262.50 the  loss suffered  by way  of depreciation in the
old shares. The Court proceeded on the basis that in working
out capital  gain or  loss, the	 principles which  had to be
applied are those which are a part of commercial practice or
which an
120
ordinary  man  of  business  would  resort  to	when  making
computation for	 his business  purposes. It  will be noticed
that this principle was applied by the Court in a case where
a capital  gain was  sought to be taxed under the Income Tax
Act. That  profits or gains under the Income Tax Act must be
understood in the sense of real profits or gains, that is to
say, on the basis of ordinary commercial principles on which
actual profits	are computed, a sense in which no commercial
man would misunderstand, has been regarded as a principle of
general application,  and there is a catena of cases of this
Court which affirms that principle. Reference may be made to
Calcutta  Co.  Ltd.  v.	 Commissioner  of  Income-Tax,	West
Bengal, (1959) 37 I.T.R. 1, Commissioner of Income-Tax v.Bai
Shirinbai K.  Kooka, (1962)  46 I.T.R.	86,  Poona  Electric
Supply Co.  Ltd. v.  Commissioner of Income-Tax, Bombay City
I, (1965)  57 I.T.R.  521, Commissioner	 of Income-Tax, West
Bengal II v. Birla Gwalior (P) Ltd. (1973) 89 I.T.R. 266 and
Bafna Textiles	v. Income-Tax  officer, Assessment-4, Circle
II, Bangalore, (1975) 98 I.T.R. 209.
      What is the profit or gain which can be said to accrue
or arise  to the  assessee when	 he makes  over his personal
asset to  the partnership  firm as  his contribution  to its
capital? The  consideration, as	 we have  observed,  is	 the
right of a partner during the subsistence of the partnership
to get	his share of profits from time to time and after the
dissolution of	the partnership	 or with his retirement from
the partnership to receive the value of the share in the net
partnership  assets   as  on  the  date	 of  dissolution  or
retirement  after  a  deduction	 of  liabilities  and  prior
charges. When  his personal asset merges into the capital of
the partnership firm a corresponding credit entry is made in
partnership firm,  but that  entry is  made merely  for	 the
purpose of  adjusting the  rights of  the partners  inter-se
when the partnership is dissolved or the partner retires. It
evidences no  debt due	by the	firm to the partner. Indeed,
the capital  represented by the notional entry to the credit
of the	partner's account  may be  completely wiped  out  by
losses which  may be subsequently incurred by the firm, even
in the	very accounting year in which the capital account is
credited. Having  regard to  the nature	 and quality  of the
consideration which  the partner  may be  said to acquire on
introducing his	 personal asset into the partnership firm as
his contribution  to its  capital it cannot be said that any
income or gain arises or accrues to the assessee in the true
commercial sense  which a  business man	 would understand as
real income or gain.
121
     An objection  has been taken by learned counsel for the
respondent  to	 this  submission  being  raised  before  us
because, it  is said, the question has neither been referred
to his Court nor was it ever argued at any earlier stage. We
are not	 impressed by the objection because we think that it
constitutes one	 aspect of  the questions  which  have	been
referred in  these cases.  The point rests on considerations
purely of  law and  is fundamental  to the  question whether
capital gain  arises to an assessee upon the transfer of his
shares to  the partnership firm as his capital contribution.
The objection is, therefore, over-ruled.
     Inasmuch as  we are  of opinion  that the consideration
received by  the assessee  on the  transfer of his shares to
the partnership	 firm dies not fall within the contemplation
of s.48 of the Income-Tax Act, and further that no profit or
gain can be said to arise for the purposes of the Income-Tax
Act, we hold that these cases fall outside the scope of s.45
of the Act altogether.
     We have  decided these  appeals on	 the assumption that
the partnership	 firm in  question is a genuine firm and not
the result  of a  sham or  unreal transaction,	and that the
transfer by  the  partner  of  his  personal  asset  to	 the
partnership  firm   represents	a   genuine   intention	  to
contribute to  the share capital of the firm for the purpose
of carrying  on the partnership business. If the transfer of
the personal asset by the assessee to a partnership in which
he is  or becomes  a partner  is merely a device or ruse for
converting the	asset into  money which	 would substantially
remain available-for his benefit without liability to income
tax on	a capital  gain, it  will be  open to the income tax
authorities to go behind the transaction and examine whether
the transaction	 of creating the partnership is a genuine or
a sham	transaction  and,  even	 where	the  partnership  is
genuine the  transaction of  transferring the personal asset
to  the	 partnership  firm  represents	a  real	 attempt  to
contribute to  the share capital of the partnership firm for
the purpose  of carrying  on the  partnership business or is
nothing but  a device  or ruse to convert the personal asset
into money  substantially for  the benefit  of the  assessee
while evading  tax on a capital gain. The income Tax Officer
will be	 entitled to  consider all  the relevant  indicia in
this regard,  whether the  partnership is formed between the
assessee and  his wife and children or substantially limited
to  them,   whether  the  personal  asset  is  sold  by	 the
partnership  firm  soon	 after	it  is	transferred  by	 the
assessee  to   it,  whether  the  partnership  firm  has  no
substantial or real business or the
122
record shows  that there was no real need of the partnership
firm for  such capital	contribution from  the assessee. ALL
these and  other pertinent  considerations may be taken into
regard when the Income Tax Officer enters upon a scrutiny of
the transaction,  for in  the task  of determining whether a
transaction is a sham or illusory transaction or a device or
ruse he	 is entitled  to penetrate  the veil covering it and
ascertain the truth.
     In the  result, the  questions  which  arise  in  these
appeals are answered as follows:-
	  1. There  was a  transfer of	the shares  when the
	  assessee made them over to the partnership firm as
	  his capital contribution.
	  2. When the assessee transferred his shares to the
	  partnership  firm  he	 received  no  consideration
	  within the  meaning of  s.48 of the Income-Tax Act
	  1961 nor  did any profit or gain accrue to him for
	  the purpose of s.45 of the Income-Tax Act, 1961.
These answers  are given  by us	 subject to the reservations
made by us in the preceding paragraph.
     The appeals are partly allowed and there is no order as
to costs.
S.R.				     Appeals partly allowed.
123

Distributors (Baroda) Pvt. Ltd vs Union Of India And Two Ors on 1 July, 1985
Equivalent 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
Author: P.N. Bhagwati
Bench: P.N. Bhagwati, Y.V.  Chandrachud, Amarendra Nath  Sen, D.P. Madon, M.P.  Thakkar
DISTRIBUTORS (BARODA) PVT. LTD.

	Vs.

UNION OF INDIA AND TWO ORS.

DATE OF JUDGMENT01/07/1985

BENCH:
BENCH:
MADON, D.P.
THAKKAR, M.P. (J)

CITATION:
 1985 AIR 1585		  1985 SCR  Supl. (1) 778
 1986 SCC  (1)	43	  1985 SCALE  (1)1216
 D	    1986 SC1565	 (9)
 RF	    1992 SC 803	 (21)

ACT:
     Income Tax Act 1961 Sections 80M(1) and 80AA:
     Income by	way of	inter-corporate dividends-Deduction-
Whether to be made with reference to full amount of dividend
received  or   dividend	 computed  in  accordance  with	 the
provisions of  the Act-Section 80AA-Whether retrospective in
operation.
     Constitution of India 1950, Article 141:
     Supreme  Court-Declaration	  of  law-To   be   certain,
definite  and	correct-Judicial  decisions-Continuity	 and
consistency-Essentiality-Pointed   out-Earlier	 ruling	  of
Court-Manifestly wrong,	 proceeds upon	mistaken  assumption
with  regard   to  existence  or  continuance  of  statutory
provision,    contrary to another decision of Court-Doctrine
of  stare  decisis-No  bar  to	over-ruling  such  decision-
Decision  of   Court  in   fiscal  matters-Interference	  in
exceptional cases-Necessity of.
     Interpretation of Statutes:
     Statutory	 provision-Meaning    of-Interpretation	  on
earlier	 statutory   provision	in  different  language	 and
structurally different-Reference  to and reliance on-Whether
permissible.
     Words and Phrases-Meaning of:
     'Such income  by way  of dividends'-Meaning  of-Section
80M Income Tax Act 1961.

HEADNOTE:
     The earliest  provision granting  exemption from  super
tax in	respect of  inter-corporate dividend was made as far
back as	 9th December,	1933 in a Notification issued by the
Governor General in Council and it provided as follows:-
     "The Governor  General in	Council is pleased to exempt
from super tax:
779
     (i) So  much of  the income  of  any  investment  trust
company as  is derived	from dividends	paid  by  any  other
company which  has paid	 or will pay super-tax in respect of
the profits out of which such dividends are paid".
     This provision  came  up  for  consideration  before  a
Division Bench	of the	High  Court  of	 Bombay	 in  CIT  v.
Industrial Investment  Trust Co.  Ltd. (1968) 67 I.T.R. 437.
The High  Court guided by a decision of this Court in CIT v.
South India  Bank (1966)  59 ITR  763 held that the dividend
income which  was exempted  under the  notification would be
the dividend  income received  by the  assessee and  not the
said  income   less  any   further  amounts"   because	 the
notification must  be regarded	a self-contained one and not
controlled by  any other provisions of the Act and there was
no warrant  to construe the word income' in the notification
as total  income nor  to qualify the dividend computed under
Section 12 of the Act.
     A provision  of a	similar kind granting exemption from
super tax  in respect  of certain  specified  categories  of
inter-corporate dividend  was introduced  as Section  56A of
the Income Tax Act 1922 by the Finance Act, 1953.
     When the  Indian Income  Tax Act, 1922 was repealed and
the Income  Tax Act,  1961 was	enacted with effect from 1st
April, 1902,  Section 99,  subsection (i)  was introduced in
the new	 Act exempting	certain categories  of	income	from
super tax  and one  such category was that set out in clause
(iv) of Section 99 sub-section (1) which read as follows:
     "99. (1)  Super-tax shall not be payable by an assessee
     in respect	 of the following amounts which are included
     in his total income- (iv) if the assessee is a company,
     any dividend  received by	it from	 an Indian  company,
     subject  to  the  provisions  contained  in  the  fifth
     Schedule."
     This provision  continued in force upto Ist March, 1965
subject to  a minor  inconsequential amendment	made by	 the
Finance Act, 1964.
     This provision  did  not  come  up	 for  interpretation
before this Court only in Cloth Traders Case, but it came to
be considered by some of the High Courts.
     The three	High Courts  of Bombay,	 Calcutta and Madras
C.I.T v. New Great Insurance Company Ltd. (1963) 90 ITR 348,
C.I.T v.  Darbhangha Marketing	Company Ltd.  1971 80 ITR 72
and Madras  Auto Service v. I.T.O. (1975) 101 I.T.R. 589] on
a construction	of clause (iv) of sub-section (1) of section
99, took  the  view  that  the	entire	amount	of  dividend
received by  the assessee  from an Indian Company was exempt
from super tax and the exemption was not limited to dividend
income computed in accordance with the provisions of the Act
and forming part of the total income.
780
     Section 99	 sub-section (i) remained in force only upto
the close of the assessment year 1964-65 and by an amendment
made by	 the Finance  Act, 1965,  Section 99 sub-section (1)
was omitted  and chapter IVA and section 85A were introduced
in the present Act with effect from Ist April, 1965. Chapter
IVA comprised  section 80A  to	80D  providing	for  certain
specified deductions  to be  made in computing total income,
while  Section	 85A  provided	 for  deduction	 of  tax  on
incorporate dividends.
     This Section  was also  considered by  the Bombay	High
Court in  New Great Insurance Company's Case. The High Court
observed that  except for some minor verbal changes, section
85A was	 almost in  the same terms as section 99 sub-section
(1) clause  (iv), the  only real  difference being  that the
exemption granted  under section  99 sub-section  (i) clause
(iv) was in regard to super-tax, while the deduction allowed
under section 85A was in regard to income tax, and held that
under section  85A also,  the deduction	 admissible  was  in
respect of the entire dividend received by the assessee from
an Indian  Company and	not in	respect of  dividend  income
minus deductions  allowable under  the provisions of the Act
in computing 'total income'
     The spate of legislative changes did not come to an end
with the  enactment of section 85A. The Original Chapter VIA
and  certain  other  sections  including  section  85A	were
deleted from  the present  Act by  Finance (No	2) Act, 1967
with effect  from Ist  April, 1968  and replaced  by the new
Chapter VIA  which contains a fasciculus of sections from s.
80A to s. 80VV. Section 80A sub-section (1) provides that in
computing the  total income  of an  assessee there  shall be
allowed from  his gross total income, in accordance with and
subject to  the provisions  of	Chapter	 VIA  the  deduction
specified in Section 80C to Section 80VV and sub-section (2)
of that	 Section imposed  a ceiling  on such  deductions  by
enacting that  the aggregate  amount of such deduction shall
not in	any case,  exceed the  gross  total  income  of	 the
assessee. The  expression "gross total income" is defined in
clause (V)  of Section 80B to mean the total income computed
in accordance  with the	 provisions of the Act before making
any deduction  under Chapter  VIA  or  under  Section  280D.
Section 80M  is the  new section  which corresponds  to	 the
repealed Section  85A  and  it	provides  for  deduction  in
respect of  certain categories of inter-corporate dividends.
Several amendments  were made  subsequently in	this section
but they relate primarily to the percentage of the income to
be allowed as a deduction.
     One amendment  that was  made by  the Finance Act, 1968
was that the words "received by it" occurring in sub-section
(1) of	Section 80M were omitted with effect from Ist April,
1968, so  that right from the date of its enactment, section
80M sub-section (1) was to be read as if the words "received
by it" were not in the opening part of that provision.
     Petitioner No.  1 was incorporated as a Limited Company
and Petitioner	No. 2  a Director  and shareholder  therein.
Petitioner No  1 received  dividends on shares held by it in
different domestic  companies and  paid interest  on  monies
borrowed for  the purpose  of investment  in such shares. In
the course  of its assessment for the assessment years 1970-
71 up to 1980-81,
781
Petitioner No.	1 claimed  that	 the  deduction	 permissible
under Section  80M must	 be calculated with reference to the
full amount  of dividends  received by Petitioner No. 1 from
the  domestic  companies  and  not  with  reference  to	 the
dividends as  computed in  accordance with the provisions of
the Income  Tax Act, 1961. The assessments of Petitioner No.
1 were	actually completed on the basis of his claim and the
view taken  by this Court in Cloth Traders Case in regard to
the construction  of  Section  80M.  The  Revenue  preferred
appeals against	 such assessments  and	these  appeals	were
pending at  different stages  at the time of filing the Writ
Petition.
     The Petitioner  No. 1  was entitled  to succeed  in the
appeals as  well as  in the  original assessments which were
pending before	the different  authorities, so	long as	 the
decision in  Cloth Traders  Case  stood	 unaffected  by	 any
constitutionally valid legislative amendment.
     However, with  a view to overriding the decision in the
Cloth Traders  case with  retrospective	 effect,  Parliament
enacted Section	 80AA and  since this  section was deemed to
have been introduced in the Income Tax Act, 1961 with effect
from 1st  April, 1968,	and it	provided that  the deduction
required to  be allowed	 under Section 80M shall be computed
not with  reference to the gross amount of dividend received
by the	assessee from  a domestic company but with reference
to the	dividend income	 as computed  in accordance with the
provisions of  the Act,	 the claim  of petitioner  No. 1 for
deduction on  the basis	 of  the  full	amount	of  dividend
received by  it from  domestic companies  was liable  to  be
rejected and  deduction could be allowed to Petitioner No. 1
only with  reference to	 the  dividend	income	computed  in
accordance with the provision of the Act.
     The introduction of Section 80AA thus had the effect of
enhancing the  tax liability  of Petitioner  No. 1  and	 the
petitioners  filed   a	 Writ	Petition   challenging	 the
Constitutional validity	 of Section  80AA on the ground that
it enhanced  the tax  burden with retrospective effect going
back for  a period  of	almost	12  years  and	consequently
imposed	 an   unreasonable  restriction	  on  the  right  of
petitioner No.	1 to  carry on	its business  in  breach  of
Article 19 (1) (g) of the Constitution.
     Dismissing the writ petition,
^
     HELD-(By the Court)
     1.	 The  deduction	 envisaged  by	sub-section  (1)  of
Section 80  is required	 to be	made with  reference to	 the
income by  way of  dividends computed in accordance with the
provisions of  the Income  Tax Act and not with reference to
the full amount of dividend received by the assessee. [802F,
809A]
     2. Section	 80AA  in  its	retrospective  operation  is
merely declaratory  of the  law as  it always  was since Ist
April, 1968 and no complaint can validly be made against it.
[807E, 809D]
782
     Cloth Traders Ltd. v. Additional Commissioner of Income
Tax, 118  ITR 243,  over-ruled and  Cambey Electrical Supply
Industrial Co.	Ltd. v.	 Commissioner of  Income-Tax, (1970)
113 84, approved.
     (Per Chandrachud  C.J., P.N.  Bhagwati, D.P.  Madon and
M.P. Thakkar, JJ).
     The Inquiry is not whether the view taken by the Bombay
High Court in New Great Insurance Company's case is correct.
It must	 be conceded  that it has been held to be correct in
the decision  in Cloth Traders Case. However another view in
regard to  the interpretation of Section 85A is possible. It
is not	at all unreasonable to construe the words "income so
included" as  meaning  the  quantum  of	 income	 by  way  of
dividends included  in the  total income  of  the  assessee.
These  words  in  the  context	in  which  they	 occur	have
obviously reference  to quantum	 of the	 income	 by  way  of
dividends to  which the	 average rate of income tax is to be
applied. That quantum is defined by these words and in order
to determine  it, the  question is what is the income by way
of dividends included in the total income and the answer can
only be	 that is  income computed  in  accordance  with	 the
provisions of  the Act.	 It is	not  necessary	to  consider
whether the construction placed on Section 85A by the Bombay
High Court in New Great Insurance Company Case is correct or
not, because interpretation of Section 85A is not concerned.
It is  section 80M  which  has	to  be	construed  and	this
section, is  materially different  from Section 85A. Section
80M cannot  be construed  in the light of the interpretation
placed on  its predecessor  section by the Bombay High Court
particularly  when   Section  80M   is	 admittedly   worded
differently from  its predecessor  section. Section 80M must
be construed on its own language and its true interpretation
arrived at  according to  the plain  natural meaning  of the
words used by the Legislature. [795 D-H]
     2. Section	 80M is the new Section which corresponds to
the repealed  Section 85A  and it  provides for deduction in
It is  the interpretation  of this section which constitutes
the subject-matter  of controversy between the parties. [796
D]
     3. What  is the  object behind  grant of  relief  under
Section 80M. The main object of the relief under Section 80M
is to  avoid  taxation	once  again  in	 the  hands  of	 the
receiving company of the amount which has already borne full
tax in	the hands  of the paying company. Now when an amount
by way	of dividend  is received  by the  assessee from	 the
paying company	the full  amount of such dividend would have
suffered tax,  in the  assessment of  the paying  company in
order to  encourage inter-company  investments. In  order to
encourage investments  the Legislature	intended  that	this
amount should  not bear	 tax once  again in the hands of the
assessee either	 its entirety  or to a specified extent. But
the amount  by way  of dividend which would otherwise suffer
tax in	the hands  of the  assessee,  would  be	 the  amount
computed in  accordance with  the provisions  of the Act and
not the	 full  amount  received	 from  the  paying  company.
Therefore, it  is reasonable  to  assume  that	in  enacting
Section 80M  the Legislature  intended to  grant relief with
reference to  the amount  of dividend computed in accordance
with the provisions of the Act and not with reference to the
full amount of dividend received from the paying
783
company. The  Legislature could	 certainly be attributed the
intention to  prevent double  taxation but not to provide an
additional benefit  which would	 go beyond  what is required
for saving  the amount	of dividend from taxation once again
the hands of the assessee. [799 A-E]
     4. Section	 80M sub-section  (1) opens  with the  words
"where	the  gross  total  income  of  an  assessee.........
includes any  income by	 way of	 dividends from	 a  domestic
company" and  proceeds to  say that  in such  a case,  there
shall be  allowed in  computing	 the  total  income  of	 the
assessee, a deduction "from such income by way of dividends"
of an  amount equal  to the  whole of  such income or 60% of
such income  as the  case may be, depending on the nature of
the domestic  company  from  which  the	 income	 by  way  of
dividends  is  received.  The  opening	words  describe	 the
condition which	 must be  fulfilled in	order to attract the
applicability of  the provision contained in sub-section (1)
of Section 80M. The condition is that the gross total income
of the assessee must include income by way of dividends from
a domestic  company  "Gross  total  income"  is	 defined  in
Section 80B  clause (v)	 to mean  "total income	 computed in
accordance with	 the provisions of the Act before making any
deduction under	 Chapter VIA  or under Section 280D". Income
by way	of dividends from a domestic company included in the
gross total  income  would  therefore  obviously  be  income
computed in  accordance with the provisions of the Act, that
is after  deducting interest  on monies borrowed for earning
such income.  If income	 by way of dividends from a domestic
company computed  in accordance	 with the  provisions of the
Act is	included in  the gross	total income,  or  in  other
words, form  part of  the gross total income, the conditions
specified in  the opening part of sub-section (1) of Section
80M would  be fulfilled	 and the  provision enacted  in that
sub-section would be attracted.
			 [799G-800C]
     5. The  words "such  income by  way of  dividends" must
have reference	to the	income by way of dividends mentioned
earlier and  that would be income by way of dividends from a
domestic company  which	 is  included  in  the	gross  total
income. Consequently,  in order	 to determine  what is "such
income by  way of  dividends", the  question to	 be asked is
what is	 the income  by way  of dividends  from	 a  domestic
company included  in the  gross total  income and that would
obviously be  the income  by way  of dividends	computed  in
accordance with	 the provisions	 of the Act. It is difficult
to appreciate  how, when interpreting the words "such income
by way	of dividends"  a dichotomy  can be  made between the
category of  income and	 the quantum of the income by way of
dividends so included. [800H-801C]
     6. There  is also	another	 strong	 indication  in	 the
language of  sub-section (1)  of Section  80M which  clearly
compels taking the view that the deduction envisaged by that
provision is  required to  be made  with  reference  to	 the
provisions of  the Act	and not	 with reference	 to the full
amount of  dividend received by the assessee. The indication
was also  unfortunately lost  sight of by the Court in Cloth
Traders case  presumably because  it was  not brought to the
attention of  the Court. The Court observed in Cloth Traders
case that the whole of the income by way of dividends from a
domestic company  or 60%  of such income as the same may be,
would be deductible from the gross total income for
784
striving  at   the  total   income  of	the  assessee.	This
observation  appears   to  have	  been	 made	under	some
misapprehension, because what sub-section (1) of Section 80M
required 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. 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 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 it if "such
income by  way of  dividends" were  interpreted to mean that
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.	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,  so far  as sub-section  ( )	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. [801G-802F]
     7. Structurally  there is hardly any difference between
Section 80E  sub-section (1) and Section 80M sub-section (1)
and the	 reasoning  which  appealed  to	 the  Court  in	 the
interpretation of  sub-section (1)  of Section 80E in Cambay
Electric Supply Industrial Company Ltd. v. C.I.T. must apply
equally in  the interpretation of sub-section (1) of Section
80M. [803 B]
     8. Ordinarily this Court would be reluctant to overturn
a decision  given by  a Bench  of this	Court, because it is
essential that there should be continuity and consistency in
judicial decisions,  and law should be certain and definite.
It is  almost as  important that  the law  should be settled
correctly. But	there  may  be	circumstances  where  public
interest demands  that the previous decision be reviewed and
reconsidered. The doctrine of stare decisis should not deter
the Court  from overruling  an earlier	decision, if  it  is
satisfied that such decision is manifestly wrong or proceeds
upon a	mistaken assumption  in regard	to the	existence or
continuance of	a statutory  provision	or  is	contrary  to
another decision of the Court. [805G-806A]
     9. There  are over-riding	considerations which  compel
reconsideration and  review of the decision in Cloth Traders
Case. In the first place, the decision in Cloth Traders case
was rendered  by this Court on 4th May, 1979 and immediately
thereafter, with  in a	few  months,  Parliament  introduced
Section 80AA  with retrospective effect from Ist April, 1968
with a	view to	 over-riding the  interpretation  placed  on
Section 80M in Cloth Traders case. The decision
785
in Cloth Traders case did not therefore hold the field for a
period of  more than  a few  months and it could not be said
that any assessee was misled into acting to its detriment on
the basis  of that  decision. There  was no decision of this
Court in  regard to the interpretation of sub-section (1) of
Section 80M  prior to the decision in Cloth Traders case and
there was  therefore no	 authoritative pronouncement of this
Court  on  this	 question  of  interpretation  on  which  an
assessee  could	  claim	 to   rely  for	 making	 its  fiscal
arrangements. Another  circumstance which makes is necessary
to reconsider and review the decision in Cloth Traders Case,
is the	decision in Cambay Electric Supply Company case. The
decision in  Cloth Traders case is inconsistent with that in
Cambay Electric	 Supply Company'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,  and having considered
and reviewed  the decision in Cloth Traders case come to the
conclusion that	 the  decision	in  Cloth  Traders  Case  is
erroneous and must be over turned. [806C-807D]
     (Per A.N. Sen, J. concurring)
     The authority  and jurisdiction  of a  larger Bench  of
this Court  to override	 and over-rule	any  decision  of  a
smaller Bench  cannot be  questioned. However, a decision of
this Court  on any fiscal legislation involving the question
of financial  benefit and  liability should  not normally be
interfered with	 and should  be interfered with only in very
rare cases.  On the  basis of  the decision of this Court on
any fiscal  legislation and  any matter	 involving financial
arrangements  and   adjustments,  parties  are	entitled  to
arrange their  financial affairs and in fact they so arrange
and adjust  the financial  affairs on  the basis  of the law
laid down  by this  Court. Unsettling  a position settled by
the decision  of this  Court may  lead to  the confusion and
result in  financial instability,  causing serious prejudice
not only  to the  parties concerned but also to the economic
growth of the country as a whole. [808 C-E]
     2. If  on interpretation of any provision of any fiscal
legislation two	 views may  be reasonably possible, a larger
Bench of this Court may not interfere with a view taken by a
smaller Bench  by this	Court mainly  on the ground that the
other view appears to the larger Bench to be the better view
and may	 commend itself	 to the larger Bench. If, however, a
decision of  the smaller  Bench has necessarily to interfere
with the  decision, as	this Court  will not  permit a wrong
decision to operate as good law of the land. [808 F]

JUDGMENT:
     ORIGINAL JURISDICTION: Writ Petition No. 2043 of 1981.
     Under Article 32 of the Constitution of India
     K.H. Kaji and M.N. Shroff for the Petitioners.
     K. Parasaran, Attorney General and K.S. Gurumoorthy for
786
 The following Judgments were delivered
     BHAGWATI, J.  This writ  petition raises an interesting
question of  construction of  Section 80 M of the Income Tax
Act, 1961.  This question  would appear	 to be	concluded in
favour of  the assessee	 by the	 decision of  this Court  in
Cloth Traders  Limited v.  Additional Commissioner of Income
Tax, 118  ITR 243,  but the correctness of the view taken in
that case  has been challenged in the present writ petition.
Since the  decision in	Cloth Traders Case (supra) was given
by a  Bench of three Judges, it is obvious that its validity
can be	canvassed before  this Bench  which consists of five
Judges. If  this Bench	too takes the same view in regard of
the construction  of Section  80M as  that  taken  in  Cloth
Traders case  (supra), it would become necessary to consider
the question  of constitutional	 validity  of  Section	80AA
which was  introduced in the Income Tax Act, 1961 by Section
12 of the Finance (No. 2) Act 1980 with a view to overriding
with retrospective effect the construction placed on Section
80M by	this in	 Cloth Traders case (supra). If on the other
hand, this  Bench disagrees  with the  view taken  in  Cloth
Traders	 case	(supra)	 and   hold  that  even	 before	 the
introduction  of  Section  80AA,  Section  80M,	 on  a	true
interpretation of  its language,  meant exactly what Section
80AA now retrospectively declares it to mean, no question of
constitutional validity	 of Section  80AA would	 arise since
Section 80AA  would then be merely declaratory of the law as
it always  was and  would not be imposing any new tax burden
with retrospective  effect. The	 first question that we must
therefore consider is as to what is the true construction of
Section	 80M   unaided	 by   the   subsequent	 legislative
interpretation imposed	upon it	 by the enactment of Section
80AA: do  we affirm  the view  taken in	 Cloth Traders	case
(supra) or do we dissent from it.
 We have  given our	 most anxious  consideration to this
question,  particularly	  since	 one  of  us,  namely,	P.N.
Bhagwati, J.  was a  party to  the decision in Cloth Traders
case (supra). But having regard to various considerations to
which  we  shall  advert  in  detail  when  we	examine	 the
arguments  advanced   on  behalf  of  the  parties,  we	 are
compelled to  reach the	 conclusion that  Cloth Traders case
must be	 regarded as wrongly decided. The view taken in that
case in	 regard to  the construction  of Section 80M must be
held to be erroneous and it must be corrected. To perpetuate
an error  is no	 heroism. To rectify it is the compulsion of
judicial conscience.  In this we derive comfort and strength
from the wise and inspiring words of
787
Justice Bronson in Pierce v. Delameter A.M.Y. at page 18: "a
Judge ought  to be  wise enough	 to know that he is fallible
therefore everyday  to learn:  great and  honest  enough  to
discard all  mere pride of opinion and follow truth wherever
it may	lead:  and  courageous	enough	to  acknowledge	 his
errors".
 We	 may  begin  our  discussion  by  referring  to	 the
legislative history  of the provision enacted in Section 80M
but before  we do so, a brief statement of facts may help to
provide	 the   back-drop  against   which  the	question  of
construction  of   Section  80M	 arises	 for  consideration.
Petitioner No.	1 was  incorporated as	a limited company on
10th November  1941 under the Baroda Companies Act, 1918 and
at  all	  material  times  it  carried	on  business  of  an
investment company.  Petitioner No.  2	is  a  Director	 and
shareholder of	Petitioner No.	1. Throughout  the  material
period with  which we  are concerned  in this writ petition,
Petitioner No.	1 received dividends on shares held by it in
the course of its assessments for the assessment years 1970-
71 upto 1980-81, Petitioner No. 1 claimed that the deduction
permissible  under  Section  80M  must	be  calculated	with
reference to  the  full	 amount	 of  dividends	received  by
Petitioner No.	1  from	 domestic  companies  and  not	with
reference to  the dividend  income as computed in accordance
with the  provisions of the Income Tax Act, 1961. This claim
was liable  to succeed	if the	view taken  in Cloth Traders
case (supra)  in regard	 to the	 construction of Section 80M
was correct  and some of the assessments of Petitioner No. 1
were actually  completed on  the basis	that this  claim was
justified.  The	  Revenue  preferred  appeals  against	such
assessments and	 these appeals	were  pending  at  different
stages at  the time  of filing of the present writ petition.
The assessments	 for some  of the assessment years were also
pending before	the Income  tax	 Officer. So  long  as	 the
decision in  Cloth Traders  case (supra) stood unaffected by
any Constitutionally valid legislative amendment, Petitioner
No. 1  was entitled  to succeed in the appeals as well as in
the original  assessments which	 were pending  consideration
before different  authorities. But with a view to overriding
the  decision	in   Cloth   Traders   case   (supra)	with
retrospective effect,  Parliament enacted  Section 80AA	 and
since this section was deemed to have been introduced in the
Income Tax Act, 1961 with effect from Ist April, 1968 and it
provided that  the deduction  required to  be allowed  under
Section 80M  shall be  computed not  with reference  to	 the
gross amount of dividend received by the assessee from a
788
domestic Company  but with  reference to the dividend income
as computed  in accordance  with the  provisions of the Act,
the claim  of petitioner No. 1 for deduction on the basis of
the full  amount of  dividend received	by it  from domestic
companies was  liable to  be rejected and deduction could be
allowed to  petitioner no.  1 only  with  reference  to	 the
dividend income computed in accordance with the provision of
the Act.  The introduction  of Section	80AA  thus  had	 the
effect of  enhancing the  tax liability	 of petitioner No. 1
and the	 petitioners  accordingly  filed  the  present	writ
petition challenging  the constitutional validity of Section
80AA on	 the ground  that it  enhanced	the  tax  burden  of
petition No.  1 with  retrospective effect  going back for a
period of  almost 12  years and	 thus  imposed	unreasonable
restriction on the right of petitioner No. 1 to carry on its
business in breach of Article 19(1)(g) of the Constitution.
 We may  first set	out the	 history of  the legislation
preceding the  enactment of  Section 80M, since considerable
reliance was  placed on this history both in the decision in
Cloth Traders  case (supra)  as also  in the  course of	 the
arguments  in	the  present  writ  petition.  The  earliest
provision granting  exemption from  super tax  in respect of
inter-corporate dividends  was	made  as  far  back  as	 9th
December 1933  in a  notification  issued  by  the  Governor
General in Council and it provided as follows:
	  "The Governor	 General in  Council is	 pleased  to
     exempt from  super tax-(i) so much of the income of any
     investment trust  company as  is derived from dividends
     paid by  any other	 company which	has paid or will pay
     super-tax in  respect of  the profits out of which such
     dividends are paid."
 This provision  came  up  for  consideration  before  a
Division Bench	of the	High Court  of Bombay  in C.I.T.  v.
Industrial Investment  Trust Co.  Ltd. (1968)  67 I.T.R. 437
and the	 question was  whether the  dividend income exempted
from super tax the entire income by way of dividend received
by an  investment trust	 company or  the dividend  income as
computed in  accordance with the provisions of the Act, i.e.
after deducting	 the expenses  incurred in  earning it.	 The
High Court  of Bombay  held that  the "dividend income which
was exempted  under the	 notification would  be the dividend
income received by the assessee and not the said income less
any further  amounts"  because	"the  notification  must  be
regarded as a self-contained one
789
and not	 controlled by	any other provisions of the Act" and
there was  "no warrant	to construe the word 'income' in the
notification as	 total income  nor to  qualify the  dividend
income specified  in the  said notification  as the dividend
income computed	 under Section	12 of  the Act." It was thus
held that  the entire  amount of  dividend  received  by  an
investment trust  company would be exempt from super tax and
not the	 amount of  dividend minus  the expenses incurred in
earning	 it.   It  may	be  noticed,  and  this	 aspect	 was
emphasised by  the Bombay High Court, that what was exempted
from super  tax under  the notification	 was "so much of the
income of  any investment  trust company  as is derived from
dividends paid	by any	other  company"	 and  there  was  no
reference to  'total income' in the notification nor was any
indication given in the notification that the income derived
from dividends	which was  sought to  be exempted from super
tax was	 dividend income  forming part of 'total income' and
that is	 why the  Bombay High  Court came  to the conclusion
that the dividend income exempted under the notification was
the entire  income  by	way  of	 dividend  received  by	 the
assessee  and	not  the  dividend  income  as	computed  in
accordance with the provisions of the Act.
 The High  Court  of  Bombay  in  taking  this  view  in
Industrial Investment Trust Company's case was guided by the
decision of this Court in C.I.T. v. South Indian Bank (1966)
59 I.T.R.  763. Since the decision in South Indian Bank case
(supra) is  the only  decision of  this Court  respecting an
allied provision prior to the decision in Cloth Traders case
(supra), it  is necessary  to refer  to it in some detail in
order to  see whether  it  really  supports  the  conclusion
reached in  Cloth Traders  case (supra). The question which
arose in South Indian Bank case (supra) was in regard to the
true interpretation  of a notification issued by the Central
Government under  Section 60A  of the Indian Income Tax Act,
1922. This  notification was  subsequent in point of time to
the notification  which came  to be  considered by  the High
Court of Bombay in the Industrial Investment Trust Company's
case, but  it came  up for  construction before	 this  court
earlier in South Indian Bank case (supra). This notification
was in the following terms:
	  "No income-tax  shall be payable by an assessee on
     the interest  received on the following income-tax free
     loans issued by the former Government of Tranvancore or
     by the former Government of Cochin, provided that such
790
     interest is  received within  the	territories  of	 the
     State of  Travancore Cochin and is not brought into any
     other part of the taxable territories to which the said
     Act applies.  Such interest shall, however, be included
     in the  total income of the assessee for the purpose of
     section 16 of the Indian Income-tax Act, 1922......."
The argument  of the  Revenue was  that the  exemption	from
income tax granted under this notification was in respect of
interest  receivable   on  securities	minus  the  expenses
incurred in  earning it	 and not  in respect  of the  entire
amount of  interest because  it	 was  only  that  amount  of
interest arrived  at after  computation in  accordance	with
Section 8  of the  old Act which was includible in the total
income and liable to bear tax and the exemption from the tax
could, therefore  only be  in respect  of such	amount. This
argument was  negatived by  the court and it was pointed out
by Subba Rao, J. that (p. 766):
	  "....this  notification  does	 not  refer  to	 the
     provision of section 8 of the Income-tax Act at all. It
     gives a  total exemption from income-tax to an assessee
     in respect	 of the	 interest receivable  on  income-tax
     free loans	 mentioned therein.  It gives that exemption
     subject two conditions, namely (i) that the interest is
     received  within	the  territories  of  the  State  of
     Travancore-Cochin, and  (ii) that	it is not brought to
     any other	part of the taxable territories. It includes
     the said  exempted interest  in the total income of the
     assessee for  the purpose	of section 16 of the Income-
     tax Act.  Shortly stated,	the notification  is a self-
     contained one; it provides an exemption from income-tax
     payable by	 an assessee on a particular class of income
     subject to specified conditions. Therefore, there is no
     scope   for   controlling	 the   provisions   of	 the
     notification with	reference to section 8 of the Income
     tax Act. The expression 'interest receivable on income-
     tax free  loans' is  clear and  unambiguous. Though the
     point of time from which the exemption works is when it
     is received  within the  territories of  the  State  of
     Travancore-Cochin, what  is exempted  is  the  interest
     receivable. '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."
791
It will	 be noticed that the entire basis of the judgment of
the Court was that the notification was a self-contained one
and it gave exemption from income tax in respect of interest
receivable on  certain categories  of income tax free loans,
without any reference to total income, or to "the provisions
of section  8 of the Income tax Act at all." That is why the
judgment pointed out that there was no scope for controlling
the provisions of the notification with reference to section
8 of  the Income Tax Act and proceeded to hold that what was
exempted  from	 income	 tax   under  the  notification	 was
"interest receivable"  that  is,  "the	amount	of  interest
calculated as  per the	terms  of  the	securities"  without
deduction of the "amount spent in receiving the same". There
was nothing  in the  notification to  indicate that what was
sought to be exempted was the amount of interest included in
the total income'.
     Thereafter a  provision  of  a  similar  kind  granting
exemption from	super tax  in respect  of certain  specified
categories of  inter-corporate dividends  was introduced  as
Section 56 in the Indian Income Tax 1922 by the Finance Act,
1953. It  is however  not necessary  to	 make  any  detailed
reference to  this provision  since there is no decided case
which has considered this provision or expressed any opinion
upon it.
 When the  Indian Income  Tax Act  1922 was repealed and
the Income  Tax Act  1961 was  enacted with  effect from Ist
April, 1962,  section 99  sub-section (i)  was introduced in
(iv).  Section	99  sub-section	 (1)  clause  (iv)  read  as
follows:
	  "99. (1)  Super-tax shall  not be  payable  by  an
     assessee in  respect of the following amounts which are
     included in  his total income .... (iv) if the assessee
     is a  company, any	 dividend received  by	it  from  an
     Indian company,  subject to the provisions contained in
     the Fifth Schedule."
This provision	continued in  force  upto  Ist	March,	1965
Finance Act  1964. Now	this provision	did not	 at any time
come up	 for interpretation  before this  Court prior to the
decision in Cloth Traders case but it
792
did came  to be	 considered by	some of the High Courts. The
question in  regard to	the interpretation of this provision
which arose before the High Court of Bombay in C.I.T. v. New
Great Insurance	 Company  Ltd.	(1963)	90  I.T.R.  348	 was
whether the  exemption granted	under this  provision was in
regard to  the entire  amount of  dividend received  by	 the
assessee from  an Indian  Company or  it was  limited to the
dividend income	 computed in  accordance with the provisions
of the	Act and	 forming part  of 'total  income'. The	High
Court of  Bombay accepting  the contention  of the  assessee
held that  on a plain reading of clause (iv) sub-section (1)
of Section  99, it  was clear  that the exemption from super
tax was	 granted in  respect of "any dividend received by it
from an	 Indian Company"  and these last words, according to
their plain  grammatical construction,	could mean  only one
thing, namely, the entire amount of dividend received by the
assessee from an Indian Company and nothing less. The Bombay
High  Court   emphasised  the	word  'received'   following
immediately upon  the word  'dividend' and observed that the
use of	this word  also showed	that the  exemption  was  in
regard to  the dividend	 received and  not in  regard to the
dividend received  minus the  expenses. The  High  Court  of
Bombay	pointed	 out  that  the	 words	"amounts  which	 are
included in his total income" in the opening part of section
99 sub-section	(1) did	 not have  any limitative effect but
they were used merely as a convenient mode of describing the
different items	 of income  set out in clauses (i) to (v) of
that sub-section.  Clauses (i)	to (v) referred to different
items of  income which were sought to be exempted from super
tax under  sub-section (1)  of Section 99 and it was only if
these items  of income	were included in the total income of
the assessee  that the	question of exemption from super-tax
would arise and hence the legislature used the general words
"amounts which	are included  in his  total income"  in	 the
opening part  of sub-section (1) of section 99 as an omnibus
formula	 to   cover  these  different  items.  These  words,
according to  the Bombay High Court, were descriptive of the
items of  income a  included in the computation of the total
income and were not indicative of the quantum of the amounts
of the different items included in such computation and they
did not,  therefore, have  the effect  of cutting  down	 the
plain natural meaning of the words "any dividend received by
it from	 an Indian company" which represented the quantum of
income in  respect of  which exemption	from  super-tax	 was
granted under  the section.  It may  be pointed out that the
same view  in regard  to the  construction of clause (iv) of
sub-section (1) of Section 99 was taken by the Calcutta High
Court in C.I.T. v.
793
Darbhanga Marketing Company Limited and this decision of the
Calcutta High  Court was  noted with  approval by  the	High
Court of  Bombay  in  New  Great  Insurance  Company's	case
(supra). The  same view	 was also  taken by  the Madras High
Court in  C.I.T.  v.  Madras  Motor  and  General  Insurance
Company and  it was approved in a later decision of the same
High Court in Madras Auto Service v. I.T.O. It would thus be
seen that,  on a  construction of clause (iv) of sub-section
(1) of	Section	 99,  three  High  Courts,  namely,  Bombay,
Calcutta and  Madras took the view that the entire amount of
dividend received by the assessee from an Indian company was
exempt from  super tax	and the exemption was not limited to
of the Act and forming part of the 'total income'.
 This view	taken by  the three High Courts was strongly
relied	upon   by  the	 petitioners  in   support  of	 the
construction of Section 80M canvassed on their behalf and in
fact the  decision in  Cloth Traders  case (supra) sought to
derive	some   strength	 from  this  view.  But	 on  further
reflection we  do not  see how	this view taken by the three
High Courts  in regard to the construction of clause (iv) of
sub-section  (1)   of  Section	 99  can   assist   in	 the
interpretation of  an entirely	new section, namely, Section
80M which,  as we shall presently point out, is different in
its structure,	language and  content from  clause (iv) sub-
section (1)  of Section 99. We may point out that some doubt
was raised  on behalf  of  the	Revenue	 in  regard  to	 the
correctness of	this view taken by the three High Courts but
we do  not think it necessary to consider whether this doubt
is well	 founded or not because we are of the view that even
if the construction placed on clause (iv) of sub-section (1)
of Section  99 by  the three  High Courts  were correct,  it
cannot necessarily  lead to  the conclusion  that a  similar
construction must  also be  placed on  Section 80M  which is
different in  material respects	 from clause  (iv)  of	sub-
section (1)  of Section	 99. It	 is most  unsafe to  try  to
arrive at  the true  meaning of	 a  statutory  provision  by
reference to an interpretation which. might have been placed
on an  earlier statutory provision which is not only couched
in different  language but is also structurally different We
must therefore	construe the  language of Section 80M on its
own terms  uninhibited by  any interpretation which may have
been placed  on clause (iv) of sub-section (1) of Section 99
by any High Court.
794
     We may,  proceeding further  with the  narration of the
history of  the legislation,  point out that Section 99 sub-
section (1)  remained in  force only  upto the	close of the
assessment year	 1964-65 and  by an  amendment made  by	 the
Finance Act  No. 10  of 1965  Section 99 sub-section (1) was
omitted and  Chapter VI A and Section 85A were introduced in
the present Act with effect from Ist April, 1965. Chapter VI
A  comprised  Section  80A  to	80D  providing	for  certain
while Section  85 A  in	 so  far  as  material	provided  as
follows:
	  "85A.	 Deduction   of	  tax	on   inter-corporate
     dividends where  the total	 income of an assessee being
     company  includes	 any  income  by  way  of  dividends
     received by  it from  an Indian  company or  a  company
     which has	made the  prescribed  arrangements  for	 the
     declaration  and	payment	 of   dividends	  (including
     dividends on  preference shares  )	 within	 India,	 the
     assessee shall  be entitled  to a	deduction  from	 the
     income tax	 with which  it is  chargeable on  its total
     income for any assessment year of so much of the amount
     of income	tax   calculated  at  the  average  rate  of
     income-tax on  the income	so included  (other than any
     such income on which no income-tax is payable under the
     provisions of  this Act) as exceeds an amount of twenty
     five per cent thereof..
This section  too came	to be  considered by the Bombay High
Court in  New Great Insurance Company's case (supra) because
two of the assessment years with which the Bombay High Court
was concerned in that case were assessment years 1965-66 and
1966-67 when Section 85A was in force. The Bombay High Court
pointed out  that except  for  some  minor  verbal  changes,
Section 85A  was almost in the same terms as Section 99 sub-
section (1) clause (iv), the only real difference being that
the exemption  granted	under  Section	99  sub-section	 (1)
clause (iv)  was in regard to super-tax, while the deduction
allowed under  Section 85A  was in regard to income-tax. The
same interpretation was, therefore, placed on Section 85A as
in the case of Section 99 sub-section (1) clause (iv) and it
was held  that under  Section  85A  the	 assessee  would  be
entitled to  deduction of income-tax in respect of the whole
of  the	 dividend  received  from  an  Indian  company.	 The
expression "where the total income...... includes any income
by way	of dividends" in the opening part of Section 85A was
construed as referring to the
795
category of  income by	way of	dividends received  from  an
Indian company.	 so that  if  this  particular	category  of
income is  included in	the computation of total income, the
assessee would	be entitled to a deduction of so much of the
amount of  income-tax calculated  at  the  average  rate  of
income-tax on  the "income so included" as exceeds an amount
of twenty-five per cent of such income. The words "income so
included" were	read to	 mean not the quantum of the "income
by way	of dividends"  included in  the total income but the
income falling	within the  category of	 "income by  way  of
dividends from	an Indian  company" included  in  the  total
income. Thus,  the view	 taken by  the Bombay High Court was
that under Section 85A also, the deduction admissible was in
respect of  the entire	dividend 'received  by the  assessee
from an Indian company and not in respect of dividend income
in computing 'total income'.
 But here  again we are not concerned to inquire whether
the view  taken by  the	 Bombay	 High  Court  in  New  Great
Insurance Company's  case (Supra) is correct, though it must
be conceded  that it  has been	held to	 be correct  in	 the
decision in Cloth Traders Case (Supra). We do feel, however,
that another view in regard to the interpretation of Section
85A is	possible. It  is not at all unreasonable to construe
the words  "income so  included" as  meaning the  quantum of
income by  way of  dividends included in the total income of
the assessee. These words in the context in which they occur
have obviously	reference to quantum of the income by way of
to determine  it, we  have to  ask the question: what is the
income by  way of dividends included in the total income and
the answer  can only  be  that	it  is	income	computed  in
accordance with	 the provisions	 of the Act. But, as we have
pointed out  above, it	is not necessary to consider whether
the construction  placed on  Section 85A  by the Bombay High
Court in  New Great  Insurance	Company's  case	 (supra)  is
correct or  not, because  we are not concerned here with the
interpretation of  Section 85A.	 It is Section 80M which has
to be construed and this Section as we shall presently show,
is materially different from Section 85A. We cannot construe
Section 80M in the light of the interpretation placed on its
predecessor section  by the  Bombay High  Court particularly
when Section  80M is  admittedly worded differently from its
predecessor section. We must construe Section 80M on its own
and arrive at its true interpretation according to the plain
natural	 language   meaning  of	  the  words   used  by	 the
legislature.
796
     It seems  that the spate of changes in this legislative
provision did  not come	 to an	end with  the  enactment  of
Section 85A.  The original  Chapter VI	A and  certain other
section including Section 85 A were deleted from the present
Act by	the Finance  (No. 2) Act, 1967, with effect from Ist
April 1968,  and replaced  by  a  new  Chapter	VI  A  which
contains a  fasciculus of sections from Section 80A to 80VV.
Section 80A,  sub-section (1) provides that in computing the
total income  of an assessee there shall be allowed from his
gross total  income, in	 accordance with  and subject to the
provisions of  Chapter VI  A, the  deductions  specified  in
Section 80C  to Section	 80VV and  sub-section (2)  of	that
Section imposes	 a ceiling  on such  deductions by  enacting
that the  aggregate amount  of such deductions shall not, in
any case, exceed the gross total income of the assessee. The
expression "gross  total income" is defined in clause (v) of
Section 80B  to mean the total income computed in accordance
with the  provisions of the Act before making any deductions
under Chapter  VI A  or under  Section 280 D. Section 80M is
the new	 Section which	corresponds to	the repealed Section
85A and	 it provides  for deduction  in respect	 of  certain
categories  of	 inter-corporate  dividends.   It   is	 the
interpretation	of   this  section   which  constitutes	 the
subject-matter of  controversy between the parties and hence
it would be desirable to set it out in extenso. This Section
has under-gone	changes from  time to time since the date of
its enactment and we will therefore reproduce it in the form
in which it stood when originally enacted:
	  "80M.	 Deduction  in	respect	 of  certain  inter-
     corporate dividends-  (1) Where  the gross total income
     of an  assessee being  a company includes any income by
     way  of  dividends	 received  by  it  from	 a  domestic
     company, there  shall in accordance with and subject to
     the  provisions   of  this	  section,  be	allowed,  in
     computing the total income of the assessee, a deduction
     from such income by way of dividends of an amount equal
     to-
	  (a)  Where the assessee is a foreign company-
	  (i)  in respect of such income by was of dividends
	       received by  it from  an Indian company which
	       is not  such a  company as  is referred to in
	       Section 108  and which is mainly engaged in a
	       priority industry
     80% of such income;
797
	  (ii) in respect of such income by way of dividends
	       other than  the dividends referred to in sub-
	       clause (i)
			 65% of such income;
	  (b)  where the assessee is a domestic company-
	       in respect  of any  such	 income	 by  way  of
	       dividends
	       60% of such income"
There were  several amendments	made  subsequently  in	this
Section but  they relate  primarily to the percentage of the
income to  be allowed  as a  deduction and  do not  have any
bearing on  the question  of interpretation posed before us.
One amendment  is however  material and that was made by the
Finance Act  1968  by  which  the  words  "received  by	 it"
occurring in  sub-section (1)  of Section  80M were  omitted
with effect  from 1st April 1968 so that right from the date
of its enactment, Section 80M sub-section (1) was to be read
as if  the words  "received by	it" were  not in the opening
part of that provision.
 Soon after	 the enactment	of Section  80M	 a  question
arose before the Gujarat High Court in Addl. C.I.T. v. Cloth
Traders Private	 Limited whether  on a	true construction of
that Section,  the permissible deduction is to be calculated
with reference	to the	full amount of dividends received by
the assessee  from a  domestic company	or with reference to
the  dividend	income	computed   in  accordance  with	 the
provisions of the Act, that is, after deducting the interest
paid on monies borrowed for earning such income. The Gujarat
High Court  in a  Judgment delivered  on 28th November 1973,
held that  the deduction  permissible under  Section 80M  is
liable to  be calculated  with	reference  to  the  dividend
and not	 with reference	 to the	 full  amount  of  dividends
received by  the assessee. The assessee  being aggrieved by
this judgment  preferred an  appeal to	this Court  and this
appeal was  allowed  by	 the  judgment	delivered  in  Cloth
Traders Case  (supra). This  Court over-ruled the view taken
by the	Gujarat High  Court  and  held	that  the  deduction
required to  be allowed under Section 80M must be calculated
"with reference	 to the	 full amount  of dividends  received
from a domestic company and
798
not with  reference to	the dividend  income as	 computed in
accordance with	 the provisions	 of the	 Act, that is, after
making deductions provided under the Act." This decision was
given by the Court on 4th May 1979.
 Now,  according   to  Parliament,	this  interpretation
placed on  Section 80M	by  the	 summit	 court	was  not  in
conformity with	 the legislative  intent and  it resulted in
considerable  unjustified   loss  of   revenue.	  Parliament
therefore immediately proceeded to set right what, according
to it  was an  interpretation contrary	to  the	 legislative
intent	and   with  a	view  to   setting  at	naught	such
interpretation. Parliament, by Section 12 of Finance (No. 2)
Act 1980,  introduced in  the Income  Tax Act, 1961, Section
80AA with  retrospective effect from 1st April 1968, that is
the date  when Section 80M was originally enacted, providing
that the  deduction required to be allowed under Section 80M
in respect  of inter-corporate	dividends "shall be computed
with reference	to the	income by  way of  such dividends as
computed in  accordance with  the  provisions  of  this	 Act
(before making	any deduction  under this  Chapter) and	 not
with reference to the gross amount of such dividends". It is
the validity of this new Section 80AA which is challenged in
the present  writ petition.  But we  may make  it clear that
what is	 challenged is	not  the  prospective  operation  of
Section 80AA.  That would clearly be unexceptionable because
the Legislature	 can always  impose  a	new  tax  burden  or
enhance an  existing tax  liability with prospective effect.
But the	 complaint of the assessee was against retrospective
effect being  given to Section 80AA, because that would have
the effect  of enhancing  the tax  burden on the assessee by
setting at  naught the	interpretation placed on Section 80M
by the	decision in  Cloth Traders  case  and  reducing	 the
amount of  deduction required  to be  allowed under  Section
80M. However,  as pointed  out at  the commencement  of this
judgment,  it	would  become	necessary  to  examine	this
complaint   against    the   constitutional    validity	  of
retrospective operation	 of Section  80AA only	if we affirm
the interpretation  placed on Section 80M by the decision of
this Court  in Cloth  Traders case. If we do not agree with
the decision of this Court in Cloth Traders case (supra) and
take the  view that  the Gujarat High Court was right in the
interpretation placed  by it  on Section 80M in Addl. C.I.T.
v.  Cloth   Traders   Private	Limited	  no   question	  of
constitutional validity	 of the	 retrospective operation  of
Section 80AA  would remain to be considered, because in that
event Section  80AA in	its retrospective operation would be
merely	clarificatory	in  nature  and	 would	not  involve
imposition of any new tax burden.
799
     We may  therefore first examine the language of Section
80M for	 arriving at  its true interpretation. But before we
do so,	let us	consider what  is the object behind grant of
relief under  Section 80M.  It was common ground between the
parties that the main object of the relief under Section 80M
tax in	the hands  of the  paying company.  Vide the written
submission under  the heading  "Object of  relief on  inter-
corporate dividends"  filed by the learned counsel on behalf
of the	assessee in the course of the arguments. Now when an
amount by  way of  dividend is received by the assessee from
the paying  company, the  full amount of such dividend would
have suffered  tax in  the assessment  of the paying company
and it is obvious, that, in order to encourage inter-company
investments,  the  Legislature	intended  that	this  amount
should not  bear tax once again in the hands of the assessee
either its entirety or to a specified extent. But the amount
by way	of dividend which would other-wise suffer tax in the
hands of  the asseesee,	 would be  the	amount	computed  in
accordance with	 the provisions	 of the Act and not the full
amount received	 from the  paying company.  Therefore it  is
reasonable to  assume  that  in	 enacting  Section  80M	 the
Legislature intended  to grant	relief with reference to the
amount of  dividend received  from the paying company. It is
difficult to  imagine any  reason why the Legislature should
have intended  to give	relief with  reference to  the	full
amount of  dividend received  from the	paying company	when
that is	 not the  amount with  is liable  to suffer tax once
again in  the hands  of the  assessee. The Legislature could
certainly be  attributed the  intention	 to  prevent  double
taxation but  not to  provide an  additional  benefit  which
would go  beyond what  is required  for saving the amount of
dividend from  taxation once  again  in	 the  hands  of	 the
assessee. Bearing  in mind  these prefatory  observations in
regard to  the legislative  object, we	may now	 proceed  to
construe the language of Section 80M.
 Section 80M sub-section (1) opens with the words "where
the gross  total income	 of an	assessee........includes any
income by  way of  dividends from  a domestic  company"	 and
proceeds to  say that in such a case, there shall be allowed
in computing  the total	 income of the assessee, a deduction
"from such income by way of dividends" of an amount equal to
the whole  of such income or 60% of such income, as the case
may be, depending on the nature of the domestic company from
which the income by way of dividends is
800
received. The  opening words  describe the  condition  which
must be	 fulfilled in  order to attract the applicability of
the provision  contained in  sub-section (1) of Section 80M.
The condition is that the gross total income of the assessee
must include  income by	 way of	 dividends from	 a  domestic
company. "Gross	 total income"	is defined  in	Section	 80B
clause (v) to mean "total income computed in accordance with
the provisions	of the Act before making any deduction under
Chapter VIA  or	 under	Section	 280D."	 Income	 by  way  of
dividends from	a domestic  company included  in  the  gross
total income would therefore obviously be income computed in
deducting interest  on	monies	borrowed  for  earning	such
income. If  income by  way  of	dividends  from	 a  domestic
Act in	included in  the gross	total income,  or  in  other
words, forms  part of  the gross total income, the condition
specified in  the opening part of sub-section (1) of section
 Now it  was urged	on behalf  of the  assessee that the
words "Where the gross total income of an assessee..........
company" in  the opening  part of sub-section (1) of Section
80M refer  only to  the inclusion  of the category of income
and not	 to the	 quantum of  such income  and therefore	 the
words "such  income by	way of dividends" following upon the
specification of  this condition,  cannot have	reference to
the  quantum  of  the  income  included	 but  must  be	held
referable only	to category of the income included, that is,
income by way of dividends from a domestic company. This was
the same argument which found favour with the Court in Cloth
Traders case (supra), but on fuller consideration, we do not
think it  is well  founded. We	may assume with the Court in
Cloth Traders  case that  the words  "where the	 gross total
income of  an assessee.............  includes any  income by
way of	dividends from a domestic company" are intended only
to provide  that a  particular category	 of income,  namely,
income by  way of  dividends from  a domestic company should
form a	component part	of gross, total income, irrespective
of what	 is the	 of quantum  income so	included but  it  is
difficult to see how the factor of quantum can altogether be
excluded when  we talk of any category of income included in
the gross  total income. What is included in the gross total
income in  such a  case is  a particular  quantum of  income
belonging to  the specified  category. Therefore  the  words
"such income by way of dividends" must be referable not only
to the cate-
801
gory of	 income included  in the gross total income but also
to the	quantum of the income so included. It is obvious, as
a matter of plain grammer that the words "such income by way
of dividends"  must have  reference to	the income by way of
dividends mentioned  earlier and that would be income by way
of dividends  from a  domestic company	which is included in
the gross  total income. Consequently, in order to determine
what is	 "such income  by way  of dividends", we have to ask
the question:  what is the income by way of dividends from a
domestic company included in the gross total income and that
would obviously	 be the	 income by way of dividends computed
in  accordance	with  the  provisions  of  the	Act.  It  is
difficult to  appreciate how,  when we	are interpreting the
words "such  income by	way of	dividends", we	can  make  a
dichotomy between the category of income by way of dividends
included in  the gross	total income  and the quantum of the
income by  way of dividends so included. This Court observed
in Cloth  Traders case that the words "such income by way of
dividends" as  a matter of plain grammer must be substituted
by the	words "income  by way  of dividends  from a domestic
company" in  order to arrive at a proper construction of the
section, but  there is	a clear fallacy in this observation,
because in  making the	substitution it	 stop short with the
words "income  by way  of dividends from a domestic company"
and does  not go the full length to which plain grammer must
dictate us to go, namely, 'income be way of dividends from a
domestic  company   included  in  the  gross  total  income"
(emphasis supplied). Otherwise we would not be giving to the
word 'such'  its full meaning and effect. The word 'such' in
the context  in which it occurs can only mean that income by
way of	dividends from	a domestic company which is included
in the	gross total  income and	 that  must  necessarily  be
provisions of the Act.
 There is  also  one  other	 strong	 indication  in	 the
compels us  to take the view that the deduction envisaged by
that provision	is required to be made with reference to the
amount of dividend received by the assessee. This indication
domestic company  or 60%  of such income as the case may be?
would be deductible from the gross
802
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	 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 50 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.
 This  view	 which	we  are	 taking	 in  regard  to	 the
construction of	 sub-section (1)  of  Section  80M  is	also
supported  by	the  decision  of  a  Bench  of	 this  Court
consisting of  one of us, Chandrachud, C.J. and Tulzapurkar,
J. in  Cambay Electric	Supply Industrial Company Limited v.
C.I.T. This decision was rendered by the Court on
803
11th April 1978 at least a year before the decision in Cloth
Traders case,  but, unfortunately,  it appears,	 it was	 not
brought to the attention of the Court when the Cloth Traders
case was  argued, because  we have  no doubt  that if it had
been cited,  the Court would have certainly made a reference
to it  in the  judgment in  Cloth Traders  case. The Section
which came  up for  consideration before the Court in Cambay
Electric Supply	 Company's case	 was undoubtedly a different
one, namely,  Section 80E, but the reasoning which prevailed
with the  Court in  placing a  particular interpretation  on
sub-section (1)	 of Section  80E would equally to applicable
in the	interpretation of  sub-section (1)  of Section	80M.
Section 80E  as it stood at the material time provided inter
alia as follows in subsection (1):
	  "80E(1). Deduction in respect of profits and gains
     from  specified  industries  in  the  case	 of  certain
     companies. -(1)  In the case of a company to which this
     section applies, where the total income (as computed in
     accordance with  the  other  provisions  of  this	Act)
     includes any  profits and	gains  attributable  to	 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 Fifth
     Schedule, there  shall be allowed a deduction from such
     profits and  gains of an amount equal to eight per cent
     thereof, in computing the total income of the Company."
The question which arose in Cambay Electric Supply Company's
case was  whether  unabsorbed  depreciation  and  unabsorbed
development rebate were liable to be deducted in arriving at
the figure  of profits	and gains exigible to deduction of 8
per cent contemplated in sub-section (1) of Section 80E. The
argument of  the assessee  was precisely the same as the one
advanced in  the present  case, namely, that the words "such
profits and  gains" in	the later part of sub-section (1) of
Section 80E  were intended  to refer only to the category of
profits and  gains referred  to in  the earlier part of that
provision, namely,  "profits and  gains attributable  to 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 Fifth Schedule" and not to the
quantum of  the profits	 and gains  included  in  the  total
income, so
804
that the  profits and  gains exigible  to the deduction of 8
per cent   were	 the profits  and gains	 attributable to the
specified business in their entirety and not the profits and
gains as  computed in  accordance with the provisions of the
Act. The  assessee contended  that,  in	 the  circumstances,
unabsorbed depreciation	 and unabsorbed	 development  rebate
were not  liable to  be deducted  from the profits and gains
attributable to	 the specified	business for arriving at the
figure exigible to the deduction of 8%. This argument of the
assessee was  rejected by  the Court and the Court held that
the profits  and gains	exigible to  the deduction  of 8 per
cent were  profits and gains computed in accordance with the
provisions of  the Act	and forming part of the total income
and hence unabsorbed depreciation and unabsorbed development
rebate were liable to be excluded from the profits and gains
attributable to	 the specified	business in  arriving at the
figure exigible	 to 8  per cent	 deduction. Tulzapurkar,  J.
speaking on  behalf of	the Court analysed the provisions of
sub section (1) of Section 80E in the following words:
	  "On reading  sub-section (1)	it will become clear
     that three	 important steps  are required	to be  taken
     before the	 special deduction permissible thereunder is
     allowed and  the net  total income	 exigible to  tax is
     determined. First,	 compute the  total  income  of	 the
     concerned	assessse   in  accordance   with  the  other
     provisions of the Act, i.e., in accordance with all the
     provisions except	section 80E;  secondly, ascerta what
     Part of  the total	 income so  computed  represses	 the
     profits and  gains attributable  to the business of the
     specified industry (here generation and distribution of
     electricity); and,	 thirdly, if  there be	profits	 and
     gains so  attributable, deduct  8 per cent thereof from
     such profits and gains and then arrive at the net total
     income exigible to tax."
The   learned	Judge	then   proceeded   to	apply	this
interpretation of  sub-section (1)  of Section	80E  to	 the
facts of the case before him and observed:
	  "As	 indicated    earlier,	  sub-section	 (1)
     contemplates three	 steps being taken for computing the
     special deduction	permissible thereunder	and arriving
     at the  net income	 exigible to  tax find the first two
     steps read	 together contain the legislative mandate as
     to how  the total income of which the profits and gains
     attributable to the busi-
805
     ness of  the specified  industry forms  a	part-of	 the
     concerned assessee	 is to	be computed and according to
     the parenthetical clause, which contains the key words,
     the same  is to  be computed  in  accordance  with	 the
     provisions of  the Act  except section 80E and since in
     this case it is income from business the same will have
     to be  computed in	 accordance with  sections 30 to 43A
     which would  include section  32(2) (which provides for
     carry forward of depreciation) and section 33(2) (which
     provides for  carry forward  of development  rebate for
     eight years).  In other  words, in	 computing the total
     income of	the concerned  assessee, items of unabsorbed
     depreciation and  unabsorbed  development	rebate	will
     have to  be deducted before arriving at the figure that
     will become  exigible to  the deduction  of 8  per cent
     contemplated by Section 80E (1).
It will	 thus be  seen that  according to this decision, the
words "such  profits and  gains" in  the later	part of sub-
section(1) of  Section 80E  were referable to the quantum of
the profits and gains attributable to the specified business
included in  the total	income as referred to in the earlier
part of	 the provision.	 If  this  decision  lays  down	 the
correct interpretation of sub-section (1) of Section 80E the
same interpretation  must also	govern the  language of sub-
section (1) of Section 80M. Structurally there is hardly any
difference between  Section 80E	 sub-section (1) and Section
80M sub-section	 (1) and the reasoning which appealed to the
Court in the interpretation of subsection (1) of Section 80E
must apply  equally in the interpretation of sub-section (1)
of Section  80M. We  find ourselves wholly in agreement with
the view  taken by  the	 Court	in  Cambay  Electric  Supply
Company's case	and  we	 must  therefore  dissent  from	 the
interpretation placed  on sub-section  (1) of Section 80M by
the decision in Cloth Traders case (supra).
 But, even	if in our view the decision in Cloth Traders
case is	 erroneous, the	 question still	 remains whether  we
should over-turn  it. Ordinarily  we would  be reluctant  to
over-turn a decision given by a Bench of this Court, because
it  is	 essential  that  There	 should	 be  continuity	 and
consistency in	judicial decisions and law should be certain
and definite.  It is almost as important that the law should
be  settled   permanently  as  that  it	 should	 be  settled
reconsidered. The doctrine of stare
806
decisis should	not deter  the	Court  from  over-ruling  an
earlier decision,  if it  is satisfied that such decision is
manifestly wrong  or proceeds  upon a mistaken assumption in
regard to  the	existence  or  continuance  of	a  statutory
provision or  is contrary  to another decision of the Court.
It was	Jackson, J.  who said  in his  dissenting opinion in
Massachusetts v.  United States:  "I see  no  reason  why  I
should	be   consciously   wrong   today   because   I	 was
unconsciously wrong  yesterday". Lord  Denning also  said to
the same  effect when  he observed  in Ostime  v. Australian
Mutual Provident  Society: "The	 doctrine of  precedent does
not compel Your Lordships to follow the wrong path until you
fall over  the edge  of the  cliff". Here we find that there
are over-riding considerations which compel us to reconsider
and review  the decision in Cloth Traders case. In the first
place, the  decision in	 Cloth Traders	case was rendered by
this Court  on 4th  May	 1979  and  immediately	 thereafter,
within a few months, Parliament introduced Section 80AA with
retrospective effect  from 1st	April 1968  with a  view  to
over-riding the	 interpretation placed	on  Section  80M  in
Cloth Traders  case. The  decision in Cloth Traders case did
not therefore hold the field for a period of more than a few
months and it could not be said that any assessee was misled
into acting  to its detriment on the basis of that decision.
There was  no decision	in regard  to the  interpretation of
sub-section (1) of Section 80M given by any High Court prior
to  the	 decision  in  Cloth  Traders  case  and  there	 was
therefore no  authoritative pronouncement  of this  Court on
this question  of interpretation  on which we assessee could
claim to  rely for  making its fiscal arrangements. The only
decision in  regard to the interpretation of sub-section (1)
of Section 80M given by any High Court prior to the decision
in Cloth Traders case, was that of the Gujarat High Court in
Addi. C.I.T.  v. Cloth	Traders	 Private  Limited  and	that
decision took  precisely the same view which we are inclined
to accept  in the present case. It is therefore difficult to
see how	 any assessee  can legitimately	 complain  that	 any
hardship or  inconvenience would  be caused  to	 it  if	 the
decision in  Cloth Traders  case was  over-turned by  us. If
despite the  decision of  the Gujarat  High Court  in  Addl.
C.I.T. v. Cloth Traders Private Limited (supra) the assessee
proceeded on the assumption, now found to be erroneous, that
the Gujarat  High Court decision was wrong and the deduction
permissible under  sub-section (1) of Section 80M was liable
to be  calculated with	reference  to  the  full  amount  of
dividend
807
received by  the assessee, the assessee can have only itself
to blame. Knowing fully well that the Gujarat High Court had
decided the question of interpretation of sub-section (1) of
Section 80M  in favour	of the	Revenue	 and  there  was  no
decision of  this Court	 taking a different view, no prudent
assessee  could	  have	proceeded   to	make  its  financial
arrangements on	 the basis  that the decision of the Gujarat
High Court  was erroneous. Moreover, we find, for reason we
have already  discussed that  the decision  in Cloth Traders
case is	 manifestly wrong because it has failed to take into
account a  very vital  factor, namely,	that  the  deduction
required to  be made under sub-section (1) of Section 80M is
not from the gross total income but from "such income by way
of dividends". There is  also	another	 circumstance  which
makes it  necessary for	 us to	reconsider  and	 review	 the
decision in  Cloth Traders  case and that is the decision in
Cambay Electric SUPPLY Company's case. The decision in Cloth
Traders case  is inconsistent  with that  in Cambay Electric
Supply Company'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
reconsideration that  the decision  in Cloth Traders case in
erroneous and must be over-turned.
     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 1st April 1968
and no complaint can validly be made against it.
     We accordingly  dismiss the  writ petition	 but, in the
peculiar circumstances	of the	case, we  direct  that	each
party shall bear and pay its own costs.
 AMARENDRA NATH  SEN, J.  I	 have  had  the	 benefit  of
reading the  judgment of  my learned brother Bhagwati, J. MY
learned brother in his judgment has set out all the material
facts and  circumstances of the case. He has referred to the
relevant statutory provisions and to the legislative history
of Section 80M of the Income-Tax Act. He has also considered
the earlier decisions of various Courts including
808
the decisions  of  this	 Court	in  Cloth  Traders  Ltd.  v.
Additional  Commissioner   of  Income	tax  and  in  Cambay
Electrical Supply  Industrial Co.  Ltd	v.  Commissioner  of
Income-Tax. He	has analysed  the provisions  of Section 80M
and has	 proceeded to  interpret the  same. As I am in broad
agreement with	what have been stated by my learned brother,
I do  not propose to reproduce the same. I, however, wish to
make some observations of my own.
 The authority  and jurisdiction  of a  larger Bench  of
this Court  to over-ride  and over-rule	 any decision  of  a
smaller Bench  cannot be  questioned. I	 am, however, of the
opinion that  the decision  of	this  Court  on	 any  fiscal
legislation involving  the question of financial benefit and
liability should  not normally be interfered with and should
be interfered  with only in very rare cases. On the basis of
the decision of this Court on any fiscal legislation and any
matter involving  financial  arrangements  and	adjustments,
parties are  entitled to arrange their financial affairs and
in fact	 they so  arrange and adjust their financial affairs
on the	basis of the law laid down by this Court. Unsettling
a position settled by the decision of this Court may lead to
confusion  and	result	in  financial  instability,  causing
serious prejudice not only to the parties concerned but also
to the	economic growth	 of the	 country as  a whole.  If on
interpretation of  any provision  in any  fiscal legislation
two views may be reasonably possible, a larger Bench of this
Court may  not interfere  with the  view taken	by a smaller
Bench of this Court merely on the ground that the other view
appears to  the larger	Bench to  be the better view and may
commend	 itself	 to  the  larger  Bench.  If,  however,	 the
decision of the smaller Bench is erroneous, the larger Bench
has necessarily	 to interfere  with the	 decision,  as	this
Court will  not permit	a wrong	 decision to operate as good
law of the land.
 On a  careful consideration  of all  the relevant facts
and circumstances  of this  case and  the earlier  decisions
which have  all been  noted in	the judgment  of my  learned
brother, I  have no  hesitation in  coming to the conclusion
that the  decision arrived  at by my learned brother for the
reasons stated	by him in his judgment is sound and correct.
My learned  brother has	 properly analysed the provisions of
Section 80M  and has  correctly construed the same, applying
the well settled principles of construction, I agree
809
with my	 learned brother  and the  reasons given  by him for
coming to  the conclusion  that the  decision of  this Court
Cloth Traders  Ltd. v. Additional Commissioner of Income Tax
is erroneous.  In my  opinion, it  cannot be  said  that  in
deciding the case of Cloth Traders Ltd. this Court had taken
one of	two reasonably possible views. As my learned brother
in  his	  judgment  has	  aptly	 pointed  out  on  a  proper
interpretation of  Section 80M	that the  view taken by this
Court in Cloth Traders case is fallacious and wrong. I am in
entire agreement with the interpretation of Section 80M made
by my learned brother for reasons stated in his judgment.
 It may  be noted  that as	soon as the decision of this
Court in  Cloth Traders	 case was  given, the  Parliament to
clearly manifest the legislative intent and to indicate that
the decision  did not  reflect the  true  intention  of	 the
Legislature  introduced	  by  amendment	 Section  80AA	with
retrospective effect.  In view	of the proper interpretation
of Section  80M in  the judgment  of my learned brother with
which I	 agree, it  cannot be said that Section 80AA has the
effect of  imposing any fresh tax with retrospective effect.
Section 80AA  is clearly  declaratory in  nature and  merely
declares what  the correct  position  has  always  been.  No
question of  imposition of  any fresh tax with retrospective
effect falls  for consideration in this case. It may also be
pointed out  that the  decision in Cloth Traders case cannot
be said	 to have  held the  field for  any length of time to
cause any  serious prejudice to an assessee. The decision of
the Gujarat High Court in Cloth Traders case which was upset
by this	 Court was  against the	 assessee and the Parliament
had intervened	as soon	 as this Court reversed the decision
of the Gujarat High Court in Cloth Traders case. This aspect
has also been fully dealt with in the judgment of my learned
brother.
     With these	 observations I	 am in entire agreement with
the judgment  of my  learned brother  and I  agree with	 the
order proposed by him.
N.V.K.					Petition dismissed.
810

Vazir Sultan Tobacco Co. Ltd. Etc. Etc vs Commlssioner Of Income-Tax Andhra ... on 25 September, 1981
Equivalent 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
Author: V.D. Tulzapurkar
Bench: V.D. Tulzapurkar, E.S.  Venkataramiah, Amarendra Nath  Sen
VAZIR SULTAN TOBACCO CO. LTD. ETC. ETC.

	Vs.

COMMlSSIONER OF INCOME-TAX ANDHRA PRADESH, HYDERABAD

DATE OF JUDGMENT25/09/1981

BENCH:
BENCH:
VENKATARAMIAH, E.S. (J)

CITATION:
 1981 AIR 2105		  1982 SCR  (1) 789
 1981 SCC  (4) 435	  1981 SCALE  (3)1483
 RF	    1986 SC 484	 (13,17)
 F	    1986 SC1746	 (6)
 R	    1986 SC1938	 (5,13,14,16,17)

ACT:
     Super Profits  Tax Act,  1963 and	Company's  (Profits)
Sur-tax	 Act,  1964-Rule  I  of	 Second	 Schedule-Scope	 of-
"Provision"  and   "Reserve"-Distinction-  A  sum  of  money
transferred  from   current  profits  to  general  reserves-
Dividend paid from that fund-General reserve how calculated.

HEADNOTE:
     The Super	(Profits Tax)  Act, 1963  and the  Company's
(Profits) Sur-tax  Act, 1964 (the scheme and main provisions
of both	 of which are almost identical) impose a special tax
on excess  profits earned  by companies.  The special tax is
imposed in  respect of	so much	 of a  company's "chargeable
profits" of  the previous  year as  exceeded  the  "standard
deduction"- The	 term "chargeable profit" is defined to mean
the total  income of  an assessee  computed under the Income
Tax  Act,  1961	 for  any  previous  year  and	adjusted  in
accordance  with  the  provisions  of  that  Act.  "Standard
deduction" is  determined by  computing	 the  capital  of  a
company in  accordance with  the  rules	 laid  down  in	 the
schedule. The  material part  of rule I provides that before
any  amount  or	 sum  qualifies	 for  inclusion	 in  capital
computation of	a company  two conditions are required to be
fulfilled namely:  (i) that  the amount	 or sum	 must  be  a
"reserve" and  (b) that	 it must  not have  been allowed  in
computing the  company's profit	 for the  purposes of Income
Tax Acts, 1922 or 1961.
     ln their  respective balance  sheets, the assessees had
shown under the heading "current liabilities and provisions"
appropriations	of   large  sums   of  money  for  taxation,
retirement gratuity  and dividends  and claimed that for the
purposes of  super profits tax these sums should be regarded
as "other  reserves" within  the meaning of Rule 1 of Second
Schedule to  the Act and that for the computation of capital
they should be taken into account.
     Treating  these   sums  as	  "provisions"	and  not  as
"reserves", the	 Super Profits	Tax officer  determined	 the
capital and  the standard  deduction by	 excluding them from
the computation of the capital. He then levied super profits
tax on	that  portion  of  the	chargeable  profits  of	 the
previous year as exceeded the standard deduction.
     While the	Appellate Assistant  Commissioner upheld the
assessee's contention  that these sums were "reserves" which
should be  taken into  account for  computing their capital,
the Appellate  Tribunal held  that these were not "reserves"
within
790
the meaning  of Rule l of the Second Schedule to the Act and
as such could not enter into capital computation.
     On reference  the High  Court held	 that the  sums	 set
apart were  not "reserves  and so  should be excluded in the
computation of	the capital  for the purposes of levying the
super profits tax.
     In Tax  Reference no.  5 (a  case under  the  Companies
(Profits) Sur-tax  Act, 1964)  the assessee transferred from
out of	its current  profits a	large sum  of money  to	 the
general reserves  and paid dividend to its shareholders from
out of	the augmented  general	reserves.  On  the  question
whether for computing the capital for the purpose of sur-tax
the general  reserves should or should not be reduced by the
sum  of	 dividend  paid,  the  taxing  authorities  and	 the
appellate tribunal  ignored this  amount holding that it was
not a "reserve".
     None of  the items of appropriation either for taxation
or for	retirement gratuity  or for proposed dividend in the
assessees' cases had been allowed in computing their profits
under the Income Tax Act, 1961.
^
     HELD: [per Tulzapurkar & Venkataramiah, JJ]
     The expressions "reserve" and "provision" have not been
defined in  the Act.  Standard dictionaries,  without making
any distinction	 between the  two concepts, use them more or
less synonymously  connoting the same idea. But since in the
context of  the legislation  a clear distinction between the
two is implied it is essential to know the exact connotation
of  the	 two  concepts	and  the  distinction  as  known  in
commercial accountancy. The rules for computation of capital
contained in  the Second  Schedule to the Act proceed on the
basis of the formula of capital plus reserve, a formula well
known in  commercial accountancy.  But since they occur in a
taxing	statute	  applicable   to   companies	only   these
expressions will  have to  be understood  in  the  sense  or
meaning attributed  to them  by men  of business,  trade and
commerce and  by  persons  interested  in  or  dealing	with
companies. Therefore, the meaning attached to these words in
the Companies  Act, 1956 would govern their construction for
the purpose of these two enactments [800 C-H]
     The broad	distinction between  the two  expressions as
judicially  evolved   by  this	 Court	is   that,  while  a
"provision" is a charge against the profits to be taken into
account against	 gross	receipts  in  the  profit  and	loss
account, a  "reserve" is  an appropriation  of profits,	 the
asset or assets by which it is represented being retained to
form part of the capital employed in the business. [801 F]
     C.l.T. v.	Ccntury Spinning & Manufacturiag Co., 24 ITR
499 and Metal Box Company of India Ltd. v. Their Workmen, 73
lTR 67 followed.
     The Companies  Act, which	enjoins upon  the  Board  of
Directors of  every company to lay before the annual general
meeting of  its shareholders  an annual	 balance sheet and a
profit and  loss account, enumerates the separate heads that
should be  shown in  the balance  sheet, two  of these items
being "reserve'	 and "provision".  The definitions  of these
two expressions given in the Act show
791
that if any retention or appropriation of a sum falls within
the definition of A "provision" it can never be a "reserve".
But  the   converse  is	  not  true.  If  the  retention  or
appropriation is  not a	 "provision" that  is, if  it is not
designated to  meet depreciation,  renewals or diminution in
value  of   assets  or	 any  known   liability	 it  is	 not
automatically a	 "reserve" and	the question will have to be
decided having	regard to  the true  nature and character of
the sum	 so retained  or appropriated  depending on  several
factors, including the intention with which and the purposes
for which  such retention  or appropriation  had been  made.
[803 E-Fl
     Having regard  to the  type of  definitions of  the two
concepts, if  a particular  retention or  appropriation of a
sum falls  within the  expression "provision"  then that sum
will have to be excluded from the computation of capital. If
the sum	 is in	fact a "reserve" then it would be taken into
account for the computation of capital. [804 B-C]
     Where the assessee had set apart a sum of money to meet
tax  liability	in  respect  of	 profits  earned  during  an
accounting year,  which liability  was not  quantified, such
setting apart for a known and existing liability, would be a
"provision" and	 could not  be regarded as a "reserve". [806
A-C]
     Kesoram Industries and Cotton Mills Ltd.v. Commissioner
of Wealth Tax  (central) Calcutta, 59 ITR 767 followed.
     But if  provision for  a known or existing liability is
made in	 excess of  the amount	reasonably necessary for the
purpose, such  excess should  be treated  as  reserve"	and,
therefore, would  be includible in capital computation. [806
E]
     Since the assessee (in C.A. No. 860/73) had at no stage
of  the	  proceedings  before	the  Taxing  Authorities  or
Appellate Tribunal  or the High Court raised a plea that the
provision made	by it  for taxation  was in  excess  of	 the
amount reasonably  necesssary for  the purpose and that such
excess should  be treated  as a	 "reserve", the	 plea  which
needs investigation  into facts,  could not be allowed to be
raised for  the first time in appeal before this Court. [807
F]
     Ordinarily an  appropriation to  gratuity reserve	will
have to	 be regarded  as a  provision made  for a contingent
liability, for,	 under a  scheme framed	 by  a	company	 the
liability to  pay gratuity  to its employee on determination
of  employment	arises	only  when  the	 employment  of	 the
employee is  determined by  death, incapacity, retirement or
resignation-an event  (cessation of  employment) certain  to
happen in  the service	career of  every employee. Moreover,
the amount  of gratuity	 payable is usually dependent on the
employee's wages  at the  time of  G, determination  of	 his
employment and	the number of years of service put in by him
and the	 liability accrues  and enhances  with completion of
every year  of service;	 but the  company can work out on an
acturial valuation  its estimated liability (i.e. discounted
present value  of  the	liability  under  the  scheme  on  a
scientific basis)  and make  a provision  for such liability
not all	 at once  but spread  over a  number of years. If by
adopting such  scientific method  any appropriation  is made
such appropriation  will constitute a provision representing
fairly accurately  a known  and existing  liability for	 the
year in question; if however, an ad hoc sum
792
is appropriated	 without resorting  to any  scientific basis
such appropriation  would also	be a  provision intended  to
meet a	known liability,  though a  contingent one, for, the
expression 'liability'	occurring in  cl. (7)(1)(a)  of Part
III of	Sixth Schedule	to the	Companies Act  includes	 any
expenditure contracted	for and	 arising under	a contingent
liability: but	if the sum so appropriated is shown to be in
excess of  the sum  required to meet the estimated liability
(discounted present  value on a scientific basis) it is only
the excess  that will have to be regarded as a reserve under
clause (7)  (2) of Part III to the Sixth Schedule. [807 G.H;
808 A-D]
     In the  instant case  although the	 assessee had  urged
before the  authorities below  that different  treatment for
the same  item could not be given for purposes of income tax
assessment and super profits tax assessment the assessee did
not clarify  by placing	 material on  record as	 to  whether
appropriation was based on any acturial valuation or whether
it was	an appropriation  of an	 ad hoc amount a which has a
vital bearing  on the  question, whether  the  appropriation
could be  treated as  a provision or reserve. In the absence
of proper  material the	 question should  be decided  by the
taxing	authorities   whether  the   amount  set  apart	 and
transferred to	gratuity reserve by the assessee company was
either a  provision or	a reserve  and if the latter to what
extent. [812 C-E]
     Standard Mills  Co. Ltd. v. Commissioner of Wealth-Tax,
Bombay, 63,  I.T.R.470 & Workmen of William Jacks & Co. Ltd.
v. Management of Jacks & Co.Ltd; Madras. [1971] Supp. S.C.R.
450 followed.
     Southern Railway  of Peru	Ltd. v. Owen [1957] A.C. 334
     The  appropriations  of  an  amount  by  the  Board  of
Directors by  way of  providing for  proposed dividend would
not constitute	'provision', for,  the appropriations cannot
be said	 to be by way of providing for any known or existing
liability, none having arisen on the date when the Directors
made recommendation much less on the relevant date after the
first day  of the  previous year  relevant to the assessment
year in	 question. This	 by itself  would  not	convert	 the
appropriations into "reserves". [813 E-F]
     The tests	and guidelines	laid down  by this  Court in
this respect  are: (1)	the true nature and character of the
appropriation must  be	determined  with  reference  to	 the
substance in  the matter,  which means	that one  must	have
regard to the intention with which and the purpose for which
appropriation has been made such intention and purpose being
gathered from  the  surrounding	 circumstances.	 A  mass  of
undistributed profits cannot automatically become a reserve.
Some body  possessing the  requisite authority	must clearly
indicate that  a  portion  thereof  has	 been  earmarked  or
separated from	the general  mass of  profits with a view to
constituting it	 either a  general  reserve  or	 a  specific
reserve; (2)  the surrounding  circumstances should  make it
apparent that  the amount  so earmark  ed or set apart is in
fact a	reserve to  be utilised	 in future  for	 a  specific
purpose on  a specific	occasion; (3) a clear conduct on the
part of the Directors in setting apart a sum from out of the
mass of	 undistributed profits	avowedly for  the purpose of
distribution of	 dividend in the same year would run counter
to any	intention of  making that  amount a reserve, (4) the
nomenclature accorded  to any  particular fund	which is set
apart from out of the profits would not be material
793
Or decisive  of the  matter; and (5) if any amount set apart
from out  of the  profits A is going to make up capital fund
of the	assessee and  would be available to the assessee for
its business purposes it would become a reserve liable to be
included in  the capital  computation of  the assessee under
that Act. [815 F-H, 817 G]
     The relevant  provisions of  the Companies	 Act clearly
show that  creating reserves  out of  the profits is a stage
distinct in  point of  fact and anterior in point of time to
the stage  of making  recommendation for payment of dividend
and the scheme of the provisions suggests that appropriation
made by	 the Board  of Directors  by way  of recommending  a
payment of  dividend cannot  in the  nature of	things be  a
reserve. [818 F-G]
     Judged  in	 the  light  of	 the  above  guidelines	 the
appropriations made  by the  Directors for proposed dividend
in the	case of	 the concerned	assessee companies  did	 not
constitute 'reserves' and the concerned amounts so set apart
would  have   to  be   ignored	or   excluded  from  capital
computation. [818 H]
     Standard Mills  Co. Ltd.  v. Commissioner of Wealth-tax
Bombay, 63  I.T.R.470, Metal  Box Co. Of India Ltd. v. Their
Workmen, 73 ITR 67, First National City Bank v. Commissioner
of Income-Tax,	42 ITR	67 &  Commissioner  of	Income-	 tax
(Central), Calcutta  v. Standard  Vacuum oil Co., 59 ITR 685
followed.
     Although under  the Companies  Act it  is open  to	 the
Directors to  recommend and  the  share-holders	 to  approve
payment of  dividend from the current year's profits or from
the past  year's profits and on transfer of a portion of the
current year's	profit to  the general reserve the augmented
general reserve	 becomes a  congolmerate fund, having regard
to the	natural course	of human conduct it is not difficult
to predicate  that dividends  would ordinarily	be paid	 out
from the  current income  rather than from the past savings,
unless	the   directors	 in   their  report   expressly	  or
specifically state  that payment  of dividends would be made
from the past savings. From the commercial point of view, if
any amount  is required	 for incurring	any  expenditure  or
making any  disbursement like distribution of dividends in a
current year,  ordinarily the  same will  come	out  of	 the
current income of the company if it is available and only if
the sum	 is insufficient  then	the  past  savings  will  be
resorted to for the purpose of incurring that expenditure or
making that  disbursement. Such	 a course would be in accord
with the common sense point of view. [822 C-F]
     In the  absense of	 express indication  to the contrary
the normal  rule for a commercial concern would be to resort
to current  income rather  than past savings while incurring
any expenditure or making any disbursement. [822 H]
     Commissioner of  Income-Tax, Bombay  City-l  v.  Bharat
Bijlee Ltd. 107 ITR 30; & Commissioner of Income-Tax, Bombay
City-ll v. Marrior (India) Ltd. 120 ITR Sl 2 approved.
[per A.N. Sen, J.]
     The amount	 set  apart  for  payment  of  any  dividend
recommended by	the Board  of Directors is not an amount set
apart for meeting a known or existing
794
liability and  cannot be considered to be a "reserve" within
the meaning  of the  Act for  the purposes of computation of
the capital of the company. [832 F]
     The Companies Act, 1956 provides for the preparation of
annual balance	sheet in  the prescribed  form and laying it
before the  shareholders  at  the  annual  general  meeting.
Regulation 87,	Table A	 in Schedule I contemplates that the
Board may  set aside  out of  the  profits  of	the  company
certain sum  as "reserve"  before dividend is recommended by
it. The	 amount recommended  by the  Board  for	 payment  of
dividend is  shown in  the  balance  sheet  under  the	head
"provision" and	 not under  any head  of "reserve". The true
nature and  character of  the  sum  so	set  apart  must  be
determined with	 regard to the substance of the matter which
in this case is that the sum set apart was never intended to
constitute a "reserve' of the company. [833 F, 834G]
     In law  the liability  for payment	 of dividend  arises
only when  the share-holders accept the recommendations made
by the	Directors. Till	 then it is open to the Directors to
modify	or   withdraw  their  recommendation  before  it  is
accepted by  the shareholders  and it is equally open to the
share-holders  not  to	accept	the  recommendation  in	 its
entirety. Even	so, for business purposes when the Directors
make any  recommendation for  payment of  dividend  and	 set
apart any  amount for  this purpose  the Directors intend to
make a provision and do not create any reserve, as Directors
know that  their recomendation	is generally accepted by the
shareholders as a matter of course. Therefore any amount set
apart for  this purpose	 is understood by persons interested
in company  matters and	 in dealing with companies to mean a
provision for  the payment  of dividend	 to the shareholders
and is not understood to constitute a "reserve". [832 C-F]
     Commissioner  of  lncome-tax  Bombay  City	 v.  Century
Spinning and  Manufacturing Co.	 Ltd. [1953]  24 I.T.R. 499,
Commissioner of	 Income Tax  v.	 Standard  Vaccum  oil	Co.,
[1966] 59  I.T.R. 685,	Metal  Box  Co.	 Of  Ltd.  v.  Their
Workmen, [1963]	 73 I.T.R, 53, Commissioner of Income-tax v.
Mysore Electrical  Industries Ltd., [1971] 80 l.T.R. 567 and
Kesho Ram  Industries and Cotton Mills Ltd v.Commissioner of
Wealth	Tax   (Central),  Calcutta,  [1966]  59	 I.T.R.	 767

JUDGMENT:
     CIVIL APPELLATE  JURISDICTION: Civil  Appeal No. 860 of
1973.
     From the  judgment and  order dated  the 1st September,
1972 of	 the Andhra  Pradesh High Court at Hyderabad in R.C.
No. 10 of 1971.
			    AND
	       Civil Appeal No. 1614 (NT) of 1978.
     Appeal by	Special Leave  from the	 judgment and  order
dated the 26th July, 1976 of the Calcutta High Court in l.T.
Reference No.454 of 1974.
			    AND
		    Review Petition No. 57 of 1980.
795
			     IN
	  Special Leave Petition (Civil) No. 4602 of 1977
     From the  judgment and  order dated the 11th June, 1974
of the	Calcutta High  Court in	 I.T. Reference	 No. 195  of
1969.
			    AND
	       Tax Reference Case Nos. 2 and 3 of 1977.
     Income-tax Reference  under section  257 of the Income-
tax Act, 1961 drawn up by the Income-tax Appellate Tribunal,
Bombay Bench  'B' in R.A. Nos. 1223 and 1224 (Bom.) of 1972-
73 (I.T. A. Nos. 24 and 25 (Bom.) of 1971-72.
			    AND
		    Tax Reference Case No. S of 1978.
     Income Tax	 Reference under  section 257  of the Income
Tax Act,  1961 made  by the  Income Tax	 Appellate Tribunal,
Bombay Bench  "D" in  R.A. No. 225 (Bom.) of 1977-78 arising
out of S.T.A.No. 36 (Bombay) 1 1976-77.
     A. Subbarao  and Y.V.  Anjaneyulu for  the appellant in
Civil Appeal No. 860/73. E
     V.S. Desai,  Dr. Debi Pal, Praveen Kumar and Anil Kumar
Sharma for  the Appellant  in C.A.  1614 of 1978 and for the
Petitioner in Review Petition No. 57/80.
     K.G. Haji	and R.J.  John	for  the  Appellant  in	 Tax
Reference Case Nos. 2 and 3 of 1977.
     S.E.  Dastur,   S.N.  Talwar  and	R.J.  John  for	 the
Appellant in Tax Reference Case No. 5 of 1978.
     S.T. Desai,  J. Ramamurthi	 and Miss  A. Subhashini for
the Respondent in Civil Appeal No. 860/73.
     Miss A.  Subhashini for  the Respondent in Civil Appeal
No.1614 of 1978
     S.C.  Manehanda   and  Miss   A.  Subhashini   for	 the
Respondent in Tax Reference Nos. 2 and 3 of 1977.
796
     S.C. Manchanda,  Anil Dev	Singh and Miss A. Subhashini
for the Respondent in Tax Reference Case No. 5/1978.
     S P. Mehta and K.J. John for the Intervener.
     Dr. Debi  Paul and	 K.J. John for the Intervener in Tax
Reference Case No. 5/1978.
     The following Judgments were delivered:
     TULZAPUKKAR,  J.	In  these   Civil  Appeals  and	 Tax
Reference Cases	 certain common	 questions of  law arise for
our determination  and hence  all these	 are disposed  of by
this  common  judgment.	 The  common  questions	 raised	 are
whether amounts retained or appropriated or set apart by the
concerned assessee  company by	way of	making provision (a)
for taxation,  (b)  for	 retirement  gratuity  and  (c)	 for
proposed dividends  from out  of profits and other surpluses
could be  considered as	 "other reserves" within the meaning
of Rule	 I of  the Second  Schedule to the Super Profits Tax
Act, 1963 (or Rule 1 of the Second Schedule to the Company's
(Profits)  Sur-tax  Act,  1964)	 for  inclusion	 in  capital
computation of	the Company for the purpose of levying super
profit tax ? The first three matters concerning Vazir Sultan
Tobacco Co.  Ltd; Hyderabad,  Ballarpur lndustries, Ltd; and
M/s. Bengal  Paper Mills  Co. Ltd;  Calcutta arise under the
Super Profits  Tax Act,	 1963 while  the the  Tax  Reference
Cases concerning  M/s. Echjay  Industries Pvt. Ltd. and Hyco
Products  Pvt.	 Ltd.  Bombay	arise  under  the  Companies
(Profits) Sur-tax Act.1 964.
     Since Civil  Appeal  No.  860  of	1973  (Vazir  Sultan
Tobacco Company's  case) is  comprehensive and comprises all
the three  items of  appropriation it  will be sufficient if
the facts  in this  case are  set out  in detail  so  as  to
understand how	the questions  for  determination  arise  in
these matters. Vazir Sultan Tobacco Co. Ltd. was an assessee
under the  Super (Profits)  Tax Act,  1963. For	 the assess-
ment year  1963-64, for which the relevant accounting period
was the year which ended 30th September, 1962, for computing
the chargeable	profits of that year for the purpose of levy
of super  profits tax  under the  Act, the  assessee company
claimed that  the appropriations  of a)	 Rs.  33,68,360	 for
taxation, (b)  Rs. 9,08,106  for retirement gratuity and (c)
Rs. 18,41,820  for dividends  (all of which items were shown
under the  heading 'current  liabilities and  provisions' in
the concerned balance-sheet as at 30th Sept. 1962) should be
regar-
797
ded as	"other reserves"  within the  meaning of  Rule 1  of
Second	A   Schedule  to  the  Act  and	 be  included  while
determining its	 capital.  The	Super  Profits	Tax  officer
rejected the  assessee's contention  as in  his opinion	 all
these items  were "provisions  ' and  not "reserves"  and as
such these  had to  be ignored	or excluded from the capital
computation of	the assessee  company and  on that  basis he
determined the	capital,  and  the  standard  deduction	 and
levied super  profits tax  on that portion of the chargeable
profits of  the previous  year which  exceeded the  standard
deduction. In  the appeal  preferred by the assessee company
against the  assessment, the  Appellate Commissioner  upheld
the assessee's	contentions and	 held that  those items were
"reserves" and	took them  into account	 while computing the
capital of  the assessee  company.  In	the  further  appeal
prefer- red  by	 the  Super  Tax  officer,  the	 Income	 Tax
Appellate Tribunal  accepted the Department's contention and
held that  these were  not "reserves"  within the meaning of
Rule I	of the	Second Schedule to the Act and as such these
could not  enter into  capital computation  of the  assessee
company. In the Reference that was made under section 256(1)
of the	Income Tax  Act, 1961  read with  s. 10 of the Super
Profits Tax  Act at the instance of the assessee company the
following question of law was referred to the Andhra Pradesh
High Court for its opinion:
	  "Whether on  the facts and in the circumstances of
     the case the provisions (a) for taxation Rs. 33,68,360,
     (b) for  retirement gratuity  Rs. 9,08,106	 and (c) for
     dividends Rs. 18,41,820, could be treated as 'reserves'
     for computing  the capital	 for the  purpose  of  super
     profits tax  under Second Schedule to the Super Profits
     Tax Act, 1963 for the assessment year 1963-64 ?" F
     The  High	 Court	on   a	consideration	of   several
authorities answered  the question  in respect	of the three
items in  favour of  the Revenue  and against  the  assessee
company and  held that	the three  sums so  set apart by the
assessee company  in its  balance-sheet were  not "reserves"
and had to be excluded in the computation of its capital for
the purpose  of levying	 super profits	tax payable  on	 the
chargeable profits  tor the  relevant accounting year. It is
this view  of the High Court that is being challenged by the
assessee company in the Civil Appeal No. 86() of 1973 before
us.
     In Civil Appeal No. 1614/1978 (Ballarpur Industries Ltd
) and  Review Petition	No. 57	of 1980	 (M/s. Bengal  Paper
Mills Co. Ltd.)
798
We are	concerned with only two items of appropriation being
(a) provision  for taxation  and (b)  provision for proposed
dividend and  in each  one of  these cases the Calcutta High
Court had  taken the  view  that  these	 two  items  do	 not
constitute "reserves"  and as  such have to be ignored while
computing the capital of the assessee company.
     In Tax  Reference Case Nos. 2 and 3 of 1977 (M/s Echjay
Industries  Pvt.  Ltd.)-a  case	 under	Companies  (Profits)
Surtax Act,  1964,  we	are  concerned	with  two  items  of
appropriation being (a) provision for taxation (b) provision
for proposed  dividend for  the two assessment years 1969-70
and 1970-71  and in each of the years the Taxing Authorities
as also	 the Income Tax Appellate Tribunal Bombay have taken
the view that these appropriations did not constitute "other
reserves" within  the  meaning	of  Rule  I  of	 the  Second
Schedule to  the Companies  (Profit) Surtax Act, 1954 and as
such were  not includible  in the capital computation of the
assessee company  but in  view of  a divergence	 of  opinion
between the different High Courts on the point, the Tribunal
has at	the instance  of the  assessee company made a direct
Reference to  this Court under s. 257 of the Income Tax Act,
1961 read  with s. 18 of the Companies (Profits) Surtax Act,
1964.
     In Tax  Reference Case  No. 5  of 1978  (Hyco  Products
Pvt.Ltd.)-also a  case under Companies (Profits) Surtax Act,
1964 the same question pertaining to dividend alone but in a
different form	arose for  consideration before	 the  Taxing
Authorities and	 the Income  Tax Appellate  Tribunal. It was
not a  case of	'proposed dividend' but the assessee company
after transferring  Rs. 29,77,000  out of the current year's
profit amounting  to Rs. 61,03,382 to General Reserves, paid
out of	Rs. 3,10,450  as dividend  to its share-holders from
such augmented General Reserves and the question was whether
while computing	 the capital of the assessee-company for the
purpose of  levy of  surtax the	 General Reserves  should or
should not be reduced by the aforesaid sum of Rs. 3,10,450 ?
In other  words, the  question was whether the amount of Rs.
3,10,450 could	not form part of the General Reserves on the
relevant date  (being 1.1.  1973) for the computation of the
capital ?  The Taxing  Authorities as  well as the Appellate
Tribunal Bombay	 held that  the said  amount of Rs. 3,10,450
had to	be ignored for the purpose of computation of capital
for surtax  purposes because  it  was  not  a  reserve.	 The
assessee company  has challenged  this view  of the Tribunal
before us  in this direct Reference made to this Court under
s. 257 of the
799
Income Tax  Act, 1961  read with  s. 18	 of  the  Companies'
(Profits) A Surtax Act, 1964.
     It	 may   be  stated  that	 the  scheme  and  the	main
provisions  of	the  two  concerned  enactments	 are  almost
identical, the	object of  both these  enactments being	 the
imposition of  a special  tax on  excess profits  earned  by
companies. Under  Section 4  of the  1963 Act,	which is the
charging provision,  there shall be charged on every company
for every  assessment year commencing on and from 1st April,
1963, a	 tax, called the super profits tax, in respect of so
much of	 its "chargeable  profits" of  the previous  year as
exceed	the  "standard	deduction"  at	the  rate  or  rates
specified in  the Third	 Schedule. Section  2(5) defines the
expression "chargeable	profits" to mean the total income of
an assessee computed under the Income Tax Act, 1961, for any
previous year and adjusted in accordance with the provisions
of First Schedule, while Section 2(9) defines the expression
"standard deduction" to mean an amount equal to six per cent
of the capital of company as computed in accordance with the
provisions of  the Second  Schedule, or	 an  amount  of	 Rs.
50,000	whichever  is  greater.	 In  order  to	D  determine
"standard deduction" it becomes necessary to compute capital
of the company in accordance with the rules laid down in the
Second Schedule and rule 1 is relevant for our purposes, the
material portion whereof runs as follows:
     "1.  Subject to  the other provisions contained in this
	  Schedule, the	 capital of  a company	shall be the
	  sum of  the amounts,	as on  the first  day of the
	  previous year	 relevant to the assessment year, of
	  its paid  up share  capital and of its reserve, if
	  any, credited under the proviso (b) to Clause (vi-
	  b) of	 sub-section (2!  of sec.  10 of  the Indian
	  Income Tax  Act, 1922	 or under sub section (3) of
	  sec. 34  of the  Income Tax  Act, 1961, and of its
	  other reserves  in so	 far as the amounts credited
	  to such  other reserves  have not  been allowed in
	  computing its	 profits for  the  purposes  of	 the
	  Indian Income Tax Act, 1922 or the Income Tax Act,
	  1961 .. "
     It will be clear from the aforesaid provision of rule 1
that before  any amount	 or sum	 qualifies for	inclusion in
capital computation of a company two conditions are required
to be  fulfilled-(a) that  the	amount	or  sum	 must  be  a
"reserve" and  (b) the	same must  not have  been allowed in
computing the company's profits for the purposes of the 1922
Act or the 1961 Act. That none of the items
800
of appropriation  either  for  taxation	 or  for  retirement
gratuity,  or	for  proposed	dividend  in  the  concerned
assessees' case had been allowed in computing the assessee's
profits under  the 1961	 Act has not been disputed; in other
words  the   second  condition	 indicated  above  has	been
satisfied. The	question is whether any of these items could
be  treated   as  or  falls  within  the  expression  "other
reserves" occurring in the said rule.
 The expression  'reserve' has  not been  defined in the
Act and	 therefore one	would be  inclined to  resort to its
ordinary natural  meaning as  given in the dictionary but it
seems to  us that  the dictionary  meaning, though useful in
itself, may  not be sufficient, for, the dictionaries do not
make any  distinction between the two concepts 'reserve' and
'provision' while  giving their	 primary meanings whereas in
the context  of the  legislation with which we are concerned
in the	case a clear distinction between the two is implied.
According to  the dictionaries (both oxford and Webster) the
applicable primary  meaning of	the word  'reserve' is: "tc,
keep for  future use  or enjoyment;  to set  apart for	some
purpose or  end in  view; to  keep in  store for  future  or
special	 use;	to  keep   in  reserve",  while	 'provision'
according to Webster means: "something provided for future."
In other words according to the dictionary meanings both the
words are more or less synonymous and connote the same idea.
Since the  rules for computation of capital contained in the
Second Schedule	 to the	 Act proceed  on the  basis  of	 the
formula of  capital plus  reserves-a formula  well-known  in
commercial accountancy,	 it becomes  essential to  know	 the
exact  connotation   of	 the   two  concepts  'reserve'	 and
'provision' and	 the distinction between the two as known in
commercial  accountancy.   Besides,  though  the  expression
'reserve' is  not defined in the Act, it cannot be forgotten
that it	 occurs in  a taxing  statute which is applicable to
companies only	and to	no other  assessable entities and as
such the  expression will  have	 to  be	 understood  in	 its
ordinary popular sense, that is to say, the sense or meaning
that is	 attributed to	it by  men of  business,  trade	 and
companies. Therefore,  the meanings  attached to  these	 two
words in  the provisions  of the  Companies Act 1956 dealing
with  preparation  of  balance-sheet  and  profit  and	loss
account would  govern their construction for the purposes of
the two	 taxing enactments.  We might  mention here  that in
C.l.T. v.  Century Spinning  and Manufacturing	Company	 (1)
this Court after referring to the dictionary
801
meaning of  the expression  'reserve' observed: "what is the
true A	nature	and  character	of  the	 disputed  sum	(sum
allegedly set  apart) must  be determined  with reference to
the substance  of the  matter" and  went on to determine the
true nature  and character  of the  disputed sum  by relying
upon the  provisions of	 the Indian  Companies Act 1913, the
form and  the contents	of the balance-sheets required to be
drawn up and Regulation 99 in Table A of the 1st Schedule.
 The distinction  between the  two concepts of 'reserve'
and  'provision'   is  fairly	well-known   in	  commercial
accountancy and the same has been explained by this Court in
Metal Box Company of India Ltd. v. Their Workmen (1) thus:
	  "The distinction between a provision and a reserve
     is in  commercial accountancy fairly well known. Provi-
     sions made	 against anticipated losses and contingencies
     are charges  against profits and therefore, to be taken
     into account  against gross  receipts in  the P. and L.
     account and  the  balance-sheet.  On  the	other  hand,
     reserves are  appropriations of  profits, the assets by
     which they	 are represented being retained to form part
     of the capital employed in the business. Provisions are
     usually shown in the balance sheet by way of deductions
     from the  assets in  respect of  which  they  are	made
     whereas general reserves and reserve funds are shown as
     part of  the proprietor's	interest.  (See	 Spicer	 and
     Pegler's Book-keeping  and Accounts, 15th Edition, page
     42)".
In other words the broad distinction between the two is that
whereas a  provision is	 a charge  against the profits to be
taken into  account against  gross receipts  in the  P and L
account, a reserve is an appropriation of profits, the asset
or assets  by which it is represented being retained to form
part of	 the capital  employed in  the business.  Bearing in
mind  the   aforesaid  broad  distinction  we  will  briefly
indicate how  the two concepts are defined and dealt with by
the Companies Act, 1956.
     Under s. 210 of the Companies Act, 1956 it is incumbent
upon the  Board of  Directors of every company to lay before
the annual  general meeting  of its  share-holders  (a)	 the
annual balancesheet  and (b)  the profits  and loss  account
pertaining to the previous
802
financial year.	 Section 211(1) provides that every balance-
sheet of  a company  shall give	 a true and fair view of the
state of  affairs of  the company  as  at  the	end  of	 the
financial year	and shall, subject to the provisions of this
section, be in the form set out in Part I of Schedule VI, or
near thereto as circumstances admit or in such other from as
may be	approved by  the Central Government either generally
or in  any particular  case, while  s. 211(2)  provides that
every profit and loss account of a company shall give a true
and fair  view of  the profit or loss of the company for the
financial year	and shall, subject as aforesaid, comply with
the requirements of Part Ir of r Schedule VI, so far as they
are applicable	thereto. In  other words  the preparation of
balance-sheet as  well as  profit and  loss account  in	 the
prescribed forms  and laying  the  same	 before	 the  share-
holders	 at   the  annual   general  meeting  are  statutory
requirements which  the company	 has to observe. The Form of
balance-sheet as  given in  Part I  of Schedule	 VI contains
separate heads	of 'reserves  and  Surpluses'  and  'current
liabilities  and   provisions'	and   under   the   sub-head
'reserves' different  kinds of	reserves are  indicated	 and
under sub-head	'provisions' different	types of  provisions
are indicated; Part III is the interpretation clause setting
out the	 definitions of	 various  expressions  occurring  in
Parts I	 and Il	 and the  expressions 'reserve', 'provision'
and 'liability' have been defined in cl. 7 thereof. Material
portion of cl. (7) of Part III runs as under:
     "(1) For the  purposes of	Parts I and II of this Sche-
     dule, unless the context otherwise requires:
     (a)  the expression  "provision" shall, subject to sub.
	  cl. (2) of this clause mean any amount written off
	  or retained  by way of providing for depreciation,
	  renewals or  diminution in  value  of	 assets,  or
	  retained  by	 way  of  providing  for  any  known
	  liability of which the amount cannot be determined
	  with substantial accuracy:
     (b)  the expression  "reserve" shall  not,	 subject  as
	  aforesaid,  include  any  amount  written  off  or
	  retained by  way of  providing  for  depreciation,
	  renewals or  diminution  in  value  of  assets  or
	  liability;
     (c)  x	x    x	  x   x	   x	x    x	  x
803
     and in this sub-clause the expression "liability" shall
     include A	all liabilities	 in respect  of	 expenditure
     contracted	 for   and  all	  disputed   or	  contingent
     liabilities.
     (2)  Where-
	  (a)  any amount  written off or retained by way of
	       providing  for	depreciation,  renewals	  or
	       diminution in  value of	assets, not being an
	       amount  written	off  in	 relation  to  fixed
	       assets before  the commencement	of this Act;
	       or
	  (b)  any amount  retained by	way of providing for
	       any known liability,
     is in excess of the amount which, in the opinion of the
     directors, is reasonably necessary for the purpose, the
     excess shall  be  treated	for  the  purposes  of	this
     Schedule as a 'reserve' and not a 'provision'."
     On a plain reading of cl. 7(1) (a) and (b) and cl. 7(2)
above it  will appear clear that though the term 'provision'
is defined  positively	by  specifying	what  it  means	 the
definition  of	 'reserve'  is	negative  in  form  and	 not
exhaustive in  the sense  that	it  only  specifies  certain
amounts which  are not to be included in the term 'reserve'.
In other  words the  effect of	reading the  two definitions
together is  that if any retention or appropriation of a sum
falls within the definition of 'provision' it can never be a
reserve but  it does  not follow  that if  the retention  or
appropriation is  not a	 provision  it	is  automatically  a
reserve and  the question  will have  to be  decided  having
regard to  the true  nature and	 character  of	the  sum  so
retained  or   appropriated  depending	on  several  factors
including the intention with which and the purpose for which
such retention	or appropriation  has been  made because the
substance of  the matter  is to	 be  regarded  and  in	this
context the primary dictionary meaning of the term 'reserve'
may have to be availed of. But it is clear beyond doubt that
if  any	 retention  or	appreciation  of  a  sum  is  not  a
provision, that	 is to	say, if it is not designated to meet
depreciation, renewals	or diminution  in value of assets or
any known  liability the  same is not necessarily a reserve.
We are	emphasising this aspect of the matter because during
the hearing almost all counsel for the assessees strenuously
contended before  us that  once it was shown or became clear
that the retention or appreciation of a sum out of
804
     profits and  surpluses was	 for an unknown liability or
for a  liability which did not exist on the relevant date it
must be	 regarded as  a reserve.  The fallacy underlying the
contention  becomes   apparent	if  the	 negative  and	non-
exhaustive aspects of the definition of reserve are borne in
mind. Having  regard to	 type  of  definitions	of  the	 two
concepts which	are to	be found  in cl.  7 of Part. III the
proper approach	 in our	 view, would  be first	to ascertain
whether the  particular retention  or appropriation of a sum
falls within  the expression 'provision' and if it does then
clearly the  concerned sum will have to be excluded from the
computation of	a capital,  but in  case  the  retention  or
appropriation of  the sum  is not a provision as defined the
question will  have to	be decided  by reference to the true
nature and  character of the sum so retained or appropriated
having regard  to several  factors as mentioned above and if
the concerned sum is in fact a reserve then it will be taken
into account for the computation of capital.
     Having  thus   indicated  the  proper  approach  to  be
adopted, we  shall proceed  to deal  with the three items of
appropriation  being   (a)  provision	for  taxation,	 (b)
provision for  retirement gratuity  and	 (c)  provision	 for
proposed  dividends   in  the  case  of	 concerned  assessee
companies in these Appeals and Tax Reference Cases.
 Dealing first  with the item of appropriation by way of
provision for  taxation, which	arises in  Civil Appeal	 No.
860/1973 (Vazir	 Sultan Tobacco	 Company), Civil  Appeal No.
1614 (NT)/  1978 (Ballarpur Industries Ltd;) Review Petition
No. 50/1980  (M/s. Bengal  Paper Mills	Co.  Ltd.)  and	 Tax
Reference Cases	 Nos. 2 & 3/1977 (M/s Echjay Industries Pvt.
Ltd;)-the common  question is  whether the concerned amounts
appropriated or	 set apart  by these assessee-companies from
out of	the profits  and other	surpluses by  way of  making
provision for  taxation constitute  a provision or a reserve
on the	relevant date,	being the  first day of the previous
year relevant  to the  assessment year	in question ? Taking
Vazir Sultan  Tobacco Company's case as an illustration, for
the assessment	year 1963-64  the relevant accounting period
was the year which ended on September 30, 1962; under Rule I
of the	Second Schedule	 to the	 Super Profits	Tax Act, the
first day of the previous year would be october 1, 1961 and.
therefore, the balance-sheet of that company as on September
30, 1961  and the  profits and	loss account  which ended on
September 30,  1961 would be relevant. It cannot be disputed
that on	 the expiry  of September  30,	1961,  the  assessee
company incurred  the taxation	liability in  respect of the
profits
805
which it  had earned  during that  year,  though  the  exact
amount of  such	 liability  could  not	be  determined	with
substantial accuracy at that time and the same would have to
be ascertained	by reference  to rate of taxes applicable to
that year.  The liability for taxation having thus arisen on
the expiry of the last day of the year, the setting apart of
the sum of Rs. 33,68,360 by the Board of Directors will have
to be  regarded as  a provision	 for a	known  and  existing
liability, the	quantification whereof bad to be done later.
On principle,  therefore, it seems to us clear that the item
of Rs.	33,68,360 which	 had been  set apart by the Board of
Directors for  taxation must  be regarded as a provision and
cannot be  regarded as	a  reserve.  Similar  would  be	 the
position in  regard to	the appropriations for taxation made
by the other assessee-companies mentioned earlier.
 In this context a reference to this Court's decision in
the case  of Kesoram  Industries and  Cotton Mills  Ltd.  v.
Commissioner of	 Wealth Tax  (Central) Calcutta(')  would be
useful. In  that case  the question  was whether  a  certain
amount which  had been set apart as provision for payment of
income-tax and	super tax  was	a  "debt  owed"	 within	 the
meaning of  s. 2(m) of the Wealth-Tax Act, 1957, as on March
31, 1957  which was  the valuation  date  and  as  such	 was
deductible in  computing the  net wealth  of  the  appellant
company. In  its balance-sheet for the year ending March 31,
1957 the  appellant company  had shown	a certain  amount as
provision for payment of income-tax and super-tax in respect
of that	 year of  account and  this Court took the view that
the expression	"debt owed" within the meaning of s. 2(m) of
the Wealth-Tax	Act, 1957  could be defined as the liability
to pay	in presenti  or in  futuro an  ascertainable sum  of
money and that the liability to pay income-tax was a present
liability  though  the	tax  became  payable  after  it	 was
quantified in accordance with ascertainable data; that there
was a perfected debt on the last date of the accounting year
and not	 a contingent  liability. The Court further observed
that the  rate was  always easily ascertainable; that if the
Finance Act  was passed,  it was the rate fixed by that Act;
if the	Finance Act  was not  yet passed,  it was  the	rate
proposed in  the Finance  Bill pending before the Parliament
or the	rate in	 force in  the preceding  year whichever was
more favourable to the assessee and that all the ingredients
of a  "debt" were  present and it was a present liability of
an ascertainable  amount and  that, therefore, the amount of
of the year of account ending March 31, 1957 was a "debt H
806
owed" within  the meaning  of s. 2(m) on the valuation date,
namely	March  31,  1957  and  was  as	such  deductible  in
computing the net wealth. The ratio of this decision clearly
suggests that  the appropriation of the amounts set apart by
the  assessee	companies  before   us	for  taxation  would
constitute a  provision made  by them  to meet	a known	 and
existing liability  and as  such the concerned amounts would
not be includible i n capital computation.
 Counsel  for  the	assessee  company  in  Vazir  Sultan
Tobacco	 Company's  case,  however,  attempted	to  raise  a
further plea  that the	provision for taxation in the sum of
Rs. 33,68,360 was an excess provision in the sense it was in
excess of  the amount which was reasonably necessary for the
purpose of  taxation and,  there ore,  the excess  should be
treated as  a reserve and not a provision and in this behalf
reliance was  placed on	 cl. (7) (2) of Part III of Schedule
VT and three decisions-of the Madras High Court Commissioner
of Income-tax  Madras v.  Indian Steel Rolling Mills Ltd.(l)
of the	Himachal Pradesh High Court in Hotz Hotels Pvt. Ltd.
v. Commissioner	 of Income  Tax, Haryana,  H.P. and Delhi(2)
and of	Allahabad High	Court in Commissioner of Income-Tax,
Delhi v.  Modi Spinning and Weaving Mills(3). There could be
no dispute about the principle that if provision for a known
or existing  liability is  made in excess of the amount that
would be reasonably necessary for the purpose 13: the excess
shall have  to be treated as a reserve and, therefore, would
be includible  in the  capital computation  but no such case
was made  out by  the assessee	company at  any stage of the
assessment proceedings	either before the Taxing Authorities
or even	 before the  Tribunal or  the High  Court and in the
absence of  any such plea having been raised at any stage of
the proceedings	 it will  not be  proper for  this Court  to
allow the  assessee company to raise such a plea, which will
need investigation  into facts,	 for the  first time  in its
appeal before  this Court.  The	 contention  is,  therefore,
rejected. Dealing  next with  the item of appropriation made
for retirement	gratuity, which	 arises only in Civil Appeal
No. 860/1973  (Vazir Sultan  Tobacco Co.)  the	question  is
whether the sum of Rs. 9,O8,106 appropriated or set apart by
the assessee  company from  out of  its	 profits  and  other
surpluses by  way of  providing for retirement gratuity is a
provision or a reserve on the relevant date,
807
viz. 1.10.1961 ? Counsel for the assessee-compaoy vehemently
urged before us that this appropriation had not been allowed
as a  deduction in  the income-tax assessment proceedings of
the company  for the  relevant assessment year on the ground
that it	 was in	 the nature of a reserve and the entire sum,
minus the  actual payments, was added back to the income and
profits of  the assessee-company  and if  that be so, in the
super profit-tax  assessment  it  cannot  be  treated  as  a
provision and  excluded from  capital computation. According
to him	there could  not be two different treatments for the
same item  in income-tax  assessment and  super	 profit	 tax
assessment.  He	  pointed  out	 that  this  contention	 was
specifically  urged  in	 the  appeal  before  the  Appellate
Assistant Commissioner	but was wrongly rejected. He further
submitted that	no actuarial  valuation had been undertaking
but ad hoc amount was appropriate or transferred to gratuity
reserve and  as such  the same should have been treated as a
reserve and  included in  capital computation.	On the other
hand, counsel  for the	Revenue seriously  disputed the last
submission and	contended that	it was never the case of the
assessee-company either	 before the  Taxing  Authorities  or
before the  Tribunal or	 before	 the  High  Court  that	 the
appropriation was  or an  ad hoc sum without undertaking any
actuarial valuation.  It must  be observed  that whereas the
assessee-company did  urge a  contention  before  the  lower
authorities that  different treatments	for  the  same	item
could not  be given for purpose of income-tax assessment and
super profit-tax  assessment, the  assessee company  did not
clarify by  placing material  on record	 as to	whether	 the
appropriation of  the amount  was  based  on  any  actuarial
valuation or  whether it  was an  appropriation of an ad hoc
amount an aspect which, as we shall presently point out, has
a vital	 bearing on  the question  whether the appropriation
could be treated as a provision or a reserve. In the absence
of proper  material  touching  this  vital  aspect,  we	 are
afraid, the  issue in  question will  have to be remanded to
the Taxing  Authorities through the Tribunal for disposal in
the light  of the  well settled	 principles in	that behalf,
which we shall presently indicate.
liability to  pay gratuity to its employees on determination
of employment  arises  only  when  the	employment.  Of	 the
resignation-an event  (cessation of  employment) Certain  to
happen in  the service	career of  every employee; moreover,
emp-
808
loyee's wages at the time of determination of his employment
and the	 number of  years of  service put  in by him and the
liability accrues and enhances with completion of every year
of service;  but the  company can  work out  on an actuarial
valuation its  estimated liability  (i.e. discounted present
value of  the liability	 under the  scheme on  a  scientific
basis) and  make a  provision for  such liability not all at
once but  spread over a number of years. It is clear that if
by adopting such scientific method any appropriation is made
year in question; if, however, an ad hoc sum is appropriated
without resorting to any scientific basis such appropriation
would  also   be  a  provision	intended  to  meet  a  known
liability, though  a contingent	 one,  for,  the  expression
'liability' occurring  in cl. (7) (1) (a) of Part III of the
Sixth Schedule to the Companies Act includes any expenditure
contracted for and arising under a contingent liability; but
if the	sum so	appropriated is shown to be in excess of the
sum required  to meet  the estimated  liability	 (discounted
present value  on a  scientific basis) it is only the excess
that will have to be regarded as a reserve under cl. (7) (2)
of Part III to the Sixth Schedule.
     In the above context we might refer to one English case
decided by  the House of Lords and two or three decisions of
this Court, which seem to lead to aforesaid propositions. In
Southern Railway  of Peru Ltd. v. Owen(1) an English Company
operating a  railway in	 Peru was,  under the  laws of	that
country, liable	 to pay	 its employees	conpensation on	 the
termination of	their services	either by  dismissal  or  by
notice	or  on	such  termination  by  death  or  efflux  of
contractual time.  The compensation  so paid  was an  amount
equivalent to one month's salary at the rate in force at the
date of	 determination for  every year	of service.  In	 the
computation of taxable income under the Income-tax Act 1918,
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 the	 sum 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. The House
of Lords  rejected the	deductions on  the  ground  that  in
calculating the	 deductions  the  company  had	ignored	 the
factor of  discount. But,  their  Lordships  recognised	 the
principle that	the company  was entitled to charge, against
each year's receipts, the cost of making the
809
provision for  the  retirement	which  would  ultimately  be
payable as  the company	 had the  benefit of  the employee's
services during	 that year provided the present value of the
future payments	 could be  fairly estimated. Lord MacDermott
observed at page 345 as follows:
	  ".... as  a general  proposition it  is,  I  think
     right to say that, in computing his taxable profits for
     a particular  year, B a trader, who is under a definite
     obligation to  pay his  employees for their services in
     that year	an  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."
 In Standard  Mills Co.  Ltd. v. Commissioner of Wealth-
Tax, Bombay  (1) the  question for  decision was  whether an
estimated liability  under  gratuity  schemes  framed  under
industrial awards  amounted to 'debts' and could be deducted
while computing the net wealth of the assessee-company under
the Wealth  Tax Act. This Court held in view of the terms of
s. 2  (m) of that Act, that as the liability lo pay gratuity
was  not   in  praesenti   but	would  arise  in  future  on
determination of the service, i. e. On the retirement, death
or termination,	 the estimated	liability under	 the schemes
would not  be a 'debt' and, therefore, could not be deducted
while computing	 the net wealth. The House of Lords decision
in the	case of	 Southern Rly.	Of  Peru  Ltd.	(supra)	 was
distinguished by  this Court  as having	 no relevance to the
question before	 it on the ground that the House of Lords in
that decision was concerned in determining the deductibility
of the	present value  of a  liability which  may  arise  in
future in the computation of taxable income for the relevant
year under  the income-tax  laws. It  will thus	 appear that
this Court was of the view that though such a liability is a
contingent liability  and, therefore,  not a 'debt' under s.
2(m) of	 the Wealth-Tax Act it would be deductible under the
Income Tax Act while computing the taxable profits; in other
words different	 considerations would apply to cases arising
under the Wealth-Tax Act and the Income-Tax Act.
 In Matal Box Co's case (supra) this Court was concerned
with the  nature of  liability under a scheme of gratuity in
the context  of the  Payment of	 Bonus	Act,  1965  and	 the
question related to a sum
810
of Rs.	18.38 lakhs  being the estimated liability under the
two gratuity  schemes  framed  by  the	company,  which	 was
deducted from  the gross  receipts in  the P & L Account, it
being contended on behalf of the workmen that such deduction
was not	 justified while determining the 'available surplus'
and the	 'allocable surplus'  for payment  of bonus  to them
under the Payment of Bonus Act, 1965. The Court rejected the
contention and	adverting to  the decision of House of Lords
in the	case of Southern Rly. Of Peru Ltd. (supra) held that
an estimated  liability under  gratuity schemes	 even if  it
amounted to  a contingent  liability and  was not  a  'debt'
under the  Wealth Tax Act, if properly ascertainable and its
present value  was fairly discounted was deductible from the
gross-receipts while  preparing	 the  P	 &  L  Account.	 The
material portion  of the  head-note appearing  at page 54 of
the report runs thus:
	  "Contingent liabilities  discounted 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 consideration.  An
     estimated liability  under	 a  scheme  of	gratuity  if
     properly  ascertainable   and  its	  present  value  is
     discounted, is deductible from the gross receipts while
     pre paring	 the P	& L  account. This  is recognised in
     trade circles  and there  is nothing  in the  Bonus Act
     which prohibits  such  a  practice.  Such	a  provision
     provides for  a known liability of which the amount can
     be determined  with substantial  accuracy.	 It  cannot,
     therefore,	 be   termed  a	 "reserve".  Therefore,	 the
     estimated liability for the year on account of a scheme
     of gratuity  should be  allowed to be deducted from the
     gross profits.  The allowance  is not restricted to the
     actual payment of gratuity during the year."
At page 62 of the Report this Court observed thus:
	  "Two questions,  therefore, arise:  (I) whether it
     is legitimate  in such a scheme of gratuity to estimate
     the liability on an actuarial valuation and deduct such
     estimated liability  in the P & L Alc while working out
     its  net	profits;  (2)  if  it  is,  b  whether	such
     appropriation amounts to a reserve or a provision?.. In
     the case  of an  assessee maintaining  his accounts  on
     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, re-
811
     gard being	 had to the accepted principle of commercial
     A 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".
Again at page 64 of the Report this Court observed thus:
	  "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 pro vide from his 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  n
     liability	is  a  contingent  liability,  provided	 its
     discounted present	 value is  ascertainable, it  can be
     taken into	 account. Contingent  liabilities discounted
     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."
 In the  case of Workmen of William Jacks . Co. Ltd. v.
Management of  Jacks &	Co. Ltd. Madras (1) another decision
under the  Payments of	Bonus Act,  1965, this	Court, after
referring to  the distinction  pointed out in Metal Box Co's
case between  the two concepts 'provision' and 'reserve' has
observed on page 547 as follows:
	  "The	provision  for	gratuity,  furlough  salary,
     passage, service  and commission,	in the	present case
     was  all	made  in   respect  of	existing  and  known
     liabilities though	 in some  cases the amount could not
     be ascertained  with accuracy.  It was not a case where
     it was  an anticipated  loss or anticipated expenditure
     which  would   arise  in	future.	 Such  provision  is
     therefore not a reserve at all and cannot be added back
     under item 2 (c) of the Second Schedule."
812
 In the above case also the Court was concerned with the
question whether  particular provision	made  for  gratuity,
furlough salary,  passage, etc. was a reserve or a provision
for the	 purpose of  Second Schedule to the Payment of Bonus
Act,  1965.  At	 page  546  of	the  report  the  Court	 has
categorically  observed	  that	all   these  items,  namely,
gratuity furlough salary, passage, service, commission, etc.
were clearly  in respect  of liabilities  which had  already
accrued in  the years  in which	 the provision	was made and
were not  in respect  of anticipated liabilities which might
arise in future and, therefore, the Court held that the said
provision was not a reserve but a provision.
 From the  aforesaid discussion of the case law it seems
to us  clear that  the propositions  indicated by us earlier
clearly	 emerge.   Since  in  the  instant  case  sufficient
material throwing light on the above aspects of the question
has not	 been made  available, we  think, it  will be in the
interest of  justice to remand the case through the Tribunal
to the taxing authority to decide the issue whether the con-
cerned amount  (Rs. 9,O8,1061-) set apart and transferred to
gratuity reserve  by  the  assessee  company  was  either  a
provision or a reserve and if the latter to what extent? The
taxing authority will decide the issue in light of the above
principles after  giving  an  opportunity  to  the  assessee
company to place additional relevant materials before
     Turning to	 the last  item of  appropriation by  way of
provision for  proposed dividends, which arises in all these
matters (except	 in Tax	 Reference Case	 No. 511978  of Hyco
Products Pvt.  Ltd.) the  common  question  is	whether	 the
concerned amount  appropriated or set apart by the assessee-
companies from out of the profits and other surpluses by way
of making  provision for  'proposed dividends' constituted a
provision or a reserve on the relevant date ?
     It is  true that under s. 27 of the Companies Act, 1956
the Directors  can merely  recommend that  a certain  sum be
paid as	 dividend but such recommendation does not result in
any obligation	or liability; the obligation or liability to
pay the	 dividend arises  only when the share-holders at the
annual general	meeting of  the company decide to accept the
recommendation and  pass a resolution for declaration of the
dividend. It  is therefore open to the directors to withdraw
or modify  their  recommendation  at  any  time	 before	 the
shareholders accept  the same  and it is equally open to the
shareholders not  to accept  the recommendation at all or to
declare a dividend of an amount lesser than that recommended
by directors. In Kesoram
813
Industries  case   (supra)  this  Court	 has  clarified	 the
aforesaid legal	 A position  by observing at page 772 of the
report, thus:
	  "The directors  cannot  distribute  dividends	 but
     they can  only recommend  to the  general body  of	 the
     company the  quantum of  dividend	to  be	distributed.
     Under section  217 of  the Indian	Companies Act, there
     shall be  attached to every balance-sheet laid before a
     company in	 general meeting  a report  by its  board of
     directors with  respect to,  interalia, the  amount, if
     any, which it recommends to be paid by way of dividend.
     Till the  company in  its general	body meeting accepts
     the  recommendation  and  declares	 the  dividend,	 the
     report of	the directors  in  that	 regard	 is  only  a
     recommendation which  may be  withdrawn or	 modified as
     the case  may be.	As on  the valuation date (under the
     Wealth Tax	 Act) nothing  further happened	 than a mere
     recommendation by	the directors  as to the amount that
     might be distributed as dividend, it is not possible to
     hold that	there was  any debt  owed by the assessee to
     the share holders on the valuation date."
     All that  follows from  above is  that in	the  instant
cases the  appropriations of  the concerned  amounts by	 the
Board of Directors by way of providing for proposed dividend
would not  constitute 'provisions'  for, the  appropriations
cannot be  said to  be by  way of providing for any known or
existing liability,  none having arisen on the date when the
directors made	the recommendation much less on the relevant
date being  the first  day of  the previous year relevant to
the assessment	year in question. But as stated earlier this
by itself  would not automatically convert the appropriation
into 'reserves',  regard being	had to the negative and non-
exhaustive character of the definition of 'reserve' given in
cl. 7  (I)(b) of  Part III  of the  Sixth  Schedule  to	 the
Companies A  ct. The  question whether the concerned amounts
in fact	 constituted 'reserves'	 or  not  will	have  to  be
decided by having regard to the true nature and character of
the  sums  so  appropriated  depending	on  the	 surrounding
circumstances particularly  the intention with which and the
purpose for which such appropriations had been made.
     We	 have	already	 indicated  that  according  to	 the
dictionaries  (both   oxford  and  Webster)  the  applicable
meaning of the word 'reserve' is: "to keep for future use or
enjoyment; to  set apart for some purpose or end in view; to
keep in store for future or special
814
use; to keep in reserve." In other words, the word 'reserve'
as a  noun in  ordinary parlance would mean "something which
is kept	 for future  use or  stored up	for something or set
apart for  some purpose".  It  cannot  be  disputed  that  a
reserve may be a general reserve or specific reserve and all
that is	 required is that an amount should be kept apart for
some purpose,  either general  or  specific.  Eeven  so	 the
question is  whether the earmarking of a portion of pro fits
by the	board of  directors of	a company  avowedly for	 the
purpose of  distributing  dividend  would  fall	 within	 the
expression 'reserve'  occurring in  rule  T  of	 the  Second
Schedule to  the Super	Profits	 Tax  Act,  1963?  For	this
purpose certain	 tests indicated  in some  decisions of this
Court will have to be considered: The first decision of this
Court in that behalf is the decision in Century Spinning and
Manufacturing Company's	 ease  (supra).	 In  that  case	 the
material  facts	  were	these:	For  the  year	ending	31st
December, 1946,	 the profit  of the  assessee-company, whose
accounting year	 was the  calendar year,  was a	 certain sum
according to  the profit  and  loss  account.  After  making
provision for  depreciation and taxation, the balance of Rs.
5,08,637 was  carried to the balance sheet. This sum was not
allowed in  computing the  profits of  the assessee  for the
purposes of income tax. On 28th February, 1946, the Board of
directors recommended  out of  that amount  the sum  of	 Rs.
4,92,426 should	 be distributed	 as dividend and the balance
of Rs.	16,211 was  to be carried forward to the next year's
account. This  recommendation was  accepted  by	 the  share-
holders in  their meeting on 3rd April, 1946, and the amount
was shortly afterwards distributed as dividend. In computing
the capital  of the  assessee company  on 1st  April,  1946,
under the  Business Profits  Tax  Act,	1947,  the  assessee
claimed that  the sum  of Rs. 5,08,637 and the profit earned
by it  during the  period 1st  January, 1946  to 1st  April,
1946, should  be treated  as "reserves"	 for the  purpose of
rule 2(1)  of Schedule	IT. The High Court held that the sum
of Rs. 5,08,637 must be treated as a reserve for the purpose
of rule	 2, but	 the profit made by the assessees during the
period 1st  January, 1946  to 1st  April, 1946	could not be
included in  the reserves.  On appeal  to this Court, it was
held that  the sum  of Rs.  5,08,637 as	 well as the profits
earned by  the assessee	 during the period 1st January, 1946
to 1st	April, 1946 did not constitute "reserves" within the
meaning of  rule 2 (1) of Schedule II. After noting that the
expression 'reserve'  had not  been defined  in the Business
Profits Tax  Act, 1947	and after noting dictionary meanings
of that expression the Court observed:
815
	  " What  is the  true nature  and character  of the
     disputed A sum must be determined with reference to the
     substance of the matter and when this is borne in mind,
     it follows	 that the  1st of  April, 1946	which is the
     crucial date,  the sum  of Rs.  5,08,637 could  not  be
     called a  reserve for nobody possessed of the requisite
     authority had  indicated on  that date  the  manner  of
     disposal or  distination. On  the other  hand, B on the
     28th February,  1946 the directors clearly earmarked it
     for distribution  as dividend  and did  not make  it  a
     reserve. Nor  did the  company in	its meeting  of	 3rd
     April, 1946  decide that  it was a reserve. It remained
     on the 1st of April, as a mass of undistributed profits
     which were available for distribution and not earmarked
     as "reserve".  On the  1st of  January, 1946 the amount
     was simply	 brought from the profit and loss account to
     the next  year and	 nobody with  any authority  on that
     date made	or declared  a reserve. The reserve may be a
     general reserve  or a  specific reserve, but there must
     be a  clear indication to show whether it was a reserve
     either of	the one	 or the other kind. The fact that it
     constituted a  mass of undistributed profits on the 1st
     Jan. 1946	cannot automatically  make it  a reserve. On
     the 1st  April, 1946  which is  the commencement of the
     chargeable	 accounting   year,  there   was  merely   a
     recommendation by	the directors  that  the  amount  in
     question should  be distributed  as dividend.  Far from
     showing that  the directors  have made  the  amount  in
     question a	 reserve it  shows that	 they had decided to
     earmark it for distribution as dividend."
     The decision clearly lays down that the true nature and
character of  the  appropriation  must	be  determined	with
reference to  the substance  of the  matter; obviously	this
means that  one must have regard to the intention with which
and the	 purpose for which appropriation has been made, such
intention and  purpose being  gathered from  the surrounding
circumstances.	In   that  behalf   the	 following   aspects
mentioned in  the judgment  provide some  guidelines: (a)  a
mass of	 undistributed profits cannot automatically become a
reserve and that somebody possessing the requisite authority
must clearly  indicate	that  a	 portion  thereof  has	been
earmarked or separated from the general mass of profits with
a view	to constituting	 it either  a general  reserve or  a
specific reserve,  (b) the  surrounding circumstances should
make it	 apparent that the amount so ear-marked or set apart
is in fact a reserve to be utilised in future for a specific
purpose and  on a specific occasion, and (c) a clear conduct
on the
816
part of the directors in setting apart a sum from out of the
distribution as	 dividend in the same year would run counter
to any	intention of  making that  amount a  reserve. It was
because these  aspects obtained	 in the case that this Court
took the  view that  neither the sum of Rs. 5,08,637 nor the
profits	 earned	 by  the  assessee  during  the	 period	 1st
January, 1946 to 1st April 1946 constituted "reserve" within
the meaning  of Rule 2(1) of Second Schedule of the Business
Profits Tax Act, 1947.
 Two more  decisions of this Court one in First National
City Bank v. Commissioner of Income-Tax (1) and the other in
Commissioner of	 Income-Tax (Central),	Calcutta v. Standard
Vacuum oil Co.(2) which provide two more guidelines, may now
be considered.	In both	 these cases the Court was concerned
with the question whether the amount set apart as "undivided
profit" or  set apart as "earned surplus" in accordance with
the system  of accountancy  which  obtained  in	 the  United
States amounted	 to a  reserve liable  to be included in the
capital computation  under rule	 2 of  Schedule	 II  of	 the
Business Profits  Tax Act,  1947.  In  both  the  cases	 the
assessees  were	 non-resident  companies  and  followed	 the
system	of   accounting	 that	obtained  in   the  American
commercial world.  In the first case Justice Kapur, speaking
for the	 court, pointed	 out the  difference between the two
system of accounting at Page 23 of the Report thus:
 "In India  at the  end of  an year  of account the
     unallocated profit	 or loss  is carried  forward to the
     account of	 the next  year, and such unallocated amount
     gets merged  in the account of that year. In the system
     of accounting  in the  USA each year's account is self-
     contained and  nothing is	carried forward.  If afteral
     locating the  profits to  diverse heads mentioned above
     any balance  remains, it  is credited to the "undivided
     profits" which  become part  of the capital fund. If in
     any year  as a  result of	the allocation there is loss
     the accumulated undivided profits of the previous years
     are drawn	upon and  if  that  fund  is  exhausted	 the
     banking company  draws upon  the surplus.	In its	very
     nature  the   undivided  profits  are  accumulation  of
     amounts of	 residue on  hand at  the end of the year of
     successive periods	 of accounting and these amounts are
     by the  prevailing accounting practice and the Treasury
     directions regarded  as a	part of	 the capital fund of
     the banking company.'
817
     After quoting with approval the above observations, Mr.
A Justice  Shah in Standard Vacuum Oil Co.'s case went on to
observe at page 695 of the report as follows:
 "It is  true that  the  court	 in  that  case	 was
     dealing with  a case  of  a  banking  company  but	 the
     characteristics noted  are not peculiar to the accounts
     of	 a   banking  company;	 they  are  applicable	with
     appropriate variations to the accounts of all companies
     in	 which	different  nomenclatures  are  used  in	 the
     accounts to designate the residue on hand as 'surplus',
     ' undivided profits' or 'earned surplus'.
	  Where the  balance of net profits after allocation
     to	 specific  reserves  and  payment  of  dividend	 are
     entered  in  the  account	under  the  caption  'earned
     surplus', it  is intended thereby to designate the fund
     which is to be utilised for the purpose of the business
     of the  assessee. Such a fund may be regarded according
     to the Indian practice as 'general reserve")
This Court in the first case held that the amount designated
as "undivided  profits" which  was available  for continuous
future use  of the  business for  the bank was a part of the
reserve and had to be taken into account while computing the
capital under  rule 2(1)  of Schedule  II  of  the  Business
Profits Tax  Act; similarly,  in the  second case  the Court
held that  the amount  which had  been allocated  to "earned
surplus" which	was intended for the purpose of the business
of the	assessee company and was used in subsequent years in
business, represented ''reserves" within the meaning of rule
2 of  Schedule II  of the  Business Profits: Tax. From these
two decisions  two aspects emerge very clearly. In the first
place, the  nomenclature accorded  to  any  particular	fund
which is  set apart  from out  of the  profits would  not be
material or  decisive of  the matter  and  secondly,  having
regard to  the purpose	of rule	 of 2  of Schedule II of the
Business Profits Tax Act, 1947, if any amount set apart from
out of	the profits  is going to make up capital fund of the
assessee and  would be	available to  the assessee  for	 its
business purposes,  it would  become a	reserve liable to be
that Act.
     The provisions  of the  Companies Act  1956  also	lend
support	 to   the  proposition	that  an  appropriation	 for
proposed dividend  would not  amount to	 a reserve.  Section
217(1) runs thus:
818
	  "217(1) There	 shall be  attached to every balance
     sheet laid	 before a  company  in	general	 meeting,  a
     report by its Board of directors, with respect to-
	  (a)  the state of the company's affairs,
	  (b)  the amounts,  if any  which  it	proposes  to
	       carry to any reserves in such balance sheet,
	  (c)  the amounts,  if	 any,  which  it  recommends
	       should be paid by way of dividend;
	  (d)  ................................. "
Regulation 87 of Table A in the First Schedule runs thus:
	  "87(1) The  Board  may,  before  recommending	 any
     dividend, set  aside out  of the profits of the company
     such sums	as it thinks proper as a reserve or reserves
     which  shall,  at	the  discretion	 of  the  Board,  be
     applicable for  any purpose to which the profits of the
     company may  be properly  applied, including  provision
     for meeting  contingencies or for equalising dividends;
     and  pending   such  application	may  at	  the	like
     discretion, either	 be employed  in the business of the
     company or	 be invested in such investments (other than
     shares of	the company)  as the Board may, from time to
     time, think fit.
	  (2)  The Board  may also carry forward any profits
	  which it  may think prudent not to divide, without
	  setting them aside as a reserve."
The aforesaid  provisions read	together clearly  show	that
creating re serves out of the profits is a stage distinct in
point of  fact and anterior in point of time to the stage of
making recommendation for payment of dividend and the scheme
of the	provisions suggests  that appropriation	 made by the
Board of  Directors by	way of	recommending  a	 payment  of
dividend cannot in the nature of things be a reserve.
     If regard	be had to the guide-lines indicated above as
well as	 the provisions	 of the Companies Act 1956 specified
above we  are clearly  of the opinion that the appropiations
made by	 the directors	for proposed dividend in the case of
the   concerned	  assessee-companies   do   not	  constitute
'reserves' and the concerned amounts so set apart would have
to be ignored or excluded from capital computation.
819
     Since we have reached the aforesaid conclusion on first
principles and	on the	basis of  the  guidelines  discussed
above it  is unnecessary  for us  to go	 into or discuss the
scope and  effect of  the Explanation  to Rule	1 in  Second
Schedule to The Companies (Profits) Sur-tax Act, 1964 though
it seems  to us	 prime facie  that  the	 Explanation,  being
clarifacatory in nature is declaratory of the existing legal
position.
 Dealing with  the last  case of Hyco Products Pvt. Ltd.
Bombay (Tax  Reference	Case  No.  5  of  1978),  where	 the
question pertaining  to dividend  but in  a  different	form
arises for  consideration, the admitted facts may briefly be
stated. The question relates to the Assessment Year 1974-75,
the relevant  previous year being calendar year 1973 and the
material date  being 1.1.1973.	After the  accounts  of	 the
calendar year  1972 were finalised the directors transferred
out of	the profits  of Rs.  61,03,382 of that year a sum of
Rs. 29,77,000  to the General Reserve. With such tranfer the
General Reserve of the assessee company as on 1.1.1973 stood
at Rs.	86,07,712. At  the end	of the	calendar year,	1973
admittedly the	directors did  not make	 any  provision	 for
'proposed dividend'  in its  accounts but  there was note on
the Balance Sheets to the following effect:-
	  "The directors  have recommended  dividend for the
     year 1972	at the	rate of	 Rs. 10/-  per share free of
     tax. The  dividend, if approved by the share-holders at
     the forth-	 coming Annual General Meeting, will be paid
     out of  General Reserve  and no  separate provision has
     been made therefor in the accounts."
At the Annual General Meeting held on June 30, 1973 dividend
of Rs.	3,10,450 was  declared by  the share-holders and the
same was  soon thereafter  paid	 out  of  the  said  General
Reserve. In the surtax assessment proceedings under the 1964
Act the	 assessee claimed  that the  entire general  reserve
which stood  as Rs. 86,07,712 as on 1.1.1973 should be taken
into account  while computing  the capital  of the  assessee
company. But the taxing officer reduced the general reserves
by the aforesaid sum of Rs. 3,10,450 and only the balance of
Rs. 82,97,262  was  added  in  computing  the  capital.	 The
Appellate Assistant  Commissioner as  well as the Income-Tax
Appellate Tribunal, Bombay confirmed the order of the Taxing
officer. The Tribunal took the view that though it was not a
case of 'pro- posed dividend' since the amount actually paid
out  as	  dividend  was	  a  smaller  sum  than	 the  amount
transferred from out of profits to
820
the General  Reserve that  amount could not form part of the
reserve and  therefore the General Reserve as reduced by Rs.
3,10,450 was  properly taken into account for the purpose of
computation of	the capital  as on the relevant date. At the
instance of  the assessee  the	Tribunal  has  referred	 the
following question  of law  directly to	 this Court  for its
opinion under s. 257 of the Income Tax Act 1961 read with s.
18 of the Companies (Profits) Sur-tax Act, 1964:
     the case  the Tribunal was justified in excluding a sum
     of Rs. 3,10,450 representing the dividends declared for
     the calendar year 1972 from the General Reserves on the
     opening date  of the  previous year while computing the
     capital under  the Second	Schedule  of  the  Companies
     (Profits) Sur-tax	Act, 1964  for the  assessment	year
     1974-75?"
     Counsel for  the assessee-company	contended that after
con ceding  that this  was not a case of "proposed dividend"
the Tribunal  erred in	holding that  the sum of Rs 3,10,450
representing the dividends paid out from the General Reserve
was liable to be excluded while computing the capital of the
company as  on 1.1.1973	 for purposes  of sur-tax assessment
under the  1964 Act. According to him under s. 205(1) of the
Companies Act,	1956 dividend  can be  paid from  out of the
current year's	profits or profits of any previous financial
year or	 years and  there is  no presumption  in law  or  in
commercial accounting  that a dividend has to be paid either
from the  current year's  profits or  from the	past year' s
profits. He  further urged that once from out of the current
year's profit	a  certain sum is transferred to the General
Reserve it merges into the latter and the General Reserve so
augmented becomes  a conglomerate  fund and  if out  of such
conglomerate fund  any sum  is recommended  or paid  out  as
dividend it  will be  difficult to say that such payment has
come out  of the  portion of current year's profits that has
been transferred  and merged  and there is no reason why the
principle 'Last-in, First-out' should be invoked for drawing
the inference  that the	 payment has  been made	 out of	 the
current year's profits. He pointed out that such a principle
was applied  by the  Bombay High  Court	 in  two  decisions,
namely, Commissioner  of Income-Tax, Bombay City-l v. Bharat
Bijlee Ltd.(1)	and Commissioner of Income Tax, Bombay City-
ll v. Marrior (India) Ltd.(2) but urged that there
821
was no warrant for it. In support of his contention that the
entire A  General  Reserve  of	Rs.  86,07,712	without	 any
deduction  should   have  been	 taken	into  account  while
computing  the	capital	 of  the  assessee-company,  counsel
relied upon  a decision	 of the Andhra Pradesh High Court in
Super Spinning	Mills Ltd.  v. Commissioner  of Income	Tax,
Hyderabad(l).
     Alternatively counsel  pointed out that as far as stock
valuation is  concerned a  question often arises whether the
stock on  hand at the end of the year is to be valued at the
closing price  or at  the  initial  purchase  price  and  in
'Advanced Accounting' by R. Keith Yorston and E. Bryan Smyth
(a treatise  on the principles and practice of accounting in
Australia) three  methods of  valuing the closing stock have
been indicated at pages 441 and 442 of Vol. II (5th Edn.) of
the treatise,  namely, (a)  First-in First-out,	 (b) Last-in
First-out and  (c) Average  Cost. In  regard to	 these three
methods the authors have stated thus .
     (a) First-in First-out
	  The assumption  underlying this method is that the
     oldest stock  is used or issued first or that sales are
     made in  the order	 in which the goods are purchased or
     produced.	If  there  are	several	 lots  of  goods  at
     different prices,	they are regarded as being exhausted
     in the order of purchase. On a rising market this would
     write off the lower-priced lots first, and on a falling
     market the higher-priced lots would go first."
     (b) "Last-in First-out.
	  This	method	assumes	 that  the  items  of  stock
     purchased are  the first  to be issued or sold and thus
     the stock	remaining is  valued  at  the  cost  of	 the
     earlier purchase."
     (c) Average Cost.
	  On this  basis issues	 of stocks are valued at the
     weighted average  cost of	the stock  on  hand  at	 the
     beginning and of the purchases, less any issues already
     made."
822
Counsel for  the assessee urged that for determining whether
the entire  General Reserve  of	 Rs.  86,07,712	 or  reduced
General Reserve	 of  Rs.  82,97,262  should  be	 taken	into
account for  capital computation either the 'First-in First-
out'  principle	  should  be   adopted;	 if   not,  only   a
proportionate deduction	 should	 be  made  and	the  balance
should be  held to  be includible  in  capital	computation,
particularly because the payment of dividend has been from a
conglomerate fund.
 It	 is   not  possible   to  accept   either  of  these
contentions urged by counsel for the assessee-company. It is
true that under s. 205(1) a of the Companies Act, 1956 it is
open to	 the directors to recommend and the share-holders to
approve payment	 of dividends either from the current year's
profits or  from the  past year's  profits. It	is also true
that on	 transfer of  a portion of current year's profits to
the General  Reserve the augmented General Reserve becomes a
conglomerate fund but having regard to the natural course of
human conduct of hard-headed men of business and commerce it
is not	difficult to  predicate	 that  the  dividends  would
ordinarily be  paid out	 from the current income rather than
from the  past savings	unless the directors in their report
expressly or  specifically state  that payment	of dividends
would be  made from  the past  savings. From  the commercial
point of  view if  any amount  is required for incurring any
expenditure or	making any disbursement like distribution of
dividends in  a current	 year, then ordinarily the same will
come out  of the  current income  of the  company if  it  is
available and only if the same is insufficient then the past
savings will  be resorted  to for  the purpose	of incurring
that expenditure  or making that disbursement; such a course
would be  in accord  with the common sense point of view. We
may point  out that  this  aspect  of  the  matter  was	 not
considered  by	the  Andhra  Pradesh  High  Court  in  Super
Spinning Mills	Ltd. case (supra) and the view of the Bombay
High Court  in the  case of  Bharat Bijlee  Ltd. (supra) and
Marrior (India)	 Ltd. (supra) commends itself to us. Even in
regard to  the question	 of valuing  the closing  stock	 the
learned authors	 of the	 treatise referred to by the counsel
for the	 assessee-company merely  indicate three methods for
such valuation	and it	will be open to a commercial concern
to avail  of any  one method.  In our view in the context of
the question  whether while  incurring	any  expenditure  or
making any  disbursement a commercial concern will resort to
current income	or past	 savings, the  normal rule,  in	 the
absence of  express indication	to the contrary, would be to
resort to the current income rather than past savings.
823
     In our  view, therefore,  the  Tribunal  was  right  in
excluding the  sum of Rs. 3,10,450 from the General Reserves
assessment  year   ]974-75,  in	  the  absence	 of  express
indication to the contrary.
     In the  result Civil  Appeal No.  1614(NT) of  1978 and
Review Petition	 No. 57	 of 1980 are dismissed. Civil Appeal
No. 860	 of g  1973 is	partly allowed and the issue whether
the appropriation  for retirement  gratuity is	a reserve or
not is	remanded to the Taxing Authority and the rest of the
appeal is  dismissed. In Tax Reference Cases Nos. 2 and 3 of
1977 and  No. S	 of 1978  the questions	 referred to  us are
answered  in  favour  of  the  Department  and	against	 the
assessee-companies. Each  party will  bear its	own costs in
all the matters.
 AMARENDRA NATH  SEN, J. At the outset I wish to observe
that  I	 have  been  somewhat  diffident  in  hearing  these
matters. I  felt a  little embarrassed	as I found that as a
Judge of  the High  Court at  Calcutta, I had an occasion to
consider some  of the  questions in  the case of Braithwaite
and Co.	 (India) Ltd.  v. Commissioner of. Income- Tax, West
Bengal, (I)  (Income Tax  Reference No.	 262 of	 1969). As I
have already  considered some  of  the	questions  and	have
expressed my  views on the same in the judgment delivered by
me in  the said	 reference, I was wondering whether I should
hear  these  appeals.  The  members  of	 the  Bar,  however,
represented to	me that they had not only no objection to my
hearing these  appeals but they also wanted me to hear these
appeals. They further represented that most of the Judges of
this Court  had on  some occasion  or other considered these
questions. They	 further stated	 that if  I would decline to
take up	 these matters	not only  the members of the Bar who
had come from various parts of the country for these appeals
would be  seriously inconvenienced;  but also  the  litigant
public who  had been  waiting for  years for  the hearing of
these matters  would be	 prejudiced. It	 was further pointed
out to	me that	 the judgment  which was delivered by me was
not under  appeal and  further	it  would  appear  from	 the
judgment  which	 I  had	 earlier  delivered  in	 Braithwaite
matter, there  was in  fact a concession made by the learned
counsel appearing  on behalf  of the  assessee that the said
case was covered by the decision of the Supreme Court in the
case of	 Commissioner of  Income-tax Bombay  City v. Century
Spinning and  Manufacturing Co. Ltd. (') The learned counsel
appearing on behalf
824
of the	parties further	 represented to	 me that the earlier
judgment was  delivered by  me as  a Judge of the High Court
and it	was always  open to  me to  reconsider	'  my  view,
particularly as	 a Judge  of this  Court after	hearing	 the
submissions to	be made	 by the learned counsel appearing on
behalf	of   the  parties.   In	 view	of   the   aforesaid
representations and submissions made by the learned lawyers,
I was  persuaded to  hear  these  appeals  with	 my  learned
brothers to  avoid inconvenience not only to the lawyers but
to the	litigant public. I have also had no doubt in my mind
that if	 I felt	 after hearing	the submissions	 made by the
learned counsel	 appearing on behalf of the parties in these
appeals, that the earlier judgment delivered by me was wrong
and incorrect,	I would	 have no hesitation in reconsidering
my earlier decision.
     I do  not propose	to set out the facts of this case at
any length  in this  judgment. The facts have been fully and
correctly set  out in  the judgment  of my  learned  brother
Tulzapurkar, J.	 My learned brother in his judgment has also
dealt with  the various	 arguments which  were advanced from
the Bar	 and has  also considered  the decisions  which were
cited.
     I propose	to notice  only some of the decisions which,
to my  mind, are  particularly important for decision of the
question whether the provision made in the balance-sheet for
payment of  dividend to the share-holders recommended by the
Board of  Directors constituted	 a 'reserve' and the amount,
so set apart, should be taken into account, in computing the
capital of  the company for the purpose of Super-Profits Tax
Act, 1963.  It may  be noted  that in  the  Act	 itself	 the
expression 'reserve' has not been defined.
 In the  case of Commissioner of Income-tax, Bombay City
v. Century Spinning and Manufacturing Co. Ltd. (supra), this
Court had  the occasion	 to consider the meaning of the word
'reserve' while	 dealing with  a case under Business Profits
Tax Act	 (XXI of 1947). In this Act also, there were similar
provisions with	 regard to computation of the capital of the
Company	 and  the  assessee  had  claimed  that	 the  amount
recommended by	the Board  of Directors	 and  earmarked	 for
payment of  the dividend  to  the  share-holders  should  be
treated as  'reserve' and should be taken into consideration
in computing  the capital of the assessee. The Supreme Court
observed at pp. 503-504 as follows :-
	  "The term  'reserve' is not defined in the Act and
     we must  resort to	 the  ordinary	natural	 meaning  as
     understood
825
     in common	parlance. The dictionary meaning of the word
     'reserve' is :-
	       "1 (a)  To keep	for future use or enjoyment;
	  to store  up for some time or occasion; to refrain
	  from using or for enjoying at once.
	       (b) To keep back or hold over to a later time
	  or place or for further treatment.
	       6. To set apart for some purpose or with some
	  end in view; to keep for some use.
	       II.  To	 retain	 or   preserve	for  certain
	  purposes (oxford Dictionary, Vol . VIII, P. 513.)
	       In  Webster's  New  International  Dictionary
	  Second Edition,  page 2118 'reserve' is defined as
	  follows:
	       1. To  keep in  store for  future or  special
	  use; to  keep in  reserve; to	 retain, to keep, as
	  for oneself.
	       2. To  keep back; to retain or hold over to a
	  future time or place.
	       3. To preserve."
     The Supreme  Court further observed at p. 504: "What is
the true  nature and  character of the disputed sum, must be
determined, with  reference to the substance of the matter?"
The Supreme Court held at p. 504-505 as follows :-
	  "A reserve  in the  sense in	which it  is used in
     rule 2 can only mean profit earned by a company and not
     distributed as  dividend to  the shareholders  but kept
     back by  the directors  for any purpose to which it may
     be put  in future.	 Therefore, giving  to the 'reserve'
     its plain	natural meaning	 it is clear that the sum of
     Rs. 5,08,637   was	 kept in  reserve by the company and
     not distributed  as profits  and subjected to taxation.
     Therefore, it satisfied all the requirements of rule 2.
     The Directors  had no  power to  distribute the  sum as
     dividend. They could only recommend as indeed they did,
     and it  was upto  the shareholders	 of the	 company  to
     accept that recommendation in which case alone the
826
     distribution could	 take place.  The recommendation was
     accepted and  the dividend was actually distributed. It
     is, therefore,  not correct  to say that the amount was
     kept back.	 The nature  of the amount which was nothing
     more than	the undistributed  profits of  the  Company,
     remained unaltered.  Thus the  profits Lying unutilised
     and not  specially set  apart for	any purpose  on	 the
     crucial date  did not  constitute reserves	 within	 the
     meaning of Schedule II, rule 2(1)."
     The Supreme Court also referred to S.l31 (a) and 132 of
the Indian  Companies Act.  Referring to  these sections the
Supreme Court observed at p. 505 as follows:
	  "Section 131	(a) enjoins  upon the  directors  to
     attach to	every balance sheet a report with respect to
     the state	of company's  affairs and  the amount if any
     which they	 recommend to be paid by way of dividend and
     the amount,  if any, which they propose to carry to the
     reserve fund,  general reserve  or reserve account. The
     latter section  refers to	the contents  of the balance
     sheet which  is to	 be drawn  up in  the Form marked in
     Schedule III.  This Form  contains a  separate head  of
     reserves. Regulation  99 of  the Ist Schedule. Table A,
     lays down	'that the directors may, before recommending
     any dividend  set aside  out  of  the  profits  of	 the
     company such  sums as they think proper as a reserve or
     reserves  which   shall,  at   the	 discretion  of	 the
     directors, be  applicable for meeting contingencies, or
     for equalising  dividends, or  for any other purpose to
     which the	profits	 of  the  company  may	be  properly
     applied.. ' The Regulation suggests that any sum out of
     the profits  of the  company which	 is to	be made	 asa
     reserve or	 reserves  must	 be  set  aside	 before	 the
     directors recommend  any dividend.	 In  this  case	 the
     directors while recommending dividend took no action to
     set aside	any portion  of this  sum as  a	 reserve  or
     reserves. Indeed, they never applied their mind to this
     aspect of the matter. The balance sheet drawn up by the
     assessee  as   showing  the  profits  was	prepared  in
     accordance with  the provisions of the Indian Companies
     Act. These provisions also support the conclusion as to
     what is the true nature of a reserve shown in a balance
     sheet."
 In the  case of  Commissioner of Income Tax v. Standard
Vacuum oil  Co. (1)  this Court had occasion to consider the
decision in
827
the case  of Commissioner  of Income-tax v. Century Spinning
and A  Manufacturing Co. Ltd. (supra). Dealing with the said
decision of this Court held at p. 697-98 as follows :-
	  "The Court  was dealing  in  this  case  with	 the
     accounts of  an Indian  Company, the  balance-sheet  of
     which was	prepared according  to the provisions of the
     Indian Companies  Act, 1913. Regulation 99 of the First
     Schedule, Table  A, required  that reserves must be set
     apart before the directors recommended any dividend but
     out of  the profits  of the  company no  amount was set
     apart towards reserves before the directors recommended
     payment of	 dividend to  the shareholders. The identity
     of the  amount remaining  on hand	at the	foot of	 the
     profit and	 loss account  was not	preserved. rt  is on
     these facts  that the  court held	that  there  was  no
     allocation of  the amount	to reserve and from the mere
     fact that	it was carried forward in the account of the
     next  year	  and  ultimately   applied  in	 payment  of
     dividend, it  could not  be said to be specifically set
     apart for	any purpose  at the relevant date, i. e. the
     end of the year of account."
     This Court	 then proceeded	 to hold  at  p.  697-98  as
follows :-
	  "We are  in  this  case  dealing  with  a  foreign
     company and  the system  of accounting  followed by the
     company is	 different in  important respects  from	 the
     system which  obtains  in	India.	Companies  in  India
     maintain diverse  types of	 reserves: such	 as  capital
     reserve, reserve  for redemption of debentures, reserve
     for replacement  of plant	and machinery,	reserve	 for
     buying new	 plant to  be added  to the  existing  ones,
     reserve for bad and doubtful debts? reserve for payment
     of dividend  and general reserve. Depreciation reserves
     within the	 limit prescribed  by the  Income-tax Act or
     the Rules	thereunder is  the only	 reserve which	is a
     permissible allowance  in the  computation	 of  taxable
     profits.  In   its	 ordinary   meaning  the  expression
     'reserve' means  something specifically  kept apart for
     future use or for a specific occasion."
 In the case of Metal Box Company of India Ltd. v. Their
Workmen, (1)  this Court while dealing with a case under the
pay-
828
ment of	 Bonus	Act,  1965  had	 occasion  to  consider	 the
expression 'reserve'  and its meaning for the purpose of the
said Act. This Court held at p. 67-68 as follows :-
	  " The	 next question	is  whether  the  amount  so
     provided is  a provision or a reserve. This distinction
     between a	provision and  a reserve  is  in  commercial
     accountancy fairly	 well known. Provisions made against
     anticipated  losses   and	contingencies	are  charges
     against profits and therefore, to be taken into account
     against gross  receipts in	 the P	& L  account and the
     balance-sheet.  On	  the  other   hand   reserves	 are
     appropriations of	profits, the asset by which they are
     represented being	retained in form part of the capital
     employed in  the business. Provisions are usually shown
     in the  balance-sheet by  way of  deductions  from	 the
     assets in	respect	 of  which  they  are  made  whereas
     general reserves and reserve funds are shown as part of
     the proprietor's  interest	 (see  Spicer  and  Pegler's
     Book-keeping and  Accounts,  15th	Edn.  page  42).  An
     amount set	 aside out  of profits	and other surpluses,
     not  designed   to	 meet	a  liability,	contingency,
     commitment or  diminution in  value of  assets known to
     exist at the date of the balance-sheet is a reserve but
     an amount	set aside out of profits and other surpluses
     to provide	 for any known liability of which the amount
     cannot be	determined with	 substantial accuracy  is  a
     provision; (see  William  Pickles	Accountancy,  Second
     Edn. p.  192; Part	 III, clause  7, Schedule  VI to the
     Companies	Act,   1958,  which  derives  provision	 and
     reserve."
In  the	  case	of  Commissioner  of  Income-tax  v.  Mysore
Electrical Industries  Ltd.(1) the  facts  were	 briefly  as
follows:-
     Out of  the profits  of the  company for the accounting
period ending  March 31,  1963. the Directors of the company
appropriated  the  following  amounts  towards	reserves  on
August 8,  1963: (i) Rs. 2,56,000 as plant modernisation and
rehabilitation	reserve:  (ii)	Rs.  89,557  as	 development
rebate reserve. The question was whether these amounts could
be included in computing the capital of the respondent as on
April 1,  1963 under  rule 1 of Schedule II to the Companies
(Profits)  Sur-tax   Act,  1964.  for  the  purpose  of	 the
statutory deduction  for the  assessment year  1961-65,	 The
contention  of	 the   department   was	  that	 since	 the
appropriations were  made on 8th August, 1963 they could not
be treated  as components  of capital as on the first day of
the previous year i.e. 1st April, 1963. Negativ-
829
ing the	 contention of	the department, this Court held that
the  determination  of	the  Directors	to  appropriate	 the
amounts of  the three  items of	 reserve on 8th August, 1963
had to	be related to first April, 1963, viz., the beginning
of the	accounts for  the new year, and had to be treated as
effective from	that day  and the said three items had to be
added to  the other  items for computation of the capital of
the company as on first April, 1963 under rule 1 of Schedule
II to  the Companies  (Profits) Sur-tax Act, 1964. It may be
noted that  in this  case before the trial court a claim had
been made  by  the  company  that  a  sum  of  Rs.  3,15,000
representing  dividend	reserve	 was  to  be  considered  in
computing  the	 assessee's  capital   for  the	 purpose  of
Companies (Profits) Sur-tax Act, 1964 and the High Court had
rejected this  claim. As against the rejection of this claim
by the	High Court,  no appeal	had been  preferred  by	 the
assessee to  the Supreme  Court.  The  Supreme	Court  while
considering the	 three items which came up for consideration
before it  held, as  already noted, that the decision of the
directors to appropriate the amounts to these three items of
reserve on  8th August, 1963 had to be related to 1st April,
1963 and this Court observed at pp. 560-570 as follows:-
	  "It is well known that the accounts of the company
     have to  be made  up for a year up to a particular day.
     In this  case that	 day was the 31st March, 1963. If it
     was reasonably  practicable to  make up the accounts up
     to the  31st March,  1963, and  present the same to the
     directors of  the respondent  on April  1,	 1963,	they
     could have made up their minds on that day and declared
     their intention  of appropriating	the said  and  other
     sums to  reserves of different kinds. But the fact that
     they could	 not do	 so for	 the simple  reason that the
     calculation and  collection of figures of all the items
     of income	and expenditure	 of the company for the year
     ending March  31, 1962,  was bound	 to take  some	time
     cannot make  any difference to the nature or quality of
     the  appropriation	  of  the  profits  to	reserves  as
     determined by  the directors  after the first of April,
     1963.  Their  determination  to  appropriate  the	sums
     mentioned to  the three separate classes of reserves on
     the 8th  August, 1963,  must be  related to  the 1st of
     April, 1963,  i.e., the  beginning of  the accounts for
     the new year and must be treated as effective from that
     day".
830
 Relying on	 the aforesaid decisions and also many other
decisions  of  the  various  High  Courts  which  have	been
considered by  my learned  brother Tulzapurkar,	 J.  in	 his
judgment, the  learned counsel	for the	 assessee has argued
that the  word 'reserve'  which has  not been defined in the
Act, has  to be	 understood in	its ordinary meaning as laid
down by	 the Supreme  Court in	the case of Century Spinning
Mills Ltd.  The further	 argument is that the recommendation
for dividend by the directors of the Company does not create
any kind  of liability,	 immediate or  future. It  is argued
that the obligation to pay the dividend only arises when the
shareholders at	 the Annual  General Meeting  of the Company
decided to  accept the	recommendation of  the Directors and
pass  a	 resolution  for  declaration  of  dividend. It  is
submitted that	it is  open to	the Directors to withdraw or
modify the  recommendations made by them any time before the
shareholders accept  the recommendations  and in  support of
this contention	 reference is  made to	the decision of this
Court in  the case  of Keshoram	 Industries and Cotton Mills
Ltd. v.	 Commissioner of  Wealth Tax (Central), Calcutta (I)
and n reliance is placed on the following observations at p.
772 :-
     directors with  respect to,  inter alia, the amount. if
     the recommendations  and  declares	 the  dividend,	 the
     the case  may be.	As on  the  valuation  date  nothing
     further happened  than a  mere  recommendation  by	 the
     directors as to the amount that might be distributed as
     dividend, it is not possible to hold that there was any
     debt owed	by the	assessee to the share holders on the
     valuation date."
It is further argued that it is open to the share-holders to
accept the  i recommendations  in its  entirety or to modify
the same by
831
deciding to  declare dividend  at a  rate lower than the one
recommended by	the directors.	It is,	therefore, contended
that the  recommendation of  the directors  for	 payment  of
dividend does  not have	 the effect  of creating any kind of
liability and there is no debt owed by the company by virtue
of the	said recommendations. It has been submitted that the
decision of  this Court	 in the	 case of  Mysore  Electrical
Industries Ltd.	 (supra) is  of no  assistance and  the said
decision does  not lay	down that  in the event of the share
holders' acceptance  of recommendation made by the directors
for the distribution of dividend to the share-holders of the
company, the liability for payment of the dividend will also
relate back;  and the doctrine of relation-back applies only
in respect  of items  which the	 directors are	competent to
decide for  themselves, in  view of  the process involved in
the preparation of accounts of the company.
     The main  argument advanced on behalf of the Revenue is
that any  amount which	may be	set  apart  for	 payment  of
dividend r  recommended to  be paid  by the Directors cannot
constitute 'reserve' within the meaning of the Act.
     The argument advanced on behalf of the assessee appears
to be  sound; but  to my  mind the  said arguments  are	 not
sufficiently convincing	 to lead the Court to the conclusion
that  the   amount  set	  apart	 for   payment	of  dividend
recommended  by	  the  Board  of  Directors  can  constitute
'reserve' within  the meaning  of the Act for the purpose of
computation of the capital of the Company.
 The word  'reserve' has not been defined in the ACT. In
the absence  of any  such definition  the  word	 has  to  be
understood in  its ordinary  sense. It	is, however,  to  be
remembered that	 the word  'reserve'  in  the  instant	case
occurs in a taxing statute specially applicable to Companies
only. The  word 'reserve'  should be so construed as to give
the  said  word	 the  meaning  in  which  it  is  ordinarily
understood by  persons interested in Companies or in dealing
with Companies.	 In other  words, the word 'reserve' for the
purpose of  this Act  should be	 understood in	the sense in
which it  is understood	 in company  circles and  by persons
interested in  Companies and  in dealing  with Companies. It
may be	noticed that  while considering the true meaning and
true nature  of 'reserve',  the Supreme Court in the case of
Commissioner  of   Income  Tax	 v.  Century   Spinning	 and
Manufacturing Co. Ltd. (supra) has referred
832
to S.  131 (a)	and 132	 of the Indian Companies Act, to the
Form marked  in Schedule  III in  which balance sheet of the
Company has  to be prepared and also to Regulation 99 of the
First Schedule,	 Table A. I have earlier quoted the relevant
observations of the Supreme Court.
     It is,  no doubt, true that the re commendations of the
Directors for  payment of  any dividend	 does not create any
kind of	 liability for	the payment  of the said amount. The
liability for  payment of any amount by way of dividend only
arises when the share-holders accept the recommendations and
a dividend  is declared at the annual general meeting of the
Company. It  is open  to the Directors to modify or withdraw
the recommendation  with regard	 to the	 payment of dividend
before the  said recommendation	 is accepted  by the  share-
holders. It  is also open to the share-holders not to accept
the recommendation  of the  Directors in its entirety and to
modify the  same. The legal liability for the payment of any
dividend only  arises after  the share-holders at the annual
general meeting	 have decided  to declare  a dividend on the
basis of  the recommendations  of the  Directors or  on	 the
basis of  any modification  thereof. The  liability for	 the
payment of  dividend only arises after the dividend has been
declared by  the share-holders at the annual general meeting
and this  liability does  not relate  back to  3 any earlier
date on	 the basis  of the recommendations of the directors.
as the	directors do  not enjoy any power of declaring the b
dividend. The  amount that  may be  set apart for payment of
any dividend on the basis of the recommendations made by the
Directors, cannot  be considered  to be	 an amount set apart
for meeting a known or existing liability.
     Though the amount which is set apart for payment of any
dividend recommended  by the  Board of	Directors is  not an
amount	set   apart  for   meeting  any	 known	or  existing
liability, yet	the said  amount  so  set  apart  cannot  be
considered to  be a  'reserve' within the meaning of the Act
for the	 purpose  of  computation  of  the  capital  of	 the
Company.
 S. 210 of the Companies Act, 1956 specifically provides
that at	 every annual general meeting of a Company the Board
of Directors  of a  Company shall lay before the Company the
balance sheet  of the  Company and also the Profits and Loss
account. S. 211
833
further provides that every balance sheet of a Company shall
give a	A true	and fair view of the state of affairs of the
Company as  at the  end of  the Financial  Year	 and  shall,
subject to the provisions of the section, be in the form set
out in	Part I	of  Schedule  VI,  or  as  near	 thereto  as
circumstances admit or in such other form as may be approved
by the	Central Government  either generally  or in a parti-
cular case.  The preparation  of  a  balance  sheet  in	 the
prescribed form and laying the same before the share-holders
at the	annual meeting	are statutory requirements which the
Company has to observe.
 Regulation 87 of Table A in Schedule I provides:
	  "(1)	The   Board  may,  before  recommending	 any
     dividend, set  aside out  of the profits of the Company
     Company may  be properly  applied, including provisions
     and  pending   such  application,	 may  at   the	like
     shares of	the Company)  as the  Board may from time to
	  (2) The  Board may  also carry forward any profits
     which it  may think  prudent  not	to  divide.  without
     setting them aside as a reserve".
This Regulation	 contemplates that  the Board  may set aside
out of	the profits  of the  Company such sums, as it thinks
proper, as  a  reserve	or  reserves  which  shall,  at	 the
discretion of  the Board,  be applicable  for any purpose to
which the  profits of  the Company  may be  properly applied
including the  provisions for  meeting contingencies  or for
equalising the	dividends, before recommending any dividend.
In other  words, the  sums out of the profits of the Company
have to	 be set	 apart as  reserve before  any	dividend  is
recommended by	the Board;  and the  recommendation  of	 the
Board for  payment of dividend comes only after the creation
of reserve. The amount that may, therefore, be set apart for
payment of  dividend recommended  by the  Board is an amount
which is set apart
834
after the Board had created the reserve. The form of balance
sheet referred	to in  S. 211  of the Companies Act, 1956 is
appended in  Part I  of Schedule  VI of	 the Statute. In the
statutory form	there are  various heads  including heads of
various kinds  of reserves  and also  of provisions.  In the
balance sheet  of the  Company which  has  necessarily	been
prepared in  accordance with  the provisions  of the statute
and in	the form  prescribed, the  amount recommended by the
Board for  payment of dividend has been shown under the head
provisions and	not under  any head  of reserves.  It is, no
doubt, true that the true nature and character of the sum so
set apart must be determined with regard lo the substance of
the matter.  The substance  of the matter clearly appears to
be that	 the amount  is set  apart for	payment of  dividend
recommended by the Board to be paid to the share-holders and
the said amount is never intended to constitute a reserve of
the Company.  Indeed a	provision is made for payment of the
said amount  to the  share-holders by way of dividend on the
basis of the recommendation made by the Directors. Though in
law the	 recommendation made by the Directors for payment of
dividend to  share-holders does not create any liability for
the payment  of dividend  and liability only arises when the
shareholders accept  the said  recommendation, and though in
law it	may be	open to	 the Board to modify or withdraw the
recommendation with regard to the payment of dividend before
the acceptance	by the share-holders and it may also be open
to the	share-holders not  to accept the said recommendation
in its	entirety and  to modify	 the same, yet, for business
purposes, when	the directors  make any	 recommendation	 for
payment of dividend and set apart any amount for the payment
of dividend so recommended, the directors intended to make a
provision for  the payment  of dividend	 recommended by them
and not	 to create  any reserve,  as the Directors very well
know that the recommendation made by them with regard to the
payment of  dividend is	 not normally  up-set by  the share-
holders and  it is  generally accepted by the share-holders,
as a matter of course. Any amount set apart by the Directors
for payment  of dividend to the share-holders recommended by
them, is  understood by persons interested in company and in
dealing with  companies to  mean a provision for the payment
of dividend  to the  share-holders and	is not understood to
constitute a  reserve. In  my opinion,	this true nature and
character of  the sum  so set  apart are  reflected  in	 the
provisions of the Companies Act and more particularly in the
manner of preparation of the balance-sheet of the Company. I
am, therefore,	of the opinion that the amount set apart for
the payment
835
of any	proposed dividend on the basis of the recommendation
of A the Directors cannot constitute reserve for the purpose
of computation	of the capital of the Company. The view that
I have	taken, to  my mind, appears to be in accord with the
view earlier  expressed by  this Court	in the	decisions to
which I have already referred.
     On the  other questions, I entirely agree with the view
expressed by  my learned brother Tulzapurkar, J. and I agree
with the order proposed by him.
	  C.A. No. 1614(NT)/78, Review Petition
No. 57180 and Tax Reference Cases
Nos 2&3/77 and 5/1978 dismissed.
P.B.R.			     C.A. No. 860/73 partly allowed.
836

Allied Motors (P) Ltd vs Commissioner Of Income-Tax, Delhi on 10 March, 1997
Equivalent 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
Author: Sujata V. Manohar
Bench: A.M. Ahmadi, Sujata V. Manohar, K. Venkataswami
ALLIED MOTORS (P) LTD.

	Vs.

COMMISSIONER OF INCOME-TAX, DELHI.

DATE OF JUDGMENT:	10/03/1997

BENCH:
A.M. AHMADI, SUJATA V. MANOHAR, K. VENKATASWAMI

ACT:

HEADNOTE:

JUDGMENT:
 (With Tax Reference No.1/94, CA Nos. 3175/91 and 2380/91)
		      J U D G M E N T
Mrs. Sujata V. Manohar, J.
     The two  Income-tax References which are before us deal
with a	common question	 relating to  the interpretation  of
Section 43B of the Income-tax Act, 1961. The references have
been made  under Section 256(1) of the Income-tax Act, 1961.
Since the same question arises in the two civil appeals also
these appeals  have been  heard along with these references.
For the	 sake of convenience, we are taking the statement of
the case in Income-tax Reference No.2 of 1993.
     The following  question has  been referred	 to us under
Section 256(1):-
     "Whether on  the facts  and in  the
     circumstances  of	 the  case,  the
     sales-tax collected by the assessee
     and  paid	after  the  end	 of  the
     relevant previous	year but  within
     the time allowed under the relevant
     sales-tax law  is to  be Income-Tax
     Act,  1961	  while	 computing   the
     business	income	 of   the   said
     previous year "?
 The relevant  assessment year  is 1984-85, the relevant
accounting period  being the  year ending  on 30th  of June,
1983. The  assessee filed  the return declaring an income of
Rs. 1,91,940/-. The Income-Tax Officer, however, disallowed,
inter alia,  deduction claimed	by the assessee of an amount
of  Rs.	  5,78.240/-  which  was  on  account  of  sales-tax
collected by  the assessee  for	 the  last  quarter  of	 the
relevant accounting  year. This amount was payable within 30
days of	 the end  of the  quarter. The	deduction which	 was
claimed by  the assessee  was disallowed  by the  Income-tax
Officer under  Section 43B of the Income-tax Act, 1961 which
was inserted  in the  statute with effect from 1.4.1984. The
assessee filed	an appeal before the Commissioner of Income-
Tax (Appeals), inter alia, in respect of this  disallowance.
However, the  appeal was  dismissed. The  assessee filed  an
appeal	before	 the  Income-Tax   Appellate  Tribunal.	 The
tribunal also  dismissed the  appeal on	 the  basis  of	 the
judgments of  the Delhi	 High Court  in the  case  of Sanghi
Motors v.  Union of  India (187 ITR 703) and Escorts Ltd. v.
Union	of India  & Ors.  (189 ITR   81). Hence the present
reference has  come before  us. One  of the  judgment relied
upon by	 the tribunal  was the	 judgment  in  the  case  of
Escorts Ltd.  v. Union	of India  (supra). Civil  Appeal No.
3175 (NT)  of 1991  is an  appeal from	the decision  of the
Delhi High  Court in  the above	 case which  is being  heard
along with the present tax-references.
     The relevant provisions of	 Section 43B for our purpose
ar as follows :-
     "43B:-  Certain  deductions  to  be
     only on actual payment --
	  Notwithstanding	anything
     contained in any other provision of
     this  Act,	 a  deduction  otherwise
     allowable under this Act in respect
     of --
     (a) any sum payable by the assessee
     by way  of tax,  duty, cess or fee,
     by whatever  name called, under any
     law for the time being in force, or
     (b) ............................
     (c) ............................
     (d) ............................
     shall be  allowed (irrespective  of
     the  previous  year  in  which  the
     liability	to   pay  such	sum  was
     incurred by  the assessee according
     to	  the	method	 of   accounting
     regularly employed	 by him) only in
     computing the income referred to in
     section 28	 of that  previous  year
     fin which such sum in actually paid
     by him :
     -	  Provided     that	 nothing
     contained	in  this  section  shall
     apply  in	 relation  to	any  sum
     referred to in clause (a) or clause
     (c) or clause (d) which is actually
     paid by  the assessee  on or before
     the due date applicable in his case
     for furnishing the return of income
     under sub-section	(1)  of	 section
     139 in respect of the previous year
     in which  the liability to pay such
     sum was  incurred as  aforesaid and
     the evidence  of  such  payment  is
     furnished	by  the	 assessee  along
     with such return :
     Provided further .........
     Explanation 1 - ..........
     - -  Explanation  2   --  For   the
     purposes of clause (a), as in force
     at all  material  times,  'any  sum
     payable means  a sum  for which the
     assessee incurred	liability in the
     previous year  even though such sum
     might not	have been payable within
     that year under the relevant law.
     Explanation 3 - .............
     Explanation 4 - ............."
 Section 43B  was inserted	in the	Income-tax Act, 1961
with effect  from 1.4.1984.  The section,  as it  originally
stood, did  not contain	 the two provisos. The first proviso
has been  set out  above. The  proviso was  inserted by	 the
Finance Act  of 1987  which came  into effect from 1.4.1988.
Explanation 2 has been added subsequently by the Finance Act
of 1989	 but with  retrospective effect	 from  1.4.1984.  In
these References  and appeals  we  are	concerned  with	 the
application of	Section 43B  as it stood before the provisos
were added.
     Prior to the insertion of Section 43B in the Income Tax
Act, 1961,  income chargeable  under the  head 'profits	 and
gains'	of   business  or   profession	was   computable  in
accordance with	 the method of accounting regularly employed
by the	assessee as  per Section  145 of the Income-tax Act,
1961. An  assessee who	had adopted the mercantile system of
accounting would  be entitled  to account for his income and
expenditure on	the basis of accrual and not on the basis of
actual receipt	or disbursement.  After insertion of Section
43B, however,  even if	the assessee  had regularly  adopted
mercantile system  of accounting,  the amount of tax payable
by the	assessee could be deducted only in the year in which
the assessee  incurred the  liability to pay that tax. Hence
an assessee  (as in  the present  case), who  had  collected
sales-tax in  the last	quarter of  the previous  accounting
year and  deposited it	in the treasury within the statutory
period falling	in the	next accounting	 year, would  not be
entitled to  claim any	deduction for  it. The	sales-tax so
collected will	form a	part of	 the assessee's	 income.  To
obviate this  kind of unexpected outcome of section 43B, the
first proviso was added in Section 43B by the Finance Act of
1987. The  proviso makes  it clear that the Section will not
apply in  relation to  any sum which is actually paid by the
assessee in  the next  accounting year	if it  is paid on or
before the  due date for  furnishing the return of income in
respect of  the previous  year in which the liability to pay
such sum  was incurred	and the	 evidence of such payment is
furnished by the assessee along with the return.
     The proviso,  however, was not on the statute book when
the assessments	 were made  in respect	of  these  assessees
since the  assessments pertain	to assessment  year prior to
the insertion  of the proviso in Section 43B. The assessees,
however, contend  that the proviso should be given effect to
retrospectively from the date when section 43B became a part
of the	Income-tax Act,	 1961, as  it is intended to obviate
unexpected hardships in the application of Section 43B.
     To under  stand the  circumstances in which section 43B
came to	 be inserted  in the Income-tax Act and the mischief
which it  sought to  prevent, it is necessary to look at the
memorandum explaining  the provisions in the Finance Bill of
1983 [(1983) 140 ITR (St.) 160] :-
     "59.  Under   the	Income-tax  Act,
     profits and  gains of  business and
     profession	   are	  computed    in
     accordance	 with	the  method   of
     accounting	 regularly  employed  by
     the assessee. Broadly stated, under
     the    mercantile	   system     of
     accounting, income	 and  outgo  are
     accounted	for   on  the  basis  of
     accrual and  not on  the  basis  of
     actual disbursements  or  receipts.
     for the  purposes of computation of
     profession,  the	Income-tax   act
     defines the  word	'paid'	to  mean
     'actually	 paid	 or    incurred'
     according	 to    the   method   of
     accounting on  the basis  of  which
     the profits or gains are computed.
     60.  Several  cases  have	come  to
     notice  where  tax	 payers	 do  not
     discharge their statutory liability
     such as  in respect of excise duty,
     employer's	    contribution      to
     provident	fund,  Employees'  State
     Insurance Scheme,	etc..  for  long
     period of time, extending sometimes
     to several	 years. For  the purpose
     of	 their	income-tax  assessments,
     they   claim   the	  liability   as
     deduction on  the ground  that they
     maintain accounts	on mercantile or
     accrual basis.  On the  other  hand
     they dispute  the liability  and do
     not discharge  the same.  For  some
     reason  or	  the  other  undisputed
     liabilities also  are not	paid. To
     curb this	practice, it is proposed
     to proved	that deduction	for  any
     sum payable  by the assessee by way
     of tax  or duty  under any	 law for
     the    time    being    in	   force
     (irrespective of  whether such  tax
     or duty  is disputed or not) or any
     sum payable  by the  assessee as an
     employer by  way of contribution to
     any     provident	    fund,     or
     superannuation  fund   or	gratuity
     fund or  any  other  fund	for  the
     welfare of	 computing the income of
     that previous  year in  which  such
     sum is actually paid by him."
     The Budget	 Speech of the Finance Minister for the year
1983-84, reproduced  in (1983)	140 ITR	 (St.) 31, is to the
same effect.
 Section 43B  was, therefore,  clearly aimed  at curbing
the activities	of those  tax payers  who did  not discharge
their  statutory   liability  of  payment  of  excise  duty,
employer's contribution	 to provident  fund  etc.  for	long
periods of  time but  claimed deductions in that regard from
their income  on the  ground that the liability to pay these
amounts had  been incurred  by them in the relevant previous
year. It  was to  stop this  mischief that  Section 43B	 was
inserted. It  was clearly  not realised that the language in
which Section  43B was	worded would cause hardship to those
tax payers  who had  paid  sales-tax  within  the  statutory
period prescribed  for this payment, although the payment so
made by	 them did  not fall in the relevant accounting year.
It could  be paid only in the next quarter which fell in the
next accounting year. Therefore, even when the sales-tax had
in fact	 been paid  by the  assessee  within  the  statutory
period prescribed for its payment and prior to the filing of
the income  tax return,	 these	assessees  were	 unwittingly
prevented from claiming a legitimate deduction in respect of
the tax	 paid by them. This was not intended by Section 43B.
Hence the  first proviso  was inserted	in Section  43B. The
amendment which	 was made  by the  Finance Act	of  1987  in
Section 43B by inserting, inter alia, the first proviso, was
remedial  in   nature,	designed   to  eliminate  unintended
consequences which  may cause undue hardship to the assessee
and which  made the  provision unworkable  or  unjust  in  a
specific situation.
     Looking to the curative nature of the amendment made by
the Finance Act of 1987 it has been submitted before us that
the proviso which is inserted by the amending Finance Act of
1987 should  be given  retrospective effect  and be  read as
forming a  part of  Section 43B	 from  its  inception.	This
submission has	taken support  from decisions of a number of
High  Courts   before  whom   this  question   came  up	 for
consideration.	The   High  Courts   of	 Calcutta,  Gujarat,
Karnataka,  Orissa,  Gauhati,  Rajasthan,  Andhara  Pradesh,
Patna and  Kerala appear  to have  taken the  view that	 the
proviso must  be given	retrospective effect.  Some of these
High courts  have held	that  "sum  payable"  under  Section
43B(a) refers only to the sum payable in the same accounting
year thus excluding sales tax payable in the next accounting
year from  the ambit of Section 43B(a). The Delhi High Court
has taken  a contrary view holding that the first proviso to
Section 43B  operates only prospectively. We will refer only
to some of these judgments.
     Explanation 2  was added  to Section 43B by the Finance
Act of	1989 with  retrospective effect	 from 1.4.1984.	 The
Memorandum   explaining	   the	 reasons   for	 introducing
Explanation 2, states inter alia, as follows [(1989) 176 ITR
(St.) 123] :-
	  "24.	 Under	  the	existing
     provisions of  section 43B	 of  the
     Income-tax Act, a deduction for any
     sum payable  by way  of  tax,  duty
     cess or  fee, etc.,  is allowed  on
     actual  payment   basis  only.  The
     objective behind  these  provisions
     is	  to	provide	  for	 a   tax
     disincentive by  denying  deduction
     in respect of a statutory liability
     which is  not  paid  in  time.  The
     Finance  Act,  1987,  inserted    a
     proviso to	 section 43B  to provide
     that any  sum payable by way of tax
     or duty,  etc., liability for which
     was incurred  in the  previous year
     will he  allowed as a deduction, if
     it is actually paid by the due date
     of	 furnishing   the  return  under
     Section 139(1)  of	 the  Income-tax
     Act, in  respect of  the assessment
     year   to	 which	 the   aforesaid
     previous year relates. This proviso
     was  introduced   to   remove   the
     hardship	 caused	   to	 certain
     taxpayers who  had represented that
     since the	sales-tax for  the  last
     quarter cannot  be paid within that
     previous  of   section   43B   will
     unnecessarily involve  disallowance
     of	 the   payment	for   the   last
     quarter.
	  Certain      courts	    have
     interpreted   the	 provisions   of
     section 43B  in a	manner which may
     negate the	 very operations  of his
     section. The  interpretation  given
     by these courts revolves around the
     use of the words 'any sum payable'.
     The interpretation	 given to  these
     words is  that amount  payable in a
     particular	 year	should	also  be
     statutorily   payable   under   the
     relevant statute  in the same year.
     This  is  against	the  legislative
     intent  and   it	is,   therefore,
     proposed, by way of a clarificatory
     amendment	and   for   removal   of
     doubts, that  the	words  'any  sum
     payable' be  defined  to  mean  any
     sum, liability  for which	has been
     incurred by the taxpayer during the
     previous year  irrespective of  the
     date   by	 which	 such	sum   is
     statutorily payable.
	  This	 amendment   will   take
     effect from April 1, 1984."
     While  interpreting   Section  43B	 without  the  first
proviso some  of the  High Courts, in order to prevent undue
hardship to  the assessee,  had taken  the view that Section
43B would  not be  attracted unless  the sum  payable by the
assessee by way of tax, duty, cess or fee was payable in the
same accounting	 year. If  the tax  was payable	 in the next
accounting year,  Section 43B  would not  be attracted. This
was done in order to prevent any undue hardship to assessees
such as	 the ones before us. The memorandum of reasons takes
note of	 the combined  effect of  Section 43B  and the first
proviso inserted  by the  Finance Act, 1987. After referring
to the	fact that the first proviso now removes the hardship
caused to  such tax  payers it	explains  the  insertion  of
Explanation 2  as being	 for the  purpose  of  removing	 any
ambiguity about	 the term 'any sum payable' under clause (a)
of Section  43B. This Explanation is made retrospective. The
Memorandum seems  to proceed  on the  basis that Section 43B
read with  the proviso	takes care of the hardship situation
and hence  Explanation 2  can be inserted with retrospective
effect to make clear the ambit of Section 43B(a). Therefore,
Section	 43B(a),  the  first  proviso  of  Section  43B	 and
Explanation 2  have to	be read together as giving effect to
the true  intention of	Section 43B.  If  Explanation  2  is
retrospective,	the   first  proviso  will  have  to  be  so
construed. Read	 in this  light also,  the proviso has to be
read  into   Section  43B  from	 its  inception	 along	with
Explanation 2.
This position  is reinforced  by a departmental Circular No.
550 dated  1st of  January 1990,  [(1990) 182 ITR (St.) 114,
123] :-
	  "AMENDMENT	OF    PROVISIONS
     RELATING OF CERTAIN DEDUCTION OT BE
     ALLOWED ONLY ON ACTUAL PAYMENT.
	  15.1	 Under	  the	existing
     Income-Tax Act,  1961, a  deduction
     for any  sum payable by way of tax,
     duty, cess or fee, etc., is allowed
     on actual	payment basis  only. The
     disincentive     by      'statutory
     liability' which  is  not	paid  in
     time.  The	  Finance   Act,   1987,
     inserted a	 proviso to  section 43B
     to provide	 that  any  sum	 payable
     liability for which was incurred in
     the previsous  year will be allowed
     as a  deduction, if  it is actually
     paid by  the due date of furnishing
     the return	 under Section 139(1) of
     the Income-tax  Act, in  respect of
     assessment	 year	to   which   the
     aforesaid	previous  year	relates.
     This  proviso   was  introduced  to
     remove  the   hardship  caused   to
     certain	taxpayers     who    had
     represented that  since  the  sales
     tax for  the last quarter cannot be
     paid within  the previous year, the
     original provisions  of section 43B
     will     unnecessarily	 involve
     disallowance of the payment for the
     last quarter.
     negate the	 very operation	 of this
     use  of   the  words   '  any   sum
     payable'. The  interpretation given
     to these  words is	 that the amount
     payable in a particular year should
     also be  statutorily payable  under
     the relevant  statute in  the  same
     year.  Thus,   the	 sales	 tax  in
     respect of	 sales made  in the last
     quarter  was  held	 to  be	 totally
     outside the  purview of section 43B
     since the	same is	 not statutorily
     payable in	 the financial	year  to
     which it  relates. This  is against
     the  legislative	   intent   and,
     therefore, by  way of  inserting an
     Explanation, it  has been clarified
     that the  words 'any   sum payable'
     shall mean	 any sum,  liability for
     which  has	 been  incurred	 by  the
     taxpayer during  the previous  year
     irrespective of  the date	by which
     such  sum	is  statutorily	 payable
     ........"
     The departmental  understanding also appears to be that
Section 43B,  the proviso  and Explanation 2 have to be read
together as  expressing the  true intention  of Section 43B.
Explanation 2  has been	 expressly made	 retrospective.	 The
first proviso,	however, cannot be isolated from Explanation
2 and  the main	  body	of Section  43B. without  the  first
proviso, Explanation 2 would not obviate the hardship or the
unintended consequences of Section 43B. The proviso supplies
an obvious  omission. But  for this  proviso  the  ambit  of
Section 43B  becomes unduly  wide bringing  within the scope
those payments which were not intended to be prohibited from
the category of permissible deductions.
 In the  case of Goodyear India Ltd. v. State of Haryana
and Anr.  (188 ITR  402) this  court said  that he  rule  of
reasonable construction	 must be  applied while construing a
statute.  Literal  construction	 should	 be  avoided  if  it
defeats the manifest object and purpose of the Act.
     Therefore, in  the well  known words  of Judge  learned
Hand, one  cannot make a fortress out of the dictionary; and
should remember	 that statutes	have some purpose and object
to accomplish  whose sympathetic  and imaginative  discovery
is the	surest guide  to their	meaning. In the case of R.B.
Jodha Mal  Kuthiala v.	Commissioner of	 Income-tax, Punjab,
jammu &	 Kashmir and  Himachal Pradesh	(82 ITR	 570),	this
Court said  that one  should apply  the rule  of  reasonable
interpretation.	 A  proviso  which  is	inserted  to  remedy
unintended consequences	 and to made the provision workable,
a proviso  which supplies an obvious omission in the section
and is	required to  be read  into the	section to  give the
section a  reasonable interpretation, requires to be treated
as  retrospective   in	operation   so	that   a  reasonable
interpretation can be given to the section as a whole.
     This view	has been accepted by a number of High Court.
In the	case of	 Commissioner  of  Income-Tax  v.  Chandulal
Venichand ([1994]  209 ITR  7), the  Gujarat High  Court has
held that  he first  proviso to section 43B is retrospective
and sales-tax for the last quarter paid before the filing of
the return  for the  assessment	 year  is  deductable.	This
decision deals	with assessment	 year 1984-85. The Calcutta
High Court  in the case of Commissioner of Income-tax v. Sri
Jagannath Steel	 Corporation ([1991] 191 ITR 676), has taken
a similar  view holding	 that the  statutory  liability	 for
sales-tax actually  discharge after the expiry of accounting
year in	 compliance with the relevant stature is entitled to
deduction under	 Section 43B.  The High	 Court has  held the
amendment to be clarificatory and, therefore, retrospective.
The Gujarat  High Court in the above case held the amendment
to be  curative and explanatory and hence retrospective. The
Patna High  Court has  also held the amendment inserting the
first proviso  to be  explanatory in  the case of Jamshedpur
Motor Accessories  Stores v. union of India and Ors. ([1991]
189 ITR	 70.), It  was held  that amendment  inserting first
proviso to be retrospective. The special leave petition from
this decision  of the  Patna High  Court was  dismissed. The
view of	 the Delhi  High Court,	 therefore, that  the  first
proviso to  section 43B will be available only prospectively
does not appear to be correct. As observed by G.P.  Singh in
his Principles	of statutory  Interpretation, 4th  Edn. Page
291, "It  is well  settled that	 if a  statute	curative  or
merely	declaratory   of  the	previous  law  retrospective
operation is  generally intended."  In	fact  the  amendment
would not  serve its object in such a situation unless it is
construed as  retrospective. The  view, therefore,  taken by
the Delhi High Court cannot be sustained.
     In the premises the appeals are allowed and the Income-
tax references	are answered  in favour of the assessees and
against the  revenue. In  the circumstances,  however, there
will be no order as to costs.

