"Whether, on the facts and in the circumstances of the case, the proviso to section 13 of the Act Should be invoked?" The reference relates to the assessment years 1952-53, 1953-54 and 1954-55, the relevant accounting period being the years 1951, 1952 and 1953 ending on 30th September of each year. The assessee is a partnership concern carrying on the business of chemist and druggists including dispensing of medicines at Hyderabad. It has a medical store and deals in medicines or retail as well as wholesaled basis. For the period under reference, the assessee's books disclosed a turnover of Rs 2.58, 3.16 and 3.78 lakhs on which the gross profit return was 7.8, 5.6 and 4.5 per cent. respectively. The Income-tax Officer did not accept the gross profits returned and for the various defects discovered in the method employed by the assessee as shown in his order, he was of the opinion that the true income and profits cannot be deducted from the account books. He, therefore, invoked the proviso to section 13 and after considering the assessee's reasons for the low rate of gross profits, estimated the gross profits for the three years in question at 12, 10 and 10 per cent. respectively. The Appellate Assistant Commissioner reduced the gross profit rates to 10, 8.5 and 8.5 per cent. respectively after a careful consideration of comparable cases and also the reasons given by the parties. When the matter came before the Appellate Tribunal, there was a difference of opinion between the Judicial Member and the Accountant Member. While the former held that the application of the proviso to section 13 was not justified, the Accountant Member held otherwise and confirmed the order of the Appellate Assistant Commissioner. The matter was then referred, according to the provisions of the Income-tax Act, to the President of the Tribunal who agreed with the Accountant Member and upheld the order of the Appellate Assistant Commissioner.
For carrying on the business and activities of the company, for utilising the funds of the company profitably, and for the advancement of charity, education and industry in so far as is appropriate, to purchase, take on lease or for hire, to sell, to let on lease or for hire movable or immovable properties, to construct buildings, to purchase or assign shares, debentures, bonds and such other rights and securities and security bonds, to join in the kuries conducted by other institutions, to lend the company's funds and its kuri amounts on the security of immovable properties and movable properties such as kuri pass books, etc., to borrow for the requirements of the company on the security of the company's properties, to invest funds of the company in banks or securities, to accept as security for future subscriptions from prized subscribers movable or immovable properties, shares, bonds, debentures, etc. or specific or personal guarantee and accept and administer trust properties which are conducive to the furtherance of charity, education and industry with or without remuneration.
The assessee firm, Mugneeram Bangur & Co., Land Department had been carrying on the business of land development for many years. Its business was to buy large blocks of land in the suburbs of Calcutta, develop the same and parcel out in small plots and sell at a profit. Originally it had seven partners, six of them being Bangurs and the seventh being one Charu Chandra Chatterjee. Two of the partners, namely, Mugneeram Bangur and Charu chandra Chatterjee, retired from the firm on July 11, 1945. The remaining partners were not willing to carry on the business with unlimited liability and decided to float a limited company which would take over the business of the firm. Accordingly, a new company was formed in the name mentioned above and incorporated as a public company on April 8, 1948. The five remaining partners of the firm were also the promoters of the new company which had four directors, two of them Bangurs and two being outsiders, namely, one Walter Robert Elliot and the late Sir Bejoy Prosad Singha Roy. The capital of the company was Rs 34,99,300 divided into shares of Rs 100 each. Out of these all but seven shares were allotted to the five partners. Rs 34,99,300 was the consideration for which the firm transferred its business and its assets to the company.
The assessment year 1953-54, a notice under section 22(2) was issued to the petitioner on July 1, 1953. Similarly, for the assessment year 1954-55 a notice under that section was issued to the petitioner on July 5, 1954. Returns of income do not appear to have been filed in consequence of these notices. the cases for the two years were fixed for production of account books under section 22(4) on December 10, 1955. For noncompliance with notices under sections 22(2) and 22(4) assessments for the two years in question were completed under section 23(4) on December 10, 1955. Subsequently, loss returns were filed by the petitioner for the assessment year 1953-54 on December 20, 1955, and for the year 1954-55 on February 21, 1956. In due course the assessment order dated December 10, 1955, under section 23(4) were taken before the Income-tax Appellate Tribunal. The Tribunal by order dated April 13, 1959, cancelled and assessments and allowed the petitioner's applications under section 27 on the ground that notices under section 22(2) had not been served upon the petitioner. Thereafter, on March 28, 1960, the impugned notices were issued against the petitioner.The short point raised by learned counsel for the petitioner is that in these circumstances and having regard to the fact, that returns for the two years in question were already filed by the petitioner, notices under section 34(1)(a) were invalid. Learned counsel took his stand upon the decision of the Supreme court in Commissioner of Income-tax v. Ranchhoddas Karsondas [1959] 36 I.T.R. 569; [1960] 1 S.C.R. 114.
