The assessee-company carried on its business till May 7, 1948. On that day a new company named "General Commercial Corporation (India) Limited" was formed and the entire business as well as the assets of the assessee-firm were transferred to the new company. In response to a notice under section 22(2) of the Act served on the assessee-company in March, 1949, it filed a "nil" return of its income in May, 1949, for the year 1948-49. In a letter accompanying the return it was stated that there was no previous year corresponding to the assessment year 1948-49. This was accepted by the Income-tax Officer and the assessment proceedings were closed as "not assessable", some time in July, 1949. For the next assessment year, that is, 1949-50, the assessee submitted a return showing a loss in respect of its business from April 7, 1947, to May 7, 1948, a period of thirteen months. This is extraordinary. An assessee has undoubtedly a choice in the method of accounting, namely, of adopting the cash system or the mercantile system. He has also a choice as to the previous year to be adopted for accounting purpose: but the year of accounting can comprise only twelve months and no more. As observed by Mahajan J. in Commissioner of Income-tax v. Srinivasan and Gopalan [1953] 23 I.T.R. 87, 99; [1953] S.C.R. 486.
The assessee is a private limited company with its mines, factory and head office at Bhilwara in Rajasthan, and was incorporated as a company in the former State of Udaipur on 12th November, 1946. The assessee carried on mining business at Bhilwara and was engaged in the cutting, processing, sorting and packing of mica which was sent almost entirely by railway to Kodarma and Girdih villages in Part A and Part C States, as they then were. The assessee followed the mercantile method of accounting and the assessment years in question are 1950-51 and 1951-52, the corresponding previous years being the years from 2nd November, 1948, to 21st October, 1949, and 22nd October, 1949, to 9th November, 1950, respectively. The total sale proceeds of the assessee during the two assessment years amounted to Rs. 19,77,544 and the assessee tendered bills to the local branch of the Bank of Rajasthan to the extent of Rs. 15,64,475 and received that much of the payment at Bhilwara. As Rajasthan was then a Part B State, the assessee claimed that it was entitled to the benefit of rebate under the Part B States (Taxation Concessions) Order, 1950, and that section 4(1)(a) of the Act was not applicable to its transactions. By his order dated 31st May, 1954, for the assessment year 1951-52, the Income-tax Officer held that since the railway receipts were obtained by the assessee for " self " and were sent by the assessee through its banker to the buyers, the ownership in the goods continued to vest in the assessee until their actual delivery to the buyers, so that the title in the goods passed only at Kodarma when the delivery of the railway receipts was made by the bank on behalf of the assessee.
The respondents admit that the appellant had executed the sale deed on January 15, 1945, in favour of Ram Chander but asserts that nevertheless he continued to be a partner of the firm, and that he was liable to pay the income-tax assessed upon the firm.The petition was dismissed on the ground that disputed questions of fact were involved in its decision and that in any event every partner was liable jointly and severally in respect of the tax due from the firm.From the affidavits filed by the parties, it is apparent that the respondents do not admit that the interest of the appellant was transferred to Ram Chander. Reference has been made to the fact that a partnership deed dated March 5, 1945, recites that Ram Chander left the partnership firm at the end of the firm's accounting period ending Diwali, 1944, but it was not comprehensible--
Under section 10(2)(iii) of the Act, the amount of the interest paid "in respect of capital borrowed for the purposes of the business" is a permissible deduction in the computation of profits and gains of business, profession or vocation. It is plain from the language of clause (iii) of section 10(2) that for a claim for deduction of interest under that provision all that is necessary is that, first, the money, that is capital, must have been borrowed by the assessee; secondly, it should have been borrowed for the purposes of the business, profession or vocation of the assessee; and, thirdly, the assessee should have paid this amount as an allowance under that clause. This clause makes no distinction between the capital borrowed in order to acquire a revenue asset and the amount borrowed to acquire a capital asset. It also does not say that for the purposes of business the borrowing of capital should have been necessary, so that if at the time of borrowing the assessee had sufficient money of his own to invest in the business then the deduction cannot be allowed. Again, as held by this court in Birla Gwalior Private Ltd. v. Commissioner of Income-tax [1962] 44 I.T.R. 847 the interest paid is also not subject to the test of reasonableness. When the Income-tax Officer finds that the borrowing transaction was not illusory or colourable and that the capital was borrowed by the assessee for the purposes of the business and the amount of interest was paid, then the claim made by the assessee for deduction on account of the interest paid on borrowed capital has to be allowed. In holding that the interest paid by the assessee on the amount lent to him by the Gwalior State for acquiring his brother's share in the Ram Kishan Oil Mills was not a permissible deduction, the Tribunal relied on Metro Theatre, Bombay Ltd. v. Commissioner of Income-tax**. That was a case where an assessee purchased a 999 years old leasehold interest in his business premises for a premium payable by instalments, and paid interest on the instalments outstanding from time to time.