R.K. Garg And Ors. vs Union Of India (Uoi) And Ors. on 13 November, 1981
Equivalent 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
Bench: Y.V. Chandrachud, A.C. Gupta, A.N. Sen, P.N. Bhagwati, S. Murtaza Fazal Ali
JUDGMENT
  
P.N. Bhagwati, J.
 
 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. 

 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: 

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; 

 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; 

 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; 

 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: 

 3. (1) Notwithstanding anything contained in any 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) 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. 

Explanation: 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. 

 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-

 (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; 

 (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 
 
 (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. 

 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. 

 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:

Even 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: 

All 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.' 
 
 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.

In 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:

The 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: 

The 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. 

 The rules have not been challenged to be ultra vires the 1957 Act in the instant case. 

 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. 

 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: 

123 (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. 

 (2) An Ordinance promulgated under this article shall have the same force and effect as an Act of Parliament, but every such Ordinance: 

 (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
 
 (b) may be withdrawn at any time by the President. 

 (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. 

 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-
 ...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. 

 These words provide a complete answer to the criticism of Mr. R.K. Garg.  

 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.

 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: 

 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.

 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. 

 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.

 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. 

 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: 
 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.  

 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. 

 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. 

 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. 

 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. 

 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.

15. 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. 

 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. 

 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. 

 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. 

 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. 

 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. 

 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. 

 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. 

Gupta, J. 

 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: 

 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. 

 I shall give my reapreamble
sons later.  

 24. Here briefly are my reasons.

 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. 

 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: 

 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: 

 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; 

27. 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: 

It [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. 

 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. 

 28. The Act contains nine sections. The sections that are relevant for the present purpose are set out below. 
 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. 

 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. 

 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:

 (1) that the classification must be founded on an intelligible differentia which distinguishes those that are grouped together from others and, 
 
 (2) that the differentia must have rational relation to the object sought to be achieved by the Act. 

 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: 

 (a) any manner of relief under the Income-tax Act on the ground that he has acquired the Bonds; or
 
 (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 
 
 (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. 

 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. 

 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. 

 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:
  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... 

 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:
  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.

 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:
 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. 

 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:
 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.

Bhagwati J.

 Reiterates in Maneka Gandhi v. Union of India  what he had said in Royappa's case and adds:
 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....

 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?

 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. 

 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. 

 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. 

 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. 

 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. 

 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.

Shashikant Laxman Kale And Anr vs Union Of India And Anr on 20 July, 1990
Equivalent 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
Author: Jagdish Saran  Verma
Bench: Jagdish Saran  Verma, N.D.  Ojha
SHASHIKANT LAXMAN KALE AND ANR.

	Vs.

UNION OF INDIA AND ANR.

DATE OF JUDGMENT20/07/1990

BENCH:
VERMA, JAGDISH SARAN (J)
BENCH:
VENKATACHALLIAH, M.N. (J)

CITATION:
 1990 AIR 2114		  1990 SCR  (3) 441
 1990 SCC  (4) 366	  JT 1990 (3)	267
 1990 SCALE  (2)71

ACT:
    Income  Tax Act, 1961: Chapter  III--Section  10--Clause
(10-C) --Scope and Constitutional validity of--Public Sector
Companies--Employees-Voluntary	 Retirement--"Golden   hand-
shake"to  employees-Exemption from  income-tax--Held  clause
(10-C) does not include employees of a private sector compa-
ny.
    Constitution  of India,  1950: Article 14 Public  Sector
Companies-Employees-Amount received at the time of voluntary
retirement--Exemption  from tax under clause (10-C) of	Sec-
tion  10  of Income Tax Act, 1961--Exclusion  of  non-public
sector employees from clause (10-C) and consequent denial of
benefit	 of  tax  exemption--Held  public  sector  employees
constitute a distinct class--Clause (10-C) is neither  arbi-
trary  nor violative of Article 14  Object of cluase  (10-C)
explained.
    Taxing Statute--Constitutional validity  of--Reasonable-
ness of classification--Determination of--Scope for  classi-
fication  in a taxing statute is greater--Court should	look
beyond	obstensible classification into purpose of  law	 and
apply the test of "palpable arbitrariness"
    Statutory	interpretation--Statute--Determination	  of
object	and purpose--Permissible Aid--Statement	 of  objects
and reasons of the Bill--Whether can be looked into.
    Finance  Bill--Explanatory	 Memorandum--Heading-Neither
determinative of object nor can camouflage the object of the
Act.

HEADNOTE:
    By	Finance	 Act, 1987, clause (10-C)  was	inserted  in
section	 10 of the Income-Tax Act, 1961. The effect of	this
clause was to grant tax exemption to employees of the public
sector in respect of the amount received under the voluntary
retirement scheme approved by the Central Government.
    The petitioners-an employee of a private sector  company
and the trade-union of the said private company-flied a writ
petition in this
442
court challenging the validity of clause (10-C)	 contending;
(i)  the denial of benefit of tax exemption to employees  of
private	 sector company being arbitrary and  discriminatory,
the  impugned  clause was unconstitutional as  violative  of
Article	 14:  (ii)  the heading	 'Welfare-Measures'  to	 the
Memorandum  explaining	the provisions in the  Finance	Bill
1987  proposing insertion of clause (10-C) in section 10  of
the  Income-Tax Act, 1961 was decisive of the object of	 its
enactment;  the tax benefit being in the nature	 of  welfare
measure the impugned clause must be so construed as to apply
to  all employees equally, whether of the public  sector  or
private sector in order to uphold its validity.
Dismissing the petition, this Court,
    HELD:  There  is a distinction between  the	 public	 and
private sectors. The Government or the public sector  under-
takings	 are as a distinct class separate from those in	 the
private	 sector and the fact that the profit earned  in	 the
former	is  for public benefit instead of  private  benefit,
provides  an intelligible differentia from the social  point
of view which is of prime importance for the national econo-
my.  Thus, there exists an intelligible differentia  between
the two categories which has a rational nexus with the	main
object	of  promoting the national economic  policy  or	 the
public	policy.	 This element also appears in  the  impugned
enactment itself wherein 'economic viability of such  compa-
ny' is specified as the most relevant circumstance for grant
of  approval of the scheme by the Central  Government.	This
intrinsic element in the provision itself supports the	view
that  the main object thereof is to promote and improve	 the
health of the public sector companies even though its effect
is  a benefit of its employees. The economic status  of	 em-
ployees	 of a public sector company who get the	 benefit  of
the provision is also lower as compared to their counterpart
in the private sector. Viewed in this perspective, the	very
foundation of the challenge to the impugned provision on the
basis  of economic equality of employees in both sectors  is
non-existent. Once the stage is reached where the  differen-
tiation is rightly made between a public sector company	 and
a  private  sector company and that too essentially  on	 the
ground	of economic viability of the public  sector  company
and  other  relevant circumstances, the	 argument  based  on
equality  does not survive. This is independent of the	dis-
parity	in  the	 compensation package of  employees  in	 the
private	 sector and the public sector. The argument of	dis-
crimination  is	 based on initial equality between  the	 two
classes	 alleging bifurcation thereafter between  those	 who
stood integrated earlier as one class. This basic assumption
being fallacious, the question of any hostile discrimination
by  granting  the benefit only to a few in  the	 same  class
denying the same to those left out does not arise.  [465D-H;
466A-B]
443
    2.	The  purposes of the  impugned	legislation  include
reduction in the existing gap between the lower compensation
package in public sector and the higher compensation package
of the counterpart in private sector in addition to prevent-
ing  misuse  of the benefit in private sector which  is	 not
subject to the control of administration by Government	like
that in the public sector. One of the purposes is streamlin-
ing  the public sector to cure it of one of its ailments  of
overstaffing. The provision is an incentive to the  unwanted
personnel to seek voluntary retirement thereby enabling	 the
public	sector	to achieve the true  object  indicated.	 The
personnel  seeking voluntary retirement no doubt get  a	 tax
benefit but then that is an incentive for seeking  voluntary
retirement and at any rate that is the effect of the  provi-
sion  or its fallout and not its true object. The real	dis-
tinction  between  the true object of an enactment  and	 the
effect	thereof,  even	though appearing to  be	 blurred  at
times, has to be borne in mind, particularly in a  situation
like this. [466F-H; 467A-B]
    2.1	 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  provi-
sion  do  not  fall in the same class as  employees  of	 the
public sector and the benefit of the fall-out of the  provi-
sion  being  available only to the public  sector  employees
cannot	render the classification invalid or arbitrary.	 The
other  clauses in section of the Act further show  that	 the
scheme	of  section 10 contemplates  a	distinction  between
employees  based  on the category of  their  employer.	This
classification cannot, therefore, be faulted. [67B-C]
    Hindustan Paper Corporation Ltd. v. Government of Kerala
JUDGMENT:
v. Union of India & Ors. etc. etc., Judgments Today 1982 (2)
SC  465;  L.K. Jha Memorial Lecture, delivered	on  the	 6th
December 1988, by Shri R.N. Malhotra, Governor, Reserve Bank
of  India,  on "Growth and Current Fiscal  Challenges",	 re-
ferred to.
 Hindustan  Antibiotics v. Workmen, [1967] 1 SCR 652	 and
S.K.  Dutta,  1.  T.O. v. Lawrence Singh  Ingty,  [1968]  68
I.T.R. 272, distinguished and held inapplicable.
    R.D. Shetty v. International Airport Authority of India,
[1979] 3 SCR 1014, cited.
    2.2	 In view of the simultaneous definition	 of  'public
sector	company'  in  the Income-Tax Act, there	 can  be  no
occasion to construe this
444
expression differently without which a private sector compa-
ny cannot be included in it. It is, therefore, not  possible
to  construe  the  impugned provision  while  upholding	 its
validity  in  such a manner as to include a  private  sector
company also within its ambit. [468C-D]
    3. The principles of valid classification are that those
grouped together in one class must possess a common  charac-
teristic  which distinguishes them from those excluded	from
the group; and this characteristic or intelligible differen-
tia must have a rational nexus with the object sought to  be
achieved by the enactment. [449D]
Re  The	 Special  Courts Bill, 1978, [1979]  2	S.C.R.	476,
 4.	The latitude for classification in a taxing is	much
greater;  and in order to tax something it is not  necessary
to  tax everything. These basic postulates have to be  borne
in  mind while determining the constitutional validity of  a
taxing provision challenged on the ground of discrimination.
1451C]
    P.H.  Ashwathanarayana  v. State  of  Karnataka,  [1989]
(Supp.) 1  S.C.C. 696; Federation of Hotel  and  Restaurant
Association  of India v. Union of India, [1989]	 178  I.T.R.
97; Kerala Hotel and Restaurant Association & Ors. v.  State
of Kerala & Ors., A.I.R. 1990 SC 913 and 1. T.O. v. N. Takin
Roy Rymbai, [1976] 103 I.T.R. 82 SC, referred to.
    East India Tobacco Co. v. Andhra Pradesh, A.I.R. 1962 SC
1733;  Vivian  Joseph Ferriera v. Municipal  Corporation  of
Greater	 Bombay, AIR 1972 S.C. 845 and Jaipur Hosiery  Mills
v. State of Rajasthan, A.I.R. 1971 SC 1330, cited.
    5. The Court should, therefore, look beyond the  obsten-
sible classification and to the purpose of the law and apply
the  test of 'palpable arbitrariness' in the context of	 the
felt needs of the times and societal exigencies informed  by
experience  to determine reasonableness of  the	 classifica-
tion. [453B]
    5.1	 It  is	 necessary to discern the  true	 purpose  or
object	of  the impugned enactment because it is  only	with
reference  to  the  true object of the	enactment  that	 the
existence  of a rational nexus of the differentia  on  which
the  classification is based, with the object sought  to  be
achieved  by  the  enactment, can be examined  to  test	 the
validity of the classification. [453E-F]
445
    5.2 There is a clear distinction between the 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. 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 of object of the  legis-
lation, so determined. [453H; 454A]
    Francis  Bennion's Statutory Interpretation,  1984	edi-
tion, page 237, referred to.
    6. For determining the purpose or object of the legisla-
tion, 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. For the limited	pur-
pose  of  appreciating	the background	and  the  antecedent
factual matrix leading to the legislation, it is permissible
to  look  into the statement of Objects and Reasons  of	 the
Bill  which  actuated the step to provide a remedy  for	 the
then existing malady. [454B-C]
    A.	Thangal Kunju Musaliar v. M. Venkitachalam  Potti  &
Anr., [1955] 2 S.C.R. 1196; State of West Bengal v. Union of
India, [1964] 1 S.C.R. 371 and Pannalal Binjraj v. Union  of
India, [1957] S.C.R. 233, referred to.
    6.1	 To  sustain the presumption  of  constitutionality,
consideration  may be had even to matters of  common  knowl-
edge;  the history of the times; and very conceivable  state
of  facts existing at the time of legislation which  can  be
assumed.  Even	though	for the purpose	 of  construing	 the
meaning	 of the enacted provision, it is not permissible  to
use  these  aids,  yet it is permissible to  look  into	 the
historical  facts and surrounding circumstances	 for  ascer-
taining	 the  evil sought to be	 remedied.  The	 distinction
between	 the  purpose or object of the legislation  and	 the
legislative  intention	is significant in this	exercise  to
emphasise  the availability of larger material to the  Court
for  reliance when determining the purpose or object of	 the
legislation as distinguished from the meaning of the enacted
provision. [454F-H]
    7. An explanatory memorandum is usually 'not an accurate
guide of the final Act'. [455C]
Francis	 Bennion's Statutory Interpretation, 1984 Edn.	page
529,referred to.
446
    7.1	 A catch-phrase possibly used as a populist  measure
to  describe  some  provisions in the Finance  Bill  in	 the
explanatory  memorandum	 while introducing the Bill  in	 the
Parliament  can	 neither  be determinative of,	nor  can  it
camouflage  the	 true object of the legislation. It  is	 not
unlikely  that	the phrase 'welfare measures'  was  used  to
emphasise more on the effect of the provisions thereunder on
the taxpayer for populism. [457G]

&
ORIGINAL JURISDICTION: Writ Petition No. 136 of 1989.
(Under Article 32 of the Constitution of India).
    Narayan  B. Shatye, Mukul Mudgal, Venkatesh Rao,  Sudhir
Gopi for the Petitioners.
    A.B.  Divan,  V. Gauri Shankar,  S.C.  Manchanda,  Ashok
Sagar, Ms. Amrita Mitra, Ms. A. Subhashini, Ravinder Narain,
S. Sukumaran, M.K. Shashidharan, S. Rajappa for the Respond-
ents.
The Judgment of the Court was delivered by
    VERMA, J. This petition under Article 32 of the  Consti-
tution	challenges  the constitutional	validity  of  clause
(10-C) inserted in section 10 of the Indian Income-tax	Act,
1961  (hereinafter referred to as 'the Act') by the  Finance
Act,  1987 with effect from 1.4.1987. Section 10 deals	with
incomes	 not  included in total income for  the	 purpose  of
taxation  under	 the  Act. The effect of  clause  (10-C)  so
inserted  in section 10 of the Act is that any	payment	 re-
ceived by an employee of a public sector company at the time
of  his voluntary retirement in accordance with	 any  scheme
which  the  Central  Government may, having  regard  to	 the
economic  viability of such company and other relevant	cir-
cumstances,  approve in this behalf, is not included in	 the
total  income  of such employee resulting in  grant  of	 tax
exemption  to  that extent to him. The	petitioners  contend
that the denial of this benefit to an employee of a  private
sector	company	 at  the time of  his  voluntary  retirement
amounts	 to an invidious distinction between  public  sector
employees  and	private sector employees in  the  matter  of
taxation  and is arbitrary and unintelligible  amounting  to
hostile discrimination.
    The initial submission on behalf of the petitioners	 was
that the aforesaid clause (10-C) of section 10 of the Act is
constitutionally  invalid for this reason.  However,  during
the course of arguments the
447
stand  of the petitioners was modified to contend  that	 the
provision must be so construed as to apply to all  employees
equally,  whether of the public or private sector, in  order
to uphold its validity. The question, therefore, is  whether
there  is any such hostile discrimination as alleged by	 the
petitioners and if so, is it possible to construe the provi-
sion in the manner suggested on behalf of the petitioners to
apply  it equally to all employees of the public as well  as
private sectors?
    The	 first petitioner is an employee of second  respond-
ent--Peico  Electronic	and Electricals Limited,  a  private
sector	company--and the second petitioner is  a  registered
trade  union  representing the employees of the	 second	 re-
spondent-company. Counsel for the second  respondent-company
sought	to  support the petitioners' case. Counsel  for	 the
first  respondent supporting the validity of  the  provision
indicated that employees of the public sector constituted  a
distinct class for the purpose of taxation so that there was
no discrimination between employees of the same class if the
real  object  of the provision is borne in  mind.  We  shall
refer  to  the	arguments of the two sides  in	some  detail
later.
 Chapter  III of the Indian Income Tax Act, 1961  relates
to  "incomes  which do not form part of the  total  income".
Section	 10 in Chapter III deals with "incomes not  included
in  total income". It provides that in computing  the  total
income of a previous year of any person, any income  falling
within any of the clauses therein shall not be included. The
several	 clauses  in section 10	 specify  different  incomes
which  would ordinarily be included in the total  income  of
the  assessee  for the purpose of taxation but	for  such  a
provision. Clause (10-C) of Section 10 is as under:
"(10-C):--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 Central Government may,
having regard to the economic viability of such company	 and
other relevant circumstances, approve in this behalf."
    We	may now summarise the arguments advanced before	 us.
Shri  Shetye  for the petitioners first contended  that	 the
reason given for enacting clause (10-C) as indicated in	 the
memorandum  explaining provisions of the Finance Bill,	1987
is  that the tax benefit is given as a welfare	measure.  He
argued, if so, all employees whether of private or of public
sector are in the same class and are entitled equally to the
448
benefit of a welfare measure for employees. His next conten-
tion is that, if that be the only stated basis of the  clas-
sification, it has no rational nexus with the object of	 the
provision  and it violates Article 14 of  the  Constitution.
Learned	 counsel  for the petitioners  referred	 to  certain
other  clauses in section 10 of the Act which apply  equally
to  all	 employees  irrespective of the	 category  of  their
employer, to suggest that all such measures being for  bene-
fit of employees, no further classification of the employees
is  permissible	 with  reference to the	 category  of  their
employer. It was further urged that consequently the  exclu-
sion of non-public sector employees is not only	 discrimina-
tory but also arbitrary. On this basis it was contended that
instead	 of  striking down the provision  as  invalid  which
while  denying	the benefit to the public  sector  employees
would  not  also serve any useful purpose  for	the  private
sector	employees,  the court should adopt  a  positive	 and
constructive  approach and the provision so construed as  to
extend	its  benefit to all employees  irrespective  of	 the
category of their employer to uphold its validity.
    Shri  Dewan for the second respondent, a private  sector
company,  supported learned counsel for the petitioners.  He
contended that if there be any such discrimination then	 the
question  to  ask  is: whether the  Parliament	intended  to
confine the benefit of this welfare measure only to  employ-
ees  of the public sector? He further contended that  it  is
possible to read the provision in such a manner as to extend
its benefit to all employees instead of confining it only to
the public sector employees.
    In	reply,	Dr. Gauri Shankar for the  first  respondent
contended  that the employees of public sector constitute  a
distinct class for this purpose in view of the fact that the
public	sector	undertakings have a distinct  character	 and
role  in  the national economy. He argued that to  make	 the
public	sector	undertakings economically  more	 viable	 and
thereby	 contribute  more to the national  economy,  it	 has
become necessary to streamline and trim the higher  echelons
by inducing the unwanted personnel to leave voluntarily with
a  "golden hand-shake" instead of resorting to	retrenchment
which  involves	 several complication  including  protracted
litigation  which is not conducive to the wellbeing  of	 the
public sector undertakings. He argued that this problem does
not  exist in the private sector where the higher  employees
can leave or be asked to leave, without corresponding diffi-
culties, experienced in the public sector. This provision is
meant essentially for employees at the higher levels in	 the
public	sector undertakings whose economic status cannot  be
equated with their counterpart in the
449
private	 sector.  For this reason equating the two  sets  of
employees  for the tax benefit was urged to be	unjustified,
there  being an intelligible differentia between  them.	 Dr.
Gauri  Shankar	also contended that the real object  of	 the
enactment  was to streamline the public sector	by  reducing
overstaffing  at  the higher level and	the  consequent	 tax
exemption to the retiring employee was merely the effect  or
fall-out  of  the real object. The provision  was  meant  to
induce	the unwanted personnel to seek voluntary  retirement
and  thereby  promote the real object  of  streamlining	 the
ailing	public sector. To support his argument, he  produced
material  indicating the historical background	and  factual
matrix including material to show the great disparity in the
emoluments  and perquisites, i.e., compensation	 package  of
the private sector and the public sector employees  particu-
larly at the higher levels.
    The	 main  question for decision is	 the  discrimination
alleged by the petitioners. The principles of valid  classi-
fication  are long settled by a catena of decisions of	this
Court but their application to a given case is quite often a
vexed  question. The problem is more vexed in cases  falling
within the grey zone. The principles are that those  grouped
together  in one class must possess a common  characteristic
which distinguishes them from those excluded from the group;
and  this  characteristic or intelligible  differentia	must
have a rational nexus with the object sought to be  achieved
by  the enactment. It is sufficient to cite the decision  in
[1979]	2 SCR 476--In Re The Special Courts Bill,  1978--and
to  refer to the propositions quoted at p. 534-537  therein.
Some of the propositions are stated thus:
"2.  The State, in the exercise of its	governmental  power,
has  of	 necessity  to make laws  operating  differently  on
different groups or classes of persons within its  territory
to attain particular ends in giving effect to its  policies,
and it must possess for that purpose large powers of distin-
guishing  and classifying persons or things to be  subjected
to such laws.
3.  The Constitutional command to the State to afford  equal
protection  of	its laws sets a goal not attainable  by	 the
invention  and application of a precise formula.  Therefore,
classification need not be constituted by an exact or scien-
tific  exclusion  or  inclusion of persons  or	things.	 The
Courts	should	not insist on delusive	exactness  or  apply
doctrinaire tests for determining the validity of  classifi-
cation in any given case. Classification is justified if  it
is not palpably arbitrary.
450
4.  The principle underlying the guarantee of Article 14  is
not  that the same rules of law should be applicable to	 all
persons	 within the Indian territory or that the same  reme-
dies  should be made available to them irrespective of	dif-
ferences  of circumstances. It only means that	all  persons
similarly  circumstanced  shall	 be treated  alike  both  in
privileges  conferred  and liabilities imposed.	 Equal	laws
would  have to be applied to all in the same situation,	 and
there  should  be no discrimination between one	 person	 and
another if as regards the subject-matter of the	 legislation
their position is substantially the same.
6.  The law can make and set apart the classes according  to
the needs and exigencies of the society and as suggested  by
experience.  It can recognise even degree of evil,  but	 the
classification	should	never be  arbitrary,  artificial  or
evasive.
7.  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,	 (1) that the classification must be rounded 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.
8. 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  person
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  legisla-
tion,  provided such classification is not arbitrary in	 the
sense above mentioned.
451
11.  Classification  necessarily  implied the  making  of  a
distinction or discrimination between persons classified and
those  who are not members of that class. It is the  essence
of a classification that upon the class are cast duties	 and
burdens	 different from those resting upon the general	pub-
lic.  Indeed,  the very idea of classification	is  that  of
inequality,  so	 that it goes without saying that  the	mere
fact  of  inequality ,n no manner determines the  matter  of
constitutionality."
(emphasis supplied)
    It is well-settled that the latitude for  classification
in  a  taxing statute is much greater; and in order  to	 tax
something it is not necessary to tax everything. These basic
postulates  have to be borne in mind while  determining	 the
constitutional validity of a taxing provision challenged  on
the ground of discrimination.
 The	 scope	for permissible classification in  a  taxing
statute	 was once again considered in a recent decision.  of
this  Court in P.H. Ashwathanarayana v. State of  Karnataka,
[1989]	Suppl.	1 SCC 696. After a review of  earlier  deci-
sions, it was stated therein as under:
"It is for the State to decide what economic and socialpoli-
cy  it should pursue and what discriminations advance  those
social	and economic policies. In view of the inherent	com-
plexity	 of these fiscal adjustments, courts give  a  larger
discretion  to the legislature in the matter of its  prefer-
ences  of  economic and social policies and  effectuate	 the
chosen system in all possible and reasonable ways .....	 "
    In	Federation  of Hotel and Restaurant  Association  of
India  v. Union of India, [1989] 178 ITR 97, it was said  as
under:
"...  The test could only be one of  palpable  arbitrariness
applied	 in the context of the felt needs of the  times	 and
societal exigencies informed by experience."
"... A reasonable classification is. one which includes	 all
who are similarly situated and none who are not. In order to
ascertain  whether  persons are similarly placed,  one	must
look  beyond the classification and to the purposes  of	 the
law."
452
    This  Court	 has  held in Kerala  Hotel  and  Restaurant
Association & Ors. v. State of Kerala & Ors., A.I.R. 1990 SC
913 as under:
"The  scope  for  classification permitted  in	taxation  is
greater and unless the classification made can be termed  to
be  palpably arbitrary, it must be left to  the	 legislative
wisdom	to choose the yardstick for classification,  in	 the
background  of	the fiscal policy of the  State	 to  promote
economic equality as well  .....  ' '
"Thus,	it  is clear that the test applicable  for  striking
down  a taxing provision on this ground is one	of  palpable
arbitrariness  applied in the context of the felt  needs  of
the  times and societal exigencies informed  by	 experience,
and  the  courts should not interfere with  the	 legislative
wisdom	of making the classification unless the	 classifica-
tion is found to be invalid by this test."
    It is useful to refer also to the decision of this Court
in  1.	T.O. v. N. Takin Roy Rymbai, [1976]  103  I.T.R.  82
(S.C.)--wherein	 a similar question relating to validity  of
classification	in another clause of section 10 of  the	 In-
come-Tax Act, 1961 arose for consideration. This Court while
upholding the validity of the classification summarised	 the
principles applied, as under:
"....  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, incomes	 and
objects	 which it would tax, and which it would not tax.  So
long as the classification made within this wide and  flexi-
ble range by a taxing statute does not transgress the funda-
mental principles underlying the doctrine of equality, it is
not  vulnerable on the ground of discrimination	 merely	 be-
cause  it taxes or exempts from tax some incomes or  objects
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
453
would be a violation of Article 14. (see East India  Tobacco
Co.  v. Andhra Pradesh; Vivian Joseph Ferriera v.  Municipal
Corporation of Greater Bombay; Jaipur Hosiery Mills v. State
of Rajasthan)"
    We must, therefore, look beyond the ostensible.  classi-
fication and to the purpose of the law and apply the test of
'palpable arbitrariness' in the context of the felt needs of
the times and societal exigencies informed by experience  to
determine reasonableness of the classification. It is  clear
that  the role of public sector in the sphere  of  promoting
the  national economy and the context of felt needs  of	 the
times and societal exigencies informed by experience  gained
from its functioning till the enactment are of significance.
There is no dispute that the impugned provision includes all
employees  of the public sector and none not in	 the  public
sector. The question is whether those left out are similarly
situated  for  the purpose of the enactment  to	 render	 the
classification	palpably arbitrary. It is only if this	test
of  palpable arbitrariness applied in this manner is  satis-
fied,  that the provision can be faulted  as  discriminatory
but  not otherwise. Unless such a defect can be	 found,	 the
further	 question  of  construing the provision	 in  such  a
manner as to include all employees and not merely  employees
of public sector companies, does not arise.
    It	is  first necessary to discern the true	 purpose  or
existence of a rational nexus of the differntia on which the
classification	is  based,  with the  object  sought  to  be
validity of the classification. In Francis Bennion's  Statu-
tory  Interpretation, 1984 edition, the distinction  between
the  legislative intention and the purpose or object of	 the
legislation  has  been succinctly summarised at	 p.  237  as
under:
"The distinction between the purpose or object of an  enact-
ment and the legislative intention governing it is that	 the
former	relates	 to the mischief to which the  enactment  is
directed  and  its remedy, while the latter relates  to	 the
legal meaning of the enactment."
    There is thus a clear distinction between the two. 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
454
of the remedy as enacted. 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.	 The
question  next	is  of the manner in which  the	 purpose  or
object of the enactment has to be determined and the materi-
al which can be used for this exercise.
    For	 determining the purpose or object of  the  legisla-
tion,  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. For the  limited
purpose	 of appreciating the background and  the  antecedent
to  look  into the Statement of Objects and Reasons  of	 the
then  existing	malady. In A. Thangal  Kunju  Musaliar	v.M.
Venkitachalam Potti & Anr., [1955] 2 S.C.R. 1196, the State-
ment of Objects and Reasons was used for judging the reason-
ableness of a classification made in an enactment to see  if
it  infringed or was contrary to the constitution.  In	that
decision  for  determining the question, even  affidavit  on
behalf of the State of "the circumstances which prevailed at
the  time  when the law there under consideration  had	been
passed	and which necessitated the passing of that law"	 was
relied	on.  It was reiterated in State of  West  Bengal  v.
Union of India, [1964] 1 S.C.R. 37 1- that the Statement  of
Objects and Reasons accompanying a Bill, when introduced  in
Parliament,  can be used for 'the limited purpose of  under-
standing the background and the antecedent state of  affairs
leading	 up  to	 the legislation.' Similarly,	in  Pannalal
Binjraj	 v. Union of India, [1957] SCR 233--a  challenge  to
the validity of classification was repelled placing reliance
on  an	affidavit filed on behalf of the  Central  Board  of
Revenue disclosing the true object of enacting the  impugned
provision in the Income-Tax Act.
    Not	 only this, to sustain the presumption of  constitu-
tionality,  consideration  may	be had even  to	 matters  of
common	knowledge; the history of the times; and every	con-
ceivable state of facts existing at the time of	 legislation
which  can be assumed. Even though for the purpose  of	con-
struing	 the  meaning of the enacted provision,	 it  is	 not
permissible to use these aids, yet it is permissible to look
into the historical facts and surrounding circumstances	 for
ascertaining the evil sought to be remedied. The distinction
legislative intention, indicated earlier, is significant  in
this exercise to emphasise the availability of larger  mate-
rial to the Court for reliance when determining the  purpose
or  object  of	the legislation as  distinguished  from	 the
meaning of the enacted provision.
455
    We	propose to utilise these permissible aids  for	dis-
cerning	 the purpose or object of the legislative  provision
in order to examine the validity of the classification	made
therein.
    Strong  reliance has been placed on behalf of the  peti-
tioners	 on the Memorandum explaining the provisions in	 the
Finance Bill, 1987, wherein the explanatory note relating to
clause 4(a) of the Bill proposing insertion of clause (10-C)
in Section 10 of the Income-tax Act, 1961 appears under	 the
heading	 'Welfare Measures'. It may be mentioned  that	this
heading is only in the explanatory memorandum and not in the
'Notes on Clauses' appended to the 'Statement of Objects and
Reasons' of the Bill. (See [1987] 165 ITR (Statutes) at	 pp.
119, 122 & 155). We would presently show that the  petition-
ers cannot draw support from this heading in the explanatory
memorandum.  Moreover, an explanatory memorandum is  usually
'not  an  accurate  guide of the final	Act'.  (See  Francis
Bennion's Statutory Interpretation, 1984 Ed. at p. 529).
    It was urged that the impugned provision being described
as  a  welfare measure in the  explanatory  memorandum,	 the
object	of  the enactment was the welfare of  the  employees
and,  therefore, no further classification of the  employees
could  be  made.  It was argued that  the  heading  'welfare
measures'  is,	therefore,  decisive of the  object  of	 its
enactment.  In	our opinion, this cannot  be  accepted.	 The
Statement of Objects and Reasons (See (1987) 165 ITR  (Stat-
utes) at p. 119) is as under:
"The  object of the Bill is to give effect to the  financial
proposals  of the Central Government for the financial	year
1987-88. The Notes on Clauses explain the various provisions
contained in the Bill."
Thereafter,  the Notes on clauses in the Finance Bill,	1987
are from pp. 119-151. The Note relating to this clause at p.
122 is as under:
"Clause 4 seeks to amend section 10 of the Income-Tax Act.
Sub-Clause  (a)	 of  this clause proposes to  insert  a	 new
clause (10-C) in this section. Under the proposed amendment,
any  payment  received	by an employee of  a  public  sector
company	 at the time of his voluntary retirement in  accord-
ance with any scheme which the Central Govern-
456
ment  may, having regard to. the economic viability  of	 the
public	sector	company and  other  relevant  circumstances,
approve in this behalf, shall be exempt from tax.
This  amendment will take effect from 1st April,  1987,	 and
will,  accordingly apply in relation to the assessment	year
1987-88 and subsequent years."
No where in the 'Notes on Clauses' the proposal in the	Bill
is  described as a welfare measure. It is then in the  memo-
randum	explaining the provisions in the Finance Bill,	1987
that  the provisions are divided under different heads,	 one
of  which is 'welfare measures'. The subheading relating  to
this  proposal	is mentioned as 'Exemption  of	compensation
received  by  public sector employees on  voluntary  retire-
ment'.	It is mentioned in paragraph 13 of  the	 explanatory
memorandum that a number of public sector undertakings	have
formulated voluntary retirement schemes for their employees;
that  under section 10(10-B) of the Income-Tax Act any	com-
pensation received by a workman at the time of his retrench-
ment is exempt upto the specified limit; and that this limit
of  exemption under section 10 (10-B) is, however,  not	 ap-
plicable  in respect of compensation received under  certain
schemes	 approved  by the Central  Government.	By  enacting
section 10 (10-C), the proposal obviously was to extend	 the
same  benefit  to  the payment	made  under  these  approved
schemes	 as  was existing for  compensation  under  approved
scheme	given by section 10 (lOB). The heading	of  'welfare
measures'  applies  also to paragraph 14 in  the  memorandum
relating to modification of provisions relating to deduction
in respect of donations to certain funds etc. It is,  there-
fore, clear that in this explanatory memorandum the headings
are fairly wide and matters collected under the same heading
may be diverse not giving a true indication of the object of
the provision.
    It	is also significant that the proposal to amend	sec-
tion  10 by inserting a new clause (10-C) therein  was	con-
tained	in sub-clause (a) of clause 4 of the  Finance  Bill,
while  sub-clause (b) of clause 4 of the Finance  Bill	pro-
posed to insert a new item in sub-clause (iv) of clause (15)
of section 10 to provide that interest payable by the public
sector	companies on certain specified bonds and  debentures
will  not form part of the tax-payer's total income  subject
to  the	 specified conditions. This was in  pursuance  of  a
series	of public sector bonds being floated which  are	 in-
tended	to  yield  tax-free return to the  holders  of	such
bonds. The effect of the amendment so made yielding tax-free
return	to the holders of public sector bonds is similar  to
the amendment by
457
insertion of a new clause (10-C), the effect of which is  to
grant  tax  exemption to employees of the public  sector  in
respect	 of the amount received under the voluntary  retire-
ment  scheme approved by the Central Government. Both  these
proposals  relating to the amendment of section 10  were  in
sub-clauses  (a)  and (b) of clause 4 of the  Finance  Bill.
Ordinarily  in the memorandum explaining the  provisions  in
the  Finance  Bill both the sub-clauses of clause  4  should
have been, therefore, mentioned under the same heading being
of  essentially the same nature. It is interesting  to	note
that the proposal in clause 4(b) was mentioned in  paragraph
17  of the explanatory memorandum under the heading  'Incen-
tives  for  growth and modernisation' with  the	 sub-heading
'Measures  for	raising resources for  the  public  sector'.
Admittedly, the effect of this provision was to grant a	 tax
benefit to the holders of the public sector bonds by  amend-
ing section 10 in this manner but the real object for giving
that  benefit to the tax-payer was to provide  an  incentive
for  growth  and  modernisation by adopting  a	measure	 for
raising the resources for the public sector. If the proposal
in sub-clause  of clause 4 of the Finance Bill fell in	this
category, there is no reason why the proposal in  sub-clause
(a) of the same clause of the Bill, both sub-clauses  relat-
ing  to amendment of section 10, can be treated	 differently
merely	because in the explanatory memorandum the  two	sub-
clauses	 are under different headings. This distribution  of
the sub-clauses of the same clause in the Finance Bill under
different heads in the explanatory memorandum is  sufficient
to  show that no particular significance can be attached  to
the  heading 'welfare measures under which the	proposal  to
insert clause (10-C) in section 10 of the Act was placed  in
that  memorandum. We see no reason why insertion  of  clause
(10-C)	in section10 cannot also be described  as  incentive
for growth and modernisation being a measure for improvement
of the public sector. 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 public sector  by  streamlining	 its
staff.
    A  catch-phrase possibly used as a populist	 measure  to
describe some provisions in the Finance Bill in the explana-
tory memorandum while introducing the Bill in the Parliament
can  neither be determinative of, nor can it camouflage	 the
true object of the legislation. It is not unlikely that	 the
phrase 'welfare measures' was used to emphasise more on	 the
effect	of  the provisions thereunder on the  tax-payer	 for
populism.
In  view  of  the fact that the challenge is  based  on	 the
initial
458
assumption  of equality between all employees of the  public
sector and the private sector, it will be useful to refer to
the  nature  and  role of  the	public	sector	undertakings
vis-a-vis those of the private sector along with the histor-
ical  background  and surrounding circumstances	 leading  to
enactment  of the impugned provision. For this	purpose,  we
would  first  refer to the counter-affidavit  of  Shri	S.K.
Abrol,	Officer-onSpecial-Duty,	 Central  Board	 of   Direct
Taxes,	Department  of	Revenue, Ministry  of  Finance,	 New
Delhi,	which  states the reasons for  insertion  of  clause
(10-C) in section 10 of the Income-Tax Act, 1961. The  coun-
ter-affidavit states with reference to some other clauses of
section	 10 of the Act that the legislature for purposes  of
exemption from income-tax has always differentiated  between
private sector employees and those in the public sector	 and
Government employment. It states further as follows:
"As submitted in the paragraph above, sectionl 10 (10-C) was
introduced by the Finance Act, 1987 w.e.f. 1.4.1987 and	 the
legislature in its wisdom sought to restrict these  benefits
to  only the employees in the public sector. The reason	 for
introducing  this provision is contained in the Circular  of
the  Central  Board of Direct Taxes explaining	the  Finance
Act, 1987, relevant extract from which is reproduced hereun-
der:
	  15.1.	 At present under section 10 (10B) any	com-
pensation  received by a workmen at the time of his  retire-
ment  is exempted upto the amount calculated  in  accordance
with   section	25F  of	 the  Industrial  Disputes  Act	  or
Rs.50,000,  whichever  is less. The limit is,  however,	 not
applicable in respect of compensation received under certain
schemes approved by the Central Government.
	  15.2	A number of public sector  undertakings.have
formulated voluntary retirement schemes for their employees.
With a view to extend relief to such employees, the  Finance
Act,  1987, by introducing new clause (10C) in	section	 10,
provides  exemption  in respect of any payment	received  by
them at the time of their voluntary retirement in accordance
with  any scheme which the Central Government  may  approve,
having regard to the economic viability of the public sector
company	 and  other relevant circumstances.  This  exemption
will  be available to any employee whether a workman  or  an
executive.
459
    15.3.  This	 amendment  shall  come	 into  force  w.e,f.
1.4.1987  and  will, accordingly, apply to  assessment	year
1987-88 and subsequent year.'
"It  is submitted that for all purposes, the private  sector
and the public sector have been treated differently and	 are
known to be different classes. The Industrial Policy Resolu-
tion,  1956, which reviewed the earlier	 Industrial  Policy,
clearly	 distinguished industries in the public	 sector	 and
those  in the private sector. The Industrial Policy  Resolu-
tion  mentioned	 that for adoption of socialist	 pattern  of
society as the national objective, the requirement was	that
industries  of	basic and strategic importance,	 or  in	 the
nature	of public utility service, should be in	 the  public
sector.	 The Industrial Policy Resolution placed the  indus-
tries  in  three different categories;	 .....	 Thus,	this
categorisation	of  industries into public  sector,  private
sector was on the basis of Articles 38 and 39 of the Consti-
tution	of  India, as has been mentioned in  the  Industrial
Policy Resolution, 1956."
    "The  respondent submits that there were  certain  basic
distinctions between the undertakings in the private  sector
and in the public sector as has been observed by this  Hon'-
ble  Court in the case of R.D. Shetry v. International	Air-
port Authority of India, [1979] 3 SCR 1014. A public  sector
undertaking  is either established by a statute or  incorpo-
rated  under  law.  Public Sector  Undertakings	 are  wholly
controlled by Government not only in their policy making but
also in carrying out the functions entrusted to them by	 law
establishing  it or by charter of their in  corporation.  As
such public sector undertakings are bound by any  directions
that  may be issued by Government from time to time  in	 re-
spect  of  policy matters. The entire share capital  of	 the
public sector undertakings is held by the Government and  it
is  under the direct control and supervision of	 Government.
The  pay  scales of the employees in the public	 sector	 are
fixed by the administrative Ministry inconsultation with the
Bureau of Public Enterprises, who exercise complete  control
over  the actions of public sector undertakings. The  public
sector undertakings are answerable to the Parliament through
their  administrative Ministries. The entire budget  of	 the
public sector undertakings is controlled by the
460
administrative	Ministries.  The  Comptroller  and   Auditor
General	 audits the accounts of the public sector  undertak-
ings  and  any leakages etc. are brought to  the  notice  of
Parliament. The recruitment and conduct rules of the  public
sector	employees are subject to overall control of  Govern-
ment through Bureau of Public Enterprises  .....  "
	  "   .....  Section 10 (10C), while  extending	 the
benefit	 to  employees of public sector has, as	 its  basis,
exempted  incomes  received from Government  through  public
sector undertakings. The distinction is based on intelligent
differentiation and the object of this differentiation is to
promote	 the  interests of the employees  of  public  sector
undertakings  so  as to bring this at par with	the  private
sector	employees whose emoluments and other  conditions  of
service are not governed by any statute or are not under any
control."
"The respondent submits that the legislature is aware of the
differentiation	 between the public sector undertakings	 and
private	 sector undertakings. and in its wisdom. has  chosen
to   restrict  the  benefit  only  to  the   public   sector
employees  .....  "
"The respondent submits that the extension of the benefit of
section	 10 (10C) of the Income Tax Act to the employees  of
the  private sector is likely to be misused by way  of	fre-
quent  payment	to the employees in the	 garb  of  voluntary
retirement  benefits and it will not be possible to  provide
necessary  safeguards in law to check such  practices.	This
would  defeat  the very purpose of the Scheme  of  Voluntary
Retirement, besides leading to large scale revenue loss."
    The counter-affidavit filed on behalf of respondent	 No.
1  disclosing  the  reasons which led to  the  insertion  of
clause (10C) in section 10 of the Act confining the  benefit
granted	 thereby  only	to employees of	 the  public  sector
indicates  that	 the  purposes of  the	legislation  include
that  in the public sector. It is evident from the  material
produced  before  us that the compensation  package  in	 the
public
461
sector,	 particularly  at the higher levels, is	 much  lower
than that in the private sector.
    Some  insight  into	 the existing state  of	 the  public
sector undertakings and their viability with suggestions for
improvement  are  found in the First Dr. L.K.  Jha  Memorial
Lecture,  delivered on the 6th December, 1988, by Shri	R.N.
Malhotra,  Governor, Reserve Bank of India, on	"Growth	 and
Current Fiscal Challenges". While giving an overview of	 the
progress during the last four decades, the speaker  referred
to the 'performance of the public sector' as under:
"The  public  sector which now accounts for about  half	 the
total national investment has made crucial contributions  to
the development of the economy by expanding the	 infrastruc-
ture, establishing basic industries and producing goods	 and
services  of  strategic importance. The public	sector	has,
however,  not been able to generate  surpluses	commensurate
with its share in plan outlays."
    On	"planning and resources"  and  "financing of  public
sector", he said:
"An analysis of the financing pattern of public sector	plan
expenditures indicates that over time the shares of  balance
from  current revenues and additional resource	mobilisation
have  been  declining while reliance on borrowed  funds	 has
been rising  .....  "
    Therefore,	he  referred  to the  deterioration  in	 the
finances  with	reference  to the  growing  expenditure,  as
under:
"  .....  Interestingly, about two thirds of the savings  of
these  enterprises  represent  provisions  for	depreciation
which are supposed to cover replacement costs, Though sever-
al  of	these  enterprises are	operating  efficiently,	 The
savings	 of  public sector enterprises as a  group  are	 not
commensurate with the investment made in them. According  to
the  public enterprises survey, the capital employed in	 the
Central	  Public  Sector  Enterprises  amounted	  to   about
Rs.52,000  crores at the end of 1986-87. About 100 of  these
units  made  losses amounting to Rs. 1,708  crores  and	 109
units  were  making after tax profit of Rs.3,478  crores  of
which Rs.2,142 crores came from the oil sector. The rate of
462
return	was 6.0 per cent before tax and 3.4 per	 cent  after
tax.  If  the oil sector which benefits from the  oil  price
policy	 is   excluded,	 the  rate  of	 return	  would	  be
negative   .....  There is imperative need  for	 substantial
improvement  in	 the  working and  profitability  of  public
sector undertakings."
Referring to the existing state of "public debt", he said:
"The Long Term Fiscal Policy (LTFP) had raised concern about
increasing  reliance on borrowings to finance the  budgetary
outlays and had suggested containment of domestic borrowings
including those from the Reserve Bank  .....  In the  event,
the  level  of	borrowings has been much  higher  than	that
envisaged  in the Seventh Plan	.....This has  happened	 de-
spite  the fact that some public sector enterprises,  previ-
ously  dependent  on the budget, were allowed to  raise	 re-
sources directly from the capital market through bond float-
ations of the order of Rs.2,000 crores each year from  1986-
87  .....
	 Growing  levels of borrowing by the Government	 and
public sector undertakings raise two major concerns.  First,
whether	 the present level of Government borrowing  is	sus-
tainable? Unless there are adequate surpluses in the revenue
account which can be utilised for debt servicing, the budge-
tary deficit would widen. The increased borrowings for	debt
servicing  would create the vicious circle of  progressively
higher	interest  burdens and still  higher  borrowing.	 The
second	issue is whether the increasing level of  Government
borrowing  coupled with that of public	sector	undertakings
would result in crowding out of private sector	investments.
Since  the total investment in the economy is  shared  about
equally between the public and private sectors, it is impor-
tant to ensure that the 'requirements of the private  sector
are  also adequately met so that the overall growth  targets
of the national economy are achieved. ' '
Dealing with the efficiency issues, he said as under:
"I  shall  now refer briefly to the efficiency	issues	with
special reference to the public sector	.....  The  persist-
ence  of a  high ICOR would, however, indicate	considerable
scope of improvement in efficiency  .....
463
	 Cost  and time over-runs are major contributors  to
the  high ICOR	..........  The public sector  has  rendered
great  service in providing infrastructure and	establishing
basic  and strategic industries. Managerial skills  in	that
sector are generally of a high order. The aim should  there-
fore  be to promote productivity and profitability  of	this
sector	by  introducing	 the requisite	policy	changes	 and
improvements. One of the important aims of this sector which
needs reiteration is its financial viability. Efficient	 use
of  manpower is imperative. This is difficulty to ensure  if
overmanning persists along with restrictive practices  which
resist	technological change and systems improvement   .....
"
    The	 factual matrix and historical background  appearing
from  the above material prove that the public sector  needs
toning	up. One of its affliction is overmanning or  surplus
staff,	the  obvious  remedy of which  is  streamlining,  by
removing  the  non-productive  and  unwanted  personnel,  if
possible, without any complication. Retrenchment is often an
unsafe	course	to  adopt.since it may	lead  to  protracted
litigation  and uncertain outcome. We cannot  overlook	this
well known, though unfortunate fact.
    A  safe mode to relieve the public sector of its  unpro-
ductive	 and surplus manpower is to induce those persons  to
seek  voluntary	 retirement under a  scheme  providing	some
incentive  or inducement for seeking  voluntary	 retirement.
Clause	(10-B)	of section 10 of Incometax Act,	 1961,	does
grant tax exemption in respect of any compensation  received
at the time of retrenchment upto the prescribed limit.	That
limit,	however,  does not apply  to  compensation  received
under certain schemes approved by the Central Government. It
is, therefore, reasonable that same benefit be also extended
in  respect  of any payment received by an employee  of	 the
public	sector	on his voluntary retirement under  a  scheme
similarly approved by the Central Government.
    The public sector's role visualised on advent of freedom
was as an 'instrument of development and national strength',
a  'key to our self-reliance', 'catalyst of  social  change'
and  for  attaining 'commanding heights of the	economy'  in
keeping with our national aim of Welfare State and a social-
ist economy. Unfortunately, inspite of a
464
strong rationale for setting up and promoting public  sector
in  the national economy, it has not so far fully  justified
the legitimate expectation and a large number of the  public
sector	undertakings are losing concerns. A study  into	 the
causes which all the public sector has shown that one of its
drawbacks is overstaffing. Streamlining the public sector to
get  rid  of  its unproductive and  unwanted  personnel	 is,
therefore,  a  felt  need. A scheme  whereby  such  unwanted
personnel can be induced to leave voluntarily granting	some
incentive for doing so is, therefore, ultimately  beneficial
to the health and prosperity of the public sector and conse-
quently	 to  the national-economy. These factors  alone	 are
sufficient  to provide an intelligible	differentia  between
public	and private sectors and its rational nexus with	 the
object	of improving the performance of public sector,	pro-
moting national economy.
    It	is useful to remember that the country having  opted
for  mixed economy, the healthy and vigorous functioning  of
the  public sector undertakings is conducive to the  benefit
of the private sector as well, in addition to promoting	 the
well-being of the national economy. A point of view emerging
currently  is  that just as public sector  undertakings	 are
outside the purview of the Monopolies and Restrictive  Trade
Practices Act by virtue of the exemption conferred on  them,
the  Income-tax	 Act should confer similar exemption  to  it
from  tax liability by suitable amendment in section  10  of
the  Act as is given to local authorities,  housing  boards,
etc. This view is supported on the ground that the exemption
from  tax  liability  or public	 sector	 undertakings  would
ultimately  benefit  the consumers of the  products  of	 the
public	sector undertakings. This is not an irrelevant	cir-
cumstances to indicate that according to the general percep-
tion, there is a distinction between the public and  private
sectors. In some earlier decisions of this Court, the public
sector has been treated as a distinct class for the  purpose
of exemption under Statutes.
 In	Hindustan  Paper Corporation Ltd. v.  Government  of
Kerala & Ors., [1986] 3 SCC 398, a provision granting exemp-
tion to Government companies and cooperative societies alone
for selling forest produce at less than selling price  fixed
under the Kerala Forest Produce (Fixation of Selling  Price)
Act,  1978  was held to be constitutionally  valid  and	 not
violative of Articles 14 and 19(1)(g) of the Constitution of
India.	It  was held that the Government  or  public  sector
undertakings  formed a distinct class. In this	context,  it
was held as under:
"   .....  As far as Government undertakings  and  companies
are concerned, it has to be held that they form a class by
465
themselves since any profit that they may make would in	 the
end result in the benefit to the members of the	 generalpub-
lic. The profit, if any, enriches the public coffer and	 not
the  private  coffer. The role of industries in	 the  public
sector is very sensitive and critical from the point of view
of national economy. Their survival very often depends	upon
the  budgetary.	 provision and not  upon  private  resources
which  are  available  to  the	industries  in	the  private
sector	.....  "
Similarly,  in	M. Jhangir Bhatusha etc. etc.  v.  Union  of
India  &  Ors. etc. etc., 1982 Judgments Today 2 SC  465,  a
concession  in	import	duty granted to	 the  State  Trading
Corporation was upheld on the ground that public policy	 can
support the differentiation.
    It	is  clear that the Government or the  public  sector
undertakings have been treated as a distinct class  separate
from  those  in	 the private sector and the  fact  that	 the
profit earned in the former is for public benefit instead of
private	 benefit, provides an intelligible differentia	from
the  social point of view which is of prime  importance	 for
the  national  economy. Thus, there exists  an	intelligible
differentia between the two categories which has a  rational
nexus with the main object of promoting the national econom-
ic policy or the public policy. This element also appears in
the impugned enactment itself wherein 'economic viability of
such company' is specified as the most relevant circumstance
of  grant of approval of the scheme by the  Central  Govern-
ment.  This intrinsic element in the provision	itself	sup-
ports  the view that the main object thereof is	 to  promote
and  improve the health of the public sector companies	even
though its effect is a benefit to its employees.
    As already indicated, clause (10-C) of section 10 of the
Act  itself mentions economic viability of a  public  sector
company	 as  the most relevant circumstance to	attract	 the
provision.  The	 economic status of employees  of  a  public
sector company who get the benefit of the provision is	also
lower  as compared to their counterpart in the private	sec-
tor. If this be the correct perspective as we think it is in
the  present case, the very foundation of the  challenge  to
the impugned provision on the basis of economic equality  of
employees in both sectors is non-existent. Once the stage is
reached where the differentiation is rightly made between  a
public sector company and a private sector company and	that
too  essentially on the ground of economic viability of	 the
public sector company and other relevant circumstances, the
466
argument  based on equality does not survive. This is  inde-
pendent	 of  the disparity in the  compensation	 package  of
employees  in the private sector and the public sector.	 The
argument  of  discrimination is based  on  initial  equality
between	 the  two classes  alleging  bifurcation  thereafter
between	 those	who stood integrated earlier as	 one  class.
This basic assumption being fallacious, the question of	 any
hostile discrimination by granting the benefit only to a few
in  the same class denying the same to those left  out	does
not arise.
    We	shall now refer to some other clauses of section  10
of  the	 Act to which reference was made at the	 hearing  in
support	 of the rival contentions. Sub-clause (i) of  clause
(10)  of section 10 confines the benefit thereunder only  to
the Government servants, defence personnel and employees  of
a local authority. Sub-clause (i) of clause (10-A) similarly
confines the benefit to Government servants, defence person-
nel  and  employees of a local authority  or  a	 corporation
established  by a statute. Clause (10-A) also makes  a	dis-
tinction between the Government employees and other  employ-
ees. Clause (10-B) also removes the limit in respect of	 any
payment as retrenchment compensation under a scheme approved
by the Central Government. Some other clauses in section  10
of  the Act further show that the scheme of section 10	con-
templates  a  distinction  between employees  based  on	 the
category  of  their  employer.	Accordingly,  clause  (10-C)
therein	 is not a departure from the existing scheme but  in
conformity with some clauses earlier enacted therein.
    Once  the  impugned	 provision contained  in  the  newly
inserted clause (10-C) of section 10 of the Income-Tax	Act,
1961 is viewed in the above perspective keeping in mind	 the
true object of the provision, there is no foundation for the
argument  that	it is either  discriminatory  or  arbitrary.
There  is a definite purpose for its enactment. One  of	 the
purposes is streamlining the public sector to cure it of one
of  its	 ailments  of overstaffing which  is  realised	from
experience  of	almost four decades of its  functioning.  In
view  of  the role attributed to the public  sector  in	 the
sphere	of national economy, improvement in the	 functioning
thereof	 must  be achieved in all possible ways.  A  measure
adopted	 to cure it of one of its ailments is undoubtedly  a
forward	 step  towards promoting the national  economy.	 The
provision is an incentive to the unwanted personnel to	seek
voluntary  retirement thereby enabling the public sector  to
achieve	 the  true object indicated. The  personnel  seeking
voluntary  retirement  no doubt get a tax benefit  but	then
that is an incentive for seeking voluntary retirement and at
any rate that is the effect of the provision or its fall-out
and not its true
467
object.	 It  is similar to the incentive given to  the	taX-
payers to invest in the public sector bonds by non-inclusion
of  the	 interest earned thereon in  the  tax-payer's  total
income	which  promotes the true object of raising  the	 re-
sources	 of the public sector for its growth and  modernisa-
tion.  The  real distinction between the true object  of  an
enactment  and the effect thereof, even though appearing  to
be  blurred at times, has to be borne in mind,	particularly
in a situation like this. With this perspective, 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 fall-out of the provision being available only to the
public	sector	employees cannot render	 the  classification
invalid or arbitrary. This classification cannot, therefore,
be faulted.
 Some of the cases cited by the petitioners in support of
the  contention of equality of employees in the	 public	 and
private	 sectors in the present context also are  inapplica-
ble.  The  decision  in Hindustan  Antibiotics	v.  Workmen,
[1967]	1  SCR 652 related to wage fixation and	 is  distin-
guishable. S.K.  Dutta,  I.T.O. v.  Lawrence  Singh  Ingty,
[1968] 68 ITR 272--was distinguished and explained in [1976]
103  ITR  82 relied on by us. Moreover, [1976]	103  ITR  82
which  also related to a provision in Section 10 of  Income-
tax Act, 1961 itself says as under:
"Classification	 for purposes of taxation or  for  exempting
from  tax  with	 reference to the source of  the  income  is
integral  to the fundamental scheme of the  Income-tax	Act.
Indeed,	 the entire warp and woof of the 1961 Act  has	been
woven on this pattern."
"   .....  Suffice it to say that classification of  sources
of  income is integral to the basic scheme of the 1961	Act.
It  is	nobody's case that the entire scheme of the  Act  is
irrational and violative of article 14 of the  Constitution.
Such an extravagent contention has not been canvassed before
us.  Thus,  the classification made by	the  aforesaid	sub-
clause	(a) for purposes of exemption is not unreal  or	 un-
known. It conforms to a well-recognised pattern. It is based
on intelligible differentia. The object of this differentia-
tion  between income accruing or received from a  source  in
the specified areas and the income accruing or received from
a  source  outside such areas, is to benefit  not  only	 the
members of the Scheduled Tribes residing in the specified
468
 areas but also to benefit economically such areas  .....  "
    The	 other submission of the petitioners is to read	 the
provision  in a manner which would cover all  employees	 in-
cluding employees of the private sector within the ambit  of
the impugned provision. This further question does not arise
in  view of our conclusion that there is  no  discrimination
made  out. We may, however, mention that the  Finance  Bill,
1987  while inserting a new clause (10-C) in section  10  of
the  Income-tax	 Act simultaneously inserted  a	 new  clause
(36-A)	in  section 2 of the Act with effect  from  1.4.1987
defining 'public sector company', which expression has	been
used  in the newly inserted clause (10-C) of section 10.  In
view of the simultaneous definition of 'public sector compa-
ny'  in the Act, there can be no occasion to  construe	this
company also within its ambit.
    Consequently, the writ petition is dismissed, but in the
facts and circumstances of the case, there shall be no order
as to costs.
       All the interim orders shall stand vacated.
T.N.A.						    Petition
dismissed.
469

Jamnaprasad Kanhaiyalal vs Commissioner Of Income-Tax, M.P., ... on 8 May, 1981
Equivalent 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
Author: A.P.  Sen
Bench: A.P.  Sen, R.S. Pathak, E.S.  Venkataramiah
JAMNAPRASAD KANHAIYALAL

	Vs.

COMMISSIONER OF INCOME-TAX, M.P., BHOPAL

DATE OF JUDGMENT08/05/1981

BENCH:
SEN, A.P. (J)
BENCH:

CITATION:
 1981 AIR 1759		  1981 SCR  (3) 849
 1981 SCC  (3) 441
 R	    1984 SC 989	 (1,2)
 F	    1984 SC1990	 (2)

ACT:
     Voluntary Disclosure  Scheme under	 section 24  of	 the
Finance (No.  2) Act,  1965, Scope and effect of-Whether the
acceptance of  a disclosure  statement made  by a  declarant
under section  24 of  the Finance Act, 1965 confers immunity
on another  person from tax liability in respect of the same
sum of	money-Whether section  24 has  an overriding  effect
over section  68 of  the Income	 Tax Act, 1961-Bar of double
taxation-Section 18  of the  Voluntary Disclosures of Income
and Wealth Act, 1976 (Act 8 of 1976).

HEADNOTE:
     During the	 course of the assessment proceedings of the
assessee-firm for  the assessment  year 1967-68,  the Income
Tax officer  noticed cash  credits of  Rs. 9,250 each in the
names of  five sons of the Managing Partner, in the books of
the assessee.  The  Income  Tax	 officer  found	 that  these
creditors, who	were minors,  had no  independent source  of
income. The  assessee contended before the ITO that the five
creditors  had	 voluntarily  disclosed	 the  credits  under
section 24  of the  Finance (No.  2) Act,  1965 and that the
disclosures were  accepted  by	the  Commissioner.  The	 ITO
rejected the  contention of  the assessee  and held that the
cash credits in question were unexplained cash credits, that
they represented the income of the assessee from undisclosed
source, and  accordingly made an addition of Rs. 46,250. The
appellate Assistant Commissioner held that the acceptance of
the voluntary disclosures under section 24(3) of the Act and
the payment  of tax  thereon precluded	the Department	from
disputing  the	 fact  that   the  income  belonged  to	 the
creditors, and,	 as the same income could not be taxed twice
once in the hands of the creditors and again in the hands of
the assessee,  set aside  the order of the ITO. The Tribunal
disagreed with	the  Appellate	Assistant  Commissioner	 and
upheld the  order of  the ITO.	Hence the  reference at	 the
instance of the assessee under section 257 of the Income Tax
Act, 1961 .
     Answering the reference against the assessee, the Court
^
     HELD: Per Sen, J.
     1. Section	 24 of	the Finance (No. 2) Act, 1965 cannot
be  construed  as  conferring  any  benefit,  concession  or
immunity on  any person	 other than  the person	 making	 the
declaration under  the provisions  of the Act. The scheme of
the Act	 makes it  abundantly clear  that it  was to protect
only  those  who  preferred  to	 disclose  the	income	they
themselves had	earned in The past and which they had failed
to disclose  at the  proper time.  The scheme only permitted
the bringing
850
forward of  income to  tax; it did not require investigation
of the claim of the declarant. The Act granted immunity only
to the declarant and not to other persons to whom the income
really belonged. [859 G-H, 860 A]
     2. The  legal fiction created by sub-s. (3) of s. 24 of
the Finance  (No. 2) Act, 1965 by virtue of which the amount
declared by  the declarant  had to  be charged to income-tax
"as if	such amount were the total income of the declarant",
was limited  in scope and it cannot be invoked in assessment
proceedings relating  to any  person other  than the  person
making the  declaration, and  did not  take away  the  power
vested in  the ITO  under section  68 of the Income Tax Act,
1961 to	 reject the'  explanation of  an assessee for a cash
credit	on   the  ground   that	 the   explanation  was	 not
satisfactory in the case of such other person. [861 F-G]
     3. The  finality under  sub-s. (8) of section 24 of the
Act was	 to the	 order of the Central Board of Revenue under
sub-s. (6)  thereof and not to the assessment of tax made on
the basis  of a	 declaration made by the creditors under the
scheme.	 There	 was,  therefore,   nothing  to	 prevent  an
investigation into  the true  nature and  source of the cash
credits. [861 B, D]
     4. The  acceptance of  voluntary disclosures under s 24
of the	Act and	 the payment of tax thereon by the creditors
could not, in law, justify the deletion of the amount of Rs.
46,250	as   it	 represented   the  assessee's	income	from
undisclosed sources.  In a  case of  this description, there
was no	question of double taxation which was a situation of
assessee's own	making in getting false declarations made in
the names  of the creditors with a view to avoid higher slab
of taxation.  once it  was found that the income declared by
the creditors  did not	belong to them, there was nothing to
prevent the same being taxed in the hands of the assessee to
which it actually belonged. [861 H, 862 A-B, 863 C]
     Manilal Gafoorbhai	 Shah v. Commissioner of Income Tax,
(1974) 95  I.T.R.  624	Gujarat;  Badri	 Prasad	 &  Sons  v.
Commissioner of	 Income Tax, (1975) 98 I.T.R. 657 Allahabad;
Pioneer Trading	 Syndicate v.  Commissioner of	Income	Tax,
Lucknow, (1979)	 120 I.T.R.  5 (Full  Bench  Allahabad)	 and
Additional  Commissioner   of  Income	Tax  v.	 Samarathmal
Santoshchand,  (1980)	124  I.T.R.   297  Madhya   Pradesh,
approved.
     Rattan Lal	 & Ors	v. Income Tax officer, 98 I.T.R. 681
Delhi; Shakuntala  Devi & Ors v. C.I.T, (1980) 125 I.T.R. 18
Delhi and  Mohd. Ahsan	Wani v. C.I.T., (1977) 106 I.T.R. 84
Jammu & Kashmir, overruled.
     5. The declaration made under sub-s. (2) of s.24 of the
Income Tax Act, 1961 had to relate to income actually earned
by the	assessee. It  did not require any investigation into
the correctness	 of the declarations or any determination of
the amounts  belonging to  the declarant. The mere charge to
tax on	the amounts  under the	Voluntary Disclosure  Scheme
could not  have the  effect of converting the money from the
deductions from the books of the assessee into the income of
The  declarants	 if  it	 did  not  belong  to  it.  It	was,
therefore, open	 to the	 Income Tax  officer to	 investigate
into the  source of  the cash credit amounting to Rs. 46,250
standing in  the books	of the	assessee in the names of the
sons of the Managing Partner. [859 C-D, 860 F-G]
851
     1. The  making of	an assessment against a declarant on
his disclosure	of statement under section 24 of the Finance
(No. 2)	 Act, 1965  cannot deprive  Income  Tax	 officer  of
jurisdiction to	 assess the  same receipt  in the  hands  of
another person	if, in	a  properly  constituted  assessment
proceeding under  the Income  Tax Act,	the receipt  can  be
regarded as the taxable income of such other person. [852 G-
H, 853 A]
     2. The  liability	imposed	 under	section	 24  of	 the
Finance (No.  2) Act,  1965 is	identifiable with the income
tax liability  under the  Income Tax  Act.  The	 scheme	 for
voluntary disclosure  of income	 and its  taxation  is	only
another mode  provided by  law for  imposing income  tax and
recovering it.	Consequently the  general  principles  which
apply to  assessments made  under the  Income Tax Act would,
except for  provision to  the  contrary,  be  applicable  to
assessments made  under section	 24 of	the Finance  (No. 2)
Act, 1965.  Accordingly when the assessment to income tax is
made under  the latter enactment, it will be governed by the
general principle  that a  finding recorded  therein governs
only the particular person assessed. [852 B-D]
     3. The  finality enacted by sub.s. (8) of section 24 of
the Finance  (No. 2) Act, 1965 attaches to the assessment of
the declarant only. It cannot in law operate in favour of or
against any other person. [852 F]
     3:1. The  jurisdiction of	an Income  Tax officer	when
making an  assessment is  concerned primarily with the issue
whether the  receipt  under  consideration  constitutes	 the
income of  the assessee	 before him.  Any finding reached by
the Income Tax officer touching a person not the assessee in
the process  of determining that issue cannot be regarded as
an operative  finding in  favour of  or against such person.
The only  exception of	this rule  centers  on	the  limited
class, and  for the  limited purpose, defined by the Supreme
Court in  Income Tax  Officer, A-Ward,	Sitapur v. Murlidhar
Bhagwan Das, 52 I.T.R. 335 at 346. [852 D-F]
     Ahmed Ibrahim  S. Dhoraji v. The Commissioner of Wealth
Tax Gujarat,  [1981] 3 SCR p. 402 and Income Tax Officer, A-
Ward, Sitapur  v. Murlidhar  Bhagwan Das, 52 ITR 335 at 346,
applied.

JUDGMENT:
     CIVIL APPELLATE JURISDICTION: Tax Reference Case No. 19
of 1975.
     Tax Reference u/s. 256 of the Income Tax Act, 1961 made
by  the	 Income	 Tax  Appellate	 Tribunal,  Jabalpur  Bench,
Jabalpur in R.A. No. 221/Jab/73-74 arising out of I.T.A. No.
1560 (Jab)/1972-73  decided on	10-1-1974;  Assessment	Year
1967-68.
     S. T. Desai, B.L. Noma and K.J. John for the Petitioner
852
     V.s. Desai,  Champat Rai and Miss A. Subhashini for the
Respondent.
     The Judgment  of A.P.  Sen and E. S. Venkataramiah, JJ.
was delivered  by Sen,	J. R.S.	 Pathak, J.  gave a separate
opinion.
     PATHAK, J:	 I agree.  The acceptance  of  a  disclosure
statement made by a declarant under s.24 of the Finance (No.
2) Act,	 1965 cannot  confer immunity on another person from
tax liability  in respect  of the  same sum of money. As was
held by	 this Court  in Ahmed  Ibrahim	S.  Dhoraji  v.	 The
Commissioner (of  Wealth Tax  Gujarat the  liability imposed
under s.24  of the Finance (No. 2) Act, 1965 is identifiable
with the  income tax liability under the Income-tax Act. The
scheme for  voluntary disclosure  of income and its taxation
is only another mode provided by law for imposing income tax
and recovering	it.  Consequently,  the	 general  principles
which apply  to assessments  made under	 the Income-Tax	 Act
would  except	for  the   provision  to  the  contrary,  be
applicable to  assessments made	 under s.24  of the  Finance
(No. 2)	 Act, 1965.  Accordingly,  when	 the  assessment  to
income tax  is made  under the	latter enactment, it will be
governed by  the general  principle that  a finding recorded
therein governs	 only the  particular person  assessed.	 The
jurisdiction  of  an  Income  Tax  officer  when  making  an
assessment is concerned primarily with the issue whether the
receipt under  consideration constitutes  the income  of the
assessee before	 him. Any  finding reached by the Income Tax
officer touching a person not the assessee in the process of
determining that  issue cannot	be regarded  as an operative
finding in  favour of  or  against  such  person.  The	only
exception to this rule centres on the limited class, and for
the limited  purpose, defined  by this	Court in  Income-Tax
Officer, A-Ward	 Sitapur v. Murlidhar Bhagwan Das. Viewed in
the light of that principle it is apparent that the finality
enacted by sub-section (8) of section 24 of the Finance (No.
2) Act,	 1965 attaches	to the	assessment of  the declarant
only. It  cannot in  law operate in favour of or against any
other person.
     I am  of opinion  that  the  making  of  an  assessment
against a  declarant on	 his disclosure statement under s.24
of the	Finance (No.  2) Act,  1965 cannot deprive an Income
Tax officer  of jurisdiction  to assess	 the same receipt in
the hands of another person if, in
853
a  properly  constituted  assessment  proceeding  under	 the
Income Tax A Act, the receipt can be regarded as the taxable
income of  such other  person.	I  would  answer  the  first
question in  the affirmative,  in favour  of the Revenue and
against the  assessee. That being so, no answer is necessary
to the	second question.  The Commissioner  of Income-Tax is
entitled to his costs of the reference.
     SEN, J.  This is a direct reference under s. 257 of the
Income Tax  Act, 1961  made  by	 the  Income  Tax  Appellate
(Tribunal, Jabalpur,  for short, The Appellate Tribunal), at
the instance  of the assessee. The reference is necessitated
due to	divergence of  opinion, as  reflected in the various
decisions of  different High  Courts, with  respect  to	 the
scope and effect of the Voluntary Disclosure Scheme under s.
24 of the Finance (No. 2) Act, 1965 (the 'Act', for short).
     The assessee,  Messrs. Jamnaprasad	 Kanhaiyalal,  is  a
partnership firm.  The firm  consists of 4 partners, namely,
Kanhaiyalal and	 his 3	major sons, Rajkumar, Swatantrakumar
and Santoshkumar  with his minor son Satishkumar admitted to
the benefits of the partnership. In the course of assessment
proceedings for	 the assessment	 year 1967-68,	the relevant
accounting year	 of which  was the year ending Diwali, 1966,
the Income Tax officer (ITO, for short) noticed in the books
of account  of the  asssesee five  Cash credits of Rs. 9,250
each in	 the names  of five sons of Kanhaiyalal, as detailed
below:
						     Rs.
	  Sailendrakumar		5 yrs.	   9,250/-
	  Satishkumar			9 yrs.	   9,250/-
	  Sunilkumar			7 yrs.	   9,250/-
	  Swatantrakumar		16 yrs.	   9,250/-
	  Santoshkumar			18 yrs.	   9,250/-
						  --------
						  46,250/-
						  ---------
The ITo	 accordingly called upon the assessee to explain the
genuineness as	well as	 the source  of the cash credits. On
being  questioned,   Kanhaiyalal   the	 Managing   Partner,
disavowed ail  knowledge as to the capacity of the creditors
to advance the amounts in question.
854
On the	contrary, he  admitted that  the  creditors  had  no
independent source  of income  of their	 own.  In  fact,  he
further stated	that he	 could not explain the source of the
cash credits.
     It was  contended before  the ITo	that  the  creditors
having	made   voluntary  disclosures  under  the  Voluntary
Disclosure Scheme  and the  disclosures made  by them having
been accepted by the Commissioner of Income Tax and tax paid
thereon, the  amount of	 Rs. 46,250  could not be treated as
income of  the assessee	 from undisclosed  sources. The ITo,
however, held  that the	 disclosures made  under the  scheme
granted	 immunity   from  further   taxation  only   to	 the
declarant, and	not to	person to  whom the  income actually
belonged. He further held that the assessee having failed to
prove the  genuineness and  source of  the cash credits, the
amount of Rs. 46,250 credited in the books of account of the
assessee in the names of the creditors, who had no income of
their own  must be  treated as	the assessee's	income	from
undisclosed sources.  According to  him, such  cash  credits
were treated  in their names after making false declarations
under the  Scheme, with	 a view	 to avoid  a higher  rate of
taxation. He  accordingly made	an addition of Rs. 46,250 as
assessee's income from undisclosed sources.
     The Appellate Assistant Commissioner disagreed with the
ITO, holding  that when	 an amount was disclosed by a person
under s.  24 of	 the Act,  there was an immunity not only as
regards the  declarant, but  there was also a finality as to
the  assessment.  In  his  view,  the  entire  statement  of
Kanhaiyalal had	 to be	ignored, as it was not clear in what
capacity the  questions were  put to  him  and	the  answers
elicited because  any investigation  into the  source of the
deposits was  prohibited  and  illegal	under  the  Act.  He
accordingly  held  that	 the  acceptance  of  the  voluntary
disclosures  made  by  the  creditors  in  question  to	 the
Commissioner and  the payment  of tax  thereon precluded the
Department from	 disputing that	 the income  belonged to the
said creditors-and as the same income cannot be taxed twice,
the assessee, the order passed by the ITO in that behalf was
unsustainable.	 The   Appellate   Assistant   Commissioner,
therefore,  directed   the  deletion   of  Rs.	46,250.	 The
Department went up in appeal before the Appellate Tribunal.
     The Appellate  Tribunal, however,	disagreed  with	 the
Appellate Assistant  Commissioner and upheld the decision of
the ITo. It was of the opinion that the ITo was justified in
treating the  cash credits appearing in the books of account
of the assessee in the names of
855
the creditors  as unexplained  cash credits,  since  it	 was
found that  the A  income declared  by the creditors did not
belong to  them, and  there was	 nothing to prevent the same
being taxed  in the  hands  of	the  assessee  to  which  it
actually belonged.  According to  the Tribunal	the immunity
under s.  24 of the Act was conferred on the declarant only,
and there  was nothing to preclude an investigation into the
true  nature  and  source  of  the  credits.  The  Appellate
Tribunal, after	 taking into  consideration the statement of
Kanhaiyalal, and  having regard	 to the age of the creditors
and the fact that none of them had any independent source of
income at  any time,  held that	 the ITo  was  justified  in
holding that the asssessee failed to discharge the burden of
proof under  s. 68  of the Income Tax Act, 1961 in regard to
the nature and source of the cash credits and, therefore, it
had to	be treated as the assessee's income from undisclosed
sources. Thereupon,  the assessee  applied to  the Appellate
Tribunal under	s. 256	of the Income Tax Act, 1961 to refer
the question  of law arising out of its order, to the Madhya
Pradesh High Court for its opinion.
     There being a conflict of opinion between the different
High Courts  as to  the true  nature of the immunity granted
under s.  24 of	 the Act,  the Appellate Tribunal has made a
reference under	 s. 257	 of the Income Tax Act, 1961 to this
Court, of  the following  questions of law, for its opinion,
namely:
     1.	  Whether on  the facts	 and in the circumstances of
	  the case,  it was  open to the Revenue authorities
	  to investigate  into the  genuineness of  the five
	  credits aggregating  to Rs.  46,250 and  records a
	  finding in  regard thereto,  when  the  Disclosure
	  petitions made by the five creditors under Section
	  24 of	 the Finance  (No. 2)  Act, 1965,  had	been
	  acted upon by the Revenue authorities ?
     2.	  If the  answer to  the first	question is  in	 the
	  negative and	in favour  of the  assessee, whether
	  the addition	of Rs.	46,250 to  the income of the
	  assessee   as	  representing	 its   income	from
	  undisclosed  sources,	 for  the  assessment  years
	  1967-68, is valid and justified in law ?
     The main  question in  controversy lies within a narrow
compass. The question, in fact, is whether the provisions of
s. 24 of the Act can be construed as conferring any benefit,
concession or
856
declaration under  the provisions  of the  Act.	 It  may  be
mentioned that	to avoid any room for doubt, the legislature
has introduced	s. 18 in the Voluntary Disclosures of Income
and Wealth  Act, 1976 (Act No. 8 of 1976) which specifically
provides that save as otherwise provided in the Act, nothing
contained in  the Act  shall be	 construed as conferring any
benefit, concession or immunity on any person other than the
person making  the declaration	under the  provisions of the
Act. The  question for	consideration is whether the absence
of such	 a provision  as is found in Act No. 8 of 1976 leads
to the consequence that acceptance of a declaration under s.
24 of the Act confers a benefit which is not provided by the
Act on a person other than the declarants and takes away the
power of  the ITO under s. 68 of the Income Tax Act, 1961 to
make an	 investigation as to the nature and source of a cash
credit appearing in the books of the assesssee to reject the
explanation offered by the assessee as unsatisfactory and to
treat it as his income from undisclosed sources.
 Section 24	 of the	 Finance (No.  2) Act, 1965 provided
for the	 making	 of  voluntary	disclosures  in	 respect  of
amounts representing  income chargeable	 to  tax  under	 the
Income Tax  Act 1922  or the  Income tax  Act, 1961, for any
assessment year	 commencing on	or before  April 1, 1964. On
such disclosure	 being made under sub-s. (I) thereof, in the
manner provided	 by sub-s.  (2) the amount was to be charged
to Income  tax in  accordance with sub-s. (3) which provided
by a  legal fiction  that income tax shall be charged on the
amounts of voluntarily disclosed income at certain specified
rates "as  if such  amount were	 the  total  income  of	 the
declarant". There  was a  safeguard provided  in sub-s.	 (4)
that the benefit under the scheme would be available only in
respect of  the voluntarily  disclosed	income	and  not  in
respect of  the amount	detected  or  deemed  to  have	been
detected by the ITO before the date of declaration. When the
Commissioner of	 Income Tax passed an order under sub-s. (4)
there was an appeal provided to the Central Board of Revenue
under sub-s.  (S) and  the Board  was empowered under sub-s.
(6) to	pass such orders thereon as it deemed fit. There was
a finality  attached to	 the order of the Board under sub-s.
(8)
     In support	 of the	 reference, learned  counsel for the
assessee  has,	 in  substance,	  put  forth   a  three-fold
contention. It is submitted, firstly, that the ITO could not
have treated the cash credits standing
857
in the	names of  the  sons  of	 Kanhaiyalal,  the  Managing
Partner as . the assessee's income from undisclosed sources,
having regard  to the  fact that each one of them had made a
declaration under sub-s. (I) and paid tax thereon under sub-
s. (3). The submission is that it is not permissible for the
Department to  go into the question of the nature and source
of the	amount so  declared in	a voluntary disclosure under
s.24 of	 the Act,  and to say that it does not represent the
income of  the declarant.  Secondly, it is urged that sub-s.
(I) read with sub-s. (3) of s.24 of the Act has a overriding
effect over s.68 of the Income Tax Act, 1961 and, therefore,
the ITO	 could not  make any  investigation as to the nature
and source of the cash credits, and thirdly, it is submitted
that there  cannot be  double taxation	of the	same income,
the  assessee.	These  submissions  proceed  on	 a  wrongful
assumption that	 there is  a finality  attached under sub-s.
(8) to	the legal  fiction created  by sub-s.  (3) for which
there is  no basis  whatever. The contentions cannot, in our
opinion, prevail.
     For an  appreciations of  the contentions raised, it is
necessary to  set out the relevant provisions of s.24 of the
Act. Sub-s. (1), insofar as relevant reads .
     (1)  Subject to  the provisions  of this section, where
	  any person  makes, on	 or after  the 19th  day  of
	  August, 1965,	 and before  the 1st  day of  April,
	  1966, a declaration in accordance with sub-section
	  (2) in  respect of  the amount representing income
	  chargeable to tax under the Indian Income-tax Act,
	  1922 (11 of 1922), or the Income-tax Act, 1961 (43
	  of 1961),  for assessment  year commencing  on  or
	  before the 1st day of April, 1964-
     (a)  for which he has failed to furnish a return within
	  the time  allowed under  section 22  of the Indian
	  Income-tax Act,  1922 (11 of 1922), or section 139
	  of the Income-tax Act, 1961 (43 of 1961), or G
     (b)  which he  has failed to disclose in a return of in
	  come filed  by him  on or  before the	 19th day of
	  August, 1965,	 under the  Indian Income  Tax	Act,
	  1922 (11  of 1922) or the Income Tax Act, 1961 (43
	  of 1961), or
858
     (c)  which has  escaped assessment	 by  reason  of	 the
	  omission or  failure on the part of such person to
	  make a return under either of the said Acts to the
	  Income-tax officer  or to disclose fully and truly
	  11 material facts necessary for his assessment.
he shall,  notwithstanding anything  contained in  the	said
Acts, be  charged income-tax  in accordance with sub-section
(3) in respect of the amount so declared or it more than one
declaration has	 been made  by a person the aggregate of the
amounts declared therein, as reduced by any amount specified
in any	order made  under sub-section (4) or, if such amount
is altered  by an  order of the Board under sub-section (6),
then such altered amount...............
     Sub-s.  (3)  containing  the  legal  fiction  reads  as
follows:
     (3)  Income-tax shall  be charged	on the amount of the
	  voluntarily disclosed income-
	  (a)  where the  declarant is a person other than a
	       company, at  the rates specified in paragraph
	       A, and
	  (b)  where the  declarant is	a  company,  at	 the
	       rates specified in Paragraph F,
of Part	 I of  First Schedule to the Finance Act (X of 1965)
as if such amount were the total income of the declarant
     Sub-s. (8)	 on which  strong reliance  is placed,	runs
thus:
     (8)  An order  under sub-section (6) shall be final and
	  shall not  be called	in question before any Court
	  of law or any other authority.
     The crux  of the  matter is  whether the  provisions of
s.24 of	 the Act can be construed as conferring any benefit,
concession or  immunity on  any person other than the person
making the  declaration under the provisions of the Act. The
question is  whether the  non-obstente clause  contained  in
sub-s. (I) of s. 24 of the Act precludes the Department from
proceeding against  the person	to whom	 the income actually
belonged. The contention that there was an immunity not only
as regards  the declarant,  but there was also a finality as
to the	assessment under  s.24	of  the	 Act  stems  from  a
misconception of  the nature  and  scope  of  the  Voluntary
Disclosure Scheme.
859
     Under sub-s. (I) of s.24, a person was required to make
a voluntary disclosure in respect of the amount representing
the income  chargeable to  tax under  the Indian  Income Tax
Act, 1922  or the  Income Tax  Act, 1961  for any assessment
year commencing on or before April 1, 1964. Sub s. (I) makes
it clear  that the  declarations, which	 were expected to be
made in	 the manner provided by sub-s. (2), were with regard
to the	income which  was chargeable to tax under the Income
Tax Acts of 1922 or 1961, but which was not disclosed at the
proper time. Neither under the Act of 1922 nor under the Act
of 1961,  was a	 person required  to submit  a	return	with
regard to  the income  which was either not earned or deemed
to have	 been earned by him. It, therefore, follows that the
declarations under  sub-s. (2)	of s.24	 had  to  relate  to
income actually earned by him. The scheme only permitted the
bringing forward  of  income  to  tax  it  did	not  require
investigation of  the claim  of the  declarant. If  a person
made a declaration, the Commissioner was under an obligation
to assess him to tax.
     In	 respect   of  the  voluntary  disclosures  made,  a
declarant acquired an immunity from further investigation as
to the	nature and  source of  the income.  He also acquired
certain benefits.  One of  the distinctive  features of	 the
scheme was  that tax  was chargeable  on the  whole  of	 the
disclosed income taken as a single block at rates prescribed
for personal  income or	 for corporate income under the Act,
and not	 at an ad hoc concessional rate. Further, facilities
were allowed  to payment  of tax  in appropriate instalments
extending over a period not exceeding four years, subject to
a down	payment of  not less  than 10%	of the	tax due	 and
furnishing a  security in  respect of  the  balance.  Income
which had  already been	 detected on  the material available
prior to  the  date  of	 disclosure,  was,  however,  to  be
assessed under	the regular provisions of the Income Tax Act
and not under the scheme. Any admissions made by a person in
the declarations filed by him under the scheme in respect of
such income  were not  to be  used in  assessing that income
under the  Income Tax  Act. Under  the scheme, the disclosed
income was  not to  be subject to any further proceedings of
assessment. The	 identity of  the declarant  was not  to  be
revealed and he was also immune from penalty and prosecution
for the	 past concealment  of the  disclosed income.  It is,
therefore, obvious that the Act granted immunity only to the
declarant alone	 and not to other persons to whom the income
really belonged.
     The scheme of the Act makes it abundantly clear that it
was to	protect only  those who	 preferred to  disclose	 the
income they
860
themselves had	earned in the past and which they had failed
to disclose  at the appropriate time. It is undoubtedly true
that the  Act was brought on the statute book to unearth the
unaccounted  money.   But  there   is  no  warrant  for	 the
proposition that  by  enacting	the  same,  the	 legislature
intended to  permit, or	 connive at,  any fraud sought to be
committed by  making benami declarations. If the contentions
were to be accepted, it would follow that an assessee in the
higher income  group could,  with immunity,  find out  a few
near relatives	who would oblige him by filing returns under
s.24  of  the  Act  disclosing	unaccounted  income  of	 the
assessee as  their own and claiming that the said income was
kept by them in deposit with the assessee.
     That takes	 us to	the contention	based on  the  legal
fiction contained  in sub-s.  (3) of s.24 of the Act and the
finality of the assessment, by virtue of sub-s. (8) thereof.
The legal  fiction contained  in sub-s.	 (3) of	 s.24 of the
Act, construed	in the	light of  the other provisions; must
mean that  the income  voluntarily disclosed shall be deemed
to be  the income  of the  declarant. The  words "as if such
income were the total income of the declarant" can only mean
that even  though the  income did not actually belong to the
declarant lt  would be treated to be his income for purposes
of payment  of income tax under the scheme. If, therefore, a
person made  a false  declaration with	regard to income not
earned by  him,	 it  is	 difficult  to	comprehend  how	 the
Department could  be prevented	from proceeding	 against the
person to  whom the  income actually belonged and during the
course of whose assessment the concealed income is detected.
It, therefore,	logically follows that on a disclosure being
made, the  amount was  not to  be charged  to income  tax in
accordance with	 sub-s. (3)  of s.24  of the Act, taking the
disclosed income as the taxable income of the declarant.
     The immunity  under s.  24 of  the Act was conferred on
the declarant  only and	 there was  nothing to	preclude  an
investigation  into  the  true	nature	and  source  of	 the
credits. The  ITO was,	therefore, justified in treating the
cash credits  in the books of account of the assessee in the
names of  the creditors	 as unexplained	 cash  credits.	 The
finality under	sub-s. (8)  is to  the order  of the Central
Board of  Revenue under	 sub-s. (6).  Under sub-s.  (4)	 the
Commissioner of Income Tax was required, within thirty days,
if satisfied  that the	whole or  any  part  of	 the  income
declared had  been detected  or deemed to have been detected
by the ITO prior to the
861
date of	 declaration, to  make an  order in  writing to that
effect and  forward a  copy thereof  to the  declarant.	 Any
person who objected to such an order could appeal under sub-
s. (5)	to the	Central Board of Revenue stating the grounds
for such  an objection. The Board was empowered to pass such
orders as it thought fit under sub-s. (6). This order of the
Board under sub-s. (6) was final and conclusive by reason of
sub-s. (8).  Thus, the	finality under sub-s. (8) was to the
order of  the Board under sub-s. (6) of s. 24 and not to the
assessment of  tax made on the declarations furnished by the
creditors under	 the scheme,  by virtue of the legal fiction
contained in sub-s. (3) of s. 24 of the Act.
     The next  question	 that  calls  for  determination  is
whether the  non-obstante clause  contained in sub-s. (1) of
s. 24  of the  Act precludes  the Department from proceeding
against the  person to	whom the  income actually  belonged.
Under sub-s. (1) of s. 24 the declaration was required to be
made in	 respect of  the amount which represented the income
of the	declarant. The	declaration could  not	be  made  in
respect of  an amount  which  was  not	the  income  of	 the
declarant. If,	therefore, a person made a false declaration
with respect  to an amount which was not his income, but was
the income  of somebody	 else, then  there  was	 nothing  to
prevent an investigation into the true nature and sources of
the said amount. There was nothing in s. 24 of the Act which
prevented  the	ITO,  if  he  was  not	satisfied  with	 the
explanation of	an assessee  about the genuineness or source
of an  amount found  credited in  his books, in spite of its
having already been made the subject of a declaration by the
creditor and then taxed under the scheme. We find no warrant
for the	 submission that s. 24 had an overriding effect over
s. 68  of the  Income Tax  Act, 1961, insofar as the persons
other than the declarants were concerned.
     In our  judgment, the  legal fiction  created by sub-s.
(3) of	s. 24  of the  Act by  virtue of  which	 the  amount
declared by  the declarant  was to  be charged to income tax
"as if	such amount  were the total income of the declarant"
was limited  in its  scope, and	 it  cannot  be	 invoked  in
assessment proceedings relating to any person other than the
person making  the declaration	under the  Act so as to rule
out the applicability of s. 68 of the Income Tax Act, 1961.
     The last  question that  remains is  whether  the	same
income cannot  be taxed	 twice, once  in the  hands  of	 the
creditors and  again in the hands of the assessee. In a case
of this description, there is
862
no question  of double	taxation. The  situation is  of	 the
assessee's own making in getting false declarations filed in
of taxation.  Once it  was found that the income declared by
which it actually belonged.
 It follows that the decisions of the Gujarat High Court
in Manilal Gafoorbhai Shah v. Commissioner of Income Tax, of
the  Allahabad	 High  Court  in  Badri	 Prasad	 &  Sons  v.
Commissioner of Income Tax, and Pioneer Trading Syndicate v.
Commissioner of	 Income	 Tax,  Lucknow	and  of	 the  Madhya
Pradesh High  Court in	Addl. Commissioner  of Income Tax v.
Samrathmal Santoshchand which lay down the true scope of the
Voluntary Disclosure  Scheme under  s. 24 of the Act must be
upheld. The  decisions of the Delhi High Court in Rattan Lal
& Ors  v. Income  Tax Officer  and Shakuntala Devi & ors. v.
C.I.T. and  of the Jammu & Kashmir High Court in Mohd. Ahsan
Wani  v.   C.I.T.,  taking  a  view  to	 the  contrary,	 are
overruled.
     The  Income  Tax  officer	was  entitled  to  determine
whether the  amount disclosed  was or  was not the income of
the declarant,	while  dealing	with  the  case	 of  another
assessee under	s. 68 of the Income Tax Act, 1961. The legal
fiction created by sub-s. (3) of s. 24 was restricted to the
Voluntary Disclosure  Scheme itself.  The protection enjoyed
by the	declarant under	 that scheme  extended only  to	 the
amounts so  declared being  not liable	to be  added, in any
assessment, of the declarant. There was no absolute finality
attached to  the declaration  especially when the nature and
source of  the sum  declared was  being determined  for	 the
purpose of  its inclusion in the income of an assessee other
than the  declarant. There  was,  therefore,  nothing  which
prevented the Income Tax officer from investigating into the
nature and  source of  the sums	 credited in  the  books  of
account of  an assessee	 and reject  his explanation  to the
effect that
863
the sums  belonged to  the persons who had made declarations
about them under s. 24 of the Act.
     Accordingly, the  reference must  be answered in favour
of the	Revenue and  against the assessee. Our answer to the
first question	is that	 the legal fiction created by sub-s.
(3) of	s. 24  of the  Finance (No.2) Act, 1965 by virtue of
which the  amounts disclosed  by the  declarants had  to  be
charged to  income tax	"as if	such amount  were the  total
income of the declarants" was limited in its scope and could
not be invoked in the assessment proceedings relating to the
assessee in  whose books of account the cash credits appear.
The answer to the first question is sufficient to dispose of
the second.  On the  construction placed on sub-s. (3) of s.
24 of  the Act,	 it must  also be  held	 that  the  ITO	 was
justified in  treating the  cash credits  appearing  in	 the
books of account of the assessee, amounting to Rs. 46,250 as
the assessee's	income from  undisclosed sources,  since the
assessee failed to discharge the burden of proof placed upon
him  under   s.	 68   of  the  Income  Tax  Act,  1961.	 The
Commissioner of Income Tax shall be entitled to his costs of
the reference.
S.R.
864

The Commr Of Income Tax vs M/S Samsung Electronics Co Ltd on 24 September, 2009
Bench: D.V.Shylendra Kumar, Aravind Kumar
 
IN THE HIGH COURT OF KARNATAKA
AT BANGALORE

Dated this the 249 day of September, 2009 __  O' O V

PRESENT

AND

THE I-ION'BLE MR JUsT1CE.A3AVIN'D, 

ITA Nos. 2808 of 2005, 2809._._0L_2GO5, 2810.,of,,7

2005, 2911 of 2005, 29867-of ;,20015,O"171*A .1V6,2989 of
2005 C/w 2991 of 2005, -11'f1"AO"1\}cs;' 12005
C/w 3076 of 2005.,' 3077:61'~:;2005?--_3078;6f 2005,
3079 of 2005,?'    3.15} 266 of 2006
C/w 265    of 2006, 269 of
2006, 270555192-006E1=1:606-of-2006;"611"0 of 2006, ITA
No. 611 of 2006"1';;<;51 60961? 2006, ITA No. 612 of
2006, 1TA._Nos.1055-l'ofV'290'6'"& 585-594 of 2009
C/w_lO56O01" 2006--- &,'.5,5"2}556 of 2009, 1066 of

 ,_ 2006-, 1067 of 2006.,_._6z.v557--575 of 2009, 1053 of
V 2006  1.613 of 2009, 1061 of 2006 & 65 76682
 672oo9,7811~,,s,,,11o,s. 1062 of 2006, 1258 of 2006,

1.266' of 2006,1265 of 2006, rm No. 1268 of 2006
0/151269 67 2006, ITA 515.1270 of 2006, ITA Nos.

 '  V'L";.W0m60 of'2006 & 5951604 of2009, 737 of 200 7, 738
_ 2007, 739 512007, 740 of 2007, 741 of 2007,
  7215 of 2007, 746 of 2007, 747 of 2007, 777 of
 "2007, 780 of 2007, 782 of 2007, 785 of 2007, 786

12
V,

THE HON'BLE MR JUSTICE D V   X , 1,'

[By Sri. M.V. Seshachala & Sri. K.V. Aravind, Advs.]

And :

M/ S. SAMSUNG ELECTRONICS CO. LTD.
INDIA SOFTVVARE OPERATIONS

LEVEL 61'" AND 71",

PRESTIGE MERIDIANWII,

NO.30, 1\/LG. ROAD.

BANGALORE -- 560 001.  " 

[By Sri. KP. Kumar, Sr. COuné$0::i"fQ;* UnAive;rsa'1V  

THIS APPEAL IS FILED UNDER__:SECTI_ON f260A_ OE'; THE
INCOME TAX ACT, 1961, PRAY1?'§{} TQ'0SE"T..ASI1':3E ORDER DATED
18.02.2005 PASSED IN IT:3;._ fNO;._  FOR THE
ASSESSMENT YEAR 2001-2002  f   A 2
In rm No. 2309 of 2(}G5_  " A 0 0

Between:

1 THE OOVMMISEIONERVOE.1N.cOME.JfAX,
INTERD1A'I'IOIV7AiL TAX;A'nOr€., '
RAsTROTHANA'Ei,IE,O'ING,_[ 
NRUPA'1'HUN_GA ROI  
BANGALORE. . '  '

2 THE INCOME-'rAX'OFE1OER TDS~I,

 _ RASTROTHANA B'UILD__I__1\IG,
_  ..NRU--PAT5HIJN'GA ROAD,
 .B'ANGALOEE.j-~.  APPELLANTS

0    Seshachala, Adv.)

" " M'/'s_. SAMSUNG. ELECTRONICS CO. LTD,
.: LNIJIA OPERATIONS
 "LEVEL .A6T¥:i_AE'sID 7T1--J,
» W..P}LF1S;'I'I'GE MERIDIAN-11.
  =NO..30,M.G.ROAD,
"  , BANGALORE - 560 001.  RESPONDENT

[By Sri. K.P. Kumar, Sr. Counsel for Universal Legal]

THIS APPEAL IS FILED UNDER SECTION 260A OF TI"IE

INCOME TAX ACT, 1961, PRAYING TO SET ASIDE ORDER 
18.02.2005 PASSED IN ITA NO. 264/B/2002 FOR   

ASSESSMENT YEAR 19992000 AND E'I'C., _

In ITA No. 2810 of 2005

Between:

I THE COMMISSIONER OF INCOME-TAX,» 
INTERNATIONAL TAXATION, ' ' 
RASTROTHANA BUILDING.

NRUPATHUNGA ROAD.
BANGALORE.

2 THE INCOMEWTAX OFFICER TDS  
RASTROTHANA BUILDING, " '
NRUPATHUNGAROAD.    -  *
BANGALORE   2:   " ;AppELLANTS

 .. my sgsham Actv.1
And: I  I I 'D I

M/S. SAMSUNG ELECTRONICS  LTD,

INDIA SOFTWARE OPERATIONS "

LEVEL em 1{'.ND_7TH, _  '

P1?I£*STTGE»»N:ERIDLAN»II,   _____ .. «

N-O.3"0, MQO. R0"AD;" 

BAI'=?_GALO--RE 58.0'OO'1.__  RESPONDENT

[ByI'S:i«.  Sr. Counsel for Universal Legal}

  IS FILED UNDER SECTION 260A OF THE

_:CCe~I.?;\ICOME TAX~.ACjT, 1961, PRAYING To SET ASIDE ORDER DATED
_ "*18,'02.'2005 PASSED IN ITA No. 265/BANG/2002 FOR THE
IOASSESSMENT YEAR 2000-2001 AND ETC,

In ITA No. 2911 of 2005
Between:

1 THE COMMISSIONER OF INCOIVIETAX,
CR. BUELDING,
QUEENS ROAD,

2 THE INCOME-TAX OFFICER {TDS]--I,
C.R. BUILDING.

BANGALORE.  ,5 ..   z$Ap1P'EI§LAN'IS'  ' ~  

[By Sri. IVLV. SeShaChB121_, AdIf.}__ ' . 1

And :

M/ S. RAFFLES SOFTWARE  2;' I O'
7?" FLOOR, No.12},   I
DICKENSON ROAD,   '
BANGALORE ~ 560 04"2,.  

[By Sri. }:'<VV.'}3'.vO'KriS§hna',¥'§VSz*3 Kumar, AdVS.]

THIS APPEAL '1SVEI'LEDv._IjI:I,DI:R SECTION 260A OF THE
INCOME TAX ACT. 1I961V;xPRAY[NG_'TO SET ASIDE ORDER DATED
28.03.2005 PASSED 'IN QITA3 N0. 151/BANG/2002 FOR THE
ASSESSMENT YEAR 20904200 1' AND ETC.,
IIT f'I"A No, C2988 Of 2005" """ 

Betiiveénz. 2 V B' V

O  THEOCOMNIISSIONER OFINCOMETAX,

. INTERNATIONAL TAXATION,
I RASTROTHANA BUILDING,
_ V '?ERUPAT'fi'UNGA ROAD,
"BANGALORE,

«  TI:IEINCOME~TAX OFFICER.
.. INTERNATIONAL TAXATEON,
 '"wARDm19{2},

* RASTROTRANA BUILDING.

 I  my Sn". Miv. Seshachala & Sri. K.V_. Arvind, AdvS.]
. 'NI/.S."'SOIeATA INFORMATION

 0"' NO_. 103, 13?' FLOOR,

N RUPATHUNGA ROAD,
BANGALORE. . .. APPELLANTS

[Ey Sri. M.V. Seshachala & Sri. K.V. Arvind, AdVs.}   

And :

M/S. SONATA INFORMATION
TECHNOLOGY LIMITED,
NOI93, Isr FLOOR,
R.V.ROAD,BASAVANGUDI,      "  
BANGALORE -- 550 004.   RESPQNDBSNT. 

[By 811. G. Sarangan, Sr. COunsOl  

THIS APPEAL IS FILED __ UNDER..._s_EC'I'ION 26'0A._0E' THE
INCOME TAX ACT, 1961, PRAYINO TO" SET 'A.S],DE,ORDER DATED
28.04.2005 PASSED IN ITA N0; _3i335_/f3ANG';'.2OO4 FOR THE
ASSESSMENT YEAR 20022003 AND ETC;;    

In ITA No. 2989 of   "   

Between:

1 THE COMMISSIONER 'OF 'INCOME--TAX.
INTERNATIONAL TANATIAON;  
RASTROTHANA BUILDING, "  '
NRUPATHUNGAROAD,  '
BANGALORE.  '

  -TI»IEA--.INc%OME~.frAX OFFICER,
 .INTERI'J.ATiONAL TAXATION,
  "  
R.AS3_RO*FHA.NA.BUILDING.
NRUPA'i'HUNG_A'ROAD,
BANGALQRE.  APPELLANTS

RV. ROAD,
BASAVANGUDI .

BANGALORE -- 560 004.  REX3PONE)EN'I7_0""V,'

{By Sri. G. Sarangan, Sr. Counsel for Smt. Vani. H_,--;    ~

THIS APPEAL IS FILED UNDER SECTION 260A--.:0F00"T}HEV

INCOME TAX ACT, 1961, PRAYING TO SE'I:'ASI'D«.'i3  'DATED?  
28.04.2005 PASSED IN ETA NO. 864/2004; FOR  1 ~

ASSESSMENT YEAR 2001 2002 AND E'PC.,

In {TA No. 2991 of 2005

Between:

1 THE COMMISSIONER OF"I1\IcOME:TAx,"*«  I 'I 
INTERNATIONAL TAXATION,  ' *  
RASTROTHANA BIIILDINC};  _  '
NRUPATHUNGAROAD, I '

BANGALORE.   _.   

2 THE INcOME»TAX_.EOEF;IcER'}'ifA  I *
INTERNATIONAL '

wARI:)~V1'9(2},'=..;f.  _ 
RASTROTHANA 'E'I,IIV1,aDIN(';-,. _ '~~- ._
NRUPATHUNGA    
BANGALORE. , I  "  APPELLANTS

{By  2SeVShaOhaIIa  Sri. K.V. Arvind, AdVS.]

Aid' 

M/S SO'NATA :I'E_§'O RMATION
TECHNOLOGY LIMITED;

' 0' =.N.o.193, 1sT'ELOOR;i._ v

 RV. ROAD":

_ ' I EBASAVANGUDIV; 
"BAI'JGAI,ORE » -SS0 004.  RESPONDENT

0   Sarangan, Sr. Counsel for Smt. Vani. H., Adv.)

8
THIS APPEAL IS FILED UNDER SECTION 260A OF THE

INCOME TAX ACT, 1961, PRAYING TO SET ASIDE ORDER DATED
28.04.2005 PASSED IN ITA NO. 865/BANG/2004 FOR TR

ASSESSMENT YEAR 2002-2003 AND ETC, V. 

In ITA No. 3075 of 2005
Between:

1 THE COMMISSIONER OF INCOME~TAX».~~ 
INTERNATIONAL TAXATION, A ' '

NRUPATHUNGA ROAD,

2 THE INCOMETAX OFFICER; _

INTERNATIONAL TAXATION,  '

WARD~l9{1}.   '
RAS'I'ROTHANAE$.U1LDINi3, ' 0   
NRURATIIUNGARAD,    " _ 

BANGALORE"    "    APRELLANTS
[By Sn; _Mv,vV:"SI§SI2I.;§,I3I'1al£i'  Arvind, AdvS.}

And:

M/S. SONATA SOFTWPIRE I_:I'D_.,  
APS TRUST..ELIILDINOA., ' ' '-
1/4, BULL 1TEM1~'LE ROAD

NQRQ COLONY.  I " -
BANGALORE +560. 4017.  RESPONDENT

{By  Sr. Counsel for Smt. Vani. H., Adv]

THI':-3.  IS FILED UNDER SEUHON 260A OF THE

"».INc'OME TAx.A<::T, 1961. PRAYING TO SET ASIDE ORDER DATED
" '*2.8;0_4l2005 PASSED IN ITA NO. 2989/BANG/2004 FOR THE
.: -ASSESSIVIE"-NT YEAR 2002-2003 AND E'£'C.,

In ITA No. 3076 of 2005
Between:

1 THE COMMISSIONER OF INCOMECFAX.
INTERNATIONAL TAXATETON.
RASTROTHANA BUILDING,   ._
NRUPATHUNGA ROAD, :

2 THE INCOME-TAX OFFICER,

INTERNATIONAL TAXATION,

WARDwl9(1),

NRUPATHUNGA ROAD. 9  5 _   , 
BANGALORE.  ~ ._  1];   APPELLANTS

[By Sri. M.V. SeShacha}z--T& Sni.'E.._V,_ Adv-s.]

Ami :

M/S. SONATA SOFTWARE LTD;,._  T_  '

APS TRUST EU1r._.DING_.' *x,._ - 

1 /4, BULL TEMPLE ROAD, 

N.R.COLONY.¥_ _-- V     -

EANGALORE--'560._01~r..    RESPONDENT

[By Sri. G. Safangan,  for Smt. Vani. H., AdV.]

 . THIvS5gAPF5EAL 1S"I-'ILEDV UNDER SECTION 260A OF THE
1N.cO'ME TAX ACT,"1..9S1, PRAYING TO SET ASIDE ORDER DATED

28;o4.:2Q05_ PASSED"~--1N ITA NO. 2988/BANG/2004 FOR THE
ASSESSMENT _3_rEAR 20_0_1w2002 AND E"PC.,

 O'  ITA Nioy"3o77'  25005

T%OT§sm:em.en=

<_1-  V~:O:'THFfO'COMMISSIONER OF INCOMEWTAX,

_ iN'}fER1\TA'I'IONAL TAXATION,
~  RASTROTHANA BUILDING,
  HNRUPATHUNGA ROAD.
" BANGALORE.

10

2 THE INCOME~TAX OFFICER,
WARD- I 9{2).

BANGALORE.   %

[By Sri. M.V. Seshachaia 8: Sri. K.V§.'AArvind'I.¢AdtIS}i   '  

And:

M/S. SONATA SOFTWARE I;rD..

APS TRUST BUILDING,

I /4. BULL TEMPLE ROAD.

N.R. COLONY, ,    *  

BANGALORE -- 560 017.   p  » " 'RESPONDENT

{By Sri. G. Sarangan, Sr. Collrisel {Gr  Adv.]

THIS APPEAL ;~IS*EI-LED:1'.UI«IDER'"SEC'rION: 260A OF THE
INCOME TAX ACT,_ .19»61.i'I.ER_A&TNC:  SET ASIDE ORDER DATED
28.04.2005 PASSED .19-I ITA. NO-.. SSS/BANG/2004 FOR THE

ASSESSMENT YEAR..;f00::.;;g003'_AND  
in ITA No. 3073 @2005' 
Between: A '

1 THE COMMISSIONER OF' INCOME/I'AX,
_ INTF}RNA'I'IONAL 1'A_KA_"§ION,
'  .RAsTRO2..IHAI».IA BUILDING,
 ,NRI,.}PATH{.INGA ROAD.
    
 " ' THE "INCOME;TAX OFFICER.

INTERNA__'FIONAL TAXATION.
3 WARD-..19I.1).
~ __ "RASTRO'IT_HANA BUILDING.
'V »NRUP_ATHUNGA ROAD.
"«E3;'%.I$§GIé1I,OI?{E.  APPELLANTS

'   Sn}. M.V. Seshachaia 8: Sri. K.V. Arvind, AdvS.]

11

And:

M/S. SONATA SOFTWARE LTD..
APS TRUST BUILDING.

1/ 4. BULL TEMPLE ROAD,

N.R. COLONY.

BANGALORE - 560 017.  RESpOI~IO'EI$IfI'-  "

{By Sri. G. Sarangan, Sr. Counsel for Smt. Vani..VI_fIL";-..I§dIf_;.]-  %

THIS APPEAL IS FILED UNDER SECTIO:\I '_2.S0A« OETIIE7' n .
INCOME TAX ACT. 1961, PRAYING TO SET=.AS1O.Ez OROER DA'i"P§I3_ :_~
28.04.2005 PASSED IN ITA NO. 2987/BANG-./2004 ':'?OR  '

ASSESSMENT YEAR 20002001 AND ERG' A 4_ ..  ._
In ITA No. 3079 of 2005 M "
Between:

1 THE COMMISSIONER OF INCOME}-TAX,.--~«._  'I
INTERNATIONAL'FAXA'I'ION';'»_:'= - A V
RASTROTHANA.,S~IIILDIN<:;, _    ~
NRUPATIIUNGA ROAD, _   _  ' 
BANGALORE" "      '

2 THE INCONIE-TAXOFFICER;._ " __
1N'rERNA*r1VO'I-IAL '"i1A_s){I'x'£'--fO§\.R,__  "
WARD-19{2"}..._' ' _ . . " 
RASTPOTHAN"A_BUILDIN'G,
_ NRUEPATHIJNGA I
'"~._BAIv~IG2\L_QRE:..,A  _____   APPELLANTS

 SajiIM§V'."I$SS-hachaia & Sri. K.V. Arvind, Advs.]

  And :

-{M/S.' SONATA SQFTVVARE LTD,
~  TRUST BUILDING.
_ .1 /4." }3U'LLf1'EMPLE ROAD.
 ; w_N.R. "COLONY.
  BANGALORE§ - 560 017.  RESPONDENT

{ByvSI'i.aG. Sarangan, Sr. Counsel for Smt. Vani. H., Adm]

12

THIS APPEAL IS FILED UNDER SECTION 260A OP' 

28.04.2005 PASSED IN ITA NO. 867/BANG/2004  

ASSESSMENT YEAR 2001-2002 AND E'I'C.,

In ITA NO. 3080 of 2005

Between:

I THE COMMISSIONER OF INCOME-TAX,
INTERNATIONAL TAXATION,  _ 'I ._ 
RASTROTHANA BUILDING,  "

2 THE INCOME--TAX OFFICER.) _
WARD»19(2}, I   I
RASTROTHANA B_UiI.,.DIN?3, '
NRUPATHUNGA ROAD "

BANGALORE.   'I       APPELLANTS
{By Sri. __1\V/_I_IV;'~   Arvind, AdVs.]

And :  T I 22

M/S. SONATA  

APS TRUST BUILD£NG,. ._ V ' I. 

1/4. BULL TEMPLE  ~

N.R. COLONY, II ~ _

BANGALORE *iE60=.017.  """ "  RESPONDENT

my SA'.  "SgIv¢ﬁg:a1a#, Sr. Counsel for Smt. Vani. H., Adv.]

T*IA:IS'IIAPREA1; IS FILED UNDER SECTION 260A OF' THE

0' v._r'IN'COME TAX AC'I',.V 1:961, PRAYING TO SET ASIDE ORDER DATED
V_28.C14.2005 PASSED IN ITA NO. 866/BANG/2004 FOR THE
~ -« ASSESSMENT  20002001 AND ETO,

13

In ITA No. 266 of 2006
Between:

1 THE COMMISSIONER OF INCOMEWTAX.
IN'TERNATIONAL TAXATION,
RASTROTHANA BUILDING,

2 THE INCOMETAX OFFICER, 
WARI)~19[1],
NRUPATHUNGA ROAD, _  ~ . _    --
BANGALORE. V'    

{By Sri. M.V. SeshachaEa~..& SrI;"K.'*kj.':IA}SBnd, Advs.}" 

And:
M/S.IIEwLE"rTPACKARD1_NDIA"""  _  

SOFTWARE OPERATION'BVr.L'IfD.,§   _ 

No.29, CUNNINGrLAM».ROAp;. ' __    .

BANGALORE A 560' 052;**._ '  ,    RESPONDENT

[By Sri. G.  for Srnt. Vani. H., AdV.}

THIS , APPEAL IS EILED- UNDER SECTION 260A OF THE
INCOME TAX ACT, 1961;-PRAYING TO SET ASIDE ORDER DATED
l:§).O8v.200'5. "PASSED IN ITA NO. 970/BANG/2004 FOR THE
ASSESSMENT_YEAR 2001-2002 AND E'IC.,

 In ITA Né_._ 26Bi"'¢f\200*6

V  i3éi;ween:"=--

' " "  V'  COW'/IISSIONER OF INCOME-TAX.

..  INTERNATIONAL TAXATION.
- T 'RASTROTNANA BUILDING,
--  NRUPATHUNGA ROAD.

 V' BANGALORE.

 2 THEi__INCO§v;E--'rAI:"'OPFICER,

14

2 THE INCOME--TAX OFFICER.

INTERNATIONAL TAXATION.

WARD~19(1), '

NRUPATHUNGA ROAD,    .. 
BANGALORE.  APPEI,LANTs

[By Sri. M.V. Seshachala 8: Sri. KAI.'Ar»vangI;'_,«Ac1x¥§,'3:v    
And: _  _   *

M/S. IIEWLETT PACKARD INDIA
SOFTWARE OPERATION PVT. LTD.,

No.29, CUNNINGHAM ROAD,      
BANGALORE ~ 560 052. V    *    RESPONDENT

[By Sri. G. Sarangan, Sr. CC'.I¢'E.1J1'1.S€]:' fa}  Adv.]

THIS APPEAL IS FILEDf UI\II)ER_ Sf2Cf["I(§N,«ﬁ6OA OF THE
INCOME TAX ACT, 1961;i;PRAY§NG€ TO SET ASIDEORDER DATED
19.08.2005 PASSF.D'~IN5I_ _I_TA= ,NO."...96-9/"BANG/2004 FOR THE

ASSESSMENT YEAR 20"00~'200I AND  '
In ITA No. 268"o£2f0o6"¥:.3   '
Between: 1 ' V V %

1 THE COMMISSIONER OI? IN.f;'OME~TAX,
. _ RASTROTHANA B"UILI)_I_N.G.
_  -NRUPATHUNGA ROAD,
 .BAAIGALORE, 

IN'TERNATION_J\£ TAXATION.
WAR;D~ 19(1),. 
1 RASTROTHANA BUILDING.
-  '-'NRUPATI-IUNGA ROAD, E
;,BANGiALORE. .  APPELLANTS

_'   M.V. Seshachala 8: Sn'. K.V. Arvind, Advs.]

}5

And:

M/ S. APARA ENTERPRISES
SOLUTIONS PVT. LTD.

OXFORD TOWERS, SUIT 801.
7?" FLOOR, 139 AIRPORT ROAD,
KODIHALLI,

BANGALORE -- 560 088.  REsPc§_Nb£:N;T:  4- 

[By Sri. S. Parthasarathy, Adv.}

Tms APPEAL 1s FILED UNDER sE;c*r1QN j;2"60A_oF'T£v£01:i'}__j
INCOME TAX ACT, 1961, PRAYING TO SET As13:)E~ ORDER .DATE:I_:)=._. 

29.07.2005 PASSED IN ITA NO. 3799/BANG/2004T,.FoR' 'mi:
ASSESSMENT YEAR 2001-2002 AND   ,   

In ITA No. 269 of 2006

Between:

1 THE COMMIS-SlQN5E_RfOF 1_IJc0.ME.:1'A;<. .
INTERNATIONAL"rA><A'1'I0N;jy.  «  
RASTROTHANA E'>{j'«I;LDII'»I(}'; A * *
NRUPA'1'HUN-0A;:'RoA%J; " 
BANGALORE. '  

2 THE 1Nc0ME'TAXV.Q1r§fIcER.,_  "
INTERNATIONAL TAXA'1'E_Oi\I :_ 
WARI).--19{1], "   r

_ RASTéRO'FHANA BUILDING.
' *  _NRLI_PA'I';HUNGA R0A;u;""
'BANG.AL0£<E,  APPELLANIS

1  S.§:s5f1acha1a 8: Sn'. K.V. Arvind, Advs.]

~ ..1ws. APARA ENTERPRISES SOLUTIONS PVT. LTD.
_ .QXFORI3 mwERs, sun' 801.
«V '.7TH._F'L«(}OR, '139 AIRPORT ROAD.
  
' .B_AN'GALORE - 560 088.  RESPONDENT

{By Sri. S. Parthasarathy, Adm}

16
THIS APPEAL IS FILED UNDER SECTION 260A OF' THE

29.07.2005 PASSED IN ITA NO. 3800/BANG/2004, FOR THE
ASSESSMENT YEAR 2001~2002 AND ETC.

In ITA No. 270 of 2006

Between:

1 THE COMMISSIONER OF INCOME~'I'AX,
RASTROTHANA BUILDING,   -
NRUPATHUNGA ROAD, 1

2 THE INCOMETAX OFFICER.
IN'I'ERNATIONAL TAXATION.
WARD-19(1),
NRUPATHUNGA ROAD, '   .   
BANGALORE. * 'I  '--  'iv   APRELLANIS

[By Sri. M.V. Se$'ha.chaJ.a"'&' 

And:

M/S. APARA EN':jE12pRI'sEs---sOLU:1ONs PVT. LTD.

OXFORD TOWERS,._SU_IT 801;, " A 

7TH FLOOR,' 3 39 AIRPQRTROAD, 

KQDKHALLI}  ' - V

 -560.088.  ~~~~~   RESPONDENT

 ~ _   S. Parthasarathy, Adv.]
"'TI-IES FILED UNDER SECTION 260A OF THE

  1VNcOME.TAX ACT; j19%31, PRAYING TO SET ASIDE ORDER DATED
 ";2'907.20o:5__ PASSED IN ITA NO. 3801/BANG/2004 FOR THE
*._AssEssMENjr  20022003 AND Eve,

4: .:SI:InIff£'A"NOe.._.6(I)6 of 2006

*.'=_Betwmmm 

I1  I "THE COMMISSIONER OF INCOME~TAX,

'17

BANGALORE-

2 THE INCOME--TAX OFFICER,
WARD» 19(1),
RASTROTHANA BUILDING, _,  S
NRUPATHUNGA ROAD, ' '

BANGALORE.   , .. 3AFI>EI,.I;AI\II*Sj-A ; A I

{By Sri. M.V. Seshatihala, Aim"

And :

M/S. EDS TECHNOLOGIES   f _ V 
NO.153,2ND CROSS, I' ' -  "
PROMENADE ROAD, - _ .
FRAZER TOWN,  V  *
BANGALORE -- 560 O(}5.W_ 1* »

(::B"y'iyI/is-."  IIqII,?;;AcIvs.;

THIS APPfEAL"j.IS FI3LED--_UNDER*»SECTION 260A OF THE
INCOME TAX ACT, 105.1,' FRA1eINO TO SET ASIDE ORDER DATED
30.09.2005 PASSED IIsT"'-ETA, 14550/BANG/2004 FOR .. THE
ASSESSMENT YEAR 20002200 I AND 

In ITA No, .610 «£2005 

  , . . . . . . ..
1  _ 'IZ'HE'CO'MM.IS«S_IONER OF INCOME~TAX,
" IN'-FEIRNI'x'1'I.QI\IAL TAXATION,
RASTROTHANA' BUILDING,
1 BANC;ALOR3'£.

.: f2' .,  INCOMETAX OFFICER,

" _ INTERNATIONAL TAXATION.
I VVARI} 1 9{1},

 '' ~~NRORATHUNGA ROAD,

BANGALORE.  APPELLANTS

18

{By Sri. M.V. Seshachala 8: Sn'. K.V. Arvind, Advs.}

And:

M/S. HEWLET PACKARD INDIA PVT. LTD.,
NO. 24, SALARPURIA ARENA,

HOSUR MAIN ROAD.

ADUGODI.

BANGALORE ~ 560 030.   ' fRF,S?ONjDEb-Iff" 'V: 

[By Sri. G. Sarangan, Sr. Counsel. for Smt. Vani.  Advi}
THIS APPEAL IS FILED UNDER"-.SECT§A0N 260.3 
INCOME TAX ACT, 1961, PRAYTNG TO '3ET,ASIDE'-  DATED
23.09.2005 PASSED IN ITA NO. 3708xI3ANG/20040 FOR} THE
ASSESSMENT YEAR 2001~2002:--AND     

in ITA No. 611 of 2006

Between:

1 THE cOMMIs'SIQNRR'.01~':I:\IC'QMI:.rI5A}<, . 
INTERNATIONA_:L"'IfA}(ATIQN,.':-.   

RASIRVOTRANAI ';RUI_LDIN ' - ___
NRUPATHUNCEA ROAD,  *
BANOAL'oRE._ ' '  

2 THE INVCOMEVCAX OFFICER.
 INTE%RNAiHONAL'-TAXA'I'ION,
'   ..... 
' RAs*rRO17I=LANA BUILDING.
 NRUPATHUNGA ROAD.
 BANGALORE.    APPELLAN'I'S

 Sktshachaia <32: Sri. K.V. Arvinci, Advs.}

 v._M/s~.. }~IEWI;ET PACKARD INDIA PVT. LTD..
 NO.-_2'4.._ SALARRURIA ARENA,
--i=H_OsUR;MAIN ROAD.
V AD{JG.ODI,
 BANGALORE A 560 030.  RESPONDENT

19

[By Sri. G. Sarangan, Sr. Counsel for Smt. Vani. PL, Adv.};'"--.»

THIS APPEAL IS FILED UNDER SECTION 260A 
INCOME TAX ACT, 1961, PRAYINO TO SET ASIDE ORDER"DAI'ED" ;_. 
23.09.2005 PASSED IN ITA NO. 3709/BANG/2004 .EORV..T'R.E'*I  '

ASSESSMENT YEAR 2002-2003 AND E)'I'C.,

In ITA No. 609 of 2006

Between:

1 THE COMMISSIONER OF' INCQME:'I1~\.X.
INTERNATIONAL TAXATION,  --
RASTROTHANA BUILDING,'
NRUPATHUNGA ROAD, '  
BANGALORE. ' '

2 THE INCOME~TAX'Q_FFIC'ER{ ' - 
INTERNATIONAL 'I§A}«:ATION,g ~ 
WARD--19(1)_.,.  __  ~  _  
RASTROTHANA..EI}ILDING;~.D'j*--.0  I E.
NRUPATHUNGA'---R{)AD,    
     APPELLANTS

[By Sri';._M'.V.  K.V. Arvind, Advs.]
And: 0'  

M/S. HEWLET PACKARD INDIA PVT. LTD,

NO; 24, SAEARRURIA  "

HQSUR MAIN 'ROAD«,.__

ADUGOD1,»_  '  

BANG-ANQRE  500 0:30:  RESPONDENT

 [ﬂy Sri,__ O.V'Saré';ngan, Sr. Counsel for Smt. Vani. H., Adm}

  THIS APPEAL IS FILED UNDER SECTION 260A OF THE
_ ._INCOM'BTAX ACT, 1961, RRAYING TO SET ASIDE ORDER DATED

 '~._f23.0SI2V005"_«PASSED IN ITA NO. 3707/BANG/2004 FOR THE
 ASSESSMENT YEAR 20002001 AND ETC,

In ITA No. 612 of 2006
Between:

1 THE COMMISSIONER OF INCOME--TAX.
INTIERNATTONAL TAXATION.
RASTROTI-{ANA BUILDING.

2 THE INCOME--TAX OFFICER,   *-

IN°'I'ERNATIONAL TAXATION. I

WARD~19(1},

NRUPATHUNGAROAD,   .   
BANGALORE.   *._APPE=LLAN'1'S

{By Sri. M.V. Seshachai'a_&  A[r"%ri_nd, 
And:  _.. .

M /S. HEWLET PACKARD' I.I_\ID1A'--_ 
NO. 24, SALARPURIA'ARE.?1NA.  =:   _ 

I-IOSUR '1;
ADUGODL 3 _*g._~D«A-,__;
BANGALORE  560 030.'     .  RESPONDENT

{By Sri. G. Séirahgafi', .S'I"..'.CG;D}:1seI for Smt. Vani. H., Adv.]

 THIS APPEAL 1B...VEILEI:» UNDER SECTION 260A OF THE
11\ICOME;AC'E"», I96I,'PRAYING TO SET ASIDE ORDER DATED
23.09.2005 p'AssED._ IN ITA NO. 3710/BANG/2004 FOR THE
ASSESSB/1EAN'1'v.YI:1Af~l2003-20041 AND E3'I'C..

  ITANOS. 10.455 552005 & 535-594 of 2009

_   _Be1:ween: N' .. 

4: ~-:1' .. *I*Hi=;.cOi\rIIx/IISSIONER OF INcOME--TAx.

*  1NT1_'ERNA'i'1ONAL TAXATION.
"  'BANGALORE.

21

2 THE INCOMEMTAX OFFICER,
VVARD~ 19(2),

BANGALORE.   

{By Sri. M.V. Seshachaia & Sri. K.V. Amnd, AciyE..}" if 5?.'  "' 

!_L1£_= 

TECHNOLOGY LIMITED.

NOJ93, 18'1" FLOOR.

RV. ROAD, BASAVANGUDI,   " . u   "
BANGALORE A 560 004.   " ~R_E's:>ONDENT

[By Sri. G. Sarangan, Sr. Ci0L1ﬁnse_i'OfOfASfr;t:""Jani. 

THESE APPEALS ARE FILE0.C.UNI)ER"sEC*1*§OAi' 260A OF THE
INCOME TAX ACT, 1961.. PRAY]-NG. To SET ASI'DE'€_)'I{DER DATED
31.01.2006 PASSED _ ma I-TA NO, 159341603/"B2'.i1'\§G/2004, AND

In rm Nos. 11056 0%." 20(§0'&. '$5éA5_5$}$f 2009
Between: O A O 2

1 THE VCQMMESSIONER OF INCOME/FAX,
_ INTE}_RNATIONA'L--TAXA'I'ION.
' *  __ RAS'ﬁ2QT{'PLlkNA BUI':L;D}NG,
 NRUPAT1--.ILIN'G_A ROAD.
 ' BAi\EGALOREi'..A ' --.

  2 ":H.E--.AINCO'§k1E#1?AX OFFICER,

IN'PERNA'FIQNAL TAXA'1'iON,
« WA.RD~I'9(2}.
. ' RASTROTHANA BUILDING,
A '  I'-JRUPATHUNGA ROAD.
 BA§\IGALORE.  APPELLAIVFES

  [By Sri. M.V. Seshachala 81 Sri. K.V. Anrind, A<:1vs.]

22
And :

NQ193, 1ST FLOOR.

RV. ROAD, BASAVANGUDI, T  = I ."j  ~ I
BANGALORE -- 560 004.  RESPONOEE. u _,_ 

[By Sri. G. Sarangan, Sr. Counsel for Smt. VaI1i,.,I:1b;' 

THESE APPEALS ARE FILED UNDERfSEOT1ON'*«2S0A«  
INCOME TAX ACT, 1961, PRAYING TO SETzASII3E.. ORDER DATE :3
31.01.2000 PASSED IN ITA NO. 3495-3500/BANG/2QgQ4,'v AND 

In ITA No. 1066 of 2006
Between:

1 THE COMMISSIONER OF' INCOME-TAX,--"'~~.  _ 
INTERNA1IONALfmxAIIO'I\I;"*..'A '  1 .. "
RASTROTHAN£;B?;?11'.DINi'}, :: »
NRUPATHUNGA ROAD, ~. 3 

2 THE INCOME--TAX OF}P'ICVEI?~?.,_ 

INTERNATIONAL TAX.ATIO'N_, " v I"
WARDwI9{2}._ " _ j I 
RAS'§fRO*II-IANA EU.I.1;I:>II\IG, 

_ NRU}???A'IHUNGA" ROAD.

'   _____   APPELLANTS

 L'[I3%yf:yI;I.i;<vIVSeshachaIa & Sri. K.V.Arav1'nd, Advs.}

 M/S. SONAZ{'A"I}§IF'OI3{1\fIA'£'ION
~ .. .1'I?EcrINOLOG'Y, LIMITED.
_ ._NO;'I93*, .131' FLOOR,
;  Ry."«ROAO;'*~_r3ASAvANOUDI,
"  'I3AI<.rc.ALOI'*<E W 500 004.  RESPONDENT

    '[By-fﬁri. G. Sarang-an, Sr. Counsel for Smt. Vani. H., Ac£v.]

23

31.01.2006 PASSED IN ITA NO. 1770/BANG/2004, AND ETC.,

In ITA Nos. 1067 of 2006 8: 557675 of 2009
Between:

1 THE COMMISSIONER OF INCOME--TAX,m
INTERNATIONAL TAXATION,  "

WARD~19[2),  
RASTROTHANA BUILDING. _ ;
NRUPATHUNGA ROAD, _'     v
BANGALORE.      

[By Sri. M.V.     Advs.]

And:  1111  . 

M/S. SONATA'-IINFORl\/IATION   '

TECHNOLOGY 'LIM'ITED,._ ' ' 

NO.193, 1S1'FLOCR,OI _ ' _ .

RV. ROAD, 13ASAVAZ\?GUDI--.

BANGALORE -- 0560 004-.  RESPONDENT

   irgaréiizgan, Sr. Counsel for Smt. Vani. PL, Adv.]

A  FILED UNDER SECTION 260A OF THE

  INCOME ACT}; 1961, PRAYENG TO SET ASIDE ORDER DATED
""3v:.01.20G5__ PASSED IN DA NO. 1561-1580/BANG/2004, AND

{I .1' In' "IHTAB No.5. 1053 of 2006 & 611-613 of 2009

"~,_ B8t'Wé\B_1_i_: "A

I IE: " -THE COMMISSIONER OF INCOMETAX,

24

INTERNATIONAL TAXATTON,
WARD-- 19(2),

BANGALORE.   .

[By Sri. M.V. Seshachaia & Sri.  A:§;:zI:njd,"~AcI&;s;I., "

And :

NO193, 1s? FLOOR,

R.V. ROAD, EASAVANGUDI,  % --_ , ,   

BANGALORE A 560 004. ' '      RESPONDENT

[By Sri. G. Sarangaji, Sr.   H., Adv.]

THESE, F1LED,UND«ER :§3Ec'IION 260A OF THE
INCOME TAX, ACT, '106.1,4I-1RA*rI'NG TO SET ASIDE ORDER DATED
31.01.2000 FASSED. I1\IfITA --3428--3431/BANG/2004, AND

In ITA NOS. u106B1O'9fVV20O'3  65%'?-6810f 2009
   A   ..... .. W

1  THE1OOvMMISsI'ONER OFINCOMETAX,
*- INTERNAf1"1ONAL. --':I'AxATION,
RASTROTIiA.?\?A' BUILDING.
NR1I_PATRUNjGA ROAD,
--V BANGALORE.

   B  INOOMETAX OFFICER.

I « . " INTERNATIONAL TAXATION,
'wARD»19(21,
RASTROTNANA BUILDING,

  ....NRUPATHUNGA ROAD,

BANGALORE. . . . APPELLANTS

25

{By Sri. M.V. Seshachala 8: Sri. K.V. Anzind, Advs.}

And :

M/ S. SONATA INFORMATION

NO.193, 1ST FLOOR,   ._
R.V. ROAD, BASAVANGUDI, I

BANGALORE » 560 004.   .. :'REsPON'DEI§i*r..4 :3

THESE APPEALS ARE FILED UNDER SEOIION 200A'.VOI3j_frIIE
INCOME TAX ACT, 1961, PRAYINO TO'-SE':T_ASIDE-.. ORDER DATED
31.01.2006 PASSED IN ITA NO. 168221708/BANG_/2004,; AND

In ITA No. 1062 of 2006

Between:

1 THE COMMISSIONAEB'-;_OP"IN(3QME--~T;?.X, V
INTERNA1'IONAL"TA}(P:'HON;--   I. I 
RASTROTI~iAI*.?A"'I'3'éE_1.LDING.  ~
NRUPArrH'UNO'A ROAD, " '
I3ANOAI,ORE.'=1_--.   --

2 THE INc'OIvI'E--TAX_ OI3jE1CE.R;"<« 
INTERNATTO_NAL TA 'I'IO.N',;~
wARDgI9(2),'~' V'   
_ RAS_rROTHANAB1_JILDING,
' *  NRUPATfHUNGA ROA£.*;~"
'E..ANGALORE;«I__  APPELLANTS

I    Saéihachala & Sri. K.V. Anrind, Ac1vs.;

~ .0 QM/_s;-..MPHAsIs EFL LIMITED.
_ ._NOI1.39,':}, HOSUR ROAD.
;  KORAMANGALA.
"  'BAN_G'A_LO:*<E « 560 095.  RESPONDENT

[By M/S. King <3: Partridge, AdVs.]

26

INCOME TAX ACT, 1961. PRAYENG TO SET ASIDE ORDER DATED
20.01.2006 PASSED IN ITA NO. 980/BANG/2004 FOR THE
ASSESSMENT YEARS 2001-2002 AND ETC,

In ITA No. 1258 of 2006

Between:

1 THE COMMISSIONER OF INCOME--TAX,
INTERNATIONAL TAXATION,   "

INTERNATIONAL TAXA';{'ION,
WARD-19{1),  
RASTROTHANA BUILDING, _ ;
NRUPATHUNGA ROAD, __ '   _  
BANGALORE. ,     ;.".~. '~~,.APPELLANTS

[By Sri. M.V. s¢s;,;,,¢ha:g &;S{-1.'K.,§r;1A"A,w_d,rAid, Advs.}

ENGINEERING 'ANALYSIS CENTRE" ~ . 
OF EXCELLENCE IF)" LT'I)"., = "
PHASE~3. SITE NO."I52', . _ 

HOODI VILLAGE,  ._

EXPORT P_R'O1\,/£.O'I'I_C)N INDUSFRIAL AREA,
PHASE,  FIELD ROAD,

BAFIGALORE 560' 066, . .. RESPONDENT
{By"F3ri. S.~7CwaII1esh, Sr. Counsel, Sri. V. Ganga Bai,
Sn. P:,1var§..--Shar1na, 8: Sri. Kuber Devan, Advs.

 I for Universal Legal}

TRIS AI5PEAL IS FILED UNDER SECTION 260A OF THE

 {~.I_IVIINC0}\{iE_TAX ACT, 1961, FRAYING TO SET ASIDE ORDER DATED
 25_.1_1.'2005* PASSED IN ITA NO. 954/BANG/2004 FOR THE
ASSESSMENT YEAR 2001-2002 AND ETC,

27
In ITA No. 1264 of 2006

Between:

RASTROTI-IANA BUILDING.

TDS--1,   ~
RASTROTHANA BUILDING, I

BANGALORE.  _ 5.,  ARPEI,fANTS 

[By Sri. M.V. Seshachaia & SriI;"'e«IV{:IQV. ArviI1c:I_,   
And : I I I I

INEINEON TECHNOLOGIES INDIA I?"v"r.' SIJILL, _  

IOTH FLOOR, DISCOVERY BUILDING,' = 

INTERNATIONAL TECHNOI,OGI:"'PAR:«s; _ _ _ - 
WHITEFIELD ROAD;    

BANGALORE - 560.086.  ~      RESPONDENT

[By Sri. 'I<,R- I§uIn.¢:¢;.IjAév~;..I§:'I~. M /s. King & Partridge]

THIS.APPEAL VISAFILED UNDER SECTION 260A OF' THE
INCOME TAX ACT, 196-1_, PRAYING TO SET ASIDE ORDER DATED
2l'5."I~]_.20(ﬁ_5'* PASSED IN"I~TA' NO. 468/BANG/2002, FOR THE
ASSESSMENTYE.AR~ 2001-2002 AND ETC,

In I;I"A;_k_'3?_e.I '1'1i6M§;_g.;f'2ﬁO6

"Between":._

" A  LI ' ~ .   THE COMMISSIONER OF' INCOMETAX,

3  ., INTERNATIONAL TAXATION,
" _ RASTROTHANA BUILDING,
'NRUPATHUNGA ROAD,

 BANGALORE.

I "  THE INCOME-TAX OFFICER,

30
25.11.2005 PASSED IN ITA NO. 372/BANG/2002 FOR THE
ASSESSMENT YEAR 2000-2001 AND ETC.,

In ITA No. 12'?0 of 2006
Between:

1 THE COMMISSIONER OF INCOME-TAX,

INTERNATIONAL TAPCATTON

WARD-19{1),

NRUPATZI-IUNGA ROAD,"  .   " "
BANGALORE.   _    'APPELLANIS

{By Sri. M.V. Seshachala    Advs.}

ENGINEERING ANAI:;SISVCENEERE.V _ «

OF EXCELLENCE (p)LT'O..f,-~ I  ' ~

PHASEL3, SITENO. 152, ' '

HOODIvILLAOE';,_ " V '_ a = _ 

EXPORT PROMOTION 'INDUS*I'RIAL AREA.

PIIASE. FIELD" ROAD.

EAI-I.OALc)__RE;_..L5S0 066.  ----------   RESPONDENT

   Sr. Counsel, Sri. Pavan Sharma,
 .  S11. :'KIIbEIf.f3evan, Advs. for Universal Legal}

THIS AI?=PEAL0Is FILED UNDER SECTION 260A OF THE

 INCOME TAX "ACT, 1961, PRAYING '10 SET ASIDE ORDER DATED
'4.«.O'j2.'3-,_1'I..2005 'PASSED IN ITA NO. 955/BANG/2004 FOR THE
._ASSESSMENT YEAR 2002-2003 AND ErC..

31

Ci
In ITA Nos. 1060 of 2006c?&v§595-604 of 2009, 737 of 2007,
738 of 2007, 739 of 2007, 740 of 2007, 741 of 2007, 745
of 2007, 746 of 2007, 747 of 2007, 777 of 2007, 780--'O_f

2007 . 782 of 2007. 785 of 2007, 786 of 2007 , 787 of 

and 953 of 2007
Between:

1 THE COMMISSIONER OF INCOME~TAX;"'  A 
INTERNATIONAL TAXATION , I "

2 THE INCOMETAX OFFICER
INTERNATIONAL TAXATION .
WARD~19{2}, '   1_
RASTROTHANA BUILDING,' _A 'I
NRUPATHUNGA ROAD, '
BANGALORE. 

 " I'  OOMMON
\: APPELLANTS

Ané:

M/S. SONATA IN.E'ORI\/IA.TIGN' _ 
TECHNOLOGY LIMITED, _ ' '
NO. 193, 151: EIOOR',   =
BASAVANOUDL: ..
BANGALOR1'J_~ I560 004.  COMMON
    I  RESPONDENT

 G. Sarangan, Sr. Counsel for
 I " Smt. H. Vani, Adv}

'   IjI'A NOS." 1060 OF 2006 81 595-604 OF 2009 ARE FILED

4: «UNDER SE.CTION 260A OF THE INCOME TAX ACT, 1951, PRAYING

 "7170 ASIDE ORDER DATED 31.01.2006 PASSED IN ITA NO.
1 _v3034--3094/BANG/2004 AND I;TC..

32

ITA N08. 737 OF 2007, 738 OF 2007, 739 OF 2007, 740 OF'
2007, 741 OF 2007, 745 OF 2007, 746 OF 2007, 747 OF' 2007, 777
O? 2007, 780 OF 2007, 782 OF' 2007, 785 OF' 2007, 786 OF' 2007_._&

787 OF 2007 ARE FILED UNDER SECTION 260A OF THE INCOME,
TAX ACT, 1961, PRAYIN0 TO SET ASIDE ORDER DATED"g
13.04.2007 PASSED IN ITA NOS. 307/BANG,/20,071-,  ,
305/BANG/2007, 302/BANG/2007, 301/BANE/2'007..,__' --'-- '

298/BANG/2007, 325/BANG/2007, 296/BAN__G/.20.07, 2
295 / BANG / 2 007, 297 / BAN G / 2007 , 300_,v"BAN_G.,/20,07.,A

304/BANG/2007, 303/BANG/2007, V-3'O6,"--BAN(}/20_()77',_ 8:} 

308/BANG/2007 AND ETC.

ITA NO. 953 OR 2007 IS FILED: UNDER SECTION--".I_260A OE 

THE INCOME TAX ACT, 1961, PRAYI_NG._'I0 SET .ASID_E«ORDER
DATED 10.08.2007 PASSED IN ITA No.21 I,/BANG-/2006'.=EOR THE
ASSESSMENT YEAR 2006-2007 AND  -- '  ii

In ITA Nos. 1203 of 2006,1204 o1:_2006, "1205 of 2006,
1206 of 2006, 1207 of 2006, 11206.o'r,~'2006;»..1209 of 2006,
1210 of 2006, 1211 of 2006,. .12-12' or..2006,*~1213 of 2006,
1214 of 2006, 1215,o1v200a6, 121:6.0f.,2006,'2«l217 of 2006.
1213 of 2006, 12139 0322000, 1220 62 2001251221 of 2006.
1222 of 2006, 1.g223~._0f»2006,-1224'"--0f«2006, 1225 of 2006.
1236 of 2006. 1232 Cif 2006, '71j;.;;3s-or 2006, 1239 of 2006.
1240 of 2006,-4.2411 ofiI:?,,=0G5_,_;;l242----vofv2006, 1243 of 2006

and 1244 o1':'_ 2006  

Between:

1.: v ,_ THE"COMM1SSIONER._QIt' INCOIVIETAX,
 . ' - INTERNATIONAL TAXATION,
 » RASTROT*IIANA.I3UILDIN0,
*  NRUP1{fii,UI'JGA ROAD.
BANGALORE.  

 _ THE-ADbI*I':O°NAL COMMISSIONER

 OF INCOI*giE--TAX (ASSESSMENT)
 " INTERNA'I'IONAL TAXATION,
 RA2\3GE«19,
' .,RASf§fROTHANA BUILDING,

 L' EANOALORE.  COMMON

APPELLANTS

33

[By Sri. IVLV. Seshachala, Sr. Stanciing Counsel}
And :

NO. 193, 191" FLOOR.

RV. ROAD,   -
BASAVANGUDI, :

BANGALORE A 560 004.   f'cO»MMO':xr   
' * RESF_QN'DEN'£ 

[By Sri. G. Sarangan, Sr*;v2.6:C0uns6I'f01'   I
Smt. H. Vani, Adm} "

THESE APPEALS ARE  U1'-IDERVI'S'F,C'I"I'ON 260A OF THE
INCOME TAX ACT, 1961, PRAYING; TO 2.3061' ASIDEVV ORDER DATED
07.04.2006 PASSED V IN ...1..'V1'A.__ v__NQS.--"~.V 'A7266/--13ANG/2005,

769/BANG/2005,  /BANO,iiz00«5A§"'v #770/BANG/2005,

772/BANG/2005,  37741-/'BANG/2OO<5."--V ""'144/BANG/2005,
145/BANG/2005,  7'78.[BAl\1'G/"2Q05,V"v_V ' 778/BANG/2005,
1016/BANG/2005,,  ;j_453;'BANG,'.2005,  452/BANG/2005,
1015/BANG/t:006,_  ":r;;73/1:sA1'x1_c;/200.51.,~' 206/BANG/2005.
777/BANG/2005, '~ 205/BANG/2005, 146/BANG/2005.
450/BANG/2005:,' . "v%i'5A1V;'BA1'\IG;l2OO5, 775/BANG/2005, '
1026/BANG/2005; -- V101*'0./BANG/.2005, 1025/BANG/2005.
1021/BANG/2005, = '102'3/BANG/2005, 1024/BANG/2005,

1018/BANG_/2005}.V101?/BANGYZOOS, 1022/BANG/2005 8:
1020 /BANQ3/':2.005 AND. 

in ITA  i'246~n.f 20066: 543-543 of 2009, 1247 of 2006
8: '60:-3».-.610? of 2009'.' 11243 of 2006 & 580-584 of 2009. 1250
of 20061.&A5*z6»..-5?9~-of 2009 and 1251 of 2006

 VB-etweeAn*~:.__

"  :1 ' ~ .  '  THE COMMISSIONER OF INCOME--TAX,

  , IN1"--E5RNA'I'IONAL TAXATION.
" _ i°J§1S'I.T92O'FHANA BUILDING.

34
2 THE JOINT COMMISSIONER
OF INCOME-TAX
RANGE19,
NRUPATHUNGA ROAD,  
BANGALORE.  COMMON .  =

[By Sri. 1VI.V. Seshachaia, Sr. Standing CO§I1'1SfC_:1]:'~VV V 
And : . '' M 'V

NO. 193, 15'? FLOOR,

RV. ROAD.

BASAVANGUDI,   -   
BANGALORE -- 560 004, I   ._  _ ~ HCOMMON

" '- v  V  RESPONDENT

[By Sri.  ~Sara:r} géih.',V:Sr. COuI1S€1 
"  H'.i_V3.ni; Achy} 

THESE) APPEJXLS ARE FILED UNDER SECTION 260A OF THE
INCOME TAXACT.' l.961;:"'PARAYI:*EG"'TO SET ASIDE ORDER DATED
07.04.2006 PASSED IN =I_TA  135-141/BANG/2005, 236-
242/BANG/2005,' 2.624267'/BANG/2005, 88-92 /BANG/2005 .3:
498/BANG/2005 AND"m-.,  "

in ITA.   (£2007 }{549-551 of 2009 and 94 of 2007

  Betwe'en':"7

"  :1; ' ~ .   THE COMMISSIONER OF INCOME--TAX,

3  ,, INi'--ERNATTONAL TAXATION,
" _ :'?.ASTROTHANA BUILDING,
A' NRUPATHUNGA ROAD.

35
2 THE ADDITIONAL COMMISSIONER

OF INCOME--'FAX
RANGE} 19,

BANGALORE.  COMMON  .
AP    .

{By Sn'. M.V. Seshachala, Sr. Standing CO1_JI1--S(OI]".VV I 
And: _  . M .0

NO. 193, 15'!' FLOOR.

RV. ROAD,

BASAVANGUDI,       
BANGALORE - 560 004. '     . V' ~  COMMON

 - 2   RESPONDENT

[By Sri. ' ~Sarangai1', :53". "C..(V:'J»'..'1Y1.E'I€fI 
  Adm] 

ITA NOS. 7'7'*{).F 2007..&~.._549--551 OF 2009 ARE FILED
UNDER SECTION 260A 'Q:'FTATI1E'VI--NCOIVIE TAX ACT, 1961, PRAYING
TO SET ASIDE ORDER DATED._07,64.2006 PASSED IN ITA NO.
436439/BANG/'2006 AND .0 

ITA;NOS, 94 OR 2007 & 650M656 OF 2009 ARE FILED
UNDER SECTION 260A  INCOME TAX ACT, 1961, PRAYING
TO SET ASIDE' ORDER DATED 06.07.2006 PASSED IN ITA NO.
75é»1,--7'6,1 '/BANG'/2005 AND ETC.

 ITAIINOS. 9.1"_9_'},o} 2667 3: 533-542 of 2009 and 921 of
 ggo7 & 503-532 'of 2009

_ vuBeijxe'e:1;_4

  1   "'*r'IHE'DIRECTOR {COMMISSIONER}

 OE INCOMEZWTAX.
*  INTERNATEONAL TAXATION,
RASHTROTHANA BI-IAVAN,

 " »,§372--702)'.BANG/20")? AND E'DC.,

"1~AFOR_"aUDOMEN'iI' ON 14-092009, 1'7~08-2009 3: 2008-2009,
 I COMING ON FOR FRONOUNCEMENT OF JUDGMENT THIS DAY.
 =,SflYi;EPJD  KUMAR J., DELIVERED THE F'OLLOW"I}\EG:

36

BANGALORE ~-- 560 001.

WARD 2(1),
RASHTROTI-IANA BHAVAN,
NO. 14/3,  9
SR1 FLOOR,  '
NRUPATHUNGA ROAD,     
BANGALORE.   COIViMQN._ _ 

  _ 'VIAFFEIA.-ANTS

{By Sri. M.V. Se,-shachala, Sr. ST_éa1:éiing CODDSCIV1-I

And:

TECHNOLOGY LIMITED,'  V ~
NO. 193, 151' FLC)OR.,.  

R.V. ROAD, 
BASAVANAGUDI, V ,   .. 
BANGALORE--~04'.'*      COMMON

   --  - RESPONDENT

{By 2811, G'. '~ Counsel for
 A Srrﬂi, PL Vafﬁ, AdV.]

f "-ITA19 OF 2007~& 533-542 OF 2009 AND 921 OF
2007 3: '5Q3--532,_OF"2009 ARE FILED UNDER SECTTON 260A OF
THE'*INCOME  1961, PRAYINO TO SET ASIDE ORDER
DATED .18'._07.20:07 P."'-SSED IN ITA NOS. 931-941/BANG/2006 &

  HAVING BEEN HEARD AND RESERVED

37

JUDGMENT

The above appeals are all by the revenue 

against the orders passed by the Income Tax Ap'pe11ajte 

Tribuna}. Bangalore Bench, where 

had aliowed the appeals fiied by _different resid'_ent "~n it

assessees in respect of different assessmeIit._  ﬂby

hoiding that the resident -~  Iiahleffor
deduction of any part of the  to
noI1--resideIit    for the
software which    asfsessees had
acquired/purchased' "n_on;residents for the
purposes of  of the resident --
assessees  " the  of the nature of their

liah'ilit3f/ohiigatiorr:under the provisions of section 195 of

jathe  [for short 'the Act') by holding

 the  "payments were not in the nature of

  within the meaning of section 9[1][Vi] of

 if " A   Act  it is not royaity it is not income and if it was

VV._"I}.;Otui}'VlV(5V(a'I1'}T}(3 in the hands of the non--residerit assessees it

V

 *  i1f1(to1'nc" is"*£'é::_ll2'1t'*i.€'jL1$1= Ellfld 1101" s141s¥.ai1'1al;)lc:.
 'V I,<:»'a_1'i1r;.ci'_c0unseI for t.1'1c7 assessees I'1ave (>oI1t.ended
.1 in' !..Ij;..«r>.§sé*..ay1p1:>e'als 1.1m: thxa rzamlre of }")E1yIT1(".']'"l1 is not

V" $u:;>y--«-;x1:-;y*: ex.-'e1'1 witiain H16 H1e2u'1i1'1g zmd scope of secti01'1

4'2

A\='oic.i:;.1.11C<:é A_.§_{:'(*c:11t'1'1£.s [for short" 'I)'.I'AA'E (=?111.er<>c1 irzto with
sc=\='cra1 C(.>11m.ri('rs alui :'c:l<:v21.11t" for 1.119 purpose of ('EEC'}"J,

;)z:1yme1"11' .

6. While' U16', nat:1.:1'e of }')E.1yI1}C1'1i  t:e*sI:é(i"' ~--d1_1  t:h(~:_

to11cl'1st.01.1e of 21 royalty paynmm. as (:i'<%:f]'.11_.'<.-'*;«Tj..~y'1'1'1  

DTAA and the prese11t p21yme1'1t '<'::l_' tljxe zissc-jSsee}1_aot
qu21li.1'yir1g for dE'.&5C'.1'i[JEZi(')l"1 'rc)y:i:l_t.y'?_ 21nd. u1';}'1C.y:fé'f?_)1'e g()es out

of the purview of 'r0y211i:y' ass"d.e§i7i11cd}jr1 .t;r:1jf'11s'§ of S€CT,i.OI}

9[1}[\/1] of the AQtj_.L;.1}    there  3111
in {x()y1.'-Sit-f.5'{:C? n cy_  ::':l:7}l\'/\\    V  f' 2111 En t.ernation 211
Ag1'eet1"r1e1'11 :'e;_md '  'of the Act, it is the
pr0vi.s1'0ns oi  ut'E'1_'_§'  has to pmvail and

1;}1f:1fc2f()re..tf_he tonclL1s§io1.f3____Qf.the original authority and the

1'i1_i.s".:_V z3;pj3--e11a!.:§:"~2m1:I'1vQ1-ity that it  royalty ancl 1.he1'c.=f01fe

§/

51
8. Whether the Tribunal was correct in
holding that since the assessee had
purchased only a right to use the
copyright i.e. the software and not the
entire copyright itself, the payment  .
cannot be treated as Royalty as per the  l  
Double Taxation Avoidance Agreement"-._V  L"
and Treaties which is beneficial to --the'*-  .
assessee and consequently sect£on._9<.of'  i
the Act should not 'take"rt.'i'iniio  
consideration. .    l

9. Whether the Tribunal .=toa;s'r..'jco'rrect in" 
holding that the payr_ne=nt ._the
character of purchase anfd"sale..Ofgoods
and therefore carirzotf b'e._"»,trea;texd_ 615
royalty  liable-to IncoﬁL8.T¢'x- "

13. It is in the b.a(ékgrour1d.. of developments and

the questions haVing.V.arisei1_l"for examination in these

appeals, argurnlents are ad\ran.c'ed'.l

  .,i_Seshaehala. learned senior standing

  appellant M revenue along with

 K V 'Aravir;d;e:'I}_earned junior standing counsel, in all

--4the«se'.cases,"rnany learned senior counsel instructed by

 thleirl"--ll(A:o1_1rit-3el on record have appeared and made

$/

 .AAI3V.'.-'i'.ji'i"I1(',',I'1i'Il -is t.0- ~h.é}t21xed at 10% as givirig the niaxinium
" -«biE;i«1¢1'i~f. to t'i1C. is just and proper.
7'4]. '}?qéi*».c:E)1ii:.1'a Sri.K.P.Kuma1', 1€'c1I"1'1("d senior (touiisel

 -  é1.i}3(i°;l»ri--I'1g for the respo1'1c:i<;".*.i'"1£' would pose the foliowing

54

I'C"'fC:?1'l't'd if.1}(:T1"€?i1"l  dc-rc=-r1'1'ic(i to £}.('('l'E,.1(' or arise in india
squzxmly applies to 1,hc:~ fa(:1.s of the pm-:scm: Case.
A(7c(>1'c1iiig;1y, SI'i.S(?Si'1E:1('h£11E1. brings to our iioiiioe t,1_1r;-22
EISSCSSIDETII1 o1'der w1'.1c-;r1'eir1 the Ass(3ss.ing Offic<~::t 
exami.i'1ed 'Lh€S(;'. issues which is at AI1I'1€X1.1f€--ij(::'  
suppcirts the \/i€VV of the Assessing 
effect that the ti'ar1sact.ion wlieii liﬁad    "

21g:reeme1ii_ i'ei'ic3ct,s that it is a 1ic(;ﬁ::c and th.::"v_arhoiif1t.

paid thereu1'1dei' \v_ou'lgVi"_-be 1ic7eii(f£=. i'eé7;-ind. i:ifiL1s _is royalty
within the C1E'.fi1'1i3'["iC)i_f."."'v(ﬁ"V.$E3Cﬁi5:1'3s'!Vg[..i':},--{\*;i?,, 01': the i.'I".Ac1' anti

hence Sc:('7l.ivi)ii"Vi'£95; "7'};iiii',r'é;i{::i'<?d.  VIi:V is rioticed in the

zissessiiicm oiidezf t_1i;~_1i  Offi("t-:1' had hc.-'rid that

though rate of te:1>"<*cw_19i i'(s)ya1i"y éifs per Section 1 15A is  per

D7I'AA., and" LC3{f.fftE'}f€l'11 pk{éi.*E:«e1'1is21get  fixed for dif'f(-:i"erit

(ie1.tQ.<;;'Q1'i<:fs. 'héisu (1-(51n&_i.. to t"hc'=r ('.()i"EC1L1Si()I] that the eiitire

5/

  c:omp21Iay'i--ss' i1i"i'.he f2;=eit.:1re of royalty and not out right 

'7yo_s;.i11ce sofE;.\i»2;'1*éA. rom21i11s with the trarlsferor.

_A'Sfi;Séslmohala would fiirtiher come1'1c1 that the

 mling rcp<_)rE.ec.i in 238 ITR 296 which has been

5

'J1

(;_uesI'io:1 for }3e;.*.ia"1;-4' a1'1$\4-\-'e:'C('l 1'1am1c?iy w'}'1et.1'1c1" H19 NR1 
c11e1rge21b1e to tax in Erldia and a1'te1*npI:s to amswer the
que.si,£c)1'1 by c()11i.m'1cliI'1_g E:11e1t_ the '§"1"ibuna1 in pa1'agra;§n_
5.1 at page 35 has held t:}1aI: the  was not 
in law in crc)nte:nding that this case is not 

Section 9{I}[vi) of the Act.

18. Sri. Seshachala would co1}t.ehci"._ihe1t. ,V4L'1"v'1'L?'

Appeliate Authority 21%, page,93,. _ha-S*-r3x2,11i1i'1j1<;Ei-,the effect of

D'I'AA, the c1e1"in1'1.i--:)I1 f V. 1'gi'1«e('i:. _Vt1'1L:'§.1':%jz,t__oC1é'i*" and also the

meau'1ing to be etsgigziggi to 'i1}1_}é;:11...___vHc}' cro_z'1i:ends that the
1*oy;-my as cié:j_fi1'u_:,d ;.aV1"id'é:ég"V's;«:;t%'i;vion._&}[ 1)[vi) of't:l1e Act' and the
same defilied 'uhd§:1'V".Afi.iC§s{"'_.»~12 emci '13 of the DTAA

21grcc:111e13t_§.ﬁ()i"USA é1'n-.d_Sw(:(ich xscrspectively are one and

i.}'1C_sa11:1'e. fggtnd i1e';'1%ti'c: _t:.hc-2 payment. made by the .respo.ndem.

@/

720;.  Sesliachaia. lc:e1rnc'-mi senior standing coimsei

 'zip'}J.§r25i.1'iiig for the 1'€"'.\»'t':',l'1{1(,' f1i1'1'.hc1' (.'.(.)I"1i(:'11dS tl'12.1t' in 

56

(.1<_)1isidei'C(i by Hit" Appclle-11.9 Al11'.}'1(')l"iE'.y at gasige 94 of the
papei' book \V}'1t'l'€il'1 it  ('.()l'}-SiCi("'I'€TCi by thli', AdV21I}:Cf--:T>7
R1.iIi1'1§_.?§ At,1t,l1<>i'ii.y \Vitl'} |'6t'f91'cr11(*L? 10 I;l'1(;' fL1m't1i()niI"1§.3; ~
etc and C(_)11cEu(ieci t.he1i: such payment 
(vide page 99 and 100}. It  (T(_)I1tI(?f:i(>{(;,(i:"ihéii. 1'-its 
deeinccl income uricier SC()1.i0_11 9 iii"  
the 1'.'a(?i*. whether it is 'shrin}{¥"v§ifei;3psd*" ~.9(>:'i~'  
shelf/brzinded software' urﬁiL:»}1  
and gone into. Si"i.SV(1s1121c%lri,;1_1§i.  12 and
13 of DTAA  zmci points
01.11: tliat thq  in this regard is
oftwo fold: 9 V  H

(i) AVs§)fi,\iréi1*eV_:isw 7go<A$'tl9sV""'é:ii1d it does not find a place

" V .. 'ii 1'15..A'i7;)"l  21g1'€1éﬁi{? 11 L

s{.ii'V} 'i<5ts3i1'{_%.1'wise defiiiition urider Section I2
 i)'I".A~,?3_i9'4j'..'i'(A)r royalty the word software. is not

rfie.i'ii.i()11eci.

58
Sri.Seshacha1a has formulated the foliowing points for

addressing the arguments.

(i) the assessee was bound to deduct tax 
Section 195 of the Act and he cannot   
that it is not the income of the recipient';-._:: v  ' Vt" ' 

(ii) The payment is covered by~'S'ection  
the Act.       

[iii] The Tribunal did not c_onsi'cie_r" 
assessee can questionzﬁhthe  of
recipient under Sectionsi2'U'iVc{'i]uVand 20 i'['1A}i

(iv) Software is a  to tax
under Sectiohn  and relies

upon   in "the_4'cas'e"ofifransmission

Ci;orpo_ration__  VS.'. won" (1999) 239 ITR
587V(scj at 'paragraph..--8.

  K,umar;'»isai*ned senior counsel appearing
forVthe"responidefitsiwouid contend that the Words used in

 i"'t-section ' .195 _is't"??ciiargeab1e to tax'. Hence a person

~ if.-e.du-cting 1235; under Section 195 would have to
 first see whether the same is chargeable to tax

 "then only if it is so he has to deduct and if it is not

§/M.

5 9

(£ee1"nec.l inrome within the scope of S(i('i'_l()I'l 9(1_)[Vi} of the

ACE". 1.l'1(--31'1 if it is to be E.al<en to be 21 1"I'2-idiiig rt-:c1eipE.. it 

be cha.rgca,ble to tax as busiiicss profit and if~~--oi_j§l°..e_{_1* . A'

con.d.itions of 12116'. DTAA are satisfied l'h€il ii; c.a.,11_

income 'dCCI"L.ll1"lg in India. anti Diloltg. l'._c)i:}fiemrise_7  f

Sri.K.P.Kumai' relies upon the wry cle(*I'ision I'C--Vl'i'€:'/"dv'.'i,'1_pC)l'lV'§
by Sri.Seshe1c11a]21 and lariilgs to ()l",i'I'_ ll(_)lii(_'.€'3 'p:;;ir21gr21i)h 8
wherein it; is held 'applicatioh fo de;di,1'c1'.'»t.éi2:%\7v()u1d arise

only in the eveériig  Sri KL11'1"18_l'
cont.e11c'lss that   El-"id ill i5 31 l1"€1diT1¥
:'€cc:iPt t.l11ii$i'iV'ii'o1j'  India. Sri Kumar
oubmits i,l1aix'i.i'itifaiﬁli1l.g in India ELl"i€I1 only it
is cl1a1'gea.l)E._e ttiiélltziizi aﬁd   paynient is made outside
lr.i'§l1liav.,z1As  insi,2u'1i Case, it will not be

lieiblé... " as SL1('.h the respo.r1den'[ Company

V'.jV\:'Ol.l1d nc:--.ij___ be§.~re:vt1i'i,1Aii'c2cl to deduct" the  Sri Kumar

""éor1«ij.c%'r*..gls if 21'}}éfI'SOl'] is not liable to be C.h'c1l'gE'.d to tax then

 ._ iiilio'  beiI'1g ('?()I}SFi1'L1'L"'d as .21 person in default under

Se:§:i.vicoa:'1--i2OO does not arise. This _posii*ior; the respondent

 be b0~;i_'1(-?. iii1_iii:iiA11d W'11i](,' readiiig SC('.'(',i0I1 195 and 21
 ii&1b10_.T,() dedimi: can look into as to whether
'"g_.'iT1C'()iT1€:f ()§~ .t:=he 1*ec:ipiei"zi: is c'1iiz'1rgeabl<: to tax in India and

Oz':1:'-.=::V~u..r_:li3: ex;-1.11':inai:i01'1_ if ii" is f(_)1.1:'1cl by !:l'1<;? i'€Sp()I1C1(".I'l1. that

60

02111 comc1'1(_'1 in e-1.11 z»1pp(*a1 b(:f'01'r3 1'.1"1e z:u.11.11(,)i'ii'ies or the
'i'rib1.u'1211 as responcieiiii would steep into the shoes of 
assessce, sL.1bmii.s H1211": {Dy 1"e21(iii"1g i:1'1e emire_j1.1(ign1eij:i_iixiii'-.
!:ra11s1nissi(.)1'1 C'1"po1'aIi(:>.:'1 ('.€1.SC it does not  :"
I'I'gl1('. of the I'(:'.Sp()i'1Cl€111' to cliallenge 
based on c11argee1bi1ity. Sri KL1iTi'ai* 
(t11ai*geab1ii.y {to pay advance. 

4(2) read with Secriiicms 190.5196 gpi'----€'uh'c.Aci'. a11é1"(?v0n1;t;r1ds

ihai: adniiilieclly in _i.l«3'e_V i'_ii1si,éi1'1i_.cgise«,}52iy'm§;§11:ii is not madc
in India and it  Op_€I7)vfb"'thé"'f§3Sj3GV. déf1'{.Es to urge iihai. the
E'(,'(f.'i_]')i(?i'11.  )"ir"itm"<_:'}1aiifgézzaiiﬁitr  Iii"i.1'1is 1*eg_gai'd Sr3ci..i0n.s

4, 5[2b], g(ij'('\7i}vE11}(.'1VI95.':2.Ii3Q§x"jD'17€¥SS€d into $€;ri'vi('.c. 'I"h<..*

decision in _t1"1e E215? oft.'-CAI*§"  I31} Lilly (2009) 312 PPR

2a2 5[SC}  p'a,r21~g;'a.]')l'1«"29  ;:)a.g<:* 247 is relied upon 1.0

(rc)i11.€-izijiii_i.}'i&f._ provision uncic-tr S6-rciion 4 will have

33/

62

Secti(:)1'1 200 e111(:l Elms the 1'c*:_s1)(')1'1(lc1'1t" cicms not c0r1'1c

within trlle ambit of cle<?111ecl dcfau.lE<-:1". .215". the paym.r;=:'i1.1.

wasM11(:)tt in Elhcr. 11a!'111'e of 21 1"0y211t:y p21yn1e1.'1l:.

24. It is c:()11'::e:1'T1ded by 1.110 _lear1'1ed C()LiI1'S€_;?l:"il)I"v.:fl'lC

assessee 1:112.-1t once they do 11:')! 0.01mi; 1;11d€1';. tlliqelgjhelfgizxg  f

p1'(1)Vi$i()1'1s namely Section 4. f;}1}'0__queS'l,i0'I"2 of ,€ftl:dI.llCtir1'g

the tax does not 2-msc as I'C?C{l.11'1'lE?"Ci_'lL111dC1'.'SiTCl.i(Jli} 195
inaslfnucll as Section 195 ..4(_?EJ%«-81t'.e-t11p--laf<:~s_'{lie _declu()ti0r1 of

tax only in re*spec,l__ of 51.1011'-.ir1<:mir1él'*.\2v§1i.p?i becomes

(?l1a1"ge.21l3l@ 1.il1d('_3V.l;._  L" _ p.1V'L"27vi:i3.iL)1'1:'-_s..V  llﬁiéé Act namely

Sec£'ic)1"1 4. i~"Ic;:1=;r.{c4."viii»"is_(it_>_{ite11'c.led 111211'. o1'1ce they are
ouliside the p1tr.'v_iew of _cl'1'l211*'ggé;;bilitiy t.he1'e is abssolmiely no
liability  dt-YCl1l(".l t"e1'3--i. '&»iI1d .l'1C'.1'l(',C 1110 (I(')I'1.S€C_]L1@1"Il.lE;1l order

pzmsetl'«1--.1miCr'«tbegii:-i.Q11 20'}  bad in law. [11  ctmtended

 t.l'1et1!". tile.CONSétqV1j1«.ci:§=tfc?s:; of 1"1()n--payme1'1l'  not 21lt'.r2»1ciCc1, if

7._l}1(:'Vpe1's(i)h  1710 duty 1:0 d€dLl(".lI. as Llrgeci.

  Se'=11'211'1§,_;"e[11'1, Scniol' (::()ur1s<:1 by 1'elyi1'1g upon to

 F399) {TR 587 and with 1*efe1~c-zmre tic) Pezrzigrapll 8 of

63

the Jucigenieiu of the '1"1'ibu.;1'1al Whi('.h refe.1's to Section

195(l.){2){3) of £1119 Inconio Tax Act, submits that 

miher sum (',h'di"g€:'.Elb1€ under the provisions of m;§'A:5;.~%-.__jg ;.

would meal} that 'sum' is ehargeablt-=. to tax. w}'1i'c?vii:co£;1d=A

be assessed to tax under the Act: 1111211,: 1116O(?ji">r1'sidAe:f21tioif1s..__ 

would be whether the payment.   to I?:.QV1j1g..3

resident is Cha1'gCdb1€ to tax u11de_r___i"i1:;~ 'provisions ofitiihe

Act or not, subrnits that if ifhis tE1'i+',€If|:Vi.h§£1';"iIh(%--.,SL111} is not

._.are'.i,l1<_3 (:Qn.:scC11iéi'£ces is not a

at all (:l1argea1bI¢,_V 
question 2111s'\'7v__§fI:'e{j.V*:.ii1;_:O CORPORATION
vase. 1T)(",(.'.'r'.11,E.':,§;'-Vﬁiﬂ.'  qr-_ie.stiion that arose for
consideration 'A1)'ei_'oro  Sri Sarsingan subriiiiled
t1'1:a1. Secéti,,c1§ii'V195  to pure income receipts like".

iI11'.VC*"['(',\',-31:,"~.1fCl11}V'€ﬁ[I(7,';"".E1]}d not to something in which the

7'»__i11<:omes=is'--sa>11ibed'd.ed=imd 'mat' the Supreme Court: was not

V:slj('.(1UVi1't?(ff to éo1'1sic1er a. Case of the p1'es€n1: nat:ur<~.*. in

«:"i7z'a1'1sniissi.oz1 C()rporat:ion  and th€I'€fOl'C the

'_d(=:_(%'i's'i('Ji'.g is not: an aL1iiI*iori.t':y for the present. case. sL1bmit:s

lj1a"1'.»(':()1'1sidc?ra1ion in UIQSE' a1ppL'*.als is as to whetilier the

$/

64

payrneiii of 21 's1,.1:m' to the r1on--1'eside1'1t.  chargeable ,:."o,

tax under the Act or i'1o1':? that. sum rnay be i1i1eor11e«...p_or_e-f 

income or income hidden or embedded I:herein,"'~--._If-:iSo,

then tax  required to be imposed;o1i_the

Elab<)1"ai1;i1ig; Sri SaraI1ga1'1 s1.:b111ii:s' ljhaii wh_.a'ii \VO1}.1'd  the';

income is to be computed on  
provisions of the Act': iI1(3iL£dii1:g'- 
of the business inconie. if   receipt.
Trade receipt:    proceeds of
some properiiy or   in the course oi'
f1,.irther  to be deducteci is
income tax oéiyeble  rate under the Act

Under the    of previous year is
 Se('ii.'ioI1___.4={2]. Section 4 provides that in

respeci,:*oi;' i.nc.o11.1_eL'*--.chargeable under sub--section (1),

 ir1(to1ii'é.._i:'éicx. s}1.t3i_lJ__be'"dec1L1(:ied at source where it is so

 .Videduci.ib}e__L1rider provision of the Act. If the sum that

bcxpaicl to the non-residem, is (?hE1Fg(?2ib]€ to tax, tax is

5re%q_Liir_er.i L')-,be (ied'1,ic:t,ed. Emphasises the word ''if': that

/§//

65

If 3": 5000 is carried from this C()'{1I1I,I'_V then obviously it is

not iiicome. there is no question of deductiilg the moixieyt

at S()L11'(,'.€; that if a gift  made tI:ie:re is no eler1§imeiii..'_'of ;_.

income iii the payment and draws attent.ior1_--to~-

Circuiar which says that if a con1i11issio.r_1~is paicl-. to  

person who carries on a c0miI1issio'r*:._Vbusi'nessVabtoaidvaodi
services are renciered in the oth1er__eo11_r1tify tha--t;_is not to

be subject. to tax; that if   the foreign

country and   there is no
liability of tag; iii 1   

26. StlbI11i'£jSi()i}0ﬁbjIV}«P_eii'I'}(?%iTE':~v!i)_Li*1]i€-561 for the assessees is
as under,    iimy be income out

of _c1iffere1j17_'§ i'ieads of izricome provided under Section 1.4 of

t.I'1e._Ar7t.xtI1'c:T,  L-.o.'s,ay income from salaries, income from

 house~.propei*ty:--._ "pi"ofit:s aiici gains of business or

:t{professiori"; céipitaxl gains and income from other sources.

.127'. ,fTi'he§i-scheme of tax cieductzioii at source applies not

"_'c.,1niy9--'t:(5§ the amoi.mt. paid which wholly bears "ir1come"

66
ctliaraeier siieii as saiaries. diviciends. ir1te1'esi'

securities. ete.._ but also to g_gi'oss suins, the w1iioIefV.o_f

which may not be iricome or p1'ofit:s of the re(>ipie'ii1i_s':it:h

as paymei'1i.s to eo11ii1'a(:t.o1's and sL1b4eoi1i._1jgio3:oi7s" e1'Iid7{.I1e  f

payment of iI'1SL11'a1"l('.€ (:()n1mi:+ssti'.()i'1.   
contended that the sum which ma3i"r3~ei1'equifed'.F[oV.:beivpaid
to the no1i--1*esicIent. may    and.
may co1:1tai1'} .21 fraction of the. :¢i1':1'.C0}"T1Ef. It
is true that in   eoritain a
fraction of the  in other cases
such 21 ii'ite1'e,_s1'  of 1'ig__§htos of patents,
goodwill or   niaehinery and such
other f4l"c1I]S§~:':'.c:,1'CI'.'i~€)I1S. it: a large part as taxable

ir1e'o_1'ii.-e"L1r1_cic-?i' 'iihe4piiov'isions of the Act. Whatever may be

 Z'iﬁAi':h(§A'.::.ii!iCOET1(3 is from profits and gains of

 .\i?o;.11.Ci".V'be computed wider the Act as provided
.1 .:i;i'i*rie,._.'(');fgular assessm en 1;.

ihirpose oi" s1.ib--see'i.ion (I) of section 195 is to

"t:hai:' the sum which is ehaigeabie 1.II'id€I' Seeiiion 4 of

$/

1) i'°1',

¢

67

{.110 ACE. 1'c)r levy and colleciion of i1h1c()111.e--t,ax. the 

should dedum il1('(ﬁ)I1']tFI.E1X tE'1e1'e()1'1 at 1'1'1e rates in t'<:»1"h(;%V,~..i'1;'  , A'

the amoum. is to be paid to a r1<m--reside.n1._....7Ifheu

pmvisio1'1  for t,e1'1tative deduction ()f:jr}CQ[Iit?v~tt.'&1¢X1 '~.'h'er'er)I3A_  AA

subje-Ct. to reg'L11a.:_' assess111e1'11" 21.r'1d_ by  ded1;1C{iA0v1j of

1'nc0me--tax, the rights of the  .41'ev".r1df?:':invvvf:any
mamler. adversely affezrtheti :'t.hehA§A:"i'i_ghts hf the
payee or 1"€(Tipi€l'1T. 2111:  Sections
195(2), 195{3)  Secttion 195

refers to paye<':j_f;111c*...ui':2;SVec.f1;i'oh"{3}. _1_i¢.f'6:13s 1:0 21 recipient.

29. It is c()1"1i-'e1'"1clco1 -byffie'1'e;iiaf1é::(i COLII1E:3C.1 appearilig for
the assessces that  .oi'11y"-th'i1'1g which  requ1'.1'eci to be
c1c:,ihcé"by t'h--ei"11?--.'i:--.; 1"'0._file e11i""éipplict21tic)11 for determinatioli. by

the  that such sum would not be

T'v._{f'h'2:1'gea1ble__in ﬂue <:::g1se of 1,110 rec:ipier1t, or for

HC}f§t4€4-Efrfiinélt.i()l"1v4317 the e1pprop_1'ial'.e p1'0p011.ion of such sum

"'._-$0 4(?hé1rg§e;1lj1er, or for g1'a1'1£'. of Ce.1't.ific:a1;e aL1':1horisi11g the

  rCci'pie»::1€L 1:0 1'eceiv@ the :;1.mo1.:111. wit,hoL1t deduCti(m of tax,

 "Ol"v'.d.G(iLl()fi()I'"1 of i1'1c0111e--'t:21x at any loxrver rates or no

M

~€

68

de<.iuc:tio1'"a. 011 such d(:'.lZC1TI1il'3&:lii()l1. tax at the e1pp1'()prie;-?'_e

rate Could be deducted at £110 soume. if no 
app11'c211:icm  ﬁled. i11C()me--tax on such sum  t'0T..be 
deducted and it; is the statutory 0b1ig2ii'i0iT<1. Q1?t.h€_Tp'eIjsV()Vn ' 

responsible for paying sucll "sum" to L'l¢d1.;_c:t: tz1X,_=_Vther'<3()1'=; "

before n1e1ki12g payment. He  to dist:ha=rg£i  the
obligation of tax deduction é11.V_s0u1'L§é:' t hat.°'t.he ir;t.éhfion of
the legislzlturc is gross sum with  then

the provisions of   -- Coﬁid ;;1:~2.i;\r€"%3:é§¥f1~w 0_r:iitt.€d.

30. Sri  :f Z Q_L1:§I1st?1 appearing for
the  'f:.1'£'er as:-sessee was able to
dern0nst1'at:e t.'1i'a._1_ Vi:}f:cV>.   ' inade to 21 ncm-reside1'"at
wq.s    to tax and therefore no

0bii'gVa*tiVQ11_Vo13.V_V V1iI'1'C'«._I""t'.'T>'_iC1E)l'1f payer to deduct on payment.

 Vt H21t, 'Tr2m_sm1'ssi0n Co1'p01'ati0r; 
 an'4"e11.1ﬁts:_()fi'ty to hold that even wher1 there is 3-10
C H't.he.re is an (_>b1igg21t:i01'1 to deduct. under
 of the Act', Lmless one has ,g"c)ne through

§/%

'i;1.1,§ }é»1-()c:£éss of Sec. 195(2) of'1ih£-: Act.

as 69

31. Sri Gamesh Sl,.lbI1')i.tS that the 'j1,1dggm.ent of tjsiis
SLl])I'(.'.lTl.€ Court fully siipporiis the case of the 
tiiaii; the e1'11.ire payment is 1101 (:!1e11'g_;'ea1b1e to   i
of the (rharge iinder Sec:i:i()1"1 4 ofv' fIV"1'(>j'«_»é§t':«1"_. 2

obligation to C1€fd1.1C'[. at ail urider Se(rtiovi'1._ 1195 0ft1'].EjAx":X(i'1L:.

32. Leanied C()U.I1S€l for F116? 
several conteiitions b21svt:&i--zT o.11'&*.  =n_um.ber of
authorities. both of 't11<é_.SL1;3"1'ér1*1V§%::  iseiverai High
Courts, to drive { :if::_i1'a1_t:"tHiVie payment is
not a payineiii.__i11 'i.l1:s  ifciyzaiiiir paymt-:nt; {2} that

it" is more a "of 21 payment made to
acquire a Copysi'iiag{i1'LZ€Cir&Li;i.iijlé':i:}E11'1.e1ki1'1g the characizz-3r of a
p2i:,.r1}ien1'.    or some .n1erChandize: {3}
t1'1cr'3V..1I..:€'\'/'f",':VIA1"'  argu1nem."s sake. the payment is
  payment" imcier the hicome
 'Auct. \7iiii,.hi);_11{Vxconcediiig. even then, in terms of the
  i:1V0idE111C€ £~}.§.:{I'€?(-3I31€I1tS, it does not retain
A'.4'i?fiC.'_"V'E}1J;iJ§'£1(If.€1' of a royalty paynleiii; and  it is an

 propositioii of law that the provisions of double

$/is

 'bt1sir1es«s I'ﬁE'?V';--'4"E:/iii;-§"i'-. and Consequently the income receipt
"i'11:.'I:t'h(;"' !.12iI1ds*af the n0n«resident recipient. then also, it
47.1"«_(f21I1't1011Kb€' taxed under the Act, but C2111 be subjected to

 * .  1'.&'V1){..."()'1'1'}:g/'Zi.I1 the country of the n(m~resident recipient and

70

taxation an-'c)idam".e ag,.§ree1ne,i'1t.s prevail over the provision..s

of the Imral IE1\»VS \»-'1':2:.. the income Tax Act and a 
definiti<)]-1 of 1'c3y.g11t.y in terms of the p1'o\risioI1"s_f::
Income Tzvt Act, part,ict,alarIy as in S:.§et:it)'1'1A 
Income Tax Act, are of no c:()11seqVL1c:>11ezVe'gindt.  
not at all an income receipt  liainds 
resident; recipient: (4) if  aceltiife the
crharacter of a payment t'c)if:_   or a
product, in the se1:vs'e:;i. is   copy-righted
article, which   étpackaged form,
aveiilable <)1;viV"  then, even
assuming    nattire of business
receipt m §«h.x3(:'t'.7'g1 An0ni1'esider1t,. the non--resident
 a«v}Se'1t1v1121nent. estabiishmerit or not

carxjying  regtti..>jii* >..A1te.t~i"\/it.y in India, the payment: even if it

5%// 

73

CCE U. H P INDL/-1 SALES (P) LTD.
[(2007) 8 SCC 404)]

SPRINT R P G INDIA LTD. v. COMMR;.."")"'«'[_":
OF CUSTOMS [2000 (1 16) ELT 6 SC)'-._ I

PUNJAB NATIONAL BANK  "R L'.-I_/Alla!)  _  " 

[2004 (1 '72) ELT 24 SC]

STATE OF KARNATAKA_u.  

[(2006) 2 SCC 747]

RAJENDRA SINGH v;"0S1:'piT2.?0'-OF UI5 

[(2007) 7 SCC 378jT_A _ 1, _

CCE v. S.F-.!IKUMAR-- TAGEII:VC!1'ES«V:.0)'[2008
(232) SC]::

SAMSUNG 'ELECT'ROIvICS"; CO. LTD.
INOIA  'OPERATIONS v.
ITO (TDS)gI, BANGALOI'€E
TATA~ CONSIILTANCY SERVICE v.
STATE)IQF"AP..[{2.(?04) 271 ITR 404
(SC)!    '

 _ '0TR:ANSMISSION0' CORPORATION OF
'  _VINDLAvO;i'1'__AP LTD. v. CIT [(1999) 239
  IT'? *I55'7f(3*571

2' ._tINION INDIA 1). AJADI BACI-mo

ANDOLAN & ANOTHER [(2003) 263

ITR 706 (SC)]

   v. VIJAY SHIP BREAKING
CORPORATION {(2003} 261 ITR 1 1 3]

74

r CIT v. INTERNATIONAL DATA 
MANAGEMENT LTD. [(2003) 314 ITR W  
1 771 ~ "

r CIT v. ENGINEERING ANALYSIS  *-  "
CENTRE OF EXCELLENCE PVT. _L-'1'D:;~., 
[ITA 2158 AND 1270 014* $5006}.  

r CIT v. ELI LILLY AND  . «. "
LTD. [(2009) 312 ITR225 SC] I * 

, DIRECTOR OF INCOM1?i4T§{1X._Vv. PAEER 
PRODUCTS LT1).~..[[200'2]'2.57'I.'1fR 11  

2 CIT, PANJAB v. R 
[(1965)56.ITR 20;».     R. 

, CIT   'ENCEINEER.
AP[(i!9$-5).152.IT.R.7'53]  

34. These W.-{Ii'.v;1;§§§;:I§:v'»;§'pd¢§:_'hééemn 260--A of the
Act. The EI1C'CsniIe--  of iegislation enacted
by the P2,r3,i_2In1euf1t._:valzkaiillhk  the purpose of raising
 (:e'm:.;~aI"gC¥§}eTr1mer11. and the aim and object:

is tci~..Ie"-.«f_y a11:"C1._{:D1ie;§~t' tax on an incomes which come

'v..__AAWi'iLhiH t.h'e__n1§>va;1.i D;g and scope of the pr0v1's1'_or1s of the Act

' " 'a5;'1i(l..<.";"uaI1t:ify11r1g the Eiabiiity (e:1'ez1t;ed on such income.

Q/

ii 76

which is not For the niziin purpose of levying tax c)r1.y'iCi*i,e
income of the resident. Oi' I'1OI'1-I'(-'Sidt?I1t..' i.e_, whe1je._.ii;nc'ie:tT 

certaiii eire1,1msi:e:u'1ees eert,ai1'1 types of ii1(:O'1I1esifcire,3

exempted from the net of iiaxaiiiori, u
 though has i'eeeive_d_  
otherwise definitely could have   
will not become income for  of

the Iiability to tax under the Ae't._iri:i__/Vieur -'ijfitiiievv-eixemption.

37. it is t:herei?:a:'eyy_c:iea'i' ;.ii3_()'f.1'~41' i:i_ieV_-::hai'ging section
and the CX€ITI.pfyi(_)i"i..§5i'O:if§_Si()i1_$'Si1(){.1"Id~3i\Af£1yS be coristrued
strictly a1'1d"'£::A1ie:--.re.  ftzi' unduly expanding the

scope of ievy,  :».1_ procte-ssioi"ii:iiei'pi"et.aiioii1.

35??'  to  of the Income Tax Act,
nanieiyl  the previous year is brought, to tax
 i'()il'(>.x2iri.iiig'yeéir, kiiown  assessment: year and for
 to finalize the assessment and to
  specific tax iiabiiity of the assessee, ii

 * .  riei:.es's£x;i*£iy involves an exercise o_i'g21i,hering iiiforiilatioii,

§/

§Oine par't...0l'V__*the liability is recovered in advance at
W  a1;1d rerriit.t.ed to the income Tax Departmerit which
"«_e'a1'i i.e1'-2Vst1--re avoidance of the later lamenteltiori by the

  l"V('3'\f'..§VI"1U("i'V, due to the Ilorieavatilability of the assessee or

77

seeking for further explanation arlci tl'1ei1 passixig orders
etc.. there is bound to be a time gap between the actugil
earning of the irieome and the date of dete1'r11ine1tir>jr'1~V..bf_V"=V
the tax liability and as it was the  is
revenue that realization of tax becomes' 
difficult when once the income  
the assessee. even before theifiii'a11izatio1j1.'0f

liability for the assessment year"  a

demand notice is svewefl fo;},_l0win'g "the--:.asseVésment order.
the assessee eit.i"iei'_:-4'rri».'ciy'"not,'*~be 'left W;§th much funds 01"

may not evehﬂ {i'1'"i«..:'l11die3_) for enforcing the tax

liability and to  ()xreyr":;@1V<:_l1'~si'tt2ati0I1s framers of the Act

have erivisaged the  of advance payment. of tax as
irrdieatedV"i'iri Eihaiuters -~  and XVI of the Act providing

for arliat:_tre1t~:aa_¢d fn.et,h0d of collecting tax. Where under.

   aiso coming within the scope of
oft1'1e total income of the n01'1~res1'dent
4._';:r1"i§i2~~tj}1e?fefQ1'cso far as non»»resident is concerned, there is
iV.t:o_1j'iVs"id'e1"£11:ile significance  to whcthei' any income had

"aris.er1 or accrued to the nonwresident. in India or has even

78

even due to the nonwavai1291bi1it.y of the assets of the
assessee agz1i1'1st_ which the I'G\»-'€I'11.l€' could have pro<.:eecie"CL_dv

for recovery of the aniount.

39. Under the scheme ()ft}f1e Act   ' 'A
main charging section, i.e. section -$01' thc-:"A::t. 
the resident is co11cerned,'ai1   global
income is taxable in India 'cir:idc1'&iV_Line:iAt:.i,ﬁfV.':'S0,, far as non
resident is co1ice1'nec_i;.   linked
to the total    such income

which is eéit.1i_er_1'e'ce'Ned or ._d'ceVI;iﬂed..,1j_Q.have been received

in India ()1*'.,_a(rc:r1*u.r:s'vrjitA_'a1ji'ses'"'--or "deemed to have been

accrued or aris"'e.n"to er_1'1o11"»1fe:<;ide11t. in India in the year

dy1.ri1'1g w.h.iphii't11e S{1bj'S(vY_t'Iﬁ&1ttE¥1' arises and even here the

i1'1conie_"wliieh'isdeemed to accrue or arise in India in

3/

e 79

been deemed to have a(.t(:rued or arisen in India. T his i{§;'.'t,o

be found in see1'1'on 5 of the Act providing for the se(ipe'_'ef 

t()i',a.l_ income, while section 6 of the Act. prox-fl' K
concept. of residence; se(tt,ion 9 of 
fiction, an arti1"ieia1 way of tixideirstieiiidliiigl'wiiether 
has accrued or arisen in India   i;H3fiOI1
and the significance being 
assessee, even by the empioiyrnien  section

9 of the Act, if  accrued or
deemed 1:0 have  in India, such

income, is ineoniei'wfhi(:h'Alis iizixeible in India.

40. In all the é;b.ove  discussion proceeds on
  tine"'ps.yn'iei1ts have all been made to
foreign  are all non»res1'dents within the

 5, 6 and 9 of the Act and by the
teoi"1ji'i.r1.p(:ti"i.fe"  of these provisions if it is to be held
 i;i:'<1ni_' 'i'}i':l"GﬂVpEi}>f.ID(?l11 in the hands of ricimresideiit is in the
  payment, which can be otherwise be called as

fiiicorrae, the significance for present purpose is that the

V

e 80

resident: payers such as the appellants are definiteiy
under an ob1ige1i.io1'1 to make deductions in terms of
section 195 of the Act and to remit. the same wit.hi11:"th_eL'~».v
stipulated period 1.0 the aecr01.1nt of the revenue.  is
may result: in the defaulting 
being iireaiied as a defaulter or  
against. for recovery of the a11noL1:rit.V_whi.eh__ 

payer shouicl have cIedue.ted.ar1d ren1.i:1_}te'Ci-»i,'.r.o i.he"e-reaiit of

the Income Tax 
41. E1 is in  effort has
been put  appearing for
the eissessees.  us thai: in the first

iiistagnce the rec.#e'ip_i:.s=ii'1 t..11evhands of the nonvresident

stippEier/ reL:i':pie1i'f,..yis nc)t:mat. all in the nature of income in
the h--;--1hC_3-S  fei.1_o~i'i~r<;ésider]t Suppliers and therefore

 }'SAI'1.() lax .}ViAi.afA;i)iIit'y and that the Vi€W taken by the

H 'i:'i5i14f5:1r'i':;2.i is the.- proper View and no need for i1'it;e:rferenee.

 . T[i9991 239 1;*R 587[sc1.

 V~.L_"€':~e(V:t"i'oI1 195 of the Act. for n(J1'_1--ct()mpIianc:e, with
'  :whit':''h obligations as provided in this section. the I'€V&?I"1L1€

'*}1;7;ci:fpr0ceec.ied e1gaa.i1'1st: tile 1'es1:)011dem's - assessees for

84

resort,<'-2d to the above noticreci argL11m-ants and .21 googi
number of .2u1t,h0rit'.ies .2111" Cited in support" 
(:()nteI1t.io1'1s. A h
47. Hcwvever. on the part. of thg  V'
Sri. Seshachaia, learned  
straight and simple and  of
the obligatioxl on the part'    and
consequence of nQr1;ﬁg.c,j-: (1uct:'=Ai0I*, :§»§~  percentage
of the payrnelli;  "Adhering to the
reqL1i1'en1e11§jVé'  is not a matter
which is  is fufiy and squarely
covered by ..1:he  Supreme Court in the
 of '»;1'.'}2z:3z'J§.'Sjl'$ilT1fﬁSSIéOvJ?'§f"éb0RPORATION OF A.P. LT1).,

vs.  OF INCOME TAX' reported in

35/%

85

recovery in terms of section 201 of the Act. Section 1950-ff
the Act reads as under:

195. Other sums. -~ (1) Any person _ .
responsible for paying to a non-resi;;ie'nt,:'_iv, 
not being a company, orfto "a«fo-yreign_'*
company, any interest or any other sum "
chargeable under the provisions of th.is" "
Act [not being income'lc'h._argeable und,er£j«~v... ~
the head "Salaries" shallfat the'i1'_rr1'e.of 
credit of such income to__uthVe'Vaccount.iof 
the payee or at~..the  Cfuvpaymennt in
thereof in cash by the "issue of a
cheque or draft or by any other.fV_'mode,
whicheveris earlie"r,- .deciuc.t_ income tax
thereon at'  raises ginforce.'  V. 