The assessee was originally assessed under section 23(1) of the Act on January 30, 1945, on an income of Rs 5,403. On December 30, 1948, there was a reassessment under section 23(3) and section 34, and the revised assessment was in respect of a total income of Rs 16,041. During the course of the assessment proceedings for the assessment year 1952-53, the Income-tax Officer came to be in receipt of information indicating that a certain income of the assessee had escaped assessment in the assessment year 1944-45. He accordingly reopened the assessment after the issue of a notice under section 34(1)(a) and brought to assessment a sum of Rs 1,75,000 said to have been the profit earned by the assessee during the account year relevant to that assessment year in a certain transaction involving the purchase and sale of a coffee estate. The facts that emerge from the records and the statement of the case are briefly as follows:The assessee, along with some others, purchased in the year 1937 a group of coffee estates in the Mysore State from the Tea Estates (India) Ltd. Out of this purchase, the assessee, his uncle, M.C. Pothan, and another, K.M. Cherian, got as their share of the purchase an estate known as the Devadanam Group which was valued at Rs 35,000. In 1940, part of the estate was taken away by K.M. Cherian. Accordingly, the remaining extent of that estate was left with the assessee and his uncle, M.C. Pothan, and in this estate, the two persons were entitled in the ratio of 7 : 4.
The assessee, which will be referred to as the bank, is a bank called the Canara Bank Limited, with its head-office in India and its branches in various places including one opened in Karachi before it became, in the year 1947, part of the Dominion of Pakistan, on the partition of India. Even after such partition, the currencies of the two Dominions on India and Pakistan were at par until there was a deflation of the Indian rupees on September 18, 1949. Pakistan not having devalued her rupee, there was the inevitable disturbances of the parity between the currencies of the two countries and, for various reasons, the exchange ratio between the two currencies was not determined until February 27, 1951, on which date it was agreed that a hundred Pakistan rupees were equivalent to a hundred and forty-four Indian rupees.On the date of the regulation of the Indian rupee, the Karachi branch had with it Rs 3,97,221 belonging to the head-office and difficulties created by the currency situation made its remittance to the head-office impossible for quite a long time. its remittance was permitted by the State Bank of Pakistan only on July 1, 1953, and when so remitted, it appreciated in value in terms of Indian currency and the equivalent sum received in India was Rs 5,71,038. The bank thus made a profit of Rs 1,73,817 and, after making certain deductions, the head-office of the bank transferred a sum of Rs 1,70,746 to its contingency reserve account and, in its return of income for the assessment year 1954-1955, claimed that sum as a nontaxable capital gain. That claim failed before the income-tax Officer and the Appellate Assistant commissioner.
For that year an assessment order was made against the petitioner. On January 31, 1950. Under this assessment order no penal interest at all was levied against the petitioner. As the law stood at that time, it was obligatory upon the Income-tax Officer to have levied the penal interest against an assessee in case the conditions under section 18A(6) were satisfied. It may be noted that the fifth provost that section was introduced by the amending Act of 1953 only with effect from April 1, 1952. Under the said fifth proviso and rule 48, it became optional and discretionary with the Income-tax Officer to levy or not to levy penal interest. Prior to that, however, and on the date on which the assessment order was passed in this case, there was no option or discretion with the Income-tax Officer except to impose penal interest. The Income-tax Officer noticed the omission and on January 27, 1950, served a notice upon the petitioner under section 35 of the Income-tax Act proposing to impose penal interest. In due course penal interest was imposed and February 12, 1951, a notice of demand was served on the petitioner. The amount mentioned in this notice of demand was Rs 6,904-3-0 which was the amount of penal interest imposed upon the petitioner. There is some controversy raised with regard to the service of notice under section 35 and the service of notice of demand. The petitioner's case is that neither of the two service were proper. This has been denied by the Income-tax Officer. I cannot go into this controversy on a question of fact in a writ petition. Mr. Gulati, learned counsel for the petitioner, agreed that I could not go into a controversy on a question of fact and I have, therefore, proceeded on the footing that the service of the two notices was proper. Subsequently, appeals against the assessment order were taken to the Appellate Assistant Commissioner and to the Income-tax Appellate Tribunal on the question of the quantum of assessable income.