The assessee failed to comply fully with the said notices and the Income-tax Officer made a best judgment assessment under section 23(4) on the 28th January, 1954. On the 1st March, 1954, the assessee filed an application under section 27 for setting aside the best judgment assessment under section 23(4). It was alleged in the said application by the assessee that he had complied with the requisition of the notices issued by the Income-tax Officer and the best judgment assessment, therefore, was not justified. The application was rejected by the Income- tax Officer. In the arguments before the Appellate Assistant Commissioner in the appeal, which the assessee preferred against the order of the Income- tax Officer, an additional ground was taken, viz., that the notices under section 22(4) were invalid and, consequently, the Income-tax Officer had no right to make a best judgment assessment for non-compliance with the said notices. The argument advanced was that prior to the amendment of section 22(4) were the Amending Act of 1953, the Income-tax Officer could under the said section ask only for the production of accounts and documents and not for any other information or particulars. The amendment made by the Amending Act of 1953 gave power to the Income-tax Officer to require the assessee to supply particulars and information in addition to the accounts and documents, but this amendment became operative only from the 1st April, 1952, and, therefore, could not apply to assessments of a period prior to the said date. Since the assessment in the present case was for the assessment year 1949-50, the Income-tax Officer had no power to require the assessee to furnish particulars or information on a notice under section 22(4).
The assessee contends that the aforesaid proviso to section 24(1) does not govern the computation of the profits and gains for the purpose of section 10, and that the proviso should be read only when the provisions of section 24(1) are applied. For the Commissioner, however, it is urged that the proviso cannot be treated as a step in the application of section 24(1) but should be considered when the profits and gains are computed under section 10. The point which arises is one of no little difficulty, but, having given the matter our careful consideration, in our opinion, the contention advanced on behalf of the assessee must prevail.
The assessee is a private limited company carrying on business in distillation and sale of sandal-wood oil. The assessment in question relates to the assessment for the eight years, the assessment years being 1950-51, 1951-52, 1952-53, 1953-54, 1954-55, 1955-56, 1956-57 and 1957-58, the corresponding accounting periods being the financial years ending with March 31, 1950, March 31, 1951, March 31, 1952, March 31, 1953, March 31, 1954, March 31, 1955, March 31, 1956, and March 31, 1957, respectively. The present assessee is a limited company which was formed from the then existing registered firm consisting of nine partners. There were in fact altogether fourteen shareholders by reason of the partition in the family of one G. Venkatesam Chetty and also due to transfer of some shares by Srinivasalu Chetty to his son. The shareholders of the new private limited company are no other than the old partners and their nominees. On the formation of the new private limited company, the shares also were allotted in the same proportion as the shares held by them in the partnership firm. Thus the present status of private limited company is only a change-over from that of the old partnership firm. At the time of the change-over as a private limited company the assessee valued the assets such as building and machinery received from the firm mentioned supra at Rs 63,000 and Rs 87,000 respectively, but the written down value as per the books of the firm then was only of Rs 3,994 and Rs 13,210 respectively. At the time of purchase, the valuation was placed also on goodwill and it was determined at Rs 64,000. The assessee had to incur the necessary expenses for due execution of agreement and sale deeds and for conversion of the firm into a private limited company after partition among the various partners.