Proviiiied-""tha't"-- in"'-tithe'  of interest
pay_able.tby*1:the G_ooei'nrn.ent' or a public
sector"ba5n_lc u7iitliin"the meaning of clause
[23~Dj'of Sec-t:i4or:ty1iOgyor a" public financial
institution' .u)ithin"'-the "meaning of that
claus'e,_4 deduction of tax shall be made
only at the~time* of payment thereof in
.. «cash or by" 'the_'_issue of a cheque or draft
" oriby any other mode:

in  'VP:"oTvideti".fi.irther that no such deduction
A "-shall---"tjbe1' made in respect of any
'--.._div__iti'ends referred to in Section 1 15-0.

of T Explanation. --- For the purposes of this
V 'section, where any interest or other sum
  aforesaid is credited to any account,
whether called "interest payable
account" or "Suspense account" or by
any other name, in the books of account

r/

86

of the person liable to pay such income,

such crediting shall be deemed to be _ ._ .V
credit of such inco_me to the account of"   _.__
the payee and the provisions of this  
section shall apply accordingly.  V

[2] Where the person responsible for paying ' '

any such sum chargeable under. this Act, = , .
{other than salary} to a non%resi'den't*VV. 
considers that the wh.o_le.. or of such' .su"m  ''
would not be income chargeable in 

case of the recipient,   an 
application to the"Assessing, 'Qfficer to
determine, by general 'or'¥"special...order,

the appropriate pr0_i90rti0_n .,of 's.uc'h[j'sum

so chargjeableg rand  such
determinati';;ri,V  [shall be deducted

under,  s'u.b¥--sectio«n----..__ ('£1  _on_ly_. ' on that
proportion._ {of the which is so

ch.a.*g€§lb,le: "1 if;  "

{3} Subject to rules made" under sub-section
{5),"anyr person entitied to receive any
interest or othe1.'_si.:m on which income
.tax has to bededucted under subsection

JV may rnake__..an application in the

A "prescribed form to the Assessing Officer
 for._the'~gra.nt of a certificate authorising
  himffto 'receive such interest or other sum
 "'witho'ut_ deduction of tax under that sub-
"'««seC.tion.«-"'and where any such certificate
is. granted, every person responsible for

_ _ paying such interest or other sum to the
V V "person to whom such certificate is
' granted shall, so long as the certificate is
in force, make payment of such interest

or other sum without deducting tax

thereon under subsection (1).

;:.,,vobligatory".on  the payer if the entire payment
  become income and that the present
 "appeals are not appeals involving such
 only appeals involving the question as to

 yggjwhetliéfl the payment or any part of the payment has a

89
50. In so far as the Judgment of the Supreme Court 
TRANSMISSION CORPORATION OF A.P. ~
{supra} is concerned, though Valiant attempts  l
made on the part of the learned :
assessee, particularly, Mr. K P Kurnar,  
Sarangan, Mr. R B Krishna, 

to either distinguish this z-1:uthorjity--:_ to contend
that the Judgment can ivonly to the
limited extent of   Where a
dispute may arise  of section
195 of the    entire payment

to a foreign nonjresident""d'oels'*----not partake the character

of income_bi1tg.only  part of that payment partakes

 income and even then the deduction is

K

 gr the in TRANSMISSION CORPORATION
 Dpjstcase [supra] cannot in any way be diluted
 was the Supreme Court being directly
 exercise of interpreting the provisions of

  ggctioni  95 of the Act in that case and having interpreted

90

character of income within the meaning of section 9 of the.,_
Act read with charging section and that the 
being that no part of the payment made to   
resident can become income either under Atheﬂv 
Act or enjoys an exemption under  'if  A
then no part of such payment 
therefore in the absence of of
section 195[1] of the Act, the with

the requirements '{Vé/»ie}*,"':[t5] of section
195 of the Act   examination, such
argument  the simple reason that
in the first    for determination

of the taxggjliabiiity "(;f;_Vthe nonmresident recipient of the

 binding nature of the Judgment

V

93

Act" would mean 'sum' on which
income~tax is leuiable. In other words,
the said sum is chargeable to tax and
could be assessed to tax under the Act.

Consideration would be ---- whether  A '
payment of sum to non«resident  _
chargeable to tax under the provisions"-, 

of the Act or not? That sum .may' be" 
income or income hidden or otherwise_"--._ A' '
embedded therein. if so,  r_equired_V' -. _ _

to be deducted on thesaid sum 4» what  _

would be the income is_.to:be °c--ornput'e--d.,. 

on the basis of provisionsuof the
Act including provisions'fo-'rgicomputation
of the business income, if tl1e"pag1nent
is trade receipt Howeuer, 'whai'is. to be
deducted is:;1j.inconfae-tail: payable'-ti'1ereon
at the rates' "inj_"orcef.--«.__ Und'e_r"the__Act, total
incon'ie_ j'or;j_ the previous year would
become:"chargeable"--to  under s. 4.
Sub--_s.. {2)'7Of.s;*.4 i«nt€-K alias. provides that
in' respect of '=inco_me ' chargeable under
sub--s. (1), incom~a--ta2c'shall be deducted
at source _u:he.-e "it is so deductible

_{under ang,vi__Vproui:3ion of the Act. {f the
 'sum that  be paid to the non-

resir,ierit«--._is chargeable to tax, tax is

__ " 'reVq«uirie"d...to'..be deducted. The sum which
~. A' may be income out of
 different heads of income provided
 un"der'"s. 14 of the Act, that is to say,

incoirrie from salaries, income from

 "  property, profits and gains of
 business or profession, capital gains

and income from other sources. The
scheme of tax deduction at source
applies not only to the amount paid
which wholly bears "income" character

94

such as salaries, dividends, interest on
securities, etc., but also to gross sums,

the whole of which may not be income  l' l '
or proﬁt of the recipient, such as? _
payments to contractors and  ' 
contractors and the payrnent.' of 
insurance commission. It} has been  " '
contended that the sum whichgrriay be"  _
required to be paid to, r the no'n_--reside_ntA A . f

may only be a trading r'ecei_pt, arid,   

contain a fraction of sum' as taxablie

income. It is true,» that in"so_me"'cases,'  

trading receipt may-cor-itain., afraciion of
sum as taxable in_r,_-om..:2,f" })ut"in»...other
cases such as 'interest, ..,ycom.misi.sion,
transfer _Q,i', yrightsﬁz of  'goodwill or
drawings  plant and _rnachinery and
such gotrier. trarisasction-s, " contain
large sum  tcpcabie  under the
pi'ov'isioVn:s offiriilieﬂéct. Whatever may be
the ,__I3'OSiiiQT'ES;", if~._the_ -income is from
pro._fits_ and gVains«..olf. business, it would
be computed the Act as provided
at the' Q!" reguiar assessment. The

_},purpose of.._sub--s. (1) of s. 195 is to see

 - 'that the sumlivhich is chargeable under
 s._ 4.,ofVthe Act for levy and collection of

V' V , it  the payee should deduct

. Q" -.,income_--tajc thereon at the rates in force,

 ij' thetifriount is to be paid to a non-

" resident. The said provision is for

ten_tative deduction of incomewtax

.. A' 'lgthereon subject to regular assessment
 and by the deduction of incorne-tax,

rights of the parties are not, in any
manner, adversely ajfected. Further, the
rights of payee or recipient are fully
safeguarded under ss. 195(2), 195(3)

95

and 197. Only thing which is required to
be done by them is to file an appltbaiion
for determination by the AO that such
sum would not be chargeable to tax in
the case of recipient, or

for     

determination of appropriate proportion' 
of such so chargeable, or for grant. V

certiﬁcate authorising recripient 

to   i

receive the amount without:ded1,iciion.of.'  4' '
tax, or deduction of incomeitaxjat any » _ ,
lower rates or no deduction.".On such"

determination, tax at appropriate 'rate
would be deducted at theusource. '4'f._ no

such application.:*'is file<i"'in.corne_--tax on 

such sum is to be..d.*3dacted.v  the

statutory .-ilobligation  of "~{th.e ' person
respons?ible}1i.'fo.*_paying _such " ''sum' to
deduct l'  *  _ before. ' making
paynient... ;;He toé""dis-charge the
obligation oftttic deductionat source.

 considered
and». interpreted .sirn.ilar provision of s.
18 (33; qrthe I:-ff' Act, 1922, in the case

V' _{ ofP.C. R"ay_V& Co. (India) {P} Ltd. vs. A.C.
 ~ liﬂ/.lfclkltEAlj€€, ITf)"(}l 959) 36 FIR 365 {Cal} :
' u _, 'V   and rightly held:

 'l;cl1.aig'eable under the provisions of

this. Ajct' means actually liable to be

 assessed to tax, in other words, Q' the

siirsi contemplated is taxable income, a

 it difficulty is undoubtedly created as to
 _,-complying with the provisions of the

section".

The High Court further held that s.
18(3B) contemplated not merely

   even if the interpretation so placed
 nec.e__s}sari1y partake the character of the ratio of
  the sense, that the Judgment does not
 become an authority for a particular

tit"-«.p:'oposition and therefore cannot be cited as a precedent.

97
under s. 195 is limited only to
appropriate proportion of income
chargeable under the Act, are correct. "

52. The interpretation by the Supreme Court   
respect of a statutory provision, namely. 

the Act that interpretation becomes the law at

the supreme court within the  'of of
the Constitution of India  'have to be
necessarily applied"  ali  wherein
arises the questionxofy the Act and
the "of~~the Act operates in
any given case,"  fact that an answer
given by p  eourt in TRANSMISSION
  A'A;F;"--'LTD.,'s case {supra} was an

answer'   a question that had actually not

V

'."».%>'necessar:ily,'  the cases on hand and the
VVgiudgmentu"rendered in each case, on such application of
.1 the lixawxcie-clared by the Supreme Court, to the facts of the

 "particular case.

98
on appiying the tests as are relevant for determining the
question as to whether a Judgment is an authority 
binding precedent for a particular proposition  
ratio if any has not even been appiied to the  
case and decision of the case is not    
all such tests are irrelevant and 'd2oesd'n_ot in 
detract from the constitutional  of
wherein it is emphatically"iinade  the law
declared by the suprerne  on all
courts within    the interpretation

of the supreine  the legal position of
section 195  is the law

declared  bindingoon all courts in this country and

 assessees likes it or not it has to be

é/i

 fact situation  prevail in the present appeals.
~  'There " .___3'e certain appeals wherein the very

 g "argurnent  raised by the respondents -- assessees before

100

the payment to the resident recipient pri1na--facie bears
the character of an income recipient and therefore;the_.'_t'~e._
obligation under sub--section {1} of section  

54. The Judgment of they   
TRANSMISSION CORPORATION 
[supra] is a binding   and
there is absolutely no._scope,...fdI? even to
examine an  A the premise
that the   TRANSMISSION
CORPORATlO_i\T'  case [supra] is not a
binding precedent  premise that the said
Judgmernifis distinguishable for any other reason for the

purposely' "the ruling in that Judgment to the

 appellate authority in their appeals filed under section

%

101

246 of the Act as against an order passed under section

201 of the Act which is a provision providing for the

consequential action that can be taken by the assessi.ng._

authority against an assessee who has failed to 

with the requirement of deduction of tax at source'.__i.eg,'-at'ad

the time of payment and not remittingthe'arnount.Ato«thVe":"

revenue after such deduction etc.,,

56. As we have already  of the
nature involving€exercisi3\;'§;f of the
non--resident,   'or payment received
by the nonqresildglentTtirjiri  assessee cannot be
an exercise that to even for the purpose of

 .,p_eXteritvv-sf'obligation on the part of the

resilde-n~t payer .to=ascertain as to whether there is any

iinscope for_ll"re1ievingAi:; the resident payer totally from the

-. _l.oh1igation of deduction or even partially, as an answer for

 'that obtained only by going through the procedure

.  under section 195[2] of the Act and on making

application in this regard and for the said purpose to

M2

the assessing officer and in the absence of such 
application by the resident payer, assuming 
appeal is filed by the resident payer   '
consequential order passed by the assessing  
section 201 of the Act, for the 
indicated earlier that question  be" in:

the appeal ﬁled under section 246"'oi against; the
order under section 201 of the  we have

indicated earlier in_the_V\a_vake of the reqiiirernent of section

195[2] of the  the wake of the
binding   . supreme court. in
TRANSMTSSIGN 4' J OF A.P. LTD.,'s case
[supra] ey§n"the ;ppe_llate authority in the appeal of the

section 246 of the Act as against the order

 of the" asseyssVi1igvV._offi'cer passed under section 201 of the

 is precluded from going into such question and if so it
'not:open eyen to the appellate Tribunal to Venture on
'answer to the very question in the assessee's

LE"jgfurtherllappeal to the Tribunal and opinion rendered by

lvrequirernents of  195 of the Act and the provision
.  being'  to section 200 of the Act and section
   providing for consequential action only in a
 where any person who has actually deducted

amount in accordance with the preceding statutory

103

the Tribunal on the question answering it in favour of tics
assessee is of no consequence in law, is not a 
exercise of its appellate powers; an answer of 
is not binding in law and is necessai'iljfiiah1'e_ 

aside and the question answered in favoiirlof the  A
57. In this context, an incidentaljvléarguinient.'\ai§§pféfised
though feebiy, to the effect the nature
as attempted by the  to be for
the reason of  of to comply
with the  i'95{'l] of the Act and
therefore  under section 201 of the
Act cannot  the the reason that section
 of  consequential action on the

failure  assessee on non--compliance of the

$/'/

=  A.  deductible to the date on which such tax
" _ "is actually paid.

 Where the tax has not been paid as

106
201. Consequences of failure to deduct or

pay. ---- {1} If' any such person referred to  
in Section 200 and I the cases referred to___ ' . " * '
in Section 194, the principal officer   --
the company of which he is the principal  S"
officer does not deduct the whole or'any--.'_~. S' V .
part of the tax or after deductingfaiis cto  < . " V
pay the tax as required by 'or under  

Act, he or it shall, without prejudice _to_ " b'

any other consequenc;e_s'---._which- he or,
may incur, be deemed tc>~.be.an as-sessee "

in default in respect of the"ta_x:'w. S

Provided that penllliy  be
charged under Section V221 ~fro'm,fV such
person, principal' cornpany
unless the A Asseslsirtg " Officer is -- satisfied
that such per:_=on4.:_or' ~pri'nc:;r_9'al_ officer or
cornpar1y~;ﬁ__    be, has
without'~Vi_gobt7i.V_  suj}'ic--ient reasons
failed to 'deduct and pay _the tax.

(1 --A} With__prejudice.'A'io»_ "the'provisions of sub-
section _V( .3}, if__ar.t_y 'such person, principal
gojficer or» company as is referred to in

 ,s_ub~section' does not deduct the
_  wh.:)ie_ or any part of the 'tax or after
 " ~ deductingfails to pay the tax as required
 by'vo::,,_undér this Act, he or it shall be
"ltable'to_ pay simple interest at twelve per
V"-.cen't'per annum on the amount of such
taxffrom the date on which such tax was

aforesaid after it is deducted, the
amount of the tax together with the

 of o.n the part of the assessee for not
.:"dn¢d4u'c.ting th'e:_amount at source at the time of remittance
  to a non--resident and consequential non-
.  however bona fide the assessee might have

'jélfirterltained the thought and the belief that in fact no part

107

amount of simple interest thereon r _
referred to in subsection, (1 -A} shall be a  ._ V
charge upon all the assets of the person_,.... V " '
or the company, as the case may baa.

referred to in subsection (1). " 

and a sequential reading of section   
is a Provision obviousiy Precedin§l,.5.,:V:S€:ction' Act';
because of which it does get intov-se;c'ti.oi1..gA.20tiloft-the Act
and at the relevant time . ucovering the
case of the total faiiu.re H   ivnot only a
situation of dedu.ctlt._n   avﬁfajlure to remit the
amount andginl   201 clearly
indicating  it springs into action
as a consequential nieasure-S inilsituations of the assessee
failiiagieither  deduct 'orto pay, the order passed under

section  _of. _t}is4=,"A_.c't.. is bad and is a relevant order even

108

of the payment to the non~resiclent was not chargeableitc-.g

tax under the Income Tax Act, 1961, either for the " 
that it was income at all within the   3
expression and does not get into 
the reason that even when   ineonie  it
provisions of the Act, it becomes   
view of the provisions of   that such
income of the r1on--resident_  are all *~
virtually exercises    the time of
determination oi' liabililty of the non-
resident asselssevei of a return being
ﬁeld by the  examination of such
questions ggioesgnot arifsexwhilel the assessing oﬁicer is in

the.eXe1'cise of'takin.g consequential action on an assessee

;_._vwho  his obligation under section i95[1]

 the Act:"'*ancl:.ti1erefore goes against the assessees and

 iansvvered accordingly.

  examining the scope and the extent of

 'reivgipplicabiiity of the provisions of section 195 of the Act, We

' lVl"=li3.bi1it3.I'A  it-.non~resident assessee. The amount
-4h.l.l'_dvcducted uiidér section 195 of the Act is not the same as
 the liability of the nomresident assessee for

 of tax llﬂdel' the Income Tax Act, 1961. A non~«

109

cannot lose sight of the fact that this section in the first
instance is not a charging section nor a section providiigig-.p'
for determination of the tax liability of the   
who is in receipt of payments from a resident. '_   it it

59. The section itself occurs in chapter' 
providing for collection and recovery._:'by   A it
deduction effected at source  the
deduction is in advan;o_e:'--  __beforelV the

determination of the aCt1,1_EJ~.'_'C:E].XVV--.1plaitbllilyi".C)f the non»

resident foreigin    

60. The  the resident who is
responsible £015 to the non--resident is
onlysiva  or tentative amount which is kept as a

butter  this amount against the possible tax

©/

 authottity-'___Q.f  by the supreme court in
VV'i*~?i'i2z3ii\TS1|¢!'fS$I{)i!VvA'EORPORATION or A.P. LTD.,'s case
   scope and the manner of reducing the
 for deduction imposed on a resident payer in

 section 19511] of the Act is by the method of

112
62. Even here, one should bear in mind that it is
actuaily either an exercise for the assessrnent_.iof 
income of the non-resident nor _the _ it 

determination of the non-resident.

63. As we are of the opinion that-section_"'}95 of it
is not at all a provision wherein  is
required to indulge in an effPfpdveterrrrintation of the
income of a non»re'sid;e.tn't  orgy on
the basis of a   the non«~resident
who can   contentions as
have been  in  appeal by the learned

senior cotynsel appearing on 'behalf of the respondents,

12;, thc.e_resident"«payers and even much more on the

3//,

1.lvl'"proportionate  so deductible in terms of the
--.ldeterminatioi1_lby the assessing officer i.e., the resident

jlias not filed an application under subsection

 to deduct and remit the amount turn around and

113

invoking the procedure contemplated under sub«~sectio.n__>
{2} of section 195 of the Act i.e., only when the 
responsible for paying any such sum 
this Act on a non~resident, considerS'ltha"tethl-e 
such sum would not be income chargeable.in   it
the recipient, by making an  to 
officer to determine by  orderlllthe
appropriate proportion of   and
upon such    the liberty

of deducting the to tax

to fulﬁl the"lobligat.ion_.l_l'«castiiinderllllsub--section [1] of

section 195 of t1'«1.p€l\Act.'~._lV  it

64;" '~ ._In SQ .a resid "'nt'payer who has not admittedly

taken " had made any efforts to have the

section 195 of the Act cannot, later, after having

V.

'contendingllthat ltlijeiioayment did not result in any taxable
 in thevwhands of the non-resident and this can be

  'e>iexfcis_e:".:undertaken by the assessing officer only in an

1 14
contend that no part of the payment had resulted in any

taxable income in the hands of the non--resident recipients
and therefore it cannot be said that there was any ~
on the part of the resident payer in fulﬁlling its h
under section 19511] of the Act and';  J 
demand raised in terms of section 20 the it°:vl'riot'3'; 
sustainable as the demand proceedsion 

there was a failure on the part"'~of  

65. We further  if it is to be
put in other  iVhile' is not open to a
resident payer'   officer to embark
upon the exercise ..of  the tax liability of the

ncvn4'residvé_nt recipient"on--~a'rnere ﬁling of objections to a

deInVa=n_.d'' :  201 of the Act by merely

act'ua1yV_return of income ﬁled by the non--resident recipient

 paymei1tV"i)_¢.Q:i's:"t1j1¢ ij1i'aracter of a semblance of an income
Vivireceipt  of the non--resident recipient, then
.1 on the part of the resident payer who

 a payment to the non--resident recipient is

116

and means of recovering the tax in advance even before

the actual crystaliization of the tax liability of an assessee'-.y.

in terms of the provisions contained in chapter--XVIi.~c-i " 
Act and section 195 of the Act being one such. it
and an exercise of this nature and   
determination of the actual tax "  it
assessee at the time of the piizlreiivfgthe
respondents in the presen't:._._a'p_pe:alsgit prernature

one for the ipactgzupai of the tax
liability of the   i

66. If one    oinigiving a rough and

crude comparison to in which the provisions

of section' 9'5.of the Acitvioperates on a resident payer who

rnakes  non--resident recipient and if the

éﬂz.

 The""--oniy'iiniited way of either avoiding or warding
ngnidedsmissiie is by the resident payer invoking

 of section 195[2] of the Act and even here

117
like a guided missile which gets itseif attached to the

target, the moment the resident assessee makes paymenTt'~.g
to the non~resident recipient and there is no way 
resident payer avoiding the guided missile zeroing: it
resident payer Whether by way of  
amount does not necessarily resuit  it
amount taxable as income in   
resident recipient under contending
that the non--resident reci.pi.ent  possibly
avoided any    nnder the Act by
the over all  of the Act or
even by the Acorpnbinedtt  of the provisions of a

double tazggation avoidancedagreement and the Act as is

sought'tovtttbeﬁcoiltended by the respondents in the present

 l

 on   of the provisions of section 195
it  Act"~in the  of the law declared by the supreme
M in _ TRANSMSSION CORPORATION or A.P.

 ' '  « _  {supra}.

118
to the very limited extent of correcting an incorrect
identification, an incorrect computation or to call in 
the actual determination of the tax liability of   
resident which in fact had been determined as'_pa§t':::of  3
process of assessing the income of the  
by using that as the basis for 
reduction in the rate at which the    to

be made on the payment to  Except for

this method, therellthe-l-resident payer
avoiding the   the provisions of
section 195[:.;1V]ll .a_' consequence of such

default when isslerved. notice in terms of

section 20}; of the   V"

583 "'This.c..I§ositioi1iis the clear legal position that emerges

W

119
69. The assessing authority and the first appellate

authority while are correct to the extent of holding that
there was an obligation on the part of the resident  "

in effecting a deduction from out of the  h

by them in favour of the non--resident;recipi-Bnts g_ 

consideration for acquiring what i'su"imown'* ._as-_'.='shrinVk

wrapped software' or what sou'ghV_t': as
'ready to sell, off the shelf  and
even assuming it   of goods for
the purpose of  under the
provisions     Sales Tax Act,
1957 as held  hy  court in 'TATA
CONSUL'1)f1NCY  "case [supra], all such

to the background While examining the

 question'-Tof.3the"'_o_h}igation of a resident payer in terms of

Vvigsseciion 1'95[1=]: of "the Act and as arguments not relevant

 pur_pos'e of answering this question.

  Tribunai has clearly committed an error in law

 ' ~.__in upon to answer the question of the actual

«P

122

character of a royalty paynient and therefore applying the

relevant provisions of the DTAA and even the exercisevyof

holding that the actual percentage of deduction at    

was at 10% or 12% or 15% as the case rnay be  

upon the country in which the non--re'side'r1et.recipient  

assessed and having regard to the of"  
that country and even such   be
declared to be incorrect, V   law and
therefore illegal, wepvhfavgg  by
the assessing   appeliate
authority  tfiereﬁason that on this
aspect of  not joined issue at
all and while the» the very beginning had
ta:_1§;ei1,_thisp_j of  payrnent in the hands of the non-

resident'  .:::being in the nature of a royalty

'payment   affirmed by the appeliate authority,

~ .tIIi.at was not rriade an issue or question for determination

'Vi4lbeforelithelftribunal by the revenue and therefore we do

nlo't.lp_rQpose to disturb this factual emergence of facts.

V

V7_d"oﬁ»icer cannotv. enibark on an exercise as though it is
 to de"'te__rinine the actual tax liability of the non--

'~..yres'ident'~assessee is that if such a situation is permitted

in to be assessed in advance, even in the hands of a

123

particularly, in ascertaining the extent of deduction that

was required to be made by the resident payer 
therefore we are not disturbing the orders of the   " 
authority as affirmed by the first appellate  

second appellate authority on this aspect ofthje   A  

72. One another reason  for  "that_d§the
assessing officer, even in a   application
is made by the resident p_ayer,'  of the
Act, for the  the actual
amount being' t'he'--:vnon4res'ident recipient so
that the resident  only the reduced

amount  rernithit tocredit of the account of the

re§Jen--ne while doiI'ig*"so i.e., While examining an

applieationuridpeiré 195[2] of the Act, the assessing

to':"taKe..Ep1ace and if the income of the non--resident is

bayerl' Version of the liability when the
 pp  of the' non-resident recipient of a
 this country is actually determined
 a different determination of the tax liability of

 V - ..the" inonwresident recipient.

124
resident payer, there can arise conflicting decisions 
versions, in so far as the tax liability of the non--residvent.:l_:l_*-..

is concerned as even after a determination  'V' 
i95[2] of the Act, where under the tax liabjilpity of  it 
resident is determined in the hands oi"l=the'_'_'re:siden'tl 
and that too prematurely, then  

productive as it will be always open--to"t-he--~.nona1'esi.de.rlt to

contend that no partpof  in India
and is able to rnalie    basis of a
return of income. nonlifresident assessee.
it will resultiin   of the actual tax
liability of the  of a payment from

this country; one i/ersion when the liability is determined

ex"/en    an-4:1 that too in the hands of the resident

Q/,r

125
73. A situation of this nature should necessarily be

avoided and it can be avoided if we should bear in 

that the exercise under section l95[2] of the Act   

for extending a limited concession in favour...

resident payer when things are veryiiclearrz A'

involve any doubt or ainbiguityssuch as in a situation_V§

where the non--resident recipient of the arnountgflas filed

a return of his income as. i7one--_ a.j_risi'ng«  such a

transaction with  assessing
officer has   payment and
has indicatefﬁ 1 .order passed on the
return of incorneglfilevd liriionilresident that no part of
the Vreceiptgis taxable the provisions of the Act [for

whatever_, reasonip and if so based on this

itppsettled'/undiispdied'iffactual/legal position, the resident

Ttggayer by the assessment order passed by the

.1 on the return of income ﬁled by the non-

.A"-dfresidentg for any earlier year seek for granting the

 VVcfp'-cornrnensurate relief from the obligation for deduction of

,9/.

 :reCipient,...:the imposed on the resident payers in
 sec'tion 195[1] of the Act springs into action, the

  is to be a payment to the non-resident and

 .  in all these appeals, the payers who are the

,.,,,..,,t4ll""t7t:5Spondents in all these appeals, having not taken any

127

recipient was getting out of the net of taxation under

Income Tax Act, 1961 due to one or the other reason.

75. in all these appeals, there being no dispute nor. "

there be any dispute regarding the payments m_ade'-by the it " it

resident payers, bearing the  
receipt in the hands of the  the payments
whether are in respect of  payment
for buying/purchasingﬁ  software
product and is  or even be in the
nature of    opined by the

assessing officers fin appeals by the first

appellate at1thorit'i,es', nearerthefess, the payment deﬁnitely
being,inv-":,_tt1e,.\---,.:naturexﬂofwav payment resulting in some

possibie the hands of the non--resident

ﬁg/.

130
78. For the reasons stated above, while we refrain from
answering the questions raised in these appeals 
to the actual determination of the tax liability of    
resident assessees in respect of the  
had received from the resident   
respondents in all these appeals',-~:,t:l:We  

questions relating to the correctn.eSs=.orlo'ther\vise'*of'lthe

orders passed by the tribunal  favour of
the revenue and pas-slesslee;vlallowjlthe appeals,
set aside the   and restore
the orders  authorities and

affirming orders,'  appellate authorities,

so far as  relates to confirming the demand raised on all

these re-sponclentslﬁassessees in terms of the provisions

 of  for the failure of the respondents

 assessees  'comply with the requirement of section

irgagigpomle Act.

 . llnccordingly, these appeals are allowed.

V

131

IN ITA Nos. 919/2007 & 921/2007:

80. Whiie these two batches of appeals had 
heard along with the above appeals, it is noticed that   
strike a slightly different note, in the  
ultimately the question may be one of   

manner of obligation of a residen't.e,.lpayer topdeducltp an

amount at a percentage of the  made tollla 'non-
resident recipient, these '-this court
under section 260f1#t   stage had
reached wherein   or the
second appeilate had...__opi.:1ed on merits about
the correctness   order passed by the
original/assessinglauthorityl:in: respect of 11 remittances

[can-pespo3~ldin;gtll:oul:an:A Nos.931 to 941/Bang/2006] and

gyvanothei'. [corresponding to ITA Nos.672 to

VV7tl)2v/'.Bangl/'2OO':7a] "made during the accounting period

for the assessment year 2006-07 and wherein

"  ﬁi--'st*appellate authority had declined to examine the

 the orders passed by the assessing authority

99/

132

relating to these 42 remittances where under the origin~a3"*.y
authority had concluded that the remittances  " 

nature of a royalty payment, the amount to  it

While making the remittance is at such 

amount as had been indicated inpthe A}D_ot:ble  it

Avoidance Agreement between   

States of America, particu1a'riy;;as [2] of the

agreement. V    '

81. The first   dismissed the
appeal Which="""ti1e§ assessee under
section 248  the  only for the
reason that 'V ..assesseeftiriesident rernitter had not
availed the}*~p;f.ocedure"'Vofwnaking an application under

section:   seeking for determination of the

:?:pr.oportionate  in the payment to the non--resident
~ --cofnstituting the? taxable part of the payment or to put in

it  otheriVaordsj'A"income part of the payment.

43/

 ».l_8.07.20(:)7'  the Income Tax Appellate Tribunal
pllinp_4pth¢se appeals, i.e., ITA No.931-941/Bang/2006 and

  P§los,t$7~2--702/Bang/2007, the revenue has come up

133
82. The first appellate authority having dismissed such
appeals filed under section 248/249 of the Act 
tenable, the assessee had preferred further appeals§V_:to   
Income Tax Appellate Tribunal in appeals _a.-3"  

above .

83. The Income Tax Appellate"Tribunal;._ :Ba'ng.a§1ore
Bench 'A' passed the comrnen  18.(V)l7.VfVl),OO7
allowing all the appeals  'matter to the

Commissioner of;  for fresh disposal
of the appea;ls.*;:.Eits  that the
Commissioner'  jigﬁlppeals] was wrong in
dismissingpthe  p_appealAs_l'at~*l"':the threshold as being not

 common remand order dated

V

134

with an appeal each i.e., ITA Nos.919 of 2007 & 921 

2007 respectively.

85. We notice that though the registryhas assi'gr1e'_cioi'1e'_'   

appeal number before this court and-v.pth'._'_'ei 

revenue has only paid one set ofeoyurt fee both i"i1_"iTA'°

Nos.919 of 2007 and 92.1 of.2OO7y.i.;eA}",v-.a"--~su1no'i7Rs.,l§2/~

on the memorandum of  these two
appeals are batch of apvpeals; order of
the Tribunal   of all the 43
appeals before"it--.apr-,Vd  should have
necessarily assigned of appeals instead of
one appeéilciun   and 31 numbers of
appeals   N'o'."9'21 of 2007 and should have

also  c_re'coVer:ed.a.l ~ commensurate court fee from the

lappellants;  is also hereby directed to take such

"'co;'rective m'easures in all other appeals, wherein also

 é 's--uch.situ.ati.ons arise and act for correcting the number of

 apiplealsfand also for recovering the deﬁcit court fees,

0,  was payable by the appellants.

35/

deﬁniteljg' .erititl.e.di:Inaintain an appeal before the First

  -iiX};p.eliate Authority.

 -..l.'TI'hel>statutory provisions in the Section is very clear

  on thisaspect and the Tribunal is correct in holding that

135
86. Insofar the question of law raised in these appeals

are concerned it is one of maintainability of an 
under Section 248 of the Act, by a f 
payer/assessee who had in fact deductedthe:  
terms of sub--section (1) of Section 19:54Aa1_jidl..
amount to the account of  1§evelnue',p 

nevertheless disputing such p_iiability,_ﬂ' 
87. This question has to  in the

'afﬁrrnative'   was correct in
reversing the"  lth'e"lCommissioner of
Income Tax  rejected the appeal under

Section 248_/24SS""at"th¢v._ threshold as not maintainable.

Thve"a.ssess_ee gyatho phasHi'r1"fa'ct deducted and remitted the

"_:.sub~section (1) of Section 195 is

V

:ﬂ'€ommissi_oner. Income Tax (Appeals), takes up the
 for "disposal on the merits of the matter. For

 'statistical purposes, these appeals are dismissed.

136
the appeals were maintainable and could not have been
disposed of at the threshoid and the Colnlnissioneifu 
Income Tax (Appeals) could not have disposed;0f-'4«'thei4y¥ 
appeals at the threshold, as not rnaintainabie. _. ..  V  in

89. However, insofar as the scope  it 

appeal under Section 248 is concerned "in  of:

the view, that we have  appeals,
that View equally apppliies  also and
while the remand    Tltibunal is left
undisturbedpi, it  Revenue are

dismissed, the' the interpretation of law

that we have p1aced'\on;,t_he» Vpfovisions of Section 195 of
t1?_.e'Act,  Apnecessaiailygoverns the examination of

,. ,::S_ection 248 of the Act, when the

who

137
90. To sum up, the substantial questions raised in all

these appeals are answered as under:

S1.No.

Substantial questions raised

"Whether the Tribunal was correct _

in holding that an appeal was
maintainable u/5.248 of the Aet,
even though there was no

adjudication by the Authorities"

under the Act in accordance .._with

Section 195(3), (4) &. {5} read 

Section 200 of the Act?

1[t2o07',' » 92 11 of zooff p

A1:sw'eI''w. ' S' «i _ 
As  ar1'sw'ere'd_' A. in _ V'
1'i'A 919 {of |«

. 'c0FyP'Tln€d"'*-~--, by
 "C.o1m_'rt:'_.ss»ioner.. needs to have been
.g7§§duCféd--?  "

Whether the Tribunal' scorrectev.l_  ,
S  Not--e'orrect,

'In ' the negative,
"against

in holding that payments'
made by thejlssessee Companly
for purchase jiof software 4_'_fro'rn"
Aayn1eb"b6A's.ta'~Pa_,cy"zI::,-«-._S'i::1gapOre;_
Peritus SoftI;;~.a:fe S'erv.ice_'Inc'.",t USA
and ~AtSt".'--'al'Y;COn?2p11terS*- PL'tl"';l;l'd.,
Singapore  the'«..a"mo;Lnts of
Rs.3,"4_3,'O_95/~«,  Rs_,'4-7_,89,419/--
and Rs.=8,89,6'"1 1'/.-' was not liable
to tncorne  in Vlndta and
conseq.uently. no TDS as held by
ti-"i._e'~ 2/'r.cA.-;sAessing" '''' "Q[f'Lcer and
the Appellate

the
in
the

assessee and
favour of
revenue

 lsamsung Electronics Co.
'   has not been accepted by
'the

AV£.r_'hether_S'the Tribunal was correct
in "merely following the judgment
passed' by its in the case of
Ltd.
and

Revenue appealed

  V. ﬁagainst before this Hon'ble Court

where the facts were not entirely

Deﬁnitely wrong,
answered in

the negative,
against the
assessee and in
favour of the
revenue

V.

138

Identical to one subsisting in the
present case and therefore the
Tlribunai was bound to have
recorded an independent funding
and therefore the impugned order

is perverse?  s

Whether the Tribunal based onthe

fact that the Assessee has irrzpor;t.ed*

software from Aaymetrix Asia

Pacific, Singapore; Peritus 'S<j_fiu)are"

Service Inc., USA and
Computers Pvt. Ltd, Singapor'e,on_
payment of

and Singapore' ;"'prooision's_' of Section
9{1}(V3'Q,'r--.lfh€ Income  Act: fndian
Cop_u_right_ Act, _'V19V5'7,V  Revised
entTy*--.On Articief-»..1C}}§'CD; the
I nternal V' Revenue' Service " Reg ulation
of USA,'"u._4theV Views"  the High
Powered Committee on E-Commerce
and other factsand circumstances of
the ' p5r'ese'n.t case which could have
'c-learly =_sho'wn that the payments

 V'  'the_A3sessee was liable to
 in 'India;;Vand consequently the

Assesseeiuras bound to deduct tax
at 'sou--rce"?

y'Rs.3.43;'O95'/'-.' Teveﬂug 

Rs.47,89,419/~ and "4--.Rs.8,89,;_3} '
was bound to have taken' :into.>'-- 
consideration the Ruling'r. of gtheﬁ  '
Advance Ruling 'Authority_f_{238"~l1'1R ' i'

296}; the Dolublei'Taxaiion,Agreement "
between ;'fndi_o.V and USA and 'India'

_'_'In'V t11§. 

against. . ' ' fthe

" :-1vssVessvee"'.__"an~d"' in " V

fav-oi11"   the

Whether the Tribunal should have
.'*e.(_:Orded a finding that it is under

 'vsection 195(2) and {3} and (4) of
[the Act, the chargeability to tax or

?not of the recipient is decided and

In the afﬁrmative,
in favour of the
revenue and

  having failed to obtain such a assessee

@/

Joint Commissioner Of Income-Tax ... vs George Williamson (Assam) Ltd. And ... on 13 August, 2002
Equivalent citations: (2003)181CTR(GAU)69, [2002]258ITR126(GAUHATI)
Author: P.P. Naolekar
Bench: Prakash Prabhakar Naolekar, Amitava Roy
JUDGMENT
 
 P.P. Naolekar, C.J. 
 
 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. 

 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.

 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. 

 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. 

 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. 

 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. 

 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. 

 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. 

 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

the 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. 

 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. 

 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 : 

 "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) :

 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. 

 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. 

 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 : -- 

 (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 ; 

 (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 ; 

 (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    
 
 (iv) excessive loss or depreciation allowance or any other allowance under this Act has been computed. 

 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. 

 (2) The Assessing Officer shall, before issuing any notice under this section, record his reasons for doing so."

 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. 

 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.

 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.

 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.

 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.

 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

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.

 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.

 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. 

 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,

1999, Shri J.C. Pegu, the Assessing Officer, has alleged in paragraphs 4 and 5, as under (see page 545 of [2000] 243 ITR) : 

  "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 : 

 (i) Gladiolai Estate (P.) Ltd. ; 

 (ii) Rohini Estate (P.) Ltd. ; 

 (iii) Gagan Properties (P.) Ltd. ; and  
 
 (iv) Smriti Properties (P.) Ltd.   

 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. 

 (i) B. S. Consultants (P.) Ltd. ; 

 (ii) Manoj Commercial Services (P.) Ltd. ; 

 (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.  

 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. 

  Rs.

  (i)
  Rohini Properties (P.) Ltd.
  13,96,000

  (ii)
  Gladiolai Estate (P.) Ltd.
  13,29,600

  Total
   27,25,600 

 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

reason 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)."  

 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. 

 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

of 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.

 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. 

 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 : 
  ". . . 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." 

 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

of 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. 

 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.

Commissioner Of Income-Tax vs Rajesh Kumar Jalan on 9 August, 2006
Equivalent citations: (2006)206CTR(GAU)361, [2006]286ITR274(GAUHATI)
Author: T. Nandakumar Singh
Bench: D. Biswas, T. Nandakumar Singh
JUDGMENT
T. Nandakumar Singh J.

1. 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.

2. 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.

54. 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,--

(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
 
(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.

(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:

Provided 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,--

(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
 
(ii) the assessee shall be entitled to withdraw such amount in accordance with the scheme aforesaid.

3. 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.

4. 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.

5. 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 :

9. 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.

10. 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 :

any 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, . . .

11. 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.

12. 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.

13. 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.

6. 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.

7. 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.

8. 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:

24. 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.

25. 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.

9. 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.

 Parties are to bear their own costs.

Commissioner Of Income-Tax vs Davy Ashmore India Ltd. on 13 December, 1990
Equivalent citations: [1991]190ITR626(CAL)
JUDGMENT
 
Ajit K. Sengupta, J.  
 
1. In this reference under Section 256(1) of the Income-tax Act, 1961, the following question of law has been referred to this court: 
 "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 ?" 

2. Shortly stated, the facts are as follows : 
 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. 

3. 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. 

4. 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. 

5 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.

6. 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. 

7. 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. 

8. 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. 

9. 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 : 

"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. 

Now, 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. 

The Government of India and the Government of the United Kingdom of Great Britain and Northern Ireland ; 

Desiring 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 : 

Have agreed as follows."  

10. The intention is clear. All provisions of the said Convention shall be given effect to notwithstanding the provisions contained in relevant Act or
Acts. 

11. 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.

12. The conclusion is inescapable that, in case of inconsistency between the terms of the Agreement and the taxation statute, the Agreement alone would prevail. 

13. 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

Double 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 : 

"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. 

Thus, 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.''  
 
14. 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. 

15. "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) : 

"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 : 

(a) any patent, trademark, design or model, plan, secret formula or process  
 
(b) industrial, commercial or scientific equipment, or information concerning industrial, commercial or scientific experience ; 
 
(c) any copyright of literary, artistic or scientific work, cinematographic films, and films or tapes for radio or television broadcasting ;   
 
but 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."  

16. 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

treated 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. 

17. 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. 

18. 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) :

"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. 

Royalty 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. 

When 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. 

It 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."  

19. 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.

20. 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.

21. 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) :

 "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. 

 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

exploit 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. 

There is no reason why payment for the user of such specialised knowledge, though not protected by a patent, should not be treated as
royalty or in the nature of royalty."  

22. 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. 

23. There will be no order as to costs. 

 Bhagabati Prasad Banerjee J.  

24. I agree.

Mahadeva Upendra Sinai Etc. Etc vs Union Of India & Ors on 7 November, 1974
Equivalent 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
Author: A. Alagiriswami
Bench: A. Alagiriswami, A.N.  Ray, Kuttyil Kurien Mathew, P.K. Goswami, Ranjit Singh Sarkaria
MAHADEVA UPENDRA SINAI ETC.  ETC.

	Vs.

UNION OF INDIA & ORS.

DATE OF JUDGMENT07/11/1974

BENCH:
ALAGIRISWAMI, A.
BENCH:
RAY, A.N. (CJ)
MATHEW, KUTTYIL KURIEN
GOSWAMI, P.K.
SARKARIA, RANJIT SINGH

CITATION:
 1975 AIR  797		  1975 SCR  (2) 640
 1975 SCC  (3) 765
 RF	    1986 SC 368	 (16)
 R	    1989 SC1719	 (16,18)

ACT:
Taxation  Laws (Extension to Union Territories) (Removal  of
Difficulties) Order 1970 Cl. (3), proviso (2)-If ultra vires
Taxation  laws (Extension to Union  Territories)  Regulation
III of 1963.

HEADNOTE:
Goa, Daman and Diu, erstwhile Portuguese territories  became
a Union Territory of the Indian Union on December 19,  1961.
The President of India, in exercise of the powers under Art.
240  promulgated  the  Taxation	 Laws  (Extension  to  Union
Territories)  Regulation  II  of  1963.	 By  cl.  3  of	 the
Regulation, the Indian Income Tax Act, 1961, was extended to
the  Union Territory.  By cl. (4) the corresponding  law  in
the Union Territory was repealed from April 1, 1963.  Clause
(7)  provided that if any difficulty arose in giving  effect
in  the Union Territory, to the provisions of any Act  etc.,
the Central Government may, by general or special order give
necessary directions for the removal of the difficulty..
The  petitioners  were	carrying on business  in  the  Union
Territory, where there was a Portuguese law relating to levy
of tax, the scheme of which was entirely different from	 the
Indian Act.  Under that law, the net profits and gains	were
not calculated but a tax was levied at a certain  percentage
on the gross income or turnover of the business irrespective
of whether the assessee made any profits or suffered losses.
After the extension of the Indian Act. the petitioners	were
assessed under it from the assessment year 1964-65  onwards.
The assessee was allowed depreciation of the assets used  by
him  for  his business. on the basis of	 the  'written	down
value'	under s. 43(6)(b) read with s. 32 of the Income	 Tax
Act.
Section 32 adopts two methods in allowing depreciation.	  In
the case of non-ocean going ships and buildings,  machinery,
plant	or   furniture,	  the	prescribed   percentage	  of
depreciation  is to be computed on the basis of the  written
down  value of the asset.  Section 43 (6)  defines  'written
down  value' to mean (a) in the case of assets	acquired  in
the  previous year, the actual cost and (b) in the  case  of
assets	before the previous year, the actual cost  less	 all
depreciation  actually allowed under the 1961-Act  or  under
the  1922-Act or any Act repealed by that Act or  under	 any
executive  orders.   Where  the asset was  acquired  in	 the
previous   year	 depreciation  would  be  allowed   at	 the
prescribed  rate on such cost, and in subsequent years,	 the
depreciation would be calculated on the basis of actual cost
less depreciation actually allowed.
For   the   assessment	year  1964-65,	in   assessing	 the
petitioner,  the written down value was taken as the  actual
cost  of  the assessee's assets since  no  depreciation	 was
actually  allowed to him earlier and the written down  value
was  progressively  reduced  in	 the  succeeding  years	  by
deducting the depreciation actually allowed in
On  Nov.  8,  1970, the	 Central  Government,  in  purported
exercise  of  its powers under cl. (7)	of  the	 Regulation,
promulgated   the   Taxation  Laws   (Extension	  to   Union
Territories)  (Removal of Difficulties) Order.	It  provided
in  cl. (3) that in making any assessment under	 the  Income
Tax Act, 1961, all depreciation actually allowed tinder	 the
local  laws  shall be taken into account  in  computing	 the
deductions, and in the proviso 2 to cl. (3), that, where  in
respect	 of any period no depreciation was actually  allowed
under  the local law, depreciation for that period shall  be
calculated at the rate under the Indian Income Tax, 1961, or
the  1922 Act or any Act repealed by that Act or  under	 any
executive  orders  issued when the Indian  Income  Tax	Act,
1886, was in force, and the depreciation shall be deemed  to
be  the depreciation actually allowed under the	 local	law.
In the light of proviso 2 to cl. (3) of the 1970 order,	 the
assessment already made of the petitioner were sought to  be
revised, so that, the written down value of the
641
assets	for calculating the depreciation allowance-even	 for
the first time when the petitioners were assessed under	 the
1961-Act-would	not be the actual cost of the assets, but  a
far   lower   sum  with	 proportionate	 increase   in	 the
petitioner's  liability	 to tax since  the  assessment	year
1964-65.
The petitioner therefore challenged the validity of  Proviso
2  to  Cl.  (3) of the Taxation	 laws  (Extension  to  Union
Territories) (Removal of Difficulties) Order 1970.
(Per A. N. Ray, C.J., K. K. Mathew, P. K. (Goswami and R. S.
Sarkaria, JJ.).
HELD : Allowing the Petitions,
The 2nd Proviso to cl. (3) of the 1970-Order is ultra  vires
the Central Government when exercising its powers under	 cl.
(7)  of	 Regulation  III of 1963, and  the  Revenue  is	 not
entitled to levy tax on the basis of the depreciation allow-
ance computed in accordance with the said Proviso. [659E-F]
(1)    To   keep   pace	  with	 the   rapidly	  increasing
responsibilities   of  a  welfare  democratic	state,	 the
legislature   has  to  turn  out  a  plethora	of   hurried
legislation.   It is well nigh impossible,  especially	when
the  legislature deals with socioeconomic activities of	 the
State or extends existing Indian laws to territories freshly
merged in the Indian Union, to foresee all the circumstances
to deal with which a statute is enacted or to anticipate all
the  difficulties  that might arise in its  working  due  to
peculiar   local  conditions.	In  order  to  obviate	 the
necessity  of  approaching the legislature  for	 removal  of
every  difficulty  however trivial, encountered in  the	 en-
forcement  of  the  statute,  the  legislature	invests	 the
Executive with power to remove difficulties' for making	 the
implementation	of  the statute effective  by  making  minor
adaptations  and  peripheral  adjustments  in  the   statute
without touching its substance. [653D-H]
(2)  The existence or arising of a 'difficulty' is the	sine
qua  non  for the exercise of the power under cl. 7  of	 the
1963-Regulation.   The	'difficulty'  contemplated  by	 the
clause must be a difficulty arising in giving effect to	 the
provisions of the Act and not a difficulty arising  aliunde.
Further, the Central Government can exercise the power under
the  clause only to the extent it is necessary for  applying
or giving effect to the Act and no further.  It may slightly
tinker	with the Act to round off angularities and  smoothen
the joints or remove minor obscurities to make it  workable,
but it cannot change, disfigure or do violence to the  basic
structure and primary features of the Act.  Under the  guise
of  removing a difficulty, it cannot change the	 scheme	 and
essential provisions of the Act. [653H654B]
(3)  The  contention that but for the impugned proviso,	 the
provisions of ss. 32 and 43 (6) (b) of 'the 1961-Act, on its
extension to the Union Territory, could not be given  effect
to  and applied to the petitioner must be  rejected.   There
could be no difficulty in computing the 'written down value'
under S. 43 (6) (b) of the assets that had been acquired  by
the   petitioner  before  the  previous	 year.	  Since	  no
depreciation was, in fact, allowed to the petitioner in	 the
past under the Portuguese law, in the first assessment under
the  Indian Act, the written down value would be the  actual
cost of the assets less nil.  Thereafter, in each succeeding
year,  the  depreciation actually allowed in  the  preceding
year  would  be deducted causing yearly	 diminution  of	 the
written	 down  value  with consequent  decrease	 in  the  de
preciation  allowed  on that basis.  This  was	exactly	 the
manner	in which the 'written down value' of the  assets  of
the  petitioner had been computed and  depreciation  allowed
for  the  several  assessment years  from  1964-65  onwards,
showing	 that  there  was  no  difficulty  in  applying	 the
provisions. [655H-656D]
(4)  There  is no basis for the argument that  the  impugned
proviso	 brings	 about	equality  of  treatment	 among	 the
different  assessees in India.	Far from ensuring parity  of
treatment it puts the assessee in the Union territories in a
worse position than the assessees in the rest of India. [656
D-F]
Straw,	Products Ltd. v. Income-tax Officer, Bhopal,  [1968]
2, S.C.R. 1 followed.
Commissioner  of Income-tax, Hyderabad v. Dewan Bahadur	 Ram
Gopal  Mills  Ltd.  [1961]  2  S.C.R.  318  at	325  &	 326
642
The phrase 'actually allowed' is limited to the depreciation
actually  taken into account or granted or given  effect  to
and  cannot be stretched to mean 'nationally  allowed'.	  In
this   Union   Territory,  under  the  Portuguese   law	  no
depreciation  was ever computed or actually allowed  to	 the
assessees.  The impugned proviso. by replacing	depreciation
'actually  allowed' with depreciation 'deemed to  have	been
allowed, by a fiction of law, even where no depreciation was
at   all  allowed,  in	effect,	 attempts  to	change	 the
fundamental  scheme of the Indian Act in its application  to
the assessees in the Union Territory of Goa, Diu and  Daman.
[658B-E]
(6)  Under s. 32(2) of the Indian Income Tax Act an assessee
is  entitled to ,carry forward' unabsorbed  depreciation  in
case of loss or inadequate profits, without any time  limit.
For  ensuring  this right to an	 assessee,  assessments	 for
ascertaining  losses  or  insufficiency of  profits  of	 his
business,  since  the acquisition and use of the  assets  by
him,  will have to be made.  In the Union Territory  of	 Goa
etc.,  during  the interregnums between Dec. 19,  1961,	 and
April  1,  1963, there was no law authorising  the  levy  of
income	tax.  Even under the Portuguese law, the tax was  in
reality	 a  'turn  over' tax irrespective  of  the  assessee
making	profit or loss.	 Retrospective assessments  for	 the
purpose,  going back to a period prior to 1963,	 could	have
been made under a law of Parliament but not under an  execu-
tive fiat.  But, in the Indian Income Tax Act as extended to
these	territories,  there  is	 no  provision	for   making
assessment  in respect of those past years.  In the  absence
of  such law, it is impossible to work the  Proviso  without
riding	rough shod over the rights of the assessees to	have
their  unabsorbed  depreciation	 relating  to  the  pre-1963
period,	 carried forward.  Therefore, a Goan  assessee,	 who
suffered  losses and depreciation of his assets	 will  never
get  the  benefit  of such carry forward,  as  no  machinery
exists	for  determining the inadequacy of  profits  or	 the
factual	 of losses in those years.  Viewed from this  angle,
the  impugned  proviso would, in the implementation  of	 the
Act, create difficulties rather than remove them. [659A-E]
(Per Alagiriswami.  J., dissenting).
HELD : Dismissing the petition,
(1)  The   provision  regarding	 written  down	 value	 and
allowance  of depreciation under the Indian Income  Tax	 law
proceeds  on the basis of depreciation allowed year by	year
with  the result that the written down value goes down	year
after  year aid similarly the depreciation.  If,  therefore,
because	 there	was no provision under the  Income  Tax	 law
applying to the former Portuguese territories providing	 for
depreciation the written down value of an asset is taken  as
the actual cost even after many years of its acquisition  it
would mean putting the assessees in those 'territories at an
advantage  compared to the assessees in the rest  of  India.
More important, it would not accord with realities and would
not  be in accordance with the scheme of depreciation  under
the  Indian Income-tax Act.  A certain plant  and  machinery
purchased  10 years earlier and now worth half its  original
value  would  be  taken to be worth its	 original  cost	 and
depreciation  allowed  on  that basis.	 It  is,  therefore,
necessary to devise some method by which both the  assessees
in  the	 Indian	 Territory  and	 the  erstwhile	  Portuguese
territory  could be put on the same footing and	 the  normal
scheme of depreciation under the Indian Income-tax Act	made
applicable  to	all.  A similar problem arose  in  the	case
dealt with in Commissioner of Income Tax, Hyderabad v. Dewan
Bahadur Ramgopal Mills Ltd. [1961] 2 S.C.R. 318 dealing with
assessees in Hyderabad governed by the Hyderabad Income	 Tax
Act  before  the Indian Income tax Act was extended  to	 the
Hyderabad area and the decision given therein is exactly  to
the point. [661D-H; 663H]
(2)  In	 that  case, this Court held  that  if	depreciation
actually allowed under the.  Hyderabad Income-tax Act  alone
was   taken   into  account  in	 computing   the   aggregate
depreciation  allowance	 and  the  written  down  value	  an
anomalous   result   would  follow,   namely,	depreciation
allowance  to be allowed to the assessee in  the  accounting
year under the Indian Income Tax Act would be more than what
was allowed in previous years under the Hyderabad Income-tax
Act,  that this would create a disparity and be against	 the
scheme	of the Indian Income tax Act, that it was  therefore
necessary  to  explain paragraph 2 of the  Removal  of	Dif-
ficulties   Order,  1950,  (considered	to  that  case)	  to
assimilate or harmonise the position regarding	depreciation
allowance.  This is exactly what was proposed to be dead  in
the  case  of  the  former  Portuguese	territories  by	 the
impugned Order. [663B-H]
643
(3)  The decision in Rajngopal Mills was considered in Straw
Products Ltd. v.    I.T.O.  [1968]  2  SCR  1.	It  was	 not
dissented  from and by implication the decision in  Ramgopal
Mills  is  still good law.  In the Straw Products  case	 the
court  held that the order impugned in that case sought,  in
purported exercise of the removal of difficulties power,  to
remove a difficulty which had not arisen and that  therefore
it  was unauthorised.  The Court specifically did not  think
it  necessary to determine to what extent, if any, it  would
be  open  to the Central Government by an  Order  issued  in
exercise  of the power to remove difficulties to  make	pro-
vision	which  is inconsistent with the	 provisions  of	 the
Indian	Income	tax  Act, nor did it  hold  that  the  Order
impugned in that case was inconsistent with the provision of
the  Indian  Income-tax Act.  It was therefore open  to	 the
Central	 Government, in exercise of its powers under cl.  7,
to issue the, impugned order.	      [665B-G]
(4)  Under  the scheme of the Indian Income tax Act, it	 was
open  to the assessee to carry forward the depreciation	 for
any  length of time if he had sustained any loss.  It  could
not  however,  be contended by the assessee in	the  present
case that it will now be very difficult, if not	 impossible,
for  the  assessee to produce all the  accounts	 of  earlier
years  to  show	 the  losses  which  he	 had  incurred,	 the
depreciation  he  was  entitled to and which  he  can  carry
forward.    Assessees  are  expected  to  and	would	have
maintained accounts at least for the purpose of the  Income-
tax  Act,  which  was  in force	 in  the  former  Portuguese
territories,  though  that Act was a simple  one.   What  is
necessary  for	working out the impugned order	is  to	know
whether	 there	was a profit or a loss and as  the  cost  of
acquisition of the assets, in respect of which	depreciation
allowance is claimed, should also be available it should not
be  very difficult to calculate the depreciation and  arrive
at  the	 written down value as on the date when	 the  Indian
Income-tax  Act	 was  extended	to  the	 former	  Portuguese
territories.   To accede to the claim of the  assessee	that
the  original value of the assets should be taken to be	 the
written	 down value however long they might have  been	used
means  that  they get an advantage not merely in  the  first
year in which the Indian Income-tax Act was applied to those
territories  but to enjoy a continued advantage	 which	will
last is long as their assets last. [665G-666C]
(5)  The  Order	 is  given  retrospective  effect,  but	 the
Central Government has the power to make an order or give  a
direction  so  as to remove, the difficulty  from  the	very
beginning, and that is what the Order does. [666F-G]
Ramgopal Mills Case, followed.

JUDGMENT:
ORIGINAL JURISDICTION : Writ Petitions Nos. 112, 391-394  of
1971 and 330-31 & 382-387 of 1974.
Petitions under Article 32 of the Constitution of India.
A.   K. Sen (In W.P. No. 112/71), N. A. Palkhiwala (In	W.P.
330331	and 382-387/74), S. P. Mehta, P. C. Bhartari, J.  B.
Dadachanji, G. C.  Mathur, Arati Mehta and Ravinder  Narain,
for the petitioners.
F.   S. Nariman, Additional Solicitor General, P. P. Rao and
S. P. Nayar, for the respondents.
The  Judgment of the Court was delivered by R. S.  Sarkaria,
J. A. Alagiriswami, J. gave a dissenting Opinion.
SARKARIA,  J.  These writ petitions under Article 32 of	 the
Constitution raise a question with regard to the validity of
the  2nd  Proviso  to  Clause  (3)  of	the  Taxation	Laws
(Extension  to Union Territories) (Removal of  Difficulties)
Order  2  of 1970.  The first five petitions  of  1971	were
urged  earlier	by  Shri Ashok Sen and the  rest  have	been
argued	now  by	 Shri  N. A.  Palkhiwala.   They  are  being
disposed of by a common judgment.
The  petitioners  are  carrying on  business  in  the  Union
Territories of Goa, Daman and Diu.  Respondents 1 and 2	 are
the Union of India and the Income-tax Officer, respectively.
644
Goa,  Daman  and Diu are  erstwhile  Portuguese	 territories
which  became  a  part of the Union of	India  on  and	from
December  19,  1961.  Thereupon, the President of  India  in
exercise  of  powers under Article 240 of  the	Constitution
Territories)   Regulation  III	of  1963  (for	short,	 the
Regulation).   By  Clause (3) of  this	Regulation,  amongst
other laws, the Indian Income-tax Act, 1961 (for short,	 the
Act)  was extended to the Union Territory of Goa, Daman	 and
Diu  with  effect  from April 1,  1963	subject	 to  certain
modifications, one of which was the insertion of s. 294-A in
the Act.  Section 294-A gave power to the Central Government
to make exemption, reduction or modification in, respect  of
income-tax  to	avoid  hardship	 or  anomaly  or  to  remove
difficulty in the application of the Act to any assessee  in
the Union Territories of Dadra Nagar Haveli, Goa, Daman	 and
Diu  etc.   The	 power	granting  the  exemption  etc.	 was
exercisable  before  March 31, 1967.  We are  not  concerned
with  the  Section because the impugned order was  not	made
under it..
By  Clause (4) of the Regulation, t~e laws in force  in	 the
Union  Territory corresponding to the Acts specified in	 the
Schedule, stand repealed from April 1, 1963.
Clause (7) provides
	      "If any difficulty arises in giving effect  in
	      any  Union Territory to the provisions of	 any
	      Act,  or	of any rule, notification  or  order
	      made   or	 issued	 thereunder,   the   Central
	      Government  may, by general or  special  order
	      published	 in the Official Gazette, make	such
	      provisions  or give such directions us  appear
	      to it to be expedient or-necessary for the re-
	      moval of the difficulty.
On  November  8, 1970, the Central Government  in  purported
exercise  of its powers under Clause (7) of  the  Regulation
Territories)  (Removal of Difficulties) Order No. 2 of	1970
(hereinafter  called the 1970 Order). the material  part  of
which runs thus
	      "Whereas	certain difficulties have arisen  in
	      giving effect to the provisions of the Income-
	      tax  Act,	 1961. in the Union  Territories  of
	      Goa,  Daman,  Diu .... Now  therefore....	 the
	      Central Government hereby makes the  following
	      order...
	      (1)
	      (2)   It	shall  be deemed to have  come	into
	      force on the 1st day of April 1963.
	      (3)   Computation	 of  aggregate	depreciation
	      allowable and written down value-In making any
	      assessment under the Income-tax Act, 1961	 (43
	      of  1961)	 all depreciation  actually  allowed
	      under  the  local	 laws shall  be	 taken	into
	      account  in  computing the  aggregate  of	 all
	      deductions in respect of depreciation referred
	      to in Clause (1) of subsection (2) of  Section
	      34,  and	the  written down  value  under	 sub
	      clause (2) of clause (6) of Section 43 of	 the
	      said Act.
	      64 5
	      Provided	that where in respect of any  asset,
	      depreciation  has	 been allowed for  any	year
	      both  in the assessment made under  the  local
	      law  and	in  the assessment  made  under	 the
	      Income-tax  Act, 1885, the greater of the	 two
	      sums allowed shall only be taken into account,
	      Provided further that where in respect of	 any
	      period  no depreciation was  actually  allowed
	      under  the  local	 law  or  the	depreciation
	      actually allowed cannot be ascertained, depre-
	      ciation  in  respect of that period  shall  be
	      calculated  at the rate for the time being  in
	      force under the Income-tax Act, 1961 or  under
	      the  Indian Income-tax Act, 1922, or  any	 Act
	      repealed	by that Act or under  any  executive
	      orders, issued when the Indian Income-tax Act,
	      1886 was in force, as the case may be, and the
	      depreciation so calculated shall be deemed  to
	      be the depreciation actually allowed under the
	      local law."
As clarified by the Explanation, "local law" in relation  to
the,  Union  Territory	of  Goa, Daman	and  Diu  means	 the
Portuguese  law	 relating  to  tax on  income  as  in  force
immediately  before  April 1, 1963.  In	 these	territories,
there was in force a Portuguese law relating to levy of tax,
the scheme of which was entirely different from that of	 the
Indian	Income-tax  Act.   Under  that	law  there  was	  no
provision  for	granting  depreciation	allowance;  the	 net
profits	 and gains of the business were not  calculated	 and
the  tax  was levied at a certain percentage  on  the  gross
income or turnover of the business, irrespective of  whether
the assessee had made profits or suffered losses.,
After  the extension of the Act to Goa, Daman and  Diu,	 the
petitioners   were  assessed  under  the  Act  for   several
assessment  years  from	 1964-65 onwards.  In  each  of	 the
completed assessments, the assessee was allowed depreciation
of the assets used by him for his business, on the basis  of
'written-down value' under cl. (b) of S. 43(6) road with  s.
32. For the assessment year 1964-65 the "written-down value"
was  taken as the actual cost of the assets to the  assessee
since  no depreciation was actually allowed to him  earlier.
In  each of the succeeding annual assessments the  'written-
down  value'  was  progressively reduced  by  deducting	 the
depreciation actually allowed in the preceding year from the
actual cost of the assets.
In  the light of the 2nd Proviso to Clause (3) of  the	1970
Order,	the past completed assessments in the case of  these
petitioners are being revised.	In consequence, the written-
down  value of the assets for calculating the,	depreciation
allowance even for the first time when the petitioners	were
assessed under the Act, would not be the actual cost of	 the
assets	to  the assessee, but a far lower sum  with  propor-
tionate increase in the petitioners' liability to tax  since
the assessment year 1964-65.
In  the	 case of petitioners in Writ Petitions	330-331-  of
1971,  the  Respondent	(Income-tax  Officer)  has   already
"revised"  the assessment for the year 1965-66, and  reduced
the  depreciation allowed in view of the 1970 Order  and  in
the  result raised a higher demand.  He has,  However,	kept
that demand in abeyance till the decision of these peti-
646
tions, wherein the validity of the 2nd Proviso	(hereinafter
called the impugned Proviso) to Clause (3) of the 1970 Order
is in question.
Section	 2(24)	(i) of the Act defines "income"	 to  include
"profits  and gains".  Section 28(i) makes the "profits	 and
gains of any business or profession which was carried on  by
the   assessee	at  any	 time  during  the  previous   year"
chargeable  to	income-tax.  Section 29	 requires  that	 the
income referred to in S. 28 shall be computed in  accordance
with the provisions including those for deductions contained
in ss. 30 to 43-A.  Since the tax is chargeable on  "profits
and  gains"  and not on gross receipts, the  profits  to  be
assessed  must be the real profits computed, subject to	 the
special	 requirements  of  the Act in  accordance  with	 the
ordinary  principles of commercial accounting.	 It  follows
that it the deduction of a particular item from the incoming
of the business, or profession is neither expressly  covered
by  the aforesaid sections, nor prohibited expressly  or  by
necessary implication by those provisions, it can be allowed
under  S. 28(1) provided on ordinary commercial	 principles,
it  is a proper item to be debited against the	incoming  in
ascertaining the "profits and gains" property  so-called-see
Badridas   Degu	  v.  Commissioner  of	 Income-tax(1)	 and
Commissioner of Income-tax v. Plymaun.(2)
We  have  alluded to these general principles for  a  proper
perspective.  Dedications by way of depreciation  allowance,
with which we are directly concerned, have been specifically
recognised  and dealt with in ss. 3 2, 34 and 43 (6) of	 the
Act.
the case of ocean-going ships depreciation is allowed,	year
after  year,  at  the fixed  prescribed	 percentage  on	 the
original  cost	of the asset to the  assessee  s.  32(1)(8).
This has been called the straight-line method.	In the	case
of non-ocean going ships and buildings, machinery, plant  or
furniture, the prescribed percentage, of depreciation is  to
be computed on the basis of written-down value of the  asset
s,  32(1)(ii).	 This is known as the  "written-down  value'
method.	  Both	these  methods	seek  to  ensure  that	 the
aggregate of the depreciation allowances granted, year after
year, does not exceed hundred per cent of the original	cost
of  the	 asset.	 In the straight-line method,  however,	 the
entire	depreciation  is  written off  sooner  than  in	 the
'written-down  value' method, if the figures of actual	cost
of  the asset and the prescribed percentage are the same  in
either case.
Sub-section  (2)  of  s.  32  allows  the  carry-forward  of
unabsorbed  depreciation allowance to any  subsequent  year,
without any time-limit, where such non-absorption is  "owing
to  there  being  no profits or	 gains	chargeable  for	 the
previous  year or owing to the profits or gains	 being	less
than  the allowance".  Depreciation loss under s. 32(2)	 (2)
thus, to a large extent, stands on the same footing as other
business losses.
An assessee claiming depreciation of assets has to show that
such  assets  are owned by him and were used by him  in	 the
account year for the purpose of his business, the profits of
which are being charged s.
(1) 34 I.T.R.  10  (S. C.).
(2) 46 I.T.R. 649 (S.C.).
647
32 (i) ]. Further, the total of all deductions in respect of
depreciation  under s. 32(i) of the Act or under the  Indian
Income-tax Act, 1922 (for short, the 1922 Act) or under	 any
Act repealed by that Act, made year after year, should	not,
in  any event, exceed the actual cost of the assets  to	 the
assessee s. 34(2)(i).
The  definition of "actual cost" is to be found in s.  43(1)
and  that of "written-down value" in s. 43 (6).	  The  later
defines it to mean-
	      (a)   in	the case of assets acquired  in	 the
	      previous	 year,	the  ,actual  cost  to	 the
	      assessee;
	      (b)   in	the case of assets  acquired  before
	      the  previous  year, the actual  cost  to	 the
	      assessee	 less  all   depreciation   actually
	      allowed  to  him under this Act or  under	 the
	      1922  Act or any Act repealed by that Act,  or
	      under  any  executive Orders issued  when	 the
	      Indian Income-tax Act, 1886 was in force.
The  pivot of the definition of "written-down value" is	 the
"actual	 cost" of the assets.  Where the asset was  acquired
and  also used for the business in the previous	 year,	such
value  would  be its full actual cost and  depreciation	 for
that  year would be allowed at the prescribed rate  oh	such
cost.  In subsequent year, depreciation would be  calculated
on  the	 basis	of actual cost	less  depreciation  actually
allowed.   The key word in clause (b) is "actually".  It  is
the  anti-thesis  of  that  which  is  merely	speculative,
theoretical  or	 imaginary.   "Actually"  contraindicates  a
deeming	 construction of the word "allowed" which it  quali-
fies.  The connotation of. the phrase "actually allowed"  is
thus limited to depreciation actually taken into account  or
granted and given effect to, i.e. debited by the  Income-tax
Officer	 against the incoming of the business  in  computing
the  taxable income of the assessee; it cannot be  stretched
to  mean  "nationally  allowed" or merely  allowable,  on  a
notional basis.
Of  course, any depreciation carried forward under s.  32(2)
is,  in	 view  of Explanation 3 to S.  43(6)  considered  as
depreciation  "actually allowed.  But such is not  the	case
here.
From  the above conspectus, it is clear that the essence  of
the   scheme   of  the	Indian	Income-tax  Act	  is,	that
depreciation is allowed, year after year, on the actual cost
of the assets as reduced by depreciation actually allowed in
earlier years. it follows, therefore, that even in the	case
of  assets acquired before the previous year, where  in	 the
past  no  depreciation	was computed,  actually	 allowed  or
carried forward, for no fault of the assessee, the "written-
down value" may, under Clause (b) of s. 43 (6), also, be the
actual cost of the assets to the assessee.
648
Relying	 on  the  ratio of this Court's	 decision  in  Straw
Products  Ltd  v.  Income-tax  Officer,	 Bhopal(1),  learned
Counsel	 for the petitioners have pressed these points	into
argument
	      (1)   The 'arising of a difficulty' in  giving
	      effect  to the Indian Income-tax Act or  rules
	      etc., made thereunder is a condition precedent
	      to  the invocation of the power  under  Clause
	      (7) of the Regulation, and since the existence
	      of that condition had not been established  as
	      an objective fact, the Central Government	 had
	      no  power to promulgate the impugned  Proviso.
	      It  is stressed that the Act has been  applied
	      all these years since its extension in  April,
	      1963   to	  these	 Territories   without	 any
	      difficulty.
	      (2)   The	 power	under  Clause  (7)  of	 the
	      Regulation  can be exercised only in a  manner
	      consistent  with	the  scheme  and   essential
	      provisions  of the Act.  The impugned  proviso
	      seeks to amend and change the scheme and basic
	      provisions of the Act inasmuch as it provides,
	      inconsistently  with  ss.43(6) and 32  of	 the
	      Act, for determining the written-down value on
	      the basis of a notional depreciation in  cases
	      in which no depreciation was actually allowed.
	      (3)   In	any case, it would be impossible  to
	      work the impugned Proviso.
Mr. Nariman, learned Additional Solicitor-General,  submits,
in reply, that difficulties had arisen in the application of
the  provisions	 of  the  Act  in  the	matter	of  allowing
depreciation  to assessees in these Union Territories.	 But
for the impugned provisions, it is contended, such assessees
would not have been entitled to claim depreciation allowance
either under clause (a) or under clause (b) of s.43(6)	read
with  s.32 of the Act.	Clause (a) could not apply to  these
cases  because	the  assets were acquired  before  the	year
immediately  preceding April 1,1963.  Clause (b)  would	 not
cover  their case because, firstly, under the scheme of	 the
Act, the written-down value of assets acquired several years
earlier	 cannot	 be ,taken as their full actual	 cost,	and,
secondly, the Portuguese law, under which they were formerly
assessed, was not repealed by the Indian Income-tax Act, but
by  the Regulation.  It is argued that in s.43(6) read	with
s.32,  there  is  an implied  prohibition  against  allowing
depreciation on the actual cost of the assets which were not
acquired  in the previous year.	 This difficulty,  says	 the
Counsel,  had  to be removed to enable	the  petitioners  to
claim  just  depreciation  allowance.	If  it	is  assumed-
proceeds  the argument that s. 43 (6) is applicable  to	 the
'case  of  these assessees and the depreciation	 has  to  be
calculated  on the original full cost of the assets  despite
their  being old and worn out by use over the years, such  a
course	would. be wholly divorced from realities,  and	give
the assessees in Goa, Daman and Diu an undue advantage	over
the  assessees	in India.  This resultant disparity,  it  is
urged, was a difficulty and the
(1)[1968] 2 S.C.R.  1.
649
impugned Proviso removes it by bringing the assessees in the
former Portuguese Territories at par with the assessees	 who
had suffered taxation under the Act.
Learned Counsel further maintains that the decision in Straw
Products' case does not advance the case of the petitioners,
rather it supports the Revenue. In this connection, Counsel
has invited our attention to the observations of this  Court
at  pp.	 8  and 13 of the Report  in  Straw  Products'	case
(supra) to the effect that by the application,of the  Indian
Income-tax Act, 1922, to the merged States "a difficulty did
arise  in the matter of determining the	 depreciation  allo-
wance  under s. 10(2)(vi)" which corresponds to	 s.32(1)(ii)
of  the 1961 Act, and that this "difficulty" was removed  by
the  Taxation  Laws Merged States  Removal  of	Difficulties
Order 1949.
It  is further contended that once it was found that such  a
difficulty had arisen, the Central Government could, in	 the
legitimate  exercise of its powers under Clause (7)  of	 the
Regulation,   exercise	of  the	 same  by   providing	that
allowances, where they were, not actually allowed, should be
deemed to have been allowed for the purpose of	depreciation
in  prior years.  On this point reliance has been placed  on
Commissioner   of  Income-tax,	Madhya	Pradesh	  v.   Straw
Products(1)  and  Commissioner of  Income-tax  Hyderabad  v.
Dewan Bahadur RamGopal Mills Ltd.(2).
Since both sides rely, more or less, on the decision of this
Court  in Straw Products Ltd. v. Income-tax Officer,  Bhopal
(supra)	 and the other two authorities cited have also	been
noticed therein, it will be appropriate to examine the	same
in detail.
The assessee therein was a Company formed in 1937 in Bhopal'
State  and  was	 exempted by the Ruler of  that	 State	from
payment of' all taxes for a period of ten years expiring  on
October 31, 1948.  The State  of Bhopal merged with India on
August 1, 1949.	 The Taxation Laws (Extension	to    Merged
States and Amendments) Act 67 of 1949,	which  replaced	 the
earlier	 Ordinance  21 of 1949, extended  with	effect	from
April 1, 1949, to the merged States, amongst other Acts. the
Indian Income-tax Act, 1922 and by s. 7 the laws in force in
the  merged States corresponding to the extended  Act  stood
repealed  Section  6  contained	 a  "removal  of  difficulty
clause" which was substantially the same as Clause 7 of	 the
Regulation in the present case.	 Section 6 provided
	      "If any difficulty arises in giving effect  to
	      the  provisions  of  any Act,  rule  or  order
	      extended	by Section 3 to the  merged  States,
	      the  Central  Government may, by	order,	make
	      such  provisions	or give such  directions  as
	      appear  to it to be necessary for	 removal  of
	      the difficulty."
The Central Government in exercise of its power under Clause
(8)  of	 Ordinance 21 of 1949	     (which  corresponds  to
Section 6 of Act
(1) [1964] 2 S.C.R. 881, 887. (2) [1961] 2 S.C.R. 318, 325.
650
  67  of  1949) issued the  Taxation  Laws  (Merged  States)
(Removal  ,of Difficulties) Order, 1949, clause(2) of  which
provided :
	      "In  making any, assessment under	 the  Indian
	      Income-tax   Act,	  1922,	  all	depreciation
	      actually allowed under any laws or rules of  a
	      merged State relating to income-tax and super-
	      tax, shall be taken into account in  computing
	      the aggregate depreciation allowance  referred
	      to in sub-clause (c) of the Proviso to  clause
	      (vi)  of sub-section (2) and the written	down
	      value  under  clause  (b)	 of  sub-s.  (5)  of
	      section IO of the said Act.
	      both  in	the assessment made  in	 the  merged
	      State and in British India, the greater of the
	      two  sums	 allowed shall only  be	 taken	into
	      account."
According to clause (2) of the above Order, in computing the
profits and gains of the business carried on by the assessee
for  determining  the tax payable by it for  the  assessment
year 1949-50, depreciation allowed under Section 10(2)	(vi)
of  the 1922 Act was taken as a percentage of  the  original
cost  to  the  assessee of the assets used  by	it  for	 its
business, and in the four subsequent years the written	down
value	of  the	 assets	 admissible  for  depreciation	 was
determined  on	that  basis.  The  Income-tax  Officer	then
revised	 the assessments in respect of the assessment  years
1952-53 and 1953-54 and recomputed its taxable income on the
footing	 that  since the commencement of  the  business	 the
assessee  must	be deemed nationally to	 have  been  allowed
depreciation under the Bhopal Income-tax Act.  The Appellate
Assistant Commissioner and the Income-tax Appellate Tribunal
disagreed  with	 the  Income-tax Officer  and  restored	 the
original  assessment.  On a reference made by the  Appellate
Tribunal,  the	High Court held in favour of  the  assessee.
The Income-tax Commissioner appealed to this Court.   During
the  pendency  of  that appeal, the  Central  Government  in
exercise of its power under s.6 of the Act 67 of 1949 issued
an  Order called the Taxation Laws (Merged States)  (Removal
of   Difficulties)  Amendment  Order,  1962,   adding	this
Explanation to the order of 1949
	      "Explanation-For	  the	purpose	  of	this
	      paragraph,  the ,expression  all	depreciation
	      actually allowed under any laws ,or rules of a
	      Merged State means and shall be deemed  always
	      to have meant
	      (a)   the aggregate allowance for depreciation
	      taken  into account in computing	the  written
	      down value under any laws or rules in force in
	      a	 merged State or carried forward  under	 the
	      said laws or rules, and
	      (b)   in cases where income had been  exempted
	      from tax under any laws or rules in force in a
	      merged  State or under any assessment  with  a
	      Ruler  the depreciation that would  have	been
	      allowed had the income not been so exempted.
651
This  Court  held  in  Commissioner  of	 Income-tax,  Madhya
Pradesh	 v. Straw Products Ltd. (supra) that the  expression
actually allowed" in the Removal of Difficulties Order 1949,
meant  allowance actually given effect to, but by virtue  of
the  Explanation, added by the aforesaid Order of 1962,	 the
correct	 basis for computing the written down value  of	 the
depreciable  assets  for  the relevant period  was  the	 one
adopted by the Income-tax officer.  This Court then declined
to examine the challenge to the validity of the (Removal  of
Difficulties) Amendment Order, 1962, for the reason that  an
authority  or  court administering the Act cannot  permit  a
challenge to be raised against the vires of the Act.
The  assessee  thereafter challenged the vires of  the	1962
Order  by  a writ petition filed under Article	226  of	 the
Constitution.	The Petition was dismissed and the  assessee
appealed to this Court on a certificate granted by the	High
Court.	 The Court first examined clause (2) of the  Removal
of  Difficulties  Order of 1949, which	corresponds  to	 the
unchallenged  part of paragraph (3) of the 1970	 Order,	 and
held it to be, valid on the ground that since the Income-tax
Acts of the merged States had not been repealed by the	1922
Act,  a	 difficulty had arisen in taking  into	account	 all
depreciation  actually allowed under any laws or rules of  a
merged	State  relating	 to income-tax for  the	 purpose  of
computing  the aggregate depreciation allowance referred  to
in sub-clause (c) of the Proviso to S. 10(2)(vi) of the 1922
Act, and that the 1949 Order did no more than removing	this
difficulty.
The  Court  then proceeded to examine the challenge  to	 the
validity  of sub-clause (g) of the Explanation added by	 the
1962  Order.   In this connection, contentions (1)  and	 (2)
canvassed  in that case were precisely the same	 which	have
now  been  raised before us on behalf  of  the	petitioners.
Both these contentions were accepted by the Court and, as  a
result, the aforesaid sub-clause (b) of the Explanation	 was
struck	down.	In that context, Shah J. (as  he  then	was)
speaking for the Beach constituted by seven learned  Judges,
observed
	      "Exercise	 of the power to make provisions  or
	      to issue directions as may appear necessary to
	      the  Central Government is conditioned by	 the
	      existence	 of a difficulty arising  in  giving
	      effect  to the provisions of any Act, rule  or
	      order.  The section does not make the  arising
	      of  the.	difficulty a  matter  of  subjective
	      satisfaction.  of	 the  Government;  it  is  a
	      condition	 precedent to the exercise of  power
	      and existence of the condition, if challenged,
	      must be established as an objective fact."
The Court held that after the promulgation of the 1949 Order
no  difficulty	survived or arose in giving  effect  to	 the
provisions of s.10 of the 1922 Act.  In that connection,  it
was observed :
	      "It  is  impossible,  on	the  words  used  in
	      s.10(5)  clause (b) read with the 1949  Order,
	      to  hold	that-the written down value  of	 the
	      assessee in a merged State could not be deter-
	      mined   and  with	 a  view to remove that
	      difficulty the impugned
	       652
	      Order  was  promulgated.	The  fact  that	 the
	      assets  were  acquired by a person at  a	time
	      when  he was not an assessee under the  Indian
	      Income-tax  Act  or under the  State  Act	 not
	      disable him, when he is assessed to tax on the
	      profits  will the business, from claiming	 the
	      benefit of the depreciation allowance on those
	      assets   if  used	 for  the  purpose  of	 the
	      business."
	      (emphasis added)
The  Court  noted that the impugned provision  of  the	1962
Order  seeks  to  alter the connotation	 of  the  expression
"depreciation  actually	 allowed." It then towards  the	 end
concluded
	      "To  sum up : the power conferred by s.  6  of
			    Act	 67  of	 1949  is  a  power  to	 r
emove	a
	      difficulty  which arose in the application  of
	      the Indian Income-tax Act to the merged States
	      : it can be exercised in the manner consistent
	      with  the scheme and essential  provisions  of
	      the  Act and for the purpose for which  it  is
	      conferred.  The impugned Order which seeks  in
	      purported	 exercise of the power, to remove  a
	      difficulty   which   had	 not   arisen	was,
	      therefore, unauthorised."
A  comparative study of Explanation (b) in the	1962  Order,
which was being challenged in Straw Products' case, and	 the
second	Proviso to Clause (3) of Order 2 of 1970,  which  is
the  target  of	 attack from the petitioners'  side  in	 the
instant case, reveals a striking similarity between the	 two
impugned provisions.  There, the 1962 Order envisaged  cases
of  assessees from a merged State who had not been  actually
allowed	 depreciation of the assets because of	their  being
exempted by the Ruler of that State from payment of  income-
tax.  In the case in hand, also, the impugned proviso  seeks
to  cover the case of an assessee, who before the merger  of
these	Territories  in	 the Union of India,  had  not	been
allowed	 depreciation  because	the  law  by  which  he	 was
government was not a law imposing tax on the gross  turnover
of the	business, irrespective of profits or losses, and, as
such, did not recognise any claim to depreciation.  Further,
in  both the cases, the impugned provisions seek  to  change
the  essence of the definition of "written-down	 value"	 and
scheme of the Indian Income-tax Act relating to depreciation
allowance,   by	  substituting	 "depreciation	 fictionally
allowed"  for  "depreciation actually  allowed."  This,	 the
Court  held, the Central Government was not competent to  do
under  the  garb of removing a "difficulty"  which  was	 not
proved to have arisen.
In Straw Products' case it was averred in the writ  petition
by  the	 assessee that 'no difficulty had arisen  in  giving
effect to the provisions of the Indian Income-tax Act 1922,"
and  as such, there was no question of the exercise  of	 any
power  under  Section 6 of the Merged States  Act  "for	 the
purpose	 of  passing  the  impugned  Order  of	1962.	This
allegation  was	 denied	 by  the  Respondents,	and  it	 was
contended on their behalf that the "arising of a difficulty"
in  the enforcement of the Income-tax Act was a	 matter	 for
subjective satisfaction of the Government.
653
Precisely similar pleas have been taken in the affidavits of
the  parties in the present case (vide	W.Ps.112,391-394  of
1971).	 The position here is very much the same as  was  in
Straw  Products'  case (supra) Here also,  the	Respondents'
plea,  in  substance,  is  that there  is  a  deficiency  or
omission  in the provisions of ss.32 and 43(6) of the  (1961
Act  and unless the deficiency or omission was supplied,  it
would be difficult for the Central Government to collect tax
and allow depreciation to assessees like the petitioners  to
the  same  extent or at the same rate at which it  has	been
collected  from or allowed to assessees who have  throughout
been assessed under the Indian Income-tax Act.
This  raises  two  questions : (1) Is  this  a	'difficulty'
within	the contemplation of Clause (7) of the Regulation  ?
(2)  Is the Central Government in the exercise of its  power
under that Clause competent to supply a deficiency or  cases
omission  of this nature ?
For reasons that follow( the answers to both these questions
must be in the negative.
For  a	proper appreciation of the points  involved,  it  is
necessary  to have a general idea of the nature and  purpose
of a "removal of difficulty clause" and the power  conferred
by it on the Government.
To keep pace with the rapidly increasing responsibilities of
a Welfare democratic, State, the legislature has to turn out
a  plethora of hurried legislation, the volume of  which  is
often  matched	with its complexity.   Under  conditions  of
extreme	 pressure,  with heavy demands on the  time  of	 the
legislature and the endurance and skill of the draftsman, it
is well nigh impossible to foresee all the circumstances  to
deal  with which a statute is enacted or to  anticipate	 all
peculiar  local	 conditions or even a local  law.   This  is
particularly  true  when Parliament  undertakes	 legislation
which  gives a new dimension to socioeconomic activities  of
the  State  or	extends	 the existing  Indian  laws  to	 new
territories  or areas freshly merged in the Union of  India.
In  order  to  obviate	the  necessity	of  approaching	 the
legislature  for  removal  of  every  difficulty,  howsoever
trivial,  encountered  in the enforcement of a	statute,  by
going  through	the time-consuming amendatory  process,	 the
legislature  sometimes	thinks it expedient  to	 invest	 the
Executive   with  a  very  limited  power  to	make   minor
adaptations  and peripheral adjustments in the statute,	 for
making	its implementation effective, without  touching	 its
substance.  That is why the "removal, of difficulty clause",
once  frowned upon and nick-named us "Henry VIII Clause"  in
scornful commemoration of the absolutist ways in which	that
English	 King  got  the	 "difficulties"	 in  enforcing	 his
autocratic  will  removed through the instrumentality  of  a
servile	 Parliament,  now finds acceptance  as	a  practical
necessity,  in several Indian statutes of post	independence
era.
Now let us turn to Clause (7) of the Regulation.  It will be
seen  that  the	 power given by it is  not  uncontrolled  or
unfettered.   It is strictly circumscribed, and its  use  is
conditioned  and restricted.  The existence or arising of  a
"difficulty" is the sine qua non for the exercise
654
of the power.  If this condition precedent is not  satisfied
as an objective fact, the power under this Clause cannot, be
invoked at au.	Again, the "difficulty" contemplated by	 the
Clause must be a difficulty arising in giving effect to	 the
provisions of the Act and not a difficulty arising  aliunde,
or  an extraneous difficulty.  Further, the Central  Govern-
ment  can  exercise the power under the Clause only  to	 the
extent it is necessary for applying or giving effect to	 the
Act  etc., and no further.  It may slightly tinker with	 the
Act  to round off angularities, and smoothen the  joints  or
remove minor obscurities to make it workable, but it  cannot
change, disfigure or do violence to the basic structure	 and
primary features of the Act.  In no case, can it, under	 the
guise  of  removing  a difficulty,  change  the	 scheme	 and
essential provisions of the Act.
The above principles, particularly the distinction between a
'difficulty'  which falls within the purview of the  Removal
of  Difficulty Clause and one which falls outside it,  finds
ample  illustration  in	 the 1949  Order  and  the  impugned
provision of the 1962 Order which came up for  consideration
in Straw Products' case (supra).  Excepting the reference to
the corresponding provision of the 1922 Act, the language of
the  1949 Order was the same as that of the unimpugned	part
of  clause (3) of Order 2 of 1970 in the present case.	 The
1949 Order related to the removal of a difficulty which	 bad
arisen	in giving effect to the provisions of  s.10(2)	(vi)
Proviso	 (c) and s.10(5) (b) of the 1922 Act,  corresponding
to  s.34 (2) (i) and s.43 (6) (b) of the Act of 1961.	This
difficulty  had	 arisen because the income-tax laws  of	 the
merged States were not repealed by the Indian Income-tax Act
but  by	 the Taxation Laws (Extension to Merged	 States	 and
Amendment) Act 67 of 1949.  Owing to this, the	depreciation
actually  allowed under the laws of the merged States  could
not  be	 taken	into  account  in  computing  the  aggregate
depreciation  allowance	 referred  to  in  sub-s.(2)   (vi).
Proviso	 (c) or the written down value under clause  (b)  of
sub-s.(5)  of s.10 of the 1922 Act.  If this difficulty	 had
not  been  removed, anomalous results would  have  followed.
The  written  down value of the assets acquired	 before	 the
previous year would have been taken as the original cost  of
the  assets without deduction of the  depreciation  actually
allowed	 in the past under the State laws.  This would	have
given  to  the assessees in the merged	States,	 a  benefit,
inconsistently	with  the scheme of s.10 of  the  1922	Act,
exceeding  in  the aggregate even the original cost  of	 the
assets.
The 1949 order removed this difficulty.	 In terms, it did no
more  than directing that if under the income-tax laws of  a
merged	State any depreciation was actually allowed, it	 was
to  be taken into account in ascertaining  the	written-down
value  of the assets.  Far from supplanting or changing	 the
essence	 of the essential provisions of the Act relating  to
depreciation  and written down value, it gave  effect,	life
and meaning to them.
The,  observations in Straw Products Ltd's case	 (supra)  to
the  effect, that "by the extension of the  Income-tax	Act,
1922, the rules and the orders made thereunder to the  areas
of the merged States,
655
undoubtedly   numerous	difficulties  arose"  and  it	was,
therefore, necessary to devise machinery for removing those,
difficulties"-On which Shri Nariman relies-were made by this
Court in the context of the 1949 Order.	 They did not relate
to the then impugned provision of the 1962 Order.
The 1962 Order, Explanation (b), is an instance of an  Order
foreign to the Removal of Difficulty Clause.  The  so-called
"difficulty" which was sought to be 'removed' by that  Order
was  not  a 'difficulty' of the kind  contemplated  by	that
Clause,	  because  it  did  not,  in  fact,  arise  in	 the
application  or enforcement of the Income-tax Act,  but	 de-
hors  it.  No difficulty in implementing the scheme  of	 the
1922  Act read with the 1949 Order existed as  an  objective
fact.
The 1962 Order, Explanation (b), purported to substitute  in
s.10(5)	 (b)  of  the  1922 Act	 (as  adopted  by  the	1949
Order)'depreciation  notionally allowed'  for  "depreciation
actually  allowed".   This the Central	Government  was	 not
competent  to  do under that  Clause  because  "depreciation
actually   allowed"  was  the  linchpin	 of  the   statutory
definition of "written-down value".  Indeed, the 1962  Order
sought	to amend the essential provisions of the  Income-tax
Act in an attempt to collect tax which in the opinion of the
Central	 Government, the tax-payer could and should pay	 but
to  recall  the	 words of this Court--"which  has  not	been
imposed	 by  adequate legislation".  In the  present  cases,
also, the impugned Proviso of the 1970 Order seeks to do the
same thing by raising the taxable income of the assessee, in
consistently with the scheme of the Act of 1961.
Although  the  language	 of the	 impugned  Proviso,  in	 the
present case, is not identical with that of Explanation	 (b)
of the 1962 Order in the Straw Products Ltd. v. Commissioner
of Income-tax (supra) yet the sum, substance and the  device
for    replacing   depreciation	  "actually   allowed"	  by
depreciation "fictionally allowed" are the same.
True,  that  under the income-tax law of the  merged  State,
depreciation was allowable, and 1962 Order, Explanation	 (b)
was  intended  to  cover cases	where  no  depreciation	 was
actually  allowed  on  account	of  the	 exemption  of	 the
assessee,  from tax under a State law or a rule or under  an
agreement  with the Ruler of a merged State (whose word	 was
law);  whereas	in  the instant case  depreciation  was	 not
allowed	 because  it was not computed under  the  Portuguese
Law.   But this is a distinction without a  difference.	  As
noticed	 already, the Portuguese law was not a law  imposing
tax  on net income.  That law levied tax  on  gross-receipts
and  not on the profits and gains of a business.   It  would
not  be,  wrong	 to say that before  the  merger,  in  these
territories, there was no income-tax in the sense the tax is
under stood under the Indian Income-tax Act.  In  principle,
therefore, there would be no difference between a case where
one person is exempted from income tax under the law, and  a
case where all are exempted, there being no income-tax law.
We  are	 unable to accept the contention that  but  for	 the
impugned Proviso, the provisions of s. 32 and s. 43 (6)	 (b)
of the 1961 Act on
656
its  extension	to  Goa, Daman and Diu could  not  be  given
effect to and applied to the assessees in those territories.
There could be no difficulty in computing the 'written	down
value.	of  the	 assets	 that  had  been  acquired  by	 teh
petitioners before the previous year, under clause (b) of s.
43(6).	Since no depreciation was, in fact, allowed  to	 the
petitioners in the past		    under the Portuguese law
in the first assessment under the Indian Income-tax Act, the
written down value would, under " clause (b) work out to  be
the actual cost of the assets less nil.	 Thereafter, in each
succeeding  year  the depreciation actually allowed  in	 the
preceding  year would be deducted causing yearly  diminution
of  the written down value with consequent decrease  in	 the
depreciation  allowed on that basis.  Exactly, this was	 the
manner in which the written down value of the assets of	 the
petitioners  has been computed and depreciation allowed	 for
several assessment years from 1964-65 ,onwards.	 This itself
demonstrates  that there was no difficulty in  applying	 the
aforesaid provisions to the cases of these assessees.
We  find no merit in the argument that the impugned  Proviso
brings about equality of treatment among different assessees
in  India. The law on the point was declared by this  Court
in  Straw Products Ltd.'s case about seven years  back.	  If
that decision did not correctly interpret the intendment  of
the  Legislature,  the Parliament would have  nullified	 its
effect	by  legislation.  As a result, no assessee,  in	 the
Territories of the erstwhile Part B States and Merged States
has suffered the disadvantage of depreciation being deducted
on  notional  basis in determining the written	down  value,
when  in  fact, no depreciation had  been  actually  allowed
under  the  former local laws.	Similarly,  no	assessee  in
British	  India	  suffered  such  fictional   deduction	  of
depreciation when it had not been actually allowed  earlier.
The impugned Proviso, therefore, far from ensuring parity of
treatment puts the assessee in Union Territories in a  worse
position than the assessees in the rest of India.
We  may now notice this Court's decision in Commissioner  of
Income-tax,  Hyderabad v. Dewan Bahadur Ramgopal Mills	Ltd.
(supra),  relied  upon by Shri Nariman.	 The facts  of	that
case were that prior to January 29, 1950, when the erstwhile
State  of  Hyderabad was merged in the Union of	 India,	 the
respondent company therein was assessed to income-tax  under
the   Hyderabad	 Income-tax  Act,  by	which	depreciation
allowance was granted to it on the basis of the written down
value  of  its assets in accordance with cl.(c) of  s.12  of
that  Act.  After the merger, the Hyderabad  Income-tax	 Act
was  repealed, and by ss.3 and 12 of the Finance  Act  1950,
the Indian In come-tax Act, 1922, was extended to that area.
Under  the  Removal of Difficulty Clause ie. s.	 12  of	 the
Finance	 Act,  the Central Government on December  2,  1950,
issued the Removal of Difficulties.Order, 1950.	 Paragraph 2
of  the Order provided that "in making any assessment  under
the  Indian Income-tax Act, 1922, all depreciation  actually
allowed	 under any laws or rules of Part B State ....  shall
be   taken   into  account  in	 computing   the   aggregate
depreciation  allowance referred to in Proviso (c) to s.  10
(2) (vi) and the written down value under s.10(5) (b) of the
said Act".  For the assessment year 1951-52
			    657
the,  respondent  company was assessed for  the	 first	time
under  the 1922 Act, aid on the basis of para 2 of the	1950
Order, it claimed depreciation allowance by working out the,
value  of  the	assets	at  their  inception  and  deducting
therefrom  such	 depreciation as was allowed for  the  three
assessment  years  in  which  it  was  assessed	 under	 the
Hyderabad  income-tax Act.  The matter was brought  to	this
Court  and while, it was pending here, on May 8,  1956,	 the
Central	 Government  issued  another  order  under  s.12  of
Finance Act, 1950, reenacting and adding this Explanation to
the, aforesaid para 2 :
	      "For  the purpose, of paragraph 2,  expression
	      'depreciation actually allowed' under any laws
	      or rules of a Part B State means and shall  be
	      deemed  to  have always  meant  the  aggregate
	      allowance for depreciation taken into  account
	      in computing the written down value under	 any
	      laws  or	rules of a Part B State	 or  carried
	      forward under the said laws or rules."
The Company challenged the validity of Para 2 of the  Order,
particularly  the Explanation inter alia on the ground	that
it   was  ultra	 vires	the  powers  conferred	on   Central
Government  by Section 12 of the Finance Act,  1950.   'Ibis
Court  upheld  the,  validity  of  the	impugned  provision.
Therein, it was manifest that in applying the provisions  of
s.10(5) (b) of the 1922 Act to the assessees from  Hyderabad
(a  Part B State), there was an initial	 difficulty  because
the  Hyderabad income-tax Act had been repealed not  by	 the
1922  Act  but by the Finance Act,  1950.   This  difficulty
could  be validly removed by making an Order under  s.12  of
the Finance Act, 1950.	Attempt to remove it by issuing	 the
1950  Order did not completely achieve its object.   In	 its
application  that Order led to an anomalous result,  namely,
the written down value of the assets and the allowance to be
allowed on its basis to the assessee in the accounting	year
on  first assessment under the Indian Income-tax Act,  would
be more than what it was allowed in previous years under the
Hyderabad Income-tax Act.  It was to remove this  difficulty
and  to harmonise the position as to depreciation  with	 the
scheme	of  the	 Indian Income-tax  Act	 that  the  impugned
Explanation was added by the 1956 Order.
It  will  be seen that under the Hyderabad  Income-tax	Act,
depreciation  allowance	 had actually been  allowed  to	 the
assessees  on  the basis of written  down  value  calculated
according to the mechanism provided in that Act.  After	 the
promulgation  of  the 1950 Order, the only  difficulty	that
remained  was caused by the different rates at which  depre-
ciation	 had  actually been taken into account	and  allowed
under  the Hyderabad Income-tax Act.  The Explanation  added
by  the 1956 Order, in effect, did no more  than  explaining
that  in  paragraph  2	of  1950  Order,  "all	depreciation
actually  taken	 into account by the Income-tax	 Officer  in
computing the written down value under the Hyderabad Income-
tax Act means "all depreciation actually allowed."
As has been said already and it needs to be said again,	 the
words  "depreciation  actually	allowed" in s.	43  (6)	 (b)
connote	 depreciation  that  has actually  been	 taken	into
account and given effect to by the
658
Income-tax  authorities in the computation of  the,  profits
and  gains  of	the, business in  assessing  income-tax	 for
earlier	 years	The, said Explanation did not,	change	that
basic  connotation, it only clarified it.  Thus	 in  issuing
the  1950 Order and the 1956 Order, adding  the	 Explanation
the  Central Government in that case, did not over-step	 the
limits	of  the	 power delegated to it	under  s.12  of	 the
Finance Act, 1950.  The impugned provision in the D. B.	 Ram
Gopal  Mills  case  (supra) corresponds to  clause  (2)	 and
Explanation   (a)  thereto  of	the  1949  Order   and	 the
substantive part of clause (3) of the 1970 Order, it is	 not
analogous to the impugned Proviso in the instant case.
The  situation before us is materially different.  Here,  no
assessees  under the Portuguese Law.  Indeed,  under,  that-
law  the.  tax	was levied not on net income  but  on  gross
turnover of the business.  There wag, strictly speaking,, no
assessment  of	tax  on,  real	"profits  and  gains"  of  a
business,  the tax being levied on gross receipts on ad	 hoc
basis'.	  Allowing  or taking into account  depreciation  of
assets	was out of question in that process  of	 assessment.
In the case in hand, the imputed Proviso seeks to  introduce
a  new	concept of calculating depreciation.   By  replacing
"depreciation actually allowed" with "depreciation deemed to
have  been  allowed"  by a fiction of  law,  even  where  no
depreciation  was at all- allowed under any law outside	 the
taxation territories, it, in- effect, attempts to change the
fundamental scheme of the Act.
D.   B.	 Ram  Gopal  Mills's,  case  (supra)  was   noticed,
explained  and distinguished in, Straw Products	 Ltd's	case
(supra). It was observed that the former "did not  support
the  view that the arising of a difficulty is a	 matter	 for
the  subjective satisfaction of the Central Government"	 The
precedent  case is not in pari materia with D. B. Ram  Gopal
Mills'	case. It is in line with Straw  Products  Ltd.  v.
Income-tax  Commissioner,  and. the, ratio  of	the   latter
decision and the observations made- therein with regard,  to
the then impugned Order of 1962 apply with full force to the
impugned Proviso in the instant case.
In  the	 light	of  what has  been  said  above,  we  accept
contentions (1)	    and	 (2)  advanced	on  behalf  of	 the
petitioners.
Be  that  as it may, the last contention  canvassed  by	 Mr.
Palkhiwala is a clincher.  The argument is that the impugned
Proviso	 is not workable, because, under the Portuguese	 law
there  was no tax on income at all.  These Territories	were
merged	with  India  on December 19, 1961,  and	 the  Indian
Income-tax Act was extended to these Territories from  April
1, 1963.  During this interregnums, it is contended, the was
no law either Portuguese or Indian, under which the income
659
if those prior years could be computed.	 If there is a loss,
or profit  is  inadequate to absorb the depreciation, latter
can  be carried- for- Yard without limit of time.  Owing  to
the absence of any tax law during the aforesaid interregnum,
proceeds  the argument, the petitioners would not  have	 the
benefit	 of  carry-forward' of depreciation  form  any	year
prior  to 1963, and, thus, the impugned Proviso instead.  of
removing  any difficulty, would create serious	difficulties
and legal complications.
There is a good deal of force in this contention.
It  has been noticed earlier that the tax imposed under	 the
Portuguese law was, in reality, a 'turn-over' tax and not  a
tax  on the income of a business.  The levy was	 exacted  on
gross receipts, irrespective of loss or profit.	 Thereafter,
during	the interregnum between December 19, 1661 and  April
1, 1963, there .was in force no law authorising the, levy of
income-tax  in	these Territories.  We have also  seen	that
under  the  Act an assessee is entitled	 to  'carry-forward'
unabsorbed  depreciation  in  case  of	loss  or  inadequate
profits without any time limit Is. 32(2).  For ensuring this
right to an assessee, assessments for ascertaining losses or
insufficiency	of  profits  of	 his  business,	 since	 the
acquisition  and  use of the assets by him will have  to  be
made.	In  the Indian Income-tax Act as extended  to  these
Union	Territories,  there  is	 no  provision	for   making
assessment in respect of those past years.  Therefore a Goan
assessee  who made losses and suffered depreciation  of	 his
assets will never get the benefit of such carry-forward,  as
no machinery exists for determining inadequacy of profits or
the  factum of losses in, those years which is. a  condition
precedent to carry forward of. depreciation.   Retrospective
assessments for this purpose, going back to a period,  prior
to 1963 could have been made, if at all, under a law made by
Parliament and not under an executive fiat.  In the  absence
of  such  law it is impossible to work the  Proviso  without
riding	rough-shod over the rights of the assessees to	have
their unabsorbed depreciation relating to pre-1 963  period,
carried	 forward.   Viewed from this  #angle,  the  impugned
Proviso	 would,	 in the implementation of  the	Act,  create
difficulties rather than removing them.
For  the  foregoing reasons, we allow  these  petitions	 and
declare	 that the 2nd Proviso to Clause (3) of the  Taxation
Laws   (Extension   to	Union	Territories)   (Removal	  of
Difficulties)  Order 2 of 1970, is ultra vires	the  Central
Government  when exercising the powers under Clause (7)	 ,of
Regulation IIII of 1963 and the Revenue authorities are	 not
entitled  to  levy  tax on the	basis  of  the	depreciation
allowance computed in. accordance with the said	 Proviso  in
the  , Order.  The respondents, shall pay, the costs of	 the
660
ALAGIRISAMI, J.These matters have been argued twice once  by
Mr. A. K. Sen on behalf of the petitioners in W.P. Nos. 112,
391-394 of 1971, and again by Mr. N. A. Palkhivala on behalf
of the petitioner,, in W.P. Nos. 330-331 & 382-387 of  1974.
The  question  that arises in. all these  petitions  is	 the
constitutional validity of the Taxation Law,, (Extension  to
Union Territories) (Removed of Difficulties) Order 2 of 1970
issued	under clause 7 of the Taxation Laws  (Extension	 to,
Union  Territories)  Regulation, 1963 by  which	 the  Indian
Income-tax Act was extended, with certain amendments, to the
Union  Territories  of Goa, Daman and Diu with	effect	from
April  1,  1963.   Clause 7 of	that  Regulation,  which  is
relevant for our purposes, reads as follows
	      "7. If any difficulty arises in giving  effect
	      in  any Union Territory to the  provisions  of
	      any Act, or of any rule, notification or order
	      provisions  or give such directions as  appear
	      to  it  to be expedient or necessary  for	 the
	      removal of the difficulty."
Under the law in force in the former Portuguese	 territories
of  Goa,  Daman and Diu income-tax was levied at  a  certain
percentage  of	the  gross  receipts  of  an  assessee.	  No
allowance  in  the nature of depreciation was  permitted  in
computing  the gross income.  Under clause (ii)	 of  section
32(1)  of  the Indian Income-tax Act, 1961  depreciation  is
allowed	 in  the  case of  buildings,  machinery,  plant  or
furniture  at  such  percentage on the	written	 down  value
thereof as may be prescribed.  Written down value is defined
in section 43 (6) as follows:
	      "(6) "Written down value" means-
	      previous	 year,	the  actual  cost   to	 the
	      assessee;
	      the  previous  year,. the actual cost  to	 the
	      allowed  to him under this Act, or  under	 the
	      Indian  Income-tax Act, 1922 (XI of 1922),  or
	      any  Act	repealed by that Act, or  under	 any
	      executive	  orders  issued  when	the   Indian
	      Income-tax  Act,	1886 (II of  1886),  was  in
	      force:
 (Proviso omitted)
It  would be noticed at once that even if  depreciation	 was
allowable  under the Portuguese Income-tax Law, when it	 was
in  force in the former Portuguese territories,	 clause	 (b)
above  will  not apply as that law was not repealed  by	 the
Indian	Income-tax Act, 1961 or the Indian  Income-tax	Act,
1922 or any Act repealed by that Act or under any  executive
orders	issued	when the Indian Income-tax Act 1886  was  in
force.	As was pointed out by this Court in its decisions in
The  Commissioner of Income-tax, Hyderabad v. Dewan  Bahadur
Ramgopal  Mills	 Ltd.  [1961]. (2) SCR 318]  and  the  Straw
Products  Ltd.	v.  I.T.O. [1968 (2) SCR  1],  this  is	 one
difficulty  to	remove which a	Difficulties  Removal  Order
would  have had to be issued.  When we put the	question  to
Mr.  Palkhivala as to what would happen if such an order  to
remove difficulties was not issued, he maintained that	even
so the assessees in
661
these  cases  would  have been entitled to  the	 benefit  of
clause	(b).   I  am not sure that he is  right	 but  it  is
unnecessary to decide that question.
Be that as it may, I shall now discuss the question based on
the  relevant  provisions of law.  Clause (a) deals  with  a
case of the acquisition of the assets in the previous  year,
in which case the actual cost is itself taken as the written
down  value.  In the case of the assets acquired before	 the
previous year the actual cost less all depreciation actually
allowed	 is  the written down value.  Now  what	 happens  if
under  the  law applicable to the territory in	question  no
depreciation was allowable at all?' It stands to reason	 and
common	sense that in such a case the written down value  of
the asset in question on the date the Indian Income,-tax Act
1961 becomes applicable to that territory should be  related
to  realities  and  not	 be  wholly  unrelated	to  them  or
notional.   The provision regarding written down  value	 and
allowance  of depreciation under the Indian  Income-tax	 Law
after  year and similarly the depreciation, as	was  pointed
out  by	 this Court in Ramgopal Mills case  (supra)  in	 the
following words :
	      " The basic and normal scheme of	depreciation
	      under  the Indian Income,-tax Act is  that  it
	      decreases	 every year, being a  percentage  of
	      the written down value which in the first year
	      is  the  actual cost and in  succeeding  years
	      actual  cost  less all  depreciation  actually
	      allowed  under the Income-tax Act or  any	 Act
	      repealed thereby etc."
If,  therefore,	 because there was no  provision  under	 the
Income-tax law applying to the former Portuguese territories
providing  for	depreciation the written down  value  of  an
asset  is taken as the actual cost even after many years  of
is acquisition it would mean putting the assessees in  those
territories at an advantage compared to the assesses in	 the
rest  of  India.  More important, it would not	accord	with
realities and would not be in accordance with the scheme  of
depreciation  under  the  Indian  Income-tax  Act.   It	 is,
therefore, necessary to devise some method by which both can
be  put	 on  the  same footing	and  the  normal  scheme  of
depreciation under the Indian Income-tax Act made applicable
to them.  It cannot be argued that a certain plant machinery
value  should still be taken to be worth its  original	cost
and depreciation allowed on that basis.	 It is not as though
such a problem arises for the first time.  In the case dealt
with  in  the Ramgopal Mills case the  Hyderabad  Income-tax
Act,  which  was applicable to the case	 before	 the  Indian
Income-Tax Act was extended to the Hyderabad area, had	come
into force in 1357-F and had been in force for three  years.
In  the	 assessment  for  those	 three	years	depreciation
allowance  was given to it on the basis of the written	down
value  of  its assets in accordance with the  provisions  of
clause (c) of s.12(5) of the Hyderabad Income-tax Act.	That
clause	provided that in the case of assets acquired  before
the  previous year and before the commencement of  the	Act,
the  written  down  value would be the actual  cost  to	 the
assessee  less (i) depreciation at the rates  applicable  to
the assets calculated on the actual cost for the first	year
since acquisition and for the next year
662
On the actual cost diminished by the depreciation  allowance
for one year   and   so	  on,  for   each   year   upto,the-
commencement of the Act and (ii)   depreciation	    actually
allowed to the assessee on such assets for each	  financial
year  after   the commencement	of the Act.   Now  this	 is-
exactly-what  is  proposed-to be done;	in-the-case  of	 the
former Portuguese territories by the impugned order.
For an appreciation of the actual situation that arises	 let
us  take  some concrete figures. Suppose in  the  Hyderabad
case  the asset concerned had been purchased for Rs.  100.00
three  years before, the Hyderabad Income-tax Act came	into
force and depreciation was ten per cent.  At the end of	 the
first year the written-down value would be Rs. 90.00, at the
end  of	 the second year Rs. 8 1.00 and at the	end  of	 the
third  year Rs. 72.90. It was this Rs. 72.90 that was  taken
into account for the purpose of working out the depreciation
allowable  under the Hyderabad Income-tax Act in  the  first
year  when  that  Act came into force.	On  this  basis	 the
written down value of the asset at the end of the first year
after the Hyderabad Income-tax Act came into force would  be
Rs.  65.61,  at the end of the second year Rs. 59  (more  or
less), at the end of the third year Rs. 53.10, that is, when
the  Indian  Income-tax Act was extended  to  the  Hyderabad
area.	When  the  Indian Income-tax  Act  was	extended  to
Hyderabad area a Difficulties Removal Order was first issued
in there terms in 1950.
"Computation of aggregate depreciation allowance and written
down value
	      In  making  any assessment  under	 the  Indian
	      Part B State relating to Income-tax on profits
	      of  business, shall be taken into	 account  in
	      computing the aggregate depreciation allowance
	      referred	to in sub-clause (c) of the  proviso
	      to,  clause  (vi) of sub-section (2)  and	 the
	      written	down  value  under  clause  (b)	  of
	      subsection (5) of sec. 10 of the said Act."
Taking	 advantage  of	the  presence  of  the	words	"all
depreciation  actually allowed" in this order  the  assessee
argued	that  only  the	 depreciation  ;allowed	 after	 the
'Hyderabad  Income-tax Act came into force should  be  taken
into  account  for the, purpose of arriving at	the  written
down  value  for the purpose of the Indian Income  tax	Act.
That  was  on  the basis  that	the  depreciation  allowance
calculated for the three years before the Hyderabad  Income-
tax  Act  came	into- force was	 not  depreciation  actually
allowed	 because  in  those years there	 was  no  income-tax
assessment  and	 there was no question of  any	depreciation
being allowed.	In other words, what. the assessee said	 was
that taking the original cost at Rs. 100.00 the depreciation
actually  allowed  during the three years during  which	 the
Hyderabad  Income-tax Act was in, force, that is, Rs.  72.90
minus,	Rs.  65.61 (,Rs. 7.29), Rs. 65.61 minus	 Rs.  59.00;
(Rs. 6.61) and Rs. 59.00 minus Rs. 53. 10 (Rs. 5.90) that is
Rs.  19.80,  should  be deducted from the  actual  cost	 for
arriving  at  the  written down value for  the	purposes  of
Indian Income-tax Act and that Rs. 90.20(Rs lOO.00 minus Rs.
19.80) should be taken to be the written down value  instead
of the figure of Rs.
			    663
53.10.In  order to get over this difficulty  an	 explanation
was added total the Removal of Difficulties Order in 1953 in
the following words
	      "Explanation  :  For  the	 purpose  of   this,
	      paragraph,  the expression  "all	depreciation
	      actually	allowed under any law or rules of  a
	      Part  B  State" means and shall be  deemed  to
	      have always meant the aggregate allowance	 for
	      depreciation  taken into account in  computing
	      the written down value under any laws or rules
	      of a Part B State or carried forward under the
	      said laws or rules."
(There was another similar explanation added in 1956 but for
the  purposes of the argument in this case that is not	very
relevant).  It was the validity of this second order  adding
the  explanation that was questioned.  In dealing  with	 the
argument  that no difficulty arose in giving effect  to	 the
provisions  of the Act so as to justify the issuance of	 the
Difficulties Removal Order and the Explanation thereto	this
Court first dealt with the difficulty caused by the fact  of
the  earlier Income-tax law not having been repealed by	 the
Indian	Income-tax Act 1922 etc. and that difficulty  having
to  be	removed by the issuance of  a  Difficulties  Removal
Order and then made the observation which we have  extracted
earlier	 about the basic and normal scheme  of	depreciation
under  the Indian Income-tax Act and then went on  to  point
out :
	      "If,  however, depreciation  actually  allowed
	      under  the Hyderabad Income-tax Act was  taken
	      into.  account  in  computing  the   aggregate
	      depreciation  allowance and the  written	down
	      value,  an. anomalous result would. follow  as
	      in  the  present	case,  namely	depreciation
	      allowance to be allowed to the assessee in the
	      accounting  year under the  Indian  Income-tax
	      Act  would  be more than what was	 allowed  in
	      previous years under the Hyderabad  Income-tax
	      Act.   This  would create a disparity  and  be
	      against  the scheme of the Indian,  Income-tax
	      Act.   It	 was,  therefore,  necessary  :	  to
	      explain	paragraph  2  of  the,	Removal	  of
	      Difficulties  Order,  1950, to  assimilate  or
	      harmonise the: position regarding depreciation
	      allowance,  and the explanation added in	1953
	      or  1956. was obviously intended.	 to,  remove
	      the  difficulty arising out of that  disparity
	      or disharmony."
In,  effect it means, in terms of the example which we	have
given  earlier that instead of the written down value  being
taken  to be Rs. 53.10 when, the  Indian Income-tax Act	 was
extended  to Hyderabad the assessee. wanted Rs. 80.20 to  be
taken  as the, written down- value and that was	 why-  this,
Court  pointed	out that the depreciation  allowed  to	the,
assessee. in, the accounting year, under the Indian  Income-
tax  Act  would, he more  than what was	 allowed  under	 the
HYderabad  Income-,tax Act, and that. this, would  create  a
disparity  and be against the scheme of the) Indian  Income-
tax  Act.   This  decision is exactly  to  the	point.	 The
effect. of, the argument on, behalf of the petitioners would
be,  taking  it,  that in Goa, also.  the  asset  had,	been
acquired  for  Rs.  100.00 six years,,	before,	 the  Indian
Income-,tax Act 1961 was extended to that area and the	rate
of depreciation was also ten per
664
cent, that instead of the written down value being Rs. 53.10
it Will be Rs. 100.00, exactly the price at which the  asset
was  acquired six years earlier, even though its  value	 now
might be much less.
Mr.  Palkhilvala relied completely on the decision in  Straw
Products'  case in support of his argument that in  exercise
of  the powers under clause 7 the  impugned order could	 not
be  made.  In that case when the Indian Income-tax  Act	 was
extended  to the State of Bhopal a Removal  of	Difficulties
Order  was issued in 1949 similar to the one  introduced  in
Hyderabad in the first instance in 1950.  When it was argued
then  on  the basis of the use of the  words  "depreciation-
actually allowed" that only such depreciation could be taken
into  account  a second Removal of  Difficulties  Order	 was
issued	in 1962 which added an explanation in the  following
terms :
	       "Explanation.-For   the	 purpose   of	this
	      Merged  State"  means  and  shall	 be  deemed,
	      always to have meant :
	      a)    the aggregate allowance for depreciation
	      a	 marged State or carried forward  under	 the
	      merged  State  or under any agreement  with  a
	      Ruler,  the depreciation that would have	been
	      allowed had the income not been so exempted."
That  was because the Ruler of Bhopal had  earlier  exempted
the  income  of the assessee from income-tax and  there	 was
therefore  no question of any depreciation allowance  having
been made or any written down value having to be calculated.
When  the matter came up before this Court, this Court	held
that whatever difficulty there was removed by the 1949 order
and  thereafter	 there	was  no	 further  difficulty  to  be
removed.  We shall quote the exact words
	      "Section	6 of Act 67 of 1949  authorises	 the
	      Central  Government to make provisions  or  to
	      give directions as may appear to be  necessary
	      for  removal of difficulties which had  arisen
	      in giving effect to the provisions of any Act,
	      rule  or order extended by S. 3 to the  merged
	      States.	By  the application  of	 the  Indian
	      Income-tax   Act	to  the	 merged	  States   a
	      difficulty  did arise in the matter of  deter-
	      mining  the  depreciation allowance  under  S.
	      10(2)  (vi).  That difficulty was	 removed  by
	      the  enactment  of the Taxation  Laws  (Merged
	      States) (Removal of Difficulties) Order, 1949.
	      Even  by that order all depreciation  actually
	      allowed  under any laws or rules of  a  merged
	      State  relating to income-tax was to be  taken
	      into   account  in  computing  the   aggregate
	      depreciation allowance.  Thereafter there
	      665
	      survived no difficulty in giving effect to the
	      provisions of the Indian income-tax Act or the
	      rules or orders extended by s. 3 to the merged
	      States.
	      To sum up: the power conferred by s. 6 of	 Act
	      67  of 1949 is a power to remove a  difficulty
	      which  arises  in	  the  application  of	 the
	      Income-tax Act to the merged States, it can be
	      exercised	 in the manner consistent  with	 the
	      scheme and essential provisions of the Act and
	      for  the	purpose for which it  is  conferred.
	      The  impugned Order which seeks, in  purported
	      exercise of the power, to remove a  difficulty
	      which had not arisen was, therefore,  unautho-
	      rised."
That   was   the  ratio	 of  that  decision.	This   Court
specifically did not think it necessary to determine to what
extent,	 if any, it would be open to the Central  Government
by an order issued in exercise of the power conferred by  s.
6 of Act 67 of 1949 to make provision which is	inconsistent
with  the provisions of the Indian Income-tax, Act.  It	 did
not  hold  that	 the 1962 Order was  inconsistent  with	 the
provisions  of the Indian Income-tax Act.  It  did  consider
the decision in Ramgopal Mills case.  After referring to the
Explanation. added to the Removal of Difficulties Order this
Court pointed out
	      "This  Court  held  that	by  the	 Removal  of
	      Difficulties  Order, 1950 an anomalous  result
	      followed,	  and  the  depreciation   allowance
	      allowed  to  the	assessee  under	 the  Indian
	      Income-tax Act was more than the	depreciation
	      allowance, under the Hyderabad Income-tax Act,
	      and  it was necessary to issue the Removal  of
	      Difficulties Order, 1956.	 In the view of	 the
	      Court,  in that case the	condition  precedent
	      to, the exercise of the power did exist."
Thus,  it  'did not dissent from the  decision	in  Ramgopal
Mills case,.  By implication it hold that decision as a good
one.  That is exactly the position here.  It was, therefore,
open  to  the Central Government in exercise of	 its  powers
under clause 7 to issue the impugned order.  It only  brings
it  into line with the scheme of the Indian Income-tax	Act,
otherwise  as  I mentioned earlier, the	 assessees  in	Goa,
Daman  and  Diu	 would be at an advantage  compared  to	 the
assessees in the rest of India.
The only contention of any substance which was urged against
This was that under the scheme of the Indian Income-tax	 Act
it   was  open	to  the	 assessee  to  carry   forward	 the
depreciation for any length of time if he had sustained	 any
loss and it would now be very difficult, if not impossible,-
forward.  I do not consider that it is an impossibility.  If
it  is	difficult  it is not a difficulty  which  cannot  be
solved as the Hyderabad example shows.
666
Assessees are expected to and would have maintained accounts
at least for the purpose of the Income-tax Act which was  in
force in the former Portuguese territories, though that, Act
was a simple one and not as complex as the Indian Income-tax
Act.   What is necessary for working out the impugned  order
is to know whether there was a Profit or a loss and as	the,
cost  of  acquisition  of the assets, in  respect  of  which
depreciation allowance is claimed, should also be  available
it   should   not  be  very  difficult	to   calculate	 the
depreciation and arrive at the written down value as on	 the
date  when the Indian Income-tax Art was extended to  former
Portuguese  territories.   To  accede to the  claim  of	 the
assessees  that the original value of the assets  should  be
taken  down to be the written down value, however long	they
might  have been used, means that they get an advantage	 not
merely in the first year in which the Indian Income-tax	 Act
applied	 to those territories- It is a	continued  advantage
which  will last as long as these assets last.	In terms  of
the  example I have given earlier in the first year  instead
of  the	 10 per cent out of the written down  value  of	 Rs.
53.10,	that is Rs. 5.30, being allowed as the	depreciation
it  will  be Rs. 10 In the second year it will be  Rs.	9.00
instead	 of Rs. 4.77. In the third year it will be Rs.	8.10
as  against Rs- 4-30 and so on.	 I can see no  justification
either	on  principle or on the wording of  the	 statute  to
allow  the assessees any such concession.  Whatever  I	have
stated earlier would be sufficient to show that the impugned
order  is not in excess of the delegated  powers  but.merely
carries out the purpose of the delegation.
It only remains to deal with the, further contention  raised
that the order is given retrospective effect and that is not
valid.	 This  contention is best answered in the  words  of
this Court in Ramgopal Mills case thus :
 Section  12 (in this case cl. 7) by  the	very
	      nature  of its intent and purpose	 confers  on
	      the Central Government power to make an  order
	      to  remove  a  difficulty.which  has   already
	      arisen, and the power to remove the difficulty
	      must  necessarily include the power to  remove
	      the  difficulty  from time to time  it  arose.
	      The-Central  Government  has,  therefore.	 the
	      Power-to make an order or give a direction  so
	      as  to  remove-the difficulty  from  the	very
	      beginning,  and that is what the	notification
	      of  1.956	 (in this case the  notification  of
	      1970) does."
	      I	  would,  therefore,  dismiss	these	writ
	      petitions.
V.P.S.				 Petitions allowed.
667

The Commissioner Of Income Tax, Delhi vs Bansi Dhar & Sons on 19 December, 1985
Equivalent 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
Author: Sabyasachi  Mukharji
Bench: Sabyasachi  Mukharji, V.D. Tulzapurkar
THE COMMISSIONER OF INCOME TAX, DELHI

	Vs.

BANSI DHAR & SONS

DATE OF JUDGMENT19/12/1985

BENCH:
MUKHARJI, SABYASACHI (J)
BENCH:

CITATION:
 1985 SCALE  (2)1416

ACT:
     Indian Income  Tax Act  1922: Section 66 and Income Tax
Act 1961:  Section 256	- High	Court - Jurisdiction of - To
grant stay or pass interim orders in pending references.
     Interpretation  of	  statutes  :  Words  of  statute  -
Judicial construction  of words	 by superior court - How far
useful in construing identical words in another enactment.

HEADNOTE:
     The Assessee  was a  Hindu Undivided Family. The father
of the Karta of the HUF died in an air crash. On his death a
sum of	over Rs.  2 lakhs was received by the Karta from the
Insurance  Company   on	 account  of  the  insurance  policy
covering the life of his father. The income derived from the
said amount  was treated as his personal income and assessed
in his	personal assessment, and it continued to be assessed
in the personal assessment of the Karta even after formation
of the	HUF on	his marriage  and the  birth of	 a son. This
position continued till the assessment year 1959-60.
     For the  first time  in the assessment year 1960-61 the
Income Tax  Officer treated  the income	 from the  insurance
amount as  that of  the HUF  and assessed  the income in the
hands of  the HUF. Being aggrieved the assessee appealed and
the  Appellate	 Assistant  Commissioner   set	 aside	 the
assessment holding  that the  income was the personal income
of the Karta and not of the HUF.
     The Revenue  preferred an	appeal	to  the	 Income	 Tax
Appellate Tribunal.  A similar	appeal was also preferred to
the Tribunal  by the  Revenue for  assessment year  1962-63.
Both the appeals were disposed of by a common order, whereby
it was	held that the income in question was that of the HUF
and was liable to be assessed as such.
     The Tribunal referred to the High Court at the instance
of  the	 assessee-HUF  the  question,  "whether	 the  amount
received from
851
the Insurance  Company on  account of the accident Insurance
Policy covering the risk of his father was correctly treated
as ancestral property." The assessee also filed applications
for injunction	and stay  under section	 151 of	 the Code of
Civil Procedure	 invoking the  inherent jurisdiction  of the
High Court.
     In the  applications for stay it was contended that for
the subsequent	years 1963-64  & 1964-65 similar appeals had
been filed  by the  Revenue, before  the Tribunal  and	were
pending, that  for the	assessment years  1965-66 to 1969-70
the orders  of the  Appellate  Assistant  Commissioner	were
against the  assessee and  the	assessee-HUF  had  preferred
appeals to the Tribunal which were also pending, that in the
said appeals  preferred by  the assessee HUF, on application
by the assessee the Tribunal had granted stay of recovery of
the tax	 demanded, on the condition that the assessee should
furnish adequate security, that since the matter relating to
the two	 assessment years  (1960-61 and 1962-63) were before
the High  Court under section 66(1) of the Indian Income Tax
Act, 1922/section 256(1) of the Income Tax Act, 1961 similar
order of  stay should  be granted  by the High Court because
prejudice would	 be caused  to the  assessee if	 in spite of
full tax being paid by the karta in his personal assessment,
the HUF	 is asked  to pay  tax over  again in respect of the
same income.
     The Revenue  opposed  the	aforesaid  applications	 for
stay, contending  in its  counter-affidavit that  under	 the
provisions of  the Income Tax Acts of 1922 and 1961 the High
Court	exercised   only   an	advisory   or	consultative
jurisdiction, and  consequently had no jurisdiction or power
to grant  stay of  the recovery	 of tax as prayed for in the
application, and  that grant  of stay  by the High Court and
this court  had in  fact been  prohibited by the two Acts of
1922 and 1961.
     The High  Court  rejected	the  preliminary  objections
raised by  the Revenue	and granted  stay of  realisation of
taxes. It  found that  there should  be stay  on  terms	 and
granted stay  on condition  that the assessee should furnish
adequate security for the said amount to the satisfaction of
the concerned Income Tax Officer.
     In the  appeals to	 this  Court:  on  the	question  of
jurisdiction of	 the High  Court and  Supreme Court to grant
stay or	 pass interim  orders in  pending  references  under
section 66  of the  Indian Income  Tax Act, 1922 and section
256 of the Income Tax Act, 1961.
     Allowing the Appeals to this Court,
852
^
     HELD :  1. The High Court in answering a question under
section 66  of 1922  Act or section 256 of 1961 Act does not
exercise original,  appellate or revisional jurisdiction but
only advisory jurisdiction. [866 C; 870 C]
     2. Rendering  advice on the question of law referred to
the courts  has nothing	 to do	with the  recovery of tax or
granting stay in respect of the same. [870 G]
     3. It  cannot be  said that the High Court has inherent
power or  incidental power  in the  matter  of	a  reference
pending before	it to  grant stay of realisation or to grant
an injunction.	That must  remain within the jurisdiction of
the appellate authority and pendency of a reference does not
detract from  that jurisdiction	 of the Appellate Authority.
The High  Court was,  therefore in error in the instant case
in exercising  its jurisdiction by passing an order for stay
of realisation	under section  151  of	the  Code  of  Civil
Procedure, 1908 in a pending reference. The High Court could
have exercised	its power if the Appellate Authority had not
properly  exercised   its  jurisdiction,  not  in  reference
jurisdiction but  by virtue  of its  jurisdiction under Art.
226  or	  Article  227	of  the	 Constitution  of  India  in
appropriate cases.  But that  was  not	so  in	the  instant
case.[870 H - 871 B]
     Sridhar v.	 Commissioner of  Wealth Tax, 153 at 543, at
547; Dwarka Prasad  Baja v. Commissioner of Income Tax, West
Bengal-I, 126 I.T.R. 219. approved.
     Polisetti Narayana	 Rao v.	 Commissioner of Income Tax,
Hyderabad, 29 I.T.R. 222, over-ruled.
     4. In  answering questions	 or disposing  of references
either under  section 66  of 1922 Act or section 256 of 1961
Act, the  High	Courts	do  not	 exercise  any	jurisdiction
conferred upon	them by	 the Code  of Civil Procedure or the
Characters or  by the  Acts establishing the respective High
Courts.	 In   respect  of   certain  matters   jurisdictions
exercised by  the High	Court must be kept separate from the
concept	 of   inherent	powers	 or  incidental	  powers  in
exercising jurisdiction	 under section	66 of  1922  Act  or
section 256  of 1961  Act. Section  66 of  Income-tax Act of
1961 is a special jurisdiction of a limited nature conferred
not by	the Code of Civil Procedure or by the Charters or by
the special  Acts constituting	such High  Courts but by the
special provisions  of Income-Tax  Act 1922  or 1961 for the
limited	 purpose   of  obtaining  High	Court's	 opinion  on
questions of law. In giving
853
that opinion  properly if  any	question  of  incidental  or
ancillary power	 arises such  as giving	 an  opportunity  or
restoring a  reference dismissed  without hearing  or giving
some additional time to file paper book, such powers inhered
to the	jurisdiction conferred	upon it. But such incidental
powers can  not be  so construed  as to	 confer the power of
stay of	 recovery of  taxes pending a reference which lie in
the  domain  of	 an  appellate	authority.  The	 concept  of
granting stay  in a reference ex debito justitiae therefore,
does not  arise. That  concept might  arise in	case of	 the
Appellate Authority exercising its power to grant stay where
there is  no express provision. Ex debito justitiae is to do
justice between the parties. [870 C-F]
     Tata Iron	& Steel	 Co. Ltd. v. Chief Revenue Authority
of Bombay,  1923 Privy	Council -  50  Indian  Appeals	212;
Commissioner v.	 Bombay Trust Corporation, 1936 A.I.R. Privy
Council -  63  Indian  Appeals	408;  Hukum  Chand  Boid  v.
Kamalanand Singh,  [1906] I.L.R>  33, Cal. 927; Commissioner
of Income  Tax Bombay  v. Scindia Steam Navigation Co. Ltd.,
42 I.T.R.  589; C.P.  Sarathy Mudaliar	v.  Commissioner  of
Income Tax,  Andhra  Pradesh,  62  I.T.R.  576;	 Jatashankar
Dayram v.  Commissioner	 of  Income  Tax,  101	I.T.R.	343,
referred.
     Income Tax Officer, Cannaore v. M.K. Mohammed Kumhi, 71
I.T.R. 815, explained.
     5. In an appropriate case, if the assessee feels that a
stay of	 recovery  pending  disposal  of  the  reference  is
necessary or  is  in  the  interest  of	 justice,  then	 the
assessee is entitled to apply before the Appellate Authority
to grant  a stay  until disposal  of reference	by the	High
Court or  until such time as the Appellate Authority thought
fit. But  in case  the	Appellate  Authority  acted  without
jurisdiction  or  in  excess  jurisdiction  or	in  improper
exercise of  the jurisdiction,	then the  decision  of	such
Appellate Authority  can be  corrected by  the High Court by
issuing appropriate  writs under Articles 226 and 227 of the
Constitution. [869 H - 870 B]
     6. Prior  to 1918, there was no provision for reference
to the	High Court  at all in respect of any decision by the
revenue	 authorities.	In  Act	 VII  of  1918,	 section  51
contained this	provision  under  which	 the  Chief  Revenue
Authority was  empowered to  refer a  case to the High Court
when any questions arose regarding the interpretation of any
of the provisions of the Act or of any rule made thereunder.
The said authority could do so
854
(i) either  suo motu  (ii) on  reference from  a subordinate
authority or  (iii) on the application of the assessee. This
is  no	 part  of  the	Civil  or  appellate  or  revisional
jurisdiction of the High Court. [858 G-H]
     7. Section	 66 of	the Act of 1922 provides that within
certain time  either at	 the instance  of the assessee or at
the instance  of the  Revenue, the  Tribunal might  refer  a
question of  law for  the opinion of the High Court. It also
empowered the  assessee to  make an  application to the High
Court in  case the  Tribunal refused  to refer	the question
after drawing  up a  statement of case. Section 66A provides
for reference  to be  heard by	Benches of  High Courts	 and
appeals in certain cases to this Court. Under Section 256 of
1961 Act,  the provision  of reference	to the High Court is
the same as under section 66 of 1922 Act. [859 B, F, 860 C]
     8. Once  certain words  in an  Act	 of  Parliament	 had
received a  judicial construction  in one  of  the  superior
courts, and  the  legislature  repeated	 these	without	 any
alteration in  a subsequent statute, the legislature must be
taken to  have used  them according  to the  meaning which a
court of competent jurisdiction had given to them. This rule
of interpretation  affords only a valuable presumption as to
the meaning  of the  language employed in a statute. Where a
judicial interpretation	 is well settled and well recognised
the rule  ought doubtless,  to receive effect, but must be a
question of  circumstances  whether  Parliament	 was  to  be
presumed to  have tacitly  given statutory  authority  to  a
single judgment	 of a  competent court	so as to render that
judgment,  however,  obviously	wrong  unexaminable  by	 the
Highest Court. [868 E-G]
     Barras v. Aberdeen Steam Trawling and Fishing Co. Ltd.,
1933 A.E.R. - 1933 A.C. 402, referred to.

JUDGMENT:
     CIVIL APPELLATE  JURISDICTION :  Civil Appeal  No. 1668
(NT) of 1978.
     From the  Judgment and  Order dated  15.7.1977  of	 the
Delhi High Court in I.T.R. Nos. 82 & 83 of 1973.
			    WITH
     Civil Appeal Nos. 77 & 78 (NT) of 1974
     From the  judgment and  Order dated  30.7.1973  of	 the
Patna High Court in Tax Appeals Cases Nos. 16 & 17 of 1972.
855
S.C. Manchanda,	 and Miss A. Subhashini for the Appellant in
C.A. No. 1668 of 1978.
     S.T. Desai,  Harish Salve,	 Mrs. A.K.  Verma, Miss Lira
Goswami and  J.B. Dadachandji for the Respondent in C.A. No.
1668 of 1978.
     B.B. Ahuja	 and Miss A. Subhashini for the Appellant in
C.A. No. 77 & 78 of 1974.
 Nemo for the Respondents in C.A. No. 77 & 78 of 1974.
     SABYASACHI MUKHARJI,  J. The  main question involved in
these appeals,	is the	question of jurisdiction of the High
Court, to  grant stay  or pass	interim	 orders	 in  pending
references under  section 66  of the  Indian Income-Tax Act,
1922 (hereinafter called the Act of 1922) and section 256 of
the Income  Tax Act,  1961 (hereinafter	 called the  'Act of
1961').	 These	 appeals  are  by  special  leave  from	 the
judgments of  the High	Courts. The  main  judgment  is	 the
judgment of  the Delhi	High Court  in the  case of L. Bansi
Dhar and Sons v. Commissioner of Income-Tax, New Delhi (C.A.
No. 1668/78).  The question  arose in  applications filed by
the assessee  under section  151 of  CPC in  two  Income-tax
References Nos. 82 and 83 of 1973 relating to the assessment
years 1960-61 and 1962-63 respectively praying that the High
Court might  be pleased	 to grant  an order of injuction for
restraining the	 Commissioner  of  Income-tax  (I),  Central
Revenue Building,  and/or his subordinate officers including
the Income-tax Officer, Company Circle (III), from enforcing
and/or	realising   the	 demand	  raised  in  the  aforesaid
assessment years  1960-61 and  1962-63, and  from taking any
steps for  the recovery	 thereof till  the disposal  of	 the
references pending in the High Court.
     The assessee  is a Hindu undivided family. The Karta of
the HUF is Lala Bansi Dhar. His father, Lala Murlidhar, died
in the	year 1949  in an  air crash.  On the  death  of	 the
father, a sum of Rs.2,49,874 was received by Lala Bansi Dhar
from  the  insurance  company  on  account  of	an  accident
insurance policy  covering the	risk  of  the  life  of	 the
deceased. The  income  derived	from  the  said	 amount	 was
treated as the income of Lala Bansi Dhar and was assessed in
his personal  assessment. Lala Bansi Dhar was married on 3rd
February, 1953, and a son, Tilak Kumar, was born on 3rd
856
February,  1956.   The	income	from  the  insurance  amount
continued to  be assessed in the personal assessment of Lala
Bansi Dhar  even after	formation of the HUF on his marriage
and the birth of a son, and continued to be so assessed till
the assessment year 1959-60.
     In the  assessment year 1960-61 for the first time, the
Income-tax Officer  treated the	 income from  the  insurance
amount as  that on  the HUF  and assessed  the income in the
hands of  the HUF.  On appeal  by  the	assessee,  HUF,	 the
Appellate Assistant  Commissioner set  aside the  assessment
holding that  the income  was the  personal income  of	Lala
Bansi Dhar  and not  of the  HUF. Against  that	 order,	 the
revenue preferred  an appeal  to  the  Income-tax  Appellate
Tribunal.  A  similar  appeal  was  also  preferred  to	 the
Tribunal by  the revenue  for the  assessment year  1962-63.
Both the  appeals were	disposed of  by the  Tribunal  by  a
common order on 23rd November, 1970 whereby it was held that
the income in question was that of the HUF and the liable to
be assessed  as such.  Then at the instance of asseasee-HUF,
the Tribunal  referred	to  the	 High  Court  the  following
question under	section 256(1)	of the Income-tax Act, 1961,
as arising out of the said common order namely :
     "Whether, on  the facts and in the circumstances of the
case, the  amount of  Rs.2,49,874 received  by L. Bansi Dhar
from the  insurance  company  on  account  of  the  accident
insurance policy  covering the	risk  to  the  life  of	 his
father, L.  Murlidhar, is  correctly  treated  as  ancestral
property of the H.U.F. of which L. Bansi Dhar is the karta?"
     Two references were registered as Income-tax References
Nos. 82	 and 83	 of 1973, and it was in the said references,
that the applications for injunction and stay had been filed
by the	assesee-HUF under  section 151	of the Code of Civil
Procedure invoking  the inherent  jurisdiction of  the	High
Court.
     It was  stated in the application for stay that for the
subsequent assessment  years 1963-64  and  1964-65,  similar
appeals had  been filed	 by the	 revenue before the Tribunal
and the	 same were  pending, that  for the  assessment years
1965-66 to  1969-70, however  the orders  of  the  Appellate
Assistant Commissioner	were against  the assessee,  and the
assessee-HUF had  preferred appeals  to the  Tribunal  which
were also pending, that in the said appeals preferred by the
assessee-HUF on	 application by	 the assessee,	the Tribunal
had granted stay of the recovery of the tax demanded on
857
the condition  that the	 assessee  should  furnish  adequate
security to the satisfaction of the Income-tax Officer, that
since the matter relating to the two assessment years (1960-
61 and	1962-63) was  before the  High Court  in  references
under  section	 66(1)	of   the  Indian   Income-tax	Act,
1922/section 256(1)  of the  Income-tax Act,  1961,  similar
order of  stay should  be granted  by  the  High  Court	 and
full tax being paid by its karta in his personal assessment,
same income.  A	 counter-affidavit  was	 filed	in  which  a
preliminary objection  was raised  that under the provisions
of the	Income-tax Act,	 the High  Court exercised  only  an
advisory or  consultative jurisdiction	and consequently had
no jurisdiction	 or power  to grant  stay of the recovery of
tax as prayed for in the application, and that, in fact, the
grant of  stay by  the High  Court and	this Court  had been
prohibited by  the two	Acts of	 1922 and  1961. On  merits,
however, it  was admitted  that tax  had been  paid by	Lala
Bansi Dhar in his personal capacity on the basis of the same
income which  had been	returned by  him in  his  individual
income-tax return,  yet, it was admitted that as a result of
the impugned  order of	the Appellate  Tribunal, the  income
from the insurance amount was assessable in the hands of the
HUF and	 the HUF was obliged to pay the tax unless and until
the question  of law referred to the High Court was answered
in favour  of the assesee and that the assessee would not be
prejudiced if  no stay was granted and the tax was realised,
as it  would get  a refund  of the  tax	 paid  in  case	 the
references were answered in its favour.
     The  question   for  determination	  which	  fell	 for
consideration before the High Court and which requires to be
considered in  these appeals  by this Court, is, whether the
court, in  a reference	to it  either under section 66(1) of
the Act of 1922, or under section 256(1) of the Act of 1961,
has jurisdiction or power to pass any order granting stay of
recovery  of   the  taxes   pending  the   disposal  of	 the
references.
     The High  Court on	 consideration of  certain  matters,
rejected the  preliminary objection  and granted stay of the
realisation of	taxes. The  High Court	found that,  in	 the
facts and circumstances of the case, there should be stay on
terms and the High Court granted that stay on condition that
the assessee  should furnish  adequate security for the said
amount to  the	satisfaction  of  the  concerned  Income-tax
Officer within	six weeks  from the date of the order of the
High Court.  The other	two matters being Civil Appeals Nos.
77 and 78 of 1974 arise out of
858
the decision  of the Patna High Court where stay was granted
by the	Patna High  Court in  respect of  realisation of tax
pending disposal of the income-tax references.
     The revenue  has come  up to this Court challenging the
validity of  the decision  of the  High Courts	that pending
references in  income-tax matters to the Courts either under
section 66  of the  Act of  the 1922 or under section 256 of
the Act	 of 1961,  the High  Courts or the Supreme Court, as
the case  may be,  have inherent  powers or  jurisdiction to
pass any  order granting stay or granting injunction staying
the realisation	 of  the  amount  pending  disposal  of	 the
references. Incidentally,  it may be pointed out that at the
bar at	the time of hearing of the appeals, it was stated by
counsel on  behalf of  the assessee  that in the decision of
the Delhi  High Court,	ultimately the	reference  has	been
answered in  favour of	the assessee. So far as the assessee
in  that   matter  is  concerned  the  question	 has  become
academic.
     The High  Court of	 Delhi in its judgment had discussed
all the	 relevant authorities.	The references	were pending
under section  66(1) of	 the Act  of 1922  for the first two
years, in  respect of  similar appeals	for  the  assessment
years 1965-66  and 1969-70 the references were pending under
section 256(1)	of the	Act of	1961. The  scheme of section
66(1) of  the Act  of 1922  as well as section 256(1) of the
Act of 1961 are well-known.
     The High Court noted and as is the case that the Act of
1922 did  not and  the Act  of 1961  does  not	contain	 any
express provision  empowering the  High Court or the Supreme
Court to  grant stay  of recovery  of tax  including pending
disposal of  the reference  before it  or pass	any order in
that respect  of the same. Therefore, the assessee sought to
invoke the  inherent jurisdiction or the ancillary powers of
the courts.
     Prior to  1918, there was no provision for reference to
the High  Court at  all in  respect of	any decision  by the
contained this	provision  under  which	 the  Chief  revenue
authority was  empowered to  refer a  case to the High Court
when any  question arose regarding the interpretation of any
The said  authority could  do so (i) either suo motu or (ii)
on reference  from a  subordinate authority  or (iii) on the
application of the assessee. This is no part of the civil or
appellate authority  or revisional  jurisdiction of the High
Court.
859
 Section  66   of  the  Act	 of  1922  contains  similar
provisions like	 section 149  of the English Income-Tax Act,
1918. Section  66 of  the Act  of 1922	provides that within
the instance  of the  revenue, the  Tribunal might  refer  a
after drawing  up a  statement of  case. It  is well-settled
that the  fact found  by the Tribunal were to be accepted by
the High  Court and  in case  the High	Court found that the
facts found  by the  Tribunal were  not sufficient, the High
Court might  under sub-section (4) of section 66 require the
Tribunal  to  make  such  additions  thereto  or  alteration
therein as  the High  Court might direct in that behalf. The
High Court  upon hearing  of any such case should decide the
question of  law raised	 thereby and  deliver  its  judgment
thereon containing  the grounds	 on which  such decision  is
founded and  shall send	 a copy	 of such  judgment under the
seal of	 the Court and the signature of the Registrar to the
Appellate Tribunal.  Sub-section (7)  of section 66 provides
that notwithstanding  that a  reference is  made  under	 the
section to  the High  Court, "income tax shall be payable in
accordance with	 the assessment	 made in  the case".  It  is
provided that if the amount of an assessment is reduced as a
result of  such reference,  the amount	over-paid  shall  be
refunded with  such interest  as the  Commissioner may allow
unless	the   High  Court,   on	 intimation   given  by	 the
Commissioner within thirty days of the receipt of the result
of such reference that he intends to ask for leave to appeal
to the	Supreme Court,	or to  an authority  authorising the
Commissioner to	 postpone payment  of such  refund until the
disposal of the appeal to the Supreme Court.
     Section 66A  provides for	reference  to  be  heard  by
Benches of  High Courts and appeals in certain cases to this
Court.
     The provisions  of Code  of Civil Procedure relating to
appeals to  the Supreme	 Court as far as might apply in case
of appeals  under the  section in  the like manner as in the
case of	 appeals by  the High Court provided that nothing in
sub-section (3)	 shall be  deemed to  have  effect  on	sub-
section (5)  or sub-section  (7) of  section 66. Sub-section
(4) of	section 66A  provides that where the judgment of the
High Court  is	varied	or  reversed  in  appeal  under	 the
section, effect	 shall be  given to the order of the Supreme
Court in  the manner  provided in sub-section (5) and (7) of
section 66 in the case of a judgment of the High Court.
860
     After the	High Court  and in  cases of  appeals to the
Supreme Court,	the courts answer the question in any manner
or give	 certain  opinion.  The	 appellate  tribunals  would
dispose of  the appeals	 in  accordance	 with  the  opinions
expressed or answers given by the High Courts or the Supreme
Court. Therefore  under	 the  scheme,  the  appeal  is	kept
pending before	the Tribunal  and the appellate jurisdiction
is retained by the Tribunal, but the High Court exercises an
advisory or consultative jurisdiction.
     Under  section  256  of  1961  Act,  the  provision  of
reference to  the High Court is the same as under section 66
of 1922	 Act. The  slight differences between section 256 of
1961 Act  and section  66(1) and  (2) of  1922 Act have been
noted in  Kanga & Palkivala's Income Tax - 7th Edn. - Vol I,
p.1146. For  the present  purpose it is not necessary to set
these out in detail. There is provision for reference to the
Supreme Court under section 257 of 1961 Act. By sections 261
and 262,  there are  provisions for  appeal to Supreme Court
and hearing  before Supreme  Court from	 the decision of the
references in  the High	 Courts. Section  265  enjoins	that
notwithstanding that  a reference  has been made to the High
Court or  the Supreme  Court or an appeal has been preferred
to the	Supreme Court,	tax shall  be payable  in accordance
with the assessment made in the case. The scheme of 1961 Act
so far	as the	scheme of  reference to	 the High Court on a
question of  law is  concerned is  the same  as that of 1922
Act. When  a question of law arises, the Tribunal can and in
certain circumstances  must seek  at  the  instance  of	 the
assessee or  in its  own motion	 or at	the instance  of the
revenue the  opinion of	 the High Court on such a questions.
The jurisdiction  exercised by	the High  Courts  is  purely
advisory,  it	is  neither  of	 a  Civil  Court  exercising
original, nor  of any  appellate or revisional jurisdiction.
Therefore, the	powers and  jurisdiction of  the High Courts
and in	certain cases  of the Supreme Court, are those which
are expressed  and conferred  upon them and also those which
inher in  the exercise of that jurisdiction or are ancillary
or those  which sub-serve  the exercise of that function and
jurisdiction of	 giving advice.	 The appeal  is kept pending
before the Appellate Tribunal.
 In	 Tata  Iron  &	Steel  Co.  Ltd.  v.  Chief  Revenue
Authority of  Bombay, 1923 Privy Council = 50 Indian Appeals
212, the  Judicial Committee  had to  consider the  question
whether	 the   function	 of   the  High	 Court	under  these
provisions was	advisory  or  not.  The	 Judicial  Committee
decided that such advice was not judgment within the meaning
of clause 39 of the Letter Patent of the High
861
Court of  Bombay. The  use of the expression 'determination'
was not	 decisive as  to whether  the  decision	 was  merely
advisory or  not. The  decision or  order made	by the court
under section  51 was  merely advisory. This view  was	 re-
affirmed in  Commissioner v.  Bombay Trust Corporation, 1936
A.I.R. Privy  council 269 = 63 Indian Appeals 408. It is for
this reason  that section  66A of  the	1922  Act  expressly
provided for  an appeal	 from a	 decision of  the High Court
under section  66 of the said Act. The High Court noted that
neither 1922  Act nor  1961  Act  did  contain	any  express
provision empowering  the High Court or the Supreme Court to
grant stay  or recovery	 of  tax  pending  disposal  of	 the
reference before  it. The  High Court  in the decision under
appeal held  that it had inherent jurisdiction under section
66 of  1922 Act	 or under  section 256	of 1961 Act to grant
stay pending  disposal of  the	reference.  The	 High  Court
referred to the several decisions some of which will have to
be noticed here. Thereafter on consideration of the relevant
facts, the  High Court	granted the stay in the instant case
as noted before.
 Reliance was  placed by  the High Court on the decision
of the	Andhra Pradesh	High Court in Polisetti Narayana Rao
v. Commissioner of Income-tax, Hyderebad, 29 I.T.R. 222. The
Andhra Pradesh	High Court  referred to	 the decision in the
case of	 Hukum Chand Boid v. Kamalanand Singh, (1906) I.L.R.
33, Cal. 927, and referred to the observations of Woodroffe,
J., where  he posed  the question  as to  whether the  power
vested in  the High  Court under  section 151 of the Code of
Civil Procedure	 was wide enough to apply to a case like the
present. It  was noted	that the  decision was	approved and
followed by  the Madras	 High Court  in several cases as was
noted at  page 226  of 29  I.T.R. It was further pointed out
that article  227 was wide enough to include such power. The
judgment of  that Court	 was delivered	by Bhimasankaram  J.
Subba Rao, C.J. of the Andhra Pradesh High Court was a party
to that	 decision. It  may, however,  be pointed out that in
the  facts  and	 circumstances	the  Court  found  that	 the
assessee was not entitled to any relief pending the disposal
of the	reference. As  pointed out  before that reliance had
been placed by the Andhra Pradesh High Court on the decision
in  Hukum  Chand  Boid's  case	(supra).  It  is  necessary,
therefore, to  discuss that  decision.	The  said  case	 was
concerned with	the nature of the jurisdiction and the ambit
of powers  under section  583 and  546 of  the Code of Civil
Procedure 1882	as  it	stood  at  the	relevant  time.	 The
division bench	of the	Calcutta High  Court  consisting  of
Woodroffe and  Mookherjee JJ.  held that under the principle
indicated by  section 583  of the  Code of Civil Procedure a
decree for reversal
862
necessarily carried  with it the right to restitution of all
that had  taken under the erroneous decree and the Appellate
Court having  seisin of	 the appeal, had as ancillary to its
duty to grant restitution, an inherent power in the exercise
of which  it could, notwithstanding that the decree appealed
against had  been executed,  call  upon	 the  respondent  to
furnish security for the due performance of any decree which
might be  made on the appeal. After discussing the facts the
court held that the Code of Civil Procedure bound the courts
so far	as it went. The Code, was not exhaustive and did not
affect the  previously existing	 powers unless it took these
away; in matters with which it did not deal, the court could
exercise an inherent jurisdiction to do that justice between
the parties  which was warranted under the circumstances and
which the  necessities	of  the	 case  required.  There	 was
difference of  opinion between Woodroffe J. and Mookerjee J.
on the	scope of applicability of section 546 of the Code of
Civil Procedure. Justice Woodroffe at page 931 of the report
observed:-
	  "The Court  has, therefore,  in many	cases, where
	  the  circumstances  require  it,  acted  upon	 the
	  assumption of	 the possession of an inherent power
	  to act ex debito justitiae and to do that real and
	  substantial justice  for the	administration,	 for
	  which it alone exists."
     Similarly Justice Mookerjee observed at page 941 of the
report as follows:-
	  "It may  be added  that the exercise by Courts, of
	  what	are   called  their   "inherent	 powers"  or
	  "incidental powers"  is familiar  in other systems
	  of law,  and such  exercise is  justified  on	 the
	  ground that  it is  necessary to make its ordinary
	  exercise of jurisdiction effectual, because, "when
	  jurisdiction	has   once  attached,  it  continues
	  necessarily and  all the  powers requisite to give
	  it full  and complete	 effect	 can  be  exercised,
	  until the end of law shall be attained" (See Works
	  on Courts  and their	Jurisdiction section  27 and
	  Wells on Jurisdiction of Courts, Chapter XVII)".
 These observations, however, will have to be understood
in the	context in  which the  same were  made. If there was
jurisdiction to	 do certain  matter then  all powers to make
that jurisdiction effective must be implied to the authority
unless expressly  prohibited. But  in references  under 1922
Act as well as
863
1961  Act   the	 courts	  merely  exercise  an	advisory  or
consultative jurisdiction while the appeals are kept pending
before the tribunal, therefore, nothing should be implied as
distracting from the jurisdiction of the tribunals. Power to
grant stay  is incidental  and ancillary  to  the  appellate
jurisdiction. What  was true  of the  appellate jurisdiction
could not  be predicated  of the referential jurisdiction. -
See the	 observations of  the majority judgment of the Delhi
High Court in Narula Trading Agency v. Commissioner of Sales
Tax [1981]  47 S.T.C.  p.45, though  made in  the context of
different statutory provisions.
 This decision  of Andhra Pradesh High Court was noticed
by this	 Court in  Income-tax  Officer,	 Cannanore  v.	M.K.
Mohammed Kunhi	71 I.T.R.  815.	 That  decision	 requires  a
little closer  examination. This  Court in that decision was
dealing with  section 254 of the Act of 1961 which conferred
on the	Appellate Tribunal powers of the widest amplitude in
dealing with  appeals before it. This Court held that  power
granted by  implication the power of doing all such acts, or
employing such	means, as  were essentially necessary to its
execution. The	statutory power	 under section	254  carried
with it	 the duty  in proper  cases to	make such orders for
staying recovery  proceedings pending  an appeal  before the
Tribunal, as  would prevent  the appeal, if successful, from
being rendered	nugatory. Section  254 carried	with it	 the
appellate powers of the Appellate Tribunal. This Court while
interpreting  that   power  referred   to  the	Sutherland's
Statutory Construction	of third  edition, articles 5401 and
5402., in  Domat's Civil  Law (Cushing's edition), Volume 1,
at page	 88, Maxwell on Interpretation of Statutes, eleventh
edition, and case to the conclusion that where the power was
given to  an authority,	 incidental powers to discharge that
authority were	implied in  the grant  of that	power.	This
Court noted that the Income-tax Appellate Tribunal was not a
court but  exercised judicial  powers. The  Court noted that
there were certain decisions in which difficulties were felt
that the  Appellate Tribunal  did not  possess the  power to
stay recovery  during the  pendency of	an appeal. Reference
was made  to a	decision of the Andhra Pradesh High Court in
the case of Vetcha Sreeramamurthy v. The Income-tax Officer,
Vizianagaram and  Another 30  I.T.R. 252,  where  Viswanatha
Sastri, J.  observed that  there was  no confinement  of  an
express power  of granting a stay of realisation of the tax,
nor was	 there any  power allowing  the tax  to be  paid  in
instalments. The  learned judge	 observed that	neither	 the
Appellate Assistant  Commissioner nor the Appellate Tribunal
was  given   the  power	 to  stay  the	collection  of	tax.
Therefore, according to the learned judge,
864
whether the  law should	 not be	 made more  liberal so as to
enable an  assessee who	 has preferred	an appeal, to obtain
from the  appellate forum,  a stay  of	collection  of	tax,
either in whole or in part, on furnishing suitable security,
was a  matter for  the legislature to consider. Referring to
the decision  in Pollisetti  Narayana Rao v. Commissioner of
Income-tax (supra),  this Court	 made an  observation to the
effect that  "the same	High Court  held that  stay could be
granted by  it pending	reference of a case by the Appellate
Tribunal to  the High  Court. This  power the High Court had
under section  151 of  the Civil  Procedure Code  and  under
article 227  of	 the  Constitution". This  passage  in	 our
opinion cannot be taken as approving the observations of the
Andhra Pradesh	High Court in Pollisetti Narayana Rao's case
(supra). This  Court was  dealing  with	 the  power  of	 the
appellate authority  i.e. the Appellate Tribunal. Therefore,
that would  be an entirely different question. The appellate
authority must	have the incidental power or inherent power-
inherent for  the disposal  of an  appeal to grant a stay or
not to grant a stay.
 The High Court, in our opinion, as was contended by the
revenue in answering a question under section 66 of 1922 Act
or section  256 of  1961 Act  does  not	 exercise  original,
appellate  or  revisional  jurisdiction	 but  only  advisory
Jurisdiction. See the observations of the judicial committee
in Tata	 Iron &	 Steel Co.  Ltd. v. Chief Revenue Authority,
Bombay, (supra).  It is	 only consultative, neither original
nor appellate.
 In New  Jehangir Vakil  Mills Ltd.	 v. Commissioner  of
Income-tax, Bombay  North Kutch and Saurashtra 37 I.T.R. 11,
this Court  held that  the  High  Court	 cannot	 direct	 the
Tribunal to find new facts or raise a new question of law or
embark a new line of enquiry.
 In Commissioner  of Income-tax, Bombay v. Scindia Steam
Navigation Co. Ltd. 42 I.T.R. 589, a bench of five judges of
this Court  was of  the view  that reference jurisdiction or
special	 jurisdiction	is  different	from  appellate	  or
supervisory jurisdiction. The jurisdiction of the High Court
in a reference under section 66 of 1922 Act was special one,
different from	its ordinary  jurisdiction as a civil court.
The High  Court hearing	 a reference  under that section did
not exercise  any appellate  or	 revisional  or	 supervisory
jurisdiction over  the	Tribunal.  It  acted  purely  in  an
advisory capacity  on a reference which properly came before
it under section 66(1) and (2) of 1922 Act. This Court noted
that the High Court gives the Tribunal advice,
865
but ultimately it is for the Tribunal to give effect to that
advice. This  Court further  observed that  it	was  of	 the
essence of  such a  Jurisdiction that the court shall decide
only questions	which were  referred to it and not any other
questions. This	 Court was,  however of	 the view  that	 the
power of  the court  to issue  a direction  to the  Tribunal
under section  66(2) of the Act of 1922 was in the nature of
a mandamus and it was well settled that no mandamus would be
issued unless  the applicant  had made	a distinct demand on
the appropriate	 authorities for  the very  reliefs which he
sought to enforce by mandamus and that had been refused.
     This question  was again  considered by  this Court  in
Petlad Turkey Red Dye Works Co. Ltd. Commissioner of Income-
Tax Bombay  North 48  I.T.R. 92. This Court observed at page
98 of the report that the jurisdiction of the High Court was
confined to  giving an	opinion. It  was purely advisory and
the High Court had no jurisdiction to direct the Tribunal to
take fresh evidence.
 In C.P. Sarathy Mudaliar v. Commissioner of Income-Tax,
Andhra Pradesh 62 I.T.R. 576, this Court noted that the High
Court cannot  set aside	 the order  of the  Tribunal and the
High Court  does not sit in appeal over the judgement of the
Tribunal. If  the High	Court found  that the material facts
were not  stated in  the statement  of case, or the Tribunal
had not	 stated its  conclusion on  material facts, the High
Court might call upon the Tribunal to submit a supplementary
statement of case under section 66(4) of 1922 Act. It may be
mentioned that	it would  be  incidental  to  answering	 the
question.
I v.  Greaves Cotton  and Co. Ltd. 68 I.T.R. 200, this Court
noted that it was well settled that the High Court was not a
court of appeal under reference under section 66 of 1922 Act
or under  section 256 of 1961 Act and it was not open to the
High Court in such a reference to embark upon a re-appraisal
of the	evidence and the facts found by the Tribunal must be
accepted by the High Court.
A full	bench of  the Kerala  High Court  in the  case of K.
Ahamad v.  Commissioner of  Income-tax, Kerala 96 I.T.R. 29,
held that  the High  Court had power to delete under section
256 of	1961 Act  an erroneous sentence in the judgment. The
full bench  held that  the courts  were constituted  for the
purpose of  doing justice  and should  have  power  that  is
inherent to  the discharge  of the  function and  that these
must have  power akin  to correct accidental slips. The full
bench therein  acted on	 the principle	that no	 act of	 the
court should ever injure a party.
866
 A learned	single judge of the Bombay High Court in the
case of	 Jatashankar Dayaram  v. Commissioner  of Income-Tax
101 I.T.R.  343, held that application for a reference under
section	 256(2)	 of  1961  Act	in  forma  pauperis  can  be
permitted. This	 would be  incidental or  ancillary  to	 the
discharge of  the function  of giving advice conferred under
section 66 of 1922 Act.
 This Court	 in the	 case of  Jaipur Mineral Development
Syndicate v.  Commissioner  of	Income-Tax,  New  Delhi	 106
I.T.R. 653  at 656,  held that reference which was dismissed
for paper books not being filed in time could be restored.
     It is  common ground  that jurisdiction  conferred upon
the High  Court under the Income-Tax Act is neither original
nor  appellate.	 The  jurisdiction  which  it  exercised  in
dealing with  the income-tax reference was advisory and is a
special jurisdiction.
 It was  contended on  behalf of  the assessee  that the
High Court  was	 a  court  when	 it  exercised	its  special
jurisdiction and  it was  well settled	that the  High Court
while  hearing	a  reference  under  a	taxing	statute	 had
inherent power	to make	 all such  orders  as  it  would  be
necessary to  do justice where the circumstances of the case
so  required  and  for	this  reliance	was  placed  on	 the
observations of	 this Court  in the  case of  Jaipur Mineral
Development Syndicate  v. Commissioner	of  Income-Tax,	 New
Delhi (supra). But as has been noticed before the power that
was exercised was for properly giving advice.
 The Allahabad  High Court in Sridhar v. Commissioner of
Wealth-Tax, 153	 I.T.R. 543 at 547, observed that only power
that High  Court could	exercise under	section	 27  of	 the
Wealth-Tax Act,	 1957 was  similar to section 66 of 1922 Act
i.e. to	 give opinion  about the questions referred to it in
an advisory capacity by answering the questions in favour of
the assessee  or the  revenue, as  the case  might be.	Even
while hearing  a reference  under a taxing statute, the High
Court has  certain inherent powers. But the extent and scope
of the inherent power which can be exercised by an appellate
or revisional  court cannot  be the  extent and scope of the
inherent  power	 of  the  High	Court  while  exercising  an
advisory jurisdiction  such as is conferred by section 27 of
the Act.  The  inherent	 power	which  the  High  Court	 can
exercise while	hearing a reference under section 27 must be
confined to  the procedure  about the hearing of a reference
and to passing such orders as are ancillary or incidental to
the advice which the
867
High Court  proposes to	 give while answering the questions.
While hearing  a reference  under section  27, the Allahabad
High Court further held that the High Court did not have the
further inherent  power to  pass interim  orders restraining
the orders  of AAC or by the Tribunal being given effect to.
It was further held that what the High Court could not do at
the time  of passing the final order, it could certainly not
do as  an interim  measure in  the purported exercise of its
inherent power.
 It is  true that  the High	 Courts sometimes act on the
assumption that it possessed inherent power to act ex debito
justitiae and  to do  real and substantial justice for which
alone these  existed where  the circumstances of the case so
required, the  power related to matters of procedure and not
substantive rights  of the  parties. See  in this connection
Manohar Lal  Chopra v.	Rai Bahadur  Rao Raja  Seth Hiralal,
[1962] 1  Supp. S.C.R.	450, where  this Court a page 463 of
the report  referred to	 section 151  of the  Code of  Civil
Procedure and  observed that  the section  itself said	that
nothing in  the Code  should be deemed to limit or otherwise
affect the  inherent power  of	the  court  to	make  orders
necessary for  the ends of justice. This 'inherent power' as
was observed  by this  Court "had  not been conferred on the
court. It was a power inherent in the Court by virtue of its
duty to do justice between the parties before it".
 Further the Code itself recognised the existence of the
inherent power	of  the	 Code,	there  was  no	question  of
implying any powers outside the limits of the Code. See also
Padam sen  and Anr.  v. The State of Uttar Pradesh, [1961] 1
S.C.R. 884 at 887.
     The  special  jurisdiction	 of  the  High	Court  under
section 256 does not deprive it of judicial character or its
inherent power,	 it was	 submitted. This in our opinion does
not solve  the question	 because the High Court in answering
reference indubitably  acts in judicial capacity and must be
implied to  have powers which are necessary to discharge the
obligations in	exercising its jurisdiction of giving advice
conferred by  the special  provisions of the statute. It was
further submitted that the extent and scope of that inherent
power could  not be  confined to  a straight jacket. It took
within its  ambit the  power to	 grant stay  of	 proceedings
before the  court as  it deemed necessary to do for the ends
of justice.  The High  Court could  exercise such  power  to
grant stay,  it was  submitted where the legislature had not
denied or  excluded the same in unmistakable terms. But this
was not	 clear because	of the	language. It was stated that
pendency of a
868
reference would	 not stay  the realisation,  indicates	that
reference has  nothing to  do with  the stay of realisation.
The realisation	 of non-realisation  of tax  is part  of the
appellate jurisdiction	of the	Tribunal. It  was,  however,
submitted that the inherent power of the High Court and also
of the	Supreme Court  had not	been excluded by the general
provision in  section 265  of 1961  Act	 which	stated	that
with the  assessment made.  This section,  it was submitted,
did not	 impose any  embargo on	 the inherent  power. It was
submitted that section 265 of 1961 Act, as regards reference
made to	 the High  Court, is  in pari  materia with  section
66(7) which  also related  to reference	 to the	 High Court.
Section 66(7)  was interpreted	by the	Andhra Pradesh	High
Court in  Pollisetti Narayana Rao v. Commissioner of Income-
tax (supra).  It was  submitted that legislature by adopting
the identical  language in  1961 Act  must  be	regarded  as
having accepted	 it in	section 265  of	 1961  Act.  It	 was
submitted that	while in  re-enacting similar  provisions of
section 66(7),	in  section  265  the  legislature  must  be
regarded as  intending the same meaning to the pari material
expression in  the 1961 Act. For this reliance was placed on
the observations  of House of Lords in the Case of Barras v.
Aberdeen Steam	Trawling and Fishing Co., Ltd. 1933 A.E.R. =
1933 A.C.  402, where it was held that once certain words in
an Act of Parliament had received a judicial construction in
one of	the superior  courts, and  the legislature  repeated
these without  any alteration  in a  subsequent statute, the
legislature must be taken to have used them according to the
meaning which a court of competent jurisdiction had given to
them. Lord  Macmillan however  observed that  this  rule  of
interpretation afforded	 only a	 valuable presumption  as to
the rule  ought, doubtless, to receive effect, but must be a
judgment, however,  obviously  wrong,  unexaminable  by	 the
highest court.
 Therefore, in  this case  only solitary decision of the
Andhra Pradesh	High Court  which was  not in all subsequent
cases followed	and which  in a	 way was contrary to several
decisions of  the other	 High Courts  as well  as this Court
cannot be  said to  have received  parliamentary acceptance.
The attention of the Andhra Pradesh High Court was not drawn
to the decision of this Court in Seth
869
Premchand Satramdas  v. State  of Bihar 19 I.T.R. 108, where
dealing with the nature of the Jurisdiction of the Courts in
reference matters  under Sales	Tax Act	 this Court observed
that the  High Court  acquired Jurisdiction to deal with the
case by	 virtue of  an express	provision of the Bihar Sales
Tax Act. Jurisdiction was only consultative neither original
 The Calcutta  High Court  in the  case of Dwarka Prasad
Baja v. Commissioner of Income-tax, West Bengal-I 126 I.T.R.
219, observed  that in	exercising  its	 Jurisdiction  under
section 256  of the Income-Tax Act, 1961, the High Court did
not act	 as a  court of	 appeal, as the Income-tax Appellate
Tribunal does  under section 254 of the Act. The High Court,
in  disposing  of  the	reference,  could  only	 answer	 the
questions actually referred and could not raise any question
by itself.  The findings  of fact by the Tribunal were final
so far	as the	High Court was concerned and only on limited
grounds such findings of fact could be challenged. After the
judgment of the High Court is delivered, the Tribunal has to
pass necessary	orders to  dispose of the case in conformity
with the  judgment under  section 260  of the  Act. The High
Court exercised	 a very	 limited jurisdiction.	It  did	 not
dispose of  the entire	matter but its decision was confined
only to	 the questions of law as arise from the order of the
Tribunal. Therefore,  it could	not be	said that  the	High
Court exercised	 its general  jurisdiction under article 227
of the Constitution in dealing with a reference. If the High
Court could  in such  case exercise  its powers under equity
jurisdiction and  grant a  temporary injunction or a stay it
would have  to ascertain  and to go into facts for which the
Income-Tax Act,	 1961 did  not make any provision. Moreover,
issuance of  orders permitting collection or recovery of tax
or  staying  such  collection  or  recovery  if	 made  under
exercise of  inherent power would result in extension of the
jurisdiction of	 the High Court under section 256 of the Act
of 1961.  The Calcutta	High Court, further, was of the view
that a	court could  not vest  itself with  such  additional
jurisdiction by	 invoking its  inherent powers.	 Hence,	 the
Court, in seisin of a reference under the I.T. Act could not
issue an  order of  temporary injunction,  according to	 the
Calcutta High  Court, or  stay of  proceedings which  was an
injunction in  an indirect  manner in respect of recovery of
taxes.
     In an  appropriate case,  if the  assessee feels that a
assessee is entitled to apply before the appellate authority
to grant a stay until disposal
870
of reference  by the  High Court  or until  such time as the
appellate authority  thought fit.  But in case the appellate
authority  acted   without   jurisdiction   or	 in   excess
jurisdiction or	 in improper  exercise of  the jurisdiction,
then decision  of such	appellate authority can be corrected
by the	High  Courts  by  issuing  appropriate	writs  under
article 226 and 227 of the Constitution.
     It has  to be borne in mind that in answering questions
or disposing  of references  either under section 66 of 1922
Act or	section 256  of 1961  Act, the	High Courts  do	 not
exercise any jurisdiction conferred upon them by the Code of
Civil Procedure	 or the Charters or by the Acts establishing
respective  High  Courts.  In  respect	of  certain  matters
jurisdictions exercised	 by the	 High Court,  must  be	kept
separate from  the concept  of inherent powers or incidental
powers in  exercising jurisdiction  under section 66 of 1922
Act or 256 of 1961 Act. Section 66 of Income-Tax Act of 1922
or section  256 of  Income-Tax Act  of	1961  is  a  special
jurisdiction of	 a limited  nature conferred not by the Code
of Civil Procedure or by the Charters or by the special Acts
constituting such  High Courts but by the special provisions
of Income-Tax  Act 1922	 or  1961  for	limited	 purpose  of
obtaining High	Court's opinion	 on  questions	of  law.  In
giving that  opinion properly  if any question of incidental
or ancillary  power arises  such as giving an opportunity or
to the	Jurisdiction conferred	upon it. But such incidental
the domain of an appellate authority. Therefore, the concept
of granting stay in a reference ex debito justitiae does not
arise. That  concept might  arise in  case of  the appellate
authority exercising  its power to grant stay where there is
not express  provision. Ex debito justitiae is to do justice
between the parties.
     Rendering advice on the question of law referred to the
courts has  nothing to	do  with  the  recovery	 of  tax  or
granting stay in respect of the same.
     Therefore, in  our opinion	 it cannot  be said that the
High Court  had inherent  power or  incidental power  in the
matter of  a reference	pending before	it to  grant stay of
realisation or	to grant injunction. That must remain within
the jurisdiction  of the appellate authority and pendency of
a reference does not detract
871
from that  jurisdiction of  the appellate  authority. In our
opinion,  therefore,   the  High   Court  was  in  error  in
exercising its	jurisdiction by passing an order for stay of
realisation under section 151 of the Code of Civil Procedure
in a  pending reference. The High Court could have exercised
its power  if  the  appellate  authority  had  not  properly
exercised its  jurisdiction, not  in reference	jurisdiction
but by	virtue of  its jurisdiction  under  article  226  or
article 227  in appropriate cases. But that was not the case
here.
 In that  view of  the  matter,  we	 are  in  respectful
agreement with	the views  expressed by	 the Allahabad	High
Court in  Sridhar v.  Commissioner of Wealth-tax (supra) and
the views  of the  Calcutta High Court in Dwarka Prasad Baja
v. Commissioner	 of Income-tax, West Bengal-I (supra) and we
are unable  to sustain the views expressed by Andhra Pradesh
High Court  in Polisetti  Narayana Rao	v.  Commissioner  of
Income-tax, Hyderabad  (supra). The  appeals are accordingly
allowed. The  judgment and  order of  the High Court are set
aside. But  in the  facts and  circumstances  of  the  case,
parties are directed to pay and bear their own costs.
N.V.K.					    Appeals allowed.
872

Madurai Distt. Central Cooperative ... vs The Third Income-Tax Officer, Madurai on 28 July, 1975
Equivalent 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
Author: Y.V. Chandrachud
Bench: Y.V. Chandrachud, Ranjit Singh Sarkaria, A.C. Gupta
MADURAI DISTT. CENTRAL COOPERATIVE BANK LTD.

	Vs.

THE THIRD INCOME-TAX OFFICER, MADURAI

DATE OF JUDGMENT28/07/1975

BENCH:
CHANDRACHUD, Y.V.
BENCH:

CITATION:
 1975 AIR 2016		  1976 SCR  (1) 136
 1975 SCC  (2) 454
 D	    1981 SC1562	 (17)

ACT:
     Constitution of  India-Article 246(1)-7th Schedule List
1 Entry	 82- Income-Tax	 ,Act 1961-Sec.	 2(8), 4 & 81(i)(a)-
Finance Act  1963-Sec. 2(1)  (a). 2(8),	 3,  Part  1,  First
Schedule-Whether tax can exceed taxable income- Finance Act-
Nature	and   scope  of-Whether	 can  impose  fresh  charge-
Harshness of  a taxing	statute if  a ground  for challenge-
Business income	 of a  cooperative  society  doing  banking-
Whether	 additional   surcharge	 a   tax-Whether  additional
surcharge Can  be levied  on income exempted from payment of
tax.

HEADNOTE:
     The appellant  is a  Cooperative Society engaged in the
business of  banking According	to section 8] (i) (a) of the
Income 'Tax  Act, 1961, a Cooperative Society engaged in the
business of  banking is	 not liable to pay income tax on its
business income.  The Finance Act, 1963, however, by section
2(i) (a),  2(8), 3,  paragraph A(ii)  of Part I of the First
Schedule and  clause  of  that	portion	 of  Part  I  called
surcharge on  Income Tax  provides for	levy  of  additional
surcharge for  the purposes  of the  Union calculated on the
amount	of  the	 residual  income  at  the  rates  mentioned
therein.  The	total  income	of  the	 appellant  for	 the
assessment year	 1963-64 was  Rs. 10,00,098. Out of this Rs.
9,48,335 was  its business income. 'The tax amounting to Rs.
23,845 was charged on Rs. 51,763 Applying the Finance Act of
1963, the  residual income  of the appellant was computed at
Rs. 5.39,386  and a  surcharge thereon	was  levied  of	 Rs.
52,828 Thus,  the total tax imposed on the appellant came to
Rs. 76,674.
     The assessment  order passed  by the Income Tax officer
levying the tax as aforesaid was challenged by the appellant
in the	High Court by a Writ Petition. The main grievance of
the appellant  before the  High Court  was that	 whereas its
taxable income	was only Rs. 51,763, a tax of Rs. 76,674 was
imposed on  it. The  relevant provisions  of the Finance Act
were challenged	 as  invalid  on  the  ground  that(i)	they
imposed additional surcharge on income which was exempt from
tax under the provisions of the Income Tax Act and that (ii)
the additional	surcharge was intended as additional levy on
the income  tax and  had no independent existence apart from
it The High Court rejected these contentions.
     On an appeal by certificate, dismissing the appeal,
^
HELD :
     1.	 It  is	 indisputable  that  the  appellant  is	 not
required to pay income tax on the banking income. In view of
section 81.  It is  also not  liable to pay surcharge on its
business income in view of section 99(1)(v). [139C]
     2. The,  grievance of the appellant that the tax levied
upon it	 exceeds its taxable income can afford no true guide
to the construction of the relevant provisions of the Income
Tax Act	 or the	 Finance Act. Harshness of a taxing statute,
apart from  a possible	challenge to it under Art. 13 of the
Constitution cannot  be an  invalidating circumstance.	But,
the grievance-on this score is misconceived. It assumes what
has to	be examined that no part of the income exempted from
Income Tax  and Super  Tax under  the Income  Tax Act can be
brought to tax by a Finance Act, [140G-H]
     3. The  concession of  the counsel	 for  the  appellant
giving up  challenge to	 the power.  of	 the  Parliament  to
impose a  new charge by Finance Act was Properly made. Under
Art.  246(11)	of  the	 Constitution,	Parliament  has	 the
exclusive power	 to make  laws with  respect ''o  any of the
matters in List	 of the Seventh Schedule. Entry 82 in List I
relates to tax on income other than agricultural income. The
Income Tax Act, 1961 and the annual Finance Acts are enacted
by the Parliament in exercise of the powers conferred by Art
246(1) read with entry 82 of List I. Once the Parliament has
the legislative	 competence to	enact a	 law with respect to
certain subject matter, the limits of
136
that competence	 cannot be  judged further  by the  form  or
manner in  which that  power is exercised. Exigencies of the
Financial  year	 determine  the	 scope	and  nature  of	 the
provisions of  the Finance  Act. The  primary purpose of the
Finance Act  is to describe the rates at with the Income Tax
will be	 charged under	the Income Tax Act but that does not
mean that  new and  distinct tax  cannot  be  charged  under
Finance Act.  Therefore, what is not income under the Income
Tax Act	 can be made income by the Finance Act. An exemption
granted by  the Income	Tax A,	t can  be withdrawn  by	 the
Finance Act or the efficacy of that exemption may be reduced
by the imposition of a new charge. [141D-E; G-H]
     4. The  contention of the appellant that surcharges are
nothing but income tax and, therefore, expression income tax
occurring in  Sec. 4  and 81  of the Act includes surcharges
and AS	such exempted  cannot be  accepted. The	 case of the
C.I.T. Kerala  vs. K.  Srinivasan distinguished.  There	 the
essential point	 for determination  was whether surcharge is
additional mode	 or rate  for charging income tax. The Court
held there that it was so. The question before us is whether
even if	 the surcharge	is an  additional mode	or rate	 for
charging income to the Finance Act of 1963 authorises by its
terms the  levy of  additional surcharge  on income which is
exempt from  income tax under the Income Tax, Act, 1961. The
residual income	 as defined  by the  1963 Finance Act is not
the same  as the business income of a Cooperative Bank which
is exempted  under see.	 81. The  additional surcharge	is a
distinct charge	 not dependent	for its	 leviability on	 the
assessee's liability  to pay  income tax  or Super  Tax. The
decision of  Allahabad High  Court in Allahabad District Co-
operative Bank Ltd vs. Union of India over-ruled. [143D-E]
     5.	 The  additional  surcharge  though  levied  by	 the
Finance Act  1963 independently of the Income Tax Act is but
a mode	of levying tax on a portion of the assessee's income
computed in  accordance with  the definition in section 2(8)
of the Finance Act 1963. [147F]
			 ARGUMENTS
For The Appellant
     1. Under  section 81 read with section 4 of the Income-
tax Act, 1961, income tax is not payable by the appellant. a
Co-operative Society,  in respect of its income from banking
business. Similarly  super-tax is  not payable under section
99(i)(v) read with section 4.
     2. The  primary purpose  of the  annual Finance Acts as
envisaged by section 4 of the Income-tax Act is to prescribe
the rates  of income-tax on the total income of an assessee,
and this  function as  contemplated by	section 4  is to  be
"subject to  the other	provisions of this Act", namely, the
Income-tax Act,	 1961,	which  would  include,	inter  alia,
section 81.
     3.	 The   history	of   Indian  income-tax	 shows	that
surcharges by  way of  increase to the amount of income-tax,
which are  added to the basic amount, in view of article 271
of the Constitution of India, are nothing other than income-
tax and a part of income-tax alone. Therefore the expression
'income-tax' in	 section 4  and 81  of the  Income-tax	Act,
1961, and section and Schedule I, Part 1 of the Finance Act,
1953, includes surcharges.
     4. Section	 2 of the Finance Act, 1963, and Schedule I,
Part  I,  Paragraph  A	all  clearly  contemplate  that	 the
surcharge. special  surcharge and  additional surcharge	 are
all only  by way of increase of the amount of income-tax and
not only  partake of  the character  of income-tax  but	 are
actually a  part of  income tax.  They are  merely rates  of
income-tax. The	 main part  of section	2(1) (a)  says	that
"Income-tax shall  be charged at the rates specified in Part
I of  the First	 Schedule" and	clause (ii)  of that section
provides in  the ease  referred to  therein that  income-tax
"shall further	be increased  by an additional surcharge for
the purpose  of the  Union calculated in the manner provided
in the First Schedule. Similarly in Paragraph A of Part I of
the First Schedule the heading to the provisions prescribing
rates of  surcharge is	"surcharges on	income-tax"  in	 the
plural. The main part in the heading also provides that "the
amount of
137
income-tax... shall  be increased  by the  aggregate of	 the
surcharges calculated  as  under  "  Clause  (c)  thereafter
provides for the additional surcharge for the purpose of the
Union. Paragraph A also therefore clearly indicates that the
three surcharges  are only  of the  same nature and that all
the three  surcharges are  only by  way of  increase of	 the
amount of income-tax; in other words part of the income-tax.
Is either  section 2  nor paragraph A of Part I of the First
Schedule can  even  remotely  be  said	to  contemplate	 any
separate levy of additional surcharge other than income-tax.
     5. From  the assessment  order  it	 is  seen  that	 the
following have	been charged only on the real taxable income
of the	appellant namely  Rs. 51,763:  (i) income  tax	(ii)
surcharge on  income tax  (iii) special surcharge on income-
tax (iv)  super-tax and	 (v) surcharge	on super-tax.  These
items have  not been  charged on  the total  income  of	 Rs.
10,00,098, because  income-tax is not payable on the balance
of the total income under section 81. The Income-tax officer
has sought  to impose only additional surcharge under clause
(c) in respect to the total income of Rs. 10,00,098. In view
of section  81 no  additional surcharge	 is payable  on	 the
total income  of Rs.  10,00,098. It  is payable	 only on the
taxable income of Rs. 51,763.
     6. Section 2 read with Paragraph A Part I of Schedule I
to the Finance Act merely purports to lay down the method of
computation where  income-tax is payable. It does not either
dire  thy   or	by   implication  make	 any  amendment	  or
modification in section 81.
     7. Section	 3 of the Finance Act ]963 also applies to a
stage of  computation only  and in  regard to relief, rebate
etc. It	 does not  impose  any	liability  or  any  tax.  It
operates only  where additional surcharge is payable and not
other wise,  and where	relief, rebate	etc. is	 to be given
from the  tax payable by the assessee, e.g. deduction of tax
based on  life insurance premia provident fund contribution.
donations to charitable institution etc. Section 81 does not
provide for any such relief or rebate.
     8. Section	 2(8) of  the Finance  Act,  1963,  defining
"residual income"  which requires  deduction from  the total
income of  income-tax, surcharge  and special  surcharge  to
ascertain residual  income also	 does not have the effect of
imposing any  liability or  any tax  but merely provides for
computation. In	 a taxing Act one has to look merely at what
is clearly  said. There is no room for any intendment. There
is no equity about a tax. There is no presumption as to tax.
Nothing is  to be  read in, nothing is to be implied." "In a
case of	 reasonable doubt.  the construction most beneficial
to the	subject is  to be  adopted." The  court will be very
slow in	 reading an  implied amendment	in a tax law because
there is no intendment.
     9. Income-tax  is one tax, not several taxes on several
heads or several items of income:
For the Respondent
     1. It is open to the Parliament to pass an Act relating
to more than one topic or field of operation, covered by the
Entries in  List 1.  It is  not as  if there must be as many
Enactments as the topics which the enactment covers.
     2. The  legislature has  a wide  range of selection and
freedom in  appraisal not  only in  the subjects of taxation
and the	 manner of taxation but also in the determination of
the rate  or rates  applicable. If production were always to
be taken into account there will have to be a settlement for
every year and the tax will become a kind of income-tax.
     The burden	 of proving  discrimination is	always heavy
and heavier still when a taxing statute is under attack. The
burden is  on the  person complaining of discrimination. The
burden is  proving not	possible  'inequality'	but  hostile
'unequal' treatment.  This is more so when uniform taxes are
levied. The State cannot be asked to demonstrate equality.
     3. Income which is exempt from taxation is income which
is assessable  to tax and therefore liable to tax but tax is
not imposed on account of the exemp-
138
tion. This exemption can by subsequent legislation be wholly
or partially  withdrawn both  as regards items of income and
levies imposed	for the	 purpose of taxation. Thus where the
Income-tax Act	1961 says  that business  income  of  a	 co-
operative society will be exempt from income-tax it would be
open to	 the Parliament	 by enactment  of the Finance Act of
1963 to say that this exemption shall be partially withdrawn
as regards  residual income  and this partial exemption will
operate only for the purpose of income-tax but not surcharge
on  residual income. The net result of the partial withdrawn
of the	exemption would mean that though the business income
of a  co-operative society  will  be  exempt  from  tax	 the
residual income	 which	is  only  a  part  of  the  exempted
business income	 could be  subjected to surcharge on income-
tax only.
     4. Income-tax  and	 surcharge  on	income-tax  are	 two
different levies  though the  computation of  the latter  is
based upon a percentage of the former. The to are  inclusive
for the	 purpose of  imposing tax  but they are not one levy
only.