The Agricultural Income-tax Officer, Batlagunda, refused registration of a firm under section 27 of the Madras Agricultural Income-tax Act for the agricultural income-tax year 1957-58 in respect of a firm alleged to consist of 15 partners, of whom one was a minor entitled only for the benefits of the partnership. This decision was affirmed both by the Assistant Commissioner of Agricultural Income-tax, Madurai, and the Agricultural Income-tax Appellate Tribunal, Madras. In this tax revision case the correctness of the said decision is challenged.The facts that led to the application for registration are quite simple and are not in controversy. Aruna Group Estates, Bodinaickanur, is the name of a firm and the firm was originally constituted with five partners who had entered into a partnership agreement, dated 13th April, 1950. The firm owned plantations of cardamom and other agricultural and horticultural products.
"Any receipts (not being capital gains chargeable according to the provisions of section 12B) and not being receipts arising from business or the exercise of a profession, vocation or occupation, which are of a casual and non-recurring nature, or are not by way of addition to the remuneration of an employee."The petitioner was a distinguished and successful lawyer and is an active politician. He held high offices in the Government of this country as Governor-General of India, Governor of a State, Minister in the Union Government and Chief Minister of Madras State. He has all along been an author of books and a writer of great repute. His books and writings are widely read not merely in this country but throughout the globe.
"In the case of income, profits or gains chargeable under this Act which.....any trustee or trustees appointed under a trust declared by a duly executed instrument in writing whether testamentary or otherwise (including the trustee or trustees under any Wakf deed which is valid under the Mussalman Wakf Validating Act, 1913) are entitled to receive on behalf of any person, the tax shall be levied upon and recoverable from such........trustee or trustees, in the like manner and to the same amount as it would be leviable upon and recoverable from the person on whose behalf such income, profits or gains are receivable, and all the provisions of this Act shall apply accordingly." The first proviso to sub-section (1) corresponds to sub-section (4) of section 21 of the Wealth-tax Act. Under the provisions of the Income- tax Act, it has never been held that under this proviso a trustee was to be considered as holding property on his own behalf and, therefore, the assessment should not be made on the income of the beneficiary. Both under the Indian Income-tax Act and the Wealth-tax Act, these provisions are enabling and do not prevent assessments being made on the beneficiaries directly. But if the provisions confer an alternative right, it would be meaningless to say that the trustees, for the purpose of this section, hold property on their own behalf and so do not come within the scope thereof. Perhaps, in view of the Supreme Court decision, the wordings of both these Acts require modification.
The assessee is a railway company which runs a railway known as Dehri Rohtas Light Railway over a distance of 37 miles from Dehri-on-Sone to Rohtas in the Shahabad district. During the accounting year ending on the 31st March, 1951, the assessee renewed 5,518 sleepers on this railway line and incurred an expenditure of Rs 29,927. The assessee also incurred an expenditure of Rs 2,028 as railway freight for transporting materials for replacing the sleepers. For the same accounting year the assessee incurred an expenditure of Rs 7,511 for replacing certain parts of engine boilers. The assessee claimed that the expenditure required for changing the sleepers and for repairs of the boilers should be deducted under the provisions of section 10(2) of the Indian Income Tax Act. The claim was rejected by the Income Tax Officer, but on appeal the appellate Assistant Commissioner held that the expenditure should be deducted. The Income Tax department took the matter in appeal to the Appellate Tribunal which allowed the appeal and held that the expenditure incurred by the assessee for replacing the sleepers and for repairs of the boilers cannot be allowed as a deduction under section 10(2) of the Income Tax Act.