The assessee is an individual carrying on business as commission agents in certain commodities. He also trades on his own account in kapas, which he sells after converting it into lint and cotton seeds. Besides this business, which the assessee was carrying on in his individual capacity, he also carried on some business in kapas in partnership with one Chinna Venkayya Vithoba of Umri. In the relevant assessment year 1953-54 for which the accounting year was the year ending October 18, 1952, the assessee had made a profit of Rs 14,189 in his individual business. In the partnership business, which he had carried on in partnership with Chinna Venkayya, his share of loss came to Rs 13,831. The assessee claimed to deduct this loss from the profits and gains in the individual business. The Income Tax Officer disallowed the same observing that the loss sought to be adjusted was the share of the assessee's loss in the business of an unregistered partnership and it was not capable of being adjusted against his profits and gains in his individual business. The decision of the Income Tax Officer was upheld by the Appellate Assistant Commissioner. In the second appeal before the Tribunal, the Tribunal took the view that that assessee was entitled to adjust the said loss in computing the profits and gains of his business under section I0 of the Income Tax Act and that the second proviso to section 24(1) had no application to the case. It, therefore, allowed the assessee's appeal and directed that the assessee was entitled to adjust the loss in the computation of his income under the head "business". At the instance of the Commissioner of Income Tax, the Income Tax Appellate Tribunal drew up a statement of the case under section 66(1) of the Income Tax Act and referred to this court the question, which we have set out in the beginning.
The contention of Sri K. Srinivasan that service on a servant is no service in law is supported by the decision of the Rangoon High Court in Commissioner of Income-tax v. Dey Brothers [1935] 3 I.T.R. 213. Therein the assessee who resided at Calcutta owned a business at Rangoon styled as Dey Brothers. This business was carried on by one D who was appointed as manager by the assessee. A process issued by the Income-tax Officer in connection with the assessment of the business was served, in the absence of D, on M, one of his assistants working in the shop, who signed on the back of the copies, "for Dey Brothers", under a rubber stamp. The question was whether there was sufficient service of the notice. The court held that the mere fact that the notice had in some way or other reached the person upon whom it was to be served was not sufficient but there must be service as prescribed in section 63(1) of the Income-tax Act, 1922. It further held that neither the fact that M had accepted previous notices nor the fact that according to the practice obtaining in the business the employees were expected to hand over all communications to the manager was sufficient evidence to support a finding that D had been duly served. Similar was the view taken by the Nagpur Judicial Commissioner in Commissioner of Income-tax v. Baxiram Rodmal [1934] 2 I.T.R. 438. For the reasons mentioned above, we hold that the notices served in these cases which form the basis for the proceedings under section 147 of the Act are wholly invalid notices and the petitioners cannot be assessed in pursuance of those notices.
The facts briefly are that the assessee is a firm of six partners which carried on business in the manufacture and sale of sugar, molasses, confectionery, golden syrup and extraction and sale of rice and oils. The assessee also owned certain sugar mills comprising the plant and machinery and the lands appurtenant thereto used for the purpose of the said business. On January 21, 1948, the said business was sold as a going concern by the assessee firm to R.B. Lachmandas Mohan Lal and Sons Ltd., a private limited liability company incorporated on January 20, 1948. The memorandum and articles of association of the said company are annexed hereto as annexures "A" and "B", which form part of the case. They are, however, not printed in order to save cost and the assessee has undertaken to furnish copies to their Lordships at the time of the hearing. The Controller of Capital Issues issued a certificate to the said company, dated January 12, 1948, a copy whereof is annexed hereto as annexure "C" and forming part of the case.