JUDGMENT:
     CIVIL APPELLATE  JURISDICTION: Civil Appeal No. 1795 of
1970.
     From the  Judgment and  order dated  the 15th  October,
1968 of	 the Madras  High Court in Writ Petition No. 2252 of
1965.
     S. T. Desai and T. A. Ramachandran, for the appellant.
     N. D. Karkhanis and S. P. Nayar, for the respondent.
     CHANDRACHUD,J.-The appellant  filed a  writ petition in
the  High   Court  of	Madras	under  Article	226  of	 the
Constitution to	 challenge an  assessment order dated August
22,  1963   made  by   the  respondent,	 levying  additional
surcharge on  its residual  income. The High Court dismissed
the writ petition by its judgment dated October IS, 1968 but
it has	granted to  the appellant  a certificate  to file an
appeal to  this Court  under Articles  133(a) and (c) of the
Constitution.
     The appellant  is a co-operative society engaged in the
business of  banking. Its  total income	 for the  assessment
year  1963-64	was  computed	by  the	 respondent  at	 Rs.
10,00,098. Out of this, Rs. 9,48,335 was its business income
while Rs.  51,763 was  its income from other sources. Since,
under section  81(i)(a) of  the Income-tax  Act, 1961  a co-
operative society  engaged in the business of banking is not
liable to  pay income-tax  on its  business income  the	 tax
amounting to  Rs. 23,845.47  was charged  on Rs. 51,763 only
though for  the purposes of rate the income was taken at Rs.
9,48,335 in  view of  section 110  of the  Act. Applying the
Finance Act,  XIII of  1963,  the  respondent  computed	 the
residual income	 of the appellant at Rs. 5,39,386 and levied
on it  an additional  surcharge of  Rs. 52,828.60.  Thus the
total tax levied on the appellant came to Rs. 23,845.47 plus
Rs. 52,828.60 i.e., Rs. 76,674.07.
     The main  grievance of  the appellant  before the	High
Court was  that whereas	 its taxable  income  was  only	 Rs.
51,763, a  tax of  Rs. 76,674.07  was  imposed	on  it.	 The
relevant provisions of the Finance Act were accordingly said
to be  invalid as  they	 could	not  subject  to  additional
surcharge an  income which  was exempt	from tax  under	 the
provisions of  the Income-tax Act. The additional surcharge,
it was	contended, was intended as an additional levy on the
income
139
tax and	 had no	 independent existence	apart from it. These
contentions were  rejected by  the High Court and hence this
appeal.
 Section 81	 of the	 Income-tax Act, 1961 was deleted by
the Finance  Act, XX of 1967, with effect from April 1, 1968
but its provisions were incorporated by the same Finance Act
in section 80P.	 Section 81 (i)(a) read thus:
	  "81. Income  of co-operative societies.-Income-tax
     shall not be payable by a co-operative society-
     (i) in  respect of	 the profits  and gains	 of business
     carried on by it, if it is-
	  (a)  a society engaged in carrying on the business
	       of banking  or providing credit facilities to
	       its members;"
It is  indisputable that  by reason  of this  provision, the
tanking income	 of  the appellant amounting to Rs. 9,48,335
is exempt  from income	tax. It	 is equally  clear  that  by
reason of section 99(1)(v) of the Act of 1961, the appellant
is not	liable to  pay supertax on its business income. That
section provides  that where  the assessee is a co-operative
society, super-tax  shall not be payable by it on any income
in respect  whereof no income-tax is payable by it by virtue
of the provisions of section 81.
     The dispute  really centers  round	 the  provisions  of
Finance Act,  VIII of 1963. The provisions of that Act which
are relevant  for our purpose are sections 2(1)(a), 2(8), 3,
Paragraph A(ii)	 of Part I of the First Schedule, and clause
(c) of	that` portion  of Part	1,  called  `'Surcharges  on
Income Tax."
 Section 2(1)(a) of the Finance Act, 1963 provides that:
	  2. Income-tax	 and super-tax-(1)  Subject  to	 the
     provisions of  sub-section (2),  (3), (4)	and (5), for
     the assessment year commencing on the 1st day of April,
     1963,-
	  (a)  income-tax shall	 be  charged  at  the  rates
	       specified in  Part I  of the  First  Schedule
	       and,-
	       (i)  in the  cases to  which paragraphs A,C,C
		    and E  of  that  Part  apply,  shall  be
		    increased by a surcharge for purposes of
		    the Union  and, except  in	the cases to
		    which the  said  paragraph	applies	   a
		    special surcharge,	calculated in either
		    case in the manner provided therein; and
	       (ii) in	the cases  to which paragraphs A and
		    of	the   aforesaid	 Part  apply,  shall
		    further be	increased by  an  additional
		    surcharge  for  purposes  of  the  Union
		    (hereinafter referred  to as  additional
		    surcharge)	calculated   in	 the  manner
		    provided in the said Schedule;"
 Section 2 (8) provides that:
	  For the  purposes of paragraphs A and of Part I of
     the First	Schedule, the  expression "residual  income"
     means the amount of the total income as reduced by-
140
     (a)  the amount  of the capital gains, if any, included
	  therein; and
     (b)  the	amount	of   tax  (exclusive  of  additional
	  surcharge) which  would have	been  chargeable  on
	  such reduced total income if it had been the total
	  income   no part of which had been exempt from tax
	  and on  no portion  of which	deduction of tax had
	  been	admissible   under  any	 provisions  of	 the
	  Income-tax Act or this Act."
 Section 3 provides that:
	  "Notwithstanding   anything	contained   in	 the
     provisions of  Chapter VII or Chapter VIII-A or section
     110 of the Income tax Act or sub-section (5) of section
     2 of  this Act,  in calculating  any relief  rebate  or
     deduction in respect of income-tax payable on the total
     income of	an assessee  which includes  any  income  on
     which no income-tax is payable or in respect of which a
     deduction of  income-tax is admissible under any of the
     aforesaid provisions,  no account shall be taken of the
     additional surcharge."
 The First Schedule of the Finance Act, 1963 consists of
three parts  out of which we are only concerned with Part I.
Part I which is called "Income-tax and surcharges on income-
tax" consists of Paragraphs A, B, C, and out of which we are
concerned with	Paragraph A only. Clause (ii) of Paragraph A
prescribes rate	 of income-tax	for incomes  accruing, inter
alia, to  "association of  persons".  Since  a	co-operative
society is  an association of persons, Paragraph A of Part I
would apply to the case of the appellant for`the purposes of
section 2(1)(a)(ii)  of the Finance Act oil 1963, though not
for the	 purpose of bringing its exempted business income to
income-tax.
     That portion of Part I, Paragraph A, called "Surcharges
on Income  Tax" provides: "The amount of income-tax computed
at the	rates hereinbefore  specified shall  be increased by
the aggregate of the surcharges calculated as under". Clause
(a) provides  for a  surcharge for the purposes of the Union
at the	rates mentioned	 in sub-clauses (i), (ii) and (iii).
Clause (b)  provides for  the levy  of a  special surcharge.
Clause (c) with which we are concerned provides for the levy
of "an	additional surcharge  for the  purposes of the Union
calculated on  the amount  of the  residual income"  at	 the
rates mentioned therein.
     The grievance  of the  appellant, which appears to have
been pressed  before the  High Court  with some earnestness,
that the  tax levied  upon it exceeds its taxable income can
afford no  true guide  to the  construction of	the relevant
provisions of  the  Income  tax	 Act  or  the  Finance	Act.
Harshness  of  a  taxing  statute,  apart  from	 a  possible
challenge to it under Article 13 of the Constitution, cannot
be an  invalidating circumstance.  But the grievance on this
score is  basically misconceived. It assumes, what has to be
examined, that	no part	 of the income exempted from income-
tax and super-tax under the Income-tax Act can be brought to
tax by	a Finance Act. The total income of the appellant was
computed
141
at Rs.	10,00,098. By  reason of  sections 81 (i) (a) and 99
(1) (v)	 of the Income-tax Act, 1961 the appellant enjoys an
exemption from	income tax  and super-tax  in respect of its
business income which amounts to  Rs. 9,48,335. The balance,
viz. Rs.  51,763 which was the appellant's income from other
sources was alone taxable under the Act of 1961 and a tax of
Rs. 23,845.47  was imposed on that income; The Finance	 Act
of 1963	 subjects 'residual  income' to	 certain charges and
such in	 come was  computed, admittedly	 correctly,  at	 Rs.
5,39,386. An  additional  surcharge  of	 Rs.  52,828.60	 was
levied on  the residual	 income. Thus on the assumption that
the Finance  Act,  validly-and	on  a  true  interpretation,
imposes the additional surcharge on residual income, the tax
imposed	 on   the  appellant   is  Rs.	23,845.47  plus	 Rs.
52,828.60. The	total tax  of Rs.  76,674.07 thus imposed is
far less  than the. appellant's total taxable income arrived
at by  the addition  of	 its  non-business  income  and	 the
residual income.  That leads to the inquiry first as regards
the  scope  of	a  Finance  Act	 and  then  as	regards	 the
interpretation of the Finance Act of 1963.
     Learned counsel for the appellant, during the course of
his arguments,	gave up	 the challenge	to the	power of the
Parliament to  impose a	 new charge  by a  Finance Act. This
concession was	properly made.	By  Article  246(1)  of	 the
Constitution, Parliament  has the  exclusive power  to	make
laws with  respect to  any of  the matters  in List I of the
Seventh Schedule.  Entry 82  in List  I relates to "taxes on
income other  than agricultural income". The Income-tax Act,
1961  and  the	annual	Finance	 Acts  are  enacted  by	 the
Parliament in  exercise of  the power  conferred by  Article
246(1) read with Entry 82 of List I. Once the Parliament has
the legislative	 competence to enact a law with respect to a
certain subject-matter, the limits of that competence cannot
be judged  further by the form or manner in which that power
is exercised. Accordingly, though it would be unconventional
for  the   Parliament  to   amend  a   taxing	statute	  by
incorporating  the   amending  provision  in  an  Act  of  a
different pith and substance, such a course would not be un-
constitutional.
 Much more	so can	the Parliament	introduce a charging
provision in  a	 Finance  Act.	True,  as  said	 in  Kesoram
Industries and	Cotton Mills  Ltd  v. Commissioner of Wealth
Tax, (Central)	Calcutta(1), that  the Income-tax  Act is  a
permanent Act  v. while	 the Finance  Acts are	passed every
year and  their primary purpose is to prescribe the rates at
which the  income-tax will  be charged	under the Income tax
act. But  that does  not mean that a new and distinct charge
cannot be  introduced under  the Finance  Act. Exigencies of
the Financial  year determine  the scope  and nature  of its
provisions. If the Parliament has the legislative competence
to introduce a new charge of tax, it may exercise that power
either by incorporating that charge in the Income-tax Act or
by introducing	it in  the Finance  Act or for the matter of
that in any other Statute. The alternative in this regard is
generally determined  by the  consideration whether  the new
charge is  intended to be more or less of a permanent nature
or whether  its introduction  is dictated  by the  financial
exigencies of  the particular  year. Therefore,	 what is not
'income' under
142
the Income-tax Act can be made 'income' by a Finance Act, an
exemption granted  by the Income-tax Act can be withdrawn by
the Finance  Act or  the efficacy  of that  exemption may be
reduced by  the imposition  of	a  new	charge.	 Subject  to
constitutional limitations,  additional tax  revenue may  be
collected either  by enhance  the rate	or by  the levy of a
fresh charge.  The  Parliament,	 through  the  medium  of  a
Finance Act,  may as  much do  the  one	 as  the  other. In
McGregor  and	Balfour	 Ltd.,	 Calcutta  v.  C.I.T.,	West
Bengal(1), which was affirmed by this Court in 36 I.T.R. 65.
Chakravartti C.J.  delivering the  judgment  of	 a  Division
Bench observed	that the Finance Acts though annual Acts are
not necessarily	 temporary Act	 for  they may	and often do
contain provisions  of a  general character  which are	of a
permanent operation.
 In Hari  Krishna Bhargav  v. Union of India and Anr.(2)
an assessee challenged the scheme of Annuity Deposits of the
ground that  the Parliament has no competence to incorporate
ill the	 Income tax  Act a provision which was substantially
one relating  to borrowings by the Central Government from a
class of  tax-payers. That  scheme was introduced by Finance
Act 5  of 1964	which incorporated Chapter XXII-A containing
section 28-A  to section  28-X in  the Income tax Act, 1961.
The challenge  was repelled by this Court on the ground that
if the	parliament had the legislative competence to pass an
Act for collecting Annuity Deposits from tax-payers, nothing
contained in the Constitution disentitled it "as a matter of
legislative  arrangement   to  incorporate   the  provisions
relating to  borrowing from tax-payers in the Income-tax Act
or any other statute".
     This  discussion  became  necessary  in  spite  of	 the
appellant's  concession	  on  the  Parliament's	 legislative
competence  because   for  a  proper  understanding  of	 the
provisions of  the Finance  Act 1963,  it  is  essential  to
appreciate that	 a Finance  Act may not only prescribe rates
but also introduce a new charge.
     We will  now proceed  to consider the provisions of the
Finance Act,  1963 under  which the  respondent	 has  levied
additional surcharge on the appellant's residual income. The
question for  consideration is	whether clause	(c)  of	 the
portion "Surcharges  on Income Tax" occurring in Paragraph A
of Part I introduces a new charge in the shape of additional
surcharge so  that the	said charge, can be levied even on a
part of	 the appellant's income which is exempt from income-
tax and	 super-tax under  sections 81(i)(a)  and 99(1)(v) of
the Act of 1961.
     The  history   of	Indian	 income-tax,  according	  to
appellant's  counsel,	shows  that  surcharges	 by  way  of
increase in the amount of income-tax are nothing but income-
tax and	 therefore the	expression "income-tax" occurring in
sections 4  and 81  of the  Act of 1961 and in section 2 and
the  First  Schedule  of  the  Finance	Act,  1963  includes
surcharges. To	put it differently, the argument is that the
exemption granted  by section 81(i)(a) extends to surcharges
also as	 a result  whereof a co-operative society engaged in
the business  of banking is neither liable to pay income-tax
nor any of the surcharges on its business income.
143
 In C.I.T.,	 Kerala v.  K. Srinivasan(1)  on  which	 the
appellant relies,  this Court  has traced the history of the
concept of  'surcharge' in  tax laws  of our  country. After
considering  the   report  of	the  Committee	 on   Indian
Constitutional Reforms,	 the provisions of the Government of
India Act, 1935, the provisions of Articles 269, 270 and 271
of the Constitution and the various Finance Acts, this Court
held, differing	 from the High Court, that the word "income-
tax" in	 section 2(2)  of the  Finance	Act,  1964  includes
surcharges and the additional surcharge.
     This case	does not  touch the point before us. In that
case, the  assessee's income  for the accounting year ending
March 30,  1964 consisted  mainly  of  his  salary.  Section
2(2)(a) of  the Finance Act, 1964 did not by itself refer to
any surcharge  but it provided that in making the assessment
for the	 assessment year  commencing on	 April 1,  1964	 the
"income-tax" payable  by the  assessee on  his salary-income
shall be  an amount  bearing to the total amount of "income-
tax" payable  according to  the rates  applicable under	 the
operation of  the Finance Act, 1963 on his total income, the
same proportion	 as the	 salary income	bears  t  the  total
income. The question which arose for consideration was under
the total income. The question which arose for consideration
was whether  the words	"income-tax payable according to the
rates applicable  under the  operation of  the Finance	Act,
1963" included	surcharges which were leviable under the Act
of 1963.  The question	was answered  by this  Court in	 the
affirmative. As the judgment shows, "the essential point for
determination" was  whether surcharge  is an additional mode
or rate	 for charging  income tax"  (p. 351). The Court held
that it	 was. The question before us is whether, even if the
surcharger is  but an  additional mode	or rate for charging
income-tax, the	 Finance Act of 1963 authorises by its terms
the levy  of additional	 surcharge on income which is exempt
from  income-tax  under	 the  Income-tax  Act,	1961  In  K.
Srinivasans case  the Court  declined to express any opinion
on the	distinction made  by the  High Court that surcharges
are levied under the Finance Act while income tax was levied
under the Income-tax Act (p. 351). In the instant case it is
not disputed by the-revenue that a surcharge partakes of the
essential characteristics  of income-tax  and is an increase
in income-tax.	What we have to determine is whether the Act
of 1963 provides for the levy of additional surcharge.
     Granting	that	the   word   "income-tax"   includes
surcharges, it	may be	arguable that the exemption from the
payment of  income-tax under  section 81 (i) (a) of the 1961
Act would extend to surcharges. But the matter does not rest
with what  section 81 (i)(a) says. Even if that section were
to grant  an express  exemption from  surcharges on business
income the  Parliament could  take away	 that  exemption  or
curtail	 the   benefit	available  under  it  by  making  an
appropriate  provision	 in  the   Finance  Act.   If  while
legislating on a matter within its competence the Parliament
can grant  an exemption,  it is	 surely competent  to it  to
withdraw that exemption in exercise of the self-same power.
 The Finance  Act, 1963,  like its	annual counterparts,
contains provisions  not only  prescribing rates of taxation
but making  extensive and  important  modifications  in	 the
Income-tax Act itself. By sections 4 to
144
20 of  the Act of 1963, various provisions of the income-tax
Act have  been amended.	 By these  amendments, some of which
are given  retrospective effect, old provisions are deleted,
new ones  are added  and indeed	 new  concepts	of  taxation
altogether are	introduced. Such innovations fall within the
legitimate scope  of Finance  Acts. Section  11 (14)  of the
Indian Finance	Act, 1946  made	 in  the  amount  of  excess
profits tax repaid under section 28 of the U.K. Finance Act,
1941, "income"	for the purpose of the Indian Income tax Act
and further  provided that   "income  shall be	treated	 for
purposes of  assessment to  income tax	and super-tax as the
income of  the previous	 year. It  was held by this Court in
McGregor and  Balfour Ltd.  v. C.I.T.  West  Bengal(1)	that
section 11(14) charged the amount with a liability to tax by
its own	 force. It  was further	 held  that  the  particular
provision,  framed   as	 it   was,  applied   to  subsequent
assessment years  just as  it applied to the assessment year
1946-47.
     Having seen  the nature  and scope of Finance Acts, the
specific question  which we  have to consider is whether, as
contended by the appellant, section 2 read with Paragraph A,
Part I of the First schedule of the Finance Act, 1963 merely
lays down  a method of computation in cases where income-tax
is in  fact payable or whether, as contended by the revenue,
the  Finance  Act  provides  for  the  levy  of	 a  new	 and
independent  charge.   According  to  the  appellant,  these
provisions  of	 the  Finance	Act  do	  not,	directly  or
indirectly, bring about any amendment to section 81(i)(a) of
the Income-tax	Act but merely prescribe that in cases where
the income-tax	is payable,  "The amount  of income  tax....
shall be  increased by the aggregate of the surcharges". The
heading "Surcharges  on income tax" under which provision is
made in	 the Finance Act for the calculation of a surcharge,
a special surcharge and an additional surcharge is also said
to bear	 out the  contention that  the	levy  of  additional
surcharge on  the residual  income cannot  be  disassociated
from the main charge of income-tax.
     We are  unable to accept this contention Article 269(1)
of the	Constitution provides  that  the  duties  and  taxes
mentioned therein  shall be  levied  and  collected  by	 the
Government of  India but  shall be assigned to the States in
the manner  provided in	 clause (2). Article 270(1) provides
that Taxes on income other than agricultural income shall be
levied	and   collected	 by  the  Government  of  India	 and
distributed between  the Union	and the States in the manner
provided in  clause (2).  By  Article  271,  notwithstanding
anything in  Articles 269  and 270,  Parliament may increase
any of	the duties or taxes referred to in those Articles by
a surcharge  for purposes  of the Union. Surcharges leviable
under section 2(1) of the Finance Act. 1963 are relatable to
Article 271 of the Constitution.
 Section 2(1)(a)(ii)  of that Act provides, in so far as
relevant, that	for the	 assessment year commencing on April
1, 1963	 income-tax shall  be charged at the rates specified
in Part I of First Schedule and in cases  to which Paragraph
A of Part I applies, the income-tax shall further
145
be increased  by an additional surcharge for purposes of the
Union  calculated  in  the  manner  provided  in  the  First
Schedule. `Clause (c) of Paragraph  prescribes the manner in
which the  additional surcharge	 is  to	 be  calculated.  It
provides that additional surcharge for purposes of the Union
shall be  calculated "on the amount of the residual income'.
at the rates mentioned in that clause. Thus both the purpose
and concept  of the  additional surcharge are different from
those of  income-tax. The  additional surcharge	 is leviable
exclusively for	 purposes of  the Union	 so that  the entire
proceeds of  such surcharge  may under	Article 271  of	 the
Constitution, from  part of  the Consolidated Fund of India.
taxes and  duties mentioned in Article 269(1), though levied
and collected  by the Government, have to be assigned to the
States in the manner provided in clause (2) of that Article.
Then again,  the additional surcharge levied for purposes of
the Union  is to  be calculated not on total income like the
income-tax but	it is  to  be  calculated  on  the  residual
income. Section	 2(8) of  the Act  of 1963  defines residual
income as total income reduced by (a) capital gains, if any,
included in  that total	 income and  (b) the  amount of	 tax
(exclusive of  additional surcharge)  which would  have been
chargeable on  such reduced  total income if it had been the
total income  no part  of which had been exempt from tax and
on no portion of which deduction of tax had been admissible.
In order that the exemption granted to co-operative banks by
section 81  (i) (a)  may not  lose its	meaning and content,
section 2(8)  of the  Finance Act  introduces the concept of
residual income	 on which  alone the additional surcharge is
payable. The residual income is not the same as the business
income of a co-operative bank, which is exempt under section
81(i)(a) from  income tax.  For	 ascertaining  the  residual
income	the total income is reduced by the amount of capital
gains  and   further  by  the  amount  of  tax	(other	than
additional surcharge)  which would have been charged on such
reduced total  income on the assumption that the whole of it
was liable to be brought to tax.
     Thus in  the instant  case the  additional surcharge is
not  levied  on	 the  appellant's  business  income  of	 Rs.
9,48,335 which	is exempt  from income-tax and super-tax. It
is levied  on the  residual] income of Rs. 5,39,386 which is
arrived	 at   after  deducting	Gross  taxes  (exclusive  of
additional surcharge)  amounting to  Rs. 4,60,712  from	 the
assessee's gross  income of  Rs. 10,00,098.  By section 3 of
the Finance  Act of  1963 no  account can  be taken  of	 the
additional surcharge  in calculating  any relief,  rebate or
deduction in  respect of  income-tax payable  on  the  total
income of  an assessee which includes any income on which no
income-tax is  payable or in respect of which a deduction of
income-tax is  admissible. Section  3,	by  its	 terms,	 has
precedence over anything contained in Chapter VII or Chapter
VIII A	or in  section 110  of the Income-tax Act or section
2(5) of	 the Finance  Act itself.  Additional  surcharge  is
treated in this way as falling in a separate category.
     Thus, additional  surcharge is  a district	 charge. not
dependent for its leviability on the assessee's liability to
pay income-tax	or super-tax. Such a qualification cannot be
read into  section 2(1)(a)(ii)	of the Act of 1963 as argued
by the	appellant.  That  section  uses	 the  language	that
"income-tax....shall further  be increased  by an additional
sur-
146
charge", not  for  making  the	assessability  to  surcharge
dependent upon	Assessability to  income  tax  but  for	 the
simple reason  that if	an assessee`s  total income includes
income on  which no  tax is payable, tax has all the same to
be computed  for purposes of rate Section 110 of the Income-
tax Act,  1961 provides	 that where there is included in the
total income  of an  assessee any income on which no income-
tax is payable, the assessee shall be entitled to 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. The income-tax computed
at a  certain rate  is by  section 2(1)(a)(ii) to be further
increased by  an additional  surcharge for  purposes of	 the
Union. This  becomes clearer  still  from  the	language  of
Paragraph A,  under the heading ..Surcharges on Income Tax".
It says:  "The amount  of income-tax  computed at  the	rate
hereinbefore specified	shall be  increased by the aggregate
of the	surcharges,". If  the intention	 was  to  limit	 the
liability to pay additional surcharge to income which can be
brought to  income tax, appropriate language could have been
used to convey that simple sense.
     The weakness  of  the  appellant's	 contention  becomes
manifest when it is realised that were the contention right,
the  appellant	 would	not  be	 liable	 to  pay  additional
surcharge even	on that	 portion of  its non-business income
which is contained in the residual income. By the definition
in section  2(8) of  the Act  of 1963, residual income means
the total  income as reduced and therefore, the non business
income	which  is  chargeable  to  income-tax  must  form  a
component of  the residual income. Concededly, the appellant
is liable  to pay  additional surcharge	 on its non-business
income. This  is so   not  because additional  surcharge  is
payable by  law on  non-business income	 but because  it  is
payable	 on   residual	income	 and  residual	 income,  by
definition, includes  non business  income  as	reduced.  In
fact, it  consists of  the amount of total income as reduced
by the	amounts mentioned  in clauses (a) and (b) of section
2(8).
 Relying on	 United Commercial Bank Ltd. v. Commissioner
of Income-tax,	West Bengal(1),	 East India Housing and Land
Development Trust  Ltd. v.  Commissioner of  Income-tax West
Bengal(2),  and	  K.  V.   Al.	M.  Ramanathan	Chettiar  v.
Commissioner  of   Income-tax,	Madras(3),  the	 appellant's
counsel urged  that income-tax	is a single levy, that it is
one tax	 and not  so many taxes separately levied on several
heads of  income. This	partly is  the same  argument  in  a
different disguise that an assessee who is not liable to pay
income-tax cannot be made liable to pay additional surcharge
under  the   Finance  Act,   1963.  We	have  rejected	that
contention. Partly,  the argument  is designed	to establish
correlation with  section 146 of the income tax Act, 1961 by
which, when  any tax,  interest, penalty,  fine or any other
sum is	payable in consequence of any order passed under the
Act, the  Income-tax office has to serve upon the assessee a
notice of  demand in  the prescribed form specifying the sum
so payable. This provision presents no
147
difficulty for,	 if an	assessee is liable to pay additional
surcharge but  no income-tax  or super	tax, the  notice  of
demand will  mention the  particular amount  payable as	 tax
due. The  appellant being  liable to  pay tax  on  its	non-
business income	 and additional	 surcharge on  its  residual
income, the demand notice will call for payment of the total
amount due from the appellant by way of tax.
     The interpretation	 put by	 us on the Finance Act, 1963
does no	 violence to  section 4	 of the Income-tax Act, 1961
under which  income-tax	 at  the  rates	 prescribed  by	 the
Finance Act  is to  be	charged	 "in  accordance  with,	 and
subject to  the provisions  of."  the  Income-tax  Act.	 The
Income-tax Act	exempts the  assessee's business income from
income tax  and super-tax. The Finance Act brings to tax its
residual income.
 The decision  of the  Allahabad High Court in Allahabad
District Co-operative  Bank  Ltd.  v.  Union  of  India	 and
Ors.(1)	 is   directly	in   favour  of	 the  appellant	 and
naturally, learned  counsel for	 the appellant	relies on it
very strongly. But that case, in our opinion, is incorrectly
decided. The  learned Judges  were in  error in holding that
section 2  of the  Finance Act,	 1963	does not provide for
the levy  of a tax other than income-tax" and that therefore
additional surcharge  is not  payable to  the extent  of the
income which  is exempt	 under section	81 of the Income-tax
Act. One  of the  difficulties which the learned Judges felt
in accepting  the revenue's  contention	 was  that  if	"the
additional surcharge  mentioned in  the Finance	 Act of 1963
was not	 partake of  the nature of income-tax it will not be
possible to  demand and	 realise it  under the provisions of
the income-tax	Act, and  the notice  of demand and recovery
proceedings would  be vitiated	on that	 account". The	very
assumption  of	 this  observation   is	 falacious   because
additional surcharge  indubitably partakes of the nature and
essential characteristics  of income-tax.  It is  a  tax  on
residual income and by reason of the definition contained in
section 2(8)  of the  Act of  1963, "residual  income" would
include non-business  income which  under the Income-tax Act
is  charge   able  to	income-tax.  Thus,   the  additional
surcharge,  though   levied  by	  the  Finance	 Act,	1963
independently of  the Income-tax  Act,	is  but	 a  mode  of
levying tax  on a  portion of the assessee's income computed
in accordance with the definition in section 2(8) of the Act
of 1963.  Therefore, the  notice of demand under section 156
of the	Income-tax Act	can lawfully call for the payment of
amount due from an assessee by way of additional surcharge.
     For these	reasons, we confirm the judgment of the High
Court but  in the circumstances there will be no order as to
costs.
P.H.P.					   Appeal dismissed.
148

Income Tax Officer,Udaipur vs M/S Arihant Tiles & Marbles(P)Ltd on 2 December, 2009
Equivalent 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)
Author: S.H. Kapadia
Bench: H.L. Dattu, J.M. Panchal, S.H. Kapadia
                                                                               REPORTABLE

                       IN THE SUPREME COURT OF INDIA

                        CIVIL APPELLATE JURISDICTION

                       CIVIL APPEAL NO.8036 OF 2009
                 (Arising out of S.L.P.(C) No.9812/2008)

Income Tax Officer, Udaipur                                   ...Appellant(s)

                      Versus

M/s Arihant Tiles & Marbles (P) Ltd.                          ...Respondent(s)

                                       W I T H

            CIVIL APPEAL NOS.8037 TO 8044 OF 2009
(Arising out of S.L.P.(C) Nos.1685, 1691, 2577, 3711, 5283,
                16674, 20789 & 20619 of 2009)

                                 J U D G M E N T

S.H. KAPADIA, J.

        Leave granted.

        In this batch of Civil Appeals, a common question

of   law    which       arises    for    determination          is:    whether

conversion of marble blocks by sawing into slabs and

tiles      and     polishing       amounts        to     "manufacture         or

production       of    article    or    thing"     so    as    to     make   the

respondent(s)-assessee(s)              entitled    to    the     benefit      of

Section 80IA of the Income Tax Act, 1961, as it stood at

the material time.

        The lead matter is Civil Appeal arising out of

S.L.P.(C)        No.9812/2008      in    the      case    of    Income       Tax

Officer, Udaipur Vs. M/s. Arihant Tiles & Marbles (P)
Ltd.

         The assessee, during the relevant Assessment Year

2001-2002,          was         engaged       in      the         business    of

manufacture/production of polished slabs and tiles which

the assessee exported (partly).                    The prime condition for

allowing deduction under Section 80IA, as it stood at

the    material         time,    was   that    industrial          undertakings

should manufacture or produce any article or thing, not

being any article or thing specified in the list in

Eleventh Schedule of the Income Tax Act, 1961.

         The question before us is: whether on facts and

circumstances of the case(s) the activities undertaken

by     the   respondent(s)          herein     would        fall    within    the

meaning      of    the    words     "manufacture       or     production"      in

Section 80IA of the 1961 Act?

         To answer the above issue, it is necessary to

reproduce the details of stepwise activities undertaken

by the assessee(s) which read as follows:-

                  "i)     Marble blocks excavated/extracted
                          by the    mine owners being in raw
                          uneven shapes have to be properly
                          sorted out and marked;

                  ii)     Such blocks are then processed on
                          single   blade/wire   saw   machines
                          using advanced technology to square
                          them by separating waster material;

                  iii)    Squared up blocks are sawed for
                          making slabs by using the gang saw
                          machine   or    single/multi block
                          cutter machine;

                  iv)     The      sawn       slabs         are     further
                        reinforced by way of filling cracks
                        by epoxy resins and fibre netting;

             v)         The slabs are polished on polishing
                        machine; the slabs are further edge
                        cut into required dimensions/tiles
                        as   per   market   requirement   in
                        prefect angles by edge cutting
                        machine   and   multi  disc   cutter
                        machines;

             vi)        Polished slabs and tiles are buffed
                        by shiner."

In addition to the above activities, it may also be

noted     that    the     assessee(s)         has   been    consistently

regarded     as      a        manufacturer/producer         by      various

Government       Departments          and    Agencies.        The       above

processes    undertaken         by    the    respondent(s)       have    been

treated as manufacture under the Excise Act and allied

tax laws.

        At the outset, we may point out that in numerous

judgments of this Court, it has been consistently held

that the word "production" is wider in its scope as

compared to the word "manufacture".                 Further, Parliament

itself has taken note of the ground reality and has

amended the provisions of the Income Tax Act, 1961 by

inserting Section 2(29BA) vide Finance Act, 2009, with

effect from 1st April, 2009.

        We quote herein-below the relevant provisions of

Section    2(29BA)       as    also    the   relevant      provisions      of

Section 80IA(2)(iii) of the Income Tax Act, 1961.

             "2(29BA)     "manufacture"     with   its
                   grammatical  variations,  means   a
                      change in a non-living physical
                      object or article or thing,-

                      (a)     resulting in transformation of
                             the object or article or thing
                             into a new and distinct object
                             or article or thing having a
                             different name, character and
                             use; or

                      (b) bringing into existence of a
                          new and distinct object or
                          article   or   thing   with  a
                          different chemical composition
                          or integral structure;"

               "80IA(2) (iii) it manufactures or produces
               any article or thing, not being any article
               or thing specified in the list in the
               Eleventh Schedule, or operates one or more
               cold storage plant or plants, in any part
               of India."

        The Authorities below rejected the contention of

the assessee(s) that its activities of polishing slabs

and   making    of   tiles    from   marble     blocks    constituted

"manufacture" or "production" under Section 80IA of the

Income Tax Act.       There was difference of opinion in this

connection between the Members of the ITAT.               However, by

the impugned judgment, the High Court has accepted the

contention     of    the    assessee(s)      holding   that    in     the

present      case,     polished      slabs      and    tiles        stood

manufactured/produced         from   the      marble     blocks      and,

consequently, each of the assessee was entitled to the

benefit of deduction under Section 80IA.                 Hence, these

Civil Appeals have been filed by the Department.

        Incidentally, it may be noted that some of the
assessees before us are also job workers duly registered

under   the    provisions       of   the    Excise      Act/Rules     framed

thereunder.        It may also be clarified that in these

cases, we are concerned with assessees who are basically

factory owners and not mine owners.                 This distinction is

of some relevance when we analyse the various judgments

cited before us fairly by the learned counsel on behalf

of the Department.

        The    main   judgment       on    which    the    Department     has

placed reliance is the judgment of this Court in Lucky

Minmat Pvt. Ltd. Vs. Commissioner of Income Tax, Jaipur,

reported      in   (2001)   9    SCC      669.     In     that    case,   the

following question came up for consideration before the

Tribunal:

               "Whether on the facts and in the
        circumstances of the case, the Tribunal was
        justified in holding that business activity of
        the assessee was in the nature of manufacturing
        or production so as to be entitled for relief
        under Section 80HH of the Income Tax Act,
        1961."

The assessee in that case had the business of mining of

limestones and marble blocks which thereafter were cut

and sized before being sold in the market.                       It was held

by this Court that the assessee was essentially in the

business of mining of limestone.                 It was held that the

activity of excavation will not constitute manufacture

or   production.       It   was      further       held    that    even   the

activity of cutting and sizing of marble blocks after
excavation would not come within the ambit of expression

'manufacture' or 'production'.                          In the circumstances,

this Court held that the assessee was not entitled to

the    benefit       of    Section       80HH      of    the       Income      Tax    Act.

However, this Court distinguished the judgment of the

Rajasthan      High       Court     in    the       case       of    CIT       vs.    Best

Chemical and Lime Stone Industries Pvt. Ltd., reported

in 210 ITR 883 (Raj.).                 In that case, M/s Best Chemical

was engaged in the business of extracting limestone and

its sale thereafter after converting it into lime and

limedust or concrete which was held to be an activity of

manufacture or production.                    The activity of conversion

into lime and limedust, according to this Court, in the

case    of     Lucky       Minmat        Pvt.      Ltd.        (supra)         certainly

constituted a manufacturing process.                               It was clarified

in    the    said    case    that       mere     mining        of        limestone     and

marble and cutting the same before it was sold will not

constitute "manufacture" or "production" but conversion

into lime and limedust could constitute the activity of

manufacturing or production.                       This distinction has not

been    taken        into    account          by        the     Department            while

rejecting      the    claim       of    the     assessee(s)              for   deduction

under Section 80IA of the Income Tax Act, 1961.

 There    is     one        more     judgment            of     which       Shri

Bhattacharya,         learned          Additional             Solicitor          General,

appearing       on    behalf       of     the      Department,             has       placed

reliance.           That    is    the     judgment            of    this       Court    in
Rajasthan          State         Electricity         Board       Vs.      Associated

Industries & Anr., reported in AIR 2000 SC 2382.                                     In

that     case,           the       only      question         that      arose       for

consideration           was     whether      pumping       out    water     from    the

mines came within the meaning of the word manufacture,

production, processing or repair of goods so as to claim

exemption      from        duty      under    Notifications          issued      under

Section       3(3)      of     the    Rajasthan       Electricity         Duty     Act,

1962.         In       that    case,        the    first     respondent       was     a

registered             public        limited         company,          engaged       in

excavating stones from collieries and thereafter cutting

and    polishing          them     into     slabs.         The   Rajasthan       State

Government levied excise duty under the provisions of

the    Act.        A     Notification         dated    23rd      March,     1962    was

issued    by       the     State      under       Section     3(3)     of    the    Act

granting exemption from tax on the energy consumed by a

consumer in any industry in the manufacture, production,

processing or repair of goods and by or in respect of

any mine as defined in the Indian Mines Act, 1923.                                 This

notification was later on superseded on 2nd March, 1963

by which electricity duty came to be remitted in certain

cases.    One more notification was issued on 1st November,

1965 once again superseding earlier notifications.                                   By

clause    (c)        of      the     said    notification,          the     State    of

Rajasthan reduced the duty on the energy consumed in

industries, other than those mentioned in clause (a) of

the     notification               which     are      in      the      manufacture,
production, processing or repair of goods.
 The        basic             controversy       which         arose           for

determination in the said case was whether the activity

of pumping out water from the mines came within the

meaning       of     the        words      "manufacture",           "production",

"processing or repair of goods".                            While disposing of

the matter, this Court, vide paragraphs 1 and 10, stated

that    the    specific          case    of    the    company       was   that       the

electrical         energy       was    consumed       for    pumping      out    water

from    mines      to     make     mines      ready    for       mining   activity.

This     aspect      is     very        important.           It     needs       to    be

highlighted         that        the    case    of     the    company      was        that

pumping out water from mines to make the                              mines ready

for mining activity came within the ambit of the term

"manufacture".              This       argument       was    rejected       by       this

Court,     after examining various judgments of this Court

on the connotation of the word "manufacture".                                   In our

view,    the    judgment          of    this    Court       in   Rajasthan       State

Electricity Board has no application to the facts of the

present case.             Even if        one reads paragraph 17 of the

said judgment in the light of paragraphs 1 and 10, it is

very clear that the only activity which came up for

consideration before this Court in the case of Rajasthan

Electricity Board (supra) was the activity of pumping

out    water       from     a    mine     in    order       to    make    the        mine

functional.         In the present case, we are not considered

with such activity. Therefore, in our view the judgment
of this Court in Rajasthan Electricity Board (supra) has

no application to the facts of the present case.
 In the case of Aman Marble Industries Pvt. Ltd.

vs. Collector of Central Excise, reported in 157 ELT 393

(SC),       the    question        that       arose       for    consideration            was

whether       cutting        of    marble          blocks       into     marble         slabs

amounted          to   manufacture         for      the     purposes         of    Central

Excise Act.            At the outset, we may point out that in the

present case, we are not only concerned with the word

"manufacture",           but       we     are       also    concerned           with      the

connotation of the word "production" in Section 80IA of

the Income Tax Act, 1961, which, as stated herein-above,

has     a     wider          meaning          as        compared       to     the        word

"manufacture".                Further, when one refers to the word

"production",           it     means      manufacture           plus     something         in

addition thereto. The word "production" was not under

consideration           before      this       Court       in   the      case      of    Aman

Marble Industries Pvt. Ltd. (supra).                            Be that as it may,

in    that    case,       it      was    held       that    "cutting"         of    marble

blocks        into       slabs          per        se     did      not       amount        to

"manufacture". This       conclusion        was      based     on    the

observations made by this court in the case of Rajasthan

State       Electricity         Board      (supra). In     our    view,       the

judgment of this Court in Aman Marble Industries Pvt.

Ltd.(supra) also has no application to the facts of the

present case.             One of the most important reasons for

saying so is that in all such cases, particularly under
the Excise law, the Court has to go by the facts of each

case.    In each case one has to examine the nature of the

activity undertaken by an assessee.                     Mere extraction of

stones may not constitute manufacture.                    Similarly, after

extraction, if marble blocks are cut into slabs per se

will not amount to the activity of manufacture.
         In the present case, we have extracted in detail

the process undertaken by each of the respondents before

us.     In the present case, we are not concerned only with

cutting of marble blocks into slabs.                        In the present

case     we   are      also     concerned        with    the    activity     of

polishing        and        ultimate    conversion        of   blocks      into

polished slabs and tiles.               What we find from the process

indicated herein-above is that there are various stages

through which the blocks have to go through before they

become polished slabs and tiles.                   In the circumstances,

we are of the view that on the facts of the cases in

hand, there is certainly an activity which will come in

the    category        of    "manufacture"       or     "production"      under

Section 80IA of the Income Tax Act.                      As stated herein-

above,     the    judgment        of    this     Court    in    Aman     Marble

Industries Pvt. Ltd. was not required to construe the

word "production" in addition to the word "manufacture".

One has to examine the scheme of the Act also while

deciding      the      question        as   to    whether      the     activity

constitutes         manufacture        or    production.             Therefore,

looking to the nature of the activity stepwise, we are
of     the    view    that     the     subject      activity          certainly

constitutes      "manufacture         or    production"        in     terms    of

Section 80IA.         In this connection, our view is also

fortified by the following judgments of this Court which

have been fairly pointed out to us by learned counsel

appearing for the Department.

 In the case of Commissioner of Income Tax vs.

Sesa Goa Ltd., reported in 271 ITR 331 (SC), the meaning

of the word "production" came up for consideration.                           The

question which came before this Court was whether the

ITAT    was   justified      in    holding    that      the    assessee       was

entitled to deduction under Section 32A of the Income

Tax Act, 1961, in respect of machinery used in mining

activity ignoring the fact that the assessee was engaged

in extraction and processing of iron ore, not amounting

to manufacture or production of any article or thing.

The High Court in that case, while dismissing the appeal

preferred      by    the    Revenue,       held   that    extraction          and

processing of iron ore did not amount to "manufacture".

However, it came to the conclusion that extraction of

iron    ore    and    the      various      processes         would    involve

"production"          within         the      meaning          of       Section

32A(2)(b)(iii)        of     the     Income       Tax    Act,       1961      and

consequently, the assessee was entitled to the benefit

of investment allowance under Section 32A of the Income

Tax Act.      In that matter, it was argued on behalf of the

Revenue that extraction and processing of iron ore did
not produce any new product whereas it was argued on

behalf of the assessee that it did produce a distinct

new product. The view expressed by the High Court that

the activity in question constituted "production" has

been affirmed by this Court in Sesa Goa's case saying

that the High Court's opinion was unimpeachable.                          It was

held by this Court that the word "production" is wider

in ambit and it has a wider connotation than the word

"manufacture".      It was held that while every manufacture

can   constitute      production,           every    production        did    not

amount to manufacture.

 In our view, applying the tests laid down by this

Court in Sesa Goa's case (supra) and applying it to the

activities      undertaken        by        the     respondents           herein,

reproduced    herein-above),           it    is     clear       that   the    said

activities would come within the meaning of the word

"production".

 One more aspect needs to be highlighted.                         By the

said judgment, this Court affirmed the decision of the

Karnataka    High   Court    in    the       case    of        Commissioner    of

Income Tax vs. Mysore Minerals Ltd, (2001) 250 ITR 725

(Kar).

 In the case of Commissioner of Income Tax Vs.

N.C. Budharaja & Co., reported in 204 ITR 412 (SC), the

question which arose for determination before this Court

was   whether    construction          of     a     dam     to    store      water

(reservoir)     can     be   characterised                as     amounting     to
manufacturing or producing an article.                     It was held that

the word "manufacture" and the word "production" have

received      extensive       judicial      attention      both   under    the

Income Tax as well as under the Central Excise and the

Sales    Tax    laws.         The    test    for    determining     whether

"manufacture" can be said to have taken place is whether

the commodity, which is subjected to a process can no

longer   be    regarded       as    the    original    commodity     but    is

recognised in trade as a new and distinct commodity.

The word "production", when used in juxtaposition with

the word "manufacture", takes in bringing into existence

new goods by a process which may or may not amount to

manufacture.       The word "production" takes in all the

byproducts, intermediate products and residual products

which emerge in the course of manufacture of goods.
 Applying the above tests laid down by this Court

in Budharaja's case (supra) to the facts of the present

cases, we are of the view that blocks converted into

polished slabs and tiles after undergoing the process

indicated above certainly results in emergence of a new

and distinct commodity.               The original block does not

remain the marble block, it becomes a slab or tile.                        In

the circumstances,        not       only    there    is    manufacture     but

also an activity which is something beyond manufacture

and   which    brings     a    new    product       into    existence     and,

therefore, on the facts of these cases, we are of the

view that the High Court was right in coming to the
conclusion     that      the        activity         undertaken           by    the

respondents-assessees          did        constitute          manufacture        or

production in terms of              Section 80IA of the Income Tax

Act, 1961.

        Before      concluding,          we    would    like       to    make   one

observation.        If the contention of the Department is to

be accepted, namely that the activity undertaken by the

respondents herein is not a manufacture, then, it would

have serious        revenue    consequences.                As   stated     above,

each of the respondents is paying excise duty, some of

the   respondents       are    job        workers       and      the     activity

undertaken     by    them     has     been       recognised         by     various

Government Authorities as manufacture.                       To say that the

activity will not amount to manufacture or production

under Section 80IA will have disastrous consequences,

particularly in view of the fact that the assessees in

all the cases would plead that they were not liable to

pay excise duty, sales tax etc. because the activity did

not constitute manufacture.                   Keeping in mind the above

factors, we are of the view that in the present cases,

the   activity      undertaken       by       each     of    the    respondents

constitutes    manufacture          or    production         and,       therefore,

they would be entitled to the benefit of Section 80IA of

the Income Tax Act, 1961.

        For   the       afore-stated            reasons,         Civil     Appeals

filed by the Department stand dismissed with no order as

to costs.
                     ..................J.
                     (S.H. KAPADIA)

                     ..................J.
                     (J.M. PANCHAL)

                     (H.L. DATTU)
New Delhi,
December 02, 2009.

Bharat Commerce 7 Industries Ltd vs The Commissioner Of Income Tax, Central ... on 5 March, 1998
Equivalent 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
Bench: Sujata V.Manohar, D.P. Wadhwa
BHARAT COMMERCE 7 INDUSTRIES LTD.

	Vs.

THE COMMISSIONER OF INCOME TAX, CENTRAL II

DATE OF JUDGMENT:	05/03/1998

BENCH:
SUJATA V.MANOHAR, D.P. WADHWA

ACT:

HEADNOTE:

JUDGMENT:
	       [With C.A. Nos. 3355-56/1993]
		      J U D G M E N T
Mrs. Sujata v. Manohar, J.
C.A. No. 5509 of 1985
     The following  question was  referred to the High Court
of Delhi under Section 256(1) of the Income tax Act, 1961 at
the instance of the assessee :-
     circumstances of the case the claim
     for deduction  of	interest  levied
     under Section  139 to the extent of
     Rs. 11,470/-   and	 interest levied
     under  Section 215 to the extent of
     Rs. 1,04,339/- was rightly rejected
     as not  allowable under  Section 37
     of the Income-Tax Act, 1961 for the
     assessment year 1972-73?"
The High  Court has answered the question in the affirmative
and in	favour of  the revenue.	 The  question	pertains  to
assessment year	 1972-73. The  assessee is a limited company
manufacturing  yarn.   It  also	 does  some  other  business
activities. The Income Tax Officer at the time of completing
the assessment	for assessment year 1972-73 levied  interest
under Section 139 to the extent of Rs. 11,470/- and interest
under Section  215 of the Income Tax Act, 1961 to the extent
of Rs.	1,04, 399/-. The assessee claimed deduction of these
amounts of  interest under Section 37 of the Income Tax Act,
1961 in	 computing its	business income. This claim has been
rejected.
     The assessee contends that the taxes which were payable
were delayed  and to  that extent  the assessee's  financial
resources  increased.	these  increased   resources  became
available for business purposes. Hence the interest which is
paid to	 the Government under Section 139 and 215 represent,
in effect, interest on capital that would have been borrowed
by the	assessee otherwise.  Hence these  amount  should  be
allowed as  deduction under  Section 37 as expenses incurred
wholly and exclusively for the purpose of its business.
     The assessee  was required	 to pay	 advance  tax  under
Section 212  on the basis of his own estimate. Under Section
215, it	 the tax  so paid  is less  then 75% of the assessed
tax, interest  as prescribed  therein, is  payable .  it  is
difficult to see how the interest so paid for not paying the
requisite amount  of advance  tax  as  prescribed    can  be
considered as  expenditure laid	 out wholly  and exclusively
for the	 purpose of  business. In the case of Smt. Padmavati
Jaikrishna V. Additional Commissioner of Income-Tax, Gujarat
([1987] 166  ITR 176)  the assessee  borrowed money  for the
purpose of  discharge of  her liabilities for the payment of
income-tax,  wealth-tax	  and  annuity	 deposit.  She	paid
interest on  this borrowed  amount. The income earned by the
assessee was  income from other sources. hence the allowable
deduction would have been under Section 57(3). In respect of
the payment  of annuity	 deposit this  Court said  that	 the
dominant purpose  of making  the annuity  deposit was not to
earn income  but to  meet the  statutory liability of making
the deposit.  The liability  for payment  of income-tax	 and
wealth-tax  was	  a  statutory	 liability.  Therefore,	 the
expenditure in	the form  of interest which was paid was not
expenditure wholly or exclusively for the purpose of earning
income. Hence  it could	 not allowed  as a  deduction  under
Section 57(3)  of the  Income Tax  Act, 1961. In the case of
East India  Pharmaceutical Works  Ltd.	V.  Commissioner  of
Income-Tax  ([1997]  224  ITR  627)  this  court  held	that
interest on  an overdraft  for payment of income-tax was not
expenditure wholly  and exclusively incurred for the purpose
of business  and was  not deductible under Section 37 of the
Income Tax Act. This Court affirmed the decision in the case
of Smt. Padmavati Jaikrishna (supra).
     A similar	view has  been taken  by a  number  of	High
Courts in  earlier decision.  In the  case  of	Aruna  Mills
Limited v.  Commissioner of  Income-Tax Ahmedabad ([1957] 31
ITR 153)  the Bombay High Court was concerned with a similar
question. It held that the interest which an assessee had to
pay under  sub-section 7 of Section 18A of the India Income-
Tax Act,  1922 for having under-estimated the tax payable by
him by	way of	advance tax,  cannot be	 claimed as business
expenditure under  Section 10(2)  (xv) of  the said Act. The
Court observed that it was difficult to understand how, when
a business  man commits default in discharging his statutory
obligation,  the   consequences	 of   that   default   could
constitute  an	expenditure  exclusively  incurred  for	 the
purpose of his business. The same view was taken in the case
of orient  General Industries  Limited	v.  Commissioner  of
Income-Tax ([1994] 209 ITR 490), where the Calcutta High has
held that  interest paid  for delay in filing the income-tax
return has  no connection with the business of the assessee.
The assessee  does not	pay the	 interest for the purpose of
business or  for carrying  on of business activity. Hence it
is not	deductible in  computing the income of the assessee.
The Calcutta  High Court reaffirmed in this case its earlier
judgment in  Balmer Lawrie  and Co.  Ltd. v. Commissioner of
Income-Tax, Calcutta  ([1960] 39  ITR 751). The Punjab	 and
Haryana High  Court has	 also taken  the same  view  in	 the
Commissioner of Income-Tax  v. Oriental Carpet Manufacturers
(India) P. Ltd. ([1973] 90 ITR 373) by holding that interest
on payment  of delayed	tax takes  colour from the principle
amount payable	and hence is not deductible. The madras High
Court has also held in Commissioner of Income-Tax, Madras V.
Sundaram &  Company Private  Ltd. ([1964]  52 ITR  763) that
interest money borrowed to pay advance tax is not deductible
as business expenditure. This view has been affirmed by this
Court in Smt. Padmavati Jaikrishna's case (supra) as well as
in East India Pharmacutical's case (supra).
 The assessee,  however,  has  placed  reliance  upon  a
decision of  this court	 in commissioner of Income-Tax, West
Bengal I  V. Birla  Cotton Spinning  and Weaving  Mills Ltd.
([1971] 82  ITR 166).  The assessee  in that  case had spent
money towards  expenses in  engaging lawyers  and conducting
proceedings before the Investigation Commission for its case
relating to  certain assessment	 years and had also incurred
such expenses in courts where the vires of the statute under
which the  Commission was  constituted were  challenged. The
Court allowed  the expenses  so incurred  in connection with
the  proceedings  before  the  Investigation  commission  as
deductible expenses  while  computing  the  profits  of	 the
assessee's business.  On the  facts of	that case  the Court
came to	 the conclusion	 that the  expenses so incurred were
for protection	of the	assessee's business from any process
or proceedings	which would  have affected  its	 income	 and
profits. Even  otherwise the  expenditure was  incidental to
the business and was necessitated or justified by commercial
expediency.
 The expenses  in that  case were  incurred for  a	very
different purpose  from the  purpose for  which the assessee
has paid interest in the present case. When interest is paid
for committing a default in respect of a statutory liability
to pay	advance tax,  the amount  paid and  the	 expenditure
incurred in  that connection  is in  no way  connected	with
preserving or  promoting the  business of the assessee. this
is not	expenditure   which is	incurred and which has to be
taken into  account before  the profits	 of the business are
calculated. The	 liability in the case of payment of income-
tax and	 interest  for	delayed	 payment  of  income-tax  of
advance tax  arises on	the computation	 of the	 profits and
gains of  business. The	 tax which  is	payable	 is  on	 the
assessee's income  after  the  income  is  determined.	This
cannot, therefore,  be considered  as an expenditure for the
purpose of earning any income or profits. The ratio or Biral
Cotton Mills  case (supra)  is not applicable in the present
case.
 Learned Counsel  for the  assessee also  relied upon  a
decision of  this Court	 in Mahalakshmi	 Sugar Mill  Co.  V.
Commissioner of	 Income-TAx, Delhi ([1980] 123 ITR 429). The
assessee in that case had claimed deduction of interest paid
on arrears of sugarcane cess. this was held by this Court as
a part	of the assessee's liability to pay cess and was held
to be  deductible. The	ratio of this judgment also can have
no application	here. The  payment of sugarcane cess is very
much a part of the assessee's business expense. Any interest
on arrears  of cess  would, therefore, take colour from cess
which is payable. it is an indirect tax which has to be paid
in the	course of carrying on business. It is required to be
deducted in  order to  arrive at  the  net  profits  of	 the
assessee for  the relevant  assessment year. We are here not
concerned with	the payment  of any  indirect tax  which the
assessee may  have to  pay in the course of his business. We
are concerned  with the	 tax with  was required	 to be	paid
after the  ascertainment of  the net  income of the assessee
for the relevant assessment year. Interest which is paid for
delayed payment	 of advance  tax on  such income  cannot  be
considered as  expenditure wholly  and exclusively  for	 the
purpose of business. Under the Income Tax act the payment of
such interest  is inextricably connected with the assessee's
tax liability.	If income-tax  itself is  not a	 permissible
deduction under Section 37, any interest payable for default
committed by  the  assessee  in	 discharging  his  statutory
obligation under  the Income  Tax Act,	which is  calculated
with reference	to the	tax on income cannot be allowed as a
deduction.
     In the  present case  section 80V of the income Tax Act
is not	attracted because  Section 80V	was inserted  in the
Income Tax Act only with effect from 1st of April, 1976.
     In the premises the High Court has rightly answered the
question in  favour of the revenue and against the assessee.
The appeal is, therefore, dismissed with costs.
C.A. Nos. 3355-56/1993
     These appeals  relate to  assessment years	 1977-78 and
1978-79. The  following question  was referred	to the	High
Court under  Section 256(1)  of the  Income Tax Act, 1961 at
the instance of the revenue:-
     "Whether on facts and circumstances
     of the case and in law the Tribunal
     was  right	  in  holding  that  the
     assessee was  not entitled	 to  the
     deduction	of   Rs.   2,94,082   in
     assessment	 year  1977-78	and  Rs.
     43,142/-  assessment  year	 1978-79
     being  the	  interest  payable   on
     account of additional liability for
     income-tax and  sur-tax on	 account
     of the  disclosure of  income  made
     under the	Voluntary Disclosure  of
     Income and	 Wealth Act, 1976 u/s 37
     or 36(1)  (iii) of	 the  Income-tax
     Act, 1961?."
The assessee  disclosed certain	 income under  the voluntary
Disclosure of  Income and  Wealth Act, 1976. As a result the
assessee became	 liable to  pay income-tax  and sur-tax. The
assessee applied  for payment  of income-tax  and sur-tax by
instalments under the provisions of the Voluntary Disclosure
of Income  and Wealth  Act, 1976.  The assessee	 was granted
these instalments.  The assessee  was also  required to	 pay
interest under Section 6 of the said Act for delayed payment
of income-tax  and sur-tax. The assessee paid by way of such
interest, a sum of Rs. 2,82,106/- in assessment year 1977-78
and a  sum of  Rs. 36,370/-  in assessment year 1978-79. The
claim of  the assessee	for deduction  of these	 amounts was
rejected by the revenue authorities.
     At the  instance of the assessee the above question has
been raised,  The High	Court has also answered the question
against the  assessee. It  is the contention of the assessee
that instead  of taking	 a loan	 or withdrawing capital from
his business  for payment  of  tax,  the  assessee  obtained
instalments for	 payment of tax and was, therefore, required
to pay	interest. The payment of interest is, therefore, for
the purposes  of assessee's  business and  hence  should  be
allowed as  a deduction.  The argument	is  similar  to	 the
argument advanced  in C.A.  No. 5509  of  1985	relating  to
Bharat	Commerce   &  Industries  Ltd.	The  main  point  of
distinction  which  the	 assessee  has	drawn  is  that	 the
interest in  his case  is under	 the Voluntary Disclosure of
Income and  Wealth Act,	 1976 and hence it should be treated
as expenditure	incurred for  the purposes of the assessee's
business.
 Voluntary Disclosure  of Income  and Wealth  Act,	1976
[102 ITR  page 49  (statutes)] is  an  Act  to	provide	 for
Voluntary Disclosure  of Income and Wealth. Section 3 of the
Act provides  that where  any person makes, on or before the
prescribed date, as set out in the Section, a declaration in
respect of  any income	chargeable to  tax under  the Indian
Income Tax  Act for  any assessment  year for  which he	 has
failed to  furnish a  return under Section 139 of the Income
Tax; or	 has failed  to disclose  in a return of income, the
income so  disclosed; or the assessee makes a declaration of
income	which  has  escaped  assessment	 by  reason  of	 the
omission or  failure on	 the part  of such  person to make a
return or  to disclose	fully and  truly all  material facts
necessary for  his assessment  or  otherwise;  then  on	 the
income so  disclosed  and  declared,  income  tax  shall  be
charged at  the rates  specified in the schedule to the said
Act.
 Section  4	  provides  for	 the  manner  in  which	 the
declaration is	to be  made and	 particulars which are to be
furnished. Under  Section 5 income-tax payable under the Act
in respect  of the  Voluntarily disclosed income is required
to be  paid by	the declarant  before making the declaration
and the	 declaration is	 required to be accompanied by proof
of payment  of such  tax. Sub-section (2), however, provides
that if	 the Commissioner  is satisfied	  on  an application
made in	 this behalf by the declarant, that the declarant is
unable, for  good and  sufficient reasons,  to pay  the full
amount of income-tax in respect of the voluntarily disclosed
income in accordance with sub-section (1), he may extend the
time for payment of the amount which remains unpaid or allow
payment of  the amount which remains unpaid of allow payment
by instalments	if the declarant furnishes adequate security
for the	 payment thereof.  However, an	amount which  is not
less than  one-half of	the amount  of income-tax payable in
respect of  the Voluntarily  disclosed income has to be paid
on or  before 31st of day of march. 1976, and the remainder,
on or before the 31st day of March, 1977.
     Under Section  6, if  the amount  of income-tax  is not
paid on	 or before  31st of  March, 1976  the  declarant  is
liable to  pay simple  interest at  12 per cent per annum on
the amount  remaining unpaid  from 1st of April, 1976 to the
date of payment and "the rules made thereunder shall, so far
as may	be, apply  as if  the interest	payable	 under	this
section were  interest	payable	 under	sub-section  (2)  of
Section 220  of that  Act (i.e.	 Income Tax Act, 1961)". The
interest, therefore, which is payable for delayed payment of
income-tax on  the voluntarily	disclosed income  is of	 the
same nature  as interest  on income-tax under the Income Tax
Act. Payment  of  such	interest  cannot  be  considered  as
expenditure incurred  wholly or exclusively for the purposes
of business  of the  assessee. For the reasons which we have
set out	 above in C.A. No. 5509 of 1985, in the present case
also the  tax which  is required to paid under the Voluntary
Disclosure of  Income and  Wealth Act,	1976 is a tax on the
declared income	 of the	 assessee which	 was  not  disclosed
earlier and  is disclosed  under the said Act. Income-tax is
payable by  virtue of the said Act. It is nevertheless a tax
on income  and shares  all characteristics of such tax. When
the assessee is liable to pay interest on delayed payment of
such tax,  it is  on account  of his  not paying  income-tax
within the  prescribed period.	We do not see any reason why
any distinction	 can  be  made	between	 such  interest	 and
interest paid  under the Income Tax Act, 1961. Both payments
do not	have any  nexus with  the business  of the assessee.
They are statutory liabilities in respect of the obligations
of the assessee which arise under the Income Tax Act and the
Voluntary Disclosure  of Income	 and Wealth  Act, 1976 after
the income  of the  assessee is	 determined and/or  declared
under the  said Acts.  They cannot  be deducted	 before	 the
determination of such income.
     The assessee,  however,  has  drawn  our  attention  to
Section 80V  of the  Income Tax Act, 1961 which was in force
during the  assessment years  with which  we are  concerned.
Under	Section 80V,  "In computing  the total	income of an
assessee there	shall be  allowed by  way of  deduction	 any
interest paid  by him  in the  previous year  on  any  money
borrowed for  the payment of any tax due from him under this
Act". Learned  counsel for  the	 respondent  submitted	that
Section 80V  will apply only to the payment of any tax under
the Income  Tax Act of 1961. It will not apply to payment of
income-tax under  the Voluntary	 Disclosure  of	 Income	 and
Wealth Act,  1976. We  need not	 dwell	on  this  submission
because, even  it we  assume  that Section 80V does apply it
can apply  only if  the assessee  has borrowed any money for
payment of  any tax  and has  paid interest  in the relevant
previous year  on such	borrowed money. In the present case,
the assessee  has not  borrowed any money for the purpose of
paying tax;  nor has he paid any interest to any third party
for such  borrowing. The contention of the assessee seems to
be, that  he had  avoided borrowing money for payment of tax
by obtaining  instalments from	the  department	 and  paying
interest. Therefore,  the  payment  of	interest  should  be
considered as  equivalent to his paying interest on borrowed
money for payment of tax. The submission has to be stated to
be rejected.  Obtaining instalments  from the department and
paying	interest  cannot  be  considered  as  equivalent  to
borrowing money	 from a	 third party  for payment of tax and
paying interest	 on  such  borrowed  money.  The  assessee's
argument, if  taken to	its logical conclusion, would amount
to saying  that the  assessee had, in effect, borrowed money
from the  income tax  department to pay tax for which he was
paying interest	 to  the  income  tax  department.  Such  is
clearly not the case, as it cannot be.
 The assessee  has placed  reliance on a decision of the
Andhra Pradesh	High Court  in the  case of  Commissioner of
Income-Tax V.  Bakelite Hylam  Ltd. ([1988] 171 ITR 583). In
the case  before the  Andhra Pradesh High Court the assessee
had taken  certain amount  from his overdraft account to pay
income tax.  The interest payable on the amount so withdrawn
was held  deductible under section 80V. This decision has no
application to	the facts  of the  present  case  where	 the
assessee has  not borrowed  any moneys for payment of income
tax. Section 80V is not attracted in the present case.
     The assessee has strongly relied upon a decision of the
Gujarat High  Court in	the case  of c.J.  Patel  &  co.  v.
Commissioner of	 Income-Tax   ([1986] 179 ITR 486). The case
before the  Gujarat High Court was a case where the assessee
had made a disclosure under the Voluntary Disclosure scheme.
Instead of  making payment  of	tax  a	bank  guarantee	 was
furnished to  the department  and commission was paid to the
bank for  obtaining the	 bank guarantee.  A  question  arose
whether this  commission which	was paid  to the bank by the
assessee was  allowable as  a deduction.  The  Gujarat	High
Court purported	 to distinguish	 the earlier judgments where
interest paid  on delayed  payment of  tax was	held as	 not
deductible. The	 Gujarat High  Court said  that	 payment  of
interest for  delayed payment  of tax or payment of interest
on moneys borrowed from third parties fro payment of tax may
be inadmissible.  But such  payments are  not similar to the
payment which  an assessee  makes to  the bank as commission
for obtaining  a bank  guarantee for securing the payment of
tax. The  Gujarat High has not held that payment of interest
on delayed  payment of	tax is n expense incurred wholly for
the purposes  of the  assessee's business.  It has, however,
distinguished commission  on bank guarantee from interest on
money borrowed	for payment of tax. The above case does not,
therefore, help	 the assessee  in the  present case. We need
not, therefore,	 help the  assessee in	the present case. We
need not, therefore, examine the correctness or otherwise of
the judgment of the Gujarat High Court.
 It cannot	be said,  in  the  present  case,  that	 the
payment of interest is in any way an expense incurred wholly
or exclusively for the purpose of assessee's business. Nor s
it  a  payment	made  for  the	purpose	 of  preserving	 and
protecting the	assessee's business  as in the case of Birla
Cotton Mills (supra).
     Apart from	 section 37,  the assessee  has also present
into service  Section 36(1) (iii) which permits deduction in
respect of the amount of interest paid in respect of capital
borrowed for  the purposes  of the  assessee's	business  or
profession. For	 the reasons  set out earlier, the claim for
deduction under section 36(1)(iii) is also misconceived just
as the assessee's claim under section 37 is misconceived.
     In the premises, the question raised has to be answered
in favour  of the  revenue and	against	 the  assessee.	 The
appeals are, therefore, dismissed with costs.

Income Tax Officer, Income ... vs Nawab Mir Barkat Ali Khan Bahadur on 16 October, 1974
Equivalent 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
Bench: A.C. Gupta, Hans Raj Khanna
INCOME	TAX  OFFICER, INCOME TAX-CUM-WEALTH TAX	 CIRCLE	 II,

	Vs.

NAWAB MIR BARKAT ALI KHAN BAHADUR

DATE OF JUDGMENT16/10/1974

BENCH:
BENCH:
KHANNA, HANS RAJ

CITATION:
 1975 AIR  703		  1975 SCR  (2) 464
 1975 SCC  (4) 370
 F	    1991 SC 331	 (6,13)

ACT:
Income	tax Act, 1961, s. 147--Scope of High  Court's  power
interference under Art. 226.

HEADNOTE:
In  1950, the respondent had executed three trust deeds	 for
the benefit of three ladies who were described as his wives,
and  himself, as the father of their minor children.   After
the returns in respect of the assessment year 1955-56, 1956-
57,  1957-58 and 1958-59 were filed by the  respondent,	 the
Income-tax Officer, who had the three trust deeds before him
called	upon  the respondent for information  regarding	 his
relationship   to  those  three	 ladies	 as  well   as	 his
relationship  to a fourth lady.	 A statement was  filed,  on
behalf	of  the respondent, before the	Income-tax  Officer,
wherein	 it  was stated that only the fourth  lady  was	 his
legally	 wedded	 wife,	that the  other	 three	were  merely
referred  to as the wives, and that their children were	 not
the  legitimate children of the respondent.  The  Income-tax
Officer, in assessing the total income of the respondent did
not  include, under s. 16(3) of the 1922-Act, the income  of
those  three ladies and their minor children arising out  of
the trust properties.  In fact, he assessed them  separately
with respect to their income from the trust properties.	  In
1964  the Income-tax Officer issued notices under s. 148  of
the 1961-Act seeking to reopen the assessments under s.	 147
on the ground that there were two other trust deeds of 1957,
which  were not produced before the I. T. 0. in	 which	also
two  of	 the ladies were acknowledged as the  wives  of	 the
respondent and their children as his children and that their
marriage should be presumed because of the  acknowledgement.
The  respondent	 there-upon challenged the validity  of	 the
proceedings and the High Court allowed his petition.
Dismissing the appeal to this Court,
HELD  : (1) Section 147(a) provides that if  the  Income-tax
Officer has reason to believe that 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	 for
any  year, income chargeable to tax has	 escaped  assessment
for that year, he may assess or reassess such income for the
assessment  year  concerned.  The fact that the	 ladies	 and
their  children had been described in the 1957-documents  as
wives  and  children  of  the  respondent  would  have	been
material  if  the description were any thing  new  that	 the
Income-tax Officer happened to discover for the first  time.
But the 1950,deeds also contained the same description.	 The
non-production	of  the 1957-documents at the  time  of	 the
original  assessment  cannot therefore be regarded  as	non-
disclosure of any material fact necessary for the assessment
of the respondent for the relevant assessment years.  Having
second	thoughts on the same material does not	warrant	 the
initiation of a proceeding under s. 147. [467G-H; 468B; D-E]
(2)  The   law	has  not  changed  or  since  the   original
assessments  were  made and it was open	 to  the  Income-tax
Officer	 to have made the presumption that the	ladies	were
the  wives  at	the time when he made  the  assessment.	  He
cannot avail of s. 147 to correct his mistake. [468F-G]
(3)  The expression 'reason to believe' occurring in s.	 147
of the 1961-Act or the corresponding s. 34 of the  1922-Act,
does  not mean a purely subjective satisfaction on the	part
of the Income-tax Officer.  The reasons for the belief	must
have  a	 rational  connection or  relevant  bearing  to	 the
formation  of the belief.  Therefore, the High Court,  under
Art.  226, has power to set aside a notice under s.  147  of
the  1961  Act or s. 34 of the 1922-Act,  if  the  condition
precedent  to the exercise of the .jurisdiction under  those
sections did not exist. [469C-D]
465

JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 1179-1782
of 1970.
From  the Judgment & Order dated the 7th March, 1969 of	 the
Andhra Pradesh High Court in Writ Petition Nos. 1042-1045 of
1964.
S.   C.	 Manchanda, B. B. Ahuja and R. N. Sachthey, for	 the
Appellant (In all the Appeals).
S.   V.	 Gupte, Anwarulla Pasha, J. B. Dadachanji, A.  Subba
Rao and Anjali K.  Varma,  for the Respondents (In  all	 the
Appeals).
M.   N. Phadke, A. V. Rangam, Gopal Nair and A.	 Subhashini,
for the Interveners (In all the Appeals).
GUPTA,	J.  These  are four appeals by	certificate  from  a
common	Judgment  of  the High Court of	 Andhra	 Pradesh  at
Hyderabad  by which the High Court directed  the  appellant,
Income	Tax  Officer, Income Tax-cum-Wealth Tax	 Circle	 11,
Hyderabad to refrain from proceeding against the  respondent
under  sec.  147  (a)  of the Income  Tax  Act,	 1961.	 The
appellant  had	served on the respondent,  Nawab  Sahib	 Mir
Osman  Alikhan	Bahadur, H. E. H., the Nizam  of  Hyderabad,
notices	 under sec. 148 of the income Tax Act, 1961  stating
that he had reasons to believe that income of the respondent
chargeable to tax for the assessment years 1955-56, 1956-57,
1957-58	 and  1958-59  had  escaped  assessment	 within	 the
meaning of sec. 147 of the Act and proposing to reassess the
income	for  the  said	assessment  years.   The  respondent
challenged  the validity of the proceedings under  sec.	 147
sought to be initiated by filing four writ petitions in	 the
High  Court of Andhra Pradesh at Hyderabad.  The High  Court
by the impugned Judgment allowed all the four petitions	 and
prevented  the	Income Tax Officer from	 proceeding  further
under  sec.  147  of the Income Tax  Act,  1961.   In  these
appeals the appellant questions the correctness of the	High
Court's decision.
The  material facts are briefly these.	Assessments for	 the
aforesaid  four years were completed respectively  on  March
18,  1958, March 19, 1958, July 20, 1958 and March 28,	1961
under  the  income Tax Act of 1922.  After  the	 returns  in
respect of the said years were filed, the Income Tax Officer
called	upon the respondent to state his  relationship	with
four  ladies by putting three queries to him.	The  queries
were as follows:
	      "(a)  The	 rites and ceremonies  attendant  on
	      legal  marriages, according to Muslim law	 and
	      how they were observed in the case of each  of
	      the  four	 ladies	 viz.,	Dulhan	Pasha  Begum
	      Saheba, Mazharunnisa Begumsaheba, Laila  Begum
	      Saheba and jani Begum Saheba.
	      (b)   What  legal	 status is accorded  to	 the
	      children	of Mazharunnisa Begum  Saheb,  Laila
	      Begum Saheba and Jani Begum Saheba, vis-a-vis,
	      the  children of the late Dulhan Pasha  Be-gum
	      Saheba?
	      466
	      (c)   Any other factors from the point of view
	      of the religion which distinguished the status
	      of  late	Dulhan Pasha Begum Saheba  from	 the
	      other three ladies."
It appears that on May 1, 1950, August 6, 1950 and  December
29,  1950  the respondent had executed	three  trust  deeds,
described respectively as Family Trust, Miscellaneous  Trust
and   Family  Pocket  Money  Trust,  for  the	benefit	  of
Mazharunnissa  Begum, Laila Begum, Jani Begum and the  minor
children  of the last two. in the aforesaid trust deeds	 the
three  ladies were described as wives of the respondent	 who
was also referred to as the father of their minor  children.
In  one	 of these documents, viz., the family  Pocket  Money
Trust Deed, the description of Laila Begum and Jani Begum as
wives  was preceded by the expression "ladies of  position".
Under  sec.  16	 (3)  of the income  Tax  Act  of  1922,  in
computing  the	total  income  of  any	individual  for	 the
purposes  of  assessment, the income of the  wife  or  minor
child of the assessee arising from assets transferred by the
husband	 to the wife or the minor child otherwise  than	 for
adequate  consideration	 was to be included.   There  is  no
dispute	 that these trust deeds were before the	 Income	 Tax
Officer	 before	 he completed the assessments for  the	said
four years.
On  September  9, 1957 Shri C.	B.  Taraporewala,  Financial
Adviser	  and  General	Power  of  Attorney  Agent  of	 the
respondent, filed a statement before the Income Tax  Officer
in reply to these queries.  In this reply it was stated that
the  late  Dulhan Pasha Begum Saheba was  the  only  legally
wedded	wife  of the respondent, that with the	other  three
ladies	the  respondent had not gone through  the  essential
formalities of a valid marriage under Mohanunedan Law,	that
these three ladies who occupied high social position and who
were received in his palace were "ladies of position" and in
view  of  the special favours bestowed upon them  they	were
referred to as wives in the said three trust deeds though in
the strict legal sense the description was incorrect and the
children  of these ladies were not tile legitimate  children
of  the	 respondent and had no legal status as	such.	This
explanation  apparently	 satisfied the	income	Tax  officer
because in assessing the total income of the respondent	 for
the  said four years he did not include the income of  these
three  ladies  and their minor children arising out  of	 the
trust	properties.    It   is	also   admitted	  that	 the
beneficiaries of the trusts were separately assessed on	 the
income	derived from the trusts along with their  individual
income.
On  March 13, 1964 the notices under sec. 148 of the  Income
Tax Act, 1961 were issued seeking to reopen the	 assessments
under  sec. 147 of the Act.  After some correspondence	with
the  income Tax Officer, the authorized	 representatives  of
the  respondent, M/s.  S. G. Dastgir and Company,  Chartered
Accountants,  filed supplemental returns for  the  aforesaid
four years "without prejudice" to the respondent's right  to
question  the  valid it of the	notices.   The	supplemental
returns	 merely affirmed the original returns filed  by	 the
By  his	 letter	 dated	April 15,  1964	 addressed  to	M/s.
Dastgir	 and  Company,	the Income Tax	officer	 stated	 the
reasons for reopening the
467
assessments under sec. 147(a).	Referring to two  subsequent
trusts	named  Fern  Hill  and	Race  View  created  by	 the
respondent   on	  March	 21,1957  and	December   5,	1957
respectively, it was stated that the material facts relating
to these two documents were not brought to the notice of the
Department  in	the course of the original  assessment	pro-
ceedings.  Fern Hill Trust was created for the benfit of the
children of Laila Begum and Race View Trust for the  benefit
of  Jani Begum and her son Imdad Jah Bahadur.  'in the	Fern
Hill  Trust  Deed Laila Begum was described as wife  of	 the
respondent   and  her  children	 as  the  children  of	 the
respondent  by her.  Similarly in the Race View	 Trust	Deed
Jani Begum was described as wife of the respondent and lmdad
Jah Bahadur as his son by her.	According to the Income	 Tax
Officer	 the  facts  that Laila Begum and  Jani	 Begum	were
described as wives and their children as the children of the
respondent  in	the Trust Deeds executed in  1957  indicated
that  "certain	material facts relevant for  the  assessment
years  were  not  disclosed  to	 the  Department,  that	 the
statement given by the Financial Adviser is. untrue and that
thereby	 income chargeable to tax has been under  assessed".
In  his letter the Income Tax Officer also referred to	sec.
268 of Mulla's Principles of Mohammedan Law which enumerates
the  circumstances from which marriage will be	presumed  in
the  absence of direct proof and stated that the  respondent
having acknowledged the three ladies as his wives and  their
children as his children in the Trust Deeds executed in 1950
and  1957 all the circumstances mentioned in see.  268	were
present.   The	letter	concluded  by  saying  that  it	 was
established  that  the ladies and their	 children  were	 the
legal wives and legitimate children of the respondent.
The  common  counter-affidavit affirmed by  the	 Income	 Tax
officer in answer to the writ petitions was on similar lines
to the aforesaid latter.  Admittedly Fern Hill and Race View
Trust  Deeds executed in 1957 were not produced	 before	 the
Income Tax officer when he made the original assessments for
the four years in question. in the counter affidavit it	 was
alleged	 that  these  two Trust	 Deeds	were  "material	 and
primary	 facts necessary for completing the  assessments  of
the  petitioner-assessee for the relevant assessment  years"
and it was submitted that if the said two documents had been
disclosed  at  the  time of the	 original  assessments,	 the
income	Tax  Officer "would have certainly arrived.  at	 the
conclusion"  that he came to in his letter dated  April	 15,
1964.
Clause	(a)  of Sec. 147 of the Income Tax Act,	 1961  under
which the assessments were sought to be reopened, so far  as
it is relevant for the present purpose, provides that if the
Income Tax Officer has reason to believe that, by reason  of
the  omission  or  failure on the part	of  an	assessee  to
disclose  fully and truly all material facts  necessary	 for
his;  assessment for any year, income chargeable to tax	 has
escaped assessment for that year, he may assess or  reassess
such  income  for the assessment year concerned.   The	High
court  held.  that the reasons assigned	 for  reopening	 the
assessments  did  not fall within the scope of	omission  or
failure	 on the part of the assessee to disclose  fully	 and
truly  all material facts, that all the material facts	were
before the Department
15-255 Sup.Cl/75
468
when  it  made the assessments in question  and	 the  trusts
created	 in  1957 did not "throw a different  light  on	 the
matters already disclosed".
The question is whether the existence of the two trust deeds
executed  by  the  respondent in 1957 was  a  material	fact
necessary  for	his assessment for the	relevant  assessment
years.	 The fact that the three ladies and  their  children
have  been  described in these two documents  as  wives	 and
children  of the respondent would have been material if	 the
description  were anything new that the Income	Tax  Officer
happened  to discover for the first time.  The	three  trust
deeds  of 1950 also contained the same description of  these
ladies	and  their  children  and  the	Income	Tax  Officer
accepted  the  statement  made	by  respondent's   Financial
Adviser	 Shri G. B. Taraporewala seeking to explain why	 the
ladies had been described as wives therein.  It is true that
the trust deeds of 1957 were not produced at the time of the
original  assessment  but  we do  not  see  what  difference
production of these two additional documents could have made
which  contain the same description of the ladies.   Neither
the   letter  addressed	 to  the   respondent's	  authorised
representatives,  M/s.	 S. G. Dastgir and Company,  by	 the
Income	Tax  Officer  on April 15,  1964  nor  the  counter-
affidavit filed in the High Court explains this point.	 The
documents  of  1957  conform to those of  1950	in  material
particulars;  the trust deeds of 1957 only repeat  what	 the
deeds	of  1950  had  disclosed.   Non-production  of	 the
documents  executed  in	 1957 at the time  of  the  original
assessments  cannot therefore be regarded as  non-disclosure
of  any	 material fact necessary for the assessment  of	 the
respondent  for	 the relevant assessment  years.   The	High
Court  was right in holding that the Income Tax officer	 had
no valid reasons 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  of  a
proceeding under sec. 147 of the Income Tax Act, 1961.
 Mr.  Manchanda, learned counsel for the appellant, took  us
through several sections of Mulla's Principles of Mohammedan
Law   including	  sec.	268  and  submitted  that   in	 the
circumstances of the case it must be presumed that the three
ladies were the legally wedded wives of the respondent.	 The
law has not changed since the original assessments were made
and  it	 was  open to the Income Tax Officer  to  make	that
presumption  at the time.  If he should have but did not  do
so  then,  he  cannot  avail of sec.  147  to  correct	that
mistake.   In  any  event, we are not called  upon  in	this
proceeding  to record a finding on the question	 whether  in
fact the ladies were respondent's legally wedded wives.	  We
are  concerned only with the question whether the  condition
precedent  to  the exercise of jurisdiction under  sec.	 147
exists in this case; we have found that it does not.
Mr. Manchanda also contended that the High Court  exercising
jurisdiction under Art. 226 of the Constitution had no power
to  investigate	 whether  on the  material  before  him	 the
Income-Tax  Officer was justified in proceeding	 under	sec.
147  of the Income Tax Act, 1961.  He relied, among  others,
on the following decisions in support
469
of   his   contention:	S.  Narayanappa	  and	others	 vs.
Commissioner of Income Tax, Bangalore, (1) Kantamani Venkata
Narayana and Sons vs.  First Additional Income Tax  Officer,
Rajahmundry, (2) Commissioner of Income Tax, Gujarat vs.  A.
Raman  & Co. (3) and of course, Calcutta Discount  Co.	Ltd.
vs.  Income tax Officer, Companies District I Calcutta, (4)
  We  do not think that these decisions help him.   In	this
case,  the  decision  of  the High Court  is  not  that	 the
material  before the Income Tax Officer was insufficient  or
that  he had failed to draw the correct conclusion from	 the
material  before him but that no fresh material had come  to
light	justifying  reopening  of  the	 assessments.	 The
authorities  to which Mr. Manchanda referred point out	that
the expression "reason to believe" occurring in sec. 147  of
the Income Tax Act, 1961 or the corresponding sec. 34 of the
Act  of 1922 does not mean a purely subjective	satisfaction
on  the part of the Income Tax Officer, the reasons for	 the
belief must have a rational connection or a relevant bearing
to  the	 formation of the belief, and that  the	 High  Court
under Art. 226 of the Constitution has power to set aside  a
notice	under sec. 147 of the Act of 1961 or sec. 34 of	 the
Act  of 1922 if the condition precedent to the	exercise  of
jurisdiction under these sections does not exist.
In  the	 result, these appeals fail and are  dismissed	with
costs.	One hearing fee.
An  application	 for intervention in these appeals  made  by
three persons claiming to be sons of the respondent was	 not
ultimately pressed; no order is therefore called for on this
application.
Appeals dismissed.
(1)  63 I.T.R. 219.
(2)  63 I.T.R. 638.
(3)  67 I.T.R. 11.
(4)  41 I.T.R. 191.
470

Commissioner Of Income Tax-12 vs Tip Top Typography on 8 August, 2014
Author: S. C. Dharmadhikari
Bench: S.C. Dharmadhikari
                                                     *1*                                itxa2447.11

sbw
             IN THE HIGH COURT OF JUDICATURE AT BOMBAY

                 ORDINARY ORIGINAL CIVIL  JURISDICTION

                        INCOME TAX APPEAL NO.1213 OF  2011

      Commissioner of Income Tax-12              ]
      R. No.265, 2nd Floor                       ]
      Ayakar Bhavan, Mumbai-400 020.             ]                      ..Appellant

            -Versus-

      Tip Top Typography                         ]
      58, Sheth Chambers                         ]

      Dr. V. B. Gandhi Marg, Fort                ]
      Mumbai-400 023.            ig              ]                      ..Respondent

                               ALONG WITH
                               
         INCOME TAX APPEAL NOS.2447/2011, 5363/2010, 5489/2010, 
      673/2011, 732/2011, 1316/2011, 1468/2011, 2108/011, 2115/2011, 
       2116/2011, 2161/2011, 411/2012, 753/2012, 754/2012, 974/2012, 
       819/2012, 820/2012, 821/2012, 827/2012, 1182/2012, 1472/2012, 
      106/2014, 195/2014, 342/2014, 343/2014, 657/2014, 676/2014 and 
         
                                944/2014. 
      
                                  ...........

      Mr.  P. C. Chhotaray for the Revenue in ITXA Nos.1213/2011, 1316/2011, 
      106/2014,   195/2014,   342/2014,   343/2014,   657/2014,   676/2014   and 

      944/2014.
      Mr. Tejveer Singh for the Revenue in ITXA Nos. 2447/2011, 753/2012, 
      754/2012,   974/2012,   819/2012,   820/2012,   821/2012,   827/2012   and 
      1182/2012.
      Mr.   Vimal   Gupta,   Senior   Advocate,   with   Ms.   Padma   Divakar   for   the 
      Revenue in ITXA Nos.2108/2011 and 1472/2012.

      Mr.   Abhay   Ahuja   for   Revenue   in   ITXA   Nos.5363/2010,   5489/2010, 
      673/2011, 732/2011 and 411/2012.
      Mr.   Suresh   Kumar   for   the   Revenue   in   ITXA   Nos.1468   of   2011   and 
      2161/2011.
      Ms.   A.   Vissanjee   with   Mr.   S.   J.   Mehta   for   the   Assesssee   in   ITXA 
      Nos.2447/2011,   2116/2011,   2115/2011,   2161/2011,   753/2012, 
      754/2012,   794/2012,   819/2012,   820/2012,   821/2012,   827/2012   and 

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    1182/2012.
    Mr. R. Murlidharan i/b. M/s. Rajesh Shah & Co. for the Assessee in ITXA 

    Nos.1213/2011.
    Mr.   Subhash   Shetty   for   Assessee   in   ITXA   Nos.5363/2010,   5489/2010, 
    673/2011, 737/2011 and 411/2012.

    Ms. Vasanti B. Patel for the Assessee in ITXA Nos.106/2014, 195/2014, 
    342/2014, 343/2014, 657/2014, 676/2014 and 944/2014.
    Mr. Prakash Shah with Mr. Jas Sanghavi i/b. PDS Legal for the Respondent 
    in ITXA No.1468/2011.

                                          ...........

                                          CORAM:  S.C. DHARMADHIKARI
                                                            AND

                                                    B.P. COLABAWALLA, JJ.
                                ig        RESERVED ON : 2nd JULY, 2014

                                          PRONOUNCED ON: 8th AUGUST, 2014.
                              
    J U D G M E N T (PER S. C. DHARMADHIKARI, J.)

    1]            In   all   these   appeals,   we   are   concerned   with   the   following 
       
    substantial question of law:-

             "(i) Whether on the facts and circumstances of the case and 

             in   law,   Tribunal   was   right   in   holding   that   the   fair   rental 

             value specified in section 23(1)(a) is the municipal value or 

             actual rent received whichever is higher and not the annual 

             letting   value   on   the   basis   of   comparable   instances   as 

             adopted by the Assessing Officer, though the property under 

             consideration was not covered by the Rent Control Act?

             (ii) Whether on the facts and circumstances of the case and 

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              in law, Tribunal was right in remitting the matter back to 

              the file of the Assessing Officer with direction to verify the 

              rateable value fixed by the Municipal Authorities and if the 

              same is less than the actual rent received, then the actual 

              rent received should be taxed?"

    Some of the appeals have been admitted but we shall proceed to Admit 

    the rest of them on the above mentioned substantial questions of law.  The 

    Respondents therein waive service. By consent heard forthwith.

    2]     Similarly, there are appeals in which arguments were canvassed on 
                              
    the   basis   that   the   rent   control   legislation   operating   in   the   State   is 

    applicable   but   the   parties   are   not   at   idem  on   the   quantum   of   rent. 

    Therefore, the proceedings in that behalf and particularly for fixation of 
    
    standard   rent   were   not   initiated   under   the   rent   control   legislation. 

    Therefore, the  Assessing Officer  took upon himself the  responsibility of 

    fixing the fair/standard rent.   Whether this step taken by the Assessing 

    Officer   is   permissible   in   law   or   otherwise   is   the   further   question. 

    Similarly, in some of the appeals, there is not an agreement of tenancy but 

    of leave and license.     Thereunder, license fee has been agreed between 

    the   parties.     Further,   the   quantum   of   security   deposit   has   also   been 

    stipulated in the agreement. Therefore, the question arises as to whether 

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    the security deposit which though refundable but without interest can be 

    taken into consideration for holding that the agreed license fees does not 

    reflect the market trend or market rate prevailing in the area.

    3]     For the purposes of answering these questions we would refer to the 

    facts   in   Income   Tax   Appeal   No.1213   of   2011.   The   assessment   year   in 

    question therein is 2005-06.  The brief facts are that the return of income 

    for assessment year in question was filed on 31 st  August, 2005 declaring 
                              
    total  income  at   Rs.3,12,520/-.    The  same   was  processed   under   section 

    143(1) of the Income Tax Act, 1961 (for short the 'I.T. Act').  The case was 
                             
    selected for scrutiny.   The Assessing Officer noticed that the respondent-

    assessee had let out commercial premises admeasuring about 8118 sq.ft. 

    built up area consisting of office premises along with Car parking open 
    
    space in the building "Seth House" in a prime locality at Dr. V. B. Gandhi 

    Road, Mumbai-23.  The premises were given to a related concern namely 

    M/s.   Reliance   Industries   Ltd.   for   Rs.3,60,000/-   and   a   sum   of 

    Rs.5,25,00,000/-   was   received   as   interest   free   security   deposit.     The 

    Assessing   Officer   noticed   that   the   rent   received   by   the   assessee   was 

    nominal  and  the  circumstantial  evidence  indicated that the  fair  market 

    value was higher.  Therefore, he obtained instances of the rental amount 

    prevailing in the market and particularly in the area and confirmed that 

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    the property was not covered by the Rent Control Act.   On the basis of 

    such   comparable   instance,   the   annual   letting   value   as   provided   under 

    section   23(1)(a)   was   determined   at   Rs.85,72,608/-   as   against 

    Rs.3,60,000/- shown by the assessee.   The assessment order dated 24 th 

    December, 2007 copy of which is at Annexure-A was passed and being 

    aggrieved   thereby   the   assessee   preferred   an   appeal   before   the 

    Commissioner of Income Tax (Appeals).  The Commissioner of Income Tax 

    (Appeals) by his order dated 11 th December, 2008 confirmed the action of 
                              
    the   Assessing  Officer.     A   copy   of   the   Commissioner's   order   is   at 
                             
    Annexure-C.

    4]     The assessee, thereafter, carried the matter in appeal to the Income 
       
    Tax Appellate Tribunal and by an order dated 31 st March, 2010 the matter 
    
    was remitted back to the Assessing Officer.  The Tribunal directed him to 

    verify the  rateable  value  fixed by the  Municipal    authorities and if  the 

    same is less than Rs.3,60,000/-, then, the actual rent received should be 

    taxed. Copy of this order of the Tribunal is annexed as Annexure-E to this 

    memo of appeal.

    5]     It is aggrieved by this order of the Tribunal that the revenue has 

    approached this Court in appeal under section 260A of the Income Tax Act 

    raising the above substantial questions of law.

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    6]     Mr. Chhotaray, learned counsel, appearing for the revenue in these 

    appeals submitted that the language of   section 23(1)(a) of the Income 

    Tax Act, 1961, for short the I.T. Act is clear.  That has no relation to the 

    rateable value determined by the municipal corporation.   It has also no 

    relation to any deposits or security amount obtained by the assessee like 

    the respondents. Therefore, the attempt is to depress the rent.  When such 

    attempts are noticed, then, it can never be intended by the law that the 

    Assessing Officer is obliged to adopt the municipal value.  In the present 
                              
    case   the   matter   has   been   completely   distorted   by   the   assessee.     The 
                             
    reference   to   section   23(1)(b)   is   misplaced.     The   element   of   municipal 

    property   tax   rate   has,   therefore,   no   relevance.     On   facts   also,   the 

    relationship is admitted.   The Assessing Officer has made a comparative 
       
    study and analysed the prevailing rate.  Mr. Chhotaray, therefore, submits 

    that the findings at page 16 and 18 of the paper book would reflect that 

    there   was   nothing   erroneous   or   illegal   in   the   manner   in   which   the 

    Assessing Officer proceeded to determine the rent. Mr. Chhotaray submits 

    that section 23(1)(a) refers to a reasonable expectation with regard to the 

    rent that can be obtained if the premises are let.  The Assessing Officer has 

    clearly gone by this requirement of the section.   Mr. Chhotaray submits 

    that   the   Assessing   Officer   had   correctly   determined   the   rent   and   his 

    finding   has   been   upheld   by   the   Commissioner.     The   Assessee   did   not 

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    appear before the Commissioner but his absence cannot be said to be fatal 

    more so, when the assessee had complete opportunity to argue its case 

    before the Tribunal.

    7]     Criticizing   the   Tribunal's   order,   Mr.   Chhotaray   submits   that   the 

    Tribunal   has   observed   nothing   with   regard   to   the   approach   of   the 

    Assessing Officer.  The Tribunal does not hold that the course adopted by 

    the   Assessing   Officer   is   imperssible   in   law.     In   para-14   of   the   order, 
                                
    Tribunal has agreed with the Assessing Officer  that there is a possibility of 

    the   rent   or   compensation   being   shown   at   lower   rate   and   it   can   be 
                               
    determined  by  taking  recourse   to  section  23(1)(a),  then,  there   was  no 

    need   to   freeze  the  rent  or   the   quantum   thereof   with  the   figure   of   the 
       
    annual letting value as determined by the Mumbai Municipal Corporation. 

    Thus, there is a patent error of law committed by the Tribunal.   Merely, 

    because the words "might be reasonably expected to be let" are inserted 

    by   the   legislature   in   section   23(1)(a)   that   does   not   mean   that   the 

    Assessing   Officer   is   bound   by   the   valuation   made   by   the   Municipal 

    Corporation.  That is a complete misreading of the section.  Mr. Chhotaray 

    submits that the municipal valuation cannot be the sole and only criterion. 

    The municipal valuation is not binding on the Assessing Officer.   He can 

    independently determine the rent which can be fetched by the assessees. 

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    In doing so he can make local enquiry including from brokers and refer to 

    the agreements between parties.  He can also refer to the valuation by the  

    State Government and for the purposes of recovery of State taxes.   Mr. 

    Chhotaray submits that there is a tendency to accept deposit of a hefty 

    sum.     Even   a   nominal   rent   which   is   higher   than   the   municipal 

    determination   is   taken   as   the   basis   for   such   security   deposit.     Mr. 

    Chhotaray submits that if  the intent of the  legislature  was to make an 

    assessment   by   municipal   valuation   alone,   then,   that   would   have   been 
                                
    clearly spelled out in law.  Mr. Chhotaray, therefore, referred to Rule 4, 5, 
                               
    6 and 7 of the Wealth Tax Rules in this behalf.

    8]     Mr.   Chhotaray   also   submitted   that   the   Tribunal   has   solely   relied 
       
    upon   its   own   order   in   the   case   of   Park   Paper   Industries   Ltd.   which   is 
    
    delivered in the case of a self-occupied property.   At the same time, the 

    Tribunal failed to note that there is a contrary view taken in the case of 

    the   Income   Tax  Officer   V/s.   M/s.   Baker   Technical   Services   Private   Ltd. 

    Income Tax Appeal No.5262, 5264/Mum/2006. In such circumstances, Mr. 

    Chhotaray submits that the impugned order be set aside and the appeal be 

    allowed.

    9]     Mr. Chhotaray also submits that the  Assessing Officer was of  the 

    view that the monthly rent shown was very low and did not represent the 

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    correct fair rental value of the property under section 23(1)(a) of the Act. 

    Under section 23(1)(a), the annual value of the property shall be deemed 

    to be the sum for which the property might reasonably be expected to let 

    from   year   to   year   (henceforth   referred   to   as   fair   rental   value   of   the 

    property).   The section mandates the Assessing Officer to determine the 

    fair rental value of the property under section 23(1)(a).   The Assessing 

    Officer made enquiries to find out the comparable rent prevailing in the 

    vicinity. He has prepared a chart of the comparable cases showing that the 
                                
    monthly rent per sq. ft. in the vicinity ranged between Rs.79 to Rs.110 per 
                               
    sq.   ft.   instead   of   Rs.3.70   per   sq.   ft.   shown   by   the   assessee.     The 

    information   collected   by   the   Assessing   Officer   was   confronted   to   the 

    assessee.

    10]    The assessee contended that the gross municipal rateable value of 

    the property was Rs.39,572/- per annum which came to Rs.3298/- per 

    month.  As per the assessee the municipal rateable value represented the 

    fair rental value of the property in the market under section 23(1)(a) and 

    since the rent received was much more than the municipal rateable value, 

    the annual value shown by the assessee should be accepted in view of 

    section 23(1)(b) of the Act.   Section 23(1)(b) provides that if the actual 

    rent received is more than the fair rental value under section 23(1)(a), 

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    then the actual rent received should be adopted as the annual value.

    11]     At the time of the hearing it was pointed out by the revenue that , 

    according to the theory behind the provision relating to the income from 

    house property, annual value of the property is a hypothetical income from 

    the   property   representing   the   sum   for   which   the   property   might 

    reasonably   be   expected   to   let   from   year   to   year.   It   is   an   artificial   or 

    assumed   income.     The   actual   rent   received   is   not   material   in 
                                 
    determination of the annual value.  Annual value is the inherent attribute 

    of the property to be determined by adopting various methods.

    12]     It was pointed out that reading both the provisions 23(1)(a) and 

    23(1)(b)  together   would show  that determination  of  annual  value  is  a 
       
    two-step process.  The first step is to determine the fair rental value in the 
    
    market   under   section   23(1)(a).     This   is   the   most   important   part. 

    Thereafter, the second step is to refer to section 23(1)(b) which provides 

    that   if   the   actual   rent   received   is   more   than   the   fair   rental   value 

    determined under section 23(1)(a), then the actual rent received would 

    be   deemed   to   be   the   annual   value.     It   was   pointed   out   that   in   the 

    captioned   case,   there   is   no   applicability   of   section   23(1)(b)   since   the 

    annual value, as determined by the Assessing Officer, is much more than 

    the actual rent received.

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    13]    Mr.   Chhotaray   further   submits   that   annual   value   is   a   statutory 

    hypothetical   figure.     The   provisions   of   section   23(1)(a)   mandates   the 

    Assessing Officer to determine this value.  It simply states that the annual 

    value is the sum for which the property might reasonably be expected to 

    let   from   year   to   year.   It   does   not   speak   anything   else.     The   Assessing 

    Officer determines the annual value by taking various factors into account. 

    He may take recourse to different recognized methods.   One important 

    method is to find the prevailing market rate of rent in the area.  In order  
                                
    to find it out, he may make inquiry with let out properties in the locality, 
                               
    make enquiry with the brokers, use internet for knowing the prevailing 

    rate in the area, take the help of a valuer, adopt any other method.  After 

    collecting   the   information,   the   assessee   is   confronted   with   the   data 
       
    gathered   and   after   considering   his   objections   suitable   adjustments   are 

    made to determine the correct annual value.  It is submitted that valuation 

    is   an   art   and   there   are   recognized   methods.     The   Assessing   Officer   is 

    capable of making the valuation on his own by adopting the appropriate 

    method.  Each property is unique so far its annual value is concerned.  It is 

    not   correct   to   impose   a   standard   annual   value   for   all   properties   in   a 

    locality.  Valuation of a property is distorted because of relation between 

    parties, collusion, heavy security deposit.   Therefore, each case needs to 

    be addressed on its own facts and Assessing Officer is competent to handle 

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    this issue.  It is respectfully submitted  that this is the correct approach to 

    determine the annual value. It is important to note that the order of the 

    Assessing   Officer   is   subject   to   judicial   scrutiny.     The   Assessing   Officer 

    should be left alone to perform this function as required by law.

    14]    Mr. Chhotaray submits that municipal rateable value is not a reliable 

    data for determining the annual value under the Income Tax Act.   It is 

    invariably   seen   that   the   municipal   value   is   much   below   the   fair   rental 
                               
    value of the property.  The valuation is outdated.  In such a situation, the 

    municipal value is not a reliable data for determining the annual value for 
                              
    section 23(1)(a) of the Income Tax Act.   Hence, adopting the municipal 

    value for determining the annual value under the Income Tax Act would 
       
    lead to substantial loss of revenue.  The objectives of the local authorities 
    
    and   the   Income   Tax   Departments   are   entirely   different.     Municipal 

    Authorities are concerned with the collection of property tax in order to 

    provide the civic amenities.   They would rest content in prescribing the 

    rate   for  a   particular   area   and   would  not   be   bothered   about   accurately 

    determining the income from a particular property which is the objective 

    of   the   Income   Tax   Department.     The   municipal   rateable   value   is   also 

    subject to litigation.  It is impossible to develop any mechanism by which 

    the Income Tax Department would keep track of the appeal proceedings in 

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    municipal cases and adopt the modifications.  The Income Tax Department 

    is not equipped to liaise regularly with municipal authorities in order to 

    perform   its   own   function   of   making   an   assessment.     Also   most   of   the 

    returns are accepted without scrutiny and unless there is clear exposition 

    of law, the assessee would show low income from house property which 

    will lead to loss of revenue.  It would be unfair to require the Income Tax 

    Department to adopt the municipal valuation even if it notices gross and 

    glaring   undervaluation   in   municipal   valuation.     The   Income   Tax 
                               
    Department has no control over the municipal valuation.  Under the law, 
                              
    there  is  no reference  to the  municipal  valuation.   There  is no case for 

    introducing   the   element   of   municipal   valuation   in   the   income   tax   law. 

    The process of municipal valuation of different states is different.   The 
       
    local authorities have their own priorities.  For example, Mumbai has now 

    switched over to the capital value system where the municipal value is at a 

    certain percentage of the capital value of the property.   Properties with 

    area  up  to 500 sq.  ft.  would  not  pay the  higher  rate.   The concept of 

    determining the fair rent of the property is no longer there.   Therefore, 

    there   would   no   longer   be   any   commonality   in   the   wordings   of   the 

    provisions   of   the   section   23(1)(a)   of   the   Income   Tax   Act   and   the 

    provisions of the Municipal Act which is the main plank of the argument 

    for adopting the municipal value for income tax.  Income Tax Department 

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    is accountable for collection under the Income Tax law and should not be 

    dependent on municipal system which is not accountable to it.  Therefore, 

    the annual   value of the property under the income tax law should be 

    delinked from the municipal valuation.  Municipal valuation can at best be 

    a factor to be considered by the Assessing Officer and nothing more than 

    that.   The Assessing Officer can reject the municipal valuation for valid 

    reasons.

    15]
                               
           Mr. Chhotaray then submits that heavy security deposit is a factor to 

    be taken judicial notice of.  In many cases heavy security deposits running 
                              
    into crores of rupees are taken by the landlord as a consequence of which 

    the amount of rent is reduced.  It is accepted by the assessees that there is 
       
    an  inverse   correlation   between   the   amount  of   security  deposit  and  the 
    
    amount of rent.  If the security deposit is more, the amount of rent is less 

    and   vice   versa.     Thus   the   rent   fluctuates   according   to   the   amount   of 

    security deposit.   Annual  value  is an artificial  statutory figure which is 

    germane to the property.   It should be, by and large, same for a particular 

    property   and   should   not   vary   according   to   the   quantum   of   security 

    deposit.   This goes against the very theory of annual value unanimously 

    propounded by all the judgments.  It needs to be judicially recognized that 

    security deposit is a factor to be taken into account in determining the 

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    annual   value.     The   Courts   have   not   found   favour   with   the   idea   of 

    calculating   the   notional   value   of   interest   on   the   security   deposit   and 

    increase the rent to that extent.   But to completely ignore the effect of 

    security deposit on the amount of rent fixed between the parties would 

    lead to ignoring the ground reality of the transactions when it is openly 

    admitted that one of the main objectives behind heavy security deposit is 

    to reduce rent and this would result in eventually determining a wrong 

    annual value.  It is submitted that a rebuttable presumption may be raised 
                               
    against   assessees   accepting   security   deposit   beyond   a   certain   normal 
                              
    amount that, they have benefited to the extent of the notional interest on 

    the   security   deposit   and   the   annual   value   should   be   increased   by   this 

    notional interest.   The assessee would be free to rebut this presumption 
       
    with valid reasons.

    16]    Mr. Chhotaray has relied upon the following decisions in support of 

    his above contentions.

    1)     (1981) 128 ITR 315 - Bhagawan Dass Jain V/s. Union of India and 

           Others;

    2)     (1975) 100 ITR   97 - Sakarlal Balabhai V/s. Income Tax Officer,  

           Special Investigation Circle IV, Ahmedabad and Another;

    3)     AIR 1968 Supreme Court 441 (V 55 C 97) - Motichand Hirachand 

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                                              *16*                                  itxa2447.11

          and others V/s. Bombay Municipal Corporation;

    4)    AIR 1962 Supreme Court 151 (V 49 C 28) - The Corporation of  

          Calcutta V/s. Sm. Padma Debi and others;

    5)    AIR 2011 Supreme Court 1940 - Mohammad Ahmad & Anr. V/s.  

          Atma Ram Chauhan & Ors.;

    6)    (1975) 101 ITR 810 - Kashi Prasad Kataruka V/s. Commissioner of 

          Income Tax, Bihar;

    7)    (2001)    248  ITR 723 - Commissioner  of  Income  Tax V/s.  J. K.  
                            
          Investors (Bombay)Ltd.;
                           
    8)    Order of Allahabad High Court in case of Sewa Ram Oil Mills V/s. 

          Commissioner of Income Tax;

    9)    Order of Madras High Court   dated 4 th  April, 2003 in case of N.  
       
          Nataraj V/s. Deputy Commissioner of Income Tax and

    10)   (2011) 333 ITR 38 - Commissioner of Income Tax V/s. Moni Kumar 

          Subba. 

    17]   Mr.   Chhotaray's   submissions   were   adopted   by   Mr.   Tejveer   Singh 

    appearing   for   the   revenue     in   Income   Tax   Appeal   Nos.   2447/2011, 

    819/2012,   820/2012,   821/2012,   827/2012,   1182/2012,   753/2012, 

    754/2012 and 794/2012 and Mr. Suresh Kumar.

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    18]    Mr. Abhay Ahuja appearing for the revenue in some of the appeals 

    submitted that in Income Tax Appeal No.5489 of 2010, the questions of 

    law arise out of the letting of two flats by the private limited companies to 

    its   Directors.     The   flats   are   in   a   building   known   as   Samudra   Gaurav 

    Apartments, Worli, Mumbai.  The facts of the case in the first matter viz. 

    Income Tax Appeal No. 5489 of 2010 for assessment year 2005-06 are that 

    the assessee by reason of its holding two class 'A' shares of M/s. Samudra 

    Gaurav Apartment Pvt. Ltd. from the year 1980 was entitled to use and 
                               
    occupy two flats admeasuring 5142 sq. ft. each with four covered garages 
                              
    bearing No.E-1, E-2, E-6 and E-13 of which the assessee has been given 

    possession.     The   assessee   derives   income   from   house   property.     The 

    aforesaid property has not been included in the block of assets against 
       
    which   the   aggregate   rental   income   for   each   of   the   years   is   shown   as 

    Rs.60,000/-   consisting   of   Rs.30,000/-   from   each   of   the   directors.     The 

    Assessing Officer found that the property in question is Worli sea facing, 

    and looking to the size of the flats, location of the property, car parking  

    facility and use of the garden, the rent of Rs.2500/- per month for each 

    flat to each of the directors is very low and he therefore called upon the 

    assessee   to   explain   why   the   ALV   of   the   above   flats   should   not   be 

    determined within the meaning of section 23(1) of the Income Tax Act, 

    1961.  The Assessing Officer relying upon the records of the Sub-Registrar 

                                                  17/64
                                                   *18*                                   itxa2447.11

    of Properties, circle Worli during the previous year under consideration 

    showed the prevailing rate of Rs.8919/- per sq. ft. whereas the assessee 

    recorded return from the property at the rate of 12% p.a.  That would be 

    about Rs.90/- per sq. ft. per month and upon further confirmation of the 

    same on the basis of spot enquiry made by the inspector of the fair rental 

    value of the area during the subject period which was ranging between 

    Rs.80/- to Rs.100/- per sq. ft. per month, the Assessing Officer held that 

    the assessee company has been charging only Re.1/- per sq. ft. per month 
                               
    from its Directors.  He, therefore, adopted the lowest rent of Rs.80/- per 
                              
    sq. ft. for the relevant assessment year and calculated the rental value of  

    two   flats   (5142   sq.ft.)   at   Rs.4,11,360/-   p.m.   and   the   annual   rental   at 

    Rs.49,36,320/-.

    19]    Mr. Ahuja further submits that with respect to the assessee's claim 

    that it could not charge rent higher than the deemed standard rent i.e. 

    rent   on   01.10.1987,   the   Assessing   Officer   held   that   the   claim   was   not 

    tenable as the standard rent had not been fixed by a Court under section 

    8(1)(c) of the Maharashtra Rent Control Act, 1999 upon an application for 

    the same as could have been done by the assessee.  Thus the assessee had 

    deliberately   foregone   its   right   to   fix   standard   rent   higher   than   the 

    artificially   low   rent   being   charged   on   01.10.1987   and   had   not   even 

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    availed   off   the   benefit   of   annual   5%   permissible   increase   under   the 

    Maharashtra Rent Control act, 1999 obviously because the Director being 

    the tenant of the assessee company.   The Assessing Officer held that the 

    rent at which the property can be reasonably let out is definitely much 

    more   than   the   rent   being   charged   from   the   director   tenants.     The 

    Assessing   Officer   relied   on   the   two   judgments   of   Dewan   Daulat   Rai 

    Kapoor V/s. New Delhi Municipal Committee and Anr. ]122 ITR 700 (SC)] 

    and T. V. Sundaram Iyengar and Sons Ltd. V/s. CIT [241 ITR 420 (Mad)]. 

    The assessee filed appeal against the order of the Assessing Officer mainly 
                              
    on   the   ground   that   the   Assessing   Officer   erred   in   not   considering   the 

    provisions that the Annual Value of the property situated in a area where 

    Rent   Control   Law   applies   cannot   exceed   the   standard   rent   as   per 
       
    Maharashtra Rent Control Act, 1999.  The assessee submitted that as per 

    Municipal   Records   the   fair   market   value   of   the   said   property   was 

    Rs.24,288/- per year and the rent of Rs.30,000/- for each of the properties 

    being   higher   should   be   taxed   as   rental   income.     The   Commissioner   of 

    Income Tax (Appeals) upheld the Assessing Officer's order including the 

    finding that the assessee had not taken any recourse to section 8(1) of the 

    Maharashtra Rent Control Act, 1999 for fixation of standard rent.     The 

    Commissioner   of   Income   Tax   (Appeals)   also   gave   a   finding   that   the 

    assessee's attempt to take protection of the Maharashtra Rent Control act, 

                                                  19/64
                                                   *20*                                   itxa2447.11

    1999   was   inconsistent   and   highly   contradictory.   He   found   that   on   the 

    assessee's own showing the rate by the Municipal Corporation of Greater 

    Bombay   was   Rs.24,288/-   and   the   rent   received   by   the   assessee   was 

    Rs.60,000/-.   Accordingly he gave a finding that the assessee itself had 

    given   a   go-by   to   the   provisions  of   section   10   of   the   Maharashtra   Rent 

    Control Act, 1999 and concluded that the assessee had  taken the property 

    outside the purview of the Maharashtra Rent Control Act, 1999 and the 

    assessee   could   not   take   cover   under   it   for   income   tax   purposes.     The 
                               
    Commissioner   of   Income   Tax   (Appeals)   also   relied   upon   the   cases   of 
                              
    Dewan Daulat Rai Kapoor V/s. New Delhi Municipal Committee and Anr. 

    (supra) and T. V. Sundaram Iyengar & Sons (supra), and held that the 

    Assessing Officer was right in fixing the rent of property at Rs.4,11,360/- 

    per month.   In appeal before the Tribunal, on the finding of the lower 

    authority that the Maharashtra Rent Control Act, 1999 was violated on the 

    basis that the assessee received rent over and above the standard rent, the 

    assessee submitted that the property was tenanted for a long time and the 

    provisions of the Maharashtra Rent Control Act, 1999 protect the tenant 

    and also postulates that if rent was fixed prior to the implementation of 

    the   Maharashtra   Rent   Control   Act,   1999,   the   rent   fixed   will   become 

    standard rent under the Act and accordingly the assessee is covered under 

    the provisions of the Maharashtra Rent Control Act, 1999.   The Income 

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                                                   *21*                                   itxa2447.11

    Tax Appellate Tribunal held that (i) the assessee has given property on 

    rent to Mr. T. B. Ruia long back and on his death Mrs. Asha Ruia became  

    the tenant and there was a revised agreement dated 14.08.2008.   In all 

    the years the Assessing Officer has been accepting rent received by the 

    assessee   company   and   the   assessment   order   for   one   of   the   years   viz. 

    Assessment year  2004-05 is under section 143(3) of the Income Tax Act, 

    1961   (ii)   it   was   already   established   that   while   invoking   provisions   of 

    section   23   of   the   Income   Tax   Act,   1961,   the   Assessing   Officer   has   to 
                               
    consider   municipal   rateable   value,   or   standard   rent   or   actual   rent 
                              
    received, whichever is higher and set out the various paragraphs of the 

    decision of the Tribunal in the case of ITO v/s. Makrupa Chemicals (P)Ltd. 

    [108   ITD   95   (Bom)]   stating   that   the   methodology   for   arriving   at   the 
       
    annual   value   of   property   under   the   provisions   of   section   23(1)   of   the 

    Income   Tax   Act,   1961   was   given   therein;   (iii)   that   the   property   is   a 

    tenanted property and the tenant is a protected tenant as per the orders of 

    the Court and since the rent received by the assessee is more than the 

    standard   rent/municipal   rateable   value,   the   Assessing   Officer   has   no 

    option than to accept the rent received by the assessee.   He accordingly 

    directed the Assessing Officer to accept the rent offered by the assessee 

    and determine the income from the house property accordingly.   Similar 

    facts exist for assessment year 2005-06 in the case of Commissioner of 

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                                                    *22*                                   itxa2447.11

    Income Tax-Central III V/s. Ramrikhdas Balkison & Sons Pvt. Ltd. (ITXA 

    5356   of   2010)   as   well   as   for   assessment   year   2006-07   in   the   case   of 

    Commissioner of Income Tax-Central-III V/s. Ramgopal Ganpatrai & Sons 

    Pvt. Ltd. (ITXA 732ofo 2011) and Commissioner of Income Tax-Central-III 

    V/s. Ramrikhdas Balkison & Sons Pvt. Ltd. (ITXA 673 of 2011).

    20]    Mr. Ahuja, therefore, submits that findings by the Tribunal that the 

    revised  agreement  is   dated  14.08.2000   and   after   the   enactment  of  the 
                                
    Maharashtra Rent Control Act, 1999 are vitiated in law.   No finding was 

    rendered by the Tribunal on the submission of the assessee that if rent was 
                               
    fixed prior to the implementation of the Maharashtra Rent Control act, 

    1999,   the   rent   fixed   will   become   standard   rent   under   the   Act.     Even 
       
    otherwise there is neither any evidence nor finding that the standard rent 
    
    was fixed under section 7(14)(a) or section 8(1) nor the case falls under 

    section 6 of the Maharashtra Rent Control Act, 1999. There is no finding 

    by the Tribunal that standard rent was fixed in accordance with section 

    8(1) of the Maharashtra Rent Control Act, 1999.  In fact, there is a clear 

    statement by the assessee in the statement of facts in   the appeal before 

    Commissioner of Income Tax (Appeals) that as per Municipal Records the 

    fair   market   value   (and   not   standard   rent)   of   the   said   property   was 

    Rs.24,288/-   per   year.     The   Tribunal   appears   to   have   erroneously 

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    considered   this   figure   as   the   standard   rent.     Therefore,   finding   by   the 

    Tribunal   that   rent   received   is   more   than   the   standard   rent   and   the 

    Assessing   Officer   has   no   option   but   to   accept   the   rent   received   as   the 

    basis, is also erroneous.   Even assuming without admitting that the said 

    rent received from each director per year is Rs.30,000/- that would be in 

    violation of section  10 of  the  Maharashtra Rent Control  Act, 1999 and 

    take the assessee's case outside the ambit of the Rent Control legislation, 

    which has been the case of the revenue.  Also finding by the Tribunal that 
                                
    since rent received by the assessee is more than the municipal rateable 
                               
    value, the Assessing Officer has no option than to accept the rent received 

    as   per   the   decision   in   ITO   V/s.   Makrupa   Chemicals   (P)Ltd.   (supra)   is 

    erroneous as it presupposes that the assessee is outside the purview of the 
       
    Rent Control Act whereas the Tribunal itself has given a finding that the 

    property is a tenanted property and the tenant is a protected tenant as per 

    the orders of the Court.  On the issue of earlier years, it is submitted that 

    only   for   assessment  year   2004-05   the   assessee's   stand   appears   to   have 

    been accepted under section 143(3) but for no other year.  Every year is a 

    separate unit of assessment.   In any event the Tribunal has decided the 

    matter on merits and not on the basis of earlier years.  It is submitted that 

    if this Court holds that the property is outside the purview/ambit of the 

    Maharashtra Rent Control Act, 1999, the appellant revenue craves leave of 

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    this   Court   to   adopt   the   arguments   and   submissions   made   by   Shri   P.C. 

    Chhotaray in  the  case  of  Commissioner of Income  Tax-12 V/s. Tip Top 

    Typography (ITXA 1213 of 2011), and submit that Court be pleased to 

    allow the appeals upholding the orders passed by the Assessing Officer 

    and   Commissioner   of   Income   Tax   (Appeals)   determining   ALV   of   the 

    property.   Alternatively, if this Court holds that the case of the assessees 

    herein falls within the purview of the Maharashtra Rent Control Act, 1999, 

    then,   it   is   submitted   on   behalf   of   the   appellant   revenue   that   as   no 
                               
    standard rent has been fixed by a Rent Controller or  a Court either as per 
                              
    section 7(14)(a) or in accordance with section 8(1) of the Maharashtra 

    Rent Control Act, 1999, nor is there any finding by the Tribunal that any 

    standard rent was fixed prior to the Maharashtra Rent Control Act, 1999, 
       
    this Court be pleased to apply the principles laid down  by the Hon'ble 

    Supreme Court in the case of Dewan Daulat Rai Kapoor v/s. New Delhi 

    Municipal Committee and Anr. (supra).  In the event, this Court finds that 

    the assessee's case/property falls within the ambit of the Maharashtra Rent 

    Control Act, 1999 it is submitted that this Court be pleased to consider 

    remanding the matters back to the Assessing Officer to arrive at the figure 

    of standard rent by applying the principles laid down in Maharashtra Rent 

    Control Act, 1999 for determination of standard rent and determine the 

    annual value of the property on the basis of such figure of standard rent.  

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    21]    Mr. Ahuja has relied upon the following judgments in support of the 

    above contentions:-

    1)     (1980) 122 ITR 700 - Dewan Daulat Rai Kapoor V/s. New Delhi  

           Municipal Committee and Another;

    2)     (2000) 241 ITR 420 - T. V. Sundaram Iyengar and Sons Ltd. V/s.  

           Commissioner of Income Tax;

    3)     (2008) 298 ITR 413 (Jharkhand) - Commissioner of Income Tax  

           V/s. Shrimati Bhagwani Devi.
                                
    22]    On the other hand, Mr. Murlidhar and Mr. Jasani appearing for the 
                               
    assessee in some of the appeals so also Mr. Prakash Shah would submit 

    that   the   expression   "sum   for   which   the   property   might   reasonably   be 
       
    expected to let from year to year" is considered and explained in Circular 
    
    No.204 dated 24th July, 1976.  That Circular explains the provisions of  the 

    Taxation Laws (Amendment) Act, 1975.  Prior to the insertion of section 

    23(1)(b)   by   this   Amendment   Act,   1975   the   annual   value   of   house 

    property could only be determined on the basis of section 23(1)(a) and 

    not  on  the   basis   of   actual   rent   received   for   the   property.    The   Central 

    Board of Direct Taxes has explained the rationale for the amendment and 

    hence reliance is placed by Shri Murlidhar on the wording of the Circular 

    204 dated 24th July, 1976.  Mr. Murlidhar submits that the Central Board 

                                                   25/64
                                                 *26*                                  itxa2447.11

    of Direct Taxes recorded the annual value under section 23(1)(a) as being 

    equal to the  municipal valuation of the  property.   He submits that this 

    Circular  holds    the  field and  has not  been  withdrawn. It  will  bind  the 

    revenue under section 119 of Income Tax Act.   Then, Mr. Murlidhar has 

    placed reliance upon a judgment of the Calcutta High Court in the case of 

    Commissioner of Income Tax V/s. Smt. Prabhavati reported in  (1983) 141 

    ITR 149.  Mr. Murlidhar relied upon the observations at page 424 of the 

    report   and   urged   that   the   wording   of   section   143   of   the   Bombay 
                              
    Municipal   Corporation   Act,   1888   contains   identical   expression/words 
                             
    namely that the rateable value has to be determined on the basis of the 

    rent which such rent or building might reasonably be expected to be let 

    from year to year.  Similar principle is laid down in the case of Motichand 
       
    Hirachand reported in  AIR 1968 Supreme Court 441.

    23]    Mr. Murlidhar, then, relied upon the decision of this Court in the 

    case   of   M.V.   Sonavala   V/s.   Commissioner   of   Income   Tax   reported   in 

    (1989) 177 ITR 246.  Mr. Murlidhar also relied upon the decision of this 

    Court   in   the   case   of   Smt.   Smitaben   N.   Ambani   V/s.   Commissioner   of 

    Wealth Tax reported in (2010) 323 ITR 104.  He has also relied upon the 

    decision of the Calcutta High Court in the case of Commissioner of Income 

    Tax V/s. Satya Co. Ltd. and the decision of the Full Bench of Delhi High 

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    Court in the case of Commissioner of Income Tax V/s. Mani Kumar Subba 

    (2011)   Vol.333   ITR   838.     Mr.   Murlidhar,   therefore,   submits   that   in   all 

    these decisions it has held that the rateable value fixed by the Municipal 

    Corporation cannot be ignored or brushed aside.  If the correctness of the 

    municipal   valuation   was   never   disputed   by   the   department,   then,   the 

    same should be adopted as the annual value of the premises.  In all these 

    decisions, therefore, the principle laid down is that the department will 

    have to bring in material to show as to how the municipal rateable value 
                               
    does not represent the correct rent.  

    24]    In the facts of the case namely Tip Top Typography, Mr. Murlidhar 

    submits that the respondent-assessee had received a refundable security 
       
    deposit   of   Rs.5.25   crores   and   had   spent   a   sum   of   Rs.65   lakhs   on 
    
    renovation   of   the   premises.     If   the   municipal   rateable   value   of   the 

    premises   is   to   be   taken   into   consideration,   then,   the   Tribunal's   order 

    cannot be said to be perverse or vitiated by an error of law apparent on 

    the face of the record.  Mr.  Murlidhar submits that Municipal Corporation 

    is a responsible body entrusted in imposing as much legitimate tax   as 

    possible,   and   therefore,   its   valuation   constitutes   a   safe   guide   for 

    determining the annual value of the property.  He, therefore, submits that 

    the appeal of the revenue be dismissed.

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                                                    *28*                                   itxa2447.11

    25]    Ms.Vissanjee,   learned   counsel,   appearing   in   the   other   appeals 

    submits   that   the   language   of   section   154   of   the   Mumbai   Municipal 

    Corporation Act, 1888 is in pari materia  with section 23(1)(a).   The test 

    for   determining   the   rateable   value   under   the   Mumbai   Municipal 

    Corporation Act and the annual letting value under section 23(1)(a) of the 

    Income   Tax   Act   is   identical.     Both   statutes   contemplate   fixation   of 

    rateable/annual   value   at   the   reasonable   amount   of   rent   which   can   be 

    expected by the owner from a hypothetical tenant.  The basis of charge of 
                                
    income from house property is its 'annual value'.   The annual value is a 
                               
    deemed or notional figure based on which the owner is subjected to tax 

    irrespective   of   whether   or   not   the   property   has   been   let.     The   only 

    exceptions   are   (i)   a   property   which   is   occupied   by   the   owner   for   the 
       
    purpose   of   his   business   (ii)   a   property   occupied   by   the   owner   for   the 

    purpose of his own residence or cannot actually be occupied by the owner 

    by   reason   of   the   fact   that   owing   to   his   employment,   business     or 

    profession carried on at any other place, he has to reside at that place in a 

    building not belonging to him [section 23(2)(a) and (b)].  The exception 

    in (ii) above is not available if the house or any part is actually let during  

    the whole or part of the previous year or any other benefit is derived by 

    the owner. [section 23(3)].  And further exception in (ii) above is limited 

    to one house which the assessee at his option may specify [section 23(4)]. 

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                                                   *29*                                   itxa2447.11

    It is because an assessee is assessable to income from house property on a 

    notional figure even if the property is not let out that section 23(1)(a) 

    uses the expression 'reasonably be expected to let'.   It is for this reason 

    that   the   municipal   rateable   value   has   been   correctly   adopted   for   the 

    purpose  of   determining  the   annual   value  under   section   23(1)(a).     The 

    proposition by the Revenue that the Assessing Officer can adopt the 'fair 

    rent' based on information obtained from local enquiries, brokers and the 

    internet is totally unwarranted.   In cases where the property is let out, 
                               
    ordinarily the license fee agreed between a willing licensor and a willing 
                              
    licensee   uninfluenced   by   any   extraneous   circumstances   would   afford 

    reliable evidence of what the landlord might reasonably expect to get from 

    a hypothetical tenant.   If such rent is higher than the municipal rateable 
       
    value, the provisions of sub-clause (b) of section 23(1) would apply.  The 

    action   of   the   Assessing   Officer   in   determining   the   annual   value   by   (i) 

    imputing   notional   interest   on   the   security   deposit   to   the   actual   rent 

    received   while   separately   assessing   the   income   earned   on   the   security 

    deposit (equivalent to 12 months advance license fee) offered to tax under 

    the head 'other sources' [Reclamation Real Estate Co. India Pvt. Ltd.] (ii) 

    adopting the rent fetched by another premises in the same building as the 

    annual letting value in the case of the assessee [Reclamation Properties 

    India Pvt. Ltd. & Reclamation Realty India Pvt. Ltd.] in place of the rent 

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                                                    *30*                                    itxa2447.11

    receivable has been rightly reversed by the Tribunal.  So also the action of 

    the Assessing Officer in reopening past assessments to reassess the annual 

    letting value based on the rent fetched by some other premises has been 

    rightly rejected by the Tribunal. Ms. Vissanjee, therefore, submits that the 

    appeal be dismissed.

    26]    Mr. Prakash Shah appearing in Income Tax Appeal No.1468 of 2011 

    submits that this appeal challenges the order passed by the Income Tax 
                                
    Appellate Tribunal in Income Tax Appeal No.2587/MUM/2009 dated 16 th 

    July, 2010 in respect of the assessment year 2005-06.  The respondent is 
                               
    the   owner   of   a   commercial   property   at   Kandivali(W),   Mumbai.   The 

    respondent has let out the first floor admeasuring 4625 sq.ft to 9 entities, 
       
    which are group entities in 1992.  These entities have in turn sub-let the 
    
    premises   to   Saraswat   Co-operative   Bank   Ltd.     The   Assessing   Officer 

    accepted the transaction between the tenants and Saraswat Co-operative 

    Bank   Ltd.   as   genuine   and   the   rent   payable   by   the   tenants   to   the 

    respondents as Annual Letting Value within the meaning of section 23 of 

    the   Income   Tax   Act,   1961.     It   is   urged   by   Shri   Shah   that   though   the 

    tenants   filed   their   respective   returns   of   income   and   offered   the   rent 

    received   by   them   from   Saraswat   Bank   for   taxation   what   transpired 

    thereafter   is   that   the   annual   rateable   value   determined   by   the 

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                                                   *31*                                   itxa2447.11

    Brihanmumbai Mahanagarpalika was set aside by the Small Causes Court 

    at Mumbai.  The Small Causes Court, Mumbai had held that the municipal 

    valuation cannot be based on the amount received by the tenants (group 

    entities) from sub-tenant (M/s. Saraswat Bank).  The rateable value has to 

    be determined on the rent paid by the group entities   (tenants) to the 

    owner namely the respondent-assessee. It is in these circumstances that in 

    the   return   of   income,   the   respondent-assessee   stated   accordingly. 

    However, the Assessing Officer determined the Annual Letting Value on 
                               
    the amount or quantum which was received by the tenant from the sub-

    tenant.     The   Assessing   Officer   added   the   difference   between   the   rent 

    received   by   the   respondent-assessee   from   the   tenants   and   the   amount 

    received  by   the   tenants   from  the   sub-tenant.    For   the  first   time  in   the 
       
    assessment year 2005-06, the Assessing Officer held that the transaction 

    between the respondents and the tenants is camouflage and colourable 

    device to evade the tax.  

    27]    An appeal was preferred before the Commissioner of Income Tax 

    (Appeals) against the addition made by the Assessing Officer and the said 

    appeal was partly allowed on 4 th February, 2009.  By the impugned order, 

    the   Tribunal   set   aside   the   Annual   Letting   Value   determined   by   the 

    Assessing   Officer   and   sustained   by   the   Commissioner   of   Income   Tax 

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                                                 *32*                                  itxa2447.11

    (Appeals).     The   Tribunal   held   that   the   transaction   between   the 

    respondents and the tenants is not a colourable device.   It is submitted, 

    therefore, the tax effect, as stated by the revenue in the memo of appeal is 

    Rs.6.84 lakhs which is much below Rs.10 lakhs.  Therefore, no appeal can 

    be filed to the Tribunal.   Further and without prejudice, there is a pure 

    finding of fact and which cannot be said to be perverse.   All the tenants 

    except one have offered the amount received from the sub-tenant to tax. 

    The transaction between the respondent-assessee and the group entities is 
                              
    held to be genuine.  It is purely a commercial transaction and cannot be 
                             
    said to be entered into for avoiding taxes.   It may be that, there is an 

    interest   free   deposit   which   has   been   made   by   the   tenants   with   the 

    respondents.   However, no interest free security deposit was received by 
       
    the Saraswat Bank from the respondent-assessee.  Hence the  transactions 

    entered between the respondent and the tenants were at arm's length and 

    the Annual Letting Value cannot be the rent received by the tenants  from 

    the sub-tenant.  Further, it is submitted that  where a property is let out 

    and   subsequently   tenant's   sub-let   the   same   property   for   higher   rental 

    income, the   higher   rental   income  earned  by   the   tenant  from  the   same 

    property cannot be taken as Annual Letting Value in the hands of owner 

    for computing the income from house property.   It is submitted that the 

    Annual Letting Value in the present case is the actual rent received from 

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                                                   *33*                                   itxa2447.11

    the tenants.     It is submitted that this Court in case of Akshay Textiles 

    Trading and Agencies Pvt. Ltd. (supra) has held that Annual Letting Value 

    is the rent received or receivable by the assessee-owner from the tenants 

    irrespective whether the tenants have received higher rent by subletting. 

    The   premises   are   within   Greater   Mumbai   and   are   covered   by   the   rent 

    control legislation.  The Annual Letting Value for the purpose of municipal 

    tax is held to be the rent paid by the tenants to the respondent determined 

    by  the   competent  court.     The   Assessing  Officer  was  bound  to   take  the 
                               
    rateable value fixed by the competent Court for the purpose of municipal 
                              
    tax as the Annual Letting Value.   It is submitted that it is a well settled  

    position   that   the   rent   received   by   the   respondent   or   standard   rent   of 

    property whichever is higher is the Annual Letting Value for the purpose of 
       
    section 23(1) of the Act.  It is also submitted that this issue had come up 

    in   earlier   assessments   of   the   respondent   and   the   rent   received   by   the 

    respondent was accepted as Annual Letting Value by the department since 

    assessment years 1993-94 (first year), 1994-95 and 1996-97.   All these 

    assessments   were   completed   under   section   143(3)   and   after   elaborate 

    discussion the rent received by the respondent was accepted as Annual 

    Letting Value.  There are no changes in the facts and circumstance of the 

    case to deviate from the Annual Letting Value determined by the Assessing 

    Officer   in   the   previous   assessment   years.     In   general,   doctrine   of   'Res 

                                                   33/64
                                                     *34*                                   itxa2447.11

    Judicata' does not apply to Income Tax Proceedings.  However, it appears 

    that conclusion reached based on identical facts in the previous years need 

    not be given a go by in the absence of any compelling circumstance.   In 

    this respect, reliance is placed on following decisions:

    1)      Radhasoami Satsang 193 ITR 321 (SC);

    2)      Berger Paints India Ltd. V/s. CIT 266 ITR 99 (SC);

    3)      Baijnath Brijmohan & Sons Ltd. 161 ITR 234 (Bom);

    4)      H A Shah 30 ITR 618 (Bom); and
                                
    5)      CIT V/s. Paul Brothers 216 ITR 548 (Bom).
                               
    28]    Mr.   Shah   submits   that   in   view   of   the   above   submissions,   the 

    impugned order passed by the Tribunal needs to be upheld and appeal 
       
    filed by the revenue is liable to be dismissed.

    29]    For   properly   appreciating   the   rival   contentions   it   would   be 

    necessary to make a reference to section 22 and 23 of the Income Tax Act, 

    1961.     Section   22   falls   in   Chapter   IV   of   the   Income   Tax   Act   which   is 

    entitled   as   computation   of   total   income.   Section   14   is   the   first   section 

    appearing in this Chapter and it sets out the heads of income.  By section 

    14(A) the expenditure incurred in relation to the income which has to be 

    excluded   from   the   total   income   is   set   out.   Then,   there   is   a   sub-

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    title/heading "A. Salaries".  Section 15 to 17 deal with salaries, deductions 

    from salaries and salary, perquisites in lieu of salary.  

    30]   Then, comes the heading "C. Income from house property".  Section 

    22 falling thereunder states that  the annual value of property consisting 

    of any building or lands appurtenant thereto, of which the assessee is the 

    owner, excluding such portions of such property as he may occupy for the 

    purpose of any business or profession carried on by him and profits shall 
                              
    be chargeable  to income tax under the head income from house property.

    31]   Section   23   states   that   for   the   purpose   of   section   22,   the   annual 

    value of property shall be deemed to be under clause (a), the sum for 

    which the property might reasonably be expected to be let from year to 
       
    year or under clause (b) when the property or any part of the properties 
    
    are let and the actual rent received or receivable by the owner in respect 

    thereof, is in excess of the sum which is referred to in clause (a).  Then, 

    the amount so received or receivable would be deemed to be the annual 

    value for the purposes of section 22.  There is a third category where the 

    property or any part of it has been let but was vacant during the whole or 

    any part of the previous year and because of such vacancy the actual rent 

    received or receivable by the owner in respect thereof, is less than the sum 

    referred to in clause (a) the amount so received or receivable will be the 

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    annual   value.     Thereafter   there   is   a   proviso   and   which   refers   to   the 

    deduction   towards   tax   levied   by   any   local   authority   in   respect   of   the 

    property and these have to be deducted in determining the annual value 

    of the property of that previous year in which such taxes are actually paid 

    by the assessees.  Then, there is an explanation and which states that for  

    the purpose of clause (b) or (c) of sub-section (1) the amount of actual 

    rent received or receivable by the owner shall not include, subject to the 

    rules, the amount of rent which the owner cannot realize.  By sub-sections 
                                 
    (2)   and   (3)   it   has   been   clarified   that   the   annual   value   in   view   of   the 
                                
    circumstances set out in this sub-section will be taken to be nil but sub-

    section (2) of section 23 if will not apply in the circumstances set out by 

    sub-section(3).     If   the   owner   has   more   than   one   house   then,   how   the 
       
    annual value has to be determined, is set out in sub-section (4) of section 

    23.

    32]     Thus, the  scheme is that income from house property shall be taken 

    as a component of the income chargeable to tax.  How that income from 

    house property has to be 'computed' is then provided by the legislature. 

    That is the annual value of the property.  Thus, the legislature deems the 

    annual value firstly to be the sum for which the property might reasonably 

    be expected to be let from year to year.   In the event, the property which  

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    consists of any buildings or lands appurtenant thereto,   the actual rent 

    received or receivable by the owner in respect thereof if in excess of the 

    sum referred to in clause (a), it is that amount so received or receivable 

    which   shall   be   deemed   to   be   the   annual   value   for   the   purposes   of 

    computing the tax under the head income from house property.  

    33]    In the present appeals, the arguments proceed on the footing that in 

    computing the annual value of house property under section 23 (1)(a) is 
                              
    the Assessing Officer required to adopt the municipal rateable value of the 

    property.  However, in all the appeals before us, the factual position is that 
                             
    the property or part thereof is let or given on leave and license basis.  The  

    Assessing   Officer   has   disbelieved   the   assessees   in   computation   or 
       
    calculation of income from house property.  In the opinion of the Assessing 
    
    Officer   and   the   revenue,   the   amount   received   towards   rent   or 

    compensation   either   coupled   with   an   interest   free   security   deposit   or 

    otherwise as reflected and shown in the accounts of the assessees is not 

    the market rent or market value.   Therefore, it would be open for the 

    Assessing Officer to doubt or question the same.  Thereafter, the Assessing 

    Officer is free to determine the amount which the property may fetch.  In 

    other words, the sum for which the property might reasonably be expected 

    to be let from year to year can be determined by him.

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    34]    The   Assessing   Officer,   therefore,   in   the   Appeal   No.1213   of   2011 

    referred to the rental income shown under the head "income from house 

    property".     The   assessee   disclosed   that   after   claiming   deduction   from 

    municipal   taxes,   repairs,   the   net   income   from   house   property   is 

    Rs.2,49,882/- in the Profit and Loss Account for the year consideration 

    though the assessee credited rental income of Rs.3,60,000/-.

    35]    The Assessing Officer called upon the assessee to furnish the details 
                                
    of   the   property   let   out.     Although   the   Assessing   Officer   refers   to   the 

    transaction as letting what the assessee produced was a copy of the leave 
                               
    and license agreement.  The leave and license agreement is dated 1 st April, 

    2004.  On perusal of the above, Assessing Officer noted the facts which we 
       
    have referred in some  details in the opening paragraphs of this judgment. 

    We may proceed on the premise that the Assessing Officer was empowered 

    and   equally   justified   in   calling   upon   the   assessee   to   substantiate   the 

    quantum received but what we find is that the assessee furnished certain 

    details.   Those details are referred to in para-3 of the assessment order. 

    Thereafter, the Assessing Officer issued a notice under section 142(1) of 

    the   Income   Tax   Act   and   the   assessee   was   called   upon   to   furnish   an 

    explanation   as   to   why   the   income   from   house   property   should   not   be 

    computed   by   estimating   the   annual   value   as   per   provisions   of   section 

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    23(1)(a) of the Income Tax Act.   The assessees representative addressed 

    letters   and   urged   that   no   estimation   is   required   to   be   made   as   the 

    quantum reflects the  prevailing rate or value in  the market.   From the 

    record   it   appears   that   the   Assessing   Officer   in   the   letter   dated   12 th 

    December,   2007   set   out   certain   instances   and   which   he   termed   as 

    comparable.     He   submits   that   these   instances   are   of   leave   and   license 

    agreement.  Therefore, the rate per sq.ft. and based on which the license 

    fees are determined would demonstrate as to how the amount decided or 
                               
    determined   as  license   fees  by   the   assessee   with   the   related   party   M/s. 

    Reliance is lesser than the prevailing rate.

    36]    Thereafter, the Assessing Officer dealt with the stand of the assessee 
       
    and which was supported by the assessee by some decisions of Courts of 
    
    law.  This is evident from paras-3.8 onwards.  The Assessing Officer held 

    that the assessee has let out the premises to M/s. Reliance Industries Ltd. 

    for a period of 33 months as per the leave and license agreement entered 

    into between the assessee and M/s. Reliance Industries Ltd. dated 1 st April, 

    2004.     The   Assessing   Officer   held   that   the   relationship   between   the 

    assessee firm and the tenants is established as both belong to the Reliance 

    Group.  Then, he held that the annual value of the premises let out by the 

    assessee can be estimated as per the provisions of section 23(1)(a)   and 

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    the estimate can be of an amount higher than the standard or 'fair rent' 

    determined as per the Rent Control Act/municipal rateable value.  

    37]    At the same time, the Assessing Officer refers to certain instances, in 

    para 3.11.1 of his order, of properties in respect of which annual value had 

    been   estimated   by   the   Assessing   Officer   under   section   23(1)(a)   of   the 

    Income Tax Act, 1961   on these properties which had not been let out. 

    Therefore, only notional rent was estimated.  

    38]
                               
           In   the   case   before   us   what   the   Assessing   Officer   and   the   other 
                              
    authorities so also the revenue feels that despite the assessees producing 

    before   them   the   relevant   documents   evidencing   the   letting   out   of 

    properties,   the income derived therefrom is not in tune or par with the 
       
    prevailing market rate.  Therefore, an estimation can be done in terms of 
    
    section   23(1)(a)   of   the   Income   Tax   Act.     During   such   estimation   the 

    Assessing Officer is not bound by either standard rent or the ratable value 

    for   the   purposes   of   municipal   taxation   determined   by   the   municipal 

    authorities.

    39]    It is this controversy which is being dealt with by us.  In the case of 

    Commissioner of Income Tax V/s. J. K. Investors (Bombay) Ltd. (2001)  

    248 ITR 723 a Division Bench of this Court was considering a question of 

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    law,   whether   notional   interest   on   interest   free   deposit   received   by   the 

    assessee   against  letting  of   property  could  be  taken   into   account  in  the 

    cases falling under section 23(1)(b) of Income Tax Act, 1961.   In other 

    words, whether such interest would form part of annual rent received or 

    receivable under this provision.

    40]    The facts that are noted by the Division Bench are that the assessee 

    purchased premises in a building and which premises were let out to M/s. 

    Raymond   Woollen   Mills   Ltd.   from   1 st  October,   1991.     The   assessee 

    purchased the premises in the previous year relevant to the assessment 
                               
    year   1992-93.    The   Lessee  agreed  to   deposit   the   amount   as  a   security 

    deposit for the due performance of the lease.  The assessee was not to pay 
       
    any   interest   on   the   security   deposit   to   the   lessee.     The   premises   were 
    
    covered by the provisions of the Bombay Rent Act, 1947.   The Assessing 

    Officer   held   that   for   the   purposes   of   section   23(1)(b)   and   though   the 

    annual rent received or receivable was higher than the expected rent, still 

    the notional interest for the interest free deposit would be the sum total of 

    the   rent   actually   received   plus   this   notional   interest.     That     notional 

    interest  was   calculated   by  the   Assessing  Officer   at  a   rate   at  which   the 

    assessee   borrowed   funds.     This   order   of   the   Assessing   Officer   was 

    confirmed in appeal by the Commissioner of Income Tax (Appeals).  Being 

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    aggrieved by this order, the assessee carried the matter in the Tribunal. 

    The Tribunal on facts  found that the actual rent received by the assessee, 

    even without taking into account the notional interest, was more than the 

    annual value determinable under section 23(1)(a) of the Act and it is for 

    this reason that the Department invoked only section 23(1)(b) of the Act. 

    The   Tribunal   concluded   that   section   23(1)(b)   only   applied   to   cases   of 

    actual rent being received by the assessee and that the said section does 

    not apply to cases falling under section 23(1)(a) which permits adoption 
                                
    of   notional   value   as   annual   letting   value   of   the   property.     Hence,   the 
                               
    Tribunal allowed the appeal. 

    41]     This Court, on facts further noted that the department has invoked 
       
    section 23(1)(b) of the Act and not section 23(1)(a).  Further the Tribunal 
    
    held  that  an  annual   rent   received   by   the  assessee   even   without   taking 

    account the notional interest was more than Annual Letting Value of the 

    property determinable under section 23(1)(a) of the Income Tax Act.  The 

    Division Bench of this Court referred to the judgment of the Calcutta High 

    Court  in   the   case  of  Commissioner  of Income  Tax V/s.  Satya  Co.Ltd.  

    (1994) 75 Taxman 193 and a judgment of the Madras High Court in  

    the   case   of   Commissioner   of   Income   Tax   V/s.   Ratanchand   Chordia  

    (1997) 228 ITR 626.  The Division Bench further held as under:-

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    "In this matter, we are required to  consider the scheme of taxation  
    of income from house property.  Section 22 says that the measure  

    of income from house property is its annual value.   The annual  

    value   is   to   be   decided   in   accordance   with   section   23.    In   this  
    matter,   we   are   required   to   consider   the   scheme   of   taxation   of  
    income from house property. Section 22 says that the measure of  

    income from house property is its annual value. The annual value  
    is to be decided in accordance with section 23. Sub-section (1) of  
    section   23,   by   virtue   of   the   amendment   with   effect   from   the  

    assessment year 1976-77, has two limbs, namely, clauses (a) and  
                          
    (b). Clause (a) states that the annual value is the sum for which  
    the property might reasonably be expected to be let from year to  
                         
    year. Clause (b) covers a case where the property is let and the  
    actual rent is in excess of the sum for which the property might  
    reasonably be expected to be let from year to year. In other words,  
      
    insertion of clause (b) by the Taxation Laws (Amendment) Act,  
   
    1975 covers a case where the rent for a year actually received by  
    the owner is in excess of the lawful rent which is known as the fair  
    rent   or   standard   rent   under   the   rent   control   legislation.   The  

    provision   of   section   23(1)(a)   apply   both   to   owner   occupied  
    property as also to property which is let out and the measure of  
    valuation to decide the annual value is the standard rent or the  

    fair rent. Section 23(1 )(b) only applies to cases where the actual  
    rent received is more than the reasonable rent under section 23(1)
    (a) and it is for this reason that section 23(1)(b) contemplates  
    that in such cases the annual value should be decided on the basis  
    of the actual rent received. As stated hereinabove, in this case, the  

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    department   has   invoked   section   23(1)(b)   which,   as   stated  
    hereinabove, proceeds on the basis that the actual rent received by  

    the assessee is more than the reasonable rent under section 23(1)
    (a). The Tribunal has also found that the actual rent received by  
    the   assessee,   even   without   taking   into   account   the   notional  
    interest,was   more   than   the   annual   value   determinable   under  

    section 23(1)(a). This finding of fact has not been challenged by  
    the department in this appeal. On the contrary, the department  
    has contended that in this case section 23(1)(b) was applicable.  

    They have not relied on the provisions of section 23(1)(a). The  
                          
    question   as   to   whether   notional   interest   could  have   been   taken  
    into account under section 23(1)(a) does not arise in this appeal  
                         
    and   we   do   not   wish   to   go   into   that   question   in   this   appeal.  
    However, the moot point which needs to be considered in this case  
    is   whether   notional   interest   could   form   part   of   the   actual   rent  
      
    received by the assessee under section 23(1)(b). It is important to  
   
    note that the property is covered by the provisions of the Bombay  
    Rent Act. The scheme of section 23(1)(b), in contradistinction to  
    section 23(1)(a), shows that fair rent is the basis to determine the  

    annual value of a property. This was the sole basis prior to the  
    assessment   year   1975-76.   However,   after   the   amendment   of  
    section 23(1) by the Taxation Laves (Amendment) Act, 1975, the  

    legislature has clearly laid down under section 23(1)(b) that when  
    the actual annual rent received or receivable is in excess of the fair  
    rent determinable under section 23(1)(a), then such higher actual  
    annual rent would constitute the annual value of the property. It is  
    important to bear in mind that under section 22, the measure of  

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    is to be decided in accordance with section 23(1). By, virtue of the  

    amendment,  clause  (a)  states  that  annual   value  is  the  sum  for  

    which the property might reasonably be expected to  be let from  
    year to year whereas clause (b) covers a case where the property is  
    let   and   the   actual   rent   is   in   excess   of   the   sum   for   which   the  

    property might reasonable be expected to be let from year to year.  
    In our view, this later insertion of clause (b) by the Taxation Laws  
    (Amendment) Act. 1975 is meant to cover a case where the rent  

    per annum actually received by the owner is in excess of the fair  
                           
    rent or the standard rent under the rent control legislation. Now,  
    in this case, the department has invoked section 23(1)(b). Now, in  
                          
    this case, it has been found that the actual rent received by the  
    assessee   is   more   than   the   fair   rent   even   without   taking   into  
    account   notional   interest.   Generally,   the   fair   rent   is   fixed   even  
      
    under   the   B.M.C.   Act   and  the   Rent   Act   by   taking   into   account 
   
    various principles of valuation, viz., contractor's method, the rent  
    method etc. However, that exercise is undertaken to decide the fair  
    rent of the property. In that connection, the actual rent received by  

    the lessor also provides a piece of evidence to decide the fair rent of  
    the property. However, under the Income Tax Act, the scheme is  
    slightly different. Section 23(1)(b) provides that where the actual  

    rent   is   more   than   the   fair   rent,   the   actual   rent   would   be   the  
    annual value of the property. In the circumstances, the value of the  
    notional   advantage,   like   notional   interest   in   this   case,   will   not  
    form part of actual rent received as contemplated by section 23(1)
    (b).   At   the   cost   of   repetition   it   may   be   mentioned   that   under  

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                                                    *46*                                   itxa2447.11

          section 23(1)(a), the assessing officer has to decide the fair rent of  
          the property. While deciding the fair rent, various factors could be  

          taken into account. In such cases various methods like contractors  

          method could be taken into account. If on comparison of the fair  
          rent with the actual rent received, the assessing officer finds that  
          the actual rent received is more than the fair rent determinable as  

          above,  then  actual  rent shall  constitute  the annual  value under  
          section 23(1)(b). Now, applying the above test to the facts of this  
          case, we find a categorical finding of fact recorded by the Tribunal  

          that the actual rent received by the assessee was more than the fair  
                                
          rent. Under the above circumstances, in view of the said finding of  
          fact, we do not see any reason to interfere."

    42]    The Division Bench expressly kept open the question as to whether 
       
    notional interest can form part of the "fair rent" under section 23(1)(a) of 
    
    the Income Tax Act, 1961.

    43]    It also appears that both, the judgment in the case of Satya & Co. 

    (supra) rendered by a Division Bench of the Calcutta High Court and the 

    judgment of this Court in the case of J.K. Investors (Bombay) (supra) were 

    considered by the Full Bench of the Delhi High Court on which decision 

    heavy reliance is placed by the counsel for the assessee.  The Full Bench 

    was   called   upon   to   decide   as   to   how   to   determine   "fair   rent"   of   the 

    property and, then, to find out as to whether the actual rent received is 

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    less or  more than  the "fair  rent" so that higher of the  two is taken as 

    Annual Letting Value under section 23(1)(b) of the Income Tax Act.

    44]    The factual and admitted position before the Delhi Full Bench was 

    in addition to the contractual rent, substantial amount by way  of interest 

    free deposit is given,   the security deposit is many time more than the 

    annual   rent  received  by  the  assessee.   Nonetheless,  the   Annual   Letting 

    Value   arrived   at   by   the   Municipal   Corporation   was   less   than   the 
                                
    contractual rent received by the assessees.   The Assessing Officer while 

    arriving   at   the   "fair   rent"   had   added   notional   interest   on   the   security 
                               
    deposit to the actual rent received to arrive at the Annual Letting Value. 

    None of the cases before the Full Bench involved applicability of the Delhi 
       
    Rent Control Act.  Therefore, question of fixing standard rent in terms of 
    
    this Act did not arise.   However, it was admitted that if the property is 

    covered by Delhi Rent Control Act then the standard rent under the said 

    Act can be treated as "fair rent" in view of various judgments.

    45]    In the above backdrop, the Full Bench held as under:-

                   With this, we revert back to the moot question, viz., how to  
           determine the "fair rent" of the property and then to find out as  
           to whether actual rent received is less or more than the "fair rent"  
           so   that   higher   of   two   is   taken   as   annual   letting   value   under  
           Section 23 (1) (b) of the Act. For this purpose, we first discuss the  

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     validity   of   approach   taken   by   the   AO,   viz.,   whether   it   is  
     permissible   to   add   notional   interest   of   interest   free   security  

     deposit and add the same to the actual rent received for arriving  

     at annual letting value. Even the Division Bench while making  
     reference did not countenance the aforesaid formula adopted by  
     the AO as is clear from Para 12 of the reference order wherein it  

     is observed as under:

     "12. In this backdrop, the important question which arises for  
     determination is: what is the fair rent of the properties, which  

     were let out in the instant case? The mistake committed by the  
                          
     AO   was   that   he   did   not   address   this   issue   and   straightway  
     proceeded   to  add   notional  interest   on  the  interest   free   security  
                         
     deposit.  
 The   aforesaid   conclusion   is   correct.   We   may   record   that 
     permissibility of adding notional interest into actual market rent  
      
     received was not approved by the Calcutta High Court in the case  
   
     of Commissioner of Income Tax Vs. Satya Co. Ltd.[(1997) 140  
     CTR (Cal) 569] and categorically rejected in the following words:

             "There is no mandate of law whereby the AO could convert  
     the depression in the rate of rent into money value by assuming  
     the   market   rate   of   interest   on   the   deposit   as   the   further   rent  
     received by way of benefit of interest-free deposit. But s. 23, as  

     already noted, does not permit such calculation of the value of the  
     benefit of interest-free deposit as part of the rent. This situation is,  
     however, foreseen by Schedule III to the WT Act and it authorises  
     computation of presumptive interest at the rate of 15 per cent. as  
     an integral part of rent to be added to the ostensible rent. No such  

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     provision, however, exists in the Act. That being so, the act of the  
     AO in presuming  such  notional  interest  as  integral part of the  

     rent   is   ultra   vires   the   provision   of   s.   23(1)   and   is,   therefore,  

     unauthorised.   Though   what   has   been   urged   on   behalf   of   the  
     Revenue   is   not   to   be   brushed   aside   as   irrational,   yet   the  
     contention   is   not   acceptable   as   the   law   itself   comes   short   of  

     tackling such fact-situation."
 This view of the Calcutta High Court has been accepted by  
     a Division Bench of this Court as well in the case of Commissioner  

     of Income Tax Vs. Asian Hotels Limited [(2008) 215 CTR (Del.)  
                           
     84] holding that the notional interest on refundable security, if  
     deposited, was neither taxable as profit or gain from business or  
                          
     profession under Section 28(iv) of the Act or income from house  
     property under Section 23(1)(a) of the Act. Rationale given in  
     this behalf was as under (page 493):

               "A   plain   reading   of   the   provisions   indicates   that   the  
   
     question of any         notional interest on an interest free deposit  
     being added to the income of       an assessed on the basis that it  
     may have been earned by the Assessee if placed as a fixed deposit,  

     does not arise. Section 28 (iv) is concerned with business income  
     and is distinct and different from income from house property. It  
     talks   of   the   value   of   any   benefit   on   perquisite,   "whether  

     convertible into money or not" arising from "the business or the  
     exercise of a profession." It has been explained by this Court in  
     Ravinder Singh that Section 28 (iv) can be invoked only where  
     the   benefit   or   perquisite   is   other   than   cash   and   that   the   term  
     "benefit or amenity or perquisite" cannot relate to cash payments.  

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     In the instant case, the AO has determined the monetary value of  
     the benefit stated to have accrued to the assessed by adding a sum  

     that   constituted   18%   simple   interest   on   the   deposit.   On   the  

     strength of Ravinder Singh, it must be held that this rules out the  
     application of Section 28 (iv) of the Act.

 Section   23(1)(a)   is   relevant   for   determining   the   income  

     from house property and concerns determination of the annual  
     letting value of such property. That provision talks of "the sum for  
     which the property might reasonably be expected to let from year  

     to   year."   This   contemplates   the   possible   rent   that   the   property  
                         
     might fetch  and not  certainly  the  interest in  fixed deposit that  
     may be placed by the tenant with the landlord in connection with  
                        
     the letting out of such property. It must be remembered that in a  
     taxing statute it would be unsafe for the Court to go beyond the 
     letter of the law and try to read into the provision more than  
      
     what is already provided for. The attempt by learned counsel for  
   
     the Revenue to draw an analogy from the Wealth Tax Act, 1957 is  
     also to no avail. It is an admitted position that there is a specific  
     provision in the Wealth Tax Act which provides for considering of  

     a   notional   interest   whereas   Section   23(1)(a)   contains   no   such  
     specific provision."

 We approve the aforesaid view of the Division Bench of this  

     Court and Operative words in Section 23 (1)(a) of the Act are  
     "the sum for which the property might reasonably be expected to  
     let from year to year". These words provide a specific direction to  
     the Revenue for determining the  "fair rent". The Assessing Officer,  
     having regard to the aforesaid provision is expected to make an  

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     inquiry as to what would be the possible rent that the property  
     might fetch. Thus, if  he finds that the actual rent received is less  

     than the "fair/market rent" because of the reason that the assessee  

     has   received   abnormally   high   interest   free   security   deposit   and  
     because of that reason,   the actual rent received is less than the  
     rent which the property might fetch, he can undertake necessary  

     exercise in that behalf. However, by no stretch of imagination, the  
     notional   interest   on   the   interest   free   security   can   be   taken   as  
     determinative factor to arrive at a "fair rent". The Provisions of  

     Section   23(1)(a)   do   not   mandate   this.   The   Division   Bench   in  
                          
     Asian Hotels Limited [2010] 323 ITR 490 (Delhi), thus, rightly  
     observed that in a taxing statute it would be unsafe for the Court  
                         
     to   go   beyond   the   letter   of   the   law   and   try   to   read   into   the  
     provision more than  what is already provided for. We may also 
     record   that   even   the   Bombay   High   Court   in   the   case   of  
      
     Commissioner of Income Tax Vs. J. K. Investors (Bombay) Ltd.,  
   
     [(2001) 248 ITR 723 (Bom.)] categorically rejected the formula  
     of addition of notional interest while determining the "fair rent".

             It   is,   thus,   manifest   that   various   Courts   have   held   a  

     consistent view that notional interest cannot form part of actual  
     rent. Hence, there is no justification to take a different view that  
     what has been stated in Asian Hotels Limited [2010] 323 ITR 490  

     (Delhi).

             The next question would be as to whether the annual letting  
     value fixed by the Municipal Authorities under the Delhi Municipal  
     Corporation Act  can be the basis of adopting annual letting value  
     for   the   purposes   of   Section   23   of   the   Act.   This   question   was  

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     answered in affirmative by the Calcutta High Court in Satya Co.  
     Ltd. [1997] 140 CTR (Cal) 569 on the ground that the provisions  

     contained   in   the   Delhi   Municipal   Corporation   Act   for   fixing  

     annual letting value is in pari materia with Section 23 of the Act.  
     The   Court   opined   that   the   fair   rent   fixed   under   the   Municipal  
     laws, which takes into consideration everything, would form the  

     basis of arriving at annual value to be determined under Section  
     23(1)(a)   and   to   be   compared   with   actual   rent   and   notional  
     advantage in the form of notional interest on interest free security  

     deposit could not be taken into consideration. It is clear from the  
                         
     following discussion therein:

            "6. With regard to question Nos. (5) and (6) which are only  
                        
     for the assessment years 1984-85 and 1985-86 the further issue  
     involved is whether any addition to the annual rental value can be  
     made with reference to any notional interest on the deposit made  
      
     by the tenant. When the annual value is determined under sub-

     clause (a) of sub-section   (1) of section 23 with reference to the  
     fair rent then to such value no further addition can be made. The  
     fair rent, takes into consideration everything. The notional interest  

     on the deposit is not any actual rent received or receivable. Under  
     sub-clause (b) of section 23(1) only  the  actual  rent received or  
     receivable can be taken into consideration and not any notional  

     advantage. The rent is an actual sum of money which is payable  
     by   the   tenant   for   use   of   the   premises   to   the   landlord.   Any  
     advantage and/or perquisite cannot be treated as rent. Wherever  
     any such perquisite or benefit is sought to be treated as income,  
     specific provisions in that behalf  have been made in the Act by  

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     including such benefit, etc., in the definition of the income under  
     section 2(24) of the Act. Specific provisions have also been made  

     under   different   heads  for   adding   such   benefits   or   perquisites   as  

     income while computing income under those heads, e.g., salary,  
     business. The computation of the income under the head 'House  
     property' is on a deemed basis. The tax has to be paid by reason of  

     the ownership of the property. Even if one does not incur any sum  
     on account of repairs, a statutory deduction therefore is allowed  
     and   where   on   repairs   expenses   are   incurred   in   excess   of   such  

     statutory   limit,   no   deduction   for   such   excess   is   allowed.   The  
                          
     deductions for municipal taxes and repairs are not allowed to the  
     extent they  are  borne by  the tenant.  However, even such  actual  
                         
     reimbursements   for   municipal   taxes,   insurance,   repairs   or 
     maintenance of common facilities are not considered as part of the  
     rent and added to the annual value. Accordingly, there can be no  
      
     scope or justification whatsoever for making any addition for any  
   
     notional interest for determining the annual value.

             Whatever  benefit or  advantage which  is derived from the  
     deposits   -   whether   by   way   of   saving   of   interest   or   of   earning  

     interest   or  making  profits  by  investing  such   deposit   -  the   same  
     would be reflected in computing the income of the assessee under  
     other heads.

             In our view there is no scope for making any addition on  
     account of so-called notional interest on the deposit made by the  
     tenant, since there is no provision to this effect in s. 22 or 23 of  
     the IT Act, 1961."

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 *54*                                    itxa2447.11

             In fact, this is the view taken even by the Supreme Court in  
     the case of Mrs. Shiela Kaushish Vs. CIT [1981] 131 ITR 435 on  

     account   of   similarity   of   the   provisions   under   the   municipal  

     enactments and Section 23 of the Act.

             It is on this basis that in the present case, the Commissioner  
     of Income Tax (Appeals) gave primacy to the rateable value of the  

     property   fixed   by   the   Municipal   Corporation   of   Delhi   vide   its  
     assessment   order   dated   December   31,   1996   and   on   this   basis,  
     opined that the actual rent was more than the said rateable value  

     and therefore, as per Section 23 (1)(b), the actual rent would be  
                           
     the income from house property and there could not have been  
     any further additions.

 Since   the  provisions  of   fixation   of  annual   rent  under   the 
     Delhi Municipal Corporation Act are in pari materia of Section 23  
     of   the   Act,   we   are   inclined   to   accept   the   aforesaid   view   of   the  
      
     Calcutta High Court in Satya Co. Ltd. [1997] 140 CTR (Cal) 569  
   
     that   in   such   circumstances,   the   annual   value   fixed   by   the  
     Municipal   Authorities   can   be   a   rational   yardstick.   However,   it  

     would be subject to the condition that the annual value fixed bears  
     a close proximity with the assessment year in question in respect  
     of which the assessment is to be made under the Income Tax laws.  
     If there is a change in circumstances because of passage of time,  

     viz.,   the   annual   value   was   fixed   by   the   Municipal   Authorities  
     much earlier in point of time on the basis of rent than received,  
     this may not provide a safe yardstick if in the Assessment Year in  
     question when assessment is to be made under Income Tax Act.  
     The property is let-out at a much higher rent. Thus, the Assessing  

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     Officer   in   a   given   case   can   ignore   the   municipal   valuation   for  
     determining annual letting value if he finds that the same is not  

     based on relevant material for determining the "fair rent" in the  

     market   and   there   is   sufficient   material   on   record   for   taking   a  
     different   valuation.   We   may   profitably   reproduce   the   following  
     observations of the Supreme Court in the case of Corporation of  

     Calcutta Vs. Smt. Padma Debi, AIR 1962 SC 151, 153.

         "A bargain between a willing lessor and a willing lessee  
         uninfluenced by any extraneous circumstances may afford a  

         guiding test of reasonableness. An inflated or deflated rate  
         of rent based upon fraud, emergency, relationship and such  
                          
         other considerations may take it out of the bounds of  
         reasonableness."

 Thus the rateable value, if correctly determined, under the  
     municipal laws can be taken as ALV under Section 23(1)(a) of the  
      
     Act. To that extent we agree with the contention of the learned  
     Counsel of the assessee. However, we make it clear that rateable  
   
     value is not binding on the assessing officer. If the assessing officer  
     can   show   that   rateable   value   under   municipal   laws   does   not  

     represent the correct fair rent, then he may determine the same on  
     the   basis   of   material/   evidence   placed   on   record.   This   view   is  
     fortified by the decision of Patna High Court in the case of Kashi  

     Prasad Kataruka v. CIT [1975] 101 ITR 810.

              The above discussion leads to the following conclusions:

               (i) ALV would be the sum at which the property may be  
     reasonably   let   out   by   a   willing   lessor   to   a   willing   lessee  

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     uninfluenced by any  extraneous circumstances.

             (ii)   An   inflated   or   deflated   rent   based   on   extraneous  
     consideration may take it out of the bounds of reasonableness.

             (iii) Actual rent received, in normal circumstances, would  
     be a reliable evidence unless the rent is inflated/deflated by

     reason of extraneous consideration.

             (iv) Such ALV, however, cannot exceed the standard rent as  
     per the Rent Control Legislation applicable to the property.

             (v)   if   standard   rent   has   not   been   fixed   by   the   Rent  
                          
     Controller, then it is the duty of the assessing officer to determine  
     the standard rent as per the provisions of rent control enactment.

             (vi) The standard rent is the upper limit, if the fair rent is 
     less than the standard rent, then it is the fair rent which shall be  
      
     taken as ALV and not the standard rent.

 We would like to remark that still the question remains as  
     to   how   to   determine   the   reasonable/fair   rent.   It   has   been  
     indicated   by   the   Supreme   Court   that   extraneous   circumstances  

     may inflate/deflate the "fair rent". The question would, therefore,  
     be as to what would be circumstances which can be taken into  
     consideration by the Assessing Officer while determining the fair  

     rent. It is not necessary for us to give any opinion in this behalf, as  
     we are not called upon to do so in these appeals. However, we may  
     observe   that   no   particular   test   can   be   laid   down   and   it   would  
     depend on facts of each case. We would do nothing more than to  
     extract the following passage from the Supreme Court judgment in  

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           the   case   of   Motichand   Hirachand   Vs.   Bombay   Municipal  
           Corporation, AIR 1968 SC 441, 442 :

                   "It   is   well-recognized   principle   in   rating   that   both   gross  

           value and net annual value are estimated by reference to the rent  
           at which the property might reasonably be expected to let from  
           year to year. Various methods of valuation are applied in order to  

           arrive at such hypothetical rent, for instance, by reference to the  
           actual rent paid for the property or for others comparable to it or  
           where   there   are   no   rents   by   reference   to   the   assessments   of  

           comparable properties or to the profits carried from the property  
                                
           or to the cost of construction."

    46]    We  have and after careful reading of the provision  in question and 

    the conclusion of the Full Bench of the Delhi High Court councluded that a 
       
    different   view   cannot   be   taken.     We   respectfully   concur   with   the   view 
    
    taken in this Full  Bench decision of the Delhi High Court.

    47]    We are of the view that where Rent Control Legislation is applicable 

    and as is now urged the trend in the real estate market so also in the 

    commercial   field   is   that   considering   the   difficulties   faced   in   either 

    retrieving back immovable properties in metro cities and towns, so also 

    the time spent in litigation, it is expedient to execute a leave and license 

    agreements.  These are usually for fixed periods and renewable.  In such 

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    cases as well, the conceded position is that the Annual Letting Value will 

    have to be determined on the same basis as noted above.  In the event and 

    as urged before us, the security deposit collected and refundable interest 

    free and the monthly compensation shows a total mismatch or does not 

    reflect the prevailing rate or the attempt is to deflate or inflate the rent by 

    such methods, then, as held by the Delhi High Court, the Assessing Officer 

    is   not   prevented   from   carrying   out   the   necessary   investigation   and 

    enquiry.  He must have cogent and satisfactory material in his possession 
                               
    and which will indicate that the parties have concealed the real position. 

    He must not make a guess work or act on conjectures and surmises.  There 

    must be definite and positive material to   indicate that the parties have 

    suppressed   the   prevailing   rate.     Then,   the   enquiries   that   the   Assessing 
       
    Officer can make, would be for ascertaining the going rate.  He can make 

    a comparative study and make a  analysis.  In that regard, transactions of 

    identical or similar nature can be ascertained by obtaining the requisite 

    details.  However, there also the Assessing Officer must safeguard against 

    adopting   the   rate   stated   therein   straightway.     He   must   find   out   as   to 

    whether the property which has been let out or given on leave and license 

    basis is of a similar nature, namely, commercial or residential. He should 

    also satisfy himself as to whether the rate obtained by him from the deals 

    and   transactions   and   documents   in   relation   thereto   can   be   applied   or 

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    whether a departure therefrom can be made, for example, because of the 

    area, the measurement, the location, the use to which the property has 

    been put, the access  thereto and the special advantages or benefits.  It is 

    possible that in  a  high rise building because  of  special  advantages and 

    benefits an office or a block on the upper floor may fetch higher returns or 

    vice versa.  Therefore, there is no magic formula and everything depends 

    upon the facts and circumstances in each case.   However, we emphasize 

    that before the Assessing Officer determines the rate by the above exercise 
                               
    or similar permissible process he is bound to disclose the material in his 
                              
    possession to the parties.  He must not proceed to rely upon the material 

    in   his   possession   and   disbelieve   the   parties.     The   satisfaction   of   the 

    Assessing   Officer   that   the   bargain   reveals   an   inflated   or   deflated   rate 
       
    based on fraud, emergency, relationship and other considerations makes it 

    unreasonable must precede the undertaking of the above exercise.   After 

    the above ascertainment is done by the Officer he must, then, comply with 

    the   principles   of   fairness   and   justice   and   make   the   disclosure   to   the 

    Assessee so as to obtain his view.

    48]    We are not in agreement with Shri Chhotaray that the municipal 

    rateable   value   cannot   be   accepted   as   a   bonafide   rental   value   of   the 

    property and it must be discarded straightway in all cases.  There cannot 

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    be a blanket rejection of the same.  If that is taken to be a safe guide, then, 

    to discard it there must be cogent and reliable material.

    49]    We are of the opinion that market rate in the locality is an approved 

    method   for   determining   the   fair   rental   value   but   it   is   only   when   the 

    Assessing   Officer   is   convinced   that   the   case   before   him   is   suspicious, 

    determination   by   the   parties   is   doubtful   that   he   can   resort   to   enquire 

    about   the   prevailing   rate     in   the   locality.     We   are   of   the   view   that 
                                
    municipal rateable value may not be binding on the Assessing Officer but 

    that is only in cases of afore-referred nature.  It is definitely a safe guide.

    50]    We have broadly agreed with the view taken by the Full Bench of 

    the Delhi High Court.  Hence, the issue of determination of the "fair rental 
       
    value"   in   respect   of   properties   not   covered   by   or   covered   by   the   Rent 
    
    Control Act is to be undertaken in terms of the law laid down in the Full 

    Bench decision of the Delhi High Court.  

    51]    We   quite   see   the   force   in   the   arguments   of   Ms.   Vissanjee   that 

    ordinarily the license fee agreed between the willing licensor or a willing 

    reliable evidence of what the landlord might reasonably be expect to get 

    from a hypothetical tenant.  She has in making this submission, answered 

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    the issue and summed up the conclusion as well.  Then, it is but natural 

    and   logical   that     in   the   event,   the   transaction   is   influenced   by   any 

    extraneous   circumstances   or   vitiated   by   fraud,   or   the   like   that   the 

    Assessing Officer can adopt a "fair rent" based on the opinion obtained 

    from reliable sources.   There as well, we do not see as to how we can 

    uphold the submissions of Mr. Chhotaray that the notional rent on the 

    security   deposit   can   be   taken   into   account   and   consideration   for   the 

    determination.    If the transaction itself does not reflect any of the afore-

    stated   aspects,   then,     merely   because   a   security   deposit   which   is 
                                
    refundable   and   interest   free   has   been   obtained,   the   Assessing   Officer 

    should   not   presume   that   this   sum   or   the   interest   derived   therefrom   at 

    Bank rate is the income of the assessee till the determination or conclusion 
       
    of the transaction.   The Assessing Officer ought to be aware of several 

    aspects and matters involved in such transactions.   It is not necessary that 

    if the license is for three years that it will operative and continuing till the 

    end.     There   are   terms   and   conditions   on   which   the   leave   and   license 

    agreement   is   executed   by   parties.     These   terms   and   conditions   are 

    willingly accepted.  They enable the license to be determined even before 

    the stated period expires.  Equally, the licensee can opt out of the deal.  A 

    leave and license does not create any interest in the property.  Therefore, 

    it   is   not   as   if   the   security   deposit   being   made,   it   will   be   necessarily 

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    refundable after the third year and not otherwise.   Everything depends 

    upon the facts and circumstances in each case and the nature of the deal 

    or transaction.   These are not matters which abide by any fixed formula 

    and   which   can   be   universally   applied.     Today,   it   may   be   commercially 

    unviable   to enter into a lease and, therefore, this mode of inducting a 

    'third   party'   in   the   premises   is   adopted.     This   may   not   be   the   trend 

    tomorrow, therefore, we do not wish to conclude the matter by evolving 

    any rigid test.             
    52]    We have also noted the submissions of Shri Ahuja.   We are of the 
                               
    opinion that even in the cases and matters brought by him to our notice, it 

    is evident that the Assessing Officer cannot brush aside the rent control 
       
    legislation, in the event, it is applicable to the premises in question.  Then, 
    
    the Assessing Officer has to undertake the exercise contemplated by the 

    rent control legislation for fixation of standard rent.  The attempt by the 

    Assessing   Officer   to   override   the   rent     control   legislation   and   when   it 

    balances the rights between the parties has rightly been interfered with in 

    the given case by the Appellate authority.   The Assessing Officer either 

    must undertake the exercise to fix the standard rent himself and in terms 

    of the Maharashtra Rent Control Act, 1999 if the same is applicable or 

    leave the parties to have it determined by the Court or Tribunal under that 

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    Act.  Until, then, he may not be justified in applying any other formula or 

    method and determine the "fair rent" by abiding with the same.   If he 

    desires to undertake the determination himself, he will have to go by the 

    Maharashtra Rent Control Act, 1999.   Merely because the rent has not 

    been fixed under that Act does not mean that any other determination and 

    contrary thereto can be made by the Assessing Officer.  Once again having 

    respectfully concurred with the judgment of the Full Bench of the Delhi 

    High Court, we need not say anything more on this issue.

    53]     Thus, apart from the three aspects namely of a municipal valuation, 
                                
    of obtaining interest free security deposit and the properties being covered 

    by the Maharashtra Rent Control Act but no standard rent thereunder is 
       
    fixed, our attention has not been invited to any other case.   Suffice it to 
    
    hold   that   in   those   cases   and   to   which   our   attention   is   not   invited   the 

    principles laid down in the decisions of the Hon'ble Supreme Court and 

    referred to by the Full Bench of the Delhi High Court would govern the 

    enquiry.

    54]     As   a   result   of   the   above   discussion,   we   are   of   the   opinion   that 

    wherever the Assessing Officer has not adhered to the above principles, 

    and his finding and conclusion has been interfered with, by the higher 

    Appellate Authorities, the revenue cannot bring the matter to this Court as 

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    no   substantial   question   of   law   can   be   arising   for   determination   and 

    consideration of this Court.   Then, the findings by the last fact finding 

    Authority, namely the Tribunal and against the revenue shall have to be 

    upheld as they are consistent with the facts and circumstances brought 

    before   it.     If   they   are   not   vitiated   by   any   perversity   or   error   of   law 

    apparent on the face of the record, the appeals of the revenue cannot be 

    entertained.  They would have to be accordingly dismissed.

      (B.P.COLABAWALLA, J.)                         (S.C. DHARMADHIKARI, J.)
                                
    wadhwa

                                                     64/64

Tata Iron & Steel Co. Ltd. vs D.V. Bapat, Income-Tax Officer, ... on 26 February, 1975
Equivalent citations: [1975]101ITR292(BOM)
JUDGMENT

 S.K. Desai, J. 
 
 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.  

 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.  

 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.  

 4. The said two circulars may now be fully set out :  

 "First Circular No. 47 (F.No. 9/100/69-IT(A-II), dated September 21, 1970. See  
 
 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.  

 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."   

 "Second Circular No. 146 (F.No. 228/2-73-IT(A-II), dated September 26, 1974. See [1975] 101 ITR (St). 46.  

 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.

 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.

 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.

 4. All pending assessments may be completed in the light of the present instructions."   

 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.

 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.

 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.  

 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.

 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.

 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.  

 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.

 12. According to Venkatarama Aiyar J., who spoke for the Supreme Court, it was well-settled that :  
  "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'."  

 13. It was further observed :  
  "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).

 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.

 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.  

 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.  

 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 :  
  "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."  

 18. The learned Law Lord went on to observe (at page 748 of the report) :  
  "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."  

 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) :  
  "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."  

 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 :  
  "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."  

 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 :  
  "........ 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).  

 22. Lord Radcliffe then went on to observe :  
  "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).  

 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.  

 24. In Indian Molasses Company's case Hidayatullah J. (as he then was), speaking for the Supreme Court, observed as follows :
  "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).  

 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 :  
  "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."  

 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.  

 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.

 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 :

 "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.  

 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."   

 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.

 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.

 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.  
  "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).  

 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.  

 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 :
  "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."  

 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
  "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)."  

 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) :
  "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."  

 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.  

 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.

 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.

 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.

 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.

 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.).

 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.

 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.  

 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.

 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  
 
 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.

 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)  
  "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."

 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.

 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) :
  "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."  

 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.

 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.

 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.

 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.

 54. The provisions of section 36(1)(v) and section 40(a)(iv), on which reliance was placed, may be set out :  

 "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 -.....  

 (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." 

 "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', -  

 (a) in the case of any assessee -.......  

 (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'........."   

 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.

 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.  

 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.

 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.  

 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.

 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.   

 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.

 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.

 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.  

 64. This has been a test case and, in our opinion, the parties should bear their own costs of the proceedings. Order accordingly.  

 65. Mr. Joshi applied for a certificate under article 133 of the Constitution of India.  

 66. Mr. Palkhivala opposes the application.  

 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.  

 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.  

 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.  

 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.

Commissioner Of Income-Tax vs Dunlop Rubber Co. (I) Ltd. on 3 October, 1975
Equivalent citations: [1977]107ITR182(CAL)
JUDGMENT
 
 Hazra, J. 
 
1. 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. 

2. 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. 

3. 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: 

  "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. 

 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
purpose 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. 

 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."  

4. 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. 

5. 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. 

6. 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. 

7. The assessee appealed to the Appellate Assistant Commissioner and contended that there was no requirement to maintain separate account for

any 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). 

8. 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. 

9. 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. 

10. 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. 

11. The Tribunal held as follows :  

  "(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; 

 (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 ; 

 (3) the assessee has discharged the onus by submitting before the Income-tax Officer the computation of capital and profits ; and   
 
 (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 : 
  "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 ?"  

12. 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 : 
  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. 

13. 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

established undertaking and conditions laid down under Sub-section (2) have been fulfilled. 

14. 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. 

15. 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. 

16. 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. 

" CHAPTER VII INCOMES FORMING PART OF TOTAL INCOME ON WHICH 

NO INCOME-TAX IS PAYABLE.
 * *                        *                        *
 
 84. Income of newly established industrial undertakings or hotels.- 

  (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. 

 (2) This section applies to any industrial Undertaking which fulfils all the following conditions, namely :...... 

 (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......"   

17. 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

of 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. 

18. 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 :
  "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." 

19. Then the learned judge further observed: 
  "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," 

20. 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.

21. 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.

22. 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. 

23. 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. 

24. 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. 

25. 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. 

26. 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. 

27. With regard to this aspect of the matter, the Appellate Tribunal said: 
  "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." 

28. I agree with the view of the Appellate Tribunal in this respect. 

29. 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, 
 
30. 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 : 
   "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." 

31. 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. 

32. With regard to the principle of apportionment, the Supreme Court observed in Commissioner of Income-tax v. Best and Co. (Private) Ltd. :

  "The difficulty in apportionment cannot be a ground for rejecting the claim either of the revenue or of the assessee." 

33. Again, in Madras Co-operative Central Land Mortgage Bank Ltd. v. Commissioner of Income-tax  the Supreme Court said :
  "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." 

34. 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. 

35. 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. 

36. 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. 

37. 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 :
  "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." 

38. 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: 

 Section 10(2)(vi): 

  "Such profits or gains shall be computed after making the following allowances, namely :--......... 

 Provided that- 
  (a) the prescribed particulars have been duly furnished ;........."    

39. 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. 

40. 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 :

 " 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."   

41. The Bombay High Court in that case was considering Section 10(2)(vi) of the Indian Income-tax Act, 1922, which is differently worded.

42. 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
43. 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.

44. 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.

45. 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. 

46. 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

Commissioners [1946] 1 All ER 528 (CA) quoted by the Supreme Court in that judgment laid down at page 316 of the report:
  "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." 

47. 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) 
  "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."

48. The Bombay High Court answered the question in the affirmative after substituting the word "before" for the word "without" in the question. 

49. '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. 

50. Mr. Sen cited the case of Commissioner of Income-tax v. S. S. Sivan Pillai ., It appears from this report (page 357) :
  "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

of an industrial undertaking  have to be determined under   Section 10 of
the Act." 

51. This case does not help the contentions made by   Mr. Sen.   In any event, I
will quote here the observation at page  358  of the report which is as
follows--See  : 
  "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. " 

52.  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. 

53. 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. 

54. In that view of the matter which I have expressed, the question
referred to this court must be answered in the affirmative and against the
revenue. We return our answer accordingly. 

55. Parties will bear their own costs of the reference. 

 Deb, J.     

56. I agree.

Russell Properties Pvt. Ltd. vs A. Chowdhury, Addl. Commissioner Of ... on 6 May, 1976
Equivalent citations: [1977]109ITR229(CAL)
Author: Sabyasachi Mukharji
Bench: Sabyasachi Mukharji
JUDGMENT
 
 Sabyasachi Mukharji, J. 
 
1. The petitioner, Russell Properties Pvt. Ltd. acquired premises No.  6,  Little Russell Street, Calcutta,  comprising an

area 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 : 
  "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.' "

2. 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,

therefore, 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:
 
   Rs.

   Rent received
   2,28,625
 
   Less : 50% of the collection charges
   25,000 
 
   2,03,625
 
   Less : 1/6th for repairs
   33,971
 
   6% collection charges
   12,230 
 
   Property income
   1,57,424
 
3. 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 : 

"(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. 

 (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. 

 (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. 

 (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."  

4. In the meantime, between 11th February, 1972, and 21st February, 1972, orders of assessment were passed by the Income-tax Officer for the

assessment 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,
1972. 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,
1973, 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. 

5. 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: 

"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

Act, 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.

2. 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."  

6. 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
Commissioner of Income-tax thereafter made an application under Section 256(2) of the Act, but the High Court has dismissed the said application.

On 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. 

7. 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

on 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

the 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

the 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 .
  "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.

It 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." 

8. 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. 

9. 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

QB 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. 

10. 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. 

11. If these conditions are fulfilled, he may, after giving the assessee reasonable opportunity, pass such orders as he deems fit and proper. The

section 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

to 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".

12. 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'

findings 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

Supreme 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:

"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, 
 
4. 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."  

13. 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

seems 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

authorities 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.

14. 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.

Gopal C. Sharma vs Commissioner Of Income-Tax on 11 October, 1993
Equivalent citations: [1994]209ITR946(BOM)
ORDER 

Facts : 
 Appeal, touching issue in question, filed by 
assessee dismissed as time barred. Same issues dealt with by 
Tribunal while deciding revenue's appeal and finding recorded. 
Further question touching the issues referred by Tribunal under 
s. 256(1).   
 
Conclusion : 
 Merely because assessee's appeal on the 
issues dismissed as time barred, it cannot be said the question 
did not arise out of Tribunal's order.                             
 
Application : 
 Also to current assessment years.
 
Citation : 
 
Income Tax Act 1961 s.256(1) 

Head 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. 

Held : 
 The transaction of compulsory acquisition if land 
is respect of a capital asset could never be viewed as an 
adventure in the nature of trade. The assessee had no choice but to claim compensation 
for acquisition of the said land. Even as far as the sale of land 
to V is concerned, the said lands were already subject-matter of 
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 lands did not 
constitute stock-in-trade of the assessee. As far as these lands 
are concerned, the assessee had no choice but to complete the 
sale of lands in favour of V and file a claim for compensation 
with the Special Land Acquisition Officer in respect of lands 
under acquisition. These transactions did not constitute, 
therefore, adventure in the nature of trade and were liable to be 
taxed to capital gain tax and not on the footing of `business 
income'.
 
 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.
 
 Also to current assesment years.
 
Citation : 
 
Income Tax Act 1961 s.14 

Capital gains--AGRICULTURAL LAND--User test. 

Held : 
 (i) 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 purpose or absence thereof at the 
relevant time is undoubtedly one of the crucial tests for 
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 locality, zone in which it is situate and 
its potentiality. The fact that the land is sold or transferred 
to a non-agriculturist for a non-agriculture purpose or that it 
is likely to be used for non-agricultural purpose soon after its 
transfer is also considered as a relevant factor germane to the 
determination of the issue. Merely because the land was used for 
agricultural purpose in remote past or it continues to be 
assessed to land revenue on the footing of agricultural land is 
not decisive.--Smt. Sarifabibi Mohamed Ibrahim v. CIT (1993) 
204 ITR 631 (SC) and CIT v. V. A. Trivedi (1988) 172 ITR 
95 (Bom) followed. (ii) The lands were situate in heavy 
industrial zone and that the said lands were not in fact used or 
intended to be used for agricultural purpose at the relevant time 
since several years. At least 10 acres of the land out of 25 
acres was in fact used for non-agricultural purpose by L & T Ltd. 
since the year 1960, i.e., for 7 years prior to the date of 
transfer of the land. The reference lands were not, therefore, 
agricultural lands.
 
 Non-user of land for cultivation for 
reasonable span of time and at the material time is crucial test 
and the mere user of land for agricultural purpose in the past and 
the fact that land was continued to be assessed to land revenue 
are not material.        
 
Citation : 
 
Income Tax Act 1961 s.45 

JUDGMENT
 
 D.R. Dhanuka, J. 
 
 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 :  

 "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 ?  

 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 ?  

 3. Whether there was any evidence before the Tribunal to hold that the said land was not agricultural land ?  

 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' ?  

 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 :  

 (i) for 1965-66, Rs. 1,00,486 on sales of land to the Voras,  
 
 (ii) for 1968-69, Rs. 5,59,821 out of compensation received from Larsen and Toubro,  
 
 (iii) for 1972-73, Rs. 1,03,896 out of additional compensation from Larsen and Toubro ?"    

 2. The "reference lands" consist of the following :  

 (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.  

 (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.   

3.  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.  

 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.  

 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.

 6. We shall now proceed to summarised the facts.  

 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 :  

 1. Shri Chandrabhan B. Sharma (father of the assessee).  

 2. Shri Cheddilal B. Gupta; and  
 
 3. Shri Shrilal M. Bhatt.   

 8. By another indenture of lease, the owners granted lease of several other plots of land in favour of Shri Chandrabhan Sharma individually.  

 (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.  

 (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.  

 (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.  

 (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.  

 (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.  

 (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.  

 (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.  

(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.  

 (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.   

 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.  

 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.  

 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.  

 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.  

 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.  

 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.  

 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.

 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.  

 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.  

 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.  

 (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.  

 (b) That the reference lands were assessed to land revenue on the footing that the said land continued to be agricultural lands.  

 (c) That the assessee had at no stage applied to the Revenue authorities for permission to convert the said lands to non-agricultural use.   

 19. Learned counsel for the assessee further submitted as under :  

  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.  

 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.  

 (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.  

 (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.  

 (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.  

 (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.  

 (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.    

20. 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.

 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 :
  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.  

 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) :
"Whether a land is an agricultural land or not is essentially a question of fact."  

 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 .

 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) :
 "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. : .

 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 :  

 (a) That the said land was situated within the municipal limits and at a distance of 1 k.m. for the railway station;  

 (Note : In this case, the reference lands were situate in a heavy industrial zone and were located in the midst of factories, etc.)  
 
 (b) That the said land was not cultivated for a period of four years prior to the date of sale;  

 (c) That the land was sold to a housing society for construction of residential buildings, i.e., for non-agricultural user;  

 (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.   

 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.

 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.

 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.

 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.  

 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.  

 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.

 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.

 33. In the light of the above discussion, we answer the questions referred to us as under :  

 (i) We answer question No. 2 in the affirmative and in favour of the Revenue  
 
 (ii) We answer question No. 3 in the affirmative and in favour of the Revenue.  

 (iii) We answer question No. 4 as under :  
  "the lease rent was assessable under the head "Other sources."  

 (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.   

 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.  

 35. Heaving regard to the facts and circumstances of the case, there shall be no order as to costs.

Nirmala L. Mehta vs A. Balasubramaniam, Commissioner Of ... on 29 April, 2004
Equivalent citations: (2004)191CTR(BOM)8, [2004]269ITR1(BOM)
Author: R.M. Lodha
Bench: R.M. Lodha, J.P. Devadhar
JUDGMENT
R.M. Lodha J.

1. 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.

2. 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.

3. 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 :

"During British days, Sikkim was an Indian State, under a hereditary monarch called Chogyal, subject to British paramountcy.

When 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.

In 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--

(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.

(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. 

There 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.

The 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.

We 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 :

'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.' 
 
This 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.

By 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." 

4. 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.

"371F. Notwithstanding anything in this Constitution.-- . . . .

(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 ;

(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 . . ."  

5. 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) :

"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.

In 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 :

'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.' 
 
And caps the same as under :

'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.' 
 
With 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.

20. 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.

21. 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'." 

6. 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.

7. 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.

8. 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.

9. 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.

10. 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.

11. 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 :

"Office of the Director of State Lotteries, 
Government of Sikkim, 
Gangtok (Sikkim).

Income-tax Deduction Certificate No. 52/FIN/LOT.

Certificated 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.

The 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.

 (Sd.) .......................

Director of Lotteries, 
Government of Sikkim". 

12. 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.

13. 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.

14. The Constitution Bench of the Supreme Court in Amalgamated Coalfields Ltd. v. Janapada Sabha, , held thus (page 965) :
  "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." 

15. 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.

16. 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.

17. 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.

18. Since the respondents have not chosen to appear, no order as to costs.

Jalgaon District Central Co-Operative ... vs Union Of India (Uoi) And Ors. on 5 September, 2003
Equivalent citations: 2004(2)BOMCR88, [2004]265ITR423(BOM), 2003(4)MHLJ353
Author: B. B. Vagyani
Bench: B.B. Vagyani, A.S. Bagga
JUDGMENT
 
 B. B. Vagyani, J. 
 
 1. Rule. Rule made returnable forthwith. With consent of parties, taken up for final hearing forthwith. 

 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. 

 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. 

 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. 

 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. 

 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. 

 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. 

 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. 

 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. 

 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. 

 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. 

 12. Shri Shah, learned Senior Counsel, during the course of submissions, highlighted following points : 

 (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. 

 (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. 

 (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.  

 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. 

 14. In order to buttress his submissions, learned Senior Counsel Shri Shah has relied upon following cases : 
 (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, . 

 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. 

 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. 

 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. 

 18. The definition of "Member" given in Section 2(19) of the Maharashtra
Co-operative Societies Act, 1960 takes within its sweep even a nominal member,
associate member and sympathizer member. There is no distinction made
between duly registered member and nominal, associate and sympathizer
member. 

 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. 

 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. 

 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. 

 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. 

 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. 

 24. The Division Bench of this Court, in the case of Banque Nationale De
Paris (cited supra), has ruled out that CBDT cannot issue a circular under Section
119 of the Act, which would override or detract from the provisions of the
Income Tax Act, 1961. CBDT can legitimately issue administrative instructions
or orders by exercising powers under Section 119 of the Income Tax Act, 1961.
However, by virtue of Section 119 of the Act, the CBDT is not at all permitted to
override or withdraw the exemption clause under Section 194-A(3)(v) of the
Income 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
delegated authority even to amend the provisions of the Income Tax Act, 1961
enacted by the Parliament. 

 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. 

 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.

Petron Engineering Construction (P.) ... vs Central Board Of Direct Taxes And Others on 11 August, 1987
Equivalent citations: (1987)89BOMLR383, [1988]171ITR80(BOM)
JUDGMENT
 
 Bharucha, J. 
 
 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. 

 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. 

 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. 

 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. 

 5. Section 80-O of the Income-tax Act, 1961, so far as it is material reads thus : 
  "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." 

 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. 

 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."

 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. 
 
 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. 

 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. 

 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. 
 
 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".

 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. 

 14. In our view, therefore, the learned single judge was right in the view that he took upon this aspect. 

 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. 

 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". 

 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. 

 18. The appeal was dismissed. 

 19. No order as to costs.

Commissioner Of Income-Tax vs Mico Products Pvt. Ltd. on 4 October, 1990
Equivalent citations: (1990)92BOMLR659, [1991]187ITR517(BOM)
Bench: Sujata V. Manohar
JUDGMENT
 
  Mrs. Sujata V. Manohar, J. 
 
 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. 

2. 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. 

3. 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. 

4. 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 : 
  "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 ?" 

5. 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. 

6. 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 : 

Assessment year          Claim for depreciation
                                (in Rs.)
1971-72                            70,111
1972-73                            85,154
1973-74                          2,41,858
1974-75                          3,91,373
1975-76                          4,87,175
1976-77                         13,36,622
1977-78                         11,61,914
1978-79                         12,93,069
1979-80                         10,69,898
1980-81                         11,75,187  
 
 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. 

7. 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. 

8. 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 : 
  "(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." 

9. 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. 
  "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." 

10. 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) : 
  "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." 

11. 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. 

12. 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. 

13. 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 : 

 "35. (2) For the purposes of clause (iv) of Sub-section (1), - 

 (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; 

 (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.... 

 (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." 

14. Once again section 35(2)(iv) was retained in its original form. 

15. 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 : 

 "35. (2) For the purposes of clause (iv) of Sub-section (1), - ... 

 (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 :" 

16. 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. 

17. 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. 

18. 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.

19. 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) :
  "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." 

20. 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.

21. 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., .

22. 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.

23. 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. 

24. 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. 

25. 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.

26. 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. 

27. 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.) 
 
28. 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. 

29. 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. 

30. 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. 

31. 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.

32. 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.

33. 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)). 

34. 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. 

35. 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). 

36. 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 . 

37. 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). 

38. 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. 

39. 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. 

40. 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.

41. 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. 

42. 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. 

43. 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. 

44. 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. 

45. 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. 

46. 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. 

47. 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. 

48. 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). 

49. 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. : 
  "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." 

50. 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. 

51. 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.

52. 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.

The Additional Commissioner Of ... vs Vinayaka Cinema, Nellore on 10 August, 1977
Equivalent citations: [1977]110ITR468(AP), AIR 1978 ANDHRA PRADESH 51, 1978 TAX. L. R. 133
JUDGMENT
 
Divan, C.J.

 1. These two matters have been placed before a Full Bench of five Judges in 
view of the order of reference made by a Division Bench of which one of us 
(Divan C. J.) was a member on December 1, 1976. Those two matters were 
referred to a larger Bench in view of the conflicting decisions of the different High 
Courts on the point which is involved in both these matters. 

  2.  The question that has to be decided is whether the provisions of S. 187 
of the Income-tax Act , 1961 (hereinafter referred to as 'the Act') can be invoked 
by the Income-tax authorities, when a partnership firm is dissolved; and after the 
dissolution of the partnership firm, the business of the firm is continued by 
another partnership firm in which one or more of the partners of the dissolved 
firm have also joined and there are thus common partners between the dissolved 
firm and the new firm which continues the business of the old firm. 

  3.  In order to appreciate the controversies arising in both these matters, 
we will first refer to the facts in R. C. No. 22 of 1975. We are concerned in this 
case with assessment year 1969-70. The relevant accounting year is financial 
year 1968-69. The assessee is a registered firm carrying on business of running 
a cinema theatre under the name and style of "Sri Vinayaka Cinema" at Nellore. 
The partnership was constituted by a partnership deed dated April 29, 1967. This 
partnership was duly registered under the provisions of the Income-tax Act. 
Amongst 9 partners of the firm, Srinivasulu and his son, Kamalakara Rao were 
also partners. Kamalakara Rao was a major at the relevant time and was the 
managing partner of the firm. Srinivasulu had gifted away four out of the twelve 
shares that he held in the firm to his daughter Smt. Y.V. Ramani and had formed 
a sub-partnership with her in the firm. The sub-partnership was recognised by the 
Income-tax Department and assessments were made separately on the father 
and daughter in respect of their respective share incomes. Srinivasulu, died on 
August 17, 1968 and on that very day another partner, Subbarama Reddy, 
retired from the firm after gifting away his interest in the firm's business to one K. 
Penchala Lakshmamma. There was no clause in the partnership deed dated 
April 29, 1967 providing that, in the event of the death of one of the partners, the 
firm was not to be dissolved. Hence, as a result of the death of Srinivasulu, the 
old partnership firm stood dissolved under the provisions of the Partnership Act. 
By a deed dated August 19, 1968, a new partnership firm was constituted and 
under the new partnership deed, seven of the partners of the old firm together 
with two new partners, viz., Y. V. Ramani and k. Penchala Lakshmamma, started 
a new partnership firm. This new  firm was also registered under the Income-tax 
Act. For the assessment year 1969-70, two separate returns were filed, one for 
the period 1-4-1968 to 17-8-1968 and the other for the period 18-8-1968 to 31-3-
1969. It may be mentioned that the business of the old firm was taken over and 
continued by the new firm that came into existence under the partnership deed 
dated August 19, 1968. An application for renewal of registration was sent along 
with the return for the first period while for the second period, a fresh application 
in form 11 was filed. 

  4.  On those facts, the Income-tax Officer held that there was only a 
change in the constitution of the firm as contemplated by S. 187 (2) of the Act 
and he accordingly clubbed the incomes of the two periods and made a single 
assessment. He however granted registration to the firm that came into existence 
under the partnership deed of August 19, 1968 and allocated the profits among 
the respective partners who constituted the firm in the two different periods. 
Against this decision of the Income Tax officer, the matter was taken in appeal to 
the Appellate Assistant Commissioner. The contention of the assessee was 
accepted by the Assistant Commissioner observing that, in the absence of any 
provision in the partnership deed to continue the firm even after the death of a 
partner, the firm stood dissolved on August 17, 1968 when Srinivasalu died and 
the firm, which came into existence on August 18, 1968 was a new firm. The 
matter was taken in appeal to the Tribunal by the Revenue. The Tribunal held 
that the Appellate Assistant Commissioner was right in directing that there should 
be two separate assessments, one for the period 1-4-1968 to 17-8-1968 and the 
other 18-8-1968 to 31-3-1969. On these facts ultimately, at the instance of the 
Revenue, the following questions came to be referred to this Court for its opinion 
: 

   "Whether , on the facts and in the circumstances of the case 
and in view of S. 187 (2) (e) of the Income tax Act, 1961, a single assessment 
could not be made on the aggregate of the incomes for the two periods and the 
tax charged on such aggregate income?" 

  5.  In R. C. No. 67 of 1975, the facts are as follows : The assessment year 
under consideration is 1971-72. The accounting year is the financial year from 
April 1, 1970 to March 31, 1971. There were originally two partners in the firm, 
M/s Prasad Motors and Electricals. They were Ch. Suryanarayana and K. 
Sanyasiraju. Each of these two partners represented his Hindu undivided family 
in the business of the partnership firm. During the course of the financial year 
1970-71 which is the accounting year for this firm, a partition took lace in the 
family of Ch. Suryanarayana and after the partition, he retired from the 
partnership with effect from October 1, 1970. As a result of the retirement of 
Suryanarayana, it is obvious that the firm stood dissolved because the only 
partner left thereafter was K. Sanyasi Raju. A new partnership deed was 
executed on October 26, 1970, and under this deed, a new partnership firm was 
brought into existence with effect from October 1, 1970. Under this new 
partnership deed, five minors some of whom belonged to the family of 
Suryanarayana, were admitted to the benefits of the partnership and two 
strangers were taken as partners. On these facts, two returns were filed, one for 
the period 1-4-1970 to 30-9-1970 and the other for the period 1-10-1970 to 31-3-
1971. The Income-tax Officer held that there was only a change in the 
constitution of the firm with effect from October 1, 1970 and he accordingly 
clubbed the incomes of the two periods and made a single assessment on the 
income of the entire period from April 1, 1970 to March 31, 1971 under S. 187 (2) 
of the Act. The assessee took the matter in appeal and the Appellate Assistant 
Commissioner confirmed the order of the Income-tax Officer. The assessee 
carried the matter in further appeal to the Tribunal and the Tribunal held that, on 
the retirement of Suryanarayana, the firm which existed till then between 
Suryanarayana and Sanyasi Raju was dissolved and what was brought into 
existence on October 1, 1970 was entirely a new firm and hence the provisions 
of S. 187 (2) were not applicable. The Tribunal directed that there should be two 
separate assessments on the two firms, one on the old firm from April 1, 1970 to 
September 30, 1970 and the other on the new firm, which came into existence 
under the partnership deed of October 26, 1970, for the period October 1, 1970 
to March 31, 1971. Thereafter, at the instance of the Revenue, the following 
question has been referred to this Court for its opinion: 

   "Whether, on the facts and in the circumstances of the case, 
there was a change in the constitution of the earlier firm on 1-10-1970 in terms of 
S. 187 (2) of the Income-tax Act, 1961, or whether the firm that came into 
existence on that date under the deed dated 26-10-1970 was a new firm which 
succeeded the earlier firm in terms of S. 188 of the Act." It is obvious from the 
narration of facts set out hereinabove that the main question that we have to 
consider is the effect of the provisions of S. 187 (2) of the Income-tax Act when, 
under the provisions of the Partnership Act, a firm is dissolved. 