"Whether, on the facts and circumstances of the case, the sum of Rs 23,049 is an allowable deduction under section 10(2) of the Act?" The assessee who was carrying on business originally as a proprietary concern took a working partner, Shantilal Navalchand, on and from the 1st April, 1949, the share of the latter being 8/17. The partnership continued for about six years and was dissolved on 31st March, 1955, when Shantilal Navalchand retired from the firm. Thereafter the assessee continued the business with the same stock-in-trade himself taking over the entire assets and liabilities of the firm.While submitting his return for the assessment year 1956-57 (the relative year of account ending with March 31, 1956) the assessee deducted a sum of Rs 23,049 as bad and doubtful debts. Those debts were originally due to the firm of which Shantilal Navalchand was a partner. The Income-tax Officer refused to accept the claim of the assessee to write off bad debts on the ground that they do not belong to the assessee's proprietary business and that it was, on the other hand, a capital loss. This view was affirmed on appeal by the Appellate Assistant Commissioner and on further appeal by the Appellate Tribunal. Hence this reference. The Tribunal has stated:"These debts which are now claimed to have become bad are those of the business carried on previously by the firm and, therefore, the deduction could be claimed only by that entity and, with the dissolution of that entity before the previous year, the right to such claim can be said to have been lost with it."
The assessee is a private limited company which was carrying on transport business. One of the objects of the company was also to invest by way of shares and securities in any other company which was engaged in transport business. Besides certain vehicles for the purpose of its transport operations, the company had also 36 fully paid-up shares in another company known as the Tirunelveli Motor Bus Co. Ltd. In 1942, the assessee company transferred 14 of its buses to the Tirunelveli Motor Bus Service Co. (hereinafter referred to as the T.M.B.S. Co.). Along with the vehicles, it transferred also its route rights. This transfer gave rise to series of disputes ending in several suits in which the assessee company figured as the plaintiff. During the calendar years relevant to the assessment years, 1949-50, 1950-51, 1952-53 and 1953-54, the assessee company incurred legal expenses, the eligibility of which expenses for deduction under section 10(2)(xv) is in question in the present reference. It is accordingly necessary to examine the scope of the legal actions concerned and to determine whether the expenses incurred in relation to those legal actions are of the nature covered by section 10(2)(xv).
The assessee is a Hindu undivided family carrying on business on an extensive scale with a capital of nearly Rs 20,00,000 (twenty lakhs). During the year ended 9th November, 1950, the assessee made large borrowals for purposes of his business and paid interest amounting to Rs 93,611 on these borrowals. In the course of that year, the assessee withdrew from the business from time to time Rs 1,77,984 for his personal expenses. The Income-tax Officer disallowed a sum of Rs 13,500 representing the interest upon Rs 1,77,984, since he thought that the borrowals amounting to Rs 1,77,984 were made in the name of the business for his personal purposes. According to him, money was withdrawn from the books of account to meet the personal expenditure of the assessee and, as this sum of money was not actually used for the business, the interest paid thereon could not be allowed as permissible deduction.On appeal, the Appellate Assistant Commissioner reached the conclusion that the assessee could claim this deduction as it was the interest paid on capital borrowed for the purpose of business.
"It is gathered at the time of hearing that the assessee borrowed more than a lakh of rupees from this bank for investing in shares in Subhodaya Publications, a limited concern. No income is derived from this company so far. This interest payment cannot, therefore, be allowed under 'business' as the borrowed money was not utilised for business purposes." The Appellate Assistant Commissioner also held against the assessee on the ground that for the allowance to fall within the scope of section 12(2) of the Act, there should be some income from that source. "For purposes of section 12(2) the outlay to be considered is with reference to each source and not merely to the head of income. So long as there is no income from the shares which is the source in question, the interest referable thereto cannot constitute a proper deduction in the assessment. There can be no two opinions about Mr. Viswanatha Aiyar's argument that the ultimate result can conceivably be a loss but such a loss must be computed for each source under the head 'other sources' which is obligatory only if there is any income at the starting point in the computation."