The Bombay decision cited by the learned counsel for the department does not throw any light on this enquiry. It is not, therefore, necessary to refer to it.Although we are more inclined to agree with the law as stated by the Gujarat High Court, we do not think it necessary to express any final opinion on this aspect of the matter as this reference can be disposed of on the interpretation of clause (xxiv)(d) of section 2 of the Act. This definition is of wider import than that contained in the Transfer of Property Act. The only requirement of this clause is that the transaction, which seeks to accomplish certain results, should have the effect of diminishing directly or indirectly the value of his own property and to enhance the value of the property of any other person. Incontestably, by the declaration made by Shri Malakondiah by the conversion of his self-acquired properties into joint family properties, there was a decrease in the value of the property of Shri Malakondiah and it enhanced the value of the property of the joint family. That joint Hindu family answers the description of any other person is seen by clause (xviii) of section 2 which says that a person includes a Hindu undivided family or a company or an association or a body of individuals or persons, whether incorporated or not. Since the conversion in this case has the effect of diminishing the value of the declarant's property and raising the value of the property of the joint Hindu family, it falls within the purview of clause (d). The transfer contemplated by this clause is a transfer as a result of which the income accrues to the joint family from the properties, the subject-matter of the declaration. There can be little doubt that by this transaction the owner of the property had divested himself of it and vested it completely in the joint Hindu family. He has thus effected a change of ownership of the property. If it is a transfer of property within the terms of clause (xxiv)(d) it is a gift as envisaged in clause (xii) and section 4(a).
The Commissioner of Income-tax, U.P., Lucknow, received reports to the effect that the firm has been evading payment of income-tax. He, therefore, decided to get the premises of the firm searched for obtaining documents which would be useful for assessment of income-tax. On May 29, 1963, letters of authorization were issued in favour of the Income-tax Officer, D-Ward, Meerut. Under that authority, the two Income-tax officers searched the premises of M/s. Seth Brothers (Shanti Niketan, Civil Lines, Meerut) on the 7th and the 8th of June, 1963. The two officers seized a large number of documents from these premises. The documents so recovered included documents belonging to M/s. Seth Brothers and also documents belonging to three other associated business concerns. Since then, these documents have been in the custody of the income-tax authorities. These connected writ petitions are directed against those proceedings dated the 7th and the 8th of June, 1963. According to the petitioners, the documents were unlawfully seized from their possession.
It is stated that the Income-tax Officer called for returns of the earlier years and the petitioner filed a return for the assessment years 1953-54 to 1959-60. According to the Commissioner of Income-tax, as stated by him in the impugned order under section 33B of the said Act, dated 7th February, 1963, the assessee filed a voluntary return of income for the assessment years 1953-54 to 1960-61, all dated February 14, 1961, excepting the last one which was dated February 13, 1961. Cognisance of the returns was taken by the Income-tax Officer, Shri H. Biswas, and notices under section 23(2) of the said Act were issued and served on Shri J.L. Kherria, an income-tax practitioner, who was an authorised representative of the assessee. On the 18th February, 1961, assessment orders were passed for the years 1953 to 1961. On 28th January, 1963, the Commissioner of Income-tax, West Bengal, issued a notice upon the petitioner under section 33B of the said Act. This notice has been referred to in the pleadings but no copy has been annexed. I have, therefore, called for the original notice to be produced and I have directed that a copy be kept on the record marked as exhibit 1.
The assessee is a registered firm carrying on contract business in the supply of dehydrated vegetable products to the Government. During the course of its business the assessee undertook a contract to supply onions and potatoes to the Government of India. This contract was executed with the Director General of Food, New Delhi, in 1943, for the supply of 100 tons of dehydrated onions by December 31, 1943. The contract contained a clause stipulating that, in the event of the assessee failing to deliver supplies in accordance with the terms of the contract, it would be liable to a penalty of 2 annas per pound on the quantity which it failed to deliver by the due date, unless its failure was due to reasons beyond its control. The assessee was able to supply only about 15 tons of onions by December 31, 1943. As the entire contract was not executed by it within the time stipulated, the Government cancelled the contract and imposed a penalty at the rate of one anna per pound on the balance remaining undelivered. Upon receiving this communication from the Government, the assessee applied to the Government to reconsider its decision and informed it that the required bulk of supplies as well as the facilities for supplying them had already been arranged. Upon this, it appears that the Government recalled its decision and extended the date for delivery of the supplies to August 31, 1944, upon condition, however, that the assessee paid liquidated damages at 2 per cent. These terms were accepted by the assessee, and it paid damages totalling Rs 17,240, of which a sum of Rs 13,517 was paid in the previous year relating to the assessment year 1945-46 and the balance of Rs 3,723 was paid in the previous year relating to the assessment year 1946-47.