  6.  In order to appreciate the controversy that has arisen, it will be 
necessary to refer to some of the provisions of the Income-tax Act. Sub-sec. (23) 
of S. 2 says that the words 'firm,' 'partner' and 'partnership' have the meanings 
respectively assigned to them in the Indian Partnership Act, 1932 (9 of 1932); but 
the expression 'partner' shall also include any person who, being a minor has 
been admitted to the benefits of partnership. It is thus clear that a departure to 
this limited extent from the provisions of the Partnership Act has been made by 
the Income-tax Act, because under the provisions of the Partnership Act, a minor 
can only be admitted to the benefits of the partnership, but cannot be a partner 
because partnership requires an agreement between the partners and the minor 
cannot enter into a contract because of the provisions of S. 11 of the Contract 
Act. Under that section of the Contract Act, a contract by the minor would be void 
and hence the Partnership Act provides that a minor can only be admitted to the 
benefits of the partnership; but he cannot become a partner. For the purpose of 
the Income-tax Act, however a minor admitted to the benefits of the partnership 
is also a partner. 

  7.  Under S. 2 (31), 'person' includes by cl. (Iv) a firm and S. 4 of the Act, 
which is the charging section, provides that, 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 the Act in respect of the total 
income of the previous year or previous years as the case may be, of every 
person. By virtue of the definition of the word 'person' it is obvious that a firm, as 
distinguished from the partners constituting the firm is an assessable entity and 
can be assessed as such. Chapter XVI of the Act contains special provisions 
applicable to firms. This chapter consists of Ss. 182 to 189 (both inclusive). 
Section 182 provides for assessment of registered firms and Section 183 
provides for assessment of unregistered firms. Section 184 provides for 
application for registration of firms. Section 185 deals with the procedure on 
receipt of application for registration or renewal of registration and S. 186 deals 
with cancellation of registration. Sections 187, 188 and 189 are in the part of 
Chap. XVI, which is designated as Part-C with the heading "Changes in 
constitution, succession and dissolution." Section 187 (1) is in these terms: 

   "187  (1) Where at the time of making an assessment under 
S. 143 or S. 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: 

 Provided that  

  (i)  the income of the previous year shall, for the purposes of 
inclusion in the total incomes of the partners, be apportioned between the 
partners who, in such previous year, were entitled to receive the same; and  

  (ii)  when the tax assessed upon a partner cannot be recovered from him, 
it shall be recovered from the firm as constituted at the time of making the 
assessment."    

 Section 188 provides for succession of one firm by another firm. It may be 
pointed out that S. 170 of the Act provides for succession to business otherwise 
than on death and it deals with all persons and not merely with succession of one 
firm by another. Under S. 188, where a firm carrying on a business or profession 
is succeeded by another firm, and the case is not one covered by S. 187, 
separate assessments shall be made on the predecessor firm and the successor 
firm in accordance with the provisions of S. 170. Therefore, it is obvious that S. 
188 is a specific provision which has to be applied when there is a succession of 
one firm by another as distinguished from a change in the constitution of the firm 
and  the case is not one covered by S. 187. Section 189 deals with a situation 
when the firm is dissolved or the business of a firm has been discontinued and 
under sub-s. (1), where any business or profession carried on by a firm has been 
discontinued or where a firm is dissolved, the Income-tax Officer shall make an 
assessment of the total income of the firm as if no such discontinuance or 
dissolution had taken place, and all the provisions of the Act including the 
provisions relating to the levy of a penalty or any other sum chargeable under 
any provisions of the Act shall apply, so far as may be, to such assessment. 

  8.  At this stage, it will be relevant to refer to some of the provisions of the 
Indian Partnership Act, 1932. Section 4 provides that  "partnership" is the relation 
between persons who have agreed to share the profits of a business carried on 
by all or any or them acting for all Persons who have agreed to share the profits 
of a business carried on by all or any or them acting for all Persons who have 
entered into partnership with one another are called 'individually 'partners' and 
collectively 'a firm' and the name under which their business is carried on is 
called the 'firm name'. Chapter V of the Partnership Act deals with incoming and 
outgoing partners. Section 31 deals with introduction of a partner and it says that, 
subject to contract between the partners and to the provisions of S. 30, no 
person shall be introduced as a partner into a firm without the consent of all the 
existing partners. Under S. 32 (1), a partner may retire with the consent of all the 
other partners, in accordance with an express agreement by the partners or 
where  the partnership is at will, by giving notice in writing to all the other partners 
of his intention to retire. Section 33 provides for expulsion of a partner. Section 
34 (1) provides that, where under a contract between the partners the firm is not 
dissolved by the adjudication of a partner as an insolvent, the estate of a partner 
so adjudicated is not liable for any act of the firm and the firm is not liable for any 
act of the insolvent, done after the date on which the order of adjudication is 
made. Section 35 provides that, where under a contract between the partners the 
firm is not dissolved by the death of a partner, the estate of a deceased partner is 
not liable for any act of the firm done after his death. Chapter VI of the 
Partnership Act provides for dissolution of a firm and under S. 39, the dissolution 
of partnership between all the partners of a firm is called the 'dissolution of the 
firm'. Section 42 provides: 

  "Subject to contract between the partners a firm is dissolved-

  (a) if constituted for a fixed term, by the expiry of that 
term; 

  (b) if constituted to carry out one or more adventures or undertakings, by 
the completion thereof; 

  (c) by the death of a partner; and  

  (d) by the adjudication of a partner as an insolvent."  

  It is therefore clear that, subject to contract between the partners, a firm is 
dissolved by the death of a partner or by the adjudication of a partner as an 
insolvent. If, under the partnership deed or any other agreement entered into 
between the partners before the date of the death of one of the partners or 
before the date of the adjudication of one of the partners as an insolvent, it is 
agreed between the partners inter se that the firm shall not be dissolved on the 
death or on the adjudication of one of the partners as an insolvent, the firm would 
continue. 

  9. Mr. Rama Rao, the learned counsel for the Revenue has emphasised 
before us that the words "cease to be partners" which occur in S. 187 (2) (a) of 
the Income-tax Act, are also to be found in the Partnership Act, because it is 
obvious that, if one or more of the partners cease to be partners or one or more 
new partners are admitted in a firm which exists and continues both under the 
Partnership Act as well as under the Income-tax Act, there is a mere change in 
the constitution of the firm and there is no new firm which comes into existence. 
In this case, we cannot do better than refer to the observations of Sir John 
Beaumont delivering the opinion of their Lordships of the Privy Council in 
Bhagavanji v.  Alembic Works, AIR P. C. 100. In para 10 at P. 101 of the report, it 
was observed: 

   "Before the Board it was argued that under the Indian 
Partnership Act, 1932, a firm is recognised as an entity apart from the persons 
constituting it, and that the entity continues so long as the firm exists and 
continues to carry on its business. It is true that the Indian Partnership Act goes 
further than the English Partnership Act, 1890 in recognising that a firm may 
possess a personality distinct from the persons constituting it, the law in India in 
that respect being more in accordance with the law of Scotland, than with that of 
England. But the fact that a firm possesses a distinct personality does not involve 
that the personality continues unchanged so long as the business of the firm 
continues. The Indian Act, like the English Act, avoids making a firm a corporate 
body enjoying the right of perpetual succession." 

 To the same effect are the observations of the Supreme Court in Commr. 
of Income-tax v. A. W. Figgies and Co.  Mahajan J. (As he then was) speaking for the Supreme Court, 
observed:

   "It is true that under the law of partnership a firm has no legal 
existence apart from its partners and it is merely a compendious name to 
describe its partners but it is also equally true that under that law there is no 
dissolution of the firm by the mere incoming or outgoing of partners. A partner 
can retire with the consent of the other partners and a person can be introduced 
in the partnership by the consent of the other partners. The reconstituted firm can 
carry on its business in the same firm's name till dissolution. The law with respect 
to retiring partners as enacted in the Partnership Act is to a certain extent a 
compromise between the strict doctrine of English Common Law which refuses 
to see anything in the firm but a collective name for individuals carrying on 
business in partnership and the mercantile usage which recognises the firm as a 
distinct person or quasi Corporation." 

  Mr. Rama Rao drew our attention to Black's Law Dictionary, Fourth 
Edition, page 282 where the word "cease" has been defined to mean to stop, to 
become extinct, to pass away, to come to an end. Similarly in Webster's 
International Dictionary the word 'cease' had been defined to mean a 
discontinuance or a temporary or final ceasing. In Corpus Juris Secundum, 
volume 14, at page 58, the word 'cease' has been defined to mean to become 
extinct or pass away, to come to an end, or stop. Mr. Rama Rao also drew our 
attention to the fact that S. 37 of the Partnership Act mentions the words 'ceased 
to be a partner.' Section 45 (1) of the Partnership Act provides for liability for acts 
of partners done after dissolution, and it says: 

   "45.  (1) Notwithstanding the dissolution of a firm, the 
partners continue to be liable as such to third parties for any act done by any of 
them which would have been an act of the firm if one before the dissolution, until 
public notice is given of the dissolution. 

  Provided that the estate of a partner who dies, or who is adjudicated an 
insolvent or of a partner who, not having been known to the person dealing with 
the firm to be a partner, retires from the firm, is not liable under this section for 
acts done after the date on which he ceases to be a partner."  

 It is true that, in the limited context of S. 45 (1) of the Partnership Act, even 
on dissolution of Partnership because of the other provisions of the Partnership 
Act, the partner, who died, can be said to have ceased to be a partner. Such 
cessasion may either be because of the death of a partner or because of 
adjudication of a partner as an insolvent or because of retirement of a partner. In 
the context of S. 45 (1) the words "ceased to be a partner" are undoubtedly used 
to cover all these three contingencies. 

  10. At this stage, before starting discussion on the different authorities to 
which our attention has been drawn, it is necessary to refer to the analogous 
provisions of the Income-tax Act, 1922 (hereinafter referred to as '1922 Act'). 

 Under S. 26  (1). 

   "Where, at the time of making an assessment under S. 23, it 
is found that a change has occurred in the constitution of a firm or that a firm has 
been newly constituted, the assessment shall be made on the firm as constituted 
at the time of making the assessment." 

  The two provisos to sub-sec. (2) of S. 26 provided for succession of a 
business and it says that, where a person carrying on any business, profession 
or vocation has been succeeded in such capacity by another person, such 
person and such other person shall, subject to the provisions of sub-sec. (4) of S. 
25, each be assessed in respect of his actual share, if any, of the income, profits 
and gains of the previous year. It is obvious from what we have stated above that 
the provisions of S. 26 (1) of 1922 Act had been re-enacted as S. 187 (1) of 1961 
Act and an important change is that, whereas Section 26 (1) spoke of a change 
in the constitution of the firm and also of the firm being newly constituted under 
1961 Act, provision is made only for a change in the constitution of the firm and it 
does not deal with the eventuality of a firm being newly constituted. This change 
as between the provisions of 1922 Act and 1961 Act is very material, because if 
the provisions of S. 26 (1) of 1922 Act are borne in mind, the distinction between 
S. 26 (1) of the 1922 Act and S. 187 (1) of 1961 Act will clearly remain in the 
forefront. 

 11. To deal in a chronological order with the authorities under the Income-
tax Act, we will refer to the decision of the Supreme Court in Commr. of Income-
tax v. A. W. Figgies and Co.  (supra). The Court there was 
concerned with succession under S. 26 (1) and the question was one of the 
applicability of S. 25 (4) and S. 26 (1) of the 1922 Act, Mahajan, J., (as he then 
was) speaking for the Supreme Court, observed at page 409 of the report; AIR 1953 SC 456:

   "But under the Income-tax Act, the position is somewhat 
different. A firm can be charged as a distinct assessable entity as distinct from its 
partners who can also be assessed individually." 

 After referring to the charging S. 3 of 1922 Act analogous to the charging S. 
4 of 1961 Act, Mahajan J. Observed (at p.456 of AIR): 

   "The partners of the firm are distinct assessable entities, 
while the firm as such is a separate and distinct unit for purposes of assessment. 
Sections 26, 48 and 55 of the Act fully bear out this position. These provisions of 
the Act go to show that the technical view of the nature of a partnership under 
English law or Indian law, cannot be taken in applying the law of income tax. The 
true question to decide is one of identity of the unit assessed under the Income-
tax Act. 1918 which paid double tax in the year 1939, with the unit to whose 
business the private limited company succeeded in the year 1947." 

  12. In Shivram Poddar v. Income-tax Officer,  the Supreme Court was concerned with the discontinuance of business of a 
firm and the provisions of S. 26 (1) and other connected provisions of 1922 Act. 
Shah, J. (As he then was ) speaking for the Supreme Court, observed at p. 827 
of the report (51 ITR): (at p. 1098 of AIR):

   "Discontinuance of business has the same connotation in S. 
44 as it has in S. 25 of the Act; it does not cover mere change in ownership or in 
the constitution of the unit of assessment. Section 44 is, therefore, attracted only 
when the business of a firm is discontinued. i.e. when there is complete 
cessation of the business and not when there is a change in the ownership of the 
firm, or in its constitution, because by reconstitution of the firm no change is 
brought in the personality of the firm, and succession to the business and not 
discontinuance of the business results. Under the ordinary law governing 
partnerships, modification in the constitution of the firm in the absence of a 
special agreement to the contrary amounts to dissolution of the firm and 
reconstitution thereof, a firm at common law being a group of individuals who 
have agreed to share the profits of a business carried on by all or any of them 
acting for all , and supersession of the agreement brings about an end of the 
relation. But the Income-tax Act recognises a firm for purposes of assessment as 
a unit independent of the partners constituting it; it invests the firm with a 
personality which survives reconstitution. A firm discontinuing its business may 
be assessed in the manner provided by Section 25 (1) in the year of account in 
which it discontinues its business; it may also be assessed in the year of 
assessment. In either case, it is the assessment of the income of the firm. Where 
the firm is dissolved, but the business is not discontinued, there being change in 
the constitution of the firm, assessment has to be made under S. 26 (1), and if 
there be succession to the business, assessment has to be made under S. 26
92). The provisions relating to assessment on reconstituted or newly constituted 
firms,and on succession to the business are obligatory. Therefore, even when 
there is change in the ownership of the business carried on by a firm on 
reconstitution or because of a new constitution, assessment must still be made 
upon the firm." 

  13. Mr. Rama Rao for the Revenue has very strongly relied upon the 
particular words in the above passage,which we have underlined; but it must not 
be forgotten that it was while dealing with the provisions of S. 26 (1) which dealt 
with both changes occurring in the constitution of the firm and a newly-
constituted firm that those observations were made. Assessment undoubtedly 
had to be made under S. 26 (1) when there was a change in the constitution of 
the firm and when a firm was newly constituted. If a partnership firm was 
dissolved and the business of the firm was continued by another firm under the 
provisions of 1922 Act, since there would be a newly constituted firm as 
distinguished from a change of the constitution of the firm, the provisions of S. 26 
(1) of 1922 Act had to be invoked. But the question is whether, with the change in 
the provisions of S. 26 (1) by the dropping of the reference "a newly-constituted 
firm" occurring in S. 26 (1), the above observations of the Supreme Court have 
any force to the provisions of S. 187 (1) of 1961 Act. We are unable to accept the 
contention of Mr. Rama Rao that S. 187 (1) would cover the case of a firm which 
is dissolved, but its business has been continued by a new firm, though some of 
the partners of the new firm may be common to the old firm as well.  We see no 
reason to apply the above observations of the Supreme Court, particularly the 
underlined words to the language of S. 187 (1) of 1961 Act. Those observations 
were made in the context of the language of S. 26 (1) of 1922 Act where the 
language and scheme of the section were entirely different. 

 14. The decision in Shivram Poddar's case  was 
followed 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 
extensively from the decision in Shivram Poddar's case supra and the passages 
which we have extracted from that decision were also extracted by Shah, J., in 
Commr. of Income-tax v. Kirkend Coal Co. . For 
the reasons which we have set out hereinabove, the decision in Commr. of 
Income-tax  v. Kirkend Coal Co.  which was 
delivered in the context of the provisions of Section 26 (1) and Section 44 of the 
1922 Act., cannot entirely help us in interpreting the provisions of S. 187 (1) 
which depart from the provisions of S. 26 (1) of 1922 Act in very material 
particulars, as we have pointed out above.

 15. We may however refer to another decision of the Supreme Court in 
Commr. of Income-tax v. K. H. Chambers . The 
question was what was meant by succession in the context of the Income-tax 
Act. Subba Rao, J. (As he then was) quoted with approval, at page 680 of the 
report, (of 55 ITR); (at pp. 973, 974 of AIR 1965 SC) from the decision of Finlay 
J. in Malayalam Plantations Ltd. v. Clark (1935) 19 Tax Cas 314. The passage 
from the decision of Finlay, J., is in these terms: 

   "The substance of what was done, I think clearly was this. 
The thing was taken over as a going concern, taken over with the things growing 
on it, and with the coolies employed to work the estate. I am not going into it any 
further because it is essentially a question of fact, but I cannot avoid the view that 
there was material upon which commissioners might arrive at the conclusion that 
there was a succession." 

  16. Commenting upon this observation of Finlay, J., Subba Rao, J. (As he 
then was ) observed:- 

   "This is an authority for the position that if a business was 
taken over as a going concern the mere fact that some assets, which were not 
required by the successor for the carrying on of the business, were not 
transferred to him would not make it any the less a succession in law. It is not 
necessary to multiply decisions. Succession involves change of ownership; that 
is, the transferor goes out and the transferee comes in; it connotes that the whole 
business is transferred; it also implies that substantially the identity and the 
continuity of the business are preserved. If there is a transfer of a business, any 
arrangement between the transferor and the transferee in respect of some of the 
assets and liabilities not with a view to enable the transferor to run a part of the 
business transferred out to enable the transferee to run the business 
unhampered by the load of debts or for any other appropriate collateral purpose 
cannot detract from the totality of succession." 

  This decision of the Supreme Court points out that, if there is any change 
of ownership in the sense of the transferor going out and the transferee coming 
in and at the same time substantially the identity and the continuity of the 
business have been preserved, there would be a succession as distinguished 
from mere continuance of the firm if the transferor and the transferee are 
partnership firms. 

  17. We may point out that, apart from these decisions of the Supreme 
Court which we have just now noted, under S. 26 (1) of the 1922 Act, there has 
been no decision of the Supreme Court regarding the provisions of S. 187 (1) of 
the 1961 Act and hence we will first notice the provisions of Ss. 187, 188 and 189 
in the context in which they occur in 1961 Act and then consider how the High 
Courts including this Court have dealt with this aspect of the law. 

  18. Section 187 which we have set out hereinabove deals with change in 
constitution of a firm. The very concept of change in the constitution of a firm 
envisages that the same identical firm continues as before, but there is a change 
in the composition of the firm or as Section 184 (7) and S. 187 (2) (b) point out, 
there  may be an alteration in the shares inter se of the partners of the firm. The 
change in the constitution of the firm in the sense of continuity being maintained 
and the identity of the firm being maintained is contemplated by the provisions of 
Ss. 31 to 35 of the partnership Act. The firm does not get dissolved as a result of 
the change in the constitution of the firm. There may be the introduction of a new 
partner or there may be the retirement of a partner or there may be expulsion of 
a partner or where there is a contract to the contrary, the partnership does not 
get dissolved even on the death of a partner. Similarly, if a partner is adjudicated 
an insolvent, and there is a provision to the contrary between the partners that 
the insolvency of one of the partners is not to bring about a dissolution of the 
firm, such adjudication of one of the partners as an insolvent may also bring 
about a change in the constitution of the firm because the insolvent ceases to be 
a partner of the firm; but the firm will not be dissolved. The very basic concept 
underlying S. 187 (i) is that one and the same firm must be continuing throughout 
the assessment year under consideration. But there is a change in the 
constitution of the firm, though the firm, as an entity, continues as one and single 
entity throughout the period. If the firm ceases to exist, the relationship of 
partners inter se comes to an end and therefore the firm can no longer be said to 
continue as before. Since the continuance or the existence of the firm is the basic 
concept underlying S. 187 (10 which speaks of a change in the constitution of the 
firm, it is obvious that the provisions of S. 187 (2), which defines "for the 
purposes of this section" what is meant by change in the constitution of the firm, 
cannot go contrary to the basic concept underlying S. 187 (1). Clause (a) of 
Section 187 (2) provides that, for the purposes of this section, there is a change 
in the constitution of the firm if one or more of the partners cease to be partners 
or one or more new partners are admitted. In such circumstances, one or more of 
the persons who were partners of the firm before the change continue as partner 
or partners after the change. Similarly, where all the partners continued with a 
change in their respective shares or in the shares of some of them, there is a 
mere change in the constitution of the firm. It is obvious that, if the words "if one 
or more of the partners cease to be partners" are understood in the sense of the 
provisions of the Sections in Chapter V of the Partnership Act without doing 
violence to the underlying concept of S. 187 (1) the notions of the Partnership Act 
and the Income-tax Act can be reconciled. There is nothing in the Income-tax Act 
which compels us to take a different view and which compels us to hold that the 
scheme of these sections and the basic concept under the Partnership Act are 
departed from when the legislature enacted S. 187 (1). The words "for the 
purposes of this Section" occurring at the commencement of S. 187 (2) cannot 
serve the purpose of a non obstante clause, as has been contended by Mr. 
Rama Rao. There is no provision in the Partnership Act which contemplates that, 
by a mere change in the constitution of the firm by virtue of the provisions of the 
Partnership Act, a firm can be said to be continued, as the two concepts are 
diametrically opposed to each other. If there is a dissolution, the firm comes to an 
end and if a firm comes to an end, there cannot be a continuity of the firm as it 
stood prior to its dissolution and therefore, after the dissolution, there cannot be 
said to be a mere change in the constitution of a firm. 

  19. It may be pointed out that S. 189 (1) deals  with a situation where any 
business or profession carried on by a firm has been discontinued or where a 
firm is dissolved and the liabilities of the firm which has been dissolved or the 
liabilities of the firm which has discontinued its business or the income of the firm 
which has been dissolved or the income of the firm which has been dissolved or 
the income of the firm which has discontinued its business are to be adjusted in 
the light of S. 189 (1). It is, therefore, difficult to accept the contention urged on 
behalf of the Revenue that S. 187 also contemplates a situation where a firm has 
been dissolved because of the provisions of the Partnership Act. It may be 
pointed out that, once a firm is dissolved under sub-sec. (8) of S. 184, a fresh 
registration will have to be applied for. Even if there is a change in the 
constitution of the firm, the firm has to apply for fresh registration. We are merely 
referring to the provisions of S. 184 with a view to point out that the notions and 
concepts in the Partnership Act are not totally to be overlooked when considering 
the provisions of the 1961 Act. Moreover, S. 2 (23) requires the words 'firm,' 
'partner' and 'partnership to be interpreted in the same manner as has been done 
in the Partnership Act. Once a firm is dissolved in view of the provisions of the 
Partnership Act, it is obvious that that firm comes to an end and there cannot be 
said to be a change in the constitution of such a firm just because after the 
dissolution of the firm, by virtue of a new agreement between some of the 
partners of the dissolved firm, the business of the firm is continued and the new 
firm takes over the business of the old firm. It is possible to urge that, in the event 
of a firm being dissolved under the provisions of the Partnership Act, if some o 
the partners of the dissolved firm agree to restart the business by virtue of a new 
agreement, there is a newly-constituted firm but the words 'a newly-constituted 
firm" which were present in S. 26 (1) of the 1922 Act are absent from S. 187 (1) 
of the 1961 Act. Under these circumstances, by a mere process of interpretation, 
it obviously follows that the basic concept underlying S. 187 is a continuity of a 
firm as an entity. Once dissolution comes about, the provisions of S. 187 can 
never apply. Therefore, the decision in Shivram Poddar v. Income-tax Officer 
 supra and Commr. of Income-tax v. Kirkend Coal Co.  supra both decided by the Supreme Court, cannot help the 
Income-tax authorities in such an eventuality.

  20. We may point out that the Madras High Court in Kaithari Lungi Stores 
v. Cjommr. of Income-tax 104 ITR 160: (1977 Tax LR 354 (Mad)) dealt with the 
provisions of S. 187 and Ramaswami J. speaking for the Division Bench of the 
Madras High Court, observed at page 164 of the report (104 ITR) : (at p. 356 of 
1977 Tax LR) : 

 "A change in the constitution of a firm must be distinguished 
from the dissolution of the firm. The distinction was clearly brought out by this 
Court in Tyresoles (India) Calcutta v. Commr. of Income-tax, (1963) 49 ITR 515 
(Mad) and the following passage in that Judgement is worth quoting:

   "The dissolution and reconstitution of a partnership are two 
different legal concepts. The dissolution puts an end to the partnership, but 
reconstitution keeps it subsisting, though in another form. A dissolution followed 
by some of the erstwhile partners taking over the assets and liabilities of the 
dissolved Partnership and forming themselves into a Partnership is not 
reconstitution of the original Partnership. The Partnership formed after the 
dissolution is a new Partnership and not a continuation of the old Partnership for 
it would be contradiction in terms to say that what ceased to exist was continued 
A reconstitution of a firm or Partnership necessarily implies that the firm never 
became extinct. What it denotes is a structural alteration of the membership of 
the firm, by addition or reduction of members, and an incidental redistribution of 
the shares of the partners."  

  21. Ramaswami, J. Further observed: 

   "In our opinion, the words "ceasing to be partners" in S. 187 
(2) would also include a case of death of a partner when such death, by reason 
of a contract to the contrary or by reason of any law, did not bring about the 
dissolution of the Partnership." 

 The learned Judges of the Madras High Court declined to accept the view 
propounded by Seth, J. in Dahi Laxmi Dal Factory v. Income-tax Officer 103 ITR 
517: (1975 Tax LR 132) (All) (FB). We respectfully agree with the conclusions of 
the learned Judges of the madras High Court because, on our own analysis of 
the wording of the Sections, we have come to the same conclusions.

  22. We will now examine in chronological order the decisions of the 
different High Courts delivered in the context of S. 187. In Dharam Pal Sat Dev v. 
Commr. of Income-tax  a Division Bench of the Punjab 
and Haryana High Court dealt with a situation where three partners were carrying 
on the Partnership business and one of the partners died. The remaining two 
partners and the son of the deceased entered into Partnership after the death of 
the deceased partner and they carried on the same business as previous 
Partnership. There was no clause in the Partnership deed before the death of the 
partner providing for non-dissolution of the firm in the event of the death of one of 
the partners. On these facts, the Division Bench held that the provisions of the 
Partnership Act can be referred to only if it is found that a particular situation is 
not covered by the provisions of the Income-tax Act. A particular case can be 
covered by S. 188 of the Act only when it is a succession of one firm by another, 
meaning thereby that there is a complete change and no one of the partners in 
the previous firm continued to be a partner in the latter firm, which was not the 
case before the Division Bench. Bhopinder Singh Dhillon, J. delivering the 
judgement of the Division Bench, referred to the decisions of the Supreme Court 
in Commr. of Income-tax v. Kirkend Coal Co.  supra and 
Shivram Poddar v. Income-tax Officer (AIR 1954 SC 1075) supra and it appears 
from the decision of the Division Bench of the Punjab and Haryana High Court, 
that the learned Judges did not distinguish between S. 26 (1) of the 1922 Act and 
S. 187 (1) of the 1961 Act and reproduced the observations of the Supreme 
Court in Shivaram Poddar's case (at p. 1098 of Air) supra :

   "Where the firm is dissolved, but the business is not 
discontinued, there being a change in the constitution of the firm, assessment 
has to be made under S. 26 (1), and if there be succession to the business, 
assessment has to be made under S. 26 (2)." 

 We have already pointed out that those observations in Shivram Poddar's 
case supra cannot apply to cases arising under S. 187 (1) of the 1961 Act. With 
great respect to the learned Judge of the Punjab and Haryana High Court, we 
are unable to accept their reasoning regarding S. 187 (1).

 23. The next decision in point of time is the majority decision of the Full 
Bench of the Allahabad High Court in Dahi Laxmi Dal Factory v. Income-tax 
Officer 1975 Tax LR 132 (All) (FB) supra. The majority of the learned Judges 
there held that S. 187 of the Income-tax Act 1961 applies only where a firm is 
reconstituted in accordance with Ss. 31 and 32 of the Indian Partnership Act, 
namely, when a new partner if taken in or an existing partner retires with the 
consent of all the partners or without their consent if the contract of Partnership 
so provides. But where a firm is dissolved either by agreement of the partners or 
by operation of law and another firm takes over the business, that will be a case 
of succession governed by Section 188 of the Act, even though some of the 
partners of the two firms are common. In the case before the Full Bench of the 
Allahabad High Court, the old firm was constituted by two partners. One of them 
died and there was no stipulation in the partnership deed that the firm shall not 
stand dissolved on the death of a partner. Even if there had been such a 
stipulation, the firm could not have been saved from dissolution, because after 
the death of one of the partners, only one partner was left and one man cannot 
constitute a firm. The firm automatically came to an end. Since the erstwhile firm 
stood dissolved on the death of one of the partners, the new firm which took over 
the same business could be assessed only in accordance with S. 188 and a 
single assessment for the whole year was not valid. With respect, we agree with 
the learned Judges who delivered the majority decision of the Full Bench of the 
Allahabad High Court, but we differ from them only to the limited extent that the 
reconstitution of the firm is covered not only by Ss. 31 and 32 of the Partnership 
Act but also by the other provisions of Chapter V of the Partnership Act under 
which because of a contract to the contrary a firm is not dissolved even on the 
death of one of the partners of the firm or on the adjudication of a partner as an 
insolvent. We agree with the comment of the learned Judges of the madras High 
Court in Kaithari Lungi Stores v. Commr. of Income-tax (1977 Tax 354 (mad)) 
(supra) about this majority decision of the Full Bench of the Allahabad High 
Court; but barring this divergence of views between ourselves and the majority of 
the learned Judges of the Allahabad High Court as to when there can be said to 
be a change in the constitution of a firm viz., whether only under the provisions of 
Ss. 31 and 32 of the Partnership Act or whether under the other provisions of 
Chapter V of the Partnership Act as well, we agree with the conclusions of the 
learned Judges of the Full Bench of the Allahabad High Court.

 24. In Addl. Commr. of Income-tax Gujarat v. Harjivandas Hathibhai, 1976 
Tax LR 1107 (Guj) a Division Bench of the Gujarat High Court to which one of us 
(Divan C. J. ) was a party, the provisions of S. 187 were considered, and it was 
held (at p. 1112 Para 7) :

   "Even though a partner retires, the firm continues as before. 
What is meant by a change in the constitution of the firm is coming in of a new 
partner with the consent of all the existing partners or by the retirement of a 
partner with the consent of all the partners. In such cases there is a mere change 
in the constitution of the firm and nothing more. The same firm continues as 
before. The question of dissolution of the firm either by operation of law or by act 
of parties is a different thing altogether. When a firm is dissolved, the old 
relationship comes to and end and a new relationship comes into existence and if 
the succeeding Partnership firm continues the old business, then there is 
succession of one firm by another as contemplated by Section 188. Sub-sec. (2) 
of S. 187 merely specifies two kinds of changes in the constitution of the firm. 
Clause (a) of sub-sec. (2) of S. 187 refers to the continuance of the firm on one 
or more of the partners ceasing to be partners or one or more new partners being 
admitted. It deals with cases of retirement of partners and introduction of new 
partners but the firm would continue in such a case. Therefore, all that sub-sec 
(2) of S. 187 points out is that with the retirement of one or more of the partners 
so long as one of the old partners continues and with the introduction of new 
partners there is a mere change in the constitution of the firm." 

  25. At page 1112 of the report, the Division Bench of the Gujarat High 
Court pointed out: 

 "Even apart from the decision of the learned Judges of the 
Allahabad High Court in the Full Bench decision referred to above (Dahi Laxmi 
Dal Factory's case (1975 Tax LR 132 (All)) (FB) it is obvious on general 
principles that unless the words of the Income-tax Act compel us to do so, it 
would not be correct to depart from the well-known principles of Partnership law. 
The Partnership law contemplates retirement of a partner and even though a 
partner retires the firm continues as before. What is meant by a change in the 
constitution of the firm is coming in of a new partner with the consent of all the 
existing partners or by the retirement of a partner with the consent of all the 
partners; in such cases there is a mere change in the constitution of the firm and 
nothing more. The same firm continues as before."

  26. We are in agreement with this conclusion of the learned Judges of the 
Division Bench of the Gujarat High Court. 

 27. In Addl. Commr. of Income-tax v. Visakha Flour Mills (ii) 1977 Tax LR 
41 (Andh Pra) a Full Bench of this Court consisting of one of us (Raghuvir J.) 
Kondaiah and Gangadhara Rao, JJ. held (at p. 47):

   "A change in the constitution of a firm within the meaning of 
S. 187 would occur where (i) one of the partners voluntarily retires or is expelled 
leaving the remaining partners to continue the business, or (ii) a new partner is 
introduced with the consent of the existing partners or (iii) all the partners 
continue as before but with re-adjustment or reallocation of shares of one or 
more or all of them, or (iv) one of the partners dies. Under S. 42 (6) of the 
Partnership Act, the firm gets dissolved if any one of the partners dies when 
there is no specific agreement in the deed of partnership to the effect that 
notwithstanding the death of any one of the partners, the firm continues to do its 
business with the remaining partners." 

 It was further held by the Full Bench: 

   "If there is conflict between the provisions of the Income-tax 
Act and those under the Partnership Act, the provisions of the Income-tax Act 
would prevail over those of the Partnership Act." 

  Pausing here we are in agreement with this proposition of law; but as 
pointed out earlier, in fact, there is no conflict between the provisions of S. 187 
(1) of the Income-tax Act and the provisions of the Partnership Act, when one 
bears in mind the basic concept underlying the provisions of S. 187, viz. the 
continuity of the firm as an entity in the eye of law. The Full Bench further 
observed: 

   "A close and combined reading of Ss. 187 and 188 does not 
warrant or justify the assumption that S. 187 is not applicable to a case of 
dissolution of a firm. Where therefore, a firm is dissolved on account of the death 
of a partner by virtue of the provisions of S. 42 (c) of the Partnership Act and the 
business is continued by the remaining partners of by the remaining partners and 
another in the place of the deceased partner, there being only a change in the 
constitution of the firm within the meaning of S. 187 (2) (a) the assessment of the 
firm for the previous year or years must invariably be made under S. 187 and if 
there be succession to the business by another separate entity owned by 
altogether different partners, assessment has to be made under S. 188 as it 
would squarely fall under S. 188 as it would squarely fall under 
S.188." 

 The Full Bench further held: 

   "However, if there are one or more of the partners continuing 
as partners in the second firm, it must be construed to be only a change in the 
constitution of the firm within the meaning of S. 187 but not a case of succession 
as contemplated by S. 188." 

 With great respect to the learned Judges of the Full Bench of this Court, we 
are unable to agree with their interpretation of Ss. 187 and 188 of the Income-tax 
Act, 1961. 

 28. Sections 187, 188 and 189 deal with three different situations. Section 
187 deals with a case where the firm continues to be the same as before in the 
eye of law, but there is a change in the constitution either because of a partner 
coming into or another partner going out and so long as one partner is common 
there is said to be a mere change in the constitution of the firm. Section 188 
deals with situation where there is a succession of one firm by another firm and 
in such a situation, the assessment has to be made in the light of S. 170. Section 
189 deals with a situation where a partnership firm is dissolved or its business 
discontinued. Just because some of the partners of the dissolved firm constitute 
a new partnership firm by a new agreement arrived at among themselves it 
cannot be said that the old firm continues with a mere change in the constitution. 
It is altogether a new firm and the learned Judges of the Madras High Court have 
rightly pointed out in Katthari Lungi Stores v. Commr. of Income-tax (1977 Tax 
LR 354 (Mad)) (supra) that a change in the constitution of the firm must be 
distinguished from the dissolution of the firm. Under these circumstances, we are 
unable to accept the reasoning or conclusions of the learned Judges of the Full 
Bench of this Court in Addl. Commr. of  Income-tax v. Visakha Flour Mills. 1977 
Tax LR 41 (Andh Para) (FB) (supra), as regards the interpretation of S. 187 in 
the context of dissolution of a firm by virtue of the provisions of the Partnership 
Act.

 29. Mr. Rama Rao for the Revenue drew our attention to a decision of a 
Division Bench of the Allahabad High Court in R. B. Jessa Ram Fateh Chand v. 
Commr. of Income-tax, . But  this decision was overruled 
by the majority of the learned Judges of the Full Bench of the Allahabad High 
Court in Dahi Laxmi Dal Factory v. Income-tax Officer, (1975 Tax LR 132 (All) 
(FB)) (supra), and since we substantially agree with the conclusions of the 
majority of the learned Judges of the Full Bench in Dahi Laxmi Dal Factory v. 
Income-tax Officer (supra), it is not necessary for us to deal with this 
decision.

  30. In Commr. of Income-tax v. Kelukutty, 85 ITR 102: (1972 Tax LR 72 
(Ker)), a Division Bench of the Kerala High Court dealt with a situation where, 
because of cl. 7 of the partnership deed, the firm was not to be dissolved in the 
event of the death of one of the partners and since the firm was not dissolved, 
the case would squarely fall under the provisions of S. 187 (1) of the Income-tax 
Act.

  31. In Hoshiarpur Electric Supply Co. v. Commr. of Income-tax, , after setting out the passage from the decision of the Supreme 
Court in Commr. of  I.-T. v. A. W. Figgies & Co.,  (supra), the 
learned Judges of the Punjab and Haryana High Court Observed:

   These observations quite precisely apply to the present 
case, because their Lordships definitely decided that technically the law of 
partnership does not apply to a case like the present which is to be considered 
by applying the law of income-tax. In the present case also the business of the 
firm originally constituted continued as the electrical undertaking at Hoshiarpur 
from the very beginning right down to its purchase by the Punjab Government, 
and it continued to be the same unit throughout, carrying on the same business 
of supply of electricity, the same place and there was no cesser of that business 
or any change in the unit" 

  32. The question which we have to consider in the present case did not 
arise strictly for the decision in that particular case and it is not necessary for us 
to deal with that particular case in greater detail. 

  33. In Sandersons & Morgans v. Income-tax Officer, 87 ITR 270 : (1973 
Tax LR 614 (Cal) ), Sabyasachi Mukharji, J. of the Calcutta High Court, sitting 
single, dealt with a situation where there was a contract to the contrary providing 
that, in the event of death of one of the partners, the partnership firm was not to 
be dissolved. Thus it is obvious that the case would clearly fall under the 
provisions of S. 187 of the Income-tax Act, 1961. At page 281 of the report (87 
ITR) : (at p. 620 of Tax LR), Sabyasachi Mukharji, J. Observed:

   "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." 

  34. Sabyasachi Mukharji, J. further observed: 

   "...................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'." 

 With respect, we are unable to agree with the later part of the reasoning of 
the learned single Judge of the Calcutta High Court. 

  35. In Commr. of Income-tax v. T. Veera Raghavulu Chetty & Sons, 100 
ITR 723 : (1976 Tax LR 460 (Andh Pra) ), a Division Bench of this Court 
consisting of Obul Reddi, C. J. and Sriramulu, J., dealt with a situation where 
there was introduction of new partners in the midst of the accounting year. They 
were not dealing with a situation where a firm was dissolved because of the 
provisions of the Partnership Act, and it was held that the entire income of the 
firm for the whole year was to be assessed instead of two separate assessments 
and the conclusion of the learned Judges of the Division Bench is correct in the 
light of the fact that the case was clearly governed by the provisions of S. 187 (10 
as interpreted by us. These are all the different decisions which have a bearing 
on this case.

 36. It is  true, as pointed out by the Gujarat High Court in Addl. Commr. of 
Income-tax, Gujarat v. Harjivandas hathibhai, (1976 Tax LR 1107 (Guj) ) (supra), 
in para 10 of its judgement that contract to the contrary can be spelled out from 
the conduct of the parties: but such conduct must be of the partners who 
constituted the firm before the dissolution took place under the provisions of the 
Partnership Act. It cannot be said that the conduct of the surviving partners, after 
the dissolution of the firm, is any indication regarding the existence of the 
contract to the contrary before the death of the deceased person, which brings 
about the dissolution of the firm. Even the subsequent conduct of the surviving 
partners may indicate under certain circumstances that there must have been a 
contract to the contrary between the surviving partners and the deceased partner 
during the lifetime of the deceased partner. But as we have stated above, it is a 
mere question of inference from the facts. The decision of the Gujarat High Curt 
in Ramprasad Firm v. Bai Reva,  which was relied upon by Mr. 
Rama Rao in support of his argument, merely lays down the same proposition 
and it does not advance the case of the Revenue any further. These are all the 
decisions which have been cited before us at the Bar and on a perusal  and 
consideration of these different decisions and in the light of the provisions of S. 
187 as interpreted by us, it must be held that S. 187 does not apply to a situation 
where a firm is dissolved by the operation of one or the other provisions of the 
Partnership Act and after dissolution, one or more of the partners of the dissolved 
firm continue the same business as before by a fresh agreement with one or 
more new partners.

 37. In the light of the above conclusion, it is not strictly necessary for us to 
deal with the contention urged by Mr. Swamy who appears for the assessee in R. 
C. No. 67 of 1975 that, even if the case falls under S. 187, there should be two 
assessments. It is not possible for us to accept that contention because under 
the scheme of the Act, once the case falls under S. 187, there must be a single 
assessment because there is only one assessee viz. the firm as it stood 
constituted at the end of the assessment year and there can be only one 
assessment in respect of a single assessee. This argument which appealed to 
the dissenting Judge. H. N. Seth J. of the Allahabad High Court in Dahi Laxmi 
Dal Factory v. Income-tax Officer, (1975 Tax LR 132 (All) ) (FB) (supra), 
therefore, cannot be sustained.

  38. In view of our conclusion as above, it necessarily follows that, in R. C. 
No. 22/75, because of the death of Srinivasulu on August, 17, 1968, the old firm 
was dissolved and there was succession to that firm by another firm within the 
meaning of S. 188 when under a new agreement seven of the old partners 
together with two new partners continued the old business as before. Therefore, 
the case was not covered by S. 187 and hence it is obligatory on the part of the 
Income-tax Officer to make two separate assessments, one on the dissolved firm 
and the other on the new partnership firm. We therefore answer the question in 
R. C. No. 22 of 1975 in the affirmation i.e. in favour of the assessee and against 
the Revenue. In R. C. No. 67/75 on the retirement of Ch. Suryanarayana with 
effect from September 30, 1970, the old firm, which was in existence till then, 
came to an end because there were only two partners and one partner, Ch. 
Suryanarayana retired and the other partner, K. Sanyasiraju could not continue 
the business of the firm. Because of hat dissolution, though the business of the 
partnership was carried on by another firm and was continued, there was a mere 
succession within the meaning of S. 188 and the case was not covered by the 
provisions of S. 187. Under these circumstances, we answer the question 
referred to us in r. C. No. 67/75 in the negative as to the first part and in the 
affirmative as to the second part i.e. in favour of the assessee as to both parts of 
the question. The Commissioner will pay the costs of the reference to the 
assessees in each of these two matters. Advocate's fee Rs. 250/- in each. 

Lakshmaiah, J. 

 39. The point that arises for determination in this reference pertains to the 
interpretation of S. 187 of the Income-tax Act, 1961. 

  39-A. "The main question" that we have to consider on the facts of the two 
cases referred, as formulated by My Lord Chief Justice, is "the effect of the 
provisions of s. 187 (2) of the Income-tax Act, when under the provisions of the 
Partnership Act, a firm is dissolved." 

  40. But the crucial problem that requires solution into this reference is 
whether it can be said that "a change had occurred in the constitution of a firm", 
within the meaning of that expression as occurring in S. 187 of the Income-tax 
Act, 1961 when a partner dies, "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." 

  41. In other words, to put it differently the question is whether, if a partner 
dies, he does not cease to be a partner under S. 187 (2) of the Income-tax 
Act. 

  42. The problem of interpretation can be approached both textually as well 
as contextually. 

 1. TEXTUAL APPROACH: 

   "A Statute is the will of the legislature, and the fundamental 
rule of interpretation to which all others are subordinate, is that a statute is to be 
expounded 'according to the intent of them that made it.' If the words of the 
statute are in themselves precise and unambiguous no more is necessary than to 
expound those words themselves in such case best declaring the intention of the 
legislature. The object of all interpretation of a statute is to determine what 
intention is conveyed, either expressly or impliedly, by the language used, so far 
as is necessary for determining whether the particular case or state of facts 
presented to the interpreter falls within it.............................The safer and more 
correct course of dealing with a question of construction is to take the words 
themselves and arrive, if possible, at their meaning without, in the first place, 
reference to cases.......................... 

  When the language is not only plain but admits of but one meaning, the 
task of interpretation can hardly be said to arise. It is not allowable, says Vattel, 
to interpret what has no need of interpretation. Absoluta Sententia Expositore 
non Indiget. Such language best declares, without more, the intention of the law 
giver, and is decisive of it. The rule of construction is 'to intend the legislature to 
have meant what they have actually expressed." (Maxwell on The Interpretation 
of Statutes - Eleventh Edition, pages 1 to 4).  

  43. Section 187 of the Income-tax Act, 1961 (referred to hereinafter as the 
Act) reads: 

  "187. Change in constitution of a Firm.- 

  (1) Where at the time of making an assessment under S. 
143 or S. 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 : 

  (i) the income of the previous year shall, for the purposes of 
partners, who, in such previous year, were entitled to receive the same; and  

 (ii) when the tax assessed upon a partner cannot be recovered from him, it 
shall be recovered from the firm as constituted at the time of making the 
assessment.   

  2. For the purposes of this section, there is a change in the constitution of  
the firm.................... 

   (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 parsons who were partners of the firm before the change continue as partner 
or partners after the change; or  

  (b) where all the partners continue with a change in their respective 
shares or in the shares of some of them."   

  44. Chapter XVI of the Act wherein the above section occurs deals with 
"special provision applicable to firms" with regard to assessment. Section 182 
provides for assessment of registered firms and S. 183, for assessment of 
unregistered firms. Sections 184 to 186 deal with "registration of firms." 

  45. Of the remaining other three sections in that Chapter, S. 187 deals 
with "Change in constitution of a firm," S. 188, with "succession of one firm by 
another firm", and S. 189, with "firm dissolved or business discontinued." 

  46. Chapter IV deals with the general 'procedure for assessment.' Section 
139, the first section under that Chapter provides for the return of total income by 
an assessee. 

  47. Where a return has been made under S. 139, S. 143 provides for the 
making of an assessment of the assessee by the Income-tax Officer. 

  48. Where there is failure on the part of the assessee to make the return 
under s. 139, or to comply with some or all of the requirements of Ss. 142 & 143, 
s. 144 provides for the making of a best judgement assessment by the Income-
tax Officer. 

  49. Where at the time of making an assessment under S. 143 or S. 144, it 
is found that a change has occurred in the constitution of a firm the assessment 
shall have to be made under S. 187 on the firm as constituted at the time of 
making the assessment.  

  50. As to when such a change in the constitution of the firm takes place, 
sub- sec. (2) of S. 187 provides by saying, leaving the immaterial portion,  

   "For the purposes of this section, there is a change in the 
constitution of the firm - if one......of the partners cease to be partners................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." 

  51. Assuming that  "such circumstances" as mentioned in sub-s. (2) exist, 
the question is whether there can be a change in the constitution of the firm, if 
one of the partners dies and whether on account of the death of such a partner, 
he does not cease to be a partner. 

  52. The statutory expression needing explanation is 'if one...........of the 
partners cease to be partners'. When does a partner cease to be a partner ? 
Whether a partner does not cease to be a partner on account of his death,  are 
the questions to be answered. Put that way, not much dialectical dexterity, nor 
any interpretative ingenuity is needed to reach the conclusion that a partner 
ceases to be a partner on account of his death as a partner cannot be said to 
continue as a partner after his death excepting it be when the legislature so 
provides by any fiction, and it is nobody's case that the legislature so 
provided. 

  53. The aforesaid statutory expression as to when "a partner ceases to be 
a partner" and whether a partner does not cease to be a partner after his death, 
do not admit any dubity or ambiguity as to justify a need to have resort to any 
extrinsic material such as what is contained in the Partnership Act. 

  54. The words of the statute are in themselves precise and unambiguous. 
No more is necessary than to expound those words in their natural and original 
sense, as the words themselves best declare the intention of the legislature. The 
safer and correct course of dealing with a question of construction is to take the 
words themselves and arrive at their meaning, without in the first place, reference 
to cases and other extrinsic material. When the language is not only plain but 
admits of one meaning, the task of interpretation can hardly be said to arise. It is 
not allowable to interpret what has no need of interpretation. 

  55. I am therefore of the opinion that when a partner of a firm dies, such a 
partner ceases to be a partner and as such there will be "a change in the 
constitution of the firm" under sub-sec. (2) of s. 187 of the Act provided that one 
or more of the persons who were partners of the firm before the change continue 
as partner or partners after the change. 

  56. The contextual theory of interpretation of the S. 187 of the Act to which 
we now propose to advert does not in any way militate against the aforesaid 
view. 

  57. How far reference to and reliance upon the concepts of Partnership 
Act militate against the aforesaid interpretation of S. 187 of the Act is a question 
proposed to be answered under the contextual theory of interpretation. 

 CONTEXTUAL APPROACH: 

  58. Consolidating  Act - Principles and Presumptions of Interpretation: 

 The Income-tax Act, 1961 as its preamble discloses, is an 
Act to consolidate and amend the law relating to income-tax and super-tax. This 
Act by S. 297 repealed the Indian Income-tax Act, 1922 which also contained the 
same preamble. 

  59. In Ravulu Subba Rao v. Commr. of Income-tax,  
 Justice Venkatarama Ayyar speaking for the Supreme Court 
observed, referring to the Indian Income-tax Act, 1922: 

   "The Act is, as stated in the preamble, one to consolidate 
and amend the law relating to income-tax." 

 After referring to the rule of construction to be applied to such a statute as 
stated by Lord Herschell in Bank of England v. Vagliano Bros., (1891 AC 107) 
the learned Judge stated at page 170 of the report thus:- 

   "We must therefore construe the provisions of the Indian 
Income-tax Act as forming a  Code complete in itself and exhaustive of the 
matters dealt with therein, and ascertain what their true scope is." (Emphasis 
supplied). 

  60. The House of Lords decision in Bank of England v. Vagliano Bros., 
(1891) A C P 107 at pp. 144 and 145 concerned with the interpretation of the 
Bills of Exchange Act, 1882 which codified the law relating to Negotiable 
Instruments. Lord Herschell laid down the proper rule of construction thus: 

   "I cannot bring myself to think that this is the proper way to 
deal with such a statute as the Bills of Exchange Act, which was intended to be a 
code of the law relating to negotiable instruments. I think the proper course is in 
the first instance to examine the language of the statute and to ask what is its 
natural meaning, uninfluenced by any considerations derived from the previous 
state of the law, and not to start with inquiring how the law previously stood, and 
then, assuming that it was probably intended to leave it unaltered, to see if the 
words of the enactment will bear an interpretation in conformity with this 
view. 

  If a statute, intended to embody in a code a particular branch of the law, is 
to be treated in this fashion, it appears to me that its utility will be almost entirely 
destroyed, and the very object with which it was enacted will be frustrated. The 
purpose of such a statute surely was that on any point specifically dealt with by it 
the law should be ascertained by interpreting the language used instead of as 
before, by roaming over a vast number of authorities in order to discover what 
the law was, extracting it by a minute critical examination of the prior 
decisions."  

 61. In Rogers Pratt Co. v.  Secretary of State (AIR 1925 Cal 34 at p. 
41 (FB) ). A full Bench of the Calcutta High Court considered the principles of 
interpretation applicable to the interpretation of Income-tax Act, 1918, Mukerji, J. 
observed at page 41 of the report:

   "A perusal of the several enactments makes it clear that the 
Income-tax Act of 1918 (Act VII of 1918) effected a radical change in the scheme 
and scope of operation of this branch of law. The Act of 1918 professes to be a 
consolidating and amending statute; on any point specifically dealt with in the Act 
the law is to be ascertained by interpreting the language used in the statute in its 
natural meaning, uninfluenced by considerations derived from the previous state 
of the law; Administrator General v. Premlal ( (1895) ILR 22 Cal 788 (PC) ). 
Norendra v. Kamalbasini ( (1896) ILR 23 Cal 563 (PC) ) and Ramdas v. 
Amarchand & Co. (1916) ILR 40 Bom 630 : (AIR 1916 PC 7). Reference to the 
previous state of the law would be permissible for the purpose of aiding in the 
construction of a new statute if any provision therein is of doubtful import: Bank of 
England v. Vagliano bros (1891 AC 107) Robinson v. Canadian Pacific Rly. Co. 
(1892 AC 481) and Morsey Docks v. Cameron (1864) 11 HLC 443." 

  "The purpose of a consolidating statute is to present the whole body of the 
statutory law on a subject in complete form, repealing the former statutes." 

  (Halsbury's Laws of England, Third Edition Vol. 36 Para 538 at Page 
366). 

  62. The following passages on consolidating statute and their 
interpretation from Maxwell on The Interpretation of Statutes, Twelfth Edition are 
very instructive. 

  "Consolidating Statutes. 

  A consolidating statute is one which collects the statutory provisions 
relating to a particular topic, and embodies them in a single Act of Parliament, 
making only minor amendments and improvements. 

  In the construction of a consolidation Act, the presumption that Parliament 
does not intend to alter the existing law applies with particular force. For the 
object of the Act was merely to 'reproduce the law as it stood before," (at pp. 20, 
21) 

   xx  xx  xx  xx  xx  xx 
  
  In interpreting a consolidating Act, account is taken of judicial decisions on 
provisions contained in the statutes now codified. 'One has to remember', said 
Lord Evershed M. R., that Parliament must be taken to have been aware of the 
decisions of their courts in the meantime." (at. Page 24) 

  In the case of a consolidating Act there is a particularly strong 
presumption that it does not alter the law contained in the statutes which it 
replaces. The reason is that it is the invariable practice of Parliament to require 
from those who have preferred a consolidation Bill an assurance that it will make 
no substantial change in the law and to have that checked by a committee." (at 
pp. 116, 117). 

   "The statutes dealing with a particular subject may constitute 
a special code in regard thereto. Among the objects intended to be attained by 
the codification of laws are the collection and embodiment in one statute of all the 
laws and parts of laws on the same subject, which had previously been enacted 
and which it is intended to continue in force." (page 59). 

   Xx  xx  xx  xx  xx  xx 
 
  "Codes, Compilations, and Revisions.- It has generally been held that 
codes and compiled or revised statutes intended to express either the whole of 
the general laws of a state, or of some great sub-division of such laws, may be 
adopted by one act under a general title without violating a constitutional 
provision prohibiting the enactment of any bill containing more than one subject 
and requiring that subject to be expressed in the title. In this respect, it has been 
declared that any construction of these with the very commendable policy of 
incorporating the entire body of statutory law on one general subject in a single 
act, instead of dividing it into a number of separate acts, would not only be 
contrary to its spirit but also seriously embarrassing to honest legislation" (p. 
184). 

  (From 'American Jurisprudence' Vol 50) "Consolidation is the reduction 
into a systematic form of the whole of the statute law relating to a given  subject, 
as illustrated or explained by judicial decisions. 'The very object of consolidation 
is to collect the statutory law bearing upon a particular subject, and to bring it 
down to date, in order that it may form a useful code applicable to the 
circumstances existing when the consolidating Act was passed. 'Referring to S. 
192 of the Supreme Court of Judicature (Consolidation ) Act, 1925, Lord 
Hanworth M. R. Said: 'the object therefore of  the Act was to consolidate and 
reproduce the law as it stood before the passing of that Act., " (at pp. 361., 
362). 

  "One has to begin" (said Evershed M. R. In 1958) "by the consideration 
that the Judicature Act is a consolidating Ac t and one does not look for 
substantial changes in the law..................in a consolidating Act." 

 And of the Trustee Act 1925 Romer L. J. Said: "It is a consolidation Act......It 
is therefore, extremely unlikely, to say the least of it, that it effected any 
substantial change in the pre-existing law." In Galloway v. Galloway Lord 
Radcliffe said: "This is a consolidation Act, the function of which is to repeat but 
not to amend the existing statute law." (Pp. 363 & 364) (Craies on Statute-law 
Seventh Edition). Law Commission of India-Twelfth Report on Income-tax Act, 
1922. 

  63. The Income-tax Act, 1961 came into force on April, 1 1962,. It is based 
on the recommendations contained in the law Commission's 12th Report, 
1958. 

  64.  In this connection, it is very interesting and instructive to notice what 
the Law Commission has said in their report about Chapter XVI of the Act which 
deals with the special provisions applicable to Firms (wherein Ss. 187 to 189 
occur) in para 65 at page 22 of their report:  

   "65. Chapter XVI Special Provisions of the Act applicable to 
firms have been gathered together in this chapter. This will enable the partners 
and others to ascertain the law from one Chapter instead of searching for 
provisions, dispersed all over the Act. 

 The principal changes made in this Chapter are given below: 

  (1) The provisions contained at present in the Rules 
regarding the registration and cancellation of registration of firms, have been 
incorporated in the Act. 

  (2) The provision for fresh application for registration every year has been 
deleted, as it entails hardship. A declaration that there has been no change in the 
constitution of the firm will suffice. 

  (3) There was some difficulty in the determining when there is a change in 
the constitution of a firm and when there is a succession. The specific 
circumstances which result in a change in the constitution of a firm have now 
been defined".    

  MACHINERY PROVISIONS- PRESUMPTIONS:- 

  65. Sections 187 to 189 in chapter XVI of the Act relate to assessment of 
firms. They are not changing sections. They are only machinery provisions. 

  66. Lord Normand speaking for the Judicial Committee of the Privy 
Council, while interpreting S. 34 of the Indian Income -Tax Act, 1922 in Commr. 
Of Income-tax Bengal v. Mahalingam Ramjidas (1940) 8 ITR 442 at p. 448 : (AIR 
1940 PC 124 at pp. 126, 127 ) observed:

   "The section, although it is part of the taxing Act, imposes no 
changes on the subject and deals merely with the machinery of assessment . In 
interpreting provisions of this kind the rule is that that construction should be 
preferred which makes the machinery workable, Ut Res Valeat Potius Quam 
Pereat." (At p. 448) 

 67. Justice Sarkar (as he then was) laid down the following rule of 
construction for machinery provisions in a taxing statute in Gusahai Saigal v. 
Commr. of Income -tax, Punjab .

   " Now it is well recognised that the rule of construction on 
which the assessee relies applies only to a taxing provision and has no 
application to all provisions in a taxing statute. It does not, for example, apply to a 
provision not, for example, apply to a provision not creating a charge for the tax 
but laying down the machinery for its calculation or procedure for its collection. 
The provisions in a taxing statute dealing with machinery for assessment have to 
be construed by the ordinary rules of construction,  that is to say, in accordance 
with the clear intentions of the legislature which is to make a charge levied 
effective. Reference may be made to a few cases laying down this distinction. In 
Commr. of Income -tax v. Mahalingam Ramjidas, (AIR 1940 PC 124) it was said 
:-  

   " The section , although it is part of a taxing Act, impose no 
charge on the subject, and deals merely with the machinery of assessment. In 
preferred which makes the machinery workable. Ut Res Vleat Quam Pereat. 

 In India United Mills Ltd. v. Commr. of Excess Profits Tax  This court observed :-

   " That section is, it should be emphasised, not a changing 
section, but a machinery section and a machinery section should be so 
construed as to effectuate the changing sections".  

 68-69.  The aforesaid rule of construction laid down by Sarkar, J. (As he 
then was ) was referred  to with approval by Justice Subbarao (as he then was ) 
in a latter case Banarasi Devi v. Income-tax Officer .

 CONTEXTUAL THEORY OF CONSTRUCTION: 

  70.  The Judicial Committee of the Privy Council in Canada Sugar 
Refining Co. V. Reg.  (1898) AC 735 speaking through Lord Davey Observed at 
p. 741 of the report:- 

   " Every clause of a statute should be construed with 
reference to the context and the other clauses of the Act, so as, so far as 
possible, to make a consistent enactment of the whole statute or series of 
statutes relating to the subject-matter". 

  71.  The following passages on principles of interpretation from Halsbury's 
Laws of England Third Edition Volume 36 may be usefully referred:- 

   " The dominant purpose in construing a statute is to 
ascertain the intention of the legislature as so expressed. This intention, and 
therefore the meaning of the statute, is primarily to be sought in the words used 
in the statue itself  , which must, if they are plain and unambiguous, be applied as 
they stand, ............... 

  If the words of a statute are clear and unambiguous, they themselves 
indicate what must be taken to have been the intention of Parliament and there is 
no need to look elsewhere to discover their intention or their meaning. (pp. 337, 
338) 

  Although the words of a statute are normally to be construed in their 
ordinary meaning, due regard must be had to their subject matter and object, and 
to the occasion on which and the circumstances with reference to which they are 
used, and they should be construed in the light of their context rather than in 
what may be either their strict etymological sense or their popular meaning apart 
from that context." (At p. 394).  

 REFERENTIAL LEGISLATION INCORPORATING THE PROVISIONS OF 
PARTNERSHIP ACT INTO INCOME-TAX ACT - LIMITS AND EXTENT: 

  72. Unless the context otherwise requires, the Income-tax Act, 1961 
provides in the definition clause by S. 2 (230 that "firm", "partner" and 
"partnership" have the meaning respectively assigned to them in the Indian 
partnership Act, 1932; but the expression 'partner' shall also include 'any person 
who, being a minor, has been admitted to the benefits of partnership" 

  73. The clue to the proper appreciation of the impact of Partnership Act on 
the Income-tax Act, particularly on Section 187 thereof, is to be found only in a 
correct appraisal of what is called the theory of "Referential Legislation." 

  74. The earliest case recognising this principle was R. v. Merionethshire 
Inhabitants (1844) 6 QB 343. There, statute 43 G 3 E. 59 applied statute 13 G. C. 
78 "as fully and effectually as if the same and every part thereof were hereinafter 
repealed and re-enacted." 

  75. The classic exposition of the subject by Lord Esher, Master of Rolls in 
the year 1866 in Re Wood's Estate; Exparte Her Majesty's Commrs. of Works & 
Buildings (1886) 31 Ch. D 607 was followed in subsequent decisions, here, 
there, everywhere, set the trend in this branch of law. 

  76. In that case, Act 18 and 19 Victoria Ch. 95 was passed in 1855, after 
the passing of the 'lands Clauses Act.' The material Sections of the Act of 1855 
are 9th and 11th. By the 9th section, certain Sections of the Act of 1840 are 
incorporated into the Act of 1855. The Act of 1840 was passed before the Lands 
Clauses Act. Considering the legal effect of the 9th Section of the Act of 1855 
which brings into that Act those sections of the former Act. Lord Esher, M. R. 
Said:  

   "..................It is to put them into the Act of 1855 just as if 
they had been written into it for the first time. If a subsequent Act brings into itself 
by reference some of the clauses of a former Act, the legal effect of that, as has 
often been held, is to write those sections into the new Act just as if they had 
been actually written in it with the pen, or printed in it, and, the moment you have 
those clauses in the later Act, you have no occasion to refer to the former Act at 
all. For all practical purposes, therefore, those sections of the Act of 1840 are to 
be dealt with as if they were actually in the Act of 1855." (Pp. 615,  
616). 

  77. Speaking about the Legislative practice to incorporate by reference, 
the Supreme Court of India said in A. T. Corporation v. Asstt. Collector, Customs 
: 

   "It is a well accepted Legislative practice to incorporate by 
reference, if the Legislature so chooses, the provisions of some other Act in so 
far as they are relevant for the purposes of and in furtherance of the scheme and 
object of that Act ....................." 

  78. The same practice has been obtaining in the United States of America, 
Mr. Justice Sanford delivering the opinion of the Supreme Court of America said 
in Engel v. Devenport (1925) 70 Law Ed. 813 at p. 817 : 

   "The adoption of an earlier statute by reference makes it as 
much as part of the later act as though it had been incorporated at full length. 
Kendall v. United States, (1838) 12 Pet. 524 at p. 625: 9 Law ed. 1181, 1221; re 
Heath, 144 U.S. at pp. 92, 94 : 36 Law ed. 358 at p. 359: 12 Sup Ct. Rep. 615; 
Interstate Concol. Street R. Co. v. Massachusetts, (1907) 207 U. S. 79, 85: 52 
Law ed. 111, 114 : 28 Sup Ct. Rep. 26 : 12 Ann. Cas. 555: It brings into the later 
act "all that is fairly covered by the reference" (Panama R. Co. Case, (1923) 264 
U. S. 375 (392) : 68 Law ed. 748 (755) : 44 Sup. Ct. Rep. 391); that is to say all 
the provisions of the former act which, from the nature of the subject matter, are 
applicable to the later act." 

  "The  adoption of an earlier statute by reference makes it as much part of 
the later Act as though it has been incorporated at Full length." (American 
Jurisprudence Vol. 50 at p. 58). 

  "Where a statute incorporates by reference the whole or any part of an 
earlier statute, the provisions so incorporated are in general to be construed as 
they would be if set out in full in the later statute." (Halsbury's Laws of England-
Third Edition Volume 36 at p. 404).  

  "The effect of incorporating one Act with another is presumably to make 
them parts of the same Code." (Craies on Statute Law-Seventh Edition at p. 
360).   

 LEGAL PERSONALITY OF A FIRM: 

  Text Books: 

  79. Speaking about the legal conception of personality Sir John Salmond 
said in his 'Jurisprudence' Twelfth Edition in paragraph 61 at page 299: 

   "So far as legal theory is concerned, a person is any being 
whom the law regards as capable of rights or duties. Any being that is so capable 
is a person, even though he be a man. Persons are the substances of which 
rights and duties are the attributes. It is only in this respect that persons possess 
judicial significance, and this is the exclusive point of view from which personality 
receives legal recognition. 

  Persons as so defined are of two kinds, distinguishable as natural and 
legal. A natural person is a human being. Legal persons are beings, real or 
imaginary, who for the purpose of legal reasoning are treated in greater or less 
degree in the same way as human beings."  

  80. G. W. Paton in his Text Book of 'Jurisprudence' Third Edition at page 
247 said : 

   "................Most of the matters ............... involve not tangible 
things which exist in the world around us independently of man, but intangible 
things created in one way or another by man for his purposes as a social animal. 
Notions and concepts like rights and duties, juristic acts, remedial rights, 
property, or possession, although they may be concerned with tangible things in 
one way or another, are not themselves tangible things but represent or stand for 
or serve or describe certain relationships." 

  "It is difficult to conceive of rights or duties except as going to the 
relationships between persons." 

  "If  by persons we meant always human beings that perhaps there would 
not need to be much discussion about legal personality. It is clear, however, that 
the law creates not only its own rules for determining the relationships between 
persons but its own rules for determining what entitles shall be recognised as 
persons for the purposes of the law. For the purposes of the law an idol, a trade 
union, or a 'one man' commercial company may be recognised as persons for 
the purposes of legal relationships, distinct from any human beings connected 
with them."  

  81. Hans Kolson in his "General Theory of Law & State" under the heading  
"The Legal Person" said at page 93 : 

   "The concept of a legal person is another general concept 
used in the presentation of positive law and closely related to the concepts of 
legal duty and legal right. The concept of the legal person - who, by definition, is 
the subject of legal duties and legal rights-answers the need of imagining a 
bearer of the rights and duties. Juristic thinking is not satisfied with the insight 
that a certain human action or omission forms the contents of a duty or a right. 
There must exist something, that 'has' the duty or the right. In this idea, a general 
trend of human thought is manifested. Empirically observable qualities, too, are 
interpreted as qualities of an object or a substance, and grammatically they are 
represented as predicates of a subject. This substance is not an additional entity. 
The grammatical subject denoting it is only a symbol of the fact that the qualities 
form a unity." 

  "This duplication of the object of knowledge is characteristic of the 
primitive mythological thinking which is called animism. According to the animistic 
interpretation of nature, every object of the perceptual world is believed to be the 
abode of an invisible spirit who is the master of the object, who "has" the object in 
the same way as the substance has its qualities, the grammatical subject its 
predicates. This the legal person, as ordinarily understood, also "has" its legal 
duties and rights in this same sense. The legal person is the legal substance to 
which duties and rights belong as legal qualities. The idea that "the person has" 
duties and rights involves the relation of substance and quality. 

  In reality, however, the legal person is not a separate entity besides 'its' 
duties and rights, but only their personified unity or  - since duties and rights are 
legal norms - the personified unity of a set of legal norms."  

  82. Ernest Barker in his introduction to 'Natural Law and the Theory of 
Society" by Otto Gireke said at page IXIII.  

   "Legal personality, as distinct from Psychological and ethical 
personality, is a power or capacity for legal action - a capacity recognised by law 
(and only existing when recognised by law) for originating such action as belongs 
to the scheme of law. From this point of view the existence of legal personality 
not only presupposes, as that of moral personality does the presence of human 
society; it also presupposes the presence of an organised legal association. It is 
a thing bound up with rights; in fact it is a capacity for rights; and rights, in the full 
sense of the word, are only possible in such an association. Now rights may 
belong, and obviously do belong, to groups as well as to individuals. In the field 
of the organised legal association we must therefore assign legal personality to 
groups as well as to individuals, and here we have to admit that there are Group-
persons as well as individual persons. 

  "Similarly many of the groups contained in the State are legal persons. 
They have a capacity for rights; and a capacity for rights means a legal 
personality."  

  83. L. C. B. Gower in his book "The Principles of Modern company Law" 
Third Edition said at page 67 :- 

   "...................Statutes of the early nineteenth century enabled 
the Crown by letters patent to confer all or any of the advantages of incorporation 
without actually granting corporate personality, and similarly as statute may 
confer many of these privileges without actual incorporation. In fact, this has 
been done in several cases, with the result that between the two extremes of an 
unincorporated club or society and the corporation there are many hybrids, which 
though formally unincorporated, possess a greater or lesser number of the 
attributes of a corporation. Among these hybrids even partnership ought perhaps 
to be included for the partners can now sue or be sued in the firm's 
name." 

 Case Law : 

  84. Bonsor v. Musicians' Union, (1956 AC 104) is a case decided by 
House of Lords where Lord Keith of Avanthilam referring with approval the 
decision of Farwell, J. in Taff Vale Rly. case, (1901 AC 426) observed at page 
150 about the conception of legal entity thus: 

   "The view which I have endeavoured to formulate is, I think, 
entirely consistent with the decisions and dicta in earlier trade union cases which 
have come before this House. In the Taff Vale Rly, case Farwell J. whose 
judgment was upheld by this House, does not describe a registered trade union 
as a legal entity, though he does so in another case to which I refer later. He 
uses language, however, from which I think the conception of such a union as a 
legal entity arose. For instance, he says : Now although a corporation and an 
individual or individuals may be the only entity known to the common law who 
can sue or be sued, it is competent to the legislature to give to an association of 
individual which is neither a corporation nor a partnership nor an individual a 
capacity for owning property and acting by agents, and such capacity in the 
absence of express enactment to the contrary involves the necessary correlative 
of liability to the extent of such property for the acts and defaults of such agents. 
It is beside the mark to say of such an association that is unknown to the 
common law. The legislature has legalised it, and it must be dealt with by the 
courts according to the intention of the legislature." In other places he refers to it 
as a creature of statute. In this House Lord Halsbury L. C. Expressly adopted the 
judgment of Farwell J. and in a short sentence referred to such a trade union as 
a thing created by the legislature, Lord MacNaghten, Lord Shand and Lord 
Brampton also accepted the judgment of Farwell, J." 

 85. The Judicial Committee of the Privy Council observed about the 'legal 
personality' thus in Bhagwanji v. Alembic Chemical works, (AIR 1948 PC 100) at 
page 101. Sir John Beaumont observed :

   "It is true that the Indian Partnership Act goes further than 
the English Partnership Act, 1890, in recognising that a firm may possess a 
personality distinct from the persons constituting it; the law in India in that respect 
being more in accordance with the law of Scotland, than with that of England. But 
the fact that a firm possesses a distinct personality does not involve that the 
personality continues unchanged so long as the business of the firm continues. 
The Indian Act, like the English Act, avoids making a firm a corporate body 
enjoying the right of perpetual succession." 

 86. Chief Justice Subba Rao of Andhra Pradesh High Court (as he then 
was) observed in T. Jalayya v. N. Venkateswara Rao. (AIR 1957 Andh Pra 658) 
at pages 660 and 661 thus :-

   "At the outset it is necessary to ascertain the legal 
characteristics of a firm. It is settled law that a firm is not legal entity but only 
consists of the individual partners for the time being. The essential characteristic 
of a firm is that each partner is a representative of the other partners. Each of the 
partners is an agent and a principal. He is an agent in so far as he can bind the 
other partners by his acts within the scope of the partnership business and he is 
a principal to the extent that he is bound by the acts of the other partners. The 
liabilities of the firm can be enforced against each of the partners personally. The 
aforesaid legal concept is the foundation of the decision of the Judicial 
Committee in the matter of Stuart Samual, (1913) AC 514." 

 87. Our Supreme Court speaking through Justice Mahajan (as he then 
was) in Commr. of Income-tax v. A. W Giggies & Co.,   thus :

distinct person or quasi-corporation. But under the Income-tax Act the position is 
somewhat different. A firm can be charged as a distinct assessable entity as 
distinct from its partners who can also be assessed individually." 

  88. After quoting S. 3 of the Income-tax Act, 1922 the learned Judge 
proceeded to state thus: 

the Act go to show that the technical view of the nature of a partnership, under 
English law or Indian Law, cannot be taken in applying the law of Income-
tax." 

 89. Yet on another occasion the Supreme Court of India in Shivram 
Poddar v. Income-tax Officer,  
speaking through Shah, J. (As he then was) observed (at p. 1097 of AIR) :

   "A firm whether registered or unregistered is recognised 
under the Act as a unit of assessment (Ss. 3 and 2 (2) and its income computed 
under cls. (3) and (4) of S. 23 as the income of any other unit." 

   X  x  x  x  x  x 
 
  "Under the ordinary law governing partnership modification in the 
constitution of the firm in the absence of a special agreement to the contrary 
amounts to dissolution of the firm and reconstitution thereof, a firm at common 
law being a group of individuals who have agreed to share the profits of a 
business carried on by all or any of them acting for all, and suppression of the 
agreement brings about an end of the relation. But the Income-tax Act 
recognises a firm for purposes of assessment as a unit independent of the 
partners constituting it; it invests the firm with a personality which survives 
reconstitution."  

  90. Dias in his 'Jurisprudence' Fourth Edition at page 340 said : 

   "A human being ceases to be a person, in law as in fact, at 
death". ".........A statute can always abrogate the effect of a judicial decision, and 
the courts regard themselves as bound to give effect to legislation............." (at p. 
164). 

 (Rupert Cross in his 'Precedent in English Law'). 

   "A statute is abrogative and can sweep away inconvenient 
rules." (At p. 211) (Paton on 'Jurisprudence' third Edition). 

  91. We shall now proceed to discuss the problem raised in the aforesaid 
background. 

  92. The Income-tax Act, 1961 as its preamble discloses, is an Act to 
consolidate and amend the law relating to income-tax and super-tax. That Act by 
S. 297 repealed the Indian Income-tax Act, 1922. The purpose of consolidating a 
statute is to present the whole body of the statutory law on a subject in a 
complete form repealing the former statutes. There is a strong presumption that 
the consolidating Act does not alter the law contained in the statutes it replaces. 
We must construe the provisions of a consolidating Act as forming a code 
complete in itself and exhaustive of the matters dealt with therein and ascertain 
what their true scope is, as otherwise its utility as a consolidating Act will be 
almost entirely destroyed and the very object with  which it was enacted will be 
frustrated. 

  93. Unless the context otherwise requires, the Act provides in the 
definition clause by S. 2 (230 that 'firm', 'partner' and 'partnership' have the 
meanings respectively assigned to them in the Indian Partnership Act, 1932, but 
the expression 'Partner' shall also include 'any person who being a minor, has 
been admitted to the benefits of partnership." 

  94. The Partnership Act defines by S. 4 the aforesaid expressions. 
"Partnership" is the relation between persons who have agreed to share the 
profits of a business carried on by all or any of them acting for all." Persons who 
have entered into partnership with one another are called individually 'Partners' 
and collectively 'a firm' and the name under which their business is carried on is 
called the 'Firm name'. The expression 'Partnership' does not occur in S. 187 
and the expression 'Partner' was assigned in the Act an extended meaning. We 
are not now concerned with these two expressions for construing S. 187. The 
expression 'Firm' contained therein needs explanation and interpretation. 

  95. When the Income-tax Act defines 'Firm' to have the same meaning 
assigned to it by the Partnership Act, the legal effect of that is to write 
Partnership Act definition of firm into the Income-tax Act just as if it has been 
actually written in it with the pen or printed in it and the moment you have that in 
the Income-tax Act, you have no occasion to refer to the Partnership Act at 
all. 

  96. Such of those provisions of Partnership Act which were adopted by or 
incorporated into the Income-tax Act through the well-recognised and established 
device or referential legislation, must be dealt with as if they were actually in the 
Income-tax Act, with the judicial Interpretation placed upon those adopted or 
incorporated concepts. There is thus no occasion to spell out any conflict, 
apparent or real, between the two Acts as the one was integrated into or 
interwoven into the warp and woof of the other later Act. For all practical 
purposes, it is the later Income-tax Act alone that has got to be looked into. 

  97. Under the law of Partnership, a firm has no legal existence apart from 
its partners and it is merely compendious name to describe its partners. But 
under the Income-tax Act, the position is somewhat different. A firm can be 
charged as a distinct assessable entity as distinct from its partners who can also 
be assessed individually. Provisions contained in S. 26 of Act of 1922 
corresponding to S. 187 of the Act go to show that the technical view of the 
nature of a partnership cannot be taken in applying the law of Income-tax. A firm, 
whether registered or unregistered, is recognised under the Income-tax Act as a 
unit of assessment and its income computed as the income of any other unit. 
Legal personality is the gift of law, be it common law or statutory law. With its 
abrogative force, the legislature can confer legal personality on any entity 
absolutely or qualifiedly. The Income-tax Act invests a firm with a personality 
which survives its reconstitution.  

  98. Section 187 occurs in Chap. XVI of the Act which deals with special 
provisions applicable to firms. The Income-tax Act, 1961 is based on the 
recommendations contained in the law Commission's Twelfth Report, 1958. As 
per that report, the provisions pertaining to firms, whereever they are contained 
in the Act or the Rules made thereunder, were all collected together in that 
chapter. As there was some difficulty in determining when there is a change in 
the constitution of a firm and where there is suggestion, specific circumstances 
which result in a change in the constitution, of a firm have been defined in S. 187 
(2) of the Act. This repealing Act does not thus purport to alter the effect of the 
provisions of the repealed Act. It is, as it should be, having regard to the 
consolidating and amendatory nature of the Act. 

  99. Chapter XVI of the Act containing Ss. 187 to 189 relate to assessment 
of firms. They are not charging sections. They are only machinery provisions. 
The principles and presumptions of interpretation of charging provisions are not 
applicable to machinery provisions though contained in the taxing statute. They 
are to be interpreted just like any other provision of law. 

  100. With the aforesaid background, we shall now interpret S. 187 of the 
Act. 

  101. Where at the time of making an assessment under s. 143 or S. 144, it 
is found that a change has occurred in the constitution of a firm, the assessment 
making the assessment. As to when such a change takes place, s. 187 (2) 
provides by saying that, "for the purpose of this section, there is a change in the 
constitution of the firm, if one of the partners ceases to be partners, 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." 

  102. "A human being ceases to be a person in law, as in fact, at death". A 
partner of a firm ceases to be a partner on his death. Therefore, whenever a 
partner of a firm dies, such a partner ceases to be a partner and as such there 
will be "change in the constitution of the firm" under sub-s (2) of S. 187 of the Act, 
provided that one or more of the persons who were partners of the firm before 
the change continue as partner or partners after the change. 

  103. I am fortified in this view of mine by the decisions of the Supreme 
Court rendered while interpreting S. 26 of Act of 1922 also which corresponds to 
S. 187 of the Act excepting it be in some particular matter to which we shall 
advert to during the course of this judgment. The facts of these cases are given 
in the judgment of My Lord the Chief Justice. 

  104. In commr. of Income-tax v. A. W. Figgies & Co. 
(supra) the following observations of Mahajan, J. (As he then was) while 
interpreting S. 25 (4) of 1922 Act are relevant (at page 456) : 

   "The Section does not regard a mere change in the 
personnel of the partners as amounting to succession and disregards such a 
change. It follows from the provisions of the section that a mere change in the 
constitution of the partnership does not necessarily bring into existence a new 
assessable unit or a distinct assessable entity and in such a case there is no 
devolution of the business as a whole." 

  105. Adverting to the substratum of the business the firm was carrying on, 
the learned Judge proceeded to observe (at p. 456 of AIR) : 

   "The true question to decide is one of identity of the unit 
assessed under the Income-tax Act, 1918, which paid double tax in the year 
1939, with the unit to whose business the private limited company succeeded in 
the year 1947. We have no doubt that the Tribunal and the High Court were right 
in holding that in spite of the mere changes in the constitution of the firm the 
business of the firm as originally constituted continued as tea brokers right from 
its inception till the time it was succeeded by the limited company and that it was 
the same unit all through, carrying on the same business, at the same place and 
there was no cesser of that business or any change in the unit." 

   X  x  x  x  x  x 
 
  "To all intents and purposes the firm as reconstituted was not a different 
unit but it remained the same unit in spite of the change in its constitution." 

  106. It is pertinent to note that the definition of 'partnership' in S. 4 of the 
Partnership Act lays particular stress upon the 'business being carried on by all 
the partners or any of them acting or all' with which aspect alone the Income-tax 
Act is primarily concerned and that aspect of the definition was not allowed to 
undergo any transformation in the Act though such transformation took place in 
the definition of 'partner' and 'firm' either statutorily or judicially. 

  107. In Shivram Poddar v. Income-tax Officer,  
(supra) the Supreme Court was considering S. 26 (1) and (2) of Income-tax Act, 
1922. Justice Shah (as he then was) observed at page 827 of the report (51 ITR) 
: (At page 1098 of AIR SC) :

  "Section 44 is, therefore, attracted only when the business of a 
firm is discontinued i.e. when there is complete cessation of the business and not 
when there is a change in the ownership of the firm, or in its constitution, 
because by reconstitution of the firm, no change is brought in the personality of 
the firm, and succession to the business and not discontinuance of the business 
results." 

 The learned Judge proceeded further to observe at p. 828 (of ITR) : (at page 
1098 of AIR SC) : 

discontinued, there being change in the constitution of the firm, assessment has 
to be made under S. 26 (1) and if there be succession to the business, 
assessment has to be made under S. 26 (2). The provisions relating to 
assessment on reconstituted or newly constituted firms, and on succession to the 
business are obligatory." 

  108. In Commr. of Income-tax v. Kirkend Coal Co., . Justice Shah ( as he then was ) referred to his own judgement in 
Shivram Poddar case,  after referring to the same in 
extenso.

  109. But it is submitted that these decisions were rendered in the context 
of S. 26 (1) of the Income-tax Act, 1922, the language in which differs in a 
material particular from the language employed in S. 187. We have already 
extracted S. 187. We shall read S. 26 (1) of 1922 Act :  

   "26. Change in constitution of a firm : 91) Where at the time 
of making an assessment under S. 23, it is found that a change has occurred in 
the constitution of a firm or that a firm has been newly constituted, the 
assessment shall be made on the firm as constituted at the time of making the 
assessment: 

   Provided that the income, profits and gains of the previous 
year shall, for the purpose of inclusion in the total incomes of the partners, be 
apportioned between the partners who in such previous year were entitled to 
receive the same : 

   Provided further that when the tax assessed upon a partner 
cannot be recovered from him it shall be recovered from the firm as constituted at 
the time of making the assessment."   

  110. "Change in constitution of a firm" is the marginal heading, same in 
both the sections. The assessment shall have to be made in both the sections 
"on the firm as constituted at the time of making the assessment." Whereas the 
expression "as constituted" under S. 187 refers to a case where "a change has 
occurred in the constitution of the firm", that expression in S. 26 (1) refers to that 
and another case also where "a firm has been newly constituted." 

  111. The expressions "a change in the constitution of a firm" as well as "a 
firm has been newly constituted" under S. 26 (10 exhaust between themselves all 
the cases provided for under the rubric of "a change in the constitution of a firm" 
as defined for the purpose of  S.187 under cls. (A) and (b) of sub-s. (2) thereof as 
not to suggest any materiality of change between the old and the corresponding 
new section.  

  112. The consolidating Act, 1961 does not purport to bring any material 
change in the law relating to the assessment of firms. The only change sought to 
be brought about in 1961 Act as per the Law Commission's Report is to collect all 
provisions of law contained in the Act and the Rules made thereunder pertaining 
to the firms at one place in Chap. XVI and to define the conception of "change in 
the constitution of the firm" as was done under sub-s. (2) of S. 187. 

  113. There is no case brought to our notice to show that having regard to 
the subject-matter to  which the concept of  "a firm has been newly constituted" 
refers to, it falls under the category of "succession of one firm by another firm" 
under S. 188 of 1961 Act or under Section 26 (2) of 1922 Act. Besides that, what 
falls within S. 187 falls outside S. 188. There is that declaration of statutory 
exclusion of cases falling under S. 187 from out of the purview of S. 188.  

 114. Firms whether reconstituted or newly constituted or dissolved with 
their business not being discontinued, fall under s. 26 (1) of the repealed act of 
1922. We may remind ourselves once again of the observations of Justice Shah 
(as he then was) in Shivram Poddar's case  that "where the 
firm is dissolved but the business is not discontinued, there being change in the 
constitution of the firm, assessment has to be made under S. 26 (1)."

  115. Therefore, the Supreme Court decisions are applicable to the 
interpretation of S. 187 and govern the cases arising thereunder. 

  116. The framers of the consolidating Act, 1961 grouped together under 
sub-heading (c0 in Chap. XVI, S. 187 dealing with "change in the constitution of a 
firm", S. 188 with "succession of one firm by another firm" and S. 189 which deals 
with "firms dissolved or business discontinued" together. Therefore, cases where 
firm is dissolved and business discontinued fall under S. 189. But cases where 
there is a dissolution but the business was not discontinued, fall under S. 187 
provided the other conditions mentioned therein are fulfilled. 

  117. For one thing, the expression "dissolution" does not appear in S. 187. 
There is no justification grammatically, linguistically or otherwise to read into it by 
implication conceptions pertaining to dissolution, as the latter cases are already 
provided for under s. 189 as not to have any need to have recourse to s. 187. 
The nature of the Act consolidating and amending and the presumptions of 
interpretation negative such an interpretation. 

  118. The consequences that may flow or follow from out of dissolution 
under Partnership Act such as winding up of the affairs of the firm after 
dissolution are not envisaged in a case of dissolution followed by reconstitution 
under S. 187 though such a case may fall under S. 189. 

 119. Nor the tests of succession as laid down by Justice Suba Rao (as he 
then was) in Commr. of Income-tax v. K. H. Chambers,  as referred to by My Lord the Chief Justice are satisfied in 
the cases under reference.

  120. For the reasons given above, I agree with the conclusion reached by 
Kondaiah, J. speaking for the Full Bench in Addl. Income-tax Commr., A.  P. v. 
Visakha  Flour Mills, (1977 Tax LR 41 (Andh Pra) (FB) that where a firm is 
dissolved on account of the death of a partner and the business is continued by 
the remaining partners and another in the place of the deceased partner, there is 
only a change in the constitution of the firm within the meaning of S. 187 (2) of 
the Act. I agree with the conclusion of My Lord the Chief Justice and Kondaiah, J. 
in the above case that when a case falls under S. 187, there must be a single 
assessment. I agree with the conclusion of my learned brother, Raghuvir, J. 

Raghuvir, J.

 121. In the Full bench judgment of Visakha Flour Mills case (1977 Tax LR 
41) (Andh Pra) (FB) this court considering an identical reference reviewed all the 
cases which have been cited now before us. Kondaiah, J. speaking for the Full 
Court dealt with all aspects of the question and the divergent views expressed in 
this regard by other High Courts in the country. The fact that two of us for the 
second time affirm and reiterate the views expressed earlier shows the "question 
is open" (Chunilal V. Mehta & Sons, Ltd v. Century Spg. & Mfg. Co Ltd.,  and the subject is capable of discussion as 
possible "alternative views". There is no case in this court in which the view taken 
in Visakha Flour Mills case 1977 Tax LR 41 (Andh Pra) (FB) is doubted.

  122. The facts necessitating the references in R. C. No. 22 of 1975 and in 
R. C. No. 67 of 1975 have been fully stated in the opinion of the Chief 
Justice. 

 123. Following the reasoning stated in the Visakha Flour Mills case (1977 
Tax LR 41 (Andh Pra) (FB) (supra) in R. C. No. 22 of 1975 I answer the question 
that single assessment could be made. The answer is against the assessee and 
in favour of the Revenue. In R. C. No. 67 of 1975 the firm constituted in the deed 
on 26-10-1970 has not "succeeded" the earlier firm constituted by the deed on 1-
10-1970 with in the meaning of S. 188 of the Act but was a "change"  under S. 
187 (2) of the Act. The answer is in favour of the Revenue and against the 
assessee.

124. 
Answered against  the Revenue.

Sadanand S. Varde And Ors. vs State Of Maharashtra And Ors. on 14 June, 2000
Equivalent citations: 2001(1)BOMCR261, [2001]247ITR609(BOM)
Author: B.N. Srikrishna
Bench: B.N. Srikrishna, Pratibha Upasani
JUDGMENT
 
 B.N. Srikrishna, J. 
 
 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

at 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. 

2. 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. 

3. 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. 

 Facts : 

4. 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.

5. 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. 

6. 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

Planning 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. 

7. 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. 

8. 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. 

9. 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.

(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 : 
   "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." 

10. 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. 

11. 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-

missioner (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. 

12. 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. 

13. 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 : 

 "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. 

 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

extreme 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. 

 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. 

 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 : 

 (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. 

 (ii) the development shall be allowed, 10D and CC shall be issued as per the Development Control Rules. 

 (iii) The FSI of the road area would be admissible on plot A as per the Development Control Rules 10(2). 

 (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.  

 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. 

 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. 

 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. 

 No orders as to costs each party to bear its own costs."  

14. This order was consonant with the exemption order under Section 20 of
the Urban Land Ceiling Act and also made some realignment of the 120
feet development plan road as a result of which three distinct plots : (a)
one comprising the Fort ; (b) one comprising the garden measuring about

7,000 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. 

15. 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. 

16.  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. 

17. 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

Land'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. 

18. 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. 

19. 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 : 
  "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." 

20. 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-

lopment 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. 

21. 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

amalgamation 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. 

22. 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. 

23. 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. 

 Bona /ides of the litigation : 

24. 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-

tioners 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?" 

25. 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. 

 Legal contentions : 

26. The petitioners urged a number of contentions which were diffused and unstructured. We have gathered them as best as we can and the

contentions of the petitioners can be broadly summarized under the following heads' : 

 (a) Violation of Coastal Regulation Zone (CRZ) Rules. 

 (b) Contravention of the Urban Land Ceiling Act and the exemption order made thereunder. 

 (c) Contravention of the provisions of the Maharashtra Regional and Town Planning Act, 1966. 

 (d) Violation of the sanctioned development plan. 

 (e) Challenge to the decision of the Ministry of Environment and Forests, Government of India. 

 (f) Challenge to the corrigendum notification dated November 22, 1996. 

 (g) Challenge to sanctioned development plan. 

 (h) Challenge to permission granted by the State Pollution Control Board.  

 (i) Contravention of the provisions of the Maharashtra Regional and Town Planning Act, 1966, and the Development Control Regulations for Greater Bombay, 1991. 

 (j) Contravention of the Development Control Regulation No. 59. 

 (k) Amalgamation of sixth and ninth respondents fraudulent, illegal and intended to circumvent law. 

 (l) Application of Chapter XX-C of the Income-tax Act, 1961.   

 Scope of judicial review : 

27. 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-

rities to decide and the final say in such matters should normally not come within the purview of judicial review. 

28. 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) :
 "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." 

29. 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) :
  "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. . ." 

30. Keeping this overall approach in view, we shall now examine the legal disputes posed for our resolution. 

  (a) Violation of Coastal Regulation Zone (CRZ) Rules :  

*****  
   
 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.

 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
dated February 19, 1991, must fail. 

***** 
 
 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,
we find that the construction does not contravene the CRZ-II Regulations. 

***** 
 
 Hence, we see no violation of sub-clause (v) of Clause 2 of 1991 CRZ notification. 

***** 
 
 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. 

 In our view, Sub-clause (ix) of Clause 2 of the CRZ notification has no
application at all. 

***** 
 
 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
attracted. 

*****  
 
 (b) Contravention of the Urban Land (Ceiling and Regulation) Act,
1976, and the exemption thereunder : 

***** 
 
 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. 

* * * * * *                                         * *   
 
 (c) Contravention oj the provisions of the Maharashtra Regional and
Town Planning Act, 1966. 
 
***** 
   
 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-

dents would not be affected. The contention that the sanctioned building plans could never have been extended is, therefore, of no substance and
fails. 

*****  
 
 (d) Violation of the sanctioned development plan : 

***** 
  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. 

 (e) Challenge to decision of (he Ministry of Environment and Forests,
Government of India : 

***** 
  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. 

 (f) Challenge to the corrigendum notification, dated November 22, 1996 : 

***** 
  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. 

 (g) Challenge to sanctioned Development Plan : 

***** 
  We are of the view that the contention is not required to be decided, as it is not material at this stage. 

 (h) Challenge to permission granted by the State Pollution Control
Board : 

***** 
  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.

 (i) Contravention of the provisions of the Maharashtra Regional and Town Planning Act, 1966, and the Development Control Regulations for
Greater Bombay, 1991 : 

***** 
  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. 

 (j) Contravention of the Development Control Regulation No. 59 : 

***** 
  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. 

 (k) Amalgamation of sixth and ninth respondents fraudulent, illegat and intended to circumvent law : 

 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.   

31. 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 : 

 (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  
 
 (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.   

32. Hence, the company court was deliberately misled into sanctioning a fraudulent scheme of amalgamation. 

33. 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. 

34. 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. 

35. 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

with. 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 : 
  "(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." 

36. 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 : 
  "(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-

pany 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." 

37. 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

upon 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. 

38. 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 : 
  "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." 

39. 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. 

 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

9, 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. 

 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.

 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-

ness of an order made under Section 391 by the company court which has become final, conclusive and binding". 

 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.  

 (1) Application of Chapter XX-C of the Income-tax Act, 1961 :  

 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. 

 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

that 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)

and 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. 
 
 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

respondents 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. 

 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. 

 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. 

 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. 

 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

amalgamation 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.

 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. 

 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. 
 
 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

Section 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. 

 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 :

 (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 ; 

 (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  
 
 (c) the provisions of Chapter XX-C are not intended to affect parties unconnected with tax evasion.  

 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. 

 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-

fers 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

the 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.

 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. 

 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) .

 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

amalgamation 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.

 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 : 

 (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) ; 

 (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 ; 

 (c) acquisition of shares by the shareholders of the transferor-company does not enable them to acquire the assets of the amalgamated com-

pany, nor can they be said to enjoy any property or asset of the amalgamated company.  

 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. 

  "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.

 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

"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. 

 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. 

 The valuation put on the shares cannot be treated as "apparent consideration" for the purposes of transfer. If the valuation of the shares pro-

posed 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. 

 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.

 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. 

 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.

 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

purchaser 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. 

 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. 

 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. 

 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-

pany 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. 

 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. 

 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. 

 The conclusions which we have arrived at on statutory interpretation also appear backed by the following practical considerations : 

 (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. 

 (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, . 

 (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.   

 Thus, we are of the considered view that the contention of the petitioners, which was enthusiastically echoed by the fifth respondent, appro-

priate 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. 

 History of litigation : 

 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, . 

 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

to 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. 

 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.

 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. 

 In view of the dismissal of the writ petition, all interim orders are vacated. 

 Issuance of certified copy expedited.

Commissioner Of Income-Tax vs Vr. S.R.M. Firm And Others on 15 March, 1994
Equivalent citations: [1994]208ITR400(MAD)
Author: A.R. Lakshmanan
Bench: A.R. Lakshmanan
JUDGMENT 
 
 Raju, J.  
 
 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.  

 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 :  

 "(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 ?  

 (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 ?"  

 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 :  
  "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)) ?"  

 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 :  
  "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) ?"  

 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 :  
  "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 ?"  

 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 :  
  "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)) ?"  

 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 :  
  "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)) ?"  

 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.

 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.  

 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.  

 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.  

 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.  

 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.  

 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.  

 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) :
  "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."  

 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.

 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) :
  "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."  

 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.

 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.  

 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.  

 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.  

 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.  

 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.

 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.  

 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.  

 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 :  

 Tax Case No. 264 of 1983 :

 (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.  

 (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.   

 Tax Case No. 789 of 1984 and Tax Case No. 790 of 1984 :
  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).  

 Tax Cases Nos. 840 and 841 of 1984 :  
  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.  

 Tax Case No. 135 of 1985 :
  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).  

 Tax Case No. 72 of 1987 :
  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).   

 27. Having regard to the facts and circumstances of these cases, there shall be no order as to costs.

T.M. Kanniyan vs Income-Tax Officer, Pondicherry And ... on 30 October, 1967
Equivalent citations: 1968 AIR 637, 1968 SCR (2) 103, AIR 1968 SUPREME COURT 637
Author: R.S. Bachawat
Bench: R.S. Bachawat, K.N.  Wanchoo, V. Ramaswami, G.K. Mitter, K.S. Hegde
T.M. KANNIYAN

	Vs.

INCOME-TAX OFFICER, PONDICHERRY AND ANR.(With Connected Peti

DATE OF JUDGMENT:
30/10/1967

BENCH:
BACHAWAT, R.S.
BENCH:
WANCHOO, K.N. (CJ)
RAMASWAMI, V.
MITTER, G.K.

CITATION:
 1968 AIR  637		  1968 SCR  (2) 103
 RF	    1970 SC1126	 (16)

ACT:
Constitution   of  India,  Articles  240(1)  and   Proviso,,
246--Power  of	President  to  make  Regulation	 for   Union
territories,	scope	of--"Peace,   progress	 and	good
government",  meaning of--Taxation Laws (Extension,to  Union
Territories)  Regulation  (3 of 1963)--General Clauses	Act,
1897,  s.  3(58)--Definition  of  "State"  including   Union
territories if repugnant to the subject and context of	Art.
246.

HEADNOTE:
Parliament enacted the Pondicherry Administration Act. 1962.
which	 provided that all laws in force immediately  before
August 19. 1962, when Pondicherry became a Union  territory,
were to continue to be in force until amended or repealed by
a  competent legislature or other competent authority.	 The
President,  in	exercise of the powers conferred on  him  by
Art.  240 of the Constitution to make regulations of "peace,
progress  and  good  government" of  the  Union	 territories
promulgated  the Tax Laws (Extension to	 Union	Territories)
Regulation.  1963. By this Regulation the laws in  force  in
relation  to  income tax in Union territory  of	 Pond:cherry
were repeated  and the Indian  Income-tax Act, 1961 was made
applicable.	    The petitioners challenged	the rites of
the Regulation.
HELD: The Regulation is valid.
    The	 power	of the President to make  regulations  under
Art.  240  is not limited to the subject of law	 and  order.
Authority to make regulations for "peace. progress and	good
government" is a common	 form  of grant of legislative power
and the expression "peace, progress and good government"  is
of very wide import giving wide discretion to the  authority
empowered to pass laws for such purposes.  The President can
make regulations with respect to a Union territory occupying
the same field on which Parliament can also make laws.	Such
a regulation may repeal or amend any Act made by  Parliament
or  any existing law which is for the time being  applicable
to  the	 Union territory and when promulgated has  the	same
force  and effect as an Act of Parliament which	 applies  to
that territory. [107E-108D]
    Riel  v. queen. [1865] 10 A.C. 675. Chenard and  Co.  v.
Joachim	 Arissol,  [1949]  A.C.	 127,  Attorney-General	 for
Saskatchewan v. Canadian Pacific Ry. Co., [1953] A.C.  59'4,
King  Emperor v. Benoari Lal Sarma, [1914] L.R. 72 I.A.	 57.
Jogendra  Narayan Deb v.  Debendra Narayan Roy, [1942]	L.R.
69 I.A. 76 and Girindra Nath Banerjee v.  Birendra Nath Pal.
[1927] I.L.R. 54 Cal. 727, referred to.
    Parliament has, by virtue of Art. 246(4), power to	make
laws with respect to any matter including matters enumerated
in  the State List, for any part of the territory  of  India
not  included in a State.  With regard to Union	 territories
there is no distribution of legislative power
104
and  Parliament	 has plenary power to make  laws  for  those
territories  on	 any  subject.	 Though	 the  definition  of
"State"	 in  s.	 3(58) of the General	Clauses	 Act,  1897,
taking	 within	 it  Union  territories,  applies   to	 the
interpretation	 of   the   Constitution,   this   inclusive
definition  is repugnant to the subject and context of	Art.
246.   There,	the   expression  "State"  means  the  State
specified  in  the FirSt Schedule.  Parliament	can  by	 law
extend	the Income-tax Act, 1961, to a Union territory	with
such  modifications  as it thinks fit.	The  President	can,
therefore, by regulation do the same.  [108E; 109A-D]
R.K. Sen v. Union, [1966] 1 S.C.R. 430, referred to.
    The	 power of the President to make regulations for	 any
of the Union territories specified in Art. 240(1) so long as
no legislature is created for the territory is not  fettered
by  the.  proviso  to Art. 24-0(2 ) or	limited	 to  matters
enumerated  in	the  State List and  the.  Concurrent  list.
[110G]
   It  is not necessary to make any distribution of  income-
tax with  respect to Union territories, as those territories
are centrally administered through the President.  [111A-B]

JUDGMENT:
ORIGINAL JURISDICTION: Writ Petitions Nos. 49, 60, 61 and 80
of 1967.
    Writ  Petitions  under Art. 32 of  the  Constitution  of
India for  the enforcement of fundamental rights.
    K. Narayanaswamy and Lily Thomas, for the petitioner (in
W.P. No. 49 of 1967).
Sadhu Singh, for the petitioner (in W.P. No. 60 of 1967).
    S.K.  Dholakia and Sadhu Singh, for the  petitioner	 (in
W.P. No. 61 of 1967).
    S.T. Desai and Sadhu Singh, for the petitioner (in	W.P.
No. 80 of 1967).
    C.K.  Daphtary,  Attorney-General,	B.L.  lyengar,	R.H.
Dhebar for R.N. Sachthey, for the respondents (in W.P. No 49
of 1967).
    R.H.  Dhebar for R.N. Sachthey, for the respondents	 (in
W.Ps. Nos. 60, 61 and 80 of 1967).
Bachawat,  J. In all these writ petitions,  the	 petitioners
challenge the vires of the Taxation Laws (Extension to Union
Territories)  Regulation No. 3 of 1963.	 The  contention  is
that the President had no power to promulgate the Regulation
under  Art.  240 of the Constitution.  On August  16,  1962,
Pondicherry became a Union Territory.  On December 5,  1962,
Parliament enacted the Pondicherry Administration Act,	1962
(Act  No. 49 of 1962). Section 4 (1 ) of this  Act  provided
that  all laws in force immediately before August  19,	1962
would continue to be in force in
105
Pondicherry  until  amended  or	 repealed  by  a   competent
legislature  or	 other competent  authority.   Section	4(2)
empowered   the	  Central  Government  to   make   necessary
adaptations   and   modifications   for	  the	purpose	  of
facilitating the application of any such law in relation  to
the   administration   of  Pondicherry	and   bringing	 the
provisions  of any such law into accord with the  provisions
of  the	 Constitution.	Section 7 provided that	 all  taxes,
duties, cesses and fees which immediately before August	 19,
1962 were being lawfully levied would continue to be  levied
in  Pondicherry	 and to be applied for	the  same  purposes,
until  other provision	was made by a competent	 legislature
or  other  competent  authority. After the passing  of	this
Act,  the  petitioners	continued  to  be  sub.jeer  to	 the
existing   French laws relating to income-tax.On  March	 30,
1963, the President in the exercise of the powers  conferred
on  him	 by Art. 240 of the  Constitution  promulgated	 the
impugned Regulation No. 3 of 1963.  The Regulation  extended
certain	 Indian	 Acts  relating to taxation  to	 the   Union
territories  mentioned	therein.   Section  3  (2)  of	 the
Regulation extended the Income-tax Act, 1961, subject to the
modifications  mentioned  in  Part II of  the  Schedule,  to
Pondicherry  as	 from April 1, 1963. Section  4(1)  provided
that  any law in force in Pondicherry corresponding  to	 the
Income-tax Act, 1961 would stand repealed on April 1,  1963.
The  petitioners  carry on business at Pondicherry  and	 are
being assessed to income-tax under the Income-tax Act. 1961.
They  have  filed the present writ petitions  asking  for  a
declaration  that the Income-tax Act, 1961 was	not  legally
extended  to  Pondicherry and a direction  prohibiting	 the
respondents   from  implementing  that Act  in	relation  to
Pondicherry.
    In	the  Constitution of India  as	originally  enacted,
India  was declared to be a Union of States, [Art.  1  (1)].
The States and their territories were specified in Parts  A,
B and C of the First schedule [Art. 1(2)].  The territory of
India  consisted  of  the territories  of  the	States,	 the
territories  specified	in  Part D  of	the  First  Schedule
(Andaman and Nicobar Islands) and such other territories  as
may be acquired, [Art. 1 (3)].	As original enacted. part VI
of the Constitution dealt with Part A States, Part VII dealt
with  Part B States, Part VIII dealt with Part C States	 and
Part  IX dealt with the territories specified in Part  D  of
the  First Schedule.  The Constitution	(Seventh  Amendment)
Act  passed  on	 October  19, 1956  altered  the  scheme  of
division  of  India  in	 to   A	 B  and	 C  States  and	 the
territories  mentioned	in  Part D of  the  first  Schedule.
Article	 1 and the First Schedule were amended so  that	 the
territory  of  India would comprise the territories  of	 the
states,	 the  Union  territories  specified  in	 the   First
Schedule and such other territories as may be acquired.	  By
cl.  30 added to Art. 66. "Union territory" was	 defined  to
mean any Union territory specified in the First Schedule and
to include any other territory
supp. C.I./68-8
106
comprised  within 'the territory of India but not  specified
in that Schedule. Consequential amendments were made in Part
VI  and other Parts of the Constitution.  Parts VII  and  IX
were repealed. Part VIII was drastically amended. The  title
of Part VIII was altered to that of "Union Territories". The
amended	 Art. 239 provided for the administration  of  Union
territories by the President acting through an administrator
to  be appointed by him.  The amended Art. 240 was in  these
terms:
		    "240.   Power  of  President   to	make
	      regulations for certain Union  territories.--(
	      1 ) The President may make regulations for the
	      peace,  progress	and good government  of	 the
	      Union territory of--
	      (a) the Andaman and Nicobar Islands;
	      (b)   the	 Laccadive,  Minicoy  and   Amindivi
			    Islands.
		    (2) Any regulation so made may repeal or
	      amend  any  Act  made  by	 Parliament  or	 any
	      existing	law  which  is for  the	 time  being
	      applicable  to the Union territory  and,	when
	      promulgated  by the President, shall have	 the
	      same force and effect as an Act of  Parliament
	      which applies to that territory."
The  amended  Art.  241 dealt with  High  Courts  for  Union
territories.   Article 242 relating to Coorg  was  repealed.
Article	 240  (1) and the First Schedule were  amended	from
time  to time.	The Constitution (Fourteenth Amendment)	 Act
passed	on December 28, 1962 amended the First Schedule	 and
Art. 240 and added Art. 239A. Article 239A and the  amended
Art.  240  are in these terms:
		    "239A. (1 ) Parliament may by law create
	      for  any of the Union territories of  Himachal
	      Pradesh, Manipur, Tripura, Goa, Daman and Diu,
	      and Pondicherry--
		 (a)  a	 body,	whether	 elected  or  partly
	      nominated and partly elected, to function as a
	      Legislature for the Union territory, or
	      (b)  a Council of Ministers,or both with	such
	      constitution,  powers and functions,  in	each
	      case, as may be specified in the law.
		    (2)	 Any such law as is referred  to  in
	      clause  (1)  shall  not be  deemed  to  be  an
	      amendment	  of  this  Constitution   for	 the
	      purposes	of article 368 notwithstanding	that
	      it contains any provision which amends or	 has
	      the effect of amending this Constitution.
	      107
		      240.   (1)  The  President  may	make
	      regulations  for the peace, progress and	good
	      government of the Union territory of-
	      (b)   the	 Laccudive,  Minicoy  and   Amindivi
	      Islands;
		   (c)	Dadra and Nagar Haveli;
		   (d)	Gao, Daman and Diu;
		   (e)	Pondicherry:
		     Provided that when any body is  created
	      under   article	239A  to   function   as   a
	      Legislature  for	the Union teriyaki  of	Goa,
	      Daman    and   Diu   or	 Pondicherry,	 the
	      President	 shall not make any  regulation	 for
	      the  peace,  progress and good  government  of
	      that Union territory with effect from the date
	      appointed	  for  the  first  meeting  of	 the
	      Legislature.
		     (2)  Any regulation so made may  repeal
	      or  amend	 any Act made by Parliament  or	 any
    Regulation	No. 3 of 1963 was made by the  President  in
the  exercise  of  the	power  conferred  on  him  to	make
regulations  for the peace, progress and good government  of
the  Union territories. The contention that under  Art.	 240
the President can make regulations limited to the subject of
law  and  order	 only  cannot  be accepted.   The  grant  of
legislative  power to make laws, regulations  or  ordinances
for  British  dependencies has long been  expressed  in	 the
common	 form  of  that	 of  making  laws,  regulations	  or
ordinances for "peace and good government" of the  territory
or  similar  objects  such  as	"peace,	 order	 and	good
government",  "peace,  welfare	and  good  government"	 and
"peace,	 progress  and good government" of  the	 territory..
Instances  of	this  common form of  grant  of	 legislative
power to legislatures and authorities in India are s. 42  of
the  Indian  Councils  Act, 1861, ss. 71,  72,	80A  of	 the
Government  of India Act, 1915, s. 72 of the ninth  Schedule
and  s. 92(2) of the Government of India Act,1935.   Such  a
power  was  held  to  authorise	 the  utmost  discretion  of
enactment  for	the  attainment of  peace,  order  and	good
government  of	the territory and a Court will	not  enquire
whether	 any  particular enactment made in the	exercise  of
this  power,  in  fact, promotes   those  objects,  Riel  v.
Queen), Chenard and Co.	 v.  Joachim  Arissol(2).  The words
"peace, order and good government" and
(1) [1885] 10 A.C. 675, 678-679.
(2) [1949] A.C. 127, 132.
108
similar	 expressions  are words of very wide  import  giving
wide discretion to the authority empowered to pass laws	 for
such   purposes,  Attorney-General  for	  Saskatchewan	  v.
Canadian   Pacific  Ry.	 CO.(1) King Emperor v. Benoari	 Lal
Sarma(2). In	Jogendra  Narayan Deb  v.  Debendra  Narayan
Roy(3) Sir George Rankin said that the words have  reference
to  the	 scope and not	to  the merits of  the	legislation.
Girindra Nath Banerjee v. Birendra Nath Pal(4), he said that
"these	words are used because they are words of the  widest
significance  and  it  is  not open to a  Court	 of  law  to
consider with regard to any particular piece of	 legislation
whether in fact it is meritorious in the sense that it	will
conduce	 to peace or to good government.  It  is  sufficient
that  they are words which are intended to give, subject  to
the restrictions of the Act, a legislating power to the body
which  it invests with that authority." Article 240  of	 the
Constitution  confers  on the President a general  power  of
making	 regulations  for  the	peace,	progress  and	good
government of the specified Union territories.	In  exercise
of this power, the President may make a regulation repealing
or  amending any Act made by Parliament or any existing	 law
which  is  for	the  time  being  applicable  to  the  Union
territory.  The regulation when promulgated by the President
has the stone force and effect as an Act of Parliament which
applies	 to  that territory.  The President  can  thus	make
regulations  on	 all subjects on which Parliament  can	make
laws for the territory.
    Parliament has plenary power to legislate for the  Union
territories  with  regard to any subject.   With  regard  to
Union  territories there is no distribution  of	 legislative
power.	Article 246(4) enacts that "Parliament has power  to
make  laws  with respect to any matter for any part  of	 the
territory  of India not included in a State  notwithstanding
that such matter is a matter enumerated in the State  List."
In  R.K.  Sen  v. Union(3) it was pointed  out	that  having
regard to Art. 367, the definition of "State" in s. 3(58) of
the General Clauses Act, 1897 applies for the interpretation
of  the Constitution unless there is anything repugnant	 in.
the   subject  or  context.   Under  that  definition,	 the
expression   "State"  as  respects  any	 period	 after	 the
commencement  of the Constitution (Seventh  Amendment)	Act,
1956 "shall mean a State specified in the First Schedule  to
the  Constitution and shall include a Union territory.'	 But
this  inclusive definition is repugnant to the	subject	 and
con  text of Art. 246.	There, the expression "State"  means
the  State  specified  in the First Schedule.	There  is  a
distribution of legislative power between Parliament and the
legislatures of the States Exclusive power to legislate with
respect	 to  the  matters enumerated in the  State  List  is
assigned to the legislatures of the States esta
 (1) [1953] A.C. 594, 613-614.'
 (2) [1914] L.R. 72 I.A. 57, 72.
 (3) [1942] L.R. 69 I.A. 76, 90.
 (4) [1927] I.L.R. 54 Cal. 727, 738,
 (5) [1966] 1 S.C.R. 430, 433.
109
blished by Part V1.  There is no distribution of legislative
power  with  respect  to Union	territories.   That  is	 why
Parliament  is given power by Art. 246(4) to legislate	even
with respect  to  matters enumerated in the State List.	  If
the  inclusive	definition  of "State" in s.  3(58)  of	 the
General	 Clauses  Act  were  to.  apply	  to  Art.   246(4),
Parliament  would have no power to legislate for  the  Union
territories with respect to matters enumerated in the  State
List and until a legislature empowered to legislate on those
matters	  is   created	under  Art.  239A  for	 the   Union
territories,  there  would be no  legislature  competent  to
legislate   on	 those	matterS;   moreover,   for   certain
territories  such  as  the Andaman and	Nicobar	 Islands  no
legislature  can  be created under Art. 239A, and  for	such
territories there can be no authority competent to legislate
with respect to matters,enumerated in the State List.	Such
a  construction is repugnant to the subject and	 context  of
Art. 246.  It follows that m view of Art. 246(4), Parliament
has plenary powers to make laws for Union territories on all
matters.   Parliament can by law extend the Income-tax	Act,
1961  to  a Union territory with such  modifications  as  it
thinks	fit.   The President in the exercise of	 his  powers
under  Art.  240 can make regulations which  have  the	same
that  territory.  The President can therefore by  regulation
made under Art. 240 extend the Income-tax Act, 1961 to	that
territory with such modifications as he thinks lit.
    The	 President can thus make regulations under Art.	 240
with  respect to a Union territory occupying the same  field
on  which  Parliament  can  also  make	laws.	We  are	 not
impressed  by the argument that such overlapping  of  powers
would lead to. a clash between the President and Parliament.
The  Union. territories. are centrally administered  through
the  President	acting	through an  administrator.   In	 the
cabinet	 system	 of  Government the President  acts  on	 the
advice of the Ministers who are	 responsible Parliament.
The  proviso to Art. 240(1) lays down the condition for	 the
cesser	of power of the President to make regulations  under
Art. 240(1).  The power of the President to make regulations
for the Union territory of Goa, Daman and Diu or Pondicherry
ceases when a legislature for the territory is created	with
effect from the date appointed for the first meeting of	 the
legislature.   But until such a legislature is created,	 the
President  retains  his full power to make  regulations	 for
those territories.  The proviso does not act as a fetter  on
the  general power of the President to make regulations	 for
the Union territory while no legislature for that  territory
is brought into. existence.  The proviso does not enact,  as
is  suggested  by  the petitioners, that the  power  of	 the
President is confined
110
to  making laws with respect to the matters  enumerated	  in
the  State  List and the Concurrent List.  The	argument  is
that a legislature created under Art. 239A can be authorised
to  pass laws with respect to those matters only and  having
regard to. the proviso to Art. 240(1) the President's  power
to   make   regulations	  under	 Art.	240   is   similarly
circumscribed.	As a matter of fact, the Government of Union
Territories  Act,  1963 created local legislatures  for	 the
Union  territories  of Himachal Pradesh,  Manipur.  Tripura,
Goa,  Daman  and Diu and Pondicherry and s. 18	of  the	 Act
conferred on those legislatures power to make laws for those
territories  with respect to the matters enumerated  in	 the
State  List  or	 the Concurrent List.	Assuming  that	 the
local  legislature created under Art. 239A can be authorised
to make laws with respect only to the matters enumerated  in
the  State List or the Concurrent List, it does	 not  follow
that  the power of the President to make  regulations  under
Art.  240 is so limited.  By the express words of Art.	240,
the  President can make regulations for the peace,  progress
and good government of the specified Union territories.	 Any
regulation  so	made  may repeal or amend any  Act  made  by
Parliament   and   applicable  to  that	  territory.	When
promulgated  by	 the President the regulation has  the	same
force and effect as an Act of Parliament applicable to	that
territory.   This  general power of the	 President  to	make
regulations extends. to all matters on which Parliament	 can
legislate.   It	 may  be recalled that	Art.  239A  and	 the
proviso	 to  Art. 240(1) were inserted by  the	Constitution
(Fourteenth Amendment) Act. Under Art. 240 as it stood after
the  Constitution  (Seventh Amendment) Act  and	 before	 the
enactment of the Constitution (Fourteenth Amendment) Act, it
could  not  be	contended  that the  general  power  of	 the
President to make regulations under Art. 240(1) was  limited
to  matters enumerated in the State List and the  Concurrent
List. The position was not changed by the insertion of	Art.
239A  and  the proviso to Art. 240(1)  by  the	Constitution
(Fourteenth  Amendment) Act.  Moreover, Art. 239A  does	 not
authorise  Parliament to create legislatures for  the  Union
territories  of the Andaman and Nicobar Islands,  Laccadive,
Minicoy and Amindivi Islands and Dadra and Nagar Haveli.  It
is clear, therefore, that the power of the President to make
regulations with respect to those territories is not limited
by the proviso to Art. 240( 1 ).  We  are  satisfied.  -that
the proviso to Art. 240(1) on its true construction does not
fetter	the power of the President to make  regulations	 for
any  of	 the  Union territories	 specified  in	Art.  240(1)
including  Pondicherry as long as no Legislature is  created
for the territory.
    It	was  suggested that there is no	 provision  for	 the
distribution   of  the	income-tax  attributable  to   Union
territories and therefore the President could not extend the
Income-tax  Act,  1961	to the Union  territories.  If	this
argument were sound, even Parliament
111
could	not   extend  the  Income-tax  Act  to	 the   Union
territories. Moreover, the argument overlooks Art. 270 which
shows that the income-tax attributable to Union	 territories
forms  part  of the Consolidated Fund of India.	 It  is	 not
necessary  to  make  any  distribution	of  income-tax	with
respect	 to  Union  territories	 as  those  territories	 are
centrally administered through the President.
    There  is no force in the contention that the  President
cannot make a law with respect to income-tax in the  absence
of an express grant of such a power.  There is	distribution
of  legislative power between the Centre and the States	 and
consequently distinct grants of taxing power are made in the
legislative lists. With respect to Union territories,  there
is  no	distribution  of legislative power.  For  the  Union
territories, Parliament has plenary powers to make laws	 and
the  President has general powers to make  regulations.	  In
the  exercise  of his powers under Art. 240,  the  President
could make Regulation No. 3 of 1963 extending the Income-tax
Act, 1961 and other laws to the Union territories.
The petitions are dismissed with costs, one hearing fee.
Y.p.				       Petitions dismissed.
112

Dagi Ram Pindi Lal And Anr vs Trilok Chand Jain And Ors on 4 February, 1992
Equivalent 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
Author: Kuldip Singh
Bench: Kuldip Singh
DAGI RAM PINDI LAL AND ANR

	Vs.

TRILOK CHAND JAIN AND ORS.

DATE OF JUDGMENT04/02/1992

BENCH:
ANAND, A.S. (J)
BENCH:
KULDIP SINGH (J)

CITATION:
 1992 AIR  990		  1992 SCR  (1) 545
 1992 SCC  (2)	13	  JT 1992 (1)	526
 1992 SCALE  (1)249

ACT:
    Income  Tax Act, 1922-Section 54 and Section 137 of	 the
Income	Tax  Act, 1961-Repeal of 1922 Act  and	omission  of
Section	 137-Jurisdiction of Courts to call for the  record-
Scope of.
    Income   Tax  Act,	1961-Section   138(1)(b)-Scope	 and
application  of-Jurisdiction and powers of  Commissioner  of
Income	Tax under-Scope of-Court's order for  Production  of
Record-Commissioner  cannot refuse-Omission of Section	137-
Legislative intention.
    Income Tax Act, 1961-Sections 138(1)(b), 137  read	with
section	 6,  General Clauses Act-Repeal	 of  any  Enactment-
Effect-Omission of Section 137-Court's order for  production
of record-Ban on Court's jurisdiction whether continues.
    Income  Tax Act, 1961-Sections 137, 138(1)(b)-Repeal  of
Section 137-Documents relating to assessment proceedings for
1964-65 onwards-Filed before the authority after 1.4.1964 by
assessee-Whether  Court can summon.

HEADNOTE:
    The Plaintiff-respondent instituted a suit for  recovery
of Rs.1,39,722.86 against the defendants-appellants.
    When   evidence   was  being  recorded   in	  the	suit
proceedings,  the plaintiff obtained summons from the  court
requiring the Income Tax Department to produce in the  court
records	 relating  to  the  income  tax	 assessment  of	 the
defendants for the assessment years 1964-65 to 1971-72.
    The	 Income Tax Officer produced the record in a  sealed
cover.
    The plaintiff also obtained summons requiring the Income
Tax Officer to produce the income tax record relating to two
other  assessees,  which was produced in the Court  by	 the
Department  in	a  sealed cover with a	submission  that  no
disclosure of information regarding income tax
						       546
pertaining  to	an income tax  assessee could be  made.	 The
plaintiffs in the meanwhile filed in the court	a  number of
certified  copies of the accounts of the  defendants,  which
he  had obtained from the Income-Tax authorities and  sought
permission  of the Court to tender the certified  copies  in
evidence.
    Before a Single Judge of the High Court on the  question
of  privilege  as  claimed by  the  Income  Tax	 Department,
arguments were addressed by the parties.
    The	 following three questions were referred to the Full
Bench
    (i)	  What is the position of law relating to  privilege
prior to 1964?
    (ii)  What is the position of law relating to  privilege
after 1964? and
    (iii) What is the effect of the production of  certified
copies	relating to income-tax assessment records,  and	 how
far certified copies can be admitted in evidence?
    The	 Full Bench answered the first and second  questions
sustaining  the	 claim of the privilege by  the	 Income	 Tax
Department and the Full Bench did not express any opinion on
the third question.
    Against  the  judgment  of the Full Bench  of  the	High
Court,	appeal was filed by special leave.  The	 controversy
before	this Court was confined to the finding of  the	High
Court relating to the claim of privilege for the  production
of  documents which were filed after the repeal	 of  Section
137,  with  effect from 1.4.1964 in  respect  of  assessment
years 1964-65 onwards.
    The	 appellants  (defendants) contended that  after	 the
repeal	of  Section 137 of the Income-Tax Act, 1961  by	 the
Finance Act, 1964 there was no longer any impediment left in
the  way  of  a	 civil court to	 summon	 the  production  of
documents  filed  by  an  assessee  during  the	  assessment
proceedings  before an Income-Tax Officer after 1.4.1964  in
respect	 of assessment years 1964-65 onwards, and  that	 the
finality  attached  to	an order of  the  Commissioner	with
regard to claim of privilege under Section 138(1)(b) had  no
relationship  to  the  power of the  court  to	summon	that
record.
    Allowing  the appeal of the defendants-appellants,	this
Court,
						       547
    HELD:1.01.	Section 54 of  the Income Tax Act, 1922	 and
after  its repeal, Section 137 of the Income Tax  Act,	1961
had only placed fetters on the exercise of the jurisdiction,
in  respect  of	 the specified	documents,  by	the  courts,
notwithstanding anything contained in any other law for	 the
time  being  in force. The exercise of the  jurisdiction  to
seek  production  of documents had, only been  put  under  a
cloud  in so far as the record of assessment  is  concerned.
[560E]
    1.02.  With the repeal of the 1922 Act and	omission  of
Section 137 of the 1961 Act, the fetters on the exercise  of
the  jurisdiction  were	 removed with the  result  that	 the
exercise  of  jurisdiction  to call for	 the  production  of
documents  relevant  to the case pending before	 the  court,
even from the income-tax authorities, revived. [560E-F]
    1.03. Neither Section 54 of the 1922 Act nor Section 137
of   the  1961	Act  had  taken	 away  for  all	 times	 the
jurisdiction  of the courts to call for the record from	 the
Income-Tax authorities. Those  provisions had only  put	 the
exercise  of  that  jurisdiction under	a  cloud  and  those
fetters	 were  coterminous with the life of  Section  54  of
the 1922 Act or Section 137 of the 1961 Act. [560F-G]
    2.01.  Clause (b) of Sub-Section (1) of Section  138  is
limited	 in its scope and application. Under it, any  person
can  make  an  application  to	the  Commissioner  for	 any
information  relating  to  an assessee	in  respect  of	 any
assessment made either under the 1922 Act or under the	1961
Act  on or after the 1st April 1960 and the Commissioner  of
Income	Tax  has  the authority to furnish or  cause  to  be
furnished  the	information  asked for	on  being  satisfied
that it is in the public interest so to do and such an order
of  the	 Commissioner  is  final and  cannot  be  called  in
question in any court of law. The Commissioner of Income Tax
under this clause performs only an administrative  function,
on his	subjective satisfaction as to whether  it is in	 the
public	interest  to furnish the information or not  to	 any
person	seeking	 such information and his decision  in	that
behalf is final and the aggrieved person cannot question  it
in  a  court  of  law.	By  enacting  this  provision,	 the
legislature  could  not be said to have	 intended  that	 the
Commissioner  of Income Tax would have the authority to	 sit
in  judgment over the requisition   (Judicial order) made by
a  court  of  law  requiring the  production  of  record  of
assessment  relating  to  an  assessee	in  a  case  pending
before the court. [562H-563D]
						       548
    2.02. When a court of law, in any matter pending  before
it,  desires  the  production  of  record  relating  to	 any
assessment after applying its judicial mind and hearing	 the
parties	 and on being prima facie satisfied that the  record
required to be	summoned is relevant for the decision of the
controversy before it - it passes a judicial order summoning
the  production	 of  that  record  from	 the  Party   having
possession  of	the record. The Commissioner of	 Income	 Tax
cannot,	 therefore,  refuse  to	 send  the  record,  as	  he
certainly  is  not authorised to set at	 naught	 a  judicial
order of a court law. He must obey the order of the court by
sending the record to the court concerned. [563D-F]
     2.03.  It is open to the Commissioner of Income Tax  to
claim  privilege,  in respect of any document or  record  so
summoned  by a court of law, under Sections 123 and  124  of
the  Indian Evidence Act, 1872 and even then it is  for	 the
court to decide whether or not to grant that privilege.	 Had
the   legislature  intended  that  no  document	  from	 the
assessment  record  of an assessee should be produced  in  a
court  on being summoned by it, without the approval of	 the
Commissioner of Income Tax, it would have said so in Section
138 of the Act itself. [563F-G]
     2.04.   The  repeal of Section 137 of the	Act  clearly
discloses  the	legislative intent that it was felt  by	 the
legislature  that  it  was no more  necessary  to  keep	 the
records of assessment by the Income Tax Department  relating
to  an assessee as confidential from the courts and  the  bar
with regard to the production of any part of the record	 was
removed in so far as the courts are concerned.	The finality
which  has  been attached to the order of  the	Commissioner
under  Section	138(1)(b) of the Act is	 restricted  to	 the
cases  where  the information etc. as  contemplated  by	 the
section	 is called for by any person, other than a court  of
law by	a judicial order. [563G-564A]
     2.05  The finality which has been attached to the order
of  the Commissioner under Section 138(1)(b) of the  Act  is
applicable  only in cases where application is made  to	 the
Commissioner  by a party or any other person  for  receiving
documents  or  information.  It has nothing to do  with	 the
powers of the courts to summon the production of  assessment
record of an assessee, filed after 1.4.1964.  The  privilege
as to secrecy, which the assessee had acquired under Section
54 of the 1922 Act remained unimpaired by the repeal of that
Act or even by the omission of Section
						  549
137  of	 the 1961 Act in respect of record  filed  prior  to
1.4.1964 and relating to the assessments prior to that date.
That privilege did not extend, after April 1,1964. to record
filed before the income-tax authorities, for the  assessment
years 1964-65 onwards.	[560H-561B]
     2.06.  Section 138(1)(b) does not effect the powers  of
the  courts to require the production of assessment  records
or  the disclosure of any information therefrom to it, in  a
case pending before the court when the court, by a  judicial
order,	requires  the production of the	 record,  considered
relevant  by  it for decision of a case pending	 before	 it.
[564B-C]
     2.07.   The  High	Court,	therefore,  fell  in   error
in holding that the assessment records of an assessee  filed
before the income-tax authorities, even after April  1,1964,
are immune from production in a court of law on summons	 for
their  production  being issued by the court  and  that	 the
disclosure  of any information from the record even  to	 the
courts is subject to the veto powers of the Commissioner  of
Income Tax. [564B]
     3.01.  Section 6 of the General Clauses Act as well  as
Section 138 (1)(b) of the 1961 Act cannot extend the ban  on
the exercise of the jurisdiction by the courts to summon the
production  of	documents from	the  income-tax	 authorities
after  April 1,1964 relating to assessment year	 1964-65  in
respect of the record filed after April 1,1964. [561B-C]
     3.02.  Section  6 of the General Clauses  Act  provides
that  the  repeal  of  any  enactment,	unless	a  different
intention  appears, shall not affect any  right,  privilege,
obligation or liability acquired, accrued or incurred  under
the repealed enactment. [561F]
     3.03  The general principle is that an enactment  which
is  repealed,  is to be treated, except as  to	transactions
past  and closed, as if it had never existed.  The  assessee
had  acquired no right or privilege under the repealed	Act,
since the provision is only a procedural restriction and did
not create any substantive right in the assessee, in respect
of assessments for the period after the omission of  Section
137  of	 the  1961  Act.   Thus,  reliance  placed  on	 the
provisions  of Section 6 of the General Clauses Act to	hold
the continuation of the ban on the exercise of	jurisdiction
by the courts was misplaced. [561H-562B]
     3.04.  In	respect	 of the documents  filed  after	 the
omission of Section
						  550
137  of	 the  1961  Act , with	effect	from  April  1,1964,
relating  to assessments for the period 1964-65 onwards,  no
right,	privilege,  obligation or liability can be  said  to
have been acquired accrued or incurred prior to the omission
of Section 137 of the Act. [561F-G]
     3.05  The ban contained in Section 137 of the 1961	 Act
on  the exercise of the powers of a civil court to call	 for
production  of	documents  etc. could not be  said  to	have
continued  to  exist, in matters arising subsequent  to	 the
omission of that Section with effect from April 1, 1964	 and
that ban came to an end in respect of the period after April
1, 1964. [561G]
     4. After the repeal of Section 137 of the act, there is
no  longer  any	 impediment left in the way of	a  court  to
summon	the  production of documents filed  by	an  assessee
before	 the  income-tax  authorities  after  April   1,1964
relating  to assessment proceedings for 1964-65 onwards	 and
that  the finality attached to an order of  the	 Commissioner
under Section 138 (1)(b) has no relevance to the exercise of
powers by a court to summon the production of documents in a
case pending before the Court. [564D-E]

JUDGMENT:
     CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1360  of
1974.
     From  the	judgment and Order dated 14.12.1973  of	 the
Delhi High Court in suit No. 64 of 1969.
     Ms.   Suruchi  Agarwal  and  T.V.S.N.  Chari  for	 the
Appellants.
     H.K. Puri and Mrs. Urmila Sirur for the Respondents.
     DR.  A.S.ANAND,J.	 This appeal, by special  leave,  is
directed against the judgment of the Full Bench of the Delhi
High  Court, dated  14.12.1973 in Suit No. 64/69,  delivered
in  a reference made by	 a learned Single Judge for  opinion
of  the Full Bench.  The questions referred by	the  learned
Single Judge to the Full Bench revolved around the scope and
effect	of  the	 provisions of Sections 54 and	59B  of	 the
Indian	Income Tax Act 1922 (hereinafter referred to as	 the
'1922  Act') and Sections 137 and 138 of the Income Tax	 Act
1961 (hereinafter referred to as the '1961 Act') as  amended
from  time  to time in 1964 and 1967 in the context  of	 the
claim  of  privilege by the Income Tax	Department  for	 the
production of the
						       551
documents relating to assessment of an assessee summoned  by
the  Civil  Court.   The  following  three  questions	were
referred to and considered by the Full Bench:
	  "1.  What  is	 the position  of  law	relating  to
	  privilege prior to 1964?
	  2.   What  is	 the position  of  law	relating  to
	  privilege after 1964 ?; and
	  3.   What  is	 the effect  of	 the  production  of
	  certified copies relating to income-tax  assessment
	  records,  and	 how  far  certified  copies  can  be
	  admitted in evidence ?"
     The  circumstances under which these  questions  arose,
briefly put, are as follows:
     2. The plaintiff, Trilok Chand Jain, instituted a	suit
for recovery of Rs. 1,39,722.86 against the defendants, M/s.
Dagi  Ram  Pindi Lal and Smt. Budh Wanti  Gulati,  w/o	Shri
Pindi Lal Gulati, the appellants herein.  During the  course
of  proceedings	 in  the  suit,	 when  evidence	 was   being
recorded,  the	plaintiff obtained summons  from  the  court
records	 relating  to  the  Income  Tax	 Assessment  of	 the
defendants,  M/s.  Dagi Ram Pindi Lal,	for  the  assessment
years  1964-65 to 1971-72.  The Income tax officer to	whom
the  summons were issued, sent the record in a sealed  cover
through	 an  Inspector along with a letter,  dated  November
1,1972,	 claiming that the said record was privileged  under
Section 137 of the 1961 Act.  The plaintiff also applied for
and  obtained  summons requiring the Income tax	 Officer  to
produce	 the  Income  tax record relating  to  M/s  Borizeon
Industrial Products (P) Ltd. and Bishamber Nath Kaul.	That
record	was also sent by the Income Tax Officer in a  sealed
cover  alongwith a letter in which it was submitted that  no
disclosure of information regarding income tax pertaining to
an  income tax assessee could be made.	The  plaintiffs,  it
appears,  in  the meanwhile filed in the court a  number  of
certified copies of the accounts of the defendants, which he
had been able to obtain from the income-tax authorities	 and
sought	permission  of	the Court to  tender  the  certified
copies in evidence.  Arguments were addressed by the parties
before the learned Single Judge on the question of privilege
as claimed by the Income Tax officer.  Being of the  opinion
that the question of privilege, as claimed by the Income Tax
officer, was important and likely to arise in
						      552
the course of trial of suits in future also, a reference was
made  by  the learned Single Judge to the  Full	 Bench.	  In
dealing with the three questions (supra) referred to it, the
Full  Bench considered different situations.  It  considered
the first question in the following four situations:
	  "(a) Where the documents, records, etc. in respect
	 of  which  privilege is claimed were  filed  by  an
	 assessee or a third party before April 1,1962, with
	 effect	 from which date the Indian Income Tax	Act,
	 1922  was repealed, in respect of assessment  years
	 up  to	 and including assessment  year	 1961-62  in
	 proceedings  for the said assessment  years  taking
	 place under the Indian Income-tax Act,1922;
	  (b) Where the documents, records, etc. were  filed
	 by an assessee or a third party after April 1,1962,
	 but  before April 1,1964 in respect  of  assessment
	 years	up to and including assessment year  1961-62
	 in proceedings for the said assessment years taking
	 place under the Indian Income_tax Act,1922;
	  (c)  Where the document, records, etc. were  filed
	 but  before April 1,1964, in respect of  assessment
	 place under the Income-tax Act, 1961;and
	  (d) Where the documents, records, etc. were  filed
	 but before April 1,1964, in respect of	  assessment
	 years	1962-63 and 1963-64 in proceedings  for	 the
	 said  assessment  years  taking  place	 under	 the
	 Income-tax Act, 1961."
     and sustained  the claim of privilege by the Income Tax
Department in each one of the situations.
      The     Full  Bench  while  considering	the   second
question, dealt with the following situations:
	  (a) Where the documents, records, etc. in  respect
	 of   which  privilege is claimed were filed  by  an
	 assessee  or a third party after April 1, 1964,  in
	 respect  of  assessment years up to  and  including
	 assessment year 1961-62 in proceedings for the said
						       553
	  assessment  years  taking place under	 the  Indian
	 Income-tax Act, 1922;
	  (b)  Where the documents, records etc. were  filed
	 by  an	 assessee or a third party  after  April  1,
	 1964,	in  respect of assessment years	 up  to	 and
	 including year 1961-62 in proceedings for the	said
	 assessment  years  taking place  under	 the  Indian
	 Income-tax Act, 1961;
	  (c) Where the documents, records, etc. were  filed
	 1964,	in respect of assessment years	1962-63	 and
	 1963-64  in  proceedings for the  said	 assessments
	 years taking place under the Income-tax Act,  1961;
	 and
	 1964,	in  respect  of	 assessment  years   1964-65
	 onwards."
     The  claim	 of  privilege was sustained  in  all  above
situations also.
3.  Dealing with the effect of omission of Section  137	 and
substitution of section 138 (1) (a) and (b), the High  Court
opined;
	  ".....that when a party to a proceeding in a Court
	 applies  for summoning any documents, records	etc.
	 from  the  income-tax authorities,  the  Court	 may
	 summon	 the  said documents, records, etc.  But  on
	 receipt of summons, it is open	 to the Commissioner
	 of  Income-tax to consider the matter	as  provided
	 under	section 138 (1) (b), and decide	 whether  it
	 would be (sic) in the public interest to produce or
	 furnish the documents, records, etc. summoned	for,
	 and  submit his view to the Court in answer to	 the
	 summons.   In	case,  he  is  satisfied  that	 the
	 production   etc.  would  not	be  in	the   public
	 interest,  his decision is final and the  Court  to
	 which	the  said decision  is	communicated  cannot
	 question the same."
					[EMPHASIS SUPPLIED]
   The	Full Bench, however, did not express any opinion  on
     4. Learned counsel for the appellant has not questioned
the findings of the Full Bench in so far  as they relate  to
the claim of privilege in respect
						  554
of  documents filed prior to the repeal of the 1922 Act	  or
before	the omission of Section 137 from the 1961 Act.	 She
has  questioned	 the  findings of the  Full  Bench  only  as
regards	 the power and jurisdiction of the Court  to  summon
the  documents,	 after the repeal of the 1922 Act  and after
the deletion of Section 137 from the 1961 Act by the Finance
Act, 1964 as also the interpretation placed by the Bench  on
Section	 138 (1) (b) of the Act.  The controversy before  us
has been confined to the finding of the High Court  relating
to  the claim of privilege for the production  of  documents
which  were  filed  after the repeal of	 Section  137,	with
effect from 1.4.1964 in respect of assessment years  1964-65
onwards.   Thus, it is the finding on situation (d)  of	 the
second	question as rendered by the Full Bench	Which  alone
has been questioned and debated before us.
     The  precise  argument of the learned counsel  for	 the
appellant  is  that after the repeal of Section 137  of	 the
1961 Act by Act V of 1964, there is no longer any impediment
left in the way of a civil court to summon the production of
proceedings before an Income-tax Officer after	1.4.1964  in
regard	to claim of privilege under Section 138 (1) (b)	 has
no  relationship  to the power of the court to	summon	that
record.
     5.	 For a	proper appreciation of the question  debated
before	us, it would be desirable to refer to  the  relevant
provisions  of	the 1922 Act and 1961 Act, as  amended	from
time  to time, and notice the changes brought about  in	 the
matter of claim of privilege by the Income Tax Department.
	  Section 54 (1) and (2) of the 1922 Act provided as
	 follows:
	    "54.  Disclosure  of  information  by  a  public
	 servant
	  (1)  All  particulars contained in  any  statement
	 made,	return	furnished or accounts  or  documents
	 produced under the provisions of this Act or in any
	 evidence given, or affidavit or deposition made, in
	 the course of any proceedings under this Act  other
	 than  proceedings  under this Chapter,	 or  in	 any
	 record	  of  any  assessment  proceeding,  or	 any
	 proceeding  relating to the recovery of  a  demand,
	 prepared  for	the purpose of this  Act,  shall  be
	 treated as confidential, and notwithstanding
						       555
	  anything  contained  in the Indian  Evidence	Act,
	 1872(1 of 1872) no Court shall save as provided  in
	 this Act, be entitled to require any public servant
	 to  produce  before it any such  return,  accounts,
	 documents  or	record	or any	part  of  any	such
	 record,  or to give evidence before it	 in  respect
	 thereof.
	  (2) If a public servant discloses any	 particulars
	 contained   in	  any	such   statement,    return,
	 accounts,documents, evidence, affidavit  deposition
	 or record, he shall be punishable with imprisonment
	 which	may extend to six months, and shall also  be
	 liable to fine."
     6.	 By Section  9 of the Taxation Laws (Amendment)	 Act
of  1960,  Section 59-B was inserted in the  1922  Act	with
effect from April 1, 1960.  It provided as under:-
	  "59-B	 Disclosure  of	 information  regarding	 tax
	 payable-
	  Where	 a  person  makes  an  application  to	 the
	 Commissioner  in   the prescribed  form  and  after
	 payment of the prescribed fee for information as to
	 the  amount  of tax determined as  payable  by	 any
	 assessee  in respect of any assessment made  on  or
	 after the 1st day of April, 1960, the	Commissioner
	 may, notwithstanding anything contained in  section
	 54,   if  he  is  satisfied  that  there   are	  no
	 circumstances	justifying its refusal,	 furnish  or
	 cause to be furnished the information asked for."
     Both   the	  aforesaid  provisions	  dealt	  with	 the
confidential  nature  of  the documents	 filed,	 before	 the
Income	Tax  authorities  and  the  claim  of  privilege  to
disclose  the  same  to anyone, including a  court  of	law.
Section 54 (1) declared that the various documents  referred
to therein shall be treated as confidential and prohibited a
court from requiring any public servant to produce before it
any  such document or to give evidence before it in  respect
thereof,  notwithstanding anything contained in	 the  Indian
Evidence  Act,	1872.  Sub-Section (2) of  Section  54	made
punishable,  the  disclosure  by a public  servant,  of	 any
information  contained	in those documents.  the  effect  of
introduction  of Section 59-B by Taxation  Laws	 (Amendment)
Act  1960  was	that  it  entitled  a  person  to  make	  an
application  to	 the  Commissioner  to	obtain	 information
thereafter as to the amount of tax determined, as payable by
an assessee in respect of any assessment made
						  556
on or before April 1, 1960, and authorised the	Commissioner
to   furnish  or  cause	 to be	 furnished  the	 sought	 for
information,  if  he  was  satisfied  that  there  were	  no
circumstances  justifying its refusal.	This legal  position
continued  to prevail till April 1, 1960, when the 1922	 Act
was  repealed by the 1961 Act. In the 1961 Act ,  provisions
were made corresponding to sections 54 and 59-B of the	1922
Act  in	 Sections  137 and 138.	 The  relevant	portions  of
Sections 137 and 138 of the Act provided as follows:
	  "137. Disclosure of information prohibited-
	 produced  under the provisions of this Act,  or  in
	 any evidence given or affidavit or deposition	made
	 in  the course of any proceedings under  this	Act,
	 other	than proceedings under Chapter XXII,  or  in
	 any  record of any assessment proceedings,  or	 any
	 proceedings  relating	to  recovery  of  a  demand,
	 prepared  for	the purposes of this Act,  shall  be
	 treated   as  confidential,   and   notwithstanding
	 anything  contained  in the  Indian  Evidence	Act,
	 1872, no Court shall, save as provided in this Act,
	 be  entitled  to  require  any	 public	 servant  to
	 produce  before  it  any  such	 return,   accounts,
	 documents or record or any part of any such record,
	 or to give evidence before it in respect thereof.
	  (2)	No   public  servant  shall   disclose	 any
	 particulars   contained  in  any  such	  statement,
	 return,  accounts, documents, evidence,  affidavit,
	 deposition or record.
	  (3) .......
	  (4) .......
	  (5) .......
	  "138.	 Disclosure  of information  respecting	 tax
	 payable-
	  WHERE	 A  person  makes  an  application  to	 the
	 Commissioner  in the prescribed form and  pays	 the
	 prescribed fee for information as to the amount  of
	 tax determined as payable by an assessee in respect
	 of any assessment made either under this Act or the
	 Indian-income	tax Act, 1922.	On or after the	 1st
	 day
						       557
	  of	April,	 1960,	 the	Commissioner	may,
	 notwithstanding anything contained in Section	137,
	 if he is satisfied that there are no  circumstances
	 justifying  its  refusal, furnish or  cause  to  be
	 furnished the information asked for."
     7.	 The  provisions of Section 137(1) of the  1961	 Act
were, as is seen, almost identical to the provisions of sub-
section	 (1) of Section 54 of the 1922 Act and	Section	 137
(2)   prohibited  a  public  servant  from  disclosing	 the
particulars  contained in any of the documents mentioned  in
Section 137 (1).  The provisions of Section 138 of the	1961
Act were almost identical to the provisions of Section	59-B
of the 1922 Act.
     8.	 With effect from April 1, 1964, Section 137 of	 the
1961 Act was omitted from the Statute vide Section 32 of the
Finance	 Act No. V of 1964, and Section 138 was	 substituted
by a new Section vide Section 33 of the Finance Act No. V of
1964.  The substituted Section 138 reads as under:-
	  "138.	  Disclosure   of   information	  respecting
	 assessees:-
	  (1)  Where  a person makes an application  to	 the
	 Commissioner	in  the	 prescribed  form  for	 any
	 information relating to any assessee in respect  of
	 any  assessment made either under this Act  or	 the
	 Indian	 Income-tax Act, 1922, on or after  the	 1st
	 day of April, 1960, the Commissioner may,  if he is
	 satisfied  that it is in the public interest so  to
	 do,   furnish	 or  cause  to	be   furnished	 the
	 information asked for in respect of that assessment
	 only and his decision in this behalf shall be final
	 and shall not be called in question in any Court of
	 law.
	  (2)  Notwithstanding	anything contained  in	sub-
	 section (1) or	 any other law for the time being in
	 force, the Central Government may, having regard to
	 the  practices	 and usages customary or  any  other
	 relevant factors, by order notified in the Official
	 Gazette,  direct  that no information	or  document
	 shall be furnished or produced by a public  servant
	 in  respect of such matters relating to such  class
	 of  assessees or except to such authorities as	 may
	 be specified in the order."
     9.	 The scope of Section 138, of the 1961 Act  was,  as
can  be	 seen,	enlarged by the	 substituted  provisions  of
Section 138.  Under the original
						  558
Section	  138  a  person  could	 make  an  application	 for
information  only  as to the amount of	tax  determined,  as
payable	 by  an	 assessee,  under  sub-section	(1)  of	 the
substituted Section 138, a person could make an	 application
for any information relating to an assessment.	Again, under
the  original Section 138, before the necessary	 information
could be furnished or cause to be furnished to an applicant,
the  Commissioner  was to be satisfied that  there  were  no
circumstances justifying refusal to furnish the	 information
asked for; under sub-Section (1) of the substituted  Section
138,  the Commissioner was required to be satisfied that  it
was in the public interest to furnish the information  asked
for  and  "his decision in this behalf shall  be  final	 and
shall not be called in question in any court of law."	Vide
sub-Section (2) of the substituted Section 138, the  Central
Government  was	 also  empowered  to  direct,  by  an  order
notified  in  the Official Gazette, that no  information  or
document shall be furnished or produced by a public  servant
in  respect  of	 such  matters relating	 to  such  class  of
assessees or except to such authorities as may be  specified
in the order.
     10, The substituted Section 138 was once again  amended
and  substituted  vide Section 28 of the Finance  Act,	1967
with effect from April 1, 1967.	 The new sub-section (1)  of
section 138 reads as follows:
	  "(1)(a)   The	 Board	or  any	  other	  income-tax
	 authority  specified by it by a general or  special
	 order	in  this behalf may furnish or cause  to  be
	 furnished to-
	  (i) any officer, authority or body performing	 any
	 functions under any law relating to the  imposition
	 of any tax, duty of cess, or to dealings in foreign
	 exchange as defined in section 2(d) of the  Foreign
	 Exchange Regulation Act, 1947; or
	  (ii)such  officer,  authority or  body  performing
	 functions  under  any	other  law  as	the  Central
	 Government  may, if in its opinion it is  necessary
	 so  to	 do  in	 the  public  interest,	 specify  by
	 notification  in  the	Official  Gazette  in	this
	 behalf,  any  such  information  relating  to	 any
	 assessee  in respect of any assessment	 made  under
	 this Act or the Indian income-tax Act, 1922 as may,
	 in  the  opinion of the Board or  other  Income-tax
	 authority, be necessary for the purpose of enabling
	 the  officer, authority or body to perform  his  or
	 its functions under that law.
						       559
	  (b)  Where  a person makes an application  to	 the
	 any  assessment made under this Act or	 the  Indian
	 Income-tax  Act  1922, on or after the 1st  day  of
	 April,	  1960	the  Commissioner  may,	 if  he	  is
	 and shall not be called in question in any court of
	 law."
     The  provisions  of sub-Section (1) of Section  138  as
they originally stood were incorporated in clause (b) of the
substituted   sub -Section  (1)	 and  a	 new  provision	  was
incorporated   in  clause  (a)	of  sub-Section	 (1)   which
empowered  the	Board  or  any	other  income-tax  authority
specified by it by a general or special order in that behalf
to furnish or cause to be furnished, information relating to
any   assessee	to  such officer, authority or	body  as  is
mentioned  in the provision to enable him or it	 to  perform
its  functions	under  the  Act.   Vide	 clause	 (b)of	 the
substituted  sub-Section  (1) of Section 138,  finality	 has
also been attached to an order of the Commissioner, made  on
an  application	  filed by any	person	seeking	 information
relating  to an assessee in respect of any assessment.	 The
Commissioner,  has to make an order, after  being  satisfied
that  it is in the public interest so to do, to	 furnish  or
cause to be furnished such information and that decision  of
the  Commissioner is immune from challenge  in any court  of
law.
     11.  The controversy as already noticed, before  us  is
limited	 to the jurisdiction or lack of it of a civil  court
to  seek  production of documents relating  to	 assessments
filed after April 1, 1964 in assessment proceedings  1964-65
onwards, after the omission of Section 137 of the Act.
     12.  The Full Bench, in the impugned judgment, came  to
the  conclusion	  that the omission of Section 137  did	 not
make  any  difference and  that the ban	 on  the  courts  as
contained in the repealed Section 137 continued to remain in
force  by  virtue of the provisions of Section 138  (1)	 and
after 1967 by Section 138 (1)(b) of the Act even in  respect
of  the documents filed in the assessment  proceeding  after
April 1, 1964 for assessments relating to the period 1964-65
onwards.    The	 Full  Bench  also  pressed  into  aid	 the
provisions of Section 6 of the General Clauses Act to
						  560
hold  that the repeal of Section 137 did not remove the	 ban
on  the courts to  summon any documents from the  income-tax
authorities,  even  in respect of documents which  had	been
filed before the Income-tax authorities after the repeal  of
Section 137 after April 1, 1964.
     13.  In  our opinion the High Court fell  in  error  in
coming	to  that  conclusion.	It  not	 only  ignored	 the
legislative  intent manifest in the omission of Section	 137
of the 1961 Act, after the repeal of the 1922 Act, but	also
ignored	 the  powers of a court under the  general  law,  to
summon such documents, record etc. as is found relevant to a
case  pending  before  the  court, in  the  absence  of	 any
specific  prohibition, under any law for the time  being  in
force.	 The  High Court assumed that by Section 54  of	 the
1922 ACt and Section 137   of the 1961 Act, the jurisdiction
of  the	 courts to call for documents  from  the  income-tax
authorities  had  been	taken away for all  times  to  come,
notwithstanding	 the repeal of the 1922 Act or the  omission
of  Section  137 specifically from the 1961 Act.   The	High
Court appears to have lost sight of the position that  under
the  Code of Civil Procedure, the courts of law have  always
possessed  the	jurisdiction to call for the  production  of
documents relevant to the case before the court from anybody
having	custody of those documents.  Section 54 of the	1922
Act  and  after its repeal Section 137 of the 1961  Act	 had
only  placed fetters  on the exercise of that  jurisdiction,
time  being in force.  The exercise of the  jurisdiction  to
seek production of documents had, thus only been put under a
With the repeal of the 1922 Act and omission of Section	 137
of  the	 1961  Act,  the fetters on  the  exercise  of	that
jurisdiction were removed with the result that the  exercise
of the jurisdiction to call for the production of  documents
relevant to the case pending before the court, even from the
income-tax authorities, revived.  Neither Section 54 of	 the
1922 Act nor Section 137 of the 1961 Act had taken away	 for
all  times  the jurisdiction of the courts to call  for	 the
record	from the income-tax authorities.  Those	 provisions,
as  already  noticed  had, only put  the  exercise  of	that
jurisdiction   under   a  cloud	 and  those   fetters	were
coterminous  with the life of Section 54 of the 1922 Act  or
Section 137 of the 1961 Act.
     14.  The finality which has been attached to the  order
if the Commissioner under Section 138 (1) (b) of the Act  is
Commissioner by a party or any other person
						  561
for  receiving documents or information.  It has nothing  to
do with the powers of the courts to summon the production of
assessment record of an assessee, filed after 1.4.1964.	 The
Privilege  as  to secrecy, which the assessee  had  acquired
under Section 54 of the 1922 Act remained unimpaired by	 the
repeal	of that Act or even by	the omission of Section	 137
of the 1951 Act in respect of record filed prior to 1.4.1964
and  relating to the assessments prior to that	date.	That
privilege  did	not extend, after April 1, 1964,  to  record
years 1964-65 onwards.	Section 6 of the General Clauses Act
as well as Section 138 (1) (b) of the 1961 Act cannot extend
the ban on the exercise of the jurisdiction by the courts to
summon	the  production	 of documents  from  the  income-tax
authorities after April 1, 1964 relating to assessment	year
1964-65 in respect of the record filed after April 1, 1964.
     15.  Section 6 (C) of the General Clauses Act, 1897  on
which reliance was placed by the HIgh Court reads as under:-
	  "6.  Where  this  ACt,  or  any  Central  Act	  or
	 regulation made after the commencement of this Act,
	 repeals any enactment hitherto made or hereafter to
	 be   made,  then,  unless  a  different   intention
	 appears, the repeal shall not ..................
	  (c)  affect  any right, privilege,  obligation  or
	 liability acquired or incurred under any  enactment
	 so repealed."
     A plain reading of the Section shows that the repeal of
any  enactment unless a different intention  appears,  shall
not  affect  any right, privilege, obligation  or  liability
acquired, accrued or incurred under the repealed  enactment.
In  respect  of	 the documents filed  after  the  repeal  of
Section 137 of the 1961 Act, with effect from April 1, 1964,
have  been  acquired,  accrued	or  incurred  prior  to	 the
omission  of section 137  of the Act.	Therefore,  the	 ban
contained in Section 137 of the 1961 Act on the exercise  of
the  powers  of	 a civil court to  call	 for  production  of
documents  etc.	 could	not be said to	have   continued  to
exist, in matters arising subsequent to the omission of that
Section with effect from April 1, 1964 and that ban came  to
an  end in respect of the period after April 1,	 1964.	 The
general principle is that an enactment which is repealed, is
to  be	treated, except as to transactions past and  closed,
as  if it had never existed.  The assessee had	acquired  no
right or
						  562
privilege  under  the repealed Act, since the  provision  is
only  a	 procedural  restriction  and  did  not	 create	 any
substantive right on the assessee, in respect of assessments
for the period after the omission of Section 137 of the 1961
Act.   Thus, reliance placed on the provisions of Section  6
of  the General Clauses Act to hold the continuation of	 the
ban  on	 the  exercise of jurisdiction	by  the	 courts	 was
misplaced.
     16.  Dealing with the scope of Section 138 (1)  (b)  of
the  Act,  the	High Court held	 that  the  said  provisions
attached   a  finality	to  an	order  of  the	Income	 Tax
Commissioner  and applied to the cases where the record	 was
summoned even by a court of law.  The High Court opined:
	  "The	complete omission of the declaration of	 the
	 confidential nature of the documents, records, etc.
	 and  the  removal of the ban on courts	 and  public
	 servants  no  doubt, suggests that the power  of  a
	 court	 under	the  general  law  to  summon	such
	 documents, records,etc. relevant to the case before
	 it  has been restored.	 But at the same  time,	 the
	 legislature  which  empowered the  Commissioner  of
	 Income-tax  to	 furnish the information  if  he  is
	 do made  the decision of the Commissioner final and
	 un-questionable in a Court of law.  When two powers
	 are  thus vested in two legal authorities,  neither
	 of them can be ignored, and both of them have to be
	 reconciled  and given effect to .  In the  case  of
	 the  two powers under consideration, it has  to  be
	 noted	that  the power to summon which vests  in  a
	 court is under the general law, while the power  of
	 the  Commissioner has been conferred upon him by  a
	 special law and has, therefore, to prevail over the
	 former.   In  view of the same, it has to  be	held
	 that  while  it is open to a court  to	 summon	 the
	 documents,   records  etc.  from   the	  Income-tax
	 Commissioner,	 it   is   equally   open   to	 the
	 Commissioner  on receiving the summons to  consider
	 whether the production/furnishing of the documents,
	 records  etc. would be in the public interest,	 and
	 submit	 the  same  to the court in  answer  to	 the
	 summons."
	  We are unable to subscribe to the above view.
     17.  Clause  (b) of sub-Section (1) of Section  138  is
limited in its scope and application.  Under it, any  person
can make an application to the
						  563
Commissioner for any information relating to an assessee  in
respect of any assessment made either under the 1922 Act  or
under  the 1961 Act on or after the 1st April 1960  and	 the
Commissioner  of Income Tax has the authority to furnish  or
cause  to  be furnished the information asked for  on  being
satisfied  that	 it is in the public interest so to  do	 and
such  an  order of the Commissioner is final and  cannot  be
called in question in any court of law.	 The Commissioner of
Income Tax under this clause performs only an administrative
function, on his subjective satisfaction as to whether it is
in the public interest to furnish the information or not  to
any person seeking such information and his decision in that
in  a  court  of  law.	 By  enacting  this  provision,	 the
in  judgment  over the requisition made by a  court  of	 law
requiring the production of record of assessment relating to
an  assessee  in a case pending before the  court.   When  a
court  of law, in any matter pending before it	desires	 the
production  of	record	relating  to  any  assessment  after
applying  its judicial mind and hearing the parties  and  on
being  prima facie satisfied that the record required to  be
summoned  is  relevant for the decision of  the	 controversy
before	it  -  it  passes a  judicial  order  summoning	 the
production  of that record from the party having  possession  of
the   record.	The  Commissioner  of  Income  Tax   cannot,
therefore, refuse to send the record, as he certainly is not
authorised  to set at naught a judicial order of a court  of
law.   He  must obey the order of the court by	sending	 the
record	to  the	 court concerned indeed it is  open  to	 the
Commissioner of Income Tax to claim privilege, in respect of
any document or record so summoned by a court of law,  under
Sections  123  and 124 of the Indian Evidence Act  1872	 and
even  then it is for the court to decide whether or  not  to
grant that privilege.  Had the legislature intended that  no
document from the assessment record of an assessee should be
produced  in  a court on being summoned by it,	without	 the
approval  of the Commissioner of Income Tax, it	 would	have
said  so  in Section 138 of the Act itself.  The  repeal  of
Section	 137  of the Act clearly discloses  the	 legislative
intent	that it was felt by the legislature that it  was  no
more  necessary	 to keep the records of	 assessment  by	 the
Income	 Tax   Department  relating  to	  an   assessee	  as
confidential from the courts and the bar with regard to	 the
production  of any part of the record was removed in so	 far
as the courts are concerned.  The finality which has
						     564
been attached to the order of the Commissioner under Section
138(1)(b) of the Act is, thus, restricted to the cases where
the  information  etc.	as contemplated by  the	 Section  is
called	for  by any person, other than a court of law  by  a
judicial order.	 The High Court, therefore, fell in error in
holding	 that  the assessment records of an  assessee  filed
before the income-tax authorities, even after April 1, 1964,
Income Tax.  Section 138(1)(b) does not affect the powers of
relevant by it for decision of a case pending before it.
     18. As a result of the above discussion, we, therefore,
find  that  the answer given by the Full Bench of  the	High
Court  in  the impugned judgment, to situation	(d)  of	 the
second	question (supra) as formulated by it,  is  erroneous
and  we set it aside.  Consequently, we hold that after	 the
repeal	of  Section 137 of the Act, there is no	 longer	 any
impediment  left  in  the  way of  a  court  to	 summon	 the
production  of	documents filed by an  assessee	 before	 the
income-tax  authorities	 after	April 1,  1964	relating  to
assessment  proceedings	 for 1964-65 onwards  and  that	 the
finality  attached  to an order of  the	 Commissioner  under
Section 138(1)(b) has no relevance to the exercise of powers
by  a court to summon the production of documents in a	case
pending	 before the Court.  Since, the challenge  before  us
had  been confined to the answer given by the High Court  to
situation (d) of the second question as formulated by it and
no  other finding of the High Court was called in  question,
we  have refrained from expressing any opinion on the  other
findings  recorded by the Full Bench of the High Court.	 The
appeal	consequently succeeds to the extent indicated  above
and is allowed.	 We, however, make no order as to costs.
V.P.R.					     Appeal allowed.
						       565

Commissioner Of Income Tax, Calcutfa vs T.I. & M. Sales Ltd on 10 April, 1987
Equivalent 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
Author: Misra Rangnath
Bench: Misra Rangnath, R.S.  Pathak
COMMISSIONER OF INCOME TAX, CALCUTFA

	Vs.

T.I. & M. SALES LTD.

DATE OF JUDGMENT10/04/1987

BENCH:
MISRA RANGNATH
BENCH:
PATHAK, R.S. (CJ)

CITATION:
 1987 AIR 1234		  1987 SCR  (2) 883
 1987 SCC  (3) 132	  JT 1987 (2)	272
 1987 SCALE  (1)771

ACT:
    Income  Tax	 Act,  1961/Income  Tax	 Act,  1922--Section
163(1)(b)/  Section 43--'Business Connection'--What  amounts
to-Dependent upon a set of facts in a particular case.

HEADNOTE:
    The assessee-respondent was assessed to income tax as  a
representative	assessee of ten non-resident companies.	 The
companies were grouped under three heads--six in  Group---A,
three  in  Group--B and one in Group  C. In  regard  to	 the
companies under Group--A, the assessee had no direct  agree-
ment  but had dealings by virtue of its agreement  with	 the
exporting  company;  as regards the  three  companies  under
Group--B, the assessee had no business connection with them;
and so far as the only company under Group--C was concerned,
the  assessee's	 stand was that it had	an  agreement  dated
December 16, 1948 with the export company, but no  liability
accrued under the law in respect of the transactions.
    The	 Income-tax  Officer referred  specifically  to	 the
agreement  of 1948 and refuted the stand of the company.  He
held that the agreement was a clear authority that the	non-
resident  had  employed the Indian Company for	selling	 its
goods in India on commission and that it brings into  exist-
ence  a	 business connection between the two  companies.  He
also held that the Group-A companies were connected with the
Indian Company through the export company.
    Appeals  were  filed  by the  assessee  challenging	 the
assessments before the Appellate Assistant Commissioner. The
assessee  tried	 to establish the actual course	 of  dealing
between	 the  Indian Company and the ten  non-residents	 and
contended  that	 no  liability under the  Act  accrued.	 The
Appellate Authority dismissed the contentions of the  asses-
see  by holding that the assessee had produced no  proof  of
its assertions and on the contrary had blocked the inquiry.
    Before  the Tribunal, an appeal was filed by the  asses-
see. Along with the grounds, an affidavit dated December 27,
1965 of the Secretary of the assessee was also filed and  it
was stated therein that there was no
884
obstruction to the proceedings before the Appellate  Assist-
ant  Commissioner with regard to the attempted probe by	 the
Appellate  Authority  and that several documents  were	made
available  before the Appellate Authority and were  actually
placed	before	him,  and in case  the	Appellate  Authority
wanted any information or further documents to be  produced,
the Secretary was prepared to do so.
    The	 Tribunal did not deal with the aforesaid  affidavit
on  the ground that it was not necessary for the purpose  of
determining  whether the Indian Company could  be  appointed
agent  under Section 163 of the Act. It upheld	the  assess-
ments  and referred to the High Court the questions  whether
the non-resident companies had business connection with	 the
Indian Company and whether the Indian Company was  correctly
treated as an agent of the said non-resident companies under
Section 163 of Income-tax Act, 1961.
    The	 High  ,Court held that the Indian assessee  had  no
business connections with the non-resident companies  within
the meaning of Section 9 of the Act.
Dismissing the appeals of the Revenue, this Court,
    HELD:  1. The High Court was right in holding  that	 the
Indian	assessee had no business connections with  the	non-
resident  companies within the meaning of Section 9  of	 the
1961 Act. Unless the matter comes under Section 163(1)(a) of
the Act, there will be no liability for assessment. [893F]
    2.	Whether	 a relationship would  amount  to  "business
connection" as provided in Section 163(1)(b) of the  Income-
tax  Act of 1961 for the purpose of giving rise to  the	 li-
ability	 under Section 9(1) of the Act would depend  upon  a
set of facts arising in a particular case. [889F-G]
    3.	The, order of the Appellate  Assistant	Commissioner
shows that the Secretary appeared before him at the  hearing
on September 3 and 4, 1965 and the appeals were dismissed by
order dated September 17, 1965. [890F]
    4.	Ordinarily, the High Court should have	declined  to
use  the  assertions  in the affidavit for  the	 purpose  of
recording  findings of fact and if, at all, in	its  opinion
the  affidavit	was to be utilised, the matter	should	have
gone  before  the Tribunal for a fresh disposal of  the	 ap-
peals. [892H]
885
    5. In the instant case, the High Court relying upon	 the
affidavit  of the Secretary of the assessee had	 found	that
during	the  hearing  of the appeals  before  the  Appellate
Assistant  Commissioner, the Secretary had produced  certain
records	 to show the manner in which the business  had	been
carried on and the nature of the transactions. The  Tribunal
obviously  fell into an error in brushing aside the  affida-
vit.  The facts stated therein had a direct bearing  on	 the
point  in  issue,  namely, whether there  was  any  business
connection between the assessee and the non-resident  compa-
nies. [889G-H; 891C-D]
    6. The assessments relate to a period about a quarter of
a  century back and by its conduct, the Revenue	 appears  to
have  waived its right to dispute the facts asserted in	 the
affidavit  on one hand by not challenging its  admissibility
and  on the other by not disputing the contents thereof.  It
would  not  be	appropriate at this stage to  put  back	 the
matter	to the stage of the second appeal before the  Tribu-
nal. [893D-El
    Commissioner  of Income Tax, Punjab v.R.D. Aggarwal	 and
Company and another, [1965] 56 ITR 20, referred to.

JUDGMENT:
    CIVIL   APPELLATE JURISDICTION: Civil Appeal Nos.  1449-
1456 of 1974.
    From  the Judgment and Order dated 15/21.9.1972  of	 the
Calcutta High Court in I.T.R Nos. 128 and 160 of 1967.
    S.C.  Manchanda,  V.Gauri Shankar, M.B. Rao and  Ms.  A.
Subhashini for the Appellants.
    Dr. Devi Pal, H.K. Dutt, Ms. S. Seal and D.N. Gupta	 for
the Respondent.
    RANGANATH MISRA, J. These are appeals by the Revenue  by
special	 leave and are directed against the decision of	 the
Calcutta High Court dated 15.9.1972 rendered upon references
made under section 256(1) of the Income-tax Act of 1961. The
Tribunal referred the following six questions for opinion of
the Court:-
      1.  Whether on the facts and in the  circumstances  of
the  case  and	on a proper construction  of  the  agreement
between	 the  Indian  Company and the  Export  Company,	 the
Tribunal was
886
right  in  holding that the six	 non-resident  companies  in
Group  A had a business connection with the  Indian  Company
and therefore that the Indian Company was correctly  treated
as an agent of the said non-resident companies under section
163 of the Income-tax Act, 1961?
      2. If the answer to question No. 1 is in the  affirma-
tive, then, whether on the facts and in the circumstances of
the  case,  the Tribunal was justified in holding  that	 any
profit	could be deemed to accrue or arise in India  to	 the
six  non-residents in the United Kingdom in respect  of	 the
goods sold by them to customers in India?
      3.  Whether, on the facts and in the circumstances  of
the case and on a proper construction of the agreement dated
22.3. 1955 between the Indian Company and Crane Packing Ltd.
(company in Group-B), the Tribunal was right in holding that
the  non-resident company had business connection  with	 the
Indian	Company and, therefore, the Indian Company was	cor-
rectly treated as an agent of the said non-resident  company
under section 163 of the Income-tax Act, 1961?
      4. If the answer to question No. 3 is in the  affirma-
tive then, whether on the facts and in the circumstances  of
aforesaid non-resident company in respect of the goods	sold
by it to customers in India?
      5.  Whether, on the facts and in the circumstances  of
the  case and on proper construction of the agreement  dated
1.6.1954  between  the Indian Company and  Budy	 Tubing	 Co.
(Australia) Pvt. Ltd. (non-resident company in Group-B), the
Tribunal was right in holding that the non-resident  company
had business connection with the Indian Company and,  there-
fore,  the Indian Company was correctly treated as an  agent
of  the	 said nonresident company under section 163  of	 the
Income-tax Act, 1961?
      6. If the answer to question No. 5 is in the  affirma-
profits	 could be deemed to accrue or arise in India to	 the
to the customers in India?
887
    The short facts relevant for appreciating the background
in  which  these questions arose are these--T.I.&  M.  Sales
Ltd.,  assesseerespondent, was assessed to income tax  as  a
Tribunal  grouped the ten nonresident companies under  three
heads--six in Group-A, three in Group-B and one in  Group-C.
In regard to the companies under Group-A, the assesee had no
direct agreement but had dealings by virtue of its agreement
with  the exporting company. So far as the  three  companies
under  Group-B are concerned, the assessee had	no  business
connection  with them and so far as the only  company  under
Group-C	 is concerned, the assessee's stand was that it	 had
an  agreement dated 16.12.1948 with the export company,	 but
no liability accrued under the law in respect of the  trans-
actions. The Income-tax Officer referred specifically to the
agreement  of 1948 and refuted the stand of the assessee  by
saying:-
	      "The agreement of 6.12.1948 referred to  above
	      which  continued during the relevant years  is
	      clear  authority	that  the  non-resident	 had
	      employed	the Indian Company for	selling	 its
	      goods  in India on commission.  The  agreement
	      certainly	 brings	 into existence	 a  business
	      connection between the two. The Indian Company
	      is  in receipt of commission  calculated	with
	      reference	 to  the aforesaid values  of  goods
	      sent  not only by the non-residents, but	also
	      by some manufacturers of the T.I. Group in the
	      United  Kingdom with which the Indian  Company
	      had no direct contract, but which supply goods
	      to  India as per orders placed by	 the  Indian
	      Company	     through	    the		non-
	      residents	 ............  ".
The Income-tax Officer also found that the Group-A companies
belonging  to the T.I. Group were connected with the  Indian
Company through the export company.
    Appeals  challenging  the assessment were taken  to	 the
Appellate  Assistant Commissioner. Before him, the  assessee
tried to establish the actual course of dealing between	 the
Indian Company and the ten non-residents and contended	that
no liability under the Act accrued. The Appellate  Authority
dismissed  the contentions of the assessee by  holding	that
"the assessee has produced no proof of its assertions and on
the contrary, has blocked the enquiry by me thereon".  Along
with the grounds of the appeal filed before the Tribunal, an
affidavit  dated  27.12.1965 of Carol  Sturart	Cameron	 was
filed.	Cameron	 stated in that affidavit that	he  was	 the
Secretary of the assessee and was in superin-
888
tendence  of the proceedings relating to the assessments  of
the  assessee  as representative-assessee of  the  ten	non-
residents. In that affidavit, he denied the fact that before
the  Appellate	Assistant Commissioner any  obstruction	 was
offered to an attempted probe by the said Appellate Authori-
ty.  On	 the other hand, the affidavit stated  that  several
documents were made available before the Appellate Authority
and  were  available and actually placed before him  and  in
case  the  Appellate  Authority wanted	any  information  or
further documents to be produced, Cameron was prepared to do
so. We shall again refer to the affidavit in its appropriate
place  later. Before the Tribunal, some argument was  raised
with reference to the affidavit but ultimately the  Tribunal
upheld the assessments but referred the questions  indicated
above  for the opinion of the High Court. The High Court  by
the  impugned judgment reported in 151 ITR 286	referred  to
the  provisions of sections, 4, 42 and 43 of the  Income-tax
Act  of 1922 corresponding to sections 5, 9 and 163  respec-
tively	of the Income-tax Act of 1961. In the light  of	 the
affidavit  of  Cameron,	 it took note of the  fact  that  no
attempt	 had been made by the Revenue to traverse the  facts
stated therein, referred to and relied upon the decision  of
this Court in the case of Commissioner of Income-tax, Punjab
v.  R.D.  Aggarwal & Co., 56 ITR 20 and came  to  hold	that
there was no element of business connection and,  therefore,
the assessee was not liable. Questions 1, 3 and 5 were	thus
answered in the negative and against the Revenue and, there-
fore,  Questions  2, 4 and 6 which were required to  be	 an-
swered	only if the answer to the other three questions	 was
in the affirmative did not arise.
	      In 56 ITR 20, this Court held:-
			"A relation to be a business connec-
	      tion must be real and intimate, and through or
	      from which income must accrue or arise whether
	      directly or indirectly to the nonresident. The
	      expression  business  connection	 undoubtedly
	      means something more than business. A business
	      connection  in section 42 involves a  relation
	      between  a business carried on by a  non-resi-
	      dent  which yields profits or gains  and	some
	      activity	in  the	 taxable  territories  which
	      contributes  directly  or	 indirectly  to	 the
	      earning  of those profits or gains. It  predi-
	      cates  an	 element of continuity	between	 the
	      business of the non-resident and the  activity
	      in the taxable territories, a stray or isolat-
	      ed transaction is normally not to be  regarded
	      as a business connection. Business  connection
	      may take several forms it may include carrying
	      on a part of
	      889
	      the  main business or activity  incidental  to
	      the main business of the non-resident  through
	      an  agent.or it may merely be a  relation	 be-
	      tween the business of the non-resident and the
	      activity	in  the taxable	 territories,  which
	      facilitates or assists the carrying on of that
	      business.	 In each case the  question  whether
	      there is a business connection from or through
	      which income, profits or gains arise or accrue
	      to  a nonresident must be determined upon	 the
	      facts and circumstances of the case."
		       "A relation to be a business  connec-
	      directly or indirectly to the nonresident. But
	      it  must	in all cases be remembered  that  by
	      section  42,  income,  profit  or	 gain  which
	      accrues  or arises to a  non-resident  outside
	      the  taxable  territories	 is  sought  to	  be
	      brought within the net of the Income-tax	law,
	      and  not income, profit or gain which  accrues
	      or  arises  or is deemed to  accrue  or  arise
	      within  the  taxable territories.	 Income	 re-
	      ceived  or deemed to be received, or  accruing
	      or arising or deemed to be accruing or arising
	      within the taxable teritories in the  previous
	      year  is taxable by section 4(1)(a) &  (c)  of
	      the  Act,	 whether  the person  earning  is  a
	      resident	or non-resident. If the agent  of  a
	      non-resident receives that income or is  enti-
	      tled  to receive that income, it may be  taxed
	      in  the  hands of the agent by  the  machinery
	      provision enacted in section 40(2). Income not
	      taxable  under section 4 of the Act of a	non-
	      resident	becomes taxable under section  42(1)
	      if  there	 subsists a connection	between	 the
	      activity	in the taxable territories  and	 the
	      business	of the non-resident, and if  through
	      or  from	that connection income	directly  or
	      indirectly arises."
    Whether a relationship would amount to "business connec-
tion" as provided in section 163(1)(b) of the Income-tax Act
of  1961 for the purpose of giving rise to  liability  under
section	 9(1)  of the Act would depend upon a set  of  facts
arising	 in a particular case. The High Court, relying	upon
the facts stated in the affidavit of Cameron, has found that
during	the  hearing  or the appeals  before  the  Appellate
Assistant  Commissioner, Court had produced certain  records
to show the manner in which the business had been carried on
and the nature of the transactions. The Appellate  Assistant
Commissioner in his order indicated:-
890
	      "The  assessee submits that the contracts	 for
	      the  supply  of goods ordered  by	 the  Indian
	      buyers  are accepted in the  foreign  country,
	      that the property in the goods shipped  passes
	      to  the Indian buyers at the port of  shipment
	      in  the foreign country, that the payment	 for
	      the goods is received by the non-residents  in
	      the  foreign  country that the sale  and	pur-
	      chases are as between principal and  principal
	      and,  therefore, cannot be said that the	non-
	      residents have either a business connection in
	      India or have any income which could be deemed
	      to accrue or arise in India as attributable to
	      any operation carried out in India. I may here
	      touch  briefly on that the assessee  has	pro-
	      duced no proof of these assertions and, on the
	      contrary, has blocked enquiry by me therein."
		       "The  assessee is aggrieved  that  in
	      the  orders under section 143, the  Income-tax
	      Officer assumed ipsi dixit that the sales were
	      made  in	India. It submits that while  it  is
	      true  that  the non-residents'  products	were
	      sold  to persons in India, that does not	con-
	      clude  the question and, on the facts of	this
	      case, the property in the goods sold passed to
	      the  Indian buyers outside India	and,  there-
	      fore,   the  Income-tax  Officer's   axiomatic
	      assumption that there were any sales in  India
	      is  incorrect  and if there were no  sales  in
	      India,  there  is	 no income  which  could  be
	      deemed to accrue or arise in India by invoking
	      the provisions of section 9 as no operation is
	      carried out in India."
The order of the Appellate Assistant Commissioner shows that
Cameron	 appeared before him at the hearing on 3.9.1965	 and
4.9.1965  and  the  appeals were dismissed  by	order  dated
17.9.1965.
 This  Court's  judgment in C.I.T.v.R.D. Aggarwal  &	 Co.
(supra) was pronounced on 6th of October, 1964. The order of
the Appellate Assistant Commissioner makes casual  reference
to  this judgment but the ratio thereof had not been put  to
use  in any manner and the same does not appear to have	 had
any  perceptible  effect on the decision  of  the  Appellate
Assistant Commissioner.
    Along  with	 the memoranda of appeal  filed	 before	 the
Tribunal, the assessee filed the affidavit of Cameron.	That
affidavit is dated 27.12.1965. The Revenue had notice of  it
and the Tribunal in its decision has stated "along with	 the
grounds of appeal before us, there is an
891
affidavit by Shri Cameron setting out the course of  dealing
and  alleging  that several of these  representatives  files
were  inspected by the Appellate Assistant  Commissioner  at
the  time of hearing of the appeals." The  Tribunal  however
did not dealt with the affidavit by saying:-
	      "For  the purpose of a decision as to  whether
	      the  Indian company could be  appointed  agent
	      under  section 163 by virtue of business	con-
	      nection with the non-resident companies, it is
	      not  necessary  to go into the  terms  of	 the
	      affidavit. These facts might have a bearing on
	      the  quantum of the income deemed to arise  to
	      the  non-resident companies from the  business
	      connection."
The Tribunal obviously fell into an error in brushing  aside
the affidavit for the reason it indicated. The facts  stated
in the affidavit had a direct bearing on the point in issue,
namely,	 whether there was any business	 connection  between
the assessee and the non-resident companies.
    In course of the argument of the matter before the	High
Court,	sumptuous reference was made by the counsel for	 the
Revenue	 to  the affidavit of Cameron. The judgment  of	 the
High Court says:-
	      "Mr Pal (for the department) submits that	 the
	      affidavit of Mr. Carol Stuart Cameron,  Secre-
	      tary   of	 the  Indian  Company  affirmed	  on
	      27.12.1965  which was filed before the  Appel-
	      late  Tribunal  contains facts which  must  be
	      read in the light of the agreement between the
	      parties. ?".
    This  would indicate that there was no objection to	 the
acceptance  of	the affidavit and use of its  content  while
dealing	 with the matter and the High Court relied upon	 the
affidavit and stated:-
	      "In  our case, the facts as they	appear	from
	      the  documents on record and the affidavit  of
	      Mr. Cameron referred to above, which  inciden-
	      tally has not been traversed by the department
	      are  (a) procuring of raw materials and  manu-
	      facture  of finished goods took place  outside
	      the  taxable  territories, (b)  contracts	 for
	      sale  of goods were entered into	outside	 the
	      taxable territories, (c) price was received by
	      the non-residents outside the taxable territo-
	      ries  and (d) delivery was also  made  outside
	      the taxable territories. Moreover, Cameron  in
	      his  affidavit categorically states  that	 the
	      orders which were sent from India were accept-
	      ed by the
	      892
	      non residents in London and intimation of such
	      acceptance  was  communicated  either  to	 the
	      Indian company or to the Indian customers	 and
	      the orders became binding contracts only after
	      being accepted in this manner. In other words,
	      the Indian company had no authority to  accept
	      any  offers  on behalf of any  of	 these	non-
	      residents whether they belonged to Group-A  or
	      Group-B.	The department, as we  have  stated,
	      has not adduced any evidence to contradict the
	      facts stated by Cameron either from the course
	      of dealings between the parties or otherwise."
			"The position, therefore, is that in
	      a	 case  like this there can  be	no  business
	      connection unless the Indian assessee has	 the
	      authority	 to accept offers or to	 enter	into
	      contracts on behalf of the non-residents.	 The
	      Tribunal	has  found that in the case  of	 one
	      company only there was an express	 prohibition
	      against acceptance of offers. But in the other
	      contracts	 there was no such express  prohibi-
	      tion.  The Tribunal has granted relief in	 the
	      case  of express prohibition but has  taken  a
	      different view with regard to those  contracts
	      in which there was no such prohibition. In our
	      opinion, having regard to the facts stated  by
	      Cameron and the course of dealings between the
	      parties,	absence of express  prohibition,  in
	      the  instant case, is immaterial. It  is	true
	      that the Indian company was the sole agent  of
	      the  Group-B companies. But it  appears,	from
	      the evidence on record that in spite of  being
	      the  sole	 agent, the Indian  company  had  no
	      authority given to it by the Group-B companies
	      to  accept offers on their behalf. So  far  as
	      Group-A companies are concerned, there was  no
	      privity of contract at all either of agency or
	      of  any  other variety. In these	premises  we
	      cannot  but hold that the Indian assessee	 had
	      no business connections with the	non-resident
	      companies	 belonging  either  to	Group-A	  or
	      Group-B  within the meaning of section  42  of
	      the 1922 Act corresponding to section 9 of the
	      1961 Act."
Learned	 counsel for the appellant was very  critical  about
the  manner in which the High Court utilised  the  affidavit
and came to its conclusions regarding the facts in  dispute.
The  criticism	is not without force. Ordinarily,  the	High
Court  should  have declined to use the	 assertions  in	 the
affidavit for the purpose of recording findings of fact	 and
if, at all, in its opinion the affidavit was to be utilised,
the matter should
893
have  gone before the Tribunal for a fresh disposal  of	 the
appeals.  The  facts  of this case  are,  however,  somewhat
peculiar.  Rule	 10 of the Income-Tax  (Appellate  Tribunal)
Rules, 1963 provides:-
	      "Where a fact which cannot be borne out by  or
	      is contrary to the record is alleged, it shall
	      be stated clearly and concisely and  supported
	      by a duly sworn affidavit."
 It is the stand of the respondent that Cameron's affida-
vit  came  within the ambit of Rule 10 and  had,  therefore,
been  filed along with the memoranda of appeals	 before	 the
Tribunal. We are satisfied that the Revenue had full  notice
of  the affidavit and as pointed out by the High  Court,  it
did not dispute the facts stated in the affidavit by  filing
objection  or  counter thereto. The affidavit had  not	been
rejected by the Tribunal but had only been brushed aside  by
saying	that  it was not relevant. Before  the	High  Court,
counsel	 for the Revenue also used the affidavit. We do	 not
think  it would be appropriate at this stage to	 accept	 the
submission  made at the Bar on behalf of the  appellant	 and
put back the matter to the stage of the second appeal before
the  Tribunal.	The assessments relate to a period  about  a
quarter	 of a century back and by its conduct,	the  Revenue
appears	 to have waived its fight to dispute the  facts	 as-
serted	in the affidavit on one hand by not challenging	 its
admissibility  and on the other, by not disputing  the	con-
tents  thereof. We have been told during the hearing of	 the
appeals	 that Cameron is now dead. Once the facts stated  in
the  affidavit	are accepted, the ratio of the	decision  of
this Court in C. LT. v.R.D. Aggarwal & Co. (supra) would  be
fully  applicable and the High Court has utilised the  ratio
in that decision to find out whether any business connection
between the assessee and the non-resident companies had been
established.  There  is no dispute that	 unless	 the  matter
comes  under section 163(1)(a) of the Act, there will be  no
liability for assessment. In that view of the matter,  these
appeals have to fail.
The  appeals are therefore dismissed but without  any  order
for
costs.
N.P.V.					       Appeals	dis-
missed.
894

Shiela Kaushish vs Commissioner Of Income-Tax, Delhi on 18 August, 1981
Equivalent 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
Bench: P.N. Bhagwati, Baharul  Islam
SHIELA KAUSHISH

	Vs.

COMMISSIONER OF INCOME-TAX, DELHI

DATE OF JUDGMENT18/08/1981

BENCH:
BENCH:
ISLAM, BAHARUL (J)

CITATION:
 1981 AIR 1729		  1982 SCR  (1) 309
 1981 SCC  (4) 121	  1981 SCALE  (3)1225
 R	    1982 SC  16	 (2)

ACT:
     Income  Tax  Act,	1961,  5.  23(1)-Income	 from  house
property-Chargeability	to   income  tax-"Annual  value"  of
building-Determination of-Whether standard rent determinable
under provisions  of Rent  Act or  actual rent	received  by
landlord from tenant.
     Words and	Phrases-"Annual Value"-Meaning of-Income Tax
Act, 1961, S. 23(1).