The petitioner is a partnership firm carrying on the business of ornamentation of glass bangles and of selling them. One Raj Nath was in the employment of the firm for two years ending October 18, 1952, as a salesman and as a Munim. He left the service of the firm with effect from that date and entered the employment of another concern, Messrs. Ganga Glass Works, Firozabad. Subsequently, Raj Nath carried on his own business. It is alleged that the business was of purchase of bangles in Firozabad and of sale of the same in Bangalore, Mysore and others States. The sale proceeds were collected by him and sent by bank drafts was deposited in his personal account in the Central Bank of India, Etmadpur and Tundla branches, with which the petitioner firm had no concern. Raj Nath carried on business at Mysore also prior to joining in Mysore but the petitioner firm had no concern with this Ram Saran Lal. In his business Raj Nath employed the services of Chandan Mal Kothari & Co., a banker firm of Firozabad, for discounting hundis drawn in favour of Raj Nath and the said banker maintained an account of the dealing of Raj Nath with which the petitioner firm had nothing to do, the account of the petitioner with Chandan Mal Kothari & Co. being an entirely distinct account. This Raj Nath was an assessee in his own name and in the assessment year 1954-55 he made a statement proceedings for that year in which he admitted the carrying on of a separate business and all other facts as stated above. His statement was recorded by the Income-tax Officer on May 11, 1960, and also on April 25, 1961. Assessments against Raj Nath for the years 1954-55 to 1959-60 were completed.
The learned counsel for the assessee has challenged the correctness of the Bombay and the Madhya Pradesh decisions and has strenuously argued that the proviso under consideration is by no means meaningless and has illustrated the same by taking up figures of income and losses under other heads and under the head "profits and gains of business, profession or vocation". It does not appear that the proviso if confined to section 24(1) would be meaningless and even the Bombay bench did not go to the extent of saying as the Madhya Pradesh High Court observed that if would be rendered meaningless if confined to section 24(1). It is further pointed out by the learned counsel for the assessee that the significance of the other provisions in section 24 relating to speculative transactions and the carrying forward of losses from speculative transactions did not properly engage the attention of the Bombay or the Madhya Pradesh High Courts. In this connection our attention has been invited to Explanation 1 and Explanation 2 which appear after the second proviso to section 24(1). According to the contention canvassed the Explanations as also the subsequent provisions contained in sub-section (2) indicates that the provisions with regard to losses incurred in speculative transactions were being confined to section 24. In this connection in Explanation 2 there is a proviso which employs the language "provided that for the purpose of this section......", and it is urged that after making the main provision with regard to setting off of losses under one head against income, profits and gains, under another head (the heads being those given in section 6), the legislature proceeded to provide for the exceptions to the general rule which had been laid down with regard to the set-off of losses. The first exception was contained in the first proviso relating to speculative transactions which were in the nature of a business and the method in which they could be carried forward was provided in sub-section (2). The other exceptions were contained in sub-section (2)(a) and (2)(b), which related to the head "capital gains". Reliance has been placed on behalf of the assessee on Commissioner of Income-tax v. Indo-Mercantile Bank Ltd. [1959] 36 I.T.R. 1, 7 (S.C.), where the proviso appearing in section 32(1) of the Travancore Income-tax Act was almost similar to another proviso to section 24(1) of the Indian Income-tax Act. An argument was examined where a section framed as a proviso to a preceding section may sometimes contain matter which is in substance a fresh enactment adding and not merely qualifying that which goes before, this being based on Rhondda Urban District Council v. Taff Vale Railway Co. [1909] A.C. 253 At page 7 of the following observations were made:
"Whether having regard to the provisions of section 10(2)(iii) of the Act, the Income-tax authorities had power to scale down the rate of interest on the ground of unreasonableness."The material facts are that the assessee is a private limited company carrying on the business of managing agents of various mills and concerns. It borrowed or accepted on deposit moneys from several persons at different rates of interest and the funds so obtained were made available to several concerns in which the assessee was interested. In the assessment proceeding for the years 1950-51, 195I-52 and 1952-53 the assessee claimed that in the relevant accounting years it had paid certain sums to four ladies by way of interest at 6? per cent. per annum on the moneys borrowed from them and that, therefore, this interest amount