In the assessment year 1956-57, the previous year being calendar year 1955, the income-tax of the assessee-company on its total income was computed at nil and the previous loss was ordered to be carried forward. The assessment order for the assessment year 1956-57 was made on February 17, 1958. In the previous year relating to the assessment year 1956-57, however, the petitioner-company had declared dividends amounting to Rs. 15,77,340 on its ordinary subscribed share capital of Rs. 1,57,71,400. The declared dividend was in excess of 6 per cent. of the capital investment. In the assessment year 1957-58, the assesseecompany was assessed on a total income of Rs. 61,69,943. For the purpose of computation of super-tax from the aforesaid assessed income, a sum of Rs. 4,67,705 was deducted, being the capital gain included in the total income on which the corporation tax was not payable. Thus the total income was reduced to Rs. 57,02,238. According to the provisions of the Finance Act, 1957, the corporation tax payable by the petitioner-company at the rate of 50 per cent. was calculated at Rs. 28,51,119. From this amount, a rebate at the rate of 30 per cent. was granted to the petitioner company, it being entitled to grant of rebate according to the provisions of the Finance Act. The rebate granted at the rate of 30% amounted to Rs. 17,10,671.40 nP. In the previous year relevant to the assessment year 1957-58, the petitioner-company had declared dividends and it appears that the dividends declared exceeded 6% of the capital investment. Under the provisions of the Finance Act, therefore, from the aforesaid amount of rebate determined there was a withdrawal to the extent of Rs. 1,27,971.20 nP. The net corporation tax determined payable by the petitioner-company was thus determined at Rs. 12,68,418.80. The aforesaid assessment order was made on the 14th of February, 1959. Now it may be noted that in the withdrawals from the rebate in the assessment for the year 1957-58 there was no withdrawal in respect of the excess dividend declared by the petitionercompany in the previous year relevant to the assessment year 1956-57.
The assessee is the Rajah of Vizianagaram and a big landlord. As the sole owner of the income of an impartible estate he was being assessed to income-tax as an individual. Even after the Estates Abolition Act, the assessment was being completed in the same status. The main source of his income is from house properties, interest on securities, dividends, etc. He owns amongst others a market and a fort. For the assessment years 1957-58 and 1958-59, for which the accounting years are the years ending on June 30, 1956, and June 30, 1957, respectively, he returned the income as a Hindu undivided family consisting of himself, his wife and sons. But that status was not accepted by the Income-tax Officer and finally by the Tribunal and he was assessed to tax as an individual as ever. That is not, however, the point which must engage our attention, for it is not covered by any of the questions referred. The controversy in this reference is confined to the assessment as made in relation to two items of property. One is the market and the other is the fort. As regard the first item, the question is whether the income derived therefrom is to be assessed under section 9 as the department has done or under section 10 of the Indian Income-tax Act, as the income or profits of business, as the assessee claims. The reason for the controversy is that if section 10 is the appropriate provision, the assessee would be entitled to much larger allowances by way of deductions in computing the income. In relation to the second item, i.e., the fort, the question is whether the income from this item of property for the assessment years in question should have been completely exempted from tax under section 2(1)(c) of the Act as it was being done consistently for the earlier years.