HEADNOTE:
     The appellant-assessee  constructed a warehouse and let
out different  portions under different tenancies commencing
on different  dates. Later  on a  new lease was entered into
between the  assessee and  her tenant for letting out of the
entire warehouse  and the assessee started receiving rent at
the rate  of Rs. 34,797/- per month in respect of the entire
warehouse from 1st April, 1968.
     In the  course of	assessment of  the assessee  for the
assessment years  1969-70 and  1970-71 the question arose as
to how	the  "annual  value"  of  the  warehouse  should  be
determined for	the purpose  of chargeability  to income tax
under the  head "income	 from house  property". The assessee
claimed before	the Income.  Tax officer  that on  a  proper
construction of	 sub-section (I)  of section  23, it was not
the actual  rent received by her from the warehouse that was
material for  determining the  annual value of the warehouse
but the	 hypothetical amount  for which	 the warehouse might
reasonably be  expected to  be let  from year  to year,	 and
since the  Delhi Rent Control Act 1958 was applicable in the
area in which the warehouse was situate, the warehouse could
not reasonably	be expected to be let from year to year at a
rent exceeding	the standard  rent  determinable  under	 the
provisions of that Act. The Income Tax officer rejected this
claim and took the view that the actual rent received by the
assessee provided the most accurate and satisfactory measure
of the	amount for  which the  warehouse might reasonably be
expected to  let from  year to	year and the annual value of
the warehouse  must therefore be taken to be the actual rent
received by  the assessee  and he  accordingly assessed	 the
assessee to tax on the basis of the actual rent.
     The assessee's  appeals for  each of the two assessment
years  to   the	 Appellate   Assistant	 Commissioner	were
unsuccessful. The  Income-Tax Tribunal took the same view on
further appeals	 by the	 assessee and  held relying  on	 the
decision of this Court in M. M. Chawla v. J. S. Sethi [1970]
2 SCR, 390 that in the absence of fixation of standard rent,
the agreed rent which is legally recoverable and not tainted
by fraud,  relationship or  any other  consideration must be
taken to  be the  standard rent	 and hence  the actual	rent
received by  the assessee  was rightly	taken as  the annual
value of the warehouse.
310
     The assessee's  applications to the Tribunal as well as
to the	High Court  for the  making  of	 a  reference  under
section 256 of the Income-Tax Act, 1961 were also dismissed.
     Allowing the appeals to this Court,
^
     HELD: 1.  The annual value of the building according to
the definition given in sub-section (l) of section 23 of the
Income-Tax Act, 1961 is the standard rent determinable under
the provisions	of the	Rent Act  and not  the	actual	rent
received by the landlord from the tenant. [316 H-317 A]
     2. In  Dewan  Daulat  Rai	Kapoor	etc.  v.  New  Delhi
Municipal Committee  [1980] 2  S.C.R. 607 a decision of this
Court given  on the  interpretation of	the ,  definition of
'annual value'	in the	Delhi Municipal Corporation Act 1957
and the Punjab Municipal Act 1911 for the purpose of levy of
house tax,  it was  held that even if the standard rent of a
building has  not been fixed by the Controller under section
9 of  the Rent Act, the landlord cannot reasonably expect to
receive from  a hypothetical  tenant anything  more than the
standard rent  determinable under the provisions of the Rent
Act and	 this would  be equally	 so whether the building has
been let out to a tenant who has lost his right to apply for
fixation of  standard rent  by reason  of expiration  of the
period of  limitation prescribed  by section  12 of the Rent
Act or	the building is self-occupied by the owner, and that
the standard  rent determinable	 under the provisions of the
Rent Act  and not  the actual  rent received by the landlord
would constitute  the correct measure of the annual value of
the building. [314 H, 316 A-C]
     3. This  decision though given on the interpretation of
the definition	of 'annual  value' in  the  Delhi  Municipal
Corporation Act	 1957 and  the Punjab Municipal Act 1911 for
the  purpose   of  levy	 of  house  tax,  would	 be  equally
applicable in  interpreting the definition of 'annual value'
in sub-section (I) of section 23 of the Income-Tax Act, 1961
because these  definitions are	in identical terms and it is
impossible to  distinguish the	definition of 'annual value'
in sub section (1) of section 23 of the Income Tax Act, 1961
from  the   definition	of   that  term	  in  the  Municipal
Corporation Act 1957, and the Punjab Municipal Act, 1911.
     In the  instant case  the annual value of the warehouse
for the	 purpose of  chargeability  to	income-tax  for	 the
assessment years  1969-70  and	1970-71	 would	have  to  be
determined on  the basis  of the standard rents of different
portions of  the warehouse  determinable under clause (b) of
sub-section (2)	 and paragraph	(b)  of	 sub-clause  (2)  of
clause (B)  of sub-section (I) of section 6 of the Rent Act.
[319 C]

JUDGMENT:
     CIVIL APPELLATE  JURISDICTION: Civil  Appeal Nos.	2110
and 21 1 1 of 1978.
     Appeals by	 special leave	from the  judgment and order
dated the  1st February,  1978 of  the Delhi  High Court  in
I.T.C. Nos. 14 and 15 of 1974.
311
			    WITH
     Civil Appeal Nos. 1184-85 of 1981.
     Appeals by	 special leave from the order dated the 28th
September, 1973	 of the	 Income Tax Appellate Tribunal Delhi
Bench in I.T.A. No 386 and 387 of 1972-73.
     Soli J.  Sorabjee, T.A.  Ramachandran,  Parkash  Sarup,
Ravinder Narain	 and Talat  Ansari for	the Appellant in all
the Appeals.
     P.A. Francis, S.P. Nayar and Miss A. Subhashini for the
Respondent in all the Appeals.
     The Judgment of the Court was delivered by C
     BHAGWATI, J.  These appeals  by special  leave raise  a
common question	 of law	 relating to  the  determination  of
annual value  of a building for the purpose of chargeability
to tax	under the Income tax Act, 1961 where the building is
governed by  the provisions  of the Rent Control legislation
but the	 standard rent	has not yet been ID fixed. The facts
giving rise  to these  appeals are  few and  may be  briefly
stated as follows:
     The assessee constructed a warehouse in Delhi some time
in 1961	 at a  total cost  of Rs.  4,13,000/-. The warehouse
consisted of  two portions  on the  ground floor, one on the
north and  the other on the south and also a mezzanine floor
and a first floor. On 19th March, 1962, the assessee let out
the whole  of the first floor to the American Embassy at the
rent of	 Rs. 5810/- per month and subsequently on 1st April,
1964 she  let out  the northern	 portion of the ground floor
together with  the mezzanine floor to the same tenant at the
rent of	 Rs. 6907/-  per month and on 7th December, 1964 the
northern portion of the ground floor was let out to the same
tenant at  the rent of Rs. 6640/- per month. Thus the entire
warehouse was  let out	by  the	 assessee  to  the  American
Embassy with  different portions  let  out  under  different
tenancies commencing on different dates. On 17th July, 1967,
however, a  new lease  was entered into between the assessee
and the	 American Embassy  for letting	out  of	 the  entire
warehouse at  the rent	of Rs.	34,797/- per  month and this
lease came  into effect	 from 1st  April, 1968. The assessee
thus started  receiving rent at the rate of Rs. 34,797/- per
month in  respect of  the entire  warehouse from  1st April,
1968.
     The question  arose in  the course of assessment of the
assessee to  income tax for the assessment years 1969-70 and
1970-71 as  to how  the annual value of the warehouse should
be determined for the
312
purpose of  chargeability  to  income  tax  under  the	head
"Income from house property". Now income from house property
chargeable to  tax is  computable  under  section  22  which
provides that the annual value of property consisting of any
buildings  or	lands  appurtenant  thereto,  of  which	 the
assessee is  the owner,	 shall be  chargeable to  income tax
under  the   head  "Income   from  house  property".  Where,
therefore, the assessee owns a building, the annual value of
such building  is chargeable  to income	 tax under  the head
"income from  house property"  under  section  22.  But	 the
question immediately  arises: how  is the annual value to be
determined ? The answer is provided by section 23 which lays
down the  mode of determination of annual value. Sub-section
(l) of	that section  as  it  stood  at	 the  material	time
provided that  "for the	 purposes of  section 22, the annual
value of  any property	shall be  deemed to  be the  sum for
which the  property might reasonably be expected to let from
year to	 year. The  assessee therefore	claimed	 that  on  a
proper construction of sub-section (I) of section 23, it was
not the	 actual	 rent  received	 by  the  assessee  for	 the
warehouse that was material for determining the annual value
of the	warehouse but  the hypothetical amount for which the
warehouse might	 reasonably be	expected to let from year to
year and  since the Delhi Rent Control Act 1958 (hereinafter
referred to  as the  Rent Act) was applicable in the area in
which the  warehouse was  situate, the	warehouse could	 not
reasonably be  expected to  let from  year to year at a rent
exceeding  the	 standard  rent	  determinable	 under	 the
provisions of that Act. The Income Tax officer however, took
the view  that the  actual rent	 received  by  the  assessee
provided the  most accurate  and satisfactory measure of the
amount for  which the warehouse might reasonably be expected
to let	from year  to year  and	 the  annual  value  of	 the
warehouse must	therefore be  taken to	be the	actual	rent
assessee to  tax on the basis of the actual rent received by
her. The  assessee preferred  an  appeal  to  the  Appellate
Assistant Commissioner	for each of the two assessment years
challenging the correctness of the view taken by the Income-
tax officer  and contending  that the  annual value  of	 the
warehouse must be taken to be the standard rent determinable
under the  provisions of  the Rent Act, but the appeals were
unsuccessful and  the determination of the annual value made
by the	Income-tax officer  was affirmed.  The Tribunal also
took the same view on further appeals by the assessee and by
a consolidated	order dated  28th September, 1973, confirmed
the assessments	 made on  the assessee	on the	basis of the
actual rent  received by  her. The  Tribunal held relying on
the decision  of this  Court in	 M.M. Chawala v. J S. Sethi,
[1970] 2 SCR 390 that, in the
313
absence of  fixation of standard rent, the agreed rent which
is  legally   A	 recoverable   and  not	 tainted  by  fraud,
relationship or	 any other consideration must be taken to be
the standard  rent and hence the actual rent received by the
assessee was  rightly taken  as	 the  annual  value  of	 the
warehouse. In  the mean	 time, an  application was  made for
fixation of  the standard  rent of  the warehouse by the new
tenant who  came to  occupy the warehouse after the American
Embassy	 vacated  it  and  on  this  application,  the	Rent
Controller by  an order	 dated 13th  March, 1973  fixed	 the
standard  rent	 at  Rs.   34,848.00  per  annum  under	 the
provisions of  the Rent	 Act. The  assessee aggrieved by the
order dated  28th  September  1973  made  by  the  Tribunal,
preferred two applications one in respect of each assessment
year, seeking  reference of  five questions which, according
to the assessee, arose out of the order of the Tribunal, but
the Tribunal  by a  common order  dated 26th February, 1974,
rejected the  applications on the ground that there was only
one question  of law  which arose  out of  the order  of the
Tribunal but  that was	concluded by  the decision  of	this
Court in  M.M. Chawla's case (supra) and so far as the other
questions were	concerned, they	 were all  questions of fact
and hence not referable under section 256 (1) of the Income-
tax  Act,   1961.  The	 assessee  thereupon  preferred	 two
applications before  the High  Court of	 Delhi under section
256 (2)	 of the	 Income-tax  Act,  1961	 for  directing	 the
Tribunal to  make a  reference, but  these applications also
met with  the same  fate and on the same grounds which found
favour with  the Tribunal,  they were  rejected by  the High
Court by  judgment dated 1st February, 1978. This led to the
filing of  two petitions for special leave to appeal, one in
respect of  each assessment  year, and	these petitions were
allowed and special leave granted by this Court, giving rise
to civil appeals Nos. 2110 and 2111 of 1978. Since these two
appeals were directed against the judgment of the High Court
refusing two  call for	a reference  from the  Tribunal, the
only question  which could have been considered by the Court
in these  appeals was  as to  whether any  questions of	 law
arose out  of the  order of  the Tribunal  requiring  to  be
referred to  the  High	Court  and  therefore  even  if	 the
assessee succeeded  in the appeals there would not be an end
to the	litigation but	the questions  of law  formulated by
this Court  would have to be referred by the Tribunal to the
High Court  and then  the High	Court would have to hear the
reference and  answer the  questions referred  to  it.	This
would have  delayed considerably  the final determination of
the questions  of law  arising	out  of	 the  order  of	 the
Tribunal and  it was,  therefore. agreed between the Parties
that the following two ques-
314
tions of  law should  be  decided  by  the  Court  in  these
appeals, since they admittedly arose out of the order of the
Tribunal:
     (1)  "Whether, on the facts and in the circumstances of
	  the case, the actual rent received by the assessee
	  or the  standard rent under the Delhi Rent Control
	  Act, should  be taken	 to be the "annual value" of
	  the property	within the  meaning of section 23 of
	  the Income Tax Act, 1961,
     (2)  Whether, there was any material on record on which
	  the Tribunal	could hold  that the  receipt of Rs.
	  4,17,674/- from  the	American  Embassy  would  he
	  reasonable rent  for which  the property  might be
	  let in  spite of  the fact  that properties in the
	  immediate neighbourhood  let out  to the  Bank  of
	  Baroda and  Indian Oxygen Company Ltd. were let at
	  rents considerably lower.
This Court  accordingly made  an order	directing that these
two questions  of law  should be  disposed of  by the  Court
directly, without calling for a reference from the Tribunal.
However, since	some doubt was felt whether this Court could
directly dispose  of the two questions of law arising out of
the order-of  the Tribunal  without calling for a reference,
the assessee  by  way  of  abundant  caution  preferred	 two
petitions for  special leave  to appeal directed against the
order of  the Tribunal	dated 28th  September, 1973  and  on
these petitions, special leave was granted by this-Court and
that is how Civil Appeal Nos. 1184-1185 of 1981 have come up
for hearing before us along  with C.A. Nos. 2110 and 2111 of
1978.
     Though two questions have been formulated by this Court
as arising  out of  the order  of the  Tribunal	 dated	28th
September, 1973,  it is	 the first  which really  formed the
subject matter of controversy between the parties and since,
in our	view, that  question has to be answered in favour of
the  assessee,	 it  is	 not  necessary	 to  embark  upon  a
consideration of  the second  question. So  far as the first
question is  concerned, it  stands concluded  by the  recent
decision of  this Court in Dewan Daulat Rai Kapoor etc. etc.
v.  New	 Delhi	Municipal  Committee.(1)  There	 were  three
appeals decided	 by a  common judgment	in that case and the
question which	arose for determination in these appeals was
as to how the annual value of a
315
building should	 be determined	for levy  of house tax where
the building  is governed by the provisions of the Rent Act,
but the	 standard rent	has not yet been fixed. One of these
appeals related	 to a  case where  the building	 was situate
within the jurisdiction of the New Delhi Municipal Committee
and was	 liable to be assessed to house tax under the Punjab
Municipal Act,	1911 while  the other  two related  to cases
where the  building was	 situate within	 the  limit  of	 the
Corporation of	Delhi and  was assessable to house tax under
the Delhi  Municipal Corporation  Act, 1957.  The house	 tax
under both statutes was levied with reference to the 'annual
value' of  the building.  The 'annual  value' was defined in
both statutes  in the  same terms,  barring a second proviso
which  occurred	 in  section  116  of  the  Delhi  Municipal
Corporation Act,  1957, but  was absent in section 3 (1) (b)
of the	Punjab Municipal Act, 1911. This proviso was however
not material as it dealt with a case where the standard rent
was fixed  under the  provisions of  the Rent  Act, while in
none of	 the cases  before the	Court was  the standard rent
fixed in  respect of  the building involved in such case. L.
According to  the definition  given in	both  statutes,	 the
'annual value'	of a building meant the gross annual rent at
which the  building might reasonably be expected to let from
year to	 year. The  controversy between the parties centered
round the question as to what is the true meaning and effect
of the expression "the gross annual rent at which such house
or building.. may reasonably be expected to let from year to
year" occurring	 in the	 definition in	both  statutes.	 The
argument of  the Municipal  Authorities was  that since	 the
standard  rent	 of  the  building  was	 not  fixed  by	 the
Controller under  section 9  of the  Rent Act  in any of the
cases before  the Court	 and in each of the cases the period
of limitation  prescribed by  section 12 of the Rent Act for
making an  application for fixation of the standard rent had
expired, the  landlord in each case was entitled to continue
to receive  the contractual rent from the tenant without any
legal impediment  and hence the annual value of the building
was  not  limited  to  the  standard  rent  determinable  in
accordance with	 the principles	 laid down  in the Rent Act,
but  was   liable  to	be  assessed  by  reference  to	 the
contractual  rent  recoverable	by  the	 landlord  from	 the
tenant. The  Municipal Authorities  urged that if it was not
penal for  the landlord to receive the contractual rent from
the tenant,  even if  it be  higher than  the standard	rent
determinable under  the provisions of the Rent Act, it would
not be	incorrect to  say that the landlord could reasonably
expect to  let the  building at the contractual rent and the
contractual rent  therefore provided  a correct	 measure for
determination of  the annual  value of	the  building.	This
argument
316
was hower rejected by the court and it was held that even if
the standard  rent of  a building  has not been fixed by the
Controller under  section 9  of the  Rent Act,	the landlord
cannot reasonably  expect to  receive  from  a	hypothetical
tenant anything	 more than  the standard  rent	determinable
under the  provisions of  the Rent  Act and this would be so
equally whether	 the building  has been	 let out to a tenant
who has lost his right to apply for fixation of the standard
rent by	 reason of  expiration of  the period  of limitation
prescribed by  section 12 of the Rent Act or the building is
self-occupied by  the  owner.  Therefore,  in  either  case,
according to  the definition of 'annual value' given in both
statutes,  the	 standard  rent	  determinable	 under	 the
provisions of  the Rent Act and not the actual rent received
by the landlord from the tenant would constitute the correct
measure of  the annual	value of  the  building.  The  court
pointed out  that in each case the assessing authority would
have to	 arrive at  its own  figure of	the standard rent by
applying the  principles laid  down  in	 the  Rent  Act	 for
determination of  the standard rent and determine the annual
value of  the building	on the	basis of  such figure of the
standard rent.	The  court,  on	 this  view,  negatived	 the
attempt of the Municipal Authorities in each of the cases to
determine the  annual value of the the building on the basis
of the	actual rent  received by  the landlord	and observed
that the  annual value	of the	building must  be held to be
limited by  the measure of the standard rent determinable on
the principles	laid down  in the  Rent Act and it could not
exceed such  measure of	 the standard  rent. Now  this was a
decision given	on the	interpretation of  the definition of
'annual value'	in the Delhi Municipal Corporation Act, 1957
and the	 Punjab Municipal  Act, .911 for the purpose of levy
of  house  tax,	 but  it  would	 be  equally  applicable  in
interpreting, the  definition of  'annual value' in sub-sec.
(1) of section 23 of the Income-tax Act, 1961, because these
definitions are	 in identical  terms and it is impossible to
distinguish the definition of 'annual value' in sub-sec. (I)
of  section   23  of  the  Income-tax  Act,  1961  from	 the
definition of  that term  in the  Municipal Corporation Act,
1957. and  the Punjab Municipal Act, 1911. We must therefore
hold, on  an indentical	 line of reasoning, that even if the
standard rent  of a  building has  not	been  fixed  by	 the
Controller under section 9 of the Rent Act and the period of
limitation prescribed  by section  12 of  the Rent  Act	 for
making an  application for  fixation of	 the  standard	rent
having expired,	 it is	no longer competent to the tenant to
have the  standard rent	 of the	 building fixed,  the annual
value of  the building	according to the definition given in
sub-section (l)	 of section  23 of  the Income-tax Act, 1961
must be held to be the standard rent determinable under
317
received   by	the   landlord	 from	the   tenant.	This
interpretation which  we are placing on the language of sub-
section (1)  of sec.  23 of the Income-tax Act, 1961, may be
regarded as  having received  legislative approval,  for  we
find that by section 6 of the Taxation Laws (Amendment) Act,
1975, sub-section  (I) of section 23 has been amended and it
has now been made clear by the introduction of clause (b) in
that sub-section  that where  the property  is let  and	 the
annual rent  received or  receivable by the owner in respect
thereof is in excess of the sum for which the property might
reasonably be  expected to let from year to year, the amount
so received  or receivable  shall be  deemed to	 the  annual
value of  the property.	 The newly  added clause (b) clearly
postulates  that   the	sum   for  which  a  building  might
reasonably be  expected to let from year to year may be less
than  the  actual  amount  received  of	 receivable  by	 the
landlord from  the tenant. We are therefore of the view that
in the	present case  the standard  rent  of  the  warehouse
determinable under  the provisions  of the  Rent Act must be
taken to  be the  annual value	within the  meaning of	sub-
section (1)  of section 23 of the Income-tax Act, 1961 D and
the actual  rent received  by the assessee from the American
Embassy cannot	of  itself  be	taken  as  representing	 the
correct measure of the annual value.
     We must  therefore address ourselves to the question as
to  what  would	 be  the  standard  rent  of  the  warehouse
determinable under  the provisions  of the  Rent Act for the
assessment year	 1969-70 and 1970-71 the relevant accounting
years being 1st April 1968 to 31st March 1969 and I st April
1969 to	 31 st March 1970. Now 'standard rent' is defined in
section 2  (k) to  mean the  standard rent  referred  to  in
section 6  or where  the standard  rent has  been  increased
under section  7, such	increased rent.	 Section 6 lays down
different  formulae   for  determination  of  standard	rent
according to different situations. Clause (A) of sub-section
(1) enacts  provisions for determination of standard rent in
case of residential premises. but we need not refer to those
provisions, since  we are  concerned in the present case not
with  residential   premises  but  with	 a  warehouse  which
constitutes  non-   residential	 premises.   The  provisions
applicable for determination of standard rent in the case of
non-residential premises  are set  out in clause (B) of sub-
section (I)  and there also, we are concerned only with sub-
clause (2)  because the warehouse was admittedly let out for
the first time after 2nd June, 1944. Since the standard rent
of the	warehouse was  not at any time fixed under the Delhi
and Ajmer  Merwara Rent	 Control Act, 1947, or the Delhi and
Ajmer Rent
318
Control Act,  1952, the	 standard  rent	 was  liable  to  be
determined under  paragraph  (b)  of  sub-clause  (2)  which
provides that "the rent calculated on the basis of seven and
one-half per  cent per	annum of the aggregate amount of the
reasonable cost	 of construction and the market price of the
land  comprised	  in  the   premises  on  the  date  of	 the
commencement of	 the construction"  shall be taken to be the
standard rent  of the  premises. There	is a proviso to this
paragraph which	 says that"  where the	rent  so  calculated
exceeds twelve	hundred rupees	per annum, this clause shall
have effect  as if  for the  words "seven  and one-half	 per
cent" the  words "eight	 and five-eighth  per cent" had been
substituted." But  all these provisions for determination of
standard  rent	are  subject  to  the  overriding  provision
enacted in  sub-section (2)  which provides  in clause	(b),
which is the clause applicable in the present case since the
warehouse was  constructed on or after 19th June, 1955, that
in case	 of such  premises.... "the  annual rent  calculated
with reference	to the rent agreed upon between the landlord
and the	 tenant when  such premises were first let out shall
be deemed to be the standard rent for a period of five years
from the  date of such letting out.." Now the first floor of
the warehouse  was first  let out  at the rent of Rs. 5810/-
per month  from 19th  March 1962  and therefore under clause
(b) of	sub-section (2)	 the rent  of Rs.  5810/- per  month
would be  the standard	rent  of  the  first  floor  of	 the
warehouse for  the period of five years from 19th March 1962
up to 18th March 1967 and thereafter the standard rent would
have to	 be determined under paragraph (b) sub-clause (2) of
clause (B)  of sub-section  (I) and this latter figure would
represent the  standard rent  of the  warehouse determinable
under the  provisions of  the Rent  Act for  the  accounting
years 1st  April 1968  to 31st March 1969 and 1st April 1969
to 31st	 March 1970.  The next	portion of the warehouse let
out to	the American Embassy was the northern portion of the
ground floor  together with  the  mezzanine  floor  for	 the
period of  five years  from 1st	 April 1964 up to 31st March
1969 under  clause (b)	of sub section (2) and thereafter it
would have  to be  deter mined	under paragraph	 (b) of sub-
clause (2)  of clause  (B) of  sub section (1). Thus for the
accounting year	 1st April  1968  to  31st  March  1969	 the
standard rent  of the  northern portion	 of the ground floor
and the mezzanine floor determinable under the provisions of
the Rent  Act would  be Rs.  6907/- per	 month while for the
accounting year	 1st April  1969 to  31st  March  1970,	 the
standard rent would be that determinable under paragraph (b)
of sub-clause  (2) of  clause (B)  of sub-section  (1). That
leaves the  southern portion  of the  ground floor which was
first let  out to  the American	 Embassy at  the rent of Rs.
6640/- per
319
month from 7th December 1964, and according to clause (b) of
sub- A	section (2), the standard rent of this portion would
be Rs.	66401- per  month for  the period of five years from
7th December,  1964 up	to 6th December, 1969 and thereafter
it would be determinable under paragraph (b) of sub-clause 2
of clause  (B) of  sub-section (1).  Thus for the accounting
year 1 st April 1968 to 31 st March 1969 and I st April 1969
to 6th	December 1969  the standard  rent  of  the  southern
portion	 of   the  ground   floor  determinable	  under	 the
provisions of  the Rent	 Act would  be Rs. 66401- per month,
while for  the remaining portion of the accounting year from
7th December  1969 to  31st March  1970, the  standard	rent
would be  determinable under paragraph (b) of sub-clause (2)
of clause  (B) of  sub-section (1).  The annual value of the
warehouse for the purpose of chargeability to income tax for
the assessment	years 1969-70  and 1970-71  would have to be
determined on  the basis  of the  standard rent of different
clause (B)  of sub-section  (1) of section 6 of the Rent Act
as discussed above. D
     We accordingly  answer question  No. 1 in favour of the
assessee by  holding that  the standard	 rent  of  different
portions of  the warehouse determinable under the provisions
of the	Rent Act  as indicated above and not the actual rent
received by the assessee from the American Embassy should be
taken be  the annual  value  of	 the  warehouse	 within	 the
meaning of  sub-section (I)  of section 23 of the Income-tax
Act, 1961.  On this  view taken	 by us, the the assessee did
not press  question No.	 2 and	hence it is not necessary to
answer it.  We allow  the appeals  of the  assessee to	this
limited extent	and direct  that the  Revenue will  pay	 the
costs of the appeals to the assessee.
N. V. K.				     Appeals allowed
320

Thanthi Trust vs Income-Tax Officer on 22 November, 1988
Equivalent citations: [1989]177ITR307(MAD)
Author: S. Mohan
Bench: S. Mohan
JUDGMENT
 
 Mohan, J. 
 
 1. All these matters raise one and the same question of law. Therefore, we propose to deal with them under a common judgment.  

 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.  

 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.  

 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.  

 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).  

 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.  

 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 .

 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 .

 9. We will now set out the tabular statement as to the subject-matter of the writ petitions:  

___________________________________________________________________
Assessment     Completion of      Reopening    Proceedings
year              original          notice        No.
assessment
1969-70        19-4-1972          4-3-1978    W.A. 539 of 1981
against
W.P. 10840 of 1981
1970-71        28-3-1973          5-3-1979    W.P. 1222 of 1979
1971-72        26-2-1975         13-3-1980    W.P. 1742 of 1980
1972-73        27-3-1975         24-3-1981    W.A. 1828 of 1987
against
W.P. 2297 of 1982
1973-74        31-12-1975         4-3-1978    W.A. 540 of 1981
against
W.P. 10841 of 1981
___________________________________________________________________  
 
10. 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. 

11. 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. 

12. 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. 

13. 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.

14. 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.

15. 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.

16. 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.

17. 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. 

18. 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. 

19. 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. 

20. 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. 

21. 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. .

22. 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.

23. 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.

24. 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.

25. Having regard to the above submissions, the following questions emerge for our consideration: 

 (1) What is the law in relation to invocation of power. Under section 147(a) of the Act ? 

(2) Whether the reason given in the notices could be held to be tenable ? 

(3) Whether the writ petitions are maintainable ? 

(4) Whether there is delay ?  

Section 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. 

26. 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. 

27. It has been held in ITO v. Madnani Engineering Works Ltd. [1978] 118 ITR 1 (SC) (headnote) thus:

  "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: 

 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. 

(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. 

CIT v. Burlop Dealers Ltd. , applied.

(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. 

(iv) That, therefore, the notice of reassessment was void."   

28. 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: 
 "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."

29. 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):
  "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)." 

30. This case dealt with the corresponding provision under the old Act. At page 612 of the above decision, it was held:
  "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." 

31. In ITO v. Lakhmani Mewal Das , it was held at page 448 thus:

  "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. 

The 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."  

32. The headnote in Indian Oil Corporation v. ITO [1986] 159 ITR 956 (SC) is sufficient for our purpose:
  "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." 

33. 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:
  "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". 

34. On this reasoning it was further held at page 13 thus: 
  "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." 

35. In the decision in Gemini Leather Stores v. ITO , it is held (headnote):

  "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: 
  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."  

36. 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. 

37. 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:

  "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. 

We 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."  

38. In the decision in VXL India Ltd., v. ITO  it is held (headnote):

  "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. 

In 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."  

39. 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.

40. 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):
  "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." 

41. In CIT v. Mahalakshmi Textiles Mills Ltd. , it has been held:
  "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." 

42. This case related to the discovery of subsequent information. 

43. In D.L.F. Housing and Construction P. Ltd., v. Union of India [1983] 142 ITR 347 (Delhi), it has been held (headnote):

  "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. 

Held, 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."  

44. On facts it was found therein that there was no true and full disclosure. 

45. In R. L. Traders v. Union of India [1986] 158 ITR 824 (Delhi), it has been held (headnote):

 "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.

The 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: 
  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."  

46. 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. 

47. 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:
  "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." 

48. 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):

  "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. 

For 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. 

Held, 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".  

49. 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. 

50. 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:
  "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." 

51. 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):

  "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. 

The 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; 

Held, 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."  

52. It is in the light of this, we will examine the notices. 

53. 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:  

 "Add:  

Rs.
Total demand as per accounts              95,28,197
Total demand as per ABC reconciliation    95,23,780
4,417"  
 
 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:

  "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).  

 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."   

 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.

 56. As regards the advertisement charges, the finding of the appellate authority for the year 1970-71 may now be extracted:  

  "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.  

 Particulars:  

Acct. Year     1966-67  1967-68  1968-69  1969-70  1970-71  1971-72
-------------------------------------------------------------------
Asst. Year     1968-69  1969-70  1970-71  1971-72  1972-73  1973-74
Adv. Income    2965304  3576001  42330134  5631567  7047772 7768658
Adv. Dep.
balance         151230   363456    788002   789222    90872   90447  
 
 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."   

 57. This affords a complete answer with regard to the omission or failure on the part of the appellant.  

 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:  
  "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."  

 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.  

 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:  

 "SUSPENSE-CASH BALANCE  
 
 Madras Office  
  
Date    Balance as per suspense register   Balance as per book
                   Rs.                           Rs.
30-6-1968       65,445.79                    65,445.79
30-6-1969     1,49,131.80                  1,49,131.80
30-6-1970     1,48,471.82                  1,48,741.82
30-6-1971     1,66,107.05                  1,66,107.05
30-6-1972     2,27,367.62                  2,27,367.62"
__________________________________________________________________  
 
 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.

 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.

 63. In view of the foregoing discussion. We hold that the writ petitions are maintainable for the limited purpose of deciding the jurisdictional issue.  

 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:  
  "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."

 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  
  "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."

 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.

H.L. Sibal vs Commissioner Of Income-Tax And Ors. on 15 July, 1975
Equivalent citations: [1975]101ITR112(P&H)
JUDGMENT

M.R. Sharma, J.

1. 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.

2. 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.

3. 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.

4. 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.

5. 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.

6. 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.

7. 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

represent  any undisclosed  income,  respondent   No.   2   remarked   that Rs   10,000 had to be seized as per instructions.

8. 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
--both seized and unseized mentioned in the notice.

9. 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 :
 "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."

10. 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.

11. On November   18, 1974, the petitioner made a detailed reply to the
above  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

was 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.

12. 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.

13. 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.

14. 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

the 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."

15. On January 9, 1975, the petitioner filed affidavits of Shri Kapil Sibal and Shri Baikunth Lal explaining some points.

16. 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.

17. 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.

18. 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
S. C. Sibal, advocate, the order might be annulled.   The Bench ordered 

accordingly. 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.

19. 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.

20. 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

and 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:

"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.

It 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.

Since 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

nothing 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."

21. In paragraph 26 of the written statement it has been specifically stated that proceedings under Section 132 were initiated by Shri M. K. Dhar.

22. 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:

"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.

For 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,"

23. 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 ;
 "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

where 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."

24. 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.

25. 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.

26. 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 :

"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.

It 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

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.

Since 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."

27. The issuance of the search warrants against the petitioner pursuant to some matter of policy was denied and it was stated :

"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.

For 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

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 the deponent after duly recording his reasons therefor."

28. 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.

29. 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.

30. 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.

31. 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

the 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.

32. 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.

33. 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-

(i) the same was conducted with regard to seized and unseized assets;

(ii) no proper opportunity was granted to him by the Income-tax Officer, which was his due, and
 
(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.

34. 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

requisite 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.

35. In order to appreciate the points of law involved, it becomes necessary to notice the following portions of Section 132 of the Act :

"132. (1) Where the Director of Inspection or the Commissioner, in consequence of information in his possession, has reason to belive that-

(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
 
(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
 
(c) any person is 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 this Act (hereinafter in this section referred to as the
undisclosed income or property), 
 
he 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-

(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;

(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;

(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;

(iv) place marks of identification on any books of account or other documents or make or cause to be made extracts or copies therefrom; 

(v) make a note or an inventory of any such money, bullion, jewellery or other valuable article or thing. ......

(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.

(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,--

(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 ;

(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;

(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,
 
and 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 :

Provided 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 
Provided 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. ......

(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)"

36. The Scheme of Section 132(1) shows that--

(1) the Commissioner of Income-tax must have some information;

(2) the information should be relevant to the requisite belief of the Income-tax Commissioner; and
 
(3) this belief should be entertained for a statutory purpose mentioned in Sub-section (1), Clause (a), (b) or (c) of Section 132.

37. 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".

38. 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 :

"(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,
 
(ii) He must be of the opinion that such thing cannot be otherwise got without undue delay,
 
(iii) He must record in writing the grounds of his belief, and
 
(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."

39. 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.

40. 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 :
 "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)."

41. 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.

42. 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.

43. 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 :
 "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

exercise 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."

44. 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.

45. 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-

(a) that the person concerned will not produce the books of account, and
 
(b) that such books would be useful for, or relevant to, any proceeding under the Act.

46. 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.

47. 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):
 "'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.'"

48. 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.

49. Section 34 of the Indian Income-tax Act, 1922, and Section 147 of the
Act 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.

50. 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:
 "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."

51. 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 :
 "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
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. Further, the report submitted by him under Section 151(2)
does not mention any reason for coming to the conclusion that it is a fit
case for the issue of a notice under Section 148. We are also of the opinion
that the Commissioner has mechanically accorded permission. He did not
 
himself 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."

52. In S. Narayanappa v. Commissioner of Income-tax, [1967] 63 ITR 219, 221 (SC). it was held:
 "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."

53. 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.

54. 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 :
 "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."

55. 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.

56. The applicability of Section 165, Criminal Procedure Code, to the searches made under Section 132(1) gives an indication that this section is intended

to 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.

57. 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.

58. 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.

59. 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

guests 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.

60. 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.

61. 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

though 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.

62. 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 :

"Shri R. K. Bali,
 
I.T.O., Chandigarh.

Whereas information has been laid, before me and on the consideration thereof I have reason to believe that-

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 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 ;......

Sarvshri/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;

And 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......"

(Sd.)                    

S. N. Mathur,              

            Commissioner of Income-tax, 

                                                  Patiala-1.               

8-10-74 

Patiala.   

63. 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

October 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.

64. 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.

65. 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.

66. 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.

67. 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.

68. 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.

69. File No. II, marked by us, relating to searches and seizures--doctors and advocates--starts with the following note :

"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.

Sd.                      
S. N. Mathur,              

1-10-74."              

70. 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

Assistant 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.

71. 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.

72. 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:

"Proposal for action under Section 132 of the Income-tax Act, 1961,
Whereas 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 :

1.    Shri H. L. Sibab
 
2.    Shri Bhagirath Dass,
 
3.   Shri Anand Swarup.

4. Shri Mulkh Raj Mahajan and his sons, S/Shri M. K. Mahajan, B. K. Mahajan and J. K. Mahajan.

5.    Shri S. C. Sibal.

I 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.

Sd.        

J. S. Dulat,  

I.A.C. of I.T., 

Chandigarh,   

7-10-74."  

73. 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.

74. 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 :

  " Discussed with I.A.C. who is Gurdial Singh Mann to Shri H. L. Sibal ? Is he one of the
  name-lenders or a person who is helping Shri- Sibal in divesting of his income surreptitiously and thus evading
  I.T./W.T., etc.
  
     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.

  A.O. to please
  verify this at the time of search.

  Sd. S. N. Mathur,
  
  7-10-74
  
  7/10/74
  
  see remarks of I.A.C. re. this matter
  in this note.
  
  7-10-74. "

75. 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.

76. 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.

77. 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 :

"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.
Since 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 :--

1.    Shri H.L. Sibal, Advocate.

2.    Shri Satish Sibal, Advocate.

3.   Shri Bhagirath Dass, Advocate.

4.    Shri Anand Sarup, Advocate.

5.    Shri Mulkh Raj Mahajan, Advocate,  

(and also his sons).

The 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.

Sd.      

S. N. Mathur, 

                                                     7-10-74."

78. 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.

79. 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 :

"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.

  Gross shown
  
Net shown 
  
1970-71 
  
1,09,548 
  
75.601 
  
1971-72 
  
1,29,594 
  
1,02,952 
  
1972-73 
  
1,48,669 
  
1,03,810 
  
1973-74 
  
1,70,500 
  
1,20,300 
  
Gross receipts shown low. Needs investigation by getting records or briefs.

Wealth showing a downward trend.

1969-70
   
3,30,622
   
Reason for this fall.

1973-74
   
91,267
   
(Sd.)   S. N. Mathur.
  "

80. 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.

81. 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

from 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.

82. For the reasons mentioned above, we hold-

(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 ;

(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
 
(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.

83. 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.

84. 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.

85. 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.

86. 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:

(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

October 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.

(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.

(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.

87. 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.

R.S. Narula, C.J.

88. I agree.

Commissioner Of Income Tax vs M/S.Ideal Garden Complex P.Ltd on 20 September, 2011
Author: Chitra Venkataraman
Bench: Chitra Venkataraman, M.Jaichandren
       
 IN THE HIGH COURT OF JUDICATURE AT MADRAS

Dated : 20.09.2011

Coram

The Honourable Mrs.Justice CHITRA VENKATARAMAN
and
The Honourable Mr.Justice M.JAICHANDREN

Tax Case (Appeal) Nos.443 to 448 of 2005
---

Commissioner of Income Tax
Salem					       			...Appellant 

-vs-

M/s.Ideal Garden Complex P.Ltd
7/54, Junction Yercaud Road, Salem		      ...Respondent 

	Tax 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.

		For Appellant  :	Mr.K.Subramaniam						                Standing Counsel for Income Tax

		For respondent :  Mr.P.J.Rishikesh

J U D G M E N T

(The Judgment of the Court was made by
CHITRA VENKATARAMAN, J. )
	The 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:-
	"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) ?
	2. 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 ?
	3. 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 ?"

 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.

 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".

 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".

 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).

 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.

	7. 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.  

 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".

 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.

 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".

	11. 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. 

	12. Heard learned Standing counsel for the Revenue as well as learned counsel for the assessee and perused the materials available on record. 

	13. 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.  

	14. 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.  

	15. 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.

	16. 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. 

	17. 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.  

	18. 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".

 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).

 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:-
	" 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."
In so holding, the Apex Court ultimately held as follows:-
	" 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."

	21. 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".  

	22. 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:-
	" 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."

 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).

 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 :-
	"(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";
	(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 ;
	(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 ;
	(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."

	25. 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.

	26. 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. 

	27. 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.

 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.

 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.

	30. In the result, we allow the Tax Case Appeals and the substantial questions of law are answered in favour of the Revenue.

nvsri

To

1.Commissioner of Income Tax, Salem

2.The Commissioner of Income-Tax(Appeals) Salem

3.The Income Tax Appellate Tribunal
   Bench 'D', 
  Chennai

Ahmedabad Electricity Co. Ltd. And ... vs Commissioner Of Income-Tax on 30 April, 1992
Equivalent citations: 1992(3)BOMCR678, [1993]199ITR351(BOM)
Author: Sujata Manohar
Bench: B.N. Srikrishna, Sujata V. Manohar
ORDER THEREON'--In s. 254(1)--Not merely refers to the appeal but the entire tax proceedings. 

HELD : 
 Sec. 254 states that the 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 Tribunal is, 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 
s. 254 are the words "may pass such orders...as it thinks fit". 
These are the words which describe the jurisdiction of the 
Tribunal. The word `thereon' merely refers to the fact that the 
Tribunal while deciding the appeal has to exercise this 
jurisdiction. The phrase "pass such order thereon" does not in 
any way restrict the jurisdiction of the Tribunal but, on the 
contrary, confers the widest possible jurisdiction on the 
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. 

Income Tax Act 1961 s.254 

Appeal (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.

HELD : 
 Under s. 254(1) the Tribunal may, after giving 
both the parties to the appeal an opportunity of being heard, 
"pass such orders thereon as it thinks fit". The word `thereon' 
merely refers to the appeal. Sec. 254 states that the Tribunal, 
it thinks fit. To read the word `thereon' as restricting the 
jurisdiction of the Tribunal is not warranted. It 
s. 254 are the words "may pass such orders... as it thinks fit". 
Tribunal while deciding the appeal has to exercise its 
it necessary or permissible to do so. The Tribunal has 
jurisdiction to permit additional grounds to be raised before it 
even though these may not arise from the order of the AAC, so 
long as these grounds are in respect of the subject-matter of the 
entire tax proceedings. 

ORDER
 
Mrs. Sujata Manohar J. 

 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) :  

"(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 ?" 

 2. In respect of the second question, the pertinent facts are as follows :  

 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.

 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.

 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.

 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 :  
  "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 ?"  

 7. The facts relating to this question are as follows :  

 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.  

 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.

 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 :  

 (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;  

 (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;  

 (c) in any other case, he may pass such orders in the appeal as he thinks fit. 

 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.  

 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.  

 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.  

 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.  

 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.  

 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.

 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.  

 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.  

 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.  

 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.

 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.  

 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."

 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.

 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.  

 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)).

 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.

 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.

 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.

 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.

 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).

 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.

 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.

 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.

 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.

 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.  

 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.  

 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.

 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.

 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.

 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).

 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.  

 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.  

 43. The proceedings may, accordingly, be plated before the Tribunal for its decision in the light of the above.

Taylor Instrument Co. (India) Ltd. vs Commissioner Of Income-Tax on 22 April, 1992
Equivalent citations: ILR1992DELHI1037
Author: B.N. Kirpal
Bench: B.N. Kirpal
JUDGMENT
 
 B.N. Kirpal, J.
 
 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.  

 For the assessment year 1968-69 :  

 In respect of the assessment year 1968-69, the Tribunal has referred six questions of law to this court. These are as follows :  

 "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 ?  

 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 ?  

 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 ?  

 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 ?  

 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 ?  

 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 ?"   

 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 :  

  "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 - ...  

 (ii) in the case of any block of assets, such percentage on the written down value thereof as may be prescribed :  

 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 :  

 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."   

 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.  

 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.  

 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.  

 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.  

 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.  

 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).  

 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.  

 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.

 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.

 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.

 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.  

 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."

 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."  

 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.  

 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.  

 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.  

 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) :  

  "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 :  

 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."  

 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.

 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."

 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...."

 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.

 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.  

 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.

 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.

 For the assessment your 1969-70 :  

 Five questions of law are sought to be raised in this year. They are as follows :  

  "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 ?  

 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 ?  

 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 ?  

 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 ?  

 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 ?"   

  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.  

 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.  

 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 :  

  "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.  

 (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.  

 (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."   

 Section 80B(7) is as follows :  
  "'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."  

 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.  
 
 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.

 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.  

 There will be no order as to costs.

Orissa Cement Ltd. vs Commissioner Of Income-Tax, Delhi on 5 November, 1992
Equivalent citations: 50(1993)DLT109, [1993]200ITR636(DELHI)
JUDGMENT  

 B.N. Kirpal, J.  

 (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:-     

 "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 ?  

 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 ? "   

The questions of law referred at the instance of the Department are as follows:-     

1. 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 ?  

 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 ?

 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? "  

(2) We will firstly deal with the reference which has been made at the instance of assessed.   

(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.   

(4) In view of the aforesaid decisions the first question is answered in the affirmative and in favor of the Department.   

(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.   

(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.   

(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).   

(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   

(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   

(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.   

(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.   

(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).

(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."  

(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".

(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."

(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.   

(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.   

(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.   

(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.   

(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.

(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.

(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.   

(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.

(24) The said question is, therefore, answered inthe  affirmative and in favor of the asssessee.   

(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.   

(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.   

(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.

Commissioner Of Income Tax vs First Leasing Co. Of India Ltd. (Cit V. ... on 12 September, 1996
Equivalent citations: (1997)140CTR(MAD)218
ORDER. 

Ratio: 
 When a question of law was squarely before the 
Tribunal, who failed to deal  with it, the same question therefore, one 
arising out of its order.

Held: 
 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 section 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 section 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 deemed to have been dealt with by the Tribunal and, 
therefore, it is one arising out of its order.

Case Law Analysis: 
 VR. C. RM. 
Adaikkappa Chettiar v. CIT (1970) 78 ITR 285 (Mad) and CIT 
v. Scindia Steam Navigation Co. Ltd. (1961) 42 ITR 589 (SC) 
followed.

Application: 

A. Y.: 
 1977-78
 
Dt. Ord.: 
 12-9-1996
 
Income Tax Act 1961 s.32(1)(vi) 

Income Tax Act 1961 s.32A 

Investment allowance--ALLOWABILITY--In respect of a bulldozer. 

Ratio: 
 Assessee could not claim investment allowance in 
respect of a buldozer under section 32A(2)(b)(iii).

Held: 
Relying on the terminology used in section 
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......". The Supreme Court so held that the 
assessee in that case was not entitled to the allowance under 
section 32A. The assessee in this Tax Case No. 1651 of 1986, is 
not entitled to the abovesaid investment allowance under section 
32A in relation to its hiring of buldozer.

CIT v. N. C. Budharaja & Co. etc., 
(1993) 204 ITR 412 (SC) and Builders Associations of India 
v. Union of India & Ors. (1994) 209 ITR 877 (SC) followed.

Not to current assessment years.

A. Y.: 
1977-78
 
Dt. Ord.: 
12-9-1996
 
Investment allowance--ALLOWABILITY--Assessee engaged in hiring of machinery. 

Ratio: 
 Assessee engaged in hiring of machinery is entitled 
to investment allowance as such hiring is not transfer for 
purpose of sub-section 5 of section 32A.

Held: 
The assessee is wholly using the plant or machinery 
for the purpose of his/its business which consists of leasing it 
to other parties. Sub-section (1) or (2) of section 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. 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-section (2)(a) of section 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-section (1) or 
sub-section 2(b)(iii) of section 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. 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 section 
32A. 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. Even on the footing that 
the term `otherwise transferred' would include such "lease" the 
said provision will not disentitle the assessee 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". 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. The Tribunal 
itself has found that the above said `lease' transaction by the 
assessee will not actually come under the terms `otherwise 
transferred' found in section 32A sub-section (5) taking into 
account the definition of the term `transfer' under section 2 
clause (47) of the Act. 

Case Law analysis: 
CIT v. Shaan Finance (P) Ltd. (1992) 
109 CTR (Karn) 209 : (1993) 199 ITR 409 (Karn), CIT v. 
Pandiyan Bank Ltd. (1969) 71 ITR 707 (Mad), CIT v. 
Eastern Spinning Mills & Industries (1995) 125 Taxation 353 
(Cal), CEPT v. Shri Lakshmi Silk Mills Ltd. (1951) 20 ITR 451 
(SC) and Ajodhpya Prasad Tara Chand Khokra v. CIT (1967) 66 ITR 576 (All) relied on. 
Blue Bay Fisheries (P) Ltd. v. CIT (1987) 166 ITR 1 (Ker) distinguished.

A. Y.: 
1977-78
 
Dt. Ord.: 
12-9-1996 

Depreciation--INITIAL DEPRECIATION--Leasing of machinery. 

Ratio & Held: 
 Assessee engaged in leasing out machinery 
was entitled to initial depreciation.

A. Y.: 
1977-78
 
Dt. Ord.: 
12-9-1996 

ORDER
 
ABDUL HADI, J. :

In 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.

2. 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.

2(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.

3. 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.

4. With reference to the said "common question" the sole question of law referred to us in TC No. 786 of 1986 runs as follows :

"Whether the Tribunal was right in holding that the assessee was not entitled to investment allowance under S. 32A of the Act ?"

5. Likewise, in both TC Nos. 1242 and 1243 of 1991 the question of law referred to us, runs as follows :

"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 ?"

6. In TC No. 1651 of 1986 the question of law referred to us runs as follows :

"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 ?"

(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").

7. 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 :

"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 ?"

(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 :

"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 ?"

Regarding 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.

8. 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 :

"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.....

......

......

.......

.......

.........

of 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...

(2) The ship or aircraft or machinery or plant referred to in sub-s. (1) shall be the following namely :

(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;

(b) any new machinery or plant installed after the 31st day of March, 1976, -

(i)................................... 		(ii)..................................

(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;

(Note : This Eleventh Schedule contains non-priority articles or things).

(2A)............... (2B)............... (2C)............... (2D)............... (3)................

(4) The deduction under sub-s. (1) shall be allowed only if the following conditions are fulfilled, namely :

(i)...... 								.........

(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 -

(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
 
(b)..... 						..........

(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 -

(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
 
(b)..... 		.......... 				(c)..... 					.........."

9. Thus, the main conditions to be satisfied as per S. 32A(1) and (2) are :

(1) the subject-matter is to be owned by the assessee;

(2) is wholly used for the purpose of business of the assessee; and
 
(3) the subject-matter should come under any of the enumerated categories of S. 32A(2)."

That the plant or machinery in the present case is owned by the assessee is not disputed.

10. 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.

11. 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.

12. 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.

12A. 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 :

"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].

So, 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.

13. 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).

14. 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.

It 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.

15. 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.

16. 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 :

"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."

17. 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).

18. 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 :

"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.

However, 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."

In 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 :

"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."

19. 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.

20. 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 :

"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."

So, 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 :

"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."

......."

21. 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.

22. 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....."

In 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.

23. 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.

24. No doubt, we find in the abovesaid Tribunals order that the only discussion is virtually only the following :

"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)."

So 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.

25. 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.

26. Insofar as TC No. 786 of 1986, the question referred to us is answered in the negative and against the Revenue.

27. 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.

28. 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.

Commissioner Of Income-Tax vs Rayala Corporation (P.) Ltd. on 20 January, 1995
Equivalent citations: [1995]215ITR883(MAD)
ORDER--Failure to notice assessee's recalcitrance. 

Ratio : 
 Where Tribunal instead of taking notice 
of assessee's recalcitrance treated it as a wronged person, the 
matter is remitted back to the Tribunal for deciding afresh. 
 
Facts: 
 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 calandestinely 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 assessing officer. The Tribunal, instead of 
taking notice of the assessee's recalcitrance, has treated it as 
a wronged person. 
 
Held : 
 The assessee has received a premium at the hands of 
the Tribunal upon its recalcitrance. The matter is remitted back 
to the Tribunal to decide afresh and while deciding the matter 
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 assessing officer under seciton 144 of the Act. 
 
 Also to current assessment years. 
 
A. Y. : 
 1962-63
 
Assessment--BEST JUDGMENT ASSESSMENT--Basis of deciding whether any error in the judgment. 

Ratio & Held : 
 Whether the assessing 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. 
 
 Also to current assessment year.
 
A. Y. : 
 1961-62 to 1964-65
 
Income Tax Act 1961 s.144 

Assessment--BEST JUDGMENT ASSESSMENT--Procedure and conditions precedent. 

 A best judgment assessment is called for 
only when all the materials asked for the assessment are not 
available with the assessing officer. The assessing officer 
relies on the information gathered by him as well as the 
surrounding circumstances of the case. 
 
 Commissioner of Sales-tax v. H. M. 
Esufali H. M. Abdulali (1973) 90 ITR 217 (SC) relied on.
 
A. Y. : 
 
Assessment--BEST JUDGMENT ASSESSMENT--Putting additional evidence/material at appellate stage. 

 There cannot be a procedure wherein the best 
judgment of the assessing 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. 
 
A. Y. : 
 
Assessment--BEST JUDGMENT ASSESSMENT--Validity. 

Ratio : 
 The assessee being a defaulter, who has not 
responded to the notice under section 148 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 assessing 
officer, recourse to section 144 is valid. 
 
Facts : 
 In a raid by the Officers of the Enforcement 
Directorate and the Income Tax Department, 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 assessing officer's 
insistence to the assessee to produce details regarding the import 
of raw materials, components, store items and also details 
regarding the number of typewriters supplied to its distributors 
was also ignored by the assessee. Except for a reply letter at 
some stage that it (assessee) had submitted in the concerned 
assessment year's returns and it accordingly had been assessed, 
the assessee kept itself away from the proceedings before the 
assessing officer. The assessing officer took recourse to the 
best judgment, as contemplated under section 144 of the Act. 
 
Held : 
 There is no error in the procedure adopted by the 
assessing 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 assessing 
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. 
 
A. Y. : 
 
Appeal (Tribunal)--JURISDICTION--Conditions precedent. 

 The role of the Tribunal comes to 
examine the contentions of the assessee or the revenue 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 assessing officer are 
completed and the remedy of a statutory appeal before the first 
appellate authority.
 
A. Y. : 
 1962-63
 
Income Tax Act 1961 s.253 

Appeal (Tribunal)--POWER OF TRIBUNAL--Limitation. 

 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. 
 
A. Y. : 
 1962-63
 
Appeal (Tribunal)--ADDITIONAL EVIDENCE--Reappraisal. 

 The Tribunal  commits an 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 as such, the matter is 
remitted back to the Tribunal for deciding afresh. 
 
A. Y. : 
 1962-63
 
JUDGMENT  
 
 Mishra, J.
 
 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. 

 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 : 
  "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." 

 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 : 
  "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." 

 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 : 

  "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 : 
   Date  of cheque     No. of cheque          Amount
                                            Rs.
 2-3-1962            951046                5,000
13-3-1962            951890                5,000
30-3-1962            949511                6,000

 He explained as follows : 
 
 '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 : 

 '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.' 
 
 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." 

 5. The assessee preferred an appeal. The Appellate Assistant Commissioner found some reasons to hold as follows : 

  "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. 

 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 : 

 '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. 

 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. ... 

 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." 

 6. The Tribunal has, however, found as follows : 
  "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." 

 7. About the assessment year 1962-63, the Tribunal has, however, noted as follows : 
  "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." 

 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 : 
  "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." 

 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 : 

 "(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 ? 

 (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 ? 

 (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 ?" 

 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. 

 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. 

 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. 

 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 : 
  "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." 

 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) :
 "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."

 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. 

 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) :
  "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'." 

 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."

 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. 

 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. 

 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.

Commissioner Of Income-Tax vs Madras Stock Exchange Ltd. And Ors. on 15 April, 1976
Equivalent citations: [1976]105ITR547(MAD)
Author: V. Ramaswami
Bench: V. Ramaswami
JUDGMENT
 
 Sethuraman, J. 
 
1. 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. 

2. 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: 

 (a) To promote and protect trade, commerce and industries of India, in the Province of Madras and in particular in the Andhra country ; 

 (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 ; 

 (c) To watch over and protect the general commercial interests of India or any part thereof and the interests of the Andhras in particular

engaged in trade, commerce or manufacture in India and in particular the Andhra Desa ; and
 
 (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, .

3. 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. 

4. 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
also 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. 

5. At the instance of the revenue, the following two questions have been referred in so far as this case is concerned; 

"(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) ? 

 (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 ?"  

6. 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

the 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. 

7. The relevant provisions may now be extracted : 

 "11(1) ...... the following income shall  not be included in  the total
income of the previous year of the person in receipt of the income--

 (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; 

 (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,......... 

 (4) For the purposes of this section 'property held under trust' includes a business undertaking so held,......"  

8. Section 2(15)........."charitable purpose" 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. (Underlining ours*).

9. 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.

10. There are two decisions of the Supreme Court which had occasion to
consider the amended definition.   The first decision is  reported in Sole

Trustee, 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 :
  "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."  

11. 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:
  "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
is there, the income becomes entitled to exemption. That, in our opinion, is the most reliable test." 

12. 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. 

13. 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
activities.    That is considered to be the mandate of the  new amendment. At page 805 the position was summed up as follows :
  "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." 

14. 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
objects of the Chamber were and whether it was seeking to accomplish the said objects by indulging in an activity for profit.

15. 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

question No. 2. The answer is in the affirmative and in favour of the assessee. 

16. 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. 

17. 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 :

 (a) encouraging and developing the film industry in South India ; 

 (b) watching, protecting and extending the rights and privileges of its members and of the film trade in general; 

 (c) encouraging and facilitating film production, distribution and exhibition; 

 (d) acting as a clearing house for information on all matters affecting the production, distribution and exhibition of films; 

 (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

by way  of dividend, bonus  or  otherwise.    The  income  derived  by this assesses falls into two parts as follows : 

  Category of income
  1962-63 
 Rs.
  1963-64  
Rs.

  Property
  14,663
  14,382

  Other sources
  4,584
  16,434

18. 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. 

19. 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. 

20. 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. 

21. At the instance of the revenue the following question has been referred: 
  "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?"  

22. 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. 

23. 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. 

24. 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 :
  "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'." 

25. 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-

ties 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. 

26. 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: 

  Rs.
  Rs.

  Interest on securities
  
  5,357

  Property
  
  41,271

 Other sources :
 
  (a)
  Exhibition
  3,77,428
  
  (b)
  Interest
         120 
 
  3,77,548 

  Total
  4,24,176 

27. 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".

28. 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

par 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. 

29. At the instance of the revenue, the following question has been referred : 
  "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 ?" 

30. 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. 

31. 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

of 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. 

32. 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.

33. 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
otherwise 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 : 

  Sources
  1962-63 
 Rs.
  1963-64  
Rs.

  Property
  4,357
  6,815

  399
  399

  76,400
  --

  Business
  -- 
  58,722 

  81,156 
  65,936 

34. 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. 

35. 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.

36. The Income-tax Officer was of the view that the decision of the Andhra
Chamber of Commerce was not applicable to it and held that no part of the
income of the assessee-company was entitled to any exemption. The
Appellate Assistant Commissioner on appeal distinguished the decision in
the Andhra Chamber of Commerce case, as he was of the view that the
stock exchange was formed for the purpose of promoting the actual trade
interest of its constituent members. He rejected the claim for exemption
for both the years. The Tribunal, after referring to the amendment to
article 167 under which the profits were not to be distributed among the
members and, after referring to the decision of the Bombay High Court in
V.V. Ruia v. S. Dalmia, [1968] 38 Comp Cas 572 (Bom) came to the conclusion that the object of the
assessee was advancement of general public utility and that its income was
exempt. However, it was of the view that the assessee had no opportunity
to place the facts on the question as to whether it had accumulated the
profits beyond the margin set out in Section 11. For this purpose, it sent
back the matter to the Appellate Assistant Commissioner. On the above facts, the following question has been referred :
  "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 ?" 

37. 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. 

38. Section 37 of the Companies Act, 1956, relates to companies limited by guarantee. Section 37(1) to the extent material runs as follows: 
  " Section 37(1).--In the case of a company limited by guarantee and not having   a   share   capital..... .every   provision   in   the   memorandum   or
articles 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." 

39. 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: 
  "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

the 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." 

40. 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. 

41. 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. 

42. 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. 

43. 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. 
S. 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. 

44. 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) : 
  "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." 

45. The ownership of immovable, property in that  particular case was held to be incidental to its main object of regulating and controlling transaction in

securities.    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 : 
  "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
stock 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." 

46. 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. 

47. 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. 

48. 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. 

Tax Case No. 277 of 1970.

49. The only question referred in this reference is as follows: 
  "Whether, on the facts and in the circumstances of the case, the
Appellate Tribunal was right in law in holding that the object of the asses
see constituted 'charitable purpose' as defined in Section 2(15) of the
Income-tax Act, 1961, and that its income was exempt under Section 11(1)of the same Act ?"  

50. 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.

Tax Case No. 87 of 1971.

51. The questions referred in this reference are as follows : 

"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) ?

2. 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 ?  

52. 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.

Commissioner Of Income-Tax vs Union Carbide India Ltd. on 9 July, 1986
Equivalent citations: [1987]165ITR550(CAL)
JUDGMENT
 
  Dipak Kumar Sen, J.  
 
 1. The material facts and proceedings leading up to the present reference are as follows : 

 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. 

 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. 

 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.

 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.

 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. 

 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.

 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. 

 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. 

 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 : 
  " 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 ?" 

 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
assessee was not entitled to relief under Section 80J also on the ground that
the income involved arose from the ships of the assessee. In support of
his contentions, the learned advocate for the Revenue cited the following
decisions : 

 (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.

 (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.

 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. 

 (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.

 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. 

 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. 

 14. In support of his contentions, the learned advocate for the assessee cited the following decisions : 

 (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. 

 (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.  

 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) : 

   "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. 

 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."  

 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. 
 (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.

 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. 

 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. 

 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. 

 20. For the above reasons, we answer the question referredin the affirmative and in favour of the assessee. 

 21. There will be no order as to costs. 

  Monjula Bose, J.  

 22. I agree.

Commissioner Of Income-Tax vs P. Muncherji And Company on 21 April, 1987
Equivalent citations: [1987]167ITR671(BOM)
Author: S.P. Bharucha
Bench: S.P. Bharucha
JUDGMENT
 
 Sugla, J. 
 
 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. 

 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. 

 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. 

 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.

 5. The Tribunal has referred to this court the following five questions of law arising out of its impugned order : 

"(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 ? 

 (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 ? 

 (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 ? 

 (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 ? 

 (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 ?" 

 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. 

 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.

 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.

 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.

 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 :

"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." 

 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 :

"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." 

 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 :

"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." 

 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. 

 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 
  
"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."

 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.

 16. This court in CIT v. Sakseria Cotton Mills Ltd. [1980] 124 ITR 570 at page 577 has observed :

"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." 

 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. 

 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 :

"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." 

 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 : 

"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." 

 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.

 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. 

 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. 

 23. No order as to costs.

Mettur Chemical And Industrial ... vs Commissioner Of Income-Tax on 21 April, 1976
Equivalent citations: [1977]110ITR822(MAD)
JUDGMENT

  Ismail, J.   
 
 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 : 

 "(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 ?" 

  (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 ?"  

 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.

Though 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

raised 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.

 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.

 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

and, 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. 

 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

rectification 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.

 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 :
 " 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."

 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. 

 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 :
  " 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-

not 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.

 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):
  " It was stated on behalf of the appellant that in any case the Income-
tax Officer could have legitimately assessed one-third share of the income
which was due to the assessee according to the judgment of the Madras
High Court and there was escape only to the extent of two-thirds share of
the income. This argument is not of much avail to the appellant because
once proceedings under Section 34 are taken to be validly initiated with
regard to two-thirds share of the income, the jurisdiction of the Income-tax
Officer cannot be confined only to that portion of the income. Section 34
in terms states that once the Income-tax Officer decides to reopen the
assessment he could do so within the period prescribed by serving on the
person liable to pay tax a notice containing all or any of the requirements
which may be included in a notice under Section 22(2) and may proceed to
assess or reassess such income, profits or gains. It is, therefore, manifest
that once assessment is reopened by issuing a notice under Sub-section (2)
of Section 22 the previous order of assessment is set aside and the whole
assessment proceedings start afresh. " 

 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

all 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.

 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

only 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.

 12. We may also mention the fact that Mr. Jayaraman, at one stage, con
tended that the mistake in the assessment order for the year 1959-60 dated
May 27, 1960, crept in only by the judgment of this court dated January 16,
1963, and there was no mistake earlier and the period of limitation, therefore,
had to be computed from the date of that judgment. We are unable to
accept this contention. Either there is a mistake in the order as passed on
the date when it was passed or there was no such mistake and there was
no question of notional mistake creeping into an order as a result of the
courts in the country declaring the law subsequently. As a matter of fact,
the effect of the judgment of this court in Kumbakonam Electric Supply
Corporation Ltd. v. Commissioner of Income-tax [1963] 50 ITR 809 (Mad) is
one to declare that, as the law stood always, the wealth-tax paid by an
assessee could not be deducted in the computation of the business income
either under Section 10(1) or Section 10(2)(xv) of the Indian Income-tax Act,
1922, and this court did not intend to lay down any law for the first time by
the said judgment. Section 154(7) of the Income-tax Act, 1961, states that
the period of four years should be from the date of the order sought to be
amended' and not from the date when a mistake can be said to have crept
into that order. Therefore, even assuming that a mistake crept into the
order only when the High Court delivered the judgment, certainly the date
of the judgment of the High Court cannot be said to be the date of the order
of the Income-tax Officer within the scope of Section 154(7) of the Income-tax
Act, 1961.

 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.

Premchand Sitanath Roy vs Addl. Commissioner Of Income-Tax And ... on 19 December, 1975
Equivalent citations: [1977]109ITR751(CAL)
JUDGMENT

1. 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: 

  "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. 

 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. 

 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 ".  

2. 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

Income-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

order 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
said 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
Commissioner 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
affected 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
which 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
did 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
authority. 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
and even after the appeal was disposed of by the Appellate Assistant
Commissioner. 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
exercise of the said power on hypothetical considerations of policy or the extraordinary nature of the power.

3. 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

superior 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.

4. 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. 

5. 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

has 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. .

6. In  the  aforesaid  view  of the  matter  the application  fails  and  is

7.  The rule nisi is discharged. 

8.  Interim order is vacated. 

9. There will be no order as to costs. 

10. Let the operation of this order be stayed for a period of six weeks from the date.

Anand Kumar Saraf And Ors. vs Commissioner Of Income-Tax And Ors. on 29 July, 1993
Equivalent citations: [1995]211ITR562(CAL)
JUDGMENT
 
1. 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 :

 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". 

2. 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. 

3. 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

searching 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. 

4. 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. 

5. 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) : 

"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 ? 

Answer : Yes." 

" Question No. 12 : Can immunity given by the circulars be availed of by assessees whose premises have been searched by the tax authorities ? 

Answer : No." 

"Question No. 19 : Kindly clarify the expression 'before detection by the Department' ? 

Answer : 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." 

"Question No. 30 : Whether an assessee could make a declaration in respect of assets or income which is not the subject-matter of seizure ? 

Answer : Yes, if it has not been already found out in the course of the search."  

6. 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.

7. 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. 

8. 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 : 

(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, 
 
(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. 

(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. 

(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. 

(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. 

(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

bank accounts were not found by the Department but were being voluntarily disclosed by the/writ petitioner.  

9. 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 : 

"Anand Kumar Saraf, assessment years 1980-81 to 1985-86 : 

  Miscellaneous order : 

After 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."  

10. 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.

11. 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 : 
 "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."

12. 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 : 

"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. 

On 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

same by way of a supplementary affidavit in the present proceeding on all available grounds. 

The 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. 

 The application is disposed of in terms of the foregoing order."  

13. 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. 

14. 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. 

15. 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. 

16. At the outset, we must observe that the learned judge dismissed the writ application solely on the ground that the appellant-writ petitioner

has 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.

17. 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. 

18. 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. 

19. 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

as 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". 

20. 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. 

21. 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. 

22. 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.

23. 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. 

24. 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. 

25. 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.

26. 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. 

27. 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. 

 28. There will be no order as to costs. 

  Bhagabati Prasad Banerjee ,J.  

29. I agree.

Commissioner Of Income-Tax vs Smt. V.J. Aleykutti, T.J. Joseph And Dr. ... on 31 January, 1991
Equivalent citations: [1991]189ITR711(KER)
Author: K.S. Paripoornan
Bench: K.S. Paripoornan
JUDGMENT
 
K.S. Paripoornan, J.  
 
1. 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.  

2. 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.

3. The details of the various cases are as follows :  

  Income-tax References Nos. 71 and 72 of 1986 :  
    Respondent-assessee	...        Smt. V.J. Aleykutty.
 Assessment years      . . .       1969-70 and 1970-71.
  
 Income-tax References Nos. 64 and 65 of 1988 :  
   Respondent-assessee	...        Sri T.J. Joseph.
Assessment years          ...     1969-70 and 1970-71.
 
 Income-tax References Nos. 68 and 69 of 1988 :  
   Respondent-assessee	.. ,         Sri K.J. Mathew.
Assessment years         ...         1969-70 and 1970-71.     
 
4. 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.  

5. In the next batch of cases, the details are as follows : 

  Income-tax Reference No. 34 of 1986 :  
    Respondent-assessee	...         Dr. K.J. Mathew.
 Assessment year       . . .         1976-77.  
 
 Income-tax Reference No. 141 of 1986 :  
   Respondent-assessee	...        Smt V.J. Aleykutty.
Assessment year          ...         1978-79.  
 
 Income-tax Reference No. 53 of 1987 :  
   Respondent-assessee	...        Dr. K.J. Mathew.
Assessment year         ...         1978-79.  
 
 Income-tax Reference No. 67 of 1988 :  
Assessment year            ...         1977-78.  
 
 Income-tax References Nos. 88 to 90 of 1988 :  
   Respondent-assessee	...        Smt. V.J. Aleykutty.
Assessment years       ...         1980-81 to 1982-83.    
 
6. In this later batch of seven cases, we are concerned with the interpre
tation to be placed on Section 64(1)(vii) of the Income-tax Act, 1961, after
its amendment by the Taxation Laws (Amendment) Act, 1975, read along
with Explanation 3 to the section.  

7. 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

1988. 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 :  

 Income-tax References Nos. 71 and 72 of 1986 : (Illustrative case)  
 
8. 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 :  

 Rs. 5,000 on August 9, 1965 ;  

 Rs. 15,000 on March 22, 1966 ; and   
 
 Rs. 12,000 on March 31, 1967.   

9. 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.

10. 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 :
 "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."

11. 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.  

12. 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 :  

 Income-tax References Nos. 71 and 72 of 1986 :  
  "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?"  

 Income-tax References Nos. 68 and 69 of 1988:  
  "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?"   

13. 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:

  "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 :   

 (1) In computing the total income of any individual, there shall be included all such income as arises directly or indirectly-- ...  

 (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."    

14. 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:  

 Income-tax Reference No. 34 of 1986 :  

  "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?   

 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?"

  "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?"  

 Income-tax Reference No. 53 of 1987:  
  "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?"

  "(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?  

 (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?"

 Income-tax References Nos. 88 to 90 of 1988:  
  "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?"   

15. 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 :  

 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 -- ...  

 (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."   

16. 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.  

17. 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):

  "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 ....  

 (iv) from assets transferred directly or indirectly to the minor child, not being a married daughter, by such individual otherwise than for adequate consideration."   

18. In construing the above section, the Supreme Court held thus (at p. 30) :  
  "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."

19. 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 :
  "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."  

20. 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.

21. 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) :

 "16. (3) In computing the total income of any individual for the purpose of assessment, there shall be included-- ...  

 (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."   

22. 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) :

  "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....   

 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."   

23. 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.

24. 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 :  

 (1) Who created the trust ?  

 (2) Who are its beneficiaries ?  

 (3) What are the terms and conditions under which the beneficiaries received income ?  

 (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?   

25. 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.

26. 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.  

27. The references are answered as above.  

28. 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.

Life Insurance Corporation Of India & ... vs Gangadhar Vishwanath Ranade (Dead) By ... on 8 September, 1989
Equivalent 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
LIFE INSURANCE CORPORATION OF INDIA & ANR.

	Vs.

GANGADHAR VISHWANATH RANADE (DEAD) BY LRS.

DATE OF JUDGMENT08/09/1989

BENCH:
BENCH:

CITATION:
 1990 AIR  185		  1989 SCR  Supl. (1)  97
 1989 SCC  (4) 297	  JT 1989 (3)	637
 1989 SCALE  (2)499

ACT:
    Income  Tax	 Act,  1961--Sections 226(3)  (vi)  and	 281
--Assignment of policies by insurer  Assignment accepted  by
LIC--ITO  of opinion that transfer of policy with intent  to
defraud Revenue--Inordinate delay by LIC in making statement
on  oath  before ITO--Liability of LIC to  pay	interest  to
assignee  of  policies	for delay  in  fulfilling  statutory
obligation.

HEADNOTE:
    One	 Sh. G.V. Ranade took four policies on his own	life
from the LIC during the period. 1958 to 1960. In April	1969
G.V.  Ranade assigned absolutely all these four policies  in
favour of his wife Smt. Kamalabai G. Ranade and the  assign-
ment  was  duly registered by the LIC. These  policies	were
paid  up  and the date of maturity of  these  were  14.9.72,
28.12.73, 9.11.75 and 21.12.75.
    There  were some income tax dues against the  said	G.V.
Ranade	for recovery of which income tax officer  'commenced
recovery  proceedings.	The Income Tax	Officer	 on  27.1.71
issued a notice under Section 226(3) of the Income Tax	Act,
1961  to the Manager of the LIC at Nagpur directing the	 LIC
to  pay to I.T.O. forthwith any amount due from the  LIC  to
or, held by the LIC for or on account of the said Ranade  to
meet  the amount due from Ranade as arrears of	income	tax.
The  Divisional Manager of the LIC at Nagpur intimated	this
fact  of receipt of the notice under section 226(3)  of	 the
Income	Tax Act 1961 to the assignee of these policies	Smt.
Kamalabai  G. Ranade, suggesting that she take steps to	 get
the notice vacated in order to safeguard her interest in the
policies. By further correspondence the ITO required the LIC
to  deposit  the amount of Rs.3415.70  payable	against	 the
first  policy  which was to mature on 14.9.72  and  the	 LIC
informed the assignee that the moneys due under the policies
will be paid to her only after her getting the notice served
on LIC by the ITO vacated.
    On 5.9.72 Smt. kamalabai G. Ranade flied a Writ Petition
in  the	 High  Court of Bombay impleading LIC  and  the	 ITO
claiming  several reliefs including a direction to  the	 LIC
for payment of Rs.3415.70 and also to make a statement	that
no part of the said amount is due to G.V.
98
Ranade	nor does the LIC hold any part of the sum for or  on
account	 of  Ranade.  This Writ Petition  was  dismissed  in
limine. Smt. Kamalabai G. Ranade filed an appeal by  special
leave in this court and this court disposed of the appeal on
the  counsel  for  the LIC stating that he  would  file	 the
necessary statement on oath in accordance with S. 226(3)(vi)
of the Income Tax Act, 1961 stating that no sum of money  is
due  to the Assessee, insured person, before the ITO  except
one  policy in respect of which the LIC having already	paid
the money to ITO no statement need be made and	consequently
no  order  can	be made u/s 226(3)(vi) and  the	 appeal	 was
disposed of accordingly.
    It	appears	 that the ITO did not revoke  the  order  of
attachment inspite of the LIC making the requisite statement
on  oath under section 226(3)(vi) of the Income Tax  Act  on
5.12.75. This led to the filing of another Writ Petition  in
the Bombay High Court by Smt. Kamalabai praying for a direc-
tion  to the ITO to revoke all notices issued under  section
226(3)	to the LIC and to the LIC to pay her the amount	 due
against the policies which had matured. On 4.4.1977  counsel
for  the  ITO produced before the High Court a copy  of	 the
order dated 1.4.77 passed by the ITO withdrawing the  notice
u/s  226(3) of the Income Tax Act and the Writ Petition	 was
dismissed as withdrawn.
    Smt.  Kamalabai  then sent notice to the  LIC  demanding
payment	 of the total amount due against the  four  policies
together with interest @ 15% since the delay in payment	 had
been  occasioned  by the default of the LIC.  LIC  made	 the
payment	 of these amounts to her but disputed its  liability
to  pay	 interest thereon for the period subsequent  to	 the
date of maturity on the ground that the delay was occasioned
by  the ITOs notice u/s 226(3). This dispute  regarding	 the
LIC's  liability to pay interest led to the filing  of	Writ
Petition  No. 1248 of 1977 decided on January 7, 1981  which
gives rise to this appeal.
     The impugned judgment holds that the last two  policies
having matured on 9.11.75 and 21.12.75 a few days before  or
after  5.12.75 when the statement on oath u/s 226(3) of	 the
Income Tax Act was made by the LIC did not qualify for award
of  such interest which was payable in respect of the  first
two which had matured earlier on 14.9.72 and 28.12.73.	This
view  of  the High Court on which the award of	interest  is
based is assailed on behalf of the appellant.
     The  dispute  in this appeal is only  about  the  LIC's
liability  for payment of interest on the  principal  amount
from  the  date	 of maturity of the first  two	policies  to
31.12.75  and  the rate of 15% p.a. which is alleged  to  be
excessive.
99
Dismissing the appeal with costs this Court,
    HELD: In the instant case, admittedly assignment of	 the
policies  was made by the insured G.V. Ranade and  the	same
was  duly accepted and registered by the LIC in April  1969.
It  is, therefore, obvious that the LIC was bound to act  on
that assignment in favour of Smt. Kamalabai G. Ranade unless
the assignment was held to be invalid by a competent author-
ity on a proper proceeding taken for this purpose [111B]
    Mere  issuance  of notice under section  226(3)  of	 the
Income Tax Act, 1961 did not have the effect of invalidating
the assignment nor did the casual mention of section 281  of
the  Income  Tax Act, 1961 by the ITO in  his  letter  dated
28.8.72 result in this consequence. Any further step towards
formation  of  the final opinion by the ITO could  be  taken
only after the LIC had made the requisite statement on	oath
under section 226(3)(vi) of the Income Tax Act, 1961 on	 the
basis of the registered assignment of policies. [111C-D]
    The	 question of revocation of the notice  under  clause
(vii)  of  subsection (3) of Section 226 of the	 Income	 Tax
Act, 1961 arose in the present case only after the LIC	made
the requisite statement on oath under section 226(3)(vi)  of
the Act in view of its consistent stand throughout that	 the
moneys	due  under the policies were held by it for  and  on
behalf of the assignee and not the defaulter. Mere  informa-
tion  of the assignment to the ITO and keeping the  assignee
informed of the ITO's action did not amount to discharge  of
the statutory obligation under section 226(3)(vi) of the Act
by the LIC. Sub-section (3) of Section 226 of the Income Tax
Act,  1961 clearly shows that on a notice  thereunder  being
issued	by  the ITO to the LIC in the present case,  it	 was
incumbent on the LIC to make the requisite statement on oath
under clause (vi) thereof raising an objection on the  basis
of  the	 registered assignment. It was then for the  ITO  to
proceed	 further and form his final opinion and	 revoke	 the
notice under clause (vii). [112D-E; 113G-H]
    The inordinate delay in making the statement on oath  by
the LIC under section 226(3)(vi) of the Income Tax Act, 1961
was  the  result of misconstruction of	the  provisions	 and
misappreciation of its liability thereunder. [114B]
    Obviously  the assignee of the policies who	 had  become
entitled  to receive the amount due thereunder on the  dates
of  their  maturity must be compensated by the LIC  for	 its
failure to perform its statutory
100
obligation  under section 226(3)(vi) of the Income Tax	Act,
1961 within a reasonable time. Performance of this statutory
obligation by the LIC in the present case being after  inor-
dinate delay award of interest to the assignee of the  poli-
cies  to  whom the payment thereunder had to  be  made	even
according  to  the stand of the LIC is,	 therefore,  clearly
justified. [114C-D]

JUDGMENT:
    CIVIL  APPELLATE JURISDICTION: Civil Appeal No. 1979  of
1981.
    From  the Judgment and Order dated 7.1.81 of the  Bombay
High Court in Civil Writ Petition No. 1248 of 1977.
P.P.  Rao,  Kailash Vasdev and S. Murlidhar for	 the  Appel-
lants.
A.K. Sanghi for the Respondent.
    VERMA,  J. This appeal by special leave is	against	 the
judgment dated January 7, 1981 in Writ Petition No. 1248  of
1977  of  the  Nagput Bench of the Bombay  High	 Court.	 The
special	 leave	has been confined only to  the	question  of
liability  of the appellant, Life Insurance Corporation,  to
pay interest for the period after date of maturity of insur-
ance policy, in case of delay in payment. Accordingly,	this
is the only question arising for decision in this appeal.
    The	 writ petition in the High Court was filed  by	Smt.
Kamalabai G. Ranade, the wife of Gangadhar Vishwanath Ranade
of  Nagput. The said G.V. Ranade took four policies  on	 his
own  life  from	 the Life  Insurance  Corporation  of  India
(hereinafter  referred	to as "the LIC") during	 the  period
1958  to 1960. These policies were paid up and the  particu-
lars  thereof including their paid up value payable  on	 the
date of maturity are as under:
  Policy	 Sum	      Paid up	  Date of
  Number	 Assured      Value	  Maturity.
  19620636	 10,000.00    3415.70	  14.9.72
  13932229	 3,500.00     1118.65	  28.12.73
  13969 144	 5,000.00     892.20	  9.11.75
  13972300	 2,000.00     557.70	  21.12.75
In April 1969 G.V. Ranade assigned absolutely all these four
101
insurance  policies in favour of his wife Smt. Kamalabai  G.
Ranade and the assignment so madewas duly registered by	 the
LIC as under:
	       "In registering this Assignment the  Corpora-
	      tion makes no admission as to its validity.
		    Nagpur		 sd/-
		    Dt. 8.4.69	       P. Divisional  Manag-
	      er"
    It appears that there were some income tax dues  against
the said G.V. Ranade for recovery of which Income-tax  Offi-
cer had commenced recovery proceedings. Prior to the date of
maturity  of  these  policies  the  Income-tax	Officer	  on
27.1.1971 issued a notice under section 226(3) of the Income
Tax Act, 1961 to the Manager of the LIC at Nagpur  directing
the LIC to pay to the ITO forthwith any amount due from	 the
LIC  to	 or, held by the LIC for or on account of  the	said
G.V.  Ranadeto meet the amount due from G.V. Ranade  as	 ar-
rears  of  income  tax. This notice  further  mentioned	 the
consequences  envisaged by section 226(3) of the Income	 Tax
Act,  1961.  The  Divisional Manager of the  LIC  at  Nagput
intimated  the fact of receipt of the notice  under  section
226(3) of the Income Tax Act, 1961 to the assignee of  these
policies, Smt. Kamalabai G. Ranade, suggesting that she take
steps  to get the notice vacated in order to  safeguard	 her
interest in the policies. The further correspondence in this
behalf between Income-tax Officer, the LIC and the  assignee
shows that the Income-tax Officer required the LIC to depos-
it the amount of Rs.3415.70 payable against the first policy
which was to mature on 14.9.72 and the LIC kept the assignee
informed  of  this demand by the ITO adding  in	 its  letter
dated  27.7.1972 to the assignee that the moneys  due  under
the  policies will be paid to her "only after  your  getting
the notice served on us by the ITO vacated". This was  reit-
erated by the LIC in its letter dated 11.8.72 to the assign-
ee.
    The	 assignee  sent a notice dated 21.8.72	to  the	 LIC
reiterating  that the policies had been absolutely  assigned
to  her	 as  admitted by the LIC as a result  of  which	 the
amount	payable against the same had to be paid only to	 her
since  the amount was not held by the LIC for or on  account
of G.V. Ranade. The LIC was also required by this notice  to
take the necessary steps for revocation of the ITO's  notice
and to make the payment due in respect of all these policies
to  the assignee. The assignee sent a similar notice to	 the
ITO  asserting her claim as the assignee to get	 the  moneys
payable	 under	the  policies. The ITO	in  a  letter  dated
28.7.72 addressed to the LIC had added that the alleged
102
transfer  of  policies by G.V. Ranade to his wife  are	void
with an intention to defraud the revenue and the case  falls
within	the mischief of section 281 of the Income  Tax	Act,
1961;  and the LIC was requested to withhold any payment  to
Smt. Kamalabai G. Ranade till further communication from the
ITO.
    On 5.9.1972 Smt. Kamalubai G. Ranade filed a writ  peti-
tion, (S.C.A. No. 861 of 1972), in the High Court of  Bombay
impleading the LIC and the ITO as respondents therein claim-
ing several reliefs which are mentioned at pages 33 to 35 of
the paper-book. The reliefs included a direction to the	 LIC
for payment of Rs.3415.70 due on 14.9.72 on maturity of	 the
first policy to Smt. Kamalabai G. Ranade and also to make  a
statement  on oath as contemplated by section 226(3) of	 the
Income Tax Act, 1961 that no part of the said amount is	 due
to G.V. Ranade nor does the LIC hold any part of the sum for
or  on account of G.V. Ranade. This writ petition  was	dis-
missed in limine by the High Court on 14.9.72. The amount of
Rs.3415.70 payable against the first policy which matured on
14.9.72	 was paid by the LIC to the ITO. Smt.  Kamalabai  G.
Ranade	filed  an appeal (C.A. No. 373.of 1973)	 by  special
leave  in this Court against dismissal of her writ  petition
by  the	 Bombay High Court. That appeal was disposed  of  by
this Court on October 6, 1975 as under:
			"On  behalf  of the  Life  Insurance
	      Corporation of India Mr. Rathi stated that  he
	      would file the necessary statement on oath  in
	      accordance with sub-cl. (vi) of CI. (3) of  S.
	      226 of the Income Tax Act, 1961 and file it in
	      Court  within  two months from  today  stating
	      that  no sum of money is due to the  Assessee,
	      insured person, before the Incometax  Officer.
	      It  will thereafter be open to the  Income-tax
	      Officer  to take such other proceedings as  he
	      might  consider necessary in order to  realise
	      the  amounts  due from the  assessee.  It	 is,
	      however, stated that in respect of one policy,
	      the  Life	 Insurance Corporation	has  already
	      paid  the money to the Income-tax Officer.  In
	      respect  of it no statement need be  made	 and
	      consequently  no	order can be made  under  S.
	      226(3)(vi). The appeal is disposed of  accord-
	      ingly. There will be no order as to costs".
    In	pursuance of the above order of this Court, the	 LIC
filed  on December 5, 1975 the requisite statement  on	oath
under  section	226(3)(vi) of the Income Tax  Act,  L961  in
respect of the remaining three policies.
103
attachment  in spite of the LIC making the requisite  state-
ment  on  oath under section 226(3)(vi) of Income  Tax	Act,
1961  on 5.12.75. This led to another writ petition  (S.C.A.
302 of 1977) filed in the Bombay High Court by Smt.  Kamala-
bai  G. Ranade praying for a direction to the ITO to  revoke
all  notices issued under section 226(3) to the LIC  and  to
the  LIC to pay to her the amount due against  the  policies
which  had matured. On 4.4.71 counsel for the  ITO  produced
before	the  High  Court a copy of the	order  dated  1.4.77
passed	by  the Income-tax Officer  withdrawing	 the  notice
under  section 226(3) of the Income Tax Act, 196 1  and	 the
writ petition was dismissed as withdrawn.
    Smt. Kamalabai G. Ranade then promptly sent a notice  to
the  LIC demanding payment of the total amount	due  against
these  four policies together with interest @ 15% since	 the
delay  in payment had been occasioned by the default of	 the
LIC.  Admittedly  the  LIC had made  the  payment  of  these
amounts to Smt. Kamalabai G. Ranade in these circumstances.
The  L.I.C. has not disputed at any stage its  liability  to
pay to Smt. Kamalabai G. Ranade the amounts due under  these
policies.  However,  it has disputed its  liability  to	 pay
interest  thereon for any period after the date of  maturity
on the ground that the delay was Occasioned by the  I.T.O.'s
notice under section 226(3). On the other hand, Smt. Kamala-
bai G. Ranade claimed that the L.I.C. nad wrongfully refused
to   make  the	statement  as  contemplated  under   section
226(3)(vi) of the Income Tax Act, 1961 resulting in delay in
payment	 of the moneys after maturity of the policies.	This
dispute regarding the L.I.C.'s liability to pay interest led
to the filing of the Writ Petition No. 1248 of 1977  decided
on January 7, 1981 which gives rise to this appeal.
    The	 impugned judgment of the Bombay High Court in	Writ
Petition  No. 1248 of 1977 holds that the last two  policies
having	matured	 on 9.11. 1975 and 21.12.1975, i.e.,  a	 few
days  before  or after 5.12.75 when the	 statement  on	oath
under section 226(3) of the Income Tax Act, 1961 was made by
the L.I.C. did not qualify for award of such interest  which
was  payable in respect of the first two which	had  matured
much  earlier on 14.9.72 and 28.12.73. For the	period	com-
mencing from the date of maturity of the policy ending	with
performance of the L.I.C.'s obligation to make the statement
under  section	226(3)(vi) of the Income Tax  Act,  1961  on
5.12.75	 the L.I.C. has been held liable to pay interest  on
the basis of its failure to perform
104
its  statutory	obligation. This view of the High  Court  on
which the award of interest is based, is assailed on  behalf
of the appellant.
    The surviving dispute in this appeal is now only  .about
the L.I.C.'s liability for payment of interest on the  prin-
cipal  amount  from the date of maturity of  the  first	 two
policies  to 31.12.75, and the rate of 15 % per annum  which
is alleged to be excessive.
    Broadly stated, the contention of the appellant is	that
the  appellant	was not liable to pay any interest  for	 the
period	during which it was restrained from making the	pay-
ment on account of the I.T.O.'s notice under section  226(3)
of the Income tax Act, 1961 and the I.T.O. also adding	that
the  matter fell within the ambit of S. 281 of the  Act.  On
this basis it was urged on behalf of the appellant that	 the
award of interest on the first two policies from the date of
their  maturity	 till 31.12.1975 (statement on oath  by	 the
L.I.C. being made only. on 5.12.1975) is contrary to law.
    To support the main contention of the appellant, that it
is  not	 liable for payment of any interest for	 any  period
after  maturity	 of  the policies, Shri	 P.P.  Rao,  learned
counsel	 for the appellant advanced several  arguments.	 His
first  argument is that the Income-tax Officer was a  neces-
sary  party in the writ petition giving rise to this  appeal
and in his absence no effective adjudication of this dispute
can be made. The second argument is that the High Court	 has
misconstrued section 226(3) of the Income Tax Act, 1961	 and
thereby wrongly fastened the liability for payment of inter-
est  upto 31.12.75 on the appellant. The third	argument  is
that  the principle of res judicata or atleast	constructive
res  judicata,	as a result of the earlier  writ  petitions,
bars  the claim for payment of interest in this	 writ  peti-
tion. The fourth argument is that the writ petition  (S.C.A.
No.  302  of 1977) being withdrawn  unconditionally  without
liberty	 to file a fresh petition, this writ petition  (W.P.
No. 1248 of 1977) is not maintainable. The fifth argument is
that the rate of 15% p.a. at which interest has been awarded
is  excessive. The sixth and the last argument is  that	 the
appellant  has	been  required to  make	 double	 payment  of
Rs.3415.70 due against the policy which matured on 14.9.1972
inasmuch  as  the L.I.C. had already deposited	that  amount
earlier	 in September 1972 with the I.T.O. in  pursuance  to
the I.T.O. 's demand.
    In	reply,	Shri A.K. Sanghi, learned  counsel  for	 the
respondent  contended  that  the liability  for	 payment  of
interest  has been correctly fastened on the  appellant	 be-
cause of its failure to discharge the statu-
105
tory  obligation of making the requisite statement  on	oath
under  section 226(3)(vi) of the Income Tax Act,  1961	till
5.12.1975.  He	argued that the L.I.C. having  accepted	 and
registered the absolute assignment made by the insured	G.V.
Ranade	in favour of his wife Smt. Kamalabai G.	 Ranade,  it
was  the duty of the L.I.C. to promptly make  the  requisite
statement on oath under section 226(3)(vi) of the Income Tax
Act,  1961 which it made much later on 5.12.75 in  pursuance
to  the	 Court's order to enable the I.T.O.  to	 revoke	 the
notice issued by him under section 226(3) of the Income	 Tax
Act,  1961. Shri Sanghi stated that even though the  special
leave granted by this Court is confined only to the question
of  interest and therefore, does not extend to the  question
of  alleged double payment of Rs.3415.70 by the	 L.I.C.	 yet
the respondent concedes that the amount of Rs.3415.70 depos-
ited  by the L.I.C. with the I.T.O. may be refunded  by	 the
I.T.O. to the L.I.C. together with interest, if any, payable
on  refund of that amount; and that the respondent does	 not
lay any claim to that amount from the I.T.O. having obtained
that amount from the L.I.C.
    We	shall  first dispose of the last point	relating  to
double payment by the L.I.C. of the amount of Rs.3415.70  in
view of the express concession made by Shri Sanghi,  learned
counsel for the respondent that the respondent does not	 lay
any  claim to it and that the L.I.C. may obtain	 its  refund
from the I.T.O. In view of this statement of learned counsel
for the respondent, Shri Sanghi, it is sufficient to observe
that it would be open to the L.I.C. to obtain refund of	 the
amount of Rs.3415.70 deposited by it with the I.T.O. togeth-
er  with  interest,  if any, payable on the  refund  by	 the
Income	Tax Department, since it has been conceded that	 the
respondent  does  not claim that amount from the  I.T.O.  We
shall  now  deal with the remaining arguments of  Shri	Rao,
learned counsel for the appellant.
    The first argument of the learned counsel for the appel-
lant  is that the I.T.O. was a necessary party in  the	writ
petition  giving  rise	to this appeal.. We  are  unable  to
accept this contention. The only claim made in Writ Petition
No.  1248  of 1977 decided on 7.1.1981 giving rise  to	this
appeal	is for payment of interest by the appellant, and  no
relief has been sought against the I.T.O. This being so, for
effective adjudication of the L.I.C.'s liability towards the
respondent, the presence of the I.T.O. is not necessary. The
respondent's  claim is only against the L.I.C.	without	 any
claim being made in the alternative or otherwise against the
I.T.O. The respondent's claim has, therefore, to succeed  or
fail  only on the basis of the L.I.C.'s liability  vis-a-vis
the  respondent without involving the I.T.O. or anyone	else
in that process. Merely
106
because the defence of the L.I.C. was based on an act of the
I.T.O.,	 it was not incumbent for the respondent to  implead
the  I.T.O. in this proceeding when neither any	 relief	 was
claimed against the I.T.O. nor was any suggestion of  I.T.O.
's liability for payment of interest made in the writ  peti-
tion. This argument is, therefore, rejected.
    The second argument relating to construction of  section
226(3)	of  the	 Income Tax Act, 1961 is in  fact  the	main
argument  of Shri Rao and, therefore, we shall consider	 the
same  after disposing of the remaining arguments  which	 are
shorter points.
    The	 third	argument is based on the  principle  of	 res
judicata  and constructive res judicata on the basis of	 two
earlier	 writ petitions filed by Smt. Kamalabai	 G.  Ranade.
The first writ petition was S.C.A. No. 861 of 1972 filed  in
the Bombay High Court on 5.9.72 prior to the date of maturi-
ty  of the first policy claim against,which was required  to
be  paid  by  the L.I.C. to the assignee,  Smt.	 Kamalaba  G
Ranade. This was after issuance of the notice under  section
226(3)	of  the Income Tax Act, 1961 by the  I.T.O.  to	 the
L.I.C. One of the reliefs claimed therein was a direction to
the  L.I.C. to make a statement on oath as required by	sec-
tion 226(3)(vi) of the Income Tax Act, 1961 that no part  of
the  amount due against the policy maturing on	14.9.72	 was
due  to the insured G.V. Ranade nor did the L.I.C. hold	 any
part of that sum for or on account of the alleged defaulter.
No  doubt  some other reliefs including	 revocation  of	 the
notice	under  section 226(3) of the Income  Tax  Act,	1961
were. also claimed including payment 01' the amount together
with  the accretions thereto. This writ petition being	dis-
missed,	 Smt.  Kamalabai  G. Ranade came to  this  Court  by
special leave and Civil Appeal No. 373 of 1973 was  disposed
of  by	this  Court's order dated  6.10.1975  requiting	 the
L.I.C. to make the necessary statement on oath in accordance
with  section 226(3)(vi) of the Income Tax Act, 1961  within
two months. It is obvious that with this direction requiring
the  L.I.C.  to make the requisite statement on	 oath  under
section	 226(3)(vi) of the Income Tax Act, 1961, no  further
question  survived in that writ petition and the  consequent
civil  appeal  in  this Court since  the  further  questions
including  payment of interest on the principal amount	were
to  arise only at a subsequent stage. Asking for  any  other
relief	was obviously premature at that stage. It is  appar-
ently for this reason that this Court did not at that  stage
go into the other questions relating to the further  reliefs
specified  in  that  writ petition.  That  decision  cannot,
therefore,  preclude agitation of the question	of  interest
subsequently.
107
    The next writ petition filed by Smt. Kamalabai G. Ranade
was  S.C.A.  No. 302 of 1977 in the Bombay High	 Court.	 The
prayer made therein was for a direction to the L.I.C. to pay
the principal amount together with interest thereon. In this
writ petition also the I.T.O. was impleaded as a party. This
writ petition had to be filed because in spite of the L.I.C.
having made the requisite statement under section 226(3)(vi)
of  the	 Income	 Tax Act, 1961 on  5.12.75,  the  Income-tax
Officer had not withdrawn the notice under section 226(3) of
the  Income Tax Act, 1961 issued to the L.I.C.	and,  there-
fore, the L.I.C. was not making the payment to the  respond-
ent. On 4.4.77 that writ petition was dismissed as withdrawn
as  a result of the I.T.O .'s counsel filing a copy  of	 the
order  dated 1.4.1977 withdrawing the I.T.O.'s notice  under
section	 226(3)	 of the Income Tax Act,	 1961  enabling	 the
L.I.C.	to make the payment due against the policies to	 the
respondent. The operation of the notice under section 226(3)
of  the	 income Tax Act, 1961 by the I.T.O. being  the	only
reason	given  by the L.I.C. to support its action  of	non-
payment to the respondent, it was unnecessary to persue that
writ petition when the I.T.O. had made the order withdrawing
the  notice under section 226(3) of the Act. Admittedly,  it
was in consequence of the withdrawal of the I.T.O.'s  notice
by order dated 1.4.77 that payment was actually made by	 the
L.I.C.	to  the respondent. It is, therefore,  difficult  to
appreciate how the withdrawal of that writ petition can,  in
any  manner, preclude the respondent from raising the  ques-
tion  of  the L.I.C.'s liability to pay	 interest  when	 the
principal amount alone was paid later.
    The	 L.I.C.	 having refused to pay the interest  on	 the
principal  amount in spite of the inordinate delay  in	pay-
ment,  the  Writ Petition No. 1248 of 1977 had to  be  filed
giving	rise  to this appeal raising only  the	question  of
L.I.C.'s  liability to pay interest on the principal  amount
due  against  the policies. The same is	 therefore,  clearly
maintainable  and the earlier writ petitions cannot, in	 any
manner,	 bar the adjudication of this point her,'in for	 the
reasons	 already given. This contention of  learned  counsel
for the appellant is also, therefore, rejected.
    The fourth contention based on withdrawal of writ  peti-
tion  (S.C.A. No. 302 of 1977) being covered by the  discus-
sion relating to the third contention, the same is rejected.
    The fifth argument relates to the rate of interest. Shri
Rao contended that the award of interest @15% p.a. is exces-
sive even if the L.I.C. is held liable for payment of inter-
est. Reference was made by
108
Shri Rao to Section 244 of the Income Tax Act, 1961  provid-
ing  for payment of interest on refund which prescribed	 the
rate of 12% p.a. from 1.7.1972 to 1.10.1984, the increase to
15%  p.a. being made therein only from 1.10.84 by  amendment
of that section. It was urged that the period in question in
the present case being prior to 1.10.84 the rate of 15% p.a.
in excess of the statutory provision of 12% p.a. in  Section
244 of the Income Tax Act, 1961 is unjustified.	 Admittedly,
the  award of interest, in the present case, for payment  by
the L.I.C. is not governed by Section 244 of the Income	 Tax
Act, 1961. Apparently, for this reason, learned counsel	 for
the  appellant relied on Section 244 of the Income Tax	Act,
1961  as of persuasive value. We are not impressed  by	this
argument. The High Court has relied on the fact that  inter-
est @ 15% p.a. is reasonable, in the present case,  particu-
larly  in  view of the fact that the L.I.C.  itself  charges
interest at that rate. It is sufficient for us to state that
there  is  no  material produced, in the  present  case,  to
suggest	 that award of interest @ 15% p.a. is  excessive  to
permit interference with the rate in this appeal particular-
ly when the High Court has come to the conclusion that	this
is  the reasonable rate. This argument also  is,  therefore,
rejected.
    The	 only point remaining for consideration now  is	 the
construction  of Section 226(3) of the Income Tax Act,	1961
the relevant portion of which, reads as under:
	      "Other  modes  of recovery:  226.(1)  Notwith-
	      standing the issue of a certificate to the Tax
	      Recovery	Officer under section 222,  the	 In-
	      come-tax	Officer may recover the tax  by	 any
	      one  or  more of the modes  provided  in	this
	      section.
............
	      (3)(i) The Income-tax Officer may, at any time
	      or  from	time to time, by notice	 in  writing
	      require  any person from whom money is due  or
	      may  become due to the assessee or any  person
	      who  holds or may subsequently hold money	 for
	      or  on account of the assessee, to pay to	 the
	      Income-tax  Officer either forthwith upon	 the
	      money  becoming  due or being held  or  at  or
	      within  the time specified in the notice	(not
	      being before the money becomes due or is held)
	      so  much of the money as is sufficient to	 pay
	      the  amount due by the assessee in respect  of
	      arrears  or the whole of the money when it  is
	      equal to or less than that amount.
	      109
			(ii) A notice under this sub-section
	      may  be issued to any person who holds or	 may
	      subsequently hold any money for or on  account
	      of the assessee jointly with any other  person
	      and for the purposes of this sub-section,	 the
	      shares  of the joint-holders in  such  account
	      shall  be	 presumed,  until  the	contrary  is
	      proved to be equal.
			(iii) A copy of the notice shall  be
	      forwarded to the assessee at his last  address
	      known  to the Income-tax Officer, and  in	 the
	      case  of	a joint account to  all	 the  joint-
	      holders  at their last addresses known to	 the
	      Income-tax Officer.
			(iv)  Save as otherwise provided  in
	      this  sub-section,  every	 person	 to  whom  a
	      notice is issued under this subsection.  shall
	      be  bound to comply with such notice, and,  in
	      particular, where any such notice is issued to
	      a post office, banking company or an  insurer,
	      it  shall not be necessary for any pass  book,
	      deposit receipt, policy or any other  document
	      to  be produced for the purpose of any  entry,
	      endorsement  or  the like	 being	made  before
	      payment  is  made, notwithstanding  any  rule,
	      practice or requirement to the contrary.
			(v) Any claim respecting any proper-
	      ty  in relation to which a notice	 under	this
	      sub-section has been issued arising after	 the
	      date  of the notice shall be void	 as  against
	      any demand contained in the notice.
			  (vi)	Where  a person	 to  whom  a
	      notice  under this subsection is sent  objects
	      to  it  by a statement on oath  that  the	 sum
	      demanded or any part thereof is not due to the
	      assessee	or that he does not hold  any  money
	      for  or  on  account of  the  assessee,  then,
	      nothing contained in this sub-section shall be
	      deemed to require such person to pay any	such
	      sum  or part thereof, as the case may be,	 but
	      if  it is discovered that such  statement	 was
	      false in any material particular, such  person
	      shall  be personally liable to the  Income-tax
	      Officer to the extent of his own liability  to
	      the assessee on the date of the notice, or  to
	      the extent of the assessee's liability for any
	      sum due under this Act, whichever is less.
	      (vii) The Income-tax Officer may, at any	time
	      or
	      110
	      from time to time, amend or revoke any  notice
	      issued  under this sub-section or	 extend	 the
	      time  for making any payment in  pursuance  of
	      such notice.
			(viii) The Income-tax Officer  shall
	      grant a receipt for any amount paid in compli-
	      ance  with  a notice issued  under  this	sub-
	      section,	and  the person so paying  shall  be
	      fully  discharged	 from his liability  to	 the
	      assessee to the extent of the amount so paid.
			(ix)  Any  person  discharging	 any
	      liability	 to the assessee after receipt of  a
	      notice under this sub-section shall be person-
	      ally  liable to the Income-tax Officer to	 the
	      extent of his own liability to the assessee so
	      discharged or to the extent of the  assessee's
	      liability	 for  any sum due  under  this	Act,
	      whichever is less.
			(x)  If the person to whom a  notice
	      under  this subsection is sent fails  to	make
	      payment in pursuance thereof to the Income-tax
	      Officer, he shall be deemed to be an  assessee
	      in default in respect of the amount  specified
	      in  the notice and further proceedings may  be
	      taken  against him for the realisation of	 the
	      amount as if it were an arrear of tax due from
	      him, in the manner provided in sections 222 to
	      225 and the notice shall have the same  effect
	      as an attachment of a debt by the Tax Recovery
	      Officer  in exercise of his powers under	sec-
	      tion 222."
					  ............."
     The  argument of the learned counsel for the  appellant
is  that  on receipt of the I.T.O.'s  notice  under  section
226(3) of the Income Tax Act, 1961, the L.I.C. was not	left
with  the  option  to make the payment to  assignee  of	 the
policies  since the L.I.C. or its officer making the  state-
ment  on  oath under section 226(3)(vi) would  thereby	have
been  exposed to personal liability as the defaulter of	 the
income	tax dues. It was argued that in these  circumstances
the L.I.C. could make the payment only aftter revocation  of
the  notice by the I.T.O.'s Order dated 1.4.77	and,  there-
fore, the L.I.C. cannot be held liable for payment of inter-
est  for any period prior to revocation of the	notice.	 The
period	for  which the L.I.C. has been held  liable  to	 pay
interest  being	 prior to revocation of the  notice  by	 the
I.T.O., it was urged that the same was unjustified.
111
    Having  given our anxious consideration to the  argument
we cannot persuade ourselves to accept the same. On a  close
scrutiny  of the provision we find that the benefit  claimed
by  the L.I.C. is not available to it, in the facts  of	 the
present case.
    Admittedly	assignment of the policies was made  by	 the
insured	 G.V.  Ranade  and the same was	 duly  accepted	 and
registered  by the L.I.C. in April 1969. It  is,  therefore,
obvious that the L.I.C. was bound to act on that  assignment
in favour of Smt. Kamalabai G. Ranade unless the  assignment
was held to be invalid by a competent authority in a  proper
proceeding  taken for this purpose. It is  significant	that
the L.I.C. never disputed the validity of the assignment and
was throughout prepared to act on it. It is undisputed	that
the  assignment	 was not declared invalid by  any  competent
authority.  Mere issuance of notice under section 226(3)  of
the Income Tax Act, 1961 did not have the effect of  invali-
dating the assignment nor did the casual mention of  Section
281 of the Income Tax Act, 1961 by the I.T.O. in his  letter
dated  28.8.72 result in this consequence. Any further	step
towards	 formation of the final opinion by the I.T.O.  could
be taken only after the L.I.C. had made the requisite state-
ment on oath under section 226(3)(vi) of the Income Tax Act,
1961 on the basis of the registered assignment of  policies.
This  act was performed by the L.I.C. only on 5.12.75  which
led to revocation of the notice under section 226(3) of	 the
Act,  by the I.T.O. The question is of the liability of	 the
L.I.C. in these circumstances.
 Section  226 consists of several Sub-sections  of  which
sub-sections (1) and (3) alone are relevant for our purpose.
Sub-section  (1)  enables the I.T.O. to recover the  tax  by
anyone	or more of the further modes provided in  this	sec-
tion.  Sub-section  (3) deals with one such mode  where	 the
defaulter's  money is held by another person. Clause (i)  of
sub-section  (3) enables the I.T.O. by notice in writing  to
require any person from whom money is due or may become	 due
to the assessee or any person who holds or may	subsequently
hold  money  for or on account of the assessee	to  pay	 the
Income-tax Officer that money or so much of it as is  suffi-
cient  t6  pay the dues of the assessee in  respect  of	 the
arrears	 of  tax. It is in exercise of this power  that	 the
I.T.O.	had issued the notice to the L.I.C. in	the  present
case.  Obviously,  the	I.T.O. had assumed  that  the  money
payable	 on maturity of these policies belonged to  the	 in-
sured/assessee/defaulter  G.V. Ranade overlooking  the	duly
registered  assignment	made much earlier in favour  of	 the
assessee's  wife in April 1969. The further clauses (ii)  to
(v) of sub-section (3) deal with ancillary matters and	also
provide that any
112
claim in respect of property covered by the notice shall  be
void  after  the date of the notice as	against	 the  demand
contained in the notice.
    Clause  (vi)  is relevant for the  present	purpose	 and
speaks	of the obligation of a person to whom such a  notice
has  been  sent. Clause (vi) relieves the  person  receiving
such  a	 notice	 from the liability to pay any	sum  to	 the
I.T.O. in obedience to the notice if he "objects to it by  a
statement on oath that the sum demanded or any part  thereof
is  not	 due to the assessee or that he does  not  hold	 any
money  for or on account of the assessee". This clause	fur-
ther provides that "if it is discovered that such  statement
was  false in any material particular" such person shall  be
personally liable to the I.T.O. to the extent of the  asses-
see's  liability  on the date of notice. Clause	 (vii)	then
provides,  inter  alia, for amendment or revocation  of	 the
notice	issued	under this sub-section by  the	I.T.O.	This
stage of amendment or revocation of the notice under  clause
(vii)  is  reached only after the stage provided  in  clause
(vi),  in a case where the notice objects that he  does	 not
hold  the  money for or on behalf of the  defaulter  of	 tax
dues.
    It	is, therefore, obvious that the question of  revoca-
tion of the notice under clause (vii) of sub-section (3)  of
section 226 of the Income Tax Act, 1961 arose in the present
case  only after the L.I.C. made the requisite statement  on
oath  under  section 226(3)(vi) of the Act in  view  of	 its
consistent  stand throughout that the moneys due  under	 the
policies  were held by it for and on behalf of the  assignee
and not the defaulter. Mere information of the assignment to
the I.T.O. and keeping the assignee informed of the I.T.O.'s
action did not amount to discharge of the statutory  obliga-
tion under section 226(3)(vi) of the Act, by the L.I.C.	 The
statute	 having expressly provided the mode of raising	such
an objection in the form of a statement on oath specified in
clause	(vi), performance of that obligation by	 the  notice
had  to be made only in that manner. This statutory  obliga-
tion was performed by the L.I.C. only on 5.12.1975 as stated
earlier.  The  personal liability arising after	 making	 the
requisite  statement on oath as envisaged by clause (vi)  is
only  "if it is discovered that such statement was false  in
any material particular and not otherwise.
     Learned  counsel  for  the appellant  argued  that	 the
requisite  statement under section 226(3)(vi) of the  Income
Tax  Act,  1961	 could not be made by the  L.I.C.  since  it
involved  the  risk of exposing the L.I.C.  or	its  officer
making	the statement on oath to personal liability for	 the
income	tax dues of the assessee/defaulter G.V.	 Ranade.  In
the  first place, such a statement was in fact made  without
hesitation by the
113
L.I.C. on 5.12.75 after the assignee was compelled to obtain
such a direction in a writ petition filed by her. That apart
the  risk  visualised on behalf of the L.I.C.,	in  ultimate
analysis,  is entirely imaginary and not real. The  risk  of
personal liability envisaged in clause (vi) arises only	 "if
it is discovered that such statement was false in any  mate-
rial particular". Thus, there is no risk of personal liabil-
ity  of the person making the statement on oath	 unless	 any
material particular mentioned in the statement is false. The
statement on oath required to be made by clause (vi) is only
"that the sum demanded or any part thereof is not due to the
assessee  or that he does not hold any money for or  on	 ac-
count  of  the assessee". The L.I.C. itself  has  taken	 the
stand throughout that the sum demanded by the notice  issued
under  section	226(3) of the Income Tax Act,  1961  by	 the
I.T.O.	did  not belong to the assessee inasmuch as  it	 was
payable	 only to the assignee, Smt. Kamalabai G.  Ranade  by
virtue	of the assignment made, accepted and  registered  in
April  1969  much earlier to the date of  the  notice.	This
being  so  the	making	of this statement  on  oath  of	 the
L.I.C.'s own stand which in fact was so made on 5.12.75	 did
not  involve  even remotely the possibility of any  risk  of
personal liability.
    On	the contrary, real risk of the L.I.C. being  treated
deemed	defaulter assessee under clause (x)  of	 sub-section
(3)  of section 226 of the Act lay in its failure to pay  to
the I.T.O. after receipt of notice under section 226(3), the
amounts of the matured policies within the time given by the
I.T.O. or a reasonable time, without objecting to the demand
by  denying  its  liability to the assessee  in	 the  manner
prescribed  in clause (vi) thereof, instead of in doing	 so.
Prudence  also required the L.I.C. in its own  interest,  to
object	to  the demand according to clause (vi)	 instead  of
refusing or delaying the objection. The argument that such a
statement  was not made since it involved the likelihood  of
exposing  the  L.I.C.  or any of its  officers	to  personal
liability  has,	 therefore, no merit. This  being  the	only
reason	given by the L.I.C. to justify the inordinate  delay
in  making the requisite statement under section  226(3)(vi)
of the Income Tax Act, 1961, it is obvious that this defence
is untenable.
    Sub-section	 (3) of section 226 of the Income  Tax	Act,
1961 clearly shows that on a notice thereunder being  issued
by  the	 I.T.O. to the L.I.C., in the present case,  it	 was
incumbent  on the L.I.C. to make the requisite statement  on
oath  under clause (vi) thereof raising an objection on	 the
basis  of  the registered assignment. It was  then  for	 the
I.T.O.	to  proceed further and form his final	opinion	 and
revoke	the notice under clause (vii). It was  not  possible
for the assignee of the
114
policies  to obtain revocation of the notice by	 the  I.T.O.
without	 the requisite statement on oath being made  by	 the
L.I.C.	as  envisaged in clause (vi) of sub-section  (3)  of
section	 226 of the Income Tax Act. It is obvious  that	 the
inordinate  delay  in making the statement on  oath  by	 the
L.I.C. under section 226(3)(vi) of the Income Tax Act,	1961
was  the  result  of misconstruction of	 the  provision	 and
misappreciation of its liability thereunder.
entitled to receive the amounts due thereunder on the  dates
of their maturity must be compensated by the L.I.C. for	 its
failure	 to perform its statutory obligation  under  section
226(3)(vi)  of the Income Tax Act, 1961 within a  reasonable
time. We have no doubt that this is the proper	construction
of section 226(3) of the Income Tax Act, 1961 and the conse-
quential liability resulting from the failure of the  notice
to raise the objection in the prescribed manner under clause
(vi)  thereof within a reasonable time. Performance of	this
statutory  obligation  by the L.I.C., in the  present  case,
being  after  inordinate  delay, award of  interest  to	 the
assignee of the policies to whom the payment thereunder	 had
to  be	made even according to the stand of the	 L.1.C.	 is,
therefore,  clearly  justified.	 This  contention  which  is
really the main contention urged on behalf of the appellant,
therefore, fails and is rejected.
    Consequently,  the appeal is dismissed with	 costs.	 The
costs are quantified at Rs.2,000.
R.N.J.						Appeal	dis-
missed.
115

Sunil Sitaram Mahajan vs Suryakant Pandurang Badave And Ors on 13 June, 2018
Equivalent citations: AIRONLINE 2018 BOM 822
Author: R.D. Dhanuka
Bench: R.D. Dhanuka
                                                                   wp6778-17

vai

               IN THE HIGH COURT OF JUDICATURE AT BOMBAY
                      CIVIL APPELLATE JURISDICTION

                           WRIT PETITION NO.6778 OF 2017

      Shri Sunil Sitaram Mahajan                   )
      Age 49 years, Occupation : Business,         )
      R/At Radhakrishna Colony, Ichalkaranji,      )
      Taluka Hatkanangale, District Kolhapur       )         ...Petitioner

                   ....Versus....

      1).   Suryakant Pandurang Badave,            )
            Age Adult, Occupation : Business,      )
            R/At 5/606, Date Mala, Ichalkaranji,   )
            District Kolhapur.                     )
                                                   )
      2).   District Deputy Registrar              )
            Co-operative Societies, Kolhapur.      )
                                                   )
      3).   Recovery Officer,                      )
            Shahu Corner Nagari Sahakari           )
            Path Sanstha Maryadit,                 )
            5/44, Shahu Corner, Ichalkaranji,      )
                                                   )
      4).   Sou.Pooja Annaso Jadhav,               )
            Age Adult, Occupation : Household,     )
            R/At Mahavir Housing Society,          )
            Kolhapur Road, Ichalkaranji,           )
                                                   )
      5).   Joint Registrar,                       )
            Co-operative Societies, Kolhapur       )
            Division, Kolhapur.                    )
                                                   )
      6).   Shivaji Dhondiram Powar,               )
            Age Adult, R/At Behind Radha           )
            Krishna Talkies, Ichalkaranji,         )
                                                   )

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7).   Shahu Corner Nagari Sahakari Pat                )
      Sanstha Maryadit, Ichalkaranji,                 )
      5/44, Near Venkatrao School,                    )
      Shahu Corner, Ichalkaranji - 416 115            )
      Taluka Hatkanangale, Dist. Kolhapur             )            ...Respondents

Mr.Amit B. Borkar for the Petitioner.

Mr.Girish R. Agrawal for the Respondent No.1.

Mr.S.H. Kankal, A.G.P. for the State - Respondent Nos.2 and 5.

Mr.Pradeep D. Dalvi for the Respondent Nos.4 and 7.

Mr.N.J. Patil i/b Mr.Amey N. Patil for the Respondent No.6.

                        CORAM         : R.D. DHANUKA, J.
                        RESERVED ON   : 4TH MAY, 2018
                        PRONOUNCED ON : 13TH JUNE, 2018

JUDGMENT :-

1.           By this petition filed under Article 227 of the Constitution of
India, the petitioner has impugned the order and judgment dated 1 st
February, 2017 passed by the learned Divisional Registrar, Co-
operative     Societies,       Kolhapur   Division,       Kolhapur     in    Revision
Application Nos.373 and 374 of 2016 and the Revision Application
Nos. 409 and 420 of 2016. Learned counsel appearing for the
petitioner states that all the respondents are served. The statement is
accepted. Rule. Learned counsel for the respondents waive service.
By consent of parties, writ petition is heard finally.

2.           The respondent no.4 had obtained a loan from the
respondent no.7 i.e. Shahu Corner Nagari Sahakari Path Sanstha
Maryadit. The respondent no.1 and one Ratanlal Madanlal Bamb
were the guarantors for the said loan obtained by the respondent no.4

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from the respondent no.7 society. The borrower as well as the
guarantors committed default in making repayment of the said loan.
The respondent no.7 therefore, filed an application under section 101
of the Maharashtra Co-operative Societies Act, 1960 (for short "the
M.C.S. Act.") before the District Deputy Registrar, respondent no.2
herein.

3.          On 1st June, 2010, the respondent no.2 issued a recovery
certificate in favour of the respondent no.7 society. The said recovery
certificate was neither challenged by the borrower nor by the
guarantors. Pursuant to the said recovery certificate, the respondent
no.3 attached the immovable property of the respondent no4. The
property of the respondent no.1 bearing City Survey No.12029
admeasuring        459 sq. mtrs. at Date Mala, Ichalkaranji was also
attached. On 26th December, 2012, the auction came to be held in
respect of the said property of the respondent no.1. The petitioner
along with other four bidders participated in the said auction. The bid
of the petitioner was the highest. It is the case of the petitioner that
the bid of the petitioner was much more than the upset price and was
thus accepted by the respondent no.3.

4.          The petitioner deposited an amount of Rs.5,47,500/-
towards 15% of the amount of bid by cheque No.012593 dated 26 th
December, 2012 on the same date drawn on Kalappa Awade
Ichalkaranji Janata Sahakari Bank Limited and thereafter deposited
the balance 85% amount of Rs.31,02,500/-         by cheque No.12598
dated 7th January, 2013 drawn on the same Bank within a period of 15
days from the date of auction. The petitioner also deposited an
amount of Rs.2,20,000/- towards the stamp duty in respect of the
proposed sale deed.

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5.           It is the case of the petitioner that since the borrower or the
guarantors did not pay the amount of auction along with costs plus
5% amount within 30 days from the date of auction under Rule
107(13) and other provisions of the Maharashtra Co-operative
Societies Rules (for short the "M.C.S. Rules"), the respondent no.3
sent a proposal for confirmation of sale to the respondent no.2 i.e. the
District Deputy Registrar. The respondent no.2 however, by an order
dated 21st December, 2013 refused to grant sale certificate in favour
of the petitioner.

6.           The respondent no.3 addressed a letter to the respondent
no.2 on 6th January, 2014 stating that due to factual incorrect
statement, the respondent no.2 had refused to confirm the sale in
favour of the petitioner and thus the respondent no.2              shall grant
confirmation of sale in respect of the said property in favour of the
petitioner. The respondent no.2 accordingly issued a notice dated 23rd
January, 2014 to all the concerned parties to remain present in his
office on 3rd February, 2014 for hearing on the objections mentioned
in the letter dated 6th January, 2014 addressed by the respondent
no.3 i.e. the Recovery Officer of Shahu Corner Nagari Sahakari
Path Sanstha Maryadit.

7.           Being aggrieved by the said communication dated 6 th
January, 2014 sent by the respondent no.2, the respondent no.1
herein filed a Revision Application bearing No.51 of 2014 initially
without making the petitioner a party respondent. The petitioner
however, on his application was later on impleaded as one of the
respondent       to the said revision application. The petitioner filed a
detailed reply raising various issues, including the issue of

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maintainability of the said revision application. The petitioner also
pointed out that the respondent no.1 had already filed a suit (Regular
Civil Suit No.199 of 2014) which suit was pending on the date of the
said revision application filed by the respondent no.1.

8.          By an order dated 20th January, 2015 passed by the
respondent no.5 i.e. the Divisional Joint Registrar, Co-operative
Societies, the petitioner herein preferred a writ petition (11417 of
2015) in this Court. By an order and judgment dated 18th March, 2016,
passed by Shri Justice R.M. Savant, the said writ petition was made
absolute. This Court was pleased to set aside the letter dated 21 st
December, 2013 of the District Deputy Registrar, holding that the said
authority had erroneously refused the permission on the grounds
mentioned in the said order and judgment. This Court directed the
District Deputy Registrar to proceed on the basis of the notice of
hearing dated 23rd January, 2014 and to conclude the proceedings.
The said order and judgment dated 18th March, 2016 was not
impugned by any of the respondents.

9.          Pursuant to the said order and judgment, the learned
District Deputy Registrar after hearing all the parties, issued a sale
certificate and confirmation of sale by an order dated 12 th September,
2016 in favour of the petitioner. Being aggrieved by the said sale
certificate dated 12th September, 2016, the respondent no.1 filed a
fresh Revision Application No.373 of 2016. The respondent no.6 filed
Revision Application No.409 of 2016. By an order dated 1 st February,
2017, the learned Divisional Joint Registrar, Co-operative Societies,
Kolhapur Division, Kolhapur allowed the said revision applications
filed by the respondent nos.1 and 6 and was pleased to set aside the
sale confirmation order and sale certificate issued by the learned

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District Deputy Registrar, Co-operative Societies on 12th September,
2016 and various orders passed therein. Being aggrieved by the said
order dated 1st February, 2017, the petitioner herein preferred this writ
petition under Article 227 of the Constitution of India.

10.          Mr.Borkar, learned counsel appearing for the petitioner
invited my attention to various annexures to the writ petition including
various orders passed by the authorities from time to time and the
order and judgment dated 18th March, 2016 passed by this Court in
Writ Petition No.11417 of 2015 filed by the petitioner thereby allowing
the said writ petition. It is submitted that neither the borrower nor the
guarantors had challenged the recovery certificate dated 1st June,
2010 issued by the learned District Deputy Registrar, Co-operative
Societies, in favour of the respondent no.7 society. Neither the
borrower nor the guarantors invoked any of the provisions of Rule 107
of the M.C.S. Rules and did not deposit any amount as contemplated
under those provisions for setting aside the sale in favour of the
petitioner. He submits that the respondent no.1 thus could not have
filed the said revision application directly i.e. Revision Application (51
of 2014) before the Revisional Authority thereby impugning the sale
and confirmation certificates.

11.          Learned counsel strongly placed reliance on the order and
judgment delivered by this Court on 18th March, 2016 in an earlier Writ
Petition filed by the petitioner (11417 of 2015) against the order of the
learned Divisional Joint Registrar passed on 20 th January, 2015. He
submits that this Court has already held in the said judgment that the
notice of hearing issued by the learned District Deputy Registrar by
no stretch of imagination could be said to be a decision or order so
as to entitle the respondent no.1 to invoke section 154 of the said

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M.C.S. Act. It is held by this Court that the learned Divisional Joint
Registrar has exceeded his jurisdiction under section 154 of the
M.C.S. Act when none was vested in him and thus the said learned
Divisional Joint Registrar had erred in setting aside the notice of
hearing dated 23rd January, 2014.

12.          It is submitted that the revision application filed by the
respondent no.1 which was the subject matter of the Writ Petition
No.11417 of 2015 having been already held as not maintainable,
upon remand of the proceedings before the respondent no.2 and
upon adverse order passed by the respondent no.2 and in favour of
the petitioner upon such remand, could not have been challenged
once again by way of the revision application under section 154 of the
M.C.S. Act. It is submitted by the learned counsel that the revision
application challenging the sale and confirmation certificate was not
maintainable in view of the respondent no.1 not having applied for
setting aside the sale under Rule 107 of the M.C.S. Rules. It is
submitted that the impugned order thus passed by the learned
Divisional Joint Registrar is in the teeth of the order and judgment
passed of this Court which was delivered on 18 th March, 2016 in Writ
Petition No.11417 of 2015 filed by the petitioner against the

13.          In support of the submission that the revision application
filed by the respondent no.1 was not maintainable, learned counsel
for the petitioner also placed reliance on the judgment of this Court in
case of Manager, Adarsh Mahila Nagri Sahakari Bank Limited &
Anr. vs. State of Maharashtra & Ors., 2012(2) Bom. C.R. 163 and
in particular paragraphs 6 to 9. He submits that the judgment of this
Court in case of Manager, Adarsh Mahila Nagri Sahakari Bank

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Limited & Anr. (supra) has been followed by this Court in the said
judgment dated 18th March, 2016. He submits that though the issue of
maintainability of the revision application was raised by the petitioner
before the learned Divisional Joint Registrar, the said contention
raised by the petitioner has been totally over looked by the Revisional
Authority.

14.          Learned counsel for the petitioner strongly placed reliance
on Rule 107 (12), (13), (14) and (19) and would submit that the
respondent no.1 could have exercised his remedy under one of these
provisions before the respondent no.3 itself if he was aggrieved by
the auction sale proposed by the respondent no.3 or even after such
sale was effected within the time prescribed under those provisions
and on the terms and conditions set out therein. The respondent no.1
however, did not exhaust any of those remedies available in law to
the respondent no.1.

15.          Learned counsel for the petitioner placed reliance on the
judgment of the Supreme Court in case of Commissioner of Income
Tax, Bombay South, Bombay vs. M/s.Ogale Glass Works
Limited, AIR 1954, SC 429 and in particular paragraph 11. He also
placed reliance on section 269(SS) and 269(T) which provisions were
inserted in the year 2004 and 2002 respectively in the Income Tax
Act, 1961. It is submitted that the petitioner had already made a
deposit of amount of 15% on the date of auction by a cheque. Since
the amount involved in the said transaction was more than
Rs.20,000/- under the provisions of the Income Tax Act, 1961 and
more particularly section 269(SS) and 269(T), the petitioner could not
have deposited the said amount in cash.

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16.          It is submitted that the cheque issued and deposited by the
petitioner was accepted unconditionally by the respondent no.3. The
cheque was admittedly encashed in the account of the respondent
no.3 when deposited. He submits that thus the payment made by a
cheque by the petitioner thus relate back to the date of the deposit of
cheque and in law the date of payment was the date of the delivery of
the cheque and not when the cheque was honoured upon
presentation. He submits that the impugned order passed by the
learned Divisional Joint Registrar is totally perverse and is contrary to
the provisions of the M.C.S. Act and said M.C.S. Rules. The petitioner
has already made the entire payment including the payment of stamp
duty. The respondent no.1 not having raised any objection at any
point of time when the auction sale took place within the time
contemplated and in the manner as provided under the said Rules,
could not have raised an objection subsequently by filing a revision

17.          Mr.Girish Agrawal, learned counsel appearing for the
respondent no.1 (one of the guarantors) on the other hand would
submit that the petitioner had not complied with the mandatory
requirement of deposit of 15% on the date of the auction sale in cash
or by demand draft or by R.T.G.S. The payment made by the
petitioner by a cheque towards 15% deposit on the date of auction
could not even considered as compliance of mandatory requirement
under Rule 107(11)(g) of the M.C.S. Rules. He submits that
admittedly on the date of issuance of the said cheque, there was no
sufficient balance in the account of the petitioner. It is submitted that
the said Rule 107(11)(g) of the M.C.S. Rules is in pari materia with
Order 21 Rule 84 of the Code of Civil Procedure, 1908. Since the
cheque was admittedly honoured after three days of such deposit, the

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said deposit could not have been considered as in compliance of Rule
107(11)(g) of the M.C.S. Rules.

18.          In support of this submission, the learned counsel for the
respondent no.1 placed reliance on the following judgments :-

a).          This Court in case of Niranjan D. Woody vs. The South
Indian Co-op. Bank Ltd. & Ors., 2006(6) ALL MR 144 (paragraphs
11 to 13),
b).          The judgment of the Punjab & Haryana High Court in case
of Margaret A. Skinner vs. M/s.Empire Store Connaught Place,
1975(77) PunLR 64 (paragraphs 8),

c).          The judgment of the Allahabad High Court in case of Hira
Lal & Ors. vs. Mst.Champa & Ors., AIR 1955 Allahabad, 226
(paragraphs 4),
d).          The judgment of the Himachal Pradesh High Court in case
of State Bank of India vs. Mohini Devi, 1998 Law Suit (HP) 28
(paragraph 25),
e).          The judgment of the Madhya Pradesh High Court in case
of M/s.Progressive Industrial Enterprises vs. Bank of Baroda &
Ors., AIR 1989 Madhya Pradesh 177 (paragraphs 7, 9 and 10),
f).          The judgment of the Supreme Court in case of Rao
Mahmood Ahmed Khan vs. Sh.Ranbir Singh & Ors., AIR 1995 SC
2195 (paragraph 12) and

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g).          The judgment of the Supreme Court in case of C.N.
Paramasivam & Anr. vs. Sunrise Plaza, Through Partner & Ors.,
(2013)9 SCC 460 (Head Note "B").

19.          Insofar as the issue of maintainability of the revision
application is concerned, it is submitted by the learned counsel that
this Court while disposing of the writ petition by an order dated 18 th
March, 2016 in Writ Petition No.11417 of 2015 had made prima-facie
observations about the maintainability of the said revision application
and the said decision was not conclusive on the said issue. It is
submitted that in any event since the order passed by the respondent
no.2 confirming the sale and the sale certificate was nullity and ex-
facie in violation of the provisions of Rule 107, the sale of the property
in favour of the petitioner was nullity, the revision application filed
under section 154 of the M.C.S. Act was maintainable. He placed
reliance on an unreported judgment of this Court delivered on 7 th
March, 2018 in case of Manisha Bijal Shah vs. Shankar Laxman
Sutar & Ors. in Writ Petition No.1965 of 2013 with companion writ
petition.

20.          It is submitted by the learned counsel that Rule 107(11)(g)
of the M.C.S. Rules is in pari materia with Order 21 Rule 84 of the
Code of Civil Procedure, 1908. Since the petitioner had not deposited
15% of the highest bid amount at the time of purchase of the property
in auction in cash, the sale of the property in question could not have
confirmed in favour of the auction purchasers, in view of the sale
being nullity and in violation of Rule 107(11(g) of the M.C.S. Rules.
The said property was required to be re-sold.

21.          Mr.Agrawal learned counsel for the borrower also placed

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reliance on the following judgments :-

a).          The judgment of the Supreme Court in case of Assistant
Director of Inspection Investigation vs Kum. A.B. Shanthi, AIR
2002 SC 2188 (paragraph 4),
b).          The judgment of the Supreme Court in case of Manilal
Mohanlal Shah & Ors. vs. Sardar Sayed Ahmed Sayed Mahmad &
Anr., AIR 1954 SC 349 (paragraph 8),
c).          The judgment of the Supreme Court in case of Balram
Bhasa Ram vs. Ilam Singh & Ors., AIR 1996 SC 2781 (paragraphs
8 and 9),

d).          The judgment of the Supreme Court in case of M/s.Shilpa
Shares & Securities & Ors. vs. National Co-operative Bank
Limited & Ors., AIR 2007 SC 1874 (paragraphs 5 and 6),
e).          The judgment of the Punjab & Haryana High Court in case
of Ramji Lal & Anr. vs. Sarab Singh (dead) through L.Rs. & Ors.
2010(4) CCC 501 (P & H) (paragraph 21),

f).          The judgment of the Punjab & Haryana High Court in case
of Mehtab Singh Malik vs. M/s.S.R. Buildcon India (P) Ltd. & Ors.,
2009(4) CCC 417 (P & H) (paragraph 16),

g).          The judgment of this Court in case of               Jagdish
Radhakisan Kayasth vs. Ramesh N. Wagh & Ors., AIR 2001 Bom.
152 (paragraph 24 to 29),

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h).          The judgment of the Supreme Court in case of Sarguja
Transport Service vs. State Transport Appellate Tribunal Gwalior
& Ors., AIR 1987 SC 88 (paragraph 9),
i).          The judgment of the Supreme Court in case of Kiran
Singh & Ors. vs. Chaman Paswan & Ors. AIR 1954 SC 340, and

j).          The judgment of the Supreme Court in case of Gurnam
Singh (D) Thr. L.Rs. & Ors. vs. Gurbachan Kaur (D) by L.Rs. &
Ors., AIR 2017 SC 2419 (paragraph 23).

22.          Learned counsel for the respondent no.1 distinguished the
judgment of this Court in case of Shivangi D. Shah & Anr. vs.
Greater Bombay Co-operative Bank Ltd. & Ors., 2008 SCC
OnLine Bom. 20 on the ground that the facts before this Court in the
said judgment were totally different. During the course of argument
before this Court, I invited the attention of the learned counsel for the
parties to an unreported judgment of this Court delivered on 31st
January, 2013 in case of Shri Daulat Babanrao Tarle & Ors. vs.
Shri Balasaheb Babanrao Tarle in Writ Petition No.5299 of 2012
with companion writ petition. Learned counsel for the respondent no.1
distinguished the said judgment on the ground that this Court has not
considered the provisions of Order 21 Rule 84 of the Code of Civil
Procedure, 1908 in the said judgment and on the ground that the
facts before this Court in the said judgment were totally different. He
also distinguished the other judgments relied upon by the learned
counsel for the petitioner, including the judgment of the Supreme
Court in case of Commissioner of Income Tax, Bombay South,
Bombay (supra) and would submit that reliance placed by the
learned counsel for the auction purchaser on section 269(SS) and

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269(T) of the Income Tax Act, 1961 is of no relevance to the facts of
this case.

23.          Mr.Patil, learned counsel appearing for the respondent
no.6, who claims to have purchased the property in question from the
respondent no.1 submits that neither the auction purchaser nor the
bank had raised an issue of maintainability of the revision application
filed by the respondent no.1 or his client before the Special Recovery
Officer and thus cannot be allowed to raise that issue for the first time
in this writ petition. He placed reliance on section 21 of the Code of
Civil Procedure, 1908 and Rule 57 of the said M.C.S. Rules in support
of his submission that the auction of the suit property in favour of the
auction purchaser is nullity. He submits that office bearers of the
bank could not have remain present at the time of auction. He
submits that the respondent no.1 has already entered into an
agreement for sale with his client in respect of the property in
question on 6th July, 2007 for a consideration of Rs.21,49,195/-. Out
of the said consideration amount, the respondent no.6 has already
paid a sum of Rs.5.00 lakh to the respondent no.1. Under the said
agreement for sale, the respondent no.1 had agreed to execute a sale
deed in favour of his client on or before 10th November, 2007.

24.          It is submitted that the suit property has been auctioned by
the Special Recovery Officer without issuing any notice to his client.
His client has already filed a suit for various reliefs against the
respondent no.1 in a Civil Court which is still pending. His client is
ready and willing to deposit the entire dues of the bank within such
time as this Court may direct.

25.          Mr.Borkar, learned counsel for the auction purchaser in

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rejoinder submits that this Court in the order and judgment dated 18 th
March, 2016 in Writ Petition No.11417 of 2015 has already held that
the revision application filed by the guarantor was not maintainable.
He submits that all the findings rendered by this Court in the said
judgment were not prima-facie. He submits that            the Revisional
Authority cannot set aside the registered document entered into in
favour of the petitioner.

26.          Insofar as the judgments relied upon by Mr.Agrawal,
learned counsel for the respondent no.1 are concerned, it is
submitted that none of those judgments would assist the case of the
respondent no.1 or the respondent no.6, who is claiming through the
respondent no.1 in view of the fact that in none of those judgments,
the Supreme Court as well as the High Courts as the case may be
had considered the provisions of section 269(SS) and (TT) which
were inserted in the Income Tax Act, 1961 in the year 2004 and 2002
respectively. He submits that under the said provisions any payment
above Rs.20,000/- for any such transaction in cash was specifically
prohibited. It is submitted that in any event, no prejudice of any nature
whatsoever had caused to any of the respondents even if the said
cheque towards 15% of the amount was encashed by the bank after
three days from the date of deposit of such cheque by the petitioner.
No substantial injury is caused to any of the respondents as set out
under Rule 107 (14) of the M.C.S. Rules merely because the cheque
was encahsed by the bank after three days from the date of such
deposit.

27.          It is submitted that since the Central Act override the
provisions of the State Act i.e. the said M.C.S. Rules in case of
inconsistency, the provisions of the Income Tax Tax would be binding

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and not the provisions of the said M.C.S. Rules. He submits that in
any event the said Rule 107 of the said M.C.S. Rules does not
provide for any cash payment. He submits that even if it is construed
that the said Rule 107 of the M.C.S. Rules would contemplate
payment of 15% of the highest bid amount to be deposited on the
date of auction in cash, the same would be contrary to the provisions
of section 269(SS) and (TT) and 271(d) of the Income Tax Act, 1961.
He submits that the letter of the lender bank, if any, thus asking the
petitioner to deposit the said 15% of the highest bid amount
immediately would not be binding upon him being contrary to law. He
submits that in the said order and judgment dated 18 th March, 2016
passed by this Court in the said Writ Petition No.11417 of 2015 filed
by the petitioner herein, the impugned letters have been set aside. He
submits that the said judgment would be thus binding on all the
parties and in view of the said judgment, the revision applications filed
by the respondent no.1 as well as the respondent no.6 were not
maintainable.
                     REASONS AND CONCLUSIONS :

28.          It is not in dispute that the respondent no.4 had obtained a
loan from the respondent no.7 society for which the respondent no.1
and Mr.Ratanlal Madanlal Bamb were the guarantors. The borrowers
as well as the guarantors committed default in making repayment of
the said loan. The recovery certificate was issued by the District
Deputy Registrar on an application filed by the respondent no.7 under
section 101 of the MCS Act. The said recovery certificate dated 1 st
June, 2010 issued by the respondent no.2 was admittedly neither
challenged by the borrowers nor by the guarantors. The properties
mortgaged in favour of the respondent no.7 were thereafter attached
in execution of the said recovery certificate dated 1st June, 2010. The

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respondent no.3 thereafter took steps to auction the said property in
execution of the said recovery certificate. Auction sale was admittedly
conducted on 26th December, 2012 in respect of the property of the
respondent no.1.

29.          It is not in dispute that the petitioner along with the other
four bidders participated in the said auction and that the bid of the
petitioner was the highest and was much more than the auction price.
The bid of the petitioner was accepted by the respondent no.3. It is
also not in dispute that on 26th December, 2012 itself the petitioner
deposited an amount of Rs.5,47,500/- towards 15% of the amount as
bid with the respondent no.3 by cheque bearing No.012593 dated 26th
December, 2012 drawn on Kalappa Awade Ichalkaranji Janata
Sahakari Bank Limited. The petitioner thereafter also deposited the
balance 85% amount of Rs.31,02,500/- by cheque No.12598 dated
7th January, 2013 drawn on the same Bank within a period of 15 days
from the date of auction. The said cheque was also honoured when
presented. The petitioner also deposited an amount of Rs.2,20,000/-
towards the stamp duty in respect of the proposed sale deed.

30.          It is not in dispute that the said cheque of Rs.5,47,500/-
December, 2012 deposited with the respondent no.3 on the date of
auction was thereafter deposited by the respondent no.7 in its
account and was honoured on 28th December, 2012. The respondent
no.3 as well as other respondents did not raise any objection when
the petitioner had deposited the said amount towards 15% of the
highest bid amount by cheque with the respondent no.3 on 26 th
December, 2012 or even thereafter any time prior to the petitioner
depositing the balance 15% of the highest bid amount with the

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respondent no.3.

31.          The questions that arise for consideration of this court is
(a) whether the revision application filed by the respondent no.1 and
the respondent no.6 under section 154 of the Maharashtra Co-
operative Societies Act, 1960 were at all maintainable or not ? (b)
whether payment of Rs.5,47,500/- made by the petitioner towards
15% of the highest bid amount by a cheque dated 26th December,
2012 on the date of auction with the respondent no.3 was in
compliance with Rule 107(11) (g) of the MCS Rules or not? (c)
whether the petitioner was required to deposit the said 15% amount
under Rule 107(11)(g) of the MCS Rules, only in cash or by bankers'
cheque on the date of auction of the immoveable property.

32.          It is not in dispute that the respondent no.3 had sent a
proposal to the respondent no.2 for confirmation of the sale in respect
of the property auctioned in favour of the petitioner after the entire
consideration was received by the respondent no.3 from the
petitioner. It is the case of the petitioner that no such proposal was
required to be sent of the respondent no.3 to the respondent no.2 for
confirmation. It is not in dispute that by an order dated 21st December,
2013, the respondent no.2 had refused to grant the sale certificate in
favour of the petitioner.            Though the petitioner had already made
payment of the entire amount i.e. the highest bid amount submitted by
him, the respondent no.2 refused to confirm and grant sale certificate
in favour of the petitioner on the ground that the petitioner had not
deposited 15% amount of the highest bid on the date of auction.

33.          A perusal of the record indicates that the respondent no.3
vide its letter dated 6th January, 2014 informed the respondent no.2

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that due to factually incorrect statement made in the said order dated
21st December, 2013, the respondent no.2 had refused to confirm the
sale in favour of the petitioner and did not issue sale certificate in
respect of the said property in question. The respondent no.3
conveyed to the respondent no.2 that thus it was necessary and in the
interest of justice that the confirmation of the sale shall be issued by
the respondent no.2 in favour of the petitioner. Pursuant to the said
letter dated 6th January, 2014 from the respondent no.3, the
respondent no.2 issued a notice on 23rd January, 2014 calling upon all
the concerned parties to remain present in his office on 3rd February,
2014 for hearing on the objection mentioned in the letter dated 6th
January, 2014 issued by the respondent no.3.

34.          The respondent no.1 had admittedly challenged the said
notice dated 6th January, 2014 issued by the respondent no.2 calling
all the parties for hearing on the objection mentioned in the letter
dated 6th January, 2014. The respondent no.1 filed a Revision
Application No.51 of 2014 before the Divisional Joint Registrar under
section 154 of the MCS Act. The respondent no.1 also filed a regular
civil suit bearing no.199 of 2014 for various reliefs. The respondent
no.5 by an order dated 20th January, 2015 allowed the said Revision
Application No.51 of 2014 filed by the respondent no.1. It is not in
dispute that the petitioner herein filed a writ petition bearing no.11417
of 2015 in this court impugning the said order dated 20 th January,
2015 passed by the respondent no.5 thereby allowing the Revision
Application No.51 of 2014 filed by the respondent no.1.

35.          The said writ petition filed by the petitioner came to be
allowed. A perusal of the said judgment dated 18th March, 2016
delivered by this court on the said writ petition indicates that in the

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said writ petition, the petitioner had not only impugned the order dated
20th January, 2015 passed by the respondent no.5 but had also
challenged the order dated 21st December, 2013 passed by the
respondent no.2 refusing to issue the sale certificate in favour of the
petitioner on the ground that the petitioner had not paid the 15%
amount on the date of auction of the property in question and also on
the ground that the names of the witnesses to the auction were not
mentioned. A perusal of the said judgment indicates that it is held by
this court that the auction proceedings had taken place pursuant to
the certificate issued under section 101 of the MCS Act. The record
clearly disclosed that no recourse was taken against the said
certificate by the borrowers or the guarantors. The petitioner had paid
an amount of Rs.5,47,500/- within the period stipulated and had paid
the balance 85% on 7th January, 2013.

36.          This court also noticed that the respondent no.1 had not
challenged the auction notice or the auction sale which recourse was
available under section 107 of the MCS Rules. This court accordingly
in paragraph (9) of the said judgment observed that the objections as
mentioned in the letter dated 21st December, 2013 prima facie did not
have any substance. The notice for confirmation of sale said to be a
sequitter to the auction sale that had taken place pursuant to which
the purchase price had been paid by the petitioner. It is held that the
notice of hearing for confirmation of the sale is therefore a logical
consequence of the said auction proceedings and cannot be said to
be a "decision" or "order" so as to enable the respondent no.1 to
invoke the revisionary jurisdiction.      This court held that the word
"decision" appearing in section 154 would take its colour from the
word "order" appearing in the said provision and therefore in the
instant case the notice regarding confirmation of sale is neither a

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"decision" or an "order".

37.          This court adverted to the judgment of this court in case of
Manager, Adarsh Mahila Nagri Sahakari Bank Limited & Anr.
(supra) holding that the order confirming a sale was not an order
which was capable of being challenged under section 154 of the MCS
Act. This court accordingly held that the Divisional Joint Registrar has
exceeded his jurisdiction under section 154 of the MCS Act when
none was vested in him and therefore erred in setting aside the notice
of hearing dated 23rd January, 2014. This court accordingly was
pleased to set aside the letter/order dated 21st December, 2013 of the
District Deputy Registrar on the ground that the said District Deputy
Registrar had erroneously refused permission on the ground
mentioned in the said order dated 21st December, 2013 which were
untenable. This court accordingly directed the Deputy Registrar to
proceed on the basis of the notice hearing dated 23rd January, 2014
and to conclude the proceedings. It is not in dispute that the said
judgment delivered by this court thereby setting aside the letter/order
dated 21st December, 2013 has not been impugned by the

38.          Insofar as maintainability of the revision application filed by
the respondent no.1 is concerned, this court held that the notice of
hearing issued by the District Deputy Registrar by no stretch of
imagination could be said to be decided or ordered so as to entitle the
respondent no.1 to invoke section 154 of the MCS Act. The Divisional
Joint Registrar has accordingly exceeded his jurisdiction under
section 154 of the M.C.S. Act.

39.          The question that however arises is whether the

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respondent nos.1 and 6 could file a revision application under section
154 against the order passed by the respondent no.5 issuing sale
certificate and thereby confirming the sale of the property in question
in favour of the petitioner by an order dated 12th September, 2016. A
perusal of the order dated 12th September, 2016 passed by the
learned District Deputy Registrar, Co-operative Societies, Kolhapur
thereby confirming the sale and issuing sale certificate indicates that
the said order is a reasoned order. It is not in dispute that the
respondent no.1 or respondent no.6 had neither challenged the
recovery certificate issued by the Deputy Registrar under section 101
of the MCS Act nor had challenged the auction sale at any point of
time.

40.            It is also not in dispute that neither the respondent no.1 nor
the respondent no.6 had exercised the recourse available under
Rules 107(12), (13), (14) and (19) of the said MCS Rules within the
time prescribed under those rules or otherwise. The subject matter of
the first revision application filed by the respondent no.1 was the
notice dated 23rd January, 2014 i.e. the notice of hearing dated 23rd
January, 2014 and the letter/order dated 21st December, 2013
refusing to grant sanction to the sale of the immoveable property in
favour of the petitioner.              Insofar as the first revision application
impugning the said notice dated 23rd January, 2014 is concerned, the
same could not be considered as a decision or order which would
entitle the respondent no.1 invoking under section 154 of the MCS
Act.

41.            This Court in case of Manager, Adarsh Mahila Nagri
Sahakari Bank Limited & Anr. (supra) has construed section 154 of
the MCS Act and also Rule 107 of the MCS Rules and has held that

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the revision application under section 154 of the MCS Act is possible
either sue motu or on application in respect of only an order passed in
a inquiry or proceeding by a subordinate officer of the revisional
authority. It is held that since the borrower did not avail opportunity
under sub rule 13 and did not avail remedy available to her under sub
rule 14, the order confirming the sale was mere formality. It is held
that the said order confirming the sale was thus not an order in real
sense. The order is also an expression of opinion by judicial or quasi
judicial authority after hearing the parties and after recording reasons
for the same. This court accordingly held that the order confirming
the sale could not be said to be an order contemplated under section
154.

42.           This court in the above referred judgment also held that if
the borrower believed that the auction sale was tainted with
irregularity/mistake or fraud and that because of such, sale she had
sustained substantial injury etc., the borrower had an ample
opportunities under sub-rule 14 (i) of Rule 107 to challenge the
legality of the sale on the grounds mentioned therein. In this case,
the respondent no.1 or respondent no.6 did not make out any case of
fraud or nullity of the auction sale before this court or before the
revisionary authority.

43.           This Court in case of Ramchandra Sitaram Mulik & Ors.
vs. Janata Nagari Sahakari Patsanstha Ltd. and Ors., 2018 (2)
Mh.L.J. 245 has after adverting to the judgment of this Court in case
of Manager, Adarsh Mahila Nagri Sahakari Bank Limited & Anr.
(supra) and various other judgments has held that the revision
application under section 154 of the MCS Act was not maintainable in
view of the fact that the sale and confirmation certificate issued by the

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Deputy Registrar was not an order which would entitle the borrower or
the guarantor invoked under section 154 of the MCS Act. In the said
judgment, this court also considered the fact that the borrower had not
challenged the legality of the sale on the grounds mentioned in Rule
107(14)(i) of the MCS Rules. In my view the principles laid down by
this Court in case of Manager, Adarsh Mahila Nagri Sahakari Bank
Limited & Anr. (supra) and in case of Ramchandra Sitaram Mulik &
Ors. (supra) would squarely applies to the facts of this case. I am
respectfully bound by those judgments.

44.          In my view, the impugned order passed by the learned
District Deputy Registrar confirming the sale and issuing sale
certificate could not have been challenged by way of revision
application under section 154 of the MCS Act.           The said order
confirming the sale was a mere formality and not an order in real
sense. The order confirming the sale cannot be an order which would
attract the remedy of the revision application under section 154 of the
MCS Act.

45.          A perusal of the impugned order passed by the Divisional
Joint Registrar indicates that though an objection of maintainability of
two revision applications filed by the respondent nos. 1 and 6 was
raised by the petitioner, the said issue of maintainability has not been
considered by the revisioning authority in the impugned order at all.
In my view, since the revision application itself was not maintainable,
the entire order passed by the revisionary authority is without
jurisdiction and thus deserves to be set aside on that ground itself.
The remedy of the respondent nos. 1 and 6 was under Rules 107(12),
(13), (14) and (19) of the said MCS Rules which the respondent nos.
1 and 6 admittedly failed to invoke. The respondent nos. 1 and 6

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therefore could not have filed a revision application only against the
order of confirmation of sale passed by the concerned authority.

46.          Insofar as submission of the learned counsel for the
respondent no.1 that this court had only made prima facie
observations in order and judgment dated 18th March,2016 to the
effect that the objections mentioned in the letter dated 21st December,
2013 did not have any substance is concerned, a perusal of the said
judgment clearly indicates that in later part of paragraph (9) of the
said judgment, this court has set aside the said letter/order dated
dated 23rd December, 2013 of the District Deputy Registrar on the
ground that the District Deputy Registrar had erroneously refused
permission on the grounds indicated in the said judgment which were
untenable.      There is thus no substance in this submission of the
learned counsel for the respondent no.1.

47.          Since both the parties have addressed this court also on
the issue as to whether the entire auction proceedings could be
considered as nullity on the ground that the petitioner had not paid
15% of the highest bid amount in cash or by bankers' cheque or
demand draft on the date of auction and whether the respondent nos.
1 and 6 were entitled to file a revision application on the ground of
nullity or fraud, this court will deal with the said issue also. Both the
parties have relied upon several judgments in support of their rival
contentions on this issue which would be dealt with in the later part of
this judgment.

48.          The undisputed facts on this issue are that the auction of
the property in question took place on 26th December, 2012. The bid
of the petitioner was much more than the upset price. The petitioner

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had already deposited an amount of Rs.5,47,500/- towards 15% of
the amount of the highest bid submitted by him by cheque dated 26th
December, 2012 on the date of auction after the petitioner was
declared as the highest bidder. The said cheque was accepted by the
respondent no.3 without raising any objection. The said cheque was
admittedly deposited by the respondent no.7 subsequently and was
admittedly honoured on 28th December, 2012 in the account of the
respondent no.7.

49.          Neither the respondent no.1 nor the respondent no.7 could
point out any terms and conditions of sale requiring that the payment
of 15% or 85% of the highest bid amount was required to be paid or
deposited in cash or by demand draft or by bankers' cheque. Neither
the respondent no.1 nor the respondent no.6 challenged the auction
sale on the ground on nullity or otherwise by invoking any of the
remedy provided under Rules 107(12), (13), (14) and (19) of the said
MCS Rules. It is not the case of the respondent nos. 1, 6 or 7 that the
petitioner had not deposited the 15% amount on the date of auction
by cheque.

50.          A perusal of Rule 107(11)(g) indicates that it provides that
a sum of money equal to 15% of the price of the immoveable property
shall be deposited by the purchaser in the hands of the recovery
officer at the time of the purchase, and in default of such deposit, the
property shall forthwith be re-sold. Rule 107(11)(h) provides that the
remainder of the purchase money and the amount required for the
general stamp for the sale certificate shall be paid within thirty days
from the date of sale. It is not in dispute that the remainder amount of
the purchase money had been paid by the petitioner within the time
prescribed in the said provision. The payment of requisite stamp duty

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was also deposited by the petitioner within the time prescribed. The
said rule 107(11)(g) and (h) does not indicate that either the payment
of 15% or 85% is required to be paid in cash or by demand draft or
bankers' cheque.          In my view there is thus no substance in the
submission of the learned counsel for the respondent nos.1 or 6 that
the petitioner having failed to deposit 15% amount on the date of
auction in cash or by demand draft or by bankers' cheque, the auction
sale in favour of the petitioner was nullity or illegal.

51.          Mr.Borkar, learned counsel for the petitioner placed
reliance on sections 269SS and 269T of the Income Tax Act, 1961 in
support of his submission that even otherwise since the amount
towards 15% highest bid amount under Rule 107(11)(g) was more
than Rs.20,000/- the petitioner could not have deposited the said
amount otherwise then by account payee cheque or account payee
bank draft in view of the bar under sections 269SS and 269T of the
Income Tax Act, 1961. He also placed reliance on the judgment of
Supreme Court in case of Commissioner of Income Tax, Bombay
South, Bombay vs. Messrs Ogale Glass Works Ltd., Ogale Wadi,
AIR 1954 SC 429.

52.          Supreme Court in the said judgment has while construing
the provisions of section 82 of the Negotiable Instruments Act, 1881
has held that when it is said that a payment by negotiable instrument
is a conditional payment what is meant is that such payment is
subject to a condition subsequent that if the negotiable instrument is
dishonoured on presentation, the creditor may consider it as waste
paper and resort to his original demand. It is held that a cheque,
unless dishonoured, is payment. The payment takes effect from the
delivery of the cheque, but is defeated by the happening of the

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condition, i.e. non-payment at maturity.

53.          This court in an unreported judgment in case of Shri
Daulat Babanrao Tarle & Ors. (supra) has adverted to the judgment
of Supreme Court in case of Commissioner of Income Tax,
Bombay South, Bombay (supra) and also subsequent judgment of
Supreme       Court       in    case   of    K.   Saraswathy      vs.      P.S.S.
Somasundaram Chettiar, AIR 1989 SC 1553 in which it was held
that the payment by cheque realized subsequently on the cheque
being honoured and encashed, relates back to the date of the receipt
of the cheque, and in law the date of payment is the date of delivery
of the cheque. Payment by cheque is an ordinary incident of the
present day life, whether commercial or private and unless it is
specifically mentioned that payment must be in cash, there is no
reason why payment by cheque should not be taken to be due
payment if the cheque is subsequently encashed in the ordinary
course. In the said judgment, this court also rejected the submission
of the respondent that on the date of issuance of the cheque, there
was no money in the account of the drawer and an arrangement was
made subsequently for realizing the cheque holding that there was
nothing to suggest that the cheque was not honoured in due course
and the bank had any time declined to honour the said cheque for
want of funds in the ordinary course.

54.          In my view, the principles of law laid down in the judgment
Bombay South, Bombay (supra) and judgment of this court in case
of Shri Daulat Babanrao Tarle & Ors. (supra) would squarely apply
to the facts of this case. In this case also it is not the case of any of
the respondents that the cheque deposited by the petitioner was

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dishonoured when presented by the respondent no.7 society for
payment for want of sufficient balance in the account of the petitioner
or for any other reason.

55.          In my view, in view of the specific bar under sections
269SS and 269T of the Income Tax Act, 1961 from making/depositing
any payment of Rs.20,000/- or above otherwise then by way of
account payee cheque or account payee bank draft, the petitioner
was not allowed to make any payment in cash on the date of auction
even if there would have been a condition for payment of depositing
cash which in this case did not exist. Not only the petitioner but also
the respondent no.7 society and the borrower and guarantors or the
other bidders were bound to comply with the provisions of the Income
Tax Act, 1961 and the said provision being binding upon them. I am
not inclined to accept the submission of the learned counsel for the
respondent no.1 that the provisions of sections 269SS and 269T of
the Income Tax Act, 1961 was not applicable to the facts of this case
or that the same were not relevant for the purpose of deciding
whether the auction sale confirmed in favour of the petitioner was
nullity or not.

56.          In my view, since there was no specific condition in the
conditions for sale of the property in question or under rule 107(11)(g)
of the MCS Rules for depositing the amount in cash only or by
banker's cheque or demand draft, the payment deposited by the
petitioner by cheque admittedly on the date of auction sale was a
valid payment in compliance with the provisions of rule 107(11)(g) of
the MCS Rules. Merely because the cheque was deposited by the
bank in its bank account on the next day of such deposit made by the
petitioner or that the amount was credited in the account of the

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respondent no.7 after two days could not make the said deposit as if
in contravention of rule 107(11)(g) of the MCS Rules.                      The
encashment of the cheque in the account of the respondent no.7
would relate back to the date of the deposit of the said cheque by the
petitioner with the respondent no.3 on the date of auction sale in
compliance with the obligation under rule 107(11)(g) of the MCS
Rules. The provisions of the Income Tax Act being Central Act, in
case of inconsistency if any between Income Tax Act, 1961 and the
MCS Rules, the provisions of Income Tax Act would prevail.

57.          Be that as it may, since this court had already set aside the
letter/order dated 21st December, 2013 issued by the learned District
Deputy Registrar refusing to confirm the sale in favour of the
petitioner on the condition that the petitioner did not make payment of
15% of the highest bid amount on the date of auction, the learned
District Joint Registrar in the impugned order could not have rendered
a finding that the petitioner had not complied with the points
mentioned in the said letter/order dated 21st December, 2013 or that
the auction was not conducted as per the provisions of rule 107(11)(g)
of the MCS Rules.           In my view, the order passed by the learned
Divisional Joint Registrar is ex-facie contrary to the order and
judgment dated 18th March, 2016 passed by this court setting aside
the letter/order dated 21st December, 2013 on the ground that the
learned District Deputy Registrar had erroneously refused permission
on the grounds which were totally untenable.

58.          Insofar as submission of the learned counsel for the
respondent no.1 that the observations made by this court in the order
and judgment dated 18th March, 2016 about the maintainability of the
said revision application filed by the respondent no.1 were prima facie

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is concerned, a perusal of the paragraph no.9 indicates that this court
had taken a         view that the order passed by the District Deputy
Registrar was not a "decision" or "order" so as to enable the
respondent no.1 to invoke section 154 of the MCS Act and thus the
Divisional Joint Registrar had exceeded his jurisdiction under section
154 of the said MCS Act though the same was not vested in him and
therefore he had erred in setting aside the notice of hearing dated 23rd
January,2014. Be that as it may, by the said order, this court had set
aside the letter/order dated 21st December, 2013 which was subject
matter of the said revision application filed by the respondent no.1.

59.          Insofar as the judgment of this court in case of Manisha
Bijal Shah (supra) relied upon by the learned counsel for the
respondent no.1 is concerned, this court in the said judgment had
recorded a specific finding that the auction on the part of the auction
purchaser and the authority was fraudulent and thus the entire auction
sale was nullity. In this case, the respondent no.1 has not been able
to demonstrate before this court that the auction sale in favour of the
petitioner was fraudulent or nullity. The judgment of this court in case
of Manisha Bijal Shah (supra) thus would not assist the case of the

60.          Insofar as the reliance placed by the learned counsel for
the respondent no.1 on the provisions of Order 21 Rule 84 in support
of the submission that the said provision is in pari materia with the
provisions of rule 107(11)(g) of the MCS Rules and in support thereof
reliance of various judgments of Supreme Court and this court is
concerned, in my view the reliance placed on the said provision under
Order 21 Rule 84 of the Code of Civil Procedure, 1908 and various
judgments in support thereof would not assist the case of the

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respondent no.1. In none of the judgments relied upon by the learned
counsel for the respondent no.1, the Supreme Court or this court had
considered the provisions of sections 269SS and 269T of the Income
Tax Act, 1961. Be that as it may, this court will now deal with those
judgments referred to and relied upon by the learned counsel for the

61.            Insofar as judgment of Supreme Court in case of Manilal
Mohanlal Shah & Ors. (supra) and judgment of Supreme Court in
case of Balram Bhasa Ram (supra) are concerned, the Supreme
Court has held that the provisions regarding deposit of 25% under
Order 21 Rule 85 of the Code of Civil Procedure by the purchaser
other than the decree holder is mandatory and if the payment is not
made within the time prescribed, the court has discretion to forfeit the
deposit and the discretion ends, but the obligation of the court to re-
sell the property is imperative. Similar view has been taken by the
Punjab and Haryana High Court in case of Ramji Lal & Anr. (supra)
and in case of Mehtab Singh Malik (supra), judgment of Allahabad
High Court in case of Hira Lal & Ors. vs. Mst.Champa & Ors. (S)
AIR 1955 Allahabad 226 (Vol.42,C.N.70) and judgment of Supreme
Court in case of C.N. Paramasivam & Anr. (supra). However, in
none of these judgments, the Supreme Court as well as the the other
High Courts have neither considered the provisions of sections 269SS
and 269T of the Income Tax Act, 1961 nor has considered the
provisions of rule 107(11)(g) of the MCS Rules or a situation where
the auction purchaser had admittedly deposited the 15% amount by
cheque on the date of auction itself, which was subsequently cleared
when presented. None of these judgments would assist the case of
the respondent no.1 and are clearly distinguishable in the facts of this
case.

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62.          Insofar as judgment of Supreme Court in case of
Assistant Director of Inspection Investigation (supra) relied upon
by the learned counsel for the respondent no.1 is concerned, the said
judgment would not assist the case of the respondent no.1 but would
assist the case of the petitioner. In the said judgment, the Supreme
Court has held that sections 269SS was inserted in the Income Tax
Act, 1961 by Finance Act, 1984 debarring persons from taking or
accepting from any other person any loan or deposit otherwise than
by account-payee cheque or account-payee bank draft, if the amount
of such loan or deposit or the aggregate amount of such loan or
deposit is Rs. 10,000/- or more. Such restriction is neither violative of
article 14 of the Constitution of India, nor it can be said that section
269SS was inserted without legislative competence.

63.          Insofar as judgment of Supreme Court in case of
M/s.Shilpa Shares & Securities & Ors. (supra) relied upon by the
learned counsel for the respondent no.1 is concerned, Supreme Court
has held that under rule 107(11)(g) of the rules, 15% of the price of
the immovable property has to be deposited by the auction purchaser
at the time of the purchase, and the remaining 85% of the purchase
money has to be paid within 15 days from the date of such sale.
Since, there was no compliance of the said provision, the Supreme
Court was of the opinion that the auction sale of the property was
nullity and there was no valid auction sale. In the said judgment,
Supreme Court did not consider the provisions of sections 269SS
and 269T of the Income Tax Act, 1961 or that the payment of 15% of
the highest bid amount was required to be paid in cash or by demand
draft or cheque. The principles laid down by the Supreme Court in
the said judgment are not in dispute. However, in the fact of this

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case, the said judgment would not assist the case of the respondent
no.1.

64.            Insofar as judgment of this Court in case of Jagdish
Radhakisan Kayasth (supra) is concerned, the executing court in
that matter while construing the provisions of Order 21 Rule 84 (1) of
the Code of Civil Procedure, 1908 had directed the auction purchaser
to deposit the entire amount as contemplated under sub-rule(1) of
Rule 84 of Order 21 on the same day till 5.30 p.m. which the auction
purchaser had failed to deposit.            The auction purchaser though
deposited the amount on the next day, the same was accepted by the
executing court.            Supreme Court held that there was material
irregularity committed by the executing court by accepting the amount
from the auction purchaser on the next day.                Supreme Court
accordingly was pleased to set aside the auction sale after declaring
the auction sale nullity on the ground of material irregularity and
directed the executing court to hold a fresh auction sale. In my view,
the facts before this court in the said judgment were totally different
and are distinguishable. In this case, the petitioner had deposited the
requisite amount on the day of auction sale itself with the respondent
no.3 and not on the next date or in violation of any order of any court.

65.            Insofar as judgment of this court in case of Niranjan D.
Woody (supra) relied upon by the learned counsel for the
respondents is concerned, this court in the said judgment had
construed the provisions of rule 107(11)(g) of the said MCS Rules and
held that rule 107(11)(g) requires a deposit of sum of money equal to
15% of the price at the time of purchase. The words, "at the time of
purchase" in the case of an auction must mean the same thing as the
words "on every sale of immovable property" that are used in Rule

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84(1). "At the time of purchase" must necessarily mean at the time
when the auction purchaser is informed of the acceptance of his bid. It
is held that both the sets of provisions i.e. the provisions of Order 21
being statutory and those of Rule 107 being subordinate legislation
emphasize the fundamental principle that the mandate of deposit
within the period stipulated has to be complied with strictly. In the
absence of compliance with the mandatory requirement, the sale itself
is no sale in the eyes of law. In default of compliance, the sale is
rendered a nullity.

66.          This court held that once the auction takes place and the
highest bid is accepted, the consequence thereof is to knock down
the sale in favour of the highest bidder. It is at that time that the
highest bidder must make a payment equivalent to 15% of the total
price of the immovable property. The time of purchase under Clause
(g) is the time when the bid is accepted. This court held that the
Divisional Joint Registrar has clearly lost sight of the fact that the
mandatory requirement of Rule 107(11)(h) could not have been
relaxed by the said authority. This court accordingly recorded the
finding that 15% of the sale consideration was not deposited on 4 th
November, 2005, at the time of purchase but thereafter. This court
accordingly was pleased to set aside the order passed by the
Divisional Joint Registrar and held that the sale in favour of the
auction purchaser was in nullity. The principles laid down by this
court in the said judgment are not in dispute. However, in the said
judgment, this court does not consider a situation where the auction
purchaser had deposited 15% amount by cheque on the same date
which cheque was honoured when presented and the amount was
credited to the account of the respondent no.7 society.

                                     35
                                                                wp6778-17

67.          Insofar as judgment of Supreme Court in case of Rao
Mahmood Ahmed Khan (supra) is concerned, a perusal of the said
judgment clearly indicates that the said judgment is delivered by the
Supreme Court prior to the insertion of sections 269SS and 269T of
the Income Tax Act, 1961 which were inserted much later and thereby
prohibiting making deposit of any amount above Rs.20,000/- after 30 th
June, 1984 otherwise then by way of account payee cheque or
account payee bank draft. In my view the provisions under sections
269SS and 269T of the Income Tax Act, 1961 would be binding on all
the parties thereby barring deposit of Rs.20,000/- or above otherwise
than by way of account payee cheque or account payee bank draft.
In view of such statutory bar, the auction purchaser could not have
deposited all the said amount in cash which was much more than
Rs.20,000/- on the date of auction sale upon acceptance of his bid by
the respondent no.3. The judgment of Supreme Court thus in case of
Rao Mahmood Ahmed Khan (supra) would not apply to the facts of
this case and would not assist the case of the respondent no.1. Even
otherwise in view of the inconsistency in the provisions of sections
269SS and 269T of the Income Tax Act, 1961 and rule 107(11)(g) of
the MCS Rules, the provisions of sections 269SS and 269T of the
Income Tax Act, 1961 would prevail.

68.          Insofar as the submission of Mr.Patil, learned counsel for
the respondent no.6 who claims to have purchased the property in
question from the respondent no.1 that neither the auction purchasers
nor the bank had raised an issue of maintainability of the revision
application filed by the respondent no.1 or his client before the special
recovery officer is concerned, there is no merit in this submission of
the learned counsel. Reliance placed by the learned counsel on Rule
57 of the MCS Rules in support of the submission that the auction of

                                     36
                                                                       wp6778-17

the suit property in favour of the petitioner was nullity is totally
misplaced. Even if the office bearers of the respondent no. 7 were
present at the time of auction that would not indicate that they were
interested in the auctioned properties personally. Insofar as the
proceedings filed by the respondent no.6 in respect of the property in
question is concerned, this court does not express any view on the
merits of the said proceedings. The fact remains that no adverse
order is passed in respect of the property in question against the
petitioner or in favour of the respondent no.6 in the said proceedings
till date. In my view, the revisional authority cannot set aside the
registered documents entered into in favour of the petitioner directly
or indirectly.

69.           In my view, findings rendered by the learned Divisional
Joint Registrar, Co-operative Societies, Kolhapur Division, Kolhapur in
the impugned order dated 1st February, 2017 are perverse and
contrary to the principles of law laid down by the Supreme Court and
this court and also contrary to the provisions of rule 107 of the MCS
Rules and various other provisions of MCS Act and thus deserve to
be set aside.

70.           I, therefore, pass the following order :-

a).           Writ Petition No.6778 of 2017 is allowed in terms of prayer
clause (a).

b).           Revision Application Nos.373 and 374 of 2016 and the
Revision Application Nos. 409 and 410 of 2016 are dismissed.

c).           The confirmation order and sale certificate issued by

                                      37
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                                                                   wp6778-17

the District Deputy Registrar, Co-operative Societies, Kolhapur on 12th
September, 2016 in favour of the petitioner is upheld.

d).          Rule is made absolute in the aforesaid terms.

e).          There shall be no order as to costs.

                                                    (R.D. DHANUKA, J.)

71.          At the request of Mr.Agrawal, learned counsel for the
respondent no.1, the operation of this order is stayed for a period of
four weeks from today. If any Special Leave Petition is filed by the
respondent no.1, a copy thereof shall be served upon the petitioner
and other contesting respondents in advance.

                                     38

Gulab Chand Sharma vs H.P. Sharma Etc. on 27 August, 1973
Equivalent citations: ILR1974DELHI190, [1974]95ITR117(DELHI)
JUDGMENT  

 V.S. Deshpande, J.  

 (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.  

(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).  

(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.  

(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.  

(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.  

(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."  

(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.  

(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).  

(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."

(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.  

(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.  

(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."  

(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 .

(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."

(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.

(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.  

(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.   

(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.  

(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.  

(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.  

(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".

(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.

Tata Tea Ltd. & Anr. Etc vs State Of West Bengal & Ors. Etc on 5 May, 1988
Equivalent 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
Author: M.H. Kania
Bench: M.H. Kania, R.S.  Pathak
TATA TEA LTD. & ANR. ETC.

	Vs.

STATE OF WEST BENGAL & ORS. ETC.

DATE OF JUDGMENT05/05/1988

BENCH:
KANIA, M.H.
BENCH:

CITATION:
 1988 AIR 1435		  1988 SCR  (3) 961
 1988 SCC  Supl.  316	  JT 1988 (2)	299
 1988 SCALE  (1)867
 R	    1988 SC1450	 (1)

ACT:
     Bengal Agricultural  Income-tax (Amendment)  Act, 1980-
Challenging constitutional validity of sections 3 and 5 of.
     Agricultural Income-tax  (Amendment) Act,	1980 (Kerala
Act No.	 17 of 1980)-Challenging amendment made by-Resulting
in deletion  of Explanation after clause (2) of section 2(a)
of Agricultural Income-tax Act, 1950.
     Whether entire  income of	assessee from  sale  of	 tea
grown  and  manufactured  by  him  is  subject	to  levy  of
agricultural income-tax.

HEADNOTE:
     These Writ	 Petitions, filed  in this  Court by  Public
Limited Companies  growing, manufacturing and selling tea in
the States of West Bengal and Kerala raised common questions
of law.
     The Writ Petitions relating to the State of West Bengal
challenged the	constitutional validity	 of sections 3 and 5
of the Bengal Agricultural Income-tax (Amendment) Act, 1980,
whereby sub-section  (2) and (2A) of section 8 of the Bengal
Agricultural Income-tax	 Act, 1944  were omitted  and always
deemed to  be omitted.	The petitioners	 alleged that  as  a
result of the omission of the said Sub-sections (2) and (2A)
of section 8, the State Legislature had sought to assume the
power, competence  and jurisdiction  to impose	agricultural
income-tax on  the entire  income from the sale of tea grown
and manufactured  by a	seller and  had thereby transgressed
the constitutional  limitations contained  in Article 246(3)
of the Constitution of India. The petitioners contended that
the  income   derived  from   the  sale	 of  tea  grown	 and
manufactured by them was derived partly from agriculture and
partly	from  manufacture  by  elaborate  processes  through
valuable machinery.  Prior to  the said	 amendment Act,	 the
position was  that the	income	of  an	assessee  who  grew,
manufactured and sold tea in West Bengal, was computed under
the Indian  Income-tax Act, 1922 (the Act of 1922) read with
the Income-tax	Rules, 1922, and agricultural income-tax was
levied only  in respect of 60 per cent of that income. After
the coming  into force	of the	Income-tax Act, 1961 and the
Income-tax Rules, 1962 also a State Legislature
962
could only  legislate in  respect of  60  per  cent  of	 the
income, treated	 as agricultural  income. The  object of the
impugned amendment  Act, was  to  subject  to  the  levy  of
agricultural income-tax,  the entire  income derived  by  an
assessee from the sale of tea grown and manufactured by him.
     The writ  petition relating  to Kerala State challenged
the  amendment	 made	by   the   Agricultural	  Income-tax
(Amendment) Act,  1980 (Kerala	Act No. 17 of 1980) deleting
the Explanation	 after clause  (2) of  section 2(a)  of	 the
Agricultural Income-tax Act, 1950, with a view to making the
entire income  from sale  of tea  earned by  an assessee who
grew and  manufactured tea in that State subject to the levy
of agricultural income-tax.
     The petitioners  urged that these amendments, in so far
as  they   purported  to  confer  power	 on  the  respective
legislatures of	 the States  of West  Bengal and  Kerala  to
legislate regarding taxes on the income from the sale of tea
grown and  manufactured by the assessees in excess of 60 per
cent of	 such income computed in the manner prescribed under
the law	 relating to  income-tax were  void and	 beyond	 the
legislative competence	of the legislatures of the States of
West Bengal  and Kerala in view of the provisions of Article
246 of	the Constitution  of India read with the entry 82 in
List I	and Entry  46 in the List II of the Seventh Schedule
to the	Constitution and  the relevant provisions of the law
relating to income-tax.
     The respondents  contended that  Article 366(1)  of the
Constitution  merely  stated  that  the	 term  "agricultural
income"	 had  the  same	 meaning  as  given  to	 it  in	 the
enactments relating  to income-tax and the definition of the
said term  in Act  of 1922  and the  Act  of  1961  did	 not
prescribe that	only a particular part of the income derived
by an  assessee from  the sale of tea grown and manufactured
by him	could be regarded as agricultural income, and it was
open  to   the	State	Legislatures   concerned   to	levy
agricultural income-tax on such entire income.
     Disposing of the petitions, the Court,
^
     HELD: The	main question  to be  considered was whether
the impugned  provisions in the Bengal Amendment Act of 1980
were in	 excess of the legislative competence of West Bengal
State  Legislature,   and  whether   by	 deletion   of	 the
Explanation effected  by the  Kerala Amendment	Act of 1980,
the definition	of the	term "agricultural  income" in	sub-
section (a)  of Section 2 of the Kerala Agricultural Income-
tax Act
963
became void  as in  excess of  the legislative competence of
the State Legislature. [978D-E]
     A perusal	of Entry  82 of	 the List  I in	 the Seventh
Schedule and Entry 46 in the List II makes it clear that the
Legislatures of	 the States  of West  Bengal and  Kerala can
pass laws  imposing taxes  only in  respect of	agricultural
income, and in respect of income other than the agricultural
income, it  is only  the Parliament  which has	the power to
legislate in  respect of  taxes on  such income. Sub-article
(1)  of	  Article  366	 of  the  Constitution	states	that
"agricultural income"  means such  income as  is defined  as
"agricultural income"  for the	purposes of  the  enactments
relating to  Indian income-tax.	 It is	significant that the
words used  are not  "as defined  by the enactments relating
Indian Income-tax"  but are  "as defined for the purposes of
the  enactments	  relating  to	Indian	Income-tax"(emphasis
supplied).[978F-G]
     Although the  Explanation has  been deleted from clause
(2)  of	  Sub-section  (a)   of	 Section  2  of	 the  Kerala
Agricultural Income-tax	 Act, and in spite of the amendments
carried out  by the  Amendment Act of 1979 and the Amendment
Act 1980 in the case of the West Bengal Agricultural Income-
tax Act, an Agricultural Income Tax Officer acting under the
Kerala	 Agricultural	Income-tax   Act   or	the   Bengal
Agricultural  Income   tax  Act	  has  no   power  to	levy
agricultural income  tax except in respect of 60 per cent of
the income derived by an assessee from the sale of tea grown
and manufactured by him and computed in the manner leid down
under the  relevant Income-tax	Act  and  the  rules  framed
thereunder. [984B-C]
     The decision  of this  Court in  Commissioner of  Sales
Tax, Lucknow v. D.S. Bist, [1979] 44 S.T.C. 392, relied upon
by the	State of  Kerala and the State of West Bengal was of
no assistance  to them	as the ratio of that decision had no
application to present cases. [986A]
     Article 366(1)  of the  Constitution provides  that the
term  "agricultural   income"  has   the  same	 meaning  as
attributed to  it for the purposes of enactments relating to
Indian income-tax,  and Rule 8 of the Income-tax Rules, 1962
as well	 as Rule 24 of the Income-tax Rules 1922, pertain to
and  are   bound  up   with  the   definition  of  the	term
"agricultural income" for the purposes of laws or enactments
pertaining to  Indian Income-tax and the provisions of those
rules have  to be  taken into  account	in  considering	 the
meaning of  the term "agricultural income" under sub-article
(1) of Article 366 of the Constitution. [987B-D]
964
     Clause (b)	 of sub-section	 (2) of	 Section 295  of the
Income-tax Act, 1961 specifically confers power on the rule-
making authority  to make  rules relating  to the  manner in
which and  the procedure by which income for the purposes of
the Act	 of 1961  would be  arrived at in the case of income
derived in  part from  agriculture and in part from business
and  Rule  8  clearly  provides	 for  the  manner  in  which
computation of income for the purposes of the Act of 1961 is
to be  made in	the case  of income derived from the sale of
tea grown and manufactured by a seller and it cannot be said
that the  said rule goes beyond the scope of the rule-making
power conferred	 under section	295, as contended by counsel
for the two States. [987E-F]
     Although the  Explanation to  Section 2(a)	 (2) of	 the
Kerala Agricultural  Income-tax Act  has been deleted by the
Amendment Act  of 1980,	 the result  would still be the same
that the  Kerala State	Legislature can	 impose tax  only in
respect of  60 per cent of the income derived by an assessee
who sells  tea grown  and manufactured	by him	in India and
such income  has to  be computed  in the manner laid down in
the Act	 of 1922  and thereafter  in the  Act  of  1961	 for
computation of the business income. The same is the position
in respect  of the powers of the legislature of the State of
West  Bengal   in  spite  of  the  amendments  made  by	 the
legislature by	the Amendment  Act of 1980 and earlier under
the amending Act of 1979 which was in force for one year. It
is not	necessary to strike down the said amendments because
they do	 not directly  conflict with  the definition  of the
term "agricultural  income" under the Constitution, but they
do not	confer any  wider power	 on the State Legislature to
impose taxes  on the agricultural income then what is stated
earlier. [987G-H;988A-B]
     The  validity   of	 the   amendments  to	the   Bengal
Agricultural Income-tax Act made in 1980 and the deletion of
the  Explanation   in  Section	 2(a)(2)   of	the   Kerala
Agricultural Income-tax	 Act were  challenged as being ultra
vires and  invalid in  law on  several other grounds but the
Court did  not go into those grounds in view of what it held
as set out above. [988C-D]
     Although none  of the  prayers  in	 the  petitions	 was
granted in terms, the petitioners substantially succeeded in
the petitions.[988E]
     Karimtharuvi Tea Estates Ltd. & Anr. v. State of Kerala
JUDGMENT:
Trading	 Co.  Ltd.  etc.  v.  Commissioner  of	Agricultural
Income-tax, Kerala,  [1968] 69	ITR 667; State of Tamil Nadu
v. Kannan Devan Hills Produce Co. Ltd.,
965
[1972]	84   I.T.R.  475;   Tea	 Estate	 India	P.  Ltd.  v.
Commissioner of	 Income-tax,  West  Bengal  II,	 [1976]	 103
I.T.R. 785;  Commissioner  of  Income-tax,  Madras  v.	R.M.
Chidambaram Pillai etc., [1977] 106 I.T.R. 292; Commissioner
of Sales  Tax, Lucknow v. D.S. Bist & Ors., [1979] 44 S.T.C.
392; and  High	Land  Produces	Co.  Ltd.  &  Anr.  etc.  v.
Inspecting Asstt.  Commr. of Agricultural Income-tax & Sales
Tax (Special),	Kottayam and  Ors. etc.,  [1984] 148  I.T.R.
746, referred to.