should be deducted under section 10(2)(iii) in the computation of its business income for the respective assessment years. The Income-tax Officer made an allowance calculating interest at the rate of 3 per cent. per annum finding that the payment of interest to the four ladies at 6? per cent. was not on business considerations. The assessee had paid to the four ladies an aggregate amount of interest of Rs 38,297, Rs 40,450 and Rs 41,394 for the years 1950-51, 1951-52 and 1952-53 respectively. The Income-tax Officer disallowed the claim to the extent of Rs 21,276 Rs 32,950 and Rs 22,552 for the three years. An appeal preferred by the assessee before the Appellate Assistant Commissioner was dismissed. Thereupon the assessee appealed to the Tribunal. The Judicial Member of the Tribunal held that the claim made by the company for deduction of the interest amount must be accepted wholly as it was not disputed that the capital was borrowed for the purposes of business and was actually utilized in the business and there was nothing mala fide in the transactions. The Accountant Member took the view that though it was not for the department to say that the assessee should pay interest at a particular rate, but when a claim for deduction on account of interest at a certain rate was put forward by the assessee, it was open to the department to find out whether the rate of interest claimed was one "which is businesslike in the circumstances of the case". On this view he upheld the decision of the Appellate Assistant Commissioner. The matter then came up before the President of the Tribunal for resolving the difference of opinion between the two Members. The question that was referred to the President was, whether on the facts and circumstances of this case the department was right in disallowing the sums of Rs 21,276, Rs 32,950 and Rs 22,552 paid as interest to the depositors."
The assessee is a partner in the firm of Messrs. Akula Venkatasubbaiah Chetty & Sons carrying on business in Cuddapah with two adults and four minor sons. He and his sons constituted a Hindu undivided family. On April 1, 1946, they effected a partition of the joint family properties and applied to the department for recognition of the partition under section 25A of the Income-tax Act (hereinafter referred to as the Act) . Immediately thereafter, the erstwhile male, coparceners constituted themselves from April 1, 1946, into a firm known as Akula Venkatasubbaiah & Sons and the minor sons of the assessee were admitted to the benefits of the partnership. On the basis of the instrument of partnership made on June 19, 1946, the concerned Income-tax Officer granted registration on March 31, 1951, for the assessment year 1947-48 and for subsequent years also on applications made on behalf of the partnership. In the returns submitted by the assessee, the income derived by the minors from the partnership was not included with the result that it was not brought to assessment for the relevant assessment years. Subsequently, the Income-tax Officer started proceedings under section 34(1)(a) of the Act to include such income in the assessment of the assessee by a notice issued on September 6, 1956, which was served on the assessee on September 10, 1956. The assessment was completed under section 34 on August 31, 1957, for the assessment year 1948-49 and on October 28, 1957, for the assessment years 1949-50 to 1955-56 both inclusive.
"In cases where the expenditure is made for the initial outlay or for extension of a business or a substantial replacement of the equipment, there is no doubt that it is capital expenditure... The question however arises for consideration where expenditure is incurred while the business is going on and is not incurred either for extension of a business or for the substantial replacement of its equipment. Such expenditure can be looked at either from the joint of view of what is acquired or from the point of view of what is the source from which the expenditure is incurred. If the expenditure is made for acquiring or bringing into existence an asset or an advantage for the enduring benefit of the business, it is properly attributable to capital and is of the nature of capital expenditure. If, on the other hand, it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits, it is a revenue expenditure. If any such asset or advantage for the enduring benefit of the business is thus acquired or brought into existence, it would be immaterial whether the source of the payment was the capital or the income of the concern or whether the payment was made once and for all or was made periodically. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure. The source or the manner of the payment would then be of no consequence. It is only in those cases where this test is of no avail that one may go to the test of fixed or circulating capital and consider whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. If it was part of the fixed capital of the business, it would be of the nature of capital expenditure and if it was part of its circulating capital, it would be of the nature of revenue expenditure. These tests are thus mutually exclusive and have to be applied to the facts of each particular case in the manner above indicated."