The Income-tax Officer found that part of the expenditure was incurred only for the expansion of existing machinery and was not for the installation of new machinery. He accordingly disallowed development rebate (Rs. 23,304) and extra depreciation (Rs. 1,554) relevant to such expansion. On appeal, the Appellate Assistant Commissioner inspected the mills in question. He came to the conclusion that the modifications effected to the old machinery were of a capital nature, but nevertheless could not be considered as new plant and machinery in respect of which alone development rebate and extra depreciation could be allowed. He, therefore, disallowed the claim. In the further appeal to the Appellate Tribunal, it was contended that the Appellate Assistant Commissioner "erred in disallowing the amount of Rs 23,304 on account of development rebate and Rs 1,554 on account of depreciation under section 10(2)(via) in respect of the sum of Rs 93,000 incurred by the appellants as capital expenditure for installing new machinery in the appellants' mill." In the grounds of appeal, it was finally urged that the Appellate Assistant Commissioner should have held "that alternatively the appellants were entitled to the deduction of the whole amount of Rs 93,000 as revenue expenditure." It would be noticed that while before the Income-tax Officer and Appellate Assistant Commissioner the claim to development rebate was limited to a sum of Rs 23,000 and odd as falling within the scope of section 10(2)(via) of the Act, before the Tribunal the alternative claim was that the entire expenditure of Rs 93,000 should have been allowed as amounting to revenue expenditure only. The Tribunal rejected the claim to development rebate, as, in its view, only the minor component parts of the ring-frame had been replaced and such alteration could not be classified as installation of machinery and plant. It then proceeded to examine the claim to deduction of Rs 93,000 as revenue expenditure. The Tribunal inspected the mill and studied the working of the machinery and the part which the materials played in the process of yarn spinning. It found that the alterations were accounted for by the replacement of certain parts by what was known as Casablanca High Drafting System. The manufacturers of those parts purported to claim a higher efficiency in productive capacity by the substitution of those parts in the place of the old parts.
The assessee is an association of persons doing abkari contract in Sadam of Gulbarga District which was formerly a part of the old Hyderabad State and now a part of the Mysore State. In this case we are concerned with the assessment of the assessee for the assessment years 1950-51, 1951-52 and 1952-53. The Income-tax Officer rejected the return submitted by the assessee and added to the income returned by him a sum of Rs 86,386 for the assessment year 1950-51, Rs 75,000 for the year 1951-52 and Rs 46,100 for the year 1952-53. The accounts produced by the assessee were not found to be reliable by the Income-tax Officer and so he had recourse to best judgment assessment.
The argument maintained by Mr. Karanth was that if from these provisions it is clear that the estate duty paid by the petitioner was a charge on the properties which vested in her in her capacity as an executor under the will of her husband, and that estate duty became payable on the passing of the property by death, the property which vested in the executor was the property burdened with the liability to pay the estate duty and its market value which is relevant for the purpose of section 53 of the Court-Fees and Suits Valuation Act must necessarily be the value of the estate at the time of death reduced by the sum payable by way of estate duty. The competing argument pressed on us by Mr. Government Pleader was that on the death of the deceased, there was the passing of the property and the vesting of it in the executor and that the market value of the property which so vested was the market value at the time of death and not its value which abated by reason of the charge created by section 74 of the Estate Duty Act in respect of the liability for the payment of estate duty.
"Whether, on the facts and circumstances of the present case, 20% of the profit could be reasonably attributable to the acts of purchase of the assessee in British India?" As both the references relate to the same business transactions of the assessee and pertain to the assessment year, we shall dispose them of together.The assessee is the Bikaner Textile Merchants Syndicate Limited, Bikaner, which was a company incorporated in the former Bikaner State. The company was a non-resident company which commenced its business in October, 1946, and the present dispute relates to its first assessment for the assessment year 1948-49 covering the accounting period ended on Dewali 1947. The company was formed because there was acute scarcity of cloth in the then Bikaner State in the year 1946-47 and it was required to operate in accordance with the scheme formulated in letter No. 4113 dated November 6, 1946, of the Minister of Civil Supplies, Government of Bikaner, which was circulated to all concerned by the Director of Civil Supplies under his endorsement No. 375-T dated November 16, 1946. The scheme set out in that letter was that the quota of cloth allotted to the State of Bikaner by the authorities concerned in British India would be procured by a syndicate of wholesalers which had already been formed into a joint stock concern. It was stipulated that the syndicate would sell the cloth procured by it to retailers at 12 per cent. above the mill price, but that a part of that income would be apportioned under various heads enumerated in the scheme, leaving a net profit of 1? per cent. to the syndicate. It was one of the conditions of the scheme that eight experienced and influential merchants belonging to the syndicate would work as its active partners and would receive 1 per cent. as commission from the syndicate by way of remuneration for going to the producing centres to bring the quota allotted to the State from the different stations. One of the eight wholesalers was to be nominated as the "importer".