&
     ORIGINAL JURISDICTION:  Writ  Petitions  Nos.  5409-10,
5411-12/80, 358 & 12807-12808/84.
     (Under Article 32 of the Constitution)
     Dr.  Devi	 Paul,	Ms.  M.	 Seal,	H.K.  Dutt  for	 the
petitioners in WP. Nos. 5409-12/80, 12807-12808/84.
     Dr. V.  Gauri Shankar,  P.N. Tiwari,  Manoj  Arora,  S.
Rajappa and  S.R. Srivastava  for the petitioners in WP. No.
358/84
     P.S. Poti, V.J. Francis and N.M. Popli, for Respondents
in WP. Nos. 5411-12/80
     S.C. Manchanda,  B.B. Ahuja  and Ms.  A. Subhashini for
the U.O.I.
     Tapas Ray,	 H.K. Puri,  G.S. Chatterjee and Dalip Sinha
for Respondents in 12807-08, 5409-10/80
     D.P. Mukherjee, for the Intervenor.
     KANIA, J.	These writ  petitions are  filed  by  Public
Limited Companies  growing  and	 manufacturing	tea  in	 the
States of  West Bengal	and Kerala  respectively.  Although,
there are  some differences in the facts, the material facts
are largely common and the questions raised in the petitions
can be fairly regarded as common questions of law. They are,
therefore,  being   disposed  of  together  by	this  common
judgment.
     The Petitioners in Civil Writ Petitions Nos. 5409-10 of
1980 are  the Tata Tea Limited and a shareholder of the said
Company. These	petitions are  directed against the State of
West Bengal, Commissioner of Agricultural Income-tax of West
Bengal, West Bengal Agricultural
966
Income-tax Officer,  Calcutta Range-I,	Union of  India	 and
Income-tax Officer, O-Ward, Companies District-II, Calcutta.
The Petitioners in Civil Writ Petitions Nos. 5411-12 of 1980
are also the Tata Tea Limited and a shareholder thereof. The
Respondents are	 State of Kerala, Commissioner and Assistant
Commissioner of	 Agricultural Income-tax at Kerala, Union of
India and  the concerned Income-tax Officer. The Petitioners
in other  writ petitions  are Tea Companies and shareholders
thereof and  the Respondents  are ranged on similar lines as
above.
     The Petitioners are Public Limited Companies growing as
well as	 manufacturing tea  and selling	 the same. As far as
the petitions  directed against the State of West Bengal are
concerned, the	challenge therein  is to  the constitutional
validity of  Sections 3	 &  5  of  the	Bengal	Agricultural
Income-tax (Amendment)	Act, 1980.  The Bengal	Agricultural
Income-tax Act, 1944 provides for the levy and collection of
agricultural income-tax	 in the then Province of Bengal, the
predecessor Province  to the  present State  of West  Bengal
and, after  the coming	into force  of the Constitution, the
State of  West Bengal.	By the	said amending  Act, for	 the
first time,  sub-sections (2)  & (2A)  of Section  8 of	 the
Bengal Agricultural  Income-tax Act  were omitted and always
deemed	to   have  been	  omitted.  It	is  alleged  by	 the
Petitioners that as a result of the omission of sub-sections
(2) &  (2A) of	Section 8 of the Bengal Agricultural Income-
tax Act,  1944, the  State Legislature	has sought to assume
the   power,   competence   and	  jurisdiction	 to   impose
agricultural income-tax	 on the	 entire income	derived from
the sale  of tea  grown and manufactured by a seller and has
thereby	  transgressed	  the	constitutional	 limitations
contained in  Article 246(3)  of the  Constitution of  India
read with Entry 46 of List II of the Seventh Schedule to the
Constitution of India.
     In the  aforesaid Writ  Petitions Nos.  5409-10 of 1980
the process  of manufacturing tea has been described in some
detail. To  put it  very briefly, the green tea grown by the
tea growers  is withered by exposure to air under natural or
controlled conditions.	Certain machinery  and equipment  is
required for  the aforesaid process. The object of withering
is partial  dehydration of  shoots to make them leathery and
flaccid	 for   rolling	and  chemical  changes.	 The  change
brounght about	is the increase in caffeline, soluble sugars
and amino  acids. The  second process  involves rupture	 and
distortion of  tea shoots into smaller sizes to allow mixing
of enzymes  and substrates.  This is  known as	rolling. The
process of  rolling is	carried out  by mechanical bruising,
tearing, cutting,  crushing breaking and twisting tea leaves
for which crank roller/
967
rotorvane/C.T.C. machines are employed. The third process is
of  fermentation   which  involves  exposure  to  air  under
controlled temprature.	For this  the equipment	 required is
fermentation chamber/trags/floor/troughs.  As  a  result  of
this process,  the colour  of  tea  changes  from  green  to
coppery. The  next process  is of  drying  or  roasting	 for
stoppage of  fermentation: dehydration to ensure keeping the
quality of the product. Drying or roasting has to be done at
a temperature  of 30 degree celsius and humidity exposure to
blast of  hot air  in a counter current dryer. The equipment
required for  this is  a conventional tea dryer. As a result
of this process, the moisture in the tea is reduced to 4 per
cent and  it becomes  black in	colour.	 This  manufacturing
process is  applied to	tea leaves  in a  factory  which  is
situated within	 the garden area owned by the Petitioner and
licensed under	the Factories  Act. It	is averred  that the
carrying out  of the  aforesaid processes  is a	 specialised
operation involving  the application  of modern	 methods  of
bio-chemical engineering.  The cleaning	 of the	 tea is then
done with  machines according  to various  sizes like broken
pekoe, broken  orange pekoe, pekoe dust, dust, churmani dust
and so on. There are other also other brands of tea produced
by the	aforesaid process.  It is needless to consider these
processes in  detail except  to state  that they  are  quite
elaborate and, in the cases before us, valuable machinery is
being used  for	 carrying  out	these  processes  which	 are
carried out in factories.
     The case  of the Petitioners is that the income derived
from the  sale of tea grown and manufactured as aforesaid is
derived partly from agriculture and partly from manufacture.
Under  the   Indian  Income-tax	  Act,	1922   (referred  to
hereinafter as	"the Act  of 1922")  and  the  Rules  framed
thereunder the income derived from the sale of tea grown and
manufactured by	 a seller,  has to be computed in the manner
laid down  in Rule  24 of  the Income-tax Rules, 1922 and 40
per cent  of the  income so  computed is  treated as  income
other than agricultural income and the remaining 60 per cent
is treated  as agricultural income. In respect of the income
other than  agricultural income,  it is the Union Parliament
which  has   and  before   the	coming	into  force  of	 the
Constitution the  Centre Legislature  which had the power to
legislate in  respect  of  taxes;  and	in  respect  of	 the
agricultural income,  the legislative  power in	 respect  of
taxation was  left to  the Provinces under the Government of
India Act,  1935 and  to the  States under the Constitution.
The Bengal  Agricultural Income-tax Act, 1944 enacted by the
Provincial Legislature of Bengal defined agricultural income
in identical  terms as	contained in Section 2(1) of the Act
of 1922.  The Bengal  Agricultural  Income-tax	Act  further
provided by sub-section (2) of
968
Section 8  that notwithstanding anything contained that Act,
in the	case of	 tea grown  in West  Bengal and	 sold by the
grower	himself	  or  his   agents  after  manufacture,	 the
agricultural income  derived therefrom shall be deemed to be
that portion  of the  income computed as aforesaid under the
Act of	1922 on	 which income-tax  was not payable under the
Act of	1922 and  agricultural income-tax  was levied on the
whole of  such agricultural income. As a result of this, the
manufactured and sold tea in West Bengal was computed in the
manner laid  down in  the Act  of 1922	read with Income-tax
Rules, 1922  and agricultural  income-tax was levied only in
respect of  60 per cent of that income. On coming into force
of the	Income-tax Act, 1961 which replaced the Act of 1922,
the position  remained the  same. The  Income-tax Act,	1961
(referred to  hereinafter as  "the Act	of 1961")  came into
effect from  1st April, 1962. The definition of agricultural
income in the Act of 1961 is contained in sub-section (1) of
Section 2  of that  Act and  is in  pari  materia  with	 the
definition of  the said	 term in  the Act of 1922. Rule 8 of
the Income-tax	Rules, 1962  is in pari materia with Rule 24
of the	Income-tax Rules,  1922. As  a result  of this	even
after the  Act of  1961 and  the Income-tax Rules, 1962 came
into force,  a State  Legislature could	 only  legislate  in
respect of  taxes regarding that part of the income computed
by the	Income-tax Officer  concerned as  aforesaid which is
treated as agricultural income,namely, 60 per cent of it.
     In 1979,  the Legislature	of the	State of West Bengal
enacted the  Bengal Agricultural Income-tax (Amendment) Act,
1979. By  the said Amendment Act, sub-section (2A) was added
after  sub-section   (2)  in   Section	8   of	the   Bengal
Agricultural Income-tax	 Act, 1944.  Very briefly  put,	 the
said  sub-section  (2A)	 gave  powers  to  the	Agricultural
Income-tax Officer to make the computation of income derived
from tea  in cases  where it  had not  been computed for the
purposes of  assessment of  income-tax under the Act of 1961
or, although  computed, the assessment under the Act of 1961
had been  annulled or  set aside under that Act and no order
of assessment  under Section  25 had  been made	 within	 six
years from  the end  of the  year in  which the agricultural
income was first assessable in the manner and subject to the
limitations and	 conditions set out in the said sub-section.
It is not really necessary for us to consider this provision
further in  the view  which we	have taken.  Moreover,	this
Amendment Act  remained in force only for the period 1979-80
after which  it was  replaced by  the Amendment Act of 1980.
The West  Bengal Legislature  in  1980	amended	 the  Bengal
Agricultural  Income-tax  Act  by  the	Bengal	Agricultural
Income-tax (Amendment) Act, 1980. By the said Amendment Act,
sub-sections
969
(2) and (2A) of Section 8 of the Bengal Agricultural Income-
tax were  deleted and  always deemed to have been deleted as
already pointed	 out and  Section  25(4)  of  that  Act	 was
omitted. Section  7 of	the Amendment Act provided for cases
where  the   asessment	under	the  Act   of  1961  of	 any
agricultural income  derived from tea was made before coming
into force  of the  Amendment Act  but we  are not concerned
with that  section. Under  the petition, the challenge is to
the validity  of Sections  3 and  5  of	 the  Amendment	 Act
whereby the aforesaid sub-sections (2) and (2A) of Section 8
were omitted with retrospective effect and Section 25(4) was
omitted. It  is submitted  in the  petition that,  from	 the
speech of  the Finance	Minister at  the time of introducing
the Bill  for carrying	out the	 amendments, as well as from
the affidavit in reply filed by the State of West Bengal, it
is clear  that the  entire object  of the  amendments was to
subject to  the levy  of agricultural income-tax, the entire
income derived by an assessee from the sale of tea grown and
manufactured by him.
     We come  next to  the petitions  against the  State  of
Kerala. Under  the Agricultural	 Income-tax Act, 1950 passed
by the	Legislature of	the State  of Kerala,  "agricultural
income" is  defined in	the same  maner as  under the Act of
1922 and  there was  an	 Explanation  after  clause  (2)  in
Section 2  (a) stating that agricultural income derived from
land used  for agricultural  purposes by  the cultivation of
tea leaves means that portion of the income derived from the
cultivation, manufacture and sale of tea as is defined to be
agricultural income  for the purposes of enactments relating
to  the	 Indian	 Income-tax  Act.  By  an  Act	called	"The
Agricultural income-tax	 (Amendment) Act,  1980" (Kerala Act
No. 17	of 1980), the Kerala Agricultural Income-tax Act was
amended	 and  the  said	 Explanation  was  deleted.  It	 was
submitted that	this deletion  was made	 with a view to make
the entire  income  earned  by	an  assessee  who  grew	 and
manufactured tea from the sale of tea subject to the levy of
agricultural income-tax.  Here again,  it  was	pointed	 out
that, from the speech of the Finance Minister at the time of
introducing the	 Bill concerned and the stand taken in Court
by the	State of Kerala, it was clear that the entire object
of the amendment was to make the entire income derived by an
assessee as  aforestated liable	 to the levy of agricultural
income-tax. These  submissions were  adopted by	 the learned
Counsel who  appeared for  the other  Petitioners and by Mr.
Manchanda  who	appeare	 for  the  Union  of  India.  It  is
submitted by  Dr. Paul,	 learned Counsel  for the  Tata	 Tea
Company that  the aforesaid  amendments, in  so far  as they
purport to  confer power  on the  respective legislatures of
the State  of  West  Bengal  and  the  State  of  Kerala  to
970
grown and  manufactured by  an assessee	 in excess of 60 per
the law	 relating to  income-tax are  void and	of no  legal
effect as  they are beyond the legislative competence of the
respective legislatures	 of the	 States of  West Bengal	 and
Kerala respectively in view of the provisions of Article 246
of the	Constitution read  with Entry 82 in List I and Entry
46 in  List II	in the	Seventh Schedule to the Constitution
and the	 relevant provisions  of the law relating to income-
tax.
     Dr. Paul, learned Counsel for Tata Tea Company and Tata
Finlay Company	further submitted that, if the entire income
derived from  the sale	of tea	grown and manufactured by an
assessee were  to be  regarded as  agricultural income,	 the
result would  be that  the Parliament  would  not  have	 any
competence to legislate in respect of taxes on the same with
the result  that the  provisions of  the Act of 1922 and the
Act of	1961 imposing  the levy of income-tax on any part of
such  income  would  become  ultra  vires.  This  particular
submission was	not  supported	by  Dr.	 Gauri	Shankar	 who
appeared for  Petitioner in  W.P. No.  358 of  1984 and	 was
opposed by  Mr. Manchanda  who appeared	 for  the  Union  of
India.
     As far  as the  State of  West Bengal  and the State of
Kerala	are  concerned,	 they  are  represented	 by  learned
Counsel, Mr.  Potti and	 Mr. Tapas  Ray respectively. It was
urged by  Mr. Potti  and Mr.  Ray that Article 366(1) of the
Constitution  merely  states  that  the	 term  'agricultural
income"	 has  the  same	 meaning  as  given  to	 it  in	 the
enactments relating  to income-tax,  that the  definition of
the said term in the Act of 1922 and the Act of 1961 did not
prescribe that	only a	particular  portion  of	 the  income
derived by  an assessee	 from the  sale	 of  tea  grown	 and
manufactured by	 him can  be regarded as agricultural income
and hence it was open to the State Legislatures concerned to
levy  agricultural   income-tax	 on   such  entire   income.
Alternatively, it  was submitted by them that, in any event,
in law, the entire income derived from the sale of tea by an
assessee growing  and manufacturing  tea must  be held to be
agricultural income  in view  of the decision of the Supreme
Court in  the case  of Bist & Co. (which we propose to refer
to  more  particularly	hereinafter)  and  hence  the  State
Legislature was	 entitled to levy agricultural income-tax on
the same.  The Parliament  had	no  power  to  legislate  in
respect of such income.
     In	 order	 to  examine   the  correctness	  of   these
contentions, certain relevant provisions of law may be noted
at this	 stage. Under  Article 246(1)  of the  Constitution,
Parliament has exclusive power to legislate
971
with respect  to any  of the matters enumerated in List I in
the Seventh  Schedule to  the Constitution which is referred
to in  the Constitution	 as the	 "Union List". Clause (3) of
that Article  prescribes that  a Legislature  of a State has
exclusive power	 to make  laws with  respect to	 any of	 the
matters enumerated  in	List  II  in  the  Seventh  Schedule
(referred to  in the  Constitution  as	the  "State  List").
Clause (2) of the said Article provides that both Parliament
and State  Legislatures have power to make laws with respect
to any	of the matters enumerated in List III in the Seventh
Schedule called the "Concurrent List". Entry 82 in List I or
the  Union   List  reads   "taxes  on	income	other	than
agricultural income." Entry 46 of List II (State List) reads
"taxes	on   agricultural  income".   Article  366   of	 the
Constitution  contains	 definitions  and   sub-Article	 (1)
thereof reads as follows:
	       "Agricultural   income	means	agricultural
	  income  as   defined	for   the  purposes  of	 the
	  enactments relating to Indian Income-tax Act."
     The material portion of sub-section (1) of Section 2 of
the Act	 of  1922  (Indian  Income-tax	Act,  1922)  defines
agricultural income as follows:
	  "Agricultural income means:
	       (a) any	rent or	 revenue derived  from	land
	  which is  used for  agricultural purposes,  and is
	  either assessed  to land-revenue  in	the  taxable
	  territories or  subject to  a local  rate assessed
	  and collected	 by officers  of the  Government  as
	  such;
	       (b) any income derived from such land by
	       (i) agriculture, or
	       (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
	       (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
972
		    other  than	 a  process  of	 the  nature
		    described in sub-clause (ii);
	       x	     x		   x		 x"
     Clause (c)	 of the	 said sub-section  and	the  Proviso
thereto are not material for our purposes.
 Section 59	 of the Act of 1922 deals with the powers to
make rules.  Sub-section (1)  confers power  on the  Central
Board of  Revenue, subject  to the  control of	the  Central
Government, to	make rules  for carrying out the purposes of
the Act	 of 1922 and for the ascertainment and determination
of any	class of income. The material portion of sub-section
(2) of that section runs as follows:
	       "Without prejudice  to the  generality of the
	  foregoing power, such rules may
	       (a) prescribe  the manner  in which,  and the
	  procedure by	which, the income, profits and gains
	  shall be arrived at in the case of
	       (i) incomes  derived in part from agriculture
	       and in part from business;
	       x	     x		   x		 x"
     Sub-section (5) of Section 59 reads as follows:
	  "Rules made  under this section shall be published
	  in the  Official Gazette, and shall thereupon have
	  effect as if enacted in this Act."
     Rule 24  of the  Income-tax Rules,	 1922 deals with the
computation of income derived from the sale of tea grown and
manufactured by the seller and that rule runs as follows:
	       "Income derived	from the  sale of  tea grown
	  and manufactured  by the  seller  in	the  taxable
	  territories shall be computed as if it were income
	  derived from	business, and  40 per  cent of	such
	  income shall	be deemed  to be income, profits and
	  gains liable to tax:
973
	       Provided that  in computing  such  income  an
	  allowance shall  be made in respect of the cost of
	  planting bushes in replacement of bushes that have
	  died or  become permanently  useless	in  an	area
	  already planted,  unless such	 area has previously
	  been abandoned."
     Sub-section (1)  of  Section  2  of  the  Act  of	1961
(Income-tax  Act,   1961)  defines  the	 term  "agricultural
income". The  material portion of that definition is similar
to the	definition contained  in the Act of 1922 and runs as
follows:
	  "(1) "agricultural income" means
	  (a) any rent or revenue derived from land which is
	  situated in  India and  is used  for	agricultural
	  purposes;
	  (b) any income derived from such land by
	       (i) agriculture; 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
	       (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".
     Clause (c)	 of the said sub-section is not material for
our purpose.  Section 295  of the Act of 1961 deals with the
power to  make rules.  The relevant  portion of that section
runs as follows:
	       "(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.
	       (2) In  particular, and	without prejudice to
	  the generality  of the foregoing power, such rules
	  may provide for all
974
	  or any of the following matters
	       (a) the	ascertainment and  determination  of
	  any class of income;
	       (b) the	manner in which and the procedure by
	  which the  income shall  be arrived at in the case
	  of-
	       (i) income  derived in  part from agriculture
	  and in part from business;
	  x	     x		x	   x	      x"
The Board referred to in Section 295(1) is the Central Board
of Direct taxes.
     Section 296  provides inter  alia that  a	rule  framed
under Section 295 shall be laid, as soon as may be after the
rule is made, before each House of Parliament and shall have
effect subject	to any modification or deletion made by both
Houses of  Parliament. Rule  7 of  the Incometax Rules, 1962
made under  Section 295 of the Act of 1961 deals with income
which is partially agricultural and partially from business.
Rule 8 deals with income from the manufacture of tea and the
said rule runs as follows:
	  "(1) Income derived from the sale of tea grown and
	  manufactured by  the	seller	in  India  shall  be
	  computed  as	 if  it	 were  income  derived	from
	  business, and	 forty per cent of such income shall
	  be deemed to be income liable to tax.
	  (2) In computing such income an allowance shall be
	  made in  respect of the cost of planting bushes in
	  replacement of  bushes that  have died  or  become
	  permanently useless in an area already planted, if
	  such area  has not  previously been abandoned, and
	  for the  purpose  of	determining  such  cost,  no
	  deduction shall  be made  in respect of the amount
	  of any  subsidy which,  under	 the  provisions  of
	  clause (30)  of Section  10, is  not includible in
	  the total income."
 Section 7	of the	Bengal Agricultural  Income-tax Act,
1944 deals  with the computation of tax and allowances under
the head  "AGRICULTURAL INCOME	FROM AGRICULTURE". Section 8
of that	 Act deals  with the  computation of  tax  on  mixed
income. Sub-section
975
(1) of	Section 8,  very briefly  stated, prescribes that in
case of	 such mixed  income which is partly agricultural and
is  assessable	 under	the   said  Bengal  Act	 and  partly
chargeable under the Indian Income-tax Act of 1922 under the
head "Business", agricultural income-tax would be payable by
an assessee  in respect	 of the market value of agricultural
produce which has been raised by the assessee or received by
him as	rent-in-kind and  which has  been utilised by him as
raw material  in such business or the sale receipts of which
are included  in the  accounts of  the business	 subject  to
allowances permissible	under that  Act. Clause	 (a) of	 the
Proviso to  that sub-section makes it clear that if, for the
purposes of  assessment of income-tax under the Act of 1922,
the market  value of  the produce  had been  determined that
would be  accepted as  market value also for the said Bengal
Act. Clause  (b) of the Proviso deals with common charges on
agricultural income  and income	 chargeable under the Act of
1922. The  material portion  of sub-sections  (2) and (3) of
the said section ran as follows:
	       "(2) Notwithstanding  anything  contained  in
	  this Act,  in the  case of  tea the plant Camellia
	  Thea (Linn.)	grown in West Bengal and sold by the
	  grower himself or his agent after manufacture, the
	  agricultural income  derived therefrom  shall,  as
	  long as  for the purposes of assessment of income-
	  tax under  the Indian	 Income-tax Act,  1922,	 the
	  income derived  therefrom is	computed under	that
	  Act in  such manner  as  to  include	agricultural
	  income, be  deemed to	 be  that  portion  of	such
	  income as  so computed  on which income-tax is not
	  payable under	 that Act,  and agricultural income-
	  tax at  the rates  specified in the Schedule shall
	  be payable  on  the  whole  of  such	agricultural
	  income as so computed.
	  X	     X		X	   X	      X
	       (3) For	the purpose  of	 the  assessment  of
	  agricultural income-tax  under this section or any
	  rule made  thereunder a certified copy of an order
	  of an	 assessment under the Indian Income-tax Act,
	  1922, or  a certified	 copy of  an  order  of	 any
	  appellate or	revising authority  or of  the	High
	  Court or of the Supreme Court altering or amending
	  such order  of assessment  under the provisions of
	  that Act  shall  be  conclusive  evidence  of	 the
	  contents of such order."
     The Bengal Agricultural Income-tax (Amendment) Act,1980
976
(referred to  hereinafter as  "the Bengal  Amendment Act  of
1980") was  passed by  the Legislature	of the State of West
Bengal and  published in the Gazette on 31st March, 1980. By
Section 2  of that  Act, Section  7A was  inserted into	 the
Bengal Agricultural  Income-tax Act,  1944 and	that section
	  "7A:	Notwithstanding	 anything  to  the  contrary
	  contained in	this Act, in the case of an assessee
	  being a  company or a firm or other association of
	  persons, the	agricultural income of such assessee
	  shall be computed in accordance with the method of
	  accounting regularly employed by such assessee for
	  such computation:
	       Provided that  if, in any case, the method of
	  accounting as	 aforesaid  is	such  that,  in	 the
	  opinion of  the Agricultural	Income-tax  Officer,
	  the agricultural  income cannot  be computed,	 the
	  computation shall  be made  on such  basis and  in
	  such manner as the Agricultural Income-tax Officer
	  may determine."
     Section 3	of the	Amendment Act  of 1980 provides that
subsections (2)	 and (2A)  of Section 8 of the Bengal Act of
1944 shall  be omitted	and shall  be always  deemed to have
been omitted.  Section 7 of the Bengal Amendment Act of 1980
	       "(7) Notwithstanding  any judgment, decree or
	  order of  any court, tribunal, or authority to the
	  contrary, where  any assessment  under the Income-
	  tax Act,  1961 of  any agricultural income derived
	  from tea  has been  made before  the	coming	into
	  force of this Act, the proceeding relating to such
	  assessment may  be taken  and continued  under the
	  principal Act as if this Act had not been passed."
     It	 may   be  mentioned   here  that   by	the   Bengal
Agricultural Income-tax	 (Amendment) Act,  1979, sub-section
(2A) was  inserted after sub-section (2) in Section 8 of the
Bengal Act  of 1944.  That Act	remained in force only for a
period of one year. The material portion of sub-section (2A)
ran as follows:
	       "(2A) Where  the computation  of	 the  income
	  derived from	tea has	 not been  completed for the
	  purposes of  assessment of  income-tax  under	 the
	  Income-tax Act,  1961, or  where such	 computation
	  has been completed but the
977
	  assessment under  the Income-tax  Act,  1961,	 has
	  been annulled	 or set	 aside under that Act and no
	  order of assessment under Section 25 has been made
	  within six years from the end of the year in which
	  the agricultural  income was first assessable, the
	  Agricultural	   Income-tax	  Officer     shall,
	  notwithstanding anything to the contrary contained
	  in  this   Act,  assess  the	agricultural  income
	  derived from	tea in	such manner  and within such
	  period as  may be  prescribed and  shall determine
	  the sum  payable by  the assessee  on the basis of
	  such assessment:
	  X	      X		  X	      X		  X"
     In the  State of  Kerala, agricultural  income-tax	 was
sought to  be imposed  by the  Agricultural Income-tax	Act,
1950 passed  by the  Legislature of the State of Kerala. The
definition of the term "agricultural income" is contained in
sub-section (a)	 of Section  2 of  the	Kerala	Agricultural
Income-tax Act.	 The said  definition is  in line  with	 the
definition of the said term under the Act of 1922. There was
an Explanation	after  clause  (2)  of	sub-section  (a)  of
Section 2.  The material  part of  sub-section (a)  runs  as
follows:
	  "2(a) "agricultural income" means-
	  (1) any rent or revenue derived from land which is
	  used for agricultural purposes;
	  (2) any income derived from such land by
	       process of the nature described in sub-clause
	       (ii);
	  x	      x		  x	      x		  x"
978
     The  Explanation  referred	 to  above,  which  followed
clause 2 ran as follows:
	  "Agricultural income derived from such land by the
	  cultivation of  tea  means  that  portion  of	 the
	  income derived  from the  cultivation, manufacture
	  and sale  of tea  as is defined to be agricultural
	  income for the purposes of the enactments relating
	  to Indian Income-tax"
     By Section	 2 of  the Agricultural Income-tax Amendment
Act, 1980  (Kerala Act 17 of 1980), the said Explanation was
omitted with  effect from  1.4.1980. The  affidavit in reply
filed on behalf of the State of Kerala as well as the speech
of the	Finance Minister  of the  said State  at the time of
introducing of	the Bill  which was  passed  as	 the  Kerala
Amendment Act  of 1980,	 make it  clear that  the  intention
behind deleting of Explanation was to make the entire income
earned	by   a	person	from  the  sale	 of  tea  grown	 and
manufactured by	 him in	 the State  liable to  the  levy  of
     The main  question which we have to consider is whether
the aforesaid  provisios in the Bengal Amendment Act of 1980
are in	excess of  the legislative  competence of  the	West
Bengal State Legislature. It will also have to be considered
whether	 by   reason  of   the	deletion  of  the  aforesaid
Explanation effected by the Kerala Amendment Act of 1980 the
definition of  the term "agricultural income" in sub-section
(a) of	Section 2  of  the  Kerala  Agricultural  Income-tax
the State Legislature.
     A perusal of Entry 82 of List I in the Seventh Schedule
and Entry  46 in  List II  makes  it  clear  the  respective
Legislatures of	 the State  of West  Bengal and the State of
Kerala could  pass laws	 imposing taxes	 only in  respect of
agricultural income;  and in  respect of  income other	than
agricultural income,  it is  only Parliament  which has	 the
power to  legislate in respect of taxes on such income. sub-
article (1)  of Article	 366 of the Constitution states that
"agricultural  income"	 for  the   purposes  of  enactments
words used are not "as defined by the enactments relating to
Indian income-tax"  but "as  defined for the purposes of the
enactments  relating   to  Indian   income-tax."   (emphasis
supplied). We  have already  set out  the definition  of the
term "agricultural  income" under the Act of 1922 as well as
that in	 the Act  of 1961 which replaced the Act of 1922. If
these definitions  are	read  by  themselves,  it  would  be
difficult to say
979
that there  is any  conflict between them and the definition
of the	term   "agricultural income" contained in the Bengal
Agricultural Incometax Act, 1944 after its amendment in 1980
or  the	  definition  of   the	said   term  in	 the  Kerala
Agricultural Income-tax Act of 1950, even after the deletion
of the	aforesaid Explanation.	However, it must be realised
that Section  59 of  the Act  of 1922 and Section 295 of the
Act of 1961 both deal with rule making powers. Under the Act
of 1922	 that power is given to the Central Board of Revenue
and under the Act of 1961 that power is given to the Central
Board of  Direct Taxes.	 Clause (a)  of sub-section  (2)  of
Section 59 of the Act of 1922 specifically confers powers on
the Central  Board of  Revenue to make rules prescribing the
manner in  which and  the procedure by which income, profits
and gains  shall be arrived at in the case of income derived
in part	 from agriculture  and	in  part  from	business.  A
similar power  is conferred  under Section 295 of the Act of
1961 on	 the Central  Board of Direct Taxes to make rules in
respect of  income derived  in part  from agriculture and in
part from  business. The  only difference between Section 59
of the	Act of	1922 and  Section 295  of the Act of 1961 in
this connection,  to which  our attention  was drawn  by Mr.
Potti, is  that sub-section  (5) of Section 59 provides that
the rules  made under the said Section shall be published in
the Official  Gazette and  shall thereupon have effect as if
enacted in the Act of 1922 whereas Section 296 of the Act of
1961 provides that the rules made under the Act of 1961 have
to be  laid before  each House	of Parliament  in the manner
prescribed in  Section 296 and both Houses of Parliament are
entitled to make such changes therein as they may resolve or
they might  direct that	 the rule should not be given effect
to. This, however, does not make much difference. Rule 24 of
the Income-tax	Rules, 1922  and Rule  8 of  the  Income-tax
Rules; 1962  framed under Section 295 of the Act of 1961 are
in pari materia.
     It may  be mentioned here that Rule 7 of the Income-tax
Rules, 1962  deals with	 the computation  of income which is
partially agricultural	and partially from business and Rule
8 is  the specific rule dealing with income derived from the
sale of	 tea grown  and manufactured by the seller in India.
Under sub-rule	(1) of	Rule 8,	 it is	provided  that	such
income shall  be computed  as if it were income derived from
business and  40 per  cent of  such income  is deemed  to be
income liable to tax.
     A perusal	of the	aforesaid Rule	8(1) makes  it clear
that under  the said rule, income from the sale of tea grown
and manufactured  by a seller in India has to be computed as
if it were income derived from
980
business which	would imply  that the  deductions  allowable
under the  Act of  1961 in  respect of	income derived	from
business would	be allowable  in the  case of income derived
from the  sale of tea grown and manufactured by a seller and
further allowance  would be  granted as set out in Rule 8(2)
and 40 per cent of the income so computed would be deemed to
be income  liable to  the levy of income-tax and the balance
of the	income would be liable to tax as agricultural income
subject to  such further deductions as the law pertaining to
the  levy   of	agricultural  income-tax  might	 allow.	 The
question is  whether Rule  24 of  the Income-tax Rules, 1922
and Rule 8 of the Income-tax Rules, 1962 can be said to form
part of	 the definition	 of the	 term "agricultural  income"
under the Act of 1922 and the Act of 1961 respectively.
 In Karimtharuvi  Tea Estates  Ltd. &  Anr. v.  State of
Kerala &  Ors., [1965]	48 I.T.R.  85 a	 Bench comprising of
five learned  Judges  of  this	Court  was  called  upon  to
consider the question of the power of a State Legislature to
make a	law in	respect	 of  taxes  on	agricultural  income
arising from  tea plantations  and the	Bench took  the view
that the  power of the State Legislatures in this connection
is limited  to	legislating  with  respect  to	agricultural
income determined  in accordance  with Rule 24 of the Indian
Income-tax Rules,  1922, under which income derived from the
sale of tea grown and manufactured by the seller is first to
be computed  under Section  10 of  the Act of 1922, as if it
were income  derived from  business. Any  expenditure by the
assessee, not being an allowance described in clauses (i) to
(xiv) of  Section 10(2)	 of the Act of 1922 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  such business  would be deductible. Of
the income  so computed, 40 per cent, being under Rule 24 of
the Indian  Income-tax Rules,  1922 treated as income liable
to  income-tax,	  the  other  60  per  cent  alone  will  be
"agricultural income".	The State Legislature is free in the
exercise of  its plenary  legislative power to allow further
deductions from	 such computed	agricultural income  in	 the
case of	 tea plantations  as it	 considers fit but it cannot
add to	the amount  of agricultural  income so	computed  by
providing that	certain items of expenditure deducted in the
computation of the income from business under the provisions
of the	Indian Income-tax  Act, 1922  be not deducted and be
considered to  be a part of the taxable agricultural income.
The State  Legislature cannot  enact such  a provision which
would make  agricultural income	 from tea plantations higher
than what it would be if computed in accordance with Rule 24
read with  Section 10  of the Indian Income-tax Act. In that
case, the  provision of	 the Kerala  Agricultural Income-tax
Act which had to be considered was
981
Explanation 2  to Section 5 added by an amending Act in 1961
which deals with the computation of agricultural income. The
provisions of  Section 2  of the Kerala Agricultural Income-
tax Act which defines "agricultural income" for the purposes
of that Act and the Explanation to clause (2) of sub-section
(a) of	that Section, which Explanation has now been deleted
by the	impugned Amendment Act, were also considered. It was
pointed out (p. 91 of the Report) that:
	  "`Agricultural   income'   as	  defined   in	 the
	  Constitution means  'agricultural income  for	 the
	  purpose of the enactments relating to income-tax'.
	  One such  enactment is the Income-tax Act. Rule 24
	  of the  Income-tax Rules  1922 has been made under
	  the power  conferred by  Section 59 of the Income-
	  tax Act  and has effect as if enacted in that Act.
	  When Section 59 of the Income-tax Act provides for
	  the Rules  made under	 that Act  to prescribe	 the
	  proportions of  income from  business	 and  income
	  from agriculture  in the  entire income derived in
	  part from  agriculture and  in part from business,
	  the proportion  so prescribed	 must be taken to be
	  prescribed  by   the	Act.  These  rules  were  in
	  existence   in    1950   when	  the	Constitution
	  incorporated	the   definition  of   "agricultural
	  income" from	the Income-tax Act by reference. The
	  definition of	 the term  was	bound  up  with	 the
	  Rules." (emphasis supplied).
     It was  pointed out  by  Mr.  Potti  that	there  is  a
reference in  the aforesaid judgment to the said Explanation
contained in  Section 2(a)(2)  of  the	Kerala	Agricultural
Income-tax  Act,   which   is	now   deleted,	 and   which
substantially incorporated  the provisions of Rule 24 of the
Income-tax Rules,  1922	 about	the  computation  of  income
manufactured by	 him and  the respective  proportions of the
same which  could be  regarded as  agricultural	 income	 and
other income  respectively. It	is, however, not possible to
say that  the aforesaid decision is essentially based on the
said Explanation as contended by Mr. Potti.
 The question  whether  computation	 of  income  by	 the
Central Income-tax  authorities could  be disregarded  by an
Agricultural Income-tax	 Officer  acting  under	 the  Kerala
Agricultural Income-tax Act came up for consideration before
another Bench of five learned Judges of this Court in Anglo-
American Direct Tea Trading Co. Ltd. etc. v. Commissioner of
Agricultural Income-tax,  Kerala, [1968]  69 I.T.R.  667. In
that case the year in question were 1958-59 to 1961-62,
982
with the  result that  the provisions  of the Act of 1922 as
well as the Act of 1961 and of the Income-tax Rules, 1922 as
well as	 the Income-tax	 Rules, 1962  had to  be taken	into
account. This  Court followed  its decision  in the  case of
Karimtharuvi Tea  Estates Ltd.	& Anr.	v. State of Kerala &
Ors., [1965] 48 I.T.R. 85 and held that income from the sale
of tea	grown and  manufactured by  an assessee	 is  derived
partly from  business  and  partly  from  agriculture.	This
income is  computed as if it were income from business under
the Central Income-tax Act and the Rules made thereunder. Of
the income  so computed	 as aforesaid, 40 per cent is deemed
to be  income derived  from business  and assessable to non-
agricultural income-tax.  The balance  of 60 per cent of the
income so computed is agricultural income within the meaning
of the	Central Income-tax Act and the Constitution of India
and the	 power of  the State  Legislature to  make a  law in
respect of  taxes on  agricultural income  arising from	 tea
plantations is	limited to  legislating with  respect to the
agricultural income  so determined.  It was also pointed out
that the  Explanation  to  Section  2(a)(2)  of	 the  Kerala
Agricultural Income-tax	 Act,  1950  adopted  this  rule  of
computation. It	 was held in that case that the Agricultural
Income-tax Officer  acting under the Kerala Act was bound to
accept the computation of the tea income already made by the
Central Income-tax  authorities and  to assess	only 60	 per
cent of	 the income  so computed,  less deductions allowable
under Section  5 of the Kerala Act in so far as the same had
not been allowed in the assessment under the Central Income-
tax Act.  The Court  also held	that if, before Agricultural
Income-tax Officer proceeds to make the assessment under the
Kerala Act,  an	 assessment  of	 income	 by  the  Income-tax
Officer under  Rule 24 of the Income-tax Rules, 1922 or Rule
8 of  the Income-tax  Rules, 1962  had been  made, then	 the
Agricultural Income-tax	 Officer acting under the Kerala Act
is bound to accept the computation of the tea income already
made by	 the Central Income-tax Authorities as aforesaid. In
the case  of State  of Tamil  Nadu  v.	Kannan	Devan  Hills
Produce Co.  Ltd., [1972]  84 I.T.R.  475 a  Division  Bench
comprising of  two learned Judges of this Court followed the
aforesaid decisions.
 In the case of Tea Estate India P. Ltd. v. Commissioner
of Income-tax, West Bengal II, [1976] 103 I.T.R. 785 a Bench
comprising of  two learned Judges of this Court observed (at
P. 795) as follows:
	  "Income which	 is realised by sale of tea by a tea
	  company which grows tea on its land and thereafter
	  subjects  it	 to  manufacturing  process  in	 its
	  factory  is  an  integrated  income.	Such  income
	  consists of two elements or com-
983
	  ponents. One	element or component consists of the
	  agricultural income  which is	 yielded in the form
	  of green  leaves purely by the land over which tea
	  plants are  grown. The second element or component
	  consists of  non-agricultural income	which is the
	  result  of   subjecting  green  leaves  which	 are
	  plucked from the tea plants grown on the land to a
	  particular manufacturing process in the factory of
	  the tea company."
 The decisions  in the cases of Karimtharuvi Tea Estates
Ltd. & Anglo-American Direct Tea Trading Co. Ltd., [1968] 69
I.T.R. 667,  [1965] 48	I.T.R. 85  referred to	earlier have
been cited  with approval  by a Division Bench of this Court
in Commissioner	 of Income-tax,	 Madras v.  R.M. Chidambaram
Pillai, etc., [1977] 106 I.T.R. 292.
 A reading of Article 245 of the Constitution with Entry
82 of List I and Entry 46 of List II in the Seventh Schedule
makes it  clear that  the State	 Legislature  has  exclusive
jurisdiction  to   legislate  in   respect   of	  taxes	  on
agricultural income;  and  in  respect	of  taxes  on  other
income, it is Parliament alone which can legislate. The term
"agricultural income" used in that Entry has to be construed
in accordance  with the	 definition  of	 the  said  term  in
Article 366(1)	of the	Constitution of	 India and that sub-
article states	that agricultural income means "agricultural
income	as  defined  for  the  purposes	 of  the  enactments
relating to  Indian Income-tax". A scrutiny of the aforesaid
decisions of  this Court  in Karimatharuvi  Tea Estates Ltd.
(supra) and  Anglo-American Direct  Tea	 Trading  Co.  Ltd.,
[1968] 69  I.T.R. 667 shows that this Court has consistently
taken the view that the definition of the term "agricultural
income" for  the purposes  of the Act of 1922 and tha Act of
1961, being  Acts pertaining  to the levy of income-tax, has
to be  considered in  the light of Rule 24 of the Income-tax
Rules, 1922 in the case of the Act of 1922 and Rules 7 and 8
of the	Income-tax Rules,  1962 as far as the Act of 1961 is
concerned. An analysis of the said decisions shows that this
Court has  taken the  view that,  in case of income from the
sale of	 tea grown  and manufactured by an assessee, Rule 24
of the	Income-tax Rules,  1922 and Rule 8 of the Income-tax
Rules, 1962 although at first glance they appear to be rules
of  apportionment   and	 computation,  must  be	 treated  as
incorporated in	 the definition	 of the	 term  "agricultural
income" in the Act of 1922 and the Act of 1961 respectively.
It is  true that in both the cases, Karimtharuvi Tea Estates
Ltd. (supra)  & Anglo-American	Direct Tea Trading Co. Ltd.,
[1968] 48  I.T.R. 83  it has been noticed by this Court that
the said  Explanation  to  Section  2(a)(2)  to	 the  Kerala
Agricultural Income-tax Act
984
was in line with the provisions of Rule 24 of the Income-tax
Rules, 1922  and Rule  8 of  the Income-tax  Rules, 1962 but
that by	 itself does not make any difference and the reading
of the	aforesaid decisions  makes it  perfectly clear	that
even without  that Explanation	the position would have been
the same.  The conclusion which must follow is that although
the Explanation	 has been  deleted from	 clause (2)  of sub-
tax Act	 and in	 spite of  the amendments carried out by the
Amendment Act  of 1979	and thereafter	the Amendment Act of
1980 in	 the case of the Bengal Agricultural Income-tax Act,
an Agricultural	 Income-tax Officer  acting under the Kerala
Agricultural  Income-tax  Act  or  the	Bengal	Agricultural
Income-tax Act	has no power to levy agricultural income-tax
except in respect of 60 per cent of the income derived by an
assessee from  the sale of tea grown and manufactured by him
and computed  in the  manner laid  down under  the  relevant
Central Incometax Act and the Rules framed thereunder.
 It was,  however, contended  by Mr.  Potti on behalf of
the State of Kerala and Mr. Tapas Ray on behalf of the State
of West	 Bengal that  the  position  as	 emerging  from	 the
aforesaid decisions  of this  Court has	 been altered by the
decision of  this Court in the case of Commissioner of Sales
Tax, Lucknow  v. D.S.  Bist & Ors., [1979] 44 S.T.C. 392. In
that case  the assessee	 owned some tea gardens in the State
of U.P.	 and sold the tea-leaves grown by him in his gardens
after processing  and packing  the same.  A  question  arose
whether	 the   tea  leaves   sold  by	the  assessee	were
agricultural produce  grown by	himself and  the sales were,
therefore, not	exigible to  sales tax	under the Proviso to
Section 2(i) of the U.P. Sales Tax Act, 1948. The contention
of the	revenue was  that the goods in question, namely, tea
leaves grown  and processed  as aforestated had ceased to be
an  agricultural   produce  after   processing	 and   were,
therefore, exigible  to sales  tax. The	 processes to  which
tea-leaves were	 subjected by  the assessee was described by
the Revising Authority as follows (p. 394):
	  "(1) The tea-leaves were first of all subjected to
	       withering in  shadow in	rooms  on  a  wooden
	       floor for about 14 hours.
	  (2)	Then they  were crushed	 by hand or foot and
	       were then roasted for about 15 minutes.
	  (3)	Later they were roasted on mats for about 15
	       minutes.
985
	  (4)  And then they were covered by wet sheets for
	       generating fermentation.	 During this process
		    the colour	of leaves  was changed	from
	       green	 to yellowish.
	  (5)  he leaves were then subjected to grading with
	       sieves of various sizes. Fanning machines are
		    also  used	in  completing	the  grading
	       process.
	  (6)	The produce  was then  finally roasted	with
	       charcoal for  obtaining suitable	 flavour and
	       colours.
	  (7)  It is this final product which was eventually
	       sold by the assessee."
     It was  observed by  the Supreme Court that if the tea-
leaves sold  by	 the  assessee	substantially  retained	 the
character of  being an	agricultural produce, the assessee's
sales would  not be  exigible to sales tax. If, on the other
hand,  the  leaves  had	 undergone  such  vital	 changes  by
processing that	 they  lost  their  character  of  being  an
agricultural produce  and became a different commodity, then
the sales  made by  the assessee were exigible to sales tax.
The Court  held	 that,	on  the	 findings  recorded  by	 the
revising authority,  it could not be justifiably held in law
that  the  tea-leaves  lost  their  character  of  being  an
agricultural produce and became something different. All the
processes applied  by the  assessee were  necessary for	 the
purpose of saving the tea-leaves from perishing, making them
fit for transporting and marketing them. It was submitted by
learned Counsel	 that  this  decision  laid  down  that	 the
processes involved  in producing  marketable tea  were	only
such as would be carried out by an agriculturist to make his
produce marketable  and hence the entire income derived from
the  sale   of	such   tea  leaves  should  be	regarded  as
agricultural income. In our view, it is impossible to accept
this contention. In the first place, the question before the
Court in  that case was not relating to agricultural income-
tax at	all but	 relating to  sales tax.  Moreover, what the
Court was  called upon	to consider,  and  what	 it  did  to
consider, was  only whether  the tea-leaves after undergoing
the processes  set out	earlier continued to be agricultural
produce or  whether they  became a different commodity which
could not  be regarded	as an  agricultural produce. It  is
significant that the aforesaid decisions rendered by Benches
comparising  five   learned  Judges   of   this	  Court	  in
Karimatharuvi and Anglo-American's, Cases, as well the other
decisions referred  to earlier, have not been referred to in
that decision  at all,	and rightly so, because the Division
Bench in Bist's Case was called upon to consider
986
a question  which was  essentially a different question. The
ratio of  the decision	in Bist's Case has no application to
the cases  before us.  That decision  is, therefore,  of  no
assistance to  learned Counsel	for the	 State of Kerala and
the State of West Bengal.
 We find  that the	judgment in  Bist's Case referred to
above has  been distinguished  by a  learned Single Judge of
the Kerala  High Court in High Land Produces Co. Ltd. & Anr.
etc. v.	 Inspecting Asstt. Commr. of Agricultural Income-tax
& Sales	 Tax (Special),	 Kottayam, and Ors. etc., [1984] 148
I.T.R. 746  in considering  the scope  of the  power of	 the
State Legislature  to tax  agricultural	 income.  That	case
arose after  the aforesaid  amendment of Section 2(a) of the
Kerala	Agricultural   Income-tax  Act,	  1950	whereby	 the
Explanation at	the  end  of  Section  2(a)(2)	thereof	 was
deleted. It  has been  pointed out by the learned Judge that
the Explanation	 to Section  2(a) of the Kerala Agricultural
Income-tax Act,	 1950 was, in substance, in harmony with the
concept of mixed income contemplated by Section 295(2)(b) of
the Act	 of 1961  and Rule  8 of Income-tax Rules, 1962. The
Explanation specifically  referred to  that portion  of	 the
income from tea as was defined by the Central Act and Rule 8
to be  agricultural income  by exclusion  from total  income
computed under	the Central  Act. This	Explanation has been
omitted by  the Amendment Act of 1980. The State Legislature
is perfectly  competent to  omit any  provision which it has
enacted. However,  it cannot  thereby widen the ambit of the
State Act  so as  to bring  to tax the entire income derived
from the  sale of tea grown and manufactured by an assessee.
It has been pointed out by the learned Judge in his judgment
that none  of the  observations in Bist's Case could be read
to mean	 that the  entirety of	the income  derived from the
sale of	 tea grown and manufactured by the assessee would be
chargeable  to	 agricultural	income-tax,   for   such   a
construction would  not only be unwarranted by the facts and
reasoning of  that case,  but  would  also  be	directly  in
conflict with  the Central  statute and	 the principle	laid
down by	 a larger  Benches comprising five learned Judges of
the Supreme Court in the aforesaid two decisions.
     It was  contended by  Mr. Potti  and Mr.  Ray,  learned
Counsel for the Respondent States that Rule 8 of the Income-
tax Rules, 1962 was not a part of an enactment and could not
be regarded  as an  enactment and hence it need not be taken
into account  in considering  the  definition  of  the	term
"agricultural income" under the Constitution. It was pointed
out by	them that,  unlike sub-section	(5) of Section 59 of
the Act of 1922 which provided that the rules made under the
said section  would have  effect, after	 publication in	 the
Gazette, as if enacted in
987
that Act,  Section 296	of the	Act of	1961 merely provided
inter alia  that a  rule framed	 under Section 295 had to be
laid, as  soon as  may be,  before each	 House of Parliament
while it is in Session for a total period of thirty days and
unless it  was directed	 to be	deleted or  amended by	both
Houses of  Parliament it  would be  given effect  to. It was
pointed out  by them  that Rule	 8, therefore,	could not be
said to	 be enactment  and hence  it could  not	 affect	 the
definition of  the term	 "agricultural income" under Article
366(1) of  the Constitution.  We are  unable to	 accept this
submission. What  Article 366(1)  provides is  that the term
"agricultural income"  has the same meaning as attributed to
it  for	 the  purposes	of  enactments	relating  to  Indian
incometax and  in our view, it is quite clear that Rule 8 of
the Income-tax Rules, 1962 as well as Rule 24 of the Income-
tax Rules,  1922, pertain  to and  are	bound  up  with	 the
definition  of	 the  term  "agricultural  income"  for	 the
purposes of  laws or enactments pertaining to Indian income-
tax and hence the provisions of those rules have to be taken
into  account	in  considering	 the  meaning  of  the	term
"agricultural income"  under sub-article  (1) of Article 366
     It was  next contended by Mr. Potti & Mr. Ray that Rule
8 went	beyond the  scope of the rule making power conferred
by Section 295 of the Act of 1961 and hence was ultra vires.
This submission	 has to	 be rejected.  Clause  (b)  of	sub-
section (2) of Section 295 specifically confers power on the
rule making  authority to  make rules relating to the manner
in which  and the procedure by which income for the purposes
of the Act of 1961 would be arrived at in the case of income
tea grown and manufactured by a seller in India and hence we
totally fail  to see  how it  can be said that the said rule
goes beyond  the scope	of the	rule-making power  conferred
under Section 295.
     In view  of what we have discussed above, it appears to
us that	 although the  Explanation to Section 2(a)(2) of the
Kerala Agricultural Income-tax Act, 1950 has been deleted by
the Amendment  Act of  1980, the  result would	still be the
same, namely,  that the	 Kerala State Legislature can impose
tax only  in respect of 60 per cent of the income derived by
an assessee  who sells	tea grown and manufactured by him in
India and  such income has to be computed in the manner laid
down in	 the Act  of 1922  and thereafter in the Act of 1961
for computation of business income. The same is the position
in respect of the powers of
988
the legislature	 of the State of West Bengal in spite of the
amendments made by the said legislature by the Amendment Act
of 1980 and earlier under the amending Act of 1979 which was
in force  only for  one year as we have stated before. It is
not necessary  to strike  down the  said amendments  because
term "agricultural income" under the Constitution as we have
pointed out  earlier, but  we may make it clear that they do
not confer  any wider  power on	 the  State  Legislature  to
impose taxes  on agricultural  income than  what we have set
out earlier.
     Before parting  with the  matter, it  must be mentioned
that the  validity of the aforesaid amendments to the Bengal
Agricultural Income-tax	 Act, 1944  made  in  1980  and	 the
deletion of the Explanation in Section 2(a)(2) of the Kerala
vires and  invalid in  law on several other grounds. We have
not thought it necessary to go into these grounds in view of
what we	 have held,  as set  out above. Dr. Pal on behalf of
Tata Tea  Co.  and  Tata  Finlay  Co.  also  challenged	 the
amendment carried  out in  1980 in  the Bengal	Agricultural
Income-tax Act	on the	ground of being its retrospective in
operation. It also appears to us unnecessary to go into this
question in view of what we have already held.
     In the  result, although  none of	the prayers  in	 the
petitions is granted in terms, the Petitioners substantially
succeed in  the Petitions.  There will	be a  declaration in
terms of  the last  but	 one  paragraph	 in  favour  of	 the
Petitioners. Considering  the facts and circumstances of the
case, however,	we feel that the parties should bear and pay
their own costs and we direct accordingly.
S.L.				 Petitions disposed of.
989

Ahmed Ibrahim Sahigra Dhoraji vs Commissioner Of Wealth Tax, Gujarat on 7 April, 1981
Equivalent 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
Author: E.S.  Venkataramiah
Bench: E.S.  Venkataramiah, R.S. Pathak
AHMED IBRAHIM SAHIGRA DHORAJI

	Vs.

COMMISSIONER OF WEALTH TAX, GUJARAT

DATE OF JUDGMENT07/04/1981

BENCH:
BENCH:

CITATION:
 1981 AIR 1562		  1981 SCR  (3) 402
 1981 SCC  (3)	77	  1981 SCALE  (1)694
 RF	    1981 SC1759	 (23)

ACT:
     Wealth Tax	 Act, 1957-Section  2(m)-Finance  Act,	1965
gave  incentives   for	voluntary  disclosure  of  concealed
income-Assessee declared  large amount	of such	 income	 and
paid tax  as provided  by Finance Act-Tax so paid-Whether an
allowable deduction  as "debt  owed "  under the  Wealth Tax
Act.

HEADNOTE:
     As part  of a  measure to	mop up	unaccounted money on
which no  income tax  had been paid, an incentive scheme was
prepared by  the Government  under which a person disclosing
such income  was required  to pay  a specified	rate of	 tax
without attracting  the penal  provisions of  the Income Tax
Act. Section  68 of  the Finance  Act, 1965  provided that a
person	making	 voluntary  disclosure	 of  his  income  in
accordance with	 the provisions	 of  the  section  would  be
charged income	tax  at	 a  specified  rate  notwithstanding
anything contained in the Income Tax Act.
     The assessee  had a large sum of such unaccounted money
in his	possession. Without allocating the total sum amongst
the different  assessment years,  he declared  that he had a
sum of Rs. 7 lakhs in his possession which was earned by him
during the  assessment years  1957-58 to 1964-65. Income Tax
in respect  of	this  income  computed	in  accordance	with
section 68 of the Finance Act was paid by him.
     In the  wealth tax	 returns filed by him in response to
the  notice  issued  by	 the  Wealth  Tax  officer  for	 re-
assessment consequent  on the  disclosure of  his wealth the
assessee claimed deductions of income-tax paid under section
68 of the Finance Act. But the Wealth Tax officer disallowed
the claim  holding that since the assessee had not shown the
liability to  pay income  tax in  his balance sheets for the
respective years  the deductions claimed by him could not be
allowed in any of the assessment years.
     The  Appellate  Assistant	Commissioner  dismissed	 the
assessee's appeal.  The Tribunal,  on the  other hand,	held
that the  liability constituted	 a "debt  owed"	 because  in
truth and substance, it was a liability under the Income Tax
Act, 1922  or 1961  and not  a new  liability created by the
Finance Act, 1965.
     On reference  the High  Court held	 in  favour  of	 the
Revenue on  the ground	that section  68 of  the Finance Act
enacted a new charge of tax on an ad hoc
403
basis on disclosed income and, therefore, it was not a "debt
owed" which could be allowed as a deduction under the Wealth
Tax Act.
     On behalf	of the	Revenue it  was contended that since
the tax	 paid by the assessee under the voluntary disclosure
scheme was in discharge of a liability created for the first
time by	 the Finance  Act, 1965	 it  was  not  an  allowable
deduction under the Wealth Tax Act.
^
     HELD: The	assessee was  entitled to claim deduction of
income tax  paid on  the amounts  added to  his total wealth
under section  2 (m)  of the Wealth Tax Act in the course of
the assessment proceedings. [418 B] C
     1. Merely	because the  amounts  were  disclosed  in  a
declaration under  section 68  of the  Finance Act, they did
not cease  to be  incomes not already charged to income tax.
Although the  Finance Act  merely levied a fixed rate of tax
in respect  of all  the income	disclosed  without  allowing
deductions, exemptions	and such  other allowances which are
allowable under	 the Income  Tax Acts,	its function  was no
more than  that of  an annual  Finance Act  despite the fact
that it	 made certain alterations in regard to the filing of
declaration and computation of taxable income. [414 G-H]
     2. The nature of the declaration which was dependent on
the  volition  of  the	declaring  and	the  fact  that	 the
liability  to	tax  the  amount  was  contingent  upon	 the
willingness of	the declaring  to disclose  the amount would
not make  a difference	because such  voluntary	 disclosure,
even in	 the absence  of section  68, would have exposed the
assesseee  to  assessment  or  reassessment.  The  voluntary
character of  the declaration  cannot alter the character of
the tax. [415 A-B]
     3. The  true position  is that  the amount declared has
the liability  to pay  income tax  embedded  in	 it  on	 the
valuation date	but only the ascertainment of that liability
is postponed to a future date. [417 C]
     In the instant case its determination was allowed to be
done in	 accordance with  the provisions of section 68. Even
though this  section was  a complete  code in  itself it was
only a scheme which provided a method for the liquidation of
an already  existing income  tax liability which was present
on the relevant valuation date. [417 D]
     4. Nor  did the  absence of  allocation of	 the  amount
disclosed amongst different assessment years detract the tax
from being  called a  tax on  income because such allocation
would not  achieve any	additional purpose  in the scheme of
section 68  This section is in the nature of a package deal.
The net	 result achieved  was that the declarant was treated
as having  discharged all  his liability  in respect of such
income under the income tax law. [415E]
404
     5. The  finding of	 the  High  Court  that	 section  68
created a  fresh charge	 is incompatible with the foundation
of the very reassessment proceedings under section 17 of the
Wealth Tax Act. [415 H]
     6. Moreover  section 68,  at more than one place stated
that what  was pay  able was income tax which clearly showed
that what was payable under the section was income tax. [412
B-C]
     C.I.T. v.	Khalau	Makanji	 Spinning  and	Weaving	 Co.
Ltd.,40 I.T.R.	189. Madurai  District	Central	 Cooperative
Bank Ltd. v. Third I.T.O. 101 I.T.R. 24, distinguished.
     C. K.  Bahu Naidu v. Wealth Tax Officer, 112 ITR 34; C.
Ii T  v. GirdhariLal,  99 ITR  79; C.W.T. v. B.K Sharma, 110
I.T.R. 902;  C.W.T. v.	Bansidhar Poddar.  112 ITR 957; D.C.
Shah v. C.W.T., 117 ITR 348; Bhagwandas Jain v. Addl. C.W.T.
116 ITR	 347 and  Bhagwanidas Binani v. C.W.T., 124 ITR 783,
approved.

JUDGMENT:
     CIVIL APPELLATE  JURISDICTION: Civil  Appeal Nos.	1217
1222 of 1973.
     Appeals by	 certificate from  the	Judgment  and  order
dated 21.12  1972 of  the Gujarat  High Court  in Wealth Tax
Reference No. 2 of 1969.
     V. S.  Desai, Shardul  S. Shroff  and H. S. Parihar for
the Appellant.
     S. T.  Desai, P.  A. Francis and Miss A. Subhashini for
     VENKATARAMIAH, J. On the basis of a certificate granted
under section  29(1) of the Wealth-tax Act 1957 (hereinafter
referred to  as the  Act )  the appellant  has	filed  these
appeals against	 the judgment  and order  dated December  21
1972 of the High Court of Gujarat in Wealth-tax Reference No
2 of  1969. The	 questions referred  to the High Court under
section 27  of the Act by the In come-tax Appellate Tribunal
Ahmedabad Bench read thus:
     "(1) Whether on  the facts	 and in the circumstances of
	  the case  the liability  in respect  of income-tax
	  payable on  the concealed  income disclosed by the
	  assessee pursuant to section 68 of the Finance Act
	  1965 is  deductible  under  section  2(m)  of	 the
	  Wealth-tax Act 1957 in computing the net wealth of
	  the assessee for the
405
	  assessment years 1959-60 1960-61 1961-62 1962-63 A
	  1963-64 and 1964-65.
     (2)  Whether the Tribunal was right in holding that the
	  liability to pay tax on the amount disclosed under
	  section 68 of the Finance Act 1965 arose not under
	  that Finance Act but under section 3 of the Indian
	  Income-tax Act 1922.
     Having regard  to the  assessment years in question the
second question should be read as including within its scope
also the  question whether the Tribunal was right in holding
that the  liability to pay tax on the amount disclosed under
section 68  of the  Finance Act,  1965 arose  not under that
Finance Act but under section 4 of the Income-tax Act 1961.
     The assessee  who is the appellant in these appeals had
been assessed  on the basis of his returns of net wealth and
the  statements	  filed	 therewith   in	 the  status  of  an
individual to  wealth-tax under	 section 16(3)	of  the	 Act
during the  assessment years  1957-58 t	 1964-65 on  various
dates between January 15 1960 and July 14 1964. Subsequently
the assessee  made a  disclosure under	section	 68  of	 the
Finance Act  1965 (hereinafter	referred to  as the  Finance
Act)   of Rs.7,00,000  which had  been shown  as having been
covered by  some hundi	transactions with a concern known as
M/s Abdul Razack & Co. in his books of account at the Bombay
branch	of  his	 business.  Alongwith  the  declaration	 the
assessee filed	a statement  that this	concealed income had
been earned  by him  during the	 assessment years 1957-58 to
1964-65. He however did not allocate the total sum disclosed
amongst different  assessment years  but showed it in a lump
sum. The  amount of  income-tax was  computed at  60% of the
total concealed income and it was paid as contemplated under
section 68  of	the  Finance  Act.  The	 Wealth-tax  officer
thereafter reopened  the  assessments  or  the	assessee  to
wealth-tax for	assessment years  1957-58 to  1964-65 on the
ground that  he had reason to believe that certain wealth of
the assessee  had escaped  assessment during  the said years
and that  his belief  was founded  on the disclosure made by
the assessee  under section  68 of  the Finance	 Act. We are
concerned in  these appeals  only with	the assessment years
1959-60 to 1964-65. On scrutiny it was found on the basis of
peak cash  credits in  each assessment year that the amounts
covered by hundies were as under:
406
     Assessment	 years			   Peak cash credits
      1959-60				     RS. 4,57,465/-
      1960-61				     RS. 5,59,8231-
      1961-62				     RS. 6,38,325/-
      1962-63				     RS. 6,82,974/-
      1963-64				     RS. 7,01,578/-
      1964-65				     RS. 7,01,578/-
 As can  be seen  from the	above statement the assessee
had substantial sums with him in the years in question which
had  not   been	 disclosed   earlier.  Since  these  amounts
constituted the	 wealth which  was  liable  to	tax  on	 the
respective valuation  dates the	 assessee filed	 returns  of
wealth for  the above mentioned years in compliance with the
notices issued	to him	and in	the course of the assessment
proceedings he claimed the deduction for income- tax payable
by him	in respect  of the sums which had been progressively
earned by  him from  year to  year and	which were liable to
income tax under the relevant income tax law in force during
the years relying upon the decision of this Court in Kesoram
Industries and	Cotton Mills  Ltd v. Commissioner of Wealth-
tax (Central), Calcutta. The Wealth-tax officer however held
that since in his balance selects the assessee had not shown
the liability to pay income-tax the deduction of the amounts
claimed could  not be allowed in any of the assessment years
and accordingly	 the orders  of reassessment  were passed by
him after  disallowing the  claim made	by the	assessee. He
however included  the sums  mentioned in the above statement
in the	net wealth  of the  respective assessment  years and
determined the	wealth-tax  payable  by	 the  assessee.	 The
appeals filed  by the  assessee against	 the orders  of	 the
Wealth-tax   officer	before	 the   Appellate   Assistant
Commissioner  were  dismissed.	On  further  appeal  to	 the
Income-tax Appellate-Tribunal  the Tribunal  held  that	 the
deduction claimed  in respect of each assessment year was in
truth and  substance a liability under the Indian Income-tax
Act 1922  or the  Income-tax Act 1961 as the case may be and
not a new liability created by the Finance Act and therefore
it constituted a debt owed by the assessee on the respective
valuation dates	 within the  meaning of	 section 2(m) of the
Act and	 that the  deduction claimed should be allowed while
computing the net wealth
407
of  the	 assessee.  Accordingly	 the  Tribunal	allowed	 the
appeals of  the assessee.  Thereafter at the instance of the
Commissioner  of  Wealth-tax  the  Tribunal  referred  under
section 27  of the  Act the two questions mentioned above to
the High  Court. After	hearing the  parties the  High Court
answered both the questions in the negative and in favour of
the Revenue  by its  judgment dated  December 21  1972. On a
certificate granted by the High Court under section 29(1) of
the Act the assessee has come up in appeal to this Court.
     The relevant part of section 2(m) of the Act reads:
	  "2. (m)  net wealth  means the amount by which the
	  aggregate value  computed in	accordance with	 the
	  provisions of	 this Act of all the assets wherever
	  located belonging to the assessee on the valuation
	  date including  assets required  to be included in
	  his net  wealth as  on that date under this Act is
	  in excess  of the aggregate value of all the debts
	  owed by  the assessee	 on the valuation date other
	  than
     In the case of Kesoram Industries and Cotton Mills Ltd.
(supra.) this Court has held that income-tax other than that
falling under  clause (iii)  of	 section  2(m)	of  the	 Act
payable on the valuation date is a debt owed by the assessee
and hence  is  deductible  from	 the  total  wealth  of	 the
assessee while determining the net wealth for the purpose of
levying wealth-tax.
 The principal  question which  arises for consideration
in these  appeals relates  to the  true character of the tax
paid by	 the assessee in the proceedings under section 68 of
the Finance  Act and  the applicability	 of the ratio of the
decision of this Court in the case of Kesoram Industries and
Cotton Mills  Ltd. (supra).  Since it  is contended  by	 the
assessee that  the tax	so paid	 was the  tax which  he	 was
liable to  pay under  the relevant  income-tax law  in force
during the  assessment years  in question and it is urged by
the Department	that the  said payment was in discharge of a
liability created  for the  first time by the Finance Act it
is necessary  to examine the provisions of section 68 of the
Finance Act  in some  detail in so far as they relate to the
question involved in this case. The relevant part of section
68 of  the Finance Act which came into force on March 1 1965
reads:
408
     "68.  Voluntary  disclosure  of  income-(1)  Where	 any
person makes  a declaration  in accordance  with sub-section
(2) in respect of the amount representing income-
     (a)  which he  has failed	to disclose  in a  return of
	  income for any assessment year filed by him before
	  the first  day of  March  1965  under	 the  Indian
	  Income-tax Act 1922 (Xl of 1922) or the Income-tax
	  Act 1961 (XLIII of 1961) or
     (b)  which has  escaped assessment	 for any  assessment
	  year for  which an assessment has been made before
	  the 1st day of March 1965 under either of the said
	  Acts or
     (c)  for the  assessment of  which no  proceeding under
	  either of  the said Acts has been taken before the
	  1st day of March 1965,
     he shall notwithstanding anything contained in the said
     Acts be charged income-tax at the rate specified in sub
     section (3) in respect of the amount so declared if he-
     (i)  pays the  amount of  income-tax as computed at the
	  said rate or
     (ii) furnishes adequate  security for the payment there
	  of in	 accordance with  sub-section (4)  and under
	  takes to  pay such  income-tax within a period not
	  exceeding  six   months  from	  the  date  of	 the
	  declaration as may be specified by him therein or
     (iii)On or	 before the  31st day  of May 1965 pays such
	  amount as  is not less than one-half of the amount
	  of income-tax	 as computed  at the  said  rate  or
	  furnishes adequate security for the payment there-
	  of in	 accordance  with  sub-section	(4)  and  in
	  either case assigns any shares in or debentures of
	  a joint  stock company  or mortgages any immovable
	  property in  favour of  the President	 of India by
	  way o	 f security  for the  payment of the balance
	  and undertakes  to Fay  such	balance	 within	 the
	  period referred to in clause (ii).
409
     (2)  The declaration  shall be made to the Commissioner
	  and  shall  specify  the  period  required  to  be
	  specified under  clause (ii)	of  sub-section	 (1)
	  contain the  name address  and  signature  of	 the
	  person  making   the	declaration  and  also	full
	  information in  respect of  the following  matters
	  namely:- B
	  (a)  Whether he  was assessed to income-tax or not
	       and if  assessed the  name of  the Income-tax
	       Circle in which he was assessed.
	  (b)  The amount  of income  declared giving  where
	       available details  of the  financial year  or
	       years in	 which the income was earned and the
	       amount pertaining to each such year.
	  (c)  Whether the amount declared is represented by
	       cash  (including	  bank	 deposits)   bullion
	       investments in  shares debts  due from  other
	       persons commodities  or any  other assets and
	       the name	 in which  it is  held and  location
	       thereof:
	  Provided that	 the  declaration  shall  be  of  no
     effect unless it is made after the 28th day of February
     1965 and before the Ist day of June 1965. F
     (3)  The rate  of income-tax  chargeable in  respect of
	  the amount referred to in sub-section (1) shall be
	  sixty per cent of such amount:
	  Provided that	 if before the Ist day of April 1965
     the tax on the amount declared is paid by the declarant
     at the  rate of  fifty seven per cent of such amount he
     shall not	be liable  to pay  any further	tax on	such
     amount.
     (4)  A person shall not be considered to have furnished
	  adequate security  for the  payment of the tax for
	  the purposes of sub-section (I) unless the payment
	  is guaranteed	 by a  scheduled bank  or the person
	  makes an  assignment in favour of the President of
	  India of  any security  of the  Central  or  State
	  Government.
	  Explanation-For the  purposes of  this sub-section
     where an assignment of Government securities is made in
410
     favour of	the President  the amount  covered  by	such
     assignment shall  be the market value of the securities
     on the date of the assignment.
     (5)  Any amount  of income-tax  paid in  pursuance of a
	  declaration made  under this	section shall not be
	  refundable in	 any circumstances and no person who
	  has made  the declaration  shall be  entitled i  n
	  respect of any amount so declared or any amount of
	  tax  so   paid  to   reopen  any   assessment	  or
	  reassessment made  under the Indian Income-tax Act
	  1922 (XI  of 1922)  or  the  Income-tax  Act	1961
	  (XLIII of 1961) or the Excess Profits Tax Act 1943
	  (XV of  1940) or the Business Profits Tax Act 1947
	  (XXI of  1963) or  the Companies  (Profits) Surtax
	  Act 194  (VII of  1964) or  claim any	 set-off  or
	  relief in  any appeal	 reference revision or other
	  proceeding in	  relation  to any such assessment -
	  or reassessment.
     (6)  (a) Any  amount declared  by any person under this
	  section in respect of which the tax referred to in
	  subsection (3)  is paid  shall not  be included in
	  his total  income for	 any assessment under any of
	  the  Acts  mentioned	hl  sub-section	 (5)  if  he
	  credits in  the books of account if any maintained
	  by him  for any  source of  income or in any other
	  record the  amount declared  as reduced by the tax
	  paid thereon under this section...
 Section 68(1)  of the  Finance Act	 provides that where
any person  makes a  declaration in  accordance with section
68(2) in respect of any amount represent n g income which he
has failed  to disclose	 in his	 return or which has escaped
assessment for	any assessment	year for which an assessment
has been  made before  March 1, 1965 under either of the two
Acts namely  the Indian	 Income-tax Act 1922 and the Income-
tax Act 19 1 or for the assessment of which no proceeding is
taken before March 1, 1965 he shall notwithstanding anything
contained in the said Acts be charged income-tax at the rate
specified in  sub-section (3)  thereof	in  respect  of	 the
amount so  declared. If	 he pays the amount of income-tax as
computed at the said rate or furnishes adequate security for
the payment  thereof  in  accordance  with  sub-section	 (4)
thereof and  undertakes to  pay such  income-tax within	 the
period specified  in the  section he  would be absolved from
the liability under the relevant law of in
411
come-tax. The  declaration should  however be filed with the
particulars  mentioned	 in  section  68(2).  Section  68(3)
provides that  the rate	 of income-tax chargeable in respect
of the	amount referred to in the declaration shall be sixty
percent of  such amount	 provided that	if the	tax is	paid
within April  1, 1965  the tax	payable would be fifty seven
percent. Sub-section  (5) of  section 68  of the Finance Act
provides that  any amount of income-tax paid in pursuance of
a  declaration	 made  under   that  section  shall  not  be
refundable in  any circumstances nor a declarant is entitled
in respect  of any  amount declared  or tax  paid thereon to
reopen any  assessment or reassessment made under the Indian
Income-tax Act	1922 or Income-tax Act 1961 or any other Act
mentioned therein.  He cannot  also  claim  any	 set-off  or
relief in  any appeal reference revision or other proceeding
in relation  to any  such assessment or reassessment. Clause
(a) of	sub-section (6)	 of section  68 grants immunity from
proceedings under the Acts mentioned in section 68(5) to the
assessee by providing that any amount declared by any person
under section  68 in respect of which the tax referred to hl
sub-section (3) thereof is paid shall not be included in his
total income for any assessment under any of the assessments
made under  any of the Acts mentioned in section 68(5) if he
credits in the books of account if any maintained by him for
any source  of income  or hl  any other	 record	 the  amount
declared as  reduced by	 the tax  paid thereon under section
68.
     On an  examination of  the several provisions contained
in section  68 of the Finance Act it becomes clear that they
had been  enacted as  a part  of the measures adopted with a
view to	 unearthing unaccounted	 money in  possession of the
members of  the public on which income-tax had not been paid
and also  to create  an incentive  to such  persons to	make
disclosure of  their unaccounted  incomes  and	to  pay	 tax
thereon at  the specified  rate without the liability to pay
any interest  thereon or  penalties for	 non-compliance with
the law	 of income-tax.	 The declaration  to be	 riled by  a
person under  section 68 is about an amount representing his
income earned  in an earlier accounting period which has not
been subjected	to  tax	 in  the  ordinary  course  although
income-tax was	payable hl  respect of	it. If the declarant
pays tax at the rate specified in sub-section (3) of section
68 he would be absolved from any further liability to tax on
such income.  The declaration  has to  be  made	 before	 the
Commissioner  of  Income-tax  and  it  should  contain	full
information namely  whether he was assessed to income-tax or
not and	 if assessed  the name	of the	Income-tax circle in
which he was assessed the
412
amount of  income declared giving w ere available details of
the financial  year or	years in which the income was earned
and the	 amount pertaining to each such year and whether the
amount declared	 is  represented  by  cash  (including	bank
deposits) bullion  investment in shares debts due from other
persons commodities  or any  other assets  and the  name  in
which it  is held  and the location thereof. Section 68 also
states at  more than one place that what is payable pursuant
to a  declaration is  income-tax. Section  68  (1)  contains
words such as he shall notwithstanding anything contained in
the said Acts be charged income tax at the rate specified in
sub-section (3) . if he pays the amount of income-tax at the
said rate  and undertakes  to pay  such income-tax . Section
68(3) contains the words: the rate of income-tax chargeable.
Section 68(5)  refers to:  (a) any amount of income-tax paid
and section  68(7) contains  the words:	 paid the income-tax
under this section . These words show that Parliament was of
the view  that what was payable under section 68 was income-
tax.
     The points	 of difference	between any Finance Act that
may be	passed annually	 fixing the  rates of income tax and
section 68 of the Finance Act however relate to (i) the time
within which  and the  manner in which information in regard
to the	income	is  to	be  furnished  (ii)  the  method  of
computation of	taxable income	and E(iii)  the rate  of tax
payable on  such income. The declaration which is equivalent
to a return to be filed under the Indian Income-tax Act 1922
or Income-tax  Act 1961 need not contain all the particulars
that have  to be  furnished in	such return. The declaration
can be	filed during  the period  mentioned  in	 proviso  to
section 68(2).	There  is  no  provision  to  claim  various
deductions exemptions  set off etc. in respect of the income
disclosed in  the declaration as in the case of income shown
in an  ordinary return.	 Since the  rate of tax is a uniform
one and	 does not  vary	 with  the  quantum  of	 the  income
disclosed there	 is no	need to	 trace it  to  any  specific
assessment year.  Further the declaration is a voluntary one
and  it	 is  not  pursuant  to	any  notice  issued  by	 the
Department.
     The question  is whether  these distinguishing features
make  the   amount  disclosed	in  a  declaration  anything
different from	the income  of an  assessee and the tax paid
under section 68 anything different from a tax on income. In
other words  does section  68 impose  a new  charge  on	 the
income	of   the  declarant   for  the	 first	time  wholly
independent of	the levy  under	 section  3  of	 the  Indian
Income-tax Act	192' or section 4 of the Income-tax Act 1961
? The High
413
Court has  given the  following reasons for holding that the
tax paid under section 68 is not tax on income payable under
the Indian  Income-tax Act 1922 and Income-tax Act 1961: (i)
the charge  under the  Income-tax Act is on the total income
of the	previous year  and not	on any	particular  item  of
income but  that is  not so under section 68,(ii) payment of
tax under section 68 has no reference to any assessment year
and unless it is correlated to an assessment year it can not
be ordinary  income-tax and  (iii) the	disclosed income  is
chargeable to  tax without  allowing  usual  deductions	 and
without providing for any procedure for qualification.
     The High  Court  proceeded	 to  hold  that	 section  68
enacted a  new charge of tax on an ad hoc basis on disclosed
income irrespective  of the  assessment year in which it was
earned. The  disclosure of concealed income coupled with the
payment of  tax as contemplated in clause (i) of sub-section
(1) according to the High Court not only created a charge of
tax but	 also satisfied	 it. In	 its view  the disclosure of
concealed income  coupled with	furnishing of  security	 and
undertaking as	contemplated in	 clause (ii)  created a	 new
charge of  tax and  when the  undertaking was carried out by
payment of  tax the liability arising from the charge of tax
was satisfied.
     one basic fallacy underlying the conclusion of the High
Court that  a new  charge is  being levied  under section 68
appears to  be the assumption that the amount in question in
respect of which tax is payable under that provision was not
liable to  income-tax earlier.	lt should  be borne  in mind
that the  declaration contemplated  under section  68  is  a
declaration in	respect of income of earlier years which had
been concealed	and on	which tax  was	payable	 during	 the
relevant assessment  years in the ordinary course. Section 3
of the	Indian Income-tax  Act 1922 and section 4 of Income-
tax Act	 1961 which  are couched  more or  less in  the same
language state	that where  any Central	 Act enacts that inc
me-tax shall  be charged  for any  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 the	relevant Act  in respect  of the total income of the
previous year  or previous years as the case may be of every
person. Now  it is  well settled  by a	series	of  judicial
decisions that	the liability to income-tax arises by virtue
of the	charging section  in the relevant Income-tax Act and
it arises not later than the close of the previous year even
though the  rate of  tax for  the year	of assessment may be
fixed  after   the  close  of  the  previous  year  and	 the
assessment has	necessarily to	be made	 after the  previous
year.
414
The quality  of chargeability  of any  income to  tax is not
dependent upon	the passing  of the  Finance Act  though its
quantification may  be governed	 by the	 provisions  of	 the
Finance Act  in respect	 of any assessment year vide Wallace
Brothers and Co. Ltd. v. Commissioner of Income-tax. Messers
Chatturam Horilram  Ltd. v.  Commissioner of  Income-tax and
Ors. and  Kalwa Devadattam  & Ors.  v. The  Union of India &
Ors. In the case of Kesoram Industries and Cotton Mills Ltd.
(supra) Subba  Rao J.  (as he then was) summarised the legal
position thus :-
	  To summarize:	 A debt	 is a  present obligation to
     pay an  ascertainable sum	of money, whether the amount
     is	 payable  in  prasenti	or  in	futuro:	 debitum  in
     prsesenti, solvendum  in futuro. But a Sum payable upon
     a contingency  does not  become a	debt until  the said
     contingency has happened. A liability to pay income-tax
     is a  present liability though it becomes payable after
     it is quantified in accordance with ascertainable data.
     There is  a perfected  debt at any rate on the last day
     of the  accounting year and not a contingent liability.
     The  rate	is  always  easily  ascertainable.  If	tile
     Finance Act  is passe  l it  is the  rate fixed by that
     Act; if  the Finance  Act has not yet been passed it is
     the  rate	proposed  in  Finance  Bill  pending  before
     Parliament or  the rate  in force in the preceding year
     whichever is  more favourable  to the assessee. All the
     ingredients of  a debt  are present.  It is  a  present
     liability of an ascertain able amount.
     It is  thus clear	that it- the assessee had brought to
the notice  of	the  Department	 in  the  usual	 course	 the
existence of  incomes which  were later	 on  declared  under
section 68  they would	have been  taxed during the relevant
assessment year.  Hence merely because they are disclosed in
a declaration  filed under  section 68, they cannot cease to
be income  not already	charged for  income tax.  It is true
that the  Finance Act in question merely levied a fixed rate
of tax	in respect  of	all  the  income  disclosed  without
allowing  deductions   exemptions  and	 set-off  under	 the
relevant income-tax  law yet  its function  was no more than
that of	 a Finance  Act passed	annually even though it made
certain alterations with regard to filing of declaration and
computation of taxable income
415
     It was  however urged  on behalf of the Department that
the   nature of the declaration which was dependent upon the
volition of the declarant and the fact that the liability to
tax the	 amount mentioned  therein was	contingent upon	 the
willingness of the declarant to disclose the amount ought to
make a	difference. We	do not	think so  because  any	such
voluntary disclosure  by an  assessee even in the absence of
section 68  would have	exposed	 him  to  an  assessment  or
reassessment as the case may be being made in respect of the
sum  disclosed	as  part  of  the  income  of  the  relevant
assessment year	 and of course with the additional liability
to payment  of interest and levy of penalty and perhaps with
the right  to claim  deductions if  any	 admissible  in	 the
circumstances  of   the	 case	and  the  benefit  of  other
procedural  rights.   The   voluntary	character   of	 the
declaration cannot therefore alter the character of the tax.
There is  also no  substance in	 the contention	 that in the
absence of  the allocation  of the  amount disclosed amongst
different assessment  years the tax payable under section 68
cannot be  termed as a tax on income because such allocation
section 68  Irrespective of  the other income which may have
been determined in an ordinary proceeding under the relevant
law of	income-tax a  fixed rate  of tax  is  payable  under
section 68(3)  and hence  the amount disclosed being treated
as the	income of  any particular  year would  not make	 any
difference regarding  the quantum  of tax.  Nor is there any
other purpose to be served by such allocation. Section 68 is
in the	nature of a package deal but the net result achieved
is that	 the declarant	is treated  as having discharged all
his liability  in respect  of  the  said  income  under	 the
income-tax law.
     There is  one other  circumstance which  may be noticed
here. The  tax levied  under section 68 can be only a tax on
income. If  we hold  it otherwise  it may  become a  tax  on
wealth itself.	The basis  of the  liability in this case is
the admission made by the declarant that the amount declared
was his	 income earned	in previous years but concealed from
the knowledge  of the  Department. In these circumstances it
cannot be  said that the amount declared under section 68 is
not income which was not taxable under the Indian Income-tax
Act 1922  or the Income-tax Act 1961 as the case may be. The
finding of  the High  Court that  section 68 created a fresh
charge is  incompatible with  the  foundation  of  the	very
reassessment proceedings  under section	 17 of	the Act. The
basis of  these proceedings  is the  information  which	 the
Wealth-tax officer acquired
416
from the declaration filed by the assessee in this case that
the  assessee	was  in	  possession  of  unaccounted  funds
represented   by    the	  non-genuine	hundis	 which	 had
progressively reached  the level  of Rs. 7,01,578 during the
assessment year	 1964-65 from  the level  of Rs. 4,57;465 in
1959-60 by  gradual accumulation  of income.  But  for	this
assumption in the absence of any other material reassessment
under the Act would have been possible only in the last year
in which  the disclosure  was made.  That however is not the
case here.
 The High Court in support of its view has relied on the
decision of  the Kerala	 High Court  though not	 the  reason
given in  support of  that decision  in C.  K. Babu Naidu v.
Wealth-tax Officer. That decision has since been reversed in
appeal by a Division Bench of that Court in C. K. Babu Naidu
v. Wealth-tax  Officer, 'A' Ward, Calicut & anr in which the
Kerala High  Court has	held  that  the	 liability  for	 tax
arising under  section 68  of the  Finance Act	was  nothing
other than  the liability  under  the  Income-tax  Act	1961
itself and accordingly has allowed the deduction of tax paid
under section  68 as  a debt  owed on the valuation date. In
Commissioner of	 Wealth-Tax, Haryana,  H.P. &  Delhi-III  v.
Girdhari Lal,  Commissioner of	Wealth-tax v.  B. K  Sharma,
Commissioner of	 Wealth tax,  West Bengal-III,	Calcutta  v.
Bansidhar Poddar,  D. C.  Shah v. commissioner of Wealth-tax
Mysore and  Shri Bhagwandas  Jain v.  Addl. Commissioner  of
Wealth-tax, M.	P.,  the  High	Courts	of  Delhi  Allahabad
Calcutta Karnataka and Madhya Pradesh have accepted the view
that the tax paid under section 68 of the Finance Act should
be treated  as a  debt owed  for purposes of determining net
wealth as  denied in section 2(m) of the Act. The High Court
of  Bombay   has  also	 recalled  the	same  conclusion  in
Bhagwandas Binani  v.  Commissioner  of	 Wealth-tax,  Bombay
City-III but  in doing	so it observed that it appears to us
that although  it is  not possible to say that the amount of
income-tax paid	 under section 68 of the Finance Act 1965 is
income-tax under the charging sec-
417
tion 3	or section 4 of the I.T. Acts it must be regarded as
income-tax paid	 in lieu  of such  income-tax and  would  be
entitled to  the same  considerations  as  lavished  by	 the
Supreme Court on the ordinary charge of income-tax. The High
Court of  Bombay appears  to take the view as the High Court
of Gujarat  has done in the decision under appeal that a new
liability is  created by section 68 but it however would not
have any  adverse effect  on the  right of  the assessee  to
claim the  deduction. While  we approve	 of  the  conclusion
reached by  the High  Court of	Bombay we feel that the said
decision to  the extent	 it attempts  to follow	 the  reason
given by  the Gujarat  High Court to hold that the liability
under section  68 is  a fresh  liability is not correct. The
true position  is that the amount declared has the liability
to pay	income-tax imbedded  in it on the valuation date but
only the  ascertainment of  that liability is postponed to a
future date.  In  the  instant	case  its  determination  is
allowed to  he done  in accordance  with the  provisions  of
section 68.  Even though  it  may  appear  to  be  itself  a
complete code  it is  only a  scheme which provides a method
for  the  liquidation  of  an  already	existing  income-tax
liability which	 was present on the relevant valuation date.
The view  does not in any way To counter to any observations
made by	 this Court  in Commissioner  of Income-Tax,  Bombay
City I	v. Khatau  Makanji Spinning  and Weaving Co. Ltd. In
that case  this Court  was concerned  with the validity of a
charge	levied	by  the	 Finance  Act  1951  in	 respect  of
dividends distributed in excess of the specified limit under
clause (ii)  of the  proviso to	 Paragraph of  Part I of the
First Schedule to that Act as applied to the assessment year
1953-54 by  the Finance	 Act  1953.  This  Court  held	that
income-tax was	a tax  on income of the previous year and it
would not  cover some  thing which was not the income of the
previous year  or made	fictionally so	and according to the
scheme of  that provision  it was impossible to say that the
additional income-tax  was  properly  laid  upon  the  total
income because	what was  actually taxed was never a part of
the total  income of  the previous  year. This	decision  is
clearly distinguishable	 from the present case where what is
taxed is  the income  which was ordinarily liable to tax but
which had not been included in the return of the assessee or
which had  escaped assessment  or  which  was  still  to  be
assessed to income-tax under the relevant Income-tax Act. It
was in	fact a	part of the total income though not assessed
till the  declaration was  made. Merely because it is stated
that the rate of tax charged on the
418
amount declared is sixty per cent or fifty-seven per cent as
the case  may be it does not cease to be a part of the total
income. This is not a case where what was not in fact income
had been  converted into  income by section 68. For the same
reason the  Department cannot  derive any  support from	 the
observations made  by this Court in Madurai District Central
Co-operative  Bank   Ltd.  v.	Third  Income  tax  officer,
Madurai.(l) We	are therefore  of the view that the assessee
was entitled to claim deduction of income tax payable on the
amounts added  to his total wealth under section 2(m) of the
Act in the course of the reassessment proceedings.
     In the result these appeals are allowed the judgment of
the High Court is set aside and the questions referred to it
are answered  in  the  affirmative  and	 in  favour  of	 the
assessee.  The	 Department  will   pay	 the  costs  of	 the
appellant-assessee Hearing fee one set.
P.B.R.					  Appeals allowed.
419

Union Of India & Ors vs M.V.Valliappan & Ors on 27 July, 1999
Equivalent 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
Author: M.B.Shah
Bench: S.P.Bharucha, B.N.Kirpal, S.Rajendra Babu, S.S.M.Quadri, M.B.Shah
           CASE NO.:
Appeal (civil)  1612 of 1988

M.V.VALLIAPPAN & ORS.

DATE OF JUDGMENT: 27/07/1999

BENCH:
S.P.BHARUCHA & B.N.KIRPAL & S.RAJENDRA BABU & S.S.M.QUADRI & M.B.SHAH

JUDGMENT:
JUDGMENT

DELIVERED BY:
M.B.SHAH, J. 

M.B.Shah, J.

 These  appeals by special leave are filed against	 the
judgments  and	orders	passed by the High Court  of  Madras
dated  13.1.1988  in Writ Petition Nos.992 and 993 of  1981,
162  & 6036 of 1983, 904-905, 994, 995, 5430, 6162 and	9283
of  1984, by the High Court of Karnataka dated 9.11.1993  in
Writ  Petition	Nos.   12312  to 12317	of  1987  and  dated
25.11.1992  in W.P.  No.23708 of 1992, and by the High Court
of  Gujarat  dated 29.6.1993 in Income Tax Application	Nos.
164  and 165 of 1993.  By a common judgment and order passed
in various writ petitions filed before the Madras High Court
(M.V.	Valliappan & Ors.  Vs.	Income-Tax Officer &  Others
170  ITR 238), the High Court struck down the provisions  of
Section	 171(9) of the Income Tax Act, 1961 as violative  of
Article	 14 of the Constitution of India and that it suffers
from the vice of legislative competence.  In the High Court,
number	of  writ  petitions were filed	involving  questions
relating  to  the validity, scope and interpretation of	 the
provisions  of	Section 171 (9).  For our purpose, it  would
suffice to mention facts of Writ Petition No.994 of 1984 for
deciding  the  question involved in these appeals.   In	 the
said petition, it was the case of the petitioner that he was
a  Karta of a Hindu undivided family consisting of  himself,
his  wife,  his	 minor son and minor daughter.	It  was	 his
contention  that the Hindu undivided family was a partner in
a  partnership	firm in which its funds were  invested.	  On
13th  April,  1979,  a partial partition of  certain  assets
belonging  to  the Hindu undivided family was effected	with
effect	from that date by executing a deed of partition.  An
application under Section 171(2) of the Income Tax Act, 1961
for  recognition  of the said partial partition came  to  be
filed before the Income Tax Officer.  The Income Tax Officer
passed	an  order dated 28th December, 1979 recognizing	 the
partial	 partition.   Thereafter  for  the  assessment	year
1980-81,  a  return  was submitted on behalf  of  the  Hindu
undivided family on April 12, 1980 which did not include the
income	from  the property which was the subject  matter  of
partial	 partition.  The income derived from the assets that
were  the subject matter of partial partition were  declared
by  the respective individuals in their respective  returns.
In   accordance	 with  the   said  return,  assessment	 was
finalised.   Similarly, wealth tax return for the assessment
year  1980-81 was also filed and accepted by the Income	 Tax
Officer.   Thereafter,	a notice dated March 4,	 1983  under
Section	 148  of  the  Act was received	 by  the  petitioner
stating that income of the petitioner had escaped assessment
and  the Income Tax Officer proposed to reopen the completed
assessment  for the year 1980-81.  The assessee objected  to
the  re- opening of the assessment on the ground that  order
under  Section 171 of the Act recognising the partition	 not
having	been cancelled or revoked, continued to be effective
and,  thereafter, no income from the partitioned  properties
could  be  assessed  in	 the hands of  the  Hindu  undivided
family.	  These	 objections were rejected by the I.T.O.	  by
order dated 30th November, 1983.  Fresh assessment order for
H.U.F.	 was  made by including the income relating  to	 the
assets	which were partially partitioned and allotted to the
individual  members  of	 the Hindu undivided  family.	That
re-assessment  order was challenged by filing writ petition.
Facts  in the other writ petitions were also similar to	 the
facts as stated above.	The High Court after considering the
various contentions and decisions relied upon by the parties
arrived at and summarised its conclusion as under:  -

      (1)  Section  171(9)  of the  Income-tax	Act,  1951,
cannot	be  sustained on the ground that it is a measure  to
counteract the tendency to tax avoidance and it suffers from
the vice of legislative incompetence.

      (2)  Section  171(9) of the Income-Tax Act,  1961,  is
also  void  on the ground of violation of Article 14 of	 the

      (3)  Section  171(9)  of	the  Income-Tax	 Act,  1961,
entrenches  upon the charging provisions in Section 4 of the
Income-Tax  Act,  1961, and purports to bring to charge	 the
income	which does not belong to the Hindu undivided  family
to  be assessed in the hands of the Hindu undivided  family.
The provision thus enlarges the scope of sections 4 and 5 of
the Act and is, therefore, invalid.

      (4) Section 171(9) of the Income-Tax Act, 1961 has the
effect of fastening a penal liability on the Hindu undivided
family when in fact, in the case of a partial partition, the
liability for concealment of income is that of the member of
the  Hindu undivided family who earned the income in his own
right and not of the Hindu undivided family.

      (5)  The	effect of section 171(9) of  the  Income-Tax
Act,  1961  is	that  it virtually negatives  the  right  of
partition  under  the personal law only in certain cases  of
partition  after  December 31, 1978, and there is  no  valid
basis of justification for treating Hindu undivided families
separately  in	a hostile manner with reference to the	date
December  31,  1978,  the choice of the date  being  clearly
arbitrary.

      (6)  The operation of Section 171(9) of the Income-Tax
Act,  1961,  is	 restricted only to cases where a  claim  in
respect	 of  a	partial partition which	 is  effected  after
December  31,  1978,  is  made for the	first  time  in	 the
assessment year 1980-81.

      (7) The provisions of Section 171(9) of the Income Tax
Act,  1961,  will not fasten any liability in respect  of  a
partial	 partition which has already been recognised in	 the
assessment year 1979-80 and a finding recorded in respect of
such  a	 claim for the assessment year 1979-80 will  not  be
affected  by  the  invalidating provision in clause  (a)  of
sub-Section (9) of Section 171 of the Act.

      In  Civil	 Appeal	 Nos.12590/95 & 5743-48 of  1995,  a
similar	 view  has  been taken by the Karnataka	 High  Court
following  the	decision rendered by the Madras High  Court.
The  Karnataka	High  Court has held Section 171(9)  of	 the
Income	Tax Act, 1961 as unconstitutional and also  declared
Section	  20A  of  the	Wealth	 Tax  Act,  1957  which	  is
substantially  similar	to Section 171(9) of the Income	 Tax
Act   as  void	being  violative  of  Article  14   of	 the
Constitution.	The  Gujarat  High Court  has  rejected	 the
Income	Tax  Applications  filed before it for	raising	 and
referring the following question:-

      whether  on the facts and in the circumstances of the
case  and  in law, the Tribunal was right in coming  to	 the
conclusion  that  share	 income	 from the firm	to  the	 two
smaller	 HUFs  cannot be clubbed in the hands of the  bigger
HUFs.

      In  the said cases also, I.T.O.  refused to  recognise
partial	 partition  in	view of the  provisions	 of  Section
171(9)	of the Act and added the share income of two smaller
HUFs  in  the hands of the assessee bigger HUF.	 Since	the
question  involved  in all these cases is of  constitutional
validity  of Section 171(9) of the Income Tax Act, 1961, all
these matters were directed to be placed together before the
Constitution  Bench.   Hence, these appeals are disposed  of
this  common judgment and order.  Learned counsel  appearing
on  behalf  of	the  appellant-Revenue	submitted  that	 the
findings  given	 by the High Court are, on the face  of	 it,
erroneous.  He contended that there is no reason for holding
that  Section  171(9) suffers from the vice  of	 legislative
incompetence  or  that the prescribed cut off date  as	31st
December,   1978  is  violative	 of   Article  14   of	 the
Constitution of India.	The cut off date is prescribed after
taking	into consideration the assessment year and is  given
effect	from the assessment year 1980-81.  It is his further
submission  that  those who have partially  partitioned	 HUF
properties  prior to cut off date and those who have done it
subsequently  are  both distinct and different classes.	  As
against	 this, learned Counsel for the respondents submitted
that  the  reasons  recorded by the High Court	for  holding
sub-section   (9)  to  be  invalid  do	not  call  for	 any
interference.  Before appreciating the contentions raised by
the learned Counsel for the parties, it will be necessary to
refer to the relevant part of Section 171of the Act which is
as under:

      171(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
finding	 of  partition has been given under this section  in
respect of the Hindu undivided family.

      (2)  Where, at the time of making an assessment  under
Section 143 or Section 144, it is claimed by or on behalf of
any  member  of	 Hindu family assessed as undivided  that  a
partition, where total or partial, has taken place among the
members	 of such family, the (Assessing) Officer shall	make
an  inquiry thereinto after giving notice of the inquiry  to
all the members of the family.

      (3)  On the completion of the inquiry, the (Assessing)
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.

      (4) to (8) XX XX XX

      (9)   Notwithstanding   anything	 contained  in	 the
foregoing  provisions  of  this	 section,  where  a  partial
partition  has	taken place after the 31st day of  December,
1978,  among  the other members of a Hindu undivided  family
hitherto assessed as undivided, --

      (a)  no  claim that such partial partition  has  taken
place  shall  be inquired into under sub-Section (2) and  no
finding	 shall	be recorded under sub-Section (3) that	such
partial	 partition had taken place and any finding  recorded
under sub-Section (3) to that effect whether before or after
the  18th day of June, 1980, being the date of	introduction
of the Finance (No.2) Bill, 1980, shall be null and void;

      (b)  Such	 family	 shall continue to be liable  to  be
assessed  under this Act as if no such partial partition had
taken place;

      (c)  Each	 member or group of members of	such  family
immediately  before  such partial partition and	 the  family
shall  be jointly and severally liable for any tax, penalty,
interest,  fine	 or other sum payable under this Act by	 the
family	in  respect of any period, whether before  or  after
such partial partition;

      (d)  The	several liability of any member or group  of
members aforesaid shall be computed according to the portion
of  the joint family property allotted to him or it at	such
partial partition,

      And   the	  provisions  of   this	 Act   shall   apply
accordingly.

      Explanation - --------

      From  the aforesaid section, it is clear that for	 the
purposes  of income tax, the concept of partial partition of
HUF  was recognised, but is done away with by the  amendment
which  specifically provides that where a partial  partition
has  taken place after 31st December, 1978 no claim of	such
partial	 partition having taken place shall be inquired into
under sub-Section (2) and no finding shall be recorded under
sub-Section (3) that such partial partition has taken place.
If  any	 such  finding	is recorded  under  sub-Section	 (3)
whether	 before	 or after 18th June, 1980 being the date  of
introduction  of Finance Bill (No.  2) 1980, the same  shall
be  null and void.  The effect of the aforesaid	 sub-Section
is  that for the purposes of income- tax partial  partitions
taking	place  on or after 1-1-79 are not to be	 recognised.
If  a  partial partition has taken place after the  cut	 off
date no inquiry as contemplated under sub-Section (2) by the
Income-Tax  Officer  shall be held.  Even if the inquiry  is
completed  and finding is given, it would be treated as null
and  void.  In this view of the matter, contention raised in
some  of  the  petitions  by the  learned  Counsel  for	 the
respondents that partial partition took place on 13th April,
1979  and that in the assessment year it was recognised	 and
benefit	 was  given to the assessee, has no significance  in
view  of crystal clear language used in the sub-section that
partial partition taking place after the cut off date is not
to  be	inquired into and if inquired the findings would  be
null  and  void.  Such a family is to be assessed under	 the
Act  as	 if no partial partition has taken place.  The	next
question  is whether the amendment to the aforesaid  section
can  be	 said  to  be  in any  way  beyond  the	 legislative
competence.  In our view, it is difficult to comprehend that
the  said  amendment  can be termed  as	 beyond	 legislative
competence.   The Parliament has the authority to delete  or
amend  any provision of the Income Tax Act and it cannot  be
said   that  it	 is   beyond  legislative  competence.	 The
legislative  competence is to be decided on the basis of the
Constitution  that empowers the Legislature to levy taxes on
income.	  The  relevant	 item 82 of List I  of	the  Seventh
Schedule  to  the  Constitution empowers the  Parliament  to
enact  the  legislation	 for imposition of taxes  on  income
other  than  agricultural income.  Further, the	 concept  of
partial partition of HUF was not recognised under the Income
Tax  Act, 1922 and was recognised only under the Income	 Tax
Act,  1961.  All that is done by the amendment is to restore
the status quo ante that prevailed prior to 1961 Act.  It is
for  the  legislature to decide whether the  recognition  of
partial	 partition  introduced in the Income-Tax Act  should
continue  or not.  If it considers that it has led to abuses
or inconvenience, it is entitled to amend or delete.  As per
the  object  and  reasons  of	the  Amending  Act,  it	 was
introduced  because  multiple Hindu undivided families	were
created	 by effecting partial partitions as regards  persons
constituting  the joint family or as regards the  properties
belonging to the joint family or both, which resulted in tax
reduction  or  evasion	and  with a  view  to  curbing	this
creation  of  multiple	Hindu undivided families  by  making
partial	 partitions, it was proposed to de-recognise partial
partitions of HUF effected after 31st December, 1978 for the
tax purposes.  By having multiple partial partitions qua the
properties  or the members, it is possible to manipulate the
affairs	 of  the HUF for reduction of tax liability  and  to
prevent such manipulation, sub-section (9) is added.  Hence,
it  would be difficult to hold that addition of	 sub-Section
171(9) is beyond the legislative competence.  Further in the
case   of   Balaji   vs.    Income  Tax	  Officer,   Special
Investigation  Circle,	Akola and Others (1961) 63 ITR	393,
similar	 contention was considered by this Court and it	 was
held  that  it is settled law that entries in the Lists	 are
not  powers but are only fields of legislation and Entry  82
can  sustain  law made to prevent the evasion of  tax.	 The
Court  dealt  with the validity of Section 16 (3) (a) (i)  &
(ii)  of  the Income Tax Act, 1922 which provided  that	 for
computing the total income of any individual for the purpose
of  assessment,	 the  shares  in the  profits  of  the	firm
received by the wife and/or minor children shall be included
in  the total income of the individual if he is the  partner
of  the said firm.  The Court held that sub-section  3(a)(i)
and  (ii) was enacted for preventing evasion of tax and	 was
well  within the competence of Federal Legislature.  On	 the
question  of  legislative competence, the Court referred  to
earlier	 decision  in  the case of Sardar Baldev  Singh	 Vs.
C.I.T.	 (1960) 40 ITR 605 and held as under:- So entry	 54
(Government  of India Act, 1935) should be read not only  as
authorising  the imposition of a tax but also as authorising
an  enactment  which prevents the tax imposed being  evaded.
If  it were not to be so read then the admitted power to tax
a  person on his own income might often be made	 infructuous
by ingenious contrivances.

      The  decision holds that the said entry can sustain  a
law made to prevent the evasion of tax.

      The   Court   also   dealt   with	 the   question	  of
constitutional	validity  on the ground of violation of	 the
doctrine  of equality and negatived the contention that	 the
legislature ought to have classified genuine and non genuine
cases of partnership by holding that demarcating a group any
further,  by  sub classification as genuine and	 non-genuine
partnerships,  might  defeat  the purpose of the  Act.	 The
Court  observed as under:  - This mode of taxation may be a
little	hard on a husband or a father in the case of genuine
partnership with wife or minor children, but that is offset,
to  a  large  extent, by the beneficient results  that	flow
therefrom  to the public, namely, the prevention of  evasion
of  income-tax, and also by the fact that, by and large, the
additional  payment of tax made on the income of the wife or
the  minor children will ultimately be borne by them in	 the
final accounting between them.

      Next ground is with regard to violation of Article 14.
The  amendment	is brought with effect from 1st April,	1980
and  is to apply in relation to assessment years 1980-81 and
thereafter.   It  is  true  that two  distinct	classes	 are
created	 one of families having partial partition which has
taken  place prior to the cut off date and other of  partial
partition  taking  place  after the cut off  date.   Benefit
which  is conferred upon those assessees who have  partially
partitioned  their property prior to the cut off date is not
withdrawn  and	others who partitioned their property  after
the  cut  off  date would not get the same, but	 that  would
hardly	be  a ground for holding it as violative of  Article
14.   It  is settled law that differentiation is not  always
discriminatory.	  If there is a rational nexus on the  basis
of  which  differentiation  has been made  with	 the  object
sought	to  be achieved by particular provision,  then	such
differentiation	 is not discriminatory and does not  violate
the  principles	 of  Article 14 of the	Constitution.	This
principle  is  too  well- settled now to  be  reiterated  by
reference  to  cases.  Further, whether the same  result  or
better	result could have been achieved and better basis  of
differentiation could have been evolved is within the domain
of  Legislature	 and  must be left to its  wisdom.   In	 the
present	   case,   there   is	 intelligible	basis	 for
differentiation	 and  the classification is having  rational
nexus  of achieving the object of preventing the creation of
further	 multiple Hindu undivided families for reduction  of
tax  liabilities.  Further, for the validity of the Section,
it  is	not  necessary for the legislature to  withdraw	 the
benefit	 which is already conferred.  Secondly, cut off date
of  31st December, 1978 cannot be said to be arbitrary.	 The
Amending  Bill	was  introduced in June, 1980 and  is  given
effect	to from the assessment year 1980-81.  It is  settled
law  that the choice of a date as a basis for classification
cannot	always be dubbed as arbitrary even if no  particular
reason	is forthcoming for the choice unless it is shown  to
be  capricious	or  whimsical in the  circumstances;   while
fixing	a  line,  a  point  is necessary  and  there  is  no
mathematical  or  logical way of fixing it;  Precisely,	 the
decision of the Legislature or its delegate must be accepted
unless	it  is	very  wide off the  reasonable	mark.	[Re:
University  Grants Commission, etc.  Vs.  Sadhana  Chaudhary
and  Others,  etc.   (1996) 10 S.C.C.	536].	The  learned
Counsel	 for  the Respondent was not in a position to  point
out  any ground for holding that the said date is capricious
or whimsical in the circumstances of the case.	In this view
of  the	 matter,  the finding given by the High	 Court	that
there  is no valid basis of justification for treating Hindu
undivided  family  separately  in  a  hostile  manner	with
reference  to the date, i.e., 31st December, 1978, is on the
face  of  it erroneous.	 The next reason given by  the	High
Court  is that it entrenches upon the charging provisions in
Section	 4 & 5 of the Income Tax Act and purports to  charge
the  income  which does not belong to HUF to be assessed  in
the hands of HUF.  Hence, it enlarges the scope of Section 4
&  5 of the Act.  In our view, this reason is also devoid of
any substance because charging Sections 4 & 5 are to be read
with  the definition of the word person given in the  Act,
that  is,  the tax is to be charged in respect of the  total
income	of the previous year of every person.  Word person
is  given  the meaning in Section 2 (31) which,	 inter-alia,
includes  a  Hindu  undivided  family.	It is  open  to	 the
Legislature  to give different meaning to the word  person
for  the purpose of the Act which may or may not include HUF
or  such  other legal entities.	 In such a situation, it  is
open  to the HUF to take the benefit of the Act as available
or to partition the HUF as a whole.  It is to be stated that
even prior to the amendment, all partial partitions were not
recognised  under the Act.  Partial partition which was only
in accordance with the Explanation was recognised.  Further,
prior  to  Income  Tax Act, 1961, there was no	question  of
recognising  partial  partition and the	 relevant  provision
under  the  Income  Tax Act, 1922 was  Section	25A.   After
considering the various decisions, this Court in the case of
M/s.   Kalloomal Tapeswari Prasad (HUF), Kanpur Vs.  C.I.T.,
Kanpur	(1982)	133 I.T.R.  690 held that the  substance  of
decisions  in Kalwa Devadattam Vs.  Union of India (1963) 49
ITR  (SC) 165, in Add. ITO Vs.	 A.  Thimmayya (1965) 55 ITR
666  (SC),  and	 in  Joint Family of  Udayan  Chinubhai	 Vs.
C.I.T.	 (1967) 63 ITR 416 (SC) was that under Section	25-A
of  the	 1922  Act a Hindu undivided family which  had	been
assessed  to tax could be treated as undivided and subjected
to  tax	 under	the Act in that status unless and  until  an
order  was made under Section 25-A (I);	 if in the course of
the  assessment	 proceedings  it is claimed by	any  of	 the
members	 of  the Hindu undivided family that there has	been
total partition of the family property resulting in physical
division  thereof  as  it  was	capable	 of,  the  assessing
authority  should  hold an inquiry and decide whether  there
had  been  such a partition or not;  If he held that such  a
partition  had	taken  place, he should proceed to  make  an
assessment  of	the  total  income of the family  as  if  no
partition  had taken place and then proceed to apportion the
liability  as stated in Section 25-A amongst the  individual
members of the family.	If no claim was made or if the claim
where  it  was made was disallowed after inquiry, the  Hindu
undivided family would continue to be liable to the assessed
as  such.   This was the legal position under the 1922	Act.
The  Court  further  held as under:  - Hindu law  does	not
require	 that the property must in every case be partitioned
by metes and bounds or physically into different portions to
complete  a partition.	Disruption of status can be  brought
about  by any of the modes referred to above and it is	open
to  the	 parties  to  enjoy   their  share  of	property  as
tenants-in-common  in  any manner known to law according  to
their  desire.	 But the income tax law	 introduces  certain
conditions  of its own to give effect to the partition under
Section 171 of the Act"

      The  Court  also	held:  If a  transaction  does	not
satisfy	 the  above  additional	 conditions,  it  cannot  be
treated as a partition under the Act even though under Hindu
law  there  has	 been a partition  total or  partial.	The
consequence  will  be  that  the undivided  family  will  be
continued  to  be assessed as such by reason of	 sub-Section
(1) of Section 171.

 From  the aforesaid decisions, it is clear that  prior
to   Income  tax  Act,	1961,	there  was  no	question  of
recognising  partial  partition.  Even with regard to  total
partition,  it	was required to satisfy all  the  conditions
prescribed  in	Section 25A and an order was required to  be
passed	for that purpose under Section 25A(1).	If the claim
of  partition  was  disallowed after inquiry,  the  HUF	 was
liable	to be assessed as such.	 After the new Act,  partial
partition  was	not  recognised	  unless  it  satisfied	 the
conditions  laid  down in the Explanation.   Therefore,	 the
contention  that  sub-Section (9) entrenches  upon  charging
provision in Sections 4 & 5 of the Act is without any basis.
The  aforesaid case of Kalloomal was relied upon in the case
of  I.T.O.  Vs.	 N.K.  Sarada Thampatty, (1991) 187 ITR 696,
and  the  Court observed that in considering the  factum  of
partition   for	 the  purpose  of   amendment,	it  is	 not
permissible  to	 ignore	 the  special  meaning	assigned  to
partition under the Explanation to Section 171 even if the
partition  is to be effected by a decree of the Court.	 The
Legislature  has  assigned  special   meaning  to  the	word
Partition  under  the Explanation which is different  from
general	 principles of Hindu law and it contains the deeming
provision  under which partition of the property of the	 HUF
could be accepted.  In this view of the matter, it cannot be
held  that by addition of sub-Section (9), scope of Sections
4  and 5 of the Act is enlarged and, therefore, it is beyond
legislative  competence.   The	learned	  Counsel  for	 the
respondent,  inter  alia,  submitted  that:  -	(1)  Such  a
drastic	 and sweeping provision was arbitrary and  excessive
and was not at all necessary to prevent the abuse of partial
partition  as  a tax avoidance tool.  (2) Partial  partition
can  be	 for absolute, genuine and bona fide need and if  it
was not genuine or for bona fide need as per Explanation, it
was  not  recognised.  Therefore, there was no necessity  of
amending  the  Act.  (3) Once, there is a partial  partition
and  if	 it is not recognised, the income received from	 the
partitioned assets would be taxable in the hands of HUF at a
significantly higher rate of tax than the rate applicable to
the  separated member.	(4) Under the provisions of the Act,
HUF can be liable to pay the tax without having control over
the  assets  which  are partitioned.  (5)  Considering	this
hardship  and inequities resulting from Section 171(9),	 the
Court  has  rightly held the provisions to be arbitrary	 and

 In our view, the aforesaid submissions are without any
substance  and	similar	 contentions   are  dealt  with	 and
rejected  by  this  Court  in  the  cases  mentioned  above.
[Sardar	 Baldev	 Singh	40  ITR 605 and Balaji	63  ITR	 393
(supra)].   It is for the Legislature to recognise or not to
recognise  partial partition of HUF property for the purpose
of  levy  and  collection  of  tax;   it  is  also  for	 the
legislature  to	 decide whether only non bona  fide  partial
partition  undertaken for reducing the tax liability  should
not be recognised or not to recognise all partial partitions
of  HUF	 properties.  Further, consideration of hardship  is
totally	 irrelevant for deciding the question of legislative
competence.  In the case of taxation, it is settled law that
hardship  or  equity  has  no role to  play  in	 determining
eligibility  to	 tax  and  it  is  for	the  legislature  to
determine  the same.  Lastly, once the partial partition  is
not recognized, tax is to be calculated as if the assets are
held  by  the HUF.  Hence, the question whether the  HUF  is
required  to  recover  tax  from  the  person  to  whom	 the
properties are allotted, is not required to be considered by
the  Taxing  authority as for the purpose of income tax	 the
properties  belong  to	the  HUF.   If	the  HUF  finds	 any
hardship, it is for the members of HUF to have the partition
of  the	 entire	 estate and not to have	 partial  partition.
Therefore,  there is no substance in the contentions  raised
by the learned Counsel for the Respondent.

      In  this	view  of the matter, aforesaid	appeals	 are
allowed.  The judgments and orders holding Section 171(9) of
the  Income Tax Act, 1961 and Section 20A of the Wealth	 Tax
Act,  1957  as unconstitutional are quashed and	 set  aside.
The  writ  petitions filed by the respondents  as  mentioned
above  before the Madras High Court and Karnataka High Court
challenging the validity of Section 171(9) of the Income Tax
Act and for consequential reliefs are dismissed.  The orders
of  the	 Gujarat  High Court  rejecting	 applications  under
Section	 256(2)	 of  the Income Tax Act, 1961 are  also	 set
aside  and  in	the said matters, the Income  Tax  Appellate
Tribunal,  Ahmedabad  shall refer the questions to the	High
Court  for determination.  Ordered accordingly.	 No order as
to costs.

Sasadhar Chakravarty & Anr vs Union Of India & Ors on 4 November, 1996
Equivalent 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
Bench: A.M. Ahmadi, K.S. Paripoornan, Sujata V. Manohar
SASADHAR CHAKRAVARTY & ANR.

	Vs.

DATE OF JUDGMENT:	04/11/1996

BENCH:
A.M. AHMADI, K.S. PARIPOORNAN, SUJATA V. MANOHAR

ACT:

HEADNOTE:

JUDGMENT:
		      J U D G M E N T
     Mrs Sujata V. Manohar, J.
     The first	petitioner in  this  writ  petition  was  an
employee of  M/s Indian	 Oxygen	 Limited.  He  retired	from
service at  the end  of March,	1980 on attaining the age of
superannuation.	 Indian	 Oxygen	 Ltd.  has  set	 up  a	non-
contributory superannuation  fund known as the Indian Oxygen
Ltd. Staff  Pension Fund.  It is  a noncontributory approved
superannuation fund  set up  under  the	 provisions  of	 the
Income-Tax Act,	 1961. On retirement, under the rules of the
fund, the  first petitioner  is receiving an annuity under a
policy purchased  by the  trustees of the Fund from the Life
Insurance Corporation  of India.  The second petitioner is a
society	 registered   under  the   West	  Bengal   Societies
Registration  Act,   1961.  Its	  membership  constists	  of
pensioners    of     various	non-contributory    approved
superannuation funds.  Petitioner No.1	is the	Secretary of
the Association.
     It is  the contention  of the  petitioners that certain
improvements which have been effected in the executive staff
pension fund  of Indian	 Oxygen Ltd.  in 1985 should be made
available to  the existing  pensioners of  the Indian Oxygen
Ltd. and  that	the  denial  of	 the  benefits	of  such  an
improvement to	the existing  pensioners of the said fund is
arbitrary and  violative of  Article 1	of the Constitution.
The petitioners have also challenged Clause ll(cc) of Part B
of schedule  IV of the Income Tax Act, 1961 as conferring an
unguided power	to the	Board to frame rules. They have also
challenged Rules  89 and 91 of the Income Tax Rules, 1962 as
arbitrary and  violative of Article 14. The petitioners have
also alleged  that these  rules	 suffer	 from  the  vice  of
excessive delegation.  They have  further submitted that the
appropriation of  the purchase	price of annuities after the
death of  the  annuitant/pensioner  by	the  Life  Insurance
Corporation of India (respondent No.4) is ultra vires Clause
3 of  Part B  of Schedule IV of the Income Tax Act, 1961 and
constitutes an	arbitrary or  excessive use  of	 power.	 The
petitioners  have   contended  that   the  scheme   of	such
noncontributory	 approved  superannuation  funds  should  be
modified so as to provide for disbursement of pension by the
funds themselves  or in	 the alternative by a statutory body
to be newly constituted under a new scheme.
     Under Section  2(6) of  the Income	 Tax Act,  1961,  an
approved superannuation	 fund has  been defined	 to  mean  a
superannuation fund  or any  part of  a superannuation	fund
which  has   been  and	continues  to  be  approved  by	 the
Commissioner in	 accordance with the rules contained in Part
B of the fourth Schedule. Under Section 36(1) of the Income-
tax Act,  1961, deductions  as provided	 in that sub-section
shall be  allowed in  respect  of  the	matters	 dealt	with
therein in  computing the income of an assessee. Clause (iv)
of sub-section	(1) of	Section 36  grants  such  deduction,
inter alia, in respect of any sum paid by the assessee as an
employer  by   way  of	 contribution  towards	an  approved
superannuation	fund  subject  to  such	 limits	 as  may  be
prescribed for approving the superannuation fund and subject
to such	 conditions as the Board may think fit to specify as
set out	 therein. Therefore,  any amount paid by an employer
by way	of contribution	 towards, inter	 alia,	an  approved
superannuation fund, subject to such limits as may be
prescribed is  deductible in  computing the  income  of	 the
assessee employer.
     Part B of Schedule IV of the Income-Tax Act, 1961 deals
with approved  superannuation funds.  Under Clause 3 of Part
8, in  order that  a superannuation  fund  may	receive	 and
retain approval,  it shall satisfy the conditions set out in
the said  clause as  well as  any other conditions which the
Board may,  by rules,  prescribe. Under	 clause 3 one of the
conditions is  to the  effect that  the fund shall be a fund
established under  an irrevocable trust in connection with a
trade or  undertaking carried on in India. Another condition
so prescribed  is that	the fund  shall have  for  its	sole
purpose, the  provision of  annuities for  employees in	 the
trade or  undertaking on  their retirement  at	or  after  a
specified age  or on  their becoming  incapacitated prior to
such retirement or for the widows, children or dependants of
persons who  are or  have been such employes on the death of
those persons. Contributions in respect of each employee are
required to made by the employer or the fund so set up.
     The trustees of the superannuation fund are required to
make an application to the Assessing Officer for approval of
the fund  under Clause 4 of the said Part B. Clause 11 deals
with the  rule making  power of	 the Board.  Clause,  11(cc)
empowers  the	Board  to  make	 rules	for  regulating	 the
investment  or	 deposit  of   the  moneys  of	an  approved
superannuation fund.
     Part XIII	of the Income-Tax Rules, 1962 covering Rules
82 to  97 and  dealing with Approved Superannuation Funds is
framed in  exercise of	the powers  conferred,	inter  alia,
under clause 11 (cc) of Part B of Schedule IV. Under Rule 85
of the	Income-Tax Rules, 1962 all moneys contributed to the
approved superannuation	 fund are required to be invested in
a Post	Office Savings Bank Account in India or in a current
account or  in a  savings account with any scheduled bank or
utilised in  accordance with  Rule 89  for  making  payments
under a	 scheme of  insurance or  for purchase	of annuities
referred to  in that Rule. Under Rule 87 the ordinary annual
contribution by	 the employer  to a  fund in  respect of any
particular employee shall not exceed twenty-five per cent of
his salary  for each  year  as	reduced	 by  the  employer's
contribution, if  any,	to  any	 provident  fund    (whether
recognised or  not) in respect of the same employee for that
year. Rule 89 provides as follows:
     Rule 89.
     "Scheme of insurance or annuity.
     For the  purpose of  providing  the
     annuities	for  the  beneficiaries,
     the trustees shall -
     (i)  enter	  into	 a   scheme   of
     insurance with  the Life  Insurance
     Corporation established  under  the
     Life  Insurance   Corporation  Act,
     1956 (31 of 1956), or
     (ii) accumulate  the  contributions
     in respect	 of each beneficiary and
     purchase an  annuity from	the said
     Life Insurance Corporation of India
     at the  time of  the retirement  or
     death of  each employee  or on  his
     becoming  incapacitated   prior  to
     retirement."
     Rule 91 is as follows:
     "Beneficiary  not	 to   have   any
     interest in  insurance and employer
     not  have	any  interest  in  funds
     moneys.
     (1) No  beneficiary shall	have any
     interest in  any  insurance  policy
     taken out by the trustees under the
     rules of  a fund  and he  shall  be
     entitled only  to an  annuity  from
     the fund.
     (2) No  money belonging to the fund
     shall be receivable by the employer
     under any	circumstances nor  shall
     the  employer   have  any	lien  or
     charge on the fund."
     Under the	Indian Oxygen  Executive Staff	Pension Fund
which is  an approved  superannuation fund  as per the above
provisions, for	 the purpose  of providing  annuities to the
beneficiaries, the  trustees accumulate	 the contribution in
respect of each beneficiary and purchase an annuity from the
Life  Insurance	  Corporation  of   India  at  the  time  of
retirement or  death of	 each  employee	 or  on	 his  become
incapacitated  prior   to  retirement  as  per	Rule  89(ii)
Therefore,  when   an  employee	  retires,  all	 accumulated
contributions in  respect of  the concerned employee made by
the employer  to the  pension fund of the trust are utilised
for the	 purpose of  purchasing an  annuity  from  the	Life
Insurance Corporation  of  India  for  the  benefit  of	 the
employee. The  right of	 the employee to receive the annuity
and the	 quantum of this annuity get crystalised at the time
of purchase  of the annuity under hen existing scheme of the
Life Insurance Corporation of India. This annuity is payable
for a  minimum fixed  period and  thereafter as	 long as the
recepient is  alive. The Life Insurance Corporation of India
Ltd. in	 its affidavit	has set out that it is the common to
provide that  the annuity  would be  payable for  a selected
number of  years irrespective  of whether  the annuitant  is
alive or  not. At the end of the selected number of years if
the annuitant  is alive, the annuity is Continued throughout
the life-time of the annuitant.
     Rules 85  and 89  are meant  to  safeguard	 the  moneys
deposited in  the superannuation  fund and  to secure to the
annuitant the  annuity amount. Undoubtedly, Rule 89 requires
the trustees  to purchase an annuity from the Life Insurance
Corporation of	India to  the exclusion of anyone else,. But
this provision	must be	 judged in  the context	 of the fact
that the  contracts of life insurance which are entered into
by the	Life Insurance	Corporation of India are backed by a
government guarantee  which is provided by Section 37 of the
Life Insurance Corporation Act, 1956. The payment of annuity
is thus properly secured.
     The petitioners  contend that  any improvements made in
the existing  pension scheme  after the	 retirement  of	 the
employees should  also be  made available  to  such  retired
employees who  are the	existing pensioners of the Fund. The
denial of  the benefit	of such	 improvements in the pension
schemes to  the existing  pensioners is ultra vires Articles
14, 19,	 21. 31	 and 300A of the Constitution of India. This
contention is  based on	 a misunderstanding of the nature of
the annuity  which is  purchased in respect of each employee
as and	when he retires. The right of an employee to receive
the annuity and the quantum of this annuity gets determined
at the	time when  the annuity	is purchased. Any subsequent
improvements in	 a given  Pension Fund	scheme would  not be
available  to	those  persons	 whose	rights	are  already
crystalised under  the annuity	scheme	by  which  they	 are
governed because  the amounts contributed by the employer in
respect of  such persons  are  already	withdrawn  from	 the
Pension	 Fund	to  purchase   an  annuity.  Any  subsequent
improvement in	the Pension  Fund will	benefit	 only  those
whose moneys form a part of the Pension Fund.
     As regards	 the improvements  made in the Indian Oxygen
Limited Executive  Staff Pension  Fund Scheme  in 1585,	 the
trustees of  the said fund in their affidavit have explained
that an	 improvement in	 the pension  scheme of	 an approved
superannuation fund  is effected  on the basis of the fund's
financial position  as	determined  by	actuarial  valuation
based  on   current  resources	 of  the   fund	 and  future
contributions to  be received by the fund only in respect of
the existing members in service. An employer cannot make tax
deductible contributions  to the fund in respect of its past
employees. Therefore,  there is	 no scope for augmenting the
resources of  the fund to meet any obligation that may arise
on account  of extending  the benefit  of improvement to the
past employees	who are	 existing  pensioners.	The  amounts
contributed in	regard	to  such  existing  pensioners	have
already been  transferred from the corpus of the fund to the
Life Insurance	Corporation of	India  for  the	 purpose  of
purchasing an annuity. Hence there is no accretion coming to
the said fund from out of the transferred corpus relating to
such existing  pensioners. Hence  the improvements which are
determined by  actuarial  valuation  based  on	the  current
resources of  the fund and its future expectations cannot be
made available to the existing pensioners.
 In these  circumstances the ratio of D.S. Nakara & Ors.
v. Union  of India  (AIR 1983  SC 130)	cannot be applied to
extend the  benefit of improvement in the pension schemes of
such funds to the existing pensioners. By the very nature of
this scheme,  such benefits are available only to members in
service. In  the present  case, the  Pension Fund is created
out of	contributions made by the employer in respect of its
employees who  are in  service in  the manner provided under
the Income-Tax Act and the Rules. The contribution is in the
form of	 a  fixed  percentage  of  salary  of  each  of	 the
employees. There is, therefore, no provision for an employer
making	any  additional	 payment  in  respect  of  its	past
employees who  are the existing pensioners. In Nakara's case
(supra) the  increase in  pension  could  ba  met  from	 the
general revenue	 of the	 Central Government. No such reserve
of funds  is  available	 to  the  trustees  of	an  approved
superannuation fund.  As soon  as an employee retires and an
annuity is  purchased for  his benefit	under Rule  89 there
remains no  scope for  any fresh contribution on his account
so as  to entitle  him to an increased pension prospectively
on the	basis  of  improvements	 made  subsequently  in	 the
pension scheme of a fund. Since the existing pensioners form
a distinct  class, there  is no question of any violation of
Article 14 in this connection or of any other Article of the
     The  Life	 Insurance  Corporation	  of  India  in	 its
affidavit has pointed out that with effect from 1.4.1985 the
Corporation decided  to increase  the pensions payable under
their annuity  scheme. They  decided to	 make this  increase
available not  only to	new  pensionrers  but  also  to	 the
annuities which	 were in the course of payment. Accordingly,
the first  petitioner's pension	 under his  existing annuity
policies was  increased	 with  effect  from  1.4.1985.	This
decision of  the Life  Insurance Corporation  to enhance the
pension was only with a view to grant relief to the existing
pensioners and	was not	 based on any contractual obligation
of the	Corporation. The Corporation has further pointed out
in its	affidavit that	it has	now introduced a new annuity
scheme. An  option has been given to the existing members to
switch	over  to  the  new  scheme.  Under  the	 new  option
available to  the pensioners  the value	 of the	 outstanding
instalments is	determined and	the same  is applied  in the
purchase of an annuity. Such annuity would be payable during
the  lifetime	of  the	 annuitant  and	 the  value  of	 the
outstanding  instalments  is  returned	to  the	 annuitant's
nominee on  his death.	The benefit  of changing over to the
new scheme is thus made available to the existing pensioners
also. There  is, therefore, no discrimination in this regard
as against the existing pensioners.
     The petitioners contend that Clause 11(cc) of Part B of
Schedule IV  of the Income-Tax Act. 1961 and Rules 85 and 91
of the	Income-Tax Rules,  1962 which  are framed  under the
rule-making  power   conferred	by   Clause  11(cc)  are  an
arbitrary  and	 uncanalised  exercise	of  power  and	are,
therefore, violative  of Articles  14 and  19(1)(g)  of	 the
Constitution.	Now,   the   entire   scheme   of   approved
superanuation funds  is so framed as to ensure safety of the
Fund so that the beneficiaries are assured of an annuity for
the requisite  period. Hence  under Part B of Schedule IV of
the Income-Tax Act the approved superannuation funds require
the approval  of the  Chief Commissioner or the Commissioner
of Income-tax.	The purpose  of such  approval is clearly to
ensure that  the fund  is established  under an	 irrevocable
trust for  the benefit of the employees of any establishment
or undertaking	and to	ensure that  the fund shall have for
its sole purpose provision of annuities for the employees on
their retirement or on their becoming incapaciated or in the
event of their death for the benefit of their dependants. It
is necessary  that the	funds should be invested in a manner
which secures  them over  a period of time for this purpose.
Clause 11 (1)(cc) gives to the Board the power to make rules
for the	 purpose of  regulating the investment or deposit of
moneys of  an approved	superannuation fund.  This cannot be
called as  an arbitrary conferment of power on the Board. By
the very  nature of  the scheme	 as framed,  the purpose  of
regulating investment  of the trust funds is to ensure their
safety.
     In pursuance  of this  rule-making	 power	Rule  89  is
framed.	 Under	 Rule  89,  for	 the  purpose  of  providing
annuities  for	 the  beneficiaries,   the  trustees   of  a
superannuation fund  are required  either to  enter  into  a
scheme of  insurance with  the Life Insurance Corporation of
India  or   they  have	 the  option   to   accumulate	 the
contributions in respect of each beneficiary and purchase an
annuity from  the Life Insurance Corporation of India at the
time of	 the retirement	 or death of each employee or on his
becoming incapacitated	prior to  retirement. The annuity is
purchased from the accumulated contributions made in respect
of each	 beneficiary  which  are  a  part  of  the  approved
superannuation fund. The petitioners have contended that the
trustees of  the superannuation fund should not be compelled
to purchase  an annuity	 from the Life Insurance Corporation
of India  and that  the investment  of the  contribution  in
respect of  each beneficiary could be made in another manner
which would  fetch to the beneficiary a higher return. It is
however, pointed  out by the Life Insurance Corporation that
the secruity which is provided by purchasing an annuity from
the Life Insurance Corporation of India is not comparable to
other  kinds   of  investments	 because  all  contracts  of
insurance entered into by the Life Insurance Corporation are
backed by  a  government  guarantee  which  is	provided  by
Section 37  of the  Life Insurance  Corporation	 Act,  1956.
Therefore, from	 the point of view of safety and security of
the moneys  of the  superannuation fund, an investment in an
annuity through	 the Life  Insurance  Corporation  of  India
provides valuable  security to	a beneficiary.	By  ensuring
that the  investment is	 made in  a manner which ensures the
safety of  the Fund  and the payment of an annuity the Board
has  ensured  that  the	 Fund  is  not	misutilised  or	 the
pensioner is  not deprived  of his annuity. of course, it is
possible to  envisage other types of schemes and other types
of investments,	 which may have varying safety and different
returns. But that does not mean that Rule 89 is arbitrary or
unreasonable. The  entire scheme  is framed  on the basis of
relevant considarations and cannot be called unreasonable or
     Rule 91  provides that  the beneficiary  shall not have
any interest  in any  insurance	 policy	 taken	out  by	 the
trustees under	the rules of a fund and he shall be entitled
only to the annuity. It is contended by the petitioners that
the Life  Insurance  Corproation  appropriate,	the  capital
purchase price	on the	death  of  the	annuitant  and	this
amounts to  an	unjust	enrichment  of	the  Life  Insurance
Corporation at	the cost  of the beneficiary. The submission
is based  on a	misconception of the manner in which annuity
is calculated.	The annual  instalment does not consist only
of the	interest which is earned on the capital used for the
purchase of  annuity.  The  annual  instalment	contains  an
element both  of interest  as also  a part of the capital so
that over  a period  of years as actuarially calculated, the
entire capital	and the interest earned thereon are utilised
for the	 payment of  annuities to the beneficiary. Secondly,
the Life  Insurance Corporation has introduced a new annuity
scheme under  which an option has been given to the existing
members to  switch over	 to the	 new scheme.  As per the new
option available  to the pensioners the value of outstanding
instalments is	determined and this is used for the purchase
of an  annuity. This new annuity would be payable during the
life  time   of	 the   beneficiary  and	 the  value  of	 the
outstanding instalments	 is returned  to  the  beneficiary's
nominee on  his death.	The petitioners	 have the  option to
switch	over   to  this	 new  scheme  in  respect  of  their
outstanding instalments.  Therefore, in	 any event there can
be no  question of  the	 L.I.C.	 appropriating	the  capital
purchase price	of an annuity on the death of the annuitant.
Rule 91,  therefore, in	 any event,  cannot be considered as
giving any unjust gains to the Life Insurance Corporation of
India.
     Moreover, under  sub-clause (2) of Clause 11, all rules
which are made under Clause 11 are subject to the provisions
of Section  296.  Section  296	provides  that	the  General
Government shall  cause every rule made under this Act to be
laid as	 soon as  may be  after the rule is made before each
House of  Parliament while  it is  in session  for  a  total
period of  thirty days, and the rule shall, thereafter, have
effect only in such modified form as Parliament may suggest,
or if  it so decides, may be of no effect, or may be brought
into effect  without prejudice	to the	validity of anything
previously done	 under the  rule. This	also is an important
check on  any arbitrary	 exercise of rule-making power under
Clause 11.
     Hence, the	 challenge to  these rules  and to Clause 11
(cc) has no substance.
 The petitioners have also raised some objections to the
changes made  in the  Indian Oxygen  Limited Executive staff
Pension Fund  in 1984  and 1985.  the definition of "salary"
under the  old Pension	Fund Rules of Indian Oxygen Ltd. did
not include  commission	 payable  to  whole-time  Directors.
However, by  a Deed of Variation dated 9.1.84 the definition
of "salary"  has been  changed. "Salary" has been defined to
mean the  basic salary	of a  member and  to have  the	same
meaning as  defined in	Rule 2(h)  of Part  A of  the Fourth
Schedule to  the Income	 Tax Act,  1961. In  the case  of  a
whole-time  Director.	"salary"  now	also  includes	 the
commission on  net profits  payable to the Director provided
that  such   commission	 is   a	 part	and  parcel  of	 the
remuneration of	 the whole-time	 Director according  to	 the
terms of  his appointment  as approved	by the Central Govt.
under the  Companies Act.  The	petitioners  object  to	 the
commission being  included in  the salary  of  a  whole-time
Director as  now defined.  This change	has been made in the
light of  a decision  of this Court in the case of Gestetnet
Duplicators P.	Ltd. v.	 Commissioner of  Income  Tax,	West
Bengal (117  ITR page  1) where this Court has held that the
commission payable  as	per  the  terms	 of  a	contract  of
employment at  a fixed	percentage of  turnover falls within
the term  "salary" as  defined in Rule 2(h) of Part A of the
Fourth Schedule	 to the	 Income-Tax Act, 1961. The change in
the definition is in accordance with the meaning assigned to
"salary" under Rule 2(h). The question of any discrimination
on this	 score does  not arise. In any case, the petitioners
who retired  prior to  1984 are	 in no	way affected by this
change.
     The approved  superannuation fund	is set	up only from
the contributions  made by the employer who is given certain
tax   benefits in  order to encourage the setting up of such
superannuation funds.  We do  not see  any reason  to strike
down any  part of  the scheme for such a superannuation fund
prescribed under  the Income-Tax   Acts 1961 and the Income-
Tax Rules,  1962. The  petition is  therefore, dismissed. In
the circumstances, there will be no order as to costs.

Kapurchand Shrimal vs Tax Recovery Officer, Hyderabad & Ors on 14 August, 1968
Equivalent citations: 1969 AIR 682, 1969 SCR (1) 691, AIR 1969 SUPREME COURT 682
Author: J.C. Shah
Bench: J.C. Shah, V. Ramaswami, A.N. Grover
KAPURCHAND SHRIMAL

	Vs.

TAX RECOVERY OFFICER, HYDERABAD & ORS.

14/08/1968

BENCH:
SHAH, J.C.
BENCH:
SHAH, J.C.

CITATION:
 1969 AIR  682		  1969 SCR  (1) 691
 R	    1979 SC1588	 (7)

ACT:
Income-tax Act (11 of 1922)-Hindu undivided family--Defaults
in payment of tax-Whether Karta can be detained.

HEADNOTE:
A  Hindu  undivided family committed default in	 payment  of
income-tax, and a certificate for recovery of tax due to the
family	was issued by the Income Tax Office in	exercise  of
the power conferred by	rule 76 of Sch. II of the Income Tax
Act, 1961.  The Tax Recovery Officer directed the arrest and
detention  in  prison of the karta of the  family  for	non-
payment	 of  tax.  The Karta then moved a  petition  in	 the
High  Court  of Andhra Pradesh challenging his detention  on
the  ground that he was not a defaulter.  The  petition	 was
rejected.   The	 Karta appealed.  He also moved	 a  petition
under  Art. 32 of the Constitution in the Supreme Court	 for
an order for his release from custody.
HELD  :--The  Legislature having treated a  Hindu  undivided
family	as  a taxable entity distinct  from  the  individual
members constituting it,. and proceedings,for assessment and
recovery  of  tax  having  been	 taken!	 against  the  Hindu
undivided  family,  it	was not open  to  the  Tax  Recovery
Officer	 to initiate proceedings against the manager of	 the
Hindu  undivided family for his arrest and  detention.	 The
manager	 by virtue of his status is competent  to  represent
the  Hindu undivided family, but on that account  he  cannot
for  the purpose of s. 222 of the Act of 1961 be  deemed  to
be.  the assessee when assessment is made against the  Hindu
undivided family and certificate for recovery is also issued
against the family. [695 B-D]
For the purposes of cl. (a) of s. 2(7)	the  person  against
whom, any proceeding under the Act has been taken is  deemed
an assessee:  but that postulates that the proceeding should
be lawfully taken against the person before he may be deemed
to  be an assessee for the purpose of s. 222 or r. 2 and  r.
73.   There  is	 no provision in the  Act  which  deems	 the
manager to be the assessee for the purpose of assessment and
recovery  of  tax, when the income of  the  Hindu  undivided
family of which he is the Manager is assessed to tax. Nor is
there  any  provision  in the Act  enabling  the  Income-tax
Officer or the Tax Recovery Officer to treat the manager  of
the  Hindu  undivided family as an assessee  in	 default  in
respect	 of  tax  due by the Hindu  undivided  family.	 The
Legislature has again made no provision for recovery of	 tax
by  resort  to the personal property of the manager  of	 the
Hindu undivided family assessed to tax or by his arrest	 and
detention for default by  the  family in paying the tax due.
[695 H696D]

JUDGMENT:
CIVIL  APPELLATE/ORIGINAL JURISDICTION: Civil  Appeals	Nos.
1319 and 1320 of 1966.
Appeals by special leave from the judgments and orders dated
February 16, 1966 and February 1, 1966 of the Andhra Pradesh
High Court in Writ Appeals Nos. 143 of 1966 and 166 of 1965
respectively and Writ Petition No. 103 of 1966.
3Sup.C1/68-13
692
Petition under Art. 32 of the Constitution of India for	 the
enforcement of fundamental rights.
B.C.  Misra,  Om  Prakash Gupta and M.V.  Goswami,  for	 the
appellant/petitioner (in all the matters).
B.  Sen	 and R.N. Sachthey, for the respondent (in  all	 the
matters ).
Shah,  J..  Kapurchand Shrimal	a  Hindu  undivided  family-
committed default in payment of income-tax due by it for the
assessment   years  1955-56  to	 1959-60.   The	  Income-tax
Officer,  Special  Investigation Circle,  Hyderabad,  issued
certificate on ,June 16, 1959, under s. 46 of the Income-tax
Act, 1922, fox' recovery of tax due by the family.  Pursuant
to the certificate, properties of the Hindu undivided family
movable	 and  immovable and outstandings were  attached	 for
realizing the tax dues.
In  exercise of the powers conferred by r. 76 of Sch. II  of
the Income-tax Act, 1961, the Tax Recovery Officer  directed
on  August 10, 1965, that Kapurchand Shrimal manager of	 the
family	be detained in civil prison for fifteen	 days.	 The
manager	 then moved a petition in the High Court  of  Andhra
Pradesh	 against the order of detention.  The  petition	 was
rejected  by a single Judge of the High Court  holding	that
the manager had, in contravention of r. 16(2) of Sch. II  of
the  Income-tax Act, 1961, dealt with the properties of	 the
family	after  receiving  notice of the	 issue	of  the	 tax
recovery  certificate.	 In appeal against that	 order,	 the
manager applied for leave to raise the contention that where
a Hindu undivided family had committed default in payment of
the tax, its Karta not being the assessee against  whom	 the
certificate  is	 issued,. is not liable to be  detained	 for
recovery of tax due by the Hindu undivided family.  The High
Court declined to allow the contention to be raised and held
that  the manager having acted in contravention of r.  16(2)
of  Sch. II of the Income-tax Act, 1961, the ingredients  of
r.  73	were attracted and he was liable to be	detained  in
civil  prison.	 A,  day before this order  was	 passed	 the
appellant  filed  another  petition under Art.	226  of	 the
Constitution  challenging  the validity of  the	 proceedings
against	 him  on the ground that he was not  a	"defaulter".
That  petition was dismissed by the High Court holding	that
the  earlier  judgment	of the High Court  operated  to	 bar
investigation into the plea raised.
Appeals	 Nos.  1319 & 1320 of 1966 arise out of	 the  orders
made  by the High Court in the two petitions under Art.	 226
of  the Constitution.  The manager was, after the  order  of
the High
693
Court,	arrested  and sent to prison for  six  months.	 The
manager	  then	 filed	petition  under	 Art.  32   of	 the
Constitution  praying  for a writ in the  nature  of  habeas
corpus	for  an order for his release from  the	 custody  of
Superintendent	District Prison, Hyderabad. In our  judgment
the  claim  of	the  manager that he is	 not  liable  to  be
arrested  and detained in prison for failure to satisfy	 the
tax due by the Hindu undivided family in enforcement of	 the
certificate  issued  under  s. 222 of  the  Income-tax	Act,
1961,, must be upheld.
By virtue of s. 297(2)(j), notwithstanding the repeal of the
Indian	Income-tax  Act, 1922, any stun payable	 by  way  of
income-tax, super-tax, interest, penalty or otherwise  under
the Income-tax Act, 1922, may be recovered under the Act  of
1961, but without prejudice to any action already taken	 for
the   recovery	 of  such  sum	under  the   repealed	Act.
Proceedings could therefore be taken for recovery of the tax
due for the assessment years 1955-56 to 1959-60 by the Hindu
undivided family under the Income-tax Act of 1961.   Section
220 of Act 1961 deals with payment of tax and the conditions
in which an assessee may be deemed to' be in default.  Under
the Act tax assessed has to be paid within thirty-five	days
of  the service of a notice of demand: if the amount is	 not
paid within the time limited at the place and to the  person
mentioned  in the said notice, the assessee shall be  deemed
to  be	in default.  Section 222 provides for the  issue  of
certificate to the Tax Recovery Officer.  It provides, in so
far as it is material:
	      "(  1 ) When an assessee is in default  or  is
	      deemed to be in default in making a payment of
	      tax, the Income-tax Officer may forward to the
	      Tax  Recovery Officer a certificate under	 his
	      signature specifying the amount of arrears due
	      from  the	 assessee,  and	 the  Tax   Recovery
	      Officer on receipt of such certificate,  shall
	      proceed  to  recover from	 such  assessee	 the
	      amount specified therein by one or more of the
	      modes mentioned below, in accordance with	 the
	      rules laid down in the Second Schedule--
		   (a) attachment and sale of the assessee's
	      movable  property;
		   (b) attachment and sale of the assessee's
	      immovable
		   property;
		   (c)	arrest	of  the	 assessee  and	 his
	      detention in prison;
		   (d)	 appointing  a	receiver   for	 the
	      management of
		   the	assessee's  movable  and   immovable
	      properties".
By  r.	1  (b)	of Sch.-II of  the  Income-tax	Act,   1961,
"defaulter""   means   the   assessee	mentioned   in	 the
certificate.  Rule 2 provides
694
that  when  a  certificate  has been  received	by  the	 Tax
Recovery Officer from the Income-tax Officer for recovery of
arrears	 under Sch. II, the Tax Recovery Officer shah  cause
to  be	served	upon the defaulter a  notice  requiring	 the
defaulter  to  pay the amount specified in  the	 certificate
within	fifteen days from the date of service of the  notice
and  intimating	 that in default steps would  b.e  taken  to
realise	 the  amount under the Schedule.  Rule	16  provides
that where a notice has been served on a defaulter under  r.
2, the defaulter shall not be competent to mortgage, charge,
lease  or otherwise deal with any property belonging to	 him
except	 with  the permission of the Tax  Recovery  Officer.
Rule 73 provides that no order for the arrest and  detention
in  civil prison of a defaulter shah be made unless the	 Tax
Recovery  Officer has, issued and served a notice  upon	 the
defaulter  calling upon him to appear on the date  specified
in  the	 notice	 and  to show cause why	 he  should  not  be
committed  to the civil prison, and unless the Tax  Recovery
Officer, for reasons to be recorded in writing, is satisfied
and  that  the	defaulter  with	 the  object  or  effect  of
obstructing the execution of the certificate, has, after the
receipt of the certificate in the office of the Tax Recovery
Officer, dishonestly transferred, concealed, or removed	 any
part of his property; and (b) that the defaulter has, or has
had  since the receipt of the certificate in the  office  of
the  Tax Recovery Officer, the means to pay the	 arrears  or
some substantial part thereof and refuses or neglects or has
refused or neglected to pay the same.  Rule 76 provides	 for
the  issue of an order of detention of the defaulter by	 the
Tax Recovery Officer.
The  scheme  of the Income-tax Act, 1961, is  to  treat	 the
assessee  failing  to  pay the tax  due	 within	 the  period
prescribed  a defaulter.  The Income-tax Officer may,  where
the    assessee	  is  found  to	 be  in	 default,  issue   a
certificate for recovery and forward it to the Tax  Recovery
Officer	 specifying  the  amount of  arrears  due  from	 the
assessee.  The amount due may be recovered by resort to	 any
one  or more of the four modes prescribed by s. 222  of	 the
Act.  If the defaulter fails to comply with a notice  issued
by  the Tax Recovery Officer requiring the defaulter to	 pay
the amount within fifteen days from the date of the  service
of the notice, proceedings for recovery may be taken against
the assessee for recovery of 'the tax.	But under the scheme
of the Act and the Rules, the assessee alone may be  treated
in  default.   The Act and the Rules  contemplate  that	 the
notice for payment of the tax arrears may be issued  against
the assessee, and proceedings for recovery of the tax may be
taken against the assessee alone. Under the Income-tax	Act,
1961, a Hindu undivided family is a distinct taxable entity.
apart  from  the  individual  members  who  constitute	that
family.	 Section 4 of the Income-tax Act charges tax for any
assessment year, the total income of the previous
695
year  of every person and 'person' is defined in s. 2 (31  )
as  including--(i)  an	individual, (u)	 a  Hindu  undivided
family,	 (iii) a company, (iv ) a firm, (v ) an	 association
of persons or a body of individuals, whether Incorporated or
not,  (vi)  a  local authority and  (vii)  every  artificial
juridical  person, not falling within any of  the  preceding
sub-clauses.	The  Legislature  having  treated  a   Hindu
undivided  family  as  a taxable entity	 distinct  from	 the
individual  members  constituting it,  and  proceedings	 for
assessment and recovery of tax having been taken against the
Hindu undivided family, it was not open to the Tax  Recovery
Hindu undivided family for his arrest and detention.  It  is
true that if properties of the family movable and  immovable
are  to be attached, proceedings may be started against	 the
Hindu undivided family and the manager represents the family
in proceedings before the Tax Recovery Officer.	 But by	 the
clearest  implication of the statute the assessee alone	 may
be  deemed  to be in default for  non-payment of   tax,	 and
liability to arrest and detention on failure to pay the	 tax
due is also incurred by the assessee alone.  The manager  by
virtue	of  his status is competent to represent  the  Hindu
undivided  family,  but on that account he  cannot  for	 the
purpose	 of  s. 222 of the Act of 1961 be deemed to  be	 the
assessee  when	the  assessment is made	 against  the  Hindu
undivided  family  and certificate for	recovery  is  issued
against the family.
Counsel	 for the Revenue invited our attention to s.  140(b)
and s. 282(2) of the Income-tax Act, 1961, in support of his
contention  that  when	tax is assessed	 against  the  Hindu
undivided  family  there  is  no  distinction  between	 the
representative	status of the manager of the family and	 his
personal  status.  Section 140(b) authorises the manager  in
the case of a Hindu undivided farofly to sign and verify the
return	of  income, and s. 282(2) provides for the  mode  of
service	 of  notice  or requisition issued  under  the	Act,
amongst	 others,  against  a  Hindu  undivided	family.	 But
because	  the  manager	of  a  Hindu  undivided	 family	  is
authorised  to	sign and verify the return of income  and  a
notice	under  the Act could be served upon him when  it  is
addressed  to a Hindu undivided family and such	 service  is
treated	 as service upon the Hindu undivided family for	 the
purpose	 of the Act, the manager cannot be deemed to be	 the
assessee where the income assessed is of the Hindu undivided
family.	  The  expression 'assessee' under s. 2(7)  means  a
person by whom any tax or any other sum of money is  payable
under the Act, and includes--(a) every person in respect  of
whom  any  proceeding under the Act has been taken  for	 the
assessment  of	his  income or of the income  of  any  other
person in respect of which he is assessable, or of the	loss
sustained  by him or by such other person, or of the  amount
of  refund  due to him or to such other	 person;  (b)  every
person who is deemed
696
to be an assessee under any provisions of the Act; (c) every
person who is deemed to be an assessee in default under	 any
provisions  of the Act.	 For purposes of cl. (a) the  person
against whom any proceeding under the Act has been taken  is
deemed an assessee: but that necessarily postulates that the
proceeding  should  be	lawfully taken	against	 the  person
before he could be deemed to be an assessee for the  purpose
of  s.. 222.or r. 2 and r.73.  There is no provision in	 the
Act  which  deems the manager to be the	 assessee,  for	 the
purpose	 of assessment and recovery of tax, when the  income
of the Hindu undivided family of which he is the manager  is
assessed  to tax.  Nor is there any provision  enabling	 the
Income-tax Officer or the Tax Recovery Officer to treat	 the
manager	 of  the Hindu undivided family as  an	assessee  in
default	 under	the  provisions of  the	 Act.	Section	 160
provides for treating a person as a representative  assessee
and  s. 161  prescribes	 the liability of  a  representative
assessee.   Section  179  makes	 a  special  provision	 for
rendering the Directors of private company in liquidation to
be jointly and severally liable for the payment of tax which
cannot	be recovered from the assets of the private  company
in liquidation.	 The Legislature has made no such  provision
for  recovery of tax by resort to the personal	property  of
the manager of the Hindu undivided family, or by his  arrest
and  detention for default by the family in paying  the	 tax
due.
Sections 276, 276A, 277 and 278 on which reliance was placed
by  counsel for the Revenue in support of his argument	also
do  not	 assist	 him.  These sections  occur  in  a  chapter
relating to penalties, and they seek to penalise failure  to
carry  out  specific provisions mentioned therein.   We	 are
unable	to  hold  that the expression "person" in  ss.	276,
276A  and 277 is used m the sense in which it is defined  in
s.  2  (31  ) of the Act.  For each specific  act  which  is
deemed	 to  be	 an  offence  under  those  provisions,	  an
individual  who without reasonable cause or excuse fails  to
do  the	 acts  prescribed by statute or	 acts  in  a  manner
contrary to the statute or makes a declaration on oath which
he  believed to be false or does not believe to be true,  is
made  liable  to  be punished.	Section	 278  penalises	 the
abetment  or  inducing	any person to make  and	 deliver  an
account,  statement  of declaration relating to	 any  income
chargeable  to tax which is false and which he either  knows
to be false or does not believe to. be true.  In the context
in  which the expression "person" occurs in ss.	 276,  276A,
277 and 278, there can be no doubt that it seeks to penalise
only  those individuals who fail to carry out the duty	case
by the specific provisions of the statute. or are  otherwise
responsible for the acts done.	For the default of the Hindu
undivided  family, therefore. in payment of tax.  the  Karta
cannot be arrested and detained in prison.
697
The High Court, we think, took a somewhat technical view  in
declining to allow the contention raised by the appellant in
the first writ petition presented before the High Court that
he  was	 not liable to be arrested and imprisoned  for	non-
payment	 of the tax arrears, since he was not  an  assessee.
and  then in treating the judgment of the High Court in	 the
first writ petition operating constructively as res judicata
in the second petition.
The appeals are allowed and the order of detention passed by
the Tax Recovery Officer against the appellant is   declared
unauthorized.	No order in Petition No. 103 of	 1966.	 The
appellant will be entitled to his costs in Appeal No..	1320
of 1966 in all the three Courts.  There will be no order  as
to  costs in Appeal No. 1319 of 1966 and Writ  Petition	 No.
103 of 1966.
Y.P.					   Appeals allowed.
698

Commissioner Of Income-Tax vs A.K. Das on 27 August, 1969
Equivalent citations: [1970]77ITR31(CAL)
JUDGMENT

P.B. Mukharji, J.
 
 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:

 "(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 ? 

 (2) At the instance of the assessee- 
 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 ?"  

 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. 

 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. 

 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. 

 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. 

 6. On those facts the questions set out above have been referred to this court for an answer. 

 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.  

 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 : 
  "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." 

 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. 

 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 ? 

 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 :
 "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."

12. Paragraph 4 of that form requires the applicant to state the questions of law that arise out of the order of the Appellate Tribunal. 

13. 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 : 
  "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." 

 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. 

 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 : 
  "Save as provided in Section 256, orders passed by the Appellate Tribunal on appeal shall be final." 

 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 :
  "...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." 

 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.

 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 : 
  "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." 

 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.  .

 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. 

 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. 

 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:
  "In either ordinary parlance or legal sense, the Income-tax Appellate Tribunal cannot be held to be a civil, criminal or revenue court." 

 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:
  "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." 

 24. Again at page 421 of the report the observation is as follows :
 "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."

25. 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."

26. 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.

27. 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 :

 "It is obvious that there may be cases where a winning party would
be seriously prejudiced if it was precluded from raising a question of law
merely because it had not made an application for a reference and the
reference was asked for at the instance of the losing party. The winning
party can never apply for a reference. But it may happen that if the
court takes a particular view on the reference asked for by the losing party,
certain 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." 

 "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.

28. 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.

 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:
 "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.

 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: 
  "...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 ?" 

 31. In order to appreciate the merits of this point urged by the assessee, it will be helpful to have the following calendar ;-- 

 1-4-62    :    The new Income-tax Act, 1951, came into force.
 
29-8-64    :    I.T.O.'s reference under Section 274(2) of the I.T. Act, 1961, to the Inspecting
Asstt. Commissioner.
 
  31-8-64    :    I.T.O.'s order of assessment and notice under Section 274(1) of the I.T, Act. 
 
 2-9-64    :    Service of the above notice on the assessee.
 
  22-9-64    :    I.T.O.'s  hearing of the assessee. 
 
 11-3-65   :    Inspecting Asstt. Commissioner's notice under sec. 274(1) of the Act to the assessee.  
 
 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. 

 33. It will be necessary and helpful to have Section 275 to decide this question. Section 275 reads as follows : 
  "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." 

 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.

 35. The Tribunal came to the following finding on this issue : 
  "In this case, assessment proceedings were completed by the passing of the assessment order on 31st August, 1964. ...." 

 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 : 
  "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." 

 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. 

 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. 

 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: 

 "If the Income-tax Officer or the Appellate Assistant Commissioner in the course of any proceedings under this Act is satisfied that any person--... 
  (c) has concealed the particulars o! his income or deliberately furnished inaccurate particulars of such income, 
 
 he may direct that such person shall pay by way of  penalty--. 
  (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." 

 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".  

 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. 

 41. The next stage is reached in Section 274 which is described as the "procedure". Section 274 reads as follows: 

 "(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. 

 (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."  

42. 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. 

 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,  
 
 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.

 45. The reason why the Income-tax Act,  1961, in Section 274(1) requires
that no order of penalty shall be made without hearing  the assessee or
giving 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.

 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. 

 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. 

 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. 

 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.

 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.

 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.

 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. 

 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.

 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,
 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.

 56. Neither Section 22 nor Section 34 of the old Income-tax Act of 1922 used the expression "commencement of the proceedings". 

 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 :
  "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." 

 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.

 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.

 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."

 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:
  "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." 

 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. 

 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 :
  "I do not think that great assistance is to be obtained from earlier cases dealing with other sections of other Acts of Parliament." 

 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 :
 "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."

 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. 

 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. 

 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 : 
  "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.

68. 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.

69. 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. 

 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. 

 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.

72. Each party will bear his own costs. 

Sabyasachi Mukharji, J.

 I agree.

Addl. Commissioner Of Income-Tax, ... vs I.M. Patel And Co. on 3 May, 1976
Equivalent citations: [1977]107ITR214(GUJ)
JUDGMENT
 
 B.J. Divan, C.J. 
 
 1. In this case by an order of reference dated September 4, 1974, the following question has been referred to this Full Benc :  
  "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 ?"  

 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 :  
  "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 ?"  

 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.

 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.  

 5. Section 271(1)(a) of the Income-tax Act, 1961, is in these term :  

 "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 -  

 (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, -........  

 he may direct that such person shall pay by way of penalty, -  

 (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."   

 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."  

 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.  

 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 :
  "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)]."  

 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 :
  "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."  

 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 :  
  "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 ?"  

 and question (3) which the Supreme Court formulated for itself wa :  
  "Whether imposition of penalties for failure to register as a dealer was justified ?"  

 Section 9(1) of the Orissa Sales Tax Act, 1947, provide :  
  "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."  

 Section 12(2) provide :  
  "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."  

Section 25(1)(a) provide :  

 "Whoever (a) carries on business as a dealer in contravention of sub-section (1) of section 9 - ... 

 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."   

 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.

 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 :

 "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.

 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."

 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 :

 "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.  

 "No tax shall be levied or collected except by authority of law"   

 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.

 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.  

 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 :  
  "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."  

 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 :  
  "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."  

 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).  

 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.  

 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 :

 "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.  

 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.  

 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."   

 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.  

 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  
  "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."

 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 :  

 "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 :

 '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.'"    

 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.

 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 :
  "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."  

 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 :
 "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."

 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.  

 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.  

 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 :
  "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."  

 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].

 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]).
  "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."  

 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.

 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.

 30. In the light of the above discussion, our conclusions are as follows :  

 (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;  

 (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;  

 (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;  

 (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.   

 In view of the above discussion and in view of our conclusion, we answer the question as reframed by us as follow :  
 "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."  

 31. The matter will now go before the Division Bench for disposing of the case in accordance with law.

Ahmedabad Urban Development Authority vs Assistant Commissioner Of Income Tax ... on 2 May, 2017
Bench: M.R. Shah, B.N. Karia
             O/TAXAP/423/2016                                                               CAV JUDGMENT

                        IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

                                      TAX APPEAL  NO. 423 of 2016
                                                With 
                                      TAX APPEAL NO. 424 of 2016
                                                  TO 
                                      TAX APPEAL NO. 425 of 2016
                                                With 
                                CIVIL APPLICATION (OJ) NO. 211 of 2016
                                                   In  
                                      TAX APPEAL NO. 423 of 2016
                                                   TO
                                CIVIL APPLICATION (OJ) NO. 213 of 2016
                                                  In    
          
         FOR APPROVAL AND SIGNATURE: 
         HONOURABLE MR.JUSTICE M.R. SHAH                                  sd/­
         and
         HONOURABLE MR.JUSTICE B.N. KARIA                                  sd/­
         =========================================
         1      Whether Reporters of Local Papers may be allowed to see         YES
                the judgment ?

         2      To be referred to the Reporter or not ?                                          YES

         3      Whether their Lordships wish to see the fair copy of the                          NO
                judgment ?

         4      Whether this case involves a substantial question of law as                       NO
                to   the   interpretation  of   the   Constitution  of   India  or   any 
                order made thereunder ?

         =============================================
                  AHMEDABAD URBAN DEVELOPMENT AUTHORITY....Appellant(s)
                                         Versus
             ASSISTANT COMMISSIONER OF INCOME TAX (EXEMPTION)....Opponent(s)
         Appearance:
         MR. S.N. SOPARKAR, LD. SR ADV WITH MR B S SOPARKAR, ADVOCATE for 
         the Appellant(s) No. 1
         Mr. MANSIH R BHATT LE SR ADV WITH MRS MAUNA M BHATT, ADVOCATE 
         for the Opponent(s) No. 1
             CORAM: HONOURABLE MR.JUSTICE M.R. SHAH
                    and
                    HONOURABLE MR.JUSTICE B.N. KARIA

                                                    Page 1 of 57

HC-NIC                                           Page 1 of 57      Created On Wed Aug 16 05:49:41 IST 2017
           O/TAXAP/423/2016                                                                 CAV JUDGMENT

                                      Date : 02/05/2017
                                       CAV JUDGMENT
                          (PER : HONOURABLE MR.JUSTICE M.R. SHAH)

         1.0.           As common question of law and facts arise in this group 
         of appeals and as such with respect to same assessee­ Ahmedabad 
         Urban Development Authority (hereinafter referred to as "AUDA") 
         and   arising   out   of   the   impugned   common   judgment   and   order 
         passed by the learned Income Tax Appellate Tribunal (hereinafter 
         referred   to   as   the   "ITAT")   with   respect   to   different   assessment 
         years, all these appeals are decided and disposed of together by this 
         common judgment and order. 

         2.0.           Feeling  aggrieved   and  dissatisfied  with  the   impugned 
         judgment   and   order   passed   by   the   learned   ITAT   passed   in   ITA 
         No.712/AHD/2013   for   AY   2009­10,   by   which,   learned   ITAT   has 
         held that the activities of appellant­ assessee cannot be said to be 
         for"charitable purpose" within the definition of Section 2(15) of the 
         Income Tax Act and therefore, not entitled to deduction claimed 
         under Section 11 of the Income Tax Act, the assessee has preferred 
         the present Tax Appeal No. 423 of 2016 to consider the following 
         questions of law.

                     "(1)Whether the Income­tax Appellate Tribunal has erred in  
                     law   and   on   facts   in   holding   that   the   activity   of   the  
                     appellant was in the nature of trade, commerce or business  
                     and hence it cannot be regarded as activity for charitable  
                     purpose   in   view   of   the   proviso   to   section   2(15)   of   the  
                     Income­tax Act, 1961?
                     (2) Whether the Income­tax Appellate Tribunal has erred in  
                     law and on facts in disallowing the claim of exemption of  

                                                   Page 2 of 57

HC-NIC                                          Page 2 of 57      Created On Wed Aug 16 05:49:41 IST 2017

                     the appellant under section 11 of the Income­tax Act, 1961,  
                     and assessing the income of the appellant under sections 28  
                     to 44 of the Income­tax Act, 1961?"

         2.1.             Feeling aggrieved and dissatisfied with the impugned 
         No.647/AHD/2014   for  AY 2010­11,  by which,   learned  ITAT  has 
         held that the activities of the appellant­ assessee cannot be said to 
         be for "charitable purpose" within the definition of Section 2(15) of 
         the   Income   Tax   Act   and   therefore,   not   entitled   to   deduction 
         claimed under Section 11 of the Income Tax Act, the assessee has 
         preferred the present Tax Appeal No. 424 of 2016 to consider the 
         following question of law.

         2.2.             Feeling aggrieved and dissatisfied with the impugned 
         No.2335/AHD/2015 for AY 2011­12, by which, learned ITAT has 

                                                   Page 3 of 57

HC-NIC                                          Page 3 of 57      Created On Wed Aug 16 05:49:41 IST 2017

         for "charitable purpose" within the definition of Section 2(15) of 
         preferred the present Tax Appeal No. 425 of 2016 to consider the 

         3.0.           The facts leading to the present appeals in nutshell are 
         as under;

         3.1.           That   the   assessee   AUDA   is   constituted   as   Urban 
         Development   Authority,   constituted   by   the   State   Government   in 
         exercise of powers under Section 22 of the Gujarat Town Planning 
         and Urban Development Act, 1976 (hereinafter referred to as the 
         "Town  Planning Act").  The powers and function  of  the  AUDA as 
         Urban Development Authority are as per Section 23 of the Town 
         Planning  Act.  As   per    Section   23  of  the  Town Planning  Act,  the 
         AUDA as a Urban Development Authority is required to undertake 

                                                   Page 4 of 57

HC-NIC                                          Page 4 of 57      Created On Wed Aug 16 05:49:41 IST 2017
           O/TAXAP/423/2016                                                         CAV JUDGMENT

         the development of the Urban Area having jurisdiction as per the 
         Notification issued by the State Government. The function of the 
         AUDA as Urban Development Authority are as under: 
         (i) To undertake the preparation of development plans under the 
         provisions of this Act, for the urban development area; 

         (ii)   To   undertake   the   preparation   2   [and   execution]   of   town 
         planning schemes under the provisions of this Act, if so directed by 
         the State Government; 

         (iii) To carry out surveys in the urban development area for the 
         preparation of development plans or town planning schemes; 

         (iv) To guide, direct and assist the local authority or authorities and 
         other  statutory   authorities   functioning  in  the  urban   development 
         area in matters pertaining to the planning, development and use of 
         urban land; 

         (v) To control the development activities in accordance with the 
         development plan in the urban development area; 3 [(v­a) to levy 
         and collect such security fees for secrutiny of documents submitted 
         to the appropriate authority for permission for development as may 
         be prescribed by regulations;]

         (vi) To execute works in connection with supply of water, disposal 
         of sewerage and provision of other services and amenities; 4 [(vi­a) 
         to levy and collect such fees for the execution of works referred to 
         in clause (vi) and for provision of other services and amenities as 
         may be prescribed by regulations;]

         (vii) To acquire, hold, manage and dispose of property, movable or 
         immovable, as it may deem necessary; 

                                           Page 5 of 57
HC-NIC                                  Page 5 of 57      Created On Wed Aug 16 05:49:41 IST 2017
            O/TAXAP/423/2016                                                            CAV JUDGMENT
         (viii)   To   enter   into   contracts,   agreements   or   arrangements,   with 
         any   local   authority,   person   or   organisation   as   the   urban 
         development authority may consider necessary for performing its 
         functions; 

         (ix)   To   carry   any   development   works   in   the   urban   development 
         area as may be assigned to it by the State Government from time to 
         time; 

         (x) To exercise such other powers and perform such other functions 
         as   are   supplemental,   incidental   or   consequential   to   any   of   the 
         foregoing powers and functions or as may be directed by the State 
         Government.

         3.2.            That prior to AY 2002­03 the assessee was enjoying the 
         exemption under Section 10(20A) of the Income Tax Act. However, 
         subsequently   Section   10(20A)   of   the   Act   came   to   be   deleted   / 
         omitted   by   the   Finance   Act,   2002   w.e.f.   1.4.2003.   That 
         simultaneously, exemption granted under Section 10(20A) of the 
         Income Tax Act also came to be withdrawn by Finance Act, 2002.

         Tax Appeal No. 423 of 2016 

         4.0. That the assessee filed return of income for the year 2009­10 
         declaring total income at Rs. NIL after claiming deduction under 
         Section   11   r.w.s,   2(15)   of   the   Income   Tax   Act.   The   case   of   the 
         assessee was taken up for scrutiny assessment and the assessment 
         order came to be passed under Section 143(3) of the Act. The AO 
         determined the income of the assessee at Rs. 359,95,83,000/­ by 

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           O/TAXAP/423/2016                                                           CAV JUDGMENT

         disallowing   the   deduction   claimed   under   Section   11   of   the   Act. 
         That the AO  held that activities of the assessee cannot be said to be 
         for "charitable purpose" as contained in Section 2(15) of the Act, in 
         light of the proviso to Section 2(15) of the Act and therefore, the 
         assessee is not entitled to deduction claimed under Section 11 of 
         the Act. 

         4.1.           Feeling aggrieved and dissatisfied with the order passed 
         by the AO, the assessee preferred appeal before the learned CIT(A). 
         That the learned CIT(A) confirmed the disallowance made under 
         Section 11 A of the Act on the ground that the case of the assessee 
         is covered by proviso to Section 2(15) of the Act. Feeling aggrieved 
         and   dissatisfied   with   the   order   passed   by   the   learned   CIT(A) 
         confirming the disallowance made under Section 11A of the Act, 
         the   assessee   preferred   appeal   before   the   learned   ITAT.   By 
         impugned judgment and order, the learned ITAT has dismissed the 
         said  appeal   by   observing   that   considering   the   proviso  to   Section 
         2(15) of  the  Act,  the  assessee shall  not be  entitled to deduction 
         under Section 11 of the Act as the activities of assesee can be said 
         to be in the nature of trade, commerce and business. 

         4.2.           Feeling  aggrieved   and  dissatisfied  with  the   impugned 
         judgment and order passed by the learned ITAT, the assessee has 
         preferred the present Tax Appeal No. 423 of 2016 to consider the 

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            O/TAXAP/423/2016                                                                 CAV JUDGMENT

                      law   and   on   facts   in   holding   that   the   activity   of   the  
                      appellant was in the nature of trade, commerce or business  
                      and hence it cannot be regarded as activity for charitable  
                      purpose   in   view   of   the   proviso   to   section   2(15)   of   the  
                      Income­tax Act, 1961?
                      (2) Whether the Income­tax Appellate Tribunal has erred in  
                      law and on facts in disallowing the claim of exemption of  
                      the appellant under section 11 of the Income­tax Act, 1961,  
                      and assessing the income of the appellant under sections 28  
                      to 44 of the Income­tax Act, 1961?"  

         4.3.            Similar orders are passing in the case of very assessee 
         for AY 2010­11 & 2011­12,   which are the subject matter of Tax 
         Appeal Nos. 424 of  2016 and 425 of 2016.

         5.0. Therefore,   the   short   question   which   is   posed   for   the 
         consideration of this Court is whether the activities of the assessee­ 
         AUDA can be said to be in nature of trade, commerce and business 
         and   hence it cannot be regarded as activity for charitable purpose 
         in   view   of   the   proviso   to   section   2(15)   of   the   Income­tax   Act, 
         1961 ?

         6.0. Shri S.N. Soparkar, learned Senior Advocate has appeared on 
         behalf   of   the   assessee   and   Shri   Manish   R   Bhatt,   learned   Senior 
         Advocate   has   appeared   on   behalf   of   the   revenue   in   all   these 
         appeals. 

         7.0. Shri S.N. Soparkar, learned Senior Advocate for the assessee 
         has vehemently submitted that in the facts and circumstances of the 

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         case, the learned Tribunal has materially erred in holding that the 
         activities of the assessee is in the nature of trade, commerce and 
         business and therefore, the case of the assessee would fall under 
         the proviso to Section 2(15) of the Act so to as deny the deduction 
         claimed   under   Section   11   of   the   Income   Tax   Act,   as"Charitable 
         Institute". 

         7.1. It is vehemently submitted by Shri Soparkar, learned Senior 
         Advocate for the assessee that while holding that the activities of 
         the assessee can be said to be in the nature of trade, commerce and 
         business,   the   learned   Tribunal   has   not   properly   appreciated   the 
         object and purpose for which, the AUDA as an Urban Development 
         Authority   has   been   constituted   under   the   provisions   of   Town 
         Planning Act. It is further submitted by Soparkar, learned Senior 
         Advocate for the assessee that while holding the activities of the 
         assessee   can   be   said   to   be   in   the   nature   of   trade,   commerce   or 
         business, the learned Tribunal has not appreciated the object and 
         purpose for which, the assessee has been constituted as an Urban 
         Development Authority under Section 22 of the Town Planning Act 
         and   learned   Tribunal   has   not   properly   appreciated   and   /   or 
         considered the activities and the services rendered by the assessee. 

         7.2. Shri Soparkar, learned Senior Advocate for the assessee has 
         further   submitted   that   learned   Tribunal   has   not   properly 
         appreciated the fact that the assessee has been constituted as an 
         Urban Development Authority under the provision of Section 22 of 
         the Town Planning Act to carry out the development of the area 
         included in the Urban Development Plan / Scheme. It is submitted 

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         that therefore, the assessee has been performing the statutory duty 
         to carry out the development work in the urban area, for which, the 
         Urban   Development   Authority   has   been   constituted   by   the   State 
         Government. 

         7.3.  Shri Soparkar, learned Senior Advocate for the assessee has 
         taken us to various provisions of the Town Planning Act in support 
         of   his   submissions   that   activities   of   the   assessee­   AUDA   is   the 
         statutory   duty   under   the   provision   of   Town   Planning   Act   and 
         therefore, activities carried out by the assessee­ AUDA cannot be 
         said   to   be   in   the   nature   of   trade,   commerce   or   business.   It   is 
         vehemently submitted that therefore, the activities of the assessee­ 
         AUDA cannot be said to be in the nature of trade, commerce and 
         business and therefore, the proviso to Section 2(15) shall not be 
         applicable.   It   is   submitted   that   it   cannot   be   disputed   that   the 
         services   provided   by   the   appellant   ­assessee   can   be   said   to   be 
         providing  public utility and therefore, the activities of the assessee­ 
         AUDA   can   be   said   to   be   for   "charitable   purpose"   within   the 
         definition of Section 2(15) of the Income Tax Act and therefore, the 
         assessee ­ AUDA is entitled to deduction under Section 11 of the 
         Income Tax Act. 

         7.4. Shri Soparkar, learned Senior Advocate for the assessee has 
         further  submitted  that   the   assessee   is   entitled  to  be   regarded   as 
         charitable   institution   because   the   assessee   is   not   a   trading 
         corporation and is established under a statute for carrying out the 
         development   work   that   too   within   four   corners   of   the   Town 
         Planning Act. 

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            O/TAXAP/423/2016                                                             CAV JUDGMENT

         7.5. Shri Soparkar, learned Senior Advocate for the assessee has 
         further submitted that in the case of Commissioner of Income Tax 
         vs.   Gujarat   Maritime   Board   reported   in   295   ITR   561   (SC),   the 
         Hon'ble Supreme Court has held that Gujarat Maritime Board being 
         a   statutory   authority   established   under   the   provisions   of   Gujarat 
         Maritime   Board   Act,   1981   and   has   been   constituted   for 
         predominant   purpose   of   development   of   minor   ports   within   the 
         State   of   Gujarat   and   management   and   control   of   the   Gujarat 
         Maritime Board was essentially with the State Government having 
         no profit motive, Gujarat Maritime Board is entitled to exemption 
         under Section 11 in light of the definition of the words "charitable 
         purposes" as defined under Section 2(15) of the Act. It is submitted 
         that in the aforesaid decision, it is held that even if  it had ceased to 
         be   a   local   authority   under   Section   10(20)   of   the   Act,   it   is   not 
         precluded   from   claiming   exemption   under   Section   11   (1)   of   the 
         Act.  It  is submitted that in the aforesaid  decision,  it is  held and 
         observed that Section 10(20) and 11 of the Act  operate in totally 
         different spheres. 

         7.6.            Shri Soparkar, learned Senior Advocate for the assessee 
         has   also   heavily   relied   upon   another   decision   of   the   Hon'ble 
         Supreme Court in the case of Shri Ramtanu Cooperative Housing 
         Society   Ltd   and   Another   vs.   State   of   Maharastra   and   Another 
         reported in 1970(3) SCC 323 in support of his above submission. It 
         is submitted that in the case of  Shri Ramtanu Cooperative Housing 
         Society Ltd and Another (supra) the activities of the assessee, it was 
         constituted   under   the   provisions   of   Maharastra   Industrial 
         Development Act is held to be non profit making. It is submitted 

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            O/TAXAP/423/2016                                                           CAV JUDGMENT

         that in the aforesaid decisions, it is observed and held that merely 
         because   the   assessee   corporation   is  selling   the   plots,   considering 
         the   underlying  concept   of   a   trading   Corporation   i.e.   buying   and 
         selling , there is no aspect of buying or selling by the Corporation. 
         That the Corporation  carries  out the purpose  of the  Act,  namely 
         development of Industry in the State. 

         7.7.            It is further submitted by Shri Soparkar, learned Senior 
         Advocate   for   the   assessee   that   assessee   cannot   be   denied   the 
         benefit of being a charitable institution   on the ground of that its 
         objects involve "the carrying on of an activity in the nature of trade, 
         commerce or business. It is submitted that even the circular issued 
         by the CBDT dated 19.12.2008 also clarifies that the amendment to 
         Section   2(15)   is   meant   to   cover   only   those   commercial 
         establishments who hide their real identity as a "mask" of charity. 

 7.8.            Shri   Soparkar,   learned   Senior   Advocate   has   heavily 
         relied upon the decision of the Director of Income Tax (Exemption) 
         vs. Sabarmati Ashram Gaushala trust reported in 362 Itr 539 (Guj), 
         more particularly, para 5 to 9 and 12 and 13 as well as decision of 
         the   Delhi   High   Court   in   the   case   of   Institute   of   Chartered 
         Accountants   of   India   vs.   Direct   General   of   Income   Tax 
         (Exemptions),   Delhi   reported   in   347   ITR   99   (para   14   to   33)   in 
         support   of   his   submissions   that   the   activities   carried   on   by   the 
         assessee cannot be said to be in the nature of trade, commerce or 
         business. 

 7.9.            It is further submitted by Shri Soparkar, learned Senior 

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         Advocate   for the assessee that by impugned judgment and order 
         the learned ITAT has held that activities carried on by the assessee 
         in the nature of trade, commerce or business on one of the ground 
         that   the   assessee   is   collecting   cess   or   fees.   It   is   vehemently 
         submitted   by   Shri   Soparkar,   learned   Senior   Advocate     for   the 
         assessee   that   the   assessee   cannot   be   denied   the   status   of   a 
         charitable institution on the ground that it is rendering any service 
         in relation to any trade, commerce or business for a case or a fee or 
         any other consideration because (1) the assessee collects regulatory 
         fee for the objects of the act (2)there is no element of profiteering 
         in the said collection (3) no services are rendered to any particular 
         trade, commerce or business. In support of his above submissions, 
         he has relied upon the following decisions of Delhi High Court.
         (1) GSI India vs. DGIT reported in (2014) 360 ITR 138 (Delhi)
         (2)   Indian   Trade   Promotion   Organization   vs.   Director   of  Income 
         Tax (Exemption) reported in (2015) 371 ITR 333 (Delhi). 

         7.10.            It is further submitted by Shri Soparkar, learned Senior 
         Advocate  for the assessee that one another reason assigned by the 
         learned   Tribunal   while   holding   that   activities   carried   out   by   the 
         assessee is in the nature of trade, commerce or business is that the 
         assessee is selling lands by public auction. It is submitted that while 
         holding so, learned ITAT has not properly appreciated the fact that 
         sale of land by the assessee is in the mode to recover the cost of the 
         scheme and is expressly prescribed under Section 40(3)(jj)(a)(iv) 
         r.w.s. 40(3)(jj)(b) of the Gujarat Town Planning Act. It is submitted 
         that the lands are sold by public auction as mandated in catena of 
         decisions of the Hon'ble Supreme Court as well as this Court and so 

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         as to avoid any allegation of favoritism and so as to get maximum 
         amount,   which   is   required   to   be   used   only   to   carry   out   the 
         development in the Urban Development Area. It is submitted that 
         while selling the lands by auction and that too as permitted under 
         the   provision   of   Town   Planning   Act   there   is   no   element   of 
         profitering but it is only for recovery of cost only. It is submitted 
         that   even   the   entire   amount   realized  by   selling  the   lands  to  the 
         extent of 15% of the Urban Development Area, is required to be 
         used by the assessee only to carry out the development work and 
         other amenities / facilities to be provided like road, drainage, street 
         light etc. It is submitted that therefore, the activities carried out by 
         the assessee cannot be said to be profitering  and / or in the nature 
         of   trade,   commercial   or   business.   In   support   of   his   above 
         submission, he has relied upon the decision of the Division Bench 
         of this Court in the case of Ahmedabad Green Belt Khedut Mandal 
         vs. State of Gujarat through Secretary reported in 2001(1) GLR 888 
         (para 37 & 38(. 

 7.11.           It   is   submitted   by   Shri   Soparkar,   learned   Senior 
         Advocate for the assessee that by permitting the AUDA to sell the 
         plots   that   is   on   element   of   profiter   has   been   negatived   by   the 
         Hon'ble   Supreme   Court   in   the   case   of   Ahmedabad   Municipal 
         Corporation   and   Another   vs.     Ahmedabad   Green   Belt   Khedut 
         Mandal reported in (2014) 7 SCC 357.
                 It is submitted that therefore, also the activities carried out by 
         the assessee cannot be said to be in the nature of trade, commerce 
         or business, which can take away the assessee from the purview of 
         charitable institution / charitable purpose as per Section 2(15) of 

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         the Act. 

 7.12.           Shri Soparkar, learned Senior Advocate for the assessee 
         has relied upon the  decision of the Allahbad High Court in the case 
         Commissioner   of   Income   Tax,   Luknow   vs.   Luknow   Development 
         Authority reported in (2013) 38 Taxmann. com 246 (All)and the 
         decision of the Rajasthan High  Court in the case of Commissioner 
         of   Income   Tax   I,   Jodhpur   vs.   Jodhpur   Development   Authority, 
         Jodhpure rendered in Tax Appeal No, 63 of 2012 by which, with 
         respect to other development authorities, the Courts have held that 
         activities carried out by such development authority cannot be said 
         to   be   in   the   nature   of   trade,   commerce   or   business   and   their 
         activities is for charitable purpose is within the meaning of Section 
         2(15)   and   therefore,   all   such   development   authorities   shall   be 
         entitled to exemption / deduction under Section 11 of the Income 
         Tax Act. 

         7.13.             It   is   submitted   by   Shri   Soparkar,   learned   Senior 
         Advocate   for   the   assessee   that   that   even   otherwise   the   reasons 
         assigned by the learned ITAT in the impugned judgment and order 
         and while holding that the activities carried out by assessee can be 
         said   to   be   trade,   commerce   or   business   are   not   germane.   It   is 
         submitted that, the considering the object and purpose for which 
         AUDA has been constituted as Urban Development Authority and 
         considering   the   activities   carried   out   by   the   assessee   which   is 
         statutory  in nature  and  to carry out  the  development  as per the 
         Gujarat   Town   Planning   Act,   the   activities   carried   out   by   the 

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         business and therefore, the proviso to Section 2(15) of the Act shall 
         not be applicable and therefore,   assessee­ AUDA shall be entitled 
         to exemption/ deduction under Section 11 of the Act.

                Making above submissions and relying upon above decisions, 
         it   is   requested   to   allow   the   present   Appeals   and   held   that   the 
         activities carried out by the assessee cannot be said to be in the 
         nature   of   trade,   commerce   or   business   and  therefore,   proviso   to 
         Section 2(15) of the Act shall not be applicable and activities of the 
         assessee can be said to be in the nature of public utility services and 
         therefore, can be said to be charitable purpose within the meaning 
         of   Section  2(15)  of  the Act  and  therefore,   the  assessee  AUDA  is 
         entitled to exemption / deduction under Section 11 of the Act as 
         claimed.  

         8.0. All these submissions are vehemently opposed by Shri Manish 
         R Bhatt, learned Senior Advocate for the Revenue. 

         8.1. It is vehemently submitted by Shri Manish R Bhatt, learned 
         Senior   Advocate   for   the   Revenue   that   in   the   facts   and 
         circumstances of the case learned Tribunal has rightly held that the 
         activities   of   the   appellant   were   in   the   nature   of   trade   and 
         commerce   and   therefore,   the   activities   cannot   be   said   to   be   for 
         charitable purpose in view of proviso to Section 2(15) of the Act. 

         8.2.   It is vehemently submitted by Shri Manish R Bhatt, learned 
         Senior   Advocate   for   the   Revenue   that   the  main   object   of   the 
         appellant­ assessee is contribution towards planned and controlled 

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         development   for   the   entire   urban   development   area   and   clearly 
         such   activity   falls   under   the   category   'advancement   of   general 
         public utility'. It is submitted that however, when the activities of 
         business, considering the proviso to Section 2(15), the activities of 
         the   assessee   cannot   be   said   to   be   for   charitable   purpose   and 
         therefore, the assessee is not entitled to exemption as claimed. 

         8.3.    It is vehemently submitted by Shri Manish R Bhatt, learned 
         Senior   Advocate   for   the   Revenue   that   the   Tribunal   being   a   fact 
         finding authority has given following findings on facts in its order.
         (1). The plots  of  land  have been acquired by  the Assessee  at  a 
         very nominal price in the name of town planning scheme, but have 
         been given lease at a very high premium by means of auction to the 
         highest bidder. 
         (2). The land is given on lease not even at its jantri rate (stamp 
         value), but at a commercial/ market rate. This virtue of the land 
         transactions   is   very   characteristic   of   commercial   activity   with   a 
         profit motive. The said activity of the Assessee can by no stretch of 
         imagination be treated as charitable activity within the meaning of 
         education,   medical   relief,   relief   of   poor,   and   preservation   of 
         environment or reservation of monuments.
         (3). The plots of land were acquired from the public at nominal 
         rates and sold to various commercial entities at market rate, and 
         this systematic, regular and organised activity indicates that AUDA 
         is   involved   in   carrying   on   the   activity   which   is   in   the   nature   of 
         trade, commerce or business.

                                               Page 17 of 57
HC-NIC                                       Page 17 of 57     Created On Wed Aug 16 05:49:41 IST 2017
            O/TAXAP/423/2016                                                              CAV JUDGMENT

         8.4. It is submitted that since the assessee sold the plots of land at 
         a   premium   and   at   market   rates,   to   various   commercial   entities, 
         with a motive to earn profit, the learned Tribunal has rightly held 
         activities of the assessee as a business transaction. It is submitted 
         that therefore,  provisos to Sec 2(15) of the Act  shall be squarely 
         applicable to the facts of the case.

         8.5.   It is vehemently submitted by Shri Manish R Bhatt, learned 
         Senior Advocate for the Revenue that  two major characteristics of 
         any   business   activity   are   profit   motive   and   continuity.   It   is 
         submitted that from  the   purchase  and sale  details pertaining to 
         A.Y. 2007­ 08, 2008­09 and 2009­10, it is clear that the appellant­ 
         assessee   is   engaged   in   the   business   of   giving   land   on     sale/ 
         leasehold at a high premium on a continuous basis and on profit 
         basis. 

 8.6. It is further submitted by Shri Bhatt, learned Senior Advocate 
         for the appellant­assessee that the decision of the Division Bench of 
         this Court in the case of  Sabarmati Ashram Gaushala Trust (supra) 
         which has been heavily relied upon by the learned counsel for the 
         assessee is  distinguishable on facts and therefore, not applicable to 
         the   facts   of   the   present   case.   It   is  submitted   that   in   the   case   of 
         Sabarmati Ashram Gaushala Trust (supra), the assessee trust was 
         created with object to breed the cattles and to improve the quality 
         of the cows and oxen. The income was generated by the assessee 
         from the activity of milk production and sale thereof. The assessee 
         was   thus   marketing   products   which   were  incidental  to   its   main 
         activity of improving breeding of milch cows, and therefore, it was 

                                                Page 18 of 57

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         held as non­commercial activity. It is submitted that therefore,   in 
         the   aforesaid   facts,   the   Division   Bench   has   held   that  "merely 
         because while carrying out activities for the purpose of achieving 
         objects of trust, certain incidental surpluses were generated, would 
         not render activity in nature of trade, commerce or business".  It is 
         submitted   that   in   the   aforesaid   decision   the   Division   Bench 
         considered   the   CBDT   circular   of  11/2008   dated   19­12­2008   in 
         which, it has been clarified that the proviso aims to attract those 
         activities   which   are   truly   in   the   nature   of   trade,   commerce   or 
         business   but   are   carried   out   under   the   guise   of   activities   in   the 
         nature of 'public utility'. It is submitted that thereafter after taking 
         into   account   the   object   of   the   trust,   which   was   admittedly 
         charitable in nature, this Court has held that surplus generated was 
         wholly   secondary   in   the   case   of  the   assessee­   Sabarmati   Ashram 
         Gaushala Trust (supra) and that  if there is any surplus generated 
         at   the   end   of   the   year,   that   by   itself   would   not   be   the   sole 
         consideration   for   judging   whether   any   activity   was   trade, 
         commerce or business particularly if generating 'surplus' is wholly 
         incidental to the principal activities of the trust; which is otherwise 
         for general public utility, and therefore, of charitable nature. 
                It is submitted that in the present case the principal source of 
         receipts   is   akin   to   a   real   estate   developer.   It   is   submitted   that 
         learned   Tribunal   in   the   impugned   judgment   and   order   has 
         discussed the above and brought out this fact in great detail that 
         the   assessee   functions   as   an   effective   and   efficient   real   estate 
         development entity with a view to maximize profit. It is submitted 
         that   some   of   the   activities   of   assessee   may   be   those   related   to 
         Governance,   but   a   large   number   of   activities   and   the   receipts 

                                               Page 19 of 57

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         generated by them were from activities which were in the "nature 
         of trade, commerce and business."

         8.7. It is further submitted by Shri Bhatt, learned Senior Advocate 
         for the revenue that even from the income expenditure account and 
         Balance sheet   it is founed that the appellant was engaged in the 
         business of development, leasing out and sale of plots of land. It is 
         submitted   that   the   plots   of   land   have   been   acquired   by   the 
         appellant at a very nominal price and have been given on lease or 
         sold at a very high premium. It is submitted that the sale of plots of 
         land   were   also  affected   by   conducting   auction   after   fixing   base 
         price.   That   the   assessee   also   charges   for   the   services   such   as 
         providing drainage, charges for FSI, charges for additional Height 
         and charges for betterment.

         8.8. It is further submitted by Shri Bhatt, learned Senior Advocate 
         for the Revenue that  the business model of the assessee has been 
         aptly  been  discussed  by  the  Tribunal.   It  is  submitted  that    main 
         excerpts are as under:
         A.     "Whenever   a   town   planning   scheme   is  conceived,   the   land 
         belonging to various persons/entities are put into a common pool, 
         and thereafter, the scheme in a planned way is drawn. 
         B.     40% of the land is to be taken from the land owners and the 
         same is to be used as (i) fifteen per cent for roads, (ii) five per cent 
         for parks, play grounds, gardens and open space, (iii) five per cent 
         for   social   infrastructure   such   as   school,   dispensary,   fire   brigade, 
         public   utility   place   as   earmarked   in   the   Draft   Town   Planning 
         Scheme, and (iv) fifteen per cent for sale by appropriate authority 

                                             Page 20 of 57

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         for  residential,  commercial  or industrial  use  depending upon  the 
         nature   of   development.   15%   land   would   vest   in   the   Assessee, 
         i.e.AUDA.
         C.     However,   such   land   of   15%   of   share   retained   out   of   40% 
         appropriated from the original land owners is not free of cost. The 
         cost is incurrence of expenditure on the development of remaining 
         85% of the land. The land owners have sacrificed their 40% land, 
         the   potentiality   of   60%   would   increase.   In   other   words, 
         relinquishment   value,   representing   40%   of   the   land   by   the   land 
         owners, would be compensated by enhancing the value of balance 
         60% land being developed land in a township.
         D.     As   per   Section   52(3)   of   the   T.P.   Act,   the   Town   Planning 
         Officer shall estimate the cost of this scheme (development) and 
         the contribution to be levied on each owner of the plan is to be 
         notified. It is wrong to suggest that the Assessee got the land free of 
         cost. The cost of land is embedded in the expenditure required to 
         be incurred on development of scheme.
         E.     Supposing,   after   notification   of   the   scheme,   the   law   had 
         stipulated   and   the   government   had   decided   to   outsource   the 
         development work to a third party (a infrastructure company with 
         similar rights and entitlement as given to AUDA), could it be urged 
         that   infrastructure   development   company   doing   similar   work,   as 
         AUDA was not engaged in the activity in the nature of trade? 
         F.     The most crucial factor which proves that the Assessee has 
         been working with profit motive is that the Town Planning Officer 
         is well aware about the cost of development. In spite of that the 
         Assessee   has   never   sold   the   15%   of   the   land   on   cost   basis.   For 
         example,   the  Assessee  has  developed   1500   sq.yards  of  land  in   a 

                                              Page 21 of 57

HC-NIC                                      Page 21 of 57     Created On Wed Aug 16 05:49:41 IST 2017

         scheme, the cost to develop a scheme is Rs.60000/­. The Assessee 
         should have allotted 15% of 1500 sq.yards of land at the rate of 
         400 per sq.yards to the needy persons/institutions by draw of lots. 
         Instead of this, the Assessee has fixed a base price, and thereafter, 
         put the land on auction. It allotted the land to the highest bidder. It 
         has sold the land keeping in view the profit in mind.
         G.     It   may   be   noted  that   huge   profits   have   been   made   by   the 
         Assessee   in   these   years   out   of   the   above­said   real   estate 
         development activity. If that be so, where is the element of charity? 
         The activity of developing roads, park or laying of sewerage land 
         are   not   to   be   seen   representing   a   charitable   act   as   the   assessee 
         levies charges for their use from the plot owners. Moreover, it has 
         claimed depreciation on these assets on business lines, and if an 
         independent infrastructure company would be given such rights, it 
         could not be held that the same is for charitable purposes. These 
         are just to demonstrate that the Assessee shall perform the activity 
         of advancement of any other objects of general public utility. But 
         auction   of   land   to   the   highest   bidder   is   an   activity,   which   is 
         specifically,   keeping   in   view,   the   profit   in   mind   and   the   levy   of 
         cess/charges/fees   are   designed   in   lines   of   an   professional   and 
         business oriented infrastructure development real estate entity.
         H.     It may be noted that there are surplus and reserves which are 
         continuously swelling. These are generated by the Assessee by way 
         of this activity sale/lease of land and charging fees. The Assessee 
         has not been charging nominal fees or selling the land at a nominal 
         rate. It has been making money by putting the land on auction after 
         taking a reserve price. This activity cannot be said to be a charitable 
         activity.

                                               Page 22 of 57
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         8.9. It   is   submitted   that   having   noted   the   above   facts     and 
         activities of the assessee which is in the nature of trade or business, 
         the learned Tribunal has rightly applied proviso to Section 2(15) of 
         the   Act   and   has   rightly   held   that   the   activities   of   the   assessee 
         cannot be said to be "charitable purpose".

         8.10. It   is   further   submitted   that   by   Shri   Bhatt,   learned   Senior 
         Advocate   for   the   Revenue   that   it   is   true   that   the   assessee   has 
         helped   in   planned   development   in   vicinity   of   Ahmedabad.     It   is 
         submitted   that   however   if   a   private   developer   would   have   been 
         given the same mandate by the government, it would have done 
         equally better. It is submitted that the assessee is also required to 
         make a planned development of the city under a scheme approved 
         by the State Government. It is  creating a number of infrastructure 
         facilities   and   public   utility   services   are   being   rendered.   It   is 
         submitted that these services are also being provided for a fee or 
         consideration. It is submitted that in the final scheme of things, the 
         Authority does incur a cost for such land which may be adjusted 
         against the recoveries due to the assessee or against the amount 
         payable for the area by way of compensation. It is submitted that 
         the mode of payment of cost of acquisition whether by cash or by 
         way of adjustment against the value of final plot to be allotted to 
         the original owners will not alter the fact that the land is acquired 
         for a cost. It is submitted that by virtue of the provisions of the 
         Town Planning Act,   15% of the total notified area is sold by the 
         appellant   and   from   such   sale   huge   profits   are   derived.   It   is 
         submitted that the  acquisition and sale of the landa is in the nature 

                                              Page 23 of 57

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         of a trade or business and the activity is not different from a normal 
         purchase or sale activity by a real estate developer. 

         8.11.  It is further submitted by Shri Bhatt, learned Senior Advocate 
         for   the   Revenue   that   as   can   be   seen   from   the   financial   of   the 
         assessee,   the cost   for the land has been incurred and has been 
         capitalized as cost of acquisition. That the said practice  is followed 
         from  year  to  year.  That the  assessee  has become   entitled to sell 
         15% of the land by virtue of the provisions of the Town Planning 
         Scheme.   That   the   said   entitlement   comes   for   a   cost   and   has 
         resulted in huge profits. That therefore, the activity in respect of 
         15% of the land sold by the assessee, thus, is in the nature of trade 
         or business and therefore, the first limb of proviso to Section 2(15) 
         of the Act is satisfied. It is submitted that every  part of the cost of 
         development   is   recovered   from   the   owners   of   the   plots   of   land. 
         That the amount of final compensation is determined after making 
         adjustment   of   the   development   cost.   That   all     kinds   of   civic 
         amenities/services that are being provided are not free but for a 
         cost. It is submitted that therefore, even second limb of the proviso 
         to section 2(15) is also satisfied.. 

         8.12.  It is further submitted by Shri Bhatt, learned Senior Advocate 
         for the Revenue that suppose, after notification of the scheme, the 
         law had stipulated and the government had decided to outsource 
         the   development   work   to   a  third   party   ­   infrastructure   company 
         with similar rights and the entitlements as given to AUDA, could it 
         be urged that the Infrastructure Development Company doing the 
         same   work   as   AUDA   is   not   engaged   in   activity   in   the   nature   of 

                                              Page 24 of 57

HC-NIC                                      Page 24 of 57     Created On Wed Aug 16 05:49:41 IST 2017

         trade or business? It is submitted that it would have been definitely 
         constituted as its business income. It is submitted that therefore, it 
         is  then, not possible to urge otherwise to suggest that the activity is 
         not in the nature of trade or business. It is submitted that nature of 
         the   activities   of   the   assessee     are   no   different   from   that   of   a 
         developer of a real estate. It is submitted that   difference in the 
         scale of operation or the mode of recovery or degree of profits or 
         how   such   profits   are   utilised   would   not   alter   the   nature   of   the 
         activity. 

         8.13. t is further submitted by Shri Bhatt, learned Senior Advocate 
         for   the   Revenue   that   the   object   of   the   proper   development   or 
         redevelopment of any urban area is of the state government and 
         the choice of either constituting an authority for the development 
         or   entrusting   it   to   a   third   party   is   of   the   Government.   It   is 
         submitted that the object of the urban development is of the State 
         Government. It is submitted that the Authority is only carrying out 
         and executing the state's object. It is submitted that there are many 
         activities   in   the   nature   of   infrastructure   development   like   roads, 
         power, housing, etc where the government, instead of constituting 
         an   authority,   enters   into   agreement   with   Infrastructure 
         Development   companies.   It   is   submitted   that   these   private 
         companies are allowed to recover their cost and earn profits as a 
         concessionaires or the Govt. may also make direct payments. It is 
         submitted that the income in all such cases would undoubtedly be 
         assessed on profits from business. It is submitted that the mere fact 
         that the same activity is done by an instrumentality of the state will 
         not   alter   the   character   of   the   activity.   It   is   submitted   that   the 

                                               Page 25 of 57

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         activity will still be in the nature of business or trade.

         8.14.           It   is   further   submitted   that   the   requirement   of   the 
         provisions is not that there should be a business per se, but the only 
         requirement is that the activity is in the nature of business or trade. 
         The word "Business" as defined in section 2(13) is of wide import 
         and would cover the activities of the appellant. It is submitted that 
         besides, the condition stipulated in the Proviso to section 2(15) is 
         not the carrying of business per se, but only the activity being in the 
         nature   of   trade   or   business  which  further   widens  the   width  and 
         amplitude of the proviso.
                 It   is   submitted   that   the   learned   Tribunal   in   the   impugned 
         judgment and order which discussing at length that an activity in 
         nature of "Trade, Commerce  or Business" has observed following 
         attributes and that the activities of appellant does squarely satisfies 
         each of the same:
         (i).    It should be a continuous and systematic exercise of activity 
         of purchase and sale with a view to make profit. If a person buys 
         goods with a view to sell them for profit, it is an ordinary case of 
         trade. If the transactions are on a large scale it is called commerce.
 (ii). Business   vocation   connotes   some   real,   substantive   and 
         systematic  course   of  activity   or   conduct   with  a  set   purpose.   The 
         second   essential   characteristic   is   profit   motive   or   capable   of 
         producing profit. To regard an activity as business, there must be a 
         course   of   dealings   continued,   or   contemplated   to   be   continued, 
         normally   with   an   object   of   making   profit   and   not   for   sport   or 
         pleasure (Bharat Development P. Ltd. v. CIT [1982] 133 ITR 470 
         (Delhi)).

                                              Page 26 of 57
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         (iii). The third essential characteristic is that a business transaction 
         must be between two persons. Business is not a unilateral act. It is 
         brought about by a transaction between two or more persons. 
         (iv) And,   lastly,   the   business   activity   usually   involves   a   twin 
         activity.   There  is   usually   an  element  of  reciprocity   involved   in   a 
         business transaction.

         8.15.           It   is   further   submitted   by   Shri   Bhatt,   learned   Senior 
         Advocate for the Revenue that even the learned Tribunal has taken 
         into  consideration and analyzed the background and framework of 
         the law governing taxability of  charitable institution. 

         8.16. It   is   submitted   that   definition   of   "charitable   purpose"   as 
         contained in Section 2(15) originally enacted was circumscribed by 
         the   expression   'any   other   object   of   general   public   utility   not 
         involving carrying on any activity for profit." It is submitted that 
         this     expression   had   created   various   difficulties   to   certain 
         institutions. The restrictions provided in the phrase "not involving 
         carrying on any activity for profit' was omitted by the Finance Act, 
         1983 w.e.f. 01.04.1984, but another restrictions was imposed on 
         the business activities carried out by any "charitable institution". It 
         is submitted that these  restrictions were introduced by way of sub­ 
         section (4A) of section 11 of the Act.  That the assessee, who was in 
         the business also is required to keep separate books of account for 
         business activities under sub­section(4) of Section 11 of the Act. 
         That   certain   instrumentalities   of   the   State   like   local   authorities, 
         housing boards, urban development authorities, various boards like 
         tea board, coffee board, rubber board etc. were enjoying blanket 

                                               Page 27 of 57

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         exemption from tax under section 10 of the Act and their incomes 
         did not form part of the taxable income. It is submitted that these 
         entities   were   not   regarded   as   charitable   institutions   subject   to 
         regime of section 11 of the Act, but were given complete exemption 
         under section 10 on their own right. That the present Assessee was 
         enjoying this exemption under section 10(20A), as the said section 
         allowed the exemption to any authority constituted by or under any 
         law   enacted   for   the   purpose   of   planning   and   development   or 
         improvement of cities, town or villages. It is submitted that Section 
         Section 10(20A) of the Act came to be omitted by the Finance Act, 
         2002   w.e.f.   1.4.2013.   Therefore,   the   exemption   enjoyed   by   the 
         housing   board   was   taken   away.   It   is   submitted   that   similar 
         exemption  enjoyed by  sports  bodies  like   cricket,   hockey,  football 
         etc. under section 10(23), the authority for marketing commodities 
         under section 10(29) was also withdrawn under section 10(29)  by 
         Finance Act, 2002. Similarly, the scope of local authority enjoying 
         exemption   under   section   10(20)   was   limited   to   only   Panchayat, 
         Municipality,   Municipal   committee   and   Cantonment   board   by 
         introducing an exhaustive definition of local authorities, which was 
         hitherto   not   there,   thereby   denying   any   room   for   broader 
         interpretation of the term. It is submitted that the   principle that 
         such authorities should enjoy exemption merely because these were 
         created   as   an   instrument   of   the   State   or   these   were   engaged   in 
         public  good was derecognized by the Parliament. It is submitted 
         that the legislative intent was explicit that these were not to get 
         indirect support of the government through tax exemption route. It 
         is  submitted that  therefore,   the  parliament  intervened again  and 
         introduced proviso to section 2(15) of the Finance Act, 2008 w.e.f. 

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         1.4.2009.   It   is   submitted   that   this   proviso   provides   that 
         "advancement of any other object of general public utility" shall not 
         be a charitable purpose, if it involves the carrying on any activity in 
         the   nature,   trade,   commerce   or   business   or   any   activity   of 
         rendering   any   service   in   relation   to   any   trade,   commerce   or 
         business, for a cess, fee or any other consideration, irrespective of 
         the   nature   or   application   of   such   income.   It   is   submitted   that 
         therefore, amendment in Section 2(15) of the Act, the omission of 
         Sections   10(20A),   10(29)   and   10(23)   is   also   required   to   be 
         considered. It is submitted that therefore, even proviso to Section 
         2(15) of the Act  is not read as the revenue suggest and / or as the 
         learned   Tribunal   has   read,   intention   of   the   Parliament   to   omit 
         Section   10(20A),   Section   10(23)   and   10(29)   of   the   Act   will   be 
         frustrated.

         8.17.           It   is   further   submitted   by   Shri   Bhatt,   learned   Senior 
         Advocate   for   the   Revenue   that   Parliament   has   subsequently 
         revisited the issue, and a complete exemption of their income has 
         again been provided to them under section 10 by introduction of 
         clause (46) by Finance Act, 2011 w.e.f. 1.6.2016. It is submitted 
         that   said   section   provides   that   the   specified   income   to   a   board, 
         authority,   body   or   trust,   established/constituted   by   the 
         Central/State Government for the benefit of general public will be 
         exempt from tax,  subject to its non­engagement in any commercial 
         activity,   and   also   subject   to   its   being   notified   by   the   Central 
         Government for the purpose. It is submitted that therefore, assessee 
         could   apply  for   exemption  under  section   10   after  1.6.2016.  It   is 
         submitted   that   however   for   the   earlier   years,   the   pre­amended 

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         provisions will apply and the Assessee will have to pass the test of 
         proviso   to   section   2(15).     It   is   submitted   that   therefore,   with 
         respect to past years, as the activities of the assessee is found to be 
         in the nature of trade, commerce or business, proviso to Section 
         2(15) of the Act shall be applicable and therefore, activities of the 
         assessee cannot be said to be for charitable purpose and therefore, 
         the assessee is not entitled  to exemption as claimed under Section 
         11 of the Act. 

         8.18.           It   is   further   submitted   by   Shri   Bhatt,   learned   Senior 
         Advocate for the Revenue that the proviso to Section 2(15) only 
         needs an assessee to carry on activities in the nature of business, 
         commerce or trade irrespective of whether the assessee generates 
         profits from such activities or not and irrespective of whether profit 
         making   is   prime   motive   or   not.   Section   2(15)   has   defined 
         charitable purpose to include (i) relief of the poor, (ii) education, 
         (iii)   medical   relief,   (iv)preservation   of   monuments   or   places   or 
         objects of artistic or historic interest and (v) the advancement of 
         any other "object of general public utility".
                 It is submitted that the proviso (i) and (ii) to Section 2(15) 
         would   apply   if   the   activity   of   the   trust   is   deemed   to   be   that   of 
         "advancement   of   any   other   object   of   general   public   utility"   The 
         proviso further provides that such activities will not be charitable 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 
         consideration, irrespective  of the nature of use or application, or 
         retention, of the income from such activity .

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                It is submitted that neither the provision of Section 2(15) nor 
         the   proviso   thereto   differentiate   the   Assessee   trust   as   a   trust 
         enacted under any Government legislature or gazette or Act. Nor 
         these   provisions   specify   that   they   will   not   be   applicable   to   any 
         authority carrying on the activities of development of any industrial 
         area or a town/city.

         8.19.  It is further submitted by Shri Bhatt, learned Senior Advocate 
         for   the   Revenue   that   the   appellant   has   not   claimed   itself   to   be 
         carrying on of any activity in the nature of (i) relief of the poor, (ii) 
         education, (iii) medical relief, (iv) preservation of monuments or 
         places   or   objects   of   artistic   or   historic   interest.   The   Appellate 
         authorities have all agreed that the authorities like AUDA are all 
         carrying on activities which are those of "advancement of any other 
         object   of   general   public   utility".   It   is   therefore   succinct   that   the 
         authorities like the appellant will have to fulfill the conditions laid 
         down in the proviso in order to claim the activities to be charitable 
         in the nature. It is submitted that the proviso do not specify that the 
         activities carried on by the appellant need to be with profit motive 
         to be not deemed to be charitable. It is submitted that all it states is 
         that the activities should be in the 'nature of trade, commerce or 
         business'.

         8.20. Shri   Bhatt,   learned   Senior   Advocate   for   the   Revenue   has 
         relied   upon   the   decision   of   the   Delhi   High   Court   in   the   case   of 
         Indian Trade Promotion Organization vs. Director of Income Tax 
         (Exemption) reported in (2015) 371 ITR 333 (Delhi)(para 45 to 
 48) and decision of the Punjab & Hariyana High Court in the case 

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         of Tribune v. Commissioner of Income Tax, Chandigarh, 390 ITR 
         547   (Punjab   and   Haryana)     (para   48   to   61),   in   support   of   his 
         submissions that considering the definition of "business" contained 
         in Section 2(13) of the Act even the activities of the assessee can be 
         said to be business activities. 
                Making   above   submissions   and   relying   upon   the   following 
         decisions, it is requested to dismiss the present appeals and answer 
         the question of law in favour of revenue and against the assessee. 
         1.     Indian Trade Promotion Organization vs. Director of Income 
         Tax (Exemption) reported in (2015) 371 ITR 333 (Delhi).
 2.     Tribune   v.   Commissioner   of   Income   Tax,   Chandigarh,   390 
         ITR 547 (Punjab and Haryana).
 3.     Jammu Development Authority vs. Union of India and ors in 
         ITA No. 164 of 2014 dated 7.11.2013 rendered by the Jammu and 
         Kashmir High Court.
         4.     Raja   Rameshwar   Rao   Vs._Commissioner   of   Income   Tax 
         reported in 42 ITR 179 (SC). 
 5.     Jalandhar Development Authority vs. CIT reported in (2010) 
         35 SOT 15 (ARS) (URO) of ITAT Amristar Bench.
         6.
         9.0. Heard   the   learned   advocates   for   the   respective   parties   at 
         length. 
         10.    The   short   but   interesting   question   of   law   posed   for   the 
         consideration   of   this   Court   in   the   present   appeal   is   whether   the 
         activities of the   of the Assessee­ AUDA can be said to be in the 
         nature of trade, commerce or business so as to deny the status of 
         the   assessee   as   a   charitable   institution   within   the   definition   of 
         Section 2(15) of the Act ?  

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            O/TAXAP/423/2016                                                               CAV JUDGMENT

                The second question which is posed for the consideration of 
         this Court is whether the  the activity of the assessee can be said to 
         be   activity   of   rendering   any   service   in   relation   to   any   trade, 
         commerce or business, for cess or fees or any other consideration, 
         as the assessee is collecting / recovering fees by performing duty 
         under the provision of Gujarat Town Planning Act and therefore, 
         whether second part of the proviso to Section 2(15) of the Act shall 
         be applicable so as to deny the exemption claimed by the assessee, 
         claim under Section 11 of  the Act?

         11.    While   considering   the   aforesaid   questions,   the   relevant 
         provisions   of   the   Gujarat   Town   Planning   Act,   under   which,   the 
         Assessee has been constituted as Urban Development Authority and 
         powers   and   functions   of   the   Assessee   as   an   Urban   Development 
         Authority   are   required   to   be   considered,   so   as   to   appreciate 
         whether   the   activities   of   the   Assessee   being   Urban   Development 
         Authority can be said to be in the nature of trade, commerce  or 
         business ?
                The   relevant   provisions   of   the   Gujarat   Town   Planning   Act, 
         under   which,   the   Assessee   AUDA   has  been   constituted   as  Urban 
         Development Authority are as under: 
 Section 2(viii):  "Development", with all its grammatical  
                         variations   and   cognate   expressions,   means   the   carrying  
                         out   of   any   building,   engineering,   mining,   or   other  
                         operations in, or over, or under land or the making of any  
                         material change in any building or land or in the use of  
                         any   building   or   land,   and   includes   layout   and   sub­
                         division of any land;
 Section 2(xxviii):"Urban  development  authority"  means  
                         an urban development authority constituted under section  
                         22;

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          O/TAXAP/423/2016                                                                CAV JUDGMENT
Section   2(xxix):"Urban   development   area"   means   an  
                       area   declared   to   be   an   urban   development   area   under  
                       section 22.
 Section 22:  Declaration Of Urban Development Area  
                       And Constitution Of Urban Development Authority  :­
                       (1)  Where  the  State  Government  is of opinion  that the  
                       object   of   proper   development   or   redevelopment   of   any  
                       urban area or group of urban areas in the State together  
                       with such adjacent areas as may be considered necessary,  
                       whether   covered   under   a   development   area   already  
                       declared as such under section 3 or not, will be best served  
                       by entrusting the work of development or redevelopment  
                       thereof   to   a   special   authority,   instead   of   to   an   area  
                       development   authority,   the   State   Government   may,   by  
                       notification,   declare   such   area   to   be   an   urban  
                       development   area   and   constitute   an   authority   for   such  
                       area to be called the urban development authority of that  
                       area, and thereupon all the powers and functions of an  
                       area development  authority  relating  to the  development  
                       or   redevelopment  of  a development  area  under  this  Act  
                       shall,   in   relation   to   such   urban   development   area,   be  
                       exercised   and   performed   by   such   urban   development  
                       authority1***
                       (2) Every notification issued under sub­section (1) shall  
                       define  the limits  of the area to which it relates. 2[(2A)  
                       The State Government may, by notification in the Official  
                       Gazette,  include  in or  exclude  any  area  from  an  urban  
                       development   area,   amalgamate   two   or   more   urban  
                       development areas into one urban development area, sub­
                       divide  any urban development  area into different urban  
                       development   areas   and   include   such   sub­divided   urban  
                       development area in any other urban development area.] 
                       (3) Every urban development authority constituted under  
                       sub­section   (1)   shall   be   a   body   corporate   by   the   name  
                       aforesaid,   having   perpetual   succession   and   a   common  
                       seal, with power to acquire, hold and dispose of property,  
                       both movable and immovable, and to contract, and by the  
                       said name sue and be sued.
                       (4) The urban development authority shall consist of the  
                       following   members   namely:­   (i)   a   Chairman   to   be  
                       appointed by the State Government; (ii) such persons, not  
                       exceeding3[four in number] who are members of the local  
                       authority   or   authorities   functioning   in   the   urban  
                       development   area,   as   may   be   nominated   by   the   State  
                       Government;   (iii)4[Three   officials]   of   the   State  
                       Government,   to   be   nominated   by   that   Government,   ex­
                       officio;   (iv)   the   Presidents   of   the   district   panchayats  

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                       functioning in the urban development area, or, as the case  
                       may   be,   part   thereof,   ex­officio;   (v)   the   Chief   Town  
                       planner   or   his   representative,   ex­officio;   (vi)   the   Chief  
                       Engineer   or   Engineers   (Public   Health)   of   the   local  
                       development area or his or their nominee or nominees, ex­
                       officio;   5[(vi­a)   the   Municipal   Commissioner   of   the  
                       Municipal Corporation, if any, functioning  in the urban  
                       development area, ex­officio;] (vii) a member secretary to 
                       be appointed by the State Government who shall also be  
                       designated as the Chief Executive Authority of the Urban  
                       Development Authority. 
                       (5) The provisions of sub­sections (5) to (12) of section 5  
                       shall apply in relation to an urban development authority  
                       as   they   apply   in   relation   to   an   area   development  
                       authority,   with   the   modification   that   references   to   an  
                       area development authority in the said subsection shall be  
                       construed   as   references   to   an   urban   development  
                       authority.
 Section   23:  Powers   And   Function   Of   Urban  
                       Development                           Authority                      :­
                       (1)  [The powers and functions of] an urban development  
                       authority shall be:­ (i) To undertake  the preparation of  
                       development plans under the provisions of this Act, for the  
                       urban   development   area;   (ii)   To   undertake   the  
                       preparation   [and   execution]   of   town   planning   schemes  
                       under the provisions of this Act, if so directed by the State  
                       Government;   (iii)   To   carry   out   surveys   in   the   urban  
                       development   area   for   the   preparation   of   development  
                       plans or town planning schemes; (iv) To guide, direct and  
                       assist   the   local   authority   or   authorities   and   other  
                       statutory   authorities   functioning   in   the   urban  
                       development area in matters pertaining to the planning,  
                       development  and  use  of urban  land;  (v)  To  control  the  
                       development activities in accordance with the development  
                       plan in the urban development area; 3 [(v­a) to levy and  
                       collect   such   security   fees   for   secrutiny   of   documents  
                       submitted to the appropriate authority for permission for  
                       development as may be prescribed by regulations;] (vi) To  
                       execute works in connection with supply of water, disposal  
                       of sewerage and provision of other services and amenities;  
                       4 [(vi­a) to levy and collect such fees for the execution of  
                       works referred to in clause (vi) and for provision of other  
                       services   and   amenities   as   may   be   prescribed   by  
                       regulations;] (vii) To acquire, hold, manage and dispose  
                       of   property,   movable   or   immovable,   as   it   may   deem  
                       necessary;   (viii)   To   enter   into   contracts,   agreements   or  

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          O/TAXAP/423/2016                                                                    CAV JUDGMENT

                       arrangements,   with   any   local   authority,   person   or  
                       organisation   as   the   urban   development   authority   may  
                       consider   necessary   for   performing   its   functions;   (ix)   To  
                       carry any development  works  in the urban development  
                       area as may be assigned  to it by the State  Government  
                       from time to time; (x) To exercise such other powers and  
                       perform   such   other   functions   as   are   supplemental,  
                       incidental or consequential to any of the foregoing powers  
                       and   functions   or   as   may   be   directed   by   the   State  
                       Government. 
                       (2)   The   urban   development   authority   may,   with   the  
                       approval of the State Government, delegate 5 [any of its  
                       powers and functions] to the local authority or authorities  
                       functioning in the urban development area. 
                       (3) The urban development authority shall have its office  
                       at such place as the State Government may specify in this  
                       behalf.
 Section  40.  Making   And   Contents   Of   A   Town  
                       Planning                             Scheme                                 :­
                       (1) Subject to the provision of this Act or any other law  
                       for the time being in force, the appropriate authority may  
                       make   one   or   more   town   planning   schemes   for   the  
                       development area or any part thereof, regard being had to  
                       the proposals in the final development plan, if any. 
                       (2) A town planning scheme may be made in accordance  
                       with   the   provisions   of   this   Act   in   respect   of   any   land  
                       which is­ (i) In the course of development; 1 [(ii) likely to  
                       be used for residential or commercial or industrial or for  
                       building   purposes;   or]   (iii)   Already   built   upon.  
                       Explanation:­   For   the   purpose   of   this   sub­section   the  
                       expression "land likely to be used for building purposes"  
                       shall   include   any   land   likely   to   be   used   as,   or   for   the  
                       purpose  of providing,  open  spaces,  roads, streets,  parks,  
                       pleasure or recreation grounds, parking spaces or for the  
                       purpose  of executing  any  work  upon  or  under  the  land  
                       incidental   to   a   town   planning   scheme,   whether   in   the  
                       nature of a building work or not. 
                       (3) A town planning scheme may make provision for any  
                       of the following matters, namely:­ (a) The laying out or  
                       relaying out of land, either vacant or already built upon;  
                       (b) The filling up or reclamation of low­lying, swampy or  
                       unhealthy  areas,  or  levelling  up  of land;  (c) Lay­out of  
                       new   streets   or   roads,   construction,   diversion,   extension,  
                       alteration,   improvement   and   closing   up   of   streets   and  
                       roads   and   discontinuance   of   communications;   (d)   The  
                       construction, alteration and removal of buildings, bridges  
                       and other structures; (e) The allotment or reservation of  

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                       land for roads, open spaces, gardens, recreation grounds,  
                       schools, markets, green­belts, dairies, transport facilities,  
                       public   purposes   of   all   kinds;   (f)   Drainage,   inclusive   of  
                       sewerage,   surface   or   sub­soil   drainage   and   sewage  
                       disposal;   (g)   Lighting;   (h)   Water   supply;   (i)   The  
                       preservation of objects of historical or national interest or  
                       natural   beauty,   and   of   buildings   actually   used   for  
                       religious   purposes;   (j)   The   reservation   of   land   to   the  
                       extent of ten per cent. or such percentage as near thereto  
                       as possible of the total area covered under the scheme, for  
                       the purpose  of providing  housing accommodation  to the  
                       members of socially and economically backward classes of  
                       people; 2 [3 [(jj) (a) the allotment of land from the total  
                       area   covered   under   the   scheme,   to   the   extent   of.­   (i)  
                       Fifteen  per cent.  for  roads,  (ii)  five  per  cent.  for  parks,  
                       play grounds, gardens and open space, (iii) five per cent.  
                       for   social   infrastructure   such   as   school,   dispensary,   fire  
                       brigade,   public   utility   place   as   earmarked   in   the   Draft  
                       Town Planning Scheme, and (iv) fifteen per cent. for sale  
                       by   appropriate   authority   for   residential,   commercial   or  
                       industrial use depending upon the nature of development:  
                       Provided   that   the   percentage   of   the   allotment   of   land  
                       specified   in   paragraphs   (i)   to   (iii)   may   be   altered  
                       depending   upon   the  nature   of   development   and   for  the  
                       reasons to be recorded in writing; (b) the proceeds from  
                       the sale of land referred to in para (iv) of sub­clause (a)  
                       shall be used for the purpose of providing infrastructural  
                       facilities; (c) the land allotted for the purposes referred to  
                       in paragraphs (ii) and (iii) of sub­clause (a) shall not be  
                       changed  by variation  of schemes  for  the  purposes  other  
                       than  public   purpose;]]   (k)   the  imposition  of   conditions  
                       and   restrictions   in   regard   to   the   open   space   to   be  
                       maintained around buildings, the percentage of building  
                       area for a plot, the number, size, height and character of  
                       building  allowed  in specifiedares,  the purposes  to which  
                       buildings   or   specified   areas   may   or   may   not   be  
                       appropriated, the sub­division of plots, the discontinuance  
                       of   objectionable   uses   of   lands   in   any   area   in   specified  
                       periods, parkings space and loading and unloading space  
                       for any building and the sizes or locations of projections  
                       and advertisement signs; (l) the suspension, so far as may  
                       be necessary, for the proper carrying out of the scheme, of  
                       any rule, bye­law, regulation, notification or order made  
                       or issued under any Act of the State Legislature or any of  
                       the   Acts   which   the   State   Legislature   is   competent   to  
                       amend:   Provided   that   any   suspension   under   this   clause  
                       shall   cease   to   operate   in   the   event   of   the   State  

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                       Government refusing to sanction the preliminary scheme,  
                       or   in  the   event   of   the   withdrawal   of   the   scheme   under  
                       section   66,   or   on   the   coming   into   force   of   the   final  
                       scheme; (m) such other matters not inconsistent with the  
                       objects of this Act as may be prescribed.
 Section  91:  Fund   Of   The   Appropriate   Authority  :­
                       (1) An appropriate authority shall have and maintain its  
                       own   fund   to   which   shall   be   credited­   (a)   All   moneys  
                       received   by   the   authority   by   way   of   grants,  
                       loans,1[advances,   fees,   development   charges   or  
                       otherwise;] (b) All moneys derived from its undertakings,  
                       projections   and   other   sources;   (c)   Such   amount   of  
                       contributions   from   local   authorities   as   the   State  
                       government may specify from time to time to be credited  
                       to   the   fund   of   the   authority.   (2)   The   fund   of   an  
                       appropriate  authority shall be applied  towards  meeting­  
                       (a)   Expenditure   incurred   in   the   administration   of   this  
                       Act; (b) Cost of acquisition of land for the purposes of this  
                       Act; (c) Expenditure for any development of land in the  
                       development   area;   (d)   Expenditure   for   such   other  
                       purposes   as   the   State   Government   may   direct.   (3)   An  
                       appropriate authority may keep in current account with  
                       the State Bank" of India or any other bank approved by  
                       the State Government in this behalf, such sums of money  
                       out of its fund as may be prescribed  and any money in  
                       excess of the said sum shall be invested in such manner as  
                       may be approved by the State Government. (4) The State  
                       Government may, make such grants, advances and loans  
                       to an appropriate authority as the State Government may  
                       deem necessary for the performance of its functions under  
                       this Act and all grants, loans and advances so made shall  
                       be   made   on   such   terms   and   conditions   as   the   State  
                       Government may determine.
 Section   95:Accounts   And   Audit                                    :­
                       (1)   An   appropriate   authority   shall   maintain   proper  
                       accounts   and   other   relevant   records   and   prepare   an  
                       annual statement of accounts including the balance sheet  
                       in such form as the State Government may prescribe. (2)  
                       The accounts of an appropriate authority shall be subject  
                       to audit annually by the Accountant General of the State  
                       and any expenditure incurred by him in connection with  
                       such   audit   shall   be   payable   by   the   authority   to   the  
                       Accountant General. (3) The Accountant General or any  
                       person appointed by him in connection with the audit of  
                       accounts of an appropriate authority shall have the same  
                       rights,  privileges  and  authority  in connection  with  such  
                       audit as the Accountant  General has in connection with  

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           O/TAXAP/423/2016                                                                CAV JUDGMENT

                        Government   accounts   and   in   particular   shall   have   the  
                        right   to   demand   the   production   of   books,   accounts,  
                        connected vouchers and other documents and papers and  
                        to inspect the office of the appropriate authority. (4) The  
                        accounts  of an  authority   as  certified  by the   Accountant  
                        General   or   any   other  person   authorised   by   him   in   this  
                        behalf,   together   with   the   audit   report   thereon,   shall  be  
                        forwarded annually to the State Government.

         12.   From the  aforesaid provisions of the Town Planning Act, it 
         can   be     gathered   that   Assessee   has   been   constituted   as   Urban 
         Development Authority under the provisions of Section 22 of the 
         Town Planning Act. The purpose and object of constitution of the 
         Urban   Development   Authority   is   proper   development   or   re­
         development   of   urban   area.   Even   Urban   Development   Authority 
         consists   of  (i)   a   Chairman   to   be   appointed   by   the   State 
         Government;   (ii)   such   persons,   not   exceeding   [four   in   number] 
         who are members of the local authority or authorities functioning 
         in the urban development area, as may be nominated by the State 
         Government;  (iii)   Three   officials   of  the  State  Government,   to  be 
         nominated  by   that   Government,   ex­officio;   (iv)   the   Presidents  of 
         the district panchayats functioning in the urban development area, 
         or, as the case may be, part thereof, ex­officio; (v) the Chief Town 
         planner or his representative, ex­officio; (vi) the Chief Engineer or 
         Engineers   (Public   Health)   of   the   local   authority   or   authorities 
         functioning in the urban development area or his or their nominee 
         or nominees, ex­officio; 5[(vi­a) the Municipal Commissioner of the 
         Municipal   Corporation,   if   any,   functioning   in   the   urban 
         development   area,   ex­officio;]   (vii)   a   member   secretary   to   be 
         appointed by the State Government who shall also be designated as 
         the Chief Executive Authority of the Urban Development Authority. 

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         Thus,   the   constitution   of   the   Urban   Development   Authority   is 
         subject  to  the  control  of  the State Government.  The  powers  and 
         functions   of   the   Urban   Development   Authority   as     contained   in 
         Section 23 are reproduced herein above. Considering Section 40 of 
         the Town Planning Act, the Town Planning Scheme prepared by the 
         Urban Development Authority which has been prepared subject to 
         sanction by the State Government for development of the Urban 
         Development Area, also provide for   roads, open spaces, gardens, 
         recreation grounds, schools, markets, green­belts, dairies, transport 
         facilities,   public   purposes   of   all   kinds;   drainage,   inclusive   of 
         sewerage,   surface   or   sub­soil   drainage   and   sewage   disposal; 
         Lighting;   Water   supply   etc.   The   Town   Planning   Scheme   also 
         provide for  historical or national interest or natural beauty, and of 
         buildings actually used for religious purposes.  The Scheme are also 
         provide for reservation of land to the extent of ten percent, or such 
         percentage   as   near   thereto   as   possible   of   the   total   area   covered 
         under   the   scheme,   for   the   purpose   of   providing   housing 
         accommodation   to   the   members   of   socially   and   economically 
         backward   classes   of   people.   As   per   Section   40(i)(jj)   for   the 
         aforesaid purposes certain percentage of total area covered under 
         the scheme are  allotted earmarked. Fifteen percent of total area is 
         allotted   for   the   purpose   of     roads,     five   percent   for   parks,   play 
         grounds,   gardens   and   open   space,   five   percent   for   social 
         infrastructure such as school, dispensary, fire brigade, public utility 
         place as earmarked in the Draft Town Planning Scheme and Fifteen 
         percent   for   sale   by   appropriate   authority   for   residential, 
         commercial   or   industrial   use   depending   upon   the   nature   of 
         development.   Last   Fifteen   percent   is   earmarked   under   the   Town 

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         Planning Scheme for sale, by appropriate authority for residential, 
         commercial   or   industrial   use.   The   appropriate   authority   /  Urban 
         Development Authority is permitted to sale the said plots / lands to 
         the extent of 15% of the total area to meet with the expenditure 
         towards drainage, roads, gardens, schools, markets, water supply 
         etc. So that maximum price can be fetched and the same can be 
         utilized for the development of the Urban Development Area and so 
         as to avoid any allegation of favoritism and nepotism, the plots are 
         sold by public auction. It is required to be noted the entire amount 
         realized by the assessee being Urban Development Authority either 
         by   selling   plots   or   by   recovery   of   some   fees   /   charges,   Urban 
         Authority is required to use only for the purpose of development in 
         the Urban Development Area and not for any other purpose. The 
         learned   Tribunal   has   observed   and   held   that   as   the   assessee   is 
         selling     the   plots,   to   the   extent   of   15%   of   total   area,   by   public 
         auction and gets maximum amount, it amounts to profitering and 
         therefore,   the   activities   of   the   Assessee   can  be   said  to  be   in   the 
         nature   of   business.   However,   while   holding   so,   learned   Tribunal 
         has not properly appreciated the object and purpose of permitting 
         the Urban Development Authority to sale the plots, maximum to 
         the extent of 15% of the total area i.e. to meet with the expenditure 
         for   providing   them   infrastructural   facilities   like   gardens,   roads, 
         lighting, water supply, drainage system etc. The learned Tribunal 
         has also not properly appreciated the reasons for selling the plot by 
         holding public auction i.e.; (1) to avoid any further allegation of 
         favoritism and nepotism and   (2) so that maximum market price 
         can   be   fetched,   which   can   be   used   for   the   development   of   the 
         Urban Development Area.

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         12.1. At this stage decision of the Hon'ble Supreme Court in the 
         case of   Ahmedabad Green Belt Khedut Mandal (supra) ((2014) 7 
         SCC 357) is required to be referred to. Before the Hon'ble Supreme 
         Court, it was contended on behalf of original land owners whose 
         lands were included in the TP Scheme that by permitting the Area 
         Development Authority / Urban Development Authority to sell 15% 
         of the total area, by that the Urban Development Authority will be 
         making   profit,   the   Hon'ble   Supreme   Court   has   negatived   the 
         aforesaid   and   has   observed   that   the   activities   of   the   Urban 
         Development Authority / Area Development Authority while selling 
         the land to the extent of 15% to the total area covered under the 
         scheme cannot be said to be profitering.  It is observed and held 
         that sale upto 15%   is from total area covered under the scheme 
         and   not   in   respect   of   every   plot   of   land.   In   order   to   generate 
         financial   resources   for   the   development   of   infrastructure,   the 
         salable   plot   for   residential,   commercial   and   industrial   use   are 
         allotted by the appropriate authority. It is further observed that the 
         provision of the Act have to be read as a whole and therefore, the 
         provision   of   Section   40(3)(jj)(a)(iv)   for   sale   is   to   be   in 
         consonance / conjointly with other statutory provisions and not in 
         isolation.Under   the   circumstances,   the   learned   Tribunal   has 
         committed gross error in considering the activities of the appellant 
         Urban   Development   Authority   for   profiter   by   selling   15%   of   the 
         total  area  and thereby  has  committed gross  error  in  holding the 
         activities   of   the   assessee   in   the   nature   of   trade,   commerce   or 
         business.    

                                              Page 42 of 57
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         12.2. Whether the activities of the appellant AUDA can be said to 
         be in the nature of trade, commerce or business as occurring in the 
         first   proviso   to   Section   2(15)   of   the   Act,   few   decisions   of   the 
         Hon'ble Supreme Court as well as other High Courts are required to 
         be referred to at this stage.

         12.3. In the case of Khoday Distilleries Ltd and Others vs. State of 
         Karnataka and others reported in (1995) 1 SCC 574, the Hon'ble 
         Supreme Court had an occasion to consider the word "trade". In the 
         said   decision,   the   Hon'ble   Supreme   Court   has   held   that   "the 
         primary meaning of the word "trade" is the exchange of goods for 
         goods or goods for money".
         12.4. In the case of State of Andhra Pradesh vs. Abdul Bakhi and 
         Bros reported in 1964(5) STC 644 (SC) while considering the word 
         "business",   the   Hon'ble   Supreme   Court   has   held   that   "the   word 
         "business" was of indefinite import and in a taxing statute, it is used 
         in   sense   of   an   occupation,   or   profession   which   occupies   time, 
         attention or labour of a person, and is clearly associated with the 
         object of marking profit".

 12.5 In   the   case   of   Institute   of   Chartered   Accountants   of   India 
         (supra)   while   considering   the   whether   activities   of   Indian   Trade 
         promotion     organization   can   be   said   to   be   in   the   nature   of 
         "business", despite the fact that the said organization was collecting 
         rent   for   providing   the   space   at   trade,   fair   and   exhibitions   and 
         though was receiving income by way of sale of tickets and income 
         from tickets and sale in Pragati Maidan etc., after considering the 
         various decisions of the Hon'ble Supreme Court as well as decisions 

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         of   the   other   High   Courts,   it   is   held   that   activities   of   the   said 
         organization cannot be considered as "business". While holding so, 
         Delhi High Court has observed and held as under:
                         "An   activity   would   be   considered   'business'   if   it   is 
                         undertaken with a profit motive, but in some cases, 
                         this may not be determinative. Normally, the profit 
                         motive test should be satisfied,  but in a given case 
                         activity   may   be   regarded   as   a   business  even   when 
                         profit motive cannot be established / proved. In such 
                         cases, there should be evidence and material to show 
                         that   the   activity   has   continued   on   sound   and 
                         recognized   business   principles   and   pursued   with 
                         reasonable   continuity.   There   should   be   facts   and 
                         other circumstances which justify and show that the 
                         activity   undertaken   is   in   fact   in   the   nature   of 
                         business."

         12.6. In the aforesaid decision, after considering the decision of the 
         Hon'ble Supreme Court in the case of Commissioner of Sales Tax 
         vs. Sai Publication Fund reported in (2002) 258 ITR 70(SC), it is 
         held by the Delhi High Court that "thus, if the dominant activity of 
         the   assessee   was   not   business,   then   any   incidental   or   ancillary 
         activity   would   also   not   fall   within   the   definition   of   business."  In 
         para 64, 67, 69, 70, 71 and 72 the Delhi High Court has observed 
         and held as under:
                          "64. It is not necessary that a person should give  
                          something   for   free   or   at   a   concessional   rate   to  
                          qualify   as   being   established   for   a   charitable  
                          purpose. If the object and purpose of the institution  
                          is  charitable,  the  fact   that  the   institution   collects  
                          certain charges, does not alter the character of the  
                          institution.  

                          67.The expressions trade, commerce and ―business  
                          as occurring in the first proviso to section 2(15) of  
                          the Act must be read in the context of the intent  
                          and purport of section 2(15) of the Act and cannot  
                          be interpreted to mean any activity which is carried  
                          on in an organised manner. The purpose and the  
                          dominant object for which an institution carries on  

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          O/TAXAP/423/2016                                                                   CAV JUDGMENT

                        its activities  is material to determine  whether  the  
                        same   is   business   or   not.   The   purport   of   the   first  
                        proviso to section 2(15) of the Act is not to exclude  
                        entities which are essentially for charitable purpose  
                        but   are   conducting   some   activities   for   a 
                        consideration or a fee. The object of introducing the  
                        first proviso is to exclude organizations which are  
                        carrying   on   regular   business   from   the   scope   of  
                        charitable purpose. The purpose of introducing the  
                        proviso   to  Section   2(15)  of   the   Act   can   be  
                        understood from the Budget Speech of the Finance  
                        Minister  while  introducing  the Finance  Bill 2008.  
                        The relevant extract to the Speech is as under:­ 

                        Charitable   purpose   includes   relief   of   the   poor,  
                        education,   medical   relief   and   any   other   object   of  
                        general   public   utility.   These   activities   are   tax  
                        exempt, as they should be. However, some entities  
                        carrying on regular trade, commerce or business or  
                        providing   services   in   relation   to   any   trade,  
                        commerce   or   business   and   earning   incomes   have  
                        sought to claim that their purposes would also fall  
                        under charitable purpose. Obviously, this was not  
                        the intention of Parliament and, hence, I propose to  
                        amend   the   law   to   exclude   the   aforesaid   cases.  
                        Genuine   charitable   organizations   will   not   in   any  
                        way be affected.' The expressions business, trade or  
                        commerce as used in the first proviso must, thus, be  
                        interpreted   restrictively   and   where   the   dominant  
                        object   of   an   organisation   is   charitable   any  
                        incidental   activity   for   furtherance   of   the   object  
                        would   not   fall   within   the   expressions   business,  
                        trade or commerce.  

 69.  In  the  case  of Addl.  Commissioner  of Income  
                        Tax   v.   Surat   Art   Silk   Cloth   Manufacturers  
                        Association: [1980] 121 ITR 1 (SC), the Supreme  
                        Court held as under:­ 

                        The test which has, therefore, now to be applied is  
                        whether   the   predominant   object   of   the   activity  
                        involved in carrying out the object of general public  
                        utility  is to subserve  the  charitable  purpose  or to  
                        earn   profit.   Where   profit­making   is   the  
                        predominant   object   of   the   activity,   the   purpose,  
                        though   an   object   of   general   public   utility   would  
                        cease to be a charitable purpose.

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                        But where the predominant object of the activity is  
                        to any out the charitable purpose and not to earn  
                        profit, it would not lose its character of a charitable  
                        purpose merely be cause some profit arises from the  
                        activity.' 

 70. Although in that case the statutory provisions  
                        being   considered   by   the   Supreme   Court   were  
                        different   and   the   utilisation   of   income   earned   is,  
                        now,   not   a   relevant   consideration   in   view   of   the  
                        express words of the first proviso to  section 2(15) 
                        of the Act, nonetheless the test of dominant object  
                        of   an   entity   would   be   relevant   to   determine  
                        whether the entity is carrying on business or not. In  
                        the   present   case,   there   is   little   doubt   that   the  
                        objects of the activities of the petitioner are entirely  
                        for charitable  purposes.  WP(C)  1872/13  Page  48  
                        of 55 Finally in ICAI(II) (supra), this court, with  
                        reference   to   H.   Abdul   Bakhi   and   Bros   (supra)  
                        observed as under:­ 

 71. Although, it is not essential that an activity be  
                        carried   on   for   profit   motive   in   order   to   be  
                        considered   as   business,   but   existence   of   profit  
                        motive   would  be  a  vital  indicator  in  determining  
                        whether an organisation is carrying on business or  
                        not.   In   the   present   case,   the   petitioner   has  
                        submitted   figures   to   indicate   that   expenditure   on  
                        salaries   and   depreciation   exceeds   the   surplus   as  
                        generated   from   holding   coaching   classes.   In 
                        addition,   the   petitioner   institute   provides   study  
                        material   and   other   academic   support   such   as  
                        facilities   of   a   library   without   any   material  
                        additional costs. The Supreme Court in the case of  
                        State   of   Andhra   Pradesh   v.   H.   Abdul   Bakhi   and  
                        Bros. (supra) held as under: 

                        The expression "business" though extensively used a  
                        word  of indefinite  import,  in taxing  statutes  it is  
                        used  in the  sense  of an  occupation,  or  profession  
                        which occupies the time, attention and labour of a  
                        person, normally with the object of making profit.  
                        To regard an activity as business there must be a  
                        course   of   dealings,   either   actually   continued   or  
                        contemplated to be continued with a profit motive,  
                        and not for sport or pleasure. (Underlining added) 

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                         72.   There   is   nothing   on   record   to   indicate   the  
                         assertion of the petitioner that its activities are not  
                         fuelled   by   profit   motive   is   incorrect.   Absence   of  
                         profit motive, though not conclusive, does indicate  
                         that the petitioner is not carrying on any business."

 12.7. Identical question came to be considered by the Delhi High 
         Court in the case of Bureau of India Standard vs. Director General 
         of Income Tax (Exemptions) reported in (2013) 212 Taxman 210 
         (Delhi). In the said decision, the Delhi High Court was considering 
         whether the activities of the Bureau of Indian Standards (supra) in 
         granting licenses and trading certificates and charging amounted to 
         carrying on business, trade or commerce and while considering the 
         said question, it is observed as under:
                             " In these  circumstances,rendering  any  service  in  
                             relation to trade, commerce or business cannot, in  
                             the   opinion   of   the   Court,   receive   such   a   wide  
                             construction as to enfold regulatory and sovereign  
                             authorities,   set   up   under   statutory   enactments,  
                             and tasked to act as agencies of the State in public  
                             duties   which   cannot   be   discharged   by   private  
                             bodies. Often, apart from the controlling or parent  
                             statutes,   like   the   BIS   Act,   these   statutory   bodies  
                             (including BIS) are empowered to frame  rules or  
                             regulations,   exercise   coercive   powers,   including  
                             inspection, raids; they possess search and seizure  
                             powers   and   are   invariably   subjected   to  
                             Parliamentary   or   legislative   oversight.   The  
                             primary   object   for   setting   up   such   regulatory  
                             bodies  would  be  to ensure  general  public  utility.  
                             The prescribing of standards, and enforcing those  
                             standards,   through   accreditation   and   continuing  
                             supervision   through   inspection   etc.,   cannot   be  
                             considered   as   trade,   business   or   commercial  
                             activity, merely because the testing procedures, or  
                             accreditation   involves   charging   of   such   fees.   It  
                             cannot   be   said   that   the  public   utility   activity  of  
                             evolving,   prescribing   and   enforcing   standards,  
                             involves   the   carrying   on   of   trade   or   commercial  

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                                activity."

 12.8. Circular   No.11   of   2008   issued   by   the   CBDT     fell   for 
         consideration by the Delhi High Court in the case of M/s G.S. 1 
         India    v. Director General of Income­tax (Exemption) and Another : 
         WP(C)   7797/2009,   decided   on   26.09.2013   (2013)   219   Taxman 
         205. It is held that even as per the said circular, proviso to Section 
         2(15)   of   the   Act   is   applicable   to   assessee,   who   are   engaged   in 
         commercial activities i.e. carrying on business, trade or commerce, 
         in the garb of 'public utilities' to avoid tax liability as it was noticed 
         that   the   object   'general   public   utility'   was   sometimes   used   as   a 
         mask   or   device   to   hide   the   true   purpose,   which   was   'trade, 
         commerce   or   business'.     Thus,   it   is   evident   that   introduction   of 
         proviso to Section 2(15) by virtue of the Finance Act, 2008 was 
         directed to prevent the unholy practice of pure trade, commerce 
         and business entities from masking their activities and portraying 
         them in the garb of an activity with the object of a general public 
         utility. It is not designed to hit at those institutions, which had the 
         advancement of the objects of general public utility at their hearts 
         and   were   charity   institutions.   The   attempt   was   to   remove   the 
         masks   from   the   entities,   which   were   purely   trade,   commerce   or 
         business entities, and to expose their true identities. 

         .        In the case of  M/s G.S. 1 India (Supra), in para 21, 22 and 
         27, the Delhi High Court has observed and held as under:
                       "21.   ...   As   observed   above,   legal   terms,   trade,   commerce   or  
                       business in Section 2(15), mean activity undertaken with a view  
                       to   make   or   earn   profit.   Profit   motive   is  determinative  and   a  
                       critical factor to discern whether an activity is business, trade or  
                       commerce. The court further held:­ 

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                    22.   Business   activity   has   an   important   pervading   element   of  
                    self­interest,   though   fair   dealing   should   and   can   be   present,  
                    whilst   charity   or   charitable   activity   is   anti­thesis   of   activity  
                    undertaken with profit motive or activity undertaken on sound  
                    or recognized business principles. Charity is driven by altruism  
                    and desire to serve others, though element of self­preservation  
                    may be present. For charity, benevolence should be omnipresent  
                    and demonstrable  but it is not equivalent to self­sacrifice  and  
                    abnegation. The antiquated definition of charity, which entails  
                    giving and receiving nothing in return is outdated. A mandatory  
                    feature   would   be;   charitable   activity   should   be   devoid   of  
                    selfishness or illiberal spirit. Enrichment of oneself or self­gain  
                    should be missing and the predominant purpose of the activity  
                    WP(C) 1872/13 Page 52 of 55 should be to serve and benefit  
                    others. A small contribution by way of fee that the beneficiary  
                    pays   would   not   convert   charitable   activity   into   business,  
                    commerce   or   trade   in   the   absence   of   contrary   evidence.  
                    Quantum   of   fee   charged,   economic   status   of   the   beneficiaries  
                    who pay, commercial value of benefits in comparison to the fee,  
                    purpose and object behind the fee etc. are several factors which  
                    will decide the seminal question, is it business? 

                    27.   As   observed   above,   fee   charged   and   quantum   of   income  
                    earned can be indicative of the fact that the person is carrying  
                    on business or commerce and not charity, but we must keep in  
                    mind   that   charitable   activities   require   operational/running  
                    expenses as well as capital expenses to be able to sustain and  
                    continue in long run. The petitioner has to be substantially self­  
                    sustaining   in   long­term   and   should   not   depend   upon  
                    government, in other words taxpayers should not subsidize the  
                    said activities, which nevertheless are charitable and fall under  
                    WP(C) 1872/13  Page 53 of 55 the residuary clause ­ general  
                    public   utility.   The   impugned   order   does   not   refer   to   any  
                    statutory mandate that a charitable institution falling under the  
                    last clause  should be wholly,  substantially or in part must be  
                    funded   by   voluntary   contributions.   No   such   requirement   has  
                    been pointed out or argued. A practical and pragmatic view is  
                    required when we examine the data, which should be analyzed  
                    objectively   and   a   narrow   and   coloured   view   will   be   counter­
                    productive and contrary to the language of Section 2(15) of the  
                    Act."

         12.9. While upholding the constitutional validity of the proviso to 
         Section  2(15)    of  the  Act,  the Division   Bench of the Delhi  High 
         Court   in   the   case   of  Indian   Trade   Promotion   Organization   vs. 

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         Director of Income Tax (Exemption) in WP(C) No.1872 of 2013 
         decided on 22.01.2015 has observed in para 58 as under:
                       "As   defined   in  Section   2(15)  cannot   be   construed  
                       literally and in absolute terms. It has to take colour and  
                       be considered in the context of  Section 10(23C)(iv)  of  
                       the   said   Act.   It   is   also   clear   that   if   the   literal  
                       interpretation is given to the proviso to Section 2(15) of 
                       the   said   Act,   then   the   proviso   would   be   at   risk   of  
                       running   fowl   of   the   principle   of   equality   enshrined  in  
                       Article 14 of the Constitution India. In order to save the  
                       Constitutional   validity   of  the   proviso,  the  same  would  
                       have to be read down and interpreted in the context of  
                       Section 10(23C)(iv)  because,  in our   view,  the  context  
                       requires   such   an   interpretation.   The   correct  
                       interpretation of the proviso to Section 2(15) of the said  
                       Act would  be that it carves out an exception from the  
                       charitable purpose of advancement of any other object of  
                       general   public   utility   and   that   exception   is   limited   to  
                       activities 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. In both the activities, in the nature  
                       of   trade,   commerce   or   business   or   the   activity   of  
                       rendering any service in relation to any trade, commerce  
                       or business, the dominant and the prime objective has to  
                       be   seen.   If   the   dominant   and   prime   objective   of   the  
                       WP(C) 1872/13 Page 54 of 55 institution, which claims  
                       to have been established for charitable purposes, is profit  
                       making, whether its activities are directly in the nature  
                       of   trade,   commerce   or   business   or   indirectly   in   the  
                       rendering   of   any   service   in   relation   to   any   trade,  
                       commerce or business, then it would not be entitled to  
                       claim its object to be a 'charitable purpose'. On the flip  
                       side, where an institution is not driven primarily by a  
                       desire   or   motive   to   earn   profits,   but   to   do   charity  
                       through the advancement of an object of general public  
                       utility,   it   cannot   but   be   regarded   as   an   institution  
                       established for charitable purposes.

         13.   Applying the aforesaid decisions to the facts of the case on 
         hand and with respect to the activities of the AUDA ­ Ahmedabad 
         Urban Development Authority under the provisions of the Gujarat 

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         Town Planning Act by no stretch of imagination, it can be said that 
         the activities of the assessee (AUDA) can be said to be in the nature 
         of trade, commerce or business and / or its object and purpose is 
         profiteering. Merely because under the statutory provisions and to 
         meet   with   the   expenditure   of   Town   Planning   Scheme   and   /   or 
         providing various services under the Town Planning Scheme, such 
         as road,  drainage, electricity,  water supply etc. if the assessee is 
         permitted to sale the plots (land) to the extent of 15% of the total 
         area under the Town Planning Scheme and while selling the said 
         plots they are sold by holding the public auction, it cannot be said 
         that activities of the assessee is profiteering, to be in the nature of 
         trade, commerce and business.

         13.1.   In   the   case   of     Lucknow   Development   Authority,   Gomti 
         Nagar   (supra),   it   is   held   by   the   Allahabad   High   Court   that   the 
         activities   of   the   authority   cannot   be   said   to   be   in   the   nature   of 
         trade, commerce or business and / or profiteering and therefore, 
         proviso to Section 2(15) of the Act shall not be applicable.

         13.2. Similar,   view   has   been   expressed   by   the   Rajasthan   High 
         Court  in the case of Commissioner of Income Tax­I, Jodhpur vs. 
         Jodhpur  Development  Authority,   Jodhpur ­Tax Appeal  No. 63 of 
         2012 decided on  5.7.2016.

         14.    Considering the aforesaid facts and circumstances and more 
         particularly, considering the fact that the assessee is   a statutory 
         body   ­   Urban   Development   Authority   constituted   under   the 
         provisions   of   the   Act,   constituted   to   carry   out   the   object   and 
         purpose of Town Planning Act and collects regulatory fees for the 

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         object of the Acts; no services are rendered to any particular trade, 
         commerce or business; whatever the income is earned / received by 
         the assessee even while selling the plots (to the extent of 15% of 
         the   total   area   covered   under   the   Town   Planning   Scheme)   is 
         required to be used only for the purpose to carry out the object and 
         purpose of Town Planning Act and to meet with expenditure while 
         providing general utility service to the public such as   electricity, 
         road, drainage, water etc. and even the entire control is with State 
         Government   and   even   accounts   are   also   subjected   to   audit   and 
         there   is   no   element   of   profiteering   at   all,   the   activities   of   the 
         assessee cannot be said to be in the nature of trade, commerce and 
         business and therefore, proviso to Section 2(15)of the Act shall not 
         be   applicable   so   far   as   assessee   is   concerned   and   therefore,   the 
         assessee is entitled to exemption under Section 11 of the Income 
         Tax Act. Therefore, the question no.1 is to be held in favour of the 
         assessee and against the revenue. 

 15.    Now,   so   far   as   another   question   which   is   posed   for   the 
         consideration of this Court i.e. whether while collecting the cess or 
         fees,   activities   of   the   assessee   can   be   said   to   be   rendering   any 
         services   in   relation   to   any   trade,   commerce   or   business   is 
         concerned,   for   the   reasons   stated   above,   merely   because   the 
         assessee is collecting cess or fees which is regulatory in nature, the 
         proviso   to   Section   2(15)of   the   Act   shall   not   be   applicable.   As 
         observed herein above neither there is element of profiteering nor 
         the same can be said to be in the nature of trade, commerce  or 
         business. At this stage, decision of the Division Bench of this Court 
         in the case of Sabarmati Ashram Gaushala Trust (supra) is required 

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         to   be   referred   to.   In   the   case   before   the   Division   Bench,   the 
         assessee Trust­ Sabarmati Ashram Gaushala Trust was engaged in 
         the activity of breeding milk cattle; to improve the quality of cows 
         and oxen and other related activities. The Assessing Officer denied 
         the   exemption   to   the   trust   under   Section   11   of   the   Act   on   the 
         ground that considerable income was generated from the activities 
         of milk production and sale and therefore, considering the proviso 
         to Section 2(15) of the Act, the said Trust­ assessee was denied the 
         exemption   under   Section   11   of   the   Act.   While   holding   that   the 
         activities of the assessee trust still can be said to be for charitable 
         purpose within the meaning of Section 2(15) of the Act and same 
         cannot be said to be in the nature of trade, commerce or business 
         for which proviso to Section 2(15) of the Act    is required to be 
         applied. In para 6, 7, 8 and 12, it is observed and held as under: 

                      6.The legal controversy in the present Tax Appeal centers 
                      around the first  proviso. In the plain terms, the  proviso 
                      provides   for   exclusion   from   the   main   object   of   the 
                      definition   of   the   term  Charitable   purposes  and   applies 
                      only   to   cases   of   advancement  of   any   other   of   general 
                      general  public  utility.   If   the   conditions  provided  under 
                      the  proviso  are satisfied, any entity, even if involved in 
                      advancement of any other object of general public utility 
                      by   virtue   to  proviso,  would   be   excluded   from   the 
                      definition of charitable trust. However, for the application 
                      of the proviso, what is necessary is that the entity should 
                      be   involved   in   carrying   on   activities   in   the   nature   of 
                      trade, commerce or business, or any activity of rendering 
                      services in relation to any trade, commerce or business, 
                      for a cess or fee or any other consideration. In such a 
                      situation, the nature, use or application, or retention of 
                      income from such activities would not be relevant. Under 
                      the circumstances, the important elements of application 
                      of  proviso  are   that   the   entity   should   be   involved   in 
                      carrying   on   the   activities   of   any   trade,   commerce   or 
                      business or any activities of rendering service in relation 
                      to any trade, commerce or business, for a cess or fee or 

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                    any other consideration. Such statutory amendment was 
                    explained   by   the   Finance   Ministers   speech   in   the 
                    Parliament. Relevant portion of which reads as under :
                               I   once   again   assure   the   House   that 
                               genuine   charitable   organizations   will 
                               not in any way be affected. The CBDT 
                               will, following the usual practice, issue 
                               an   explanatory   circular   containing 
                               guidelines for determining whether any 
                               entity is carrying on 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.   Whether   the   purpose   is   a 
                               charitable   purpose   will   depend   on   the 
                               totality   of   the   facts   of   the   case. 
                               Ordinarily, Chambers of Commerce and 
                               similar organizations rendering services 
                               to their members would not be affected 
                               by   the   amendment  and   their   activities 
                               would   continue   to   be   regarded   as 
                               advancement   of   any   other   object   of 
                               general public utility.

                    7.In   consonance   with   such   assurance   given   by   the 
                    Finance Minister on the floor of the House, CBDT issued 
                    a   Circular  No.  11   of   2008  dated  19th  December  2008 
                    explaining the amendment as under :­
                                   3.  The  newly  inserted  proviso  to section  2 
                                   (15)   will   apply   only   to   entities   whose 
                                   purpose is  advancement  of any other  object  
                                   of general public utility ie., the fourth limb of 
                                   the   definition   of  charitable   purpose 
                                   contained   in   section   2   (15).   Hence,   such 
                                   entities   will   not   be   eligible   for   exemption 
                                   under section 11 or under section 10 (23C) 
                                   of   the   Act   if   they   carry   on   commercial 
                                   activities. Whether such an entity is carrying 
                                   on   any   activity   in   the   nature   of   trade, 
                                   commerce or business is a question of fact 
                                   which will be decided based on the nature, 
                                   scope, extent and frequency of the activity.
                                    3.1   There   are   industry   and   trade 
                                    associations who claim exemption from tax 
                                    under section 11 on the ground that their 
                                    objects are for charitable purpose as these 
                                    are   covered   under  any   other   object   of  
                                    general public utility. Under the principle of 

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          O/TAXAP/423/2016                                                        CAV JUDGMENT

                            mutuality,   if   trading   takes   place   between 
                            persons   who   are   associated   together   and 
                            contribute   to   a   common   fund   for   the 
                            financing of some venture or object and in 
                            this   respect   have   no   dealings   or   relations 
                            with   any   outside   body,   then   any   surplus 
                            returned   to   the   persons   forming   such 
                            association is not chargeable to tax. In such 
                            cases,   there   must   be   complete   identity 
                            between   the   contributors   and   the 
                            participants.   Therefore,  where   industry   or  
                            trade   associations   claim   both   to   be  
                            charitable   institutions   as   well   as   mutual  
                            organizations   and   their   activities   are  
                            restricted   to   contributions   from   and  
                            participation   of   only   their   members,   these  
                            would   not   fall   under   the   purview   of   the  
                            proviso   to   section   2   (15)   owing   to   the  
                            principle   of   mutuality.   However,   if   such 
                            organizations   have   dealings   with   non­
                            members,   their   claim   to   be   chargeable 
                            organizations   would   now   be   governed   by 
                            the   additional   conditions  stipulated   in   the 
                            proviso to section 2 (15).
                             3.2 In the final analysis, however, whether 
                             the   assessee   has   for   its   object   the 
                             advancement of any other object of general 
                             public utility is a question of fact. If such 
                             assessee   is  engaged  in  any  activity  in  the 
                             nature   of  trade,  commerce  or   business  or 
                             renders   any   service   in   relation   to   trade, 
                             commerce   or   business,   it   would   not   be 
                             entitled to claim that its object is charitable 
                             purpose.   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. 

                                        Page 55 of 57
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                      8.What  thus   emerges  from  the   statutory  provisions,  as 
                      explained   in   the   speech   of   Finance   Minister   and   the 
                      CBDT Circular, is that the activity of a  trust  would be 
                      excluded from the term charitable purpose if it is engaged 
                      in   any   activity   in   the   nature   of   trade,   commerce   or 
                      business   or   renders   any   service   in   relation   to   trade, 
                      commerce or business for a cess, fee and/or any other 
                      consideration. It is not aimed at excluding the genuine 
                      charitable trusts of general public utility but is aimed at 
                      excluding activities in the nature of trade, commerce or 
                      business which are masked as charitable purpose.

                      12.All these were the objects of the general public utility  
                      and would squarely fall under section 2 (15) of the Act.  
                      Profit making was neither the aim nor object of the Trust.  
                      It   was   not   the   principal   activity.   Merely   because   while  
                      carrying out the activities for the purpose of achieving the  
                      objects   of   the   Trust,   certain   incidental   surpluses   were  
                      generated, would not render the activity in the nature of  
                      trade, commerce or business. As clarified by the CBDT in 
                      its Circular No. 11/2008 dated 19th  December 2008 the  
                      proviso aims to attract those activities which are truly in  
                      the nature of trade, commerce or business but are carried  
                      out  under  the  guise  of activities  in the  nature  of public  
                      utility.

         15.1.   Applying the aforesaid decision to the facts of the case on 
         hand   and   the   object   and   purpose   for   which   the   assessee   is 
         established / constituted under the provisions of the Gujarat Town 
         Planning  Act   and  collection   of  fees  and  cess  is  incidental  to the 
         object and purpose of the Act, even the case would not fall under 
         second part of proviso to Section 2(15) of the Act.

         15.2. Considering the aforesaid facts and circumstances of the case, 
         we are of opinion that the learned Tribunal has committed a grave 
         error in holding the activities of the assessee in the nature of trade, 
         commerce or business and consequently holding that the proviso to 
         Section   2(15)   of   the   Act   shall   be   applicable   and   therefore,   the 

                                                  Page 56 of 57

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            O/TAXAP/423/2016                                                          CAV JUDGMENT

         assessee is not entitled to exemption under Section 11 of the Act. 
         For the reasons stated above, it is held that the proviso to Section 
         2(15) of the Act shall not be applicable so far as assessee­ AUDA is 
         concerned and as the activities of the assessee can be said to be 
         providing general public utility services, the assessee is entitled to 
         exemption   under   Section   11   of   the   Act.   Both   the   questions   are 
         therefore,   answered   in   favour   of   the   assessee   and   against   the 
         revenue.

         16.         In view of the above and for the reasons stated above, the 
         impugned  order   passed  order   passed  by  the   learned  Tribunal   in 
         respective   appeals   for   different   assessment   year   are   hereby 
         quashed and set aside. Accordingly, all these appeals are allowed 
         and answered both the questions in favour of assessee and against 
         the revenue. No costs.

                                                                                           sd/­
                                                                                (M.R. SHAH, J.) 

                                                                                            sd/­
                                                                                (B.N. KARIA, J.) 
         Kaushik

                                            Page 57 of 57

HC-NIC                                    Page 57 of 57     Created On Wed Aug 16 05:49:41 IST 2017

Lakhmani Mewal Das vs Income-Tax Officer, 'I' Ward And Ors. on 13 January, 1972
Equivalent citations: [1975]99ITR296(CAL)
Author: Arun K. Mukherjea
Bench: Arun K. Mukherjea, Sabyasachi Mukharji
JUDGMENT
 
 Arun K. Mukherjea J.  
 
 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. 
 
 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. 
 
 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: 
  "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." 
 
 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. 
 
 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: 
  "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." 
 
 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. 
 
 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 : 
   
 "147.    Income escaping assessment.--If- 
   
 (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  
 
 (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).   
 
 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:-- 
   
 (a) where income chargeable to tax has been under-assessed ; or (b) where such income has been assessed at too low a rate ; or  
 
 (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  
 
 (d) where excessive loss or depreciation allowance has been computed.  
 
 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." 
 
 "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. 
  (2) The Income-tax Officer shall, before issuing any notice under this section, record his reasons for doing so."  
 
 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. 
 
 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. 
 
 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. 
 
 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 : 
  
  "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. 
 
 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 ?......... 
 
 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). 
 
 "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).  
 
12. 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. 
 
 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. 
 
 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. 
 
 15. In the case of Burlop Dealers Ltd., the assessee, Burlop Dealers Ltd.
(hereinafter referred to as "the company"), disclosed for the assessment
year 1949-50, a profit of Rs. 1,75,875 from a joint venture with H. M. Ltd.
in plywood chests. The company claimed that the sum of Rs. 87,937, being
half the aforesaid profit, had been paid to Ratiram Tansukhrai under an
agreement dated 7th October, 1948, under which Ratiram Tansukhrai had
agreed 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: 
  "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)." 
 
 16. Shah C.J. further observed that : 
  "...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." 
 
 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: 

 (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). 
 
 (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. 
 
 (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)).  
 
 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: 
  
  "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. 
 
 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. 
 
 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. 
 
 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. 
 
 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. 
 
 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. 
 
 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. 

   In the Supreme Court case
   In the instant case
 
During the year the assessee
  had shown to
  have taken loans from various parties of Calcutta. From D.I.'s
  Inv. No. A/P/Misc. (5) D.I./ 63-64/5623 dated August 13, 1965, forwarded to this office under C.I.T., Bihar
  and Orissa, Patna's letter No. Inv.-(Inv) 15/65-66/H.C./ M/-709E/1953-2017 dated Patna
  September 24, 1965, it appears that these persons are name-lenders and the
  transactions are bogus. Hence, proper investigation regarding these loans is
  necessary. The names of some of the persons from whom money is alleged to
  have been taken on loan on hundis are:
   
1. Seth Bhagwan Singh Sri-charan.
   
2. Radhakissen Shyam Sunder.
   
3. Lakha Singh Lal Singh.
  
There are hundi loan credits in
  the names of Narain Singh Nanda-lal, D. K. Naraindas, Bagwandas Srichand, etc.,
  who are known name-lenders, and also hundi loan credit in the name of
  Mohansingh Kanayalal who has since confessed he was doing only name-lending.
  In the original assessment these creditors 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).
  
  Sd/- S. P. Chaliha
   N.S. Raghuthaman.
 
  30-4-66
   I.T.O., "E" Ward, H.C. Cal.
 
  Income-tax Officer,
  13-2-67.
 
  A-Ward, Mazaffarpur.
  
 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".  
 
 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: 
   
 (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.  
 
 (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.  
 
  (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. 
 
 (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. 
 
 (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. 
 
 (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. 
 
 (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.   
 
 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. 
 
 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. 
   
 Deject (a).  
 
 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.  
 
 Defect (b).  
 
 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. 
 
 Defect (c). 
 
 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". 
 
 Defect (d). 
 
 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. 
 
 Defect (e). 
 
 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. 
 
 Defect (f). 
 
 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. 
 
 Defect (g). 
 
 In view of the earlier defects, it is obvious that defect (g) is also common to both reports.  
 
22.  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. 
 
 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. 
  "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." 
 
 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. 
 
 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. 
 
 26. After the conclusion of the hearing of this application another decision
of the Supreme Court which involves a similar question about the fulfil
ment of the conditions precedent to a reassessment proceeding has become
available to us, viz., the case of Sheo Nath Singh v. Appellate Assistant
Commissioner 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): 
  
  "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 : 
   
 (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.  
 
 (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.  
 
(Sd.) A. K. Bhowmik, 

Income-tax Officer, 

 Dist. II(2), Calcutta."  
 
27. 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, : 

  "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." 
 
 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. 
 
 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. 
 
 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. 
 
 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. 
 
 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. 
 
 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. 
 
 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. 
 
 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. 
 
  Sabyasacht Mukharji, J.  
 
 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. 

 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: 

  "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. 

 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."  

 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: 

  "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)." 

 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- 

 (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   
 
 (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 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) .... 

 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."  

 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. 

 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 :
  "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." 

 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- 

 (i) form a belief,  
 
 (ii) that belief must not be a pretence, but  must  be held  in  good faith,  
 
 (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   
 
 (v) such facts must be basic primary facts and not inferential facts.
The 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.  

 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.

 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 : 
  "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." 

 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.

 46. As mentioned hereinbefore, counsel for the assessee placed strong reli
ance on the case of Chhugamal Rajpal v. S. P. Chaliha. It is, therefore,
necessary to examine the said decision in detail. In proceedings for assess
ment for the assessment years 1960-61, the assessee-firm had produced its
books of accounts and also a statement giving the full names and addresses
of the various creditors from whom it had claimed to have borrowed on
hundies during the accounting year in question. Assessment was completed
after enquiry. Thereafter, on June 3, 1966, the Income-tax Officer issued
a notice under Section 148 of the Income-tax Act, 1961, initiating
reassessment proceedings for that year. The assessee-firm filed a writ petition in the High Court at Patna, challenging the validity of that notice,
inter alia, on the ground that the requirements of Section 151(2) of the Act
had not been complied with. But the writ petition was dismissed by the
High Court. The Supreme Court has noted that, at the time of the original
assessment, the assessee produced before the Income-tax Officer a statement
showing the various creditors from whom it had borrowed on hundis during
the accounting year in question. In that statement it had given full names
and addresses of the alleged creditors. When the appeal came up for hearing
before the Supreme Court, the Supreme Court found that the affidavit filed
by 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.

 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:
  "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." 

48. 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:
  "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." 

49. 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. 

 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.

 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. 

 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. 

 53. Our attention was drawn to the judgment of K.L. Roy J. in Matter
No. 234 of 1969 (Lakhmini Mewal Das v. Income-tax Officer ) between the
same parties as mentioned hereinbefore. I am in respectful agreement
with the conclusion reached by his Lordship. In view of the several
decisions mentioned hereinbefore, it is not, however, necessary to refer to
his 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.

 54. In the aforesaid view of the matter I would hold that the conditions
precedent for the issue of the notice under Section 148 of the Act have
been made out and would dismiss/this application without any order as to
costs.

Commissioner Of Income-Tax vs Ms. Monica Oswal, Jawahar Lal Oswal And ... on 15 September, 2003
Equivalent citations: (2004)190CTR(P&H)56, [2004]267ITR308(P&H)
Author: Ashutosh Mohunta
Bench: Ashutosh Mohunta
JUDGMENT

Jawahar Lal Gupta, J.
 
1. 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.

2. 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.

3. Counsel for the parties have referred to the facts in I. T. A. No. 49 of 1999. These may be briefly noticed.

4. 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 . . ."

5. 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.

6. 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 :
 "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 ?"

7. 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.

8. 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.

9. Mr. Sharma had himself proposed the following three questions :

"(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 ?

(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 ?

(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 ?"

10. In the circumstances of these cases, the above questions represent the core of the controversy. The first two questions can be considered together.

11. Reg : (i and ii)
 
12. 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.

13. 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.

14. 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.

15. 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.

16. How close is the friendship ?

17. 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.

18. Mr. Sharma contended that Mr. Gill is a close friend of Mr. Oswal. Thus, he had made the gift. Is it so ?

19. 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.

20.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.

21. 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.

22. 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."

23. 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.

24. 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.

25. 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.

26. 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 ?

27. 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.

28. 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.

29. 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 :

Dated : 15 October, 1996.
 "Inland Revenue
Our ref. : SCO4/F38233/R11
Your ref. : DOF No. 501/27/95-FTD
Dear Mr. Srinivasan,
UK/India Double Taxation Convention--Exchange of Information
UK-B. P. Bharadwaj
India--Miss Monica Oswal.

I 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.

Our 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.

The 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.

Our 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.

Yours sincerely, 
(Sd.) ............

Jean Courtney".

30. 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.

31. 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.

32. 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.

33. 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.

34. Truth is violated not only by falsehood but also by silence. These cases are an instance.

35. 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.

36. 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.

37. 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.

38. 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.

39. 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.

40. 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.

41. 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--

(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.

(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.

(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.

(iv) The Tribunal had not appreciated the cumulative effect of the evidence in its entirety.

42. Thus, the findings recorded by the Tribunal are clearly untenable.

43. 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.

44. 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.

45. 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.

46. 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.

47. Reg : (iii)
 
48. 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 ?

49. 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.

50. 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.

51. Mr. Sharma submitted that the Tribunal had taken a possible view. The High Court should not interfere.

52. 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.

53. Thus, even the third question is answered in favour of the Revenue and against the assessee.

54. 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.

55. 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.

56. No other point was raised.

57. In view of the above, the appeals are allowed. The three questions as posed above are answered in favour of the Revenue. No costs.

Ashutosh Mohunta, J.

58. 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 :
 "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 ?"

59. The salient facts of the case in brief are :

60. 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.

61. 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.

62. 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.

63. Evidence filed in the case of Miss Ruchika Oswal :

1. Copy of memorandum of gift;

2. Affidavit of Mr. B. P. Bhardwaj;

3. Statement confirming gift received through Inland Revenue Services;

4. Copy of bank certificate confirming that the draft amount was credited to her account;

5. Copy of her capital account;

6. Statement of Mr. J. L. Oswal recorded by Income-tax Officer ; and
 
7. Copy of power of authority in favour of Mr. J. L. Oswal to receive gift on her behalf.

64. Evidence filed in the case of Miss Monica Oswal :

1. Memorandum of gift;

2. Certificate of the bank ;

3. Affidavit of Mr. O. S. Gill;

4. Statement of Mr. O. S. Gill ;

5. Letter received from the Inland Revenue U. K. ;

6. Copy of the capital account where the amount is credited ;

7. Power of attorney favouring Mr. J. L. Oswal to receive gift; and
 
8. Statement of Mr. J. L. Oswal confirming gift.

65. 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 :

"I. Letter No. 504/27/95--From FTD--CBDT (Delhi) dated 7th October, 1995 to U. K. Inland Revenue Authority--with its enclosure :

The 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.

Gifts 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."

"II. Letter from the Inland Revenue to the Central Board of Direct Taxes dated October 15, 1996, in respect of Mr. B. P. Bhardwaj :
 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.

Our investigator contacted Mr. B. P. Bhardwaj concerning gifts made to Miss Monica Oswal. He has replied that :

* 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.

* The funds were provided by Mr. Virender 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."

"III. Letter from the Inland Revenue to the Central Board of Direct Taxes dated February 10, 1997, in respect of Mr. O. S. Gill :
 I refer to my letter of 15 October, 1996, and am now able to provide you with a final report.

We have managed to contact Dr. Gill and he has stated :

1. The gift was given to Miss Oswal on the occasion of her forthcoming marriage. The amount given was $ 2,00,000.

2. The amount was given as a gift and was by means of a bank draft.

3. There is no agreement between Dr. Gill and Miss Oswal on repayment of any of the amounts given.

This information is provided in accordance with Article 28 of our Double Taxation Convention and its use and disclosure must be governed accordingly."

66. 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.

67. 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).

68. 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.

69. 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.

70. 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.

71. 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.

72. 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 :
 (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.

73. 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.

74. 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.

75. 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.

76. 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.

77. 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 :

1. 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.

2. 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.

3. 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.

4. 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.

5. 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.

6. 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.

78. 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.

79. 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.

80. 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.

81. 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.

82. 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.

G. S. Singhvi, J.

83. 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.

84. 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 ;

"(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 ?

(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 ?"

85. 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.

86. 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.

87. 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.

88. 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.

89. 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.

90. 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.

91. 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 :

"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.

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--

(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.

(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.

Thus, the findings recorded by the Tribunal are clearly untenable.

Mr. 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.

This 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.

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.

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.

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 ?

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.

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, 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.

Mr. Sharma submitted that the Tribunal had taken a possible view. The High Court should not interfere.

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.

Thus, even the third question is answered in favour of the Revenue and against the assessee.

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.

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.

Ashutosh Mohunta J.

92. 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.

93 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.

94. 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."

95. 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.

96. 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.

97. Section 260A of the Act under which the present appeal has been filed reads as under :

"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.

(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--

(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 ; . . .

(c) in the form of a memorandum of appeal precisely stating therein the substantial question of law involved.

(3) Where the High Court is satisfied that a substantial question of law is involved in any case, it shall formulate that question.

(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 :
 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.

(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.

(6) The High Court may determine any issue which--

(a) has not been determined by the Appellate Tribunal; or
 
(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).

(7) Save as otherwise provided in this Act, the provisions of the Code
of 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."

98. 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 :

       "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."

99. 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).

100. 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) :
 "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."

101. In Ram Prasad Rajak v. Nand Kumar and Bros. [1998] 6 SCC 748, the Supreme Court held (page 751) :
 "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."

102. 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) :

"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.

If 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."

103. In Hari Singh v. Kanhaiya Lal [1999] 7 SCC 288, the Supreme Court referred to its earlier judgments and observed (headnote) :
 "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." 

104. 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) :

"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) :

'. . . 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.'
 
and laid down the following test as proper test, for determining whether a question of law raised in the case is substantial (page 1318) :

The 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.' ...

A 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."

105. 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 :

(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.

(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
 
opinion on the question of law, the same has to be treated as a substantial question of law.

(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.

(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.

(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.

(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.

106. 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 :

(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 ?

(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.

107. In the result, the appeals are admitted for hearing and determination of the aforementioned questions of law.

Balwant Singh And Tohers vs R. D. Shah, Director Of Inspection, ... on 22 March, 1968
Equivalent citations: [1969]71ITR550(DELHI)
JUDGMENT
KAPUR 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.

The 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 :

&quto;(See rule 112)
 
Warrant of authorisation under section 132 of the Income-tax Act, 1961, and Rule 112(1) of the Income-tax Rules, 1962.

The Income-tax Officers,
 
S/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.

Whereas information has been laid before me and on the consideration thereof, I have reason to believe that :

If 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;

S. 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;

And 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;

This is to authorise and require you as overleaf (name of the Inspecting Assistant Commissioner of Income-tax or the Income-tax Officer) -

(a) to enter and search the said premises;

(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;

(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;

(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;

(e) to make a ntoe or an inventory of any such money, bullion, jewellery or toher valuable article or thing;

(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
 
(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.

You 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.

Sd/- R. D. Shah
 
22-7-66.

Seal Director of Inspection (Investigation)&quto;

In 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.

Petitioners 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.

Mr. 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 :

&quto;(1) Where the Director of Inspection or the Commissioner, in consequence of information in his possession, has reason to believe that -

(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
 
(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
 
(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),
 
he 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 -

(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;

(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;

(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;

(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;

(v) make a ntoe or an inventory of any such money, bullion, jewellery or toher valuable article or thing.

(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.

(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.

(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.

(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, -

(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;

(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;

(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,
 
and 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 :

Provided 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 :

Provided 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.

(6) The assets retained under sub-section (5) may be dealt with in accordance with the provisions of section 132A.

(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.

(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 :

Provided 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.

(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.

(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.

(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.

(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.

(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).

(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 -

(i) for obtaining ingress into such building or place to be searched where free ingress thereto is nto available;

(ii) for ensuring safe custody of any books of account or toher documents or assets seized.

Explanation 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.

Explanation 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;

Section 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 :

&quto;(2) Subject to any rules made in this behalf, any Income-tax Officer specially authorised by the Commissioner in this behalf may, -

(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;

(ii) seize any such books of account or toher document or place marks of identification thereon on make extracts or copies there from;

(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;

Mr. 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 :

(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
 
(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 -

(a) the reason to believe was nto bona fide;

(b) there are no grounds justifying the existence of the reason to believe;

(c) the grounds given in support of such existence of the reason to believe are extraneous to the cause; and
 
(d) at least some of such grounds are irrelevant or extraneous to the matter in issue.

The 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).

This argument of Mr. Veda Vyasa suffers from several fallacies :

(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.

(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
 
(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.

Mr. 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.

In that sense the expression &quto;reason to believe&quto; is btoh subjective and objective but the area of objectivity is limited.

In 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 :

&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;

In Barium Chemicals Ltd. v. Company Law Board Hidayatullah J. (as he then was) observed :

&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 :

It 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......

Since 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;

Similarly, Shelat J., while dealing with the expression &quto;reason to believe&quto;, observed :

&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;

Mr. 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.

The 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 -

&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;

(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;

(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 :

(i) the petitioners have acquired wealth, and have been spending, on a scale quite disproportionate to their declared incomes;

(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;

(iii) the petitioners have nto disclosed large transactions through bank accounts;

(iv) the petitioners have nto disclosed business activity in various names; and
 
(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;

(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;

(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;

(f) independent enquiries were also made by the officers of the Directorate of Inspection (Intelligence), New Delhi, which showed the following :

(i) the petitioners were carrying on extensive business at various places which had apparently nto been disclosed;

(ii) the petitioners had acquired several licenses in several scarce commodities and had disposed them of secretly and at fantastic profits;

(iii) the petitioners had been incurring lavish expenditure which was quite inconsistent with their declared resources;

(iv) the petitioners had acquired assets worth several lakhs of rupees which is also inconsistent with their declared resources;

(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
 
(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.

Enquiries 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.

(g) On the basis of the information mentioned above, the first respondent came to the following conclusion :

(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;

(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
 
(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;

Mr. 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.

Mr. 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.

Mr. 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.

Mr. Desai, the learned counsel for the revenue, on the toher hand, drew our attention to the following :

(a) the authorisation has been issued in Form No. 45, the prescribed form;

(b) sub-rule (14) of rule 112 provides that the authorisation &quto;shall be in Form No. 45&quto;;

(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;

(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
 
(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.

The 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.

So 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.

Shri 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.

Mr. 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.

Before 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 :

(1) One file styled Dass Commission Inquiry containing some correspondence in the case regarding A. S. Kalia.

(2) Papers regarding Mars, Rubber and General Industries -shifting of factory.

(3) File - Metro Engineering and Metal Works -Electricity.

(4) Metro Engineering and Metal Works writ petition.

(5) List of phtoostat copies 12 - Import license application.

(6) Several files containing statements and documents in the case - State v. N. S. Giani.

(7) Petition under article 226 in the Punjab High Court -Baldeo Singh v. Director General, Development Wing.

(8) File containing correspondence with Chief Settlement Officer.

(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
 
(i) copy of the letter from Chief Controller of Imports and Exports addressed to Shri Sadhu Singh, Advocate.

Mr. 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.

According 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.

Mr. 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.

That 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.

The 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 :

&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.

(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;

Their Lordships observed :

&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;

Mr. 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 :

&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;

The above observation has to be read in the context. Their Lordships said :

&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;

In 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.

Mr. 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.

In 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.

Regarding 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.

Mr. 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.

I 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 :

&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;

In 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.

It 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.

Having 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 :

&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;

Though 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.

In the circumstances, this petition fails and is dismissed but with no order as to costs.

ANDLEY J. - I entirely agree.

Petition dismissed.

The Commissioner Of Income Tax vs Divine Holdings Pvt. Ltd on 7 March, 2012
Author: D.Y.Chandrachud
Bench: D.Y. Chandrachud, M.S. Sanklecha
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                 ORDINARY ORIGINAL CIVIL JURISDICTION

                  INCOME TAX APPEAL NO.3334 OF 2010

    The Commissioner of Income Tax-
    Central II, Mumbai                                       ..Appellant.
          versus
    Divine Holdings Pvt. Ltd.                           ..Respondent.
                                     .....

    Mr. A.R. Malhotra with Ms. Padma Divakar for the Appellant.
    Mr. R.A. Shaikh for the Respondent.
                                     ......

                          CORAM : DR.D.Y.CHANDRACHUD &

                                   M.S. SANKLECHA, JJ.
                           ig          7 March 2012.

    ORAL JUDGMENT (Per. DR.D.Y.CHANDRACHUD, J.) :
    1.    This Appeal arises from a decision of the Income Tax Appellate
    Tribunal dated 3 November 2009; the Assessment Year                in question
    being Assessment Year 2005-06.        The Appeal raises the following
           
    substantial questions of law :
          "1. Whether on the facts and in the circumstances of the case,
        
          the Tribunal, in law, was right in holding that the assessee being
          a notified person under the Special Court (Trial of Offences
          relating to Transactions in Securities) Act, 1992 is not liable to
          pay interest u/s. 234A, 234B, & 234C of the IT Act, 1961;

          2.     Whether on the facts and in the circumstances of the case
          and in law, the Tribunal was right in holding that interest under
          Sections 234A, 234B & 234C is not chargeable in the assessee's
          case being notified person under Special Court (Trial of Offences
          relating to Transactions in Securities) Act, 1992 without

          appreciating that the said Act has not ruled that the provisions of
          Sections 234A, 234B, and 234C are not applicable to the notified
          persons or they are exempted from the liability of payment of
          interest under these sections of Income Tax Act, 1961."

    2.    The Appeal is admitted on the aforesaid questions and is taken
    up for hearing and final disposal by consent.

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    3.      The assessee is a notified person under the Special Court (Trial of
    Offences relating to Transactions in Securities) Act 1992. The assets of

    the assessee including its bank accounts were attached and vested in
    the Custodian under the Act.        The return of income for Assessment

    Year 2005-06 which was due on 31 October 2005 was filed on 26
    February 2007 declaring a total income of Rs.37.54 lacs.                         The
    assessment was completed under Section 143(3) on 13 December

    2007, determining a total income of Rs.45.73 lacs. The Commissioner
    (Appeals) disposed of the appeal by an order dated 29 August 2008.
    The Commissioner held that the provisions of Sections 234A, 234B and
    234C of the Income Tax Act, 1961 were mandatory. In appeal, the

    Tribunal relied upon its decision in the case of Orion Travels Private
                             
    Limited rendered on 9 October 2009, in coming to the conclusion that
    interest under Sections 234A, 234B and 234C should not be levied on
                            
    the assessee for the Assessment Year under reference.                The appeal
    filed by the Revenue from the decision of the Income Tax Appellate
    Tribunal in the case of Orion Travels Private Limited (supra) is also
    before the Court in this batch of appeals which has been heard
           
    together.

    4.      Counsel appearing on behalf of the Revenue urges that -
          (i) The provisions of Sections 234A, 234B and 234C are mandatory

             in nature;
          (ii) The decision of the Tribunal in Orion Travels relied on the view
             taken by the Special Court to the effect that no interest could be
             imposed on a notified party for the non-fulfillment of an act

             which a notified party is prevented from doing by reason of the
             Special Court Act. This would include the liability to pay interest
             under Section 234B;
          (iii)The Tribunal, however, it was urged, did not consider the
             judgment of the Supreme Court in Harshad Shantilal Mehta v.
             Custodian1 which specifically took the view that interest or

    1 (1998) 231 ITR 871.

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             penalty for any action or default         after the date of the
             notification would not be covered by the Special Court Act. The

             Special Court, according to the judgment of the Supreme Court,
             is required to consider this question only from the point of view

             of distribution of any part of the surplus assets in the hands of
             the custodian after the discharge of liabilities under Section11(2)
             (a) and 11(2)(b) of the Special Court Act. That, however, would

             have no bearing on the principal question as regards the liability
             to pay interest under Sections 234A, 234B and 234C as the case
             may be, which does not fall within the domain of the Special
             Court;

          (iv)The Central Board of Direct Taxes has issued a direction on 26
                             
             June 2006 in pursuance of the provisions of Section 119(2)(a) of
             the Income Tax Act, 1961, regarding the waiver of interest under
                            
             Sections 234A, 234B and 234C by which the Chief Commissioner
             of Income Tax has been vested with the power to reduce or
             waive interest charged under those provisions in certain
             specified cases. Consequently, a remedy would still be open to
           
             the notified party to apply to the Chief Commissioner for a
        
             waiver or reduction of interest in terms of the directions issued
             on 26 June 2006.

    5.       On the other hand, it has been urged on behalf of the
    Respondent that -
          (i) The provisions of the Special Court Act would override the
             provisions of the Income Tax Act, 1961;

          (ii) A notified person by virtue of the notification under Section 3 of
             the Special Court Act loses right and control over his assets and
             is unable to discharge his statutory obligations as a result of a
             legal disability cast upon him;
 (iii)Interest under Sections 234A, 234B and 234C enjoys the last
             priority in payment under Section 11(2)(c). Reliance was sought
             to be placed on the decisions of the Supreme Court in Tax

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            Recovery Officer v. Custodian2 and in Solidaire India
            Limited v. Fairgrowth Financial Services Ltd.3.

    6.      In Harshad Shantilal Mehta (supra)              the decision of the

    Supreme Court dwelt on six questions of which two, questions 5 and 6,
    have a bearing on the issues which arise in this appeal.                      Those
    questions were :

          i) Whether the expression 'tax' in Section 11(2)(a) of the Special
            Court (Trial of Offences relating to Transactions and Securities)
            Act 1992 includes penalty or interest; and
          ii) Whether the Special Court has the power to absolve a notified

            person from the payment of penalty or interest from the period
                             
            subsequent to the date of the notification under Section 3. In
            the alternative, is the notified person liable to pay interest or
                            
            penalty arising from his inability to pay tax after his notification.

    7.      As regards the first of the aforesaid two questions, the Supreme
    Court held that the expression 'tax' under Section 2(43) of the Income
           
    Tax Act, 1961 is a concept which is distinct from penalty and interest
        
    since tax within the definition does not include penalty or interest.
    The provisions for the imposition of penalty and interest are distinct
    from those for the imposition of tax.         The Supreme Court therefore

    held that neither penalty nor interest can be considered as tax within
    the meaning of Section 11(2)(a) of the Special Court Act.                   On the
    second question, the Supreme Court held that interest or penalty for
    any action or default after the date of the notification, are not covered

    by the Special Court Act. The Supreme Court held that a taxing statute
    is a code in itself for the imposition of tax, penalty or interest. Hence,
    the remedy of a notified person who is assessed to penalty or interest
    after the notified period would be to move the appropriate authority
    under the taxing statute in that connection.            In that context the
    Supreme Court held as follows :

    2 (2007) 7 SCC 461
    3 (2001) 3 SCC 71.

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          "If    it is open to him under the relevant taxing statute to
          contend that he was unable to pay his taxes on account of the
          attachment of all his properties under the Special Court Act,

          and      that there is a valid reason why penalty or interest
          should not be imposed upon him after the date of notification,
          the concerned authorities under the Taxing Statute can       take

          notice of these circumstances in accordance with      law for the
          purpose of deciding whether penalty or interest can be
          imposed on the notified person. The Special Court is required to
          consider this question only from the         point of    view of
          distributing any part of the surplus assets    in thehands     of

          the Custodian after the discharge of liabilities            under
          Section 11(2)(a) and 11(2)(b). The       Special            Court
                 has full discretion under Section 11(2)(c) to decide
          whether such claim for penalty or interest should       be paid
          out of any surplus funds in the hands of the Custodian."

    8.
                          
          After the decision of the Supreme Court, a direction has been
    issued by the Central Board of Direct Taxes under Section 119(2)(a) of
    the Income Tax Act, 1961 on 26 June 2006 directing that the Chief
                         
    Commissioner of Income Tax and the Director General may reduce or
    waive interest charged under Sections 234A, 234B or 234C in the
    classes of cases or of income specified in paragraph 2 or the order for
           
    the period and to the extent that the Chief Commissioner / Director
        
    General may deem fit.       However, it has been directed that no
    reduction or waiver of interest shall be ordered unless the assessee
    files a return of income for the relevant Assessment Year and pays the

    entire income tax due on the income as assessed. Both the authorities
    may impose any other conditions as deemed fit for reduction or waiver
    of interest. Paragraph 2 of the direction contains classes of income or
    classes of cases in which reduction or waiver of interest under Section

    234A, 234B or 234C can be considered and which are as follows :
          "(a) Where during the course of proceedings for search and
          seizure under section 132 of the Income-tax Act, or otherwise,
          the books of account and other incriminating documents have
          been seized, and the assessee has been unable to furnish the
          return of income of the previous year, during which the action
          under section 132 has taken place, within the time specified in
          this behalf, and the Chief Commissioner / Director-General is
          satisfied, having regard to the facts and circumstances of the
          case, that the delay in furnishing such return of income cannot
          reasonably be attributed to the assessee.

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           (b)   Any income chargeable to income-tax under any head of
           income other than "Capital gains" is received or accrued after

           due date of payment of the first or subsequent installments of
           advance tax which was neither anticipated nor was in the
           contemplation of the assessee, and the advance tax on such

           income is paid in the remaining installment or installments, and
           the Chief Commissioner/ Director-General is satisfied on the facts
           and circumstances of the case that this is a fit case for reduction
           or waiver of the interest chargeable under section 234C of the
           Income-tax Act.

           (c)   Where any income was not chargeable to income-tax in
           the case of an assessee on the basis of any order passed by the
           High Court within whose jurisdiction he is assessable to income-
           tax, and as a result, he did not pay income-tax in relation to such

           income in any previous year, and subsequently, in consequence
           of any retrospective amendment of law or the decision of the
                               
           Supreme Court of India, or as the case may be, a decision of a
           larger Bench of the jurisdictional High Court (which was not
           challenged before the Supreme Court and has become final), in
                              
           any assessment or reassessment proceedings the advance tax
           paid by the assessee during such financial year is found to be
           less than the amount of advance tax payable on his current
           income, and the assessee is chargeable to interest under section
           234B or section 234C, and the Chief Commissioner/ Director-

           General is satisfied that this is a fit case for reduction or waiver
           of such interest.

           (d)  Where a return of income could not be filed by the
           assessee due to unavoidable circumstances and such return of
           income is filed voluntarily by the assessee or his legal heirs
           without detection by the Assessing Officer."

    The circular clarifies further that the cases referred to in paragraphs
    2(a) and 2(d) are specified only for the purposes of waiver of interest
    under Section 234A. The circular was issued in supercession of earlier

    orders      dated     23   May        1996   and    30       January        1997.

 9.     The levy of interest under the provisions of Sections 234A, 234B
    and 234C is mandatory in nature. The Constitution Bench of the
    Supreme Court in Commissioner of Income Tax v. Anjum M.H.
    Ghaswala4         held   that   the    provision   for    the     levy      of    interest

    4 (2001) 252 ITR 1.

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    contemplated under Sections 234A, 234B and 234C is mandatory in
    nature and a power of waiver or reduction has not been expressly

    conferred upon the Settlement Commission under Chapter XIX A of the
    Income Tax Act, 1961. The Supreme Court held that the Settlement

    Commission does not have the power to reduce or waive interest
    statutorily payable under those provisions except to the extent of
    granting relief under the circulars issued by the Board under Section

    119. Section 119 statutorily confers a power upon the Board to issue
    general or special orders inter alia in respect of any class of income or
    class of cases, where it considers it is necessary or expedient to do so
    for the proper and efficient management of assessment and collection

    of revenue, on the guidelines, principles or procedures to be followed
                          
    by other income tax authorities whether by way of realisation of the
    provisions of Sections 234A, 234B, 234C or otherwise.                  It is in
                         
    pursuance of this power that the Central Board of Direct Taxes has
    issued its direction dated 23 June 2006 in which power has been
    specifically conferred upon the Chief Commissioner / Director General
    in the circumstances set out in paragraph 2 of the direction.

    10.   The submission which has been urged on behalf of the
    Respondent, however, is that the provisions of the Special Court Act,
    would override those of the Income Tax Act, 1961 and that

    consequently the provisions of Sections 234A, 234B and 234C would
    not be attracted.

    11.   In order to consider this submission,    a brief reference to the

    provisions of the Special Court Act would be in order. Under Section
    3(2) the Custodian is empowered, on being satisfied on information
    received that any person has been involved in any offence relating to
    transactions in securities after 1 April 1991 and on or before 6 June
    1992, to notify the name of such person in the official gazette. Under
    sub section (3) of Section 3 with effect from the notification under sub
    section (2) any property belonging to a person notified shall stand

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    attached simultaneously with the issuance of the notification.                      The
    property attached is thereafter required to be dealt with by the

    Custodian in such manner as the Special Court may direct.                       Under
    Section 9A, the Special Court can exercise all the jurisdiction, power

    and authority as were exercisable by a Civil Court in relation to any
    matter or claim relating to any property standing attached under
    Section 3(3). Under Section 11(1) the Special Court is entrusted with

    the jurisdiction to make such orders as it may deem fit directing the
    Custodian in regard to the disposal of property under attachment.
    Section 11(2) provides as follows :
           "11(2)        The following liabilities shall be paid or discharged in

           full, as far as may be, in the order as under -

           (a)
                                
                  All revenues, taxes, ceases and rates due from the persons
           notified by the Custodian under sub-section (2) of section 3 to
           the Central Government or any State Government or any local
                               
           authority;

           (b)  All amounts due from the person so notified by the
           Custodian to any bank or financial institution or mutual fund;

           (c)   Any other liability as may be specified by the Special Court
           from time to time."

    Under Section 13 the provisions of the Act are to have effect
    notwithstanding anything inconsistent therewith contained in any

    other law for the time being in force or in any instrument having effect
    by virtue of any law, other than the Act, or in any decree or order of
    any Court, tribunal or other authority.

    12.    In Commissioner of Income Tax v. A.K. Menon5 the Supreme
    Court held that the Special Court has no power to sit in appeal over or
    overrule the orders of the tax authorities, the Income Tax Appellate
    Tribunal or the Courts in regard to the tax liabilities of notified persons.
    The only power of the Special Court is to determine the priorities in
    which claims upon the property under attachment shall be paid. There
    is    no   provision   in   the   Special   Court   Act   which      governs        the
    5 (1995) 5 SCC 200.

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    determination of tax liabilities.   The determination of tax liabilities
    under the Income Tax Act, 1961 is not governed by the provisions of

    the Special Court Act. Section 11 of the Special Court Act provides for
    the discharge of liabilities and empowers the Special Court to make

    such order as it may deem fit directing the custodian in regard to the
    disposal of the property under attachment. Sub-section (2) of Section
    11 provides for the liabilities which shall be paid or discharged in full.

    The Supreme Court has held that the expression 'tax' in clause (a) of
    sub-section (2) of Section 11 would not include penalty or interest.
    The expression "any other liability as may be specified by the Special
    Court from time to time" in clause (c) of sub-section (2) has been dealt

    with by the Supreme Court       in Harshad Shantilal Mehta (supra)
                          
    where the Court held that the Special Court would have the full
    discretion to decide as to whether such claim for penalty or interest
                         
    should be paid out of any surplus in the hands of the Custodian. In
    other words, it is evident that the jurisdiction of the Special Court
    under Section 11(2)(c) is to determine if and if so, the extent of which
    the liability on account of penalty or interest should be paid out of any
        
    surplus funds in the hands of the Custodian. The determination of the
     
    liability to pay penalty or interest under the Income Tax Act, 1961 does
    not   fall   within   the   domain     of   the      Special        Court.

    13.   In the judgment of the Supreme Court in Solidaire India
    Limited (supra), the Supreme Court held that both the Special Court
    Act and the Sick Industrial Companies (Special Provisions) Act 1985 are
    special Acts and in the event of a conflict, the later Act namely the

    Special Court Act would prevail. In the Tax Recovery Officer v.
    Custodian (supra) the Custodian in exercise of powers under Section
    3(2) notified Dhanraj Mills Private Limited as a notified person. The
    assets of the notified person stood attached.          Killick Nixon Private
    Limited together with its group companies owed money to the notified
    person and the custodian filed suits for recovery.             The suits were
    decreed by the Special Court.         In execution, the Special Court

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    appointed a Receiver for taking charge of the assets of Killick Nixon
    and its group companies and thereafter certain properties were put to

    auction and money was realised.      The Tax Recovery Officer filed an
    application for intervention before the Special Court with a prayer that

    the Custodian be directed to consider a claim for the recovery of
    arrears of income tax from Killick Nixon on a priority basis before the
    distribution of the sale proceeds to any other creditor.                       The

    intervention applications were dismissed by the Special Court.                 The
    Supreme Court observed that under clause (a) of sub-section (1) of
    Section 9A, on and from the commencement of the Special Court (Trial
    of offences relating to Transactions in Securities) Amendment Act

    1994, the Special Court shall exercise all such jurisdiction, powers and
    authority      as    were
                             ig exercisable     immediately        before
    commencement by any Civil Court in relation to any matter or claim
                                                                                 such
                           
    relating to any property standing attached under sub-section (3) of
    Section 3. The Supreme Court held that the jurisdiction of the Special
    Court is confined to the property of the notified person which stands
    attached under section 3(3).     In paragraph 14 of the judgment, the
        
    Supreme Court observed as follows :

           "In Solidaire India Ltd.3 the provisions of Section 13 of the
           Special Court (Trial of Offences Relating to Transactions in
           Securities) Act, 1992 and Section 32 of the Sick Industrial
           Companies (Special Provisions) Act 1985 were examined and it

           was held that both these Acts are special Acts and in such an
           event it is the later Act, namely, the Special Courts (Trial of
           Offences Relating to Transactions in Securities) Act, 1992 which
           must prevail. Thus there can be no manner of doubt that the
           provisions of the Special Courts Act, wherever they are
           applicable, shall prevail over the provisions of the Income Tax

           Act."

    The Supreme Court held that the Special Court could not have
    entertained the application moved by the Income Tax Department
    under Section 26(4) of the Income Tax Act, 1961 for the realisation of
    its income tax dues from Killick Nixon Private Limited which was not a
    notified party.

     PNP                                11/11                           ITXA3334-2010.sxw

    14.   In paragraph 14 of the judgment, extracted above, the Supreme

    Court has held that the provisions of the Special Court Act, wherever
    they are applicable shall prevail over the provisions of the Income Tax

    Act, 1961. The words "wherever they are applicable" are crucial. The
    Special Court Act makes no provision in regard to the determination of
    the liability to pay interest under the Income Tax Act, 1961.                  That

    liability is clearly referable to the provisions embodied in Sections
    234A, 234B and 234C. In the circumstances, the Tribunal, in our view,
    was in error in coming to the conclusion that interest under Sections
    234A, 234B and 234C cannot be levied on an assessee who is a

    notified party under the Special Court Act. By the circular which has
                          
    been issued by the Board, the power to grant such a waiver or
    remission has been vested with the Chief Commissioner. In terms of
                         
    the judgment of the Supreme Court in Harshad Shantilal Mehta
    (supra) the notified person, the assessee in the present case, is not
    without remedy since it is open to the assessee to take recourse to the
    remedy available under the direction dated 26 June 2006.                          We
        
    accordingly answer the questions of law as framed in the negative.

    However, we clarify that it would be open to the notified person to
    seek a waiver or reduction     by making an application to the Chief
    Commissioner of Income Tax in terms of the order dated 26 June 2006

    of the Central Board of Direct Taxes.          The appeal is accordingly
    disposed of.

          There shall be no order as to costs.

                                                 (Dr. D.Y. Chandrachud, J.)

                                                   (M.S. Sanklecha, J.)

Mahaveer Enterprises vs Union Of India (Uoi) And Ors. on 30 April, 1997
Equivalent citations: [2000]244ITR789(RAJ)
Author: Bhagwati Prasad
Bench: Bhagwati Prasad
JUDGMENT
 
M.G. Mukherji, C.J. 
 
 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.  

 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.  

 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.  

 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 :  

  "2. (1A) 'agricultural income' means--(a) any rent or revenue derived from land which is situated in India and is used for agricultural purposes ;  

 (b) any income derived from such land by- 

 (i) agriculture ; or  
 
 (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  
 
 (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 ;  

 (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 :  

 (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, 

requires as a dwelling house, or as a store-house, or other out-building, and  
 
 (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-

 (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  
 
 (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." 

 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 :  
    "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."  

 6. Under Section 2(14) of the Income-tax Act, we find the definition of "capital asset". Section 2(14) is quoted hereinbelow :  

 "(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- 

 (i) any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession ;  

 (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.  

 Explanation--For the purposes of this sub-clause, 'jewellery' includes- 

 (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 ;  

 (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;   

 (iii) agricultural land in India, not being' land situate- 

 (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  
 
 (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 ;   

 (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;  

 (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 :  
  "(1) agricultural income ;"   

 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 :  

  "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,--  

 (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  
 
 (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

gain 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.   

 (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 :  

  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,--  

 (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  
 
 (ii) the assessee shall be entitled to withdraw such amount in accordance with the scheme aforesaid."  

 8. We quote hereinbelow the impugned amendment effected by the Finance Act, 1989 (see [1989] 177 ITR (St.) 167, 172) :  

  "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 :--  
  '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'."  

 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.  

 10. It would be necessary for us to understand the historical background as regards the clarificatory amendment of the provisions relating to agricultural income.  

 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.  

 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".  

 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) :

  "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.  

 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,  
 
 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 . . .

 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)  

of 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'."  

 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) :
  "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."  

 15. However, in B.S. Jayachandra v. ITO [19861 161 ITR 190 (Kar), it was held as follows (headnote) :
  "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."  

 16. The decision of the Kerala High Court in CITv. T.K. Sarala Devi [1987] 167 ITR 136 also held a similar view.  

 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.  

 18. The writ petitioner produced along with its writ application the following documents which were made annexures to the writ application :  

 "1. Copy of the return of income for the assessment year 1987-88 was made annexure-1.  

 2. Copy of the return of income for the assessment year 1988-89 was made annexure-2.  

 3. Copy of the assessment order for the assessment year 1987-88 was made annexure-3.  

 4. Copy of the assessment order for the assessment year 1988-89 was made annexure-4.  

 5. Copy of the first appeal order for the assessment years 1987-88 and 1988-89 was made annexure-5.  

 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.  

 7. Copy of penalty order under Section 273 for the assessment year 1988-89 was made annexure-7.  

 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.  

 9. Copy of written submission of the assessee before the Income-tax Officer was made annexure-9.  

 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.  

 11. Copy of reply to penalty notice dated January 4, 1992, was made annexure-11.  

  12. Copy of the application for grant of stay to the Deputy Commissioner of Income-tax dated March 16, 1992, was made annexure-12.  

 13. Copy of the application for grant of stay to the Deputy Commissioner of Income-tax dated March 30, 1992, was made annexure-13.  

 14. Copy of the application for stay to the Commissioner of Income-tax dated March 30, 1992, was made annexure-14.  

 15. Copy of the application for grant of stay to the Income-tax Officer dated March 30, 1992, was made annexure-15.  

 16. Copy of the order dated March 25, 1992, of the Income-tax Officer rejecting the stay application was made annexure-16.  

 17. Copy of the order of the Deputy Commissioner of Income-tax dated March 26, 1992, rejecting the stay application was made annexure-17."  

 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-

tax 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.  

 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.  

 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.  

 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.  

 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.  

 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. 

 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.  

 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.  

 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).

 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.  

 29. It was further submitted that the writ petitioner has not exhausted the other remedies as provided under the Income-tax Act before approaching

this 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.  

 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.  

 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.  

 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 

is 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.

 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 

favour 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.  

 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.

 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

situated 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

judged 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",
 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,

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 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.

 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.  

 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-

nal 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.  

 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

income-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.  

 40. The writ petition, having no force, is dismissed.

Income-Tax Officer vs Roshni Cold Storage (P.) Ltd. And Ors. on 20 July, 1998
Equivalent citations: [2000]245ITR322(MAD)
JUDGMENT

V. Kanakaraj, J.
 
 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. 

 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. 

 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  
 
 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). 

 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. 

 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. 

 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."

 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
those points brought forth by the respondents in the form of written sub
missions, wherein it is contended that the trial court has based its acquittal judgment mainly on three grounds : They are : 

 (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
Act, 1961, treating them as the principal officers before launching a prosecution for the offence under Section 276B of the Income-tax Act, 1961,
which requirement is mandatory ;  

 (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 ; 

 (iii) that the respondent/accused No. 1-company, Roshni Cold Storage
(P.) Ltd., has been incurring heavy losses from the date of its incorporation
and hence there was reasonable cause and excuse for the delayed remittance of the tax deducted at source which fact was admitted by the Department.  

 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) :
  "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." 

 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 :
   "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." 

 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. 

 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".

 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." 

 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. 

 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 : 

       Details
        of advance tax paid from 1973 to 1982
        
        For
        the year ended
        
        Assessment
        year
       
        Advance
        tax>
     
        30-6-1973
       
        1974-75
       
        1,25,482
       
        30-6-1974
        
        1975-76
        
        1,74,147
  
        30-6-1975
     
        1976-77
 
        2,38,885
    
        30-6-1976
   
        1977-78
  
        4,38,330
    
        30-6-1977
    
        1978-79
   
        1,79,106
   
        30-6-1978
   
        1979-80
   
        2,86,650
    
        30-6-1979
     
        1980-81
   
        2,19,704
  
        30-6-1980
   
        1981-82
 
        2,47,135

        30-6-1981
  
        1982-83
    
        3,01,450
   
        30-6-1982
    
        1983-84
        
        2,37,490
  
  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. 

 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.  

 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.

 (1) PNB Finance and Industries Ltd. v. Miss Gita Kripalani, ITO ;

 (2) ITO v. Taurus Equipment (P.) Ltd. [1979] 118 ITR 982 (Patna); and  
 
 (3) Sequoia Construction Co. P. Ltd. v. P. P. Suri, ITO [1986] 158 ITR 496 (Delhi).

 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 :
 
        Rs.

        31-12-1975
        loss
      
        16,73,264
      
        31-12-1976
        loss
      
        18,52,732
      
        31-12-1977
        loss
      
        22,91,340
      
        31-12-1980
        loss
      
        28,66,198
      
        31-12-1981
        loss
      
        16,70,517
      
        31-12-1982
        loss
      
        13,74,410
      
 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) :
  "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." 

 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. 

 12. In conclusion, the appeal against the acquittal is liable to be dismissed on the following grounds : 

 (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 ;

 (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 ;

 (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."  

 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) :
  "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." 

 14. In Banwari v. ITO , the Supreme Court has Ruled by observing (headnote) :

 "(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; 

 (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."  

 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) :
  "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." 

 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. 

 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. 

 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. 

 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. 

 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. 

 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 : 

 (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 ? 

 (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 ? 

 (iii) Whether A1 to A5 and A7-company attempted to cheat from levying interest on tax deducted at source ? 

 (iv) Whether A1-company's delayed remittance of tax deducted at source was without reasonable cause or excuse ? and  
 
 (v) Is exhibit P17 authorisation to prosecute valid ?  

 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.

 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.

 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. 

 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. 

 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.

 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.

 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. 

 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.

Commissioner Of Income-Tax vs Shree Nirmal Commercial Ltd. (And Vice ... on 27 April, 1994
Equivalent citations: [1995]213ITR361(BOM)
JUDGMENT 
 
 I.G. Shah, J.   
 
 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.  

2. The following three questions have been referred at the instance of the Revenue :  

 "(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 ?  

 (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 ?  

 (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 ?"  

  The following three questions have been referred at the instance of the assessee :  

 "(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 ?  

 (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 ?  

 "(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 ?  

 (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 ?"   

3.  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.

 4. The brief facts giving rise to these two references are as under :  

 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 -

 "(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.  

 (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.  

 (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.  

 (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.  

 (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."   

 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".

6. 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.

7. 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.  

8. 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".

 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
thereto 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.

 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.  

11.  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 :  
  "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."  

 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 :
  "The Department had not produced any material to show that the agreements between the assessee and its members were collusive arrangements."  

 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.

 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.  

 15. In the result, the questions in Income-tax Reference No. 1 of 1982 are answered as under :  

 (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 ?  

 Answered in the affirmative in favour of the assessee.  

 (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 ?  

 (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 ?  

 Answered in the affirmative, as income from business and trade.  

 (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 ?  

 Answered in the negative and against the Revenue.   

 16. The following questions in Income-tax Reference No. 138 of 1982 are answered as under :  

 (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 ?  

 Answered in the affirmative in favour of the Revenue.  

 (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 ?  

 17. No order as to costs.

Steel Containers Ltd. vs Commissioner Of Income-Tax on 27 November, 1974
Equivalent citations: [1978]112ITR995(CAL)
JUDGMENT
 
Sabyasachi Mukharji, J.  
 
1. 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 : 

" 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. 

3. 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. 

4. 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. 

5. 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. 

6. The secretaries shall be entitled to receive from the company by
way of remuneration for its services as secretaries the sum of, or in respect
of any period of less than one calendar month, calculated at the rate of
rupees ten thousand per calendar month, such sum being payable in arrear
on the last day of each calendar month. 

7. 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. "  

2. 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. 

3.  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 : 

(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 ; 

(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 ; 

(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.  

4. 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. 

5. 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 : 

(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; 

(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 ; 

(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  
 
(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.

The 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 : 

"(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. ; 

(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 ; 

(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;......

(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."    

 6. 
 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 : 

(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. 
 
(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. 

(iii) The assessee had no monopoly in the trade and the large profits were due to the expert services of B.L. 
 
(iv) The fact that B.L. got remuneration from other companies for
services rendered to them was irrelevant in judging the remuneration paid
by the assessee-company. Also on the basis of the managing agency agree
ment with I.G. it would have been entitled to have in the years under
appeal Rs. 1,34,445 and Rs. 2,19,218 and the remuneration actually paid
to them was much less.

7. 
The 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,

whether 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 :

(i) The payment was made to the company which was the assessee's holding company;

(ii)   The services rendered were purely secretarial;

(iii) The services rendered had no direct and immediate impact on the company's trade or extent of business;

(iv) As the managing agents were doing much heavier work, the payee company did not derive such a large remuneration;

(v) That there were no secretaries in the first two years of the company's working; and 
 
(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.

8. 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.

9. 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 :

" (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 ?

(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 ? "

10. At the instance of the revenue, the Tribunal has also referred a third question, namely :

" 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. ? "

11. 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

of 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

introducing 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.

12.  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. 

13.  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. 

 " 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 '. 

 (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 : 

  (i)
    
On 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)
    
at the rate of 1% or  Rs. 5,000, which-ever is higher.

  (ii)
    
On the next Rs. 40,00,000 of the profits and gains of the business (computed in the manner aforesaid)
   at the rate of %
 
  (iii)
    
on the next Rs. 1,20,00,000 of the profits and gains of the business (computed in the manner aforesaid)
   at the rate of 1/4%
 
  (iv)
    
on the balance of the profits and gains of the business (computed in the manner aforesaid)
   nil."

 " 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'.--... 

 (c) in the case of any company--

 (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......." 

14. 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 .

15. 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.

16. 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. 

17. 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.

18. 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.

19. In this case we have noticed the facts upon which the Tribunal has relied. 

20. 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.

21. 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.

22. In the premises, question No. 2 must be answered in the affirmative and in favour of the revenue. 

23. 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.
In the facts and circumstances of the case, each party will pay and bear its own costs. 

R.N. Pyne, J.  

Additional Commissioner Of Income-Tax vs Central Bank Of India on 18 February, 1984
Equivalent citations: (1984)43CTR(BOM)329, [1986]159ITR756(BOM), [1984]18TAXMAN119(BOM)
JUDGMENT

Sujata V. Manohar, J. 
 
 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 : 

 Re : Assessment year 1963-64. 

 "(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 ? 

 (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 ?" 

 Re : Assessment Year 1964-65 : 

 "(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 ? 

 (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 ? 

 (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 ? 

 (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 ?" 

 Re : Assessment year 1965-66 : 

 "(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 ? 

 (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 ? 

 (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 ?" 

 Re : Assessment year 1966-67 : 

 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.

 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. 

 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. 

 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. 

 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. 

 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. 

 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. 

 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. 

 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 : 
  "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." 

 11. Sub-section (2B) of section 24 reads as under : 
  "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." 

 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). 

 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 : 

 "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 :- 

 (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; 

 (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." 

 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 :- 

 (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 
 
 (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). 

 (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). 

 (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."

 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. 

 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. 

 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. 

 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. 

 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). 

 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. 

 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.

 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 ? 

 22. Section 80 of the Income-tax Act, 1961, provides as follows : 

 "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." 

 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. 

 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. 

 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 : 

 "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)." 

 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.

 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).

 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.

 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. 

 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.

 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. 

 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. 

 33. The applicant will pay to the respondent the costs of the reference.

Shahdara (Delhi) Saharanpur Light ... vs Commissioner Of Income-Tax on 9 July, 1993
Equivalent citations: [1994]208ITR882(CAL)
JUDGMENT
 
Ajit Kumar Sengupta, J.
 
 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 : 

 Assessment years : 1972-73 to 1974-75 and 1976-77 to 1981-82 : 

" 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 ? 

 2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in rejecting the stand of the assessee : 

 (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 ? 

 (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 ? 

 (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 ?"  

 For assessment years 1972-73, 1976-77 and 1980-81 : 
  "(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 ?" 

 For assessment year 1972-73 : 

 "3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding :-- 

 (a) That Section 144B was applicable to reassessment proceedings under Section 147 of the Income-tax Act, 1961 ? 

 (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? 

 (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 ?  

 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 ? 

 5. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding : 

 (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 ? 

 (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 ?"  

 For assessment years 1973-74, 1974-75 and 1976-77 to 1981-82 : 
  "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 ?" 

 For assessment years 1973-74 and 1974-75 : 
  "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'?" 

 For assessment year 1974-75 : 
  "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 ?" 

 For assessment year 1976-77 : 
  "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 ?" 

 For assessment year 1979-80 : 
  "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 ?" 

2. 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. 

 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.

 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.

3. 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).

4. Questions Nos. 8 and 10 have not been pressed. 

5. Thus, we are now left with questions Nos. 4, 5, 7 and 9. 

6. 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. 

7. 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 : 
  "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." 

8. The Valuation Officer, Delhi, by his letter dated November 3, 1987, wrote as follows : 
  "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." 

9. 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. 

10. 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.  

11. 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 : 

 "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. 

 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. 

 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. 

 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."   

12. 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. 

13. 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 : 

 "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. 

 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".  

14. 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.

 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.

16. 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.

 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. 

 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.

19. 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. 

 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.

 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. 

 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. 

 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. 

 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. 

 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. 

 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. 

 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.

 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. 

 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 .

 30. We, therefore, answer question No. 4 and question No. 5 as a whole in the affirmative and against the assessee. 

 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 : 

 "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. 

 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'."  

 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.

 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.

 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.

 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. 

 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. 

 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 : 
  "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." 

 38. The reasons recorded by the Income-tax Officer before issuing the notice under Section 148 are in the following terms : 

 "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. 

 (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. 

 (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. 

 (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. 

 Issue notice under Section 148."  

 39. The Tribunal upheld the initiation of the proceedings observing as follows : 
 "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."

40. 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. 

41. 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.

 42. For the reasons aforesaid, we answer the ninth question as well in the affirmative and against the assessee. 

 43. There will be no order as to costs.

Shyamal Kumar Sen, J.

 I agree.

Sundaram Industries Ltd. vs Commissioner Of Income-Tax on 29 January, 1986
Equivalent citations: [1986]159ITR646(MAD)
JUDGMENT

 Chandurkar, J. 
 
 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 :  
  "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 ?"  

 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.  

 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.

 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.

 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) :
  "'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."  

 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.  

 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".

 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".  

 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 :
  "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."  

 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 :
  "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 ?"  

 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 :
  "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."  

 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) :  
  "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."  

 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) :  
  "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'."  

 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) :  
  "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."  

 15. After referring to the provisions of the Surtax Act, the Division Bench of the Karnataka High Court observed as follows (p. 941) :  
  "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."  

 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.  

 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 :  
  "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."  

 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 :  
  "'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;"  

 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.  

 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) :  
  "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."  

 21. In appeal, Lord Halsbury observed in [1906] AC 10 (HL) at p. 12 as follows :  
  "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."  

 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.  

 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 :
  "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."  

 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 :  
  "... 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."  

 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) :
  "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."  

 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) :  
 "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."  

 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.

 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.  

 29. Section 40(a)(ii) reads as follows :  

 (a) in the case of any assessee - ......  

 (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;"   
 
 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 :

 "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', -  

 (a) in the case of any assessee -  

 (ii) any sum paid on account of any rate or tax levied on the basis of, any such profits or gains;"   
 
 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 :  
  "(iia) any sum paid on account of wealth-tax....." ("Explanation" is not relevant for our purpose).  

 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.  

 33. T.C. No. 287 of 1979 : The question referred at the instance of the assessee in this reference is as follows :  
  "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 ?"  

 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.

K.P. Varghese vs Income-Tax Officer, B-Ward And Ors. on 3 April, 1970
Equivalent citations: [1970]77ITR719(KER)
JUDGMENT

M.U. Isaac, J.

 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. 

 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. 

 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 : 

 "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- 

 (a) is received or is deemed to be received in India in such year   by or on behalf of such person ; or  
 
 (b) accrues or arises or is deemed to accrue or arise to him in India during such year ;  or  
 
 (c) accrues or arises to him outside India during such year : 
  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. "   

 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: 

 "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 :-- 

 A.--Salaries. 

 B.--Interest on securities.  

 C.--Income from house property.  

 D.--Profits and gains of business or profession.  

 E.--Capital gains.  

 F.--Income from other sources. "   

 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. 

 "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. 

 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 :-- 

 (i) expenditure incurred wholly and exclusively in  connection  with such transfer; 
 
 (ii) the cost of acquisition of the capital asset and the cost of any improvement thereto.  
 
 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. 

 (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."  

 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: 

  "'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. 

 Such acceptance must be made during the lifetime of the donor and while he is still capable of giving. 

 If the donee dies before acceptance, the gift is void."  

 7. Section 2(xii) of the Gift-tax Act reads : 
  "'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." 

 8. Section 4 of the Gift-tax Act reads : 

 "Gift to include certain transfers.--For the purposes of this Act,-- 
  (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 ; ... "  
 
 (Clauses (b), (c) and (d) are omitted, being unnecessary for the present discussion). 

 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. 

 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: 

 "(22A) ' fair market value ', in relation to a capital asset, means- 

 (i) the price that the capital asset would ordinarily fetch on sale in the open market on the relevant date ; and  
 
 (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."   

 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. 

 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. 

 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. 

 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: 
  "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." 

 15. The statement may appear to be very elementary; but it is very meaningful. 

 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.

 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. 

 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 :
  "What the proviso gets at for charge is the actual capital gain which
the vendor should, in the circumstances, have made but is made to appear
that the gain as shown by the consideration for the transaction to be much
less or nil. We are not persuaded to think that the proviso discourages or
avoids honest transactions made out of love and affection or for other
conceivable reasons on pain of being on an assumption, hauled up, if we
may use the expression, for having attempted to avoid or reduce the tax
liability and on that basis made liable to tax on the difference between the
consideration for the transaction and the fair market value. That simply,
as we read the proviso, is not its purpose. It does not treat what is not an
actual capital gain as a deemed capital gain. In fact, occurring as it does as
the first proviso to Sub-section (2) dealing with the procedural aspect of
computation, it should, we think, be interpreted as limited to escaped
capital gain, which is so in truth and in fact, and not intended to bring
about fictional gain on an assumption and charge the same." 

 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 :
  "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." 

 20. Sub-section (2) of Section 52 applies if, in the opinion of the Income-tax
Officer, the fair market value of the capital asset transferred by an assessee
exceeds the value of the consideration declared by the assessee in respect of
the transfer. "To declare" means, to make known, to announce. The use
of the words "declared by the assessee" in the sub-section is significant.
They are not equivalent to "received by or accrued to the assessee" or
"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
in the deed of transfer. 

 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 : 
  "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." 

 22. Sir Richard Henn Collins M.R. in Fletcher v. Birkenhead Corporation, [1907] 1 K.B. 205 (C.A.) stated: 

 "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 : 
  '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.'"  
 
 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 : 
  "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." 

 24. There is another reason which compels me to reject the construction
canvassed by the learned counsel for the revenue to be given to Section 52
of the Income-tax Act. Suppose an assessee has a capital asset, whose cost
of acquisition including improvements thereto is Rs. 20,000; he transfers
it for a consideration of Rs. 25,000; the expenditure incurred by him in
connection with the transfer is Rs. 5,000; and the fair market value of the
asset on the date of transfer is Rs. 1,00,000. By the above transfer, the
assessee 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
learned counsel for the revenue puts on Section 52, the assessee has derived
capital gains amounting to Rs. 75,000. The same is the position, even if
the transfer was made for a nominal consideration of rupee one; but if he
transfers it without any consideration, Section 47(iii) of the Act operates ;
and the assessee does not derive any capital gains at all. In all these three
instances, the assessee is liable to pay gift-tax on the difference between
the market value of the asset and the actual consideration for which it is
transferred. This is a very illogical, if not an absurd, position. I cannot
assume that Parliament intended that, unless the language used in the
statute 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. 

 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. 

  "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. 

 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 : 

 (a) the transferee is a person who is directly or indirectly connected with the assessee; and  
 
 (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.  
 
 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".  

 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 : 
  "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." 

 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. 

 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. 

 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. 

 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:
  "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."  

 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:
  "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." 

 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 :
  "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." 

 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 :
  "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." 

 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 :

  "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. 

 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."  

 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.

 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.

 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.

 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.

 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.

Lally Jacob vs Income-Tax Officer And Ors. on 10 April, 1992
Equivalent citations: [1992]197ITR439(KER)
Bench: M. Jagannadha Rao, K.S. Paripoornan
ORDER

 K.S. Paripoornan, J. 
 
1. 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.

2. 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 :
  "... 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 ..." 

3. 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.

4. 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.

5. 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).

6. 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.

7. 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.

8. The office is directed to place the papers before the Honourable Chief Justice for passing appropriate orders.

Case Note: 

Direct 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. 

Head Note:

INCOME TAX  

Advance 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.
Marketing Federation v. Union of India (1981) 130 ITR 928 (Del) 
and CIT v. Pratap Singh of Nabha (1982) 138 ITR 27 (Del) 
concurred with. Not to current assessment years as s. 217 has 
become inoperative w.e.f. 1-4-1988.

Income Tax Act 1961 s.217 

Income Tax Act 1961 s.147 

JUDGMENT
 
 P. Krishnamoorthy, J. 

9. 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").

10. 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.

11. 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.

12. 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 :
  "'regular assessment' means the assessment made under Section 143 or Section 144;" 

13. 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.

14. 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.

15. 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 :

"217. (1) Where, on making the regular assessment, the Income-tax Officer finds--

(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
 
(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, 
 
simple 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." 

16. 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.

17. 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) :
 "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)." .

18. 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.

19. 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) :
  "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." 

20. 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.

21. 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.

22. 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.

23. 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.

24. 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.

25. 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 :
  "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." 

26. 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.

27. 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.

Commissioner Of Income-Tax vs H.H. Maharaja Sahib Shri Lokendra ... on 6 January, 1986
Equivalent citations: [1986]162ITR93(MP)
JUDGMENT
 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: 
  "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 ? " 

 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. 

 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
ed by the Income-tax Officer. Against this order of the Commissioner
(Appeals), both the assessee and the Department came up in second appeal before the Tribunal. 

 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. 

 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. 

 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. 

 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. 

 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: 

 9. Section 2(14) of the Act is as follows : 

  "capital asset" means property of any kind held by an assessee whether or not connected with his business or profession, but does not include- 

 (i) any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession; 

 (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."    

 10. Section 2(47) of the Income-tax Act, 1961, is as follows : 
  " transfer ", in relation to a capital asset, includes the sale, exchange
or relinquishment of the asset or the extinguishment of any rights therein
or the compulsory acquisition thereof under any law. " 

 11. Section 45 of the said Act, with which we are directly concerned is as follows: 
  "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." 

 12. The learned counsel for the Revenue also placed reliance on Section 49 and Section 55, which are as under: 

 "49. Cost with reference to certain modes of acquisition.--(1) Where the capital asset became the property of the assessee- 

 (i) on any distribution of assets on the total or partial partition of a Hindu undivided family; 

 (ii) under a gift or will; 

 (iii) (a) by succession, inheritance or devolution, or  
 
 (b) on  any  distribution of assets on the dissolution of a firm, body of individuals or other association of persons, or  
 
 (c) on any distribution of assets on the  liquidation  of  a  company, or  
 
 (d) under a transfer to  a revocable or an irrevocable trust, or  
 
 (e) under any such transfer as is referred  to  in  Clause (iv) or Clause (v) or Clause (vi) of Section 47; 

 (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,  
 
 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. 

 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

acquisition other than that referred to in   Clause (i) or Clause (ii) or Clause (iii) or Clause (iv) of this sub-section. 

 (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." 

 "55. Meaning of 'adjusted', 'cost of improvement' and 'cost of acquisition'.--(1) For the purposes of Sections 48, 49 and 50, 
   
 (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; 

 (b) 'cost of any improvement'  in relation to a capital asset, 
 
 (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   
 
 (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,  
 
 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, 
 
 (2) For the purposes of Sections 48 and 49, 'cost of acquisition', in relation to a capital asset,-- 

 (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; 

 (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; 

 (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;  

 (v) where the capital asset, being a share or a stock of a company, became the property of the assessee on- 

 (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, 
 
 (b) the conversion of any shares of the company into stock, 
 
 (c) the re-conversion of any stock of the company into shares, 
 
 (d) the sub-division of any of the shares of the company into shares of smaller amount, or  
 
 (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.  

 (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."  

 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 : 
  " 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

previous 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." 

 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 : 

  " 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. 

 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."  

 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. 

 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. 

 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) :
  "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." 

 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
capital asset is made. If the capital asset is such that it has cost nothing,
in terms of money to the assessee, the charging provision must be interpret
ed as being not referable to such capital asset and a self-created or self-
generated goodwill being such an asset, will be outside the purview of the
charging section. Therefore, on a proper interpretation of the charging
provision itself, it seems clear that the concept of actual cost expressed in
terms of money to the assessee of the capital asset at some particular point
of time would be a necessary ingredient before the transfer of that capital
asset can give rise to chargeable gain. Since self-created or self-generated
goodwill is not a capital asset which could be said to have been acquired
by the assessee-firm at any particular point of time and is not a capital
asset which could be said to have cost something in terms of money to the
assessee, such goodwill will not be a capital asset the transfer of which
will give rise to chargeable capital gain under Section 12B(1) of the 1922
Act or Section 45 of the 1961 Act.  

 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." 

 20. In CIT v. Jaswantlal Dayabhai [1978] 114 ITR 798, a Division Bench of this court has held as under (headnote):
  "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

type of capital asset and its transfer cannot be the subject of taxation under Section 45 of the Act.
Therefore, 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." 

 21. In CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294, the Supreme Court has held as under (headnote):

  "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. 

 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. 

 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. 

 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."  

 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) :

  "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 : 

 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; 

 (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; 

 (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

locality, 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. 

 (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. 

  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. "  

 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):

 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:  
  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. "  

 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).

 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.

 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

calculated 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. 

 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 : 
  "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."

Madgul Udyog vs Commissioner Of Income-Tax on 5 July, 1989
Equivalent citations: [1990]184ITR484(CAL)
JUDGMENT

Ajit K. Sengupta, J. 
 
 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:

"(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 ?

(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 

be 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 ?" 

2. The relevant facts are as under :

The 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  
handed over to the respective buyers as indicated hereinbelow :

  Previous year
  Assessment year
  No. of flats

  Diwali 1975
  1976-77
  5

      "    1976
  1977-78
  11

      "    1977
  1978-79
  3

      "    1978
  1979-80
  2

      "    1979
  1980-81
  2

      "    1980
  1981-82
  1 + 1 shop 

  Total :
  24 
3. Two shops on the ground floor remain unsold till date.

4. 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 

and sale of flats was assessed as business income and the assessee-firm has always treated the constructed and unsold area as stock-in-trade.

5. 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.

6. 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 :

(a) CIT v. Zorostrian Building Society Ltd. [1976] 102 ITR 499 (Bom).

(b) CIT v. Union Land and Building Society (P.) Ltd. [1972] 83 ITR 794 (Bom).

(c) CIT v. Bhurangya Coal Company .

(d) CIT v. Ganga Properties Ltd. .

(e) East India Housing and Land Development Trust Ltd. v. CIT .

7. 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.

8. 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 

assessee-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.

9. 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.

10. The first issue was decided by the Tribunal against the assessee-firm. The relevant findings of the Tribunal may be summarised as under :

(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.

(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.

(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.

(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.

(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.

(vi) Section 53A of the Transfer of Property Act has been misinterpreted by the Commissioner of Income-tax (Appeals). The said Section 

does 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.

(vii) The Tribunal relied on the following decisions :

(a) Sushil Ansal v. C1T [1986] 160 ITR308 (Delhi) ; 

(b) CIT v. Ganga Properties  ;

(c) CIT v. Union Land and Building Society (P.) Ltd. [1972] 83 ITR 794 (Bom) ;

(d) Kartar Singh (S.) v. CIT  ;

(e) CIT v. D. L. F. Housing Construction (P.) Ltd.  ;

(f) Anand (D. C.) and Sons v. CIT  ; and
 
(g) CIT v. Biman Behari Shaw Shebait [1968] 68 ITR 815 (Cal).

11. 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.

12. Mr. N. K. Poddar, learned counsel appearing on behalf of the assessee, has submitted that the assessee is engaged in the business of construction 

of 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.

13. 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.

14. The rival contentions have to be examined in the light of the decisions cited at the Bar.

15. 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 

income under Section 9 of the 1922 Act, corresponding to Section 22 of the
1961 Act. The following observations of the Supreme Court are of great
significance (at page 575) :

"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.

For 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." 

16. 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 :
  "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..." 

17. Again, the Supreme Court observed as under (at pp. 578, 579) :
  ". . .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." 

 18. In Sushil Ansal v. CIT [1986]  160 ITR 308, the Delhi High Court 
held (at p. 314) :
  "... 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." 

19. 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 

from possession and the property right is essentially a guarantee of the
exclusion of other persons from the use or handling of the thing.

20. 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.

21. 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.

22. 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.

23. 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.

24. 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.

25. 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.

26. 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.

27. 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.

28. 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.

29. 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.

30. 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.

31. 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.

32. 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 

that 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.

33. 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.

34. 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.

35. The Supreme Court observed (at p. 893) :

"... 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 ...".

"In the instant appeal, however, we are concerned with the expression 'belonging to' and not with the expression 'owner'." (p. 894).

"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)"

"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 

expression '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). 

36. 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.

37. 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.

38. 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.

39. 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) :
  "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 

own 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." 

40. 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 

buyers 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.

41. 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.

42. 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 

higher 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.

43. Section 23(1)(a) which is relevant for our purpose reads as under :
  "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." 

44. Section 168 of the Calcutta Municipal Act, 1951, which corresponds to Section 23(1)(a) of the Income-tax Act, 1961, reads as under :
  "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."' 
 
45. 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.

46. 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.

47. 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 .

48. The Tribunal has referred to the provisions of Section 8(1)(e) of the West Bengal Premises Tenancy Act, 1956, which reads as under :
  "(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 

provided 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." 

49. Section 8(1)(e) of the West Bengal Premises Tenancy Act, 1956, again refers to that rent which would be reasonable.

50. 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.

51. 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.

52. 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.

53. 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.

K. M. Yusuf, J. 

 54. I agree.

Isha Beevi And Ors. vs Tax Recovery Officer And Ors. on 30 September, 1969
Equivalent citations: [1971]80ITR82(KER)
Author: K.K. Mathew
Bench: K.K. Mathew
JUDGMENT

K.K. Mathew, J.

 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. 

 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. 

 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. 

 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. 

 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. 

 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. 
(1) Opium and Revenue Laws (Extension of Application) Act, 1950,--See [1950] 18 I.T.R. (Statutes) 100.

 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. 

 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 : 

 "(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 : 
  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: .... "  

 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 :

"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:
 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." 

10. The word ''assessee" has been defined in the Act as follows :

"'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)].

Sub-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;
 "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." 

11. 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.

12. 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.)
13. 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 :

"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 :--....
  (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...." 

 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. 

 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. 

 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. 

 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. 

 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.

 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 :
  "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." 

 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.

 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.

 22. It was contended for the appellants that Thangal Kunju Musaliar had
executed four gift deeds during his life that the title to the properties
included in the gift deeds passed to the donees, and that the revenue
should not have proceeded to attach the properties as if they belonged to
Thangal Kunju Musaliar at the time of his death. It is contended that the
revenue should have filed a suit and obtained an adjudication that the gift
deeds were either sham or intended to defeat or delay his creditors before
proceeding to attach the properties. Reliance was placed in this connection
upon the ruling of this court in Abdulla v. State of Kerala, [1962] I.L.R. 1 Ker. 396 where
Vaidialingam J. held that when a dealer assessed to sales tax transferred
his property, the amount assessed cannot be recovered from the property
transferred, unless there is an adjudication by a civil court that the transfer
was either intended to defeat or delay the creditors or that it was sham.
We are not satisfied that it was necessary for the revenue to have filed a
suit for declaration that the gift deeds executed by Thangal Kunju Musaliar
were 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
date of his death. We think that the revenue was entitled to proceed as if
the 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.

23. 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.

Grindlays Bank Ltd. vs Commissioner Of Income-Tax. on 5 September, 1989
Equivalent citations: (1992)94CTR(CAL)46, [1992]193ITR457(CAL)
JUDGMENT
SUHAS CHANDRA SENT J. - The Tribunal has referred the following questions of law under section 256 (1) of the Income-tax Act, 1961 :

"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 ?

2. 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 ?

3. 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 ?

4. 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 ?

5. 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 ?"

The facts of the case have been stated by the Tribunal in the statement of case as under :

The 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).

The 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 :

"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."

The Tribunal dealt with the argument that no interest could be charged. It held :

"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)."

The Tribunal went on to observe :

"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."

The Tribunal thereafter observed as follows :

"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.

Assuming 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."

Thereafter, at the instance of the assessee, the Tribunal referred to this court the five questions of law mentioned hereinbefore.

The 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.

We 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.

Section 5 (1) lays down :

"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 -

(a) is received or is deemed to be received in India in such year by or on behalf of such person; or
 
(b) accrues or arises or is deemed to accrue or arise to him in India during such year; or
 
(c) accrues or arises to him outside India during such year."

Sub-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.

In 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.

It 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.

This 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.

Dr. 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 :

"9. Income deemed to accrue or arise in India. - (1) The following incomes shall be deemed to accrue or arise in India - ....

(ii) income which falls under the head Salaries if it is earned in India;

(iii) income chargeable under the head Salaries payable by the Government to a citizen of India for service outside India;....

(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."

Even 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.

The meaning of the word "earn" according to Websters New International Dictionary of the English Language, Second Edition, Unabridged, is :

(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.

(2) to acquire by labour, service or performance; to deserve and receive as compensation; as, to earn a good living.

The 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.

I 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.

The 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.

The 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.

It 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.

Therefore, a narrow meaning cannot be given to the scope of section 9 (1) (ii) by referring to the provision of section 9 (1) (iii).

The 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.

Therefore, the first question must be answered in the affirmative and in favour of the Revenue.

The 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.

The 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.

Section 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.

That 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.

Moreover, 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). :

"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."

This 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.

A 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.

Under 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.

BHAGABATI PRASAD BANERJEE J. - I agree.

Rameswar Sirkar vs Income-Tax Officer, "A" Ward And Ors. on 6 August, 1971
Equivalent citations: [1973]88ITR374(CAL)
JUDGMENT
 
Sabyasachi Mukherji, J.  
 
1. 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,

met 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

borne in mind that this Hindu undivided family is governed by the Dayabhaga system of Hindu law.  

2. 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

disrupted. 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.

3. 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:  

 "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.  

 (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

assessed 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.  

 (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.  

 (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,--  

  (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  
 
 (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.   

 (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.  

 (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.  

 (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.  

 (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."   

4. 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

the 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:
  " 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. "  

5. 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. "

6. In the case before the Madras High Court also the said Hindu family
was assessed to tax prior to  the  relevant assessment year in  question.
It 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:  
  "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. "  

7. 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:  
  " (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. "  

8. In the facts of the instant case the provisions of Sub-section (4) of Section 170 cannot also be applied.  

9. 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.

The 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 
disrupted 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.

10. 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

be illegal or void. The Supreme Court in that case affirmed the principles laid
down by the Division Bench judgment of this court in the case of Gopiram
Agarwalla v. First Addl. Income-tax Officer, [1959] 37 I.T.R. 493 (Cal.).   There  the Supreme Court
observed that the mere fact that the serving officer did not find the assessee
to be served with the notice at his address was not sufficient to establish
that he could not be found.   It must be shown not only that the serving
officer went to that place at a reasonable time when the assessee was
expected to be present but also that if he was not found proper and reason
able attempts had been made to find him either at that  address or
elsewhere.   If after such reasonable attempts, if any, made,  the position
still was that the party was not found, then and then only could it be said
that he could not be found.   The question is, therefore, from the service
returns even if these are accepted to be correct can it be said that reason
able attempts had been made to find the assessee.   The process-server in
his statement states that he went to serve between a particular period; but
he mentions one period only.   He further stated that having failed in his
attempt to serve the notice he served the notice by affixation.   He does
not state how he made his attempts and if there was any prospect to find
out the person in some other place or on some other  date.   In that light
it must be held that no reasonable attempts had been made to serve  the
assessee.   Counsellor the Revenue contended that whether the assessee had
reasonable opportunity or not was a question of fact better suited to be
decided in the income-tax proceeding itself. He drew my attention to the
decision of the Supreme Court in the case of Champalal Binani v. Commissioner of Income-tax, .   There the Supreme Court had occasion to consider
whether reasonable opportunity had been given  to the assessee to  make
representation against an order under Section 33B of the Indian Income-tax
Act, 1922.   The Supreme Court observed that the  notice was affixed at
two places of which the  addresses were furnished by the assessee in his
returns, and it was not suggested that the assessee was not carrying on his
business at those two places.    It was held that there was a proper service
of notice.   The Supreme Court further observed that if  the  assessee had
any grievance about the sufficiency of the opportunity given to him to
make his representations, his obvious remedy was to appeal against the
order 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
assessee should be given reasonable opportunity.   How that reasonable
opportunity should be afforded to the assessee would depend upon the facts
and circumstances of each case and as to whether reasonable opportunity
has been granted or not to a particular assessee in a particular case the
Supreme Court observed that the Income-tax Act provided the machinery,
 
resort 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.

11. 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.  

12. 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.

Income-Tax Officer, "A" Ward And Ors. vs Eastern Coal Co. Ltd. (In Liquidation) on 4 December, 1973
Equivalent citations: [1975]101ITR477(CAL)
JUDGMENT

1. 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.

2. 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 :

"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.

At 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." 

3. 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, .

4. 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.

5. The next question is whether this action can be held to be valid in
view of the provisions of Section 297(2)(d)(ii) of the Income-tax Act, 1961,
read with Section 150(2) and Section 153, Explanation 2, of the said Act,
Counsel for the assessee contended that Section 297(2)(d)(ii) of the Income-
tax Act, 1961, did not apply because, firstly, it was submitted that it was
in conflict with the provisions of Section 297(2)(a) of the Income tax Act,
1961, and it was submitted that assessment under that Act included
reassessment. Therefore, it was urged that inasmuch as a return for the
original assessment had been filed before the coming into operation of the
Income-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.

6. 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.

7. 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.

8. 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.

9. 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.

10. 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.

11. There will be no order as to costs.

Sankar Prasad Mitra, C.J.

I agree.

Commissioner Of Income Tax vs M/S H.P. State Co-Operative Bank Ltd on 19 April, 2017
Bench: Mansoor Ahmad Mir, Sandeep Sharma
       IN THE HIGH COURT OF HIMACHAL PRADESH AT SHIMLA

                                                                     ITA No. 14 of 2012
                                                       Reserved on: April 6, 2017
                                                         Decided on: April 19, 2017
    --------------------------------------------------------------------------------------------

                                                                               .
    Commissioner of Income Tax, Shimla                                         ...Appellant

                                              Versus

    M/s H.P. State Co-operative Bank Ltd., Shimla                           ...Respondent
    Coram
    Hon'ble Mr. Justice Mansoor Ahmad Mir, Chief Justice
    Hon'ble Mr. Justice Sandeep Sharma, Judge

    Whether approved for reporting? Yes.
    For the appellant            : Ms. Vandana Kuthiala, Advocate.

    For the respondent           : Mr. Vishal Mohan and Mr. Sanjay Prashar,
                            r       Advocates.

    Per Sandeep Sharma, Judge

                    This appeal under Section 260-A of the Income-Tax Act,

    1961 has been filed thereby laying challenge to order dated

    21.6.2011,       passed       by    the     Income       Tax     Appellate      Tribunal

    Chandigarh Bench 'A', Chandigarh (in short, 'Tribunal'), in setting

    aside order of Commissioner Income Tax (Appeals).

           2.       Briefly stated the facts necessary for the adjudication of

    the present appeal are that the H.P. State Co-operative Bank Ltd.

    (hereafter, 'assessee') is a credit institution within the meaning of

    Section 2(5A) of the Interest-Tax Act, 1974 and as such it was

    under obligation to furnish the return of chargeable interest for the

    relevant year under Section 7(1) of the Interest-Tax Act, 1974,

    before 31.12.1992. Under sub-section (3) of Section 7, the assessee

    could furnish its return of chargeable interest before the expiry of

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                                          2

    one year from the end of the relevant assessment year or before the

    completion of the assessment, whichever is earlier. However, the

    fact remains that assessee failed to furnish return within stipulated

                                                                    .
    period as prescribed under Section 7 of the Act ibid. Assessing

    Officer issued notice under Section 10 of the Interest-Tax Act,

    1974, upon the assessee on 12.9.1995. Assessee, in response to

    notice as referred above, filed return of interest tax on 19.2.1996

    declaring therein chargeable interest of `7,18,86,395/-. Assessing

    Officer passed assessment order under Section 8 (2) on 26.2.1998

    determining        therein   chargeable     interest      amounting           to

    `15,21,18,010/- and raised tax demand of `93,89,057/-. Vide

    rectification    order   under   Section   17,   he    further    demanded

    `1,54,162. Perusal of Annexure P-3 placed on record by the

    appellant suggests that the Commissioner Income Tax, Shimla,

    vide order dated 1.3.2000 passed under Section 19 of the Interest-

 Tax Act, 1974, set aside aforesaid order of assessment having been

    passed by the Assessing Officer under Section 8 (2) of the Interest-

 Tax Act, 1974, holding same to be erroneous and prejudicial to the

    interests of revenue and, accordingly, directed him to make fresh

    assessment after affording opportunity of hearing to the assessee.

         3.         Being aggrieved and dissatisfied with the aforesaid

    order, Assessee preferred an appeal before Commissioner Income

    Tax (Appeals), Shimla: Panchkula, which came to be registered as

    Appeal No. IT/4/97-98/SML. However, the same was dismissed as

    infructuous, by the Commissioner Income Tax (Appeals), vide order

    dated 2.8.2000, on the ground that Commissioner Income Tax,

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                                       3

    Shimla has already set aside assessment directing the Assessing

    Officer to complete fresh assessment, points of objection as raised

    in the appeal, no longer survive. It further emerges from the record

                                                                .
    that the assessee Bank did not contest the chargeable interest

    assessed by the Assessing Officer. Perusal of Annexure P-6

    suggests that during the pendency of the aforesaid assessment

    proceedings, proceedings under Section 13 of the Interest-Tax Act,

    1974,     were also initiated by the Department for levying penalty

    upon the assessee Bank and, accordingly, vide order dated

    29.8.2002, penalty of `1,49,67,486/- i.e. penalty equal to three

    times the interest sought to be evaded, was imposed by the Dy.

    Commissioner of Income Tax, Circle Shimla.

         4.      Being aggrieved with the penalty having been imposed

    by the Assessing Officer under Section 13 of the Interest-Tax Act,

    1974, assessee Bank preferred an appeal before Commissioner

    Income Tax (Appeals), Shimla. However, the fact remains that the

    learned Commissioner Income Tax (Appeals) upheld the penalty

    imposed by the authority concerned but held that the penalty of

    300% is harsh upon the assessee, accordingly, modified penalty to

    100% of tax evaded.

         5.      Being further aggrieved and dissatisfied with the

    aforesaid order passed by the learned Commissioner Income Tax

    (Appeals), both the parties filed appeals bearing Intt. Tax Apl. No.

    3/Chandi/2003       (A.Y.   1992-93)   and   Intt.    Tax      Apl.     No.

    4/Chandi/2003 (A.Y. 1992-93), before the Tribunal below. Perusal

    of Annexure P-8, placed on record, suggests that both the appeals

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                                       4

    were heard together by the Tribunal and Tribunal, while allowing

    appeal of the assessee, held as under:

                 "When we compare the provisions of Section 13 of the
                Interest-Tax Act, 1974 and Explanation 3 to Section

                                                                 .
                271(1)(c), it is observed that there is no such provision

                under the Interest-Tax Act, 1974 corresponding to
                Explanation 3 to Section 271(1)(c)."

         6.     It is seen that there is no such provision under the

    Interest-Tax Act, 1974 corresponding to Explanation 3 to 271(1)(c)

    of the Income-Tax Act, 1961 and as such basis adopted for

    imposition of penalty by revenue authority is not in accordance

    with provisions of Interest-Tax Act, 1974 and, accordingly,

    cancelled the same.

         7.     Appellant being aggrieved and dissatisfied with the

    aforesaid order having been passed by the Tribunal, preferred an

    appeal under Section 260-A of the Income-Tax Act, 1961 before

    this Court, wherein following question of law was formulated:

          "Whether absence of proviso in section 13 of the Interest tax

          Act, 1974 corresponding to explanation 3 to section 271(1)(c)
          of the Income-Tax Act, 1961, could render the case ineligible

          for penalty u/s 13 of the Interest tax Act even on the
          differential amount of tax sought to evaded i.e. the difference
          of tax sought to evaded on chargeable interest assessed by
          the A.O. and chargeable returned by the assessee?"

         8.     This Court taking note of the fact that the Tribunal only

    took into consideration Section 271 (1)(c) while holding that there is

    no basis for imposition of penalty under Section 13, and ignored

    other grounds, which were taken into consideration by the

    Assessing Officer, remanded matter to the Assessing Officer to

    determine the question as to whether assessee was liable to pay

    penalty and if so, to what extent, strictly in consonance with the

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                                       5

    provisions of Section 13 of the Interest-Tax Act, 1974, totally being

    uninfluenced by the provisions of Section 271(1)(c) of the Income-

 Tax Act, 1961.

                                                                   .
         9.     Subsequent to passing of aforesaid order by this Court,

    Assessing Officer passed fresh penalty order (Annexure P-9 dated

    28.5.2010) under Section 13 of the Interest-Tax Act, 1974, levying

    therein 100% penalty of the amount of `49,89,162, i.e. tax sought

    to be evaded.

         10.    Assessee being aggrieved with the aforesaid imposition

    of penalty vide order dated 28.5.2010, preferred an appeal before

    Commissioner Income Tax (Appeals), who vide order dated

    30.11.2010 in Appeal No. IT/119/2010-11/Sml, dismissed the

    appeal of the assessee and as such assessee was compelled to

    prefer an appeal before the Tribunal below. Learned Tribunal

    below, while allowing appeal of the assessee held that penalty

    under Section 13 of the Interest-Tax Act, 1974 is/was leviable,

    where assessee had concealed its interest chargeable to tax or

    furnished   inaccurate   particulars   of   tax   chargeable. Learned

    Tribunal below, taking note of the fact that interest became

    chargeable only pursuant to Board's Instructions No. 1923 dated

    14.3.1995, that too for the period from October, 1991 to 31.3.1992

    and that the assessee had declared total interest levied by it in its

    profit and loss account, held that there was no merit in the levying

    of penalty under Interest-Tax Act, 1974 and accordingly set aside

    the order of Assessing Officer, levying penalty. In the aforesaid

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                                      6

    background, appellant has approached this Court, by way of

    instant appeal.

         11.   The appeal was admitted on following substantial

                                                                .
    question of law, on 21.5.2012:

         "i)   Whether the finding of the Ld. ITAT to the effect that
         the assessee has neither concealed the particulars of interest
         nor furnished inaccurate particulars of interest is perverse

         even though the assessee had not disclosed or furnished
         such interest until escapement of the interest was detected
         by the department?
         ii)   Whether on the facts and circumstances of the case the
         ITAT is correct in deleting penalty on the grounds that the

         interest become chargeable to tax only after Board's inst. No.
         1923 dated 14.3.1995 and hence non disclosure of such
         interest in assessment years prior to this date could not be
         termed as concealment or furnishing inaccurate particulars,
         even though the assessee had filed his return after the date?"

         12.   Ms. Vandana Kuthiala,      learned counsel representing

    the appellant vehemently argued that impugned order dated

    21.6.2011 (Annexure P-A)     having been passed by the Tribunal

    below is not sustainable as the same is not based upon correct

    appreciation of evidence adduced on record by the respective

    parties as well as provisions of law applicable in the instant case.

    Ms. Kuthiala, strenuously argued that the Tribunal while holding

    that there is no merit in levying of penalty under Section 13 of the

    Interest-Tax Act, 1974, has failed to consider the fact that the

    interest on securities, interest on head office investment account

    and interest on loan to primary agriculture cooperative societies

    was chargeable interest under Interest-Tax Act, 1974. She further

    stated that Board's Instructions No. 1923 dated 14.3.1995 were

    clarificatory in nature and no benefit, if any, could be available

    pursuant to aforesaid instructions to the assessee before he filed

                                       7

    return of interest tax, that too pursuant to the notice under Section

    10 of the Interest-Tax Act, 1974. Learned counsel representing the

    appellant forcefully contended that the learned Tribunal below

                                                                 .
    failed to take note of the fact that return of chargeable interest was

    not filed voluntarily but was filed in response to notice under

    Section 10 of the Interest-Tax Act, 1974 and there was difference in

    the chargeable interest of the assessee and interest as assessed by

    the Assessing Officer. To substantiate her aforesaid arguments,

    learned counsel representing the appellant invited attention of this

    Court to assessment order (Annexure P-9) having been passed by

    the Assessing Officer under Section 13 of the Interest-Tax Act,

    1974, to demonstrate that the assessee had concealed interest

    chargeable to tax and had furnished inaccurate particulars to the

    tune of `16,63,05,388/- and as such penalty was rightly imposed

    upon the assessee at the rate of 100% of the interest sought to be

    evaded.

         13.    Mr. Vishal Mohan, learned counsel representing the

    respondent, supported the impugned order passed by the learned

    Tribunal and stated that there is no illegality or infirmity in the

    same, as such, there is no scope of interference. While specifically

    referring to the questions of law referred to herein above, Mr.

    Mohan strenuously argued that the learned Tribunal below has

    returned specific findings of fact that assessee neither concealed

    particulars of interest nor furnished inaccurate particulars of

    interest, that too on the basis of record made available to it by the

    Department, during the proceedings of the appeal, as such, same

                                       8

    can not be gone into by this Court especially in the present

    proceedings. Mr. Mohan, further contended that bare perusal of

    orders passed by Assessing Officer clearly suggests that             penalty

                                                                  .
    has been levied on entire amount of interest assessed to tax as

    16.63 Crore, ignoring the fact that advance tax amounting to

    `23,50,000/- was paid by the assessee, prior to initiation of

    aforesaid proceedings. While specifically inviting attention of this

    Court to the impugned order passed by the learned Tribunal below,

    Mr. Mohan, contended that it is undisputed before the authority

    concerned that since no return form was available, return was

    delayed but the fact remains that advance tax as referred to above,

    was paid by the assessee. Learned counsel representing the

    respondent further contended that bare perusal of order passed by

    the Assessing Officer clearly suggests that initially interest on

    securities totaling to `3.74 Crores was not subjected to tax but the

    same was included lateron pursuant to order passed under Section

    19 of the Interest-Tax Act, 1974. Learned counsel representing the

    respondent strenuously argued that penalty, if any, under Section

    13 of the Act could be levied against the assessee, had he concealed

    particulars   of   chargeable   interest   or   furnished       inaccurate

    particulars of such interest. Mr. Vishal Mohan, further contended

    that provisions of Section 271 (1)(c) of the Income Tax Act, 1961,

    could also not be made applicable in the case of assessee, which

    lays down presumption against the assessee, in case of non-filing of

    return within particular time. In this regard, he invited attention of

    this Court to para-10 of the impugned order, to demonstrate that

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                                       9

    provisions of Section 271(1)(c) of Income-Tax Act, 1961, which lay

    down presumption against assessee in non-filing of return within

    particular time, are not applicable to the interest tax proceedings.

                                                                 .
    While concluding his arguments, learned counsel representing the

    respondent contended that there is nothing on record suggestive of

    the fact that assessee concealed particulars of interest or furnished

    inaccurate particulars of interests, rather record clearly suggests

    that assessee had declared total interest received by it in its profit

    and loss account. Learned counsel representing the respondent

    further contended that assessee had furnished return of chargeable

    interest for the financial year 1991-92 relating to assessment year

    1992-93 and had declared chargeable interest of `7.18 Crores. In

    the aforesaid background, he prayed for dismissal of the appeal.

         14.    We have heard the learned counsel representing the

    parties and gone through the record.

         15.    While exploring answer       to the     questions       of law

    reproduced herein above, as well as submissions made by the

    learned counsel representing the parties, this Court had an

    occasion to peruse material adduced on record by the appellant-

    department as well as impugned order having been passed by the

    learned Tribunal below, perusal whereof certainly suggest that

    there is no dispute, if any, with regard to chargeable interest

    assessed by the Assessing Officer, which was determined by

    Assessing Officer on 5.2.2002 by way of revised assessment order

    (Annexure P-5), whereby assessee was held liable to pay chargeable

    interest at `16,63,05,388/- as against interest of `7,18,86,385/-.

                                      10
    Dispute, if any, inter se parties is with regard to imposition of

    penalty under Section 13 of Interest-Tax Act, 1974, whereby,

    initially penalty of `1,49,67,486 i.e. three times of the interest tax

                                                                 .
    sought to be evaded, came to be imposed by the Assessing Officer,

    however, quantum of same was reduced to `49,89,162/- i.e. 100%

    of tax, sought to be evaded, by the Commissioner Income Tax

    (Appeals), vide order dated 20.8.2003.

         16.    This Court, while allowing ITA No. 33 of 2006, having

    been preferred by appellant department, has already held that

    Section 271 (1)(c) of the Income-Tax Act, 1961 can not be taken

    into consideration while imposing penalty under Section 13 of the

    Interest-Tax Act, 1974. This Court has further held that though

    Section 21 of the Interest-Tax Act, 1974 makes certain provisions

    of Income-Tax Act, 1961 applicable to proceedings under Interest-

 Tax Act, 1974 but Section 271 is not included therein, as such, this

    Court came to conclusion that provisions contained in Section

    271(1)(c) were wrongly invoked by the Assessing Officer and

    Commissioner Income Tax while imposing penalty under Section 13

    of the Interest-Tax Act, 1974 against respondent Bank. However,

    the fact remains that this Court in the aforesaid appeal, while

    holding that provisions contained in Section 271 (1)(c) of Income-

 Tax Act, 1961 are not applicable to proceedings under Interest-Tax

    Act, 1974, categorically held that Section 13 of the Act provides for

    imposition of penalty in case assessee conceals particulars of

    chargeable interests or furnishes inaccurate particulars of such

    interest. After careful examination of judgment passed by this

                                        11

    Court in ITA No. 33 of 2006, dated 28.10.2009, there can not be

    any dispute that penalty, if any, under Section 13 of the Interest-

 Tax Act, 1974 could be imposed against assessee in case Assessing

                                                                   .
    Officer comes to definite conclusion that assessee concealed

    particulars    of   chargeable   interest   or   furnished       inaccurate

    particulars of such interest.

         17.      Careful perusal of impugned order having been passed

    clearly suggests that learned Tribunal below had an occasion to go

    through the complete record pertaining to the proceedings of the

    imposition of penalty under Section 13 of the Interest-Tax Act,

    1974, against the respondent. Paras 16 and 17 of the impugned

    order passed by learned Tribunal below clearly suggest that before

    passing impugned order, it carefully examined/ analyzed order

    passed by Assessing Officer imposing therein penalty under Section

    13 of the Interest-Tax Act, 1974. It clearly emerges from the

    impugned order, which is admittedly based upon record of the

    appellant that assessee had furnished return of chargeable interest

    for the financial year 1991-92 relating to assessment year 1992-93

    and declared chargeable interest at `7.18 Crores, which was

    accepted in its entirety. It is also not disputed that assessee had

    paid advance tax of `23,50,000/- against aforesaid income before

    closure of financial year i.e. `1,10,000/- on 7.2.1992 and

    `12,50,000/- on 16.3.1992. Similarly, there is no dispute that

    return of chargeable interest as referred above was not filed within

    stipulated time by assessee, rather same was filed pursuant to

    issuance of notice of re-assessment issued by Assessing Officer

                                      12

    under Section 10 of the Interest-Tax Act, 1974. Similarly, it clearly

    emerges from record that further additional amount of tax                 on

    securities and head office investment account was ordered by the

                                                                 .
    Commissioner Income Tax, while exercising powers under Section

    19 of the Interest-Tax Act, 1974, pursuant to Board's instructions

    No. 1923 dated 14.3.1995

         18.    Similarly, it emerges from the order of Assessing Officer

    itself that assessee in its profit and loss account had declared

    interest received as `39.98 Crores, which was duly considered by

    the Assessing Officer and details relating to interest on approved

    securities i.e. chargeable for the period of six months i.e. from

    1.10.1991 to 31.3.1992 was duly assessed as income of the

    assessee. At this stage, it would be profitable to refer to Section 13

    of the Interest-Tax Act, 1974, which is reproduced below:

         "Penalty for concealment of chargeable interest
         13.    If the Assessing Officer or the Commissioner (Appeals)
         in the course of any proceeding under this Act, is satisfied

         that any person has concealed the particulars of chargeable
         interest or has furnished inaccurate particulars of such

         interest, he may direct that such person shall pay by way of
         penalty, in addition to any interest-tax payable by him, a sum
         which shall not be less than, but shall not exceed three times,
         the amount of interest-tax sought to be evaded by reason of

         the concealment of particulars of his chargeable interest or
         the furnishing of inaccurate particulars of such chargeable
         interest."

         19.    True it is that provisions contained in Section 13 of

    Interest-Tax Act, 1974 clearly suggest that penalty is leviable on

    the assessee where he/she has concealed its interest chargeable to

    tax or furnished inaccurate particulars of interest chargeable to

    income tax. It clearly emerges from the record that assessee had

                                           13

    furnished return of chargeable interest for the financial year 1991-

    92 relating to assessment year 1992-93. At the cost of repetition, it

    may be taken note at this stage that assessee had also paid

                                                                         .
    advance tax of `23,50,000/-, against aforesaid income before

    closure of the financial year. It also emerges from the record that

    return was delayed on account of non-availability of return form.

    Averments with regard to non-availability of return form with the

    department at relevant time, has been nowhere disputed by the

    representative of the department, who conducted case before

    learned Tribunal below.

 20.   Their lordships of the Supreme Court in Commr. of

    Inc.-Tax v. Angidi Chettiar reported in (1962) 44 I.T.R. 739 have

    held as under:

               "The penalty provisions under section 28 would therefore in the event
               of the default contemplated by clause (a), (b) or (c) be applicable in the
               course of assessment of a registered firm. If a registered firm is
               exposed to liability of paying penalty, by committing any of the

               defaults contemplated by clause (a), (b) or (c) by virtue of section 44,
               notwithstanding the dissolution of the firm the assessment proceedings
               are liable to be continued against the registered firm, as if it has not

               been dissolved.

               Counsel contended that in any event, penalty for the assessment year

               1949-50 could not be imposed upon the assessee firm because there
               was no evidence that the Income-Tax Officer was satisfied in the court
               of any assessment proceedings under the Income-Tax Act that the firm
               had concealed the particulars of its income or had deliberately
               furnished inaccurate particulars of the income. 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 proceedings by the Income-Tax Officer. Satisfaction before
               conclusion of the proceeding 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. There is no evidence on the record that

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                                            14

               the Income-Tax Officer was not satisfied in the course of the
               assessment proceedings that the firm had concealed its income. The
               assessment order is dated the 10th November, 1951, and there is an
               endorsement at the foot of the assessment order by the Income-Tax
               Officer that action under S. 28 had been taken for concealment of
               income indicating clearly that the Income-Tax Officer was satisfied in
               the course of the assessment proceedings that the firm had concealed

                                                                          .
               its income.

               In our view, the High Court was in error in holding that penalty could
               not be imposed under section 28 (1) (c) upon the firm Messrs. S. V.
               Veerappan Chettiar & Co. after its dissolution."

         21.   Their lordships of Supreme Court in K.C. Builders v.

    Asstt. C.I.T. (S.C.) reported in (2004) 265 I.T.R. 562 have held as

    under:

               "Section 147 of the Act deals with income escaping assessment.
               Section 148 deals with issue of notice where income has escaped
               assessment. Section 254 deals with orders of Appellate Tribunal.

               Section 256 deals with statement of case to the High Court (reference).

               Section 271 (1)(c) reads as follows:- "Section 271. Failure to furnish
               returns, comply with notices, concealment of income, etc.   (1) If the
               Assessing Officer or the Commissioner(Appeals) in the course of any
               proceedings under this Act, is satisfied that any person  

               (a)             ..

               (b)                 .

               (c) has concealed the particulars of his income or furnished inaccurate
               particulars of such income, he may direct that such person shall pay by
               way of penalty, -

               (i)         .

               (ii)        

               (iii) in the cases referred to in clause (c), in addition to any tax payable
               by him, a sum which shall not be less than, but which shall not exceed
               three times, the amount of tax sought to be evaded by reason of the
               concealment of particulars of his income or the furnishing of
               inaccurate particulars of such income."

               One of the amendments made to the abovementioned provisions is the
               omission of the word "deliberately" from the expression "deliberately
               furnished inaccurate particulars of such income". It is implicit in the
               word "concealed" that there has been a deliberate act on the part of the
               assessee. The meaning of the word "concealment" as found in Shorter
               Oxford English Dictionary, 3rd Edition, Volume I, is as follows:- "In

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                                           15

               law, the intentional suppression of truth or fact known, to the injury or
               prejudice of another."

               The word "concealment" inherently carried with it the element of mens
               rea. Therefore, the mere fact that some figure or some particulars have
               been disclosed by itself, even if takes out the case from the purview of
               non-disclosure, it cannot by itself take out the case from the purview of

                                                                        .
               furnishing inaccurate particulars. Mere omission from the return of an

               item of receipt does neither amount to concealment nor deliberate
               furnishing of inaccurate particulars of income unless and until there is
               some evidence to show or some circumstances found from which it can
               be gathered that the omission was attributable to an intention or desire

               on the part of the assessee to hide or conceal the income so as to avoid
               the imposition of tax thereon. In order that a penalty under Section
               271(1) (iii) may be imposed, it has to be proved that the assessee has
               consciously made the concealment or furnished inaccurate particulars
               of his income. Where the additions made in the assessment order, on

               the basis of which penalty for concealment was levied, are deleted,
               there remains no basis at all for levying the penalty for concealment
               and, therefore, in such a case no such penalty can survive and the same
               is liable to be cancelled as in the instant case. Ordinarily, penalty
               cannot stand if the assessment itself is set aside. Where an order of

               assessment or reassessment on the basis of which penalty has been
               levied on the assessee has itself been finally set aside or cancelled by

               the Tribunal or otherwise, the penalty cannot stand by itself and the
               same is liable to be cancelled as in the instant case ordered by the
               Tribunal and later cancellation of penalty by the authorities."

         22.   Similarly, Division Bench of Delhi High Court in CIT v.

    Bacardi Martini India Ltd. (Delhi) reported in (2007) 288 ITR 585

    (Delhi) have held as under:

 "14. We have heard the counsel for the parties and perused the record.
               It has been observed by the Supreme Court in K.C. Builders and Anr v.
               Assistant Commissioner of Income Tax- 2004 ITR Vol. 265 page 562,
               that concealment inherently carries with it the element of means ria. It

               is implied in the word 'concealment' that there has been a deliberate act
               on the part of the assessed. The meaning of word 'concealment' as
               found in Shorter Oxford Dictionary III Edition, Vol-I is "in law the
               intentional suppression of truth or fact known, to the injury or
               prejudice of another". Supreme Court further observed that mere
               omission from the return of an item of receipt does neither amount to
               concealment nor deliberate furnishing of inaccurate particulars of
               income, unless and until there is some evidence to show or some
               circumstances found from which it can be gathered that the omission
               was attributable to an intention or desire on the part of the assess to
               hide or conceal the income so as to avoid imposition of tax thereon. In
               order that a penalty under Section 271(1)(iii) may be imposed, it has to
               be proved that assessed has consciously made the concealment or
               furnished inaccurate particulars of his income.

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                                 16
 15.     It is clear from the law laid down by the Supreme court that
     concealment must be accompanied with the intention of the assessed to
     evade his tax liability. The assessed in this case had uniformly claimed
     expenditure against four heads in three assessment years. When the
     appeal against the order of Assessing Officer before CIT (A) in respect
     of assessment order 1998-1999 failed the assessed instead of preferring
     appeal considered it proper not to litigate further as it was running into

                                                               .
     heavy losses and even if the appeal had been allowed, the assessed

     would not have paid any tax. The assessed in any case would have
     remained in heavy losses. The assessed therefore thought it proper not
     to prefer an appeal and after receipt of order, assessed made an
     application on 4.2.2003 to correct the income returns of subsequent

     years in accordance with order of CIT for the year 1998-1999. The
     assessed, therefore, filed revised returns deleting the expenses which
     were disallowed by the CIT (A). In the relevant year assessed had also
     claimed expenses of Rs. 2 crores paid by the assessed in terms of the
     agreement entered into by the assessed with the leasing Lesser. The

     assessed claimed the entire amount of Rs. 2 crores as deduction since
     the assessed had paid this amount of Rs. 2 Crores to the Lesser. There
     is no dispute that the assessed had disclosed all particulars. It was only
     difference of opinion between the assessed and the Assessing Officer
     and the assessed accepted the opinion of the Assessing Officer instead

     of preferring an appeal.

     16.     It is not a case where assessed had not been able to explain any
     expenditure or had failed to give any details and the Assessing Officer
     had added the same into the income. In Durga Timber v. CIT 197 ITR
     Page 63, relied upon by the appellant, during the course of the
     assessment proceedings the Income Tax Officer had noticed cash

     credits and investments shown in the books of account and asked the
     assessed to give explanation. The assessed could not give explanation
     of entires nor could explain the source of income and admitted that the
     two amounts be treated as his concealment. Under these circumstances

     court observed that there was concealment of income and penalty was
     justified. In the present case assessed had explained all the expenditure

     and had actually incurred the expenditure but the expenditures were
     disallowed because of difference of opinion between the assessed and
     the Assessing Officer. This is not a case where revised return was filed
     as a result of discovery of some facts by the Assessing Officer or

     inability of the assessed to explain the expenditure. The revised return
     was filed because some of the expenditure were disallowed by the CIT
     (A) appeal for year 1998-99 although the expenditure were not
     doubted. There are cases where an expenditure is disallowed by the
     Assessing Officer and it is allowed by the CIT (A). It is again
     disallowed by the ITAT and in appeal allowed by the High Court and
     may be disallowed by the Supreme Court. Merely because there is
     difference of opinion for allowing or disallowing the expenditure
     between the assessed and Assessing Officer, it cannot be said that
     assessed had intention to conceal the income. The filing of the revised
     return excluding some of the disallowed expenditure and claiming
     expenditure of Rs. 2 crores which was actually spent by the assessed in
     the relevant assessment year as deduction, does not amount to
     concealment or furnishing inaccurate particulars. The assessed had
     given all particulars of expenditure and income and had disclosed all

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                                            17

               facts to the Assessing Officer. It is not the case of the Assessing Officer
               or the appellant that in reply to the questionnaire of the Assessing
               Officer, some new facts were discovered or Assessing Officer had dug
               out some information which was not furnished by the assessed.

               17.     We find that appellant's contention of concealment of income
               by the assessed or furnishing of false particulars by the assessed has no

                                                                         .
               basis. There is no force in the appeal and the appeal deserves to be

               dismissed and is hereby dismissed. No order as to costs."

         23.   Similarly, this Court sees substantial force in the

    arguments having been made by the learned counsel representing

    the respondent that there was no occasion for the respondent Bank

    to show interest on securities and interest on head office

    investment account, because same was made chargeable pursuant

    to Board's instructions No. 1923 dated 14.3.1995 and that too for

    the period October, 1991 to 31.3.1992 and as such there is no

    concealment, if any, on the part of assessee. Learned counsel

    representing the appellant was unable to dispute that interest on

    securities and interest on head office investment account was made

    chargeable pursuant to Board's instructions No. 1923 dated

    14.3.1995 and as such, this Court sees no occasion for assessee

    Bank to declare same in its profit and loss account, wherein it had

    declared interest of `39.98 Crores, on approved securities for the

    period 1.10.1991 to 31.3.1992. Otherwise also, penalty order dated

    28.5.2010 passed under Section 13 of the Interest-Tax Act, 1974,

    nowhere suggests that appellant was able to prove on record that

    assessee concealed particulars of interest or furnished inaccurate

    particulars of interest, rather, careful examination of material

    available on record clearly suggests that assessee had furnished

    complete particulars of its income in the profit and loss account

                                      18

    and as such, there is no illegality or infirmity in the order passed

    by learned Tribunal below, whereby it has held that there is no

    merit in holding assessee liable to pay penalty under Section 13 of

                                                                 .
    the Interest-Tax Act, 1974.

         24.     Thus, this Court sees no illegality or infirmity in the

    order passed by learned Tribunal below, whereby it has deleted

    penalty on the ground that interest became chargeable to tax only

    after Board's instructions No. 1923 dated 14.3.1995, because,

    admittedly, interest on securities and interest on head office

    investment account was made chargeable pursuant to Board's

    instructions, which could certainly be not made applicable to the

    assessment made for the period October, 1991 to 31.3.1992.

         25.     In these circumstances, we answer both the substantial

    questions of law in favour of the respondent and against the

    appellant.

         26.     Accordingly, impugned order is upheld and appeal is

    dismissed. Pending applications, if any, are also disposed of.

                                             (Mansoor Ahmad Mir)
                                                Chief Justice

                                               (Sandeep Sharma)
                                                    Judge
            April 19, 2017
               (vikrant)

The Tamil Nadu Cricket Association vs The Director Of Income Tax (Exemptions) on 21 October, 2013
Bench: Chitra Venkataraman, T.S.Sivagnanam
       
Dated : 21.10.2013
Coram
and
The Honourable Mr.Justice T.S.SIVAGNANAM

Tax Case (Appeal).No.450 of 2013
and M.P.No.1 of 2013
---
The Tamil Nadu Cricket Association
No.5, M.A.Chidambaram Stadium
Victoria Hostel Road
Chepauk, Chennai-600 005					
								 ... Appellant
-vs-

1.The Director of Income Tax (Exemptions)
   No.121, Mahatma Gandhi Road
   Nungambakkam,  Chennai-600 034

2.The Deputy Director of Income Tax
   Exemptions-I
   121, Mahatma Gandhi Road
   Chennai-600 034

3.The Joint Director of Income Tax (Exemptions)
   Nungambakkam, Chennai-34			   
							     ...  Respondents

	Tax 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.

	For appellant	   : Mr.P.S.Raman, Senior counsel
				     for Mr.P.R.Raman
	For respondent       : Mr.J.Narayanaswamy
				      Standing Counsel for I.T.Department.

J U D G M E N T

CHITRA VENKATARAMAN, J.)
	The 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:-
	"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' ?
	2. 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 ?
	3. 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 ?"
	2. 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:-
	(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. 
	(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. 
	(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. 
	(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. 

	3. 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.  

	4. 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. 

	5. 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. 

	6. 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:-
1.Subscription
2.Rent for hiring cricket ground, rooms and premises
3.Fees for providing services to IPL
4.Income from advertisement
5.Subsidy from BCCI
6.Sale of ticket for conducting of matches
7.Restaurant and catering income etc.
Thus, 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. 

	7. 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. 

	8. 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.  

	9. 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.  

	10. 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.  

	11. 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.  

	12. 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. 

	13. 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.  

	14. 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.

	15. 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. 

	16. 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. 

	17. 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).

	18. 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.  

	19. 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).

	20. 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 charitable purpose 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. 

	21. Heard learned Senior counsel appearing for the assessee and learned Standing counsel appearing for the Revenue and perused the materials available on record.

	22. 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:-
	" 'charitable purpose' includes relief of the poor, education, medical relief and the advancement of any other object of general public utility."

	23. Section 2(15) was amended under Finance Act,2008, with effect form 1.4.2009 by substituting the following provision which  reads s under:
	"2. Definitions.
		....
	(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. 
Provided 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;)

 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.

	25. 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'.

	26. The Central Board of Direct Taxes, in paragraph 3.2 pointed out to the scope of the circular as under:-
	" 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."

	27. 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.

	28. 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. 

	29. 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. 

	30. 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:-
Provision inserted under Finance Act, 2004:
 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. 

Provided that no order under this sub-section shall be passed unless  such trust or institution has been given a reasonable opportunity of being heard.

    31. After amendment in the year 2010, Section 12AA(3)  of the Income Tax Act reads as follows:
	"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:
Provided that no order under this sub-section shall be passed unless  such trust or institution has been given a reasonable opportunity of being heard."

	32. 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. 

	33. 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.  

	34.   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.  

	36. 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:
	"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. 
...........
power 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."

 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:-
	" 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."

	38. 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. 

	39. 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.  

	40. 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.  

	41. Referring to Section 12AA of the Income Tax Act, 1961, this Court has held as under:-
	" 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."

 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.

	43. 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.

	44. 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.  

	45. 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.  

	46. 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 general public utility .  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.

 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.

 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 assessees 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.

 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. 

 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.
	51. 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. 

	52. 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.  

	53. 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.  

	54. 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.  

	55. 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.   

	56.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.  	

	57. 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.  

	58. In the result, the Tax Case (Appeal) stands allowed. No costs. Consequently, connected MP is closed.

Index:Yes					  (C.V.,J)        (T.S.S.,J)
Internet:Yes						 21.10.2013	
nvsri

To

1. The Director of Income Tax (Exemptions)
    No.121, Mahatma Gandhi Road
    Nungambakkam,   Chennai-600 034

   Exemptions-I,  121 Mahatma Gandhi Road

   121, Mahatma Gandhi Road,   Nungambakkam

4.The Income Tax Appellate Tribunal
   B Bench, Chennai.
					CHITRA VENKATARAMAN, J.
									and	
						T.S.SIVAGNANAM, J.

nvsri

Tax Case (Appeal) No.450 of 2013

21.10.2013

C.N. Paramasivam vs Sunrise Plaza on 31 March, 2010
Author: C.Nagappan
Bench: C. Nagappan
       
DATED:      31.03.2010

C O R A M

THE HONOURABLE MR. JUSTICE C. NAGAPPAN

and

THE HONOURABLE MR. JUSTICE T.S.SIVAGNANAM

Writ Petition No.14594  of  2007
and
M.P.Nos.1  and  2  of  2007

1. C.N. Paramasivam
2. E.M.C. Palaniappan		         	    ... Petitioners 

Vs

1. Sunrise Plaza,
represented by its Partner 
 Kalyanasundaram
No.637-638 (321-C),
Poonamallee High Road
Aminjikarai, Chennai-600 029.

2. S.Kalyanasundaram

3. Mrs.Vasantha Kalyanasundaram

4. Indian Bank
Anna Nagar Branch,
Chennai-600 040.

5. The Debts Recovery Appellate Tribunal,
Chennai.				 	   ...  Respondents

    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.

		  For Petitioners      ...   Mr. R. Murari

	               For  Respondents  ...   Mr.T.V.Ramanujam,  	
				         Senior  Counsel 
				         for M/s.S.Ramesh	
				         for Respondents 1 to 3

				         Mr.M.Vijayan
				         for M/s.King & Partridge
					for  R4.	
	
 O R D E R
C.NAGAPPAN, J.

	The 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.

	2. 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.

	 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.

	 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.   

	  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.

	   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.

	7.  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.

	8. 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.

"1.JANAK RAJ  V.  GURDIAL SINGH  (AIR  1967  SUPREME COURT 608)
2.  GURJOGINDER SINGH VS. JASWANT KAUR (SMT)  AND ANR. (SC)  (1994) 2 SCC 368)
3.    PADANATHIL RUQMINI AMMA  V.  P.K.ABDULLA (1996) 7 SCC 668)
4. ASHWIN  S.MEHTA  AND ANOTHER V.  CUSTODIAN  AND OTHERS (2006) 2 SCC  385)
5. JANATHA TEXTILES AND ORS. VS.                     TAX  RECOVERY  OFFICER  AND  ANR.         (2008)	8  SCALE  76)
6.   S. CHOKALINGAM ASARI V. N.S.KRISHNA   IYER AND OTHERS  (A.I.R. 1964 MADRAS 404)"

          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.

"1. MANILAL MOHANLAL SHAH  AND OTHERS V. SARDAR SAYED AHMED SAYED MAHMAD AND ANOTHER (AIR  1954 SUPREME COURT 349)
2. RAO MAHMOOD AHMED KHAN V.                       Sh. RANBIR SINGH AND OTHERS (AIR  1995 SUPREME COURT 2195)
3.    BALRAM SON OF BHASA RAM V. ILAM SINGH AND OTHERS (AIR  1996 SUPREME COURT 2781)

4.   NARAYANA KARWA  V.  UNION OF  INDIA  [2008]  296  ITR  0545]"

	10. 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).

	11.  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.

          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.

	"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.

(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.

	58.  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."

Similar 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.  
               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.
   "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).

    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.
      10.  ....
    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."

The 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.

          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.

"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.

2. 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.

3. 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.

4. The Recovery officer has the absolute right to accept or reject a bid or postpone/cancel the sale.

5. ......."

The 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.

	15.  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.
"DRC 164/2001	
      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/-."

From 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.

	16.  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:
   "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.

    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."

      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.

	18.  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.

	19.  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.

	20.  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.

	21.  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.

   "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.
   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.
.....  .....
There 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."

The ratio of the  above decision  is  applicable to the facts of the present  case.

 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.

	23.  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.

	24. With respect,  we  are not  in  agreement  with the view taken by the Division Bench of  Andhra Pradesh High Court in the above decision.

	25. 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.  

 	26.  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.

	27.  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. 

          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.

	29.  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.

	30.  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.

   				       (C.N., J.)        (T.S.S., J.)         						       				              	   31 .3.2010     

Index:    Yes.
Internet: Yes.      
vks

To

1.  Indian  Bank

2. The Registrar,
Debts Recovery Appellate Tribunal,
Chennai.	
 
and       
T.S.SIVAGNANAM, J.
vks

W.P.No.No.14594  of  2007
and

   31.3.2010

Chowgule And Co. Ltd. vs Commissioner Of Income-Tax And Others on 3 March, 1992
Equivalent citations: 1992(3)BOMCR256, [1992]195ITR810(BOM)
JUDGMENT
 
 M.L. Dudhat, J. 
 
 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.  

 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.  

3. 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.  

 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.  

 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.  

 6. The petitioners, in paragraph 8 of their petition, have stated as under :  

 "The application of rule 115 of the Income-tax Rules, 1962, to the petitioners' export earnings will yield the following result :  

 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."   

 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.  

 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.  

 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.  

 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.  

 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 :  
  "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."  

12. 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) :

  "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) :

 "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.'  
 
 The same principle applies to receipts in the course of business of a transport operator."   

 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) :  
  "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."  

 14. In paragraph 8 of the aforesaid judgment, the Supreme Court had reiterated the aforesaid proposition by observing as follows (at page 376) :  
 "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."

 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.  

 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 :  

 "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. . . . . .  

 (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."   

 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.  

 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.  

 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.  

 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.

 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.

 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.

 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 :  
  "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)."  

 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.  

 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.

Mahendra Kumar Agrawalla vs Income-Tax Officer And Ors. on 12 September, 1974
Equivalent citations: [1976]103ITR688(PATNA)
Author: Nagendra Prasad Singh
Bench: Nagendra Prasad Singh
JUDGMENT

 S.N.P. Singh, J.  
 
 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. 

 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. 

 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

of 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". 

 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. 

 5. Mr. T. P. Mukherjee, learned counsel appearing for the petitioner, raised the following contentions : 

(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". 

 (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". 

 (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. 

 (4) The requisite conditions to reopen the assessment being not present, the Income-tax Officer had no jurisdiction to issue the impugned notices. 

 (5) The Commissioner of Income-tax mechanically granted sanction for issuing the notices without applying his mind and as such the notices are invalid. 

 (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).  

 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. 

 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

persons 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:

"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." 

 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

and 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. 

8.  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 : 

"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 :

......You will be paid a fixed profit of Rs. 1,500 yearly  as  your share
only when there is a profit in the business......"   
 
9. 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

submission, 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.

 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 

Syndicate, [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.

 11. In the Income-tax Act, 1961, the charging section is Section 4, which reads thus: 

"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 : 

 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. 

 (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."  
 
 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

separately 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:

"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." 

 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  
  
"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

be 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." 

 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. 

 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. 

 16. 
 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. 

 17. The impugned notice issued under Section 148 of the Income-tax Act, 1961, reads as follows:  

  "To  
 
       M/s. Central Sulunga (A.O.P.) 

        Colliery, Jharia.  

       Whereas 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. 

 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. 

 2. The notice is being issued after obtaining the necessary satisfaction of the Commissioner of Income-tax, Bihar, Patna. 

(Sd.) Illegible,         

 Income-tax Officer."  

Although 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

Colliery 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. 

 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: 

        "Government of India  
 
 Office of the Income-tax Officer, Colliery Circle,  
 
 Dhanbad.  

--------- 

No. Con. B. CC/68-69/2752  

Dated Dhanbad the 19th March, 1969. 

 To  
 
    The Commissioner of Income-tax,  

    Bihar, Patna. 
 
  Sir, 
 			Sub:    M/s, Central Sulunga Colliery--proposal u/s 147.
 
-------------- 
 
 I beg to submit herewith proposal under Section 147(a) for assessment years 1960-61 to 1965-66, in respect of the above assessee.  

 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. 

Yours faithfully, 

 (Sd.) S. P. Varma,  

Income-tax Officer, Ward-B,  

Colliery Circle, Dhanbad." 

 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. 

 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

affect the jurisdiction of the Income-tax Officer to proceed with the assessments under Section 147. 

 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: 

"(a) the secretary, treasurer, manager or agent of the authority, company, association or body, or  
 
 (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 : 

 "Central Sulunga Colliery Co.  

P.O. Jharia (Dhanbad),  

Dated May 6, 1969.  

 Ref. No......... 

The Income-tax Officer,  

Ward-B,  

Colliery Circle,  

Dhanbad.  
 			Sub: Your notice dated 31-3-69 u/s 148 of the I.T. Act, 1961,
			for the assessment year 1962-63. 

 Dear Sir,  
 
 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. 
 
 We, therefore, pray that at least one month's time may kindly be granted to enable us to reply in the matter. 
 
 And for this act of grace, we shall pray. 

Yours faithfully,         

For Central Sulunga Colliery Co. 

(Sd.) Yogendra Kumar Agrawalla.  

Co-Partner."           

 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

the Income-tax Officer to proceed with the assessment under Section 147 of the Income-tax Act, 1961. 

 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.

 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. 

 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
of 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. 

 Nagendra Prasad  Singh, J.  

 26. I agree.

Akola Electrical Supply Co. Pvt. Ltd. vs Commissioner Of Income-Tax, Bombay ... on 5 August, 1977
Equivalent citations: [1978]113ITR265(BOM)
Bench: V.D. Tulzapurkar
JUDGMENT
 
 Kantawala, C.J.  
 
 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. 

2. 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. 

3. 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. 

4. 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. 

5. 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. 
 
6. 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. 

7. 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. 

8. Out of this order of the Tribunal the following three questions are referred to us for our determination at the instance of the assessee : 

 "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 ? 

2. 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 ? 

3. 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 ?"  

9. 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. 

10. 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. 

11. 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 : 
 "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." 

12. Sub-section (7), prior to the amendment, provided as under : 
 "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." 

13. 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 : 
 "(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." 

14. At the end of sub-section (7) the following words were added - 
 "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." 

15. 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 : 

 "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 - 

(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 : 
  Provided that any such debt, mortgage or similar obligation shall attach to the purchase money in substitution for undertaking :  

(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.   

16. 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. 

17. 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 : 

 "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 : 
  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.  

Explanation. - 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."  

18. Sub-section (3) and (4) are not relevant for the present purpose but Explanation to sub-section (4) is relevant and is as under : 
 "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." 

19. Sub-section (5) contains provisions as regards writing off of the loss of the earlier years and its provisions are as under : 
 "(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." 

20. 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 : 

"Explanation. - For the purposes of this clause, - 

(1) 'moneys payable' in respect of any building, machinery, plant or furniture includes - 

(a) any insurance, salvage or compensation moneys payable in respect thereof; 

(b) where the building, machinery, plant or furniture is sold, the price for which it is sold.....  

(2) 'sold' includes a transfer by way of exchange or a compulsory acquisition under any law for the time being in force..."   

21. 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 :

In 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 : 
 "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.  

22. 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- ). 

23. 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. 

24. 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.

25. 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. 

26. 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 : 

 "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. 

(2) Such profits or gains shall be computed after making the following allowances, namely :-...... 

(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 :...... 

Provided 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 :....... 

Provided 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 :....."   

27. 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. 

28. 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.

29. 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.

30. The assessee shall pay the costs of the revenue.

Income Tax Officer vs Mrs. Dwarika Prasad Trust. on 2 June, 1989
Equivalent citations: [1989]30ITD84(DELHI)
ORDER
Per 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.

3. 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.

4. 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.

5. 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.

6. 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.

7. 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.

8. 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.

9. 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.

10. 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.

6. 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.

7. 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.

8. 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.

9. 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.

10. 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.

ORDER UNDER SECTION 225(4) OF THE INCOME-TAX ACT, 1961
 
In 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 :-

"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 ?"

2. 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.

THIRD MEMBER ORDER
 
Per 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.

2. 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.

3. 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.

4. Against this order of the Appellate Asstt. Commissioner, the department filed a further appeal before the Tribunal raising the questions noted above.

5. 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.

6. 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.

7. 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;-

As 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.

8. 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.

9. Section 12A of the Income-tax Act, 1961 provides :

"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 :-

(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 :

Provided 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.

(Sub-clause (b) is not quoted here as it is not relevant for our present purpose.)
 
Rule 17A prescribes the procedure for making an application. It provides :

"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 :-

(a) where the trust is created, or the institution is established, under an instrument, the instrument, in original, together with one copy thereof;

and 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 :

Provided 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 :

(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."

It 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.

10. 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.

11. The trust deep provided in clause (d), which is the controversial clause, as under :

"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."

It 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.

12. 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 :

"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."

The second question posed for consideration before the Supreme Court was :

"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 ?"

Thus 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.

13. 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.

14. 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.

15. The matter will now go before the regular Bench for deciding the appeals according to the opinion of the majority.

Sandersons & Morgans vs Income-Tax Officer, "A" Ward And Ors. on 23 December, 1971
Equivalent citations: [1973]87ITR270(CAL)
JUDGMENT
 
  Sabyasachi Mukhakji, J.  
 
 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 : 
  "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. " 

 2. Clause 4 is very material and is to the following effect: 
  "The death or retirement of any partner shall not dissolve the partnership as to the other partners. " 

 3. Clause 8 stipulated: 

  " 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. 

 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. 

 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."  

 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." 

 5. Clause 24(a) is also relevant and provides as follows : 
  " 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." 

 6. Clause 26 provides as follows : 
  " 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." 

 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. 

 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 : 

 " Order regarding Regulation Under Section 184(4). 

 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."  

9. 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: 

 " Appellate order and ground of decision. 

 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. 

 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."  

 10. As mentioned hereinbefore, being aggrieved by the aforesaid two orders the petitioner moved this application under Article 226 of the Constitution. 

 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. 

 Section 184: 

  " (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. 

 (2) Such application may, subject to the provisions of this section, be made either during the existence of the firm or after its dissolution. 

 (3) The application shall be made to the Income-tax Officer having jurisdiction to assess the firm, and shall be signed- 

 (a) by all the partners (not being minors) personally; or  
 
 (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,"    

 Section 185: 

  " 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- 

 (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;  

 (b) if he is not so satisfied, he shall pass an order in writing refusing to register the firm.   

 (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.  

 (3) If the defect is not rectified within such time, the Income-tax Officer may reject the application."   

 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: 

 " For the purposes of this section, there is a change in the constitution of the firm- 

 (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  
 
 (b) where all the partners continue with a change in their respective shares or in the shares of some of them."    

13.  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. 

 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. 

 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 ", 
 
 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. 

 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. 

 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.

 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.

Singho Mica Mining Co. Ltd. vs Commissioner Of Income-Tax, Central on 27 June, 1975
Equivalent citations: [1978]111ITR231(CAL)
JUDGMENT
 
 Dipak Kumar Sen, J.  
 
 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
the Income-tax Officer to compute and recover such interest. Interest was levied accordingly.

2. 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.

3. 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.

4. 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).

5. 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.

6. 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.

7. 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.

8. 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.

9. 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.

10. 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
Indian 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.

11. 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.

12. 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.

13. The questions which have been referred under Section 256(1) of the Income-tax Act, 1961, in this reference are as follows :

"(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 ?

(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 ?

(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 ?

(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 ?" 

14. 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.

15. 
Mr. 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,
 
16. 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.

17. 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):

"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 ?" 

18. 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):

"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." 

19. 
Mr. 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.

20. 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
1948-49. The appeal in respect of the assessment year 1949-50 remained
pending.

21. 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. 

22. The questions which were mooted before the Supreme Court were as
follows:

"(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 ?

(2) Did the order of registration along with the subsequent order of
assessment merge in the appellate order? 

(3) Whether the order of registration, in respect of the assessment year
1949-50 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 ? " 

23. 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,
 
24. But in the case before it the order granting registration to a firm under Section 26A was an independent and separate order.

25. 
No 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.

26. 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.

27. 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.

28. 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
not 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.

29. 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.

30. 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.

31. 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.

32. 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
subject-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.

33. 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.

34. 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.

35. 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
assessment order it could not be said that there was an error on the part of the Income-tax Officer.

36. 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.

37. 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.

38. 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.

39. 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,
40. On the preceding reasons we answer the questions as follows ;

With reference to question No. 1 we hold that only the assessment order which was the subject-matter of the appeal merged with the order
of 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. 

Question 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.

Question No. 3 is answered also in the affirmative and in favour of the
revenue.

41. 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.

42. In the facts and circumstances there will be no order as to costs.

Deb,  J.  

43. I agree.

In The Matter Of: National Conduits (P) ... vs The Official Liquidator, New Delhi Of ... on 24 September, 1973
Equivalent citations: [1974]44COMPCAS219(DELHI), ILR1974DELHI535, [1974]94ITR378(DELHI)
JUDGMENT  

 D.K. Kapur, J.  

 (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.   

(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.   

(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.

(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."  

The 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."

Later 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."  

These 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.   

(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.

(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   

(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."

Under 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."  

Thus, 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."  

(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.   

(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.   

(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.

(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,

Commissioner Of Income-Tax vs Pratap Chand Maheshwari on 9 November, 1979
Equivalent citations: [1980]124ITR653(P&H)
JUDGMENT
 
 S.S. Dewan, J. 
 
 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"): 

 1.    (Arising out of I.T. Ref. Nos. 14, 15, 16 and 17 of 1979) Assessment year 1972-73   
    
  " (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? 

 (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 ? "  

 2.   (Arising out of I.T. Ref. No. 2 of 1979)
Assessment year 1973-74   
   
 " (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

for the purpose of levy of penalty under Section 273(1)(a) of the Income-tax Act, 1961 ? 

 (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 ? "  

 3.    Arising out of LT. Ref. Nos. 10, 11, 12 and 13 of 1979) Assessment year 1970-71   
   
 " (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 ? 

 4.    (Arising out of I.T. Ref. Nos. 38, 39 and 40 of 1978) Assessment year 1973-74  
  " 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)? " 

 5.    (Arising out of LT. Ref. No. 46 of 1978) Assessment year 1973-74  
  " 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?" 

2. The facts in the context of which the aforesaid questions are to be considered are not in dispute and can be stated thus : 

3. 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

of 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:
  " 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." 

4. This is how the matter is before us. 

5. 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

in 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.

 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 : 

 " 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- 

 (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...... 

 (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, 
 
 he may direct that such person shall, in addition to the amount of tax, if any, payable by him, pay by way of penalty... "  

7. 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 ! 
  
  " (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--... 

 (c) has concealed the particulars of his income or furnished inaccurate particulars of such income, 
 
 he may direct that such person shall pay by way of penalty...... "  

8.  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. 

9. 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.

the 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): 
  "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. " 

10. 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.

11. 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."

 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.

 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) :
  " 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
Act, 1961, 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. Hence, penalty for concealment of income
cannot be levied once in the hands of the firm and again in the hands of its
partners.  

14. 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.

15. 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. 

B.S. Dhillon, J. 

 16. I agree.

Presidency Medical Centre (P.) Ltd. vs Commissioner Of Income-Tax on 8 October, 1974
Equivalent citations: [1977]108ITR838(CAL)
JUDGMENT
 
  Sabyasachi Mukharji, J.  
 
 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 : 
  "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." 

 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. 

 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.

 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: 
  "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 ?" 

 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: 
  "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." 

 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: 
  "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)." 

 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: 

 "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- 

 (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;  

 (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   
 
 (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- 

 (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  
 
 (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."     

 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 :

  "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. 

 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."  

 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.

 10. In that view of the matter, the question referred to this court is answered in the affirmative and in favour of the assessee. 

 11. Each party will pay and bear their own costs. 

  Pyne, J.  

 12. I agree.

Mohindra Mohan Sirkar vs Income-Tax Officer And Anr. on 2 June, 1977
Equivalent citations: 81CWN876, [1978]112ITR47(CAL)
Author: M.M. Dutt
Bench: M.M. Dutt
JUDGMENT
 
 M.M. Dutt, J. 
 
 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. 

 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. 

 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. 

 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. 

5. The learned judge held that the returns filed by the appellant did not
show the prescribed particulars and, therefore, the revenue was entitled to
ignore the returns and proceed to issue notices under Section 148 of the
Income-tax Act, 1961. Upon the said findings, the learned judge discharged
the rule. Hence, this appeal.  

6. 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 : 

  "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,-- 

 (a) for the enforcement of any of the rights conferred by the provisions of Part III; or  
 
 (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  
 
 (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.....  

 (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 

such redress is provided for by or under any other law for   the time being
in force."  

7. Section 58(2) provides as follows : 

 "(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 : 

 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."  

8. 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

assessments 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. 

9. 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

circumstances, in our view, the petition under Article 226 had not abated as contended on behalf of the respondents. 

10. 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. 

 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 : 

  "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. 

 (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. 

 (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."  

12. 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. 

 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

invalid 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. 

14. 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.

15. 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.

 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

Section 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.

17. 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. 

18. 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. 

19. The appeal is allowed, but in view of the facts and circumstances of the case, there will be no order for costs. 

 Sharma, J. 

 20. I agree.

Commissioner Of Income-Tax vs Hindustan Gum And Chemicals Ltd. on 1 August, 1989
Equivalent citations: [1990]182ITR396(CAL)
JUDGMENT
 
  Ajit K. Sengupta, J. 
 
1. 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: 

 "(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? 

 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?"  

2. 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.

3. 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. 

4. 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. 

5. 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). 

6. 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 : 

  "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 : 

 (1) Income, profits and gains and other sums falling within the following clauses shall be excluded from such total income, namely: 

 (viii) 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...."  

7. 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. 

8. 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.

9. 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 : 
  "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." 

10. The said Explanation has come into effect on and from April 1, 1981. 

11. 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. 

12. 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. 

13. 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. 

14. It is, therefore, submitted that the decision in Distributors (Baroda)
P. Ltd.  does not cover the present question and
is no authority for the point which is to be decided in the present reference. 

15. 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) :
  "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?" 

16. There the Division Bench held as follows (at page 327) : 

 "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.

 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."

17. The Revenue has contended to the contrary. Heavy reliance has been placed on Distributors (Baroda) P. Ltd. .  

18. We have given our anxious consideration to the rival contentions. 

19. 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. 

20. 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. 

21. 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. 

22. 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) : 

 "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. 

 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."  

23. 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. .  

24. 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.

25. The contention of the assessee cannot be accepted for more than one
reason. 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. 

26. 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 : 
  "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). 

27. 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. 

28. This view which we have taken is also supported by the provisions contained in Rule 2 of the First Schedule. It provides as follows : 

  "The balance of the total income arrived at after making the exclusions mentioned in Rule 1 shall be reduced by-- 

 (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-- 

 (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 ; 

 (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." 

29. 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. 

30. 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) : 

 PART II

 COMPUTATION OF CHARGEABLE PROFITS.

 (Copies of the audited profit and loss account and balance-sheet must be attached to this return).

  Rs.
  Rs.

  1.
  Total income computed in accordance with the provisions of the Income-tax Act, 1961.
  Profit  + 
Loss    -
   
  (i)
  
  (ii)
  Income from house property
  
  (iii)
  Profits and gains of business
  
  (iv)
  Capital gains
  
  (v)
  Income from other sources
  
  Total income
   
Please see Note 2.
 
Note 2 (See item 1 of Part II)
 
Against 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,"  

31. 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. 

32. 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. 

33. There will be no order as to costs.  

  J.N. Hore, J. 

34. I agree.

Commissioner Of Income-Tax vs Globe Transport Corporation, Shambhu ... on 31 January, 1991
Equivalent citations: [1992]195ITR311(RAJ), 1991(1)WLC232
JUDGMENT

N.C. Sharma, J. 
 
 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.

2. 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 

been 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 :
  "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 ?" 

3. 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 

moved 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 :
  "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 ?" 

4. 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 :
  "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 ?" 

5. 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, 

respectively, and were answered by similar orders passed on 2nd, 3rd and 6th May, 1988. This court held :

"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.

Consequently, 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." 

6. 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.

7. 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.

8. 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 

the 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.

9. 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.

10. 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-

tax 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.

11. 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).

12. 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).

13. 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 :
  "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." 

14. 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 

judgment 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.

15. 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.

16. 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.

17. 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 :
  "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." 

18. 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 

whatsoever 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.

19. 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.

20. 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.

Bokaro Steel Ltd. vs Commissioner Of Income-Tax (No. 2) on 21 October, 1987
Equivalent citations: [1988]170ITR545(PATNA)
JUDGMENT
 
 Uday Sinha, J.  
 
 1. These are two references under Section 256(1) of
the Income-tax Act, 1961 (hereinafter referred to as " the Act").    They
relate to the assessment year 1972-73.    Taxation Case No. 41 of 1978  is
at the instance of the assessee and Taxation Case No. 42 of 1978 is at the

instance 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 : 

"(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 ? 

 (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 ? 

 (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 ? 

 (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 ? "  

 2. The questions referred at the instance of the Revenue are the following :

" (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 ? 

 (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 ? 

 (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 ? 

 (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 ? "  

 3. Two of the questions referred to this court read as follows : 

"(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 ? 

 (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 ?"  

 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

assessee 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. 

 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. 

 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. 

 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

a 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 :

"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 ' ? " 

 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): 

" 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." 

 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. 

 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

blue-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 :

" 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." 

  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); 

" 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."

 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.

 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. 

 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): 

" 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

said 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) 
 
 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. 

 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

before 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.

 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.

 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

and 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.

 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.

 20. Let a copy of this judgment be transmitted to the Assistant Registrar,
Income-tax Appellate Tribunal, in terms of Section 260 of the Income-tax
Act, 1961. 

 S.B. Sanyal  
 
 21. I agree.

Income-Tax Officer, "I" Ward And Ors. vs Mahadeo Lal Tulsyan on 25 May, 1977
Equivalent citations: [1978]111ITR25(CAL)
JUDGMENT
 
 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, 
 
 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

had 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. 

 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.

 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
also 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: 

  "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

assessee 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. 

 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."  

 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.  

 6. Section 147 of the Income-tax Act, 1961, inter alia, provides as follows : 

 " 147.    If- 

 (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  
 
 (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, assessor reassess such income or recompute the loss or the depreciation allowance, as the case may be, for the assessment year concerned......."   

 7. Section 148 runs as follows : 

 "(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. 

 (2) The Income-tax Officer shall, before issuing any notice under this section, record his reasons for doing so."  

 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

grounds, 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. .

 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:

 "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 : 

 "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."  

 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

loans 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 : 
  "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." 

 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. 

 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

Section 148 was not justified in relying on the opinion of the other Income-tax Officer which was merely a change of opinion. 

 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
this 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
a 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 :
  "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." 

 14. Further, the Supreme Court observed : 
  "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."

 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;

 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

Section 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,
 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

formation 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.

 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.

 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

scrutiny 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.

 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. 

 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
could grant permission for the issue of a notice under Section 148, but in
the instant case, the permission was granted by the Additional Commissioner of Income-tax and, accordingly, the notice was invalid. This argument
is devoid of any merit, for Section 2(16) of the Income-tax Act, 1961,
defines the word "Commissioner" as meaning a person appointed to be a
Commissioner of Income-tax under Sub-section (1) of Section 117, and
includes a person appointed to be an Additional Commissioner of Income-
tax under that sub-section. No other point has been argued on behalf of
either party.

 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. 

 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. 

 Sharma, J. 

 24. I agree.

Kumari A.B. Shanthi (Alias) Vennira ... vs Assistant Director Of Inspection, ... on 21 April, 1992
Equivalent citations: [1992]197ITR330(MAD)
Author: Pratap Singh
Bench: Pratap Singh
JUDGMENT
 
Pratap Singh, J.
 
 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. 

 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 : 

 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. 

 4. Mr. N. C. Raghavachari, learned senior counsel appearing for the petitioner submitted : 

 (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"). 

 (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. 

 (iii) Section 269SS is violative of article 14 of the Constitution. 

 (iv) The punishment provided in section 276DD of the Income-tax Act, 1961, is draconian is nature and hence it has been repealed subsequently.  

 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. 

 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. 

 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. 

 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 : 

 "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, - 

 (a) the amount of such loan or deposit or the aggregate amount of such loan and deposit; or 
 
 (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 
 
 (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 :  

 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, - 

 (a) Government; 

 (b) any banking company, post office savings bank or co-operative bank; 

 (c) any corporation established by a Central, State or Provincial Act; 

 (d) any Government company as defined in section 617 of the Companies Act, 1956 (1 of 1956); 

 (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."   

 9. Section 276DD reads as follows : 

 "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."  

 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. 

 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.

 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) :

 "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."

 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) :

 "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. 

 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."  

 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) : 

 "In order to appreciate the contentions, it is necessary to bear in mind the concept of article 14.

 Article 14 provides : 
 'The State shall not deny to any person equality before the law or the equal protection of the laws within the territory or India.' 
 
 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)."

 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.

 16. In State of Andhra Pradesh v. Nalla Raja Reddy, , the apex court has laid down as follows (at page 1468) :

 "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 
 
 (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."  

 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.

 18. From the above, the following principles emerge : 

 (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.

 (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. 

 (iii) The entire concept of article 14 is fundamentally the same, viz., 'like should be treated alike'. 

 (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.  

 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. 

 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. 

 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. 

 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. 

 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. 

 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. 

 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. 

 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. 
27. 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.
28. 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.
29. 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.

Laxmi Industries And Cold Storage Co. ... vs Income-Tax Officer, "A" Ward And Ors. on 8 May, 1970
Equivalent citations: [1971]79ITR248(ALL)
Bench: R.S. Pathak
JUDGMENT
 
 Pathak, J. 
 
 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

Appellate 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 ". 

 2. This petition has now been filed under Article 226 of the Constitution praying for certiorari and prohibition. 

 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. 

4. 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. 

 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

attracted 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. 

6. 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 :
 " 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. "

7. 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:  
  " 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." 

8. 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. 

 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.

10. 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:
  "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." 

10. 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 : 
  "...... so far as the present appellant is concerned, the list prepared
under 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. " 

11. 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. 

12. 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.

13. 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, 
 
14. 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: 
  "...... when  an  authority  passed an order which  is within its
competence, 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. " 

15. It is true that ultimately the Supreme Court did not decide the case on
the bafts of that principle, but that was because its application was
precluded by certain distinguishing considerations, which included Rule 3 of
the Railway Services (Safeguarding of National Security) Rules, and also
because the respondent was content to have the validity of the impugned
orders determined on the looting that they were passed under Rule 3 with
out reference to the alternative provision under Rule 148 of the Railway
Establishment Code. No such distinguishing feature exists in the case
before us. 

16. 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. 

 T.P. Mukherjee, J. 

 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. 

18. 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

deposits 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. 

19. 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. 

 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. 

 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.

22. 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 
assessment 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.

23. I would dismiss the petition on this ground alone with costs. 

BY THE COURT       
 
 24. For the reasons contained in our respective judgments, the writ petition is dismissed with costs.

Andhra Pradesh State Road Transport ... vs Commissioner Of Income-Tax on 3 December, 1971
Equivalent citations: [1975]100ITR392(AP)
JUDGMENT
 
 A.D.V. Reddy, J. 
 
 1. The Andhra Pradesh Road Transport Corporation established by a notification under the Road Transport Corporations

Act, 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. 

 2. The question referred to us for our decision is as follows: 
  " 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 ? " 

 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: 

 " 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 : 
  (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......" 

 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......"  

 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. 

 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
formerly 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. 

 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. 

 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. 

 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

the issue of new shares, in a case where the capital was made up of shares. 

 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. 

 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. 

 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. 

 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.

 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 :
  " 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......" 

 14. On the circumstances of the case, they held : 
  " ......even when an activity is in furtherance of the objects of a trust
and 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. " 

 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.

 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 : 

  " ...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." 

 " 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 ".  

 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
and religious purposes also...... Section 28 in Chapter IV relating to
computation 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. 

 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. 

 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.

Surendra Prasad Singh And Ors. vs Commissioner Of Income-Tax on 16 June, 1988
Equivalent citations: [1988]173ITR510(GAUHATI)
Author: S.N. Phukan
Bench: S.N. Phukan
ORDER--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 

HELD: 
 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.  

Income Tax Act 1961 s.263 

Revision under s. 263--ERRONEOUS AND PREJUDICIAL ORDER--Scope--Direction to levey penalty under s. 271(1) and s. 273--Cannot be given 

HELD: 
 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. 

NOTE- 
 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].  

JUDGMENT

 A. Raghuvir, C.J. 
 
1. These references were consolidated in the statement of cases. Therefore, we propose to dispose of all the cases in one order. 

a. The following two questions have been referred under Sub-section (1) of Section 256 of the Income-tax Act, 1961 : 

 "(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 ? 

 (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

penalty 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 ? "  

3. 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 ". 

4. 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

while 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. 

5. 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 ". 

6. The Appellate Tribunal, however, made such an error and directed that interest be charged by the Income-tax Officer. 

7. The Supreme Court in Central Provinces Manganese Ore Co. Ltd. v. CIT [1986] 160 ITR 961 considered this very aspect and held (p. 968):' 
  
  " 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.

 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,"  

8. Following the above decision, we answer the first question in favour of the Revenue but qualify the answer by saying that the Income-tax

Officer 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. 

9. 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. 

10. 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

proceedings 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."

11. 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.

12. 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.

Dawn & Co. vs Commissioner Of Income-Tax on 17 August, 1971
Equivalent citations: [1973]87ITR71(KER)
JUDGMENT
 
Krishnamoorthy Iyer, J.  
 
 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 : 

" Whether, on the facts and in the circumstances of the case, the levy of penalty under Section 271(1)(a) is justified in law?" 

 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. 

 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. 

 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. 

 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 : 

" 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." 

 6. Section 271(1)(a) of the Income-tax Act, 1961, reads : 

"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- 

(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......  

 he may direct that such person shall pay by way of penalty,--  

(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; ... ."  

 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. 

8. 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 :

" 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
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 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.

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   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."

9. 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 :

" 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
flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute." 

10. 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. 

 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.

 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. 

 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. 

 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.

Commissioner Of Income-Tax vs Darbhanga Marketing Co. Ltd. on 14 April, 1969
Equivalent citations: [1971]80ITR72(CAL)
JUDGMENT

Sabyasachi Mukharji, J. 
 
 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 

Rs. 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.

2. 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.

3. 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.

4. 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 :
  "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?" 

5. 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 

of 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 :
  "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 
for in respect of  'any sum' that must be a  sum about  which it is  possible 
to say that the tax shall not be payable upon  it which can be possible only 
if it is a part of the income of the year and is liable to tax." 

6. 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:
 "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."

7. 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.

8. Dr. Devi Prasad Pal, learned counsel for the assessee, on the other
hand, contended that on a proper and strict interpretation of the language
of 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
from the dividend something which the assessee has received would be
contrary to the express provision of the language of the statute. He further
submitted that if the revenue's contention is accepted in respect of the
other sub-clauses of the same section, it would result in anomalies. In
respect of the heading, he urged that the expression "income forming part
of the total income" was descriptive of the heads of the income included in
the total income of an assessee in respect of which exemption was being

granted 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:
  "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" 

9. 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.

10. 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:

"B--Incomes forming part of total income on which no super-tax is payable.

99. 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--

(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;

(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;

(iii) any dividends received by assessee from a co-operative society as a member thereof;

(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...."   

11. 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 

any 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.

12. 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.

13. 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.

Deb, J. 

 14. I agree.

Commissioner Of Income-Tax vs Dunlop India Ltd. on 8 January, 1990
Equivalent citations: [1992]197ITR34(CAL)
Author: Suhas Chandra Sen
Bench: Suhas Chandra Sen
JUDGMENT

 Suhas Chandra Sen, J. 
 
 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

judgment and order passed on March 21, 1989, are recalled. The case has been heard de novo. 

 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 : 

 "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 ? 

 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 )?

 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 ? 

 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?"  

 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. 

 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

being 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 ". 

 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. 

 5. The Tribunal held : 
 "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

by 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."

 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. 

 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. 

 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

some 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. 

 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). 

 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. 

 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.

 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.

 13. 
Question 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 : 

 "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. 

 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.

 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."  

 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. 

 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. 

 16. The Tribunal held : 
  "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

buildings, 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." 

 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. 

 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. 

 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

commission 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. 

 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. 

 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. 

 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. 

 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

for 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. 

 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". 

 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. 

 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. 

 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

industry 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. 

 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) :
  ". . . . 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

of any moneys of the employer available for the purpose. The remuneration therefore is not agricultural income and is not exempt from tax." 

 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. 

 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. 

 31. Therefore, the questions raised are answered in the following manner : 

 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. 

 Question No. 2 is answered in the negative and in favour of the Revenue. 

 Question No. 3 is answered in the affirmative and in favour of the assessee.

 Question No. 4 is in two parts and is answered in the following manner : 
  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.  

 32. There will be no order as to costs. 

 Bhagabati Prasad Banerjee, J. 

 33. I agree.

Commissioner Of Income-Tax vs Baker Mercer India P. Ltd. on 8 August, 1990
Equivalent citations: [1992]196ITR667(BOM)
JUDGMENT
MRS. Sujata V. Manohar J.

1. 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 :

"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 ?

2. 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 ?

3. 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 ?

4. 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 ?

2. 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.

3. 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.

4. 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.

5. 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.
 
6. 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.

7. 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.

8. 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.

9. The rule is, therefore, discharged, with no order as to costs.